1. Significant Accounting Policies
The Smith Barney Financial Services Fund (“Fund”), a separate non-diversified investment fund of the Smith Barney Sector Series Inc. (“Company”), a Maryland corporation, is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company.
The following are significant accounting policies consistently followed by the Fund and are in conformity with U.S. generally accepted accounting principles (“GAAP”). 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.
Notes to Financial Statements (continued) (unaudited)
(f) Dividends and Distributions to Shareholders. Dividends and distributions to shareholders are recorded on the ex-dividend date; the Fund distributes dividends and capital gains, if any, at least annually.The character of income and gains to be distributed is determined in accordance with income tax regulations which may differ from GAAP.
(g) Class Accounting. Class specific expenses are charged to each class; management fees, general fund expenses, income, gains and/or losses are allocated on the basis of relative net assets of each class or on another reasonable basis.
(h) Federal and Other Taxes. It is the Fund’s policy to comply with the federal income and excise tax requirements of the Internal Revenue Code 1986, as amended, applicable to regulated investment companies. Accordingly, the Fund intends to distribute substantially all of its taxable income and net realized gains on investments, if any, to shareholders each year. Therefore, no federal income tax provision is required. Under the applicable foreign tax law, a withholding tax may be imposed on interest, dividends and capital gains at various rates.
(i) Reclassification. GAAP requires that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. Accordingly, during the current year, $30,649 has been reclassified between undistributed net investment income and accumulated net realized gain from investment transactions, as a result of permanent differences attributable to book/tax differences from distributions from Real Estate Investment Trusts and foreign currency transactions treated as ordinary income for tax. These reclassifications have no effect on net assets or net asset values per share.
2. Management Agreement and Other Transactions
Smith Barney Fund Management LLC (“SBFM”), an indirect wholly-owned subsidiary of Citigroup Inc. (“Citigroup”), acts as investment manager to the Fund. The Fund pays SBFM a management fee calculated at an annual rate of 0.80% of the Fund’s average daily net assets. This fee is calculated daily and paid monthly. SBFM has entered into a sub-advisory agreement with Citigroup Asset Management Ltd. (“CAM Ltd.”), an affiliate of SBFM. Pursuant to the sub-advisory agreement, CAM Ltd. is responsible for the day-to-day fund operations and investment decisions of the Fund. For services provided to the Fund, SBFM pays CAM Ltd. a sub-advisory fee calculated at an annual rate of 0.50% of the Fund’s average daily net assets.
During the year ended October 31, 2004, the Fund’s Class A, B and C shares had voluntary expense limitations in place of 1.50%, 2.25% and 2.25%, respectively. These expense limitations can be terminated at any time by SBFM. During the year ended October 31, 2004, SBFM waived a portion of its management fee amounting to $21,745.
Citicorp Trust Bank, fsb. (“CTB”), another subsidiary of Citigroup, acts as the Fund’s transfer agent. PFPC Inc. (“PFPC”) and Primerica Shareholder Services (“PSS”), another subsidiary of Citigroup, act as the Fund’s sub-transfer agents. CTB receives account fees and asset-based fees that vary according to the size and type of account. PFPC and PSS are responsible for shareholder recordkeeping and financial processing for all shareholder accounts and are paid by CTB. For the year ended October 31, 2004, the Fund paid transfer agent fees of $62,670 to CTB.
Citigroup Global Markets Inc. (“CGM”) and PFS Distributors, Inc., both of which are subsidiaries of Citigroup, act as the Fund’s distributors.
On February 2, 2004, initial sales charges on Class L shares were eliminated. Effective April 29, 2004, Class L shares were renamed Class C shares.
There is a maximum sales charge of 5.00% for Class A shares.There is a contingent deferred sales charge (“CDSC”) of 5.00% on Class B shares, which applies if redemption occurs within one year from purchase payment and declines thereafter by 1.00% per year until no CDSC is incurred. Class C shares have a 1.00% CDSC, which applies if redemption occurs within one year from purchase payment. In certain cases, Class A shares have a 1.00% CDSC, which applies if redemption occurs
19 Smith Barney Sector Series Inc. | 2004 Annual Report
Notes to Financial Statements (continued) (unaudited)
within one year from purchase payment. This CDSC only applies to those purchases of Class A shares which, when combined with current holdings of Class A shares, equal or exceed $1,000,000 in the aggregate.These purchases do not incur an initial sales charge.
For the year ended October 31, 2004, CGM and its affiliates received sales charges of approximately $72,000 and $3,000 on sales of the Fund’s Class A and C shares, respectively. In addition, for the year ended October 31, 2004, CDSCs paid to CGM and its affiliates were approximately $79,000 for Class B shares.
For the year ended October 31, 2004, CGM and its affiliates received brokerage commissions of $4,256.
All officers and one Director of the Company are employees of Citigroup or its affiliates and do not receive compensation from the Company.
3. Investments
During the year ended October 31, 2004, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) were as follows:
|
| Purchases | | $ | 32,244,605 | |
|
| Sales | | | 45,506,705 | |
|
At October 31, 2004, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows:
|
| Gross unrealized appreciation | | $ | 6,450,528 | |
| Gross unrealized depreciation | | | (2,231,519 | ) |
|
| Net unrealized appreciation | | $ | 4,219,009 | |
|
4. Class Specific Expenses
Pursuant to a Rule 12b-1 Distribution Plan, the Fund pays a service fee with respect to Class A, B and C shares calculated at an annual rate of 0.25% of the average daily net assets of each respective class.The Fund also pays a distribution fee with respect to Class B and C shares calculated at an annual rate of 0.75% of the average daily net assets of each class, respectively. For the year ended October 31, 2004, total Rule 12b-1 Distribution Plan fees, which are accrued daily and paid monthly, were as follows:
| | | Class A | | Class B | | Class C |
|
| Rule 12b-1 Distribution Plan Fees | | $ | 41,110 | | $ | 308,532 | | $ | 182,329 |
|
| |
| For the year ended October 31, 2004, total Transfer Agency Service expenses were as follows: |
| | | | | | | | | | |
| | | | Class A | | | Class B | | | Class C |
|
| Transfer Agency Service Expenses | | $ | 29,658 | | $ | 55,191 | | $ | 32,376 |
|
| |
| For the year ended October 31, 2004, total Shareholder Communication expenses were as follows: |
| | | | | | | | | | |
| | | | Class A | | | Class B | | | Class C |
|
| Shareholder Communication Expenses | | $ | 12,389 | | $ | 23,066 | | $ | 13,511 |
|
20 Smith Barney Sector Series Inc. | 2004 Annual Report
Notes to Financial Statements (continued) (unaudited)
5. Dividends and Distributions Paid to Shareholders by Class
| | Year Ended October 31, 2004 | Year Ended October 31, 2003 |
|
| Class A | | | | | | | |
| Net investment income | | $ | 141,577 | | | — | |
| Net realized gains | | | — | | $ | 291,292 | |
|
| Total | | $ | 141,577 | | $ | 291,292 | |
|
| Class B | | | | | | | |
| Net investment income | | $ | 68,391 | | | — | |
| Net realized gains | | | — | | $ | 587,336 | |
|
| Total | | $ | 68,391 | | $ | 587,336 | |
|
| Class C | | | | | | | |
| Net investment income | | $ | 40,126 | | | — | |
| Net realized gains | | | — | | $ | 425,291 | |
|
| Total | | $ | 40,126 | | $ | 425,291 | |
|
6. Capital Shares
At October 31, 2004, the Fund had 400 million shares of capital stock authorized with a par value of $0.001 per share.The Fund has the ability to issue multiple classes of shares. Each share of a class represents an identical interest in the Fund and has the same rights, except that each class bears certain expenses specifically related to the distribution of its shares. Effective April 29, 2004, the Fund renamed Class L shares as Class C shares.
Transactions in shares of each class were as follows:
| | | Year Ended | | | Year Ended | |
| | | October 31, 2004 | | | October 31, 2003 | |
| | |
| |
|
| | | Shares | | | | Amount | | | Shares | | | | Amount | |
|
| Class A | | | | | | | | | | | | | | |
| Shares sold | | 208,169 | | | $ | 3,288,659 | | | 193,058 | | | $ | 2,484,197 | |
| Shares issued on reinvestment | | 8,740 | | | | 134,510 | | | 22,918 | | | | 273,645 | |
| Shares reacquired | | (332,675 | ) | | | (5,196,196 | ) | | (312,740 | ) | | | (4,042,964 | ) |
|
| Net Decrease | | (115,766 | ) | | $ | (1,773,027 | ) | | (96,764 | ) | | $ | (1,285,122 | ) |
|
| Class B | | | | | | | | | | | | | | |
| Shares sold | | 126,464 | | | $ | 1,945,979 | | | 264,664 | | | $ | 3,299,291 | |
| Shares issued on reinvestment | | 4,212 | | | | 63,517 | | | 47,116 | | | | 552,196 | |
| Shares reacquired | | (493,336 | ) | | | (7,574,129 | ) | | (486,621 | ) | | | (6,121,078 | ) |
|
| Net Decrease | | (362,660 | ) | | $ | (5,564,633 | ) | | (174,841 | ) | | $ | (2,269,591 | ) |
|
| Class C* | | | | | | | | | | | | | | |
| Shares sold | | 35,251 | | | $ | 541,454 | | | 45,324 | | | $ | 573,962 | |
| Shares issued on reinvestment | | 2,503 | | | | 37,745 | | | 34,877 | | | | 408,761 | |
| Shares reacquired | | (439,032 | ) | | | (6,685,649 | ) | | (382,238 | ) | | | (4,760,805 | ) |
|
| Net Decrease | | (401,278 | ) | | $ | (6,106,450 | ) | | (302,037 | ) | | $ | (3,778,082 | ) |
|
* On April 29, 2004, Class L shares were renamed as Class C shares.
21 Smith Barney Sector Series Inc. | 2004 Annual Report
Notes to Financial Statements (continued) (unaudited)
7. Income Tax Information and Distributions to Shareholders
The tax character of distributions paid during the fiscal years ended October 31, 2004 and October 31, 2003 were as follows:
| | | | 2004 | | | 2003 | |
|
| Distributions paid from: | | | | | | | |
| Ordinary income | | $ | 250,094 | | $ | 108 | |
| Net long-term capital gains | | | — | | | 1,303,811 | |
|
| Total Distributions Paid | | $ | 250,094 | | $ | 1,303,919 | |
|
As of October 31, 2004, the components of undistributed earnings and net accumulated earnings on a tax basis were as follows:
|
| Undistributed ordinary income — net | | $ | 196,192 | |
|
| Undistributed long-term capital gains — net | | | 5,934,141 | |
|
| Total undistributed earnings | | | 6,130,333 | |
|
| |
| Other book/tax temporary differences | | | (470 | )* |
|
| Unrealized appreciation | | | 4,219,009 | ** |
|
| Total accumulated earnings — net | | $ | 10,348,872 | |
|
| * | Other book/tax temporary differences are attributed primarily to differences in book/tax treatment of various items. |
| |
| ** | The difference between book-basis and tax-basis unrealized appreciation is attributable primarily to the tax deferral of losses on wash sales and the difference between book and tax cost on Real Estate Investment Trusts. |
8. Additional Information
In connection with an investigation previously disclosed by Citigroup, the Staff of the Securities and Exchange Commission (“SEC”) has notified Citigroup Asset Management (“CAM”), the Citigroup business unit that includes the funds’ investment manager and other investment advisory companies; Citicorp Trust Bank (“CTB”), an affiliate of CAM; Thomas W. Jones, the former CEO of CAM; and three other individuals, one of whom is an employee and the other two of whom are former employees of CAM, that the SEC Staff is considering recommending a civil injunctive action and/or an administrative proceeding against each of them relating to the creation and operation of an internal transfer agent unit to serve various CAM-managed funds.
In 1999, CTB entered the transfer agent business. CTB hired an unaffiliated subcontractor to perform some of the transfer agent services.The subcontractor, in exchange, had signed a separate agreement with CAM in 1998 that guaranteed investment management revenue to CAM and investment banking revenue to a CAM affiliate. The subcontractor’s business was later taken over by PFPC Inc., and at that time the revenue guarantee was eliminated and a one-time payment was made by the subcontractor to a CAM affiliate.
CAM did not disclose the revenue guarantee when the boards of various CAM-managed funds hired CTB as transfer agent. Nor did CAM disclose to the boards of the various CAM-managed funds the one-time payment received by the CAM affiliate when it was made.
In addition, the SEC Staff has indicated that it is considering recommending action based on the adequacy of the disclosures made to the fund boards that approved the transfer agency arrangement, CAM’s initiation and operation of, and compensation for, the transfer agent business and CAM’s retention of, and agreements with, the subcontractor.
22 Smith Barney Sector Series Inc. | 2004 Annual Report
Notes to Financial Statements (continued)
Citigroup is cooperating fully in the investigation and will seek to resolve the matter in discussions with the SEC Staff. Although there can be no assurance, Citigroup does not believe that this matter will have a material adverse effect on the Fund. As previously disclosed, CAM has already agreed to pay the applicable funds, primarily through fee waivers, a total of approximately $17 million (plus interest) that is the amount of the revenue received by Citigroup relating to the revenue guarantee.
9. Legal Matters
Beginning in June 2004, class action lawsuits alleging violations of the federal securities laws were filed against Citigroup Global Markets Inc. (the “Distributor”) and a number of its affiliates, including Smith Barney Fund Management LLC and Salomon Brothers Asset Management Inc (the “Advisers”), substantially all of the mutual funds managed by the Advisers, including the Fund (the “Funds”), and directors or trustees of the Funds (collectively, the “Defendants”). The complaints alleged, among other things, that the Distributor created various undisclosed incentives for its brokers to sell Smith Barney and Salomon Brothers funds. In addition, according to the complaints, the Advisers caused the Funds to pay excessive brokerage commissions to the Distributor for steering clients towards proprietary funds. The complaints also alleged that the defendants breached their fiduciary duty to the Funds by improperly charging Rule 12b-1 fees and by drawing on fund assets to make undisclosed payments of soft dollars and excessive brokerage commissions.The complaints also alleged that the Funds failed to adequately disclose certain of the allegedly wrongful conduct. The complaints sought injunctive relief and compensatory and punitive damages, rescission of the Funds’ contracts with the Advisers, recovery of all fees paid to the Advisers pursuant to such contracts and an award of attorneys’ fees and litigation expenses.
On December 15, 2004, a consolidated amended complaint (the “Complaint”) was filed alleging substantially similar causes of action.While the lawsuit is in its earliest stages, to the extent that the Complaint purports to state causes of action against the Funds, Citigroup Asset Management believes the Funds have significant defenses to such allegations, which the Funds intend to vigorously assert in responding to the Complaint.
Additional lawsuits arising out of these circumstances and presenting similar allegations and requests for relief may be filed against the Defendants in the future.
As of the date of this report, Citigroup Asset Management and the Funds believe that the resolution of the pending lawsuit will not have a material effect on the financial position or results of operations of the Funds or the ability of the Advisers and their affiliates to continue to render services to the Funds under their respective contracts.
23 Smith Barney Sector Series Inc. | 2004 Annual Report
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
Smith Barney Sector Series Inc.:
We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Smith Barney Financial Services Fund of Smith Barney Sector Series Inc. (“Fund”) as of October 31, 2004, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended and the financial highlights for each of the years in the four-year period then ended, and for the period February 28, 2000 (commencement of operations) through October 31, 2000.These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit.
We conducted our audit in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of October 31, 2004, by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presenta-tion.We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of October 31, 2004, and the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended and the financial highlights for each of the years in the four-year period then ended, and for the period February 28, 2000 through October 31, 2000, in conformity with U.S. generally accepted accounting principles.
| | /s/ KPMG LLP |
| |  |
New York, New York
December 17, 2004
24 Smith Barney Sector Series Inc. | 2004 Annual Report
Additional Information (unaudited)
Information about Directors and Officers
The business and affairs of the Smith Barney Financial Services Fund (“Fund”) are managed under the direction of the Board of Directors of Smith Barney Sector Series Inc. (“Company”). Information pertaining to the Directors and Officers of the Company is set forth below. The Statement of Additional Information includes additional information about the Company’s Directors and is available, without charge, upon request by calling the Fund’s transfer agent (Citicorp Trust Bank, fsb. at 1-800-451-2010) or the Fund’s sub-transfer agents (PFPC at 1-800-451-2010 and Primerica Shareholder Services at 1-800-544-5445).
| Name, Address and Age | | Position(s) Held
with Fund | | Term of Office*
and Length of
Time Served | | Principal
Occupation(s) During
Past Five Years | | Number of
Portfolios In
Fund Complex
Overseen by
Director | | Other
Board
Memberships
Held by Director |
|
| |
| Non-Interested Directors: | | | | | | | | | | |
| Dwight B. Crane | | Director | | Since | | Professor, Harvard Business | | 49 | | None |
| Harvard Business School | | | | 2000 | | School | | | | |
| Soldiers Field | | | | | | | | | | |
| Morgan Hall #375 | | | | | | | | | | |
| Boston, MA 02163 | | | | | | | | | | |
| D.O.B.: 1/24/37 | | | | | | | | | | |
| | | | | | | | | | | |
| Burt N. Dorsett | | Director | | Since | | President of Dorsett McCabe | | 27 | | None |
| The Stratford #702 | | | | 2000 | | Capital Management Inc.; | | | | |
| 5601 Turtle Bay Drive | | | | | | Chief Investment Officer | | | | |
| Naples, FL 34108 | | | | | | of Leeb Capital Management, Inc. | | | | |
| D.O.B.: 11/8/30 | | | | | | (Since 1999) | | | | |
| | | | | | | | | | | |
| Elliot S. Jaffe | | Director | | Since | | Chairman of The Dress Barn, Inc. | | 27 | | The Dress Barn, Inc. |
| The Dress Barn, Inc. | | | | 2000 | | | | | | |
| Executive Office | | | | | | | | | | |
| 30 Dunnigan Drive | | | | | | | | | | |
| Suffern, NY 10901 | | | | | | | | | | |
| D.O.B.: 5/3/26 | | | | | | | | | | |
| | | | | | | | | | | |
| Stephen E. Kaufman | | Director | | Since | | Attorney | | 55 | | None |
| Stephen E. Kaufman PC | | | | 2000 | | | | | | |
| 277 Park Avenue, 47th Floor | | | | | | | | | | |
| New York, NY 10172 | | | | | | | | | | |
| D.O.B.: 2/16/32 | | | | | | | | | | |
| | | | | | | | | | | |
| Cornelius C. Rose, Jr. | | Director | | Since | | Chief Executive Officer of | | 27 | | None |
| P.O. Box 5388 | | | | 2000 | | Performance Learning | | | | |
| West Lebanon, NH 03784 | | | | | | Systems | | | | |
| D.O.B.: 11/12/32 | | | | | | | | | | |
| |
| Interested Director: | | | | | | | | | | |
| | | | | | | | | | | |
| R. Jay Gerken, CFA** | | Chairman, | | Since | | Managing Director of Citigroup | | 221 | | None |
| Citigroup Asset Management (“CAM”) | | President and | | 2002 | | Global Markets Inc. (“CGM”); | | | | |
| 399 Park Avenue, 4th Floor | | Chief Executive | | | | Chairman, President and Chief | | | | |
| New York, NY 10022 | | Officer | | | | Executive Officer of Smith Barney | | | | |
| D.O.B.: 4/5/51 | | | | | | Fund Management LLC (“SBFM”), | | | | |
| | | | | | | Travelers Investment Adviser, Inc. | | | | |
| | | | | | | (“TIA”) and Citi Fund Management | | | | |
| | | | | | | Inc. (“CFM”); President and Chief | | | | |
| | | | | | | Executive Officer of certain mutual | | | | |
| | | | | | | funds associated with Citigroup Inc. | | | | |
| | | | | | | (“Citigroup”); Formerly, Portfolio | | | | |
| | | | | | | Manager of Smith Barney Allocation | | | | |
| | | | | | | Series Inc. (from 1996 to 2001) and | | | | |
| | | | | | | Smith Barney Growth and Income | | | | |
| | | | | | | Fund (from 1996 to 2000) | | | | |
25 Smith Barney Sector Series Inc. | 2004 Annual Report
Additional Information (unaudited) (continued)
| Name, Address and Age | | Position(s) Held
with Fund | | Term of Office*
and Length of
Time Served | | Principal
Occupation(s) During
Past Five Years | | Number of
Portfolios In
Fund Complex
Overseen by
Director | | Other
Board
Memberships
Held by Director |
|
| |
| Officers: | | | | | | | | | | |
| Andrew B. Shoup | | Senior Vice | | Since | | Director of CAM; Senior Vice President | | N/A | | N/A |
| CAM | | President and | | 2003 | | and Chief Administrative Officer of | | | | |
| 125 Broad Street, 11th Floor | | Chief | | | | mutual funds associated with | | | | |
| New York, NY 10004 | | Administrative | | | | Citigroup; Head of International Funds | | | | |
| D.O.B.: 8/1/56 | | Officer | | | | Administration of CAM (from 2001 to | | | | |
| | | | | | | 2003); Director of Global Funds | | | | |
| | | | | | | Administration of CAM (from 2000 to | | | | |
| | | | | | | 2001); Head of U.S. Citibank Funds | | | | |
| | | | | | | Administration of CAM (from 1998 | | | | |
| | | | | | | to 2000) | | | | |
| | | | | | | | | | | |
| James M. Giallanza | | Chief | | Since | | Director of CGM; Chief Financial | | N/A | | N/A |
| CAM | | Financial | | 2002 | | Officer and Treasurer of certain | | | | |
| 125 Broad Street, 11th Floor | | Officer and | | | | mutual funds associated with | | | | |
| New York, NY 10004 | | Treasurer | | | | Citigroup; Director and Controller | | | | |
| D.O.B.: 3/31/66 | | | | | | of the U.S. wholesale business at | | | | |
| | | | | | | UBS Global Asset Management US, | | | | |
| | | | | | | Inc. (from September 2001 to July | | | | |
| | | | | | | 2004); Director of Global Funds | | | | |
| | | | | | | Administration at CAM (from June | | | | |
| | | | | | | 2000 to September 2001); | | | | |
| | | | | | | Treasurer of the Lazard Funds | | | | |
| | | | | | | (from June 1998 to June 2000) | | | | |
| | | | | | | | | | | |
| Andrew Beagley | | Chief Anti-Money | | Since | | Director of CGM (since 2000); | | N/A | | N/A |
| CAM | | Laundering | | 2002 | | Director of Compliance, North America | | | | |
| 399 Park Avenue, 4th Floor | | Compliance | | | | CAM (since 2000); Chief Anti-Money | | | | |
| New York, NY 10022 | | Officer | | | | Laundering Compliance Officer, Chief | | | | |
| D.O.B.: 10/9/62 | | | | | | Compliance Officer and Vice President | | | | |
| | | Chief | | Since | | of certain mutual funds associated with | | | | |
| | | Compliance | | 2004 | | Citigroup; Director of Compliance, | | | | |
| | | Officer | | | | Europe, the Middle East and Africa, | | | | |
| | | | | | | Citigroup Asset Management (from | | | | |
| | | | | | | 1999 to 2000); Compliance Officer, SBFM, | | |
| | | | | | | CFM, TIA, Salomon Brothers Asset | | | | |
| | | | | | | Management Limited, Smith Barney | | | | |
| | | | | | | Global Capital Management Inc., | | | | |
| | | | | | | Salomon Brothers Asset Management | | | | |
| | | | | | | Asia Pacific Limited (from 1997 to 1999) | | | | |
| | | | | | | | | | | |
| Kaprel Ozsolak | | Controller | | Since | | Vice President of CGM; Controller of | | N/A | | N/A |
| CAM | | | | 2002 | | certain mutual funds associated with | | | | |
| 125 Broad Street, 11th Floor | | | | | | Citigroup; Chief Financial Officer and | | | | |
| New York, NY 10004 | | | | | | Treasurer of certain mutual funds | | | | |
| D.O.B.: 10/26/65 | | | | | | associated with Citigroup (since 2004) | | | | |
| | | | | | | | | | | |
| Robert I. Frenkel | | Secretary | | Since | | Managing Director and General | | N/A | | N/A |
| CAM | | and Chief | | 2003 | | Counsel of Global Mutual Funds | | | | |
| 300 First Stamford Place, 4th Floor | | Legal Officer | | | | for CAM and its predecessor (since | | | | |
| Stamford, CT 06902 | | | | | | 1994); Secretary and Chief Legal | | | | |
| D.O.B.: 12/12/54 | | | | | | Officer of mutual funds associated | | | | |
| | | | | | | with Citigroup | | | | |
| | | |
|
| * | Each Director and Officer serves until his or her successor has been duly elected and qualified. |
| |
| ** | Mr. Gerken is an “interested person” of the Company as defined in the Investment Company Act of 1940, as amended, because Mr. Gerken is an officer of SBFM and certain of its affiliates. |
26 Smith Barney Sector Series Inc. | 2004 Annual Report
Important Tax Information (unaudited)
The following information is provided with respect to the ordinary income distributions paid by Smith Barney Sector Series Inc. — Smith Barney Financial Services Fund during the taxable year ended October 31, 2004.
|
| | Record Date: | | 12/26/2003 | |
| | Payable Date: | | 12/30/2003 | |
|
| | Qualified Dividend Income for Individuals | | 100% | |
|
| | Dividends Qualifying for the Dividends Received Deduction for Corporations | | 100% | |
|
Please retain this information for your records.27 Smith Barney Sector Series Inc. | 2004 Annual Report
SMITH BARNEY
FINANCIAL SERVICES FUND | | |
| | DIRECTORS | | INVESTMENT MANAGER |
| | Dwight B. Crane | | Smith Barney Fund |
| | Burt N. Dorsett | | Management LLC |
| | R. Jay Gerken, CFA | | |
| | Chairman | | SUB-ADVISER |
| | Elliot S. Jaffe | | Citigroup Asset Management Ltd. |
| | Stephen E. Kaufman | | |
| | Cornelius C. Rose, Jr. | | DISTRIBUTORS |
| | | | Citigroup Global Markets Inc. |
| | OFFICERS | | PFS Distributors, Inc. |
| | R. Jay Gerken, CFA | | |
| | President and | | CUSTODIAN |
| | Chief Executive Officer | | State Street Bank and |
| | | | Trust Company |
| | Andrew B. Shoup | | |
| | Senior Vice President and | | TRANSFER AGENT |
| | Chief Administrative Officer | | Citicorp Trust Bank, fsb. |
| | | | 125 Broad Street, 11th Floor |
| | James M. Giallanza | | New York, New York 10004 |
| | Chief Financial Officer | | |
| | and Treasurer | | SUB-TRANSFER AGENTS |
| | | | PFPC Inc. |
| | Andrew Beagley | | P.O. Box 9699 |
| | Chief Anti-Money Laundering | | Providence, Rhode Island |
| | Compliance Officer and | | 02940-9699 |
| | Chief Compliance Officer | | |
| | | | Primerica Shareholder Services |
| | Kaprel Ozsolak | | P.O. Box 9662 |
| | Controller | | Providence, Rhode Island |
| | | | 02940-9662 |
| | Robert I. Frenkel | | |
| | Secretary and | | |
| | Chief Legal Officer | | |
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Smith Barney Sector Series Inc.
Smith Barney Financial Services Fund
The Fund is a separate investment fund of the Smith Barney
Sector Series Inc., a Maryland corporation. | | This report is submitted for the general information of the shareholders of Smith Barney Sector Series Inc. — Smith Barney Financial Services Fund, but it may also be used as sales literature when preceded or accompanied by the current Prospectus. |
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| | | SMITH BARNEY FINANCIAL SERVICES FUND
Smith Barney Mutual Funds
125 Broad Street
10th Floor, MF-2
New York, New York 10004 |
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| | | This document must be preceded or accompanied by a free prospectus. Investors should consider the fund’s investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other important information about the fund. Please read the prospectus carefully before you invest or send money. |
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| | | www.smithbarneymutualfunds.com |
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The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q are available on the Commission’s website at www.sec.gov. The Fund’s Forms N-Q may be reveiwed and copied at the Commission’s Public Reference Room in Washington, D.C., and information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. To obtain information on Form N-Q from the Fund, shareholders can call 1-800-451-2010. Information on how the Fund voted proxies relating to portfolio securities during the 12-month period ended June 30, 2004 and a description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available (1) without charge, upon request, by calling 1-800-451-2010, (2) on the Fund’s website at www.citigroupAM.com and (3) on the SEC’s website at www.sec.gov. | | ©2004 Citigroup Global Markets Inc.
Member NASD, SIPC
FD02127 12/04 | 04-7554 |
| ITEM 2. | | CODE OF ETHICS. |
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| | The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller. |
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| ITEM 3. | | AUDIT COMMITTEE FINANCIAL EXPERT. |
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| | The Board of Directors of the registrant has determined that Dwight B. Crane, a Member of the Board’s Audit Committee, possesses the technical attributes identified in Instruction 2(b) of Item 3 to Form N-CSR to qualify as an “audit committee financial expert,” and has designated Mr. Crane as the Audit Committee’s financial expert. Mr. Crane is an “independent” Director pursuant to paragraph (a)(2) of Item 3 to Form N-CSR. |
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| ITEM 4. | | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
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| | (a) | Audit Fees for the Smith Barney Sector Series Inc. were $47,700 and $46,000 for the years ended 10/31/04 and 10/31/03. |
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| | (b) | Audit-Related Fees for the Smith Barney Sector Series Inc. were $0 and $0 for the years ended 10/31/04 and 10/31/03. |
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| | (c) | Tax Fees for Smith Barney Sector Series Inc. of $7,200 and $6,600 for the years ended 10/31/04 and 10/31/03. These amounts represent aggregate fees paid for tax compliance, tax advice and tax planning services, which include (the filing and amendment of federal, state and local income tax returns, timely RIC qualification review and tax distribution and analysis planning) rendered by the Accountant to Smith Barney Sector Series Inc. |
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| | (d) | All Other Fees for Smith Barney Sector Series Inc. of $0 and $0 for the years ended 10/31/04 and 10/31/03. |
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| | (e) | (1) Audit Committee’s pre–approval policies and procedures described in paragraph (c) (7) of Rule 2-01 of Regulation S-X. |
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| | | The Charter for the Audit Committee (the “Committee”) of the Board of each registered investment company (the “Fund”) advised by Smith Barney Fund Management LLC or Salomon Brothers Asset Management Inc. or one of their affiliates (each, an “Adviser”) requires that the Committee shall approve (a) all audit and permissible non-audit services to be provided to the Fund and (b) all permissible non-audit services to be provided by the Fund’s independent auditors to the Adviser and any Covered Service Providers if the engagement relates directly to the operations and financial reporting of the Fund. The Committee may implement policies and procedures by which such services are approved other than by the full Committee. |
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| | | The Committee shall not approve non-audit services that the Committee believes may impair the independence of the auditors. As of the date of the approval of this Audit Committee Charter, permissible non-audit services include any professional services (including tax services), that are not prohibited services as described below, provided to the Fund by the independent auditors, other than those provided to the Fund in connection with an audit or a review of the financial statements of the Fund. Permissible non-audit services may not include: (i) bookkeeping or other services related to the accounting records or financial statements of the Fund; (ii) financial information systems design and implementation; (iii) appraisal or valuation services, fairness opinions or contribution-in-kind reports; (iv) actuarial services; (v) internal audit outsourcing services; (vi) management functions or human resources; (vii) broker or dealer, investment adviser or investme nt banking services; (viii) legal services and expert services unrelated to the audit; and (ix) any other service the Public Company Accounting Oversight Board determines, by regulation, is impermissible. |
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| | | Pre-approval by the Committee of any permissible non-audit services is not required so long as: (i) the aggregate amount of all such permissible non-audit services provided to the Fund, the Adviser and any service providers controlling, controlled by or under common control with the Adviser that provide ongoing services to the Fund (“Covered Service Providers”) constitutes not more than 5% of the total amount of revenues paid to the independent auditors during the fiscal year in which the permissible non-audit services are provided to (a) the Fund, (b) the Adviser and (c) any entity controlling, controlled by or under common control with the Adviser that provides ongoing services to the Fund during the fiscal year in which the services are provided that would have to be approved by the Committee; (ii) the permissible non-audit services were not recognized by the Fund at the time of the engagement to be non-audit services; and (iii) such services ar e promptly brought to the attention of the Committee and approved by the Committee (or its delegate(s)) prior to the completion of the audit. |
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| | | (2) For the Smith Barney Sector Series Inc., the percentage of fees that were approved by the audit committee, with respect to: Audit-Related Fees were 100% and 100% for the years ended 10/31/04 and 10/31/03; Tax Fees were 100% and 100% for the years ended 10/31/04 and 10/31/03; and Other Fees were 100% and 100% for the years ended 10/31/04 and 10/31/03. |
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| | (f) | N/A |
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| | (g)
| Non-audit fees billed by the Accountant for services rendered to Smith Barney Sector Series Inc. and CAM and any entity controlling, controlled by, or under common control with CAM that provides ongoing services to Smith Barney Sector Series Inc. were $0 and $0 for the years ended 10/31/04 and 10/31/03. |
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| | (h) | Yes. The Smith Barney Sector Series Inc.’s Audit Committee has considered whether the provision of non-audit services that were rendered to Service Affiliates which were not pre-approved (not requiring pre-approval) is compatible with maintaining the Accountant's independence. All services provided by the Accountant to the Smith Barney Sector Series Inc. or to Service Affiliates which were required to be pre-approved were pre-approved as required. |
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| ITEM 5. | | AUDIT COMMITTEE OF LISTED REGISTRANTS. |
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| | Not applicable. |
| ITEM 6. | | [RESERVED] |
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| ITEM 7. | | DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
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| | Not applicable. |
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| ITEM 8. | | [RESERVED] |
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| ITEM 9. | | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
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| | Not applicable. |
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| ITEM 10. | | CONTROLS AND PROCEDURES. |
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| | (a) | The registrant’s principal executive officer and principal financial officer have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a- 3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”)) are effective as of a date within 90 days of the filing date of this report that includes the disclosure required by this paragraph, based on their evaluation of the disclosure controls and procedures required by Rule 30a-3(b) under the 1940 Act and 15d-15(b) under the Securities Exchange Act of 1934. |
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| | (b) | There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the registrant’s last fiscal half-year (the registrant’s second fiscal half-year in the case of an annual report) that have materially affected, or are likely to materially affect the registrant’s internal control over financial reporting. |
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| ITEM 11. | | EXHIBITS. |
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| | (a) | Code of Ethics attached hereto. |
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| | Exhibit 99.CODE ETH |
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| | (b) | Attached hereto. |
| | Exhibit 99.CERT | | Certifications pursuant to section 302 of the Sarbanes-Oxley Act of 2002 |
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| | Exhibit 99.906CERT | | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this Report to be signed on its behalf by the undersigned, there unto duly authorized.
Smith Barney Sector Series Inc.
| By: | | /s/ R. Jay Gerken |
| | | R. Jay Gerken |
| | | Chief Executive Officer of |
| | | Smith Barney Sector Series Inc. |
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| Date: | | January 7, 2005 |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| By: | | /s/ R. Jay Gerken |
| | | R. Jay Gerken |
| | | Chief Executive Officer of |
| | | Smith Barney Sector Series Inc. |
| Date: | | January 7, 2005 |
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| By: | | /s/ James M. Giallanza |
| | | James M. Giallanza |
| | | Chief Financial Officer of |
| | | Smith Barney Sector Series Inc. |
| Date: | | January 7, 2005 |
Research Series
