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 811-10201
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The Appleton Funds
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(Exact name of registrant as specified in charter)
45 Milk Street, Boston, Massachusetts 02109
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(Address of principal executive offices) (Zip code)
James I. Ladge, 45 Milk Street, Boston, Massachusetts 02109
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(Name and address of agent for service)
Registrant's telephone number, including area code: (513) 362-8000
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Date of fiscal year end: 12/31
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Date of reporting period: 12/31/05
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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, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
Item 1. Reports to Stockholders.
Annual Report for Appleton Equity Growth Fund.
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APPLETON EQUITY GROWTH FUND
---------------------------
Annual Report
December 31, 2005
Investment Adviser Administrator
------------------ -------------
Appleton Partners, Inc. Integrated Fund Services, Inc.
45 Milk Street, Eighth Floor 303 Broadway
Boston, MA 02109 Suite 1100
Cincinnati, OH 45202
1-877-712-7753
================================================================================
[LOGO] APPLETON FUNDS
Dear Shareholder:
For the full year, the Fund returned 2.49% compared to the S&P 500 Index, the
Fund's benchmark, which returned 4.91% during the same period. Performance
improved as the year unfolded, as the Fund's fourth quarter return of 2.94%
outperformed the S&P 500 index return of 2.09%. While the fund was overweight
the market-leading energy sector, the relative underperformance for the first
three quarters of the year was due to the negative impact of several poorly
performing stocks, which have since been liquidated from the portfolio.
While the equity markets hovered around breakeven for most of 2005, investors
balanced the positive news of solid economic growth with concerns over a number
of important issues. On the economic front, GDP growth was an above average 3.7%
for the first 3 quarters of the year. Despite two major hurricanes, the job
market remained robust in 2005, as almost 2.0 million payroll jobs were added.
Even with the promising economic statistics, American consumers and corporations
still face a number of challenges as they enter 2006. These include a slowing
housing market, record-high energy prices that are still working their way
through the economy and an aggressive Federal Reserve.
Despite a healthy economy and strong corporate balance sheets, concern over the
duration of the Fed's tightening phase, while not overwhelming the overall
uptrend, has continued to act as a headwind for equity markets for the past 18
months. Despite the 13th consecutive 25 basis point increase in December, equity
markets rallied in the fourth quarter, as the Fed's language in its Meeting
Minutes was interpreted as indicating that the rate increase might soon end.
While further spikes in energy costs could prove inflationary and prolong the
tightening cycle, continued high productivity, intense global competition, and a
vigilant Fed should help to ensure that consumer price inflation stays in check.
For a number of years, American homeowners have been substituting home price
appreciation for what used to be savings from current income. Borrowing against
this increased equity has provided consumers with an abundant source of
discretionary cash, helping to drive both consumer spending and the overall
economy. There are now indications that housing inflation, as a driving force to
economic growth, may be starting to abate. We will continue to monitor the
strength of housing inflation carefully, since a diminishing rate of inflation
is likely to change consumer savings and spending patterns. If and when that
occurs, our nation's export and capital spending sectors could expect to assume
a larger role in the economy's future growth.
Energy markets stole the headlines for much of 2005, as the average price of oil
rose nearly 37%. In addition to America's continue economic expansion, the
primary drivers for oil have been the growth of the Chinese and Indian
economies, where GDP growth has measured over 9% and 6% respectively, for the
past several years. Rising energy prices carry implications for both U.S.
corporations and consumers, as high oil and natural gas prices have
significantly increased input costs for all sectors of the economy. Similarly,
high gasoline, heating oil and natural gas prices act as a form of tax and
reduce personal discretionary incomes. Considering the overall pace of global
economies, it is clear that the potential inflationary effects of high energy
prices are not going away anytime soon.
Using the companies in the S&P 500 Index as a proxy for the overall corporate
sector, profits are expected to show further gains for the fourth quarter, but
are likely to see the smallest gain in 3 1/2 years. This decelerating earnings
growth trend is evidence of the maturation of this economic cycle. Not
surprisingly, profit and stock price gains varied widely amongst the different
sectors of the market. Energy profits and energy related stock prices were by
far the strongest, buoyed by record high oil and gas prices. The consumer
discretionary stocks and profits were weakest despite strong consumer spending.
Looking ahead in 2006, we expect to see further increases in corporate earnings,
although the rate of growth will likely slow for the second consecutive year.
As we enter 2006, the fund continues its investment focus on the stocks of
companies whose earnings are expected to grow faster than the market, that
demonstrate leadership in their industries and possess characteristics enabling
them to thrive in the current and expected environment. We continue to
overweight the Energy sector, as both domestic and global forces continue to
create investment opportunities in exploration, drilling, oilfield services and
coal companies. We have also overweight the Industrial sector as corporations,
flush with cash, should continue with capital expenditure projects and durable
goods orders. We continue with underweight positions in the more economically
sensitive Financial, Consumer Discretion and Technology sectors. However, we
will continue to monitor economic and market conditions and are prepared to
alter the portfolio accordingly.
The manifestations of a maturing domestic economic cycle will continue as we
move throughout 2006. However, we believe that an end to the Fed's rate
tightening cycle combined with an amazingly resilient U.S. consumer, increasing
capital spending and strengthening global economy, should present opportunities
for investors in 2006.
Sincerely,
/s/ James I. Ladge, CFA
President
Comparison of the Change in Value of a $10,000 Investment in the
Appleton Equity Growth Fund, S&P 500 Index
and the Russell 1000 Growth Index
[The following data represents the line chart depicted inthe printed material.]
Appleton Equity S&P 500 Russell 1000
Growth Fund Index Growth Index
----------- ----- ------------
12/31/00 10,000 10,000 10,000
01/31/01 10,650 10,355 10,691
02/28/01 9,180 9,411 8,876
03/31/01 8,110 8,814 7,910
04/30/01 9,050 9,499 8,910
05/31/01 8,870 9,563 8,779
06/30/01 8,360 9,330 8,576
07/31/01 8,310 9,238 8,362
08/31/01 7,630 8,660 7,678
09/30/01 6,560 7,961 6,911
10/31/01 6,940 8,113 7,274
11/30/01 7,670 8,735 7,973
12/31/01 7,560 8,812 7,958
03/31/02 7,250 8,836 7,752
06/30/02 5,910 7,652 6,304
09/30/02 4,850 6,330 5,356
12/31/02 5,160 6,864 5,738
03/31/03 5,140 6,648 5,677
06/30/03 5,740 7,671 6,489
09/30/03 5,900 7,874 6,743
12/31/03 6,400 8,832 7,445
03/31/04 6,670 8,982 7,504
06/30/04 6,610 9,137 7,650
09/30/04 6,420 8,966 7,249
12/31/04 6,851 9,793 7,914
03/31/05 6,861 9,583 7,591
06/30/05 6,720 9,714 7,777
09/30/05 6,821 10,064 8,089
12/31/05 7,021 10,274 8,329
Past performance is not predictive of future performance.
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Appleton Equity Growth Fund
Average Annual Total Returns*
1 Year 5 Year Since Inception**
2.49% (6.83%) (6.83%)
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* The returns shown do not reflect the deduction of taxes that a shareholder
would pay on Fund distributions or the redemption of Fund shares.
** Fund inception was December 31, 2000.
Tabular Presentation of Portfolio
As of December 31, 2005
Sector (% of Net Assets)
Consumer Software & Services 2.1%
Consumer, Cyclical 2.6%
Consumer, Non-Cyclical 19.0%
Energy 12.2%
Financial Services 15.6%
Healthcare 10.6%
Industrial 16.5%
Materials 4.5%
Technology 15.3%
Money Markets 1.9%
Liabilities in Excess of Other Assets (0.3%)
------
100.0%
======
APPLETON EQUITY GROWTH FUND
PORTFOLIO OF INVESTMENTS
December 31, 2005
Market
Shares Value
COMMON STOCKS -- 98.4%
COMPUTER SOFTWARE & SERVICES -- 2.1%
3,900 Adobe Systems, Inc. $ 144,144
------------
CONSUMER, CYCLICAL -- 2.6%
4,000 The Scotts Miracle-Gro Co. 180,960
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CONSUMER, NON-CYCLICAL -- 19.0%
1,800 Hershey Co. 99,450
2,950 Kellogg Co. 127,499
2,600 Lowe's Companies, Inc. 173,316
3,000 PepsiCo, Inc. 177,240
3,937 Procter & Gamble Co. 227,873
3,400 Target Corp. 186,898
3,700 Walgreen Co. 163,762
1,900 Whole Foods Market, Inc. 147,041
------------
1,303,079
------------
ENERGY -- 12.2%
2,575 Apache Corp. 176,439
3,750 Baker Hughes, Inc. 227,925
4,400 Exxon Mobil Corp. 247,148
5,100 Smith International, Inc. 189,261
------------
840,773
------------
FINANCIAL SERVICES -- 15.6%
3,775 American Express Co. 194,262
3,596 Bank of America Corp. 165,955
3,500 Citigroup, Inc. 169,855
2,125 Franklin Resources, Inc. 199,771
3,975 MetLife, Inc. 194,775
4,800 People's Bank 149,088
------------
1,073,706
------------
HEALTHCARE -- 10.6%
3,250 Johnson & Johnson 195,325
2,375 Quest Diagnostics, Inc. 122,265
3,950 United Health Group, Inc. 245,453
5,800 VCA Antech, Inc.* 163,560
------------
726,603
------------
APPLETON EQUITY GROWTH FUND
PORTFOLIO OF INVESTMENTS
December 31, 2005
Market
Shares Value
INDUSTRIAL -- 16.5%
3,200 Burlington Northern Santa Fe Corp. 226,623
3,750 Caterpiller, Inc. 216,638
7,450 General Electric Co. 261,122
5,400 Joy Global, Inc. 216,000
4,150 Precision Castparts Corp. 215,012
------------
1,135,395
------------
MATERIALS -- 4.5%
1,525 Potash Corp. of Saskatchewan, Inc. 122,336
3,475 Praxair, Inc. 184,036
------------
306,372
------------
TECHNOLOGY -- 15.3%
3,400 Amphenol Corp. 150,484
11,500 EMC Corp.* 156,630
8,400 Intel Corp. 209,664
1,700 International Business Machines Corp. 139,740
6,350 Jabil Circuit, Inc.* 235,522
6,000 Microsoft Corp. 156,900
------------
1,048,940
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TOTAL COMMON STOCKS $ 6,759,972
------------
MONEY MARKETS -- 1.9%
127,674 First American Treasury Fund $ 127,674
------------
TOTAL INVESTMENT SECURITIES -- 100.3%
(Cost $5,983,970) $ 6,887,646
LIABILITIES IN EXCESS OF OTHER ASSETS -- (0.3%) (23,959)
-------------
NET ASSETS -- 100.0% $ 6,863,687
============
* Non-income producing security.
See accompanying notes to financial statements.
APPLETON EQUITY GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2005
ASSETS
Investment securities:
At acquisition cost $ 5,983,970
============
At market value $ 6,887,646
Dividends receivable 4,540
Receivable from Adviser 2,072
Other assets 154
------------
TOTAL ASSETS 6,894,412
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LIABILITIES
Payable to other affiliates 6,496
Payable to Trustees 7,013
Payable for capital shares redeemed 821
Other accrued expenses and liabilities 16,395
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TOTAL LIABILITIES 30,725
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NET ASSETS $ 6,863,687
============
NET ASSETS CONSIST OF
Paid-in capital $ 8,218,211
Accumulated net realized losses from security transactions (2,258,200)
Net unrealized appreciation on investments 903,676
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NET ASSETS $ 6,863,687
============
Shares of beneficial interest outstanding (unlimited number
of shares authorized, no par value) 979,898
============
Net asset value, offering price and redemption price per share $ 7.00
============
See accompanying notes to financial statements.
APPLETON EQUITY GROWTH FUND
STATEMENT OF OPERATIONS
For the Year Ended December 31, 2005
INVESTMENT INCOME
Dividends $ 95,425
------------
EXPENSES
Investment advisory fees 68,573
Accounting services fees 30,000
Administration fees 24,000
Transfer agent fees 24,000
Trustees' fees and expenses 13,488
Professional fees 17,000
Distribution expenses 17,143
Compliance fees and expenses 26,250
Custodian fees 5,500
Registration fees 3,304
Postage and supplies 900
Insurance expense 3,408
Reports to shareholders 3,000
Pricing expense 1,200
------------
TOTAL EXPENSES 237,766
Fees waived and expenses reimbursed by Adviser (134,897)
------------
NET EXPENSES 102,869
------------
NET INVESTMENT LOSS (7,444)
------------
REALIZED AND UNREALIZED GAINS ON INVESTMENTS
Net realized gains from security transactions 10,571
Net change in unrealized appreciation/
depreciation on investments 162,037
------------
NET REALIZED AND UNREALIZED GAINS ON INVESTMENTS 172,608
------------
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 165,164
============
See accompanying notes to financial statements.
APPLETON EQUITY GROWTH FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the For the
Year Ended Year Ended
December 31, December 31,
2005 2004
------------ ------------
FROM OPERATIONS
Net investment income (loss) $ (7,444) $ 19,940
Net realized gains from security transactions 10,571 2,927
Net change in unrealized appreciation/depreciation on investments 162,037 395,805
------------ ------------
Net increase in net assets from operations 165,164 418,672
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income -- (19,940)
------------ ------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 1,274,271 1,139,428
Proceeds from shares reinvested -- 12,224
Payments for shares redeemed (1,201,342) (468,821)
------------ ------------
Net increase in net assets from capital share transactions 72,929 682,831
------------ ------------
TOTAL INCREASE IN NET ASSETS 238,093 1,081,563
NET ASSETS
Beginning of period 6,625,594 5,544,031
------------ ------------
End of period $ 6,863,687 $ 6,625,594
============ ============
ACCUMULATED NET INVESTMENT LOSS $ -- $ --
------------ ------------
CAPITAL SHARE ACTIVITY
Sold 186,535 172,476
Reinvested -- 1,790
Redeemed (176,177) (70,462)
------------ ------------
Net increase in shares outstanding 10,359 103,804
Shares outstanding, beginning of period 969,540 865,736
------------ ------------
Shares outstanding, end of period 979,898 969,540
============ ============
See accompanying notes to financial statements.
APPLETON EQUITY GROWTH FUND
FINANCIAL HIGHLIGHTS
Selected Per Share Data and Ratios for a Share Outstanding Throughout Each Year
For the For the For the For the For the
Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31,
2005 2004 2003 2002 2001(a)
---------- ---------- ---------- ---------- ----------
Net asset value at beginning of year $ 6.83 $ 6.40 $ 5.16 $ 7.56 $ 10.00
---------- ---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income (loss) (0.01) 0.02 (0.01) (0.03) (0.03)
Net realized and unrealized gains
(losses) on investments 0.18 0.43 1.25 (2.37) (2.41)
---------- ---------- ---------- ---------- ----------
Total from investment operations 0.17 0.45 1.24 (2.40) (2.44)
---------- ---------- ---------- ---------- ----------
Less distributions:
Dividends from net investment income -- (0.02) -- -- --
---------- ---------- ---------- ---------- ----------
Net asset value at end of year $ 7.00 $ 6.83 $ 6.40 $ 5.16 $ 7.56
========== ========== ========== ========== ==========
Total return 2.49% 7.04% 24.03% (31.75%) (24.40%)
========== ========== ========== ========== ==========
Net assets at end of year $6,863,687 $6,625,594 $5,544,031 $4,099,021 $4,781,914
========== ========== ========== ========== ==========
Ratio of net expenses to average net assets 1.50% 1.50% 1.50% 1.50% 1.50%
Ratio of net investment income (loss)
to average net assets (0.11%) 0.33% (0.22%) (0.56%) (0.47%)
Portfolio turnover rate 85% 40% 58% 56% 34%
(a) The Fund commenced operations on December 31, (2000.)
See accompanying notes to financial statements.
APPLETON EQUITY GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
1. Significant Accounting Policies
The Appleton Funds (the Trust) is registered under the Investment Company Act of
1940, as amended, (the 1940 Act), as a diversified, no-load, open-end management
investment company. The Trust was organized as an Ohio business trust on October
31, 2000. The Trust currently offers one series of shares to investors: the
Appleton Equity Growth Fund (the Fund). The Trust was capitalized on December
29, 2000, when the initial shares of the Fund were purchased at $10 per share.
The Fund commenced operations on December 31, 2000.
The Fund seeks long-term growth of capital by investing primarily in common
stocks.
The following is a summary of the Fund's significant accounting policies:
Securities valuation - The Fund's portfolio securities are valued as of the
close of business of the regular session of the New York Stock Exchange
(normally 4:00 p.m., Eastern time). Portfolio securities traded on stock
exchanges are valued at their last sales price as of the close of the regular
session of trading on the day the securities are being valued. Securities quoted
by NASDAQ are valued at the NASDAQ Official Closing Price. Securities for which
market quotations are not readily available are valued at their fair value as
determined in good faith in accordance with consistently applied procedures
established by and under the general supervision of the Board of Trustees. Money
market instruments are valued at amortized cost, which approximates market
value.
Share valuation - The net asset value per share of the Fund is calculated daily
by dividing the total value of the Fund's assets, less liabilities, by the
number of shares outstanding, rounded to the nearest cent. The offering and
redemption price per share are equal to the net asset value per share.
Investment income and distributions to shareholders - Interest income is accrued
as earned. Dividend income is recorded on the ex-dividend date. Dividends
arising from net investment income are declared and paid annually. Net realized
short-term capital gains, if any, may be distributed throughout the year and net
realized long-term capital gains, if any, are distributed at least once each
year. Income dividends and capital gain distributions are determined in
accordance with income tax regulations. Differences between book and tax
distributions are considered temporary or permanent in nature. To the extent
these differences are permanent in nature, such amounts are reclassified within
the composition of net assets based on their federal tax basis treatment;
temporary differences do not require reclassifications.
Security transactions - Security transactions are accounted for on trade date.
Securities sold are determined on a specific identification basis.
Estimates - The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
Federal income tax - It is the Fund's policy to continue to comply with the
special provisions of the Internal Revenue Code applicable to regulated
investment companies. As provided therein, in any fiscal year in which the Fund
so qualifies and distributes at least 90% of its taxable net income, the Fund
(but not the shareholders) will be relieved of federal income tax on the income
distributed. Accordingly, no provision for income taxes has been made.
In order to avoid imposition of the excise tax applicable to regulated
investment companies, it is also the Fund's intention to declare and pay as
dividends in each calendar year at least 98% of its net investment income
(earned during the calendar year) and 98% of its net realized capital gains
(earned during the twelve months ended October 31) plus undistributed amounts
from prior years.
The tax character of distributions paid for the years ended December 31, 2005
and 2004 was as follows:
2005 2004
---------- ----------
From ordinary income $ -- $ 19,940
The following information is computed on a tax basis as of December 31, 2005:
Cost of portfolio investments $ 5,983,970
============
Gross unrealized appreciation on investments $ 968,673
Gross unrealized depreciation on investments (64,997)
------------
Net unrealized appreciation on investments $ 903,676
Capital loss carryforwards (2,258,200)
------------
Total accumulated deficit $ (1,354,524)
============
During the year ended December 31, 2005, the Fund utilized $6,612 of capital
loss carryforwards. The remaining capital loss carryforwards in the above table
expire as follows:
Amount December 31,
------------ ------------
$ 240,954 2009
$ 1,650,125 2010
$ 367,121 2011
-----------
$ 2,258,200
===========
These capital loss carryforwards may be utilized in future years to offset
gains, if any, prior to distributing such gains to shareholders.
Certain reclassifications, the result of permanent differences between financial
statement and income tax reporting requirements have been made to the components
of capital. The reclassifications resulted from the difference in the tax
treatment of net investment losses. These reclassifications have no impact on
the net assets or net asset value per share of the Fund and are designed to
present the Fund's capital accounts on a tax basis. For the year ended December
31, 2005, the Fund reclassified $7,444 of net investment losses to paid-in
capital on the Statement of Assets and Liabilities.
2. Investment Transactions
For the year ended December 31, 2005, the cost of purchases and proceeds from
sales of portfolio securities, other than short-term investments, amounted to
$5,703,904 and $5,726,002, respectively.
3. Transactions with Affiliates
Certain trustees and officers of the Trust are also officers of Appleton
Partners, Inc. (the Adviser), Integrated Fund Services, Inc. (IFS), the
administrative services agent, shareholder servicing and transfer agent, and
accounting services agent for the Trust, and/or of IFS Fund Distributors, Inc.
(the Distributor), the Trust's principal underwriter.
INVESTMENT ADVISORY AGREEMENT
Pursuant to an Investment Advisory Agreement between the Trust and the Adviser,
the Adviser manages the Fund's investments. For these services, the Fund pays
the Adviser an advisory fee, which is computed and accrued daily and paid
monthly, at an annual rate of 1.00% of its average daily net assets.
Pursuant to a written contract between the Adviser and the Fund, the Adviser has
agreed to waive a portion of its advisory fees and/or assume certain expenses of
the Fund, other than brokerage commissions, extraordinary items, interest and
taxes, to the extent annual Fund operating expenses exceed 1.50% of the Fund's
average daily net assets. The Adviser has agreed to maintain these expense
limitations with regard to the Fund through December 31, 2006. For the year
ended December 31, 2005, the Adviser waived $68,573 of advisory fees and
reimbursed the Fund for $66,324 of other operating expenses.
ADMINISTRATION, ACCOUNTING AND TRANSFER AGENCY AGREEMENT
Under the terms of an Administration, Accounting and Transfer Agency Agreement
between the Trust and IFS, IFS supplies non-investment related statistical and
research data, internal regulatory compliance services and executive and
administrative services for the Fund. IFS supervises the preparation of tax
returns, reports to shareholders of the Fund, reports to and filings with the
Securities and Exchange Commission and state securities commissions, and
materials for meetings of the Board of Trustees. For these administrative
services, IFS receives a monthly fee based on the Fund's average daily net
assets, subject to a monthly minimum fee.
IFS maintains the records of each shareholder's account, answers shareholders'
inquiries concerning their accounts, processes purchases and redemptions of the
Fund's shares, acts as dividend and distribution disbursing agent and performs
other shareholder service functions. For these transfer agency and shareholder
services, IFS receives a monthly fee per shareholder account, subject to a
monthly minimum fee. In addition, the Fund pays IFS out-of-pocket expenses
including, but not limited to, postage and supplies.
IFS also calculates the daily net asset value per share and maintains the
financial books and records of the Fund. For these accounting services, IFS
receives a monthly fee, based on average daily net assets, from the Fund. In
addition, the Fund pays IFS certain out-of-pocket expenses incurred by IFS in
obtaining valuations of the Fund's portfolio securities.
DISTRIBUTION PLAN
The Fund has adopted a plan of distribution (the Plan) pursuant to Rule 12b-1
under the 1940 Act. The Plan permits the Fund to pay for expenses incurred in
the distribution and promotion of the Fund's shares including but not limited
to, the printing of prospectuses, statements of additional information and
reports used for sales purposes, advertisements, expenses of preparation and
printing of sales literature, promotion, marketing and sales expenses and other
distribution-related expenses, including any distribution fees paid to
securities dealers or other firms who have executed a distribution or service
agreement with the Trust.
The Plan limits payment of distribution expenses in any fiscal year to a maximum
of 0.25% of the Fund's average daily net assets. For the year ended December 31,
2005, the Fund accrued and the Adviser subsequently reimbursed $17,143 of
distribution expenses under the Plan.
UNDERWRITING AGREEMENT
The Trust has entered into an Underwriting Agreement on behalf of the Fund with
the Distributor. Pursuant to the Underwriting Agreement, the Distributor acts as
principal underwriter and, as such, is the exclusive agent for distribution of
shares of the Fund. The Distributor receives no compensation for its services
and is an affiliate of IFS.
COMPLIANCE SERVICES AGREEMENT
Under the terms of the Compliance Services Agreement between the Trust and IFS,
IFS provides certain compliance services to the Trust, including developing and
assisting in implementing a compliance program for IFS on behalf of the funds
and providing administrative support services to the Funds' Compliance Program
and Chief Compliance Officer.
4. Commitments and Contingencies
The Fund indemnifies the Trust's officers and Trustees for certain liabilities
that might arise from the performance of their duties to the Fund. Additionally,
in the normal course of business, the Fund enters into contracts that contain a
variety of representations and warranties and which provide general
indemnifications. The Fund's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the Fund
that have not yet occurred. However, based on experience, the Fund expects the
risks of loss to be remote.
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Trustees
of the Appleton Funds
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the Appleton Equity Growth Fund (the "Fund") of
the Appleton Funds as of December 31, 2005, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and the financial highlights for
each of the four years in the period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The financial highlights presented
herein for the year ended December 31, 2001 were audited by other auditors whose
report dated February 20, 2002, expressed an unqualified opinion on those
financial statements.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
We were not engaged to perform an audit of the Fund's internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Fund's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights, assessing the accounting
principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of December 31, 2005 by correspondence with the
custodian. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Appleton Equity Growth Fund of the Appleton Funds as of December 31, 2005, and
the results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for each of the four years in the period then ended, in conformity
with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Cincinnati, Ohio
January 30, 2006
APPLETON EQUITY GROWTH FUND
OTHER ITEMS
December 31, 2005
(Unaudited)
PROXY VOTING POLICIES AND PROCEDURES
The Adviser is responsible for exercising the voting rights associated with the
securities purchased and held by the Fund. A description of the policies and
procedures the Adviser uses in fulfilling this responsibility and information
regarding how those proxies were voted during the twelve month period ended June
30 are available without charge, upon request, by calling 1-617-338-0700. They
are also available on the Securities and Exchange Commission's website at
http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The Trust files a complete listing of portfolio holdings for the Fund as of the
end of the first and third quarters of each fiscal year on Form N-Q. The
complete listing (i) is available on the Commission's website; (ii) may be
reviewed and copied at the Commission's Public Reference Room in Washington, DC;
and (iii) will be made available to shareholders upon request by calling
1.800.543.0407. Information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330.
SCHEDULE OF SHAREHOLDER EXPENSES
As a shareholder of the Fund, you incur ongoing costs, including investment
advisory fees; distribution (12b-1) fees; and other Fund expenses. This example
is intended to help you understand your ongoing costs (in dollars) of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period (July 1, 2005 through December 31, 2005).
Actual Expenses
The first line of the table below provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During the Six
Months Ended December 31, 2005" to estimate the expenses you paid on your
account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund's and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Net Expense Ratio Beginning Ending Expenses Paid During
Annualized Account Value Account Value the Six Months Ended
December 31, 2005 July 1, 2005 December 31, 2005 December 31, 2005*
----------------- ------------ ----------------- ------------------
Appleton Equity Growth Fund
Actual 1.50% $ 1,000.00 $ 1,044.80 $ 7.73
Hypothetical 1.50% $ 1,000.00 $ 1,017.64 $ 7.63
- ---------------------------
* Expenses are equal to the Fund's annualized expense ratio, multiplied by
the average account value over the period, multiplied by [number of days
in most recent fiscal half-year/365] (to reflect the one-half year
period).
APPLETON EQUITY GROWTH FUND
ADVISORY AGREEMENT APPROVAL (unaudited)
December 31, 2005
At a meeting held on December 8, 2005, the Board of Trustees of the Fund, and
those Trustees (the "Independent Trustees") who are not "interested persons" of
the Fund as defined in the Investment Company Act of 1940, as amended, (the
"Act"), voting separately, approved the extension of the Fund's investment
advisory contract with the Investment Adviser. In connection with such action,
the Investment Adviser made a presentation to the Board with information
requested by the Independent Trustees. Such information included (i) information
confirming the financial condition of the Investment Adviser and the Investment
Adviser's profitability derived from its relationship with the Fund; (ii) a
description of the personnel and services provided by the Investment Adviser;
(iii) comparative information on fees and investment performance; and (iv)
information regarding brokerage and portfolio transactions. Comparative fee and
performance information was provided through an independent third party.
The Board reviewed and discussed financial information provided by the
Investment Adviser. The Board reviewed and considered the Investment Adviser's
profitability derived from its relationship with the Fund. The Board determined
that the Investment Adviser is solvent and sufficiently well capitalized to
perform the ongoing responsibilities to the Fund and to satisfy its obligations
under the Act and the advisory agreement.
The Board reviewed the advisory fee and the effective investment advisory fee
rate paid by the Fund and the appropriateness of such advisory fee. The Board
reviewed and considered any economies of scale which could be realized by the
Fund and how the current advisory fee for the Fund reflects the economies of
scale for the benefit of the shareholders of the Fund, noting that at this stage
of the Fund in view of its relatively small size, no such economies of scale had
been realized.
The Board also reviewed and considered the fees or other payments received by
the Investment Adviser. Specifically, the Board reviewed and considered
comparison of fees charged by investment advisers to fund peers of the Fund,
noting that the Investment Adviser's fees were generally in line with fund
peers. The Board also considered and reviewed information regarding brokerage,
observing that the Fund, in light of its size, generates relatively little in
brokerage fees.
The Board reviewed and considered the qualifications of the portfolio manager to
manage the portfolio of the Fund, including his history managing equity
investments generally and his experience with the types of securities included
in the Fund's portfolio, as well as his background and expertise and the amount
of time he would be able to devote to the affairs of the Fund. The Board
concluded, in light of the particular requirements of the Fund and its
investment program, that it was satisfied with the professional qualifications
and overall commitment to the Fund of the portfolio manager.
The Board considered the nature, extent and quality of services rendered to the
Fund by the Investment Adviser and the investment performance of the Fund based
on the data provided which included comparisons with the public markets as
represented by indices and with peer funds. The Board determined that in light
of the data taken as a whole and the nature of the investment program of the
Fund, the investment performance was reasonable and acceptable. The Board
discussed the Investment Adviser's profitability, and it was noted that the
potential profitability was within ranges generally determined to be reasonable,
given the services rendered and the Fund's performance and services provided.
The Board concluded that the Fund's fees paid to the Investment adviser were
reasonable in light of comparative performance and advisory fee information,
costs of the services provided and profits to be realized and benefits derived
by the Investment Adviser from its relationship with the Fund.
APPLETON EQUITY GROWTH FUND
MANAGEMENT OF THE TRUST (UNAUDITED)
December 31, 2005
Listed in the charts below is basic information regarding the Trustees and
Officers of the Trust.
Number of Other
Portfolios in Directorships
Fund Complex Held by Trustee
Current Position with Trust Principal Occupation(s) Overseen by Outside the Fund
Name/Address/Age and Length of Time Served During Last 5 yrs Trustee Complex
- ------------------------------- ----------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*:
James I. Ladge, CFA President, Trustee Senior Vice President, 1 N/A
45 Milk Street, 8th Floor (December 2000 - Present) Appleton Partners, Inc.
Boston, MA 02109 Treasurer (1993 - Present)
Age: 36 (December 2003 - Present)
Douglas C. Chamberlain, CFA Trustee President, Appleton 1 N/A
45 Milk Street, 8th Floor (December 2000 - Present) Partners, Inc.
Boston, MA 02109 (1998 - Present)
Age: 57
DISINTERESTED TRUSTEES:
Jack W. Aber, PhD Trustee Professor, Boston 1 Director, Manager
Boston University School of (December 2000 - Present) University Funds
Management (1972- Present) Director, Third
595 Commonwealth Avenue Avenue Funds
Boston, MA 02215
Age: 67
John M. Cornish, Esq. Trustee Partner, Choate, Hall 1 Director, Thompson
Choate Hall & Stewart (December 2000 - Present) & Stewart Steel Company
53 State Street (1985 - Present)
Boston, MA 02109
Age: 57
Grady B. Hedgespeth Trustee Trustee, Chief Investment 1 N/A
ICA Group (December 2000 - Present) Officer, New Markets
One Harvard Street, Suite 200 Equity Fund
Brookline, MA 02445 (March 2000 -
Age: 49 November 2001);
President, Fleet
Development Ventures
(1996 - 2000)
President, ICA Group,
a non-profit
consulting firm
(March 2002 - 2004);
Senior Vice President,
CFO, Seedco
(2004-Present)
OFFICERS:
Michele D. Hubley Secretary and Chief Vice President & Chief N/A N/A
45 Milk Street, 8th Floor Compliance Officer Compliance Officer of
Boston, MA 02109 (December 2004 - Present) Appleton Partners, Inc.
Age: 48 (1995 - Present)
* All Interested Trustees are such because of their interest in the
investment adviser, as defined in the Investment Company Act of 1940.
The Statement of Additional Information contains additional information about
the Trustees and is available without charge upon request by calling
1-877-71-Apple.
Item 2. Code of Ethics.
At the end of the period covered by this report, the registrant has adopted a
code of ethics that applies to its principal executive officer and principal
financial officer.
Item 3. Audit Committee Financial Expert.
The registrant's Board of Trustees has determined that the registrant has at
least one audit committee financial expert. Mr. Jack Aber is the registrant's
"audit committee financial expert" and is "independent" (as each term is defined
in Item 3 of Form N-CSR).
Item 4. Principal Accountant Fees and Services.
(a) Audit Fees. Audit fees totaled $16,000 for the December 31, 2005 fiscal year
and $17,168 for the December 31, 2004 fiscal year, including fees associated
with the annual audit and filings of the registrant's Form N-1A and Form N-SAR.
(b) Audit-Related Fees. There were no audit-related fees for the December 31,
2005 or December 31, 2004 fiscal years.
(c) Tax Fees. Tax fees totaled $2,000 for the December 31, 2005 fiscal year and
$1,600 for the December 31, 2004 fiscal year and consisted of fees for tax
compliance services during both years.
(d) All Other Fees. There were no other fees for the December 31, 2005 or
December 31, 2004 fiscal years.
(e) (1) Audit Committee Pre-Approval Policies. The Audit Committee's
pre-approval policies describe the types of audit, audit-related, tax and other
services that may receive the general pre-approval of the Audit Committee. The
pre-approval policies provide that annual audit service fees, tax services not
specifically granted pre-approval, services exceeding pre-approved cost levels
and other services that have not received general pre-approval will be subject
to specific pre-approval by the Audit Committee. The pre-approval policies
further provide that the Committee may grant general pre-approval to other audit
services (statutory audits and services associated with SEC registration
statements, periodic reports and other documents filed with the SEC or other
documents issued in connection with securities offerings), audit-related
services (accounting consultations related to accounting, financial reporting or
disclosure matters not classified as "audit services," assistance with
understanding and implementing new accounting and financial reporting guidance
from rulemaking authorities, agreed-upon or expanded audit procedures related to
accounting and/or billing records required to respond to or comply with
financial, accounting or regulatory reporting matters and assistance with
internal control reporting requirements under Form N-SAR and Form N-CSR), tax
services that have historically been provided by the auditor that the Committee
believes would not impair the independence of the auditor and are consistent
with the SEC's rules on auditor independence and permissible non-audit services
classified as "all other services" that are routine and recurring services.
-2-
(e)(2) All services described in paragraphs (b) through (d) of Item 4 were
approved by the Audit Committee.
(f) Not applicable
(g) The aggregate non-audit fees for services to the registrant, its investment
adviser and any entity controlling, controlled by, or under common control with
the adviser that provides ongoing services to the registrant were $2,000 for the
fiscal year ended December 31, 2005 and $1,600 for the fiscal year ended
December 31, 2004.
(h) Not applicable
Item 5. Audit Committee of Listed Registrants.
Not applicable
Item 6. Schedule of Investments.
The Schedule of Investments in securities of unaffiliated issuers is included in
the Annual Report.
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 does not have procedures by which shareholders may recommend
nominees to its Board of Trustees.
Item 11. Controls and Procedures.
(a) Based on an evaluation of the registrant's disclosure controls and
procedures (as defined in Rule 30a-3(c) under the 1940 Act) the
registrant's principal executive officer and principal financial
officer have concluded that the registrant's disclosure controls and
procedures are effective as of a date within 90 days of the filing
date of this report.
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act)
that occurred during the registrant's second fiscal half-year that
have materially affected, or are reasonably likely to materially
affect, the registrant's internal control over financial reporting.
-3-
Item 12. Exhibits.
(a)(1) Code of Ethics for Senior Financial Officers is filed herewith
(a)(2) Certifications required by Item 12(a) of Form N-CSR are filed herewith.
(a)(3) Not applicable.
(b) Certification required by Item 12(b) of Form N-CSR is filed herewith.
-4-
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 Appleton Funds
-------------------------------------------------------------------
By (Signature and Title)
/s/ James I. Ladge
- ------------------------
James I. Ladge
President and Treasurer
Date: March 2, 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/ James I. Ladge
- ------------------------
James I. Ladge
President and Treasurer
Date: March 2, 2006
-5-