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Expires: August 31, 2011
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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
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The Cutler Trust
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(Exact name of registrant as specified in charter)
525 East Bigham Knoll, Suite 100 Jacksonville, Oregon 97530
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(Address of principal executive offices) (Zip code)
Erich M. Patten
Cutler Investment Counsel, LLC
525 East Bigham Knoll, Suite 100 Jacksonville, Oregon 97530
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(Name and address of agent for service)
Registrant's telephone number, including area code: (541) 770-9000
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Date of fiscal year end: June 30, 2008
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Date of reporting period: June 30, 2008
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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
[LOGO] CUTLER
TRUST
ANNUAL REPORT
JUNE 30, 2008
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CUTLER EQUITY FUND
TABLE OF CONTENTS
================================================================================
Page
Letter to Shareholders.................................................. 3
Management Discussion of Fund Performance............................... 4
Performance Information (Unaudited)..................................... 6
Portfolio Information (Unaudited)....................................... 7
Schedule of Investments................................................. 8
Statement of Assets and Liabilities .................................... 11
Statement of Operations................................................. 12
Statements of Changes in Net Assets..................................... 13
Financial Highlights.................................................... 14
Notes to Financial Statements........................................... 15
Report of Independent Registered Public Accounting Firm................. 19
About Your Fund's Expenses (Unaudited).................................. 20
Trustees and Officers of the Trust (Unaudited).......................... 22
Additional Information (Unaudited)...................................... 24
Approval of Investment Advisory Agreement (Unaudited)................... 25
2
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CUTLER EQUITY FUND
LETTER TO SHAREHOLDERS
================================================================================
To The Cutler Trust Shareholders:
The enclosed content represents the Cutler Equity Fund's Annual Report for the
fiscal year ended June 30th, 2008. While the bull market of the last five years
recently came to an end, the Fund performed well during the period compared to
its relevant benchmarks. The US has not officially entered a recession, yet the
dual drags of rising commodity inflation and housing deflation have resulted in
a bear market for US equities. At Cutler, we maintain a long-term investment
perspective and believe that this bear market represents a business cycle not
unlike those of the past. We believe that the strength of the US economy will
ultimately prevail and equity prices will return to previous highs.
The investment climate of the past twelve months was a result of the prevalence
of low interest rates following the previous bear market. When the Federal
Reserve lowered interest rates to combat the deflationary impact of the bursting
tech bubble, they produced a well-documented housing bubble. With the bursting
of the housing bubble, the Fed has produced an inflationary commodity bubble.
The resulting game of monetary policy "musical chairs" eventually will force the
Federal Reserve to raise interest rates to combat inflation. We believe
controlling inflation will be positive for US equities, as consumer spending
power is stabilized.
The instability of US banking institutions has prevented the Fed from
aggressively countering inflationary trends. The credit crisis that began in the
summer of 2007 has been a historical financial crisis that has changed the
landscape of the American banking sector. As in all crises, however, the
strongest institutions will prevail, and the financial sector will be healthier
in the long run. We believe that a rise in the Federal Funds rate will be a
strong indication from the Federal Reserve that the banking crisis has passed,
and will be a bullish signal for equity investors.
In the meantime, we believe that the Cutler Equity Fund is well-positioned to
weather the market volatility. As always, the Fund holdings have a strong
dividend bias, large capitalizations, and relative value. These characteristics
represent companies that are likely to be the winners of sector restructuring;
the companies still standing when the dust settles.
Thank you for your continued support.
Sincerely,
/s/ Matthew C. Patten /s/ Erich M. Patten
Matthew C. Patten Erich M. Patten
Chairman Portfolio Manager
The Cutler Trust Cutler Investment Counsel, LLC.
3
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CUTLER EQUITY FUND
MANAGEMENT DISCUSSION OF FUND PERFORMANCE
================================================================================
1) HOW DID THE FUND PERFORM LAST YEAR?
The Fund performed very well on a relative basis, outperforming the S&P
500 and Dow Jones Industrial Average by over 200 basis points each. This
outperformance was especially notable, as many similar funds had poor
relative performance due to substantial weightings in high dividend
financial stocks. Despite the strong relative performance, the Fund's
return during the fiscal year was still negative at -11.13% including all
fees and expenses.
2) WHAT WERE THE MOST SIGNIFICANT MARKET FACTORS AFFECTING THE FUND'S
PERFORMANCE DURING THE PAST YEAR?
Market factors included:
1) Rapid rise of commodity prices
2) Weakness of the US housing market
3) Stressed credit markets
4) The decline in value of the US dollar
5) Negative overall equities markets
3) WHY DID THE FUND OUTPERFORM RELATIVE TO THE BENCHMARK?
The Fund's good relative performance can be attributed to the defensive
nature of Cutler's dividend based investment philosophy. In addition,
active management helped the Fund's performance, as the financial sector
positions were aggressively replaced with more defensive positions. The
financials were the worst performing sector during the period, and the
Fund had a substantial underweight relative to the S&P 500 throughout most
of the year.
4) WHAT STRATEGIES DID YOU USE TO MANAGE THE FUND?
The Cutler Equity Income Process focuses on dividends as the primary
driver of investment returns. All securities held had a dividend yield of
at least 1.25% at the time of the initial purchase, a minimum of $3
billion market capitalization, and an investment grade rating on their
senior debt. In addition, no securities cut their dividend while held in
the portfolio.
5) WHAT WERE THE PRIMARY STRATEGIC FACTORS THAT GUIDED YOUR MANAGEMENT OF THE
FUND?
The combination of fundamental bottom-up analysis with top-down sector
allocation contributed to the overall performance of the Fund. Strategic
factors included an underweighting in financials, specifically to
investment banking securities. Utilities were a strong performing sector
and the Fund's allocation was relatively high versus the S&P 500.
4
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CUTLER EQUITY FUND
MANAGEMENT DISCUSSION OF FUND PERFORMANCE
(Continued)
================================================================================
6) WHAT WERE SOME OF THE KEY TRENDS IN EACH OF THE REGIONS/SIGNIFICANT
INDUSTRIES THE FUND INVESTS IN?
The Fund's holdings remain 100% domiciled in the US, and the strategies
employed do not have any additional regional bias. An important trend
affecting the Fund was the overall down markets, which have been
influenced by rising inflation and falling housing prices. Tighter credit
has been a major investment theme, particularly among lower quality and
smaller capitalization securities with financing needs. The Cutler Equity
Fund holds companies that generally have access to capital in all market
environments, and therefore tend to have lower volatility during periods
of stress.
7) WHICH SECURITIES CONTRIBUTED MOST TO THE FUND'S PERFORMANCE?
1) National Fuel Gas Co.
2) ConocoPhillips
3) Chevron Corp.
4) Exelon Corp. (Sold on 4/4/08)
5) IBM Corp.
8) DID ANY SECURITIES HURT THE FUND'S PERFORMANCE?
1) The McGraw-Hill Cos., Inc.
2) Lincoln National Corp.
3) Citigroup, Inc. (Sold on 1/11/08)
4) Washington Mutual, Inc. (Sold on 8/3/07)
5) Weyerhaeuser Co.
The views in this report were those of Cutler Investment Counsel, LLC as
of June 30, 2008 and may not reflect their views on the date this report
is first published or anytime thereafter. These views are intended to
assist shareholders in understanding their investment in the Fund and do
not constitute investment advice.
BEFORE INVESTING YOU SHOULD CAREFULLY CONSIDER THE FUND'S INVESTMENT
OBJECTIVES, RISKS, CHARGES AND EXPENSES. THIS AND OTHER INFORMATION IS IN
THE PROSPECTUS, A COPY OF WHICH MAY BE OBTAINED BY CALLING 1-800-228-8537.
PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST. PAST PERFORMANCE
IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RESULTS AND PRINCIPAL
VALUE WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER
THAN THE PERFORMANCE DATA QUOTED. PERFORMANCE DATA CURRENT TO THE MOST
RECENT MONTH-END, ARE AVAILABLE BY CALLING 800-228-8537.
5
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CUTLER EQUITY FUND
PERFORMANCE INFORMATION
June 30, 2008 (Unaudited)
================================================================================
COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN
CUTLER EQUITY FUND AND THE S&P 500 TOTAL RETURN INDEX
[LINE GRAPH OMITTED]
Cutler Equity Fund S&P 500 Total Return Index
-------------------- --------------------------
DATE VALUE DATE VALUE
---- ------- ---- -------
06/30/98 $10,000 06/30/98 $10,000
09/30/98 9,052 09/30/98 9,005
12/31/98 10,447 12/31/98 10,923
03/31/99 10,511 03/31/99 11,467
06/30/99 11,810 06/30/99 12,276
09/30/99 10,707 09/30/99 11,509
12/31/99 10,790 12/31/99 13,222
03/31/00 10,902 03/31/00 13,525
06/30/00 10,717 06/30/00 13,165
09/30/00 10,943 09/30/00 13,038
12/31/00 11,724 12/31/00 12,018
03/31/01 11,279 03/31/01 10,593
06/30/01 11,679 06/30/01 11,213
09/30/01 10,530 09/30/01 9,567
12/31/01 11,351 12/31/01 10,589
03/31/02 11,578 03/31/02 10,618
06/30/02 10,036 06/30/02 9,196
09/30/02 7,853 09/30/02 7,607
12/31/02 8,785 12/31/02 8,249
03/31/03 8,271 03/31/03 7,989
06/30/03 9,560 06/30/03 9,219
09/30/03 9,575 09/30/03 9,463
12/31/03 10,953 12/31/03 10,615
03/31/04 10,928 03/31/04 10,795
06/30/04 11,031 06/30/04 10,981
09/30/04 11,117 09/30/04 10,776
12/31/04 11,757 12/31/04 11,770
03/31/05 11,691 03/31/05 11,517
06/30/05 11,667 06/30/05 11,675
09/30/05 12,098 09/30/05 12,096
12/31/05 12,164 12/31/05 12,349
03/31/06 12,544 03/31/06 12,869
06/30/06 12,701 06/30/06 12,684
09/30/06 13,424 09/30/06 13,402
12/31/06 14,273 12/31/06 14,300
03/31/07 14,371 03/31/07 14,392
06/30/07 15,190 06/30/07 15,294
09/30/07 15,510 09/30/07 15,604
12/31/07 15,007 12/31/07 15,085
03/31/08 14,171 03/31/08 13,660
06/30/08 13,499 06/30/08 13,287
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AVERAGE ANNUAL TOTAL RETURNS(a)
(FOR PERIODS ENDED JUNE 30, 2008)
1 Year 5 Years 10 Years
------ ------- --------
Cutler Equity Fund -11.13% 7.15% 3.05%
S&P 500 Total Return Index -13.12% 7.58% 2.88%
(a) Returns shown do not reflect the deduction of taxes a shareholder would pay
on Fund distributions or the redemption of Fund shares.
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The Cutler Equity Fund (the "Fund") is managed pursuant to an equity income
strategy. The investment manager and Trustees believe the S&P 500 Total Return
Index is the most appropriate benchmark for the Fund due to its focus on large
capitalization securities, broad index membership, and the representation of
multiple security types that are used in the management of the Fund.
6
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CUTLER EQUITY FUND
PORTFOLIO INFORMATION
June 30, 2008 (Unaudited)
================================================================================
SECTOR ALLOCATION (% OF NET ASSETS)
[PIE CHART OMITTED] Consumer Discretionary 7.1%
Consumer Staples 15.8%
Energy 13.6%
Financials 10.5%
Health Care 5.6%
Industrials 15.2%
Information Technology 7.0%
Materials 11.0%
Telecommunication Services 5.8%
Utilities 7.7%
Other 0.7%
7
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CUTLER EQUITY FUND
SCHEDULE OF INVESTMENTS
June 30, 2008
================================================================================
SHARES COMMON STOCKS -- 99.3% VALUE
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AEROSPACE & DEFENSE -- 3.5%
19,800 United Technologies Corp. ......................... $ 1,221,660
------------
BEVERAGES -- 3.6%
19,430 PepsiCo, Inc. ..................................... 1,235,554
------------
CHEMICALS -- 2.5%
24,240 Dow Chemical Co. (The) ............................ 846,218
------------
COMMERCIAL BANKS -- 5.2%
34,860 U.S. Bancorp ...................................... 972,245
35,100 Wells Fargo & Co. ................................. 833,625
------------
1,805,870
------------
COMMERCIAL SERVICES & SUPPLIES -- 2.1%
21,550 Pitney Bowes, Inc. ................................ 734,855
------------
COMPUTERS & PERIPHERALS -- 4.3%
12,500 International Business Machines Corp. ............. 1,481,625
------------
CONSTRUCTION MATERIALS -- 3.1%
17,820 Vulcan Materials Co. .............................. 1,065,280
------------
DIVERSIFIED FINANCIAL SERVICES -- 2.6%
25,800 JPMorgan Chase & Co. .............................. 885,198
------------
DIVERSIFIED TELECOMMUNICATION SERVICES -- 5.8%
32,770 AT&T, Inc. ........................................ 1,104,021
25,450 Verizon Communications, Inc. ...................... 900,930
------------
2,004,951
------------
ELECTRICAL EQUIPMENT -- 3.1%
21,800 Emerson Electric Co. .............................. 1,078,010
------------
FOOD & STAPLES RETAILING -- 2.9%
36,520 Sysco Corp. ....................................... 1,004,665
------------
FOOD PRODUCTS -- 3.0%
31,010 Archer-Daniels-Midland Co. ........................ 1,046,588
------------
GAS UTILITIES -- 4.5%
26,290 National Fuel Gas Co. ............................. 1,563,729
------------
HOUSEHOLD PRODUCTS -- 6.3%
18,190 Kimberly-Clark Corp. .............................. 1,087,398
17,780 Procter & Gamble Co. (The) ........................ 1,081,202
------------
2,168,600
------------
8
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CUTLER EQUITY FUND
SCHEDULE OF INVESTMENTS (Continued)
================================================================================
SHARES COMMON STOCKS -- 99.3% (CONTINUED) VALUE
- --------------------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES -- 2.5%
32,650 General Electric Co. .............................. $ 871,429
------------
INSURANCE -- 2.7%
20,750 Lincoln National Corp. ............................ 940,390
------------
MACHINERY -- 3.9%
18,240 Caterpillar, Inc. ................................. 1,346,477
------------
MEDIA -- 2.6%
22,060 McGraw-Hill Cos., Inc. (The) ...................... 885,047
------------
METALS & MINING -- 3.4%
32,520 Alcoa, Inc. ....................................... 1,158,362
------------
MULTI-LINE RETAIL -- 2.5%
28,930 Nordstrom, Inc. ................................... 876,579
------------
MULTI-UTILITIES -- 3.2%
28,000 Consolidated Edison, Inc. ......................... 1,094,520
------------
OIL, GAS & CONSUMABLE FUELS -- 13.6%
16,540 Chevron Corp. ..................................... 1,639,610
17,950 ConocoPhillips .................................... 1,694,301
15,660 Exxon Mobil Corp. ................................. 1,380,116
------------
4,714,027
------------
PAPER & FOREST PRODUCTS -- 2.1%
14,390 Weyerhaeuser Co. .................................. 735,905
------------
PHARMACEUTICALS -- 5.6%
17,200 Johnson & Johnson ................................. 1,106,648
47,220 Pfizer, Inc. ...................................... 824,933
------------
1,931,581
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT -- 2.7%
43,530 Intel Corp. ....................................... 935,024
------------
SPECIALTY RETAIL -- 2.0%
29,280 Home Depot, Inc. (The) ............................ 685,738
------------
TOTAL COMMON STOCKS (Cost $29,195,723) ............ $ 34,317,882
------------
9
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CUTLER EQUITY FUND
SCHEDULE OF INVESTMENTS (Continued)
================================================================================
SHARES MONEY MARKET FUNDS -- 1.3% VALUE
- --------------------------------------------------------------------------------
429,025 Fidelity Institutional Money Market Portfolio -
Select Class, 2.574% (a) (Cost $429,025) .......... $ 429,025
------------
TOTAL INVESTMENTS AT VALUE -- 100.6%
(Cost $29,624,748) ................................ $ 34,746,907
LIABILITIES IN EXCESS OF OTHER ASSETS -- (0.6%) ... (198,283)
------------
NET ASSETS -- 100.0% .............................. $ 34,548,624
============
(a) Variable rate security. The rate shown is the 7-day effective yield as of
June 30, 2008.
See accompanying notes to financial statements.
10
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CUTLER EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
June 30, 2008
================================================================================
ASSETS
Investments in securities:
At acquisition cost ......................................... $ 29,624,748
============
At value .................................................... $ 34,746,907
Dividends receivable ........................................ 55,433
Receivable for capital shares sold .......................... 13,800
Other assets ................................................ 4,765
------------
Total assets .................................................. 34,820,905
------------
LIABILITIES
Dividends payable ........................................... 6,841
Payable for capital shares redeemed ......................... 219,600
Investment advisory fees (Note 3) ........................... 22,724
Administration fees (Note 3) ................................ 6,000
Other accrued expenses and liabilities ...................... 17,116
------------
Total liabilities ............................................. 272,281
------------
NET ASSETS .................................................... $ 34,548,624
============
NET ASSETS CONSIST OF:
Paid-in capital ............................................. $ 42,569,282
Undistributed net investment income ......................... 965
Accumulated net realized losses from security transactions .. (13,143,782)
Net unrealized appreciation on investments .................. 5,122,159
------------
NET ASSETS .................................................... $ 34,548,624
============
Shares of beneficial interest outstanding (unlimited number
of shares authorized, no par value) ......................... 3,199,693
============
Net asset value, offering price and redemption price
per share (Note 2) .......................................... $ 10.80
============
See accompanying notes to financial statements.
11
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CUTLER EQUITY FUND
STATEMENT OF OPERATIONS
For the Year Ended June 30, 2008
================================================================================
INVESTMENT INCOME
Dividend income .............................................. $ 1,070,821
------------
EXPENSES
Investment advisory fees (Note 3) ............................ 288,331
Administration fees (Note 3) ................................. 72,000
Trustees' fees and expenses .................................. 40,808
Professional fees ............................................ 37,218
Insurance expense ............................................ 16,150
Registration fees ............................................ 13,796
Custody fees ................................................. 11,423
Postage and supplies ......................................... 8,662
Printing of shareholder reports .............................. 6,011
Shareholder services fees (Note 3) ........................... 887
Other expenses ............................................... 7,232
------------
Total expenses ................................................. 502,518
------------
NET INVESTMENT INCOME .......................................... 568,303
------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS
Net realized gains from investments .......................... 1,502,137
Net change in unrealized appreciation/depreciation
on investments ............................................. (6,448,599)
------------
NET REALIZED AND UNREALIZED LOSSES ON INVESTMENTS .............. (4,946,462)
------------
NET DECREASE IN NET ASSETS FROM OPERATIONS ..................... $ (4,378,159)
============
See accompanying notes to financial statements.
12
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CUTLER EQUITY FUND
STATEMENTS OF CHANGES IN NET ASSETS
==================================================================================================
Year Year
Ended Ended
June 30, 2008 June 30, 2007
- --------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income ........................................... $ 568,303 $ 546,435
Net realized gains from investments ............................. 1,502,137 2,662,323
Net change in unrealized appreciation/depreciation of investments (6,448,599) 3,965,088
------------ ------------
Net increase (decrease) in net assets from operations ............. (4,378,159) 7,173,846
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income .................................... (571,357) (547,696)
------------ ------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold ....................................... 3,782,936 804,972
Net asset value of shares issued in reinvestment
of distributions to shareholders .............................. 546,735 525,004
Payments for shares redeemed .................................... (5,343,431) (5,526,984)
------------ ------------
Net decrease from capital share transactions ...................... (1,013,760) (4,197,008)
------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS ........................... (5,963,276) 2,429,142
NET ASSETS
Beginning of year ................................................. 40,511,900 38,082,758
------------ ------------
End of year ....................................................... $ 34,548,624 $ 40,511,900
============ ============
UNDISTRIBUTED NET INVESTMENT INCOME ............................... $ 965 $ 4,019
============ ============
CAPITAL SHARE ACTIVITY
Sold .............................................................. 315,266 68,340
Reinvested ........................................................ 47,040 44,997
Redeemed .......................................................... (446,161) (470,570)
------------ ------------
Net decrease in shares outstanding ................................ (83,855) (357,233)
Shares outstanding at beginning of year ........................... 3,283,548 3,640,781
------------ ------------
Shares outstanding at end of year ................................. 3,199,693 3,283,548
============ ============
See accompanying notes to financial statements.
13
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CUTLER EQUITY FUND
FINANCIAL HIGHLIGHTS
====================================================================================================================
Per Share Data for a Share Outstanding Throughout Each Year
- --------------------------------------------------------------------------------------------------------------------
YEARS ENDED JUNE 30,
----------------------------------------------------------------------
2008 2007 2006 2005 2004
- --------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of year ...... $ 12.34 $ 10.46 $ 9.75 $ 9.38 $ 8.29
---------- ---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income ................... 0.18 0.16 0.15 0.17 0.18
Net realized and unrealized gains
(losses) on investments ............... (1.54) 1.88 0.71 0.37 1.09
---------- ---------- ---------- ---------- ----------
Total from investment operations .......... (1.36) 2.04 0.86 0.54 1.27
---------- ---------- ---------- ---------- ----------
Less distributions from:
Net investment income ................... (0.18) (0.16) (0.15) (0.17) (0.18)
---------- ---------- ---------- ---------- ----------
Net asset value at end of year ............ $ 10.80 $ 12.34 $ 10.46 $ 9.75 $ 9.38
========== ========== ========== ========== ==========
Total return (a) .......................... (11.13%) 19.59% 8.86% 5.77% 15.39%
========== ========== ========== ========== ==========
Net assets at the end of year (000's) ..... $ 34,549 $ 40,512 $ 38,083 $ 40,107 $ 41,233
========== ========== ========== ========== ==========
Ratios/supplementary data:
Ratio of net expenses to average net assets 1.31% 1.30% 1.26% 1.30%(b) 1.25%(b)
Ratio of net investment income
to average net assets ................... 1.48% 1.36% 1.44% 1.77% 1.95%
Portfolio turnover rate ................... 13% 10% 21% 14% 14%
(a) 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 gain
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.
(b) Absent fee waivers by the Fund's investment adviser, the ratio of gross
expenses to average net assets would have been 1.43% and 1.43% for the
years ended June 30, 2005 and 2004, respectively.
See accompanying notes to financial statements.
14
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CUTLER EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
June 30, 2008
================================================================================
1. ORGANIZATION
The Cutler Equity 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.
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 -- Portfolio securities are valued as of the close of
business of the regular session of the principal exchange where the
security is traded. 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. Securities which are quoted by
NASDAQ are valued at the NASDAQ Official Closing 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.
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.
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 of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures 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.
15
- --------------------------------------------------------------------------------
CUTLER EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
================================================================================
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. Dividends and distributions are recorded on the ex-dividend date.
The tax character of distributions paid during the years ended June 30,
2008 and 2007 was ordinary income.
FEDERAL INCOME 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
June 30, 2008:
Tax cost of portfolio investments .................. $ 29,672,660
============
Gross unrealized appreciation ...................... $ 8,064,375
Gross unrealized depreciation ...................... (2,990,128)
------------
Net unrealized appreciation ........................ 5,074,247
Undistributed ordinary income ...................... 7,806
Capital loss carryforward .......................... (13,095,870)
Other temporary differences due to timing of cash
distributions ...................................... (6,841)
------------
Accumulated deficit ................................ $ (8,020,658)
============
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.
16
- --------------------------------------------------------------------------------
CUTLER EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
================================================================================
As of June 30, 2008, the Fund had capital loss carryforwards of
$13,095,870, of which $4,320,968 expires June 30, 2010, $5,747,725 expires
June 30, 2011, $2,687,016 expires June 30, 2012 and $340,161 expires June
30, 2014. These capital loss carryforwards may be utilized in future years
to offset net realized capital gains, if any, prior to distributing such
gains to shareholders.
During the year ended June 30, 2008, the Fund utilized $1,485,536 of
capital loss carryforwards to offset current year realized gains.
For the year ended June 30, 2008, the Fund reclassified $9 of accumulated
net realized losses from security transactions against paid-in capital on
the Statement of Assets and Liabilities. This reclassification is due to
permanent differences in the recognition of capital gains or losses under
income tax regulations and accounting principles generally accepted in the
United States. Such reclassification had no effect on the Fund's net
assets or net asset value per share.
The Financial Accounting Standards Board's ("FASB") Interpretation No. 48
("FIN 48") "Accounting for Uncertainty in Income Taxes" provides guidance
for how uncertain tax positions should be recognized, measured, presented
and disclosed in the financial statements. FIN 48 requires the evaluation
of tax positions 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 authority. Tax positions not deemed to
meet the more-likely-than-not threshold are required to be recorded as a
tax benefit or expense in the current year. Based on management's
analysis, the application of FIN 48 does not have a material impact on
these financial statements. The statute of limitations on the Fund's tax
returns remains open for the years ended June 30, 2005 through June 30,
2007.
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 the Adviser a fee, which is accrued daily and
paid monthly, at an annual rate of 0.75% of the Fund's average daily net
assets.
Certain officers of the Trust are also officers of the Adviser.
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% of the Fund's average daily net assets up to
$500 million; 0.125% on the next $500 million of such assets; and 0.10% on
such assets in excess of $1 billion, subject to a minimum monthly fee of
$6,000. 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.
17
- --------------------------------------------------------------------------------
CUTLER EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
================================================================================
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 and account maintenance services.
4. SECURITIES TRANSACTIONS
The cost of purchases and proceeds from sales of investment securities,
other than short-term investments, amounted to $4,907,963 and $5,261,907,
respectively, during the year ended June 30, 2008.
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.
6. NEW ACCOUNTING PRONOUNCEMENT
In September 2006, FASB issued Statement on Financial Accounting Standards
("SFAS") No. 157, "Fair Value Measurements." This standard establishes a
single authoritative definition of fair value, sets out a framework for
measuring fair value and requires additional disclosures about fair value
measurements. SFAS No. 157 applies to fair value measurements already
required or permitted by existing standards. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15,
2007 and interim periods within those fiscal years. The changes to current
generally accepted accounting principles from the application of SFAS No.
157 relate to the definition of fair value, the methods used to measure
fair value, and the expanded disclosures about fair value measurements. As
of June 30, 2008, the Fund does not believe the adoption of SFAS No. 157
will impact the amounts reported in the financial statements; however,
additional disclosures will be required about the inputs used to develop
the measurements and the effect of certain of the measurements reported on
the statement of changes in net assets for a fiscal period.
18
- --------------------------------------------------------------------------------
CUTLER EQUITY FUND
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
================================================================================
To the Board of Trustees of The Cutler Trust
and the Shareholders of the Cutler Equity Fund
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Cutler Equity Fund, a series
of shares of beneficial interest of The Cutler Trust, as of June 30, 2008,
and the related statement of operations, the statement of changes in net
assets and financial highlights for the year 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 audit. The statement of
changes in net assets for the year ended June 30, 2007 and the financial
highlights for each of the four years in the period ended June 30, 2007
were audited by other auditors whose report dated August 21, 2007
expressed an unqualified opinion on such financial statement and financial
highlights.
We conducted our audit 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. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
June 30, 2008 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, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position
of the Cutler Equity Fund as of June 30, 2008, the results of its
operations, the changes in its net assets and the financial highlights for
the year then ended, in conformity with accounting principles generally
accepted in the United States of America.
/s/ BRIGGS, BUNTING & DOUGHERTY, LLP
BRIGGS, BUNTING & DOUGHERTY, LLP
Philadelphia, Pennsylvania
August 15, 2008
19
- --------------------------------------------------------------------------------
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. 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 mutual fund's ongoing costs 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
(January 1, 2008) and held for the entire period (June 30, 2008).
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 impose any sales loads.
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.
20
- --------------------------------------------------------------------------------
CUTLER EQUITY FUND
ABOUT YOUR FUND'S EXPENSES (Unaudited) (Continued)
================================================================================
More information about the Fund's expenses, including annual expense
ratios over the past five years, 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
January 1, 2008 June 30, 2008 During Period*
--------------- ------------- --------------
Based on Actual Fund Return $1,000.00 $ 899.50 $6.23
Based on Hypothetical 5% Return
(before expenses) $1,000.00 $1,018.30 $6.62
* Expenses are equal to the Fund's annualized expense ratio of 1.32% for the
period, multiplied by the average account value over the period,
multiplied by 182/366 (to reflect the one-half year period).
21
- --------------------------------------------------------------------------------
CUTLER EQUITY FUND
TRUSTEES AND OFFICERS OF THE TRUST (Unaudited)
================================================================================
The Board of Trustees is responsible for managing the Trust's business
affairs and exercising all the Trust's powers except those reserved for
shareholders. The following tables give information about each Board
member and the senior officers of the Fund. Each Trustee holds office
until the person resigns, is removed, or replaced. Officers are elected
for an annual term. Unless otherwise noted, the Trustees and officers have
held their principal occupations for more than five years. The Fund's
Statement of Additional Information includes additional information about
the Trustees and is available, without charge and upon request, by calling
1-888-CUTLER4.
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF
PORTFOLIOS IN OTHER
NAME POSITION LENGTH FUND COMPLEX DIRECTORSHIPS
DATE OF BIRTH WITH THE OF TIME PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
AND ADDRESS TRUST SERVED DURING PAST 5 YEARS TRUSTEE TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
- ------------------------------------------------------------------------------------------------------------------------------------
Matthew C. Patten(1) Trustee/ Trustee President, Investment Committee 1 None
Born: December 1975 Chairman/ Since 2006; Member and Portfolio Manager of
525 Bigham Knoll, Suite 100 Treasurer Treasurer Cutler Investment Counsel, LLC
Jacksonville, OR 97530 Since since 2003; Portfolio Manager,
2004 Member and President of Cutler
Venture Partners, LLC (a private
equity firm) since 2003;
Investment Committee Member of
Table Rock (a registered
investment adviser) from2002
until 2004; Portfolio Manager -
Private Equity and Public Equity
of Table Rock from 2000 until
2004; Chief Operating Officer and
Portfolio Manager of Cutler Asia,
LLC (a private equity firm)
from2000 until 2006; Director of
The First America Asia Fund I,
L.P. (a private equity fund) from
1999 until 2006.
- ------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
- ------------------------------------------------------------------------------------------------------------------------------------
Robert B.Watts, Jr. Trustee Since 1996 Counsel, Northhaven Associates 1 None
Born: December 1930 since 1985.
1710 Lake Village Drive
Medford, OR 97504
- ------------------------------------------------------------------------------------------------------------------------------------
Robert E. Clarke Trustee Since 2002 Retired. 1 None
Born: May 1922
One Skyline Drive Apt. 3407
Medford,OR 97504
- ------------------------------------------------------------------------------------------------------------------------------------
John P. Cooney Trustee Since 2007 Retired since March 2007; U.S. 1 None
Born: January 1932 Magistrate Judge until March 2007.
100 Greenway Circle
Medford, OR 97504
- ------------------------------------------------------------------------------------------------------------------------------------
Dr. Mario Campagna Trustee Since 2007 Retired. 1 None
Born: April 1927
1701 Lake Village Drive
Medford, OR 97504
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Matthew C. Patten is an "Interested Person," as defined by the 1940Act,
because he is an affiliated person of the Adviser.
22
- --------------------------------------------------------------------------------
CUTLER EQUITY FUND
TRUSTEES AND OFFICERS OF THE TRUST (Unaudited)
(Continued)
================================================================================
- ---------------------------------------------------------------------------------------------------------------------
NAME, POSITION
DATE OF BIRTH WITH LENGTH PRINCIPAL OCCUPATION(S)
AND ADDRESS THE TRUST OF TIME SERVED DURING PAST 5 YEARS
- ---------------------------------------------------------------------------------------------------------------------
SENIOR OFFICERS
- ---------------------------------------------------------------------------------------------------------------------
Erich M. Patten President Since 2004 Investment Committee Member, Portfolio
Born: October 1977 Manager and Corporate Secretary of
525 Bigham Knoll, Suite 100 Cutler Investment Counsel, LLC since
Jacksonville, OR 97530 2003; Member of Cutler Venture
Partners, LLC (private equity firm)
since 2003; Investment Committee
Member and Portfolio Manager of Table
Rock (a registered investment adviser)
from 2003 until 2004.
- ---------------------------------------------------------------------------------------------------------------------
Brooke C. Ashland Vice President/ Since 2002 Investment Committee Member and Chief
Born: December 1951 Chief Compliance Executive Officer of Cutler Investment
525 Bigham Knoll, Suite 100 Officer Counsel, LLC since 2003; Portfolio
Jacksonville, OR 97530 Manager, Member and Chief Executive
Officer of Cutler Venture Partners,
LLC (a private equity firm) since
2003; Chief Executive Officer of
Centricity, LLC (an investment
adviser) since 2003; General Partner
Of The First America Asia Fund I, LP
(a private equity fund) from 1999
until 2006; Chief Operating Officer,
Chief Executive Officer and Portfolio
Manager of Cutler Asia, LLC (a private
equity firm) from 1998 until 2007;
Chief Executive Officer and/or
Chairman of the Board of Managers for
Table Rock (a registered investment
adviser) from 1995 to 2004; Chief
Executive Officer and President of
Trustee Investment Services, Inc. (a
Trustee education firm) since 1991;
President of Big Bear Timber, LLC
(farming) since 1989.
- ---------------------------------------------------------------------------------------------------------------------
Carol S. Fischer Vice President/ Since 1996 Member and Chief Operating Officer of
Born: December 1955 Asst. Secretary/ Cutler Investment Counsel, LLC since
525 Bigham Knoll, Suite 100 Asst. Treasurer 2003; Member and Chief Operating
Jacksonville, OR 97530 Officer of Table Rock (a registered
investment adviser) from 1994 to 2004;
Secretary of P.S.& S., Inc. (a sales
company) since 1990.
- ---------------------------------------------------------------------------------------------------------------------
Robert G. Dorsey Vice President Since 2005 Managing Director of Ultimus Fund
Born: April 1957 Solutions, LLC and Ultimus
225 Pictoria Drive Fund Distributors, LLC.
Suite 450
Cincinnati, OH 45246
- ---------------------------------------------------------------------------------------------------------------------
John F. Splain Secretary Since 2005 Managing Director of Ultimus Fund
Born: September 1956 Solutions, LLC and Ultimus Fund
225 Pictoria Drive Distributors, LLC.
Suite 450
Cincinnati, OH 45246
- ---------------------------------------------------------------------------------------------------------------------
23
- --------------------------------------------------------------------------------
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 Commission ("SEC")
website at 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 the Fund's portfolio holdings with
the SEC as of the first and third quarters of each fiscal year on Form
N-Q. The filings are available without charge, upon request, by calling
1-800-228-8537. Furthermore, you may 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.
CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
On December 18, 2007, Deloitte & Touche ("D&T") was replaced as
independent registered public accounting firm of the Fund, and Briggs,
Bunting & Dougherty, LLP was selected as the Fund's new independent
registered public accounting firm. The Fund's selection of Briggs, Bunting
& Dougherty, LLP as its independent registered public accounting firm was
approved by the Audit Committee and Board of Trustees of the Trust.
D&T's reports on the Fund's financial statements for the fiscal years
ended June 30, 2007 and 2006 did not contain an adverse opinion or a
disclaimer of opinion, and were not qualified or modified as to
uncertainty, audit scope or accounting principles. During such fiscal
years, and through the date of D&T's replacement, there were no
disagreements between the Fund and D&T on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope
or procedures, which disagreements, if not resolved to the satisfaction of
D&T, would have caused it to make reference to the subject matter of the
disagreements in connection with its reports on the financial statements
for such years.
24
- --------------------------------------------------------------------------------
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 March 20, 2008, 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 of comparable
private accounts of 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.
Management provided detailed information on its professional personnel,
including each person's area of responsibility. Management of the Adviser
also updated the Trustees on the expansion of the Adviser's product base
and plans for continued expansion during the coming year.
The Trustees also discussed and considered the quality of administrative
and other services provided to the Fund, the Adviser's and the Fund's
compliance programs, and the Adviser's role in coordinating such services
and programs. The Independent Trustees were advised by experienced
independent counsel throughout the process. The Adviser provided the Board
with information to assist the Trustees in analyzing the performance of
the Fund over various periods ended December 31, 2007. The Fund's returns
were compared to the returns of S&P 500 Total Return Index, the Dow Jones
Industrial Average and certain other indices, comparable private accounts
managed by the Adviser, and domestic equity funds in the Morningstar
database of similar size with similar investment objectives. These
analyses and comparisons showed that the Fund has performed competitively
over both the short and long term. Based upon their review, the Trustees
found that the Fund's performance has been competitive with the returns of
relevant securities indices and other similarly situated mutual funds.
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 0.75% of the Fund's average daily net
assets, and the total expense ratio for the Fund for the fiscal year ended
June 30, 2007 was 1.30% of average net assets. The Trustees took note of
the fact that the Fund's advisory fee and expense ratio were equal to the
median advisory fee and expenses ratio for funds with assets under $100
million which are categorized by Morningstar as Large Cap Value.
25
- --------------------------------------------------------------------------------
CUTLER EQUITY FUND
APPROVAL OF INVESTMENT ADVISORY AGREEMENT
(Unaudited) (Continued)
================================================================================
The Trustees reviewed the Adviser's current registration form (Form ADV)
and its financial statement as well as an analysis prepared by the Adviser
reflecting its revenues and expenses with respect to its services to the
Fund for the year ended December 31, 2007. The Trustees noted that the
Fund does not have any "soft dollar" arrangements with broker-dealers that
would otherwise benefit the Adviser and considered any fall-out benefits
to the Adviser from managing the Fund.
Prior to voting, the Independent Trustees reviewed the proposed
continuance of the Agreement with counsel in executive session. In
approving the Agreement, the Independent Trustees reached the following
conclusions: (1) based on the 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 to the Fund; (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
quality and scope of services provided by the Adviser and the investment
performance of the Fund. The Independent Trustees further determined that,
based on the Fund's asset levels, which have remained relatively constant
over the past several years, 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.
26
(This page intentionally left blank)
CUTLER INVESTMENT COUNSEL, LLC
INVESTMENT MANAGEMENT
INVESTMENT ADVISER TO THE TRUST
525 Bigham Knoll
Suite 100
Jacksonville, OR 97530
(800)228-8537 o(541)770-9000
Fax:(541)779-0006
info@cutler.com
ITEM 2. CODE OF ETHICS.
As of the end of the period covered by this report, the registrant has adopted a
code of ethics that applies to the registrant's principal executive officer,
principal financial officer, principal accounting officer or controller, or
persons performing similar functions, regardless of whether these individuals
are employed by the registrant or a third party. Pursuant to Item 12(a)(1), a
copy of registrant's code of ethics is filed as an exhibit to this Form N-CSR.
During the period covered by this report, the code of ethics has not been
amended, and the registrant has not granted any waivers, including implicit
waivers, from the provisions of the code of ethics.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The registrant's board of trustees has determined that the registrant does not
have an audit committee financial expert serving on its audit committee. The
audit committee determined that, although none of its members meet the technical
definition of an audit committee financial expert, the collective experience of
the members provides the registrant with adequate oversight for the registrant's
current level of financial complexity.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) AUDIT FEES. The aggregate fees billed for professional services
rendered by the principal accountant for the audit of the
registrant's annual financial statements or for services that are
normally provided by the accountant in connection with statutory and
regulatory filings or engagements were $15,000 with respect to the
registrant's fiscal year ended June 30, 2008. The aggregate fees
billed for professional services rendered by the former principal
accountant for the audit of the registrant's annual financial
statements or for services that are normally provided by the
accountant in connection with statutory and regulatory filings or
engagements were $21,500 with respect to the registrant's fiscal
year ended June 30, 2007.
(b) AUDIT-RELATED FEES. No fees were billed in either of the last two
fiscal years for assurance and related services by the principal
accountant that are reasonably related to the performance of the
audit of the registrant's financial statements and are not reported
under paragraph (a) of this Item.
(c) TAX FEES. The aggregate fees billed for professional services
rendered by the principal accountant for tax compliance, tax advice,
and tax planning were $2,500 with respect to the registrant's fiscal
year ended June 30, 2008. The aggregate fees billed for professional
services rendered by the former principal accountant for tax
compliance, tax advice, and tax planning were $3,900 with respect to
the registrant's fiscal year ended June 30, 2007. The services
comprising these fees are the preparation of the registrant's
federal income and excise tax returns.
(d) ALL OTHER FEES. No fees were billed in either of the last two fiscal
years for products and services provided by the principal
accountant, other than the services reported in paragraphs (a)
through (c) of this Item.
(e)(1) The audit committee has not adopted pre-approval policies and
procedures described in paragraph (c)(7) of Rule 2-01 of Regulation
S-X.
(e)(2) None of the services described in paragraph (b) through (d) of this
Item were approved by the audit committee pursuant to paragraph
(c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) Less than 50% of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the
most recent fiscal year were attributed to work performed by persons
other than the principal accountant's full-time, permanent
employees.
(g) During the fiscal year ended June 30, 2008, aggregate non-audit fees
of $2,500 were billed by the registrant's principal accountant for
services rendered to the registrant. During the fiscal year ended
June 30, 2007, aggregate non-audit fees of $3,900 were billed by the
registrant's former principal accountant for services rendered to
the registrant. No non-audit fees were billed in either of the last
two fiscal years by the registrant's principal accountant for
services rendered to the registrant's investment adviser (not
including any sub-adviser whose role is primarily portfolio
management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or
under common control with the adviser that provides ongoing services
to the registrant.
(h) The principal accountant has not provided any non-audit services to
the registrant's investment adviser (not including any sub-adviser
whose role is primarily portfolio management and is subcontracted
with or overseen by another investment adviser), and any entity
controlling, controlled by, or under common control with the
investment adviser that provides ongoing services to the registrant.
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: Attached hereto
(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.CODE ETH Code of Ethics
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
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By (Signature and Title)* /s/ Erich M. Patten
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Erich M. Patten, President
Date August 27, 2008
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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
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Erich M. Patten, President
Date August 27, 2008
-----------------------------
By (Signature and Title)* /s/ Matthew C. Patten
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Matthew C. Patten, Treasurer
Date August 27, 2008
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* Print the name and title of each signing officer under his or her signature.