LEHMAN BROTHERS FUNDS, INC.
LEHMAN
SELECTED GROWTH
STOCK PORTFOLIO
ANNUAL
REPORT
FOR THE FISCAL PERIOD ENDED
DECEMBER 31, 1995
LEHMAN BROTHERS
<PAGE>
THIS REPORT IS FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF LEHMAN
SELECTED GROWTH STOCK PORTFOLIO. ITS USE IN CONNECTION WITH ANY OFFERING OF THE
FUND'S SHARES IS AUTHORIZED ONLY IF ACCOMPANIED OR PRECEDED BY THE FUND'S
CURRENT PROSPECTUS.
<PAGE>
DEAR SHAREHOLDER:
We are pleased to provide the attached Report to Shareholders of the Lehman
Selected Growth Stock Portfolio (the "Fund") for the fiscal period ended
December
31, 1995. The report on the Fund's overall performance results for the year is
included under "Management Discussion & Performance Analysis" on page 2 of this
report.
OUTLOOK FOR 1996
We continue to have a positive outlook for 1996, however our expectation is
for heightened market volatility. With the long bond at 6%, we believe that a
company growing 15% to 20% can justify a fairly hefty multiple. Thus, in this
climate, any earnings shortfall or subtle change in expectations, regardless of
how minor, equates to a meaningful correction in price. We are, nevertheless,
optimistic. The combination of decelerating economic growth and benign inflation
represents an environment where growth is hard to find. We believe this is a
healthy climate for small- to mid-cap growth stocks to outperform the market.
Some themes we are especially interested in this year:
Companies that provide integrated solutions to business. The fast pace at
which new technologies are introduced has companies confused. This confusion
should be favorable for those businesses that adapt new technologies to offer
solutions for specific business problems, or train the professionals needed to
provide in-house technical expertise.
Companies that educate. Obsolete is a term often applied to an old
technology, but in our society there are many relatively young individuals who
need additional skills to stay competitive in the job market. Furthermore,
employed adults often require additional skills to accomplish their tasks more
efficiently. Advances in technology allow education to be brought into the
workplace interactively, making training easier to accomplish.
Companies that specialize in outsourced services. One of the easiest ways a
business can downsize is to eliminate functions that can be performed more
economically by outside vendors. We believe that businesses in this category
have a potential economic advantage over an in-house effort because they can
attract and retain the talent while building the volumes necessary to achieve
peak efficiency.
We are encouraged by the Fund's prospects for the upcoming year and thank
our shareholders for your continued support.
Sincerely,
/s/ Andrew D. Gordon
Andrew D. Gordon
President
February 27, 1996
1
<PAGE>
MANAGEMENT DISCUSSION AND PERFORMANCE ANALYSIS
The Fund's aggregate total return from inception through December 31, 1995
was 48.02%, which compares favorably with the broader equity indices as well as
other funds with similar investment objectives. We attribute the strong
performance to a favorable climate for equities in general and for growth issues
in particular. That environment also favored our investment approach which
concentrates on businesses across a range of industries that are healthy and
growing, with characteristics that lend themselves to consistent growth, and
with valuations that make sense. We started the year with a heavy concentration
in technology. However, as the year progressed we shifted our emphasis to the
health care sector which had lagged in performance during the first half of the
year but whose fundamentals were improving.
Since our last report to shareholders for the fiscal year ended July 31,
1995, the Fund advanced 10.82% comparing favorably with the Lipper Mid-Cap Fund
Average which advanced 5.81% and the Russell 2000 Index which advanced 6.14%
during that same time span. Our outperformance reflects a reduced exposure to
technology and a concurrent increase in health care holdings.
2
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
LEHMAN SELECTED GROWTH STOCK PORTFOLIO -- CDSC SHARES
Description of the plot points for the graph in the report.
Lehman Brothers Funds, Inc.
Lehman Selected Growth Stock Portfolio -- CDSC
Shares vs Russell 2000 Index and Lipper Mid Cap Fund Average Growth of $10,000
Investment
<TABLE>
<CAPTION>
Lehman
Selected
Lipper Mid Cap Russell 2000 Growth Stock
Fund Average Index Portfolio
<S> <C> <C> <C>
05/20/94 $10,000 $10,000 $10,000
05/31/94 $10,000 $10,000 $ 9,920
06/30/94 $ 9,579 $ 9,660 $ 9,670
09/30/94 $10,399 $10,332 $10,270
12/31/94 $10,308 $10,141 $10,223
03/31/95 $10,963 $10,609 $11,234
06/30/95 $11,981 $11,603 $12,396
09/30/95 $13,492 $12,749 $13,887
12/31/95 $13,662 $13,026 $14,802
</TABLE>
Lehman Selected
Growth Stock
Portfolio -- CDSC
Shares Aggregate
Total Return
for period ended
December 31, 1995*
Since Inception
05/20/94
Fund:
48.02%
Russell 2000 Small
Capitalization Index
30.26%
Period Ended
12/31/95*
Fund:
10.82%
The graph above shows the results of a hypothetical $10,000 invested in the
Lehman Selected Growth Stock Portfolio (the "Fund") -- CDSC Shares from the
inception of the Fund, compared to a theoretical investment of $10,000 in the
respective indices over the same period. (Index results are calculated beginning
the first day of the month following the commencement of the Fund's operations.)
The results for the Fund reflect the waiver of a portion of fees by the Adviser
and Administrator of the Fund for the period indicated.
The Russell 2000 Small Capitalization Index is a capitalization weighted total
return index which is comprised of 2000 of the smallest capitalized U.S.
domiciled companies whose common stock is traded in the U.S. on the New York
Stock Exchange, American Stock Exchange and NASDAQ. The Lipper Mid-Cap Fund
Average was derived from a universe of only those mutual funds that were in
existence as of the inception date of the Fund and are comprised of mid-cap
funds tracked by Lipper Analytical Services, Inc.
NOTE: The performance shown represents past performance and is not a guarantee
of future results. A portfolio's share price and investment return will vary
with market conditions, and the value of shares, when redeemed, may be worth
more or less than the original cost. Also, the figures shown above do not
reflect the effect of any sales charge.
+ Assumes the reinvestment of all dividends and distributions.
* The Fund's fiscal year end was changed from July 31 to December 31. The total
return is for the period August 1, 1995 through December 31, 1995.
3
<PAGE>
Description of pie chart in the report.
INDUSTRY BREAKDOWN
<TABLE>
<S> <C>
Computer & Computer Services 22.2%
Healthcare 13.6%
Electric 11.2%
Medical & Dental Equipment 7.6%
Financial Services 6.7%
Pharmaceuticals 5.2%
Telecommunications 4.9%
Administrative Services 4.1%
Other Common Stocks 21.2%
Repurchase Agreement and
Net Other Assets and Liabilities 3.3%
100.0%
</TABLE>
TOP TEN HOLDINGS
<TABLE>
<CAPTION>
PERCENTAGE OF
COMPANY NET ASSET
<S> <C>
Apollo Group Inc., Class A 3.5%
Policy Management Systems Corporation 3.2
Paychex, Inc. 3.0
Health Management Systems, Inc. 2.6
Kent Electronics Corporation 2.6
IDEXX Laboratories Inc. 2.6
Scholastic Corporation 2.2
Apria Healthcare Group Inc. 1.9
Watson Pharmaceuticals Inc. 1.9
Fritz Companies, Inc. 1.9
25.4%
</TABLE>
4
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
LEHMAN SELECTED GROWTH STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
<S> <C> <C>
COMMON STOCKS - 96.7%
COMPUTER & COMPUTER SERVICES - 22.2%
13,000 Adaptec Inc.** $ 533,000
5,000 Adobe Systems Inc. 310,000
14,000 America OnLine Inc.** 525,000
20,000 American Management Systems Inc.** 600,000
10,000 Barra Inc.** 170,000
25,000 BISYS Group, Inc.** 768,750
4,000 Cabletron Systems, Inc.** 324,000
15,000 Cadence Design Systems, Inc.** 630,000
15,000 Compshare Inc.** 390,000
10,000 Data General Corporation** 137,500
7,500 Datametrics Corporation** 59,063
10,000 DST Systems, Inc.** 285,000
10,000 HCIA Inc.** 467,500
5,000 Intuit Inc.** 390,000
3,000 Netcom On-Line Communication Services, Inc.** 108,000
5,000 NetStar Inc.** 91,250
20,000 Orbital Sciences Corporation** 255,000
30,000 Pace Health Management Systems, Inc.** 78,750
30,000 Policy Management Systems Corporation** 1,428,750
10,000 PsiNet Inc.** 228,750
10,000 Quarterdeck Corporation**+ 275,000
7,000 Softdesk, Inc.** 138,250
15,000 Software 2000 Inc.** 116,250
20,000 Stac Inc.** 287,500
10,000 Sterling Software Inc.** 623,750
5,000 Sun Microsystems Inc.** 228,125
10,000 Symantec Corporation** 232,500
10,000 Tecnomatix Technologies Ltd.** 125,000
9,806,688
HEALTHCARE - 13.6%
30,000 Apria Healthcare Group Inc.** 847,500
9,000 Biogen, Inc.** 553,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
LEHMAN SELECTED GROWTH STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED) DECEMBER 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
<S> <C> <C>
COMMON STOCKS (CONTINUED)
HEALTHCARE (CONTINUED)
20,000 Cell Genesys Inc.** $ 200,000
10,000 Community Health Systems, Inc.** 356,250
10,000 Genzyme Corporation - General Division** 623,750
30,000 Genzyme Corporation - Tissue Repair** 476,250
30,000 Health Management Systems, Inc.** 1,170,000
20,000 HEALTHSOUTH Corporation** 582,500
14,000 Inphynet Medical Management, Inc.** 336,000
15,400 Integrated Health Services Inc.** 385,000
20,000 Ostex International Inc.** 385,000
7,500 Pediatric Services of America, Inc.** 118,125
6,033,875
ELECTRIC - 11.2%
20,000 Amphenol Corporation, Class A** 485,000
10,000 Franklin Electric Publishing, Inc.** 295,000
30,000 International Rectifier Corporation** 750,000
12,000 Kemet Corporation 286,500
19,550 Kent Electronics Corporation** 1,141,231
20,000 LTX Corporation** 182,500
10,000 Mackie Designs Inc.** 112,500
6,000 SGS-THOMSON N.V.** 241,500
8,000 S3 Inc.** 141,000
15,000 Thermotrex Corporation** 750,000
10,000 Unitrode Corporation** 282,500
10,000 Xilinx Inc.** 305,000
4,972,731
MEDICAL & DENTAL EQUIPMENT - 7.6%
24,000 IDEXX Laboratories Inc.** 1,128,000
10,000 Maxxim Medical, Inc.** 167,500
25,000 Neopath, Inc.** 581,250
10,000 Physician Sales & Services Inc.** 285,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
LEHMAN SELECTED GROWTH STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED) DECEMBER 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
<S> <C> <C>
COMMON STOCKS (CONTINUED)
MEDICAL & DENTAL EQUIPMENT (CONTINUED)
15,000 Thermedics Inc.** $ 416,250
10,000 Thermo Cardiosystems Inc.** 772,500
3,350,500
FINANCIAL SERVICES - 6.7%
39,999 Apollo Group Inc., Class A** 1,564,961
30,000 Equifax Inc. 641,250
20,000 Medaphis Corporation** 740,000
2,946,211
PHARMACEUTICALS - 5.2%
10,000 Elan Corporation Plc, Sponsored ADR** 486,250
10,000 R.P. Scherer Corporation** 491,250
10,000 Teva Pharmaceutical Industries, Ltd. 463,750
17,200 Watson Pharmaceuticals Inc.** 842,800
2,284,050
TELECOMMUNICATIONS - 4.9%
25,000 ECI Telecom Ltd. 570,312
15,000 PictureTel Corporation** 646,875
30,000 Precision Systems Inc.** 405,000
15,000 Satellite Technology Management, Inc.** 288,750
10,000 Transaction Network Service, Inc.** 250,000
2,160,937
ADMINISTRATIVE SERVICES - 4.1%
15,000 Fiserv Inc.** 450,000
27,000 Paychex, Inc. 1,346,625
1,796,625
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
LEHMAN SELECTED GROWTH STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED) DECEMBER 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
<S> <C> <C>
COMMON STOCKS (CONTINUED)
BROADCASTING - 3.6%
18,000 Clear Channel Communications, Inc.** $ 794,250
10,000 Emmis Broadcasting Corporation, Class A** 310,000
500 Infinity Broadcasting Corporation, Class A** 18,625
10,000 LIN Television Corporation** 297,500
6,000 United Video Satellite Group, Inc., Class A** 162,000
1,582,375
CONSUMER SERVICES - 3.5%
10,000 Hagar Corporation 180,000
15,000 Learning Tree International, Inc.** 234,375
15,000 Pronet, Inc. 442,500
20,000 Regis Corporation** 480,000
20,000 SCP Pool Corporation** 209,063
1,545,938
RETAIL - 3.2%
25,000 Duty Free International Inc. 400,000
10,000 MSC Industrial Direct Company, Class A** 275,000
15,000 Office-Max Inc.** 335,625
10,000 Tandy Corporation 415,000
1,425,625
PUBLISHING - 3.0%
15,000 Desktop Data Inc.** 367,500
12,500 Scholastic Corporation** 971,875
1,339,375
TRANSPORTATION - 1.9%
20,000 Fritz Companies, Inc.** 830,000
INSURANCE - 1.5%
12,000 MGIC Investment Corporation 651,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
LEHMAN SELECTED GROWTH STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED) DECEMBER 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
<S> <C> <C>
COMMON STOCKS (CONTINUED)
ENTERTAINMENT - 1.1%
10,000 Carnival Corporation $ 243,750
10,000 GTECH Holdings Corporation** 260,000
503,750
MISCELLANEOUS - 3.4%
9,000 Applied Materials Inc.** 354,375
15,000 Cort Business Services Corporation** 247,500
17,600 Dimark Inc.** 255,200
10,000 Sealed Air Corporation 281,250
15,000 Thermo Fibertek Inc.** 339,375
1,477,700
TOTAL COMMON STOCKS (Cost $33,354,966) 42,707,380
PRINCIPAL
AMOUNT
REPURCHASE AGREEMENT - 2.4% (Cost $1,079,000)
$1,079,000 Agreement with Chase Manhattan Corporation, dated 12/29/95
bearing 6.000% to be repurchased at $1,079,719 on 1/2/96,
collateralized by $1,525,000 Federal National
Mortgage Association Adjustable Rate Mortgage,
7.206% due 3/1/24 1,079,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
LEHMAN SELECTED GROWTH STOCK PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED) DECEMBER 31, 1995
<TABLE>
<CAPTION>
VALUE
(NOTE 1)
<S> <C> <C> <C>
TOTAL INVESTMENTS (Cost $34,433,966*) 99.1% $43,786,380
NUMBER OF
CONTRACTS
WRITTEN OPTION - (0.1)% (Premium received $14,075)
MATURITY STRIKE
DATE PRICE
100 Quarterdeck Corporation Call 1/19/96 $22.50 (0.1) (60,000)
OTHER ASSETS AND LIABILITIES (Net) 1.0 466,190
NET ASSETS 100.0% $44,192,570
</TABLE>
- ------------------
* Aggregate cost for Federal tax purposes.
** Non-income producing securities.
+ Security on which option was written (share amount subject to call has a
market value of $275,000).
ADR - American Depositary Receipt
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
LEHMAN SELECTED GROWTH STOCK PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1995
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $34,433,966) (Note 1)
See accompanying schedule $43,786,380
Cash 561
Receivable for investment securities sold 708,445
Unamortized organization costs (Note 6) 73,678
Receivable for Fund shares sold 55,837
Dividends and interest receivable 2,847
TOTAL ASSETS 44,627,748
LIABILITIES:
Payable for investment securities purchased $232,500
Call Option written, at value (Premium received
$14,075) (Note 1)
See accompanying schedule 60,000
Investment advisory fee payable (Note 2) 48,794
Distribution fee payable (Note 3) 26,506
Custodian fees payable (Note 2) 18,900
Administration fee payable (Note 2) 13,060
Service fee payable (Note 3) 8,835
Transfer agent fees payable (Note 2) 2,489
Accrued expenses and other payables 24,094
TOTAL LIABILITIES 435,178
NET ASSETS $44,192,570
NET ASSETS CONSIST OF:
Accumulated net investment loss $ (314,862)
Accumulated net realized gain on 2,419,332
investments sold
Net unrealized appreciation of investments 9,306,489
Par value 3,282
Paid-in capital in excess of par value 32,778,329
TOTAL NET ASSETS $44,192,570
NET ASSET VALUE:
NET ASSET VALUE and offering price per CDSC share+
($44,192,570 / 3,281,596 shares of capital stock outstanding) $13.47
</TABLE>
+ Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
LEHMAN SELECTED GROWTH STOCK PORTFOLIO
STATEMENT OF OPERATIONS
<TABLE>
<S> <C> <C>
FOR THE PERIOD ENDED DECEMBER 31, 1995*
INVESTMENT INCOME:
Dividends (Net of foreign withholding
taxes of $808) $29,890
Interest 12,209
TOTAL INVESTMENT INCOME 42,099
EXPENSES:
Distribution fee (Note 3) $127,576
Investment advisory fee (Note 2) 127,576
Service fee (Note 3) 42,525
Administration fee (Note 2) 34,020
Legal and audit fees 15,953
Custodian fees (Note 2) 12,131
Amortization of organization costs (Note 6) 9,115
Transfer agent fees (Note 2) 6,454
Directors' fees and expenses (Note 2) 6,333
Other 3,930
Total expenses 385,613
Fees waived by Investment Adviser and
Administrator (Note 2) (28,652)
Net expenses 356,961
NET INVESTMENT LOSS (314,862)
REALIZED AND UNREALIZED GAIN/(LOSS)
ON INVESTMENTS (Notes 1 and 4):
Net realized gain on:
Securities 4,460,027
Written options 2,687
Net realized gain on investments 4,462,714
Net change in unrealized appreciation/(depreciation) of:
Securities 260,900
Written options (45,925)
Net change in unrealized appreciation of investments 214,975
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 4,677,689
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $4,362,827
</TABLE>
* The Fund's fiscal year end was changed from July 31 to December 31. The
financial information contained in this report is for the period August 1,
1995 through December 31, 1995.
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
LEHMAN SELECTED GROWTH STOCK PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
PERIOD YEAR
ENDED ENDED
12/31/95* 07/31/95
<S> <C> <C>
Net investment loss $ (314,862) $ (436,172)
Net realized gain on investments 4,462,714 2,302,193
Net change in unrealized appreciation of investments 214,975 9,220,789
Net increase in net assets resulting from operations 4,362,827 11,086,810
Dividends to shareholders from net
investment income - (38,112)
Dividends to shareholders from net realized gains (3,686,624) (101)
Net increase in net assets from Fund share
transactions (Note 5) 4,392,586 1,733,990
Net increase in net assets 5,068,789 12,782,587
NET ASSETS:
Beginning of period 39,123,781 26,341,194
End of period (including accumulated net
investment loss of $(314,862) at
December 31, 1995) $44,192,570 $39,123,781
</TABLE>
* The Fund's fiscal year end was changed from July 31 to December 31. The
financial information contained in this report is for the period August 1,
1995 through December 31, 1995.
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
LEHMAN SELECTED GROWTH STOCK PORTFOLIO
FINANCIAL HIGHLIGHTS
FOR A CDSC SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
PERIOD YEAR PERIOD
ENDED ENDED ENDED
12/31/95** 07/31/95 07/31/94*
<S> <C> <C> <C>
Net asset value, beginning of period $13.34 $ 9.73 $10.00
Income from investment operations:
Net investment income/(loss)+ (0.10) (0.15) 0.01
Net realized and unrealized gain/(loss)
on investments 1.51 3.77 (0.28)
Total from investment operations 1.41 3.62 (0.27)
Dividends from net investment income - (0.01) -
Dividends from net realized gains (1.28) - ## -
Total dividends (1.28) (0.01) -
Net asset value, end of period $13.47 $13.34 $9.73
Total return++ 10.82% 37.27% (2.70)%
Ratios to average net assets/
supplemental data:
Net assets, end of period (in 000's) $44,193 $39,124 $26,341
Ratio of operating expenses
to average net assets+++ 2.09%*** 2.10% 2.04%***
Ratio of net investment income/
(loss) to average net assets (1.85)%*** (1.32)% 1.06%***
Portfolio turnover rate 93% 192% 33%
</TABLE>
* The Fund's CDSC Shares (formerly called Portfolio Shares) commenced
operations on May 20, 1994.
** The Fund's fiscal year end was changed from July 31 to December 31.
*** Annualized.
+ Net investment income/(loss) per share before waiver of fees and/or
expenses reimbursed by Investment Adviser and Administrator for the
fiscal period ended December 31, 1995, the fiscal year ended July 31,
1995 and the fiscal period ended July 31, 1994 was $(0.10), $(0.19) and
$0.00, respectively.
++ Total return represents aggregate total return for the periods indicated
and does not reflect any applicable sales charges. Total return for the
period of less than one year is not annualized.
+++ Annualized operating expense ratios before waiver of fees and/or
expenses reimbursed by Investment Adviser and Administrator for the
fiscal period ended December 31, 1995, the fiscal year ended July 31,
1995 and the fiscal period ended July 31, 1994 were 2.26%, 2.46% and
3.42%, respectively.
## Amount is less than $0.01 per share.
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
LEHMAN SELECTED GROWTH STOCK PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION AND 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 consisting of four funds, including Lehman Selected Growth
Stock Portfolio (the "Fund"). The Fund currently offers one class of shares,
referred to as CDSC Shares for purposes of this report. CDSC Shares may be
subject to a contingent deferred sales charge. The preparation of the Financial
Statements in accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the Financial Statements. Actual results could differ from
those estimates. The Fund's fiscal year end was changed from July 31 to December
31. The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.
Portfolio valuation: Portfolio securities held by the Fund 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 in the
absence of sales in such market, at the mean between the closing bid and asked
prices. Securities traded only on over-the-counter markets are valued on the
basis of the closing over-the-counter sale prices or, if no sale occurred on
such day, at the mean of the current bid and asked prices. Securities which are
traded both on the over-the-counter market and on a stock exchange will be
valued according to the broadest and most representative market. Certain
securities of the Fund may be valued by independent pricing services which use
prices provided by one or more principal market makers. Restricted securities,
15
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
LEHMAN SELECTED GROWTH STOCK PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (continued)
securities for which market quotations are not readily available, and other
assets of the Fund 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 Fund may engage in repurchase agreement
transactions. The 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. 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 counter party
default, the Fund has the right to use the collateral to offset losses incurred.
There is potential loss to the 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. Lehman
Brothers Global Asset Management Inc., the Funds investment adviser (the
"Investment Adviser" or "LBGAM"), acting under the supervision of the Board of
Directors, reviews the value of the collateral and the creditworthiness of those
banks and dealers with which the Fund enters into repurchase agreements to
evaluate potential risks.
Option contracts: The Fund may purchase or write exchange-listed and
over-the-counter put and call options on securities, financial futures
contracts, equity indices and other
16
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
LEHMAN SELECTED GROWTH STOCK PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (continued)
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.
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
17
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
LEHMAN SELECTED GROWTH STOCK PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (continued)
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 that the Fund may forego
the opportunity for 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.
Federal income taxes: The Fund has qualified and intends to qualify
each year as a regulated investment company pursuant to the requirements of the
Internal Revenue Code of 1986, as amended. The Fund distributes substantially
all of its taxable income to its shareholders, therefore, no Federal income tax
provision is required. The Fund's tax year end is July 31.
18
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
LEHMAN SELECTED GROWTH STOCK PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (continued)
Dividends and distributions to shareholders: Dividends from net
investment income of the Fund 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 they have been
earned. In order to avoid the application of a 4% non-deductible excise tax on
certain undistributed amounts of ordinary income and capital gains, the Fund may
make additional distributions of any undistributed ordinary income or capital
gains before December 31 of a given year 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 Fund, timing
differences and differing characterizations of distributions made by the Fund.
2. INVESTMENT ADVISORY FEE, ADMINISTRATION FEE AND OTHER
RELATED PARTY TRANSACTIONS
LBGAM serves as the Fund's investment adviser pursuant to an investment
advisory agreement. LBGAM is a wholly-owned subsidiary of Lehman Brothers
Holdings Inc. ("Holdings"). LBGAM is entitled to receive from the Fund 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 period ended December
31, 1995, LBGAM voluntarily waived advisory fees of $22,620.
First Data Investor Services Group, Inc. ("FDISG"), formerly The
Shareholder Services Group, Inc., a wholly-owned subsidiary
19
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
LEHMAN SELECTED GROWTH STOCK PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (continued)
of First Data Corporation, serves as the Fund's administrator pursuant to an
administration agreement. Under the administration agreement, FDISG is entitled
to receive from the Fund a monthly fee at an annual rate of 0.20% of the value
of its average daily net assets. FDISG may voluntarily waive administration
fees. For the period ended December 31, 1995, FDISG voluntarily waived
administration fees of $6,032.
For the period ended December 31, 1995, the Fund incurred total
brokerage commissions of $48,427, of which $4,980 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 period ended December 31, 1995, Lehman Brothers received
contingent deferred sales charges of $76,108 from the Fund.
No employee of Holdings, Lehman Brothers, LBGAM or FDISG 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 Holdings, Lehman Brothers, LBGAM or FDISG 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.
20
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
LEHMAN SELECTED GROWTH STOCK PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (continued)
Boston Safe Deposit and Trust Company, an indirect wholly-owned subsidiary
of Mellon Bank Corporation, serves as the Fund's custodian. FDISG serves as the
Fund's transfer agent.
3. SERVICE AGREEMENTS
Lehman Brothers acts as the distributor of the Fund's shares.
The Company has adopted a services and distribution plan ("the Plan") with
respect to the Fund. Under the Plan, the Fund 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 the Fund's shares.
For the period ended December 31, 1995, the Fund incurred distribution and
service fees on its CDSC shares of $127,576 and $42,525, respectively.
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, aggregated $37,522,517 and $37,534,559, respectively,
for the period ended December 31, 1995. At December 31, 1995, aggregate gross
unrealized appreciation for all securities in which there is an excess of value
21
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
LEHMAN SELECTED GROWTH STOCK PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (continued)
over tax cost was $10,133,729 and aggregate gross unrealized depreciation for
all securities in which there is an excess of tax cost over value was $781,315.
Net unrealized appreciation on a tax basis was $9,352,414.
Written option activity for the Fund for the period ended December 31,
1995 was as follows:
<TABLE>
<CAPTION>
NUMBER OF
CONTRACTS PREMIUM
<S> <C> <C>
Options outstanding at 0 $ 0
July 31, 1995
Options written 300 32,061
Options expired (200) (17,986)
----- --------
Options outstanding at
December 31, 1995 100 $14,075
===== =======
</TABLE>
5. SHARES OF CAPITAL STOCK
The Board of Directors has authority to issue 10 billion shares of capital
stock ($0.001 par value) for the Company.
22
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
LEHMAN SELECTED GROWTH STOCK PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (continued)
The table below summarizes the capital stock transactions for the Fund's
CDSC Shares:
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED
12/31/95* 07/31/95
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Sold................ 632,402 $8,336,857 1,317,909 $13,970,294
Dividend 232,532 3,004,314 2,703 27,599
Reinvestment......
Redeemed............ (516,545) (6,948,585) (1,093,817) (12,263,903)
-------- ---------- ---------- -----------
Net increase........ 348,389 $4,392,586 226,795 $ 1,733,990
========= ========== =========== ============
</TABLE>
- ---------------
* The Fund changed its fiscal year end from July 31 to December 31. The
amounts noted above are for the period August 1, 1995 through December 31, 1995.
6. ORGANIZATION COSTS
The Fund bears all costs in connection with its organization including
fees and expenses of registering and qualifying its 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 Fund. In the event that any of the initial
shares of the Fund are redeemed during such amortization period, the Fund 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.
23
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
LEHMAN SELECTED GROWTH STOCK PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (continued)
7. PLAN OF REORGANIZATION
The Company, on behalf of the Fund, and AMT Capital Fund, Inc. ("AMT
Fund"), on behalf of the U.S. Selected Growth Portfolio (the "Purchaser")
entered into an Agreement and Plan of Reorganization (the "Agreement") dated as
of December 14, 1995. The Agreement contemplates the reorganization of the Fund
as a new portfolio of AMT Capital Fund (the "new AMT Fund") through the transfer
of all of the assets and liabilities of the Fund to the Purchaser in exchange
for shares of the Purchaser which would be distributed to shareholders of the
Fund. The Fund's Board of Directors approved the reorganization on November 1,
1995 and shareholder approval was received January 18, 1996. Once the
reorganization is finalized, each shareholder of the Fund will receive a number
of Class B shares of common stock of the new AMT Fund equal to the number held
in the Fund. As part of the reorganization, the Fund will transfer all of its
assets to the new AMT Fund. The new AMT Fund will be managed by AMT Capital
Advisers, Inc. and Delphi Asset Management, Inc. ("Delphi") as sub-adviser. The
Fund's current portfolio manager will continue to manage the new AMT Fund as an
employee of Delphi. Once the transaction is completed, the Fund will cease
operations.
24
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Shareholders and Directors
Lehman Brothers Funds, Inc.
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Lehman Selected Growth Stock Portfolio (the
"Fund", one of the portfolios constituting Lehman Brothers Funds, Inc.) as of
December 31, 1995, the related statement of operations for the period from
August 1, 1995 to December 31, 1995, and the statement of changes in net assets
and financial highlights for each of the periods indicated therein. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995, by correspondence with the custodian and brokers, or other
appropriate auditing procedures where replies from brokers were not received. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Lehman
Selected Growth Stock Portfolio of Lehman Brothers Funds, Inc. at December 31,
1995, the results of its operations for the period from August 1, 1995 to
December 31, 1995, and the changes in its net assets and financial highlights
for each of the periods indicated, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young
Boston, Massachusetts
February 15, 1996
<PAGE>
LEHMAN BROTHERS
LEHMAN BROTHERS INC. ALL RIGHTS RESERVED
MEMBER SIPC
<PAGE>
