See accompanying Notes to Financial Statements.
APPLETON EQUITY GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
December 31, 2010
| 1. | Significant Accounting Policies |
The Appleton Funds (the Trust) is registered under the Investment Company Act of 1940, as amended, (the 1940 Act), as a diversified, no-load, open-end management investment company. The Trust was organized as an Ohio business trust on October 31, 2000. The Trust currently offers one series of shares to investors: the Appleton Equity Growth Fund (the Fund). The Trust was capitalized on December 29, 2000, when the initial shares of the Fund were purchased at $10 per share. The Fund commenced operations on December 31, 2000.
The Fund seeks long-term growth of capital by investing primarily in common stocks.
The following is a summary of the Fund's significant accounting policies:
Securities valuation – The Fund's portfolio securities are valued as of the close of business of the regular session of the New York Stock Exchange (normally 4:00 p.m., Eastern time). Portfolio securities traded on stock exchanges are valued at their last sales price as of the close of the regular session of trading on the day the securities are being valued. Securities quoted by NASDAQ are valued at the NASDAQ Official Closing Price. Securities for which market quotations are not readily available are valued at their fair value as determined in good faith in accordance with consistently applied procedures established by and under the general supervision of the Board of Trustees. Money market instruments are valued at amortized cost, which approximates market value.
The various inputs that are used in determining the fair value of the Fund’s investments are summarized into the three broad levels listed below:
| | · | Level 1 – quoted prices in active markets for identical securities |
| | · | Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.) |
| | · | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. As of December 31, 2010, all of the Fund’s securities were categorized as Level 1 securities. There were no transfers between Levels 1 and 2 during the year ended December 31, 2010. See the Portfolio of Investments for industry classification.
Share valuation – The net asset value per share of the Fund is calculated daily by dividing the total value of the Fund's assets, less liabilities, by the number of shares outstanding, rounded to the nearest cent. The offering and redemption price per share are equal to the net asset value per share.
Investment income and distributions to shareholders – Interest income is accrued as earned. Dividend income is recorded on the ex-dividend date. Dividends arising from net investment income are declared and paid annually. Net realized short-term capital gains, if any, may be distributed throughout the year and net realized long-term capital gains, if any, are distributed at least once each year. Income dividends and capital gain distributions are determined in accordance with income tax regulations. Differences between book and tax distributions are considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the composition of net assets based on their federal tax basis treatment; temporary differences do not require reclassifications.
Security transactions – Security transactions are accounted for on trade date. Securities sold are determined on a specific identification basis.
Estimates – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
Federal income tax – It is the Fund's policy to continue to comply with the special provisions of the Internal Revenue Code applicable to regulated investment companies. As provided therein, in any fiscal year in which the Fund so qualifies and distributes at least 90% of its investment company taxable income, the Fund (but not the shareholders) will be relieved of federal income tax on the income distributed. Accordingly, no provision for income taxes has been made.
In order to avoid imposition of the excise tax applicable to regulated investment companies, it is also the Fund's intention to declare and pay as dividends in each calendar year at least 98% of its investment company taxable income (earned during the calendar year) and 98% of its realized capital gains (earned during the twelve months ended October 31) plus undistributed amounts from prior years.
There were no distributions paid during the fiscal years ended December 31, 2010 and 2009.
The following information is computed on a tax basis as of December 31, 2010:
| Tax Cost of portfolio investments | | $ | 9,823,716 | |
| Gross unrealized appreciation on investments | | $ | 3,199,625 | |
| Gross unrealized depreciation on investments | | | (166,085 | ) |
| Net unrealized appreciation on investments | | | 3,033,540 | |
| Capital loss carryforwards | | | (1,786,531 | ) |
| Total accumulated earnings | | $ | 1,247,009 | |
The capital loss carryforwards in the above table expire as follows:
| Amount | | | December 31, |
| $ | 367,121 | | | | 2011 |
| | 129,485 | | | | 2016 |
| | 1,289,925 | | | | 2017 |
| $ | 1,786,531 | | | | |
These capital loss carryforwards may be utilized in future years to offset gains, if any, prior to distributing such gains to shareholders.
During the year ended December 31, 2010, the Fund utilized capital loss carryforwards of $353,807.
During the year ended December 31, 2010, the Fund had expired capital loss carryforwards in the amount of $1,084,426.
Certain reclassifications, the result of permanent differences between financial statement and income tax reporting requirements have been made to the components of capital. The reclassifications resulted from the difference in the tax treatment of net investment losses and expiration of capital loss carryforward. These reclassifications have no impact on the net assets or net asset value per share of the Fund and are designed to present the Fund’s capital accounts on a tax basis. For the year ended December 31, 2010, the Fund reclassified $33,025 of net investment losses and $1,084,426 expired capital loss carryforward to paid-in capital on the Statement of Assets and Liabilities.
The Fund evaluates tax positions taken or expected to be taken in the course of preparing the Fund’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authorities. Tax positions not deemed to meet the more-likely-than-not threshold are recorded as tax benefits or expenses in the current year. Management has analyzed the Fund’s tax positions taken on federal income tax returns for all open tax years (tax years ended December 31, 2007 – December 31, 2010), and has concluded that no provision for federal income tax is required in the Fund’s financial statements.
| 2. | Investment Transactions |
For the year ended December 31, 2010, the cost of purchases and proceeds from sales of portfolio securities, other than short-term investments, amounted to $4,606,239 and $3,965,005, respectively.
| 3. | Transactions with Affiliates |
Certain Trustees and Officers of the Trust are also Officers of Appleton Partners, Inc. (the Adviser) or JPMorgan Chase Bank, N.A. (JPMorgan) the administrative services agent, shareholder servicing and transfer agent, and accounting services agent for the Trust.
Investment Advisory Agreement
Pursuant to an Investment Advisory Agreement between the Trust and the Adviser, the Adviser manages the Fund’s investments. For these services, the Fund pays the Adviser an advisory fee, which is computed and accrued daily and paid monthly, at an annual rate of 1.00% of its average daily net assets.
Pursuant to a written contract between the Adviser and the Fund, the Adviser has agreed to waive a portion of its advisory fees and/or assume certain expenses of the Fund, other than brokerage commissions, extraordinary items, interest and taxes, to the extent annualized Fund operating expenses exceed 1.50% of the Fund’s average daily net assets. The Adviser has agreed to maintain these expense limitations with regard to the Fund through December 31, 2011. For the year ended December 31, 2010, the Adviser waived $108,848 of advisory fees and reimbursed $183 of other operating expenses.
Administration, Accounting And Transfer Agency Agreement
Under the terms of an Administration, Accounting and Transfer Agency Agreement between the Trust and JPMorgan, JPMorgan supplies non-investment related statistical and research data, internal regulatory compliance services and executive and administrative services for the Fund. JPMorgan supervises the preparation of tax returns, reports to shareholders of the Fund, reports to and filings with the Securities and Exchange Commission and state securities commissions, and materials for meetings of the Board of Trustees. For these administrative services, JPMorgan receives a monthly fee based on the Fund's average daily net assets, subject to a monthly minimum fee.
JPMorgan maintains the records of each shareholder's account, answers shareholders' inquiries concerning their accounts, processes purchases and redemptions of the Fund's shares, acts as dividend and distribution disbursing agent and performs other shareholder service functions. For these transfer agency and shareholder services, JPMorgan receives a monthly fee per shareholder account, subject to a monthly minimum fee. In addition, the Fund pays JPMorgan out-of-pocket expenses including, but not limited to, postage and supplies.
JPMorgan also calculates the daily net asset value per share and maintains the financial books and records of the Fund. For these accounting services, JPMorgan receives a monthly fee, based on average daily net assets, from the Fund. In addition, the Fund pays JPMorgan certain out-of-pocket expenses incurred by JPMorgan in obtaining valuations of the Fund's portfolio securities.
Distribution Plan
The Fund has adopted a plan of distribution (the Plan) pursuant to Rule 12b-1 under the 1940 Act. The Plan permits the Fund to pay for expenses incurred in the distribution and promotion of the Fund’s shares including but not limited to, the printing of prospectuses, statements of additional information and reports used for sales purposes, advertisements, expenses of preparation and printing of sales literature, promotion, marketing and sales expenses and other distribution-related expenses, including any distribution fees paid to securities dealers or other firms who have executed a distribution or service agreement with the Trust.
The Plan limits payment of distribution expenses in any fiscal year to a maximum of 0.25% of the Fund’s average daily net assets. For the year ended December 31, 2010, the Fund accrued and the Adviser subsequently reimbursed $27,212 of distribution expenses under the Plan.
Underwriting Agreement
The Trust entered into an Underwriting Agreement on behalf of the Fund with Unified Financial Securities, Inc. (the Distributor). Pursuant to the Underwriting Agreement, the Distributor acts as principal underwriter and, as such, is the exclusive agent for distribution of shares of the Fund. The Distributor receives no compensation for its services.
Compliance Services Agreement
Under the terms of the Compliance Services Agreement between the Trust and JPMorgan, JPMorgan provides certain compliance services to the Trust, including developing and assisting in implementing a compliance program for JPMorgan on behalf of the Fund and providing administrative support services to the Fund’s Compliance Program and Chief Compliance Officer.
In addition, the Trust has contracted with JPMorgan to provide certain compliance services on behalf of the Trust. Subject to the direction of the Trustees of the Trust, JPMorgan developed and assisted in implementing a compliance program for JPMorgan on behalf of the Fund and; provides administrative support services to the Fund’s Compliance Program and Chief Compliance Officer. For these services, JPMorgan receives a quarterly fee from the Trust.
| 4. | Commitments and Contingencies |
The Fund indemnifies the Trust’s Officers and Trustees for certain liabilities that might arise from the performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of representations and warranties and which provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risk of loss to be remote.
Management has evaluated subsequent events through the date of this filing. This evaluation did not result in any subsequent events that necessitated recognition or disclosures.
The Regulated Investment Company Modernization Act of 2010 (the ‘‘Act’’) was enacted on December 22, 2010. The Act makes changes to several tax rules impacting the Fund. In general, the provisions of the Act will be effective for the Fund’s fiscal year ending December 31, 2011. Although the Act provides several benefits, including the unlimited carryover of future capital losses, there may be a greater likelihood that all or a portion of the Fund’s pre-enactment capital loss carryovers may expire without being utilized due to the fact that post-enactment capital losses get utilized before pre-enactment capital loss carryovers. Relevant information regarding the impact of the Act on the Fund, if any, will be contained within the ‘‘Federal Taxes’’ section of the financial statement notes for the fiscal year ending December 31, 2011.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of the Appleton Funds:
We have audited the accompanying statement of assets and liabilities of the Appleton Equity Growth Fund (the Fund) of the Appleton Funds, including the portfolio of investments, as of December 31, 2010, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. 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 the standards of the Public Company Accounting Oversight Board (United States). 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. We were not engaged to perform an audit of the Fund's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2010, by correspondence with the custodian. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Appleton Equity Growth Fund at December 31, 2010, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with U.S. generally accepted accounting principles.
Cincinnati, Ohio
February 23, 2011
APPLETON EQUITY GROWTH FUND
OTHER ITEMS
December 31, 2010 (Unaudited)
PROXY VOTING POLICIES AND PROCEDURES
The Adviser is responsible for exercising the voting rights associated with the securities purchased and held by the Fund. A description of the policies and procedures the Adviser uses in fulfilling this responsibility and information regarding how those proxies were voted during the twelve month period ended June 30 are available without charge, upon request, by calling 1-617-338-0700. They are also available on the Securities and Exchange Commission's website at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The Trust files a complete listing of portfolio holdings for the Fund as of the end of the first and third quarters of each fiscal year on Form N-Q. The complete listing (i) is available on the Commission’s website; (ii) may be reviewed and copied at the Commission's Public Reference Room in Washington, DC; and (iii) will be made available to shareholders upon request by calling 1-800-543-0407. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
SCHEDULE OF SHAREHOLDER EXPENSES
As a shareholder of the Fund, you incur ongoing costs, including investment advisory fees; distribution (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2010 through December 31, 2010).
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During the Six Months Ended December 31, 2010" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund's and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
| | | | | | | | | Expenses Paid | |
| | | Net Expense | | | | Ending | | During the Six | |
| | | Ratio Annualized | | Beginning | | Account Value | | Months Ended | |
| | | December 31, | | Account Value | | December 31, | | December 31, | |
| | | 2010 | | July 1, 2010 | | 2010 | | 2010* | |
| | | | | | | | | | |
| Actual | | 1.50% | | $1,000.00 | | $1,275.00 | | $8.60 | |
| Hypothetical | | 1.50% | | $1,000.00 | | $1,017.64 | | $7.63 | |
* Expenses are equal to the Fund's annualized expense ratio, multiplied by the average account value over the period, multiplied by [number of days in most recent fiscal half-year/365] (to reflect the one-half year period).
APPLETON EQUITY GROWTH FUND
ADVISORY AGREEMENT APPROVAL (unaudited)
December 31, 2010
The Board of Trustees of the Fund, including a majority of the Trustees who are not interested persons of the Trust (the “Independent Trustees”), reviewed and approved the Trust’s Investment Advisory Agreement with the Adviser at a meeting held on December 9, 2010.
The Adviser made a presentation to the Board with information requested by the Independent Trustees. Such information included (i) information confirming the financial condition of the Adviser and the Investment Adviser’s profitability derived from its relationship with the Fund; (ii) a description of the personnel and services provided by the Adviser; (iii) comparative information on fees and investment performance; and (iv) information regarding brokerage and portfolio transactions. Comparative fee and performance information was provided through an independent third party.
The Board reviewed and discussed financial information provided by the Adviser. The Board reviewed and considered the Adviser’s profitability derived from its relationship with the Fund and it was noted that the potential profitability was within ranges generally determined to be reasonable, given the services rendered and the Fund’s performance and services provided. The Board determined that the Adviser is solvent and sufficiently well capitalized to perform the ongoing responsibilities to the Fund and to satisfy its obligations under the Act and the advisory agreement.
The Board reviewed the advisory fee and the effective investment advisory fee rate paid by the Fund and the appropriateness of such advisory fee. The Board reviewed and considered any economies of scale which could be realized by the Fund and how the current advisory fee for the Fund reflects the economies of scale for the benefit of the shareholders of the Fund, noting that at this stage of the Fund in view of its relatively small size, no such economies of scale had been realized.
The Board also reviewed and considered the fees or other payments received by the Adviser, including information about fees generally charged by the Adviser to private clients, noting that the Adviser is required to provide services to the Fund, as a registered investment company, that it does not provide to private clients. Specifically, the Board reviewed and considered comparison of fees charged by investment advisers to fund peers of the Fund, noting that the Adviser’s fees were generally in line with fund peers. The Board also considered and reviewed information regarding brokerage, observing that the Fund, in light of its size, generates relatively little in brokerage fees.
The Board reviewed and considered the qualifications of the portfolio management team to manage the portfolio of the Fund, including the members’ history managing equity investments generally and their experience with the types of securities included in the Fund’s portfolio, as well as the members’ backgrounds and expertise and the amount of time each would be able to devote to the affairs of the Fund. The Board concluded, in light of the particular requirements of the Fund and its investment program, that it was satisfied with the professional qualifications and overall commitment to the Fund of the portfolio management team.
The Board considered the nature, extent and quality of services rendered to the Fund by the Adviser and the investment performance of the Fund based on the data provided which included comparisons with the public markets as represented by indices and with peer funds. The Board determined that in light of the data taken as a whole and the nature of the investment program of the Fund, the investment performance was reasonable and acceptable. The Board concluded that the Fund’s fees paid to the Adviser were reasonable in light of comparative performance and advisory fee information, costs of the services provided and profits to be realized and benefits derived by the Adviser from its relationship with the Fund.
Based on this review, which included an executive session of the Trustees, it was the consensus of the Independent Trustees that the continuation of the Investment Advisory Agreement is in the best interest of the Fund and its shareholders.
APPLETON EQUITY GROWTH FUND
Management of the Trust (Unaudited)
December 31, 2010
Listed in the chart below is basic information regarding the Trustees and Officers of the Trust.
| | | | | | | Number of | | Other |
| | | | | | | Portfolios In | | Directorships |
| | | | | | | Fund Complex | | Held by Trustee |
| | | Current Position with Trust | | Principal Occupation(s) | | Overseen by | | Outside the Fund |
| Name/Address/Age | | and Length of Time Served | | During Last 5 years | | Trustee | | Complex |
| | | | | | | | | |
| INTERESTED TRUSTEES* | | | | | | | | |
| | | | | | | | | |
| James I. Ladge, CFA | | President, Trustee | | Senior Vice President | | 1 | | Director, Cambridge |
45 Milk Street, 8th floor | | (December 2000 – Present) | | Appleton Partners, Inc. | | | | Appleton Trust, NA |
| Boston, MA 02109 | | Treasurer | | (1993 – Present) | | | | |
| Age: 42 | | (December 2003 – Present) | | | | | | |
| | | | | | | | | |
| Douglas C. Chamberlain, CFA | | Trustee | | | | | | |
45 Milk Street, 8th floor | | (December 2000 – Present) | | President, CEO | | 1 | | Director, Cambridge |
| Boston, MA 02109 | | | | Appleton Partners, Inc. | | | | Appleton Trust, NA |
| Age: 63 | | | | (1998 – Present) | | | | |
| | | | | | | | | |
| DISINTERESTED TRUSTEES: | | | | | | | | |
| | | | | | | | | |
| Jack W. Aber PhD | | Trustee | | Professor, Boston University | | 1 | | Director, Manager |
| Boston University School of | | (December 2000- Present) | | (1972 – Present) | | | | Funds |
| Management | | | | | | | | Director, Third |
| 595 Commonwealth Avenue | | | | | | | | Avenue Funds |
| Boston, MA 02215 | | | | | | | | |
| Age: 73 | | | | | | | | |
| | | | | | | | | |
| John M. Cornish, Esquire | | Trustee | | Partner, Choate, Hall & Stewart | | 1 | | Director, Thompson |
| Choate Hall & Stewart | | (December 2000 – Present) | | (1985 – Present) | | | | Steel Company |
| 2 International Place | | | | | | | | |
| Boston, MA 02110 | | | | | | | | |
| Age: 63 | | | | | | | | |
| | | | | | | | | |
| Grady B. Hedgespeth | | Trustee | | Director, Financial Assistance | | 1 | | Director, National |
| 1315 Independence Ave. SE #8 | | (December 2000 – Present) | | Small Business Administration | | | | Cooperative Bank |
| Washington, DC 20024 | | | | (2008 – Present) | | | | |
| Age: 55 | | | | Independent Consultant | | | | |
| | | | | (2005 - 2008) | | | | |
| OFFICER: | | | | | | | | |
| | | | | | | | | |
| Michele D. Hubley | | Secretary and | | Vice President & Chief Compliance | | N/A | | N/A |
45 Milk Street, 8th floor | | Chief Compliance Officer | | Officer, Appleton Partners, Inc. | | | | |
| Boston, MA 02109 | | (December 2004 – Present) | | (1995 – Present) | | | | |
| Age: 53 | | | | | | | | |
| · | All Interested Trustees are such because of their interest in the investment adviser, as defined in the Investment Company Act of 1940. |
The Statement of Additional Information contains additional information about the Trustees and is available without charge upon request by calling 1-877-71-Apple.
