UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-4757
SMITH BARNEY SECTOR SERIES INC.
(Exact name of registrant as specified in charter)
125 Broad Street, New York, NY 10004
(Address of principal executive offices) (Zip code)
Robert I. Frenkel, Esq.
Smith Barney Fund Management LLC
300 First Stamford Place
Stamford, CT 06902
(Name and address of agent for service)
Registrant's telephone number, including area code: (800) 451-2010
Date of fiscal year end: OCTOBER 31
Date of reporting period: OCTOBER 31, 2003
ITEM 1. REPORT TO STOCKHOLDERS.
The ANNUAL Report to Stockholders is filed herewith.
SMITH BARNEY
SECTOR SERIES INC.
SMITH BARNEY
FINANCIAL SERVICES FUND
RESEARCH SERIES | ANNUAL REPORT | OCTOBER 31, 2003
[SMITH BARNEY MUTUAL FUNDS LOGO]
YOUR SERIOUS MONEY. PROFESSIONALLY MANAGED.(R) is a registered service mark of
Citigroup Global Markets Inc.
NOT FDIC INSURED o NOT BANK GUARANTEED o MAY LOSE VALUE
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SMITH BARNEY FUND
MANAGEMENT LLC
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Smith Barney Fund Management LLC is the investment manager to the fund.
Citigroup Asset Management Ltd. is the subadviser. The fund's management team
follows a systematic and rigorous approach designed to provide appropriate
exposure to the market sector.
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FUND OBJECTIVE*
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The fund seeks long-term capital appreciation by investing primarily in common
stocks. The fund invests at least 80% of its assets in securities of companies
principally engaged in providing financial services to consumers and industries.
These companies may include, for example, commercial banks, savings and loan
associations, broker-dealers, investment banks, investment advisers, insurance
companies, real estate-related companies, leasing companies, and consumer and
industrial finance companies.
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FUND FACTS
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FUND INCEPTION
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February 28, 2000
* Since the fund focuses its investments on companies involved in financial
services, an investment in the fund may involve a greater degree of risk than
an investment in other mutual funds with greater diversification.
[GRAPHIC] Research Series
Annual Report o October 31, 2003
SMITH BARNEY
FINANCIAL SERVICES FUND
WHAT'S INSIDE
LETTER FROM THE CHAIRMAN .................................................... 1
MANAGER OVERVIEW ............................................................ 2
FUND PERFORMANCE ............................................................ 4
HISTORICAL PERFORMANCE ...................................................... 5
SCHEDULE OF INVESTMENTS ..................................................... 6
STATEMENT OF ASSETS AND LIABILITIES ......................................... 8
STATEMENT OF OPERATIONS ..................................................... 9
STATEMENTS OF CHANGES IN NET ASSETS ......................................... 10
NOTES TO FINANCIAL STATEMENTS ............................................... 11
FINANCIAL HIGHLIGHTS ........................................................ 16
TAX INFORMATION ............................................................. 17
INDEPENDENT AUDITORS' REPORT ................................................ 18
ADDITIONAL INFORMATION ...................................................... 19
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LETTER FROM THE CHAIRMAN
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[PHOTO OF R. JAY GERKEN]
R. JAY GERKEN, CFA
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
DEAR SHAREHOLDER,
We are pleased to present the annual report for Smith Barney Financial Services
Fund. After a torturous three-year bear market, the U.S. stock market has
rallied strongly so far in 2003 as geopolitical uncertainties eased and
investors began to look forward to better economic times. The recent performance
of the U.S. economy has supported an improvement in investor sentiment and
corporate earnings.
SPECIAL SHAREHOLDER NOTICES
It is with great sadness that we bring to your attention the passing of Alfred
J. Bianchetti, Director Emeritus, and James J. Crisona, Director Emeritus, of
the fund. Messrs. Bianchetti and Crisona, who both passed away on September 4th,
lived accomplished lives to the ages of 80 and 97, respectively. We will sorely
miss their presence and will remember the dedicated service they provided to the
fund's shareholders through their outstanding contributions as long-term members
of the Board.
The Board of Directors of the Smith Barney Sector Services, Inc. on behalf of
the fund has approved the transfer and assignment of the sub-advisory agreements
from Citi Fund Management, Inc. ("CFM") to Citigroup Asset Management Limited
("CAM Ltd.") effective August 1, 2003. The current CFM managers will continue to
manage the fund's portfolio through CAM Ltd. CAM Ltd. and CFM are both
affiliates of the fund's current manager Smith Barney Fund Management LLC
("SBFM"). CAM Ltd. and SBFM are subsidiaries of Citigroup Inc. CAM Ltd. is
located at Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB, United
Kingdom.
If you have any questions about recent economic events or investing in a
recovering economy, we urge you to talk with your financial adviser. As always,
we thank you for entrusting your assets to us, and we look forward to helping
you continue to meet your financial goals. Please read on to learn more about
your fund's performance and the Manager's strategy.
Sincerely,
/s/ R. Jay Gerken
R. Jay Gerken, CFA
Chairman, President and Chief Executive Officer
NOVEMBER 19, 2003
1 SMITH BARNEY SECTOR SERIES INC. | 2003 Annual Report
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MANAGER OVERVIEW
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PERFORMANCE REVIEW
For the 12 months ended October 31, 2003, Class A shares of the Smith Barney
Financial Services Fund, excluding sales charges, returned 21.33%. These shares
performed worse than the fund's unmanaged benchmark the Goldman Sachs Financials
Index,(i) which returned 24.96% for the same period. They also underperformed
the average of the fund's Lipper peer group of financial services funds, which
returned 25.65% for the same period.(1) We attribute the fund's underperformance
to relative weakness among its thrifts and mortgage finance holdings.
MARKET OVERVIEW
The financial services sector generally declined during the first half of the
fund's fiscal year, which began in November 2002, reaching a low point in March
2003 as persistent economic weakness and the build-up to the war in Iraq took
their toll on stock prices. However, the sector and the broader market recovered
strongly over the balance of the year, as investor sentiment improved against a
backdrop of low global interest rates, the quick resolution of major combat
operations in Iraq and signs of a more sustainable economic recovery in the
U.S., Japan and elsewhere. Over the year, the financials sector's greatest gains
were concentrated primarily in the capital markets and real estate sub-sectors.
Laggards included the insurance area.
The stock market over the past year has been focused on recovery prospects for
corporate profits. Companies in the capital markets and consumer finance areas
- -- many of which have suffered from weak financial positions or have operated in
a relatively depressed business environment -- tended to rebound more strongly
than others, because their operations benefited more from the general market
recovery and declining rate of defaults on consumer credit. In general, despite
attractive valuations and sound finances, stocks of higher quality, blue-chip
companies did not rally as strongly as smaller and more speculative stocks,
which were more leveraged to improving economic conditions.
PERFORMANCE SNAPSHOT
AS OF OCTOBER 31, 2003
(EXCLUDING SALES CHARGES)
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CLASS A SHARES
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6 Months 16.43%
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12 Months 21.33%
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GOLDMAN SACHS FINANCIALS INDEX
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6 Months 18.74%
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12 Months 24.96%
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AVERAGE OF LIPPER FINANCIAL SERVICES FUNDS
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6 Months 19.78%
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12 Months 25.65%
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Class A share returns assume the reinvestment of income dividends and capital
gains distributions at net asset value and the deduction of all fund expenses.
Returns have not been adjusted to include sales charges that may apply when
shares are purchased or the deduction of taxes that a shareholder would pay on
fund distributions. Results for other share classes may vary.
The Goldman Sachs Financial Services Index is an unmanaged market-value weighted
index comprised of companies in the banking services, brokerage, asset
management, insurance and real estate industries. Please note that an investor
cannot invest directly in an index.
Lipper Inc. is a major independent mutual-fund tracking organization. Returns
are based on the period ended October 31, 2003, calculated among 116 funds for
the six-month period and among 115 funds for the 12-month period, in the fund's
Lipper peer group including the reinvestment of dividends and capital gains and
excluding sales charges.
ALL FIGURES REPRESENT PAST PERFORMANCE AND ARE NOT A GUARANTEE OF FUTURE
RESULTS. Principal value and investment returns will fluctuate and investors'
shares, when redeemed may be worth more or less than their original cost.
(1) Lipper Inc. is a major independent mutual-fund tracking organization.
Returns are based on the period ended October 31, 2003, calculated among
115 funds for the 12-month period, in the fund's Lipper financial services
funds category including the reinvestment of dividends and capital gains
and excluding sales charges.
2 SMITH BARNEY SECTOR SERIES INC. | 2003 Annual Report
FUND OVERVIEW
Our investment approach seeks to add value relative to the fund's benchmark from
our stock selection strategy rather than through industry or thematic
allocations. In the improving market environment, we continued to focus on
companies that our analysis suggests are most attractive within their
sub-sectors. This analysis employs a long-term valuation framework that seeks to
project earnings and dividends several years into the future. While this
approach historically has produced strong results, it proved less effective in
an environment in which investors were focused primarily on short-term recovery
prospects.
Our fundamental valuation methodology led to particularly disappointing stock
selections in the mortgage finance industry. FREDDIE MAC and FANNIE MAE
underperformed the averages amid uncertainty surrounding the restatement of
prior-year financial results, accounting errors, changes in senior management
and regulatory investigations. We continue to hold Freddie Mac and Fannie Mae in
anticipation of a resolution of these issues, which we believe will cause
investors' attention to return to the more fundamental strengths of attractive
valuations in a competitively advantaged, stable and high-return business. The
fund's relatively light exposure to the real estate and diversified financials
segments also detracted from its relative performance.
On the other hand, the fund benefited from its overweighted position in consumer
finance companies, such as CAPITAL ONE FINANCIAL CORP., which has since been
eliminated from the fund, and AMERICAN EXPRESS CO., which has been retained.
J.P. MORGAN CHASE & CO. contributed strongly to performance as the capital
markets segment recovered, and we sold our position after realizing gains.
FRANKLIN RESOURCES, INC. and STATE STREET CORP. also contributed positively, and
these holdings have been retained because we see potential for further gains.
Results from our security selection strategy in the commercial banks area was
aided by strong performance from ZIONS BANCORP. and FIFTH THIRD BANCORP, but the
sub-sector's relative performance was hurt by not owning FLEETBOSTON FINANCIAL
CORP.
ADDITIONAL INFORMATION ABOUT YOUR FUND
The Fund's Adviser and some of its affiliates have received requests for
information from various government regulators regarding market timing, late
trading, fees and other mutual fund issues in connection with various
investigations. The Adviser and its affiliates are responding to those
information requests, but are not in a position to predict the outcome of these
requests and investigations.
Thank you for your investment in the Smith Barney Financial Services Fund. We
appreciate that you have entrusted us to manage your money and we value our
relationship with you.
Sincerely,
The Portfolio Management Team
Citigroup Asset Management, Limited.
NOVEMBER 19, 2003
The information provided is not intended to be a forecast of future events,
a guarantee of future results or investment advice. Views expressed may
differ from those of the firm as a whole.
Portfolio holdings and breakdowns are as of October 31, 2003 and are
subject to change. Please refer to pages 6 through 7 for a list and
percentage breakdown of the fund's holdings.
(i) The Goldman Sachs Financial Services Index is an unmanaged market-value
weighted index comprised of companies in the banking services, brokerage,
asset management, insurance and real estate industries. Please note that an
investor cannot invest directly in an index.
The fund's top ten holdings as of October 31, 2003 were: Wells Fargo & Co.
(6.44%); Berkshire Hathaway Inc., Class A Shares (6.11%); Bank of America
Corp. (5.31%); American International Group, Inc. (5.08%); American Express
Co. (4.82%); Fannie Mae (4.65%); The Goldman Sachs Group, Inc. (3.87%);
Freddie Mac (3.57%); Morgan Stanley (3.39%); Washington Mutual, Inc.
(3.11%).
3 SMITH BARNEY SECTOR SERIES INC. | 2003 Annual Report
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AVERAGE ANNUAL TOTAL RETURNS+ (UNAUDITED)
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WITHOUT SALES CHARGES(1)
------------------------------------------------
CLASS A CLASS B CLASS L
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Twelve Months Ended 10/31/03 21.33% 20.39% 20.48%
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Inception* through 10/31/03 10.50 9.67 9.69
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WITH SALES CHARGES(2)
------------------------------------------------
CLASS A CLASS B CLASS L
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Twelve Months Ended 10/31/03 15.23% 15.39% 18.32%
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Inception* through 10/31/03 8.97 9.24 9.38
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CUMULATIVE TOTAL RETURNS+ (UNAUDITED)
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WITHOUT SALES CHARGES(1)
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Class A (Inception* through 10/31/03) 44.34%
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Class B (Inception* through 10/31/03) 40.38
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Class L (Inception* through 10/31/03) 40.45
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(1) ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS, IF
ANY, AT NET ASSET VALUE AND DOES NOT REFLECT THE DEDUCTION OF THE
APPLICABLE SALES CHARGES WITH RESPECT TO CLASS A AND L SHARES OR THE
APPLICABLE CONTINGENT DEFERRED SALES CHARGES ("CDSC") WITH RESPECT TO CLASS
B AND L SHARES.
(2) ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS, IF
ANY, AT NET ASSET VALUE. IN ADDITION, CLASS A AND L SHARES REFLECT THE
DEDUCTION OF THE MAXIMUM INITIAL SALES CHARGES OF 5.00% AND 1.00%,
RESPECTIVELY; CLASS B SHARES REFLECT THE DEDUCTION OF A 5.00% CDSC, WHICH
APPLIES IF SHARES ARE REDEEMED WITHIN ONE YEAR FROM PURCHASE PAYMENT.
THEREAFTER, THE CDSC DECLINES BY 1.00% PER YEAR UNTIL NO CDSC CHARGE IS
INCURRED. CLASS L SHARES ALSO REFLECT THE DEDUCTION OF A 1.00% CDSC, WHICH
APPLIES IF SHARES ARE REDEEMED WITHIN ONE YEAR FROM PURCHASE PAYMENT.
* INCEPTION DATES FOR CLASS A, B AND L SHARES IS FEBRUARY 28, 2000.
+ THE RETURNS SHOWN DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER
WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION SHARES OF FUND SHARES.
PERFORMANCE FIGURES MAY REFLECT FEE WAIVERS AND/OR EXPENSE REIMBURSEMENTS.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. IN THE ABSENCE OF FEE
WAIVERS AND/OR EXPENSE REIMBURSEMENTS, THE TOTAL RETURN WOULD BE REDUCED.
4 SMITH BARNEY SECTOR SERIES INC. | 2003 Annual Report
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HISTORICAL PERFORMANCE (UNAUDITED)
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VALUE OF $10,000 INVESTED IN CLASS A, B AND L SHARES OF THE
SMITH BARNEY FINANCIAL SERVICES FUND VS. GOLDMAN SACHS FINANCIALS INDEX+
- --------------------------------------------------------------------------------
FEBRUARY 2000 -- OCTOBER 2003
[DATA BELOW REPRESENTS A LINE CHART IN THE ORIGINAL PIECE.]
SMITH BARNEY SMITH BARNEY SMITH BARNEY
FINANCIAL SERVICES FINANCIAL SERVICES FINANCIAL SERVICES
FUND-- FUND-- FUND-- GOLDMAN SACHS
CLASS A SHARES CLASS B SHARES CLASS L SHARES FINANCIAL INDEX
------------------ ------------------ ------------------ ---------------
2/28/00 9500 10000 9896 10000
10/31/00 13242 13868 13724 13919
10/31/01 11940 12406 12276 12555
10/31/02 11301 11660 11537 12425
10/31/03 13712 13838 13899 15526
+ Hypothetical illustration of $10,000 invested in Class A, B and L shares at
inception on February 28, 2000, assuming deduction of the maximum 5.00% and
1.00% sales charges at the time of investment for Class A and L shares,
respectively; and the deduction of the maximum 5.00% CDSC for Class B
shares. It also assumes reinvestment of dividends and capital gains, if
any, at net asset value through October 31, 2003. The Goldman Sachs
Financials Index is comprised of companies in the banking services,
brokerage, asset management, insurance and real estate industries. The
Index is unmanaged and is not subject to the same management and trading
expenses as a mutual fund. Please note that an investor cannot invest
directly in an index. The returns shown do not reflect the deduction of
taxes that a shareholder would pay on fund distributions or the redemption
of fund shares.
ALL FIGURES REPRESENT PAST PERFORMANCE AND ARE NOT A GUARANTEE OF FUTURE
RESULTS. The performance data represents past performance including the
investment return and principal value of an investment, which will
fluctuate so that an investor's shares, when redeemed, may be worth more or
less than their original cost. Performance figures may reflect fee waivers
and/or expense reimbursements. In the absence of fee waivers and/or expense
reimbursements, the total return would be reduced.
5 SMITH BARNEY SECTOR SERIES INC. | 2003 Annual Report
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SCHEDULE OF INVESTMENTS OCTOBER 31, 2003
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SHARES SECURITY VALUE
- --------------------------------------------------------------------------------
COMMON STOCK -- 99.8%
BANKS -- 36.5%
28,990 AmSouth Bancorp. $ 684,744
48,185 Bank of America Corp. 3,649,050
22,156 Bank of Montreal 829,521
35,267 Bank One Corp. 1,497,084
17,202 Canadian Imperial Bank of Commerce 771,854
8,047 Comerica Inc. 414,260
22,800 Fifth Third Bancorp 1,321,488
10,442 HSBC Holdings PLC, ADR 783,881
27,140 Huntington Bancshares Inc. 587,852
8,560 M&T Bank Corp. 803,784
17,150 Marshall & Ilsley Corp. 614,313
17,809 Regions Financial Corp. 654,481
24,690 Royal Bank of Canada 1,189,564
22,698 SouthTrust Corp. 722,931
21,181 The Toronto-Dominion Bank 705,115
46,000 U.S. Bancorp 1,252,120
14,383 UnionBancal Corp. 779,127
48,867 Washington Mutual, Inc. 2,137,931
78,593 Wells Fargo & Co. 4,426,358
21,163 Zions Bancorp. 1,297,080
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25,122,538
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COMMERCIAL SERVICES AND SUPPLIES -- 0.7%
10,740 H&R Block, Inc. 505,747
- --------------------------------------------------------------------------------
DIVERSIFIED FINANCIALS -- 34.2%
21,300 Alliance Capital Management Holding L.P. 715,041
70,547 American Express Co. 3,310,771
15,336 The Bank of New York Co., Inc. 478,330
9,263 The Bear Stearns Cos., Inc. 706,304
44,613 Fannie Mae 3,198,306
38,389 Franklin Resources, Inc. 1,820,406
43,691 Freddie Mac 2,452,376
28,357 The Goldman Sachs Group, Inc. 2,662,722
44,808 J.P. Morgan Chase & Co. 1,608,607
10,062 Lehman Brothers Holdings Inc. 724,464
53,000 MBNA Corp. 1,311,750
24,019 Mellon Financial Corp. 717,448
42,406 Morgan Stanley 2,326,817
27,724 State Street Corp. 1,451,629
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23,484,971
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SEE NOTES TO FINANCIAL STATEMENTS.
6 SMITH BARNEY SECTOR SERIES INC. | 2003 Annual Report
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SCHEDULE OF INVESTMENTS (CONTINUED) OCTOBER 31, 2003
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
- --------------------------------------------------------------------------------
INSURANCE -- 26.2%
34,580 AFLAC Inc. $ 1,261,478
24,614 The Allstate Corp. 972,253
57,338 American International Group, Inc. 3,487,871
54 Berkshire Hathaway Inc., Class A Shares* 4,201,740
9,160 The Chubb Corp. 611,980
11,836 Cincinnati Financial Corp. 484,329
9,096 The Hartford Financial Services Group, Inc. 499,370
9,945 Jefferson-Pilot Corp. 474,774
20,621 Lincoln National Corp. 823,397
19,616 Marsh & McLennan Cos., Inc. 838,584
8,631 MBIA Inc. 514,494
7,094 MGIC Investment Corp. 363,993
45,900 Nationwide Financial Services, Inc. 1,559,223
12,400 The Progressive Corp. 915,120
12,302 Protective Life Corp. 399,446
8,665 XL Capital Ltd. 602,217
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18,010,269
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REAL ESTATE -- 2.2%
12,600 Archstone-Smith Trust 336,420
12,700 Equity Office Properties Trust 355,727
8,200 Health Care Property Investors, Inc. 382,366
9,300 Simon Property Group, Inc. 419,244
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1,493,757
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TOTAL COMMON STOCK
(Cost -- $61,215,961) 68,617,282
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FACE
AMOUNT SECURITY VALUE
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 0.2%
$117,000 State Street Bank and Trust Co., 0.940%
due 11/3/03; Proceeds at maturity -- $117,009;
(Fully collateralized by Federal Home Loan
Bank Notes, 1.250% due 7/2/04; Market value --
$120,583) (Cost -- $117,000) 117,000
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TOTAL INVESTMENTS -- 100.0%
(Cost -- $61,332,961**) $68,734,282
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* NON-INCOME PRODUCING SECURITY.
** AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $61,808,677.
Abbreviation used in this schedule:
-----------------------------------
ADR -- American Depositary Receipt
SEE NOTES TO FINANCIAL STATEMENTS.
7 SMITH BARNEY SECTOR SERIES INC. | 2003 Annual Report
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STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 2003
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ASSETS:
Investments, at value (Cost -- $61,332,961) $ 68,734,282
Cash 10
Dividends and interest receivable 92,559
Receivable for Fund shares sold 65,375
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TOTAL ASSETS 68,892,226
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LIABILITIES:
Management fee payable 47,022
Payable for Fund shares reacquired 23,423
Distribution plan fees payable 23,108
Accrued expenses 77,956
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TOTAL LIABILITIES 171,509
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TOTAL NET ASSETS $ 68,720,717
- --------------------------------------------------------------------------------
NET ASSETS:
Par value of capital shares $ 4,732
Capital paid in excess of par value 64,912,285
Undistributed net investment income 180,332
Accumulated net realized loss from investment transactions (3,778,056)
Net unrealized appreciation of investments and foreign
currencies 7,401,424
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TOTAL NET ASSETS $ 68,720,717
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SHARES OUTSTANDING:
Class A 1,115,885
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Class B 2,189,376
---------------------------------------------------------------------------
Class L 1,426,666
---------------------------------------------------------------------------
NET ASSET VALUE:
Class A (and redemption price) $14.81
---------------------------------------------------------------------------
Class B * $14.43
---------------------------------------------------------------------------
Class L * $14.44
---------------------------------------------------------------------------
MAXIMUM PUBLIC OFFERING PRICE PER SHARE:
Class A (net asset value plus 5.26% of net asset value per share) $15.59
---------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value per share) $14.59
- --------------------------------------------------------------------------------
* REDEMPTION PRICE IS NAV OF CLASS B AND L SHARES REDUCED BY A 5.00% AND
1.00% CDSC, RESPECTIVELY, IF SHARES ARE REDEEMED WITHIN ONE YEAR FROM
PURCHASE PAYMENT (SEE NOTE 2).
SEE NOTES TO FINANCIAL STATEMENTS.
8 SMITH BARNEY SECTOR SERIES INC. | 2003 Annual Report
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STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2003
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 1,409,116
Interest 3,058
Less: Foreign withholding tax (17,201)
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TOTAL INVESTMENT INCOME 1,394,973
- --------------------------------------------------------------------------------
EXPENSES:
Distribution plan fees (Note 6) 528,796
Management fee (Note 2) 512,889
Shareholder servicing fees (Note 6) 98,308
Audit and legal 27,758
Custody 19,080
Directors' fees 13,051
Registration fees 5,427
Other 5,910
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TOTAL EXPENSES 1,211,219
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 183,754
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTE 3):
Realized Gain (Loss) From:
Investment transactions (3,191,303)
Foreign currency transactions 900
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NET REALIZED LOSS (3,190,403)
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation) of
Investments:
Beginning of year (7,766,245)
End of year 7,401,424
- --------------------------------------------------------------------------------
INCREASE IN NET UNREALIZED APPRECIATION 15,167,669
- --------------------------------------------------------------------------------
NET GAIN ON INVESTMENTS AND FOREIGN CURRENCIES 11,977,266
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INCREASE IN NET ASSETS FROM OPERATIONS $12,161,020
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SEE NOTES TO FINANCIAL STATEMENTS.
9 SMITH BARNEY SECTOR SERIES INC. | 2003 Annual Report
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STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED OCTOBER 31,
- --------------------------------------------------------------------------------
2003 2002
- ----------------------------------------------------------------------------------------------------------
OPERATIONS:
Net investment income (loss) $ 183,754 $ (205,916)
Net realized gain (loss) (3,190,403) 1,101,240
Increase (decrease) in net unrealized appreciation 15,167,669 (5,088,640)
- ----------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS 12,161,020 (4,193,316)
- ----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM (NOTE 7):
Net realized gains (1,303,919) (4,375,419)
- ----------------------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO SHAREHOLDERS (1,303,919) (4,375,419)
- ----------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net proceeds from sale of shares 6,357,450 16,096,034
Net asset value of shares issued for reinvestment of dividends 1,234,602 4,157,273
Cost of shares reacquired (14,924,847) (25,373,865)
- ----------------------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS (7,332,795) (5,120,558)
- ----------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 3,524,306 (13,689,293)
NET ASSETS:
Beginning of year 65,196,411 78,885,704
- ----------------------------------------------------------------------------------------------------------
END OF YEAR* $68,720,717 $65,196,411
- ----------------------------------------------------------------------------------------------------------
* Includes undistributed net investment income of: $180,332 --
- ----------------------------------------------------------------------------------------------------------
* Includes accumulated net investment loss of: -- $(4,214)
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SEE NOTES TO FINANCIAL STATEMENTS.
10 SMITH BARNEY SECTOR SERIES INC. | 2003 Annual Report
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NOTES TO FINANCIAL STATEMENTS
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1. Significant Accounting Policies
The Smith Barney Financial Services Fund ("Fund"), a separate 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 a
non-diversified, open-end management investment company. The Company consists of
this Fund and two other separate investment funds: Smith Barney Health Sciences
Fund and Smith Barney Technology Fund. The financial statements and financial
highlights for the other funds are presented in separate shareholder reports.
The significant accounting policies consistently followed by the Fund are: (a)
security transactions are accounted for on trade date; (b) securities traded on
national securities markets are valued at the closing prices in the primary
exchange on which they are traded; securities listed or traded on certain
foreign exchanges or other markets whose operations are similar to the U.S.
over-the-counter market (including securities listed on exchanges where the
primary market is believed to be over-the-counter) and securities for which no
sale was reported on that date are valued at the mean between the bid and asked
prices; securities listed on the NASDAQ National Market System for which market
quotations are available are valued at the official closing price or, if there
is no official closing price that day, at the last sales price. Securities which
are listed or traded on more than one exchange or market are valued at the
quotations on the exchange or market determined to be the primary market for
such securities; (c) securities for which market quotations are not available
will be valued in good faith at fair value by or under the direction of the
Board of Directors; (d) securities maturing within 60 days are valued at cost
plus accreted discount, or minus amortized premium, which approximates value;
(e) the accounting records of the Fund are maintained in U.S. dollars. All
assets and liabilities denominated in foreign currencies are translated into
U.S. dollars based on the rate of exchange of such currencies against U.S.
dollars on the date of valuation. Purchases and sales of securities, and income
and expenses are translated at the rate of exchange quoted on the respective
date that such transactions are recorded. Differences between income or expense
amounts recorded and collected or paid are adjusted when reported by the
custodian; (f) interest income, adjusted for amortization of premium and
accretion of discount, is recorded on an accrual basis; (g) dividend income is
recorded on the ex-dividend date; foreign dividends are recorded on the
ex-dividend date or as soon as practical after the Fund determines the existence
of a dividend declaration after exercising reasonable due diligence; (h)
dividends and distributions to shareholders are recorded on the ex-dividend
date; the Fund distributes dividends and capital gains, if any, annually; (i)
gains or losses on the sale of securities are calculated by using the specific
identification method; (j) class specific expenses are charged to each class;
management fees and general Fund expenses are allocated on the basis of relative
net assets of each class or on another reasonable basis; (k) the character of
income and gains to be distributed is determined in accordance with income tax
regulations which may differ from accounting principles generally accepted in
the United States of America. At October 31, 2003, reclassifications were made
to the Fund's capital accounts to reflect permanent book/tax differences and
income and gains available for distributions under income tax regulations.Net
investment income, net realized gains and net assets were not affected by this
adjustment; (l) the Fund intends to comply with the applicable provisions of the
Internal Revenue Code of 1986, as amended, pertaining to regulated investment
companies and to make distributions of taxable income sufficient to relieve it
from substantially all Federal income and excise taxes; and (m) 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.
In addition, the Fund may enter into forward exchange contracts in order to
hedge against foreign currency risk. These contracts are marked-to-market daily,
by recognizing the difference between the contract exchange rate and the current
market rate as an unrealized gain or loss. Realized gains or losses are
recognized when contracts are settled or offset by entering into
11 SMITH BARNEY SECTOR SERIES INC. | 2003 Annual Report
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
another forward exchange contract. The Fund from time to time may also enter
into options and/or futures contracts typically to hedge market or currency
risk.
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 delegated the daily management of the Fund to Citi Fund Management Inc.
("CFM"), an affiliate of SBFM. For services provided to the Fund, SBFM pays CFM
a sub-advisory fee calculated at an annual rate of 0.50% of the Fund's average
daily net assets. The Board of Directors of the Company, on behalf of the Fund,
has approved the transfer and assignment of the sub-advisory agreement from CFM
to Citigroup Asset Management Ltd. ("CAM Ltd."), effective August 1, 2003. The
current CFM managers will continue to manage the Fund's portfolio through CAM
Ltd.
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, 2003, the Fund paid transfer agent fees of $64,969 to
CTB.
Citigroup Global Markets Inc. ("CGM") (formerly known as Salomon Smith Barney
Inc.) and PFS Distributors, Inc., both of which are subsidiaries of Citigroup,
act as the Fund's distributors. For the year ended October 31, 2003, CGM and its
affiliates did not receive any brokerage commissions.
There are maximum initial sales charges of 5.00% and 1.00% for Class A and L
shares, respectively. 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 L shares also have a 1.00% CDSC, which applies if redemption
occurs within one year from purchase payment. In addition, Class A shares have a
1.00% CDSC, which applies if redemption occurs 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, 2003, CGM and its affiliates received sales
charges of approximately $58,000 and $2,000 on sales of the Fund's Class A and L
shares, respectively. In addition, for the year ended October 31, 2003, CDSCs
paid to CGM and its affiliates were approximately $94,000 for Class B shares.
All officers and one Director of the Company are employees of Citigroup or its
affiliates.
3. Investments
During the year ended October 31, 2003, the aggregate cost of purchases and
proceeds from sales of investments (including maturities of long-term
investments, but excluding short-term investments) were as follows:
- --------------------------------------------------------------------------------
Purchases $14,047,485
- --------------------------------------------------------------------------------
Sales 22,828,411
- --------------------------------------------------------------------------------
12 SMITH BARNEY SECTOR SERIES INC. | 2003 Annual Report
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
At October 31, 2003, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were as follows:
- --------------------------------------------------------------------------------
Gross unrealized appreciation $10,260,655
Gross unrealized depreciation (3,335,050)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 6,925,605
- --------------------------------------------------------------------------------
4. Repurchase Agreements
The Fund purchases (and the custodian takes possession of) U.S. government
securities from securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day),
at an agreed upon higher repurchase price. The Fund requires continual
maintenance of the market value (plus accrued interest) of the collateral in
amounts at least equal to the repurchase price.
5. Concentration of Risk
The Fund normally invests at least 80% of its assets in financial services
related investments. As a result of this concentration policy, the Fund's
investments may be subject to greater risk and market fluctuation than a fund
that invests in securities representing a broader range of investment
alternatives.
6. Class Specific Expenses
Pursuant to a Rule 12b-1 Distribution Plan, the Fund pays a service fee with
respect to Class A, B and L 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 L 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, 2003, total Rule 12b-1 Distribution Plan fees, which
are accrued daily and paid monthly, were as follows:
CLASS A CLASS B CLASS L
- --------------------------------------------------------------------------------
Rule 12b-1 Distribution Plan Fees $37,438 $292,277 $199,081
- --------------------------------------------------------------------------------
For the year ended October 31, 2003, total Shareholder Servicing fees were as
follows:
CLASS A CLASS B CLASS L
- --------------------------------------------------------------------------------
Shareholder Servicing Fees $23,016 $ 44,840 $ 30,452
- --------------------------------------------------------------------------------
7. Distributions Paid to Shareholders by Class
YEAR ENDED YEAR ENDED
OCTOBER 31, 2003 OCTOBER 31, 2002
- --------------------------------------------------------------------------------
NET REALIZED GAINS
Class A $ 291,292 $ 892,781
Class B 587,336 1,885,444
Class L 425,291 1,597,194
- --------------------------------------------------------------------------------
Total $1,303,919 $4,375,419
- --------------------------------------------------------------------------------
13 SMITH BARNEY SECTOR SERIES INC. | 2003 Annual Report
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
8. Capital Shares
At October 31, 2003, 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.
Transactions in shares of each class were as follows:
YEAR ENDED YEAR ENDED
OCTOBER 31, 2003 OCTOBER 31, 2002
------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------
CLASS A
Shares sold 193,058 $ 2,484,197 505,631 $ 7,118,929
Shares issued on reinvestment 22,918 273,645 60,450 855,366
Shares reacquired (312,740) (4,042,964) (511,025) (6,967,973)
- -------------------------------------------------------------------------------------------------
Net Increase (Decrease) (96,764) $(1,285,122) 55,056 $ 1,006,322
- -------------------------------------------------------------------------------------------------
CLASS B
Shares sold 264,664 $ 3,299,291 446,749 $ 6,176,589
Shares issued on reinvestment 47,116 552,196 126,216 1,765,764
Shares reacquired (486,621) (6,121,078) (659,117) (8,826,580)
- -------------------------------------------------------------------------------------------------
Net Decrease (174,841) $(2,269,591) (86,152) $ (884,227)
- -------------------------------------------------------------------------------------------------
CLASS L
Shares sold 45,324 $ 573,962 197,150 $ 2,800,516
Shares issued on reinvestment 34,877 408,761 109,803 1,536,143
Shares reacquired (382,238) (4,760,805) (703,438) (9,579,312)
- -------------------------------------------------------------------------------------------------
Net Decrease (302,037) $(3,778,082) (396,485) $(5,242,653)
- -------------------------------------------------------------------------------------------------
9. Capital Loss Carryforward
At October 31, 2003, the Fund had, for Federal income tax purposes,
approximately $3,302,000 of unused capital loss carryforwards available to
offset future capital gains, expiring on October 31, 2011. To the extent that
these carryforward losses are used to offset capital gains, it is probable that
the gains so offset will not be distributed.
10. Income Tax Information and Distributions to Shareholders
At October 31, 2003, the tax basis components of distributable earnings were:
- --------------------------------------------------------------------------------
Undistributed ordinary income $ 182,674
- --------------------------------------------------------------------------------
Accumulated capital losses (3,302,340)
- --------------------------------------------------------------------------------
Unrealized appreciation 6,925,708
- --------------------------------------------------------------------------------
The difference between book basis and tax basis unrealized appreciation is
attributable primarily to wash sales loss deferrals.
The tax character of distributions paid during the year ended October 31, 2003
was:
- --------------------------------------------------------------------------------
Ordinary income $ 108
Long-term capital gains 1,303,811
- --------------------------------------------------------------------------------
Total $1,303,919
- --------------------------------------------------------------------------------
14 SMITH BARNEY SECTOR SERIES INC. | 2003 Annual Report
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
11. Subsequent Event
The Fund has received the following information from Citigroup Asset Management
("CAM"), the Citigroup business unit which includes the Fund's Investment
Manager and other investment advisory companies, all of which are indirect,
wholly-owned subsidiaries of Citigroup. CAM is reviewing its entry, through an
affiliate, into the transfer agent business in the period 1997-1999. As CAM
currently understands the facts, at the time CAM decided to enter the transfer
agent business, CAM sub-contracted for a period of five years certain of the
transfer agency services to a third party and also concluded a revenue guarantee
agreement with this sub-contractor providing that the sub-contractor would
guarantee certain benefits to CAM or its affiliates (the "Revenue Guarantee
Agreement"). In connection with the subsequent purchase of the sub-contractor's
business by an affiliate of the current sub-transfer agent (PFPC Inc.) used by
CAM on many of the funds it manages, this Revenue Guarantee Agreement was
amended eliminating those benefits in exchange for arrangements that included a
one-time payment from the sub-contractor.
The Boards of CAM-managed funds (the "Boards") were not informed of the Revenue
Guarantee Agreement with the sub-contractor at the time the Boards considered
and approved the transfer agent arrangements. Nor were the Boards informed of
the subsequent amendment to the Revenue Guarantee Agreement when that occurred.
CAM has begun to take corrective actions. CAM will pay to the applicable funds
$16 million (plus interest) that CAM and its affiliates received from the
Revenue Guarantee Agreement and its amendment. CAM also plans an independent
review to verify that the transfer agency fees charged by CAM were fairly priced
as compared to competitive alternatives. CAM is instituting new procedures and
making changes designed to ensure no similar arrangements are entered into in
the future.
CAM has briefed the SEC, the New York State Attorney General and other
regulators with respect to this matter, as well as the U.S. Attorney who is
investigating the matter. CAM is cooperating with governmental authorities on
this matter, the ultimate outcome of which is not yet determinable.
15 SMITH BARNEY SECTOR SERIES INC. | 2003 Annual Report
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR
ENDED OCTOBER 31, UNLESS OTHERWISE NOTED:
CLASS A SHARES 2003(1) 2002(1) 2001 2000(2)
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $ 12.46 $ 13.87 $ 15.89 $ 11.40
- ------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income(3) 0.11 0.05 0.06 0.05
Net realized and unrealized gain (loss) 2.49 (0.70) (1.55) 4.44
- ------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 2.60 (0.65) (1.49) 4.49
- ------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income -- -- (0.06) --
Net realized gains (0.25) (0.76) (0.47) --
- ------------------------------------------------------------------------------------------------------------------
Total Distributions (0.25) (0.76) (0.53) --
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 14.81 $ 12.46 $ 13.87 $ 15.89
- ------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(4) 21.33% (5.35)% (9.83)% 39.39%++
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000s) $16,524 $15,105 $16,050 $14,276
- ------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(3)(5) 1.31% 1.49% 1.50% 1.51%+
Net investment income 0.86 0.35 0.39 0.69+
- ------------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 22% 20% 42% 26%
- ------------------------------------------------------------------------------------------------------------------
CLASS B SHARES 2003(1) 2002(1) 2001 2000(2)
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $ 12.24 $ 13.73 $ 15.81 $ 11.40
- ------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
- ------------------------------------------------------------------------------------------------------------------
Net investment gain (loss)(3) 0.01 (0.06) (0.05) (0.01)
Net realized and unrealized gain (loss) 2.43 (0.67) (1.55) 4.42
- ------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 2.44 (0.73) (1.60) 4.41
- ------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income -- -- (0.01) --
Net realized gains (0.25) (0.76) (0.47) --
- ------------------------------------------------------------------------------------------------------------------
Total Distributions (0.25) (0.76) (0.48) --
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 14.43 $ 12.24 $ 13.73 $ 15.81
- ------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(4) 20.39% (6.02)% (10.54)% 38.68%++
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000s) $31,602 $28,933 $33,649 $28,696
- ------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(3)(5) 2.06% 2.24% 2.25% 2.26%+
Net investment income (loss) 0.11 (0.40) (0.36) (0.07)+
- ------------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 22% 20% 42% 26%
- ------------------------------------------------------------------------------------------------------------------
(1) PER SHARE AMOUNTS HAVE BEEN CALCULATED USING THE MONTHLY AVERAGE SHARES
METHOD.
(2) FOR THE PERIOD FEBRUARY 28, 2000 (INCEPTION DATE) TO OCTOBER 31, 2000.
(3) THE MANAGER WAIVED ALL OR A PORTION OF ITS FEES AND/OR REIMBURSED EXPENSES
FOR THE YEAR ENDED OCTOBER 31, 2001 AND THE PERIOD ENDED OCTOBER 31, 2000.
IF SUCH FEES WERE NOT WAIVED AND EXPENSES NOT REIMBURSED, THE PER SHARE
DECREASES TO NET INVESTMENT INCOME AND THE ACTUAL EXPENSE RATIOS WOULD HAVE
BEEN AS FOLLOWS:
Per Share Decreases Expense Ratios Without Fee
to Net Investment Income Waivers and Reimbursements
------------------------ ---------------------------
2001 2000 2001 2000
----- ----- ----- -----
Class A Shares $0.01 $0.00* 1.53% 2.06%+
Class B Shares 0.01 0.05 2.28 2.81+
(4) PERFORMANCE FIGURES MAY REFLECT FEE WAIVERS AND/OR EXPENSE REIMBURSEMENTS.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. IN THE ABSENCE OF FEE
WAIVERS AND/OR EXPENSE REIMBURSEMENTS, THE TOTAL RETURN WOULD BE REDUCED.
(5) AS A RESULT OF A VOLUNTARY EXPENSE LIMITATION, THE RATIO OF EXPENSES TO
AVERAGE NET ASSETS WILL NOT EXCEED 1.50% AND 2.25% FOR CLASS A AND B
SHARES, RESPECTIVELY.
* AMOUNT REPRESENTS LESS THAN $0.01 PER SHARE.
++ TOTAL RETURN IS NOT ANNUALIZED, AS IT MAY NOT BE REPRESENTATIVE OF THE
TOTAL RETURN FOR THE YEAR.
+ ANNUALIZED.
16 SMITH BARNEY SECTOR SERIES INC. | 2003 Annual Report
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR
ENDED OCTOBER 31, UNLESS OTHERWISE NOTED:
CLASS L SHARES 2003(1) 2002(1) 2001 2000(2)
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $ 12.24 $ 13.73 $ 15.81 $ 11.40
- --------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment gain (loss)(3) 0.01 (0.06) (0.05) (0.01)
Net realized and unrealized gain (loss) 2.44 (0.67) (1.55) 4.42
- --------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 2.45 (0.73) (1.60) 4.41
- --------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income -- -- (0.01) --
Net realized gains (0.25) (0.76) (0.47) --
- --------------------------------------------------------------------------------------------------------------
Total Distributions (0.25) (0.76) (0.48) --
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 14.44 $ 12.24 $ 13.73 $ 15.81
- --------------------------------------------------------------------------------------------------------------
TOTAL RETURN(4) 20.48% (6.02)% (10.55)% 38.68%++
- --------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000s) $20,595 $21,158 $29,187 $30,863
- --------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(3)(5) 2.07% 2.24% 2.25% 2.26%+
Net investment income (loss) 0.11 (0.41) (0.36) (0.08)+
- --------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 22% 20% 42% 26%
- --------------------------------------------------------------------------------------------------------------
(1) PER SHARE AMOUNTS HAVE BEEN CALCULATED USING THE MONTHLY AVERAGE SHARES
METHOD.
(2) FOR THE PERIOD FEBRUARY 28, 2000 (INCEPTION DATE) TO OCTOBER 31, 2000.
(3) THE MANAGER WAIVED ALL OR A PORTION OF ITS FEES AND/OR REIMBURSED EXPENSES
FOR THE YEAR ENDED OCTOBER 31, 2001 AND THE PERIOD ENDED OCTOBER 31, 2000.
IF SUCH FEES WERE NOT WAIVED AND EXPENSES NOT REIMBURSED, THE PER SHARE
INCREASES TO NET INVESTMENT LOSS AND THE ACTUAL EXPENSE RATIOS WOULD HAVE
BEEN AS FOLLOWS:
Expense Ratios
Per Share Increases Without Fee Waivers
to Net Investment Loss and Reimbursements
--------------------- ---------------------
2001 2000 2001 2000
----- ----- ----- -----
Class L Shares $0.01 $0.06 2.29% 2.81%+
(4) PERFORMANCE FIGURES MAY REFLECT FEE WAIVERS AND/OR EXPENSE REIMBURSEMENTS.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. IN THE ABSENCE OF FEE
WAIVERS AND/OR EXPENSE REIMBURSEMENTS, THE TOTAL RETURN WOULD BE REDUCED.
(5) AS A RESULT OF A VOLUNTARY EXPENSE LIMITATION, THE RATIO OF EXPENSES TO
AVERAGE NET ASSETS WILL NOT EXCEED 2.25% FOR CLASS L SHARES.
++ TOTAL RETURN IS NOT ANNUALIZED, AS IT MAY NOT BE REPRESENTATIVE OF THE
TOTAL RETURN FOR THE YEAR.
+ ANNUALIZED.
- --------------------------------------------------------------------------------
TAX INFORMATION (AUDITED)
- --------------------------------------------------------------------------------
For Federal tax purposes the Fund hereby designates for the fiscal year ended
October 31, 2003:
o A corporate dividends received deduction of 100.00%.
o Total long-term capital gain distributions paid of $1,303,811.
17 SMITH BARNEY SECTOR SERIES INC. | 2003 Annual Report
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
OF THE 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, 2003, 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 three-year period then ended
and for the period February 28, 2000 (commencement of operations) to 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, 2003, by correspondence with the custodian
and broker. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide 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, 2003, 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
three-year period then ended and for the period February 28, 2000 to October 31,
2000, in conformity with accounting principles generally accepted in the United
States of America.
/s/ KPMG LLP
New York, New York
December 10, 2003
18 SMITH BARNEY SECTOR SERIES INC. | 2003 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 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 agent (Primerica Shareholder Services
at 1-800-544-5445).
NUMBER OF
PRINCIPAL PORTFOLIOS IN OTHER
POSITION(S) TERM OF OFFICE* OCCUPATION(S) FUND COMPLEX DIRECTORSHIPS
HELD AND LENGTH OF DURING PAST OVERSEEN BY HELD BY
NAME, ADDRESS AND AGE WITH FUND TIME SERVED FIVE YEARS DIRECTOR DIRECTOR
- -----------------------------------------------------------------------------------------------------------------------------------
NON-INTERESTED DIRECTORS:
Herbert Barg Director Since Retired 42 None
1460 Drayton Lane 2000
Wynnewood, PA 19096
Age 80
Dwight B. Crane Director Since Professor, Harvard Business 49 None
Harvard Business School 2000 School
Soldiers Field
Morgan Hall #375
Boston, MA 02163
Age 66
Burt N. Dorsett Director Since President-- Dorsett McCabe 27 None
201 East 62nd Street 2000 Capital Management Inc.;
New York, NY 10021 Chief Investment Officer of
Age 73 Leeb Capital Management, Inc.
(1999-Present)
Elliot S. Jaffe Director Since Chairman of 27 Zweig Total Return
The Dress Barn Inc. 2000 The Dress Barn Inc. Fund; Zweig Fund,
Executive Office Inc.
30 Dunnigan Drive
Suffern, NY 10901
Age 77
Stephen E. Kaufman Director Since Attorney 56 None
Stephen E. Kaufman PC 2000
277 Park Avenue, 47th Floor
New York, NY 10172
Age 71
Joseph J. McCann Director Since Retired 27 None
200 Oak Park Place 2000
Suite One
Pittsburgh, PA 15243
Age 73
Cornelius C. Rose, Jr. Director Since Chief Executive Officer-- 27 None
P.O. Box 5388 2000 Performance Learning
West Lebanon, NH 03784 Systems
Age 71
19 SMITH BARNEY SECTOR SERIES INC. | 2003 Annual Report
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
NUMBER OF
PRINCIPAL PORTFOLIOS IN OTHER
POSITION(S) TERM OF OFFICE* OCCUPATION(S) FUND COMPLEX DIRECTORSHIPS
HELD AND LENGTH OF DURING PAST OVERSEEN BY HELD BY
NAME, ADDRESS AND AGE WITH FUND TIME SERVED FIVE YEARS DIRECTOR DIRECTOR
- -----------------------------------------------------------------------------------------------------------------------------------
INTERESTED DIRECTOR:
R. Jay Gerken, CFA** Chairman, Since Managing Director of Citigroup 220 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
Age 52 Barney 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 1996-2001) and Smith
Barney Growth and Income Fund
(from 1996-2000)
OFFICERS:
Andrew B. Shoup*** Senior Vice Since Director of CAM; Senior Vice N/A N/A
CAM President and 2003 President and Chief
125 Broad Street, 10th Floor Chief Administrative Officer of mutual
New York, NY 10004 Administrative funds associated with Citigroup;
Age 47 Officer Head of International Funds
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)
Richard L. Peteka 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 affiliated with
New York, NY 10004 Treasurer Citigroup; Director and Head of
Age 42 Internal Control for CAM U.S.
Mutual Fund Administration (from
1999-2002); Vice President, Head
of Mutual Fund Administration
and Treasurer at Oppenheimer
Capital (from 1996-1999)
Kaprel Ozsolak Controller Since Vice President of CGM; N/A N/A
CAM 2002 Controller of certain funds
125 Broad Street, 11th Floor associated with Citigroup
New York, NY 10004
Age 38
Robert I. Frenkel Secretary*** Since Managing Director and General N/A N/A
CAM and Chief Legal 2003 Counsel of Global Mutual Funds
300 First Stamford Place Officer for CAM and its predecessor
4th Floor (since 1994); Secretary of CFM;
Stamford, CT 06902 Secretary and Chief Legal
Age 48 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.
*** AS OF NOVEMBER 25, 2003.
20 SMITH BARNEY SECTOR SERIES INC. | 2003 Annual Report
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SMITH BARNEY
FINANCIAL SERVICES FUND
- --------------------------------------------------------------------------------
DIRECTORS INVESTMENT MANAGER
Herbert Barg Smith Barney Fund
Dwight B. Crane Management LLC
Burt N. Dorsett
R. Jay Gerken, CFA
CHAIRMAN DISTRIBUTORS
Elliot S. Jaffe
Stephen E. Kaufman Citigroup Global Markets Inc.
Joseph J. McCann PFS Distributors, Inc.
Cornelius C. Rose, Jr.
CUSTODIAN
OFFICERS
State Street Bank and
R. Jay Gerken, CFA Trust Company
President and
Chief Executive Officer
TRANSFER AGENT
Andrew B. Shoup*
Senior Vice President and Citicorp Trust Bank, fsb.
Chief Administrative Officer 125 Broad Street, 11th Floor
New York, New York 10004
Richard L. Peteka
Chief Financial Officer
and Treasurer SUB-TRANSFER AGENTS
Kaprel Ozsolak PFPC Inc.
Controller P.O. Box 9699
Providence, Rhode Island
Robert I. Frenkel 02940-9699
Secretary* and
Chief Legal Officer Primerica Shareholder Services
P.O. Box 9662
Providence, Rhode Island
02940-9662
* AS OF NOVEMBER 25, 2003.
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, which gives details about charges, expenses, investment objectives
and operating policies of the Fund. If used as sales material after January 31,
2004, this report must be accompanied by performance information for the most
recently completed calendar quarter.
SMITH BARNEY FINANCIAL SERVICES FUND
Smith Barney Mutual Funds
125 Broad Street
10th Floor, MF-2
New York, New York 10004
For complete information on any Smith Barney Mutual Funds, including management
fees and expenses, call or write your financial professional for a free
prospectus. Read it carefully before you invest or send money.
www.smithbarneymutualfunds.com
(C)2003 Citigroup Global Markets Inc.
Member NASD, SIPC
FD02127 12/03 03-5779
ITEM 2. CODE OF ETHICS.
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.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Board of Directors of the registrant has determined that Dwight
Crane, the Chairman 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.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. [RESERVED]
ITEM 9. CONTROLS AND PROCEDURES.
(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.
(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.
ITEM 10. EXHIBITS.
(a) Code of Ethics attached hereto.
Exhibit 99.CODE ETH
(b) Attached hereto.
Exhibit 99.CERT Certifications pursuant to section 302
of the Sarbanes-Oxley Act of 2002
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.
Date: December 29, 2003
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: December 29, 2003
By: /s/ Richard L. Peteka
(Richard L. Peteka)
Chief Financial Officer of
SMITH BARNEY SECTOR SERIES INC.
Date: December 29, 2003