UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-08394
TEMPLETON DRAGON FUND, INC.
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(Exact name of registrant as specified in charter)
500 EAST BROWARD BLVD., SUITE 2100, FORT LAUDERDALE, FL 33394-3091
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(Address of principal executive offices) (Zip code)
CRAIG S. TYLE, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
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(Name and address of agent for service)
Registrant's telephone number, including area code: (954) 527-7500
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Date of fiscal year end: 12/31
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Date of reporting period: 12/31/07
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ITEM 1. REPORTS TO STOCKHOLDERS.
[GRAPHIC OMITTED]
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DECEMBER 31, 2007
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ANNUAL 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 annual report
Contents
IMPORTANT NOTICE TO SHAREHOLDERS .......................................... 1
ANNUAL REPORT
Templeton Dragon Fund, Inc. ............................................... 3
Performance Summary ....................................................... 7
Financial Highlights and Statement of Investments ......................... 8
Financial Statements ...................................................... 13
Notes to Financial Statements ............................................. 16
Report of Independent Registered Public Accounting Firm ................... 23
Annual Meeting of Shareholders ............................................ 24
Dividend Reinvestment and Cash Purchase Plan .............................. 25
Tax Designation ........................................................... 28
Board Members and Officers ................................................ 30
Shareholder Information ................................................... 35
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Important Notice to Shareholders
EXCHANGE-TRADED FUNDS
The Fund may invest up to 10% of its total assets in shares of exchange-traded
funds (ETFs) for the purpose of short-term cash management. The Fund will use
ETFs when the investment manager determines that the Fund will benefit from
market exposure when there is excess cash in the Fund and the investment manager
is not able to invest in a single stock fast enough because either the stock is
not liquid enough to accommodate a large purchase or the Fund would cause
excessive market impact in trying to invest cash in a single stock immediately
(referred to as "equitizing cash"). This strategy can allow the investment
manager to be more selective in the securities it buys for the Fund and the
prices paid because the investment manager is not forced to buy stocks at any
price just to get market exposure. The Fund may also use ETFs to provide the
Fund with liquidity during volatile markets without having to hold
underperforming cash.
An investment in an ETF generally represents the same risks as an investment in
a conventional fund (i.e., an investment company that is not exchange-traded).
The price of an ETF can fluctuate and the Fund could lose money investing in an
ETF if the prices of the securities owned by the ETF go down. In addition, ETFs
are subject to certain other risks that do not apply to conventional funds, such
as the risk that the market price of the ETF's shares may trade at a discount to
their net asset value; the risk that an active market for an ETF's shares may
not develop or be maintained; or the risk that an ETF's shares could be delisted
from an exchange or that trading may be halted for various reasons.
Most ETFs are investment companies. Therefore, the Fund's purchases of ETFs are
subject to limitations on investments in other investment companies under
section 12(d)(1) of the 1940 Act, unless exemptions from those limitations are
available pursuant to the SEC's current rules, exemptions and interpretations
under the 1940 Act.
Not part of the annual report | 1
Important Notice to Shareholders (CONTINUED)
SHARE REPURCHASE PROGRAM
The Fund's Board previously authorized management to implement an open-market
share repurchase program pursuant to which the Fund may purchase Fund shares,
from time to time, in open-market transactions, at the discretion of management.
This authorization remains in effect.
2 | Not part of the annual report
Annual 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.
GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 12/31/07
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
China 63.1%
Hong Kong 23.7%
Taiwan 12.6%
Cambodia 0.4%
Singapore 0.2%
Dear Shareholder:
We are pleased to bring you Templeton Dragon Fund's annual report for the fiscal
year ended December 31, 2007.
PERFORMANCE OVERVIEW
Templeton Dragon Fund posted cumulative total returns of +31.69% in market price
terms and +43.22% in net asset value terms for the 12 months under review. You
can find the Fund's long-term performance data in the Performance Summary on
page 7.
ECONOMIC AND MARKET OVERVIEW
In 2007, Chinese equities had another positive year, with the Chinese market
emerging as one of the top performers globally. Stock prices were supported by a
robust macroeconomic environment, significant investment inflows and rising
commodity prices. Periods of increased volatility, however, occurred during the
year as nervous investors reacted to government efforts to curb heated share
prices in the domestic A share markets as well as concerns surrounding the U.S.
subprime lending crisis and its impact on the global economy.
China's expansion of the Qualified Domestic Institutional Investor (QDII)
program to allow domestic fund managers and brokerages to invest in foreign
securities provided a boost to the Hong Kong-listed China H and Red Chip shares
due to significant investment flows from mainland investors. 1
1. "China H" denotes shares of China-incorporated, Hong Kong-listed companies
with most businesses in China. "Red Chip" denotes shares of Hong Kong-listed
companies with significant exposure to China. China H and Red Chip shares are
traded on the Hong Kong Stock Exchange.
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.
Annual Report | 3
TOP 10 HOLDINGS
12/31/07
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COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
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China Mobile Ltd. 12.0%
WIRELESS TELECOMMUNICATION SERVICES,
CHINA
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Sinopec (China Petroleum and
Chemical Corp.), H 11.2%
OIL, GAS & CONSUMABLE FUELS, CHINA
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Dairy Farm International Holdings Ltd. 11.1%
FOOD & STAPLES RETAILING, HONG KONG
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PetroChina Co. Ltd., H 7.8%
OIL, GAS & CONSUMABLE FUELS, CHINA
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China Construction Bank Corp., H 5.3%
COMMERCIAL BANKS, CHINA
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CNOOC Ltd., ord. & 144A 5.1%
OIL, GAS & CONSUMABLE FUELS, CHINA
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Cheung Kong Infrastructure Holdings Ltd. 3.2%
ELECTRIC UTILITIES, HONG KONG
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Asustek Computer Inc. 3.0%
COMPUTERS & PERIPHERALS, TAIWAN
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China Shenhua Energy Co. Ltd., H 2.9%
OIL, GAS & CONSUMABLE FUELS, CHINA
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Citic Pacific Ltd. 2.8%
INDUSTRIAL CONGLOMERATES, HONG KONG
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However, the government's decision to delay implementation of the Qualified
Domestic Retail Investor (QDRI) program, which would have allowed mainland
investors to invest in Hong Kong-listed shares, dampened investor sentiment in
the latter part of the year.
The Hong Kong stock market benefited from ample liquidity, strong gross domestic
product growth and lower interest rates, which also supported property prices.
Taiwan, however, underperformed its peers in 2007. A slow recovery in the
technology sector coupled with political uncertainty and concerns over the
global economic outlook drove investors away from the market.
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 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
For the 12 months under review, the Fund's exposure to the energy,
telecommunication services, food and staples retailing, and capital goods
sectors contributed significantly to absolute performance. 2 In the energy
sector, Sinopec (China Petroleum and Chemical), the country's largest integrated
energy company, CNOOC, China's biggest offshore oil and natural gas exploration
and production company, and China Shenhua Energy, the country's principal coal
producer, were among the largest contributors to performance. Rising oil prices
and growing demand for oil and coal in China as well as other emerging markets
benefited these companies.
2. The energy sector comprises oil, gas and consumable fuels in the SOI. The
telecommunication services sector comprises diversified telecommunication
services and wireless telecommunication services in the SOI. The capital goods
industry comprises electrical equipment, industrial conglomerates and machinery
in the SOI.
4 | Annual Report
China Mobile, the country's and the world's largest wireless telecommunication
company by number of subscribers, was the Fund's top contributor during the
period. In the food and staples retailing sector, the Fund's only sector
position was 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.
Sectors that detracted from Fund performance during the reporting period
included semiconductors and semiconductor equipment; food, beverage and tobacco;
and consumer durables and apparel. 3 The largest detractors in the
semiconductors industry were Novatek Microelectronics, TSMC (Taiwan
Semiconductor Manufacturing) and Semiconductor Manufacturing International.
These out-of-favor stocks traded at what we considered low valuations on
concerns of their near-term business outlook. Despite the current stock
weakness, company fundamentals had not weakened. Consistent with our long-term
strategy, we continued to hold these stocks as we believed patient investors
would likely be rewarded over the longer term. People's Food Holdings, one of
China's biggest meat processing companies, and Samson Holdings, a leading
residential furniture wholesaler, also detracted from performance as both stocks
declined in value during the period. We sold the Fund's position in Samson by
period-end as rising cost pressure weakened the company's competitiveness. We
continued to hold People's Food because we believed the impact of high pork
prices on its business was only temporary.
During the reporting period, we made significant purchases in China H shares as
we believed these companies should be key beneficiaries of China's QDII program
expansion. Additions included shares of major commercial banks China
Construction Bank and Bank of China, Dongfeng Motor, one of the country's
leading automobile manufacturers, and PetroChina, a dominant player in the
upstream oil and gas sector.
From a sector perspective, we increased the Fund's allocations to several
sectors based on what we considered favorable market trends. With commodity
prices expected to stay at relatively high levels and growing global energy
demand, we increased our investments in the oil, gas and consumable fuels
3. The food, beverage and tobacco sector comprises food products in the SOI. The
consumer durables and apparel sector comprises textiles, apparel and luxury
goods in the SOI.
Annual Report | 5
industry. Greater global demand for consumer products and services also led us
to increase our allocation to packaged foods and meats, integrated
telecommunication services and automobile manufacturing companies. 4 We also
added select Taiwanese semiconductors and computer hardware companies based on
what we considered attractive valuations. 5
To raise funds for income and capital gains distribution in 2007, we sold a
number of holdings. These sales also allowed the Fund to focus on stocks we
considered relatively more attractively valued within our investment universe.
We sold select positions as stocks reached sale price targets. As a result, the
Fund's exposure to the diversified banking, electric utilities, and life and
health insurance industries fell. 6 Major sales included all or part of China
Mobile, HSBC Holdings, one of the world's largest banking and financial services
organizations, and Datang International Power Generation, China's premier
electric utility.
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.
4. The packaged foods and meats industry is part of food products in the SOI.
The integrated telecommunication services industry is part of diversified
telecommunication services in the SOI. The automobile manufacturing industry is
part of automobiles in the SOI.
5. The semiconductors industry is part of semiconductors and semiconductor
equipment in the SOI. The computer hardware industry is part of computers and
peripherals in the SOI.
6. The diversified banking industry is part of commercial banks in the SOI. The
life and health insurance industry is part of insurance in the SOI.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF DECEMBER 31, 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 | Annual Report
Performance Summary as of 12/31/07
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 sales charges paid at inception or brokerage
commissions paid on secondary market purchases. The performance table does not
reflect any taxes that a shareholder would pay on Fund dividends, capital gain
distributions, if any, or any realized gains on the sale of Fund shares.
PRICE AND DISTRIBUTION INFORMATION
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SYMBOL: TDF CHANGE 12/31/07 12/31/06
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Net Asset Value (NAV) +$7.78 $34.73 $26.95
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Market Price (NYSE) +$4.68 $30.94 $26.26
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DISTRIBUTIONS (1/1/07-12/31/07)
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Dividend Income $0.3339
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Short-Term Capital Gain $0.3977
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Long-Term Capital Gain $2.5099
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TOTAL $3.2415
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PERFORMANCE
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1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return 1
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Based on change in NAV 2 +43.22% +379.62% +417.67%
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Based on change in market price 3 +31.69% +370.08% +527.02%
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Average Annual Total Return 1
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Based on change in NAV 2 +43.22% +36.84% +17.87%
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Based on change in market price 3 +31.69% +36.29% +20.15%
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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.
2. Assumes reinvestment of distributions based on net asset value.
3. Assumes reinvestment of distributions based on the dividend reinvestment and
cash purchase plan.
Annual Report | 7
Templeton Dragon Fund, Inc.
FINANCIAL HIGHLIGHTS
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YEAR ENDED DECEMBER 31,
2007 2006 2005 2004 2003
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PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ..................... $ 26.95 $ 21.80 $ 18.70 $ 16.62 $ 9.73
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Income from investment operations:
Net investment income a ............................. 0.58 0.38 0.59 0.25 0.56
Net realized and unrealized gains (losses) .......... 10.44 7.12 3.28 2.39 6.75
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Total from investment operations ....................... 11.02 7.50 3.87 2.64 7.31
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Capital share repurchases .............................. -- -- -- -- 0.14
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Less distributions from:
Net investment income ............................... (0.33) (0.37) (0.41) (0.16) (0.56)
Net realized gains .................................. (2.91) (1.98) (0.36) (0.40) --
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Total distributions .................................... (3.24) (2.35) (0.77) (0.56) (0.56)
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Net asset value, end of year ........................... $ 34.73 $ 26.95 $ 21.80 $ 18.70 $ 16.62
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Market value, end of year b ............................ $ 30.94 $ 26.26 $ 19.18 $ 17.47 $ 17.99
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Total return (based on market value per share) ......... 31.69% 49.56% 14.08% 0.36% 108.44%
RATIOS TO AVERAGE NET ASSETS
Expenses ............................................... 1.47% c 1.49% c 1.52% c 1.52% c 1.64% d
Net investment income .................................. 1.85% 1.61% 2.92% 1.45% 4.57%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................ $ 1,315,377 $ 1,017,910 $ 823,243 $ 706,138 $ 626,959
Portfolio turnover rate ................................ 15.66% 18.83% 8.84% 19.42% 29.91%
a Based on average daily shares outstanding.
b Based on the last sale on the New York Stock Exchange.
c Benefit of expense reduction rounds to less than 0.01%.
d 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.
| Annual Report
Templeton Dragon Fund, Inc.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007
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COUNTRY SHARES/UNITS VALUE
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COMMON STOCKS AND OTHER EQUITY INTERESTS 100.0%
AIR FREIGHT & LOGISTICS 0.1%
Sinotrans Ltd., H .......................................................... China 3,017,000 $ 1,330,899
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AUTO COMPONENTS 1.6%
Cheng Shin Rubber Industry Co. Ltd. ........................................ Taiwan 10,519,391 17,191,727
Norstar Founders Group Ltd. ................................................ Hong Kong 13,376,000 3,876,555
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21,068,282
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AUTOMOBILES 1.6%
Dongfeng Motor Corp., H .................................................... China 27,354,000 19,292,777
Great Wall Motor Co. Ltd., H ............................................... China 1,127,000 1,621,541
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20,914,318
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COMMERCIAL BANKS 8.7%
Bank of China Ltd., H ...................................................... China 22,222,000 10,771,747
a Bank of China Ltd., H, 144A ................................................ China 20,840,000 10,101,845
China Construction Bank Corp., H ........................................... China 81,776,000 69,316,802
b Chinatrust Financial Holding Co. Ltd. ...................................... Taiwan 2,153,896 1,530,907
a Industrial and Commercial Bank of China, H, 144A ........................... China 31,104,000 22,336,518
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114,057,819
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COMMUNICATIONS EQUIPMENT 0.5%
D-Link Corp. ............................................................... Taiwan 1,905,301 3,366,443
ZTE Corp., H ............................................................... China 488,000 2,628,333
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5,994,776
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COMPUTERS & PERIPHERALS 4.5%
Acer Inc. .................................................................. Taiwan 3,636,360 7,120,224
Advantech Co. Ltd. ......................................................... Taiwan 1,727,219 3,935,907
Asustek Computer Inc. ...................................................... Taiwan 13,327,755 40,028,472
Lite-On IT Corp. ........................................................... Taiwan 5,531,720 4,511,686
Lite-On Technology Corp. ................................................... Taiwan 1,988,514 3,470,549
----------------
59,066,838
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DISTRIBUTORS 2.0%
China Resources Enterprise Ltd. ............................................ Hong Kong 5,818,000 24,993,652
b Dah Chong Hong Holdings Ltd. ............................................... Hong Kong 2,648,520 1,188,728
a,b Dah Chong Hong Holdings Ltd., 144A ......................................... Hong Kong 550,000 246,855
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26,429,235
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DIVERSIFIED TELECOMMUNICATION SERVICES 2.3%
China Netcom Group Corp. (Hong Kong) Ltd. .................................. China 1,456,000 4,378,400
China Telecom Corp. Ltd., H ................................................ China 32,240,000 25,632,910
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30,011,310
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ELECTRIC UTILITIES 3.2%
Cheung Kong Infrastructure Holdings Ltd. ................................... Hong Kong 11,060,000 41,343,276
----------------
ELECTRICAL EQUIPMENT 1.0%
BYD Co. Ltd., H ............................................................ China 337,500 2,233,236
Phoenixtec Power Co. Ltd. .................................................. Taiwan 7,339,945 11,146,849
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13,380,085
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Annual Report | 9
Templeton Dragon Fund, Inc.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
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COUNTRY SHARES/UNITS VALUE
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COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
ELECTRONIC EQUIPMENT & INSTRUMENTS 1.2%
AU Optronics Corp. ......................................................... Taiwan 6,856,845 $ 13,426,138
Yorkey Optical International Cayman Ltd. ................................... China 8,097,000 2,107,810
----------------
15,533,948
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FOOD & STAPLES RETAILING 11.1%
Dairy Farm International Holdings Ltd. ..................................... Hong Kong 33,360,378 145,451,248
----------------
FOOD PRODUCTS 0.7%
b China Foods Ltd. ........................................................... China 5,320,000 3,963,683
People's Food Holdings Ltd. ................................................ China 3,031,000 2,334,046
Uni-President Enterprises Corp. ............................................ Taiwan 1,407,231 1,904,947
Xiwang Sugar Holdings Co. Ltd. ............................................. Hong Kong 2,996,000 1,290,899
----------------
9,493,575
----------------
HOTELS, RESTAURANTS & LEISURE 0.4%
NagaCorp Ltd. .............................................................. Cambodia 17,265,000 5,645,702
----------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 3.0%
Datang International Power Generation Co. Ltd., H .......................... China 29,806,000 26,602,603
Guangdong Electric Power Development Co. Ltd., B ........................... China 8,604,300 7,480,945
Huadian Power International Corp. Ltd., H .................................. China 8,404,000 4,267,686
Huaneng Power International Inc., H ........................................ China 1,454,000 1,530,801
----------------
39,882,035
----------------
INDUSTRIAL CONGLOMERATES 5.1%
Citic Pacific Ltd. ......................................................... Hong Kong 6,638,000 37,071,197
Shanghai Industrial Holdings Ltd. .......................................... China 6,850,000 29,866,249
----------------
66,937,446
----------------
INSURANCE 0.3%
China Life Insurance Co. Ltd., H ........................................... China 786,000 4,067,029
----------------
IT SERVICES 0.4%
Travelsky Technology Ltd., H ............................................... China 5,463,000 5,807,603
----------------
MACHINERY 1.8%
China Infrastructure Machinery Holdings Ltd. ............................... Hong Kong 1,449,000 2,292,951
China International Marine Containers (Group) Co. Ltd., B .................. China 11,818,895 21,930,908
----------------
24,223,859
----------------
MEDIA 0.1%
a Next Media Ltd., 144A ...................................................... Hong Kong 4,974,000 1,766,838
----------------
METALS & MINING 0.2%
Aluminum Corp. of China Ltd., H ............................................ China 952,000 1,965,505
----------------
OIL, GAS & CONSUMABLE FUELS 28.4%
a China Coal Energy Co., H, 144A ............................................. China 891,000 2,799,336
China Petroleum and Chemical Corp., H ...................................... China 97,904,000 147,896,169
China Shenhua Energy Co. Ltd., H ........................................... China 6,448,000 38,532,053
CNOOC Ltd. ................................................................. China 24,902,000 42,407,581
a CNOOC Ltd., 144A ........................................................... China 14,270,000 24,301,509
PetroChina Co. Ltd., H ..................................................... China 57,624,000 102,713,943
Yanzhou Coal Mining Co. Ltd., H ............................................ China 7,680,000 15,225,863
----------------
373,876,454
----------------
10 | Annual Report
Templeton Dragon Fund, Inc.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
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COUNTRY SHARES/UNITS VALUE
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COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
PHARMACEUTICALS 0.1%
Tong Ren Tang Technologies Co. Ltd., H ..................................... China 679,000 $ 1,262,551
----------------
REAL ESTATE 1.6%
Cheung Kong (Holdings) Ltd. ................................................ Hong Kong 1,167,000 21,579,795
----------------
REAL ESTATE MANAGEMENT & DEVELOPMENT 0.2%
b Soho China Ltd. ............................................................ China 1,265,500 1,306,379
a,b Soho China Ltd., 144A ...................................................... China 764,000 788,679
----------------
2,095,058
----------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 3.8%
MediaTek Inc. .............................................................. Taiwan 380,000 4,933,087
Novatek Microelectronics Corp. Ltd. ........................................ Taiwan 2,848,673 10,892,243
b Semiconductor Manufacturing International Corp. ............................ China 30,520,000 3,209,294
Sunplus Technology Co. Ltd. ................................................ Taiwan 3,628,419 5,437,594
Taiwan Semiconductor Manufacturing Co. Ltd. ................................ Taiwan 13,506,914 25,822,654
----------------
50,294,872
----------------
SPECIALTY RETAIL 0.1%
I.T Ltd. ................................................................... Hong Kong 1,934,000 719,226
Sa Sa International Holdings Ltd. .......................................... Hong Kong 2,430,000 994,050
----------------
1,713,276
----------------
TEXTILES, APPAREL & LUXURY GOODS 0.5%
Tack Fat Group International Ltd. .......................................... Hong Kong 19,824,000 2,415,050
Tainan Enterprises Co. Ltd. ................................................ Taiwan 1,657,443 2,248,766
Weiqiao Textile Co. Ltd., H ................................................ China 801,000 1,146,326
----------------
5,810,142
----------------
TRANSPORTATION INFRASTRUCTURE 2.9%
Cosco Pacific Ltd. ......................................................... China 3,354,000 8,946,179
Hopewell Holdings Ltd. ..................................................... Hong Kong 5,876,000 27,126,608
a Rickmers Maritime, 144A .................................................... Singapore 2,904,000 2,316,834
----------------
38,389,621
----------------
WIRELESS TELECOMMUNICATION SERVICES 12.6%
China Mobile Ltd. .......................................................... China 8,905,000 157,474,192
Taiwan Mobile Co. Ltd. ..................................................... Taiwan 6,292,764 8,440,803
----------------
165,914,995
----------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $522,652,917) ..................................................... 1,315,308,390
----------------
Annual Report | 11
Templeton Dragon Fund, Inc.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
------------------------------------------------------------------------------------------------------------------------------------
COUNTRY SHARES VALUE
------------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENT (COST $107,990) 0.0% c
MONEY MARKET FUND 0.0% c
d Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.58% ....... United States 107,990 $ 107,990
----------------
TOTAL INVESTMENTS (COST $522,760,907) 100.0% ............................... 1,315,416,380
OTHER ASSETS, LESS LIABILITIES 0.0% c ...................................... (39,157)
----------------
NET ASSETS 100.0% .......................................................... $ 1,315,377,223
================
a 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 December 31, 2007, the aggregate value of
these securities was $64,658,414, representing 4.92% of net assets.
b Non-income producing for the twelve months ended December 31, 2007.
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.
| Annual Report
Templeton Dragon Fund, Inc.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2007
Assets:
Investments in securities:
Cost - Unaffiliated issuers ................................................................ $ 522,652,917
Cost - Sweep Money Fund (Note 7) ........................................................... 107,990
---------------
Total cost of investments .................................................................. $ 522,760,907
===============
Value - Unaffiliated issuers ............................................................... $1,315,308,390
Value - Sweep Money Fund (Note 7) .......................................................... 107,990
---------------
Total value of investments ................................................................. 1,315,416,380
Receivables:
Investment securities sold ................................................................. 11,294,893
---------------
Total assets ............................................................................ 1,326,711,273
---------------
Liabilities:
Payables:
Affiliates ................................................................................. 1,626,530
Funds advanced by custodian ................................................................... 9,483,572
Accrued expenses and other liabilities ........................................................ 223,948
---------------
Total liabilities ....................................................................... 11,334,050
---------------
Net assets, at value ................................................................. $1,315,377,223
===============
Net assets consist of:
Paid-in capital ............................................................................... $ 458,954,780
Undistributed net investment income ........................................................... 21,911,851
Net unrealized appreciation (depreciation) .................................................... 792,656,249
Accumulated net realized gain (loss) .......................................................... 41,854,343
===============
Net assets, at value .................................................................... $1,315,377,223
===============
Shares outstanding ............................................................................ 37,873,327
===============
Net asset value per share ..................................................................... $ 34.73
===============
Annual 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 year ended December 31, 2007
Investment income:
Dividends (net of foreign taxes of $1,308,549)
Unaffiliated issuers ...................................................................... $ 38,490,693
Sweep Money Fund (Note 7) ................................................................. 907,961
Interest (net of foreign taxes of $472) ...................................................... 1,909
---------------
Total investment income ................................................................ 39,400,563
---------------
Expenses:
Management fees (Note 3a) .................................................................... 14,655,479
Administrative fees (Note 3b) ................................................................ 1,777,524
Transfer agent fees .......................................................................... 130,657
Custodian fees (Note 4) ...................................................................... 523,739
Reports to shareholders ...................................................................... 80,576
Registration and filing fees ................................................................. 36,309
Professional fees ............................................................................ 158,643
Directors' fees and expenses ................................................................. 66,396
Other ........................................................................................ 35,865
---------------
Total expenses ......................................................................... 17,465,188
Expense reductions (Note 4) ............................................................ (16,000)
---------------
Net expenses ........................................................................ 17,449,188
---------------
Net investment income ............................................................ 21,951,375
---------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ............................................................................... 118,760,899
Foreign currency transactions ............................................................. 11,331
---------------
Net realized gain (loss) ............................................................ 118,772,230
---------------
Net change in unrealized appreciation (depreciation) on:
Investments ............................................................................... 276,726,066
Translation of assets and liabilities denominated
in foreign currencies .................................................................. 402
---------------
Net change in unrealized appreciation (depreciation) ................................ 276,726,468
---------------
Net realized and unrealized gain (loss) ......................................................... 395,498,698
---------------
Net increase (decrease) in net assets resulting from
operations ................................................................................... $ 417,450,073
===============
14 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Templeton Dragon Fund, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
----------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------
2007 2006
----------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ................................................... $ 21,951,375 $ 14,446,350
Net realized gain (loss) from investments and foreign currency
transactions .......................................................... 118,772,230 100,452,988
Net change in unrealized appreciation (depreciation) on investments
and translation of assets and liabilities denominated in foreign
currencies ............................................................ 276,726,468 168,625,532
----------------------------------
Net increase (decrease) in net assets resulting from operations .... 417,450,073 283,524,870
----------------------------------
Distributions to shareholders from:
Net investment income .................................................... (12,645,904) (14,005,159)
Net realized gains ....................................................... (110,120,527) (74,852,814)
----------------------------------
Total distributions to shareholders ......................................... (122,766,431) (88,857,973)
----------------------------------
Capital shares transactions: (Note 2) ....................................... 2,783,627 --
----------------------------------
Net increase (decrease) in net assets .............................. 297,467,269 194,666,897
Net assets:
Beginning of year ........................................................... 1,017,909,954 823,243,057
----------------------------------
End of year ................................................................. $ 1,315,377,223 $ 1,017,909,954
==================================
Undistributed net investment income included in net assets:
End of year ................................................................. $ 21,911,851 $ 12,644,038
==================================
Annual Report |
The accompanying notes are an integral part of these financial statements. | 15
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Templeton Dragon Fund, Inc. (Fund) is registered under the Investment Company
Act of 1940, as amended, (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 | Annual Report
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (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.
Annual Report | 17
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (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 December 31, 2007, there were 100 million shares authorized ($0.01 par
value). Transactions in the Fund's shares were as follows:
-----------------------------------------
YEAR ENDED DECEMBER 31,
2007 2006
-----------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------
Shares issued for reinvestments
of distributions ............... 103,212 $ 2,783,627 -- --
18 | Annual Report
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
The Fund's Board of Directors previously authorized an open-market share
repurchase program pursuant to which 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 years ended December 31, 2007 and
December 31, 2006, there were no shares repurchased.
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
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 year ended December 31, 2007, the
custodian fees were reduced as noted in the Statement of Operations.
Annual Report | 19
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES
The Fund has reviewed the tax positions taken on federal income tax returns, for
each of the open tax years and as of December 31, 2007 and has determined that
no provision for income tax is required in the Fund's financial statements.
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, 2007, the Fund deferred realized currency losses of
$59,705.
The tax character of distributions paid during the years ended December 31, 2007
and 2006, was as follows:
---------------------------
2007 2006
---------------------------
Distributions paid from:
Ordinary income ....................... $ 27,708,126 $19,999,276
Long term capital gain ................ 95,058,305 68,858,697
---------------------------
$122,766,431 $88,857,973
===========================
At December 31, 2007, the cost of investments, net unrealized appreciation
(depreciation), for income tax purposes were as follows:
Cost of investments ................................... $ 522,905,961
==============
Unrealized appreciation ............................... $ 810,258,088
Unrealized depreciation ............................... (17,747,669)
--------------
Net unrealized appreciation (depreciation) ............ $ 792,510,419
==============
Undistributed ordinary income ......................... $ 24,057,660
Undistributed long term capital gains ................. 39,913,293
--------------
Distributable earnings ................................ $ 63,970,953
==============
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of foreign currency transactions.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales and foreign currency
transactions.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
year ended December 31, 2007, aggregated $184,882,147 and $274,769,813,
respectively.
20 | Annual Report
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Fund may invest in the Franklin Institutional Fiduciary Trust Money Market
Portfolio (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.
9. REORGANIZATION TO A DELAWARE STATUTORY TRUST
On May 29, 2002, the Board of Directors approved an Agreement and Plan of
Reorganization (Agreement) whereby the Fund would be reorganized and its
domicile changed from a Maryland corporation to a Delaware statutory trust. The
completion of the reorganization is pending quidance 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. 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.
Annual Report | 21
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. REGULATORY AND LITIGATION MATTERS (CONTINUED)
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.
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.
11. NEW ACCOUNTING PRONOUNCEMENT
In September 2006, 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 | Annual Report
Templeton Dragon Fund, Inc.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF TEMPLETON DRAGON FUND, INC.
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Templeton Dragon Fund, Inc. (the
"Fund") at December 31, 2007, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the five years in the period
then ended, in conformity with accounting principles generally accepted in the
United States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 2007 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
February 20, 2008
Annual Report | 23
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.
24 | Annual Report
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 BNY Mellon Shareholder Services, P.O. Box 358035,
Pittsburgh, PA 15252-8035, 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
BNY Mellon Shareholder 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.
Annual Report | 25
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.
26 | Annual Report
Templeton Dragon Fund, Inc.
TRANSFER AGENT
BNY Mellon Shareholder Services
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 BNY Mellon Shareholder
Services 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 BNY Mellon Shareholder 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 BNY Mellon
Shareholder 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.
Annual Report | 27
Templeton Dragon Fund, Inc.
TAX DESIGNATION (UNAUDITED)
Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund
designates the maximum amount allowable but no less than $102,475,962 as a long
term capital gain dividend for the fiscal year ended December 31, 2007.
Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $16,254,656 as a short term capital gain dividend for
purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended December 31, 2007.
Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $6,152,277 as qualified dividends for purposes of the
maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2007. In January 2008, shareholders will receive Form 1099-DIV
which will include their share of qualified dividends distributed during the
calendar year 2007. Shareholders are advised to check with their tax advisors
for information on the treatment of these amounts on their individual income tax
returns.
At December 31, 2007, more than 50% of the Fund's total assets were invested in
securities of foreign issuers. In most instances, foreign taxes were withheld
from income paid to the Fund on these investments. As shown in the table below,
the Fund designates to shareholders the foreign source income and foreign taxes
paid, pursuant to Section 853 of the Code. This designation will allow
shareholders of record on December 21, 2007, to treat their proportionate share
of foreign taxes paid by the Fund as having been paid directly by them. The
shareholder shall consider these amounts as foreign taxes paid in the tax year
in which they receive the Fund distribution.
The following table provides a detailed analysis of foreign tax paid, foreign
source income, and foreign qualified dividends as designated by the Funds, to
Class A shareholders of record.
Record Date: 12/21/2007
------------------------------------------------------------------------------------------------------
FOREIGN TAX PAID FOREIGN SOURCE INCOME FOREIGN QUALIFIED DIVIDENDS
CLASS PER SHARE PER SHARE PER SHARE
------------------------------------------------------------------------------------------------------
Class A ..................... $ 0.0346 $ 0.7170 $ 0.1107
Foreign Tax Paid Per Share (Column 1) is the amount per share available to you,
as a tax credit (assuming you held your shares in the Fund for a minimum of 16
days during the 31-day period beginning 15 days before the ex-dividend date of
the Fund's distribution to which the foreign taxes relate), or, as a tax
deduction.
28 | Annual Report
Templeton Dragon Fund, Inc.
TAX DESIGNATION (UNAUDITED) (CONTINUED)
Foreign Source Income Per Share (Column 2) is the amount per share of income
dividends paid to you that is attributable to foreign securities held by the
Fund, plus any foreign taxes withheld on these dividends. The amounts reported
include foreign source qualified dividends that have not been adjusted for the
rate differential applicable to such dividend income. 1
Foreign Qualified Dividends Per Share (Column 3) is the amount per share of
foreign source qualified dividends the Fund paid to you, plus any foreign taxes
withheld on these dividends. These amounts represent the portion of the Foreign
Source Income reported to you in column 2 that were derived from qualified
foreign securities held by the Fund. 1
In January 2008, shareholders will receive Form 1099-DIV which will include
their share of taxes paid and foreign source income distributed during the
calendar year 2007. The Foreign Source Income reported on Form 1099-DIV has not
been adjusted for the rate differential on foreign source qualified dividend
income. Shareholders are advised to check with their tax advisors for
information on the treatment of these amounts on their 2007 individual income
tax returns.
1 Qualified dividends are taxed at a maximum rate of 15% (5% for those in the
10% and 15% income tax bracket). In determining the amount of foreign tax credit
that may be applied against the U.S. tax liability of individuals receiving
foreign source qualified dividends, adjustments may be required to the foreign
tax credit limitation calculation to reflect the rate differential applicable to
such dividend income. The rules however permit certain individuals to elect not
to apply the rate differential adjustments for capital gains and/or dividends
for any taxable year. Please consult your tax advisor and the instructions to
Form 1116 for more information.
Annual Report | 29
Templeton Dragon Fund, Inc.
BOARD MEMBERS AND OFFICERS
The name, year of birth and address of the officers and board members, as well
as their affiliations, positions held with the Fund, principal occupations
during the past five years and number of U.S. registered portfolios overseen in
the Franklin Templeton Investments fund complex are shown below. Generally, each
board member serves a three-year term that continues until that person's
successor is elected and qualified.
INDEPENDENT BOARD MEMBERS
------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
------------------------------------------------------------------------------------------------------------------------------------
HARRIS J. ASHTON (1932) Director Since 1994 141 Bar-S Foods (meat packing company).
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief
Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998).
------------------------------------------------------------------------------------------------------------------------------------
FRANK J. CROTHERS (1944) Director Since 1998 20 Fortis, Inc. (utility holding
500 East Broward Blvd. company), Nuinsco Resources
Suite 2100 Limited (mineral exploration),
Fort Lauderdale, FL 33394-3091 Royal Fidelity Merchant Bank &
Trust Limited (financial
services), C.A. Bancorp Inc.
(financial services), Victory
Nickel Inc. (mineral exploration),
ABACO Markets Limited (retail
distributors) and Belize
Electricity Limited (electric
utility).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman, Island Corporate Holdings Ltd.; Director and Vice Chairman, Caribbean Utilities Company Ltd.; Director, Provo Power
Company Ltd.; director of various other business and nonprofit organizations; and FORMERLY, Chairman, Atlantic Equipment & Power
Ltd. (1977-2003).
------------------------------------------------------------------------------------------------------------------------------------
EDITH E. HOLIDAY (1952) Lead Director since 141 Hess Corporation (exploration and
500 East Broward Blvd. Independent 1996 and Lead refining of oil and gas), H.J.
Suite 2100 Director Independent Heinz Company (processed foods and
Fort Lauderdale, FL 33394-3091 Director since allied products), RTI International
December 2007 Metals, Inc. (manufacture and
distribution of titanium), Canadian
National Railway (railroad) and
White Mountains Insurance Group,
Ltd. (holding company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of
the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and
Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989).
------------------------------------------------------------------------------------------------------------------------------------
30 | Annual Report
------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
------------------------------------------------------------------------------------------------------------------------------------
DAVID W. NIEMIEC (1949) Director Since 2005 20 Emeritus Corporation (assisted
500 East Broward Blvd. living) and OSI Pharmaceuticals,
Suite 2100 Inc. (pharmaceutical products).
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Advisor, Saratoga Partners (private equity fund); Director, various private companies; and Managing Director, Saratoga Partners
FORMERLY, (1998-2001) and SBC Warburg Dillon Read (investment banking) (1997-1998); Vice Chairman, Dillon, Read & Co. Inc.
(investment banking) (1991-1997); and Chief Financial Officer, Dillon, Read & Co. Inc. (1982-1997).
------------------------------------------------------------------------------------------------------------------------------------
FRANK A. OLSON (1932) Director Since 2003 141 Hess Corporation (exploration and
500 East Broward Blvd. refining of oil and gas) and
Suite 2100 Sentient Jet (private jet service).
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer
(1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines).
------------------------------------------------------------------------------------------------------------------------------------
LARRY D. THOMPSON (1945) Director Since 2005 141 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY,
Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (credit card provider) (1997-2001); Senior Fellow of
The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General,
U.S. Department of Justice (2001-2003).
------------------------------------------------------------------------------------------------------------------------------------
CONSTANTINE D. TSERETOPOULOS Director Since 1997 20 None
(1954)
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Physician, Lyford Cay Hospital (1987-present); director of various nonprofit organizations; and FORMERLY, Cardiology Fellow,
University of Maryland (1985-1987) and Internal Medicine Resident, Greater Baltimore Medical Center (1982-1985).
------------------------------------------------------------------------------------------------------------------------------------
ROBERT E. WADE (1946) Director Since 2006 34 El Oro and Exploration Co., p.l.c.
500 East Broward Blvd. (investments) and ARC Wireless
Suite 2100 Solutions, Inc. (wireless
Fort Lauderdale, FL 33394-3091 components and network products).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Practicing attorney.
------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 31
INTERESTED BOARD MEMBERS AND OFFICERS
------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
------------------------------------------------------------------------------------------------------------------------------------
**CHARLES B. JOHNSON (1933) Director and Since 1994 141 None
One Franklin Parkway Vice President
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Templeton Worldwide, Inc.;
and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 42
of the investment companies in Franklin Templeton Investments.
------------------------------------------------------------------------------------------------------------------------------------
**GREGORY E. JOHNSON (1961) Director Since 2006 92 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, President and Chief Executive Officer, Franklin Resources, Inc.; President, Templeton Worldwide, Inc.; Director, Templeton
Asset Management Ltd.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin
Resources, Inc. and of 33 of the investment companies in Franklin Templeton Investments.
------------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (1952) Chief Chief Not Applicable Not Applicable
One Franklin Parkway Compliance Compliance
San Mateo, CA 94403-1906 Officer and Officer since
Vice President 2004 and Vice
- AML President
Compliance - AML
Compliance
since 2006
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of
46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc.
(1994-2001).
------------------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (1947) Senior Vice Since 2002 Not Applicable Not Applicable
500 East Broward Blvd. President
Suite 2100 and Chief
Fort Lauderdale, FL 33394-3091 Executive
Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other
subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
------------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; officer and director of one of the subsidiaries of Franklin
Resources, Inc.; and officer of 46 of the investment companies in Franklin Templeton Investments.
------------------------------------------------------------------------------------------------------------------------------------
32 | Annual Report
------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
------------------------------------------------------------------------------------------------------------------------------------
RUPERT H. JOHNSON, JR. (1940) Vice President Since 1996 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc. and
Templeton Worldwide, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the
case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the investment companies in Franklin
Templeton Investments.
------------------------------------------------------------------------------------------------------------------------------------
JOHN R. KAY (1940) Vice President Since 1994 Not Applicable Not Applicable
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Templeton Worldwide, Inc.; Senior Vice President, Franklin Templeton Services, LLC; and officer of some of the other
subsidiaries of Franklin Resources, Inc. and of 32 of the investment companies in Franklin Templeton Investments; and FORMERLY,
Vice President and Controller, Keystone Group, Inc.
------------------------------------------------------------------------------------------------------------------------------------
MARK MOBIUS (1936) President President Not Applicable Not Applicable
17th Floor, and Chief since 1994 and
The Chater House Executive Chief
8 Connaught Road Officer - Executive
Central, Hong Kong Investment Officer -
Management Investment
Management
since 2002
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Portfolio Manager of various Templeton advisory affiliates; Managing Director, Templeton Asset Management Ltd.; and officer and/or
director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of six of the investment companies
in Franklin Templeton Investments; and FORMERLY, President, International Investment Trust Company Limited (investment manager of
Taiwan R.O.C. Fund) (1986-1987); and Director, Vickers da Costa, Hong Kong (1983-1986).
------------------------------------------------------------------------------------------------------------------------------------
ROBERT C. ROSSELOT (1960) Secretary Since 2004 Not Applicable Not Applicable
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President and
Secretary, Templeton Investment Counsel, LLC; Vice President, Secretary and Trust Officer, Fiduciary Trust International of the
South; and officer of 14 of the investment companies in Franklin Templeton Investments.
------------------------------------------------------------------------------------------------------------------------------------
GREGORY R. SEWARD (1956) Treasurer Since 2004 Not Applicable Not Applicable
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 18 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 33
------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
------------------------------------------------------------------------------------------------------------------------------------
CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman & Sterling,
LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
------------------------------------------------------------------------------------------------------------------------------------
GALEN G. VETTER (1951) Chief Financial Since 2004 Not Applicable Not Applicable
500 East Broward Blvd. Officer and
Suite 2100 Chief
Fort Lauderdale, FL 33394-3091 Accounting
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; officer of some of the other subsidiaries of Franklin Resources, Inc. and
of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc.
(1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and 1991-2004).
------------------------------------------------------------------------------------------------------------------------------------
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments fund
complex. These portfolios have a common investment manager or affiliated
investment managers.
** Charles B. Johnson is considered to be an interested person of the Fund under
the federal securities laws due to his position as officer, director and major
shareholder of Franklin Resources, Inc. (Resources), which is the parent company
of the Fund's investment manager. Gregory E. Johnson is considered to be an
interested person of the Trust under the federal securities laws due to his
position as officer and director of Resources.
Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the
father and uncle, respectively, of Gregory E. Johnson.
Note 2: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.
Note 3: Prior to December 31, 2007, Nicholas F. Brady ceased to be a director of
the Fund.
THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE U.S. SECURITIES AND
EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT
COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL
EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD HAS DETERMINED
THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS
DESIGNATED DAVID W. NIEMIEC AS AN AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD
BELIEVES THAT MR. NIEMIEC QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE
BUSINESS BACKGROUND AND EXPERIENCE. MR. NIEMIEC HAS SERVED AS A MEMBER OF THE
FUND AUDIT COMMITTEE SINCE 2005, CURRENTLY SERVES AS AN ADVISOR TO SARATOGA
PARTNERS AND WAS FORMERLY ITS MANAGING DIRECTOR FROM 1998 TO 2001. MR. NIEMIEC
IS A DIRECTOR OF EMERITUS CORPORATION AND OSI PHARMACEUTICALS, INC. AND VARIOUS
PRIVATE COMPANIES, AND WAS FORMERLY MANAGING DIRECTOR OF SBC WARBURG DILLON READ
FROM 1997 TO 1998, AND WAS VICE CHAIRMAN FROM 1991 TO 1997 AND CHIEF FINANCIAL
OFFICER FROM 1982 TO 1997 OF DILLON, READ & CO. INC. AS A RESULT OF SUCH
BACKGROUND AND EXPERIENCE, THE BOARD BELIEVES THAT MR. NIEMIEC HAS ACQUIRED AN
UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL
STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE
ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING
FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF
ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN
UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN
UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MR. NIEMIEC IS AN INDEPENDENT BOARD
MEMBER AS THAT TERM IS DEFINED UNDER THE APPLICABLE U.S. SECURITIES AND EXCHANGE
COMMISSION RULES AND RELEASES.
34 | Annual Report
Templeton Dragon Fund, Inc.
SHAREHOLDER INFORMATION
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-CSRS for
the six months ended June 30, 2007. Additionally, the Fund expects to file, on
or about February 28, 2008, such certifications with its Form N-CSR for the year
ended December 31, 2007.
Annual Report | 35
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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 Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Growth Opportunities Fund 2
Franklin Small Cap Growth Fund II 3
Franklin Small-Mid Cap Growth Fund
VALUE
Franklin All Cap Value Fund
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 4
Mutual Shares Fund
BLEND
Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Focused Core Equity 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 5
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund
Franklin Income Fund
Franklin Limited Maturity U.S. Government Securities Fund 5
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 5
Templeton Global Bond Fund
Templeton Income Fund
Templeton International Bond 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
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 closed to new investors. Existing shareholders and select
retirement plans can continue adding to their accounts.
2. Effective 11/1/07, Franklin Aggressive Growth Fund changed its name to
Franklin Growth Opportunities Fund. The fund's investment goal and strategy
remained the same.
3. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
4. 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.
5. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
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.
12/07 Not part of the annual report
[LOGO](R)
FRANKLIN TEMPLETON 100 Fountain Parkway
INVESTMENTS P.O. Box 33030
St. Petersburg, FL 33733-8030
ANNUAL REPORT AND SHAREHOLDER INFORMATION
TEMPLETON DRAGON FUND, INC.
INVESTMENT MANAGER
Templeton Asset Management Ltd.
TRANSFER AGENT
Mellon Investor Services LLC
P.O. Box 358015
Pittsburgh, PA 15252-8015
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 A2007 02/08
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 expert is David W. Niemiec and he is
"independent" as defined under the relevant Securities and Exchange Commission
Rules and Releases.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant for the audit of the registrant's annual
financial statements or for services that are normally provided by the principal
accountant in connection with statutory and regulatory filings or engagements
were $57,775 for the fiscal year ended December 31, 2007 and $62,309 for the
fiscal year ended December 31, 2006.
(b) Audit-Related Fees
There were no fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant that are
reasonably related to the performance of the audit of the registrant's financial
statements and are not reported under paragraph (a) of Item 4.
There were no fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant's investment
adviser and any entity controlling, controlled by or under common control with
the investment adviser that provides ongoing services to the registrant that are
reasonably related to the performance of the audit of their financial
statements.
(c) Tax Fees
There were no fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant for tax compliance, tax
advice and tax planning.
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant for tax
compliance, tax advice and tax planning were $46,000 for the fiscal year ended
December 31, 2007 and $3,961 for the fiscal year ended December 31, 2006. The
services for which these fees were paid included tax compliance and advice.
(d) All Other Fees
The aggregate fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant not reported in
paragraphs (a)-(c) of Item 4 were $0 for the fiscal year ended December 31, 2007
and $486 for the fiscal year ended December 31, 2006. The services for which
these fees were paid included review of materials provided to the fund Board in
connection with the investment management contract renewal process.
The aggregate fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant other than
services reported in paragraphs (a)-(c) of Item 4 were $0 for the fiscal year
ended December 31, 2007 and $175,375 for the fiscal year ended December 31,
2006. The services for which these fees were paid included review of materials
provided to the fund Board in connect with the investment management contract
renewal process.
(e) (1) The registrant's audit committee is directly responsible for approving
the services to be provided by the auditors, including:
(i) pre-approval of all audit and audit related services;
(ii) pre-approval of all non-audit related services to be provided to
the Fund by the auditors;
(iii) pre-approval of all non-audit related services to be provided to
the registrant by the auditors to the registrant's investment adviser or to any
entity that controls, is controlled by or is under common control with the
registrant's investment adviser and that provides ongoing services to the
registrant where the non-audit services relate directly to the operations or
financial reporting of the registrant; and
(iv) establishment by the audit committee, if deemed necessary or
appropriate, as an alternative to committee pre-approval of services to be
provided by the auditors, as required by paragraphs (ii) and (iii) above, of
policies and procedures to permit such services to be pre-approved by other
means, such as through establishment of guidelines or by action of a designated
member or members of the committee; provided the policies and procedures are
detailed as to the particular service and the committee is informed of each
service and such policies and procedures do not include delegation of audit
committee responsibilities, as contemplated under the Securities Exchange Act of
1934, to management; subject, in the case of (ii) through (iv), to any waivers,
exceptions or exemptions that may be available under applicable law or rules.
(e) (2) None of the services provided to the registrant described in paragraphs
(b)-(d) of Item 4 were approved by the audit committee pursuant to paragraph
(c)(7)(i)(C) of Rule 2-01 of regulation S-X.
(f) No disclosures are required by this Item 4(f).
(g) The aggregate non-audit fees paid to the principal accountant for services
rendered by the principal accountant to the registrant and the registrant's
investment adviser and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
registrant were $46,000 for the fiscal year ended December 31, 2007 and $179,822
for the fiscal year ended December 31, 2006.
(h) The registrant's audit committee of the board has considered whether the
provision of non-audit services that were rendered to the registrant's
investment adviser (not including any sub-adviser whose role is primarily
portfolio management and is subcontracted with or overseen by another investment
adviser), and any entity controlling, controlled by, or under common control
with the investment adviser that provides ongoing services to the registrant
that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of
Regulation S-X is compatible with maintaining the principal accountant's
independence.
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 RiskMetrics Group
(RiskMetrics), 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 RiskMetrics' and/or Glass Lewis' analyses are thoroughly reviewed and
considered in making a final voting decision, the manager does not consider
recommendations from RiskMetrics, 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
may defer to the voting recommendation of RiskMetrics, 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. If
the conflict is not resolved by the Fund, the Proxy Group may 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 RiskMetrics, Glass Lewis or those of another independent third party provider
of proxy services; or send the proxy directly to the Fund. Where the Proxy Group
or 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.
Where a material conflict of interest has been identified, but the items on
which the manager's vote recommendations differ from Glass Lewis, RiskMetrics,
or another independent third party provider of proxy services relate
specifically to (1) shareholder proposals regarding social or environmental
issues or political contributions, (2) "Other Business" without describing the
matters that might be considered, or (3) items the manager wishes to vote in
opposition to the recommendations of an issuer's management, the Proxy Group may
defer to the vote recommendations of the manager rather than sending the proxy
directly to the Fund for approval.
To avoid certain potential conflicts of interest, the manager will employ echo
voting, if possible, in the following instances: (1) when the Fund invests in an
underlying fund in reliance on Sections 12(d)(1) of the 1940 Act, or pursuant to
an SEC exemptive order; (2) when the Fund invests uninvested cash in affiliated
money market funds pursuant to an SEC exemptive order ("cash sweep
arrangement"); or (3) when required pursuant to the Fund's governing documents
or applicable law. Echo voting means that the Investment Manager will vote the
shares in the same proportion as the vote of all of the other holders of the
fund's shares.
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 RiskMetrics 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.
(a)(1) As of February 28, 2008, the portfolio managers of the Fund are as
follows:
MARK MOBIUS, PH.D., MANAGING DIRECTOR OF TEMPLETON ASSET MANAGEMENT LTD.
Dr. Mobius has been a manager of the Fund since inception. He has overall
authority for supervising the team allocating the investments of the Fund. He
has final responsibility over all aspects of the Fund's investment portfolio,
including but not limited to, purchases and sales of individual securities,
portfolio risk assessment, and the management of daily cash balances in
accordance with anticipated management requirements. The degree to which he may
perform these functions, and the nature of these functions, may change from time
to time. Dr. Mobius joined Franklin Templeton Investments in 1987.
EDDIE CHOW, INVESTMENT ANALYST OF TEMPLETON ASSET MANAGEMENT LTD.
Mr. Chow heads the team with primary responsibility for allocation of
investments for the Fund. He has been working on the Fund since 2000 providing
research and advice on the purchases and sales of individual securities, and
portfolio risk assessment. Mr. Chow joined Franklin Templeton Investments in
1994.
(a)(2) This section reflects information about the portfolio managers as of
December 31, 2007.
The following table shows the number of other accounts managed by each portfolio
manager and the total assets in the accounts managed within each category:
--------------------------------------------------------------------------------------------------------
ASSETS ASSETS OF
NUMBER OF OTHER OTHER POOLED ASSETS OF
OF OTHER REGISTERED NUMBER OF INVESTMENTS OTHER
REGISTERED INVESTMENT OTHER POOLED VEHICLES NUMBER OF ACCOUNTS
INVESTMENT COMPANIES INVESTMENT MANAGED OTHERS MANAGED
COMPANIES MANAGED VEHICLES (X $1 ACCOUNTS (X $1
NAME MANAGED (x $1 MILLION) MANAGED/1 MILLION)/1 MANAGED/1 MILLION)/1
-----------------------------------------------------------------------------------------------------------
Mark Mobius 8 14,401.1 31 28,590.9 5 2,197.1
-----------------------------------------------------------------------------------------------------------
Eddie Chow 1 1,238.7 3 1,279.5 N/A 0
------------- ---------------------------------------------------------------------------------------------
1. The various pooled investment vehicles and accounts listed are managed by a
team of investment professionals. Accordingly, the individual managers listed
would not be solely responsible for managing such listed amounts.
Portfolio managers that provide investment services to the Fund may also provide
services to a variety of other investment products, including other funds,
institutional accounts and private accounts. The advisory fees for some of such
other products and accounts may be different than that charged to the Fund and
may include performance based compensation. This may result in fees that are
higher (or lower) than the advisory fees paid by the Fund. As a matter of
policy, each fund or account is managed solely for the benefit of the beneficial
owners thereof. As discussed below, the separation of the trading execution
function from the portfolio management function and the application of
objectively based trade allocation procedures helps to mitigate potential
conflicts of interest that may arise as a result of the portfolio managers
managing accounts with different advisory fees.
CONFLICTS. The management of multiple funds, including the Fund, and accounts
may also give rise to potential conflicts of interest if the funds and other
accounts have different objectives, benchmarks, time horizons, and fees as the
portfolio manager must allocate his or her time and investment ideas across
multiple funds and accounts. The manager seeks to manage such competing
interests for the time and attention of portfolio managers by having portfolio
managers focus on a particular investment discipline. Most other accounts
managed by a portfolio manager are managed using the same investment strategies
that are used in connection with the management of the Fund. Accordingly,
portfolio holdings, position sizes, and industry and sector exposures tend to be
similar across similar portfolios, which may minimize the potential for
conflicts of interest. As noted above, the separate management of the trade
execution and valuation functions from the portfolio management process also
helps to reduce potential conflicts of interest. However, securities selected
for funds or accounts other than the Fund may outperform the securities selected
for the Fund. Moreover, if a portfolio manager identifies a limited investment
opportunity that may be suitable for more than one fund or other account, the
Fund may not be able to take full advantage of that opportunity due to an
allocation of that opportunity across all eligible funds and other accounts. The
manager seeks to manage such potential conflicts by using procedures intended to
provide a fair allocation of buy and sell opportunities among funds and other
accounts.
The structure of a portfolio manager's compensation may give rise to potential
conflicts of interest. A portfolio manager's base pay and bonus tend to increase
with additional and more complex responsibilities that include increased assets
under management. As such, there may be an indirect relationship between a
portfolio manager's marketing or sales efforts and his or her bonus.
Finally, the management of personal accounts by a portfolio manager may give
rise to potential conflicts of interest. While the funds and the manager have
adopted a code of ethics which they believe contains provisions reasonably
necessary to prevent a wide range of prohibited activities by portfolio managers
and others with respect to their personal trading activities, there can be no
assurance that the code of ethics addresses all individual conduct that could
result in conflicts of interest.
The manager and the Fund have adopted certain compliance procedures that are
designed to address these, and other, types of conflicts. However, there is no
guarantee that such procedures will detect each and every situation where a
conflict arises.
COMPENSATION. The manager seeks to maintain a compensation program that is
competitively positioned to attract, retain and motivate top-quality investment
professionals. Portfolio managers receive a base salary, a cash incentive bonus
opportunity, an equity compensation opportunity, and a benefits package.
Portfolio manager compensation is reviewed annually and the level of
compensation is based on individual performance, the salary range for a
portfolio manager's level of responsibility and Franklin Templeton guidelines.
Portfolio managers are provided no financial incentive to favor one fund or
account over another. Each portfolio manager's compensation consists of the
following three elements:
BASE SALARY Each portfolio manager is paid a base salary.
ANNUAL BONUS Annual bonuses are structured to align the interests of
the portfolio manager with those of the Fund's shareholders. Each
portfolio manager is eligible to receive an annual bonus. Bonuses
generally are split between cash (50% to 65%) and restricted shares of
a Franklin Templeton fund which vest over a three-year period (17.5% to
25%) and other mutual fund shares (17.5% to 25%). The deferred
equity-based compensation is intended to build a vested interest of the
portfolio manager in the financial performance of both Franklin
Resources and mutual funds advised by the manager. The bonus plan is
intended to provide a competitive level of annual bonus compensation
that is tied to the portfolio manager achieving consistently strong
investment performance, which aligns the financial incentives of the
portfolio manager and Fund shareholders. The Chief Investment Officer
of the manager and/or other officers of the manager, with
responsibility for the Fund, have discretion in the granting of annual
bonuses to portfolio managers in accordance with Franklin Templeton
guidelines. The following factors are generally used in determining
bonuses under the plan:
o INVESTMENT PERFORMANCE. Primary consideration is given to the
historic investment performance over the 1, 3 and 5 preceding
years of all accounts managed by the portfolio manager. The
pre-tax performance of each fund managed is measured relative to
a relevant peer group and/or applicable benchmark as appropriate.
o NON-INVESTMENT PERFORMANCE. The more qualitative contributions of
a portfolio manager to the manager's business and the investment
management team, including business knowledge, contribution to
team efforts, mentoring of junior staff, and contribution to the
marketing of the Fund, are evaluated in determining the amount of
any bonus award.
o RESEARCH. Where the portfolio management team also has research
responsibilities, each portfolio manager is evaluated on the
number and performance of recommendations over time.
o RESPONSIBILITIES. The characteristics and complexity of funds
managed by the portfolio manager are factored in the manager's
appraisal.
ADDITIONAL LONG-TERM EQUITY-BASED COMPENSATION Portfolio managers may
also be awarded restricted shares or units of one or more mutual funds,
and options to purchase common shares of a Franklin Templeton fund.
Awards of such deferred equity-based compensation typically vest over
time, so as to create incentives to retain key talent.
Portfolio managers also participate in benefit plans and programs available
generally to all employees of the manager.
OWNERSHIP OF FUND SHARES. The manager has a policy of encouraging portfolio
managers to invest in the funds they manage. Exceptions arise when, for example,
a fund is closed to new investors or when tax considerations or jurisdictional
constraints cause such an investment to be inappropriate for the portfolio
manager. The following is the dollar range of Fund shares beneficially owned by
each portfolio manager (such amounts may change from time to time):
----------------------------------------------------------
Dollar Range of Fund Shares
Portfolio Manager Beneficially Owned
----------------------------------------------------------
Mark Mobius None
----------------------------------------------------------
Eddie Chow None
----------------------------------------------------------
Note: Because the portfolio managers are all foreign nationals, they do not hold
shares in this U.S. registered fund, however they own shares in other similar
Franklin Templeton funds managed by them, registered offshore and appropriate
for foreign nationals.
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 Galen G. Vetter, Chief Executive Officer - Finance and Administration, and
Laura Fergerson, Chief Financial Officer and Chief Accounting Officer
(B) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
Galen G. Vetter, Chief Executive Officer - Finance and Administration, and Laura
Fergerson, Chief Financial Officer and Chief Accounting 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/GALEN G. VETTER
---------------------------------
Galen G. Vetter
Chief Executive Officer -
Finance and Administration
Date February 27, 2008
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/GALEN G. VETTER
---------------------------------
Galen G. Vetter
Chief Executive Officer -
Finance and Administration
Date February 27, 2008
By /s/LAURA FERGERSON
----------------------------------
Laura Fergerson
Chief Financial Officer and
Chief Accounting Officer
Date February 27, 2008