<PAGE>
Templeton
Dragon Fund, Inc.
[PHOTO APPEARS HERE]
J. Mark Mobius, Ph.D.
President
Templeton Dragon
Fund, Inc.
- ---------------------------
Dr. Mobius has been living overseas since earning his Ph.D. in economics and
political science at Massachusetts Institute of Technology in 1964. During his
extensive travels, he has acquired a thorough knowledge of the business
practices and customs that are unique to developing nations. Together with his
team of Templeton analysts, Dr. Mobius currently oversees more than $6 billion
in emerging markets investments for the Templeton Group of Funds.
- --------------------------------------------------------------------------------
Your Fund's Objective
The Templeton Dragon Fund, Inc. seeks long-term capital appreciation by
investing at least 45% of its total assets in the equity securities of "China
companies."
- --------------------------------------------------------------------------------
May 19, 1995
Dear Shareholder:
This first annual report of the Templeton Dragon Fund covers the period from its
initial offering on September 21, 1994 through the end of the fiscal year on
March 31, 1995. This period was difficult for emerging market funds in general
and for the Dragon Fund in particular.
During this time, the Chinese and Hong Kong stock markets were adversely
affected by two major factors. The first was a potential trade war between China
and the U.S., which was finally averted on February 26, 1995. The second was the
uncertain health of Chinese leader Deng Xiao Ping. Because Deng has no obvious
successor at present, comments from his daughter
1
<PAGE>
- --------------------------------------------------------------------------------
Templeton Dragon Fund, Inc.
Geographic Distribution on 3/31/95
Based on Total Net Assets
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Singapore 0.3%
China 3.1%
Hong Kong 38.8%
Short-Term Obligations &
Other Net Assets 57.8%
</TABLE>
about his deteriorating health aroused concerns regarding the stability of China
and Hong Kong in a post-Deng period. The Hong Kong market was also affected by
concerns about rising interest rates, soft prices of residential property, and
China's takeover of Hong Kong in 1997. Weakness in these markets gave us a
chance to accumulate shares at reasonable prices, and we deployed our cash as
opportunities arose.
As of March 31, 1995, the Fund had approximately 42.2% of its total net assets
invested in equities. We are holding the remaining 57.8% in cash and other
liquid assets while we wait for buying opportunities to emerge. Among the
positions held by the Fund, each of which represented more than 3% of its total
net assets were: HSBC Holdings, PLC, the holding company for the Hongkong Bank,
with major subsidiaries in the U.S. and the United Kingdom; Cheung Kong
Holdings, Ltd., one of the largest property development companies in Hong Kong,
with interests in telecommunications, trading, energy and finance; and Sun Hung
Kai Properties, Ltd., a leading Hong Kong property development company with
interests in commercial, industrial and residential real estate.
Since the Fund's inception, we have focused on companies listed on the Hong Kong
Stock Exchange. Many of them are benefiting from developments in China, but we
believe they have better management than most companies listed on the China
exchanges (China "B" shares). Another reason for this strategy is that the
availability of China "B" shares, most of which are listed on the Shanghai Stock
Exchange, is still relatively low. As the "B" share markets develop further, we
expect to increase the Fund's investment in them.
2
<PAGE>
- --------------------------------------------------------------------------------
Templeton Dragon Fund, Inc.
Top Ten Holdings as of 3/31/95
Based on Total Net Assets
<TABLE>
<CAPTION>
% of Total
Company, Industry, Country Net Assets
- --------------------------------------------------------------------------------
<S> <C>
HSBC Holdings PLC; Banking, Hong Kong 5.3%
- --------------------------------------------------------------------------------
Cheung Kong Holdings Ltd.; Multi-Industry,
Hong Kong 4.9%
- --------------------------------------------------------------------------------
Sun Hung Kai Properties Ltd.; Real Estate,
Hong Kong 4.5%
- --------------------------------------------------------------------------------
New World Development Co. Ltd.; Real Estate,
Hong Kong 3.1%
- --------------------------------------------------------------------------------
Hang Lung Development Co. Ltd.; Real Estate,
Hong Kong 2.6%
- --------------------------------------------------------------------------------
Jardine Matheson Holdings Ltd.; Multi-Industry,
Hong Kong 2.2%
- --------------------------------------------------------------------------------
Wheelock & Co. Ltd.; Multi-Industry,
Hong Kong 1.6%
- --------------------------------------------------------------------------------
Hopewell Holdings Ltd.; Construction
& Housing, Hong Kong 1.6%
- --------------------------------------------------------------------------------
Jardine Strategic Holdings Ltd.; Multi-Industry,
Hong Kong 1.4%
- --------------------------------------------------------------------------------
Swire Pacific Ltd.; Multi-Industry,
Hong Kong 1.3%
- --------------------------------------------------------------------------------
</TABLE>
For a complete list of portfolio holdings, see page 10 of this report.
Looking forward, we remain optimistic about the long-term investment outlook for
China and the Templeton Dragon Fund. Property prices in Hong Kong appear to have
stabilized, and stock prices, in our opinion, already reflect the fears that
were weakening the market. We do not expect significant changes in China's long-
term economic policies after Deng because the reform movement does not depend
upon him -- or any other person. Deng could not have enforced the movement
towards a market economy without support throughout the country, and although
there may be temporary setbacks, we think reformers stand a good chance of
dominating China's political agenda if its economy continues to grow at a
healthy rate.
Although we believe that China is and likely will remain one of the world's most
interesting growth stories, investing in any emerging market means putting up
with a certain amount of volatility, and, in some cases, severe market
corrections. Investing in China companies is no exception, entailing special
considerations, including risks related to market and currency volatility,
adverse social and political developments, and the relatively small size and
lesser liquidity of the markets involved. While short-term volatility can be
disconcerting, declines of as much as 40% to 50% are not unusual in emerging
markets. In fact, the Hong Kong market has increased 1000% in the last 15 years,
but has suffered nine declines of more than 20% during that time.
Thank you for investing in the Templeton Dragon Fund. We appreciate your support
and welcome your comments.
3
<PAGE>
Performance Summary
In market-price terms, the Templeton Dragon Fund produced a total return of
- -19.34% for the period from inception on September 21, 1994 through March 31,
1995. Based on the change in actual net asset value (in contrast to market
price), total return was -0.11% for the same period. Both total return figures
assume reinvestment of dividends and capital gains in accordance with the
dividend reinvestment plan.
During the reporting period, shareholders received income distributions totaling
9.5 cents ($0.095) per share. The Fund's closing price on the New York Stock
Exchange (NYSE) decreased $3.00 per share, from $15.00 at inception on September
21, 1994 to $12.00 on March 31, 1995. During this time, the Fund's net asset
value declined from $14.10 to $13.97.
We believe it is important to maintain a long-term investment perspective, and
we encourage shareholders to view their investments in a similar manner. Past
distributions and total returns are not predictive of future performance, and
distributions will vary depending on income earned by the Fund, as well as any
profits realized from the sale of securities in the portfolio.
- --------------------------------------------------------------------------------
Templeton Dragon Fund, Inc.
Cumulative Total Returns*
Period Ended 3/31/95
<TABLE>
<CAPTION>
Since
Inception
(9/21/94)
<S> <C>
Based on change
in net asset value -0.11%
Based on change
in market price -19.34%
</TABLE>
*Cumulative total return calculations show the change in value of an investment
over the period indicated. These calculations assume reinvestment of all
distributions and capital gains, either at net asset value or at market price on
the reinvestment date. Past performance is not predictive of future results.
4
<PAGE>
The Following Letter was
Written by Dr. Mobius After a
Recent Trip to Washington, D.C.
Although Washington, D.C. is not an emerging-market city, that's where work on
this letter began. I visited the U.S. capital to investigate U.S. trade actions
towards China and China's trade and investment relations with various
multilateral agencies. The following report is based on those discussions.
One of the factors impacting stock market sentiment in China and Hong Kong
during early 1995 was the threat of a trade war between the U.S. and China. On
February 4, 1995, the Clinton Administration announced it was ready to impose
the harshest trade sanctions in U.S. history, on China. U.S. Trade
Representative (USTR) Mickey Kantor stated that unless a bilateral accord could
be reached, the sanctions would take effect on February 26, regardless of
China's counter-actions and any resulting trade war between the two economic
giants. "We cannot stand by while the interests of our fastest growing, most
competitive industries are sacrificed in China," said Kantor.
The key irritant in the bilateral trade relationship has been intellectual
property rights (IPR) concerning China's piracy of Hollywood films, recorded
music, pharmaceutical and agri-chemicals patents, and computer software -- all
of which are among the most competitive U.S. industries. The official U.S.
position was that China's enforcement of trade regulations was virtually non-
existent for copyrighted works.
According to the International Intellectual Property Alliance (IIPA), a
federation of U.S. trade associations, core copyright industries such as those
just mentioned make up the second largest segment of total U.S. exports. At
$45.8 billion a year, and growing by 11.7% annually, they trail only motor
vehicles and auto parts ($47.3 billion). The IIPA claims that last year the
following U.S. industries lost approximately $866 million through piracy in
China: computer programs ($351 million), sound recordings and musical
compositions ($345 million),
5
<PAGE>
books ($120 million) and motion pictures ($50 million). The group maintains that
Chinese government ministries routinely use pirated U.S. software in their
computers and allow retailers to sell it pre-loaded onto computers. It adds that
IIPA members filed 25 civil cases on this subject in China in 1994, but have so
far obtained only one judgement in a court system that simply does not yet work
for foreign complainants. The organization says there has been virtually no
action by central, provincial, or most local governments to stem the tide of
whole-sale infringements.
The USTR's office was especially disappointed because it believes China has
failed to implement the January 16, 1992, Memorandum of Understanding in which
it promised to take direct steps to protect intellectual property rights of U.S.
exporters in these critical sectors. That agreement had averted a stiff package
of trade sanctions the Bush Administration was threatening to impose at the
time. Many experts believe it may be politically impossible for Chinese trade
agencies to crack down on their country's pirate firms, which are often linked
to powerful forces in the political and military establishments.
According to Mickey Kantor, the Business Software Alliance, a U.S. trade
association, estimated that 94% of the computer software used in China was
pirated from its members. Kantor also said that 29 compact disc factories in
China were producing 75 million U.S.-copyrighted compact discs (CDs), laser
discs, and CD-ROMs each year even though China's domestic market capacity for
such products was only 5 million units a year. He accused China of intentionally
pirating these products in order to fuel a lucrative export business, and
claimed that China created demand for bootleg U.S. movie videos by preventing
Hollywood from showing more than 10 films there per year. "The Chinese," said
Kantor, "have taken some steps, but they have not addressed the major
substantive problems -- or the continuing operation of Chinese factories that
mass produce pirated products for export."
Kantor's comments came after six months of IPR negotiations with China,
beginning on June 30, 1994. When these talks failed to reach a conclusion, his
office announced on December 31, 1994, that it was threatening to impose stiff
sanctions on $2.5 billion worth of Chinese exports. The month of January saw
much behind-the-scenes lobbying, with
6
<PAGE>
U.S. industries struggling to ensure that the proposed sanctions would not hurt
them. By February 4, the lobbying campaign had lowered the proposed sanctions
to only $1.1 billion -- a small portion of China's $30 billion U.S. trade
deficit with China. The prevailing belief was that such action would not harm
the core aspects of economic relations between the U.S. and China.
China quickly threatened to impose sanctions of its own, which many experts say
were far less threatening to the U.S. than those Washington wanted to impose on
Beijing. The most serious measures appeared to be a suspension of legally
imported films and videos from the U.S., and an end to negotiations on joint
ventures with U.S. auto makers. Since few of the former are allowed in to China
now, and German and Japanese car makers are already present to pre-empt the
latter, Beijing probably chose these counter-retaliatory measures because they
would have little impact on China's domestic economy.
Potentially the world's largest consumer market, China is of growing interest to
all exporting nations. However, the prevailing thinking in Washington is that
the U.S. is a far more important market to China than China is to the U.S. For
now at least, any trade war would seem to hurt China more than the U.S. Many
experts doubt China would impose any retaliatory sanctions that would restrict
its ability to benefit from U.S. trade and investment in telecommunications,
power generation and aircraft assembly. Still, the White House can hardly ignore
the fact that China is currently the world's fastest growing market for U.S.
exports, showing a volume increase of 18% between 1993 and 1994, compared with
4% for U.S. exports to the world overall during that period.
Finally, on February 26, the Office of the United States Trade Representative
issued an announcement stating that the U.S. and China had reached an accord on
protection of intellectual property rights, and that China had promised to take
immediate steps to address rampant piracy throughout that country. The agreement
provided for a special enforcement period during which China would make long-
term changes to ensure effective enforce-
7
<PAGE>
ment of intellectual property rights and would provide U.S. right-holders
with enhanced access to the Chinese market.
I believe that it will be very difficult to eliminate piracy of intellectual
property rights in China. The value of pirated property is so great, and the
ability to pay for it is so limited, that violation of the February 26 accord
will likely be tempting to people who have taken to heart Deng Xiao Ping's
dictum, "to be rich is glorious." China will probably continue to absorb
technology and know-how from the U.S. and other countries, and pay only a
fraction of what they should be paying for such assets. However, such technology
and know-how should enable China to increase productivity and upgrade its growth
prospects, and benefits should eventually accrue to the rest of the world.
Sincerely,
/s/ J. Mark Mobius, Ph.D.
J. Mark Mobius, Ph.D.
President
Templeton Dragon Fund, Inc.
- --------------------------------------------------------------------------------
Although Sir John Templeton has not been involved in investment management of
the Templeton funds since October 1992, we were saddened by his recent
decision to step down as Chairman and Director of the U.S. registered
Templeton funds. The independent directors have nominated John Wm. Galbraith,
former vice chairman of Templeton, Galbraith & Hansberger, Ltd. to succeed
him. The investment manager will continue to use the investment philosophies
and principles established by Sir John.
- --------------------------------------------------------------------------------
8
<PAGE>
Templeton Dragon Fund, Inc.
Financial Highlights
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
SEPTEMBER 8, 1994
(COMMENCEMENT
OF OPERATIONS) TO
MARCH 31, 1995
-----------------
<S> <C>
Net asset value, beginning of period $ 14.10
--------
Income from investment operations:
Net investment income .22
Net realized and unrealized loss (.22)
--------
Total from investment operations (.00)
Underwriting expenses deducted from capital (.04)
Distributions to shareholders from net investment income (.09)
--------
Change in net asset value (.13)
--------
Net asset value, end of period $ 13.97
========
TOTAL RETURN *
Based on market value per share (19.34)%
Based on net asset value per share (0.11)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $754,227
Ratio of expenses to average net assets 1.54%**
Ratio of net investment income to average net assets 2.99%**
Portfolio turnover rate --
</TABLE>
*NOT ANNUALIZED.
**ANNUALIZED.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
Templeton Dragon Fund, Inc.
Investment Portfolio, March 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
COMMON STOCKS: 42.2%
- -------------------------------------------------------------------------------
Appliances & Household Durables: 0.5%
Luks Industrial Co. Ltd. H.K. 4,136,000 $ 518,872
Semi-Tech Co. Ltd. H.K. 1,284,500 2,134,742
*Shanghai Narcissus Electric
Appliances Co. Ltd., B Chn. 2,461,900 615,475
Shanghai Vacuum Electron Devices
Co. Ltd., B Chn. 1,976,010 375,442
Shenzhen Huafa Electronics Co.
Ltd., B Chn. 18,000 3,818
Shenzhen Konka Electronic Group Co.
Ltd., B Chn. 202,000 99,276
------------
3,747,625
- -------------------------------------------------------------------------------
Automobiles: 0.7%
Jardine International Motor
Holdings Ltd. H.K. 4,805,000 5,313,341
- -------------------------------------------------------------------------------
Banking: 5.5%
HSBC Holdings PLC H.K. 3,514,000 39,652,936
JCG Holdings Ltd. H.K. 3,322,000 1,901,170
------------
41,554,106
- -------------------------------------------------------------------------------
Broadcasting & Publishing: 0.1%
Leefung-Asco Printers Holdings Ltd. H.K. 951,000 150,054
Ming Pao Enterprise Corp. Ltd. H.K. 822,000 499,664
South Sea Development Co. Ltd. H.K. 6,138,000 309,599
------------
959,317
- -------------------------------------------------------------------------------
Building Materials & Components: 0.4%
K Wah International Holdings Ltd. H.K. 9,846,000 1,604,496
Shanghai Yaohua Pilkington Glass, B Chn. 1,540,300 1,694,330
------------
3,298,826
- -------------------------------------------------------------------------------
Chemicals: 0.2%
Shanghai Chlor-Alkali Chemical Co.
Ltd., B Chn. 1,819,000 458,388
Shanghai Petrochemical Co. Ltd., H Chn. 2,836,000 871,120
*Zhuhai Sez Lizhu Pharmaceutical, B Chn. 1,198,000 550,039
------------
1,879,547
- -------------------------------------------------------------------------------
Construction & Housing: 1.7%
Hopewell Holdings Ltd. H.K. 16,838,000 11,868,482
Wai Kee Holdings Ltd. H.K. 3,978,000 637,962
------------
12,506,444
- -------------------------------------------------------------------------------
Electrical & Electronics: 0.5%
China Treasure Telecomunications
Holdings Ltd. H.K. 934,000 50,735
G.P. Batteries International Ltd. Sing. 900,000 2,430,000
</TABLE>
10
<PAGE>
Templeton Dragon Fund, Inc.
Investment Portfolio, March 31, 1995 (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
COMMON STOCKS (CONT.)
- -------------------------------------------------------------------------------
Electrical & Electronics (cont.)
Gold Peak Industries Holdings Ltd. H.K. 1,107,000 $ 400,879
Great Wall Electronic International
Ltd. H.K. 6,960,000 522,090
Tsann Kuen Enterprise Co. Ltd., B Chn. 546,000 203,020
------------
3,606,724
- -------------------------------------------------------------------------------
Electronic Components & Instruments: 0.1%
S. Megga International Holdings
Ltd. H.K. 10,362,000 710,277
- -------------------------------------------------------------------------------
Financial Services: 0.8%
Min Xin Holdings H.K. 1,000,000 184,946
Peregrine Investments Holdings Ltd. H.K. 2,066,000 2,364,731
Sun Hung Kai & Co. Ltd. H.K. 9,547,000 3,827,690
------------
6,377,367
- -------------------------------------------------------------------------------
Food & Household Products: 2.0%
C.P. Pokphand Co. Ltd. H.K. 7,870,000 2,341,050
Dairy Farm International Holdings
Ltd. H.K. 7,246,000 9,277,729
Fairwood Holdings Ltd. H.K. 12,734,000 1,366,945
Golden Resources Development
International Ltd. H.K. 4,556,000 400,683
Vitasoy International Holdings Ltd. H.K. 5,004,000 1,828,285
------------
15,214,692
- -------------------------------------------------------------------------------
Health & Personal Care: 0.1%
China Pharmaceutical Enterprise &
Investment Corp. Ltd. H.K. 8,281,000 931,773
- -------------------------------------------------------------------------------
Industrial Components: 0.2%
Shanghai Refrigerator Compressor
Co. Ltd., B Chn. 600,000 271,200
*Shanghai Rubber Belt Co. Ltd., B Chn. 807,936 126,038
Shanghai Tyre & Rubber Co. Ltd., B Chn. 4,870,000 1,363,600
------------
1,760,838
- -------------------------------------------------------------------------------
Leisure & Tourism: 0.1%
*Glynhill International Ltd. H.K. 880,000 30,729
Hongkong & Shanghai Hotels Ltd. H.K. 307,000 361,317
Shanghai Jin Jiang Tower Co. Ltd.,
B Chn. 1,173,989 429,680
------------
821,726
- -------------------------------------------------------------------------------
Machinery & Engineering: 1.0%
Guangzhou Shipyard International
Co. Ltd., H Chn. 5,708,000 2,712,998
Shanghai Erfangji Textile Machinery
Co. Ltd., B Chn. 5,655,000 1,051,830
</TABLE>
11
<PAGE>
Templeton Dragon Fund, Inc.
Investment Portfolio, March 31, 1995 (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
COMMON STOCKS (CONT.)
- -------------------------------------------------------------------------------
Machinery & Engineering (cont.)
*Shanghai Industrial Sewing Machine
Corp. Chn. 9,514,700 $ 2,702,175
*Shanghai Steel Tube Co. Ltd., B Chn. 4,626,000 1,054,728
------------
7,521,731
- -------------------------------------------------------------------------------
Merchandising: 1.4%
Dickson Concepts (International)
Ltd. H.K. 7,048,000 3,782,876
Fortei Holdings Ltd. H.K. 3,978,000 303,546
Joyce Boutique Holdings Ltd. H.K. 26,000 4,540
Le Saunda Holdings Ltd. H.K. 3,316,000 278,764
LI & Fung Ltd. H.K. 2,994,000 2,013,554
Linkful International Holdings Ltd. H.K. 2,211,000 171,573
Wo Kee Hong Holdings Ltd. H.K. 15,773,000 3,325,141
Yaohan Hongkong Corp. Ltd. H.K. 4,000,000 517,331
------------
10,397,325
- -------------------------------------------------------------------------------
Miscellaneous Materials & Commodities: 0.1%
*Luoyang Glass Co. Ltd., H Chn. 2,267,000 1,055,510
- -------------------------------------------------------------------------------
Multi-Industry: 12.0%
Cheung Kong Holdings Ltd. H.K. 8,449,000 36,825,052
China Southern Glass Co. Ltd., B Chn. 500,000 294,878
Jardine Matheson Holdings Ltd. H.K. 1,832,800 16,495,200
Jardine Strategic Holdings Ltd. H.K. 2,797,000 10,628,600
Lai Sun Garment International Ltd. H.K. 2,168,000 2,355,303
Shenzhen Gintian Industrial Co.
Ltd., B Chn. 202,000 90,132
Stelux Holdings Ltd. H.K. 6,839,000 1,990,138
Swire Pacific Ltd., B H.K. 8,702,500 9,679,449
Wheelock & Co. Ltd. H.K. 7,335,000 12,427,380
------------
90,786,132
- -------------------------------------------------------------------------------
Real Estate: 11.8%
China Overseas Land & Investment
Ltd. H.K. 10,691,000 2,129,351
Hang Lung Development Co. Ltd. H.K. 12,983,000 19,813,683
*Hang Lung Development Co. Ltd.,
wts. H.K. 535,000 81,648
Lai Sun Development Co. Ltd. H.K. 20,682,000 2,701,606
New World Development Co. Ltd. H.K. 8,683,000 23,639,052
Shanghai Jinqiao Export Processing
Zone Development, B Chn. 2,954,700 1,914,646
*Shanghai Lujiaxui Finance & Trade
Zone Development Stock Co. Ltd., B Chn. 1,314,000 959,220
*Shanghai Outer Gaoqiao Free Trade
Zone Development Co., B Chn. 1,571,000 848,340
Shenzhen Properties & Resources
Development Group Ltd., B Chn. 290,000 108,769
Shenzhen Vanke Co. Ltd., B Chn. 494,000 194,227
</TABLE>
12
<PAGE>
Templeton Dragon Fund, Inc.
Investment Portfolio, March 31, 1995 (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
COMMON STOCKS (CONT.)
- -------------------------------------------------------------------------------
Real Estate (cont.)
Sun Hung Kai Properties Ltd. H.K. 4,956,000 $ 33,811,304
Tian An China Investments Co. Ltd. H.K. 16,486,000 2,814,475
------------
89,016,321
- -------------------------------------------------------------------------------
Recreation, Other Consumer Goods: 0.6%
*Fu Hui Jewellery Co. Ltd. H.K. 7,430,000 461,252
*Shanghai Forever Bicycle Co. Ltd.,
B Chn. 1,252,000 225,360
Shanghai Phoenix Bicycle Co. Ltd.,
B Chn. 822,300 238,467
Shanghai Wingsung Stationery Co.
Ltd., B Chn. 200,000 48,400
Shenzhen China Bicycles Co. Ltd., B Chn. 1,478,000 586,842
Yue Yuen Industrial Holdings Ltd. H.K. 11,546,000 2,792,424
------------
4,352,745
- -------------------------------------------------------------------------------
Telecommunications: 0.1%
*Shanghai Posts &
Telecommunications Equipment Co., B Chn. 50,000 30,000
- -------------------------------------------------------------------------------
Textiles & Apparel: 0.6%
Goldlion Holdings Ltd. H.K. 11,204,000 2,666,239
Laws International Holdings Ltd. H.K. 7,218,000 1,241,586
Shanghai Lian Hua Fibre Corp., B Chn. 80,000 20,720
Top Form International Ltd. H.K. 7,481,000 551,496
Tungtex (Holdings) Co. Ltd. H.K. 3,000,000 387,998
------------
4,868,039
- -------------------------------------------------------------------------------
Transportation: 0.1%
Chiwan Wharf Holdings Ltd., B Chn. 520,000 237,067
- -------------------------------------------------------------------------------
Utilities-Electrical & Gas: 1.5%
Hong Kong Electric Holdings Ltd. H.K. 2,710,000 8,674,664
Shandong Huaneng Power Chn. 190,000 1,710,000
Wing Shan International Ltd. H.K. 8,486,000 1,031,666
------------
11,416,330
- -------------------------------------------------------------------------------
Wholesale & International Trade: 0.1%
East Asiatic Co. Ltd. H.K. 2,044,000 293,435
------------
TOTAL COMMON STOCKS (cost $330,516,031) 318,657,238
- -------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
Templeton Dragon Fund, Inc.
Investment Portfolio, March 31, 1995 (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL IN
INDUSTRY ISSUE COUNTRY LOCAL CURRENCY VALUE
- ------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SHORT TERM OBLIGATIONS: 59.7% (cost
$450,004,064)
- ------------------------------------------------------------------------------
U.S. Treasury Bills, 5.40% to
5.66% with
maturities to 5/18/95 U.S. $452,006,000 $450,182,501
- ------------------------------------------------------------------------------
TOTAL INVESTMENTS: 101.9% (cost
$780,520,095) 768,839,739
OTHER ASSETS, LESS LIABILITIES: (1.9)% (14,612,876)
------------
TOTAL NET ASSETS: 100.0% $754,226,863
============
</TABLE>
* NON-INCOME PRODUCING.
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
Templeton Dragon Fund, Inc.
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1995
<TABLE>
<S> <C>
Assets:
Investments in securities
at value (identified cost
$780,520,095) $768,839,739
Receivables:
Investment securities
sold 12,395,238
Dividends 992,481
Unamortized organization
costs 17,311
------------
Total assets 782,244,769
------------
Liabilities:
Payables:
Organization and
registration expenses 65,075
Investment securities
purchased 26,765,018
Accrued expenses 1,187,813
------------
Total liabilities 28,017,906
------------
Net assets, at value $754,226,863
============
Net assets consists of:
Undistributed net
investment income $ 6,580,715
Net unrealized
depreciation (11,680,356)
Accumulated net realized
gain 31,545
Net capital paid in on
shares of
capital stock 759,294,959
------------
Net assets, at value $754,226,863
============
Shares outstanding 54,007,093
============
Net asset value per share
($754,226,863 / 54,007,093) $ 13.97
============
</TABLE>
STATEMENT OF OPERATIONS
for the period September 8, 1994
(commencement of operations) to March 31, 1995
<TABLE>
<S> <C> <C>
Investment income:
Dividends $ 2,559,679
Interest 15,160,973
------------
Total income $ 17,720,652
Expenses:
Management fees (Note 3) 4,959,778
Administrative fees
(Note 3) 595,174
Transfer agent fees 35,500
Custodian fees 150,000
Reports to shareholders 98,000
Audit fees 20,350
Legal fees 50,500
Registration fees 55,000
Directors' fees
and expenses 35,500
Amortization of
organization costs 2,255
Other 7,206
------------
Total expenses 6,009,263
------------
Net investment income 11,711,389
Realized and unrealized
gain (loss):
Net realized gain (loss) on:
Investments 104,212
Foreign currency transactions (72,667)
------------
31,545
Net unrealized depreciation on investments (11,680,356)
------------
Net realized and unrealized loss (11,648,811)
------------
Net increase in net assets resulting from
operations $ 62,578
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
Templeton Dragon Fund, Inc.
Financial Statements (cont.)
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 8, 1994
(COMMENCEMENT
OF OPERATIONS) TO
MARCH 31, 1995
-----------------
<S> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 11,711,389
Net realized gain from security and foreign currency
transactions 31,545
Net unrealized depreciation (11,680,356)
------------
Net increase in net assets resulting from operations 62,578
Distributions to shareholders from net investment income (5,130,674)
Capital share transactions (Note 2) 759,194,948
------------
Net increase in net assets 754,126,852
Net assets:
Beginning of period 100,011
------------
End of period $754,226,863
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
Templeton Dragon Fund, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SUMMARY OF ACCOUNTING POLICIES
Templeton Dragon Fund, Inc. (the Fund) was organized as a Maryland corporation
on March 2, 1994 and commenced operations on September 8, 1994 as a closed-end,
non-diversified management investment company registered under the Investment
Company Act of 1940. The following summarizes the Fund's significant accounting
policies.
a. Securities Valuations:
Securities listed or traded on a recognized national or foreign stock exchange
or NASDAQ are valued at the last reported sales prices on the principal ex-
change on which the securities are traded. Over-the-counter securities and
listed securities for which no sale is reported are valued at the mean between
the last current bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
and approved in good faith by the Board of Directors.
b. Foreign Currency Translations:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the rate of exchange of
such currencies against U.S. dollars on the date of valuation. Purchases and
sales of portfolio securities and income items denominated in foreign curren-
cies are translated into U.S. dollar amounts on the respective dates of such
transactions. When the Fund purchases or sells foreign securities it customar-
ily enters into foreign exchange contracts to minimize foreign exchange risk
between the trade date and the settlement date of such transactions.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales of for-
eign currencies, currency gains or losses realized between the trade and set-
tlement dates on securities transactions, the differences between the amounts
of dividends, interest, and foreign withholding taxes recorded on the Fund's
books, and the U.S. dollar equivalent of the amounts actually received or paid.
Net unrealized foreign exchange gains and losses arise from changes in the
value of assets and liabilities other than investments in securities at the end
of the fiscal period, resulting from changes in the exchange rates.
c. Income Taxes:
It is the Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
taxable income to its shareholders. Therefore, no provision has been made for
income taxes.
d. Security Transactions, Investment Income, Distributions and Expenses:
Security transactions are accounted for on trade date. Dividend income is re-
corded on the ex-dividend date. Certain dividend income on foreign securities
is recorded as soon as information is available to the Fund. Interest income
and estimated expenses are accrued daily. Distributions to shareholders, which
are determined in accordance with income tax regulations, are recorded on the
ex-dividend date.
e. Unamortized Organization Costs:
Organization costs are being amortized on a straight line basis over five
years.
2. TRANSACTIONS IN SHARES OF CAPITAL STOCK
On September 21, 1994, the fund completed the initial public offering of 54
million shares of its common stock; proceeds paid to the Fund amounted to
$759,194,948, after deduction of underwriting commissions and expenses of
$2,205,052.
At March 31, 1995, there were 100,000,000 shares of $.01 par value capital
stock authorized.
17
<PAGE>
Templeton Dragon Fund, Inc.
Notes to Financial Statements (cont.)
- --------------------------------------------------------------------------------
3. INVESTMENT MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Certain officers of the Fund are also directors or officers of Templeton In-
vestment Management (Hong Kong) Limited (TIML) and Templeton Global Investors,
Inc. (TGII), the Fund's investment manager and administrative manager, respec-
tively. The Fund pays monthly an investment management fee to TIML equal, on an
annual basis, to 1.25% of the average weekly net assets of the Fund. The Fund
pays TGII monthly a fee of 0.15% per annum of the Fund's average weekly net as-
sets. TGII and the Fund has entered into a Japanese Shareholder Servicing and
Administration Agreement with Nomura Capital Management, Inc. (NCM), whereby
NCM provides various administrative services to the Fund. For its services TGII
pays to NCM a fee equal, on an annual basis, to 0.10% of the Fund's average
weekly net assets.
An officer of the Fund is a partner of Dechert Price & Rhoads, legal counsel
for the Fund, which firm received $50,500 for the period September 8, 1994
(commencement of operations) through March 31, 1995.
4. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding short-term securities) for the pe-
riod ended March 31, 1995 were $330,516,032 and $0, respectively. The cost of
securities for federal income tax purposes is the same as that shown in the
Statement of Assets and Liabilities. Realized gains and losses are reported on
an identified cost basis.
At March 31, 1995, the aggregate gross unrealized appreciation and depreciation
of portfolio securities, based on cost for federal income taxes purposes, was
as follows:
<TABLE>
<S> <C>
Unrealized appreciation $ 7,484,395
Unrealized depreciation (19,164,751)
------------
Net unrealized depreciation $(11,680,356)
============
</TABLE>
5. UNAUDITED QUARTERLY RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
NET INCREASE
NET GAIN (LOSS) (DECREASE)
ON SECURITY AND IN NET ASSETS
INVESTMENT NET INVESTMENT FOREIGN CURRENCY RESULTING FROM
INCOME INCOME TRANSACTIONS OPERATIONS
----------------- ------------------ ------------------- -------------------
PER PER PER PER
TOTAL SHARE TOTAL SHARE TOTAL SHARE TOTAL SHARE
----------- ----- ----------- ----- ------------ ----- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995
For the period ended:
September 30, 1994 $ 95,154 --* $ (207,382) $(.01) $ 172,251 $ .01 $ (35,131) --*
December 31, 1994 8,973,078 $.17 5,159,548 .10 (27,968,243) (.51) (22,808,695) $(.41)
March 31, 1995 8,652,420 .16 6,759,223 .13 16,147,181 .28 22,906,404 .41
----------- ---- ----------- ----- ------------ ----- ------------ -----
$17,720,652 $.33 $11,711,389 $ .22 $(11,648,811) $(.22) $ 62,578 --*
=========== ==== =========== ===== ============ ===== ============ =====
</TABLE>
* LESS THAN $.01.
18
<PAGE>
Templeton Dragon Fund, Inc.
Independent Auditor's Report
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders
Templeton Dragon Fund, Inc.
We have audited the accompanying statement of assets and liabilities, including
the investment portfolio, of Templeton Dragon Fund, Inc. as of March 31, 1995,
and the related statement of operations, the statement of changes in net assets
and the financial highlights for the period from September 8, 1994 (commence-
ment of operations) to March 31, 1995. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audit.
We conducted our audit in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial high-
lights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
March 31, 1995, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement pre-
sentation. We believe that our audit provides a reasonable basis for our opin-
ion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Tem-
pleton Dragon Fund, Inc. as of March 31, 1995, the results of its operations,
the changes in its net assets and the financial highlights for the period indi-
cated, in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
New York, New York
April 28, 1995
19
<PAGE>
Templeton Dragon Fund, Inc.
- --------------------------------------------------------------------------------
DIVIDEND REINVESTMENT PLAN
The Fund offers a Dividend Reinvestment Plan (the "Plan") with the following
features: *If shares of the Fund are held in the shareholder's name, the share-
holder will automatically be a participant in the Plan 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 in-
structs them otherwise, or unless the reinvestment service is not provided by
the broker-dealer or nominee. *Participants should contact Chemical Mellon Se-
curities Trust Company, Dividend Reinvestment Services, P.O. Box 750, Pitts-
burgh, PA 15230, to receive the Plan brochure. *To receive dividends or distri-
butions in cash, the shareholder must notify Chemical Mellon Securities Trust
Company ("Mellon") or the institution in whose name the shares are held. Mellon
must receive written notice within 10 business days before the record date for
the distribution. *Whenever the Fund declares dividends in either cash or com-
mon stock of the Fund, if the market price is equal to or exceeds net asset
value at the valuation date, participants 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 and if dividends and/or capital gains distributions are
payable only in cash, the participant will receive shares purchased on the New
York Stock Exchange. *The automatic reinvestment of dividends and/or capital
gains does not relieve the participant of any income tax which may be payable
on dividends or distributions. *The participant may withdraw from the Plan
without penalty at any time by written notice to Mellon. Upon withdrawal, the
participant will receive, without charge, stock certificates issued and in the
participant's name for all full shares; or, if the participant's wishes, Mellon
will sell the participant's shares and send the proceeds, net of any brokerage
commissions. A $5.00 fee is charged by Mellon upon any cash withdrawal or ter-
mination. *Whenever shares are purchased on the New York Stock Exchange, each
participant will pay a pro rata portion of brokerage commissions. Brokerage
commissions will be deducted from amounts to be invested.
20
<PAGE>
Templeton Dragon Fund, Inc.
- --------------------------------------------------------------------------------
TRANSFER AGENT
Chemical Mellon Shareholder Services
Securities Transfer Services
450 West 33rd Street
New York, NY 10001
800-526-0801
SHAREHOLDER INFORMATION
Weekly comparative net asset value and market price information about Templeton
Dragon Fund, Inc. shares is published each Monday in The Wall Street Journal,
weekly in Barron's and each Saturday in The New York Times and other newspapers
in a table called "Publicly Traded Funds". The Fund's New York Stock Exchange
trading symbol is TDF.
For current information about the net asset value, call 1-800-292-9293.
If any shareholder is not receiving copies of the Reports to Shareholders be-
cause shares are registered in a broker's name or in a custodian's name, he or
she can write and request that his or her name be added to the Fund's mailing
list, by writing Templeton Dragon Fund, Inc., 700 Central Avenue, St. Peters-
burg, FL 33701.
21
<PAGE>
NOTES
-----
<PAGE>
The Franklin Templeton Group
- --------------------------------------------------------------------------------
Literature Request -- Call today for a free descriptive brochure and prospectus
on any of the funds listed below. The prospectus contains more complete
information, including fees, charges and expenses, and should be read carefully
before investing or sending money.
TEMPLETON Massachusetts*** German Government Bond Fund
FUNDS Michigan*** Global Government Income Fund
Minnesota*** Investment Grade Income Fund
American Trust Missouri U.S. Government Securities Fund
American Government New Jersey
Securities Fund New York* FRANKLIN FUNDS SEEKING HIGH
Developing Markets North Carolina CURRENT INCOME AND STABILITY
Trust Ohio*** OF PRINCIPAL
Foreign Fund Oregon Adjustable Rate Securities
Global Infrastructure Pennsylvania Fund
Fund Tennessee** Adjustable U.S. Government
Global Opportunities Texas Securities Fund
Trust Virginia Short-Intermediate U.S.
Global Rising Dividends Washington** Government Securities Fund
Fund
Greater European Fund FRANKLIN FUNDS FRANKLIN FUNDS FOR NON-U.S.
Growth Fund SEEKING CAPITAL GROWTH INVESTORS
Income Fund California Tax-Advantaged High Yield
Japan Fund DynaTech Fund Securities Fund
Latin America Fund Growth Fund Tax-Advantaged International
Money Fund Equity Fund Bond Fund
Real Estate Securities Global Health Tax-Advantaged U.S.
Fund Care Fund Government Securities Fund
Smaller Companies Gold Fund
Growth Fund Growth Fund FRANKLIN TEMPLETON
World Fund International INTERNATIONAL CURRENCY FUNDS
Equity Fund Global Currency Fund
FRANKLIN FUNDS Pacific Hard Currency Fund
SEEKING TAX- Growth Fund High Income Currency Fund
FREE INCOME Real Estate
Federal Intermediate Securities FRANKLIN MONEY MARKET FUNDS
Term Fund California Tax-Exempt Money
Tax-Free Income Fund Small Cap Fund
Federal Tax-Free Growth Fund Federal Money Fund
Income Fund IFT U.S. Treasury Money
High Yield Tax-Free Market Portfolio
Income Fund FRANKLIN FUNDS SEEKING Money Fund
Insured Tax-Free GROWTH AND INCOME New York Tax-Exempt Money
Income Fund*** Balance Sheet Fund
Puerto Rico Tax-Free Investment Fund Tax-Exempt Money Fund
Income Fund Convertible Securities
Fund FRANKLIN FUND FOR
FRANKLIN STATE-SPECIFIC Equity Income Fund CORPORATIONS
FUNDS SEEKING TAX-FREE Global Utilities Fund Corporate Qualified Dividend
INCOME Income Fund Fund
Alabama Premier Return Fund
Arizona* Rising Dividends Fund FRANKLIN TEMPLETON VARIABLE
Arkansas** Strategic Income Fund ANNUITIES
California* Utilities Fund Franklin Valuemark
Colorado Franklin Templeton Valuemark
Connecticut FRANKLIN FUNDS SEEKING Income
Florida* HIGH CURRENT INCOME Plus (an intermediate
Georgia AGE High Income Fund annuity)
Hawaii**
Indiana
Kentucky
Louisiana
Maryland
Toll-free 1-800/DIAL BEN (1-800/342-5236)
* Two or more fund options available: Long-term portfolio, intermediate-term
portfolio, a portfolio of municipal securities, and a high yield portfolio
(CA).
** The fund may invest up to 100% of its assets in bonds that pay interest
subject to the federal alternative minimum tax.
*** Portfolio of insured municipal securities.
<PAGE>
TEMPLETON DRAGON FUND, INC.
700 Central Avenue
St. Petersburg,
Florida 33701-3628
Auditors
McGladrey & Pullen, LLP
555 Fifth Avenue
New York, New York 10017-2416
Investors should be aware that the value of investments made for the Fund may
go up as well as down and that the Investment Manager may make errors in
selecting securities for the Fund's portfolio. Like any investment in
securities, the Fund's portfolio will be subject to the risk of loss from
market, currency, economic, political and other factors. The Fund and Fund
investors are not protected from such losses by the Investment Manager.
Therefore, investors who cannot accept the risk of such losses should not
invest in shares of the Fund.
To ensure the highest quality of service, telephone calls to or from our
service departments may be monitored, recorded and accessed. These calls can
be determined bythe presence of a regular beeping tone.
TLTRG A95 05/95
[RECYCLING LOGO APPEARS HERE]
TEMPLETON
DRAGON
FUND, INC.
Annual Report
March 31, 1995
[FRANKLIN TEMPLETON LOGO APPEARS HERE]
