<PAGE> 1
[DLB LOGO]
THE DLB FIXED INCOME FUND
Annual Report
December 31, 1997
[EXPERIENCE TO MANAGE THE FUTURE]
<PAGE> 2
DLB FIXED INCOME FUND
Manager's Commentary
MARKET REVIEW
DLB FIXED INCOME FUND SHAREHOLDERS ENJOYED THE BENEFITS OF A STRONG RALLY IN
THE BOND MARKET THAT GAINED MOMENTUM AS 1997 PROGRESSED. Long-term interest
rates fell a full percentage point since early last summer, while
intermediate-term rates were down a half to three-quarters of a percentage
point during the same time period. Lower rates in this country reflect both
domestic and global circumstances.
AT HOME, RISING PRODUCTIVITY, A DRAMATIC DROP IN THE FEDERAL DEFICIT TO NEAR
SURPLUS LEVELS, AND IMPROVING MONETARY POLICY CREDIBILITY HAVE ALL HELPED TO
PROPEL RATES LOWER. In addition, the U.S. bond market has been the beneficiary
of capital flows out of Asia in the wake of the Asian currency crisis. While
deflation in Asia and other parts of the world is expected to have a negative
impact on our export industries in 1998, at the same time, it means investor's
expectations about inflation will continue to move lower.
OVER THE COURSE OF THE YEAR, THE YIELD CURVE SHIFTED TO A FLATTER SLOPE AS
INTERMEDIATE AND LONG-TERM RATES FELL IN RESPONSE TO THE FAVORABLE INFLATION
ENVIRONMENT, WHILE SHORT-TERM RATES REMAINED PRETTY MUCH UNCHANGED DUE TO THE
FEDERAL RESERVE'S STABLE MONETARY POLICY STANCE.
Issuance in the corporate debt market was easily absorbed throughout the year.
Credit quality in the aggregate continued to improve. Corporate quality yield
spreads narrowed during most of the year, but recently widened in sympathy with
international issuers negatively impacted by the crisis in Asia.
THE DLB FIXED INCOME FUND TOTAL RETURN FOR 1997 WAS 9.01%.
<PAGE> 3
DLB FIXED INCOME FUND
Manager's Commentary
OUTLOOK
AS WE COMMENCE THE NEW YEAR, THE DOMESTIC ECONOMY REMAINS ON SOUND FOOTING.
Rising employment, a continuation of the capital spending boom, and the benefits
of lower interest rates for both consumer and business should allow for modest
growth in 1998. The wildcard in the outlook is the unknown fallout from the
Asian financial crisis.
IT IS EXPECTED THAT THE FINANCIAL RESCUE PACKAGES AND REFORMS CURRENTLY BEING
PUT IN PLACE BY THE INTERNATIONAL MONETARY FUND AND THE INTERNATIONAL BANKING
COMMUNITY WILL STEM THE ASIAN CONTAGION AND LIMIT THE RISK OF GLOBAL DEFLATION.
However, Asian countries have lost massive wealth and the question remains --
how much impact will this damage have on the global economy and, specifically,
growth in the U.S.?
U.S. DOMESTIC PURCHASING POWER WILL BENEFIT FROM DECLINING ASIAN IMPORT PRICES,
BUT THIS POSITIVE WILL BE OFFSET BY ASIA'S MORE COMPETITIVE TRADING POSITION DUE
TO CURRENCY DEVALUATION AND EXCESS CAPACITY IN ASIA. Expectations are that U.S.
exports will be negatively impacted reducing overall real GDP by a half to one
percentage point in 1998. As a result, a substantial widening in our trade
account deficit is to be expected. A further risk to domestic growth will be
realized if investment in the U.S. leads to overcapacity, as it did in Asia.
Such a situation could prompt a sharp cutback in capital spending but, at this
juncture, there is no sign of this scenario happening. In fact, many companies
feel compelled to boost capital spending in an effort to raise productivity. In
an environment of little to no pricing power, this will help companies maintain
profit margins and maintain competitiveness in an increasingly global economy.
THE OUTLOOK FOR INFLATION AND, THEREFORE, INTEREST RATES REMAINS POSITIVE.
Pockets of global deflation and the likelihood of moderating domestic economic
activity will help keep prices in check this year. Today's level of interest
rates reflects a decline in inflation expectations and a lower risk premium for
extending debt maturity. The latter reflects a much-improved fiscal picture and
reduced volatility of inflation.
<PAGE> 4
DLB FIXED INCOME FUND
Manager's Commentary
PORTFOLIO REVIEW
THE PRIMARY OBJECTIVES OF THE DLB FIXED INCOME FUND ARE TO OBTAIN A FAVORABLE
TOTAL RETURN OVER THE LONG RUN, PROVIDE A HIGH LEVEL OF INCOME, AND MAINTAIN
REASONABLE STABILITY OF PRINCIPAL. Through active portfolio management, our
ongoing investment strategy is to uncover attractive investment opportunities
and to replace fully valued situations with what are believed to be undervalued
opportunities.
THE DLB FIXED INCOME FUND TOTAL RETURN FOR 1997 WAS 9.01%. Sizable cash flows
into the Fund between July and year-end, a period where bond prices were
appreciating at a faster rate than the yield received on short-term investments,
hindered performance. Performance for much of the year benefited from a
narrowing of corporate yield spreads relative to Treasuries; however, during the
fourth quarter, as previously mentioned, spreads widened, erasing earlier gains.
RECENT TRADING ACTIVITY HAS FOCUSED ON THE USE OF "SPECIAL SITUATIONS." Special
situations added include a 14-year Oslo Seismic issue secured by marine vessels,
and California Infrastructure and Massachusetts Turnpike Authority issues.
OSLO SEISMIC IS A SPECIAL PURPOSE SUBSIDIARY OF PETROLEUM GEO, A NORWEGIAN FIRM,
USED TO FUND THE PURCHASE OF MARINE VESSELS USED BY PETRO GEO, A NAME ALREADY
HELD IN THE PORTFOLIO. California Infrastructure, rated AAA with a five-year
average life, are commonly referred to as Rate Reduction Bonds. These asset
backed securities came about as part of the dramatic restructuring of the
electric utility industry underway in that state.
IN DECEMBER, WE INITIATED WHAT IS KNOW AS A "CROSSOVER TRADE" WITH THE PURCHASE
OF A 30-YEAR ISSUE FROM THE MASSACHUSETTS TURNPIKE AUTHORITY. Crossover trades
are simply the purchase of municipal or tax-exempt securities by investors who
normally buy taxable bonds. Municipals historically trade cheap relative to
Treasury bonds for a brief period over year-ends for various, mostly technical,
reasons. This year, municipals looked particularly attractive as the muni versus
Treasury ratio approached 88%. We would expect to unwind this trade (sell munis
and buy Treasuries or corporates) within a couple of months, as the ratio
declines to more normal historic levels -- realizing capital appreciation versus
alternative taxable thirty year investments.
AT YEAR'S END, THE FUND'S AVERAGE EFFECTIVE DURATION AND MATURITY WERE 4.6% AND
8.8% RESPECTIVELY. The average quality of the portfolio was AA2. Portfolio
turnover for 1997 was 28%.
<PAGE> 5
DLB FIXED INCOME FUND
Growth of a $100,000 Investment
Cumulative Total Return Since Inception 7/25/95
DLB Fixed Lehman Bros.
Income Aggregate
--------- -----------
$100,000.00 $100,000.00
07-31-95 $100,100.00 $100,150.00
08-31-95 $101,501.40 $101,361.82
09-30-95 $102,404.76 $102,345.02
10-31-95 $103,602.90 $103,675.51
11-30-95 $105,105.14 $105,230.64
12-31-95 $106,461.00 $106,703.87
01-31-96 $107,397.85 $107,408.12
02-28-96 $106,356.09 $105,539.22
03-31-96 $105,526.52 $104,800.44
04-30-96 $105,009.44 $104,213.56
05-30-96 $104,799.42 $104,004.13
06-30-96 $105,836.93 $105,398.80
07-31-96 $106,048.61 $105,683.38
08-31-96 $105,942.56 $105,503.72
09-30-96 $107,605.86 $107,339.48
10-31-96 $109,790.25 $109,722.42
11-30-96 $111,557.88 $111,598.67
12-31-96 $110,408.83 $110,560.80
01-31-97 $110,850.47 $110,903.54
02-28-97 $111,072.17 $111,180.80
03-31-97 $109,872.59 $109,946.69
04-30-97 $111,399.82 $111,595.89
05-31-97 $112,380.14 $112,656.05
06-30-97 $113,796.13 $113,996.66
07-31-97 $116,527.23 $117,074.57
08-31-97 $115,653.28 $116,079.44
09-30-96 $117,295.55 $117,797.41
10-31-97 $118,937.69 $119,505.48
11-30-97 $119,151.78 $120,055.20
12-31-97 $120,367.13 $121,267.76
<TABLE>
<CAPTION>
TOTAL RETURNS (%) FOR PERIODS ENDED 12/31/97
6 Months One Year Annualized
7/1/97 - 1/1/97 - Since Inception
12/31/97 12/31/97 7/25/95 - 12/31/97
<S> <C> <C> <C>
DLB FIXED INCOME FUND 5.77 9.01 7.70
Lehman Brothers Aggregate 6.36 9.66 8.01
</TABLE>
LEHMAN BROTHERS AGGREGATE BOND INDEX is composed of securities from Lehman
Brothers Government/Corporate Bond Index, Mortgage-Backed Securities Index, and
the Asset-Backed Securities Index. Total return comprises price
appreciation/depreciation and income as a percentage of the original investment.
Indexes are rebalanced monthly by market capitalization.
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. Investment return and share
price will fluctuate with market conditions, and investors may have a gain or
loss when shares are sold. The fund's total return reflects an expense
limitation in effect during the periods shown. In the absence of such expense
limitation, returns would have been lower.
THIS REPORT AND THE FUND FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR
THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE DLB FIXED INCOME FUND. The
report is not intended for distribution to prospective investors unless preceded
or accompanied by a current prospectus.
<PAGE> 6
DLB FIXED INCOME
FUND
FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 1997 AND 1996
<PAGE> 7
DLB FIXED INCOME FUND
TABLE OF CONTENTS
<TABLE>
<S> <C>
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS:
Portfolio of Investments as of December 31, 1997 2 - 5
Statement of Assets and Liabilities as of December 31, 1997 6
Statement of Operations for the Year Ended December 31, 1997 7
Statements of Changes in Net Assets for the Years Ended
December 31, 1997 and 1996 8
Financial Highlights for Each of the Years in the Three-year Period Ended
December 31, 1997 9
Notes to Financial Statements 10 - 12
</TABLE>
<PAGE> 8
INDEPENDENT AUDITORS' REPORT
To the Trustees of The DLB Fund Group and Shareholders of DLB Fixed Income Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of DLB Fixed Income Fund (the "Fund") (a separate
series of The DLB Fund Group) as of December 31, 1997, the related statement of
operations for the year then ended, the statements of changes in net assets for
the years ended December 31, 1997 and 1996, and the financial highlights for
each of the years in the three-year period ended December 31, 1997. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures include confirmation of securities owned at December
31, 1997 by correspondence with the custodian. 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, such financial statements and financial highlights present
fairly, in all material respects, the financial position of DLB Fixed Income
Fund at December 31, 1997, the results of its operations, the changes in its net
assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 6, 1998
<PAGE> 9
DLB FIXED INCOME FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
BONDS - 98.5%
<TABLE>
<CAPTION>
S&P/MOODY'S
RATING PRINCIPAL
(UNAUDITED) ISSUER AMOUNT VALUE
<S> <C> <C> <C>
US GOVERNMENT AND FEDERAL AGENCIES - 31.3%
AAA US Treasury, 7.875%, 1998 $ 450,000 $ 450,423
AAA US Treasury, 6.250%, 1999 650,000 654,674
AAA US Treasury, 5.875%, 2000 1,475,000 1,480,767
AAA US Treasury, 6.375%, 2001 1,000,000 1,020,620
AAA US Treasury, 6.250%, 2001 1,000,000 1,017,030
AAA US Treasury, 6.625%, 2002 775,000 800,064
AAA US Treasury, 11.625%, 2002 500,000 623,045
AAA US Treasury, 11.125%, 2003 25,000 31,359
AAA US Treasury, 5.875%, 2004 150,000 151,313
AAA US Treasury, 7.250%, 2004 450,000 486,351
AAA US Treasury, 7.500%, 2005 75,000 82,430
AAA US Treasury, 5.625%, 2006 2,000,000 1,977,500
AAA FNMA, 5.810%, 1999 600,000 600,000
AAA FNMA, 6.210%, 2007 700,000 702,737
-----------
10,078,313
-----------
MORTGAGES - 17.2%
AAA FHLMC Gold Pool #M90449, 5.500%, 2001 392,479 386,419
AAA FHLMC Gold Pool #G00143, 7.500%, 2023 274,400 282,091
AAA FNMA Pool #346537, 6.000%, 2011 466,741 459,413
AAA GNMA Pool #780332, 8.000%, 2009 328,297 340,910
AAA GNMA Pool #410343, 7.500%, 2011 597,428 615,709
AAA GNMA Pool #423828, 6.000%, 2011 457,092 452,882
AAA GNMA Pool #398964, 7.500%, 2011 261,750 269,760
AAA GNMA Pool #357262, 7.500%, 2023 383,948 394,595
AAA GNMA Pool #380866, 7.000%, 2024 80,658 81,573
AAA GNMA Pool #401135, 8.500%, 2024 710,585 747,962
AAA GNMA Pool #432175, 8.000%, 2026 90,799 94,156
AAA GNMA Pool #441009, 8.000%, 2026 349,785 362,717
BAA3 Green Tree Financial 1994-A, 6.900%, 2004 43,961 44,397
AAA Green Tree Financial 1995-A, 7.250%, 2005 176,950 177,468
AAA Green Tree Financial 1995-2 A-4, 7.850%, 2026 300,000 303,561
</TABLE>
2
<PAGE> 10
<TABLE>
<CAPTION>
S&P/MOODY'S
RATING PRINCIPAL
(UNAUDITED) ISSUER AMOUNT VALUE
<S> <C> <C> <C>
MORTGAGES (CONTINUED)
AAA Green Tree Financial 1995-1 A-5, 8.400%, 2025 $200,000 $ 206,624
AAA Green Tree Financial 1995-3 A-4, 7.050%, 2025 100,000 100,812
AAA Green Tree Financial 1996-2 A3, 6.900%, 2027 200,000 202,874
----------
5,523,923
----------
TAX EXEMPT - 1.5%
AAA Mass State Turnpike Authority, 5.550%, 2037 500,000 486,270
----------
ASSET BACKED - 1.5%
AAA California Infrastructure, 6.250%, 2004 500,000 496,875
----------
BANKS - 3.9%
AA3 Chase Capital, 7.670%, 2026 225,000 233,111
AA3 Chase Capital Floater, 6.250%, 2027 265,000 254,581
AA2 J.P. Morgan Capital Trust, 7.540%, 2027 385,000 391,106
A2 Suntrust Banks, 6.000%, 2026 400,000 390,128
----------
1,268,926
----------
FINANCIAL - 7.1%
AA3 Associates Corp. N.A., 6.450%, 2001 500,000 503,585
A1 Ford Capital BV, 10.125%, 2000 100,000 110,135
A1 Ford Motor Credit, 8.200%, 2002 250,000 267,005
A1 Ford Motor Credit, 7.200%, 2007 300,000 316,284
A3 GMAC Global, 6.750%, 2002 400,000 407,340
A2 John Deere Capital Corporation, 6.300%, 1999 250,000 250,813
AA3 Norwest Corp., 6.000%, 2000 150,000 149,589
AA3 Wachovia Capital FRN TRST II, 6.250%, 2027 265,000 271,307
----------
2,276,058
----------
INDUSTRIAL - 21.8%
BAA3 Airgas Inc., 7.140%, 2004 415,000 431,185
A1 Aluminum Company of America, 5.750%, 2001 500,000 493,120
BAA2 American Stores, 8.000%, 2026 235,000 262,967
A3 Cardinal Distribution, 6.500%, 2004 400,000 402,740
A3 Cardinal Health, 6.000%, 2006 150,000 145,422
BAA1 Champion International, 7.200%, 2026 675,000 721,163
BAA1 Comdisco Inc., 6.375%, 2001 300,000 300,000
A2 Cooper Industries MTN, 7.870%, 1998 100,000 100,048
BAA1 Crown Cork & Seal, 5.875%, 1998 500,000 499,960
</TABLE>
3
<PAGE> 11
<TABLE>
<CAPTION>
S&P/MOODY'S
RATING PRINCIPAL
(UNAUDITED) ISSUER AMOUNT VALUE
<S> <C> <C> <C>
INDUSTRIAL (CONTINUED)
A1 International Business Machines, 6.220%, 2027 $400,000 $ 403,336
BA1 Lockheed Martin, 7.750%, 2026 250,000 277,053
BAA1 Marriott International, 7.875%, 2005 300,000 326,397
A2 McDonnell Douglas, 8.250%, 2000 50,000 52,358
BAA1 Norfolk Southern, 7.050%, 2037 125,000 132,118
A2 Philip Morris Companies, 7.125%, 1999 300,000 304,725
A2 Philip Morris Companies, 7.200%, 2007 175,000 180,581
BAA1 Raytheon Co., 6.450%, 2002 200,000 200,982
A3 Ryder System Inc., 8.450%, 1999 100,000 104,332
A2 Sears, Roebuck & Co., 6.500%, 2000 100,000 100,925
A2 Sears, Roebuck & Co., 6.950%, 2002 50,000 51,212
BAA1 Supervalue Inc., 7.250%, 1999 500,000 507,555
BA1 Telecommunications Inc., 9.800%, 2012 170,000 211,346
BA1 Time Warner Inc., 9.150%, 2023 150,000 184,814
BAA2 Tosco Corporation, 7.625%, 2006 575,000 611,438
----------
7,005,777
----------
TRANSPORTATION - 3.4%
A1 Atchinson Topeka & Santa Fe, 7.750%, 1999 75,000 77,014
BAA2 CSX Corp., 9.500%, 2000 100,000 107,488
BAA2 CSX Corp., 9.000%, 2006 200,000 230,448
BAA3 Delta Air Lines, 10.375%, 2022 130,000 177,953
BAA1 Norfolk Southern, 6.700%, 2037 125,000 126,491
BAA1 United Air Lines Inc., 7.270%, 2013 297,872 309,209
BAA2 Union Pacific Corp., 7.250%, 2008 60,000 62,768
----------
1,091,371
----------
OTHER - 2.0%
AAA New Jersey Economic Development Authority, 7.425%, 2029 600,000 658,530
----------
INTERNATIONAL - 8.6%
BAA2 Canadian National Railroad, 7.000%, 2004 350,000 357,665
A2 Hydro Quebec, 8.050%, 2024 450,000 518,072
BAA2 Oslo Seimsic Services, 6.250%, 2011 423,250 466,180
BAA3 Petro Geo-Services, 7.500%, 2007 400,000 423,300
</TABLE>
4
<PAGE> 12
<TABLE>
<CAPTION>
PRINCIPAL
ISSUER AMOUNT VALUE
<S> <C> <C> <C>
INTERNATIONAL (CONTINUED)
AA3 Province of Ontario, 7.750%, 2002 $575,000 $ 611,112
BAA1 Southern Investments UK, 6.375%, 2001 400,000 399,384
-----------
2,775,713
-----------
TOTAL BONDS (identified cost, $31,085,647) 31,661,756
-----------
REPURCHASE AGREEMENT - .1%
Bank of New York, dated 12/31/97, due 1/2/98 (secured
by various U.S. Treasury Bonds valued at $48,147), at cost $ 47,178 $ 47,178
-----------
Total Investments (identified cost $31,085,647) 31,708,934
Other assets, less liabilities - 1.4% 446,019
-----------
NET ASSETS - 100% $32,154,953
===========
</TABLE>
See Notes to financial statements.
5
<PAGE> 13
DLB FIXED INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investments, at value (identified cost, $31,085,647) $ 31,708,934
Interest receivable 495,859
Receivable from investment manager 8,491
------------
32,213,284
------------
LIABILITIES:
Management fees 5,515
Accrued expenses 52,816
------------
58,331
------------
NET ASSETS $ 32,154,953
============
NET ASSETS CONSIST OF:
Paid-in capital $ 31,516,786
Unrealized appreciation on investments 623,287
Accumulated net realized loss on investments (7,677)
Accumulated undistributed net investment income 22,557
------------
$ 32,154,953
============
SHARES OF BENEFICIAL INTEREST OUTSTANDING 3,030,691
============
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PRICE PER
SHARE (NET ASSETS/SHARES OF BENEFICIAL INTEREST
OUTSTANDING) $ 10.61
============
</TABLE>
See notes to financial statements.
6
<PAGE> 14
DLB FIXED INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
INTEREST INCOME $ 1,359,601
-----------
EXPENSES:
Management fee 86,512
Trustees' fees 5,501
Custodian fee 55,207
Accounting and audit fees 31,371
Registration fees 23,801
Legal fees 16,696
Transfer agent fee 8,001
Printing fees 2,521
Miscellaneous 256
-----------
229,866
Reduction of expenses by investment manager (111,177)
-----------
Net expenses 118,689
-----------
Net investment income 1,240,912
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Realized gain (identified cost basis) 26,429
Change in unrealized appreciation 715,791
-----------
Net realized and unrealized gain on investments 742,220
-----------
Increase in net assets from operations $ 1,983,132
===========
</TABLE>
See notes to financial statements.
7
<PAGE> 15
DLB FIXED INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
From operations:
Net investment income $ 1,240,912 $ 756,599
Net realized gain (loss) on investments 26,429 (34,750)
Net unrealized appreciation (depreciation) on investments 715,791 (225,496)
------------ ------------
1,983,132 496,353
------------ ------------
Distributions to shareholders:
From net investment income (1,212,012) (756,599)
In excess of net investment income -- (5,699)
------------ ------------
(1,212,012) (762,298)
------------ ------------
Fund share transactions:
Net proceeds from sale of shares 17,272,202 10,052,530
Net asset value of shares issued in
reinvestment of distributions 887,748 694,367
Cost of shares reacquired (2,036,662) (545,546)
------------ ------------
16,123,288 10,201,351
------------ ------------
Total increase in net assets 16,894,408 9,935,406
NET ASSETS:
At beginning of period 15,260,545 5,325,139
------------ ------------
At end of period (including accumulated undistributed (distributions
in excess of) net investment income of $22,557 and ($5,666),
respectively) $ 32,154,953 $ 15,260,545
============ ============
</TABLE>
See notes to financial statements.
8
<PAGE> 16
DLB FIXED INCOME FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
1997 1996 1995 **
------------ ------------ ------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 10.11 $ 10.26 $ 10.00
---------- ---------- ----------
Income from investment operations:
Net investment income .42 .53 .28
Net realized and unrealized gain (loss) on investments .49 (.15) .37
---------- ---------- ----------
.91 .38 .65
---------- ---------- ----------
Less distributions to shareholders:
From net investment income (1) (.41) (.53) (.28)
From net realized gain on investments -- -- (.11)
---------- ---------- ----------
(.41) (.53) (.39)
---------- ---------- ----------
Net asset value - end of period $ 10.61 $ 10.11 $ 10.26
========== ========== ==========
Total Return 9.03% 3.70% 14.75% *
Ratios and Supplemental Data:
Ratio of expenses to average net assets
.55% .55% .55% *
Ratio of net investment income to average net assets 5.74% 6.36% 6.24% *
Portfolio turnover 44% 65% 42%
Net assets at end of period (000 omitted) $ 32,155 $ 15,261 $ 5,325
</TABLE>
The manager has agreed with the Fund to reduce its management fee and bear
certain expenses, such that the Fund's total expenses do not exceed .55% of
average daily net assets on an annualized basis. If the management fee reduction
and expenses borne by the manager had been borne by the Fund and had 1995
expenses been limited to that permitted by state securities law, the net
investment income per share and ratios would have been:
<TABLE>
<S> <C> <C> <C>
Net investment income $ .38 $ .44 $ .19
Ratios (to average net assets):
Expenses
1.06% 1.66% 2.50% *
Net investment income
5.22% 5.25% 4.33% *
</TABLE>
* Annualized.
** For the period from July 25, 1995 (commencement of operations) to December
31, 1995.
(1) Distributions in excess of net investment income for the year ended
December 31, 1996 were less than $.01 per share.
See notes to financial statements.
9
<PAGE> 17
DLB FIXED INCOME FUND
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
DLB Fixed Income Fund (the "Fund") is a non-diversified series of The
DLB Fund Group (the "Trust"). The Trust is organized as a Massachusetts
business trust and is registered under the Investment Company Act of
1940, as amended, as an open-end management investment company.
2. SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT VALUATION - Debt securities other than short-term
obligations, including listed issues, are valued on the basis of
valuations furnished by dealers or by a pricing service, with
consideration to factors such as institutional-size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics and other market data, without exclusive
reliance upon exchange or over-the-counter prices. Securities for which
there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Trustees.
Short-term obligations, which mature in 60 days or less, are valued at
amortized cost, which approximates market value.
REPURCHASE AGREEMENTS - The Fund may enter into repurchase agreements
with institutions that the Fund's investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The Fund
requires that the securities purchased in a repurchase transaction be
transferred to the custodian in a manner sufficient to enable the Fund
to obtain those securities in the event of a default. The Fund
monitors, on a daily basis, the value of the securities transferred to
ensure that the value, including accrued interest, of the securities
under each repurchase agreement is greater than amounts owed to the
Fund.
INVESTMENT TRANSACTIONS AND INCOME - Investment transactions are
recorded on the trade date. Interest income is recorded on the accrual
basis. All premium and original discount are amortized or accreted for
financial statement and tax reporting purposes as required by federal
income tax regulations.
TAXES AND DISTRIBUTIONS - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the "Code") applicable to
regulated investment companies and to distribute to shareholders all of
its taxable income, including any net realized gain on investments.
Accordingly, no provision for federal income or excise tax is
necessary. At December 31, 1997, the Fund, for federal income tax
purposes, had $7,677 in capital loss carryforwards, which expires
December 31, 2004. To the extent permitted by the Code, capital loss
carryovers will reduce taxable income arising from future net realized
gain on investments, if any, and thus will reduce the amount of the
distributions to shareholders that would otherwise be necessary. The
Fund files a tax return annually using tax accounting methods required
by the Code that may differ from generally accepted accounting
principles, the basis on which these financial statements are prepared.
Accordingly, the amount of net investment income and net realized gain
reported in these financial statements may differ from that reported on
the Fund's tax return, and, consequently, the character of
distributions to shareholders reported in the financial highlights may
differ from that reported to shareholders on Form 1099-DIV.
10
<PAGE> 18
Distributions to shareholders are recorded on the ex-dividend date. The
Fund distinguishes between distributions for tax purposes and financial
reporting purposes. Only distributions in excess of tax-basis earnings
and profits are reported as a return of capital. Differences between
income for the financial statements and tax-basis earnings and profits
may result in temporary over-distributions for financial statement
purposes, which are classified as distributions in excess of net
investment income or accumulated undistributed net realized gains.
During the year ended December 31, 1997, $677 was reclassified from
accumulated net realized loss to accumulated undistributed net
investment income due to differences between financial reporting and
tax accounting for realized gains on investment transactions. This
change had no effect on net assets or net asset value per share.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
3. TRANSACTIONS WITH AFFILIATES
The Fund engages David L. Babson & Co. Inc. ("Babson") to provide
investment advisory and administrative services and general office
facilities. The fee for such services is computed daily and paid
monthly at an effective annual rate of .40% of average daily net
assets. For the year ended December 31, 1997, the management fee
amounted to $86,512, of which $43,352 was waived by Babson.
Additionally, $67,825 of Fund expenses were borne by Babson.
The Fund pays no compensation directly to those of its Trustees who
also are officers of the investment manager, or to the officers of the
Fund, all of whom receive remuneration for their services to the Fund
from Babson.
4. PORTFOLIO SECURITIES
Purchases and sales of investments, other than short-term obligations,
were as follows:
<TABLE>
<CAPTION>
Purchases Sales
----------- ----------
<S> <C> <C>
U.S. Government securities $ 8,258,740 $3,894,555
=========== ==========
Investments (non-U.S. Government securities) $18,347,530 $5,618,188
=========== ==========
</TABLE>
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Fund, as computed on a federal income tax
basis, are as follows:
<TABLE>
<S> <C>
Aggregate cost $ 31,085,647
============
Gross unrealized appreciation $ 641,676
Gross unrealized depreciation (18,389)
------------
Net unrealized appreciation $ 623,287
============
</TABLE>
11
<PAGE> 19
5. SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without
par value). Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Shares sold 1,635,464 974,836
Shares issued in reinvestment
of distributions 83,908 68,681
Redemptions (197,835) (53,152)
--------- -------
Net increase 1,521,537 990,365
========= =======
</TABLE>
12
<PAGE> 20
[DLB LOGO]
THE DLB MID CAPITALIZATION FUND
ANNUAL REPORT
December 31, 1997
(EXPERIENCE TO MANAGE THE FUTURE)
<PAGE> 21
DLB MID CAP FUND
MANAGER'S COMMENTARY
THE DLB MID CAP FUND ACHIEVED A TOTAL RETURN OF 1.43% IN THE FOURTH QUARTER
VERSUS A LOSS OF -2.3% FOR THE RUSSELL 2500 INDEX BENCHMARK. This concluded a
very successful 1997 for the Fund, which had a total return of 32.97% for the
year versus a return of 24.40% for the Russell 2500.
WE CONTINUE TO FIND SMALL/MID CAPITALIZATION STOCKS TO BE ATTRACTIVELY VALUED
RELATIVE TO THE OVERALL MARKET, SO IT WAS SOMEWHAT DISAPPOINTING TO SEE INVESTOR
SENTIMENT TURN AGAINST SMALLER STOCKS IN THE FOURTH QUARTER. This is
particularly surprising considering larger companies' greater exposure to the
slowing economies overseas. Typically, a stronger dollar, coupled with weakening
international economies, portends a very favorable environment for small/mid
capitalization investors (primarily because smaller companies tend to be more
oriented to the domestic economies).
THE UNCERTAINTY AND TURMOIL IN INTERNATIONAL ECONOMIES HAS FOCUSED INVESTORS'
ATTENTION ON THE SUSTAINABILITY OF EARNINGS GROWTH IN CORPORATE AMERICA. Large
cap stocks are predicted by analysts to see their earnings growth rate decline
to 7% in 1998, a substantial slowdown from 15% earnings growth we have seen over
the past several years. Smaller companies, by contrast, are expected to grow
earnings by 23% (although, analysts' estimates are notoriously optimistic).
OUR GREATEST CONCERN FOR FUTURE EARNINGS GROWTH -- FOR BOTH SMALLER AND LARGER
COMPANIES -- IS THE ABILITY OF COMPANIES TO IMPROVE THEIR PROFITABILITY GOING
FORWARD. Profit margins for corporate America are at post-World War II highs.
Slowing demand coupled with very little pricing power will put pressure on
profit margins. If profitability declines, the projected earnings growth rates
for large and small companies will be virtually impossible to achieve.
OUR INVESTMENT PROCESS IS FOCUSED ON IDENTIFYING ATTRACTIVELY VALUED COMPANIES
THAT HAVE VERIFIABLE OPPORTUNITIES TO IMPROVE THEIR PROFIT MARGINS. These are
the types of companies that should outperform the market regardless of what the
domestic and international economies do.
LISTED ON THE FOLLOWING PAGE ARE THE BEST AND WORST PERFORMING STOCKS IN THE
FUND FOR THE YEAR 1997.
<PAGE> 22
DLB MID CAP FUND
MANAGER'S COMMENTARY
<TABLE>
<CAPTION>
Best Performers Business Gain (%)
- -------------------------------------------------------------------
<S> <C> <C>
Dime Bancorp Thrift/Bank 106.0
Herman Miller Office Furniture Systems 94.0
First Security Corporation Bank 89.0
Fred Meyer Retail Supermarkets 78.0
Octel Communications Telecommunications 77.0
</TABLE>
IN GENERAL, FINANCIAL HOLDINGS DID QUITE WELL THIS YEAR. Valuation levels on
banks and thrifts continued to rise, and Dime and First Security were
beneficiaries. Business at both companies was very strong as well. Octel was
acquired by Lucent Technologies at a significant gain to the Fund's cost. Herman
Miller, one of last year's strongest performers, continued to deliver excellent
earnings growth.
FRED MEYER ANNOUNCED A SERIES OF LARGE ACQUISITIONS, SIGNIFICANTLY INCREASING
ITS MARKET SHARE IN THE WESTERN U.S. This has been a terrific holding for the
Fund, almost tripling in the past two years since purchase. We are concerned
that the level of risk has increased at Fred Meyer; debt is up a lot due to the
acquisitions, and the stock's valuation has risen as Wall Street has endorsed
the company's strategy. Given these factors, we have sold the stock.
<TABLE>
<CAPTION>
Underperformers Business Loss (%)
- -------------------------------------------------------------------
<S> <C> <C>
Global Inds. Technologies Conglomerate 23.0
Elsag Bailey Process Automation 12.0
Calgon Carbon Environmental Services 10.0
Charming Shoppes Retail 7.0
Intergraph CAD/CAM Software 2.0
</TABLE>
CHARMING SHOPPES EXPERIENCED A GENERALLY WEAK FALL SELLING SEASON. The company's
management team is working on revamping its stores' apparel offerings. We expect
to see positive results from this soon. Intergraph is in the midst of a major
restructuring effort, causing investors to overlook its stock during the
process. Elsag Bailey's integration of a large European acquisition is taking
longer than planned. Global Industrial reported a disappointing quarter, but we
remain excited about its new product offerings. Calgon Carbon has several large
orders deferred into the new year.
<PAGE> 23
DLB MID CAP FUND
GROWTH OF A
$100,000 INVESTMENT
Cumulative Total Return Since Inception 7/25/95
DLB MID RUSSELL
CAP 2500
------- -------
07/25/95 $100,000.00 $100,000.00
07/31/95 $100,500.00 $103,140.00
08/31/95 $99,696.00 $104,790.24
09/30/95 $100,792.66 $106,749.82
10/31/95 $98,595.38 $103,408.55
11/30/95 $106,697.11 $107,824.09
12/31/95 $109,270.22 $109,667.89
01/31/96 $111,302.65 $110,446.53
02/28/96 $114,852.86 $113,770.97
03/31/96 $117,702.62 $116,091.90
04/30/96 $119,232.76 $121,455.34
05/30/96 $121,879.73 $124,746.78
06/30/96 $119,746.83 $120,917.05
07/31/96 $112,118.96 $112,065.93
08/31/96 $116,087.97 $118,509.72
09/30/96 $117,202.41 $123,641.19
10/31/96 $115,983.51 $122,825.16
11/30/96 $122,188.63 $128,757.81
12/31/96 $125,402.19 $130,521.59
01/31/97 $126,380.32 $134,123.99
02/28/97 $127,467.19 $132,125.54
03/31/97 $127,581.91 $126,140.25
04/30/97 $127,581.91 $127,729.62
05/31/97 $137,711.92 $139,493.52
06/30/97 $146,318.91 $145,198.80
07/31/97 $156,663.66 $153,707.45
08/31/97 $167,739.78 $162,714.71
09/30/97 $179,598.98 $172,249.79
10/31/97 $192,296.63 $182,343.63
11/30/97 $205,892.00 $193,028.96
12/31/97 $220,448.57 $204,340.46
01/31/98 $236,034.28 $216,314.81
TOTAL RETURNS FOR PERIODS ENDED 12/31/97
<TABLE>
<CAPTION>
6 Months One Year Annualized
7/1/97 - 1/1/97 - Since Inception
12/31/97 12/31/97 7/25/95 - 12/31/97
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
DLB MID CAPITALIZATION FUND 13.95 32.97 22.69
Russell 2500 11.78 24.36 20.94
</TABLE>
RUSSELL 2500 INDEX consists of the bottom 500 securities in the Russell 1000
Index and all 2,000 securities in the Russell 2000 Index, representing
approximately 23% of the Russell 3000 total market capitalization. This index is
a good measure of small to medium-small stock performance.
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. Investment return and share
price will fluctuate with market conditions, and investors may have a gain or
loss when shares are sold. The fund's total return reflects an expense
limitation in effect during the periods shown. In the absence of such expense
limitation, returns would have been lower.
THIS REPORT AND THE FUND FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR
THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE DLB MID CAPITALIZATION FUND.
The report is not intended for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
<PAGE> 24
DLB MID CAPITALIZATION FUND
FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996
<PAGE> 25
DLB MID CAPITALIZATION FUND
TABLE OF CONTENTS
<TABLE>
<S> <C>
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS:
Portfolio of Investments as of December 31, 1997 2 - 5
Statement of Assets and Liabilities as of December 31, 1997 6
Statement of Operations for the Year Ended December 31, 1997 7
Statements of Changes in Net Assets for the Years Ended December 31, 1997
and 1996 8
Financial Highlights for each of the Years in the Three-Year Period Ended
December 31, 1997 9
Notes to Financial Statements 10 - 11
</TABLE>
<PAGE> 26
INDEPENDENT AUDITORS' REPORT
To the Trustees of The DLB Fund Group and
Shareholders of DLB Mid Capitalization Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of DLB Mid Capitalization Fund (the "Fund") (a
separate series of The DLB Fund Group) as of December 31, 1997, the related
statement of operations for the year then ended, the statements of changes in
net assets for the years ended December 31, 1997 and 1996, and the financial
highlights for each of the years in the three-year period ended December 31,
1997. These financial statements and financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures include confirmation of securities owned at December
31, 1997 by correspondence with the custodian and brokers; where replies were
not received from brokers, we performed other auditing procedures. 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, such financial statements and financial highlights present
fairly, in all material respects, the financial position of DLB Mid
Capitalization Fund at December 31, 1997, the results of its operations, the
changes in its net assets, and its financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 6, 1998
<PAGE> 27
DLB MID CAPITALIZATION FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
COMMON STOCKS - 94.3%
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
AEROSPACE - 4.2%
EG&G Inc. 24,400 $ 507,825
Newport News Shipbuilding, Inc. 25,600 651,200
----------
1,159,025
----------
APPAREL - 3.8%
National Service Industries 9,300 460,931
The Stride Rite Corporation 48,000 576,000
----------
1,036,931
----------
AUTO PARTS - 6.3%
Bandag Incorporated 15,100 722,913
Exide Corporation 22,700 587,363
The Standard Products Company 15,600 399,750
----------
1,710,026
----------
BANKS - 7.4%
Dime Bancorp, Inc. 23,400 707,850
First Security Corporation 15,700 657,438
Golden State Bancorp, Inc. 17,500 654,063
----------
2,019,351
----------
COAL GAS & PIPE - 2.3%
Nabors Industries * 19,800 622,463
----------
COMPUTERS - 2.2%
Gerber Scientific, Inc. 30,300 602,213
----------
DOMESTIC OIL - 0.9%
Quaker State Corporation 17,600 250,800
----------
</TABLE>
2
<PAGE> 28
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
ELECTRONICS & INSTRUMENTS - 7.1%
Intergraph Corporation * 70,500 $ 705,000
Magnetek Incorporated * 30,000 585,000
Scitex Corporation Ltd. 53,000 639,313
----------
1,929,313
----------
EXPLORATION & DRILLING - 1.0%
Global Industrial Technologies, Inc. * 15,500 262,531
----------
FOOD PRODUCERS - 2.0%
Ralcorp Holdings, Inc. 32,400 548,775
----------
FURNITURE & APPLIANCES - 5.5%
Herman Miller, Inc. 8,800 480,150
La-Z-Boy Chair Company 12,600 543,375
Stanhome, Inc. 18,600 477,788
----------
1,501,313
----------
INSURANCE COMPANIES - 5.6%
HSB Group, Inc. 8,900 491,169
Life USA Holdings, Inc. * 25,200 425,250
Western National Corp. 16,600 491,775
Willis Corroon Group 10,800 132,975
----------
1,541,169
----------
MACHINERY & EQUIPMENT - 6.7%
Elsag Bailey * 43,400 716,100
Flowserve Corporation 18,239 509,552
Harsco Corporation 13,800 595,125
----------
1,820,777
----------
METALS & MINING - 5.8%
Calmat Co. 28,600 797,225
Martin Marietta Materials 21,300 778,781
----------
1,576,006
----------
NATURAL GAS - 2.4%
Equitable Resources, Inc. 18,300 647,363
----------
</TABLE>
3
<PAGE> 29
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
OFFICE EQUIPMENT - 2.7%
Wallace Computer Services 18,900 $ 734,738
----------
PAPER & FOREST PRODUCTS - 1.8%
Albany International Corp. 21,300 489,900
----------
PRINTING & PUBLISHING - 9.2%
ACNeilsen Corporation * 32,900 801,938
Central Newspapers, Inc. 6,900 510,169
Hollinger International 47,500 665,000
Lee Enterprises 18,100 535,081
----------
2,512,188
----------
PROFESSIONAL SERVICES - 5.2%
Metromail Corporation * 33,100 591,663
Policy Management Systems Corporation * 12,000 834,750
----------
1,426,413
----------
SPECIALTY CHEMICALS -2.0%
Calgon Carbon 51,200 550,400
----------
SPECIALTY RETAIL - 1.2%
Charming Shoppes * 71,200 333,750
----------
TELECOMMUNICATIONS - 0.5%
Commscope, Inc. * 10,800 145,125
----------
TOBACCO - 2.5%
Dimon Incorporated 26,100 685,125
----------
TRANSPORTATION - 2.5%
Fritz Companies, Inc. * 48,500 675,963
----------
</TABLE>
4
<PAGE> 30
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
TRUCKING & SHIPPING - 3.8%
Alexander & Baldwin Inc. 17,200 $ 469,775
J.B. Hunt Transport Services, Inc. 29,800 558,750
-------------
1,028,525
-------------
TOTAL COMMON STOCKS
(identified cost, $21,173,477) 25,810,180
-------------
PRINCIPAL
REPURCHASE AGREEMENT - 5.8% AMOUNT
Bank of New York, dated 12/31/97, due 1/2/98
(Secured by various U.S. Treasury Bonds
valued at $1,604,494), at cost $1,572,193 1,572,193
-------------
Total Investments (identified cost, $22,745,670) 27,382,376
Other assets, less liabilities - (0.1)% (24,686)
-------------
NET ASSETS - 100% 27,357,690
=============
</TABLE>
* Non-income producing securities
See notes to financial statements.
5
<PAGE> 31
DLB MID CAPITALIZATION FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investments, at value (identified cost, $22,745,670) $27,382,376
Dividends and interest receivable 37,268
Receivable from investment manager 896
Receivable for fund shares sold 152,179
-----------
27,572,719
-----------
LIABILITIES:
Payable for investments purchased 157,727
Management fees 6,545
Accrued expenses 50,757
-----------
215,029
-----------
NET ASSETS $27,357,690
===========
NET ASSETS CONSIST OF:
Paid-in capital $22,717,039
Unrealized appreciation on investments 4,636,706
Accumulated undistributed net realized gain on investments 35
Accumulated undistributed net investment income 3,910
-----------
$27,357,690
===========
SHARES OF BENEFICIAL INTEREST OUTSTANDING 1,928,534
===========
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PRICE PER
SHARE (NET ASSETS/SHARES OF BENEFICIAL INTEREST
OUTSTANDING)
$ 14.19
===========
</TABLE>
See notes to financial statements.
6
<PAGE> 32
DLB MID CAPITALIZATION FUND
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
NET INVESTMENT INCOME:
<S> <C>
Dividends (net of foreign taxes withheld of $2,256) $ 258,003
Interest
50,079
-----------
308,082
-----------
EXPENSES:
Management fee 109,834
Trustees' fees 5,501
Custodian fee 50,190
Accounting and audit fees 29,872
Registration fees 20,885
Legal fees 15,533
Transfer agent fees 8,001
Printing fees 2,521
Miscellaneous 258
-----------
242,595
Reduction of expenses by investment manager (78,200)
-----------
Net expenses 164,395
-----------
Net investment income 143,687
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Realized gain (identified cost basis) 1,834,448
Change in unrealized appreciation 3,124,915
-----------
Net realized and unrealized gain on investments 4,959,363
-----------
Increase in net assets from operations $ 5,103,050
===========
</TABLE>
See notes to financial statements.
7
<PAGE> 33
DLB MID CAPITALIZATION FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1997 1996
--------------- ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
From operations:
Net investment income $ 143,687 $ 159,975
Net realized gain on investments 1,834,448 755,181
Net unrealized appreciation on investments 3,124,915 760,116
--------------- ------------
5,103,050 1,675,272
--------------- ------------
Distributions to shareholders:
From net investment income (139,420) (160,207)
In excess of net investment income - (357)
From net realized gain on investments (1,834,045) (755,181)
In excess of net realized gain on investments - (368)
--------------- ------------
(1,973,465) (916,113)
--------------- ------------
Fund share transactions:
Net proceeds from sale of shares 9,389,016 1,176,534
Net asset value of shares issued in
reinvestment of distributions 1,973,465 916,113
Cost of shares reacquired (824,091) (90,965)
--------------- ------------
10,538,390 2,001,682
--------------- ------------
Total increase in net assets 13,667,975 2,760,841
NET ASSETS:
At beginning of period 13,689,715 10,928,874
=============== ============
At end of period (including accumulated undistributed (distributions
in excess of) net investment income of $3,910 and
($357), respectively) $27,357,690 $13,689,715
=============== ============
</TABLE>
See notes to financial statements.
8
<PAGE> 34
DLB MID CAPITALIZATION FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
1997 1996 1995 **
------------- ---------------- --------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 11.51 $ 10.75 $ 10.00
--------- ---------- ---------
Income from investment operations:
Net investment income .08 .15 .08
Net realized and unrealized gain on investments 3.72 1.44 .84
--------- ---------- ---------
3.80 1.59 .92
--------- ---------- ---------
Less distributions to shareholders:
From net investment income (1) (.08) (.15) (.08)
From net realized gain on investments (2) (1.04) (.68) (.09)
--------- ---------- ---------
(1.12) (.83) (.17)
--------- ---------- ---------
Net asset value - end of period $ 14.19 $ 11.51 $ 10.75
========= ========== =========
Total Return 32.95% 14.75% 21.17%
Ratios and Supplemental Data:
Ratio of expenses to average net assets .90% .90% .90% *
Ratio of net investment income to average net assets .78% 1.28% 1.90% *
Portfolio turnover 32% 25% 6%
Average commission rate paid (3) $ .05262 $ .05270 --
Net assets at end of period (000 omitted) $ 27,358 $ 13,690 $ 10,929
</TABLE>
The manager has agreed with the Fund to reduce its management fee and bear
certain expenses, such that the Fund's total expenses do not exceed .90% of
average daily net assets on an annualized basis. If the management fee reduction
and expenses borne by the manager had been borne by the Fund and had 1995
expenses been limited to that permitted by state securities law, the net
investment income per share and ratios would have been:
<TABLE>
<S> <C> <C> <C>
Net investment income $ .04 $ .05 $ .01
Ratios (to average net assets):
Expenses 1.33% 1.77% 2.50% *
Net investment income .36% .41% .32% *
</TABLE>
* Annualized.
** For the period from July 25, 1995 (commencement of operations) to
December 31, 1995.
(1) Distributions in excess of net investment income for the year ended
December 31, 1996 were less than $.01 per share.
(2) Distributions in excess of net realized gain on investments for the
year ended December 31, 1996 were less than $.01 per share.
(3) For years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for security trades
on which commissions are charged. Average commission rate paid is
computed by dividing the total dollar amount of commissions paid during
the year by the total number of shares purchased and sold on which
commissions were charged.
See notes to financial statements.
9
<PAGE> 35
DLB MID CAPITALIZATION FUND
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
DLB Mid Capitalization Fund (the "Fund") is a non-diversified series of
The DLB Fund Group (the "Trust" ). The Trust is organized as a
Massachusetts business trust and is registered under the Investment
Company Act of 1940, as amended, as an open-end management investment
company.
2. SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT VALUATION - Equity securities listed on securities exchanges
or reported through the NASDAQ system are valued at last sale prices.
Unlisted equity securities or listed equity securities for which last
sale prices are not available are valued at last quoted bid prices.
Securities for which there are no such quotations or valuations are
valued at fair value as determined in good faith by or at the direction
of the Trustees. Short-term obligations, which mature in 60 days or
less, are valued at amortized cost, which approximates market value.
REPURCHASE AGREEMENTS - The Fund may enter into repurchase agreements
with institutions that the Fund's investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The Fund
requires that the securities purchased in a repurchase transaction be
transferred to the custodian in a manner sufficient to enable the Fund
to obtain those securities in the event of a default. The Fund
monitors, on a daily basis, the value of the securities transferred to
ensure that the value, including accrued interest, of the securities
under each repurchase agreement is greater than amounts owed to the
Fund.
INVESTMENT TRANSACTIONS and Income - Investment transactions are
recorded on the trade date. Dividend income is recorded on the
ex-dividend date. Dividend payments received in additional securities
are recorded in an amount equal to the value of the securities.
Interest income is recorded on the accrual basis.
TAXES AND DISTRIBUTIONS - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the "Code") applicable to
regulated investment companies and to distribute to shareholders all of
its taxable income, including any net realized gain on investments.
Accordingly, no provision for federal income or excise tax is
necessary. The Fund files a tax return annually using tax accounting
methods required by the Code that may differ from generally accepted
accounting principles, the basis on which these financial statements
are prepared. Accordingly, the amount of net investment income and net
realized gain reported on these financial statements may differ from
that reported on the Fund's tax return, and, consequently, the
character of distributions to shareholders reported in the financial
highlights may differ from that reported to shareholders on Form
1099-DIV.
Distributions to shareholders are recorded on the ex-dividend date. The
Fund distinguishes between distributions for tax purposes and financial
reporting purposes. Only distributions in excess of tax-basis earnings
and profits are reported as a return of capital. Differences between
income for the financial statements and tax-basis earnings and profits
may result in temporary over distributions for financial statement
purposes, which are classified as distributions in excess of net
investment income or accumulated undistributed net realized gains.
10
<PAGE> 36
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
3. TRANSACTIONS WITH AFFILIATES
The Fund engages David L. Babson & Co. Inc. ("Babson") to provide
investment advisory and administrative services, and general office
facilities. The fee for such services is computed daily and paid
monthly at an effective annual rate of .60% of average daily net
assets. For the year ended December 31, 1997, the management fee
amounted to $109,834, of which $55,036 was waived by Babson.
Additionally, $23,164 of Fund expenses were borne by Babson.
The Fund pays no compensation directly to those of its Trustees who
also are officers of the investment manager, or to the officers of the
Fund, all of whom receive remuneration for their services to the Fund
from Babson.
4. PORTFOLIO SECURITIES
Purchases and sales of investments, other than short-term obligations,
aggregated $13,008,286 and $5,713,165, respectively.
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Fund, as computed on a federal income tax
basis, are as follows:
<TABLE>
<S> <C>
Aggregate cost $22,745,620
==============
Gross unrealized appreciation $ 5,257,295
Gross unrealized depreciation (620,589)
--------------
Net unrealized appreciation $ 4,636,706
==============
</TABLE>
5. SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without
par value). Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1997 1996
------------------ ---------------
<S> <C> <C>
Shares sold 659,292 100,908
Shares issued in reinvestment
of distributions 140,061 79,593
Redemptions (60,046) (7,818)
========== ==========
Net increase 739,307 172,683
========== ==========
</TABLE>
11
<PAGE> 37
[DLB LOGO]
THE DLB VALUE FUND
Annual Report
December 31, 1997
[EXPERIENCE TO MANAGE THE FUTURE]
<PAGE> 38
DLB VALUE FUND
Manager's Commentary
THE DLB VALUE FUND HAD A TOTAL RETURN OF -0.97% FOR THE FOURTH QUARTER OF 1997.
This compares to a total return of +2.87% for the S&P 500. For the full year
1997, the Fund had a total return (appreciation plus income) of +26.35%. The
corresponding total return for the S&P 500 was +33.36%. The average return for
"growth and income" funds in Lipper was 26.99%, and the average for "growth"
funds was 25.17%. In the Morningstar database, the average return for the Large
Cap Value category of funds was 26.60%. Total assets at the end of the year for
the Fund were $56.1 million.
THE SHIFT IN MARKET STYLE PREFERENCE TOWARD VALUE-ORIENTED SECURITIES IN THE
THIRD QUARTER WAS SHORT-LIVED. As measured by the S&P/BARRA Growth and Value
indices, Growth rebounded in the fourth quarter, gaining +3.25%; its Value
counterpart returned +2.22%. This was probably due to the flight to recognized
large capitalization growth companies as a result of the problems in Southeast
Asia. For the full year, Growth returned 6.5 percentage points more than Value
as measured by the S&P/BARRA indices. This continued dominance by the growth
style since the fourth quarter of 1993 is the longest period that either style
has remained in favor without a significant shift since the inception of these
indices in 1975.
MANY OF THE NIFTY-FIFTY STOCKS THAT HAVE DRIVEN THE S&P TO NEW HIGHS ARE SELLING
AT PRICE/EARNINGS MULTIPLES IN THE 30'S, 40'S, 50'S AND EVEN HIGHER. In the
words of one of our old finance professors, the market is discounting their
future cash flows into the hereafter. While these high quality companies surely
deserve to sell at some premium, multiples this high constitute a risk we would
prefer not to take. So long as these market leaders continue to outperform,
index funds will do well. When the price/earnings premium narrows to more normal
levels, index funds will lag. We are not privileged to know exactly (or even
approximately) when this will happen, but it will happen.
FOR ALL OF 1997, IN TERMS OF INDIVIDUAL HOLDINGS, THE FOLLOWING CHARTS SHOW THE
TOP TEN LEADERS AND LAGGARDS:
<TABLE>
<CAPTION>
Gain for
Leaders 1997 (%)
- --------------------------- --------
<S> <C>
*Travelers 79.4
Safety-Kleen 69.8
US Bancorp 66.7
American Express 59.6
Martin Marietta 59.3
Allstate 58.0
Tenet Healthcare 51.4
SLM Holding 51.3
National City 50.2
Dana 48.8
----
Average 59.5
* Travelers acquired Salomon, Inc. -- November, 1997.
</TABLE>
<PAGE> 39
DLB VALUE FUND
<TABLE>
<CAPTION>
Gain for
Laggards 1997 (%)
- ------------------------------------------
<S> <C>
Lockheed Martin 9.4
Texas Utilities 7.1
Weyerhaeuser 6.9
Potlatch 4.0
Sears Roebuck 0.4
Willamette Industries -5.7
Boeing -7.0
Aetna -10.8
Reebok International -31.4
Apple Computer -37.1
- ------------------------------------------
Average -6.4
</TABLE>
REEBOK INTERNATIONAL AND APPLE COMPUTER WERE THE WORST PERFORMERS. Apple's
struggles continued on a number of fronts, from losing money in operations to
losing their CEO through an ouster by founder Steve Jobs. It appeared that
Apple's stock price was entrenched in a trading range between $15 and $20, when
on August 6, during the MacWorld symposium and trade show in Boston, Apple's
stock price broke $29 on encouraging statements from Mr. Jobs and the
announcement that Microsoft had invested $150 million in the company. The stock
ultimately retreated into the teens, thus causing underperformance in the fourth
quarter. As part of our rebalancing discipline, we sold shares of Apple during
the price spike.
AS FOR REEBOK, ITS TURF IS ONE OF THE MOST INTENSELY COMPETITIVE RETAIL
LANDSCAPES. Combine this fact with 1997 being much less than a banner year for
footwear manufacturers in general, and one has identified the major ingredients
causing Reebok's underperformance. However, selling at only ten times earnings
with expected long-term earnings growth of 12% annually, Reebok looks
attractive.
FOR THE FULL YEAR, SALOMON INC./TRAVELERS GROUP WAS THE BEST PERFORMING HOLDING
IN OUR PORTFOLIO. Salomon Inc.'s success story culminated in the company being
acquired by Travelers Group in November. Travelers paid 1.695 shares for each
share of Salomon, and we retained the Travelers shares after the takeover.
Sanford Weill, CEO of Travelers, has kept what one analyst has called the
"Travelers juggernaut" on course and, increasingly, more profitable throughout
his stewardship. Salomon has all the hallmarks of another successful "Sandy"
Weill acquisition, and the market continues to reward such accomplishments most
impressively.
SAFETY-KLEEN, OUR SECOND BEST PERFORMER IN 1997, WAS THE BENEFICIARY OF A
TAKEOVER THAT WE EXPECT TO BE COMPLETED DURING THE FIRST QUARTER OF 1998. On
August 8, the management of Safety-Kleen announced that it was "seeking
strategic alternatives." This led to a hostile takeover bid valued at
approximately $26/share in cash and stock by Laidlaw
<PAGE> 40
DLB VALUE FUND
Environmental Services on November 14, 1997. Then, less than a week later, on
November 20, Philip Services Corporation announced a definitive agreement to
acquire Safety-Kleen for $27 in cash. Laidlaw countered by upping its bid to a
net of $28.73 in stock and cash. The eventual winner is still in doubt.
FOR ALL OF 1997, OUR HOLDINGS OF FINANCIAL STOCKS AFFECTED OUR RESULTS MOST
POSITIVELY. Indeed, five of the top ten performers were either banks or
insurance companies. Negatively affecting results was our exposure to the
retailing environment and the forest products industry.
WE EMPHASIZE THAT THE BABSON VALUE STRATEGY CONTINUES TO HAVE ATTRACTIVE
VALUATION CHARACTERISTICS. The average price/earnings ratio based on estimated
earnings for 1998 for the companies held is 15.9 times, compared to 19.9 times
for the S&P 500. The average price/book value is 2.7, compared to 3.9 for the
S&P 500. Also, the current gross yield is higher and the portfolio volatility (a
measure of risk) lower than corresponding figures for the market.
<PAGE> 41
DLB VALUE FUND
Growth of a $100,000 Investment
DLB VALUE S & P
FUND 500
--------- -----
$100,000.00 $100,000.00
07/31/95 $100,800.00 $102,400.00
08/31/95 $100,699.20 $102,656.00
09/30/95 $104,294.16 $106,988.08
10/31/95 $102,093.55 $106,602.93
11/30/95 $106,789.86 $111,282.79
12/31/95 $108,176.13 $113,430.55
01/31/96 $110,428.23 $117,287.19
02/28/96 $113,398.75 $118,377.96
03/31/96 $116,880.09 $119,514.39
04/30/96 $118,306.03 $121,271.25
05/30/96 $121,370.16 $124,400.05
06/30/96 $120,654.07 $124,872.77
07/31/96 $116,467.38 $119,353.39
08/31/96 $120,252.57 $121,871.75
09/30/96 $124,040.52 $128,733.13
10/31/96 $125,057.65 $132,286.16
11/30/96 $134,874.68 $142,287.00
12/31/96 $134,132.87 $139,469.72
01/31/97 $139,808.69 $148,186.57
02/28/97 $142,155.44 $149,342.43
03/31/97 $136,909.91 $143,204.45
04/30/97 $139,374.28 $151,753.76
05/31/97 $147,402.24 $160,995.56
06/30/97 $152,752.94 $168,208.17
07/31/97 $166,668.74 $181,597.54
08/31/97 $162,068.68 $171,428.07
09/30/97 $171,063.49 $180,822.33
10/31/97 $163,468.27 $174,782.87
11/30/97 $170,644.53 $182,875.31
12/31/97 $169,415.89 $186,020.77
01/31/98 $169,754.72 $188,085.60
TOTAL RETURNS (%) FOR PERIODS ENDED 12/31/97
---------------------------------------------
6 Months One Year Annualized
7/1/97 - 1/1/97 - Since Inception
12/31/97 12/31/97 7/25/95 - 12/31/97
---------------------------------------------
DLB VALUE FUND 10.91 26.30 23.48
S&P 500 10.58 33.36 28.18
STANDARD & POORS 500 INDEX is an index of common stocks frequently used as a
general measure of stock market performance. The index assumes reinvestment of
all distributions and interest payments and does not take into account brokerage
fees or taxes. Securities in the fund do not match those in the index and
performance of the fund will differ.
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. Investment return and share
price will fluctuate with market conditions, and investors may have a gain or
loss when shares are sold. The Fund's total return reflects an expense
limitation in effect during the periods shown. In the absence of such expense
limitation, returns would have been lower.
THIS REPORT AND THE FUND FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR
THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE DLB VALUE FUND. The report is
not intended for distribution to prospective investors unless preceded or
accompanied by a current prospectus.
<PAGE> 42
------------------------------------------
DLB VALUE FUND
FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 1997 AND 1996
<PAGE> 43
DLB VALUE FUND
TABLE OF CONTENTS
<TABLE>
<S> <C>
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS:
Portfolio of Investments as of December 31, 1997 2 - 5
Statement of Assets and Liabilities as of December 31, 1997 6
Statement of Operations for the Year Ended December 31, 1997 7
Statements of Changes in Net Assets for the Years Ended
December 31, 1997 and 1996 8
Financial Highlights for Each of the Years in the Three-Year Period
Ended December 31, 1997 9
Notes to Financial Statements 10 - 12
</TABLE>
<PAGE> 44
INDEPENDENT AUDITORS' REPORT
To the Trustees of The DLB Fund Group and Shareholders of DLB Value Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of DLB Value Fund (the "Fund") (a separate series
of The DLB Fund Group) as of December 31, 1997, the related statement of
operations for the year then ended, the statements of changes in net assets for
the years ended December 31, 1997 and 1996, and the financial highlights for
each of the years in the three-year period ended December 31, 1997. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures include confirmation of securities owned at December
31, 1997 by correspondence with the custodian and brokers; where replies were
not received from brokers, we performed other auditing procedures. 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, such financial statements and financial highlights present
fairly, in all material respects, the financial position of DLB Value Fund at
December 31, 1997, the results of its operations, the changes in its net assets,
and its financial highlights for the respective stated periods in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 6, 1998
<PAGE> 45
DLB VALUE FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
COMMON STOCKS - 94.4%
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
AEROSPACE - 4.2%
The Boeing Company 27,300 $ 1,335,994
Lockheed Martin Corporation 10,300 1,014,550
-----------
2,350,544
-----------
AIRLINES - 2.4%
KLM Royal Dutch Airlines 35,737 1,349,072
-----------
APPAREL - 2.2%
Reebok International Ltd. * 42,900 1,236,056
-----------
AUTO PARTS - 2.2%
Dana Corporation 25,900 1,230,250
-----------
BANKS - 9.2%
Chase Manhattan Corporation 11,900 1,303,050
National City Corporation 19,300 1,268,975
US Bancorp 11,500 1,287,281
Wells Fargo & Company 3,900 1,323,806
-----------
5,183,112
-----------
CHEMICALS - 2.4%
E.I. DuPont De Nemours and Company 22,200 1,333,388
-----------
COMPUTERS - 4.6%
Apple Computer * 96,000 1,260,000
International Business Machines Corporation 12,600 1,317,488
-----------
2,577,488
-----------
DISCOUNT RETAIL - 2.2%
Kmart Corporation * 80,100 926,156
Kmart Financing ** 5,800 299,425
-----------
1,225,581
-----------
</TABLE>
2
<PAGE> 46
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
DIVERSIFIED - 1.5%
The Energy Group PLC 9,400 $ 419,475
Hanson PLC 17,600 405,900
----------
825,375
----------
DOMESTIC OIL - 2.4%
Atlantic Richfield Co. 16,600 1,330,075
----------
ELECTRICAL POWER - 5.0%
Illinova Corporation 52,800 1,422,300
Texas Utilities Company 33,300 1,384,031
----------
2,806,331
----------
ENVIRONMENTAL - 1.0%
Safety-Kleen Corp. 20,700 567,956
----------
FINANCIAL SERVICES - 11.4%
American Express Company 15,400 1,374,450
SLM Holding Corporation 9,100 1,266,038
The Student Loan Corporation 25,800 1,273,875
Transamerica Corporation 11,800 1,256,700
Travelers Group Inc. 23,603 1,271,612
----------
6,442,675
----------
FOOD PRODUCERS -2.1%
Diageo PLC 31,227 1,182,723
----------
GENERAL RETAIL - 4.6%
J C Penney Company, Inc. 21,500 1,296,719
Sears Roebuck and Co. 29,200 1,321,300
----------
2,618,019
----------
INSURANCE - 7.0%
Aetna Inc. 18,900 1,333,631
The Allstate Corporation 14,800 1,344,950
General RE Corporation 5,900 1,250,800
---------
3,929,381
---------
</TABLE>
3
<PAGE> 47
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
INTERNATIONAL OIL - 2.2%
Royal Dutch Petroleum 23,200 $ 1,257,150
-----------
MEDICAL SUPPLIES & SERVICES - 4.9%
Tenet Healthcare Corporation * 42,100 1,394,563
United Healthcare Corporation 27,100 1,346,531
-----------
2,741,094
-----------
METALS & MINING - 0.4%
Martin Marietta Materials, Inc. 6,800 248,625
-----------
OFFICE EQUIPMENT - 4.7%
Wallace Computer Services, Inc. 33,400 1,298,425
Xerox Corporation 18,200 1,343,388
-----------
2,641,813
-----------
PAPER & FOREST PRODUCTS - 6.5%
Potlatch Corporation 27,900 1,199,700
Weyerhaeuser Company 24,500 1,202,031
Willamette Industries, Inc. 40,200 1,293,938
-----------
3,695,669
-----------
PRINTING & PUBLISHING - 2.3%
Harcourt General Inc. 23,700 1,297,575
-----------
RAILROADS - 2.3%
CSX Corporation 24,200 1,306,800
-----------
SPECIALTY CHEMICALS - 0.8%
Millennium Chemicals Inc. 19,000 447,688
-----------
SPECIALTY RETAIL - 2.3%
The Limited Inc. 50,800 1,295,400
-----------
STEEL - 2.3%
USX - US Steel Group Inc. 41,800 1,306,250
-----------
</TABLE>
4
<PAGE> 48
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
TRUCKING & SHIPPING - 1.6%
Overseas Shipholding Group 41,000 $ 894,310
------------
TOTAL COMMON AND PREFERRED STOCKS
(identified cost, $45,132,577) 53,320,400
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
<S> <C> <C>
REPURCHASE AGREEMENT - 9.3%
Bank of New York, dated 12/31/97, due 1/2/98
(Secured by various U.S. Treasury Bonds $ 5,244,153 5,244,153
------------
valued at $5,351,897), at cost
Total Investments (identified cost, $50,376,730) 58,564,553
Other assets, less liabilities - (3.7)% (2,115,442)
------------
NET ASSETS - 100% $ 56,449,111
============
</TABLE>
* Non-income producing securities
** Preferred stock
See notes to financial statements
5
<PAGE> 49
DLB VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at value (identified cost, $50,376,730) $ 58,564,553
Receivable for investments sold 24,308
Dividends and interest receivable 58,825
Receivable for fund shares sold 353,914
Receivable from investment manager 2,994
-------------
59,004,594
-------------
LIABILITIES:
Payable for investments purchased 2,492,088
Management fees 15,919
Accrued expenses 47,476
-------------
2,555,483
-------------
NET ASSETS $ 56,449,111
=============
NET ASSETS CONSIST OF:
Paid-in capital $ 48,510,539
Unrealized appreciation on investments 8,187,823
Accumulated distributions in excess of net realized gain
on investment transactions (249,251)
-------------
$ 56,449,111
=============
SHARES OF BENEFICIAL INTEREST OUTSTANDING 3,786,510
=============
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PRICE PER
SHARE (NET ASSETS/SHARES OF BENEFICIAL INTEREST
OUTSTANDING) $ 14.91
=============
</TABLE>
See notes to financial statements.
6
<PAGE> 50
DLB VALUE FUND
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
Dividends (net of foreign tax withheld of $8,569) $ 676,855
Interest 119,268
-----------
796,123
-----------
EXPENSES:
Management fee 207,027
Trustees' fees 5,501
Custodian fee 48,974
Accounting and audit fees 29,875
Registration costs 22,740
Legal fees 19,702
Transfer agent fee 8,001
Printing fees 3,696
Miscellaneous
1,220
-----------
346,736
Reduction of expenses by investment manager (78,638)
-----------
Net expenses 268,098
-----------
Net investment income 528,025
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Realized gain (identified cost basis) 2,487,991
Change in unrealized appreciation 5,222,346
-----------
Net realized and unrealized gain on investments 7,710,337
-----------
Increase in net assets from operations $8,238,362
===========
</TABLE>
See notes to financial statements.
7
<PAGE> 51
DLB VALUE FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1997 1996
------------ -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
From operations:
Net investment income $ 528,025 $ 238,207
Net realized gain on investments 2,487,991 595,835
Net unrealized appreciation on investments 5,222,346 2,386,704
------------- -------------
8,238,362 3,220,746
------------- -------------
Distributions to shareholders:
From net investment income (520,799) (234,884)
From net realized gain on investments (2,487,991) (595,835)
In excess of net realized gain on investments (228,789) (31,253)
------------- -------------
(3,237,579) (861,972)
------------- -------------
Fund share transactions:
Net proceeds from sale of shares 36,994,760 5,414,040
Net asset value of shares issued in
reinvestment of distributions 3,237,577 861,972
Cost of shares reacquired (8,012,111) (224,262)
------------- -------------
32,220,226 6,051,750
------------- -------------
Total increase in net assets 37,221,009 8,410,524
NET ASSETS:
At beginning of period 19,228,102 10,817,578
============= =============
At end of period (including accumulated undistributed net
investment income of $0 and $0, respectively) $56,449,111 $19,228,102
============= =============
</TABLE>
See notes to financial statements.
8
<PAGE> 52
DLB VALUE FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
1997 1996 1995 **
---------------- --------------- ----------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 12.53 $ 10.58 $ 10.00
-------- -------- ---------
Income from investment operations:
Net investment income .15 .16 .09
Net realized and unrealized gain on investments 3.15 2.38 .73
-------- -------- ---------
3.30 2.54 .82
-------- -------- ---------
Less distributions to shareholders:
From net investment income (.15) (.16) (.09)
From net realized gain on investments (.70) (.41) (.15)
In excess of net realized gain on investments (.07) (.02) -
-------- -------- ---------
(.92) (.59) (.24)
-------- -------- ---------
Net asset value - end of period $ 14.91 $ 12.53 $ 10.58
======== ======== =========
Total Return 26.35% 23.99% 18.64% *
Ratios and Supplemental Data:
Ratio of expenses to average net assets .71% .80% .80% *
Ratio of net investment income to average net assets 1.40% 1.56% 2.02% *
Portfolio turnover 25% 23% 7%
Average commission rate paid (1) $ .05796 $ .05378 -
Net assets at end of period (000 omitted) $ 56,499 $ 19,228 $10,818
The manager has agreed with the Fund to reduce its management fee and bear
certain expenses, such that the Fund's total expenses do not exceed .80% of
average daily net assets on an annualized basis. If the management fee reduction
and expenses borne by the manager had been borne by the Fund, the investment
income per share and ratios would have been:
Net investment income $ .13 $ .09 $ .02
Ratios (to average net assets):
Expenses .92% 1.50% 2.43% *
Net investment income 1.19% .86% .40% *
</TABLE>
* Annualized.
** For the period from July 25, 1995 (commencement of operations) to
December 31, 1995.
(1) For years beginning on or after September 1, 1995, a fund is required to
disclose its average commission rate per share for security trades on which
commissions are charged. Average commission rate paid is computed by
dividing the total dollar amount of commissions paid during the year by the
total number of shares purchased and sold on which commissions were
charged.
See notes to financial statements.
9
<PAGE> 53
DLB VALUE FUND
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
DLB Value Fund (the "Fund") is a non-diversified series of The DLB Fund
Group (the "Trust"). The Trust is organized as a Massachusetts business
trust and is registered under the Investment Company Act of 1940, as
amended, as an open-end management investment company.
2. SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT VALUATION - Equity securities listed on securities exchanges
or reported through the NASDAQ system are valued at last sale prices.
Unlisted equity securities or listed equity securities for which last
sale prices are not available are valued at last quoted bid prices.
Securities for which there are no such quotations or valuations are
valued at fair value as determined in good faith by or at the direction
of the Trustees. Short-term obligations, which mature in 60 days or
less, are valued at amortized cost, which approximates market value.
REPURCHASE AGREEMENTS - The Fund may enter into repurchase agreements
with institutions that the Fund's investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The Fund
requires that the securities purchased in a repurchase transaction be
transferred to the custodian in a manner sufficient to enable the Fund
to obtain those securities in the event of a default. The Fund
monitors, on a daily basis, the value of the securities transferred to
ensure that the value, including accrued interest, of the securities
under each repurchase agreement is greater than amounts owed to the
Fund.
INVESTMENT TRANSACTIONS AND INCOME - Investment transactions are
recorded on the trade date. Dividend income is recorded on the
ex-dividend date. Dividend payments received in additional securities
are recorded in an amount equal to the value of the securities.
Interest income is recorded on the accrual basis.
TAXES AND DISTRIBUTIONS - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the "Code") applicable to
regulated investment companies and to distribute to shareholders all of
its taxable income, including any net realized gain on investments.
Accordingly, no provision for federal income or excise tax is
necessary. The Fund files a tax return annually using tax accounting
methods required by the Code that may differ from generally accepted
accounting principles, the basis on which these financial statements
are prepared. Accordingly, the amount of net investment income and net
realized gain reported in these financial statements may differ from
that reported on the Fund's tax return, and, consequently, the
character of distributions to shareholders reported in the financial
highlights may differ from that reported to shareholders on Form
1099-DIV.
Distributions to shareholders are recorded on the ex-dividend date. The
Fund distinguishes between distributions for tax purposes and financial
reporting purposes. Only distributions in excess of tax-basis earnings
and profits are reported as a return of capital. Differences between
income for the financial statements and tax-basis earnings and profits
may result in temporary over-distributions for financial statement
purposes, which are classified as distributions in excess of net
investment income or accumulated undistributed net realized gains.
9
<PAGE> 54
During the year ended December 31, 1997, $7,226 was reclassified from
undistributed net investment income to accumulated distributions in
excess of net realized gain on investment transactions due to
redesignation of distributions. This change had no effect on net assets
or net asset value per share.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
3. TRANSACTIONS WITH AFFILIATES
The Fund engages David L. Babson & Co. Inc. ("Babson") to provide
investment advisory and administrative services and general office
facilities. The fee for such services is computed daily and paid
monthly at an effective annual rate of .55% of average daily net
assets. For the year ended December 31, 1997, the management fee
amounted to $207,027, of which $75,644 was waived by Babson.
Additionally, $2,994 of Fund expenses were borne by Babson.
The Fund pays no compensation directly to those of its Trustees who
also are officers of the investment manager, or to the officers of the
Fund, all of whom receive remuneration for their services to the Fund
from Babson.
4. PORTFOLIO SECURITIES
Purchases and sales of investments, other than short-term obligations,
aggregated $36,220,360 and $8,999,598, respectively.
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Fund, as computed on a federal income tax
basis, are as follows:
<TABLE>
<CAPTION>
<S> <C>
Aggregate cost $ 50,635,315
===============
Gross unrealized appreciation $ 9,121,190
Gross unrealized depreciation (1,191,952)
---------------
Net unrealized appreciation $ 7,929,238
===============
</TABLE>
10
<PAGE> 55
5. SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without
par value). Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1997 1996
------------------- ------------------
<S> <C> <C>
Shares sold 2,546,356 462,564
Shares issued in reinvestment
of distributions 218,608 68,793
Redemptions (513,437) (18,965)
-------------- -----------
Net increase 2,251,527 512,392
=============== ===========
</TABLE>
11
<PAGE> 56
DLB
The DLB Global Small Cap Fund
Annual Report
December 31, 1997
[EXPERIENCE TO MANAGE THE FUTURE]
<PAGE> 57
DLB GLOBAL SMALL CAP FUND
Manager's Commentary
THE DLB GLOBAL SMALL CAP FUND INVESTS ON A WORLDWIDE BASIS IN COMPANIES WITH
MARKET CAPITALIZATIONS UP TO $1.5 BILLION AT THE TIME OF PURCHASE. The
investment process combines the unique strengths of two investment managers.
David L. Babson & Co. is the Fund's manager and oversees the domestic portion of
the portfolio. Babson - Stewart Ivory International is the Fund's sub-advisor
and manages the non-U.S. portion of the portfolio. At year-end 1997, total
assets in the Fund were $13.9 million, of which 54.8% were invested in U.S.
securities and 45.2% were held in international securities.
FOR 1997, THE FUND ACHIEVED A TOTAL RETURN AS FOLLOWS:
DLB Global Small Cap 4.65%
Salomon EMI ex-U.S. -9.39%
Russell 2500 24.36%
Combined Index 6.95%
IN THE U.S., WE CONTINUE TO FIND SMALL/MID CAPITALIZATION STOCKS TO BE
ATTRACTIVELY VALUED RELATIVE TO THE OVERALL MARKET. Our investment process is
focused on identifying attractively valued companies that have verifiable
opportunities to improve their profit margins. These are the types of companies
that should outperform the market regardless of what domestic and international
markets do.
LISTED BELOW ARE THE BEST AND WORST PERFORMING U.S. SMALL/MID CAPITALIZATION
STOCKS IN THE FUND FOR THE FULL YEAR 1997.
<TABLE>
<CAPTION>
Best Performers Business Gain (%)
- --------------- -------- --------
<S> <C> <C>
Dime Bancorp Thrift/Bank 106.0
Herman Miller Office Furniture Systems 94.0
First Security Corporation Bank 89.0
Fred Meyer Retail Supermarkets 78.0
Octel Communications Telecommunications 77.0
</TABLE>
<TABLE>
<CAPTION>
Underperformers Business Loss (%)
- --------------- -------- --------
<S> <C> <C>
Global Inds. Technologies Conglomerate 23.0
Elsag Bailey Process Automation 12.0
Calgon Carbon Environmental Services 10.0
Charming Shoppes Retail 7.0
Intergraph CAD/CAM Software 2.0
</TABLE>
<PAGE> 58
DLB GLOBAL SMALL CAP FUND
Manager's Commentary
IN 1997, THE INTERNATIONAL MARKETS WERE CHARACTERIZED BY A GOOD DEAL OF
VOLATILITY AND WIDE SWINGS IN QUARTERLY PERFORMANCE. The economic crisis in Asia
has caused world stock markets to correct substantially over the past few
months. We have continued to increase weightings in European markets where
prospects for economic growth and capital appreciation look attractive. We
expect the relative performance of smaller companies in Europe to improve in
1998. In addition, although Asian exposure has been cut back, the relatively
high weightings in Asia, ex-Japan (4.9% of the total Fund, 10.7% of the
International portion), were affected by the fourth quarter economic crisis. In
spite of this, we remain convinced about the long-term attractiveness of
selected Asian companies, and early results in 1998 look encouraging.
LISTED BELOW ARE THE BEST AND WORST PERFORMING INTERNATIONAL SMALL/MID
CAPITALIZATION STOCKS IN THE FUND FOR THE FULL YEAR 1997.
<TABLE>
<CAPTION>
% Gain
Best Performers (Country) Business (in local currency)
- ------------------------- -------- -------------------
<S> <C> <C>
Gewiss (Italy) Electronic Components 67.9
Quinsa (Argentina) Brewer 50.0
Devro (U.K.) Food Casings 39.5
Allied Colloids (U.K.) Specialty Chemicals 39.0
SKW Trostberg (Germany) Specialty Chemicals 36.6
</TABLE>
<TABLE>
<CAPTION>
% Loss
Worst Performers (Country) Business (in local currency)
- -------------------------- -------- -------------------
<S> <C> <C>
Thai Pineapple (Thailand) Pineapple Production 80.0
Nihon Jumbo (Japan) Photo Development 79.0
Haw Par Healthcare (Singapore) Healthcare 57.4
FCC (Japan) Automotive Parts 51.8
Chen Hsong Holdings (Hong Kong) Machinery 50.0
</TABLE>
<PAGE> 59
DLB GLOBAL SMALL CAP FUND
Growth of a $100,000 Investment
CUMULATIVE RETURN SINCE INCEPTION 7/19/95
DLB Global Combined Solomon EMI
Small Cap Index Lex-US
----------- -------- ------------
$100,000.00 $100,000.00 $100,000.00
07/95 $100,300.00 $105,860.00 $100,420.00
08/95 $98,795.50 $104,928.43 $97,879.37
09/95 $99,793.33 $111,454.98 $98,623.26
10/95 $98,396.23 $108,133.62 $95,782.91
11/95 $100,993.85 $111,572.27 $98,589.35
12/95 $104,013.61 $114,897.12 $102,365.32
01/96 $106,426.72 $116,390.79 $104,187.42
02/96 $109,853.66 $118,904.83 $105,812.75
03/96 $112,587.05 $121,508.84 $108,246.44
04/96 $115,291.17 $127,584.29 $113,940.20
05/96 $116,605.49 $128,413.58 $113,017.29
06/96 $115,089.62 $126,795.57 $113,028.59
07/96 $109,450.23 $120,176.84 $108,756.11
08/96 $110,763.63 $123,758.11 $109,854.54
09/96 $111,052.69 $126,394.16 $110,469.73
10/96 $110,562.91 $125,762.19 $110,038.90
11/96 $113,481.77 $129,535.06 $111,843.53
12/96 $114,264.79 $128,952.15 $109,785.61
01/97 $110,996.82 $129,016.63 $107,414.24
02/97 $109,450.23 $120,465.27 $110,583.21
03/97 $106,749.74 $117,104.29 $109,112.45
04/97 $106,737.87 $116,858.37 $107,486.68
05/97 $112,480.37 $125,903.21 $114,376.57
06/97 $116,507.17 $129,869.16 $116,961.48
07/97 $119,326.64 $132,739.27 $115,195.36
08/97 $118,014.05 $130,987.11 $110,276.52
09/97 $120,929.00 $136,593.36 $112,239.44
10/97 $116,696.48 $130,801.80 $107,805.99
11/97 $115,482.84 $128,408.12 $102,997.84
12/97 $117,896.43 $128,459.49 $100,721.59
TOTAL RETURNS(%) FOR PERIODS ENDED 12/31/97
<TABLE>
<CAPTION>
6 Months One Year Annualized
7/1/97 - 1/1/97 - Since Inception
12/31/97 12/31/97 7/19/95 - 12/31/97
<S> <C> <C> <C>
DLB GLOBAL SMALL CAP FUND 1.19 4.65 7.41
Combined Index -1.08 6.95 13.72
Salomon EMI (ex-US) -13.88 -9.39 -0.21
Russell 2500 index 11.78 24.36 20.92
</TABLE>
SALOMON BROTHERS BROAD MARKET INDEX (BMI) fully represents the universe of
institutionally available global stocks. All companies with an available market
capitalization greater than US $100 million are included in the index.
SALOMON BROTHERS EXTENDED MARKET INDEX, EX-US, (EMI) represents the bottom 20%
of the cumulative available market capital of the BMI. The EMI defines the small
stock index outside the U.S.
RUSSELL 2500 INDEX consists of the bottom 500 securities in the Russell 1000
Index and all 2,000 securities in the Russell 2000 Index, representing
approximately 23% of the Russell 3000 total market capitalization. This index is
a good measure of small to medium-small stock performance in the U.S.
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. Investment return and share
price will fluctuate with market conditions, and investors may have a gain or
loss when shares are sold. The fund's total return reflects an expense
limitation in effect during the periods shown. In the absence of such expense
limitation, returns would have been lower.
THIS REPORT AND THE FUND FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR
THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE DLB GLOBAL SMALL CAP FUND.
The report is not intended for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
<PAGE> 60
DLB GLOBAL SMALL
CAPITALIZATION FUND
FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 1997 AND 1996
<PAGE> 61
DLB GLOBAL SMALL CAPITALIZATION FUND
TABLE OF CONTENTS
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS:
Portfolio of Investments as of December 31, 1997 2 - 8
Statement of Assets and Liabilities as of December 31, 1997 9
Statement of Operations for the Year Ended December 31, 1997 10
Statements of Changes in Net Assets for the Years Ended
December 31, 1997 and 1996 11
Financial Highlights for Each of the Years in the Three-Year Period 12
Ended December 31, 1997
Notes to Financial Statements 13 - 16
<PAGE> 62
INDEPENDENT AUDITORS' REPORT
To the Trustees of The DLB Fund Group and Shareholders of DLB Global Small
Capitalization Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of DLB Global Small Capitalization Fund (the
"Fund") (a separate series of The DLB Fund Group) as of December 31, 1997, the
related statement of operations for the year then ended, the statements of
changes in net assets for the years ended December 31, 1997 and 1996, and the
financial highlights for each of the years in the three-year period ended
December 31, 1997. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures include confirmation of securities owned at December
31, 1997 by correspondence with the custodian and brokers; where replies were
not received from the brokers, we performed other auditing procedures. 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, such financial statements and financial highlights present
fairly, in all material respects, the financial position of DLB Global Small
Capitalization Fund at December 31, 1997, the results of its operations, the
changes in its net assets, and its financial highlights for the respective
stated periods, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 6, 1998
<PAGE> 63
DLB GLOBAL SMALL CAPITALIZATION FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
- -------------------------------------------------------------------------------
COMMON AND PREFERRED STOCKS - 96.5%
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
AEROSPACE - 2.7%
EG&G, Inc. 6,000 $ 124,875
Newport News Shipbuilding, Inc. 9,800 249,288
-----------
374,163
-----------
APPAREL & TEXTILE - 2.6%
National Service Industries, Inc. 3,700 183,381
The Stride Rite Corporation 14,500 174,000
-----------
357,381
-----------
AUTO PARTS MANUFACTURERS - 3.0%
Bandag Incorporated 3,400 162,775
Exide Corporation 5,300 137,138
The Standard Products Company 4,400 112,750
-----------
412,663
-----------
BANKS - 5.1%
Dime Bancorp, Inc. 8,100 245,025
First Security Corporation 5,425 227,172
Golden State Bancorp 6,400 239,200
-----------
711,397
-----------
COAL GAS & PIPE - 1.1%
Nabors Industries, Inc. * 4,800 150,900
-----------
COMPUTERS - 1.4%
Gerber Scientific, Inc. 9,500 188,813
-----------
DOMESTIC OIL - 0.6%
Quaker State Corporation 6,100 86,925
-----------
</TABLE>
2
<PAGE> 64
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
ELECTRONICS & INSTRUMENTS - 3.9%
Intergraph Corporation * 20,200 $ 202,000
Magnetek Inc. * 8,800 171,600
Scitex Corporation Ltd. 13,900 167,669
-----------
541,269
-----------
EXPLORATION & DRILLING - 0.8%
Global Industrial Technologies Inc. * 6,200 105,013
-----------
FOOD PRODUCERS - 1.3%
Ralcorp Holdings, Inc. 10,300 174,456
-----------
FURNITURE & APPLIANCES - 3.3%
Herman Miller, Inc. 3,400 185,513
La-Z-Boy Chair Company 3,500 150,938
Stanhome, Inc. 5,000 128,438
-----------
464,889
-----------
INSURANCE - 3.8%
Hartford Steam Boiler 2,200 121,413
Life USA Holding, Inc. * 9,000 151,875
Western National Corporation 6,600 195,525
Willis Corroon Group 4,300 52,944
-----------
521,757
-----------
MACHINERY & EQUIPMENT - 3.5%
Flowserve Corporation 5,295 147,929
Elsag Bailey Process Automation NV * 12,400 204,600
Harsco Corporation 3,200 138,000
-----------
490,529
-----------
METALS & MINING - 2.9%
Calmat Co. 7,600 211,850
Martin Marietta Materials 5,400 197,438
-----------
409,288
-----------
NATURAL GAS - 1.4%
Equitable Resources, Inc. 5,500 194,563
-----------
</TABLE>
3
<PAGE> 65
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
OFFICE EQUIPMENT - 1.5%
Wallace Computer Services 5,300 $ 206,038
-----------
PAPER & FOREST PRODUCTS - 0.8%
Albany International Corp. 4,800 110,400
-----------
PRINTING & PUBLISHING - 5.1%
ACNeilson Corporation * 9,700 236,438
Central Newspapers Inc. 2,300 170,056
Hollinger International 10,800 151,200
Lee Enterprises, Inc. 5,100 150,769
-----------
708,463
-----------
PROFESSIONAL SERVICES - 3.0%
Metromail Corporation * 10,700 191,263
Policy Management Systems Corporation * 3,300 229,557
-----------
420,820
-----------
SPECIALTY CHEMICALS - 0.9%
Calgon Carbon Corporation 11,900 127,925
-----------
SPECIALTY RETAIL - 0.8%
Charming Shoppes 24,100 112,969
-----------
TELECOMMUNICATIONS - 0.3%
Commscope Inc. * 2,700 36,281
-----------
TOBACCO - 1.6%
Dimon, Inc. 8,300 217,875
-----------
TRANSPORTATION - 1.5%
Fritz Companies, Inc. * 14,900 207,669
-----------
TRUCKING & SHIPPING - 1.8%
Alexander & Baldwin, Inc. 4,600 125,638
J.B. Hunt Transport Services, Inc. 6,400 120,000
-----------
245,638
-----------
</TABLE>
4
<PAGE> 66
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
FOREIGN STOCKS
ARGENTINA - 0.1%
Quinsa (Breweries) 1,200 $ 16,425
-----------
BELGIUM - 1.7%
Colruyt (Food Retailers) 450 229,697
-----------
FINLAND - 0.7%
KCI Konecranes International (Diversified Industrial) 3,000 99,101
-----------
FRANCE - 5.5%
Brioche Pasquier (Food Producers) 1,300 136,058
Europeenne d'Extincteurs (Diversified Industrial) 2,000 134,563
Metropole Television (Media) 1,750 191,586
Societe Manutan (Distributors) 2,000 149,514
Royal Canin SA (Food Producers) * 3,000 145,527
-----------
757,248
-----------
GERMANY - 4.2%
Beta Systems Software (Support Systems) * 1,500 118,386
MLP Pref. Non Vtg. (Life Insurance) ** 750 189,668
SKW Trostberg (Chemicals) 6,000 190,418
Sto AG (Building and Construction) ** 250 87,539
-----------
586,011
-----------
HONG KONG - 3.9%
CDL Hotel International (Leisure and Hotels) 195,000 59,133
Chen Hsong Holdings (Engineering) 150,000 45,487
Gold Peak Industries Ltd. (Warrants) (Electronic and Electrical) 30,000 2,826
Gold Peak Industries Ltd. (Electronics and Electrical) 150,000 83,231
South China Morning Post (Media) 81,000 56,965
Vitasoy International Holdings (Food Producers) 250,000 105,652
V-Tech Holdings Ltd. (Electronic and Electrical) 40,000 117,943
YGM Trading (Textiles and Apparel) 100,000 65,166
-----------
536,403
-----------
HUNGARY - 0.5%
Pick Szeged GDR (Food Producers) 850 67,844
-----------
</TABLE>
5
<PAGE> 67
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
IRELAND - 0.9%
CBT Group (Support Services) * 1,500 $ 123,188
-----------
ITALY - 1.0%
Gewiss Spa (Electronic and Electrical) 7,000 132,505
-----------
JAPAN - 3.3%
Aderans (Healthcare) 3,000 72,469
Altech Co. Ltd. (Distributors) 2,000 19,325
Arrk Corporation (Diversified Industrial) 3,000 43,712
FCC Co. Ltd. (Engineering) 3,300 34,923
Hikari Tsushin (Telecommunications) 1,500 30,138
Misumi (Distributors) * 2,000 32,669
Mori Seiki (Engineering) * 9,000 93,175
Namco (Media) 2,000 58,129
Nihon Jumbo (Support Services) 60 391
T&K Toka (Chemicals) * 1,000 24,540
Union Tool (Engineering) 2,000 51,380
-----------
460,851
-----------
MALAYSIA - 0.2%
Jaya Jusco Stores (General Retailers) 12,000 8,026
Perlis Plantations (Diversified Industrial) 15,000 21,222
-----------
29,248
-----------
NETHERLANDS - 3.2%
Nutreco Holding (Food Producers) * 6,000 136,720
Nutricia Certificates (Food Producers) 6,500 197,164
Unique International (Support Services) 5,000 106,535
-----------
440,419
-----------
NEW ZEALAND - 0.4%
Guiness Peat Group (Other Financial) 100,000 51,066
-----------
NORWAY - 0.8%
Tomra Systems (Diversified Industrial) * 5,000 111,702
-----------
</TABLE>
6
<PAGE> 68
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
SINGAPORE - 0.5%
Haw Par Healthcare Limited (Pharmaceuticals) 50,000 $ 25,698
Tibs Holdings (Transport) 80,000 40,404
-----------
66,102
SPAIN - 1.0%
Mapfre Vida (Life Insurance) * 4,000 140,351
-----------
SWITZERLAND - 3.2%
Disetronic Holding (Healthcare) 70 153,320
Fotolabo (Support Services) 600 133,470
Phoenix Meccano (Engineering) 300 152,977
-----------
439,767
-----------
THAILAND - 0.3%
Matichon Public Co. Ltd (Media) 24,000 20,513
Thai Pineapple (Food Producers) 72,000 18,462
-----------
38,975
-----------
UNITED KINGDOM - 10.8%
Alliance Unichem (Healthcare) 21,300 111,267
Allied Colloids (Chemicals) 57,728 157,417
WS Atkins (Support Services) 15,000 89,199
Peter Black (Household Goods) 19,000 122,660
Brake Brothers (Food Retailers) 9,000 85,010
N Brown Group (General Retailers) 20,000 135,687
Cattles Holdings (Other Financial) 20,000 133,059
Devro (Food Producers) 15,000 92,895
Expro International (Oil Exploration) 9,000 78,800
Fairey Group (Electronic and Electrical) 11,300 946,657
Rotork (Engineering) * 13,000 57,232
Seton Healthcare Group (Healthcare) 13,000 109,552
Spirax-Sarco Engineering (Engineering) 12,000 112,755
St. James Place Capital (Life Insurance) 41,000 115,843
-----------
1,496,033
-----------
TOTAL COMMON AND PREFERRED STOCKS 13,401,020
(identified cost, $11,587,926) -----------
</TABLE>
7
<PAGE> 69
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<S> <C> <C>
REPURCHASE AGREEMENT - 4.2%
Bank of New York, dated 12/31/97, due 1/2/98
(Secured by various U.S. Treasury Bonds
valued at $597,490), at cost $ 585,461 $ 585,461
-----------
Total Investments (identified cost, $12,173,387) 13,986,481
Other assets, less liabilities - (.7%) (99,339)
----------
NET ASSETS - 100% $13,887,142
===========
</TABLE>
* Non-income producing securities
** Preferred Stock
See notes to financial statements
8
<PAGE> 70
DLB GLOBAL SMALL CAPITALIZATION FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
ASSETS:
<S> <C>
Investments, at value (identified cost, $12,173,387) $13,986,481
Foreign cash, at value (cost, $4,679) 4,679
Receivable for fund shares sold 2,102
Dividends and interest receivable 13,486
Receivable from investment manager 7,324
Other 8,145
----------
14,022,217
----------
LIABILITIES:
Payable for investments purchased 74,477
Management fees 9,225
Accrued expenses 51,373
----------
135,075
----------
NET ASSETS $13,887,142
===========
NET ASSETS CONSIST OF:
Paid-in capital $12,109,247
Unrealized appreciation on investments and
translation of assets and 1,812,809
liabilities in foreign currencies
Accumulated distributions in excess of net realized
gain on investments and foreign currency transactions (7,988)
Accumulated distributions in excess of net
investment income (26,926)
----------
Total $13,887,142
===========
SHARES OF BENEFICIAL INTEREST OUTSTANDING 1,231,899
===========
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PRICE
PER SHARE (NET ASSETS/SHARES OF BENEFICIAL INTEREST
OUTSTANDING) $ 11.27
============
</TABLE>
See notes to financial statements.
9
<PAGE> 71
DLB GLOBAL SMALL CAPITALIZATION FUND
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
Dividends (net of foreign taxes withheld of $13,603) $ 209,041
Interest 17,958
---------
226,999
---------
EXPENSES:
Management fee 131,927
Trustees' fees 5,500
Custodian fees 65,790
Accounting and audit fees 32,269
Registration fees 20,700
Legal fees 15,532
Transfer agent fees 8,000
Printing fees 2,521
Miscellaneous 256
---------
282,495
Reduction of expenses by investment manager (84,669)
---------
Net expenses 197,826
---------
Net investment income 29,173
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) (identified cost basis):
Investment transactions 46,084
Foreign currency transactions and forward foreign currency exchange
contracts and other transactions denominated in foreign currency (18,772)
---------
Net realized gain on investments and foreign currency 27,312
---------
Change in unrealized appreciation (depreciation):
Investments 572,972
Foreign currency and forward foreign currency exchange contracts and other
transactions denominated in foreign currency (208)
---------
Net unrealized gain on investments and foreign currency 572,764
---------
Net realized and unrealized gain on investments and foreign
currency 600,076
---------
Increase in net assets from operations $ 629,249
=========
</TABLE>
See notes to financial statements.
10
<PAGE> 72
DLB GLOBAL SMALL CAPITALIZATION FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
From operations:
Net investment income $ 29,173 $ 11,312
Net realized gain on investments and foreign currency 27,312 153,011
Net unrealized appreciation on investments 572,76 868,114
and foreign currency ------------ ------------
629,249 1,032,437
------------ ------------
Distributions to shareholders:
From net investment income (9,121) (10,427)
From net realized gain on investments (27,312) (117,741)
In excess of net realized gain on investments (9,806) (46,438)
Tax return of capital (474,986) -
------------ ------------
(521,225) (174,606)
------------ ------------
Fund share transactions:
Net proceeds from sale of shares 906,178 1,136,330
Net asset value of shares issued in
reinvestment of distributions 521,225 174,606
Cost of shares reacquired (233,889) (92,441)
------------ ------------
1,193,514 1,218,495
------------ ------------
Total increase in net assets 1,301,538 2,076,326
NET ASSETS:
At beginning of period 12,585,604 10,509,278
------------ ------------
At end of period (including accumulated
distributions in excess of net investment
income of $26,926 and $354, respectively) $ 13,887,147 $ 12,585,604
============ ============
</TABLE>
See notes to financial statements.
11
<PAGE> 73
DLB GLOBAL SMALL CAPITALIZATION FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
1997 1996 1995**
-------------- -------------- --------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each
period):
Net asset value - beginning of period $ 11.19 $ 10.33 $ 10.00
----------- ----------- ----------
Income from investment operations:
Net investment income .02 .01 .07
Net realized and unrealized gain on investments .50 1.01 .33
----------- ----------- ----------
.52 1.02 .40
----------- ----------- ----------
Less distributions to shareholders:
From net investment income (.01) (.01) (.07)
From net realized gain on investments (.02) (.11) -
In excess of net realized gain on investments (.01) (.04) -
Tax return of capital (.41) - -
----------- ----------- ----------
(.44) (.16) (.07)
----------- ----------- ----------
Net asset value - end of period
$ 11.27 $ 11.19 $ 10.33
=========== =========== ==========
Total Return 4.66% 9.85% 8.96% *
Ratios and Supplemental Data:
Ratio of expenses to average net assets 1.50% 1.50% 1.46% *
Ratio of net investment income to average net assets .22% .09% 1.46% *
Portfolio turnover 44% 22% 5%
Average commission rate paid (1) $ .0115 $ .0117 -
Net assets at end of period (000 omitted) $ 13,887 $ 12,586 $ 10,509
</TABLE>
The manager has agreed with the Fund to reduce its management fee and bear
certain expenses, such that the Fund's total expenses do not exceed 1.50% of
average daily net assets on an annualized basis. If the management fee reduction
and expenses borne by the manager had been borne by the Fund and had 1995
expenses been limited to that permitted by state securities law, the net
investment income (loss) per share and ratios would have been:
<TABLE>
<S> <C> <C> <C>
Net investment income (loss) $(.05) $(.10) $.02
Ratios (to average net assets):
Expenses 2.14% 2.36% 2.50% *
Net investment income (loss) (.42)% (.77)% .42% *
</TABLE>
* Annualized.
** For the period from July 19, 1995 (commencement of operations) to December
31, 1995.
(1) For years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for security trades
on which commissions are charged. Average commission rate paid is
computed by dividing the total dollar amount of commissions paid during
the year by the total number of shares purchased and sold on which
commissions were charged.
See notes to financial statements.
12
<PAGE> 74
DLB GLOBAL SMALL CAPITALIZATION FUND
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
DLB Global Small Capitalization Fund (the "Fund") is a non-diversified
series of The DLB Fund Group (the "Trust" ). The Trust is organized as a
Massachusetts business trust and is registered under the Investment
Company Act of 1940, as amended, as an open-end management investment
company.
2. SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT VALUATION - Equity securities listed on securities exchanges or
reported through the NASDAQ system are valued at last sale prices.
Unlisted equity securities or listed equity securities for which last sale
prices are not available are valued at last quoted bid prices. Securities
for which there are no such quotations or valuations are valued at fair
value as determined in good faith by or at the direction of the Trustees.
Short-term obligations, which mature in 60 days or less, are valued at
amortized cost, which approximates market value.
REPURCHASE AGREEMENTS - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The Fund
requires that the securities purchased in a repurchase transaction be
transferred to the custodian in a manner sufficient to enable the Fund to
obtain those securities in the event of a default. The Fund monitors, on a
daily basis, the value of the securities transferred to ensure that the
value, including accrued interest, of the securities under each repurchase
agreement is greater than amounts owed to the Fund.
FOREIGN CURRENCY TRANSLATION - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars at current exchange rates. Purchases and
sales of foreign investments and income and expenses are converted into
U.S. dollars at currency exchange rates prevailing on the respective dates
of such transactions. Security transaction gains and losses attributable
to changes in foreign currency exchange rates are recorded for financial
statement purposes as net realized gains and losses on investments. Income
and expense gains and losses that are attributable to changes in foreign
exchange rates are recorded for financial statement purposes as foreign
currency transaction gains and losses. The portion of both realized and
unrealized gains and losses on investments that results from fluctuations
in foreign currency exchange rates is not separately disclosed.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS - The Fund may enter into
forward foreign currency exchange contracts for the purchase or sale of a
specific foreign currency at a fixed price on a future date. The risks
associated with these contracts include the possible inability of
counterparties to meet the terms of the contracts and from unanticipated
movements in the value of a foreign currency relative to the U.S. dollar.
The Fund enters into forward contracts for hedging purposes only. The Fund
may enter into contracts to deliver or receive foreign currency it will
receive from or require for its normal investment activities. It may also
use contracts in a manner intended to protect foreign currency-denominated
securities from declines in value resulting from unfavorable exchange rate
movements. Forward foreign currency exchange contracts are adjusted by the
daily change in the exchange rates of the underlying currencies, and any
gains or losses are recorded for financial statement purposes as
unrealized until the contract settlement date.
13
<PAGE> 75
INVESTMENT TRANSACTIONS AND INCOME - Investment transactions are recorded
on the trade date. Dividend income is recorded on the ex-dividend date.
Dividend payments received in additional securities are recorded in an
amount equal to the value of the securities. Interest income is recorded
on the accrual basis.
TAXES AND DISTRIBUTIONS - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the "Code") applicable to
regulated investment companies and to distribute to shareholders all of
its taxable income, including any net realized gain on investments.
Accordingly, no provision for federal income or excise tax is necessary.
The Fund files a tax return annually using tax accounting methods required
by the Code that may differ from generally accepted accounting principles,
the basis on which these financial statements are prepared. Accordingly,
the amount of net investment income and net realized gain reported in
these financial statements may differ from that reported on the Fund's tax
return, and, consequently, the character of distributions to shareholders
reported in the financial highlights may differ from that reported to
shareholders on Form 1099-DIV. Foreign taxes are provided with respect to
interest and dividend income earned in foreign currencies in accordance
with applicable tax rates and, to the extent unrecoverable, are recorded
as a reduction of net investment income.
Distributions to shareholders are recorded on the ex-dividend date. The
Fund distinguishes between distributions for tax purposes and financial
reporting purposes. Only distributions in excess of tax-basis earnings and
profits are reported as a return of capital. Differences between income
for the financial statements and tax-basis earnings and profits may result
in temporary over-distributions for financial statement purposes, which
are classified as distributions in excess of net investment income or
accumulated undistributed net realized gains. During the year ended
December 31, 1997, $23,803 was reclassified from accumulated distributions
in excess of net realized gains on investments and foreign currency
transactions to accumulated distributions in excess of net investment
income due to differences between financial reporting and tax accounting
for foreign currency transactions. In addition, $22,821 was redesignated
as a distribution from accumulated distributions in excess of net
investment income. These changes had no effect on net assets or net asset
value per share.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
3. TRANSACTIONS WITH AFFILIATES
The Fund engages David L. Babson & Co. Inc. ("Babson") to provide
investment advisory and administrative services, and general office
facilities. The fee for such service is computed daily and paid monthly at
an effective annual rate of 1.00% of average daily net assets. For the
period ended December 31, 1997, the management fee amounted to $131,927,
of which $26,418 was waived by Babson. Additionally, $58,251 of Fund
expenses were borne by Babson.
Babson has entered into a sub-advisory agreement with Babson-Stewart Ivory
International ("BSII"), an affiliate of Babson, with respect to the
management of the international component of the Fund's portfolio. Under
the sub-advisory agreement, Babson pays BSII a monthly fee at the annual
rate of .50% of average daily net assets.
14
<PAGE> 76
The Fund pays no compensation directly to those of its Trustees who also
are officers of the investment manager, or to the officers of the Fund,
all of whom receive remuneration for their services to the Fund from
Babson.
4. PORTFOLIO SECURITIES
Purchases and sales of investments, other than short-term obligations,
aggregated $5,991,682 and $5,598,528, respectively.
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Fund, as computed on a federal income tax basis,
are as follows:
<TABLE>
<S> <C>
Aggregate cost $12,198,713
===========
Gross unrealized appreciation $ 2,845,690
Gross unrealized depreciation (1,057,922)
-----------
Net unrealized appreciation $ 1,787,768
===========
</TABLE>
5. SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December December
31, 1997 31, 1996
------------ ------------
<S> <C> <C>
Shares sold 81,079 100,497
Shares issued in reinvestment
of distributions 46,413 15,604
Redemptions (20,517) (8,189)
------- -------
Net increase 106,975 107,912
======= =======
</TABLE>
6. FINANCIAL INSTRUMENTS
The Fund trades financial instruments with off-balance sheet risk in the
normal course of its investing activities in order to manage exposure to
such market risks as changes in interest rates and foreign currency
exchange rates. These financial instruments include forward foreign
currency exchange contracts. The notional or contractual amounts of these
instruments represent the Fund's investment in particular classes of
financial instruments and does not necessarily represent the amounts
potentially subject to risk. The measurement of risks associated with
these instruments is meaningful only when all related and offsetting
transactions are considered. The Fund did not have any open financial
instruments at December 31, 1997.
15
<PAGE> 77
7. RISKS ASSOCIATED WITH FOREIGN INVESTMENTS
Investing in securities issued by companies whose principal business
activities are outside the United States may involve significant risks not
present in domestic investments. For example, there is generally less
publicly available information about foreign companies, particularly those
not subject to disclosure and reporting requirements of the U.S.
securities laws. Foreign issuers are generally not bound by uniform
accounting, auditing, and financial reporting requirements and standards
of practice comparable to those applicable to domestic issuers.
Investments in foreign securities also involve the risk of possible
adverse changes in investment or exchange control regulations,
expropriation or confiscatory taxation, limitation on the removal of funds
or other assets of the Fund, political or financial instability or
diplomatic and other developments that could affect such investments.
Foreign stock markets, while growing in volume and sophistication, are
generally not as developed as those in the United States, and securities
of some foreign issuers (particularly those located in developing
countries) may be less liquid and more volatile than securities of
comparable U.S. companies. In general, there is less overall government
supervision and regulation of foreign securities markets, broker-dealers,
and issuers than in the United States.
16
<PAGE> 78
[DLB LOGO]
THE DLB GLOBAL BOND FUND
ANNUAL REPORT
DECEMBER 31, 1997
[EXPERIENCE TO MANAGE THE FUTURE]
<PAGE> 79
DLB GLOBAL BOND FUND
Manager's Commentary
THE DLB GLOBAL BOND FUND ENDED THE FOURTH QUARTER OUTPERFORMING THE JP MORGAN
GLOBAL BOND INDEX BY 127 BASIS POINTS, BRINGING ITS FULL YEAR EXCESS RETURN OVER
THE BENCHMARK TO 516 BASIS POINTS. The information ratio, which is the manager's
ratio of excess returns relative to risk undertaken, stood at 1.19. This means
that the strategy added 119 basis points for every 100 basis points of active
risk. According to Lipper Analytical Services, the DLB Global Bond Fund ranked
in the top quartile of all global bond funds for 1997.
THE FIRST HALF OF THE YEAR WAS CHARACTERIZED BY A SIGNIFICANT DECLINE IN YIELDS
ACROSS MOST WORLD MARKETS. This was in spite of a considerable amount of
relatively bad news for interest rates.
THE MOVE WAS LED BY THE SO-CALLED HIGH YIELDING EUROPEAN CURRENCIES (ITALY,
SPAIN, ETC.) AS FUNDAMENTALS IN THESE COUNTRIES CONTINUED TO IMPROVE, AND
WORRIES OF A DELAY OR BREAK IN THE EUROPEAN MONETARY UNION (EMU) WANED. On the
negative side, the Federal Reserve tightening in March, continued strength in
the U.S. economy, the elections in France and the U.K. (both won by the
Socialists), and tightening in monetary policy in the U.K. were all dismissed by
the market when it realized that inflationary pressures were not building after
all. The ever-improving U.S. fiscal situation has also been very benign for
interest rates.
THE THIRD QUARTER WAS HIGHLIGHTED BY A STRONG PERFORMANCE OF ALL FIXED INCOME
MARKETS. The bull market was led again by the peripheral countries, with bullish
sentiment in Italy regarding government pension reform and expectations of
another Bank of Italy rate cut. The core European countries, however,
underperformed as the Bundesbank hiked rates. In the dollar bloc, continued
favorable inflation in the U.S. boosted bond returns by 3.4% in the third
quarter. In Australia, the release of poor employment figures and stagnant
economic growth caused market participants to expect the Reserve Bank of
Australia to cut rates by 50 basis points in the near future. In Japan, Japanese
Government Bonds rallied to an all time high, driving the yield of a 10 year
security to 1.87%. This rally was fueled by the dismal economic outlook and the
11% drop in second quarter GDP.
THE FOURTH QUARTER HAS BEEN HIGHLIGHTED BY THE LATEST DEVELOPMENT IN THE WORLD
ECONOMIES, NAMELY THE COLLAPSE OF SOUTHEAST ASIAN CURRENCIES AND THE
ACCOMPANYING DROP IN EQUITY MARKETS. Korea was the most affected by the turmoil
as its bonds were
<PAGE> 80
DLB GLOBAL BOND FUND
Manager's Commentary
downgraded to below investment grade status. European markets performed well
throughout the fourth quarter, driven by inflation optimism and worries of a
possible global slowdown in growth. EMU convergence led to stronger performance
in Southern European countries. In the U.S., the Federal Reserve left rates
unchanged in the fourth quarter, thus raising them only once by 25 basis points
during the year. Markets continued to rise on the back of inflation optimism
even though the country is experiencing the tightest labor markets seen in 20
years. In Japan, the announcement of a 2 trillion yen tax cut was greeted with
disappointment, as it was perceived to be not enough to insure a quick recovery.
The U.S. dollar strengthened throughout the year (up 11% against the yen and 14%
against the deutschemark), and the Fund capitalized on that strength by being
hedged into US dollars.
IN SUMMARY, WE BELIEVE THE CURRENT ECONOMIC ENVIRONMENT IS QUITE CONSTRUCTIVE
FOR FIXED INCOME INVESTMENTS. Low inflation and an extremely benign fiscal
position are the main factors supporting the fixed income markets at the moment.
The problems in emerging markets can only add to this positive picture. Markets
that haven't reacted to the emerging market events, or that are pricing
considerably monetary tightening in the near future, are prime candidates for
establishing long positions. Japanese bonds that should be candidates for
further rate declines (given that the crisis is happening in their backyard)
will be affected negatively by portfolio reallocations to support the stock
market.
<PAGE> 81
DLB GLOBAL BOND FUND
Growth of a $100,000 Investment
Cumulative Total Return Since Inception 8/26/96
DLB Global JP Morgan
Fund Global Gov't
----------- ------------
$100,000.00 $100,000.00
08-31-96 $100,000.00 $99,890.00
09-30-96 $101,300.00 $100,439.40
10-31-96 $102,697.94 $102,428.10
11-30-96 $104,002.20 $103,892.82
12-31-96 $103,222.19 $103,165.57
01-31-97 $103,635.06 $100,586.43
02-28-97 $104,464.16 $99,892.38
03-31-97 $103,325.50 $99,133.20
04-30-97 $104,152.10 $98,578.05
05-31-97 $104,568.71 $100,904.50
06-30-97 $104,882.42 $102,054.81
07-31-97 $106,539.56 $101,677.20
08-31-97 $105,953.59 $101,555.19
09-30-96 $107,818.37 $103,809.72
10-31-97 $108,648.58 $106,010.48
11-30-97 $109,170.09 $104,738.36
12-31-97 $110,010.70 $104,623.14
TOTAL RETURNS (%) FOR PERIODS ENDED 12/31/97
<TABLE>
<CAPTION>
6 Months One Year Annualized
7/1/97 - 1/1/97 - Since Inception
12/31/97 12/31/97 8/26/96 - 12/31/97
<S> <C> <C> <C>
DLB GLOBAL BOND FUND 4.89 6.56 6.97
JP Morgan Global Gov't Bond Index 2.52 1.41 3.24
</TABLE>
Disclosure Statement
J.P. MORGAN GLOBAL GOVERNMENT BOND INDEX is a total return, market
capitalization weighted index, rebalanced monthly consisting of the following
countries: Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan,
Netherlands, Spain, Sweden, United Kingdom and United States.
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. Investment return and share
price will fluctuate with market conditions, and investors may have a gain or
loss when shares are sold. The fund's total return reflects an expense
limitation in effect during the periods shown. In the absence of such expense
limitation, returns would have been lower.
THIS REPORT AND THE FUND FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR
THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE DLB GLOBAL BOND FUND. The
report is not intended for distribution to prospective investors unless preceded
or accompanied by a current prospectus.
<PAGE> 82
DLB GLOBAL BOND
FUND
FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 1997 AND THE
PERIOD FROM AUGUST 26, 1996
(COMMENCEMENT OF OPERATIONS) TO
DECEMBER 31, 1996
<PAGE> 83
DLB GLOBAL BOND FUND
TABLE OF CONTENTS
<TABLE>
<S> <C>
INDEPENDENT AUDITORS' OPINION 1
FINANCIAL STATEMENTS:
Portfolio of Investments as of December 31, 1997 2-3
Statement of Assets and Liabilities as of December 31, 1997 4
Statement of Operations for the Year Ended December 31, 1997 5
Statements of Changes in Net Assets for the Year Ended December 31, 1997
and the Period from August 26, 1996 (commencement of operations) to
December 31, 1996 6
Financial Highlights for the Year Ended December 31, 1997 and the Period
from August 26, 1996 (commencement of operations) to
December 31, 1996 7
Notes to Financial Statements 8-13
</TABLE>
<PAGE> 84
INDEPENDENT AUDITORS' REPORT
To the Trustees of The DLB Fund Group and
Shareholders of DLB Global Bond Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of DLB Global Bond Fund (the "Fund") (a separate
series of The DLB Fund Group) as of December 31, 1997, the related statement of
operations for the year then ended, and the statements of changes in net assets
and the financial highlights for the year ended December 31, 1997 and the period
from August 26, 1996 (commencement of operations) to December 31, 1996. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures include confirmation of securities owned at December
31, 1997 by correspondence with the custodian. 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, such financial statements and financial highlights present
fairly, in all material respects, the financial position of DLB Global Bond Fund
at December 31, 1997, the results of its operations, the changes in its net
assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 6, 1998
<PAGE> 85
DLB GLOBAL BOND FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
BONDS - 96.9%
<TABLE>
<CAPTION>
S&P/MOODY'S
RATING PRINCIPAL
(UNAUDITED) ISSUER AMOUNT VALUE
<S> <C> <C> <C> <C>
US GOVERNMENT - 55.6%
AAA US Treasury, 6.375%, 2001 $ 3,000,000 $ 3,062,811
AAA US Treasury, 6.625%, 2007 1,000,000 1,058,750
AAA US Treasury, 6.125%, 2007 7,000,000 7,194,684
N/A US Treasury, 1998 4,650,000 4,542,529
-----------
15,858,774
US GOVERNMENT AGENCY - 10.3%
Aaa Tennessee Valley Authority, Global
Bond, 6.375%, 2006 DEM 5,000,000 2,935,471
-----------
FOREIGN GOVERNMENT - 31.1%
AAA Canadian Government, 7.00%, 2001 CAD 1,000,000 735,493
AAA Italian Republic BTPS, 9.50%, 2001 ITL 1,000,000,000 641,334
AAA Italian Republic BTPS, 6.75%, 2007 1,000,000,000 613,590
Aaa French Republic BTAN, 5.75%, 2001 FRF 13,000,000 2,236,315
Aaa French Republic OAT, 6.00%, 2025 2,000,000 336,739
Aa2 Kingdom of Spain, 8.40%, 2001 ESP 100,000,000 725,845
Aaa United Kingdom Treasury, 7.25%, 2007 GBP 1,200,000 2,108,616
AAA New Zealand Government, 8.00%, 2001 NZD 500,000 294,502
Aaa Deutschland Republic, 6.25%, 2024 DEM 2,000,000 1,158,182
-----------
8,850,616
-----------
TOTAL BONDS (identified cost $28,114,097) 27,644,861
-----------
</TABLE>
2
<PAGE> 86
PURCHASED PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS - 0.1%
<TABLE>
<CAPTION>
DESCRIPTION / EXPIRATION MONTH / STRIKE PRICE CONTRACTS
<S> <C> <C>
Financial futures contracts for 1,000 U.S.
Treasury 10 year Notes / January / 121.0 10 $ 16,562
Financial futures contracts for 1,250
Deutsche Marks / January / 57.5 15 562
-----------
Total Purchased Put Options (identified cost, $23,937) 17,124
-----------
PURCHASED CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS - 0.0%
Financial futures contracts for 1,250
Japanese Yen / January / 80.0 30 3,750
Financial futures contracts for 1,250
Japanese Yen / January / 78.5 10 3,500
-----------
Total Purchased Call Options (identified cost, $31,813) 7,250
-----------
Total Investments (identified cost $28,169,847) 27,669,235
-----------
WRITTEN PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS - (0.0)%
Financial futures contracts for 1,000 U.S.
Treasury 10 year Notes / January / 123.0
(premiums received, $3,100) 10 (2,656)
-----------
Other Assets, Less Liabilities - 2.9% 834,703
-----------
NET ASSETS - 100% $28,501,282
===========
</TABLE>
Abbreviations have been used throughout this report to
indicate amounts shown in currencies other than the U.S.
dollar. A list of abbreviations is shown below.
CAD - Canadian Dollar GBP - British Pounds
DEM - Deutsche Marks ITL - Italian Lire
ESP - Spanish Pesetas NZD - New Zealand Dollars
FRF - French Francs
See notes to financial statements
3
<PAGE> 87
DLB GLOBAL BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investments, at value (identified cost, $28,169,847) $ 27,669,235
Cash 214,386
Interest receivable 543,526
Net receivable for open forward foreign currency exchange contracts sold 126,578
Receivable from investment manager 18,492
Other assets 11,498
------------
28,583,715
------------
LIABILITIES:
Payable for daily variation margin on open futures contracts 17,167
Written options, at value (premium received, $3,100) 2,656
Management fees 13,248
Accrued expenses 49,362
------------
82,433
------------
NET ASSETS $ 28,501,282
============
NET ASSETS CONSIST OF:
Paid-in capital $ 29,235,521
Unrealized depreciation on investments and translation of assets and
liabilities in foreign currencies (451,969)
Accumulated distributions in excess of net investment income (21,541)
Accumulated distributions in excess of net realized gain on investment
and foreign currency transactions (260,729)
------------
$ 28,501,282
============
SHARES OF BENEFICIAL INTEREST OUTSTANDING 2,930,729
============
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PRICE PER
SHARE (NET ASSETS/SHARES OF BENEFICIAL INTEREST
OUTSTANDING) $ 9.72
============
</TABLE>
See notes to financial statements.
4
<PAGE> 88
DLB GLOBAL BOND FUND
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31,1997
<TABLE>
<S> <C>
INTEREST INCOME $ 1,755,429
-----------
EXPENSES:
Management fee 204,520
Trustees' fees 5,501
Custodian fee 63,303
Accounting and audit fees 36,737
Registration fees 26,866
Legal fees 20,731
Printing fees 22,317
Transfer agent fee 8,001
Miscellaneous fees 258
-----------
Total expenses 388,234
Reduction of expenses by investment manager (170,157)
-----------
Net expenses 218,077
-----------
Net investment income 1,537,352
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) (identified cost basis):
Investment transactions (134,638)
Foreign currency transactions and forward foreign currency exchange
contracts and other transactions denominated in foreign currency 1,423,129
Written options transactions (393)
Futures contracts (507,678)
-----------
Net realized gain 780,420
-----------
Change in unrealized appreciation (depreciation):
Investments (740,602)
Foreign currency and forward foreign currency exchange contracts and other
transactions denominated in foreign currency 208,950
Written options 444
Futures contracts (21,698)
-----------
Net unrealized loss (552,906)
-----------
Net realized and unrealized gain 227,514
-----------
Increase in net assets from operations $ 1,764,866
===========
</TABLE>
See notes to financial statements.
5
<PAGE> 89
DLB GLOBAL BOND FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, December 31,
1997 1996 **
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
From operations:
Net investment income $ 1,537,352 $ 471,859
Net realized gain on investments 780,420 232,460
Net unrealized appreciation (depreciation) on investments (552,906) 100,937
------------ ------------
1,764,866 805,256
------------ ------------
Distributions to shareholders:
From net investment income (1,537,352) (471,859)
In excess of net investment income (938,259) (280,141)
From net realized gain on investments -- (76,750)
------------ ------------
(2,475,611) (828,750)
------------ ------------
Fund share transactions:
Net proceeds from sale of shares 932,227 25,000,000
Net asset value of shares issued in
reinvestment of distributions 2,475,611 828,750
Cost of shares reacquired (1,077) --
------------ ------------
3,406,761 25,828,750
------------ ------------
Total increase in net assets 2,696,016 25,805,256
NET ASSETS:
At beginning of period 25,805,266 10
------------ ------------
At end of period (including accumulated distributions
in excess of net investment income of $21,541
and $57,466, respectively) $ 28,501,282 $ 25,805,266
============ ============
</TABLE>
** For the period from August 26, 1996 (commencement of operations) to December
31, 1996.
See notes to financial statements.
6
<PAGE> 90
DLB GLOBAL BOND FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Period Ended Period Ended
December 31, December 31,
1997 1996 **
------------- ------------
<S> <C> <C>
Per share data (for a share outstanding throughout each
period):
Net asset value - beginning of period $ 9.99 $ 10.00
---------- ----------
Income from investment operations:
Net investment income .58 .19
Net realized and unrealized gain on investments
and foreign currency .08 .13
---------- ----------
.66 .32
---------- ----------
Less distributions to shareholders:
From net investment income (.58) (.19)
In excess of net investment income (.35) (.11)
From net realized gain on investments and foreign
currency -- (.03)
---------- ----------
(.93) (.33)
---------- ----------
Net asset value - end of period $ 9.72 $ 9.99
========== ==========
Total Return 6.57% 3.21%
Ratios and Supplemental Data:
Ratio of expenses to average net assets .80% * .80%
Ratio of net investment income to average net assets 5.64% 5.35% *
Portfolio turnover 234% 232%
Net assets at end of period (000 omitted) $ 28,501 $ 25,805
</TABLE>
The manager has agreed with the Fund to reduce its management fee and bear
certain expenses, such that the Fund's total expenses do not exceed .80% of
average daily net assets on an annualized basis. If the management fee reduction
and expenses borne by the manager had been borne by the Fund, the investment
income per share and ratios would have been:
<TABLE>
<S> <C> <C>
Net investment income $ .52 $ .17
Ratios (to average net assets):
Expenses 1.42% 1.33% *
Net investment income 5.01% 4.81% *
</TABLE>
* Annualized.
** For the period August 26, 1996 (commencement of operations) to December 31,
1996.
See notes to financial statements.
7
<PAGE> 91
DLB GLOBAL BOND FUND
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
DLB Global Bond Fund (the "Fund") is a non-diversified series of The DLB
Fund Group (the "Trust"). The Trust is organized as a Massachusetts
business trust and is registered under the Investment Company Act of 1940
(the "1940 Act"), as amended, as an open-end management investment
company.
2. SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT VALUATION - Debt securities, including listed issues and
forward contracts, are valued on the basis of valuations furnished by
dealers or by a pricing service, with consideration to factors such as
institutional-size trading in similar groups of securities, yield,
quality, coupon rate, maturity, type of issue, trading characteristics
and other market data, without exclusive reliance upon exchange or
over-the-counter prices. Futures contracts, options and options on
futures contracts listed on commodities exchanges are valued at closing
settlement prices. Over-the-counter options are valued by brokers through
the use of a pricing model which takes into account closing bond
valuations, implied volatility and short-term repurchase rates.
Securities for which there are no such quotations or valuations are
valued at fair value as determined in good faith by or at the direction
of the Trustees. Short-term obligations, which mature in 60 days or less,
are valued at amortized cost, which approximates market value.
REPURCHASE AGREEMENTS - The Fund may enter into repurchase agreements
with institutions that the Fund's investment advisor has determined are
creditworthy. Each repurchase agreement is recorded at cost. The Fund
requires that the securities purchased in a repurchase transaction be
transferred to the custodian in a manner sufficient to enable the Fund to
obtain those securities in the event of a default. The Fund monitors, on
a daily basis, the value of the securities transferred to ensure that the
value, including accrued interest, of the securities under each
repurchase agreement is greater than amounts owed to the Fund.
REVERSE REPURCHASE AGREEMENTS - The Fund may enter into reverse
repurchase agreements in which the Fund sells securities to a bank or
dealer and agrees to repurchase them at a mutually agreed date and price.
Under the 1940 Act, reverse repurchase agreements will be regarded as a
form of borrowing by the Fund unless, at the time it enters into a
reverse repurchase agreement, it establishes and maintains a segregated
account with its custodian containing securities from its portfolio
having a value not less than the repurchase price (including accrued
interest). The Fund has established and maintained such an account for
each of its reverse repurchase agreements. Reverse repurchase agreements
involve the risk that the market value of the securities that the Fund is
obligated to repurchase under the agreement may decline below the
repurchase price. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such
buyer or its trustee or receiver may receive an extension of time to
determine whether to enforce the Fund's obligation to repurchase the
securities, and the Fund's use of the proceeds of the reverse repurchase
agreement may effectively be restricted pending such decision.
8
<PAGE> 92
FOREIGN CURRENCY TRANSLATION - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars at current exchange rates. Purchases and
sales of foreign investments, income and expenses are converted into U.S.
dollars at currency exchange rates prevailing on the respective dates of
such transactions. Security transaction gains and losses attributable to
changes in foreign currency exchange rates are recorded for financial
statement purposes as net realized gains and losses on investments.
Income and expense gains and losses that are attributable to changes in
foreign exchange rates are recorded for financial statement purposes as
foreign currency transaction gains and losses. The portion of both
realized and unrealized gains and losses on investments that results from
fluctuations in foreign currency exchange rates is not separately
disclosed.
PURCHASED OR WRITTEN OPTIONS - The Fund may purchase and sell call and
put options with respect to securities and foreign currencies. Upon the
purchase or sale of an option by the Fund, the premium paid or received
is recorded as an investment or liability, the value of which is marked
to market daily. Premiums paid or received from purchasing or writing
options which expire unexercised are treated by the Fund on the
expiration date as realized gains or losses. The difference between the
premium and the amount received or paid on effecting a closing purchase
or sale transaction, including brokerage commissions, is also treated as
a realized gain or loss. If an option is exercised, the premium paid or
received is added to the proceeds from the sale or cost of the purchase
in determining whether the Fund has realized a gain or a loss on
investment transactions. The risk associated with purchasing options is
limited to the premium originally paid. The Fund, as writer of an option,
may have no control over whether the underlying securities may be sold or
purchased and as a result bears the market risk of an unfavorable change
in the price of the security underlying the written option.
FUTURES CONTRACTS - The Fund may enter into futures contracts for the
delayed delivery of securities or foreign currency. Upon entering such
contracts, the Fund must deposit either in cash or securities an amount
equal to a specified percentage of the contract amount. Subsequent
payments are made or received by the Fund each day depending on the
fluctuations in the value of the underlying security, and are recorded
for financial statement purposes as unrealized gains or losses by the
Fund. The Fund's investments in futures contracts are designed to hedge
against anticipated future changes in interest or exchange rates.
Investments in futures may also be made in order to reduce fluctuations
in net asset value by hedging against a decline in the value of
securities or currencies owned by the Fund or an increase in the value of
securities or currencies which the Fund expects to purchase. The Fund may
also use such techniques, to the extent permitted by applicable law, as a
substitute for direct investment in foreign securities. Should interest
or exchange rates move unexpectedly, the Fund may not achieve the
anticipated benefits of the futures contracts and may realize a loss.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS - The Fund may enter into
forward foreign currency exchange contracts for the purchase or sale of a
specific foreign currency at a fixed price on a future date. The risks
associated with these contracts include the possible inability of
counterparties to meet the terms of the contracts and from unanticipated
movements in the value of a foreign currency relative to the U.S. dollar.
The Fund enters into forward contracts for hedging purposes only. The
Fund may enter into contracts to deliver or receive foreign currency it
will receive from or require for its normal investment activities. It may
also use contracts in a manner intended to protect foreign
currency-denominated securities from declines in value resulting from
unfavorable exchange rate movements. Forward foreign currency
9
<PAGE> 93
exchange contracts are adjusted by the daily change in the exchange rates
of the underlying currencies, and any gains or losses are recorded for
financial statement purposes as unrealized until the contract settlement
date.
INVESTMENT TRANSACTIONS AND INCOME - Investment transactions are recorded
on the trade date. Interest income is recorded on the accrual basis. All
premium and original issue discount are amortized or accreted for
financial statement and tax reporting purposes as required by federal
income tax regulations.
TAXES AND DISTRIBUTIONS - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the "Code") applicable to
regulated investment companies and to distribute to shareholders all of
its taxable income, including any net realized gain on investments.
Accordingly, no provision for federal income or excise tax is necessary.
At December 31, 1997, the Fund, for federal income tax purposes, had
$208,993 in capital loss carryforwards, which expires December 31, 2005.
To the extent permitted by the Code, capital loss carryovers will reduce
taxable income arising from future net realized gain on investments, if
any, and thus will reduce the amount of the distributions to shareholders
that would otherwise be necessary. The Fund files a tax return annually
using tax accounting methods required by the Code that may differ from
generally accepted accounting principles, the basis on which these
financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported in these financial
statements may differ from that reported on the Fund's tax return, and,
consequently, the character of distributions to shareholders reported in
the financial highlights may differ from that reported to shareholders on
Form 1099-DIV. Foreign taxes are provided with respect to interest and
dividend income earned in foreign currencies in accordance with
applicable tax rates and, to the extent unrecoverable, are recorded as a
reduction of net investment income.
Distributions to shareholders are recorded on the ex-dividend date. The
Fund distinguishes between distributions for tax purposes and financial
reporting purposes. Only distributions in excess of tax-basis earnings
and profits are reported as a return of capital. Differences between
income for the financial statements and tax-basis earnings and profits
may result in temporary over-distributions for financial statement
purposes, which are classified as distributions in excess of net
investment income or accumulated undistributed net realized gains. During
the year ended December 31, 1997, $974,184 was reclassified from
accumulated distributions in excess of net investment income to
accumulated distributions in excess of net realized gain on investments
and foreign currency transactions due to differences between financial
reporting and tax accounting for realized gains on investments and
foreign currency transactions. This change had no effect on net assets or
net asset value per share.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
10
<PAGE> 94
3. TRANSACTIONS WITH AFFILIATES
The Fund engages David L. Babson & Co. Inc. ("Babson") to provide
investment advisory and administrative services, and general office
facilities. The fee for such services is computed daily and paid monthly
at an effective annual rate of .75% of average daily net assets. For the
year ended December 31, 1997, the management fee amounted to $204,520, of
which $54,592 was waived by Babson. Additionally, $115,565 of Fund
expenses were borne by Babson.
Babson has entered into a sub-advisory agreement with Potomac Babson
Incorporated ("PBI") with respect to the management of the international
component of the Fund's portfolio. Under the sub-advisory agreement,
Babson pays PBI a monthly fee at the annual rate of .65% of average daily
net assets. PBI is a 60% owned subsidiary of Babson.
The Fund pays no compensation directly to those of its Trustees who also
are officers of the investment manager, or to the officers of the Fund,
all of whom receive remuneration for their services to the Fund from
Babson.
4. PORTFOLIO SECURITIES
Purchases and sales of investments, other than purchased options and
short-term obligations, were as follows:
<TABLE>
<CAPTION>
Purchases Sales
----------- -----------
<S> <C> <C>
U.S. Government securities $56,561,383 $54,304,791
=========== ===========
Investments (non-U.S. Government securities) $ 6,862,431 $ 6,392,734
=========== ===========
</TABLE>
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Fund, as computed on a federal income tax basis,
are as follows:
<TABLE>
<S> <C>
Aggregate cost $28,169,847
===========
Gross unrealized depreciation $(1,750,438)
Gross unrealized appreciation 1,249,826
-----------
Net unrealized depreciation $ (500,612)
===========
</TABLE>
11
<PAGE> 95
5. SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par
value). Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, December 31,
1997 1996 **
----------- ------------
<S> <C> <C>
Shares sold 92,967 2,500,000
Shares issued in reinvestment
of distributions 254,910 82,959
Redemptions (107) --
-------- ---------
Net increase 347,770 2,582,959
======== =========
</TABLE>
** For the period August 26, 1996 (commencement of operations) to
December 31, 1996.
6. FINANCIAL INSTRUMENTS
The Fund trades financial instruments with off-balance sheet risk in the
normal course of its investing activities in order to manage exposure to
such market risks as changes in interest rates and foreign currency
exchange rates. These financial instruments include forward foreign
currency exchange contracts, futures contracts and written option
contracts. The notional or contractual amounts of these instruments
represent the Fund's investment in particular classes of financial
instruments and does not necessarily represent the amounts potentially
subject to risk. The measurement of risks associated with these
instruments is meaningful only when all related and offsetting
transactions are considered. A summary of obligations under these
financial instruments at December 31, 1997 is as follows:
Forward Foreign Currency Exchange Contracts
<TABLE>
<CAPTION>
Net
In Unrealized
Settlement Contracts to Exchange Contracts Appreciation
Date Deliver/Receive For at Value (Depreciation)
---------- --------------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Sales 1/30/98 CAD 1,077,000 $ 751,046 $ 752,857 $ (1,811)
1/30/98 DEM 7,560,000 4,254,361 4,209,518 44,843
1/30/98 ESP 117,370,000 779,867 768,833 11,034
1/30/98 FRF 16,238,000 2,730,452 2,702,325 28,127
1/30/98 GBP 1,301,000 2,159,660 2,133,770 25,890
1/30/98 ITL 2,243,475,000 1,285,571 1,267,286 18,285
1/30/98 NZD 524,000 303,396 303,186 210
----------- ----------- ----------
$12,264,353 $12,137,775 $ 126,578
=========== =========== ==========
</TABLE>
At December 31, 1997, the Fund had sufficient cash and securities to
cover any commitments under these contracts.
12
<PAGE> 96
Futures Contracts
<TABLE>
<CAPTION>
Unrealized
Appreciation
Expiration Contracts Position (Depreciation)
---------- ------------------------- -------- --------------
<S> <C> <C> <C>
March 1998 30 U.S. Treasury Futures Short $(21,712)
March 1998 20 Deutsche Marks Futures Long (7,550)
March 1998 3 German 10-year Futures Short (2,976)
--------
$(32,238)
========
</TABLE>
At December 31, 1997, the Fund had sufficient cash and securities to
cover margin requirements on open futures contracts.
Written Option Transactions
<TABLE>
<CAPTION>
1997 Puts
----------------------
Contracts Premiums
--------- --------
<S> <C> <C>
Written options outstanding at beginning of period -- $ --
Options written 145 56,291
Options closed (135) (53,191)
---- --------
Written options outstanding at end of period 10 $ 3,100
==== ========
</TABLE>
At December 31, 1997, the Fund had sufficient cash and securities to
cover any commitments under these contracts.
7. RISKS ASSOCIATED WITH FOREIGN INVESTMENTS
Investing in securities issued by companies whose principal business
activities are outside the United States may involve significant risks
not present in domestic investments. For example, there is generally less
publicly available information about foreign companies, particularly
those not subject to disclosure and reporting requirements of the U.S.
securities laws. Foreign issuers are generally not bound by uniform
accounting, auditing, and financial reporting requirements and standards
of practice comparable to those applicable to domestic issuers.
Investments in foreign securities also involve the risk of possible
adverse changes in investment or exchange control regulations,
expropriation or confiscatory taxation, limitation on the removal of
funds or other assets of the Fund, political or financial instability or
diplomatic and other developments that could affect such investments.
Foreign stock markets, while growing in volume and sophistication, are
generally not as developed as those in the United States, and securities
of some foreign issuers (particularly those located in developing
countries) may be less liquid and more volatile than securities of
comparable U.S. companies. In general, there is less overall government
supervision and regulation of foreign securities markets, broker-dealers,
and issuers than in the United States.
13
<PAGE> 97
[DLB LOGO]
THE DLB QUANTITATIVE EQUITY FUND
ANNUAL REPORT
DECEMBER 31, 1997
[EXPERIENCE TO MANAGE THE FUTURE]
<PAGE> 98
DLB QUANTITATIVE EQUITY FUND
Manager's Commentary
IT WAS YET ANOTHER INTERESTING YEAR FOR THE U.S. STOCK MARKET. The S&P 500 rose
over 30% for the second year in a row, guided by a low inflation rate and steady
GDP growth. Of course, this is the top-down view. If you look at the whole year,
the last quarter brought some unfortunate economic surprises from Asia.
Suddenly, investors discovered that much of our economic growth (on the margin)
is globally derived. Despite this turn of events, the S&P 500 has "settled" into
a trading range, as investors wait for quarterly/annual earnings reports in
early 1998.
LARGE CAPITALIZATION STOCKS INVESTED IN THE "VALUE" STYLE DROVE THIS YEAR'S
PERFORMANCE. Basically, those stocks in the S&P 500 (the large ones) with low
price multiples (price to earnings or price to book) did very well.
THE FUND, WHICH IS INVESTED IN A "CORE" STYLE, OUTPERFORMED ITS BENCHMARK, THE
RUSSELL 1000 GROWTH INDEX, FOR THE YEAR. Over the life of the Fund, we continue
to outperform our benchmark, as well as the S&P 500 (the ubiquitous overall
benchmark).
THE FUND, BY DESIGN IS CONSTRUCTED TO BE NEUTRAL TO THE RUSSELL 1000 GROWTH
INDEX. This has the effect of being sector neutral (having roughly the same
economic sector weight) to this benchmark. In addition, other characteristics
such as beta (average propensity of the portfolio to move in concert with the
market), dividend yield, and market capitalization are held neutral to the
benchmark. The neutral stance allows us to focus on picking the best stocks in
each sector without engaging in risky market timing.
OUR STOCK PICKING WAS QUITE GOOD FOR THE FIRST THREE QUARTERS OF THE YEAR. The
first calendar quarter was led by value-oriented selections, as we saw calendar
1996 earnings come in at or above targets. The second and third quarters were
led by momentum-oriented stocks as the market bid those stocks with strong
year-over-year earnings comparisons up.
FOR THE LAST QUARTER, HIGH RELATIVE STRENGTH STOCKS (THOSE WITH SUCCESSFUL STOCK
PRICE RECORDS OVER THE PREVIOUS 12 MONTHS) DID POORLY DURING THE FOURTH QUARTER.
In broad terms, the earnings momentum investors owned the high relative strength
stocks which are the stocks that did well last year and have strong earnings
momentum. As earnings flatten for a stock, as we saw in the fourth quarter,
earnings momentum investors tend to exit the stock -- temporarily depressing the
stock's price.
<PAGE> 99
DLB QUANTITATIVE EQUITY FUND
MANAGER'S COMMENTARY
With our stock picking models coincidentally weighted towards these stocks, our
performance suffered.
OUR STRATEGY HAS SEEN PERIODS OF UP TO 6 MONTHS WHERE STOCK FUNDAMENTALS ARE
IGNORED; TYPICALLY, OCCURRING AT ECONOMIC INFLECTION POINTS (WHEN RECESSION
BEGINS) OR EXTERNAL EVENTS (SUCH AS THE INVASION OF KUWAIT OR OCTOBER'S ASIAN
PROBLEM). As the market refocuses on the fundamentals of a stock, we tend to
have our strongest outperformance.
WE REMAIN FULLY INVESTED. The characteristics of the portfolio remain neutral to
the Russell 1000 Growth Index in most characteristics: beta, capitalization,
yield, and sector weightings. Our positions are drawn from the Russell 1000
membership.
<PAGE> 100
DLB QUANTITATIVE EQUITY FUND
Growth of a $100,000 Investment
Cumulative Total Return Since Inception 8/26/96
DLB Quantitative Russell 1000 Growth
---------------- -------------------
$100,000.00 $100,000.00
08-96 $98,500.00 $100,240.00
09-30-96 $106,399.70 $107,537.47
10-31-96 $110,102.41 $106,182.70
11-30-96 $120,098.71 $116,307.22
12-31-96 $118,502.38 $114,027.60
01-31-97 $127,449.31 $122,020.93
02-28-97 $128,163.03 $121,191.19
03-31-97 $123,362.55 $114,634.74
04-30-97 $131,920.62 $122,246.49
05-31-97 $139,849.05 $131,072.69
06-30-97 $144,631.89 $136,315.60
07-31-97 $160,281.06 $148,365.89
08-31-97 $154,382.71 $139,886.49
09-30-96 $164,510.22 $146,559.07
10-31-97 $153,510.22 $141,136.38
11-30-97 $159,553.84 $147,134.68
12-31-97 $156,674.07 $148,782.58
TOTAL RETURNS FOR PERIODS ENDED 12/31/97
<TABLE>
<CAPTION>
6 Months One Year Annualized
7/1/97 - 1/1/97 - Since Inception
12/31/97 12/31/97 8/26/96 - 12/31/97
<S> <C> <C> <C>
DLB QUANTITATIVE GROWTH FUND 8.33 32.22 37.29
Russell 1000 Growth 9.15 30.49 32.37
</TABLE>
RUSSELL 1000 GROWTH INDEX contains those Russell 1000 securities with a
greater-than-average growth orientation. Securities in this index tend to
exhibit higher price-to-book and price-earnings ratios, lower dividend yields
and higher forecasted growth values than the Value universe.
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. Investment return and share
price will fluctuate with market conditions, and investors may have a gain or
loss when shares are sold. The fund's total return reflects an expense
limitation in effect during the periods shown. In the absence of such expense
limitation, returns would have been lower.
THIS REPORT AND THE FUND FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR
THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE DLB QUANTITATIVE EQUITY FUND.
The report is not intended for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
<PAGE> 101
DLB QUANTITATIVE
EQUITY FUND
FINANCIAL STATEMENTS FOR THE
YEAR ENDED DECEMBER 31, 1997 AND THE
PERIOD FROM AUGUST 26, 1996
(COMMENCEMENT OF OPERATIONS) TO
DECEMBER 31, 1996
<PAGE> 102
DLB QUANTITATIVE EQUITY FUND
TABLE OF CONTENTS
<TABLE>
<S> <C>
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS:
Portfolio of Investments as of December 31, 1997 2-6
Statement of Assets and Liabilities as of December 31, 1997 7
Statement of Operations for the Year Ended December 31, 1997 8
Statements of Changes in Net Assets for the Year Ended December 31, 1997
and the Period from August 26, 1996 (commencement of operations) to
December 31, 1996 9
Financial Highlights for the Year Ended December 31, 1997 and the Period
from August 26, 1996 (commencement of operations) to
December 31, 1996 10
Notes to Financial Statements 11-12
</TABLE>
<PAGE> 103
INDEPENDENT AUDITORS' REPORT
To the Trustees of The DLB Fund Group and
Shareholders of DLB Quantitative Equity Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of DLB Quantitative Equity Fund (the "Fund") (a
separate series of The DLB Fund Group) as of December 31, 1997, the related
statement of operations for the year then ended, and the statements of changes
in net assets and the financial highlights for the year ended December 31, 1997
and the period from August 26, 1996 (commencement of operations) to December 31,
1996. These financial statements and financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures include confirmation of securities owned at December
31, 1997 by correspondence with the custodian. 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, such financial statements and financial highlights present
fairly, in all material respects, the financial position of DLB Quantitative
Equity Fund at December 31, 1997, the result of its operations, the changes in
its net assets, and its financial highlights for the respective stated periods
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 6, 1998
<PAGE> 104
DLB QUANTITATIVE EQUITY FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
COMMON STOCKS - 99.0%
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
AEROSPACE - 1.5%
General Dynamics Corporation 3,200 $ 276,600
Raytheon Company 19 943
Thiokol Corporation 1,300 105,625
----------
383,168
----------
AIRLINES - 0.8%
UAL Corporation * 2,300 212,750
----------
APPAREL - 9.5%
Jones Apparel Group Inc. * 12,100 520,300
Liz Claiborne, Inc. 12,600 526,838
Nike, Inc. 1,300 51,025
Ross Stores Incorporated 11,900 432,863
VF Corporation 14,000 643,125
Warnaco Group 7,000 219,625
----------
2,393,776
----------
AUTO & TRUCK MANUFACTURERS - 1.8%
Ford Motor Company 9,100 443,056
General Motors Corporation 300 18,188
----------
461,244
----------
BANKS - 1.7%
The Chase Manhattan Corporation 1,300 142,350
First Chicago NBD Corporation 3,300 275,550
----------
417,900
----------
BEVERAGES - 1.5%
The Coca-Cola Company 5,800 386,425
----------
BUILDING SUPPLIES - 0.2%
Owens Corning 1,200 40,950
----------
</TABLE>
2
<PAGE> 105
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
CHEMICALS - 1.6%
Solutia Incorporated 5,900 $ 157,456
Union Carbide Corporation 5,500 236,156
----------
393,612
----------
COMPUTERS - 9.5%
Compaq Computer Corporation 13,750 776,016
Dell Computer Corporation * 7,600 638,400
International Business Machines Corporation 5,500 575,094
Quantum Corporation * 1,600 32,100
Storage Technology Corporation * 6,000 371,625
----------
2,393,235
----------
COMPUTER SERVICES - 0.9%
Computer Associates International, Inc. 4,350 230,006
----------
COMPUTER SOFTWARE - 5.3%
Cadence Design Systems, Inc. * 3,800 93,100
Microsoft Corporation * 9,500 1,227,875
----------
1,320,975
----------
CONSTRUCTION - 1.9%
Case Corporation 6,900 417,019
USG Corporation 1,400 68,600
----------
485,619
----------
DISCOUNT RETAIL - 0.8%
The TJX Companies Inc. 3,400 116,875
Wal Mart Stores Inc. 2,300 90,706
----------
207,581
----------
DIVERSIFIED - 2.6%
Litton Industries * 11,400 655,500
----------
DOMESTIC OIL - 0.1%
Phillips Petroleum Company 200 9,725
Sun Company, Inc. 200 8,413
----------
18,138
----------
</TABLE>
3
<PAGE> 106
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
DRUGS - 12.8%
Bristol-Meyers Squibb Company 11,100 $1,050,338
Eli Lilly & Company 300 20,888
Merck & Co., Inc. 11,400 1,211,250
Schering-Plough Corporation 15,100 938,088
----------
3,220,564
----------
ELECTRICAL EQUIPMENT - 4.2%
General Electric Company 11,500 843,813
W.W. Grainger, Inc. 2,200 213,813
----------
1,057,626
----------
ELECTRICAL POWER - 0.3%
GPU Incorporated 2,000 84,250
----------
FINANCIAL SERVICES - 3.0%
Lehman Brothers Holdings Inc. 10,600 540,600
The Money Store Inc. 6,900 144,900
Morgan Stanley, Dean Witter Discover & Co. 1,300 76,863
----------
762,363
----------
FOOD PRODUCERS - 5.6%
ConAgra, Inc. 14,000 459,375
Dean Foods Company 5,000 297,500
Interstate Bakeries Corporation 17,400 650,325
----------
1,407,200
----------
FOOD RETAILERS - 0.9%
The Kroger Co. 6,000 221,625
----------
GENERAL RETAIL - 2.0%
Federated Department Stores Inc. * 11,700 503,831
----------
INSURANCE COMPANIES - 2.6%
CIGNA Corporation 2,100 363,431
Old Republic International Corp. 4,000 148,750
Wellpoint Health Networks Inc. * 3,400 143,650
----------
655,831
----------
</TABLE>
4
<PAGE> 107
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
INTERNATIONAL OIL - 1.0%
Exxon Corporation 4,200 $ 256,988
----------
MACHINERY & EQUIPMENT - 4.4%
AGCO Corporation 2,800 81,900
Aeroquip-Vickers Inc. 6,000 294,375
Caterpillar Inc. 11,400 553,613
Deere & Company 3,000 174,938
----------
1,104,826
----------
MEDICAL SUPPLIES & SERVICES - 6.7%
Abbott Laboratories 5,900 386,819
Becton Dickinson and Company 1,700 85,000
Guidant Corporation 8,800 547,800
Johnson & Johnson 4,900 322,788
Tenet Healthcare Corporation 9,900 327,938
----------
1,670,345
----------
NATURAL GAS - 0.1%
The Columbia Gas System Inc. 400 31,425
----------
OFFICE EQUIPMENT - 0.2%
Tech Data Corporation * 1,600 62,200
----------
OIL SERVICES - 2.2%
Global Marine Inc. * 17,900 438,550
Rowan Companies, Inc. * 3,300 100,650
----------
539,200
----------
PRINTING & PUBLISHING - 2.6%
American Greetings Corporation 3,100 121,288
Central Newspapers 2,700 199,631
Gannett Company, Inc. 600 37,088
Washington Post Company 600 291,900
----------
649,907
----------
</TABLE>
5
<PAGE> 108
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
RECREATION - 3.8%
G Tech Holdings Corporation * 4,000 $127,750
KingWorld Productions Inc. 5,700 329,175
MGM Grand, Inc. * 13,700 494,056
--------
950,981
--------
SEMICONDUCTORS - 1.6%
Intel Corporation 5,600 393,400
--------
SPECIALTY CHEMICALS - 1.2%
UCAR International Inc. 7,800 311,513
--------
SPECIALTY RETAIL - 1.4%
Intimate Brands, Inc. 15,100 363,344
--------
TELEPHONE - 0.9%
AT&T Corporation 3,500 214,375
--------
TOBACCO - 1.4%
UST, Inc. 3,700 136,661
Universal Corp. 5,400 222,075
--------
358,736
--------
TOTAL COMMON STOCKS
(identified cost, $19,319,929) 24,821,409
Other assets, less liabilities - 1.0% 248,074
----------
NET ASSETS - 100% $25,069,483
===========
</TABLE>
* Non-income producing securities
See notes to financial statements
6
<PAGE> 109
DLB QUANTITATIVE EQUITY FUND
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
ASSETS:
<S> <C>
Investments, at value (identified cost, $19,319,929) $ 24,821,409
Cash 274,633
Receivable from investment manager 16,997
Dividends and interest receivable 24,172
Receivable for fund shares sold 1,340
------------
25,138,551
------------
LIABILITIES:
Management fees 11,648
Accrued expenses 57,420
------------
69,068
------------
NET ASSETS $ 25,069,483
============
NET ASSETS CONSIST OF:
Paid-in capital $ 19,569,520
Unrealized appreciation on investments
5,501,480
Accumulated undistributed net investment income 7,834
Accumulated distributions in excess of net realized gain on
investment transactions (9,351)
------------
$ 25,069,483
============
SHARES OF BENEFICIAL INTEREST OUTSTANDING 1,723,525
============
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PRICE PER
SHARE (NET ASSETS/SHARES OF BENEFICIAL INTEREST
OUTSTANDING) $ 14.55
============
</TABLE>
See notes to financial statements.
7
<PAGE> 110
DLB QUANTITATIVE EQUITY FUND
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
NET INVESTMENT INCOME:
<S> <C>
Dividends $ 218,652
Interest 8,733
-----------
227,385
-----------
EXPENSES:
Management fee 151,521
Trustees' fees 5,501
Custodian fee 50,162
Accounting and audit fees 32,430
Registration costs 23,778
Printing fees 22,317
Legal fees 19,942
Transfer agent fee 8,001
Miscellaneous 258
-----------
313,910
Reduction of expenses by investment manager (132,364)
-----------
Net expenses 181,546
-----------
Net investment income 45,839
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Realized gain (identified cost basis) 1,189,437
Change in unrealized appreciation 3,708,423
-----------
Net realized and unrealized gain on investments 4,897,860
-----------
Increase in net assets from operations $ 4,943,699
===========
</TABLE>
See notes to financial statements.
8
<PAGE> 111
DLB QUANTITATIVE EQUITY FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, December 31,
1997 1996 **
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
From operations:
Net investment income $ 45,839 $ 19,206
Net realized gain on investments 1,189,437 356,106
Net unrealized appreciation on investments 3,708,423 1,793,057
------------ ------------
4,943,699 2,168,369
------------ ------------
Distributions to shareholders:
From net investment income (43,840) (13,371)
From net realized gain on investments (1,335,243) (210,300)
In excess of realized gains (9,351) --
------------ ------------
(1,388,434) (223,671)
------------ ------------
Fund share transactions:
Net proceeds from sale of shares 6,349,810 11,728,918
Net asset value of shares issued in
reinvestment of distributions 1,388,434 223,671
Cost of shares reacquired (121,323) --
------------ ------------
7,616,921 11,952,589
------------ ------------
Total increase in net assets 11,172,186 13,897,287
NET ASSETS:
At beginning of period 13,897,297 10
------------ ------------
At end of period (including accumulated undistributed net
investment income of $7,834 and $5,835, respectively) $ 25,069,483 $ 13,897,297
============ ============
</TABLE>
** For the period from August 26, 1996 (commencement of operations) to December
31, 1996.
See notes to financial statements.
9
<PAGE> 112
DLB QUANTITATIVE EQUITY FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, December 31,
1997 1996 **
---------------- ---------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 11.66 $ 10.00
------------ ------------
Income from investment operations:
Net investment income .03 .01
Net realized and unrealized gain on investments 3.73 1.84
------------ ------------
3.76 1.85
------------ ------------
Less distributions to shareholders:
From net investment income (.03) (.01)
From net realized gain on investments (.83) (.18)
In excess of realized gain on investments (.01) --
------------ ------------
(.87) (.19)
------------ ------------
Net asset value - end of period $ 14.55 $ 11.66
============ ============
Total Return 32.23% 18.51%
Ratios and Supplemental Data:
Ratio of expenses to average net assets .90% .90% *
Ratio of net investment income to average net assets .23% .43% *
Portfolio turnover 46% 10%
Average commission rate paid (1) $ .0336 $ .0193
Net assets at end of period (000 omitted) $ 25,069 $ 13,897
</TABLE>
The manager has agreed with the Fund to reduce its management fee and bear
certain expenses, such that the Fund's total expenses do not exceed .90% of
average daily net assets on an annualized basis. If the management fee reduction
and expenses borne by the manager had been borne by the Fund, the net investment
income (loss) per share and ratios would have been:
<TABLE>
<S> <C> <C>
Net investment loss $ (.06) $ (.01)
Ratios (to average net assets):
Expenses 1.55% 1.82% *
Net investment loss (.43)% (.50)%*
</TABLE>
* Annualized
** For the period August 26, 1996 (commencement of operations) to December 31,
1996.
(1) Average commission rate paid is computed by dividing the total dollar
amount of commissions paid during the period by the total number of shares
purchased and sold on which commissions were charged.
See notes to financial statements.
10
<PAGE> 113
DLB QUANTITATIVE EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
DLB Quantitative Equity Fund (the "Fund") is a non-diversified series
of The DLB Fund Group (the "Trust"). The Trust is organized as a
Massachusetts business trust and is registered under the Investment
Company Act of 1940, as amended, as an open-end management investment
company.
2. SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT VALUATION - Equity securities listed on securities exchanges
or reported through the NASDAQ system are valued at last sale prices.
Unlisted equity securities or listed equity securities for which last
sale prices are not available are valued at last quoted bid prices.
Securities for which there are no such quotations or valuations are
valued at fair value as determined in good faith by or at the direction
of the Trustees.
INVESTMENT TRANSACTIONS AND INCOME - Investment transactions are
recorded on the trade date. Dividend income is recorded on the
ex-dividend date. Dividend payments received in additional securities
are recorded in an amount equal to the value of the securities.
Interest income is recorded on the accrual basis.
TAXES AND DISTRIBUTIONS - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the "Code") applicable to
regulated investment companies and to distribute to shareholders all of
its taxable income, including any net realized gain on investments.
Accordingly, no provision for federal income or excise tax is
necessary. The Fund files a tax return annually using tax accounting
methods required by the Code that may differ from generally accepted
accounting principles, the basis on which these financial statements
are prepared. Accordingly, the amount of net investment income and net
realized gain reported in these financial statements may differ from
that reported on the Fund's tax return, and, consequently, the
character of distributions to shareholders reported in the financial
highlights may differ from that reported to shareholders on Form
1099-DIV.
Distributions to shareholders are recorded on the ex-dividend date. The
Fund distinguishes between distributions for tax purposes and financial
reporting purposes. Only distributions in excess of tax-basis earnings
and profits are reported as a return of capital. Differences between
income for the financial statements and tax-basis earnings and profits
may result in temporary over-distributions for financial statement
purposes, which are classified as distributions in excess of net
investment income or accumulated undistributed net realized gains.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
11
<PAGE> 114
3. TRANSACTIONS WITH AFFILIATES
The Fund engages David L. Babson & Co. Inc. ("Babson") to provide
investment advisory and administrative services and general office
facilities. The fee for such services is computed daily and paid
monthly at an effective annual rate of .75% of average daily net
assets. For the year ended December 31, 1997, the management fee
amounted to $151,521, of which $40,577 was waived by Babson.
Additionally, $91,787 of Fund expenses were borne by Babson.
The Fund pays no compensation directly to those of its Trustees who
also are officers of the investment manager, or to the officers of the
Fund, all of whom receive remuneration for their services to the Fund
from Babson.
4. PORTFOLIO SECURITIES
Purchases and sales of investments, other than short-term obligations,
aggregated $15,442,357 and $8,148,389, respectively.
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Fund, as computed on a federal income tax
basis, are as follows:
<TABLE>
<S> <C>
Aggregate cost $ 19,319,929
============
Gross unrealized appreciation $ 5,763,000
Gross unrealized depreciation (261,520)
------------
Net unrealized appreciation $ 5,501,480
============
</TABLE>
5. SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without
par value). Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, December 31,
1997 1996 **
-------- ---------
<S> <C> <C>
Shares sold 444,204 1,172,892
Shares issued in reinvestment
of distributions 95,246 19,183
Redemptions (8,001) --
-------- ---------
Net increase 531,449 1,192,075
======== =========
</TABLE>
** For the period August 26, 1996 (commencement of operations) to
December 31, 1996.
12
