Smith Barney
DISCIPLINED SMALL CAP FUND, INC.
388 Greenwich Street
New York, New York 10013
(800)-451-2010
Statement of Additional
Information
June 23 ,
1997
This Statement of Additional Information expands upon and
supplements the information contained in the current Prospectus of Smith
Barney Disciplined Small Cap Fund, Inc. (formerly The Inefficient-Market
Fund, Inc. (the "Fund"), dated June 23 , 1997, as amended or supplemented
from time to time, and should be read in conjunction with the Fund's
Prospectus. The Fund's Prospectus may be obtained from any Smith Barney
Financial Consultant, or by writing or calling the Fund at the address or
telephone number set forth above. This Statement of Additional
Information, although not in itself a prospectus, is incorporated by
reference into the Prospectus in its entirety.
TABLE OF CONTENTS
For ease of reference, the same section headings are used in both the
Prospectus and this Statement of Additional Information, except where
shown below:
Management of the Fund 1
Administration of the Fund 3
Investment Objective and Management Policies 4
Purchase of Shares 9
Redemption of Shares 9
Distributor 10
Valuation of Shares 11
Exchange
Privilege.............................................................
.................. 11
Performance Data (See in the Prospectus "Performance'') 12
Taxes (See in the Prospectus "Dividends, Distributions and Taxes'')
14
Additional Information. 15
Financial Statements.. 15
MANAGEMENT OF THE FUND
The executive officers of the Fund are employees of certain of the
organizations that provide services to the Fund. These organizations are
as follows:
Name Service
Smith Barney Inc.
("Smith Barney'') Distributor
Travelers Investment Management Company
("TIMCO") Investment Adviser
Smith Barney Funds Management Inc.
("SBMFM") Administrator
PNC Bank, National Association ("PNC") Custodian
First Data Investor Services Group, Inc. ("First Data").....
Transfer Agent
These organizations and the functions they perform for the Fund are
discussed in the Prospectus and in this Statement of Additional
Information.
Directors and Executive Officers of the Fund
The Directors and executive officers of the Fund, together with
information as to their principal business occupations during the past
five years, are shown below. Each Director who is an "interested person"
of the Fund, as defined in the Investment Company Act of 1940, as amended
(the "1940 Act"), is indicated by an asterisk.
Joseph H. Fleiss
Retired; Director of ten investment companies
associated with Smith Barney. Formerly Senior Vice
President of Citibank, Manager of Citibank's Bond
Investment Portfolio and Money Desk, and a Director of
Citicorp Securities Co., Inc.; 79.
Donald R. Foley
Retired; Director of ten investment companies
associated with Smith Barney. Formerly Vice President
of Edwin Bird Wilson, Incorporated (advertising);74
Paul Hardin
Interim President of University of Alabama at
Birmingham; Professor of Law at the University of North
Carolina at Chapel Hill; Director of twelve investment
companies associated with Smith Barney and a Director
of The Summit Bancorporation. Formerly, Chancellor of
the University of North Carolina at Chapel Hill; 65.
Francis P.
Martin
Practicing physician; Director of ten investment
companies associated with Smith Barney; formerly
President of the Nassau Physicians' Fund, Inc.; 72
Heath B.
McLendon*
Managing Director of Smith Barney; Director of forty
two investment companies associated with Smith Barney;
Chairman of the Board of Smith Barney Strategy Advisers
Inc.: and President of SBMFM and Director of TIMCO.
Prior to July 1993, Senior Executive Vice President of
Shearson Lehman Brothers Inc.; Vice Chairman of
Shearson Asset Management; 63
John P. Toolan
Retired; Director of ten investment companies
associated with Smith Barney. Director of John Hancock
Funds. Formerly Director and Chairman of the Smith
Barney Trust Company, Director of Smith Barney Inc. and
the Manager. Prior to 1992, Senior Executive Vice
President, Director and Member of the Executive
Committee of Smith Barney; 66
Roderick C.
Rasmussen
Investment Counselor; Director of ten investment
companies associated with Smith Barney. Formerly Vice
President of Dresdner and Company Inc. (investment
counselors); 70
Bruce D.
Sargent*
Managing Director of Smith Barney, and Vice President
and Director of SBMFM, Smith Barney Funds, Inc., and
Smith Barney World Funds, Inc.; 53
Christina T.
Sydor
Secretary. Managing Director of Smith Barney; General
Counsel and Secretary of SBMFM and Secretary of the
other investment companies associated with Smith
Barney; 46.
Lewis Daidone
Senior Vice President and Treasurer. Managing Director
of Smith Barney; Director and Senior Vice President of
SBMFM; Senior Vice President and Treasurer of the other
investment companies associated with Smith Barney; 40
Thomas M.
Reynolds
Controller and Assistant Secretary. Director of Smith
Barney in the Asset Management Division and Controller
of and Assistant Controller of certain other investment
companies associated with Smith Barney ; 36.
As of February 10, 1997, the Directors and Officers of the Fund owned
in the aggregate less than 1% of the outstanding shares of the Fund. No
officer, director or employee of Smith Barney or any parent or subsidiary
receives any compensation from the Fund for serving as an officer or
Director of the Fund. The Fund pays each Director who is not an officer,
director or employee of Smith Barney or any of its affiliates a fee of
$42,000 per annum plus $100 per meeting attended and reimburses them for
travel and out-of-pocket expenses. For the Fund's fiscal year ended
December 31, 1996, such fees and expenses totaled $5,000. Upon the
attainment of age 72 the Fund's current Directors may elect to change to
emeritus status. Any directors elected or appointed to the Board in the
future will be required to change to emeritus status upon attainment of
age 80. Directors Emeritus are entitled to serve in emeritus status for
a maximum of 10 years during which time they are paid 50% of the annual
retainer fee and meeting fees otherwise applicable to the Fund Directors,
together with reasonable out-of-pocket expenses for each meeting
attended.
For the fiscal year ended December 31, 1996, the Directors of the Fund
were paid the following compensation:
Compensation Table
Name of Person
Aggregate
Compensat
ion
from Fund
Pension or
Retirement
Benefits Accrued
as part
of Fund Expenses
Total
Compensation
from Fund and
Fund Complex
Paid to
Directors
Number of
Funds for Which
Director Serves
Within Fund
Complex
Joseph H.
Fleiss+
828
0
58,500
10
Donald R.
Foley+
828
0
58,300
10
Paul Hardin+
956
0
76,850
12
Heath B.
McLendon*
0
0
0
42
Francis P.
Martin
856
0
58,300
10
Roderick C.
Rasmussen
856
0
58,500
10
Bruce D.
Sargent*
0
0
0
3
John P.
Toolan+
856
0
58,500
10
C. Richard
Youngdahl
856
0
58,500
10
* Designates an interested director".
+ Pursuant to the Fund's deferred compensation plan, the indicated
Directors have elected to defer the following payment of some or all of
their compensation: Joseph H. Fleiss: $828, Donald P. Foley : $828,
Paul Hardin: $956 and John P. Toolan: $856.
Investment Adviser -TIMCO
Travelers Investment Management Company ("TIMCO") serves as investment
adviser to the Fund pursuant to a written agreement (the "Advisory
Agreement"). The services provided by TIMCO under the Advisory Agreement
are described in the Prospectus under "Management of the Fund." TIMCO
bears all of it's expenses of it's employees and overhead in connection
with it's duties under the Advisory Agreement. TIMCO is a wholly owned
subsidiary of Smith Barney Holdings Inc. ("Holdings"), which is in turn a
wholly owned subsidiary of Travelers Group Inc. ("Travelers").
As compensation for investment advisory services, the Fund pays TIMCO
a fee computed daily and paid monthly at the annual rate of 0.65% of the
value of the Fund's average daily net assets. For the 1996, 1995 and 1994
fiscal years, the Fund paid $416,000, $418,000 and $402,000,
respectively, in investment advisory fees.
Administrator - SBMFM serves as administrator to the Fund pursuant to
a written agreement (the "Administration Agreement"). The services
provided by SBMFM under the Administration Agreement are described in the
Prospectus under "Management of the Fund." SBMFM pays the salary of any
officer and employee who is employed by both it and the Fund and bears
all expenses in connection with the performance of its services.
As compensation for administration services rendered to the Fund,
SBMFM receives a fee at the annual rate of 0.10% of the value of the
Fund's average daily net assets. For the 1996, 1995 and 1994 fiscal
period, the Fund paid SBMFM $138,000 , $139,000 and $134,000 in
administration fees.
The Investment Advisory Agreement provides that except for the
expenses specifically assumed by TIMCO, the Fund bears expenses incurred
in its operation, including: fees of the directors not affiliated with
the Adviser or its affiliates and board meeting expenses; fees of the
Adviser and of Smith Barney Mutual Funds Management Inc. (or any
successor) as the Administrator; interest charges; taxes; charges and
expenses of the Fund's legal counsel and independent accountants, and of
the transfer agent, registrar and dividend disbursing agent of the Fund;
expenses of issue, repurchase or redemption of Shares; expenses of
printing and mailing stockholder reports, notices, proxy statements and
reports to governmental offices; brokerage and other expenses connected
with the execution, recording and settlement of portfolio security
transactions; expenses connected with negotiating, effecting purchases or
sales or registering privately issued portfolio securities; fees and
expenses of the Fund's custodians for all services to the Fund, including
safekeeping of funds and securities and maintaining required books and
accounts; expenses of fidelity bonding and other insurance premiums;
expenses of stockholder's meetings; filing fees and expenses related to
the registration and qualification of the Fund's shares and the Fund
under Federal of State Securities laws and maintaining such registrations
and qualifications (including the printing of the Funds registration
statements and prospectuses); fees payable to the National Association of
Securities Dealers, Inc. in connection with this offering; and its other
business and operating expenses.
TIMCO has agreed that if in any fiscal year the aggregate expenses of
the Fund (including fees paid pursuant to the Advisory and Agreements,
but excluding interest, taxes, brokerage, fees paid pursuant to the
Fund's services and distribution plan, and, with the prior written
consent of the necessary state securities commissions, extraordinary
expenses) exceed the expense limitation of any state having jurisdiction
over the Fund, TIMCO will, to the extent required by state law, reduce
its management fee by such excess expense. Such a fee reduction, if any,
will be reconciled on a monthly basis. The most restrictive state
limitation applicable to the Fund would require TIMCO to reduce its fees
in any year that such excess expenses exceed 2.5% of the first $30
million of average net assets, 2% of the next $70 million of average net
assets and 1.5% of the remaining average net assets.
Counsel and Auditors
Sullivan & Cromwell serves as counsel to the Fund. The Directors who
are not "interested persons" of the Fund have selected Sullivan &
Cromwell as their legal counsel.
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 10154, has
been selected as the Fund's independent auditor to examine and report on
the Fund's financial statements and highlights for the fiscal year ending
December 31, 1997.
Investment Objective and Management Policies
The Prospectus discusses the Fund's investment objective and the
policies it employs to achieve its objective. The following discussion
supplements the description of the Fund's investment objective and
management policies in the Prospectus.
Leveraging
The Fund may from time to time leverage its investments by purchasing
securities with borrowed money. The Fund may borrow money only from banks
and in an amount not to exceed 33 1/3% of the total value of its assets
less its liabilities. The amount of the Fund's borrowings also may be
limited by the availability and cost of credit and by restrictions
imposed by the Federal Reserve Board.
The Fund is required under the 1940 Act to maintain at all times an
asset coverage of 300% of the amount of its borrowings. If, as a result
of market fluctuations or for any other reason, the Fund's asset coverage
drops below 300%, the Fund must reduce its outstanding bank debt within
three business days so as to restore its asset coverage to the 300%
level.
Any gain in the value of securities purchased with borrowed money that
exceeds the interest paid on the amount borrowed would cause the net
asset value of the Fund's shares to increase more rapidly than otherwise
would be the case. Conversely, any decline in the value of securities
purchased would cause the net asset value of the Fund's shares to
decrease more rapidly than otherwise would be the case. Borrowed money
thus creates an opportunity for greater capital gain but at the same time
increases exposure to capital risk. The net cost of any borrowed money
would be an expense that otherwise would not be incurred, and this
expense could restrict or eliminate the Fund's net investment income in
any given period.
Lending of Portfolio Securities
As stated in the Prospectus, the Fund has the ability to lend
securities from its portfolio to brokers, dealers and other financial
organizations. The Fund may not lend its portfolio securities to Smith
Barney or its affiliates unless it has applied for and received specific
authority from the SEC. Loans of portfolio securities by the Fund will be
collateralized by cash, letters of credit or securities issued or
guaranteed by the United States government, its agencies or
instrumentality's ("U.S. government securities") which will be maintained
at all times in an amount equal to at least 100% of the current market
value of the loaned securities. From time to time, the Fund may return a
part of the interest earned from the investment of collateral received
for securities loaned to the borrower and/or a third party, which is
unaffiliated with the Fund or with Smith Barney, and which is acting as a
"finder."
In lending its portfolio securities, the Fund can increase its income
by continuing to receive interest on the loaned securities as well as by
either investing the cash collateral in short-term instruments or
obtaining yield in the form of interest paid by the borrower when
government securities are used as collateral. Requirements of the SEC,
which may be subject to future modifications, currently provide that the
following conditions must be met whenever portfolio securities are
loaned: (a) the Fund must receive at least 100% cash collateral or
equivalent securities from the borrower; (b) the borrower must increase
such collateral whenever the market value of the securities rises above
the level of such collateral; (c) the Fund must be able to terminate the
loan at any time; (d) the Fund must receive reasonable interest on the
loan, as well as an amount equal to any dividends, interest or other
distributions on the loaned securities, and any increase in market value;
(e) the Fund may pay only reasonable custodian fees in connection with
the loan; and (f) voting rights on the loaned securities may pass to the
borrower; however, if a material event adversely affecting the investment
occurs, the Fund's Board of Directors must terminate the loan and regain
the right to vote the securities. The risks in lending portfolio
securities, as with other extensions of secured credit, consist of
possible delay in receiving additional collateral or in the recovery of
the securities or possible loss of rights in the collateral should the
borrower fail financially.
Short Term Instruments
As stated in the Prospectus, the Fund may invest in short term and
money market instruments. Money market instruments in which the Fund may
invest include: U.S. government securities; certificates of deposit, time
deposits and bankers' acceptances issued by domestic banks (including
their branches located outside the United States and subsidiaries located
in Canada), domestic branches of foreign banks, savings and loan
associations and similar institutions; high grade commercial paper; and
repurchase agreements with respect to the foregoing types of instruments.
The following is a more detailed description of such money market
instruments.
Bank Obligations. Certificates of deposits ("CDs") are short-term,
negotiable obligations of commercial banks. Time deposits ("TDs") are
non-negotiable deposits maintained in banking institutions for specified
periods of time at stated interest rates. Bankers' acceptances are time
drafts drawn on commercial banks by borrowers, usually in connection with
international transactions.
Domestic commercial banks organized under Federal law are supervised
and examined by the Comptroller of the Currency and are required to be
members of the Federal Reserve System and to be insured by the Federal
Deposit Insurance Corporation (the "FDIC"). Domestic banks organized
under state law are supervised and examined by state banking authorities
but are members of the Federal Reserve System only if they elect to join.
Most state banks are insured by the FDIC (although such insurance may not
be of material benefit to the Fund, depending upon the principal amount
of CDs of each bank held by the Fund) and are subject to Federal
examination and to a substantial body of Federal law and regulation. As a
result of governmental regulations, domestic branches of domestic banks
are, among other things, generally required to maintain specified levels
of reserves, and are subject to other supervision and regulation designed
to promote financial soundness.
Obligations of foreign branches of domestic banks, such as CDs and
TDs, may be general obligations of the parent bank in addition to the
issuing branch, or may be limited by the terms of a specific obligation
and governmental regulation. Such obligations are subject to different
risks than are those of domestic banks or domestic branches of foreign
banks. These risks include foreign economic and political developments,
foreign governmental restrictions that may adversely affect payment of
principal and interest on the obligations, foreign exchange controls and
foreign withholding and other taxes on interest income. Foreign branches
of domestic banks are not necessarily subject to the same or similar
regulatory requirements that apply to domestic banks, such as mandatory
reserve requirements, loan limitations, and accounting, auditing and
financial recordkeeping requirements. In addition, less information may
be publicly available about a foreign branch of a domestic bank than
about a domestic bank. CDs issued by wholly owned Canadian subsidiaries
of domestic banks are guaranteed as to repayment of principal and
interest (but not as to sovereign risk) by the domestic parent bank.
Obligations of domestic branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may
be limited by the terms of a specific obligation and by governmental
regulation as well as governmental action in the country in which the
foreign bank has its head office. A domestic branch of a foreign bank
with assets in excess of $1 billion may or may not be subject to reserve
requirements imposed by the Federal Reserve System or by the state in
which the branch is located if the branch is licensed in that state. In
addition, branches licensed by the Comptroller of the Currency and
branches licensed by certain states ("State Branches") may or may not be
required to: (a) pledge to the regulator by depositing assets with a
designated bank within the state, an amount of its assets equal to 5% of
its total liabilities; and (b) maintain assets within the state in an
amount equal to a specified percentage of the aggregate amount of
liabilities of the foreign bank payable at or through all of its agencies
or branches within the state. The deposits of State Branches may not
necessarily be insured by the FDIC. In addition, there may be less
publicly available information about a domestic branch of a foreign bank
than about a domestic bank.
In view of the foregoing factors associated with the purchase of CDs
and TDs issued by foreign branches of domestic banks or by domestic
branches of foreign banks, TIMCO will carefully evaluate such investments
on a case-by-case basis.
Savings and loans associations whose CDs may be purchased by the Fund
are supervised by the Office of Thrift Supervision and are insured by the
Savings Association Insurance Fund which is administered by the FDIC and
is backed by the full faith and credit of the United States government.
As a result, such savings and loan associations are subject to regulation
and examination.
Investment Restrictions
The Fund has adopted the following restrictions and fundamental
policies that cannot be changed without approval by the holders of a
majority of the Fund's outstanding shares defined as the lesser of (a)
more than 50% of the outstanding shares of the Fund or (b) 67% or more of
the Fund's shares present at a meeting, if the holders of more than 50%
of the outstanding shares are present in person or by proxy.
1. Invest 25% or more of the value of its total assets in any one
industry;
2. Borrow money (including borrowing through entering into reverse
repurchase agreements) in excess of 31/3% of its total assets
(including the amount of borrowed but excluding any liabilities and
indebtedness constituting senior securities) except that the Fund
may borrow up to an additional 5% of its total assets for temporary
purposes; or pledge its assets other than to secure such borrowings
or in connection with Hedging Transactions, short sales, when-
issued and forward commitment transaction and similar investment
strategies.
3. Issue any senior security if such issuance is specifically
prohibited by the 1940 Act or the rules and regulations thereunder
(for the purpose of this restriction, collateral arrangements with
respect to options, futures contracts and options on futures
contracts and collateral arrangements with respect to initial and
variation margin are not deemed to be the issuance of a senior
security);
4. Make loans, except the Fund may purchase debt obligations, may
enter into repurchase agreements and may lend its securities;
5. Underwrite the securities of other issuers, except to the extent
that in connection with the disposition of portfolio securities the
Fund may be deemed to be an underwriter;
6. Invest for the purpose of exercising control over management of any
company;
7. Purchase real estate or interests therein other than securities
secured by real estate, participation therein or real estate
investment trusts and similar instruments;
8. Purchase or sell commodities or commodities contracts except for
hedging purposes; or
9. Make any short sale of securities except in conformity with
applicable laws, rules and regulations and unless, giving effect to
such sale, the market value of all securities sold short does not
exceed 25% of the value of the Fund's total assets and the Fund's
aggregate short sales of a particular class of an issuer's
securities do not exceed 25% of the then outstanding securities of
that class of the issuer's securities.
10. Purchase any security (other than U.S. obligations) such that (a)
more than 25% of the Fund's total assets would be invested in
securities of a single issuer or (b) as to 75% of the Fund's total
assets (I) more than 5% of the Fund's total assets would then be
invested in securities of a single issuer or (ii) the Fund would
own more than 10% of the voting securities of a single issuer.
Certain restrictions listed above permit the Fund without shareholder
approval to engage in investment practices that the Fund does not
currently pursue. The Fund has no present intention of altering its
current investment practices as otherwise described in the Prospectus and
this Statement of Additional Information and any future change in these
practices would require Board approval. If any percentage restriction
described above is complied with at the time of an investment, a later
increase or decrease in percentage resulting from a change in values or
assets will not constitute a violation of such restriction. The Fund may
make commitments more restrictive than the restrictions listed above so
as to permit the sale of Fund shares in certain states. Should the Fund
determine that any such commitment is no longer in the best interests of
the Fund and its shareholders, it will revoke the commitment by
terminating sales of its shares in the state involved.
Portfolio Turnover
The Fund's investment policies may result in its experiencing a
greater portfolio turnover rate than those of investment companies that
seek to produce income or to maintain a balanced investment position.
Although the Fund's portfolio turnover rate cannot be predicted and will
vary from year to year, TIMCO expects that the Fund's annual portfolio
turnover rate may exceed 100%, but will not exceed 150%. A 100%
portfolio turnover rate would occur, for instance, if all securities in
the Fund's portfolio were replaced once during a period of one year. A
high rate of portfolio turnover in any year will increase brokerage
commissions paid and could result in high amounts of realized investment
gain subject to the payment of taxes by shareholders. Any realized short-
term investment gain will be taxed to shareholders as ordinary income.
For the 1996, 1995 and 1994 fiscal years, the Fund's portfolio turnover
rates were 151%, 177% and 45% respectively.
Portfolio Transactions and Brokerage
Decisions to buy and sell securities for the Fund are made by TIMCO,
subject to the overall supervision and review of the Fund's Board of
Directors. Portfolio securities transactions for the Fund are effected by
or under the supervision of TIMCO.
Transactions on stock exchanges involve the payment of negotiated
brokerage commissions. There is generally no stated commission in the
case of securities traded in the over-the-counter markets, but the price
of those securities includes an undisclosed commission or mark-up. The
cost of securities purchased from underwriters includes an underwriting
commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-
down. For the 1996, 1995 and 1994 fiscal years, the Fund paid $176,000,
$155,000 and $190,000 respectively, in brokerage commissions.
In executing portfolio transactions and selecting brokers or dealers,
it is the Fund's policy to seek the best overall terms available. The
Advisory Agreement between the Fund and TIMCO provides that, in assessing
the best overall terms available for any transaction, TIMCO shall
consider the factors it deems relevant, including the breadth of the
market in the security, the price of the security, the financial
condition and execution capability of the broker or dealer, and the
reasonableness of the commission, if any, for the specific transaction
and on a continuing basis. In addition, the Advisory Agreement authorizes
TIMCO, in selecting brokers or dealers to execute a particular
transaction and in evaluating the best overall terms available, to
consider the brokerage and research services (as those terms are defined
in Section 28(e) of the Securities Exchange Act of 1934) provided to the
Fund and/or other accounts over which TIMCO or an affiliate exercises
investment discretion.
The Fund's Board of Directors will periodically review the commissions
paid by the Fund to determine if the commissions paid over representative
periods of time were reasonable in relation to the benefits inuring to
the Fund. It is possible that certain of the services received will
primarily benefit one or more other accounts for which investment
discretion is exercised. Conversely, the Fund may be the primary
beneficiary of services received as a result of portfolio transactions
effected for other accounts. TIMCO's fee under the Advisory Agreement is
not reduced by reason of TIMCO's receiving such brokerage and research
services.
The Fund's Board of Directors has determined that any portfolio
transaction for the Fund may be executed through Smith Barney if, in
TIMCO's judgment, the use of Smith Barney is likely to result in price
and execution at least as favorable as those of other qualified brokers,
and if, in the transaction, Smith Barney charges the Fund a commission
rate consistent with that charged by Smith Barney to comparable
unaffiliated customers in similar transactions. In addition, under SEC
rules, Smith Barney may directly execute such transactions for the Fund
on the floor of any national securities exchange, provided (a) the Board
of Directors has expressly authorized Smith Barney to effect such
transactions and (b) Smith Barney annually advises the Fund of the
aggregate compensation it earned on such transactions. Smith Barney will
not participate in commissions from brokerage given by the Fund to other
brokers or dealers and will not receive any reciprocal brokerage business
resulting therefrom. Over-the-counter purchases and sales are transacted
directly with principal market makers except in those cases in which
better prices and executions may be obtained elsewhere. For the 1996,
1995 and 1994 fiscal years, the Fund paid $7,375, $32,635 and $5,400,
respectively, in brokerage commissions to Smith Barney. For the 1996
fiscal year, Smith Barney received 4.2% of the brokerage commissions paid
by the Fund and effected 29% of the total dollar amount of transactions
for the Fund involving the payment of brokerage commissions.
Even though investment decisions for the Fund are made independently
from those of the other accounts managed by TIMCO, investments of the
kind made by the Fund also may be made by those other accounts. When the
Fund and one or more accounts managed by TIMCO are prepared to invest in,
or desire to dispose of, the same security, available investments or
opportunities for sales will be allocated in a manner believed by TIMCO
to be equitable. In some cases, this procedure may adversely affect the
price paid or received by the Fund or the size of the position obtained
for or disposed of by the Fund.
Purchase of Shares
Volume Discounts
The schedule of sales charges on Class A shares described in the
Prospectus applies to purchases made by any "purchaser," which is defined
to include the following: (a) an individual; (b) an individual's spouse
and his or her children purchasing shares for his or her own account; (c)
a trustee or other fiduciary purchasing shares for a single trust estate
or single fiduciary account; (d) a pension, profit-sharing or other
employee benefit plan qualified under Section 401(a) of the Internal
Revenue Code of 1986, as amended (the "Code"), and qualified employee
benefit plans of employers who are "affiliated persons" of each other
within the meaning of the 1940 Act; (e) tax-exempt organizations
enumerated in Section 501(c)(3) or (13) of the Code; and (f) a trustee or
other professional fiduciary (including a bank, or an investment adviser
registered with the SEC under the Investment Advisers Act of 1940, as
amended) purchasing shares of the Fund for one or more trust estates or
fiduciary accounts. Purchasers who wish to combine purchase orders to
take advantage of volume discounts should contact a Smith Barney
Financial Consultant.
Combined Right of Accumulation
Reduced sales charges, in accordance with the schedule in the Prospectus,
apply to any purchase of Class A shares if the aggregate investment in
Class A shares of the Fund and in Class A shares of other funds of the
Smith Barney Mutual Funds that are offered with a sales charge, including
the purchase being made, of any purchaser is $25,000 or more. The reduced
sales charge is subject to confirmation of the shareholder's holdings
through a check of appropriate records. The Fund reserves the right to
terminate or amend the combined rights of accumulation at any time after
written notice to shareholders. For further information regarding the
right of accumulation, shareholders should contact a Smith Barney
Financial Consultant.
Determination of Public Offering Price
The Fund offers its shares to the public on a continuous basis. The
public offering price for a Class A and Class Y share of the Fund is
equal to the net asset value per share at the time of purchase, plus for
Class A shares an initial sales charge based on the aggregate amount of
the investment. The public offering price for a Class B and Class C share
(and Class A share purchases, including applicable rights of
accumulation, equaling or exceeding $500,000), is equal to the net asset
value per share at the time of purchase and no sales charge is imposed at
the time of purchase. A contingent deferred sales charge ("CDSC"),
however, is imposed on certain redemption's of Class B and Class C
shares, and of Class A shares when purchased in amounts equaling or
exceeding $500,000. The method of computation of the public offering
price is shown in the Fund's financial statements incorporated by
reference in their entirety into this Statement of Additional
Information.
Redemption of Shares
The right of redemption may be suspended or the date of payment
postponed (a) for any period during which the NYSE is closed (other than
for customary weekend or holiday closings), (b) when trading in markets
the Fund normally utilizes is restricted, or an emergency exists, as
determined by the SEC, so that disposal of the Fund's investments or
determination of net asset value is not reasonably practicable or (c) for
such other periods as the SEC by order may permit for the protection of
the Fund's shareholders.
Distributions in Kind
If the Board of Directors of the Fund determines that it would be
detrimental to the best interests of the remaining shareholders of the
Fund to make a redemption payment wholly in cash, the Fund may pay, in
accordance with SEC rules, any portion of a redemption in excess of the
lesser of $250,000 or 1% of the Fund's net assets by distribution in kind
of portfolio securities in lieu of cash. Securities issued as a
distribution in kind may incur brokerage commissions when shareholders
subsequently sell those securities.
Automatic Cash Withdrawal Plan
An automatic cash withdrawal plan (the "Withdrawal Plan") is available to
shareholders who own shares with a value of at least $10,000 ($5,000 for
retirement plan accounts) and who wish to receive specific amounts of
cash monthly or quarterly. Withdrawals of at least $100 may be made under
the Withdrawal Plan by redeeming as many shares of the Fund as may be
necessary to cover the stipulated withdrawal payment. Any applicable CDSC
will not be waived on amounts withdrawn by shareholders that exceed 1.00%
per month of the value of a shareholder's shares at the time the
Withdrawal Plan commences. (With respect to Withdrawal Plans in effect
prior to November 7, 1994 any applicable CDSC will be waived on amounts
withdrawn that do not exceed 2.00% per month of the value of a
shareholder's shares at the time the Withdrawal Plan commences.) To the
extent withdrawals exceed dividends, distributions and appreciation of a
shareholder's investment in the Fund, there will be a reduction in the
value of the shareholder's investment and continued withdrawal payments
will reduce the shareholder's investment and ultimately may exhaust it.
Withdrawal payments should not be considered as income from investment in
the Fund. Furthermore, as it generally would not be advantageous to a
shareholder to make additional investments in the Fund at the same time
that he or she is participating in the Withdrawal Plan, purchases by such
shareholders in amounts of less than $5,000 ordinarily will not be
permitted.
Shareholders who wish to participate in the Withdrawal Plan and who
hold their shares in certificate form must deposit their share
certificates with First Data as agent for Withdrawal Plan members. All
dividends and distributions on shares in the Withdrawal Plan are
reinvested automatically at net asset value in additional shares of the
Fund. A shareholder who purchases shares directly through First Data may
continue to do so and applications for participation in the Withdrawal
Plan must be received by First Data no later than the eighth day of the
month to be eligible for participation beginning with that month's
withdrawal. For additional information, shareholders should contact a
Smith Barney Financial Consultant.
Distribution
To compensate Smith Barney for the services it provides and for the
expense it bears under the Distribution Agreement, the Fund has adopted a
services and distribution plan (the "Plan") pursuant to Rule 12b-1 under
the 1940 Act. See "Distribution" in the Prospectus. Under the Plan, the
Fund pays Smith Barney a service fee, accrued daily and paid monthly,
calculated at the annual rate of 0.25% of the value of the Fund's average
daily net assets attributable to the Class A, Class B and Class C shares.
In addition, the Fund pays Smith Barney a distribution fee with respect
to Class B and Class C shares primarily intended to compensate Smith
Barney for its initial expense of paying Financial Consultants a
commission upon sales of those shares. The Class B and Class C
distribution fee is calculated at the annual rate of 0.75% of the value
of the Fund's average net assets attributable to the shares of the
respective Class.
Under its terms, the Plan continues from year to year, provided such
continuance is approved annually by vote of the Board of Directors,
including a majority of the Directors who are not interested persons of
the Fund and who have no direct or indirect financial interest in the
operation of the Plan or in the Distribution Agreement (the "Independent
Directors"). The Plan may not be amended to increase the amount of the
service and distribution fees without shareholder approval, and all
material amendments of the Plan also must be approved by the Directors
and Independent Directors in the manner described above. The Plan may be
terminated with respect to a Class of the Fund at any time, without
penalty, by vote of a majority of the Independent Directors or by vote of
a majority of the outstanding voting securities of the Class (as defined
in the 1940 Act). Pursuant to the Plan, Smith Barney will provide the
Fund's Board of Directors with periodic reports of amounts expended under
the Plan and the purpose for which such expenditures were made.
Valuation of Shares
Each Class' net asset value per share is calculated on each day,
Monday through Friday, except days on which the NYSE is closed. The NYSE
currently is scheduled to be closed on New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas, and on the preceding Friday or subsequent Monday when one of
these holidays falls on a Saturday or Sunday, respectively. Because of
the differences in distribution fees and Class-specific expenses, the per
share net asset value of each Class may differ. The following is a
description of the procedures used by the Fund in valuing its assets.
Securities listed on a national securities exchange will be valued on
the basis of the last sale on the date on which the valuation is made or,
in the absence of sales, at the mean between the closing bid and asked
prices. Over-the-counter securities will be valued on the basis of the
bid price at the close of business on each day, or, if market quotations
for those securities are not readily available, at fair value, as
determined in good faith by the Fund's Board of Directors. Short-term
obligations with maturities of 60 days or less are valued at amortized
cost, which constitutes fair value as determined by the Fund's Board of
Directors. Amortized cost involves valuing an instrument at its original
cost to the Fund and thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the effect of
fluctuating interest rates on the market value of the instrument. All
other securities and other assets of the Fund will be valued at fair
value as determined in good faith by the Fund's Board of Directors.
Exchange Privilege
Except as noted below, shareholders of any fund of the Smith Barney
Mutual Funds may exchange all or part of their shares for shares of the
same class of other funds of the Smith Barney Mutual Funds, to the extent
such shares are offered for sale in the shareholder's state of residence,
on the basis of relative net asset value per share at the time of
exchange, except that Class B shares of the Fund exchanged for Class B
shares of another fund will be subject to the higher applicable CDSC of
the two funds and, for purposes of calculating CDSC rates and conversion
periods, will be deemed to have been held since the date the shares being
exchanged were deemed to be purchased.
The exchange privilege enables shareholders to acquire shares of the
same Class in a fund with different investment objectives when they
believe that a shift between funds is an appropriate investment decision.
This privilege is available to shareholders residing in any state in
which the fund shares being acquired may legally be sold. Prior to any
exchange, the shareholder should obtain and review a copy of the current
prospectus of each fund into which an exchange is being considered.
Prospectuses may be obtained from a Smith Barney Financial Consultant.
Upon receipt of proper instructions and all necessary supporting
documents, shares submitted for exchange are redeemed at the then-current
net asset value and, subject to any applicable CDSC, the proceeds are
immediately invested, at a price as described above, in shares of the
fund being acquired. Smith Barney reserves the right to reject any
exchange request. The exchange privilege may be modified or terminated at
any time after written notice to shareholders.
IRA AND OTHER PROTOTYPE RETIREMENT PLANS
Copies of the following plans with custody or trust agreements have
been approved by the Internal Revenue Service and are available from the
Fund or Smith Barney; investors should consult with their own tax or
retirement planning advisors prior to the establishment of a plan.
IRA, Rollover IRA and Simplified Employee Pension - IRA
The Small Business Job Protection Act of 1996 changed the
eligibility requirements for participants in Individual Retirement
Accounts ("IRAs"). Under these new provisions, if you or your spouse
have earned income, each of you may establish an IRA and make maximum
annual contributions equal to the lesser of earned income or $2,000. As
a result of this legislation, married couples where one spouse is non-
working may now contribute a total of $4,000 annually to their IRAs.
If you or your spouse is an active participant in an employer-
sponsored retirement plan, a deduction for contributions to an IRA might
still be allowed in full or in part, depending on your combined adjusted
gross income. For married couples filing jointly, a full deduction for
contributions to an IRA will be allowed where the couples' adjusted gross
income is below $40,001 ($25,001 for an unmarried individual); a partial
deduction will be allowed when adjusted gross income is between $40,001 -
$50,000 ($25,001-$35,000 for an unmarried individual); and no deduction
when adjusted gross income is $50,000 ($35,000 for an unmarried
individual).
A Rollover IRA is available to defer taxes on lump sum payments and
other qualifying rollover amounts (no maximum) received from another
retirement plan.
An employer who has established a Simplified Employee Pension - IRA
("SEP-IRA") on behalf of eligible employees may make a maximum annual
contribution to each participant's account of 15% (up to $24,000) of each
participant's compensation. Compensation is capped at $160,000 for 1997.
Performance Data
From time to time, the Fund may quote total return of the Classes in
advertisements or in reports and other communications to shareholders.
The Fund may include comparative performance information in advertising
or marketing the Fund's shares. Such performance information may include
data from the following industry and financial publications: Barron's,
Business Week, CDA Investment Technologies, Inc., Changing Times, Forbes,
Fortune, Institutional Investor, Investors Daily, Money, Morningstar
Mutual Fund Values, The New York Times, USA Today and The Wall Street
Journal. To the extent any advertisement or sales literature of the Fund
describes the expenses or performance of Class A, Class B, Class C or
Class Y, it will also disclose such information for the other Classes.
Average Annual Total Return
"Average annual total return" figures are computed according to a
formula prescribed by the SEC. The formula can be expressed as follows:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a hypothetical $1,000
investment made at the beginning of a 1-, 5-, or 10-
year period at the end of the 1-, 5-, or 10-year
period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions.
Average annual total return was as follows for the periods indicated:
20.56% for the one-year period beginning on January 1, 1996 through
December 31, 1996;
11.64% per annum during the five-year period beginning on January 1,
1992 through December 31, 1996; and
since August 1, 1995 when TIMCO became investment adviser to the Fund
through December 31, 1996 the Fund's Average Annual Total Return was
22.74%.
Aggregate Total Return
"Aggregate total return" figures represent the cumulative change in
the value of an investment in the Class for the specified period and are
computed by the following formula:
ERV-P
AGGREGATE TOTAL RETURN = P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical $10,000
investment made at the beginning of the 1-, 5-, or
10-year period at the end of the 1-, 5-, or 10-year
period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions.
Aggregate total return was as follows for the periods indicated:
20.56% for the one-year period from January 1, 1996 through December
31, 1996.
73.42% for the five-year period from January 1, 1992 through
December 31,1996; and
since August 1, 1995 when TIMCO became the Fund's investment adviser
through December 31, 1996 the Fund's Aggregate Total Return was 33.83%.
Performance will vary from time to time depending upon market
conditions, the composition of the Fund's portfolio, operating expenses
and the expenses exclusively attributable to the Class. Consequently, any
given performance quotation should not be considered representative of
the Class' performance for any specified period in the future. Because
performance will vary, it may not provide a basis for comparing an
investment in the Class with certain bank deposits or other investments
that pay a fixed yield for a stated period of time. Investors comparing
the Class' performance with that of other mutual funds should give
consideration to the quality and maturity of the respective investment
companies' portfolio securities.
It is important to note that the total return figures set forth above
are based on historical earnings and are not intended to indicate future
performance.
Taxes
The following is a summary of certain Federal income tax
considerations that may affect the Fund and its shareholders. The summary
is not intended as a substitute for individual tax advice and investors
are urged to consult their own tax advisors as to the tax consequences of
an investment in the Fund.
The Fund has qualified and intends to continue to qualify each year as
a regulated investment company under the Code. Provided that the Fund (a)
is a regulated investment company and (b) distributes at least 90% of its
net investment income (including, for this purpose, net realized short-
term capital gains), the Fund will not be liable for Federal income taxes
to the extent its net investment income and its net realized long- and
short-term capital gains, if any, are distributed to its shareholders.
Although the Fund expects to be relieved of all or substantially all
Federal, state, and local income or franchise taxes, depending upon the
extent of its activities in states and localities in which its offices
are maintained, in which its agents or independent contractors are
located, or in which it is otherwise deemed to be conducting business,
that portion of the Fund's income which is treated as earned in any such
state or locality could be subject to state and local taxes. Any such
taxes paid by the Fund would reduce the amount of income and gains
available for distribution to shareholders. All net investment income and
net capital gains earned by the Fund will be reinvested automatically in
additional shares of the same Class of the Fund at net asset value,
unless the shareholder elects to receive dividends and distributions in
cash.
Gains or losses on the sales of securities by the Fund generally will
be long-term capital gains or losses if the Fund has held the securities
for more than one year. Gains or losses on the sales of securities held
for not more than one year generally will be short-term capital gains or
losses. If the Fund acquires a debt security at a substantial discount, a
portion of any gain upon the sale or redemption will be taxed as ordinary
income, rather than capital gain to the extent it reflects accrued market
discount.
Dividends of net investment income and distributions of net realized
short-term capital gains will be taxable to shareholders as ordinary
income for Federal income tax purposes, whether received in cash or
reinvested in additional shares. Dividends received by corporate
shareholders will qualify for the dividends-received deduction only to
the extent that the Fund designates the amount distributed as a dividend
and the amount so designated does not exceed the aggregate amount of
dividends received by the Fund from domestic corporations for the taxable
year. The Federal dividends-received deduction for corporate shareholders
may be further reduced or disallowed if the shares with respect to which
dividends are received are treated as debt financed or are deemed to have
been held for less than 46 days.
Distributions of long-term capital gains will be taxable to
shareholders as such, whether paid in cash or reinvested in additional
shares and regardless of the length of time that the shareholder has held
his or her interest in the Fund. If a shareholder receives a distribution
taxable as long-term capital gain with respect to his or her investment
in the Fund and redeems or exchanges the shares before he or she has held
them for more than six months, any loss on the redemption or exchange
that is less than or equal to the amount of the distribution will be
treated as a long-term capital loss.
If a shareholder (a) incurs a sales charge in acquiring or redeeming
shares of the Fund, (b) disposes of those shares within 90 days and (c)
acquires shares in a mutual fund for which the otherwise applicable sales
charge is reduced by reason of a reinvestment right (i.e., exchange
privilege), the original sales charge increases the shareholder's tax
basis in the original shares only to the extent the otherwise applicable
sales charge for the second acquisition is not reduced. The portion of
the original sales charge that does not increase the shareholder's tax
basis in the original shares would be treated as incurred with respect to
the second acquisition and, as a general rule, would increase the
shareholder's tax basis in the newly acquired shares. Furthermore, the
same rule also applies to a disposition of the newly acquired or redeemed
shares made within 90 days of the second acquisition. This provision
prevents a shareholder from immediately deducting the sales charge by
shifting his or her investment in a family of mutual funds.
Investors considering buying shares of the Fund on or just prior to a
record date for a taxable dividend or capital gain distribution should be
aware that, regardless of whether the price of the Fund shares to be
purchased reflects the amount of the forthcoming dividend or distribution
payment, any such payment will be a taxable dividend or distribution
payment.
If a shareholder fails to furnish a correct taxpayer identification
number, fails to report dividend and interest income in full, or fails to
certify that he or she has provided a correct taxpayer identification
number and that he or she is not subject to such withholding, the
shareholder may be subject to a 31% "backup withholding" tax with respect
to (a) any taxable dividends and distributions and (b) any proceeds of
any redemption of Fund shares. An individual's taxpayer identification
number is his or her social security number. The backup withholding tax
is not an additional tax and may be credited against a shareholder's
regular Federal income tax liability.
The foregoing is only a summary of certain tax considerations
generally affecting the Fund and its shareholders and is not intended as
a substitute for careful tax planning. Shareholders are urged to consult
their tax advisors with specific reference to their own tax situations,
including their state and local tax liabilities.
Additional Information
The Fund, an open end management investment company, was incorporated
on October 4 1989 in Maryland under the name The Inefficient-Market Fund
Inc. (the "Fund") as a non-diversified closed end company and converted
to open-end diversified status on June 23, 1997 pursuant to shareholder
approval on April 18, 1997 and Securities and Exchange Declaration of
Effectiveness on June 23, 1997.
PNC Bank is located at 17th Chestnut Street, Philadelphia, PA 19103,
and serves as the custodian of the Fund. Under its agreement with the
Fund, PNC Bank holds the Fund's portfolio securities and keeps all
necessary accounts and records. For its services, PNC Bank receives a
monthly fee based upon the month-end market value of securities held in
custody and also receives securities transaction charges. PNC Bank is
authorized to establish separate accounts for foreign securities owned by
the Fund to be held with foreign branches of other domestic banks as well
as with certain foreign banks and securities depositories. The assets of
the Fund are held under bank custodianship in compliance with the 1940
Act.
First Data is located at Exchange Place, Boston, Massachusetts 02109,
and serves as the Fund's transfer agent. Under the transfer agency
agreement, First Data maintains the shareholder account records for the
Fund, handles certain communications between shareholders and the Fund
and distributes dividends and distributions payable by the Fund. For
these services, First Data receives a monthly fee computed on the basis
of the number of shareholder accounts it maintains for the Fund during
the month and is reimbursed for out-of-pocket expenses.
Financial Statements
The Fund's Annual Report for the fiscal year ended December 31, 1996,
accompanies this Statement of Additional Information and is incorporated
herein by reference in its entirety.
Smith Barney
Disciplined Small
Cap Fund, Inc.
Statement of
Additional
Information
June 23, 1997
Smith Barney
Disciplined Small Cap Fund, Inc.
388 Greenwich Street
New York, NY 10013
...................................Fund ........................
SMITH BARNEY
A Member of Travelers
Group
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