ANNUAL REPORT
[GRAPHIC OF WORLD MAP]
December 31, 1998
TEMPLETON DRAGON FUND, INC.
[FRANKLIN TEMPLETON LOGO]
PAGE
[FRANKLIN TEMPLETON CELEBRATING OVER 50 YEARS LOGO]
Thank you for investing with Franklin Templeton. We encourage our investors to
maintain a long-term perspective and remember that all securities markets move
both up and down, as do mutual fund share prices. We appreciate your past
support and look forward to serving your investment needs in the years ahead.
In 1992, Sir John Templeton retired after a 50-year career of helping investors
manage their money. Currently he devotes all of his time and efforts to the John
Templeton Foundation. A major portion of his assets remain invested in the
Templeton funds which are managed by many of the investment professionals he
selected and trained.
[PHOTO OF J. MARK MOBIUS]
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: 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 report of Templeton Dragon Fund covers the period from March 31, 1998 to
December 31, 1998. It covers nine months because the Fund's fiscal year end date
was recently changed from March 31 to December 31. This was a roller-coaster
period for securities of most emerging countries, including China. In January
1998, currency speculation and investor concerns about Asian economies caused
China companies' share prices to drop sharply, but they rebounded in February
1998 as other Asian nations began to restructure their debt. However, slowing of
economic reforms announced earlier in the year and domestic disappointment in
the government's apparent inability to near its 8.0% annual growth target
contributed to diminishing demand for stocks from March through August. In June,
the apparent
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 10 of
this report.
CONTENTS
<TABLE>
<S> <C>
Shareholder Letter ............. 1
Performance Summary ............ 8
Financial Highlights &
Statement of Investments ....... 9
Financial Statements ........... 16
Notes to the Financial
Statements ..................... 19
Independent Auditor's Report ... 22
</TABLE>
FUND CATEGORY
[PYRAMID GRAPHIC]
PAGE
GEOGRAPHIC DISTRIBUTION
Templeton Dragon Fund,Inc.
Based on Total Net Assets
12/31/98
[BAR GRAPH]
<TABLE>
<S> <C>
Hong Kong Shares 71.8%
China B-Shares 16.8%
Thailand 4.7%
Singapore 3.2%
Phillipines 1.6%
Malaysia 1.1%
Short-Term Obligations
& Other Net Assets 0.8%
</TABLE>
shakiness of Japan's financial sector and the rapid devaluation of the Japanese
yen, coupled with creeping unemployment and weak property prices in Hong Kong
helped to drive Hong Kong's Hang Seng Index down 36.77% from its March 25
high.(1) But the Index rebounded in July due largely to the U.S. and Japanese
governments' support of the yen. Then, when Russia's economic meltdown in August
spurred renewed speculation against Hong Kong's currency, the Hong Kong Monetary
Authority (HKMA) began purchasing blue chip stocks and index futures. The HKMA
also reduced its prime lending rate in line with the U.S. and other G7 member
nations, and Hong Kong's equity market remained relatively stable for the rest
of the year. Within this environment, the Fund posted a nine-month cumulative
total return of -30.08% in market-price terms and -20.60% in net asset value
terms.
On December 31, 1998, 71.8% of the Fund's total net assets were invested in Hong
Kong, 16.8% in mainland China, 10.6% in other markets, and 0.8% in cash and
other short-term assets. The fund's heavy weighting in Hong Kong was due to the
greater availability of investment opportunities there in comparison with
mainland China, where a slowed reforms process and government regulations
limited the attractiveness of investments. At the close of the reporting period,
the Fund's largest single position was HSBC Holdings Plc., the holding company
for one of the world's largest banking firms. We also maintained significant
positions in Cheung Kong Holdings Ltd. and New World Development Co. Ltd.
1. Source: Bloomberg. Market return is measured in U.S. dollars and includes
reinvested dividends.
2
PAGE
Although Hong Kong experienced depressed retail sales and record unemployment
during the reporting period, we believe prospects for its medium- to long-term
economic growth remain bright. Amendments to the Hong Kong dollar peg mechanism
and mainland China's promises to support the renminbi may help to ease currency
worries of some investors. Buyers' interest in Hong Kong property appears to be
recovering as prices of many apartments have stabilized and in some cases
reportedly risen based on the expectations of land developers. In addition,
hotel occupancy rates have broken through the 80% mark, offering hope of a
recovery in the tourism trade. Finally, the renewed rivalry between Hong Kong
and Singapore over the title of Asia's No. 2 financial market could prompt the
Hong Kong government to be more proactive in developing investment incentives
and may improve investor sentiment towards Hong Kong.
While mainland China faces necessary economic reforms, we believe renewed
restructuring of state-owned enterprises could promote efficiency, and help to
improve China's standing as an exporter. Domestic manufacturers could benefit
from cheap raw-material imports, while demand for Chinese products may increase
if other Asian currencies strengthen, making imports more expensive.
International investors appear to be gaining interest in mainland China's
relatively untapped market, which could result in increased alliances between
domestic and foreign firms. Although we believe China faces significant
challenges, we remain optimistic about its long-term prospects.
Of course, investing in any emerging market securities means accepting a certain
amount of volatility and, in some cases,
TOP 10 HOLDINGS
December 31, 1998
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY, COUNTRY* NET ASSETS
- ------------------ ----------
<S> <C>
HSBC Holdings Plc.,
Banking, Hong Kong 12.2%
Cheung Kong Holdings Ltd.,
Multi-Industry, Hong Kong 8.1%
New World
Development Co. Ltd.
Real Estate, Hong Kong 5.8%
Dairy Farm International
Holdings Ltd.,
Merchandising, Hong Kong 5.2%
Hong Kong Electric
Holdings Ltd.,
Utilities Electrical & Gas,
Hong Kong 4.9%
Hang Lung
Development Co. Ltd.,
Real Estate, Hong Kong 4.1%
Sun Hung Kai Properties Ltd.,
Real Estate, Hong Kong 3.8%
Citic Pacific Ltd.,
Multi-Industry, Hong Kong 3.2%
China Resources
Enterprises Ltd.,
Multi-Industry, China 3.2%
Cathay Pacific Airways Ltd.,
Transportation, Hong Kong 2.7%
</TABLE>
* Hong Kong reverted to the sovereignty of China on July 1, 1997.
3
PAGE
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 in excess of 50% are not
unusual in emerging markets. In fact, the Hong Kong equity market has increased
1049% 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 December 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 past
performance is not predictive of future results, these insights may help you
understand our investment and management philosophy.
Thank you for investing in the Templeton Dragon Fund. We appreciate your
confidence and welcome your comments or suggestions.
Sincerely,
/s/ J. Mark Mobius
- ------------------
J. Mark Mobius, Ph.D.
President
Templeton Dragon Fund, Inc.
2. Source: Bloomberg. Based on quarterly percentage price change over 15 years
ended December 31, 1998. Market returns are measured in Hong Kong dollars.
4
PAGE
IMPORTANT NOTICE TO SHAREHOLDERS
EURO RISK. On January 1, 1999, the European Monetary Union (EMU) introduced a
new single currency, the euro, which will replace the national currency for
participating member countries. The transition and the elimination of currency
risk among EMU countries may change the economic environment and behavior of
investors, particularly in European markets. If the Fund holds investments in
countries with currencies replaced by the euro, the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting will be impacted.
Franklin Resources, Inc. has created an interdepartmental team to handle all
euro-related changes to enable the Franklin Templeton Funds to process
transactions accurately and completely with minimal disruption to business
activities. While the implementation of the euro could have a negative effect on
the Fund, the Fund's manager and its affiliated services providers are taking
steps they believe are reasonably designed to address the euro issue.
Because this change to a single currency is new and untested, the establishment
of the euro may result in market volatility. For the same reason, it is not
possible to predict the impact of the euro on the business or financial
condition of European issuers which the Fund may hold in its portfolio, and
their impact on Fund performance. To the extent the Fund holds non-U.S. dollar
(euro or other) denominated securities, it will still be exposed to currency
risk due to fluctuations in those currencies versus the U.S. dollar.
YEAR 2000 ISSUE. When evaluating current and potential portfolio positions, Year
2000 is one of the factors the Fund's manager considers.
5
PAGE
The manager will rely upon public filings and other statements made by companies
about their Year 2000 readiness. Issuers in countries outside the U.S.,
particularly in emerging markets, may not be required to make the same level of
disclosure about Year 2000 readiness as is required in the U.S. The manager, of
course, cannot audit each company and its major suppliers to verify their Year
2000 readiness.
If a company in which the Fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the Fund's portfolio
holdings will have a similar impact on the Fund's performance.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has already
begun making necessary software changes to help the computer systems that
service the Fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues to
seek reasonable assurances from all major hardware, software or data-services
suppliers that they will be Year 2000 compliant on a timely basis. Resources is
also beginning to develop a contingency plan, including identification of those
mission critical systems for which it is practical to develop a contingency
plan. However, in an operation as complex and geographically distributed as
Resources' business, the alternatives to use of normal systems, especially
mission critical systems, or supplies of electricity or long distance voice and
data lines are limited.
RUSSIAN SECURITIES. Effective December 11, 1998, the Fund's non-fundamental
investment policies have been revised so that the Fund may no longer invest in
Russian securities.
6
PAGE
MANAGED DISTRIBUTION POLICY. On July 22, 1998, the Board of Directors of the
Fund adopted a managed distribution policy under which approximately 10% of the
Fund's average net asset value would be distributed on an annual basis as
described below. Based on the experience of other closed-end investment
companies that have adopted similar policies, and consistent with its ongoing
efforts to enhance shareholder value, the Board adopted this policy in an effort
to address the market discount of the Fund's share price to net asset value.
Under the managed distribution policy, the Fund intends to make quarterly
distributions to Fund shareholders equal to 2.5% of the Fund's net asset value
at the close of the New York Stock Exchange on the Friday prior to the
declaration date. If the total amount distributed exceeds the Fund's aggregate
net investment income and net realized capital gains with respect to a given
year, the excess amount distributed generally will constitute a return of
capital. Shareholders who participate in the Fund's dividend reinvestment and
cash purchase plan will receive their distributions in additional shares of the
Fund. The first distribution under this policy was paid on September 15, 1998 to
all shareholders of record on September 3, 1998. The second distribution under
this policy was paid on December 30, 1998 to all shareholders of record on
December 21, 1998.
REPURCHASE PROGRAM. On October 18, 1997, the Board of Directors of the Fund
authorized management to implement an open-market share repurchase program
pursuant to which the Fund, 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. This authorization remains in effect.
7
PAGE
TEMPLETON
DRAGON FUND
PERFORMANCE SUMMARY AS OF 12/31/98
Although the Board of Directors adopted a managed distribution policy for the
fund, distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities and the level of
the operating expenses. Past distributions are not indicative of future trends.
All total returns include reinvested distributions 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 any sales charges paid at
inception or brokerage commissions paid on secondary market purchases.
PRICE AND DISTRIBUTION INFORMATION (4/1/98 - 12/31/98)
<TABLE>
<CAPTION>
CHANGE 12/31/98 3/31/98
------ -------- -------
<S> <C> <C> <C>
Net Asset Value -$3.58 $10.00 $13.58
NYSE Market Price -$4.00 $ 7.38 $11.38
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS
-------------
<S> <C>
Dividend Income $0.2636
Return of Capital $0.3037
TOTAL $0.5673
</TABLE>
PERFORMANCE
<TABLE>
<CAPTION>
Periods ended 12/31/98
SINCE
INCEPTION
1-YEAR 3-YEAR 9/8/94
------ ------ ------
<S> <C> <C> <C>
Cumulative Total Return(1)
Based on change in net asset value -18.38% -12.92% -6.40%
Based on change in market price -25.98% -30.45% -35.07%
Average Annual Total Return(2)
Based on change in net asset value -18.38% -4.50% -1.52%
Based on change in market price -25.98% -11.39% -9.52%
</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.
Since markets can go down as well as up, investment return and principal value
will change with market conditions, currency fluctuations, 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. Also, as a non-diversified investment company investing in "China
companies," the Fund may invest in a relatively small number of issuers and, as
a result, may be subject to greater risk of loss with respect to its portfolio
securities. You may have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
8
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TEMPLETON DRAGON FUND, INC.
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
PERIOD ENDED --------------------------------------------------
DECEMBER 31, 1998++ 1998 1997 1996 1995+
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net asset value, beginning of year............ $13.58 $18.25 $15.73 $13.97 $14.10
---------------------------------------------------------------------------
Income from investment operations:
Net investment income........................ .25 .37 .34 .37 .22
Net realized and unrealized gains (losses)... (3.26) (3.58) 2.82 1.92 (.22)
---------------------------------------------------------------------------
Total from investment operations.............. (3.01) (3.21) 3.16 2.29 --
Underwriting expenses deducted from capital... -- -- -- -- (.04)
---------------------------------------------------------------------------
Less distributions from:
Net investment income........................ (.27) (.35) (.34) (.47) (.09)
Net realized gains........................... -- (.70) (.30) (.06) --
In excess of net realized gains.............. -- (.41) -- -- --
Tax return of capital........................ (.30) -- -- -- --
---------------------------------------------------------------------------
Total distributions........................... (.57) (1.46) (.64) (.53) (.09)
---------------------------------------------------------------------------
Net asset value, end of year.................. $10.00 $13.58 $18.25 $15.73 $13.97
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total Return*
Based on market value per share.............. (30.08)% (11.82)% 7.80% 21.11% (19.34)%
Based on net asset value per share........... (20.60)% (16.39)% 20.76% 16.89% (.11)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)............... $528,464 $733,533 $985,719 $849,510 $754,227
Ratios to average net assets:
Expenses..................................... 1.59%** 1.53% 1.50% 1.52% 1.54%**
Net investment income........................ 3.21%** 2.14% 1.93% 2.48% 2.99%**
Portfolio turnover rate....................... 39.92% 13.59% 8.73% 7.81% --
</TABLE>
*Total return is not annualized.
**Annualized.
+For the period September 8, 1994 (commencement of operations) to March 31,
1995.
++For the period April 1, 1998 to December 31, 1998. Prior to this period, the
Fund's fiscal year end was March 31.
See Notes to Financial Statements.
9
PAGE
TEMPLETON DRAGON FUND, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
-------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 99.2%
APPLIANCES & HOUSEHOLD DURABLES 1.1%
*Sanyo Universal Electric Public Co Ltd., fgn. ............. Thailand 330,100 $ 61,323
*Semi-Tech Co. Ltd. ........................................ Hong Kong 53,736,359 2,219,579
*Shanghai Vacuum Electron Devices Co. Ltd., B............... China 3,008,641 349,002
Shenzhen Konka Electronic Group Co. Ltd., B................. China 5,898,381 2,976,885
------------
5,606,789
------------
AUTOMOBILES .8%
Cycle & Carriage Ltd. ...................................... Singapore 211,000 722,515
Jardine International Motor Holdings Ltd. .................. Hong Kong 7,683,000 3,049,498
Oriental Holdings Bhd. ..................................... Malaysia 509,000 625,524
Perusahaan Otomobil Nasional Bhd. .......................... Malaysia 2,000 2,416
Qingling Motors Co. Ltd., H................................. China 560,000 98,306
------------
4,498,259
------------
BANKING 15.4%
*Bangkok Bank Public Co. Ltd. .............................. Thailand 998,400 1,428,837
HSBC Holdings Plc. ......................................... Hong Kong 2,596,532 64,684,975
Overseas Chinese Banking Corp. Ltd., fgn. .................. Singapore 602,000 4,086,303
Philippine Commercial International Bank Inc. .............. Philippines 160,750 669,447
*Philippine National Bank................................... Philippines 1,319,300 2,034,910
Public Bank Bhd. ........................................... Malaysia 358,000 150,412
Public Bank Bhd., fgn. ..................................... Malaysia 3,088,000 1,200,105
*Siam Commercial Bank Ltd., loc. ........................... Thailand 63,534 30,600
*Siam Commercial Bank Ltd., fgn. ........................... Thailand 715,362 428,213
*Thai Farmers Bank Public Co. Ltd. ......................... Thailand 2,365,400 3,482,837
*Thai Military Bank Ltd., fgn. ............................. Thailand 100,200 26,749
United Overseas Bank Ltd., fgn. ............................ Singapore 513,000 3,295,636
------------
81,519,024
------------
BEVERAGES & TOBACCO .5%
Fraser and Neave Ltd. ...................................... Singapore 292,000 852,994
Rothmans Industries Ltd. ................................... Singapore 1,000 6,000
+*Tsingtao Brewery Co., H................................... China 18,462,000 1,954,092
------------
2,813,086
------------
BROADCASTING & PUBLISHING
Times Publishing Ltd. ...................................... Singapore 74,000 115,709
------------
BUILDING MATERIALS & COMPONENTS 1.5%
Cement Industries of Malaysia Bhd. ......................... Malaysia 100,000 47,056
*China Southern Glass Co. Ltd., B........................... China 10,558,963 967,681
Sembawang Resources Ltd. ................................... Singapore 134,000 104,764
Shanghai Yaohua Pilkington Glass, B......................... China 7,850,475 667,290
*Siam Cement Public Co. Ltd. ............................... Thailand 355,300 5,475,932
*Tipco Asphalt Public Co. Ltd., fgn. ....................... Thailand 482,300 783,148
------------
8,045,871
------------
</TABLE>
10
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TEMPLETON DRAGON FUND, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
-------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
CHEMICALS 1.2%
*Shanghai Chlor-Alkali Chemical Co. Ltd., B................. China 7,184,200 $ 488,526
Shanghai Petrochemical Co. Ltd., H.......................... China 58,824,000 5,315,021
Shenzhen Petrochemical Shareholding Co. Ltd., B............. China 422,692 54,560
Singapore Petroleum Company, fgn. .......................... Singapore 61,000 25,139
*Thai Petrochemical Industry Public Co. Ltd., fgn. ......... Thailand 2,545,100 420,272
------------
6,303,518
------------
CONSTRUCTION & HOUSING .4%
*Italian-Thai Development Public Co. Ltd., fgn. ............ Thailand 701,600 1,409,572
YTL Corp. Berhad............................................ Malaysia 870,000 902,852
------------
2,312,424
------------
ELECTRICAL & ELECTRONICS 1.1%
Acer Computer International Ltd. ........................... Singapore 9,000 4,500
Acma Ltd. .................................................. Singapore 33,000 14,500
GP Batteries International Ltd. ............................ Singapore 637,000 1,358,933
*GP Batteries International Ltd., wts. ..................... Singapore 223,000 106,094
Great Wall Electronic International Ltd. ................... Hong Kong 39,449,366 1,222,091
*Hana Microelectronics Co. Ltd., fgn. ...................... Thailand 18,700 45,290
*Shinawatra Computer & Comm. Public Co. Ltd. ............... Thailand 893,500 2,950,874
------------
5,702,282
------------
ENERGY EQUIPMENT & SERVICES .1%
Zhenhai Refining & Chemical Co. Ltd., H..................... China 1,971,000 302,751
------------
ENERGY SOURCES .6%
*Petron Corporation......................................... Philippines 670,000 73,201
Yanzhou Coal Mining Company Ltd. ........................... China 17,789,000 2,985,020
------------
3,058,221
------------
FINANCIAL SERVICES .9%
AMMB Holdings Bhd. ......................................... Malaysia 58,000 54,585
Hong Leong Finance Ltd., fgn. .............................. Singapore 50,000 95,758
Industrial Finance Corp. of Thailand, fgn. ................. Thailand 2,806,500 1,158,594
JCG Holdings Ltd. .......................................... Hong Kong 9,888,000 3,190,810
Overseas Union Trust, fgn. ................................. Singapore 1,000 1,091
------------
4,500,838
------------
FOOD & HOUSEHOLD PRODUCTS 1.3%
Boustead Holdings Bhd. ..................................... Malaysia 70,000 43,821
*Charoen Pokphand Feedmill Public Co. Ltd. ................. Thailand 11,900 14,492
Golden Resources Development International Ltd. ............ Hong Kong 25,779,000 1,331,001
Ng Fung Hong Ltd. .......................................... Hong Kong 3,468,000 3,111,117
RFM Corp. .................................................. Philippines 13,000 2,005
Saha Pathanapibul Public Co. Ltd., fgn. .................... Thailand 65,000 66,190
*Serm Suk Public Co. Ltd. .................................. Thailand 13,200 67,390
</TABLE>
11
PAGE
TEMPLETON DRAGON FUND, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
-------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
FOOD & HOUSEHOLD PRODUCTS (CONT.)
+*Shanghai New Asia Group Co. Ltd., B....................... China 13,759,408 $ 1,761,204
Tingyi (Cayman Islands) Holding Corp. ...................... Hong Kong 4,797,000 433,431
------------
6,830,651
------------
HEALTH & PERSONAL CARE .1%
*Zhuhai Sez Lizhu Pharmaceutical Group Inc., B.............. China 1,994,354 267,724
------------
INDUSTRIAL COMPONENTS .4%
Kian Joo Can Factory Bhd. .................................. Malaysia 236,000 277,632
*Leader Universal Holdings Bhd. ............................ Malaysia 562,000 123,964
*Shanghai Refrigerator Compressor Co. Ltd., B............... China 4,789,033 450,169
*Shanghai Tyre & Rubber Co. Ltd., B......................... China 10,424,040 1,042,404
------------
1,894,169
------------
INSURANCE
Bangkok Insurance Public Co. Ltd. .......................... Thailand 18,500 68,735
------------
LEISURE & TOURISM 2.8%
CDL Hotel International Ltd. ............................... Hong Kong 193,850 49,793
Genting Bhd. ............................................... Malaysia 160,600 278,336
Hind Hotels International Ltd. ............................. Singapore 27,000 18,491
Hong Kong & Shanghai Hotels Ltd. ........................... Hong Kong 11,150,000 7,915,712
Overseas Union Enterprise Ltd. ............................. Singapore 302,400 601,135
Republic Hotels & Resorts Ltd. ............................. Singapore 75,000 35,455
Resorts World Bhd. ......................................... Malaysia 431,000 396,572
+*Shanghai Jin Jiang Tower Co. Ltd., B...................... China 14,567,850 1,281,971
Shangri La Hotels (Malaysia) Bhd. .......................... Malaysia 99,000 26,412
Shangri-La Asia Ltd. ....................................... Hong Kong 5,162,000 4,397,586
------------
15,001,463
------------
MACHINERY & ENGINEERING .2%
*Dalian Refrigeration Co. Ltd., B........................... China 136,300 24,455
Guangzhou Shipyard International Co. Ltd., H................ China 1,462,000 86,808
*Keppel Philippine Holdings Inc., B......................... Philippines 206,800 3,721
*Northeast Electric Transmission & Transformation, H........ China 5,234,000 344,553
*Shanghai Erfangji Textile Machinery Co. Ltd., B............ China 5,659,734 316,945
*Shanghai Steel Tube Co. Ltd., B............................ China 3,029,300 202,963
*Thai Engine Manufacturing Public Company Ltd. ............. Thailand 31,000 7,764
------------
987,209
------------
MERCHANDISING 6.2%
Dairy Farm International Holdings Ltd. ..................... Hong Kong 23,734,643 27,294,839
Dickson Concepts (International) Ltd. ...................... Hong Kong 4,180,000 3,237,278
Hour Glass Ltd. ............................................ Singapore 171,000 28,500
</TABLE>
12
PAGE
TEMPLETON DRAGON FUND, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
-------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
MERCHANDISING (CONT.)
Robinson & Co., Ltd. ....................................... Singapore 18,000 $ 40,364
Siam Makro Public Company Ltd., fgn. ....................... Thailand 1,158,300 2,263,363
------------
32,864,344
------------
METALS & MINING .4%
Bengang Steel Plates Co. Ltd., B............................ China 12,479,800 1,369,238
Malayawata Steel Bhd. ...................................... Malaysia 135,000 27,793
Natsteel Ltd. .............................................. Singapore 441,000 483,764
*Philex Mining Corp., B..................................... Philippines 3,372,000 26,872
------------
1,907,667
------------
MISC MATERIALS & COMMODITIES .1%
*Luoyang Glass Co. Ltd., H.................................. China 10,627,000 340,185
------------
MULTI-INDUSTRY 26.0%
Beijing Datang Power Generation Co. Ltd., H................. China 29,590,000 8,880,151
Cheung Kong Holdings Ltd. .................................. Hong Kong 5,952,000 42,831,198
China Resources Enterprises Ltd. ........................... China 10,684,000 16,686,747
Citic Pacific Ltd. ......................................... Hong Kong 7,916,000 17,063,758
Hong Leong Industries Bhd. ................................. Malaysia 237,000 118,992
Hutchison Whampoa Ltd. ..................................... Hong Kong 1,750,000 12,367,292
Jardine Matheson Holdings Ltd. ............................. Hong Kong 4,932,259 12,725,228
Jardine Strategic Holdings Ltd. ............................ Hong Kong 9,196,625 13,335,106
Lai Sun Garment International Ltd. ......................... Hong Kong 6,979,000 1,270,178
*Sembcorp Industries Ltd. .................................. Singapore 651,035 741,785
WBL Corp. Ltd. ............................................. Singapore 49,000 31,479
Wheelock and Company Ltd. .................................. Hong Kong 13,930,511 11,148,365
------------
137,200,279
------------
REAL ESTATE 19.3%
*Belle Corp. ............................................... Philippines 68,163,000 3,749,841
China Overseas Land & Investment Ltd. ...................... Hong Kong 98,661,000 13,244,369
+China Vanke Co. Ltd., B.................................... China 7,612,125 2,092,849
Hang Lung Development Co. Ltd. ............................. Hong Kong 20,156,000 21,594,088
Henderson China Holdings Limited............................ Hong Kong 7,009,500 2,917,892
*Lai Sun Development Co. Ltd. .............................. Hong Kong 20,693,400 2,617,655
New World Development Co. Ltd. ............................. Hong Kong 12,104,112 30,466,318
Shanghai Jinqiao Export Processing Zone Development, B...... China 5,194,730 810,378
*Shanghai Lujiaxui Finance & Trade Zn Dev Stock Co Ltd, B... China 8,459,866 2,724,077
*Shanghai Wai Gaoqiao Free Trade Zone Dev Co., B............ China 659,900 129,340
Sun Hung Kai Properties Ltd. ............................... Hong Kong 2,773,700 20,228,346
United Industrial Corporation Ltd. ......................... Singapore 1,409,000 563,600
United Overseas Land Ltd. .................................. Singapore 1,521,000 1,032,436
------------
102,171,189
------------
</TABLE>
13
PAGE
TEMPLETON DRAGON FUND, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
-------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
RECREATION & OTHER CONSUMER GOODS 1.8%
*KTP Holdings Ltd. ......................................... Hong Kong 766,500 $ 29,682
*KTP Holdings Ltd., wts. ................................... Hong Kong 384,350 496
Tanjong Plc. ............................................... Malaysia 1,042,000 1,182,039
Yue Yuen Industrial (Holdings) Ltd. ........................ Hong Kong 4,246,800 8,167,714
------------
9,379,931
------------
TELECOMMUNICATIONS 1.2%
*Digital Telecommunications Philippines Inc. ............... Philippines 417,000 10,184
Philippine Long Distance Telephone Co., ADR................. Philippines 70,500 1,828,594
*Thai Telephone & Telecommunication Public Co. Ltd.,
fgn. ..................................................... Thailand 13,935,500 2,071,053
*Total Access Communication Public Co. Ltd. ................ Thailand 1,256,000 2,160,320
*United Communications Industry Public Co. Ltd., loc. ...... Thailand 417,400 224,007
------------
6,294,158
------------
TEXTILES & APPAREL .6%
Goldlion Holdings Ltd. ..................................... Hong Kong 43,757,000 3,332,361
------------
TRANSPORTATION 7.9%
Cathay Pacific Airways Ltd. ................................ Hong Kong 14,523,000 14,434,425
+Chiwan Wharf Holdings Ltd., B.............................. China 9,001,800 929,548
Cross Harbour Tunnel Co. Ltd. .............................. Hong Kong 2,808,000 2,500,913
Delgro Corp. ............................................... Singapore 126,500 164,067
Guangshen Railway Co. Ltd., H............................... China 90,796,000 10,547,794
Guangshen Railway Co. Ltd., H, ADR.......................... China 334,400 2,006,400
Hai Sun Hup Group Ltd. ..................................... Singapore 134,000 33,703
IMC Holdings Ltd. .......................................... Hong Kong 362,000 35,045
*Jinzhou Harbour Co. Ltd., B................................ China 3,090,100 580,939
Keppel Corp., Ltd. ......................................... Singapore 655,000 1,754,606
Malaysian Airlines System Bhd. ............................. Malaysia 596,000 260,423
*Neptune Orient Lines Ltd. ................................. Singapore 610,000 195,939
*Osprey Maritime Ltd. ...................................... Singapore 10,000 3,091
SBS Bus Service Ltd., fgn. ................................. Singapore 136,000 138,473
+*Shanghai Dazhong Taxi Shareholding Co. Ltd., B............ China 19,172,210 8,090,673
TIBS Holdings Ltd. ......................................... Singapore 144,500 89,327
------------
41,765,366
------------
UTILITIES ELECTRICAL & GAS 7.3%
+Guangdong Electric Power Development Co Ltd., B............ China 22,239,607 6,057,062
Hong Kong Electric Holdings Ltd. ........................... Hong Kong 8,512,700 25,821,866
Shandong Huaneng Power Development Co. Ltd., ADR............ China 1,224,700 5,587,694
Wing Shan International Ltd. ............................... Hong Kong 15,536,000 1,323,535
------------
38,790,157
------------
WHOLESALE & INTERNATIONAL TRADE
Metro Holdings Ltd. ........................................ Singapore 91,000 85,485
------------
TOTAL COMMON STOCKS (COST $618,389,309)..................... 523,959,845
------------
</TABLE>
14
PAGE
TEMPLETON DRAGON FUND, INC.
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
-------------------------------------
<S> <C> <C> <C>
SHORT TERM INVESTMENTS (COST $5,445,071) 1.0%
U.S. Treasury Bills, 3.77% to 4.60% with maturities to
4/08/99................................................... United States $ 5,475,000 $ 5,446,614
------------
TOTAL INVESTMENTS (COST $623,834,380) 100.2%................ 529,406,459
OTHER ASSETS, LESS LIABILITIES (.2%)........................ (942,269)
------------
TOTAL NET ASSETS 100.0%..................................... $528,464,190
------------
------------
</TABLE>
*Non-income producing.
**Securities traded in U.S. dollars.
+Affiliated issuers (see note 6).
See Notes to Financial Statements.
15
PAGE
TEMPLETON DRAGON FUND, INC.
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (cost $623,834,380).... $ 529,406,459
Cash....................................................... 28,294
Receivables:
Investment securities sold................................ 5,652
Dividends and interest.................................... 794,374
-------------
Total assets.......................................... 530,234,779
-------------
Liabilities:
Payables:
Investment securities purchased........................... 5,329
To affiliates............................................. 652,514
Distributions to shareholders.............................. 640,916
Accrued expenses........................................... 471,830
-------------
Total liabilities..................................... 1,770,589
-------------
Net assets, at value........................................ $ 528,464,190
-------------
-------------
Net assets consist of:
Distributions in excess of net investment income........... $ (45,403)
Net unrealized depreciation................................ (94,427,921)
Accumulated net realized loss.............................. (109,436,457)
Capital shares............................................. 732,373,971
-------------
Net assets, at value........................................ $ 528,464,190
-------------
-------------
Net asset value per share ($528,464,190 / 52,859,893 shares
outstanding).............................................. $10.00
-------------
-------------
</TABLE>
See Notes to Financial Statements.
16
PAGE
TEMPLETON DRAGON FUND, INC.
Financial Statements (continued)
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM APRIL 1, 1998 TO DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
Investment Income:
(net of foreign taxes of $62,773)
Dividends.................................................. $ 15,975,016
Interest................................................... 3,607,755
------------
Total investment income............................... $ 19,582,771
-------------
Expenses:
Management fees (Note 3)................................... 5,115,409
Administrative fees (Note 3)............................... 613,848
Transfer agent fees........................................ 26,000
Custodian fees............................................. 335,000
Reports to shareholders.................................... 193,500
Registration and filing fees............................... 37,500
Professional fees.......................................... 124,000
Directors' fees and expenses............................... 35,500
Amortization of organization costs......................... 3,025
Other...................................................... 11,496
------------
Total expenses........................................ 6,495,278
-------------
Net investment income........................... 13,087,493
-------------
Realized and unrealized losses:
Net realized loss from:
Investments............................................... (88,425,002)
Foreign currency transactions............................. (23,517)
------------
Net realized loss..................................... (88,448,519)
Net unrealized depreciation on investments............ (88,830,321)
-------------
Net realized and unrealized loss............................ (177,278,840)
-------------
Net decrease in net assets resulting from operations........ $(164,191,347)
-------------
-------------
</TABLE>
See Notes to Financial Statements.
17
PAGE
TEMPLETON DRAGON FUND, INC.
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE PERIOD
APRIL 1, 1998 TO YEAR ENDED
DECEMBER 31, 1998+ MARCH 31, 1998
-----------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income..................................... $ 13,087,493 $ 19,723,937
Net realized gain (loss) from investments and foreign
currency transactions................................... (88,448,519) 13,713,305
Net unrealized depreciation on investments................ (88,830,321) (207,043,045)
-----------------------------------------
Net decrease in net assets resulting from operations.... (164,191,347) (173,605,803)
Distributions to shareholders from:
Net investment income..................................... (13,956,089) (18,632,447)
Net realized gains........................................ -- (37,941,920)
In excess of net realized gains........................... -- (22,005,953)
Tax return of capital..................................... (16,054,032) --
Capital share transactions (Note 2)........................ (10,866,955) --
-----------------------------------------
Net decrease in net assets.............................. (205,068,423) (252,186,123)
Net assets:
Beginning of year.......................................... 733,532,613 985,718,736
-----------------------------------------
End of year................................................ $ 528,464,190 $ 733,532,613
-----------------------------------------
-----------------------------------------
Undistributed net investment income/(Distributions in excess
of net investment income) included in net assets:
End of year................................................ $ (45,403) $ 1,841,207
-----------------------------------------
-----------------------------------------
</TABLE>
+Prior to this period, the Fund's fiscal year end was March 31.
See Notes to Financial Statements.
18
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
19
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. 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
On October 18, 1997, the Board of Directors of the Fund authorized management to
implement an open-market share repurchase program pursuant to which the Fund
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.
At December 31, 1998, there were 100 million shares authorized ($0.01 par
value). During the period April 1, 1998 through December 31, 1998, 1,147,200
shares were repurchased for $10,866,955. For the year ended March 31, 1998,
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).
Legal fees of $13,042 were paid to a law firm in which a partner is an officer
of the Fund.
20
PAGE
TEMPLETON DRAGON FUND, INC.
Notes to Financial Statements (continued)
4. INCOME TAXES
At December 31, 1998, the net unrealized depreciation based on the cost of
investments for income tax purposes of $626,318,205 was as follows:
<TABLE>
<S> <C>
Unrealized appreciation..................................... $ 85,108,174
Unrealized depreciation..................................... (182,019,920)
-------------
Net unrealized depreciation................................. $ (96,911,746)
-------------
-------------
</TABLE>
Net realized capital gains differ for financial statement and tax purposes
primarily due to differing treatments of wash sales and losses realized on the
sale of securities subsequent to October 31.
At December 31, 1998, the Fund had tax basis capital losses of $107,000,000
which may be carried over to offset future capital gains. Such losses expire
December 31, 2006.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended December 31, 1998 aggregated $215,227,393 and $186,077,946, respectively.
6. INVESTMENTS IN AFFILIATES
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 December 31, 1998
were $22,167,399. For the period April 1, 1998 to December 31, 1998, dividend
income from "affiliated companies" was $364,555 and net realized gains from
disposition of "affiliated companies" were $55,304.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF REALIZED
SHARES HELD GROSS GROSS SHARES HELD VALUE DIVIDEND INCOME CAPITAL
NAME OF ISSUER APR. 1, 1998 ADDITIONS REDUCTIONS DEC. 31, 1998 DEC. 31, 1998 4/1/98-12/31/98 GAIN/LOSS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
China Vanke Co............. -- 7,612,125 -- 7,612,125 $ 2,092,849 $125,344 --
Chiwan Wharf Holdings...... 9,001,800 -- -- 9,001,800 929,548 158,744 --
Gungdong Electric Power.... 185,980 22,053,627 22,239,607 6,057,062 80,467 --
Shanghai Dazhong Taxi...... 12,499,600 7,188,610 516,000 19,172,210 8,090,673 -- $ 71,361
Shanghai Jin Jiang Tower... 14,723,850 -- 156,000 14,567,850 1,281,971 -- (16,057)
Shanghai New Asia.......... 10,584,160 3,175,248 -- 13,759,408 1,761,204 -- --
Tsingtao Brewery Co........ 3,078,000 15,384,000 -- 18,462,000 1,954,092 -- --
-------------------------------------------
TOTAL AFFILIATES........... $22,167,399 $364,555 $ 55,304
-------------------------------------------
-------------------------------------------
</TABLE>
21
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 December 31,
1998, and the related statement of operations for the period from April 1, 1998
to December 31, 1998, the statements of changes in net assets for the period
from April 1, 1998 to December 31, 1998 and the year ended March 31, 1998 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
December 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 December 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
January 28, 1999
22
PAGE
TEMPLETON DRAGON FUND, INC.
Annual Meeting of Shareholders, September 29, 1998
An Annual Meeting of Shareholders of the Fund was held at the Fund's offices,
500 E. Broward Blvd., Ft. Lauderdale, Florida, on September 29, 1998. The
purpose of the meeting was to elect six 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, 1999; 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 open-end fund; and in their
discretion, to authorize the proxyholders to vote upon such other matters that
may legally come before the meeting or any adjournment of the meeting. At the
meeting, the following persons were elected by the shareholders to serve as
Directors of the Fund: Frank J. Crothers, Martin L. Flanagan, Andrew H. Hines,
Jr., Edith E. Holiday, Charles B. Johnson, and Constantine D. Tseretopoulos.*
Shareholders ratified the selection of McGladrey & Pullen, LLP, to serve as the
Fund's independent auditors for the fiscal year ending March 31, 1999.
Shareholders voted to reject 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 open-end fund. No
other business was transacted at the meeting.
The results of the voting at the Annual Meeting are as follows:
1. The election of six (6) Directors:
<TABLE>
<CAPTION>
% OF % OF
OUTSTANDING OUTSTANDING
TERM EXPIRING 1999: FOR SHARES WITHHELD SHARES
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Frank J. Crothers........................................... 43,769,006 82.80% 2,764,469 5.23%
Constantine D. Tseretopoulos................................ 43,721,843 82.71% 2,811,632 5.32%
TERM EXPIRING 2001:
- --------------
Martin L. Flanagan.......................................... 43,822,876 82.90% 2,710,599 5.13%
Andrew H. Hines, Jr......................................... 43,656,190 82.59% 2,877,285 5.44%
Edith E. Holiday............................................ 43,754,374 82.77% 2,779,101 5.26%
Charles B. Johnson.......................................... 43,895,763 83.04% 2,637,712 4.99%
</TABLE>
2. The ratification of the selection of McGladrey & Pullen, LLP, as independent
auditors for the Fund for the fiscal year ending March 31, 1999:
<TABLE>
<CAPTION>
% OF % OF % OF
OUTSTANDING OUTSTANDING OUTSTANDING
FOR SHARES AGAINST SHARES ABSTAIN SHARES
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
44,160,359 83.54% 1,584,167 3.00% 788,947 1.49%
</TABLE>
3. The 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 open-end 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>
7,518,096 14.22% 18,929,368 35.81% 3,429,203 6.49% 16,656,808 31.51%
</TABLE>
*Harris J. Ashton, Nicholas F. Brady, S. Joseph Fortunato, John Wm. Galbraith,
Betty P. Krahmer, Gordon S. Macklin, and Fred R. Millsaps are Directors of the
Fund who are currently serving and whose terms of office continued after the
Annual Meeting of Shareholders.
23
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.
24
PAGE
TEMPLETON DRAGON FUND, INC.
TRANSFER AGENT
ChaseMellon Shareholder Services, L.L.C.
85 Challenger Road
Overpeck Centre
Ridgefield Park, NJ 07660
1-800/416-5585
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 distributions 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 7
a.m. Pacific Time any business day at 1-800-DIAL BEN(R) (1-800-342-5236).
Shareholders not receiving copies of the Reports to Shareholders because their
shares are registered in the name of a broker or a custodian can request that
they be added to the Fund's mailing list, by writing Templeton Dragon Fund,
Inc., 100 Fountain Parkway, P.O. Box 33030, St. Petersburg, FL 33733-8030.
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
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
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 Utilities Fund
Franklin Value Fund
Mutual Beacon Fund
Mutual Financial Services Fund
Mutual Qualified Fund
Mutual Shares Fund
FUND ALLOCATOR SERIES
Franklin Templeton Conservative Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton Growth Target Fund
INCOME
Franklin Adjustable U.S. Government Securities Fund
Franklin's AGE High Income Fund
Franklin Bond Fund
Franklin Floating Rate Trust
Franklin Investment Grade Income Fund
Franklin Short-Intermediate U.S. Government Securities Fund
Franklin Strategic Income Fund
Franklin U.S. Government Securities Fund
Franklin Federal Money Fund
Franklin 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**
California**
Colorado
Connecticut
Florida**
Georgia
Kentucky
Louisiana
Maryland
Massachusetts+
Michigan+
Minnesota+
Missouri
New Jersey
New York**
North Carolina
Ohio+
Oregon
Pennsylvania
Tennessee***
Texas
Virginia
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.
01/99
PAGE
ANNUAL REPORT
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
ChaseMellon Shareholder Services
85 Challenger Road
Overpeck Centre
Ridgefield Park, New Jersey 07660
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 its 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 detected
by the presence of a regular beeping tone.
TLTDF A98 02/99 [Recycle LOGO] Printed on recycled paper
