<PAGE> 1
DLB
THE DLB FIXED INCOME FUND
ANNUAL REPORT
DECEMBER 31, 1998
[EXPERIENCE TO MANAGE THE FUTURE]
<PAGE> 2
DLB FIXED INCOME FUND
MANAGER'S COMMENTARY
MARKET REVIEW
DLB Fixed Income Fund shareholders came through last fall's turmoil in the
global financial markets relatively unscathed. Shareholders benefited from the
Fund's high credit quality and intermediate-term maturity structure in an
environment where investors became increasingly risk adverse, and thus, risk was
dramatically repriced. The sudden aversion to risk sparked a flight to quality,
and that flight ended up in tremendous demand for U.S. Treasury securities at
the expense of other debt instruments. Lower quality corporate issuers and
emerging market debt, in particular, were negatively impacted by the recent
crisis in the credit markets.
The wave of fear that spread over the credit markets for a brief time in
September and early October was unprecedented. The lack of liquidity and sudden
broadening of credit spreads had never been experienced before. However,
stability thankfully returned to the markets in the fourth quarter of 1998.
Liquidity improved, spreads narrowed, though not back to mid-summer levels, and
the door for issuance of corporate debt reopened.
During the fourth quarter the financial market turmoil dissipated, with the U.S.
stock market rebounding soundly and credit spreads narrowing significantly from
those encountered in August, September and early October. The Federal Reserve
was largely responsible for thwarting a potential credit crunch and calming the
markets by moving quickly to lower interest rates three times in quick
succession during this period.
Trends in corporate credit quality weakened in 1998, resulting in more
downgrades than upgrades from the major credit rating agencies. Weaker corporate
profits in an environment of continued heavy capital investment resulted in
declining measures of credit strength, especially in commodity sensitive sectors
of the economy.
For the year, interest rates declined by 80 to 100 basis points on U.S. Treasury
securities. Interest rate volatility was above average, especially in the latter
half of the year.
At the peak of the market turmoil last fall, many believed that the possibility
of the U.S. economy slipping into recession in 1999 had increased significantly.
Actions taken by the Fed mitigated that risk, and recent economic data confirm
that economy still has plenty of momentum.
<PAGE> 3
DLB FIXED INCOME FUND
MANAGER'S COMMENTARY
MARKET REVIEW
At year-end, short-term rates were around 4.65% with inflation running at under
2% and therefore, real short-term rates are still historically high. This gives
the Fed plenty of room to maneuver. Currently, the Fed's concern is not
inflation. Rather it is making sure that deflation does not spread to this
country, from other parts of the world.
<PAGE> 4
DLB FIXED INCOME FUND
MANAGER'S COMMENTARY
OUTLOOK
DESPITE ECONOMIC AND FINANCIAL PROBLEMS OVERSEAS, THE U.S. ECONOMY SHOWED
CONTINUED VIGOR THROUGH 1998 AND INTO THE START OF 1999. Lower interest rates
and falling commodity prices appear to be contributors to this strength. Because
of the robustness of the domestic economy, and the welcome fact that financial
markets have calmed, expectations that the Federal Reserve will take additional
easing actions in the near-term have waned.
AS WE COMMENCE A NEW YEAR, CONSENSUS EXPECTATIONS ARE THAT ECONOMIC GROWTH WILL
SLOW CONSIDERABLY FROM LAST YEAR'S NEAR 4% PACE. The recent strength of the
domestic economy continues to surprise most forecasters, who had been predicting
that a softer global economy and upheaval in the financial markets in 1998 would
have a greater dampening effect on business activity than has apparently
occurred. The U.S. economy has been propelled by buoyant consumption, indicative
of low unemployment, low interest rates, rising incomes and a surging stock
market, all of which have helped keep consumer confidence at record levels.
IF A SLOWDOWN OCCURS THIS YEAR, IT WILL PUT AN END TO TWO APPARENT PARADOXES
THAT ARE CURRENTLY PRESENT. First: in a global economy, how long can the U.S.
continue to grow at its recent pace while the rest of the world slows? Reduced
trade flows from Asia may improve going forward as the economies of that region
show signs of bottoming; however, growth in Europe is still slowing and with the
recent Brazilian currency devaluation it now seems certain that Latin America is
entering a period of significantly slower growth. If so, the drag of reduced
exports to those regions will have a greater negative impact on our economy than
that experienced from the Asian economic crisis. Secondly, how much longer can
strong consumer demand more than offset the significant slowdown of the
production side of the U.S. economy? Weakness in the domestic manufacturing
sector, falling capacity utilization rates and the attendant profit squeeze for
many companies could result in further cuts in capital spending programs,
leading to diminished job and income growth and eventually less consumption.
A REVERSAL IN THE COUNTRY'S DECLINING SAVINGS RATE WOULD ALSO HAVE THE EFFECT OF
LOWERING CONSUMPTION AND THEREFORE, SLOWING OVERALL ECONOMIC GROWTH. For several
months at the end of 1998, the savings rate actually turned negative.
Individuals' willingness to spend more than available
<PAGE> 5
DLB FIXED INCOME FUND
MANAGER'S COMMENTARY
OUTLOOK
disposable income (i.e. draw down savings) reflects the fact that due to the
sharp appreciation of the equity market over the past several years, household
networth has risen dramatically, even while consumers have been on a spending
spree. A slowdown in the stock market's appreciation to historical norms would
also slow net-worth growth and force consumers to return to their former
savings patterns.
<PAGE> 6
DLB FIXED INCOME FUND
MANAGER'S COMMENTARY
PORTFOLIO REVIEW
THE PRIMARY OBJECTIVES OF THE DLB FIXED INCOME FUND ARE TO ATTAIN 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 undervalued opportunities.
THE TOTAL RATE OF RETURN FOR THE DLB FIXED INCOME FUND IN 1998 was 8.04%.
Trading activity during the last half of the year was moderate and reflected a
cautionary stance due to the volatile situation in the credit markets. In light
of turbulent market conditions, our focus was twofold: we sorted out relative
value opportunities and emphasized the defensive characteristics of the
portfolio in a period of uncertainty.
SEVERAL HIGH QUALITY CORPORATE BONDS WITH MATURITIES BETWEEN ONE AND THREE YEARS
WERE ADDED TO BOTH PORTFOLIOS. In the midst of the crisis, the short end of the
corporate maturity spectrum provided tremendous buying opportunities. Over time
horizons of 6 months to one-year, breakeven analysis indicated that the
probability of short corporates underperforming Treasuries was very low. To
hedge against a further deterioration in corporate earnings, exposure to
electric utilities was increased due to the non-cyclical nature of their
business.
AT YEAR-END, THE FUND'S AVERAGE EFFECTIVE DURATION AND MATURITY WERE 5.1 YEARS
AND 8.3 YEARS, RESPECTIVELY. THE AVERAGE QUALITY OF THE PORTFOLIO WAS AA2.
PORTFOLIO TURNOVER FOR 1998 WAS 43%.
<PAGE> 7
DLB FIXED INCOME FUND
GROWTH OF A $100,000 INVESTMENT
CUMULATIVE TOTAL RETURN SINCE INCEPTION 7/25/95
[LINE GRAPH]
<TABLE>
<CAPTION>
DLB Fixed Lehman Lehman
(net of fees) Aggreg. DLB Fixed Aggreg.
------------- ------ --------- -------
<S> <C> <C> <C> <C>
$100,000.00 $100,000.00
31-Jul-95 0.10 0.15 $100,100.00 $100,150.00
31-Aug-95 1.40 1.21 $101,501.40 $101,361.82
30-Sep-95 0.89 0.97 $102,404.76 $102,345.02
31-Oct-95 1.17 1.30 $103,602.90 $103,675.51
30-Nov-95 1.45 1.50 $105,105.14 $105,230.64
31-Dec-95 1.29 1.40 $106,461.00 $106,703.87
31-Jan-96 0.88 0.66 $107,397.85 $107,408.12
28-Feb-96 -0.97 -1.74 $106,356.09 $105,539.22
31-Mar-96 -0.78 -0.70 $105,526.52 $104,800.44
30-Apr-96 -0.49 -0.56 $105,009.44 $104,213.56
31-May-96 -0.20 -0.20 $104,799.42 $104,005.13
30-Jun-96 0.99 1.34 $105,836.93 $105,398.80
31-Jul-96 0.20 0.27 $106,048.61 $105,683.38
31-Aug-96 -0.10 -0.17 $105,942.56 $105,503.72
30-Sep-96 1.57 1.74 $107,605.86 $107,339.48
31-Oct-96 2.03 2.22 $109,790.25 $109,722.42
30-Nov-96 1.61 1.71 $111,557.88 $111,598.67
31-Dec-96 -1.03 -0.93 $110,408.83 $110,560.80
31-Jan-97 0.40 0.31 $110,850.47 $110,903.54
28-Feb-97 0.20 0.25 $111,072.17 $111,180.80
31-Mar-97 -1.08 -1.11 $109,872.59 $109,946.69
30-Apr-97 1.39 1.50 $111,399.82 $111,595.89
31-May-97 0.88 0.95 $112,380.14 $112,656.05
30-Jun-97 1.26 1.19 $113,796.13 $113,996.66
31-Jul-97 2.40 2.70 $116,527.23 $117,074.57
31-Aug-97 -0.75 -0.85 $115,653.28 $116,079.44
30-Sep-97 1.42 1.48 $117,295.55 $117,797.41
31-Oct-97 1.40 1.45 $118,937.69 $119,505.48
30-Nov-97 0.18 0.46 $119,151.78 $120,055.20
31-Dec-97 1.03 1.01 $120,379.04 $121,267.76
31-Jan-98 1.32 1.28 $121,968.05 $122,819.99
28-Feb-98 -0.09 -0.08 $121,858.28 $122,721.73
31-Mar-98 0.37 0.34 $122,309.15 $123,138.98
30-Apr-98 0.46 0.52 $122,871.77 $123,779.31
31-May-98 0.83 0.95 $123,891.61 $124,955.21
30-Jun-98 0.82 0.85 $124,907.52 $126,017.33
31-Jul-98 0.16 0.21 $125,107.37 $126,281.97
31-Aug-98 1.13 1.63 $126,521.09 $128,340.36
30-Sep-98 2.71 2.34 $129,949.81 $131,343.53
31-Oct-98 -0.73 -0.53 $129,001.17 $130,647.40
30-Nov-98 0.46 0.57 $129,594.58 $131,392.10
31-Dec-98 0.36 0.30 $130,061.12 $131,786.27
</TABLE>
TOTAL RETURNS (%) FOR PERIODS ENDED 12/31/98
<TABLE>
<CAPTION>
6 Months One Year Annualized
7/1/98- 1/1/98- Since Inception
12/31/98 12/31/98 7/25/95-12/31/98
<S> <C> <C> <C>
DLB Fixed Income Fund 4.13 8.04 7.80
Lehman Brothers Aggregate 4.58 8.68 8.20
</TABLE>
DISCLOSURE STATEMENT
LEHMAN BROTHERS AGGREGATE BOND INDEX is an unmanaged index that 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.
<PAGE> 8
DLB FIXED INCOME FUND
FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 1998 AND 1997
<PAGE> 9
DLB FIXED INCOME FUND
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS:
Portfolio of Investments as of December 31, 1998 2 - 5
Statement of Assets and Liabilities as of December 31, 1998 6
Statement of Operations for the Year Ended December 31, 1998 7
Statements of Changes in Net Assets for the Years Ended
December 31, 1998 and 1997 8
Financial Highlights for the Four-Year Period Ended December 31, 1998 9
Notes to Financial Statements 10 - 12
</TABLE>
<PAGE> 10
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, 1998, the related statement of
operations for the year then ended, the statements of changes in net assets for
the years ended December 31, 1998 and 1997, and the financial highlights for
each of the years in the four-year period ended December 31, 1998. 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, 1998 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, 1998, 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.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
February 12, 1999
<PAGE> 11
DLB FIXED INCOME FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BONDS - 96.2%
S&P/MOODY'S ISSUER PRINCIPAL VALUE
BOND RATING AMOUNT
(UNAUDITED)
<S> <C> <C> <C>
US GOVERNMENT - 25.3%
AAA US Treasury Note, 5.875%, 2000 $ 350,000 $ 354,540
AAA US Treasury Note, 6.375%, 2000 300,000 305,061
AAA US Treasury Note, 6.25%, 2001 1,750,000 1,823,273
AAA US Treasury Note, 6.375%, 2001 800,000 835,000
AAA US Treasury Note, 6.00%, 2002 100,000 104,219
AAA US Treasury Note, 6.625%, 2002 775,000 819,198
AAA US Treasury Note, 11.625%, 2002 500,000 619,375
AAA US Treasury Note, 11.125%, 2003 25,000 31,551
AAA US Treasury Note, 7.25%, 2004 100,000 112,422
AAA US Treasury Note, 7.50%, 2005 75,000 85,875
AAA US Treasury Note, 5.625%, 2006 1,300,000 1,371,097
AAA US Treasury Note, 7.875%, 2021 450,000 591,822
AAA US Treasury Note, 8.125%, 2021 1,110,000 1,497,457
------------
8,550,890
------------
US GOVERNMENT AGENCY - 3.3%
AAA Federal National Mortgage Association, 5.81%, 1999 600,000 604,404
AAA Federal National Mortgage Association, 5.75%, 2003 500,000 513,280
------------
1,117,684
------------
MORTGAGES - 14.5%
AAA FHLMC Gold Pool #M90449, 5.50%, 2001 291,497 291,427
AAA FHLMC Gold Pool #G00143, 7.50%, 2023 214,252 220,093
AAA FNMA Pool #346537, 6.00%, 2011 419,192 420,441
AAA First Union Lehman CMBS, 6.56%, 2008 675,000 698,520
AAA GNMA Pool #780332, 8.00%, 2009 252,378 260,908
AAA GNMA Pool #410343, 7.50%, 2011 449,585 463,181
AAA GNMA Pool #423828, 6.00%, 2011 400,593 404,166
AAA GNMA Pool #398964, 7.50%, 2011 224,135 230,913
AAA GNMA Pool #357262, 7.50%, 2023 305,322 315,095
AAA GNMA Pool #380866, 7.00%, 2024 70,524 72,215
AAA GNMA Pool #401135, 8.50%, 2024 396,622 420,665
</TABLE>
2
<PAGE> 12
<TABLE>
<CAPTION>
S&P/MOODY'S ISSUER PRINCIPAL VALUE
BOND RATING AMOUNT
(UNAUDITED)
<S> <C> <C> <C>
MORTGAGES (CONTINUED)
AAA GNMA Pool #432175, 8.00%, 2026 $ 53,832 $ 55,951
AAA GNMA Pool #441009, 8.00%, 2026 219,714 228,364
BAA3 Green Tree Financial 1994-A, 6.90%, 2004 34,343 34,080
BAA3 Green Tree Financial 1995-A, 7.25%, 2005 163,295 164,086
AAA Green Tree Financial 1995-2 A-4, 7.85%, 2026 125,202 125,672
AAA Green Tree Financial 1995-3 A-4, 7.05%, 2025 83,790 84,131
AAA Green Tree Financial 1995-1 A-5, 8.40%, 2025 200,000 205,186
AAA Green Tree Financial 1996-2 A-3, 6.90%, 2027 200,000 203,750
-------------
4,898,844
-------------
ASSET BACKED - 4.5%
AAA California Infrastructure, 6.42%, 2008 650,000 687,206
AAA Comedco, Inc., 5.63%, 2009 850,000 844,679
-------------
1,531,885
-------------
BANKS - 1.9%
A2 Suntrust Banks, 6.00%, 2026 400,000 393,356
AA3 Wachovia Capital FRN TRST II, 5.848%, 2027 265,000 253,141
-------------
646,497
-------------
FINANCIAL - 7.6%
AA3 Associates Corp. N.A., 6.45%, 2001 500,000 512,715
A1 Ford Capital BV, 10.125%, 2000 100,000 108,325
A1 Ford Motor Credit, 6.125%, 2003 400,000 408,516
A1 GMAC, 5.33%, 2000 650,000 649,870
A2 John Deere Capital Corporation, 6.30%, 1999 250,000 250,985
AA3 Merrill Lynch & Co., Inc., 6.5%, 2001 500,000 510,830
AA3 Norwest Corp., 6.00%, 2000 150,000 151,020
-------------
2,592,261
-------------
INDUSTRIAL - 22.3%
BAA3 Airgas Inc., 7.14%, 2004 415,000 438,448
A1 Aluminum Company of America, 5.75%, 2001 500,000 504,045
BAA2 American Stores, 8.00%, 2026 235,000 276,680
A3 Cardinal Health, 6.00%, 2006 150,000 151,479
A3 Cardinal Health, 6.25%, 2008 400,000 410,092
BAA1 Champion International, 7.20%, 2026 675,000 707,738
BAA1 Comdisco Inc., 6.375%, 2001 300,000 301,299
BAA3 Commonwealth Edison Company, 7.625%, 2007 500,000 552,415
</TABLE>
3
<PAGE> 13
<TABLE>
<CAPTION>
S&P/MOODY'S ISSUER PRINCIPAL VALUE
BOND RATING AMOUNT
(UNAUDITED)
<S> <C> <C> <C>
INDUSTRIAL (CONTINUED)
A1 Consolidated Edison, 6.15%, 2008 $ 500,000 $ 522,105
BAA1 Dana Corporation, 6.50%, 2008 350,000 359,709
A1 International Business Machines, 6.22%, 2027 400,000 404,152
A2 McDonnell Douglas, 8.25%, 2000 50,000 52,057
A2 Philip Morris Companies, 7.125%, 1999 300,000 304,596
A2 Philip Morris Companies, 7.20%, 2007 175,000 190,083
BAA1 Raytheon Co., 6.45%, 2002 400,000 410,248
A3 Ryder System Inc., 8.45%, 1999 100,000 102,968
A2 Sears, Roebuck & Co., 6.50%, 2000 100,000 101,533
A2 Sears, Roebuck & Co., 6.95%, 2002 50,000 52,125
BAA1 Supervalue Inc., 7.25%, 1999 500,000 504,650
BAA3 Telecommunications Inc., 9.80%, 2012 170,000 227,011
BAA3 Time Warner Inc., 9.15%, 2023 150,000 198,170
BAA2 Tosco Corporation, 7.625%, 2006 575,000 613,600
BAA2 Worldcom Incorporated, 6.125%, 2001 175,000 177,797
-------------
7,563,000
-------------
INTERNATIONAL - 12.0%
BAA2 Canadian National Railroad, 7.00%, 2004 350,000 369,628
BAA1 Hellenic Republic, 6.95%, 2008 300,000 322,023
A2 Hydro Quebec, 8.05%, 2024 450,000 540,020
BAA2 Oslo Seismic Services, 8.28%, 2011 405,489 450,390
BAA3 Petro Geo-Services, 7.50%, 2007 400,000 414,072
BAA1 Province of Newfoundland, 7.32%, 2023 350,000 386,397
AA3 Province of Ontario, 7.75%, 2002 1,075,000 1,158,861
BAA1 Southern Investments UK, 6.375%, 2001 400,000 405,352
-------------
4,046,743
-------------
TRANSPORTATION - 2.7%
A1 Atchinson Topeka & Santa Fe, 7.75%, 1999 75,000 76,469
BAA1 Norfolk Southern, 7.05%, 2037 125,000 135,229
BAA1 Norfolk Southern, 6.70%, 2000 125,000 126,825
BAA1 United Air Lines Inc., 7.27%, 2013 290,346 293,691
BAA1 Wisconsin Central Transportation, 6.625%, 2008 300,000 304,635
-------------
936,849
-------------
</TABLE>
4
<PAGE> 14
<TABLE>
<CAPTION>
S&P/MOODY'S ISSUER PRINCIPAL VALUE
BOND RATING AMOUNT
(UNAUDITED)
<S> <C> <C> <C>
OTHER CORPORATE - 2.1%
New Jersey Economic Development Authority,
AAA 7.425%, 2029 $ 600,000 $ 705,846
------------
TOTAL BONDS (identified cost, $31,598,300) 32,590,499
REPURCHASE AGREEMENT - 2.5%
Investors Bank & Trust Repurchase Agreement, 4.25%,
dated 12/31/98, $834,863 due on 1/4/99 (secured by
Federal Government Agency securities), at cost 834,469 834,469
------------
TOTAL INVESTMENTS (identified cost, $32,432,769) 33,424,968
Other assets, less liabilities - 1.3% 433,110
------------
NET ASSETS - 100% $ 33,858,078
============
</TABLE>
See notes to financial statements.
5
<PAGE> 15
DLB FIXED INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments, at value (identified cost, $32,432,769) $ 33,424,968
Interest receivable 469,616
Receivable for fund shares sold 3,125
Receivable from investment manager 6,677
------------
33,904,386
------------
LIABILITIES:
Accrued management fees 11,498
Accrued expenses 34,810
------------
46,308
------------
NET ASSETS $ 33,858,078
============
NET ASSETS CONSIST OF:
Paid-in capital $ 32,867,471
Unrealized appreciation of investments 992,199
Accumulated distributions in excess of net realized gain on investment
transactions (8,094)
Accumulated undistributed net investment income 6,502
------------
Total $ 33,858,078
============
SHARES OF BENEFICIAL INTEREST OUTSTANDING 3,156,951
============
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PRICE
PER SHARE (NET ASSETS / SHARES OF BENEFICIAL INTEREST
OUTSTANDING) $ 10.72
============
</TABLE>
See notes to financial statements.
6
<PAGE> 16
DLB FIXED INCOME FUND
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
INTEREST INCOME $ 2,058,768
-----------
EXPENSES:
Management fee 131,644
Trustees' fees 4,669
Custodian fee 52,318
Accounting and audit fees 28,425
Registration fees 25,840
Legal fees 10,495
Transfer agent fee 8,000
Other 2,860
-----------
264,251
Reduction of expenses by investment manager (83,268)
-----------
Net expenses 180,983
-----------
Net investment income 1,877,785
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Realized gain (identified cost basis) 291,288
Change in unrealized appreciation 368,912
-----------
Net realized and unrealized gain on investments 660,200
-----------
Increase in net assets from operations $ 2,537,985
===========
</TABLE>
See notes to financial statements.
7
<PAGE> 17
DLB FIXED INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
---- ----
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
From operations:
Net investment income $ 1,877,785 $ 1,240,912
Net realized gain on investments 291,288 26,429
Net unrealized appreciation of investments 368,912 715,791
------------ ------------
2,537,985 1,983,132
------------ ------------
Distributions to shareholders:
From net investment income (1,894,627) (1,212,012)
From net realized gain on investments (290,918) --
------------ ------------
(2,185,545) (1,212,012)
------------ ------------
Fund share transactions:
Net proceeds from sales of shares 2,275,531 17,272,202
Net asset value of shares issued in
reinvestment of distributions 1,669,653 887,748
Cost of shares reacquired (2,594,499) (2,036,662)
------------ ------------
1,350,685 16,123,288
------------ ------------
Total increase in net assets 1,703,125 16,894,408
NET ASSETS:
At beginning of period 32,154,953 15,260,545
------------ ------------
At end of period (including accumulated undistributed net
investment income of $6,502 and $22,557, respectively) $ 33,858,078 $ 32,154,953
============ ============
</TABLE>
See notes to financial statements.
8
<PAGE> 18
DLB FIXED INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period Ended
Years Ended December 31, December 31,
1998 1997 1996 1995**
---- ---- ---- ------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value- beginning of period $ 10.61 $ 10.11 $ 10.26 $10.00
------- ------- ------- ------
Income from investment operations:
Net investment income .63 .42 .53 .28
Net realized and unrealized gain (loss) on investments .20 .49 (.15) .37
------- ------- ------- ------
.83 .91 .38 .65
------- ------- ------- ------
Less distributions to shareholders:
From net investment income (1) (.63) (.41) (.53) (.28)
From net realized gain on investments (.09) -- -- (.11)
------- ------- ------- ------
(.72) (.41) (.53) (.39)
------- ------- ------- ------
Net asset value- end of period $ 10.72 $ 10.61 $ 10.11 $10.26
======= ======= ======= ======
Total return 8.04% 9.03% 3.70% 14.75%*
Ratios and Supplemental Data:
Ratio of expenses to average net assets .55% .55% .55% .55%*
Ratio of net investment income to average net assets 5.71% 5.74% 6.36% 6.24%*
Portfolio turnover 50% 44% 65% 42%
Net assets at end of period (000 omitted) $33,858 $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. Without such agreement and had the 1995 expenses been
limited to that permitted by state securities law, the investment income per
share and ratios would have been:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Net investment income $ .60 $ .38 $ .44 $ .19
Ratios (to average net assets):
Expenses .80% 1.06% 1.66% 2.50%*
Net investment income 5.45% 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> 19
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"), a Massachusetts business trust. The Trust 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 - Securities purchased under agreements to resell
to the original owner are recorded at cost. The Fund may enter into such
agreements with institutions that the Fund's investment adviser has
determined to be creditworthy. The Fund requires that the securities so
purchased be transferred to the custodian under terms that enable the
Fund to obtain such securities in the event of a default. The Fund
monitors, on a daily basis, the value of the securities to assure that
such value, including accrued interest, 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 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 gains 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, which may differ from generally accepted accounting
principles, the basis on which these financial statements are prepared.
Accordingly, the net investment income and net realized gain reported in
these financial statements may differ from the amounts 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 return of capital. Differences between income
for financial reporting purposes and tax-basis earnings and profits may
result in the reporting of temporary over-distributions in
10
<PAGE> 20
the financial statements. Such over-distributions are classified as
distributions in excess of net investment income or accumulated
undistributed net realized gains. During the year ended December 31,
1998, $787 was reclassified to accumulated undistributed net investment
income from accumulated distributions in excess of net realized gain on
investment transactions due to differences between financial reporting
and tax accounting for mortgage-backed securities. 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 amounts reported in the
financial statements. Actual results could differ from those such
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, 1998, the management fee amounted to $131,644, of
which $51,131 was waived by Babson. Additionally, $32,137 of Fund
expenses were borne by Babson.
The Fund pays no compensation directly to the Trustees who also are
officers of the investment manager, nor 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 $ 4,389,480 $ 7,585,994
=========== ===========
Investments (non-U.S. Government securities) $11,707,846 $ 8,185,549
=========== ===========
</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>
<CAPTION>
<S> <C>
Aggregate cost $ 32,432,769
============
Gross unrealized appreciation $ 1,045,311
Gross unrealized depreciation (53,112)
------------
Net unrealized appreciation $ 992,199
============
</TABLE>
11
<PAGE> 21
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>
Years Ended December 31,
1998 1997
---- ----
<S> <C> <C>
Shares sold 208,434 1,635,464
Shares issued in reinvestment
of distributions 155,364 83,908
Redemptions (237,538) (197,835)
---------- ----------
Net increase 126,260 1,521,537
========== ==========
</TABLE>
12
<PAGE> 22
DLB FIXED INCOME FUND
---------------------------------------------
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.
BABSON SECURITIES CORPORATION
One Memorial Drive, Cambridge, MA 01242
March 1999
<PAGE> 23
DLB
THE DLB GLOBAL BOND FUND
ANNUAL REPORT
DECEMBER 31, 1998
[EXPERIENCE TO MANAGE THE FUTURE]
<PAGE> 24
DLB GLOBAL BOND
MANAGER'S COMMENTARY
1998 WAS A VERY GOOD YEAR FOR BONDS THROUGHOUT THE DEVELOPED WORLD. The only
exception was Japan where yields increased mildly for the year. The following
table shows the change in 2 and 10-year yields for the US, Germany and Japan.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
COUNTRY MATURITY DEC 1997 DEC 1998
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
US 2-year 5.65 4.53
10-year 5.74 4.65
JAPAN 2-year 0.63 0.77
10-year 1.95 2.22
GERMANY 2-year 4.13 3.12
10-year 5.35 3.86
-----------------------------------------------------------------------------------------
</TABLE>
THE SINGLE MOST IMPORTANT FACTOR FOR THIS WAS THE ASIAN CRISIS; HOWEVER, OTHER
FACTORS LIKE THE BENIGN INFLATION PICTURE IN SPITE OF A RELATIVELY STRONG
ECONOMY IN THE US ALSO CONTRIBUTED TO THE POSITIVE PERFORMANCE IN BONDS. The
Asian crisis spilled over into Russia and continually threatened to spread out
to Brazil and Latin America. These factors kept fixed income markets well
supported for most of the year. The straw that broke the camel's back came when
large hedged funds, especially Long Term Capital Management, ran into financial
difficulties. The Fed surprised the market by easing interest rates very
aggressively since October. The Fed cut 75 basis points from the overnight rate
in three consecutive steps of 25 basis points. These moves restored confidence
in the financial system and the crisis has abated significantly since.
In our opinion, however, what motivated the cuts was the dramatic deterioration
in market liquidity and the increase on credit risk aversion that, although
indirectly caused by the global crisis, threatened the functioning of financial
markets in the developed world. In spite of a relatively buoyant US economy,
lead by consumption, with world inflation declining, the Fed cannot afford to
allow the Banking system to contract credit leading to the possibility of
recession and deflation in the world.
THE JAPANESE ECONOMY REMAINED EXTREMELY WEAK THROUGHOUT THE YEAR, despite
efforts by Japanese authorities to stimulate it through fiscal measures and
emergency actions to restore the banking system. The Asian crisis undoubtedly
had a more damaging effect on Japan than in any of the other developed
economies.
<PAGE> 25
DLB GLOBAL BOND
MANAGER'S COMMENTARY
This has happened through both direct effects and currency effects. All measures
taken have proven ineffective and most likely the situation will remain critical
for a while. The reaction of markets to these developments has been mind
boggling. The bond market has suffered, arguably, because of the deleveraging
effects and the currency has strengthened against all odds.
THE EUROPEAN ECONOMIES THAT WERE EXPECTED TO GROW RAPIDLY AT THE BEGINNING OF
THE YEAR SUFFERED A SIGNIFICANT BLOW WHEN THE RUSSIAN CRISIS EMERGED. The export
market, which is of outmost importance for these economies, suffered a
tremendous blow as eastern European economies soften considerably as a
consequence of the crisis.
ALL IN ALL, THEN, ECONOMIES REMAINED SUBDUED, MONETARY POLICY WAS EASED AND
DISINFLATIONARY PRESSURES EMERGED MAKING THE ENVIRONMENT VERY POSITIVE FOR
BONDS. The story for the US Dollar was less benign. After significant strength
in the Dollar at the beginning of the year due to a flight to quality, the
currency weakened significantly as the market realized that Dollar strength was
in effect one of the causes of the crisis. The extent of the reversal in the
Dollar move, however, went beyond any reasonable expectations. The Dollar
weakened by more than 35% vis-a-vis the Yen in a few days in October. The move
against European currencies, although less dramatic was also very important.
Since then the Dollar has regained strength but not to previous levels.
THE DLB GLOBAL BOND FUND RETURNED 9.73% FOR THE YEAR ENDED DECEMBER 31, 1998.
The Fund suffered some underperformance vis-a-vis its benchmark - the JP Morgan
Global Government Bond Index - produced by the extraordinary move on the Yen in
October. Furthermore, most of the holdings of the Fund were moved into Dollar
assets, as the Fund's Board of Trustees decided to terminate the Fund, effective
March 1, 1999, or as soon thereafter as is practicable, and the additional risk
of holding foreign assets was not warranted.
<PAGE> 26
DLB GLOBAL BOND
GROWTH OF A $100,000 INVESTMENT
CUMULATIVE TOTAL RETURN SINCE INCEPTION 8/26/96
<TABLE>
<CAPTION>
JPM
DLB Global Global
Bond Bond
(net of fees) Index Date DLB Global Bond JPM Global Bond Index
- ------------ ------ ---- --------------- ---------------------
<S> <C> <C> <C> <C>
$100,000.00 $100,000.00
0.00 -0.11 31-Aug-96 $100,000.00 $ 99,890.00
1.30 0.55 30-Sep-96 $101,300.00 $100,439.40
1.38 1.98 31-Oct-96 $102,697.94 $102,428.10
1.27 1.43 30-Nov-96 $104,002.20 $103,892.82
- -0.75 -0.70 31-Dec-96 $103,222.19 $103,165.57
0.40 -2.50 31-Jan-97 $103,635.08 $100,586.43
0.80 -0.69 28-Feb-97 $104,464.16 $ 99,892.38
- -1.09 -0.76 31-Mar-97 $103,325.50 $ 99,133.20
0.80 -0.56 30-Apr-97 $104,152.10 $ 98,578.05
0.40 2.36 31-May-97 $104,568.71 $100,904.50
0.30 1.14 30-Jun-97 $104,882.42 $102,054.81
1.58 -0.37 31-Jul-97 $106,539.56 $101,677.20
- -0.55 -0.12 31-Aug-97 $105,953.59 $101,555.19
1.76 2.22 30-Sep-97 $107,818.37 $103,809.72
0.77 2.12 31-Oct-97 $108,648.58 $106,010.48
0.48 -1.20 30-Nov-97 $109,170.09 $104,738.36
0.77 -0.11 31-Dec-97 $110,010.70 $104,623.14
1.44 1.00 31-Jan-98 $111,594.85 $105,669.38
0.00 0.74 28-Feb-98 $111,594.85 $106,451.33
0.20 -0.75 31-Mar-98 $111,818.04 $105,652.94
0.51 1.54 30-Apr-98 $112,388.31 $107,280.00
0.50 0.43 31-May-98 $112,950.26 $107,741.30
0.70 0.28 30-Jun-98 $113,740.91 $108,042.98
0.39 0.27 31-Jul-98 $114,184.50 $108,334.70
2.78 2.76 31-Aug-98 $117,358.83 $111,324.73
2.90 5.22 30-Sep-98 $120,762.23 $117,135.88
- -0.94 2.24 31-Oct-98 $119,627.07 $119,759.73
0.19 -1.13 30-Nov-98 $119,854.36 $118,406.44
0.72 1.88 31-Dec-98 $120,717.31 $120,623.48
</TABLE>
TOTAL RETURNS(%) FOR PERIODS ENDED 12/31/98
<TABLE>
<CAPTION>
6 Months One Year Annualized
7/1/98- 1/1/98- Since Inception
12/31/98 12/31/98 8/26/96-12/31/98
<S> <C> <C> <C>
DLB GLOBAL BOND FUND 6.13 9.73 8.11
JP Morgan Global Gov't Bond Index 11.66 15.31 8.07
</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> 27
DLB GLOBAL BOND
FUND
FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 1998 AND 1997
<PAGE> 28
DLB GLOBAL BOND FUND
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS:
Portfolio of Investments as of December 31, 1998 2
Statement of Assets and Liabilities as of December 31, 1998 3
Statement of Operations for the Year Ended December 31, 1998 4
Statements of Changes in Net Assets for the Years Ended
December 31, 1998 and 1997 5
Financial Highlights for Each of the Years in the Three-Year Period
Ended December 31, 1998 6
Notes to Financial Statements 7 - 12
</TABLE>
<PAGE> 29
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, 1998, the related statement of
operations for the year then ended, and the statements of changes in net assets
for the years ended December 31, 1998 and 1997, and the financial highlights for
each of the years in the three-year period ended December 31, 1998. 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, 1998 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, 1998, 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.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
February 12, 1999
<PAGE> 30
DLB GLOBAL BOND FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BONDS - 69.6%
S&P/MOODY'S ISSUER PRINCIPAL VALUE
BOND RATING AMOUNT
(UNAUDITED)
<S> <C> <C> <C>
US GOVERNMENT - 69.6%
AAA US Treasury Note, 4.25%, 2003 $3,000,000 $ 2,960,625
AAA US Treasury Note, 5.25%, 2003 3,500,000 3,587,500
AAA US Treasury Note, 4.75%, 2008 4,000,000 4,031,252
AAA US Treasury Note, 5.5%, 2008 1,000,000 1,060,000
AAA US Treasury Note, 5.625%, 2008 6,000,000 6,401,250
AAA Interamerica Development Bank, 5.75%, 2008 3,000,000 3,092,400
-----------
TOTAL BONDS (identified cost, $21,164,905) 21,133,027
-----------
SHORT-TERM OBLIGATIONS - 29.4%
US Treasury Bill, 4.27%, 1999 3,350,000 3,322,186
US Treasury Bills, 4.395%, 1999 5,676,000 5,611,260
-----------
TOTAL SHORT-TERM OBLIGATIONS, at amortized cost 8,933,446
-----------
REPURCHASE AGREEMENT - .4%
Investors Bank & Trust Repurchase Agreement,
4.25%, dated 12/31/98, $111,184 due on 1/4/99 (secured
by Federal Government Agency securities), at cost 111,132 111,132
-----------
TOTAL INVESTMENTS
(identified cost, $30,209,483) 30,177,605
Other Assets, Less Liabilities - .6% 193,009
-----------
NET ASSETS - 100% $30,370,614
===========
</TABLE>
See notes to financial statements.
2
<PAGE> 31
DLB GLOBAL BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at value (identified cost, $30,209,483) $ 30,177,605
Interest receivable 241,867
Receivable from investment manager 19,242
------------
30,438,714
------------
LIABILITIES:
Payable for daily variation margin on open futures contracts 2,438
Accrued management fees 19,287
Accrued expenses 46,375
------------
68,100
------------
NET ASSETS $ 30,370,614
============
NET ASSETS CONSIST OF:
Paid-in capital $ 30,517,839
Unrealized depreciation of investments and translation of assets and
liabilities in foreign currencies (27,841)
Accumulated distributions in excess of net realized gain on investment
and foreign currency transactions (119,384)
------------
$ 30,370,614
============
SHARES OF BENEFICIAL INTEREST OUTSTANDING 3,067,467
============
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PRICE
PER SHARE (NET ASSETS/SHARES OF BENEFICIAL INTEREST
OUTSTANDING) $ 9.90
============
</TABLE>
See notes to financial statements.
3
<PAGE> 32
DLB GLOBAL BOND FUND
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
INTEREST INCOME $ 1,653,415
-----------
EXPENSES:
Management fee 222,217
Trustees' fees 4,669
Custodian fee 67,967
Accounting and audit fees 41,551
Registration fees 25,694
Legal fees 14,609
Transfer agent fees 8,000
Other 2,925
-----------
387,632
Reduction of expenses by investment manager (150,643)
-----------
Net expenses 236,989
-----------
Net investment income 1,416,426
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) (identified cost basis):
Investment transactions 1,333,707
Foreign currency transactions and forward foreign currency exchange
contracts and other transactions denominated in foreign currency (392,734)
Written option transactions 90,760
Futures contracts transactions (95,530)
-----------
Net realized gain 936,203
-----------
Change in unrealized appreciation (depreciation):
Investments 468,734
Foreign currency and forward foreign currency exchange contracts and other
transactions denominated in foreign currency (80,437)
Written options (444)
Futures contracts 36,275
-----------
Net unrealized gain 424,128
-----------
Net realized and unrealized gain 1,360,331
-----------
Increase in net assets from operations $ 2,776,757
===========
</TABLE>
See notes to financial statements.
4
<PAGE> 33
DLB GLOBAL BOND FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
---- ----
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
From operations:
Net investment income $ 1,416,426 $ 1,537,352
Net realized gain on investments 936,203 780,420
Net unrealized appreciation (depreciation) of investments 424,128 (552,906)
------------ ------------
2,776,757 1,764,866
------------ ------------
Distributions to shareholders:
From net investment income (639,727) (1,537,352)
In excess of net investment income -- (938,259)
From net realized gains on investments (936,203) --
In excess of net realized gains on investments (613,813) --
------------ ------------
(2,189,743) (2,475,611)
------------ ------------
Fund share transactions:
Net proceeds from sales of shares 252,370 932,227
Net asset value of shares issued in
reinvestment of distributions 2,189,742 2,475,611
Cost of shares reacquired (1,159,794) (1,077)
------------ ------------
1,282,318 3,406,761
------------ ------------
Total increase in net assets 1,869,332 2,696,016
NET ASSETS:
At beginning of period 28,501,282 25,805,266
------------ ------------
At end of period (including accumulated distributions
in excess of net investment income of $0 and
$21,541, respectively) $ 30,370,614 $ 28,501,282
============ ============
</TABLE>
See notes to financial statements.
5
<PAGE> 34
DLB GLOBAL BOND FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period Ended
Years Ended December 31, December 31,
1998 1997 1996**
---- ---- ------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value- beginning of period $ 9.72 $ 9.99 $ 10.00
------- ------- -------
Income from investment operations:
Net investment income .47 .58 .19
Net realized and unrealized gain on investments
and foreign currency .47 .08 .13
------- ------- -------
.94 .66 .32
------- ------- -------
Less distributions to shareholders:
From net investment income (.22) (.58) (.19)
In excess of net investment income -- (.35) (.11)
From net realized gain on investments (.33) -- (.03)
In excess of net realized gain on investments (.21) -- --
------- ------- -------
(.76) (.93) (.33)
------- ------- -------
Net asset value- end of period $ 9.90 $ 9.72 $ 9.99
======= ======= =======
Total Return 9.73% 6.57% 3.21%
Ratios and Supplemental Data:
Ratio of expenses to average net assets .80% .80% .80%*
Ratio of net investment income to average net assets 4.78% 5.64% 5.35%*
Portfolio turnover 677% 234% 232%
Net assets at end of period (000 omitted) $30,371 $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. Without such agreement, the investment income per
share and ratios would have been:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net investment income $ .42 $ .52 $ .17
Ratios (to average net assets):
Expenses 1.31% 1.42% 1.33%*
Net investment income 4.27% 5.01% 4.81%*
</TABLE>
* Annualized
** For the period from August 26, 1996 (commencement of operations) to
December 31, 1996.
See notes to financial statements.
6
<PAGE> 35
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"), a Massachusetts business trust. The Trust 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 - Securities purchased under agreements to resell
to the original owner are recorded at cost. The Fund may enter into such
agreements with institutions that the Fund's investment adviser has
determined to be creditworthy. The Fund requires that the securities so
purchased be transferred to the custodian under terms that enable the
Fund to obtain such securities in the event of a default. The Fund
monitors, on a daily basis, the value of the securities to assure that
such value, including accrued interest, 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.
7
<PAGE> 36
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
8
<PAGE> 37
of counterparties to meet the terms of the contracts and 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.
INVESTMENT TRANSACTIONS AND INCOME - Investment transactions are
recorded on the trade date. Interest income is recorded on the accrual
basis. All premium and 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 gains 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, which may differ from generally accepted
accounting principles, the basis on which these financial statements are
prepared. Accordingly, the net investment income and net realized gain
reported in these financial statements may differ from the amounts
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. To
the extent that such taxes are unrecoverable, they 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 return of capital. Differences between
income for financial reporting purposes and tax-basis earnings and
profits may result in the reporting of temporary over-distributions in
the financial statements. Such over-distributions are classified as
distributions in excess of net investment income or accumulated
undistributed net realized gains. During the year ended December 31,
1998, $755,158 was reclassified from accumulated undistributed net
investment income to accumulated distributions in excess of net realized
gain on investment and foreign currency transactions due to differences
between financial reporting and tax accounting for 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 amounts reported in the
financial statements. Actual results could differ from those such
estimates.
9
<PAGE> 38
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, 1998, the management fee amounted to $222,217,
of which $46,093 was waived by Babson. Additionally, $104,550 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 effective annual rate of .65% of
average daily net assets. PBI is a 60% owned subsidiary of Babson.
The Fund pays no compensation directly to the Trustees who also are
officers of the investment manager, nor 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 $182,553,762 $179,317,477
============ ============
Investments (non-U.S. Government securities) $ 16,542,961 $ 28,502,277
============ ============
</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>
<CAPTION>
<S> <C>
Aggregate cost $ 30,263,753
============
Gross unrealized appreciation $ 178,962
Gross unrealized depreciation (265,110)
------------
Net unrealized depreciation $ (86,148)
============
</TABLE>
10
<PAGE> 39
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>
Years Ended December 31,
1998 1997
---- ----
<S> <C> <C>
Shares sold 24,916 92,967
Shares issued in reinvestment
of distributions 221,038 254,910
Redemptions (109,216) (107)
-------- --------
Net increase 136,738 347,770
======== ========
</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, 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, 1998 is as follows:
Futures Contracts
<TABLE>
<CAPTION>
Unrealized
Expiration Contracts Position Appreciation
---------- --------- -------- ------------
<S> <C> <C> <C>
March 1999 5 Deutsche Mark Futures Short $4,037
</TABLE>
At December 31, 1998, the Fund had sufficient cash and securities to
cover margin requirements on open futures contracts.
Written Option Transactions
<TABLE>
<CAPTION>
1998 Puts
Contracts Premiums
--------- --------
<S> <C> <C>
Written options outstanding at beginning of period 10 $ 3,100
Options written 185 109,785
Options exercised (30) (14,850)
Options expired (90) (53,192)
Options closed (75) (44,843)
--------- ---------
Written options outstanding at end of period -- $ --
========= =========
</TABLE>
11
<PAGE> 40
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.
8. SUBSEQUENT EVENT
The Trustees have decided to terminate the Fund effective March 1, 1999
or as soon thereafter as practicable. In connection with such
termination, the Trustees have discontinued the sale of Fund shares.
12
<PAGE> 41
DLB
THE DLB GLOBAL SMALL CAP FUND
ANNUAL REPORT
DECEMBER 31, 1998
[EXPERIENCE TO MANAGE THE FUTURE]
<PAGE> 42
DLB GLOBAL SMALL CAP FUND
MANAGER'S COMMENTARY
THE TOTAL ASSETS IN THE FUND AS OF DECEMBER 31, 1998, WERE $14.3 MILLION, OF
WHICH 47.9% WERE INVESTED IN U.S. SECURITIES AND 52.1% IN INTERNATIONAL
SECURITIES.
AN IMPORTANT FEATURE IN THE EQUITY MARKETS WAS THE CONTINUING TREND OF LARGE
COMPANY OUTPERFORMANCE RELATIVE TO SMALLER COMPANIES. For the past five years,
the larger the average market capitalization of the index, the better the index
performed. This was true even more in 1998, where small cap indices
underperformed large cap indices by the widest margin ever.
THE DOMESTIC PORTION OF THE DLB GLOBAL SMALL CAP FUND SEVERELY LAGGED ITS
BENCHMARK FOR THE QUARTER, AND, AS A RESULT, TRAILED THE BENCHMARK, THE RUSSELL
2500 INDEX, FOR ALL OF 1998. Generally speaking, superior stock selection was
able to overcome the negative effects of unfavorable industry weightings -
particularly, our relatively low weighting in the technology sector (the best
performing sector for the quarter and the year) and our increased exposure in
the pummeled energy sector (the worst performing sector for the quarter and for
the year).
THE BEST AND WORST PERFORMING U.S. STOCKS IN THE FUND FOR THE YEAR ENDING 1998
ARE LISTED BELOW:
<TABLE>
<CAPTION>
Best Performers Business Gain (%)
- --------------- -------- ----
<S> <C> <C>
Elsag Bailey Process Controls 137
Martin Marietta Materials Aggregates and Magnesia 70
Policy Management Systems Insurance Company Software 45
EG&G Inc. Industrial Conglomerate 34
Newport News Shipbuilding Defense Contractor 31
Underperformers Business Loss (%)
- ---------------- -------- ----
Halter Marine Oil Rigs & Supply Vessels 75
DiMon Incorporated Tobacco Processor 72
Foster Wheeler Corp. Engineering/Construction 58
Nabors Industries Oil & Gas Drilling Rigs 57
Golden State Bancorp California Thrift 56
</TABLE>
<PAGE> 43
DLB GLOBAL SMALL CAP FUND
MANAGER'S COMMENTARY
1998 WAS A BETTER YEAR FOR INTERNATIONAL SMALLER COMPANIES, ALTHOUGH THEY
CONTINUED TO LAG BEHIND THEIR LARGER COUNTERPARTS. The year was also
characterized by great volatility, as investors had to contend with a number of
crises in emerging economies.
EUROPE WAS THE STRONGEST AREA BOTH IN TERMS OF PERFORMANCE AND ECONOMIC
ACTIVITY. Interest rates fell in anticipation of the introduction of the single
currency, and appear ready to fall still further in 1999. The creation of the
single market meant that a number of smaller companies became attractive
acquisition targets for larger companies, and the portfolio benefited from
takeovers for some of its holdings. A large portion of the international assets
of the Fund remained invested in the European region during the year. Asia, on
the other hand, continued to struggle in the face of poor economic conditions.
Having reduced positions there in 1997, we did not add significantly to the area
during the period under review. Valuations do look attractive, however, and we
would expect to find some good investment opportunities there in 1999.
BELOW ARE THE BEST AND WORST PERFORMING INTERNATIONAL STOCKS FOR THE YEAR ENDED
1998:
<TABLE>
<CAPTION>
Gain (%)
Best Performers (Country) Business (in local currency)
- -------------------------- -------- --------
<S> <C> <C>
MLP (Germany) Insurance Services 121
Alliance Unichem (U.K.) Pharmaceutical Dist. 78
St. James Place Capital (U.K.) Life Insurance 71
Union Tools (Japan) Specialty Drills 69
Nutreco (Netherlands) Foods 60
Loss (%)
Worst Performers Country Business (in local currency)
- ------------------------ -------- --------
T&K Toka (Japan) Specialty 61
Chen Hsong Holdings (Hong Kong) Mould Machinery 57
Devro (U.K.) Food Casings 55
Gold Peak (Hong Kong) Batteries 49
Expro International (U.K.) Oil Services 47
</TABLE>
<PAGE> 44
DLB GLOBAL SMALL CAP FUND
MANAGER'S COMMENTARY
FINALLY, WE NOTE THAT 1998 MARKED THE FIFTH CONSECUTIVE YEAR THAT SMALL COMPANY
STOCKS UNDERPERFORMED LARGE COMPANY STOCKS, ALTHOUGH THE RAPID PRICE INCREASES
LATE IN THE FOURTH QUARTER WERE LED LARGELY BY SMALL COMPANY STOCKS. The
relative underperformance of small company stocks is in spite of superior
earnings growth for small companies versus large companies over the past year
and a half. The combination of underperformance and more favorable earnings
growth for small companies has resulted in the fact that relative valuations of
small company stocks versus their large company counterparts are now as
attractive as they have ever been over the past two decades.
THANK YOU FOR YOUR INVESTMENT AND YOUR CONTINUED INTEREST IN THE DLB GLOBAL
SMALL CAP FUND.
<PAGE> 45
DLB GLOBAL SMALL CAP FUND
GROWTH OF A $100,000 INVESTMENT
CUMULATIVE TOTAL RETURN SINCE INCEPTION 7/19/95
<TABLE>
<CAPTION>
R2500/
DLB Global Salomon
SM Cap EMI R2500/Salomon EMI Salomon EMI
Date (net of fees) ex-US DLB Global SM ex-US ex-US Russell 2500
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$100,000.00 $100,000.00 $100,000.00 $100,000.00
30-Jul 95 0.30 5.86 $100,300.00 $105,860.00 0.42 $100,420.00 2.17 $102,170.00
30-Aug 95 -1.50 -0.88 $98,795.50 $104,928.43 -2.53 $97,879.37 1.60 $103,804.72
30-Sep 95 1.01 6.22 $99,793.33 $111,454.98 0.76 $98,623.26 1.87 $105,745.87
31-Oct 95 -1.40 -2.98 $98,396.23 $108,133.62 -2.88 $95,782.91 -3.13 $102,436.02
30-Nov 95 2.64 3.18 $100,993.89 $111,572.27 2.93 $98,589.35 4.27 $106,810.04
31-Dec 95 2.99 2.98 $104,013.61 $114,897.12 3.83 $102,365.32 1.71 $108,636.49
31-Jan 96 2.32 1.30 $106,426.72 $116,390.79 1.78 $104,187.42 0.71 $109,407.81
28-Feb 96 3.22 2.16 $109,853.66 $118,904.83 1.56 $105,812.75 3.01 $112,700.99
31-Mar 96 2.47 2.19 $112,567.05 $121,508.84 2.30 $108,246.44 2.04 $115,000.09
30-Apr 96 2.42 5.00 $115,291.17 $127,584.29 5.26 $113,940.20 4.62 $120,313.09
31-May 96 1.14 0.65 $116,605.49 $128,413.58 -0.81 $113,017.29 2.71 $123,573.58
30-Jun 96 -1.30 -1.26 $115,089.62 $126,795.57 0.01 $113,028.59 -3.07 $119,779.87
31-Jul 96 -4.90 -5.22 $109,450.23 $120,176.84 -3.78 $108,756.11 -7.32 $111,011.98
31-Aug 96 1.20 2.98 $110,763.63 $123,758.11 1.01 $109,854.54 5.75 $117,395.17
30-Sep 96 0.27 2.13 $111,062.69 $126,394.16 0.56 $110,469.73 4.33 $122,478.38
31-Oct 96 -0.45 -0.50 $110,562.91 $125,762.19 -0.39 $110,038.90 -0.66 $121,670.02
30-Nov 96 2.64 3.00 $113,481.77 $129,535.06 1.64 $111,843.53 4.83 $127,546.69
31-Dec 96 0.69 -0.45 $114,264.79 $128,952.15 -1.84 $109,785.61 1.37 $129,294.07
31-Jan 97 -2.86 0.05 $110,996.82 $129,016.63 -2.16 $107,414.24 2.76 $132,862.59
28-Feb 97 0.00 0.24 $109,450.23 $120,465.27 1.68 $110,583.21 -1.49 $109,357.90
31-Mar 97 -0.64 -2.79 $108,749.74 $117,104.29 -1.33 $109,112.45 -4.53 $104,403.99
30-Apr 97 -1.85 -0.21 $106,737.87 $116,858.37 -1.49 $107,486.68 1.27 $105,729.92
31-May 97 5.38 7.74 $112,480.37 $125,903.21 6.41 $114,376.57 9.21 $115,467.65
30-Jun 97 3.58 3.15 $116,507.17 $129,869.16 2.26 $116,961.48 4.09 $120,190.27
31-Jul 97 2.42 2.23 $119,326.64 $132,765.24 -1.51 $115,195.36 5.86 $127,233.42
31-Aug-97 -1.1 -1.32 $118,014.05 $131,012.74 -4.27 $110,276.52 1.39 $129,001.97
30-Sep-96 2.47 4.28 $120,929.00 $136,620.08 1.78 $112,239.44 6.54 $137,438.70
31-Oct-97 -3.5 -4.24 $116,696.48 $130,827.39 -3.95 $107,805.99 -4.49 $131,267.70
30-Nov-97 -1.04 -1.83 $115,482.84 $128,433.25 -4.46 $102,997.84 0.45 $131,858.40
31-Dec-97 2.10 0.04 $117,907.98 $128,484.62 -2.21 $100,721.59 1.89 $134,350.53
31-Jan-98 -0.62 1.15 $117,176.95 $129,962.20 4.17 $104,921.68 -1.53 $132,294.96
28-Feb-98 7.14 7.36 $125,543.38 $139,527.42 7.46 $112,748.83 7.26 $141,899.58
31-Mar-98 6.33 4.54 $133,490.28 $145,861.96 4.70 $118,048.03 4.39 $148,128.97
30-Apr-98 0.55 0.56 $134,224.48 $146,678.79 0.76 $118,945.20 0.38 $148,691.86
31-May-98 0.78 -1.38 $135,271.43 $144,654.62 1.86 $121,157.58 -4.64 $141,792.56
30-Jun-98 -3.56 -1.41 $130,455.76 $142,614.99 -2.92 $117,619.77 0.12 $141,962.71
31-Jul-98 -2.17 -3.66 $127,624.87 $137,395.28 -0.69 $116,808.20 -6.87 $132,209.87
31-Aug-98 -13.93 -15.30 $109,846.73 $116,373.80 -12.26 $102,487.51 -18.86 $107,275.09
30-Sep-98 -1.71 2.09 $107,968.35 $118,806.02 -2.60 $99,822.84 7.10 $114,891.62
31-Oct-98 7.66 6.30 $116,238.73 $126,290.79 7.06 $106,870.33 5.47 $121,176.19
30-Nov-98 2.52 4.04 $119,167.94 $131,392.94 3.20 $110,290.18 4.95 $127,174.41
31-Dec-98 2.63 4.16 $122,302.06 $136,858.89 2.42 $112,959.20 6.06 $134,881.18
</TABLE>
TOTAL RETURNS (%) FOR PERIODS ENDED 12/31/98
<TABLE>
<CAPTION>
6 Months One Year Annualized
7/1/98- 1/1/98- Since Inception
12/31/98 12/31/98 7/19/95-12/31/98
<S> <C> <C> <C>
DLB Global Small Cap Fund 3.73 -6.25 6.35
Combined Index 6.53 -4.02 11.62
Salomon EMI (ex-US) 12.15 -3.96 3.18
Russell 2500 Index 0.39 -4.99 14.66
</TABLE>
DISCLOSURE STATEMENT
THE DLB GLOBAL SMALL CAPITALIZATION FUND invests in a combination of domestic
and international securities. The relative proportions of the Fund's assets
fluctuate over time. The "Combined Index" used as a benchmark to measure the
performance of this Fund is a composite of the Russell 2500 Index and Salomon
Brothers Extended Market Index, ex-US, (EMI), weighted in each (monthly) period
to reflect the proportions of the Fund's assets invested in domestic and
international securities, respectfully, during such period. As of December 31,
1998, such proportions were 47.9% domestic, 52.1% international.
SALOMON BROTHERS EXTENDED MARKET INDEX, ex-US, (EMI) is an unmanaged index that
represents the bottom 20% of the cumulative available market capital of the BMI.
The EMI defines the small stock index outside the U.S.
SALOMON BROTHERS BROAD MARKET INDEX (BMI) is an unmanaged index that 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.
RUSSEL 2500 INDEX is an unmanaged index that 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.
<PAGE> 46
DLB GLOBAL SMALL
CAPITALIZATION FUND
FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
<PAGE> 47
DLB GLOBAL SMALL CAPITALIZATION FUND
TABLE OF CONTENTS
- -----------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS:
Portfolio of Investments as of December 31, 1998 2 - 7
Statement of Assets and Liabilities as of December 31, 1998 8
Statement of Operations for the Year Ended December 31, 1998 9
Statements of Changes in Net Assets for the Years Ended
December 31, 1998 and 1997 10
Financial Highlights for the Four-Year Period Ended
December 31, 1998 11
Notes to Financial Statements 12 - 15
<PAGE> 48
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, 1998, the
related statement of operations for the year then ended, the statements of
changes in net assets for the years ended December 31, 1998 and 1997, and the
financial highlights for each of the years in the four-year period ended
December 31, 1998. 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, 1998 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, 1998, 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.
/s/ Deloitte and Touche LLP
- ---------------------------
Boston, Massachusetts
February 12, 1999
<PAGE> 49
DLB GLOBAL SMALL CAPITALIZATION FUND
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS
December 31, 1998
- --------------------------------------------------------------------------------
Common and Preferred Stocks - 95.1%
ISSUER SHARES VALUE
<S> <C> <C>
AEROSPACE - 2.3%
EG&G Inc. 6,000 $ 166,875
Newport News Shipbuilding, Inc. 4,700 157,156
---------
324,031
---------
APPAREL -.9 %
The Stride Rite Corporation 14,500 126,875
---------
AUTO PARTS - 2.3%
Bandag Incorporated 4,300 149,963
Exide Corporation 11,400 185,250
---------
335,213
---------
BANKS - 2.0%
Dime Bancorp, Inc. 5,500 145,406
Golden State Bancorp, Inc. (*) 7,600 126,350
Golden State Bancorp, Inc. Warrants (*) 3,300 15,056
---------
286,812
---------
BUILDING SUPPLIES - 1.5%
Dal-Tile International Inc. (*) 21,600 224,100
---------
COAL GAS & PIPE - 1.1%
Nabors Industries (*) 11,900 161,394
---------
COMPUTERS - .9%
Gerber Scientific Inc. 5,300 126,206
---------
COMPUTER SOFTWARE - .1%
PRI Automation Inc. (*) 700 18,200
---------
DIVERSIFIED - 1.1%
Unisource Worldwide, Inc. 20,800 150,800
---------
</TABLE>
2
<PAGE> 50
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
ELECTRONICS & INSTRUMENTS - 3.2%
Intergraph Corporation (*) 20,200 $ 116,150
Magnetek Incorporated (*) 13,200 152,625
Scitex Corporation Ltd. (*) 16,200 190,350
---------
459,125
---------
EQUITY INVESTMENT TRUSTS - .9%
HCC Insurance Holdings, Inc. 7,700 135,713
---------
FOOD PRODUCERS - 1.1%
Ralcorp Holdings Inc. (*) 8,900 162,425
---------
FURNITURE & APPLIANCES - 1.3%
Herman Miller, Inc. 3,000 80,625
La-Z-Boy Incorporated 6,000 106,875
---------
187,500
---------
INSURANCE COMPANIES - 2.2%
HSB Group, Inc. 4,100 168,356
Life USA Holdings Inc. 11,400 146,775
---------
315,131
---------
MACHINERY & EQUIPMENT - 5.1 %
Elsag Bailey Process Automation NV (*) 6,700 262,138
Flowserve Corporation 2,300 38,094
Foster Wheeler Corporation 9,800 129,238
Harsco Corporation 3,200 97,400
Roper Industries, Inc. 3,000 61,125
Unova Inc. (*) 7,700 139,563
---------
727,558
---------
METALS & MINING - 3.6%
Calmat Co. 7,600 234,650
Martin Marietta Materials 4,500 279,844
---------
514,494
---------
NATURAL GAS - 1.2%
Equitable Resources, Inc. 5,800 168,925
---------
OFFICE EQUIPMENT - 1.4%
Wallace Computer Services 7,800 205,725
---------
PAPER & FOREST PRODUCTS - .9%
Albany International Corp. 6,593 124,860
---------
</TABLE>
3
<PAGE> 51
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
PRINTING & PUBLISHING - 4.5%
ACNeilsen Corporation (*) 5,300 $ 149,725
Central Newspapers, Inc. 2,600 185,738
Hollinger International 10,800 150,525
Lee Enterprises Inc. 5,100 160,650
---------
646,638
---------
PROFESSIONAL SERVICES - 1.6%
CDI Corporation (*) 5,200 104,975
Policy Management Systems Corporation (*) 2,400 121,200
---------
226,175
---------
SPECIALTY CHEMICALS - .7 %
Calgon Carbon 14,000 105,000
---------
SPECIALTY RETAIL - 1.7%
Charming Shoppes (*) 24,100 103,931
Enesco Group Inc. 5,900 137,175
---------
241,106
---------
TELECOMMUNICATIONS - 1.1%
Commscope Inc. (*) 9,500 159,719
---------
TOBACCO - .8%
Dimon Incorporated 15,900 118,256
---------
TRANSPORTATION - 1.3 %
Fritz Companies Inc. (*) 16,800 181,650
---------
TRUCKING & SHIPPING - 2.0%
Halter Marine Group Inc. (*) 19,900 97,013
Yellow Corporation (*) 10,100 193,163
---------
290,176
---------
FOREIGN
BELGIUM - 1.2%
Colruyt NV (Food Retailers) 200 166,522
---------
FINLAND - 1.3%
KCI Konecranes International (Diversified Industrial) 4,000 180,343
---------
</TABLE>
4
<PAGE> 52
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
FRANCE - 7.4%
Brioche Pasquier, SA (Food Producers) 1,300 $ 152,086
Christian Dalloz (Safety Products) 1,000 81,803
L'Europeenne d'Extincteurs (Diversified Industrial) 2,000 124,848
M6 - Metropole Television (Media) 1,750 298,501
Societe Manutan SA (Distributors) 3,000 214,332
Royal Canin SA (Food Producers) 3,000 187,540
---------
1,059,110
---------
GERMANY - 2.2%
MLP Pref., Non Voting (Life Insurance) (**) 200 114,005
Rhoen-Klinikum, AG (Private Healthcare) 2,000 198,608
---------
312,613
---------
HONG KONG - 2.5%
CDL Hotel International Limited (Leisure and Hotels) 150,000 38,529
Chen Hsong Holdings (Engineering) 150,000 20,136
Fountain Set (Textiles) (*) 260,000 36,916
Gold Peak Industries (Holdings) Ltd. (Electronic and 150,000 42,110
Electrical)
Vitasoy International Holdings, Ltd. (Food Producers) 312,500 113,948
VTech Holdings Ltd. (Electronic and Electrical) 15,000 65,440
YGM Trading Ltd. (Textiles and Apparel) 100,000 47,757
---------
364,836
---------
HUNGARY - .3%
Pick Szeged RT-GDR (Food Producers) 4,250 36,550
---------
ITALY - 4.1%
Banca Popolare Di Brescia (Banking) 12,000 292,098
Gewiss SpA (Electronic and Electrical) 7,000 141,525
Industrie Natuzzi SpA (Furniture Producer) 6,000 149,250
---------
582,873
---------
JAPAN - 5.7%
Aderans Company, Ltd. (Healthcare) 3,000 92,980
Bellsystem24 Inc. (Telemarketing) 600 133,510
Fancl Corporation (Cosmetics, Toiletries) (*) 1,000 85,563
Hosiden Corporation (Electronic Components) 8,000 139,302
Misumi Corporation (Distributors) 2,000 37,969
</TABLE>
5
<PAGE> 53
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
JAPAN (CONTINUED)
Mycal Card Inc. (Consumer Credit) 3,000 $ 74,967
Ryohin Keikaku Company, Ltd.(Retailer) 1,000 132,892
T&K Toka Company Ltd. (Chemicals) 1,500 15,894
Union Tool Co. (Engineering) 2,000 99,779
--------
812,856
--------
MALAYSIA - .1 %
Perlis Plantations Berhad (Diversified Industrial) 15,000 15,394
--------
NETHERLANDS - 4.0%
Brunel International, NV (Temporary Employment) 3,500 70,764
Kempen & Company, NV (Banking) (*) 1,750 92,924
Nutreco Holding, NV (Food Producers) 6,000 236,233
Royal Numico (KON), NV (Telecommunications) 3,500 166,667
--------
566,588
--------
NEW ZEALAND - .4%
Guinness Peat Group (Other Financial) 60,500 52,488
--------
NORWAY - 1.4%
Tomra Systems ASA (Diversified Industrial) 6,000 197,376
--------
SINGAPORE - .7 %
Haw Par Healthcare Limited (Pharmaceuticals) 50,000 27,231
TIBS Holdings Limited (Transport) 120,000 74,070
--------
101,301
--------
SPAIN - 1.1%
Mapfre Vida Seguros (Life Insurance) 4,000 150,529
--------
SWITZERLAND - 3.7%
Bank Sarasin Ltd. (Banking) (*) 90 159,593
Fotolabo, SA (Support Services) 600 183,140
Phoenix Mecano AG (Engineering) 300 179,869
--------
522,602
--------
THAILAND - .2%
Matichon Public Co. Ltd (Media) 24,000 33,732
--------
UNITED KINGDOM - 12.1 %
Alliance Unichem PLC (Healthcare) 21,300 200,046
Peter Black Holdings, PLC (Household Goods) 19,000 85,988
</TABLE>
6
<PAGE> 54
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
UNITED KINGDOM (CONTINUED)
Brake Brothers PLC (Food Retailers) 9,000 $ 111,357
N Brown Group PLC (General Retailers) 20,000 96,659
Capita Group, PLC (Service Outsourcing) (*) 10,000 92,257
Cattles PLC (Other Financial) 20,000 210,091
Columbus Group PLC (Business Publishing) 110,000 47,956
Devro PLC (Food Producers) 23,000 65,510
Expro International Group, PLC (Oil Exploration) 14,000 66,266
Independent Insurance Group, PLC (General Insurer) (*) 19,000 80,308
Redrow Group PLC (Housebuilder) 26,000 71,896
Rotork PLC (Engineering) 13,000 83,123
Sage Group (Accounting Software) (*) 4,000 104,298
Seton Scholl Healthcare PLC (Healthcare) 13,000 180,820
Spirax-Sarco Engineering PLC (Engineering) 12,000 103,734
St. James's Place Capital PLC (Life Insurance) 27,000 129,811
---------
1,730,120
---------
TOTAL COMMON AND PREFERRED STOCKS
(identified cost, $12,335,799) 13,609,640
PRINCIPAL
AMOUNT
REPURCHASE AGREEMENT - 5.0%
Investors Bank & Trust Repurchase Agreement, 4.25%,
dated 12/31/98, $720,322 due on 1/4/99 (secured by
Federal Government Agency securities), at cost $ 719,982 719,982
----------
TOTAL INVESTMENTS (identified cost, $13,055,781) 14,329,622
Other assets, less liabilities - (.1 %) (19,798)
---------
NET ASSETS - 100% $ 14,309,824
============
</TABLE>
(*) Non-income producing security
(**) Preferred Stock
See notes to financial statements.
7
<PAGE> 55
DLB GLOBAL SMALL CAPITALIZATION FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments, at value (identified cost, $13,055,781) $ 14,329,622
Foreign cash, at value (cost, $3,493) 3,493
Dividends and interest receivable 10,179
Receivable from investment manager 9,088
Receivable for foreign taxes 11,742
------------
14,364,124
------------
LIABILITIES:
Payable for investments purchased 5,783
Accrued management fees 11,730
Accrued expenses 36,787
------------
54,300
------------
NET ASSETS $ 14,309,824
============
NET ASSETS CONSIST OF:
Paid-in capital $ 13,108,105
Unrealized appreciation of investments and translation of assets and
liabilities in foreign currencies 1,274,562
Accumulated distributions in excess of net realized gain on investments
and foreign currency transactions (2,636)
Accumulated distributions in excess of net investment income (70,207)
------------
Total $ 14,309,824
============
SHARES OF BENEFICIAL INTEREST OUTSTANDING 1,327,748
============
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PRICE
PER SHARE (NET ASSETS / SHARES OF BENEFICIAL INTEREST
OUTSTANDING) $ 10.78
============
See notes to financial statements.
</TABLE>
8
<PAGE> 56
DLB GLOBAL SMALL CAPITALIZATION FUND
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET INVESTMENT INCOME:
<S> <C>
Dividends (net of foreign tax withheld of $16,205) $ 206,307
Interest 23,203
------------
229,510
------------
EXPENSES:
Management fee 143,177
Trustees' fees 4,669
Custodian fee 67,107
Accounting and audit fees 29,428
Registration fees 20,578
Legal fees 11,258
Transfer agent fee 8,000
Other 2,782
------------
286,999
Reduction of expenses by investment manager (72,251)
------------
Net expenses 214,748
------------
Net investment income 14,762
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) (identified cost basis):
Investment transactions 1,051,146
Foreign currency transactions and forward foreign currency exchange
contracts and other transactions denominated in foreign currency (6,746)
------------
Net realized gain on investments and foreign currency 1,044,400
------------
Change in unrealized appreciation:
Investments (539,253)
Foreign currency and forward foreign currency exchange contracts and other
transactions denominated in foreign currency 1,006
------------
Net unrealized loss on investments and foreign currency (538,247)
------------
Net realized and unrealized gain on investments and foreign
currency 506,153
------------
Increase in net assets from operations $ 520,915
============
</TABLE>
See notes to financial statements.
9
<PAGE> 57
DLB GLOBAL SMALL CAPITALIZATION FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN NET ASSETS:
Years Ended December 31,
------------------------
1998 1997
---- ----
<S> <C> <C>
From operations:
Net investment income $ 14,762 $ 29,173
Net realized gain on investments and foreign currency 1,044,400 27,312
Net unrealized appreciation (depreciation) of investments
and foreign currency (538,247) 572,764
------------ ------------
520,915 629,249
------------ ------------
Distributions to shareholders:
From net investment income (14,762) (9,121)
In excess of net investment income (93,233) --
From net realized gain on investments (989,096) (27,312)
In excess of net realized gain on investments -- (9,806)
Tax return of capital -- (474,986)
------------ ------------
(1,097,091) (521,225)
------------ ------------
Fund share transactions:
Net proceeds from sales of shares 827,306 906,178
Net asset value of shares issued in
reinvestment of distributions 1,097,091 521,225
Cost of shares reacquired (925,539) (233,889)
------------ ------------
998,858 1,193,514
------------ ------------
Total increase in net assets 422,682 1,301,538
NET ASSETS:
At beginning of period 13,887,142 12,585,604
------------ ------------
At end of period (including accumulated distributions in excess
of net investment income of $70,207 and $26,926, respectively) $ 14,309,824 $ 13,887,142
============ ============
</TABLE>
See notes to financial statements.
10
<PAGE> 58
DLB GLOBAL SMALL CAPITALIZATION FUND
FINANCIAL HIGHLIGHTS
- ---------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31, Period Ended
-------------------------------------- December 31,
1998 1997 1996 1995**
---- ---- ---- ------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value- beginning of period $ 11.27 $ 11.19 $ 10.33 $ 10.00
---------- ---------- ---------- -------
Income from investment operations:
Net investment income .01 .02 .01 .07
Net realized and unrealized gain on investments .40 .50 1.01 .33
--- --- ---- ---
.41 .52 1.02 .40
--- --- ---- ---
Less distributions to shareholders:
From net investment income (.01) (.01) (.01) (.07)
In excess of net investment income (.08) -- -- --
From net realized gain on investments (.81) (.02) (.11) --
In excess of net realized gain on investment -- (.01) (.04) --
Tax return of capital -- (.40) -- --
--- --- ---- ---
(.90) (.44) (.16) (.07)
---- ---- ---- ----
Net asset value- end of period $ 10.78 $ 11.27 $ 11.19 $ 10.33
========== ========== ========== =======
Total return 3.73% 4.66% 9.85% 4.07%
Ratios and Supplemental Data:
Ratio of expenses to average net assets 1.50% 1.50% 1.50% 1.46% *
Ratio of net investment income to average net assets .10% .22% .09% 1.46% *
Portfolio turnover 36% 44% 22% 5%
Net assets at end of period (000 omitted) $ 14,310 $ 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. Without such agreement and had the 1995 expenses been
limited to that permitted by state securities law, the investment income (loss)
per share and ratios would have been:
<TABLE>
<S> <C> <C> <C> <C>
Net investment income (loss) $ (.08) $ (.05) $ (.10) $ .02
Ratios (to average net assets):
Expenses 2.00% 2.14% 2.36% 2.50% *
Net investment income (loss) (.40%) (.42%) (.77%) .42% *
</TABLE>
* Annualized
* * For the period from July 19, 1995 (commencement of operations) to
December 31, 1995.
See notes to financial statements.
11
<PAGE> 59
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"), a Massachusetts business
trust. The Trust 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 - Securities purchased under agreements to resell
to the original owner are recorded at cost. The Fund may enter into
such agreements with institutions that the Fund's investment adviser
has determined to be creditworthy. The Fund requires that the
securities so purchased be transferred to the custodian under terms
that enable the Fund to obtain such securities in the event of a
default. The Fund monitors, on a daily basis, the value of the
securities to assure that such value, including accrued interest, 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.
12
<PAGE> 60
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 gains 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, which may differ from generally accepted
accounting principles, the basis on which these financial statements
are prepared. Accordingly, the net investment income and net realized
gain reported in these financial statements may differ from the amounts
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.
To the extent that such taxes are unrecoverable, they 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 return of capital. Differences between
income for financial reporting purposes and tax-basis earnings and
profits may result in the reporting of temporary over-distributions in
the financial statements. Such over-distributions are classified as
distributions in excess of net investment income or accumulated
undistributed net realized gains. During the year ended December 31,
1998, $49,952 was reclassified from accumulated distributions in excess
of net realized gain on investment and foreign currency transactions to
accumulated distributions in excess of 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 amounts
reported in the financial statements. Actual results could differ from
those such 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 1.00% of average daily net
assets. For the year ended December 31, 1998, the management fee
amounted to $143,177, of which $22,700 was waived by Babson.
Additionally, $49,551 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
13
<PAGE> 61
portfolio. Under the sub-advisory agreement, Babson pays BSII a monthly
fee at the effective annual rate of .50% of average daily net assets.
The Fund pays no compensation directly to the Trustees who also are
officers of the investment manager, nor 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 $5,005,990 and $5,301,998, 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 $ 13,128,696
============
Gross unrealized appreciation $3,007,123
Gross unrealized depreciation (1,806,197)
------------
Net unrealized appreciation $1,200,926
============
</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>
Years Ended December 31,
------------------------
1998 1997
---- ----
<S> <C> <C>
Shares sold 74,346 81,079
Shares issued in reinvestment
of distributions 103,499 46,413
Redemptions (81,996) (20,517)
-------- --------
Net increase 95,849 106,975
======== ========
</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, 1998.
14
<PAGE> 62
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.
15
<PAGE> 63
DLB GLOBAL SMALL CAP FUND
---------------------------------------------
This report and the fund financial statements contained herein are submitted for
the general information of the shareholders of the DLB Global Small
Capitalization Fund. The report is not intended for distribution to prospective
investors unless preceded or accompanied by a current prospectus.
BABSON SECURITIES CORPORATION
One Memorial Drive, Cambridge, MA 01242
March 1999
<PAGE> 64
DLB
THE DLB MID CAPITALIZATION FUND
ANNUAL REPORT
DECEMBER 31, 1998
[EXPERIENCE TO MANAGE THE FUTURE]
<PAGE> 65
DLB MID CAP FUND
MANAGER'S COMMENTARY
1998 WAS A VERY VOLATILE YEAR IN THE EQUITY MARKETS. During the third quarter of
1998, the Russell 2500 Index, our benchmark, lost 19% of its value as investors
fled from stocks - particularly the stocks of small companies--due to fears that
the difficulties in less developed countries could soon hurt economic growth in
the US. The DLB Mid Cap Fund bettered the benchmark for the third quarter, as we
would expect given our low risk approach.
DURING THE FOURTH QUARTER OF 1998, HOWEVER, THE DOMESTIC EQUITY MARKETS SHRUGGED
OFF THE THIRD QUARTER FEARS OF A RECESSION AND MARKET DECLINES TO SURGE AHEAD.
The Russell 2500 Index increased its value by a very strong 17% during the
quarter. The strength of the fourth quarter enabled the Russell 2500 Index to
recapture all of the losses experienced in the third quarter and to finish the
year at roughly break-even. The Fund finished the year at -8.63%,
underperforming the benchmark, the Russell 2500 Index, which returned 0.39% for
the year.
THE KEY FEATURE OF THE FOURTH QUARTER WAS THE DOMINANCE OF GROWTH STOCKS. The
Russell 2500 Growth Index soared 25% for the quarter, well above the more modest
gains of the Russell 2500 Value Index, which increased its value 11%. Leading
the way for the growth stocks was the strong performance in the technology
sector, particularly the high-flying Internet stocks, whose dizzying valuations
defy traditional measures. Not surprisingly, our strict value discipline made it
difficult for us to keep apace of our benchmark in a market where growth stocks
performed so strongly.
THE OTHER IMPORTANT FEATURE IN THE EQUITY MARKETS WAS THE CONTINUING TREND OF
LARGE COMPANY OUTPERFORMANCE RELATIVE TO SMALLER COMPANIES. For the past five
years, the larger the average market capitalization of the index, the better the
index performed. This was even more true in 1998, where small cap indices
underperformed large cap indices by the widest margin ever. Indeed, the
investment performance of the Fund was hurt by its lower market capitalization
relative to its benchmark.
THE DLB MID CAP FUND SEVERELY LAGGED ITS BENCHMARK FOR THE FOURTH QUARTER, AND
AS A RESULT, TRAILED THE BENCHMARK FOR ALL OF 1998. Generally speaking, superior
stock selection was partially able to overcome the negative effects of
unfavorable industry weightings -- particularly, our relatively low weighting in
the technology sector (the best performing sector for the fourth quarter and the
year) and our
<PAGE> 66
DLB MID CAP FUND
MANAGER'S COMMENTARY
increased exposure in the pummeled energy sector (the worst performing sector
for the fourth quarter and for the year).
THE BEST PERFORMERS IN THE FUND FOR 1998 WERE:
<TABLE>
<S> <C> <C>
BEST PERFORMERS BUSINESS GAIN
Elsag Bailey Process Controls 137(%)
Martin Marietta Materials Aggregates & Magnesia 70
Policy Management System Insurance Company Software 45
EG&G Inc. Industrial Conglomerate 34
Newport News Shipbuilding Defense Contractor 31
</TABLE>
ELSAG BAILEY announced that it had reached an agreement to sell itself to ABB, a
large European industrial conglomerate, for a substantial premium to its recent
stock price. MARTIN MARIETTA MATERIALS is benefiting from a strong construction
market and the recent signing of the new highway bill (TEA-21) providing
increased funding for infrastructure building, securing future growth for the
company. POLICY MANAGEMENT SYSTEMS is beginning to realize the fruits of their
turnaround program, as well seeing good customer acceptance of new products.
EG&G is benefiting from new management focused on improving profitability
throughout the company. Newport News is finally being given credit for its large
cash flow and its stable base of future business from the US Navy.
<PAGE> 67
DLB MID CAP FUND
MANAGER'S COMMENTARY
THE WORST PERFORMERS IN THE FUND FOR 1998 WERE:
<TABLE>
<S> <C> <C>
UNDERPERFORMERS BUSINESS LOSS(%)
Halter Marine Oil Rigs & Supply Vessels 75
Dimon Incorporated Tobacco Processor 72
Foster Wheeler Corp. Engineering & Construction 58
Nabors Industries Oil & Gas Drilling Rigs 57
Golden State Bancorp California Thrift 56
</TABLE>
HALTER MARINE announced it would have difficulty achieving Wall Street analysts'
estimates for the December 1998 quarter due to cost overruns on an oil rig
construction project. We still like the long term outlook for the company and
have recently increased our weightings in the stock. DIMON reported
disappointing earnings in its most recent quarter and announced it would cut its
hefty dividend to help fund its turnaround program. FOSTER WHEELER has a
significant amount of business in Asia which has a lot of investors concerned.
This business is primarily with multinational companies based in developed
companies. The weakness in oil and gas prices has hurt all oil service
companies, like NABORS INDUSTRIES, although we believe the stocks have been too
severely penalized and represent very compelling values at these levels. The
increased mortgage refinancing activity has hurt all thrifts, including GOLDEN
STATE BANCORP.
<PAGE> 68
DLB MID CAP FUND
MANAGER'S COMMENTARY
TWO POSITIONS WERE ELIMINATED DURING THE SECOND HALF OF 1998. STANDARD PRODUCTS,
a sealing supplier to the automotive industry, was sold due to concerns that
consumer demand for new cars and trucks - which had been very strong in 1998 -
could slow over the coming year. JB HUNT, a leading trucking and intermodal
transportation company, was sold due to our belief that the stock price fairly
reflected the company's underlying fundamentals.
TWO POSITIONS WERE ADDED DURING THE SECOND HALF OF 1998. CDI CORPORATION is a
technology outsourcing and temporary help company based in Pennsylvania. Recent
demand for its engineers has declined due to slow downs in the semiconductor
industry; nevertheless, we believe this is a temporary issue and will soon right
itself. ROPER INDUSTRIES is a high quality supplier of industrial controls and
fluid handling products. Roper's stock was recently hurt due to a slow down in
two important endmarkets: the energy market (particularly, natural gas) and
semiconductor capital equipment. We believe investor concerns are overblown and
that this high quality company will regain its impressive growth track record
soon.
THE RAPID SHIFT IN SENTIMENT DURING THE YEAR - FROM FEAR IN THE LATE SUMMER AND
EARLY FALL TO UNBRIDLED OPTIMISM AT PRESENT - IS OF CONCERN TO US BECAUSE THE
SENTIMENT COULD SHIFT BACK TO FEAR JUST AS QUICKLY. The price increases in the
technology sector are troubling because they appear to us to be well in excess
of what the underlying business conditions would warrant. More worrying is the
dramatic price appreciation in Internet stocks, which appears to us to epitomize
the speculative fervor that has seized the market in its latest surge.
FINALLY, WE NOTE THAT 1998 MARKED THE FIFTH CONSECUTIVE YEAR THAT SMALL COMPANY
STOCKS UNDERPERFORMED LARGE COMPANY STOCKS, although the rapid price increases
late in the fourth quarter were led largely by small company stocks. The
relative underperformance of small company stocks is in spite of superior
earnings growth for small companies versus large companies over the past year
and a half. The combination of underperformance and more favorable earnings
growth for small companies has resulted in the fact that relative valuations of
small company stocks versus their large company counterparts are now as
attractive as they have ever been over the past two decades. Accordingly, we
believe that the most attractive area in the domestic equity market in terms of
risk and
<PAGE> 69
DLB MID CAP FUND
MANAGER'S COMMENTARY
potential rewards is small company value stocks.
IN SPITE OF THE RECENT MARKET VOLATILITY - ON THE DOWNSIDE DURING THE MIDDLE OF
1998 AND ON THE UPSIDE MORE RECENTLY - THE FUND'S INVESTMENT MANAGER, BABSON,
REMAINS COMMITTED TO ITS LOW RISK AND RESEARCH DRIVEN INVESTMENT APPROACH.
Ultimately, stock price returns are driven by attractive fundamentals coupled
with growing earnings. The Fund's approach is designed to capitalize on this
phenomenon by investing in superior companies at attractive valuations which
have an opportunity to grow their earnings faster than expected.
<PAGE> 70
DLB MID CAP FUND
- ------------------------------------------------------------------------------
GROWTH OF A $100,000 INVESTMENT
CUMULATIVE TOTAL RETURN SINCE INCEPTION 7/25/95
[GRAPH]
<TABLE>
<CAPTION>
DLB MID CAP RUSSELL DATE
(NET OF FEES) 2500 DLB MID CAP RUSSELL 2500
- ------------- -------- ---------- ------------ ----------
$100,000.00 $100,000.00
<S> <C> <C> <C> <C>
0.50 2.21 31-Jul-95 $100,500.00 $102,210.00
-0.80 1.60 31-Aug-95 $ 99,696.00 $103,845.36
1.10 1.87 30-Sep-95 $100,792.66 $105,787.27
-2.18 -3.13 31-Oct-95 $ 98,595.38 $102,476.13
8.42 4.27 30-Nov-95 $106,897.11 $106,851.86
2.22 1.71 31-Dec-95 $109,270.22 $108,679.02
1.86 0.71 31-Jan-96 $111,302.65 $109,450.65
3.01 3.01 28-Feb-96 $114,652.86 $112,745.11
2.66 2.04 31-Mar-96 $117,702.62 $115,045.11
1.30 4.62 30-Apr-96 $119,232.76 $120,360.19
2.22 2.71 31-May-96 $121,879.73 $123,621.96
-1.75 -3.07 30-Jun-96 $119,746.83 $119,826.76
-6.37 -7.32 31-Jul-96 $112,118.96 $111,055.44
3.54 5.75 31-Aug-96 $116,087.97 $117,441.13
0.96 4.33 30-Sep-96 $117,202.41 $122,526.33
-1.04 -0.66 31-Oct-96 $115,983.51 $121,717.66
5.35 4.83 30-Nov-96 $122,188.63 $127,596.62
2.63 1.37 31-Dec-96 $125,402.19 $129,344.69
0.78 2.76 31-Jan-97 $126,380.32 $132,914.61
0.86 -1.49 28-Feb-97 $127,467.19 $130,934.18
0.09 -4.53 31-Mar-97 $127,581.91 $125,002.86
0.00 1.27 30-Apr-97 $127,581.91 $126,590.40
7.94 9.21 31-May-97 $137,711.92 $138,249.37
6.25 4.09 30-Jun-97 $146,318.91 $143,903.77
7.07 5.86 31-Jul-97 $156,663.66 $152,336.53
1.32 1.39 31-Aug-97 $158,731.62 $154,454.01
3.57 6.54 30-Sep-96 $164,398.34 $164,555.30
-2.39 -4.49 31-Oct-97 $160,469.22 $157,166.77
-0.34 0.45 30-Nov-97 $159,923.62 $157,874.02
4.29 1.89 31-Dec-97 $166,784.35 $160,857.84
-3.81 -1.53 31-Jan-98 $160,429.86 $158,396.72
6.67 7.26 28-Feb-98 $171,130.54 $169,896.32
3.71 4.39 31-Mar-98 $177,479.48 $177,354.77
1.85 0.38 30-Apr-98 $180,762.85 $178,028.71
-3.25 -4.64 31-May-98 $174,888.06 $169,768.18
-4.23 0.12 30-Jun-98 $167,490.29 $169,971.90
-4.97 -6.87 31-Jul-98 $159,166.02 $158,294.83
-16.91 -18.86 31-Aug-98 $132,251.05 $128,440.43
3.47 7.1 30-Sep-98 $136,840.16 $137,559.70
5.84 5.47 31-Oct-98 $144,831.63 $145,084.21
0.30 4.95 30-Nov-98 $149,176.58 $152,265.88
2.15 6.06 31-Dec-98 $152,383.87 $161,493.19
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURNS (%) FOR PERIODS ENDED 12/31/98
----------------------------------------------
6 Months One Year Annualized
7/1/98- 1/1/98- Since Inception
12/31/98 12/31/98 7/25/95-12/31/98
<S> <C> <C> <C>
DLB MID CAPITALIZATION FUND -9.02 -8.63 12.79
Russell 2500 -4.99 0.39 14.67
</TABLE>
DISCLOSURE STATEMENT RUSSELL 2500 INDEX is an unmanaged index that 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.
<PAGE> 71
DLB MID CAPITALIZATION
FUND
FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
<PAGE> 72
DLB MID CAPITALIZATION FUND
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS:
Portfolio of Investments as of December 31, 1998 2 - 5
Statement of Assets and Liabilities as of December 31, 1998 6
Statement of Operations for the Year Ended December 31, 1998 7
Statements of Changes in Net Assets for the Years Ended
December 31, 1998 and 1997 8
Financial Highlights for Each of the Years in the Four-Year Period
Ended December 31, 1998 9
Notes to Financial Statements 10 - 11
</TABLE>
<PAGE> 73
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, 1998, the related
statement of operations for the year then ended, the statements of changes in
net assets for the years ended December 31, 1998 and 1997, and the financial
highlights for each of the years in the four-year period ended December 31,
1998. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on the 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, 1998 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, 1998, 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.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
February 12, 1999
<PAGE> 74
DLB MID CAPITALIZATION FUND
PORTFOLIO OF INVESTMENTS
December 31, 1998
- --------------------------------------------------------------------------------
COMMON STOCKS - 92.5%
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
AEROSPACE - 4.6%
EG&G Inc. 24,400 $ 678,625
Newport News Shipbuilding, Inc. 20,600 688,813
---------
1,367,438
---------
APPAREL - 1.8%
The Stride Rite Corporation 62,000 542,500
---------
AUTO PARTS - 4.6%
Bandag Incorporated 17,400 606,825
Exide Corporation 47,900 778,375
---------
1,385,200
---------
BANKS - 3.8%
Dime Bancorp, Inc. 21,000 555,188
Golden State Bancorp, Inc. (*) 31,100 517,038
Golden State Bancorp, Inc. Warrants (*) 13,100 59,769
---------
1,131,995
---------
BUILDING SUPPLIES - 3.0%
Dal-Tile International Inc. (*) 87,600 908,850
---------
COAL GAS & PIPE - 2.2%
Nabors Industries (*) 49,000 664,563
---------
COMPUTERS - 1.7%
Gerber Scientific Inc. 21,900 521,494
---------
COMPUTER SOFTWARE - .3%
PRI Automation Inc. (*) 3,200 83,200
---------
DIVERSIFIED - 2.1%
Unisource Worldwide, Inc. 88,700 643,075
---------
</TABLE>
2
<PAGE> 75
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
ELECTRONICS & INSTRUMENTS - 6.5%
Intergraph Corporation (*) 78,000 $ 448,500
Magnetek Incorporated (*) 54,800 633,625
Scitex Corporation Ltd. (*) 74,700 877,725
---------
1,959,850
---------
EQUITY INVESTMENT TRUSTS - 1.8%
HCC Insurance Holdings, Inc. 30,200 532,275
---------
FOOD PRODUCERS - 2.2%
Ralcorp Holdings Inc. (*) 36,400 664,300
---------
FURNITURE & APPLIANCES - 2.5%
Herman Miller, Inc. 12,500 335,938
La-Z-Boy Incorporated 24,300 432,844
---------
768,782
---------
INSURANCE COMPANIES - 4.4%
HSB Group, Inc. 17,450 716,541
Life USA Holdings Inc. 47,500 611,563
---------
1,328,104
---------
MACHINERY & EQUIPMENT - 10.0%
Elsag Bailey Process Automation NV (*) 26,600 1,040,725
Flowserve Corporation 9,500 157,344
Foster Wheeler Corporation 40,500 534,094
Harsco Corporation 13,800 420,038
Roper Industries, Inc. 12,800 260,800
Unova Inc. (*) 31,900 578,188
---------
2,991,189
---------
METALS & MINING - 7.0%
Calmat Co. 30,600 944,775
Martin Marietta Materials 18,300 1,138,031
---------
2,082,806
---------
NATURAL GAS - 2.2%
Equitable Resources, Inc. 22,300 649,488
---------
OFFICE EQUIPMENT - 2.8%
Wallace Computer Services 31,500 830,813
---------
</TABLE>
3
<PAGE> 76
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
PAPER & FOREST PRODUCTS - 1.6%
Albany International Corp. 24,828 $ 470,177
---------
PRINTING & PUBLISHING - 9.5%
ACNeilsen Corporation (*) 25,900 731,675
Central Newspapers, Inc. 10,400 742,950
Hollinger International 52,500 731,719
Lee Enterprises Inc. 20,000 630,000
---------
2,836,344
---------
PROFESSIONAL SERVICES - 3.1%
CDI Corporation (*) 21,900 442,106
Policy Management Systems Corporation (*) 9,700 489,850
---------
931,956
---------
SPECIALTY CHEMICALS - 1.5%
Calgon Carbon 59,800 448,500
---------
SPECIALTY RETAIL - 2.8%
Charming Shoppes (*) 71,200 307,050
Enesco Group Inc. 23,100 537,075
---------
844,125
---------
TELECOMMUNICATIONS - 2.4%
Commscope Inc. (*) 42,600 716,213
---------
TOBACCO - 1.6%
Dimon Incorporated 62,700 466,331
---------
TRANSPORTATION - 2.5%
Fritz Companies Inc. (*) 68,000 735,250
---------
TRUCKING & SHIPPING - 4.0%
Halter Marine Group Inc. (*) 81,700 398,288
Yellow Corporation (*) 41,900 801,330
---------
1,199,618
---------
TOTAL COMMON STOCKS
(identified cost, $28,102,390) 27,704,436
----------
</TABLE>
4
<PAGE> 77
<TABLE>
<CAPTION>
PRINCIPAL VALUE
ISSUER AMOUNT
<S> <C> <C>
REPURCHASE AGREEMENT - 7.6%
Investors Bank & Trust Repurchase Agreement, 4.25%,
dated 12/31/98, $2,263,264 due on 1/4/99 (secured by
Federal Government Agency securities), at cost $ 2,262,196 $ 2,262,196
-------------
TOTAL INVESTMENTS (identified cost, $30,364,586) 29,966,632
Other assets, less liabilities - (.1%) (26,490)
-------------
NET ASSETS - 100% $ 29,940,142
=============
</TABLE>
(*) Non-income producing security
See notes to financial statements.
5
<PAGE> 78
DLB MID CAPITALIZATION FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (identified cost, $30,364,586) $ 29,966,632
Receivable for investments sold 3,188
Receivable for fund shares sold 3,906
Receivable from investment manager 7,012
Dividends and interest receivable 33,232
------------
30,013,970
------------
LIABILITIES:
Payable for investments purchased 27,004
Accrued management fee 14,736
Accrued expenses 32,088
------------
73,828
------------
NET ASSETS $ 29,940,142
============
NET ASSETS CONSIST OF:
Paid-in capital $ 30,323,150
Unrealized depreciation of investments (397,954)
Accumulated undistributed net realized gain on investment
transactions 12,381
Accumulated undistributed net investment income 2,565
------------
Total $ 29,940,142
============
SHARES OF BENEFICIAL INTEREST OUTSTANDING 2,516,677
============
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PRICE
PER SHARE (NET ASSETS / SHARES OF BENEFICIAL INTEREST
OUTSTANDING) $ 11.90
============
</TABLE>
See notes to financial statements.
6
<PAGE> 79
DLB MID CAPITALIZATION FUND
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
NET INVESTMENT INCOME:
Dividends $ 380,770
Interest 61,061
-----------
441,831
-----------
EXPENSES:
Management fee 173,748
Trustees' fees 4,655
Custodian fee 43,782
Accounting and audit fees 26,380
Registration fees 24,095
Legal fees 11,258
Transfer agent fee 8,000
Other 2,868
-----------
294,786
Reduction of expenses by investment manager (75,477)
-----------
Net expenses 219,309
-----------
Net investment income 222,522
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain (identified cost basis) 2,187,410
Change in unrealized depreciation (5,034,660)
-----------
Net realized and unrealized loss on investments (2,847,250)
-----------
Decrease in net assets from operations $(2,624,728)
===========
</TABLE>
See notes to financial statements.
7
<PAGE> 80
DLB MID CAPITALIZATION FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997
---- ----
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
From operations:
Net investment income $ 222,522 $ 143,687
Net realized gain on investments 2,187,410 1,834,448
Net unrealized appreciation (depreciation) of investments (5,034,660) 3,124,915
------------ ------------
(2,624,728) 5,103,050
------------ ------------
Distributions to shareholders:
From net investment income (223,867) (139,420)
From net realized gain on investments (2,175,064) (1,834,045)
------------ ------------
(2,398,931) (1,973,465)
------------ ------------
Fund share transactions:
Net proceeds from sales of shares 9,402,928 9,389,016
Net asset value of shares issued in
reinvestment of distributions 2,398,932 1,973,465
Cost of shares reacquired (4,195,749) (824,091)
------------ ------------
7,606,111 10,538,390
------------ ------------
Total increase in net assets 2,582,452 13,667,975
NET ASSETS:
At beginning of period 27,357,690 13,689,715
------------ ------------
At end of period (including accumulated undistributed net
investment income of $2,565 and $3,910, respectively) $ 29,940,142 $ 27,357,690
============ ============
</TABLE>
See notes to financial statements.
8
<PAGE> 81
DLB MID CAPITALIZATION FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31, Period Ended
------------------------ December 31,
1998 1997 1996 1995**
---- ---- ---- ------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout
each period):
Net asset value- beginning of period $ 14.19 $ 11.51 $ 10.75 $ 10.00
------- ------- ------- -------
Income from investment operations:
Net investment income .10 .08 .15 .08
Net realized and unrealized gain (loss) on investments (1.36) 3.72 1.44 .84
------- ------- ------- -------
(1.26) 3.80 1.59 .92
------- ------- ------- -------
Less distributions to shareholders:
From net investment income (1) (.10) (.08) (.15) (.08)
From net realized gain on investments (2) (.93) (1.04) (.68) (.09)
------- ------- ------- -------
(1.03) (1.12) (.83) (.17)
------- ------- ------- -------
Net asset value-end of period $ 11.90 $ 14.19 $ 11.51 $10.75
======= ======= ======= ======
Total Return (8.63%) 32.95% 14.75% 21.17% *
Ratios and Supplemental Data:
Ratio of expenses to average net assets .76% .90% .90% .90% *
Ratio of net investment income to average net assets .77% .78% 1.28% 1.90% *
Portfolio turnover 28% 32% 25% 6%
Net assets at end of period (000 omitted) $ 29,940 $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. Without such agreement and had the 1995 expenses been
limited to that permitted by state securities law, the investment income per
share and ratios would have been:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Net investment income $ .06 $ .04 $ .05 $ .01
Ratios (to average net assets):
Expenses 1.02% 1.33% 1.77% 2.50% *
Net investment income .51% .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.
See notes to financial statements.
9
<PAGE> 82
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"), a Massachusetts business trust. The
Trust 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 - Securities purchased under agreements to resell
to the original owner are recorded at cost. The Fund may enter into
such agreements with institutions that the Fund's investment adviser
has determined to be creditworthy. The Fund requires that the
securities so purchased be transferred to the custodian under terms
that enable the Fund to obtain such securities in the event of a
default. The Fund monitors, on a daily basis, the value of the
securities to assure that such value, including accrued interest, 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 gains 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, which may differ from generally accepted
accounting principles, the basis on which these financial statements
are prepared. Accordingly, the net investment income and net realized
gain reported in these financial statements may differ from the amounts
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 return of capital. Differences between
income for financial reporting purposes and tax-basis earnings and
profits may result in the reporting of temporary over-distributions in
the financial statements. Such over-distributions are classified as
distributions in excess of net investment income or accumulated
undistributed net realized gains.
10
<PAGE> 83
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 amounts
reported in the financial statements. Actual results could differ from
those such 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, 1998, the management fee
amounted to $173,748, of which $68,465 was waived by Babson.
Additionally, $7,012 of Fund expenses were borne by Babson.
The Fund pays no compensation directly to the Trustees who also are
officers of the investment manager, nor 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 $12,639,819 and $7,898,317, 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 $ 30,364,586
============
Gross unrealized appreciation $ 4,386,676
Gross unrealized depreciation (4,784,630)
------------
Net unrealized depreciation $ (397,954)
============
</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>
Years Ended December 31,
------------------------
1998 1997
---- ----
<S> <C> <C>
Shares sold 701,642 659,292
Shares issued in reinvestment
of distributions 208,181 140,061
Redemptions (321,680) (60,046)
------- -------
Net increase 588,143 739,307
======= =======
</TABLE>
11
<PAGE> 84
DLB MID CAP FUND
---------------------------------------------
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.
BABSON SECURITIES CORPORATION
One Memorial Drive, Cambridge, MA 01242
March 1999
<PAGE> 85
DLB
THE DLB QUANTITATIVE EQUITY FUND
ANNUAL REPORT
DECEMBER 31, 1998
EXPERIENCE TO MANAGE THE FUTURE
<PAGE> 86
DLB QUANTITATIVE EQUITY FUND
Manager's Commentary
IT WAS ANOTHER BIG YEAR FOR THE LARGE-CAP US STOCK MARKET. Once again, it saw
more than a 20% return during 1998. This has almost become routine, especially
since the average US stock market return for the last 70-odd years has run about
8% annually. In any event, if you invested your money in January, and didn't
follow the stock market through its peaks and troughs for the year, you would
have been satisfied to find your money had grown substantially, again. Few
people with money in the stock market have the discipline not to follow it at
some level. The large dips that we saw over the summer had many investors
viewing the returns on their checking accounts as a fine alternative to stocks.
If you left the market in the summer, then you probably missed one of the
strongest rallies ever in the market. If there was ever a case for staying the
course with equities, this was it.
THIS HAS BEEN A LONG AND DIFFICULT YEAR FOR ANY INVESTOR WHO CARES ABOUT
VALUATION IN THE LARGE-CAP MARKET AND WHO MEASURES PERFORMANCE AGAINST A
LARGE-CAP BENCHMARK, SUCH AS THE S&P 500 OR THE RUSSELL 1000 GROWTH INDICES. The
winning stock picks this year were almost exclusively the largest cap stocks
and, not coincidentally, these were some of the highest priced stocks on a
forward earnings basis.
THE BASIC STRATEGY OF THIS FUND IS TO FIND UNDERPRICED STOCKS THAT ARE
EXPERIENCING A CHANGE IN MARKET SENTIMENT. These stocks will tend to get the
largest returns as the market revalues the stock to a "fairer" market value.
Although the Fund produced a 25.7% return for the full year, the Fund's
underperformance relative to the S&P 500 (+28.6%) and the Russell 1000 Growth
(+38.7%) this year was tied directly to the fact that low price-to-earnings
stocks did not outperform as they historically have done. The Fund's market
sentiment indicator, using the trend of brokerage analyst estimate changes, was
positive to neutral for the year, certainly not strong enough to offset the
damage inflicted by our poor-performing valuation indicator.
WHY DID THE MARKET IGNORE STOCK VALUATION? Simply put, the US, in the wake of
global financial turmoil, has become a store of liquidity. The vast money that
flowed into the US market was essentially going after the most liquid equities
available, i.e., the largest capitalization stocks, without respect to the
stock's underlying fundamentals and pricing. We believe this is an untenable
long-term
<PAGE> 87
DLB QUANTITATIVE EQUITY FUND
Manager's Commentary
situation. As the global economy stabilizes and liquidity fears subside, we
would expect a reallocation of equity money in the US market. As a basic tenet
of microeconomics, the marginal investor creates short-term pricing for stocks.
As the marginal investor moves away from the largest capitalization stocks, we
hope to find a reallocation towards the more undervalued and relatively
neglected stocks -- the Fund's basic holdings.
WE CONTINUE TO MAINTAIN DIVERSIFICATION RELATIVE TO THE RUSSELL 1000 GROWTH (a
large capitalization stock index) and hold a similar Beta (average propensity to
move with the market), dividend yield, and market capitalization as the Russell
1000 Growth.
<PAGE> 88
DLB QUANTITATIVE EQUITY FUND
Growth of a
$100,000 Investment
Cumulative Total Return Since Inception 8/26/96
[GRAPH]
<TABLE>
<CAPTION>
DLB QUANTITATIVE R1000 DLB QUANTITATIVE R1000 GROWTH
FUND (NET OF FEES) GROWTH DATE FUND
- --------------- ------ ---------- --------------- -------------
<S> <C> <C> <C> <C>
$100,000.00 $100,000.00
-1.50 0.24 31-Aug-96 $98,500.00 $100,240.00
8.02 7.28 30-Sep-96 $106,399.70 $107,537.47
3.48 0.60 31-Oct-96 $110,102.41 $108,182.70
9.08 7.51 30-Nov-96 $120,099.71 $116,307.22
-1.33 -1.96 31-Dec-96 $118,502.38 $114,027.60
7.55 7.01 31-Jan-97 $127,449.31 $122,020.93
0.56 -0.68 28-Feb-97 $128,163.03 $121,191.19
-3.73 -5.41 31-Mar-97 $123,382.55 $114,634.74
6.92 6.64 30-Apr-97 $131,920.62 $122,246.49
6.01 7.22 31-May-97 $139,849.05 $131,072.69
3.42 0.40 30-Jun-97 $144,631.89 $136,315.60
10.82 8.84 31-Jul-97 $160,281.06 $148,365.89
-3.68 -5.85 31-Aug-97 $154,382.71 $139,686.49
6.56 4.92 30-Sep-97 $164,510.22 $146,559.07
-6.66 -3.70 31-Oct-97 $153,553.84 $141,136.38
3.67 4.25 30-Nov-97 $159,189.26 $147,134.68
-1.58 1.12 31-Dec-97 $156,674.07 $148,782.58
2.75 2.99 31-Jan-98 $160,982.61 $153,231.18
8.90 7.52 28-Feb-98 $175,310.06 $164,754.17
3.01 3.99 31-Mar-98 $180,586.90 $171,327.86
0.36 1.38 30-Apr-98 $181,237.01 $173,692.18
-1.54 -2.84 31-May-98 $178,445.96 $168,759.33
5.85 6.12 30-Jun-98 $188,885.05 $179,087.40
-3.45 -0.66 31-Jul-98 $182,368.51 $177.905.42
-17.13 -15.01 31-Aug-98 $151,128.79 $151,201.82
5.27 7.68 30-Sep-98 $159,093.27 $162,814.12
6.43 8.04 31-Oct-98 $169,322.97 $175,904.37
9.16 7.61 30-Nov-98 $184,832.96 $189,290.69
6.56 9.02 31-Dec-98 $196,958.00 $206,364,71
</TABLE>
Disclosure Statement
<TABLE>
<CAPTION>
TOTAL RETURNS (%) FOR PERIODS ENDED 12/31/98
6 Months One Year Annualized
7/1/98- 1/1/98 Since Inception
12/31/98 12/31/98 8/26/96-12/31/98
<S> <C> <C> <C>
DLB Quantitative
Growth Fund 4.27 16.14 32.39
Russell 1000 Growth 15.22 28.66 34.96
</TABLE>
RUSSELL 1000 GROWTH INDEX is an unmanaged index that 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.
<PAGE> 89
DLB QUANTITATIVE
EQUITY FUND
FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 1998 AND 1997
<PAGE> 90
DLB QUANTITATIVE EQUITY FUND
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS:
Portfolio of Investments as of December 31, 1998 2 - 5
Statement of Assets and Liabilities as of December 31, 1998 6
Statement of Operations for the Year Ended December 31, 1998 7
Statements of Changes in Net Assets for the Years Ended
December 31, 1998 and 1997 8
Financial Highlights for the Each of the Years in the Three-Year Period
Ended December 31, 1998 9
Notes to Financial Statements 10 - 11
</TABLE>
<PAGE> 91
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, 1998, the related
statement of operations for the year then ended, the statements of changes in
net assets for the years ended December 31, 1998 and 1997, and the financial
highlights for the each of the years in the three-year period ended December 31,
1998. 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, 1998 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, 1998, 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.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
February 12, 1999
<PAGE> 92
DLB QUANTITATIVE EQUITY FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
COMMON STOCKS - 99.6%
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
AEROSPACE - 5.1%
General Dynamics Corporation 8,600 $ 504,175
Gulfstream Aerospace Corporation (*) 17,500 931,875
Lockheed Martin Corporation 2,800 237,300
United Technologies Corporation (*) 1,100 119,625
---------
1,792,975
---------
AIRLINES - .5%
UAL Corporation (*) 2,800 167,125
---------
APPAREL & TEXTILE - 8.6%
Fruit of the Loom, Inc. (*) 11,500 158,844
Jones Apparel Group, Inc. (*) 23,100 509,644
Liz Claiborne Inc. 9,400 296,688
Ross Stores Inc. 20,300 799,313
VF Corporation 16,900 792,188
Warnaco Group, Inc. 18,700 472,175
---------
3,028,852
---------
AUTO & TRUCK MANUFACTURERS - 3.7%
Ford Motor Company 7,400 434,288
Navistar International Corporation (*) 12,400 353,400
Paccar Inc. 12,200 501,725
---------
1,289,413
---------
BEVERAGES - .8%
Anheuser-Busch Companies, Inc. 4,100 269,063
---------
CHEMICALS - 1.2%
Solutia Incorporated 19,700 440,788
---------
COMPUTERS - 7.5%
Apple Computer Inc. (*) 25,700 1,052,094
Comverse Technology Inc. (*) 7,200 511,200
International Business Machines Corporation 5,800 1,071,550
---------
2,634,844
---------
</TABLE>
2
<PAGE> 93
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
COMPUTER SERVICES - 2.0 %
Computer Associates International, Inc. 11,150 $ 475,269
Deluxe Corporation 6,300 230,344
---------
705,613
---------
COMPUTER SOFTWARE - 6.3%
Microsoft Corporation (*) 12,500 1,733,594
Oracle Systems Corporation (*) 11,100 478,688
---------
2,212,282
---------
CONSTRUCTION - 1.0%
Fluor Corporation 3,400 144,713
USG Corporation 3,800 193,563
---------
338,276
---------
DIVERSIFIED - 3.2%
Litton Industries, Inc. 5,000 326,250
Loews Corporation (*) 8,000 786,000
---------
1,112,250
---------
DRUGS - 14.0%
Amgen, Inc. 11,200 1,171,100
Bristol-Meyers Squibb Company 10,100 1,351,506
Genzyme Corporation (*) 10,300 512,425
Eli Lilly and Company 7,800 693,225
Merck & Co., Inc. 6,700 989,506
Schering-Plough Corporation 4,200 232,050
---------
4,949,812
---------
ELECTRICAL EQUIPMENT - 4.2%
General Electric Company 14,600 1,490,113
---------
ELECTRIC POWER - 1.0%
GPU, Inc. 2,200 97,213
PECO Energy Company 6,200 258,075
---------
355,288
---------
FINANCIAL SERVICES - 5.0%
A.G. Edwards, Inc. 2,600 96,850
Lehman Brothers Holdings Inc. 12,100 533,156
Morgan Stanley, Dean Witter, Discover & Co. 5,600 397,600
The PMI Group Inc. 15,200 750,500
---------
1,778,106
---------
</TABLE>
3
<PAGE> 94
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
FOOD PRODUCERS - 3.4%
IBP Inc. 30,400 $ 885,400
Interstate Bakeries Corporation 11,600 306,675
---------
1,192,075
---------
INSURANCE COMPANIES - 2.8%
Old Republic International Corporation 11,200 252,000
Wellpoint Health Networks Inc. (*) 8,300 722,100
---------
974,100
---------
MACHINERY & EQUIPMENT - .3%
Ingersoll-Rand Company 2,600 122,038
MEDICAL SUPPLIES & SERVICES - 5.7%
Abbott Laboratories 11,800 578,200
Arterial Vascular Engineering, Inc. (*) 17,500 918,750
Guidant Corporation 4,800 529,200
---------
2,026,150
---------
OFFICE EQUIPMENT - 1.7%
Tech Data Corporation (*) 14,700 591,675
---------
PRINTING & PUBLISHING - 2.2%
American Greetings Corporation 15,900 652,894
Knight-Ridder, Inc. 2,400 122,700
---------
775,594
---------
RECREATION - 1.5%
KingWorld Productions Inc. (*) 17,700 521,044
---------
RESTAURANT & LODGING - 3.8%
Outback Steakhouse Inc. (*) 13,800 550,275
Tricon Global Restaurants, Inc. (*) 16,000 802,000
---------
1,352,275
---------
RETAIL - DISCOUNT - 4.5%
The TJX Companies Inc. 6,800 197,200
Wal Mart Stores Inc. 17,100 1,392,581
---------
1,589,781
---------
</TABLE>
4
<PAGE> 95
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
RETAIL - SPECIALTY - 1.4%
Intimate Brands, Inc. 9,600 $ 286,800
Loews Companies Inc. (*) 4,100 209,869
---------
496,669
---------
SEMICONDUCTORS - 5.8%
Intel Corporation 17,200 2,039,275
---------
TELEPHONE - 2.6%
AT&T Corporation 12,200 918,043
---------
TOTAL COMMON STOCKS
(identified cost, $27,319,945) 35,163,519
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
<S> <C> <C>
REPURCHASE AGREEMENT - .4%
Investors Bank & Trust Repurchase Agreement, 4.25%,
dated 12/31/98, $151,141 due on 1/4/99 (secured by
Federal Government Agency securities), at cost $ 151,069 151,069
------------
TOTAL INVESTMENTS (identified cost, $27,471,014) 35,314,588
Other assets, less liabilities (6,832)
------------
NET ASSETS - 100% $ 35,307,756
============
</TABLE>
(*) Non-income producing security
See notes to financial statements.
5
<PAGE> 96
DLB QUANTITATIVE EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investments, at value (identified cost, $27,471,014) $ 35,314,588
Receivable for fund shares sold 1,540
Dividends and interest receivable 41,253
Receivable from investment manager 4,270
------------
35,361,651
------------
LIABILITIES:
Accrued management fees 22,136
Accrued expenses 31,759
------------
53,895
------------
NET ASSETS $ 35,307,756
============
NET ASSETS CONSIST OF:
Paid-in capital $ 27,465,529
Unrealized appreciation of investments 7,843,574
Accumulated distributions in excess of net realized gain on investment
transactions (3,587)
Accumulated undistributed net investment income 2,240
------------
Total $ 35,307,756
============
SHARES OF BENEFICIAL INTEREST OUTSTANDING 2,222,547
============
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PRICE
PER SHARE (NET ASSETS / SHARES OF BENEFICIAL INTEREST
OUTSTANDING) $ 15.89
============
</TABLE>
See notes to financial statements.
6
<PAGE> 97
DLB QUANTITATIVE EQUITY FUND
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
Dividends $ 277,637
Interest 12,236
-----------
289,873
-----------
EXPENSES:
Management fee 223,157
Trustees' fees 4,669
Custodian fee 43,473
Registration fees 26,101
Accounting and audit fees 24,412
Transfer agent fee 8,000
Legal fees 7,849
Other 1,899
-----------
339,560
Reduction of expenses by investment manager (72,023)
-----------
Net expenses 267,537
-----------
Net investment income 22,336
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Realized gain 4,595,904
Change in unrealized appreciation 2,342,094
-----------
Net realized and unrealized gain on investments 6,937,998
-----------
Increase in net assets from operations $ 6,960,334
===========
</TABLE>
See notes to financial statements.
7
<PAGE> 98
DLB QUANTITATIVE EQUITY FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
From operations:
Net investment income $ 22,336 $ 45,839
Net realized gain on investments 4,595,904 1,189,437
Net unrealized appreciation of investments 2,342,094 3,708,423
------------ ------------
6,960,334 4,943,699
------------ ------------
Distributions to shareholders:
From net investment income (27,930) (43,840)
From net realized gain on investments (4,590,140) (1,335,243)
In excess of net realized gain on investments -- (9,351)
------------ ------------
(4,618,070) (1,388,434)
------------ ------------
Fund share transactions:
Net proceeds from sales of shares 3,940,252 6,349,810
Net asset value of shares issued in
reinvestment of distributions 4,586,644 1,388,434
Cost of shares reacquired (630,887) (121,323)
------------ ------------
7,896,009 7,616,921
------------ ------------
Total increase in net assets 10,238,273 11,172,186
NET ASSETS:
At beginning of period 25,069,483 13,897,297
------------ ------------
At end of period (including accumulated undistributed
net investment income of $2,240 and $7,834, respectively) $ 35,307,756 $ 25,069,483
============ ============
</TABLE>
See notes to financial statements.
8
<PAGE> 99
DLB QUANTITATIVE EQUITY FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------- Period Ended
December 31,
1998 1997 1996 **
---------- ---------- ------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout
each period):
Net asset value- beginning of period $ 14.55 $ 11.66 $ 10.00
---------- ---------- ----------
Income from investment operations:
Net investment income 0.01 .03 .01
Net realized and unrealized gain on investments 3.72 3.73 1.84
---------- ---------- ----------
3.73 3.76 1.85
---------- ---------- ----------
Less distributions to shareholders:
From net investment income (.01) (.03) (.01)
From net realized gain on investments (2.38) (.83) (.18)
In excess of net realized gain on investment -- (.01) --
---------- ---------- ----------
(2.39) (.87) (.19)
---------- ---------- ----------
Net asset value- end of period $ 15.89 $ 14.55 $ 11.66
========== ========== ==========
Total Return 25.71% 32.23% 18.51%
Ratios and Supplemental Data:
Ratio of expenses to average net assets .90% .90% .90% *
Ratio of net investment income to average net assets .08% .23% .43% *
Portfolio turnover 81% 46% 10%
Net assets at end of period (000 omitted) $ 35,308 $ 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. Without such agreement, the investment loss per share
and ratios would have been:
<TABLE>
<S> <C> <C> <C>
Net investment loss $ (.02) $ (.06) $ (.01)
Ratios (to average net assets):
Expenses 1.14% 1.55% 1.82% *
Net investment loss (.17%) (.43%) (.50%)*
</TABLE>
* Annualized
** For the period from August 26, 1996 (commencement of operations) to
December 31, 1996.
See notes to financial statements.
9
<PAGE> 100
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"), a Massachusetts business trust.
The Trust 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 - Securities purchased under agreements to resell
to the original owner are recorded at cost. The Fund may enter into
such agreements with institutions that the Fund's investment adviser
has determined to be creditworthy. The Fund requires that the
securities so purchased be transferred to the custodian under terms
that enable the Fund to obtain such securities in the event of a
default. The Fund monitors, on a daily basis, the value of the
securities to assure that such value, including accrued interest, 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 gains 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, which may differ from generally accepted
accounting principles, the basis on which these financial statements
are prepared. Accordingly, the net investment income and net realized
gain reported in these financial statements may differ from the amounts
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 return of capital. Differences between
income for financial reporting purposes and tax-basis earnings and
profits may result in the reporting of temporary over-distributions in
the financial statements. Such over-distributions are classified as
distributions in excess of net investment income or accumulated
undistributed net realized gains.
10
<PAGE> 101
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 amounts
reported in the financial statements. Actual results could differ from
those such 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 .75% of average daily net
assets. For the year ended December 31, 1998, the management fee
amounted to $223,157, of which $45,753 was waived by Babson.
Additionally, $26,270 of Fund expenses were borne by Babson.
The Fund pays no compensation directly to the Trustees who also are
officers of the investment manager, nor 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 $27,569,010 and $24,164,896, 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 $ 27,484,122
============
Gross unrealized appreciation $ 8,656,785
Gross unrealized depreciation (826,319)
------------
Net unrealized appreciation $ 7,830,466
============
</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>
Years Ended December 31,
------------------------
1998 1997
------------------------
<S> <C> <C>
Shares sold 249,348 444,204
Shares issued in reinvestment
of distributions 290,618 95,246
Redemptions (40,944) (8,001)
-------- --------
Net increase 499,022 531,449
======== ========
</TABLE>
11
<PAGE> 102
DLB QUANTITATIVE EQUITY FUND
---------------------------------------------
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.
BABSON SECURITIES CORPORATION
One Memorial Drive, Cambridge, MA 01242
March 1999
<PAGE> 103
DLB
THE DLB VALUE FUND
ANNUAL REPORT
DECEMBER 31, 1998
[EXPERIENCE TO MANAGE THE FUTURE]
<PAGE> 104
DLB VALUE FUND
MANAGER'S COMMENTARY
VALUE INVESTORS CONTINUE TO BE CHALLENGED BY THE DIFFICULT MARKET ENVIRONMENT.
Growth triumphed over value again in the fourth quarter and for the full year, a
virtually uninterrupted achievement for over five consecutive years, and the
spread between growth and value continued to widen. Not only has the growth
style outperformed the value style, but lower yielding stocks, particularly
lower yielding stocks in the S&P/BARRA Growth universe, have continued to
provide significantly better returns than higher yielding stocks.
MOST OF THE UNDERPERFORMANCE OF THE DLB VALUE FUND RELATIVE TO THE S&P/BARRA
VALUE INDEX, A SUBINDEX OF THE S&P 500 CONTAINING COMPANIES WITH LOWER
PRICE/BOOK RATIOS, CAN BE ATTRIBUTED TO THREE FACTORS. First and most
importantly, there was no exposure to the Communication Services sector, which
was 7.5% of the S&P/BARRA Value Index and returned an astounding 60.4%. Second,
the Fund was overweight in Consumer Cyclicals, and results there lagged the
benchmark, primarily because of weak performance in our retail and
retail-related stocks. Third, despite the positive contribution to overall
performance in the Consumer Staples sector, the Fund was underweight relative to
the benchmark.
IT IS INTERESTING TO NOTE THAT THE STOCKS THAT COMPRISE THE S&P/BARRA VALUE
INDEX'S COMMUNICATIONS SERVICES SECTOR POSSESS CHARACTERISTICS THAT ELIMINATE
THEM FROM CONSIDERATION AS PURCHASE CANDIDATES FOR THE FUND. For example, MCI
WorldCom, the leading light in this sector, currently has a trailing
price/earnings ratio of 106, a price/cash flow ratio of 57, a price/sales ratio
of 12.3, and no yield. But the stock does have a price/book ratio of 2.9, a
characteristic that included it in the S&P/BARRA Value Index. Its other
valuation characteristics, however, weighed against its inclusion in the DLB
Value Fund.
TWO FINANCIAL STOCKS, CHASE MANHATTAN (+65.5%) AND SLM HOLDING (FORMERLY "SALLIE
MAE", +48.4%), LED THE PORTFOLIO IN THE 4TH QUARTER, WHILE TWO TECH STOCKS,
APPLE COMPUTER (+211.9%) AND IBM (+77.0%) WERE THE BEST PERFORMERS FOR THE YEAR.
Chase, on the basis of its franchise and financial strength, rebounded
brilliantly from the widespread fear of financial crisis that rocked the markets
during the summer, and SLM Holding represented a safe haven amidst concerns of a
weakening global economy. Apple continued its
<PAGE> 105
DLB VALUE FUND
MANAGER'S COMMENTARY
phoenix-like recovery throughout 1998, and shareholders were rewarded
accordingly. IBM continued to fire on all cylinders, and increasing numbers of
investors began to appreciate the very profitable and annuity-like nature of its
maintenance and software services operations.
LOCKHEED MARTIN (-15.5%) AND ILLINOVA (-11.8%) WERE THE WORST PERFORMERS IN THE
LAST QUARTER. Delays in a number of Lockheed Martin aerospace and defense
programs clouded the outlook for the company. Illinova continues to be plagued
by the still undetermined fate of its Clinton nuclear generator, a concern that
contributed to its poor stock performance. Reebok International (-48.4%) and
Boeing (-32.2%) were the worst performers for the year. We remain hopeful that
new management at Reebok will help the company turn the corner in 1999. At
Boeing, the indigestion caused by too many orders and not enough parts should be
eased in 1999, and we are optimistic that management will find creative ways to
enhance shareholder value with the very strong cash flows provided by
operations.
NO SECURITIES WERE ADDED OR ELIMINATED DURING THE SECOND HALF OF 1998. Berkshire
Hathaway acquired General Re in December; however, because Berkshire Hathaway
does not qualify as a value investment according to our discipline, we will be
divesting it in 1999.
THE DLB VALUE STRATEGY CONTINUES TO HAVE ATTRACTIVE VALUATION CHARACTERISTICS,
AND ATTRACTIVENESS OF THOSE CHARACTERISTICS ACTUALLY IMPROVED RELATIVE TO THE
S&P 500 DURING THE 4TH QUARTER. The average price/earnings ratio based on
estimated earnings for 1998 for the companies held in the Fund is 18, compared
to 27 times for the S&P 500. Based on estimated earnings for 1999, the
comparison is 16 for the Fund versus 26 for the S&P 500. The average price/book
ratio is 2.2 compared to 4.5 for the S&P 500. Also, the Fund's gross yield
continues to be higher and its volatility remains lower than corresponding
figures for the market. We continue to believe that the focus will ultimately
shift from growth stocks that have led the market for so long to investments
with more reasonable valuations of earnings and assets such as those that
characterize our value strategy. At that time the Fund should provide more
satisfying positive returns in absolute and relative terms.
<PAGE> 106
DLB VALUE FUND
-----------------------------------------
GROWTH OF A
$100,000 INVESTMENT
[Cumulative Total Return Since Inception 7/25/95]
[GRAPH 1]
<TABLE>
<CAPTION>
Returns:
DLB Value Fd S&P 500 DATE DLB Value Fd S&P 500
(net of fees)
<S> <C> <C> <C> <C>
$100,000.00 $100,000.00
0.80 2.40 31-Jul-95 $100,800.00 $102,400.00
-0.10 0.25 31-Aug-95 $100,699.20 $102,656.00
3.57 4.22 30-Sep-95 $104,294.16 $106,988.08
-2.11 -0.36 31-Oct-95 $102,093.55 $106,602.93
4.60 4.39 30-Nov-95 $106,789.86 $111,282.79
1.30 1.93 31-Dec-95 $108,178.13 $113,430.55
2.08 3.40 31-Jan-96 $110,428.23 $117,287.19
2.69 0.93 28-Feb-96 $113,398.75 $118,377.96
3.07 0.96 31-Mar-96 $116,880.09 $119,514.39
1.22 1.47 30-Apr-96 $118,306.03 $121,271.25
2.59 2.58 30-May-96 $121,370.16 $124,400.05
-0.59 0.38 30-Jun-96 $120,654.07 $124,872.77
-3.47 -4.42 31-Jul-96 $116,467.38 $119,353.39
3.25 2.11 31-Aug-96 $120,252.57 $121,871.75
3.15 5.63 30-Sep-96 $124,040.52 $128,733.13
0.82 2.76 31-Oct-96 $125,057.65 $132,286.16
7.85 7.56 30-Nov-96 $134,874.68 $142,287.00
-0.55 -1.98 31-Dec-96 $134,132.87 $139,469.72
4.23 6.25 31-Jan-97 $139,806.69 $148,186.57
1.68 0.78 28-Feb-97 $142,155.44 $149,342.43
-3.69 -4.11 31-Mar-97 $136,909.91 $143,204.45
1.80 5.97 30-Apr-97 $139,374.28 $151,753.76
5.76 6.09 31-May-97 $147,402.24 $160,995.56
3.63 4.48 30-Jun-97 $152,752.94 $168,208.17
9.11 7.96 31-Jul-97 $166,668.74 $181,597.54
-2.76 -5.6 31-Aug-97 $162,068.68 $171,428.07
5.55 5.48 30-Sep-96 $171,063.49 $180,822.33
-4.44 -3.34 31-Oct-97 $163,468.27 $174,782.87
4.39 4.63 30-Nov-97 $170,644.53 $182,875.31
-0.72 1.72 31-Dec-97 $169,415.89 $186,020.77
0.20 1.11 31-Jan-98 $169,754.72 $188,085.60
7.70 7.21 28-Feb-98 $182,825.83 $201,646.57
5.22 5.12 31-Mar-98 $192,369.34 $211,970.88
2.19 1.01 30-Apr-98 $196,582.23 $214,111.78
-3.41 -1.72 31-May-98 $189,878.78 $210,429.06
1.02 4.06 30-Jun-98 $191,815.54 $218,972.48
-6.52 -1.07 31-Jul-98 $179,309.17 $216,629.47
- -16.06 -14.46 31-Aug-98 $150,512.12 $185,304.85
4.78 6.41 30-Sep-98 $157,706.59 $197,182.89
8.76 8.13 31-Oct-98 $171,521.69 $213,213.86
3.53 6.06 30-Nov-98 $177,576.41 $226,134.62
0.41 5.76 31-Dec-98 $178,304.47 $239,159.98
</TABLE>
TOTAL RETURNS (%) FOR PERIODS ENDED 12/31/98
<TABLE>
<CAPTION>
6 Months One Year Annualized
7/1/98- 1/1/98- Since Inception
12/31/98 12/31/98 7/25/95-12/31/98
<S> <C> <C> <C>
DLB Value Fund -7.04 5.25 17.98
S&P 500 9.23 28.58 28.62
</TABLE>
DISCLOSURE STATEMENT
STANDARD & POORS 500 INDEX is an unmanaged 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.
<PAGE> 107
DLB VALUE FUND
FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
<PAGE> 108
DLB VALUE FUND
TABLE OF CONTENTS
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS:
Portfolio of Investments as of December 31, 1998 2 - 5
Statement of Assets and Liabilities as of December 31, 1998 6
Statement of Operations for the Year Ended December 31, 1998 7
Statements of Changes in Net Assets for the Years Ended
December 31, 1998 and 1997 8
Financial Highlights for Each of the Years in the Four-Year Period
Ended December 31, 1998 9
Notes to Financial Statements 10 - 12
<PAGE> 109
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, 1998, the related statement of
operations for the year then ended, the statements of changes in net assets for
the years ended December 31, 1998 and 1997, and the financial highlights for
each of the years in the four-year period ended December 31, 1998. 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, 1998 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 Value Fund at
December 31, 1998, 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.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
February 12, 1999
<PAGE> 110
DLB VALUE FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998
COMMON AND PREFERRED STOCKS - 97.8%
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
AEROSPACE - 3.6%
The Boeing Company 46,500 $1,517,063
Lockheed Martin Corporation 12,900 1,093,275
----------
2,610,338
----------
AIRLINES - 2.4%
KLM Royal Dutch Airlines 56,437 1,693,110
----------
APPAREL & TEXTILE - 2.3%
Reebok International Ltd. (*) 116,300 1,729,963
----------
AUTO PARTS - 2.3%
Dana Corporation 41,300 1,688,138
----------
BANKS - 10.4%
Chase Manhattan Corporation 30,500 2,075,906
National City Corporation 23,900 1,732,750
US Bancorp 45,700 1,622,350
Wells Fargo & Company 51,000 2,036,813
----------
7,467,819
----------
CHEMICALS - GENERAL - 2.1%
E.I. Du Pont de Nemours and Company 28,600 1,517,588
----------
CHEMICALS - SPECIALTY - 1.0%
Millennium Chemicals Inc. 37,200 739,350
----------
COMPUTERS - 5.2%
Apple Computer Inc. (*) 41,400 1,694,813
International Business Machines Corporation 11,100 2,050,725
----------
3,745,538
----------
DIVERSIFIED - 4.0%
Hanson PLC 24,700 963,300
Berkshire Hathaway Inc., Class B 798 1,878,260
----------
2,841,560
----------
</TABLE>
2
<PAGE> 111
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
ELECTRIC POWER - 4.9%
Illinova Corporation 66,600 $1,665,000
Texas Utilities Company 39,800 1,858,163
----------
3,523,163
----------
FINANCIAL SERVICES - 12.5%
American Express Company 18,800 1,922,300
CitiGroup Inc. 36,803 1,821,749
SLM Holding Corporation 44,850 2,152,800
The Student Loan Corporation 23,500 1,054,563
Transamerica Corporation 17,400 2,009,700
----------
8,961,111
----------
FOOD PRODUCERS - 2.4%
Diageo PLC 37,240 1,722,350
----------
INSURANCE - 4.8%
Aetna Inc. 23,500 1,847,688
The Allstate Corporation 41,000 1,583,625
----------
3,431,313
----------
MEDICAL SUPPLIES & SERVICES - 4.8%
Tenet Healthcare Corporation (*) 63,100 1,656,375
United Healthcare Corporation 40,900 1,761,256
----------
3,417,631
----------
METALS & MINING - .6%
Martin Marietta Materials, Inc. 7,200 447,750
----------
OFFICE EQUIPMENT - 5.5%
Wallace Computer Services, Inc. 70,300 1,854,163
Xerox Corporation 17,900 2,112,200
----------
3,966,363
----------
OIL - DOMESTIC - 2.3%
Atlantic Richfield Co. 25,100 1,637,775
----------
OIL - INTERNATIONAL - 2.4%
Royal Dutch Petroleum 35,400 1,694,775
----------
</TABLE>
3
<PAGE> 112
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
PAPER & FOREST PRODUCTS - 7.4%
Potlatch Corporation 44,400 $1,637,250
Weyerhaeuser Company 34,000 1,727,625
Willamette Industries, Inc. 58,500 1,959,750
----------
5,324,625
----------
PRINTING & PUBLISHING - 2.7%
Harcourt General Inc. 36,600 1,946,663
----------
RAILROADS - 2.2%
CSX Corporation 38,400 1,593,600
----------
RETAIL - GENERAL - 4.3%
J C Penney Company, Inc. 34,700 1,626,563
Sears Roebuck and Co. 34,100 1,449,250
----------
3,075,813
----------
RETAIL - DISCOUNT - 2.3%
Kmart Corporation (*) 59,000 903,439
Kmart Financing (**) 13,500 782,156
----------
1,685,595
----------
RETAIL - SPECIALTY - 2.5%
The Limited Inc. 60,600 1,764,975
----------
STEEL - 2.2%
USX - US Steel Group 67,400 1,550,200
----------
TRUCKING & SHIPPING - .7%
Overseas Shipholding Group 31,400 504,362
----------
TOTAL COMMON AND PREFERRED STOCKS
(identified cost, $64,803,529) 70,281,463
----------
</TABLE>
4
<PAGE> 113
<TABLE>
<CAPTION>
ISSUER PRINCIPAL VALUE
AMOUNT
<S> <C> <C>
REPURCHASE AGREEMENT - 1.9%
Investors Bank & Trust Repurchase Agreement, 4.25%,
dated 12/31/98, $1,384,652 due on 1/4/99 (secured by
Federal Government Agency securities), at cost $ 1,383,998 $ 1,383,998
-----------
Total Investments (identified cost, $66,187,527) 71,665,461
Other assets, less liabilities - .3% 245,564
-----------
NET ASSETS - 100% $71,911,025
===========
</TABLE>
(*) Non-income producing security
(**) Preferred Stock
See notes to financial statements.
5
<PAGE> 114
DLB VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (identified cost, $66,187,527) $ 71,665,461
Receivable for fund shares sold 233,196
Dividends and interest receivable 79,197
------------
71,977,854
------------
LIABILITIES:
Accrued management fees 32,856
Accrued expenses 33,973
------------
66,829
------------
NET ASSETS $ 71,911,025
============
NET ASSETS CONSIST OF:
Paid-in capital $ 66,656,016
Unrealized appreciation of investments 5,477,934
Accumulated distributions in excess of net realized gain on
investment transactions (231,917)
Accumulated undistributed net investment income 8,992
------------
Total $ 71,911,025
============
SHARES OF BENEFICIAL INTEREST OUTSTANDING 4,965,028
============
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PRICE
PER SHARE (NET ASSETS / SHARES OF BENEFICIAL INTEREST
OUTSTANDING) $ 14.48
============
</TABLE>
See notes to financial statements.
6
<PAGE> 115
DLB VALUE FUND
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
Dividends (net of foreign tax withheld of $13,388) $ 1,533,556
Interest 101,912
-----------
1,635,468
-----------
EXPENSES:
Management fee 367,883
Trustees' fees 4,669
Custodian fee 41,759
Registration fees 31,981
Accounting and audit fees 27,896
Legal fees 16,089
Transfer agent fee 8,000
Printing fees 3,561
-----------
501,838
Reduction of expenses by investment manager (103,386)
-----------
Net expenses 398,452
-----------
Net investment income 1,237,016
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain (identified cost basis): 4,274,144
Change in unrealized appreciation (2,709,889)
-----------
Net realized and unrealized gain on investments 1,564,255
-----------
Increase in net assets from operations $ 2,801,271
===========
</TABLE>
See notes to financial statements.
7
<PAGE> 116
DLB VALUE FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
From operations:
Net investment income $ 1,237,016 $ 528,025
Net realized gain on investments 4,274,144 2,487,991
Net unrealized appreciation (depreciation) of investments (2,709,889) 5,222,346
------------ ------------
2,801,271 8,238,362
------------ ------------
Distributions to shareholders:
From net investment income (1,228,024) (520,799)
From net realized gain on investments (4,256,810) (2,487,991)
In excess of net realized gain on investments -- (228,789)
------------ ------------
(5,484,834) (3,237,579)
------------ ------------
Fund share transactions:
Net proceeds from sales of shares 27,948,166 36,994,760
Net asset value of shares issued in
reinvestment of distributions 5,469,771 3,237,577
Cost of shares reacquired (15,272,460) (8,012,111)
------------ ------------
18,145,477 32,220,226
------------ ------------
Total increase in net assets 15,461,914 37,221,009
NET ASSETS:
At beginning of period 56,449,111 19,228,102
------------ ------------
At end of period (including accumulated undistributed
net investment income of $8,992 and $0, respectively) $ 71,911,025 $ 56,449,111
============ ============
</TABLE>
See notes to financial statements.
8
<PAGE> 117
DLB VALUE FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period Ended
Years Ended December 31, December 31,
1998 1997 1996 1995**
--------- -------- -------- ------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout
each period):
Net asset value- beginning of period $ 14.91 $ 12.53 $ 10.58 $ 10.00
--------- -------- -------- --------
Income from investment operations:
Net investment income .27 .15 .16 .09
Net realized and unrealized gain on investments .50 3.15 2.38 .73
--------- -------- -------- --------
0.77 3.30 2.54 .82
--------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.27) (.15) (.16) (.09)
From net realized gain on investments (0.93) (.70) (.41) (.15)
In excess of net realized gain on investment -- (.07) (.02) --
--------- -------- -------- --------
(1.20) (.92) (.59) (.24)
--------- -------- -------- --------
Net asset value- end of period $ 14.48 $ 14.91 $ 12.53 $ 10.58
========= ======== ======== ========
Total Return 5.25% 26.35% 23.99% 18.64% *
Ratios and Supplemental Data:
Ratio of expenses to average net assets .60% .71% .80% .80% *
Ratio of net investment income to average net assets 1.85% 1.40% 1.56% 2.02% *
Portfolio turnover 21% 25% 23% 7%
Net assets at end of period (000 omitted) $ 71,911 $ 56,449 $ 19,228 $ 10,818
</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. Without such agreement, the investment income per
share and ratios would have been:
<TABLE>
<S> <C> <C> <C> <C>
Net investment income $ .25 $ .13 $ .09 $ .02
Ratios (to average net assets):
Expenses .75% .92% 1.50% 2.43% *
Net investment income 1.69% 1.19% .86% 0.40% *
</TABLE>
* Annualized
** For the period from July 25, 1995 (commencement of operations) to December
31, 1995.
See notes to financial statements.
9
<PAGE> 118
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"), a Massachusetts business trust. The Trust 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 - Securities purchased under agreements to resell
to the original owner are recorded at cost. The Fund may enter into
such agreements with institutions that the Fund's investment adviser
has determined to be creditworthy. The Fund requires that the
securities so purchased be transferred to the custodian under terms
that enable the Fund to obtain such securities in the event of a
default. The Fund monitors, on a daily basis, the value of the
securities to assure that such value, including accrued interest, 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.
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 gains 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, which may differ from generally accepted
accounting principles, the basis on which these financial statements
are prepared. Accordingly, the net investment income and net realized
gain reported in these financial statements may
10
<PAGE> 119
differ from the amounts 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.
To the extent that such taxes are unrecoverable, they 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 return of capital. Differences between
income for financial reporting purposes and tax-basis earnings and
profits may result in the reporting of temporary over-distributions in
the financial statements. Such over-distributions 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 amounts
reported in the financial statements. Actual results could differ from
those such 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, 1998, the management fee
amounted to $367,883, of which $103,314 was waived by Babson.
Additionally, $72 of Fund expenses were borne by Babson.
The Fund pays no compensation directly to the Trustees who also are
officers of the investment manager, nor 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 $29,097,851 and $13,701,046, 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 $ 66,425,109
============
Gross unrealized appreciation $ 9,868,207
Gross unrealized depreciation (4,627,855)
------------
Net unrealized appreciation $ 5,240,352
============
</TABLE>
11
<PAGE> 120
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>
Years Ended December 31,
------------------------
1998 1997
--------- ---------
<S> <C> <C>
Shares sold 1,766,141 2,546,356
Shares issued in reinvestment
of distributions 380,870 218,608
Redemptions (968,493) (513,437)
--------- ---------
Net increase 1,178,518 2,251,527
========= =========
</TABLE>
12
<PAGE> 121
DLB VALUE FUND
---------------------------------------------
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.
BABSON SECURITIES CORPORATION
One Memorial Drive, Cambridge, MA 01242
March 1999
<PAGE> 122
DLB
The DLB GROWTH FUND
ANNUAL REPORT
DECEMBER 31, 1998
[EXPERIENCE TO MANAGE THE FUTURE]
<PAGE> 123
DLB GROWTH FUND
MANAGER'S COMMENTARY
CALENDAR YEAR 1998 WAS A REWARDING YEAR FOR INVESTING IN MEDIUM AND LARGE
CAPITALIZATION HIGH GROWTH COMPANIES IN THE DLB GROWTH FUND.
IN THE FALL INVESTORS WERE CONFRONTED WITH A "WALL OF WORRY" THAT INCLUDED MANY
DISTURBING ISSUES: the recession in Asia, the financial meltdown in Russia,
slowing growth in Latin America, the collapse of several high profile hedge
funds, a potential Clinton impeachment and emerging fears of a recession here in
the United States. Each of these issues added a layer of uncertainty to the
global financial picture. Investor sentiment and psychology were very negative
at the market lows in early October.
SINCE THAT TIME MANY THINGS HAVE CHANGED. President Clinton appears to have made
progress in his defense against impeachment. The Federal Reserve has cut
short-term interest rates three times in an effort to head off a slowing economy
in the United States and stimulate liquidity in the financial markets. The bond
market, aided by the interest rate cuts, has digested the turmoil caused by
defaults on Russian bonds and blowups by several large hedge funds. Asia appears
to have stabilized and is actually showing slight signs of an improvement in
some areas. The International Monetary Fund has been aggressive at aiding
troubled countries in South America. Investor psychology has improved
dramatically, sending the U.S. stock market up by 28% from the lows reached in
early October.
TWO LARGE DRIVERS OF PERFORMANCE IN THE DLB GROWTH FUND IN THE LATTER HALF OF
1998 WERE THE IMPROVEMENT IN THE SEMICONDUCTOR INDUSTRY AND CONTINUED RAPID
GROWTH IN COMMUNICATIONS. After a significant slowdown in the second and third
quarters of last year, the semiconductor industry appears to have stabilized and
is expected to recover to historic levels of growth in 1999/2000. We have large
investments (partly a result of aggressive buying during the market weakness in
September/October) in industry-leading semiconductor companies like Linear
Technology, Analog Devices, Maxim Integrated Products, and Microchip, all of
whom experi-
<PAGE> 124
DLB GROWTH FUND
MANAGER'S COMMENTARY
enced enormous gains in their stock prices in the second half of 1998.
EXPLOSIVE GROWTH OF INTERNET USERS AND APPLICATIONS AS WELL AS THE CONVERGENCE
OF VOICE, DATA AND VIDEO TRAFFIC OVER NETWORKS ARE DRIVING TREMENDOUS GROWTH IN
COMMUNICATIONS. Investing in companies like Cisco Systems and Vitesse
Semiconductor, key suppliers of the Internet infrastructure, has been a
successful strategy for the DLB Growth Fund. We continue to be very optimistic
about the outlook for these companies and the technology sector in general.
THE FUND'S LARGE INVESTMENTS IN THE HEALTHCARE SECTOR WERE ALSO VERY REWARDING
IN 1998. New technologies developed in the fields of cardiac rhythm management
and interventional cardiology led to accelerating earnings growth and a record
year for Guidant Corp. An enormous pipeline of new blockbuster products coming
from Pfizer (who can forget all the publicity surrounding the launch of Viagra?)
drove this company's stock price to new all-time highs. Cardinal Health, a
lesser known pharmaceutical distribution company, benefited last year from
successful new drug launches throughout the industry.
THE DLB GROWTH FUND ALSO INVESTED IN SEVERAL COMPANIES WITH STRONG DEFENSIBLE
FRANCHISES THAT MANY WOULD CONSIDER BORING, BUT PROVED TO BE EXCELLENT
INVESTMENTS IN 1998. Companies like Safeway (grocery store retailer), CVS (drug
store retailer), Federal Home Loan Mortgage Corp. (mortgage finance) and Paychex
(payroll processing) were all top performing holdings last year.
THE FUND WAS NOT WITHOUT DISAPPOINTMENTS LAST YEAR. Oil prices collapsed and
stayed at unusually low levels throughout the year. This impacted several energy
companies whose fortunes are partially dependent on commodity oil prices. Weak
emerging market economies created a difficult environment for several of our
multinational consumer products companies. These economies also bruised some of
our financial stocks that had outstanding loans in these regions.
IN THE SECOND HALF OF CALENDAR YEAR 1998 WE MADE FOUR NEW INVESTMENTS IN THE DLB
GROWTH FUND:
ETEC SYSTEMS: Developer of high-precision manufacturing equipment sold to the
semiconductor industry
HEALTH MANAGEMENT ASSOCIATES: Owner and operator
<PAGE> 125
DLB GROWTH FUND
MANAGER'S COMMENTARY
of acute-care and psychiatric hospitals in rural geographic areas.
MSC INDUSTRIAL DIRECT: Direct marketer and distributor of industrial products to
small and mid-sized industrial customers in the U.S.
VITESSE SEMICONDUCTOR: Designer and manufacturer of ultra high speed, high
integration semiconductor chips used in telecommunications, networking, and
semiconductor test equipment products
NUMEROUS INVESTMENTS WERE LIQUIDATED DURING THIS TIME PERIOD, including Boeing,
First Data, Intel, Synopsys, Tenet Healthcare and Wallace Computer.
THANK YOU FOR YOUR INVESTMENT AND CONTINUED INTEREST IN THE DLB GROWTH FUND.
AS OF DECEMBER 31, 1998 THE TOP 10 EQUITY HOLDINGS IN THE DLB GROWTH FUND
COMPRISED JUST OVER 37% OF TOTAL ASSETS:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Top 10 Equity Holdings Percent of Fund Assets
- --------------------------------------------------------------------------------
<S> <C>
Cardinal Health 4.9%
Guidant 4.5%
Federal Home Loan Mort. 4.5%
Vitesse Semiconductor 3.5%
Linear Technology 3.4%
Safeway 3.4%
American Home Products 3.4%
Maxim Integrated Products 3.3%
Pfizer 3.2%
KLA-Tencor 3.1%
Total 37.2%
- --------------------------------------------------------------------------------
</TABLE>
LOOKING AHEAD, WE EXPECT A GRADUAL SLOWDOWN IN ECONOMIC GROWTH IN THIS COUNTRY.
Combined with low inflation this should keep interest rates at current low
levels. In this type of slow growth environment, we believe companies with the
ability to generate sustainable high levels of earnings growth without
disappointing investors will prove to be attractive investments. These are the
types of companies we continue to identify and invest in on behalf of our fellow
shareholders in the DLB Growth Fund.
<PAGE> 126
DLB GROWTH FUND
GROWTH OF A $100,000 INVESTMENT
CUMULATIVE TOTAL RETURN SINCE INCEPTION 1/20/98
<TABLE>
<CAPTION>
DLB Growth R1000
Fund (net) Growth DLB Growth Fd R1000 Growth
<S> <C> <C> <C> <C>
$100,000.00 $100,000.00
1.9 3.22 Jan-98 $101,900.00 $103,220.00
6.87 7.52 28-Feb-98 $108,900.53 $110,982.14
1.65 3.99 31-Mar-98 $110,697.39 $115,410.33
3.7 1.38 30-Apr-98 $114,793.19 $117,002.99
-3.75 -2.84 31-May-98 $110,488.45 $113,680.11
3.35 6.12 30-Jun-98 $114,189.81 $120,637.33
0.18 -0.66 31-Jul-98 $114,395.35 $119,841.13
-14.86 -15.01 31-Aug-98 $97,396.20 $101,852.97
7.08 7.68 30-Sep-98 $104,291.85 $109,675.28
7.67 8.04 31-Oct-98 $112,291.04 $118,493.17
7.75 7.61 30-Nov-98 $120,993.59 $127,510.50
8.54 9.02 31-Dec-98 $131,326.45 $139,011.95
</TABLE>
TOTAL RETURNS (%) FOR PERIODS ENDED 12/31/98
<TABLE>
<CAPTION>
6 MONTHS SINCE INCEPTION
7/1/98- 1/20/98-
12/31/98 12/3/98
<S> <C> <C>
DLB GROWTH FUND 15.01 31.33
Russell 1000 Growth 15.22 39.01
</TABLE>
DISCLOSURE STATEMENT
RUSSELL 1000 GROWTH INDEX is an unmanaged index that 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.
<PAGE> 127
DLB GROWTH FUND
FINANCIAL STATEMENTS FOR THE PERIOD FROM
JANUARY 20, 1998 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31, 1998
<PAGE> 128
DLB GROWTH FUND
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS:
Portfolio of Investments as of December 31, 1998 2 - 4
Statement of Assets and Liabilities as of December 31, 1998 5
Statement of Operations from January 20, 1998 (commencement
of operations) to December 31, 1998 6
Statement of Changes in Net Assets from January 20, 1998
(commencement of operations) to December 31, 1998 7
Financial Highlights from January 20, 1998 (commencement
of operations) to December 31, 1998 8
Notes to Financial Statements 9 - 11
<PAGE> 129
INDEPENDENT AUDITORS' REPORT
To the Trustees of The DLB Fund Group and Shareholders of DLB Growth Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of DLB Growth Fund (the "Fund") (a separate series
of The DLB Fund Group) as of December 31, 1998, and the related statements of
operations and changes in net assets and the financial highlights for the period
from January 20, 1998 (commencement of operations) to December 31, 1998. 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 audit.
We conducted our audit 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, 1998 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
audit provides 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 Growth Fund at
December 31, 1998, the results of its operations, the change in its net assets,
and its financial highlights for the period from January 20, 1998 (commencement
of operations) to December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
February 12, 1999
<PAGE> 130
DLB GROWTH FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
COMMON STOCKS - 93.3%
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
BANKS - 2.8%
Bank of America 6,900 $ 414,863
Mellon Bank Corporation 7,500 515,625
----------
930,488
----------
BEVERAGES - 3.1%
Anheuser-Busch Companies, Inc. 7,000 459,375
PepsiCo, Inc. 14,000 573,125
----------
1,032,500
----------
CHEMICALS - 4.0%
E.I. Du Pont de Nemours and Company 4,300 228,169
Monsanto Company 14,300 679,250
Praxair, Inc. 11,500 405,375
----------
1,312,794
----------
COMPUTER RELATED - 1.4%
Cisco Systems, Inc. (*) 4,950 459,422
----------
COMPUTER SERVICES - 1.7%
Automatic Data Processing, Inc. 6,900 553,294
----------
COMPUTER SOFTWARE - 2.2%
Cadence Design Systems, Inc. (*) 18,900 562,275
Microsoft Corporation (*) 1,200 166,425
----------
728,700
----------
COSMETIC & TOILETRY - 1.7%
The Gillette Company 11,600 560,425
----------
DIVERSIFIED - 1.6%
Berkshire Hathaway Inc., Class B 221 519,085
----------
DRUGS - 15.6%
American Home Products Corporation 18,900 1,064,306
Bristol-Meyers Squibb Company 5,500 735,969
Cardinal Health, Inc. 21,457 1,628,050
</TABLE>
2
<PAGE> 131
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
DRUGS (CONTINUED)
Merck & Co., Inc. 5,000 $ 738,438
Pfizer Inc. 8,000 1,003,500
----------
5,170,263
----------
ELECTRICAL EQUIPMENT - 4.6%
General Electric Company 6,600 673,613
MSC Industrial Direct Company, Inc. (*) 37,700 852,963
----------
1,526,576
----------
ELECTRONIC / INSTRUMENT - 4.4%
Analog Devices (*) 21,800 683,975
KLA Tencor Corp. (*) 18,000 780,750
----------
1,464,725
----------
FINANCIAL SERVICES - 6.1%
Federal Home Loan Mortgage Corporation 22,200 1,430,513
Paychex, Inc. 11,100 570,956
----------
2,001,469
----------
FOOD PRODUCERS - 1.7%
BestFoods 8,600 457,950
Wm. Wrigley Jr. Company 1,200 107,475
----------
565,425
----------
FOOD RETAILERS - 3.4%
Safeway Inc. (*) 18,300 1,115,156
----------
FURNITURE & APPLIANCES - .8%
Herman Miller, Inc. 9,800 263,375
----------
INSURANCE COMPANIES - 2.1%
American International Group, Inc. 7,100 686,038
----------
INTERNATIONAL OIL - 2.5%
Mobil Corporation 6,200 540,175
Royal Dutch Petroleum 6,300 301,613
----------
841,788
----------
MEDICAL SUPPLIES & SERVICES - 10.6%
Boston Scientific Corporation (*) 33,600 900,900
Guidant Corporation 14,000 1,543,500
Health Management Associates (*) 23,100 499,538
Johnson & Johnson 6,700 561,963
----------
3,505,901
----------
</TABLE>
3
<PAGE> 132
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<CAPTION>
<S> <C> <C>
PROFESSIONAL SERVICES - 1.8%
Service Corporation International 15,700 $ 597,581
-----------
RECREATION - 1.4%
The Walt Disney Company 15,300 459,000
-----------
SEMICONDUCTORS - 13.4%
ETEC Systems, Inc. (*) 15,100 604,000
Linear Technology Corporation 11,500 1,029,969
Maxim Integrated Products, Inc. (*) 21,400 934,913
Microchip Technology Incorporated (*) 24,000 888,000
Vitesse Semiconductor Corporation (*) 21,400 976,375
-----------
4,433,257
-----------
SPECIALTY RETAIL - 3.7%
CVS Corporation 10,800 594,000
Office Depot Inc. (*) 17,400 642,710
-----------
1,236,710
-----------
TOBACCO - 2.7%
Philip Morris Companies Inc. 16,400 877,400
-----------
TOTAL COMMON STOCKS
(identified cost, $23,747,130) 30,841,372
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
<S> <C> <C>
REPURCHASE AGREEMENT - 6.8%
Investors Bank & Trust Repurchase Agreement, 4.25%,
dated 12/31/98, $2,244,434 due on 1/4/99 (secured by
Federal Government Agency securities), at cost $ 2,243,374 2,243,374
------------
TOTAL INVESTMENTS (identified cost, $25,990,504) 33,084,746
Other assets, less liabilities - (.1%) (31,028)
------------
NET ASSETS - 100% $ 33,053,718
============
</TABLE>
(*) Non-income producing security
See notes to financial statements.
4
<PAGE> 133
DLB GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (identified cost, $25,990,504) $33,084,746
Dividends and interest receivable 20,497
Receivable from investment manager 202
-----------
33,105,445
===========
LIABILITIES:
Accrued management fee 15,418
Accrued expenses 36,309
-----------
51,727
-----------
NET ASSETS $33,053,718
===========
NET ASSETS CONSIST OF:
Paid-in capital $25,954,866
Unrealized appreciation of investments 7,094,242
Accumulated undistributed net investment income 1,548
Accumulated undistributed net realized gain on investment transactions 3,062
-----------
$33,053,718
===========
SHARES OF BENEFICIAL INTEREST OUTSTANDING 2,578,422
===========
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PRICE
PER SHARE (NET ASSETS / SHARES OF BENEFICIAL INTEREST
OUTSTANDING) $ 12.82
===========
</TABLE>
See notes to financial statements.
5
<PAGE> 134
DLB GROWTH FUND
STATEMENT OF OPERATIONS
PERIOD FROM JANUARY 20, 1998 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
Dividends (net of foreign tax withheld of $1,542) $ 218,384
Interest 122,770
-----------
341,154
-----------
EXPENSES:
Management fee 147,804
Trustees' fees 3,675
Custodian fee 43,713
Accounting and audit fees 27,433
Legal fees 14,876
Transfer agent fee 7,591
Registration cost 5,362
Miscellaneous 4,101
-----------
254,555
Reduction of expenses by investment manager (41,968)
-----------
Net expenses 212,587
-----------
Net investment income 128,567
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Realized gain (identified cost basis) 677,899
Change in unrealized appreciation 7,094,242
-----------
Net realized and unrealized gain on investments 7,772,141
-----------
Increase in net assets from operations $ 7,900,708
===========
</TABLE>
See notes to financial statements.
6
<PAGE> 135
DLB GROWTH FUND
STATEMENT OF CHANGES IN NET ASSETS
PERIOD FROM JANUARY 20, 1998 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INCREASE IN NET ASSETS:
From operations:
Net investment income $ 128,567
Net realized gain on investments 677,899
Net unrealized appreciation of investments 7,094,242
------------
7,900,708
------------
Distributions to shareholders:
From net investment income (127,019)
From net realized gain on investments (674,837)
------------
(801,856)
------------
Fund share transactions:
Net proceeds from sales of fund shares 25,153,000
Net asset value of shares issued in
reinvestment of distributions 801,856
------------
25,954,856
------------
Total increase in net assets 33,053,708
NET ASSETS:
At beginning of period 10
------------
At end of period (including accumulated undistributed
net investment income of $1,548) $ 33,053,718
============
</TABLE>
See notes to financial statements.
7
<PAGE> 136
DLB GROWTH FUND
FINANCIAL HIGHLIGHTS
PERIOD FROM JANUARY 20, 1998 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Per share data (for a share outstanding throughout
the period):
Net asset value- beginning of period $ 10.00
--------
Income from investment operations:
Net investment income .05
Net realized and unrealized gain on investments 3.09
--------
3.14
========
Less distributions to shareholders:
From net investment income (.05)
From net gain on investments (0.27)
--------
(0.32)
--------
Net asset value- end of period $ 12.82
========
Total return 31.33%
Ratios and Supplemental Data:
Ratio of expenses to average net assets .80% *
Ratio of net investment income to average net assets .48% *
Portfolio turnover 34%
Net assets at end of period (000 omitted) $ 33,054
</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. Without such agreement, the investment income per
share and ratios would have been:
<TABLE>
<S> <C>
Net investment income $ .03
Ratios (to average net assets):
Expenses .95% *
Net investment income .32% *
</TABLE>
* Annualized
See notes to financial statements.
8
<PAGE> 137
DLB GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BUSINESS AND ORGANIZATION
DLB Growth (the "Fund") is a non-diversified series of The DLB Fund
Group (the "Trust"), a Massachusetts business trust. The Trust 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 - Securities purchased under agreements to resell
to the original owner are recorded at cost. The Fund may enter into
such agreements with institutions that the Fund's investment adviser
has determined to be creditworthy. The Fund requires that the
securities so purchased be transferred to the custodian under terms
that enable the Fund to obtain such securities in the event of a
default. The Fund monitors, on a daily basis, the value of the
securities to assure that such value, including accrued interest, 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 gains 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, which may differ from generally accepted
accounting principles, the basis on which these financial statements
are prepared. Accordingly, the net investment income and net realized
gain reported in these financial statements may differ from the amounts
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 return of capital. Differences between
9
<PAGE> 138
income for financial reporting purposes and tax-basis earnings and
profits may result in the reporting of temporary over-distributions in
the financial statements. Such over-distributions 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 amounts
reported in the financial statements. Actual results could differ from
those such 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 period from January 20, 1998 (commencement of
operations) to December 31, 1998, the management fee amounted to
$147,804, of which $41,767 was waived by Babson. Additionally, $201 of
Fund expenses were borne by Babson.
The Fund pays no compensation directly to the Trustees who also are
officers of the investment manager, nor 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 $31,964,715 and $8,895,486, 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 $ 25,990,504
============
Gross unrealized appreciation $ 7,303,953
Gross unrealized depreciation (209,711)
------------
Net unrealized appreciation $ 7,094,242
============
</TABLE>
10
<PAGE> 139
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>
Period from
January 20, 1998
(commencement of
operations) to
December 31, 1998
-----------------
<S> <C>
Shares sold 2,515,233
Shares issued in reinvestment
of distributions 63,188
---------
Net increase 2,578,421
=========
</TABLE>
11
<PAGE> 140
DLB GROWTH FUND
---------------------------------------------
This report and the fund financial statements contained herein are submitted for
the general information of the shareholders of the DLB Growth Fund. The report
is not intended for distribution to prospective investors unless preceded or
accompanied by a current prospectus.
BABSON SECURITIES CORPORATION
One Memorial Drive, Cambridge, MA 01242
March 1999
<PAGE> 141
DLB
THE DLB MICRO CAPITALIZATION FUND
ANNUAL REPORT
DECEMBER 31, 1998
[EXPERIENCE TO MANAGE THE FUTURE]
<PAGE> 142
DLB MICRO CAP FUND
MANAGER'S COMMENTARY
AN IMPORTANT FEATURE IN THE EQUITY MARKETS DURING 1998 WAS THE CONTINUING TREND
OF LARGE COMPANY OUTPERFORMANCE RELATIVE TO SMALLER COMPANIES. For the past five
years, the larger the average market capitalization of the index, the better the
index performed. This was even more true in 1998 when the Russell 2000 Index
trailed the S&P 500 Index by 31 percentage points, the widest margin in its
twenty-year history. Indeed, the investment performance of the Fund, which
commenced operations on July 20, 1998, was hurt by its lower market
capitalization relative to its benchmark, the Russell 2000.
ANOTHER KEY FEATURE OF 1998 OCCURRED DURING THE FOURTH QUARTER WITH THE
DOMINANCE OF GROWTH STOCKS. Leading the way for the growth stocks was the strong
performance in the technology sector, a sector in which the Fund is typically
underweighted because of the short product cycles encountered in that business.
Its weighting of 12% in the Russell 2000 Index helps to explain the Fund's
underperformance versus the benchmark. Nevertheless, the Fund outperformed the
Russell 2000 Value index, indicating that the Fund did well in selecting
securities, although the basic style was out of favor.
BELOW ARE THE POSITIONS THAT WERE INITIATED DURING THE FOURTH QUARTER OF 1998:
SAGA COMMUNICATIONS owns radio stations in second tier markets. The company's
strategy is to exploit niches that allow a good sales force, rather than high
listener ratings, to generate financial results. The company has high free cash
and low debt relative to other radio stations. Radio companies such as Emmis and
Clear Channel have lauded its chairman and CEO, Ed Christian, as one of the top
managers in radio.
CMP MEDIA publishes "IT World" and other technology periodicals. It is the
leader in its markets and has good cash flow characteristics. Its earnings are
much more cyclical than the average magazine company because its revenues are
virtually all from ad pages, with the little from subscriptions.
D&K SERVICES is a regional pharmaceutical distributor, focusing on small cities
in the Midwest. The distribution is spread out with smaller orders per customer.
D&K is especially good at this, and the larger wholesalers' infrastructure make
it difficult to compete in this niche with D&K.
<PAGE> 143
DLB MICRO CAP FUND
MANAGER'S COMMENTARY
MAC GRAY runs coin-operated laundry facilities for universities and apartment
complexes, along with copiers and small refrigerator rentals. Mac Gray dominates
the university business and has consistently taken share from small competitors.
It has two large competitors in the apartment market. One appears to be
relatively weak financially and the other is content to be regional at the
moment. Stewart MacDonald, Chairman, has been in the coin-op business most of
his life. Indeed, Mac Gray has been a family business since its inception in
1959.
THE FUND'S PORTFOLIO IS CURRENTLY PRICED AT A REMARKABLY LOW PRICE TO EQUITY AND
PRICE TO BOOK RELATIVE TO EITHER THE RUSSELL 2000 OR THE S&P 500. Currently,
many investors appear to be chasing short-term returns with technology and large
cap stocks. Well-managed companies with good strategies in small, mundane market
niches have been ignored. The micro cap area has seen companies lose 50% of
their market capitalization for missing earnings estimates by 10 - 15% while
they maintained flat or rising earnings year-over-year. It is not known when
this market will reverse. We need to remember that buying pieces of businesses
(shares of common stock) is still a mathematical equation. Will the earnings of
the companies in the Fund provide a good return on the Fund's initial
investment? Clearly, the Fund has a better chance if it pays less for the
businesses than the manager believes they are worth.
THE PORTFOLIO IS POSITIONED WELL FOR THE FUND'S STRATEGY OF UNCOVERING SMALL
COMPANIES WITH SUSTAINABLE MARKET NICHES. Certainly, the more speculative areas
of the market like semiconductors and oil services will continue to see strong
short-term rallies, but our strategy should be solid over the peaks and troughs
of full market cycles.
<PAGE> 144
DLB MICRO CAP FUND
- ------------------------------------------------------------------------------
GROWTH OF A $100,000 INVESTMENT
CUMULATIVE TOTAL RETURN SINCE INCEPTION 7/20/98
<TABLE>
<CAPTION>
DLB MICRO CAP
FUND (NET OF FEES) R2000 DLB MICRO CAP R2000
- ------------- ----- ------------- -----
<S> <C> <C> <C> <C>
$100,000.00 $100,000.00
- 4.90 - 9.14 31-Jul-98 $ 95,100.00 $ 90,860.00 (7/20/98-7/31/98
-21.87 -19.42 31-Aug-98 $ 74,301.63 $ 73,214.99
4.58 7.83 30-Sep-98 $ 77,704.64 $ 78,947.72
3.47 4.08 31-Oct-98 $ 80,401.00 $ 82,168.79
2.11 5.24 30-Nov-98 $ 82,097.46 $ 86,474.43
4.87 6.19 31-Dec-98 $ 86,095.60 $ 91,827.20
</TABLE>
TOTAL RETURNS (%) FOR PERIODS ENDED 12/31/98
<TABLE>
<CAPTION>
Since Inception
7/20/98-
12/31/98
<S> <C>
DLB MICRO CAP FUND -13.90
Russell 2000 - 8.18
</TABLE>
Disclosure Statement
RUSSELL 2000 INDEX is an unmanaged index that contains the 2000 smallest stocks
in the Russell 3000 Index that represent approximately 7% of the U.S. equity
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.
<PAGE> 145
DLB MICRO CAPITALIZATION FUND
FINANCIAL STATEMENTS FOR THE PERIOD
FROM JULY 20, 1998 (COMMENCEMENT
OF OPERATIONS) TO DECEMBER 31, 1998
<PAGE> 146
DLB MICRO CAPITALIZATION FUND
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS:
Portfolio of Investments as of December 31, 1998 2 - 5
Statement of Assets and Liabilities as of December 31, 1998 6
Statement of Operations from July 20, 1998 (commencement
of operations) to December 31, 1998 7
Statement of Changes in Net Assets from July 20, 1998
(commencement of operations) to December 31, 1998 8
Financial Highlights from July 20, 1998 (commencement
of operations) to December 31, 1998 9
Notes to Financial Statements 10 - 12
<PAGE> 147
INDEPENDENT AUDITORS' REPORT
To the Trustees of The DLB Fund Group and Shareholders of DLB Micro
Capitalization Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of DLB Micro Capitalization Fund (the "Fund") (a
separate series of The DLB Fund Group) as of December 31, 1998, and the related
statements of operations and changes in net assets and the financial highlights
for the period from July 20, 1998 (commencement of operations) to December 31,
1998. 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 audit.
We conducted our audit 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, 1998 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 audit provides 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 Micro
Capitalization Fund at December 31, 1998, the results of its operations, the
change in its net assets, and its financial highlights for the period from July
20, 1998 (commencement of operations) to December 31, 1998 in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
February 12, 1999
<PAGE> 148
DLB MICRO CAPITALIZATION FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
COMMON STOCKS - 93.8%
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
AIRLINES - 7.1%
Airnet Systems Inc. (*) 26,100 $ 375,188
Hub Group Inc. (*) 20,600 399,125
Mesaba Holdings, Inc. (*) 30,900 637,313
----------
1,411,626
----------
AUTO PARTS & MANUFACTURERS - 6.7%
Autocam Corporation 32,828 541,664
Dura Automotive Systems Inc. (*) 17,000 580,125
Keystone Automotive Industries, Inc. (*) 9,800 205,188
----------
1,326,977
----------
BANKS - 2.8%
First Republic Bancorp, Inc. (*) 13,700 343,356
New England Community Bancorp, Inc. 10,500 210,000
----------
553,356
----------
BEVERAGES - 1.2%
Todhunter International, Inc. (*) 28,600 232,375
----------
BUILDING SUPPLIES - 4.7%
International Comfort Products Corporation (*) 49,100 392,826
Republic Group Incorporated 26,910 539,882
----------
932,708
----------
COMMUNICATION EQUIPMENT - 1.9%
Cunningham Graphics International Inc. (*) 25,300 385,825
----------
COMPUTER RELATED - 1.2%
Analysts International Corporation 12,700 244,475
----------
CONSTRUCTION - 1.8%
Crossman Communities, Inc. (*) 13,000 359,125
----------
CONTAINERS - 2.0%
US Can Corporation (*) 22,600 403,948
----------
</TABLE>
2
<PAGE> 149
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
COSMETIC & TOILETRY - 1.8%
The Stephan Co. 34,300 $351,575
--------
DRUGS - 2.9%
D&K Healthcare Resources Inc. (*) 600 16,350
Medco Research Inc. (*) 21,800 566,800
--------
583,150
--------
ELECTRICAL EQUIPMENT - 1.8%
Kollmorgen Corporation 23,400 356,850
--------
EXPLORATION & DRILLING - 2.2%
Stone Energy Corporation (*) 15,300 439,875
--------
FINANCIAL SERVICES - 2.6%
Conning Corporation 24,800 514,600
--------
FOOD RETAILERS - 3.1%
Performance Food Group Company (*) 21,900 615,938
--------
INSURANCE COMPANIES - 4.1%
Highlands Insurance Group Inc. (*) 31,800 415,388
Superior National Insurance Group, Inc. (*) 6,200 124,388
Stirling Cooke Brown Holdings, Ltd. 15,800 274,525
--------
814,300
--------
INTERNATIONAL OIL - 1.6%
Chieftain International, Inc. (*) 21,800 313,375
--------
MACHINERY & EQUIPMENT - 4.6%
ABC Rail Products Corporation (*) 24,100 293,719
Pentacon, Inc. (*) 22,700 97,894
Ritchie Brothers Auctioneers Inc. (*) 19,300 519,894
--------
911,506
--------
MEDIA - 2.7%
Gray Communications Systems Inc. 14,800 202,575
Saga Communications Inc. (*) 16,300 334,150
--------
536,725
--------
MEDICAL SUPPLIES & SERVICES - 4.6%
Meridian Diagnostics Inc. 27,100 182,925
Priority Healthcare Corporation (*) 14,300 741,813
--------
924,738
--------
</TABLE>
3
<PAGE> 150
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
METAL PRODUCTS - .3%
Hawk Corporation (*) 8,300 $ 69,513
----------
MISCELLANEOUS - 1.4%
Sun Hydraulics Corporation 33,100 275,144
----------
OFFICE EQUIPMENT - 1.7%
Day Runner Inc. (*) 23,100 334,950
----------
PAPER & FOREST PRODUCTS - 2.2%
Fibermark Inc. (*) 31,700 431,913
----------
PRINTING & PUBLISHING - 1.8%
CMP Media Inc. (*) 19,100 348,575
----------
PROFESSIONAL SERVICES - 6.5%
Carey International Inc. (*) 21,900 383,250
Lamalie Associates, Inc. (*) 53,000 321,313
Mac-Gray Corporation 40,600 461,825
Professional Detailing, Inc. (*) 4,550 128,538
----------
1,294,925
----------
SAVINGS & LOANS - 5.4%
HF Bancorp Inc. (*) 21,400 357,113
Lawrence Savings Bank (*) 27,300 349,781
Mech Financial Inc. 13,100 363,525
----------
1,070,419
----------
SPECIALTY RETAIL - 6.5%
Bridgford Foods Corp. 36,453 462,497
School Specialty Inc. (*) 25,800 551,475
Travis Boats & Motors, Inc. (*) 13,500 276,750
----------
1,290,722
----------
TRANSPORTATION - .8%
Willlis Lease Finance Corporation (*) 10,000 157,500
----------
TRUCKING & SHIPPING - .2%
Jevic Transportation, Inc. (*) 43,950 346,106
Mark VII, Inc. (*) 1,700 31,663
----------
377,769
----------
</TABLE>
4
<PAGE> 151
<TABLE>
<CAPTION>
ISSUER SHARES VALUE
<S> <C> <C>
WHOLESALERS - 4.1%
Pameco Corporation (*) 21,200 $ 245,125
Scansource, Inc. (*) 26,800 576,200
-----------
821,325
-----------
TOTAL COMMON STOCKS
(identified cost, $20,300,696) 18,685,800
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
<S> <C> <C>
REPURCHASE AGREEMENT - 6.7%
Investors Bank & Trust Repurchase Agreement, 4.25%,
dated 12/31/98, $1,330,980 due on 1/4/99 (secured by
Federal Government Agency securities), at cost $ 1,330,352 1,330,352
------------
TOTAL INVESTMENTS (identified cost, $21,631,048) 20,016,152
Other assets, less liabilities - (.5%) (106,081)
------------
NET ASSETS - 100% $ 19,910,071
============
</TABLE>
(*) Non-income producing security
See notes to financial statements.
5
<PAGE> 152
DLB MICRO CAPITALIZATION FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (identified cost, $21,631,048) $ 20,016,152
Receivable for investments sold 26,842
Dividends and interest receivable 4,658
Receivable from investment manager 4,702
------------
20,052,354
------------
LIABILITIES:
Payable for investments purchased 89,514
Accrued management fee 16,370
Accrued expenses 36,399
------------
142,283
------------
NET ASSETS $ 19,910,071
============
NET ASSETS CONSIST OF:
Paid-in capital $ 22,723,219
Unrealized depreciation of investments (1,614,896)
Accumulated net realized loss on investment transactions (1,198,252)
------------
$ 19,910,071
============
SHARES OF BENEFICIAL INTEREST OUTSTANDING 2,311,292
============
NET ASSET VALUE, OFFERING PRICE, AND REDEMPTION PRICE
PER SHARE (NET ASSETS / SHARES OF BENEFICIAL INTEREST
OUTSTANDING) $ 8.61
============
</TABLE>
See notes to financial statements.
6
<PAGE> 153
DLB MICRO CAPITALIZATION FUND
STATEMENT OF OPERATIONS
PERIOD FROM JULY 20, 1998 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
Interest $ 53,138
Dividends 30,873
-----------
84,011
-----------
EXPENSES:
Management fee 82,227
Trustees' fees 1,396
Accounting and audit fees 27,502
Custodian fee 23,742
Legal fees 5,762
Transfer agent fee 3,602
Other 2,042
-----------
146,273
Reduction of expenses by investment manager (39,557)
-----------
Net expenses 106,716
-----------
Net investment loss (22,705)
-----------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Realized loss (identified cost basis) (1,198,252)
Change in unrealized depreciation (1,614,896)
-----------
Net realized and unrealized loss on investments (2,813,148)
-----------
Decrease in net assets from operations $(2,835,853)
===========
</TABLE>
See notes to financial statements.
7
<PAGE> 154
DLB MICRO CAPITALIZATION FUND
STATEMENT OF CHANGES IN NET ASSETS
PERIOD FROM JULY 20, 1998 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INCREASE IN NET ASSETS:
From operations:
Net investment loss $ (22,705)
Net realized loss on investments (1,198,252)
Net unrealized depreciation of investments (1,614,896)
------------
(2,835,853)
Net proceeds from sales of fund shares 22,745,914
------------
Total increase in net assets 19,910,061
NET ASSETS:
At beginning of period 10
------------
At end of period $ 19,910,071
============
</TABLE>
See notes to financial statements.
8
<PAGE> 155
DLB MICRO CAPITALIZATION FUND
FINANCIAL HIGHLIGHTS
PERIOD FROM JULY 20, 1998 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Per share data (for a share outstanding throughout
the period):
Net asset value- beginning of period $ 10.00
--------
Loss from investment operations:
Net investment loss (.01)
Net realized and unrealized loss on investments (1.38)
--------
(1.39)
--------
Net asset value- end of period $ 8.61
========
Total return (13.90%)
Ratios and Supplemental Data:
Ratio of expenses to average net assets 1.30% *
Ratio of net investment loss to average net assets (.28%)*
Portfolio turnover 51%
Net assets at end of period (000 omitted) $ 19,910
</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 1.30% of
average daily net assets. Without such agreement, the investment loss per share
and ratios would have been:
<TABLE>
<S> <C>
Net investment loss $ (.03)
Ratios (to average net assets):
Expenses 1.77% *
Net investment loss (.76%)*
</TABLE>
* Annualized
See notes to financial statements.
9
<PAGE> 156
DLB MICRO CAPITALIZATION FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BUSINESS AND ORGANIZATION
DLB Micro Capitalization (the "Fund") is a non-diversified series of
The DLB Fund Group (the "Trust"), a Massachusetts business trust. The
Trust 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 - Securities purchased under agreements to resell
to the original owner are recorded at cost. The Fund may enter into
such agreements with institutions that the Fund's investment adviser
has determined to be creditworthy. The Fund requires that the
securities so purchased be transferred to the custodian under terms
that enable the Fund to obtain such securities in the event of a
default. The Fund monitors, on a daily basis, the value of the
securities to assure that such value, including accrued interest, 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 gains on investments.
Accordingly, no provision for federal income or excise tax is
necessary. At December 31, 1998, the Fund, for federal income tax
purposes, had capital loss carryforwards of $487,528, which expire
December 31, 2006. To the extent permitted by the Code, capital loss
carryforwards will reduce taxable income arising from future net
realized gains 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, which may differ from generally accepted
accounting principles, the basis on which these financial statements
are prepared. Accordingly, the net investment income and net realized
gain reported in these financial statements may differ from the amounts
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> 157
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 return of capital. Differences between
income for financial reporting purposes and tax-basis earnings and
profits may result in the reporting of temporary over-distributions in
the financial statements. Such over-distributions are classified as
distributions in excess of net investment income or accumulated
undistributed net realized gains. During the period ended December 31,
1998, $22,705 was reclassified from accumulated net investment loss to
paid-in capital due to differences between financial reporting and tax
accounting for net operating losses. 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 amounts
reported in the financial statements. Actual results could differ from
those such 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 1.00% of average daily net
assets. For the period from July 20, 1998 (commencement of operations)
to December 31, 1998, the management fee amounted to $82,227, of which
$8,652 was waived by Babson. Additionally, $30,905 of Fund expenses
were borne by Babson.
The Fund pays no compensation directly to the Trustees who also are
officers of the investment manager, nor 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 $25,648,681 and $4,233,924, 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 $ 21,670,457
============
Gross unrealized appreciation $ 1,242,129
Gross unrealized depreciation (2,896,434)
------------
Net unrealized depreciation $ (1,654,305)
============
</TABLE>
11
<PAGE> 158
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>
Period from
July 20, 1998
(commencement of
operations) to
December 31, 1998
-----------------
<S> <C>
Shares sold 2,311,291
=========
</TABLE>
12
<PAGE> 159
DLB MICRO CAP FUND
---------------------------------------------
This report and the fund financial statements contained herein are submitted for
the general information of the shareholders of the DLB Micro Capitalization
Fund. The report is not intended for distribution to prospective investors
unless preceded or accompanied by a current prospectus.
BABSON SECURITIES CORPORATION
One Memorial Drive, Cambridge, MA 01242
March 1999
