- -------------------------------------------------------------------------------
QUARTERLY REPORT
- --------------------------------------------------------------------------------
The Inefficient-
Market
Fund, Inc.
----------------
September 30, 1996
[Logo] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
- ---------------------------------
The Inefficient-Market Fund, Inc.
- ---------------------------------
Dear Shareholder:
We are pleased to provide you with the third quarter report for The
Inefficient-Market Fund, Inc. for the nine months ended September 30, 1996. In
this letter, we comment on the 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
this report.
Fund Performance Update
During the third quarter, The Inefficient-Market Fund had a total return of
16.60% on net asset value (NAV), assuming the reinvestment of dividends and
capital gains distributions. The Fund's performance compared favorably to the
Russell 2500 Index, which had a total return of 12.75% over the same time
period. During the third quarter, the Standard and Poor's 500 Index ("S&P 500")
generated a total return of 13.50%. The Russell 2500 Index is a
capitalization-weighted index representing small- and mid-sized companies. The
Standard and Poor's 500 Index is a capitalization-weighted index of 500 widely
held common stocks. As of September 30, 1996, the Fund's NAV was $13.40 and its
American Stock Exchange (AMEX) closing price was $11.25.
Economic and Market Overview
During the third quarter, the stock market was buffeted by concerns over slowing
corporate earnings and uncertainty about the future direction of interest rates.
When the U.S. economy demonstrated unexpected strength in early July, and
interest rates rose sharply in response, investors began to discount the worst
of all worlds for stock prices: the combination of slower earnings growth and
rising interest rates. Stocks steadily lost ground until July 16, 1996, when the
S&P 500 reached an intraday low of 606, which marked a 10% decline from its June
peak. Small-cap and growth-oriented stocks were among the hardest hit during the
July sell-off. However, stock prices recovered quickly at the end of July when
the bond market stabilized and second quarter earnings came in largely ahead of
expectations.
At the sector level, fears of both higher interest rates and an economic
slowdown prompted a rotation out of cyclical issues and into defensive growth
stocks, particularly those in the household products, cosmetics
and beverage groups. Despite the volatility of interest rates, the stocks of
consumer finance companies and money center banks rose sharply on increased
merger activity
1
<PAGE>
and solid earnings momentum. Technology stocks began to rebound due to
expectations for improving orders and stronger relative earnings gains by the
end of the year. Health care stocks turned in a mixed performance. Health care
management company stocks declined sharply on deteriorating industry
fundamentals and earnings disappointments, while drug and medical device company
stocks rose on stable growth prospects and improving relative earnings momentum.
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
investors with diversified exposure to the mid- and small-capitalization
segments of the U.S. equity market. TIMCO selects stocks primarily with a
quantitative screening process that looks for companies with attractive relative
values and solid earnings growth potential. In order to achieve consistent
relative performance, TIMCO manages the Fund to mirror the overall risk, sector
weightings and growth/value style characteristics of the Russell 2500 Index.
During the third quarter, The Inefficient-Market Fund's holdings in the health
care sector made the largest positive contribution to relative performance,
helped by a number of better performing positions in the medical devices group,
such as U.S. Surgical, Guidant, Stryker and VISX. The Fund's performance was
also helped by favorable returns in the technology sector, specifically by
Structural Dynamics and Macromedia within the business applications software
group; C-Cube Microsystems and Hadco among the integrated circuit manufacturers,
and by U.S. Robotics and Brooktrout Technology in the computer products group.
The other area where the Fund also gained significantly on its benchmark was the
consumer discretionary sector, in large part on the strength of its holdings in
the specialty retailing group including Tiffany, Oakley and Gymboree.
Market Outlook
In general, smaller capitalization stocks have difficulty outperforming the
stocks of larger capitalized companies late in an economic cycle due to their
less diversified sources of earnings. Because investors react quite harshly to
earnings disappointments in an environment of slower earnings growth, individual
stock selection becomes increasingly crucial to ultimate investment success. As
a result, many investors are likely to prefer owning the stocks of stable growth
companies that have the ability to exploit niche markets in established
industries or operate in sectors of the economy with favorable dynamics, such as
medical devices and specialty retail services. The Fund's
2
<PAGE>
disciplined investment approach continues to focus on companies that offer
improving fundamentals, relative earnings gains and stocks that trade at
attractive values across a number of parameters.
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
October 21, 1996
3
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) September 30, 1996
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
COMMON STOCKS -- 95.3%
Autos & Transportation -- 4.2%
8,200 ABC Rail Products Corp. $ 166,050
10,000 America West Airlines Inc. 117,500
14,600 Continental Airlines Inc., Class B Shares 326,675
7,100 Fritz Cos., Inc.+ 102,950
3,300 GATX Corp. 154,275
10,100 Gentex Corp. 229,775
7,300 Illinois Central Corp. 230,863
2,400 Intermet Corp. 25,800
8,300 Lear Seating Corp.+ 273,900
9,100 Oakwood Homes 250,250
6,600 Trinity Industries, Inc. 220,275
8,500 U.S. Freightways Corp. 174,250
3,300 XTRA Corp. 139,838
- --------------------------------------------------------------------------------
2,412,401
- --------------------------------------------------------------------------------
Consumer Discretionary -- 18.9%
12,600 Accustaff Inc. 326,025
5,200 A.H. Belo Corp. 179,400
3,700 Alberto Culver Co., Class B Shares 160,488
7,200 AMC Entertainment, Inc.+ 112,500
8,500 Alternative Resources Corp.+ 239,063
4,900 American Radio Systems Corp. 182,525
9,000 Bed Bath & Beyond Inc. 246,375
4,500 Blyth Industries Inc. 218,250
6,200 Borders Group Inc. 230,950
7,800 Boston Chicken, Inc.+ 274,950
6,900 CKE Restaurants, Inc. 212,175
7,400 Callaway Golf Co. 252,525
7,100 Claires Stores Inc. 151,763
3,100 Corrections Corp. of America 96,875
6,000 Day Runner Inc. 165,000
13,175 Dollar General Corp. 410,072
4,700 Doubletree Corp. 187,413
8,600 Eckerd Drugs, Inc.+ 240,800
6,400 Emmis Broadcasting Corp. 296,000
5,900 Flightsafety International, Inc. 263,288
7,700 Garden Ridge Corp. 131,863
13,300 General Nutrition Co.+ 233,581
5,200 Grand Casinos Inc. 76,700
7,800 Gymboree Corp. 236,925
6,955 Harman International Industries, Inc. 339,056
6,700 Harte Hanks Communication 186,763
12,800 Heritage Media Corp., Class A Shares+ 241,600
4,700 Just for Feet Inc. 235,588
6,400 Kohl's Corp.+ 230,400
See Notes to Financial Statements.
4
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) September 30, 1996
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Consumer Discretionary -- 18.9% (continued)
11,100 Lands End, Inc. $ 238,650
5,100 Lin Television Corp. 209,100
12,000 Maytag Corp. 234,000
10,300 The Mens Wearhouse, Inc. 257,500
7,200 Micro Warehouse, Inc. 185,400
5,200 Miller, Inc. 210,600
6,100 Nautica Enterprises, Inc.+ 196,725
4,300 Oakley Inc. 182,750
15,750 Officemax, Inc. 220,500
8,300 Performance Food Group Co. 136,950
2,300 Pulitzer Publishing Co. 131,388
2,700 Scholastic Corp. 195,750
10,100 Showboat, Inc. 222,200
3,300 Spring Industries, Inc. 146,850
3,800 St. John Knits, Inc. 190,475
6,600 Stewart Enterprises Inc. 222,750
9,000 Tiffany & Co.++ 360,000
5,200 USA Detergents Inc. 206,700
3,800 Viking Office Products, Inc.+ 114,000
5,500 Vons Companies, Inc.+ 235,813
8,050 Wolverine Worldwide, Inc. 223,388
13,100 Zale Corp.+ 286,563
- --------------------------------------------------------------------------------
10,966,965
- --------------------------------------------------------------------------------
Consumer Staples -- 1.6%
9,500 Dole Food, Inc.++ 399,000
9,900 Robert Mondavi Corp., Class A Shares + 324,225
7,800 Universal Corp. 198,900
- --------------------------------------------------------------------------------
922,125
- --------------------------------------------------------------------------------
Financial Services -- 14.0%
5,100 Advanta Corp., Class A Shares 234,600
4,500 Allied Group, Inc. 173,250
4,100 American Bankers Insurance Group, Inc. 205,000
5,900 Anchor Bancorp Inc. 194,700
10,500 City National Corp. 190,313
400 CMAC Investment Corp. 25,400
6,600 Colonial BancGroup Inc. 230,175
2,000 Crestar Financial Corp. 118,000
7,300 Dauphin Deposit Corp. 226,300
5,800 Donaldson, Lufkin & Jenrette 203,725
9,600 Enhance Financial Services Group 316,800
6,700 Executive Risk, Inc. 257,950
4,000 Finova Group, Inc. 240,000
6,000 First Commerce Corp. 209,250
7,200 First Tennessee National Corp. 238,950
See Notes to Financial Statements.
5
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) September 30, 1996
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Financial Services -- 14.0% (continued)
4,300 First Virginia Banks, Inc. $ 187,050
9,300 Great Financial Corp. 263,888
11,100 Lehman Brothers Holdings, Inc. 283,050
7,300 Mercantile Bankshares Co. 216,263
6,933 Mutual Risk Management Ltd. 201,067
2,515 Old Kent Financial Corp. 106,573
9,900 Olympic Financial Ltd. 243,788
4,700 PMI Group Inc. 249,688
6,000 PennCorp Financial Group Inc. 193,500
7,100 Reinsurance Group of America 311,513
5,300 ReliaStar Financial Corp. 251,750
8,600 Signet Banking Corp. 230,050
11,300 Silicon Valley Bancshares 319,225
5,700 Standard Federal Bancorp 260,775
4,000 Summit Bancorp 159,000
4,600 Sunamerica, Inc. 158,700
7,300 Tig Holdings, Inc. 219,000
3,100 Transatlantic Holdings, Inc. 210,800
6,300 Union Planters Corp. 223,650
6,300 Vesta Insurance Group Inc. 241,763
2,900 Washington Mutual, Inc. 108,025
2,400 Zions Bancorp 212,400
5,900 Zurich Reinsurance Center, Inc. 185,113
- --------------------------------------------------------------------------------
8,101,044
- --------------------------------------------------------------------------------
Healthcare -- 10.2%
3,100 Alza Corp. 83,313
7,900 American Homepatient Inc. 175,775
4,600 American Medical Response, Inc.+ 165,600
5,800 Amerisource Health Corp.+ 258,100
7,000 Apria Healthcare Group Inc. 131,250
1,600 Biogen, Inc.+ 121,600
11,300 CNS, Inc.+ 200,575
7,800 Centocor, Inc.+ 276,900
6,200 Foundation Health Corp. 210,025
11,800 Genzyme Corp.+ 300,900
2,800 Guidant Corp. 154,700
17,450 Health Management Associates, Inc.+ 434,069
4,400 Healthcare Compare Corp.+ 208,450
8,200 Medpartners/Mullikin, Inc. 186,550
11,500 OrNda Healthcorp+ 314,813
3,400 Oxford Health Plans, Inc.+ 169,150
7,900 Phycor, Inc. 300,694
14,300 Physician Reliance Network 218,075
10,000 Renal Treatment Centers, Inc.+++ 332,500
6,200 STERIS Corp. 210,025
See Notes to Financial Statements.
6
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) September 30, 1996
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Healthcare -- 10.2% (continued)
11,500 Stryker Corp. $ 346,438
13,400 Uromed Corp.+ 147,400
9,000 U.S. Surgical Corp. 382,500
11,000 VISX Inc. 297,000
8,300 Watson Pharmaceuticals, Inc.+ 311,250
- --------------------------------------------------------------------------------
5,937,652
- --------------------------------------------------------------------------------
Integrated Oils -- 1.1%
4,100 Pennzoil Co. 216,788
5,100 Tosco Corp. 279,863
6,700 Valero Energy Corp. 146,563
- --------------------------------------------------------------------------------
643,214
- --------------------------------------------------------------------------------
Materials & Processing -- 13.1%
8,800 Avalon Properties, Inc. 204,600
3,800 Avery Dennison Corp. 210,900
7,500 Bemis Co. 254,063
17,600 Bethlehem Steel Corp. 176,000
10,000 BMC Industries, Inc. 286,250
5,700 Boise Cascade Corp. 193,800
8,000 Cabot Corp. 223,000
8,800 Cali Realty Corp. 238,700
2,266 Castle & Cooke, Inc.+ 37,389
8,900 Commercial Metal Co. 291,475
7,800 Cytec Industries, Inc. 303,225
6,300 Dexter Corp. 188,213
8,300 First Mississippi Corp. 223,063
2,600 Georgia Gulf Corp. 77,675
9,900 Health Care Investment, Inc. 322,988
5,900 Healthsource, Inc. 87,025
10,600 Homestake Mining Co. 155,025
4,700 Hughes Supply Inc. 173,900
18,100 International Specialty Products Inc. 181,000
8,400 Liberty Property Trust 182,700
9,200 Longview Fiber Co. 144,900
9,300 Meditrust Corp. 322,013
10,600 Merry Land & Investments Co., Inc. 226,575
5,500 NCI Building Systems Inc. 178,750
10,900 Nationwide Health Properties, Inc. 239,800
1,200 Olin Corp. 100,800
1,400 Owens-Corning Fiberglass Corp.+ 51,625
6,400 Sealed Air Corp.+ 238,400
12,000 Security Capital Pacific Trust 253,500
14,600 Shiloh Industries Inc. 233,600
10,700 Simon DeBartolo Property Group, Inc. 272,850
15,500 Terra Industries, Inc. 230,563
See Notes to Financial Statements.
7
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) September 30, 1996
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Materials & Processing -- 13.1% (continued)
3,100 Texas Industries, Inc. $ 185,613
3,800 Vornado Realty Trust 153,900
14,700 Walter Industries Inc. 189,263
3,600 Willamette Industries, Inc. 235,800
7,200 Wolverine Tube, Inc.+ 309,600
- --------------------------------------------------------------------------------
7,578,543
- --------------------------------------------------------------------------------
Other Energy -- 4.2%
6,000 Apache Corp. 178,500
5,600 Cooper Cameron Corp. 321,300
9,700 Ensco International Inc. 315,250
13,000 Global Industries Ltd. 206,375
14,600 Global Marine Inc. 229,950
5,600 Louisiana Land & Exploration 294,700
14,200 Morningstar Group 163,300
6,500 Noble Affiliates, Inc. 274,625
3,600 Sonat Offshore Drilling, Inc. 159,300
4,700 Transocean Offshore Inc. 287,875
- --------------------------------------------------------------------------------
2,431,175
- --------------------------------------------------------------------------------
Producer Durables -- 6.6%
200 American Power Conversion 2,925
8,300 Charter Power Systems, Inc. 213,725
6,600 Danaher Corp. 273,075
3,000 Harnischfeger Industries, Inc. 113,250
6,800 Hubbell Inc., Class B Shares 251,600
10,500 JLG Industries Inc. 196,875
8,300 Jacobs Engineering Group 186,750
4,800 Litton Industries Inc. 236,400
8,600 Measurex Corp. 226,825
3,000 Raychem Corp. 225,000
9,500 Robbins & Myers Inc. 214,938
6,700 Sunstrand Corp. 261,300
10,700 Tetra Technologies, Inc.+ 196,613
14,900 Thermo Fibertek, Inc.+ 195,563
12,300 Toll Brothers, Inc.+ 204,488
4,700 UCAR International Inc. 190,350
8,200 United Waste Systems Inc. 284,950
6,900 York International Corp. 333,788
- --------------------------------------------------------------------------------
3,808,415
- --------------------------------------------------------------------------------
Technology -- 13.3%
1,700 Altera Corp. 86,063
5,300 America Online, Inc.+ 188,813
3,350 Andrew Corp.+ 167,081
6,900 Atmel Corp.+ 213,038
See Notes to Financial Statements.
8
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) September 30, 1996
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Technology -- 13.3% (continued)
17,500 Auspex Systems Inc. $ 269,063
7,400 Banctec Inc. 154,475
2,100 BMC Software, Inc. 166,950
4,000 Brooktrout Technology Inc. 146,000
8,400 CMS Energy Corp. 253,050
4,500 C-Cube Microsystems, Inc.+ 199,688
7,400 Cadence Design Systems, Inc.+ 264,550
9,800 Cheyenne Software Inc. 210,700
4,700 Cidco, Inc.+ 97,525
3,700 Comverse Technology, Inc. 143,838
11,850 Concord Efs, Inc.+ 305,138
11,100 Credence Systems Corp.+ 174,825
2,500 Datastream Systems Inc. 75,625
3,800 DSP Communications, Inc.+ 212,325
4,900 Electronics for Imaging 351,575
8,800 Eltron International, Inc.+ 284,900
6,200 Encad Inc. 259,625
3,700 Gateway 2000, Inc.+ 177,138
6,100 Hadco Corp. 195,200
3,500 In Focus Systems, Inc.+ 50,313
8,100 Informix Corp.+ 225,788
3,800 Intergated Device Technology, Inc.+ 37,763
10,500 International Rectifier Corp.+ 145,688
5,600 Jack Henry & Associates 177,800
7,900 Kemet Corp.+ 158,988
4,700 Lam Research Corp.+ 125,138
11,100 Macromedia, Inc.+ 230,325
6,300 Medaphis Corp. 94,500
9,800 Microcom, Inc. 83,300
4,600 National Semiconductor Corp. 92,575
5,500 SCI Systems Inc. 309,375
1,900 Solectron Corp. 93,100
8,100 Sungard Data Systems, Inc.+ 364,500
8,100 Structural Dynamics Research 193,388
15,100 TSX Corp. 215,175
6,900 Tencor Instruments Co.+ 124,632
4,400 U.S. Robotics Corp.+ 284,350
2,800 Xilinx Inc. 95,200
- --------------------------------------------------------------------------------
7,699,083
- --------------------------------------------------------------------------------
Utilities -- 8.1%
6,300 AES Corp.++ 248,063
5,900 Allegheny Power System Inc. 171,100
8,200 ATG Resources Inc. 156,825
5,200 Bay State Gas Co. 139,100
10,100 Brooklyn Union Gas Co. 281,538
See Notes to Financial Statements.
9
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) September 30, 1996
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Utilities -- 8.1% (continued)
6,600 California Energy Co. $ 210,375
5,900 Century Telephone Enterprises Inc. 202,813
2,400 Cilcorp Inc. 95,400
4,300 DPL Inc. 100,513
9,000 DQE Inc. 250,875
10,000 Enserch Corp. 208,750
4,900 Florida Progress Corp. 166,600
9,600 Illinova Corp.++ 254,400
7,300 LG & E Energy Corp.++ 162,425
8,100 Metricom Inc.+ 142,763
8,800 Mobil Telecommunications Corp.+ 138,600
5,900 National Fuel Gas Co.++ 216,825
6,300 Nipsco Industries, Inc.++ 225,225
9,300 Piedmont Natural Gas Co. 224,363
4,800 Pinnacle West Capital Corp. 142,200
4,500 Public Service Co.++ 159,750
4,600 Rochester Gas & Electric 83,950
10,200 South Jersey Industries Inc. 239,700
6,300 Teco Energy Inc. 149,625
8,100 Washington Gas Light Co. 178,200
4,900 Wisconsin Energy Corp. 132,269
- --------------------------------------------------------------------------------
4,682,247
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost -- $50,261,747) 55,182,864
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
U.S. GOVERNMENT OBLIGATIONS -- 0.2%
$ 100,000 U.S. Treasury Bill due 12/12/96++
(Cost -- $98,974) 98,998
================================================================================
REPURCHASE AGREEMENT -- 4.5%
2,622,000 Chase Manhattan Bank, 5.54% due 10/1/96;
Proceeds at maturity -- $2,622,404;
(Fully collateralized by U.S. Treasury
Notes, 6.00% due 9/30/98; Market value
-- $2,674,890) (Cost -- $2,622,000) 2,622,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $52,982,721*) $57,903,862
================================================================================
+ Non-income producing security.
++ Security segregated by Custodian for open futures contracts commitments.
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
10
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) September 30, 1996
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $52,982,721) $ 57,903,862
Cash 364
Receivable for securities sold 463,574
Dividends and interest receivable 37,791
- --------------------------------------------------------------------------------
Total Assets 58,405,591
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 630,867
Management fees payable 34,428
Administration fees payable 11,633
Payable to broker 4,200
Accrued expenses 64,764
- --------------------------------------------------------------------------------
Total Liabilities 745,892
- --------------------------------------------------------------------------------
Total Net Assets $ 57,659,699
================================================================================
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) (853,620)
Undistributed net investment income 167,763
Accumulated net realized gain from
security transactions and futures contracts 4,661,264
Net unrealized appreciation of investments and
futures contracts 4,937,190
- --------------------------------------------------------------------------------
Total Net Assets
(Equivalent to $13.40 a share on 4,303,950 shares
of $0.001 par value outstanding, authorized
100,000,000 shares) $ 57,659,699
================================================================================
See Notes to Financial Statements.
11
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Nine Months Ended September 30, 1996
INVESTMENT INCOME:
Dividends $ 498,808
Interest 195,765
- --------------------------------------------------------------------------------
Total Investment Income 694,573
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 310,781
Administration fees (Note 2) 103,594
Shareholder and system servicing fees 25,567
Shareholder communications 18,717
Audit and legal 11,999
Custody 10,481
Directors' fees 3,743
Other 20,005
- --------------------------------------------------------------------------------
Total Expenses 504,887
- --------------------------------------------------------------------------------
Net Investment Income 189,686
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
AND FUTURES CONTRACTS (NOTES3 AND 6):
Realized Gain From:
Security transactions (excluding short-term
securities) 6,339,087
Futures contracts 78,049
- --------------------------------------------------------------------------------
Net Realized Gain 6,417,136
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of
Investments and Futures Contracts:
Beginning of period 3,607,850
End of period 4,937,190
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 1,329,340
- --------------------------------------------------------------------------------
Net Gain on Investments and Futures Contracts 7,746,476
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $7,936,162
================================================================================
See Notes to Financial Statements.
12
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Nine Months Ended September 30, 1996 (unaudited)
and the Year Ended December 31, 1995
1996 1995
================================================================================
OPERATIONS:
Net investment income $ 189,686 $ 466,652
Net realized gain 6,417,136 9,756,550
Increase in net unrealized appreciation 1,329,340 133,385
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations 7,936,162 10,356,587
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- (460,174)
Net realized gains (2,582,970) (8,377,613)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (2,582,970) (8,837,787)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Treasury stock acquired (239,322) (614,298)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Fund Share Transactions (239,322) (614,298)
- --------------------------------------------------------------------------------
Increase in Net Assets 5,113,870 904,502
NET ASSETS:
Beginning of period 52,545,829 51,641,327
- --------------------------------------------------------------------------------
End of period* $ 57,659,699 $ 52,545,829
================================================================================
* Includes undistributed (over distributed)
net investment income of: $ 167,763 $ (21,923)
================================================================================
See Notes to Financial Statements.
13
<PAGE>
- --------------------------------------------------------------------------------
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; (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 was 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
<PAGE>
- --------------------------------------------------------------------------------
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 nine months ended September 30, 1996, Smith Barney Inc. ("SB"),
also a subsidiary of SBH, was paid brokerage commissions of $5,165 by the Fund
on agency portfolio transactions.
All officers and three Directors of the Fund are employees of SB.
3. INVESTMENTS
During the nine months ended September 30, 1996, the aggregate cost of
purchases and proceeds from sales of investments (including maturities, but
excluding short-term securities) were as follows:
================================================================================
Purchases $55,479,015
- --------------------------------------------------------------------------------
Sales 53,068,825
================================================================================
At September 30, 1996, the aggregate gross unrealized appreciation and
depreciation of investments were as follows:
================================================================================
Gross unrealized appreciation $ 7,320,612 *
Gross unrealized depreciation (2,399,471)*
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 4,921,141 *
================================================================================
* Substantially the same for Federal income tax purposes.
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 September
30, 1996, 80,050 shares had been repurchased.
15
<PAGE>
- --------------------------------------------------------------------------------
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 September 30, 1996, the Fund had the following open futures contracts:
Expiration # of Basis Market Unrealized
Contracts Purchased Month/Year Contracts Value Value Gain
================================================================================
Russell 2000 Index 12/96 12 $2,065,951 $2,082,000 $16,049
================================================================================
16
<PAGE>
- --------------------------------------------------------------------------------
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 0.04 0.11 0.05 0.01 0.05 0.13
Net realized and unrealized gain (loss) 1.81 2.31 (0.63) 1.01 1.15 1.82
- -----------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.85 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) (0.60) (1.94) (0.09) -- -- (0.79)
- -----------------------------------------------------------------------------------------------------------
Total Distributions (0.60) (2.05) (0.14) (0.01) (0.05) (0.93)
- -----------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 13.40 $ 12.15 $ 11.78 $ 12.50 $ 11.49 $ 10.34
- -----------------------------------------------------------------------------------------------------------
Total Return 16.60%++ 18.90% (4.36)% 8.90% 11.71% 22.69%
- -----------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $57,660 $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 0.45+ 0.84 0.43 0.08 0.45 1.26
- -----------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 105.17% 176.95% 44.80% 86.86% 45.67% 46.77%
- -----------------------------------------------------------------------------------------------------------
Market Price, End of Period $ 11.25 $ 9.813 $ 9.500 $10.500 $ 9.875 $ 8.875
===========================================================================================================
Average commissions per share
paid on equity transactions(3) $ 0.05 $ 0.05 -- -- -- --
===========================================================================================================
</TABLE>
(1) For the nine months ended September 30, 1996 (unaudited).
(2) Includes short-term realized gains distributions which are considered
ordinary income for Federal tax purposes.
(3) 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.
17
<PAGE>
- --------------------------------------------------------------------------------
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 $2.05
1996
January 9 3/4 - 10 3/8 10 12.23 -18 --
February 10 - 10 5/8 10 5/8 12.62 -16 --
March 10 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 --
July 10 1/8 - 11 5/8 10 1/4 11.89 -14 0.60
August 10 1/2 - 10 3/4 10 5/8 12.72 -16 --
September 10 3/4 - 11 1/4 11 1/4 13.40 -16 --
================================================================================
18
<PAGE>
- --------------------------------------------------------------------------------
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., 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 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.
19
<PAGE>
- --------------------------------------------------------------------------------
Dividend Reinvestment Plan (unaudited) (continued)
- --------------------------------------------------------------------------------
Participants in the Plan may withdraw from the Plan upon written notice to the
Plan Agent which must be received at least ten business days prior to the
distribution record date to become effective for that distribution. Shares in
the account of each Plan participant are held by the Plan Agent in
non-certificated form in the name of the Plan Agent or participant. When a
participant withdraws from the Plan or upon termination of the Plan as provided
below, certificates for whole Fund shares credited to his or her account under
the Plan are issued and a cash payment is made for any fraction of a Fund share
credited to such account.
The automatic reinvestment of distributions does not relieve participants to any
Federal income tax that may be payable on such distributions.
The Fund does not charge participants for reinvesting distributions. Any Plan
Agent's fees for the handling of reinvestment of distributions under the Plan
are paid by the Fund. There are no brokerage charges with respect to Common
Shares issued directly by the Fund as a result of distributions payable either
in stock or in cash. However, each participant pays a pro rata share of
brokerage commissions incurred with respect to the Plan Agent's open market
purchases in connection with the reinvestment of distributions.
Experience under the Plan may indicate that changes are desirable. Accordingly,
the Fund and the Plan Agent reserve the right to amend the Plan as applied to
any distribution paid subsequent to written notice of the change sent to all
stockholders of the Fund at least 90 days before the record date for the
distribution. The Plan also may be terminated by the Fund or the Plan Agent by
at least 30 days' written notice to all stockholders of the Fund. All
correspondence concerning the Plan should be directed to the Plan Agent at First
Data Investor Services Group, Inc., P.O. Box 1376, Boston, MA 02104.
- --------------------------------------------------------------------------------
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 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
FD0787 11/96
