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
TECHNOLOGY 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
- -------------------------
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*
- -------------------------
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 offering, using or developing products, processes or
services that will provide or will benefit significantly from technological
advances and improvements.
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FUND FACTS
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FUND INCEPTION
- -------------------------
February 28, 2000
* Since the fund focuses its investments on companies involved in the technology
industries, 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
TECHNOLOGY 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 ........................................................ 17
INDEPENDENT AUDITORS' REPORT ................................................ 20
ADDITIONAL INFORMATION ...................................................... 21
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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 the Smith Barney Technology
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.
Against this backdrop of improving business conditions, the technology sector
has experienced a robust rally. However, many of the best performers have been
companies that had experienced the greatest financial distress during the
previous bear market and which have continued to report losses. Frankly, it made
one wonder if the lessons of the technology and internet mania have already been
forgotten. If the bursting of the 1990's technology bubble has reinforced
anything, it is that it is critical to perform a thorough analysis of each
security, rather than blindly invest across a particular sector and that
earnings, valuation and other fundamentals do matter.
In our opinion, this is all the more reason why investing in technology stocks
with a professional fund manager is a more prudent strategy than buying these
stocks directly. Fund managers can provide the diversification and thorough
analysis that is so important in managing risk.
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 Company, 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.
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 SNAPSHOT
AS OF OCTOBER 31, 2003
(EXCLUDING SALES CHARGES)
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6 Months 12 Months
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Class A Shares 27.69% 41.01%
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Goldman Sachs
Technology Index 35.59% 49.49%
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Average of Lipper science
and technology funds 38.52% 53.27%
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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.
The Goldman Sachs Technology Index is a broad-based measure of U.S.-traded
technology stocks. The Index is comprised of six sub-indices -- hardware,
computer software, services, semiconductors, Internet and multimedia networking.
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 337 funds for
the six-month period and among 331 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.
Performance of other share classes may vary.
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PERFORMANCE REVIEW
For the 12 months ended October 31, 2003, Class A shares of the Smith Barney
Technology Fund, excluding sales charges, returned 41.01%. Despite these
impressive returns, these shares performed worse than the fund's unmanaged
benchmark the Goldman Sachs Technology Index,i which returned 49.49% for the
same period. They also underperformed the average of the fund's Lipper peer
group of science and technology funds, which returned 53.27% for the same
period.(1)
MARKET OVERVIEW
At the start of the fund's fiscal year last November, global economies were in
the midst of a downturn, geopolitical issues were at the forefront of investors'
minds and the information technology industry had already experienced two years
of pronounced weakness. Telecommunications carriers, bereft of free cash flow,
refrained from spending and investment. Corporations in other industries also
were under pressure to preserve cash, leading to further cuts in
information-technology budgets.
However, the market began to recover strongly in March 2003, 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. As a result, corporations
and consumers slowly began to spend more. While many long-term uncertainties
remain -- such as the degree of commoditization of the technology "food chain"
and the level of future growth and profitability for technology companies --
spending on information technology appears to have stabilized and recently has
increased, providing long-awaited relief for investors.
Against this backdrop of improving business conditions, every area of the
technology sector posted gains. However, companies that had experienced the
greatest financial distress during the previous bear market were the best
performers of the group. Investors apparently were attracted to the low stock
prices of smaller, previously beaten-down companies, many of which have
continued to report losses. Although the stocks of higher-
(1) Lipper Inc. is a major independent mutual-fund tracking organization.
Returns are based on the 12-month period ended October 31, 2003, calculated
among 331 funds in the Lipper science and technology funds category with
reinvestment of dividends and capital gains and excluding sales charges.
2 SMITH BARNEY SECTOR SERIES INC. | 2003 Annual Report
quality companies also participated in the market rally to a significant degree,
they generally lagged behind the averages for the technology sector overall.
Clearly, investors exhibited a renewed appetite for risk as the economy and the
stock market improved, sparking a rush toward the more volatile areas of the
equity markets, including technology.
FUND OVERVIEW(ii)
The fund's performance relative to its benchmark and Lipper category average
suffered from its lack of exposure to highly volatile, lower quality stocks that
were in financial distress at the beginning of the reporting period. Our
disciplined, bottom-up investment process generally leads us to companies with
stronger underlying business fundamentals, and the stocks that performed best
generally did not meet our investment criteria. While our prudence hampered
investment returns in the short-term, we remain confident that it may lead to
superior results over the longer term.
More specifically, our investment process led us to establish an overweighted
position in the information technology area, which contributed positively to
performance. On the other hand, the fund generally has been underweighted in the
communications equipment and Internet sub-sectors.
The fund particularly benefited from our stock selection strategy in the
computer hardware area, where relatively large positions in storage companies,
such as EMC Corp. and Network Appliance Inc., drove performance. However, gains
relative to the benchmark in the computer hardware segment were partly offset by
disappointing stock selections in the communications equipment and computer
software area.
We added to the fund's position in Network Appliance Inc. near the beginning of
the reporting period. The stock, which was a key contributor to the fund's
returns, rose strongly as a result of a huge rebound in profitability when the
economic recovery took hold. Nonetheless, we generally have not moved
aggressively to position the fund in companies with a high degree of operating
leverage, because we remain concerned about the long-term prospects of
businesses that, in our view, may continue to suffer from over-investment. We
also question the intrinsic value of other constituents of the fund's benchmark
that performed particularly well. For example, we reduced the fund's holdings of
QUALCOMM Inc. to an underweighted position because of renewed concerns about its
long-term revenue growth potential.
On the other hand, we have identified a number of technology companies that, in
our judgment, have high intrinsic values and management teams with the ability
to realize that value. Purchases made later in the year included Automatic Data
Processing, Inc., Nokia Oyj and Motorola, Inc. We changed our view on Motorola,
Inc. from negative to positive during the summer, and the stock already has
contributed positively to the fund's performance. These additions are part of
our strategy of investing in high-return companies that, in our view, have
catalysts in place to realize their intrinsic values.
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 Technology Fund. We look
forward to continuing to help you meet your investment objectives.
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 Technology Index is a broad-based measure of U.S.-traded
technology stocks. The Index is comprised of six sub-indices -- hardware,
computer software, services, semiconductors, Internet and multimedia
networking. Please note that an investor cannot invest directly in an
index.
(ii) The fund's top 10 holdings as of October 31, 2003 were: Intel Corp.
(12.04%), International Business Machines Corp. (9.10%), Cisco Systems,
Inc. (8.68%), Microsoft Corp. (8.63%), Hewlett-Packard Co. (5.33%), Oracle
Corp. (3.48%), Motorola, Inc. (3.48%), Dell Inc. (3.45%), Texas Instruments
Inc. (2.89%), EMC Corp. (2.88%).
3 SMITH BARNEY SECTOR SERIES INC. | 2003 Annual Report
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AVERAGE ANNUAL TOTAL RETURNS+ (UNAUDITED)
- --------------------------------------------------------------------------------
WITHOUT SALES CHARGES(1)
------------------------------------------------
CLASS A CLASS B CLASS L
- --------------------------------------------------------------------------------
Twelve Months Ended 10/31/03 41.01% 40.07% 40.44%
- --------------------------------------------------------------------------------
Inception* through 10/31/03 (25.22) (25.79) (25.74)
- --------------------------------------------------------------------------------
WITH SALES CHARGES(2)
------------------------------------------------
CLASS A CLASS B CLASS L
- --------------------------------------------------------------------------------
Twelve Months Ended 10/31/03 33.79% 35.07% 37.92%
- --------------------------------------------------------------------------------
Inception* through 10/31/03 (26.25) (26.20) (25.95)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURNS+ (UNAUDITED)
- --------------------------------------------------------------------------------
WITHOUT SALES CHARGES(1)
- --------------------------------------------------------------------------------
Class A (Inception* through 10/31/03) (65.61)%
- --------------------------------------------------------------------------------
Class B (Inception* through 10/31/03) (66.58)
- --------------------------------------------------------------------------------
Class L (Inception* through 10/31/03) (66.49)
- --------------------------------------------------------------------------------
(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, THIS CDSC DECLINES BY 1.00% PER YEAR UNTIL NO CDSC 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.
+ THE RETURNS SHOWN DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER
WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION 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.
* INCEPTION DATE FOR CLASS A, B AND L SHARES IS FEBRUARY 28, 2000.
4 SMITH BARNEY SECTOR SERIES INC. | 2003 Annual Report
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HISTORICAL PERFORMANCE (UNAUDITED)
- --------------------------------------------------------------------------------
VALUE OF $10,000 INVESTED IN CLASS A, B AND L SHARES OF THE
SMITH BARNEY TECHNOLOGY FUND VS. GOLDMAN SACHS TECHNOLOGY INDEX+
- --------------------------------------------------------------------------------
FEBRUARY 2000 -- OCTOBER 2003
[DATA BELOW REPRESENTS A LINE CHART IN THE ORIGINAL PIECE.]
SMITH BARNEY SMITH BARNEY SMITH BARNEY
TECHNOLOGY FUND-- TECHNOLOGY FUND-- TECHNOLOGY FUND-- GOLDMAN SACHS
CLASS A SHARES CLASS B SHARES CLASS L SHARES TECHNOLOGY INDEX
----------------- ----------------- ----------------- ----------------
2/28/2000 9500 10000 9900 10000
4/2000 9317 9798 9700 9538
10/2000 7617 7974 7894 7955
4/2001 4717 4921 4872 4839
10/2001 3508 3649 3613 3484
4/2002 3217 3333 3300 3259
10/2002 2317 2386 2362 2384
4/2003 2558 2632 2605 2629
10/31/2003 3267 3275 3317 3564
+ Hypothetical illustration of $10,000 invested in Class A, B and L shares on
February 28, 2000 (inception date), assuming deduction of the maximum 5.00%
and 1.00% sales charge 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
Technology Index is a broad-based unmanaged index composed of companies in
hardware, computer, software, services, semi-conductor, Internet and
multimedia networking. The Index is unmanaged and is not subject to the
same management and trading expenses of 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
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
- --------------------------------------------------------------------------------
COMMON STOCK -- 96.9%
COMMERCIAL SERVICES & SUPPLIES -- 7.4%
76,411 Automatic Data Processing, Inc. $ 2,883,751
19,700 The BISYS Group, Inc.* 281,710
24,600 Ceridian Corp.* 516,600
40,000 Concord EFS, Inc.* 427,600
11,200 DST Systems, Inc.* 423,584
48,168 First Data Corp. 1,719,598
12,300 Fiserv, Inc.* 434,436
19,200 Paychex, Inc. 747,264
- --------------------------------------------------------------------------------
7,434,543
- --------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT -- 14.4%
414,404 Cisco Systems, Inc.* 8,694,196
257,600 Motorola, Inc. 3,485,328
73,700 Nokia Oyj, Sponsored ADR 1,252,163
20,560 QUALCOMM Inc. 976,600
- --------------------------------------------------------------------------------
14,408,287
- --------------------------------------------------------------------------------
COMPUTERS & PERIPHERALS -- 20.7%
95,713 Dell Inc.* 3,457,154
208,500 EMC Corp.* 2,885,640
239,400 Hewlett-Packard Co. 5,341,014
101,849 International Business Machines Corp. 9,113,449
- --------------------------------------------------------------------------------
20,797,257
- --------------------------------------------------------------------------------
ELECTRONIC EQUIPMENT & INSTRUMENTS -- 2.1%
23,500 Agilent Technologies, Inc.* 585,620
56,300 Jabil Circuit, Inc.* 1,567,955
- --------------------------------------------------------------------------------
2,153,575
- --------------------------------------------------------------------------------
INTERNET & CATALOG RETAIL -- 3.4%
32,730 eBay Inc.* 1,830,916
43,900 InterActiveCorp* 1,611,569
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3,442,485
- --------------------------------------------------------------------------------
INTERNET SOFTWARE & SERVICES -- 0.6%
32,981 Check Point Software Technologies Ltd.* 560,347
- --------------------------------------------------------------------------------
IT CONSULTING & SERVICES -- 3.0%
60,200 Accenture Ltd., Class A Shares* 1,408,680
8,700 Affiliated Computer Services Inc., Class A Shares* 425,691
20,994 Electronic Data Systems Corp. 450,321
46,200 Unisys Corp.* 709,632
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2,994,324
- --------------------------------------------------------------------------------
SEMICONDUCTOR EQUIPMENT & PRODUCTS -- 23.8%
96,082 Applied Materials, Inc.* 2,245,436
365,171 Intel Corp. 12,068,902
57,714 Linear Technology Corp. 2,459,194
37,900 Maxim Integrated Products, Inc. 1,884,009
19,200 Novellus Systems, Inc.* 792,768
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
- --------------------------------------------------------------------------------
SEMICONDUCTOR EQUIPMENT & PRODUCTS-- 23.8% (CONTINUED)
21,783 STMicroelectronics N.V. $ 580,299
100,182 Texas Instruments Inc. 2,897,263
28,727 Xilinx, Inc.* 910,646
- --------------------------------------------------------------------------------
23,838,517
- --------------------------------------------------------------------------------
SOFTWARE -- 21.0%
54,000 Amdocs Ltd.* 1,158,840
45,600 BEA Systems, Inc.* 633,840
82,200 BMC Software, Inc.* 1,428,636
31,600 Computer Associates International, Inc. 743,232
72,300 Compuware Corp.* 406,326
87,600 Comverse Technology, Inc.* 1,580,304
5,500 Electronic Arts Inc.* 544,720
19,330 Intuit Inc.* 966,113
330,752 Microsoft Corp. 8,649,165
291,915 Oracle Corp.* 3,491,303
71,000 Siebel Systems, Inc.* 893,890
82,100 TIBCO Software Inc.* 528,724
- --------------------------------------------------------------------------------
21,025,093
- --------------------------------------------------------------------------------
TRADING COMPANIES & DISTRIBUTORS -- 0.5%
8,300 CDW Corp. 498,415
- --------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost -- $94,672,879) 97,152,843
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FACE
AMOUNT SECURITY VALUE
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 3.1%
$3,137,000 State Street Bank and Trust Co., 0.940% due
11/3/03; Proceeds at maturity--$3,137,246;
(Fully collateralized by Federal Home Loan
Mortgage Corp. Notes, 2.000% due 1/21/05;
Market value--$3,201,199) (Cost--$3,137,000) 3,137,000
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100.0%
(Cost -- $97,809,879**) $100,289,843
- --------------------------------------------------------------------------------
* NON-INCOME PRODUCING SECURITY.
** AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $110,503,856.
Abbreviation used in this schedule:
-----------------------------------
ADR -- American Depositary Receipt
SEE NOTES TO FINANCIAL STATEMENTS.
7 SMITH BARNEY SECTOR SERIES INC. | 2003 Annual REPORT
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 2003
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost--$97,809,879) $ 100,289,843
Cash 250
Receivable for Fund shares sold 107,832
Dividends and interest receivable 61,493
Prepaid expenses 14,060
- --------------------------------------------------------------------------------
TOTAL ASSETS 100,473,478
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for Fund shares reacquired 58,044
Management fee payable 53,997
Distribution plan fees payable 32,198
Accrued expenses 126,039
- --------------------------------------------------------------------------------
TOTAL LIABILITIES 270,278
- --------------------------------------------------------------------------------
TOTAL NET ASSETS $ 100,203,200
- --------------------------------------------------------------------------------
NET ASSETS:
Par value of capital shares $ 26,072
Capital paid in excess of par value 269,292,571
Accumulated net investment loss (2,334)
Accumulated net realized loss from investment transactions (171,593,073)
Net unrealized appreciation of investments 2,479,964
- --------------------------------------------------------------------------------
TOTAL NET ASSETS $ 100,203,200
- --------------------------------------------------------------------------------
SHARES OUTSTANDING:
Class A 6,870,281
---------------------------------------------------------------------------
Class B 10,916,413
---------------------------------------------------------------------------
Class L 8,285,724
---------------------------------------------------------------------------
NET ASSET VALUE:
Class A (and redemption price) $3.92
---------------------------------------------------------------------------
Class B * $3.81
---------------------------------------------------------------------------
Class L * $3.82
---------------------------------------------------------------------------
MAXIMUM PUBLIC OFFERING PRICE PER SHARE:
Class A (net asset value plus 5.26% of net asset value per share) $4.13
---------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value per share) $3.86
- --------------------------------------------------------------------------------
* 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
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2003
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 316,271
Interest 6,716
Less: Foreign withholding tax (893)
- --------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 322,094
- --------------------------------------------------------------------------------
EXPENSES:
Management fee (Note 2) 761,017
Distribution plan fees (Note 7) 640,802
Shareholder servicing fees (Note 7) 139,783
Shareholder communications (Note 7) 59,013
Audit and legal 43,521
Registration fees 32,719
Custody 24,591
Directors' fees 19,451
Other 1,158
- --------------------------------------------------------------------------------
TOTAL EXPENSES 1,722,055
Less: Management fee waiver (Note 2) (81,915)
- --------------------------------------------------------------------------------
NET EXPENSES 1,640,140
- --------------------------------------------------------------------------------
NET INVESTMENT LOSS (1,318,046)
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTE 3):
Realized Gain (Loss) From:
Investment transactions (18,014,207)
Foreign currency transactions 247
- --------------------------------------------------------------------------------
NET REALIZED LOSS (18,013,960)
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation) of
Investments:
Beginning of year (44,711,068)
End of year 2,479,964
- --------------------------------------------------------------------------------
INCREASE IN NET UNREALIZED APPRECIATION 47,191,032
- --------------------------------------------------------------------------------
NET GAIN ON INVESTMENTS AND FOREIGN CURRENCIES 29,177,072
- --------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS $ 27,859,026
- --------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS.
9 SMITH BARNEY SECTOR SERIES INC. | 2003 Annual Report
- -----------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED OCTOBER 31,
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
2003 2002
- -----------------------------------------------------------------------------------------------------
OPERATIONS:
Net investment loss $ (1,318,046) $ (1,907,534)
Net realized loss (18,013,960) (55,820,117)
Increase in net unrealized appreciation 47,191,032 17,971,861
- -----------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS 27,859,026 (39,755,790)
- -----------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net proceeds from sale of shares 18,564,129 23,320,764
Net asset value of shares issued in connection with
the transfer of the Smith Barney Sector Series Inc.--
Global Technology Fund's net assets (Note 6) -- 4,410,560
Cost of shares reacquired (15,440,011) (30,207,033)
- -----------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM FUND SHARE TRANSACTIONS 3,124,118 (2,475,709)
- -----------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 30,983,144 (42,231,499)
NET ASSETS:
Beginning of year 69,220,056 111,451,555
- -----------------------------------------------------------------------------------------------------
END OF YEAR* $ 100,203,200 $ 69,220,056
- -----------------------------------------------------------------------------------------------------
* Includes accumulated net investment loss of: $(2,334) $(4,182)
- -----------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS.
10 SMITH BARNEY SECTOR SERIES INC. | 2003 Annual Report
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
The Smith Barney Technology 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 Financial
Services Fund and Smith Barney Health Sciences 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 the securities for which
no sale was reported on that date are valued at the mean between the bid and
asked prices; 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; 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 on that day, at
the last sale price; (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, at least
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. Accordingly, a portion of accumulated net investment loss amounting
to $1,319,647 was reclassified to paid-in capital. Net investment income, net
realized gains and net assets were not affected by this change; (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.
11 SMITH BARNEY SECTOR SERIES INC. | 2003 Annual Report
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
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 another forward
exchange contract. The Fund may from time to time 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 0.95% of the
Fund's average daily net assets. This fee is calculated daily and paid monthly.
For the period from November 1, 2002 through July 31, 2003, SBFM had delegated
the daily management of the Fund to Citi Fund Management Inc. ("CFM"), an
affiliate of SBFM. For services provided to the Fund, the investment manager
paid CFM a subadvisory fee calculated at an annual rate of 0.65% 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."), another indirect
wholly-owned subsidiary of Citigroup, effective August 1, 2003. The current CFM
managers will continue to manage the Fund's portfolio through CAM Ltd. For the
year ended October 31, 2003, SBFM waived a portion of its management fee
amounting to $81,915.
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 $81,137 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 received brokerage commissions of $8,595.
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 CDSConly 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 $104,000 and $24,000 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:
CLASS B CLASS L
- --------------------------------------------------------------------------------
CDSCs $79,000 $1,000
- --------------------------------------------------------------------------------
All officers and one Director of the Company are employees of Citigroup or its
affiliates.
12 SMITH BARNEY SECTOR SERIES INC. | 2003 Annual Report
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
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 $42,415,960
- --------------------------------------------------------------------------------
Sales 43,678,638
- --------------------------------------------------------------------------------
At October 31, 2003, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were as follows:
- --------------------------------------------------------------------------------
Gross unrealized appreciation $ 12,236,260
Gross unrealized depreciation (22,450,273)
- --------------------------------------------------------------------------------
Net unrealized depreciation $(10,214,013)
- --------------------------------------------------------------------------------
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 technology 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. Transfer of Net Assets
On November 9, 2001, the Fund acquired the assets and certain liabilities of the
Smith Barney Sector Series Inc. -- Global Technology Fund pursuant to a plan of
reorganization approved by Smith Barney Sector Series Inc. -- Global Technology
Fund shareholders on November 7, 2001. Total shares issued by the Fund, the
total net assets of the Smith Barney Sector Series Inc. -- Global Technology
Fund and total net assets of the Fund on the date of the transfer were as
follows:
TOTAL NET ASSETS
OF THE SMITH BARNEY
SHARES ISSUED SECTOR SERIES INC.-- TOTAL NET ASSETS
ACQUIRED FUND BY THE FUND GLOBAL TECHNOLOGY FUND OF THE FUND
- --------------------------------------------------------------------------------------------------
Smith Barney Sector Series Inc.--
Global Technology Fund 762,406 $3,600,972 $125,856,495
- --------------------------------------------------------------------------------------------------
The total net assets of the Smith Barney Sector Series Inc. -- Global Technology
Fund before acquisition included unrealized depreciation of $809,588 and
accumulated net realized loss of $3,397,737. Total net assets of the Fund
immediately after the transfer were $129,457,469. The transaction was structured
to qualify as a tax-free reorganization under the Internal Revenue Code of 1986,
as amended.
13 SMITH BARNEY SECTOR SERIES INC. | 2003 Annual Report
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
7. Class Specific Expenses
Pursuant to a Rule 12b-1 Distribution Plan, the Fund pays a service fee with
respect to its Class A, B and L shares calculated at an annual rate of 0.25% of
the average daily net assets of each respective class. In addition, 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 $53,423 $343,643 $243,736
- --------------------------------------------------------------------------------
For the year ended October 31, 2003, total Shareholder Servicing fees were as
follows:
CLASS A CLASS B CLASS L
- --------------------------------------------------------------------------------
Shareholder Servicing Fees $37,331 $60,053 $42,399
- --------------------------------------------------------------------------------
For the year ended October 31, 2003, total Shareholder Communication expenses
were as follows:
CLASS A CLASS B CLASS L
- --------------------------------------------------------------------------------
Shareholder Communication Expenses $15,858 $25,415 $17,740
- --------------------------------------------------------------------------------
8. Capital Shares
At October 31, 2003, the Fund had 800 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 1,873,768 $ 6,063,645 1,990,284 $ 7,496,896
Net asset value of shares issued in connection
with the transfer of the Smith Barney Sector Series Inc.--
Global Technology Fund's net assets (Note 6) -- -- 163,529 882,843
Shares reacquired (1,395,233) (4,488,352) (2,181,900) (8,455,952)
- -------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) 478,535 $ 1,575,293 (28,087) $ (76,213)
- -------------------------------------------------------------------------------------------------------------------------
CLASS B
Shares sold 2,010,147 $ 6,240,032 2,439,114 $ 9,436,025
Net asset value of shares issued in connection
with the transfer of the Smith Barney Sector Series Inc.--
Global Technology Fund's net assets (Note 6) -- -- 260,918 1,635,914
Shares reacquired (1,866,876) (5,798,567) (2,804,216) (10,043,552)
- -------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) 143,271 $ 441,465 (104,184) $ 1,028,387
- -------------------------------------------------------------------------------------------------------------------------
14 SMITH BARNEY SECTOR SERIES INC. | 2003 Annual Report
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
OCTOBER 31, 2003 OCTOBER 31, 2002
------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------------------------
CLASS L
Shares sold 1,813,427 $ 6,260,452 1,483,885 $ 6,387,843
Net asset value of shares issued in connection
with the transfer of the Smith Barney Sector Series Inc.--
Global Technology Fund's net assets (Note 6) -- -- 337,959 1,891,803
Shares reacquired (1,661,743) (5,153,092) (3,089,858) (11,707,529)
- -------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) 151,684 $ 1,107,360 (1,268,014) $ (3,427,883)
- -------------------------------------------------------------------------------------------------------------------------
9. Capital Loss Carryforward
At October 31, 2003, the Fund had, for Federal income tax purposes,
approximately $158,879,000 of unused capital loss carryforwards available to
offset future capital gains. 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.
The amount and year of expiration for each carryforward loss is indicated below.
Expiration occurs on October 31 of the year indicated:
2007 2008 2009 2010 2011
- ----------------------------------------------------------------------------------------------
Carryforward Amounts $56,000 $11,939,000 $70,458,000 $54,957,000 $21,469,000
- ----------------------------------------------------------------------------------------------
10. Income Tax Information and Distributions to Shareholders
At October 31, 2003, the tax basis components of distributable earnings were:
- --------------------------------------------------------------------------------
Accumulated capital losses $(158,878,918)
- --------------------------------------------------------------------------------
Unrealized depreciation (10,214,013)
- --------------------------------------------------------------------------------
The difference between book basis and tax basis unrealized appreciation and
depreciation is attributable primarily to wash sale loss deferrals.
For the year ended October 31, 2003, the Fund did not make any distributions.
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.
15 SMITH BARNEY SECTOR SERIES INC. | 2003 Annual Report
- --------------------------------------------------------------------------------
NOTES TO FINANCIALSTATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
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.
16 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 $2.78 $4.21 $9.14 $11.40
- --------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment loss(3) (0.04) (0.05) (0.08) (0.07)
Net realized and unrealized gain (loss) 1.18 (1.38) (4.85) (2.19)
- --------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.14 (1.43) (4.93) (2.26)
- --------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $3.92 $2.78 $4.21 $ 9.14
- --------------------------------------------------------------------------------------------------------
TOTAL RETURN(4) 41.01% (33.97)% (53.94)% (19.82)%++
- --------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000s) $26,946 $17,754 $27,058 $46,363
- --------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(3)(5) 1.50% 1.50% 1.50% 1.52%+
Net investment loss (1.09) (1.29) (1.31) (1.31)+
- --------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 54% 76% 62% 24%
- --------------------------------------------------------------------------------------------------------
(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 A PORTION OF ITS FEES FOR THE YEARS ENDED OCTOBER 31,
2003, 2002 AND 2001, AND THE PERIOD ENDED OCTOBER 31, 2000. IF SUCH FEES
WERE NOT WAIVED, THE PER SHARE INCREASES TO NET INVESTMENT LOSS AND THE
ACTUAL EXPENSE RATIOS WOULD HAVE BEEN AS FOLLOWS:
Per Share Increases to Expense Ratios
Net Investment Loss Without Fee Waiver
---------------------- ------------------
2003 $0.00* 1.60%
2002 0.01 1.64
2001 0.00* 1.58
2000 0.00* 1.60+
(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 VOLUNTARY EXPENSE LIMITATIONS, THE RATIO OF EXPENSES TO
AVERAGE NET ASSETS WILL NOT EXCEED 1.50%.
* 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.
17 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 B SHARES 2003(1) 2002(1) 2001 2000(2)
- ------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $2.72 $4.16 $9.09 $11.40
- ------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment loss(3) (0.06) (0.08) (0.12) (0.12)
Net realized and unrealized gain (loss) 1.15 (1.36) (4.81) (2.19)
- ------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.09 (1.44) (4.93) (2.31)
- ------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $3.81 $2.72 $4.16 $ 9.09
- ------------------------------------------------------------------------------------------------------
TOTAL RETURN(4) 40.07% (34.62)% (54.24)% (20.26)%++
- ------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000s) $41,645 $29,324 $45,266 $74,227
- ------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(3)(5) 2.25% 2.24% 2.25% 2.27%+
Net investment loss (1.85) (2.04) (2.06) (2.06)+
- ------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 54% 76% 62% 24%
- ------------------------------------------------------------------------------------------------------
(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 A PORTION OF ITS FEES FOR THE YEARS ENDED OCTOBER 31,
2003, 2002 AND 2001, AND THE PERIOD ENDED OCTOBER 31, 2000. IF SUCH FEES
WERE NOT WAIVED, THE PER SHARE INCREASES TO NET INVESTMENT LOSS AND THE
ACTUAL EXPENSE RATIOS WOULD HAVE BEEN AS FOLLOWS:
Per Share Increases to Expense Ratios
Net Investment Loss Without Fee Waiver
---------------------- ------------------
2003 $0.00* 2.35%
2002 0.01 2.39
2001 0.00* 2.33
2000 0.00* 2.35+
(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 VOLUNTARY EXPENSE LIMITATIONS, THE RATIO OF EXPENSES TO
AVERAGE NET ASSETS WILL NOT EXCEED 2.25%.
* 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.
18 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 $2.72 $4.16 $9.09 $11.40
- ------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment loss(3) (0.06) (0.08) (0.12) (0.12)
Net realized and unrealized gain (loss) 1.16 (1.36) (4.81) (2.19)
- ------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.10 (1.44) (4.93) (2.31)
- ------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $3.82 $2.72 $4.16 $ 9.09
- ------------------------------------------------------------------------------------------------------
TOTAL RETURN(4) 40.44% (34.62)% (54.24)% (20.26)%++
NET ASSETS, END OF YEAR (000s) $31,612 $22,142 $39,127 $67,815
- ------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(3)(5) 2.25% 2.24% 2.25% 2.27%+
Net investment loss (1.84) (2.04) (2.06) (2.06)+
- ------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 54% 76% 62% 24%
- ------------------------------------------------------------------------------------------------------
(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 A PORTION OF ITS FEES FOR THE YEARS ENDED OCTOBER 31,
2003, 2002 AND 2001, AND THE PERIOD ENDED OCTOBER 31, 2000. IF SUCH FEES
WERE NOT WAIVED, THE PER SHARE INCREASES TO NET INVESTMENT LOSS AND THE
ACTUAL EXPENSE RATIOS WOULD HAVE BEEN AS FOLLOWS:
Per Share Increases to Expense Ratios
Net Investment Loss Without Fee Waiver
---------------------- ------------------
2003 $0.00* 2.35%
2002 0.01 2.39
2001 0.00* 2.33
2000 0.00* 2.35+
(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 VOLUNTARY EXPENSE LIMITATIONS, THE RATIO OF EXPENSES TO
AVERAGE NET ASSETS WILL NOT EXCEED 2.25%.
* 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.
19 SMITH BARNEY SECTOR SERIES INC. | 2003 Annual Report
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
OF THE SMITH BARNEY SECTOR SERIESINC.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Smith Barney Technology 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
20 SMITH BARNEY SECTOR SERIES INC. | 2003 Annual Report
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
INFORMATION ABOUT DIRECTORS AND OFFICERS
The business and affairs of the Smith Barney Technology 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 agent (Primerica Shareholder
Services at 1-800-544-5445).
NUMBER OF
PORTFOLIOS IN
TERM OF OFFICE* PRINCIPAL FUND COMPLEX OTHER
POSITION(S) HELD AND LENGTH OF OCCUPATION(S) DURING OVERSEEN BY DIRECTORSHIPS
NAME, ADDRESS AND AGE WITH FUND TIME SERVED PAST FIVE YEARS DIRECTOR HELD BY 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 of Dorsett McCabe 27 None
201 East 62nd Street 2000 Capital Management Inc.;
New York, NY 10021 Chief Investment Officer
Age 73 of Leeb Capital Management, Inc.
Elliot S. Jaffe Director Since Chairman of The Dress Barn Inc. 27 Zweig Total Return
The Dress Barn Inc. 2000 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
Pittsburgh, PA 15243
Age 73
Cornelius C. Rose, Jr. Director Since Chief Executive Officer of 27 None
Meadowbrook Village 2000 Performance Learning
Building 1, Apt. 6 Systems
West Lebanon, NH 03784
Age 71
21 SMITH BARNEY SECTOR SERIES INC. | 2003 Annual Report
NUMBER OF
PORTFOLIOS IN
TERM OF OFFICE* PRINCIPAL FUND COMPLEX OTHER
POSITION(S) HELD AND LENGTH OF OCCUPATION(S) DURING OVERSEEN BY DIRECTORSHIPS
NAME, ADDRESS AND AGE WITH FUND TIME SERVED PAST FIVE YEARS DIRECTOR HELD BY DIRECTOR
- ------------------------------------------------------------------------------------------------------------------------------------
INTERESTED DIRECTOR:
R. Jay Gerken, CFA** Chairman, Since Managing Director of Citigroup 220 None
Citigroup Asset Management President and 2002 Global Markets Inc. ("CGM");
("CAM") Chief Executive Chairman, President and Chief
399 Park Avenue, 4th Floor Officer Executive Officer of Smith
New York, NY 10022 Barney Fund Management LLC
Age 52 ("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 associated 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; Controller N/A N/A
CAM 2002 of certain funds associated with
125 Broad Street, 11th Floor Citigroup
New York, NY 10004
Age 38
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, Legal Officer for CAM and its predecessor (since
4th Floor 1994); Secretary of CFM; Secretary
Stamford, CT 06902 and Chief Legal Officer of mutual
Age 48 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.
22 SMITH BARNEY SECTOR SERIES INC. | 2003 Annual Report
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(This page intentionally left blank.)
SMITH BARNEY
TECHNOLOGY FUND
DIRECTORS INVESTMENT MANAGER
Herbert Barg Smith Barney Fund Management LLC
Dwight B. Crane
Burt N. Dorsett
R. Jay Gerken, CFA DISTRIBUTORS
CHAIRMAN
Elliot S. Jaffe Citigroup Global Markets Inc.
Stephen E. Kaufman PFS Distributors, Inc.
Joseph J. McCann
Cornelius C. Rose, Jr.
CUSTODIAN
OFFICERS State Street Bank and
Trust Company
R. Jay Gerken, CFA
President and Chief
Executive Officer TRANSFER AGENT
Andrew B. Shoup* Citicorp Trust Bank, fsb.
Senior Vice President and 125 Broad Street, 11th Floor
Chief Administrative Officer New York, New York 10004
Richard L. Peteka
Chief Financial Officer SUB-TRANSFER AGENTS
and Treasurer
PFPCInc. P.O. Box 9699
Kaprel Ozsolak Providence, Rhode Island
Controller 02940-9699
Robert I. Frenkel
Secretary* and Primerica Shareholder Services
Chief Legal Officer P.O. Box 9662
Providence, Rhode Island
02940-9662
* AS OF NOVEMBER 25, 2003.
SMITH BARNEY SECTOR SERIES INC.
- --------------------------------------------------------------------------------
SMITH BARNEY TECHNOLOGY 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 Technology 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 TECHNOLOGY 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
FD02129 12/03 03-5780
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: January 2, 2004
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 2, 2004
By: /s/ Richard L. Peteka
(Richard L. Peteka)
Chief Financial Officer of
Smith Barney Sector Series Inc.
Date: January 2, 2004