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ANNUAL REPORT
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1995
1995
1995
1995
1995
The Inefficient-
Market
Fund, Inc.
-------------------------------------------------------
December 31, 1995
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
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The Inefficient-Market Fund, Inc.
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Dear Shareholder:
We are pleased to provide the annual report for the year ended December 31, 1995
for The Inefficient-Market Fund, Inc. A more detailed summary of portfolio
performance can be found in the appropriate sections that follow in the annual
report. In 1995, strong corporate gains, low inflation and falling interest
rates combined to produce the best year for U.S. equities in over two decades.
The Inefficient-Market Fund achieved a respectable 18.5% total return during
this period. As of December 31, 1995, the Fund's net asset value was $12.15
after accounting for a $1.94 per share capital gains distribution paid in
December.
On June 8, 1995, The Inefficient-Market Fund commenced a share repurchase plan.
As of December 31, 1995, 59,050 shares of the Fund have been repurchased.
Economic and Market Overview
The U.S. economy turned in a mixed performance in 1995, losing momentum at year
end as consumer spending slowed. Despite the lackluster economic environment,
improved corporate productivity helped more than half of all major public
companies report unexpected positive earnings. The Federal Reserve's easing of
monetary policy was the catalyst for a sharp decline in interest rates, and
provided critical support for values in the stock market.
During the first half of 1995, cyclical stocks in the industrial and basic
industry sector led the market higher. As signs of economic weakness emerged in
late summer, investors began to invest in less economically-sensitive industry
groups on expectations of better relative earnings in 1996. Health care stocks
advanced sharply, as did many food and beverage industry stocks. Technology
stocks, which led the stock market early in the year, experienced a dramatic
sell-off during the fall on signs of inventory build-up and slowing corporate
earnings growth rates.
Despite superior earnings growth, smaller company stocks underperformed blue
chip issues during 1995. The Russell 2500 Index (which includes the smallest
2,500 publicly traded companies out of a universe of 3,000 publicly traded U.S.
firms) generated a total return of 31.7% (with dividends reinvested). In
comparison, the Standard & Poor's 500 Stock Index, an unmanaged
capitalization-weighted measure of 500 widely held common stocks, produced a
total return of 37.6%.
1
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Portfolio Review
In July 1995, The Travelers Investment Management Company (TIMCO) assumed
investment responsibilities for The Inefficient-Market Fund. TIMCO employs a
quantitative equity management process that seeks to add value through stock
selection. TIMCO manages a diversified portfolio that is structured to mirror
the overall risk, sector weightings and style orientation (i.e., growth versus
value) of the Russell 2500 Index. Implementing TIMCO's new strategy entailed a
large, one-time turnover of The Inefficient-Market Fund's holdings in the third
quarter.
TIMCO's stock selection process screens for a combination of attractive relative
values and earnings growth. Our larger positions in the health care sector
include Health Management Associates and Ornda Healthcorp, two companies in the
hospital management group trading that, in our view, are at attractive discounts
to their growth rates. In the consumer sector, our largest holdings include HFS
(a leading hotel franchiser), Clear Channel Communications (an operator of local
TV and radio stations), and Robert Mondavi (a California wine grower and
distributor). In the technology sector, our largest positions include Cadence
Designs (a leading producer of computer-aided design software) and International
Rectifier (a company that specializes in the power semiconductor market). In the
finance sector, we hold larger positions in American Bankers Insurance Group and
Executive Risk, both of which are specialty insurance underwriters.
Investment Outlook
Positive earnings surprises provided a major impetus for the stock market's
record highs in 1995. The weaker economic environment that exists now makes it
unlikely that the stock market will repeat its performance in 1996. Against this
somewhat cautious outlook, we believe lower interest rates should continue to
provide the U.S. stock market with a degree of liquidity and support for values.
In this expected environment of scarce earnings growth, we believe
small-capitalization companies should generate above-average earnings growth and
should perform well in 1996. We thank you for your investment in The
Inefficient-Market Fund.
Sincerely,
/s/ Heath B. McLendon
Heath B. McLendon
Chairman and Chief Executive Officer
2
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The Inefficient-Market Fund, Inc.
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Schedule of Investments December 31, 1995
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SHARES SECURITY VALUE
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COMMON STOCKS -- 96.2%
Autos & Transportation -- 3.5%
2,900 ABC Rail Products Corp.* $ 64,162
4,900 Bandag Corp. 265,212
5,400 Comair Holdings Inc. 145,125
7,000 Echlin Inc. 255,500
4,800 Northwest Airlines Corp., Class A Shares* 244,800
7,600 TNT Freightways Corp. 152,950
5,900 Trinity Industries Inc. 185,850
7,000 Varity Corp.* 259,875
7,100 Varlen Corp. 152,650
1,900 Wisconsin Central Transportation Corp.* 124,925
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1,851,049
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Consumer Discretionary -- 16.8%
7,500 Alberto Culver Co., Class B Shares 257,812
9,000 Apple South Inc. 193,500
8,500 Boston Chicken Inc.* 273,062
11,700 Callaway Golf Co. 264,712
14,600 Carter-Wallace Inc. 166,075
7,800 Claire's Stores Inc. 137,475
7,200 Clear Channel Communications, Inc.* 317,700
4,700 Department 56 Inc.* 180,362
3,800 Dollar General Corp. 78,850
5,600 Eckerd Drugs Inc.* 249,900
10,200 Federated Department Stores, Inc.* 280,500
6,200 Flightsafety International Inc. 311,550
9,900 General Nutrition Co.* 227,700
7,200 Great Atlantic & Pacific Tea Company, Inc. 165,600
5,355 Harman International Industries, Inc. 214,869
6,600 Heritage Media Corp., Class A Shares* 169,125
4,600 HFS Inc.* 376,050
9,000 Infinity Broadcasting Co., Class A Shares* 335,250
6,100 Kohl's Corp.* 320,250
8,100 La Quinta Inns Inc. 221,737
12,000 Lee Enterprises, Inc. 276,000
6,000 Leggett & Platt Inc. 145,500
4,100 Liz Claiborne Inc. 113,775
7,700 National Service Industries Inc. 249,287
3,600 New York Times Co., Class A Shares 106,650
7,000 Officemax Inc.* 156,625
5,200 Omnicom Group, Inc. 193,700
5,700 Papa John's International Inc.* 234,769
See Notes to Financial Statements.
3
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The Inefficient-Market Fund, Inc.
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Schedule of Investments (continued) December 31, 1995
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SHARES SECURITY VALUE
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Consumer Discretionary -- 16.8% (continued)
5,700 Paycheck Inc. $ 284,287
5,200 Players International Inc.* 55,575
4,700 Pulitizer Publishing Co. 224,425
6,600 Rite Aid Corp. 226,050
2,900 Springs Industries Inc. 119,987
4,900 St. John Knits Inc. 260,312
10,500 Staples Inc.* 255,937
6,400 Starbucks Corp.* 134,400
12,500 Stop & Shop Cos. Inc.* 289,062
3,000 Tandy Corp. 124,500
2,500 Whirlpool Corp. 133,125
9,800 Wolverine Worldwide Inc. 308,700
16,300 Zale Corp.* 262,837
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8,897,582
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Consumer Staples -- 2.8%
6,200 Dole Food Inc. 217,000
8,800 Hormel Foods Corp. 216,700
7,900 Hudson Foods Inc. 136,275
5,300 IBP Inc. 267,650
8,900 Robert Mondavi Corp., Class A Shares* 245,862
4,800 Ralcorp Holdings Inc.* 116,400
11,900 Whitman Corp. 276,675
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1,476,562
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Financial Services--- 16.8%
6,000 Allied Group Inc. 216,000
7,600 Allmerica Property & Casualty Cos., Inc. 205,200
8,700 American Bankers Insurance Group Inc. 339,300
7,300 American Re Corp. 298,387
14,400 California Federal Bank, Class A Shares* 226,800
3,600 CMAC Investment Corp. 158,400
3,700 Crestar Financial Corp. 218,763
6,600 Dauphin Deposit Corp. 189,750
10,100 Executive Risk Inc. 292,900
2,700 Finvoa Group Inc. 130,275
500 First Financial Bancorp 17,625
6,900 First Michigan Bank Corp. 191,475
7,800 First Securities Corp. 300,300
5,600 First Tennessee National Corp. 338,800
8,400 Great Financial Corp. 197,400
8,600 Green Tree Financial Corp. 226,825
1,500 Integrated Financial Group 94,500
See Notes to Financial Statements.
4
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The Inefficient-Market Fund, Inc.
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Schedule of Investments (continued) December 31, 1995
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SHARES SECURITY VALUE
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Financial Services -- 16.8% (continued)
4,200 Leader Financial Corp. $ 156,975
3,000 Magic Investment Corp. 162,750
7,700 Marshall & Ilsley Corp. 200,200
4,000 Mercantile Bancorp Inc. 184,000
6,600 Mercantile Bankshares Co. 183,975
8,250 Mercury Financial Corp. 109,313
3,200 Mutual Risk Management Ltd. 146,400
2,200 Old Kent Financial Corp. 90,475
11,800 Penncorp Financial Group, Inc. 346,625
6,700 Peoples Bank Bridgeport 127,300
7,500 Protective Life Corp. 234,375
6,400 Reinsurance Group of America 234,400
5,700 Reliance Bancorp Inc. 83,363
12,500 Signet Banking Corp. 296,875
4,600 Southern National Corp. 120,750
4,400 Southtrust Corp. 112,750
13,600 Sovereign Bancorp Inc. 137,700
7,800 Standard Federal Bancorp 307,125
3,900 Star Banc Corp. 232,050
6,300 Sunamerica Inc. 299,250
6,600 Tig Holdings Inc. 188,100
2,300 Transatlantic Holdings, Inc. 168,763
2,700 UJB Financial Corp. 96,525
9,100 Union Planters Corp. 290,063
7,500 United Carolina Bancshares Inc. 253,125
12,200 Washington Mutual Inc. 352,275
5,300 Zurich Reinsurance Centre Holdings, Inc. 160,988
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8,919,190
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Healthcare -- 9.7%
7,100 American Medical Response, Inc.* 230,750
15,000 Biomet Inc.* 268,125
800 Cordis Corp.* 80,400
10,000 FHP International Corp.* 285,000
3,300 Genzyme Corp.* 205,838
16,200 Health Management Associates, Inc.* 423,225
6,600 Healthcare Compare Corp.* 287,100
3,500 Healthsouth Rehabilitation Corp.* 101,938
9,400 Heart Technology Inc.* 309,025
7,800 Lincare Holdings Inc.* 195,000
7,100 Living Centers of America Inc.* 248,500
8,700 Mylan Laboratories Inc. 204,450
13,800 Ornda Healthcorp* 320,850
See Notes to Financial Statements.
5
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The Inefficient-Market Fund, Inc.
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Schedule of Investments (continued) December 31, 1995
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SHARES SECURITY VALUE
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Healthcare -- 9.7% (continued)
1,500 Oxford Health Plans, Inc.* $ 110,813
2,100 Pacificare Health Systems Inc., Class B Shares* 182,700
6,600 Physicians Health Services Inc.* 244,200
4,300 Renal Treatment Centers Inc.* 189,200
3,400 Sierra Health Services Inc.* 107,950
5,200 Stryker Corp. 273,000
11,000 Sybron International Corp.* 261,250
9,300 Uromed Corp.* 119,738
8,457 Value Health Inc.* 232,568
5,300 Watson Pharamaceuticals Inc.* 259,700
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5,141,320
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Materials & Processing -- 12.0%
3,200 ACX Technologies, Inc.* 48,400
8,100 Airgas Inc.* 269,325
9,000 Alumax Inc.* 275,625
4,300 American Health Properties, Inc. 92,450
3,100 Aptargroup Inc. 115,863
3,400 Avery Dennison Corp. 170,425
9,500 Ball Corp. 261,250
9,000 BMC Industries Inc. 209,250
8,200 Bowater Inc. 291,100
3,200 Cabot Corp. 172,400
7,900 Cali Realty Corp. 172,813
2,600 Chesapeake Corp. 77,025
8,000 Commerical Metal Co. 198,000
6,000 Crompton & Knowles Corp. 79,500
7,500 First Mississippi Corp. 198,750
5,271 First Mississippi Gold Inc.* 117,280
5,600 Granite Construction Inc. 176,400
3,400 Healthcare Investments Inc. 119,425
9,500 Homestake Mining Co. 148,438
2,600 IMC Global Inc. 106,275
4,800 Loctite Corp. 228,000
8,400 Meditrust Corp. 292,950
8,600 Medusa Corp. 227,900
9,500 Merry Land & Investments Co., Inc. 224,438
2,900 Nationwide Health Properties Inc. 121,800
3,600 Nucor Corp. 205,650
1,200 Owens - Corning Fiberglass Corp.* 53,850
6,800 Ply-Gem Industries, Inc. 110,500
5,100 Potlatch Inc. 204,000
10,400 Public Storage Inc. 197,600
See Notes to Financial Statements.
6
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The Inefficient-Market Fund, Inc.
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Schedule of Investments (continued) December 31, 1995
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SHARES SECURITY VALUE
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Materials & Processing -- 12.0% (continued)
9,000 Rouse Co. $ 183,375
10,800 Security Capital Pacific Trust 213,300
9,600 Simon Property Group Inc. 234,000
8,100 Storage U.S.A. Inc. 264,263
4,700 Terra Industries Inc. 66,388
6,500 Wolvervine Tube Inc.* 243,750
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6,371,758
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Other Energy -- 3.7%
10,000 Apache Corp. 295,000
8,300 Camco International Corp. 232,400
14,300 Ensco International Inc.* 328,900
5,100 Louisiana Land & Exploration Co. 218,663
9,300 Noble Affiliates Inc. 277,838
6,200 Smith International Inc.* 145,700
6,100 Tidewater Inc. 192,150
14,300 Union Texas Petroleum Holdings, Inc. 277,063
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1,967,714
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Producer Durables -- 7.8%
9,300 Baldor Electric Co. 187,163
10,200 Commerical Intertech Corp. 184,875
7,100 Crane Co. 261,813
7,000 Danaher Corp. 222,250
1,700 Duriron Company Inc. 39,737
10,000 Harnischfeger Industries, Inc. 332,500
2,400 Harsco Corp. 139,500
4,100 Idex Corp. 167,075
7,700 Measurex Corp. 217,525
8,300 Millipore Corp. 341,338
4,700 Parker - Hannifin Corp. 160,975
9,800 Pulte Corp. 329,525
9,800 Sanifll Inc.* 327,075
6,400 Stewart and Stevenson Service Inc. 161,600
4,200 Sunstrand Corp. 295,575
13,500 Thermo Fibertek Inc.* 305,437
7,500 United Waste Systems Inc.* 279,375
3,500 Watkins Johnson Co. 153,125
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4,106,463
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Technology -- 13.8%
4,000 ADC Telecommunications Inc.* 146,000
4,900 Adobe Systems Inc. 303,800
See Notes to Financial Statements.
7
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The Inefficient-Market Fund, Inc.
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Schedule of Investments (continued) December 31, 1995
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SHARES SECURITY VALUE
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Technology -- 13.8% (continued)
1,500 Alliance Semiconductor Corp.* $ 17,437
12,600 Amphenol Corp., Class A Shares* 305,550
9,600 Analog Devices Inc.* 339,600
8,000 Andrew Corp.* 306,000
4,100 Arrow Electronics Inc.* 176,812
6,000 Atmel Corp.* 134,250
7,500 Autodesk Inc. 256,875
7,650 Bay Networks Inc.* 314,606
3,100 Cabletron Systems Inc.* 251,100
9,300 Cadence Design Systems Inc.* 390,600
4,200 Cidco Inc.* 107,100
3,100 Cirrus Logic Inc.* 61,225
4,800 Concord Efs Inc.* 202,800
7,800 Credence Systems Corp.* 178,425
19,100 Cypress Semiconductor Co.* 243,525
13,900 EMC Corp.* 213,712
6,900 FSI International Inc.* 139,725
9,200 Gateway 2000 Inc.* 225,400
3,500 HBO & Co. 268,187
3,600 In Focus Systems Inc.* 130,050
10,800 Informix Corp.* 324,000
3,400 Intergated Device Technology Inc.* 43,775
13,400 International Rectifier Corp.* 335,000
4,700 Lam Research Corp.* 215,025
2,100 LSI Logic Corp.* 68,775
4,900 Microchip Technology Inc.* 178,850
5,500 Read-Rite Corp.* 127,875
3,600 Seagate Technology Inc.* 171,000
7,600 Sungard Data Systems Inc.* 216,600
7,500 Symbol Technologies Inc.* 296,250
1,200 Tellabs Inc.* 44,400
6,500 Tencor Instruments Co.* 158,437
3,900 Threecom Corp.* 181,837
1,700 U.S. Robotics Corp.* 149,175
2,100 Vishay Intertechnology Inc.* 66,150
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7,289,928
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Utilities -- 9.3%
4,700 Bay State Gas Co. 130,425
10,100 Boston Edison Co. 297,950
9,100 Brooklyn Union Gas Co. 266,175
2,067 Castle & Cooke Inc.* 34,617
5,300 Century Telephone Enterprises Inc. 168,275
See Notes to Financial Statements.
8
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The Inefficient-Market Fund, Inc.
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Schedule of Investments (continued) December 31, 1995
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SHARES SECURITY VALUE
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Utilities -- 9.3% (continued)
7,800 Delmarva Power & Lighting Co. $ 177,450
6,700 El Paso Natural Gas Co. 190,112
8,100 Illinova Corp. 243,000
10,700 Kansas City Power & Lighting Co. 279,538
5,300 LG & E Energy Corp. 223,925
12,600 MCN Corp. 292,950
7,300 Metricom Inc.* 99,462
6,700 Nicor Inc. 184,250
4,400 Nipsco Industries, Inc. 168,300
7,000 Panhandle Eastern Corp. 195,125
11,500 Piedmont Natural Gas Co. 267,375
5,100 Pinnacle West Capital Corp. 146,625
8,800 Portland General Corp. 256,300
6,000 Public Service Co. 212,250
7,600 Scana Corp. 217,550
9,200 South Jersey Industries Inc. 212,750
5,700 Teco Energy Inc. 146,063
6,700 Wisconsin Energy Corp. 205,188
8,100 Worldcom Inc.* 285,525
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4,901,180
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TOTAL COMMON STOCKS (Cost -- $47,319,499) 50,922,746
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FACE
AMOUNT SECURITY VALUE
================================================================================
U.S. GOVERNMENT OBLIGATIONS -- 0.5%
$ 20,000 U.S. Treasury Bill due 2/29/96 19,980
55,000 U.S. Treasury Bill due 6/27/96++ 53,490
190,000 U.S. Treasury Bill due 6/13/96++ 185,541
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TOTAL U.S. GOVERNMENT OBLIGATIONS (Cost -- $259,005) 259,011
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REPURCHASE AGREEMENT -- 3.3%
1,777,000 Chemical Securities Inc., 5.79% due 1/2/96;
Proceeds at maturity -- $1,778,145;
(Fully collateralized by U.S. Treasury Notes,
6.125% due 5/31/97; Market value -- 1,812,587)
(Cost -- $1,777,000) 1,777,000
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TOTAL INVESTMENTS -- 100% (Cost -- $49,355,504)+ $52,958,757
================================================================================
* Non-income producing security.
++ Security segregated by custodian for futures contracts commitments.
+ Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
9
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The Inefficient-Market Fund, Inc.
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Statement of Assets and Liabilities December 31, 1995
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ASSETS:
Investments, at value (Cost -- $49,355,504) $52,958,757
Cash 226,951
Receivable for securities sold 668,528
Receivable from broker 8,150
Dividends and interest receivable 57,877
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Total Assets 53,920,263
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LIABILITIES:
Realized gains distributions payable 651,782
Payable for securities purchased 544,334
Income dividends payable 35,482
Investment advisory fees payable 23,607
Administration fees payable 22,255
Accrued expenses and other liabilities 96,974
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Total Liabilities 1,374,434
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Total Net Assets $52,545,829
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NET ASSETS:
Par value of capital shares $ 4,384
Capital paid in excess of par value 48,742,718
Treasury stock, at cost (Note 5) (614,298)
Overdistributed net investment income (21,923)
Accumulated net realized gain on security
transactions and futures 827,098
Net unrealized appreciation on investments and futures 3,607,850
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Total Net Assets
(Equivalent to $12.15 a share on 4,324,950 shares of $0.001 par
value outstanding; authorized 100,000,000 shares) $52,545,829
================================================================================
See Notes to Financial Statements.
10
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The Inefficient-Market Fund, Inc.
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Statement of Operations For the Year Ended December 31, 1995
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INVESTMENT INCOME:
Dividends $ 646,804
Interest 500,977
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Total Investment Income 1,147,781
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EXPENSES:
Management fees (Note 2) 418,387
Administration fees (Note 2) 139,463
Custody 31,007
Shareholder and system servicing fees 21,992
Directors' fees 21,991
Shareholder communications 15,000
Audit and legal 13,195
Other 20,094
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Total Expenses 681,129
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Net Investment Income 466,652
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REALIZED AND UNREALIZED GAIN ON
INVESTMENTS AND FUTURES (NOTES 3 AND 6):
Realized Gain From:
Security transactions (excluding short-term securities) 9,360,625
Futures contracts 395,925
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Net Realized Gain 9,756,550
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Change in Net Unrealized Appreciation of Investments and Futures:
Beginning of year 3,474,465
End of year 3,607,850
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Increase in Net Unrealized Appreciation 133,385
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Net Gain on Investments and Futures 9,889,935
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Increase in Net Assets From Operations $10,356,587
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See Notes to Financial Statements.
11
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The Inefficient-Market Fund, Inc.
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Statements of Changes in Net Assets For the Years Ended December 31,
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1995 1994
================================================================================
OPERATIONS:
Net investment income $ 466,652 $ 228,974
Net realized gain 9,756,550 2,260,846
Increase (decrease) in net unrealized
appreciation 133,385 (5,056,044)
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Increase (Decrease) in
Net Assets From Operations 10,356,587 (2,566,224)
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DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (460,174) (228,845)
Net realized gains (8,377,613) (372,640)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (8,837,787) (601,485)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS:
Treasury stock acquired (Note 5) (614,298) --
- --------------------------------------------------------------------------------
Decrease in Net Assets
From Fund Share Transactions (614,298) --
- --------------------------------------------------------------------------------
Increase (Decrease) In Net Assets 904,502 (3,167,709)
NET ASSETS:
Beginning of year 51,641,327 54,809,036
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End of year* $52,545,829 $51,641,327
================================================================================
* Includes undistributed (overdistributed)
net investment income: $(21,923) $701
================================================================================
See Notes to Financial Statements.
12
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The Inefficient-Market Fund, Inc.
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Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Inefficient-Market Fund, Inc. ("Fund"), a Maryland corporation, is
registered under the Investment Company Act of 1940, as amended, as a
non-diversified, closed-end management investment company.
The significant accounting policies consistently followed by the Fund are:
(a) securities transactions are accounted for on the trade date; (b) securities
traded on a national securities exchange or on the NASDAQ National Market System
are valued at closing prices on such exchange or market; securities for which no
sales prices are reported and securities traded on other over-the-counter
markets are valued at the mean between the most recently quoted bid and asked
prices; short-term investments that have a maturity of more than 60 days are
valued at prices based on market quotations for securities of similar type,
yield and maturity; (c) short-term investments that have a maturity of 60 days
or less are valued at cost plus accreted discount, or minus amortized premium,
as applicable; (d) dividend income is recorded on the ex-dividend date and
interest income is recorded on the accrual basis; (e) gains or losses on the
sale of securities are calculated by using the specific identification method;
(f) the Fund intends to comply with the applicable provisions of the Internal
Revenue Code of 1986, as amended, pertaining to regulated investment companies
and to make distributions of taxable income sufficient to relieve it from
substantially all Federal income and excise taxes; (g) the character of income
and gains to be distributed are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles. At
December 31, 1995, reclassifications were made to the Fund's capital accounts to
reflect permanent book/tax differences and income and gains available for
distributions under income tax regulations. Accordingly, a portion of
overdistributed net investment income amounting to $99 has been reclassified to
paid-in capital. Net investment income, net realized gains and net assets were
not affected by this change; and (h) estimates and assumptions are required to
be made regarding assets, liabilities and changes in net assets resulting from
operations when financial statements are prepared. Changes in the economic
environment, financial markets and any other parameters used in determining
these estimates could cause actual results to differ from these amounts.
2. MANAGEMENT AGREEMENT AND TRANSACTIONS WITH
AFFILIATED PERSONS
Travelers Investment Management Company ("TIMCO"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment manager to the Fund. The Fund
pays TIMCO a fee calculated at the annual rate of 0.75% of the Fund's average
daily net assets. This fee is calculated daily and paid monthly.
Smith Barney Mutual Funds Management Inc. ("SBMFM"), another subsidiary of
SBH, acts as the Fund's administrator. SBMFM administers the Fund's corporate
affairs subject to the supervision of the Fund's Board of Directors and bears
the salaries and expenses of all its personnel and such other expenses incurred
in the ordinary course of the Fund's business, other than those assumed by the
Fund. As compensation for its services, the Fund pays SBMFM a fee calculated at
the annual rate of 0.25% of the Fund's average daily net assets. This fee is
calculated daily and paid monthly.
13
<PAGE>
The Inefficient-Market Fund, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
For the year ended December 31, 1995, Smith Barney Inc. ("SB"), also a
subsidiary of SBH, was paid brokerage commissions of $32,635 by the Fund on
agency portfolio transactions.
All officers and three Directors of the Fund are employees of SB.
3. INVESTMENTS
For the year ended December 31, 1995, the total aggregate cost of purchases
and proceeds from sales of investments (excluding short-term investments) were
$83,575,563 and $83,210,474, respectively. At December 31, 1995, aggregate gross
unrealized appreciation for all securities in which there is an excess of market
value over tax cost amounted to approximately $6,029,362, and aggregate gross
unrealized depreciation for all securities in which there is an excess of tax
cost over market value amounted to approximately $2,426,109 or a net unrealized
appreciation of $3,603,253.
4. REPURCHASE AGREEMENTS
The Fund purchases (and its custodian takes possession of) U.S. Government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Fund requires daily maintenance of
the market value of the collateral in amounts at least equal to the repurchase
price.
5. CAPITAL SHARES
On June 8, 1995, the Fund commenced a share repurchase plan. As of December
31, 1995, 59,050 shares had been repurchased.
6. FUTURES CONTRACTS
Initial margin deposits are made upon entering into futures contracts and
are recognized as assets. The initial margin is segregated by the custodian as
is noted in the schedule of investments. During the period the futures contract
is open, changes in the value of the contract are recognized as unrealized gains
or losses by "marking to market" on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
made or received and recognized as assets due from or liabilities due to broker,
depending upon whether unrealized gains or losses are incurred. When the
contract is closed, the Fund records a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transaction and
the Fund's basis in the contract.
At December 31, 1995, the Fund had the following open futures contracts:
Futures contracts Expiration # of Basic Market Unrealized
purchased Month/Year Contracts Value Value Gain (Loss)
================================================================================
MIDCAP 400 3/96 17 $1,863,956 $1,853,425 $(10,531)
Russell 2000 3/96 2 304,022 319,150 15,128
- --------------------------------------------------------------------------------
$ 4,597
================================================================================
14
<PAGE>
The Inefficient-Market Fund, Inc.
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $11.78 $12.50 $11.49 $10.34 $9.32
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.11 0.05 0.01 0.05 0.13
Net realized and unrealized gain (loss) 2.31 (0.63) 1.01 1.15 1.82
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 2.42 (0.58) 1.02 1.20 1.95
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.11) (0.05) (0.01) (0.05) (0.14)
Net realized gains(1) (1.94) (0.09) -- -- (0.79)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (2.05) (0.14) (0.01) (0.05) (0.93)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $12.15 $11.78 $12.50 $11.49 $10.34
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 18.90% (4.36)% 8.90% 11.71% 22.69%
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $52,546 $51,641 $54,809 $50,374 $45,335
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.22% 1.22% 1.24% 1.36% 1.28%
Net investment income 0.84 0.43 0.08 0.45 1.26
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 176.95% 44.80% 86.86% 45.67% 46.77%
- ------------------------------------------------------------------------------------------------------------------------------------
Market Price at End of Year $9.813 $9.500 $10.500 $9.875 $8.875
- ------------------------------------------------------------------------------------------------------------------------------------
Average commissions paid on
equity security transactions(2) $0.050 -- -- -- --
====================================================================================================================================
</TABLE>
(1) Includes short-term realized gains distributions which are considered
ordinary income for Federal tax purposes.
(2) New SEC disclosure guidelines require that average commissions per share be
calculated for the current year only.
15
<PAGE>
The Inefficient-Market Fund, Inc.
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors
of The Inefficient-Market Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of The Inefficient-Market Fund, Inc. as of December
31, 1995, the related statement of operations for the year then ended, the
statement of changes in net assets for each of the years in the two-year period
then ended and the financial highlights for each of the years in the five-year
period then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995, by correspondence with the custodian. As to securities
purchased and sold but not received or delivered, we performed other appropriate
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of The
Inefficient-Market Fund, Inc. as of December 31, 1995, the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended and the financial highlights for
each of the years in the five-year period then ended, in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
February 2, 1996
16
<PAGE>
The Inefficient-Market Fund, Inc.
- --------------------------------------------------------------------------------
Financial Data (unaudited)
- --------------------------------------------------------------------------------
For a share of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Dividend and
Price Price at NAV at Premium(+) Capital Gain
Period Range Quarter-End Quarter-End Discount(-) Distributions
==========================================================================================
<C> <C> <C> <C> <C> <C>
1990
1st Quarter* $12 1/8-11 $11 5/8 $11.10 + 5% --
2nd Quarter 11 5/8-9 7/8 11 11.40 - 4 $0.100
3rd Quarter 11 7/8-7 5/8 7 3/4 9.22 -16 --
4th Quarter 9-7 8 3/8 9.32 -10 0.270
1991
1st Quarter 10 1/4-7 7/8 9 1/8 10.70 -15 --
2nd Quarter 10-8 7/8 9 3/8 10.61 -12 0.300
3rd Quarter 9 3/8-8 7/8 9 3/8 10.85 -14 --
4th Quarter 9 5/8-8 1/4 8 7/8 10.34 -14 0.632
1992
1st Quarter 11 1/4-8 7/8 10 1/2 11.88 -12 --
2nd Quarter 10 7/8-9 9 1/4 10.65 -13 0.040
3rd Quarter 9 7/8-9 1/8 9 1/4 10.55 -12 --
4th Quarter 10 3/8-8 7/8 9 7/8 11.49 -14 0.010
1993
1st Quarter 10 1/2-9 3/4 10 11.30 -12 --
2nd Quarter 10-9 1/4 9 5/8 11.29 -15 0.010
3rd Quarter 10 3/8-9 1/2 10 3/8 12.25 -15 --
4th Quarter 10 3/4-10 1/8 10 1/2 12.50 -16 --
1994
1st Quarter 10 1/4-11 10 1/4 12.38 -17 --
2nd Quarter 9 1/2-10 1/8 9 1/2 11.78 -19 --
3rd Quarter 9 1/2-10 9 5/8 12.33 -22 --
4th Quarter 9-9 7/8 9 1/2 11.78 -19 0.140
1995
1st Quarter 9 1/4-9 7/8 9 5/8 12.24 -21 --
2nd Quarter 9 3/4-10 3/8 10 1/8 12.99 -22 --
3rd Quarter 10 1/8-11 1/8 10 3/4 13.74 -22 --
4th Quarter 9 1/2-11 1/2 9 13/16 12.15 -19 2.050
==========================================================================================
</TABLE>
* For the period from January 23, 1990 (commencement of operations) to March
31, 1990.
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
The amount of long-term capital gains paid by the Fund to its shareholders
for the fiscal year ended December 31, 1995, was $5,200,032.
17
<PAGE>
The Inefficient-Market Fund, Inc.
- --------------------------------------------------------------------------------
Additional Shareholder Information (unaudited)
- --------------------------------------------------------------------------------
On July 7, 1995 the annual meeting of the shareholders of the Fund was held
for the purpose of voting on the following matters:
1. To elect to the Board one class of directors consisting of three
directors;
2. To approve or disapprove the selection of KPMG Peat Marwick LLP as the
independent auditors for the Fund; and
3. To approve or disapprove a new investment advisory agreement between
the Fund and Travelers Investment Management Company, a wholly-owned
subsidiary of Smith Barney Holdings Inc., the parent company of the
Fund's administrator, containing substantially the same terms and
conditions, including the same level of fees, as the Fund's current
investment advisory agreement.
The results of the vote on Proposal 1 were as follows:
% of % of
Outstanding Outstanding
Directors Votes For Shares Voted Votes Against Shares Voted
- ------------ --------- ------------ ------------- ------------
Francis P. Martin 3,514,038 93.19% 256,833 6.81%
Bruce D. Sargent 3,517,848 93.29 253,023 6.71
Roderick C. Rasmussen 3,508,038 93.03 262,833 6.97
The results of the vote on Proposal 2 were as follows:
<TABLE>
<CAPTION>
% of % of % of
Outstanding Outstanding Outstanding
Votes For Shares Voted Votes Against Shares Voted Votes Abstaining Shares Voted
--------- ------------ ------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
3,659,110 97.04% 94,855 2.52% 16,906 0.44%
</TABLE>
The results of the vote on Proposal 3 were as follows:
<TABLE>
<CAPTION>
% of % of % of
Outstanding Outstanding Outstanding
Votes For Shares Voted Votes Against Shares Voted Votes Abstaining Shares Voted*
--------- ------------ ------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
3,384,873 89.76% 183,008 4.85% 33,858 5.39%
</TABLE>
* In addition, there are approximately 169,132 broker non-votes included in
the amount abstaining.
18
<PAGE>
The Inefficient-Market Fund, Inc.
- --------------------------------------------------------------------------------
Dividend Reinvestment Plan
- --------------------------------------------------------------------------------
Pursuant to the Fund's Dividend Reinvestment Plan ("Plan"), all distributions
are automatically reinvested by First Data Investor Services Group, Inc.
(formerly known as "The Shareholder Services Group, Inc."), as plan agent ("Plan
Agent"), in additional shares of its Common Stock ("Common Shares") as provided
below unless a stockholder elects to receive cash.
Distributions with respect to Common Shares registered in the name of a
broker-dealer or other nominee (i.e., in "street name") are reinvested by the
broker or nominee in additional Common Shares under the Plan, unless the service
is not provided by the broker or nominee. Investors who own Common Shares
registered in street name should consult their broker-dealer for details. All
distributions to stockholders who do not participate in the Plan are paid by
check mailed directly to the record holder by First Data Investor Services
Group, Inc., as dividend disbursing agent.
If the Fund declares a distribution payable either in Common Shares or in cash,
nonparticipants in the Plan receive cash, and Plan participants receive the
equivalent in Common Shares valued in the following manner: whenever the market
price is equal to or exceeds the net asset value per share at the time Common
Shares are valued for the purpose of determining the number of Common Shares
equivalent to the cash distribution, participants are issued Common Shares
valued at the greater of (1) the net asset value most recently determined or (2)
95% of the then current market price of the Common Shares.
If the net asset value of the Common Shares at the time of valuation exceeds the
market price of the Common Shares, or if the Fund declares a distribution
payable only in cash, the Plan Agent buys Common Shares in the open market, on
the American Stock Exchange or elsewhere, for the participants' accounts. If,
following the commencement of purchases and before the Plan Agent has completed
its purchases, the market price exceeds the net asset value of the Common
Shares, the average per Common Share purchase price paid by the Plan Agent may
exceed the net asset value of the Common Shares, resulting in the acquisition of
fewer Common Shares than if the distribution had been paid in Common Shares
issued by the Fund at net asset value. The Plan Agent applies all cash received
as a distribution to purchase Common Shares on the open market as soon as
practicable after the payment date of the distribution, but in no event later
than 45 days after such date, except when necessary to comply with applicable
provisions of the Federal securities laws.
19
<PAGE>
The Inefficient-Market Fund, Inc.
- --------------------------------------------------------------------------------
Dividend Reinvestment Plan (continued)
- --------------------------------------------------------------------------------
Participants in the Plan may withdraw from the Plan upon written notice to the
Plan Agent which must be received at least ten business days prior to the
distribution record date to become effective for that distribution. Shares in
the account of each Plan participant are held by the Plan Agent in
non-certificated form in the name of the Plan Agent or participant. When a
participant withdraws from the Plan or upon termination of the Plan as provided
below, certificates for whole Fund shares credited to his or her account under
the Plan are issued and a cash payment is made for any fraction of a Fund share
credited to such account.
The automatic reinvestment of distributions does not relieve participants to any
Federal income tax that may be payable on such distributions.
The Fund does not charge participants for reinvesting distributions. Any Plan
Agent's fees for the handling of reinvestment of distributions under the Plan
are paid by the Fund. There are no brokerage charges with respect to Common
Shares issued directly by the Fund as a result of distributions payable either
in stock or in cash. However, each participant pays a pro rata share of
brokerage commissions incurred with respect to the Plan Agent's open market
purchases in connection with the reinvestment of distributions.
Experience under the Plan may indicate that changes are desirable. Accordingly,
the Fund and the Plan Agent reserve the right to amend the Plan as applied to
any distribution paid subsequent to written notice of the change sent to all
stockholders of the Fund at least 90 days before the record date for the
distribution. The Plan also may be terminated by the Fund or the Plan Agent by
at least 30 days' written notice to all stockholders of the Fund. All
correspondence concerning the Plan should be directed to the Plan Agent at First
Data Investor Services Group, Inc., P.O. Box 1376, Boston, MA 02104.
20
<PAGE>
SMITH BARNEY
------------
A Member of Travelers Group [LOGO]
The Inefficient-
Market Fund, Inc.
Directors
Jessica M. Bibliowicz
Joseph H. Fleiss
Donald R. Foley
Paul Hardin
Francis P. Martin, M.D.
Heath B. McLendon, Chairman
Roderick C. Rasmussen
Bruce D. Sargent
John P. Toolan
C. Richard Youngdahl
Officers
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
Kent A. Kelley
Vice President
Sandip A. Bhagat
Vice President
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Investment Manager
Travelers Investment
Management Company
Distributor
Smith Barney Inc.
Custodian
PNC Bank
Shareholder Servicing Agent
First Data Investor Services Group, Inc.
P.O. Box 1376
Boston, MA 02104
This report is submitted for the general information of the shareholders of the
The Inefficient-Market Fund, Inc. It is not authorized for distribution to
prospective investors unless accompanied or preceded by a current Prospectus for
the Fund, which contains information concerning the Fund's investment policies
and expenses as well as other pertinent information.
The Inefficient-
Market Fund, Inc.
388 Greenwich Street
New York, New York 10013
FD0849 2/96
