<PAGE>
Lehman Brothers Funds, Inc.
-----------
DAILY INCOME
FUND
---------------
MUNICIPAL INCOME
FUND
---------------
SELECTED GROWTH
STOCK PORTFOLIO
---------------
-------------------
SEMI-ANNUAL
REPORT
January 31, 1995
---------------------
LEHMAN BROTHERS
<PAGE>
Lehman Brothers Funds, Inc.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Shareholder Letter.............................................................. 1
Daily Income Fund:
Portfolio Highlights.......................................................... 4
Portfolio of Investments...................................................... 5
Municipal Income Fund:
Portfolio Highlights.......................................................... 7
Portfolio of Investments...................................................... 8
Selected Growth Stock Portfolio:
Portfolio Highlights.......................................................... 19
Portfolio of Investments...................................................... 20
Statements of Assets and Liabilities............................................ 25
Statements of Operations........................................................ 27
Statements of Changes in Net Assets............................................. 28
Financial Highlights:
Daily Income Fund:
Select Shares............................................................... 30
CDSC Shares................................................................. 31
Municipal Income Fund:
Select Shares............................................................... 32
CDSC Shares................................................................. 33
Selected Growth Stock Portfolio:
CDSC Shares................................................................. 34
Notes to Financial Statements................................................... 35
</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:
We are pleased to present the Semi-Annual Report for the Lehman Brothers
Funds, Inc. (the "Company") for the six-month period ended January 31, 1995.
Currently, the Company offers 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 January 31, 1995, were
5.47% and 5.37%, 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 January 31, 1995, were
3.20% and 3.02%, respectively.
SELECTED GROWTH STOCK PORTFOLIO
INVESTMENT OBJECTIVE: Selected Growth Stock Portfolio is designed to pro-
vide investors with long-term capital appreciation. Under normal market condi-
tions, the Fund invests primarily in equity securities which the Fund's
Investment
Adviser believes to have the potential for above-average capital appreciation.
Typi-
cally, the Fund's holdings will consist of shares of small- and medium-sized
companies.
PERFORMANCE: For the six months ending January 31, 1995, the Fund's total
return was 5.58% compared with 4.06% for the Lipper Mid-Cap Fund Average, and
1.94% for the Russell 2000 Small Capitalization Index. Total return assumes that
dividends are reinvested in additional Fund shares and reflects certain fee
waivers, but does not reflect sales charges.
1
<PAGE>
THE ECONOMY
FIXED-INCOME MARKETS: Since our last report, the pace of economic growth
accelerated, reaching an estimated 4.5% in the fourth quarter as measured by the
Gross Domestic Product (GDP). The economy's strength was impressive in light of
the series of interest rate hikes implemented by the Federal Reserve Board (the
"Fed") -- measures that were intended to slow the economy by the fourth quarter
of 1994. Although the economic strength was achieved with only minimal
inflationary pressure, the Fed tightened its policy twice more, raising rates an
additional 125 basis points in order to temper the pace of growth and
inflationary pressures. Toward the end of December, certain sectors began to
exhibit some weakness which had many analysts wondering if this is a false
signal or the beginning of a "soft landing" for this cycle. Throughout the
operating period, DAILY INCOME FUND adopted a very defensive short average
maturity.
The municipal market was influenced more by technical conditions than by
reactions to market occurrences. Rising demand for a shrinking supply of tax-
exempt securities helped stabilize the value of securities despite rising
taxable interest rates. Therefore, MUNICIPAL INCOME FUND was well-served by a
strategy which minimized the expensive short-end of the yield curve in favor of
longer-dated notes.
EQUITY MARKETS: The Fed's policy with regard to interest rates resulted in
turbulence in the markets, with the Standard and Poor's 500 Composite Stock
Price Index and Dow Jones Industrial Average returning 1.32% and 5.29% for 1994,
respectively.
Stocks began to recover late in 1994, evidence that the prognosis for
inflation remained positive. Nevertheless, the breadth of the recovery remained
narrow and leadership was evident in just a handful of sectors with technology
well in front of the rest. In general, we would categorize 1994 as a difficult
year for investors, with most equity-based mutual funds returning negative
performance. During the six month period ended January 31, 1995, SELECTED GROWTH
STOCK PORTFOLIO was fully invested with a concentration in technology and
healthcare issues -- sectors of the U.S. economy which should continue to
sustain growth in 1995.
LOOKING FORWARD
As the growth rate for GDP decelerates, it is important to determine whether
the new rate is substantially higher than the 2.5% rate at which the Fed
believes the expansion is sustainable without igniting inflationary pressures.
If the "soft landing" scenario appears likely, then fixed income investors could
be facing their first good buying opportunity in a year after enduring a
devastating bond market in 1994. Short-term investors have a more difficult call
to make in terms of predicting the magnitude and timing of additional Fed
tightening actions which may be necessary to preserve its credibility as an
inflation fighter.
2
<PAGE>
As of the date of this letter, we expect the Fed to raise short-term
interest rates one more time by 50 basis points in the second quarter of 1995.
We also expect the yield curve to flatten as longer maturities remain in a range
of 7.25% to 7.75%. We believe the U.S. economy remains fundamentally healthy and
do not see evidence of mounting inflation or recession. Our outlook for U.S.
equities is favorable based upon our economic outlook as well as certain
technical factors which should help the market. Specifically, recent highly
publicized problems in the emerging market sector have resulted in an increasing
flow of funds into the U.S. marketplace. In terms of our outlook for U.S. growth
stocks, we believe that these stocks should perform well in an environment
characterized by slowing economic growth.
* * *
We appreciate your support of Lehman Brothers Funds, Inc. and look forward
to continuing to serve your investment needs.
<TABLE>
<S> <C>
Sincerely,
[DROP IN SIGNATURES]
Kirk D. Hartman Andrew D. Gordon
Chairman of the Board of Directors President
March 1, 1995
</TABLE>
3
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND
--------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS JANUARY 31, 1995 (UNAUDITED)
ASSET DISTRIBUTION (BY INSTRUMENT)
Pie charts depicting the allocation of Lehman Brothers Fund -- Daily Income
Fund's investment securities held at January 31, 1995 by industry
classification. The pies are broken in pieces representing industries in the
following percentages:
<TABLE>
<S> <C>
Commercial Paper 36.1%
Bank/Corporate Notes 16.3%
Municipal Notes 9.9%
Certificates of Deposit 7.4%
Eurodollar - Time Deposit 6.6%
U.S. Government Agency Security 4.1%
Repurchase Agreements 19.3%
Net Other Assets and Liabilities 0.3%
</TABLE>
AVERAGE WEIGHTED MATURITY OF PORTFOLIO
42 Days
4
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND
---------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS JANUARY 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
<C> <S> <C>
------------------------------------------------------------------
COMMERCIAL PAPER -- 36.1%
$ 20,000,000 American Home Products Corporation,
6.750%+ due 7/5/95 $ 19,422,500
Atlantic Asset Securitization
Corporation:
4,697,000 5.900%+ due 2/9/95 4,690,842
7,079,000 5.900%+ due 2/15/95 7,062,758
10,045,000 5.850%+ due 2/16/95 10,020,515
20,000,000 CS First Boston, Inc.,
6.020%+ due 3/9/95 19,879,600
25,000,000 General Electric Capital
Corporation,
6.680%+ due 7/3/95 24,294,889
20,000,000 General Motors Acceptance
Corporation,
6.350%+ due 3/30/95 19,798,917
20,000,000 Internationale Nederlanden Holdings,
6.700%+ due 6/23/95 19,471,444
Nationwide Building Society:
15,000,000 5.870%+ due 2/24/95 14,943,746
10,000,000 5.880%+ due 2/27/95 9,957,533
Postipankki Ltd.:
10,000,000 5.880%+ due 2/17/95 9,973,867
20,000,000 6.620%+ due 6/5/95 19,543,955
20,000,000 Ruby Asset Funding Corporation,
6.070%+ due 2/27/95 19,912,322
20,000,000 Toronto-Dominion Holdings, Inc.,
6.650%+ due 6/30/95 19,449,528
------------
TOTAL COMMERCIAL PAPER (COST $218,422,416) 218,422,416
------------
BANK/CORPORATE NOTES -- 16.3%
20,000,000 Beta Finance Corporation, Variable
Rate, MTN,
5.889% due 11/22/95 19,990,423
20,000,000 FCC National Bank of Wilmington,
Variable Rate, MTN,
5.950% due 1/17/96 19,994,438
9,000,000 General Motors Acceptance
Corporation, MTN,
6.650% due 2/10/95 9,005,652
20,000,000 Merrill Lynch & Company, Inc.,
Variable Rate, MTN,
6.075% due 9/8/95 20,000,000
20,000,000 SMM Trust 1994-B, Variable Rate,
4.920% due 8/11/95** 20,000,000
9,949,000 SMM Trust 1994-D, Variable Rate,
6.363% due 10/27/95** 9,949,000
------------
TOTAL BANK/CORPORATE NOTES (COST $98,939,513) 98,939,513
------------
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND
--------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL NOTES -- 9.9%
$ 20,000,000 New York, New York, Taxable Notes,
Series E,
6.240% due 3/13/95 $ 20,000,000
40,000,000 Orange County, California, Taxable
Notes, Variable Rate,
5.917% due 7/10/95++ 39,992,008
-- Purchase Guaranty issued by Lehman
Brothers Holdings, Inc., expiring
7/10/95, relating to Orange County
Taxable Notes, Variable Rate,
5.917% due 7/10/95++ --
------------
TOTAL MUNICIPAL NOTES (COST $59,992,008) 59,992,008
------------
CERTIFICATES OF DEPOSIT -- (YANKEE) -- 7.4%
20,000,000 Dai-Ichi Kangyo Bank,
7.020% due 7/5/95 20,003,306
25,000,000 Sumitomo Bank, Ltd.,
6.040% due 3/13/95 25,000,275
------------
TOTAL CERTIFICATES OF DEPOSIT -- (YANKEE) (COST 45,003,581
$45,003,581)
------------
EURODOLLAR -- TIME DEPOSIT -- 6.6% (COST $40,000,000)
40,000,000 Trust Company Atlanta, Grand Cayman
Branch,
5.875% due 2/1/95 40,000,000
------------
U.S. GOVERNMENT AGENCY SECURITY -- 4.1% (COST $25,000,000)
25,000,000 Federal National Mortgage
Association, Variable Rate, MTN,
6.100% due 10/7/96 25,000,000
------------
REPURCHASE AGREEMENTS -- 19.3%
50,000,000 Agreement with Chase Securities Inc.
dated 1/31/95 bearing 5.950% to be
repurchased at $50,008,264 on
2/1/95, collateralized by
$60,206,593 U.S. Government
Securities with various maturities
and interest rates (market value
-- $51,006,288) 50,000,000
66,562,000 Agreement with CS First Boston, Inc.
dated 1/31/95 bearing 5.950% to be
repurchased at $66,573,001 on
2/1/95, collateralized by
$193,912,716 U.S. Government
Securities with various maturities
and interest rates (market value
-- $68,445,818) 66,562,000
------------
TOTAL REPURCHASE AGREEMENTS (COST $116,562,000) 116,562,000
------------------------------------------------------------------
TOTAL INVESTMENTS (COST $603,919,518*) 99.7% 603,919,518
OTHER ASSETS AND LIABILITIES (NET) 0.3 1,777,791
------------------------------------------------------------------
NET ASSETS 100.0% $605,697,309
------------------------------------------------------------------
<FN>
* Aggregate cost for Federal tax purposes.
** Securities 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.
++ See Note 7.
MTN -- Medium Term Note
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
--------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS JANUARY 31, 1995 (UNAUDITED)
ASSET DISTRIBUTION (BY INDUSTRY)
Pie charts depicting the allocation of Lehman Brothers Funds, Inc. -- 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>
Housing 16.9%
Industrial Control 14.9%
Tax Revenue and Revenue Anticipation Notes 14.3%
Other 11.5%
General Obligation 10.7%
Education 14.3%
Utililty 7.6%
Hospital 5.4%
Transportation 3.3%
Pollution Control 0.6%
Net Other Assets and Liabilities 0.5%
</TABLE>
AVERAGE WEIGHTED MATURITY OF PORTFOLIO
41 Days
7
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
---------------------------------------------
PORTFOLIO OF INVESTMENTS JANUARY 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
<C> <S> <C>
------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES -- 99.5%
ALABAMA -- 0.9%
$ 2,000,000 Alabama State, Industrial Development Authority,
Solid Waste Disposal Revenue, (Pine City Fiber
Company Project), (Barclays Bank, PLC, LOC),
3.900% due 12/1/23++ $ 2,000,000
------------
ARIZONA -- 2.9%
500,000 Apache County, Arizona, Industrial Development
Authority Revenue, (Tucson Electric Power),
(Chemical Bank, LOC),
3.650% due 6/15/20++ 500,000
5,310,000 Phoenix, Arizona, Industrial Development
Authority Revenue, Ventana Palms Apartments,
(First Interstate Bank, CA, LOC),
3.750% due 2/1/24++ 5,310,000
500,000 Yuma, Arizona, Industrial Development Authority
Revenue, (Ardco Project), (Harris Trust and
Savings Bank, LOC),
3.800% due 7/1/03++ 500,000
------------
6,310,000
------------
CALIFORNIA -- 10.6%
2,200,000 California State, Revenue Anticipation Notes,
Series A,
5.000% due 6/28/95 2,207,907
4,100,000 Los Angeles County, California, Unified School
District, Tax and Revenue Anticipation Notes,
4.500% due 7/10/95 4,114,635
5,000,000 Marin County, California, Tax and Revenue
Anticipation Notes,
4.250% due 7/6/95 5,012,464
400,000 Moreno Valley, California, Unified School
District, Tax and Revenue Anticipation Notes,
4.500% due 6/30/95 400,327
2,140,000 Northern California Power Agency, Public Power
Revenue, (Geothermal Project No. 3), Series A,
Pre-refunded 7/1/95,
9.500% due 7/1/02 2,232,184
9,265,000 Ventura County, California, Community College,
Tax and Revenue Anticipation Notes,
4.250% due 6/30/95 9,277,394
------------
23,244,911
------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
--------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
COLORADO -- 0.8%
$ 1,800,000 Colorado State, Tax and Revenue Anticipation
Notes,
4.500% due 6/27/95 $ 1,803,299
------------
DELAWARE -- 0.9%
2,000,000 Delaware State, Economic Development Authority,
Industrial Development Revenue, (Chemical
Corporation Project), (Sumitomo Bank Ltd.,
LOC),
3.100% due 11/1/99++ 2,000,000
------------
DISTRICT OF COLUMBIA -- 0.1%
300,000 District of Columbia, Georgetown University,
Series D, (Sanwa Bank, BPA),
3.500% due 4/1/17++ 300,000
------------
FLORIDA -- 6.2%
6,100,000 Dade County, Florida, Housing Finance Authority,
Flamingo Plaza Apartments, (Bank of New York,
LOC),
3.600% due 12/1/15++ 6,100,000
700,000 Dade County, Florida, Industrial Development
Authority Revenue, (Solid Waste -- Montenay
Project), (Banque Paribas, LOC),
3.800% due 12/1/10++ 700,000
Florida Housing Finance Agency, Multi-family
Housing Authority Revenue:
1,800,000 (PNC Bank, N.A., LOC),
3.850% due 12/1/11++ 1,800,000
1,200,000 (River Oaks Project), (Citibank, NY, LOC),
3.650% due 12/1/07++ 1,200,000
2,300,000 Jacksonville, Florida, Health Facilities
Authority Revenue, (Baptist Health Project),
(Barnett Bank, LOC),
4.250% due 6/1/20+ 2,300,000
100,000 Sarasota County, Florida, Health Facilities
Authority Revenue, (Bay Village Project),
(Barnett Bank, LOC),
3.700% due 12/1/19++ 100,000
1,400,000 St. John's County, Florida, Industrial
Development Authority Revenue, Series 86,
(Kredietbank, N.W., LOC),
3.700% due 12/1/16++ 1,400,000
------------
13,600,000
------------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
--------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
GEORGIA -- 5.7%
$ 1,400,000 Brunswick & Glynn County, Georgia, Development
Authority Revenue,
General Obligation Bonds, (Banque Indosuez,
LOC),
3.600% due 2/1/95 $ 1,400,000
3,400,000 Clayton County, Georgia, Multi-family Housing
Authority Revenue, (Ten Oaks Apartments),
Series F, (FSA Insured), (Barclays Bank PLC,
BPA),
3.700% due 1/1/21++ 3,400,000
1,355,000 Colquitt County, Georgia, Development Authority
Revenue, General Obligation Bonds,
(Williamsonhouse Regency), (Fleet National
Bank, LOC),
3.900% due 4/1/98++ 1,355,000
4,250,000 Georgia State, Putters-Series 22, General
Obligation Bonds, (Morgan Guaranty Trust, BPA),
4.250% due 7/1/04++ 4,250,000
1,000,000 Municipal Electric Authority of Georgia, (General
Resolution), Series B, (Morgan Guaranty Trust,
BPA),
3.850% due 6/1/20+++ 1,000,000
1,100,000 Savannah, Georgia, Port Authority Revenue, (Pier
One Imports), (National Westminster Bank, LOC),
3.550% due 12/1/26++ 1,100,000
------------
12,505,000
------------
HAWAII -- 4.6%
10,000,000 Secondary Market Services Corporation, Student
Loan Revenue, Series I,
4.550% due 9/1/10+++ 10,000,000
------------
ILLINOIS -- 15.7%
Chicago, Illinois, O'Hare International Airport,
Special Facility Revenue, (Sanwa Bank Ltd.,
LOC):
700,000 Series A,
3.550% due 1/1/18++ 700,000
4,000,000 Series B,
3.550% due 1/1/18++ 4,000,000
2,500,000 Highland Park Hospital, Series B, (FGIC Insured),
(FGIC Securities Purchased Inc., BPA),
3.750% due 10/1/12+++ 2,500,000
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
--------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
ILLINOIS -- (CONTINUED)
$ 7,000,000 Illinois Development Finance Authority Revenue,
(River Oaks Project), (Monsanto Company, GTC),
3.600% due 11/1/23++ $ 7,000,000
2,000,000 Illinois Health Facilities Authority Revenue,
3.800% due 8/1/15+++ 2,000,000
4,000,000 Illinois Housing Development Authority Revenue,
Homeowner Mortgage, Series C-2,
4.100% due 8/1/26+++ 3,997,377
4,000,000 Illinois State Certificates,
4.750% due 6/15/95 4,010,666
1,000,000 Illinois State, Sales Tax Revenue, General
Obligation Bonds, Series A, Pre-refunded
6/15/95,
9.375% due 6/15/15 1,042,869
1,000,000 Lisle, Illinois, Multi-family Housing Revenue,
(Devonshire of Lisle Project), (American
National Bank & Trust, LOC),
3.850% due 12/15/25++ 1,000,000
4,000,000 Southwestern, Illinois, Industrial Development
Authority Revenue, (Robinson Steel Company),
(American National Bank & Trust, LOC),
4.000% due 12/1/06++ 4,000,000
4,300,000 St. Charles, Illinois, Industrial Development
Authority Revenue, (Pier 1), (National
Westminster Bank, LOC),
3.550% due 12/15/26++ 4,300,000
------------
34,550,912
------------
INDIANA -- 4.0%
3,500,000 Indiana Secondary Market for Education, Education
Loan Revenue, Series B, (AMBAC Insured), (Fuji
Bank Ltd., BPA),
3.650% due 12/1/14++ 3,500,000
4,200,000 Indianapolis, Indiana, Industrial Economic
Development Authority Revenue, (Asahi Bank
Ltd., NY, LOC),
4.625% due 9/1/95 4,200,000
1,050,000 Princeton, Indiana, Industrial Development
Authority Revenue, (Orion Denki American Inc.
Project), (Mitsubishi Bank Ltd., LOC),
3.850% due 4/30/17++ 1,050,000
------------
8,750,000
------------
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
--------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
KENTUCKY -- 4.1%
$ 700,000 Kentucky Higher Education Student Loan
Corporation, Series E, (Sumitomo Bank Ltd.,
LOC),
3.850% due 12/1/11++ $ 700,000
1,300,000 Louisville, Kentucky, Airport Lease Revenue,
Series B, (National City Bank, KY, LOC),
3.750% due 2/1/19++ 1,300,000
3,450,000 Pulaski County, Kentucky, Solid Waste Disposal
Revenue, National Rural Utilities,
3.650% due 8/15/23+++ 3,449,219
3,500,000 Walton, Kentucky, Industrial Development
Authority Revenue, (Clarion Mortgage Company of
America), (Asahi Bank Ltd., NY, LOC),
3.850% due 11/1/96++ 3,500,000
------------
8,949,219
------------
LOUISIANA -- 5.3%
800,000 Calcasieu Parish, Inc., Louisiana, (Citgo
Petroleum Corporation), (Sumitomo Bank Ltd.,
LOC),
3.450% due 8/1/04++ 800,000
Louisiana Housing Finance Agency, Multi-family
Housing Authority Revenue, (Sumitomo Bank Ltd.,
LOC):
4,635,000 (Allouette Project),
4.500% due 1/1/26++ 4,635,000
4,800,000 (New Orleans Project),
4.500% due 12/2/25++ 4,800,000
1,000,000 Louisiana State, General Obligation Bonds,
Pre-refunded 5/1/95,
9.300% due 5/1/01 1,032,426
300,000 St. Charles Parish, Louisiana, Pollution Control
Revenue, (Shell Company Project), (Shell Oil,
GTC),
3.400% due 6/1/05++ 300,000
------------
11,567,426
------------
MARYLAND -- 2.8%
4,500,000 Baltimore County, Maryland, Series 20, General
Obligation Bonds, (Morgan Guaranty Trust, BPA),
4.250% due 7/1/16++ 4,500,000
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
--------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
MARYLAND -- (CONTINUED)
$ 1,600,000 Washington Suburban Sanitation District,
Maryland, Bond Anticipation Notes, (Toronto
Dominion Bank, BPA),
3.600% due 12/28/95++ $ 1,600,000
------------
6,100,000
------------
MICHIGAN -- 2.0%
3,350,000 Grand Rapids, Michigan, Water Supply, (Societe
Generale, NY, LOC),
4.200% due 1/1/20+ 3,350,000
1,100,000 Michigan State Strategic Funding, General
Obligation Bonds, (Hi-Lex Controls Incorporated
Project), (Bank of Tokyo, NY, LOC),
3.900% due 7/1/99++ 1,100,000
------------
4,450,000
------------
MISSISSIPPI -- 0.2%
445,000 Mississippi Business Finance Corporation, Series
C, (AirCruisers Project), Series C, (Credit
Commerciale de France, LOC),
4.000% due 10/1/04++ 445,000
------------
MISSOURI -- 2.3%
1,000,000 Missouri Environmental Improvement & Energy
Resource, Pollution Control Revenue, Union
Electric Company, Series A, (Swiss Bank, LOC),
3.750% due 6/1/14+++ 1,000,000
4,000,000 Missouri Higher Education Student Loan Authority,
Series B, (National Westminster Bank, LOC),
3.800% due 6/1/20++ 4,000,000
------------
5,000,000
------------
NEVADA -- 1.2%
500,000 Clark County, Nevada, Industrial Development
Authority Revenue, (Nevada Power Company),
(Fuji Bank Ltd., LOC),
4.000% due 11/1/18++ 500,000
Nevada State, Department of Communications,
Industrial Development Authority, Series A:
150,000 (Kinplex Project), (Credit Commerciale de
France, LOC),
4.000% due 1/1/09++ 150,000
800,000 (Marshmallow Lane Partners), (Credit
Commerciale de France, LOC),
4.000% due 4/1/09++ 800,000
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
--------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
NEVADA -- (CONTINUED)
Nevada State, Department of Communications,
Industrial Development Authority, Series A
(continued):
$ 500,000 (Master Halco Project), (Kyowa Bank Ltd., LOC),
4.000% due 12/1/09++ $ 500,000
600,000 Nevada State Director, Department of
Communications, Industrial Development
Authority Revenue, (Pilot Company Project),
Series A, (Wells Fargo Bank, LOC),
3.850% due 7/1/16++ 600,000
------------
2,550,000
------------
NEW JERSEY -- 0.9%
1,050,000 New Jersey Economic Development Authority,
General Obligation Bonds, Series G, (First
Fidelity Bank, LOC),
3.650% due 7/1/03++ 1,050,000
900,000 New Jersey State Turnpike Authority, (MBIA
Insured), (Bankers Trust Company, BPA),
3.750% due 1/1/00++ 900,000
------------
1,950,000
------------
NEW MEXICO -- 1.3%
300,000 Alberquerque, New Mexico, Revenue Bonds, (Charter
Hospital Project), (Bankers Trust Company,
LOC),
3.350% due 3/1/14++ 300,000
2,500,000 Rio Arriba County, New Mexico, Industrial Revenue
Bond, (Franklin Industries Project),
(NationsBank, Georgia, LOC),
3.700% due 12/1/07++ 2,500,000
------------
2,800,000
------------
NEW YORK -- 3.6%
3,400,000 New York, New York, General Obligation Bonds,
Series B, (MBIA Insured), (Westdeutsche
Landesbank, BPA),
4.250% due 8/15/05+ 3,400,000
2,000,000 New York, New York, Revenue Anticipation Notes,
Series B,
4.750% due 6/30/95 2,005,873
2,000,000 New York State, Dormitory Authority Revenue,
General Obligation Bonds, (Morgan Guaranty
Trust, BPA),
4.250% due 7/1/10++ 2,000,000
105,000 New York State, Job Development Authority
Revenue, General Obligation Bonds, (Fuji Bank
Ltd., BPA),
4.400% due 3/1/03+ 105,000
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
--------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
NEW YORK -- (CONTINUED)
$ 500,000 Triborough Bridge and Tunnel Authority, New York,
Special Obligation Bonds, (MBIA Insured),
(Bankers Trust Company, BPA),
3.750% due 1/1/04++ $ 500,000
------------
8,010,873
------------
NORTH CAROLINA -- 1.3%
2,800,000 North Carolina Medical Care Revenue, (Carol Woods
Project), (Bank of Scotland, LOC),
4.250% due 4/1/21+ 2,800,000
------------
OHIO -- 1.7%
3,300,000 Clermont County, Ohio, Hospital Facilities
Revenue, Series B, (Mercy Health Systems, GTC),
3.650% due 9/1/21++ 3,300,000
500,000 Student Loan Funding Corporation, Ohio, Series
A-1, (National Westminster Bank, LOC),
3.700% due 1/1/07++ 500,000
------------
3,800,000
------------
PENNSYLVANIA -- 3.0%
6,500,000 Philadelphia, Pennsylvania, Tax and Revenue
Anticipation Notes, Series E, (PNC Bank, N.A.,
LOC),
4.750% due 6/15/95 6,519,554
------------
RHODE ISLAND -- 1.5%
3,200,000 Rhode Island Housing and Mortgage Finance
Corporation, Homeownership Opportunity, Series
9B,
3.900% due 4/1/13+++ 3,200,000
------------
SOUTH CAROLINA -- 1.2%
1,300,000 Anderson, South Carolina, Sewer Revenue,
Refunding and Improvement, (MBIA Insured),
Pre-refunded 7/1/95,
7.500% due 7/1/08 1,368,353
625,000 Lexington County, South Carolina, Charter Rivers
Hospital, (Mitsubishi Bank Ltd., LOC),
3.500% due 6/1/27++ 625,000
750,000 South Carolina Jobs -- Economic Development
Authority, General Obligation Bonds, (Bank of
Tokyo Ltd., LOC),
6.000% due 12/1/07++ 750,000
------------
2,743,353
------------
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
--------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
------------------------------------------------------------------------------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
SOUTH DAKOTA -- 0.6%
$ 1,370,000 South Dakota Housing Development Authority,
(Homeownership Mortgage), Series C,
3.300% due 5/1/17+++ $ 1,370,000
------------
TENNESSEE -- 6.7%
1,300,000 Chattanooga, Tennessee, Industrial Development
Board, Industrial Development Revenue, (Credit
Suisse, LOC),
3.600% due 12/15/12++ 1,300,000
6,300,000 Coffee County, Tennessee, Industrial Development
Board, Industrial Development Revenue, (M-Tek
Project), (Asahi Bank Ltd., NY, LOC),
4.875% due 12/1/01++ 6,300,000
2,200,000 Collierville, Tennessee, Industrial Development
Board, Industrial Development Revenue, (Ardco
Income Project), (Harris Trust and Savings
Bank, LOC),
3.800% due 4/1/09++ 2,200,000
500,000 Franklin County, Tennessee, Industrial
Development Board, Industrial Development
Revenue, (Franklin Industrial Project),
(NationsBank, Georgia, LOC),
3.700% due 12/1/08++ 500,000
1,500,000 Hamilton County, Tennessee, Industrial
Development Board, Industrial Development
Revenue, (Seaboard Feeds Chattanooga Project),
(Bank of New York, LOC),
3.700% due 12/1/17++ 1,500,000
3,000,000 Knox County, Tennessee, Health, Educational &
Housing Authority, Mercy Health Systems, Series
B, (Mercy Health Systems, GTC),
3.650% due 9/1/14++ 3,000,000
------------
14,800,000
------------
TEXAS -- 4.1%
2,000,000 Brazos, Texas, Higher Education Authority, Series
B1, (Student Loan Marketing Association, LOC),
3.800% due 6/1/23+++ 1,999,985
200,000 Lubbock, Texas, Health Facilities Development,
St. Joseph Health Systems Hospital Revenue,
3.800% due 7/1/13+ 200,000
</TABLE>
See Notes to Financial Statements.
16
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
--------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 1995 (UNAUDITED)
<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:
$ 4,900,000 (Fuji Bank Ltd., LOC),
3.850% due 12/1/05++ $ 4,900,000
800,000 (MBIA Insured), (Student Loan Marketing
Association, BPA),
3.650% due 4/1/20++ 800,000
800,000 (Student Loan Marketing Association, LOC),
3.650% due 3/1/05++ 800,000
300,000 San Antonio, Texas, Housing Finance Corporation,
Multi-family Housing Revenue, (Cape Cod
Apartments), (Swiss Bank, LOC),
3.700% due 6/1/20++ 300,000
100,000 Tarrant County, Texas, Health Facilities
Development, (Harris Methodist Health Systems),
(Fuji Bank Ltd., LOC),
3.750% due 9/1/18++ 100,000
------------
9,099,985
------------
WEST VIRGINIA -- 3.3%
Marion County, West Virginia, County Commission,
Solid Waste Disposal Facility Revenue, (Granite
Town Project C), (National Westminster Bank,
LOC):
1,500,000 General Obligation Bonds, Series C,
3.650% due 10/1/17++ 1,500,000
5,700,000 Series D,
3.650% due 10/1/17++ 5,700,000
------------
7,200,000
------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST $218,419,532*) 99.5% 218,419,532
OTHER ASSETS AND LIABILITIES (NET) 0.5 1,187,130
------------------------------------------------------------------------------
NET ASSETS 100.0% $219,606,662
------------------------------------------------------------------------------
<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.
</TABLE>
See Notes to Financial Statements.
17
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
--------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 1995 (UNAUDITED)
<TABLE>
<S> <C>
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
NOTE:
Approximately 74% of the municipal bonds and notes held by the Fund have credit
enhancement features backing them. Such features may have been considered by the
rating agency in rating these securities.
</TABLE>
SUMMARY OF MUNICIPAL BONDS BY COMBINED RATINGS #
<TABLE>
<CAPTION>
MOODY'S STANDARD & POOR'S
RATING OR RATING TOTAL
<S> <C> <C>
Aaa AAA 3.0%
Aa, Aa2, Aa3 AA 0.1
MIG1, VMIG1, P-1 A-1, A-1+, SP-1, SP-1+ 80.0
MIG2, VMIG2, P-2 SP-2 9.0
NON RATED NON RATED 7.9
------
100.0%
</TABLE>
# Bonds are not necessarily rated the same by both services.
See Notes to Financial Statements.
18
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
SELECTED GROWTH STOCK PORTFOLIO
---------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS JANUARY 31, 1995 (UNAUDITED)
INDUSTRY BREAKDOWN
Pie charts depicting the allocation of Lehman Brothers Funds, Inc. -- Daily
Income Fund's investment securities held at January 31, 1995 by industry
classification. The pies are broken in pieces representing industries in the
following percentages:
<TABLE>
<CAPTION>
INDUSTRY PERCENTAGE
<S> <C>
Electric 11.2%
Computer & Computer Services 10.8%
Healthcare 8.6%
Consumer Services 8.3%
Telecommunications 7.3%
Retail 6.4%
Administrative Services 5.3%
Financial Services 5.5%
Other Common Stocks 31.4%
Repurchase Agreement and Net Other Assets
and Liabilities 5.2%
---
100%
</TABLE>
TOP TEN HOLDINGS
<TABLE>
<CAPTION>
PERCENTAGE OF
COMPANY NET ASSETS
<S> <C>
------------------------------------------------------------------------
Equifax Inc. 3.5%
Paychex, Inc. 3.0
Policy Management Systems Corporation 2.3
GTECH Holding Corporation 2.0
General Instrument Corporation 1.7
Scholastic Corporation 1.6
SafeCard Services, Inc. 1.5
International Rectifier Corporation 1.5
SPS Transaction Services, Inc. 1.5
Quantum Health Resources Inc. 1.4
---
20.0%
---
---
</TABLE>
19
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
SELECTED GROWTH STOCK PORTFOLIO
---------------------------------------------
PORTFOLIO OF INVESTMENTS JANUARY 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
<C> <S> <C>
-------------------------------------------------------------------------------
COMMON STOCKS -- 94.8%
ELECTRIC -- 11.2%
10,000 Dallas Semiconductor Corporation** $ 157,500
10,100 Franklin Electric Publishing, Inc.** 270,175
10,000 FSI International, Inc.** 276,250
20,000 General Instrument Corporation** 545,000
5,000 GTI Corporation** 75,000
20,000 International Rectifier Corporation** 470,000
4,700 Kent Electronics Corporation** 200,338
10,000 Lam Research Corporation** 375,000
10,000 Tektronix Inc. 333,750
10,000 Tencor Instruments** 367,500
10,000 Teradyne, Inc.** 325,000
20,000 Zenith Electronics Corporation** 205,000
------------
3,600,513
------------
COMPUTER & COMPUTER SERVICES -- 10.8%
4,000 America Online Inc.** 218,000
10,000 American Management Systems Inc.** 188,125
18,000 BISYS Group, Inc.** 378,000
17,400 Cadence Design Systems, Inc.** 380,625
10,000 Electronic Arts, Inc.** 178,750
12,000 EMC Corporation** 223,500
20,000 Intergraph Corporation** 202,500
15,000 Orbital Sciences Corporation** 255,000
10,000 Parametric Technology Corporation** 367,500
17,500 Policy Management Systems Corporation** 726,250
10,000 Quarterdeck Office Systems** 38,125
10,000 Silicon Graphics Inc.** 312,500
------------
3,468,875
------------
HEALTHCARE -- 8.6%
10,000 Biogen, Inc.** 363,750
15,000 Community Health Systems, Inc.** 418,125
10,000 Foundation Health Corporation** 295,000
10,000 Manor Care, Inc. 302,500
10,000 Mariner Health Group, Inc.** 188,750
15,000 Multicare Companies, Inc.** 298,125
15,000 Quantum Health Resources Inc.** 455,625
</TABLE>
See Notes to Financial Statements.
20
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
SELECTED GROWTH STOCK PORTFOLIO
--------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
-------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- (CONTINUED)
HEALTHCARE -- (CONTINUED)
10,000 Scherer (R.P.) Corporation** $ 447,500
------------
2,769,375
------------
CONSUMER SERVICES -- 8.3%
8,000 CUC International, Inc.** 277,000
15,000 DIMAC Corporation** 183,750
15,000 Dimark, Inc.** 223,125
10,000 Loewen Group Inc. 280,000
15,000 Pronet, Inc. 243,750
10,000 Robert Half International, Inc.** 232,500
26,000 SafeCard Services, Inc. 484,250
20,000 Showboat, Inc. 272,500
16,000 SPS Transaction Services, Inc.** 470,000
------------
2,666,875
------------
TELECOMMUNICATIONS -- 7.3%
10,000 A Plus Communications Inc.** 136,250
20,000 Centennial Cellular Corporation, Class A 335,000
10,000 CommNet Cellular, Inc.** 231,250
5,000 LCI International, Inc.** 113,125
15,000 Metrocall, Inc.** 225,000
15,000 Mobile Telecommunication Technologies
Corporation** 326,250
10,000 QUALCOMM, Inc.** 265,000
10,000 Rogers Cantel Mobil Communications, Class B** 268,750
10,000 Transaction Network Service 150,000
10,000 Vodafone Group, PLC, ADR 305,000
------------
2,355,625
------------
RETAIL -- 6.4%
15,000 Arbor Drugs, Inc. 360,000
10,000 Barnes & Noble, Inc.** 297,500
20,000 Bombay Company, Inc.** 177,500
15,000 Heilig-Meyers Company 382,500
1,000 OfficeMax Inc.** 26,000
11,000 Orchard Supply Hardware Stores** 85,250
10,000 Pier 1 Imports, Inc. 95,000
12,000 Sports & Recreation Inc.** 274,500
</TABLE>
See Notes to Financial Statements.
21
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
SELECTED GROWTH STOCK PORTFOLIO
--------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
-------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- (CONTINUED)
RETAIL -- (CONTINUED)
14,700 Stop & Shop Companies, Inc.** $ 341,775
------------
2,040,025
------------
FINANCIAL SERVICES -- 5.6%
10,000 Apollo Group Inc., Class A** 207,500
40,000 Equifax Inc. . 1,135,000
25,000 SEI Corporation 437,500
------------
1,780,000
------------
ADMINISTRATIVE SERVICES -- 5.3%
10,000 Fiserv Inc.** 215,625
20,000 Information Resources, Inc.** 275,000
5,000 Medaphis Corporation** 250,000
25,000 Paychex, Inc. 975,000
------------
1,715,625
------------
BROADCASTING -- 4.7%
20,000 Emmis Broadcasting Corporation, Class A** . 320,000
10,000 Infinity Broadcasting Corporation, Class A** . 318,750
10,000 Scandanavian Broadcast Systems** 235,000
20,000 Turner Broadcasting Systems Inc., Class A 320,000
15,000 United Video Satellite Group, Inc., Class A** 330,000
------------
1,523,750
------------
ENTERTAINMENT -- 3.8%
10,000 Acclaim Entertainemt, Inc.** 140,625
30,000 GTECH Holding Corporation** . 656,250
10,000 Mirage Resort Inc.** 223,750
10,000 Players International Inc.** 205,000
------------
1,225,625
------------
MANUFACTURING -- 3.4%
10,000 Luxottica Group SPA, ADS 343,750
400 Ortel Corporation** 8,900
11,800 Symbol Technologies, Inc.** 306,800
19,000 Union Switch & Signal Corporation** 275,500
7,000 Watts Industries Inc., Class A 140,000
------------
1,074,950
------------
</TABLE>
See Notes to Financial Statements.
22
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
SELECTED GROWTH STOCK PORTFOLIO
--------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
-------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- (CONTINUED)
PHARMACEUTICALS -- 2.9%
10,000 Elan Corporation, PLC, ADS** $ 352,500
15,000 Perrigo Company, PLC** 196,875
15,000 Teva Pharmaceutical Industries, Ltd., ADR 386,250
------------
935,625
------------
PUBLISHING -- 2.9%
5,000 Central European Media Enterprises, Ltd.** 53,750
10,000 Scholastic Corporation** 505,000
25,000 Westcott Communications, Inc.** 353,125
------------
911,875
------------
BUILDING & EQUIPMENT -- 1.9%
12,500 Clayton Homes Inc.** 184,375
0,000 Ply Gem Industries, Inc. 412,500
------------
596,875
------------
BANKING -- 1.7%
10,000 Bank of Boston Corporation 280,000
10,000 Great Lakes Bancorp, Federal Savings Bank** 270,000
------------
550,000
------------
MEDICAL & DENTAL EQUIPMENT -- 1.6%
25,000 Orthofix International, Inc.** 346,875
10,000 Tecnol Medical Products, Inc.** 172,500
------------
519,375
------------
RESTAURANTS -- 1.5%
10,000 Brinker International, Inc.** 176,250
5,000 Buffets Inc.** 48,750
15,000 Wendy's International Inc. 241,875
------------
466,875
------------
METALS -- 1.1%
15,000 Wolverine Tube Inc.** 365,625
------------
PAPER PRODUCTS -- 1.0%
10,000 Times Mirror Company 323,750
------------
MISCELLANEOUS -- 4.8%
10,000 American Bankers Insurance Group, Inc. 251,250
</TABLE>
See Notes to Financial Statements.
23
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
SELECTED GROWTH STOCK PORTFOLIO
--------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
-------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- (CONTINUED)
MISCELLANEOUS -- (CONTINUED)
15,000 Celadon Group Inc.** $ 243,750
10,000 Comptek Research, Inc.** 146,250
1,000 Fritz Companies, Inc.** 49,500
12,000 Lear Seating Corporation** 220,500
10,000 Neopath, Inc. 120,000
10,000 Pall Corporation 190,000
10,000 Storage Trust Realty 178,750
10,000 United International Holdings Inc., Class A** 142,500
------------
1,542,500
------------
TOTAL COMMON STOCKS (COST $29,723,676) 30,433,738
------------
FACE
VALUE
-------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 6.9% (COST $2,228,000)
$ 2,228,000 Agreement with Chase Manhattan Corporation dated
1/31/95 bearing 5.950% to be repurchased at
$2,228,368 on 2/1/95, collateralized by
$2,760,000 FNMA/FHLMC mortgage-backed
securities, with various maturities and
interest rates (market value -- $2,274,911) 2,228,000
-------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST $31,951,676*) 101.7% 32,661,738
OTHER ASSETS AND LIABILITIES (NET) (1.7) (540,893)
-------------------------------------------------------------------------------
NET ASSETS 100.0% $ 32,120,845
-------------------------------------------------------------------------------
<FN>
* Aggregate cost for Federal tax purposes.
** Non-income producing securities.
ADR -- American Depositary Receipt
ADS -- American Depositary Share
</TABLE>
See Notes to Financial Statements.
24
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
---------------------------------------------------------------------------
STATEMENTS OF ASSETS & LIABILITIES JANUARY 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
DAILY MUNICIPAL SELECTED
INCOME INCOME GROWTH STOCK
NOTES FUND FUND PORTFOLIO
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost $603,919,518,
$218,419,532 and $31,951,676,
respectively) 1
See accompanying schedules:
Securities $487,357,518 $218,419,532 $ 30,433,738
Repurchase agreements 116,562,000 -- 2,228,000
-------------------------------------------------------------------------------------
Total Investments 603,919,518 218,419,532 32,661,738
Cash 381 321,005 407
Receivable for investment securities sold -- -- 1,137,516
Receivable for Fund shares sold 18,014,765 2,651,400 251,744
Dividends and/or interest receivable 1,585,842 1,731,830 6,218
Unamortized organization costs 6 336,500 132,732 93,605
-------------------------------------------------------------------------------------
TOTAL ASSETS 623,857,006 223,256,499 34,151,228
-------------------------------------------------------------------------------------
LIABILITIES:
Payable for investment securities purchased -- -- 1,830,580
Payable for Fund shares redeemed 16,975,335 3,336,152 34,883
Dividends payable 447,659 96,183 --
Investment Advisory fee payable 2 190,991 72,056 73,516
Distribution fee payable 3 92,788 32,818 20,162
Service fee payable 3 -- -- 6,721
Transfer Agent fees payable 2 210,000 27,000 3,602
Administration fee payable 2 122,436 28,038 17,604
Custodian fees payable 2 34,000 18,000 11,400
Accrued expenses and other payables 86,488 39,590 31,915
-------------------------------------------------------------------------------------
TOTAL LIABILITIES 18,159,697 3,649,837 2,030,383
-------------------------------------------------------------------------------------
NET ASSETS: $605,697,309 $219,606,662 $ 32,120,845
-------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
25
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
--------------------------------------------------------------------
STATEMENTS OF ASSETS & LIABILITIES (CONTINUED) JANUARY 31, 1995 (UNAUDITED)
<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/
(accumulated net investment loss) $ 60,635 $ 23,114 $ (140,402)
Accumulated net realized gain/(loss) on
securities and written options 7,263 (18,619) 614,925
Unrealized appreciation of securities -- -- 710,062
Par value 605,690 219,625 3,129
Paid-in capital in excess of par value 605,023,721 219,382,542 30,933,131
-------------------------------------------------------------------------------------
$605,697,309 $219,606,662 $ 32,120,845
-------------------------------------------------------------------------------------
NET ASSETS:
Select Shares $605,697,209 $219,606,562 N/A
CDSC Shares++ $ 100 $ 100 $ 32,120,845
-------------------------------------------------------------------------------------
SHARES OUTSTANDING:
Select Shares 605,689,946 219,625,181 N/A
CDSC Shares++ 100 100 3,129,171
-------------------------------------------------------------------------------------
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 $10.26
-------------------------------------------------------------------------------------
<FN>
+ Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
++ Lehman Brothers Selected Growth Stock Portfolio CDSC Shares were formerly
called Portfolio Shares.
</TABLE>
See Notes to Financial Statements.
26
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
---------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JANUARY 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
DAILY MUNICIPAL SELECTED
INCOME INCOME GROWTH STOCK
NOTES FUND FUND PORTFOLIO
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $18,335,616 $4,053,182 $ 117,848
Dividends -- -- 69,598
-------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 18,335,616 4,053,182 187,446
-------------------------------------------------------------------------------------
EXPENSES:
Investment Advisory fee 2 1,063,725 342,003 114,417
Distribution fee 3 886,438 285,001 114,417
Service fee 3 -- -- 38,139
Administration fee 2 709,150 228,002 33,562
Transfer Agent fees 2 419,533 55,111 7,481
Registration and filing fees -- -- 23,054
Legal and audit fees 51,433 41,462 20,307
Custodian fees 2 48,690 26,143 9,000
Amortization of organization costs 6 48,486 19,125 10,991
Directors' fees and expenses 2 14,122 14,122 5,500
Other 83,628 41,478 2,688
Fees waived by Distributor and/or Investment 2 and
Advisor and Administrator 3 (707,682) (263,098) (51,809)
-------------------------------------------------------------------------------------
TOTAL EXPENSES 2,617,523 789,349 327,747
-------------------------------------------------------------------------------------
NET INVESTMENT INCOME/(LOSS) 15,718,093 3,263,833 (140,301)
-------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN/(LOSS) 1 and
ON INVESTMENTS: 4
Net realized gain/(loss) from:
Securities (9,307) (6,292) 800,130
Written options -- -- 34,749
-------------------------------------------------------------------------------------
Net realized gain/(loss) on investments during
the period 1 (9,307) (6,292) 834,879
-------------------------------------------------------------------------------------
Net change in unrealized appreciation/
(depreciation) of:
Securities -- -- 854,711
Written options -- -- (15,374)
-------------------------------------------------------------------------------------
Net unrealized appreciation of investments
during the period -- -- 839,337
-------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN/
(LOSS) ON INVESTMENTS (9,307) (6,292) 1,674,216
-------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $15,708,786 $3,257,541 $ 1,533,915
---------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
27
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
---------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED JANUARY 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
SELECTED
DAILY MUNICIPAL GROWTH
INCOME INCOME STOCK
NOTES FUND FUND PORTFOLIO
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------
Net investment income/(loss) $ 15,718,093 $ 3,263,833 $ (140,301)
Net realized gain/(loss) on securities and
written options during the period (9,307) (6,292) 834,879
Net unrealized appreciation of securities and
written options during the period -- -- 839,337
-------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 15,708,786 3,257,541 1,533,915
Distributions to shareholders from net investment
income:
Select Shares (15,717,731) (3,263,763) --
CDSC Shares+ (362) (70) (38,213)
Net increase/(decrease) in net assets from share
transactions:
Select Shares 5 (212,848,315) (44,812,273) --
CDSC Shares+ 5 -- (9,788) 4,283,949
-------------------------------------------------------------------------------------
Net increase/(decrease) in net assets (212,857,622) (44,828,353) 5,779,651
NET ASSETS:
Beginning of period 818,554,931 264,435,015 26,341,194
-------------------------------------------------------------------------------------
End of period (including undistributed net
investment income/(accumulated net investment
loss) of $60,635, $23,114 and ($140,402),
respectively) $605,697,309 $219,606,662 $32,120,845
-------------------------------------------------------------------------------------
<FN>
+ Lehman Brothers Selected Growth Stock Portfolio CDSC Shares were formerly
called Portfolio Shares.
</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 5 818,538,261 264,437,454 --
CDSC Shares+ 5 100 9,888 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.
+ Lehman Brothers Selected Growth Stock Portfolio CDSC Shares were formerly
called Portfolio Shares.
</TABLE>
See Notes to Financial Statements.
29
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND
---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A SELECT SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED PERIOD
01/31/95 ENDED
(UNAUDITED) 07/31/94*
<S> <C> <C>
Net asset value, beginning of period $ 1.00 $ 1.00
-------------------------------------------------------------------------------------
Net investment income+++ 0.0226 0.0297
Dividends from net investment income (0.0226) (0.0297)
-------------------------------------------------------------------------------------
Net asset value, end of period $ 1.00 $ 1.00
-------------------------------------------------------------------------------------
Total return++ 2.28% 3.03%
-------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 605,697 $ 818,555
Ratio of net investment income to average net assets 4.43%** 3.01%**
Ratio of operating expenses to average net assets+ 0.74%** 0.66%**
-------------------------------------------------------------------------------------
<FN>
* Lehman Brothers Daily Income Fund Select Shares commenced operations on
August 2, 1993.
** Annualized.
+ Annualized operating expense ratios before waiver of fees by Investment
Adviser, Administrator and Distributor for the six months ended January 31,
1995 and the period ended July 31, 1994 were 0.94% and 0.95%, respectively.
++ Total return represents aggregate total return for the period indicated.
+++ Net investment income per share before waiver of fees by Investment Adviser,
Administrator and Distributor for the six months ended January 31, 1995 and
the period ended July 31, 1994 was $0.0216 and $0.0269, respectively.
</TABLE>
See Notes to Financial Statements.
30
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND
--------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CDSC SHARE OUTSTANDING THROUGHOUT THE PERIOD.
<TABLE>
<CAPTION>
PERIOD
ENDED
01/31/95*
(UNAUDITED)
<S> <C>
Net asset value, beginning of period $ 1.00
--------------------------------------------------------------------------------
Net investment income+++ 0.0103
Dividends from net investment income (0.0103)
--------------------------------------------------------------------------------
Net asset value, end of period $ 1.00
--------------------------------------------------------------------------------
Total return++ 1.03%
--------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) --#
Ratio of net investment income to average net assets 4.43%**
Ratio of operating expenses to average net assets+ 0.74%**
--------------------------------------------------------------------------------
<FN>
* Lehman Brothers Daily Income Fund CDSC Shares commenced operations on
November 16, 1994.
** Annualized.
+ Annualized operating expense ratio before waiver of fees by Investment
Adviser, Administrator and Distributor for the period ended January 31, 1995
was 0.94%.
++ Total return represents aggregate total return for the period indicated.
+++ Net investment income per share before waiver of fees by Investment Adviser,
Administrator and Distributor for the period ended January 31, 1995 was
$0.0098.
# Total net assets for CDSC Shares were $100 at January 31, 1995.
</TABLE>
See Notes to Financial Statements.
31
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A SELECT SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED PERIOD
01/31/95 ENDED
(UNAUDITED) 07/31/94*
<S> <C> <C>
Net asset value, beginning of period $ 1.00 $ 1.00
-------------------------------------------------------------------------------------
Net investment income+++ 0.0146 0.0207
Dividends from net investment income (0.0146) (0.0207)
-------------------------------------------------------------------------------------
Net asset value, end of period $ 1.00 $ 1.00
-------------------------------------------------------------------------------------
Total return++ 1.49% 2.09%
-------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 219,607 $ 264,425
Ratio of net investment income to average net assets 2.86%** 2.06%**
Ratio of operating expenses to average net assets+ 0.69%** 0.64%**
-------------------------------------------------------------------------------------
<FN>
* Lehman Brothers Municipal Income Fund Select Shares commenced operations on
August 2, 1993.
** Annualized.
+ Annualized operating expense ratios before waiver of fees by Investment
Adviser, Administrator and Distributor for the six months ended January 31,
1995 and the period ended July 31, 1994 were 0.92% and 0.89%, respectively.
++ Total return represents aggregate total return for the period indicated.
+++ Net investment income per share before waiver of fees by Investment Adviser,
Administrator and Distributor for the six months ended January 31, 1995 and
the period ended July 31, 1994 was $0.0134 and $0.0182, respectively.
</TABLE>
See Notes to Financial Statements.
32
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
--------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CDSC SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED PERIOD
01/31/95 ENDED
(UNAUDITED) 07/31/94*
<S> <C> <C>
Net asset value, beginning of period $ 1.00 $ 1.00
-------------------------------------------------------------------------------------
Net investment income+++ 0.0146 0.0018
Dividends from net investment income (0.0146) (0.0018)
-------------------------------------------------------------------------------------
Net asset value, end of period $ 1.00 $ 1.00
-------------------------------------------------------------------------------------
Total return++ 1.49% 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 2.86%** 2.06%**
Ratio of operating expenses to average net assets+ 0.69%** 0.64%**
-------------------------------------------------------------------------------------
<FN>
* Lehman Brothers Municipal Income Fund CDSC Shares commenced operations on
July 6, 1994.
** Annualized.
+ Annualized operating expense ratios before waiver of fees by Investment
Adviser, Administrator and Distributor for the six months ended January 31,
1995 and the period ended July 31, 1994 were 0.92% and 0.89%, respectively.
++ Total return represents aggregate total return for the period indicated.
+++ Net investment income per share before waiver of fees by Investment
Adviser, Administrator and Distributor for the six months ended January 31,
1995 and the period ended July 31, 1994 was $0.0134 and $0.0017,
respectively.
# Total net assets for CDSC Shares were $100 at January 31, 1995.
</TABLE>
See Notes to Financial Statements.
33
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
SELECTED GROWTH STOCK PORTFOLIO
---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CDSC SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED PERIOD
01/31/95 ENDED
(UNAUDITED) 07/31/94*
<S> <C> <C>
Net asset value, beginning of period $ 9.73 $ 10.00
-------------------------------------------------------------------------------------
Income from investment operations:
Net investment income/(loss)+++ (0.05) 0.01
Net realized and unrealized gain/(loss) on investments 0.59 (0.28)
-------------------------------------------------------------------------------------
Total from investment operations 0.54 (0.27 )
-------------------------------------------------------------------------------------
Dividends from net investment income (0.01 ) --
-------------------------------------------------------------------------------------
Net asset value, end of period $ 10.26 $ 9.73
-------------------------------------------------------------------------------------
Total return++ 5.58% (2.70 )%
-------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 32,121 $ 26,341
Ratio of net investment income/(loss) to average net assets (0.92 %** 1.06%**
Ratio of operating expenses to average net assets+ 2.15%** 2.04%**
Portfolio turnover rate 85% 33%
-------------------------------------------------------------------------------------
<FN>
* Lehman Brothers Selected Growth Stock Portfolio CDSC Shares (formerly called
Portfolio Shares) commenced operations on May 20, 1994.
** Annualized.
+ Annualized operating expense ratios before waiver of fees and/or expenses
reimbursed by Investment Adviser and Administrator for the six months ended
January 31, 1995 and the period ended July 31, 1994 were 2.49% and 3.42%,
respectively.
++ Total return represents aggregate total return for the period indicated.
+++ Net investment income/(loss) per share before waiver of fees and/or expenses
reimbursed by Investment Adviser and Administrator for the six months ended
January 31, 1995 and the period ended July 31, 1994 was $(0.06) and $0.00,
respectively.
</TABLE>
See Notes to Financial Statements.
34
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
SELECTED GROWTH STOCK PORTFOLIO
---------------------------------------------
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 currently offers three funds: Lehman Brothers Daily Income Fund
("Daily Income Fund"), Lehman Brothers Municipal Income Fund ("Municipal Income
Fund") and Lehman Brothers 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, referred
to as CDSC Shares for purposes of this report. Select Shares are offered without
a front-end sales load or contingent deferred sales charge. CDSC Shares may be
subject to a contingent deferred sales charge. 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
asked 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
35
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
SELECTED GROWTH STOCK PORTFOLIO
--------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (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 will take 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' Investment Adviser reviews 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 purchase or write
exchange-listed and over-the-counter put and call options on securities,
financial futures contracts, equity indices and other financial instruments for
hedging and other strategic transactions in an attempt to protect against
possible changes in the market value of securities held or to be purchased by
the Fund resulting from the securities market, to protect the Fund's unrealized
gains in the value of its securities, to facilitate the sale of those securities
for investment purposes, to establish a position in the derivatives market as a
temporary substitute for purchasing or selling particular securities or to seek
to enhance the Fund's income or gains.
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.
36
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
SELECTED GROWTH STOCK PORTFOLIO
--------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
When the 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 written call
option is exercised, the Fund realizes a gain or loss from the sale of the
underlying security and the proceeds from such sale are increased by the premium
originally received. When a written 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.
EXPENSES: Operating expenses directly attributable to a class of shares are
charged to that class' operations. 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.
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.
37
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
SELECTED GROWTH STOCK PORTFOLIO
--------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 the 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
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 characterizations of distributions made by each Fund
as a whole.
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. Under the investment
advisory agreements, LBGAM is entitled to receive from the Daily Income Fund and
the Municipal Income Fund a monthly fee at an annual rate of 0.30% of the value
of each Fund's respective average daily net assets. LBGAM is entitled to receive
from the Selected Growth Stock Portfolio 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 advisory fees. For the six months ended January 31, 1995, LBGAM
voluntarily waived advisory fees as follows:
<TABLE>
<CAPTION>
FEES WAIVED
<S> <C>
-----------------------------------------------------------------
Daily Income Fund $ 272,200
Municipal Income Fund 105,726
Selected Growth Stock Portfolio 40,902
-----------------------------------------------------------------
</TABLE>
38
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
SELECTED GROWTH STOCK PORTFOLIO
--------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (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, TSSG is entitled
to receive from each Fund a monthly fee at an annual rate of 0.20% of the value
of its respective average daily net assets. TSSG may voluntarily waive
administration fees. For the six months ended January 31, 1995, TSSG voluntarily
waived administration fees as follows:
<TABLE>
<CAPTION>
FEES WAIVED
<S> <C>
-----------------------------------------------------------------
Daily Income Fund $ 187,280
Municipal Income Fund 77,571
Selected Growth Stock Portfolio 10,907
-----------------------------------------------------------------
</TABLE>
For the six months ended January 31, 1995, the Selected Growth Stock
Portfolio incurred total brokerage commissions of $76,750, of which $17,262 was
paid to Lehman Brothers Inc. ("Lehman Brothers").
A contingent deferred sales charge may be imposed upon the redemption of CDSC
Shares within two years after the date of purchase. The amount of the contingent
deferred sales charge will depend on the number of years since the shareholder
made the purchase payment from which the amount is being redeemed.
During the six months ended January 31, 1995, each Fund incurred the
following contingent deferred sales charges:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES
CHARGES INCURRED
<S> <C>
-----------------------------------------------------------------
Daily Income Fund --
Municipal Income Fund --
Selected Growth Stock Portfolio $ 38,085
-----------------------------------------------------------------
</TABLE>
No employee of Lehman Brothers Holdings Inc., Lehman Brothers, LBGAM or TSSG
receives any compensation from the Company for serving as an officer or Director
of the Company. The Company pays each Director who is not a director, an officer
or employee of Lehman Brothers Holdings Inc.,
39
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
SELECTED GROWTH STOCK PORTFOLIO
--------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 Bank Corporation, serves as the Funds' custodian. TSSG serves as the
Funds' transfer agent.
3. SERVICES AGREEMENTS
Lehman Brothers acts as the Distributor of each Fund's 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 a
distribution fee, accrued daily and paid monthly, at an annual rate of 0.25% of
the value of its respective average daily net assets for advertising, marketing
and distributing its shares.
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 its shares.
40
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
SELECTED GROWTH STOCK PORTFOLIO
--------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
For the six months ended January 31, 1995, each Fund incurred the following
distribution fees:
<TABLE>
<CAPTION>
SELECT
SHARES CDSC SHARES
<S> <C> <C>
-----------------------------------------------------------------
Daily Income Fund $ 886,418 $ 20
Municipal Income Fund 284,994 7
Selected Growth Stock Portfolio -- 114,417
-----------------------------------------------------------------
</TABLE>
The Selected Growth Stock Portfolio incurred service fees of $38,139 for the
six months ended January 31, 1995.
Lehman Brothers may waive fees in relation to the Plan of Distribution. For
the six months ended January 31, 1995, Lehman Brothers waived fees in relation
to the Plan of Distribution as follows:
<TABLE>
<CAPTION>
FEES WAIVED
<S> <C>
-----------------------------------------------------------------
Daily Income Fund $ 248,202
Municipal Income Fund 79,801
-----------------------------------------------------------------
</TABLE>
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding short-term
investments, aggregated $42,351,277 and $23,949,636, respectively, for the six
months ended January 31, 1995 for the Selected Growth Stock Portfolio. At
January 31, 1995, aggregate gross unrealized appreciation for all securities in
which there is an excess of value over tax cost was $1,650,622 and aggregate
gross unrealized depreciation for all securities in which there is an excess of
tax cost over value was $940,560 for the Selected Growth Stock Portfolio. Net
unrealized appreciation was $710,062 for the Selected Growth Stock Portfolio.
41
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
SELECTED GROWTH STOCK PORTFOLIO
--------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Written option activity for the Selected Growth Stock Portfolio for the six
months ended January 31, 1995 was as follows:
<TABLE>
<CAPTION>
NUMBER OF
CONTRACTS PREMIUM
<S> <C> <C>
-----------------------------------------------------------------
Option outstanding at July 31, 1994 50 $ 34,749
Option expired (50) (34,749)
-----------------------------------------------------------------
Option outstanding at January 31, 1995 0 $ 0
-----------------------------------------------------------------
</TABLE>
5. SHARES OF CAPITAL STOCK
The Board of Directors has authority to issue 10,000,000,000 shares of
capital stock ($0.001 par value) for the Company. The shares of the Daily Income
Fund and the Municipal Income Fund are divided into three classes of shares,
Select Shares,CDSC Shares and Global Clearing Shares. Global Clearing Shares
have not yet been offered to the public. 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>
SIX MONTHS ENDED PERIOD ENDED
01/31/95 07/31/94*
SHARES AND SHARES AND
AMOUNT AMOUNT
<S> <C> <C>
----------------------------------------------------------------
DAILY INCOME FUND:
Select Shares:
Sold $2,029,642,924 $4,591,256,544
Dividend Reinvestment 16,334,018 19,498,755
Redeemed (2,258,825,257) (3,792,217,038)
----------------------------------------------------------------
Net increase/(decrease) $ (212,848,315 ) $ 818,538,261
----------------------------------------------------------------
* The Daily Income Fund Select Shares commenced operations on
August 2, 1993.
</TABLE>
42
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
SELECTED GROWTH STOCK PORTFOLIO
--------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
PERIOD ENDED
01/31/95**
SHARES AND AMOUNT
<S> <C> <C>
-----------------------------------------------------------------
CDSC Shares:
Sold $ 52,050
Dividend Reinvestment 284
Redeemed (52,334)
-----------------------------------------------------------------
Net increase $ 0
-----------------------------------------------------------------
** The Daily Income Fund CDSC Shares commenced operations on
November 16, 1994.
</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.
43
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
SELECTED GROWTH STOCK PORTFOLIO
--------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD ENDED
01/31/95 07/31/94*
SHARES AND SHARES AND
AMOUNT AMOUNT
<S> <C> <C>
----------------------------------------------------------------
MUNICIPAL INCOME FUND:
Select Shares:
Sold $531,763,504 $1,214,682,908
Dividend Reinvestment 3,406,783 4,150,160
Redeemed (579,982,560) (954,395,614)
----------------------------------------------------------------
Net increase/(decrease) $ (44,812,273 ) $ 264,437,454
----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD ENDED
01/31/95 07/31/94**
SHARES AND AMOUNT SHARES AND AMOUNT
<S> <C> <C>
-----------------------------------------------------------------
CDSC Shares:
Sold -- $ 9,888
Dividend Reinvestment $ 77 --
Redeemed (9,865) --
-----------------------------------------------------------------
Net increase/(decrease) $ (9,788 ) $ 9,888
-----------------------------------------------------------------
* 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>
44
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
SELECTED GROWTH STOCK PORTFOLIO
--------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
The table below summarizes the capital stock transactions for the Selected
Growth Stock Portfolio:
<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD ENDED
01/31/95 07/31/94*
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
-----------------------------------------------------------------
SELECTED GROWTH
STOCK PORTFOLIO:
CDSC Shares:
Sold 742,448 $7,551,842 2,712,257 $26,711,937
Dividend
Reinvestment 2,703 27,599 -- --
Redeemed (322,392) (3,295,492) (5,845) (57,611)
-----------------------------------------------------------------
Net increase 422,759 $4,283,949 2,706,412 $26,654,326
-----------------------------------------------------------------
<FN>
* The Selected Growth Stock Portfolio CDSC shares (formerly called Portfolio
shares) commenced operations on May 20, 1994.
</TABLE>
6. 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 each Fund. 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.
7. PURCHASE GUARANTY
On December 6, 1994, Orange County, California filed for bankruptcy. The
Daily Income Fund held on that date, and continues to hold as of the date of
this report, a $40 million position of Orange County, California, Taxable Notes,
which matures on July 10, 1995. Lehman Brothers Holdings, Inc. has
unconditionally agreed to purchase from the Daily Income Fund on demand, through
the maturity date of the notes, all or such portion of the Orange County Notes
as necessary to ensure that the offering price of the Fund's shares is
maintained on a daily basis at $1.00 per share.
45
<PAGE>
LEHMAN BROTHERS
Lehman Brothers Inc. All Rights Reserved
Member SIPC
