UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-08394
TEMPLETON DRAGON FUND, INC.
(Exact name of registrant as specified in charter)
500 EAST BROWARD BLVD., SUITE 2100, FORT LAUDERDALE, FL 33394-3091
(Address of principal executive offices) (Zip code)
CRAIG S. TYLE, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
(Name and address of agent for service)
Registrant's telephone number, including area code: (954) 527-7500_
Date of fiscal year end: 12/31
Date of reporting period: 06/30/07
ITEM 1. REPORTS TO STOCKHOLDERS.
[GRAPHIC OMITTED]
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JUNE 30, 2007
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SEMIANNUAL REPORT AND SHAREHOLDER INFORMATION INTERNATIONAL
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TEMPLETON DRAGON FUND, INC.
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[LOGO](R)
FRANKLIN TEMPLETON
INVESTMENTS
Franklin o TEMPLETON o Mutual Series
Franklin Templeton Investments
GAIN FROM OUR PERSPECTIVE
Franklin Templeton's distinct multi-manager
structure combines the specialized expertise of
three world-class investment management groups--
Franklin, Templeton and Mutual Series.
SPECIALIZED EXPERTISE Each of our portfolio management groups operates
autonomously, relying on its own research and
staying true to the unique investment disciplines
that underlie its success.
FRANKLIN. Founded in 1947, Franklin is a
recognized leader in fixed income investing and
also brings expertise in growth- and value-style
U.S. equity investing.
TEMPLETON. Founded in 1940, Templeton pioneered
international investing and, in 1954, launched
what has become the industry's oldest global
fund. Today, with offices in over 25 countries,
Templeton offers investors a truly global
perspective.
MUTUAL SERIES. Founded in 1949, Mutual Series is
dedicated to a unique style of value investing,
searching aggressively for opportunity among what
it believes are undervalued stocks, as well as
arbitrage situations and distressed securities.
TRUE DIVERSIFICATION Because our management groups work independently
and adhere to different investment approaches,
Franklin, Templeton and Mutual Series funds
typically have distinct portfolios. That's why
our funds can be used to build truly diversified
allocation plans covering every major asset
class.
RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to
consistently provide investors with exceptional
risk-adjusted returns over the long term, as well
as the reliable, accurate and personal service
that has helped us become one of the most trusted
names in financial services.
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MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
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[GRAPHIC OMITTED]
Not part of the semiannual report
Contents
IMPORTANT NOTICE TO SHAREHOLDERS .......................................... 1
SEMIANNUAL REPORT
Templeton Dragon Fund, Inc. ............................................... 2
Performance Summary ....................................................... 7
Financial Highlights and Statement of Investments ......................... 8
Financial Statements ...................................................... 13
Notes to Financial Statements ............................................. 16
Annual Meeting of Shareholders ............................................ 23
Dividend Reinvestment and Cash Purchase Plan .............................. 24
Shareholder Information .................................................. 27
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Important Notice to Shareholders
REPURCHASE PROGRAM
In December 2004, the Board of Directors of the Fund authorized management to
re-implement the Fund's open-market share repurchase program, which was
originally implemented in October 1997. The Fund's Board of Directors had
discontinued the open-market share repurchase program in May 2002, in connection
with the Fund's previously conducted tender offers. Under the program, the Fund
may purchase, from time to time, shares of the Fund's common stock in
open-market transactions, at the discretion of the Fund's investment manager.
Not part of the semiannual report | 1
Semiannual Report
Templeton Dragon Fund, Inc.
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Templeton Dragon Fund seeks long-term
capital appreciation by investing at least 45% of its total assets in equity
securities of "China companies," as defined in the Fund's prospectus.
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GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 6/30/07
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
China 53.3%
Hong Kong 27.0%
Taiwan 15.2%
U.K. 2.2%
Other 1.3%
Short-Term Investments & Other Net Assets 1.0%
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Dear Shareholder:
This semiannual report for Templeton Dragon Fund covers the period ended June
30, 2007.
PERFORMANCE OVERVIEW
Templeton Dragon Fund posted cumulative total returns of +5.07% in market price
terms and +20.61% in net asset value terms for the six months under review. You
can find the Fund's long-term performance data in the Performance Summary on
page 7.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 9.
2 | Semiannual Report
ECONOMIC AND MARKET OVERVIEW
During the six months under review, emerging market equities recorded strong
positive performance, despite volatility in Asia. A sharp sell-off in China's
Shanghai (A shares) stock market in late February triggered widespread selling
that resonated throughout the global markets. Furthermore, investor concerns
about weakness in the U.S. subprime mortgage market and its implications for the
greater economy, as well as currency volatility led to more selling. Although
some investors chose to lock in gains accrued over the past few years, most
concerns proved to be short-lived as investor confidence was restored in the
second half of the reporting period. Many market participants used the
correction as an opportunity to build positions at more attractive prices.
In February, China's A shares market correction preceded the annual National
People's Congress meeting in March against an uncertain backdrop of feverish
growth rates and record high valuations. The government attempted to cool the
economy by tripling the stamp duty paid on share transactions to 0.3%, which
subsequently, in May, led to the Chinese stock market's largest single-day
decline since February. Although both corrections were relatively brief, the
scope of February's adjustment was widespread, whereas May's drop was limited
mostly to Asia. Chinese stocks overcame the volatility and ended the period with
gains as investors remained confident in the country's rapidly growing economy.
China's expansion of the Qualified Domestic Institutional Investor (QDII)
program that allows domestic fund managers and brokerages to invest in foreign
securities provided a boost to Hong Kong-listed H and Red Chip shares as these
companies were expected to attract significant fund flows from China's domestic
investors.
INVESTMENT STRATEGY
Our investment strategy employs a fundamental, value-oriented, long-term
approach. In selecting companies for investment, we will consider overall growth
prospects, competitive positions in export markets, technologies, research and
development, productivity, labor costs, raw material costs and sources, profit
margins, returns on investment, capital resources, government regulation,
management and other factors in comparison to other companies around the world
that we believe are comparable.
Our approach to selecting investments emphasizes fundamental company-by-company
analysis (rather than broader analyses of specific industries or
TOP 10 HOLDINGS
6/30/07
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COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
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Dairy Farm International Holdings Ltd. 13.3%
FOOD & STAPLES RETAILING, HONG KONG
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China Petroleum and Chemical Corp., H 9.7%
OIL, GAS & CONSUMABLE FUELS, CHINA
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China Mobile Ltd. 9.0%
WIRELESS TELECOMMUNICATION SERVICES,
CHINA
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PetroChina Co. Ltd., H & 144A 5.9%
OIL, GAS & CONSUMABLE FUELS, CHINA
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China Construction Bank Corp., 4.2%
H & 144A
COMMERCIAL BANKS, CHINA
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CNOOC Ltd., ord & 144A 3.6%
OIL, GAS & CONSUMABLE FUELS, CHINA
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Cheung Kong Infrastructure Holdings Ltd. 3.5%
ELECTRIC UTILITIES, HONG KONG
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Asustek Computer Inc. 2.9%
COMPUTERS & PERIPHERALS, TAIWAN
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Citic Pacific Ltd. 2.9%
INDUSTRIAL CONGLOMERATES, HONG KONG
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China International Marine 2.6%
Containers (Group) Co. Ltd., B
MACHINERY, CHINA
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Semiannual Report | 3
sectors of the economy), to construct an "action list" from which we make our
buy decisions. Although we will consider historical value measures, the primary
factor in selecting securities for investment by the Fund will be the company's
current price relative to its long-term earnings potential.
MANAGER'S DISCUSSION
During the six months under review, the Fund benefited from its exposure to the
energy, food and staples retailing, and capital goods sectors. 1
A rebound in oil prices during the reporting period and growing demand for
energy and commodities in China and other emerging markets benefited many of the
Fund's energy sector investments. Among the Fund's most significant contributors
to performance were China Petroleum & Chemical (Sinopec), China's largest
integrated energy company; China Shenhua Energy, China's principal coal
producer; and CNOOC, China's largest offshore oil and natural gas exploration
and production company.
Within food and staples retailing, the Fund's only sector holding was its
investment in Dairy Farm International Holdings, which operates supermarkets,
drugstores, convenience stores and restaurants in Asia. The stock performed well
largely due to greater private consumption in the region. Capital goods
companies that recorded significant price appreciation during the reporting
period included industrial conglomerates Citic Pacific and Shanghai Industrial
Holdings, and China International Marine Containers (Group), the world's largest
manufacturer of marine containers.
In contrast, the insurance; food, beverage and tobacco; and media sectors
detracted from performance. 2 A position in China Life Insurance, the Fund's
only insurance sector investment, was among the most significant detractors from
performance during the reporting period. Lagging results in the food, beverage
and tobacco, and media sectors were largely due to the negative performance of
relatively small holdings in new Fund position Xiwang Sugar Holdings, a leading
glucose manufacturer in China and Next Media, one of the largest
Chinese-language print media companies in Hong Kong. Although increased
competition from free daily publications pressured Next Media's stock price
during the reporting period, we believed the company's growing penetration into
the Taiwan market was positive for its long-term prospects. Our outlook for
Xiwang was also positive at period-end, as we believed the company could benefit
from a rapidly growing food-processing industry that
1. The energy sector comprises oil, gas and consumable fuels in the SOI. The
capital goods sector comprises electrical equipment, industrial conglomerates
and machinery in the SOI.
2. The food, beverage and tobacco sector comprises food products in the SOI.
4 | Semiannual Report
continues to evolve to keep pace with the changing consumption patterns of a
large domestic market.
Other detractors from performance included several of the Fund's bank holdings
such as Industrial and Commercial Bank of China, Mega Financial Holding and Bank
of China. Our industry outlook was positive at period-end, as we believed
continued liberalization of the financial sector could unlock hidden value and
allow banks to benefit from the growing financial needs of consumers in the
greater China region.
During the review period, the Fund made several major purchases in Hong
Kong-listed Chinese H shares, which we believed were attractively valued and
might benefit from the expanded QDII program. New Fund H share positions
included major commercial banks China Construction Bank and Bank of China;
Dongfeng Motor, one of China's leading automobile manufacturers; and Yanzhou
Coal Mining, a major coal producer in China.
With oil prices expected to remain high, we increased our investments in the oil
and gas exploration and production, and coal and consumable fuels industries. 3
Coupled with growing global energy demand, companies in these industries could
experience higher earnings. Greater demand for consumer products and services
led us to increase our holdings in the automobile manufacturers, integrated
telecommunication services, packaged food and meat, and apparel retail
industries. 4 New Fund positions included China Netcom Group, the dominant
telecommunication services provider in Northern China, and I.T., a major fashion
retail operator in Hong Kong. The Fund also initiated exposure to Cambodia with
an investment in NagaCorp. The company manages and operates the only licensed
casino in Cambodia's capital, Phnom Penh.
During the period, the Fund undertook selective sales in Hong Kong, China Red
Chip shares and the U.K. to realize gains and raise cash for the Fund's dividend
and capital gains distribution. The Fund reduced its positions in China Mobile,
the dominant mobile services provider in China, and Cheung Kong Holdings, a
major property developer in Hong Kong. The Fund significantly reduced its
position in U.K.-based HSBC Holdings, one of the world's largest banking and
financial services organizations.
3. The oil and gas exploration and production industry; and the coal and
consumable fuels industry are part of oil, gas and consumable fuels in the SOI.
4. The automobile manufacturers industry is part of automobiles and auto
components in the SOI. The integrated telecommunication services industry is
part of diversified telecommunication services in the SOI. The packaged food and
meat industry is part of food products in the SOI. The apparel retail industry
is part of specialty retail in the SOI.
Semiannual Report | 5
Thank you for your continued participation in Templeton Dragon Fund. We look
forward to serving your future investment needs.
Sincerely,
[PHOTO OMITTED] /s/ Mark Mobius
Mark Mobius
Executive Chairman
Templeton Asset Management Ltd.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF JUNE 30, 2007, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
6 | Semiannual Report
Performance Summary as of 6/30/07
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses. Capital
gain distributions are net profits realized from the sale of portfolio
securities. Total return reflects reinvestment of the Fund's dividends and
capital gain distributions, if any, and any unrealized gains or losses. Total
returns do not reflect any taxes that a shareholder would pay on Fund dividends,
capital gain distributions, if any, or any unrealized gains on the sale of Fund
shares.
PRICE AND DISTRIBUTION INFORMATION
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SYMBOL: TDF CHANGE 6/30/07 12/31/06
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Net Asset Value (NAV) +$4.06 $31.01 $26.95
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Market Price (NYSE) +$0.04 $26.30 $26.26
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DISTRIBUTIONS (1/1/07-6/30/07)
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Dividend Income $0.3339
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Short-Term Capital Gain $0.0252
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Long-Term Capital Gain $0.8581
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TOTAL $1.2172
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PERFORMANCE
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6-MONTH 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return 1
Based on change in NAV 2 +20.61% +52.64% +287.39% +211.66%
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Based on change in market price 3 +5.07% +42.68% +269.32% +261.49%
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Average Annual Total Return 1
Based on change in NAV 2 +20.61% +52.64% +31.11% +12.04%
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Based on change in market price 3 +5.07% +42.68% +29.87% +13.71%
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PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN.
ENDNOTES
SPECIAL RISKS ARE ASSOCIATED WITH FOREIGN INVESTING, INCLUDING CURRENCY
VOLATILITY, ECONOMIC INSTABILITY AND POLITICAL DEVELOPMENTS OF COUNTRIES WHERE
THE FUND INVESTS. EMERGING MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME
FACTORS, IN ADDITION TO THOSE ASSOCIATED WITH THEIR RELATIVELY SMALL SIZE AND
LESSER LIQUIDITY. ALSO, AS A NONDIVERSIFIED INVESTMENT COMPANY INVESTING IN
"CHINA COMPANIES," THE FUND MAY INVEST IN A RELATIVELY SMALL NUMBER OF ISSUERS
AND, AS A RESULT, BE SUBJECT TO A GREATER RISK OF LOSS WITH RESPECT TO ITS
PORTFOLIO SECURITIES.
1. Total return calculations represent the cumulative and average annual changes
in value of an investment over the periods indicated. Six-month return has not
been annualized.
2. Assumes reinvestment of distributions based on net asset value.
3. Assumes reinvestment of distributions based on the dividend reinvestment and
cash purchase plan.
Semiannual Report | 7
Templeton Dragon Fund, Inc.
FINANCIAL HIGHLIGHTS
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SIX MONTHS ENDED
JUNE 30, 2007 YEAR ENDED DECEMBER 31,
(UNAUDITED) 2006 2005 2004 2003 2002
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PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .............. $ 26.95 $ 21.80 $ 18.70 $ 16.62 $ 9.73 $ 8.82
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Income from investment operations:
Net investment income a ........................ 0.26 0.38 0.59 0.25 0.56 0.17
Net realized and unrealized gains (losses) ..... 5.02 7.12 3.28 2.39 6.75 0.81
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Total from investment operations .................. 5.28 7.50 3.87 2.64 7.31 0.98
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Capital share repurchases ......................... -- -- -- -- 0.14 0.10
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Less distributions from:
Net investment income .......................... (0.34) (0.37) (0.41) (0.16) (0.56) (0.17)
Net realized gains ............................. (0.88) (1.98) (0.36) (0.40) -- --
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Total distributions ............................... (1.22) (2.35) (0.77) (0.56) (0.56) (0.17)
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Net asset value, end of period .................... $ 31.01 $ 26.95 $ 21.80 $ 18.70 $ 16.62 $ 9.73
===============================================================================
Market value, end of period b ..................... $ 26.30 $ 26.26 $ 19.18 $ 17.47 $ 17.99 $ 8.92
===============================================================================
Total return (based on market value per share) c .. 5.07% 49.56% 14.08% 0.36% 108.44% 21.22%
RATIOS TO AVERAGE NET ASSETS d
Expenses .......................................... 1.49% e 1.49% e 1.52% e 1.52% e 1.64% f 1.62%
Net investment income ............................. 1.89% 1.61% 2.92% 1.45% 4.57% 1.80%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ................. $ 1,174,588 $1,017,910 $823,243 $706,138 $626,959 $431,779
Portfolio turnover rate ........................... 8.91% 18.83% 8.84% 19.42% 29.91% 15.75%
a Based on average daily shares outstanding.
b Based on the last sale on the New York Stock Exchange.
c Total return is not annualized for periods less than one year.
d Ratios are annualized for periods less than one year.
e Benefit of expense reduction rounds to less than 0.01%.
f Ratio of expenses to average net assets, excluding payments by affiliate was
1.78%.
8 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Templeton Dragon Fund, Inc.
STATEMENT OF INVESTMENTS, JUNE 30, 2007 (UNAUDITED)
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COUNTRY SHARES VALUE
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COMMON STOCKS 99.0%
AIR FREIGHT & LOGISTICS 0.3%
Shenzhen International Holdings Ltd. ........................................ China 16,783,000 $ 1,845,913
Sinotrans Ltd., H ........................................................... China 3,017,000 1,427,645
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3,273,558
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AUTO COMPONENTS 1.6%
Cheng Shin Rubber Industry Co. Ltd. ......................................... Taiwan 9,831,207 12,611,811
Norstar Founders Group Ltd. ................................................. Hong Kong 13,376,000 6,483,488
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19,095,299
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AUTOMOBILES 1.0%
a Brilliance China Automotive Holdings Ltd. ................................... China 2,230,000 561,842
Chongqing Changan Automobile Co. Ltd., B .................................... China 1,069,169 1,255,256
Dongfeng Motor Corp., H ..................................................... China 19,270,000 10,252,229
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12,069,327
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COMMERCIAL BANKS 11.7%
a Bank of China Ltd., H ....................................................... China 15,400,000 7,641,800
a,b Bank of China Ltd., H, 144A ................................................. China 20,840,000 10,341,241
China Construction Bank Corp., H ............................................ China 33,917,000 23,336,888
b China Construction Bank Corp., H, 144A ...................................... China 38,097,000 26,212,974
Chinatrust Financial Holding Co. Ltd. ....................................... Taiwan 11,281,896 8,821,519
HSBC Holdings PLC ........................................................... United Kingdom 1,420,898 25,895,303
b Industrial and Commercial Bank of China, H, 144A ............................ China 31,104,000 17,264,309
Mega Financial Holding Co. Ltd. ............................................. Taiwan 26,847,000 18,245,136
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137,759,170
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COMMUNICATIONS EQUIPMENT 0.7%
D-Link Corp. ................................................................ Taiwan 3,320,962 7,911,883
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COMPUTERS & PERIPHERALS 4.8%
Acer Inc. ................................................................... Taiwan 3,582,621 7,331,570
Advantech Co. Ltd. .......................................................... Taiwan 1,644,865 5,275,224
Asustek Computer Inc. ....................................................... Taiwan 12,357,049 34,119,646
Compal Electronics Inc. ..................................................... Taiwan 2,222,000 2,409,316
Lite-On IT Corp. ............................................................ Taiwan 3,506,760 3,663,140
Lite-On Technology Corp. .................................................... Taiwan 2,821,424 3,649,582
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56,448,478
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DISTRIBUTORS 2.4%
China Resources Enterprise Ltd. ............................................. Hong Kong 7,454,000 28,027,215
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DIVERSIFIED TELECOMMUNICATION SERVICES 2.1%
China Netcom Group Corp. (Hong Kong) Ltd. ................................... China 1,848,000 5,105,037
China Telecom Corp. Ltd., H ................................................. China 32,240,000 18,966,889
---------------
24,071,926
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ELECTRIC UTILITIES 3.5%
Cheung Kong Infrastructure Holdings Ltd. .................................... Hong Kong 11,060,000 40,807,894
---------------
ELECTRICAL EQUIPMENT 1.1%
BYD Co. Ltd., H ............................................................. China 1,193,500 6,861,125
Phoenixtec Power Co. Ltd. ................................................... Taiwan 5,610,945 5,929,710
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12,790,835
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Semiannual Report | 9
Templeton Dragon Fund, Inc.
STATEMENT OF INVESTMENTS, JUNE 30, 2007 (UNAUDITED) (CONTINUED)
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COUNTRY SHARES VALUE
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COMMON STOCKS (CONTINUED)
ELECTRONIC EQUIPMENT & INSTRUMENTS 1.1%
AU Optronics Corp. .......................................................... Taiwan 6,723,000 $ 11,499,328
Yorkey Optical International Cayman Ltd. .................................... China 4,383,000 1,625,596
---------------
13,124,924
---------------
FOOD & STAPLES RETAILING 13.3%
Dairy Farm International Holdings Ltd. ...................................... Hong Kong 34,636,578 156,557,333
---------------
FOOD PRODUCTS 0.7%
Luzhou Bio-Chem Technology Ltd. ............................................. Singapore 2,503,000 1,029,671
People's Food Holdings Ltd. ................................................. China 3,045,000 3,718,143
Uni-President Enterprises Corp. ............................................. Taiwan 2,248,030 2,259,016
Xiwang Sugar Holdings Co. Ltd. .............................................. Hong Kong 2,856,000 1,493,911
---------------
8,500,741
---------------
HOTELS, RESTAURANTS & LEISURE 0.5%
The Hongkong and Shanghai Hotels Ltd. ....................................... Hong Kong 822,856 1,454,371
NagaCorp Ltd. ............................................................... Cambodia 14,501,000 4,042,943
---------------
5,497,314
---------------
HOUSEHOLD DURABLES 0.1%
Samson Holding Ltd. ......................................................... Hong Kong 1,942,000 1,005,883
---------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 3.4%
Datang International Power Generation Co. Ltd., H ........................... China 17,204,000 26,579,059
Guangdong Electric Power Development Co. Ltd., B ............................ China 8,604,300 7,923,029
Huadian Power International Corp. Ltd., H ................................... China 8,404,000 4,352,956
Huaneng Power International Inc., H ......................................... China 1,454,000 1,651,280
---------------
40,506,324
---------------
INDUSTRIAL CONGLOMERATES 5.1%
Citic Pacific Ltd. .......................................................... Hong Kong 6,740,000 33,833,178
Shanghai Industrial Holdings Ltd. ........................................... China 6,850,000 26,281,797
---------------
60,114,975
---------------
INSURANCE 0.4%
China Life Insurance Co. Ltd., H ............................................ China 1,452,000 5,218,145
---------------
IT SERVICES 0.4%
SinoCom Software Group Ltd. ................................................. China 1,010,000 204,090
Travelsky Technology Ltd., H ................................................ China 5,674,000 4,854,659
---------------
5,058,749
---------------
MACHINERY 2.6%
China International Marine Containers (Group) Co. Ltd., B ................... China 12,375,023 30,624,585
---------------
MEDIA 0.1%
b Next Media Ltd., 144A ....................................................... Hong Kong 4,974,000 1,698,479
---------------
METALS & MINING 0.1%
Aluminum Corp. of China Ltd., H ............................................. China 1,028,000 1,732,813
---------------
10 | Semiannual Report
Templeton Dragon Fund, Inc.
STATEMENT OF INVESTMENTS, JUNE 30, 2007 (UNAUDITED) (CONTINUED)
-----------------------------------------------------------------------------------------------------------------------------------
COUNTRY SHARES VALUE
-----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
OIL, GAS & CONSUMABLE FUELS 22.2%
a,b China Coal Energy Co., H, 144A .............................................. China 1,367,000 $ 2,048,988
China Petroleum and Chemical Corp., H ....................................... China 103,150,000 114,111,279
China Shenhua Energy Co. Ltd., H ............................................ China 6,448,000 22,512,872
CNOOC Ltd. .................................................................. China 22,727,000 25,752,481
b CNOOC Ltd., 144A ............................................................ China 14,270,000 16,169,661
PetroChina Co. Ltd., H ...................................................... China 45,320,000 66,770,651
b PetroChina Co. Ltd., H, 144A ................................................ China 1,512,000 2,227,653
Yanzhou Coal Mining Co. Ltd., H ............................................. China 7,680,000 11,727,590
---------------
261,321,175
---------------
PHARMACEUTICALS 0.2%
Tong Ren Tang Technologies Co. Ltd., H ...................................... China 679,000 1,823,611
---------------
REAL ESTATE 1.5%
Cheung Kong (Holdings) Ltd. ................................................. Hong Kong 1,167,000 15,283,191
Henderson Investment Ltd. ................................................... Hong Kong 1,271,000 1,830,321
---------------
17,113,512
---------------
REAL ESTATE MANAGEMENT & DEVELOPMENT 0.1%
a,b Country Garden Holdings Co., 144A ........................................... China 744,000 628,001
---------------
ROAD & RAIL 0.0% c
MTR Corp. Ltd. .............................................................. Hong Kong 17,181 40,694
---------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 4.5%
Novatek Microelectronics Corp. Ltd. ......................................... Taiwan 1,232,000 6,472,328
Samsung Electronics Co. Ltd. ................................................ South Korea 10,780 6,604,048
a Semiconductor Manufacturing International Corp. ............................. China 16,312,000 2,232,206
Sunplus Technology Co. Ltd. ................................................. Taiwan 3,456,617 8,646,821
Taiwan Semiconductor Manufacturing Co. Ltd. ................................. Taiwan 13,268,914 28,734,453
---------------
52,689,856
---------------
SPECIALTY RETAIL 0.1%
I.T. Ltd. ................................................................... Hong Kong 5,772,000 1,262,309
---------------
TEXTILES, APPAREL & LUXURY GOODS 0.6%
Tack Fat Group International Ltd. ........................................... Hong Kong 19,824,000 3,371,989
Tainan Enterprises Co. Ltd. ................................................. Taiwan 1,641,104 2,676,694
Weiqiao Textile Co. Ltd., H ................................................. China 363,000 814,291
---------------
6,862,974
---------------
TRANSPORTATION INFRASTRUCTURE 3.1%
Cosco Pacific Ltd. .......................................................... China 3,354,000 8,793,468
Hopewell Holdings Ltd. ...................................................... Hong Kong 5,876,000 23,972,631
a,b Rickmers Maritime, 144A ..................................................... Singapore 2,904,000 3,242,574
---------------
36,008,673
---------------
WIRELESS TELECOMMUNICATION SERVICES 9.7%
China Mobile Ltd. ........................................................... China 9,820,000 105,432,722
Taiwan Mobile Co. Ltd. ...................................................... Taiwan 6,787,764 8,344,762
---------------
113,777,484
---------------
TOTAL COMMON STOCKS (COST $516,271,202) ..................................... 1,163,424,139
---------------
Semiannual Report | 11
Templeton Dragon Fund, Inc.
STATEMENT OF INVESTMENTS, JUNE 30, 2007 (UNAUDITED) (CONTINUED)
-----------------------------------------------------------------------------------------------------------------------------------
COUNTRY SHARES VALUE
-----------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENT (COST $4,370,753) 0.4%
MONEY MARKET FUND 0.4%
d Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.99% ........ United States 4,370,753 $ 4,370,753
---------------
TOTAL INVESTMENTS (COST $520,641,955) 99.4% ................................. 1,167,794,892
OTHER ASSETS, LESS LIABILITIES 0.6% ......................................... 6,792,757
---------------
NET ASSETS 100.0% ........................................................... $ 1,174,587,649
===============
a Non-income producing for the twelve months ended June 30, 2007.
b Security was purchased pursuant to Rule 144A under the Securities Act of 1933
and may be sold in transactions exempt from registration only to qualified
institutional buyers or in a public offering registered under the Securities Act
of 1933. These securities have been deemed liquid under guidelines approved by
the Fund's Board of Directors. At June 30, 2007, the aggregate value of these
securities was $79,833,880, representing 6.80% of net assets.
c Rounds to less than 0.1% of net assets.
d See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust
Money Market Portfolio. The rate shown is the annualized seven-day yield at
period end.
12 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Templeton Dragon Fund, Inc.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
June 30, 2007 (unaudited)
Assets:
Investments in securities:
Cost - Unaffiliated issuers ............................... $ 516,271,202
Cost - Sweep Money Fund (Note 7) .......................... 4,370,753
--------------
Total cost of investments ................................. $ 520,641,955
==============
Value - Unaffiliated issuers .............................. $1,163,424,139
Value - Sweep Money Fund (Note 7) ......................... 4,370,753
--------------
Total value of investments ................................ 1,167,794,892
Cash ........................................................ 1,490,371
Foreign currency, at value (cost $110,967) .................. 110,959
Receivables:
Investment securities sold ................................ 4,413,601
Dividends ................................................. 2,268,763
--------------
Total assets ............................................ 1,176,078,586
--------------
Liabilities:
Payables:
Affiliates ................................................ 1,263,838
Accrued expenses and other liabilities ...................... 227,099
--------------
Total liabilities ....................................... 1,490,937
--------------
Net assets, at value .................................. $1,174,587,649
==============
Net assets consist of:
Paid-in capital ............................................. $ 458,884,920
Undistributed net investment income ......................... 9,730,527
Net unrealized appreciation (depreciation) .................. 647,161,631
Accumulated net realized gain (loss) ........................ 58,810,571
==============
Net assets, at value .................................. $1,174,587,649
==============
Shares outstanding ............................................ 37,873,327
==============
Net asset value per share ..................................... $ 31.01
==============
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 13
Templeton Dragon Fund, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the six months ended June 30, 2007 (unaudited)
Investment income:
Dividends (net of foreign taxes of $250,914)
Unaffiliated issuers ..................................................... $ 16,802,262
Sweep Money Fund (Note 7) ................................................ 567,388
Interest (net of foreign taxes of $472) .................................... 1,898
-------------
Total investment income ................................................ 17,371,548
-------------
Expenses:
Management fees (Note 3a) .................................................. 6,415,382
Administrative fees (Note 3b) .............................................. 753,654
Transfer agent fees ........................................................ 65,090
Custodian fees (Note 4) .................................................... 255,607
Reports to shareholders .................................................... 40,691
Registration and filing fees ............................................... 17,975
Professional fees .......................................................... 56,355
Directors' fees and expenses ............................................... 24,727
Other ...................................................................... 20,190
-------------
Total expenses ......................................................... 7,649,671
Expense reductions (Note 4) ............................................ (10,516)
-------------
Net expenses ......................................................... 7,639,155
-------------
Net investment income .............................................. 9,732,393
-------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments .............................................................. 58,963,080
Foreign currency transactions ............................................ 66,200
-------------
Net realized gain (loss) ............................................. 59,029,280
-------------
Net change in unrealized appreciation (depreciation) on:
Investments ................................................................ 131,223,530
Translation of assets and liabilities denominated in foreign currencies .... 8,320
-------------
Net change in unrealized appreciation (depreciation) ................. 131,231,850
-------------
Net realized and unrealized gain (loss) ...................................... 190,261,130
-------------
Net increase (decrease) in net assets resulting from operations .............. $ 199,993,523
=============
14 | The accompanying notes are an integral part of these financial statements.
| Semiannual Report
Templeton Dragon Fund, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
-------------------------------------
SIX MONTHS ENDED
JUNE 30, 2007 YEAR ENDED
(UNAUDITED) DECEMBER 31, 2006
-------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income .............................................................. $ 9,732,393 $ 14,446,350
Net realized gain (loss) from investments and foreign currency transactions ........ 59,029,280 100,452,988
Net change in unrealized appreciation (depreciation) on investments and
translation of assets and liabilities denominated in foreign currencies .......... 131,231,850 168,625,532
=====================================
Net increase (decrease) in net assets resulting from operations ................ 199,993,523 283,524,870
=====================================
Distributions to shareholders from:
Net investment income .............................................................. (12,645,904) (14,005,159)
Net realized gains ................................................................. (33,453,551) (74,852,814)
=====================================
Total distributions to shareholders .................................................. (46,099,455) (88,857,973)
=====================================
Capital shares transactions: (Note 2) ................................................ 2,783,627 --
=====================================
Net increase (decrease) in net assets .......................................... 156,677,695 194,666,897
Net assets:
Beginning of period .................................................................. 1,017,909,954 823,243,057
-------------------------------------
End of period ........................................................................ $ 1,174,587,649 $ 1,017,909,954
=====================================
Undistributed net investment income included in net assets:
End of period ........................................................................ $ 9,730,527 $ 12,644,038
=====================================
Semiannual Report |
The accompanying notes are an integral part of these financial statements. | 15
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Templeton Dragon Fund, Inc. (the Fund) is registered under the Investment
Company Act of 1940, as amended, (the 1940 Act) as a non-diversified, closed-end
investment company.
The following summarizes the Fund's significant accounting policies.
A. SECURITY VALUATION
Securities listed on a securities exchange or on the NASDAQ National Market
System are valued at the last quoted sale price or the official closing price of
the day, respectively. Over-the-counter securities and listed securities for
which there is no reported sale are valued within the range of the most recent
quoted bid and ask prices. Securities that trade in multiple markets or on
multiple exchanges are valued according to the broadest and most representative
market. Investments in open-end mutual funds are valued at the closing net asset
value.
Foreign securities are valued as of the close of trading on the foreign stock
exchange on which the security is primarily traded, or the NYSE, whichever is
earlier. If no sale is reported at that time, the foreign security will be
valued within the range of the most recent quoted bid and ask prices. The value
is then converted into its U.S. dollar equivalent at the foreign exchange rate
in effect at the close of the NYSE on the day that the value of the foreign
security is determined.
The Fund has procedures to determine the fair value of individual securities and
other assets for which market prices are not readily available or which may not
be reliably priced. Methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into question
the availability (including the reliability) of the value of a portfolio
security held by the Fund. The investment manager monitors price movements
following the close of trading in foreign stock markets through a series of
country specific market proxies (such as baskets of American Depository
Receipts, futures contracts and exchange traded funds). These price movements
are measured against established trigger thresholds for each specific market
proxy to assist in determining if an event has occurred. If such an event
occurs, the securities may be valued using fair value procedures, which may
include the use of independent pricing services. All security valuation
procedures are approved by the Fund's Board of Directors.
16 | Semiannual Report
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
B. FOREIGN CURRENCY TRANSLATION
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Fund's Board of Directors.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments on the
Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
C. FOREIGN CURRENCY CONTRACTS
When the Fund purchases or sells foreign securities it may enter into foreign
exchange contracts to minimize foreign exchange risk from the trade date to the
settlement date of the transactions. A foreign exchange contract is an agreement
between two parties to exchange different currencies at an agreed upon exchange
rate at a future date. Realized and unrealized gains and losses on these
contracts are included in the Statement of Operations.
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts, which may be in
excess of the amount reflected in the Statement of Assets and Liabilities.
D. INCOME TAXES
No provision has been made for U.S. income taxes because it is the Fund's policy
to qualify as a regulated investment company under the Internal Revenue Code and
to distribute to shareholders substantially all of its taxable income and net
realized gains.
Foreign securities held by the Fund may be subject to foreign taxation on
dividend and interest income received. Foreign taxes, if any, are recorded based
on the tax regulations and rates that exist in the foreign markets in which the
Fund invests.
Semiannual Report | 17
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Dividend income is
recorded on the ex-dividend date except that certain dividends from foreign
securities are recognized as soon as the Fund is notified of the ex-dividend
date. Distributions to shareholders are recorded on the ex-dividend date and are
determined according to income tax regulations (tax basis). Distributable
earnings determined on a tax basis may differ from earnings recorded in
accordance with accounting principles generally accepted in the United States of
America. These differences may be permanent or temporary. Permanent differences
are reclassified among capital accounts to reflect their tax character. These
reclassifications have no impact on net assets or the results of operations.
Temporary differences are not reclassified, as they may reverse in subsequent
periods.
F. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the amounts of income
and expenses during the reporting period. Actual results could differ from those
estimates.
G. GUARANTEES AND INDEMNIFICATIONS
Under the Fund's organizational documents, its officers and directors are
indemnified by the Fund against certain liabilities arising out of the
performance of their duties to the Fund. Additionally, in the normal course of
business, the Fund enters into contracts with service providers that contain
general indemnification clauses. The Fund's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Fund that have not yet occurred. Currently, the Fund expects the
risk of loss to be remote.
2. CAPITAL STOCK
At June 30, 2007, there were 100 million shares authorized ($0.01 par value).
During the period ended June 30, 2007, 103,212 shares were issued for $2,783,627
from reinvested distributions. During the year ended December 31, 2006, there
were no share transactions.
In December 2004, the Board of Directors of the Fund authorized management to
re-implement the Fund's open-market share repurchase program. Under the program,
the Fund may purchase, from time to time, fund shares in open-market
transactions, at the discretion of management. This authorization remains in
effect. During the period ended June 30, 2007, and the year ended December 31,
2006, there were no share repurchases.
18 | Semiannual Report
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain officers and
directors of the Fund are also officers and/or directors of the following
subsidiaries:
-------------------------------------------------------------------------------
SUBSIDIARY AFFILIATION
-------------------------------------------------------------------------------
Templeton Asset Management Ltd. (TAML) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
A. MANAGEMENT FEES
The Fund pays an investment management fee to TAML based on the average weekly
net assets of the Fund as follows:
-------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
-------------------------------------------------------------------------------
1.250% Up to and including $1 billion
1.200% Over $1 billion, up to and including $5 billion
1.150% Over $5 billion, up to and including $10 billion
1.100% Over $10 billion, up to and including $15 billion
1.050% Over $15 billion, up to and including $20 billion
1.000% In excess of $20 billion
B. ADMINISTRATIVE FEES
The Fund pays an administrative fee to FT Services of 0.15% per year of the Fund
average weekly net assets, of which 0.10% is paid to Nomura Asset Management
U.S.A. Inc., for sub-administrative services.
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Fund's custodian expenses. During the period ended June 30, 2007, the
custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
For tax purposes realized currency losses occurring subsequent to October 31,
may be deferred and treated as occurring on the first day of the following
fiscal year. At December 31, 2006, the Fund deferred realized currency losses of
$37,449.
Semiannual Report | 19
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
5. INCOME TAXES (CONTINUED)
At June 30, 2007, the cost of investments and net unrealized appreciation
(depreciation) for income tax purposes were as follows:
Cost of investments ............................................ $520,824,372
============
Unrealized appreciation ........................................ $648,754,838
Unrealized depreciation ........................................ (1,784,318)
------------
Net unrealized appreciation (depreciation) ..................... $646,970,520
============
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions and passive foreign
investment company shares.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions and passive foreign investment company shares.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
period ended June 30, 2007, aggregated $91,210,213 and $127,681,775,
respectively.
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Fund may invest in the Franklin Institutional Fiduciary Trust Money Market
Portfolio (the Sweep Money Fund), an open-end investment company managed by
Franklin Advisers, Inc. (an affiliate of the investment manager). Management
fees paid by the Fund are reduced on assets invested in the Sweep Money Fund, in
an amount not to exceed the management and administrative fees paid by the Sweep
Money Fund.
8. CONCENTRATION OF RISK
Investing in foreign securities may include certain risks and considerations not
typically associated with investing in U.S. securities, such as fluctuating
currency values and changing local and regional economic, political and social
conditions, which may result in greater market volatility. In addition, certain
foreign securities may not be as liquid as U.S. securities.
20 | Semiannual Report
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
9. REORGANIZATION TO A DELAWARE STATUTORY TRUST
On May 29, 2002, the Fund's shareholders approved an Agreement and Plan of
Reorganization (the "Plan") that provides for the reorganization of the Fund
from a Maryland corporation to a Delaware statutory trust. The completion of the
reorganization is pending guidance from the National Tax Agency in Japan
relating to the tax treatment of the Plan under Japanese laws with respect to
the Fund's Japanese shareholders. If and when the reorganization is completed,
the Delaware statutory trust will be the successor to the Fund.
10. REGULATORY AND LITIGATION MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, including the Securities and Exchange
Commission ("SEC"), relating to certain practices in the mutual fund industry,
including late trading, market timing and marketing support payments to
securities dealers who sell fund shares ("marketing support"), Franklin
Resources, Inc. and certain of its subsidiaries (collectively, the "Company"),
entered into settlements with certain of those regulators and governmental
entities. Specifically, the Company entered into settlements with the SEC, among
others, concerning market timing and marketing support.
On June 6, 2007, the SEC posted for public comment the proposed plan of
distribution for the market timing settlement. Following the public comment
period, and once the SEC approves the final plan of distribution, disbursements
of settlement monies will be made promptly to individuals who were shareholders
of the designated funds during the relevant period, in accordance with the terms
and conditions of the settlement and plan.
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, Company directors,
fund directors, and employees, have been named in private lawsuits (styled as
shareholder class actions, or as derivative actions on behalf of either the
named funds or Franklin Resources, Inc.). The lawsuits relate to the industry
practices referenced above, as well as to allegedly excessive commissions and
advisory and distribution fees.
The Company and fund management believe that the claims made in each of the
private lawsuits referenced above are without merit and intend to defend against
them vigorously. The Company cannot predict with certainty the eventual outcome
of these lawsuits, nor whether they will have a material negative impact on the
Company. If it is determined that the Company bears responsibility for any
unlawful or inappropriate conduct that caused losses to the Fund, it is
committed to making the Fund or its shareholders whole, as appropriate.
Semiannual Report | 21
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
11. NEW ACCOUNTING PRONOUNCEMENTS
The Fund adopted Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -- an
Interpretation of FASB Statement No. 109" ("FIN 48"), on June 29, 2007. FIN 48
clarifies the accounting for uncertainty in tax positions taken or expected to
be taken in a tax return. FIN 48 provides guidance on the measurement,
recognition, classification and disclosure of tax positions, along with
accounting for the related interest and penalties. The Fund has determined that
the adoption of FIN 48 did not have a material impact on the Fund's financial
statements.
In September 2006, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 157, "Fair Value Measurement" ("SFAS 157"), which defines fair
value, establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. SFAS 157 is effective for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. The Fund
believes the adoption of SFAS 157 will have no material impact on its financial
statements.
22 | Semiannual Report
Templeton Dragon Fund, Inc.
ANNUAL MEETING OF SHAREHOLDERS, MAY 18, 2007
The Annual Meeting of Shareholders of the Fund was held at the Fund's offices,
500 E. Broward Blvd., Fort Lauderdale, Florida on May 18, 2007. The purpose of
the meeting was to elect four Directors of the Fund. At the meeting, the
following persons were elected by the shareholders to serve as Directors of the
Fund: Edith E. Holiday, Charles B. Johnson, Gregory E. Johnson and Larry D.
Thompson.* No other business was transacted at the meeting.
The results of the voting at the Annual Meeting are as follows:
The election of four (4) Directors:
---------------------------------------------------------------------------------------------------------
% OF % OF SHARES % OF % OF SHARES
OUTSTANDING PRESENT OUTSTANDING PRESENT
TERM EXPIRING 2010: FOR SHARES AND VOTING WITHHELD SHARES AND VOTING
---------------------------------------------------------------------------------------------------------
Edith E. Holiday ........ 32,601,934 86.08% 98.27% 573,158 1.51% 1.73%
Larry D. Thompson ....... 32,615,333 86.12% 98.31% 559,759 1.48% 1.69%
Charles B. Johnson ...... 32,607,831 86.10% 98.29% 567,261 1.50% 1.71%
Gregory E. Johnson ...... 32,615,151 86.12% 98.31% 559,941 1.48% 1.69%
* HARRIS J. ASHTON, FRANK J. CROTHERS, DAVID W. NIEMIEC, FRANK A. OLSON,
CONSTANTINE D. TSERETOPOULOS AND ROBERT E. WADE ARE DIRECTORS OF THE FUND WHO
ARE CURRENTLY SERVING AND WHOSE TERMS OF OFFICE CONTINUED AFTER THE ANNUAL
MEETING OF SHAREHOLDERS.
Semiannual Report | 23
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, unless he elects to withdraw.
Shareholders holding their shares through Japan Securities Depository Center,
Inc., will not be enrolled in the Plan unless certain conditions are met and
they elect to participate. If shares are registered in the name of a
broker-dealer or other nominee (i.e., in "street name"), the broker-dealer or
nominee will elect to participate in the Plan on the shareholder's behalf unless
the shareholder instructs them otherwise, or unless the reinvestment service is
not provided by the broker-dealer or nominee.
Participants should contact Mellon Investor Services LLC, P.O. Box 3338, South
Hackensack, NJ 07606-1938, to receive the Plan brochure.
To receive dividends or distributions in cash, the shareholder must notify
Mellon Bank, N.A. (the "Plan Administrator") at the address above or the
institution in whose name the shares are held. The Plan Administrator must
receive written notice within 10 business days before the record date for a
distribution.
Whenever the Fund declares dividends in either cash or common stock of the Fund,
if the market price is equal to or exceeds net asset value at the valuation
date, the participant will receive the dividends entirely in stock at a price
equal to the net asset value, but not less than 95% of the then current market
price of the Fund's shares. If the market price is lower than net asset value or
if dividends and/or capital gains distributions are payable only in cash, the
participant will receive shares purchased on the New York Stock Exchange or
otherwise on the open market.
A participant has the option of submitting additional payments to the Plan
Administrator, in any amounts of at least $100, up to a maximum of $5,000 per
month, for the purchase of Fund shares for his or her account. These payments
shall be made by check or money order payable to "Mellon Bank, N.A." and sent to
Mellon Investor Services, P.O. Box 382009, Pittsburgh, PA 15250-8009, Attention:
Templeton Dragon Fund, Inc. The Plan Administrator shall apply such payments
(less a $5.00 service charge and less a pro rata share of trading fees) to
purchases of the Fund's shares on the open market.
Whenever shares are purchased on the New York Stock Exchange or otherwise on the
open market, each participant will pay a pro rata portion of trading fees.
Trading fees will be deducted from amounts to be invested.
The automatic reinvestment of dividends and/or capital gains does not relieve
the participant of any income tax which may be payable on dividends or
distributions.
24 | Semiannual Report
Templeton Dragon Fund, Inc.
DIRECT DEPOSIT SERVICE FOR REGISTERED SHAREHOLDERS
Cash distributions can now be electronically credited to a checking or savings
account at any financial institution that participates in the Automated Clearing
House ("ACH") system. The Direct Deposit service is provided for registered
shareholders at no charge. To enroll in the service, access your account online
by going to www.melloninvestor.com/isd or dial 1-800-416-5585 (toll free) and
follow the instructions. Direct Deposit will begin with the next scheduled
distribution payment date following enrollment in the service.
Semiannual Report | 25
Templeton Dragon Fund, Inc.
TRANSFER AGENT
Mellon Investor Services LLC
480 Washington Boulevard
Jersey City, NJ 07310
1-800-416-5585
www.melloninvestor.com
DIRECT REGISTRATION
If you are a registered shareholder of the Fund, purchases of shares of the Fund
can be electronically credited to your Fund account at Mellon Investor Services
LLC through Direct Registration. This service provides shareholders with a
convenient way to keep track of shares through book entry transactions, to
electronically move book-entry shares between broker-dealers, transfer agents
and DRS eligible issuers, and eliminates the possibility of lost certificates.
For additional information, please contact Mellon Investor Services at
1-800-416-5585.
SHAREHOLDER INFORMATION
Shares of Templeton Dragon Fund, Inc. are traded on the New York Stock Exchange
under the symbol TDF. The Fund's shares are also listed and traded in Japan on
the Osaka Securities Exchange Co., Ltd. Information about the net asset value
and the market price is published each Monday in the WALL STREET JOURNAL, weekly
in BARRON'S and each Saturday in THE NEW YORK TIMES and other newspapers. Daily
market prices for the Fund's shares are published in the New York Stock Exchange
Composite Transactions section of newspapers.
For current information about distributions and shareholder accounts, call
1-800-416-5585. Registered shareholders can now access their Fund account
on-line with INVESTOR SERVICE DIRECT(R). For information go to Mellon Investor
Services' web site at http://www.melloninvestor.com/isd and follow the
instructions.
The daily closing net asset value as of the previous business day may be
obtained when available by calling Franklin Templeton Fund Information after 7
a.m. Pacific time any business day at 1-800/DIAL BEN(R) (1-800-342-5236). The
Fund's net asset value and dividends are also listed on the NASDAQ Stock Market,
Inc.'s Mutual Fund Quotation Service ("NASDAQ MFQS").
Shareholders not receiving copies of the reports to shareholders because their
shares are registered in the name of a broker or a custodian can request that
they be added to the Fund's mailing list by writing Templeton Dragon Fund, Inc.,
100 Fountain Parkway, P.O. Box 33030, St. Petersburg, FL 33733-8030.
26 | Semiannual Report
Templeton Dragon Fund, Inc.
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT
At a meeting held February 27, 2007, the Board of Directors (Board), including a
majority of non-interested or independent Directors, approved renewal of the
investment management agreement for Templeton Dragon Fund, Inc. (Fund). In
reaching this decision, the Board took into account information furnished
throughout the year at regular Board meetings, as well as information prepared
specifically in connection with the annual renewal review process. Information
furnished and discussed throughout the year included investment performance
reports on the Fund, information on its share price discount to net asset value,
and other related financial information, as well as periodic reports on legal,
compliance, pricing, brokerage commissions and execution and other services
provided by the Investment Manager (Manager) and its affiliates. Information
furnished specifically in connection with the renewal process included a report
prepared by Lipper, Inc. (Lipper), an independent organization, as well as a
Fund profitability analysis report prepared by management. The Lipper report
compared the Fund's investment performance and expenses with those of other
funds deemed comparable to the Fund as selected by Lipper. The Fund
profitability analysis report discussed the profitability to Franklin Templeton
Investments from its overall U.S. fund operations, as well as on an individual
fund-by-fund basis. Included with such profitability analysis report was
information on a fund-by-fund basis listing portfolio managers and other
accounts they manage, as well as information on management fees charged by the
Manager and its affiliates including management's explanation of differences
where relevant, and a three-year expense analysis with an explanation for any
increase in expense ratios. Additional material accompanying such report was a
memorandum prepared by management describing project initiatives and capital
investments relating to the services provided to the Funds by the Franklin
Templeton Investments organization, as well as a memorandum relating to
economies of scale.
In considering such materials, the independent Directors received assistance and
advice from and met separately with independent counsel. In approving
continuance of the investment management agreement for the Fund, the Board,
including a majority of independent Directors, determined that the existing
management fee structure was fair and reasonable and that continuance of the
investment management agreement was in the best interests of the Fund and its
shareholders. While attention was given to all information furnished, the
following discusses some primary factors relevant to the Board's decision.
NATURE, EXTENT AND QUALITY OF SERVICE. The Board was satisfied with the nature
and quality of the overall services provided by the Manager and its affiliates
to the Fund and its shareholders. In addition to investment performance and
expenses discussed later, the Board's opinion was based, in part, upon periodic
reports furnished them showing that the investment policies and restrictions for
the Fund were consistently complied with as well as other reports periodically
furnished the Board covering matters such as the compliance of portfolio
managers and other management personnel with the code of ethics adopted
throughout the Franklin Templeton fund complex, the adherence to fair value
pricing procedures established by the Board, and the accuracy of net asset value
calculations. Favorable consideration was given to management's continuous
efforts and expenditures in establishing back-up systems and recovery
Semiannual Report | 27
Templeton Dragon Fund, Inc.
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
procedures to function in the event of a natural disaster, it being noted that
such systems and procedures had functioned smoothly during the Florida
hurricanes and blackouts experienced in recent years. Among other factors taken
into account by the Board were the Manager's best execution trading policies,
including a favorable report by an independent portfolio trading analytical
firm. Consideration was also given to the experience of the Fund's portfolio
management team, the number of accounts managed and general method of
compensation. In this latter respect, the Board noted that a primary factor in
management's determination of the level of a portfolio manager's bonus
compensation was the relative investment performance of the funds he or she
managed and that a portion of such bonus was required to be invested in a
predesignated list of funds within such person's fund management area so as to
be aligned with the interests of Fund shareholders.
INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment
performance of the Fund in view of its importance to shareholders. While
consideration was given to performance reports and discussions with portfolio
managers at Board meetings during the year, particular attention in assessing
performance was given to the Lipper reports furnished for the agreement renewal.
The Lipper report prepared for the Fund showed its investment performance during
2006 and the previous 10 years ended December 31, 2006, in comparison with a
six-fund performance universe consisting of the Fund and all other non-leveraged
closed-end Pacific region funds as selected by Lipper. Such report considers
total return on a net asset value basis without regard to market discounts or
premiums to accurately reflect investment performance. The Lipper report showed
the Fund's total return for 2006 was the second highest of such group, and its
total return on an annualized basis was the highest in such group during each of
the previous three-, five- and 10-year periods.
COMPARATIVE EXPENSES. Consideration was given to a Lipper report analysis of the
management fees and total expense ratios of the Fund compared with those of a
group of four other funds selected by Lipper as its appropriate Lipper expense
group. Prior to making such comparison, the Board relied upon a survey showing
that the scope of services covered under the Fund's investment management
agreement was similar to those provided by fund managers to other fund groups.
In reviewing comparative costs, emphasis was given to the Fund's contractual
investment management fee rate in comparison with the contractual investment
management fee rate that would have been charged by other funds within its
Lipper expense group assuming they were similar in size to the Fund, as well as
the actual total expense ratio of the Fund in comparison with those of such
expense group. The Lipper management effective fee analysis considers
administrative fees to be part of management fees and the results of such
expense comparisons showed the Fund's contractual investment management fee rate
to be the highest in its expense group, and the Fund's actual total expense
ratio to be the second highest in such Lipper expense group. The Board found
such expenses to be acceptable in light of the Fund's investment performance,
noting that the Fund's total expense ratio was within 20 basis points of the
median of its Lipper expense group.
28 | Semiannual Report
Templeton Dragon Fund, Inc.
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
MANAGEMENT PROFITABILITY. The Board also considered the level of profits
realized by the Manager and its affiliates in connection with the operation of
the Fund. In this respect, the Board reviewed the Fund profitability analysis
that addresses the overall profitability of Franklin Templeton's U.S. fund
business, as well as its profits in providing management and other services to
the Fund. Specific attention was given to the methodology followed in allocating
costs to the Fund, it being recognized that allocation methodologies are
inherently subjective and various allocation methodologies may each be
reasonable while producing different results. In this respect, the Board noted
that, while being continuously refined and reflecting changes in the Manager's
own cost accounting, the allocation methodology was consistent with that
followed in profitability report presentations made in prior years and that the
Fund's independent registered public accounting firm had been engaged by the
Manager to perform certain procedures on a biennial basis, specified and
approved by the Manager and the Fund's Board solely for their purposes and use
in reference to the profitability analysis. In reviewing and discussing such
analysis, management discussed with the Board its belief that costs incurred in
establishing the infrastructure necessary for the type of fund operations
conducted by the Manager and its affiliates may not be fully reflected in the
expenses allocated to the Fund in determining its profitability, as well as the
fact that the level of profits, to a certain extent, reflected operational cost
savings and efficiencies initiated by management. In addition, the Board
considered a third-party study comparing the profitability of the Manager's
parent on an overall basis as compared to other publicly held managers broken
down to show profitability from management operations exclusive of distribution
expenses, as well as profitability including distribution expenses. The Board
also considered the extent to which the Manager and its affiliates might derive
ancillary benefits from fund operations, as well as potential benefits resulting
from allocation of fund brokerage and the use of "soft" commission dollars to
pay for research. Based upon its consideration of all these factors, the Board
determined that the level of profits realized by the Manager and its affiliates
from providing services to the Fund was not excessive in view of the nature,
quality and extent of services provided.
ECONOMIES OF SCALE. The Board also considered whether the Manager realizes
economies of scale as the Fund grows larger and the extent to which any such
benefit is shared with the Fund and its shareholders. The Board believed that a
Manager's ability to realize economies of scale and the sharing of such benefit
is a more relevant consideration in the case of an open-end fund whose size
increases as a result of the continuous sale of its shares. A closed-end
investment company such as the Fund does not continuously offer shares, and
growth following its initial public offering will primarily result from market
appreciation, which benefits its shareholders. While believing economies of
scale to be less of a factor in the context of a closed-end fund, the Board
believes at some point an increase in size may lead to economies of scale that
should be shared with the Fund and its shareholders and intends to monitor
future growth of the Fund accordingly. The Board noted at the end of 2006 the
Fund's net assets were slightly in excess of $1 billion and that it had recently
added a breakpoint to the Fund's investment advisory fee at the $1 billion
level.
Semiannual Report | 29
Templeton Dragon Fund, Inc.
SHAREHOLDER INFORMATION (CONTINUED)
PROXY VOTING POLICIES AND PROCEDURES
The Fund has established Proxy Voting Policies and Procedures (Policies) that
the Fund uses to determine how to vote proxies relating to portfolio securities.
Shareholders may view the Fund's complete Policies online at
franklintempleton.com. Alternatively, shareholders may request copies of the
Policies free of charge by calling the Proxy Group collect at 1-954/527-7678 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group. Copies of the Fund's proxy voting records are also made available online
at franklintempleton.com and posted on the U.S. Securities and Exchange
Commission's website at sec.gov and reflect the most recent 12-month period
ended June 30.
QUARTERLY STATEMENT OF INVESTMENTS
The Fund files a complete statement of investments with the U.S. Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, DC. Information regarding the
operations of the Public Reference Room may be obtained by calling
1-800/SEC-0330.
CERTIFICATIONS
The Fund's Chief Executive Officer - Finance and Administration is required by
the New York Stock Exchange's Listing Standards to file annually with the
Exchange a certification that he is not aware of any violation by the Fund of
the Exchange's Corporate Governance Standards applicable to the Fund. The Fund
has filed such certification.
In addition, the Fund's Chief Executive Officer - Finance and Administration and
Chief Financial Officer and Chief Accounting Officer are required by the rules
of the U.S. Securities and Exchange Commission to provide certain certifications
with respect to the Fund's Form N-CSR and Form N-CSRS (which include the Fund's
annual and semiannual reports to shareholders) that are filed semiannually with
the Commission. The Fund has filed such certifications with its Form N-CSR for
the year ended December 31, 2006. Additionally, the Fund expects to file, on or
about August 31, 2007, such certifications with its Form N-CSRS for the
six-months ended June 30, 2007.
30 | Semiannual Report
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Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS
SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES
BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE
CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of
service, we may monitor, record and access telephone calls to or from our
service departments. These calls can be identified by the presence of a regular
beeping tone.
FRANKLIN TEMPLETON FUNDS
INTERNATIONAL
Mutual European Fund
Templeton BRIC Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Emerging Markets Small Cap Fund
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund 1
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund 1
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small Cap Growth Fund II 2
Franklin Small-Mid Cap Growth Fund
VALUE
Franklin Balance Sheet Investment Fund 1
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 1
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund 3
Mutual Shares Fund
BLEND
Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Global Real Estate Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio(R) Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
INCOME
Franklin Adjustable U.S. Government
Securities Fund 4
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund 5
Franklin Income Fund
Franklin Limited Maturity
U.S. Government Securities Fund 4
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund 4
Templeton Global Bond Fund
Templeton Income Fund
TAX-FREE INCOME 6
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 7
LIMITED-TERM FUNDS
California Limited-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Limited-Term Tax-Free Income Fund
INTERMEDIATE-TERM FUNDS
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama
Arizona
California 8
Colorado
Connecticut
Florida 8
Georgia
Kentucky
Louisiana
Maryland
Massachusetts 7
Michigan 7
Minnesota 7
Missouri
New Jersey
New York 8
North Carolina
Ohio 7
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust 9
1. The fund is open only to existing shareholders and select retirement plans.
2. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
3. The fund is a continuously offered, closed-end fund. Shares may be purchased
daily; there is no daily redemption. However, each quarter, pending board
approval, the fund will authorize the repurchase of 5%-25% of the outstanding
number of shares. Investors may tender all or a portion of their shares during
the tender period.
4. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
5. Effective 10/1/06, Franklin's AGE High Income Fund changed its name to
Franklin High Income Fund. The fund's investment goal and strategy remained the
same.
6. For investors subject to the alternative minimum tax, a small portion of fund
dividends may be taxable. Distributions of capital gains are generally taxable.
7. The fund invests primarily in insured municipal securities.
8. These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA) and
limited-term, intermediate-term and money market portfolios (CA and NY).
9. The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
05/07 Not part of the semiannual report
[LOGO](R) 100 Fountain Parkway
FRANKLIN TEMPLETON P.O. Box 33030
INVESTMENTS St. Petersburg, FL 33733-8030
SEMIANNUAL REPORT AND SHAREHOLDER INFORMATION
TEMPLETON DRAGON FUND, INC.
INVESTMENT MANAGER
Templeton Asset Management Ltd.
TRANSFER AGENT
Mellon Investor Services LLC
P.O. Box 3315
South Hackensack, NJ 07606-1915
Toll free number: 1-800-416-5585
Hearing Impaired phone number: 1-800-231-5469
Foreign Shareholders phone number: 201-680-6578
www.melloninvestor.com/isd
Investors should be aware that the value of investments made for the Fund may go
down as well as up. Like any investment in securities, the value of the Fund's
portfolio will be subject to the risk of loss from market, currency, economic,
political and other factors. The Fund and its investors are not protected from
such losses by the investment manager. Therefore, investors who cannot accept
this risk should not invest in shares of the Fund.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
identified by the presence of a regular beeping tone.
TLTDF S2007 08/07
ITEM 2. CODE OF ETHICS.
(a) The Registrant has adopted a code of ethics that applies to its principal
executive officers and principal financial and accounting officer.
(c) N/A
(d) N/A
(f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy
of its code of ethics that applies to its principal executive officers and
principal financial and accounting officer.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
(a)(1) The Registrant has an audit committee financial expert serving on its
audit committee.
(2) The audit committee financial experts are David W. Niemiec and Frank A.
Olson and they are "independent" as defined under the relevant Securities and
Exchange Commission Rules and Releases.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. N/A
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS
Members of the Audit Committee are: Frank J. Crothers, David W.
Niemiec, Frank A. Olson and Constantine D. Tseretopoulos
ITEM 6. SCHEDULE OF INVESTMENTS. N/A
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR
CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
The board of directors of the Fund has delegated the authority to vote proxies
related to the portfolio securities held by the Fund to the Fund's manager
Templeton Asset Management Ltd. in accordance with the Proxy Voting Policies and
Procedures (Policies) adopted by the manager.
The manager has delegated its administrative duties with respect to the voting
of proxies to the Proxy Group within Franklin Templeton Companies, LLC (Proxy
Group), an affiliate and wholly owned subsidiary of Franklin Resources, Inc. All
proxies received by the Proxy Group will be voted based upon the manager's
instructions and/or policies.
To assist it in analyzing proxies, the manager subscribes to Institutional
Shareholder Services (ISS), an unaffiliated third party corporate governance
research service that provides in-depth analyses of shareholder meeting agendas,
vote recommendations, recordkeeping and vote disclosure services. In addition,
the manager subscribes to Glass, Lewis & Co., LLC (Glass Lewis), an unaffiliated
third party analytical research firm, to receive analyses and vote
recommendations on the shareholder meetings of publicly held U.S. companies.
Although ISS' and/or Glass Lewis' analyses are thoroughly reviewed and
considered in making a final voting decision, the manager does not consider
recommendations from ISS, Glass Lewis or any other third party to be
determinative of the manager's ultimate decision. The manager votes proxies
solely in the interests of the Fund and its shareholders. As a matter of policy,
the officers, directors/trustees and employees of the Fund, the manager and the
Proxy Group will not be influenced by outside sources whose interests conflict
with the interests of the Fund and its shareholders. Efforts are made to resolve
all conflicts in the interests of the manager's clients. Material conflicts of
interest are identified by the Proxy Group based upon analyses of client, broker
and vendor lists, information periodically gathered from directors and officers,
and information derived from other sources, including public filings. In
situations where a material conflict of interest is identified, the Proxy Group
will refer the matter, along with the recommended course of action by the
manager to an interdepartmental Proxy Review Committee (which may include
portfolio managers and/or research analysts employed by the manager), for
evaluation and voting instructions. The Proxy Review Committee may defer to the
voting recommendation of ISS, Glass Lewis or those of another independent third
party provider of proxy services; or send the proxy directly to the Fund with a
recommendation regarding the vote for approval. Where the Proxy Review Committee
refers a matter to the Fund, it may rely upon the instructions of a
representative of the Fund, such as the board of directors or a committee of the
board.
The recommendation of management on any issue is a factor which the manager
considers in determining how proxies should be voted, but is not determinative
of the manager's ultimate decision. As a matter of practice, the votes with
respect to most issues are cast in accordance with the position of the company's
management. Each issue, however, is considered on its own merits, and the
manager will not support the position of the company's management in any
situation where it deems that the ratification of management's position would
adversely affect the investment merits of owning that company's shares.
MANAGER'S PROXY VOTING POLICIES AND PRINCIPLES The manager has adopted general
proxy voting guidelines, which are summarized below. These guidelines are not an
exhaustive list of all the issues that may arise and the manager cannot
anticipate all future situations. In all cases, each proxy will be considered
based on the relevant facts and circumstances.
BOARD OF DIRECTORS. The manager supports an independent board of directors, and
prefers that key committees such as audit, nominating, and compensation
committees be comprised of independent directors. The manager will generally
vote against management efforts to classify a board and will generally support
proposals to declassify the board of directors. The manager may withhold votes
from directors who have attended less than 75% of meetings without a valid
reason. While generally in favor of separating Chairman and CEO positions, the
manager will review this issue as well as proposals to restore or provide for
cumulative voting on a case-by-case basis, taking into consideration factors
such as the company's corporate governance guidelines or provisions and
performance.
RATIFICATION OF AUDITORS OF PORTFOLIO COMPANIES. In light of several high
profile accounting scandals, the manager will closely scrutinize the role and
performance of auditors. On a case-by-case basis, the manager will examine
proposals relating to non-audit relationships and non-audit fees. The manager
will also consider, on a case-by-case basis, proposals to rotate auditors, and
will vote against the ratification of auditors when there is clear and
compelling evidence of accounting irregularities or negligence.
MANAGEMENT AND DIRECTOR COMPENSATION. A company's equity-based compensation plan
should be in alignment with its shareholders' long-term interests. The manager
believes that executive compensation should be directly linked to the
performance of the company. The manager evaluates plans on a case-by-case basis
by considering several factors to determine whether the plan is fair and
reasonable, including the ISS quantitative model utilized to assess such plans
and/or the Glass Lewis evaluation of the plans. The manager will generally
oppose plans that have the potential to be excessively dilutive, and will almost
always oppose plans that are structured to allow the repricing of underwater
options, or plans that have an automatic share replenishment "evergreen"
feature. The manager will generally support employee stock option plans in which
the purchase price is at least 85% of fair market value, and when potential
dilution is 10% or less.
Severance compensation arrangements will be reviewed on a case-by-case basis,
although the manager will generally oppose "golden parachutes" that are
considered to be excessive. The manager will normally support proposals that
require a percentage of directors' compensation to be in the form of common
stock, as it aligns their interests with those of shareholders. The manager will
review on a case-by-case basis any shareholder proposals to adopt policies on
expensing stock option plans.
ANTI-TAKEOVER MECHANISMS AND RELATED ISSUES. The manager generally opposes
anti-takeover measures since they tend to reduce shareholder rights. On
occasion, the manager may vote with management when the research analyst has
concluded that the proposal is not onerous and would not harm the Fund or its
shareholders' interests. The manager generally supports proposals that require
shareholder rights' plans ("poison pills") to be subject to a shareholder vote
and will closely evaluate such plans on a case-by-case basis to determine
whether or not they warrant support. The manager will generally vote against any
proposal to issue stock that has unequal or subordinate voting rights. The
manager generally opposes any supermajority voting requirements as well as the
payment of "greenmail." The manager generally supports "fair price" provisions
and confidential voting.
CHANGES TO CAPITAL STRUCTURE. The manager will review, on a case-by-case basis,
proposals by companies to increase authorized shares and the purpose for the
increase and proposals seeking preemptive rights. The manager will generally not
vote in favor of dual-class capital structures to increase the number of
authorized shares where that class of stock would have superior voting rights.
The manager will generally vote in favor of the issuance of preferred stock in
cases where the company specifies the voting, dividend, conversion and other
rights of such stock and the terms of the preferred stock issuance are deemed
reasonable.
MERGERS AND CORPORATE RESTRUCTURING. Mergers and acquisitions will be subject to
careful review by the research analyst to determine whether each will be
beneficial to shareholders. The manager will analyze various economic and
strategic factors in making the final decision on a merger or acquisition.
Corporate restructuring and reincorporation proposals are also subject to a
thorough examination on a case-by-case basis.
SOCIAL AND CORPORATE POLICY ISSUES. The manager will generally give management
discretion with regard to social, environmental and ethical issues, although the
manager may vote in favor of those that are believed to have significant
economic benefits or implications for the Fund and its shareholders.
GLOBAL CORPORATE GOVERNANCE. Many of the tenets discussed above are applied to
proxy voting decisions for international companies. However, the manager must be
more flexible in these instances and must be mindful of the varied market
practices of each region.
The manager will attempt to process every proxy it receives for all domestic and
foreign issuers. However, there may be situations in which the manager cannot
process proxies, for example, where a meeting notice was received too late, or
sell orders preclude the ability to vote. If a security is on loan, the manager
may determine that it is not in the best interests of the Fund to recall the
security for voting purposes. Also, the manager may abstain from voting under
certain circumstances or vote against items such as "Other Business" when the
manager is not given adequate information from the company.
Shareholders may view the complete Policies online at franklintempleton.com.
Alternatively, shareholders may request copies of the Policies free of charge by
calling the Proxy Group collect at 1-954/527-7678 or by sending a written
request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite
1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Fund's
proxy voting records are available online at franklintempleton.com and posted on
the SEC website at WWW.SEC.GOV. The proxy voting records are updated each year
by August 31 to reflect the most recent 12-month period ended June 30.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANY
AND AFFILIATED PURCHASERS. N/A
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT
INVESTMENT COMPANY AND AFFILIATED PURCHASERS. N/A
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no changes to the procedures by which shareholders may recommend
nominees to the Registrant's Board of Directors that would require disclosure
herein.
ITEM 11. CONTROLS AND PROCEDURES.
(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Registrant's filings under the Securities
Exchange Act of 1934 and the Investment Company Act of 1940 is recorded,
processed, summarized and reported within the periods specified in the rules and
forms of the Securities and Exchange Commission. Such information is accumulated
and communicated to the Registrant's management, including its principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure. The Registrant's management,
including the principal executive officer and the principal financial officer,
recognizes that any set of controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired
control objectives.
Within 90 days prior to the filing date of this Shareholder Report on Form
N-CSR, the Registrant had carried out an evaluation, under the supervision and
with the participation of the Registrant's management, including the
Registrant's principal executive officer and the Registrant's principal
financial officer, of the effectiveness of the design and operation of the
Registrant's disclosure controls and procedures. Based on such evaluation, the
Registrant's principal executive officer and principal financial officer
concluded that the Registrant's disclosure controls and procedures are
effective.
(B) CHANGES IN INTERNAL CONTROLS. There have been no significant changes
in the Registrant's internal controls or in other factors that could
significantly affect the internal controls subsequent to the date of their
evaluation in connection with the preparation of this Shareholder Report on Form
N-CSR.
ITEM 12. EXHIBITS.
(A) (1) Code of Ethics
(A) (2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer
(B) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
TEMPLETON DRAGON FUND, INC.
By /s/JIMMY D. GAMBILL
---------------------------
Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date August 27, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /s/JIMMY D. GAMBILL
---------------------------
Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date August 27, 2007
By /s/GALEN G. VETTER
---------------------------
Galen G. Vetter
Chief Financial Officer
Date August 27, 2007