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
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TEMPLETON GLOBAL SMALLER COMPANIES FUND
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(Exact name of registrant as specified in charter)
500 EAST BROWARD BLVD., FORT LAUDERDALE, FL 33394-3091
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(Address of principal executive offices) (Zip code)
CRAIG S. TYLE, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
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(Name and address of agent for service)
Registrant's telephone number, including area code: (954) 527-7500
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Date of fiscal year end: 8/31
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Date of reporting period: 8/31/06
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ITEM 1. REPORTS TO STOCKHOLDERS
[GRAPHIC OMITTED]
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AUGUST 31, 2006
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ANNUAL REPORT AND SHAREHOLDER LETTER GLOBAL
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WANT TO RECEIVE
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SMALLER COMPANIES FUND Eligible shareholders can
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See inside for details.
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[LOGO](R)
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.
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MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
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[GRAPHIC OMITTED]
Not part of the annual report
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
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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.
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PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS.
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR
LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES
SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR MOST RECENT
MONTH-END PERFORMANCE.
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This annual report for Templeton Global Smaller Companies Fund covers the fiscal
year ended August 31, 2006.
PERFORMANCE OVERVIEW
For the 12 months under review, Templeton Global Smaller Companies Fund - Class
A posted a cumulative total return of +11.66%. The Fund underperformed its
benchmark, the Morgan Stanley Capital International (MSCI) World Index, which
posted a +16.34% 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
Global economic growth remained strong during the 12-month period ended August
31, 2006. However, signs of moderation appeared toward the end of the period
primarily due to three factors. Many central banks, including those of the
world's three largest economies, continued to tighten monetary policy, thereby
reducing the immense liquidity that helped fuel the global recovery that began
in 2001. Oil prices remained elevated and reached a historical high during the
period. Lastly, the U.S. housing market showed evidence of cooling.
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
GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 8/31/06
Asia 32.6%
Europe 31.4%
North America 28.1%
Australia 3.1%
Middle East & Africa 1.2%
Latin America 0.7%
Short-Term Investments & Other Net Assets 2.9%
Robust economic expansion sustained strong demand for oil and other commodities,
which kept prices high during most of the reporting period. In particular, many
industrial metals prices continued to rise at double-digit rates. This
contributed to economic growth in countries that are tied to mining and
industrial commodities.
Intensified corporate activity, including mergers and acquisitions, as well as
leveraged buyouts, continued across many sectors during the period. This was
fueled by the strong cash positions many companies built over the past few years
with ample cash available at historically low interest rates. In the first half
of 2006, the total value of global deals announced was $1.83 trillion, an
increase of 43% over the comparable period in 2005.2 Cross-border mergers and
acquisitions were about 40% of total deal volume, and European companies were
the most active worldwide. 2
In this environment, global equity markets performed strongly, particularly
outside the U.S. As of August 31, 2006, the 12-month total return for the MSCI
Europe, Australasia, Far East (EAFE) Index was +24.78%, while the MSCI All
Country (AC) World ex USA Index posted a total return of +25.44%. 3 By
comparison, the total return for the MSCI USA Index was +8.79% (all returns in
U.S. dollars) over the same period. 4
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 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 typical holding period is four to five years.
2. Source: "Merger Machine Keeps Churning out Deals," THE WALL STREET
JOURNAL, 7/3/06.
3. Source: Standard & Poor's Micropal. The MSCI EAFE Index is a free
float-adjusted, market capitalization-weighted index designed to measure
equity market performance in global developed markets excluding the U.S.
and Canada. The MSCI AC World ex USA Index is a free float-adjusted,
market capitalization-weighted index designed to measure equity market
performance in global developed and emerging markets excluding the U.S.
4. 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
MANAGER'S DISCUSSION
The Fund benefited from several holdings during the 12 months under review.
South Korea's Daegu Bank was among the top contributors to Fund performance with
a 63% increase in value. Daegu Bank provides banking services ranging from
commercial to foreign exchange primarily centered in and around Daegu and
Kyunbuk provinces. We found Daegu Bank's diversified loan portfolio attractive
and believed the bank was well-positioned to benefit from a pickup in the South
Korean economy. The company's operations strengthened during the review period
due to an improved export environment, a measured recovery in domestic demand,
flat yield spreads and declining credit costs as delinquency ratios fell across
segments. Despite Daegu Bank's strong recent performance, our outlook for the
company remained positive at period-end, based on our investment strategy.
Another top contributor to Fund performance during the period was D. Carnegie.
Carnegie is a Swedish-based investment bank whose primary focus is on the Nordic
stock market. Even though its client base is largely Nordic, approximately half
of the company's income is generated outside the region. Outside Sweden, the
company maintains a presence in Denmark, Finland, Norway, Luxembourg,
Switzerland, the U.K. and the U.S. Carnegie's shares increased 61% in value
during the review period as the company benefited from its leveraged business
model in an environment favorable to capital markets in the Nordic region. At
period-end, we continued to believe Carnegie was one of the most attractive
small-capitalization European financial institutions based on quality and
valuation.
The Fund also benefited as shares of Japan's second-largest security services
company Sohgo Security Services rose 38% in value during the review period.
Sohgo specializes in electronic and manned security, and cash transportation
services. Recent reports indicate that Japanese society is becoming increasingly
unsafe. In our view, the company was well-positioned to benefit from growing
demand for security services in Japan due to its size and established market
position. We found the company attractive in what we believed was a difficult
pricing environment for security services in Japan. At period-end, we had a
positive long-term outlook for the company as we think its gross margins could
improve if Japan's economy continues to rebound from its decade-long recession.
TOP 10 HOLDINGS
8/31/06
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COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
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Vestas Wind Systems AS 2.5%
ELECTRICAL EQUIPMENT, DENMARK
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Game Group PLC 2.2%
SPECIALTY RETAIL, U.K
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DX Services PLC 2.2%
AIR FREIGHT & LOGISTICS, U.K
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West Marine Inc. 2.1%
SPECIALTY RETAIL, U.S.
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Sohgo Security Services Co. Ltd. 1.9%
COMMERCIAL SERVICES & SUPPLIES,
JAPAN
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D-Link Corp. 1.7%
COMMUNICATIONS EQUIPMENT, TAIWAN
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Coinstar Inc. 1.6%
COMMERCIAL SERVICES & SUPPLIES, U.S.
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Bodycote International PLC 1.6%
MACHINERY, U.K
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OPG Groep NV 1.6%
HEALTH CARE PROVIDERS & SERVICES,
NETHERLANDS
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MDS Inc. 1.5%
HEALTH CARE PROVIDERS & SERVICES,
CANADA
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Annual Report | 5
The Fund had several detractors from performance during the 12-month review
period. SigmaTel, a U.S.-based semiconductor company that designs, develops and
markets proprietary analog circuits used in applications like MP3 audio players,
declined 74% in value and hindered Fund performance. Although significant
pricing pressure for low-end flash memory weighed on the company's earnings, we
believed that on a longer-term basis, SigmaTel can improve its business model
through new product introductions and the integration of recent acquisitions. We
also found the company's strong balance sheet attractive. The company's net cash
represented more than 20% of its market capitalization as of June 30, 2006.
Shares of Repco, the leading supplier in the Australian and New Zealand
automotive aftermarket parts and accessories markets, declined 43% in value for
the time that we held it during the review period amid a soft consumer
environment. However, we believe the company's business is less cyclical than
other industries because consumers cannot defer car maintenance indefinitely.
Repco's large size relative to its peers is an advantage in the slow growth
industry. Repco is the only national distributor in Australia's trade business.
Approximately 70% of the company's revenues come from its distribution to more
than 35,000 trade repairers. At period-end, Repco's shares traded significantly
below our assessment of the stock's intrinsic value.
Also hindering performance during the period was Nichii Gakkan, Japan's leading
provider of outsourced medical administrative services for hospitals and elderly
homecare. The company declined 32% in value for the time that we held it during
the year under review. Although Nichii Gakkan's primary business is medical
administration, the company experienced rapid growth from 2000 until last year
due to increasing demand for its elderly homecare services, driven primarily by
Japan's aging demographics and increased insurance coverage for the company's
services. However, over the past year and a half, the company faced pricing
pressures and slowing sales in its businesses. As a result, the company's shares
traded at historically low valuations based on price-to-book and
earnings-per-share ratios. At period-end, consistent with our strategy, we
believed the company's growth prospects could improve next year.
6 | Annual Report
Thank you for your continued participation in Templeton Global Smaller Companies
Fund. We look forward to serving your future investment needs.
[PICTURE OMITTED] /s/ Tucker Scott, CFA
Tucker Scott, CFA
[PICTURE OMITTED] /s/ Cynthia Sweeting, CFA
Cynthia Sweeting
Portfolio Management Team
Templeton Global Smaller Companies Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF AUGUST 31, 2006, 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 8/31/06
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
that a shareholder would pay 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
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CLASS A (SYMBOL: TEMGX) CHANGE 8/31/06 8/31/05
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Net Asset Value (NAV) -$0.73 $9.09 $9.82
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DISTRIBUTIONS (9/1/05-8/31/06)
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Dividend Income $0.1440
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Short-Term Capital Gain $0.1052
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Long-Term Capital Gain $1.3941
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TOTAL $1.6433
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CLASS B (SYMBOL: N/A) CHANGE 8/31/06 8/31/05
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Net Asset Value (NAV) -$0.78 $8.72 $9.50
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DISTRIBUTIONS (9/1/05-8/31/06)
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Dividend Income $0.0990
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Short-Term Capital Gain $0.1052
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Long-Term Capital Gain $1.3941
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TOTAL $1.5983
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CLASS C (SYMBOL: TESGX) CHANGE 8/31/06 8/31/05
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Net Asset Value (NAV) -$0.77 $8.88 $9.65
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DISTRIBUTIONS (9/1/05-8/31/06)
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Dividend Income $0.1072
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Short-Term Capital Gain $0.1052
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Long-Term Capital Gain $1.3941
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TOTAL $1.6065
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ADVISOR CLASS (SYMBOL: TGSAX) CHANGE 8/31/06 8/31/05
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Net Asset Value (NAV) -$0.73 $9.11 $9.84
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DISTRIBUTIONS (9/1/05-8/31/06)
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Dividend Income $0.1595
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Short-Term Capital Gain $0.1052
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Long-Term Capital Gain $1.3941
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TOTAL $1.6588
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8 | Annual Report
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. 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; ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY CHARGE A
2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
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CLASS A 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return 1 +11.66% +108.38% +112.75%
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Average Annual Total Return 2 +5.23% +14.46% +7.21%
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Value of $10,000 Investment 3 $10,523 $19,646 $20,055
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Avg. Ann. Total Return (9/30/06) 4 +3.99% +18.12% +7.15%
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CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99)
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Cumulative Total Return 1 +10.74% +100.59% +93.67%
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Average Annual Total Return 2 +7.07% +14.71% +9.01%
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Value of $10,000 Investment 3 $10,707 $19,859 $19,367
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Avg. Ann. Total Return (9/30/06) 4 +5.84% +18.41% +9.05%
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CLASS C 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return 1 +10.89% +101.02% +97.35%
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Average Annual Total Return 2 +9.97% +14.99% +7.03%
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Value of $10,000 Investment 3 $10,997 $20,102 $19,735
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Avg. Ann. Total Return (9/30/06) 4 +8.50% +18.66% +6.97%
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ADVISOR CLASS 5 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return 1 +11.83% +110.84% +118.94%
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Average Annual Total Return 2 +11.83% +16.09% +8.15%
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Value of $10,000 Investment 3 $11,183 $21,084 $21,894
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Avg. Ann. Total Return (9/30/06) 4 +10.60% +19.81% +8.11%
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PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN.
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
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CLASS A 8/31/06
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1-Year +5.23%
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5-Year +14.46%
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10-Year +7.21%
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CLASS A (9/1/96-8/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
TEMPLETON GLOBAL SMALLER MSCI
DATE COMPANIES FUND - CLASS A WORLD INDEX 6 CPI 6
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9/1/1996 $ 9,427 $10,000 $10,000
9/30/1996 $ 9,581 $10,393 $10,032
10/31/1996 $ 9,719 $10,468 $10,064
11/30/1996 $ 9,991 $11,056 $10,083
12/31/1996 $10,270 $10,881 $10,083
1/31/1997 $10,455 $11,014 $10,114
2/28/1997 $10,578 $11,143 $10,146
3/31/1997 $10,516 $10,924 $10,172
4/30/1997 $10,504 $11,283 $10,184
5/31/1997 $10,995 $11,982 $10,178
6/30/1997 $11,437 $12,581 $10,191
7/31/1997 $11,745 $13,162 $10,203
8/31/1997 $11,708 $12,284 $10,223
9/30/1997 $12,187 $12,953 $10,248
10/31/1997 $11,272 $12,273 $10,273
11/30/1997 $11,014 $12,493 $10,267
12/31/1997 $10,996 $12,647 $10,254
1/31/1998 $10,637 $13,001 $10,273
2/28/1998 $11,528 $13,883 $10,292
3/31/1998 $12,086 $14,471 $10,312
4/30/1998 $12,179 $14,615 $10,331
5/31/1998 $11,913 $14,434 $10,350
6/30/1998 $11,395 $14,778 $10,362
7/31/1998 $10,983 $14,757 $10,375
8/31/1998 $ 9,174 $12,791 $10,388
9/30/1998 $ 9,081 $13,019 $10,401
10/31/1998 $ 9,286 $14,199 $10,426
11/30/1998 $ 9,647 $15,045 $10,426
12/31/1998 $ 9,744 $15,783 $10,420
1/31/1999 $ 9,341 $16,130 $10,445
2/28/1999 $ 9,022 $15,704 $10,458
3/31/1999 $ 9,272 $16,360 $10,490
4/30/1999 $10,146 $17,007 $10,566
5/31/1999 $10,007 $16,388 $10,566
6/30/1999 $10,285 $17,154 $10,566
7/31/1999 $10,382 $17,105 $10,598
8/31/1999 $10,271 $17,077 $10,623
9/30/1999 $ 9,938 $16,914 $10,674
10/31/1999 $ 9,918 $17,795 $10,693
11/30/1999 $10,097 $18,298 $10,699
12/31/1999 $10,728 $19,782 $10,699
1/31/2000 $10,578 $18,651 $10,731
2/29/2000 $10,909 $18,704 $10,795
3/31/2000 $11,256 $19,999 $10,884
4/30/2000 $10,728 $19,156 $10,890
5/31/2000 $10,563 $18,673 $10,903
6/30/2000 $11,000 $19,304 $10,960
7/31/2000 $10,909 $18,763 $10,985
8/31/2000 $11,000 $19,376 $10,985
9/30/2000 $10,472 $18,348 $11,043
10/31/2000 $ 9,900 $18,043 $11,062
11/30/2000 $ 9,477 $16,950 $11,068
12/31/2000 $ 9,830 $17,226 $11,062
1/31/2001 $10,350 $17,561 $11,132
2/28/2001 $10,161 $16,079 $11,176
3/31/2001 $ 9,262 $15,026 $11,202
4/30/2001 $ 9,672 $16,140 $11,246
5/31/2001 $10,129 $15,940 $11,297
6/30/2001 $ 9,908 $15,443 $11,316
7/31/2001 $ 9,719 $15,239 $11,284
8/31/2001 $ 9,624 $14,511 $11,284
9/30/2001 $ 8,315 $13,234 $11,335
10/31/2001 $ 8,625 $13,489 $11,297
11/30/2001 $ 9,183 $14,289 $11,278
12/31/2001 $ 9,662 $14,380 $11,233
1/31/2002 $ 9,773 $13,946 $11,259
2/28/2002 $10,044 $13,828 $11,303
3/31/2002 $10,921 $14,442 $11,367
4/30/2002 $11,272 $13,957 $11,430
5/31/2002 $11,447 $13,989 $11,430
6/30/2002 $10,809 $13,143 $11,437
7/31/2002 $ 9,582 $12,037 $11,449
8/31/2002 $ 9,279 $12,062 $11,488
9/30/2002 $ 8,418 $10,738 $11,507
10/31/2002 $ 8,652 $11,533 $11,526
11/30/2002 $ 8,957 $12,157 $11,526
12/31/2002 $ 8,813 $11,570 $11,500
1/31/2003 $ 8,491 $11,221 $11,551
2/28/2003 $ 8,057 $11,029 $11,640
3/31/2003 $ 8,089 $10,998 $11,710
4/30/2003 $ 8,909 $11,981 $11,685
5/31/2003 $ 9,842 $12,671 $11,666
6/30/2003 $10,195 $12,895 $11,678
7/31/2003 $10,807 $13,159 $11,691
8/31/2003 $11,514 $13,447 $11,736
9/30/2003 $11,707 $13,532 $11,774
10/31/2003 $12,586 $14,338 $11,761
11/30/2003 $12,814 $14,560 $11,729
12/31/2003 $13,515 $15,477 $11,716
1/31/2004 $13,939 $15,728 $11,774
2/29/2004 $14,542 $15,997 $11,837
3/31/2004 $14,330 $15,897 $11,914
4/30/2004 $14,134 $15,581 $11,952
5/31/2004 $14,037 $15,733 $12,022
6/30/2004 $14,493 $16,063 $12,060
7/31/2004 $14,118 $15,543 $12,041
8/31/2004 $14,167 $15,618 $12,047
9/30/2004 $14,705 $15,918 $12,072
10/31/2004 $15,067 $16,311 $12,136
11/30/2004 $16,248 $17,175 $12,142
12/31/2004 $17,065 $17,836 $12,098
1/31/2005 $16,809 $17,438 $12,123
2/28/2005 $17,486 $17,998 $12,193
3/31/2005 $17,285 $17,658 $12,289
4/30/2005 $16,535 $17,284 $12,371
5/31/2005 $16,864 $17,604 $12,359
6/30/2005 $17,248 $17,765 $12,365
7/31/2005 $17,998 $18,389 $12,422
8/31/2005 $17,962 $18,536 $12,486
9/30/2005 $18,382 $19,023 $12,638
10/31/2005 $17,415 $18,565 $12,664
11/30/2005 $17,795 $19,194 $12,562
12/31/2005 $18,379 $19,624 $12,511
1/31/2006 $19,702 $20,504 $12,606
2/28/2006 $19,901 $20,482 $12,632
3/31/2006 $20,673 $20,942 $12,702
4/30/2006 $21,423 $21,589 $12,810
5/31/2006 $20,188 $20,871 $12,873
6/30/2006 $19,680 $20,873 $12,899
7/31/2006 $19,636 $21,008 $12,937
8/31/2006 $20,055 $21,564 $12,962
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------
CLASS B 8/31/06
- -----------------------------------
1-Year +7.07%
- -----------------------------------
5-Year +14.71%
- -----------------------------------
Since Inception (1/1/99) +9.01%
- -----------------------------------
CLASS B (1/1/99-8/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
TEMPLETON GLOBAL SMALLER MSCI WORLD
DATE COMPANIES FUND - CLASS B INDEX 6 CPI 6
- ------------------------------------------------------------------
1/1/1999 $10,000 $10,000 $10,000
1/31/1999 $ 9,573 $10,220 $10,024
2/28/1999 $ 9,245 $ 9,950 $10,037
3/31/1999 $ 9,487 $10,366 $10,067
4/30/1999 $10,385 $10,776 $10,140
5/31/1999 $10,242 $10,383 $10,140
6/30/1999 $10,513 $10,869 $10,140
7/31/1999 $10,613 $10,838 $10,171
8/31/1999 $10,484 $10,820 $10,195
9/30/1999 $10,142 $10,717 $10,244
10/31/1999 $10,118 $11,275 $10,262
11/30/1999 $10,287 $11,594 $10,268
12/31/1999 $10,914 $12,534 $10,268
1/31/2000 $10,759 $11,818 $10,299
2/29/2000 $11,084 $11,851 $10,360
3/31/2000 $11,423 $12,672 $10,445
4/30/2000 $10,883 $12,137 $10,451
5/31/2000 $10,713 $11,831 $10,464
6/30/2000 $11,145 $12,231 $10,519
7/31/2000 $11,037 $11,889 $10,543
8/31/2000 $11,114 $12,277 $10,543
9/30/2000 $10,590 $11,626 $10,598
10/31/2000 $ 9,985 $11,432 $10,616
11/30/2000 $ 9,569 $10,740 $10,622
12/31/2000 $ 9,929 $10,915 $10,616
1/31/2001 $10,428 $11,127 $10,683
2/28/2001 $10,235 $10,188 $10,726
3/31/2001 $ 9,332 $ 9,520 $10,750
4/30/2001 $ 9,719 $10,227 $10,793
5/31/2001 $10,187 $10,100 $10,842
6/30/2001 $ 9,961 $ 9,785 $10,860
7/31/2001 $ 9,751 $ 9,656 $10,830
8/31/2001 $ 9,655 $ 9,194 $10,830
9/30/2001 $ 8,333 $ 8,385 $10,879
10/31/2001 $ 8,645 $ 8,547 $10,842
11/30/2001 $ 9,180 $ 9,054 $10,824
12/31/2001 $ 9,667 $ 9,112 $10,781
1/31/2002 $ 9,764 $ 8,837 $10,805
2/28/2002 $10,023 $ 8,761 $10,848
3/31/2002 $10,915 $ 9,151 $10,909
4/30/2002 $11,240 $ 8,843 $10,970
5/31/2002 $11,418 $ 8,864 $10,970
6/30/2002 $10,769 $ 8,328 $10,976
7/31/2002 $ 9,553 $ 7,627 $10,988
8/31/2002 $ 9,245 $ 7,643 $11,025
9/30/2002 $ 8,385 $ 6,804 $11,043
10/31/2002 $ 8,612 $ 7,307 $11,062
11/30/2002 $ 8,906 $ 7,703 $11,062
12/31/2002 $ 8,759 $ 7,331 $11,037
1/31/2003 $ 8,417 $ 7,110 $11,086
2/28/2003 $ 7,992 $ 6,988 $11,171
3/31/2003 $ 8,009 $ 6,969 $11,239
4/30/2003 $ 8,824 $ 7,591 $11,214
5/31/2003 $ 9,754 $ 8,029 $11,196
6/30/2003 $10,080 $ 8,170 $11,208
7/31/2003 $10,684 $ 8,338 $11,220
8/31/2003 $11,369 $ 8,520 $11,263
9/30/2003 $11,548 $ 8,574 $11,300
10/31/2003 $12,411 $ 9,085 $11,287
11/30/2003 $12,642 $ 9,225 $11,257
12/31/2003 $13,318 $ 9,806 $11,245
1/31/2004 $13,731 $ 9,966 $11,300
2/29/2004 $14,309 $10,136 $11,361
3/31/2004 $14,094 $10,073 $11,434
4/30/2004 $13,896 $ 9,872 $11,470
5/31/2004 $13,780 $ 9,969 $11,538
6/30/2004 $14,226 $10,178 $11,574
7/31/2004 $13,846 $ 9,848 $11,556
8/31/2004 $13,896 $ 9,895 $11,562
9/30/2004 $14,408 $10,086 $11,586
10/31/2004 $14,757 $10,335 $11,647
11/30/2004 $15,893 $10,883 $11,653
12/31/2004 $16,680 $11,301 $11,611
1/31/2005 $16,423 $11,049 $11,635
2/28/2005 $17,085 $11,404 $11,702
3/31/2005 $16,864 $11,188 $11,794
4/30/2005 $16,128 $10,951 $11,873
5/31/2005 $16,441 $11,154 $11,861
6/30/2005 $16,809 $11,256 $11,867
7/31/2005 $17,526 $11,651 $11,922
8/31/2005 $17,489 $11,745 $11,983
9/30/2005 $17,875 $12,053 $12,129
10/31/2005 $16,910 $11,763 $12,154
11/30/2005 $17,291 $12,161 $12,056
12/31/2005 $17,834 $12,434 $12,007
1/31/2006 $19,100 $12,992 $12,099
2/28/2006 $19,300 $12,978 $12,123
3/31/2006 $20,033 $13,269 $12,190
4/30/2006 $20,744 $13,679 $12,294
5/31/2006 $19,522 $13,224 $12,355
6/30/2006 $19,034 $13,225 $12,379
7/31/2006 $18,967 $13,311 $12,416
8/31/2006 $19,367 $13,663 $12,441
10 | Annual Report
Performance Summary (CONTINUED)
CLASS C (9/1/96-8/31/06)
TEMPLETON GLOBAL SMALLER MSCI WORLD
DATE COMPANIES FUND - CLASS C INDEX 6 CPI 6
- ------------------------------------------------------------------
9/1/1996 $10,000 $10,000 $10,000
9/30/1996 $10,165 $10,393 $10,032
10/31/1996 $10,296 $10,468 $10,064
11/30/1996 $10,587 $11,056 $10,083
12/31/1996 $10,874 $10,881 $10,083
1/31/1997 $11,071 $11,014 $10,114
2/28/1997 $11,189 $11,143 $10,146
3/31/1997 $11,110 $10,924 $10,172
4/30/1997 $11,097 $11,283 $10,184
5/31/1997 $11,608 $11,982 $10,178
6/30/1997 $12,067 $12,581 $10,191
7/31/1997 $12,381 $13,162 $10,203
8/31/1997 $12,342 $12,284 $10,223
9/30/1997 $12,840 $12,953 $10,248
10/31/1997 $11,858 $12,273 $10,273
11/30/1997 $11,583 $12,493 $10,267
12/31/1997 $11,563 $12,647 $10,254
1/31/1998 $11,168 $13,001 $10,273
2/28/1998 $12,100 $13,883 $10,292
3/31/1998 $12,664 $14,471 $10,312
4/30/1998 $12,749 $14,615 $10,331
5/31/1998 $12,453 $14,434 $10,350
6/30/1998 $11,902 $14,778 $10,362
7/31/1998 $11,464 $14,757 $10,375
8/31/1998 $ 9,572 $12,791 $10,388
9/30/1998 $ 9,474 $13,019 $10,401
10/31/1998 $ 9,685 $14,199 $10,426
11/30/1998 $10,066 $15,045 $10,426
12/31/1998 $10,154 $15,783 $10,420
1/31/1999 $ 9,729 $16,130 $10,445
2/28/1999 $ 9,377 $15,704 $10,458
3/31/1999 $ 9,641 $16,360 $10,490
4/30/1999 $10,549 $17,007 $10,566
5/31/1999 $10,403 $16,388 $10,566
6/30/1999 $10,666 $17,154 $10,566
7/31/1999 $10,769 $17,105 $10,598
8/31/1999 $10,652 $17,077 $10,623
9/30/1999 $10,300 $16,914 $10,674
10/31/1999 $10,283 $17,795 $10,693
11/30/1999 $10,455 $18,298 $10,699
12/31/1999 $11,086 $19,782 $10,699
1/31/2000 $10,945 $18,651 $10,731
2/29/2000 $11,259 $18,704 $10,795
3/31/2000 $11,621 $19,999 $10,884
4/30/2000 $11,071 $19,156 $10,890
5/31/2000 $10,898 $18,673 $10,903
6/30/2000 $11,338 $19,304 $10,960
7/31/2000 $11,244 $18,763 $10,985
8/31/2000 $11,307 $19,376 $10,985
9/30/2000 $10,772 $18,348 $11,043
10/31/2000 $10,169 $18,043 $11,062
11/30/2000 $ 9,746 $16,950 $11,068
12/31/2000 $10,096 $17,226 $11,062
1/31/2001 $10,619 $17,561 $11,132
2/28/2001 $10,406 $16,079 $11,176
3/31/2001 $ 9,490 $15,026 $11,202
4/30/2001 $ 9,899 $16,140 $11,246
5/31/2001 $10,357 $15,940 $11,297
6/30/2001 $10,128 $15,443 $11,316
7/31/2001 $ 9,916 $15,239 $11,284
8/31/2001 $ 9,817 $14,511 $11,284
9/30/2001 $ 8,476 $13,234 $11,335
10/31/2001 $ 8,791 $13,489 $11,297
11/30/2001 $ 9,348 $14,289 $11,278
12/31/2001 $ 9,839 $14,380 $11,233
1/31/2002 $ 9,953 $13,946 $11,259
2/28/2002 $10,215 $13,828 $11,303
3/31/2002 $11,099 $14,442 $11,367
4/30/2002 $11,443 $13,957 $11,430
5/31/2002 $11,623 $13,989 $11,430
6/30/2002 $10,968 $13,143 $11,437
7/31/2002 $ 9,724 $12,037 $11,449
8/31/2002 $ 9,413 $12,062 $11,488
9/30/2002 $ 8,529 $10,738 $11,507
10/31/2002 $ 8,770 $11,533 $11,526
11/30/2002 $ 9,065 $12,157 $11,526
12/31/2002 $ 8,918 $11,570 $11,500
1/31/2003 $ 8,573 $11,221 $11,551
2/28/2003 $ 8,129 $11,029 $11,640
3/31/2003 $ 8,162 $10,998 $11,710
4/30/2003 $ 8,983 $11,981 $11,685
5/31/2003 $ 9,919 $12,671 $11,666
6/30/2003 $10,264 $12,895 $11,678
7/31/2003 $10,872 $13,159 $11,691
8/31/2003 $11,594 $13,447 $11,736
9/30/2003 $11,775 $13,532 $11,774
10/31/2003 $12,647 $14,338 $11,761
11/30/2003 $12,879 $14,560 $11,729
12/31/2003 $13,574 $15,477 $11,716
1/31/2004 $13,988 $15,728 $11,774
2/29/2004 $14,567 $15,997 $11,837
3/31/2004 $14,352 $15,897 $11,914
4/30/2004 $14,153 $15,581 $11,952
5/31/2004 $14,037 $15,733 $12,022
6/30/2004 $14,501 $16,063 $12,060
7/31/2004 $14,104 $15,543 $12,041
8/31/2004 $14,153 $15,618 $12,047
9/30/2004 $14,683 $15,918 $12,072
10/31/2004 $15,042 $16,311 $12,136
11/30/2004 $16,199 $17,175 $12,142
12/31/2004 $17,004 $17,836 $12,098
1/31/2005 $16,727 $17,438 $12,123
2/28/2005 $17,410 $17,998 $12,193
3/31/2005 $17,188 $17,658 $12,289
4/30/2005 $16,432 $17,284 $12,371
5/31/2005 $16,746 $17,604 $12,359
6/30/2005 $17,114 $17,765 $12,365
7/31/2005 $17,852 $18,389 $12,422
8/31/2005 $17,797 $18,536 $12,486
9/30/2005 $18,221 $19,023 $12,638
10/31/2005 $17,231 $18,565 $12,664
11/30/2005 $17,613 $19,194 $12,562
12/31/2005 $18,157 $19,624 $12,511
1/31/2006 $19,468 $20,504 $12,606
2/28/2006 $19,646 $20,482 $12,632
3/31/2006 $20,401 $20,942 $12,702
4/30/2006 $21,135 $21,589 $12,810
5/31/2006 $19,890 $20,871 $12,873
6/30/2006 $19,379 $20,873 $12,899
7/31/2006 $19,335 $21,008 $12,937
8/31/2006 $19,735 $21,564 $12,962
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------
CLASS C 8/31/06
- -----------------------------------
1-Year +9.97%
- -----------------------------------
5-Year +14.99%
- -----------------------------------
10-Year +7.03%
- -----------------------------------
ADVISOR CLASS (9/1/96-8/31/06) 5
TEMPLETON GLOBAL
SMALLER COMPANIES MSCI WORLD
DATE FUND - CLASS ADVISOR INDEX 6 CPI 6
- -------------------------------------------------------------
9/1/1996 $10,000 $10,000 $10,000
9/30/1996 $10,164 $10,393 $10,032
10/31/1996 $10,310 $10,468 $10,064
11/30/1996 $10,599 $11,056 $10,083
12/31/1996 $10,895 $10,881 $10,083
1/31/1997 $11,143 $11,014 $10,114
2/28/1997 $11,261 $11,143 $10,146
3/31/1997 $11,209 $10,924 $10,172
4/30/1997 $11,196 $11,283 $10,184
5/31/1997 $11,731 $11,982 $10,178
6/30/1997 $12,189 $12,581 $10,191
7/31/1997 $12,529 $13,162 $10,203
8/31/1997 $12,490 $12,284 $10,223
9/30/1997 $13,013 $12,953 $10,248
10/31/1997 $12,046 $12,273 $10,273
11/30/1997 $11,770 $12,493 $10,267
12/31/1997 $11,748 $12,647 $10,254
1/31/1998 $11,364 $13,001 $10,273
2/28/1998 $12,329 $13,883 $10,292
3/31/1998 $12,911 $14,471 $10,312
4/30/1998 $13,024 $14,615 $10,331
5/31/1998 $12,740 $14,434 $10,350
6/30/1998 $12,187 $14,778 $10,362
7/31/1998 $11,733 $14,757 $10,375
8/31/1998 $ 9,804 $12,791 $10,388
9/30/1998 $ 9,718 $13,019 $10,401
10/31/1998 $ 9,944 $14,199 $10,426
11/30/1998 $10,330 $15,045 $10,426
12/31/1998 $10,434 $15,783 $10,420
1/31/1999 $10,003 $16,130 $10,445
2/28/1999 $ 9,662 $15,704 $10,458
3/31/1999 $ 9,929 $16,360 $10,490
4/30/1999 $10,864 $17,007 $10,566
5/31/1999 $10,731 $16,388 $10,566
6/30/1999 $11,027 $17,154 $10,566
7/31/1999 $11,131 $17,105 $10,598
8/31/1999 $11,013 $17,077 $10,623
9/30/1999 $10,671 $16,914 $10,674
10/31/1999 $10,651 $17,795 $10,693
11/30/1999 $10,843 $18,298 $10,699
12/31/1999 $11,514 $19,782 $10,699
1/31/2000 $11,368 $18,651 $10,731
2/29/2000 $11,707 $18,704 $10,795
3/31/2000 $12,096 $19,999 $10,884
4/30/2000 $11,530 $19,156 $10,890
5/31/2000 $11,368 $18,673 $10,903
6/30/2000 $11,821 $19,304 $10,960
7/31/2000 $11,740 $18,763 $10,985
8/31/2000 $11,821 $19,376 $10,985
9/30/2000 $11,271 $18,348 $11,043
10/31/2000 $10,647 $18,043 $11,062
11/30/2000 $10,208 $16,950 $11,068
12/31/2000 $10,587 $17,226 $11,062
1/31/2001 $11,130 $17,561 $11,132
2/28/2001 $10,944 $16,079 $11,176
3/31/2001 $ 9,976 $15,026 $11,202
4/30/2001 $10,401 $16,140 $11,246
5/31/2001 $10,910 $15,940 $11,297
6/30/2001 $10,673 $15,443 $11,316
7/31/2001 $10,469 $15,239 $11,284
8/31/2001 $10,384 $14,511 $11,284
9/30/2001 $ 8,976 $13,234 $11,335
10/31/2001 $ 9,305 $13,489 $11,297
11/30/2001 $ 9,907 $14,289 $11,278
12/31/2001 $10,423 $14,380 $11,233
1/31/2002 $10,560 $13,946 $11,259
2/28/2002 $10,836 $13,828 $11,303
3/31/2002 $11,799 $14,442 $11,367
4/30/2002 $12,177 $13,957 $11,430
5/31/2002 $12,367 $13,989 $11,430
6/30/2002 $11,678 $13,143 $11,437
7/31/2002 $10,355 $12,037 $11,449
8/31/2002 $10,045 $12,062 $11,488
9/30/2002 $ 9,116 $10,738 $11,507
10/31/2002 $ 9,362 $11,533 $11,526
11/30/2002 $ 9,693 $12,157 $11,526
12/31/2002 $ 9,537 $11,570 $11,500
1/31/2003 $ 9,188 $11,221 $11,551
2/28/2003 $ 8,719 $11,029 $11,640
3/31/2003 $ 8,753 $10,998 $11,710
4/30/2003 $ 9,658 $11,981 $11,685
5/31/2003 $10,668 $12,671 $11,666
6/30/2003 $11,050 $12,895 $11,678
7/31/2003 $11,711 $13,159 $11,691
8/31/2003 $12,495 $13,447 $11,736
9/30/2003 $12,704 $13,532 $11,774
10/31/2003 $13,645 $14,338 $11,761
11/30/2003 $13,910 $14,560 $11,729
12/31/2003 $14,681 $15,477 $11,716
1/31/2004 $15,142 $15,728 $11,774
2/29/2004 $15,796 $15,997 $11,837
3/31/2004 $15,566 $15,897 $11,914
4/30/2004 $15,353 $15,581 $11,952
5/31/2004 $15,247 $15,733 $12,022
6/30/2004 $15,761 $16,063 $12,060
7/31/2004 $15,353 $15,543 $12,041
8/31/2004 $15,406 $15,618 $12,047
9/30/2004 $15,991 $15,918 $12,072
10/31/2004 $16,394 $16,311 $12,136
11/30/2004 $17,678 $17,175 $12,142
12/31/2004 $18,562 $17,836 $12,098
1/31/2005 $18,284 $17,438 $12,123
2/28/2005 $19,039 $17,998 $12,193
3/31/2005 $18,800 $17,658 $12,289
4/30/2005 $18,005 $17,284 $12,371
5/31/2005 $18,363 $17,604 $12,359
6/30/2005 $18,800 $17,765 $12,365
7/31/2005 $19,616 $18,389 $12,422
8/31/2005 $19,576 $18,536 $12,486
9/30/2005 $20,034 $19,023 $12,638
10/31/2005 $18,970 $18,565 $12,664
11/30/2005 $19,407 $19,194 $12,562
12/31/2005 $20,043 $19,624 $12,511
1/31/2006 $21,485 $20,504 $12,606
2/28/2006 $21,725 $20,482 $12,632
3/31/2006 $22,566 $20,942 $12,702
4/30/2006 $23,383 $21,589 $12,810
5/31/2006 $22,037 $20,871 $12,873
6/30/2006 $21,485 $20,873 $12,899
7/31/2006 $21,437 $21,008 $12,937
8/31/2006 $21,894 $21,564 $12,962
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------
ADVISOR CLASS 5 8/31/06
- -----------------------------------
1-Year +11.83%
- -----------------------------------
5-Year +16.09%
- -----------------------------------
10-Year +8.15%
- -----------------------------------
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.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
3. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
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 +100.96% and +7.49%.
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 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 3/1/06 VALUE 8/31/06 PERIOD * 3/1/06-8/31/06
- -------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,007.80 $6.78
- -------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.45 $6.82
- -------------------------------------------------------------------------------------------------------------
CLASS B
- -------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,003.50 $10.55
- -------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,014.67 $10.61
- -------------------------------------------------------------------------------------------------------------
CLASS C
- -------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,004.50 $10.56
- -------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,014.67 $10.61
- -------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- -------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,007.70 $5.52
- -------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.71 $5.55
- -------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
1.34%; B: 2.09%; C: 2.09%; and Advisor: 1.09%), 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 2006 2005 2004 2003 2002
------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............ $ 9.82 $ 8.69 $ 7.16 $ 5.82 $ 6.10
------------------------------------------------------------------------------
Income from investment operations a :
Net investment income b ..................... 0.08 0.12 0.07 0.07 0.05
Net realized and unrealized gains (losses) ... 0.83 2.02 1.56 1.32 (0.27)
------------------------------------------------------------------------------
Total from investment operations .............. 0.91 2.14 1.63 1.39 (0.22)
------------------------------------------------------------------------------
Less distributions from:
Net investment income and net realized foreign
currency gains ............................... (0.14) (0.10) (0.10) (0.05) (0.06)
Net realized gains from investments .......... (1.50) (0.91) -- -- --
------------------------------------------------------------------------------
Total distributions ........................... (1.64) (1.01) (0.10) (0.05) (0.06)
------------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- d --
------------------------------------------------------------------------------
Net asset value, end of year .................. $ 9.09 $ 9.82 $ 8.69 $ 7.16 $ 5.82
==============================================================================
Total return c ............................... 11.66% 26.78% 23.04% 24.09% (3.59)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............... $ 1,128,415 $ 949,606 $ 744,017 $ 691,103 $ 565,680
Ratios to average net assets:
Expenses ..................................... 1.34% e 1.35% e 1.42% e 1.46% 1.44%
Net investment income ........................ 0.90% 1.33% 0.91% 1.18% 0.82%
Portfolio turnover rate ....................... 33.90% 41.58% 31.69% 29.51% 25.31%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 15
Templeton Global Smaller Companies Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
CLASS B 2006 2005 2004 2003 2002
------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............ $ 9.50 $ 8.42 $ 6.97 $ 5.70 $ 5.99
------------------------------------------------------------------------
Income from investment operations a :
Net investment income b ..................... 0.01 0.06 0.02 0.03 0.02
Net realized and unrealized gains (losses) ... 0.81 1.95 1.52 1.27 (0.28)
------------------------------------------------------------------------
Total from investment operations .............. 0.82 2.01 1.54 1.30 (0.26)
------------------------------------------------------------------------
Less distributions from:
Net investment income and net realized foreign
currency gains ............................... (0.10) (0.02) (0.09) (0.03) (0.03)
Net realized gains from investments .......... (1.50) (0.91) -- -- --
------------------------------------------------------------------------
Total distributions ........................... (1.60) (0.93) (0.09) (0.03) (0.03)
------------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- d --
------------------------------------------------------------------------
Net asset value, end of year .................. $ 8.72 $ 9.50 $ 8.42 $ 6.97 $ 5.70
========================================================================
Total return c ............................... 10.74% 25.86% 22.23% 22.97% (4.25)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............... $ 8,027 $ 7,983 $ 4,896 $ 3,171 $ 1,409
Ratios to average net assets:
Expenses ..................................... 2.09% e 2.10% e 2.16% e 2.21% 2.19%
Net investment income ........................ 0.15% 0.58% 0.17% 0.43% 0.07%
Portfolio turnover rate ....................... 33.90% 41.58% 31.69% 29.51% 25.31%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
16 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Templeton Global Smaller Companies Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
-----------------------------------------------------------------------
YEAR ENDED AUGUST 31,
CLASS C 2006 2005 2004 2003 2002
-----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............ $ 9.65 $ 8.55 $ 7.05 $ 5.75 $ 6.00
---------------------------------------------------------------------
Income from investment operations a :
Net investment income b ..................... 0.01 0.06 0.02 0.02 0.01
Net realized and unrealized gains (losses) ... 0.83 1.98 1.54 1.30 (0.26)
---------------------------------------------------------------------
Total from investment operations .............. 0.84 2.04 1.56 1.32 (0.25)
---------------------------------------------------------------------
Less distributions from:
Net investment income and net realized foreign
currency gains ............................... (0.11) (0.03) (0.06) (0.02) -- f
Net realized gains from investments .......... (1.50) (0.91) -- -- --
---------------------------------------------------------------------
Total distributions ........................... (1.61) (0.94) (0.06) (0.02) --
---------------------------------------------------------------------
Redemption fees ............................... -- d -- d -- d -- d --
---------------------------------------------------------------------
Net asset value, end of year .................. $ 8.88 $ 9.65 $ 8.55 $ 7.05 $ 5.75
=====================================================================
Total return c ............................... 10.89% 25.74% 22.07% 23.17% (4.12)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............... $ 71,857 $ 55,448 $ 30,741 $ 17,347 $ 12,894
Ratios to average net assets:
Expenses ..................................... 2.09% 2.10% e 2.17% e 2.20% 2.17%
Net investment income ........................ 0.15% 0.58% 0.16% 0.44% 0.09%
Portfolio turnover rate ....................... 33.90% 41.58% 31.69% 29.51% 25.31%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
f Actual distribution from net investment income per share was $0.003.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 17
Templeton Global Smaller Companies Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
---------------------------------------------------------------------
YEAR ENDED AUGUST 31,
ADVISOR CLASS 2006 2005 2004 2003 2002
---------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............ $ 9.84 $ 8.71 $ 7.17 $ 5.84 $ 6.12
---------------------------------------------------------------------
Income from investment operations a :
Net investment income b ..................... 0.11 0.16 0.10 0.06 0.07
Net realized and unrealized gains (losses) ... 0.82 2.01 1.56 1.33 (0.28)
---------------------------------------------------------------------
Total from investment operations .............. 0.93 2.17 1.66 1.39 (0.21)
---------------------------------------------------------------------
Less distributions from:
Net investment income and net realized foreign
currency gains ............................... (0.16) (0.13) (0.12) (0.06) (0.07)
Net realized gains from investments .......... (1.50) (0.91) -- -- --
---------------------------------------------------------------------
Total distributions ........................... (1.66) (1.04) (0.12) (0.06) (0.07)
---------------------------------------------------------------------
Redemption fees ............................... -- c -- c -- c -- c --
---------------------------------------------------------------------
Net asset value, end of year .................. $ 9.11 $ 9.84 $ 8.71 $ 7.17 $ 5.84
=====================================================================
Total return .................................. 11.83% 27.07% 23.30% 24.39% (3.27)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............... $ 60,588 $ 39,912 $ 9,329 $ 4,834 $ 10,344
Ratios to average net assets:
Expenses ..................................... 1.09% d 1.10% d 1.17% d 1.21% 1.19%
Net investment income ........................ 1.15% 1.58% 1.16% 1.43% 1.07%
Portfolio turnover rate ....................... 33.90% 41.58% 31.69% 29.51% 25.31%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Amount rounds to less than $0.01 per share.
d Benefit of expense reduction rounds to less than 0.01%.
18 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Templeton Global Smaller Companies Fund
STATEMENT OF INVESTMENTS, AUGUST 31, 2006
- ------------------------------------------------------------------------------------------------------------------------
INDUSTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 97.1%
AUSTRALIA 3.1%
Billabong International Ltd. ............. Textiles, Apparel & Luxury Goods 369,406 $ 4,172,027
Downer EDI Ltd. .......................... Commercial Services & Supplies 1,621,265 6,965,365
PaperlinX Ltd. ........................... Paper & Forest Products 7,001,361 18,379,021
a Repco Corp. Ltd. ......................... Distributors 11,361,533 10,317,284
-----------
39,833,697
-----------
BAHAMAS 0.6%
b Steiner Leisure Ltd. ..................... Diversified Consumer Services 203,500 7,830,680
-----------
BELGIUM 1.1%
Barco NV ................................. Electronic Equipment & Instruments 151,370 13,362,138
-----------
BRAZIL 0.4%
c Companhia de Saneamento de Minas Gerais,
144A ..................................... Water Utilities 526,500 4,911,381
-----------
CANADA 7.6%
Abitibi-Consolidated Inc. ................ Paper & Forest Products 1,922,370 5,220,049
b ATS Automation Tooling Systems Inc. ...... Machinery 681,700 7,324,203
Domtar Inc. .............................. Paper & Forest Products 892,900 5,697,814
b Dorel Industries Inc., B ................. Household Durables 267,900 6,307,095
b GSI Group Inc. ........................... Electronic Equipment & Instruments 1,071,820 9,657,098
Legacy Hotels ............................ Real Estate 1,302,500 10,197,887
Linamar Corp. ............................ Auto Components 690,000 8,462,618
MDS Inc. ................................. Health Care Providers & Services 970,300 19,576,382
b Open Text Corp. .......................... Internet Software & Services 731,300 11,927,974
Quebecor World Inc. ...................... Commercial Services & Supplies 1,030,960 11,496,585
-----------
95,867,705
-----------
CHINA 5.3%
Bio-Treat Technology Ltd. ................ Commercial Services & Supplies 12,292,000 6,599,994
China Oilfield Services Ltd. ............. Energy Equipment & Services 23,400,000 13,088,174
b China Pharmaceutical Group Ltd. .......... Pharmaceuticals 26,320,000 3,384,230
China Resources Power Holdings Co. Ltd. .. Independent Power Producers & Energy Traders 9,984,000 8,844,998
People's Food Holdings Ltd. .............. Food Products 26,641,000 18,282,624
Sinotrans Ltd., H ........................ Air Freight & Logistics 17,648,000 5,582,189
b TCL Communication Technology Holdings Ltd. Communications Equipment 143,878,875 4,994,991
Weiqiao Textile Co. Ltd. ................. Textiles, Apparel & Luxury Goods 5,397,500 5,989,318
-----------
66,766,518
-----------
DENMARK 2.5%
b Vestas Wind Systems AS ................... Electrical Equipment 1,121,720 31,401,571
-----------
FINLAND 1.6%
Amer Sports OYJ .......................... Leisure Equipment & Products 569,700 12,663,758
Huhtamaki OYJ ............................ Containers & Packaging 444,900 7,814,780
-----------
20,478,538
-----------
Annual Report | 19
Templeton Global Smaller Companies Fund
STATEMENT OF INVESTMENTS, AUGUST 31, 2006 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------
INDUSTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
GERMANY 2.8%
Celesio AG ............................... Health Care Providers & Services 302,000 $15,434,334
b Jenoptik AG .............................. Semiconductors & Semiconductor Equipment 688,470 6,006,881
Vossloh AG ............................... Machinery 281,440 14,134,772
-----------
35,575,987
-----------
HONG KONG 6.3%
Asia Satellite Telecommunications
Holdings Ltd. ............................ Diversified Telecommunication Services 3,454,500 5,907,596
Dah Sing Financial Group ................. Commercial Banks 1,280,000 10,977,659
Fountain Set (Holdings) Ltd. ............. Textiles, Apparel & Luxury Goods 33,524,000 8,448,621
Giordano International Ltd. .............. Specialty Retail 20,439,348 11,589,897
Hang Lung Group Ltd. ..................... Real Estate 1,665,000 4,506,509
Hopewell Holdings Ltd. ................... Transportation Infrastructure 2,982,000 8,512,058
Hung Hing Printing Group Ltd. ............ Containers & Packaging 20,862,508 12,232,220
Ngai Lik Industrial Holding Ltd. ......... Household Durables 13,886,000 1,267,680
Techtronic Industries Co. Ltd. ........... Household Durables 2,869,242 4,227,910
Yue Yuen Industrial Holdings Ltd. ........ Textiles, Apparel & Luxury Goods 4,196,500 12,140,699
-----------
79,810,849
-----------
INDIA 1.0%
c Gail India Ltd., GDR, 144A ............... Metals & Mining 157,710 5,314,569
Housing Development Finance Corp. Ltd. ... Thrifts & Mortgage Finance 282,430 7,950,028
-----------
13,264,597
-----------
INDONESIA 0.4%
PT Indosat Tbk ........................... Diversified Telecommunication Services 9,955,000 4,804,431
-----------
ISRAEL 1.2%
b Orbotech Ltd. ............................ Electronic Equipment & Instruments 614,700 14,758,947
-----------
JAPAN 4.0%
Meitec Corp. ............................. Commercial Services & Supplies 304,100 9,815,943
Nichii Gakkan Co. ........................ Health Care Providers & Services 739,200 11,665,780
Sangetsu Co. Ltd. ........................ Household Durables 186,800 4,605,766
Sohgo Security Services Co. Ltd. ......... Commercial Services & Supplies 1,337,700 24,608,713
-----------
50,696,202
-----------
LUXEMBOURG 0.5%
b Thiel Logistik AG ........................ IT Services 1,547,850 5,830,330
-----------
MEXICO 0.3%
b Promotora Ambiental SA de CV ............. Commercial Services & Supplies 5,019,500 4,369,782
-----------
NETHERLANDS 5.9%
Aalberts Industries NV ................... Machinery 103,969 8,578,407
b Draka Holding NV ......................... Electrical Equipment 328,886 5,970,795
Imtech NV ................................ Construction & Engineering 192,410 10,385,706
OPG Groep NV ............................. Health Care Providers & Services 209,640 19,768,280
20 | Annual Report
Templeton Global Smaller Companies Fund
STATEMENT OF INVESTMENTS, AUGUST 31, 2006 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------
INDUSTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
NETHERLANDS (CONTINUED)
SBM Offshore NV ......................... Energy Equipment & Services 470,720 $12,912,080
Vedior NV ............................... Commercial Services & Supplies 965,560 17,863,369
-----------
75,478,637
-----------
NORWAY 1.3%
Norske Skogindustrier ASA ............... Paper & Forest Products 876,400 13,342,217
c Norske Skogindustrier ASA, 144A ......... Paper & Forest Products 183,426 2,792,458
-----------
16,134,675
-----------
RUSSIA 0.4%
b,c Pyaterochka Holding NV, GDR, 144A ....... Food & Staples Retailing 106,800 1,901,040
b,c Pyaterochka Holding NV, GDR, 144A (IPO) . Food & Staples Retailing 203,312 3,618,954
-----------
5,519,994
-----------
SINGAPORE 1.7%
Huan Hsin Holdings Ltd. ................. Electronic Equipment & Instruments 6,101,000 2,035,282
Osim International Ltd. ................. Specialty Retail 5,987,200 6,657,728
Venture Corp. Ltd. ...................... Electronic Equipment & Instruments 1,700,000 12,530,580
-----------
21,223,590
-----------
SOUTH KOREA 4.5%
Bank of Pusan ........................... Commercial Banks 1,031,300 13,249,303
Daeduck Electronics Co. Ltd. ............ Electronic Equipment & Instruments 1,221,875 10,511,709
Daegu Bank Co. Ltd. ..................... Commercial Banks 484,390 8,112,638
Halla Climate Control Corp. ............. Auto Components 1,104,000 12,345,782
Sindo Ricoh Co. ......................... Office Electronics 110,350 5,785,540
Youngone Corp. .......................... Textiles, Apparel & Luxury Goods 1,599,960 7,115,187
-----------
57,120,159
-----------
SWEDEN 1.2%
D. Carnegie & Co. AB .................... Capital Markets 877,886 15,624,950
-----------
SWITZERLAND 3.0%
b Kuoni Reisen Holding AG, B .............. Hotels, Restaurants & Leisure 12,720 6,665,637
b SIG Holding AG .......................... Machinery 27,960 6,655,791
Verwaltungs-und Privat-Bank AG .......... Capital Markets 75,518 18,283,596
Vontobel Holding AG ..................... Capital Markets 160,170 6,363,337
-----------
37,968,361
-----------
TAIWAN 6.7%
AcBel Polytech Inc. ..................... Electrical Equipment 15,774,595 4,037,636
D-Link Corp. ............................ Communications Equipment 22,170,610 21,768,930
Fu Sheng Industrial Co. Ltd. ............ Industrial Conglomerates 9,004,694 7,910,860
Giant Manufacturing Co. Ltd. ............ Leisure Equipment & Products 3,682,000 5,210,272
Pihsiang Machinery Manufacturing Co. Ltd. Health Care Equipment & Supplies 7,209,000 14,485,497
Simplo Technology Co. Ltd. .............. Computers & Peripherals 4,857,600 13,998,677
Annual Report | 21
Templeton Global Smaller Companies Fund
STATEMENT OF INVESTMENTS, AUGUST 31, 2006 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------
INDUSTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
TAIWAN (CONTINUED)
Taiwan Fu Hsing .......................... Building Products 9,336,180 $ 8,712,935
Test-Rite International Co. Ltd. ......... Distributors 16,149,387 9,327,528
------------
85,452,335
------------
THAILAND 2.7%
BEC World Public Co. Ltd., fgn ........... Media 15,103,200 7,515,429
Glow Energy Public Co. Ltd., fgn ......... Independent Power Producers & Energy Traders 4,900,700 3,716,603
c Glow Energy Public Co. Ltd., fgn., 144A .. Independent Power Producers & Energy Traders 12,056,200 9,143,207
b Total Access Communication Public Co. Ltd. Wireless Telecommunication Services 3,332,000 13,328,000
------------
33,703,239
------------
UNITED KINGDOM 11.1%
Bodycote International PLC ............... Machinery 4,450,330 19,785,974
Burberry Group PLC ....................... Textiles, Apparel & Luxury Goods 804,310 7,327,971
DS Smith PLC ............................. Containers & Packaging 3,902,900 11,667,167
DX Services PLC .......................... Air Freight & Logistics 3,509,910 27,701,217
FKI PLC .................................. Machinery 4,303,060 7,926,961
Future PLC ............................... Media 7,934,820 4,759,113
Game Group PLC ........................... Specialty Retail 16,058,130 28,129,443
a iSOFT Group PLC .......................... Health Care Technology 12,142,540 11,964,602
John Wood Group PLC ...................... Energy Equipment & Services 2,861,570 12,490,852
Yule Catto & Co. PLC ..................... Chemicals 2,090,510 9,264,464
------------
141,017,764
------------
UNITED STATES 19.9%
b Agile Software Corp. ..................... Software 1,759,250 10,150,872
b BearingPoint Inc. ........................ IT Services 1,141,250 9,540,850
Blockbuster Inc., A ...................... Specialty Retail 2,410,730 9,618,813
Bowater Inc. ............................. Paper & Forest Products 288,550 6,558,742
b Bristow Group Inc. ....................... Energy Equipment & Services 303,390 11,319,481
Central Parking Corp. .................... Commercial Services & Supplies 815,400 13,568,256
b Coinstar Inc. ............................ Commercial Services & Supplies 795,880 20,891,850
b Convergys Corp. .......................... IT Services 890,190 18,578,265
b Input/Output Inc. ........................ Energy Equipment & Services 1,123,680 11,203,090
b Interpublic Group of Cos. Inc. ........... Media 6,603 60,616
Irwin Financial Corp. .................... Commercial Banks 942,680 17,948,627
b K2 Inc. .................................. Leisure Equipment & Products 774,200 9,019,430
b Leapfrog Enterprises Inc. ................ Leisure Equipment & Products 1,267,760 9,711,042
Pier 1 Imports Inc. ...................... Specialty Retail 1,667,680 10,656,475
b RC2 Corp. ................................ Leisure Equipment & Products 229,810 7,728,510
b Scholastic Corp. ......................... Media 363,740 10,934,024
b Seitel Inc. .............................. Energy Equipment & Services 3,575,920 14,017,606
a,b Sharper Image Corp. ...................... Specialty Retail 937,400 8,877,178
b Sigmatel Inc. ............................ Semiconductors & Semiconductor Equipment 1,370,840 6,689,699
Tredegar Corp. ........................... Industrial Conglomerates 1,110,680 18,326,220
a,b West Marine Inc. ......................... Specialty Retail 1,991,430 27,222,848
------------
252,622,494
------------
22 | Annual Report
Templeton Global Smaller Companies Fund
STATEMENT OF INVESTMENTS, AUGUST 31, 2006 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------
VALUE
- --------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $1,035,638,300) ............................................. $1,231,429,551
--------------
------------------
PRINCIPAL AMOUNT
------------------
SHORT TERM INVESTMENTS
(COST $29,409,931) 2.3%
GOVERNMENT AND AGENCY SECURITIES 2.3%
UNITED STATES 2.3%
d Federal Home Loan Bank, 9/01/06 .................................... $29,414,000 29,409,931
--------------
TOTAL INVESTMENTS
(COST $1,065,048,231) 99.4% ....................................... 1,260,839,482
OTHER ASSETS, LESS LIABILITIES 0.6% ................................ 8,047,053
--------------
NET ASSETS 100.0% .................................................. $1,268,886,535
==============
SELECTED PORTFOLIO ABBREVIATION
GDR - Global Depository Receipt
a See Note 8 regarding holdings of 5% voting securities.
b Non-income producing for the twelve months ended August 31, 2006.
c 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. At August 31, 2006,
the aggregate value of these securities was $27,681,609, representing
2.18% of net assets.
d The security is traded on a discount basis with no stated coupon rate.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 23
TEMPLETON GLOBAL SMALLER COMPANIES FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
August 31, 2006
Assets:
Investments in securities:
Cost - Unaffiliated issuers ................................. $ 979,895,448
Cost - Non-controlled affiliated issuers (Note 8) ........... 85,152,783
--------------
Total cost of investments ................................... $1,065,048,231
==============
Value - Unaffiliated issuers ................................ $1,202,457,570
Value - Non-controlled affiliated issuers (Note 8) .......... 58,381,912
--------------
Total value of investments .................................. 1,260,839,482
Cash ......................................................... 70,175
Foreign currency, at value (cost $7,299,123) ................. 7,499,491
Receivables:
Capital shares sold ......................................... 2,477,518
Dividends ................................................... 2,784,351
Foreign tax ................................................. 6,950
Other (Note 9) .............................................. 72,325
--------------
Total assets ............................................ 1,273,750,292
--------------
Liabilities:
Payables:
Investment securities purchased ............................. 1,791,467
Capital shares redeemed ..................................... 1,307,202
Affiliates .................................................. 1,497,538
Accrued expenses and other liabilities ....................... 267,550
--------------
Total liabilities ..................................... 4,863,757
--------------
Net assets, at value ............................... $1,268,886,535
==============
Net assets consist of:
Paid-in capital .............................................. $ 937,150,395
Undistributed net investment income .......................... 7,350,796
Net unrealized appreciation (depreciation) ................... 196,017,356
Accumulated net realized gain (loss) ......................... 128,367,988
--------------
Net assets, at value ................................. $1,268,886,535
==============
24 | The accompanying notes are an integral part of these financial statements.
| Annual Report
TEMPLETON GLOBAL SMALLER COMPANIES FUND
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
August 31, 2006
CLASS A:
Net assets, at value ................................................ $1,128,414,572
--------------
Shares outstanding .................................................. 124,200,182
--------------
Net asset value per share a ......................................... $ 9.09
--------------
Maximum offering price per share (net asset value per share / 94.25%) $ 9.64
--------------
CLASS B:
Net assets, at value ................................................ $ 8,027,406
--------------
Shares outstanding .................................................. 920,639
--------------
Net asset value and maximum offering price per share a .............. $ 8.72
--------------
CLASS C:
Net assets, at value ................................................ $ 71,856,686
--------------
Shares outstanding .................................................. 8,095,989
--------------
Net asset value and maximum offering price per share a .............. $ 8.88
--------------
ADVISOR CLASS:
Net assets, at value ................................................ $ 60,587,871
--------------
Shares outstanding .................................................. 6,647,139
--------------
Net asset value and maximum offering price per share a .............. $ 9.11
--------------
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 |
The accompanying notes are an integral part of these financial statements. | 25
Templeton Global Smaller Companies Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended August 31, 2006
Investment income:
Dividends (net of foreign taxes of $2,812,531)
Unaffiliated issuers ............................................... $ 24,137,152
Non-controlled affiliated issuers .................................. 27,239
Interest (net of foreign taxes of $1,939) ........................... 1,939,018
Other income (Note 9) ............................................... 80,502
--------------
Total investment income ...................................... 26,183,911
--------------
Expenses:
Management fees (Note 3a) ........................................... 8,749,519
Administrative fees (Note 3b) ....................................... 1,439,827
Distribution fees (Note 3c)
Class A ............................................................ 2,614,656
Class B ............................................................ 80,904
Class C ............................................................ 645,507
Transfer agent fees (Note 3e) ....................................... 1,613,607
Custodian fees (Note 4) ............................................. 436,437
Reports to shareholders ............................................. 125,339
Registration and filing fees ........................................ 186,721
Professional fees ................................................... 85,160
Trustees' fees and expenses ......................................... 116,765
Other ............................................................... 16,202
--------------
Total expenses ............................................... 16,110,644
Expense reductions (Note 4) .................................. (9,281)
--------------
Net expenses .............................................. 16,101,363
--------------
Net investment income .................................. 10,082,548
--------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments (net of foreign taxes of $510,337) ..................... 184,052,787
Foreign currency transactions ...................................... (462,781)
--------------
Net realized gain (loss) .................................. 183,590,006
--------------
Net change in unrealized appreciation (depreciation) on:
Investments ........................................................ (73,131,374)
Translation of assets and liabilities denominated in foreign
currencies ......................................................... (74,250)
--------------
Net change in unrealized appreciation (depreciation) ........ (73,205,624)
--------------
Net realized and unrealized gain (loss) .............................. 110,384,382
--------------
Net increase (decrease) in net assets resulting from operations ...... $ 120,466,930
--------------
26 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Templeton Global Smaller Companies Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
----------------------------------
YEAR ENDED AUGUST 31,
2006 2005
----------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ............................................................. $ 10,082,548 $ 12,312,232
Net realized gain (loss) from investments and foreign currency transactions ....... 183,590,006 137,566,126
Net change in unrealized appreciation (depreciation) on investments, translation of
assets and liabilities denominated in foreign currencies, and deferred taxes .... (73,205,624) 62,531,568
----------------------------------
Net increase (decrease) in net assets resulting from operations ............. 120,466,930 212,409,926
----------------------------------
Distributions to shareholders from:
Net investment income and net realized foreign currency gains:
Class A ......................................................................... (14,072,406) (8,990,630)
Class B ......................................................................... (84,075) (10,120)
Class C ......................................................................... (638,278) (103,440)
Advisor Class ................................................................... (661,196) (177,563)
Net realized gains from investments:
Class A ......................................................................... (152,290,447) (78,639,477)
Class B ......................................................................... (1,295,699) (586,834)
Class C ......................................................................... (9,289,590) (3,462,049)
Advisor Class ................................................................... (6,553,403) (1,223,672)
----------------------------------
Total distributions to shareholders ................................................ (184,885,094) (93,193,785)
----------------------------------
Capital share transactions: (Note 2)
Class A ......................................................................... 236,046,942 96,033,384
Class B ......................................................................... 627,223 2,234,294
Class C ......................................................................... 20,477,866 19,437,641
Advisor Class ................................................................... 23,201,262 27,042,122
----------------------------------
Total capital share transactions ................................................... 280,353,293 144,747,441
----------------------------------
Redemption fees .................................................................... 3,031 1,823
----------------------------------
Net increase (decrease) in net assets ........................................ 215,938,160 263,965,405
Net assets:
Beginning of year .................................................................. 1,052,948,375 788,982,970
----------------------------------
End of year ........................................................................ $ 1,268,886,535 $ 1,052,948,375
==================================
Undistributed net investment income included in net assets:
End of year ........................................................................ $ 7,350,796 $ 5,960,716
==================================
Annual Report |
The accompanying notes are an integral part of these 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 (1940 Act) as a diversified, open-end investment
company. 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 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.
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
28 | Annual Report
Templeton Global Smaller Companies Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
(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.
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.
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
No provision has been made for U.S. income taxes because the Fund intends to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute to shareholders substantially all of its taxable income and net
realized gains.
Foreign securities held by the Fund may be subject to foreign taxation on
dividend and interest income received. Foreign taxes, if any, are recorded based
on the tax regulations and rates that exist in the foreign markets in which the
Fund invests.
The Fund may be subject to a tax imposed on net realized gains on 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 the valuation date.
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 except that certain
dividends from foreign securities are recognized as soon as the Fund is notified
of the ex-dividend date. Distributions to shareholders are recorded on the
ex-dividend date and are determined according to income tax regulations (tax
basis). Distributable earnings determined on a tax basis may differ from
earnings recorded in accordance with accounting principles generally accepted in
the United States. These differences may be permanent or temporary. Permanent
differences are reclassified among capital accounts to reflect their tax
character. These reclassifications have no impact on net assets or the results
of operations. Temporary differences are not reclassified, as they may reverse
in subsequent periods.
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. Differences in class-level
expenses may result in payment of different per share distributions by 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 period. Actual results could differ from those
estimates.
30 | Annual Report
Templeton Global Smaller Companies Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. REDEMPTION FEES
A short term trading redemption fee will be imposed, with some exceptions, on
any Fund shares that are redeemed or exchanged within seven calendar days
following their purchase date (30 days or less prior to June 1, 2004). The
redemption fee is 2% of the amount redeemed. Such fees are retained by the Fund
and accounted for as an addition to 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.
2. SHARES OF BENEFICIAL INTEREST
At August 31, 2006, there were an unlimited number of shares authorized (without
par value). Transactions in the Fund's shares were as follows:
------------------------------------------------------------
YEAR ENDED AUGUST 31,
2006 2005
------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------
CLASS A SHARES:
Shares sold .................... 29,226,711 $ 264,578,465 17,204,944 $ 160,106,256
Shares issued in reinvestment of
distributions ................. 17,755,481 146,537,072 9,113,379 77,203,673
Shares redeemed ................ (19,497,726) (175,068,595) (15,201,767) (141,276,545)
------------------------------------------------------------
Net increase (decrease) ........ 27,484,466 $ 236,046,942 11,116,556 $ 96,033,384
============================================================
CLASS B SHARES:
Shares sold .................... 208,119 $ 1,818,522 337,187 $ 3,006,475
Shares issued in reinvestment of
distributions ................. 150,687 1,202,126 64,007 527,747
Shares redeemed ................ (278,050) (2,393,425) (142,953) (1,299,928)
------------------------------------------------------------
Net increase (decrease) ........ 80,756 $ 627,223 258,241 $ 2,234,294
============================================================
CLASS C SHARES:
Shares sold .................... 3,505,816 $ 31,051,054 2,667,404 $ 24,455,155
Shares issued in reinvestment of
distributions ................. 863,406 7,009,223 329,414 2,754,726
Shares redeemed ................ (2,017,104) (17,582,411) (848,595) (7,772,240)
------------------------------------------------------------
Net increase (decrease) ........ 2,352,118 $ 20,477,866 2,148,223 $ 19,437,641
============================================================
Annual Report | 31
Templeton Global Smaller Companies Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
-----------------------------------------------------------
YEAR ENDED AUGUST 31,
2006 2005
-----------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------
ADVISOR CLASS SHARES:
Shares sold .................... 4,489,047 $ 39,947,076 3,133,170 $ 28,520,085
Shares issued in reinvestment of
distributions ................. 440,087 3,637,268 116,823 991,141
Shares redeemed ................ (2,338,574) (20,383,082) (264,671) (2,469,104)
-----------------------------------------------------------
Net increase (decrease) ........ 2,590,560 $ 23,201,262 2,985,322 $ 27,042,122
===========================================================
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 Investment Counsel LLC (TIC) Investment manager
Franklin Templeton Investment Management Limited (FTIML) 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
Under a subadvisory agreement effective October 18, 2005, FTIML, an affiliate of
TIC, provides subadvisory services to the Fund and receives from TIC fees based
on the average daily net assets of the Fund. Prior to July 20, 2005, Franklin
Templeton Investments (Asia) Limited, an affiliate of TIC, provided subadvisory
services to the Fund and received from TIC fees based on the average daily net
assets of the Fund.
32 | Annual Report
Templeton Global Smaller Companies Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTION WITH AFFILIATES (CONTINUED)
B. ADMINISTRATIVE FEES
The Funds pays an administrative fee to FT Services based on the average daily
net assets of the Funds 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 .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. Effective November 1, 2005, the Class A reimbursement
distribution plan was amended to discontinue the reimbursement of excess plan
year costs in subsequent periods.
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:
Sales charges retained net of commissions
paid to unaffiliated broker/dealers ................................ $620,986
Contingent deferred sales charges retained .......................... $ 19,667
E. TRANSFER AGENT FEES
The Fund paid transfer agent fees of $1,613,607, of which $1,065,239 was
retained by Investor Services.
Annual Report | 33
Templeton Global Smaller Companies Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, 2006, 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, 2006, the Fund deferred realized currency losses of
$366,479.
The tax character of distributions paid during the years ended August 31, 2006
and 2005, was as follows:
--------------------------
2006 2005
--------------------------
Distributions paid from:
Ordinary Income .................................. $ 27,293,368 $ 9,281,753
Long term capital gain ........................... 157,591,726 83,912,032
--------------------------
$184,885,094 $93,193,785
==========================
Net investment income and net realized gains (losses) differ for financial
statement and tax purposes primarily due to differing treatments of foreign
currency transactions, passive foreign investment company shares, and foreign
taxes on sale of securities.
At August 31, 2006, the cost of investments and net unrealized appreciation
(depreciation) for income tax purposes were as follows:
Cost of investments ......................................... $ 1,074,301,294
===============
Unrealized appreciation ..................................... $ 304,305,994
Unrealized depreciation ..................................... (117,767,806)
---------------
Net unrealized appreciation (depreciation) .................. $ 186,538,188
===============
Undistributed ordinary income ............................... $ 34,740,636
Undistributed long term capital gains ....................... 110,597,690
---------------
Distributable earnings ...................................... $ 145,338,326
===============
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
year ended August 31, 2006, aggregated $ 515,701,397 and $ 376,951,645,
respectively.
34 | Annual Report
Templeton Global Smaller Companies Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. CONCENTRATION OF RISK
Investing in foreign securities may include certain risks and considerations not
typically associated with investing in U.S. securities, such as fluctuating
currency values and changing local and regional economic, political and social
conditions, which may result in greater market volatility. In addition, certain
foreign securities may not be as liquid as U.S. securities.
8. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The 1940 Act 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, 2006 were as
shown below.
- ---------------------------------------------------------------------------------------------------------------------------
NUMBER OF NUMBER OF
SHARES HELD SHARES HELD VALUE REALIZED
AT BEGINNING GROSS GROSS AT END AT END INVESTMENT CAPITAL
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS OF YEAR OF YEAR INCOME GAIN (LOSS)
- ---------------------------------------------------------------------------------------------------------------------------
NON-CONTROLLED AFFILIATES
iSOFT Group PLC ......... -- 12,142,540 -- 12,142,540 $11,964,602 $ -- $ --
Repco Corp Ltd. ......... -- 11,361,533 -- 11,361,533 10,317,284 27,239 --
Sharper Image Corp. ..... 937,400 -- -- 937,400 8,877,178 -- --
West Marine Inc. ........ 477,510 1,513,920 -- 1,991,430 27,222,848 -- --
----------------------------------------
TOTAL AFFILIATED SECURITIES (4.60% of Net Assets) $58,381,912 $ 27,239 $ --
========================================
9. REGULATORY MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, 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 (collectively, the "Company"), entered into
settlements with certain of those regulators.
Specifically, the Company entered into settlements with the Securities and
Exchange Commission ("SEC") concerning market timing (the "August 2, 2004 SEC
Order") and marketing support payments to securities dealers who sell fund
shares (the "December 13, 2004 SEC Order") and with the California Attorney
General's Office ("CAGO") concerning marketing support payments to securities
dealers who sell fund shares (the "CAGO Settlement"). Under the terms of the
settlements with the SEC and the CAGO, the Company retained an Independent
Distribution Consultant ("IDC") to develop separate plans for the distribution
of the respective settlement monies. The CAGO approved the distribution plan
pertaining to the distribution of the monies owed under the CAGO settlement
agreement, and in March 2005, the disbursement of monies to the relevant funds
in accordance with the terms and conditions of that settlement was completed.
Annual Report | 35
Templeton Global Smaller Companies Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. REGULATORY MATTERS (CONTINUED)
On June 23, 2006, the SEC approved the IDC's proposed plan of distribution
arising from the December 13, 2004 SEC Order. The relevant funds recorded the
settlement as other income and disbursement of the settlement monies to the
designated funds in accordance with the terms and conditions of the SEC's order
and the plan was completed in September 2006.
The IDC has also completed a proposed Plan of Distribution under the August 2,
2004 SEC Order resolving the SEC's market timing investigation and has submitted
that plan to the SEC staff, where it is under review. The SEC has announced the
following expected schedule with respect to the market timing Plan of
Distribution. The SEC anticipates that Notice of the Plan will be published on
or after November 15, 2006. After publication and comment, the proposed
Distribution Plan will be submitted to the SEC for approval. When the SEC
approves the proposed Distribution Plan, with modifications as appropriate,
distributions will begin pursuant to that Plan.
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, directors, and/or
employees, have been named in private lawsuits (styled as shareholder class
actions, or as derivative actions on behalf of either the named funds or
Franklin Resources, Inc.) relating to the industry practices referenced above,
as well as to allegedly excessive advisory fees, commissions, and/or 12b-1 fees.
The lawsuits were filed in different courts throughout the country. Many of
those suits are now pending in a multi-district litigation in the United States
District Court for the District of Maryland.
The Company and fund management strongly believe that the claims made in each of
the private lawsuits referenced above are without merit and intend to defend
against them vigorously. The Company cannot predict with certainty the eventual
outcome of these lawsuits, nor whether they will have a material negative impact
on the Company. If it is determined that the Company bears responsibility for
any unlawful or inappropriate conduct that caused losses to the Fund, it is
committed to making the Fund or its shareholders whole, as appropriate.
10. NEW ACCOUNTING PRONOUNCEMENT
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions taken or expected to be taken in a
tax return. FIN 48 provides guidance on the measurement, recognition,
classification and disclosure of tax positions, along with accounting for the
related interest and penalties. FIN 48 is effective for fiscal years beginning
after December 15, 2006, and is to be applied to all open tax years as of the
date of effectiveness. The Fund is currently evaluating the impact, if any, of
applying the various provisions of FIN 48.
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 Templeton Global Smaller Companies
Fund (the "Fund") at August 31, 2006, 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, 2006 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
October 18, 2006
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 $155,916,849 as a long
term capital gain dividend for the fiscal year ended August 31, 2006.
Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $21,153,488 as a short term capital gain dividend for
purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended August 31, 2006.
Under Section 854(b)(2) of the Code, the Fund designates 3.35% of the ordinary
income dividends as income qualifying for the dividends received deduction for
the fiscal year ended August 31, 2006.
Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $16,096,448 as qualified dividends for purposes of
the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
August 31, 2006. In January 2007, shareholders will receive Form 1099-DIV which
will include their share of qualified dividends distributed during the calendar
year 2006. Shareholders are advised to check with their tax advisors for
information on the treatment of these amounts on their individual income tax
returns.
Under Section 871(k)(1)(C) of Code, the Fund designates the maximum amount
allowable but no less than $1,929,741 as interest related dividends for purposes
of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year
ended August 31, 2006.
At August 31, 2006, 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 table below, the Fund designates to shareholders
the foreign source income and foreign taxes paid, pursuant to Section 853 of the
Code. This designation will allow shareholders of record on October 19, 2006, 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: 10/19/2006
- -------------------------------------------------------------------------------
CLASS A
FOREIGN TAX FOREIGN FOREIGN
PAID SOURCE INCOME QUALIFIED DIVIDENDS
COUNTRY PER SHARE PER SHARE PER SHARE
- -------------------------------------------------------------------------------
Australia ................ $ 0.0008 $ 0.0056 $ 0.0056
Belgium .................. 0.0004 0.0020 0.0020
Brazil ................... 0.0001 0.0011 0.0000
Canada ................... 0.0013 0.0058 0.0037
China .................... 0.0000 0.0045 0.0000
Finland .................. 0.0006 0.0026 0.0026
Germany .................. 0.0011 0.0051 0.0035
Hong Kong ................ 0.0000 0.0146 0.0000
India .................... 0.0036 0.0032 0.0026
Indonesia ................ 0.0002 0.0008 0.0008
Japan .................... 0.0003 0.0032 0.0032
Netherlands .............. 0.0017 0.0080 0.0080
Norway ................... 0.0009 0.0040 0.0040
Singapore ................ 0.0000 0.0029 0.0000
South Korea .............. 0.0021 0.0085 0.0085
Sweden ................... 0.0011 0.0050 0.0050
Switzerland .............. 0.0005 0.0047 0.0022
Taiwan ................... 0.0074 0.0224 0.0000
Thailand ................. 0.0011 0.0074 0.0074
United Kingdom ........... 0.0000 0.0137 0.0137
--------------------------------------------
TOTAL .................... $ 0.0232 $ 0.1251 $ 0.0728
============================================
- -------------------------------------------------------------------------------
CLASS B
FOREIGN TAX FOREIGN FOREIGN
PAID SOURCE INCOME QUALIFIED DIVIDENDS
COUNTRY PER SHARE PER SHARE PER SHARE
- -------------------------------------------------------------------------------
Australia ................ $ 0.0008 $ 0.0040 $ 0.0040
Belgium .................. 0.0004 0.0014 0.0014
Brazil ................... 0.0001 0.0008 0.0000
Canada ................... 0.0013 0.0042 0.0027
China .................... 0.0000 0.0032 0.0000
Finland .................. 0.0006 0.0019 0.0019
Germany .................. 0.0011 0.0036 0.0025
Hong Kong ................ 0.0000 0.0104 0.0000
India .................... 0.0036 0.0023 0.0019
Indonesia ................ 0.0002 0.0006 0.0006
Japan .................... 0.0003 0.0023 0.0023
Netherlands .............. 0.0017 0.0057 0.0057
Norway ................... 0.0009 0.0028 0.0028
Singapore ................ 0.0000 0.0021 0.0000
South Korea .............. 0.0021 0.0061 0.0061
Sweden ................... 0.0011 0.0035 0.0035
Switzerland .............. 0.0005 0.0034 0.0016
Taiwan ................... 0.0074 0.0160 0.0000
Thailand ................. 0.0011 0.0053 0.0053
United Kingdom ........... 0.0000 0.0098 0.0098
--------------------------------------------
TOTAL .................... $ 0.0232 $ 0.0894 $ 0.0521
============================================
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 ................ $ 0.0008 $ 0.0042 $ 0.0042
Belgium .................. 0.0004 0.0015 0.0015
Brazil ................... 0.0001 0.0008 0.0000
Canada ................... 0.0013 0.0044 0.0028
China .................... 0.0000 0.0034 0.0000
Finland .................. 0.0006 0.0020 0.0020
Germany .................. 0.0011 0.0038 0.0026
Hong Kong ................ 0.0000 0.0110 0.0000
India .................... 0.0036 0.0024 0.0020
Indonesia ................ 0.0002 0.0006 0.0006
Japan .................... 0.0003 0.0024 0.0024
Netherlands .............. 0.0017 0.0060 0.0060
Norway ................... 0.0009 0.0030 0.0030
Singapore ................ 0.0000 0.0022 0.0000
South Korea .............. 0.0021 0.0064 0.0064
Sweden ................... 0.0011 0.0037 0.0037
Switzerland .............. 0.0005 0.0035 0.0016
Taiwan ................... 0.0074 0.0168 0.0000
Thailand ................. 0.0011 0.0056 0.0056
United Kingdom ........... 0.0000 0.0103 0.0103
-------------------------------------------
TOTAL .................... $ 0.0232 $ 0.0940 $ 0.0547
===========================================
- -------------------------------------------------------------------------------
ADVISOR CLASS
FOREIGN TAX FOREIGN FOREIGN
PAID SOURCE INCOME QUALIFIED DIVIDENDS
COUNTRY PER SHARE PER SHARE PER SHARE
- -------------------------------------------------------------------------------
Australia ................ $ 0.0008 $ 0.0061 $ 0.0061
Belgium .................. 0.0004 0.0022 0.0022
Brazil ................... 0.0001 0.0012 0.0000
Canada ................... 0.0013 0.0063 0.0040
China .................... 0.0000 0.0049 0.0000
Finland .................. 0.0006 0.0029 0.0029
Germany .................. 0.0011 0.0055 0.0038
Hong Kong ................ 0.0000 0.0158 0.0000
India .................... 0.0036 0.0035 0.0029
Indonesia ................ 0.0002 0.0008 0.0008
Japan .................... 0.0003 0.0034 0.0034
Netherlands .............. 0.0017 0.0087 0.0087
Norway ................... 0.0009 0.0043 0.0043
Singapore ................ 0.0000 0.0032 0.0000
South Korea .............. 0.0021 0.0093 0.0093
Sweden ................... 0.0011 0.0054 0.0054
Switzerland .............. 0.0005 0.0051 0.0024
Taiwan ................... 0.0074 0.0243 0.0000
Thailand ................. 0.0011 0.0080 0.0080
United Kingdom ........... 0.0000 0.0148 0.0148
-------------------------------------------
TOTAL .................... $ 0.0232 $ 0.1357 $ 0.0790
===========================================
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 (assuming you held your shares in the Fund for a minimum of 16
days during the 31-day period beginning 15 days before the ex-dividend date of
the Fund's distribution to which the foreign taxes relate), or, as a tax
deduction.
Foreign Source Income per Share (Column 2) is the amount per share of income
dividends paid to you that is attributable to foreign securities held by the
Fund, plus any foreign taxes withheld on these dividends. The amounts reported
include foreign source qualified dividends that have not been adjusted for the
rate differential applicable to such dividend income. 1
Foreign Qualified Dividends per Share (Column 3) is the amount per share of
foreign source qualified dividends the Fund paid to you, plus any foreign taxes
withheld on these dividends. These amounts represent the portion of the Foreign
Source Income reported to you in column 2 that were derived from qualified
foreign securities held by the Fund. 1
In January 2007, shareholders will receive Form 1099-DIV which will include
their share of taxes paid and foreign source income distributed during the
calendar year 2006. The Foreign Source Income reported on Form 1099-DIV has not
been adjusted for the rate differential on foreign source qualified dividend
income. Shareholders are advised to check with their tax advisors for
information on the treatment of these amounts on their 2006 individual income
tax returns.
1 Qualified dividends are taxed at a maximum rate of 15% (5% for those in
the 10% and 15% income tax brackets). In determining the amount of foreign
tax credit that may be applied against the U.S. tax liability of
individuals receiving foreign source qualified dividends, adjustments may
be required to the foreign tax credit limitation calculation to reflect
the rate differential applicable to such dividend income. The rules
however permit certain individuals to elect not to apply the rate
differential adjustments for capital gains and/or dividends for any
taxable year. Please consult your tax advisor and the instructions to Form
1116 for more information.
Annual Report | 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 appointed 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 143 Director, Bar-S Foods (meat
500 East Broward Blvd. packing 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 19 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman, Island Corporate Holdings Ltd.; Director and Vice Chairman, Caribbean Utilities Co. Ltd.; 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 144 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 139 Director, Hess Corporation
500 East Broward Blvd. (formerly, Amerada Hess
Suite 2100 Corporation) (exploration
Fort Lauderdale, FL 33394-3091 and refining of oil and
gas), H.J. Heinz Company
(processed foods and allied
products), RTI International
Metals, Inc. (manufacture
and distribution of titani-
um), 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 143 Director, MedImmune, Inc.
500 East Broward Blvd. (biotechnology) and
Suite 2100 Overstock.com (Internet
Fort Lauderdale, FL 33394-3091 services); and 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), Spacehab, Inc.
(aerospace services)
(1994-2003) and Martek
Biosciences Corporation
(1998-2006).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; Senior Business Advisor, Martek Biosciences Corporation (research and development); 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).
- ------------------------------------------------------------------------------------------------------------------------------------
DAVID W. NIEMIEC (1949) Trustee Since 2005 19 Director, Emeritus
500 East Broward Blvd. Corporation (assisted
Suite 2100 living) and OSI
Fort Lauderdale, FL 33394-3091 Pharmaceuticals, Inc.
(pharmaceutical
products).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Advisor, Saratoga Partners (private equity fund); Director, various private companies; and FORMERLY, Managing Director,
Saratoga Partners (1998-2001) and SBC Warburg Dillon Read (investment banking) (1997-1998); Vice Chairman, Dillon, Read & Co.
Inc. (investment banking) (1991-1997); and Chief Financial Officer, Dillon, Read & Co. Inc. (1982-1997).
- ------------------------------------------------------------------------------------------------------------------------------------
FRANK A. OLSON (1932) Trustee Since 2004 102 Director, Hess Corporation
500 East Broward Blvd. (formerly, Amerada Hess
Suite 2100 Corporation) (exploration
Fort Lauderdale, FL 33394-3091 and refining of 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 man-
aged care), The Hertz
Corporation, Pacific
Southwest Airlines, The RCA
Corporation, Unicom
(formerly, Commonwealth
Edison), UAL Corporation
(airlines) and White
Mountains Insurance Group,
Ltd. (holding company).
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
- ------------------------------------------------------------------------------------------------------------------------------------
LARRY D. THOMPSON (1945) Trustee Since 2005 19 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY,
Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (1997-2001); Senior Fellow of The Brookings
Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S.
Department of Justice (2001-2003).
- ------------------------------------------------------------------------------------------------------------------------------------
CONSTANTINE D. TSERETOPOULOS Trustee Since 2004 19 None
(1954)
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Physician, Lyford Cay Hospital (1987-present); director of various nonprofit organizations; and FORMERLY, Cardiology Fellow,
University of Maryland (1985-1987) and Internal Medicine Resident, Greater Baltimore Medical Center (1982-1985).
- ------------------------------------------------------------------------------------------------------------------------------------
**** ROBERT E. WADE (1946) Trustee Since March 29 Director, El Oro and
500 East Broward Blvd. 2006 Exploration Co.,
Suite 2100 p.l.c. (investments)
Fort Lauderdale, FL 33394-3091 and ARC Wireless
Solutions, Inc.
PRINCIPAL OCCUPATION DURING PAST 5 YEARS: (wireless components
Practicing attorney. and network products).
- ------------------------------------------------------------------------------------------------------------------------------------
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 10 Director, Hess
500 East Broward Blvd. Corporation (formerly,
Suite 2100 Amerada Hess
Fort Lauderdale, FL 33394-3091 Corporation) (explo-
ration and refining of
oil and gas) and
Weatherford
International, Ltd.
(oilfield products and
servicing) (2004-pres-
ent); and formerly,
Director, H.J. Heinz
Company (processed
foods and allied
products) (1987-1988;
1993-2003) and Total
Logistics, Inc.
(operating and
investment business)
(until 2005).
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).
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
** HARMON E. BURNS (1945) Trustee and Trustee 21 None
One Franklin Parkway Vice since 1992
San Mateo, CA 94403-1906 President and Vice
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 45 of the investment companies in Franklin
Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
** CHARLES B. JOHNSON (1933) Trustee, Trustee and 143 None
One Franklin Parkway Chairman Chairman of
San Mateo, CA 94403-1906 of the the Board
Board and since 1995
Vice and Vice
President 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.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of
Franklin Resources, Inc. and of 42 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (1952) Chief Chief Not Applicable Not Applicable
One Franklin Parkway Compliance Compliance
San Mateo, CA 94403-1906 Officer Officer since
and Vice 2004 and Vice
President President
- AML - AML
Compliance Compliance
since
February
2006
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001).
- ------------------------------------------------------------------------------------------------------------------------------------
JEFFREY A. EVERETT (1964) President Since 2002 Not Applicable Not Applicable
PO Box N-7759 and Chief
Lyford Cay, Nassau, Bahamas Executive
Officer -
Investment
Management
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President and Director, Templeton Global Advisors Limited; and 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
Suite 2100 and Chief
Fort Lauderdale, FL 33394-3091 Executive
Officer-Finance
and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 47 of the
investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (1947) Vice Since 2000 Not Applicable Not Applicable
One Franklin Parkway President
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; officer and director of one of the subsidiaries of Franklin
Resources, Inc.; and officer of 47 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (1947) Vice Since 2000 Not Applicable Not Applicable
One Franklin Parkway President
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
47 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 Since 1996 Not Applicable Not Applicable
One Franklin Parkway President
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 45
of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JOHN R. KAY (1940) Vice Since 1994 Not Applicable Not Applicable
500 East Broward Blvd. President
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.
- ------------------------------------------------------------------------------------------------------------------------------------
ROBERT C. ROSSELOT (1960) Secretary Since 2004 Not Applicable Not Applicable
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President and
Assistant Secretary, Templeton Investment Counsel, LLC; Vice President, Secretary and Trust Officer, Fiduciary Trust
International of the South; and officer of 14 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
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 16 of the investment companies in Franklin Templeton Investments;
and FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
- ------------------------------------------------------------------------------------------------------------------------------------
CRAIG S. TYLE (1960) Vice Since 2005 Not Applicable Not Applicable
One Franklin Parkway President
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin
Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company
Institute (ICI) (1997-2004).
- ------------------------------------------------------------------------------------------------------------------------------------
GALEN VETTER (1951) Chief Since 2004 Not Applicable Not Applicable
500 East Broward Blvd. Financial
Suite 2100 Officer and
Fort Lauderdale, FL 33394-3091 Chief
Accounting
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; officer of 47 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987
and 1991-2004).
- ------------------------------------------------------------------------------------------------------------------------------------
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments
fund complex. These portfolios have a common investment manager or
affiliated investment managers.
** Charles B. Johnson is considered to be an interested person of the Fund
under the federal securities laws due to his position as officer and
director and major shareholder of Franklin Resources, Inc. (Resources),
which is the parent company of the Fund's investment manager and
distributor. 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. Harmon E. Burns is considered
to be an interested person of the Trust under the federal securities laws
due to his position as officer and director of Resources.
*** Subsequent to August 31, 2006, Mr. Fortunato and Mr. Macklin each ceased
to be a trustee of the Fund.
**** During the reporting period, Mr. Wade became a trustee.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. Prior to
August 31, 2006, Mr. Fred R. Millsaps ceased to be a trustee of the Fund.
THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE U.S. SECURITIES AND
EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT
COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL
EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF TRUSTEES
HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT
COMMITTEE AND HAS DESIGNATED EACH OF FRANK A. OLSON AND DAVID W. NIEMIEC AS AN
AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MESSRS. OLSON AND
NIEMIEC QUALIFY AS SUCH AN EXPERT IN VIEW OF THEIR EXTENSIVE BUSINESS BACKGROUND
AND EXPERIENCE. MR. OLSON HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE
SINCE 2003. HE CURRENTLY SERVES AS CHAIRMAN EMERITUS OF THE HERTZ CORPORATION
AND WAS FORMERLY ITS CHAIRMAN OF THE BOARD FROM 1980 TO 2000 AND ITS CHIEF
EXECUTIVE OFFICER FROM 1977 TO 1999. MR. OLSON IS ALSO A DIRECTOR AND AUDIT
COMMITTEE MEMBER OF HESS CORPORATION (FORMERLY, AMERADA HESS CORPORATION) AND A
FORMER DIRECTOR AND AUDIT COMMITTEE MEMBER OF WHITE MOUNTAINS INSURANCE GROUP,
LTD., AND A FORMER CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER OF UAL
CORPORATION. MR. NIEMIEC HAS SERVED AS A MEMBER OF THE FUND AUDIT COMMITTEE
SINCE 2005, CURRENTLY SERVES AS AN ADVISOR TO SARATOGA PARTNERS AND WAS FORMERLY
ITS MANAGING DIRECTOR FROM 1998 TO 2001. MR. NIEMIEC IS A DIRECTOR OF EMERITUS
CORPORATION AND OSI PHARMACEUTICALS, INC. AND VARIOUS PRIVATE COMPANIES, AND WAS
FORMERLY MANAGING DIRECTOR OF SBC WARBURG DILLON READ FROM 1997 TO 1998, AND WAS
VICE CHAIRMAN FROM 1991 TO 1997 AND CHIEF FINANCIAL OFFICER FROM 1982 TO 1997 OF
DILLON, READ & CO. INC. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD
OF TRUSTEES BELIEVES THAT MR. OLSON AND MR. NIEMIEC 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. OLSON AND NIEMIEC 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 MANAGEMENT AGREEMENT
At a meeting held May 11, 2006, the Board of Trustees ("Board"), including a
majority of non-interested or independent Trustees, approved renewal of the
investment management agreement 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, Inc. ("Lipper"), an
independent organization, as well as a Fund profitability analysis report
prepared by management. The Lipper report compared the Fund's investment
performance and expenses with those of other 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 and its affiliates, including
management's explanation of differences where relevant and a three-year expense
analysis with an explanation for any increase in expense ratios. Additional
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 management agreement 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 management agreement was in the best interests of the Fund and its
shareholders. While attention was given to all information furnished, the
following discusses some primary factors relevant to the Board's decision.
NATURE, EXTENT AND QUALITY OF 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 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 provided Fund
shareholders from being part of the Franklin Templeton family of funds,
48 | Annual Report
Templeton Global Smaller Companies Fund
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
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. Among other factors taken into
account by the Board were the Manager's best execution trading policies,
including a favorable report by an independent portfolio trading analytical
firm. Consideration was also given to the experience of the Fund's portfolio
management team, the number of accounts managed and general method of
compensation. In this latter respect, the Board noted that a primary factor in
management's determination of 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 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 agreement
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,
2006, 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, global small/mid cap growth funds and global
small/mid cap value funds as selected by Lipper. The Fund's total return, as
shown in such report, was in the lowest quintile of such performance universe
for the one-year period, but on an annualized basis was in the highest quintile
of such performance universe for the previous three- and five-year periods, and
in the middle quintile for the previous ten-year period. The Board expressed its
satisfaction with such performance, noting the Manager's adherence to a
disciplined value approach and that the Fund's total return for the one-year
period exceeded 13.5% as shown in the Lipper report.
COMPARATIVE EXPENSES. Consideration was given to a comparative analysis of the
management fees 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 management agreement was similar
Annual Report | 49
Templeton Global Smaller Companies Fund
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
to those 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 below the median for its Lipper expense group while its
actual total expenses were in the least expensive 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.
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 that financed 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 the Fund's independent registered public accounting firm
had been engaged by the Manager to perform certain procedures on a biennial
basis, specified and approved by the Manager and the Fund's Board solely for
their purposes and use in reference to the profitability analysis. Included in
the analysis were the revenue and related costs involved in providing services
to the Fund, as well as the Fund's relative contribution 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 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 compliance requirements
resulting from the Sarbanes-Oxley Act and recent SEC requirements. In addition,
the Board considered a third-party study comparing the profitability
50 | Annual Report
Templeton Global Smaller Companies Fund
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
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 its consideration of all these factors, the Board
determined that the level of profits realized by the Manager and its affiliates
from providing services to the Fund was not excessive in view of the nature,
quality and extent of services provided.
ECONOMIES OF SCALE. The Board also considered whether 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's 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 management agreement
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
that 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 2005, the Fund's net assets were approximately $1
billion, and to the extent economies of scale may be realized by the Manager and
its affiliates, the Board believes the schedules of fees under the investment
management agreement provide a sharing of benefits with the Fund and its
shareholders.
Annual Report | 51
Templeton Global Smaller Companies Fund
SHAREHOLDER INFORMATION (CONTINUED)
PROXY VOTING POLICIES AND PROCEDURES
The Fund has established Proxy Voting Policies and Procedures ("Policies") that
the Fund uses to determine how to vote proxies relating to portfolio securities.
Shareholders may view the Fund's complete Policies online at
franklintempleton.com. Alternatively, shareholders may request copies of the
Policies free of charge by calling the Proxy Group collect at 1-954/527-7678 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group. Copies of the Fund's proxy voting records are also made available online
at franklintempleton.com and posted on the U.S. Securities and Exchange
Commission's website at sec.gov and reflect the most recent 12-month period
ended June 30.
QUARTERLY STATEMENT OF INVESTMENTS
The Fund files a complete statement of investments with the U.S. Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, DC. Information regarding the
operations of the Public Reference Room may be obtained by calling
1-800/SEC-0330.
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 BRIC 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 Balanced Fund
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 Global Real Estate Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio
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
RETIREMENT TARGET FUNDS
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
INCOME
Franklin Adjustable U.S. Government
Securities Fund 4
Franklin'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 Michigan 6
Arizona Minnesota 6
California 7 Missouri
Colorado New Jersey
Connecticut New York 7
Florida 7 North Carolina
Georgia Ohio 6
Kentucky Oregon
Louisiana Pennsylvania
Maryland Tennessee
Massachusetts 6 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.
Not part of the annual report
07/06
[LOGO](R)
FRANKLIN TEMPLETON One Franklin Parkway
INVESTMENTS 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
SUB-ADVISOR
Franklin Templeton Investment Management Limited
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 A2006 10/06
ITEM 2. CODE OF ETHICS.
(a) The Registrant has adopted a code of ethics that applies to its principal
executive officers and principal financial and accounting officer.
(c) N/A
(d) N/A
(f) Pursuant to Item 12(a)(1), the registrant is attaching as an exhibit a copy
of its code of ethics that applies to its principal executive officers and
principal financial and accounting officer.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
(A)(1) The Registrant has an audit committee financial expert serving on its
audit committee.
(2) The audit committee financial experts are David W. Niemiec and Frank A.
Olson, 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 $57,898 for the fiscal year ended August 31, 2006 and $40,840 for the
fiscal year ended August 31, 2005.
(b) Audit-Related Fees
There were no fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant that are
reasonably related to the performance of the audit of the registrant's financial
statements and are not reported under paragraph (a) of Item 4.
There were no fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant's investment
adviser and any entity controlling, controlled by or under common control with
the investment adviser that provides ongoing services to the registrant that are
reasonably related to the performance of the audit of their financial
statements.
(c) Tax Fees
There were no fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant for tax compliance, tax
advice and tax planning.
There were no 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.
(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 $664 for the fiscal year ended August 31, 2006
and $0 for the fiscal year ended August 31, 2005. 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 $175,540 for the fiscal year ended August
31, 2006 and $4,500 for the fiscal year ended August 31, 2005. 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 $176,204 for the fiscal year ended August 31, 2006 and $4,500
for the fiscal year ended August 31, 2005.
(h) The registrant's audit committee of the board has considered whether the
provision of non-audit services that were rendered to the registrant's
investment adviser (not including any sub-adviser whose role is primarily
portfolio management and is subcontracted with or overseen by another investment
adviser), and any entity controlling, controlled by, or under common control
with the investment adviser that provides ongoing services to the registrant
that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of
Regulation S-X is compatible with maintaining the principal accountant's
independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. 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 26, 2006
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 26, 2006
By /s/GALEN G. VETTER
Chief Financial Officer
Date October 26, 2006