SEMI-ANNUAL REPORT
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The Inefficient-
Market
Fund, Inc.
----------------------------------------
June 30, 1996
[Logo] Smith Barney Mutual Funds
Investing for your future.
Every day.
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The Inefficient-Market Fund, Inc.
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Dear Shareholder:
We are pleased to provide you with the semi-annual report for The
Inefficient-Market Fund, Inc. for the six-month period ended June 30, 1996. In
this letter, we have commented on the market's prevailing economic and market
conditions and briefly review the Fund's investment strategy. A detailed summary
of performance and current holdings can be found in the appropriate sections
that follow in the semi-annual report.
Fund Performance Update
Stock prices moved broadly higher during the first half of 1996, helped by solid
earnings gains and record mutual fund inflows. The Inefficient-Market Fund
achieved a total return of 10.62% on net asset value (NAV) during this period.
This compares favorably to the Russell 2500 Index return of 10.30% and the
Standard and Poor's 500 Stock Index return of 10.09% for the same period. (The
Russell 2500 Index represents companies with small to mid-sized market
capitalizations and the Standard and Poor's 500 Stock Index is a capitalization
weighted-index of 500 widely held common stocks.) As of June 30, 1996, the
Fund's NAV was $13.44 and its American Stock Exchange (AMEX) closing price was
$11.375.
On June 21, 1996, The Inefficient-Market Fund announced a distribution of $0.60
per share payable July 26, 1996. This distribution represents a short-term
capital gain of $0.41 per share and a long-term capital gain of $0.19 per share.
Economic and Market Overview
While more than half of corporate America announced positive earnings for the
first quarter of 1996, the 6% gain in operating earnings was the most sluggish
year-over-year rate of earnings growth in recent years. In the bond market,
investors reacted negatively to stronger-than-expected U.S. economic growth,
driving the yield on the 30-year Treasury bond to above the psychological 7%
level. Against the backdrop of rising interest rates and diminishing earnings
momentum, liquidity factors, such as record mutual fund inflows, merger activity
and corporate stock repurchases, appeared to provide critical catalysts for the
rising stock market.
During the first half of 1996, many investors reduced their holdings in cyclical
issues and turned to more growth-oriented sectors, based upon
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expectations that higher interest rates would translate into slower U.S.
economic growth by the end of the year. Basic material stocks weakened in
response to a sharp drop in the prices for many industrial commodities. In the
consumer sector, improving sales fueled a rally in the retail and apparel
groups. Energy exploration, pipeline and distribution stocks benefited from
strong natural gas pricing. Within the technology sector, networking and
telecommunications equipment stocks rebounded on improving fundamentals and
rising earnings estimates, while computer hardware and semiconductor stocks
declined sharply in response to slower personal computer sales and generally
lower demand for computer memory chips.
During the first half of 1996, the Russell 2500 Index, outperformed the broader
S&P 500 Index. Smaller company stocks and growth-oriented funds in general were
up strongly relative to the broader stock market averages until June, when a
sharp correction occurred in the small-cap segment of the market. The technology
sector, which makes up a significant portion of the NASDAQ Composite Index and
acts as a bellwether for the growth stock universe, was the most negatively
impacted, primarily due to concerns over softening earnings. (The NASDAQ
Composite Index is an index of over-the-counter stocks.)
Investment Strategy
The Inefficient-Market Fund is managed by the Travelers Investment Management
Company ("TIMCO"). TIMCO's approach to equity management is designed to provide
diversified exposure to the small and mid-capitalization segments of the U.S.
equity market. TIMCO selects stocks through a quantitative screening process
that seeks attractive relative value and earnings growth. In order to achieve
consistent relative performance, TIMCO manages the Fund to mirror the overall
risk, sector weightings, and growth and value style characteristics of the
Russell 2500 Index.
During the first half of 1996, The Inefficient-Market Fund benefited from
significant price appreciation of stocks primarily in the consumer discretionary
and financial services sectors. Holdings that contributed significantly to the
Fund's overall performance were: HFS, Inc. (Hospitality Franchise Systems),
which specializes in the hotel franchising and residential real estate
businesses, and has recently expanded into the car rental business with its
acquisition of Avis; Callaway Golf, the designer and manufacturer of
high-quality golf clubs; Nautica, the men's casual wear manufacturer, which is
in the process of introducing a women's line of clothing; St. John's Knits, a
high-end women's knitwear designer; and Land's End, a popular catalog retailer.
The Fund's performance was also helped by the following stocks in
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the financial services sector: Executive Risk, Sun America and Allied Group in
the insurance group; and CMAC Investment and Green Tree Financial in the
consumer finance group.
Market Outlook
Given the recent rise in interest rates, the likelihood of slower economic
growth through the remainder of the year and the recent stock market correction,
we believe that careful stock selection is critical at this stage of the market
cycle. Price momentum has turned negative for the aggressive small-cap sector in
recent weeks. Moreover, in our view, growth stocks in certain consumer and
technology groups still appear to be overvalued. Consistent with our disciplined
approach to stock selection, we have focused on stocks with improving earnings
trends, but which trade at reasonable price-to-earnings multiples relative to
their expected growth rates. (The P/E mulitiple or ratio is the price of a stock
divided by its earnings per share. This figure generally gives investors an idea
of how much they are paying for a particular company's earning power.)
In closing, thank you for investing in The Inefficient-Market Fund. We look
forward to continuing to help you achieve your financial goals.
Sincerely,
/S/ Heath B. McLendon
Heath B. McLendon
Chairman and
Chief Executive Officer
July 22, 1996
3
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The Inefficient-Market Fund, Inc.
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Schedule of Investments (unaudited) June 30, 1996
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SHARES SECURITY VALUE
================================================================================
COMMON STOCKS -- 90.1%
Autos & Transportation -- 4.1%
7,800 ABC Rail Products Corp. $ 168,675
9,500 America West Airlines 209,000
6,500 Comair Holdings, Inc. 175,500
6,800 Fritz Companies, Inc.+ 219,300
3,300 GATX Corp. 159,225
7,000 Illinois Central Corp. 198,625
7,900 Lear Seating Corp.+ 278,475
3,500 Northwest Airlines Corp., Class A Shares + 138,250
8,700 Oakwood Homes 179,438
6,300 Trinity Industries, Inc. 214,200
8,100 U.S. Freightways Corp. 157,950
4,500 Wisconsin Central Transportation Corp.+ 146,250
3,300 XTRA Corp. 146,025
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2,390,913
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Consumer Discretionary -- 18.6%
5,000 A.H. Belo Corp. 186,250
6,700 Alberto Culver Co., Class B Shares 310,713
4,500 Alternative Resources Corp.+ 165,375
6,900 AMC Entertainment, Inc.+ 192,338
11,900 Apple South, Inc. 318,325
11,300 Boston Chicken, Inc.+ 367,250
7,100 Callaway Golf Co. 236,075
32,400 Chyron Corp. 202,500
6,600 CKE Restaurants, Inc. 168,300
1,500 Corrections Corp. of America 105,000
2,300 Department 56, Inc.+ 52,038
12,575 Dollar General Corp. 367,819
14,400 Eckerd Drugs, Inc.+ 325,800
3,100 Flightsafety International, Inc. 168,175
2,800 Garden Ridge Corp. 141,400
17,900 General Nutrition Co.+ 313,250
5,000 Grand Casinos Inc. 128,750
5,655 Harman International Industries, Inc. 278,509
6,100 Heritage Media Corp., Class A Shares+ 243,238
8,500 HFS, Inc.+ 595,000
16,200 Infinity Broadcasting Co., Class A Shares+ 486,000
5,300 Jones Medical Industries Inc. 176,225
8,700 Kohl's Corp.+ 318,638
8,900 Lands End, Inc. 220,275
4,900 Lin Television Corp. 176,400
11,400 Maytag Corp. 237,975
See Notes to Financial Statements.
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The Inefficient-Market Fund, Inc.
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Schedule of Investments (unaudited)(continued) June 30, 1996
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SHARES SECURITY VALUE
================================================================================
Consumer Discretionary -- 18.6% (continued)
6,800 The Mens Wearhouse, Inc. $ 219,300
6,700 Micro Warehouse, Inc. 134,000
5,000 Miller, Inc. 153,125
11,400 Nautica Enterprises, Inc.+ 327,750
12,700 Officemax, Inc. 303,213
2,800 Omnicom Group 130,200
5,000 Pulitizer Publishing Co. 296,250
3,900 Scholastic Corp. 241,800
9,600 Showboat, Inc. 289,200
3,100 Spring Industries, Inc. 156,550
12,050 Staples, Inc.+ 234,975
7,300 St. John Knits, Inc. 325,763
4,300 Tiffany & Co. 313,900
3,800 U.S. Office Products Co. 159,600
3,600 Viking Office Products, Inc.+ 112,950
6,800 Vons Companies, Inc.+ 254,150
10,400 Wolverine Worldwide, Inc. 338,000
17,300 Zale Corp.+ 291,938
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10,764,282
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Consumer Staples -- 2.3%
9,100 Dole Food, Inc. 391,300
3,900 IBP, Inc. 107,738
9,400 Robert Mondavi Corp., Class A Shares+ 296,100
7,800 Universal Corp. 206,700
12,600 Whitman Corp. 303,975
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1,305,813
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Financial Services -- 12.8%
4,900 Advanta Corp., Class A Shares 249,900
4,300 Allied Group, Inc. 187,050
6,800 American Bankers Insurance Group, Inc. 296,650
14,900 City National Corp. 234,675
400 CMAC Investment Corp. 23,000
1,900 Crestar Financial Corp. 101,413
7,000 Dauphin Deposit Corp. 199,500
6,400 Executive Risk, Inc. 244,800
5,600 Finova Group, Inc. 273,000
11,900 First Tennessee National Corp. 364,438
4,100 First Virginia Banks, Inc. 164,000
8,900 Great Financial Corp. 230,288
11,000 Green Tree Financial Corp. 343,750
10,600 Lehman Brothers Holdings, Inc. 262,350
7,000 Mercantile Bankshares Co. 178,500
See Notes to Financial Statements.
5
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The Inefficient-Market Fund, Inc.
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Schedule of Investments (unaudited)(continued) June 30, 1996
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SHARES SECURITY VALUE
================================================================================
Financial Services -- 12.8% (continued)
4,533 Mutual Risk Management Ltd. $ 141,667
2,415 Old Kent Financial Corp. 94,487
3,000 Old National Bancorp. 111,000
7,100 Peoples Bank Bridgeport 157,975
6,800 Reinsurance Group of America 256,700
11,200 Signet Banking Corp. 260,400
4,700 Southtrust Corp. 132,188
15,180 Sovereign Bancorp., Inc. 151,800
5,400 Standard Federal Bancorp. 207,900
3,900 Star Banc Corp. 262,763
2,800 Student Loan Marketing Association 207,200
3,800 Summit Bancorp. 133,475
6,700 Sunamerica, Inc. 378,550
7,000 Tig Holdings, Inc. 203,000
3,900 Transatlantic Holdings, Inc. 273,488
9,600 Union Planters Corp. 291,600
6,300 Unionbancal Corp. 333,113
8,300 Washington Mutual, Inc. 247,963
5,600 Zurich Reinsurance Center, Inc. 176,400
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7,374,983
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Healthcare -- 8.0%
3,000 Alza Corp. 82,125
7,500 American Medical Response, Inc.+ 264,375
5,500 Amerisource Health Corp.+ 182,875
1,500 Biogen, Inc.+ 82,313
7,400 Centocor, Inc.+ 221,075
8,300 CNS, Inc.+ 201,275
4,300 Genzyme Corp.+ 216,075
3,200 Guidant Corp. 157,600
16,650 Health Management Associates, Inc.+ 337,163
5,900 Healthcare Compare Corp.+ 287,625
3,700 Healthsouth Rehabitation Corp.+ 133,200
7,800 Medpartners/Mullikin, Inc. 162,825
11,000 Ornda Healthcorp.+ 264,000
3,200 Oxford Health Plans, Inc.+ 131,600
7,500 Phycor, Inc. 285,000
12,000 Renal Treatment Centers, Inc.+ 345,000
11,000 Stryker Corp. 250,250
11,700 Sybron International Corp.+ 292,500
8,600 U.S. Surgical Corp. 266,600
18,200 Uromed Corp.+ 250,250
5,200 Watson Pharamaceuticals, Inc.+ 196,950
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4,610,676
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See Notes to Financial Statements.
6
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The Inefficient-Market Fund, Inc.
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Schedule of Investments (unaudited)(continued) June 30, 1996
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SHARES SECURITY VALUE
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Integrated Oils -- 0.3 %
6,400 Valero Energy Corp. $ 160,000
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Materials & Processing -- 10.9%
17,200 Airgas Inc.+ 326,800
8,300 American Health Properties, Inc. 183,638
8,400 Avalon Properties, Inc. 182,700
3,600 Avery Dennison Corp. 197,550
9,500 BMC Industries, Inc. 273,125
16,800 Bethlehem Steel Corp. 199,500
5,400 Boise Cascade Corp. 197,775
8,000 Cabot Corp. 196,000
8,400 Cali Realty Corp. 203,700
2,166 Castle & Cooke, Inc.+ 34,656
8,500 Commerical Metal Co. 282,625
2,500 Cytec Industries, Inc. 213,750
7,900 First Mississippi Corp. 175,775
2,500 Georgia Gulf Corp. 73,125
9,400 Health Care Investment, Inc. 317,250
5,600 Healthsource, Inc. 98,000
10,100 Homestake Mining Co. 172,963
9,200 Longview Fiber Co. 156,400
8,900 Meditrust Corp. 297,038
10,100 Merry Land & Investments Co., Inc. 212,100
10,400 Nationwide Health Properties, Inc. 219,700
1,100 Olin Corp. 98,175
1,300 Owens - Corning Fiberglass Corp.+ 55,900
8,100 Rexene Corp. 79,988
6,100 Sealed Air Corp.+ 205,113
11,400 Security Capital Pacific Trust 247,950
10,200 Simon Property Group, Inc. 249,900
14,800 Terra Industries, Inc. 183,150
3,000 Texas Industries, Inc. 205,875
3,800 Vornado Realty Trust 155,325
11,200 Walter Industries 158,200
3,400 Willamette Industries, Inc. 202,300
6,900 Wolverine Tube, Inc.+ 241,500
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6,297,546
- --------------------------------------------------------------------------------
Other Energy -- 4.0%
10,600 Apache Corp. 348,475
8,800 Camco International Corp. 298,100
2,200 Columbia Gas Systems, Inc. 114,675
9,900 Noble Affiliates, Inc. 373,725
7,900 Smith International, Inc.+ 237,988
See Notes to Financial Statements.
7
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The Inefficient-Market Fund, Inc.
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Schedule of Investments (unaudited)(continued) June 30, 1996
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SHARES SECURITY VALUE
================================================================================
Other Energy -- 4.0% (continued)
4,500 Sonat Offshore Drilling, Inc. $ 227,250
9,900 Tidewater, Inc. 434,363
15,200 Union Texas Petroleum Holdings, Inc. 296,400
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2,330,976
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Producer Durables -- 6.2%
2,300 B.F. Goodrich Co. 85,963
7,900 Charter Power Systems, Inc. 274,525
6,300 Danaher Corp. 274,050
6,300 Harnischfeger Industries, Inc. 209,475
5,300 Lincoln Electric Co. 186,825
8,200 Measurex Corp. 239,850
8,800 Millipore Corp. 368,500
5,400 Raychem Corp. 388,125
4,300 Sanifll, Inc.+ 211,775
6,800 Stewart and Stevenson Service, Inc. 154,700
8,900 Sunstrand Corp. 325,963
15,500 Tetra Technologies, Inc.+ 269,313
9,300 Thermo Fibertek, Inc.+ 156,938
11,700 Toll Brothers, Inc.+ 191,588
4,700 York International Corp. 243,225
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3,580,815
- --------------------------------------------------------------------------------
Technology -- 14.2%
2,500 ADC Telecommunications, Inc.+ 112,500
4,300 Adobe Systems, Inc. 154,263
1,600 Altera Corp. 60,800
6,400 America Online, Inc.+ 280,000
7,900 Amphenol Corp., Class A Shares+ 181,700
6,150 Andrew Corp.+ 330,563
4,300 Arrow Electronics, Inc. 185,438
4,000 Ascend Communications, Inc.+ 225,000
4,000 Atmel Corp.+ 120,500
6,100 Autodesk, Inc. 182,238
2,000 BMC Software, Inc. 119,500
4,300 C - Cube Microsystems, Inc.+ 141,900
10,700 Cadence Design Systems, Inc.+ 361,125
4,500 Cidco, Inc.+ 158,625
3,300 Cirrus Logic, Inc.+ 57,750
3,500 Comverse Technology, Inc. 106,750
7,300 Concord Efs, Inc.+ 259,150
15,700 Credence Systems Corp.+ 210,969
7,300 Cypress Semiconductor Co.+ 87,600
See Notes to Financial Statements.
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The Inefficient-Market Fund, Inc.
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited)(continued) June 30, 1996
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Technology -- 14.2% (continued)
5,200 DSP Communications, Inc.+ $ 267,150
8,400 Eltron International, Inc.+ 228,900
6,700 Gateway 2000, Inc.+ 227,800
7,700 Hadco Corp. 165,550
8,600 HBO & Co. 582,650
3,300 In Focus Systems, Inc.+ 80,025
7,700 Informix Corp.+ 173,250
3,600 Integrated Device Technology, Inc.+ 38,250
10,000 International Rectifier Corp.+ 161,250
3,800 Iomega Corp. 110,200
7,900 Kemet Corp.+ 158,000
4,700 Lam Research Corp.+ 122,200
7,300 Macromedia, Inc.+ 159,688
9,000 Maxim Integrated Products 245,813
6,000 Medaphis Corp. 238,500
6,700 Microchip Technology, Inc.+ 165,825
8,200 Microcom, Inc. 103,525
6,800 Parametric Technology Corp.+ 294,950
2,800 Policy Management Systems 140,000
2,900 Stratacom, Inc.+ 163,125
7,300 Structural Dynamics Research 160,600
8,100 Sungard Data Systems, Inc.+ 325,013
6,900 Tencor Instruments Co.+ 130,238
2,500 Transaction Systems Architects, Class A Shares 167,500
3,000 U.S. Robotics Corp.+ 256,500
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8,202,873
- --------------------------------------------------------------------------------
Utilities -- 8.7%
2,300 AES Corp. 64,975
8,200 ATG Resources, Inc. 154,775
5,000 Bay State Gas Co. 139,375
9,600 Brooklyn Union Gas Co. 261,600
5,600 Century Telephone Enterprises Inc. 178,500
8,300 Delmarva Power & Lighting Co. 174,300
14,300 Enserch Corp. 311,025
4,700 Florida Progress Corp. 163,325
7,100 Frontier Corp. 217,438
9,200 Illinova Corp. 264,500
7,000 LG& E Energy Corp. 160,125
7,700 Metricom Inc.+ 121,275
8,400 Mobil Telecommunications Corp.+ 122,850
9,900 National Fuel Gas Co. 356,400
See Notes to Financial Statements.
9
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The Inefficient-Market Fund, Inc.
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Schedule of Investments (unaudited)(continued) June 30, 1996
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SHARES SECURITY VALUE
================================================================================
Utilities -- 8.7% (continued)
14,800 Nextel Communications, Inc.+ $ 282,125
6,000 Nipsco Industries, Inc. 241,500
12,200 Piedmont Natural Gas Co. 282,125
4,600 Pinnacle West Capital Corp. 139,725
9,300 Portland General Corp. 287,138
4,300 Public Service Co. 158,025
6,800 Rochester Gas & Electric 146,200
6,700 Scana Corp. 188,438
9,700 South Jersey Industries, Inc. 206,125
6,000 Teco Energy Inc. 151,500
7,700 Washington Gas Light Co. 169,400
4,700 Wisconsin Energy Corp. 135,690
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5,078,454
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TOTAL COMMON STOCKS (Cost -- $47,369,284) 52,097,331
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
U.S. GOVERNMENT OBLIGATIONS -- 0.4%
$ 245,000 U.S. Treasury Bill due 9/12/96++
(Cost -- $242,468) 242,390
================================================================================
REPURCHASE AGREEMENT -- 9.5%
5,471,000 Chase Bank, 5.330% due 7/1/96; Proceeds at maturity --
$5,473,429; (Fully collateralized by U.S. Treasury Notes,
5.750% due 9/30/97; Market value -- $5,582,728)
(Cost -- $ 5,471,000) 5,471,000
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TOTAL INVESTMENTS -- 100%
(Cost -- $53,082,752*) $57,810,721
================================================================================
+ Non-income producing security.
++ Security segregated by Custodian for open futures contracts commitments.
* Aggregate cost for Federal income tax purpose is substantially the same.
See Notes to Financial Statements.
10
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The Inefficient-Market Fund, Inc.
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Statement of Assets and Liabilities (unaudited) June 30, 1996
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $53,082,752) $ 57,810,721
Cash 330
Receivable from broker 60,250
Receivable for securities sold 56,578
Dividends and interest receivable 42,528
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Total Assets 57,970,407
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LIABILITIES:
Management fees payable 35,826
Administration fees payable 11,942
Accrued expenses 67,003
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Total Liabilities 114,771
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Total Net Assets $57,855,636
================================================================================
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) (836,777)
Undistributed net investment income 116,336
Accumulated net realized gain on
security transactions and futures 5,283,621
Net unrealized appreciation of investments and futures 4,545,354
- --------------------------------------------------------------------------------
Total Net Assets
(Equivalent to $13.44 a share on 4,305,450 shares of
$0.001 par value outstanding; authorized 100,000,000 shares) $57,855,636
================================================================================
See Notes to Financial Statements.
11
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The Inefficient-Market Fund, Inc.
- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended June 30, 1996
INVESTMENT INCOME:
Dividends $ 327,552
Interest 149,270
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Total Investment Income 476,822
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 207,826
Administration fees (Note 2) 69,275
Shareholder and system servicing fees 19,000
Shareholder communications 12,500
Custody 7,000
Audit and legal 6,580
Directors' fees 2,500
Other 13,882
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Total Expenses 338,563
- --------------------------------------------------------------------------------
Net Investment Income 138,259
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS AND FUTURES (NOTES 3 AND 6):
Realized Gain From:
Security transactions (excluding short-term securities) 3,975,106
Futures contracts 481,417
- --------------------------------------------------------------------------------
Net Realized Gain 4,456,523
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments and Futures:
Beginning of period 3,607,850
End of period 4,545,354
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 937,504
- --------------------------------------------------------------------------------
Net Gain on Investments and Futures 5,394,027
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $5,532,286
================================================================================
See Notes to Financial Statements.
12
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The Inefficient-Market Fund, Inc.
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended June 30, 1996 (unaudited)
and the Year Ended December 31, 1995
1996 1995
===============================================================================
OPERATIONS:
Net investment income $ 138,259 $ 466,652
Net realized gain 4,456,523 9,756,550
Increase in net unrealized appreciation 937,504 133,385
- -------------------------------------------------------------------------------
Increase in Net Assets From Operations 5,532,286 10,356,587
- -------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- (460,174)
Net realized gains -- (8,377,613)
- -------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders -- (8,837,787)
- -------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS:
Treasury stock acquired (Note 5) (222,479) (614,298)
- -------------------------------------------------------------------------------
Decrease in Net Assets
From Fund Share Transactions (222,479) (614,298)
- -------------------------------------------------------------------------------
Increase in Net Assets 5,309,807 904,502
NET ASSETS:
Beginning of period 52,545,829 51,641,327
- -------------------------------------------------------------------------------
End of period* $ 57,855,636 $ 52,545,829
===============================================================================
* Includes undistributed (overdistributed)
net investment income: $ 116,336 $ (21,923)
===============================================================================
See Notes to Financial Statements.
13
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The Inefficient-Market Fund, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
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) security 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 ask
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) securities maturing within 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) dividends and distributions to shareholders
are recorded on the ex-dividend date; (f) gains or losses on the sale of
securities are calculated by using the specific identification method; (g) 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; (h) 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
(i) 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.
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.
14
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The Inefficient-Market Fund, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
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.
For the six months ended June 30, 1996, Smith Barney Inc. ("SB"), also a
subsidiary of SBH, was paid brokerage commissions of $2,875 by the Fund on
agency portfolio transactions.
All officers and three Directors of the Fund are employees of SB.
3. INVESTMENTS
For the six months ended June 30, 1996, the aggregate cost of purchases and
proceeds from sales of investments (excluding short-term securities) were
$32,564,624 and $36,332,403, respectively. At June 30, 1996, aggregate gross
unrealized appreciation for all securities in which there is an excess of market
value over tax cost amounted to approximately $7,539,778, and aggregate gross
unrealized depreciation for all securities in which there is an excess of tax
cost over market value amounted to approximately $2,811,809 or a net unrealized
appreciation of $4,727,969.
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 June 30,
1996, 78,550 shares had been repurchased.
15
<PAGE>
The Inefficient-Market Fund, Inc.
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
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 and
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 the
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. The Fund enters into such contracts to hedge a
portion of its portfolio. The Fund bears the market risk that arises from
changes in the value of the financial instruments and securities indices
(futures contracts) and the credit risk should a counterparty fail to perform
under such contracts.
At June 30, 1996, the Fund had the following open futures contracts:
Expiration # of Basis Market Unrealized
Contracts Purchased Month/Year Contracts Value Value Loss
================================================================================
MIDCAP 400 9/96 29 $3,528,169 $3,435,050 $ (93,119)
Russell 2000 9/96 11 2,007,621 1,918,125 (89,496)
- --------------------------------------------------------------------------------
$5,535,790 $5,353,175 $(182,615)
================================================================================
16
<PAGE>
The Inefficient-Market Fund, Inc.
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
1996(1) 1995 1994 1993 1992 1991
=============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $12.15 $11.78 $12.50 $11.49 $10.34 $9.32
- -------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.03 0.11 0.05 0.01 0.05 0.13
Net realized and unrealized gain (loss) 1.26 2.31 (0.63) 1.01 1.15 1.82
- -------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.29 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(2) -- (1.94) (0.09) -- -- (0.79)
- -------------------------------------------------------------------------------------------------------------
Total Distributions -- (2.05) (0.14) (0.01) (0.05) (0.93)
- -------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $13.44 $12.15 $11.78 $12.50 $11.49 $10.34
- -------------------------------------------------------------------------------------------------------------
Total Return 10.62%++ 18.90% (4.36)% 8.90% 11.71% 22.69%
- -------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $57,856 $52,546 $51,641 $54,809 $50,374 $45,335
- -------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.21%+ 1.22% 1.22% 1.24% 1.36% 1.28%
Net investment income 0.49+ 0.84 0.43 0.08 0.45 1.26
- -------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 65.38% 176.95% 44.80% 86.86% 45.67% 46.77%
- -------------------------------------------------------------------------------------------------------------
Market Price at End of Period $11.375 $9.813 $9.500 $10.500 $9.875 $8.875
- -------------------------------------------------------------------------------------------------------------
Average commissions paid on
equity security transactions(3) $0.05 $0.05 -- -- -- --
=============================================================================================================
</TABLE>
(1) For the six months ended June 30, 1996 (unaudited).
(2) Includes short-term realized gains distributions which are considered
ordinary income for Federal tax purposes.
(3) As of October 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ Total return is not annualized, as it may not be representative of the total
return for that period.
+ Annualized.
17
<PAGE>
The Inefficient-Market Fund, Inc.
- --------------------------------------------------------------------------------
Financial Data (unaudited)
- --------------------------------------------------------------------------------
For a share of capital stock outstanding throughout each period:
Dividend and
Price Price at NAV at Premium(+) Capital Gain
Period Range Month-End Month-End Discount(-) Distributions
================================================================================
1995
January $ 9 1/4 - 9 5/8 $ 9 3/8 $11.77 -20% --
February 9 3/8 - 9 7/8 9 3/4 12.31 -21 --
March 9 5/8 - 9 7/8 9 5/8 12.24 -21 --
April 9 3/4 - 10 9 13/16 12.24 -20 --
May 9 3/4 - 10 9 3/4 12.52 -22 --
June 9 3/4 - 10 1/4 10 1/8 12.99 -22 --
July 10 1/8 - 10 3/4 10 3/8 13.16 -21 --
August 10 1/4 - 10 1/2 10 3/8 13.46 -23 --
September 10 1/2 - 11 1/8 10 3/4 13.74 -22 --
October 10 1/2 - 11 10 1/2 13.46 -22 --
November 10 5/8 - 11 1/8 11 1/2 14.05 -22 --
December 9 1/2 - 11 1/2 9 13/16 12.15 -19 $2.050
1996
January 9 3/4 - 10 3/8 10 1/2 12.23 -18 --
February 10 - 10 5/8 10 5/8 12.62 -16 --
March 1 3/8 - 10 3/4 10 5/8 12.87 -17 --
April 10 5/8 - 11 1/2 11 1/2 13.45 -14 --
May 11 - 11 7/8 11 5/8 13.77 -16 --
June 11 3/8 - 11 3/4 11 3/8 13.44 -15 --
================================================================================
18
<PAGE>
The Inefficient-Market Fund, Inc.
- --------------------------------------------------------------------------------
Dividend Reinvestment Plan (unaudited)
- --------------------------------------------------------------------------------
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. 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.
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 Plan Agent is permitted to cease purchasing shares on the
open market and the Fund may issue the remaining shares at a price equal to the
greater of (a) net asset value or (b) 95% of the then current market price. In a
case where the Plan Agent has terminated open market purchases and the Fund has
issued the remaining shares, the number of shares received by the participant in
respect of the cash dividend or distribution will be
19
<PAGE>
The Inefficient-Market Fund, Inc.
- --------------------------------------------------------------------------------
Dividend Reinvestment Plan (unaudited) (continued)
- --------------------------------------------------------------------------------
based on the weighted average of prices paid for shares purchased in the open
market and the price at which the Fund issued the remaining shares.
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.
- --------------------------------------------------------------------------------
Additional Shareholder Information (unaudited)
- --------------------------------------------------------------------------------
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940, as amended, that from time to time the Fund may purchase at
market prices shares of its common stock in the open market.
20
<PAGE>
The Inefficient- SMITH BARNEY
Market Fund, Inc. ------------
A Member of the TravelersGroup [Logo]
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, N.A.
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
FD0621 8/96
