<PAGE>
Lehman Brothers Funds, Inc.
-----------
DAILY INCOME
FUND
---------------
MUNICIPAL INCOME
FUND
---------------
-------------------
SEMI-ANNUAL
REPORT
January 31, 1994
---------------------
LEHMAN BROTHERS
<PAGE>
DEAR SHAREHOLDER:
We are pleased to provide our semi-annual report for the Lehman Brothers
Daily Income Fund (the "Fund") for the period ending January 31, 1994. During
the past six months the Fund paid dividend distributions which produced an
annualized net yield of 2.75%. As of the end of the period, the Fund's seven (7)
day yield was 2.75%.
The Fund was launched in early August of 1993 during a period of low
inflation, concerns about employment and sluggish growth. With the exception of
the Federal Funds rate, which was targeted at 3%, short-term interest rates had
declined for most of the year, and the short-term yield curve was relatively
flat. The first signs of economic strength appeared in September, 1993, and
accelerated throughout the fourth quarter. Although inflation remained quite
manageable, investors grew more cautious, particularly in the bond market.
Participants in the market had to question to what degree this strength could be
sustained and whether or not the Federal Reserve Board ("Federal Reserve") would
intervene to dampen the expansion for the sake of providing an atmosphere
conducive to price stability. In early January, 1994, the markets staged a
strong but brief rally based upon a weaker December, 1993, employment report and
seasonally high levels of cash that had to be invested.
In spite of this market action, most other measures of economic activity
remained robust, which led to the February 4, 1994 Federal Reserve tightening of
the monetary system through an increase in the Federal Funds rate, to 3.25%, up
25 basis points. All fixed income markets adjusted to the increase and the
short-term yield curve steepened noticeably. There is continued concern that
further tightening is possible if economic strength continues. Although
forecasts of economic activity have been clouded by the temporary impact of the
California earthquake and severe winter weather in the Northeast, healthy retail
sales and durable goods orders continue to reflect a sound economy.
The Fund is in a relatively favorable position to respond to the increase in
rates, with an average maturity around 53 days and a substantial portion of its
assets in overnight investments. We expect to remain relatively short over the
near term as well. This is consistent with the Fund's overall investment
approach, the key elements of which are:
1) only moderate manipulation of the average maturity to reflect our interest
rate outlook;
2) more emphasis on trading execution using highly experienced professionals
who thoroughly shop the markets; and
1
<PAGE>
3) emphasis on the importance of securities selection based upon superior
credit analysis, using extensive in-house and outside resources in an
effort to quickly respond to opportunities such as new issues, improving
credits, and complex credits.
In addition to our relatively short cash position, we have bought floating
rate securities to enhance the yield, and we will continue to use them.
We at Lehman Brothers Global Asset Management Inc. want to express our
sincere appreciation for the trust that you, the investors in the Fund, have
placed in us, and we will continue to do our best to provide to you the highest
quality money market fund investment vehicle, bearing a highly competitive
yield. We appreciate the opportunity to serve you and we thank you for your
continued support.
Sincerely yours,
Clinton J. Kendrick
President
March 1, 1994
2
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS January 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 Securities 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
53 Days
3
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS January 31, 1994 (unaudited)
<TABLE>
<CAPTION>
MARKET
FACE VALUE
VALUE (NOTE 1)
<C> <S> <C>
- -------------------------------------------------------------------------------
COMMERCIAL PAPER -- 37.0%
$ 10,000,000 Alliance & Leicester Building Society,
3.379%+ due 07/21/1994 $ 9,836,597
4,000,000 BETA Finance Inc.,
3.336%+ due 02/16/1994 3,933,307
Calcot Ltd.:
5,000,000 3.339%+ due 02/04/1994 4,979,681
2,000,000 3.350%+ due 02/14/1994 1,988,345
4,000,000 3.345%+ due 02/25/1994 3,975,986
4,000,000 3.169%+ due 03/21/1994 3,976,200
4,200,000 3.217%+ due 03/21/1994 4,177,227
2,000,000 Canadian Imperial Holdings Inc.,
3.377%+ due 02/08/1994 1,966,431
Central Hispano North American Capital
Corporation:
2,400,000 3.408%+ due 02/10/1994 2,358,907
2,000,000 3.355%+ due 02/14/1994 1,967,000
1,000,000 3.333%+ due 02/22/1994 984,238
Countrywide Funding Corporation:
12,500,000 3.094%+ due 02/04/1994 12,484,979
4,000,000 3.156%+ due 02/10/1994 3,992,300
15,000,000 3.094%+ due 02/10/1994 14,983,262
7,350,000 CSC Enterprises,
3.142%+ due 03/09/1994 7,322,521
Den Danske Corp.:
2,000,000 3.407%+ due 02/03/1994 1,966,314
2,000,000 3.294%+ due 03/11/1994 1,967,060
35,000,000 Diamond Asset Funding Corporation,
3.112%+ due 02/25/1994 34,870,403
General Electric Capital Corporation:
2,000,000 3.376%+ due 02/02/1994 1,966,800
2,500,000 3.283%+ due 02/16/1994 2,459,625
General Motors Acceptance Corporation:
1,000,000 3.407%+ due 02/02/1994 983,157
15,000,000 3.167%+ due 03/21/1994 14,919,937
24,866,000 Golden Managers Acceptance Corporation,
3.138%+ due 02/16/1994 24,805,465
2,000,000 Goldman Sachs & Company,
3.408%+ due 02/09/1994 1,965,756
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
4
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) January 31, 1994 (unaudited)
<TABLE>
<CAPTION>
MARKET
FACE VALUE
VALUE (NOTE 1)
- -------------------------------------------------------------------------------
<C> <S> <C>
COMMERCIAL PAPER -- (CONTINUED)
Merrill Lynch & Company:
$ 2,000,000 3.302%+ due 02/17/1994 $ 1,967,753
3,000,000 3.304%+ due 02/19/1994 2,951,629
2,000,000 Morgan Stanley & Company,
3.408%+ due 02/07/1994 1,966,128
19,000,000 New Center Asset Trust,
3.286%+ due 02/04/1994 18,939,504
10,000,000 Nissan Capital Corporation,
3.338%+ due 04/20/1994 9,886,333
Nordbanken N.A., Inc.:
1,000,000 3.500%+ due 02/01/1994 982,800
4,500,000 3.366%+ due 02/22/1994 4,425,249
20,000,000 3.366%+ due 07/19/1994 19,669,000
5,000,000 3.335%+ due 07/20/1994 4,918,000
10,000,000 3.325%+ due 07/25/1994 9,835,592
Paine Webber, Inc.:
15,000,000 3.378%+ due 03/14/1994 14,874,375
25,000,000 3.224%+ due 04/15/1994 24,813,333
Postipankki US Inc.:
6,000,000 3.407%+ due 03/01/1994 5,899,500
3,000,000 3.345%+ due 03/08/1994 2,950,650
6,000,000 3.398%+ due 07/15/1994 5,897,573
10,000,000 3.355%+ due 07/20/1994 9,835,000
Svenska Handelsbanken:
4,000,000 3.345%+ due 02/15/1994 3,934,200
5,000,000 3.335%+ due 03/02/1994 4,917,544
------------
TOTAL COMMERCIAL PAPER (COST $313,495,661) 313,495,661
------------
CORPORATE BONDS AND NOTES -- 30.7%
25,000,000 Abbey National PLC,
3.650% due 11/15/1994# 24,985,982
20,000,000 American Telegraph & Telephone Capital
Corporation,
3.500% due 01/26/1995 20,000,000
1,250,000 Bankers Trust New York Corporation,
9.375% due 05/15/1994 1,270,220
Bear Stearns & Company, Inc.:
25,000,000 3.260% due 10/05/1994 25,000,000
15,000,000 3.550% due 10/21/1994 15,000,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) January 31, 1994 (unaudited)
<TABLE>
<CAPTION>
MARKET
FACE VALUE
VALUE (NOTE 1)
- -------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
$ 9,000,000 Concord Leasing Inc., Variable rate,
3.325% due 09/21/1994 $ 9,000,000
15,000,000 FCC National Bank, Variable rate,
3.290% due 01/11/1995 15,000,000
General Motors Acceptance Corporation:
6,000,000 6.050% due 06/01/1994 6,044,554
2,450,000 8.700% due 10/17/1994 2,526,887
1,000,000 6.450% due 01/17/1995 1,018,134
9,000,000 6.650% due 02/10/1995 9,234,774
Goldman Sachs & Company:
35,000,000 3.375% due 10/12/1994#, Variable rate 35,000,000
5,000,000 3.437% due 02/28/1994 5,000,000
Household Finance Corporation, Variable rate:
10,000,000 3.490% due 08/18/1994 9,989,194
10,000,000 3.410% due 01/13/1995 10,000,000
20,000,000 3.520% due 01/18/1995 20,000,000
200,000 Mitsubishi Bank Ltd., New York,
10.300% due 03/23/1994 201,691
35,000,000 Morgan Stanley Group Inc., Variable rate,
3.375% due 11/08/1994 35,000,000
16,000,000 Northern Trust Company,
3.625% due 12/30/1994 15,990,923
------------
TOTAL CORPORATE BONDS AND NOTES (COST $260,262,359) 260,262,359
------------
U.S. GOVERNMENT AGENCY SECURITIES -- 6.0%
Federal Farm Credit Bank, Variable rate,
20,000,000 3.200% due 09/07/1994 19,987,207
------------
Federal National Mortgage Association, Variable rate:
25,000,000 3.600% due 10/07/1996 25,000,000
5,000,000 3.350% due 09/02/1997 5,000,000
------------
30,000,000
------------
Student Loan Marketing Association, Variable rate,
1,000,000 3.395% due 11/27/1996 1,005,240
------------
TOTAL U.S. GOVERNMENT AGENCY SECURITIES (COST $50,992,447) 50,992,447
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) January 31, 1994 (unaudited)
<TABLE>
<CAPTION>
MARKET
FACE VALUE
VALUE (NOTE 1)
- -------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- 3.8%
$ 17,000,000 Cuyahoga County, Ohio,
4.170% due 12/30/1994 $ 17,032,767
15,000,000 Secondary Market Services Corporation, Hawaii,
3.40% due 09/01/2010++ 15,000,000
------------
TOTAL MUNICIPAL BONDS AND NOTES (COST $32,032,767) 32,032,767
------------
ASSET-BACKED SECURITIES -- 2.4% (COST $19,995,376)
20,000,000 Capital Auto Receivables Asset Trust, 1993-3,
Class A-1,
3.300% due 11/15/1994 19,995,376
------------
CERTIFICATES OF DEPOSIT -- 1.3%
1,000,000 Mitsubishi Bank,
3.340% due 02/01/1994 1,000,000
5,000,000 Mitsubishi Bank, New York,
3.470% due 04/14/1994 5,001,592
5,000,000 Norinchukin Bank,
3.340% due 07/25/1994 5,000,238
------------
TOTAL CERTIFICATES OF DEPOSIT (COST $11,001,830) 11,001,830
------------
REPURCHASE AGREEMENT -- 15.8% (COST $134,225,000)
134,225,000 Agreement with Paine Webber Group, 3.250% dated
01/31/1994, to be repurchased at $134,237,118
on 02/01/1994 collateralized by $136,549,281
FNMA/FHLMC mortgage-backed securities with
various maturities and coupon rates 134,225,000
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST $822,005,440*) 97.0% 822,005,440
OTHER ASSETS AND LIABILITIES (NET) 3.0 25,661,010
- -------------------------------------------------------------------------------
NET ASSETS 100.0% $847,666,450
- -------------------------------------------------------------------------------
<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.
++ Put bonds and notes have demand features which mature within one year.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
DEAR SHAREHOLDER:
We are pleased to provide our semi-annual report for the Lehman Brothers
Municipal Income Fund (the "Fund") for the period ending January 31, 1994.
During the past six months the Fund paid dividend distributions which produced
an annualized net yield of 2.16%. As of the end of the period, the Fund's seven
(7) day yield was 1.91%.
Short-term tax-exempt interest rates had been declining prior to the
formation of the Fund in August and continued to do so throughout the balance of
the year. Expectations of continued low inflation provided all the impetus the
market needed to drive rates to near record lows. Since the inception of the
Fund, we have met the challenge of maximizing our returns in the face of low
prevailing interest rates by keeping the average maturity of the Fund's
portfolio longer versus the industry average. This strategy was adopted in order
to take advantage of the positive slope in the tax-exempt yield curve that was
typical during 1993. By remaining relatively long we were able to outperform
industry averages on a consistent basis.
The fourth quarter of 1993 began with intermittent signs of strength in the
U.S. economy and began to spread across all sectors as the period unfolded,
causing investors to grow more cautious. While inflation was not viewed to be a
threat, the perception that it eventually would cause problems drove the Federal
Reserve Board to intervene in early February, 1994, which moved rates upward by
25-30 basis points. This action and the prospect for further tightening over the
course of 1994 suggests that the Fund maintain a shorter average maturity and a
higher percentage in daily and weekly reset variable rate demand notes. This
will also allow the Fund to take advantage of opportunities that present
themselves seasonally due to supply-demand imbalances.
We at Lehman Brothers Global Asset Management Inc. want to express our
sincere appreciation for the trust that you, the investors in the Fund, have
placed in us, and we will continue to do our best to provide to you the highest
quality money market fund investment vehicle, bearing a highly competitive
yield. We appreciate the opportunity to serve you and we thank you for your
continued support.
Sincerely yours,
Clinton J. Kendrick
President
March 1, 1994
8
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- ---------------------------------------------
PORTFOLIO HIGHLIGHTS January 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 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>
AVERAGE WEIGHTED MATURITY OF PORTFOLIO
81 Days
9
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS January 31, 1994 (unaudited)
<TABLE>
<CAPTION>
MARKET
FACE VALUE
VALUE (NOTE 1)
<C> <S> <C>
- -------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES -- 98.6%
ALABAMA -- 2.1%
$ 4,500,000 Phenix City, Alabama, Industrial Development
Board, Environmental Impact Revenue,
2.790% due 12/01/2023++ $ 4,500,000
------------
ARIZONA -- 4.1%
4,000,000 Arizona Educational Loan Marketing Corporation,
2.500% due 12/01/2003+++ 4,000,000
Pima County, Arizona, Industrial Development
Authority Revenue:
500,000 2.250% due 12/01/2022+++ 500,000
4,400,000 2.400% due 05/01/2025+++ 4,400,000
------------
8,900,000
------------
CALIFORNIA -- 13.4%
400,000 California Health Facilities, Hospital Revenue,
Series B,
2.000% due 10/01/2021+++ 400,000
3,650,000 California Higher Education Loan Authority,
Series E-1,
2.250% due 12/01/2022+++ 3,650,000
2,805,000 California State, Revenue Anticipation Notes,
3.500% due 06/28/1994 2,813,117
1,000,000 Chino, California, Tax and Revenue Anticipation
Notes,
3.250% due 07/29/1994 1,000,906
1,000,000 Huntington Beach, California, Tax and Revenue
Anticipation Notes,
3.250% due 07/29/1994 1,001,384
1,500,000 Indio, California, Multifamily Housing Revenue,
2.500% due 06/01/2005+++ 1,500,000
300,000 Irvine Ranch, California, Water District, Series
B,
2.150% due 10/01/2004+ 300,000
300,000 Los Angeles County, California, Housing
Authority,
(RiverPark Apartments Project),
2.550% due 09/01/2010+++ 300,000
300,000 Los Angeles County, California, Metropolitan
Transportation Authority,
2.200% due 07/01/2020+++ 300,000
300,000 Los Angeles County, California, Multifamily
Housing Authority Revenue,
2.400% due 10/01/2014+++ 300,000
9,000,000 Los Angeles County, California, Tax and Revenue
Anticipation Notes,
3.000% due 06/30/1994 9,007,803
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) January 31, 1994 (unaudited)
<TABLE>
<CAPTION>
MARKET
FACE VALUE
VALUE (NOTE 1)
- -------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
CALIFORNIA -- (CONTINUED)
$ 1,700,000 Marion County, California, Tax and Revenue
Anticipation Notes,
3.000% due 07/06/1994 $ 1,700,022
200,000 Placer County, California, Industrial Development
Authority,
Industrial Revenue, (Chesapeake Industries
Project),
2.000% due 12/01/1995+ 200,000
200,000 Sacramento County, California, Multifamily
Housing Authority Revenue, Series A,
2.300% due 04/15/2007+++ 200,000
3,000,000 Sacramento County, California, Tax and Revenue
Anticipation Notes,
3.000% due 07/29/1994 3,003,915
500,000 San Diego, California, Industrial Development
Revenue,
(Kaiser Project), Series A,
2.300% due 10/01/2007+++ 500,000
1,000,000 San Diego County, California, Multifamily Housing
Authority Revenue, Series C,
2.400% due 05/01/2005+++ 1,000,000
800,000 San Francisco, California, Tax and Revenue
Anticipation Notes,
3.250% due 07/15/1994 801,839
200,000 Santa Clara County -- Camino, California,
Hospital District, Series A,
6.850% due 08/01/2015+++ 200,000
1,000,000 Southern California, Rapid Transportation
District, Series A,
3.000% due 02/22/1994 1,000,091
------------
29,179,077
------------
COLORADO -- 0.7%
800,000 Colorado Student Obligation Bond Authority,
Series A,
2.800% due 03/01/2024+++ 800,000
750,000 Englewood, Colorado, Industrial Development
Authority Revenue,
2.300% due 12/01/2010+++ 750,000
------------
1,550,000
------------
FLORIDA -- 1.6%
500,000 Florida Housing Finance Agency Revenue,
Multifamily Housing,
2.300% due 12/01/2011+++ 500,000
400,000 Jacksonville, Florida, Health Facilities
Authority,
2.250% due 06/01/2020+ 400,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) January 31, 1994 (unaudited)
<TABLE>
<CAPTION>
MARKET
FACE VALUE
VALUE (NOTE 1)
- -------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
FLORIDA -- (CONTINUED)
$ 1,500,000 St. Johns County, Florida, Industrial Development
Authority Revenue, Series 86,
2.375% due 12/01/2016+++ $ 1,500,000
1,100,000 St. Lucie County, Florida, Pollution Control
Revenue,
2.300% due 05/01/2027+++ 1,100,000
------------
3,500,000
------------
GEORGIA -- 3.1%
3,000,000 Georgia Municipal Electric Power Authority,
Series 1985-A,
Pre-refunded,
10.500% due 01/01/2020++ 3,267,938
3,390,000 Georgia State, Residential Financing, Series-A,
2.850% due 12/01/2020++ 3,390,542
------------
6,658,480
------------
ILLINOIS -- 8.3%
5,000,000 Illinois Development Finance Authority Revenue,
(River Oaks Project),
2.500% due 11/01/2023+++ 5,000,000
Illinois State, Certificates of Obligation:
1,500,000 3.250% due 04/15/1994 1,501,351
2,000,000 3.500% due 06/15/1994 2,004,658
5,100,000 Illinois State, Toll Highway Authority, Toll
Revenue,
2.150% due 01/01/2010+++ 5,100,000
4,500,000 St. Charles, Illinois, Industrial Development
Authority Revenue, (Pier 1),
2.400% due 12/15/2026+++ 4,500,000
------------
18,106,009
------------
INDIANA -- 5.8%
2,000,000 Indiana Health Facility Authority, (Methodist
Hospital Inc.), Series B,
2.250% due 09/01/2022+++ 2,000,000
8,500,000 Indiana Secondary Market Education Loan Revenue,
Series B,
2.250% due 12/01/2014+++ 8,500,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) January 31, 1994 (unaudited)
<TABLE>
<CAPTION>
MARKET
FACE VALUE
VALUE (NOTE 1)
- -------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
INDIANA -- (CONTINUED)
$ 2,000,000 Indianapolis Industrial Economic Development
Authority Revenue,
3.200% due 09/01/1995+++ $ 2,000,000
------------
12,500,000
------------
IOWA -- 1.4%
3,000,000 Iowa State, Transportation Authority Revenue,
Series A,
3.250% due 06/30/1994 3,005,617
------------
KENTUCKY -- 1.6%
1,000,000 Kentucky Housing Corporation, Housing Revenue,
Series D,
2.750% due 01/01/2022++ 1,000,000
2,495,000 Kentucky Rural Economic Development Authority
Revenue,
2.500% due 12/01/2009+++ 2,495,000
------------
3,495,000
------------
LOUISIANA -- 2.1%
200,000 East Baton Rouge, Louisiana, Pollution Control
Revenue,
2.050% due 03/01/2022+ 200,000
Louisiana Housing Finance Agency, Revenue
Refinancing:
1,000,000 Multifamily, Alouette Project,
3.500% due 01/01/2026+++ 1,000,000
3,355,000 Multifamily, New Orleans Project,
3.500% due 12/01/2025+++ 3,355,000
------------
4,555,000
------------
MAINE -- 1.0%
2,270,000 Maine State, Tax and Revenue Anticipation Notes,
3.500% due 06/30/1994 2,276,525
------------
MARYLAND -- 6.4%
10,000,000 Baltimore, Maryland, Pollution Control Revenue,
2.200% due 02/01/2003+++ 10,000,000
Maryland State, Community Development
Administration:
2,335,000 3.400% due 04/01/2017++ 2,335,060
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) January 31, 1994 (unaudited)
<TABLE>
<CAPTION>
MARKET
FACE VALUE
VALUE (NOTE 1)
- -------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
MARYLAND -- (CONTINUED)
$ 1,500,000 Multifamily Housing, Series B,
2.700% due 04/01/2017++ $ 1,500,000
------------
13,835,060
------------
MICHIGAN -- 1.6%
3,380,000 Michigan, Municipal Bond Authority Revenue Notes,
Series B-3,
3.000% due 05/05/1994 3,382,179
------------
MISSISSIPPI -- 0.1%
150,000 Mississippi Business Finance Corporation, Series
C,
(Aircruisers Project),
2.550% due 10/01/2004+++ 150,000
------------
MISSOURI -- 4.5%
2,305,000 Kirksville, Missouri, Industrial Development
Authority Revenue, (Optech Project),
2.500% due 10/01/2009+++ 2,305,000
Missouri Higher Education Student Loan Authority:
1,500,000 Series A,
2.500% due 06/01/2017+++ 1,500,000
4,000,000 Series B,
2.300% due 06/01/2020+++ 4,000,000
2,000,000 University of Missouri, Capital Notes Project,
Series FY - 4,
3.000% due 06/30/1994 2,000,639
------------
9,805,639
------------
NEVADA -- 0.5%
500,000 Clark County, Nevada, Industrial Development
Revenue,
(Nevada Power Company),
2.800% due 11/01/2018+++ 500,000
Nevada State, Department of Communications,
Industrial Development Authority:
200,000 Series A, (Kinplex Project),
2.500% due 01/01/2009+++ 200,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) January 31, 1994 (unaudited)
<TABLE>
<CAPTION>
MARKET
FACE VALUE
VALUE (NOTE 1)
- -------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
NEVADA -- (CONTINUED)
$ 300,000 Series A, (Master Halco Project),
2.600% due 12/01/2009+++ $ 300,000
------------
1,000,000
------------
NEW MEXICO -- 0.7%
1,000,000 Albuquerque, New Mexico, Hospital Revenue,
(Charter Hospital, Inc. Project),
2.050% due 03/01/2014+++ 1,000,000
500,000 Farmington, New Mexico, Pollution Control
Revenue, Series 85-A,
2.800% due 02/01/2015++ 500,000
------------
1,500,000
------------
NEW YORK -- 9.2%
5,000,000 New York, New York, City Municipal Water Finance
Authority, Series A,
2.750% due 04/15/1994 5,000,284
8,030,000 New York, New York, Revenue Anticipation Notes,
Series B,
3.500% due 06/30/1994 8,053,060
400,000 New York, New York, Series E-3,
2.050% due 05/15/1996+ 400,000
3,300,000 New York State, Local Assistance, Series A,
2.050% due 04/01/2022+++ 3,300,000
3,140,000 New York State, Mortgage Agency Revenue, Series
32B,
2.300% due 03/01/1994 3,140,000
------------
19,893,344
------------
NORTH CAROLINA -- 1.4%
2,000,000 Bladen County, North Carolina, Industrial
Facilities & Pollution Control Revenue,
2.400% due 11/01/2020+++ 2,000,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) January 31, 1994 (unaudited)
<TABLE>
<CAPTION>
MARKET
FACE VALUE
VALUE (NOTE 1)
- -------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
NORTH CAROLINA -- (CONTINUED)
$ 1,000,000 North Carolina, Eastern Municipal Power Agency,
2.350% due 01/01/2015++ $ 1,101,315
------------
3,101,315
------------
OHIO -- 2.8%
Cincinnati, Ohio, Student Loan Funding
Corporation, Loan Revenue:
300,000 Series 1983A,
2.550% due 12/29/1998+++ 300,000
500,000 Series-A1,
2.700% due 01/01/2007+++ 500,000
400,000 Columbus, Ohio, Industrial Economic Development
Revenue,
2.200% due 12/01/1995+++ 400,000
5,000,000 Ohio State, Environmental Improvement Development
Revenue,
2.550% due 03/01/2023++ 5,000,000
------------
6,200,000
------------
OKLAHOMA -- 0.3%
550,000 Central Oklahoma Transportation & Parking
Authority
Revenue, Pre-refunded,
8.200% due 07/01/1994 561,590
------------
PENNSYLVANIA -- 1.9%
2,000,000 Pennsylvania State, Higher Education Facilities
Authority Revenue,
2.200% due 06/01/1999+++ 2,000,000
2,200,000 Philadelphia, Pennsylvania, Hospital & Higher
Education Facilities Authority,
2.350% due 06/01/2023+++ 2,200,000
------------
4,200,000
------------
PUERTO RICO -- 0.4%
1,000,000 Commonwealth of Puerto Rico, Government
Development Bank,
1.750% due 12/01/2015+++ 1,000,000
------------
SOUTH CAROLINA -- 2.0%
Piedmont Municipal Power Agency, South Carolina
Electric,
Pre-refunded:
1,985,000 11.000% due 01/01/2014++ 2,194,730
1,000,000 11.000% due 01/01/2025++ 1,104,960
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) January 31, 1994 (unaudited)
<TABLE>
<CAPTION>
MARKET
FACE VALUE
VALUE (NOTE 1)
- -------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
SOUTH CAROLINA -- (CONTINUED)
$ 1,000,000 York County, South Carolina, Pollution Control
Revenue,
(NRU Project), Series 84N-4,
2.700% due 09/15/2014++ $ 1,000,000
------------
4,299,690
------------
SOUTH DAKOTA -- 0.4%
1,000,000 South Dakota, Student Loan Assistance, Series A,
2.700% due 08/01/2004+++ 1,000,000
------------
TENNESSEE -- 3.6%
300,000 Chattanooga, Tennessee, Industrial Development
Revenue,
2.200% due 12/15/2012+++ 300,000
4,000,000 Coffee County, Tennessee, Industrial Development
Board, (Project M),
3.450% due 12/01/2001+++ 4,000,000
1,500,000 Hamilton County, Tennessee, Industrial
Development Board, Industrial Development
Revenue, (Seaboard Feeds Chattanooga Project),
2.375% due 12/01/2017+++ 1,500,000
2,000,000 Metropolitan Nashville Airport Authority,
Tennessee,
Tennessee Airport Revenue,
2.150% due 07/01/2019+++ 2,000,000
------------
7,800,000
------------
TEXAS -- 6.1%
700,000 Capital Health Facilities Development Company,
Texas,
Health Facilities,
2.790% due 12/01/2016+++ 700,000
500,000 Harris County, Texas, Health Facility Development
Corporation, (Saint Lukes), Series B,
2.100% due 02/15/2016+ 500,000
5,400,000 Houston, Texas, Apartment System, Senior Lien,
Series A,
2.350% due 05/04/1994 5,400,000
1,600,000 Mansfield, Texas, Industrial Development
Authority,
(Corporation Project),
2.400% due 11/01/2026+++ 1,600,000
800,000 North Texas Higher Education Authority, Student
Loan Revenue,
2.250% 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) January 31, 1994 (unaudited)
<TABLE>
<CAPTION>
MARKET
FACE VALUE
VALUE (NOTE 1)
- -------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
TEXAS -- (CONTINUED)
San Antonio, Texas, Housing Finance Corporation,
Multifamily Housing:
$ 300,000 (Cape Cod Apartments),
2.650% due 06/01/2020+++ $ 300,000
1,000,000 (Mesa Ridge Apartments),
2.650% due 11/01/2020+++ 1,000,000
3,000,000 Texas State, Tax and Revenue Anticipation Notes,
3.250% due 08/31/1994 3,008,435
------------
13,308,435
------------
UTAH -- 2.3%
2,000,000 Carbon County, Utah, Solid Waste Revenue,
2.650% due 07/01/2008++ 2,000,000
1,300,000 Tooele County, Utah, (Hazardous Treatment
Project), Series A,
2.700% due 11/01/2026++ 1,300,000
1,600,000 Utah State, Board of Regents, Student Loan
Revenue,
2.400% due 11/01/2013+++ 1,600,000
------------
4,900,000
------------
VIRGINIA -- 6.9%
1,500,000 Fairfax County, Virginia, Tender Offer Custodial
Receipt,
2.400% due 05/01/2012+++ 1,500,000
Virginia State, Housing Development Authority,
Commonwealth Mortgage:
1,000,000 Series B, Subseries B -- Stem II,
2.950% due 07/01/2027++ 1,000,000
3,000,000 Series I, Subseries I -- Stem,
2.800% due 07/01/2020++ 3,000,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) January 31, 1994 (unaudited)
<TABLE>
<CAPTION>
MARKET
FACE VALUE
VALUE (NOTE 1)
- -------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
VIRGINIA -- (CONTINUED)
$ 9,500,000 Series K, Subseries K,
2.650% due 01/01/2022++ $ 9,501,843
------------
15,001,843
------------
WEST VIRGINIA -- 1.6%
Marion County, West Virginia, County Commission,
Solid Waste Disposal Facility Revenue:
2,000,000 (Granite Town, Project A),
2.300% due 10/01/2017+++ 2,000,000
1,500,000 (Granite Town, Project B),
2.300% due 10/01/2017+++ 1,500,000
------------
3,500,000
------------
WISCONSIN -- 0.7%
1,500,000 Milwaukee, Wisconsin, Metropolitan Sewer
District,
5.100% due 09/01/1994 1,519,636
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST $214,184,439*) 98.6% 214,184,439
OTHER ASSETS AND LIABILITIES (NET) 1.4% 3,029,960
- -------------------------------------------------------------------------------
NET ASSETS 100.0% $217,214,399
- -------------------------------------------------------------------------------
<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.
++ Put bonds and notes have demand features which mature within one year.
+++ Variable rate demand notes are payable upon not more than seven business
days' notice. The interest rate shown reflects the rate currently in effect.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) January 31, 1994 (unaudited)
SUMMARY OF MUNICIPAL BONDS BY COMBINED RATINGS #
<TABLE>
<CAPTION>
MOODY'S STANDARD & POOR'S
RATING OR RATING TOTAL
<S> <C> <C>
Aaa AAA 8.2%
MIG1, VMIG1, P-1 A-1, A-1+, SP-1, SP 1+ 90.9%
NON RATED 0.9%
100.0%
</TABLE>
# Bonds are not necessarily rated the same by both services.
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
- ---------------------------------------------------------------------------
STATEMENT OF ASSETS & LIABILITIES January 31, 1994 (unaudited)
<TABLE>
<CAPTION>
DAILY MUNICIPAL
INCOME INCOME
NOTES FUND FUND
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------
ASSETS
Investments, at value (Cost $822,005,440 and
$214,184,439, respectively) (Note 1) See
accompanying schedules:
Securities $687,780,440 $214,184,439
Repurchase Agreements 134,225,000 --
- -------------------------------------------------------------------------------------
Total investments 822,005,440 214,184,439
Cash 172 12,527
Receivable for Fund shares sold 39,296,365 4,633,591
Interest receivable 2,866,473 1,442,610
Unamortized organization costs 5 409,060 163,042
- -------------------------------------------------------------------------------------
TOTAL ASSETS 864,577,510 220,436,209
- -------------------------------------------------------------------------------------
LIABILITIES
Payable for Fund shares redeemed 14,997,550 2,737,073
Dividends payable 941,002 165,405
Organization costs payable 428,632 155,186
Investment advisory fee payable 2 129,584 43,165
Distribution fee payable 3 129,254 34,219
Transfer agent fees payable 2 93,408 7,500
Administration fee payable 2 86,389 28,776
Custodian fees payable 2 29,619 13,753
Accrued Directors' fees and expenses 2 750 750
Accrued expenses and other payables 74,872 35,983
- -------------------------------------------------------------------------------------
TOTAL LIABILITIES 16,911,060 3,221,810
- -------------------------------------------------------------------------------------
NET ASSETS $847,666,450 $217,214,399
- -------------------------------------------------------------------------------------
NET ASSETS consist of:
Accumulated net realized gain on investments
sold $ 9,083 $ 300
Par value 847,657 217,214
Paid-in capital in excess of par value 846,809,710 216,996,885
- -------------------------------------------------------------------------------------
NET ASSETS $847,666,450 $217,214,399
- -------------------------------------------------------------------------------------
SHARES OUTSTANDING 847,657,367 217,214,099
- -------------------------------------------------------------------------------------
NET ASSET VALUE, offering and redemption
price per share $1.00 $1.00
- -------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
- ---------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED JANUARY 31, 1994 (UNAUDITED)*
<TABLE>
<CAPTION>
DAILY MUNICIPAL
INCOME INCOME
NOTES FUND FUND
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 9,999,192 $2,234,650
- -------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fee 2 898,531 254,105
Distribution fees 3 748,776 211,754
Administration fee 2 599,021 169,403
Transfer agent fees 2 350,458 23,290
Legal and audit fees 26,499 26,499
Registration and filing fees 95,948 42,978
Custodian fees 2 45,986 23,399
Amortization of organization costs 5 45,590 18,171
Directors' fees and expenses 2 14,935 14,935
Other 57,415 14,395
Fees waived by investment adviser, administrator
and distributor 2 (1,176,236) (310,859)
- -------------------------------------------------------------------------------------
TOTAL EXPENSES 1,706,923 488,070
- -------------------------------------------------------------------------------------
NET INVESTMENT INCOME 8,292,269 1,746,580
- -------------------------------------------------------------------------------------
Net realized gain on investments 1 9,083 300
- -------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 8,301,352 $1,746,880
- -------------------------------------------------------------------------------------
<FN>
* Lehman Brothers Daily Income Fund and Lehman Brothers Municipal Income Fund
commenced operations on August 2, 1993.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
- ---------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED JANUARY 31, 1994 (UNAUDITED)*
<TABLE>
<CAPTION>
DAILY MUNICIPAL
INCOME INCOME
NOTES FUND FUND
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
Net investment income $ 8,292,269 $ 1,746,580
Net realized gain on investments sold during the
period 9,083 300
- -------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 8,301,352 1,746,880
Distributions to shareholders from net investment
income (8,292,269) (1,746,580)
Net increase in net assets from Fund share
transactions 4 847,657,367 217,214,099
- -------------------------------------------------------------------------------------
Net increase in net assets 847,666,450 217,214,399
NET ASSETS:
Beginning of period -- --
- -------------------------------------------------------------------------------------
End of period $847,666,450 $217,214,399
- -------------------------------------------------------------------------------------
<FN>
* Lehman Brothers Daily Income Fund and Lehman Brothers Municipal Income Fund
commenced operations on August 2, 1993.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A FUND SHARE OUTSTANDING THROUGHOUT THE PERIOD.
<TABLE>
<CAPTION>
PERIOD
ENDED
01/31/94*
(UNAUDITED)
<S> <C>
Net asset value, beginning of period $ 1.00
- -------------------------------------------------------------------------------
Net investment income+++ 0.0122
Distributions from dividends (0.0122)
- -------------------------------------------------------------------------------
Net asset value, end of period $1.00
- -------------------------------------------------------------------------------
Total return++ 1.41%
- -------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 847,666
Ratio of net investment income to average net assets 2.77%**
Ratio of operating expenses to average net assets+ 0.57%**
- -------------------------------------------------------------------------------
<FN>
* Lehman Brothers Daily Income Fund 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 January 31, 1994
was 0.96%.
++ Total return represents aggregate total return for the period indicated.
+++ Net investment income before waiver of fees by investment adviser,
administrator and distributor was $0.0105 for the period ended January 31,
1994.
</TABLE>
24
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
- ---------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A FUND SHARE OUTSTANDING THROUGHOUT THE PERIOD.
<TABLE>
<CAPTION>
PERIOD
ENDED
01/31/94*
(UNAUDITED)
<S> <C>
Net asset value, beginning of period $ 1.00
- -------------------------------------------------------------------------------
Net investment income+++ 0.0100
Dividends from net investment income (0.0100)
- -------------------------------------------------------------------------------
Net asset value, end of period $1.00
- -------------------------------------------------------------------------------
Total return++ 1.05%
- -------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 217,214
Ratio of net investment income to average net assets 2.06%**
Ratio of operating expenses to average net assets+ 0.58%**
- -------------------------------------------------------------------------------
<FN>
* Lehman Brothers Municipal Income Fund 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 January 31, 1994
was 0.94%.
++ Total return represents aggregate total return for the period indicated.
+++ Net investment income before waiver of fees by investment adviser,
administrator and distributor was $0.0082 for the period ended January 31,
1994.
</TABLE>
25
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND
- ---------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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 consists of two funds: Lehman Brothers Daily Income Fund ("Daily
Income Fund") and Lehman Brothers Municipal Income Fund ("Municipal Income
Fund") (the "Funds"). The following is a summary of significant accounting
policies consistently followed by the Funds in the preparation of their
financial statements.
PORTFOLIO VALUATION: Securities 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, as long as the effect of fluctuating interest rates
on the market value of the instrument is not significant.
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, a 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. This arrangement results in a fixed rate of
return that is not subject to market fluctuations during the Fund's holding
period. The value of the collateral, taken as a part of the repurchase
agreement, is at least equal at all times to the total amount of the repurchase
obligations, including interest. In the event of counterparty default, a Fund
has the right to use the collateral to offset losses incurred. There is
potential loss to a Fund in the event the Fund is delayed or prevented from
exercising its rights to dispose of the collateral securities, including the
risk of a possible decline in the value of the underlying securities during the
period while the Fund seeks to assert its rights. The Funds review the value of
the collateral and the creditworthiness of those banks and dealers with which
the Funds enter into repurchase agreements to evaluate potential risks.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded as of the trade date. Realized gains and losses on investments sold are
recorded on the basis of identified cost. Interest income is recorded on the
accrual basis.
26
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 each Fund are declared daily and paid monthly. 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 Funds' net asset value of $1.00 per share. In order
to avoid the application of a 4% nondeductible excise tax on certain
undistributed amounts of ordinary income and capital gains, each Fund may make
additional distribution 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.
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"). All of
the issued and outstanding common stock (representing 92% of the voting stock)
of Holdings is held by American Express Company ("American Express"). The
remainder of Holding's voting stock is owned by Nippon Life Insurance Company.
Under the investment advisory agreements, each Fund pays a monthly fee at an
annual rate of 0.30% of the value of such Fund's average daily net assets. For
the period ended January 31, 1994, LBGAM waived fees of $578,947 and $150,941
for the Daily Income Fund and the Municipal Income Fund, respectively.
On January 21, 1994, American Express announced plans to issue a special
dividend to its common shareholders consisting of the common stock of Holdings
which it own immediately preceding such dividend. In addition, American Express'
plan to spin off Holdings provides that American Express would be entitled to
certain payments from or due to Holdings. Final terms of
27
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
the proposed transaction, which is expected to be completed during the second
quarter of 1994 and would result in Holdings emerging as an independent
publicly-owned corporation, have not yet been determined.
The Boston Company Advisors, Inc. ("Boston Advisors"), an indirect wholly
owned subsidiary of Mellon Bank Corporation ("Mellon"), serves as the Funds'
administrator pursuant to an administration agreement. Under the administration
agreement each Fund pays a monthly fee at the annual rate of 0.20% of the value
of its respective average daily net assets. For the period ended January 31,
1994, Boston Advisors waived fees of $387,632 and $100,627 for the Daily Income
Fund and Municipal Income Fund, respectively.
No employee of Lehman Brothers Inc. ("Lehman Brothers"), LBGAM, Boston
Advisors or of any parent, subsidiary or affiliate thereof receives any
compensation from the Company for serving as an officer or Director of the
Company. The Company pays each Director who is not an officer or employee of
Lehman Brothers, LBGAM or Boston Advisors or any parent, subsidiary, or
affiliate thereof $20,000 per annum, plus $500 per meeting attended, and
reimburses each such Director 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. The Shareholder Services Group, Inc., a
subsidiary of First Data Corporation, 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 Fund. Under the Plan of Distribution each Fund compensates 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
28
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
assets. For the period ended January 31, 1994, Lehman Brothers waived fees of
$209,657 and $59,291 for the Daily Income Fund and the Municipal Income Fund,
respectively.
4. SHARES OF CAPITAL STOCK
The Board of Directors has authority to issue 10,000,000,000 shares of
capital stock ($0.001 par value). Since the Funds have sold shares, issued
shares as reinvestments of dividends and redeemed shares only at a constant net
asset value of $1 per share, the number of shares represented by such sales,
reinvestments and redemptions is the same as the amounts shown below for such
transactions.
The table below summarizes transactions of each Fund:
<TABLE>
<CAPTION>
PERIOD ENDED
DAILY INCOME FUND: 01/31/94*
<S> <C>
-----------------------------------------------------------------
Sold $2,467,123,886
Dividend Reinvestment 7,112,314
Redeemed (1,626,578,833)
-----------------------------------------------------------------
Net increase $ 847,657,367
-----------------------------------------------------------------
<CAPTION>
PERIOD ENDED
MUNICIPAL INCOME FUND: 01/31/94*
<S> <C>
-----------------------------------------------------------------
Sold $ 592,081,456
Dividend Reinvestment 1,530,870
Redeemed (376,398,227)
-----------------------------------------------------------------
Net increase $ 217,214,099
-----------------------------------------------------------------
<FN>
*The Daily Income Fund and Municipal Income Fund commenced operations on August
2, 1993.
</TABLE>
5. 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
29
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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.
30
<PAGE>
Lehman Brothers Funds, Inc.
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Daily Income Fund:
President's Letter............................................................ 1
Portfolio of Investments...................................................... 4
Municipal Income Fund:
President's Letter............................................................ 8
Portfolio of Investments...................................................... 10
Statement of Assets and Liabilities............................................. 21
Statement of Operations......................................................... 22
Statement of Changes in Net Assets.............................................. 23
Financial Highlights:
Daily Income Fund............................................................. 24
Municipal Income Fund......................................................... 25
Notes to Financial Statements................................................... 26
</TABLE>
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THIS REPORT IS FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF DAILY INCOME
FUND AND MUNICIPAL INCOME FUND. ITS USE IN CONNECTION WITH ANY OFFERING OF THE
FUNDS' SHARES IS AUTHORIZED ONLY IN CASE OF A CONCURRENT OR PRIOR DELIVERY OF
THE FUNDS' CURRENT PROSPECTUS.
-------------------
<PAGE>
LEHMAN BROTHERS
Lehman Brothers Inc. All Rights Reserved
Member SIPC
