==========================
OMB APPROVAL
==========================
OMB Number: 3235-0570
Expires: Nov. 30, 2005
Estimated average burden
hours per response: 5.0
==========================
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: 811-08718
IPS Funds
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
1225 Weisgarber Road, Suite S-380, Knoxville, TN 37909
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Mr. Greg D'Amico
IPS Advisory, Inc.
1225 Weisgarber Road, Suite S-380
Knoxville, TN 37909
- --------------------------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: 800-232-9142
Date of fiscal year end: 11/30/2003
Date of reporting period: 05/31/2003
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. ANNUAL REPORT
- --------------------------------------------------------------------------------
IPS IFUND 2003 SEMIANNUAL REPORT
- --------------------------------------------------------------------------------
Fellow Portfolio Managers:
Thank you for another six months of participation and ideas. The IFUND is
similar to an investment club in that it works better with everyone's
participation. As market conditions improve, we see signs that shareholders are
more enthusiastic to share their investment ideas and opinions. IPS has also
been teeming with ideas on how to make the Fund more exciting, but has been
waiting for a better environment to enact them. We hope by implementing these
ideas, they will have the potential to attract new shareholders who can add a
new level of interest and excitement to the IFUND.
[GRAPHIC OMITTED]
FIGURE 1: Past performance is no guarantee of future results. Share price and
investment return will vary so that, when redeemed, an investor's shares may be
worth more, or less, than their original cost.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS AS OF 5/31/03
------------------------------------
INCEPTION
----------
6 MONTHS 1 YR (12/29/00)
--------- ---------- ----------
IFUND 2.98% -11.88% -29.28%
S&P 500 INDEX 3.91% - 8.06% -11.25%
NASDAQ COMPOSITE INDEX * 7.92% - 1.23% -16.54%
*Does not include reinvestment of dividends
- --------------------------------------------------------------------------------
PERFORMANCE
One of the more noticeable developments in the past six months has been the
Fund's performance in the last 3 months of the fiscal year compared to its first
three months. The IFUND gained 17.69% from March 1st through the end May 2003,
while losing 12.85% from December 1, 2002 through February 28, 2003. Much of the
run-up in the second quarter had to do with the war in Iraq and its quick
resolution. Following are details on which stocks were responsible and how the
Fund was positioned during the past two quarters.
The biggest changes in Fund have been in cash and tech sectors. The Fund
started December 2002 with 21.4% in cash and 19.7% in tech related stocks. By
February 28, 2003, it had 10.6% in cash and 43.3% in tech stocks. Some of the
tech stocks that were purchased during this time were QLOGIC (QLGC), GARMIN LTD.
(GRMN), OMNIVISION TECHNOLOGIES (OVTI) and EBAY (EBAY). Investors believed the
market was ready for a rebound and added sectors such as Computer Hardware, Data
Storage, Telecommunications and Wireless Services. The Fund had minimal selling
during this time but did exit the REIT sector by selling FBR ASSET INVESTMENT
CORP. (FBR). For the most part, the consumer sector of the Fund remained
relatively constant.
Copyright 2002, IPS Advisory. Inc.
1
The IFUND went through a trading spurt in March 2003. Stocks such as THE
STANLEY WORKS (SWK), LONE STAR STEAKHOUSE (STAR) and DELL COMPUTER (DELL) were
added to the consumer sector while L3 COMMUNICATIONS (LLL), INTERNATIONAL
RECTIFIER (IRF) and CISCO SYSTEMS (CSCO) were sold from the tech side of the
portfolio. As a result, the technology sector shrank from 44% at the end of
March 2003 to 18.3% by May 31, 2003. Meanwhile, the consumer sector of the Fund
grew from 5.2% at the end of March 2003 to 14.8% on May 31, 2003 with the
inclusion of BORDERS GROUP (BGP) and the repurchase of 99 CENT ONLY STORES
(NDN).
VOLATILITY OF RETURNS
FIGURE 2 provides an interesting perspective on the IFUND'S risk profile
since inception. The graph highlights a fascinating detail, in part, because it
was not a conscious or deliberate action by the shareholders. As illustrated,
the IFUND has lowered its risk below that of the broad market for the past six
months. The IFUND'S volatility dropped 1.71% from 7.86% on November 30, 2002 to
6.15% on May 31, 2003, significantly more than the Nasdaq's 1.15% drop to 7.80%
on May 31, 2003. The Value Line Arithmetic's volatility rose from 7.27% on
November 30, 2003 to 7.64% on May 31, 2003.
We use the Nasdaq Composite as a benchmark for the IFUND because we feel it
is more representative of the aggressive types of stocks in which the IFUND may
invest. We include the VLAC because it is a far better proxy for the broad
market than other well-known Indexes, for two reasons: it is equally weighted,
and it consists of a large number of companies (approximately 1,700) across a
broader spectrum of market capitalizations. Other Indexes are capitalization
weighted, meaning that larger companies are more heavily weighted in the
calculation of the Index. While this may make a good proxy for economic
activity, we do not believe that capitalization-weighted indexes are an
appropriate proxy for investment styles like ours that are not index funds, and
that do not take into account market capitalization as a significant factor in
our buy and sell decisions.
[GRAPHIC OMITTED]
FIGURE 2: Volatility of the Fun on a monthly basis, versus the broad stock
market as represented by the VALUE LINE ARITHMETIC COMPOSITE INDEX, a
broad-based, equally weighted index of approximately 1,700 stocks with dividends
reinvested. Risk is measured as the Standard Deviation of the most recent 13
monthly returns.
CHANGES FROM WITHIN
Chats have become a regular occurrence in the IFUND. They have proven to be
very useful in the short-term management of the Fund. On more than one occasion,
a stock has been nominated to buy or sell during a chat discussion or
immediately after one. For instance, the January 23rd chat was responsible for
buying CISCO SYSTEMS (CSCO), VERITAS SOFTWARE (VRTS) and CELESTICA (CLS). David
posted this on CELESTICA, "CLS - I was glad to see this one nominated, despite
all the analyst downs. I think the analysts are wrong here. A new "killer
device," such as a personal GPS would put Celestica back on the map." Robert
replied, "I really like Celestica. They are the most undervalued of the stocks
we have been discussing. The only problem with
Copyright 2002, IPS Advisory, Inc.
2
Celestica is that 60% of their sales is to EMS companies. Their recovery depends
on a resumption of IT spending by corporations, and there is little sign of that
yet."
By offering an organized venue for investors to share their outlook on the
markets and specific stocks, the IFUND benefits in two ways. First, the chat
introduces fresh ways of looking at different viewpoints and facilitates the
opportunity to build upon one's own ideas. Secondly, by gathering a majority of
investors at one time, it speeds up the management and consensus-building
process. Sometimes stocks are nominated and forgotten without any votes cast in
their favor. The chat is structured so that each stock is spotlighted one at a
time, and investors give their opinions on whether the Fund should buy, sell or
hold the stock. The structure and immediacy of chats have been rewarding for
those who participate and for the IFUND'S performance.
To romanticize, the IFUND is similar to the Cannery Row lab of Ed Ricketts,
John Steinbeck's friend and muse for characters in some of his most famous books
such as OF MICE AND MEN and THE GRAPES OF WRATH. Rickett's lab was an infamous
meeting place for Steinbeck, Henry Miller, John Cage and others to talk about
art and philosophize. Rickett viewed life as an enormous tide pool, where
everything was interrelated, similar to the iFund's view on the market and the
world we live in today. Our chats are the informal sessions Ricketts and his
friends savored to discover what others were thinking and to expound on those
ideas. We are part of an exciting idea and it is up to us to keep it moving
forward.
GREGORY A. D'AMICO KAREN WHITEHEAD
PRESIDENT FUND ADVISOR
================================================================================
- --------------------------------------------------------------------------------
** The above discussion reflects the Advisors' interpretation of the investment
decisions of a bunch of people we don't know. They aren't only subject to
change, we don't know what they are to begin with.
** Past performance is no guarantee of future results. Share price and
investment return will vary so that, when redeemed, an investor's shares may be
worth more or less than their original cost.
** The S&P 500 INDEX is a widely-recognized, capitalization-weighted, unmanaged
index of 500 large U.S. companies chosen for market size, liquidity and industry
group representation, and has been adjusted to reflect total return with
dividends reinvested. Returns for periods greater than one year are annualized.
The NASDAQ COMPOSITE INDEX is an unmanaged index of more than 4,000 stocks
traded electronically through the NASDAQ System. The returns shown for the
NASDAQ COMPOSITE INDEX do not include reinvestment of dividends. The VALUE LINE
ARITHMETIC COMPOSITE INDEX is an arithmetically averaged index of approximately
1,700 stocks that is more broad-based than the S&P 500 INDEX. The VALUE LINE
ARITHMETIC COMPOSITE INDEX figures do not reflect any fees or expenses.
** Portfolio composition is subject to change at any time and references to
specific securities, industries and sectors referenced in this letter are not
recommendations to purchase or sell any particular security. See the
accompanying Schedule of Investments for the percent of a Fund's portfolio
represented by the securities or industries mentioned in this letter.
** This semiannannual report is not authorized for distribution to prospective
investors unless it is preceded or accompanied by a current IPS Funds Profile or
Prospectus.
** CITCO-Quaker Fund Services, Inc., distributor. 6/2003
For more information, please contact IPS Funds at:
Phone: 800.249.6927 1225 Weisgarber Road
865.524.1676 Web Site: www.ipsifund.com Suite S-380
Fax: 865.544.0630 Email: info@ipsifund.com Knoxville, TN 37909
Copyright 2002, IPS Advisory, Inc.
3
IPS IFUND
Schedule of Investments
May 31, 2003 (Unaudited)
COMMON STOCKS - 77.74% SHARES VALUE
------------ --------------
BIOTECHNOLOGY - 6.80%
Fisher Scientific International Inc.* 65 2,060
Invitrogen Corp.* 85 3,317
--------------
5,377
--------------
BUSINESS SERVICES - 10.67%
Allied Capital Corp. 75 1,751
Angelica Corp. 200 3,576
ProQuest Co.* 70 1,960
SunGard Data Systems Inc.* 50 1,150
--------------
8,437
--------------
COMPUTER HARDWARE - 1.78%
Dell Computer Corp.* 45 1,408
--------------
CONSUMER DISCRETIONARY - 5.81%
Cadbury Schweppes Plc 125 2,994
Lone Star Steakhouse & Saloon, Inc. 70 1,603
--------------
4,597
--------------
CONSUMER RETAIL - 7.19%
99 Cents Only Stores* 55 1,748
Borders Group, Inc.* 90 1,481
Chico's FAS, Inc. 115 2,461
--------------
5,690
--------------
DEFENSE - 2.16%
United Technologies Corp. 25 1,706
--------------
DRUGS & MEDICAL EQUIPMENT - 2.45%
Amgen, Inc.* 30 1,941
--------------
HEALTHCARE - 7.31%
First Health Group Corp.* 100 2,566
Lincare Holdings Inc.* 35 1,080
WellPoint Health Networks Inc.* 25 2,134
--------------
5,780
--------------
INDUSTRIAL MANUFACTURING - 6.92%
Freeport-McMoRan Copper & Gold Inc. 195 4,280
Lear Corp.* 30 1,193
--------------
5,473
--------------
MULTIMEDIA - 3.96%
Univision Communications Inc.* 105 3,134
--------------
NATURAL GAS EXPLORATION & PRODUCTION - 4.50%
Headwaters Inc.* 100 1,899
Suncor Energy Inc. 90 1,661
--------------
3,560
--------------
SEMICONDUCTORS - 2.32%
ESS Technology, Inc.* 220 1,837
--------------
SOFTWARE - 5.11%
Autodesk, Inc. 110 1,640
Electronic Arts Inc.* 35 2,400
--------------
4,040
--------------
TELECOMMUNICATIONS - 8.66%
Benchmark Electronics, Inc.* 110 3,128
UTStarcom, Inc.* 70 2,076
Vodafone Group Plc 75 1,643
--------------
6,847
--------------
UTILITIES - 2.10%
FPL Group, Inc. 25 1,662
--------------
TOTAL COMMON STOCK (COST $55,519) 61,489
--------------
MUTUAL FUNDS - 2.26%
China Fund, Inc. 90 1,786
--------------
TOTAL MUTUAL FUNDS (COST $1,421) 1,786
--------------
SHORT-TERM INVESTMENTS - 19.97%
Federated Cash Trust Series II 15,796 15,796
--------------
TOTAL SHORT-TERM INVESTMENTS (COST $15,796) 15,796
--------------
TOTAL INVESTMENTS (COST $72,736) - 99.97% 79,071
--------------
OTHER ASSETS LESS LIABILITIES, NET - 0.03% 21
TOTAL NET ASSETS - 100.00% 79,092
==============
* Non-income producing security
SEE NOTES TO FINANCIAL STATEMENTS
Copyright 2003, IPS Advisory, Inc.
4
THE IPS IFUND
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 2003 (UNAUDITED)
IPS
IFUND
ASSETS:
Investments, at value (cost $72,736) $ 79,071
Receivable for capital shares sold 100
Dividends receivable 7
Interest receivable 4
--------------
Total Assets 79,182
--------------
LIABILITIES:
Payable to Advisor 90
--------------
Total Liabilities 90
--------------
$ 79,092
==============
NET ASSETS CONSIST OF:
Capital stock $ 138,312
Accumulated undistributed net realized
loss on investments sold (65,345)
Accumulated undistributed net investment income (210)
Net unrealized appreciation (depreciation)
on investments 6,335
--------------
Total Net Assets $ 79,092
==============
Shares outstanding (no par value,
unlimited shares authorized) 15,245
Net asset value, redemption price and
offering price per share $ 5.19
==============
The accompanying notes are an integral part of these financial statements.
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED
MAY 31, 2003 (UNAUDITED)
IPS
IFUND
INVESTMENT INCOME:
Dividend income $ 271
Interest income 15
--------------
Total investment income 286
--------------
EXPENSES:
Investment advisory fee 496
--------------
Total expenses 496
--------------
NET INVESTMENT LOSS (210)
--------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized gain on investment transactions 391
Change in unrealized appreciation (depreciation)
on investments 2,114
--------------
Net realized and unrealized loss on investments 2,505
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $ 2,295
==============
The accompanying notes are an integral part of these financial statements.
Copyright 2002, IPS Advisory, Inc.
5
THE IPS FUNDS
STATEMENTS OF CHANGES IN
NET ASSETS
IPS IFUND
FOR THE PERIOD
ENDED YEAR
MAY 31, 2003 ENDED
(UNAUDITED) NOVEMBER 30, 2002
OPERATIONS:
Net investment income (loss) $ (210) $ (718)
Net realized loss on investment transactions 391 (34,747)
Change in unrealized appreciation
(depreciation) on investments 2,114 4,151
-------------------------------------
Net increase (decrease) in net assets
resulting from operations 2,295 (31,314)
-------------------------------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 100 14,770
Cost of shares redeemed -- (1,788)
-------------------------------------
Net increase (decrease) in net assets
resulting from capital share transactions 100 12,982
-------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 2,395 (18,332)
NET ASSETS:
Beginning of period 76,697 95,029
-------------------------------------
End of period $ 79,092 $ 76,697
=====================================
The accompanying notes are an integral part of these financial statements.
Copyright 2002, IPS Advisory, Inc.
6
IPS IFUND
FINANCIAL HIGHLIGHTS
Selected per share data is based on a share of common stock outstanding
throughout each period.
DECEMBER 29,
2000 (1)
PERIOD ENDED YEAR ENDED THROUGH
MAY 31, 2003 NOVEMBER 30, NOVEMBER 30,
(UNAUDITED) 2002 2001
PER SHARE DATA:
Net asset value, beginning of period $ 5.04 $ 7.09 $ 12.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss (0.01) (0.05) (0.02)(2)
Net realized and unrealized
loss on investments 0.15 (2.00) (4.89)
--------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.14 (2.05) (4.91)
--------------------------------------------------
Net asset value, end of period $ 5.18 $5.04 $7.09
==================================================
Total return 2.98% (28.91)% (40.92%)(3)
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period (000's) $79 $77 $95
Ratio of net operating expenses to average net assets 1.40% (4) 1.40% 1.40% (4)
Ratio of net investment income to average net assets -0.30% (4) -0.83% -0.49% (4)
Portfolio turnover rate 107.88% 177.50% 124.68%
(1) Commencement of operations
(2) Net investment income per share is calculated using ending balances prior
to consideration of adjustments for permanent book and tax differences.
(3) Not annualized
(4) Annualized
The accompanying notes are an integral part of these financial statements.
Copyright 2002, IPS Advisory, Inc.
7
IPS IFUND
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 2003
1. ORGANIZATION
The IPS iFund (the "Fund") is a series of the IPS Funds (the "Trust"), an
Ohio business trust organized on August 10, 1994, and is registered under
the Investment Company Act of 1940, as amended (the "1940 Act"), as an
open-end diversified management investment company. The principal
investment objective of the Fund is long-term capital growth. The Fund
commenced operations on December 29, 2000.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles
("GAAP"). The presentation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates and assumptions.
(a) Investment Valuation
Securities which are traded on a recognized stock exchange are valued
at the last sale price on the securities exchange on which such
securities are primarily traded. Securities traded on the
over-the-counter market and listed securities for which there were no
transactions are valued at the last quoted bid price. Debt instruments
maturing within 60 days are valued by the amortized cost method. Any
securities for which market quotations are not readily available are
valued at their fair value as determined in good faith by IPS
Advisory, Inc. (the "Advisor") pursuant to guidelines established by
the Board of Directors.
(b) Federal Income and Excise Taxes
The Fund intends to meet the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute
substantially all net investment company taxable income and net
capital gains to shareholders in a manner which results in no tax cost
to the Fund. Therefore, no federal income or excise tax provision is
required.
(c) Distributions to Shareholders
Dividends from net investment income are declared and paid annually.
Distributions of net realized capital gains, if any, will be declared
and paid at least annually. Distributions to shareholders are recorded
on the ex-dividend date. The Fund may periodically make
reclassifications among certain of its capital accounts as a result of
the recognition and characterization of certain income and capital
gain distributions determined annually in accordance with federal tax
regulations which may differ from generally accepted accounting
principles.
(d) Securities Transactions and Investment Income
Investment transactions are recorded on the trade date for financial
statement purposes. The Fund determines the gain or loss realized from
the investment transactions by comparing the original cost of the
security lot sold with the net sale proceeds. Dividend income is
recognized on the ex-dividend date and interest income is recognized
on an accrual basis. Acquisition and market discounts are amortized
over the life of the security.
Copyright 2002, IPS Advisory, Inc.
8
3. SHARES OF COMMON STOCK
Transactions in shares of common stock were as follows:
DECEMBER 29, 2000
FOR THE COMMENCEMENT OF OPERATIONS
SIX MONTHS ENDED THROUGH
MAY 31, 2003 NOVEMBER 30, 2002
IPS IFUND $ Shares $ Shares
-------- -------- -------- --------
Shares sold $ 100 20 $ 14,770 2,166
Shares issued in reinvestment
of dividends -- -- -- --
Shares redeemed -- -- (1,788) (351)
-------- --------
Net increase (decrease) $ 100 20 $ 12,982 1,815
======== ========
SHARES OUTSTANDING:
Beginning of period 15,225 13,410
-------- --------
End of period 15,245 15,225
======== ========
4. INVESTMENT TRANSACTIONS
Purchases and sales of securities for the six months ended May 31, 2003,
excluding short-term investments, aggregated $66,178 and $64,909, respectively.
There were no purchases or sales of long-term U.S. government securities.
At May 31, 2003, gross unrealized appreciation and depreciation of
investments, based on cost for federal income tax purposes of $73,061 were as
follows:
Unrealized appreciation $7,108
Unrealized depreciation (776)
------
Net unrealized appreciation on investments $6,010
======
The difference between book cost and tax cost consists of wash sales in the
amount of $325.
At November 30, 2002, the Fund had an accumulated net realized capital loss
carryover of $65,412, with $30,990 expiring in 2009 and $34,422 expiring in
2010. To the extent the Fund realizes future net capital gains, taxable
distributions to its shareholders will be offset by any unused capital loss
carryover.
5. INVESTMENT ADVISOR
The Fund has an agreement with IPS Advisory, Inc. (the "Advisor"), with
whom certain officers and directors of the Fund are affiliated, to furnish
investment advisory services to the Fund. Under the terms of the agreement, the
Advisor will pay all of the Fund's operating expenses, excluding brokerage fees
and commissions, taxes, interest and extraordinary expenses. The Fund is
obligated to pay the Advisor a fee computed and accrued daily and paid monthly
at an annual rate of 1.40% of its average daily net assets to and including
$50,000,000 and 0.95% of such assets in excess of $50,000,001. Total fees paid
to IPS Advisory, Inc. during the six months ended May 31, 2003 were $496.
6. DISTRIBUTABLE EARNINGS
There were no distributions during the fiscal year ended May 31, 2003.
The tax character of distributions paid during the six months ended May 31,
2003 and the fiscal year ended 2002 was as follows:
Copyright 2002, IPS Advisory, Inc.
9
Distributions paid from: 2003 2002
---------- ----------
Ordinary income $ -- $ --
Short-term Capital Gain -- --
Long-term Capital Gain -- --
---------- ----------
$ -- $ --
========== ==========
As of November 30, 2002, the components of distributable earnings (accumulated
losses) on a tax basis were as follows:
iFund
----------
Undistributed ordinary income $ --
(accumulated losses)
Undistributed long-term capital gain
(accumulated losses) (65,412)
Unrealized appreciation/(depreciation) 3,896
----------
(61,516)
==========
The difference between book basis and tax basis unrealized appreciation
(depreciation) is attributable primarily to the deferral of wash sales.
INDEPENDENT TRUSTEES
- -------------------------------------------------------------------------------------------------------------------------------
# OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX OTHER
HELD WITH THE LENGTH OF PRINCIPAL OCCUPATION(S) DURING OVERSEEN BY DIRECTORSHIPS
NAME, AGE, AND ADDRESS TRUST TIME SERVED PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
- -------------------------------------------------------------------------------------------------------------------------------
Veenita Bisaria, 42, Independent Since Financial Analyst, Tennessee 3 None
12416 Fort West Drive Trustee inception Valley Authority
Knoxville, TN 37922 of Funds (1997-Present);Financial Analyst
in 1995. Charter (CFA).
- -------------------------------------------------------------------------------------------------------------------------------
Woodrow Henderson, 45, 6504 Independent Since Director of Planned Giving for 3 None
Clary Lane Trustee inception the University of Tennessee at
Knoxville, TN 37919 of Funds Knoxville.
in 1995
- -------------------------------------------------------------------------------------------------------------------------------
Billy Wayne Stegall, Jr., 46, Independent Since Account Executive, Colonial 3 None
316 Stonewall Street Trustee inception Life & Accident
Memphis, TN 38112 of Funds (1995-Present).
in 1995.
- -------------------------------------------------------------------------------------------------------------------------------
Copyright 2003, IPS Advisory, Inc.
10
INTERESTED TRUSTEES & OFFICERS
- -------------------------------------------------------------------------------------------------------------------
# OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND PRINCIPAL OCCUPATION COMPLEX OTHER
HELD WITH LENGTH OF (S) DURING PAST FIVE OVERSEEN DIRECTORSHIPS
NAME, AGE, AND ADDRESS THE TRUST TIME SERVED YEARS BY TRUSTEE HELD BY TRUSTEE
- -------------------------------------------------------------------------------------------------------------------
Greg D'Amico*, 39, President, Since President of IPS 3 IPS Advisory,
1225 Weisgarber Road, Chief inception Advisory, Inc. Inc.; Director
Suite S-380, Financial of Funds in of Young
Knoxville, TN 37909 Officer, 1995 Entrepreneurs'
Treasurer Organization
and Trustee (YEO);
Association for
Investment and
Management
Research
(AIMR);
Personal &
Child Safety,
LLC (PCS)
- -------------------------------------------------------------------------------------------------------------------
Robert Loest*, 59, Vice Since Chief Executive 3 IPS Advisory,
1225 Weisgarber Road, President, inception Officer of IPS Inc.
Suite S-380, Secretary of Funds in Advisory, Inc.;
Knoxville, TN 37909 and Trustee 1995 Financial Analyst
Charter (CFA); Ph.D.
in Biology.
- -------------------------------------------------------------------------------------------------------------------
* An "interested person" of the Trust, as defined in the Investment Company Act
of 1940, due to his relationship with the Advisor.
BOARD COMMITTEES
The Board has the following standing committee as described below:
- --------------------------------------------------------------------------------------------------------------
AUDIT COMMITTEE
- --------------------------------------------------------------------------------------------------------------
MEMBERS DESCRIPTION MEETINGS
- ------- ----------- --------
Veenita Bisaria, Responsible for advising the full Board with respect At least once
Independent Trustee to accounting, auditing and financial matters annually.
Woodrow Henderson, affecting the Trust. Last meeting
Independent Trustee occurred on
Billy Wayne Stegall, Jr., January 25,
Independent Trustee 2003.
Copyright 2003, IPS Advisory, Inc.
11
- --------------------------------------------------------------------------------
IPS FUNDS 2003 SEMIANNUAL REPORT
- --------------------------------------------------------------------------------
Fellow Shareholders:
In our 2002 Annual Report, we stated "Immediately ahead of us lies a bull
market of historic proportions, and we have been preparing for it for several
months now." We believe we have now entered what will prove to be a powerful,
extended bull market rally typical of those that have followed every other major
stock market crash. We expect that it will last at least a year, and that
returns on stocks for 2003 will be quite high.
There was a powerful rally off the bottom of the market on October 9, 2002,
driven by low quality stocks, short covering and valuations that had simply gone
too low. It then collapsed until March of 2003. This is typical of bear market
bounces, as well as the early stages of major bull market moves. Low quality
securities always move first. This is true not only of stocks, but also of
bonds, which have seen a major rally in junk bonds while higher quality bonds
barely budged. We did not participate until March because we have had four
similar low quality rallies of 20%-plus in the last three years, and we needed
to make certain it wasn't another head fake before we became fully invested.
What convinced us that we really are in a new bull market and not just
another bear market trap, is that in mid-March the rally picked up volume, the
advance/decline indicator moved powerfully in the direction of advancing stocks,
and the stocks that benefited broadened out very suddenly into high quality
companies like those held by our Funds. As a result, both IPS MILLENNIUM and NEW
FRONTIER FUNDS became fully invested during the month of March. We believe,
however, that this is in the context of an ongoing, secular (long term) bear
market, which is the reason behind our more conservative approach, as we explain
further below.
LOWERING THE RISK LEVEL
Since the 2002 Annual Report, we have continued to lower the risk of both
Funds, as measured by the standard deviation (SD, or volatility) of monthly
returns over a 13-month rolling period. We have lowered the SD of both Funds
dramatically since early 2001, when we first realized that this was not just
another ordinary, cyclical bear market. We continue to maintain a much lower
risk level than that of the overall stock market.
To achieve this lower level of risk, we have focused more strongly on high
levels of Free Cash Flow (FCF), lower debt/capital ratios, higher cash on the
balance sheet, and raised the bar yet again in terms of the discount from fair
value that we demand before we will buy a stock. This has limited our downside
risk without sacrificing growth potential. We are simply less likely to overpay
for growth stocks in a market where growth stocks in many sectors are
overvalued.
In the 1980s & `90s, we all came to believe that if we bought good
companies and held onto them, we could see our stocks appreciate steadily,
sometimes dramatically. We did this with several companies (EMC, CALPINE, CISCO
and others), and it encouraged us to hold onto these stocks even when P/E
multiples rose to very high levels. This resulted in the volatility of our Funds
reaching an unacceptable level in 2000, as you will see from the graph in the
report for each Fund that follows.
We have since early 2001 initiated a stricter discipline in terms of how
high or low we allow a stock to go before we sell it, and have focused more
strongly on quality. We have continued to raise the bar in terms of Free Cash
Flow (FCF= Cash From Operations minus Capital Expenditures) yield on the stock
price (currently 8%) until our risk is well below that of the overall stock
market. We use the discounted present value of a company's Free Cash Flow, not
EPS, to estimate fair value. When the stock's price rises significantly above
fair value, we sell it and take our profits.
THE RATIONALE FOR LOWER RISK
In the summer of 2001, we began to suspect that we were in the earliest
stages of a secular bear market. Such markets are characterized by an extended
period of about 15 years (plus or minus 5 years) of contracting P/E ratios, high
market volatility, global economic and political instability, and very low
overall stock returns. The initial market crash is now behind us. We expect
years of declining P/E ratios to offset growth in GDP and in earnings, so that
the stock market goes sideways for an extended period of time as we explained in
our 2002 Annual Report to you. This does not mean that one cannot earn good
returns, or that there won't be strong bull market rallies. But it will be
against a background of declining
Copyright 2003, IPS Advisory, Inc.
1
market multiples, not expanding multiples like what we had in 1982 - 2000, and
one must understand the environment, and how to invest in such an environment to
make money.
In 1901, the S&P 500 P/E ratio peaked at 23, marking the peak of the
secular bull market of the late 1880s and 1890s. During the secular bear market
following 1901, the P/E fell to a low of 5 in 1921. The P/E ratio then climbed
to a high of 28 in 1929 during the secular bull market of the 1920s, after which
it fell steadily during the following secular bear market, bottoming out at 9 in
1942. From that bottom, the P/E rose again during the next major secular bull
market to peak at 23 in 1965. This was followed by another secular bear market,
with the P/E falling to a low of 7 in 1982. The most recent secular bull market
saw the P/E ratio peak at an unheard of 42 in 2000 before the crash. As in the
past, we expect the P/E on the S&P 500 to decline until it bottoms out again
somewhere between 8 and 11 in the next decade or so.
As you can see, this is an old story. The stock market has a life of its
own, and that life over long periods of time can be completely unrelated to GDP
or EPS growth. It's clear to us now that we are in the secular bear market phase
of the stock market's life cycle. The economy should do relatively well from
here on out (with a predictable cyclical recession every few years, of course),
as should EPS growth for American companies. The problem is that a decline in
market valuation multiples for an extended period of time will more or less
offset any gains in EPS. The result is likely to be that, as from 1901 - 1921,
1929 - 1953, and 1965 - 1982, the overall stock market simply goes nowhere,
albeit with a lot of year-to-year volatility.
SUMMARY
Such secular bear markets mandate three simple rules. First, because risk
will be greater for the foreseeable future, buy only the highest quality
companies. Second, focus on high, well-covered dividends, because that's where
most of our return over the next several years will likely come from. At IPS
FUNDS, we want to see FCF well in excess of the dividend during a company's
worst year. The good news is that, for the first time since the 1950s or very
early 1960s, dividends for many well-managed, high quality companies are higher
than that of all but long term bonds. One should be able to generate relatively
safe dividend income, well in excess of rates available on bank CDs and short
term debt, with the added bonus of dividend growth and potential capital gains.
Third, due to contracting market multiples, our focus for the rest of this
decade must be on valuations. The P/E multiple on the S&P 500's trailing
earnings is 31. If one adjusts for stock options and large contributions to
badly under funded pension plans, the P/E on forward EPS for the S&P 500 is
probably still in the 30s. Using STANDARD & POOR'S new Core Earnings measure,
it's even higher. No stock market in history has entered a new bull market from
these levels. It is virtually impossible that in a subdued global economy with
some major long-term problems and massive excess capacity, earnings will grow
fast enough to justify a P/E ratio in the 30s.
This is why we have set the bar so high in terms of valuation. We will pay
P/FCF multiples no higher than the low teens, which is probably where P/E
multiples will bottom out in this cycle for the highest quality companies. We
don't use P/E ratios because EPS is too manipulable. FCF is real cash generated
by the actual core business of the company, a more conservative requirement.
This generally translates into at least a 30% discount from our very
conservative calculation of fair value for a company based on FCF before we will
buy it. This reduces downside risk significantly, which is why our volatility
has dropped so much. It is also the only way we will have a good shot at
consistently enhancing our total return with capital gains in the years ahead,
and so far it has been working.
We expect to lag the S&P 500 during strong rallies, and to outperform it
during declines, not every single day, of course, but certainly on a quarterly
basis. Our primary goal is to generate a return, adjusted for risk, that exceeds
that of the overall market most of the time, and long term. That doesn't mean we
will have the best raw return numbers, but we do expect to earn a high
risk-adjusted return.
We expect to earn decent (not great) returns on stocks over the next
decade, because we are investing for absolute, not relative returns. Our goal is
to make money no matter what the indexes do. We may not succeed every single
month, but we believe that absolute return investing gives us the best possible
chance to add value during adverse markets. We simply need to stick with our
discipline. The worst is behind us!
ROBERT A. LOEST, PH.D., CFA GREGORY A. D'AMICO
SENIOR PORTFOLIO MANAGER PRESIDENT
Copyright 2003, IPS Advisory, Inc.
2
- --------------------------------------------------------------------------------
IPS MILLENNIUM FUND
- --------------------------------------------------------------------------------
2003 FIRST HALF PERFORMANCE
IPS MILLENNIUM FUND under performed the S&P 500 for the first half of our
2003 fiscal year. The reason is that the initial rally that began in October of
2002 was composed almost exclusively of low quality companies. We remained
invested only in the highest quality stocks, and did not participate until the
end of March, 2003, when we saw the market rally broaden suddenly and strongly
into high quality companies, accompanied by high volume and a strong shift in
the advance/decline indicator toward advancers.
[GRAPHIC OMITTED]
FIGURE 1: Past performance is no guarantee of future results. Share price and
investment return will vary so that, when redeemed, an investor's shares may be
worth more, or less, than their original cost.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS AS OF 5/31/03
------------------------------------
6 1 3 5 INCEPTION
MONTHS YEAR YEARS YEARS (01/03/95)
FUND 1.47% -17.45% -27.15% -1.77% 8.25%
S&P 500 INDEX 3.91% - 8.04% -10.85% -1.09% 11.07%
NASDAQ COMPOSITE INDEX * 7.92% - 1.23% -22.29% -2.15% 9.51%
*Does not include reinvestment of dividends
- --------------------------------------------------------------------------------
The six month return figure above is composed of losses in December through
February, when most high quality stocks actually lost ground while low quality
stocks rallied, followed by a fractional loss in March and two very strong
months in April and May. The same thing happened in the bond market, with junk
bonds taking off while high quality bonds went nowhere. This left us behind the
major indexes for the period, which benefited to a large extent from the initial
low quality stock rally. The last two months were far more positive for high
quality companies and the tone of the market, and leave us optimistic for the
remainder of the year.
We decreased the number of equity holdings from 51 to 33. The risk of
reducing diversification to enhance returns is now lower because we appear to be
in a bull market. This allowed us, for instance, to build larger positions in
companies in which we have a very high level of confidence, such as WELLPOINT
HEALTH NETWORKS (WLP), R.R. DONNELLEY (DNY), EASTMAN KODAK (EK),
FREEPORT-MCMORAN COPPER & GOLD (FCX), and UNITED TECHNOLOGIES (UTX).
Because we have been buying only the highest quality companies, and we
define quality as the ability to generate very large amounts of Free Cash Flow
(FCF), we have seen the dividend yield increase substantially, rising from 1.4%
the
Copyright 2003, IPS Advisory, Inc.
3
end of November, 2002, to 2.15% at the end of May. It has continued to rise
since then. The reason is that companies with a lot of FCF, by definition, make
more money than they know what to do with. For a large percentage of them, the
decision of the Board and management is simply to return much of it to investors
in the form of dividends.
------------------------------------------------------
[GRAPHIC OMITTED]
IPS Millennium Fund
Growth of $10,000
IPSMX S&P 500 NASDAQ
(Value $000s)
-----------------------------------------
1/95 10 10 10
5/95 11 12 12
11/95 13 13 14
5/96 15 15 17
11/96 16 17 18
5/97 17 20 19
11/97 19 22 22
5/98 21 26 24
11/98 23 27 26
5/99 34 31 34
11/99 48 33 45
5/00 50 34 46
11/00 42 32 35
5/01 35 30 29
11/01 25 28 26
5/02 24 26 22
11/02 19 23 20
5/03 19 24 22
------------------------------------------------------
FIGURE 2: Past performance is no guarantee of future results. Share price and
investment return will vary so that, when redeemed, an investor's shares may be
worth more, or less, than their original cost.
IPS FUNDS continues to look for companies on the aggressive end of the
barbell that have fundamental drivers likely to add value beyond that of GDP
growth, and other efficiencies companies can achieve with restructuring, good
internal controls, and similar measures. We have always believed that technology
is a fundamental driver. In fact, a fascinating recent book entitled STOCK
CYCLES (iUniverse, 2000), by Michael Alexander, presents a strong case to
support our belief.
EASTMAN KODAK (EK), which we also profiled in our last report, continues to
take heat for their declining film business and temporary, adverse events like
SARS, while they grow in dominance in digital imaging technology, especially
their new CMOS chips for professional digital cameras. The most recent news that
buttresses our faith in the company is that they are now in commercial
production of a new OLED (organic light emitting display) technology that will
produce far more power efficient screens for everything from laptops and cell
phones to televisions. OLEDs are very thin, much lighter, have a wider viewing
angle, work better in bright light, and consume only a tiny fraction as much
power as current displays. This is a more important advance in display
technology than were Flat Panel Displays. EK invented the technology over 20
years ago, and licenses it to virtually every global display manufacturer.
FIRST HEALTH GROUP (FHCC) is another Fund company that we have built up
from a 0.5% position in our last report to over a 3% position at the end of May.
FHCC illustrates a common theme among a lot of great companies that are not
overtly technology companies: technology has gone underground, and is emerging
in the form of higher Free Cash Flows in non-technology companies that have
figured out how to use it to fundamentally change the way they do business to
better serve their customers and make more money while they do it.
FHCC uses an advanced, sophisticated form of data mining technology in a
completely new way that is beginning to catch on in other companies and sectors.
They use the software not just to examine what happened and make changes to
address it, but also to look for potential problem areas they can address before
they become problems. FIRST HEALTH, for instance, uses it to list all their
health care clients who may be about to experience a problem or gap in their
health insurance coverage, and makes a personal call to the insured (typically
an employee) to let them know what is happening, why, and suggest ways in which
they might be able to get around or minimize the problem. This greatly reduces
the stress and workload for the Human Resources Dept. of the company whose
health plan they administer, and allows them to focus on their business instead
of hiring a lot of HR people to deal with one employee health care coverage
crisis after another.
Copyright 2003, IPS Advisory, Inc.
4
[GRAPHIC OMITTED]
FIGURE 3: Volatility of the Fund on a monthly basis, versus the broad stock
market as represented by the VALUE LINE ARITHMETIC COMPOSITE INDEX, a
broad-based, equally weighted index of approximately 1,700 stocks with dividends
reinvested. Risk is measured as the Standard Deviation of the most recent 13
monthly returns.
2002 FUND RISK
We must all, in our daily lives, deal with risk assessment, from whether to
run a yellow light in traffic, to whether to undergo a medical operation or
pursue alternative treatment. Investing is no different. An assessment of risk
taken to achieve a certain return should be at the core of every investor's
decision making process. One cannot simply chase the highest returns without
knowing the risk, as we've all learned recently. Upside volatility will
inevitably translate into downside risk. This is why understanding the amount of
risk you are taking for the returns you earn is essential.
We first reported to you on our success in reducing MILLENNIUM'S risk level
in November, 2002. As you can see above, we have continued to reduce our risk
level and improve our risk-adjusted returns relative to the S&P 500 and the
VALUE LINE ARITHMETIC COMPOSITE. The risk-adjusted return is calculated simply
by dividing each monthly return by the 13-month standard deviation of returns
for that month. While we may not be able to generate superior risk-adjusted
returns every month, our goal is to do so over any reasonable investment
horizon. In hindsight, we did not react fast enough when volatility spiked in
2000, but that's a problem with the execution of our methodology, not the
methodology itself, which, as you can see above, works.
Risk is only bad when you don't understand its source and its level up
front. We would like to see all funds do a better job of informing their
shareholders of the risks they are incurring to earn their returns, and it is
our hope that the chart above will allow you to better understand your fund's
return against the background of its risk.
ROBERT LOEST, PH.D., CFA
SENIOR PORTFOLIO MANAGER
Copyright 2003, IPS Advisory, Inc.
5
- --------------------------------------------------------------------------------
IPS NEW FRONTIER FUND
- --------------------------------------------------------------------------------
2003 FIRST HALF PERFORMANCE
IPS NEW FRONTIER FUND under performed the S&P 500 for the first half of our
2003 fiscal year. The initial rally that began in October of 2002 was composed
almost exclusively of low quality companies. We remained invested only in the
highest quality stocks, and did not participate until the end of March, 2003,
when we saw the market rally broaden suddenly and strongly into high quality
companies, accompanied by high volume and a strong shift in the advance/decline
indicator toward advancers.
[GRAPHIC OMITTED]
FIGURE 4: Past performance is no guarantee of future results. Share price and
investment return will vary so that, when redeemed, an investor's shares may be
worth more, or less, than their original cost.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS AS OF 5/31/03
------------------------------------
INCEPTION
6 MONTHS 1 YEAR 3 YEARS (08/03/98)
FUND 3.52% -15.92% -39.42% -12.47%
S&P 500 INDEX 3.91% - 8.04% -10.85% - 1.56%
NASDAQ COMPOSITE INDEX * 7.92% - 1.23% -22.29% - 3.02%
*Does not include reinvestment of dividends
- --------------------------------------------------------------------------------
The six month return figure above is composed of losses in December through
February, when most high quality stocks actually lost ground while low quality
stocks rallied, followed by a fractional loss in March and two very strong
months in April and May. The same thing happened in the bond market, with junk
bonds taking off while high quality bonds went nowhere. This left us behind the
major indexes for the period, which benefited to a large extent from the initial
low quality stock rally. The last two months were far more positive for high
quality companies and the tone of the market, and leave us optimistic for the
remainder of the year.
We decreased the number of equity holdings from 39 to 24. The risk of
reducing diversification to enhance returns is now lower because we appear to be
in a bull market. This allowed us, for instance, to build larger positions in
companies in which we have a very high level of confidence, such as WELLPOINT
HEALTH NETWORKS (WLP), BENCHMARK ELECTRONICS (BHE), FREEPORT-MCMORAN COPPER &
GOLD (FCX), and UNITED TECHNOLOGIES (UTX).
Copyright 2003, IPS Advisory, Inc.
6
As you may be aware, most companies in NEW FRONTIER are in MILLENNIUM as well,
because NEW FRONTIER tends strongly to be a subset equal to the growth end of
the MILLENNIUM barbell. However, we have also been finding most of our high
potential return stocks in the small cap end of the capitalization spectrum.
This means that NEW FRONTIER will own a few stocks that simply have too low
a trading volume for MILLENNIUM. These include, most recently, companies like
industrial manufacturer WOODWARD GOVERNOR (WGOV - fuel control systems) and
FRIEDMAN, BILLINGS, RAMSEY (FBR - a real estate investment trust). Others are
small cap stocks that MILLENNIUM may own, but in which NEW FRONTIER can build a
more meaningful position. These include BANDAG (BDG - retread tires & equipment)
and ESS TECHNOLOGIES (ESST - chips for DVD, CD and digital music players).
One of our primary concerns is market valuation. The NASDAQ is so over
extended in terms of valuation that there is simply no imaginable scenario under
which earnings could grow enough in the next few years to justify the current
NASDAQ level. The consequences for NEW FRONTIER FUND, in particular, are
significant. Our FCF bar at its current setting eliminate virtually all large
cap tech stocks in particular, and most other large caps as well. Clearly, the
excess valuation in the stock market is in large capitalization stocks, and in
the NASDAQ.
------------------------------------------------------
[GRAPHIC OMITTED]
IPS New Frontier Fund
Growth of $10,000
IPSFX S&P 500 NASDAQ
(Value $000s)
-----------------------------------------
8/98 10 10 10
11/98 11 10 11
5/99 15 12 13
11/99 25 13 18
5/00 24 13 18
11/00 15 12 14
5/01 10 12 11
11/01 7 11 10
5/02 6 10 9
11/02 5 9 8
5/03 5 9 9
------------------------------------------------------
FIGURE 5: Past performance is no guarantee of future results. Share price and
investment return will vary so that, when redeemed, an investor's shares may be
worth more, or less, than their original cost.
The result is that you are likely to see a lot of names in NEW FRONTIER
with which you are unfamiliar. Rest assured, though, that every one of these
companies is profitable to a degree most companies, even the best-managed ones,
can only dream about. ESST, for example, has an average purchase price of $6.91,
zero debt, cash in the bank of over $4.00/share, and generates huge amounts of
Free Cash Flow. Our estimate of fair value based on FCF is $17, so ESST is
selling at a large discount to fair value.
BENCHMARK ELECTRONICS is the gold standard for the electronics
manufacturing outsourcers, even though it's only a small cap company. Growth
should be in the high teens, there is little debt (less than 9% of capital),
over $14/share in cash, EPS is actually growing in an environment where most of
their competitors are losing money, and BHE throws off huge amounts of Free Cash
Flow. The consensus estimate for earnings this year is $1.83, and we project
Free Cash Flow of $8 plus per share. Based on our discounted Free Cash Flow
model, this puts the current price at about one-fourth of fair value.
We are finding almost no large cap stocks that look like ESST or BHE. It
looks to us like almost all of the excess valuation in the stock market is
concentrated in the giant cap and large cap sector of the market. The result is
that every time we have raised our FCF bar, more large caps have fallen off our
list of buyable stocks, and the Funds' average market capitalization has
decreased. Three obvious ones that no longer meet our FCF criteria, for example,
are WALGREEN (WAG), MICROSOFT (MSFT) and WAL*MART (WMT).
Copyright 2003, IPS Advisory, Inc.
7
Each of these three companies is exceptionally well-managed; each of them
generates Free Cash Flow; and WMT and WAG have great stories driven by great
demographic and other drivers. We have talked about them before, owned them, and
believe in their value proposition. They are just too expensive, though, with
P/E ratios that are likely to contract for many years to come, neutralizing the
growth in EPS that we expect.
This is a secular bear market. That doesn't mean we won't have bull market
rallies - we certainly will. However, such markets are characterized by
decreasing market multiples, as we pointed out in the introduction to this
report. Buying stocks with P/E ratios of 30 in a declining P/E ratio environment
that is likely to end with P/E ratios around 10 makes it very hard to make
money. This is why we have raised the bar until we are paying low enough
multiples on our companies that we are more likely to benefit from increasing
earnings, without having the EPS growth neutralized by a declining P/E ratio.
2003 FUND RISK
We must all, in our daily lives, deal with risk assessment, from whether to
run a yellow light in traffic, to whether to undergo a medical operation or
pursue alternative treatment. Investing is no different. An assessment of risk
taken to achieve a certain return should be at the core of every investor's
decision making process. One cannot simply chase the highest returns without
knowing the risk, as we've all learned recently. Upside volatility will
inevitably translate into downside risk. This is why understanding the amount of
risk you are taking for the returns you earn is essential.
[GRAPHIC OMITTED]
FIGURE 6: Relative volatility of the Fund, on a quarterly basis, versus the
broad stock market as represented by the NASDAQ. Risk is measured as the
Standard Deviation of the most recent 13 monthly returns.
We first reported to you on our success in reducing NEW FRONTIER'S risk
level in November, 2002. As you can see above, we have continued to reduce our
risk level and improve our risk-adjusted returns relative to the S&P 500, the
VALUE LINE ARITHMETIC COMPOSITE and the NASDAQ. The risk-adjusted return is
calculated simply by dividing each monthly return by the 13-month standard
deviation of returns for that month. While we may not be able to generate
superior risk-adjusted returns every month, our goal is to do so over any
reasonable investment horizon. In hindsight, we did not react fast enough when
volatility spiked in 2000, but that's a problem with the execution of our
methodology, not the methodology itself, which, as you can see above, works.
Copyright 2003, IPS Advisory, Inc.
8
Risk is only bad when you don't understand its source and its level up
front. We would like to see all funds do a better job of informing their
shareholders of the risks they are incurring to earn their returns, and it is
our hope that the chart above will allow you to better understand your fund's
return against the background of its risk.
ROBERT LOEST, PH.D., CFA
SENIOR PORTFOLIO MANAGER
** The above outlooks reflect the opinions of IPS Advisory, Inc., are subject to
change or temporary insanity, and any forecasts made cannot be guaranteed. While
our information has been obtained from sources we trust, people make mistakes,
including us. We may also change our mind later and not tell you. The market may
change and not tell us. Technology or politics may change and not tell the
market. The gods might just be having a bad day.
** Past performance is no guarantee of future results. Share price and
investment return will vary so that, when redeemed, an investor's shares may be
worth more or less than their original cost.
** The S&P 500 INDEX is a widely-recognized, capitalization-weighted, unmanaged
index of 500 large U.S. companies chosen for market size, liquidity and industry
group representation, and has been adjusted to reflect total return with
dividends reinvested. Returns for periods greater than one year are annualized.
The NASDAQ COMPOSITE INDEX is an unmanaged index of more than 4,000 stocks
traded electronically through the NASDAQ System. The returns shown for the
NASDAQ COMPOSITE INDEX do not include reinvestment of dividends. The VALUE LINE
ARITHMETIC COMPOSITE INDEX is an arithmetically averaged index of approximately
1,700 stocks that is more broad-based than the S&P 500 INDEX. The VALUE LINE
ARITHMETIC COMPOSITE INDEX figures do not reflect any fees or expenses.
** Portfolio composition is subject to change at any time and references to
specific securities, industries and sectors referenced in this letter are not
recommendations to purchase or sell any particular security. See the
accompanying Schedule of Investments for the percent of a Fund's portfolio
represented by the securities or industries mentioned in this letter.
** This annual report is not authorized for distribution to prospective
investors unless it is preceded or accompanied by a current IPS Funds Profile or
Prospectus.
** CITCO-Quaker Fund Services, Inc. distributor. 6/2003
For more information, please contact IPS Funds at:
Phone: 800.249.6927 1225 Weisgarber Road
865.524.1676 Web Site: www.ipsfunds.com Suite S-380
Fax: 865.544.0630 Email: info@ipsfunds.com Knoxville, TN 37909
IPS Advisory, Inc. has written Proxy Voting Procedures designed to ensure that
proxies are voted consistent with written standards, and solely in the best
interests of shareholders. Please call IPS Advisory, Inc. (IPSA) at 800.232.9142
if you would like to receive a copy of our Proxy Voting Procedures at no charge
to you, or view them on our Web site at http://www.ipsfunds.com. You may also
call for information on how we voted a proxy for a specific company. IPSA does
not cross reference votes on a specific issue with the stocks to which it
applies.
Copyright 2003, IPS Advisory, Inc.
9
IPS MILLENNIUM FUND
SCHEDULE OF INVESTMENTS
MAY 31, 2003 (UNAUDITED)
COMMON STOCKS - 93.23% SHARES VALUE
------------ ------------
BANKS - 1.77%
Wells Fargo & Co. 30,000 1,449,000
------------
BIOTECHNOLOGY - 2.39%
Invitrogen Corp.* 50,000 1,951,000
------------
BUSINESS SERVICES - 7.11%
Angelica Corp. 60,000 1,072,800
R.R. Donnelley & Sons Co. 190,000 4,740,500
------------
5,813,300
------------
CONSUMER DISCRETIONARY - 22.96%
Cadbury Schweppes plc 140,000 3,353,000
Fortune Brands, Inc. 70,000 3,668,000
H.J. Heinz Co. 40,000 1,322,800
Kimberly-Clark Corp. 30,000 1,557,900
Lancaster Colony Corp. 50,000 1,934,500
Lance, Inc. 110,000 1,031,800
Lone Star Steakhouse & Saloon, Inc. 80,000 1,832,000
Newell Rubbermaid, Inc. 100,000 2,850,000
The Pepsi Bottling Group, Inc. 60,000 1,223,400
------------
18,773,400
------------
CONSUMER RETAIL - 9.80%
AutoZone, Inc.* 20,000 1,673,600
Borders Group, Inc.* 110,000 1,809,500
Brown Shoe Co., Inc. 90,000 2,551,500
Genuine Parts Co. 60,000 1,972,200
------------
8,006,800
------------
CONSUMER SERVICES - 2.50%
H&R Block, Inc. 50,000 2,047,000
------------
HEALTHCARE - 7.84%
First Health Group Corp.* 100,000 2,566,000
WellPoint Health Networks Inc.* 45,000 3,840,300
------------
6,406,300
------------
INDUSTRIAL MANUFACTURING - 21.82%
Eastman Kodak Co. 80,000 2,451,200
Freeport-McMoRan Copper & Gold Inc. 200,000 4,390,000
Hubbell Inc. 90,000 3,029,400
Kaydon Corp. 70,000 1,484,000
The Stanley Works 110,000 3,075,600
United Technologies Corp. 50,000 3,412,500
------------
17,842,700
------------
INSURANCE - 0.44%
The Allstate Corp. 10,000 359,900
------------
MULTIMEDIA - 6.63%
Hearst-Argyle Television Inc.* 110,000 2,733,500
Univision Communications Inc.* 90,000 2,686,500
------------
5,420,000
------------
REITS - 3.05%
Chelsea Property Group, Inc. 60,000 2,493,600
------------
SEMICONDUCTORS - 0.51%
ESS Technology, Inc.* 50,000 417,500
------------
TELECOMMUNICATIONS - 6.41%
Alltel Corp. 50,000 2,394,000
Benchmark Electronics, Inc.* 100,000 2,844,000
------------
5,238,000
------------
TOTAL COMMON STOCK (COST $71,003,785) 76,218,500
------------
SHORT-TERM INVESTMENTS - 6.80%
Federated Cash Trust Series II 5,553,858 5,553,858
------------
TOTAL SHORT-TERM INVESTMENTS (COST $5,553,858)
------------
TOTAL INVESTMENTS (COST $76,557,643) - 100.03% 81,772,358
------------
LIABILITIES IN EXCESS OF OTHER ASSETS, NET - (0.03)% (21,456)
------------
TOTAL NET ASSETS - 100.00% 81,750,902
============
* Non-income producing security
SEE NOTES TO FINANCIAL STATEMENTS
Copyright 2003, IPS Advisory, Inc.
10
IPS NEW FRONTIER FUND
SCHEDULE OF INVESTMENTS
MAY 31, 2003 (UNAUDITED)
COMMON STOCKS - 93.48% SHARES VALUE
------------ ------------
BIOTECHNOLOGY - 4.59%
Invitrogen Corp.* 4,000 156,080
------------
BUSINESS SERVICES - 8.60%
Angelica Corp. 8,000 143,040
R.R. Donnelley & Sons Co. 6,000 149,700
------------
292,740
------------
CONSUMER DISCRETIONARY - 17.28%
Cadbury Schweppes plc 6,000 143,700
Fortune Brands, Inc. 3,000 157,200
Lancaster Colony Corp. 3,000 116,070
Newell Rubbermaid Inc. 6,000 171,000
------------
587,970
------------
CONSUMER RETAIL - 7.07%
Borders Group, Inc. 6,000 98,700
Brown Shoe Co., Inc. 5,000 141,750
------------
240,450
------------
CONSUMER SERVICES - 3.61%
H&R Block, Inc. 3,000 122,820
------------
HEALTHCARE - 9.54%
First Health Group Corp.* 6,000 153,960
WellPoint Health Networks, Inc.* 2,000 170,680
------------
324,640
------------
INDUSTRIAL MANUFACTURING - 23.20%
Eastman Kodak Co. 4,000 122,560
Freeport-McMoRan Copper & Gold Inc. 10,000 219,500
Hubbell Inc. 2,000 67,320
Kaydon Corp. 3,000 63,600
The Stanley Works 4,000 111,840
United Technologies Corp. 3,000 204,750
------------
789,570
------------
MULTIMEDIA - 8.04%
Hearst-Argyle Television Inc.* 5,000 124,250
Univision Communications Inc.* 5,000 149,250
------------
273,500
------------
NON-BANK FINANCIAL - 0.78%
Friedman, Billings, Ramsey Group, Inc. 2,000 26,600
------------
SEMICONDUCTORS - 2.94%
ESS Technology, Inc.* 12,000 100,200
------------
TELECOMMUNICATIONS - 7.83%
Alltel Corp. 2,000 95,760
Benchmark Electronics, Inc.* 6,000 170,640
------------
266,400
------------
TOTAL COMMON STOCK (COST $2,942,670) 3,180,970
------------
SHORT-TERM INVESTMENTS - 6.18%
Federated Cash Trust Series II 210,293 210,293
------------
TOTAL SHORT-TERM INVESTMENTS (COST $210,293) 210,293
------------
TOTAL INVESTMENTS (COST $3,152,963) - 99.66% 3,391,263
OTHER ASSETS LESS LIABILITIES, NET - 0.34% 11,643
------------
TOTAL NET ASSETS - 100.00% 3,402,906
============
* Non-income producing security
SEE NOTES TO FINANCIAL STATEMENTS
Copyright 2003, IPS Advisory, Inc.
11
THE IPS FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
MAY 31, 2003 (UNAUDITED)
IPS IPS
MILLENNIUM FUND NEW FRONTIER FUND
--------------- -----------------
ASSETS:
Investments, at value (cost $76,557,643
and $3,152,963, respectively) $ 81,772,358 $ 3,391,263
Cash -- --
Receivable for investments sold -- --
Receivable for capital shares sold 37,322 3,695
Dividends receivable 274,922 11,831
Interest receivable 1,433 47
-------------- --------------
Total Assets 82,086,035 3,406,836
-------------- --------------
LIABILITIES:
Payable for investments purchased -- --
Payable for capital shares redeemed 240,926 --
Payable to Advisor 94,207 3,930
-------------- --------------
Total Liabilities 335,133 3,930
-------------- --------------
Total Net Assets $ 81,750,902 $ 3,402,906
============== ==============
NET ASSETS CONSIST OF:
Capital stock $ 389,348,723 $ 22,487,507
Accumulated undistributed net realized
loss on investments sold (312,963,656) (19,318,451)
Accumulated undistributed net investments income 151,120 (4,450)
Net unrealized appreciation (depreciation)
on investments 5,214,715 238,300
-------------- --------------
Total Net Assets $ 81,750,902 $ 3,402,906
============== ==============
Shares outstanding (no par value,
unlimited shares authorized) 3,591,190 550,645
Net asset value, redemption price and
offering price per share $ 22.76 $ 6.18
============== ==============
THE IPS FUNDS
STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED MAY 31, 2003 (UNAUDITED)
IPS IPS
MILLENNIUM FUND NEW FRONTIER FUND
--------------- -----------------
INVESTMENT INCOME:
Dividend income $ 711,099 $ 18,856
Interest income 8,567 444
-------------- --------------
Total investment income 719,666 19,300
-------------- --------------
EXPENSES:
Investment advisory fee 568,546 23,750
-------------- --------------
Total expenses 568,546 23,750
-------------- --------------
NET INVESTMENT INCOME 151,120 (4,450)
-------------- --------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss on investment transactions (2,900,512) (58,126)
Change in unrealized appreciation (depreciation)
on investments 3,282,766 165,293
-------------- --------------
Net realized and unrealized loss on investments 382,254 107,167
-------------- --------------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 533,374 $ 102,717
============== ==============
The accompanying notes are an integral part of these financial statements.
Copyright 2003, IPS Advisory, Inc.
12
THE IPS FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
IPS IPS
MILLENNIUM FUND EW FRONTIER FUND
----------------------------------- -----------------------------------
FOR THE PERIOD FOR THE PERIOD
ENDED YEAR ENDED YEAR
MAY 31, 2003 ENDED MAY 31, 2003 ENDED
(UNAUDITED) NOVEMBER 30, 2002 (UNAUDITED) NOVEMBER 30, 2002
----------------------------------- -----------------------------------
OPERATIONS:
Net investment income (loss) $ 151,120 $ (368,273) $ (4,450) $ (53,599)
Net realized loss on investment transactions (2,900,512) (36,207,928) (58,126) (1,963,080)
Change in unrealized appreciation
(depreciation) on investments 3,282,766 931,850 165,293 315,715
--------------------------------- ---------------------------------
Net decrease in net assets resulting from operations 533,374 (35,644,351) 102,717 (1,700,964)
--------------------------------- ---------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- -- -- --
Net realized gains -- -- -- --
--------------------------------- ---------------------------------
Total dividends and distributions -- -- -- --
--------------------------------- ---------------------------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 24,389,379 288,101,402 133,444 500,492
Shares issued to holders in reinvestment of dividends -- -- -- --
Cost of shares redeemed (37,814,905) (342,281,302) (558,455) (1,303,951)
--------------------------------- ---------------------------------
Net increase (decrease) in net assets resulting
from capital share transactions (13,425,526) (54,179,900) (425,011) (803,459)
--------------------------------- ---------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (12,892,152) (89,824,251) (322,294) (2,504,423)
NET ASSETS:
Beginning of period 94,643,054 184,467,305 3,725,200 6,229,623
--------------------------------- ---------------------------------
End of period $ 81,750,902 $ 94,643,054 $ 3,402,906 $ 3,725,200
================================= =================================
The accompanying notes are an integral part of these financial statements.
Copyright 2003, IPS Advisory, Inc.
13
IPS MILLENNIUM FUND
FINANCIAL HIGHLIGHTS
Selected per share data is based on a share of common stock
outstanding throughout each period.
PERIOD ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, 2003 NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
(UNAUDITED) 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
PER SHARE DATA:
Net asset value, beginning of period $ 22.43 $ 29.43 $ 49.29 $ 55.93 $ 27.53
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.04 (0.07)(1) (0.10)(1) 0.04 (0.03)
Net realized and unrealized gain
(loss) on investments 0.29 (6.93) (19.72) (6.30) 28.45
---------- ---------- ---------- ---------- ----------
TOTAL FROM INVESTMENT OPERATIONS 0.33 (7.00) (19.82) (6.26) 28.42
---------- ---------- ---------- ---------- ----------
LESS DISTRIBUTIONS:
Dividends from net investment income -- -- (0.04) -- (0.02)
Distributions from net realized gains -- -- -- (0.38) --
---------- ---------- ---------- ---------- ----------
Total dividends and distributions -- -- (0.04) (0.38) (0.02)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 22.76 $ 22.43 $ 29.43 $ 49.29 $ 55.93
========== ========== ========== ========== ==========
Total return 1.47% (23.79%) (40.25)% (11.36)% 103.23%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period (000's) $ 81,751 $ 94,643 $ 184,467 $ 409,247 $ 132,331
Ratio of net operating expenses to
average net assets 1.40% 1.34% 1.19% 1.11% 1.39%
Ratio of net investment income (loss)
to average net assets 0.19% (0.27%) (0.23%) 0.08% (0.07)%
Portfolio turnover rate 96.90% 209.20% 115.45% 27.88% 51.74%
(1) Net investment income per share is calculated using ending balances prior
to consideration of adjustments for permanent book and tax differences.
The accompanying notes are an integral part of these financial statements.
Copyright 2003, IPS Advisory, Inc.
14
IPS NEW FRONTIER FUND
FINANCIAL HIGHLIGHTS
Selected per share data is based on a share of common stock
outstanding throughout each period.
PERIOD ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, 2003 NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
(UNAUDITED) 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
PER SHARE DATA:
Net asset value, beginning of period $ 5.97 $ 8.45 $ 17.04 $ 29.39 $ 12.60
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (0.01) (0.08)(1) (0.11)(1) (0.25)(1) (0.03)
Net realized and unrealized gain
(loss) on investments 0.22 (2.40) (8.48) (11.36) 16.84
---------- ---------- ---------- ---------- ----------
TOTAL FROM INVESTMENT OPERATIONS 0.21 (2.48) (8.59) (11.61) 16.81
---------- ---------- ---------- ---------- ----------
LESS DISTRIBUTIONS:
Dividends from net investment income -- -- -- -- (0.02)
Distributions from net realized gains -- -- -- (0.74) --
---------- ---------- ---------- ---------- ----------
Total dividends and distributions -- -- -- (0.74) (0.02)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 6.18 $ 5.97 $ 8.45 $ 17.04 $ 29.39
========== ========== ========== ========== ==========
Total return 3.52% (29.35%) (50.41)% (40.92)% 133.37%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period (000's) $ 3,403 $ 3,725 $ 6,230 $ 11,077 $ 5,697
Ratio of net operating expenses
to average net assets 1.40% 1.40% 1.40% 1.40% 1.40%
Ratio of net investment income (loss)
to average net assets (0.13)% (1.11)% (1.00)% (0.92)% (0.13)%
Portfolio turnover rate 135.12% 300.19% 187.61% 78.61% 217.50%
(1) Net investment income per share is calculated using ending balances prior
to consideration of adjustments for permanent book and tax differences.
The accompanying notes are an integral part of these financial statements.
Copyright 2003, IPS Advisory, Inc.
15
IPS MILLENNIUM FUND AND IPS NEW FRONTIER FUND
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 2003
1. ORGANIZATION
The IPS Millennium Fund and the IPS New Frontier Fund (the "Funds") are
each a series of the IPS Funds (the "Trust"). The Trust was organized as an
Ohio business trust on August 10, 1994, and is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end
diversified management investment company. The principal investment
objective of the IPS Millennium Fund ("Millennium Fund") is long-term
capital growth. The principal investment objective of the IPS New Frontier
Fund ("New Frontier Fund") is capital growth. The Funds commenced
operations on January 3, 1995 and August 3, 1998, respectively.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements.
These policies are in conformity with generally accepted accounting
principles ("GAAP"). The presentation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates and assumptions.
(a) Investment Valuation
Securities, which are traded on a recognized stock exchange, are
valued at the last sale price on the securities exchange on which such
securities are primarily traded. Securities traded on the
over-the-counter market and listed securities for which there were no
transactions are valued at the last quoted bid price. Debt instruments
maturing within 60 days are valued by the amortized cost method. Any
securities for which market quotations are not readily available are
valued at their fair value as determined in good faith by IPS
Advisory, Inc. (the "Advisor") pursuant to guidelines established by
the Board of Trustees.
(b) Federal Income and Excise Taxes
The Funds intend to meet the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute
substantially all net investment company taxable income and net
capital gains to shareholders in a manner, which results in no tax
cost to the Funds. Therefore, no federal income or excise tax
provision is required.
(c) Distributions to Shareholders
Dividends from net investment income are declared and paid annually.
Distributions of net realized capital gains, if any, will be declared
and paid at least annually. Distributions to shareholders are recorded
on the ex-dividend date. The Funds may periodically make
reclassifications among certain of their capital accounts as a result
of the recognition and characterization of certain income and capital
gain distributions determined annually in accordance with federal tax
regulations which may differ from generally accepted accounting
principles.
(d) Securities Transactions and Investment Income
Investment transactions are recorded on the trade date for financial
statement purposes. The Funds determine the gain or loss realized from
investment transactions by comparing the original cost of the security
lot sold with the net sale proceeds. Dividend income is recognized on
the ex-dividend date and interest income is recognized on an accrual
basis. Acquisition and market discounts are amortized over the life of
the security.
3. SHARES OF COMMON STOCK
Transactions in shares of common stock were as follows:
FOR THE
SIX MONTHS ENDED YEAR ENDED
MAY 31, 2003 NOVEMBER 30, 2002
IPS MILLENNIUM FUND $ Shares $ Shares
------------- ------------- ------------- -------------
Shares sold $ 24,389,379 1,109,011 $ 288,101,402 11,016,757
Shares issued in reinvestment of dividends -- -- -- --
Shares redeemed (37,814,905) (1,737,122) (342,281,302) (13,066,471)
------------- ------------- ------------- -------------
Net increase (decrease) ($ 13,425,526) (621,111) ($ 54,179,900) (2,049,714)
============= =============
SHARES OUTSTANDING:
Beginning of period 4,219,301 6,269,015
------------- -------------
End of period 3,591,190 4,219,301
============= =============
Copyright 2003, IPS Advisory, Inc.
16
FOR THE
SIX MONTHS ENDED YEAR ENDED
MAY 31, 2003 NOVEMBER 30, 2002
IPS NEW FRONTIER FUND $ Shares $ Shares
------------- ------------- ------------- -------------
Shares sold $ 133,444 22,954 $ 500,492 68,451
Shares issued in reinvestment of dividends -- -- -- --
Shares redeemed (558,455) (96,762) (1,303,951) (180,957)
------------- ------------- ------------- -------------
Net increase (decrease) ($ 425,011) (73,808) ($ 803,459) (112,506)
============= =============
SHARES OUTSTANDING:
Beginning of period 624,453 736,959
------------- -------------
End of period 550,645 624,453
============= =============
4. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of investments, excluding short-term
investments, by the Funds for the six months ended May 31, 2003, are summarized
below. There were no purchases or sales of long-term U.S. government securities.
IPS MILLENNIUM FUND IPS NEW FRONTIER FUND
------------------- ---------------------
Purchases $71,474,932 $4,106,564
Sales $78,222,386 $4,547,580
At May 31, 2003, gross unrealized appreciation and depreciation of
investments for tax purposes were as follows:
IPS MILLENNIUM FUND IPS NEW FRONTIER FUND
------------------- ---------------------
Unrealized appreciation $7,327,683 $291,836
Unrealized depreciation (2,998,766) (134,867)
---------- --------
Net unrealized appreciation/
(depreciation) on investments $4,328,917 $156,969
========== ========
At May 31, 2003, the cost of investments for federal income tax purposes
for the Millennium Fund and the New Frontier Fund were $77,443,441 and
$3,234,294, respectively. The difference between book cost and tax cost consists
of wash sales of $885,798 for the Millennium Fund and $81,331for the New
Frontier Fund.
At November 30, 2002, the Millennium Fund had an accumulated net realized
capital loss carryover of $309,177,346, with $38,019,443 expiring in 2008,
$234,768,275 expiring in 2009, and $36,389,892 expiring in 2010. The New
Frontier Fund, at November 30, 2002, had an accumulated net realized capital
loss carryover of $19,178,994, with $3,627,173 expiring in 2008, $13,651,050
expiring in 2009, and $1,900,771 expiring in 2010. To the extent the Funds
realize future net capital gains, taxable distributions to their shareholders
will be offset by any unused capital loss carryovers.
5. INVESTMENT ADVISOR
The Funds have an agreement with IPS Advisory, Inc. (the "Advisor"), with
whom certain officers and directors of the Funds are affiliated, to furnish
investment advisory services to the Funds. Under the terms of the agreement, the
Advisor will pay all of the Funds' operating expenses, excluding brokerage fees
and commissions, taxes, interest and extraordinary expenses. The Funds are
obligated to pay the Advisor a fee computed and accrued daily and paid monthly
at an annual rate of 1.40% of their average daily net assets to and including
$100,000,000, 1.15% of such assets from $100,000,001 to and including
$250,000,000, and 0.90% of such assets in excess of $250,000,001. Total fees
paid to IPS Advisory, Inc. during the six months ended May 31, 2003 for the
Millennium Fund and the New Frontier Fund were $568,546 and $23,750,
respectively.
6. BENEFICIAL OWNERSHIP
The beneficial ownership, either directly or indirectly, of more than 25%
of the voting securities of a fund creates a presumption of control of the fund,
under Section 2(a)(9) of the Investment Company Act of 1940. As of May 31, 2003,
Charles Schwab & Co., for the benefit of its customers, beneficially owned 52%
of the Millennium Fund.
Copyright 2003, IPS Advisory, Inc.
17
7. DISTRIBUTABLE EARNINGS
MILLENNIUM FUND. There were no distributions during the six months ended
May 31, 2003.
The tax character of distributions paid during the six months ended May 31,
2003 and the fiscal year 2002 were as follows.
Distributions paid from: 2003 2002
---------- ----------
Ordinary income $ -- $ --
Short-term Capital Gain -- --
Long-term Capital Gain -- --
---------- ----------
$ -- $ --
========== ==========
NEW FRONTIER FUND. There were no distributions during the six months ended
May 31, 2003.
The tax character of distributions paid during the six months ended May 31,
2003 and the fiscal year 2002 were as follows.
Distributions paid from: 2003 2002
---------- ----------
Ordinary income $ -- $ --
Short-term Capital Gain -- --
Long-term Capital Gain -- --
---------- ----------
$ -- $ --
========== ==========
As of November 30, 2002, the components of distributable earnings
(accumulated losses) on a tax basis were as follows:
IPS IPS
Millennium New Frontier
Fund Fund
-------------- --------------
Undistributed ordinary income
(accumulated losses) $ -- $ --
Undistributed long-term capital gain
(accumulated losses) (309,177,346) (19,178,994)
Unrealized appreciation/(depreciation) 1,046,151 (8,324)
-------------- --------------
$ (308,131,195) $ (19,187,318)
============== ==============
The difference between book basis and tax basis unrealized appreciation
(depreciation) is attributable primarily to the deferral of wash sales.
INDEPENDENT TRUSTEES
- -------------------------------------------------------------------------------------------------------------------------------
# OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX OTHER
HELD WITH THE LENGTH OF PRINCIPAL OCCUPATION(S) DURING OVERSEEN BY DIRECTORSHIPS
NAME, AGE, AND ADDRESS TRUST TIME SERVED PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
- -------------------------------------------------------------------------------------------------------------------------------
Veenita Bisaria, 42, Independent Since Financial Analyst, Tennessee 3 None
12416 Fort West Drive Trustee inception Valley Authority
Knoxville, TN 37922 of Funds (1997-Present); Financial
in 1995 Analyst Charter (CFA).
- -------------------------------------------------------------------------------------------------------------------------------
Woodrow Henderson, 45, 6504 Independent Since Director of Planned Giving for 3 None
Clary Lane Knoxville, TN Trustee inception the University of Tennessee at
37919 of Funds Knoxville, Juris Doctor.
in 1995
- -------------------------------------------------------------------------------------------------------------------------------
Copyright 2003, IPS Advisory, Inc.
18
- -------------------------------------------------------------------------------------------------------------------------------
# OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX OTHER
HELD WITH THE LENGTH OF PRINCIPAL OCCUPATION(S) DURING OVERSEEN BY DIRECTORSHIPS
NAME, AGE, AND ADDRESS TRUST TIME SERVED PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
- -------------------------------------------------------------------------------------------------------------------------------
Billy Wayne Stegall, Jr., 46, Independent Since Account Executive, Colonial 3 None
316 Stonewall Street Memphis, Trustee inception Life & Accident
TN 38112 of Funds (1995-Present).
in 1995
- -------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES & OFFICERS
- -------------------------------------------------------------------------------------------------------------------
# OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND PRINCIPAL OCCUPATION COMPLEX OTHER
HELD WITH LENGTH OF (S) DURING PAST FIVE OVERSEEN DIRECTORSHIPS
NAME, AGE, AND ADDRESS THE TRUST TIME SERVED YEARS BY TRUSTEE HELD BY TRUSTEE
- -------------------------------------------------------------------------------------------------------------------
Greg D'Amico*, 39, 1225 President, Since President of IPS 3 IPS Advisory,
Weisgarber Road, Suite Chief inception Advisory, Inc. Inc.; Director
S-380, Knoxville, TN 37909 Financial of Funds in of Young
Officer, 1995 Entrepreneurs'
Treasurer Organization
and Trustee (YEO);
Association for
Investment and
Management
Research
(AIMR);
Personal &
Child Safety,
LLC (PCS)
- -------------------------------------------------------------------------------------------------------------------
Robert Loest*, 59, 1225 Vice Since Chief Executive 3 IPS Advisory,
Weisgarber Road, Suite President, inception Officer of IPS Inc.
S-380, Knoxville, TN Secretary of Funds in Advisory, Inc.;
37909 and Trustee 1995 Financial Analyst
Charter (CFA); Ph.D.
in Biology.
- -------------------------------------------------------------------------------------------------------------------
* An "interested person" of the Trust, as defined in the Investment Company Act
of 1940, due to his relationship with the Advisor.
BOARD COMMITTEES
The Board has the following standing committee as described below:
- --------------------------------------------------------------------------------------------------------------
AUDIT COMMITTEE
- --------------------------------------------------------------------------------------------------------------
MEMBERS DESCRIPTION MEETINGS
- ------- ----------- --------
Veenita Bisaria, Responsible for advising the full Board with respect At least once
Independent Trustee to accounting, auditing and financial matters annually.
Woodrow Henderson, affecting the Trust. Last meeting
Independent Trustee occurred on
Billy Wayne Stegall, Jr., January 25,
Independent Trustee 2003.
Copyright 2003, IPS Advisory, Inc.
19
ITEM 2. CODE OF ETHICS.
Not applicable at this time.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable at this time.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable at this time.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
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.
Not applicable.
ITEM 10. EXHIBITS
(a) Not applicable at this time.
(b) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
are attached hereto as EX-99.CERT. Certifications pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 are attached hereto as EX-906CERT.
SIGNATURES
[See General Instruction F]
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) IPS Funds
By (Signature and Title)* Greg D'Amico
PRESIDENT AND TREASURER
- -----------------------
Date 08/08/2003
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)* Greg D'Amico
PRESIDENT
- ---------
Date 08/08/2003
By (Signature and Title)* Greg D'Amico
TREASURER
- ---------
Date 08/08/2003
* Print the name and title of each signing officer under his or her signature.