Q U A R T E R L Y R E P O R T
The Inefficient-
Market
Fund, Inc.
- ------------------
March 31, 1997
<PAGE>
- ---------------------------------
The Inefficient-Market Fund, Inc.
- ---------------------------------
Dear Shareholder:
We are pleased to provide the quarterly report for The Inefficient-Market Fund,
Inc. ("Fund") for the three months ended March 31, 1997. In this letter, we
comment on market conditions during the first quarter of 1997, briefly review
the Fund's investment strategy and update you on some important new Fund
developments. A detailed summary of Fund performance and current holdings can be
found in the appropriate sections that follow. In addition, please refer to the
"Special Shareholder Notice" section that immediately follows this letter for
more information regarding recent changes to your Fund.
Fund Performance Update
During the first quarter of 1997, The Inefficient-Market Fund had a return of
- -4.23% on net asset value (NAV) and -3.26% on market value. The Fund's return on
NAV modestly lagged the Russell 2500 Index, which recorded a total return of
- -3.35% over the same period whereas, the Fund's return on market value slightly
outperformed the Russell 2500 Index. The Russell 2500 Index is a value-weighted
index representing smaller- and mid-sized companies. Over the same period, the
Standard & Poor's 500 Composite Stock Index ("S&P 500") generated a total return
of 2.68%. The S&P 500 is a recognized capitalization-weighted equity index that
is weighted in favor of large-company issues.
In order to achieve consistent relative performance, Travelers Investment
Management Company (TIMCO) manages the Fund to mirror the overall risk, sector
weightings and growth/value style characteristics of the Russell 2500 Index
while seeking to outperform the benchmark through active stock selection. For
the one-year period ended March 31, 1997, The Inefficient-Market Fund had a
total return of 9.00% based on NAV which slightly outperformed the 8.68% total
return from the Russell 2500 Index. As of March 31, 1997, the Fund's NAV was
$11.78 and its American Stock Exchange (AMEX) closing price was $11.125.
Economic and Market Overview
The first quarter began on a positive note for the equity market. Fueled by
strong fourth quarter corporate earnings and robust money flows, "blue chip"
stock indices such as the S&P 500 and The Dow Jones Industrial Average climbed
to record highs in early March. However, sentiment in the bond market began to
turn bearish in late February, against the backdrop of unexpected strength in
the economy and comments by Federal Reserve Board Chairman Alan Greenspan
regarding the possibility of "preemptive" action by the Federal Reserve Board
("Fed"). When the Fed ultimately followed through on its
1
<PAGE>
warnings and raised short-term rates on March 25, 1997, long-term Treasury bond
yields spiked over 7%. Concerns about the prospects of future interest rate
hikes triggered a sharp correction in the stock market at the end of March,
erasing most of the earlier gains during the quarter.
Since small-cap stocks had lagged the S&P 500 for nearly three years, investors
might have expected better relative performance from smaller company issues in
the event of a market correction. However, pressured by higher interest rates,
most small-cap issues failed to find any real degree of valuation support. In
the first quarter, the Russell 2500 was down more than 6% relative to the
performance of the S&P 500. Below the surface of a difficult environment for
small-cap stocks, performance varied sharply between investment styles. Hardest
hit were small-cap growth stocks, which typically trade at the highest
price-to-earnings ratios and are the most vulnerable to general swings in
investor sentiment and any hint of an earnings disappointment. (The
price-to-earnings ratio, or P/E ratio, is a common method used by investors to
determine a stock's relative value. The P/E ratio compares a stock's price to
its earnings per share.)
In our view, many small-cap issues now look more attractive on a valuation basis
than at any time in the past six years, even allowing for the fact that smaller
company issues are less liquid and tend to be more sensitive to interest rate
effects. At the end of March 1997, the Russell 2500 was valued at 14 times the
consensus estimate of 1997 earnings-per-share, while the S&P 500 traded at a
relatively lofty 18 times forward earnings.
In the first quarter, as equity investors began to discount tighter Fed monetary
policy and slower Gross Domestic Product (GDP) growth, the sectors of the
economy offering the prospect of relatively stable and predictable earnings
enjoyed the strongest stock price performance. In the consumer staples sector,
the shares of processed food and beverage companies moved higher in response to
improving gross margins. In the finance sector, many regional bank and life
insurance company issues also performed well despite a hostile interest rate
environment.
In the consumer discretionary sector, broad-line retail stocks continued to move
up in response to the unexpected strength of consumer spending. Among the weaker
sectors, small-cap technology issues were down sharply, with the most severe
price correction occurring in the computer software and telecommunication
equipment company stocks. In the health care sector, shares of drug
manufacturers and medical device companies traded generally lower, in part due
to a number of high profile earnings disappointments. In the energy sector, the
stocks of domestic exploration and production companies came under heavy selling
pressure, as the result of weaker oil and gas markets. Basic material stocks
remained weak because of excess production capacity and sluggish product demand.
2
<PAGE>
Fund's Investment Approach and Portfolio Review
TIMCO's approach to equity management is designed to provide investors with
diversified exposure to the small- and mid-sized capitalization segments of the
U.S. equity market. TIMCO selects stocks based on a disciplined quantitative
screening process that seeks both attractive relative value and earnings growth.
During the first quarter of 1997, stock selection in the financial services
sector made the largest positive contribution to the Fund's relative
performance. Specifically, the Fund's investments in a number of the
better-performing regional banks such as Anchor Bancorp and Silicon Valley
Bancshares helped its performance. The Fund also performed well in the consumer
discretionary sector, helped by its holdings in specialty retailing companies
such as Borders Group, General Nutrition and Men's Warehouse.
The Fund's performance in the health care sector was hurt by niche medical
device stocks such as Steris Corp. and Uromed that weakened in response to
company-specific earnings disappointments. The Fund also lost ground versus the
benchmark in the basic materials sector due to earnings shortfalls at
specialized metal processing companies such as Wolverine Tube, Shiloh Industries
and Oregon Metallurgical.
In the technology sector, the Fund is currently overweighted in LSI Logic and
Advanced Mirco Devices. Both chip producers should reap significant benefits
from product innovations and higher factory utilization rates as the
semiconductor industry recovers strongly from an industry-wide inventory
correction. The Fund also has an overweighted position in SCI Systems, the
largest contract manufacturer of electronic components, which should benefit
from increased outsourcing in the computer products industry. In the health care
sector, the Fund currently emphasizes Health Management Associates and Watson
Pharmaceuticals. In the consumer area, the Fund continues to overweight holdings
in well-positioned retailers such as Land's End, General Nutrition and Borders
Group that combine above-average earnings growth and low relative values.
Market Outlook
We expect the relative performance of small-cap stocks to stabilize in the
coming months. On the basis of price-to-earnings or price-to-cash flow
comparisons, the values of many small-cap issues are either at or below the
level reached in late 1990 when small-cap stocks began a three-year period of
strong relative performance. The relative value argument for small-cap stocks is
likely to attract increased attention from many investors, especially if the Fed
steers the U.S. economy to a soft landing in 1997. However, attractive values
alone will not necessarily provide the catalyst for a small-cap rally. Small-cap
stocks tend to outperform at the beginning of a cyclical upturn in the economy,
3
<PAGE>
and the recent move by the Fed to raise short-term interest rates is a painful
reminder that we are currently in the latter stages of the economic cycle.
Moreover, technology-driven gains in productivity appear so far to have
benefited mostly larger-sized companies more than smaller-sized ones.
Despite our relatively cautious outlook for small-cap equities for the rest of
1997, we remain quite positive on the opportunities available through a careful
screening of the small-cap market. We will continue to focus on companies that
have improving business fundamentals, good relative earnings gains and
discounted stock values.
In closing, we are excited about the recent changes to The Inefficient-Market
Fund and thank you for your confidence in our investment management approach. We
look forward to continuing to help you achieve your financial goals.
Sincerely,
/s/ Health B. McLendon
Heath B. McLendon
Chairman
May 8, 1997
4
<PAGE>
- --------------------------------------------------------------------------------
Special Shareholder Notice
On Friday, April 18, 1997, shareholders of The Inefficient-Market Fund, Inc.,
acting on the recommendation of its Board of Directors, approved the Fund's
conversion from a closed-end to an open-end fund and a new name -- the Smith
Barney Disciplined Small Cap Fund, Inc. (A closed-end mutual fund issues a fixed
number of shares, which are usually traded on a stock exchange. An open-end
mutual fund continuously offers to sell and redeem shares at the current net
asset value.)
However, it is anticipated that until Monday, June 23, 1997, the renamed Fund
will remain a closed-end fund and continue to trade on the American Stock
Exchange under its current symbol "IMF." In addition, the Fund's investment
objective of long-term capital appreciation will remain unchanged and it will
continue to be managed by Travelers Investment Management Company (TIMCO).
Current shareholders, on the date the Fund is converted to an open-end fund,
will receive Class A shares. However, through the end of 1997, these shares will
not be exchangeable into any other Smith Barney Mutual Fund. Moreover, in order
to mitigate the attendant costs and any adverse impact on the Fund's operations
resulting from a large number of immediate redemptions, a temporary 2%
redemption fee, payable to the Fund, will be imposed on shares redeemed from the
date the Fund's open ending becomes effective through the end of 1997. Beginning
January 2, 1998, shares will be fully exchangeable into any other Smith Barney
Mutual Fund and will no longer be subject to a redemption fee.
Finally, the Fund's expenses will be re-adjusted to conform it to an open-end
structure. The Fund's current 75 basis point management fee and 25 basis point
administrative fee will be replaced by a new fee structure consisting of a 65
basis point management fee, 10 basis point administrative fee and 25 basis point
12b-1 fee. There will be no net increase in Fund expenses for existing
shareholders under the new open-end fund fee structure.
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) March 31, 1997
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
COMMON STOCKS -- 98.4%
================================================================================
Autos & Transportation -- 4.8%
7,200 Alexander & Baldwin Inc. $ 186,300
7,800 Avondale Industries Inc.* 134,550
14,500 Cavalier Homes Inc. 163,125
10,400 Comair Holdings Inc. 226,200
6,900 Continental Airlines Inc., Class B Shares* 216,487
3,000 GATX Corp. 146,625
8,200 Gentex Corp.* 161,950
2,200 Intermet Corp. 28,875
6,400 Lear Seating Corp.* 213,600
10,900 Mascotech Inc. 223,450
6,800 Oakwood Homes Corp. 119,850
7,300 Swift Transportation Co. Inc.* 186,150
7,800 US Freightways Corp. 201,825
5,900 Wisconsin Central Transportation Corp.* 207,975
- --------------------------------------------------------------------------------
2,416,962
- --------------------------------------------------------------------------------
Consumer Discretionary -- 17.6%
11,500 Accustaff Inc.* 192,625
6,700 Alberto Culver Co., Class A Shares 149,075
2,600 American Greetings, Class A Shares 83,037
7,700 Bed Bath & Beyond Inc.* 186,244
5,500 Blyth Industries Inc.* 198,687
16,200 Borders Group* 305,775
7,300 Boston Chicken, Inc.*+ 222,650
6,500 Carmike Cinemas Inc., Class A Shares* 186,062
10,900 Claire's Stores Inc. 182,575
10,600 Corrections Corp. of America*+ 257,050
6,200 Doubletree Corp.* 220,100
6,000 Evergreen Media Corp.* 175,125
5,000 Fred Meyer Inc.* 206,250
7,100 Fruit of the Loom, Inc.* 294,650
14,000 Furniture Brands International, Inc.* 210,000
15,100 General Nutrition Co.* 305,775
3,755 Harman International Industries, Inc. 125,792
6,200 Harte-Hanks Communications Inc. 180,575
5,400 Holophane Corp.* 105,300
6,885 HSN Inc.* 174,707
4,700 International Game Technology 75,787
5,200 King World Productions, Inc.* 189,800
10,200 Lands' End, Inc.* 270,300
11,000 Maytag Corp. 226,875
3,500 Miller, Inc. 238,875
7,200 Mohawk Industries, Inc.* 150,300
7,500 Nautica Enterprises, Inc.* 188,438
8,400 Outback Steakhouse, Inc.* 168,000
See Notes to Financial Statements.
6
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) March 31, 1997
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Consumer Discretionary -- 17.6% (continued)
7,600 Performance Food Group Co.* $ 133,950
6,700 Promus Hotel Corp.* 222,775
3,400 Pulitizer Publishing Co. 147,050
7,400 Rite Aid Corp. 310,800
9,600 Ross Stores Inc. 243,600
6,400 SFX Broadcasting Inc.* 180,800
9,300 Showboat, Inc. 183,675
8,500 SITEL Corp.* 113,688
3,500 St. John Knits, Inc. 151,375
6,100 Stewart Enterprises Inc. 222,650
2,500 Supervalu Inc. 74,375
7,400 The Mens Wearhouse, Inc.* 203,500
5,500 Tiffany & Co. 209,000
7,200 Unifi Inc. 219,600
6,500 US 1 Industries Inc.* 229,125
7,100 USA Detergents Inc.* 163,300
8,500 Valassis Communications Inc.* 190,188
3,500 Viking Office Products, Inc.* 67,813
5,350 Wolverine Worldwide, Inc. 195,275
- --------------------------------------------------------------------------------
8,932,968
- --------------------------------------------------------------------------------
Consumer Staples -- 2.5%
7,400 Dean Foods Co. 256,225
5,500 Dole Food Co., Inc. 207,625
4,300 Interstate Bakeries, Corp. 203,175
9,500 McCormick & Co., Inc. 232,750
7,400 Richfood Holdings Inc. 138,750
7,200 Universal Corp. 207,900
- --------------------------------------------------------------------------------
1,246,425
- --------------------------------------------------------------------------------
Financial Services -- 16.5%
3,500 AMBAC Inc.+ 225,750
3,800 American Bankers Insurance Group, Inc. 185,250
5,200 AmSouth Bancorp. 250,900
5,300 Anchor Bancorp Inc. 234,525
3,400 Bay View Capital Corp. 173,400
4,300 Capital One Financial Co. 160,175
2,800 CCB Financial Corp. 179,900
4,400 Centura Banks Inc. 171,600
11,300 City National Corp. 248,600
800 CMAC Investment Corp. 26,700
7,900 Colonial BancGroup Inc. 181,700
9,000 Conseco Inc. 320,625
3,200 Crestar Financial Corp. 110,800
18,300 Dime Bancorp Inc.* 281,362
3,800 Donaldson, Lufkin & Jenrette, Inc. 139,175
See Notes to Financial Statements.
7
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) March 31, 1997
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Financial Services -- 16.5% (continued)
7,900 Everest Reinsurance Holdings, Inc. $ 232,062
4,000 Executive Risk, Inc. 185,500
3,200 FINOVA Group, Inc. 216,400
3,900 First American Corp. 248,137
6,600 First Tennessee National Corp. 278,850
4,200 First Virginia Banks, Inc. 215,250
7,700 Glendale Federal Bank* 177,100
8,500 Great Financial Corp. 262,437
10,200 HCC Insurance Holdings Inc.+ 249,900
16,200 Hibernia Corp. 212,625
8,700 Lehman Brothers Holdings, Inc. 253,388
6,400 Mercantile Bankshares Co. 216,000
4,433 Mutual Risk Management Ltd. 160,708
2,315 Old Kent Financial Corp. 109,094
9,600 Old Republic International Corp. 246,000
5,500 Penncorp Financial Group Inc. 176,000
6,100 People's Heritage Financial Group, Inc. 187,575
4,300 PMI Group Inc. 215,538
4,000 Relistar Financial Corp. 236,500
7,900 Silicon Valley Bancshares* 280,450
6,700 TIG Holdings, Inc. 212,725
2,400 Transatlantic Holdings, Inc. 201,600
5,800 Union Planters Corp. 235,625
5,800 Vesta Insurance Group Inc. 206,625
2,000 Zions Bancorp. 237,500
- --------------------------------------------------------------------------------
8,344,051
- --------------------------------------------------------------------------------
Healthcare -- 8.2%
2,800 ALZA Corp.* 77,000
7,300 American Homepatient Inc.* 162,425
4,100 AmeriSource Health Corp.* 179,375
6,600 Arbor Health Care Co.* 167,475
6,200 Bergen Brunswig Corp., Class A Shares 184,450
2,900 Biogen, Inc.* 108,387
14,100 Capstone Pharmacy Services, Inc.* 155,100
7,200 Centocor, Inc.* 219,600
15,100 Creative Biomolecules Inc.* 113,250
7,200 Dura Pharmaceuticals Inc.* 257,400
8,400 Genzyme Corp.* 189,000
10,250 Health Management Associates, Inc.*+ 243,437
5,200 Healthcare COMPARE Corp.* 211,250
6,400 Living Centers of America* 220,800
7,300 Phycor Inc.* 198,925
9,200 Renal Treatment Centers, Inc.* 207,000
10,600 Stryker Corp. 263,675
6,200 U.S. Surgical Corp. 189,100
See Notes to Financial Statements.
8
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) March 31, 1997
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Healthcare -- 8.2% (continued)
7,100 Vencor Inc.* $ 268,913
10,500 VISX Inc.* 232,313
5,200 Watson Pharamaceuticals, Inc.* 185,900
2,400 Wellpoint Health Network, Inc.* 99,600
- --------------------------------------------------------------------------------
4,134,375
- --------------------------------------------------------------------------------
Integrated Oils -- 1.0%
4,900 Murphy Oil Corp. 230,300
12,700 Tesoro Petroleum Corp.* 133,350
5,100 Tosco Corp. 145,350
- --------------------------------------------------------------------------------
509,000
- --------------------------------------------------------------------------------
Materials & Processing -- 14.3%
6,300 Alumax Inc.* 218,137
5,500 Aptagroup Inc. 210,375
3,800 Armstrong World Industries Inc. 246,050
8,100 Avalon Properties, Inc. 222,750
8,000 BMC Industries, Inc. 226,000
5,500 Beacon Properties Corp. 182,187
6,900 Bemis Inc. 276,000
5,200 Boise Cascade Corp. 158,600
10,000 Cabot Corp. 240,000
7,000 Cali Realty Corp. 224,000
10,300 Coeur D'Alene Mines Corp. 167,375
5,500 Commercial Metal Co. 157,437
8,000 Crompton & Knowles Corp. 156,000
5,700 Cytec Industries, Inc.* 215,887
5,800 Dexter Corp. 174,725
5,500 Felcor Suite Hotels Inc. 202,125
6,600 First Industrial Realty Trust Inc. 208,725
2,400 Georgia Gulf Corp. 60,600
5,700 Granite Construction Inc. 117,562
7,200 Health Care Properties Investment, Inc. 238,500
14,500 Host Marriott Corp.* 246,500
16,600 International Specialty Products Inc.* 207,500
3,200 James River Corp. 93,200
9,800 Liberty Property Trust 240,100
4,700 Lone Star Industries, Inc. 182,125
8,500 Meditrust Corp. 316,625
10,000 Nationwide Health Properties, Inc. 213,750
6,400 OM Group Inc. 180,000
6,400 Oregon Metallurgical Corp.* 115,200
5,900 Sealed Air Corp.* 242,638
11,000 Security Capital Pacific Trust 268,125
10,100 Shiloh Industries Inc.* 143,925
8,100 Simon DeBartolo Property Group, Inc. 245,025
See Notes to Financial Statements.
9
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) March 31, 1997
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Materials & Processing -- 14.3% (continued)
15,500 Stone Container Corp. $ 172,438
14,200 Terra Industries, Inc. 198,800
13,500 Walter Industries Inc.* 183,938
4,100 Wolverine Tube, Inc.* 106,600
- --------------------------------------------------------------------------------
7,259,524
- --------------------------------------------------------------------------------
Other Energy -- 4.7%
6,000 BJ Services Co.* 287,250
7,600 Chesapeake Energy Corp.*+ 158,650
3,000 Cooper Cameron Corp.* 205,500
5,300 Forcenergy Inc.* 152,375
13,400 Global Marine Inc.*+ 288,100
5,100 Louisiana Land & Exploration Co. 241,613
10,800 Marine Drilling Co., Inc.* 191,700
6,000 Noble Affiliates, Inc. 226,500
13,100 Noble Drilling Corp.* 225,975
10,600 Oryx Energy Co.* 204,050
3,500 Transocean Offshore Inc. 196,438
- --------------------------------------------------------------------------------
2,378,151
- --------------------------------------------------------------------------------
Producer Durables -- 7.4%
200 American Power Conversion* 4,325
6,900 Crane Co. 216,487
6,100 Danaher Corp. 253,912
7,200 Duriron Co. Inc. 158,400
2,800 Harnischfeger Industries, Inc. 130,200
6,300 Hubbell Inc., Class B Shares 266,175
7,600 Jacobs Engineering Group, Inc.* 186,200
12,800 JLG Industries Inc. 251,200
1,300 Litton Industries Inc.* 52,325
2,100 Raychem Corp. 172,988
8,700 Robbins & Myers Inc. 230,550
6,200 Sunstrand Corp. 268,925
3,800 Thiokol Corp. 209,950
5,600 Thomas & Betts Corp. 239,400
11,300 Toll Brothers, Inc.* 206,225
7,500 United Waste Systems Inc.* 279,375
8,100 US Filter Corp.* 250,088
7,300 Watts Industries Inc. 169,725
4,800 York International Corp. 201,000
- --------------------------------------------------------------------------------
3,747,450
- --------------------------------------------------------------------------------
Technology -- 13.6%
8,600 Advanced Micro Devices Inc.* 356,900
3,200 Altera Corp.* 137,600
4,575 Andrew Corp.*+ 165,272
See Notes to Financial Statements.
10
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) March 31, 1997
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Technology -- 13.6% (continued)
7,100 Applix Inc.* $ 45,262
5,200 Avant Corp.* 141,050
6,800 BancTec, Inc.* 173,400
5,300 Brooktrout Technology, Inc.* 78,837
18,200 Computervision Corp.* 97,825
3,400 Comverse Technology, Inc.* 134,300
10,450 Concord Efs, Inc.* 195,938
10,200 Credence Systems Corp.* 198,900
8,400 Datastream Systems Inc.* 134,400
2,550 Diebold Inc. 95,944
17,000 DSP Communications, Inc.* 163,625
6,000 Electronic Arts Inc.* 159,750
6,800 Electronics for Imaging Inc.* 271,150
8,100 Eltron International, Inc.* 158,962
3,900 ENCAD Inc.* 116,512
4,300 Hadco Corp.* 166,625
1,400 Harris Corp. 107,625
3,200 In Focus Systems, Inc.* 55,200
7,800 Jack Henry & Associates 173,550
7,300 KEMET Corp.* 136,875
6,400 Lam Research Corp.* 216,000
4,800 LSI Logic Corp.* 166,800
2,800 Maxim Integrated Products Inc.* 135,450
6,000 McAfee Associates Inc.* 265,500
4,200 National Semiconductor Corp.* 115,500
7,300 Network General Corp. 156,950
12,800 Periphonics Corp.* 188,800
6,700 PictureTel Corp.* 79,563
4,400 Policy Management System Corp.* 191,950
6,800 Read-Rite Corp.* 171,700
7,700 S3 Inc.* 100,100
5,100 SCI Systems Inc.* 258,188
5,400 SPSS Inc.* 134,325
5,800 Storage Technology Inc.* 227,650
4,800 SunGuard Data Systems, Inc.* 208,800
4,000 Symbol Technologies Inc.+ 193,000
10,000 Systemsoft Corp.* 100,000
6,800 Tech Data Corp.* 164,050
1,200 Tektronix Inc. 60,600
8,900 Teradyne Inc.* 256,988
- --------------------------------------------------------------------------------
6,857,416
- --------------------------------------------------------------------------------
Utilities -- 7.8%
3,700 AES Corp.* 207,200
7,500 AGL Resources Inc. 137,813
8,100 Boston Edison Co. 211,612
See Notes to Financial Statements.
11
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) March 31, 1997
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Utilities -- 7.8% (continued)
7,400 Brooklyn Union Gas Co. $ 203,500
6,500 Calenergy Inc.* 221,000
2,000 Century Telephone Enterprises Inc. 59,000
4,700 CILCORP Inc. 178,600
6,400 CMS Energy Corp. 210,400
8,000 DPL Inc. 193,000
8,300 DQE Inc. 230,325
9,200 ENSERCH Corp. 188,600
2,700 Illinova Corp. 61,762
2,100 Ipalco Enterprises Inc. 63,788
8,900 LG& E Energy Corp. 214,713
7,400 Metricom Inc.*+ 74,000
6,600 National Fuel Gas Co. 282,150
5,800 NIPSCO Industries Inc. 227,650
4,500 Northeast Utilities System Inc. 35,438
8,900 Pinnacle West Capital Corp. 268,113
7,600 Public Service Co. 294,500
9,400 South Jersey Industries Inc. 200,925
7,400 Washington Gas Light Co. 166,500
- --------------------------------------------------------------------------------
3,930,589
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost -- $47,764,272) 49,756,911
================================================================================
WARRANT -- 0.0%
1,011 Homestead Village Inc., Expire 10/29/97*
(Cost -- $2,530) 7,330
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
REPURCHASE AGREEMENT -- 1.6%
$803,000 Golman Sachs &Co., 6.444% due 4/1/97; Proceeds at
maturity -- $803,144; (Fully collateralized by U.S.
Treasury Notes, 4.750% due 10/31/98; Market value --
$819,465) (Cost -- $803,000) 803,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $48,569,802**) $50,567,241
================================================================================
* Non-income producing security.
+ Security on loan (Note 8).
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
12
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) March 31, 1997
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $48,569,802) $ 50,567,241
Cash and cash equivalents 2,013,602
Receivable for securities sold 161,044
Dividends and interest receivable 31,702
- -------------------------------------------------------------------------------
Total Assets 52,773,589
- -------------------------------------------------------------------------------
LIABILITIES:
Payable for securities loaned (Note 8) 2,012,900
Management fees payable 33,853
Administration fees payable 11,442
Accrued expenses 64,226
- -------------------------------------------------------------------------------
Total Liabilities 2,122,421
- -------------------------------------------------------------------------------
Total Net Assets $ 50,651,168
===============================================================================
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) (888,402)
Undistributed net investment income 23,930
Accumulated net realized gain from security transactions 771,099
Net unrealized appreciation of investments 1,997,439
- -------------------------------------------------------------------------------
Total Net Assets
(Equivalent to $11.78 a share on 4,300,950 shares of
$0.001 par value outstanding, 100,000,000 shares authorized) $ 50,651,168
===============================================================================
See Notes to Financial Statements.
13
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Three Months Ended March 31, 1997
INVESTMENT INCOME:
Dividends $ 147,971
Interest 15,596
- -------------------------------------------------------------------------------
Total Investment Income 163,567
- -------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 99,303
Administration fees (Note 2) 33,101
Shareholder and system servicing fees 9,343
Shareholder communications 6,148
Audit and legal 3,941
Custody 3,443
Directors' fees 1,229
Other 3,406
- -------------------------------------------------------------------------------
Total Expenses 159,914
- -------------------------------------------------------------------------------
Net Investment Income 3,653
- -------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (NOTES 3 AND 6):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 11,853,644
Cost of securities sold 11,716,916
- -------------------------------------------------------------------------------
Net Realized Gain 136,728
- -------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period 4,397,795
End of period 1,997,439
- -------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (2,400,356)
- -------------------------------------------------------------------------------
Net Loss on Investments (2,263,628)
- -------------------------------------------------------------------------------
Decrease in Net Assets From Operations $ (2,259,975)
===============================================================================
See Notes to Financial Statements.
14
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Three Months Ended March 31, 1997 (unaudited)
and the Year Ended December 31, 1996
1997 1996
===============================================================================
OPERATIONS:
Net investment income $ 3,653 $ 235,743
Net realized gain 136,728 8,411,575
Increase (decrease) in net unrealized appreciation (2,400,356) 789,945
- -------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations (2,259,975) 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 5):
Treasury stock acquired -- (274,104)
- -------------------------------------------------------------------------------
Decrease in Net Assets From
Fund Share Transactions -- (274,104)
- -------------------------------------------------------------------------------
Increase (Decrease) in Net Assets (2,259,975) 365,314
NET ASSETS:
Beginning of period 52,911,143 52,545,829
- -------------------------------------------------------------------------------
End of period* $50,651,168 $52,911,143
===============================================================================
* Includes undistributed net investment income of: $ 23,930 $ 20,277
===============================================================================
See Notes to Financial Statements.
15
<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 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) 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 distributed are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles; 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.
Smith Barney Mutual Funds Management Inc. ("SBMFM"), another subsidiary of
SBH, acts as the Fund's administrator. 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.
16
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
For the three months ended March 31, 1997, Smith Barney Inc. ("SB"), also a
subsidiary of SBH, was paid brokerage commissions of $1,415 by the Fund on
agency portfolio transactions.
All officers and three directors of the Fund are employees of SB.
3. INVESTMENTS
For the three months ended March 31, 1997, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $11,082,125
- --------------------------------------------------------------------------------
Sales 11,853,644
================================================================================
At March 31, 1997, aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes was substantially as follows:
================================================================================
Gross unrealized appreciation $ 5,092,283
Gross unrealized depreciation (3,094,844)
- -------------------------------------------------------------------------------
Net unrealized appreciation $ 1,997,439
===============================================================================
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 March 31,
1997, 83,050 shares had been repurchased.
6. 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
17
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
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 March 31, 1997, there were no open futures contracts.
7. 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 March 31, 1997, the Fund had no open purchased call or put option
contracts.
8. 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, and receives a lenders fee, which is shared 60% by the Fund and
40% by the custodian. 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. The Fund has market risk on
the collateral received.
At March 31, 1997, the Fund loaned common stocks having a value of
approximately $1,867,038 and received cash collateral of $2,012,900 for the
loan.
18
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
9. SUBSEQUENT EVENT
On Friday April 18, 1997, shareholders of the Inefficient-Market Fund, Inc.
acting on the recommendation of its Board of Directors, approved the Fund's
conversion from closed-end to an open-end fund and a new name -- the Smith
Barney Disciplined Small Cap Fund, Inc. In addition, the Fund's investment
objective of long-term capital appreciation will remain unchanged and it will
continue to be managed by Travelers Investment Management Company (TIMCO).
19
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
1997(1) 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 0.00* 0.05 0.11 0.05 0.01 0.05
Net realized and
unrealized gain (loss) (0.52) 2.14 2.31 (0.63) 1.01 1.15
- ------------------------------------------------------------------------------------------------
Total Income (Loss)
From Operations (0.52) 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(2) -- (2.00) (1.94) (0.09) -- --
- ------------------------------------------------------------------------------------------------
Total Distributions -- (2.04) (2.05) (0.14) (0.01) (0.05)
- ------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $11.78 $12.30 $12.15 $11.78 $12.50 $11.49
- ------------------------------------------------------------------------------------------------
Total Return, Based on
Market Value (3.26)%++ 39.57% 24.18% (8.46)% 6.44% 11.86%
- ------------------------------------------------------------------------------------------------
Total Return, Based on
Net Asset Value (4.23)%++ 20.56% 18.90% (4.36)% 8.90% 11.71%
- ------------------------------------------------------------------------------------------------
Net Assets,
End of Period (000s) $50,651 $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 0.03+ 0.43 0.84 0.43 0.08 0.45
- ------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 21% 151% 177% 45% 87% 46%
- ------------------------------------------------------------------------------------------------
Market Price,
End of Period $11.125 $11.500 $9.813 $9.500 $10.500 $9.875
- ------------------------------------------------------------------------------------------------
Average commissions
per share paid on
equity transactions(3) $0.05 $0.05 $0.05 -- -- --
================================================================================================
</TABLE>
(1) For the three months ended March 31, 1997 (unaudited).
(2) Includes short-term realized gains distributions which are considered
ordinary income for Federal income tax purposes.
(3) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
* 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.
20
<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 3/8 10 1/8 12.99 -22 --
July 10 1/8 - 10 3/8 10 3/8 13.16 -21 --
August 10 3/8 - 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 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 11.92 -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 --
October 11 3/8 - 12 1/4 11 3/4 13.08 -10 --
November 11 - 12 1/2 11 12.29 -10 1.40
December 11 - 11 7/8 11 1/2 12.30 -7 0.04
1997
January 11 1/4 - 12 3/8 12 3/8 12.65 -2 --
February 11 7/8 - 12 1/4 11 7/8 12.37 -4 --
March 11 1/8 - 12 1/4 11 1/8 11.78 -6 --
================================================================================
21
<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 record 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.
22
<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
shares of its common stock in the open market.
23
<PAGE>
(This page intentionally left blank.)
<PAGE>
The Inefficient-
Market Fund, Inc.
Directors
Jessica M. Bibliowicz
Joseph H. Fleiss
Donald R. Foley
Paul Hardin
Francis P. Martin, M.D.
Heath B. McLendon, Chairman
Roderick C. Rasmussen
Bruce D. Sargent
John P. Toolan
C. Richard Youngdahl
Emeritus
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
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
FD2394 5/97
