Semi
Annual
Report
[GRAPHIC OMITTED]
June 30, 2002
Templeton Dragon Fund, Inc.
[LOGO OMITTED]
Franklin(R)Templeton(R) Investments
[PHOTO OMITTED]
Mark Mobius, Ph.D.
PRESIDENT
TEMPLETON DRAGON FUND, INC.
Mark Mobius has been living in emerging market countries since earning his Ph.D.
in economics and political science at Massachusetts Institute of Technology in
1964. During his extensive travels, he has acquired a thorough knowledge of
business practices and customs unique to developing nations.
SHAREHOLDER LETTER
--------------------------------------------------------------------------------
YOUR FUND'S GOAL: TEMPLETON DRAGON FUND SEEKS LONG-TERM CAPITAL APPRECIATION BY
INVESTING AT LEAST 45% OF ITS TOTAL ASSETS IN THE EQUITY SECURITIES OF "CHINA
COMPANIES," AS DEFINED IN THE FUND'S PROSPECTUS.
--------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to bring you this semiannual report for Templeton Dragon Fund
covering the period ended June 30, 2002. During the six months under review,
China continued to be one of the fastest growing nations globally. China's
first quarter 2002 gross domestic product (GDP) grew an annualized 7.6% versus
first quarter 2001, compared with a 6.6% annualized growth rate in fourth
quarter 2001 versus fourth quarter 2000, in large part due to sustained
government expenditures.(1) Aiming to maintain high growth rates, China lowered
key interest rates for the first time since June 1999. The government hopes that
cheaper debt financing will encourage increased consumer spending.
As a result of China's accession into the World Trade Organization (WTO) and
commitment toward economic liberalization, foreign direct investment jumped
29.1% to US$14.1 billion in the first four months of 2002 compared
1. Source: National Bureau of Statistics, People's Republic of China, 3/31/02.
The dollar value, number of shares or principal value, and complete legal titles
of all portfolio holdings are listed in the Fund's Statement of Investments
(SOI). The SOI begins on page 9.
CONTENTS
Shareholder Letter ........ ........ 1
Performance Summary ................ 6
Important Notice to
Shareholders ....................... 7
Financial Highlights &
Statement of Investments ........... 8
Financial Statements ............... 12
Notes to
Financial Statements ............... 15
[GRAPHIC OMITTED]
FUND CATEGORY
Global
Growth
Growth
& Income
Income Tax-Free Income
[GRAPHIC OMITTED]
Geographic Distribution Based on Total Net Assets 6/30/02
China 43.6%
Hong Kong 37.9%
Taiwan 9.9%
Short-Term
Investments &
Other Net Assets 8.6%
with the same period in 2001.(2) According to the WTO, China has become one of
the world's top six trading nations. We believe China's WTO membership and
robust economy should continue to attract investments into the country. China
also embarked on negotiations with the Association of Southeast Asian Nations to
establish the largest free-trade bloc in the world. Other efforts to develop
regional and international relations include Chinese President Jiang Zemin's
visits to Russia and neighboring Vietnam and U.S. President Bush's trip to
mainland China in February.
Hong Kong's first quarter 2002 GDP fell an annualized 0.9% versus first quarter
2001. However, the government forecasts 2002 GDP to grow an annualized 1.0%.(3)
Unemployment reached 7.4% in May, up from 7.1% in April.(4) The jobless rate is
likely to rise further as new graduates join the work force in the summer. In
March, Hong Kong's Financial Secretary, Antony Leung, announced a budget deficit
estimated at US$8.4 billion, representing 5.2% of GDP.(5) Leung expects the
government to attain fiscal balance in fiscal year 2006-2007.
Ending three quarters of annualized declines, Taiwan's GDP grew an annualized
0.9% in first quarter 2002 compared with first quarter 2001 due to strengthening
export demand and the improving electronics industry. This growth was in
contrast to fourth quarter 2001's 1.9% annualized decline versus fourth quarter
2000.(6) We believe that exports may be a key driver of growth in 2002 and 2003.
In an effort to accelerate economic recovery and reduce unemployment, the
government
2. Source: Financial Times, CHINA POSTS STRONG ECONOMIC PERFORMANCE, 5/15/02.
3. Source: Census & Statistics Department, Hong Kong, 3/31/02.
4. Source: Census & Statistics Department, Hong Kong, 5/31/02.
5. Source: AFX News Limited, LEUNG - YR TO MARCH 2002 BUDGET DEFICIT
65.6 BLN HKD, 5.2 PCT/GDP, 3/6/02.
6. Source: Financial Times, TAIWAN'S GDP GREW IN Q1 AFTER THREE QUARTERS OF
FALL, 5/20/02.
2
announced a US$75.7 billion "Challenge 2008" plan.(7) We believe such actions
could result in greater trade, economic growth and corporate profitability, and
if so could lead to greater investor interest over the long term.
Within this environment, Templeton Dragon Fund delivered a six-month cumulative
total return of +23.10% in market-price terms and +17.01% in net asset value
terms for the period ended June 30, 2002, as shown in the Performance Summary on
page 6.
During the reporting period, China H shares (Hong Kong listed Chinese companies)
remained the Fund's largest allocation at 34.7% of total net assets on June 30,
2002. Although we sold a few of these holdings, China H shares' strong
performance as a group contributed to the Fund's significant weighting in these
shares. We selectively purchased some China Red Chip shares (Hong Kong listed
companies with significant exposure to China) because we believe these companies
have the potential to benefit from greater foreign interest. Fund performance
benefited, in part, from selective stock picking even though the Hong Kong
market generally lagged behind China's.
The Fund traded more actively in Taiwan. Sharply rising share prices in fourth
quarter 2001 led to some technology stocks becoming relatively fairly valued, in
our opinion. We repositioned our exposure from the technology sector to what we
believed were the better-valued financial and manufacturing sectors. Purchases
of various Taiwanese banks also increased
TOP 10 HOLDINGS
6/30/02
COMPANY
SECTOR/INDUSTRY, % OF TOTAL
COUNTRY NET ASSETS
--------------------------------------------------------------------------------
Dairy Farm International
Holdings Ltd. 9.0%
FOOD & DRUG RETAILING,
HONG KONG
China Petroleum &
Chemical Corp., H 5.8%
OIL & GAS, CHINA
Zhejiang Expressway Co.
Ltd., H 5.7%
TRANSPORTATION
INFRASTRUCTURE, CHINA
Hang Lung Group Ltd. 3.8%
REAL ESTATE, HONG KONG
Cheung Kong Infrastructure
Holdings Ltd. 3.6%
CONSTRUCTION MATERIALS,
HONG KONG
China Merchants Holdings
International Co. Ltd. 3.5%
INDUSTRIAL CONGLOMERATES,
HONG KONG
Tsingtao Brewery Co. Ltd., H 3.2%
BEVERAGES, CHINA
China Mobile
(Hong Kong) Ltd. 3.2%
WIRELESS TELECOMMUNICATION
SERVICES, CHINA
Jiangsu Expressway Co. Ltd. 3.1%
TRANSPORTATION
INFRASTRUCTURE, HONG KONG
TCL International
Holdings Inc. 3.0%
HOUSEHOLD DURABLES, CHINA
7. Source: Financial Times, ACER CUTS PROCUREMENT FROM OWN AFFILIATE, 5/20/02.
3
the Fund's exposure to the banking sector from 0.6% of total net assets at the
beginning of the period to 3.1% at period-end.
Within the Fund's top 10 holdings, China H company Tsingtao Brewery and China
Red Chip companies TCL International Holdings and China Mobile replaced China H
Huaneng Power International, China Red Chip Citic Pacific and Taiwanese company
Premier Image Technology during the reporting period. On June 30, 2002, the
transportation infrastructure sector dominated the portfolio, followed by food
and drug retailing and industrial conglomerates. Short-term investments and
other net assets increased from 6.4% of total net assets on December 31, 2001,
to 8.6% on June 30, 2002. We increased our cash position to make funds available
for the tender offer to purchase 10% of the Fund's shares, which began in June
2002.
Over the long term, we expect an improved global macroeconomic environment to
support China's strong growth and provide the potential for greater earnings
growth opportunities for Chinese companies. Furthermore, we believe heightened
interest in emerging markets investing should lead to increased capital inflows
into China. As for Taiwan, we anticipate the nation's investment environment may
remain relatively attractive due to strengthening macroeconomic fundamentals and
the stable political situation over the long term. Looking forward, we will
continue our search for value stocks trading at what we believe are appealing
valuations.
Of course, investing in any emerging market means accepting
a certain amount of volatility and, in some cases, the consequences of severe
market corrections. For example, Hong Kong's equity market has increased 337.85%
in the last 15 years, but has suffered 7 quarterly declines of more than 15%
each during
4
that time.(8) Investing in emerging markets, particularly "China companies,"
also entails special considerations, including risks related to market and
currency volatility, adverse economic, social and political developments, and
the markets' relatively small size and lesser liquidity. Also, as a
non-diversified investment company, the Fund may invest in a relatively small
number of issuers, which could result in a greater risk of loss. While
short-term volatility can be disconcerting, declines exceeding 50% are not
unusual in emerging markets.
Thank you for investing in Templeton Dragon Fund. We appreciate your confidence
and welcome your comments.
Sincerely,
/s/MARK MOBIUS
Mark Mobius
President
Templeton Dragon Fund, Inc.
8. Source: Standard & Poor's Micropal. Based on quarterly total return change
over 15 years ended 6/30/02. Market return is measured in U.S. dollars and
includes reinvested dividends. The MSCI Hong Kong Index is market
capitalization-weighted and measures the total returns of equity securities in
Hong Kong.
--------------------------------------------------------------------------------
This discussion reflects our views, opinions and portfolio holdings as of June
30, 2002, the end of the reporting period. The information provided is not a
complete analysis of every aspect of any country, industry, security or the
Fund. Our strategies and the Fund's portfolio composition will change depending
on market and economic conditions. Although historical performance is no
guarantee of future results, these insights may help you understand our
investment and management philosophy.
--------------------------------------------------------------------------------
5
PERFORMANCE SUMMARY AS OF 6/30/02
DISTRIBUTIONS WILL VARY BASED ON EARNINGS OF THE FUND'S PORTFOLIO AND ANY
PROFITS REALIZED FROM THE SALE OF THE PORTFOLIO'S SECURITIES, AS WELL AS THE
LEVEL OF THE FUND'S OPERATING EXPENSES. ALL TOTAL RETURNS INCLUDE REINVESTED
DISTRIBUTIONS ACCORDING TO THE TERMS SPECIFIED IN THE FUND'S DIVIDEND
REINVESTMENT AND CASH PURCHASE PLAN AND DO NOT REFLECT ANY SALES CHARGES PAID AT
INCEPTION OR BROKERAGE COMMISSIONS PAID ON SECONDARY MARKET PURCHASES.
PRICE AND DISTRIBUTION INFORMATION
CHANGE 6/30/02 12/31/01
--------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.50 $10.32 $8.82
Market Price (NYSE) +$1.73 $9.22 $7.49
1. Total return calculations represent the cumulative and average annual changes
in value of an investment over the periods indicated. Six-month returns have not
been annualized.
PERFORMANCE
COMMENCEMENT
OF OPERATIONS
6-MONTH 1-YEAR 5-YEAR (9/20/94)
--------------------------------------------------------------------------------
Cumulative Total Return(1)
Based on change in NAV +17.01% +3.58% -10.49% +41.59%
Based on change in market price +23.10% +11.97% -2.12% +18.91%
Average Annual Total Return(1)
Based on change in NAV +17.01% +3.58% -2.19% +4.57%
Based on change in market price +23.10% +11.97% -0.43% +2.25%
--------------------------------------------------------------------------------
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, currency volatility, and the economic,
social and political climates of 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 non-diversified 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. You may have
a gain or loss when you sell your shares.
--------------------------------------------------------------------------------
For updated performance figures, call Franklin Templeton Investments at
1-800/342-5236.
Past performance does not guarantee future results.
6
IMPORTANT NOTICE TO SHAREHOLDERS
--------------------------------------------------------------------------------
MEASUREMENT PERIOD. In June 2001, in efforts to address the Fund's
discount, the Board of Directors of the Fund established a nine-month
measurement period for evaluating the discount of the market value of the Fund's
shares from their net asset value. The Measurement Period began on August 1,
2001, and ended on April 30, 2002. According to the June 22, 2001, announcement,
if the Fund's shares traded at an average discount from net asset value of 10%
or more during the last 90 days of the Measurement Period (based on the closing
price of every trading day during those 90 days), then the Board would take one
of three actions, which included a tender offer for a portion of the Fund's
outstanding shares. On May 10, 2002, it was announced that the average discount
of the Fund's shares during the last 90 days of the Measurement Period exceeded
10%. Consistent with the announcement made on June 22, 2001, the Board of
Directors approved a tender offer for a portion of the Fund's outstanding
shares.
TENDER OFFER. On June 11, 2002, the Fund commenced a tender offer for up
to 4,874,109 shares, or 10%, of the Fund's outstanding shares at a price per
share equal to 90% of net asset value per share as of July 10, 2002, the
expiration date of the tender offer. A total of 4,364,925.9071 shares were
properly tendered and accepted for purchase at a purchase price of $9.45 per
share.
REPURCHASE PROGRAM. On May 10, 2002, the Board of Directors discontinued the
Fund's open-market share repurchase program.
--------------------------------------------------------------------------------
7
TEMPLETON DRAGON FUND, INC.
Financial Highlights
YEAR ENDED
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31,
JUNE 30, 2002 ---------------------------------------------------------
(UNAUDITED) 2001 2000 1999 1998+ 1998 1997
---------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE++
(for a share outstanding throughout the period)
Net asset value, beginning of period .............. $ 8.82 $9.91 $12.75 $10.00 $13.58 $18.25 $15.73
--------------------------------------------------------------------
Income from investment operations:
Net investment income ............................ .12 .25 .12 .31 .25 .37 .34
Net realized and unrealized gains (losses) ....... 1.38 (.37) (2.01) 3.58 (3.29) (3.58) 2.82
--------------------------------------------------------------------
Total from investment operations .................. 1.50 (.12) (1.89) 3.89 (3.04) (3.21) 3.16
--------------------------------------------------------------------
Capital share repurchases ......................... -- .01 .22 -- .03 -- --
--------------------------------------------------------------------
Less distributions from:
Net investment income ............................ -- (.23) (1.17) (.32) (.27) (.35) (.34)
Net realized gains ............................... -- -- -- -- -- (1.11) (.30)
Tax return of capital ............................ -- (.75) -- (.82) (.30) -- --
--------------------------------------------------------------------
Total distributions ............................... -- (.98) (1.17) (1.14) (.57) (1.46) (.64)
Net asset value, end of period .................... $10.32 $8.82 $ 9.91 $12.75 $10.00 $13.58 $18.25
--------------------------------------------------------------------
Market value, end of period(a) .................... $9.2200 $7.4900 $7.2500 $9.8125 $7.3750 $11.3750 $14.5000
--------------------------------------------------------------------
Total return (based on market value per share)* ... 23.10% 16.95% (15.31)% 50.11% (30.08)% (11.82) %7.80%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ................. $502,962 $429,889 $485,091 $673,869 $528,464 $733,533 $985,719
Ratios to average net assets:
Expenses ......................................... 1.54%** 1.54% 1.56% 1.59% 1.59%** 1.53% 1.50%
Net investment income ............................ 2.47%** 2.58% 1.04% 2.80% 3.21%** 2.14% 1.93%
Portfolio turnover rate ........................... 12.64% 70.94% 132.74% 66.60% 39.92% 13.59% 8.73%
*Total return is not annualized.
**Annualized.
+For the period April 1, 1998 to December 31, 1998. Prior to this period, the Fund's fiscal year end was March 31.
++Based on average weighted shares outstanding effective year ended December 31, 1999.
(a)Based on the last sale on the New York Stock Exchange.
See notes to financial statements.
8
TEMPLETON DRAGON FUND, INC.
STATEMENT OF INVESTMENTS, JUNE 30, 2002 (UNAUDITED)
COUNTRY SHARES VALUE
-----------------------------------------------------------------------------------------------------------
COMMON STOCKS 91.4%
AIRLINES .4%
China Southern Airlines Co. Ltd., H ......................... China 4,456,000 $ 1,813,832
-----------
AUTOMOBILES 1.3%
Qingling Motors Co. Ltd., H ................................. China 47,920,696 6,635,216
-----------
*BANKS 3.1%
Chinatrust Financial Holding Co. ............................ Taiwan 7,877,000 6,955,148
Sinopac Holdings ............................................ Taiwan 19,844,310 8,671,863
-----------
15,627,011
-----------
+BEVERAGES 3.2%
Tsingtao Brewery Co. Ltd., H ................................ China 40,502,000 16,226,867
-----------
*CHEMICALS 3.1%
Sinopec Beijing Yanhua Petrochemical Co. Ltd., H ............ China 72,215,887 10,647,282
Sinopec Shanghai Petrochemical Co. Ltd., H .................. China 32,138,000 4,779,528
-----------
15,426,810
-----------
COMMUNICATIONS EQUIPMENT .2%
Taiwan Cellular Corp. ....................................... Taiwan 848,000 1,083,795
-----------
COMPUTERS & PERIPHERALS 1.5%
CMC Magnetics Corp. ......................................... Taiwan 3,770,000 2,403,502
*Compeq Manufacturing Co. Ltd. ............................... Taiwan 2,879,000 2,671,326
Legend Group Ltd. ........................................... Hong Kong 6,838,000 2,498,516
-----------
7,573,344
-----------
CONSTRUCTION MATERIALS 3.6%
Cheung Kong Infrastructure Holdings Ltd. .................... Hong Kong 11,180,000 17,988,449
-----------
DISTRIBUTORS 1.8%
China Resources Enterprise Ltd. ............................. China 7,754,000 9,096,097
-----------
DIVERSIFIED FINANCIALS 2.4%
China Everbright Ltd. ....................................... China 14,095,788 7,770,805
Fubon Financial Holding Co. Ltd. ............................ Taiwan 1,400,374 1,399,955
*Yuanta Core Pacific Securities Co. .......................... Taiwan 4,884,020 3,026,016
-----------
12,196,776
-----------
ELECTRIC UTILITIES 4.9%
Beijing Datang Power Generation Co. Ltd., H ................. China 32,020,000 14,265,412
Huaneng Power International Inc., H ......................... China 12,896,000 10,581,401
-----------
24,846,813
-----------
ELECTRICAL EQUIPMENT 1.0%
Phoenixtec Power Co. Ltd. ................................... Taiwan 6,092,000 4,722,622
*Universal Scientific Industrial Co. Ltd. .................... Taiwan 1,002,000 377,887
-----------
5,100,509
-----------
*FOOD & DRUG RETAILING 9.0%
Dairy Farm International Holdings Ltd. ...................... Hong Kong 51,900,478 45,153,416
-----------
9
TEMPLETON DRAGON FUND, INC.
STATEMENT OF INVESTMENTS, JUNE 30, 2002 (UNAUDITED) (CONT.)
COUNTRY SHARES VALUE
-----------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
FOOD PRODUCTS 1.1%
UNI-President Enterprises Corp. ......................... Taiwan 15,601,000 $ 5,720,211
-----------
HOTELS RESTAURANTS & LEISURE 2.6%
Hong Kong & Shanghai Hotels Ltd. ........................ Hong Kong 28,157,000 13,085,869
-----------
HOUSEHOLD DURABLES 3.0%
TCL International Holdings Inc. ......................... China 53,614,000 15,121,994
-----------
INDUSTRIAL CONGLOMERATES 8.6%
Beijing Enterprises Holdings Ltd. ....................... Hong Kong 3,082,000 3,516,664
China Merchants Holdings International Co. Ltd. ......... Hong Kong 22,860,000 17,584,728
Citic Pacific Ltd. ...................................... Hong Kong 6,257,000 13,556,920
Hutchison Whampoa Ltd. .................................. Hong Kong 622,000 4,645,094
Shanghai Industrial Holdings Ltd. ....................... Hong Kong 2,008,000 3,874,435
-----------
43,177,841
-----------
IT CONSULTING & SERVICES .3%
Travelsky Technology Ltd., H ............................ China 1,911,000 1,310,758
-----------
LEISURE EQUIPMENT & PRODUCTS .2%
Giant Manufacturing Co. ................................. Taiwan 947,000 989,234
-----------
MARINE 1.9%
China Shipping Development Co. Ltd., H .................. China 43,988,000 9,474,399
-----------
+METALS & MINING 1.7%
Angang New Steel Company Ltd., H ........................ China 58,332,000 8,824,641
-----------
OIL & GAS 8.0%
China Petroleum & Chemical Corp., H ..................... China 164,928,000 29,391,204
PetroChina Co. Ltd., H .................................. China 50,880,000 10,828,377
-----------
40,219,581
-----------
PHARMACEUTICALS 1.3%
China Pharmaceutical Enterprise & Investment
Corp. Ltd. . ............................................ China 38,914,000 6,535,598
-----------
REAL ESTATE 7.2%
Cheung Kong Holdings Ltd. ............................... Hong Kong 989,000 8,241,719
Hang Lung Group Ltd. .................................... Hong Kong 20,415,000 19,237,335
Henderson China Holdings Ltd. ........................... Hong Kong 9,215,000 3,928,214
Henderson Investment Ltd. ............................... Hong Kong 5,701,000 4,787,409
-----------
36,194,677
-----------
ROAD & RAIL 1.4%
Guangshen Railway Co. Ltd., H ........................... China 27,326,000 5,184,967
MTR Corp. Ltd. .......................................... Hong Kong 1,555,849 2,014,638
-----------
7,199,605
-----------
10
TEMPLETON DRAGON FUND, INC.
STATEMENT OF INVESTMENTS, JUNE 30, 2002 (UNAUDITED) (CONT.)
COUNTRY SHARES VALUE
---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
*SEMICONDUCTOR EQUIPMENT & PRODUCTS 1.8%
Siliconware Precision Industries Co. Ltd. ............... Taiwan 6,242,000 $ 4,371,829
Taiwan Semiconductor Manufacturing Co. .................. Taiwan 80 163
United Microelectronics Corp. ........................... Taiwan 3,743,000 4,492,496
------------
8,864,488
------------
*TEXTILES & APPAREL .6%
Pou Chen Corp. .......................................... Taiwan 3,563,000 2,794,092
------------
TRANSPORTATION INFRASTRUCTURE 11.0%
Cosco Pacific Ltd. ...................................... Hong Kong 13,462,000 10,700,633
Jiangsu Expressway Co. Ltd. ............................. Hong Kong 58,002,000 15,801,928
+Zhejiang Expressway Co. Ltd., H ......................... China 85,114,000 28,917,121
------------
55,419,682
------------
*WIRELESS TELECOMMUNICATION SERVICES 5.2%
China Mobile (Hong Kong) Ltd. ........................... China 5,380,000 15,933,179
China Unicom Ltd. ....................................... China 8,246,000 6,343,118
Smartone Telecommunications Holdings Ltd. ............... Hong Kong 3,380,000 3,813,358
------------
26,089,655
------------
TOTAL COMMON STOCKS (COST $427,869,367) ................. 459,791,260
------------
(a)SHORT TERM INVESTMENTS (COST $40,275,159) 8.0%
Franklin Institutional Fiduciary Trust
Money Market Portfolio .................................. United States 40,275,159 40,275,159
------------
TOTAL INVESTMENTS (COST $468,144,526) 99.4% ............. 500,066,419
OTHER ASSETS, LESS LIABILITIES .6% ...................... 2,896,069
------------
TOTAL NET ASSETS 100.0% ................................. $502,962,488
============
*Non-income producing.
+See note 6 regarding holdings of 5% voting securities.
(a)The Franklin Institutional Fiduciary Trust Money Market Portfolio is managed by Franklin Advisers Inc., an affiliate of
Franklin Resources Inc.
See notes to financial statements.
11
TEMPLETON DRAGON FUND, INC.
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2002 (UNAUDITED)
Assets:
Investments in securities, at value:
Unaffiliated issuers (cost $399,613,470) ................... $405,822,631
Non controlled affiliates (cost $28,255,897) ............... 53,968,629
Other affiliates (cost $40,275,159) ........................ 40,275,159 $500,066,419
------------
Receivables:
Investment securities sold ................................. 257,225
Dividends .................................................. 3,683,138
------------
Total assets ........................................... 504,006,782
------------
Liabilities:
Payables:
Investment securities purchased ............................ 128,614
To affiliates .............................................. 590,843
Accrued expenses ............................................ 324,837
------------
Total liabilities ...................................... 1,044,294
------------
Net assets, at value ......................................... $502,962,488
============
Net assets consist of:
Undistributed net investment income ........................ $ 5,844,657
Net unrealized appreciation ................................ 31,927,668
Accumulated net realized loss .............................. (98,088,206)
Capital shares ............................................. 563,278,369
------------
Net assets, at value ......................................... $502,962,488
============
Net asset value per share ($502,962,488 [DIVIDE]
48,741,093 shares outstanding) ............................... $10.32
============
See notes to financial statements.
12
TEMPLETON DRAGON FUND, INC.
Financial Statements (CONTINUED)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 (UNAUDITED)
Investment Income:
(net of foreign taxes of $130,844)
Dividends ................................................... $ 9,364,019
Interest .................................................... 116,521
-----------
Total investment income ................................ $ 9,480,540
Expenses:
Management fees (Note 3) .................................... 2,938,660
Administrative fees (Note 3) ................................ 356,658
Transfer agent fees ......................................... 55,000
Custodian fees .............................................. 87,465
Registration and filing fees ................................ 41,200
Professional fees ........................................... 114,100
Directors' fees and expenses ................................ 42,800
-----------
Total expenses ......................................... 3,635,883
------------
Net investment income ................................ 5,844,657
------------
Realized and unrealized gains (losses):
Net realized gain from:
Investments ................................................ 6,805,826
Foreign currency transactions .............................. 57,443
-----------
Net realized gain ...................................... 6,863,269
Net unrealized appreciation (depreciation) on:
Investments ................................................ 60,378,513
Translation of assets and liabilities ......................
denominated in foreign currencies .......................... (13,181)
-----------
Net unrealized appreciation ............................ 60,365,332
-----------
Net realized and unrealized gain ............................. 67,228,601
-----------
Net increase in net assets resulting from operations ......... $73,073,258
===========
See notes to financial statements.
13
TEMPLETON DRAGON FUND, INC.
Financial Statements (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 (UNAUDITED)
AND THE YEAR ENDED DECEMBER 31, 2001
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2002 DECEMBER 31, 2001
-----------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ...................................... $ 5,844,657 $ 12,181,444
Net realized gain (loss) from investments and
foreign currency transactions .............................. 6,863,269 (35,849,637)
Net unrealized appreciation on investments and
translation of assets and liabilities denominated
in foreign currencies ..................................... 60,365,332 18,013,935
--------------- -----------------
Net increase (decrease) in net assets resulting
from operations ........................................ 73,073,258 (5,654,258)
Distributions to shareholders from:
Net investment income ...................................... -- (11,028,205)
Tax return of capital ...................................... -- (36,831,606)
---------------------------------
Total distributions to shareholders ......................... -- (47,859,811)
Capital share transactions (Note 2) ......................... -- (1,688,066)
---------------------------------
Net increase (decrease) in net assets .................. 73,073,258 (55,202,135)
Net assets:
Beginning of period ......................................... 429,889,230 485,091,365
---------------------------------
End of period ............................................... $502,962,488 $429,889,230
=================================
Undistributed net investment income included in net assets:
End of period ............................................... $ 5,844,657 --
=================================
See notes to financial statements.
14
TEMPLETON DRAGON FUND, INC.
Notes to Financial Statements (unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Templeton Dragon Fund, Inc. (the Fund), is registered under the Investment
Company Act of 1940 as a closed-end, non-diversified investment company. The
Fund seeks long-term capital appreciation by investing at least 45% of its total
assets in the equity securities of "China companies", as defined in the Fund's
prospectus. The following summarizes the Fund's significant accounting policies.
A. SECURITY VALUATION
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Directors.
B. FOREIGN CURRENCY TRANSLATION
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign 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 on a specified date. Realized and unrealized gains and losses 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.
D. INCOME TAXES
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.
15
TEMPLETON DRAGON FUND, INC.
Notes to Financial Statements (unaudited) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
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.
Certain income from foreign securities is recorded as soon as information is
available to the Fund. Interest income and estimated expenses are accrued daily.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
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 expense during the reporting period. Actual results could differ from those
estimates.
2. CAPITAL STOCK
On October 18, 1997, the Board of Directors of the Fund authorized management to
implement an open-market share repurchase program pursuant to which the Fund may
purchase, from time to time, up to 5.4 million shares of the Fund's common stock
in open-market transactions, at the discretion of management (approximately 10%
of the shares outstanding at the time the program was initially implemented). In
May 2000, the Board of Directors removed the 10% limitation on share repurchases
in order to give management greater flexibility to engage in an aggressive share
repurchase program. Effective May 10, 2002, the Board of Directors discontinued
the repurchase program.
At June 30, 2002, there were 100 million shares authorized ($.01par value).
Share repurchase transactions were as follows:
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2002 DECEMBER 31, 2001
-----------------------------------------
Shares repurchased ........................................................ -- 207,100
Amount repurchased ........................................................ -- $1,688,066
Weighted average discount of market price to net asset value
of shares repurchased ..................................................... -- 20%
Through June 30, 2002, the Fund had repurchased a total of 5,266,000 shares.
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Certain officers of the Fund are also officers or directors of Templeton Asset
Management Ltd. (TAML) and Franklin Templeton Services, LLC (FT Services), the
Fund's investment manager and administrative manager, respectively.
16
TEMPLETON DRAGON FUND, INC.
Notes to Financial Statements (unaudited) (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (CONT.)
The Fund pays an investment management fee to TAML of 1.25% per year of the
average weekly net assets of the Fund. Management fees were reduced on assets
invested in the Franklin Institutional Fiduciary Trust Money Market Portfolio
(Sweep Money Fund) in an amount not to exceed the management fee paid by the
Sweep Money Fund. The Fund pays FT Services an administrative fee of 0.15% per
year of the Fund's average weekly net assets, of which 0.10% is paid to Nomura
Asset Management, Inc.
4. INCOME TAXES
At June 30, 2002, the cost of investments and net unrealized appreciation for
income tax purposes were as follows:
Cost of investments .............. $471,476,270
------------
Unrealized appreciation .......... 70,691,212
Unrealized depreciation .......... (42,101,063)
------------
Net unrealized appreciation ...... $ 28,590,149
============
Net investment income and net realized gains differ for financial statement and
tax purposes primarily due to differing treatments of wash sales, foreign
currency transactions, and losses realized subsequent to October 31, on the
sales of foreign currencies.
At December 31, 2001, the Fund had tax basis capital losses which may be carried
over to offset future capital gains. Such losses expire as follows:
Capital loss carryovers expiring in:
2006 ............................ $ 4,270,183
2007 ............................ 49,694,430
2009 ............................ 47,221,414
------------
$101,186,027
============
At December 31, 2001, the Fund had deferred foreign currency losses occurring
subsequent to October 31, 2001 of $83,486. For tax purposes, such losses will be
reflected in the year ended December 31, 2002.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended June 30, 2002 aggregated $56,363,117 and $59,120,920, respectively.
17
TEMPLETON DRAGON FUND, INC.
Notes to Financial Statements (unaudited) (CONTINUED)
6. HOLDING OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The Investment Company Act of 1940 defines "affiliated companies" as investments
in portfolio companies in which the Fund owns 5% or more of the outstanding
voting securities. Investments in "affiliated companies" at June 30, 2002 were
as shown below.
NUMBER OF NUMBER OF
SHARES HELD GROSS GROSS SHARES HELD VALUE DIVIDEND INCOME REALIZED
NAME OF ISSUER DEC. 31, 2001 ADDITIONS REDUCTIONS JUNE 30, 2002 JUNE 30, 2002 1/1/02-6/30/02 GAINS
-----------------------------------------------------------------------------------------------------------------------------------
NON CONTROLLED AFFILIATES
Angang New Steel Company Ltd., H .. 58,332,000 -- -- 58,332,000 $ 8,824,641 $ 563,745 $ --
Tsingtao Brewery Co. Ltd., H ...... 40,502,000 -- -- 40,502,000 16,226,867 538,252 --
Zhejiang Expressway Co. Ltd., H ... 86,468,000 -- 1,354,000 85,114,000 28,917,121 731,231 817,873
-------------------------------------------
TOTAL NON CONTROLLED AFFILIATES $53,968,629 $1,833,228 $817,873
===========================================
7. SUBSEQUENT EVENTS
On July 11, 2002, the Fund completed a tender offer of 4,364,926 shares of its
common stock. The cost of the shares tendered and related offering expenses of
$41,248,550 and $200,525, respectively, were charged to capital shares.
18
TEMPLETON DRAGON FUND, INC.
Annual Meeting of Shareholders, May 3, 2002
An Annual Meeting of Shareholders of the Fund was held at the Fund's offices,
500 E. Broward Blvd., Ft. Lauderdale, Florida, on May 3, 2002 and reconvened on
May 29, 2002. The purpose of the meeting was to elect five Directors of the
Fund, to approve an Agreement and Plan of Reorganization that provides for the
reorganization of the Fund from a Maryland corporation to a Delaware business
trust, to approve amendments to certain of the Fund's fundamental investment
restrictions (including three Sub-Proposals) and to approve the elimination of
certain of the Fund's fundamental investment restrictions. At the meeting held
on May 3, 2002, the following persons were elected by the shareholders to serve
as Directors of the Fund: Harris J. Ashton, Nicholas F. Brady, Frank J.
Crothers, S. Joseph Fortunato and Constantine D. Tseretopoulos.* At the
reconvened meeting held on May 29, 2002, Shareholders approved an Agreement and
Plan of Reorganization that provides for the reorganization of the Fund from a
Maryland corporation to a Delaware business trust, amendments to certain of the
Fund's fundamental investment restrictions (including three Sub-Proposals), and
the elimination of certain of the Fund's fundamental investment restrictions. No
other business was transacted at the meetings.
The results of the voting at the meetings are as follows:
Proposal 1. The election of five (5) Directors:
% OF % OF % OF % OF
OUTSTANDING VOTED OUTSTANDING VOTED
TERM EXPIRING 2004: FOR SHARES SHARES WITHHELD SHARES SHARES
---------------------------------------------------------------------------------------------------------------------------
INDEPENDENT DIRECTORS
Harris J. Ashton ........ 27,809,350 57.06% 78.76% 7,501,357 15.39% 21.24%
Frank J. Crothers ....... 28,330,328 58.12% 80.23% 6,980,379 14.32% 19.77%
S. Joseph Fortunato ..... 27,833,625 57.11% 78.82% 7,477,082 15.34% 21.18%
Constantine D.
Tseretopoulos ........... 28,262,543 57.99% 80.04% 7,048,164 14.46% 19.96%
INTERESTED DIRECTOR
Nicholas F. Brady ....... 27,872,807 57.19% 78.94% 7,437,900 15.26% 21.06%
* Andrew H. Hines, Jr. Edith E. Holiday, Betty P. Krahmer, Gordon S. Macklin and Fred R. Millsaps currently serve as
Independent Directors and Martin L. Flanagan and Charles B. Johnson currently serve as Interested Directors. Their terms
of office continued after the Annual Meeting of Shareholders.
Proposal 2. To approve an Agreement and Plan of Reorganization that
provides for the reorganization of the Fund from a Maryland
corporation to a Delaware business trust:
% OF % OF VOTES
OUTSTANDING CAST ON
SHARES VOTED SHARES PROPOSAL
----------------------------------------------------------------------------------
For ................................... 28,816,142 59.12% 77.35%
Against ............................... 7,842,816 16.09% 21.05%
Abstain ............................... 595,807 1.22% 1.60%
Broker Non-Votes ...................... 4,232,811 8.68% --
----------------------------------------------------------------------------------
TOTAL ................................. 41,487,576 85.11% 100.00%
19
TEMPLETON DRAGON FUND, INC.
Annual Meeting of Shareholders, May 3, 2002 (CONTINUED)
Proposal 3. To approve amendments to certain of the Fund's fundamental
investment restrictions (includes three (3) Sub-Proposals):
Proposal 3a. To amend the Fund's fundamental investment restriction
regarding industry concentration:
% OF % OF VOTES
OUTSTANDING CAST ON
SHARES VOTED SHARES PROPOSAL
----------------------------------------------------------------------------------
For ................................... 33,958,996 69.67% 91.15%
Against ............................... 2,589,426 5.31% 6.95%
Abstain ............................... 706,438 1.45% 1.90%
Broker Non-Votes ...................... 4,232,716 8.68% --
----------------------------------------------------------------------------------
TOTAL ................................. 41,487,576 85.11% 100.00%
Proposal 3b. To amend the Fund's fundamental investment restriction
regarding borrowing and issuing senior securities:
% OF % OF VOTES
OUTSTANDING CAST ON
SHARES VOTED SHARES PROPOSAL
----------------------------------------------------------------------------------
For ................................... 25,406,494 52.13% 68.20%
Against ............................... 11,109,963 22.79% 29.82%
Abstain ............................... 738,399 1.51% 1.98%
Broker Non-Votes ...................... 4,232,720 8.68% --
----------------------------------------------------------------------------------
TOTAL ................................. 41,487,576 85.11% 100.00%
Proposal 3c. To amend the Fund's fundamental investment restriction
regarding investments in commodities:
% OF % OF VOTES
OUTSTANDING CAST ON
SHARES VOTED SHARES PROPOSAL
----------------------------------------------------------------------------------
For ................................... 24,586,388 50.44% 65.99%
Against ............................... 11,949,755 24.52% 32.08%
Abstain ............................... 718,716 1.47% 1.93%
Broker Non-Votes ...................... 4,232,717 8.68% --
----------------------------------------------------------------------------------
TOTAL ................................. 41,487,576 85.11% 100.00%
Proposal 4. To approve the elimination of certain of the Fund's
fundamental investment restrictions:
% OF % OF VOTES
OUTSTANDING CAST ON
SHARES VOTED SHARES PROPOSAL
----------------------------------------------------------------------------------
For ................................... 27,971,892 57.38% 75.08%
Against ............................... 8,568,375 17.58% 23.00%
Abstain ............................... 714,592 1.47% 1.92%
Broker Non-Votes ...................... 4,232,717 8.68% --
----------------------------------------------------------------------------------
TOTAL ................................. 41,487,576 85.11% 100.00%
20
--------------------------------------------------------------------------------
TEMPLETON DRAGON FUND, INC.
Dividend Reinvestment and Cash Purchase Plan
The Fund offers a Dividend Reinvestment and Cash Purchase Plan (the "Plan") with
the following features:
If shares of the Fund are held in the shareholder's name, the shareholder will
automatically be a participant in the Plan (other than shareholders holding
their shares through Japan Securities Clearing Corporation, who will not be
enrolled in the Plan unless certain conditions are met and they elect to
participate), unless he elects to withdraw. If the shares are registered in the
name of a broker-dealer or other nominee (i.e., in "street name"), the
broker-dealer or nominee will elect to participate in the Plan on the
shareholder's behalf unless the shareholder instructs them otherwise, or unless
the reinvestment service is not provided by the broker-dealer or nominee.
Participants should contact Mellon Investor Services LLC, P.O. Box 3338, South
Hackensack, NJ 07606-1938, to receive the Plan brochure.
To receive dividends or distributions in cash, the shareholder must notify
Mellon Securities Trust Company (the "Plan Agent") at the address above or the
institution in whose name the shares are held. The Plan Agent must receive
written notice within 10 business days before the record date for the
distribution.
Whenever the Fund declares dividends in either cash or common stock of the Fund,
if the market price is equal to or exceeds net asset value at the valuation
date, the participant will receive the dividends entirely in stock at a price
equal to the net asset value, but not less than 95% of the then current market
price of the Fund's shares. If the market price is lower than net asset value or
if dividends and/or capital gains distributions are payable only in cash, the
participant will receive shares purchased on the New York Stock Exchange or
otherwise on the open market.
A participant has the option of submitting additional payments to the Plan
Agent, in any amounts of at least $100, up to a maximum of $5,000 per month, for
the purchase of Fund shares for his or her account. These payments shall be made
by check or money order payable to "Mellon Securities Trust Company" and sent to
Mellon Investor Services LLC, P.O. Box 382009, Pittsburgh, PA 15250-8009, Attn:
Templeton Dragon Fund, Inc. The Plan Agent shall apply such payments (less a
$5.00 service charge and less a pro rata share of trading fees) to purchases of
the Fund's shares in the open market.
The automatic reinvestment of dividends and/or capital gains does not relieve
the participant of any income tax which may be payable on dividends or
distributions.
The participant may withdraw from the Plan without penalty at any time by
written notice to the Plan Agent sent to Mellon Investor Services LLC, P.O. Box
3338, South Hackensack, NJ 07606-1938. Upon withdrawal, the participant will
receive, without charge, stock certificates issued in the participant's name for
all full shares held by the Plan Agent; or, if the participant wishes, the Plan
Agent will sell the participant's shares and send the proceeds, less a service
charge of $5.00 and less trading fees.
Whenever shares are purchased on the New York Stock Exchange or otherwise on the
open market, each participant will pay a pro rata portion of trading fees.
Trading fees will be deducted from amounts to be invested.
21
TEMPLETON DRAGON FUND, INC.
TRANSFER AGENT
Mellon Investor Services LLC
85 Challenger Road
Overpeck Centre
Ridgefield Park, NJ 07660
1-800/416-5585
www.mellon-investor.com
SHAREHOLDER INFORMATION
Shares of Templeton Dragon Fund, Inc. are traded daily on the New York Stock
Exchange under the symbol "TDF". The Fund's shares are also listed and traded in
Japan on the Osaka Securities Exchange. Information about the net asset value
and the market price is published each Monday in the Wall Street Journal, weekly
in Barron's and each Saturday in The New York Times and other newspapers. Daily
market prices for the Fund's shares are published in the New York Stock Exchange
Composite Transactions section of newspapers.
For current information about distributions and shareholder accounts, call
1-800-416-5585. Registered shareholders can now access their Fund account
on-line with INVESTOR SERVICE DIRECT(SM). For information go to Mellon Investor
Services' web site at https://vault.mellon-investor.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[REGISTRATION MARK]
(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.
22
[LOGO OMITTED]
Franklin(R) Templeton(R) Investments
100 Fountain Parkway
P.O. Box 33030
St. Petersburg, Florida 33733-8030
SEMINNUAL REPORT
TEMPLETON DRAGON FUND, INC.
TRANSFER AGENT
Mellon Investor Services LLC
85 Challenger Road
Overpeck Centre
Ridgefield Park, New Jersey 07660
1-800/416-5585
www.melloninvestor.com
FUND INFORMATION
1-800/342-5236
Investors should be aware that the value of investments made for the Fund may go
down as well as up. 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 the 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 S2002 08/02 [LOGO OMITTED]
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