LEHMAN BROTHERS FUNDS, INC.
-------
DAILY INCOME
FUND
-------
MUNICIPAL INCOME
FUND
-------
NEW YORK MUNICIPAL
MONEY MARKET FUND
-------
-------
SEMI-ANNUAL
REPORT
JANUARY 31, 1996
-------
LEHMAN BROTHERS
<PAGE>
Lehman Brothers Funds, Inc.
<TABLE>
<CAPTION>
Page
<S> <C>
Shareholder Letter 1
Daily Income Fund:
Portfolio Highlights 4
Portfolio of Investments 5
Municipal Income Fund:
Portfolio Highlights 8
Portfolio of Investments 9
New York Municipal Money Market Fund:
Portfolio Highlights 22
Portfolio of Investments 23
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
</TABLE>
-------
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.
<PAGE>
DEAR SHAREHOLDER:
We are pleased to present the Semi-Annual Report for Lehman Brothers
Funds, Inc. (the "Company") for the six-month period ended January 31,
1996. This Semi- 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 inves-
tors with as high a level of current income as is consistent with stabil-
ity 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 re-
purchase agreements relating to such obligations.
Performance: The Fund's 7-day and 30-day yields on January 31, 1996
were 5.02% and 5.06%, respectively.
MUNICIPAL INCOME FUND
Investment Objective: Municipal Income Fund is designed to provide in-
vestors with as high a level of current income exempt from federal income
tax as is consistent with stability of principal. The Fund invests sub-
stantially 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 January 31, 1996
were 2.91% and 2.93%, respectively. On a tax-equivalent yield basis, the
Fund's 7-day and 30-day yields were 4.77% and 4.80%, respectively, for in-
vestors 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 in-
come taxes as is consistent with stability of principal. The Fund invests
substantially all of its assets in short-term tax-exempt obligations is-
sued 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 January 31, 1996
were 2.83% and 2.86%, respectively. On a tax-equivalent yield basis, the
Fund's 7-day and 30-day yields were 6.15% and 6.22%, respectively, for in-
vestors in the 54% tax bracket.
1
<PAGE>
THE ECONOMY
Money Markets: After the U.S. economy recorded a strong 3.2% gain in
Gross Domestic Product ("GDP") (new basis) in the third quarter of 1995,
economists and investors generally felt that the pace would decelerate in
the fourth quarter to approximately 1.5% to 2.0%. As the economy weakened,
the primary challenge was to determine the extent of the slowdown and to
gauge the probability of Federal Reserve Board (the "Fed") monetary policy
intervention. To complicate the analysis, a secondary challenge was to as-
sess the outlook for passage of congressional legislation which would
achieve a federal balanced budget and to estimate its impact on the econ-
omy and interest rates.
Data released in October and November gradually depicted a weakening
economy which eventually led the Fed to ease its monetary policy by lower-
ing the fed funds rate by 25 basis points at its Federal Open Market Com-
mittee meeting on December 19, 1995. Throughout much of the quarter, many
investors believed that the Fed would defer changes in its monetary policy
until Congress and the President were able to resolve their differences in
order to pass legislation which would balance the budget by the year 2002.
The fixed income markets staged an impressive rally throughout the quarter
based upon the combination of weak economic data and optimism for a
budget-related Fed easing. When the budget negotiations unraveled in late
November, congressional leaders applied hard-line tactics which severely
limited spending appropriations for normal government operations which, in
turn, led to the partial closing of government offices. Congressional
leaders also refused to raise the prescribed limit on the size of U.S.
government debt which forced the Treasury Department to shuffle its debt
obligations in order to avoid a default on maturing Treasury securities.
In spite of the failed negotiations, market participants were confident
enough to bet that conditions warranted further monetary easing which oc-
curred on January 31, 1996. During the rally, short-term rates (3-month
T-bills) declined from 5.57% on July 28, 1995 to 4.86% on February 2, 1996
while long-term rates (30-year T-Bonds) declined from 6.86% to 6.16%. At
this writing, the targeted fed funds rate is 5.25%. The average maturity
of DAILY INCOME FUND was extended to the degree that was appropriate given
liquidity considerations.
Municipal Market: For the past several years, tax-exempt portfolio
managers were able to anticipate swings in yields by assessing market sup-
ply. The second half of 1995, however, proved to be a dramatic exception
to this rule as the measure of the market became not supply, but lack of
supply. As overall new issuance has decreased, portfolio managers were
forced to accept ever lower rates in order to stay fully invested. This
situation was exacerbated by the fact that overall dollar levels of in-
vestment in tax-exempt money market securities increased.
Faced with this supply squeeze, tax-exempt yields fluctuated dramati-
cally from month to month. These fluctuations were not confined to abso-
lute yields but were also seen in the spreads versus fully taxable invest-
ments. In the second half of 1995, investors also realized that tax-exempt
portfolios would not automatically outperform fully taxable portfolios on
an after-tax basis as was usually the case.
2
<PAGE>
The aforementioned volatility became apparent early in the second half
of the year. In order to achieve the highest yields within this environ-
ment, both MUNICIPAL INCOME FUND and NEW YORK MUNICIPAL MONEY MARKET FUND
emphasized longer maturity notes which represented better value at the
time of purchase and ultimately aided performance as interest rates headed
lower. This maturity extension allowed the Funds to hedge against much of
the extreme yield volatility that was experienced in the very short end of
the curve.
Looking ahead to 1996, we see a continuation of the supply squeeze and
anticipate a continuation of the same portfolio strategies for both Funds.
Sincerely,
/s/ Andrew D. Gordon
Andrew D. Gordon
President
February 2, 1996
3
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
Daily Income Fund
PORTFOLIO HIGHLIGHTS JANUARY 31, 1996 (UNAUDITED)
ASSET DISTRIBUTION (BY INSTRUMENT)
PIE CHART
Pie chart broken into pieces using the figures below:
<TABLE>
<S> <C>
Net Other Assets and Liabilities 1.0%
Bank / Corporate Notes 26.1%
Commercial Paper 39.5%
Municipal Notes 5.7%
U.S. Government Agency Security 3.6%
Promissory Note 1.4%
Certificate of Deposit 0.9%
Repurchase Agreements 21.8%
</TABLE>
AVERAGE WEIGHTED MATURITY OF PORTFOLIO
23 Days
4
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
Daily Income Fund
PORTFOLIO OF INVESTMENTS JANUARY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
<S> <C> <C>
COMMERCIAL PAPER -- 39.5%
Atlantic Asset Securitization Corporation:
$15,000,000 5.520%+ due 2/13/96 $ 14,972,400
15,620,000 5.600%+ due 3/15/96 15,515,520
20,329,000 Clipper Receivables Corporation, Variable Rate,
5.550%+ due 2/16/96 20,281,989
Countrywide Funding Corporation:
10,000,000 5.590%+ due 2/14/96 9,979,814
20,000,000 5.540%+ due 2/15/96 19,956,911
Dakota Domestic Standard Corporation:
15,000,000 5.450%+ due 2/8/96 14,984,104
15,000,000 5.610%+ due 3/12/96 14,906,500
5,938,000 Enterprise Funding Corporation,
5.500%+ due 2/16/96 5,924,392
Merrill Lynch & Company:
10,000,000 5.680%+ due 2/29/96 9,955,822
20,000,000 5.700%+ due 2/29/96 19,911,333
18,090,000 Oldline Funding Corporation,
5.550%+ due 2/29/96 18,037,011
Preferred Receivables Funding Corporation:
5,075,000 5.650%+ due 3/5/96 5,048,716
7,950,000 5.410%+ due 4/11/96 7,866,370
Ranger Funding Corporation:
10,000,000 5.680%+ due 2/15/96 9,977,911
6,000,000 5.450%+ due 3/13/96 5,962,758
6,550,000 Sheffield Receivables Corporation,
5.400%+ due 3/18/96 6,504,805
Sigma Finance Corporation:
7,000,000 5.700%+ due 2/6/96 6,994,458
7,000,000 5.650%+ due 3/18/96 6,949,464
Spintab AB:
10,000,000 5.650%+ due 3/20/96 9,924,667
20,000,000 5.700%+ due 3/25/96 19,832,167
15,000,000 Swedbank Inc.,
5.410%+ due 4/15/96 14,833,193
20,000,000 Windmill Funding Corporation,
5.470%+ due 2/28/96 19,917,950
TOTAL COMMERCIAL PAPER (COST $278,238,255) 278,238,255
</TABLE>
5
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
Daily Income Fund
PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
<S> <C> <C>
BANK/CORPORATE NOTES -- 26.1%
$25,000,000 American Express Centurion Bank, Variable Rate,
5.595% due 2/12/1996 $ 24,992,769
Bear Stearns & Company Inc., Variable Rate:
15,000,000 5.970% due 2/9/96 15,000,000
15,000,000 6.208% due 2/26/96 15,000,000
CS First Boston Corporation, Variable Rate:
10,000,000 5.917% due 2/26/96 10,000,000
20,000,000 5.625% due 4/8/96 20,000,000
20,000,000 First Bank Sioux Falls, Variable Rate,
6.020% due 2/5/96 19,999,894
2,000,000 Ford Motor Credit Corporation,
8.000% due 10/1/96 2,026,679
10,100,000 General Motors Acceptance Corporation,
5.650% due 6/18/96 10,089,757
20,000,000 Goldman Sachs Group LP, Variable Rate,
6.088% due 2/2/96 20,000,000
17,000,000 Household Credit Card Corporation, Variable
Rate,
5.655% due 2/15/96 17,000,000
10,000,000 NationsBank of Texas,
7.050% due 2/8/96 10,000,000
5,000,000 NBD Bank, Notes,
5.850% due 6/5/96 4,998,192
15,000,000 SMM Trust, 1995-D, Variable Note,
5.550% due 4/28/96 15,000,000
TOTAL BANK/CORPORATE NOTES (COST $184,107,291) 184,107,291
MUNICIPAL NOTES -- 5.7%
40,000,000 Orange County, California, Taxable Notes, Vari-
able Rate,
5.477% due 6/30/96 (See Note 6) 40,000,000
-- Letter of Credit issued by Chemical Bank, ex-
piring 7/10/96 --
TOTAL MUNICIPAL NOTES (COST $40,000,000) 40,000,000
U.S. GOVERNMENT AGENCY SECURITY -- 3.6% (COST $25,000,000)
25,000,000 Federal National Mortgage Association, Variable
Rate,
6.100% due 10/7/96 25,000,000
PROMISSORY NOTE -- 1.4% (COST $10,000,000)
10,000,000 Goldman Sachs & Company,
5.625% due 4/1/96 10,000,000
</TABLE>
6
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
Daily Income Fund
PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
<S> <C> <C>
CERTIFICATE OF DEPOSIT -- 0.9% (COST $6,429,534)
$ 6,429,000 Bank of New York, Delaware,
6.350% due 2/23/96 $ 6,429,534
REPURCHASE AGREEMENTS -- 21.8%
90,000,000 Agreement with CS First Boston Corporation,
dated 1/31/96 bearing 6.030% to be repurchased
at $90,015,075 on 2/1/96, collateralized by
$99,350,000 U.S. Government Agency Securities
with various maturities and interest rates
(market value -- $93,190,816) 90,000,000
63,381,000 Agreement with Merrill Lynch & Company, dated
1/31/96 bearing 5.600% to be repurchased at
$63,390,859 on 2/1/96, collateralized by
$66,654,000 U.S. Government Agency Securities
with various maturities and interest rates
(market value -- $65,313,707) 63,381,000
TOTAL REPURCHASE AGREEMENTS (COST $153,381,000) 153,381,000
TOTAL INVESTMENTS (COST $697,156,080*) 99.0% 697,156,080
OTHER ASSETS AND LIABILITIES (NET) 1.0 7,032,379
NET ASSETS 100.0% $704,188,459
</TABLE>
* Aggregate cost for Federal tax purposes.
+ Annualized yield at date of purchase.
7
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
Municipal Income Fund
PORTFOLIO HIGHLIGHTS JANUARY 31, 1996 (UNAUDITED)
ASSET DISTRIBUTION (BY INDUSTRY)
PIE CHART
Pie chart broken into pieces using the figures below:
<TABLE>
<S> <C>
Net Other Assets and Liabilities 19.1%
Education 7.2%
General Obligation 17.7%
Hospital 6.7%
Housing 14.4%
Industrial Development Revenue 14.5%
Pollution Control Revenue 7.9%
Sewer and Water 0.2%
Transportation 3.5%
Utility 3.4%
Waste 1.3%
Other 4.1%
</TABLE>
AVERAGE WEIGHTED MATURITY OF PORTFOLIO
53 Days
8
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
Municipal Income Fund
PORTFOLIO OF INVESTMENTS JANUARY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
<S> <C> <C>
MUNICIPAL BONDS AND NOTES -- 80.9%
ALABAMA -- 2.2%
$ 3,935,000 Alabama Housing Finance Authority, Multi-Family
Housing Revenue, (Royal Garden Apartments),
(Southtrust Bank, LOC),
3.450% due 7/1/20++ $ 3,935,000
1,400,000 Cullman, Alabama, Industrial Development Board,
Industrial Revenue, (Pressac Project),
3.600% due 10/1/04++ 1,400,000
1,450,000 Gasden, Alabama, Industrial Development Board,
Pollution Control Revenue, (Alabama Power Com-
pany Project),
3.600% due 6/1/15+ 1,450,000
6,785,000
ALASKA -- 2.3%
6,100,000 Alaska State, Housing Finance Corporation, Se-
ries A,
3.100% due 6/1/26++ 6,100,000
1,150,000 Fairbanks North Starboro, Alaska, Series R,
General Obligation Bonds, (MBIA Insured),
12.000% due 3/1/96 1,157,470
7,257,470
ARIZONA -- 3.1%
1,000,000 Maricopa County, Arizona, Pollution Control
Corporation, Pollution Control Revenue, (Ari-
zona Public Service Company), Series F, (Bank
of America, LOC),
3.700% due 5/1/29+ 1,000,000
5,200,000 Maricopa County, Arizona, Tax Anticipation
Notes,
4.500% due 7/31/96 5,217,903
3,300,000 Pima County, Arizona, Industrial Development
Authority, Industrial Revenue, (Tucson Elec-
tric Power Company Project),
(Bankers Trust Company, LOC),
3.350% due 5/1/25++ 3,300,000
9,517,903
ARKANSAS -- 2.4%
Arkansas State, Development Finance Authority,
Single-Family Mortgage Revenue, Series C, (FSA
Insured):
2,000,000 3.850% due 2/1/96+++ 2,000,000
5,390,000 3.350% due 8/1/14+++ 5,390,000
7,390,000
</TABLE>
9
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
Muncipal Income Fund
PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
<S> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
CALIFORNIA -- 3.2%
$10,000,000 California State, Revenue Anticipation War-
rants, Series C,
5.750% due 4/25/96 $ 10,029,357
COLORADO -- 0.9%
1,650,000 Colorado Housing Finance Authority, Multi-
Family Housing Revenue, (Hamden & Estes),
(Dai-Ichi Kangyo, LOC),
3.700% due 12/1/05++ 1,650,000
1,000,000 Denver, Colorado, City & County, Multi-Family
Housing Revenue, (Seasons Apartment Project),
(FHLB, LOC),
(Banque Paribas, BPA),
3.250% due 10/1/06++ 1,000,000
2,650,000
DISTRICT OF COLUMBIA -- 0.8%
2,500,000 District of Columbia, (Abraham & Laura Listner
Home for Aged Women), (NationsBank of Georgia,
LOC),
3.200% due 7/1/22+ 2,500,000
FLORIDA -- 4.5%
1,000,000 Broward County, Florida, General Obligation
Notes,
Pre-refunded 7/1/96,
7.875% due 1/1/12 1,043,614
1,010,000 Broward County, Florida, Industrial Development
Revenue, (Goldline Laboratory), Series A,
(Barnett Bank, LOC),
3.150% due 6/1/06++ 1,010,000
1,690,000 Dade County, Florida, Industrial Development
Authority,
Industrial Development Revenue, (DNS Manufac-
turing Project),
(Barnett Bank, LOC),
3.400% due 11/1/09++ 1,690,000
1,500,000 Hillsbourgh County, Florida, Capital Improve-
ment Project Revenue, Subseries 2, Water &
Waste, Pre-refunded 2/1/96,
8.300% due 8/1/16 1,530,000
1,200,000 Jacksonville, Florida, Health Facilities Au-
thority, Hospital Revenue, (Baptist Medical
Center Project), (MBIA Insured),
(Sun Bank N.A., BPA),
3.700% due 6/1/08+ 1,200,000
2,000,000 Palm Beach County, Florida, School District,
Tax Anticipation Notes,
4.500% due 9/27/96 2,008,365
</TABLE>
10
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
Muncipal Income Fund
PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
<S> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
FLORIDA -- (CONTINUED)
Pinellas County, Florida, Health Facilities Au-
thority Revenue, (Bayfront Medical), (FGIC In-
sured), (Barnett Bank, BPA):
$ 600,000 3.100% due 6/1/05++ $ 600,000
500,000 3.100% due 6/1/09++ 500,000
2,000,000 Putnum County, Florida, Development Authority,
Pollution Control Revenue, (Seminole Elec-
tric), (National Rural Utility Finance, BPA),
3.750% due 3/15/14+++ 2,000,000
1,400,000 St. John's County, Florida, Industrial Develop-
ment Authority Revenue,
3.450% due 12/1/16++ 1,400,000
100,000 Sarasota County, Florida, Health Facilities Au-
thority Revenue,
(Bay Village Project), (Barnett Bank, LOC),
3.250% due 12/1/19++ 100,000
University Athletic Association Inc., Florida,
Capital Improvement Revenue:
700,000 (Sun Bank N.A., LOC),
3.400% due 2/1/20+ 700,000
100,000 (University of Florida Stadium Project),
3.400% due 2/1/20+ 100,000
13,881,979
GEORGIA -- 5.3%
1,000,000 Burke County, Georgia, Development Authority,
Pollution Control Revenue, (Georgia Power Com-
pany), 3rd Series,
3.600% due 9/1/25+ 1,000,000
7,800,000 Monroe County, Georgia, Development Authority,
Pollution Control Revenue, (Georgia Power Com-
pany), 1st Series,
3.600% due 7/1/25+ 7,800,000
6,500,000 Municipal Electric Authority of Georgia, (Gen-
eral Resolution), Series B, (Bayerische
Landesbank Girozentale, LOC),
(Credit Suisse, LOC), (Morgan Guaranty Trust,
BPA),
4.250% due 6/1/20+++ 6,503,479
1,080,000 Walton, Georgia, Industrial Building Authority,
Series A,
(Union Bank of Switzerland, LOC),
3.550% due 10/1/02++ 1,080,000
16,383,479
</TABLE>
11
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
Muncipal Income Fund
PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
<S> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
HAWAII -- 0.9%
$ 1,750,000 Hawaii State, Putters-Series BZ, (Morgan Guar-
anty, BPA),
3.350% due 10/1/06++ $ 1,750,000
1,100,000 Secondary Market Services Corporation of Ha-
waii, Student Loan Revenue, Series II, (Na-
tional Westminster Bank, LOC),
(GSL Insured),
3.250% due 9/1/10++ 1,100,000
2,850,000
ILLINOIS -- 5.7%
3,300,000 Chicago, Illinois, Municipal Securities Trust
Receipts,
Series SGA 8,
3.300% due 1/1/22++ 3,300,000
1,175,000 Hanover Park, Illinois, Notes, General Obliga-
tion Bonds,
3.850% due 6/1/96 1,175,173
1,000,000 Illinois Development Finance Authority, Indus-
trial Development Revenue, (Overton Gear &
Tool Corporation),
(Harris Trust & Savings Bank, LOC),
3.350% due 10/1/08++ 1,000,000
6,000,000 Illinois Health Facilities Authority Revenue,
Series A,
3.250% due 8/1/15+++ 6,000,000
6,300,000 Illinois Housing Development Authority, Multi-
Family Housing, (Williamsburg), (Credit Lyon-
nais, LOC), (Landesbank, LOC),
3.250% due 11/1/06++ 6,300,000
17,775,173
INDIANA -- 0.2%
500,000 Ossian, Indiana, Economic Development Revenue,
(Walbro Auto Corporation Project), (Harris
Trust & Savings Bank, LOC),
3.350% due 12/1/23++ 500,000
IOWA -- 0.1%
400,000 Iowa Finance Authority, Solid Waste Disposal
Revenue, (Cedar River Paper Company), Series
A, (Swiss Bank, LOC),
3.550% due 5/1/25+ 400,000
</TABLE>
12
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
Muncipal Income Fund
PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
<S> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
KANSAS -- 0.1%
$ 400,000 Kansas State, Department of Transportation,
Highway Revenue, Series B,
3.050% due 9/1/14++ $ 400,000
KENTUCKY -- 1.2%
1,000,000 County of Graves, Revenue Bonds, Series 1988,
(Bank of New York, LOC),
3.450% due 12/1/12++ 1,000,000
2,800,000 Pulaski County, Kentucky, Solid Waste Disposal
Revenue,
(East Kentucky Power Company), Series B,
(National Rural Utilities, BPA),
3.900% due 8/15/23+++ 2,800,000
3,800,000
LOUISANA -- 0.8%
300,000 Ascension Parish, Louisiana, Pollution Control
Revenue,
(Shell Oil Company, GTC),
3.600% due 9/1/23+ 300,000
800,000 Calcasieu Parish, Inc., Louisiana, (Citgo Pe-
troleum Corporation), (Westdeutshe Landesbank,
LOC),
3.150% due 8/1/04++ 800,000
880,000 Louisiana Housing Finance Agency, Multi-Family
Housing Authority Revenue, (New Orleans
Project),
(Sumitomo Trust, LOC),
3.700% due 12/1/25++ 880,000
500,000 Rapides Parish, Louisiana, Industrial Develop-
ment Board, Pollution Control Revenue, (Cen-
tral Louisiana Electric Company Project),
(Swiss Bank, LOC),
3.050% due 7/1/18++ 500,000
2,480,000
MAINE -- 1.6%
5,000,000 Maine State, Tax Anticipation Notes, General
Obligation Notes,
4.500% due 6/28/96 5,014,755
</TABLE>
13
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
Muncipal Income Fund
PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
<S> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
MARYLAND -- 2.2%
$ 4,500,000 Baltimore County, Maryland, Putters, Series 20,
General Obligation Bonds, (Morgan Guaranty
Trust, BPA),
3.350% due 7/1/16++ $ 4,500,000
865,000 Maryland State, Community Development Adminis-
tration, Department of Economic & Community
Development,
3.900% due 4/1/13+++ 865,313
1,500,000 Maryland State, Health & Higher Education Fa-
cilities Revenue, Series B, (Mellon Bank,
LOC),
3.200% due 7/1/24++ 1,500,000
6,865,313
MASSACHUSETTS -- 3.4%
1,410,000 Commonwealth of Massachusetts, Housing Finance
Agency, Single-Family Housing Revenue, Series
35,
4.100% due 6/1/17+++ 1,410,000
9,000,000 Massachusetts Bay Transportation Authority
Notes, Series A, (Commonwealth Guaranteed),
5.500% due 3/1/96 9,005,972
10,415,972
MINNESOTA -- 0.5%
1,500,000 Minnesota State Housing Finance Agency, Single-
Family Mortgage Revenue, Series 0,
3.600% due 7/1/29+++ 1,500,000
MISSISSIPPI -- 1.1%
3,500,000 Mississippi Business Financial Corporation,
Solid
Waste Disposal Revenue, (Morton International
Inc.
Project), Series B,
3.300% due 6/1/20++ 3,500,000
MISSOURI -- 2.7%
2,000,000 Carthage, Missouri, Industrial Development Au-
thority Revenue, Series A, (Wachovia Bank
Georgia, LOC),
3.600% due 4/1/07++ 2,000,000
1,250,000 Missouri, Environmental Improvement & Energy
Resource Authority, Pollution Control Revenue,
(Union Electric Company), Series B, (Union
Bank of Switzerland, LOC),
4.000% due 6/1/14+++ 1,250,000
</TABLE>
14
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
Muncipal Income Fund
PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
<S> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
MISSOURI -- (CONTINUED)
Missouri State Health & Educational Facilities
Authority Revenue:
$ 500,000 (Christian Health Services), Series B, (Morgan
Guaranty, LOC),
3.050% due 11/1/19++ $ 500,000
400,000 (Sisters of Mercy), Series B, (ABN Amro Bank,
BPA),
3.050% due 6/1/14++ 400,000
(St. Anthony's Medical Center), (Mitsubishi
Ltd., BPA):
2,000,000 Series A,
3.500% due 12/1/19++ 2,000,000
1,300,000 Series C,
3.500% due 12/1/19++ 1,300,000
1,000,000 (St. Luke's Episcopal), Series B,
3.700% due 12/1/16+ 1,000,000
8,450,000
NEVADA -- 1.3%
4,050,000 Nevada State, Department of Community Indus-
trial Development Revenue, (Marshmallow Lane
Partners),
(Commercial Credit, LOC),
3.350% due 4/1/09++ 4,050,000
NEW JERSEY -- 4.4%
5,000,000 Camden County, New Jersey, Bond Anticipation
Notes, Series A,
5.250% due 2/14/96 5,000,763
7,000,000 Jersey City, New Jersey, Bond Anticipation
Notes, General Obligation Bonds,
4.750% due 9/27/96 7,036,280
125,000 Maplewood Township, New Jersey, General Obliga-
tion Bonds,
4.700% due 11/1/96 125,908
555,000 Middlesex County, New Jersey, Utilities Author-
ity Sewer Revenue, BT-94, (MBIA Insured),
(Bankers Trust Company, BPA),
2.000% due 8/15/02++ 555,000
900,000 New Jersey State Turnpike Authority, (MBIA In-
sured),
(Bankers Trust Company, BPA),
2.000% due 1/1/00++ 900,000
13,617,951
</TABLE>
15
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
Muncipal Income Fund
PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
<S> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
NEW MEXICO -- 0.1%
$ 300,000 Albuquerque, New Mexico, Revenue Bonds, (Char-
ter Hospital Inc., Project), (Bankers Trust
Company, LOC),
3.250% due 3/1/14+ $ 300,000
NEW YORK -- 4.6%
1,450,000 Connetquot Central School District, New York,
Tax Anticipation Notes, General Obligation
Notes,
4.000% due 6/27/96 1,450,901
Monroe County, New York, Putters:
3,560,000 Series 24B,
3.250% due 6/1/05++ 3,560,000
910,000 Series 24C,
3.250% due 6/1/06++ 910,000
4,000,000 Nassau County, New York, Tax Anticipation
Notes, Series B, General Obligation Notes,
4.500% due 4/15/96 4,004,999
900,000 New York, New York, Series E-3, General Obliga-
tion Bonds,
(Fuji Bank Ltd., LOC),
4.050% due 5/15/96+ 900,000
3,000,000 New York, New York, Revenue Anticipation Notes,
Series B, General Obligation Notes, (Morgan
Guaranty Trust, LOC), (Union Bank of Switzer-
land, LOC),
4.750% due 6/28/96 3,016,300
400,000 Suffolk County, New York, Industrial Develop-
ment Agency, Industrial Development Revenue,
(Nissequoque Cogen Partners), (Toronto Domin-
ion Bank, LOC),
3.200% due 12/15/23++ 400,000
14,242,200
NORTH CAROLINA -- 0.3%
750,000 Greensboro, North Carolina, Public Improvement,
Series B, General Obligation Bonds, (Wachovia
Bank, BPA),
3.050% due 4/1/12++ 750,000
OHIO -- 0.5%
1,600,000 Dayton, Ohio, SPL Facilities Revenue, (Emery
Air Freight),
Series C, (Mellon Bank, LOC),
3.700% due 10/1/09+ 1,600,000
</TABLE>
16
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
Muncipal Income Fund
PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
<S> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
OREGON -- 2.4%
$ 1,500,000 Oregon State, Health, Housing, Educational &
Cultural Facilities Authority, (Guide Dogs for
the Blind), Series A,
(Banque Nationale De Paris, LOC),
3.100% due 7/1/25++ $ 1,500,000
Oregon State, Housing & Community Services De-
partment, Single Family-Mortgage Revenue,
Mortgage Program:
4,000,000 Series D,
4.100% due 9/3/96 4,001,136
2,000,000 Series F,
3.550% due 12/12/96 2,000,000
7,501,136
PENNSYLVANIA -- 5.1%
7,000,000 Commonwealth of Pennsylvania, Higher Education
Assistance Agency, Student Loan Revenue, Se-
ries A,
(Student Loan Marketing Association, LOC),
3.250% due 12/1/25++ 7,000,000
1,000,000 Commonwealth of Pennsylvania, Higher Education,
Facilities Authority Revenue, (Carnegie Mellon
University), Series B,
3.700% due 11/1/27+ 1,000,000
1,400,000 Geisinger Authority of Pennsylvania, Health
Systems, Series B, (Morgan Guaranty, BPA),
3.600% due 7/1/22+ 1,400,000
2,000,000 Pennsylvania State, Housing Finance Agency,
Single-Family Housing Revenue, Series N,
3.900% due 4/1/08+++ 2,000,000
3,000,000 Philadelphia, Pennsylvania, School District Tax
& Revenue Anticipation Notes, General Obliga-
tion Bonds,
4.500% due 6/28/96 3,006,433
1,500,000 Quakertown, Pennsylvania, Hospital Authority
Revenue,
(HPS Pooled Financing), (PNC Bank, LOC),
3.100% due 7/1/05++ 1,500,000
15,906,433
SOUTH CAROLINA -- 1.1%
1,000,000 Beaufort County, South Carolina, School Dis-
trict, Bond Anticipation Notes, General Obli-
gation Notes, (Student Aid Withholding),
4.125% due 8/15/96 1,002,954
</TABLE>
17
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
Muncipal Income Fund
PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
<S> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
SOUTH CAROLINA -- (CONTINUED)
$ 2,400,000 York County, South Carolina, Pollution Control
Revenue, (Saluda River), (Cooperative Finance
Corporation),
3.800% due 8/15/14+++ $ 2,400,000
3,402,954
SOUTH DAKOTA -- 1.0%
3,000,000 South Dakota, Housing Development Authority,
Homeownership Mortgage, Series E,
4.050% due 10/24/96 3,000,940
TENNESSEE -- 5.4%
Chattanooga, Tennessee, Industrial Development
Board, Industrial Development Revenue:
1,300,000 (Market Street Ltd. Project), (Credit Suisse,
LOC),
3.100% due 12/15/12++ 1,300,000
4,300,000 (Warehouse Row Ltd. Project), (ABN Amro Bank,
LOC),
3.100% due 12/15/12++ 4,300,000
6,600,000 McKensie, Tennessee, Industrial Development
Board,
3.450% due 2/1/01++ 6,600,000
3,000,000 Morrison, Tennessee, Industrial Development
Board, Industrial Development Revenue,
(Williamhouse-Regency),
(Fleet National Bank, LOC),
3.350% due 4/1/10++ 3,000,000
1,500,000 Rutherford County, Tennessee, Industrial Devel-
opment Board, Industrial Development Revenue,
(Leggett & Platt Inc., Project), Series A,
(Wachovia Bank, LOC),
3.750% due 12/1/03++ 1,500,000
16,700,000
TEXAS -- 3.4%
600,000 Grapevine, Texas, Industrial Development Corpo-
ration, Airport Revenue, (Southern Air Trans-
port), (Bank of Montreal, LOC),
3.200% due 3/1/10++ 600,000
1,050,000 Harris County, Texas, Health Facilities Devel-
opment Corporation, Hospital Revenue, (St.
Luke's Episcopal), Series D,
3.700% due 2/15/16+ 1,050,000
</TABLE>
18
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
Muncipal Income Fund
PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
<S> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
TEXAS -- (CONTINUED)
$ 1,900,000 Harris County, Texas, Industrial Development
Corporation, Pollution Control Revenue,
3.700% due 3/1/24+ $ 1,900,000
1,470,000 Lewisville, Texas, Independent School District,
Unrefunded Balance, General Obligation Bonds,
(MBIA Insured),
5.900% due 2/15/96 1,470,703
500,000 Panhandle Plains, Texas, Higher Education Au-
thority Inc., Student Loan Revenue, Series A,
(Student Loan Marketing
Association, LOC),
3.200% due 6/1/23++ 500,000
2,700,000 Texas State, Public Property Finance Corpora-
tion Revenue, (Mental Health & Retardation),
(FSA Insured),
4.000% due 9/1/96 2,699,890
700,000 Texas State, Veterans Housing Assistance, Fund
II-E,
3.900% due 12/1/26+++ 700,149
400,000 Travis County, Texas, Housing Finance Corpora-
tion, Multi-Family Housing Revenue, (Prime
Crest Ltd. Project), Series B, (Bank of Amer-
ica, LOC), (Kemper Investors Life Insurance,
SPA),
3.300% due 3/1/20++ 400,000
1,000,000 Tyler, Texas, Health Facilities Development
Corporation, (Mother Frances Hospital
Project), Series A, (FGIC Insured),
6.100% due 7/1/96 1,009,404
10,330,146
UTAH -- 0.3%
1,000,000 Salt Lake County, Utah, Pollution Control Reve-
nue, (Service Station Holdings Project), Se-
ries B,
3.700% due 8/1/07+ 1,000,000
VERMONT -- 1.6%
5,000,000 Vermont, Educational & Health Buildings Financ-
ing Agency Revenue, (Capital Asset Financing
Program), Series A,
(Key Bank, LOC),
3.250% due 8/1/05++ 5,000,000
</TABLE>
19
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
Muncipal Income Fund
PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
<S> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
WASHINGTON -- 0.6%
$ 1,640,000 Washington State, Series R-89B,
6.800% due 9/1/96 $ 1,668,308
WEST VIRGINIA -- 2.6%
1,620,000 Charlestown, West Virginia, Building Community
Packaging Facility Revenue, (Society National
Bank, LOC),
3.400% due 12/1/16++ 1,620,000
6,000,000 Grant County, West Virginia, County & Community
Industrial Development Revenue, (N.B. Part-
ners), Series B,
(First Union National, LOC),
3.300% due 12/1/16++ 6,000,000
500,000 Marion County, West Virginia, County & Commu-
nity Solid Waste Disposal Facility Revenue,
(Granttown Project), Series D, (National West-
minster, LOC),
3.250% due 10/1/17++ 500,000
8,120,000
WISCONSIN -- 0.7%
2,000,000 Milwaukee, Wisconsin, Industrial Development
Revenue, (Pharmacia AB, GTC),
3.650% due 6/1/09++ 2,000,000
WYOMING -- 0.3%
1,000,000 Converse County, Wyoming, Pollution Control
Revenue, (Pacificorp Projects), (AMBAC In-
sured), (Bank of New York, BPA), (First Inter-
state Bank of Oregon, BPA),
(NationsBank of Texas, BPA),
3.800% due 11/1/24+ 1,000,000
TOTAL INVESTMENTS (COST $250,536,469*) 80.9% 250,536,469
OTHER ASSETS AND LIABILITIES (NET) 19.1 59,153,078
NET ASSETS 100.0% $309,689,547
</TABLE>
* 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
January 31, 1996.
++ Variable rate demand notes are payable upon not more than seven calen-
dar days' notice. The interest rate shown reflects the rate in effect
at January 31, 1996.
+++ Put bonds and notes have demand features which mature within one year.
20
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
Muncipal Income Fund
PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 1996 (UNAUDITED)
AMBAC -- American Municipal Bond Assurance Corporation
BPA -- Instruments supported by bond purchase agreement.
FGIC -- Federal Guaranty Insurance Corporation
FHLB -- Federal Home Loan Bank
FSA -- Financial Security Association
GSL -- Guaranteed Student Loans
GTC -- Instruments guaranteed by corporation.
LOC -- Instruments supported by bank letter of credit.
MBIA -- Municipal Bond Investors Assurance
SPA -- Special Purchase Agreement
SUMMARY OF MUNICIPAL BONDS BY COMBINED RATINGS#
<TABLE>
<CAPTION>
MOODY'S STANDARD & POOR'S
RATING OR RATING TOTAL
<S> <C> <C>
Aaa AAA 7.3%
Aa, Aa2, Aa3 AA 1.9%
MIG1, VMIG1, P-1 A-1, A-1+, SP-1, SP-1+ 84.8%
MIG2, VMIG2, P-2 SP-2 3.6%
NON RATED NON RATED 2.4%
100.0%
</TABLE>
# Bonds are not necessarily rated the same by both services.
NOTE:
Approximately 44% of the municipal bonds and notes held by the Fund have
credit enhancement features backing them. Such features may have been con-
sidered by the rating agency in rating these securities.
21
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
New York Muncipal Money Market Fund
PORTFOLIO HIGHLIGHTS JANUARY 31, 1996 (UNAUDITED)
ASSET DISTRIBUTION (BY INDUSTRY)
PIE CHART
Pie chart broken into pieces using the figures below:
<TABLE>
<S> <C>
Net Other Assets and Liabilities 15.3%
Education 10.6%
General Obligation 27.3%
Hospital 0.8%
Housing 7.4%
Industrial Development Revenue 2.7%
Pollution Control Revenue 4.2%
Sewer and Water 2.7%
Transportation 8.4%
Utility 6.3%
Other 14.3%
</TABLE>
AVERAGE WEIGHTED MATURITY OF PORTFOLIO
79 Days
22
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
New York Muncipal Money Market Fund
PORTFOLIO OF INVESTMENTS JANUARY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
<S> <C> <C>
MUNICIPAL BONDS AND NOTES -- 84.7%
NEW YORK -- 83.9%
$ 300,000 Albany County, New York, South Mall Construc-
tion, Series B, General Obligation Bonds,
(FGIC Insured),
4.350% due 10/1/96 $ 301,058
3,000,000 Board Cooperative Educational Services of New
York, Sole Supervisory District, Revenue An-
ticipation Notes, Lot 2, General Obligation
Bonds, (Student Aid Withholding),
4.250% due 6/27/96 3,006,034
2,000,000 Broome County, New York, Bond Anticipation
Notes, General Obligation Notes,
4.750% due 4/19/96 2,005,653
3,500,000 Connetquot Central School District, New York,
Tax Anticipation Notes, General Obligation
Notes,
4.000% due 6/27/96 3,501,458
1,000,000 Erie County, New York, Revenue Anticipation
Notes, General Obligation Notes, (Union Bank
of Switzerland, LOC),
4.500% due 9/20/96 1,003,852
Erie County, New York, Water Revenue Authority,
(AMBAC Insured):
2,000,000 Series A, (Industrial Bank of Japan Ltd.,
BPA),
3.100% due 12/1/16++ 2,000,000
250,000 Series B,
6.350% due 12/1/96 255,141
370,000 Huntington, New York, General Obligation Bonds,
(FGIC Insured),
5.000% due 6/1/96 371,495
631,000 Liverpool, New York, Central School District,
Series A, General Obligation Bonds, (FSA In-
sured), (Student Aid Withholding),
5.600% due 7/15/96 635,720
Metropolitan Transportation Authority, New
York:
1,000,000 Series H, Prerefunded 7/1/96,
8.500% due 7/1/05 1,039,109
3,100,000 Commuter Facilities Revenue, (Bank of Tokyo,
LOC), (Industrial Bank of Japan Ltd., LOC),
(J.P. Morgan, LOC), (Mitsubishi Bank Ltd.,
LOC), (Morgan Guaranty Trust, LOC), (National
Westminster Bank PLC, LOC), (Sumitomo Bank
Ltd., LOC),
3.000% due 7/1/21++ 3,100,000
3,000,000 Monroe County, New York, Putters, Series 24C,
3.250% due 6/1/06++ 3,000,000
3,885,000 Nassau County, New York, Tax Anticipation
Notes, Series B, General Obligation Notes,
4.500% due 4/15/96 3,889,888
</TABLE>
23
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
New York Muncipal Money Market Fund
PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
<S> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
NEW YORK -- (CONTINUED)
New York, New York, City Housing Development:
$2,500,000 (East 96th Street Project), Series A, (Mitsub-
ishi Ltd., LOC),
3.200% due 8/1/15++ $ 2,500,000
2,600,000 Multi-Family Mortgage Revenue, (400 West
59th), Series A-1,
3.200% due 11/1/30++ 2,600,000
3,000,000 New York, New York, City Municipal Water Fi-
nance Authority, Water & Sewer Systems Reve-
nue, Series 96-2,
3.300% due 6/15/25++ 3,000,000
700,000 New York, New York, Escrowed to Maturity, Se-
ries B, General Obligation Bonds, Refunded,
8.000% due 6/1/96 709,526
250,000 New York, New York, Pre-refunded, Series C,
Subseries C-1, (MBIA Insured),
5.350% due 8/1/96 252,121
1,500,000 New York, New York, Series B, Subseries B-8,
General Obligation Bonds, (Mitsubishi Bank
Ltd., LOC),
3.350% due 8/15/24++ 1,500,000
2,000,000 New York, New York, Revenue Anticipation Notes,
Series B, General Obligation Notes, (Morgan
Guaranty Trust, LOC), (Union Bank of Switzer-
land, LOC),
4.750% due 6/28/96 2,006,590
New York State, Dormitory Authority Revenue:
250,000 New York University, Series B, (MBIA Insured),
3.650% due 7/1/96 250,000
300,000 Nursing Homes, Issue A, (Chemical Bank, LOC),
3.850% due 7/1/96 300,000
1,500,000 Oxford University Press Inc., (Wachovia Bank,
LOC),
3.650% due 7/1/23+ 1,500,000
3,000,000 Putters, Series 14C,
3.250% due 7/1/10++ 3,000,000
300,000 Special Obligation, State University, Series
B,
6.500% due 11/1/96 300,000
190,000 State University Educational Facilities, Se-
ries A, Refunded,
6.400% due 5/1/96 190,000
New York State, Energy Research & Development
Authority, Pollution Control Revenue, Series
B:
1,500,000 (Niagara Power Corporation Project), (Morgan
Guaranty, LOC),
3.900% due 7/1/27+ 1,500,000
</TABLE>
24
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
New York Muncipal Money Market Fund
PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
<S> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
NEW YORK -- (CONTINUED)
New York State, Energy Research & Development
Authority, Pollution Control Revenue, Series B
(continued):
$1,550,000 New York Electric & Gas, (Union Bank of Swit-
zerland, LOC),
3.200% due 2/1/29+ $ 1,550,000
500,000 New York State, Housing Finance Agency, Special
Obligation, Health Facilities, New York City,
Series A, Refunded,
6.550% due 11/1/96 510,184
New York State, Job Development Authority:
880,000 Series A-1 Thru A-9, (Sumitomo Bank, LOC),
4.000% due 3/1/00++ 880,000
70,000 Series A-1 Thru A-25,
3.600% due 3/1/07+ 70,000
185,000 Series B-1 Thru B-9, (Fuji Bank Ltd., BPA),
3.600% due 3/1/03+ 185,000
2,000,000 Series B-1 Thru B-21,
4.100% due 3/1/05+ 2,000,000
250,000 New York State, Medical Care Facilities, Fi-
nance Agency Revenue, Hospital & Nursing Home,
Series C, (FHA Insured),
4.300% due 8/15/96 250,915
1,600,000 New York State, Power Authority Revenue & Gen-
eral Purpose, Series CC,
3.600% due 1/1/97 1,601,787
2,500,000 Niagara Falls, New York, Bridge Community, Se-
ries A,
3.100% due 10/1/19++ 2,500,000
3,000,000 Rochester, New York, Bond Anticipation Notes,
Series I,
4.500% due 10/31/96 3,016,174
650,000 Schenectady, New York, Bond Anticipation Notes,
General Obligation Notes,
5.250% due 2/16/96 650,368
1,800,000 Suffolk County, New York, Industrial Develop-
ment Agency, Research Facility Revenue, (Cold
Spring Harbor Laboratory Project), (Morgan
Guaranty Trust, LOC),
3.700% due 7/1/23+ 1,800,000
1,500,000 Suffolk County, New York, Tax Anticipation
Notes, Series I, General Obligation Notes,
(National Westminster Bank, LOC), (Westdeut-
sche Landesbank, LOC),
4.000% due 8/15/96 1,506,238
420,000 Syracuse, New York, Series A, General Obliga-
tion Bonds,
(MBIA Insured),
7.000% due 6/15/96 425,171
</TABLE>
25
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
New York Muncipal Money Market Fund
PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
FACE VALUE
VALUE (NOTE 1)
<S> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
NEW YORK -- (CONTINUED)
$ 500,000 Triborough Bridge & Tunnel Authority, New York,
Special Obligation, (MBIA Insured),
2.000% due 1/1/04++ $ 500,000
61,163,482
PUERTO RICO -- 0.8%
300,000 Commonwealth of Puerto Rico, (FGIC Insured),
6.500% due 7/1/96 303,523
300,000 Puerto Rico, Housing, Bank & Finance Agency,
Special Obligation, Series H, (FSA Insured),
5.200% due 10/1/96 303,460
606,983
TOTAL INVESTMENTS (COST $61,770,465*) 84.7% 61,770,465
OTHER ASSETS AND LIABILITIES (NET) 15.3 11,197,978
NET ASSETS 100.0% $72,968,443
</TABLE>
* Aggregate cost for Federal tax purposes.
+ Variable rate demand notes are payable upon not more than one business
day's notice. The interest rate shown reflects the rate currently in
effect at January 31, 1996.
++ Variable rate demand notes are payable upon not more than seven calen-
dar days' notice. The interest rate shown reflects the rate currently
in effect at January 31, 1996.
AMBAC -- American Municipal Bond Assurance Corporation
BPA -- Instruments supported by bond purchase agreement.
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
SUMMARY OF MUNICIPAL BONDS BY COMBINED RATINGS#
<TABLE>
<CAPTION>
MOODY'S STANDARD & POOR'S
RATING OR RATING TOTAL
<S> <C> <C>
Aaa AAA 8.7%
Aa, Aa2, Aa3 AA 3.1%
MIG1, VMIG1, P-1 A-1, A-1+, SP-1, SP-1+ 82.2%
MIG2, VMIG2, P-2 SP-2 6.0%
100.0%
</TABLE>
# Bonds are not necessarily rated the same by both services.
NOTE:
Approximately 41% of the municipal bonds and notes held by the Fund have
credit enhancement features backing them. Such features may have been con-
sidered by the rating agency in rating these securities.
26
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
STATEMENTS OF ASSETS & LIABILITIES JANUARY 31, 1996 (UNAUDITED)
<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
$697,156,080, $250,536,469, and
$61,770,465, respectively) 1
See accompanying schedules:
Securities $543,775,080 $250,536,469 $61,770,465
Repurchase agreements 153,381,000 -- --
Total Investments 697,156,080 250,536,469 61,770,465
Cash 12 643,986 466,057
Receivable for Fund shares sold 34,030,766 63,784,041 11,083,140
Dividends and/or interest receivable 3,495,075 2,835,272 626,987
Unamortized organization costs 5 240,452 94,846 23,431
Other assets -- 1,001 187
TOTAL ASSETS 734,922,385 317,895,615 73,970,267
LIABILITIES:
Payable for investment securities
purchased 14,984,104 5,390,000 613,845
Payable for Fund shares redeemed 14,596,870 2,495,026 296,647
Dividends payable 559,724 119,318 29,511
Investment advisory fee payable 2 122,988 61,891 13,391
Administration fee payable 2 88,895 34,444 4,927
Distribution fee payable 3 103,063 35,376 9,840
Transfer Agent fee payable 2 61,000 10,034 541
Custodian fee payable 2 37,302 26,355 12,225
Accrued Directors' fees and expenses 2 5,500 1,833 1,833
Accrued expenses and other payables 174,480 31,791 19,064
TOTAL LIABILITIES 30,733,926 8,206,068 1,001,824
NET ASSETS $704,188,459 $309,689,547 $72,968,443
</TABLE>
27
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
STATEMENTS OF ASSETS & LIABILITIES (CONTINUED) JANUARY 31, 1996 (UNAUDITED)
<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 $ 27,184 $ 10,071 $ --
Accumulated net realized gain/(loss) on
investments (9,600) (20,293) 896
Par value 704,171 309,700 72,968
Paid-in capital in excess of par value 703,466,704 309,390,069 72,894,579
$704,188,459 $309,689,547 $72,968,443
NET ASSETS:
Select Shares $704,164,903 $309,689,446 $72,968,443
CDSC Shares $ 23,556 $ 101 N/A
SHARES OUTSTANDING:
Select Shares 704,157,640 309,709,739 72,967,547
CDSC Shares 23,556 101 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
</TABLE>
+ Redemption price per share is equal to net asset value less any applica-
ble contingent deferred sales charge.
28
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JANUARY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
NEW YORK
DAILY MUNICIPAL MUNICIPAL
INCOME INCOME MONEY MARKET
NOTES FUND FUND FUND*
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest $20,139,699 $5,248,920 $553,214
EXPENSES:
Investment advisory fee 2 989,941 395,114 43,804
Distribution fee 3 824,951 329,262 36,503
Administration fee 2 659,961 263,409 29,202
Transfer Agent fee 2 335,400 49,760 1,561
Legal and audit fees 72,647 28,420 10,104
Custodian fees 2 47,145 34,521 12,225
Amortization of organization costs 5 48,353 19,073 1,863
Directors' fees and expenses 2 11,833 8,167 1,833
Other 194,227 34,636 13,293
Total expenses 3,184,458 1,162,362 150,388
Fees waived by Investment Adviser, Ad-
ministrator and Distributor 2 and 3 (615,592) (237,903) (60,908)
NET EXPENSES 2,568,866 924,459 89,480
NET INVESTMENT INCOME 17,570,833 4,324,461 463,734
NET REALIZED GAIN/(LOSS) ON INVESTMENTS -- (3,159) 896
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $17,570,833 $4,321,302 $464,630
</TABLE>
* New York Municipal Money Market Fund commenced operations on November 6,
1995.
29
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED JANUARY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
NEW YORK
DAILY MUNICIPAL MUNICIPAL
INCOME INCOME MONEY MARKET
NOTES FUND FUND FUND*
<S> <C> <C> <C> <C>
Net investment income $ 17,570,833 $ 4,324,461 $ 463,734
Net realized gain/(loss) on investments -- (3,159) 896
Net increase in net assets resulting from
operations 17,570,833 4,321,302 464,630
Distributions to shareholders from net
investment income:
Select Shares (17,570,247) (4,324,459) (463,734)
CDSC Shares (586) (2) --
Net increase/(decrease) in net assets from
share transactions:
Select Shares 4 (166,835) 12,870,290 72,967,547
CDSC Shares 4 606 -- --
Net increase/(decrease) in net assets (166,229) 12,867,131 72,968,443
NET ASSETS:
Beginning of period 704,354,688 296,822,416 --
End of period (including undistributed net
investment income of $27,184, $10,071 and
$0, respectively) $704,188,459 $309,689,547 $72,968,443
</TABLE>
* New York Municipal Money Market Fund commenced operations on November 6,
1995.
30
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
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 oper-
ations 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, re-
spectively) $ 704,354,688 $296,822,416
</TABLE>
31
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
Daily Income Fund
FINANCIAL HIGHLIGHTS
FOR A SELECT SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR PERIOD
01/31/96 ENDED ENDED
(UNAUDITED) 07/31/95 07/31/94*
<S> <C> <C> <C>
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00
Net investment income 0.0265 0.0505 0.0297
Dividends from net investment income (0.0265) (0.0505) (0.0297)
Dividends from net realized gains -- -- ## --
Total dividends (0.0265) (0.0505) (0.0297)
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00
Total return+ 2.66% 5.14% 3.03%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $704,165 $704,332 $818,555
Ratio of net investment income to average net
assets 5.25%** 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 Invest-
ment Adviser, Administrator and Distributor 0.95%** 0.96% 0.95%**
Net investment income per share before
waiver of fees by the Investment Adviser,
Administrator and Distributor $ 0.0256 $ 0.0483 $ 0.0269
</TABLE>
- --------------------------------------------------------------------------
* Daily Income Fund Select Shares commenced operations on August 2,
1993.
** Annualized.
+ Total return represents aggregate total return for the period indi-
cated.
## Amount is less than $0.0001 per share.
32
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
Daily Income Fund
FINANCIAL HIGHLIGHTS
FOR A CDSC SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED PERIOD
01/31/96 ENDED
(UNAUDITED) 07/31/95*
<S> <C> <C>
Net asset value, beginning of period $ 1.00 $ 1.00
Net investment income 0.0265 0.0379
Dividends from net investment income (0.0265) (0.0379)
Net asset value, end of period $ 1.00 $ 1.00
Total return+ 2.66% 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 5.25%** 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, Admin-
istrator
and Distributor 0.95%** 0.96%**
Net investment income per share before waiver of
fees by the Investment Adviser, Administrator
and Distributor $ 0.0256 $ 0.0362
</TABLE>
- --------------------------------------------------------------------------
* 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.
33
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
Municipal Income Fund
FINANCIAL HIGHLIGHTS
FOR A SELECT SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR PERIOD
01/31/96 ENDED ENDED
(UNAUDITED) 07/31/95 07/31/94*
<S> <C> <C> <C>
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00
Net investment income 0.0165 0.0318 0.0207
Dividends from net investment income (0.0165) (0.0318) (0.0207)
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00
Total return+ 1.65% 3.23% 2.09%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $309,689 $296,822 $264,425
Ratio of net investment income to average net
assets 3.27%** 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 Invest-
ment Adviser, Administrator and Distributor 0.88%** 0.90% 0.89%**
Net investment income per share before
waiver of fees by the Investment Adviser,
Administrator and Distributor $ 0.0156 $ 0.0296 $ 0.0182
</TABLE>
- --------------------------------------------------------------------------
* Municipal Income Fund Select Shares commenced operations on August 2,
1993.
** Annualized.
+ Total return represents aggregate total return for the period indi-
cated.
34
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
Municipal Income Fund
FINANCIAL HIGHLIGHTS
FOR A CDSC SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR PERIOD
01/31/96 ENDED ENDED
(UNAUDITED) 07/31/95 07/31/94*
<S> <C> <C> <C>
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00
Net investment income 0.0165 0.0317 0.0018
Dividends from net investment income (0.0165) (0.0317) (0.0018)
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00
Total return+ 1.65% 3.23% 0.18%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) -- # -- # $ 10
Ratio of net investment income to average net
assets 3.27%** 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 Invest-
ment Adviser, Administrator and Distributor 0.88%** 0.90% 0.89%**
Net investment income per share before
waiver of fees by the Investment Adviser,
Administrator and Distributor $ 0.0156 $ 0.0293 $ 0.0017
</TABLE>
- --------------------------------------------------------------------------
* 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 January 31, 1996 and July
31, 1995.
35
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
New York Municipal Money Market Fund
FINANCIAL HIGHLIGHTS
FOR A SELECT SHARE OUTSTANDING THROUGHOUT THE PERIOD.
<TABLE>
<CAPTION>
PERIOD
ENDED
01/31/96*
(UNAUDITED)
<S> <C>
Net asset value, beginning of period $ 1.00
Net investment income 0.0070
Dividends from net investment income (0.0070)
Net asset value, end of period $ 1.00
Total return+ 0.70%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 72,968
Ratio of net investment income to average net assets 3.17%**
Ratio of operating expenses to average net assets 0.61%**
Ratio of operating expenses to average net assets before
waiver of fees by the Investment Adviser, Administrator
and Distributor 1.03%**
Net investment income per share before waiver of fees by
the Investment Adviser, Administrator and Distributor $ 0.0061
</TABLE>
- --------------------------------------------------------------------------
* New York Municipal Money Market Fund commenced operations on November
6, 1995.
** Annualized.
+ Total return represents aggregate total return for the period indi-
cated.
36
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
Daily Income Fund/Municipal Income Fund/
New York Municipal Money Market Fund
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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: Leh-
man Brothers Daily Income Fund ("Daily Income Fund"), Lehman Brothers Mu-
nicipal Income Fund ("Municipal Income Fund") and Lehman Brothers New York
Municipal Money Market Fund ("New York Municipal Money Market Fund") (in-
dividually 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 de-
ferred 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 identi-
cal rights and privileges except with respect to the effect of the respec-
tive 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 man-
agement 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 valua-
tion involves valuing a security at cost initially and, thereafter, assum-
ing a constant amortization to maturity of any discount or premium, re-
gardless 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 re-
sell, 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 inter-
est. 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
37
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
Daily Income Fund/Municipal Income Fund/
New York Municipal Money Market Fund
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 Broth-
ers Global Asset Management, Inc., the Funds' investment adviser (the "In-
vestment 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 ac-
crual basis. Dividend income is recorded on the ex-dividend date. Realized
gains and losses on investments sold are recorded on the basis of identi-
fied cost. Investment income and realized and unrealized gains and losses
are allocated based upon the relative net assets of each class of shares.
Expenses: Operating expenses directly attributable to a class of
shares are charged to that class' operations. Expenses for each Fund not
directly attributable to the operation of any class of shares are prorated
among the classes based upon the relative net assets of each class of
shares.
Federal income taxes: The Funds have qualified and 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 taxable income to their shareholders, there-
fore, no Federal income tax provision is required.
Dividends and distributions to shareholders: Dividends from net in-
vestment income of the Funds are determined on a class level and are de-
clared daily and paid monthly. Capital gains, unless offset by any avail-
able 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 cer-
tain 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 ac-
cordance with income tax regulations which may differ from generally ac-
cepted accounting principles. These differences are primarily due to dif-
fering 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.
38
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
Daily Income Fund/Municipal Income Fund/
New York Municipal Money Market Fund
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. INVESTMENT ADVISORY FEE, ADMINISTRATION FEE AND OTHER RELATED PARTY
TRANSACTIONS
LBGAM serves as the Funds' Investment Adviser pursuant to separate in-
vestment advisory agreements with each Fund. LBGAM is a wholly-owned sub-
sidiary of Lehman Brothers Holdings Inc. ("Holdings"). Under the invest-
ment 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 respec-
tive average daily net assets. LBGAM may voluntarily waive advisory fees.
For the six months ended January 31, 1996, LBGAM voluntarily waived advi-
sory fees as follows:
<TABLE>
<CAPTION>
FEES WAIVED
<S> <C>
Daily Income Fund $230,764
Municipal Income Fund 87,425
New York Municipal Money Market Fund 30,412
</TABLE>
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 admin-
istration 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 volun-
tarily waive administration fees. For the six months ended January 31,
1996, FDISG voluntarily waived administration fees as follows:
<TABLE>
<CAPTION>
FEES WAIVED
<S> <C>
Daily Income Fund $153,842
Municipal Income Fund 58,284
New York Municipal Money Market Fund 20,275
</TABLE>
A contingent deferred sales charge may be imposed upon the redemption
of CDSC Shares within two years after the date of purchase. The amount of
the contingent deferred sales charge will depend on the number of years
since the shareholder made the purchase payment from which the amount is
being redeemed.
During the six months ended January 31, 1996, Lehman Brothers Inc.
("Lehman Brothers") did not receive any contingent deferred sales charges
applicable to CDSC Shares.
39
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
Daily Income Fund/Municipal Income Fund/
New York Municipal Money Market Fund
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 affili-
ates a fee of $20,000 per annum, plus $500 per meeting attended, and reim-
burses each of them for travel and out-of-pocket expenses.
Boston Safe Deposit and Trust Company, an indirect wholly-owned sub-
sidiary 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 Dis-
tribution") 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 six months ended January 31, 1996, each Fund incurred the fol-
lowing distribution fees:
<TABLE>
<CAPTION>
SELECT SHARES CDSC SHARES
<S> <C> <C>
Daily Income Fund $824,916 $35
Municipal Income Fund 329,262 --
New York Municipal Money Market
Fund 36,503 N/A
</TABLE>
Lehman Brothers may waive fees in relation to the Plan of Distribu-
tion. For the six months ended January 31, 1996, Lehman Brothers waived
fees in relation to the Plan of Distribution as follows:
<TABLE>
<CAPTION>
FEES WAIVED
<S> <C>
Daily Income Fund $230,986
Municipal Income Fund 92,194
New York Municipal Money Market
Fund 10,221
</TABLE>
40
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
Daily Income Fund/Municipal Income Fund/
New York Municipal Money Market Fund
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 In-
come 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 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>
SIX MONTHS ENDED YEAR ENDED
01/31/96 07/31/95
DAILY INCOME FUND: SHARES AND AMOUNT SHARES AND AMOUNT
<S> <C> <C>
Select Shares:
Sold $ 1,813,917,092 $ 3,904,923,625
Dividend Reinvestment 14,052,239 34,228,906
Redeemed (1,828,136,166) (4,053,366,317)
Net decrease $ (166,835) $ (114,213,786)
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD ENDED
01/31/96 07/31/95*
SHARES AND AMOUNT SHARES AND AMOUNT
<S> <C> <C>
CDSC Shares:
Sold -- $ 74,550
Dividend Reinvestment $ 606 633
Redeemed -- (52,333)
Net increase $ 606 $ 22,850
</TABLE>
* Daily Income Fund CDSC Shares commenced operations on November
16, 1994.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
01/31/96 07/31/95
MUNICIPAL INCOME FUND: SHARES AND AMOUNT SHARES AND AMOUNT
<S> <C> <C>
Select Shares:
Sold $ 750,527,999 $ 1,351,615,104
Dividend Reinvestment 4,121,352 8,434,959
Redeemed (741,779,061) (1,327,648,068)
Net increase $ 12,870,290 $ 32,401,995
</TABLE>
41
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
Daily Income Fund/Municipal Income Fund/
New York Municipal Money Market Fund
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
MUNICIPAL INCOME FUND 01/31/96 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 January 31, 1996, the Municipal Income Fund had issued 101
CDSC Shares in the amount of $101 to Lehman Brothers.
<TABLE>
<CAPTION>
PERIOD ENDED
01/31/96*
NEW YORK MUNICIPAL FUND: SHARES AND AMOUNT
<S> <C>
Select Shares:
Sold $123,966,227
Dividend Reinvestment 428,467
Redeemed (51,427,147)
Net increase $ 72,967,547
</TABLE>
* New York Municipal Money Market Fund Select Shares commenced op-
erations on November 6, 1995.
5. ORGANIZATION COSTS
The Funds bear all costs in connection with their organization includ-
ing fees and expenses of registering and qualifying their shares for dis-
tribution 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 amortiza-
tion 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. LETTER OF CREDIT
On December 6, 1994, Orange County, California filed for bankruptcy.
Daily Income Fund held on that date, and continues to hold as of January
31, 1996, Orange County, California, Taxable Notes (the "Orange County
Notes") with a stated principal value of $40,000,000, which originally ma-
tured on July 10, 1995. Subsequent to the bankruptcy filing by Orange
County, Holdings unconditionally agreed to pur-
42
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
Daily Income Fund/Municipal Income Fund/
New York Municipal Money Market Fund
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
chase from Daily Income Fund on demand or upon the occurrence of certain
events, all or such portion of the Orange County Notes as necessary to en-
sure that the offering price of the Fund's shares was maintained on a
daily basis at $1.00 per share. On July 10, 1995, Daily Income Fund
elected to accept an offer from Orange County to extend the maturity of
the Orange County Notes with revised interest terms through June 30, 1996
(the "Revised Orange County Notes"). On July 10, 1995, the agreement to
purchase provided by Holdings was replaced by an irrevocable letter of
credit issued by Chemical Bank for the benefit of the Fund guaranteeing
payment of principal and interest on the Revised Orange County Notes up to
an aggregate amount of $43,000,000. Holdings has agreed to reimburse Chem-
ical Bank for any payments that Chemical Bank makes to Daily Income Fund
pursuant to the letter of credit. In addition, Holdings has uncondition-
ally agreed to pay the Fund any amount by which the amount available under
the letter of credit is insufficient to pay principal and interest on the
Revised Orange County Notes when due at or prior to the extended maturity
date of the Revised Orange County Notes. The letter of credit expires at
the close of business July 10, 1996.
7. CAPITAL LOSS CARRYFORWARDS
As determined on July 31, 1995, Municipal Income Fund had available
for Federal income tax purposes $16,808 of unused capital losses that ex-
pire July 31, 2003.
43
<PAGE>
LEHMAN BROTHERS
Lehman Brothers Inc. All Rights Reserved
Member SIPC
