-----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, GfmrIL9PcmgaVtTxiLC09nvn46I7+jMWTWcfvntNyp2E8Wc9k0zBLuXd/ssOUjGs Qzq3TVYj+P/35kAt/Q8UUg== 0000919893-04-000004.txt : 20040301 0000919893-04-000004.hdr.sgml : 20040301 20040301151436 ACCESSION NUMBER: 0000919893-04-000004 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040301 EFFECTIVENESS DATE: 20040301 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEMPLETON DRAGON FUND INC CENTRAL INDEX KEY: 0000919893 IRS NUMBER: 650473580 STATE OF INCORPORATION: MD FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-08394 FILM NUMBER: 04638918 BUSINESS ADDRESS: STREET 1: 700 CENTRAL AVE CITY: ST PETERSBURG STATE: FL ZIP: 33701 BUSINESS PHONE: 8138238712 N-CSR 1 tdfannualrpt1203.txt TEMP. DRAGON FUND ANNUAL REPORT DTD 12/31/03 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-8874 -------- TEMPLETON DRAGON FUND, INC. ----------------------------- (Exact name of registrant as specified in charter) 500 EAST BROWARD BLVD., SUITE 2100, FORT LAUDERDALE, FL 33394-3091 -------------------------------------------------------------------- (Address of principal executive offices) (Zip code) MURRAY L. SIMPSON, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 ----------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: (954) 527-7500 -------------- Date of fiscal year end: 12/31 ------ Date of reporting period: 12/31/03 ------- ITEM 1. REPORTS TO STOCKHOLDERS. DECEMBER 31, 2003 [GRAPHIC OMITTED] - -------------------------------------------------------------------------------- ANNUAL REPORT AND SHAREHOLDER INFORMATION INTERNATIONAL - -------------------------------------------------------------------------------- Templeton Dragon Fund, Inc. - -------------------------------------------------------------------------------- [GRAPHIC OMITTED] [LOGO OMITTED] FRANKLIN(R) TEMPLETON(R) INVESTMENTS Franklin o TEMPLETON o Mutual Series Franklin Templeton Investments GAIN FROM OUR PERSPECTIVE Franklin Templeton's distinct multi-manager structure combines the specialized expertise of three world-class investment management groups--Franklin, Templeton and Mutual Series. SPECIALIZED EXPERTISE Each of our portfolio management groups operates autonomously, relying on its own research and staying true to the unique investment disciplines that underlie its success. FRANKLIN. Founded in 1947, Franklin is a leader in tax-free investing and a driving force in fixed income investing around the globe. They also bring expertise in growth- and value-style U.S. equity investing. TEMPLETON. Founded in 1940, Templeton pioneered international investing and, in 1954, launched what has become the industry's oldest global fund. Today, with research offices in over 25 countries, they offer investors the broadest global reach in the industry. MUTUAL SERIES. Established in 1949, Mutual Series is dedicated to a unique style of value investing, searching aggressively for opportunity among undervalued stocks, arbitrage situations and distressed companies. TRUE DIVERSIFICATION Because our management groups work independently and adhere to distinctly different investment approaches, Franklin, Templeton and Mutual Series funds typically have a low overlap of securities. That's why our funds can be used to build truly diversified portfolios covering every major asset class. RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to consistently provide investors with exceptional risk-adjusted returns over the long term, as well as the reliable account services that have helped us become one of the most trusted names in financial services. MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS [GRAPHIC OMITTED] Not part of the annual report Contents Important Notice to Shareholders ....................... 1 ANNUAL REPORT Templeton Dragon Fund, Inc. ............................ 2 Performance Summary .................................... 6 Financial Highlights and Statement of Investments ............................... 7 Financial Statements ................................... 11 Notes to Financial Statements .......................... 14 Independent Auditors' Report ........................... 22 Annual Meeting of Shareholders ......................... 23 Dividend Reinvestment and Cash Purchase Plan ..................................... 24 Tax Designation ........................................ 26 Board Members and Officers ............................. 28 Proxy Voting Policies and Procedures ................... 34 - -------------------------------------------------------------------------------- Annual Report Templeton Dragon Fund, Inc. YOUR FUND'S GOAL AND PRIMARY INVESTMENTS: Templeton Dragon Fund seeks long-term capital appreciation by investing at least 45% of its total assets in equity securities of "China companies," as defined in the Fund's prospectus. [BAR GRAPH OMITTED] EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS: GEOGRAPHIC DISTRIBUTION Based on Total Net Assets as of 12/31/03 Hong Kong 41,2% China 38.4% Taiwan 19.7% Singapore 0.7% Dear Shareholder: This annual report for Templeton Dragon Fund covers the period ended December 31, 2003. PERFORMANCE OVERVIEW For the year ended December 31, 2003, Templeton Dragon Fund delivered a +108.44% cumulative total return in market price terms and +76.54% in net asset value terms, as shown in the Performance Summary on page 6. ECONOMIC AND MARKET OVERVIEW Despite a temporary setback resulting from the severe acute respiratory syndrome (SARS) outbreak early in the year, China's economy recorded robust gross domestic product (GDP) growth of 9.1% in 2003.(1) Trade also continued to prosper as 2003 exports and imports jumped 35% and 40% compared with 2002.(2) The mainland's attraction to multinational companies and strong economic growth continued to stimulate foreign direct investments (FDI) during the period. FDI inflows totaled a record US$53.5 billion for 2003, a 1.4% increase over 2002.(3) To ease pressure on the government to revalue the local currency, China relaxed controls on overseas companies' investments. Tensions between Taiwan and China heightened once again during the fourth quarter as Taiwanese President Chen Shui-bian stressed that Taiwan was an independent, sovereign country and proposed holding a referendum during presidential elections in March 2004 where Chen will seek re-election. The proposed referendum centers on the issues of support of the one-country principle, whether Taiwan 1. Source: National Bureau of Statistics, China. 2. Source: Customs Statistics China. 3. Source: Ministry of Commerce of the People's Republic of China. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND COMPLETE LEGAL TITLES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 8. 2 | Annual Report should buy more anti-missile weapons if China refused to withdraw its missiles pointed at Taiwan, and whether Taipei should open talks with Beijing. China has repeatedly stressed that the island must unify with the mainland or face war. Taiwan's economy, in terms of GDP, is expected to grow 3.2% in 2003 and 4.1% in 2004.(4) Taiwanese exports rose 10.4% to US$144.2 billion in 2003, while imports increased 13.1% to US$127.3 billion over the same time.(5) Hong Kong's economy bounced back in the latter half of 2003, leading third quarter GDP growth to rebound to 4.0% annualized after a poor second quarter, with the Hong Kong government forecasting 3.0% growth for calendar year 2003.(6) Unemployment rose to a high of 8.7% in 2003, reflecting the negative impact SARS had on tourism, retail and service sectors, primarily.(6) As the scenario improved toward the latter half of the year, unemployment dropped to 7.5% by the end of November.(6) On another positive note, Hong Kong and China signed a free-trade agreement at the end of June, an indication of China's opening its economy to international competition. Markets in the greater China region underperformed their emerging markets counterparts in the first part of the year due to the SARS outbreak. However, Chinese markets rebounded strongly after the containment of the virus. Bargain investors then returned in search of oversold stocks and, as reflected in the Morgan Stanley Capital International (MSCI) China Free Index, these markets returned 87.6% in U.S.-dollar terms for the year ended December 31, 2003.(7) INVESTMENT STRATEGY Our investment strategy employs a fundamental, value-oriented, long-term approach. In selecting companies for investment, we will consider overall growth prospects, competitive positions in export markets, technologies, research and development, productivity, labor costs, raw material costs and sources, profit margins, returns on investment, capital resources, government regulation, management and other factors in comparison to other companies around the world which we believe are comparable. 4. Source: Directorate General of Budget, Taiwan. 5. Source: Ministry of Finance, Taiwan. 6. Source: Census & Statistics Department, Hong Kong. 7. Source: Standard & Poor's Micropal. The MSCI China Free Index measures the total return (gross dividends are reinvested) of equity securities available to foreign (non-local) investors in China. The index is unmanaged and securities are weighted according to their market capitalization. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. Annual Report | 3 TOP 10 HOLDINGS 12/31/03 - -------------------------------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY, COUNTRY NET ASSETS - -------------------------------------------------------------------------------- Dairy Farm International Holdings Ltd. 10.7% FOOD & STAPLES RETAILING, HONG KONG - -------------------------------------------------------------------------------- China Petroleum & Chemical Corp., H 10.6% OIL & GAS, CHINA - -------------------------------------------------------------------------------- China Mobile (Hong Kong) Ltd. 4.9% WIRELESS TELECOMMUNICATION SERVICES, CHINA - -------------------------------------------------------------------------------- PetroChina Co. Ltd., H 4.8% OIL & GAS, CHINA - -------------------------------------------------------------------------------- Hang Lung Group Ltd. 4.1% REAL ESTATE, HONG KONG - -------------------------------------------------------------------------------- Cheung Kong Infrastructure Holdings Ltd. 4.0% CONSTRUCTION MATERIALS, HONG KONG - -------------------------------------------------------------------------------- China Merchants Holdings (International) Co. Ltd. 3.9% INDUSTRIAL CONGLOMERATES, HONG KONG - -------------------------------------------------------------------------------- TCL International Holdings Inc. 3.8% HOUSEHOLD DURABLES, HONG KONG - -------------------------------------------------------------------------------- Beijing Datang Power Generation Co. Ltd., H 3.7% ELECTRIC UTILITIES, CHINA - -------------------------------------------------------------------------------- Sinopec Beijing Yanhua Petrochemical Co. Ltd., H 3.1% CHEMICALS, CHINA - -------------------------------------------------------------------------------- Our approach to selecting investments emphasizes fundamental company-by-company analysis (rather than broader analyses of specific industries or sectors of the economy), to construct an "action list" from which we make our buy decisions. Although we will consider historical value measures, such as price/earnings ratios, operating profit margins and liquidation values, the primary factor in selecting securities for investment by the Fund will be the company's current price relative to its long-term earnings potential. MANAGER'S DISCUSSION The Fund's overweighted positions, relative to the MSCI China Free Index, in Tsingtao Brewery, Sinopec Beijing Yanhua Petrochemical and China Petroleum & Chemical provided a strong boost to the Fund's total return this year, as did our position in China Mobile. However, our overweighted Taiwanese positions in Sinopac Holdings and Altek Corporation worked against it. Consistent with our strategy, we continued to hold Sinopac Holdings because we believe that as a provider of a comprehensive range of financial products and services the company could benefit from the consolidation of Taiwan's banking industry. Similarly, we believe Altek, one of the world's largest manufacturers of digital cameras, could benefit from growing global demand for its products. By industry, the Fund's holdings in beverages, wireless telecommunication services, and food and staples retailing sectors yielded the greatest contribution relative to the MSCI China Free Index during the year. China Mobile was the strongest contributor among our wireless telecommunication services stocks; Hong Kong's Dairy Farm International generated positive results among food and staples retailing stocks; and China H share Tsingtao Brewery led performance in the beverages sector and was sold during the period as gains were realized. On the negative side, an overweighted position in real estate stocks and an underweighting in automobiles dampened performance, as real estate underperformed and automobiles outperformed the MSCI China Free Index. In May, the Fund completed a tender offer and bought back a total 6,656,425 shares of its common stock. The purchase was funded primarily by decreasing 4 | Annual Report certain stock holdings that we believed were less attractively valued. During the year, war and its aftermath in Iraq, ongoing geopolitical upheaval and fear of SARS brought significant price movements to many financial markets, especially in the first half of 2003. These developments, coupled with changes in fundamentals for some companies held by the Fund, were some of the major factors behind the portfolio changes. During the year under review, consistent with our strategy we decreased the Fund's exposure to China H shares (Hong Kong-listed Chinese companies), as we believed some valuations grew expensive after the market's recent strong performance. Key sales included Tsingtao Brewery, China Shipping Development and shares of Zhejiang Expressway and Jiangsu Expressway. The Fund still held 29.5% of total net assets in China H shares as of December 31, 2003. A key purchase during the year included Red Chip stock China Mobile, a dominant wireless telecommunications operator in China we believed to be well positioned to benefit from China's ongoing economic expansion. We increased the Fund's exposure to Taiwan due to the emergence of attractive valuations, as we believed some stocks had become oversold due to concerns over the SARS outbreak. There were also signs of global recovery within the technology sector, Taiwan's largest market sector. Key purchases included Acer, a major player in the global personal computer market; Delta Electronics, the world's largest notebook PC adapter manufacturer; and additional shares of Sunplus Technology, an integrated circuit design company specializing in consumer products components. We thank you for your interest in Templeton Dragon Fund, welcome your questions and comments and look forward to serving your investment needs in the years ahead. [PHOTO OMITTED] /s/Mark Mobius Mark Mobius President and Chief Executive Officer - Investment Management Templeton Dragon Fund, Inc. THIS DISCUSSION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF DECEMBER 31, 2003, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. Annual Report | 5 Performance Summary as of 12/31/03 Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses. Capital gain distributions are net profits realized from the sale of portfolio securities. Total return reflects the Fund's dividend income, capital gain distributions, if any, and any unrealized gains or losses. All total returns include reinvested distributions according to the terms specified in the Fund's dividend reinvestment and cash purchase plan and do not reflect any sales charges paid at inception or brokerage commissions paid on secondary market purchases. The performance table does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the sale of Fund shares. PRICE AND DISTRIBUTION INFORMATION
- ------------------------------------------------------------------------------------------------- CHANGE 12/31/03 12/31/02 - ------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$6.89 $16.62 $9.73 - ------------------------------------------------------------------------------------------------- Market Price (NYSE) +$9.07 $17.99 $8.92 - ------------------------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/03-12/31/03) - ------------------------------------------------------------------------------------------------- Dividend Income $0.56 - -------------------------------------------------------------------------------------------------
PERFORMANCE
- ------------------------------------------------------------------------------------------------- COMMENCEMENT OF 1-YEAR 5-YEAR OPERATIONS (9/20/94) - ------------------------------------------------------------------------------------------------- Cumulative Total Return(1) - ------------------------------------------------------------------------------------------------- Based on change in NAV +76.54% +156.07% +139.88% - ------------------------------------------------------------------------------------------------- Based on change in market price +108.44% +275.84% +144.07% - ------------------------------------------------------------------------------------------------- Average Annual Total Return(1) - ------------------------------------------------------------------------------------------------- Based on change in NAV +76.54% +20.69% +9.89% - ------------------------------------------------------------------------------------------------- Based on change in market price +108.44% +30.32% +10.09% - -------------------------------------------------------------------------------------------------
ENDNOTES ONGOING MARKET VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE; MORE RECENT RETURNS MAY DIFFER FROM THOSE SHOWN. SPECIAL RISKS ARE ASSOCIATED WITH FOREIGN INVESTING, INCLUDING CURRENCY VOLATILITY, ECONOMIC INSTABILITY AND SOCIAL AND POLITICAL DEVELOPMENTS OF COUNTRIES WHERE THE FUND INVESTS. EMERGING MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN ADDITION TO THOSE ASSOCIATED WITH THEIR RELATIVELY SMALL SIZE AND LESSER LIQUIDITY. ALSO, AS A NON-DIVERSIFIED INVESTMENT COMPANY INVESTING IN "CHINA COMPANIES," THE FUND MAY INVEST IN A RELATIVELY SMALL NUMBER OF ISSUERS AND, AS A RESULT, BE SUBJECT TO A GREATER RISK OF LOSS WITH RESPECT TO ITS PORTFOLIO SECURITIES. SINCE MARKETS CAN GO DOWN AS WELL AS UP, INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE WITH MARKET CONDITIONS, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. 1. Total return calculations represent the cumulative and average annual changes in value of an investment over the periods indicated. For more current performance figures, call Franklin Templeton Investments at 1-800/342-5236. 6 | Past performance does not guarantee future results. | Annual Report Templeton Dragon Fund, Inc. FINANCIAL HIGHLIGHTS
------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, 2003 2002 2001 2000 1999 ------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ...................... $9.73 $8.82 $9.91 $12.75 $10.00 ------------------------------------------------------------------------ Income from investment operations: Net investment income(a)................................ .56 .17 .25 .12 .31 Net realized and unrealized gains (losses) ............. 6.75 .81 (.37) (2.01) 3.58 ------------------------------------------------------------------------ Total from investment operations ........................ 7.31 .98 (.12) (1.89) 3.89 ------------------------------------------------------------------------ Capital share repurchases ............................... .14 .10 .01 .22 -- ------------------------------------------------------------------------ Less distributions from: Net investment income .................................. (.56) (.17) (.23) (1.17) (.32) ------------------------------------------------------------------------ Tax return of capital .................................. -- -- (.75) -- (.82) ------------------------------------------------------------------------ Total distributions ..................................... (.56) (.17) (.98) (1.17) (1.14) ------------------------------------------------------------------------ Net asset value, end of year ............................ $16.62 $9.73 $8.82 $9.91 $12.75 ------------------------------------------------------------------------ Market value, end of year(b)............................. $17.990 $8.920 $7.490 $7.250 $9.813 ------------------------------------------------------------------------ Total return (based on market value per share)(c)........ 108.44% 21.22% 16.95% (15.31)% 50.11% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ......................... $626,959 $431,779 $429,889 $485,091 $673,869 Ratios to average net assets: Expenses ............................................... 1.64%(d) 1.62% 1.54% 1.56% 1.59% Net investment income .................................. 4.57% 1.80% 2.58% 1.04% 2.80% Portfolio turnover rate ................................. 29.91% 15.75% 70.94% 132.74% 66.60%
a Based on average daily shares outstanding. b Based on the last sale on the New York Stock Exchange. c Total return is not annualized for periods less than one year. d Ratio of expenses to average net assets, excluding payments by affiliate were 1.78% (Note 8). Annual Report | See notes to financial statements. | 7 Templeton Dragon Fund, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2003
- ---------------------------------------------------------------------------------------------------------------------------- COUNTRY SHARES VALUE - ---------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 100.0% AIRLINES 1.3% Cathay Pacific Airways Ltd. .......................................... Hong Kong 2,060,000 $ 3,913,777 Singapore Airlines Ltd. .............................................. Singapore 654,000 4,313,019 -------------- 8,226,796 -------------- AUTO COMPONENTS 1.1% (a)Cheng Shin Rubber Industry Co. Ltd. .................................. Taiwan 5,178,000 6,604,047 -------------- AUTOMOBILES .8% Qingling Motors Co. Ltd., H .......................................... China 26,257,496 5,174,657 -------------- CHEMICALS 3.1% Sinopec Beijing Yanhua Petrochemical Co. Ltd., H ..................... China 49,271,887 19,198,240 -------------- COMMERCIAL BANKS 3.7% Chinatrust Financial Holding Co. Ltd. ................................ Taiwan 7,674,540 7,708,448 Mega Financial Holdings Co. Ltd. ..................................... Taiwan 10,307,000 6,193,308 (a)Sinopac Holdings ..................................................... Taiwan 18,042,423 9,140,786 -------------- 23,042,542 -------------- COMMUNICATIONS EQUIPMENT .4% D-Link Corp. ......................................................... Taiwan 1,953,000 2,605,918 -------------- COMPUTERS & PERIPHERALS 5.0% Acer Inc. ............................................................ Taiwan 7,633,000 11,353,947 Advantech Co. Ltd. ................................................... Taiwan 2,790,865 4,809,001 Asustek Computer Inc. ................................................ Taiwan 2,621,375 5,790,961 Compal Electronics Inc. .............................................. Taiwan 1,488,100 2,038,193 Legend Group Ltd. .................................................... Hong Kong 7,604,000 3,256,646 Lite-on Technology Corp. ............................................. Taiwan 4,081,000 4,327,423 -------------- 31,576,171 -------------- CONSTRUCTION MATERIALS 4.0% Cheung Kong Infrastructure Holdings Ltd. ............................. Hong Kong 11,060,000 24,787,985 (a)China Resources Cement ............................................... Hong Kong 872,000 280,798 -------------- 25,068,783 -------------- DISTRIBUTORS 2.3% China Resources Enterprise Ltd. ...................................... Hong Kong 12,628,000 14,313,772 -------------- DIVERSIFIED FINANCIAL SERVICES 1.0% Yuanta Core Pacific Securities Co. ................................... Taiwan 10,435,067 6,239,525 -------------- DIVERSIFIED TELECOMMUNICATION SERVICES .9% China Telecom Corp. Ltd., H .......................................... China 14,280,000 5,885,929 -------------- ELECTRIC UTILITIES 5.7% Beijing Datang Power Generation Co. Ltd., H .......................... China 32,020,000 22,890,283 Guangdong Electric Power Development Co Ltd., B ...................... China 5,467,100 4,725,159 Huaneng Power International Inc., H .................................. China 4,628,000 8,017,749 -------------- 35,633,191 -------------- ELECTRICAL EQUIPMENT 1.3% Phoenixtec Power Co. Ltd. ............................................ Taiwan 7,224,945 8,469,891 --------------
8 | Annual Report Templeton Dragon Fund, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2003 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------- COUNTRY SHARES VALUE - ---------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) ELECTRONIC EQUIPMENT & INSTRUMENTS 1.7% Delta Electronics Inc. ............................................... Taiwan 8,501,050 $ 10,892,362 -------------- FOOD & STAPLES RETAILING 10.7% Dairy Farm International Holdings Ltd. ............................... Hong Kong 39,911,478 66,851,726 -------------- FOOD PRODUCTS 1.1% UNI-President Enterprises Corp. ...................................... Taiwan 16,069,030 6,602,738 -------------- HOTELS RESTAURANTS & LEISURE 2.0% Hong Kong & Shanghai Hotels Ltd. ..................................... Hong Kong 21,534,000 12,551,052 -------------- HOUSEHOLD DURABLES 5.7% Altek Corporation .................................................... Taiwan 2,143,200 3,598,303 TCL International Holdings Inc. ...................................... Hong Kong 54,052,000 23,845,652 Tsann Kuen Enterprise Co. Ltd. ....................................... Taiwan 5,572,000 8,107,711 -------------- 35,551,666 -------------- INDUSTRIAL CONGLOMERATES 9.4% Beijing Enterprises Holdings Ltd. .................................... Hong Kong 3,082,000 3,612,525 China Merchants Holdings (International) Co. Ltd. .................... Hong Kong 18,734,000 24,733,822 Citic Pacific Ltd. ................................................... Hong Kong 7,408,000 18,893,091 Hutchison Whampoa Ltd. ............................................... Hong Kong 398,000 2,934,914 Shanghai Industrial Holdings Ltd. .................................... China 3,743,000 8,557,660 -------------- 58,732,012 -------------- INSURANCE .7% (a)China Life Insurance Co. Ltd., H ..................................... China 5,092,000 4,164,846 -------------- IT SERVICES .4% Travelsky Technology Ltd., H ......................................... China 2,558,000 2,751,211 -------------- MACHINERY .5% China International Marine Containers ................................ China 1,657,541 3,172,634 -------------- METALS & MINING .2% Yanzhou Coal Mining Co. Ltd., H ...................................... China 1,458,000 1,474,226 -------------- OIL & GAS 15.4% China Petroleum & Chemical Corp., H .................................. China 148,606,000 66,516,288 PetroChina Co. Ltd., H ............................................... China 52,754,000 30,237,944 -------------- 96,754,232 -------------- REAL ESTATE 9.0% Cheung Kong Holdings Ltd. ............................................ Hong Kong 1,807,000 14,372,488 Hang Lung Group Ltd. ................................................. Hong Kong 20,415,000 25,506,917 Henderson China Holdings Ltd. ........................................ Hong Kong 9,215,000 4,599,429 Henderson Investment Ltd. ............................................ Hong Kong 7,485,000 8,628,825 Hong Kong Land Holdings Ltd. ......................................... Hong Kong 1,904,000 3,236,800 -------------- 56,344,459 -------------- ROAD & RAIL .5% Guangshen Railway Co. Ltd., H ........................................ China 11,998,000 3,399,918 --------------
Annual Report | 9 Templeton Dragon Fund, Inc. STATEMENT OF INVESTMENTS, DECEMBER 31, 2003 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------- COUNTRY SHARES VALUE - ---------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 2.3% Elan Microelectronics Corp. .......................................... Taiwan 3,408,000 $ 3,061,679 Sunplus Technology Co. Ltd. .......................................... Taiwan 6,073,900 11,360,608 -------------- 14,422,287 -------------- TEXTILES APPAREL & LUXURY GOODS .7% Tack Fat Group International Ltd. .................................... Hong Kong 18,064,000 1,838,137 Tainan Enterprises Co., Ltd. ......................................... Taiwan 1,846,000 2,506,645 -------------- 4,344,782 -------------- TRANSPORTATION INFRASTRUCTURE 3.9% Cosco Pacific Ltd. ................................................... China 6,678,000 8,902,738 Jiangsu Expressway Co. Ltd., H ....................................... China 22,976,000 12,207,739 Zhejiang Expressway Co. Ltd., H ...................................... China 4,422,000 3,104,217 -------------- 24,214,694 -------------- WIRELESS TELECOMMUNICATION SERVICES 5.2% China Mobile (Hong Kong) Ltd. ........................................ China 9,986,000 30,677,276 Taiwan Cellular Corp. ................................................ Taiwan 2,070,764 1,799,338 -------------- 32,476,614 -------------- TOTAL COMMON STOCKS (COST $409,936,100) ............................... 626,740,921 -------------- SHORT TERM INVESTMENTS (COST $15,811,087) 2.5% (b)Franklin Institutional Fiduciary Trust Money Market Portfolio ........ United States 15,811,087 15,811,087 -------------- TOTAL INVESTMENTS (COST $425,747,187) 102.5% .......................... 642,552,008 OTHER ASSETS, LESS LIABILITIES (2.5)% ................................. (15,592,645) -------------- NET ASSETS 100.0% ..................................................... $626,959,363 --------------
a Non-income producing. b See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. 10 | See notes to financial statements. | Annual Report Templeton Dragon Fund, Inc. FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES December 31, 2003
Assets: Investments in securities: Cost .................................................................................................. $425,747,187 -------------- Value ................................................................................................. 642,552,008 Foreign Currency, at value (cost $4,480,531) ........................................................... 4,484,931 Receivables: Investment securities sold ............................................................................ 1,484,541 -------------- Total assets ...................................................................................... 648,521,480 -------------- Liabilities: Payables: Affiliates ............................................................................................ 703,020 Distributions to Shareholders .......................................................................... 20,470,504 Other liabilities ...................................................................................... 388,593 -------------- Total liabilities ................................................................................. 21,562,117 -------------- Net assets, at value ............................................................................ $626,959,363 -------------- Net assets consist of: Undistributed net investment income .................................................................... $ 1,976,800 Net unrealized appreciation (depreciation) ............................................................. 216,809,397 Accumulated net realized gain (loss) ................................................................... (47,082,739) Capital shares ......................................................................................... 455,255,905 -------------- Net assets, at value .............................................................................. $626,959,363 -------------- Net asset value per share ($626,959,363 / 37,719,742 shares outstanding) ................................ $16.62 --------------
Annual Report | See notes to financial statements. | 11 Templeton Dragon Fund, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF OPERATIONS for the year ended December 31, 2003
Investment Income: (net of foreign taxes of $676,941) Dividends .............................................................................................. $ 30,870,045 Interest ............................................................................................... 1,354 -------------- Total investment income ........................................................................... 30,871,399 -------------- Expenses: Management fees (Note 3) ............................................................................... 6,096,012 Administrative fees (Note 3) ........................................................................... 743,222 Transfer agent fees .................................................................................... 297,200 Custodian fees ......................................................................................... 283,400 Reports to shareholders ................................................................................ 229,439 Registration and filing fees ........................................................................... 38,900 Professional fees ...................................................................................... 1,084,700 Directors' fees and expenses ........................................................................... 58,800 Other .................................................................................................. 12,800 -------------- Total expenses .................................................................................... 8,844,473 -------------- Expenses paid by affiliate (Note 8) .............................................................. (688,892) -------------- Net expenses .................................................................................... 8,155,581 -------------- Net investment income .......................................................................... 22,715,818 -------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments: Unaffiliated issuers ................................................................................. 62,985,440 Non-controlled affiliated issuers (Note 6) ........................................................... (8,931,314) Foreign currency transactions ......................................................................... (73,228) -------------- Net realized gain (loss) ........................................................................ 53,980,898 -------------- Net unrealized appreciation (depreciation) on: Investments: .......................................................................................... 206,146,847 Translation of assets and liabilities denominated in foreign currencies ............................... 4,576 -------------- Net unrealized appreciation (depreciation) ...................................................... 206,151,423 -------------- Net realized and unrealized gain (loss) ................................................................. 260,132,321 -------------- Net increase (decrease) in net assets resulting from operations ......................................... $282,848,139 --------------
12 | See notes to financial statements. | Annual Report Templeton Dragon Fund, Inc. FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS for the years ended December 31, 2003 and 2002 -------------------------------- 2003 2002 -------------------------------- Increase (decrease) in net assets: Operations: Net investment income ...................................................... $ 22,715,818 $ 8,191,719 Net realized gain (loss) from investments and foreign currency transactions .............................................................. 53,980,898 3,663,821 Net unrealized appreciation (depreciation) on investments and translation of assets and liabilities denominated in foreign currencies ............... 206,151,423 39,095,638 -------------------------------- Net increase (decrease) in net assets resulting from operations ........ 282,848,139 50,951,178 Distributions to shareholders from net investment income .................... (21,136,146) (7,570,574) Capital share transactions (Note 2) ......................................... (66,531,693) (41,490,771) -------------------------------- Net increase (decrease) in net assets .................................. 195,180,300 1,889,833 Net assets: Beginning of year ........................................................... 431,779,063 429,889,230 -------------------------------- End of year ................................................................. $626,959,363 $431,779,063 -------------------------------- Undistributed net investment income included in net assets: End of year ................................................................. $ 1,976,800 $ 470,356 --------------------------------
Annual Report | See notes to financial statements. | 13 Templeton Dragon Fund, Inc. NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Templeton Dragon Fund, Inc. (the Fund), is registered under the Investment Company Act of 1940 as a closed-end, non-diversified investment company. The Fund seeks long-term capital appreciation by investing at least 45% of its total assets in the equity securities of "China companies," as defined in the Fund's prospectus. On May 29, 2002, the Fund's shareholders approved an Agreement and Plan of Reorganization (the "Plan") that provides for the reorganization of the Fund from a Maryland corporation to a Delaware statutory trust. The completion of the reorganization is pending guidance from the National Tax Agency in Japan relating to the tax treatment of the Plan under Japanese laws with respect to the Fund's Japanese shareholders. If and when the reorganization is completed, the Delaware statutory trust will be the successor to the Fund. The following summarizes the Fund's significant accounting policies. A. SECURITY VALUATION Securities listed or traded on a recognized national exchange or NASDAQ are valued at the last reported sales price. Over-the-counter securities and listed securities for which no sale is reported are valued within the range of the latest quoted bid and asked prices. Investments in open-end mutual funds are valued at the closing net asset value. Foreign securities are valued at the close of trading of the foreign exchange or the NYSE, whichever is earlier. If events occur that materially affect the values of securities after the prices or foreign exchange rates are determined, or if market quotations are not readily available, the securities will be valued at fair value as determined following procedures approved by the Board of Directors. B. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities and income items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes, and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. 14 | Annual Report Templeton Dragon Fund, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) C. FOREIGN CURRENCY CONTRACTS When the Fund purchases or sells foreign securities it may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate on a specified date. Realized and unrealized gains and losses are included in the Statement of Operations. The risks of these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the possible inability of the counterparties to fulfill their obligations under the contracts. D. INCOME TAXES No provision has been made for income taxes because the Fund's policy is to qualify as a regulated investment company under the Internal Revenue Code and to distribute substantially all of its taxable income. E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Certain income from foreign securities is recorded as soon as information is available to the Fund. Interest income and estimated expenses are accrued daily. Dividend income and distributions to shareholders are recorded on the ex-dividend date. F. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expense during the reporting period. Actual results could differ from those estimates. G. GUARANTEES AND INDEMNIFICATIONS Under the Fund's organizational documents, its officers and directors are indemnified against certain liability arising out of the performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts with service providers that contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risk of loss to be remote. Annual Report | 15 Templeton Dragon Fund, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. CAPITAL STOCK On October 18, 1997, the Board of Directors of the Fund authorized management to implement an open-market share repurchase program pursuant to which the Fund may purchase, from time to time, up to 5.4 million shares of the Fund's common stock in open-market transactions, at the discretion of management (approximately 10% of the shares outstanding at the time the program was initially implemented). In May 2000, the Board of Directors removed the 10% limitation on share repurchases in order to give management greater flexibility to engage in an aggressive share repurchase program. Effective May 10, 2002, the Board of Directors discontinued the repurchase program. At December 31, 2003, there were 100 million shares authorized ($.01 par value). On July 11, 2002 and May 22, 2003, the Fund purchased and retired certain amounts of its outstanding common stock. The Fund incurred tender costs, which were charged to additional paid-in-capital. Tender offer transactions were as follows: --------------------------------- MAY 22, 2003* JULY 11, 2002 --------------------------------- Shares repurchased and retired ......... 6,656,425 4,364,926 Purchase price ......................... $9.97 $9.45 Percentage of net asset value .......... 92.5% 90% Tender costs incurred .................. $167,136 $242,221 *See Note 8 regarding Recent Litigation 3. TRANSACTIONS WITH AFFILIATES Certain officers of the Fund are also officers or directors of Templeton Asset Management Ltd. (TAML) and Franklin Templeton Services, LLC (FT Services), the Fund's investment manager and administrative manager, respectively. The Fund pays an investment management fee to TAML of 1.25% per year of the average weekly net assets of the Fund. The Fund pays FT Services an administrative fee of 0.15% per year of the Fund's average weekly net assets, of which 0.10% is paid to Nomura Asset Management, Inc., for sub-administrative services. 4. INCOME TAXES At December 31, 2003, the cost of investments, net unrealized appreciation (depreciation), and undistributed ordinary income for income tax purposes were as follows: Cost of investments ..................................... $427,257,882 -------------- Unrealized appreciation ................................. 225,925,227 Unrealized depreciation ................................. (10,631,101) -------------- Net unrealized appreciation (depreciation) .............. $215,294,126 -------------- Distributable earnings - ordinary income ................ $ 1,976,800 -------------- 16 | Annual Report Templeton Dragon Fund, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. INCOME TAXES (CONTINUED) The tax character of distributions paid during the years ended December 31, 2003 and 2002, was as follows: ------------------------- 2003 2002 ------------------------- Distributions paid from: Ordinary income ................. $21,136,146 $7,570,574 Net investment income differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions. Net realized gains and losses differ for financial statement and tax purposes primarily due to differing treatment of wash sales and foreign currency transactions. At December 31, 2003, the Fund had tax basis capital losses of $45,572,045 which may be carried over to offset future capital gains. Such losses expire in 2009. 5. INVESTMENT TRANSACTIONS Purchases and sales of securities (excluding short-term securities) for the year ended December 31, 2003 aggregated $139,926,322 and $190,359,489, respectively. 6. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES The Investment Company Act of 1940 defines "affiliated companies" to include investments in portfolio companies in which the Fund owns 5% or more of the outstanding voting securities. Investments in "affiliated companies" at December 31, 2003 were as shown below.
- -------------------------------------------------------------------------------------------------------------------------- NUMBER OF NUMBER OF REALIZED SHARES HELD SHARES HELD VALUE CAPITAL AT BEGINNING GROSS GROSS AT END AT END DIVIDEND GAINS/ NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS OF YEAR OF YEAR INCOME (LOSSES) - -------------------------------------------------------------------------------------------------------------------------- Non-Controlled Affiliates Angang New Steel Company Ltd., H ............. 58,332,000 -- (58,332,000) -- * -- $ (967,791) Sinopec Beijing Yanhua Petrochemical Co. Ltd., H ..................... 72,215,887 -- (22,944,000) 49,271,887 * -- 516,857 Tsingtao Brewery Co. Ltd., H ..................... 39,944,000 -- (39,944,000) -- * -- (8,480,380) ---------------------------------- TOTAL NON-CONTROLLED AFFILIATES $-- $-- $(8,931,314) ---------------------------------- *As of December 31, 2003 no longer an affiliate.
Annual Report | 17 Templeton Dragon Fund, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Fund may invest in the Franklin Institutional Fiduciary Trust Money Market Portfolio (the Sweep Money Fund), an open-end investment company managed by Franklin Advisers Inc. (an affiliate of the Fund's investment manager). Management fees paid by the Fund are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management fees paid by the Sweep Money Fund. The Fund earned $260,414 of dividend income from investments in the Sweep Money Fund for the year ended December 31, 2003. 8. RECENT LITIGATION On January 29, 2003, the Fund, together with Templeton China World Fund, Inc. ("China Fund"), another closed-end management investment company in Franklin Templeton Investments, and TAML, the investment adviser to the Fund and China Fund, filed a complaint in the United States District Court for the District of Maryland, Northern Division, against Harvard College, Harvard Management Company, Inc. ("Harvard Management"), which is an investment advisor to Harvard College, and Steven Alperin, an officer of Harvard Management (referred to collectively as "Harvard"). The complaint alleged that Harvard violated several provisions of the Federal securities laws and the rules of the SEC related to Harvard's ownership of Fund shares and actions as a shareholder. On February 7, 2003, Harvard counterclaimed, alleging that the Fund, China Fund, TAML and each fund's directors violated certain provisions of the Federal securities laws and SEC rules. Harvard also asserted counterclaims of breach of fiduciary duty under Maryland state law against TAML and each fund's directors. On March 20, 2003, the parties announced a settlement of their claims. DISMISSAL OF LAWSUIT. Pursuant to the Settlement Agreement between the Fund and Harvard, the complaint brought by the Fund, China Fund and TAML against Harvard, as well as the counterclaims brought by Harvard against the Fund, China Fund, each fund's directors and TAML were dismissed without prejudice. The parties have also entered into covenants not to sue each other with respect to the claims that were made or could have been made in the litigation absent a breach of the settlement agreements. SHAREHOLDER PROPOSALS. As part of the settlement, Harvard College agreed to withdraw all of its shareholder proposals for the Fund's 2003 Annual Shareholders' meeting (the "Meeting.") 18 | Annual Report Templeton Dragon Fund, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. RECENT LITIGATION (CONTINUED) TENDER OFFERS. The Fund announced that as part of its settlement with Harvard, it agreed to take, and the Board approved, the following actions: o APRIL 2003 CASH TENDER OFFER--The Fund agreed to commence a cash tender offer, which was required to be commenced on or prior to April 30, 2003, for 15% of the Fund's outstanding shares at 92.5% of net asset value per share as of the date the offer expires. Previously, the Board had approved an April 2003 cash tender offer for not less than 10% of the Fund's outstanding shares at not less than 90% of net asset value per share. On April 24, 2003, the Fund commenced a tender offer for up to 6,656,425 shares, or 15%, of the Fund's outstanding shares at a price per share equal to 92.5% of net asset value per share as of May 22, 2003, the expiration date of the tender offer. In accordance with the terms of the tender offer, 6,656,425 shares were accepted by the Fund for a purchase price of $9.97 per share. o IN-KIND TENDER OFFERS--The Fund has applied to the SEC for an exemptive order allowing the Fund to make occasional, non-periodic tender offers, each for up to 20% of the Fund's outstanding shares at a price equal to 95% of net asset value per share as of the date the offer expires, to be paid entirely in kind through a pro rata distribution of marketable portfolio securities and available cash. Subject to certain conditions, the settlement requires the Fund to commence such an in-kind tender offer for 20% of the Fund's shares within three months after obtaining the SEC exemption. The Fund may also be required under the settlement to conduct, on substantially identical terms, up to two additional in-kind tender offers under certain circumstances. There is no assurance that the SEC will issue the exemptive order, nor is it possible to predict the date when an exemptive order might be granted. o ADDITIONAL CASH TENDER OFFERS--If the SEC does not issue the exemptive order for in-kind tender offers by March 26, 2004, the settlement provides that the Fund may, but is not obligated to, conduct an additional cash tender offer, and possibly later follow-on cash tender offers, each for 15% of the Fund's outstanding shares at a price of 92.5% of net asset value per share as of the date the offer expires. Under certain circumstances, if the Fund does not conduct these tender offers, Harvard will be relieved of its obligation to refrain from making shareholder proposals and taking other actions with respect to the Fund. Harvard announced that it intends to tender all of the shares it then owns into each tender offer described above that is commenced. The Settlement Agreement provides that the Fund will not be obligated to commence in-kind tender offers or additional cash tender offers under certain circumstances or conditions. These relate to, among other things, the number of shares tendered by shareholders into preceding tender offers as well as the beneficial ownership percentages of the Fund's shareholders. Annual Report | 19 Templeton Dragon Fund, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. RECENT LITIGATION (CONTINUED) STANDSTILL. As part of the settlement, Harvard agreed not to submit any proposals for consideration by shareholders of the Fund, or any other closed-end fund or similar investment vehicle managed by TAML or its affiliates, or for consideration by shareholders of Franklin Resources, nor to encourage others to do so, for a period of four years. Harvard also has agreed not at any time to acquire additional shares of the Fund or any other closed-end fund or similar investment vehicle managed by TAML or its affiliates. FEES, COSTS AND EXPENSES. The Fund agreed that TAML would be responsible for the legal fees and expenses incurred by the Fund and its directors with respect to the Settlement Agreement and the litigation. The Fund agreed that TAML would also be responsible for the legal fees and expenses incurred by the Fund through March 20, 2003, with respect to its proxy contest relating to the Meeting. 9. REGULATORY MATTERS On February 4, 2004, the Securities Division of the Office of the Secretary of the Commonwealth of Massachusetts filed an administrative complaint against Franklin Resources, Inc. and certain of its subsidiaries (the "Company"), alleging violations of the Massachusetts Uniform Securities Act. The complaint arises from activity that occurred in 2001 during which time an officer of a Company subsidiary was negotiating an agreement with an investor relating to investments in a mutual fund and a hedge fund. The Fund, in addition to other entities within Franklin Templeton Investments, including the Company and other funds, has been named in shareholder class actions related to the matter described above. The Fund's management believes that the claims made in the lawsuit are without merit and it intends to defend vigorously against the allegations. It is anticipated that the Fund may be named in additional similar civil actions related to the matter described above. In addition, as part of ongoing investigations by the U.S. Securities and Exchange Commission (the "SEC"), the U.S. Attorney for the Northern District of California, the New York Attorney General, the California Attorney General, the U.S. Attorney for the District of Massachusetts, the Florida Department of Financial Services, and the Commissioner of Securities and the Attorney General of the State of West Virginia, relating to certain practices in the mutual fund industry, including late trading, market timing and sales compensation arrangements, the Company and its subsidiaries, as well as certain current or former executives and employees of the Company, have received requests for information and/or subpoenas to testify or produce documents. The Company and its current employees are providing documents and information in response to these requests and subpoenas. In addition, the Company has responded to requests for similar kinds of information from regulatory authorities in some of the foreign countries where the Company conducts its global asset management business. 20 | Annual Report Templeton Dragon Fund, Inc. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. REGULATORY MATTERS (CONTINUED) The Staff of the SEC has informed the Company that it intends to recommend that the Commission authorize an action against an affiliate of the Fund's adviser and a senior executive officer relating to the frequent trading issues that are the subject of the SEC's investigation. These issues were previously disclosed as being under investigation by government authorities and the subject of an internal inquiry by the Company in its Annual Report on Form 10-K and on its public website. The Company currently is in discussions with the SEC Staff in an effort to resolve the issues raised in their investigation. Such discussions are preliminary and the Fund management has been advised that the Company cannot predict the likelihood of whether those discussions will result in a settlement and, if so, the terms of such settlement. The impact, if any, of these matters on the Fund is uncertain at this time. If the Company finds that it bears responsibility for any unlawful or improper conduct, it has committed to making the Fund or its shareholders whole, as appropriate. Annual Report | 21 Templeton Dragon Fund, Inc. INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF TEMPLETON DRAGON FUND, INC. In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Templeton Dragon Fund, Inc. (the "Fund") at December 31, 2003, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2003 by correspondence with the custodian, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California January 30, 2004, except for Note 9, as to which the date is February 12, 2004. 22 | Annual Report Templeton Dragon Fund, Inc. ANNUAL MEETING OF SHAREHOLDERS, MAY 29, 2003 An Annual Meeting of Shareholders of the Fund was held at the Tower Club, 28th Floor, Union Planters Bank Building, 100 South East 3rd Avenue, Fort Lauderdale, Florida, on May 29, 2003. The purpose of the meeting was to elect three Directors of the Fund. At the meeting held on May 29, 2003, the following persons were elected by the shareholders to serve as Directors of the Fund: Betty P. Krahmer, Gordon S. Macklin and Fred R. Millsaps.* No other business was transacted at the meeting. The results of the voting at the meeting are as follows: Proposal 1. The election of three (3) Directors:
- ------------------------------------------------------------------------------------------------------ % OF % OF % OF % OF OUTSTANDING VOTED OUTSTANDING VOTED TERM EXPIRING 2006 FOR SHARES SHARES WITHHELD SHARES SHARES - ------------------------------------------------------------------------------------------------------ INDEPENDENT DIRECTORS Betty P. Krahmer ..... 40,415,163 91.07% 98.05% 802,238 1.81% 1.95% Gordon S. Macklin .... 40,402,652 91.05% 98.02% 814,749 1.84% 1.98% Fred R. Millsaps ..... 40,251,905 90.71% 97.66% 965,496 2.18% 2.34%
* Harris J. Ashton, Frank J. Crothers, S. Joseph Fortunato, Edith E. Holiday, Frank A. Olson and Constantine D. Tseretopoulos currently serve as Independent Directors and Nicholas F. Brady, Martin L. Flanagan and Charles B. Johnson currently serve as Interested Directors. Their terms of office continued after the Annual Meeting of Shareholders. Annual Report | 23 Templeton Dragon Fund, Inc. DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN The Fund offers a Dividend Reinvestment and Cash Purchase Plan (the "Plan") with the following features: If shares of the Fund are held in the shareholder's name, the shareholder will automatically be a participant in the Plan (other than shareholders holding their shares through Japan Securities Clearing Corporation, who will not be enrolled in the Plan unless certain conditions are met and they elect to participate), unless he elects to withdraw. If the shares are registered in the name of a broker-dealer or other nominee (i.e., in "street name"), the broker-dealer or nominee will elect to participate in the Plan on the shareholder's behalf unless the shareholder instructs them otherwise, or unless the reinvestment service is not provided by the broker-dealer or nominee. Participants should contact Mellon Investor Services LLC, P.O. Box 3338, South Hackensack, NJ 07606-1938, to receive the Plan brochure. To receive dividends or distributions in cash, the shareholder must notify Mellon Securities Trust Company (the "Plan Agent") at the address above or the institution in whose name the shares are held. The Plan Agent must receive written notice within 10 business days before the record date for the distribution. Whenever the Fund declares dividends in either cash or common stock of the Fund, if the market price is equal to or exceeds net asset value at the valuation date, the participant will receive the dividends entirely in stock at a price equal to the net asset value, but not less than 95% of the then current market price of the Fund's shares. If the market price is lower than net asset value or if dividends and/or capital gains distributions are payable only in cash, the participant will receive shares purchased on the New York Stock Exchange or otherwise on the open market. A participant has the option of submitting additional payments to the Plan Agent, in any amounts of at least $100, up to a maximum of $5,000 per month, for the purchase of Fund shares for his or her account. These payments shall be made by check or money order payable to "Mellon Securities Trust Company" and sent to Mellon Investor Services LLC, P.O. Box 382009, Pittsburgh, PA 15250-8009, Attn: Templeton Dragon Fund, Inc. The Plan Agent shall apply such payments (less a $5.00 service charge and less a pro rata share of trading fees) to purchases of the Fund's shares in the open market. The automatic reinvestment of dividends and/or capital gains does not relieve the participant of any income tax which may be payable on dividends or distributions. The participant may withdraw from the Plan without penalty at any time by written notice to the Plan Agent sent to Mellon Investor Services LLC, P.O. Box 3338, South Hackensack, NJ 07606-1938. Upon withdrawal, the participant will receive, without charge, stock certificates issued in the participant's name for all full shares held by the Plan Agent; or, if the participant wishes, the Plan Agent will sell the participant's shares and send the proceeds, less a service charge of $5.00 and less trading fees. Whenever shares are purchased on the New York Stock Exchange or otherwise on the open market, each participant will pay a pro rata portion of trading fees. Trading fees will be deducted from amounts to be invested. Effective April 23, 2004, the fees for the sale of shares through the Plan will be $15.00 per transaction plus a $0.12 per share trading fee. All other terms and conditions of the Plan remain in effect and have not been modified or amended. 24 | Annual Report Templeton Dragon Fund, Inc. TRANSFER AGENT Mellon Investor Services LLC 85 Challenger Road Ridgefield Park, NJ 07660 1-800-416-5585 www.melloninvestor.com SHAREHOLDER INFORMATION Shares of Templeton Dragon Fund, Inc. are traded daily on the New York Stock Exchange under the symbol "TDF". The Fund's shares are also listed and traded in Japan on the Osaka Securities Exchange. Information about the net asset value and the market price is published each Monday in the Wall Street Journal, weekly in Barron's and each Saturday in The New York Times and other newspapers. Daily market prices for the Fund's shares are published in the New York Stock Exchange Composite Transactions section of newspapers. For current information about distributions and shareholder accounts, call 1-800-416-5585. Registered shareholders can now access their Fund account on-line with Investor Service Direct(R). For information go to Mellon Investor Services' web site at http://melloninvestor.com and follow the instructions. The daily closing net asset value as of the previous business day may be obtained when available by calling Franklin Templeton Fund Information after 7 a.m. pacific time any business day at 1-800/DIAL BEN(R) (1-800/342-5236). The Fund's net asset value and dividends are also listed on the NASDAQ Stock Market, Inc.'s Mutual Fund Quotation Service ("NASDAQ MFQS"). Shareholders not receiving copies of the reports to shareholders because their shares are registered in the name of a broker or a custodian can request that they be added to the Fund's mailing list by writing Templeton Dragon Fund, Inc., 100 Fountain Parkway, P.O. Box 33030, St. Petersburg, FL 33733-8030. Annual Report | 25 Templeton Dragon Fund, Inc. TAX DESIGNATION (UNAUDITED) Under Section 854(b)(2) of the Internal Revenue Code (Code), the Fund hereby designates up to maximum of $4,789,102 as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended December 31, 2003. In January 2004, shareholders will receive Form 1099-DIV which will include their share of qualified dividends distributed during the calendar year 2003. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns. At December 31, 2003, more than 50% of the Templeton Dragon Fund, Inc.'s total assets were invested in securities of foreign issuers. In most instances, foreign taxes were withheld from dividends paid to the Fund on these investments. As shown in the table below, the Fund hereby designates to shareholders the foreign source income and foreign taxes paid, pursuant to Section 853 of the Internal Revenue Code. This designation will allow shareholders of record on December 31, 2003, to treat their proportionate share of foreign taxes paid by the Fund as having been paid directly by them. The shareholder shall consider these amounts as foreign taxes paid in the tax year in which they receive the Fund distribution. The following table provides a detailed analysis, by country, of Foreign Tax Paid, Foreign Source Income, Foreign Qualified Dividends and Adjusted Foreign Source Income as designated by the Fund, to shareholders of record. As a service to individual shareholders filing Form 1116, "Adjusted Foreign Source Income per Share" in column 4 below reports foreign source income with the required adjustments to foreign source qualified dividends. This information is provided to simplify your reporting of foreign source income for line 1 of Form 1116. - -------------------------------------------------------------------------------- ADJUSTED FOREIGN TAX FOREIGN FOREIGN FOREIGN PAID SOURCE INCOME QUALIFIED DIVIDENDS SOURCE INCOME COUNTRY PER SHARE PER SHARE PER SHARE PER SHARE - -------------------------------------------------------------------------------- China ........... 0.0000 0.1411 0.0932 0.0878 Hong Kong ....... 0.0000 0.4159 0.0000 0.4159 Singapore ....... 0.0003 0.0019 0.0000 0.0019 Taiwan .......... 0.0176 0.0502 0.0000 0.0502 ----------------------------------------------------------- TOTAL ........... $0.0179 $0.6091 $0.0932 $0.5558 ----------------------------------------------------------- Foreign Tax Paid per Share (Column 1) is the amount per share available to you, as a tax credit or deduction (assuming you held your shares in the Fund for a minimum of 16 days during the 30-day period beginning 15 days before the ex-dividend date of the Fund's distribution to which the foreign taxes relate). Foreign Source Income per Share (Column 2) is the amount per share of income dividends paid to you that is attributable to foreign securities held by the Fund, plus any foreign taxes withheld on these dividends. The amounts reported include foreign source qualified dividends without adjustment for the lower U.S. tax rates. Generally, this is the foreign source income to be reported by certain trusts and corporate shareholders. 26 | Annual Report Templeton Dragon Fund, Inc. TAX DESIGNATION (UNAUDITED) (CONTINUED) Foreign Qualified Dividends per Share (Column 3) is the amount per share of foreign source qualified dividends the Fund paid to you, plus any foreign taxes withheld on these dividends. These amounts represent the portion of the Foreign Source Income reported to you in column 2 that were derived from qualified foreign securities held by the Fund. If you are an individual shareholder who does not meet the qualified dividend holding period requirements, you may find this information helpful to calculate the foreign source income adjustment needed to complete line 1 of Form 1116. Adjusted Foreign Source Income per Share (Column 4) is the adjusted amount per share of foreign source income the Fund paid to you. These amounts reflect the Foreign Source Income reported in column 2 adjusted for the tax rate differential on foreign source qualified dividends that may be required for certain individual shareholders pursuant to Internal Revenue Code 904(b)(2)(B). If you are an individual shareholder who meets the qualified dividend holding period requirements, generally, these Adjusted Foreign Source Income amounts may be reported directly on line 1 of Form 1116 without additional adjustment. In January 2004, shareholders will receive Form 1099-DIV which will include their share of taxes paid and foreign source income distributed during the calendar year 2003. The Foreign Source Income reported on Form 1099-DIV has been reduced to take into account the tax rate differential on foreign source qualified dividend income pursuant to Internal Revenue Code 904(b)(2)(B). Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their 2003 individual income tax returns. Annual Report | 27 Board Members and Officers The name, age and address of the officers and board members, as well as their affiliations, positions held with the Fund, principal occupations during the past five years and number of U.S. registered portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Each board member will serve until that person's successor is elected and qualified. INDEPENDENT BOARD MEMBERS
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ HARRIS J. ASHTON (71) Director Since 1994 142 Director, Bar-S Foods (meat packing 500 East Broward Blvd. company). Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). - ------------------------------------------------------------------------------------------------------------------------------------ FRANK J. CROTHERS (59) Director Since 1998 20 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Ventures Resources Corporation (Vice Chairman 1996-2003); Vice Chairman, Caribbean Utilities Co. Ltd.; Director and President, Provo Power Company Ltd.; Director, Caribbean Electric Utility Services Corporation (Chairman until 2002); director of various other business and nonprofit organizations; and FORMERLY, Chairman, Atlantic Equipment & Power Ltd. (1977-2003). - ------------------------------------------------------------------------------------------------------------------------------------ S. JOSEPH FORTUNATO (71) Director Since 1994 143 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Attorney; and FORMERLY, member of the law firm of Pitney, Hardin, Kipp & Szuch. - ------------------------------------------------------------------------------------------------------------------------------------ EDITH E. HOLIDAY (51) Director Since 1996 96 Director, Amerada Hess Corporation 500 East Broward Blvd. (exploration and refining of oil and Suite 2100 gas); Beverly Enterprises, Inc. (health Fort Lauderdale, FL 33394-3091 care); H.J. Heinz Company (processed foods and allied products); RTI International Metals, Inc. (manu- facture and distribution of titanium); and Canadian National Railway (railroad). - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989). - ------------------------------------------------------------------------------------------------------------------------------------
28 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ BETTY P. KRAHMER (74) Director Since 1994 21 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director or Trustee of various civic associations; and FORMERLY, Economic Analyst, U.S. government. - ------------------------------------------------------------------------------------------------------------------------------------ GORDON S. MACKLIN (75) Director Since 1994 142 Director, White Mountains Insurance 500 East Broward Blvd. Group, Ltd. (holding company); Suite 2100 Martek Biosciences Corporation; Fort Lauderdale, FL 33394-3091 MedImmune, Inc. (biotechnology); and Overstock.com (Internet services); and FORMERLY, Director, MCI Communication Corporation (subsequently known as MCI WorldCom, Inc. and WorldCom, Inc.) (communications services) (1988-2002) and Spacehab, Inc. (aerospace services) (1994-2003). - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company); and FORMERLY, Chairman, White River Corporation (financial services) (1993-1998) and Hambrecht & Quist Group (investment banking) (1987-1992); and President, National Association of Securities Dealers, Inc. (1970-1987). - ------------------------------------------------------------------------------------------------------------------------------------ FRED R. MILLSAPS (74) Director Since 1994 28 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various business and nonprofit organizations; manager of personal investments (1978-present); and FORMERLY, Chairman and Chief Executive Officer, Landmark Banking Corporation (1969-1978); Financial Vice President, Florida Power and Light (1965-1969); and Vice President, Federal Reserve Bank of Atlanta (1958-1965). - ------------------------------------------------------------------------------------------------------------------------------------ FRANK A. OLSON (71) Director Since 2003 20 Director, Becton, Dickinson and Co. 500 East Broward Blvd. (medical technology); White Suite 2100 Mountains Insurance Group Ltd. Fort Lauderdale, FL 33394-3091 (holding company); and Amerada Hess Corporation (exploration and refining of oil and gas). - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, The Hertz Corporation (car rental) (since 1980) (Chief Executive Officer 1977-1999); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines). - ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 29
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ CONSTANTINE D. TSERETOPOULOS (49) Director Since 1998 20 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Physician, Lyford Cay Hospital (1987-present); director of various nonprofit organizations; and FORMERLY, Cardiology Fellow, University of Maryland (1985-1987) and Internal Medicine Resident, Greater Baltimore Medical Center (1982-1985). - ------------------------------------------------------------------------------------------------------------------------------------ INTERESTED BOARD MEMBERS AND OFFICERS - ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ **NICHOLAS F. BRADY (73) Director Since 1994 21 Director, Amerada Hess Corporation 500 East Broward Blvd. (exploration and refining of oil and Suite 2100 gas); and C2, Inc. (operating and Fort Lauderdale, FL 33394-3091 investment business); and FORMERLY, Director, H.J. Heinz Company (processed foods and allied products) (1987-1988;1993-2003). - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Darby Overseas Investments, Ltd., Darby Emerging Markets Investments LDC and Darby Technology Ventures Group, LLC (investment firms) (1994-present); Director, Templeton Capital Advisors Ltd. and Franklin Templeton Investment Fund; and FORMERLY, Chairman, Templeton Emerging Markets Investment Trust PLC (until 2003); Secretary of the United States Department of the Treasury (1988-1993); Chairman of the Board, Dillon, Read & Co., Inc. (investment banking) (until 1988); and U.S. Senator, New Jersey (April 1982-December 1982). - ------------------------------------------------------------------------------------------------------------------------------------ **MARTIN L. FLANAGAN (43) Director and Since 1994 5 None One Franklin Parkway Vice President San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Co-President and Chief Executive Officer, Franklin Resources, Inc.; Senior Vice President and Chief Financial Officer, Franklin Mutual Advisers, LLC; Executive Vice President, Chief Financial Officer and Director, Templeton Worldwide, Inc.; Executive Vice President and Chief Operating Officer, Templeton Investment Counsel, LLC; President and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Investment Advisory Services, Inc. and Franklin Templeton Investor Services, LLC; Chief Financial Officer, Franklin Advisory Services, LLC; Chairman, Franklin Templeton Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------
30 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ **CHARLES B. JOHNSON (70) Director, Vice Director and Vice 142 None One Franklin Parkway President and President since San Mateo, CA 94403-1906 Chairman of 1994 and the Board and Chairman of the Board since 1995 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President, Franklin Templeton Distributors, Inc.; Director, Fiduciary Trust Company International; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ HARMON E. BURNS (58) Vice President Since 1996 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Director, Franklin Investment Advisory Services, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ JEFFREY A. EVERETT (39) Vice President Since 2001 Not Applicable None PO Box N-7759 Lyford Cay, Nassau, Bahamas - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President and Director, Templeton Global Advisors Limited; officer of 15 of the investment companies in Franklin Templeton Investments; and FORMERLY, Investment Officer, First Pennsylvania Investment Research (until 1989). - ------------------------------------------------------------------------------------------------------------------------------------ JIMMY D. GAMBILL (56) Senior Vice Since 2002 Not Applicable None 500 East Broward Blvd. President and Suite 2100 Chief Fort Lauderdale, FL 33394-3091 Executive Officer - Finance and Administration - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 51 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ DAVID P. GOSS (56) Vice President Since 2000 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Associate General Counsel, Franklin Resources, Inc.; officer and director of one of the subsidiaries of Franklin Resources, Inc.; officer of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, President, Chief Executive Officer and Director, Property Resources Equity Trust (until 1999) and Franklin Select Realty Trust (until 2000). - ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 31
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ BARBARA J. GREEN (56) Vice President Vice President Not Applicable None One Franklin Parkway and Secretary since 2000 and San Mateo, CA 94403-1906 Secretary since 1996 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, Inc., Franklin Mutual Advisers, LLC, Franklin Templeton Alternative Strategies, Inc., Franklin Templeton Investor Services, LLC, Franklin Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin Investment Services, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management, Executive Assistant and Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts) (until 1979). - ------------------------------------------------------------------------------------------------------------------------------------ RUPERT H. JOHNSON, JR. (63) Vice President Since 1996 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Director, Franklin Advisers, Inc. and Franklin Investment Advisory Services, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ JOHN R. KAY (63) Vice President Since 1994 Not Applicable None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Templeton Worldwide, Inc.; Assistant Vice President, Franklin Templeton Distributors, Inc.; Senior Vice President, Franklin Templeton Services, LLC; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 35 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President and Controller, Keystone Group, Inc. - ------------------------------------------------------------------------------------------------------------------------------------ MICHAEL O. MAGDOL (66) Vice President Since 2002 Not Applicable Director, FTI Banque, Arch 600 Fifth Avenue - AML Chemicals, Inc. and Lingnan Rockefeller Center Compliance Foundation. New York, NY 10048-0772 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; and officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 48 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------
32 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ------------------------------------------------------------------------------------------------------------------------------------ MARK MOBIUS (67) President and President since Not Applicable None 17th Floor, Chief 1994 and Chief The Chater House Executive Executive Officer - 8 Connaught Road Officer - Investment Central Hong Kong Investment Management Management since 2002 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Portfolio Manager of various Templeton advisory affiliates; Managing Director, Templeton Asset Management Ltd.; Executive Vice President and Director, Templeton Global Advisors Limited; and officer and/or director, as the case may be, of some of the subsidiaries of Franklin Resources, Inc. and of six of the investment companies in Franklin Templeton Investments; and FORMERLY, President, International Investment Trust Company Limited (investment manager of Taiwan R.O.C. Fund) (1986-1987); and Director, Vickers da Costa, Hong Kong (1983-1986). - ------------------------------------------------------------------------------------------------------------------------------------ KIMBERLEY H. MONASTERIO (40) Treasurer and Treasurer and Not Applicable None One Franklin Parkway Chief Financial Chief Financial San Mateo, CA 94403-1906 Officer Officer since 2003 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Templeton Services, LLC; and officer of 51 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------------------------------ MURRAY L. SIMPSON (66) Vice President Since 2000 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 - ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Executive Vice President and General Counsel, Franklin Resources, Inc.; officer and/or director, as the case may be, of some of the subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, Chief Executive Officer and Managing Director, Templeton Franklin Investment Services (Asia) Limited (until 2000); and Director, Templeton Asset Management Ltd. (until 1999). - ------------------------------------------------------------------------------------------------------------------------------------
*We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment adviser or affiliated investment advisers. **Charles B. Johnson is considered an interested person of the Fund under the federal securities laws due to his position as officer and director and major shareholder of Franklin Resources, Inc. (Resources), which is the parent company of the Fund's adviser. Martin L. Flanagan is considered an interested person of the Fund under the federal securities laws due to his position as officer of Resources. Nicholas F. Brady is considered an interested person of the Fund under the federal securities laws due to his business affiliations with Resources and Templeton Global Advisors Limited. On October 1, 2003, Resources acquired all of the shares of Darby Overseas Investments, Ltd. (Darby Investments) and the remaining portion of the limited partner interests not currently owned by Resources of Darby Overseas Partners, L.P. (Darby Partners). Mr. Brady, formerly a shareholder of Darby Investments and a partner of Darby Partners, will continue as Chairman of Darby Investments, which is the corporate general partner of Darby Partners. In addition, Darby Partners and Templeton Global Advisors Limited are limited partners of Darby Emerging Markets Fund, L.P. (DEMF). Mr. Brady will also continue to serve as Chairman of the corporate general partner of DEMF, and Darby Partners and Darby Investments own 100% of the stock of the general partner of DEMF. Resources also is an investor in Darby Technology Ventures Group, LLC (DTV) in which Darby Partners is a significant investor and for which Darby Partners has the right to appoint a majority of the directors. Templeton Global Advisors Limited also is a limited partner in Darby--BBVA Latin America Private Equity Fund, L.P. (DBVA), a private equity fund in which Darby Partners is a significant investor, and the general partner of which Darby Partners controls jointly with an unaffiliated third party. Mr. Brady is also a director of Templeton Capital Advisors Ltd. (TCAL), which serves as investment manager to certain unregistered funds. TCAL and Templeton Global Advisors Limited are both indirect subsidiaries of Resources. Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF DIRECTORS HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED EACH OF FRED R. MILLSAPS AND FRANK A. OLSON AS AN AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MESSRS. MILLSAPS AND OLSON QUALIFY AS SUCH AN EXPERT IN VIEW OF THEIR EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE. MR. MILLSAPS WHO IS CURRENTLY A DIRECTOR OF VARIOUS BUSINESS AND NONPROFIT ORGANIZATIONS, HAS SERVED AS A MEMBER AND CHAIRMAN OF THE FUND AUDIT COMMITTEE SINCE INCEPTION AND WAS FORMERLY CHAIRMAN AND CHIEF EXECUTIVE OFFICER OF LANDMARK BANKING CORPORATION AND FINANCIAL VICE PRESIDENT OF FLORIDA POWER AND LIGHT. MR. OLSON WHO CURRENTLY SERVES AS CHAIRMAN OF THE BOARD OF THE HERTZ CORPORATION AND WAS ITS CHIEF EXECUTIVE OFFICER FROM 1977 TO 1999; IS A DIRECTOR AND AUDIT COMMITTEE MEMBER OF AMERADA HESS CORPORATION AND WHITE MOUNTAINS INSURANCE GROUP, LTD. AND A FORMER PRESIDENT AND CHIEF EXECUTIVE OFFICER OF UNITED AIRLINES. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF DIRECTORS BELIEVES THAT MR. MILLSAPS AND MR. OLSON HAVE EACH ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MESSRS. MILLSAPS AND OLSON ARE INDEPENDENT DIRECTORS AS THAT TERM IS DEFINED UNDER THE APPLICABLE STOCK EXCHANGE RULES AND SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES. Annual Report | 33 Templeton Dragon Fund, Inc. PROXY VOTING POLICIES AND PROCEDURES The Fund has established Proxy Voting Policies and Procedures ("Policies") that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. 34 | Annual Report This page intentionally left blank. This page intentionally left blank. Literature Request For a brochure and prospectus, which contains more complete information, including charges and expenses, call Franklin Templeton Investments at 1-800/DIAL BEN(R) (1-800/342-5236). Please read the prospectus carefully before investing or sending money. To ensure the highest quality of service, we may monitor, record and access telephone calls to or from our service departments. These calls can be identified by the presence of a regular beeping tone. FRANKLIN TEMPLETON INVESTMENTS INTERNATIONAL Mutual European Fund Templeton China World Fund Templeton Developing Markets Trust Templeton Foreign Fund Templeton Foreign Smaller Companies Fund Templeton International (Ex EM) Fund GLOBAL Franklin Global Aggressive Growth Fund Franklin Global Growth Fund Mutual Discovery Fund Templeton Capital Accumulator Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund Templeton World Fund GROWTH Franklin Aggressive Growth Fund Franklin Capital Growth Fund Franklin Flex Cap Growth Fund Franklin Small-Mid Cap Growth Fund Franklin Small Cap Growth Fund II(1) VALUE Franklin Balance Sheet Investment Fund(2) Franklin Equity Income Fund Franklin Large Cap Value Fund Franklin MicroCap Value Fund(3) Franklin Small Cap Value Fund Mutual Beacon Fund Mutual Qualified Fund Mutual Recovery Fund(4) Mutual Shares Fund BLEND Franklin Blue Chip Fund Franklin Convertible Securities Fund Franklin Growth Fund Franklin Rising Dividends Fund Franklin U.S. Long-Short Fund(5) SECTOR Franklin Biotechnology Discovery Fund Franklin DynaTech Fund Franklin Global Communications Fund Franklin Global Health Care Fund Franklin Gold and Precious Metals Fund Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Utilities Fund Franklin Technology Fund Mutual Financial Services Fund ASSET ALLOCATION Franklin Templeton Corefolio Allocation Fund Franklin Templeton Founding Funds Allocation Fund TARGET FUNDS Franklin Templeton Conservative Target Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund INCOME Franklin Adjustable U.S. Government Securities Fund(6) Franklin's AGE High Income Fund Franklin Federal Money Fund(6,7) Franklin Floating Rate Daily Access Fund Franklin Floating Rate Trust(4) Franklin Income Fund Franklin Money Fund(6,7) Franklin Short-Intermediate U.S. Government Securities Fund(6) Franklin Strategic Income Fund Franklin Strategic Mortgage Portfolio(6) Franklin Templeton Hard Currency Fund Franklin Total Return Fund Franklin U.S. Government Securities Fund(6) Templeton Global Bond Fund TAX-FREE INCOME(8) NATIONAL FUNDS Double Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund(9) Tax-Exempt Money Fund(6,7) LIMITED-TERM FUNDS California Limited-Term Tax-Free Income Fund Federal Limited-Term Tax-Free Income Fund New York Limited-Term Tax-Free Income Fund INTERMEDIATE-TERM FUNDS California Intermediate-Term Tax-Free Income Fund Federal Intermediate-Term Tax-Free Income Fund New York Intermediate-Term Tax-Free Income Fund STATE-SPECIFIC(8) Alabama Arizona California(10) Colorado Connecticut Florida(10) Georgia Kentucky Louisiana Maryland Massachusetts(9) Michigan(9) Minnesota(9) Missouri New Jersey New York(10) North Carolina Ohio(9) Oregon Pennsylvania Tennessee Virginia INSURANCE FUNDS Franklin Templeton Variable Insurance Products Trust(11) 1. The fund is closed to new investors. Existing shareholders can continue adding to their accounts. 2. The fund is only open to existing shareholders as well as select retirement plans. 3. Effective June 30, 2003, the fund reopened to all new investors. 4. The fund is a continuously offered, closed-end fund. Shares may be purchased daily; there is no daily redemption. However, each quarter, pending board approval, the fund will authorize the repurchase of 5%-25% of the outstanding number of shares. Investors may tender all or a portion of their shares during the tender period. 5. Upon reaching approximately $350 million in assets, the fund intends to close to all investors. 6. An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. 7. No assurance exists that the fund's $1.00 per share price will be maintained. It is possible to lose money by investing in the fund. 8. For investors subject to the alternative minimum tax, a small portion of these dividends may be taxable. Distributions of capital gains are generally taxable. 9. Portfolio of insured municipal securities. 10. These funds are available in two or more variations, including long-term portfolios, portfolios of insured securities, a high-yield portfolio (CA) and money market portfolios (CA and NY). 11. The funds of the Franklin Templeton Variable Insurance Products Trust are generally available only through insurance company variable contracts. 11/03 Not part of the annual report [LOGO OMITTED] 100 Fountain Parkway FRANKLIN(R) TEMPLETON(R) P.O. Box 33030 INVESTMENTS St. Petersburg, FL 33733-8030 ANNUAL REPORT AND SHAREHOLDER INFORMATION Templeton Dragon Fund, Inc. AUDITORS PricewaterhouseCoopers LLP 333 Market Street San Francisco, CA 94105 TRANSFER AGENT Mellon Investor Services LLC 85 Challenger Road Ridgefield Park, NJ 07660 1-800/416-5585 www.melloninvestor.com FUND INFORMATION 1-800/342-5236 Investors should be aware that the value of investments made for the Fund may go down as well as up. Like any investment in securities, the value of the Fund's portfolio will be subject to the risk of loss from market, currency, economic, political and other factors. The Fund and its investors are not protected from such losses by the Investment Manager. Therefore, investors who cannot accept this risk should not invest in shares of the Fund. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone. TLTDF A2003 02/04 ITEM 2. CODE OF ETHICS. (a) The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer. (c) N/A (d) N/A (f) Pursuant to Item 10(a), the Registrant is attaching as an exhibit a copy of its code of ethics that applies to its principal executive officers and principal financial and accounting officer. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. (a)(1) The Registrant has an audit committee financial expert serving on its audit committee. (2) The audit committee financial experts are Fred R. Millsaps and Frank A. Olson and they are "independent" as defined under the relevant Securities and Exchange Commission Rules and Releases. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES (a) Audit Fees The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant for the audit of the registrant's annual financial statements or for services that are normally provided by the principal accountant in connection with statutory and regulatory filings or engagements were $32,549 for the fiscal year ended December 31, 2003 and $33,650 for the fiscal year ended December 31, 2002. (b) Audit-Related Fees The aggregate fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of Item 4 were $0 for the fiscal year ended December 31, 2003 and $378 for the fiscal year ended December 31, 2002. The services for which these fees were paid included payments for internal control examination pursuant to the Statement of Auditing Standards No. 70 and other attestation services. The aggregate fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant that are reasonably related to the performance of the audit of the their financial statements were $3,134 for the fiscal year ended December 31, 2003 and $195,862 for the fiscal year ended December 31, 2002. The services for which these fees were paid included payments for internal control examination pursuant to the Statement of Auditing Standards No. 70 and other attestation services. (c) Tax Fees There were no fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant for tax compliance, tax advice and tax planning. The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant for tax compliance, tax advice and tax planning were $0 for the fiscal year ended December 31, 2003 and $84,424 for the fiscal year ended December 31, 2002. The services for which these fees were paid included payments for tax compliance and advice. (d) All Other Fees There were no fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant, other than the services reported in paragraphs (a)-(c) of Item 4. There were no fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant, other than the services reported in paragraphs (a)-(c) of Item 4. (e) (1) The Fund's audit committee is directly responsible for approving the services to be provided by the auditors, including: (i) pre-approval of all audit and audit related services; (ii) pre-approval of all non-audit related services to be provided to the Fund by the auditors; (iii) pre-approval of all non-audit related services to be provided to the Fund by the auditors to the Fund's investment adviser or to any entity that controls, is controlled by or is under common control with the Fund's investment adviser and that provides ongoing services to the Fund where the non-audit services relate directly to the operations or financial reporting of the Fund; and (iv) establishment by the audit committee, if deemed necessary or appropriate, as an alternative to committee pre-approval of services to be provided by the auditors, as required by paragraphs (ii) and (iii) above, of policies and procedures to permit such services to be pre-approved by other means, such as through establishment of guidelines or by action of a designated member or members of the committee; provided the policies and procedures are detailed as to the particular service and the committee is informed of each service and such policies and procedures do not include delegation of audit committee responsibilities, as contemplated under the Securities Exchange Act of 1934, to management; subject, in the case of (ii) through (iv), to any waivers, exceptions or exemptions that may be available under applicable law or rules. (e) (2) None of the services provided to the registrant described in paragraphs (b)-(d) of Item 4 were pre-approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of regulation S-X. (f) No disclosures are required for Item 4(f). (g) The aggregate non-audit fees paid to the principal accountant for services rendered by the principal accountant to the registrant and the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant were $3,134 for the fiscal year ended December 31, 2003 and $280,664 for the fiscal year ended December 31, 2002. (h) No disclosures are required for Item 4(h). ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS N/A ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. The board of directors of the Fund has delegated the authority to vote proxies related to the portfolio securities held by the Fund to the Fund's manager Templeton Asset Management Ltd. in accordance with the Proxy Voting Policies and Procedures (Policies) adopted by the manager. The manager has delegated its administrative duties with respect to the voting of proxies to the Proxy Group within Franklin Templeton Companies, LLC (Proxy Group), an affiliate and wholly owned subsidiary of Franklin Resources, Inc. All proxies received by the Proxy Group will be voted based upon the manager's instructions and/or policies. To assist it in analyzing proxies, the manager subscribes to Institutional Shareholder Services (ISS), an unaffiliated third party corporate governance research service that provides in-depth analyses of shareholder meeting agendas, vote recommendations, recordkeeping and vote disclosure services. In addition, the manager subscribes to Glass Lewis & Co., LLC (Glass Lewis), an unaffiliated third party analytical research firm, to receive analyses and vote recommendations on the shareholder meetings of publicly held U.S. companies. Although ISS' and/or Glass Lewis' analyses are thoroughly reviewed and considered in making a final voting decision, the manager does not consider recommendations from ISS, Glass Lewis or any other third party to be determinative of the manager's ultimate decision. The manager votes proxies solely in the interests of the Fund and its shareholders. As a matter of policy, the officers, directors and employees of the Fund, the manager and the Proxy Group will not be influenced by outside sources whose interests conflict with the interests of the Fund and its shareholders. All conflicts are resolved in the interests of the manager's clients. In situations where the manager perceives a material conflict of interest, the manager may: disclose the conflict to the Fund's board of directors; defer to the voting recommendation of the Fund's board of directors, ISS, Glass Lewis or those of another independent third party provider of proxy services; or take such other action in good faith (in consultation with counsel) which would protect the interests of the Fund and its shareholders. The recommendation of management on any issue is a factor which the manager considers in determining how proxies should be voted, but is not determinative of the manager's ultimate decision. As a matter of practice, the votes with respect to most issues are cast in accordance with the position of the company's management. Each issue, however, is considered on its own merits, and the manager will not support the position of the company's management in any situation where it deems that the ratification of management's position would adversely affect the investment merits of owning that company's shares. MANAGER'S PROXY VOTING POLICIES AND PRINCIPLES The manager has adopted general proxy voting guidelines, which are summarized below. These guidelines are not an exhaustive list of all the issues that may arise and the manager cannot anticipate all future situations. In all cases, each proxy will be considered based on the relevant facts and circumstances. BOARD OF DIRECTORS. The manager supports an independent board of directors, and prefers that key committees such as audit, nominating, and compensation committees be comprised of independent directors. The manager will generally vote against management efforts to classify a board and will generally support proposals to declassify the board of directors. The manager may withhold votes from directors who have attended less than 75% of meetings without a valid reason. While generally in favor of separating Chairman and CEO positions, the manager will review this issue as well as proposals to restore or provide for cumulative voting on a case-by-case basis, taking into consideration factors such as the company's corporate governance guidelines or provisions and performance. MANAGEMENT & DIRECTOR COMPENSATION. A company's equity-based compensation plan should be in alignment with its shareholders' long-term interests. The manager evaluates plans on a case-by-case basis by considering several factors to determine whether the plan is fair and reasonable, including the ISS quantitative model utilized to assess such plans and/or the Glass Lewis evaluation of the plans. The manager will generally oppose plans that have the potential to be excessively dilutive, and will almost always oppose plans that are structured to allow the repricing of underwater options, or plans that have an automatic share replenishment "evergreen" feature. The manager will generally support employee stock option plans in which the purchase price is at least 85% of fair market value, and when potential dilution is 10% or less. Severance compensation arrangements will be reviewed on a case-by-case basis, although the manager will generally oppose "golden parachutes" that are considered to be excessive. The manager will normally support proposals that require a percentage of directors' compensation to be in the form of common stock, as they align their interests with those of shareholders. The manager will review on a case-by-case basis any shareholder proposals to adopt policies on expensing stock option plans. ANTI-TAKEOVER MECHANISMS AND RELATED ISSUES. The manager generally opposes anti-takeover measures since they tend to reduce shareholder rights. On occasion, the manager may vote with management when the research analyst has concluded that the proposal is not onerous and would not harm the Fund or its shareholders' interests. The manager generally supports proposals that require shareholder rights' plans ("poison pills") to be subject to a shareholder vote and will closely evaluate such plans on a case-by-case basis to determine whether or not they warrant support. The manager will generally vote against any proposal to issue stock that has unequal or subordinate voting rights. The manager generally opposes any supermajority voting requirements as well as the payment of "greenmail." The manager generally supports "fair price" provisions and confidential voting. CHANGES TO CAPITAL STRUCTURE. The manager will review, on a case-by-case basis, proposals by companies to increase authorized shares and the purpose for the increase and proposals seeking preemptive rights. The manager will generally not vote in favor of dual-class capital structures to increase the number of authorized shares where that class of stock would have superior voting rights. The manager will generally vote in favor of the issuance of preferred stock in cases where the company specifies the voting, dividend, conversion and other rights of such stock and the terms of the preferred stock issuance are deemed reasonable. MERGERS AND CORPORATE RESTRUCTURING. Mergers and acquisitions will be subject to careful review by the research analyst to determine whether each will be beneficial to shareholders. The manager will analyze various economic and strategic factors in making the final decision on a merger or acquisition. Corporate restructuring and reincorporation proposals are also subject to a thorough examination on a case-by-case basis. SOCIAL AND CORPORATE POLICY ISSUES. The manager will generally give management discretion with regard to social, environmental and ethical issues, although the manager may vote in favor of those that are believed to have significant economic benefits or implications for the Fund and its shareholders. GLOBAL CORPORATE GOVERNANCE. Many of the tenets discussed above are applied to proxy voting decisions for international companies. However, the manager must be more flexible in these instances and must be mindful of the varied market practices of each region. The manager will attempt to process every proxy it receives for all domestic and foreign proxies. However, there may be situations in which the manager cannot process proxies, for example, where a meeting notice was received too late, or sell orders preclude the ability to vote. The manager may abstain from voting under certain circumstances or vote against items such as "Other Business" when the manager is not given adequate information from the company. Shareholders may view the complete Policies on-line at www.franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954-847-2268 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Fund's proxy voting records will also be made available on-line at www.franklintempleton.com and posted on the SEC website at www.sec.gov no later than August 31, 2004 and will reflect the twelve-month period beginning July 1, 2003, and ending June 30, 2004. ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. N/A ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. N/A ITEM 10. CONTROLS AND PROCEDURES. (A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Registrant's filings under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Registrant's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant's management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Within 90 days prior to the filing date of this Shareholder Report on Form N-CSR, the Registrant had carried out an evaluation, under the supervision and with the participation of the Registrant's management, including the Registrant's principal executive officer and the Registrant's principal financial officer, of the effectiveness of the design and operation of the Registrant's disclosure controls and procedures. Based on such evaluation, the Registrant's principal executive officer and principal financial officer concluded that the Registrant's disclosure controls and procedures are effective. (B) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the Registrant's internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this Shareholder Report on Form N-CSR. ITEM 11. EXHIBITS. (A) Code of Ethics for Principal Executive and Senior Financial Officers (B) (1) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and Kimberley H. Monasterio, Chief Financial Officer (B) (2) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and Kimberley H. Monasterio, Chief Financial Officer SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TEMPLETON DRAGON FUND, INC. By /s/JIMMY D. GAMBILL ----------------------------- Jimmy D. Gambill Chief Executive Officer - Finance and Administration Date: February 23, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/JIMMY D. GAMBILL ----------------------------- Jimmy D. Gambill Chief Executive Officer - Finance and Administration Date: February 23, 2004 By /s/KIMBERLEY H. MONASTERIO ----------------------------- Kimberley H. Monasterio Chief Financial Officer Date: February 23, 2004 EX-99.CODE ETH 3 codeethic03.txt EXECUTIVE OFFICERS CODE OF ETHICS EXHIBIT (A) FRANKLIN TEMPLETON FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS I. COVERED OFFICERS AND PURPOSE OF THE CODE This code of ethics (the "Code")/1/ is for the investment companies within the complex registered with the United States Securities & Exchange Commission ("SEC") (collectively, "FT Funds") applies to each FT Fund's Principal Executive Officers, Principal Financial Officer and Principal Accounting Officer (the "Covered Officers" each of whom are set forth in Exhibit A) for the purpose of promoting: o Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; o Full, fair, accurate, timely and understandable disclosure in reports and documents that a registrant files with, or submits to, the SEC and in other public communications made by or on behalf of the FT Funds; o Compliance with applicable laws and governmental rules and regulations; o The prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and o Accountability for adherence to the Code. Each Covered Officer should adhere to a high standard of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. II. COVERED OFFICERS SHOULD HANDLE ETHICALLY ACTUAL AND APPARENT CONFLICTS OF INTEREST OVERVIEW. A "conflict of interest" occurs when a Covered Officer's private interest interferes with the interests of, or his service to, the FT Funds. For example, a conflict of interest would arise if a Covered Officer, or a member of his family, receives improper personal benefits as a result of his position with the FT Funds. Certain conflicts of interest arise out of the relationships between Covered Officers and the FT Funds and already are subject to conflict of interest provisions in the Investment Company Act of 1940 ("Investment Company Act") and the Investment Advisers Act of 1940 ("Investment Advisers Act"). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the FT Funds because of their status as "affiliated persons" of the FT Funds. The FT Funds' and the investment advisers' compliance programs and procedures are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside of the parameters of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts arise from, or as a result of, the contractual relationship between the FT Funds, the investment advisers and the fund administrator of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the FT Funds, for the adviser, the administrator, or for all three), be involved in establishing policies and implementing decisions that will have different effects on the adviser, administrator and the FT Funds. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the FT Funds, the adviser, and the administrator and is consistent with the performance by the Covered Officers of their duties as officers of the FT Funds. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. In addition, it is recognized by the FT Funds' Boards of Directors ("Boards") that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes. Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the FT Funds. Each Covered Officer must: o Not use his personal influence or personal relationships improperly to influence investment decisions or financial reporting by the FT Funds whereby the Covered Officer would benefit personally to the detriment of the FT Funds; o Not cause the FT Funds to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit the FT Funds; o Not retaliate against any other Covered Officer or any employee of the Funds or their affiliated persons for reports of potential violations that are made in good faith; o Report at least annually the following affiliations or other relationships:/2/ o all directorships for public companies and all companies that are required to file reports with the SEC; o any direct or indirect business relationship with any independent directors; o any direct or indirect business relationship with any independent public accounting firm; and o any direct or indirect interest in any transaction with any FT Fund that will benefit the officer (not including benefits derived from the advisory, sub-advisory, distribution or service agreements with affiliates of Franklin Resources). There are some conflict of interest situations that should always be approved in writing by FT's General Counsel or Deputy General Counsel, if material. Examples of these include/3/: o Service as a director on the board of any public or private Company; o The receipt of any gifts in excess of $100; o The receipt of any entertainment from any Company with which the FT Funds has current or prospective business dealings unless such entertainment is business related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any question of impropriety. Notwithstanding the foregoing, the Covered Officers must obtain prior approval for any entertainment with a value in excess of $1000. o Any ownership interest in, or any consulting or employment relationship with, any of the FT Fund's service providers, other than an investment adviser, principal underwriter, administrator or any affiliated person thereof; o A direct or indirect financial interest in commissions, transaction charges or spreads paid by the FT Funds for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer's employment, such as compensation or equity ownership. FT's General Counsel or Deputy General Counsel will provide a report to the FT Funds Audit Committee of any approvals granted at the next regularly scheduled meeting. III. DISCLOSURE AND COMPLIANCE o Each Covered Officer should familiarize himself with the disclosure requirements generally applicable to the FT Funds; o Each Covered Officer should not knowingly misrepresent, or cause others to misrepresent, facts about the FT Funds to others, whether within or outside the FT Funds, including to the FT Funds' directors and auditors, and to governmental regulators and self-regulatory organizations; o Each Covered Officer should, to the extent appropriate within his area of responsibility, consult with other officers and employees of the FT Funds, the adviser and the administrator with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the FT Funds file with, or submit to, the SEC and in other public communications made by the FT Funds; and o It is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations. IV. REPORTING AND ACCOUNTABILITY Each Covered Officer must: o Upon adoption of the Code (or thereafter as applicable, upon becoming a Covered Officer), affirm in writing to the Board that he has received, read, and understands the Code (see Exhibit B); o Annually thereafter affirm to the Board that he has complied with the requirements of the Code; and o Notify FT's General Counsel or Deputy General Counsel promptly if he knows of any violation of this Code. Failure to do so is itself is a violation of this Code. FT's General Counsel and Deputy General Counsel are responsible for applying this Code to specific situations in which questions are presented under it and have the authority to interpret this Code in any particular situation./4/ However, the Independent Directors of the respective fund will consider any approvals or waivers5 sought by any Chief Executive Officers of the Funds. The FT Funds will follow these procedures in investigating and enforcing this Code: o FT's General Counsel or Deputy General Counsel will take all appropriate action to investigate any potential violations reported to him; o If, after such investigation, FT's General Counsel or Deputy General Counsel believes that no violation has occurred, FT's General Counsel is not required to take any further action; o Any matter that FT's General Counsel or Deputy General Counsel believes is a violation will be reported to the Independent Directors of the appropriate FT Fund; o If the Independent Directors concur that a violation has occurred, it will inform and make a recommendation to the Board of the appropriate Funds, which will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer; o The Independent Directors will be responsible for granting waivers, as appropriate; and o Any changes to or waivers of this Code will, to the extent required, are disclosed as provided by SEC rules. V. OTHER POLICIES AND PROCEDURES This Code shall be the sole code of ethics adopted by the FT Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies there under. Insofar as other policies or procedures of the FT Funds, the FT Funds' advisers, principal underwriter, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code. The FT Code of Ethics and Policy Statement On Insider Trading, adopted by the FT Funds, FT investment advisers and FT Fund's principal underwriter pursuant to Rule 17j-l under the Investment Company Act and more detailed policies and procedures set forth in FT's Employee Handbook are separate requirements applying to the Covered Officers and others, and are not part of this Code. VI. AMENDMENTS Any amendments to this Code, other than amendments to Exhibit A, must be approved or ratified by a majority vote of the FT Funds' Board including a majority of independent directors. VII. CONFIDENTIALITY All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the FT Funds' Board and their counsel. VIII. INTERNAL USE The Code is intended solely for the internal use by the FT Funds and does not constitute an admission, by or on behalf of any FT Funds, as to any fact, circumstance, or legal conclusion. - --------------------- 1. Item 2 of Form N-CSR requires a registered management investment company to disclose annually whether, as of the end of the period covered by the report, it has adopted a code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these officers are employed by the registrant or a third party. If the registrant has not adopted such a code of ethics, it must explain why it has not done so. The registrant must also: (1) file with the SEC a copy of the code as an exhibit to its annual report; (2) post the text of the code on its Internet website and disclose, in its most recent report on Form N-CSR, its Internet address and the fact that it has posted the code on its Internet website; or (3) undertake in its most recent report on Form N-CSR to provide to any person without charge, upon request, a copy of the code and explain the manner in which such request may be made. Disclosure is also required of amendments to, or waivers (including implicit waivers) from, a provision of the code in the registrant's annual report on Form N-CSR or on its website. If the registrant intends to satisfy the requirement to disclose amendments and waivers by posting such information on its website, it will be required to disclose its Internet address and this intention. 2. Reporting of these affiliations or other relationships may be made separately by completing the Directors and Officers Questionnaire and returning to FT's General Counsel or Deputy General Counsel. 3. Any activity or relationship that would present a conflict for a Covered Officer would likely also present a conflict for the Covered Officer if a member of the Covered Officer's immediate family engages in such an activity or has such a relationship. The Cover Person should also obtain written approval by FT's General Counsel in such situations. 4. FT's General Counsel and Deputy General Counsel are authorized to consult, as appropriate, with members of the Audit Committee, counsel to the FT Funds and counsel to the Independent Directors, and are encouraged to do so. 5 Item 2 of Form N-CSR defines "waiver" as "the approval by the registrant of a material departure from a provision of the code of ethics" and "implicit waiver," which must also be disclosed, as "the registrant's failure to take action within a reasonable period of time regarding a material departure from a provision of the code of ethics that has been made known to an executive officer" of the registrant. EXHIBIT A Persons Covered by the Franklin Templeton Funds Code of Ethics FRANKLIN GROUP OF FUNDS Edward B. Jamieson, President & Chief Executive Officer - Investment Management Charles B. Johnson, President & Chief Executive Officer - Investment Management Gregory E. Johnson, President & Chief Executive Officer - Investment Management Rupert H. Johnson, Jr. President & Chief Executive Officer - Investment Management William J. Lippman, President & Chief Executive Officer - Investment Management Christopher Molumphy President & Chief Executive Officer - Investment Management Jimmy D. Gambill, Senior Vice President & Chief Executive Officer - Finance and Administration Kimberley H. Monasterio Treasurer & Chief Financial Officer FRANKLIN MUTUAL SERIES FUNDS David Winters Chairman of the Board, President & Chief Executive Officer-Investment Management Jimmy D. Gambill Senior Vice President & Chief Executive Officer- Finance and Administration Bruce S. Rosenberg Treasurer & Chief Financial Officer TEMPLETON GROUP OF FUNDS Jeffrey A. Everett President & Chief Executive Officer - Investment Management Martin L. Flanagan President & Chief Executive Officer - Investment Management Mark Mobius President & Chief Executive Officer - Investment Management Christopher J. Molumphy President & Chief Executive Officer - Investment Management Gary P. Motyl President & Chief Executive Officer - Investment Management Donald F. Reed President & Chief Executive Officer - Investment Management Jimmy D. Gambill, Senior Vice President & Chief Executive Officer - Finance and Administration Bruce S. Rosenberg Treasurer & Chief Financial Officer EXHIBIT B ACKNOWLEDGMENT FORM FRANKLIN TEMPLETON FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS. INSTRUCTIONS: 1. Complete all sections of this form. 2. Print the completed form, sign, and date. 3. Submit completed form to FT's General Counsel within 10 days of becoming a Covered Officer and by January 30th of each subsequent year. INTER-OFFICE MAIL: Murray Simpson, General Counsel, Legal SM-920/2 TELEPHONE: (650) 312-7331 Fax: (650) 312-2221 E-MAIL: Simpson, Murray (internal address); mlsimpson@frk.com (external address) - ---------------------------------------------------------------------------- COVERED OFFICER'S NAME: - ---------------------------------------------------------------------------- TITLE: - ---------------------------------------------------------------------------- DEPARTMENT: - ---------------------------------------------------------------------------- LOCATION: - ---------------------------------------------------------------------------- CERTIFICATION FOR YEAR ENDING: - ---------------------------------------------------------------------------- TO: FT GENERAL COUNSEL, LEGAL DEPARTMENT I hereby acknowledge receipt of a copy of Franklin Templeton Fund's code of ethics for Principal Executive Officers and Senior Financial Officers (the "Code") that I have read and understand. I will comply fully with all provisions of the Code to the extent they apply to me during the period of my employment. I further understand and acknowledge that any violation of the Code may subject me to disciplinary action, including termination of employment -------------------- --------------------- Signature Date signed EX-99.CERT 4 tdf1203302cert.txt CEO & CFO CERTIFICATION-SECTION 302 I, Jimmy D. Gambill, certify that: 1. I have reviewed this report on Form N-CSR of Templeton Dragon Fund, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. February 23, 2004 /s/JIMMY D. GAMBILL - ------------------------------ Jimmy D. Gambill Chief Executive Officer - Finance and Administration I, Kimberley H. Monasterio, certify that: 1. I have reviewed this report on Form N-CSR of Templeton Dragon Fund, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. February 23, 2004 /s/KIMBERLEY H. MONASTERIO - ------------------------------------------ Kimberley H. Monasterio Treasurer and Chief Financial Officer EX-99.906 CERT 5 tdf1203906cert.txt CEO & CFO CERTIFICATION-SECTION 906 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURUSANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Jimmy D. Gambill, Chief Executive Officer of the Templeton Dragon Fund, Inc. (the "Registrant"), certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The periodic report on Form N-CSR of the Registrant for the period ended 12/31/03 (the "Form N-CSR") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Dated: February 23, 2004 /s/JIMMY D. GAMBILL - ----------------------------------------- Jimmy D. Gambill Chief Executive Officer - Finance and Administration A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Registrant and will be retained by Registrant and furnished to the Securities and Exchange Commission or its staff upon request. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURUSANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Kimberley H. Monasterio, Chief Financial Officer of the Templeton Dragon Fund, Inc. (the "Registrant"), certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The periodic report on Form N-CSR of the Registrant for the period ended 12/31/03 (the "Form N-CSR") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Dated: February 23, 2004 /s/KIMBERLEY H. MONASTERIO - ---------------------------------- Kimberley H. Monasterio Treasurer and Chief Financial Officer A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Registrant and will be retained by Registrant and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----