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