LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME
FUND
MUNICIPAL INCOME
FUND
NEW YORK MUNICIPAL
MONEY MARKET FUND
ANNUAL
REPORT
July 31, 1996
LEHMAN BROTHERS
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Lehman Brothers Funds, Inc.
PAGE
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Shareholder Letter 1
Daily Income Fund:
Portfolio Highlights 4
Portfolio of Investments 5
Municipal Income Fund:
Portfolio Highlights 8
Portfolio of Investments 9
New York Municipal Money Market Fund:
Portfolio Highlights 21
Portfolio of Investments 22
Statements of Assets and Liabilities 27
Statements of Operations 29
Statements of Changes in Net Assets 30
Financial Highlights:
Daily Income Fund:
Select Shares 32
CDSC Shares 33
Municipal Income Fund:
Select Shares 34
CDSC Shares 35
New York Municipal Money Market Fund:
Select Shares 36
Notes to Financial Statements 37
Report of Ernst & Young LLP, Independent Auditors 44
Tax Information 45
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THIS REPORT IS FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF DAILY INCOME
FUND, MUNICIPAL INCOME FUND AND NEW YORK MUNICIPAL MONEY MARKET FUND. ITS USE IN
CONNECTION WITH ANY OFFERING OF THE FUNDS' SHARES IS AUTHORIZED ONLY IF
ACCOMPANIED OR PRECEDED BY THE RELEVANT FUND'S CURRENT PROSPECTUS.
DEAR SHAREHOLDER:
We are pleased to present the Annual Report for Lehman Brothers Funds, Inc.
(the "Company") for the fiscal year ended July 31, 1996. This Annual Report
includes information on the Company's three investment portfolios:
* Daily Income Fund
* Municipal Income Fund
* New York Municipal Money Market Fund
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 non-U.S. bank and commercial obligations and repurchase agreements relating
to such obligations.
Performance: The Fund's 7-day and 30-day yields on July 31, 1996 were 4.65%
and 4.64%, 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 their agencies and certain other tax-exempt securities.
Performance: The Fund's 7-day and 30-day yields on July 31, 1996 were 2.92%
and 2.60%, respectively. On a tax-equivalent yield basis, the Fund's 7-day and
30-day yields were 4.79% and 4.26%, respectively, for investors in the 39% tax
bracket.
NEW YORK MUNICIPAL MONEY MARKET FUND
Investment Objective: New York Municipal Money Market Fund is designed to
provide investors with as high a level of current income exempt from federal
income tax and from New York State and New York City personal income taxes as is
consistent with stability of principal. The Fund invests substantially all of
its assets in short-term tax-exempt obligations issued by New York State and its
local governments and their agencies and certain other tax-exempt securities.
New York Municipal Money Market Fund commenced operations on November 6, 1995.
Performance: The Fund's 7-day and 30-day yields on July 31, 1996 were 2.84%
and 2.60%, respectively. On a tax-equivalent yield basis, the Fund's 7-day and
30-day yields were 6.17% and 5.65%, respectively, for investors in the 54% tax
bracket.
THE ECONOMY
The underlying strength of the U.S. economy in the first quarter of 1996 was
extremely difficult to gauge. Early in the period, economic activity appeared to
be on the verge of recession following a very anemic fourth quarter of 1995 in
which Gross Domestic Product ("GDP") growth was only 0.5%. Short-term interest
rates trended lower as most investors believed that the Federal Reserve Board
(the "Fed") would ease monetary policy by reducing the target Fed funds rate,
which it did on January 31, 1996
1
by 25 basis points, citing "receding inflationary pressures and a moderating
economic expansion." Long-term rates, however, had begun to rise in December as
bond investors expressed disappointment over congressional failure to reach
agreement on balanced budget legislation. As February began, the economic
landscape became less clear due to the lack of timeliness and reliability of
economic data that was released in the aftermath of the shutdown of U.S.
government operations. Faced with uncertainty as to the strength, or even
direction, of the economy, anxious fixed-income investors engaged in a sell-off
in late February after Chairman Greenspan testified at the Humphrey-Hawkins
hearings that the economy was healthier than the data would indicate.
As March began, the most significant event was the release of the February
Employment Report which showed a huge increase in job creation. Short- and
long-term interest rates gapped upward as investors acknowledged a major shift
in economic expectations from one of modest growth with low inflation and
declining interest rates to one which was based upon faster growth, concern over
inflation, and the possibility of a pre-emptive tightening of monetary policy by
the Fed. In April, investors were looking for the economic data flow to begin to
exhibit a clear trend that was not distorted by the government shutdown, severe
weather, or the General Motors strike. As the quarter unfolded, a pattern of
strength became apparent in many sectors of the economy. Consumer sentiment was
buoyed by strong job growth, higher income, and the wealth effect of a
spectacular stock market. This elevated consumer willingness to spend on housing
and other consumer durables such as autos. Increased consumer debt also was a
factor in spurring retail sales. On the production side, inventory levels were,
for the most part, at desired levels which gave manufacturers the chance to
crank up production in order to meet the new demand. All the while, inflation
remained manageable, although slight pressure became noticeable in certain
commodities and employees' wages.
As a result of this indisputable strength, economists were obliged to revise
their estimates for GDP for the first and second quarters and the full year. The
actual first quarter GDP of 2.2% was well above early estimates of 1.5% and the
second quarter preliminary rate of growth was 4.2%. This pace, in combination
with an outlook for slower growth in the second half of 1996, would translate
into an annual rate of about 2.5% to 3.0% which we believe exceeds the Fed's
target for sustainable growth without inflation. Throughout the second quarter,
fixed-income investors became convinced that the Fed would soon adopt a more
restrictive monetary policy in light of the economic strength even though
inflation was still below 3.0% -- the only question was one of timing. As a
result of this consensus, long-term Treasury rates rose from 6.69% on March 29,
1996 to as high as 7.20% in mid-June. A strong rally in early August brought the
rate back down to 6.68% based upon weaker July data. The rate subsequently
retraced to 7.00% by late August as the market resumed its Fed tightening vigil
after new signs of strength. The three-month Treasury bill rate movement was
much more modest, rising from 5.14% to a high of 5.30% before settling back down
to 5.20%.
PORTFOLIO STRATEGY
Taxable Fund
Early in the period, the average maturity of the Daily Income Fund was
extended modestly in line with the Fed's policy of monetary ease. However, as
the economy strengthened and the probability for a tighter policy loomed, the
strategy was changed to
2
shorten the portfolio as much as possible in order to take advantage of expected
higher rates. In spite of the fact that the short-term yield curve is relatively
steep from one day to one year (75 basis points) in anticipation of some Fed
tightening action, it is too early to undertake a meaningful extension without
more conclusive economic data. The targeted average maturity of the taxable
funds remains at 40-50 days.
Tax-Exempt Funds
Unlike the taxable fixed-income market which was driven by economic and
monetary signals, the tax-exempt market was influenced more by technical factors
over the course of the period and experienced a high degree of seasonal
volatility. Rates began the second quarter at seasonally low levels due to an
infusion of cash in early April from bond coupon payments and normal maturities.
Mid-April saw a reversal as individuals made redemptions from tax-exempt funds
in order to make personal income tax payments. This forced fund managers to sell
some securities which pushed rates higher. This trend was reversed in early May
as cash from May coupon payments and maturities flowed into the market and drove
rates lower once again. By mid-May, the cash had been fully invested and rates
rose as demand eased. The June experience was similar to that of May.
We expected to see a gradual upward movement of rates in July and August as
the previously-described note proceeds were absorbed by a growing calendar of
re- issued notes. These two factors created the first buying opportunity of the
third quarter and we attempted to take advantage by extending average
maturities.
Looking ahead in 1996, we see a continuation of the supply squeeze and
anticipate a continuation of the same portfolio strategies for both the Taxable
and Tax-Exempt Funds.
On September 6, 1996, the Board of Directors of the Company endorsed a
proposal by Lehman Brothers Inc. pursuant to which the shares of each of the
Funds held by Lehman's brokerage clients through Lehman's automated sweep
program will be converted to shares in a corresponding fund sponsored by
Federated Investors having a substantially identical investment objective,
unless otherwise instructed by the client. Under the proposal, a letter
explaining the conversions will be mailed to shareholders by Lehman Brothers,
which will explain the proposal and enclose a prospectus of the corresponding
Federated fund. It is anticipated that following the conversions, the Company
will be dissolved, subject to any required approvals. Federated Investors,
founded in 1995, is a Pittsburgh-based investment manager with over $70 billion
in assets under management. Federated has been a pioneer in cash management,
having created the first institutional money market fund in 1976. Federated
currently offers over 40 money market funds managed specifically to meet the
varying needs of investors.
Sincerely,
/s/Andrew D. Gordon
Andrew D. Gordon
President
September 16, 1996
3
LEHMAN BROTHERS FUNDS, INC.
Daily Income Fund
PORTFOLIO HIGHLIGHTS JULY 31, 1996
ASSET DISTRIBUTION (BY INSTRUMENT)
[PIE CHART]
Repurchase Agreements and Net Other Assets and Liabilities 26.7%
Commercial Paper 36.9%
Bank/Corporate Notes 27.7%
U.S. Government Agency Security 3.3%
Promissory Notes 2.7%
Certificates of Deposit 2.7%
AVERAGE WEIGHTED MATURITY OF PORTFOLIO
39 Days
4
LEHMAN BROTHERS FUNDS, INC.
Daily Income Fund
PORTFOLIO OF INVESTMENTS JULY 31, 1996
FACE VALUE
VALUE (NOTE 1)
- --------------------------------------------------------------------------------
COMMERCIAL PAPER -- 36.9%
Atlantic Asset Securitization Corporation:
$13,375,000 5.380%+ due 8/14/96 $ 13,349,015
15,000,000 5.400%+ due 8/15/96 14,968,500
15,000,000 Clipper Receivables Corporation,
5.420%+ due 8/2/96 14,997,742
25,800,000 CXC Inc.,
5.700%+ due 8/1/96 25,800,000
14,827,000 Dakota,
5.400%+ due 8/22/96 14,780,295
Enterprise Funding Corporation:
10,000,000 5.370%+ due 8/12/96 9,983,592
8,048,000 5.330%+ due 9/17/96 7,991,997
Greenwich Funding Corporation:
10,000,000 5.380%+ due 8/27/96 9,961,144
9,490,000 5.350%+ due 8/30/96 9,449,102
10,000,000 5.350%+ due 9/3/96 9,950,958
10,046,000 Mont Blanc Capital Corporation,
5.400%+ due 8/8/96 10,035,452
Old Line Funding Corporation:
5,000,000 5.400%+ due 8/1/96 5,000,000
15,000,000 5.350%+ due 8/16/96 14,966,563
Ranger Funding Corporation:
10,000,000 5.380%+ due 8/16/96 9,977,583
5,000,000 5.420%+ due 9/11/96 4,969,136
15,000,000 Sigma Finance Corporation,
5.430%+ due 9/16/96 14,895,925
25,000,000 Spintab (AB),
5.360%+ due 8/22/96 24,921,833
30,000,000 Svenska Handelsbanken,
4.920%+ due 8/1/96 30,000,000
30,000,000 Windmill Funding Corporation,
5.370%+ due 8/21/96 29,910,500
----------
TOTAL COMMERCIAL PAPER (COST $275,909,337) 275,909,337
-----------
SEE NOTES TO FINANCIAL STATEMENTS.
5
LEHMAN BROTHERS FUNDS, INC.
Daily Income Fund
PORTFOLIO OF INVESTMENTS(CONTINUED) JULY 31, 1996
FACE VALUE
VALUE (NOTE 1)
- --------------------------------------------------------------------------------
BANK/CORPORATE NOTES -- 27.7%
$25,000,000 American Express Centurion Bank, Variable Rate,
5.470% due 2/12/97++ $ 24,996,259
20,000,000 Bank of America,
4.900% due 2/12/97 19,994,843
20,000,000 CS First Boston Corporation, Variable Rate,
5.570% due 1/7/97+++ 20,000,000
18,000,000 FCC National Bank,
5.080% due 2/24/97 17,992,828
10,000,000 First American Bank, Michigan,
5.130% due 11/7/96 10,002,826
2,000,000 Ford Motor Credit Corporation,
8.000% due 10/1/96 2,006,697
13,000,000 General Motors Acceptance Corporation,
5.250% due 12/6/96 13,004,730
17,000,000 Household Credit Card Corporation, Variable Rate,
5.526% due 1/15/97++ 17,000,000
20,000,000 Huntington National Bank,
4.900% due 2/7/97 19,991,616
12,000,000 NBD Bank,
5.050% due 8/1/96 12,000,000
20,000,000 Northern Trust Company,
5.070% due 2/28/97 20,000,000
15,000,000 SMM Trust, 1995-D, Variable Rate,
5.675% due 10/28/96+++ 15,000,000
15,000,000 SMM Trust, 1995-I, Variable Rate,
5.488% due 5/29/97++ 15,000,000
----------
TOTAL BANK/CORPORATE NOTES (COST $206,989,799) 206,989,799
-----------
U.S. GOVERNMENT AGENCY SECURITY -- 3.3% (COST $25,000,000)
25,000,000 Federal National Mortgage Association, Variable
Rate,
5.850% due 10/7/96 25,000,000
----------
CERTIFICATES OF DEPOSIT -- 2.7% (COST $20,000,052)
Sumitomo Bank:
10,000,000 5.510% due 8/8/96 10,000,019
10,000,000 5.520% due 8/13/96 10,000,033
----------
20,000,052
----------
PROMISSORY NOTES -- 2.7% (COST $20,000,000)
Goldman Sachs & Company:
10,000,000 5.500% due 8/1/96 10,000,000
10,000,000 5.190% due 8/5/96 10,000,000
----------
20,000,000
----------
SEE NOTES TO FINANCIAL STATEMENTS.
6
LEHMAN BROTHERS FUNDS, INC.
Daily Income Fund
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31, 1996
FACE VALUE
VALUE (NOTE 1)
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS -- 21.3%
$60,000,000 Agreement with Chase Securities Corporation,
dated 7/31/96 bearing 5.750% to be repurchased
at $60,009,583 on 8/1/96, collateralized by
$61,200,907 U.S. Government Agency securities
with various maturities and interest rates
(market value -- $60,899,493) $ 60,000,000
74,095,000 Agreement with Goldman Sachs Group Inc., dated
7/31/96 bearing 6.000% to be repurchased at
$74,107,349 on 8/1/96, collateralized by
$74,742,000 U.S. Government Agency securities
with various maturities and interest rates
(market value -- $75,577,436) 74,095,000
25,000,000 Agreement with Greenwich Capital Markets, dated
7/31/96 bearing 5.700% to be repurchased at
$25,003,958 on 8/1/96, collateralized by
$43,041,000 U.S. Government Agency securities
with various maturities and interest rates
(market value -- $25,500,741) 25,000,000
----------
TOTAL REPURCHASE AGREEMENTS (COST $159,095,000) 159,095,000
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST $706,994,188*) 94.6% 706,994,188
OTHER ASSETS AND LIABILITIES (NET) 5.4 40,809,328
- --------------------------------------------------------------------------------
NET ASSETS 100.0% $747,803,516
================================================================================
* Aggregate cost for Federal tax purposes.
+ Annualized yield at date of purchase.
++ 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. Variable rate
demand notes are payable upon not more than thirty days' notice. The
interest rate shown reflects the rate in effect on July 31, 1996.
+++ 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. Variable rate
demand notes are payable upon not more than ninety days' notice. The
interest rate shown reflects the rate in effect on July 31, 1996.
SEE NOTES TO FINANCIAL STATEMENTS.
7
LEHMAN BROTHERS FUNDS, INC.
Municipal Income Fund
PORTFOLIO HIGHLIGHTS JULY 31, 1996
ASSET DISTRIBUTION (BY INDUSTRY)
[PIE CHART]
Education 6.3%
General Obligation 7.5%
Hospital 15.8%
Housing 21.8%
Industrial Development Revenue 17.5%
Pollution Control Revenue 5.2%
Sewer and Water 1.7%
Transportation 2.5%
Utility 5.3%
Other 15.2%
Net Other Assets and Liabilities 1.2%
AVERAGE WEIGHTED MATURITY OF PORTFOLIO
57 Days
8
LEHMAN BROTHERS FUNDS, INC.
Municipal Income Fund
PORTFOLIO OF INVESTMENTS JULY 31, 1996
FACE VALUE
VALUE (NOTE 1)
- --------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES -- 98.8%
ALABAMA -- 0.6%
$1,320,000 Alabama Housing Finance Authority, Multi-family
Housing Revenue, (Royal Garden Apartments),
(Southtrust Bank, LOC),
3.700% due 7/1/20++ $ 1,320,000
-----------
ALASKA -- 1.9%
4,200,000 Alaska State, Housing Finance Corporation,
Series A,
3.550% due 6/1/26++ 4,200,000
---------
ARIZONA -- 0.9%
2,000,000 Pima County, Arizona, Industrial Development
Authority, Industrial Revenue, (Tucson Electric
Power Company Project), (Barclays Bank Plc, LOC),
3.650% due 12/1/22++ 2,000,000
---------
ARKANSAS -- 4.9%
Arkansas State, Development Finance Authority,
Single Family Mortgage Revenue, Series C,
(FSA Insured):
5,390,000 3.350% due 8/1/14+++ 5,390,000
2,845,000 3.350% due 8/1/14+++ 2,845,000
2,800,000 Fayetteville, Arkansas, Public Facilities Board
Revenue, Charter Vista Hospital, (Mitsubishi
Bank Ltd., LOC),
3.750% due 3/1/07++ 2,800,000
---------
11,035,000
----------
CALIFORNIA -- 1.8%
2,500,000 California Statewide, Community Development
Corporation Revenue, (Dai Ichi Kangyo Bank Ltd.,
LOC),
3.600% due 10/1/04++ 2,500,000
1,500,000 San Bernardino County, California, Tax & Revenue
Anticipation Notes, (Toronto Dominion Bank,
LOC), (Landesbank Hessen, LOC),
4.500% due 6/30/97 1,508,233
---------
4,008,233
---------
COLORADO -- 1.1%
685,000 Colorado Health Facilities Authority Revenue,
(Boulder Community Hospital Project), Series
B, (MBIA Insured), (Rabobank Nederland, SPA),
3.550% due 10/1/14++ 685,000
825,000 Colorado Student Obligation Board Authority,
Student Loan Revenue, Series C-2, (SLMA, LOC),
3.550% due 9/1/02++ 825,000
SEE NOTES TO FINANCIAL STATEMENTS.
9
LEHMAN BROTHERS FUNDS, INC.
Municipal Income Fund
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31, 1996
FACE VALUE
VALUE (NOTE 1)
- --------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
COLORADO - (CONTINUED)
$1,000,000 Denver, Colorado, City & County, Multi-Family
Housing Revenue, (Seasons Apartment Project),
(FHLB, LOC), (Landesbank Hessen, LOC),
3.650% due 10/1/06++ 1,000,000
---------
2,510,000
---------
CONNECTICUT -- 1.4%
250,000 Connecticut State, General Obligation Notes,
6.400% due 12/1/96 252,310
1,800,000 Connecticut State, Putters Series 27,
3.600% due 3/15/12++ 1,800,000
1,000,000 Connecticut State, Special Assignment
Unemployment Compensation, Advanced Federal
Revenue, Series C, (FGIC Insured),
3.900% due 11/15/01 1,000,000
---------
3,052,310
---------
FLORIDA -- 5.0%
3,705,000 Jacksonville, Florida, Electric Authority
Revenue, Municipal Securities Trust Receipts,
Series 17,
3.750% due 10/1/20++ 3,705,000
Orange County, Florida, Health Facilities
Authority Revenue:
1,300,000 (Adventist Health Systems), (Banque Paribas,
LOC),
3.950% due 11/15/14++ 1,300,000
3,000,000 Municipal Securities Trust Receipts, Series 11,
(Credit Suisse, LOC), (MBIA Insured),
3.800% due 6/7/05++ 3,000,000
2,000,000 Palm Beach County, Florida, School District,
Tax Anticipation Notes,
4.500% due 9/27/96 2,001,995
Pinellas County, Florida, Health Facilities
Authority Revenue, (Bayfront Medical),
(FGIC Insured), (Barnett Bank, BPA):
600,000 3.600% due 6/1/05++ 600,000
500,000 3.600% due 6/1/09++ 500,000
100,000 Sarasota County, Florida, Health Facilities
Authority Revenue, (Bay Village Project),
(Barnett Bank, LOC),3.650% due 12/1/19++ 100,000
----------
11,206,995
----------
SEE NOTES TO FINANCIAL STATEMENTS.
10
LEHMAN BROTHERS FUNDS, INC.
Municipal Income Fund
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31, 1996
FACE VALUE
VALUE (NOTE 1)
- --------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
GEORGIA -- 2.5%
$1,500,000 Burke County, Georgia, Development Authority,
Pollution Control Revenue, (Georgia Power
Company), 3rd Series,
3.650% due 9/1/25+ $ 1,500,000
1,650,000 College Park, Georgia, Business & Industrial
Development Authority, (Wynfield One Ltd.
Project), (Sumitomo Bank, LOC),
3.650% due 12/1/16+++ 1,650,000
1,400,000 Savannah, Georgia, Economic Development
Authority Revenue, (Home Depot Project),
Series A,
3.800% due 8/1/25++ 1,400,000
1,080,000 Walton, Georgia, Industrial Building Authority,
Series A, (Union Bank of Switzerland, LOC),
4.150% due 10/1/02++ 1,080,000
---------
5,630,000
---------
IDAHO -- 1.3%
3,000,000 Idaho State, Tax Anticipation Notes, General
Obligation Notes,
4.500% due 6/30/97 3,015,797
---------
ILLINOIS -- 6.9%
3,300,000 Chicago, Illinois, Municipal Securities Trust
Receipts, Series 8, (AMBAC Insured),
3.800% due 1/1/22++ 3,300,000
1,200,000 Chicago, Illinois, Tender Notes, Series B,
(Morgan Guaranty Trust Company, LOC),
3.650% due 10/31/96+++ 1,200,000
Illinois Development Finance Authority,
Industrial Development Revenue:
1,000,000 (Bimba Manufacturing Company Project),
(Harris Trust & Savings Bank, LOC),
3.750% due 5/1/16 1,000,000
1,000,000 (Nutrasweet Company Project),
3.700% due 11/1/23 1,000,000
6,300,000 Illinois Health Facilities Authority Revenue,
Series A, (NBD Bank, LOC),
3.600% due 8/1/15++ 6,300,000
2,500,000 Kankakee, Illinois, General Obligation Notes,
(FGIC Insured), Pre-refunded,
8.000% due 11/1/96+++ 2,577,076
----------
15,377,076
----------
SEE NOTES TO FINANCIAL STATEMENTS.
11
LEHMAN BROTHERS FUNDS, INC.
Municipal Income Fund
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31, 1996
FACE VALUE
VALUE (NOTE 1)
- --------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
INDIANA -- 1.8%
$4,000,000 Tippecanoe County, Indiana, Economic Development
Revenue, (Cons Industries Corporation Project),
(Bank of New York, LOC),
3.850% due 4/1/00++ $4,000,000
----------
KANSAS -- 1.2%
2,700,000 Mission, Kansas, Multi-family Housing Revenue,
(Woodland Village Project), (Citibank, LOC),
3.600% due 12/1/97++ 2,700,000
---------
KENTUCKY -- 3.6%
4,000,000 County of Graves, Revenue Bonds, Series 1988,
(Bank of New York, LOC),
3.800% due 12/1/12++ 4,000,000
4,000,000 Kentucky Housing Corporation, Housing Revenue,
Series B,
3.650% due 7/1/11+++ 4,000,000
---------
8,000,000
---------
LOUISANA -- 1.9%
800,000 Calcasieu Parish, Inc., Louisiana, (Citgo
Petroleum Corporation), (Westdeutsche
Landesbank, LOC),
3.600% due 8/1/04++ 800,000
2,100,000 Lake Charles, Louisiana, Port Facilities
Authority, (Citgo Petroleum Corporation),
(Westdeutsche Landesbank, LOC),
3.600% due 8/01/07++ 2,100,000
875,000 Louisiana Housing Finance Agency, Multi-family
Housing Authority Revenue, (New Orleans
Project), (Sumitomo Trust and Banking Co.,
Ltd., LOC),
4.100% due 12/1/25++ 875,000
500,000 Rapides Parish, Louisiana, Industrial
Development Board, Pollution Control Revenue,
(Central Louisiana Electric Company Project),
(Swiss Bank, LOC),
3.450% due 7/1/18++ 500,000
---------
4,275,000
---------
MARYLAND -- 3.7%
1,800,000 Frederick County, Maryland, Revenue Bonds,
(Sheppard Pratt Residential), (Societe
Generale, LOC),
3.650% due 7/1/25++ 1,800,000
SEE NOTES TO FINANCIAL STATEMENTS.
12
LEHMAN BROTHERS FUNDS, INC.
Municipal Income Fund
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31, 1996
FACE VALUE
VALUE (NOTE 1)
- --------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
MARYLAND -- (CONTINUED)
Maryland State, Health & Higher Education
Facilities Revenue:
3,100,000 Series A, (First National Bank of Chicago, LOC),
3.650% due 4/1/35++ $ 3,100,000
1,900,000 Series B, (First National Bank of Chicago, LOC),
3.700% due 4/1/35++ 1,900,000
1,400,000 Series B, (Mellon Bank, LOC),
3.750% due 7/1/24++ 1,400,000
---------
8,200,000
---------
MASSACHUSETTS -- 3.0%
860,000 Holyoke, Massachusetts, Municipal Purposes Loan,
Series A, (FSA Insured),
5.000% due 6/15/97 869,468
1,900,000 Massachusetts Municipal Wholesale Electric
Company, Power Supply System Revenue, Series
C, (Canadian Imperial Bank of Commerce, LOC),
3.600% due 7/1/19++ 1,900,000
1,000,000 New Bedford, Massachusetts, Revenue Anticipation
Notes,
4.500% due 6/30/97 1,004,820
Springfield, Massachusetts, Bond Anticipation
Notes:
1,000,000 4.250% due 2/14/97 1,002,345
2,000,000 4.600% due 7/11/97 2,009,054
---------
6,785,687
---------
MICHIGAN -- 0.1%
200,000 Dearborn, Michigan, Economic Development
Authority, Corporate Revenue,
3.700% due 3/1/25++ 200,000
---------
MINNESOTA -- 0.7%
1,500,000 Minnesota State Housing Finance Agency, Single
Family Mortgage Revenue, Series 0,
3.600% due 7/1/29+++ 1,500,000
---------
MISSISSIPPI -- 1.3%
3,000,000 Mississippi Business Financial Corporation,
Industrial Development Revenue, (Mississippi
Banking Company Project), (First National Bank,
Baltimore, LOC),
3.850% due 8/1/15++ 3,000,000
---------
SEE NOTES TO FINANCIAL STATEMENTS.
13
LEHMAN BROTHERS FUNDS, INC.
Municipal Income Fund
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31, 1996
FACE VALUE
VALUE (NOTE 1)
- --------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
MISSOURI -- 1.3%
700,000 Joplin, Missouri, Industrial Development
Authority, Industrial Revenue, (Northpark Mall
Extension), (Sumitomo Bank Ltd., LOC),
3.800% due 12/1/05++ 700,000
Missouri State Health & Educational Facilities
Authority Revenue:
500,000 (Christian Health Services), Series B, (Morgan
Guaranty Trust Company, LOC),
3.450% due 11/1/19++ 500,000
1,700,000 (Sisters of Mercy Health Systems), Series C,
3.500% due 6/1/09++ 1,700,000
---------
2,900,000
---------
NEW JERSEY -- 6.5%
7,000,000 Jersey City, New Jersey, Bond Anticipation Notes,
General Obligation Notes,
4.750% due 9/27/96 7,008,653
125,000 Maplewood Township, New Jersey, General
Obligation Notes,
4.700% due 11/1/96 125,305
New Jersey Economic Development Authority:
6,025,000 Pollution Control Revenue, (General Motors
Project), 3.600% due 10/1/00++ 6,025,000
1,530,000 (Wearbest Sil-Tex Mills), Series A,
3.900% due 7/1/15++ 1,530,000
----------
14,688,958
----------
NEW MEXICO -- 0.6%
300,000 Albuquerque, New Mexico, Revenue Bonds, (Charter
Hospital Inc. Project), (Bankers Trust
Company, LOC),
3.600% due 3/1/14++ 300,000
1,000,000 Eddy County, New Mexico, Pollution Control
Revenue, (IMC Fertilizer Inc. Project),
(Rabobank Nederland, LOC),
3.500% due 2/1/03++ 1,000,000
---------
1,300,000
---------
NEW YORK -- 8.2%
6,195,000 Mount Pleasant, New York, Industrial Development
Agency, Pollution Control Revenue, (General
Motors Corporation Project),
3.600% due 10/1/06++ 6,195,000
SEE NOTES TO FINANCIAL STATEMENTS.
14
LEHMAN BROTHERS FUNDS, INC.
Municipal Income Fund
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31, 1996
FACE VALUE
VALUE (NOTE 1)
- --------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
NEW YORK -- (CONTINUED)
Nassau County, New York, General Obligation Notes:
1,000,000 Bond Anticipation Notes, Series H,
4.000% due 8/15/96 $ 1,000,269
4,000,000 Revenue Anticipation Notes, Series A,
3.500% due 3/5/97 4,003,432
1,500,000 New York, New York, Municipal Securities Trust
Receipts, Series 1, (AMBAC Insured), (Credit
Suisse, LOC),
3.600% due 6/6/02++ 1,500,000
4,200,000 Southeast, New York, Industrial Development
Agency, Industrial Development Revenue, (The
Rawplug Company Inc. Project), (Bank of New York,
LOC),
3.550% due 5/1/21++ 4,200,000
1,500,000 West Islip, New York, Unified Free School District,
Tax Anticipation Notes, (Student Aid
Withholding),
4.250% due 6/30/97 1,504,610
----------
18,403,311
----------
NORTH CAROLINA -- 0.8%
1,000,000 Charlotte, North Carolina, Airport Revenue,
Series A, (MBIA Insured), (Commerzbank
Aktiengesel, SPA),
3.550% due 7/1/16++ 1,000,000
800,000 Greensboro, North Carolina, Enterprise Systems
Revenue, Series B, (Credit Local de France, LOC),
3.500% due 6/1/22++ 800,000
---------
1,800,000
---------
OHIO -- 0.9%
2,100,000 Clermont County, Ohio, Hospital Facilities
Revenue, (Mercy Health System), Series B,
3.700% due 9/1/21++ 2,100,000
---------
OKLAHOMA -- 0.2%
500,000 Tulsa, Oklahoma, Public Facilities Authority,
Solid Waste Disposal Revenue, (Ogden Martin
Systems, Tulsa), Series A, (AMBAC Insured),
4.300% due 11/1/96 501,286
---------
OREGON -- 3.3%
1,500,000 Oregon State, Health, Housing, Educational &
Cultural Facilities Authority, (Guide Dogs for
the Blind), Series A, (Banque Nationale
de Paris, LOC),
3.500% due 7/1/25++ 1,500,000
SEE NOTES TO FINANCIAL STATEMENTS.
15
LEHMAN BROTHERS FUNDS, INC.
Municipal Income Fund
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31, 1996
FACE VALUE
VALUE (NOTE 1)
- --------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
OREGON -- (CONTINUED)
Oregon State, Housing & Community Services
Department, Single Family Mortgage Revenue,
Mortgage Program:
4,000,000 Series D,
4.100% due 9/3/96 $ 4,000,174
2,000,000 Series F,
3.550% due 12/12/96+++ 2,000,000
---------
7,500,174
---------
PENNSYLVANIA -- 7.6%
1,200,000 Berks County, Pennsylvania, Industrial
Development Authority Revenue, (Lutheran Home
at Topton Project), (Meridian Bank, LOC),
3.900% due 9/1/25++ 1,200,000
4,750,000 Commonwealth of Pennsylvania, Higher Education
Assistance Agency, Health Services Revenue,
Putters, Series 4A,
3.700% due 1/1/08++ 4,750,000
6,025,000 Pennsylvania Housing Finance Agency, Single
Family Housing Revenue, Series N,
3.500% due 4/1/08+++ 6,025,000
3,000,000 Philadelphia, Pennsylvania, School District Tax
& Revenue Anticipation Notes, General
Obligation Notes,
4.500% due 6/30/97 3,013,170
2,000,000 Philadelphia, Pennsylvania, Tax & Revenue
Anticipation Notes, Series A, General
Obligation Notes,
4.500% due 6/30/97 2,009,640
----------
16,997,810
----------
RHODE ISLAND -- 0.9%
2,000,000 Rhode Island Housing & Mortgage Finance
Corporation, Multi-family Housing, Series A,
(AMBAC Insured), (FHA Insured),
4.600% due 7/1/97 2,010,635
----------
SOUTH CAROLINA -- 3.3%
1,000,000 Beaufort County, South Carolina, School District,
Bond Anticipation Notes, General Obligation
Notes, (Student Aid Withholding),
4.125% due 8/15/96 1,000,211
2,225,000 Lexington County, South Carolina, Revenue Bonds,
(Charter Rivers Hospital), (Mitsubishi Bank
Ltd., LOC),
3.750% due 6/1/07++ 2,225,000
SEE NOTES TO FINANCIAL STATEMENTS.
16
LEHMAN BROTHERS FUNDS, INC.
Municipal Income Fund
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31, 1996
FACE VALUE
VALUE (NOTE 1)
- --------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
SOUTH CAROLINA -- (CONTINUED)
$700,000 Rock Hill, South Carolina, Utilities System
Revenue,
3.600% due 1/1/22++ 700,000
South Carolina, Jobs Economic Development
Authority, Hospital Facilities Revenue:
2,000,000 (Chambers Oakridge Landfill), (Morgan Guaranty
Trust Company, LOC),
3.800% due 12/1/01++ 2,000,000
1,400,000 (Tuomey Regional Medical Center), Series B, (MBIA
Insured), (Wachovia Bank of South Carolina, SPA),
3.550% due 11/1/25++ 1,400,000
---------
7,325,211
---------
SOUTH DAKOTA -- 1.3%
3,000,000 South Dakota, Housing Development Authority,
Homeownership Mortgage, Series E,
4.050% due 10/24/96 3,000,297
---------
TENNESSEE -- 4.5%
3,100,000 Chattanooga, Tennessee, Industrial Development
Board, Industrial Development Revenue,
(Warehouse Row Ltd. Project), (ABN-AMRO Bank,
LOC),
3.600% due 12/15/12++ 3,100,000
1,500,000 Hamilton County, Tennessee, Industrial
Development Board, (Bank of New York, LOC),
3.800% due 12/1/17++ 1,500,000
1,200,000 McKensie, Tennessee, Industrial Development
Board, (Wachovia Bank of Georgia, LOC),
3.800% due 2/1/01++ 1,200,000
4,200,000 Metropolitan Government, Nashville & Davidson
County, Tennessee, Municipal Securities Trust
Receipts, Series 11,
3.750% due 5/15/21++ 4,200,000
----------
10,000,000
----------
TEXAS -- 7.9%
1,400,000 Harris County, Texas, Health Facilities
Development Corporation, Hospital Revenue,
(Greater Houston Pooled Health), Series A,
(Texas Commerce, LOC),
3.750% due 11/1/25++ 1,400,000
SEE NOTES TO FINANCIAL STATEMENTS.
17
LEHMAN BROTHERS FUNDS, INC.
Municipal Income Fund
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31, 1996
FACE VALUE
VALUE (NOTE 1)
- --------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
TEXAS -- (CONTINUED)
$4,400,000 North Central, Texas, Health Facilities
Development Corporation Revenue, (YMCA
Metropolitan Dallas Project),
(Bank of Tokyo-Mitsubishi Ltd., LOC),
3.750% due 6/1/21++ $ 4,400,000
San Antonio, Texas, Airport Systems Revenue:
2,000,000 3.500% due 7/1/11+++ 2,000,000
2,500,000 3.500% due 7/1/12+++ 2,500,000
2,000,000 Texas A&M University Revenue, Municipal
Securities Trust Receipts, Series 21,
3.800% due 5/15/16++ 2,000,000
2,700,000 Texas State, Public Property Finance Corporation
Revenue, (Mental Health & Retardation), (FSA
Insured),
4.000% due 9/1/96 2,699,984
700,000 Texas State, Veterans Housing Assistance, Fund
II-E,
3.900% due 12/1/26+++ 700,052
800,000 Travis County, Texas, Housing Finance
Corporation, Multi-family Housing Revenue,
(Aspen Hills Apartments Project),
(Bank of America, LOC),
3.750% due 6/1/06++ 800,000
1,275,000 West Central, Texas, Municipal Water District
Revenue, (Water Transmission Line Contract),
7.300% due 11/1/96 1,286,846
----------
17,786,882
----------
WASHINGTON -- 2.3%
2,000,000 Kent, Washington, Municipal Securities Trust
Receipts, Series 27,
3.800% due 12/1/16++ 2,000,000
1,500,000 Washington State, Housing Finance Commission,
Single Family Housing Program, Series 1N-S,
(FGIC Insured),
3.750% due 12/1/17+++ 1,500,000
1,640,000 Washington State, Series R-89B,
6.800% due 9/1/96 1,644,120
---------
5,144,120
---------
WEST VIRGINIA -- 0.7%
1,670,000 Charlestown, West Virginia, Building Commission
Packaging Facility Revenue, (Charlestown
Town), (Society National Bank, LOC),
3.700% due 12/1/16++ 1,670,000
---------
SEE NOTES TO FINANCIAL STATEMENTS.
18
LEHMAN BROTHERS FUNDS, INC.
Municipal Income Fund
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31, 1996
FACE VALUE
VALUE (NOTE 1)
- --------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
WISCONSIN -- 1.5%
$ 650,000 Platteville, Wisconsin, Industrial Development
Revenue, (Woodward Communications Project),
(Harris Trust & Savings Bank, LOC),
3.750% due 9/1/14++ $ 650,000
2,720,000 Wisconsin, Public Power Inc., Power Supply
System Revenue, Municipal Securities Trust
Receipts, Series 2,
3.800% due 7/1/21++ 2,720,000
---------
3,370,000
---------
WYOMING -- 1.4%
3,150,000 Uinta County, Wyoming, Pollution Control
Revenue, (Chevron USA Inc. Project),
3.800% due 6/15/97+++ 3,150,000
-------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost $221,664,782*) 98.8% 221,664,782
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (Net) 1.2 2,796,177
- --------------------------------------------------------------------------------
NET ASSETS 100.0% $224,460,959
- --------------------------------------------------------------------------------
* Aggregate cost for Federal tax purposes was $221,665,076. Net
unrealized depreciation of securi ties, for Federal income tax
purposes, was $294.
+ Variable rate demand notes are payable upon not more than one business
day's notice. The interest rate shown reflects the rate in effect on
July 31, 1996.
++ Variable rate demand notes are payable upon not more than seven
calendar days' notice. The interest rate shown reflects the rate in
effect on July 31, 1996.
+++ Put bonds and notes have demand features which mature within one year.
AMBAC -- American Municipal Bond Assurance Corporation
BPA -- Instruments supported by bond purchase agreement.
FGIC -- Federal Guaranty Insurance Corporation
FHA -- Federal Housing Authority
FHLB -- Federal Home Loan Bank
FSA --Financial Security Association
LOC -- Instruments supported by bank letter of credit.
MBIA -- Municipal Bond Investors Assurance
SLMA -- Student Loan Marketing Association
SPA -- Special Purchase Agreement
SEE NOTES TO FINANCIAL STATEMENTS.
19
LEHMAN BROTHERS FUNDS, INC.
Municipal Income Fund
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31, 1996
SUMMARY OF MUNICIPAL BONDS BY COMBINED RATINGS#
- --------------------------------------------------------------------------------
MOODY'S STANDARD & POOR'S
RATING OR RATING TOTAL
- --------------------------------------------------------------------------------
Aaa AAA 10.2%
Aa, Aa2, Aa3 AA 5.1%
MIG1, VMIG1, P-1 A-1, A-1+, SP-1, SP-1+ 71.7%
MIG2, VMIG2, P-2 SP-2 5.5%
NON-RATED NON-RATED 7.5%
-----
100.0%
- --------------------------------------------------------------------------------
# Bonds are not necessarily rated the same by both services.
Note:
Approximately 50% 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.
SEE NOTES TO FINANCIAL STATEMENTS.
20
LEHMAN BROTHERS FUNDS, INC.
New York Municipal Money Market Fund
PORTFOLIO HIGHLIGHTS JULY 31, 1996
ASSET DISTRIBUTION (BY INDUSTRY)
[PIE CHART]
Net Other Assets and Liabilities 0.1%
Education 6.2%
General Obligation 17.0%
Hospital 2.3%
Housing 9.8%
Industrial Development Revenue 23.8%
Pollution Control Revenue 3.6%
Sewer and Water 0.5%
Transportation 5.4%
Utility 6.5%
Other 24.8%
AVERAGE WEIGHTED MATURITY OF PORTFOLIO
67 Days
21
LEHMAN BROTHERS FUNDS, INC.
New York Municipal Money Market Fund
PORTFOLIO OF INVESTMENTS JULY 31, 1996
FACE VALUE
VALUE (NOTE 1)
- --------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES -- 99.9%
NEW YORK -- 99.3%
$ 320,000 Albany County, New York, General Obligation
Notes, FGIC Insured),
3.750% due 10/1/96 $ 320,154
1,250,000 Albany County, New York, Industrial Development
Agency, Industrial Development Revenue,
(Albany Ventures Inc. Project),
(Key Bank, LOC),
3.650% due 12/29/10++ 1,250,000
300,000 Albany County, New York, South Mall
Construction, Series B, General Obligation
Bonds, (FGIC Insured),
4.350% due 10/1/96 300,266
330,000 Babylon, New York, Waste Facilities, General
Obligation Notes, (FGIC Insured),
3.400% due 8/1/96 330,000
235,000 Buffalo, New York, Series E, General Obligation
Notes, (AMBAC Insured),
5.100% due 12/1/96 236,261
2,000,000 Clarkstown, New York, Central School District,
Tax Anticipation Notes, (Student Aid
Withholding),
4.250% due 6/27/97 2,006,949
1,300,000 Dutchess County, New York, Industrial
Development Agency, Industrial Development
Revenue, (Laerdal Medical Corporation
Project), (Bank of New York, LOC),
3.700% due 10/1/15++ 1,300,000
1,100,000 Erie County, New York, Revenue Anticipation
Notes, General Obligation Notes, (Union Bank
of Switzerland, LOC),
4.500% due 9/20/96 1,100,926
250,000 Erie County, New York, Water Revenue Authority,
Series B, (AMBAC Insured),
6.350% due 12/1/96 252,063
650,000 Garden City, New York, Bond Anticipation Notes,
3.750% due 4/3/97 650,629
3,000,000 Metropolitan Transportation Authority, New
York, Commuter Facilities Revenue, Municipal
Securities Trust Receipts,
Series 4, (Credit Suisse, LOC),
3.600% due 3/26/05++ 3,000,000
2,480,000 Mount Pleasant, New York, Industrial Development
Agency, Pollution Control Revenue, (General
Motors Corporation Project),
3.600% due 10/1/06++ 2,480,000
SEE NOTES TO FINANCIAL STATEMENTS.
22
LEHMAN BROTHERS FUNDS, INC.
New York Municipal Money Market Fund
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31, 1996
FACE VALUE
VALUE (NOTE 1)
- --------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
NEW YORK -- (CONTINUED)
$1,200,000 Nassau County, New York, Bond Anticipation
Notes, Series H, General Obligation Notes,
4.000% due 8/15/96 $1,200,293
1,000,000 New York, New York, (FSA Insured),
3.250% due 8/15/14+++ 1,000,000
New York, New York, City Housing Development:
1,100,000 Corporate Mortgage Revenue, Multi-family
Housing, 400 West 59th Street),
Series A-1, (Bayerische Hypotheken, LOC),
3.500% due 11/1/30++ 1,100,000
2,500,000 (East 96th Street Project), Series A,
(Bank of Tokyo-Mitsubishi Ltd., LOC),
3.400% due 8/1/15++ 2,500,000
1,000,000 (Upper 5th Avenue Project), Series A,
(Bankers Trust Company, LOC),
3.550% due 1/1/16++ 1,000,000
270,000 New York, New York, Escrowed to Maturity, Series
A, General Obligation Bonds, Refunded,
8.000% due 11/1/96 272,706
New York, New York, Municipal Securities Trust
Receipts, (Credit Suisse, LOC):
2,500,000 Series 1, (AMBAC Insured),
3.600% due 6/6/02++ 2,500,000
2,500,000 Series 2, (MBIA Insured),
3.600% due 7/2/00++ 2,500,000
New York, New York, Pre-refunded:
780,000 Series B,
7.000% due 8/15/06 796,517
250,000 Series C, Subseries C-1, (MBIA Insured),
5.350% due 8/1/96 250,000
1,000,000 Series D,
8.500% due 8/1/13 1,020,000
New York State, Dormitory Authority Revenue:
460,000 New York Hospital Medical Center,
(AMBAC Insured),
4.800% due 2/1/97+ 462,337
1,100,000 Oxford University Press Inc., (Wachovia
Bank, LOC),
3.600% due 7/1/23+ 1,100,000
300,000 Special Obligation, State University,
Series B,
6.500% due 11/1/96+ 300,000
SEE NOTES TO FINANCIAL STATEMENTS.
23
LEHMAN BROTHERS FUNDS, INC.
New York Municipal Money Market Fund
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31, 1996
FACE VALUE
VALUE (NOTE 1)
- --------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
NEW YORK -- (CONTINUED)
New York State, Energy Research & Development
Authority, Pollution Control Revenue:
$2,000,000 Series B, (Deutsche Bank, LOC),
3.250% due 3/1/16+++ $ 2,000,000
2,000,000 Series D, (New York Electric & Gas),
(Union Bank of Switzerland, LOC),
3.400% due 10/1/29++ 2,000,000
500,000 New York State, General Obligation Notes,
(AMBAC Insured),
5.300% due 3/1/97 505,235
500,000 New York State, Housing Finance Agency, Special
Obligation, Health Facilities, New York City,
Series A, Refunded,
6.550% due 11/1/96 503,419
New York State, Job Development Authority,
(Sumitomo Bank Ltd., LOC):
1,000,000 Series A-1 Thru A-9,
3.700% due 3/1/00++ 1,000,000
1,020,000 Series D-1 Thru D-9,
3.550% due 3/1/99++ 1,020,000
2,365,000 Series E-1 Thru E-55,
3.550% due 3/1/99++ 2,365,000
535,000 Series G-1 Thru G-33,
3.550% due 3/1/99++ 535,000
70,000 Series H-1 Thru H-11,
3.550% due 3/1/99++ 70,000
New York State, Medical Care Facilities, Finance
Agency Revenue:
565,000 Hospital & Nursing Home, Series A, (FHA
Insured),
6.900% due 2/15/97 574,830
250,000 Hospital & Nursing Home, Series C, (FHA
Insured),
4.300% due 8/15/96 250,066
1,200,000 Pooled Equipment Loan Progress II, Series A,
(Chemical Bank, LOC),
3.400% due 11/1/03++ 1,200,000
200,000 New York State, Mortgage Agency Revenue,
Series F,
6.800% due 10/1/96 201,163
1,600,000 New York State, Power Authority Revenue
& General Purpose, Series CC,
3.600% due 1/1/97 1,600,816
500,000 Oyster Bay, New York, Tax Anticipation Notes,
3.750% due 2/14/97 500,000
SEE NOTES TO FINANCIAL STATEMENTS.
24
LEHMAN BROTHERS FUNDS, INC.
New York Municipal Money Market Fund
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31, 1996
FACE VALUE
VALUE (NOTE 1)
- --------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
$3,000,000 Rochester, New York, Bond Anticipation Notes,
Series I,
4.500% due 10/31/96 $ 3,005,391
1,800,000 Southeast, New York, Industrial Development
Agency, Industrial Development Revenue, (The
Rawplug Company Inc. Project), (Bank of New
York, LOC),
3.550% due 5/1/21++ 1,800,000
Suffolk County, New York, Industrial Development
Agency, Industrial Development Revenue:
400,000 (Nissequogue Cogen Partners), (Toronto
Dominion Bank, LOC),
3.500% due 12/15/23++ 400,000
900,000 (Suffolk Inc. Civic), (European American Bank,
LOC),
3.400% due 12/1/12++ 900,000
1,500,000 Suffolk County, New York, Tax Anticipation
Notes, Series I, General Obligation Notes,
(National Westminster Bank, LOC),
(Westdeutsche Landesbank, LOC),
4.000% due 8/15/96 1,500,446
3,000,000 West Islip, New York, Unified Free School
District, Tax Anticipation Notes, General
Obligation Notes, (Student Aid Withholding),
4.250% due 6/30/97 3,009,219
250,000 Westchester County, New York, Series B,
General Obligation Notes,
4.250% due 12/15/96 250,720
375,000 White Plains, New York, General Obligation
Notes,
4.375% due 9/1/96 375,237
-----------
54,795,643
-----------
PUERTO RICO -- 0.6%
300,000 Puerto Rico, Housing, Bank & Finance Agency,
Special Obligation, Series H, (FSA Insured),
5.200% due 10/1/96 300,868
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST $55,096,511*) 99.9% 55,096,511
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (NET) 0.1 71,989
- --------------------------------------------------------------------------------
NET ASSETS 100.0% $55,168,500
- --------------------------------------------------------------------------------
* 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 in effect at
July 31, 1996.
++ Variable rate demand notes are payable upon not more than seven
calendar days' notice. The interest rate shown reflects the rate in
effect at July 31, 1996.
+++ Variable rate demand notes are payable upon not more than thirty
calendar days' notice. The interest rate shown reflects the rate in
effect on July 31, 1996.
SEE NOTES TO FINANCIAL STATEMENTS.
25
LEHMAN BROTHERS FUNDS, INC.
New York Municipal Money Market Fund
PORTFOLIO OF INVESTMENTS (CONTINUED) JULY 31, 1996
AMBAC -- American Municipal Bond Assurance Corporation
FGIC -- Federal Guaranty Insurance Corporation
FHA -- Federal Housing Association
FSA -- Financial Security Association
LOC -- Instruments supported by bank letter of credit.
MBIA -- Municipal Bond Investors Assurance
- --------------------------------------------------------------------------------
MOODY'S STANDARD & POOR'S
RATING OR RATING TOTAL
- --------------------------------------------------------------------------------
Aaa AAA 15.2%
Aa, Aa2, Aa3 AA 5.4%
A-1, A-1+, SP-1,
MIG1, VMIG1, P-1 SP-1+ 55.9%
MIG2, VMIG2, P-2 SP-2 4.5%
NON-RATED NON-RATED 19.0%
-----
100.0%
- --------------------------------------------------------------------------------
# Bonds are not necessarily rated the same by both services.
Note:
Approximately 67% 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.
SEE NOTES TO FINANCIAL STATEMENTS.
26
LEHMAN BROTHERS FUNDS, INC.
STATEMENTS OF ASSETS & LIABILITIES JULY 31, 1996
<TABLE>
<CAPTION>
NEW YORK
DAILY MUNICIPAL MUNICIPAL
INCOME INCOME MONEY MARKET
NOTES FUND FUND FUND
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value (Cost
$706,994,188, $221,664,782,
and $55,096,511,
respectively) 1
See accompanying schedules:
Securities $547,899,188 $221,664,782 $ 55,096,511
Repurchase agreements 159,095,000 -- --
- ---------------------------------------------------------------------------------------
Total Investments 706,994,188 221,664,782 55,096,511
Cash 683 -- 27,159
Receivable for Fund shares
sold 49,189,829 4,586,296 489,671
Interest receivable 3,492,679 1,600,476 625,117
Unamortized organization
costs 5 192,625 75,981 25,267
- ---------------------------------------------------------------------------------------
TOTAL ASSETS 759,870,004 227,927,535 56,263,725
- ---------------------------------------------------------------------------------------
LIABILITIES:
Payable for Fund shares
redeemed 10,617,703 2,454,680 918,176
Dividends payable 539,240 107,205 25,958
Investment advisory fee
payable 2 380,390 78,251 66,810
Administration fee payable 2 181,163 51,517 40,340
Distribution fee payable 3 111,699 33,828 8,845
Transfer Agent fee payable 2 112,769 13,667 1,930
Custodian fee payable 2 23,168 15,314 3,515
Accrued Directors' fees and
expenses 2 1,833 1,833 1,833
Cash overdraft -- 646,395 --
Accrued expenses and other
payables 98,523 63,886 27,818
- ---------------------------------------------------------------------------------------
TOTAL LIABILITIES 12,066,488 3,466,576 1,095,225
- ---------------------------------------------------------------------------------------
NET ASSETS $747,803,516 $224,460,959 $55,168,500
- ---------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
27
LEHMAN BROTHERS FUNDS, INC.
STATEMENTS OF ASSETS & LIABILITIES (CONTINUED) JULY 31, 1996
<TABLE>
<CAPTION>
NEW YORK
DAILY MUNICIPAL MUNICIPAL
INCOME INCOME MONEY MARKET
FUND FUND FUND
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSETS consist of:
Undistributed net investment
income $ 31,972 $ 14,976 $ 32,408
Accumulated net realized loss
on investments (9,600) (28,050) --
Par value 747,786 224,478 55,168
Paid-in capital in excess of
par value 747,033,358 224,249,555 55,080,924
- ----------------------------------------------------------------------------------
$747,803,516 $224,460,959 $55,168,500
- ----------------------------------------------------------------------------------
NET ASSETS:
Select Shares $747,779,408 $224,460,858 $55,168,500
CDSC Shares $ 24,108 $ 101 N/A
- ----------------------------------------------------------------------------------
SHARES OUTSTANDING:
Select Shares 747,772,144 224,488,908 55,168,290
CDSC Shares 24,109 101 N/A
- ----------------------------------------------------------------------------------
SELECT SHARES
NET ASSET VALUE, offering and
redemption price per share $1.00 $1.00 $1.00
- ----------------------------------------------------------------------------------
CDSC SHARES
NET ASSET VALUE and offering
price per share+ $1.00 $1.00 N/A
- ----------------------------------------------------------------------------------
+ Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
28
LEHMAN BROTHERS FUNDS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1996
<TABLE>
<CAPTION>
NEW YORK
DAILY MUNICIPAL MUNICIPAL
INCOME INCOME MONEY MARKET
NOTES FUND FUND FUND*
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest $39,293,584 $9,384,489 $ 1,716,409
- --------------------------------------------------------------------------------------
EXPENSES
Investment advisory fee 2 2,056,555 743,549 143,762
Distribution fee 3 1,713,797 619,624 119,802
Administration fee 2 1,371,037 495,700 95,841
Transfer Agent fee 2 679,843 100,658 6,753
Legal and audit fees 138,197 52,882 21,044
Custodian fee 2 92,886 68,784 18,286
Amortization of organization
costs 5 96,180 37,938 4,360
Directors' fees and expenses 2 19,167 19,167 12,833
Other 210,876 57,395 7,700
- --------------------------------------------------------------------------------------
Total expenses 6,378,538 2,195,697 430,381
- --------------------------------------------------------------------------------------
Fees waived by Investment
Advisor, Administrator and
Distributor 2 and 3 (1,121,489) (455,996) (111,798)
- --------------------------------------------------------------------------------------
NET EXPENSES 5,257,049 1,739,701 318,583
- --------------------------------------------------------------------------------------
NET INVESTMENT INCOME 34,036,535 7,644,788 1,397,826
- --------------------------------------------------------------------------------------
NET REALIZED GAIN/(LOSS) ON
INVESTMENTS -- (10,916) 210
- --------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $34,036,535 $7,633,872 $1,398,036
- --------------------------------------------------------------------------------------
* New York Municipal Money Market Fund commenced operations on November 6,
1995.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
29
LEHMAN BROTHERS FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED JULY 31, 1996
<TABLE>
<CAPTION>
NEW YORK
DAILY MUNICIPAL MUNICIPAL
INCOME INCOME MONEY MARKET
NOTES FUND FUND FUND*
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net investment income $ 34,036,535 $ 7,644,788 $ 1,397,826
Net realized gain/(loss) on
investments -- (10,916) 210
- ---------------------------------------------------------------------------------------
Net increase in net assets
resulting from operations 34,036,535 7,633,872 1,398,036
Distributions to shareholders
from net
investment income:
Select Shares (34,035,425) (7,644,785) (1,397,616)
CDSC Shares (1,110) (3) --
Distributions to shareholders
from net
realized gains:
Select Shares -- -- (210)
Net increase/(decrease) in net
assets from share transactions:
Select Shares 4 43,447,669 (72,350,541) 55,168,290
CDSC Shares 4 1,159 -- --
- ---------------------------------------------------------------------------------------
Net increase/(decrease) in net
assets 43,448,828 (72,361,457) 55,168,500
NET ASSETS:
Beginning of year 704,354,688 296,822,416 --
- ---------------------------------------------------------------------------------------
End of year (including
undistributed net
investment income of $31,972,
$14,976 and $32,408,
respectively) $747,803,516 $224,460,959 $55,168,500
- ---------------------------------------------------------------------------------------
* New York Municipal Money Market Fund commenced operations on November 6,
1995.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
30
LEHMAN BROTHERS FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED JULY 31, 1995
<TABLE>
<CAPTION>
DAILY MUNICIPAL
INCOME INCOME
NOTES FUND FUND
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income $ 34,420,411 $ 8,461,354
Net realized loss on investments (9,307) (4,807)
- ---------------------------------------------------------------------------------
Net increase in net assets resulting
from operations 34,411,104 8,456,547
Distributions to shareholders from net
investment income:
Select Shares (34,402,841) (8,461,282)
CDSC Shares (707) (72)
Distributions to shareholders from net
realized gains:
Select Shares (16,863) --
CDSC Shares -- --
Net increase/(decrease) in net assets
from share transactions:
Select Shares 4 (114,213,786) 32,401,995
CDSC Shares 4 22,850 (9,787)
- ---------------------------------------------------------------------------------
Net increase/(decrease) in net assets (114,200,243) 32,387,401
NET ASSETS:
Beginning of year 818,554,931 264,435,015
- ---------------------------------------------------------------------------------
End of year (including undistributed
net investment income of $27,184 and
$10,071, respectively) $ 704,354,688 $296,822,416
- ---------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
31
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A SELECT SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR PERIOD
ENDED ENDED ENDED
07/31/96 07/31/95 07/31/94*
<S> <C> <C> <C>
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00
- ----------------------------------------------------------------------------------
Net investment income 0.0498 0.0505 0.0297
- ----------------------------------------------------------------------------------
Dividends from net investment income (0.0498) (0.0505) (0.0297)
Dividends from net realized gains -- -- # --
- ----------------------------------------------------------------------------------
Total dividends (0.0498) (0.0505) (0.0297)
- ----------------------------------------------------------------------------------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00
- ----------------------------------------------------------------------------------
Total return+ 5.10% 5.14% 3.03%
- ----------------------------------------------------------------------------------
Ratios to average net
assets/supplemental data:
Net assets, end of year (in 000's) $747,779 $704,332 $818,555
Ratio of net investment income to
average net assets 4.97% 5.01% 3.01%**
Ratio of operating expenses to
average net assets 0.77% 0.74% 0.66%**
Ratio of operating expenses to
average net assets before waiver
of fees by the Investment Adviser,
Administrator and Distributor 0.93% 0.96% 0.95%**
Net investment income per share
before
waiver of fees by the Investment
Adviser, Administrator and
Distributor $ 0.0481 $ 0.0483 $0.0269
- ----------------------------------------------------------------------------------
* Daily Income Fund Select Shares commenced operations on August 2, 1993.
** Annualized.
+ Total return represents aggregate total return for the period
indicated.
# Amount is less than $0.0001 per share.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
32
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A CDSC SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
07/31/96 07/31/95*
<S> <C> <C>
Net asset value, beginning of period $ 1.00 $ 1.00
- ----------------------------------------------------------------------------------
Net investment income 0.0498 0.0379
Dividends from net investment income (0.0498) (0.0379)
- ----------------------------------------------------------------------------------
Net asset value, end of period $ 1.00 $ 1.00
- ----------------------------------------------------------------------------------
Total return+ 5.10% 3.85%
- ----------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 24 $ 23
Ratio of net investment income to average net
assets 4.97% 5.01%**
Ratio of operating expenses to average net
assets 0.77% 0.74%**
Ratio of operating expenses to average net
assets before
waiver of fees by the Investment Adviser,
Administrator
and Distributor 0.93% 0.96%**
Net investment income per share before waiver
of fees by the Investment Adviser,
Administrator and Distributor $ 0.0481 $0.0362
- ----------------------------------------------------------------------------------
* Daily Income Fund CDSC Shares commenced operations on November 16, 1994.
** Annualized.
+ Total return represents aggregate total return for the period indicated and
does not reflect the effect of any sales charge.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
33
LEHMAN BROTHERS FUNDS, INC.
MUNICIPAL INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A SELECT SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR PERIOD
ENDED ENDED ENDED
07/31/96 07/31/95 07/31/94*
<S> <C> <C> <C>
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00
- ----------------------------------------------------------------------------------
Net investment income 0.0307 0.0318 0.0207
Dividends from net investment income (0.0307) (0.0318) (0.0207)
- ----------------------------------------------------------------------------------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00
- ----------------------------------------------------------------------------------
Total return+ 3.10% 3.23% 2.09%
- ----------------------------------------------------------------------------------
Ratios to average net
assets/supplemental data:
Net assets, end of year (in 000's) $224,461 $296,822 $264,425
Ratio of net investment income to
average net assets 3.08% 3.21% 2.06%**
Ratio of operating expenses to
average net assets 0.70% 0.69% 0.64%**
Ratio of operating expenses to
average net assets before waiver
of fees by the Investment Adviser,
Administrator and Distributor 0.89% 0.90% 0.89%**
Net investment income per share
before
waiver of fees by the Investment
Adviser, Administrator and
Distributor $ 0.0289 $ 0.0296 $0.0182
- ----------------------------------------------------------------------------------
* Municipal Income Fund Select Shares commenced operations on August 2, 1993.
** Annualized.
+ Total return represents aggregate total return for the period
indicated.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
34
LEHMAN BROTHERS FUNDS,INC.
MUNICIPAL INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A CDSC SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR PERIOD
ENDED ENDED ENDED
07/31/96 07/31/95 07/31/94*
<S> <C> <C> <C>
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00
- ----------------------------------------------------------------------------------
Net investment income 0.0307 0.0317 0.0018
Dividends from net investment income (0.0307) (0.0317) (0.0018)
- ----------------------------------------------------------------------------------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00
- ----------------------------------------------------------------------------------
Total return+ 3.10% 3.23% 0.18%
- ----------------------------------------------------------------------------------
Ratios to average net
assets/supplemental data:
Net assets, end of year (in 000's) -- # -- # $ 10
Ratio of net investment income to
average net assets 3.08% 3.21% 2.06%**
Ratio of operating expenses to
average net assets 0.70% 0.69% 0.64%**
Ratio of operating expenses to
average net assets before waiver
of fees by the Investment Adviser,
Administrator and Distributor 0.89% 0.90% 0.89%**
Net investment income per share
before
waiver of fees by the Investment
Adviser, Administrator and
Distributor $ 0.0289 $ 0.0293 $0.0017
- ----------------------------------------------------------------------------------
* Municipal Income Fund CDSC Shares commenced operations on July 6, 1994.
** Annualized.
+ Total return represents aggregate total return for the period indicated and
does not reflect the effect of any sales charge.
# Total net assets for CDSC Shares were $101 at July 31, 1996 and July 31, 1995.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
35
LEHMAN BROTHERS FUNDS, INC.
NEW YORK MUNICIPAL MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
FOR A SELECT SHARE OUTSTANDING THROUGHOUT THE PERIOD.
<TABLE>
<CAPTION>
PERIOD
ENDED
07/31/96*
<S> <C>
Net asset value, beginning of period $ 1.00
- ----------------------------------------------------------------------------------
Net investment income 0.0214
- ----------------------------------------------------------------------------------
Dividends from net investment income (0.0214)
Dividends from net realized gains -- #
- ----------------------------------------------------------------------------------
Total dividends (0.0214)
- ----------------------------------------------------------------------------------
Net asset value, end of period $ 1.00
- ----------------------------------------------------------------------------------
Total return+ 2.11%
- ----------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 55,169
Ratio of net investment income to average net assets 2.92%**
Ratio of operating expenses to average net assets 0.66%**
Ratio of operating expenses to average net assets before
waiver of fees by the Investment Adviser, Administrator
and Distributor 0.90%**
Net investment income per share before waiver of fees by
the Investment Adviser, Administrator and Distributor $0.0197
- ----------------------------------------------------------------------------------
* New York Municipal Money Market Fund commenced operations on November
6, 1995.
** Annualized.
+ Total return represents aggregate total return for the period
indicated.
# Amount is less than $0.0001 per share.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
36
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
NEW YORK MUNICIPAL MONEY MARKET FUND
NOTES TO FINANCIAL STATEMENTS JULY 31, 1996
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 which currently offers three money market funds: Lehman Brothers Daily
Income Fund ("Daily Income Fund"), Lehman Brothers Municipal Income Fund
("Municipal Income Fund") and Lehman Brothers New York Municipal Money Market
Fund ("New York Municipal Money Market Fund") (individually, a "Fund" and
collectively, the "Funds"). Daily Income Fund and Municipal Income Fund
currently offer two classes of shares: Select Shares and CDSC Shares. New York
Municipal Money Market Fund currently offers one class of shares, referred to as
Select 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 the Fund 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 preparation of 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 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 Funds 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.
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. 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
37
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
NEW YORK MUNICIPAL MONEY MARKET FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 Funds enter into repurchase agreements to evaluate potential risks.
Securities transactions and investment income: Securities transactions are
recorded as of the trade date. Interest income is recorded on the accrual basis.
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 pro-rated among the
classes based upon the relative net assets of each class of shares.
Federal income taxes: The Funds intend to qualify each year as regulated
investment companies pursuant to the requirements of the Internal Revenue Code
of 1986, as amended. The Funds distribute substantially all of their income to
their shareholders, therefore, no Federal income tax provision is required.
Dividends and distributions to shareholders: Dividends from net investment
income of the Funds are determined on a class level, declared daily, and paid
monthly. Capital gains, unless offset by any available capital loss
carryforward, are distributed to shareholders annually after the close of the
fiscal year in which they have been earned, or more frequently to maintain the
Fund's net asset value of $1.00 per share. 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 due primarily 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.
For the year ended July 31, 1996, permanent differences resulting from book
and tax accounting for organizational costs were reclassified to paid-in
capital.
38
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
NEW YORK MUNICIPAL MONEY MARKET FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT ADVISORY FEE, ADMINISTRATION FEE AND OTHER RELATED PARTY
TRANSACTIONS
LBGAM serves as the Funds' Investment Adviser pursuant to separate
investment advisory agreements with each Fund. LBGAM is a wholly-owned
subsidiary of Lehman Brothers Holdings Inc. ("Holdings"). Under the investment
advisory agreements, LBGAM is entitled to receive from each Fund a monthly fee
at an annual rate of 0.30% of the value of each Fund's respective average daily
net assets. LBGAM may voluntarily waive advisory fees. For the year ended July
31, 1996, LBGAM voluntarily waived advisory fees as follows:
FEES WAIVED
- --------------------------------------------------------------------------------
Daily Income Fund $384,976
Municipal Income Fund 169,501
New York Municipal Money Market Fund 46,952
- --------------------------------------------------------------------------------
First Data Investor Services Group, Inc. ("FDISG"), formerly known as The
Shareholder Services Group, Inc., a wholly-owned subsidiary of First Data
Corporation, serves as the Funds' administrator pursuant to an administration
agreement. Under the administration agreement, FDISG is entitled to receive from
each Fund a monthly fee at an annual rate of 0.20% of the value of each Fund's
respective average daily net assets. FDISG may voluntarily waive administration
fees. For the year ended July 31, 1996, FDISG voluntarily waived administration
fees as follows:
FEES WAIVED
- --------------------------------------------------------------------------------
Daily Income Fund $256,650
Municipal Income Fund 113,000
New York Municipal Money Market Fund 31,301
- --------------------------------------------------------------------------------
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 year ended July 31, 1996, Lehman Brothers Inc., ("Lehman
Brothers") received no contingent deferred sales charges applicable to CDSC
Shares.
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, officer or
employee of Holdings, Lehman Brothers, LBGAM, 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.
39
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
NEW YORK MUNICIPAL MONEY MARKET FUND
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 each Fund's shares.
Pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended,
the Company has adopted a plan of distribution (the "Plan of Distribution") with
respect to each class of shares of each Fund. Under the Plan of Distribution,
the Funds 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 their respective average daily net assets for advertising,
marketing and distributing its shares.
For the year ended July 31, 1996, each Fund incurred the following
distribution fees:
SELECT SHARES CDSC SHARES
- --------------------------------------------------------------------------------
Daily Income Fund $1,713,738 $59
Municipal Income Fund 619,624 --
New York Municipal Money Market Fund 119,802 N/A
- --------------------------------------------------------------------------------
Lehman Brothers may waive fees in relation to the Plan of Distribution. For
the year ended July 31, 1996, Lehman Brothers waived fees in relation to the
Plan of Distribution as follows:
FEES WAIVED
- --------------------------------------------------------------------------------
Daily Income Fund $479,863
Municipal Income Fund 173,495
New York Municipal Money Market Fund 33,545
- --------------------------------------------------------------------------------
4. 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. The shares of Daily Income Fund and
Municipal Income Fund are divided into three classes of shares: Select Shares,
CDSC Shares and Global Clearing Shares. New York Municipal Money Market Fund is
divided into two classes of shares: Select Shares and Global Clearing Shares.
Global Clearing Shares
40
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
NEW YORK MUNICIPAL MONEY MARKET FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
have not yet been offered to the public. Since the Funds have sold shares,
issued shares as reinvestments of dividends and redeemed shares only at the 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 Daily Income
Fund, Municipal Income Fund and New York Municipal Money Market Fund:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
07/31/96 07/31/95
DAILY INCOME FUND: SHARES AND AMOUNT SHARES AND AMOUNT
- --------------------------------------------------------------------------------
<S> <C> <C>
Select Shares:
Sold $ 3,466,735,007 $ 3,904,923,625
Dividend Reinvestment 32,370,310 34,228,906
Redeemed (3,455,657,648) (4,053,366,317)
- --------------------------------------------------------------------------------
Net increase/(decrease) $ 43,447,669 $ (114,213,786)
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
07/31/96 07/31/95*
SHARES AND AMOUNT SHARES AND AMOUNT
- --------------------------------------------------------------------------------
<S> <C> <C>
CDSC Shares:
Sold -- $ 74,550
Dividend Reinvestment $ 1,159 633
Redeemed -- (52,333)
- --------------------------------------------------------------------------------
Net increase $ 1,159 $ 22,850
- --------------------------------------------------------------------------------
</TABLE>
* Daily Income Fund CDSC Shares commenced operations on November 16, 1994.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
07/31/96 07/31/95
MUNICIPAL INCOME FUND: SHARES AND AMOUNT SHARES AND AMOUNT
- --------------------------------------------------------------------------------
<S> <C> <C>
Select Shares:
Sold $ 1,359,377,406 $ 1,351,615,104
Dividend Reinvestment 7,346,407 8,434,959
Redeemed (1,439,074,354) (1,327,648,068)
- --------------------------------------------------------------------------------
Net increase/(decrease) $ (72,350,541) $ 32,401,995
- --------------------------------------------------------------------------------
</TABLE>
41
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
NEW YORK MUNICIPAL MONEY MARKET FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MUNICIPAL INCOME FUND: 07/31/96 07/31/95
(CONTINUED) SHARES AND AMOUNT SHARES AND AMOUNT
- --------------------------------------------------------------------------------
<S> <C> <C>
CDSC SHARES:
Sold -- --
Dividend Reinvestment -- $ 78
Redeemed -- (9,865)
- --------------------------------------------------------------------------------
Net decrease -- $(9,787)
- --------------------------------------------------------------------------------
</TABLE>
As of July 31, 1996, the Municipal Income Fund had issued 101 CDSC Shares
in the amount of $101 to Lehman Brothers.
<TABLE>
<CAPTION>
PERIOD ENDED
NEW YORK MUNICIPAL 07/31/96*
MONEY MARKET FUND: SHARES AND AMOUNT
- --------------------------------------------------------------------------------
<S> <C>
Select Shares:
Sold $ 214,947,806
Dividend Reinvestment 1,350,735
Redeemed (161,130,251)
- --------------------------------------------------------------------------------
Net increase $ 55,168,290
- --------------------------------------------------------------------------------
* New York Municipal Money Market Fund Select Shares commenced
operations on November 6, 1995.
</TABLE>
5. ORGANIZATION COSTS
The Funds bear all costs in connection with their organization including
fees and expenses of registering and qualifying their shares for distribution
under Federal and state securities regulations. All such costs are being
amortized on the straight-line method over a period of five years from the
commencement of operations of 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.
6. CAPITAL LOSS CARRYFORWARDS
As of July 31, 1996, the following Funds had available for Federal income
tax purposes unused capital losses as follows:
<TABLE>
<CAPTION>
NAME OF FUND EXPIRING IN 2003 EXPIRING IN 2004
- --------------------------------------------------------------------------------
<S> <C> <C>
Daily Income Fund -- $ 9,600
Municipal Income Fund $16,808 7,992
- --------------------------------------------------------------------------------
</TABLE>
42
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
NEW YORK MUNICIPAL MONEY MARKET FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. SUBSEQUENT EVENT
On September 6, 1996, the Board of Directors of the Company endorsed a
proposal by Lehman Brothers Inc. pursuant to which the shares of each of the
Company's funds held by Lehman's brokerage clients through Lehman's automated
sweep program will be converted to shares in a corresponding fund sponsored by
Federated Investors having a substantially identical investment objective,
unless otherwise instructed by the shareholder. It is anticipated that following
the conversions, the Company will be dissolved, subject to any required
approvals.
43
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
NEW YORK MUNICIPAL MONEY MARKET FUND
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Shareholders and Directors
Lehman Brothers Funds, Inc.
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments, of Lehman Brothers Funds, Inc. (the
"Fund") (comprising respectively, Lehman Brothers Daily Income Fund, Lehman
Brothers Municipal Income Fund and Lehman Brothers New York Municipal Money
Market Fund) as of July 31, 1996, and the related statements of operations for
the period then ended, the statements of changes in net assets and the financial
highlights for each of the periods indicated therein for each Fund class of
shares. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
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 are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of July 31, 1996, by correspondence with the
custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
each of the respective portfolios constituting Lehman Brothers Funds, Inc., at
July 31, 1996, the results of their operations, the changes in their net assets
and financial highlights for each of the indicated periods for each Fund class
of shares, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG
Boston, Massachusetts
August 30, 1996
Except for Note 7,
as to which the date is
September 9, 1996
44
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND/MUNICIPAL INCOME FUND/
NEW YORK MUNICIPAL MONEY MARKET FUND
TAX INFORMATION (UNAUDITED)
For the Year Ended July 31, 1996
Distributions made from investment income by the Municipal Income Fund and
the New York Municipal Money Market Fund are 100% tax exempt for regular Federal
income tax purposes.
Of the total distributions made by the Daily Income Fund from investment
income, 4.04% is derived from investments in U.S. Government and Agency
obligations. All or a portion of the distributions made from this income may be
exempt from taxation at the state level. Please consult your tax adviser for
state-specific information.
45
LEHMAN BROTHERS
Lehman Brothers Inc. All Rights Reserved
Member SIPC
LB0011I6
