ANNUAL REPORT
May 31, 1997
INVESCO
SMALL
COMPANY
GROWTH
FUND
A Smart Choice
For Maximum
Growth Potential
INVESCO FUNDS
<PAGE>
Economic Overview June 1997
Over the last six months, indications of strong growth paired with signs
of subdued inflation have turned the market into a daily tug-of-war between the
bulls and the bears. For the first five months of 1997, this increased
volatility took the market to both unprecedented heights and to a 9.8%
correction - a breath away from the 10% level that defines a technical
correction.
Within this environment, two distinct views about the direction of the
economy and stock market have emerged. The bulls suggest that the current
economic environment is a perfect scenario for the stock market, as low
inflation, coupled with strong economic growth, has produced rising corporate
profits. To support their analysis, they point to the strength of the Gross
Domestic Product - increasing at a 3.9% rate in the fourth quarter of 1996 and
at a revised rate of 5.8% in the first quarter of 1997. They also look at prices
across the economy as measured by the government's broadest inflation gauge, the
Gross Domestic Product price deflator, which rose only 1.8% in 1996 - the
smallest advance since 1964. The bulls suggest that 15 years of corporate
restructuring, downsizing, and investing in technology have produced, and will
continue to produce, dividends for American companies.
The bears paint a different picture. They suggest that strong economic
growth combined with unusually low unemployment (the unemployment rate for 1996
was 5.3% and decreased to 4.8% in May 1997, the lowest level since 1973) has
caused tightness in the labor market. They believe this will lead to inflation
and a reduction in corporate profits, with negative consequences for the
economy. Under their scenario, the market is overvalued and the current economic
expansion is about to end.
Within this turbulent environment, the Dow Jones Industrial Average
advanced to record highs. (The Dow is an unmanaged index reflecting
large-capitalization stock performance.) However, small-capitalization equities
generally did not participate in this upward trend. In fact, many smaller-cap
stock sectors experienced rolling corrections based on concerns over potential
earnings and valuation levels. This was especially true in higher growth
sectors, such as technology, as investors' nervousness about rising interest
rates and the sustainability of corporate profits placed a premium on the
liquidity and stability of earnings found in large-cap stocks. This caused
market leadership to narrow, and resulted in an increasingly selective market,
in which fewer and fewer stocks participated in the upward move - and left
small-capitalization growth stocks out of favor with investors.
Small Company Growth Fund
(formerly Emerging Growth Fund)
Average Annualized Total Return
as of 5/31/97 (1)
1 year -7.08%
------------------------------------------
5 years 18.08%
------------------------------------------
Since inception (12/91) 16.45%
------------------------------------------
In March, increased consumer spending reignited fears of inflation which had
negative consequences for both large- and small-cap stock markets. This
culminated with the Federal Reserve Board increasing the Fed Funds Rate by 0.25%
<PAGE>
on March 25, as a preemptive strike against inflation - the first rate increase
in more than two years. The Fed's action increased inflation concerns and
produced a sharp 5% to 10% pullback in domestic stock markets in a short time
span. The broad market recovered from the pullback, and eventually topped the
record highs set early in the year. However, any further rate increases by the
Federal Reserve Board may have negative consequences for corporate stock prices.
Graph: Total Return Performance (1),(2)
This line graph represents a comparison of the value of a $10,000 investment
in the INVESCO Small Company Growth Fund to the value of a $10,000 investment in
the Russell 2000 Index, assuming in each case reinvestment of all dividends and
capital gain distributions, for the period from inception (12/91) through
5/31/97.
In conclusion, the strength and longevity of the bull market in the 1990s
lured many investors into a false sense of security. The last days of first
quarter 1997 proved a reminder that "past performance is not a guarantee of
future results." U.S. equity markets do not consistently move in an upward
linear trend. Instead, equity markets are usually volatile, and swings of +10%
and -10% are common in the market. For many investors, the biggest concern
should be the potential erosion of savings by inflation and taxes. This
particular problem may be mitigated through long-term investments in equities as
their returns, historically, have outpaced the negative effects produced by
inflation and taxes - if investors stick with them through short-term
volatility.
Graph: Fund Diversification by Value
This pie graph reflects the allocation of the INVESCO Small Company Growth
Fund's portfolio by value of net assets in capital goods (6%), communication
services (1%), consumer cyclicals (19%), consumer staples (4%), energy (6%),
finance (12%), health care sector (8%), technology (26%), transportation (1%),
utilities (0%), and net cash & equivalents (17%).
Small Company Growth Fund
For the one-year period ended 5/31/97, INVESCO Small Company Growth Fund had
a total return of -7.08%. During the same period, the Russell 2000 had a total
return of 6.97%. For the six months ended 5/31/97, the fund had a total return
of 0.76%; during that period, the Russell 2000 had a total return of 8.44%. The
fund's short-term underperformance versus the index may be attributed to our
relatively low exposure to energy and finance stocks. These stocks typically
have slower growth rates, but produce stable earnings and were thus favored in
the recent volatile market. (Of course, past performance is not a guarantee of
future results.)(1),(2)
The line graph on page 1 illustrates the value of a $10,000 investment in
INVESCO Small Company Growth Fund, plus reinvested dividends and capital gain
distributions, from inception through 5/31/97. The chart and other total return
figures cited reflect the fund's operating expenses, but the index does not have
expenses, which would, of course, have lowered its performance.(1),(2)
<PAGE>
Strategic Summary
The last year has proven to be a difficult environment for small-cap growth
companies. This was a continuation of a three-year trend where small-cap stocks
especially small-cap growth - drastically underperformed large-caps. Three
events in particular have had a detrimental effect on the small-cap stock market
over the last year. First, an inflation scare in the summer of 1996 caused a
contraction in the price-to-earnings multiples of small-cap growth stocks. This
swift price correction left investors infatuated with the predictability of
earnings produced by large-cap companies.
Second, the flight to quality by investors was reinforced by nervousness over
the national election and the power structure vis-a-vis the Congress and
president. This forced the market not only to focus on the quality of earnings
produced by companies, but also on stock liquidity (in which a large number of
shares can be traded without strongly affecting the price).
The final key event was the market correction experienced this spring which
devalued small-cap stocks by 10% to 20%. One of the hardest hit sectors was the
small-cap technology sector which posted negative year-to-date returns as of May
31, 1997. Many small-cap companies, in all industries, are presently trading at
multiples below their internal growth rate. Conversely, many large-cap stocks
are trading at 30 to 40 times earnings and are growing at relatively slow rates
(between 8% to 15% for many of these companies). Thus, many large-cap stock
investors are paying a high premium for slower-growing assets. In comparison,
Small Company Growth Fund's holdings have an average price-to-earnings ratio of
19 (based on 1998 earnings), and these companies are growing at an average
long-term growth rate of 24%. It is unusual for small-cap growth companies to be
selling at valuation levels below their internal growth rate. Historically, when
the relative valuation levels between small-cap and large-cap stocks are this
disproportional, it is a signal that the bottom of the underperformance trend
for small-cap stocks is near.
In an effort to lessen the fund's volatility, we have increased
diversification and taken less concentrated positions within the portfolio. This
should help reduce the fund's day-to-day price fluctuations, as sectors have
rapidly rotated in and out of market favor, and price adjustments have been
quick. We believe this strategy is beginning to have a positive influence on the
fund. For the three-month period ended May 31, 1997, the fund's total return of
6.21% outperformed the return of 6.18% for the Russell 2000.(1),(2) (Of course,
past performance is not a guarantee of future results.)
Some of the stocks we favor in this environment are HealthCare Financial
Partners and REMEC Inc. The former company provides accounts receivable and
other assets-based financing to the health care industry. REMEC Inc. designs and
manufactures components for microwave transmission systems used by the defense
and wireless telecommunication industries. Both firms have improving
fundamentals and strong growth rates. They should benefit from growth in their
industries and by increasing their market share.
One of the benefits of investing in small-cap companies is that smaller
companies have the ability to grow regardless of the industry. Industries such
as department store retailing and trucking are not typically considered
high-growth industries. However, many individual companies in these industries
are experiencing phenomenal growth rates; examples of such companies owned in
the fund include Stage Stores and Simon Transportation Services. Stage Stores is
a retail apparel merchandiser that has successfully created a market niche in
the apparel industry by opening department stores in smaller markets. Simon
Transportation Inc. is a regional trucking company in the west that prides
<PAGE>
itself on superior customer satisfaction. We believe that both of these
companies have a bright future.
Looking Forward
Investors need to remember that the stock market goes through phases in which
certain industries and segments of the market fall in and out of favor with
investors. In the case of the small-cap growth stocks, we are presently
experiencing a three-year period of underperformance compared to the general
market - even though small company growth rates and balance sheets remain
strong. However, it appears that the bottom of this cycle is close at hand, and
we may enter a period of overperformance for small-cap growth stocks as compared
to the general market, though, of course, there are no guarantees in the
investment world.
Small-cap growth stocks can offer potentially dynamic returns for the patient
long-term investor. Exposure to this market, however, should be in the context
of a well-diversified portfolio.
Fund Management
Stacie L. Cowell assumed the responsibilities of portfolio manager effective
February 1997. She earned her BA in Economics from Colgate University and is a
Chartered Financial Analyst. Prior to joining INVESCO, Stacie was a senior
equities analyst with Founders Asset Management, and a capital markets and
trading analyst with Chase Manhattan Bank. She is assisted by co-managers Tim J.
Miller and Trent E. May.
Tim, a senior vice president, received his MBA from the University of
Missouri, and a BSBA from St. Louis University. A 17-year veteran of the
investment business, he is a Chartered Financial Analyst. Before joining INVESCO
in 1992, Tim was an analyst and portfolio manager with Mississippi Valley
Advisors. Trent received a BS from the Florida Institute of Technology and a MBA
from Rollins College. Before joining INVESCO in 1996, Trent was a senior equity
manager/equity analyst with Munder Capital Management. He is a Chartered
Financial Analyst.
(1) Total return assumes reinvestment of dividends and capital gain
distributions for the periods indicated. Past performance is not a guarantee of
future results. Investment return and principal value will fluctuate so that,
when redeemed, an investor's shares may be worth more or less than when
purchased.
(2) The Russell 2000 is an unmanaged index indicative of
smaller-capitalization stocks.
INVESCO Fund Codes
These two-digit codes appear after your account number on Investment
Summaries and confirmations. You may also use them to request information about
specific funds on PAL(r), your Personal Account Line.
Money Market Funds
44 U.S. Government Money Fund
25 Cash Reserves
40 Tax-Free Money Fund
Tax-Exempt Funds
36 Tax-Free Intermediate Bond
35 Tax-Free Long-Term Bond
<PAGE>
Income Funds
33 Short-Term Bond
32 U.S. Government Securities
47 Intermediate Government Bond
30 Select Income
31 High Yield
Growth & Income Funds
71 Balanced
70 Multi-Asset Allocation
48 Total Return
15 Industrial Income
46 Value Equity
Capital Appreciation Funds
10 Growth
20 Dynamics
74 Small Company Value
60 Small Company Growth
Sector Funds
50 Energy
59 Environmental Services
57 Financial Services
51 Gold
52 Health Sciences
53 Leisure
42 Realty
55 Technology
58 Utilities
38 Worldwide Capital Goods
39 Worldwide Communications
International Funds
49 International Growth
41 Asian Growth
56 European
37 European Small Company
34 Latin American Growth
54 Pacific Basin
For more information about any of the INVESCO Funds, including management fees
and expenses, please call us at 1-800-525-8085 for a prospectus. Read it
carefully before you invest or send money.
<PAGE>
INVESCO Emerging Opportunity Funds, Inc. -
Small Company Growth Fund
TEN LARGEST COMMON STOCK HOLDINGS
May 31, 1997
Description Value
- --------------------------------------------------------------------------------
Helen of Troy Ltd $5,002,250
Prime Hospitality 4,868,575
Mercury General 4,329,075
Newfield Exploration 4,085,000
Orion Capital 3,952,313
Kent Electronics 3,802,500
Eagle Hardware & Garden 3,609,375
HCC Insurance Holdings 3,558,225
NCO Group 3,504,600
REMEC Inc 3,497,513
Composition of holdings is subject to change.
-------------------------------------------
<PAGE>
INVESCO Emerging Opportunity Funds, Inc. -
Small Company Growth Fund
STATEMENT OF INVESTMENT SECURITIES
May 31, 1997
- --------------------------------------------------------------------------------
Shares or
Principal
Description Amount Value
- --------------------------------------------------------------------------------
COMMON STOCKS 80.07%
AIRLINES 0.29%
Ryanair Holdings PLC ADR*~~ 35,000 $ 866,250
-----------
AUTO PARTS 2.01%
O'Reilly Automotive* 85,000 3,081,250
Tower Automotive* 75,000 2,971,875
-----------
6,053,125
-----------
BANKS 1.05%
Provident Bankshares 84,000 3,171,000
-----------
BEVERAGES 0.97%
NuCo2 Inc* 180,000
2,925,000
-----------
BIOTECHNOLOGY 2.83%
Gilead Sciences* 65,000 1,763,125
IDEC Pharmaceuticals* 76,000 1,710,000
Pharmacyclics Inc* 116,400 1,862,400
Sepracor Inc* 130,000 3,185,000
-----------
8,520,525
-----------
COMMUNICATIONS -
EQUIPMENT & MANUFACTURING 3.70%
Comverse Technology* 52,000 2,379,000
Davox Corp* 20,000 645,000
Gilat Satellite Networks Ltd* 91,000 2,866,500
REMEC Inc* 116,100 3,497,513
Tekelec* 50,000 1,750,000
-----------
11,138,013
-----------
COMPUTER RELATED 10.98%
Aspen Technology* 66,000 2,524,500
Black Box* 60,000 2,115,000
CBT Group PLC Sponsored ADR* 53,400 2,910,300
Cognos Inc* 89,900 2,809,375
Forrester Research* 61,000 1,784,250
Larscom Inc Class A* 250,000 3,031,250
Pegasystems Inc* 75,500 2,142,312
Peregrine Systems* 195,000 2,145,000
Remedy Corp* 39,900 1,610,963
<PAGE>
SCI Systems* 30,000 1,950,000
Scopus Technology* 90,700 2,738,006
Technology Solutions* 36,000 1,305,000
Versatility Inc* 190,000 2,375,000
Visio Corp* 25,000 1,437,500
Wind River Systems* 63,775 2,168,350
-----------
33,046,806
-----------
CONSUMER - JEWELRY,
NOVELTIES & GIFTS 0.77%
Friedman's Inc Class A* 124,900 2,334,069
-----------
DISTRIBUTION 0.68%
Brightpoint Inc* 65,800 2,039,800
-----------
ELECTRICAL EQUIPMENT 2.26%
Dynatech Corp* 80,000 3,000,000
Kent Electronics* 117,000 3,802,500
6,802,500
ELECTRONICS 2.61%
ANADIGICS Inc* 75,700 2,507,562
Level One Communications* 39,600 1,494,900
Teradyne Inc* 60,000 2,460,000
Veeco Instruments* 34,000 1,411,000
-----------
7,873,462
-----------
ELECTRONICS - SEMICONDUCTOR 5.07%
Cymer Inc* 37,000 1,961,000
Cypress Semiconductor* 194,000 2,764,500
Lam Research* 60,000 2,182,500
Lattice Semiconductor* 50,700 2,940,600
Unitrode Corp* 58,200 2,888,175
VLSI Technology* 104,000 2,528,500
-----------
15,265,275
-----------
ENGINEERING & CONSTRUCTION 0.96%
Willbros Group* 280,000 2,905,000
-----------
FINANCIAL 1.11%
Warrantech Corp* 275,000 3,334,375
-----------
GAMING 0.97%
MGM Grand* 77,000 2,916,375
-----------
HEALTH CARE DRUGS -
PHARMACEUTICALS 0.70%
Jones Medical Industries 59,000 2,116,625
-----------
HEALTH CARE RELATED 7.03%
ADAC Laboratories 109,300 2,841,800
<PAGE>
Cerner Corp* 51,600 1,006,200
Coventry Corp* 175,000 2,548,437
Graham-Field Health Products* 315,000 3,346,875
HealthCare Financial Partners* 143,000 2,377,375
Healthcare Recoveries* 132,500 2,020,625
Renal Treatment Centers* 76,500 2,199,375
Total Renal Care Holdings* 63,000 2,268,000
VISX Inc* 86,300 2,545,850
-----------
21,154,537
-----------
INSURANCE 6.69%
Enhance Financial Services Group 20,700 864,225
Frontier Insurance Group 45,000 2,469,375
HCC Insurance Holdings 136,200 3,558,225
Liberty Corp 65,000 2,583,750
Mercury General 59,100 4,329,075
Orion Capital 59,100 3,952,313
PennCorp Financial Group 70,000 2,388,750
-----------
20,145,713
-----------
LEISURE TIME 1.82%
North Face* 150,000 2,737,500
Regal Cinemas* 83,000 2,728,625
-----------
5,466,125
-----------
LODGING - HOTELS 2.26%
Extended Stay America* 140,000 1,942,500
Prime Hospitality* 261,400 4,868,575
-----------
6,811,075
-----------
MANUFACTURING 1.03%
Robbins & Myers 90,000 3,093,750
-----------
OIL & GAS RELATED 5.37%
Falcon Drilling* 68,000 3,119,500
Gulf Island Fabrication* 139,100 3,407,950
Newfield Exploration* 190,000 4,085,000
Nuevo Energy* 64,000 2,792,000
Rowan Cos* 120,000 2,775,000
-----------
16,179,450
-----------
PERSONAL CARE 2.51%
Helen of Troy Ltd* 187,000 5,002,250
Playtex Products* 265,000 2,550,625
-----------
7,552,875
-----------
POLLUTION CONTROL 1.60%
American Disposal Services* 117,000 2,340,000
<PAGE>
Memtec Ltd Sponsored ADR 110,000 2,475,000
-----------
4,815,000
-----------
PUBLISHING 0.93%
McClatchy Newspapers Class A 100,000 2,787,500
-----------
REAL ESTATE INVESTMENT TRUST 1.78%
FelCor Suite Hotels 63,000 2,346,750
Intrawest Corp 180,000 3,015,000
-----------
5,361,750
-----------
RETAIL 4.17%
Eagle Hardware & Garden* 150,000 3,609,375
Global DirectMail* 115,000 2,731,250
Proffitt's Inc* 78,000 3,110,250
Stage Stores* 154,000 3,108,875
-----------
12,559,750
-----------
SAVINGS & LOAN 0.95%
FirstFed Financial* 105,000 2,861,250
-----------
SERVICES 4.70%
Avis Europe PLC* 590,000 1,264,464
NCO Group* 106,200 3,504,600
NCS HealthCare Class A* 83,000 2,324,000
Norrell Corp 100,000 3,225,000
Regis Corp 125,000 2,687,500
TeleTech Holdings* 50,000 1,156,250
-----------
14,161,814
-----------
TELECOMMUNICATIONS -
CELLULAR & WIRELESS 0.95%
McLeod Inc Class A* 120,000 2,850,000
-----------
TEXTILE - APPAREL
MANUFACTURING 0.32%
Quiksilver Inc* 35,000 958,125
-----------
TRUCKERS 1.00%
Simon Transportation Services*+ 162,400 3,004,400
-----------
TOTAL COMMON STOCKS
(Cost $217,303,949) 241,071,314
-----------
SHORT-TERM INVESTMENTS -
REPURCHASE AGREEMENTS 19.93%
Repurchase Agreement with
State Street Bank & Trust Co
dated 5/30/1997 due
6/2/1997 at 5.450%,
<PAGE>
repurchased at
$60,034,253 (Collateralized
by US Treasury Bonds due 2/15/2019
at 8.875%, value $62,498,354)
(Cost $60,007,000) 60,007,000 60,007,000
-----------
TOTAL INVESTMENT
SECURITIES AT VALUE 100.00%
(Cost $277,310,949)
(Cost for Income Tax Purposes
$277,489,508) 301,078,314
===========
* Security is non-income producing.
~~ Security is a when-issued security.
+ Security has been designated as collateral for when-
issued securities.
See Notes to Financial Statements
<PAGE>
INVESCO Emerging Opportunity Funds, Inc. -
Small Company Growth Fund
STATEMENT OF ASSETS AND LIABILITIES
May 31, 1997
ASSETS
Investment Securities at Value~
(Cost $277,310,949)~ $301,078,314
Cash 50,965
Receivables:
Investment Securities Sold 10,094,364
Fund Shares Sold 5,567,437
Dividends and Interest 20,667
Prepaid Expenses 59,538
-----------
TOTAL ASSETS 316,871,285
-----------
LIABILITIES
Payables:
Investment Securities Purchased 22,022,228
Fund Shares Repurchased 507,416
Accrued Distribution Expenses 55,304
Accrued Expenses and Other Payables 15,562
-----------
TOTAL LIABILITIES 22,600,510
-----------
Net Assets at Value $294,270,775
===========
NET ASSETS
Paid-in Capital* 246,542,328
Distributions in Excess of Net Investment Income (9,857)
Accumulated Undistributed Net Realized Gain on
Investment Securities 23,970,939
Net Appreciation of Investment Securities 23,767,365
-----------
Net Assets at Value $294,270,775
===========
Net Asset Value, Offering and Redemption
Price per Share $ 12.82
===========
~ Investment securities at cost and value at May 31,
1997 include a repurchase agreement of $60,007,000.
* The Fund has 600 million authorized shares of common
stock, par value of $0.01 per share, of which
22,950,475 were outstanding at May 31, 1997.
See Notes to Financial Statements
<PAGE>
INVESCO Emerging Opportunity Funds, Inc. -
Small Company Growth Fund
STATEMENT OF OPERATIONS
Year Ended May 31, 1997
INVESTMENT INCOME
INCOME
Dividends $ 301,494
Interest 2,285,518
-----------
TOTAL INCOME 2,587,012
-----------
EXPENSES
Investment Advisory Fees 2,029,312
Distribution Expenses 676,753
Transfer Agent Fees 1,043,895
Administrative Fees 50,600
Custodian Fees and Expenses 63,455
Directors' Fees and Expenses 18,196
Organizational Expenses 3,750
Professional Fees and Expenses 31,788
Registration Fees and Expenses 131,326
Reports to Shareholders 101,997
Other Expenses 13,320
-----------
TOTAL EXPENSES 4,164,392
Fees and Expenses Absorbed by Investment Adviser (59,729)
Fees and Expenses Paid Indirectly (38,894)
-----------
NET EXPENSES 4,065,769
-----------
NET INVESTMENT LOSS (1,478,757)
-----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENT SECURITIES
Net Realized Gain on Investment Securities
and Foreign Currency Transactions 29,515,644
Change in Net Appreciation of Investment
Securities and Foreign Currency Transactions (56,216,632)
-----------
NET LOSS ON INVESTMENT SECURITIES (26,700,988)
-----------
Net Decrease in Net Assets from Operations $(28,179,745)
===========
See Notes to Financial Statements
<PAGE>
INVESCO Emerging Opportunity Funds, Inc. -
Small Company Growth Fund
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended May 31
-------------------------------
1997 1996
<S> <C> <C>
OPERATIONS
Net Investment Loss ............ $ (1,478,757) $ (1,624,741)
Net Realized Gain on
Investment Securities and
Foreign Currency Transactions 29,515,644 15,778,132
Change in Net Appreciation of
Investment Securities and
Foreign Currency Transactions (56,216,632) 80,619,041
------------- -------------
NET INCREASE (DECREASE)
IN NET ASSETS FROM OPERATIONS (28,179,745) 94,772,432
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM NET REALIZED GAIN ON
INVESTMENT SECURITIES ....... (10,787,315) (3,120,041)
------------- -------------
FUND SHARE TRANSACTIONS
Proceeds from Sales of Shares .. 588,003,670 662,626,265
Reinvestment of Distributions .. 10,519,533 3,055,949
------------- -------------
598,523,203 665,682,214
Amounts Paid for Repurchases
Of Shares ................... (635,314,480) (541,032,810)
------------- -------------
NET INCREASE (DECREASE)
IN NET ASSETS FROM FUND
SHARE TRANSACTIONS .......... (36,791,277) 124,649,404
------------- -------------
Total Increase (Decrease) in
Net Assets .................. (75,758,337) 216,301,795
NET ASSETS
Beginning of Period ............ 370,029,112 153,727,317
------------- -------------
End of Period (Including
Distributions in Excess of
Net Investment Income
of $9,857 and $6,379,
respectively) ............... $ 294,270,775 $ 370,029,112
============= =============
FUND SHARE TRANSACTIONS
Shares Sold .................... 46,136,498 55,676,741
Shares Issued from Reinvestment
of Distributions ............ 836,877 261,428
------------- -------------
<PAGE>
46,973,375 55,938,169
Shares Repurchased ............. (49,747,852) (46,615,111)
------------- -------------
Net Increase (Decrease) in
Fund Shares ................. (2,774,477) 9,323,058
============= =============
See Notes to Financial Statements
</TABLE>
<PAGE>
INVESCO Emerging Opportunity Funds, Inc. - Small Company Growth Fund
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES. INVESCO Emerging
Opportunity Funds, Inc. (the "Fund") was incorporated in Maryland and presently
consists of the Small Company Growth Fund. The investment bjective of the Fund
is to seek long-term capital growth. The Fund is registered under the Investment
Company Act of 1940 (the Act") as a diversified, open-end management investment
company. Effective February 1, 1997, the Funds' name changed to INVESCO Emerging
Opportunity Funds, Inc.- Small Company Growth Fund.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
A. SECURITY VALUATION - Equity securities traded on national securities
exchanges or in the over-the-counter market are valued at the last sales
price in the market where such securities are primarily traded. If last sales
prices are not available, securities are valued at the highest closing
bid price obtained from one or more dealers making a market for such
securities or by a pricing service approved by the Fund's board of directors.
Foreign securities are valued at the closing price on the principal stock
exchange on which they are traded. In the event that closing prices are not
available for foreign securities, prices will be obtained from the principal
stock exchange at or prior to the close of the New York Stock Exchange.
Foreign currency exchange rates are determined daily prior to the close of
the New York Stock Exchange.
If market quotations or pricing service valuations are not readily
available, securities are valued at fair value as determined in good faith by
the Fund's board of directors.
Short-term securities are stated at amortized cost (which approximates
market value) if maturity is 60 days or less at the time of purchase, or
market value if maturity is greater than 60 days.
Assets and liabilities initially expressed in terms of foreign currencies
are translated into U.S. dollars at the prevailing market rates as quoted by
one or more banks or dealers on the date of valuation. The cost of securities
is translated into U.S. dollars at the rates of exchange prevailing when such
securities are acquired. Income and expenses are translated into U.S. dollars
at the rates of exchange prevailing when accrued.
B. WHEN-ISSUED SECURITIES - When-issued securities held by the Fund are fully
collateralized by other securities and such collateral is in the possession
of the Fund's custodian. The collateral is evaluated daily to ensure its
market value exceeds the current market value of the when-issued securities.
<PAGE>
C. REPURCHASE AGREEMENTS - Repurchase agreements held by the Fund are fully
collateralized by U.S. Government securities and such collateral is in the
possession of the Fund's custodian. The collateral is evaluated daily to
ensure its market value exceeds the current market value of the repurchase
agreements including accrued interest.
D. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME - Security transactions
are accounted for on the trade date and dividend income is recorded on the
ex-dividend date. Certain dividends from foreign securities will be
recorded as soon as the Fund is informed of the dividend if such information
is obtained subsequent to the ex dividend date. Interest income, which may be
comprised of stated coupon rate, market discount, original issue discount and
amortized premium, is recorded on the accrual basis. Cost is determined on
the specific identification basis.
The Fund may have elements of risk due to concentrated investments in
foreign issuers located in a specific country. Such concentrations may
subject the Fund to additional risks resulting from future political or
economic conditions and/or possible impositions of adverse foreign
governmental laws or currency exchange restrictions. Net realized and
unrealized gain or loss from investments includes fluctuations from currency
exchange rates and fluctuations in market value.
The Fund's use of short-term forward foreign currency contracts may
subject it to certain risks as a result of unanticipated movements in foreign
exchange rates. The Fund does not hold short-term forward foreign currency
contracts for trading purposes. The Fund may hold foreign currency in
anticipation of settling foreign security transactions and not for investment
purposes.
E. FEDERAL AND STATE TAXES - The Fund has complied and continues to comply
with the provisions of the Internal Revenue Code applicable to regulated
investment companies and, accordingly, has made or intends to make sufficient
distributions of net investment income and net realized capital gains, if
any, to relieve it from all federal and state income taxes and federal excise
taxes.
Dividends paid by the Fund from net investment income and distributions of
net realized short-term capital gains are, for federal income tax purposes,
taxable as ordinary income to shareholders.
Investment income received from foreign sources may be subject to foreign
withholding taxes. Dividend and interest income is shown gross of foreign
withholding taxes in the accompanying financial statements.
F. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS - Dividends and distributions to
shareholders are recorded by the Fund on the ex dividend/distribution
date. The Fund distributes net realized capital gains, if any, to its
shareholders at least annually, if not offset by capital loss carryovers.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for nontaxable dividends, net operating losses and
expired capital loss carryforwards. For the year ended May 31,1997, the Fund
reclassified $1,475,279 from accumulated undistributed net realized gain on
investment securities to accumulated undistributed net investment income. Net
investment income, net realized gains and net assets were not affected.
G. FORWARD FOREIGN CURRENCY CONTRACTS - The Fund enters into short-term forward
foreign currency contracts in connection with planned purchases or sales of
securities as a hedge against fluctuations in foreign exchange rates pending
<PAGE>
the settlement of transactions in foreign securities. A forward foreign
currency contract is an agreement between contracting parties to exchange an
amount of currency at some future time at an agreed upon rate. These
contracts are marked-to-market daily and the related appreciation or
depreciation of the contracts is presented in the Statement of Assets and
Liabilities.
H. EXPENSES - Under an agreement between the Fund and the Fund's Custodian,
agreed upon Custodian Fees and Expenses are reduced by credits granted by the
Custodian from any temporarily uninvested cash. Similarly, Transfer Agent
Fees and Distribution Expenses are reduced by credits earned by the Fund from
security brokerage transactions under certain broker/service arrangements
with third parties. Such credits are included in Fees and Expenses Paid
Indirectly in the Statement of Operations.
For the year ended May 31, 1997, Fees and Expenses Paid Indirectly
consisted of $36,804, $2,023 and $67 included in Custodian Fees and
Expenses, Transfer Agent Fees and Distribution Expenses, respectively.
NOTE 2 - INVESTMENT ADVISORY AND OTHER AGREEMENTS. INVESCO Funds Group,
Inc. ("IFG") serves as the Fund's investment adviser. As compensation for its
services to the Fund, IFG receives an investment advisory fee which is accrued
daily at the applicable rate and paid monthly. The fee is based on the annual
rate of 0.75% on the first $350 million of average net assets; reduced to 0.65%
on the next $350 million of average net assets; and 0.55% on average net assets
in excess of $700 million.
In accordance with a Sub-Advisory Agreement between IFG and INVESCO Trust
Company ("ITC"), a wholly owned subsidiary of IFG, investment decisions of the
Fund are made by ITC. Fees for such sub-advisory services are paid by IFG.
In accordance with an Administrative Agreement, the Fund pays IFG an annual
fee of $10,000, plus an additional amount computed at an annual rate of 0.015%
of average net assets to provide administrative, accounting and clerical
services. The fee is accrued daily and paid monthly.
IFG receives a transfer agent fee at an annual rate of $20.00 per
shareholder account, or, where applicable, per participant in an omnibus
account, per year. IFG may pay such fee for participants in omnibus accounts to
affiliates or third parties. The fee is paid monthly at one-twelfth of the
annual fee and is based upon the actual number of accounts in existence during
each month.
A plan of distribution pursuant to Rule 12b-1 of the Act provides for
reimbursement of marketing and advertising expenditures to IFG (the
"Distributor") to a maximum of 0.25% of annual average net assets. Amounts
accrued by the Fund are available to reimburse the Distributor for actual
expenditures incurred within a rolling twelve-month period. For the year ended
May 31, 1997, the Fund paid the Distributor $694,164 for reimbursement of
expenses incurred.
Effective January 1, 1997, the Rule 12b-1 distribution plan was modified by
action of the Board of Directors so that the Fund compensates IFG for
permissible activities and services in connection with the distribution of the
Fund's shares. Accordingly, the above amount reflects reimbursements under the
plan for the seven months ended December 31, 1996 and compensation under the
plan for the five months ended May 31, 1997.
IFG has voluntarily agreed, in some instances, to absorb certain fees and
expenses incurred by the Fund.
<PAGE>
NOTE 3 - PURCHASES AND SALES OF INVESTMENT SECURITIES. For the year ended
May 31, 1997, the aggregate cost of purchases and proceeds from sales of
investment securities (excluding all U.S. Government securities and short-term
securities) were $498,569,554 and $594,214,288, respectively.
There were no purchases or sales of U.S. Government securities.
NOTE 4 - APPRECIATION AND DEPRECIATION. At May 31, 1997, the gross
appreciation of securities in which there was an excess of value over tax cost
amounted to $29,099,495 and the gross depreciation of securities in which there
was an excess of tax cost over value amounted to $5,510,689, resulting in net
appreciation of $23,588,806.
NOTE 5 - TRANSACTIONS WITH AFFILIATES. Certain of the Fund's officers and
directors are also officers and directors of IFG or ITC.
The Fund has adopted an unfunded deferred compensation plan covering all
independent directors of the Fund who will have served as an independent
director for at least five years at the time of retirement. Benefits under this
plan are based on an annual rate of 40% of the retainer fee at the time of
retirement.
Pension expenses for the year ended May 31, 1997, included in Directors'
Fees and Expenses in the Statement of Operations were $3,468. Unfunded accrued
pension costs of $10,493 and pension liability of $20,340 are included in
Prepaid Expenses and Accrued Expenses, respectively, in the Statement of Assets
and Liabilities.
NOTE 6 - LINE OF CREDIT. The Fund has available a Redemption Line of
Credit Facility ("LOC"), from a consortium of national banks, to be used for
temporary or emergency purposes to fund redemptions of investor shares. The LOC
permits borrowings to a maximum of 10% of the Net Assets at Value of the Fund.
The Fund agrees to pay annual fees and interest on the unpaid principal balance
based on prevailing market rates as defined in the agreement. At May 31, 1997,
there were no such borrowings.
OTHER INFORMATION
UNAUDITED
On January 31, 1997, a special meeting of the shareholders of the Fund was
held at which the eleven directors identified below were elected, the selection
of Price Waterhouse LLP as independent accountants (Proposal 1), the approval of
a new investment advisory agreement with IFG (Proposal 2) and a new sub-advisory
agreement between IFG and ITC (Proposal 3) were ratified. The following is a
report of the votes cast:
<TABLE>
<CAPTION>
Nominee/Proposal For Against Withheld/Abstain Total
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Charles W. Brady 13,861,553 0 568,725 14,430,278
Dan J. Hesser 13,891,422 0 538,856 14,430,278
Fred A. Deering 13,855,559 0 574,719 14,430,278
Victor L. Andrews 13,866,276 0 564,002 14,430,278
Bob R. Baker 13,859,064 0 571,214 14,430,278
<PAGE>
Lawrence H. Budner 13,861,291 0 568,987 14,430,278
Daniel D. Chabris 13,845,101 0 585,177 14,430,278
A.D. Frazier, Jr. 13,860,505 0 569,773 14,430,278
Hubert L. Harris, Jr. 13,889,247 0 541,031 14,430,278
Kenneth T. King 13,838,703 0 591,575 14,430,278
John W. McIntyre 13,890,803 0 539,475 14,430,278
Proposal 1 13,833,131 181,839 415,308 14,430,278
Proposal 2 13,624,689 258,074 547,514 14,430,277
Proposal 3 13,619,651 294,176 516,450 14,430,277
</TABLE>
<PAGE>
INVESCO Emerging Opportunity Funds, Inc. -
Small Company Growth Fund
FINANCIAL HIGHLIGHTS
(For a Fund Share Outstanding Throughout Each Period)
<TABLE>
<CAPTION>
Year Ended May 31
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
PER SHARE DATA
Net Asset Value -
Beginning of Period $14.38 $9.37 $11.40 $9.89 $7.55
---------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (0.07) (0.06) 0.04 (0.01) (0.04)
Net Gains or (Losses) on Securities
(Both Realized and Unrealized) (0.96) 5.25 0.46 1.53 2.38
---------------------------------------------------------------
Total from Investment Operations (1.03) 5.19 0.50 1.52 2.34
---------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends from Net Investment Income 0.00 0.00 0.04 0.00 0.00
Distributions from Capital Gains 0.53 0.18 2.49 0.01 0.00
---------------------------------------------------------------
Total Distributions 0.53 0.18 2.53 0.01 0.00
---------------------------------------------------------------
Net Asset Value - End of Period 12.82 14.38 9.37 11.40 9.89
===============================================================
TOTAL RETURN (7.08%) 55.78% 4.98% 15.34% 30.95%
RATIOS
Net Assets - End of Period
($000 Omitted) $294,259 $370,029 $153,727 $176,510 $103,029
Ratio of Expenses to Average
Net Assets# 1.52%@ 1.48%@ 1.49% 1.37% 1.54%
Ratio of Net Investment Income
(Loss) to Average Net Assets# ( 0.55%) (0.78%) 0.41% (0.26%) (0.70%)
Portfolio Turnover Rate 216% 221% 228% 196% 153%
Average Commission Rate Paid^^ 0.0935 - - - -
# Various expenses of the Fund were voluntarily absorbed by IFG for the
years ended May 31, 1997 and 1995. If such expenses had not been voluntarily
absorbed, ratio of expenses to average net assets would have been 1.54% and
1.52%, respectively, and ratio of net investment income (loss) to average net
assets would have been (0.57%) and 0.38%, respectively.
@ Ratio is based on Total Expenses of the Fund, less Expenses Absorbed by
Investment Adviser, which is before any expense offset arrangements.
<PAGE>
^^ The average commission rate paid is the total brokerage commissions paid
on applicable purchases and sales of securities for the period divided by the
total number of related shares purchased or sold which is required to be
disclosed for fiscal years beginning September 1, 1995 and thereafter.
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
INVESCO Emerging Opportunity Funds, Inc.
In our opinion, the accompanying statement of assets and liabilities,
including the statement of investment securities, 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 Small Company Growth
Fund, formerly Emerging Growth Fund (constituting INVESCO Emerging Opportunity
Funds, Inc., hereafter referred to as the "Fund"), at May 31, 1997, the results
of its operations for the year then ended, the changes in 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 generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibiity 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 generally accepted auditing standards
which 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 May 31, 1997 by correspondence with the custodian
and the application of alternative auditing procedures for unsettled security
transactions, provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Denver, Colorado
July 2, 1997
<PAGE>
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<PAGE>
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<PAGE>
INVESCO FUNDS
We're easy to stay in touch with:
Investor Services Representatives,
1-800-525-8085
PAL(R), your Personal Account Line,
1-800-424-8085
On the World Wide Web:
http://www.invesco.com
Denver Investor Centers:
Cherry Creek, 155-B Fillmore Street;
Denver Tech Center, 7800 E. Union Avenue,
Lobby Level
INVESCO Funds Group, Inc.,(SM)Distributor
Post Office Box 173706
Denver, Colorado 80217-3706
This information must be preceded or
accompanied by a current prospectus.
