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 811-03143
----------
TEMPLETON GLOBAL SMALLER COMPANIES FUND
---------------------------------------------------
(Exact name of registrant as specified in charter)
500 EAST BROWARD BLVD., FORT LAUDERDALE, FL 33394-3091
--------------------------------------------------------
(Address of principal executive offices) (Zip code)
CRAIG S. TYLE, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
-------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: (954) 527-7500
--------------
Date of fiscal year end: 8/31
----
Date of reporting period: 8/31/05
-------
ITEM 1. REPORTS TO STOCKHOLDERS
AUGUST 31, 2005
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
ANNUAL REPORT AND SHAREHOLDER LETTER | GLOBAL
- --------------------------------------------------------------------------------
TEMPLETON GLOBAL
SMALLER COMPANIES FUND
- --------------------------------------------------------------------------------
WANT TO RECEIVE
THIS DOCUMENT
FASTER VIA EMAIL?
Eligible shareholders can
sign up for eDelivery at
franklintempleton.com.
see inside for details.
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
[LOGO OMITTED]
FRANKLIN TEMPLETON
INVESTMENTS
Franklin o TEMPLETON o Mutual Series
Franklin Templeton Investments
GAIN FROM OUR PERSPECTIVE(R)
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.
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
[GRAPHIC OMITTED]
Not part of the annual report
Contents
SHAREHOLDER LETTER ...................... 1
ANNUAL REPORT
Templeton Global Smaller
Companies Fund .......................... 3
Performance Summary ..................... 8
Your Fund's Expenses .................... 13
Financial Highlights and
Statement of Investments ................ 15
Financial Statements .................... 24
Notes to Financial Statements ........... 28
Report of Independent
Registered Public
Accounting Firm ......................... 37
Tax Designation ......................... 38
Board Members
and Officers ............................ 42
Shareholder Information ................. 48
Annual Report
Templeton Global Smaller
Companies Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Templeton Global Smaller Companies Fund
seeks to achieve long-term capital growth. Under normal market conditions, the
Fund invests at least 80% of its net assets in equity securities of smaller
companies, as defined in the Fund's prospectus, including emerging markets.
- --------------------------------------------------------------------------------
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. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236
FOR MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
We are pleased to bring you Templeton Global Smaller Companies Fund's annual
report for the fiscal year ended August 31, 2005.
PERFORMANCE OVERVIEW
For the 12 months under review, Templeton Global Smaller Companies Fund - Class
A posted a 26.78% cumulative total return. The Fund outperformed its benchmark,
the Morgan Stanley Capital International (MSCI) World Index, which posted an
18.69% total return for the same period. 1 Please note that index performance
information is provided for reference and that we do not attempt to track the
index, but rather undertake investments on the basis of fundamental research.
You can find the Fund's long-term performance data in the Performance Summary
beginning on page 8.
ECONOMIC AND MARKET OVERVIEW
The global economic recovery continued in the 12-month period ended August 31,
2005, at a pace that appeared to defy prior expectations of a global slowdown.
U.S. gross domestic product (GDP) has expanded during fifteen consecutive
quarters, with an annualized growth rate at or above 3.3% in each of the past
nine. Apart from western Europe, foreign growth also appeared to be beating the
expectations of a slowdown. China's industrial production and GDP expanded at
annualized rates of 16.4% and 9.5% for the
1. Source: Standard & Poor's Micropal. The MSCI World Index is a free
float-adjusted, market capitalization-weighted index designed to measure equity
market performance in global developed markets. The index is unmanaged and
includes reinvested dividends. One cannot invest directly in an index, nor is an
index representative of the Fund's portfolio.
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 19.
Annual Report | 3
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS:
GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 8/31/05
Europe 35.9%
Asia 30.6%
North America 20.7%
Australia & New Zealand 4.0%
Middle East & Africa 1.4%
Latin America 0.6%
Short-Term Investments & Other Net Assets 6.8%
first half of 2005, and Japan's economic outlook seemed brighter after GDP grew
4.9% and 3.3% annualized in the first and second quarters of 2005. 2 More
recently, Japanese domestic demand continued to recover underpinned by
strengthening private consumption and business investment.
Oil prices remained a major concern for the global economy as they climbed
higher, reaching a record price of almost $70 per barrel in August. 3 Rising
energy costs impacted companies and sentiment around the world. Continental
European economic growth lagged as consumer and business sentiment were weak for
a number of reasons in addition to high energy costs. This region continued to
face political and economic integration issues. Unemployment in Germany and
France remained at or above 10%. 4 Largely in consideration of these factors,
the European Central Bank (ECB) revised its growth expectations for the
12-nation euro zone. The ECB lowered its 2005 GDP growth estimate to a more
modest range of 1.1% to 1.7% from a December 2004 forecast of 1.4% to 2.4%. In
the political arena, France and the Netherlands defeated a referendum to adopt a
European constitution, raising some uncertainty about the European Union's
political future.
Despite the predominantly weak outlook for the European economy, many European
equity markets performed well during the fiscal year. In the 12-month period,
European equity markets returned 26.06%, as measured by the MSCI Europe Index,
using the local currencies of this index's constituents. 5 The MSCI Pacific
Index, which includes Japan, returned 17.50% in local currencies over the same
period. 6 U.S. markets, as measured by the MSCI USA Index, returned 13.24%. 7
While the U.S. dollar depreciated in the foreign exchange market in the first
half of the period, it appreciated in the latter half. Overall for the year
under review, foreign currency conversion had little effect on European and
Pacific region investment returns.
INVESTMENT STRATEGY
At Templeton, we take a long-term, value-oriented approach to investing. We
focus our analysis primarily at the company level; we seek to identify when
2. Sources: National Bureau of Statistics, China; Economic and Social Research
Institute (Japan).
3. Source: Bloomberg Energy/Commodity Service.
4. Sources: Deutsche Bundesbank (Germany); INSEE National Statistics Office
(France). Unemployment data for France as of 7/31/05.
5. Source: Standard & Poor's Micropal. The MSCI Europe Index is a free
float-adjusted, market capitalization-weighted index designed to measure equity
market performance in Europe.
6. Source: Standard & Poor's Micropal. The MSCI Pacific Index is a free
float-adjusted, market capitalization-weighted index designed to measure equity
market performance in the Pacific region.
7. Source: Standard & Poor's Micropal. The MSCI USA Index is a free
float-adjusted, market capitalization-weighted index designed to measure equity
market performance in the U.S.
4 | Annual Report
a company's value on the stock exchange is substantially below our estimate
of the company's underlying worth -- also known as its "intrinsic value." Our
analysts determine the intrinsic value of a company first by understanding the
company and the industry in which it operates, and then by evaluating future
earnings and cash flow growth potential. We look to invest in those companies
selling at the lowest level relative to our expectations for future earnings and
cash flow. We are patient investors; our average holding period is four to five
years.
MANAGER'S DISCUSSION
Several Fund holdings performed well during the 12 months under review.
Australia-based Iluka Resources, the world's largest pure mineral sands company,
was the Fund's top contributor to Fund performance during the review period. The
company is a leading producer and processor of zircon, and its shares increased
in value due to low inventories and high mineral prices. Zircon prices increased
from $450 per ton at the beginning of 2004 to $650 per ton by period-end.
Iluka's management team indicated it anticipates zircon prices as high as $750
within the next year. Zircon is primarily used for its high temperature and
chemical resistance properties in the ceramics and refractory industries, which
makes it ideal for use in commercial nuclear power plants. The company's stock
price reacted positively to speculation of a possible takeover attempt by the
Kolsen consortium, which in association with Buka Minerals owns an approximate
7.25% stake in Iluka. However, Iluka's management team denied any discussion
with either Kolsen or Buka regarding their investment. Despite the recent share
price increase, our outlook for the company remained positive at period-end.
Shares of Netherlands-based pharmaceutical distributor and retailer OPG Groep
also appreciated strongly and contributed to Fund performance. The company
benefited from aging demographic trends and a shift to home care treatment
products. Originally a pure wholesaler, OPG expanded its business by developing
a proprietary retail pharmacy chain in the Netherlands, which led to increased
profit margins for the company. Despite its higher margins, OPG traded at a
discount to many of its peers and consistent with our investment strategy, we
considered the company's shares represented a good value based on OPG's solid
growth prospects, low valuations and attractive dividend yield.
Another top contributor to Fund performance during the Fund's fiscal year was
GameStop. Based in Dallas, Texas, GameStop operates specialty electronic game
and PC entertainment software stores throughout the U.S., Puerto Rico
TOP 10 HOLDINGS
8/31/05
- -----------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- -----------------------------------------------------
Vestas Wind Systems AS 2.5%
ELECTRICAL EQUIPMENT, DENMARK
- -----------------------------------------------------
OPG Groep NV 2.1%
HEALTH CARE PROVIDERS & SERVICES,
NETHERLANDS
- -----------------------------------------------------
Bodycote International PLC 2.0%
MACHINERY, U.K.
- -----------------------------------------------------
MDS Inc. 1.5%
HEALTH CARE PROVIDERS & SERVICES,
CANADA
- -----------------------------------------------------
Coinstar Inc. 1.5%
COMMERCIAL SERVICES & SUPPLIES, U.S.
- -----------------------------------------------------
Orbotech Ltd. 1.4%
ELECTRONIC EQUIPMENT & INSTRUMENTS,
ISRAEL
- -----------------------------------------------------
Vedior NV 1.4%
COMMERCIAL SERVICES & SUPPLIES,
NETHERLANDS
- -----------------------------------------------------
Bank of Pusan 1.4%
COMMERCIAL BANKS, SOUTH KOREA
- -----------------------------------------------------
Arcadis NV 1.4%
CONSTRUCTION & ENGINEERING,
NETHERLANDS
- -----------------------------------------------------
Imtech NV 1.4%
CONSTRUCTION & ENGINEERING,
NETHERLANDS
- -----------------------------------------------------
Annual Report | 5
and Guam. GameStop satisfies a niche in the video game industry by allowing its
customers to trade in their used video game products for store credits and apply
those credits toward the purchase of other in-store merchandise. We believed
that not only did this build customer loyalty to the brand, but that it was also
a key driver of sales. With one of the largest assortments of new and used video
game hardware, the company was well positioned to benefit from the growth of the
video games industry. Due to substantial price appreciation, we recently took
profits in GameStop.
Some of our holdings did not perform well over the past year and detracted from
Fund performance. One example is Hong Kong knitted textiles manufacturer
Fountain Set Holdings. Fountain Set shares came under pressure during the period
due to a surge in cotton prices. Cotton accounts for a large portion of knitted
fabrics' manufacturing costs, and the company was unable to pass on the higher
costs to their customers. Despite recent stock price weakness, at period-end our
long-term outlook for the company remained positive, as we continued to believe
the shares were undervalued and that cotton prices should eventually weaken. The
company's technologically advanced manufacturing facilities enable it to produce
fine-quality fabrics at competitive prices and we believe that adds to the
company's attractiveness.
Like Fountain Set, AcBel Polytech had a negative impact on Fund performance, and
yet at period-end, following our strategy we continued to believe AcBel's
underlying fundamentals warranted investment due to its strong growth prospects,
low valuation and attractive dividend yield. AcBel manufactures standard and
custom switching power supplies and power system products. The company's
products include personal computer, web server and telecom power supplies in
addition to low-voltage switching regulators and direct-current converters. This
company is not widely followed by sell-side analysts and hence many positive
aspects of its business are not well understood. At period-end we remained
comfortable with our holdings for the long term.
Also hindering performance during the period was China Pharmaceutical Group. The
company is a leading global supplier of bulk vitamin C, penicillin and
cephalosporin. Although higher raw material and energy costs dragged on China
Pharmaceutical's shares during the period, we continued to believe the company
is the most efficient producer of vitamin C and penicillin in China, as
reflected by its superior operating margins and higher return on equity. China
Pharmaceutical's competitiveness should be sustainable going forward, given high
barriers to entry in terms of capacity, technological know-how, and the
integrated nature of production. Because of the company's leading market
position, we think China Pharmaceutical should further benefit from China's
focus on being a global manufacturing base for bulk pharmaceuticals. Chinese
pharmaceutical producers have recently managed to gain market share in the
6 | Annual Report
global pharmaceutical market because of lower labor and utility costs, less
stringent environmental regulations, and steady improvement in production
efficiency.
We thank you for your interest in Templeton Global Smaller Companies Fund,
welcome your questions and comments, and look forward to serving your future
investment needs.
[PHOTO OMITTED]
/S/Tucker Scott
Tucker Scott, CFA
[PHOTO OMITTED]
/S/Cynthia Sweeting
Cynthia Sweeting, CFA
Portfolio Management Team
Templeton Global Smaller Companies Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF AUGUST 31, 2005, 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.
Annual Report | 7
Performance Summary as of 8/31/05
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
due on Fund dividends, capital gain distributions, if any, or any realized gains
on the sale of Fund shares. Total return reflects reinvestment of the Fund's
dividends and capital gain distributions, if any, and any unrealized gains or
losses.
PRICE AND DISTRIBUTION INFORMATION
- ------------------------------------------------------------------------------------------------------
CLASS A (SYMBOL: TEMGX) CHANGE 8/31/05 8/31/04
- ------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.13 $9.82 $8.69
- ------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (9/1/04-8/31/05)
- ------------------------------------------------------------------------------------------------------
Dividend Income $0.1037
- ------------------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.9103
- ------------------------------------------------------------------------------------------------------
TOTAL $1.0140
- ------------------------------------------------------------------------------------------------------
CLASS B (SYMBOL: N/A) CHANGE 8/31/05 8/31/04
- ------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.08 $9.50 $8.42
- ------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (9/1/04-8/31/05)
- ------------------------------------------------------------------------------------------------------
Dividend Income $0.0153
- ------------------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.9103
- ------------------------------------------------------------------------------------------------------
TOTAL $0.9256
- ------------------------------------------------------------------------------------------------------
CLASS C (SYMBOL: TESGX) CHANGE 8/31/05 8/31/04
- ------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.10 $9.65 $8.55
- ------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (9/1/04-8/31/05)
- ------------------------------------------------------------------------------------------------------
Dividend Income $0.0274
- ------------------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.9103
- ------------------------------------------------------------------------------------------------------
TOTAL $0.9377
- ------------------------------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: TGSAX) CHANGE 8/31/05 8/31/04
- ------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.13 $9.84 $8.71
- ------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (9/1/04-8/31/05)
- ------------------------------------------------------------------------------------------------------
Dividend Income $0.1265
- ------------------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.9103
- ------------------------------------------------------------------------------------------------------
TOTAL $1.0368
- ------------------------------------------------------------------------------------------------------
Templeton Global Smaller Companies Fund paid distributions derived from
long-term capital gains totaling 91.03 cents per share in October and December
2004. The Fund designates such distributions as capital gain dividends per
Internal Revenue Code Section 852(b)(3).
8 | Annual Report
Performance Summary (CONTINUED)
PERFORMANCE
CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES
CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER;
CLASS C: 1% CDSC IN FIRST YEAR ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES
CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND VALUE OF $10,000 INVESTMENT INCLUDE
MAXIMUM SALES CHARGES.
- ---------------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 26.78% 63.29% 112.82%
- ---------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 19.50% 8.99% 7.20%
- ---------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $11,950 $15,381 $20,048
- ---------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/05) 4 17.82% 10.61% 7.33%
- ---------------------------------------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99)
- ---------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 25.86% 57.36% 74.89%
- ---------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 21.86% 9.21% 8.75%
- ---------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $12,186 $15,536 $17,489
- ---------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/05) 4 20.07% 10.77% 8.99%
- ---------------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 25.74% 57.40% 97.08%
- ---------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 24.74% 9.50% 7.02%
- ---------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $12,474 $15,740 $19,708
- ---------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/05) 4 23.10% 11.09% 7.15%
- ---------------------------------------------------------------------------------------------------------
ADVISOR CLASS 5 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 27.07% 65.61% 118.67%
- ---------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 27.07% 10.62% 8.14%
- ---------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $12,707 $16,561 $21,867
- ---------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/05) 4 24.19% 10.98% 9.69%
- ---------------------------------------------------------------------------------------------------------
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.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | 9
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index. The Consumer Price Index (CPI), calculated by the U.S.
Bureau of Labor Statistics, is a commonly used measure of the inflation rate.
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------------
CLASS A 8/31/05
- -------------------------------------------
1-Year 19.50%
- -------------------------------------------
5-Year 8.99%
- -------------------------------------------
10-Year 7.20%
- -------------------------------------------
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS:
The following line graph compares the performance of Templeton Global Smaller
Companies Fund - Class A with that of the MSCI World Index 6 and the CPI 6 based
on a $10,000 investment from 9/1/95 to 8/31/05.
Templeton Global Smaller
Period Companies Fund - Class A MSCI World Index 6 CPI 6
9/1/95 $9,420 $10,000 $10,000
9/30/95 $9,538 $10,293 $10,020
10/31/95 $9,211 $10,133 $10,052
11/30/95 $9,281 $10,487 $10,046
12/31/95 $9,389 $10,795 $10,039
1/31/96 $9,648 $10,993 $10,098
2/29/96 $9,931 $11,062 $10,131
3/31/96 $10,078 $11,248 $10,183
4/30/96 $10,325 $11,514 $10,222
5/31/96 $10,521 $11,526 $10,242
6/30/96 $10,595 $11,587 $10,249
7/31/96 $10,165 $11,179 $10,268
8/31/96 $10,521 $11,310 $10,288
9/30/96 $10,694 $11,755 $10,320
10/31/96 $10,847 $11,839 $10,353
11/30/96 $11,151 $12,504 $10,373
12/31/96 $11,463 $12,306 $10,373
1/31/97 $11,669 $12,457 $10,405
2/28/97 $11,806 $12,602 $10,438
3/31/97 $11,737 $12,355 $10,464
4/30/97 $11,724 $12,761 $10,477
5/31/97 $12,272 $13,551 $10,471
6/30/97 $12,766 $14,229 $10,484
7/31/97 $13,109 $14,887 $10,497
8/31/97 $13,067 $13,893 $10,517
9/30/97 $13,602 $14,650 $10,543
10/31/97 $12,581 $13,881 $10,569
11/30/97 $12,293 $14,129 $10,562
12/31/97 $12,273 $14,303 $10,549
1/31/98 $11,872 $14,704 $10,569
2/28/98 $12,866 $15,701 $10,589
3/31/98 $13,490 $16,367 $10,608
4/30/98 $13,594 $16,529 $10,628
5/31/98 $13,297 $16,324 $10,647
6/30/98 $12,718 $16,714 $10,661
7/31/98 $12,258 $16,690 $10,674
8/31/98 $10,240 $14,466 $10,687
9/30/98 $10,136 $14,725 $10,700
10/31/98 $10,364 $16,058 $10,726
11/30/98 $10,767 $17,016 $10,726
12/31/98 $10,875 $17,850 $10,719
1/31/99 $10,426 $18,243 $10,746
2/28/99 $10,070 $17,760 $10,759
3/31/99 $10,349 $18,502 $10,791
4/30/99 $11,325 $19,234 $10,870
5/31/99 $11,170 $18,534 $10,870
6/30/99 $11,480 $19,401 $10,870
7/31/99 $11,588 $19,346 $10,903
8/31/99 $11,464 $19,314 $10,929
9/30/99 $11,092 $19,129 $10,981
10/31/99 $11,070 $20,126 $11,001
11/30/99 $11,270 $20,695 $11,007
12/31/99 $11,974 $22,373 $11,007
1/31/00 $11,806 $21,094 $11,040
2/29/00 $12,176 $21,154 $11,105
3/31/00 $12,563 $22,619 $11,197
4/30/00 $11,974 $21,665 $11,203
5/31/00 $11,789 $21,119 $11,216
6/30/00 $12,277 $21,833 $11,275
7/31/00 $12,176 $21,221 $11,302
8/31/00 $12,277 $21,914 $11,302
9/30/00 $11,688 $20,751 $11,360
10/31/00 $11,050 $20,406 $11,380
11/30/00 $10,578 $19,170 $11,387
12/31/00 $10,971 $19,483 $11,380
1/31/01 $11,552 $19,861 $11,452
2/28/01 $11,341 $18,185 $11,498
3/31/01 $10,337 $16,994 $11,524
4/30/01 $10,795 $18,254 $11,570
5/31/01 $11,306 $18,028 $11,622
6/30/01 $11,059 $17,465 $11,642
7/31/01 $10,848 $17,235 $11,609
8/31/01 $10,742 $16,411 $11,609
9/30/01 $9,280 $14,967 $11,661
10/31/01 $9,627 $15,256 $11,622
11/30/01 $10,250 $16,160 $11,602
12/31/01 $10,784 $16,264 $11,557
1/31/02 $10,908 $15,773 $11,583
2/28/02 $11,211 $15,639 $11,629
3/31/02 $12,189 $16,334 $11,694
4/30/02 $12,581 $15,785 $11,759
5/31/02 $12,777 $15,822 $11,759
6/30/02 $12,065 $14,865 $11,766
7/31/02 $10,695 $13,614 $11,779
8/31/02 $10,356 $13,642 $11,818
9/30/02 $9,396 $12,145 $11,838
10/31/02 $9,656 $13,043 $11,857
11/30/02 $9,997 $13,749 $11,857
12/31/02 $9,836 $13,086 $11,831
1/31/03 $9,477 $12,690 $11,884
2/28/03 $8,992 $12,473 $11,975
3/31/03 $9,028 $12,439 $12,047
4/30/03 $9,944 $13,550 $12,021
5/31/03 $10,985 $14,331 $12,001
6/30/03 $11,379 $14,584 $12,014
7/31/03 $12,062 $14,883 $12,027
8/31/03 $12,851 $15,208 $12,073
9/30/03 $13,067 $15,305 $12,112
10/31/03 $14,048 $16,216 $12,099
11/30/03 $14,302 $16,467 $12,067
12/31/03 $15,084 $17,504 $12,054
1/31/04 $15,558 $17,789 $12,112
2/29/04 $16,231 $18,093 $12,178
3/31/04 $15,994 $17,980 $12,256
4/30/04 $15,776 $17,622 $12,296
5/31/04 $15,667 $17,794 $12,368
6/30/04 $16,176 $18,167 $12,407
7/31/04 $15,758 $17,579 $12,387
8/31/04 $15,812 $17,663 $12,394
9/30/04 $16,413 $18,003 $12,420
10/31/04 $16,816 $18,448 $12,485
11/30/04 $18,135 $19,425 $12,492
12/31/04 $19,047 $20,173 $12,446
1/31/05 $18,761 $19,722 $12,472
2/28/05 $19,517 $20,356 $12,544
3/31/05 $19,292 $19,971 $12,642
4/30/05 $18,455 $19,548 $12,727
5/31/05 $18,823 $19,910 $12,714
6/30/05 $19,251 $20,091 $12,721
7/31/05 $20,088 $20,798 $12,780
8/31/05 $20,048 $20,964 $12,845
AVERAGE ANNUAL TOTAL RETURN
- ------------------------------------------
CLASS B 8/31/05
- ------------------------------------------
1-Year 21.86%
- ------------------------------------------
5-Year 9.21%
- ------------------------------------------
Since Inception (1/1/99) 8.75%
- ------------------------------------------
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS:
The following line graph compares the performance of Templeton Global Smaller
Companies Fund - Class B with that of the MSCI World Index 6 and the CPI 6 based
on a $10,000 investment from 1/1/99 to 8/31/05.
Templeton Global Smaller
Period Companies Fund - Class B MSCI World Index 6 CPI 6
1/1/99 $10,000 $10,000 $10,000
1/31/99 $9,573 $10,220 $10,024
2/28/99 $9,245 $9,950 $10,037
3/31/99 $9,487 $10,366 $10,067
4/30/99 $10,385 $10,776 $10,140
5/31/99 $10,242 $10,383 $10,140
6/30/99 $10,513 $10,869 $10,140
7/31/99 $10,613 $10,838 $10,171
8/31/99 $10,484 $10,820 $10,195
9/30/99 $10,142 $10,717 $10,244
10/31/99 $10,118 $11,275 $10,262
11/30/99 $10,287 $11,594 $10,268
12/31/99 $10,914 $12,534 $10,268
1/31/00 $10,759 $11,818 $10,299
2/29/00 $11,084 $11,851 $10,360
3/31/00 $11,423 $12,672 $10,445
4/30/00 $10,883 $12,137 $10,451
5/31/00 $10,713 $11,831 $10,464
6/30/00 $11,145 $12,231 $10,519
7/31/00 $11,037 $11,889 $10,543
8/31/00 $11,114 $12,277 $10,543
9/30/00 $10,590 $11,626 $10,598
10/31/00 $9,985 $11,432 $10,616
11/30/00 $9,569 $10,740 $10,622
12/31/00 $9,929 $10,915 $10,616
1/31/01 $10,428 $11,127 $10,683
2/28/01 $10,235 $10,188 $10,726
3/31/01 $9,332 $9,520 $10,750
4/30/01 $9,719 $10,227 $10,793
5/31/01 $10,187 $10,100 $10,842
6/30/01 $9,961 $9,785 $10,860
7/31/01 $9,751 $9,656 $10,830
8/31/01 $9,655 $9,194 $10,830
9/30/01 $8,333 $8,385 $10,879
10/31/01 $8,645 $8,547 $10,842
11/30/01 $9,180 $9,054 $10,824
12/31/01 $9,667 $9,112 $10,781
1/31/02 $9,764 $8,837 $10,805
2/28/02 $10,023 $8,761 $10,848
3/31/02 $10,915 $9,151 $10,909
4/30/02 $11,240 $8,843 $10,970
5/31/02 $11,418 $8,864 $10,970
6/30/02 $10,769 $8,328 $10,976
7/31/02 $9,553 $7,627 $10,988
8/31/02 $9,245 $7,643 $11,025
9/30/02 $8,385 $6,804 $11,043
10/31/02 $8,612 $7,307 $11,062
11/30/02 $8,906 $7,703 $11,062
12/31/02 $8,759 $7,331 $11,037
1/31/03 $8,417 $7,110 $11,086
2/28/03 $7,992 $6,988 $11,171
3/31/03 $8,009 $6,969 $11,239
4/30/03 $8,824 $7,591 $11,214
5/31/03 $9,754 $8,029 $11,196
6/30/03 $10,080 $8,170 $11,208
7/31/03 $10,684 $8,338 $11,220
8/31/03 $11,369 $8,520 $11,263
9/30/03 $11,548 $8,574 $11,300
10/31/03 $12,411 $9,085 $11,287
11/30/03 $12,642 $9,225 $11,257
12/31/03 $13,318 $9,806 $11,245
1/31/04 $13,731 $9,966 $11,300
2/29/04 $14,309 $10,136 $11,361
3/31/04 $14,094 $10,073 $11,434
4/30/04 $13,896 $9,872 $11,470
5/31/04 $13,780 $9,969 $11,538
6/30/04 $14,226 $10,178 $11,574
7/31/04 $13,846 $9,848 $11,556
8/31/04 $13,896 $9,895 $11,562
9/30/04 $14,408 $10,086 $11,586
10/31/04 $14,757 $10,335 $11,647
11/30/04 $15,893 $10,883 $11,653
12/31/04 $16,680 $11,301 $11,611
1/31/05 $16,423 $11,049 $11,635
2/28/05 $17,085 $11,404 $11,702
3/31/05 $16,864 $11,188 $11,794
4/30/05 $16,128 $10,951 $11,873
5/31/05 $16,441 $11,154 $11,861
6/30/05 $16,809 $11,256 $11,867
7/31/05 $17,526 $11,651 $11,922
8/31/05 $17,489 $11,745 $11,983
10 | Annual Report
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- ------------------------------------------
CLASS C 8/31/05
- ------------------------------------------
1-Year 24.74%
- ------------------------------------------
5-Year 9.50%
- ------------------------------------------
10-Year 7.02%
- ------------------------------------------
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS:
The following line graph compares the performance of Templeton Global Smaller
Companies Fund - Class C with that of the MSCI World Index 6 and the CPI 6 based
on a $10,000 investment from 9/1/95 to 8/31/05.
Templeton Global Smaller
Period Companies Fund - Class C MSCI World Index 6 CPI 6
9/1/95 $10,000 $10,000 $10,000
9/30/95 $10,114 $10,293 $10,020
10/31/95 $9,752 $10,133 $10,052
11/30/95 $9,826 $10,487 $10,046
12/31/95 $9,923 $10,795 $10,039
1/31/96 $10,198 $10,993 $10,098
2/29/96 $10,499 $11,062 $10,131
3/31/96 $10,642 $11,248 $10,183
4/30/96 $10,891 $11,514 $10,222
5/31/96 $11,100 $11,526 $10,242
6/30/96 $11,178 $11,587 $10,249
7/31/96 $10,708 $11,179 $10,268
8/31/96 $11,074 $11,310 $10,288
9/30/96 $11,257 $11,755 $10,320
10/31/96 $11,401 $11,839 $10,353
11/30/96 $11,724 $12,504 $10,373
12/31/96 $12,042 $12,306 $10,373
1/31/97 $12,260 $12,457 $10,405
2/28/97 $12,390 $12,602 $10,438
3/31/97 $12,303 $12,355 $10,464
4/30/97 $12,289 $12,761 $10,477
5/31/97 $12,855 $13,551 $10,471
6/30/97 $13,362 $14,229 $10,484
7/31/97 $13,711 $14,887 $10,497
8/31/97 $13,667 $13,893 $10,517
9/30/97 $14,218 $14,650 $10,543
10/31/97 $13,131 $13,881 $10,569
11/30/97 $12,826 $14,129 $10,562
12/31/97 $12,805 $14,303 $10,549
1/31/98 $12,367 $14,704 $10,569
2/28/98 $13,399 $15,701 $10,589
3/31/98 $14,024 $16,367 $10,608
4/30/98 $14,118 $16,529 $10,628
5/31/98 $13,790 $16,324 $10,647
6/30/98 $13,180 $16,714 $10,661
7/31/98 $12,695 $16,690 $10,674
8/31/98 $10,600 $14,466 $10,687
9/30/98 $10,491 $14,725 $10,700
10/31/98 $10,725 $16,058 $10,726
11/30/98 $11,147 $17,016 $10,726
12/31/98 $11,244 $17,850 $10,719
1/31/99 $10,773 $18,243 $10,746
2/28/99 $10,384 $17,760 $10,759
3/31/99 $10,676 $18,502 $10,791
4/30/99 $11,682 $19,234 $10,870
5/31/99 $11,520 $18,534 $10,870
6/30/99 $11,812 $19,401 $10,870
7/31/99 $11,925 $19,346 $10,903
8/31/99 $11,796 $19,314 $10,929
9/30/99 $11,406 $19,129 $10,981
10/31/99 $11,387 $20,126 $11,001
11/30/99 $11,578 $20,695 $11,007
12/31/99 $12,277 $22,373 $11,007
1/31/00 $12,120 $21,094 $11,040
2/29/00 $12,468 $21,154 $11,105
3/31/00 $12,869 $22,619 $11,197
4/30/00 $12,259 $21,665 $11,203
5/31/00 $12,068 $21,119 $11,216
6/30/00 $12,555 $21,833 $11,275
7/31/00 $12,451 $21,221 $11,302
8/31/00 $12,521 $21,914 $11,302
9/30/00 $11,929 $20,751 $11,360
10/31/00 $11,261 $20,406 $11,380
11/30/00 $10,793 $19,170 $11,387
12/31/00 $11,180 $19,483 $11,380
1/31/01 $11,759 $19,861 $11,452
2/28/01 $11,524 $18,185 $11,498
3/31/01 $10,509 $16,994 $11,524
4/30/01 $10,962 $18,254 $11,570
5/31/01 $11,470 $18,028 $11,622
6/30/01 $11,216 $17,465 $11,642
7/31/01 $10,980 $17,235 $11,609
8/31/01 $10,872 $16,411 $11,609
9/30/01 $9,386 $14,967 $11,661
10/31/01 $9,735 $15,256 $11,622
11/30/01 $10,351 $16,160 $11,602
12/31/01 $10,895 $16,264 $11,557
1/31/02 $11,022 $15,773 $11,583
2/28/02 $11,312 $15,639 $11,629
3/31/02 $12,291 $16,334 $11,694
4/30/02 $12,672 $15,785 $11,759
5/31/02 $12,871 $15,822 $11,759
6/30/02 $12,146 $14,865 $11,766
7/31/02 $10,768 $13,614 $11,779
8/31/02 $10,424 $13,642 $11,818
9/30/02 $9,445 $12,145 $11,838
10/31/02 $9,711 $13,043 $11,857
11/30/02 $10,039 $13,749 $11,857
12/31/02 $9,875 $13,086 $11,831
1/31/03 $9,493 $12,690 $11,884
2/28/03 $9,002 $12,473 $11,975
3/31/03 $9,039 $12,439 $12,047
4/30/03 $9,948 $13,550 $12,021
5/31/03 $10,984 $14,331 $12,001
6/30/03 $11,366 $14,584 $12,014
7/31/03 $12,039 $14,883 $12,027
8/31/03 $12,839 $15,208 $12,073
9/30/03 $13,039 $15,305 $12,112
10/31/03 $14,005 $16,216 $12,099
11/30/03 $14,262 $16,467 $12,067
12/31/03 $15,032 $17,504 $12,054
1/31/04 $15,490 $17,789 $12,112
2/29/04 $16,131 $18,093 $12,178
3/31/04 $15,893 $17,980 $12,256
4/30/04 $15,673 $17,622 $12,296
5/31/04 $15,545 $17,794 $12,368
6/30/04 $16,058 $18,167 $12,407
7/31/04 $15,618 $17,579 $12,387
8/31/04 $15,673 $17,663 $12,394
9/30/04 $16,260 $18,003 $12,420
10/31/04 $16,657 $18,448 $12,485
11/30/04 $17,938 $19,425 $12,492
12/31/04 $18,830 $20,173 $12,446
1/31/05 $18,523 $19,722 $12,472
2/28/05 $19,279 $20,356 $12,544
3/31/05 $19,034 $19,971 $12,642
4/30/05 $18,197 $19,548 $12,727
5/31/05 $18,544 $19,910 $12,714
6/30/05 $18,952 $20,091 $12,721
7/31/05 $19,769 $20,798 $12,780
8/31/05 $19,708 $20,964 $12,845
AVERAGE ANNUAL TOTAL RETURN
- ------------------------------------------
ADVISOR CLASS 5 8/31/05
- ------------------------------------------
1-Year 27.07%
- ------------------------------------------
5-Year 10.62%
- ------------------------------------------
10-Year 8.14%
- ------------------------------------------
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS:
The following line graph compares the performance of Templeton Global Smaller
Companies Fund - Advisor Class 5 with that of the MSCI World Index 6 and the CPI
6 based on a $10,000 investment from 9/1/95 to 8/31/05.
Templeton Global Smaller
Companies Fund -
Period Advisor Class 5 MSCI World Index 6 CPI 6
9/1/95 $10,000 $10,000 $10,000
9/30/95 $10,125 $10,293 $10,020
10/31/95 $9,778 $10,133 $10,052
11/30/95 $9,853 $10,487 $10,046
12/31/95 $9,967 $10,795 $10,039
1/31/96 $10,242 $10,993 $10,098
2/29/96 $10,542 $11,062 $10,131
3/31/96 $10,699 $11,248 $10,183
4/30/96 $10,960 $11,514 $10,222
5/31/96 $11,169 $11,526 $10,242
6/30/96 $11,248 $11,587 $10,249
7/31/96 $10,790 $11,179 $10,268
8/31/96 $11,169 $11,310 $10,288
9/30/96 $11,352 $11,755 $10,320
10/31/96 $11,515 $11,839 $10,353
11/30/96 $11,838 $12,504 $10,373
12/31/96 $12,169 $12,306 $10,373
1/31/97 $12,446 $12,457 $10,405
2/28/97 $12,578 $12,602 $10,438
3/31/97 $12,520 $12,355 $10,464
4/30/97 $12,505 $12,761 $10,477
5/31/97 $13,104 $13,551 $10,471
6/30/97 $13,615 $14,229 $10,484
7/31/97 $13,995 $14,887 $10,497
8/31/97 $13,951 $13,893 $10,517
9/30/97 $14,535 $14,650 $10,543
10/31/97 $13,454 $13,881 $10,569
11/30/97 $13,146 $14,129 $10,562
12/31/97 $13,121 $14,303 $10,549
1/31/98 $12,693 $14,704 $10,569
2/28/98 $13,771 $15,701 $10,589
3/31/98 $14,421 $16,367 $10,608
4/30/98 $14,547 $16,529 $10,628
5/31/98 $14,231 $16,324 $10,647
6/30/98 $13,613 $16,714 $10,661
7/31/98 $13,106 $16,690 $10,674
8/31/98 $10,950 $14,466 $10,687
9/30/98 $10,855 $14,725 $10,700
10/31/98 $11,107 $16,058 $10,726
11/30/98 $11,538 $17,016 $10,726
12/31/98 $11,654 $17,850 $10,719
1/31/99 $11,173 $18,243 $10,746
2/28/99 $10,793 $17,760 $10,759
3/31/99 $11,091 $18,502 $10,791
4/30/99 $12,135 $19,234 $10,870
5/31/99 $11,986 $18,534 $10,870
6/30/99 $12,317 $19,401 $10,870
7/31/99 $12,433 $19,346 $10,903
8/31/99 $12,301 $19,314 $10,929
9/30/99 $11,920 $19,129 $10,981
10/31/99 $11,896 $20,126 $11,001
11/30/99 $12,111 $20,695 $11,007
12/31/99 $12,860 $22,373 $11,007
1/31/00 $12,697 $21,094 $11,040
2/29/00 $13,077 $21,154 $11,105
3/31/00 $13,510 $22,619 $11,197
4/30/00 $12,878 $21,665 $11,203
5/31/00 $12,697 $21,119 $11,216
6/30/00 $13,203 $21,833 $11,275
7/31/00 $13,113 $21,221 $11,302
8/31/00 $13,203 $21,914 $11,302
9/30/00 $12,589 $20,751 $11,360
10/31/00 $11,891 $20,406 $11,380
11/30/00 $11,403 $19,170 $11,387
12/31/00 $11,826 $19,483 $11,380
1/31/01 $12,432 $19,861 $11,452
2/28/01 $12,224 $18,185 $11,498
3/31/01 $11,144 $16,994 $11,524
4/30/01 $11,617 $18,254 $11,570
5/31/01 $12,186 $18,028 $11,622
6/30/01 $11,921 $17,465 $11,642
7/31/01 $11,693 $17,235 $11,609
8/31/01 $11,598 $16,411 $11,609
9/30/01 $10,026 $14,967 $11,661
10/31/01 $10,393 $15,256 $11,622
11/30/01 $11,066 $16,160 $11,602
12/31/01 $11,643 $16,264 $11,557
1/31/02 $11,796 $15,773 $11,583
2/28/02 $12,103 $15,639 $11,629
3/31/02 $13,179 $16,334 $11,694
4/30/02 $13,602 $15,785 $11,759
5/31/02 $13,813 $15,822 $11,759
6/30/02 $13,045 $14,865 $11,766
7/31/02 $11,565 $13,614 $11,779
8/31/02 $11,220 $13,642 $11,818
9/30/02 $10,182 $12,145 $11,838
10/31/02 $10,457 $13,043 $11,857
11/30/02 $10,827 $13,749 $11,857
12/31/02 $10,652 $13,086 $11,831
1/31/03 $10,263 $12,690 $11,884
2/28/03 $9,738 $12,473 $11,975
3/31/03 $9,777 $12,439 $12,047
4/30/03 $10,788 $13,550 $12,021
5/31/03 $11,916 $14,331 $12,001
6/30/03 $12,343 $14,584 $12,014
7/31/03 $13,082 $14,883 $12,027
8/31/03 $13,956 $15,208 $12,073
9/30/03 $14,190 $15,305 $12,112
10/31/03 $15,241 $16,216 $12,099
11/30/03 $15,536 $16,467 $12,067
12/31/03 $16,399 $17,504 $12,054
1/31/04 $16,912 $17,789 $12,112
2/29/04 $17,643 $18,093 $12,178
3/31/04 $17,386 $17,980 $12,256
4/30/04 $17,149 $17,622 $12,296
5/31/04 $17,031 $17,794 $12,368
6/30/04 $17,604 $18,167 $12,407
7/31/04 $17,149 $17,579 $12,387
8/31/04 $17,208 $17,663 $12,394
9/30/04 $17,861 $18,003 $12,420
10/31/04 $18,311 $18,448 $12,485
11/30/04 $19,746 $19,425 $12,492
12/31/04 $20,733 $20,173 $12,446
1/31/05 $20,422 $19,722 $12,472
2/28/05 $21,266 $20,356 $12,544
3/31/05 $21,000 $19,971 $12,642
4/30/05 $20,111 $19,548 $12,727
5/31/05 $20,510 $19,910 $12,714
6/30/05 $21,000 $20,091 $12,721
7/31/05 $21,910 $20,798 $12,780
8/31/05 $21,867 $20,964 $12,845
Annual Report | 11
Performance Summary (CONTINUED)
ENDNOTES
SPECIAL RISKS ARE ASSOCIATED WITH FOREIGN INVESTING, INCLUDING CURRENCY
FLUCTUATIONS, ECONOMIC INSTABILITY AND POLITICAL DEVELOPMENTS. INVESTMENTS IN
DEVELOPING MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN
ADDITION TO THOSE ASSOCIATED WITH THEIR RELATIVELY SMALL SIZE AND LESSER
LIQUIDITY. IN ADDITION, SMALLER COMPANY STOCKS HAVE HISTORICALLY EXHIBITED
GREATER PRICE VOLATILITY THAN LARGER-COMPANY STOCKS, PARTICULARLY OVER THE SHORT
TERM. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT
RISKS.
CLASS B: These shares have higher annual fees and expenses than Class A shares.
CLASS C: Prior to 1/1/04, these shares were offered with an
initial sales charge; thus actual total returns would have
differed. These shares have higher annual fees and
expenses than Class A shares.
ADVISOR CLASS: Shares are available to certain eligible investors as
described in the prospectus.
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include a sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes any current, applicable,
maximum sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the periods indicated and include any current, applicable, maximum
sales charge.
4. In accordance with SEC rules, we provide standardized average
annual total return information through the latest calendar quarter.
5. Effective 1/2/97, the Fund began offering Advisor Class shares, which do not
have sales charges or a Rule 12b-1 plan. Performance quotations for this class
reflect the following methods of calculation: (a) For periods prior to 1/2/97, a
restated figure is used based upon the Fund's Class A performance, excluding the
effect of Class A's maximum initial sales charge, but reflecting the effect of
the Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, actual Advisor
Class performance is used reflecting all charges and fees applicable to that
class. Since 1/2/97 (commencement of sales), the cumulative and average annual
total returns of Advisor Class shares were 79.69% and 7.00%.
6. Source: Standard & Poor's Micropal. The MSCI World Index is a free
float-adjusted, market capitalization-weighted index designed to measure equity
market performance in global developed markets.
12 | Annual Report
Your Fund's Expenses
As a Fund shareholder, you can incur two types of costs:
O Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
O Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs,
sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period, by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 =
$64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Annual Report | 13
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ------------------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 2/28/05 VALUE 8/31/05 PERIOD* 2/28/05-8/31/05
- ------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,027.20 $ 6.90
- ------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.40 $ 6.87
- ------------------------------------------------------------------------------------------------------------------------
CLASS B
- ------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,023.70 $10.71
- ------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,014.62 $10.66
- ------------------------------------------------------------------------------------------------------------------------
CLASS C
- ------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,022.20 $10.70
- ------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,014.62 $10.66
- ------------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- ------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,028.20 $ 5.62
- ------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.66 $ 5.60
- ------------------------------------------------------------------------------------------------------------------------
*Expenses are equal to the annualized expense ratio for each class (A: 1.35%; B:
2.10%; C: 2.10%; and Advisor: 1.10%), multiplied by the average account value
over the period, multiplied by 184/365 to reflect the one-half year period.
14 | Annual Report
Templeton Global Smaller Companies Fund
FINANCIAL HIGHLIGHTS
------------------------------------------------------------
YEAR ENDED AUGUST 31,
CLASS A 2005 2004 2003 2002 2001
------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............................. $8.69 $7.16 $5.82 $6.10 $7.30
------------------------------------------------------------
Income from investment operations:
Net investment income a ........................................ 0.12 0.07 0.07 0.05 0.07
Net realized and unrealized gains (losses) ..................... 2.02 1.56 1.32 (0.27) (0.98)
------------------------------------------------------------
Total from investment operations ................................ 2.14 1.63 1.39 (0.22) (0.91)
------------------------------------------------------------
Less distributions from:
Net investment income .......................................... (0.10) (0.10) (0.05) (0.06) (0.10)
Net realized gains ............................................. (0.91) -- -- -- (0.19)
------------------------------------------------------------
Total distributions ............................................. (1.01) (0.10) (0.05) (0.06) (0.29)
------------------------------------------------------------
Redemption fees ................................................. -- c -- c -- c -- --
------------------------------------------------------------
Net asset value, end of year .................................... $9.82 $8.69 $7.16 $5.82 $6.10
============================================================
Total return b .................................................. 26.78% 23.04% 24.09% (3.59)% (12.50)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................. $949,606 $744,017 $691,103 $565,680 $647,893
Ratios to average net assets:
Expenses ....................................................... 1.35% 1.42% 1.46% 1.44% 1.46%
Net investment income .......................................... 1.33% 0.91% 1.18% 0.82% 1.07%
Portfolio turnover rate ......................................... 41.58% 31.69% 29.51% 25.31% 36.65%
a Based on average daily shares outstanding.
b Total return does not reflect sales commissions or the contingent deferred
sales charge.
c Amount is less than $0.01 per share.
Annual Report | See notes to financial statements. | 15
Templeton Global Smaller Companies Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
------------------------------------------------------------
YEAR ENDED AUGUST 31,
CLASS B 2005 2004 2003 2002 2001
------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............................. $8.42 $6.97 $5.70 $5.99 $7.20
------------------------------------------------------------
Income from investment operations:
Net investment income a ........................................ 0.06 0.02 0.03 0.02 0.03
Net realized and unrealized gains (losses) ..................... 1.95 1.52 1.27 (0.28) (0.97)
------------------------------------------------------------
Total from investment operations ................................ 2.01 1.54 1.30 (0.26) (0.94)
------------------------------------------------------------
Less distributions from:
Net investment income .......................................... (0.02) (0.09) (0.03) (0.03) (0.08)
Net realized gains ............................................. (0.91) -- -- -- (0.19)
------------------------------------------------------------
Total distributions ............................................. (0.93) (0.09) (0.03) (0.03) (0.27)
------------------------------------------------------------
Redemption fees ................................................. -- c -- c -- c -- --
------------------------------------------------------------
Net asset value, end of year .................................... $9.50 $8.42 $6.97 $5.70 $5.99
============================================================
Total return b .................................................. 25.86% 22.23% 22.97% (4.25)% (13.13)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................. $7,983 $4,896 $3,171 $1,409 $333
Ratios to average net assets:
Expenses ....................................................... 2.10% 2.16% 2.21% 2.19% 2.20%
Net investment income (loss) ................................... 0.58% 0.17% 0.43% 0.07% 0.53%
Portfolio turnover rate ......................................... 41.58% 31.69% 29.51% 25.31% 36.65%
a Based on average daily shares outstanding.
b Total return does not reflect the contingent deferred sales charge.
c Amount is less than $0.01 per share.
16 | See notes to financial statements. | Annual Report
Templeton Global Smaller Companies Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
------------------------------------------------------------
YEAR ENDED AUGUST 31,
CLASS C 2005 2004 2003 2002 2001
------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................. $8.55 $7.05 $5.75 $6.00 $7.19
------------------------------------------------------------
Income from investment operations:
Net investment income a ....................................... 0.06 0.02 0.02 0.01 0.02
Net realized and unrealized gains (losses) .................... 1.98 1.54 1.30 (0.26) (0.96)
------------------------------------------------------------
Total from investment operations ............................... 2.04 1.56 1.32 (0.25) (0.94)
------------------------------------------------------------
Less distributions from:
Net investment income ......................................... (0.03) (0.06) (0.02) -- d (0.06)
Net realized gains ............................................ (0.91) -- -- -- (0.19)
------------------------------------------------------------
Total distributions ............................................ (0.94) (0.06) (0.02) -- (0.25)
------------------------------------------------------------
Redemption fees ................................................ -- c -- c -- c -- --
------------------------------------------------------------
Net asset value, end of year ................................... $9.65 $8.55 $7.05 $5.75 $6.00
============================================================
Total return b ................................................. 25.74% 22.07% 23.17% (4.12)% (13.17)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................ $55,448 $30,741 $17,347 $12,894 $13,348
Ratios to average net assets:
Expenses ...................................................... 2.10% 2.17% 2.20% 2.17% 2.20%
Net investment income (loss) .................................. 0.58% 0.16% 0.44% 0.09% 0.33%
Portfolio turnover rate ........................................ 41.58% 31.69% 29.51% 25.31% 36.65%
a Based on average daily shares outstanding.
b Total return does not reflect the contingent deferred sales charge.
c Amount is less than $0.01 per share.
d Actual distribution from net investment income per share was $.003.
Annual Report | See notes to financial statements. | 17
Templeton Global Smaller Companies Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
------------------------------------------------------------
YEAR ENDED AUGUST 31,
ADVISOR CLASS 2005 2004 2003 2002 2001
------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................. $8.71 $7.17 $5.84 $6.12 $7.31
------------------------------------------------------------
Income from investment operations:
Net investment income a ....................................... 0.16 0.10 0.06 0.07 0.07
Net realized and unrealized gains (losses) .................... 2.01 1.56 1.33 (0.28) (0.96)
------------------------------------------------------------
Total from investment operations ............................... 2.17 1.66 1.39 (0.21) (0.89)
------------------------------------------------------------
Less distributions from:
Net investment income ......................................... (0.13) (0.12) (0.06) (0.07) (0.11)
Net realized gains ............................................ (0.91) -- -- -- (0.19)
------------------------------------------------------------
Total distributions ............................................ (1.04) (0.12) (0.06) (0.07) (0.30)
------------------------------------------------------------
Redemption fees ................................................ -- b -- b -- b -- --
------------------------------------------------------------
Net asset value, end of year ................................... $9.84 $8.71 $7.17 $5.84 $6.12
============================================================
Total return ................................................... 27.07% 23.30% 24.39% (3.27)% (12.16)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................ $39,912 $9,329 $4,834 $10,344 $2,929
Ratios to average net assets:
Expenses ...................................................... 1.10% 1.17% 1.21% 1.19% 1.21%
Net investment income ......................................... 1.58% 1.16% 1.43% 1.07% 1.10%
Portfolio turnover rate ........................................ 41.58% 31.69% 29.51% 25.31% 36.65%
a Based on average daily shares outstanding.
b Amount is less than $0.01 per share.
18 | See notes to financial statements. | Annual Report
Templeton Global Smaller Companies Fund
STATEMENT OF INVESTMENTS, AUGUST 31, 2005
- ---------------------------------------------------------------------------------------------------------------------------
INDUSTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 92.0%
AUSTRALIA 4.0%
APN News & Media Ltd. ................... Media 1,969,020 $ 7,559,331
Billabong International Ltd. ............ Textiles Apparel & Luxury Goods 369,406 3,608,188
Downer EDI Ltd. ......................... Commercial Services & Supplies 2,581,800 11,781,305
Iluka Resources Ltd. .................... Metals & Mining 1,306,400 8,375,496
John Fairfax Holdings Ltd. .............. Media 721,850 2,368,382
PaperlinX Ltd. .......................... Paper & Forest Products 3,240,600 7,943,725
---------------
41,636,427
---------------
BAHAMAS 0.4%
a Steiner Leisure Ltd. .................... Diversified Consumer Services 126,500 3,899,995
---------------
BRAZIL 0.6%
a,b Lojas Renner SA, 144A ................... Multiline Retail 280,100 5,944,145
---------------
CANADA 8.5%
Abitibi-Consolidated Inc. ............... Paper & Forest Products 1,922,370 8,257,116
CAE Inc. ................................ Aerospace & Defense 1,903,300 13,304,746
Domtar Inc. ............................. Paper & Forest Products 892,900 6,031,127
a GSI Companies Inc. ...................... Electronic Equipment & Instruments 1,220,300 12,250,790
Legacy Hotels ........................... Real Estate 1,621,700 9,792,891
Linamar Corp. ........................... Auto Components 690,000 9,704,805
MDS Inc. ................................ Health Care Providers & Services 970,300 15,608,481
a Open Text Corp. ......................... Internet Software & Services 521,700 6,067,863
Quebecor World Inc. ..................... Commercial Services & Supplies 454,260 8,784,107
---------------
89,801,926
---------------
CHINA 4.1%
China Oilfield Services Ltd. ............ Energy Equipment & Services 28,962,000 11,179,865
a China Pharmaceutical Group Ltd. ......... Pharmaceuticals 26,320,000 4,131,735
China Resources Power Co. Ltd. ..........Independent Power Producers & Energy Traders 9,984,000 5,716,778
People's Food Holdings Ltd. ............. Food Products 18,729,000 10,302,899
a TCL Communication Technology Holdings ... Communications Equipment 10,508,000 479,994
TCL Multimedia Technology Holdings Ltd. . Household Durables 32,956,000 6,021,568
Weiqiao Textile Co. Ltd. ................ Textiles Apparel & Luxury Goods 2,463,000 3,216,749
b Weiqiao Textile Co. Ltd., 144A .......... Textiles Apparel & Luxury Goods 1,290,500 1,685,431
---------------
42,735,019
---------------
DENMARK 2.5%
a Vestas Wind Systems AS .................. Electrical Equipment 955,140 19,900,560
a,b Vestas Wind Systems AS, 144A ............ Electrical Equipment 318,380 6,633,520
---------------
26,534,080
---------------
FINLAND 4.1%
Amer Sports Corp. Ltd. .................. Leisure Equipment & Products 569,700 10,434,195
Huhtamaki OYJ ........................... Containers & Packaging 444,900 7,237,581
Metso OYJ ............................... Machinery 449,800 11,122,953
Orion OYJ, B ............................ Pharmaceuticals 675,300 14,258,924
---------------
43,053,653
---------------
Annual Report | 19
Templeton Global Smaller Companies Fund
STATEMENT OF INVESTMENTS, AUGUST 31, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
INDUSTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
GERMANY 2.0%
Celesio AG .............................. Health Care Providers & Services 151,000 $ 13,222,743
Vossloh AG .............................. Machinery 144,400 8,345,565
---------------
21,568,308
---------------
HONG KONG 6.1%
Asia Satellite Telecommunications
Holdings Ltd. ........................ Diversified Telecommunication Services 3,415,000 6,547,323
Dah Sing Financial Holdings Ltd. ........ Commercial Banks 1,280,000 8,399,761
Fountain Set Holdings Ltd. .............. Textiles Apparel & Luxury Goods 8,684,000 4,329,904
Giordano International Ltd. ............. Specialty Retail 14,531,348 9,722,904
Hang Lung Group Ltd. .................... Real Estate 1,665,000 3,127,907
Hopewell Holdings Ltd. .................. Transportation Infrastructure 2,982,000 7,654,861
Hung Hing Printing Group Ltd. ........... Containers & Packaging 20,862,508 13,287,965
Li & Fung Ltd. .......................... Distributors 929,000 1,882,708
Ngai Lik Industrial Holding Ltd. ........ Household Durables 14,060,000 2,044,328
Techtronic Industries Co. Ltd. .......... Household Durables 2,869,242 7,236,191
---------------
64,233,852
---------------
INDIA 4.0%
b Gail India Ltd., GDR, 144A .............. Gas Utilities 379,910 12,073,540
Gujarat Ambuja Cements Ltd. ............. Construction Materials 7,548,600 11,247,885
Housing Development Finance Corp. Ltd. .. Thrifts & Mortgage Finance 601,660 12,365,975
Satyam Computers Services Ltd. .......... IT Services 543,622 6,545,073
---------------
42,232,473
---------------
INDONESIA 0.5%
PT Indosat Tbk .......................... Diversified Telecommunication Services 9,955,000 5,122,476
---------------
ISRAEL 1.4%
a Orbotech Ltd. ........................... Electronic Equipment & Instruments 614,700 15,176,943
---------------
JAPAN 2.9%
Meitec Corp. ............................ Commercial Services & Supplies 304,100 9,506,130
Sangetsu Co. Ltd. ....................... Household Durables 352,000 9,604,192
Sohgo Security Services Co. Ltd. ........ Commercial Services & Supplies 874,800 11,752,519
---------------
30,862,841
---------------
LUXEMBOURG 0.0%C
a Thiel Logistik AG ....................... IT Services 44,500 164,103
---------------
NETHERLANDS 9.8%
Aalberts Industries NV .................. Industrial Conglomerates 272,969 14,139,983
Arcadis NV .............................. Construction & Engineering 533,932 14,480,963
a Draka Holding NV ........................ Electrical Equipment 193,464 3,039,876
a,b Draka Holding NV, 144A .................. Electrical Equipment 135,422 2,127,869
Imtech NV ............................... Construction & Engineering 396,540 14,280,918
Oce NV .................................. Office Electronics 413,850 6,232,250
OPG Groep NV ............................ Health Care Providers & Services 277,700 22,605,081
SBM Offshore NV ......................... Energy Equipment & Services 142,300 11,390,318
Vedior NV ............................... Commercial Services & Supplies 1,028,800 14,896,537
---------------
103,193,795
---------------
20 | Annual Report
Templeton Global Smaller Companies Fund
STATEMENT OF INVESTMENTS, AUGUST 31, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
INDUSTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
NORWAY 1.3%
Norske Skogindustrier ASA, A ............ Paper & Forest Products 286,000 $ 4,883,107
Prosafe ASA ............................. Energy Equipment & Services 215,450 8,707,028
---------------
13,590,135
---------------
RUSSIA 0.6%
a,b Pyaterochka Holding NV, GDR, 144A ....... Food & Staples Retailing 393,882 6,491,175
---------------
SINGAPORE 1.9%
Huan Hsin Holdings Ltd. ................. Electronic Equipment & Instruments 6,101,000 2,195,126
Venture Corp. Ltd. ...................... Electronic Equipment & Instruments 1,381,000 12,565,745
Want Want Holdings Ltd. ................. Food Products 4,752,500 5,417,850
---------------
20,178,721
---------------
SOUTH KOREA 5.1%
Bank of Pusan ........................... Commercial Banks 1,517,430 14,567,913
Dae Duck Electronics Co. Ltd. ........... Electronic Equipment & Instruments 1,221,875 11,071,588
Daegu Bank Co. Ltd. ..................... Commercial Banks 1,333,220 13,929,164
Halla Climate Control Co. Ltd. .......... Auto Components 1,104,000 9,652,691
Hansol Paper Co. Ltd. ................... Paper & Forest Products 482,400 4,784,516
---------------
54,005,872
---------------
SPAIN 2.0%
Sol Melia SA ............................ Hotels, Restaurants & Leisure 819,710 10,847,913
Transportes Azkar SA .................... Air Freight & Logistics 1,295,864 10,756,247
---------------
21,604,160
---------------
SWEDEN 1.3%
D. Carnegie & Co. AB .................... Capital Markets 1,132,536 13,220,236
---------------
SWITZERLAND 3.3%
Gurit Heberlein AG, Br. ................. Chemicals 11,677 10,563,420
a Kuoni Reisen Holding AG, B .............. Hotels, Restaurants & Leisure 12,720 4,924,672
SIG Holding AG .......................... Machinery 41,150 10,364,165
Verwaltungs-und Privat-Bank AG .......... Capital Markets 4,695 412,627
Vontobel Holding AG ..................... Capital Markets 295,900 8,006,859
---------------
34,271,743
---------------
TAIWAN 3.9%
AcBel Polytech Inc. ..................... Electrical Equipment 15,465,290 7,886,117
D-Link Corp. ............................ Communications Equipment 13,739,099 13,319,585
Fu Sheng Industrial Co. Ltd. ............ Industrial Conglomerates 8,658,360 10,072,779
Giant Manufacturing Co. ................. Leisure Equipment & Products 3,393,000 5,542,763
Taiwan Fu Hsing ......................... Building Products 4,503,180 4,812,559
---------------
41,633,803
---------------
THAILAND 2.1%
BEC World Public Co. Ltd., fgn. ......... Media 13,896,000 4,752,786
Glow Energy Public Co. Ltd., fgn. .......Independent Power Producers & Energy Traders 3,730,200 2,035,888
b Glow Energy Public Co. Ltd., fgn., 144A .Independent Power Producers & Energy Traders 12,056,200 6,580,097
a Total Access Communication Public Co. Ltd. Wireless Telecommunication Services 2,818,400 8,427,016
---------------
21,795,787
---------------
Annual Report | 21
Templeton Global Smaller Companies Fund
STATEMENT OF INVESTMENTS, AUGUST 31, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
INDUSTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
UNITED KINGDOM 7.8%
Avis Europe PLC ......................... Road & Rail 4,834,600 $ 4,334,577
Bodycote International PLC .............. Machinery 4,450,330 17,123,132
b Bodycote International PLC, 144A ........ Machinery 1,075,082 4,136,496
a Cambridge Antibody Technology Group PLC Biotechnology 425,000 5,671,619
DS Smith PLC ............................ Containers & Packaging 3,902,900 11,500,012
Game Group PLC .......................... Specialty Retail 6,220,800 10,426,110
Homeserve PLC ........................... Commercial Services & Supplies 334,800 6,425,814
John Wood Group ......................... Energy Equipment & Services 3,594,460 13,376,633
Yule Catto & Company PLC ................ Chemicals 2,090,510 8,712,185
---------------
81,706,578
---------------
UNITED STATES 11.8%
a Agile Software Corp. .................... Software 1,759,250 11,681,420
a BearingPoint Inc. ....................... IT Services 643,300 5,262,194
Central Parking Corp. ................... Commercial Services & Supplies 815,400 12,956,706
a Coinstar Inc. ........................... Commercial Services & Supplies 795,880 15,272,937
a Convergys Corp. ......................... IT Services 819,100 11,647,602
a Input/Output Inc. ....................... Energy Equipment & Services 535,940 4,964,440
Irwin Financial Corp. ................... Commercial Banks 249,530 5,240,130
a Maxtor Corp. ............................ Computers & Peripherals 2,365,100 11,494,386
a Scholastic Corp. ........................ Media 157,400 5,740,378
a Seitel Inc. ............................. Energy Equipment & Services 2,764,450 4,699,565
a,d Sharper Image Corp. ..................... Specialty Retail 937,400 12,598,656
a Sigmatel Inc. ........................... Semiconductors & Semiconductor Equipment 316,540 6,125,049
Tredegar Corp. .......................... Industrial Conglomerates 594,300 7,381,206
a West Marine Inc. ........................ Specialty Retail 477,510 8,891,235
---------------
123,955,904
---------------
TOTAL COMMON STOCKS (COST $710,492,940) . 968,614,150
---------------
PREFERRED STOCKS (COST $1,922,752) 1.2%
GERMANY 1.2%
Hugo Boss AG, pfd. ...................... Textiles Apparel & Luxury Goods 384,080 12,718,979
---------------
22 | Annual Report
Templeton Global Smaller Companies Fund
STATEMENT OF INVESTMENTS, AUGUST 31, 2005 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (COST $59,273,813) 5.6%
UNITED STATES 5.6%
e Federal Home Loan Bank, 9/01/05 ......... $59,279,000 $ 59,279,000
---------------
TOTAL INVESTMENTS (COST $771,689,505) 98.8% 1,040,612,129
OTHER ASSETS, LESS LIABILITIES 1.2% ........ 12,336,246
---------------
NET ASSETS 100.0% .......................... $1,052,948,375
===============
SELECTED PORTFOLIO ABBREVIATIONS:
GDR - Global Depository Receipt
a Non-income producing.
b Security was purchased pursuant to Rule 144A under the Securities Act of 1933
and may be sold in transactions exempt from registration only to qualified
institutional buyers or in a public offering registered under the Securities Act
of 1933. These securities have been deemed liquid under guidelines approved by
the Fund's Board of Trustees.
c Rounds to less than 0.05% of net assets.
d See Note 8 regarding holdings of 5% voting securities.
e The security is traded on a discount basis with no stated coupon rate.
Annual Report | See notes to financial statements. | 23
Templeton Global Smaller Companies Fund
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
August 31, 2005
Assets:
Investments in securities:
Cost - Unaffiliated issuers ................................. $ 756,232,181
Cost - Non-controlled affiliated issuers (Note 8) ........... 15,457,324
--------------
Total cost of investments ................................... $ 771,689,505
===============
Value - Unaffiliated issuers ................................ $1,028,013,473
Value - Non-controlled affiliated issuers (Note 8) .......... 12,598,656
--------------
Total value of investments .................................. 1,040,612,129
Cash ......................................................... 11,008
Foreign currency, at value (cost $7,027,958) ................. 7,360,348
Receivables:
Investment securities sold .................................. 18,009,520
Capital shares sold ......................................... 2,229,477
Dividends and interest ...................................... 2,674,735
--------------
Total assets ............................................ 1,070,897,217
--------------
Liabilities:
Payables:
Investment securities purchased ............................. 15,339,822
Capital shares redeemed ..................................... 1,197,751
Affiliates .................................................. 1,200,642
Other liabilities ............................................ 210,627
--------------
Total liabilities ....................................... 17,948,842
--------------
Net assets, at value .................................. $1,052,948,375
===============
Net assets consist of:
Paid-in capital .............................................. $656,794,071
Undistributed net investment income .......................... 5,960,716
Net unrealized appreciation (depreciation) ................... 269,222,980
Accumulated net realized gain (loss) ......................... 120,970,608
--------------
Net assets, at value .................................. $1,052,948,375
===============
24 | See notes to financial statements. | Annual Report
Templeton Global Smaller Companies Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
August 31, 2005
CLASS A:
Net assets, at value ........................................... $949,605,845
=============
Shares outstanding ............................................. 96,715,716
=============
Net asset value per share a .................................... 9.82
=============
Maximum offering price per share
(net asset value per share / 94.25%) .......................... 10.42
=============
CLASS B:
Net assets, at value ........................................... $ 7,982,662
=============
Shares outstanding ............................................. 839,883
=============
Net asset value and maximum offering price per share a ......... 9.50
=============
CLASS C:
Net assets, at value ........................................... $ 55,447,533
=============
Shares outstanding ............................................. 5,743,871
=============
Net asset value and maximum offering price per share a ......... 9.65
=============
ADVISOR CLASS:
Net assets, at value ........................................... $ 39,912,335
=============
Shares outstanding ............................................. 4,056,579
=============
Net asset value and maximum offering price per share a ......... 9.84
=============
a Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable, and redemption fees retained by the Fund.
Annual Report | See notes to financial statements. | 25
Templeton Global Smaller Companies Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended August 31, 2005
Investment income:
Dividends - Unaffiliated issuers (net of foreign taxes of $2,628,093) ...... $ 24,188,812
Interest ................................................................... 1,141,667
Other income (Note 9) ...................................................... 45,919
--------------
Total investment income ................................................ 25,376,398
--------------
Expenses:
Management fees (Note 3a) .................................................. 7,094,872
Administrative fees (Note 3b) .............................................. 1,221,188
Distribution fees (Note 3c)
Class A ................................................................... 2,177,482
Class B ................................................................... 70,589
Class C ................................................................... 426,492
Transfer agent fees (Note 3e) .............................................. 1,279,500
Custodian fees (Note 4) .................................................... 395,712
Reports to shareholders .................................................... 136,500
Registration and filing fees ............................................... 89,407
Professional fees .......................................................... 55,738
Trustees' fees and expenses ................................................ 95,900
Other ...................................................................... 46,200
--------------
Total expenses ........................................................ 13,089,580
Expense reductions (Note 4) ........................................... (25,414)
--------------
Net expenses ........................................................ 13,064,166
--------------
Net investment income ............................................. 12,312,232
--------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments (net of foreign taxes of $524,535) ............................ 137,672,430
Foreign currency transactions ............................................. (106,304)
--------------
Net realized gain (loss) 137,566,126
--------------
Net change in unrealized appreciation
(depreciation) on:
Investments ............................................................... 60,456,193
Translation of assets and liabilities denominated in foreign currencies ... 284,696
Deferred taxes ............................................................ 1,790,679
--------------
Net change in unrealized appreciation (depreciation) ..................... 62,531,568
--------------
Net realized and unrealized gain (loss) ..................................... 200,097,694
--------------
Net increase (decrease) in net assets resulting from operations ............. $ 212,409,926
==============
26 | See notes to financial statements. | Annual Report
Templeton Global Smaller Companies Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
-------------------------------
YEAR ENDED AUGUST 31,
2005 2004
-------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ............................................................. $ 12,312,232 $ 7,215,508
Net realized gain (loss) from investments and foreign currency transactions ....... 137,566,126 124,039,062
Net change in unrealized appreciation (depreciation) on investments, translation of
assets and liabilities denominated in foreign currencies, and deferred taxes ..... 62,531,568 28,977,939
-------------------------------
Net increase (decrease) in net assets resulting from operations ............... 212,409,926 160,232,509
-------------------------------
Distributions to shareholders from:
Net investment income:
Class A .......................................................................... (8,990,630) (10,007,645)
Class B .......................................................................... (10,120) (52,559)
Class C .......................................................................... (103,440) (159,628)
Advisor Class .................................................................... (177,563) (86,378)
Net realized gains:
Class A .......................................................................... (78,639,477) --
Class B .......................................................................... (586,834) --
Class C .......................................................................... (3,462,049) --
Advisor Class .................................................................... (1,223,672) --
-------------------------------
Total distributions to shareholders ................................................ (93,193,785) (10,306,210)
-------------------------------
Capital share transactions: (Note 2)
Class A .......................................................................... 96,033,384 (90,963,416)
Class B .......................................................................... 2,234,294 859,846
Class C .......................................................................... 19,437,641 9,294,105
Advisor Class .................................................................... 27,042,122 3,386,073
-------------------------------
Total capital share transactions ................................................... 144,747,441 (77,423,392)
-------------------------------
Redemption fees .................................................................... 1,823 25,007
-------------------------------
Net increase (decrease) in net assets ........................................ 263,965,405 72,527,914
Net assets:
Beginning of year .................................................................. 788,982,970 716,455,056
-------------------------------
End of year ........................................................................ $1,052,948,375 $788,982,970
===============================
Undistributed net investment income included in net assets:
End of year ........................................................................ $ 5,960,716 $ 3,438,414
===============================
Annual Report | See notes to financial statements. | 27
Templeton Global Smaller Companies Fund
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Templeton Global Smaller Companies Fund (the Fund) is registered under the
Investment Company Act of 1940 as a diversified, open-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.
Government securities generally trade in the over-the-counter market rather than
on a securities exchange. The Fund may utilize independent pricing services,
quotations from bond dealers and information with respect to bond and note
transactions, to assist in determining a current market value for each security.
The Fund's pricing services may use valuation models or matrix pricing which
considers information with respect to comparable bond and note transactions,
quotations from bond dealers, or by reference to other securities that are
considered comparable in such characteristics as rating, interest rate and
maturity date, option adjusted spread models, prepayment projections, interest
rate spreads and yield curves, to determine current 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. 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
Trustees.
28 | Annual Report
Templeton Global Smaller Companies Fund
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 Trustees.
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 on a specified 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 AND DEFERRED TAXES
No provision has been made for U.S. income taxes because the Fund's policy is to
continue 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.
The Fund is subject to a tax imposed on net realized gains of securities of
certain foreign countries. The Fund records an estimated deferred tax liability
for net unrealized gains on these securities in an amount that would be payable
if the securities were disposed of on valuation date.
Annual Report | 29
Templeton Global Smaller Companies Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. INCOME AND DEFERRED TAXES (CONTINUED)
Foreign securities held by the Fund may be subject to foreign taxation. Foreign
taxes, if any, are recorded based on the tax regulations and rates that exist in
the foreign markets in which the Fund invests.
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. Amortization of
premium and accretion of discount on debt securities are included in interest
income. Dividend income is recorded on 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 generally
accepted accounting principles. 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 will
reverse in subsequent periods.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
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 year. Actual results could differ from those
estimates.
G. REDEMPTION FEES
Redemptions and exchanges of Fund shares held five trading days or less (30 days
or less prior to June 1, 2004 and 90 days or less prior to January 1, 2004) may
be subject to the Fund's redemption fee, which is 2% of the amount redeemed.
Such fees are retained by the Fund and accounted for as additional paid-in
capital.
H. GUARANTEES AND INDEMNIFICATIONS
Under the Fund's organizational documents, its officers and trustees 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. However, based on experience, the
Fund expects the risk of loss to be remote.
30 | Annual Report
Templeton Global Smaller Companies Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST
The Fund offers four classes of shares: Class A, Class B, Class C and Advisor
Class. Effective March 1, 2005, Class B shares are only offered to existing
Class B shareholders in the form of reinvested distributions and certain
exchanges from other Franklin Templeton funds' Class B shares. Each class of
shares differs by its initial sales load, contingent deferred sales charges,
distribution fees, voting rights on matters affecting a single class and its
exchange privilege.
At August 31, 2005, there were an unlimited number of shares authorized (without
par value). Transactions in the Fund's shares were as follows:
---------------------------------------------------------------
YEAR ENDED AUGUST 31,
2005 2004
---------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------
CLASS A SHARES:
Shares sold .................... 17,204,944 $ 160,106,256 16,608,824 $ 137,819,241
Shares issued in reinvestment of
distributions ................. 9,113,379 77,203,673 1,129,959 8,565,100
Shares redeemed ................ (15,201,767) (141,276,545) (28,682,784) (237,347,757)
---------------------------------------------------------------
Net increase (decrease) ........ 11,116,556 $ 96,033,384 (10,944,001) $ (90,963,416)
===============================================================
CLASS B SHARES:
Shares sold .................... 337,187 $ 3,006,475 791,378 $ 6,371,024
Shares issued in reinvestment of
distributions ................. 64,007 527,747 6,754 49,578
Shares redeemed ................ (142,953) (1,299,928) (671,299) (5,560,756)
---------------------------------------------------------------
Net increase (decrease) ........ 258,241 $ 2,234,294 126,833 $ 859,846
===============================================================
CLASS C SHARES:
Shares sold .................... 2,667,404 $ 24,455,155 2,457,661 $ 20,249,276
Shares issued in reinvestment of
distributions ................. 329,414 2,754,726 17,982 133,963
Shares redeemed ................ (848,595) (7,772,240) (1,339,336) (11,089,134)
---------------------------------------------------------------
Net increase (decrease) ........ 2,148,223 $ 19,437,641 1,136,307 $ 9,294,105
===============================================================
ADVISOR CLASS SHARES:
Shares sold .................... 3,133,170 $ 28,520,085 1,354,236 $ 10,993,871
Shares issued in reinvestment of
distributions ................. 116,823 991,141 10,694 81,278
Shares redeemed ................ (264,671) (2,469,104) (967,391) (7,689,076)
---------------------------------------------------------------
Net increase (decrease) ........ 2,985,322 $ 27,042,122 397,539 $ 3,386,073
===============================================================
Annual Report | 31
Templeton Global Smaller Companies Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTION WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain officers and
trustees of the Fund are also officers and/or directors of the following
subsidiaries:
- ------------------------------------------------------------------------------------------------------------
SUBSIDIARY AFFILIATION
- ------------------------------------------------------------------------------------------------------------
Templeton Investments Counsel LLC (TIC) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
Franklin/Templeton Distributors, Inc. (Distributors) Principal underwriter
Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES
The Fund pays an investment management fee to TIC based on the average daily net
assets of the Fund as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.750% Up to and including $1 billion
0.730% Over $1 billion, up to and including $5 billion
0.710% Over $5 billion, up to and including $10 billion
0.690% Over $10 billion, up to and including $15 billion
0.670% Over $15 billion, up to and including $20 billion
0.650% In excess of $20 billion
B. ADMINISTRATIVE FEES
The Fund pays an administrative fee to FT Services based on the Fund's average
daily net assets as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.150% Up to and including $200 million
0.135% Over $200 million, up to and including $700 million
0.100% Over $700 million, up to and including $1.2 billion
0.075% In excess of $1.2 billion
C. DISTRIBUTION FEES
The Fund's Board of Trustees has adopted distribution plans for each share
class, with the exception of Advisor class shares, pursuant to Rule 12b-1 under
the 1940 Act. Under the Fund's Class A reimbursement distribution plan, the Fund
reimburses Distributors up to 0.25% per year of Class A's average daily net
assets for costs incurred in connection with the sale and distribution of the
Fund's shares. Under the Class A reimbursement distribution plan, costs
exceeding the maximum for the current plan year may be reimbursed in subsequent
periods. At August 31, 2005, Distributors advised the Fund that unreimbursed
costs were $1,350,608.
32 | Annual Report
Templeton Global Smaller Companies Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTION WITH AFFILIATES (CONTINUED)
C. DISTRIBUTION FEES (CONTINUED)
Under the Fund's compensation distribution plans, the Fund pays Distributors for
costs incurred in connection with the sale and distribution of the Fund's shares
up to a certain percentage per year of its average daily net assets of each
class as follows:
Class B ..................................................... 1.00%
Class C ..................................................... 1.00%
D. SALES CHARGES/UNDERWRITING AGREEMENTS
Distributors has advised the Fund of the following commission transactions
related to the sales and redemptions of the Fund's shares for the year:
Net sales charges received a ........................... $210,662
Contingent deferred sales charges retained ............. $ 19,897
aNet of commissions paid to unaffiliated broker/dealers.
E. TRANSFER AGENT FEES
The Fund paid transfer agent fees of $1,279,500, of which $962,081 was retained
by Investor 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 August 31, 2005, the
custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
For tax purposes, realized currency losses occurring subsequent to October 31,
may be deferred and treated as occurring on the first day of the following
fiscal year. At August 31, 2005, the Fund deferred realized currency losses of
$122,661.
The tax character of distributions paid during the years ended August 31, 2005
and 2004, was as follows:
---------------------------
2005 2004
---------------------------
Distributions paid from:
Ordinary Income $ 9,281,753 $10,306,210
Long term capital gain 83,912,032 --
---------------------------
$93,193,785 $10,306,210
===========================
Annual Report | 33
Templeton Global Smaller Companies Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions, passive foreign
investment company shares, and foreign taxes paid on net realized gains.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of foreign currency transactions, and
foreign taxes paid on net realized gains.
At August 31, 2005, the cost of investments, net unrealized appreciation
(depreciation), undistributed ordinary income and undistributed long term
capital gains for income tax purposes were as follows:
Cost of investments ...................................... $781,180,030
============
Unrealized appreciation .................................. $296,471,369
Unrealized depreciation .................................. (37,039,270)
------------
Net unrealized appreciation (depreciation) ............... $259,432,099
============
Undistributed ordinary income ............................ $ 24,271,943
Undistributed long term capital gains .................... 112,272,567
------------
Distributable earnings ................................... $136,544,510
============
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short-term securities) for the
year ended August 31, 2005 aggregated $400,563,485 and $366,092,771,
respectively.
7. RISK OF INVESTING IN FOREIGN SECURITIES
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.
8. HOLDINGS OF 5% VOTING SECURITIES
The Investment Company Act of 1940 defines "affiliated companies" to include
investments in portfolio companies in which a fund owns 5% or more of the
outstanding voting securities. Investments in "affiliated companies" for the
year ended August 31, 2005 were as shown below:
- ---------------------------------------------------------------------------------------------------------------
NUMBER OF NUMBER OF
SHARES HELD SHARES HELD VALUE
AT BEGINNING GROSS GROSS AT END AT END INVESTMENT REALIZED CAPITAL
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS OF YEAR OF YEAR INCOME GAIN (LOSS)
- ---------------------------------------------------------------------------------------------------------------
Sharper Image Corp. -- 937,400 -- 937,400 $12,598,656 $-- $--
--------------------------------------------
TOTAL AFFILIATED SECURITIES (1.20% of Net Assets) $12,598,656 $-- $--
============================================
34 | Annual Report
Templeton Global Smaller Companies Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. REGULATORY MATTERS
INVESTIGATIONS AND SETTLEMENTS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, including the Securities and Exchange
Commission ("SEC"), the California Attorney General's Office ("CAGO"), and the
National Association of Securities Dealers, Inc. ("NASD"), 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, Franklin
Resources, Inc. and certain of its subsidiaries (as used in this section,
together, the "Company"), as well as certain current or former executives and
employees of the Company, provided documents and information in response to
subpoenas and/or requests for documents, information and/or testimony. Beginning
in August 2004, the Company entered into settlements with certain of the
regulators and a governmental entity investigating the mutual fund industry
practices noted above. The Company believes that settlement of each of the
matters is in the best interest of the Company and shareholders of the Franklin,
Templeton, and Mutual Series mutual funds (the "funds").
Two of the settlement agreements, those with the SEC and the CAGO concerning
marketing support payments, provide that the distribution of settlement monies
are to be made to the relevant funds, not to individual shareholders. The CAGO
has approved the distribution plan pertaining to the distribution of the monies
owed under the CAGO settlement agreement and, in accordance with the terms and
conditions of that settlement, the monies were disbursed to the participating
funds, including the Fund, and are recorded as other income in the current
period. The SEC has not yet approved the distribution plan pertaining to the SEC
settlement. When approved, disbursements of settlement monies under the SEC's
settlement will be made promptly in accordance with the terms and conditions of
that order.
OTHER LEGAL PROCEEDINGS
On April 12, 2005, the Attorney General of West Virginia filed a complaint in
the Circuit Court of Marshall County, West Virginia against a number of
companies engaged in the mutual fund industry, including Franklin Resources,
Inc. and its subsidiary, Franklin Advisers, Inc., and certain other parties
alleging violations of the West Virginia Consumer Credit and Protection Act and
seeking, among other things, civil penalties and attorneys' fees and costs.
Defendants have since removed the matter to the United States District Court for
the Northern District of West Virginia. To the extent applicable to the Company,
the complaint arises from activity that occurred in 2001 and duplicates, in
whole or in part, the allegations asserted in the February 4, 2004 Massachusetts
Administrative Complaint concerning one instance of market timing (the
"Administrative Complaint") and the SEC's findings regarding market timing in
its August 2, 2004 Order (the "SEC Order"), both of which matters were
previously reported.
Annual Report | 35
Templeton Global Smaller Companies Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. REGULATORY MATTERS (CONTINUED)
OTHER LEGAL PROCEEDINGS (CONTINUED)
The Company, in addition to certain funds, and certain current and former
officers, employees, and directors have been named in multiple lawsuits in
different courts alleging violations of various federal securities and state
laws and seeking, among other relief, monetary damages, restitution, removal of
fund trustees, directors, advisers, administrators, and distributors, rescission
of management contracts and 12b-1 plans, and/or attorneys' fees and costs.
Specifically, the lawsuits claim breach of duty with respect to alleged
arrangements to permit market timing and/or late trading activity, or breach of
duty with respect to the valuation of the portfolio securities of certain
Templeton funds managed by Franklin Resources, Inc. subsidiaries, allegedly
resulting in market timing activity. The majority of these lawsuits duplicate,
in whole or in part, the allegations asserted in the Administrative Complaint
and the SEC's findings regarding market timing in the SEC Order. The lawsuits
are styled as class actions, or derivative actions on behalf of either the named
funds or Franklin Resources, Inc.
The Company, in addition to certain funds, and certain current and former
officers, employees, and directors have been named in multiple lawsuits alleging
violations of various securities laws and pendent state law claims relating to
the disclosure of marketing support payments and/or payment of allegedly
excessive commissions and/or advisory or distribution fees, and seeking, among
other relief, monetary damages, restitution, rescission of advisory contracts,
including recovery of all fees paid pursuant to those contracts, an accounting
of all monies paid to the named advisers, declaratory relief, injunctive relief,
and/or attorneys' fees and costs. These lawsuits are styled as class actions or
derivative actions brought on behalf of the named funds.
The Company and fund management strongly believe that the claims made in each of
the lawsuits described 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. Public trust and confidence are critical to the Company's business and
any material loss of investor and/or client confidence could result in a
significant decline in assets under management by the Company, which would have
an adverse effect on future financial results. 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. The Company is committed to taking all
appropriate actions to protect the interests of its funds' shareholders.
36 | Annual Report
Templeton Global Smaller Companies Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF TEMPLETON GLOBAL SMALLER COMPANIES
FUND
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 the Templeton Global Smaller
Companies Fund (the "Fund") at August 31, 2005, 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 August 31, 2005 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
October 10, 2005
Annual Report | 37
Templeton Global Smaller Companies Fund
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 $129,376,263 as a
capital gain dividend for the fiscal year ended August 31, 2005.
Under Section 854(b)(2) of the Code, the Fund designates 5.72% of the ordinary
income dividends as income qualifying for the dividends received deduction for
the fiscal year ended August 31, 2005.
Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $18,371,472 as qualified dividends for purposes of
the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
August 31, 2005. In January 2006, shareholders will receive Form 1099-DIVwhich
will include their share of qualified dividends distributed during the calendar
year 2005. Shareholders are advised to check with their tax advisors for
information on the treatment of these amounts on their individual income tax
returns.
At August 31, 2005, more than 50% of the Templeton Global Smaller Companies
Fund's total assets were invested in securities of foreign issuers. In most
instances, foreign taxes were withheld from dividends paid to the Fund on these
investments. As shown in the tables 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 October 20, 2005, 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 tables provide a detailed analysis, by country, of foreign tax
paid, foreign source income, and foreign qualified dividends as designated by
the Fund, to Class A, Class B, Class C, and Advisor Class shareholders of
record.
38 | Annual Report
Templeton Global Smaller Companies Fund
TAX DESIGNATION (UNAUDITED) (CONTINUED)
RECORD DATE: 10/20/2005
- --------------------------------------------------------------------------------
CLASS A
FOREIGN TAX FOREIGN FOREIGN
PAID SOURCE INCOME QUALIFIED DIVIDENDS
COUNTRY PER SHARE PER SHARE PER SHARE
- --------------------------------------------------------------------------------
Australia ........... $0.0009 $0.0115 $0.0115
Canada .............. 0.0017 0.0075 0.0044
China ............... 0.0000 0.0085 0.0000
Denmark ............. 0.0002 0.0009 0.0009
Finland ............. 0.0042 0.0184 0.0184
Germany ............. 0.0012 0.0051 0.0025
Hong Kong ........... 0.0000 0.0141 0.0000
India ............... 0.0048 0.0057 0.0043
Indonesia ........... 0.0002 0.0010 0.0010
Japan ............... 0.0004 0.0038 0.0038
Mexico .............. 0.0000 0.0003 0.0003
Netherlands ......... 0.0035 0.0152 0.0152
Norway .............. 0.0010 0.0044 0.0044
Singapore ........... 0.0000 0.0043 0.0000
South Korea ......... 0.0027 0.0106 0.0106
Spain ............... 0.0004 0.0018 0.0018
Sweden .............. 0.0014 0.0059 0.0059
Switzerland ......... 0.0009 0.0054 0.0054
Taiwan .............. 0.0052 0.0168 0.0000
Thailand ............ 0.0003 0.0020 0.0020
United Kingdom ...... 0.0000 0.0150 0.0150
--------------------------------------------------------
TOTAL ............... $0.0290 $0.1582 $0.1074
========================================================
- --------------------------------------------------------------------------------
CLASS B
FOREIGN TAX FOREIGN FOREIGN
PAID SOURCE INCOME QUALIFIED DIVIDENDS
COUNTRY PER SHARE PER SHARE PER SHARE
- --------------------------------------------------------------------------------
Australia ........... $0.0009 $0.0084 $0.0084
Canada .............. 0.0017 0.0054 0.0032
China ............... 0.0000 0.0061 0.0000
Denmark ............. 0.0002 0.0007 0.0007
Finland ............. 0.0042 0.0133 0.0133
Germany ............. 0.0012 0.0037 0.0018
Hong Kong ........... 0.0000 0.0103 0.0000
India ............... 0.0048 0.0041 0.0031
Indonesia ........... 0.0002 0.0007 0.0007
Japan ............... 0.0004 0.0027 0.0027
Mexico .............. 0.0000 0.0002 0.0002
Netherlands ......... 0.0035 0.0110 0.0110
Norway .............. 0.0010 0.0032 0.0032
Singapore ........... 0.0000 0.0031 0.0000
South Korea ......... 0.0027 0.0077 0.0077
Spain ............... 0.0004 0.0013 0.0013
Sweden .............. 0.0014 0.0043 0.0043
Switzerland ......... 0.0009 0.0039 0.0039
Taiwan .............. 0.0052 0.0122 0.0000
Thailand ............ 0.0003 0.0015 0.0015
United Kingdom ...... 0.0000 0.0109 0.0109
--------------------------------------------------------
TOTAL ............... $0.0290 $0.1147 $0.0779
========================================================
Annual Report | 39
Templeton Global Smaller Companies Fund
TAX DESIGNATION (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
CLASS C
FOREIGN TAX FOREIGN FOREIGN
PAID SOURCE INCOME QUALIFIED DIVIDENDS
COUNTRY PER SHARE PER SHARE PER SHARE
- --------------------------------------------------------------------------------
Australia ........... $0.0009 $0.0090 $0.0090
Canada .............. 0.0017 0.0058 0.0034
China ............... 0.0000 0.0066 0.0000
Denmark ............. 0.0002 0.0007 0.0007
Finland ............. 0.0042 0.0143 0.0143
Germany ............. 0.0012 0.0039 0.0019
Hong Kong ........... 0.0000 0.0110 0.0000
India ............... 0.0048 0.0044 0.0033
Indonesia ........... 0.0002 0.0007 0.0007
Japan ............... 0.0004 0.0029 0.0029
Mexico .............. 0.0000 0.0002 0.0002
Netherlands ......... 0.0035 0.0118 0.0118
Norway .............. 0.0010 0.0035 0.0035
Singapore ........... 0.0000 0.0034 0.0000
South Korea ......... 0.0027 0.0083 0.0083
Spain ............... 0.0004 0.0014 0.0014
Sweden .............. 0.0014 0.0046 0.0046
Switzerland ......... 0.0009 0.0042 0.0042
Taiwan .............. 0.0052 0.0130 0.0000
Thailand ............ 0.0003 0.0016 0.0016
United Kingdom ...... 0.0000 0.0116 0.0116
--------------------------------------------------------
TOTAL ............... $0.0290 $0.1229 $0.0834
========================================================
- --------------------------------------------------------------------------------
ADVISOR CLASS
FOREIGN TAX FOREIGN FOREIGN
PAID SOURCE INCOME QUALIFIED DIVIDENDS
COUNTRY PER SHARE PER SHARE PER SHARE
- --------------------------------------------------------------------------------
Australia ........... $0.0009 $0.0127 $0.0127
Bermuda ............. 0.0000 0.0001 0.0001
Canada .............. 0.0017 0.0082 0.0048
China ............... 0.0000 0.0093 0.0000
Denmark ............. 0.0002 0.0010 0.0010
Finland ............. 0.0042 0.0202 0.0202
Germany ............. 0.0012 0.0056 0.0027
Hong Kong ........... 0.0000 0.0156 0.0000
India ............... 0.0048 0.0063 0.0047
Indonesia ........... 0.0002 0.0010 0.0010
Japan ............... 0.0004 0.0041 0.0041
Mexico .............. 0.0000 0.0003 0.0003
Netherlands ......... 0.0035 0.0167 0.0167
Norway .............. 0.0010 0.0049 0.0049
Singapore ........... 0.0000 0.0048 0.0000
South Korea ......... 0.0027 0.0117 0.0117
Spain ............... 0.0004 0.0019 0.0019
Sweden .............. 0.0014 0.0065 0.0065
Switzerland ......... 0.0009 0.0060 0.0060
Taiwan .............. 0.0052 0.0185 0.0000
Thailand ............ 0.0003 0.0022 0.0022
United Kingdom ...... 0.0000 0.0165 0.0165
--------------------------------------------------------
TOTAL ............... $0.0290 $0.1741 $0.1180
========================================================
40 | Annual Report
Templeton Global Smaller Companies Fund
TAX DESIGNATION (UNAUDITED) (CONTINUED)
Foreign Tax Paid per Share (Column 1) is the amount per share available to you,
as a tax credit or deduction (assuming you held your shares in the Fund for a
minimum of 16 days during the 30-day period beginning 15 days before the
ex-dividend date of the Fund's distribution to which the foreign taxes relate).
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 without adjustment for the lower U.S.
tax rates.
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. If you have foreign source qualified
dividends, you may be required to make certain adjustments to those amounts
before taking them into account on line 1 of Form 1116. However, you may qualify
for an adjustment exception. Please see the instructions to Form 1116 for more
information.
In January 2006 shareholders will receive Form 1099-DIV which will include their
share of taxes paid and foreign source income distributed during the calendar
year 2005. The Foreign Source Income reported on Form 1099-DIV has not been
reduced to take into account the tax 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 2005
individual income tax returns.
Annual Report | 41
Templeton Global Smaller Companies Fund
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. Each board
member will serve 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) Trustee Since 1992 141 Director, Bar-S Foods (meat packing
500 East Broward Blvd. company).
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) Trustee Since 2004 20 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman, Island Corporate Holding Ltd.; Director and Vice Chairman, Caribbean Utilities Co. Limited; Director, Provo Power Company
Ltd.; director of various other business and nonprofit organizations; and FORMERLY, Chairman, Atlantic Equipment & Power Ltd.
(1977-2003).
- ------------------------------------------------------------------------------------------------------------------------------------
S. JOSEPH FORTUNATO (1932) Trustee Since 1992 142 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Attorney; and FORMERLY, member of the law firm of Pitney, Hardin, Kipp & Szuch (until 2002) (Consultant (2003)).
- ------------------------------------------------------------------------------------------------------------------------------------
EDITH E. HOLIDAY (1952) Trustee Since 2004 137 Director, Amerada Hess Corporation
500 East Broward Blvd. (exploration and refining of oil and gas),
Suite 2100 H.J. Heinz Company (processed foods and
Fort Lauderdale, FL 33394-3091 allied products), RTI International
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).
- ------------------------------------------------------------------------------------------------------------------------------------
42 | 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
- ------------------------------------------------------------------------------------------------------------------------------------
GORDON S. MACKLIN (1928) Trustee Since 1993 141 Director, Martek Biosciences Corporation,
500 East Broward Blvd. MedImmune, Inc. (biotechnology), and
Suite 2100 Overstock.com (Internet services); and
Fort Lauderdale, FL 33394-3091 FORMERLY, Director, MCI Communication
Corporation (subsequently known as MCI
WorldCom, Inc. and WorldCom, Inc.)
(communications services) (1988-2002),
White Mountains Insurance Group, Ltd.
(holding company) (1987-2004) and
Spacehab, Inc. (aerospace services)
(1994-2003).
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company)
(2001-2004); Chairman, White River Corporation (financial services) (1993-1998) and Hambrecht & Quist Group (investment banking)
(1987-1992); and President, National Association of Securities Dealers, Inc. (1970-1987).
- ------------------------------------------------------------------------------------------------------------------------------------
FRED R. MILLSAPS (1929) Trustee Since 1990 27 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various business and nonprofit organizations; manager of personal investments (1978-present); and FORMERLY, Chairman
and Chief Executive Officer, Landmark Banking Corporation (1969-1978); Financial Vice President, Florida Power and Light
(1965-1969); and Vice President, Federal Reserve Bank of Atlanta (1958-1965).
- ------------------------------------------------------------------------------------------------------------------------------------
FRANK A. OLSON (1932) Trustee Since 2004 101 Director, White Mountains Insurance Group,
500 East Broward Blvd. Ltd. (holding company), Amerada Hess
Suite 2100 Corporation (exploration and refining of
Fort Lauderdale, FL 33394-3091 oil and gas) and Sentient Jet (private jet
service); and FORMERLY, Director, Becton
Dickinson and Company (medical
technology), Cooper Industries, Inc.
(electrical products and tools and
hardware), Health Net, Inc. (formerly,
Foundation Health) (integrated managed
care), The Hertz Corporation, Pacific
Southwest Airlines, The RCA Corporation,
Unicom (formerly, Commonwealth Edison) and
UAL Corporation (airlines).
- ------------------------------------------------------------------------------------------------------------------------------------
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).
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 43
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
CONSTANTINE D. TSERETOPOULOS Trustee Since 2004 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); and director of various nonprofit organizations; and FORMERLY, Cardiology Fellow,
University of Maryland (1985-1987) and Internal Medicine Resident, Greater Baltimore Medical Center (1982-1985).
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
**NICHOLAS F. BRADY (1930) Trustee Since 1993 15 Director, Amerada Hess Corporation
500 East Broward Blvd. (exploration and refining of oil and gas),
Suite 2100 Total Logistics, Inc. (formerly C2, Inc.)
Fort Lauderdale, FL 33394-3091 (operating and investment business) and
Weatherford International, Ltd (oilfield
products and servicing) (2004-present);
and FORMERLY, Director, H.J. Heinz Company
(processed foods and allied
products)(1987-1988; 1993-2003).
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman, Darby Overseas Investments, Ltd., Darby Technology Ventures Group, LLC (investment firms) and Franklin Templeton
Investment Funds (1994-present); Director, Templeton Capital Advisors Ltd.; and FORMERLY, Chairman, Darby Emerging Markets
Investments LDC (until 2004) and Templeton Emerging Markets Investment Trust PLC (until 2003); Secretary of the United States
Department of the Treasury (1988-1993); Chairman of the Board, Dillon, Read & Co., Inc. (investment banking) (until 1988); and
U.S. Senator, New Jersey (April 1982-December 1982).
- ------------------------------------------------------------------------------------------------------------------------------------
**HARMON E. BURNS (1945) Trustee and Trustee since 21 None
One Franklin Parkway Vice President 1992 and Vice
San Mateo, CA 94403-1906 President since
1996
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin
Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, 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 46 of the investment companies in Franklin
Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
44 | 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
- ------------------------------------------------------------------------------------------------------------------------------------
**CHARLES B. JOHNSON (1933) Trustee, Trustee and 141 None
One Franklin Parkway Chairman of Chairman of the
San Mateo, CA 94403-1906 the Board and Board since 1995
Vice President and Vice
President since
1992
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President, Franklin Templeton
Distributors, Inc.; Director, Fiduciary Trust Company International; and officer and/or director or trustee, as the case may be,
of some of the other subsidiaries of Franklin Resources, Inc. and of 43 of the investment companies in Franklin Templeton
Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (1952) Chief Since 2004 Not Applicable Not Applicable
One Franklin Parkway Compliance
San Mateo, CA 94403-1906 Officer
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of 48 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001).
- ------------------------------------------------------------------------------------------------------------------------------------
JEFFREY A. EVERETT (1964) President and Since 2002 Not Applicable Not Applicable
PO Box N-7759 Chief
Lyford Cay, Nassau, Bahamas Executive
Officer -
Investment
Management
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President and Director, Templeton Global Advisors Limited; officer of 14 of the investment companies in Franklin Templeton
Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (1947) Senior Vice Since 2002 Not Applicable Not Applicable
500 East Broward Blvd. President and
Suite 2100 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 48 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 Resources, Inc.; officer and director of one of the subsidiaries of Franklin
Resources, Inc.; officer of 48 of the investment companies in Franklin Templeton Investments; and FORMERLY, President, Chief
Executive Officer and Director, Property Resources Equity Trust (until 1999) and Franklin Select Realty Trust (until 2000).
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 45
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (1947) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton
Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, LLC,
Franklin Mutual Advisers, LLC, Franklin Templeton Alternative Strategies, Inc., Franklin Templeton Investor Services, LLC,
Franklin Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and
Templeton/Franklin Investment Services, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 48
of the investment companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management,
Executive Assistant and Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S.
Securities and Exchange Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court
(District of Massachusetts) (until 1979).
- ------------------------------------------------------------------------------------------------------------------------------------
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.; Vice President and Director, Franklin
Templeton Distributors, Inc.; Director, Franklin Advisers, 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 46
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.; Assistant Vice President, Franklin Templeton Distributors, 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.
- ------------------------------------------------------------------------------------------------------------------------------------
MICHAEL O. MAGDOL (1937) Vice Since 2002 Not Applicable Not Applicable
600 Fifth Avenue President -
Rockefeller Center AML
New York, NY 10020-2302 Compliance
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; Director, Franklin Templeton
Institutional Suisse SA, Arch Chemicals, Inc. and Lingnan Foundation; and officer and/or director, as the case may be, of some of
the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
ROBERT C. ROSSELOT (1960) Secretary Since December Not Applicable Not Applicable
500 East Broward Blvd. 2004
Suite 2100
Fort Lauderdale, FL 33394-3091
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Associate General Counsel and Assistant Secretary, Franklin Resources, Inc.; Vice President and Assistant Secretary, Templeton
Investment Counsel, LLC and Fiduciary Trust International of the South; and officer of 14 of the investment companies in Franklin
Templeton Investments; and FORMERLY, Assistant General Counsel, The Prudential Insurance Company of America.
- ------------------------------------------------------------------------------------------------------------------------------------
46 | 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
- ------------------------------------------------------------------------------------------------------------------------------------
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 14 of the investment companies in Franklin Templeton Investments;
and FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
- ------------------------------------------------------------------------------------------------------------------------------------
MURRAY L. SIMPSON (1937) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President and General Counsel, Franklin Resources, Inc.; officer and/or director, as the case may be, of some of the
subsidiaries of Franklin Resources, Inc. and of 48 of the investment companies in Franklin Templeton Investments; and FORMERLY,
Chief Executive Officer and Managing Director, Templeton Franklin Investment Services (Asia) Limited (until 2000); and Director,
Templeton Asset Management Ltd. (until 1999).
- ------------------------------------------------------------------------------------------------------------------------------------
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 48 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 adviser or affiliated
investment advisers.
** Charles B. Johnson is considered to be an interested person of the Fund under
the federal securities laws due to his position as an officer and director and
major shareholder of Franklin Resources, Inc. (Resources), which is the parent
company of the Fund's adviser and distributor. Harmon E. Burns is considered to
be an interested person of the Fund under the federal securities laws due to his
position as officer and director of Resources. Nicholas F. Brady is considered
to be an interested person of the Fund under the federal securities laws due to
his ownership interest in a subsidiary of Resources, as well as his director
positions with such company and certain other related companies.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
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 OF TRUSTEES
HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT
COMMITTEE AND HAS DESIGNATED EACH OF FRED R. MILLSAPS AND FRANK A. OLSON AS AN
AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MESSRS. MILLSAPS AND
OLSON QUALIFY AS SUCH AN EXPERT IN VIEW OF THEIR EXTENSIVE BUSINESS BACKGROUND
AND EXPERIENCE. MR. MILLSAPS, WHO IS CURRENTLY A DIRECTOR OF VARIOUS BUSINESS
AND NONPROFIT ORGANIZATIONS, HAS SERVED AS A MEMBER AND CHAIRMAN OF THE FUND
AUDIT COMMITTEE SINCE 1991 AND WAS FORMERLY CHAIRMAN AND CHIEF EXECUTIVE OFFICER
OF LANDMARK BANKING CORPORATION AND FINANCIAL VICE PRESIDENT OF FLORIDA POWER
AND LIGHT. MR. OLSON, WHO HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE
SINCE 2004, CURRENTLY SERVES AS CHAIRMAN EMERITUS OF THE HERTZ CORPORATION AND
WAS FORMERLY CHAIRMAN FROM 1980-2000 AND ITS CHIEF EXECUTIVE OFFICER FROM 1977
TO 1999, IS A DIRECTOR AND AUDIT COMMITTEE MEMBER OF AMERADA HESS CORPORATION
AND WHITE MOUNTAINS INSURANCE GROUP, LTD., AND A FORMER CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER OF UAL CORPORATION. AS A RESULT OF SUCH BACKGROUND AND
EXPERIENCE, THE BOARD OF TRUSTEES BELIEVES THAT MR. MILLSAPS AND MR. OLSON HAVE
EACH 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. MESSRS. MILLSAPS AND OLSON ARE
INDEPENDENT TRUSTEES AS THAT TERM IS DEFINED UNDER THE APPLICABLE U.S.
SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI.
Annual Report | 47
Templeton Global Smaller Companies Fund
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT
At a meeting held May 11, 2005, the Board of Trustees ("Board"), including a
majority of non-interested or independent Trustees, approved renewal of the
investment advisory contract for the Fund. In reaching this decision, the Board
took into account information furnished throughout the year at regular Board
meetings, as well as information prepared specifically in connection with the
annual renewal review process. Information furnished and discussed throughout
the year included investment performance reports and related financial
information for the Fund, as well as periodic reports on shareholder services,
legal, compliance, pricing, brokerage commissions and execution and other
services provided by the Investment Manager ("Manager") and its affiliates.
Information furnished specifically in connection with the renewal process
included a report for the Fund prepared by Lipper Financial Services ("Lipper"),
an independent organization, as well as a Fund profitability analysis report
prepared by management. The Lipper report compared the Fund's investment
performance and expenses with those of other mutual funds deemed comparable to
the Fund as selected by Lipper. The Fund profitability analysis report discussed
the profitability to Franklin Templeton Investments from its overall U.S. fund
operations, as well as on an individual fund-by-fund basis. Included with such
profitability analysis report was information on a fund-by-fund basis listing
portfolio managers and other accounts they manage, as well as information on
management fees charged by the Manager including management's explanation of
differences where relevant and a three-year expense analysis with an explanation
for any increase in expense ratios. Additional information accompanying such
report was a memorandum prepared by management describing enhancements to the
services provided to the Fund by the Franklin Templeton Investments
organization, as well as a memorandum relating to economies of scale.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel. In approving
continuance of the investment advisory contract for the Fund, the Board,
including a majority of independent Trustees, determined that the existing
management fee structure was fair and reasonable and that continuance of the
investment advisory contract was in the best interests of the Fund and its
shareholders. While attention was given to all information furnished, the
following discusses the primary factors relevant to the Board's decision.
NATURE, EXTENT AND QUALITY OF SERVICES. The Board was satisfied with the nature
and quality of the overall services provided by the Manager and its affiliates
to the Fund and its shareholders. In addition to investment performance and
expenses of the Fund discussed later, the Board's opinion was based, in part,
upon periodic reports furnished them showing that the investment policies and
restrictions for the Fund were consistently complied with as well as other
reports periodically furnished the Board covering matters such as the compliance
of portfolio managers and other management personnel with the code of ethics
adopted throughout the Franklin Templeton fund complex, the adherence to fair
value pricing procedures established by the Board, and the accuracy of net asset
value calculations. The Board also noted the extent of benefits
48 | Annual Report
Templeton Global Smaller Companies Fund
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT (CONTINUED)
provided Fund shareholders from being part of the Franklin Templeton family of
funds, including the right to exchange investments between the same class of
funds without a sales charge, the ability to reinvest Fund dividends into other
funds and the right to combine holdings in other funds to obtain a reduced sales
charge. Favorable consideration was given to management's efforts and
expenditures in establishing back-up systems and recovery procedures to function
in the event of a natural disaster, it being noted by the Board that such
systems and procedures had functioned smoothly during the hurricanes and
blackout experienced last year in Florida. Other factors taken into account by
the Board were the Manager's best execution trading policies, including a
favorable third-party report on portfolio execution, as well as the compliance
procedures and qualifications of the Chief Compliance Officer established in
accordance with recently adopted SEC requirements. Consideration was also given
to the experience of the Fund's portfolio management team, the number of
accounts managed and general method of compensation. In this latter respect, the
Board noted that a primary factor in management's determination of the amount of
a portfolio manager's bonus compensation was the relative investment performance
of the funds he or she managed so as to be aligned with the interests of Fund
shareholders. The Board also took into account the transfer agent and
shareholder services provided Fund shareholders by an affiliate of the Manager,
noting continuing expenditures by management to increase and improve the scope
of such services, periodic favorable reports on such service conducted by third
parties such as Dalbar, and the firsthand experience of the individual Trustees
who deal with the shareholder services department in their capacities as
shareholders in one or more of the various Franklin Templeton funds.
INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment
performance of the Fund in view of its importance to shareholders. While
consideration was given to performance reports and discussions with portfolio
managers at Board meetings during the year, particular attention in assessing
such performance was given to the Lipper report furnished for the contract
renewal. The Lipper report prepared for the Fund showed the investment
performance of its Class A shares for the one-year period ended February 28,
2005, as well as the previous ten years ended on such date in comparison to a
performance universe consisting of the Fund and all retail and institutional
global small/mid-cap core funds as selected by Lipper. The Fund's total return,
as shown in such report, was in the highest quintile of such performance
universe for the one-year period, and on an annualized basis was also in the
highest quintile of such performance universe for the previous three- and
five-year periods, and in the fourth quintile for the previous ten-year period.
The Board expressed its satisfaction with such performance.
COMPARATIVE EXPENSES. Consideration was given to a comparative analysis of the
management fee and total expense ratios of the Fund compared with those of a
group of other funds selected by Lipper as its appropriate Lipper expense group
under the Lipper report. Prior to making such comparison, the Board relied upon
a survey showing that the scope of management advisory services covered under
the Fund's investment advisory contract was similar to those
Annual Report | 49
Templeton Global Smaller Companies Fund
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT (CONTINUED)
provided by fund managers to other mutual fund groups that would be used as a
basis of comparison in the Lipper reports. In reviewing comparative costs,
emphasis was given to the Fund's management fee in comparison with the effective
management fee that would have been charged by other funds within its Lipper
expense group assuming they were the same size as the Fund, as well as the
actual total expenses of the Fund in comparison with those of its Lipper expense
group. The Lipper effective management fee analysis includes administrative
charges as being part of a management fee, and total expenses, for comparative
consistency, are shown by Lipper for Fund Class A shares. The results of such
expense comparisons showed that the effective management fee rate for the Fund
was in the second highest quintile of its Lipper expense group while its actual
total expenses were in the lowest quintile of such group. The Board was
satisfied with the management fee and total expenses of the Fund in comparison
to its Lipper expense group, noting that in the previous year it had added
additional breakpoints to the Fund's management fee.
MANAGEMENT PROFITABILITY. The Board also considered the level of profits
realized by the Manager and its affiliates in connection with the operation of
the Fund. In this respect, the Board reviewed the Fund profitability analysis
that addresses the overall profitability of Franklin Templeton's U.S. fund
business, as well as its profits in providing management and other services to
each of the individual funds. The Board also considered the extent to which the
Manager and its affiliates might derive ancillary benefits from fund operations,
including its interest in a joint venture entity, which finances up-front
commissions paid to brokers/dealers who sold fund Class B shares, as well as
potential benefits resulting from allocation of fund brokerage and the use of
"soft" commission dollars to pay for research. Specific attention was given to
the methodology followed in allocating costs to the Fund, it being recognized
that allocation methodologies are inherently subjective and various allocation
methodologies may each be reasonable while producing different results. In this
respect, the Board noted that the cost allocation methodology was consistent
with that followed in profitability report presentations for the Fund made in
prior years and that it had engaged on a biennial basis the Fund's independent
accountants to perform certain procedures specified by the Board solely for its
purpose and use. It was also noted that legal costs and payments incurred by
Franklin Templeton in resolving various legal proceedings arising from its U.S.
fund operations had not been allocated to the Fund for purposes of determining
profitability. Included in the analysis for the Fund were the revenue and
related costs broken down separately from the management, underwriting and
shareholder services functions provided by the Manager and its affiliates to the
Fund, as well as the relative contribution of the Fund to the profitability of
the Manager's parent. In reviewing and discussing such analysis, management
discussed with the Board its belief that costs incurred in establishing the
infrastructure necessary to the type of mutual fund operations conducted by the
Manager and its corporate affiliates may not be fully reflected in the expenses
allocated to the Fund in determining its profitability, as well as the fact that
the level of profits, to a certain extent, reflected operational cost savings
and efficiencies initiated by management. The Board also took into account
management's expenditures in improving shareholder services provided the Fund,
as well as the need to meet additional regulatory and
50 | Annual Report
Templeton Global Smaller Companies Fund
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT (CONTINUED)
compliance requirements resulting from the Sarbanes-Oxley Act and recent SEC
requirements. In addition, the Board considered a third-party study comparing
the profitability of the Manager's parent on an overall basis as compared to
other publicly held managers broken down to show profitability from management
operations exclusive of distribution expenses, as well as profitability
including distribution expenses. Based upon their consideration of all these
factors, the Board determined that the level of profits realized by the Manager
under its investment advisory contract with the Fund was not excessive in view
of the nature, quality and extent of services provided.
ECONOMIES OF SCALE. The Board also considered whether economies of scale are
realized by the Manager as the Fund grows larger and the extent to which this is
reflected in the level of management fees charged. While recognizing that any
precise determination is inherently subjective, the Board noted that based upon
the Fund profitability analysis, it appears that as some funds get larger, at
some point economies of scale do result in the Manager realizing a larger profit
margin on management services provided such a fund. The Board also noted that
economies of scale are shared with a fund and its shareholders through
management fee breakpoints so that as a fund grows in size, its effective
management fee rate declines. The Fund's investment advisory contract, as
revised effective June 1, 2004, provides a fee at the rate of 0.75% on the first
$1 billion of Fund net assets; 0.73% on the next $4 billion of Fund net assets;
0.71% on the next $5 billion of Fund net assets; 0.69% on the next $5 billion of
Fund net assets; 0.67% on the next $5 billion of Fund net assets; and 0.65% on
net assets in excess of $20 billion. The Fund is also charged a separate fee for
administrative services, which starts at 0.15% on the first $200 million of Fund
net assets, and declines through breakpoints to a fixed rate of 0.075% after net
assets reach the $1.2 billion level. At the end of 2004, the Fund's net assets
were approximately $950 million, and to the extent economies of scale may be
realized by the Manager and its affiliates, the Board believes the schedules of
management advisory and administrative fees provide a sharing of benefits with
the Fund and its shareholders.
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 1-954/847-2268 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.
Annual Report | 51
Templeton Global Smaller Companies Fund
SHAREHOLDER INFORMATION (CONTINUED)
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.
52 | Annual Report
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 INVESTMENTS
INTERNATIONAL
Mutual European Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton International (Ex EM) Fund
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
Franklin Small Cap Growth Fund II 1
VALUE
Franklin Balance Sheet Investment Fund 2
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 2
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund 3
Mutual Shares Fund
BLEND
Franklin Blue Chip Fund
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
Franklin U.S. Long-Short Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care 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
Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
TARGET FUNDS
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
INCOME
Franklin Adjustable U.S. Government
Securities Fund 4
Franklin's AGE High Income Fund
Franklin Floating Rate Daily Access Fund
Franklin Income Fund
Franklin Limited Maturity
U.S. Government Securities Fund 4
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund 4
Templeton Global Bond Fund
Templeton Income Fund
TAX-FREE INCOME 5
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 6
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 7
Colorado
Connecticut
Florida 7
Georgia
Kentucky
Louisiana
Maryland
Massachusetts 6
Michigan 6
Minnesota 6
Missouri
New Jersey
New York 7
North Carolina
Ohio 7
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products
Trust 8
1.The fund is closed to new investors. Existing shareholders can continue adding
to their accounts.
2.The fund is only open to existing shareholders and select retirement plans.
3.The fund is a continuously offered, closed-end fund. Shares may be purchased
daily; there is no daily redemption. However, each quarter, pending board
approval, the fund will authorize the repurchase of 5%-25% of the outstanding
number of shares. Investors may tender all or a portion of their shares during
the tender period.
4.An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
5.For investors subject to the alternative minimum tax, a small portion of fund
dividends may be taxable. Distributions of capital gains are generally taxable.
6.Portfolio of insured municipal securities.
7.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).
8.The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
09/05 Not part of the annual report
[LOGO OMITTED]
FRANKLIN TEMPLETON
INVESTMENTS
One Franklin Parkway
San Mateo, CA 94403-1906
WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
Eligible shareholders can sign up for eDelivery at
franklintempleton.com. See inside for details.
ANNUAL REPORT AND SHAREHOLDER LETTER
Templeton Global Smaller
Companies Fund
INVESTMENT MANAGER
Templeton Investment Counsel, LLC
PRINCIPAL UNDERWRITER
Franklin Templeton Distributors, Inc.
1-800/DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
1-800/632-2301
Authorized for distribution only when accompanied or preceded by a prospectus.
Investors should carefully consider a fund's investment goals, risks, charges
and expenses before investing. 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. The prospectus
contains this and other information; please read it carefully before investing.
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.
103 A2005 10/05
ITEM 2. CODE OF ETHICS.
(a) The Registrant has adopted a code of ethics that applies to its principal
executive officers and principal financial and accounting officer.
(c) N/A
(d) N/A
(f) Pursuant to Item 12(a)(1), the registrant is attaching as an exhibit a copy
of its code of ethics that applies to its principal executive officers and
principal financial and accounting officer.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
(A)(1) The Registrant has an audit committee financial expert serving on its
audit committee.
(2) The audit committee financial experts are Fred R. Millsaps and Frank A.
Olson, they are "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 $43,090 for the fiscal year ended August 31, 2005 and $13,661 for the
fiscal year ended August 31, 2004.
(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.
The aggregate 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
were $0 for the fiscal year ended August 31, 2005 and $48,579 for the fiscal
year ended August 31, 2004. The services for which these fees were paid included
attestation services.
(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 $19,591 for the fiscal year ended
August 31, 2005 and $0 for the fiscal year ended August 31, 2004. The services
for which these fees were paid included tax compliance and advise.
(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 August 31, 2005
and $366 for the fiscal year ended August 31, 2004. 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 not reported
in paragraphs (a)-(c) of Item 4 were $4,500 for the fiscal year ended August 31,
2005 and $99,634 for the fiscal year ended August 31, 2004. 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 and
the review of the ICI transfer agent survey.
(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 $24,091 for the fiscal year ended August 31, 2005 and $148,579
for the fiscal year ended August 31, 2004.
(h) The registrant's audit committee of the board of trustees 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. N/A
ITEM 6. SCHEDULE OF INVESTMENTS. N/A
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES. N/A
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANIES AND AFFILIATED PURCHASES. N/A
ITEM 10. SUBMISSION OF MATTERS OF 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 Trustees that would require disclosure
herein.
ITEM 11. CONTROLS AND PROCEDURES.
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Registrant's filings under the Securities
Exchange Act of 1934 and the Investment Company Act of 1940 is recorded,
processed, summarized and reported within the periods specified in the rules and
forms of the Securities and Exchange Commission. Such information is accumulated
and communicated to the Registrant's management, including its principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure. The Registrant's management,
including the principal executive officer and the principal financial officer,
recognizes that any set of controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired
control objectives.
Within 90 days prior to the filing date of this Shareholder Report on Form
N-CSR, the Registrant had carried out an evaluation, under the supervision and
with the participation of the Registrant's management, including the
Registrant's principal executive officer and the Registrant's principal
financial officer, of the effectiveness of the design and operation of the
Registrant's disclosure controls and procedures. Based on such evaluation, the
Registrant's principal executive officer and principal financial officer
concluded that the Registrant's disclosure controls and procedures are
effective.
(B) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the
Registrant's internal controls or in other factors that could significantly
affect the internal controls subsequent to the date of their evaluation in
connection with the preparation of this Shareholder Report on Form N-CSR.
ITEM 12. EXHIBITS
(a)(1) Code of Ethics
(a)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
TEMPLETON GLOBAL SMALLER COMPANIES FUND
By /s/JIMMY D. GAMBILL
Chief Executive Officer -
Finance and Administration
Date October 21, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /s/JIMMY D. GAMBILL
Chief Executive Officer -
Finance and Administration
Date October 21, 2005
By /s/GALEN G. VETTER
Chief Financial Officer
Date October 21, 2005