<PAGE>
Lehman Brothers Funds, Inc.
-----------
DAILY INCOME
FUND
---------------
MUNICIPAL INCOME
FUND
---------------
SELECTED GROWTH
STOCK PORTFOLIO
---------------
-------------------
ANNUAL
REPORT
July 31, 1994
---------------------
LEHMAN BROTHERS
<PAGE>
Lehman Brothers Funds, Inc.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Shareholder Letter........ 1
Daily Income Fund:
Portfolio of Investments............ 5
Municipal Income Fund:
Portfolio of Investments............. 9
Selected Growth Stock Portfolio:
Portfolio of Investments............. 22
Statements of Assets and Liabilities............................ 26
Statements of Operations.............................28
Statements of Changes in Net Assets............................ 29
Financial Highlights:
Daily Income Fund...................30
Municipal Income Fund:
Select Shares.................. 31
CDSC Shares.................. 32
Selected Growth Stock Portfolio....................... 33
Notes to Financial Statements........34
Report of Ernst & Young LLP, Independent Auditors.........................
44
</TABLE>
--------------
THIS REPORT IS FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE
DAILY INCOME FUND, THE MUNICIPAL INCOME FUND AND THE SELECTED GROWTH STOCK
PORTFOLIO. ITS USE IN CONNECTION WITH ANY OFFERING OF THE FUNDS' SHARES IS
AUTHORIZED ONLY IF ACCOMPANIED OR PRECEDED BY THE FUNDS' CURRENT PROSPECTUS.
<PAGE>
DEAR SHAREHOLDER:
It is with pleasure that we present the Annual Report for the
Lehman
Brothers Funds, Inc. (the "Company") for the period ended July 31,
1994.
Currently, the Company includes the following three separate
investment
portfolios:
/ / Daily Income Fund
/ / Municipal Income Fund
/ / Selected Growth Stock Portfolio
DAILY INCOME FUND
INVESTMENT OBJECTIVE: Daily Income Fund is designed to provide
investors
with as high a level of current income as is consistent with stability
of
principal. The Fund invests in a portfolio consisting of a broad range of
U.S.
dollar-denominated short-term instruments, including U.S. government and
U.S.
and foreign bank and commercial obligations and repurchase agreements
relating
to such obligations.
PERFORMANCE: The Fund's 7-day and 30-day yields on July 31, 1994
were
3.76%, and 3.69%, respectively.
MUNICIPAL INCOME FUND
INVESTMENT OBJECTIVE: Municipal Income Fund is designed to
provide
investors with as high a level of current income exempt from federal income
tax
as is consistent with stability of principal. The Fund invests substantially
all
of its assets in short-term tax-exempt obligations issued by state and
local
governments and tax-exempt derivative securities.
PERFORMANCE: The Fund's 7-day and 30-day yields on July 31, 1994
were
2.47%, and 2.15%, respectively.
SELECTED GROWTH STOCK PORTFOLIO
INVESTMENT OBJECTIVE: Selected Growth Stock Portfolio is designed
to
provide investors with long-term capital appreciation. Under normal
market
conditions, the Fund invests primarily in equity securities which the
Fund's
investment adviser believes to have the potential for above-average
capital
appreciation. Typically, the Fund's holdings will consist of shares of
small-
and medium-sized companies.
PERFORMANCE: From its inception on May 20, 1994 through July 31, 1994
the
Fund's total return was -2.70% compared with +0.74% for the Standard &
Poor's
500 Composite Stock Price Index, and -1.70% for the Russell 2000
Small
Capitalization Index.
THE ECONOMY
FIXED-INCOME MARKETS: 1994 began amidst indications of strong
economic
growth and attendant concerns over rising inflation. In an effort to
moderate
the growth rate and dampen inflationary fears, the Federal Reserve Board
("Fed")
tightened monetary policy on February 4 by targeting the federal funds rate
at
1
<PAGE>
3.25%, an increase of 25 basis points. The Fed has tightened four times
since
then, reversing the trend of five years of declining interest rates.
Currently,
the Fed Funds and discount rates are 4.75% and 4.00%, respectively.
The speed and magnitude of this upward interest rate movement has
caused
investors to alter strategies and corporate issuers to scale back new
issuance
activity. Due to higher rates, the economic growth rate has since
moderated,
partially due to higher rates, and inflation seems to be manageable at about
3%
annually. Nevertheless, investors continue to monitor economic releases
very
closely for signs of re-emerging inflation pressures in order to
position
themselves defensively if, and when, further Fed tightening occurs. Long-
term
interest rates, which have moved over 150 basis points higher in the past
12
months, are expected to remain near current levels.
Throughout this very difficult operating period, DAILY INCOME FUND
and
MUNICIPAL INCOME FUND took defensive postures by steadily reducing their
average
maturities in the face of falling prices. It is notable that during the
period
there was some publicity centering around the fact that a few money market
funds
experienced market losses on certain higher risk derivative structures. It
is
important to mention that neither the Daily Income Fund nor the Municipal
Income
Fund has owned the higher risk structures that the Securities and
Exchange
Commission has subsequently identified as "inappropriate" for money fund
use.
Both the overall credit quality of the money market Funds and the liquidity
of
the Funds' assets remain very high.
EQUITY MARKETS: The changes in interest rates resulted in turbulence in
the
equity markets, with all major indices declining meaningfully through the
first
half of 1994. By mid-summer, this turbulence was replaced with renewed
investor
confidence regarding the economic outlook for 1995. Our view is that
economic
growth will extend into 1995, albeit at moderating levels. Inflation,
while
anticipated to be higher in the coming year, will likely not be lethal
for
equity markets. Recent optimism has propelled equity markets to new
highs.
However, we believe this trend will not continue. In anticipation of
third
quarter earnings releases, we expect investors' optimism to be
tempered
somewhat.
SELECTED GROWTH STOCK PORTFOLIO's performance reflected overall
market
volatility due to the Fed's actions. The current market environment can be
best
described as troublesome for growth issues in general, but especially for
growth
issues that fall short of investor expectations. In response to these
changing
market dynamics, the strategy for Selected Growth Stock Portfolio during
this
period was one of acquiring many small holdings over a wide cross-section
of
industries with the goal of building larger positions in those companies
that
meet or surpass expectations and can sustain growth during a changing
economic
climate. To date, this strategy resulted in improving the Fund's
performance
significantly, returning 2.50% from its inception on May 20, 1994
through
September 9, 1994. We acknowledge that past performance is no guarantee
of
future results.
2
<PAGE>
LOOKING FORWARD
As this is written (September 9), we expect the Fed to tighten by 25 to
50
basis points by year-end. As we look forward to the final quarter of the
year,
we plan to maintain shortened average maturities in DAILY INCOME FUND
and
MUNICIPAL INCOME FUND until the threat of further Fed intervention has
subsided.
We believe that SELECTED GROWTH STOCK PORTFOLIO is positioned to
take
advantage of its focus on growth stocks which tend to perform optimally
when
economic growth moderates, inflation fears subside and interest
rates
demonstrate a downward bias. This economic scenario may well materialize
in
1995, and we are optimistic about the overall performance prospects of the
Fund
in the coming months.
In the near future, we plan to embark on a program to expand our mutual
fund
offerings by providing you with more portfolios with a variety of objectives
to
meet more adequately your personal investment goals. Be sure to ask
your
Investment Representative for more details. In the meantime, we appreciate
your
support of Lehman Brothers Funds, Inc. and look forward to continuing to
serve
your investment needs.
Sincerely,
Clinton J. Kendrick Peter Meenan
Chairman of the Board of Directors President
September 9, 1994
3
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS JULY 31, 1994
(UNAUDITED)
ASSET DISTRIBUTION (BY INSTRUMENT)
Pie charts depicting the allocation of Lehman Brothers Fund -- Municipal
Income
Fund's investment securities held at January 31, 1994 by
industry
classification. The pies are broken in pieces representing industries in
the
following percentages:
<TABLE>
<CAPTION>
INSTRUMENT PERCENTAGE
<S> <C>
Asset-Backed Security 2.4%
Municipal Bonds and Notes 3.8%
U.S. Government Agency Securities 6.0%
Repurchase Agreements 15.8%
Corporate Bonds and Notes 30.7%
Commercial Paper 37.0%
Net Other Assets and Liabilities 3.0%
Certificates of Deposit 1.3%
</TABLE>
AVERAGE WEIGHTED MATURITY OF PORTFOLIO
17 Days
4
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS JULY 31,
1994
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
<C> <S> <C>
- ------------------------------------------------------------------------------
- -
CORPORATE NOTES -- 32.7%
$ 25,000,000 Abbey National Treasury Services plc, Variable
rate,
4.570% due 11/15/1994# $
24,994,822
20,000,000 AT&T Capital Corporation, Variable rate,
4.750% due 01/26/1995
20,000,000
Bear Stearns Companies, Inc., Variable rate:
25,000,000 5.000% due 10/05/1994
25,000,000
15,000,000 4.800% due 10/21/1994
15,000,000
44,000,000 FCC National Bank, Variable rate,
5.080% due 01/11/1995
44,000,000
General Motors Acceptance Corporation:
2,450,000 8.700% due 10/17/1994
2,472,947
1,000,000 6.450% due 01/17/1995
1,008,756
9,000,000 6.650% due 02/10/1995
9,121,154
Goldman Sachs Group L.P., Variable rate,
35,000,000 4.820% due 10/12/1994#
35,000,000
Household Finance Corporation, Variable rate:
10,000,000 4.650% due 08/18/1994
9,999,071
10,000,000 4.800% due 01/13/1995
10,000,000
20,000,000 4.770% due 01/18/1995
20,000,000
35,000,000 Morgan Stanley Group Inc., Variable rate,
4.563% due 11/08/1994
35,000,000
16,000,000 Northern Trust Company,
3.625% due 12/30/1994
15,995,871
-----------
- -
TOTAL CORPORATE NOTES (COST $267,592,621)
267,592,621
-----------
- -
MUNICIPAL NOTES -- 13.3%
17,000,000 Cuyahoga County, Ohio, Taxable Notes,
4.170% due 12/30/1994
17,014,904
New York, New York, Taxable Notes, Series E,
15,000,000 4.550% due 05/15/2018++
15,000,000
20,000,000 4.550% due 05/15/2023++
20,000,000
40,000,000 Orange County, California, Taxable Notes,
Variable rate,
4.625% due 07/10/1995
39,982,760
17,000,000 Virginia State Housing Development Authority,
Taxable Notes,
Series A, Variable rate,
4.450% due 03/01/2002++
17,000,000
-----------
- -
TOTAL MUNICIPAL NOTES (COST $108,997,664)
108,997,664
-----------
- -
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
- ------------------------------------------------------------------------------
- -
<C> <S> <C>
U.S. GOVERNMENT AGENCY SECURITIES -- 6.0%
Federal Farm Credit Bank, Variable rate:
$ 22,000,000 4.450% due 09/07/1994 $
21,997,565
2,000,000 3.980%+ due 09/19/1994
1,989,166
-----------
- -
23,986,731
-----------
- -
25,000,000 Federal National Mortgage Association, Variable
rate,
4.850% due 10/07/1996
25,000,000
-----------
- -
TOTAL U.S. GOVERNMENT AGENCY SECURITIES (COST $48,986,731)
48,986,731
-----------
- -
COMMERCIAL PAPER -- 3.7%
10,000,000 Countrywide Funding Corporation,
4.430%+ due 08/22/1994
9,974,158
20,000,000 Postipankki U.S. Inc.,
4.410%+ due 08/26/1994
19,938,750
-----------
- -
TOTAL COMMERCIAL PAPER (COST $29,912,908)
29,912,908
-----------
- -
ASSET-BACKED SECURITY -- 1.0% (COST $7,999,320)
8,000,000 Capital Auto Receivables, Asset Trust, 1993-3
Class A-1,
3.300% due 11/15/1994
7,999,320
-----------
- -
TOTAL CORPORATE NOTES, MUNICIPAL NOTES,
U.S. GOVERNMENT AGENCY SECURITIES, COMMERCIAL PAPER AND
ASSET-BACKED SECURITY (COST $463,489,244)
463,489,244
-----------
- -
REPURCHASE AGREEMENTS -- 42.2%
40,000,000 Agreement with BZW Securities, Inc., 4.250% dated
07/29/1994, to be repurchased at $40,014,167 on
08/01/1994 collateralized by $253,950,964 U.S.
Government Securities with various maturities
and coupon rates (Value $40,800,001)
40,000,000
40,000,000 Agreement with First Boston Corporation, 4.320%
dated 07/29/94 to be repurchased at $40,014,400
on 08/01/1994 collateralized by $45,803,000
U.S. Government Securities with various
maturities and coupon rates (Value $44,065,935)
40,000,000
100,000,000 Agreement with Greenwich Capital Markets, Inc.,
4.310% dated 07/29/1994, to be repurchased at
$100,035,917 on 08/01/1994 collateralized by
$184,360,526 U.S. Government Securities with
various maturities and coupon rates (Value
$102,000,674)
100,000,000
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
- ------------------------------------------------------------------------------
- -
<C> <S> <C>
REPURCHASE AGREEMENTS -- (CONTINUED)
$100,000,000 Agreement with Kidder Peabody Company, Inc.,
4.462% dated 07/29/1994 to be repurchased at
$100,037,183 on 08/01/1994 collateralized by
$272,730,865 U.S. Government Securities with
various maturities and coupon rates (Value
$102,681,290)
$100,000,000
40,947,000 Agreement with Merrill Lynch & Company, 4.270%
dated 07/29/1994, to be repurchased at
$40,961,570 on 08/01/1994 collateralized by
$55,535,892 U.S. Government Securities with
various maturities and coupon rates (Value
$41,768,066)
40,947,000
25,000,000 Agreement with Paine Webber Group, Inc., 4.250%
dated 07/29/1994, to be repurchased at
$25,008,854 on 08/01/1994 collateralized by
$25,180,000 Federal National Mortgage
Association Residential Program Note, 3.250%
due 09/07/1994 (Value $25,502,794)
25,000,000
-----------
- -
TOTAL REPURCHASE AGREEMENTS (COST $345,947,000)
345,947,000
- ------------------------------------------------------------------------------
- -
TOTAL INVESTMENTS (COST $809,436,244*) 98.9%
809,436,244
OTHER ASSETS AND LIABILITIES (NET) 1.1%
9,118,687
- ------------------------------------------------------------------------------
- -
NET ASSETS 100.0%
$818,554,931
- ------------------------------------------------------------------------------
- -
<FN>
* Aggregate cost for Federal tax purposes.
# Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
+ Annualized yield at date of purchase (unaudited).
++ Put bonds and notes have demand features which mature within one year.
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- ---------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS JULY 31, 1994
(UNAUDITED)
ASSET DISTRIBUTION (BY INDUSTRY)
Pie charts depicting the allocation of Lehman Brothers Fund -- Daily
Income
Fund's investment securities held at January 31, 1994 by
industry
classification. The pies are broken in pieces representing industries in
the
following percentages:
<TABLE>
<CAPTION>
INDUSTRY PERCENTAGE
<S> <C>
Net Other Assets and Liabilities 0.5%
Transportation 5.5%
General Obligation 6.4%
Pollution Control 8.1%
Tax Revenue and Revenue Anticipation Notes 9.3%
Industrial Control 10.3%
Utility 12.8%
Education 13.2%
Other 15.0%
Housing 19.4%
</TABLE>
AVERAGE WEIGHTED MATURITY OF PORTFOLIO
76 Days
8
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS JULY 31,
1994
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
<C> <S> <C>
- ------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES -- 99.5%
ARIZONA -- 5.1%
$ 3,300,000 Arizona Educational Loan Marketing Corporation
(Hong Kong Shanghai, BPA),
3.050% due 12/01/2008++ $ 3,300,000
5,310,000 Phoenix, Arizona, Industrial Development
Authority (First Interstate Bank, LOC),
3.10% due 02/01/2024++ 5,310,000
Pima County, Arizona, Industrial Development
Authority Revenue:
600,000 (Barclays Bank, LOC),
3.050% due 12/01/2022++ 600,000
4,400,000 (Bankers Trust, LOC),
3.000% due 05/01/2025++ 4,400,000
------------
13,610,000
------------
CALIFORNIA -- 17.0%
200,000 Alameda County, California, Multi-family Housing
Authority Revenue, (Federal Home Loan Bank,
LOC),
2.900% due 06/01/2015++ 200,000
3,000,000 California Housing Finance Agency, Home Mortgage
Revenue, Series D, (Dai Ichi Kangyo Bank, LOC),
3.200% due 08/01/2025++ 3,000,000
4,200,000 California State, Revenue Anticipation Notes,
Series A,
3.750% due 12/21/1994 4,210,982
400,000 Eastern Municipal Water District, California
Water Revenue, (FGIC Insured), (Industrial Bank
of Japan, LOC),
2.650% due 07/01/2020++ 400,000
400,000 Kern County, California, (Kern Facilities
Project), (Sanwa Bank, LOC),
2.700% due 08/01/2006++ 400,000
4,000,000 Long Beach, California, Harbor Department, Series
A-2, (Canadian Imperial Bank of Commerce,
Industrial Bank of Japan, Banque Nationale
Paris, National Westminster Bank, Interstate
Bank of California, BPA),
3.000% due 08/15/1994 4,000,000
300,000 Los Angeles County, California, Certificates of
Partnerships,
(Museum Art), Series A, (Bank of America, LOC),
2.850% due 11/01/2015++ 300,000
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
- ------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
CALIFORNIA -- (CONTINUED)
$ 300,000 Los Angeles County, California, Multi-family
Housing Authority Revenue, (Bank of America,
LOC),
2.750% due 07/01/2015++ $ 300,000
3,800,000 Los Angeles County, California, Unified School
District,
4.500% due 07/10/1995 3,831,000
4,700,000 Marion County, California, Tax and Revenue
Anticipation Notes,
4.250% due 07/06/1995 4,727,370
1,900,000 Northern California Power Agency Revenue, Series
A, Pre-refunded,
9.500% due 07/01/2002+++ 2,036,650
200,000 Placer County, California, Industrial Development
Authority, Industrial Revenue, (Chesapeake
Industries Project), (Barclays Bank, LOC),
2.750% due 12/01/1995++ 200,000
4,400,000 Rancho Santiago, California, Community College
District, Tax and Revenue Anticipation Notes,
3.150% due 11/16/1994 4,400,000
Riverside County, California, Industrial
Development Revenue,
1,400,000 4.050% due 04/01/2014++
(Sumitomo Trust, LOC): 1,400,000
5,700,000 4.050% due 07/05/2014++ 5,700,000
500,000 4.050% due 07/05/2019++ 500,000
200,000 Sacramento County, California, Multi-family
Housing Authority Revenue, Series A, (Dai Ichi
Kangyo Bank, LOC),
3.050% due 04/15/2007++ 200,000
200,000 San Diego, California, Industrial Development
Authority Revenue, (Kaiser Project), Series A,
(ABN/AMRO Bank, LOC),
3.050% due 10/01/2007++ 200,000
9,065,000 Ventura County, California, Tax and Revenue
Anticipation Notes,
4.250% due 06/30/1995 9,092,769
------------
45,098,771
------------
COLORADO -- 0.2%
400,000 Denver, Colorado, City and County Revenue,
(Childrens Hospital), (FGIC Insured), (Sakura
Bank, BPA),
2.700% due 10/01/2018++ 400,000
------------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
- ------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
FLORIDA -- 3.2%
$ 2,500,000 Dade County, Florida, Industrial Development
Authority Revenue, (Bank of Tokyo, LOC),
3.100% due 12/01/2011++ $ 2,500,000
4,400,000 Florida Housing Finance Agency, Multi-family
Housing Authority Revenue, (PNC Bank, NA, LOC),
3.050% due 12/01/2011++ 4,400,000
100,000 Sarasota County, Florida, Health Facilities
Authority (Barnett Bank, LOC),
3.150% due 12/01/2019++ 100,000
1,500,000 St. John's County, Florida, Industrial
Development Authority Revenue, Series 86,
(Kredietbank, N.W., LOC),
3.150% due 12/01/2016++ 1,500,000
------------
8,500,000
------------
GEORGIA -- 3.7%
3,400,000 Clayton County, Georgia, Multi-family Housing
Authority Revenue, (Ten Oaks Apartments),
Series F, (FSA Insured), (Barclays Bank, BPA),
3.000% due 01/01/2021++ 3,400,000
1,000,000 Colquitt County, Georgia, Development Authority
Revenue, (Williamsonhouse Regency), (Fleet
National Bank, LOC),
3.050% due 04/01/1998++ 1,000,000
3,000,000 Municipal Electric Authority of Georgia, Series
1985-A,
Pre-refunded,
10.500% due 01/01/2020+++ 3,155,924
1,000,000 Municipal Electric Authority of Georgia, (General
Resolution), Series B, (Morgan Guaranty, BPA),
3.850% due 06/01/2020+++ 1,000,000
1,100,000 Savannah, Georgia, Port Authority Revenue, (Pier
One Imports), (National Westminster Bank, LOC),
3.050% due 12/01/2026++ 1,100,000
------------
9,655,924
------------
ILLINOIS -- 9.9%
1,300,000 Chicago, Illinois, Metropolitan Sanitation
District, General Obligation Bonds,
8.000% due 01/01/1995 1,324,853
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
- ------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
ILLINOIS -- (CONTINUED)
$ 4,000,000 Chicago, Illinois, O'Hare International Airport,
Special Facility Revenue, Series B, (Sanwa
Bank, LOC),
3.100% due 01/01/2018++ $ 4,000,000
6,000,000 Illinois Development Finance Authority Revenue,
(River Oaks Project), (Monsanto Company, GTC),
3.100% due 11/01/2023++ 6,000,000
2,000,000 Illinois Development Finance Authority, Pollution
Control Revenue, Illinois Power Company, Series
D, (Mitsubishi Bank, LOC),
3.000% due 03/01/2017++ 2,000,000
2,500,000 Illinois Health Facilities Authority Revenue,
(Evanston Hospital Project), (FGIC Insured),
(Financial Guaranty Insurance Corporation,
BPA),
3.750% due 10/01/2012+++ 2,500,000
1,000,000 Lisle, Illinois, Multi-family Housing Revenue,
(American National Bank, LOC),
3.050% due 12/15/2025++ 1,000,000
7,300,000 St. Charles, Illinois, Industrial Development
Authority Revenue,
(Pier 1), (National Westminster Bank, LOC),
3.050% due 12/15/2026++ 7,300,000
2,000,000 Wood Dale, Illinois, Industrial Development
Authority Revenue, (Dai Ichi Kangyo, LOC),
3.050% due 06/01/2000++ 2,000,000
------------
26,124,853
------------
INDIANA -- 4.8%
1,200,000 Indiana Bond Book, Advertising Progress Notes,
Series A2,
3.030% due 01/17/1995 1,197,766
8,500,000 Indiana Secondary Market Education Loan Revenue,
Series B, (AMBAC Insured), (Fuji Bank, BPA),
2.850% due 12/01/2014++ 8,500,000
2,000,000 Indianapolis Industrial Economic Development
Authority Revenue (Asahi Bank, LOC),
3.900% due 09/01/1995++ 2,000,000
1,050,000 Princeton, Indiana, Industrial Development
Revenue, (Orion Denki American Inc. Project),
(Mitsubishi Bank, LOC),
3.050% due 04/30/2017++ 1,050,000
------------
12,747,766
------------
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
- ------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
KANSAS -- 0.6%
$ 1,700,000 Wichita, Kansas, Temporary Notes, Series 178,
2.750% due 08/25/1994 $ 1,699,823
------------
KENTUCKY -- 2.3%
2,495,000 Kentucky Rural Economic Development Authority
Revenue, (Industrial Bank of Japan, LOC),
3.350% due 12/01/2009++ 2,495,000
3,500,000 Walton, Kentucky, Industrial Development Revenue,
(Clarion Mortgage Company of America), (Asahi
Bank, LOC),
4.000% due 11/01/1996++ 3,500,000
------------
5,995,000
------------
LOUISIANA -- 3.4%
Louisiana Housing Finance Agency, Multi-family
Housing Authority Revenue, (Sumitomo Trust &
Banking Company, LOC):
5,185,000 (Allouette Project),
4.000% due 01/01/2026++ 5,185,000
3,900,000 (New Orleans Project),
4.000% due 12/01/2025++ 3,900,000
------------
9,085,000
------------
MARYLAND -- 1.6%
3,000,000 Maryland State, Community Development
Administrations,
2.900% due 04/01/2023+++ 3,000,000
1,100,000 Montgomery County, Maryland, Housing
Opportunities, (Draper Lane Apartments), Issue
1, (FGIC Insured), (Sumitomo Bank, BPA),
3.250% due 02/01/2026++ 1,100,000
------------
4,100,000
------------
MICHIGAN -- 0.4%
1,100,000 Michigan State Strategic Funding, (Hi-Lex
Controls Incorporated Project), (Bank of Tokyo,
LOC),
3.100% due 07/01/1999++ 1,100,000
------------
MISSISSIPPI -- 0.2%
545,000 Mississippi Business Finance Corporation, Series
C, (Air Cruisers Project), (Credit Commerciale
de France, LOC),
3.450% due 10/01/2004++ 545,000
------------
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
- ------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
MISSOURI -- 3.3%
$ 2,305,000 Kirksville, Missouri, Industrial Development
Authority Revenue,
(Optech Project), (Industrial Bank of Japan,
LOC),
3.350% due 10/01/2009++ $ 2,305,000
1,000,000 Missouri Environmental Improvement & Energy
Resource, Pollution Control Revenue, (Swiss
Bank, LOC),
3.750% due 06/01/2014+++ 1,000,000
Missouri Higher Education Student Loan Authority:
1,500,000 Series A, (Dai Ichi Kangyo, LOC),
3.000% due 06/01/2017++ 1,500,000
4,000,000 Series B, (National Westminster Bank, LOC),
3.000% due 06/01/2020++ 4,000,000
------------
8,805,000
------------
NEBRASKA -- 0.4%
1,005,000 Nebraska Educational Facilities Authority,
Equipment & Improvement Revenue, (Mitsubishi
Bank, Credit Lyonnais, BPA),
3.000% due 12/01/2000++ 1,005,000
------------
NEVADA -- 0.9%
500,000 Clark County, Nevada, Industrial Development
Revenue, (Nevada Power Company), (Fuji Bank,
LOC),
3.200% due 11/01/2018++ 500,000
Nevada State, Department of Communications,
Industrial Development Authority, Series A:
150,000 (Kinplex Project), (Credit Commerciale de France,
LOC),
3.250% due 01/01/2009++ 150,000
500,000 (Master Halco Project), (Asahi Bank, LOC),
3.300% due 12/01/2009++ 500,000
500,000 (Marshmallow Lane Partners), (Credit Commerciale
de France, LOC),
3.250% due 04/01/2009++ 500,000
600,000 (Pilot Company Project), (Wells Fargo Bank, LOC),
3.050% due 07/01/2016++ 600,000
------------
2,250,000
------------
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
- ------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
NEW HAMPSHIRE -- 0.3%
$ 800,000 New Hampshire, Higher Education & Health
Facilities Authority, (Mary Hitchcock Medical
Center), (Sakura Bank, BPA),
2.900% due 07/01/2021++ $ 800,000
------------
NEW MEXICO -- 2.2%
3,200,000 Gulf Coast Waste Disposal Authority, (Amoco Oil),
2.950% due 04/01/2015+++ 3,200,000
2,500,000 Rio Arriba County, New Mexico, Industrial Revenue
Bond, (NationsBank, Georgia, LOC),
3.150% due 12/01/2007++ 2,500,000
------------
5,700,000
------------
NEW YORK -- 3.8%
5,300,000 New York, New York, City Municipal Water Finance
Authority, (FGIC Insured), (Financial Guaranty
Insurance Corporation, BPA),
2.750% due 06/15/2024+ 5,300,000
4,350,000 New York State, Mortgage Agency Revenue, (Bank of
America, BPA),
3.100% due 10/01/2009+++ 4,350,000
500,000 Triborough Bridge and Tunnel Authority, New York
Special Obligation Bonds, (MBIA Insured),
(Bankers Trust, BPA),
2.950% due 01/01/2004++ 500,000
------------
10,150,000
------------
NORTH CAROLINA -- 6.8%
11,800,000 Bladen County, North Carolina, Industrial
Facilities & Pollution Control Revenue, (Bank
of Tokyo, LOC),
3.050% due 11/01/2020++ 11,800,000
North Carolina, Eastern Municipal Power Agency
Pre-refunded:
1,000,000 10.625% due 01/01/2015+++ 1,062,670
5,000,000 (AMBAC Insured),
10.000% due 01/01/2018+++ 5,183,890
------------
18,046,560
------------
OHIO -- 0.9%
Cincinnati, Ohio, Student Loan Funding
Corporation, Loan Revenue:
400,000 Series 1983A, (Fuji Bank, LOC),
2.600% due 12/29/1998++ 400,000
500,000 Series-A1, (National Westminster Bank, LOC),
2.900% due 01/01/2007++ 500,000
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
- ------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
OHIO -- (CONTINUED)
$ 1,500,000 Columbus, Ohio, Industrial Economic Development
Revenue,
2.850% due 12/01/1995++ $ 1,500,000
------------
2,400,000
------------
OREGON -- 0.8%
800,000 Portland, Oregon, Industrial Development Revenue,
(Columbia Grain Project), Series 1984, (Fuji,
Bank of Tokyo, LOC),
3.150% due 12/01/2014++ 800,000
1,220,000 Oregon State, Economic Development Commission,
(Toshi), Series B, (First Interstate, Oregon,
LOC),
3.500% due 07/01/2002++ 1,220,000
------------
2,020,000
------------
PENNSYLVANIA -- 3.6%
1,000,000 Allegheny County, Pennsylvania, Hospital
Development Authority, (PNC Bank, N.A., LOC),
2.800% due 03/01/2018++ 1,000,000
2,000,000 Pennsylvania State, Higher Education Facilities
Authority Revenue, (University of Pennsylvania,
LOC),
3.000% due 06/01/1999++ 2,000,000
6,500,000 Philadelphia, Pennsylvania, Tax and Revenue
Anticipation Notes, Series E, (PNC Bank, N.A.,
LOC),
4.750% due 06/15/1995 6,546,402
------------
9,546,402
------------
SOUTH CAROLINA -- 1.2%
Piedmont Municipal Power Agency, South Carolina
Electric Pre-refunded:
1,985,000 11.000% due 01/01/2014+++ 2,113,345
1,000,000 11.000% due 01/01/2025+++ 1,064,338
------------
3,177,683
------------
SOUTH DAKOTA -- 1.3%
1,370,000 South Dakota Housing Development Authority,
(Homeownership Mortgage), Series C,
3.300% due 05/01/2017+++ 1,370,000
</TABLE>
See Notes to Financial Statements.
16
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
- ------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
SOUTH DAKOTA -- (CONTINUED)
South Dakota, Student Loan Assistance, Series A:
$ 1,000,000 (Bayerische Landesbank, GTC),
3.000% due 08/01/2001++ $ 1,000,000
1,000,000 (Bayerische Landesbank, BPA),
3.000% due 08/01/2004++ 1,000,000
------------
3,370,000
------------
TENNESSEE -- 1.6%
300,000 Chattanooga, Tennessee, Industrial Development
Board, Industrial Develpoment Revenue,
(ABN/AMRO Bank, LOC),
3.050% due 12/15/2012++ 300,000
2,200,000 Collierville, Tennessee, Industrial Development
Bond Project, (Harris Trust, LOC),
3.050% due 04/01/2009++ 2,200,000
1,500,000 Hamilton County, Tennessee, Industrial
Development Board, Industrial Development
Revenue, (Seaboard Feeds Chattanooga Project),
(Bank of New York, LOC),
3.150% due 12/01/2017++ 1,500,000
300,000 Metropolitan Nashville Airport Authority,
Tennessee, Tennessee Airport Revenue, (FGIC
Insured), (Societe Generale, BPA),
2.950% due 07/01/2019++ 300,000
------------
4,300,000
------------
TEXAS -- 8.4%
2,000,000 Brazos, Texas, Higher Education Authority, Series
B1, (Student Loan Marketing Association, LOC),
3.800% due 06/01/2023+++ 1,999,962
700,000 Capital Health Facilities Development Company,
Texas, Health Facilities Revenue, (ABN/AMRO
Bank, LOC),
3.000% due 12/01/2016++ 700,000
Houston, Texas, Airport Systems, Series A,
(J.P. Morgan, Canada Imperial Bank of Commerce,
LOC):
4,600,000 3.100% due 10/05/1994 4,600,000
1,000,000 3.250% due 12/06/1994 1,000,000
North Texas Higher Education Authority, Student
Loan Revenue, (Student Loan Marketing
Association, LOC):
800,000 2.850% due 03/01/2005++ 800,000
</TABLE>
See Notes to Financial Statements.
17
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
- ------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
TEXAS -- (CONTINUED)
North Texas Higher Education Authority, Student
Loan Revenue, (Student Loan Marketing
Association, LOC): (continued)
(AMBAC Insured),
$ 800,000 3.050% due 04/01/2020++ $ 800,000
300,000 San Antonio, Texas, Housing Finance Corporation,
Multi-family Housing, (Cape Cod Apartments),
(Swiss Bank, LOC),
2.950% due 06/01/2020++ 300,000
100,000 Tarrant County, Texas, Health Facilities
Development, (Harris Methodist Health Systems),
(Fuji Bank, LOC),
3.100% due 09/01/2018++ 100,000
2,020,000 Texas Municipal Power Agency Revenue, (MBIA
Insured),
2.850% due 09/01/1994 2,020,000
10,000,000 Texas State Public Finance Authority, Series
1993-A,
2.900% due 11/03/1994 10,000,000
------------
22,319,962
------------
UTAH -- 0.9%
2,400,000 Tooele County, Utah, (Hazardous Treatment
Project), Series A,
3.000% due 11/01/2026+++ 2,400,000
------------
VERMONT -- 0.8%
2,100,000 Vermont Industrial Development Authority Revenue,
(Ryegate Project) (First Boston Corporation,
LOC),
3.050% due 12/01/2015++ 2,100,000
------------
VIRGINIA -- 5.0%
600,000 Peninsula, Port Authority, Virginia, Port
Authority Revenue, (Shell Oil, GTC),
2.700% due 12/01/2005+ 600,000
Virginia State, Housing Development Authority,
Commonwealth Mortgage:
3,000,000 Series I, Subseries I -- Stem,
2.800% due 07/01/2020+++ 3,000,000
9,500,000 Series K, Subseries K,
2.650% due 01/01/2022+++ 9,500,794
------------
13,100,794
------------
</TABLE>
See Notes to Financial Statements.
18
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
- ------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
WEST VIRGINIA -- 0.6%
$ 1,500,000 Marion County, West Virginia, County Commission,
Solid Waste Disposal Facility Revenue, (Granite
Town Project A), (National Westminster Bank,
LOC),
3.050% due 10/01/2017++ $ 1,500,000
------------
WISCONSIN -- 2.4%
1,500,000 Milwaukee, Wisconsin, Metropolitan Sewer
District,
5.100% due 09/01/1994 1,502,872
Wisconsin Housing and Economic Development
Authority:
3,400,000 (Home Ownership Revenue), Series F,
3.100% due 09/01/2018+++ 3,400,000
1,440,000 Series D,
3.100% due 09/01/2014+++ 1,440,000
------------
6,342,872
------------
WYOMING -- 1.9%
2,000,000 Lincoln County, Wyoming, Pollution Control
Revenue, (Exxon Project), Series A, (Exxon,
GTC),
3.600% due 07/01/2017+++ 2,000,000
3,000,000 Unita County, Wyoming, Pollution Control Revenue,
(Chevron, GTC),
2.650% due 08/15/2020+ 3,000,000
------------
5,000,000
- ------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST $262,996,410*) 99.5% 262,996,410
OTHER ASSETS AND LIABILITIES (NET) 0.5% 1,438,605
- ------------------------------------------------------------------------------
NET ASSETS 100.0% $264,435,015
- ------------------------------------------------------------------------------
<FN>
* Aggregate cost for Federal tax purposes.
+ Variable rate demand notes are payable upon not more than one business
day's
notice. The interest rate shown reflects the rate currently in effect.
++ Variable rate demand notes are payable upon not more than seven calendar
days' notice. The interest rate shown reflects the rate currently in
effect.
+++ Put bonds and notes have demand features which mature within one year.
AMBAC -- American Municipal Bond Assurance Corporation
BPA -- Instruments supported by bond purchase agreement.
FGIC -- Federal Guaranty Insurance Corporation
FSA -- Financial Security Association
GTC -- Instruments guaranteed by corporation.
LOC -- Instruments supported by bank letter of credit.
MBIA -- Municipal Bond Investors Assurance
</TABLE>
See Notes to Financial Statements.
19
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
SUMMARY OF MUNICIPAL BONDS BY COMBINED RATINGS #
<TABLE>
<CAPTION>
MOODY'S STANDARD & POOR'S
RATING OR RATING TOTAL
<S> <C> <C>
Aaa AAA 6.7%
Aa, Aa3 AA 6.4%
MIG1, VMG1, P-1 A-1, A-1+, SP-1, SP 1+ 77.3%
MIG2, VMG2, P-2 SP-2 5.9%
NON RATED NON RATED 3.7%
------
100%
</TABLE>
# Bonds are not necessarily rated the same by both services.
See Notes to Financial Statements.
20
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
SELECTED GROWTH STOCK PORTFOLIO
- ---------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS JULY 31, 1994
(UNAUDITED)
INDUSTRY BREAKDOWN
Pie charts depicting the allocation of Lehman Brothers Fund -- Daily
Income
Fund's investment securities held at January 31, 1994 by
industry
classification. The pies are broken in pieces representing industries in
the
following percentages:
<TABLE>
<CAPTION>
INDUSTRY PERCENTAGE
<S> <C>
Net Other Assets and Liabilities 1.4%
Other 12.3%
Hospital 3.0%
Transportation 3.3%
Pollution Control 8.4%
Utility 9.1%
Industrial Control 9.2%
Education 12.7%
Housing 13.7%
Cash & Cash Equivalents 26.9%
</TABLE>
TOP TEN HOLDINGS
<TABLE>
<CAPTION>
PERCENTAGE OF
COMPANY NET ASSETS
<S> <C>
- ------------------------------------------------------------------------
GTECH Holdings Corporation 1.5%
First Interstate Bancorp 1.4
McGraw-Hill, Inc. 1.3
Paychex, Inc. 1.3
Dallas Semiconductor Corporation 1.1
Medaphis Corporation 1.1
MBIA, Inc. 1.1
Genzyme Corporation 1.1
Scott Paper Company 1.1
Stop & Shop Companies 1.0
</TABLE>
21
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
SELECTED GROWTH STOCK PORTFOLIO
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS JULY 31,
1994
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
<C> <S> <C>
- ------------------------------------------------------------------------------
- -
COMMON STOCKS -- 39.2%
HEALTHCARE -- 3.5%
10,000 Community Health Systems, Inc.** $
215,000
10,000 Genzyme Corporation**
288,750
7,000 Homedco, Inc.**
206,500
5,000 Manor Care, Inc.
125,625
5,000 Multicare Companies, Inc.**
81,250
-----------
- -
917,125
-----------
- -
MANUFACTURING -- 3.5%
7,000 Electroglas, Inc.**
246,750
10,000 Fusion Systems Corporation**
200,000
5,000 Scott Paper Company
288,750
10,000 Union Switch & Signal Corporation**
175,000
-----------
- -
910,500
-----------
- -
RETAIL -- 3.3%
8,000 Heilig-Meyers Company
212,000
10,000 Home Shopping Network, Inc.**
118,750
8,000 Sports & Recreation, Inc.**
264,000
10,700 Stop & Shop Companies**
272,850
-----------
- -
867,600
-----------
- -
BANKING -- 3.2%
10,000 Ahmanson (H. F.) & Company
198,750
10,000 Bank of Boston Corporation
263,750
5,000 First Interstate Bancorp
375,625
-----------
- -
838,125
-----------
- -
INSURANCE -- 2.6%
8,000 CMAC Investment Corporation
209,000
5,000 MBIA, Inc.
290,000
7,000 MGIC Investment Corporation
196,875
-----------
- -
695,875
-----------
- -
PUBLISHING -- 2.5%
5,000 McGraw-Hill, Inc.
347,500
5,000 Scholastic Corporation**
220,625
10,000 Westcott Communications, Inc.**
103,125
-----------
- -
671,250
-----------
- -
</TABLE>
See Notes to Financial Statements.
22
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
SELECTED GROWTH STOCK PORTFOLIO
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- ------------------------------------------------------------------------------
- -
<C> <S> <C>
COMMON STOCKS -- (CONTINUED)
COMPUTER & COMPUTER SERVICES -- 2.4%
13,000 BISYS Group, Inc.** $
251,875
5,000 Computer Sciences Corporation**
208,750
10,000 Orbital Sciences Corporation**
172,500
-----------
- -
633,125
-----------
- -
ADMINISTRATIVE SERVICES -- 2.4%
10,000 Medaphis Corporation**
293,750
10,000 Paychex, Inc.
335,000
-----------
- -
628,750
-----------
- -
ELECTRIC -- 2.1%
5,000 American Power Conversion Corporation**
82,500
20,000 Dallas Semiconductor Corporation**
300,000
5,000 Varian Associates, Inc.
180,625
-----------
- -
563,125
-----------
- -
BROADCASTING -- 1.5%
5,000 Clear Channel Communications**
231,250
12,000 Emmis Broadcasting Corporation, Class A
171,000
-----------
- -
402,250
-----------
- -
AEROSPACE -- 1.5%
20,000 GTECH Holdings Corporation**
380,000
-----------
- -
TELECOMMUNICATIONS -- 1.4%
10,000 Centennial Cellular Corporation, Class A
155,000
5,000 Southwestern Bell Corporation
210,000
-----------
- -
365,000
-----------
- -
CABLE & TELEVISION -- 1.4%
10,000 TCA Cable Television, Inc.
222,500
10,000 United International Holdings, Inc., Class A**
133,750
-----------
- -
356,250
-----------
- -
FINANCIAL SERVICES -- 1.3%
6,000 Equifax Inc.
174,750
10,000 SEI Corporation
172,656
-----------
- -
347,406
-----------
- -
</TABLE>
See Notes to Financial Statements.
23
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
SELECTED GROWTH STOCK PORTFOLIO
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- ------------------------------------------------------------------------------
- -
<C> <S> <C>
COMMON STOCKS -- (CONTINUED)
MEDICAL & DENTAL EQUIPMENT -- 1.2%
5,000 DENTSPLY International, Inc.** $
172,500
15,000 Orthofix International, Inc.**
150,000
-----------
- -
322,500
-----------
- -
OIL & GAS -- 0.9%
5,000 Anadarko Petroleum Company
239,375
-----------
- -
WASTE MANAGEMENT -- 0.9%
8,000 WMX Technologies, Inc.
233,000
-----------
- -
BUILDING EQUIPMENT -- 0.9%
12,000 Ply Gem Industries, Inc.
229,500
-----------
- -
AUTOMOTIVE PARTS & ACCESSORIES -- 0.8%
12,000 Lear Seating Corporation**
217,500
-----------
- -
CONSUMER SERVICES -- 0.8%
7,000 CUC International, Inc.**
210,875
-----------
- -
MARKETING SERVICES -- 0.7%
20,000 Pharmaceutical Marketing Services, Inc.**
187,500
-----------
- -
METALS -- 0.4%
10,000 WCI Steel, Inc.**
100,000
-----------
- -
TOTAL COMMON STOCKS (COST $10,429,155)
10,316,631
-----------
- -
NUMBER OF
CONTRACTS
- ------------------------------------------------------------------------------
- -
PUT OPTION PURCHASED -- 0.2% (COST $92,750)
50 Nasdaq 100 Index Put Option, December 1994, at
$360.00
60,625
- ------------------------------------------------------------------------------
- -
FACE
VALUE
- ------------------------------------------------------------------------------
- -
COMMERCIAL PAPER -- 22.8%
$ 1,000,000 American Telephone and Telegraph Company,
4.350% due 08/24/1994
997,221
1,000,000 CIT Group Holdings Inc.,
4.260% due 08/10/1994
1,000,000
1,000,000 Ford Motor Credit Company,
4.200% due 08/01/1994
1,000,000
</TABLE>
See Notes to Financial Statements.
24
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
SELECTED GROWTH STOCK PORTFOLIO
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
- ------------------------------------------------------------------------------
- -
<C> <S> <C>
COMMERCIAL PAPER -- (CONTINUED)
$ 1,000,000 General Electric Capital Corporation,
4.203% due 08/01/1994 $
1,000,000
1,000,000 Household Finance Corporation,
4.386% due 08/25/1994
1,000,000
1,000,000 Xerox Corporation,
4.380% due 08/22/1994
997,445
-----------
- -
TOTAL COMMERCIAL PAPER (COST $5,994,666)
5,994,666
-----------
- -
TOTAL COMMON STOCKS, PUT OPTION PURCHASED
AND COMMERCIAL PAPER (COST $16,516,571)
16,371,922
-----------
- -
REPURCHASE AGREEMENTS -- 45.0%
5,935,000 Agreement with Chase Securities, Inc., 4.250%
dated 07/29/1994 to be repurchased at
$5,937,102 on 08/01/1994 collateralized by
$5,745,000 U.S. Treasury Notes, 7.250% due
08/31/1996 (Value $5,937,067)
5,935,000
5,936,000 Agreement with Morgan Stanley & Co., 4.250% dated
07/29/1994 to be repurchased at $5,938,102 on
08/01/1994 collateralized by $11,494,000
Federal Home Loan Mortgage Corporation, 4.922%
due 04/01/2017 (Value $6,080,377)
5,936,000
-----------
- -
TOTAL REPURCHASE AGREEMENTS (COST $11,871,000)
11,871,000
-----------
- -
TOTAL INVESTMENTS (COST $28,387,571*) 107.2%
28,242,922
- ------------------------------------------------------------------------------
- -
NUMBER OF
CONTRACTS
- ------------------------------------------------------------------------------
- -
PUT OPTION WRITTEN (0.1)% (PREMIUM RECEIVED $34,749)
50 Nasdaq 100 Index Put Option, December 1994, at
$320.00 (0.1)%
(19,375)
- ------------------------------------------------------------------------------
- -
OTHER ASSETS AND LIABILITIES (NET) (7.1)%
(1,882,353)
- ------------------------------------------------------------------------------
- -
NET ASSETS 100.0% $
26,341,194
- ------------------------------------------------------------------------------
- -
<FN>
* Aggregate cost for Federal tax purposes is $28,431,621.
** Non-income producing securities.
</TABLE>
See Notes to Financial Statements.
25
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
- ---------------------------------------------------------------------------
STATEMENTS OF ASSETS & LIABILITIES JULY 31,
1994
<TABLE>
<CAPTION>
DAILY
MUNICIPAL SELECTED
INCOME
INCOME GROWTH STOCK
NOTES FUND
FUND PORTFOLIO
<S> <C> <C> <C>
<C>
- ------------------------------------------------------------------------------
- -------
ASSETS
Investments, at value (Cost $809,436,244,
$262,996,410 and $28,387,571,
respectively) 1
See accompanying schedules:
Securities $463,489,244
$262,996,410 $ 16,371,922
Repurchase Agreements 345,947,000
- -- 11,871,000
- ------------------------------------------------------------------------------
- -------
Total Investments 809,436,244
262,996,410 28,242,922
Cash 584
20,007 100,571
Receivable for investment securities sold --
- -- 167,500
Receivable from investment adviser 2 --
- -- 11,440
Receivable from administrator 2 --
- -- 3,051
Receivable for Fund shares sold 29,766,054
4,565,482 161,607
Dividends and/or interest receivable 2,482,336
1,552,938 8,325
Unamortized organization costs 7 388,632
153,521 121,267
- ------------------------------------------------------------------------------
- -------
TOTAL ASSETS 842,073,850
269,288,358 28,816,683
- ------------------------------------------------------------------------------
- -------
LIABILITIES
Option written, at value
(Premium received $34,749)
See accompanying schedule 1 --
- -- 19,375
Payable for investment securities purchased --
- -- 2,292,450
Payable for Fund shares redeemed 20,782,364
4,149,202 --
Organization costs payable 279,172
91,404 102,568
Dividends payable 1,783,666
356,903 --
Investment advisory fee payable 2 186,848
74,410 --
Distribution fee payable 3 130,400
42,735 13,960
Service fee payable 3 --
- -- 4,653
Transfer agent fees payable 2 82,166
6,241 1,138
Administration fee payable 2 144,566
59,607 --
Custodian fees payable 2 40,000
22,000 2,400
Accrued Directors' fees and expenses 2 5,500
5,500 5,500
Accrued expenses and other payables 84,237
45,341 33,445
- ------------------------------------------------------------------------------
- -------
TOTAL LIABILITIES 23,518,919
4,853,343 2,475,489
- ------------------------------------------------------------------------------
- -------
NET ASSETS $818,554,931
$264,435,015 $ 26,341,194
- ------------------------------------------------------------------------------
- -------
</TABLE>
See Notes to Financial Statements.
26
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
- --------------------------------------------------------------------
STATEMENTS OF ASSETS & LIABILITIES (CONTINUED) JULY 31,
1994
<TABLE>
<CAPTION>
DAILY
MUNICIPAL SELECTED
INCOME
INCOME GROWTH STOCK
FUND
FUND PORTFOLIO
- ------------------------------------------------------------------------------
- -------
<S> <C> <C> <C>
<C>
NET ASSETS consist of:
Undistributed net investment income $ 60,635 $
23,114 $ 38,112
Accumulated net realized gain/(loss) on
securities sold 16,570
(12,327) (219,954)
Unrealized depreciation of securities and
written options --
- -- (129,275)
Par value 818,538
264,447 2,706
Paid-in capital in excess of par value 817,659,188
264,159,781 26,649,605
- ------------------------------------------------------------------------------
- -------
$818,554,931
$264,435,015 $ 26,341,194
- ------------------------------------------------------------------------------
- -------
NET ASSETS:
Select Shares $818,554,831
$264,425,127 N/A
CDSC Shares $ 100 $
9,888 N/A
Portfolio Shares N/A
N/A $ 26,341,194
- ------------------------------------------------------------------------------
- -------
SHARES OUTSTANDING:
Select Shares 818,538,261
264,437,454 N/A
CDSC Shares 100
9,888 N/A
Portfolio Shares N/A
N/A 2,706,412
- ------------------------------------------------------------------------------
- -------
SELECT SHARES
NET ASSET VALUE, offering and
redemption price per share $1.00
$1.00 N/A
- ------------------------------------------------------------------------------
- -------
CDSC SHARES
NET ASSET VALUE and offering price per share+ $1.00
$1.00 N/A
- ------------------------------------------------------------------------------
- -------
PORTFOLIO SHARES
NET ASSET VALUE and offering price per share+ N/A
N/A $9.73
- ------------------------------------------------------------------------------
- -------
<FN>
+ Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
</TABLE>
See Notes to Financial Statements.
27
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
- ---------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED JULY 31, 1994*
<TABLE>
<CAPTION>
DAILY
MUNICIPAL SELECTED
INCOME
INCOME GROWTH STOCK
NOTES FUND
FUND PORTFOLIO
<S> <C> <C>
<C> <C>
- ------------------------------------------------------------------------------
- -------
INVESTMENT INCOME:
Interest $26,779,283
$6,046,443 $ 102,880
Dividends --
- -- 2,455
- ------------------------------------------------------------------------------
- -------
TOTAL INVESTMENT INCOME 26,779,283
6,046,443 105,335
- ------------------------------------------------------------------------------
- -------
EXPENSES:
Investment advisory fee 2 2,185,627
670,015 25,460
Distribution fee 3 1,821,009
558,354 25,460
Service fee 3 --
- -- 8,487
Administration fee 2 1,457,085
446,676 6,790
Transfer agent fees 2 881,847
59,286 3,217
Legal and audit fees 46,455
41,033 20,795
Shareholder reports expense 64,459
5,805 10,000
Custodian fees 2 105,924
56,000 2,495
Amortization of organization costs 7 96,825
38,158 5,125
Directors' fees and expenses 2 36,185
36,185 5,500
Other 196,720
82,558 2,650
Fees waived and/or expenses reimbursed by
investment adviser, 2 and
administrator and/or distributor 3 (2,054,830)
(555,919) (46,741)
- ------------------------------------------------------------------------------
- -------
TOTAL EXPENSES 4,837,306
1,438,151 69,238
- ------------------------------------------------------------------------------
- -------
NET INVESTMENT INCOME 21,941,977
4,608,292 36,097
- ------------------------------------------------------------------------------
- -------
REALIZED AND UNREALIZED GAIN/(LOSS) 1 and
ON INVESTMENTS: 5
Net realized gain/(loss) on securities sold
during the period 1 16,570
(12,327) (219,954)
- ------------------------------------------------------------------------------
- -------
Net change in unrealized appreciation/
(depreciation) of:
Securities --
- -- (144,649)
Written options --
- -- 15,374
- ------------------------------------------------------------------------------
- -------
Net unrealized depreciation of investments
during the period --
- -- (129,275)
- ------------------------------------------------------------------------------
- -------
NET REALIZED AND UNREALIZED GAIN/
(LOSS) ON INVESTMENTS 16,570
(12,327) (349,229)
- ------------------------------------------------------------------------------
- -------
NET INCREASE/(DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $21,958,547
$4,595,965 $ (313,132)
- ------------------------------------------------------------------------------
- -------
<FN>
* Lehman Brothers Daily Income Fund and Lehman Brothers Municipal Income Fund
both commenced operations on August 2, 1993 and Lehman Brothers Selected
Growth Stock Portfolio commenced operations on May 20, 1994.
</TABLE>
See Notes to Financial Statements.
28
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
- ---------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED JULY 31, 1994*
<TABLE>
<CAPTION>
SELECTED
DAILY
MUNICIPAL GROWTH
INCOME
INCOME STOCK
NOTES FUND
FUND PORTFOLIO
<S> <C> <C> <C>
<C>
- ------------------------------------------------------------------------------
- -------------------
Net investment income $ 21,941,977 $
4,608,292 $ 36,097
Net realized gain/(loss) on securities sold
during the period 16,570
(12,327) (219,954)
Net unrealized depreciation of securities and
written options during the period --
- -- (129,275)
- ------------------------------------------------------------------------------
- -------
Net increase/(decrease) in net assets resulting
from operations 21,958,547
4,595,965 (313,132)
Distributions to shareholders from net investment
income:
Select Shares (21,941,977)
(4,608,279) --
CDSC Shares --
(13) --
Net increase in net assets from share
transactions:
Select Shares 6 818,538,261
264,437,454 --
CDSC Shares 6 100
9,888 --
Portfolio Shares 6 --
- -- 26,654,326
- ------------------------------------------------------------------------------
- -------
Net increase in net assets 818,554,931
264,435,015 26,341,194
NET ASSETS:
Beginning of period --
- -- --
- ------------------------------------------------------------------------------
- -------
End of period (including undistributed net
investment income of $60,635, $23,114 and
$38,112, respectively) $818,554,931
$264,435,015 $26,341,194
- ------------------------------------------------------------------------------
- -------
<FN>
* Lehman Brothers Daily Income Fund and Lehman Brothers Municipal Income Fund
both commenced operations on August 2, 1993 and Lehman Brothers Selected
Growth Stock Portfolio commenced operations on May 20, 1994.
</TABLE>
See Notes to Financial Statements.
29
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A SELECT SHARE OUTSTANDING THROUGHOUT THE PERIOD.
<TABLE>
<CAPTION>
PERIOD
ENDED
07/31/94*
<S> <C>
Net asset value, beginning of period $ 1.00
- ------------------------------------------------------------------------------
- --
Net investment income+++ 0.0297
Dividends from net investment income (0.0297)
- ------------------------------------------------------------------------------
- --
Net asset value, end of period $ 1.00
- ------------------------------------------------------------------------------
- --
Total return++
3.03%
- ------------------------------------------------------------------------------
- --
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $818,555
Ratio of net investment income to average net assets
3.01%**
Ratio of operating expenses to average net assets+
0.66%**
- ------------------------------------------------------------------------------
- --
<FN>
* Lehman Brothers Daily Income Fund Select Shares commenced operations on
August 2, 1993.
** Annualized.
+ Annualized operating expense ratio before waiver of fees by investment
adviser, administrator and distributor for the period ended July 31, 1994
was 0.95%.
++ Total return represents aggregate total return for the period indicated.
+++ Net investment income before waiver of fees by investment adviser,
administrator and distributor for the period ended July 31, 1994 was
$0.0269.
</TABLE>
See Notes to Financial Statements.
30
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A SELECT SHARE OUTSTANDING THROUGHOUT THE PERIOD.
<TABLE>
<CAPTION>
PERIOD
ENDED
07/31/94*
<S> <C>
Net asset value, beginning of period $ 1.00
- ------------------------------------------------------------------------------
- -
Net investment income+++ 0.0207
Dividends from net investment income
(0.0207)
- ------------------------------------------------------------------------------
- -
Net asset value, end of period $ 1.00
- ------------------------------------------------------------------------------
- -
Total return++
2.09%
- ------------------------------------------------------------------------------
- -
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 264,425
Ratio of net investment income to average net assets
2.06%**
Ratio of operating expenses to average net assets+
0.64%**
- ------------------------------------------------------------------------------
- -
<FN>
* Lehman Brothers Municipal Income Fund Select Shares commenced operations
on
August 2, 1993.
** Annualized.
+ Annualized operating expense ratio before waiver of fees by investment
adviser, administrator and distributor for the period ended July 31, 1994
was 0.89%.
++ Total return represents aggregate total return for the period indicated.
+++ Net investment income before waiver of fees by investment adviser,
administrator and distributor for the period ended July 31, 1994 was
$0.0182.
</TABLE>
See Notes to Financial Statements.
31
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CDSC SHARE OUTSTANDING THROUGHOUT THE PERIOD.
<TABLE>
<CAPTION>
PERIOD
ENDED
07/31/94*
<S> <C>
Net asset value, beginning of period $ 1.00
- ------------------------------------------------------------------------------
- -
Net investment income+++ 0.0018
Dividends from net investment income
(0.0018)
- ------------------------------------------------------------------------------
- -
Net asset value, end of period $ 1.00
- ------------------------------------------------------------------------------
- -
Total return++
0.18%
- ------------------------------------------------------------------------------
- -
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 10
Ratio of net investment income to average net assets
2.06%**
Ratio of operating expenses to average net assets+
0.64%**
- ------------------------------------------------------------------------------
- -
<FN>
* Lehman Brothers Municipal Income Fund CDSC Shares commenced operations on
July 6, 1994.
** Annualized.
+ Annualized operating expense ratio before waiver of fees by investment
adviser, administrator and distributor for the period ended July 31, 1994
was 0.89%.
++ Total return represents aggregate total return for the period indicated
and
does not reflect any applicable contingent deferred sales charge.
+++ Net investment income before waiver of fees by investment adviser,
administrator and distributor for the period ended July 31, 1994 was
$0.0017.
</TABLE>
See Notes to Financial Statements.
32
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
SELECTED GROWTH STOCK PORTFOLIO
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A PORTFOLIO SHARE OUTSTANDING THROUGHOUT THE PERIOD.
<TABLE>
<CAPTION>
PERIOD
ENDED
07/31/94*
<S> <C>
Net asset value, beginning of period $ 10.00
- ------------------------------------------------------------------------------
Income from investment operations:
Net investment income+++ 0.01
Net realized and unrealized loss on investments (0.28)
- ------------------------------------------------------------------------------
Total from investment operations (0.27)
- ------------------------------------------------------------------------------
Net asset value, end of period $ 9.73
- ------------------------------------------------------------------------------
Total return++
(2.70)%
- ------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 26,341
Ratio of net investment income to average net assets
1.06%**
Ratio of operating expenses to average net assets+
2.04%**
Portfolio turnover rate 33%
- ------------------------------------------------------------------------------
<FN>
* Lehman Brothers Selected Growth Stock Portfolio Shares commenced
operations
on May 20, 1994.
** Annualized.
+ Annualized operating expense ratio before waiver of fees and expenses
reimbursed by investment adviser and administrator for the period ended
July
31, 1994 was 3.42%.
++ Total return represents aggregate total return for the period indicated
and
does not reflect any applicable contingent deferred sales charge.
+++ Net investment income before waiver of fees and expenses reimbursed by
investment adviser and administrator for the period ended July 31, 1994
rounded to less than $0.00.
</TABLE>
See Notes to Financial Statements.
33
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
SELECTED GROWTH STOCK PORTFOLIO
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Lehman Brothers Funds, Inc. (the "Company") was incorporated under the
laws
of the State of Maryland on May 5, 1993. It is an open-end management
investment
company, which currently offers three funds: Lehman Brothers Daily Income
Fund
("Daily Income Fund"), Lehman Brothers Municipal Income Fund ("Municipal
Income
Fund") and Lehman Selected Growth Stock Portfolio ("Selected Growth
Stock
Portfolio") (the "Funds"). All Funds except Selected Growth Stock
Portfolio,
currently offer two classes of shares: Select Shares and CDSC Shares.
Selected
Growth Stock Portfolio currently offers one class of shares: Portfolio
Shares.
Select Shares are offered without a front-end sales load or contingent
deferred
sales charge ("CDSC"). CDSC Shares and Portfolio Shares may be subject to
a
CDSC. All classes of shares of each Fund represent interests in proportion
to
their net asset value and otherwise have identical rights and privileges
except
with respect to the effect of the respective sales charges, the
distribution
and/or service fees borne by each class, expenses allocable exclusively to
each
class and voting rights on matters affecting a single class. The following is
a
summary of significant accounting policies consistently followed by the Funds
in
the preparation of their financial statements.
PORTFOLIO VALUATION: Portfolio securities held by the Daily Income Fund
and
the Municipal Income Fund are valued at amortized cost which approximates
market
value. Amortized cost valuation involves valuing a security at cost
initially
and, thereafter, assuming a constant amortization to maturity of any discount
or
premium, regardless of the impact of fluctuating interest rates on the
market
value of the instrument. Portfolio securities held by the Selected Growth
Stock
Portfolio which are traded on a recognized stock exchange are valued at the
last
sale price on the securities exchange on which such securities are
primarily
traded or at the last sale price on the national securities market or in
the
absence of sales in such market, at the mean between the closing bid and
asked
prices. Selected Growth Stock Portfolio securities traded only
on
over-the-counter markets are valued on the basis of the closing over-the-
counter
bid prices or if no sale occurred on such day at the mean of the current bid
and
ask prices. Certain securities of the Selected Growth Stock Portfolio may
be
valued by one or more principal market makers. Restricted securities,
securities
for which market quotations are not readily available,
and
34
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
SELECTED GROWTH STOCK PORTFOLIO
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
other assets of the Selected Growth Stock Portfolio are valued at fair
value
under the supervision of the Board of Directors. Short-term investments
that
mature in 60 days or less are valued at amortized cost.
REPURCHASE AGREEMENTS: The Funds may engage in repurchase
agreement
transactions. Each Fund values repurchase agreements at cost and
accrues
interest into interest receivable. Under the terms of a typical
repurchase
agreement, the Fund takes possession of an underlying debt obligation subject
to
an obligation of the seller to repurchase, and the Fund to resell,
the
obligation at an agreed-upon price and time, thereby determining the
yield
during the Fund's holding period. There is potential loss to the Fund in
the
event of default by the seller, including the risk of adverse market action
or
delay in connection with the disposition of the underlying obligations.
The
Funds review the creditworthiness of those banks and dealers with which
the
Funds enter into repurchase agreements to evaluate potential risks.
OPTION CONTRACTS: The Selected Growth Stock Portfolio may engage in
option
contracts. Upon the purchase of a put option or a call option by the Fund,
the
premium paid is recorded as an investment, the value of which
is
marked-to-market daily. When a purchased option expires, the Fund will realize
a
loss in the amount of the cost of the option. When the Fund enters into
a
closing sale transaction, the Fund will realize a gain or loss depending
on
whether the sales proceeds from the closing sale transaction are greater or
less
than the cost of the option. When the Fund exercises a put option, it
will
realize a gain or loss from the sale of the underlying security and the
proceeds
from such sale will be decreased by the premium originally paid. When the
Fund
exercises a call option, the cost of the security which the Fund purchases
upon
exercise will be increased by the premium originally paid.
When a Fund writes a call option or a put option, an amount equal to
the
premium received by the Fund is recorded as a liability, the value of which
is
marked-to-market daily. When a written option expires, the Fund realizes a
gain
equal to the amount of the premium received. When the Fund enters into a
closing
purchase transaction, the Fund realizes a gain (or loss if the cost of
the
closing purchase transaction exceeds the premium received when the option
was
sold) without regard to any unrealized gain or loss on the underlying
security,
and the liability related to such option is eliminated. When a call option
is
exercised, the Fund realizes a gain or loss from the sale of
the
35
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
SELECTED GROWTH STOCK PORTFOLIO
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
underlying security and the proceeds from such sale are increased by the
premium
originally received. When a put option is exercised, the amount of the
premium
originally received will reduce the cost of the security which the
Fund
purchased upon exercise.
The risk associated with purchasing options is limited to the
premium
originally paid. The risk in writing a call option is the Fund may forego
the
opportunity of profit if the market price of the underlying security
increases
and the option is exercised. The risk in writing a put option is that the
Fund
may incur a loss if the market price of the underlying security decreases
and
the option is exercised.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions
are
recorded as of the trade date. Interest income is recorded on the accrual
basis.
Dividend income is recorded on the ex-dividend date. Realized gains and
losses
on investments sold are recorded on the basis of identified cost.
Investment
income and realized and unrealized gains and losses are allocated based upon
the
relative net assets of each class of shares.
FEDERAL INCOME TAXES: The Funds intend to qualify as regulated
investment
companies by complying with the requirements of the Internal Revenue Code
of
1986, as amended and applicable to regulated investment companies and
by
distributing substantially all of their taxable income to their
shareholders.
Therefore, no Federal income tax provision is required.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net
investment
income of the Daily Income Fund and the Municipal Income Fund are determined
on
a class level and are declared daily and paid monthly. Dividends from
net
investment income of the Selected Growth Stock Portfolio are declared and
paid
annually. Capital gains, unless offset by any available capital
loss
carryforward, are distributed to shareholders annually after the close of
the
fiscal year in which earned or more frequently to maintain the Fund's net
asset
value of $1.00 per share for the Daily Income Fund and Municipal Income Fund.
In
order to avoid the application of a 4% non-deductible excise tax on
certain
undistributed amounts of ordinary income and capital gains, each Fund may
make
additional distributions of any undistributed ordinary income or capital
gains
before each December 31, and expects to make any other distributions as
are
necessary to avoid the application of this tax. Income
36
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
SELECTED GROWTH STOCK PORTFOLIO
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
distributions and capital gain distributions are determined in accordance
with
income tax regulations which may differ from generally accepted
accounting
principles. These differences are primarily due to differing treatments
of
income and gains on various investment securities held by the Funds,
timing
differences and differing characterization of distributions made by each Fund
as
a whole.
For the period ended July 31, 1994, permanent differences resulting from
book
and tax accounting for organizational costs were reclassified to paid-in
capital
at period end.
2. INVESTMENT ADVISORY FEE, ADMINISTRATION FEE AND OTHER
RELATED PARTY TRANSACTIONS
Lehman Brothers Global Asset Management Inc. ("LBGAM") serves as the
Funds'
investment adviser pursuant to separate investment advisory agreements. LBGAM
is
a wholly-owned subsidiary of Lehman Brothers Holdings Inc. ("Holdings").
Prior
to May 31, 1994, all of the issued and outstanding common stock
(representing
92% of the voting stock) of Holdings was held by American Express
Company
("American Express"). The remainder of Holding's voting stock was owned
by
Nippon Life Insurance Company. On May 31, 1994, American Express distributed
to
holders of common stock of American Express all outstanding shares of
common
stock of Holdings. As of May 31, 1994, Nippon Life Insurance Company owned
11.2%
of the outstanding voting securities of Holdings. Under the investment
advisory
agreements, the Daily Income Fund and the Municipal Income Fund pay a
monthly
fee at an annual rate of 0.30% of the value of such Fund's average daily
net
assets. The Selected Growth Stock Portfolio pays a monthly fee at an annual
rate
of 0.75% of the value of the Fund's average daily net assets. LBGAM
may
voluntarily waive fees and reimburse expenses. For the period ended July
31,
1994, LBGAM voluntarily waived fees and reimbursed expenses as follows:
<TABLE>
<CAPTION>
EXPENSES
FEES WAIVED
REIMBURSED
<S> <C> <C>
-----------------------------------------------------------------
Daily Income Fund $918,678 -
- -
Municipal Income Fund 245,504 -
- -
Selected Growth Stock Portfolio 25,460
$11,440
-----------------------------------------------------------------
</TABLE>
37
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
SELECTED GROWTH STOCK PORTFOLIO
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Shareholder Services Group, Inc. ("TSSG"), a wholly-owned subsidiary
of
First Data Corporation, serves as the Funds' administrator pursuant to
an
administration agreement. Under the administration agreement each Fund pays
a
monthly fee at an annual rate of 0.20% of the value of its respective
average
daily net assets. Prior to the close of business on May 6, 1994, The
Boston
Company Advisors, Inc. ("Boston Advisors"), a wholly-owned subsidiary of
Mellon
Bank Corporation ("Mellon"), served as the Funds' administrator and
received
fees equivalent to the current rate for its services. On May 6, 1994,
Mellon
sold the assets comprising Boston Advisors' third party mutual fund business
to
TSSG. Effective as of the close of business on that day, TSSG became
the
administrator pursuant to an assignment to TSSG by Boston Advisors of the
Funds'
administration agreement. TSSG may voluntarily waive fees and
reimburse
expenses. For the period ended July 31, 1994, Boston Advisors and
TSSG
voluntarily waived fees and reimbursed expenses as follows:
<TABLE>
<CAPTION>
FEES WAIVED
FEES
BY
WAIVED EXPENSES
BOSTON
BY REIMBURSED
ADVISORS
TSSG BY TSSG
<S> <C> <C>
<C>
-----------------------------------------------------------------
Daily Income Fund $548,029
$78,490 --
Municipal Income Fund 138,772
15,298 --
Selected Growth Stock Portfolio --
6,790 $ 3,051
-----------------------------------------------------------------
</TABLE>
For the period ended July 31, 1994, the Selected Growth Stock
Portfolio
incurred total brokerage commissions of $21,670, of which $14,392 was paid
to
Lehman Brothers Inc. ("Lehman Brothers").
A CDSC may be imposed upon the redemption of CDSC Shares and Portfolio
Shares
within two years after the date of purchase. The amount of the CDSC will
depend
on the number of years since the shareholder made the purchase payment
from
which the amount is being redeemed. During the period ended July 31,1994,
Lehman
Brothers received $908 in CDSC Fees for the Portfolio Shares, and no CDSC
Fees
for the CDSC Shares.
No employee of Lehman Brothers, LBGAM or TSSG receives any compensation
from
the Company for serving as an officer or Director of the
Company.
38
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
SELECTED GROWTH STOCK PORTFOLIO
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company pays each Director who is not a director, an officer or employee
of
Lehman Brothers, LBGAM or TSSG or their affiliates a fee of $20,000 per
annum,
plus $500 per meeting attended, and reimburses each of them for travel
and
out-of-pocket expenses.
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary
of
Mellon, serves as the Funds' custodian. TSSG serves as the Funds'
transfer
agent.
3. SERVICE AGREEMENTS
Lehman Brothers acts as the distributor of Fund shares.
Pursuant to Rule 12b-1 under the Investment Company Act of 1940, the
Company
has adopted a plan of distribution (the "Plan of Distribution") with respect
to
each class of shares of the Daily Income Fund and the Municipal Income
Fund.
Under the Plan of Distribution the Daily Income Fund and the Municipal
Income
Fund have agreed with respect to each class to pay Lehman Brothers monthly
for
advertising, marketing and distributing its shares, at an annual rate of
0.25%
of the value of its respective average daily net assets.
In addition, the Company has adopted a services and distribution plan
("The
Plan") with respect to the Selected Growth Stock Portfolio. Under the Plan,
the
Selected Growth Stock Portfolio has agreed to pay Lehman Brothers a service
fee,
accrued daily and paid monthly, at an annual rate of 0.25% of the value of
the
Fund's average daily net assets, and a distribution fee, accrued daily and
paid
monthly, at an annual rate of 0.75% of the value of the Fund's average daily
net
assets. The service fee is used by Lehman Brothers to pay
Investment
Representatives or Introducing Brokers for servicing shareholder accounts.
The
distribution fee is paid to Lehman Brothers for advertising, marketing
and
distributing Portfolio shares.
For the period ended July 31, 1994, each Fund incurred the
following
distribution fees:
<TABLE>
<CAPTION>
PORTFOLIO
SELECT SHARES CDSC SHARES
SHARES
<S> <C> <C> <C>
-----------------------------------------------------------------
Daily Income Fund $1,821,009 -- --
Municipal Income Fund 558,352 $2 --
Selected Growth Stock Portfolio -- --
$25,460
-----------------------------------------------------------------
</TABLE>
39
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
SELECTED GROWTH STOCK PORTFOLIO
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Selected Growth Stock Portfolio incurred service fees of $8,487 for
the
period ended July 31, 1994.
For the period ended July 31, 1994, Lehman Brothers waived fees as follows:
<TABLE>
<CAPTION>
FEES WAIVED
<S> <C> <C>
-----------------------------------------------------------------
Daily Income Fund $509,633
Municipal Income Fund 156,345
-----------------------------------------------------------------
</TABLE>
4. EXPENSE ALLOCATION
Expenses for each Fund not directly attributable to the operation of
any
class of shares are prorated among the classes based upon the relative
net
assets of each class of shares. Operating expenses directly attributable to
a
class of shares are charged to that class' operations.
5. PURCHASE AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding short-
term
investments, aggregated $12,041,922 and $1,392,813, respectively, for the
period
ended July 31, 1994 for the Selected Growth Stock Portfolio. At July 31,
1994,
aggregate gross unrealized appreciation for all securities in which there is
an
excess of value over tax cost was $339,133 and aggregate gross
unrealized
depreciation for all securities in which there is an excess of tax cost
over
value was $527,832 for the Selected Growth Stock Portfolio. Net
unrealized
depreciation was $188,699 for the Selected Growth Stock Portfolio at July
31,
1994.
Written option activity for the Selected Growth Stock Portfolio for
the
period ended July 31, 1994 was as follows:
<TABLE>
<CAPTION>
NUMBER OF
CONTRACTS PREMIUM
<S> <C> <C>
-----------------------------------------------------------------
Option outstanding at May 20, 1994 0 $ 0
Option written 50 34,749
-----------------------------------------------------------------
Option outstanding at July 31, 1994 50 $34,749
-----------------------------------------------------------------
</TABLE>
40
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
SELECTED GROWTH STOCK PORTFOLIO
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SHARES OF CAPITAL STOCK
At July 31, 1994, the Board of Directors have authority to
issue
10,000,000,000 shares of capital stock ($0.001 par value) for the
Lehman
Brothers Funds, Inc. The shares of the Daily Income Fund and the
Municipal
Income Fund are divided into two classes of shares, Select Shares and
CDSC
Shares. Since the Daily Income Fund and the Municipal Income Fund have
sold
shares, issued shares as reinvestments of dividends and redeemed shares only
at
a constant net asset value of $1.00 per share, the number of shares
represented
by such sales, reinvestments and redemptions is the same as the dollar
amounts
shown below for such transactions.
The tables below summarize the capital stock transactions for the
Daily
Income Fund and the Municipal Income Fund:
<TABLE>
<CAPTION>
PERIOD ENDED
07/31/94*
<S> <C>
SHARES AND AMOUNT
-----------------------------------------------------------------
DAILY INCOME FUND:
Select Shares:
Sold $ 4,591,256,544
Dividend Reinvestment 19,498,755
Redeemed (3,792,217,038)
-----------------------------------------------------------------
Net increase $ 818,538,261
-----------------------------------------------------------------
<FN>
* The Daily Income Fund Select Shares commenced operations on August 2, 1993.
</TABLE>
At July 31, 1994, the Daily Income Fund had 100 CDSC Shares issued with a
value of $100.00 to Lehman Brothers. During the period ended July 31, 1994,
there was no income or expenses allocated to the 100 CDSC Shares.
41
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
SELECTED GROWTH STOCK PORTFOLIO
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
PERIOD ENDED
07/31/94*
<S> <C>
SHARES AND AMOUNT
-----------------------------------------------------------------
MUNICIPAL INCOME FUND:
Select Shares:
Sold $1,214,682,908
Dividend Reinvestment 4,150,160
Redeemed (954,395,614)
-----------------------------------------------------------------
Net increase $ 264,437,454
-----------------------------------------------------------------
<CAPTION>
PERIOD ENDED
07/31/94**
SHARES AND AMOUNT
<S> <C>
-----------------------------------------------------------------
MUNICIPAL INCOME FUND:
CDSC Shares:
Sold $9,888
-----------------------------------------------------------------
Net increase $9,888
-----------------------------------------------------------------
<FN>
* The Municipal Income Fund Select Shares commenced operations on August 2,
1993.
** The Municipal Income Fund CDSC Shares commenced operations on July 6, 1994.
</TABLE>
The table below summarizes the capital stock transactions for the
Selected
Growth Stock Portfolio:
<TABLE>
<CAPTION>
PERIOD ENDED
07/31/94***
<S> <C> <C>
SHARES AMOUNT
-----------------------------------------------------------------
SELECTED GROWTH STOCK PORTFOLIO:
Portfolio Shares:
Sold 2,712,257 $26,711,937
Redeemed (5,845) (57,611)
-----------------------------------------------------------------
Net increase 2,706,412 $26,654,326
-----------------------------------------------------------------
<FN>
*** The Selected Growth Stock Portfolio commenced operations on May 20, 1994.
</TABLE>
42
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
SELECTED GROWTH STOCK PORTFOLIO
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. ORGANIZATION COSTS
The Funds bear all costs in connection with their organization including
fees
and expenses of registering and qualifying their shares for distribution
under
Federal and state securities regulations. All such costs are being amortized
on
the straight-line method over a period of five years from the commencement
of
operations of the Funds. In the event that any of the initial shares of
the
Funds are redeemed during such amortization period, the Funds will be
reimbursed
for any unamortized organization costs in the same proportion as the number
of
shares redeemed bears to the number of initial shares held at the time
of
redemption.
43
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Shareholders and Directors
Lehman Brothers Funds, Inc.
We have audited the accompanying statements of assets and
liabilities,
including the portfolios of investments, of Lehman Brothers Funds, Inc.
(the
"Fund"), (comprising, respectively, the Lehman Brothers Daily Income Fund,
the
Lehman Brothers Municipal Income Fund and the Lehman Brothers Selected
Growth
Stock Portfolio) as of July 31, 1994, and the related statements of
operations
and changes in net assets, and the financial highlights for the period
indicated
therein for each Fund class of shares. These financial statements and
financial
highlights are the responsibility of the Fund's management. Our
responsibility
is to express an opinion on these financial statements and financial
highlights
based on our audit.
We conducted our audit in accordance with generally accepted standards.
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 July 31, 1994,
by
correspondence with the custodian and brokers or other appropriate
auditing
procedures where replies from brokers were not received. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to
above present fairly, in all material respects, the financial position of
each
of the respective portfolios constituting Lehman Brothers Funds, Inc. at
July
31, 1994, the results of their operations and changes in their net assets
and
financial highlights for the period indicated therein for each Fund class
of
shares, in conformity with generally accepted accounting principles.
Boston, Massachusetts
August 31, 1994
44
<PAGE>
LEHMAN BROTHERS
Lehman Brothers Inc. All Rights Reserved
Member SIPC
