<PAGE>
Templeton Dragon Fund
[PHOTO OF MARK MOBIUS APPEARS HERE]
J. Mark Mobius, Ph.D.
President
Templeton Dragon
Fund
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 $8 billion
in emerging markets investments for the Templeton Group of Funds.
Your Fund's Objective:
The Templeton Dragon Fund seeks long-term capital appreciation by investing at
least 45% of its total assets in the equity securities of "China companies."
May 16, 1996
Dear Shareholder:
We are pleased to bring you the second annual report for the Templeton Dragon
Fund, which covers the fiscal year ended March 31, 1996. For this period, as
shown in the Performance Summary on page 5, your Fund produced a total return of
21.11% in market-price terms.
In Hong Kong, a relatively high unemployment rate during the fiscal year led to
reduced consumer spending, and activity slowed in the real estate market as
higher U.S. interest rates in early 1995 drew money away from Hong Kong's
market. As a result, growth of its gross domestic product (GDP) slowed from the
strong rates of the past decade to a healthy inflation-adjusted rate of
approximately 4% to 5%.
1
<PAGE>
China's economic growth was also brought under control, as GDP slowed from a
rate of 11.8% in 1994 to 10.2% in 1995. The Chinese government, and many
economists, expect growth to fall even further during 1996. Inflation, a
chronic problem in China, fell from 24% in 1994 to 14.6% in 1995, and the
government has targeted 10% for 1996. Foreign trade and investment expanded,
increasing China's trade surplus, from US$5.3 billion in 1994 to US$16.7 billion
in 1995; foreign currency reserves increased, from US$52.9 billion in 1994 to
almost US$75 billion in 1995; the renminbi/U.S. dollar exchange rate was stable;
and personal incomes rose 4% for urban workers and 5% for rural workers.
The negotiations between the Chinese and British over Hong Kong, while still
marked by wide differences in interpretation of existing agreements, became more
productive in late 1995. For example, the Chinese government established the
Preparatory Committee, an agency designed to formulate plans for governing Hong
Kong after 1997. The committee included a substantial number of Hong Kong
businesspeople, which helped gain the approval of investors whose confidence in
a stable political environment is important to the success of Hong Kong's
reversion to Chinese sovereignty on July 1, 1997.
Templeton Dragon Fund
Geographic Distribution on 3/31/96
Based on Total Net Assets
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Hong Kong Stocks 75.6%
Chinese Stocks 10.2%
Singapore Stocks 0.3%
Short-Term Obligations &
Other Net Assets 13.9%
</TABLE>
On March 31, 1996, the Fund had 75.6% of its total net assets invested in Hong
Kong, 10.2% in China, 0.3% in Singapore and the remaining 13.9% in cash and
other liquid assets. The largest investment sectors included real estate, with
24.1% of the Fund's total net assets, multi-industry with 23.3%, banking with
8.4%, and merchandising with 4.4%. The largest positions held by the Fund
included: HSBC Holdings, PLC, the holding company for the Hongkong Bank, with
over 400 offices worldwide, and major subsidiaries in the U.S. and the U.K.; New
World Development Co. Ltd., which maintains varied commercial interests in Hong
Kong and power plants and toll
2
<PAGE>
roads in China; and Cheung Kong Holdings Ltd., a conglomerate with investments
in Hong Kong and China, and interests in property development,
telecommunications, trading, energy and finance.
Looking forward, we are hopeful that economic growth and inflation in China will
remain under control. In our opinion, even if the Chinese government begins to
relax credit in the second quarter of 1996, it is likely to be restricted to
priority sectors such as agriculture, infrastructure, telecommunications and
petrochemicals and is not expected to fuel inflation. Any expansion in credit
should prove a benefit to regional economies, especially that of Hong Kong.
We believe that Hong Kong is on a path of stable economic growth, which may be
aided by possible interest rate cuts. Also affecting its potential growth are
issues such as the levels of economic activity in Hong Kong's principal export
markets and differences between the U.S. and China concerning China's most-
favored-nation trading status and its relationship with Taiwan.
Although we believe that China is now, and likely will remain, one of the
world's most interesting potential growth stories, investing in any emerging
market means
Templeton Dragon Fund
Top 10 Holdings on 3/31/96
Based on Total Net Assets
[BAR CHART APPEARS HERE]
<TABLE>
<CAPTION>
% of Total
Company, Industry, Country Net Assets
- --------------------------------------------------------------------------------
<S> <C>
Cheung Kong Holdings Ltd.
Multi-Industry, Hong Kong 8.7%
- --------------------------------------------------------------------------------
HSBC Holdings PLC
Banking, Hong Kong 8.4%
- --------------------------------------------------------------------------------
New World Development Co. Ltd.
Real Estate, Hong Kong 8.0%
- --------------------------------------------------------------------------------
Sun Hung Kai Properties Ltd.
Real Estate, Hong Kong 6.6%
- --------------------------------------------------------------------------------
Hang Lung Development Co. Ltd.
Real Estate, Hong Kong 5.2%
- --------------------------------------------------------------------------------
Wheelock & Co. Ltd.
Multi-Industry, Hong Kong 5.1%
- --------------------------------------------------------------------------------
Hopewell Holdings Ltd.
Construction & Housing, Hong Kong 3.5%
- --------------------------------------------------------------------------------
Jardine Matheson Holdings Ltd.
Multi-Industry, Hong Kong 3.3%
- --------------------------------------------------------------------------------
Jardine Strategic Holdings Ltd.
Multi-Industry, Hong Kong 3.0%
- --------------------------------------------------------------------------------
Hongkong Electric Holdings Ltd.
Utilities - Electrical & Gas, Hong Kong 2.6%
- --------------------------------------------------------------------------------
</TABLE>
For a complete list of portfolio holdings, please see page 7 of
this report.
accepting 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
3
<PAGE>
emerging markets. In fact, the Hong Kong market has increased 700% in the last
15 years, but has suffered six declines of more than 20% during that time.1
This discussion reflects the strategies we employed for the Fund during the past
year, and includes our opinions as of the close of the period. Since economic
and market conditions are constantly changing, our strategies, and our
evaluations, conclusions and decisions regarding portfolio holdings, may change
as new circumstances arise. Although past performance of a specific investment
or sector cannot guarantee future performance, such
1 Source: Bloomberg. Based on quarterly percentage change over the 15 years
ended March 31, 1996.
information can be useful in analyzing the securities we purchase or sell for
the Fund.
Thank you for investing in the Templeton Dragon Fund. We appreciate your
support and welcome your
comments.
Sincerely,
/s/ J. Mark Mobius, Ph.D.
J. Mark Mobius, Ph.D.
President
Templeton Dragon Fund, Inc.
- --------------------------------------------------------------------------------
On July 25, 1995, the Fund's Board of Directors approved changing the Fund's
non-fundamental investment policy to authorize investments in equity securities
(i) of companies organized under the laws of, or with a principal office in,
Taiwan, (ii) for which the principal equity securities trading market is in
Taiwan, or (iii) of companies whose principal business activities are conducted
in Taiwan. Investing in Taiwan involves certain risks and special considerations
not typically associated with investing in the United States securities markets.
- --------------------------------------------------------------------------------
<PAGE>
Performance Summary
In market-price terms, the Templeton Dragon Fund produced a total return of
21.11% for the year ended March 31, 1996. Based on the change in actual net
asset value (in contrast to market price), the Fund delivered a total return of
16.89% 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 combined distributions
totaling 52.5 cents ($0.525) per share, including short-term capital gains of
5.5 cents ($0.055) and dividend income of 47.0 cents ($0.470) per share. The
Fund's closing price on the New York Stock Exchange (NYSE) increased from $12.00
on March 31, 1995 to $14.00 on March 31, 1996, while the Fund's net asset value
increased from $13.97 to $15.73. 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
Cumulative Total Returns*
Periods Ended 3/31/96
<TABLE>
<CAPTION>
Since
Inception
One-Year (9/8/94)
<S> <C> <C>
Based on change
in net asset value 16.89% 16.76%
Based on change
in market price 21.11% -2.31%
</TABLE>
*Cumulative total return calculations show the change in value of an investment
over the period indicated. These calculations assume reinvestment of all income
and capital gains distributions, either at net asset value or at market price on
the reinvestment date. Past performance is not predictive of future results.
5
<PAGE>
Templeton Dragon Fund, Inc.
Financial Highlights
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE (For a share outstanding throughout the period)
<TABLE>
<CAPTION>
SEPTEMBER 8, 1994
(COMMENCEMENT
YEAR ENDED OF OPERATIONS) TO
MARCH 31, 1996 MARCH 31, 1995
-------------- -----------------
<S> <C> <C>
Net asset value, beginning of period $ 13.97 $ 14.10
-------- --------
Income from investment operations:
Net investment income .37 .22
Net realized and unrealized gain (loss) 1.92 (.22)
-------- --------
Total from investment operations 2.29 --
-------- --------
Underwriting expenses deducted from capital -- (.04)
-------- --------
Distributions:
Dividends from net investment income (.47) (.09)
Distributions from net realized gains (.06) --
-------- --------
Total distributions (.53) (.09)
-------- --------
Change in net asset value 1.76 (.13)
-------- --------
Net asset value, end of period $ 15.73 $ 13.97
======== ========
TOTAL RETURN*
Based on market value per share 21.11% (19.34)%
Based on net asset value per share 16.89% (0.11)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $849,510 $754,227
Ratio of expenses to average net assets 1.52% 1.54%**
Ratio of net investment income to average net
assets 2.48% 2.99%**
Portfolio turnover rate 7.81% --
Average commission rate paid (per share) $ .0018
</TABLE>
*NOT ANNUALIZED FOR PERIODS OF LESS THAN ONE YEAR.
**ANNUALIZED.
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
Templeton Dragon Fund, Inc.
Investment Portfolio, March 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
<C> <S> <C> <C> <C>
- -------------------------------------------------------------------------------
COMMON STOCKS: 86.1%
- -------------------------------------------------------------------------------
Appliances & Household Durables: 2.3%
*Foshan Electrical and Lighting
Co. Ltd., B Chn. 700,000 $ 491,014
Hualing Holdings Ltd. H.K. 14,280,000 1,938,712
Luks Industrial Co. Ltd. H.K. 12,076,000 1,280,362
Semi-Tech (Global) Co. Ltd. H.K. 6,170,302 9,294,546
Shanghai Narcissus Electric
Appliances Co. Ltd., B Chn. 8,701,200 1,583,618
*Shanghai Shangling Electric
Appliance, B Chn. 3,403,000 2,259,592
*Shanghai Vacuum Electron Devices
Co. Ltd., B Chn. 5,807,092 1,399,509
Shenzhen Huafa Electronics Co.
Ltd., B Chn. 1,184,000 186,770
Shenzhen Konka Electronic Group
Co. Ltd., B Chn. 2,120,000 1,074,528
Tsann Kuen Enterprise Co. Ltd., B Chn. 546,000 105,896
------------
19,614,547
- -------------------------------------------------------------------------------
Automobiles: 1.6%
Jardine International Motor
Holdings Ltd. H.K. 7,615,000 10,141,518
Qing Ling Motors Co. Ltd., H Chn. 12,484,000 3,874,011
------------
14,015,529
- -------------------------------------------------------------------------------
Banking: 8.4%
HSBC Holdings PLC H.K. 4,775,192 71,621,706
- -------------------------------------------------------------------------------
Broadcasting & Publishing: 0.1%
Leefung-Asco Printers Holdings
Ltd. H.K. 8,165,000 1,097,957
- -------------------------------------------------------------------------------
Building Materials & Components: 1.0%
China Southern Glass Co. Ltd., B Chn. 5,562,198 2,560,308
*K Wah International Holdings
Ltd. H.K. 14,491,986 2,304,777
K Wah International Holdings
Ltd., wts. H.K. 988,700 44,743
Shanghai Yaohua Pilkington Glass,
B Chn. 4,094,800 3,931,008
------------
8,840,836
- -------------------------------------------------------------------------------
Chemicals: 1.7%
Shanghai Chlor-Alkali Chemical
Co. Ltd., B Chn. 10,050,000 2,492,400
Shanghai Petrochemical Co. Ltd.,
H Chn. 33,966,000 10,540,264
Shenzhen Petrochemical (Group)
Shareholding Co. Ltd., B Chn. 3,585,076 820,479
------------
13,853,143
- -------------------------------------------------------------------------------
Construction & Housing: 4.3%
Hopewell Holdings Ltd. H.K. 50,961,021 29,651,486
Wai Kee Holdings Ltd. H.K. 25,391,536 6,648,288
------------
36,299,774
- -------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
Templeton Dragon Fund, Inc.
Investment Portfolio, March 31, 1996 (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
<C> <S> <C> <C> <C>
- -------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
- -------------------------------------------------------------------------------
Electrical & Electronics: 0.8%
*+China Treasure
Telecomunications Holdings Ltd. H.K. 44,540,000 $ 1,727,696
*China Treasure Telecomunications
Holdings Ltd., wts. H.K. 3,930,000 43,701
G.P. Batteries International Ltd. Sing. 900,000 2,214,000
Gold Peak Industries (Holdings)
Ltd. H.K. 669,000 354,655
*GP Batteries International Ltd.,
wts. Sing. 225,000 165,938
*Great Wall Electronic
International Ltd. H.K. 17,398,000 1,327,233
Shanghai Automation
Instrumentation Co., B Chn. 4,511,000 852,579
------------
6,685,802
- -------------------------------------------------------------------------------
Electronic Components & Instruments: 0.1%
S. Megga International Holdings
Ltd. H.K. 18,862,000 743,847
- -------------------------------------------------------------------------------
Financial Services: 2.1%
JCG Holdings Ltd. H.K. 3,445,000 3,140,322
Min Xin Holdings H.K. 11,196,000 1,708,208
Peregrine Investments Holdings
Ltd. H.K. 4,756,000 7,656,090
Sun Hung Kai & Co. Ltd. H.K. 16,294,000 5,056,323
------------
17,560,943
- -------------------------------------------------------------------------------
Food & Household Products: 0.7%
C.P. Pokphand Co. Ltd. H.K. 45,000 21,383
*Fairwood Holdings Ltd. H.K. 14,768,000 1,336,643
Golden Resources Development
International Ltd. H.K. 10,138,000 1,494,352
*NG Fund Hong Ltd. H.K. 1,396,000 658,831
*Shanghai New Asia Group Co.
Ltd., B Chn. 4,622,800 2,764,434
------------
6,275,643
- -------------------------------------------------------------------------------
Health & Personal Care: 0.1%
Zhuhai Sez Lizhu Pharmaceutical,
B Chn. 2,610,000 776,183
- -------------------------------------------------------------------------------
Industrial Components: 0.3%
*Shanghai Refrigerator Compressor
Co. Ltd., B Chn. 1,445,220 624,335
*Shanghai Rubber Belt Co. Ltd., B Chn. 1,560,458 293,366
Shanghai Tyre & Rubber Co. Ltd.,
B Chn. 8,215,000 2,053,750
------------
2,971,451
- -------------------------------------------------------------------------------
Leisure & Tourism: 0.8%
*Glynhill International Ltd. H.K. 22,556,000 717,452
Hongkong & Shanghai Hotels Ltd. H.K. 1,961,000 3,207,480
Shanghai Jin Jiang Tower Co.
Ltd., B Chn. 10,646,661 2,895,892
------------
6,820,824
- -------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
Templeton Dragon Fund, Inc.
Investment Portfolio, March 31, 1996 (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
<C> <S> <C> <C> <C>
- -------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
- -------------------------------------------------------------------------------
Machinery & Engineering: 1.0%
*China Textile Machinery Co.
Ltd., B Chn. 6,266,600 $ 977,590
Guangzhou Shipyard
International Co. Ltd., H Chn. 10,530,000 2,546,043
*Northeast Electric
Transmission & Transformation H.K. 2,168,000 392,449
*Shanghai Erfangji Textile
Machinery Co. Ltd., B Chn. 20,014,656 2,641,935
Shanghai Industrial Sewing
Machine Corp. Chn. 9,514,700 1,293,999
Shanghai Steel Tube Co. Ltd., B Chn. 5,088,600 692,050
--------------
8,544,066
- -------------------------------------------------------------------------------
Merchandising: 4.4%
Dairy Farm International
Holdings Ltd. H.K. 20,262,904 19,148,444
Dickson Concepts
(International) Ltd. H.K. 9,598,000 10,548,616
Fortei Holdings Ltd. H.K. 3,978,000 190,310
Joyce Boutique Holdings Ltd. H.K. 4,039,000 1,488,382
LI & Fung Ltd. H.K. 631,897 563,756
Linkful International Holdings
Ltd. H.K. 2,211,000 105,776
Wo Kee Hong Holdings Ltd. H.K. 26,549,000 4,737,215
*Yaohan Hongkong Corp. Ltd. H.K. 4,000,000 191,363
--------------
36,973,862
- -------------------------------------------------------------------------------
Metals & Mining: 0.4%
Maanshan Iron & Steel Co. Ltd.,
H Chn. 19,076,000 3,009,144
- -------------------------------------------------------------------------------
Miscellaneous Materials & Commodities:
0.2%
Luoyang Glass Co. Ltd., H Chn. 6,091,000 1,929,525
- -------------------------------------------------------------------------------
Multi-Industry: 23.3%
Cheung Kong Holdings Ltd. H.K. 10,449,000 73,632,079
Jardine Matheson Holdings Ltd. H.K. 3,582,913 27,946,721
Jardine Strategic Holdings Ltd. H.K. 8,123,625 25,670,655
*Jardine Strategic Holdings
Ltd., wts. H.K. 349,625 131,109
Lai Sun Garment International
Ltd. H.K. 7,023,000 8,036,404
Shenzhen Gintian Industrial Co.
Ltd., B Chn. 599,200 159,601
Shenzhen Tellus Machinery &
Electronics Co. Ltd., B Chn. 162,800 24,418
Stelux International Holdings
Ltd. H.K. 8,274,000 1,904,282
Swire Pacific Ltd., B H.K. 12,645,000 17,330,877
WBL Corp. Ltd. Sing. 89,000 211,167
Wheelock & Co. Ltd. H.K. 21,431,000 42,950,672
--------------
197,997,985
- -------------------------------------------------------------------------------
Real Estate: 24.1%
China Overseas Land &
Investment Ltd. H.K. 30,733,000 7,033,542
Hang Lung Development Co. Ltd. H.K. 23,035,000 43,931,504
Lai Sun Development Co. Ltd. H.K. 79,990,000 13,548,862
New World Development Co. Ltd. H.K. 14,547,208 67,713,924
Shanghai Jinqiao Export
Processing Zone Development, B Chn. 8,338,200 2,668,224
</TABLE>
9
<PAGE>
Templeton Dragon Fund, Inc.
Investment Portfolio, March 31, 1996 (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
<C> <S> <C> <C> <C>
- -------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
- -------------------------------------------------------------------------------
Real Estate (cont.)
Shanghai Lujiaxui Finance &
Trade Zone Development Stock
Co. Ltd., B Chn. 9,559,000 $ 5,257,450
Shanghai Outer Gaoqiao Free
Trade Zone Development Co., B Chn. 1,571,000 461,874
Shenzhen Properties & Resources
Development (Group) Ltd., B Chn. 3,473,800 651,281
Shenzhen Vanke Co. Ltd., B Chn. 4,184,900 1,515,092
*+South Sea Development Co.
Ltd. H.K. 46,054,000 1,345,772
Sun Hung Kai Properties Ltd. H.K. 6,306,000 56,463,732
Tian An China Investments Co.
Ltd. H.K. 27,670,000 4,293,251
--------------
204,884,508
- -------------------------------------------------------------------------------
Recreation, Other Consumer Goods: 1.8%
*Fu Hui Jewellery Co. (H.K.)
Ltd. H.K. 7,710,000 235,268
KTP Holdings Ltd. H.K. 15,374,000 695,746
Phoenix Co. Ltd. Chn. 5,322,300 872,857
Shanghai Forever Bicycle Co.
Ltd., B Chn. 3,752,000 510,272
Shanghai Wingsung Co. Ltd., B Chn. 200,000 37,200
Shenzhen China Bicycles Co.
(Holdings) Ltd., B Chn. 13,362,400 2,159,685
Yue Yuen Industrial (Holdings)
Ltd. H.K. 42,410,000 10,309,129
--------------
14,820,157
- -------------------------------------------------------------------------------
Textiles & Apparel: 1.3%
Goldlion Holdings Ltd. H.K. 10,375,000 8,317,171
*Laws International Holdings
Ltd. H.K. 17,300,000 1,722,395
Shanghai Lian Hua Fibre Corp.,
B Chn. 296,000 50,320
Top Form International Ltd. H.K. 16,937,000 646,032
Tungtex (Holdings) Co. Ltd. H.K. 2,600,000 242,048
Victor Onward Textile
Industrial Co. Ltd., B Chn. 81,400 12,104
--------------
10,990,070
- -------------------------------------------------------------------------------
Transportation: 1.2%
China Merchants Shekou Port
Service Co. Ltd., B Chn. 4,399,900 1,518,972
Chiwan Wharf Holdings Ltd., B Chn. 6,634,000 2,603,335
Cross Harbour Tunnel Co. Ltd. H.K. 812,000 1,595,862
*Osprey Maritime Ltd. Sing. 111,000 268,620
*Shanghai Dazhong Taxi
Shareholding Co. Ltd., B Chn. 5,612,000 4,209,000
--------------
10,195,789
- -------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
Templeton Dragon Fund, Inc.
Investment Portfolio, March 31, 1996 (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
<C> <S> <C> <C> <C>
- -------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
- -------------------------------------------------------------------------------
Utilities--Electrical & Gas: 4.0%
*Guangdong Electric Power
Development Co. Ltd., B,
144A Chn. 3,380,000 $ 1,879,235
Hongkong Electric Holdings
Ltd. H.K. 6,735,500 21,903,003
Shandong Huaneng Power Chn. 886,000 7,752,500
Wing Shan International Ltd. H.K. 21,654,000 2,463,863
------------
33,998,601
- -------------------------------------------------------------------------------
Wholesale & International Trade: 0.1%
East Asiatic Co. (Hong Kong)
Ltd. (The) H.K. 7,520,000 982,053
------------
TOTAL COMMON STOCKS (cost $648,822,083) 731,503,945
- -------------------------------------------------------------------------------
<CAPTION>
PRINCIPAL IN
LOCAL CURRENCY**
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SHORT TERM OBLIGATIONS: 13.4% (cost
$113,489,247)
- -------------------------------------------------------------------------------
U.S. Treasury Bills, 4.53%
to 5.01% with
maturities to 6/06/96 U.S. 113,673,000 113,487,165
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS: 99.5% (cost
$762,311,330) 844,991,110
OTHER ASSETS, LESS LIABILITIES: 0.5% 4,518,557
------------
TOTAL NET ASSETS: 100.0% $849,509,667
============
</TABLE>
*NON-INCOME PRODUCING.
**CURRENCY OF COUNTRY INDICATED.
+SEE NOTE 5.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
Templeton Dragon Fund, Inc.
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1996
<TABLE>
<S> <C>
Assets:
Investments in securities at value
(identified cost $762,311,330) $844,991,110
Cash 598
Receivables:
Investment securities sold 10,074,843
Dividends 2,044,318
Unamortized organization costs 13,285
------------
Total assets 857,124,154
------------
Liabilities:
Payable for investment
securities purchased 6,226,419
Accrued expenses 1,388,068
------------
Total liabilities 7,614,487
------------
Net assets, at value $849,509,667
============
Net assets consist of:
Undistributed net investment income $ 1,150,166
Net unrealized appreciation 82,679,780
Accumulated net realized gain 6,384,762
Net capital paid in on shares of
capital stock 759,294,959
------------
Net assets, at value $849,509,667
============
Shares outstanding 54,007,093
============
Net asset value per share
($849,509,667 / 54,007,093) $ 15.73
============
</TABLE>
STATEMENT OF OPERATIONS
for the year ended March 31, 1996
<TABLE>
<S> <C> <C>
Investment income
(net of $341 foreign
taxes withheld)
Dividends $ 21,705,769
Interest 10,435,462
------------
Total income $ 32,141,231
Expenses:
Management fees (Note 3) 10,030,863
Administrative fees (Note 3) 1,203,706
Transfer agent fees 145,000
Custodian fees 223,000
Reports to shareholders 388,000
Audit fees 61,000
Legal fees (Note 3) 4,000
Registration fees 63,235
Directors' fees and expenses 51,000
Amortization of
organization costs 4,026
Other 14,616
------------
Total expenses 12,188,446
------------
Net investment income 19,952,785
Realized and unrealized
gain (loss):
Net realized gain (loss) on:
Investments 9,378,641
Foreign currency transactions (55,034)
------------
9,323,607
Net unrealized appreciation on investments 94,360,136
------------
Net realized and unrealized gain 103,683,743
------------
Net increase in net assets resulting from
operations $123,636,528
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
Templeton Dragon Fund, Inc.
Financial Statements (cont.)
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 8, 1994
(COMMENCEMENT
YEAR ENDED OF OPERATIONS) TO
MARCH 31, 1996 MARCH 31, 1995
-------------- -----------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 19,952,785 $ 11,711,389
Net realized gain on investment and foreign
currency transactions 9,323,607 31,545
Net unrealized appreciation (depreciation) 94,360,136 (11,680,356)
------------ ------------
Net increase in net assets resulting from
operations 123,636,528 62,578
Distributions to shareholders:
From net investment income (25,383,334) (5,130,674)
From net realized gain (2,970,390) --
Capital share transactions (Note 2) -- 759,194,948
------------ ------------
Net increase in net assets 95,282,804 754,126,852
Net assets:
Beginning of period 754,226,863 100,011
------------ ------------
End of period $849,509,667 $754,226,863
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
Templeton Dragon Fund, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SUMMARY OF ACCOUNTING POLICIES
Templeton Dragon Fund, Inc. (the Fund) is a Maryland corporation and a closed-
end, non-diversified management investment company registered under the Invest-
ment Company Act of 1940. The Fund seeks to achieve its objective by investing
in equity securities of China companies, Japan companies and Asia-Pacific com-
panies. The following summarizes the Fund's significant accounting policies.
a. Securities Valuations:
Securities listed or traded on a recognized national or foreign exchange or
NASDAQ are valued at the last reported sales prices on the principal exchange
on which the securities are traded. Over-the-counter securities and listed se-
curities 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 ap-
proved in good faith by the Board of Directors.
b. Foreign Currency Transactions:
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 a foreign exchange contract 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. Unamortized Organization Costs:
Organization costs are being amortized on a straight line basis over five
years.
e. Security Transactions, Investment Income, Distributions and Expenses:
Security transactions are accounted for on a trade date basis. Dividend income
is recorded on the ex-dividend date. Certain dividend income on foreign securi-
ties is recorded as soon as information is available to the Fund. Interest in-
come 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.
f. Accounting Estimates:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
14
<PAGE>
Templeton Dragon Fund, Inc.
Notes to Financial Statements (cont.)
- --------------------------------------------------------------------------------
2. TRANSACTIONS IN SHARES OF CAPITAL STOCK
At March 31, 1996, there were 100,000,000 shares of $.01 par value capital
stock authorized.
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.
3. INVESTMENT MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Certain officers of the Fund are also directors or officers of Templeton Asset
Management Limited (TAML) and Templeton Global Investors, Inc. (TGII), the
Fund's investment manager and administrative manager, respectively.
The Fund pays monthly an investment management fee to TAML 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 assets,
of which 0.10% is paid to Nomura Capital Management, Inc. (NCM) for various ad-
ministrative services to the Fund.
An officer of the Fund is a partner of Dechert Price & Rhoads, legal counsel
for the Fund, which firm received fees of $4,000 for the year ended March 31,
1996.
4. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding short-term securities) for the
year ended March 31, 1996 were $356,312,353 and $47,397,304, respectively. The
cost of securities for federal income tax purposes is $762,331,542. Realized
gains and losses are reported on an identified cost basis.
At March 31, 1996, the aggregate gross unrealized appreciation and depreciation
of portfolio securities, based on cost for federal income tax purposes, was as
follows:
<TABLE>
<S> <C>
Unrealized appreciation $133,853,902
Unrealized depreciation (51,194,334)
------------
Net unrealized appreciation $ 82,659,568
============
</TABLE>
5. HOLDING OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The Investment Company Act of 1940 defines "affiliated companies" as invest-
ments in portfolio companies in which the Fund owns 5% or more of the outstand-
ing voting securities. Investments in "affiliated companies" at March 31, 1996
amounted to $3,073,468.
15
<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, 1996,
and the related statement of operations for the year then ended, the statements
of changes in net assets and the financial highlights for the periods indicated
in the accompanying financial statements. These financial statements and finan-
cial highlights are the responsibility of the Fund's management. Our responsi-
bility is to express an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing 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, 1996, 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 audits provide 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, 1996, the results of its operations,
the changes in its net assets and the financial highlights for the periods in-
dicated, in conformity with generally accepted accounting principles.
LOGO
New York, New York April 26, 1996
16
<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 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 par-
ticipants may withdraw from the Plan without penalty at any time by written no-
tice 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 charges by
Mellon upon any cash withdrawal or termination. .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.
17
<PAGE>
Templeton Dragon Fund, Inc.
- --------------------------------------------------------------------------------
TRANSFER AGENT
Chemical Mellon Shareholder Services
Securities Transfer Services
450 West 33rd Street, 15th Floor
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.
18
<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.
<TABLE>
<S> <C> <C> <C>
Templeton Funds Florida* Franklin Funds Seeking Franklin Templeton Global
American Trust Georgia Growth and Income Currency Funds
Americas Government Hawaii** Balance Sheet German Government
Securities Indiana Investment Fund Bond
Developing Markets Trust Kentucky Convertible Securities Fund Global Currency
Foreign Fund Louisiana Equity Income Fund High Income Currency
Global Infrastructure Fund Maryland Global Utilities Fund Hard Currency
Global Opportunities Trust Massachusetts*** Income Fund Franklin Money
Greater European Fund Michigan*** MicroCap Value Market Funds
Growth Fund Minnesota*** Natural Resources Fund Money Fund
Growth and Income Fund Missouri Premier Return Fund Federal Money Fund
Global Bond Fund New Jersey Real Estate Securities Fund Tax-Exempt Money
Latin America Fund New York* Rising Dividends Fund Fund
Pacific Growth North Carolina Strategic Income Fund California Tax-Exempt
Global Real Estate Fund Ohio*** Utilities Fund Money Fund
Global Smaller Oregon Value New York Tax-Exempt
Company Fund Pennsylvania Money Fund
World Fund Tennessee Franklin Funds Seeking IFT U.S. Treasury Money
Texas High Current Income Market Portfolio
Franklin Funds Seeking Virginia AGE High Income Fund
Tax-Free Income Washington** Global Government Franklin Fund for Corporations
Federal Tax-Free Income Fund Corporate Qualified
Income Fund Franklin Funds Investment Grade Dividend Fund
Federal Intermediate-Term Seeking Capital Growth Income Fund
Tax-Free Income Fund California Growth Fund U.S. Government Franklin Tax-Deferred
High Yield DynaTech Fund Securities Fund Annuity
Insured Tax-Free Equity Fund Franklin Valuemark
Income Fund*** Global Health Care Franklin Funds Seeking Franklin Templeton
Puerto Rico Tax-Free Gold Fund High Current Income and Valuemark Income Plus
Income Fund Growth Fund Stability of Principal (an immediate annuity)
International Adjustable Rate
Franklin State-Specific Equity Fund Securities Fund
Funds Seeking Tax-Free Income Japan Fund Adjustable U.S. Government
Alabama Small Cap Growth Fund Securities Fund
Arizona* Short-Intermediate U.S.
Arkansas** Government
California* Securities Fund
Colorado
Connecticut Franklin Funds for
Non-U.S. Investors
Tax-Advantaged High Yield
Securities Fund
Tax-Advantaged International
Bond Fund
Tax-Advantaged U.S.
Government Securities Fund
</TABLE>
Fund Information: 1-800/342-5236
Shareholder Services: 1-800/632-2301
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
determined by the presence of a regular beeping tone.
*Two or more fund options available: long-term portfolio, intermediate-term
portfolio, a portfolio of insured 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
by the presence of
a regular beeping tone.
- --------------------------
TLTDF A96 05/96
LOGO
TEMPLETON
DRAGON
FUND, INC.
Annual Report
March 31, 1996
LOGO
