SEMI-ANNUAL REPORT
================================================================================
Smith Barney
Disciplined
Small Cap
Fund, Inc.
------------------------------------
June 30, 1997
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
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Smith Barney Disciplined Small Cap Fund, Inc.
- ---------------------------------------------
Dear Shareholder:
We are pleased to provide the semi-annual report for the Smith Barney
Disciplined Small Cap Fund, Inc. (previously known as The Inefficient-Market
Fund, Inc.) ("Fund") for the period ended June 30, 1997. In this letter we
comment on the market environment during the first half of the year 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
report.
On June 23, 1997, the Fund converted from a closed-end mutual fund with one
class of shares to an open-end mutual fund with a multi-class share structure.
(A closed-end fund generally issues a fixed number of shares which are usually
traded on a stock exchange. An open-end mutual fund issues shares redeemable
generally on a continuous basis at the Fund's current net asset value.) The Fund
is now listed in the mutual fund section of most major newspapers under the
symbol "DisSml" and trades like any other open-end mutual fund.
Performance Update
During the first half of 1997, the Fund had a total return of 8.94% on net asset
value (NAV) for Class A shares. The Fund's performance through June 30, 1997
lagged the Russell 2500 Stock Index, which recorded a total return of 11.25%
over the same period. (The Russell 2500 Stock Index is a broad-based index
representing smaller-sized U.S. companies.) For the trailing twelve-month period
ending June 30, 1997, the Fund's Class A shares achieved a total return of
18.73%, compared with the 20.10% return of the Russell 2500 over the period.
Economic Overview
Economic activity in the first quarter of 1997 showed surprising strength as
real Gross Domestic Product ("GDP") growth rose well above 5% on an annualized
basis. Despite unexpected strength in the economy and a decline in unemployment
to about 5%, reported inflation remained low. However, the strong tone of the
economy provoked concerns about the risk of rising inflation in the future and
prompted the Federal Reserve Board ("Fed") to hike short-term rates by 25 basis
points (0.25%) on March 25, 1997.
The second quarter of 1997 began with a singular focus on the future direction
of Federal Reserve policy. After the increase in the federal funds rate in late
March, it was considered quite likely that the Fed would raise interest rates
1
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again during the second quarter. (The federal funds rate is the interest rate
banks charge each other for overnight loans and a closely watched indicator of
the direction of interest rates.) However, economic data released in early May
provided mounting evidence of a slower economy and low inflation. Retail sales
for April were soft, and producer prices showed a dramatic decline of 0.4%. The
consensus forecast for second-quarter real economic growth has now dropped below
2%.
The inflation trend in recent months has been nothing short of remarkable,
especially in light of the low unemployment rate and high capacity-utilization
rates prevalent in the U.S. economy. The consumer price deflator, which is
considered to be a better inflation measure than the Consumer Price Index, fell
to a 30-year low in May at an annual rate of 1.6%. The second quarter rally in
the stock and bond markets suggests that investors have reduced their inflation
expectations and, consequently, the likelihood of further Fed tightening.
Market Commentary
The U.S. stock market remains in one of its strongest bull market runs ever.
Stock prices have now doubled over the last two and a half years and almost
tripled in the last five years in an ideal investment climate of solid economic
growth, low inflation and strong corporate profits growth.
The year 1997 began on a positive note for the stock market. Fueled by strong
fourth-quarter 1996 earnings and robust money flows into mutual funds, the S&P
500 gained more than 7% in January and February, then continued to move to new
highs in early March. However, as evidence of unexpectedly robust economic
growth came to light, investors became increasingly concerned about the risk of
higher inflation and interest rates. When the Fed raised short-term rates on
March 25, 1997, long-term U.S. Treasury bond yields moved back over the
psychologically important 7% level.
The upward spike in interest rates triggered a sharp sell-off in the stock
market during the last week of March, erasing most of the market's year-to-date
gains. For the entire first quarter the S&P 500 gained 2.7% (with dividend
reinvestment). Small-capitalization issues generally fared worse. During the
first three months of 1997, the Russell 2000 stock index declined 5.5% in value.
In sharp contrast, the second quarter of 1997 was the best quarter for the U.S.
stock market in more than ten years. The stock market rally was broad in nature,
lifting most stocks and indexes to record highs. The S&P 500 Index soared by
17.5% in the second quarter, the Russell 2000 Index rose 16.2% and the Nasdaq
index performed even better, with a gain of 18%.
2
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The stock market got off to a rocky start in April as the effects of the Fed's
rate hike in late March rippled through the capital markets. The S&P 500 sold
off to a low of 733 and the Dow retreated to almost 6300 on April 14, 1997, as
investors focused on the likelihood of higher rates. Then a mood swing to
optimism was triggered by the release of solid first-quarter earnings in April,
and the market rally began in real earnest when inflation reports from early May
showed a significant decline in producer and consumer prices. The agreement on a
balanced budget in Washington and the prospect of a lower capital gains tax
added further fuel to the stock market rally in May, and in particular helped to
trigger a rebound in small cap stocks.
Performance Review
The Fund continues to be managed by the Travelers Investment Management Company
("TIMCO") and employs the same disciplined investment style as before it became
an open-end fund. TIMCO's approach to equity management is designed to provide
diversified exposure to the universe of stocks that comprise the lowest 25% of
market capitalization of publicly traded companies in the U.S. with market
values greater than $100 million. TIMCO selects stocks based on a disciplined
quantitative screening process that seeks both 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 Stock Index.
During the second quarter, stock selection in the health care, financial
services and energy sectors made the largest positive contribution to the Fund's
relative performance. Fund performance was helped by our positions in Everest
Reinsurance, a property-casualty reinsurance underwriter, and Silicon Valley
Bancshares, a California-based commercial bank. Toward the end of the quarter,
performance was further aided by holdings in General Nutrition and Ross Stores,
both of which benefited from rising earnings estimates.
Fund performance was hurt in the second quarter by stock selection in the
technology and basic materials sectors. In particular, our positions in
Read-Rite Corp., Pairgain Technologies and LSI Logic underperformed.
Economic and Market Outlook
We believe that the biggest risk to the presently favorable investment climate
is an overly strong economy. A resurgence of economic growth in the second half
of the year may prompt the Fed to act yet again on a preemptive basis to control
inflationary pressures. Stronger retail sales could be the catalyst to a
reacceleration in third-quarter economic growth. Such a boost in consumer
spending could come from several sources: increased home mortgage refinancing
activity, the wealth effect of a record bull market in stocks, and the recent
strong growth in real disposable personal income.
3
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Valuations in the stock market continue to be stretched. The 12-month forward
price/earning multiple on the S&P 500 now stands at 18.4 times, a record high
for the last 25 years. By most measures the market is between 10% and 15%
overvalued. While it is difficult to point to one specific event that might
derail the roaring stock market engine, the high valuation level of the market
may trigger a correction on even a small negative surprise.
The sustained underperformance of the small cap sector, however, has resulted in
fairly attractive valuation levels. Indeed, small-cap stocks offer more value
than their large-cap counterparts and may therefore present a more defensive
play on the U.S. stock market at this point. We remain positive on the
opportunities available through selective screening of the small-cap market and
continue to focus on companies that offer improving fundamentals and relative
earnings gains at discounted stock valuations.
In closing, thank you for investing in the Smith Barney Disciplined Small Cap
Fund, Inc. We look forward to continuing to help you achieve your financial
goals.
Sincerely,
/s/ Heath B. McLendon
Heath B. McLendon
Chairman
August 1, 1997
4
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Schedule of Investments (unaudited) June 30, 1997
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
COMMON STOCKS -- 99.8%
================================================================================
Autos & Transportation -- 5.2%
6,800 Alexander & Baldwin Inc. $ 177,650
7,400 Avondale Industries Inc.* 155,400
13,700 Cavalier Homes Inc. 137,000
7,600 Comair Holdings Inc. 210,425
6,500 Continental Airlines Inc., Class B Shares*+ 227,094
3,900 Cummins Engine Inc. 275,194
3,400 GATX Corp. 196,350
7,800 Gentex Corp.* 154,050
2,100 Intermet Corp. 33,731
1,100 Kansas City Southern Industries, Inc. 70,950
6,100 Lear Seating Corp.* 270,688
10,300 Mascotech Inc. 215,013
6,400 Oakwood Homes Corp. 153,600
6,900 Swift Transportation Co., Inc.* 203,550
7,400 US Freightways Corp. 191,475
- --------------------------------------------------------------------------------
2,672,170
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Consumer Discretionary -- 19.5%
10,900 Accustaff Inc.*+ 258,194
5,000 A.H. Belo Corp. 208,125
6,700 Alberto Culver Co., Class A Shares 156,194
2,500 American Greetings Corp., Class A Shares 92,813
6,100 Apollo Group Inc., Class A Shares* 215,025
7,300 Bed Bath & Beyond Inc.* 221,738
13,700 Best Buy Co., Inc.* 203,788
9,600 Borders Group* 231,600
6,200 Carmike Cinemas Inc., Class A Shares* 203,050
3,200 Circus Circus Enterprise Inc.* 78,800
10,300 Claire's Stores Inc. 180,250
6,200 Consolidated Products Inc.* 115,475
4,000 Corporate Express Inc.* 57,750
2,600 Corrections Corp. of America*+ 103,350
2,800 Deluxe Corp. 95,550
5,100 Doubletree Corp.* 209,738
4,100 Emmis Broadcasting Corp.* 178,863
4,600 Evergreen Media Corp.*+ 205,275
8,800 Family Dollar Stores, Inc. 239,800
11,600 Foodmaker, Inc.* 189,950
4,200 Fred Meyer Inc.* 217,088
13,200 Furniture Brands International, Inc.* 255,750
8,500 General Nutrition Co.* 238,000
5,900 Harte-Hanks Communications Inc. 174,050
5,100 Holophane Corp.* 102,000
6,485 HSN Inc.* 202,656
12,500 International Game Technology 221,875
See Notes to Financial Statements.
5
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Schedule of Investments (unaudited) (continued) June 30, 1997
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Consumer Discretionary -- 19.5% (continued)
4,900 King World Productions, Inc.* $ 171,500
7,600 Lands' End, Inc.* 225,150
10,400 Maytag Corp. 271,700
2,400 Merrill Corp. 87,300
7,500 Miller, Inc. 270,000
6,800 Mohawk Industries, Inc.* 154,700
8,900 Nautica Enterprises, Inc.*+ 235,294
5,700 Papa John's International, Inc.* 209,475
4,700 Payless Shoesource Inc.* 257,031
7,200 Performance Food Group Co.* 151,200
4,400 Proffitt's Inc.* 193,050
6,300 Promus Hotel Corp.* 244,125
3,100 Readers Digest Association, Inc., Class A Shares 88,931
2,100 Rockshox Inc.* 36,225
6,700 Ross Stores Inc. 219,006
6,700 Ryan's Family Steak Houses Inc.* 57,369
4,900 Samsonite Corp.*+ 216,213
4,000 SFX Broadcasting Inc.* 168,750
8,000 SITEL Corp.* 165,000
3,300 St. John Knits, Inc. 178,200
5,800 Stewart Enterprises Inc. 243,600
12,900 Stride Rite Corp. 166,088
5,800 The Mens Wearhouse, Inc.* 182,700
6,800 Unifi Inc. 254,150
8,000 US 1 Industries Inc.* 285,000
8,000 Valassis Communications, Inc.* 192,000
3,300 Viking Office Products, Inc.* 62,700
7,625 Wolverine Worldwide, Inc. 231,609
- --------------------------------------------------------------------------------
10,074,813
- --------------------------------------------------------------------------------
Consumer Staples -- 2.2%
7,000 Dean Foods Co. 282,625
5,200 Dole Food Co., Inc. 222,300
3,200 Interstate Bakeries, Corp. 189,800
9,000 McCormick & Co., Inc. 227,250
6,800 Universal Corp. 215,900
- --------------------------------------------------------------------------------
1,137,875
- --------------------------------------------------------------------------------
Financial Services -- 15.5%
4,600 Albank Financial Corp. 181,700
3,300 AMBAC Inc. 252,038
3,600 American Bankers Insurance Group, Inc. 227,700
4,600 Anchor Bancorp Inc. 224,250
6,400 Bay View Capital Corp. 168,000
3,900 Capital One Financial Co.+ 147,225
2,600 CCB Financial Corp. 190,125
See Notes to Financial Statements.
6
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Schedule of Investments (unaudited) (continued) June 30, 1997
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Financial Services -- 15.5% (continued)
1,700 Charter One Financial Inc. $ 91,588
7,800 City National Corp. 187,688
800 CMAC Investment Corp. 38,200
7,500 Colonial BancGroup Inc. 181,875
2,000 Compass Bancshares Inc. 67,250
10,900 Conseco Inc. 403,277
12,900 Dime Bancorp Inc.* 225,750
3,800 Executive Risk, Inc. 197,600
3,000 FINOVA Group, Inc. 229,500
7,400 First American (Tenn) Corp. 283,975
6,200 First Tennessee National Corp. 297,600
4,000 First Virginia Banks, Inc. 241,250
5,000 Firstplus Financial Group* 170,000
7,300 Glendale Federal Bank* 190,713
4,900 Great Financial Corp. 172,113
7,200 HCC Insurance Holdings Inc.+ 192,150
15,300 Hibernia Corp. 213,244
6,100 Mercantile Bankshares Co. 244,000
5,333 Mutual Risk Management Ltd. 244,651
2,325 Old Kent Financial Corp. 125,591
9,100 Old Republic International Corp. 275,844
3,800 Onbancorp Inc. 193,800
5,500 Penncorp Financial Group Inc.+ 211,750
4,100 PMI Group Inc. 255,738
3,800 Relistar Financial Corp. 277,875
5,500 Silicon Valley Bancshares* 248,875
6,300 TIG Holdings, Inc. 196,875
6,700 Trans Financial, Inc. 186,763
2,300 Transatlantic Holdings, Inc.+ 228,275
5,500 Union Planters Corp. 285,313
5,500 Vesta Insurance Group Inc. 237,875
- --------------------------------------------------------------------------------
7,988,036
- --------------------------------------------------------------------------------
Health Care -- 9.1%
7,800 Acuson Corp.* 179,400
2,600 ALZA Corp.* 75,400
3,900 AmeriSource Health Corp.* 194,513
6,200 Arbor Health Care Co.* 192,200
7,350 Bergen Brunswig Corp., Class A Shares 204,881
13,400 Beverly Enterprises Inc. 217,750
2,700 Biogen, Inc.* 91,463
16,000 Biomet, Inc. 298,000
6,800 Centocor, Inc.* 211,225
4,200 Creative Biomolecules Inc.* 29,663
6,400 Dura Pharmaceuticals Inc.* 255,200
7,900 Genzyme Corp.* 219,225
See Notes to Financial Statements.
7
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- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) June 30, 1997
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Health Care -- 9.1% (continued)
10,650 Health Management Associates, Inc.* $ 303,525
6,400 Living Centers of America* 252,800
6,800 MiniMed Inc.* 181,050
7,900 Neurogen Corp.* 179,725
6,900 Phycor Inc.* 237,619
2,000 Quintiles Transnational Corp.* 139,250
8,700 Renal Treatment Centers, Inc.* 233,813
8,000 Theragenics Corp.* 184,000
7,100 U.S. Surgical Corp. 264,475
1,800 Vencor Inc.* 76,050
6,500 Watson Pharamaceuticals, Inc.* 274,625
4,100 Wellpoint Health Network, Inc.* 188,088
- --------------------------------------------------------------------------------
4,683,940
- --------------------------------------------------------------------------------
Integrated Oil -- 0.8%
4,600 Murphy Oil Corp. 224,250
5,800 Valero Energy Corp. 210,250
- --------------------------------------------------------------------------------
434,500
- --------------------------------------------------------------------------------
Materials & Processing -- 14.5%
6,000 Alumax Inc.* 227,625
5,200 Aptagroup Inc. 235,300
7,700 Avalon Properties, Inc. 220,413
5,200 Beacon Properties Corp. 173,550
3,500 BetzDearborn Inc. 231,000
6,000 BMC Industries, Inc. 205,500
4,900 Boise Cascade Corp. 173,031
4,700 Bowater Inc. 217,375
6,600 Cali Realty Corp. 224,400
9,700 Coeur D'Alene Mines Corp. 125,494
5,200 Commerical Metal Co. 167,700
7,600 Crompton & Knowles Corp. 169,100
5,400 Cytec Industries, Inc.* 201,825
5,500 Dexter Corp. 176,000
5,800 Ecolab Inc. 276,950
5,100 Equity Residential Properties Trust 242,250
5,200 Felcor Suite Hotels Inc.+ 193,700
6,200 First Industrial Realty Trust Inc. 181,350
1,000 FMC Corp.* 79,438
6,800 Health Care Properties Investment, Inc. 239,700
6,400 Hexcel Corp.* 110,400
12,200 International Specialty Products Inc.* 171,563
9,300 Liberty Property Trust 231,338
4,400 Lone Star Industries, Inc. 199,375
14,900 LTV Corp. 212,325
8,000 Meditrust Corp. 319,000
See Notes to Financial Statements.
8
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- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) June 30, 1997
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Materials & Processing -- 14.5% (continued)
2,500 Millennium Chemicals Inc. $ 56,875
9,500 Nationwide Health Properties, Inc. 209,000
1,600 Olin Corp. 62,500
6,100 OM Group Inc. 202,063
6,100 Oregon Metallurgical Corp.* 171,563
10,600 Pope & Talbot Inc. 174,238
5,600 Sealed Air Corp.* 266,000
10,400 Security Capital Pacific Trust 237,900
7,700 Simon DeBartolo Property Group, Inc. 246,400
2,600 Southdown, Inc. 113,425
13,400 Terra Industries, Inc. 155,775
6,200 USG Corp.* 226,300
9,700 Wausau Paper Mills Co. 183,088
- --------------------------------------------------------------------------------
7,510,829
- --------------------------------------------------------------------------------
Other Energy -- 4.2%
5,700 BJ Services* 305,663
5,700 Cooper Cameron Corp.* 266,475
5,300 Forcenergy Inc.* 165,294
4,800 Louisiana Land & Exploration Co. 274,200
10,200 Marine Drilling Co., Inc.* 200,175
4,800 Nabors Industries Inc.* 120,000
5,700 Noble Affiliates, Inc. 220,519
10,800 Noble Drilling Corp.* 243,675
10,000 Oryx Energy Co.* 211,250
2,400 Transocean Offshore Inc. 174,300
- --------------------------------------------------------------------------------
2,181,551
- --------------------------------------------------------------------------------
Producer Durables -- 7.0%
7,000 AGCO Corp. 251,563
200 American Power Conversion* 3,800
5,700 B.F. Goodrich Co. 246,881
6,500 Crane Co. 271,781
4,200 Culligan Water Technology Inc.* 187,950
4,300 Danaher Corp. 218,494
6,800 Durco International Inc. 198,900
6,000 Hubbell Inc., Class B shares 264,000
7,200 Jacobs Engineering Group, Inc.* 193,500
1,200 Litton Industries Inc.* 57,975
3,500 Precision Castparts Corp. 208,688
8,200 Robbins & Myers Inc. 266,500
2,800 Thiokol Corp. 196,000
5,300 Thomas & Betts Corp. 278,581
3,500 United Waste Systems Inc.* 143,500
7,700 US Filter Corp.* 209,825
6,300 U.S. Home Corp.* 167,344
See Notes to Financial Statements.
9
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- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) June 30, 1997
- --------------------------------------------------------------------------------
AMOUNT SECURITY VALUE
================================================================================
Producer Durables -- 7.0% (continued)
6,900 Watts Industries Inc. $ 165,600
1,600 York International Corp. 73,600
- --------------------------------------------------------------------------------
3,604,482
- --------------------------------------------------------------------------------
Technology -- 13.8%
1,900 Andrew Corp.* 53,438
3,300 Atmel Corp.* 92,400
7,200 BancTec, Inc.* 186,750
3,300 Brightpoint Inc.* 107,456
2,800 Burr-Brown Corp.* 96,600
6,300 Cambridge Technology Partnership*+ 201,600
8,800 Comdisco, Inc. 228,800
4,100 Comverse Technology, Inc.* 213,200
10,600 Datastream Systems Inc.* 164,300
2,450 Diebold Inc. 95,550
16,100 DSP Communications, Inc.* 177,100
6,400 Electronics for Imaging Inc.* 302,400
6,100 Eltron International, Inc.* 181,475
5,600 ENCAD Inc.* 232,400
4,100 Hadco Corp.* 268,550
6,200 Harbinger Corp.* 173,600
10,500 Integrated Device Technology Inc.* 110,250
9,600 Integrated Process Equipment Corp.*+ 243,000
4,000 Iomega Corp.* 79,500
7,400 Jack Henry & Associates 179,450
8,800 KEMET Corp.* 218,900
1,800 KLA-Tencor Corp.*+ 87,750
6,100 Lam Research Corp.* 226,081
6,000 LSI Logic Corp.* 192,000
4,100 McAfee Associates Inc.*+ 258,813
4,300 Microchip Technology Inc.* 127,925
1,600 Netscape Communications Corp. 51,300
10,100 Oak Technologies Inc.* 98,475
4,200 Policy Management System Corp.* 197,400
2,500 PRI Automation Inc.* 94,844
4,200 Quantum Corp.* 85,313
11,100 Read-Rite Corp.* 231,713
4,400 Remedy Corp.* 176,000
4,400 Shared Medical Systems Corp. 237,600
1,500 Smart Modular Technologies, Inc.* 50,625
5,100 SPSS Inc.* 147,900
2,600 Sterling Commerce, Inc.* 85,475
5,500 Storage Technology Inc.* 244,750
4,500 SunGard Data Systems, Inc.* 209,250
5,700 Symbol Technologies Inc. 191,663
7,700 Tech Data Corp.* 242,069
See Notes to Financial Statements.
10
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- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) June 30, 1997
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Technology -- 13.8% (continued)
1,100 Tektronix Inc. $ 66,000
4,700 Vishay Intertechnology Inc.* 136,006
3,400 Western Digital Corp.*+ 107,525
- --------------------------------------------------------------------------------
7,153,196
- --------------------------------------------------------------------------------
Utilities -- 8.0%
7,100 AGL Resources Inc. 146,438
7,700 Boston Edison Co. 203,088
7,000 Brooklyn Union Gas Co. 200,375
6,200 Calenergy Inc.* 235,600
1,900 Century Telephone Enterprises Inc. 64,006
4,400 CILCORP Inc. 181,225
6,100 CMS Energy Corp. 215,025
7,600 DPL Inc. 187,150
6,200 DQE Inc. 175,150
1,900 El Paso Natural Gas Co. 104,500
2,600 Illinova Corp.+ 57,200
2,000 Ipalco Enterprises Inc. 62,500
8,400 LG&E Energy Corp. 185,325
6,700 Mapco Inc. 211,050
7,300 MCN Energy Group Inc. 223,563
6,200 National Fuel Gas Co. 260,013
5,500 NIPSCO Industries 227,219
4,300 Northeast Utilities System 41,119
8,400 Pinnacle West Capital Corp. 252,525
7,800 Public Service Co. 323,700
8,900 South Jersey Industries Inc. 198,025
7,000 Washington Gas Light Co. 175,875
9,400 Western Gas Resources, Inc. 183,300
- --------------------------------------------------------------------------------
4,113,971
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost-- $44,129,206) 51,555,363
================================================================================
WARRANT -- 0.0%
1,011 Homestead Village Inc., Expires 10/29/97*
(Cost-- $2,530 ) 8,594
================================================================================
See Notes to Financial Statements.
11
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- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) June 30, 1997
- --------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
================================================================================
U.S. GOVERNMENT OBLIGATION -- 0.2%
$100,000 U.S. Treasury Bill due 9/18/97
(Cost-- $98,923) $ 98,923
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $44,230,659**) $51,662,880
================================================================================
* Non-income producing security.
+ Security on loan (Note 7).
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
12
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- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) June 30, 1997
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost-- $44,230,659) $51,662,880
Cash and cash equivalents (Note 7) 2,636,574
Receivable for securities sold 5,523,990
Receivable for Fund shares sold 56,880
Dividends and interest receivable 41,931
Other assets 220,337
- --------------------------------------------------------------------------------
Total Assets 60,142,592
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities loaned (Note 7) 4,637,000
Payable for securities purchased 3,423,745
Payable for Fund shares redeemed 598,981
Investment advisory fees payable 33,844
Administration fees payable 10,379
Payable to broker-variation margin 9,375
Distribution fees payable 2,274
Accrued expenses 38,446
- --------------------------------------------------------------------------------
Total Liabilities 8,754,044
- --------------------------------------------------------------------------------
Total Net Assets $51,388,548
================================================================================
NET ASSETS:
Par value of capital shares $ 3,836
Capital paid in excess of par value 41,790,154
Undistributed net investment income 61,341
Accumulated net realized gain on security transactions
and futures contracts 2,126,624
Net unrealized appreciation of investments and futures contracts 7,406,593
- --------------------------------------------------------------------------------
Total Net Assets $51,388,548
- --------------------------------------------------------------------------------
Shares Outstanding:
Class A 3,832,006
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Class B 3,004
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Class C 755
-----------------------------------------------------------------------------
Net Asset Value:
Class A $ 13.40
-----------------------------------------------------------------------------
Class B $ 13.37
-----------------------------------------------------------------------------
Class C $ 13.36
-----------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 5.26% of net asset value per share) $ 14.11
================================================================================
See Notes to Financial Statements.
13
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- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended June 30, 1997
INVESTMENT INCOME:
Dividends $ 331,994
Interest 30,151
- -------------------------------------------------------------------------------
Total Investment Income 362,145
- -------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2) 198,406
Administration fees (Note 2) 65,075
Shareholder and system servicing fees 18,792
Shareholder communications 12,364
Audit and legal 7,926
Custody 6,923
Directors' fees 2,472
Distribution fees (Note 2) 2,274
Registration fees 1,730
Other 5,119
- -------------------------------------------------------------------------------
Total Expenses 321,081
- -------------------------------------------------------------------------------
Net Investment Income 41,064
- -------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
AND FUTURES CONTRACTS (NOTES3 AND 5):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) 1,497,250
Futures contracts (4,997)
- -------------------------------------------------------------------------------
Net Realized Gain 1,492,253
- -------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments
and Futures Contracts:
Beginning of period 4,397,795
End of period 7,406,593
- -------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 3,008,798
- -------------------------------------------------------------------------------
Net Gain on Investments and Futures Contracts 4,501,051
- -------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 4,542,115
===============================================================================
See Notes to Financial Statements.
14
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended June 30, 1997 (unaudited)
and the Year Ended December 31, 1996
1997 1996
===============================================================================
OPERATIONS:
Net investment income $ 41,064 $ 235,743
Net realized gain 1,492,253 8,411,575
Increase in net unrealized appreciation 3,008,798 789,945
- -------------------------------------------------------------------------------
Increase in Net Assets From Operations 4,542,115 9,437,263
- -------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- (193,543)
Net realized gains -- (8,604,302)
- -------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders -- (8,797,845)
- -------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net proceeds from sale of shares 107,774 --
Cost of shares reacquired (6,172,484) (274,104)
- -------------------------------------------------------------------------------
Decrease in Net Assets From
Fund Share Transactions (6,064,710) (274,104)
- -------------------------------------------------------------------------------
Increase (Decrease) in Net Assets (1,522,595) 365,314
NET ASSETS:
Beginning of period 52,911,143 52,545,829
- -------------------------------------------------------------------------------
End of period* $ 51,388,548 $ 52,911,143
===============================================================================
* Includes undistributed net investment income of: $ 61,341 $ 20,277
===============================================================================
See Notes to Financial Statements.
15
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Smith Barney Disciplined Small Cap Fund, Inc. (formerly known as The
Inefficient-Market Fund, Inc.) ("Fund"), a Maryland corporation, is registered
under the Investment Company Act of 1940, as amended. On June 23, 1997, the Fund
became a diversified, open-end management investment company. Prior to that date
the Fund was 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 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 are valued at the mean between the most recently
quoted bid and ask prices; (c) securities maturing within 60 days or less are
valued at cost plus accreted discount, or minus amortized premium, which
approximates value; (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) direct expenses are charged to each class; management
fees and general fund expenses are allocated on the basis of relative net
assets; (h) 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; (i) the character of
income and gains distributed are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles; and
(j) 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 0.65% of the Fund's average
daily net assets. Prior to June 23, 1997, the investment management fee paid was
0.75%. This fee is calculated daily and paid monthly.
16
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
Smith Barney Mutual Funds Management Inc. ("SBMFM"), another subsidiary of
SBH, acts as the Fund's administrator. As compensation for its services, the
Fund also pays SBMFM a fee calculated at the annual rate of 0.10% of the Fund's
average daily net assets. Prior to June 23, 1997, the Fund paid an
administration fee of 0.25%. This fee is calculated daily and paid monthly.
For the six months ended June 30, 1997, Smith Barney Inc. ("SB"), also a
subsidiary of SBH, was paid brokerage commissions of $3,599 and sales charges of
approximately $1,000 on sales of the Fund's Class A shares.
There is a contingent deferred sales charge ("CDSC") of 5.00% on Class B
shares, which applies if redemption occurs within one year from initial purchase
and declines thereafter by 1.00% per year until no CDSC is incurred. Class C
shares have a 1.00% CDSC, which applies if redemption occurs within the first
year of purchase. In addition, shareholders who held shares at the time of
conversion to open-end status on June 23, 1997, will be subject to a 2.00%
redemption fee until the end of 1997. For the six months ended June 30, 1997,
redemption fees paid to the Fund were approximately $115,000 for Class A shares.
Pursuant to a Distribution Plan, which became effective on June 23, 1997,
the Fund pays a service fee with respect to its Class A, B and C shares
calculated at the annual rate of 0.25% of the average daily net assets of each
respective class. In addition, the Fund also pays a distribution fee with
respect to Class B and C shares calculated at the annual rate of 0.75% of the
average daily net assets of each class. For the six months ended June 30, 1997,
total Distribution Plan fees were as follows:
Class A Class B Class C
================================================================================
Distribution Plan Fees $2,271 $1 $2
================================================================================
All officers and two Directors of the Fund are employees of SB.
3. INVESTMENTS
For the six months ended June 30, 1997, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $26,787,761
- --------------------------------------------------------------------------------
Sales 32,554,868
================================================================================
17
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
At June 30, 1997, aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
================================================================================
Gross unrealized appreciation $8,315,237
Gross unrealized depreciation (883,016)
- --------------------------------------------------------------------------------
Net unrealized appreciation $7,432,221
================================================================================
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. FUTURES CONTRACTS
Initial margin deposits made upon entering into futures contracts are
recognized as assets. Securities equal to the initial margin amount are
segregated by the custodian in the name of the broker. Additional securities are
also segregated up to the current market value of the futures contract. 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 received or made 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, 1997, the Fund had the following open futures contracts:
<TABLE>
<CAPTION>
# of Basis Market Unrealized
Futures contracts purchased Contracts Expiration Value Value Loss
=======================================================================================
<S> <C> <C> <C> <C> <C>
Mid Cap 400 15 9/97 $2,197,628 $2,172,000 $(25,628)
=======================================================================================
</TABLE>
18
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
6. OPTION CONTRACTS
Premiums paid when put or call options are purchased by the Fund, represent
investments, which are marked-to-market daily. When a purchased option expires,
the Fund will realize a loss in the amount of the premium paid. When the Fund
enters into a closing sales transaction, the Fund will realize a gain or loss
depending on whether the proceeds from the closing sales transaction are greater
or less than the premium paid for the option. When the Fund exercises a put
option, it will realize a gain or loss from the sale of the underlying security
and the proceeds from such sale will be decreased by the premium originally
paid. When the Fund exercises a call option, the cost of the security which the
Fund purchases upon exercise will be increased by the premium originally paid.
At June 30, 1997, the Fund had no open purchased call or put option
contracts.
7. LENDING OF PORTFOLIO SECURITIES
The Fund has an agreement with its custodian whereby the custodian may lend
securities owned by the Fund to brokers, dealers and other financial
organizations. Fees earned by the Fund on securities lending are recorded in
interest income. Loans of securities by the Fund are collateralized by cash,
U.S. government securities or high quality money market instruments that are
maintained at all times in an amount at least equal to the current market value
of the loaned securities, plus a margin which may vary between 2% and 5%
depending on the type of securities loaned. The custodian establishes and
maintains the collateral in a segregated account.
At June 30, 1997, the Fund loaned common stocks having a value of
approximately $4,529,002 and received cash collateral of $4,637,000 for the
loan.
19
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
8. CAPITAL SHARES
At June 30, 1997, the Fund had $400 million shares of capital stock
authorized with a par value of $0.001 per share. The Fund has the ability to
issue multiple classes of shares. Each share of a class represents an identical
interest in the Fund and has the same rights, except that each class bears
certain expenses specifically related to the distribution of its shares.
As of June 30, 1997, total paid-in capital amounted to the following for
each class:
Class A Class B Class C
================================================================================
Total Paid-in Capital $41,743,990 $40,000 $10,000
================================================================================
Transactions in shares of each class were as follows:
Six Months Ended
June 30, 1997
----------------------------
Shares Amount
================================================================================
Class A
Shares sold 4,352 $ 57,774
Shares redeemed (473,296) (6,172,484)
- --------------------------------------------------------------------------------
Net Decrease (468,944) $(6,114,710)
================================================================================
Class B
Shares sold 3,004 $ 40,000
Shares redeemed -- --
- --------------------------------------------------------------------------------
Net Increase 3,004 $ 40,000
================================================================================
Class C
Shares sold 755 $ 10,000
Shares redeemed -- --
- --------------------------------------------------------------------------------
Net Increase 755 $ 10,000
================================================================================
20
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class A Shares(1) 1997(2) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $12.30 $12.15 $11.78 $12.50 $11.49 $10.34
- ------------------------------------------------------------------------------------
Income (Loss)
From Operations:
Net investment income 0.01 0.05 0.11 0.05 0.01 0.05
Net realized and
unrealized gain (loss) 1.09 2.14 2.31 (0.63) 1.01 1.15
- ------------------------------------------------------------------------------------
Total Income (Loss)
From Operations 1.10 2.19 2.42 (0.58) 1.02 1.20
- ------------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- (0.04) (0.11) (0.05) (0.01) (0.05)
Net realized gains(3) -- (2.00) (1.94) (0.09) -- --
- ------------------------------------------------------------------------------------
Total Distributions -- (2.04) (2.05) (0.14) (0.01) (0.05)
- ------------------------------------------------------------------------------------
Net Asset Value,
End of Period $13.40 $12.30 $12.15 $11.78 $12.50 $11.49
- ------------------------------------------------------------------------------------
Total Return 8.94%++ 20.56% 18.90% (4.36)% 8.90% 11.71%
- ------------------------------------------------------------------------------------
Net Assets,
End of Period (000s) $51,338 $52,911 $52,546 $51,641 $54,809 $50,374
- ------------------------------------------------------------------------------------
Ratios to Average
Net Assets:
Expenses 1.21%+ 1.21% 1.22% 1.22% 1.24% 1.36%
Net investment income 0.15+ 0.43 0.84 0.43 0.08 0.45
- ------------------------------------------------------------------------------------
Portfolio Turnover Rate 51% 151% 177% 45% 87% 46%
- ------------------------------------------------------------------------------------
Average commissions
per share paid on
equity transactions(4) $ 0.05 $ 0.05 $ 0.05 -- -- --
====================================================================================
</TABLE>
(1) The information for the years 1996-1992 represents the closed-end
predecessor to the Fund. Closed-end funds are not subject to the same legal
requirements as open-end funds, especially with respect to liquidity
requirements. The total returns noted for each year may have been different
if the Fund had been an open-end fund from inception.
(2) For the six months ended June 30, 1997 (unaudited).
(3) Includes short-term realized gains distributions which are considered
ordinary income for Federal income tax purposes.
(4) As of September 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 the year.
+ Annualized.
21
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each period:
Class B Shares Class C Shares
-------------- --------------
1997(1) 1997(2)
================================================================================
Net Asset Value, Beginning of Period $ 13.34 $ 13.24
- --------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.00* 0.00*
Net realized and unrealized gain 0.03 0.12
- --------------------------------------------------------------------------------
Total Income From Operations 0.03 0.12
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- --
- --------------------------------------------------------------------------------
Total Distributions -- --
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $ 13.37 $ 13.36
- --------------------------------------------------------------------------------
Total Return++ 0.22% 0.91%
- --------------------------------------------------------------------------------
Net Assets, End of Period (000s) $ 40 $ 10
- --------------------------------------------------------------------------------
Ratios to Average Net Assets+:
Expenses 2.24% 1.89%
Net investment income (0.66) 0.03
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 51% 51%
- --------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions $ 0.05 $ 0.05
================================================================================
(1) For the period from June 25, 1997 (inception date) to June 30, 1997
(unaudited).
(2) For the period from June 24, 1997 (inception date) to June 30, 1997
(unaudited).
* Amount represents less than $0.01.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
22
<PAGE>
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<PAGE>
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<PAGE>
Smith Barney SMITH BARNEY
Disciplined Small ------------
Cap Fund, Inc. A Member of TravelersGroup[LOGO]
Directors
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, Emeritus
Officers
Heath B. McLendon
Chief Executive Officer
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
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
Smith Barney Disciplined Small Cap 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.
Smith Barney Disciplined
Small Cap Fund, Inc.
388 Greenwich Street
New York, New York 10013
FD01319 8/97
