N-CSR 1 cu03-165.txt CUTLER TRUST CERTIFIED ANNUAL REPORT As filed with the Securities and Exchange Commission on September 5, 2003 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 811-7242 THE CUTLER TRUST Two Portland Square Portland, Maine 04101 (207) 879-1900 John Y. Keffer, President Two Portland Square Portland, Maine 04101 (207) 879-1900 Date of fiscal year end: JUNE 30, 2003 Date of reporting period: JUNE 30, 2003 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. ANNUAL REPORT JUNE 30, 2003 -------------------------------------------------------------------------------- CUTLER VALUE FUND Cutler & Company, LLC Forum Shareholder Services, LLC 3555 Lear Way Two Portland Square Medford, Oregon 97504 Portland, Maine 04101 -------------------------------------------------------------------------------- To The Cutler Trust Shareholders: Enclosed is our annual report for the fiscal year ended June 30, 2003. Last year we described the period as one of unsightly surprises. This year we would characterize as one of tough choices and tough responses. Both the economy and markets have responded rationally. With the return of a measure of stability and rationality, we feel comfortable in returning to our traditional dividend-centered strategy of value investment. To that end, on April 17, 2003, we merged our Core Fund into our Value Fund. All fund assets now are following our income-oriented value strategy. Ken Cutler, who had managed our portfolio strategy for those many years when most of you made your investments with Cutler, is again the lead portfolio manager. He is assisted by the Cutler family's third generation of investment managers, Matthew and Erich Patten. Matthew also serves as portfolio manager of Cutler's private equity division. Erich joined following completion of the Masters degree program at the University of Chicago. We continue to feel confident in the long-term direction of the economy, comfortable with the general market position, and enthusiastic about our capable and harmonious management team. As always, if we can answer any of your questions, or address any of your concerns, please do not hesitate to call upon us. Sincerely, /s/ KEN CUTLER /s/ BROOKE ASHLAND Kenneth R. Cutler Brooke C. Ashland Chairman of the Board Chief Executive Officer The Cutler Trust Cutler & Company, LLC -------------------------------------------------------------------------------- CUTLER VALUE FUND INVESTMENT ADVISOR'S REPORT JUNE 30, 2003 -------------------------------------------------------------------------------- OUTLOOK While the past twelve months certainly have had short periods of uncertainty, the trend has been improving consistently, if gradually, both in the economy and in the markets. The Federal Reserve continues its expansionist policies, and the Bush administration continues its efforts to stimulate the economy. Historically low interest rates, coupled with tax cuts on both long-term gains and dividend income, have added incentives to stock market investing. A sounder tone resonates on Wall Street and seems likely to continue going forward. We anticipate more corporate emphasis on dividends, for the first time in several years, and this of course plays to our strategy. VALUE FUND As of June 30, 2003, the Cutler Value Fund's one year total return was -4.75%, versus -1.02% for the Russell 1000(R) Value Index (the Fund's primary benchmark). The Value Fund's relative underperformance vs. the benchmark for the year reflected, to some degree, the effects of larger-than-normal portfolio turnover during the transition back to our traditional quality-dividend driven process, and merger of our Core Fund into the Value Fund. Since completion of that transition on April 17, 2003, there has been approximately no turnover. The largest losses were General Motors Corp., Honeywell International Inc. and Alcoa, Inc. The best gains were Hewlett-Packard Co., Citigroup, Inc. and Merck & Co., Inc. We believe that more emphasis on dividends by both corporations and investors will provide a wind at our back going forward as we pursue our dividend-centered strategy of value investment. PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS. PLEASE SEE PAGE THREE FOR ADDITIONAL FUND PERFORMANCE-RELATED DISCLOSURE. THE VIEWS IN THIS REPORT WERE THOSE OF THE FUND MANAGERS AS OF JUNE 30, 2003 AND MAY NOT REFLECT THEIR VIEWS ON THE DATE THIS REPORT IS FIRST PUBLISHED OR ANYTIME THEREAFTER. THESE VIEWS ARE INTENDED TO ASSIST SHAREHOLDERS OF THE FUND IN UNDERSTANDING THEIR INVESTMENTS AND DOES NOT CONSTITUTE INVESTMENT ADVICE. (08/03) 2 -------------------------------------------------------------------------------- CUTLER VALUE FUND PERFORMANCE COMPARISON JUNE 30, 2003 -------------------------------------------------------------------------------- The graph and table reflect the change in value of a hypothetical $10,000 investment in the Cutler Value Fund (the "Fund"), including reinvestment of all dividends and distributions, compared with a broad-based securities market index, over the past ten fiscal years. The Russell 1000 Value Index (the "Index") measures the performance of those Russell 1000 Index companies with lower price-to-book ratios and lower forecasted growth values. The total return of the Fund includes operating expenses that reduce returns, while the total return of the Index does not include expenses. The Fund is professionally managed while the Index is unmanaged and is not available for investment. During the period, certain fees were waived and/or expenses reimbursed; otherwise, total returns would have been lower. PAST PERFORMANCE IS NOT PREDICTIVE NOR A GUARANTEE OF FUTURE RESULTS. MARKET VOLATILITY CAN SIGNIFICANTLY IMPACT SHORT-TERM PERFORMANCE. RESULTS OF AN INVESTMENT MADE TODAY MAY DIFFER SUBSTANTIALLY FROM THE FUND'S HISTORICAL PERFORMANCE. Investment return and principal value of an investment in the Fund will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The performance information presented in the graph and table below does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Cutler Value Fund vs. Russell 1000 Value Index Average Annual Total Return Value One Year Five Year Ten Year 6/30/03 -------- --------- -------- ------- Cutler Value Fund (4.75%) (0.90%) 8.83% $23,316 Russell 1000 Value Index (1.02%) 1.05% 10.68% $27,578 DATE CUTLER VALUE FUND RUSSELL 1000 VALUE INDEX 6/30/1993 10,000 10,000 7/31/1993 9,891 10,110 8/31/1993 10,307 10,475 9/30/1993 10,183 10,493 10/31/1993 10,373 10,484 11/30/1993 10,223 10,266 12/31/1993 10,328 10,462 1/31/1994 10,488 10,856 2/28/1994 10,188 10,485 3/31/1994 9,832 10,095 4/30/1994 9,943 10,288 5/31/1994 10,104 10,407 6/30/1994 9,893 10,158 7/31/1994 10,146 10,474 8/31/1994 10,621 10,775 9/30/1994 10,368 10,418 10/31/1994 10,501 10,564 11/30/1994 10,195 10,138 12/31/1994 10,412 10,256 1/31/1995 10,729 10,571 2/28/1995 11,108 10,990 3/31/1995 11,323 11,231 4/30/1995 11,549 11,587 5/31/1995 11,950 12,073 6/30/1995 12,102 12,237 7/31/1995 12,329 12,663 8/31/1995 12,391 12,842 9/30/1995 12,936 13,306 10/31/1995 12,874 13,174 11/30/1995 13,549 13,842 12/31/1995 13,868 14,189 1/31/1996 14,275 14,631 2/29/1996 14,337 14,742 3/31/1996 14,423 14,993 4/30/1996 14,528 15,050 5/31/1996 14,810 15,238 6/30/1996 14,886 15,251 7/31/1996 14,246 14,675 8/31/1996 14,487 15,094 9/30/1996 15,298 15,694 10/31/1996 15,625 16,301 11/30/1996 16,594 17,483 12/31/1996 16,210 17,260 1/31/1997 16,973 18,096 2/28/1997 17,366 18,363 3/31/1997 16,796 17,702 4/30/1997 17,689 18,446 5/31/1997 18,572 19,476 6/30/1997 19,528 20,312 7/31/1997 20,817 21,840 8/31/1997 19,464 21,062 9/30/1997 20,498 22,335 10/31/1997 20,049 21,711 11/30/1997 21,053 22,671 12/31/1997 21,600 23,333 1/31/1998 21,692 23,003 2/28/1998 22,954 24,551 3/31/1998 24,233 26,053 4/30/1998 24,163 26,227 5/31/1998 23,642 25,838 6/30/1998 24,391 26,169 7/31/1998 23,973 25,707 8/31/1998 21,049 21,882 9/30/1998 22,079 23,137 10/31/1998 23,671 24,930 11/30/1998 24,740 26,091 12/31/1998 25,480 26,980 1/31/1999 25,298 27,195 2/28/1999 25,162 26,811 3/31/1999 25,636 27,366 4/30/1999 28,142 29,922 5/31/1999 27,671 29,593 6/30/1999 28,806 30,452 7/31/1999 28,121 29,560 8/31/1999 27,314 28,464 9/30/1999 26,115 27,469 10/31/1999 27,336 29,050 11/30/1999 26,771 28,822 12/31/1999 26,317 28,961 1/31/2000 25,094 28,017 2/29/2000 23,286 25,935 3/31/2000 26,590 29,100 4/30/2000 26,110 28,761 5/31/2000 27,523 29,064 6/30/2000 26,140 27,736 7/31/2000 26,167 28,083 8/31/2000 27,236 29,646 9/30/2000 26,690 29,917 10/31/2000 27,600 30,653 11/30/2000 27,038 29,515 12/31/2000 28,597 30,993 1/31/2001 29,443 31,112 2/28/2001 28,324 30,247 3/31/2001 27,510 29,178 4/30/2001 29,017 30,609 5/31/2001 29,537 31,297 6/30/2001 28,485 30,603 7/31/2001 28,513 30,538 8/31/2001 27,799 29,315 9/30/2001 25,682 27,251 10/31/2001 25,875 27,017 11/30/2001 27,332 28,588 12/31/2001 27,685 29,261 1/31/2002 26,969 29,035 2/28/2002 26,942 29,082 3/31/2002 28,239 30,458 4/30/2002 26,279 29,413 5/31/2002 26,279 29,561 6/30/2002 24,478 27,863 7/31/2002 21,906 25,273 8/31/2002 21,934 25,464 9/30/2002 19,154 22,633 10/31/2002 21,236 24,309 11/30/2002 22,985 25,841 12/31/2002 21,428 24,718 1/31/2003 21,066 24,120 2/28/2003 20,286 23,477 3/31/2003 20,174 23,516 4/30/2003 21,771 25,586 5/31/2003 22,807 27,238 6/30/2003 23,316 27,578 3 -------------------------------------------------------------------------------- CUTLER VALUE FUND SCHEDULE OF INVESTMENTS JUNE 30, 2003 -------------------------------------------------------------------------------- SHARES SECURITY DESCRIPTION VALUE COMMON STOCK - 99.0% CONSUMER DISCRETIONARY - 2.8% 32,250 General Motors Corp. $ 1,161,000 ----------- CONSUMER STAPLES - 11.4% 52,900 ConAgra Foods, Inc. 1,248,440 23,350 General Mills, Inc. 1,107,024 23,650 Kimberly-Clark Corp. 1,233,111 12,250 Procter & Gamble Co. 1,092,455 ----------- 4,681,030 ----------- ENERGY - 7.4% 22,850 ConocoPhillips 1,252,180 32,360 Exxon Mobil Corp. 1,162,048 14,450 Kerr-McGee Corp. 647,360 ----------- 3,061,588 ----------- FINANCIALS - 21.4% 15,800 Bank of America Corp. 1,248,674 49,600 Bank of New York Co., Inc. 1,426,000 45,500 Citigroup, Inc. 1,947,400 56,450 J.P. Morgan Chase & Co. 1,929,460 54,450 U.S. Bancorp 1,334,025 18,550 Wells Fargo & Co. 934,920 ----------- 8,820,479 ----------- HEALTH CARE - 10.0% 59,000 Bristol-Myers Squibb Co. 1,601,850 8,000 Johnson & Johnson 413,600 26,400 Merck & Co., Inc. 1,598,520 14,650 Pfizer, Inc. 500,298 ----------- 4,114,268 ----------- See Notes to Financial Statements. 4 -------------------------------------------------------------------------------- CUTLER VALUE FUND SCHEDULE OF INVESTMENTS (concluded) JUNE 30, 2003 -------------------------------------------------------------------------------- SHARES SECURITY DESCRIPTION VALUE INDUSTRIALS - 15.8% 8,250 3M Co. $ 1,064,085 21,500 Caterpillar, Inc. 1,196,690 18,950 Emerson Electric Co. 968,345 41,600 General Electric Co. 1,193,088 50,150 Honeywell International, Inc. 1,346,527 13,050 Union Pacific Corp. 757,161 ----------- 6,525,896 ----------- INFORMATION TECHNOLOGY - 2.8% 54,200 Hewlett-Packard Co. 1,154,460 ----------- MATERIALS - 11.5% 51,850 Alcoa, Inc. 1,322,175 32,050 Dow Chemical Co. 992,268 28,100 E.I. du Pont de Nemours & Co. 1,170,084 22,950 Weyerhaeuser Co. 1,239,300 ----------- 4,723,827 ----------- TELECOMMUNICATIONS - 2.8% 45,750 SBC Communications, Inc. 1,168,912 ----------- UTILITIES - 13.1% 27,900 Consolidated Edison, Inc. 1,207,512 21,100 Exelon Corp. 1,261,991 66,400 National Fuel Gas Co. 1,729,720 39,150 Southern Co. 1,219,914 ----------- 5,419,137 ----------- TOTAL COMMON STOCK (COST $41,435,551) 40,830,597 ----------- SHORT-TERM HOLDING - 1.0% 411,317 Monarch Daily Assets Cash Fund (Cost $411,317) 411,317 ----------- TOTAL INVESTMENTS IN SECURITIES -100.0% $41,241,914 (COST $41,846,868) ----------- Other Assets and Liabilities, Net - 0.0% 8,297 ----------- TOTAL NET ASSETS - 100.0% $41,250,211 =========== See Notes to Financial Statements. 5 -------------------------------------------------------------------------------- CUTLER VALUE FUND STATEMENT OF ASSETS & LIABILITIES JUNE 30, 2003 -------------------------------------------------------------------------------- ASSETS Total investments, at value (Cost $41,846,868) (Note 2) $ 41,241,914 Receivables: Fund shares sold 755 Interest and dividends 79,349 Prepaid expenses 8,797 ------------ Total Assets 41,330,815 ------------ LIABILITIES Payables: Fund shares redeemed 8,983 Dividends 9,534 Accrued Liabilities: Payable to related parties (Note 3) 16,069 Other accrued expenses 46,018 ------------ Total Liabilities 80,604 ------------ NET ASSETS $ 41,250,211 ============ COMPONENTS OF NET ASSETS Paid-in capital $ 60,615,514 Accumulated distributions in excess of net investment income (3,470) Accumulated net realized loss on investments (18,756,879) Net unrealized depreciation on investments (604,954) ------------ NET ASSETS $ 41,250,211 ============ NET ASSET VALUE, Offering and Redemption Price Per Share: Based on net assets of $41,250,211 and 4,977,224 shares outstanding. $8.29 ============ See Notes to Financial Statements. 6 -------------------------------------------------------------------------------- CUTLER VALUE FUND STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 2003 -------------------------------------------------------------------------------- INVESTMENT INCOME Dividend income $ 654,179 Interest income 3,273 ------------ Total Investment Income 657,452 ------------ EXPENSES Investment advisory fees (Note 3) 170,006 Administration fees (Note 3) 33,749 Transfer agency fees (Note 3) 20,636 Shareholder servicing fees (Note 3) 880 Custody fees (Note 3) 8,579 Accounting fees (Note 3) 49,552 Professional fees 56,345 Trustees fees and expenses 18,445 Miscellaneous expenses 47,524 ------------ Total Expenses 405,716 Fees waived by Adviser (Note 4) (122,122) ------------ Net Expenses 283,594 ------------ NET INVESTMENT INCOME 373,858 ------------ REALIZED AND UNREALIZED LOSS ON INVESTMENTS Net realized loss from investments (2,856,341) Net change in unrealized appreciation (depreciation) of investments 3,066,857 ------------ NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS 210,516 ------------ INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 584,374 ============
See Notes to Financial Statements. 7 -------------------------------------------------------------------------------- CUTLER VALUE FUND STATEMENTS OF CHANGES IN NET ASSETS -------------------------------------------------------------------------------- Year Year Ended Ended June 30, 2003 June 30, 2002 --------------- --------------- OPERATIONS Net investment income $ 373,858 $ 182,424 Net realized loss from investments (2,856,341) (843,805) Net change in unrealized appreciation (depreciation) of investments 3,066,857 (2,831,104) --------------- --------------- Increase in net assets resulting from operations 584,374 (3,492,485) --------------- --------------- DISTRIBUTIONS TO SHAREHOLDERS FROM Net investment income (376,639) (185,416) --------------- --------------- CAPITAL SHARE TRANSACTIONS Sale of shares 3,121,017 3,964,821 Transactions due to reorganization (Note 1) 20,681,496 - Reinvestment of distributions 347,681 167,202 Redemption of shares (6,070,627) (3,234,737) --------------- --------------- Net increase from capital share transactions 18,079,567 897,286 --------------- --------------- Increase (decrease) in net assets 18,287,302 (2,780,615) --------------- --------------- NET ASSETS Beginning of Period 22,962,909 25,743,524 --------------- --------------- End of Period (a) $ 41,250,211 $ 22,962,909 =============== =============== SHARE ACTIVITY Sale of shares 394,437 419,920 Transactions due to reorganization (Note 1) 2,744,243 - Reinvestment of distributions 45,394 17,428 Redemption of shares (801,965) (323,035) --------------- --------------- Net increase in shares 2,382,109 114,313 =============== =============== (a) Accumulated distributions in excess of net investment income $ (3,470) $ (4,205) =============== ===============
See Notes to Financial Statements. 8 -------------------------------------------------------------------------------- CUTLER VALUE FUND FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- Selected per share data and ratios for a share outstanding throughout each period. Year Ended June 30, ----------------------------------------------------------------------------- 2003 2002 2001 2000 1999 Net Asset Value, Beginning of Period $ 8.85 $ 10.38 $ 9.78 $ 18.93 $ 21.02 -------------- ------------- ----------- ------------ ------------- Investment Operations Net investment income 0.13 0.08 0.08 0.12 0.14 Net realized and unrealized gain (loss) on investments (0.56)(b) (1.53) 0.79 (1.97) 2.73 -------------- ------------- ----------- ------------ ------------- Total from Investment Operations (0.43) (1.45) 0.87 (1.85) 2.87 -------------- ------------- ----------- ------------ ------------- Distributions From Net investment income (0.13) (0.08) (0.08) (0.12) (0.14) In excess of net investment income - - - - - (a) Net realized gain on investments - - (0.19) (7.18) (4.82) -------------- ------------- ----------- ------------ ------------- Total Distributions (0.13) (0.08) (0.27) (7.30) (4.96) -------------- ------------- ----------- ------------ ------------- Net Asset Value, End of Period $ 8.29 $ 8.85 $ 10.38 $9.78 $18.93 ============== ============= =========== ============ ============= Total Return (4.75%) (14.07%) 8.97% (9.25%) 18.10% Ratios/Supplementary Data Net assets at the end of year (in thousands) $ 41,250 $ 22,963 $ 25,744 $ 27,615 $ 40,125 Ratios to Average Net Assets Net Expenses 1.25% 1.25% 1.25% 1.25% 1.20% Expenses excluding reimbursement/waiver of fees 1.79% 1.50% 1.45% 1.28% 1.20% Net investment income 1.65% 0.76% 0.56% 1.01% 0.80% Portfolio Turnover Rate 61% 46% 60% 66% 110%
---------------------------------------------------- (a) Amount rounds to less than $0.01. (b) Per share amount does not reflect the actual net realized and unrealized gain/loss for the period because of the timing of sales of the Fund shares and the amount of per share realized and unrealized gains and losses at such time. See Note 1. See Notes to Financial Statements. 9 -------------------------------------------------------------------------------- CUTLER VALUE FUND NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 1. ORGANIZATION The Cutler Trust was organized on October 2, 1992, as an open-end management investment company under the Investment Company Act of 1940. On February 3, 2003, the Board approved the tax-free reorganization of the Cutler Core Fund (the "Core Fund") into the Cutler Value Fund (the "Fund") pursuant to an Agreement and Plan of Reorganization between the two funds. The reorganization of the funds was approved by shareholders of the Core Fund on April 15, 2003. On April 17, 2003 the Core Fund contributed all of its assets and liabilities to the Fund for ownership in the Fund. The Core Fund then distributed to its shareholders of record all shares of the Fund received by the Core Fund. The acquisition of net assets and unrealized gain/loss from this transaction was as follows: CONTRIBUTING ENTITY DATE OF CONTRIBUTION NET ASSETS SHARES ISSUED UNREALIZED LOSS ------------------- -------------------- ---------- ------------- --------------- Cutler Core Fund April 17, 2003 $20,681,496 2,744,243 $2,508,485*
*Included in Net Aseets. Under its Trust Instrument, the Fund is authorized to issue an unlimited number of shares of beneficial interest without par value. The Fund commenced operations on December 30, 1992. The investment objective of the Fund is current income and long-term capital appreciation. NOTE 2. SIGNIFICANT ACCOUNTING POLICIES These financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of increase and decrease in net assets from operations during the fiscal period. Actual results could differ from those estimates. The following summarizes the significant accounting policies of the Fund: SECURITY VALUATION - Exchange traded securities for which market quotations are readily available are valued using the last reported sales price provided by independent pricing services as of the close of trading on the New York Stock Exchange (normally 4:00 p.m. Eastern time), on each Fund business day. In the absence of a sale, such securities are valued at the mean of the last bid and asked price. Non-exchange traded securities for which over-the-counter quotations are available are generally valued at the mean between the closing bid and asked prices. Short-term 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. 10 -------------------------------------------------------------------------------- CUTLER VALUE FUND NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------------------------------------------------- Securities (including restricted securities) for which market quotations are insufficient or not readily available, or in the judgment of the Fund's Investment Adviser, the prices or values available do not represent the fair value of the instrument, are valued in good faith, at the direction of the Trust's Board of Trustees. Investments in other open-ended regulated investment companies are valued at net asset value. SECURITY TRANSACTIONS, INVESTMENT INCOME, AND REALIZED GAIN AND LOSS - Security transactions are accounted for on trade date. Dividend income is recorded on the ex-dividend date. Interest income is recorded as earned. Identified cost of investments sold is used to determine realized gain and loss for both financial statement and federal income tax purposes. RECLASSIFICATION OF CAPITAL ACCOUNTS - On the Statement of Assets and Liabilities, as a result of permanent book-to-tax differences, reclassification adjustments were made as follows: Accumulated Net Investment Income $ 3,516 Accumulated Net Realized Loss (14,500,231) Paid-in-Capital 14,496,715 DISTRIBUTIONS TO SHAREHOLDERS - Dividends from 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 generally accepted accounting principles. These differences are due primarily to differing treatments of income and gain on various investment securities held by the Fund, timing differences and differing characterizations of distributions made by the Fund. FEDERAL TAXES - The Fund intends to qualify each year as a registered investment company and distribute all its taxable income. In addition, by distributing in each calendar year substantially all its net investment income, capital gain and certain other amounts, if any, the Fund will not be subject to a federal excise tax. Therefore, no federal income or excise tax provision is required. The Fund has capital loss carryovers of $2,082,484 expiring in June 2009, $7,402,392 expiring in June 2010, and $5,747,725 expiring in June 2011 that are available to offset future capital gains. As a result fo the reorganization, the Fund has an annual capital loss carryforward limitation. Of the $15,232,601 of capital losses, $6,211,352 has an annual limitation of $758,242. For tax purposes, the Fund has a current year deferred post-October capital loss of $3,235,642. The loss will be realized for tax purposes on the first business day of the Fund's next tax year. 11 -------------------------------------------------------------------------------- CUTLER VALUE FUND NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------------------------------------------------- NOTE 3. INVESTMENT ADVISORY AND OTHER SERVICE PROVIDERS Cutler & Company, LLC ("Adviser") serves as the Fund's investment adviser. Pursuant to an Investment Advisory Agreement, the Adviser receives an advisory fee at an annual rate of 0.75% of the Fund's average daily net assets. Forum Administrative Services, LLC ("FAdS") serves as the Fund's administrator, for which it receives compensation at an annual rate of 0.10% of the Fund's average daily net assets (with a minimum annual fee of $40,000 commencing November 1, 2002). Pursuant to the Shareholder Service Plan, certain service providers receive fees, not to exceed 0.25% per year of the average daily net assets they hold. FAdS pays these fees and the Fund reimburses FAdS. Forum Shareholder Services, LLC, an affiliate of FAdS, serves as the Fund's transfer agent and dividend disbursing agent, for which it receives an annual fee of $18,000 (prior to November 1, 2002, the annual fee was $12,000), plus certain other fees and expenses. Forum Accounting Services, LLC, an affiliate of FAdS, serves as the fund accountant, for which it receives an annual fee of $48,000 (prior to November 1, 2002, the annual fee was $36,000), subject to adjustments for the number and type of portfolio transactions, plus certain other fees and expenses. Forum Fund Services, LLC ("FFS"), a registered broker-dealer, a member of the National Association of Securities Dealers, Inc., and an affiliate of FAdS, acts as the distributor for the Fund. FFS receives no compensation for its services. Forum Trust, LLC ("Forum Trust"), an affiliate of FAdS serves as the Fund's custodian and may employ subcustodians to provide custody of the Fund's domestic assets. For its services, Forum Trust is entitled to receive compensation at an annual rate of 0.01% of the average daily net assets (this fee decreases if the Fund assets exceed $1 billion), plus $3,600 per year account maintenance fees, plus certain other fees and expenses. NOTE 4. WAIVER OF FEES The Adviser has contractually agreed to waive a portion of its fees and reimburse certain expenses, if total expenses exceed 1.25% of average net assets, through October 31, 2003. The Adviser contractually waived fees of $122,122 for the year ended June 30, 2003. 12 -------------------------------------------------------------------------------- CUTLER VALUE FUND NOTES TO FINANCIAL STATEMENTS (concluded) -------------------------------------------------------------------------------- NOTE 5. SECURITIES TRANSACTIONS The cost of securities purchased and the proceeds from sales of securities (excluding short-term securities) totaled $36,162,984 and $14,307,131, respectively, for the year ended June 30, 2003. For federal income tax purposes, the tax basis of investment securities owned as of June 30, 2003, was $42,135,503 and the net unrealized depreciation was $893,589. The aggregate gross unrealized appreciation for all securities in which there was an excess of market value over tax cost was $2,528,991, and the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over market value was $3,422,580. NOTE 6. DISTRIBUTIONS TO SHAREHOLDERS As of June 30, 2003, the components of distributable earnings on as tax basis were as follows: Distributions in Excess of Net Investment Income $ (3,470) Capital and Other Losses (18,468,244) Unrealized Depreciation (893,589) -------------- Total $ (19,365,303) ============== The tax character of distributions paid during 2003 and 2002 were as follows: 2003 2002 ---- ---- Ordinary Income $376,639 $185,416 13 -------------------------------------------------------------------------------- CUTLER VALUE FUND INDEPENDENT AUDITORS' REPORT -------------------------------------------------------------------------------- To the Board of Trustees of Cutler Trust and Shareholders of Cutler Value Fund: We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Cutler Value Fund (the "Fund") as of June 30, 2003, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2003, by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Cutler Value Fund as of June 30, 2003, the results of its operations for the year then ended, the changes in it net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Boston, Massachusetts August 9, 2003 14 -------------------------------------------------------------------------------- CUTLER VALUE FUND TAX INFORMATION AND TRUSTEES AND OFFICERS (unaudited) -------------------------------------------------------------------------------- FEDERAL TAX STATUS OF DIVIDENDS DECLARED DURING THE FISCAL YEAR INCOME DIVIDENDS - The Fund paid ordinary income dividends of $376,639 for the tax year ended June 30, 2003. The Fund designates 100% of its income dividend distributed as qualifying for the corporate dividends-received deduction (DRD) and for the qualified dividend income (QDI) as defined in Section 1(h)(11) of the Internal Revenue Code. CAPITAL GAIN DIVIDENDS - The Fund did not declare long-term capital gain dividends for the tax year ended June 30, 2003. TRUSTEES AND OFFICERS OF THE TRUST ------------------------------ ----------- -------------- --------------------------------- ------------- --------------------- NUMBER OF PORTFOLIOS IN FUND POSITION LENGTH OF PRINCIPAL COMPLEX OTHER NAME, WITH THE TIME OCCUPATION(S) OVERSEEN DIRECTORSHIPS DATE OF BIRTH AND ADDRESS TRUST SERVED 1 DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEES ------------------------------ ----------- -------------- --------------------------------- ------------- --------------------- INTERESTED TRUSTEES ------------------------------ ----------- -------------- --------------------------------- ------------- --------------------- John Y. Keffer 2 Trustee 1992- Member and Director, Forum 1 Chairman Born: July 1942 President Present Financial Group, LLC (a mutual Monarch Funds Two Portland Square fund services holding company) Portland, ME 04101 ------------------------------ ----------- -------------- --------------------------------- ------------- --------------------- Kenneth R. Cutler Trustee 1992- Chief Investment Officer since 1 None Born: March 1920 Chairman Present 2003, Investment Committee 3555 Lear Way Member since 1999, and Portfolio Medford, OR 97504-9759 Manager 1977-1999, 2003, Cutler & Company, LLC ------------------------------ ----------- -------------- --------------------------------- ------------- --------------------- DISINTERESTED TRUSTEES ------------------------------ ----------- -------------- --------------------------------- ------------- --------------------- Dr. Hatten S. Yoder, Jr. 3 Trustee 1992- Director Emeritus, Geophysical 1 None Born: March 1921 Present Laboratory, Carnegie 6709 Melody Lane Institution of Washington since Bethesda, MD 20817-3152 1948; Consultant, Los Alamos National Laboratory, since 1972 ------------------------------ ----------- -------------- --------------------------------- ------------- --------------------- Robert B. Watts, Jr. Trustee 1996- Counsel, Northhaven Associates 1 None Born: December 1930 Present since 1985 2230 Brownsboro Highway Eagle Point, OR 97524 ------------------------------ ----------- -------------- --------------------------------- ------------- --------------------- ----------------------------- 1 Each Trustee and Officer holds office until he or she resigns, is removed, or a successor is elected and qualified. 2 John Y. Keffer indirectly controls the entities that provide administration, distribution, fund accounting, transfer agency and custodial services to the Trust. 3 Subsequent to the end of the fiscal year, but prior to the issuance of this report, Dr. Hatten S. Yoder passed away. The Nominating Committee of the Board of Trustees is in the process of selecting one or more candidates for Trustee. 15 -------------------------------------------------------------------------------- CUTLER VALUE FUND TAX INFORMATION AND TRUSTEES AND OFFICERS (unaudited)(concluded) -------------------------------------------------------------------------------- ------------------------------ ----------- -------------- --------------------------------- ------------- --------------------- NUMBER OF PORTFOLIOS IN FUND POSITION LENGTH OF PRINCIPAL COMPLEX OTHER NAME, WITH THE TIME OCCUPATION(S) OVERSEEN DIRECTORSHIPS DATE OF BIRTH AND ADDRESS TRUST SERVED 1 DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEES ------------------------------ ----------- -------------- --------------------------------- ------------- --------------------- DISINTERESTED TRUSTEES ------------------------------ ------------ --------------- ------------------------------- ------------- -------------------- Robert E. Clarke Trustee May 2002- Retired 1 None Born: May 1922 Present 3152 Arnold Palmer Way Medford, OR 97504 ------------------------------ ------------ --------------- ------------------------------- ------------- -------------------- OFFICERS ------------------------------ ------------ --------------- ------------------------------- ------------- -------------------- Brooke C. Ashland Vice June 2002- Chief Executive Officer or N/A N/A Born: December 1951 President Present Chairman of the Board 3555 Lear Way since 1995, Medford, OR 97504-9759 Cutler & Company, LLC ------------------------------ ------------ --------------- ------------------------------- ------------- -------------------- Carol S. Fischer Vice 1996- Chief Operating Officer, N/A N/A Born: December 1955 President/ Present Cutler & Company, LLC since 3555 Lear Way Assistant 1994 Medford, OR 97504-9759 Secretary/ Assistant Treasurer ------------------------------ ------------ --------------- ------------------------------- ------------- -------------------- Stacey E. Hong Treasurer June 2002- Director, Forum Accounting N/A N/A Born: May 1966 Present Services, LLC since 1998, Two Portland Square with which he has been Portland, ME 04101 associated since 1992 ------------------------------ ------------ --------------- ------------------------------- ------------- -------------------- D. Blaine Riggle Secretary 1998- Relationship Manager and N/A N/A Born: November 1966 Present Counsel, Forum Financial Two Portland Square Group, LLC since 1998 Portland, ME 04101 ------------------------------ ------------ --------------- ------------------------------- ------------- --------------------
----------------------------- The Statement of Additional Information ("SAI") contains additional information about the Trust's Trustees. The SAI is available without charge by contacting the Fund at (888) 288-5374. 1 Each Trustee and Officer holds office until he or she resigns, is removed, or a successor is elected and qualified. 16 CUTLER VALUE FUND -------------------------------------------------------------------------------- TABLE OF CONTENTS JUNE 30, 2003 -------------------------------------------------------------------------------- PAGE Chairman's Letter to the Shareholders.............1 Investment Advisor's Report.......................2 Performance Comparison............................3 CUTLER VALUE FUND Cutler Value Fund Portfolio.......................4 Statement of Assets and Liabilities...............6 Statement of Operations...........................7 Statements of Changes in Net Assets...............8 Financial Highlights (Per Share Data).............9 Notes to Financial Statements....................10 Report of Independent Auditors'..................14 Tax Information and Trustees and Officers........15 Distributor Forum Fund Services, LLC CUTLER & COMPANY, LLC INVESTMENT MANAGEMENT INVESTMENT ADVISER TO THE TRUST ANNUAL REPORT 3555 Lear Way, Medford, OR 97504 ------------- (800) 228-8537 o (541) 770-9000 Fax: (541) 779-0006 June 30, 2003 info@cutler.com ------------------------------------------------------- This report is submitted for the general information of the shareholders of the Fund. It is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus, which includes information regarding the Fund's objectives and policies, risks, management experience, and other information. ------------------------------------------------------- ITEM 2. CODE OF ETHICS. Not applicable. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Not applicable. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Not applicable. ITEM 5. [RESERVED] ITEM 6. [RESERVED] ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 8. [RESERVED] ITEM 9. CONTROLS AND PROCEDURES (a) - The certifying officers, whose certifications are included herewith, have evaluated the registrant's disclosure controls and procedures within 90 days of the filing date of this report. In their opinion, based on their evaluation, the registrant's disclosure controls and procedures are adequately 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. Further, in their opinion, the registrant's disclosure controls and procedures are adequately designed, and are operating effectively to ensure that information required to be disclosed by the registrant in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. (b) - There were no significant changes in the registrant's internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. ITEM 10. EXHIBITS. (a) Not applicable. (b) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Exhibit filed herewith). (c) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Exhibit filed herewith).