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hours per response: 19.4
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-07242
-----------------------------------
The Cutler Trust
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(Exact name of registrant as specified in charter)
3555 Lear Way Medford, Oregon 97504
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(Address of principal executive offices) (Zip code)
Erich M. Patten
Cutler Investment Counsel, LLC 3555 Lear Way Medford, Oregon 97504
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(Name and address of agent for service)
Registrant's telephone number, including area code: (541) 770-9000
----------------------
Date of fiscal year end: June 30, 2006
--------------------------------------------
Date of reporting period: December 31, 2005
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
CUTLER EQUITY FUND
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THE
[GRAPHIC OMITTED] CUTLER
TRUST
SEMI-ANNUAL REPORT
DECEMBER 31, 2005
(UNAUDITED)
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CUTLER EQUITY FUND
TABLE OF CONTENTS
DECEMBER 31, 2005
================================================================================
Page
Letter to Shareholders .................................................... 3
Portfolio Information (Unaudited) ......................................... 4
Schedule of Investments (Unaudited) ....................................... 5
Statement of Assets and Liabilities (Unaudited) ........................... 7
Statement of Operations (Unaudited) ....................................... 8
Statements of Changes in Net Assets ....................................... 9
Financial Highlights ...................................................... 10
Notes to Financial Statements (Unaudited) ................................. 11
About Your Fund's Expenses (Unaudited) .................................... 15
Additional Information (Unaudited) ........................................ 17
2
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CUTLER EQUITY FUND
LETTER TO SHAREHOLDERS
================================================================================
To The Cutler Trust Shareholders:
The enclosed documents comprise the semi-annual report for the Cutler Equity
Fund. We are pleased with the performance from these previous two quarters, and
would like to provide some thoughts on the current direction of the markets.
Investors have seen substantial gains in the past year in international equities
as well as energy markets. Global growth has driven earnings and economic
expansion overseas, which has been the catalyst for demand increases of natural
resources. While we do not own international securities in the Fund, we believe
that exposure to US multi-national companies will eventually bring much of this
international growth home. In addition, we have maintained a position in at
least three energy companies throughout the duration of 2005. We remain bullish
on energy, as well as the ability for US based firms to grow revenues in rapidly
expanding markets.
We have intentionally maintained low turnover in the Fund, attempting to
minimize the impact of transaction costs. However, we have made a few notable
changes in the portfolio, such as reducing our pharmaceutical exposure and
increasing our consumer staples holdings. We believe that valuations in the
market are attractive in the large capitalization space, and that the Fund's
holdings are attractively positioned for the coming year. The Fund continues to
hold companies with a strong dividend history and maintains its traditional
equity income focus. With real estate cooling off, bonds near historic highs,
and small capitalization stocks looking expensive, we anticipate the type of
blue chip companies held in the Fund to perform well on a relative basis with
other asset classes.
On behalf of everyone at Cutler Investment Counsel, and The Cutler Trust, we
thank you for your continued support.
Sincerely,
/s/ Kenneth R. Cutler /s/ Erich M. Patten
Kenneth R. Cutler Erich M. Patten
Chairman Portfolio Manager
The Cutler Trust Cutler Investment Counsel, LLC
The views in this report were those of the Cutler Trust's investment adviser as
of December 31, 2005 and may not reflect their views on the date this report is
first published or anytime thereafter. These views are intended to asset
shareholders in understanding their investment in the Fund and do not constitute
investment advice.
3
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CUTLER EQUITY FUND
PORTFOLIO INFORMATION
DECEMBER 31, 2005 (Unaudited)
================================================================================
ASSET ALLOCATION (% OF NET ASSETS)
Consumer Discretionary - 7.1%
Consumer Staples - 12.3%
Energy - 10.4%
Financials - 20.5%
Health Care - 5.5%
Industrials - 18.6%
[GRAPHIC OMITTED] Information Technology - 6.1%
Materials - 5.9%
Telecommunication Services - 3.1%
Utilities - 9.4%
Other - 1.1%
4
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CUTLER EQUITY FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2005 (Unaudited)
================================================================================
SHARES COMMON STOCKS -- 98.9% VALUE
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CONSUMER DISCRETIONARY -- 7.1%
39,770 McDonald's Corp. .................................. $ 1,341,044
29,400 McGraw-Hill Cos., Inc. (The) ...................... 1,517,922
-----------
2,858,966
-----------
CONSUMER STAPLES -- 12.3%
19,140 Kimberly-Clark Corp. .............................. 1,141,701
22,430 PepsiCo, Inc. ..................................... 1,325,164
22,180 Procter & Gamble Co. (The) ........................ 1,283,778
38,520 Sysco Corp. ....................................... 1,196,046
-----------
4,946,689
-----------
ENERGY -- 10.4%
25,050 Chevron Corp. ..................................... 1,422,089
24,090 ConocoPhillips .................................... 1,401,556
24,060 Exxon Mobil Corp. ................................. 1,351,450
-----------
4,175,095
-----------
FINANCIALS -- 20.5%
26,850 Citigroup, Inc. ................................... 1,303,031
34,550 JPMorgan Chase & Co. .............................. 1,371,290
29,950 Lincoln National Corp. ............................ 1,588,249
46,300 U.S. Bancorp ...................................... 1,383,907
30,750 Washington Mutual, Inc. ........................... 1,337,625
19,800 Wells Fargo & Co. ................................. 1,244,034
-----------
8,228,136
-----------
HEALTH CARE -- 5.5%
19,100 Johnson & Johnson ................................. 1,147,910
45,000 Pfizer, Inc. ...................................... 1,049,400
-----------
2,197,310
-----------
INDUSTRIALS -- 18.6%
15,600 3M Co. ............................................ 1,209,000
21,210 Caterpillar, Inc. ................................. 1,225,302
18,950 Emerson Electric Co. .............................. 1,415,565
33,150 General Electric Co. .............................. 1,161,907
26,700 Pitney Bowes, Inc. ................................ 1,128,075
23,700 United Technologies Corp. ......................... 1,325,067
-----------
7,464,916
-----------
INFORMATION TECHNOLOGY -- 6.1%
42,420 Hewlett-Packard Co. ............................... 1,214,485
50,130 Intel Corp. ....................................... 1,251,245
-----------
2,465,730
-----------
MATERIALS -- 5.9%
43,020 Alcoa, Inc. ....................................... 1,272,101
25,240 Dow Chemical Co. (The) ............................ 1,106,017
-----------
2,378,118
-----------
5
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CUTLER EQUITY FUND
SCHEDULE OF INVESTMENTS (Continued)
================================================================================
SHARES COMMON STOCKS -- 98.9% (CONTINUED) VALUE
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TELECOMMUNICATION SERVICES -- 3.1%
49,970 AT&T, Inc. ........................................ $ 1,223,765
-----------
UTILITIES -- 9.4%
26,650 Exelon Corp. ...................................... 1,416,181
44,490 National Fuel Gas Co. ............................. 1,387,643
27,900 Peoples Energy Corp. .............................. 978,453
-----------
3,782,277
-----------
TOTAL COMMON STOCKS (Cost $32,615,148) $39,721,002
-----------
================================================================================
SHARES MONEY MARKET FUNDS -- 1.0% VALUE
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408,896 First American Prime Obligation Fund - Class Y
(Cost $408,896).................................... $ 408,896
-----------
TOTAL INVESTMENTS AT VALUE -- 99.9%
(Cost $33,024,044)................................ $40,129,898
OTHER ASSETS IN EXCESS OF LIABILITIES -- 0.1%...... 19,600
-----------
NET ASSETS -- 100.0%............................... $40,149,498
===========
See accompanying notes to financial statements.
6
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CUTLER EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2005 (Unaudited)
================================================================================
ASSETS
Investments in securities:
At acquisition cost ........................................... $33,024,044
===========
At value ...................................................... $40,129,898
Dividends receivable .......................................... 79,973
Other assets .................................................. 17,934
-----------
Total assets .................................................... 40,227,805
-----------
LIABILITIES
Dividends payable ............................................. 12,525
Payable for capital shares redeemed ........................... 16,600
Accrued liabilities:
Investment advisory fees (Note 3) ........................... 26,022
Administration fees (Note 3) ................................ 6,000
Other accrued expenses and liabilities ...................... 17,160
-----------
Total liabilities ............................................... 78,307
-----------
NET ASSETS ...................................................... $40,149,498
===========
NET ASSETS CONSIST OF:
Paid-in capital ............................................... $51,267,284
Undistributed net investment income ........................... 9,983
Accumulated net realized losses from security transactions .... (18,233,623)
Net unrealized appreciation on investments .................... 7,105,854
-----------
NET ASSETS ...................................................... $40,149,498
===========
Shares of beneficial interest outstanding (unlimited number
of shares authorized, no par value) ........................... 3,978,405
===========
Net asset value, offering price and redemption price per share
(Note 2)....................................................... $ 10.09
===========
See accompanying notes to financial statements.
7
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CUTLER EQUITY FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2005 (Unaudited)
================================================================================
INVESTMENT INCOME
Dividend income ............................................... $ 563,904
-----------
EXPENSES
Investment advisory fees (Note 3) ............................. 153,420
Administration fees (Note 3) .................................. 36,000
Professional fees ............................................. 17,157
Trustees' fees and expenses ................................... 11,821
Postage and supplies .......................................... 9,382
Registration fees ............................................. 8,483
Insurance expense ............................................. 7,936
Custody fees .................................................. 5,645
Printing of shareholder reports ............................... 3,963
Other expenses ................................................ 6,029
-----------
Total expenses .................................................. 259,836
-----------
NET INVESTMENT INCOME ........................................... 304,068
-----------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS
Net realized losses from investments .......................... (1,098,250)
Net change in unrealized appreciation/depreciation on investments 2,502,986
-----------
NET REALIZED AND UNREALIZED GAINS ON INVESTMENTS ................ 1,404,736
-----------
INCREASE IN NET ASSETS FROM OPERATIONS .......................... $ 1,708,804
===========
See accompanying notes to financial statements.
8
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CUTLER EQUITY FUND
STATEMENTS OF CHANGES IN NET ASSETS
===================================================================================================
Six Months
Ended Year
December 31, 2005 Ended
(Unaudited) June 30, 2004
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FROM OPERATIONS
Net investment income ........................................... $ 304,068 $ 716,341
Net realized gains (losses) from investments .................... (1,098,250) 1,355,939
Net change in unrealized appreciation/depreciation of investments 2,502,986 249,688
------------ ------------
Net increase in net assets from operations ........................ 1,708,804 2,321,968
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DISTRIBUTIONS TO SHAREHOLDERS
From net investment income ...................................... (300,075) (706,876)
------------ ------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold ....................................... 61,213 3,303,293
Net asset value of shares issued in reinvestment
of distributions to shareholders .............................. 279,200 670,761
Payments for shares redeemed .................................... (1,707,051) (6,714,508)
------------ ------------
Net decrease from capital share transactions ...................... (1,366,638) (2,740,454)
------------ ------------
Total increase (decrease) in net assets ........................... 42,091 (1,125,362)
NET ASSETS
Beginning of period ............................................... 40,107,407 41,232,769
------------ ------------
End of period ..................................................... $ 40,149,498 $ 40,107,407
============ ============
UNDISTRIBUTED NET INVESTMENT INCOME ............................... $ 9,983 $ 5,990
============ ============
CAPITAL SHARE ACTIVITY
Sold .............................................................. 6,134 352,139
Reinvested ........................................................ 27,682 69,080
Redeemed .......................................................... (169,526) (703,539)
------------ ------------
Net decrease in shares outstanding ................................ (135,710) (282,320)
Shares outstanding at beginning of period ......................... 4,114,115 4,396,435
------------ ------------
Shares outstanding at end of period ............................... 3,978,405 4,114,115
============ ============
See accompanying notes to financial statements.
9
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CUTLER EQUITY FUND
FINANCIAL HIGHLIGHTS
===================================================================================================================================
Per Share Data for a Share Outstanding Throughout Each Period
- -----------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED
DECEMBER 31, YEARS ENDED JUNE 30,
2005 ----------------------------------------------------------------------
(UNAUDITED) 2005 2004 2003 2002 2001
-------------------------------------------------------------------------------------
Net asset value at beginning of period ...... $ 9.75 $ 9.38 $ 8.29 $ 8.85 $ 10.38 $ 9.78
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income ..................... 0.08 0.17 0.18 0.13 0.08 0.08
Net realized and unrealized gains
(losses) on investments .................. 0.34 0.37 1.09 (0.56)(a) (1.53) 0.79
---------- ---------- ---------- ---------- ---------- ----------
Total from investment operations ............ 0.42 0.54 1.27 (0.43) (1.45) 0.87
---------- ---------- ---------- ---------- ---------- ----------
Less distributions from:
Net investment income ..................... (0.08) (0.17) (0.18) (0.13) (0.08) (0.08)
Net realized gains ........................ -- -- -- -- -- (0.19)
---------- ---------- ---------- ---------- ---------- ----------
Total distributions ......................... (0.08) (0.17) (0.18) (0.13) (0.08) (0.27)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value at end of period ............ $ 10.09 $ 9.75 $ 9.38 $ 8.29 $ 8.85 $ 10.38
========== ========== ========== ========== ========== ==========
Total return(b) ............................. 4.26%(c) 5.77% 15.39% (4.75%) (14.07%) 8.97%
========== ========== ========== ========== ========== ==========
Net assets at the end of period (000's) ..... $ 40,149 $ 40,107 $ 41,233 $ 41,250 $ 22,963 $ 25,744
========== ========== ========== ========== ========== ==========
Ratios/supplementary data:
Ratio of net expenses to average net assets . 1.27%(d) 1.30% 1.25% 1.25% 1.25% 1.25%
Ratio of gross expenses to
average net assets (e) .................... 1.27%(d) 1.43% 1.43% 1.79% 1.50% 1.45%
Ratio of net investment income
to average net assets ..................... 1.49%(d) 1.77% 1.95% 1.65% 0.76% 0.56%
Portfolio turnover rate ..................... 29%(d) 14% 14% 61% 46% 60%
(a) Per share amount does not reflect the actual net realized and unrealized
gain/loss for the period because of the timing of sales of the Fund shares
and the amount of per share realized and unrealized gains and losses at
such time (Note 1).
(b) Total return is a measure of the change in value of an investment in the
Fund over the period covered, which assumes any dividends or capital gains
distributions are reinvested in shares of the Fund. Returns shown do not
reflect the deduction of taxes a shareholder would pay on Fund
distributions or the redemption of Fund shares.
(c) Not annualized.
(d) Annualized.
(e) The ratio of gross expenses to average net assets reflects the expense
ratio excluding any waivers and/or expense reimbursements by the Fund's
investment adviser.
See accompanying notes to financial statements.
10
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CUTLER EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 (Unaudited)
================================================================================
1. ORGANIZATION
The Cutler Equity Fund (formerly the Cutler Value Fund) (the "Fund") is a
diversified series of The Cutler Trust (the "Trust"). The Trust is a
Delaware statutory trust that is registered as an open-end management
investment company under the Investment Company Act of 1940. The Fund is
the only series of the Trust. Under its Trust Instrument, the Trust is
authorized to issue an unlimited number of Fund shares of beneficial
interest without par value. The Fund commenced operations on October 2,
1992.
On April 15, 2003, the Board of Trustees approved the reorganization of
Cutler Core Fund (the "Core Fund") with and into the Fund pursuant to an
Agreement and Plan of Reorganization executed by the Trust on behalf of
each series. On April 17, 2003, the Core Fund exchanged its assets and
liabilities for shares of the Fund. Immediately prior to its reorganization
with and into the Fund, the Core Fund's net assets were $20,681,496. Each
shareholder of the Core Fund received .9227 shares of the Fund. The
acquisition of net assets and unrealized gain/loss from this transaction
was as follows:
CONTRIBUTING DATE OF SHARES UNREALIZED
ENTITY CONTRIBUTION NET ASSETS ISSUED GAIN
------------ ------------ ------------ ---------- ----------
Cutler Core Fund April 17, 2003 $20,681,496 2,744,243 $2,508,485
The Fund seeks current income and long-term capital appreciation.
2. SIGNIFICANT ACCOUNTING POLICIES
The following summarizes the significant accounting policies of the Fund:
SECURITIES VALUATION -- Exchange traded securities for which market
quotations are readily available are valued using the last reported sales
price provided by independent pricing services as of the close of trading
on the New York Stock Exchange (normally 4:00 p.m. Eastern time), on each
Fund business day. In the absence of a sale, such securities are valued at
the mean of the last bid and asked price. Non-exchange traded securities
for which over-the-counter quotations are available are generally valued at
the mean between the closing bid and asked prices. Money market instruments
that mature in sixty days or less may be valued at amortized cost unless
the Fund's investment adviser believes another valuation is more
appropriate. Investments in other open-end regulated investment companies
are valued at net asset value.
The Fund values securities at fair value pursuant to procedures adopted by
the Board of Trustees if (1) market quotations are insufficient or not
readily available or (2) the Fund's investment adviser believes that the
prices or values available are unreliable due to, among other things, the
occurrence of events after the close of the securities markets on which the
Fund's securities primarily trade but before the time as of which the Fund
calculates its net asset value.
11
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CUTLER EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
================================================================================
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. The offering price and redemption
price per share of the Fund is equal to the net asset value per share.
ESTIMATES -- The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements
and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
SECURITY TRANSACTIONS, INVESTMENT INCOME AND REALIZED GAINS AND LOSSES --
Investment transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date. Interest income is recorded as earned.
Gains and losses on securities sold are determined on a specific
identification basis.
DISTRIBUTIONS TO SHAREHOLDERS -- Distributions to shareholders of net
investment income, if any, are declared and paid quarterly. Capital gain
distributions, if any, are distributed to shareholders annually.
Distributions are based on amounts calculated in accordance with applicable
Federal income tax regulations, which may differ from accounting principles
generally accepted in the United States of America. These differences are
due primarily to differing treatments of income and gains on various
investment securities held by the Fund, timing differences and differing
characterizations of distributions made by the Fund. The tax character of
distributions paid for the periods ended December 31, 2005 and June 30,
2005 was ordinary income.
FEDERAL TAXES -- The Fund intends to comply with the special provisions of
Subchapter M 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 taxable net income,
the Fund (but not the shareholders) will be relieved of federal income tax
on 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 income
(earned during the calendar year) and 98% of its net realized gains (earned
during the twelve months ended October 31) plus undistributed amounts from
prior years.
The following information is computed on a tax basis for each item as of
December 31, 2005:
Cost of portfolio investments ............................. $ 33,103,952
============
Gross unrealized appreciation ............................. $ 8,313,404
Gross unrealized depreciation ............................. (1,287,458)
------------
Net unrealized appreciation ............................... 7,025,946
Undistributed ordinary income ............................. 9,983
Capital loss carryforward ................................. (16,890,239)
Other losses .............................................. (1,263,476)
------------
Accumulated deficit ....................................... $(11,117,786)
===========
12
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CUTLER EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
================================================================================
The difference between the federal income tax cost of portfolio investments
and the financial statement cost is due to certain timing differences in
the recognition of capital gains or losses under income tax regulations and
accounting principles generally accepted in the United States of America.
These "book/tax" differences are temporary in nature and are primarily due
to losses deferred due to wash sales.
As of June 30, 2005, the Fund had capital loss carryforwards of
$16,890,239, of which $1,053,106 expires June 30, 2009, $7,402,392 expires
June 30, 2010, $5,747,725 expires June 30, 2011 and $2,687,016 expires June
30, 2012. These capital loss carryforwards may be utilized in the current
and future years to offset net realized capital gains, if any, prior to
distributing such gains to shareholders.
3. TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISER -- Cutler Investment Counsel, LLC (the "Adviser") is the
investment adviser to the Fund. Pursuant to an Investment Advisory
Agreement, the Fund pays a fee, which is accrued daily and paid monthly, to
the Adviser at an annual rate of 0.75% of the Fund's average daily net
assets.
Effective January 1, 2005, the Adviser intends to voluntarily waive its
advisory fees and reimburse Fund operating expenses to the extent necessary
to limit the Fund's ordinary operating expenses to 1.35% of its average
daily net assets. This voluntary waiver may be reduced or eliminated at any
time. There were no such waivers in the period ended December 31, 2005.
ADMINISTRATION AND OTHER SERVICES -- Under the terms of a Mutual Fund
Services Agreement between the Trust and Ultimus Fund Solutions, LLC
("Ultimus"), Ultimus provides administrative, pricing, accounting, dividend
disbursing, shareholder servicing and transfer agent services for the Fund.
For these services, Ultimus receives a monthly fee from the Fund at an
annual rate of 0.15% on its average daily net assets up to $500 million;
0.125% on the next $500 million of such net assets; and 0.10% on such net
assets in excess of $1 billion, subject to a minimum monthly fee of $6,000.
During the period ended December 31, 2005, Ultimus received $36,000 for
these services. In addition, the Fund pays out-of-pocket expenses
including, but not limited to, postage, supplies and costs of pricing the
Fund's portfolio securities. Certain officers of the Trust are also
officers of Ultimus, or of Ultimus Fund Distributors, LLC, the principal
underwriter of the Fund's shares and an affiliate of Ultimus.
SHAREHOLDER SERVICE PLAN -- The Fund may pay shareholder servicing fees not
to exceed an annual rate of 0.25% of the Fund's average daily net assets.
These fees may be paid to various financial institutions that provide
shareholder services.
13
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CUTLER EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
================================================================================
4. SECURITIES TRANSACTIONS
The cost of purchases and proceeds from sales of investment securities,
other than short-term investments, amounted to $5,815,455 and $6,638,347,
respectively, for the period ended December 31, 2005.
5. CONTINGENCIES AND COMMITMENTS
The Fund indemnifies the Trust's officers and trustees for certain
liabilities that might arise from their 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.
14
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CUTLER EQUITY FUND
ABOUT YOUR FUND'S EXPENSES (Unaudited)
================================================================================
We believe it is important for you to understand the impact of costs on
your investment. All mutual funds have operating expenses. As a shareholder
of the Fund, you incur ongoing costs, including management fees and other
Fund expenses. These ongoing costs, which are deducted from the Fund's
gross income, directly reduce the investment return of the Fund.
A fund's expenses are expressed as a percentage of its average net assets.
This figure is known as the expense ratio. The following examples are
intended to help you understand the 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 examples below are based on an investment of
$1,000 made at the beginning of the period shown and held for the entire
period.
The table below illustrates the Fund's costs in two ways:
ACTUAL FUND RETURN - This section helps you to estimate the actual expenses
that you paid over the period. The "Ending Account Value" shown is derived
from the Fund's actual return, and the third column shows the dollar amount
of operating expenses that would have been paid by an investor who started
with $1,000 in the Fund. You may use the information here, together with
the amount you invested, to estimate the expenses that you paid over the
period.
To do so, 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 given for the Fund under the heading "Expenses Paid During
Period."
HYPOTHETICAL 5% RETURN - This section is intended to help you compare the
Fund's costs with those of other mutual funds. It assumes that the Fund had
an annual return of 5% before expenses during the period shown, but that
the expense ratio is unchanged. In this case, because the return used is
not the Fund's actual return, the results do not apply to your investment.
The example is useful in making comparisons because the Securities and
Exchange Commission requires all mutual funds to calculate expenses based
on a 5% return. You can assess the Fund's costs by comparing this
hypothetical example with the hypothetical examples that appear in
shareholder reports of other funds.
Note that expenses shown in the table are meant to highlight and help you
compare ongoing costs only. The Fund does not charge transaction fees, such
as purchase or redemption fees, nor does it carry a "sales load."
The calculations assume no shares were bought or sold during the period.
Your actual costs may have been higher or lower, depending on the amount of
your investment and the timing of any purchases or redemptions.
15
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CUTLER EQUITY FUND
ABOUT YOUR FUND'S EXPENSES (Unaudited) (Continued)
================================================================================
More information about the Fund's expenses, including annual expense ratios
since inception, can be found in this report. For additional information on
operating expenses and other shareholder costs, please refer to the Fund's
prospectus.
Beginning Ending
Account Value Account Value Expenses Paid
July 1, 2005 December 31, 2005 During Period*
------------- ----------------- -------------
Based on Actual Fund Return $ 1,000.00 $ 1,042.60 $ 6.54
Based on Hypothetical 5% Return
(before expenses) $ 1,000.00 $ 1,018.80 $ 6.46
* Expenses are equal to the Fund's annualized expense ratio of 1.27% for the
period, multiplied by the average account value over the period, multiplied
by 184/365 (to reflect the one-half year period).
16
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CUTLER EQUITY FUND
ADDITIONAL INFORMATION (Unaudited)
================================================================================
PROXY VOTING INFORMATION
A description of the policies and procedures that the Fund uses to
determine how to vote proxies relating to securities held in the Fund's
portfolio is available, without charge upon request, by calling
1-800-228-8537 or on the Securities and Exchange Commissions's (SEC)
website http://www.sec.gov. Information regarding how the Fund voted
proxies relating to portfolio securities during the most recent 12-month
period ended June 30 is also available without charge upon request by
calling 1-800-228-8537 or on the SEC's website at http://www.sec.gov.
FORM N-Q INFORMATION
The Trust files a complete listing of portfolio holdings for the Fund with
the SEC as of the first and third quarters of each fiscal year on Form N-Q.
The filings are available upon request, by calling 1-800-228-8537.
Furthermore, you are able to obtain a copy of the filings on the SEC's
website at http://www.sec.gov. The Trust's Forms N-Q may also be reviewed
and copied at the SEC's Public Reference Room in Washington, DC, and
information on the operation of the Public Reference Room may be obtained
by calling 1-800-SEC-0330.
17
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CUTLER EQUITY FUND
APPROVAL OF INVESTMENT ADVISORY AGREEMENT
(Unaudited)
================================================================================
The Board of Trustees, including the Independent Trustees voting separately, has
reviewed and approved the continuance of the Fund's Investment Advisory
Agreement (the "Agreement") with the Adviser for an additional one year period.
Approval took place at an in-person meeting held on December 12, 2005, at which
all of the Trustees were present.
The Independent Trustees were advised by their counsel of their fiduciary
obligations in approving the Agreement and the Trustees requested such
information from the Adviser as they deemed reasonably necessary to evaluate the
terms of the Agreement and whether the Agreement continues to be in the best
interests of the Fund and its shareholders. The Trustees reviewed: (i) the
nature, extent and quality of the services provided by the Adviser; (ii) the
investment performance of the Fund and the Adviser; (iii) the costs of the
services provided and the profits realized by the Adviser from its relationship
with the Fund; (iv) the extent to which economies of scale would be realized as
the Fund grows; and (v) whether fee levels reflect these economies of scale for
the benefit of the Fund's shareholders. The Trustees reviewed the background,
qualifications, education and experience of the Adviser's investment and
operational personnel. The Trustees also discussed and considered the quality of
administrative and other services provided to the Trust, the Adviser's
compliance program, and the Adviser's role in coordinating such services and
programs. The Independent Trustees were advised by experienced independent
counsel throughout the process. Prior to voting, the Independent Trustees
reviewed the proposed continuance of the Agreement with management.
The Adviser provided the Board with extensive information to assist the Trustees
in analyzing the performance of the Fund over various periods. The Fund's
returns were compared to the returns of S&P 500 Index, the Dow Jones Industrial
Average ("DJIA") and other securities indices, as well as various measurements
of the Fund's performance as compared to domestic equity funds in the
Morningstar database of similar size and with similar investment objectives.
These analyses and comparisons showed that the Fund has outperformed the DJIA
for the one year and five year periods ended September 30, 2005, and
outperformed the S&P 500 Index for the five but not the one year period. For the
12-month period ended September 30, 2005 the Fund had an annual total return of
8.82%, compared with 12.25% and 7.22% for the S&P 500 Index and the DJIA,
respectively. Based upon their review, the Trustees found that the Fund's
performance has been competitive with the returns of relevant securities
indices.
In reviewing the advisory fee and total expense ratios of the Fund, the Trustees
were provided with comparative expense and advisory fee information for other
mutual funds, categorized both by fund size and by investment style. The Fund
currently pays an investment advisory fee computed at the annual rate of .75% of
the Fund's average daily net assets, and the total expense ratio for the Fund
for the fiscal year ended June 30, 2005 was 1.30% of average net assets. The
Adviser informed the Trustees that it intends to continue to cap the Fund's
expenses at no more than 1.35%
18
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CUTLER EQUITY FUND
APPROVAL OF INVESTMENT ADVISORY AGREEMENT
(Unaudited) (Continued)
================================================================================
per annum for the foreseeable future, and that the Adviser intends to waive a
portion of its advisory fees, if necessary, to maintain that expense ratio. The
Trustees took note of the fact that the Fund's advisory fee and expense ratio
are in line with the averages for similarly situated funds.
The Trustees reviewed the financial condition of the Adviser and analyses
prepared by the Adviser reflecting its revenues and expenses with respect to its
services to the Fund for the fiscal years ended June 30, 2004 and 2005. The
Trustees noted that the Fund does not have any "soft dollar" arrangements with
broker-dealers that would otherwise benefit the Adviser.
In approving the Agreement, the Independent Trustees reached the following
conclusions: (1) based on the long-term performance and risk characteristics of
the Fund and the effectiveness of the Fund in achieving its stated objective,
they believe the Adviser has provided high quality services; (2) the Adviser has
the financial resources and personnel to continue to provide quality advisory
services; (3) the advisory fees are reasonable and the total expenses of the
Fund are reasonable; and (4) the continuation of the Agreement is in the best
interests of the Fund and its shareholders. The Independent Trustees also
reviewed and considered the profitability of the Adviser with regards to its
management of the Fund, concluding that the Adviser's profitability was not
excessive given the high quality and scope of services provided by the Adviser
and the investment performance of the Fund. The Independent Trustees further
determined that, at current asset levels, it would not be relevant to consider
the extent to which economies of scale would be realized as the Fund grows, and
whether fee levels reflect these economies of scale. Following further
discussion, it was the consensus of the Independent Trustees that it is not
appropriate to introduce fee breakpoints at the present time. The Trustees
noted, however, that if the Fund grows significantly in assets, it may become
necessary for the Adviser to consider adding fee breakpoints to the Agreement.
No single factor was considered in isolation or to be determinative to the
decision of the Trustees to approve continuance of the Agreement. Rather, the
Trustees concluded, in light of a weighing and balancing of all factors
considered, that it would be in the best interests of the Fund and its
shareholders to renew the Agreement for an additional annual period.
19
CUTLER INVESTMENT COUNSEL, LLC
INVESTMENT MANAGEMENT
INVESTMENT ADVISER TO THE TRUST
3555 Lear Way, Medford,OR 97504
(800)228-8537 o(541)770-9000
Fax:(541)779-0006
info@cutler.com
ITEM 2. CODE OF ETHICS.
Not required
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not required
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not required
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable
ITEM 6. SCHEDULE OF INVESTMENTS.
Not applicable [schedule filed with Item 1]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The registrant has not adopted procedures by which shareholders may recommend
nominees to the registrant's board of trustees.
ITEM 11. CONTROLS AND PROCEDURES.
(a) Based on their evaluation of the registrant's disclosure controls and
procedures (as defined in Rule 30a-3(c) under the Investment Company Act of
1940) as of a date within 90 days of the filing date of this report, the
registrant's principal executive officer and principal financial officer have
concluded that such disclosure controls and procedures are reasonably designed
and are operating effectively to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to them
by others within those entities, particularly during the period in which this
report is being prepared, and that the information required in filings on Form
N-CSR is recorded, processed, summarized, and reported on a timely basis.
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940)
that occurred during the second fiscal quarter of the period covered by this
report that have materially affected, or are reasonably likely to materially
affect, the registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
File the exhibits listed below as part of this Form. Letter or number the
exhibits in the sequence indicated.
(a)(1) Any code of ethics, or amendment thereto, that is the subject of the
disclosure required by Item 2, to the extent that the registrant intends to
satisfy the Item 2 requirements through filing of an exhibit: Not required
(a)(2) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2(a) under
the Act (17 CFR 270.30a-2(a)): Attached hereto
(a)(3) Any written solicitation to purchase securities under Rule 23c-1 under
the Act (17 CFR 270.23c-1) sent or given during the period covered by the report
by or on behalf of the registrant to 10 or more persons: Not applicable
(b) Certifications required by Rule 30a-2(b) under the Act (17 CFR
270.30a-2(b)): Attached hereto
Exhibit 99.CERT Certifications required by Rule 30a-2(a) under the Act
Exhibit 99.906CERT Certifications required by Rule 30a-2(b) under the Act
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) The Cutler Trust
---------------------------------------------------------
By (Signature and Title)* /s/ Erich M. Patten
-------------------------------------------
Erich M. Patten, President
Date February 13, 2006
------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ Erich M. Patten
-------------------------------------------
Erich M. Patten, President
Date February 13, 2006
------------------------------------------
By (Signature and Title)* /s/ Matthew C. Patten
-------------------------------------------
Matthew C. Patten, Treasurer
Date February 13, 2006
------------------------------------------
* Print the name and title of each signing officer under his or her signature.