-----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, WP+Fx2/bNsl3A4tCA+QekO7NHtLFTtDrGRdSSxr8vEN715VtVrHzcCih2+fEKkMx IUTnxZ2nc+yF+38FtLI9mw== 0000919893-05-000037.txt : 20050830 0000919893-05-000037.hdr.sgml : 20050830 20050830131916 ACCESSION NUMBER: 0000919893-05-000037 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050830 DATE AS OF CHANGE: 20050830 EFFECTIVENESS DATE: 20050830 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEMPLETON DRAGON FUND INC CENTRAL INDEX KEY: 0000919893 IRS NUMBER: 650473580 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-CSRS SEC ACT: 1940 Act SEC FILE NUMBER: 811-08394 FILM NUMBER: 051057975 BUSINESS ADDRESS: STREET 1: 500 E BROWARD BLVD. STREET 2: SUITE 2100 CITY: FORT LAUDERDALE STATE: FL ZIP: 33394-3091 BUSINESS PHONE: 9545277500 MAIL ADDRESS: STREET 1: 500 E. BROWARD BLVD. STREET 2: SUITE 2100 CITY: FORT LAUDERDALE STATE: FL ZIP: 33394-3091 N-CSRS 1 tdfsemiannualrpt605.txt TDF SEMIANNUAL REPORT DTD 6/30/05 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSRS CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-08394 ---------- 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: 6/30/05 ------- ITEM 1. REPORTS TO STOCKHOLDERS. JUNE 30, 2005 - -------------------------------------------------------------------------------- [PHOTO OMITTED] - -------------------------------------------------------------------------------- SEMIANNUAL REPORT AND SHAREHOLDER INFORMATION | INTERNATIONAL - -------------------------------------------------------------------------------- TEMPLETON DRAGON FUND, INC. - -------------------------------------------------------------------------------- [LOGO OMITTED] FRANKLIN TEMPLETON INVESTMENTS Franklin o TEMPLETON o Mutual Series Franklin Templeton Investments GAIN FROM OUR PERSPECTIVE(R) Franklin Templeton's distinct multi-manager structure combines the specialized expertise of three world-class investment management groups--Franklin, Templeton and Mutual Series. Each of our portfolio management groups operates autonomously, relying on its own research and staying true to the unique investment disciplines that underlie its success. FRANKLIN. Founded in 1947, Franklin is a recognized leader in fixed income investing and also brings expertise in growth- and value-style U.S. equity investing. TEMPLETON. Founded in 1940, Templeton pioneered international investing and, in 1954, launched what has become the industry's oldest global fund. Today, with offices in over 25 countries, Templeton offers investors a truly global perspective. MUTUAL Series. Founded in 1949, Mutual Series is dedicated to a unique style of value investing, searching aggressively for opportunity among what it believes are undervalued stocks, as well as arbitrage situations and distressed securities. SPECIALIZED EXPERTISE Because our management groups work independently and adhere to different investment approaches, Franklin, Templeton and Mutual Series funds typically have distinct portfolios. That's why our funds can be used to build truly diversified allocation plans covering every major asset class. TRUE DIVERSIFICATION At Franklin Templeton Investments, we seek to consistently provide investors with exceptional risk-adjusted returns over the long term, as well as the reliable, accurate and personal service that has helped us become one of the most trusted names in financial services. RELIABILITY YOU CAN TRUST - -------------------------------------------------------------------------------- MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS - -------------------------------------------------------------------------------- [PHOTO OMITTED] Not part of the semiannual report Contents IMPORTANT NOTICE TO SHAREHOLDERS............................. 1 SEMIANNUAL REPORT Templeton Dragon Fund, Inc. .............................. 2 Performance Summary ..................... 7 Financial Highlights and Statement of Investments ................ 9 Financial Statements .................... 13 Notes to Financial Statements .............................. 16 Annual Meeting of Shareholders ............................ 25 Dividend Reinvestment and Cash Purchase Plan ...................... 26 Shareholder Information ............................. 29 - -------------------------------------------------------------------------------- Important Notice to Shareholders REPURCHASE PROGRAM In December 2004, the Board of Directors of the Fund authorized management to re-implement the Fund's open-market share repurchase program, which was originally implemented in October 1997. The Fund's Board of Directors had discontinued the open-market share repurchase program in May 2002, in connection with the Fund's previously conducted tender offers. Under the program, the Fund may purchase, from time to time, shares of the Fund's common stock in open-market transactions, at the discretion of the Fund's Investment Manager. Not part of the semiannual report | 1 Semiannual Report Templeton Dragon Fund, Inc. YOUR FUND'S GOAL AND MAIN INVESTMENTS: Templeton Dragon Fund seeks long-term capital appreciation by investing at least 45% of its total assets in equity securities of "China companies," as defined in the Fund's prospectus. - -------------------------------------------------------------------------------- GEOGRAPHIC BREAKDOWN Based on Total Net Assets as of 6/30/05 [PIE CHART OMITTED] China 35.3% Hong Kong 32.5% Taiwan 23.9% U.K. 3.1% South Korea 1.5% Short-Term Investments & Other Net Assets 3.7% - -------------------------------------------------------------------------------- Dear Shareholder: This semiannual report for Templeton Dragon Fund covers the period ended June 30, 2005. PERFORMANCE OVERVIEW Templeton Dragon Fund posted cumulative total returns of +4.42% in market price terms and +6.08% in net asset value terms for the six months under review. You can find the Fund's long-term performance data in the Performance Summary beginning on page 7. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 10. 2 | Semiannual Report ECONOMIC AND MARKET OVERVIEW In general, China continued to record strong growth, with 9.4% first quarter 2005 gross domestic product (GDP) growth compared with a year earlier.1 Strong consumer consumption, trade and investment contributed to GDP growth. However, inflationary pressures eased, and there was slower growth in some areas of the economy. The consumer price index (CPI) increased 1.8% in May compared with a year earlier, unchanged from April and down from March's 2.7%.1 Fixed asset investment grew 26% in May compared with a year earlier. Although marginally higher than April's 25% increase, it was well below the 50% level seen in early 2004.1 High oil prices and lower exports hurt Taiwan's economic recovery, as GDP growth in first quarter 2005 slowed to 2.5% year-over-year, down from 3.3% in fourth quarter 2004.2 The government lowered its full-year growth forecast, as external trade, a significant contributor to the island's GDP, weakened. In an effort to widen the tax base and improve economic competitiveness, Taiwan plans to submit new tax legislation for parliamentary approval in July. Hong Kong recorded solid economic growth, with first quarter GDP expanding 6.0% compared with a year earlier, mainly supported by strong exports and domestic consumption.3 The government forecast GDP growth of between 4.5% and 5.5% in 2005.4 Exports rose 8.9% in the first quarter year-over-year, while private consumption increased 4.6%.4 Unemployment declined, with the jobless rate registering 5.7% for the three-month period ended May 2005, a 43-month low. 3 In politics, Donald Tsang became Hong Kong's new chief executive after the early resignation of Tung Chee-Hwa. Equity markets in the greater China region declined in first quarter 2005 as investor sentiment was adversely affected by China's passage of an anti-secession law, which allows China to use force against Taiwan if the latter demands independence. Rising U.S. interest rates and high oil prices also impacted investor confidence. Hong Kong stocks, particularly those in the property sector, suffered from rising short-term interest rates. Market sentiment turned positive in the second quarter as government efforts to curb growth in heated sectors showed some progress, and the Morgan Stanley Capital International (MSCI) China Index returned 5.25% in U.S. dollar 1. Source: National Bureau of Statistics of China. 2. Source: Taiwan Directorate General of Budget, Accounting and Statistics. 3. Source: Hong Kong Census & Statistics Department. 4. Source: Hong Kong Special Administrative Region of the People's Republic of China. Semiannual Report | 3 terms for the six months ended June 30, 2005.5 Taiwan's market benefited from MSCI index rebalancing, which raised the country's weighting in MSCI's indexes. Speculation over the revaluation of the Chinese yuan led to greater fund inflows into Hong Kong. INVESTMENT STRATEGY Our investment strategy employs a fundamental, value-oriented, long-term approach. In selecting companies for investment, we will consider overall growth prospects, competitive positions in export markets, technologies, research and development, productivity, labor costs, raw material costs and sources, profit margins, returns on investment, capital resources, government regulation, management and other factors in comparison to other companies around the world that we believe are comparable. Our approach to selecting investments emphasizes fundamental company-by-company analysis (rather than broader analyses of specific industries or sectors of the economy), to construct an "action list" from which we make our buy decisions. Although we will consider historical value measures, the primary factor in selecting securities for investment by the Fund will be the company's current price relative to its long-term earnings potential. MANAGER'S DISCUSSION For the six months ended June 30, 2005, the MSCI China Index posted a 5.25% total return. 5 Relative to the MSCI China Index, the Fund's largest contribution to performance came from our position in Dairy Farm International Holdings, a group with core interests in supermarkets, drugstores, convenience stores and restaurant businesses in Asia. In addition to the food and staples retailing sector, the Fund's absence of insurance holdings, as well as an underweighted position in the transportation industry, positively affected performance.6 The fact that the Fund did not hold China Shipping, Ping An Insurance, and PICC Property and Casualty Company helped relative performance, as those stocks significantly underperformed the index during the period. TOP 10 HOLDINGS 6/30/05 - ------------------------------------------------------ COMPANY % OF TOTAL SECTOR/INDUSTRY, COUNTRY NET ASSETS - ------------------------------------------------------ Dairy Farm International Holdings Ltd. 14.8% FOOD & STAPLES RETAILING, HONG KONG - ------------------------------------------------------ China Mobile (Hong Kong) Ltd., fgn. 7.0% WIRELESS TELECOMMUNICATION SERVICES, CHINA - ------------------------------------------------------ China Petroleum & Chemical Corp., H 5.5% OIL, GAS & CONSUMABLE FUELS, CHINA - ------------------------------------------------------ Cheung Kong Infrastructure Holdings Ltd. 4.4% ELECTRIC UTILITIES, HONG KONG - ------------------------------------------------------ Hang Lung Group Ltd. 4.0% REAL ESTATE, HONG KONG - ------------------------------------------------------ PetroChina Co. Ltd., H 4.0% OIL, GAS & CONSUMABLE FUELS, CHINA - ------------------------------------------------------ Cheung Kong Holdings Ltd. 3.4% REAL ESTATE, HONG KONG - ------------------------------------------------------ Acer Inc. 3.3% COMPUTERS & PERIPHERALS, TAIWAN - ------------------------------------------------------ HSBC Holdings PLC 3.1% COMMERCIAL BANKS, U.K. - ------------------------------------------------------ Hong Kong & Shanghai Hotels Ltd. 3.0% HOTELS, RESTAURANTS & LEISURE, HONG KONG - ------------------------------------------------------ 5. Source: Standard & Poor's Micropal. The MSCI China Index is a free float-adjusted, market capitalization-weighted index designed to meaure equity market performance in China. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 6. The transportation sector comprises air freight and logistics, airlines, and transportation infrastructure in the SOI. 4 | Semiannual Report Conversely, the Fund's underweighted exposure to the energy and telecommunication services sectors, as well as an overweighted position in commercial banks, detracted from performance.7 Underweighted positions relative to the MSCI China Index in PetroChina and China Mobile (Hong Kong) also hurt relative performance as both stocks significantly outperformed the index. The Fund's positions in HSBC Holdings and Mega Financial Holdings hindered performance as these stocks declined in value during the period. HSBC is one of the largest banking and financial services organizations in the world, while Mega is one of the largest financial holding companies in Taiwan. Therefore, we believe both companies are well positioned to benefit from increasing demand for banking services globally over the longer term, which is in line with our investment strategy. During the reporting period, the Fund increased its holdings in China H and Red Chip shares as selective stocks reached our buy limits. Key stock purchases included China's national carrier and the country's largest commercial airline, Air China; China Mobile (Hong Kong), a dominant wireless telecommunications operator with 220 million subscribers in China; and PetroChina, which has a dominant market share in upstream oil and gas businesses with huge proven reserves in China. The Fund also made an investment in South Korea's LG Corp., which increased exposure to the multi-holdings sector. The Fund reduced its exposure to Taiwan and the China Shenzhen "B" market during the period. Significant sales included shares of Sinopac Holdings and China International Marine Containers. The Fund repositioned its Hong Kong holdings by adding Hopewell Holdings and reducing exposure to Hang Lung Group. Hopewell Holdings is involved in infrastructure projects, property development and investments, hotel operations and management, restaurant operations and catering, and construction and project management. 7. The energy sector comprises oil, gas and consumable fuels in the SOI. Telecommunication services comprises diversified telecommunication services and wireless telecommunication services in the SOI. Semiannual Report | 5 This report contains new information about the Board of Directors' approval of the Fund's investment advisory contract in the past six months. It is designed to give you an understanding of several factors considered before the Board approved its contract with the Investment Manager. The discosure is in the "Shareholder Information" section beginning on page 29. Thank you for your continued participation in Templeton Dragon Fund. We look forward to serving your future investment needs. Sincerely, [PHOTO OF MARK MOBIUS] /S/Mark Mobius Mark Mobius President and Chief Executive Officer - Investment Management Templeton Dragon Fund, Inc. THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF JUNE 30, 2005, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. 6 | Semiannual Report Performance Summary as of 6/30/05 Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses. Capital gain distributions are net profits realized from the sale of portfolio securities. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. All total returns include reinvested distributions according to the terms specified in the Fund's dividend reinvestment and cash purchase plan and do not reflect any sales charges paid at inception or brokerage commissions paid on secondary market purchases. The performance table does not reflect any taxes due on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares.
PRICE AND DISTRIBUTION INFORMATION - --------------------------------------------------------------------------------------------------- SYMBOL:TDF CHANGE 6/30/05 12/31/04 - --------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.95 $19.65 $18.70 - --------------------------------------------------------------------------------------------------- Market Price (NYSE) +$0.61 $18.08 $17.47 - --------------------------------------------------------------------------------------------------- DISTRIBUTIONS (1/1/05-6/30/05) - --------------------------------------------------------------------------------------------------- Dividend Income $0.1406 - --------------------------------------------------------------------------------------------------- Long-Term Capital Gain $0.0143 - --------------------------------------------------------------------------------------------------- TOTAL $0.1549 - ---------------------------------------------------------------------------------------------------
PERFORMANCE - --------------------------------------------------------------------------------------------------- 6-MONTH 1-YEAR 5-YEAR 10-YEAR - --------------------------------------------------------------------------------------------------- Cumulative Total Return 1 - --------------------------------------------------------------------------------------------------- Based on change in NAV +6.08% +23.15% +128.46% +183.28% - --------------------------------------------------------------------------------------------------- Based on change in market price +4.42% +29.20% +179.30% +210.62% - --------------------------------------------------------------------------------------------------- Average Annual Total Return 1 - --------------------------------------------------------------------------------------------------- Based on change in NAV +6.08% +23.15% +17.97% +10.97% - --------------------------------------------------------------------------------------------------- Based on change in market price +4.42% +29.20% +22.81% +12.00% - ---------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MORE CURRENT PERFORMANCE, CALL FRANKLIN TEMPLETON INVESTMENTS AT 1-800/342-5236. Semiannual Report | 7 Performance Summary (CONTINUED) ENDNOTES SPECIAL RISKS ARE ASSOCIATED WITH FOREIGN INVESTING, INCLUDING CURRENCY VOLATILITY, ECONOMIC INSTABILITY AND POLITICAL DEVELOPMENTS OF COUNTRIES WHERE THE FUND INVESTS. EMERGING MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN ADDITION TO THOSE ASSOCIATED WITH THEIR RELATIVELY SMALL SIZE AND LESSER LIQUIDITY. ALSO, AS A NONDIVERSIFIED INVESTMENT COMPANY INVESTING IN "CHINA COMPANIES," THE FUND MAY INVEST IN A RELATIVELY SMALL NUMBER OF ISSUERS AND, AS A RESULT, BE SUBJECT TO A GREATER RISK OF LOSS WITH RESPECT TO ITS PORTFOLIO SECURITIES. 1. Total return calculations represent the cumulative and average annual changes in value of an investment over the periods indicated. Six-month return has not been annualized. 8 | Semiannual Report Templeton Dragon Fund, Inc. FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------- SIX MONTHS ENDED JUNE 30, 2005 YEAR ENDED DECEMBER 31, (UNAUDITED) 2004 2003 2002 2001 2000 --------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ......... $18.70 $16.62 $9.73 $8.82 $9.91 $12.75 --------------------------------------------------------------------------- Income from investment operations: Net investment income a ..................... 0.45 0.25 0.56 0.17 0.25 0.12 Net realized and unrealized gains (losses) .. 0.65 2.39 6.75 0.81 (0.37) (2.01) --------------------------------------------------------------------------- Total from investment operations ............. 1.10 2.64 7.31 0.98 (0.12) (1.89) --------------------------------------------------------------------------- Capital share repurchases .................... -- -- 0.14 0.10 0.01 0.22 --------------------------------------------------------------------------- Less distributions from: Net investment income ....................... (0.14) (0.16) (0.56) (0.17) (0.23) (1.17) Tax return of capital ....................... -- -- -- -- (0.75) -- Net realized gains .......................... (0.01) (0.40) -- -- -- -- --------------------------------------------------------------------------- Total distributions .......................... (0.15) (0.56) (0.56) (0.17) (0.98) (1.17) --------------------------------------------------------------------------- Net asset value, end of period ............... $19.65 $18.70 $16.62 $9.73 $8.82 $9.91 --------------------------------------------------------------------------- Market value, end of period b ................ $18.08 $17.47 $17.99 $8.92 $7.49 $7.25 --------------------------------------------------------------------------- Total return (based on market value per share) c 4.42% 0.36% 108.44% 21.22% 16.95% (15.31)% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) ............ $742,256 $706,138 $626,959 $431,779 $429,889 $485,091 Ratios to average net assets: Expenses .................................... 1.55%d 1.52% 1.64%e 1.62% 1.54% 1.56% Net investment income ....................... 4.73%d 1.45% 4.57% 1.80% 2.58% 1.04% Portfolio turnover rate ...................... 2.97% 19.42% 29.91% 15.75% 70.94% 132.74% a Based on average daily shares outstanding. b Based on the last sale on the New York Stock Exchange. c Total return is not annualized for periods less than one year. d Annualized. e Ratio of expenses to average net assets, excluding payments by affiliate were 1.78%.
Semiannual Report | See notes to financial statements. | 9 Templeton Dragon Fund, Inc. STATEMENT OF INVESTMENTS, JUNE 30, 2005 (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------- COUNTRY SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 96.3% AIR FREIGHT & LOGISTICS 0.1% Sinotrans Ltd. ....................................................... China 3,017,000 $ 941,496 ------------- AIRLINES 0.4% a Air China Ltd., H .................................................... China 7,486,000 2,528,777 a Air China Ltd., H, 144A .............................................. China 1,364,000 460,761 ------------- 2,989,538 ------------- AUTO COMPONENTS 1.4% Cheng Shin Rubber Industry Co. Ltd. .................................. Taiwan 9,409,160 10,560,241 ------------- AUTOMOBILES 0.1% Chongqing Changan Automobile Co. Ltd. ................................ China 1,638,470 902,431 ------------- CAPITAL MARKETS 1.2% Yuanta Core Pacific Securities Co. ................................... Taiwan 11,591,332 8,563,131 ------------- COMMERCIAL BANKS 6.5% a Bank of Communications, 144A ......................................... China 1,531,000 551,651 Chinatrust Financial Holding Co. Ltd. ................................ Taiwan 6,659,477 7,253,416 HSBC Holdings PLC .................................................... United Kingdom 1,412,520 22,721,453 Mega Financial Holdings Co. Ltd. ..................................... Taiwan 27,217,000 17,915,531 ------------- 48,442,051 ------------- COMMUNICATIONS EQUIPMENT 0.5% D-Link Corp. ......................................................... Taiwan 2,979,309 3,508,389 ------------- COMPUTERS & PERIPHERALS 6.2% Acer Inc. ............................................................ Taiwan 12,232,022 24,135,797 Advantech Co. Ltd. ................................................... Taiwan 2,929,282 6,935,948 Asustek Computer Inc. ................................................ Taiwan 2,883,512 8,138,468 Lite-On Technology Corp. ............................................. Taiwan 5,776,100 6,637,728 ------------- 45,847,941 ------------- CONSTRUCTION MATERIALS 0.2% Anhui Conch Cement Co. Ltd., H ....................................... China 1,306,000 1,218,464 China Resources Cement ............................................... China 872,000 187,398 ------------- 1,405,862 ------------- DISTRIBUTORS 3.1% China Resources Enterprise Ltd. ...................................... China 12,628,000 19,500,570 Test-Rite International Co. Ltd. ..................................... Taiwan 5,126,126 3,641,289 ------------- 23,141,859 ------------- DIVERSIFIED TELECOMMUNICATION SERVICES 0.5% China Telecom Corp. Ltd., H .......................................... China 10,278,000 3,703,379 ------------- ELECTRIC UTILITIES 4.4% Cheung Kong Infrastructure Holdings Ltd. ............................. Hong Kong 11,060,000 32,948,648 ------------- ELECTRICAL EQUIPMENT 0.5% Phoenixtec Power Co. Ltd. ............................................ Taiwan 3,632,945 3,905,344 ------------- ELECTRONIC EQUIPMENT & INSTRUMENTS 2.5% Delta Electronics Inc. ............................................... Taiwan 12,025,970 18,660,661 -------------
10 | Semiannual Report Templeton Dragon Fund, Inc. STATEMENT OF INVESTMENTS, JUNE 30, 2005 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- COUNTRY SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) FOOD & STAPLES RETAILING 14.8% Dairy Farm International Holdings Ltd. ............................... Hong Kong 39,843,978 $109,969,379 ------------- FOOD PRODUCTS 1.0% UNI-President Enterprises Corp. ...................................... Taiwan 16,069,030 7,558,912 ------------- HOTELS, RESTAURANTS & LEISURE 3.0% Hong Kong & Shanghai Hotels Ltd. ..................................... Hong Kong 21,388,338 22,294,284 ------------- HOUSEHOLD DURABLES 1.2% TCL Multimedia Technology Holdings Ltd. .............................. China 48,960,000 9,135,680 ------------- INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 3.8% Datang International Power Generation Co. Ltd., H .................... China 26,502,000 20,121,583 Guangdong Electric Power Development Co. Ltd., B ..................... China 11,270,600 5,482,395 Huadian Power International Corp. Ltd., H ............................ China 3,978,000 1,126,209 Huaneng Power International Inc., H .................................. China 1,454,000 1,066,524 ------------- 27,796,711 ------------- INDUSTRIAL CONGLOMERATES 5.1% Beijing Enterprises Holdings Ltd. .................................... China 976,000 1,369,014 CITIC Pacific Ltd. ................................................... China 7,081,000 20,730,390 a LG Corp. ............................................................. South Korea 221,000 5,618,463 Shanghai Industrial Holdings Ltd. .................................... China 5,118,000 9,978,020 ------------- 37,695,887 ------------- IT SERVICES 0.3% Travelsky Technology Ltd., H ......................................... China 2,837,000 2,409,543 ------------- LEISURE EQUIPMENT & PRODUCTS 0.4% Premier Image Technology Corp. ....................................... Taiwan 2,295,000 2,601,121 ------------- MACHINERY 2.0% China International Marine Containers Co. Ltd., B .................... China 12,791,872 11,687,562 Yung Tay Engineering Co. Ltd. ........................................ Taiwan 5,686,000 3,168,363 ------------- 14,855,925 ------------- METALS & MINING 0.1% Aluminum Corp. of China Ltd., H ...................................... China 1,028,000 572,151 China Oriental Group Co. Ltd., 144A .................................. China 422,000 101,008 ------------- 673,159 ------------- OFFICE ELECTRONICS 0.1% Kinpo Electronics Inc. ............................................... Taiwan 1,454,000 697,736 ------------- OIL, GAS & CONSUMABLE FUELS 9.5% China Petroleum & Chemical Corp., H .................................. China 103,150,000 40,485,597 PetroChina Co. Ltd., H ............................................... China 40,050,000 29,634,789 ------------- 70,120,386 ------------- REAL ESTATE 10.4% Cheung Kong Holdings Ltd. ............................................ Hong Kong 2,575,000 25,101,019 Hang Lung Group Ltd. ................................................. Hong Kong 16,884,042 29,983,821 Henderson China Holdings Ltd. ........................................ China 6,956,500 6,669,274 Henderson Investment Ltd. ............................................ Hong Kong 7,485,000 10,306,401 Hong Kong Land Holdings Ltd. ......................................... Hong Kong 1,904,000 5,312,160 ------------- 77,372,675 -------------
Semiannual Report | 11 Templeton Dragon Fund, Inc. STATEMENT OF INVESTMENTS, JUNE 30, 2005 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- COUNTRY SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 5.3% Elan Microelectronics Corp. .......................................... Taiwan 3,385,396 $ 1,726,098 Faraday Technology Corp. ............................................. Taiwan 432,259 829,719 Samsung Electronics Co. Ltd. ......................................... South Korea 10,780 5,147,724 Siliconware Precision Industries Co. Ltd. ............................ Taiwan 4,340,000 4,274,917 Sunplus Technology Co. Ltd. .......................................... Taiwan 6,264,390 8,820,577 Taiwan Semiconductor Manufacturing Co. ............................... Taiwan 10,645,920 18,519,027 ------------- 39,318,062 ------------- TEXTILES APPAREL & LUXURY GOODS 0.8% Tack Fat Group International Ltd. .................................... Hong Kong 26,080,000 3,322,571 Tainan Enterprises Co. Ltd. .......................................... Taiwan 1,846,000 2,421,509 ------------- 5,744,080 ------------- TRANSPORTATION INFRASTRUCTURE 3.0% China Merchants Holdings (International) Co. Ltd. .................... China 3,648,874 7,090,344 Cosco Pacific Ltd. ................................................... China 6,678,000 12,976,418 Hainan Meilan International Airport Co. Ltd., H ...................... Hong Kong 570,000 326,412 Hopewell Holdings Ltd. ............................................... Hong Kong 623,000 1,599,420 ------------- 21,992,594 ------------- WIRELESS TELECOMMUNICATION SERVICES 7.9% China Mobile (Hong Kong) Ltd., fgn. .................................. China 13,876,000 51,694,499 Taiwan Mobile Co. Ltd. ............................................... Taiwan 7,047,764 7,253,579 ------------- 58,948,078 ------------- TOTAL COMMON STOCKS (COST $447,665,508)............................... 714,705,183 ------------- SHORT TERM INVESTMENTS (COST $25,844,720) 3.5% MONEY FUND 3.5% b Franklin Institutional Fiduciary Trust Money Market Portfolio ........ United States 25,844,720 25,844,720 ------------- TOTAL INVESTMENTS (COST $473,510,228) 99.8%........................... 740,549,903 OTHER ASSETS, LESS LIABILITIES 0.2% .................................. 1,705,909 ------------- NET ASSETS 100.0%..................................................... $742,255,812 -------------
SELECTED PORTFOLIO ABBREVIATIONS: PLC - Public Limited Co a Non-income producing. b See Note 8 regarding investments in Franklin Institutional Fiduciary Trust Money Market Portfolio. 12 | See notes to financial statements. | Semiannual Report Templeton Dragon Fund, Inc. FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES June 30, 2005 (unaudited)
Assets: Investments in securities: Cost - Unaffiliated issuers............................................................................. $447,665,508 Cost - Sweep Money Fund (Note 8)........................................................................ 25,844,720 ------------- Total cost of investments............................................................................... $473,510,228 ------------- Value - Unaffiliated issuers ........................................................................... $714,705,183 Value - Sweep Money Fund (Note 8)....................................................................... 25,844,720 ------------- Total value of investments.............................................................................. 740,549,903 Cash..................................................................................................... 255,375 Foreign currency, at value (cost $677,993)............................................................... 675,325 Receivables: Investment securities sold.............................................................................. 418,702 Dividends and interest.................................................................................. 1,584,937 ------------- Total assets........................................................................................ 743,484,242 ------------- Liabilities: Payables: Investment securities purchased......................................................................... 225,871 Affiliates ............................................................................................. 851,560 Other liabilities........................................................................................ 150,999 ------------- Total liabilities................................................................................... 1,228,430 ------------- Net assets, at value.............................................................................. $742,255,812 ------------- Net assets consist of: Undistributed net investment income...................................................................... $ 16,885,754 Net unrealized appreciation (depreciation)............................................................... 267,024,039 Accumulated net realized gain (loss)..................................................................... 2,232,260 Paid-in capital.......................................................................................... 456,113,759 ------------- Net assets at value............................................................................... $742,255,812 ------------- Shares outstanding....................................................................................... 37,770,115 ------------- Net asset value per share................................................................................ $19.65 -------------
Semiannual Report | See notes to financial statements. | 13 Templeton Dragon Fund, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF OPERATIONS for the six months ended June 30, 2005 (unaudited)
Investment income: Dividends: Unaffiliated issuers (net of foreign taxes of $419,816).................................................. $22,214,717 Sweep Money Fund (Note 8)................................................................................ 210,737 Interest (net of foreign taxes of $24).................................................................... 117 ------------ Total investment income.............................................................................. 22,425,571 ------------ Expenses: Management fees (Note 3a)................................................................................. 4,461,600 Administrative fees (Note 3b)............................................................................. 551,659 Transfer agent fees ...................................................................................... 102,300 Custodian fees (Note 4)................................................................................... 262,535 Reports to shareholders................................................................................... 16,900 Registration and filing fees.............................................................................. 33,700 Professional fees......................................................................................... 83,599 Directors' fees and expenses.............................................................................. 15,150 Other..................................................................................................... 10,700 ------------ Total expenses....................................................................................... 5,538,143 Expense reductions (Note 4).......................................................................... (12) ------------ Net expenses........................................................................................ 5,538,131 ------------ Net investment income............................................................................. 16,887,440 ------------ Realized and unrealized gains (losses): Net realized gain (loss) from: Investments.............................................................................................. 5,974,977 Foreign currency transactions............................................................................ (22,498) ------------ Net realized gain (loss)............................................................................ 5,952,479 ------------ Net change in unrealized appreciation (depreciation) on: Investments.............................................................................................. 19,145,829 Translation of assets and liabilities denominated in foreign currencies.................................. (17,490) ------------ Net change in unrealized appreciation (depreciation)................................................ 19,128,339 ------------ Net realized and unrealized gain (loss).................................................................... 25,080,818 ------------ Net increase (decrease) in net assets resulting from operations............................................ $41,968,258 ------------
14 | See notes to financial statements. | Semiannual Report Templeton Dragon Fund, Inc. FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
-------------------------------------- SIX MONTHS ENDED JUNE 30, 2005 YEAR ENDED (UNAUDITED) DECEMBER 31, 2004 -------------------------------------- Increase (decrease) in net assets: Operations: Net investment income .......................................................... $ 16,887,440 $ 9,481,435 Net realized gain (loss) from investments and foreign currency transactions .... 5,952,479 58,934,673 Net change in unrealized appreciation (depreciation) on investments and translation of assets and liabilities denominated in foreign currencies ...................... 19,128,339 31,086,303 -------------------------------------- Net increase (decrease) in net assets resulting from operations ............ 41,968,258 99,502,411 -------------------------------------- Distributions to shareholders from: Net investment income .......................................................... (5,310,478) (6,171,637) Net realized gains ............................................................. (540,113) (15,009,844) -------------------------------------- Total distributions to shareholders ............................................. (5,850,591) (21,181,481) -------------------------------------- Capital share transactions (Note 2) ............................................. -- 857,852 -------------------------------------- Net increase (decrease) in net assets ...................................... 36,117,667 79,178,782 Net assets: Beginning of period ............................................................. 706,138,145 626,959,363 -------------------------------------- End of period ................................................................... $742,255,812 $706,138,145 -------------------------------------- Undistributed net investment income included in net assets: End of period $ 16,885,754 $ 5,308,792 --------------------------------------
Semiannual Report | See notes to financial statements. | 15 Templeton Dragon Fund, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Templeton Dragon Fund, Inc. (the Fund), is registered under the Investment Company Act of 1940 as a non-diversified, closed-end management investment company. On May 29, 2002, the Fund's shareholders approved an Agreement and Plan of Reorganization (the "Plan") that provides for the reorganization of the Fund from a Maryland corporation to a Delaware statutory trust. The completion of the reorganization is pending guidance from the National Tax Agency in Japan relating to the tax treatment of the Plan under Japanese laws with respect to the Fund's Japanese shareholders. If and when the reorganization is completed, the Delaware statutory trust will be the successor to the Fund. The following summarizes the Fund's significant accounting policies. A. SECURITY VALUATION Securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Investments in open-end mutual funds are valued at the closing net asset value. Foreign securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the foreign security is determined. The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Some methods for valuing these securities may include: fundamental analysis, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Fund's Board of Directors. 16 | Semiannual Report Templeton Dragon Fund, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) B. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Fund's Board of Directors. The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. C. FOREIGN CURRENCY CONTRACTS When the Fund purchases or sells foreign securities it may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate on a specified date. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The risks of these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the possible inability of the counterparties to fulfill their obligations under the contracts. D. INCOME TAXES No provision has been made for U.S. income taxes because the Fund's policy is to continue to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code and to distribute substantially all of its taxable income. Fund distributions to shareholders are determined on an income tax basis and may differ from net investment income and realized gains for financial reporting purposes. Semiannual Report | 17 Templeton Dragon Fund, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Dividend income and distributions to shareholders are recorded on the ex-dividend date. F. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates. G. GUARANTEES AND INDEMNIFICATIONS Under the Fund's organizational documents, its officers and directors are indemnified by the Fund against certain liabilities arising out of the performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts with service providers that contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risk of loss to be remote. 2. CAPITAL STOCK In December 2004, the Board of Directors of the Fund authorized management to re-implement the Fund's open-market share repurchase program. Originally implemented in October 1997, the Fund's Board of Directors had discontinued the open-market share repurchase program in May 2002, in connection with the Fund's previously conducted tender offers. Under the program, the Fund may purchase, from time to time, shares of the Fund's common stock in open-market transactions, at the discretion of the Fund's investment manager. At June 30, 2005, there were 100 million shares authorized ($0.01 par value). During the period ended June 30, 2005, there were no share transactions; all reinvested distributions were satisfied with previously issued shares purchased in the open market. During the year ended December 31, 2004, 50,373 shares were issued for $857,852 from reinvested distributions. 18 | Semiannual Report Templeton Dragon Fund, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and directors of the Fund are also officers and/or directors of the following subsidiaries: - -------------------------------------------------------------------------------- SUBSIDIARY AFFILIATION - -------------------------------------------------------------------------------- Templeton Asset Management Ltd. (TAML) Investment manager Franklin Templeton Services LLC (FT Services) Administrative manager A. MANAGEMENT FEES The Fund pays an investment management fee to TAML based on the average weekly net assets of the Fund as follows: - -------------------------------------------------------------------------------- ANNUALIZED FEE RATE NET ASSETS - -------------------------------------------------------------------------------- 1.250% Up to and including $1 billion 1.200% Over $1 billion, up to and including $5 billion 1.150% Over $5 billion, up to and including $10 billion 1.100% Over $10 billion, up to and including $15 billion 1.050% Over $15 billion, up to and including $20 billion 1.000% In excess of $20 billion B. ADMINISTRATIVE FEES The Fund pays an administrative fee to FT Services of 0.15% per year of the Fund's average weekly net assets, of which 0.10% is paid to Nomura Asset Management U.S.A. Inc., for sub-administrative services. 4. EXPENSE OFFSET ARRANGEMENT The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund's custodian expenses. During the period ended June 30, 2005, the custodian fees were reduced as noted in the Statement of Operations. 5. INCOME TAXES At December 31, 2004, the Fund had deferred capital losses occurring subsequent to October 31, 2004, of $2,401,388. For tax purposes, such losses will be reflected in the year ending December 31, 2005. Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions. Semiannual Report | 19 Templeton Dragon Fund, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 5. INCOME TAXES (CONTINUED) Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales and foreign currency transactions. At June 30, 2005, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows: Cost of investments ................................. $474,798,343 ------------- Unrealized appreciation ............................. $271,948,738 Unrealized depreciation ............................. (6,197,178) ------------- Net unrealized appreciation (depreciation) .......... $265,751,560 ------------- 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short-term securities) for the period ended June 30, 2005 aggregated $21,747,459 and $20,732,322, respectively. 7. CREDIT RISK Investing in foreign securities may include certain risks and considerations not typically associated with investing in U.S. securities, such as fluctuating currency values, changing local and regional economic, political and social conditions, which may result in greater market volatility. In addition, certain foreign securities may not be as liquid as U.S. securities. 8. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Fund may invest in the Franklin Institutional Fiduciary Trust Money Market Portfolio (the Sweep Money Fund), an open-end investment company managed by Franklin Advisers Inc. (an affiliate of the Fund's investment manager). Management fees paid by the Fund are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management fees paid by the Sweep Money Fund. 20 | Semiannual Report Templeton Dragon Fund, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 9. RECENT LITIGATION Pursuant to a settlement agreement which was announced on March 20, 2003, between the Fund and Harvard College, a former shareholder of the Fund, Harvard Management Company, Inc. ("Harvard Management"), which is an investment advisor to Harvard College, and Steven Alperin, an officer of Harvard Management at the time (referred to collectively as "Harvard"), the Fund agreed to take, and the Board approved, the following actions, among other actions, which have already been carried out. o IN-KIND TENDER OFFERs--The Fund has applied to the SEC for an exemptive order allowing the Fund to make occasional, non-periodic tender offers, each for up to 20% of the Fund's outstanding shares at a price equal to 95% of net asset value per share as of the date the offer expires, to be paid entirely in kind through a pro rata distribution of marketable portfolio securities and available cash. Subject to certain conditions, the settlement required the Fund to commence such an in-kind tender offer for 20% of the Fund's shares within three months after obtaining the SEC exemption. The Fund has also been required under the settlement to conduct, on substantially identical terms, up to two additional in-kind tender offers under certain circumstances. There is no assurance that the SEC will issue the exemptive order, nor is it possible to predict the date when an exemptive order might be granted. o ADDITIONAL CASH TENDER OFFERS--If the SEC did not issue the exemptive order for in-kind tender offers by March 26, 2004, the settlement provided that the Fund could, but was not obligated to, conduct an additional cash tender offer, and possibly later follow-on cash tender offers, each for 15% of the Fund's outstanding shares at a price of 92.5% of net asset value per share as of the date the offer expires. Under certain circumstances, if the Fund did not conduct these tender offers, Harvard would be relieved of its obligation to refrain from making shareholder proposals and taking other actions with respect to the Fund. The exemptive application was not received by March 26, 2004 and the Fund did not conduct any tender offers for the period ended June 30, 2005. The settlement agreement provides that the Fund will not be obligated to commence in-kind tender offers or additional cash tender offers under certain circumstances or conditions. These relate to, among other things, the number of shares tendered by shareholders into preceding tender offers as well as the beneficial ownership percentages of the Fund's shareholders. Semiannual Report | 21 Templeton Dragon Fund, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 9. RECENT LITIGATION (CONTINUED) STANDSTILL. As part of the settlement, Harvard agreed not to submit any proposals for consideration by shareholders of the Fund, or any other closed-end fund or similar investment vehicle managed by TAML or its affiliates, or for consideration by shareholders of Franklin Resources, Inc., nor to encourage others to do so, for a period of four years. Harvard also has agreed not at any time to acquire additional shares of the Fund or any other closed-end fund or similar investment vehicle managed by TAML or its affiliates. 10. REGULATORY MATTERS INVESTIGATIONS AND SETTLEMENTS As part of various investigations by a number of federal, state, and foreign regulators and governmental entities, including the Securities and Exchange Commission ("SEC"), the California Attorney General's Office ("CAGO"), and the National Association of Securities Dealers, Inc. ("NASD"), relating to certain practices in the mutual fund industry, including late trading, market timing and marketing support payments to securities dealers who sell fund shares, Franklin Resources, Inc. and certain of its subsidiaries (as used in this section, together, the "Company"), as well as certain current or former executives and employees of the Company, provided documents and information in response to subpoenas and/or requests for documents, information and/or testimony. Beginning in August 2004, the Company entered into settlements with certain of the regulators and a governmental entity investigating the mutual fund industry practices noted above. The Company believes that settlement of each of the matters is in the best interest of the Company and shareholders of the Franklin, Templeton, and Mutual Series mutual funds (the "funds"). Two of the settlement agreements, those with the SEC and the CAGO concerning marketing support payments, provide that the distribution of settlement monies are to be made to the relevant funds, not to individual shareholders. The CAGO has approved the distribution plan pertaining to the distribution of the monies owed under the CAGO settlement agreement and, in accordance with the terms and conditions of that settlement, the monies were disbursed to the participating funds. The Fund did not participate in the CAGO settlement. The SEC has not yet approved the distribution plan pertaining to the SEC settlement. When approved, disbursements of settlement monies under the SEC's settlement will be made promptly in accordance with the terms and conditions of that order. 22 | Semiannual Report Templeton Dragon Fund, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 10. REGULATORY MATTERS (CONTINUED) OTHER LEGAL PROCEEDINGS On April 12, 2005, the Attorney General of West Virginia filed a complaint in the Circuit Court of Marshall County, West Virginia against a number of companies engaged in the mutual fund industry, including Franklin Resources, Inc. and its subsidiary, Franklin Advisers, Inc., and certain other parties alleging violations of the West Virginia Consumer Credit and Protection Act and seeking, among other things, civil penalties and attorneys' fees and costs. Defendants have since removed the matter to the United States District Court for the Northern District of West Virginia. To the extent applicable to the Company, the complaint arises from activity that occurred in 2001 and duplicates, in whole or in part, the allegations asserted in the February 4, 2004 Massachusetts Administrative Complaint concerning one instance of market timing (the "Administrative Complaint") and the SEC's findings regarding market timing in its August 2, 2004 Order (the "SEC Order"), both of which matters were previously reported. The Company, in addition to certain Franklin, Templeton, and Mutual Series mutual funds, current and former officers, employees, and directors have been named in multiple lawsuits in different courts alleging violations of various federal securities laws and seeking, among other relief, monetary damages, restitution, removal of fund trustees, directors, advisers, administrators, and distributors, rescission of management contracts and 12b-1 plans, and/or attorneys' fees and costs. Specifically, the lawsuits claim breach of duty with respect to alleged arrangements to permit market timing and/or late trading activity, or breach of duty with respect to the valuation of the portfolio securities of certain Templeton funds managed by Franklin Resources, Inc. subsidiaries, resulting in alleged market timing activity. The majority of these lawsuits duplicate, in whole or in part, the allegations asserted in the Administrative Complaint and the SEC's findings regarding market timing in the SEC Order. The lawsuits are styled as class actions, or derivative actions on behalf of either the named funds or Franklin Resources, Inc. The Company, in addition to certain Franklin, Templeton, and Mutual Series mutual funds, current and former officers, employees, and directors have been named in multiple lawsuits alleging violations of various securities laws and pendent state law claims relating to the disclosure of marketing support payments and/or payment of allegedly excessive commissions and/or advisory or distribution fees, and seeking, among other relief, monetary damages, restitution, rescission of advisory contracts, including recovery of all fees paid pursuant to those contracts, an accounting of all monies paid to the named advisers, declaratory relief, injunctive relief, and/or attorneys' fees and costs. These lawsuits are styled as class actions or derivative actions brought on behalf of the named funds. Semiannual Report | 23 Templeton Dragon Fund, Inc. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 10. REGULATORY MATTERS (CONTINUED) OTHER LEGAL PROCEEDINGS (CONTINUED) The Company and fund management strongly believe that the claims made in each of the lawsuits described above are without merit and intends to defend against them vigorously. The Company cannot predict with certainty the eventual outcome of these lawsuits, nor whether they will have a material negative impact on the Company. Public trust and confidence are critical to the Company's business and any material loss of investor and/or client confidence could result in a significant decline in assets under management by the Company, which would have an adverse effect on future financial results. If it is determined that the Company bears responsibility for any unlawful or inappropriate conduct that caused losses to the Fund, it is committed to making the Fund or its shareholders whole, as appropriate. The Company is committed to taking all appropriate actions to protect the interests of its funds' shareholders. 24 | Semiannual Report Templeton Dragon Fund, Inc. ANNUAL MEETING OF SHAREHOLDERS, MAY 20, 2005 The Annual Meeting of Shareholders of the Fund was held at the Fund's offices, 500 E. Broward Blvd., Fort Lauderdale, Florida on May 20, 2005. The purpose of the meeting was to elect four Directors of the Fund. At the meeting, the following persons were elected by the shareholders to serve as Directors of the Fund: Harris J. Ashton, Frank J. Crothers, S. Joseph Fortunato and Constantine D. Tseretopoulos.* No other business was transacted at the meeting. The results of the voting at the Annual Meeting are as follows: The election of four (4) Directors:
- -------------------------------------------------------------------------------------------------------- % OF % OF % OF % OF OUTSTANDING VOTED OUTSTANDING VOTED TERM EXPIRING 2008: FOR SHARES SHARES WITHHELD SHARES SHARES - -------------------------------------------------------------------------------------------------------- Harris J. Ashton .........32,024,179.7486 84.79% 97.75% 738,218.5057 1.95% 2.25% Frank J. Crothers ........32,090,123.7486 84.96% 97.95% 672,274.5057 1.78% 2.05% S. Joseph Fortunato ......32,051,973.7486 84.86% 97.83% 710,424.5057 1.88% 2.17% Constantine D. Tseretopoulos ............32,073,358.7486 84.92% 97.90% 689,039.5057 1.82% 2.10%
* MARTIN L. FLANAGAN, EDITH E. HOLIDAY, CHARLES B. JOHNSON, GORDON S. MACKLIN, FRED R. MILLSAPS AND FRANK A. OLSON ARE DIRECTORS OF THE FUND WHO ARE CURRENTLY SERVING AND WHOSE TERMS OF OFFICE CONTINUED AFTER THE ANNUAL MEETING OF SHAREHOLDERS. Semiannual Report | 25 Templeton Dragon Fund, Inc. DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN The Fund offers a Dividend Reinvestment and Cash Purchase Plan (the "Plan") with the following features: If shares of the Fund are held in the shareholder's name, the shareholder will automatically be a participant in the Plan (other than shareholders holding their shares through Japan Securities Clearing Corporation, who will not be enrolled in the Plan unless certain conditions are met and they elect to participate), unless he elects to withdraw. If the shares are registered in the name of a broker-dealer or other nominee (i.e., in "street name"), the broker-dealer or nominee will elect to participate in the Plan on the shareholder's behalf unless the shareholder instructs them otherwise, or unless the reinvestment service is not provided by the broker-dealer or nominee. Participants should contact Mellon Investor Services LLC, P.O. Box 3338, South Hackensack, NJ 07606-1938, to receive the Plan brochure. To receive dividends or distributions in cash, the shareholder must notify Mellon Bank, N.A. (the "Plan Administrator") at the address above or the institution in whose name the shares are held. The Plan Administrator must receive written notice within 10 business days before the record date for the distribution. Whenever the Fund declares dividends in either cash or common stock of the Fund, if the market price is equal to or exceeds net asset value at the valuation date, the participant will receive the dividends entirely in stock at a price equal to the net asset value, but not less than 95% of the then current market price of the Fund's shares. If the market price is lower than net asset value or if dividends and/or capital gains distributions are payable only in cash, the participant will receive shares purchased on the New York Stock Exchange or otherwise on the open market. A participant has the option of submitting additional payments to the Plan Administrator, in any amounts of at least $100, up to a maximum of $5,000 per month, for the purchase of Fund shares for his or her account. These payments shall be made by check or money order payable to "Mellon Bank, N.A." and sent to Mellon Investor Services, P.O. Box 382009, Pittsburgh, PA 15250-8009, Attn: Templeton Dragon Fund, Inc. The Plan Administrator shall apply such payments (less a $5.00 service charge and less a pro rata share of trading fees) to purchases of the Fund's shares in the open market. Whenever shares are purchased on the New York Stock Exchange or otherwise on the open market, each participant will pay a pro rata portion of trading fees. Trading fees will be deducted from amounts to be invested. The automatic reinvestment of dividends and/or capital gains does not relieve the participant of any income tax which may be payable on dividends or distributions. 26 | Semiannual Report Templeton Dragon Fund, Inc. DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN (CONTINUED) The participant may withdraw from the Plan without penalty at any time by written notice to the Plan Administrator sent to Mellon Investor Services LLC, P.O. Box 3338, South Hackensack, NJ 07606-1938. Upon withdrawal, the participant will receive, without charge, stock certificates issued in the participant's name for all full shares held by the Plan Administrator; or, if the participant wishes, the Plan Administrator will sell the participant's shares and send the proceeds, less a service charge and less trading fees. The fees for the sale of shares through the Plan are $15.00 per transaction plus a $0.12 per share trading fee. Semiannual Report | 27 Templeton Dragon Fund, Inc. TRANSFER AGENT Mellon Investor Services LLC 85 Challenger Road Ridgefield Park, NJ 07660 1-800-416-5585 www.melloninvestor.com SHAREHOLDER INFORMATION Shares of Templeton Dragon Fund, Inc. are traded on the New York Stock Exchange under the symbol "TDF". The Fund's shares are also listed and traded in Japan on the Osaka Securities Exchange. Information about the net asset value and the market price is published each Monday in the WALL STREET JOURNAL, weekly in BARRON'S and each Saturday in THE NEW YORK TIMES and other newspapers. Daily market prices for the Fund's shares are published in the New York Stock Exchange Composite Transactions section of newspapers. For current information about distributions and shareholder accounts, call 1-800-416-5585. Registered shareholders can now access their Fund account on-line with INVESTOR SERVICE DIRECT(R). For information go to Mellon Investor Services' web site at http://vault.melloninvestor.com/isd and follow the instructions. The daily closing net asset value as of the previous business day may be obtained when available by calling Franklin Templeton Fund Information after 7 a.m. Pacific time any business day at 1-800/DIAL BEN(R) (1-800/342-5236). The Fund's net asset value and dividends are also listed on the NASDAQ Stock Market, Inc.'s Mutual Fund Quotation Service ("NASDAQ MFQS"). Shareholders not receiving copies of the reports to shareholders because their shares are registered in the name of a broker or a custodian can request that they be added to the Fund's mailing list by writing Templeton Dragon Fund, Inc., 100 Fountain Parkway, P.O. Box 33030, St. Petersburg, FL 33733-8030. 28 | Semiannual Report Templeton Dragon Fund, Inc. SHAREHOLDER INFORMATION BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT At a meeting held March 1, 2005, the Board of Directors ("Board"), including a majority of non-interested or independent Directors, approved renewal of the investment advisory contract for Templeton Dragon Fund, Inc. (the "Fund"). In reaching this decision, the Board took into account information furnished throughout the year at regular Board meetings, as well as information prepared specifically in connection with the annual renewal review process. Information furnished and discussed throughout the year included reports on the Fund, the share price premium or discount to net asset value, the results of investment performance and related financial information for the Fund, as well as periodic reports on legal compliance, pricing, brokerage commissions and execution and other services provided by the Investment Manager ("Manager") and its affiliates. Information furnished specifically in connection with the renewal process included a report prepared by Lipper Financial Services ("Lipper"), an independent organization, as well as a Fund profitability analysis report prepared by management. The Lipper report compared the Fund's investment performance and expenses with those of other funds deemed comparable to the Fund as selected by Lipper. The Fund profitability analysis report discussed the profitability to Franklin Templeton Investments from its overall U.S. fund operations, as well as on an individual fund-by-fund basis. Included with such profitability analysis report was information on a fund-by-fund basis listing portfolio managers and other accounts they manage, as well as information on management fees charged by the Manager including management's explanation of differences where relevant, and a three-year expense analysis with an explanation for any increase in expense ratios. Additional information accompanying such report was a memorandum prepared by management describing enhancements to the services provided to the funds by the Franklin Templeton Investments organization, as well as a memorandum relating to economies of scale. In considering such materials, the independent Directors received assistance and advice from and met separately with independent counsel. In approving continuance of the investment advisory contract for the Fund, the Board, including a majority of independent Directors, determined that the existing management fee structure was fair and reasonable and that continuance of the investment advisory contract was in the best interests of the Fund and its shareholders. While attention was given to all information furnished, the following discusses the primary factors relevant to the Board's decision. NATURE, EXTENT AND QUALITY OF SERVICE. The Board was satisfied with the nature and quality of the overall services provided by the Manager and its affiliates to the Fund and its shareholders. In addition to investment performance and expenses discussed below, the Board's opinion was based, in part, upon periodic reports furnished them showing that the investment policies and restrictions for the Fund were consistently complied with as well as other reports periodically furnished the Board covering matters such as the compliance of portfolio managers and other management personnel with the code of ethics adopted throughout the Franklin Templeton fund complex, the adherence to fair value pricing procedures established by the Board, and the accuracy of net asset value calculations. Favorable consideration was given to management's efforts and Semiannual Report | 29 Templeton Dragon Fund, Inc. SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT (CONTINUED) expenditures in establishing back-up systems and recovery procedures to function in the event of a natural disaster, it being noted by the Board that such systems and procedures had functioned smoothly during the hurricanes and blackout experienced last year in Florida. Other factors taken into account by the Board were the Manager's best execution trading policies, including a favorable third-party report on portfolio execution, as well as the compliance procedures and qualifications of the Chief Compliance Officer established in accordance with recently adopted SEC requirements. Consideration was also given to the experience of the Fund's portfolio management team, the number of accounts managed and general method of compensation. In this latter respect, the Board noted that a primary factor in management's determination of the level of a portfolio manager's bonus compensation was the relative investment performance of the funds he or she managed so as to be aligned with the interests of Fund shareholders. INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment performance of the Fund in view of its importance to shareholders. While consideration was given to performance reports and discussions with portfolio managers at Board meetings during the year, particular attention in assessing performance was given to the Lipper reports furnished for the contract renewals. The Lipper report prepared for the Fund showed its investment performance in comparison with a performance group consisting of the Fund and five other closed-end Pacific region funds as selected by Lipper during 2004, as well as during the previous ten-year period. Such report considers total return on a net asset value basis without regard to market discounts or premiums in order to accurately reflect investment performance. The Lipper report showed that while the Fund's total return for 2004 was the fourth lowest of such group, its total return on an annualized basis was the highest in such group during each of the previous three-, five- and ten-year periods. In discussing this performance, management pointed out that the Fund's total return in net asset value terms during 2004 exceeded that of the MSCI China Index, which it believed was an appropriate basis of comparison in view of the Fund's focus on China related stocks. The Board was satisfied with the Fund's performance, noting that the Fund's 2004 total return exceeded 15% as shown in such Lipper report. COMPARATIVE EXPENSES. Consideration was given to a Lipper report analysis of the management fees and total expense ratios of the Fund compared with an expense group consisting of the Fund, five other non-leveraged closed-end Pacific region funds, and four non-leveraged closed-end Pacific ex-Japan funds, as selected by Lipper. Prior to making such comparison, the Board relied upon a survey showing that the scope of management advisory services covered under the Fund's investment advisory contract was similar to those provided by fund managers to other mutual fund groups that would be used as a basis of comparison in the Lipper report. In reviewing comparative costs, emphasis was given to the Fund's management fee in comparison with the effective management fee that would have been charged by other funds within its Lipper expense group assuming they were the same size as the Fund, as well as the actual total expenses of the Fund in comparison with those of such expense group. The Lipper effective management fee analysis considers administrative fees to be part of management fees and the results of such expense 30 | Semiannual Report Templeton Dragon Fund, Inc. SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT (CONTINUED) comparisons showed the Fund's effective management fee rate to be the highest in its expense group, but the Fund's actual total expenses to be the fourth lowest in such Lipper expense group. The Board found such expenses to be acceptable. MANAGEMENT PROFITABILITY. The Board also considered the level of profits realized by the Manager and its affiliates in connection with the operation of the Fund. In this respect, the Board reviewed the Fund profitability analysis that addresses the overall profitability of Franklin Templeton's U.S. fund business, as well as its profits in providing management and other services to each of the individual funds. The Board also considered the extent to which the Manager and its affiliates might derive ancillary benefits from fund operations, as well as potential benefits resulting from allocation of fund brokerage and the use of "soft" commission dollars to pay for research. Specific attention was given to the methodology followed in allocating costs to each fund, it being recognized that allocation methodologies are inherently subjective and various allocation methodologies may each be reasonable while producing different results. In this respect, the Board noted that the cost allocation methodology was consistent with that followed in profitability report presentations made in prior years and that it had engaged on a biennial basis the Fund's independent accountants to perform certain procedures specified by the Board solely for its purpose and use. It was also noted that legal costs and payments incurred by Franklin Templeton in resolving various legal proceedings arising from its U.S. fund operations had not been allocated to the Fund for purposes of determining profitability. Included in the analysis were the revenue and related costs involved in managing the Fund, as well as its relative contribution to the profitability of the Manager's parent. In reviewing and discussing such analysis, management discussed with the Board its belief that costs incurred in establishing the infrastructure necessary to the type of fund operations conducted by the Manager and its corporate affiliates may not be fully reflected in the expenses allocated to each fund in determining its profitability, as well as the fact that the level of profits, to a certain extent, reflected operational cost savings and efficiencies initiated by management. In addition, the Board considered a third-party study comparing the profitability of the Manager's parent on an overall basis as compared to other publicly held managers broken down to show profitability from management operations exclusive of distribution expenses, as well as profitability including distribution expenses. Based upon their consideration of all these factors, the Board determined that the level of profits realized by the Manager under its investment advisory contract with the Fund was not excessive in view of the nature, quality and extent of services provided. ECONOMIES OF SCALE. The Board also considered whether the Manager realizes economies of scale as the Fund grows larger and the extent to which any such benefit is shared with the Fund and its shareholders. The Board believed that a Manager's ability to realize economies of scale and the sharing of such benefit is a more relevant consideration in the case of an open-end fund whose size increases as a result of the continuous sale of its shares. A closed-end investment company such as the Fund does not continuously offer shares and growth following its initial public offering will primarily result from market appreciation which benefits its shareholders. While believing economies of scale to be less of a factor in the context of a closed-end fund, the Board believes at Semiannual Report | 31 Templeton Dragon Fund, Inc. SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT (CONTINUED) some point an increase in size may lead to economies of scale which should be shared with the Fund and its shareholders and intends to monitor future growth of the Fund accordingly. The Board noted that in the previous year it had added a breakpoint to the Fund's investment advisory fee at the $1 billion level. PROXY VOTING POLICIES AND PROCEDURES The Fund has established Proxy Voting Policies and Procedures ("Policies") that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Fund's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. QUARTERLY STATEMENT OF INVESTMENTS The Fund files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 1-800/SEC-0330. CERTIFICATIONS The Fund's Chief Executive Officer - Finance and Administration is required by the New York Stock Exchange's Listing Standards to file annually with the Exchange a certification that he is not aware of any violation by the Fund of the Exchange's Corporate Governance Standards applicable to the Fund. The Fund has filed such certification. In addition, the Fund's Chief Executive Officer - Finance and Administration and Chief Financial Officer and Chief Accounting Officer are required by the rules of the Commission to provide certain certifications with respect to the Fund's Form N-CSR and Form N-CSRS (which include the Fund's annual and semiannual reports to shareholders) that are filed semiannually with the Commission. The Fund has filed such certifications with its Form N-CSR for the year ended December 31, 2004. Additionally, the Fund expects to file, on or about August 31, 2005, such certifications with its Form N-CSRS for the six months ended June 30, 2005. 32 | Semiannual Report Literature Request LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT 1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of service, we may monitor, record and access telephone calls to or from our service departments. These calls can be identified by the presence of a regular beeping tone. FRANKLIN TEMPLETON INVESTMENTS INTERNATIONAL Mutual European Fund Templeton China World Fund Templeton Developing Markets Trust Templeton Foreign Fund Templeton Foreign Smaller Companies Fund Templeton International (Ex EM) Fund GLOBAL Mutual Discovery Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund Templeton World Fund GROWTH Franklin Aggressive Growth Fund Franklin Capital Growth Fund Franklin Flex Cap Growth Fund Franklin Small-Mid Cap Growth Fund Franklin Small Cap Growth Fund II 1 VALUE Franklin Balance Sheet Investment Fund 2 Franklin Equity Income Fund Franklin Large Cap Value Fund Franklin MicroCap Value Fund 2 Franklin MidCap Value Fund Franklin Small Cap Value Fund Mutual Beacon Fund Mutual Qualified Fund Mutual Recovery Fund 3 Mutual Shares Fund BLEND Franklin Blue Chip Fund Franklin Convertible Securities Fund Franklin Growth Fund Franklin Rising Dividends Fund Franklin U.S. Long-Short Fund SECTOR Franklin Biotechnology Discovery Fund Franklin DynaTech Fund Franklin Global Communications Fund Franklin Global Health Care Fund Franklin Gold and Precious Metals Fund Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Technology Fund Franklin Utilities Fund Mutual Financial Services Fund ASSET ALLOCATION Franklin Templeton Corefolio Allocation Fund Franklin Templeton Founding Funds Allocation Fund Franklin Templeton Perspectives Allocation Fund TARGET FUNDS Franklin Templeton Conservative Target Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund INCOME Franklin Adjustable U.S. Government Securities Fund 4 Franklin's AGE High Income Fund Franklin Floating Rate Daily Access Fund Franklin Income Fund Franklin Limited Maturity U.S. Government Securities Fund 4 Franklin Low Duration Total Return Fund Franklin Real Return Fund Franklin Strategic Income Fund Franklin Strategic Mortgage Portfolio Franklin Templeton Hard Currency Fund Franklin Total Return Fund Franklin U.S. Government Securities Fund 4 Templeton Global Bond Fund Templeton Income Fund TAX-FREE INCOME 5 NATIONAL FUNDS Double Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund 6 LIMITED-TERM FUNDS California Limited-Term Tax-Free Income Fund Federal Limited-Term Tax-Free Income Fund New York Limited-Term Tax-Free Income Fund INTERMEDIATE-TERM FUNDS California Intermediate-Term Tax-Free Income Fund Federal Intermediate-Term Tax-Free Income Fund New York Intermediate-Term Tax-Free Income Fund STATE-SPECIFIC Alabama Arizona California 7 Colorado Connecticut Florida 7 Georgia Kentucky Louisiana Maryland Massachusetts 6 Michigan 6 Minnesota 6 Missouri New Jersey New York 7 North Carolina Ohio 7 Oregon Pennsylvania Tennessee Virginia INSURANCE FUNDS Franklin Templeton Variable Insurance Products Trust 8 1. The fund is closed to new investors. Existing shareholders can continue adding to their accounts. 2. The fund is only open to existing shareholders and select retirement plans. 3. The fund is a continuously offered, closed-end fund. Shares may be purchased daily; there is no daily redemption. However, each quarter, pending board approval, the fund will authorize the repurchase of 5%-25% of the outstanding number of shares. Investors may tender all or a portion of their shares during the tender period. 4. An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. 5. For investors subject to the alternative minimum tax, a small portion of fund dividends may be taxable. Distributions of capital gains are generally taxable. 6. Portfolio of insured municipal securities. 7. These funds are available in two or more variations, including long-term portfolios, portfolios of insured securities, a high-yield portfolio (CA) and limited-term, intermediate-term and money market portfolios (CA and NY). 8. The funds of the Franklin Templeton Variable Insurance Products Trust are generally available only through insurance company variable contracts. 06/05 Not part of the semiannual Report [LOGO OMITTED] FRANKLIN TEMPLETON 100 Fountain Parkway INVESTMENTS P.O. Box 33030 St. Petersburg, FL 33733-8030 SEMIANNUAL REPORT AND SHAREHOLDER INFORMATION TEMPLETON DRAGON FUND, INC. INVESTMENT MANAGER Templeton Asset Management Ltd. TRANSFER AGENT Mellon Investor Services LLC P.O. Box 3315 South Hackensack, NJ 07606-1915 Toll free number: 1-800-416-5585 Hearing Impaired phone number: 1-800-231-5469 Foreign Shareholders phone number: 201-329-8660 www.melloninvestor.com FUND INFORMATION 1-800/342-5236 INVESTORS SHOULD BE AWARE THAT THE VALUE OF INVESTMENTS MADE FOR THE FUND MAY GO DOWN AS WELL AS UP. LIKE ANY INVESTMENT IN SECURITIES, THE VALUE OF THE FUND'S PORTFOLIO WILL BE SUBJECT TO THE RISK OF LOSS FROM MARKET, CURRENCY, ECONOMIC, POLITICAL AND OTHER FACTORS. THE FUND AND ITS INVESTORS ARE NOT PROTECTED FROM SUCH LOSSES BY THE INVESTMENT MANAGER. THEREFORE, INVESTORS WHO CANNOT ACCEPT THIS RISK SHOULD NOT INVEST IN SHARES OF THE FUND. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone. TLTDF S2005 08/05 ITEM 2. CODE OF ETHICS. (a) The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer. (c) N/A (d) N/A (f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy of its code of ethics that applies to its principal executive officers and principal financial and accounting officer. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. (a)(1) The Registrant has an audit committee financial expert serving on its audit committee. (2) The audit committee financial experts are Fred R. Millsaps and Frank A. Olson and they are "independent" as defined under the relevant Securities and Exchange Commission Rules and Releases. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. N/A ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS Members of the Audit Committee are: Frank J. Crothers, Fred R. Millsaps; Frank A. Olson and Constantine D. Tseretopoulos ITEM 6. SCHEDULE OF INVESTMENTS. N/A ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. The board of directors of the Fund has delegated the authority to vote proxies related to the portfolio securities held by the Fund to the Fund's manager Templeton Asset Management Ltd in accordance with the Proxy Voting Policies and Procedures (Policies) adopted by the manager. The manager has delegated its administrative duties with respect to the voting of proxies to the Proxy Group within Franklin Templeton Companies, LLC (Proxy Group), an affiliate and wholly owned subsidiary of Franklin Resources, Inc. All proxies received by the Proxy Group will be voted based upon the manager's instructions and/or policies. To assist it in analyzing proxies, the manager subscribes to Institutional Shareholder Services (ISS), an unaffiliated third party corporate governance research service that provides in-depth analyses of shareholder meeting agendas, vote recommendations, recordkeeping and vote disclosure services. In addition, the manager subscribes to Glass, Lewis & Co., LLC (Glass Lewis), an unaffiliated third party analytical research firm, to receive analyses and vote recommendations on the shareholder meetings of publicly held U.S. companies. Although ISS' and/or Glass Lewis' analyses are thoroughly reviewed and considered in making a final voting decision, the manager does not consider recommendations from ISS, Glass Lewis or any other third party to be determinative of the manager's ultimate decision. The manager votes proxies solely in the interests of the Fund and its shareholders. As a matter of policy, the officers, directors/trustees and employees of the Fund, the manager and the Proxy Group will not be influenced by outside sources whose interests conflict with the interests of the Fund and its shareholders. All conflicts are resolved in the interests of the manager's clients. In situations where the manager perceives a material conflict of interest, the manager may: disclose the conflict to the Fund's board of directors; defer to the voting recommendation of the Fund's board of directors, ISS, Glass Lewis or those of another independent third party provider of proxy services; or take such other action in good faith (in consultation with counsel) which would protect the interests of the Fund and its shareholders. The recommendation of management on any issue is a factor which the manager considers in determining how proxies should be voted, but is not determinative of the manager's ultimate decision. As a matter of practice, the votes with respect to most issues are cast in accordance with the position of the company's management. Each issue, however, is considered on its own merits, and the manager will not support the position of the company's management in any situation where it deems that the ratification of management's position would adversely affect the investment merits of owning that company's shares. MANAGER'S PROXY VOTING POLICIES AND PRINCIPLES The manager has adopted general proxy voting guidelines, which are summarized below. These guidelines are not an exhaustive list of all the issues that may arise and the manager cannot anticipate all future situations. In all cases, each proxy will be considered based on the relevant facts and circumstances. BOARD OF DIRECTORS. The manager supports an independent board of directors, and prefers that key committees such as audit, nominating, and compensation committees be comprised of independent directors. The manager will generally vote against management efforts to classify a board and will generally support proposals to declassify the board of directors. The manager may withhold votes from directors who have attended less than 75% of meetings without a valid reason. While generally in favor of separating Chairman and CEO positions, the manager will review this issue as well as proposals to restore or provide for cumulative voting on a case-by-case basis, taking into consideration factors such as the company's corporate governance guidelines or provisions and performance. RATIFICATION OF AUDITORS OF PORTFOLIO COMPANIES. In light of several high profile accounting scandals, the manager will closely scrutinize the role and performance of auditors. On a case-by-case basis, the manager will examine proposals relating to non-audit relationships and non-audit fees. The manager will also consider, on a case-by-case basis, proposals to rotate auditors, and will vote against the ratification of auditors when there is clear and compelling evidence of accounting irregularities or negligence. MANAGEMENT AND DIRECTOR COMPENSATION. A company's equity-based compensation plan should be in alignment with its shareholders' long-term interests. The manager evaluates plans on a case-by-case basis by considering several factors to determine whether the plan is fair and reasonable, including the ISS quantitative model utilized to assess such plans and/or the Glass Lewis evaluation of the plans. The manager will generally oppose plans that have the potential to be excessively dilutive, and will almost always oppose plans that are structured to allow the repricing of underwater options, or plans that have an automatic share replenishment "evergreen" feature. The manager will generally support employee stock option plans in which the purchase price is at least 85% of fair market value, and when potential dilution is 10% or less. Severance compensation arrangements will be reviewed on a case-by-case basis, although the manager will generally oppose "golden parachutes" that are considered to be excessive. The manager will normally support proposals that require a percentage of directors' compensation to be in the form of common stock, as it aligns their interests with those of shareholders. The manager will review on a case-by-case basis any shareholder proposals to adopt policies on expensing stock option plans. ANTI-TAKEOVER MECHANISMS AND RELATED ISSUES. The manager generally opposes anti-takeover measures since they tend to reduce shareholder rights. On occasion, the manager may vote with management when the research analyst has concluded that the proposal is not onerous and would not harm the Fund or its shareholders' interests. The manager generally supports proposals that require shareholder rights' plans ("poison pills") to be subject to a shareholder vote and will closely evaluate such plans on a case-by-case basis to determine whether or not they warrant support. The manager will generally vote against any proposal to issue stock that has unequal or subordinate voting rights. The manager generally opposes any supermajority voting requirements as well as the payment of "greenmail." The manager generally supports "fair price" provisions and confidential voting. CHANGES TO CAPITAL STRUCTURE. The manager will review, on a case-by-case basis, proposals by companies to increase authorized shares and the purpose for the increase and proposals seeking preemptive rights. The manager will generally not vote in favor of dual-class capital structures to increase the number of authorized shares where that class of stock would have superior voting rights. The manager will generally vote in favor of the issuance of preferred stock in cases where the company specifies the voting, dividend, conversion and other rights of such stock and the terms of the preferred stock issuance are deemed reasonable. MERGERS AND CORPORATE RESTRUCTURING. Mergers and acquisitions will be subject to careful review by the research analyst to determine whether each will be beneficial to shareholders. The manager will analyze various economic and strategic factors in making the final decision on a merger or acquisition. Corporate restructuring and reincorporation proposals are also subject to a thorough examination on a case-by-case basis. SOCIAL AND CORPORATE POLICY ISSUES. The manager will generally give management discretion with regard to social, environmental and ethical issues, although the manager may vote in favor of those that are believed to have significant economic benefits or implications for the Fund and its shareholders. GLOBAL CORPORATE GOVERNANCE. Many of the tenets discussed above are applied to proxy voting decisions for international companies. However, the manager must be more flexible in these instances and must be mindful of the varied market practices of each region. The manager will attempt to process every proxy it receives for all domestic and foreign proxies. However, there may be situations in which the manager cannot process proxies, for example, where a meeting notice was received too late, or sell orders preclude the ability to vote. The manager may abstain from voting under certain circumstances or vote against items such as "Other Business" when the manager is not given adequate information from the company. Shareholders may view the complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Fund's proxy voting records are available online at franklintempleton.com and posted on the SEC website at www.sec.gov and reflect the twelve-month period beginning July 1, 2003, and ending June 30, 2004. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT. N/A ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. N/A ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant's Board of Directors that would require disclosure herein. ITEM 11. CONTROLS AND PROCEDURES. (A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Registrant's filings under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Registrant's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant's management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Within 90 days prior to the filing date of this Shareholder Report on Form N-CSR, the Registrant had carried out an evaluation, under the supervision and with the participation of the Registrant's management, including the Registrant's principal executive officer and the Registrant's principal financial officer, of the effectiveness of the design and operation of the Registrant's disclosure controls and procedures. Based on such evaluation, the Registrant's principal executive officer and principal financial officer concluded that the Registrant's disclosure controls and procedures are effective. (B) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the Registrant's internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this Shareholder Report on Form N-CSR. ITEM 12. EXHIBITS. (A)(1) Code of Ethics (A) (2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and Galen G. Vetter, Chief Financial Officer (B) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and Galen G. Vetter, Chief Financial Officer SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TEMPLETON DRAGON FUND, INC. By /s/JIMMY D. GAMBILL ----------------------------- Jimmy D. Gambill Chief Executive Officer - Finance and Administration Date: August 19, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/JIMMY D. GAMBILL ----------------------------- Jimmy D. Gambill Chief Executive Officer - Finance and Administration Date: August 19, 2005 By /s/GALEN G. VETTER ----------------------------- Galen G. Vetter Chief Financial Officer Date: August 19, 2005 EX-99.CODE ETH 2 ncsr-code704.txt SENIOR OFFICERS CODE OF ETHICS CODE OF ETHICS FOR PRINCIPAL EXECUTIVES & SENIOR FINANCIAL OFFICERS - ------------------------------------------------------------------------------ PROCEDURES Dated July 2004 - ------------------------------------------------------------------------------- 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") applies to the Principal Executive Officers, Principal Financial Officer and Principal Accounting Officer (the "Covered Officers," each of whom is set forth in Exhibit A) of each investment company advised by a Franklin Resources subsidiary and that is registered with the United States Securities & Exchange Commission ("SEC") (collectively, "FT Funds") for the purpose of promoting: o Honest and ethical conduct, including the ethical resolution 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 will be expected to adhere to a high standard of business ethics and must be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. II. Other Policies and Procedures This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Franklin Resources, Inc. has separately adopted the CODE OF ETHICS AND BUSINESS CONDUCT ("Business Conduct"), which is applicable to all officers, directors and employees of Franklin Resources, Inc., including Covered Officers. It summarizes the values, principles and business practices that guide the employee's business conduct and also provides a set of basic principles to guide officers, directors and employees regarding the minimum ethical requirements expected of them. It supplements the values, principles and business conduct identified in the Code and other existing employee policies. Additionally, the Franklin Templeton Funds have separately adopted the CODE OF ETHICS AND POLICY STATEMENT ON INSIDER TRADING governing personal securities trading and other related matters. The Code for Insider Trading provides for separate requirements that apply to the Covered Officers and others, and therefore is not part of this Code. Insofar as other policies or procedures of Franklin Resources, Inc., the Funds, the Funds' adviser, 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 superceded by this Code to the extent that they overlap or conflict with the provisions of this Code. Please review these other documents or consult with the Legal Department if have questions regarding the applicability of these policies to you. III. 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 or her 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 apposition 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 or her personal influence or personal relationships improperly to influence investment decisions orfinancial 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 FT 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:/ 1 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 of the FT Funds; o any direct or indirect business relationship with any independent public accounting firm (which are not related to the routine issues related to the firm's service as the Covered Persons accountant); 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). These reports will be reviewed by the Legal Department for compliance with the Code. There are some conflict of interest situations that should always be approved in writing by Franklin Resources General Counsel or Deputy General Counsel, if material. Examples of these include/2: o Service as a director on the board of any public or private Company; o The receipt of any gifts in excess of $100 from any person, from any corporation or association 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 from the Franklin Resources General Counsel 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. Franklin Resources 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. IV. 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 or her area of responsibility, consult with other officers and employees of the FT Funds, the FT Fund's 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. V. Reporting and Accountability Each Covered Officer must: o Upon becoming a covered officer affirm in writing to the Board that he or she 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 Franklin Resources' General Counsel or Deputy General Counsel promptly if he or she knows of any violation of this Code. Failure to do so is itself is a violation of this Code. Franklin Resources' 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./3 However, the Independent Directors of the respective FT Funds will consider any approvals or waivers/4 sought by any Chief Executive Officers of the Funds. The FT Funds will follow these procedures in investigating and enforcing this Code: o Franklin Resources General Counsel or Deputy General Counsel will take all appropriate action to investigate any potential violations reported to the Legal Department; o If, after such investigation, the General Counsel or Deputy General Counsel believes that no violation has occurred, The General Counsel is not required to take any further action; o Any matter that the 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 FT Fund or 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./5 VI. 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 thereunder. 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-1 under the Investment Company Act, the Code of Ethics and Business Conduct 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. VII. 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. VIII. 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. IX. 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. X. Disclosure on Form N-CSR 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. The Legal Department shall be responsible for ensuring that: o a copy of the Code is filed with the SEC as an exhibit to each Fund's annual report; and o any amendments to, or waivers (including implicit waivers) from, a provision of the Code is disclosed in the registrant's annual report on Form N-CSR. In the event that the foregoing disclosure is omitted or is determined to be incorrect, the Legal Department shall promptly file such information with the SEC as an amendment to Form N-CSR. In such an event, the Fund Chief Compliance Officer shall review the Code and propose such changes to the Code as are necessary or appropriate to prevent reoccurrences. EXHIBIT A Persons Covered by the Franklin Templeton Funds Code of Ethics August 2004 FRANKLIN GROUP OF FUNDS Edward B. Jamieson, President and Chief Executive Officer - Investment Management Charles B. Johnson, President and Chief Executive Officer - Investment Management Gregory E. Johnson, President and Chief Executive Officer - Investment Management Rupert H. Johnson, Jr. President and Chief Executive Officer - Investment Management William J. Lippman, President and Chief Executive Officer - Investment Management Christopher Molumphy President and Chief Executive Officer - Investment Management Jimmy D. Gambill, Senior Vice President and Chief Executive Officer - Finance and Administration Galen G. Vetter 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 and Chief Executive Officer- Finance and Administration Galen G. Vetter Chief Financial Officer TEMPLETON GROUP OF FUNDS Jeffrey A. Everett President and Chief Executive Officer - Investment Management Martin L. Flanagan President and Chief Executive Officer - Investment Management Mark Mobius President and Chief Executive Officer - Investment Management Christopher J. Molumphy President and Chief Executive Officer - Investment Management Gary P. Motyl President and Chief Executive Officer - Investment Management Donald F. Reed President and Chief Executive Officer - Investment Management Jimmy D. Gambill, Senior Vice President and Chief Executive Officer - Finance and Administration Galen G. Vetter Chief Financial Officer EXHIBIT B ACKNOWLEDGMENT FORM JULY 2004 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: Franklin Resources 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 - ----------------------------- 1 Reporting of these affiliations or other relationships shall be made by completing the annual Directors and Officers Questionnaire and returning the questionnaire to Franklin Resources Inc, General Counsel or Deputy General Counsel. 2 Any activity or relationship that would present a conflict for a Covered Officer may 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. 3 Franklin Resources 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. 4 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. See Part X. 5 See Part X. EX-99.CERT 3 tdf_302cert-63005.txt CEO & CFO CERTIFICTION PURSUANT TO SECTION 302 Exhibit 12(a)(2) 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) and internal control over financial reporting (as defined in Rule 30a-3(d) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) 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 (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this 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. August 19, 2005 /s/JIMMY D. GAMBILL Jimmy D. Gambill Chief Executive Officer - Finance and Administration I, Galen G. Vetter, 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) and internal control over financial reporting (as defined in Rule 30a-3(d) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) 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 (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this 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. August 19, 2005 /s/GALEN G. VETTER Galen G. Vetter Chief Financial Officer EX-99.906 CERT 4 tdf_906cert-63005.txt CEO & CFO CERTIFICTION PURSUANT TO SECTION 906 Exhibit 12(b) 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 6/30/05 (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: August 19, 2005 /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, Galen G. Vetter, 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 6/30/05 (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: August 19, 2005 /s/GALEN G. VETTER Galen G. Vetter 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-----