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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-08718
IPS Funds
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(Exact name of registrant as specified in charter)
1225 Weisgarber Road, Suite S-380, Knoxville, TN 37909
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(Address of principal executive offices) (Zip code)
Mr. Greg D'Amico
IPS Advisory, Inc.
1225 Weisgarber Road, Suite S-380
Knoxville, TN 37909
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(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: 11/30/2003
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. ANNUAL REPORT
[LOGO]IPS FUNDS
ANNUAL REPORT
NOVEMBER 30, 2003
IPS MILLENNIUM FUND
IPS NEW FRONTIER FUND
www.ipsfunds.com
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IPS FUNDS 2003 ANNUAL REPORT
------------------------------
Fellow Shareholders:
SUMMARY: OVER THE NEXT FEW YEARS, IF HISTORY IS ANY GUIDE WE ARE LIKELY TO
EXPERIENCE ONE OF THE GREATEST POTENTIAL TOTAL RETURN PERIODS OF THE 21ST
CENTURY. WE ARE IN A SECULAR BEAR MARKET, AND SUCH MARKETS OFFER THE GREATEST
TOTAL RETURN POTENTIAL FOR TWO REASONS. THE FIRST IS THAT HUMANS ARE SOCIAL, OR
HERD, SPECIES LIKE BIRDS, HORSES, DOGS AND HONEYBEES. THEY DO THINGS EN MASSE,
CREATING EXTREMES OF UNDER OR OVER VALUATION. THE SECOND IS THE NATURAL
PROGRESSION OF FUNDAMENTAL NEW TECHNOLOGIES, AS WE SEE FROM EXAMPLES OF STEAM
ENGINE TECHNOLOGY BEING REPLACED BY ELECTRICITY EARLY IN THE 20TH CENTURY.
MUCH HAS BEEN WRITTEN ABOUT THE FALLIBILITY OF HUMAN PSYCHOLOGICAL QUIRKS
IN THE INVESTMENT ARENA. THE ONLY WAY WE CAN DEFEND OURSELVES AGAINST THE HUGE
ERRORS THIS CAN CAUSE IS TO HAVE AN INVESTMENT DISCIPLINE. THIS MEANS WE MUST
CRUNCH NUMBERS AND WE MUST MEASURE OBJECTIVELY THE RESULTS OF OUR DISCIPLINE.
YOU DON'T NEED TO TAKE OUR WORD ON WHETHER WHAT WE ARE DOING IS WORKING OR NOT,
YOU CAN SEE THE RESULTS IN THE RISK WE TAKE RELATIVE TO THE MARKET, WHICH WE
REPORT TO YOU ON OUR WEBSITE EVERY MONTH, AND DISCUSS WEEKLY IN OUR PORTFOLIO
MANAGER'S DIARY ON IPS FUNDS' WEBSITE.
PERFORMANCE & RISK MANAGEMENT
We stated in our 2002 Annual and 2003 Semi Annual Reports to you that we
were preparing for a major bull market. We have not been disappointed. As we
reported to you six months ago, the risky, money-losing segment of the market
led the new cyclical bull move. This is typical of all bull markets. Our
performance improved dramatically in March when the market broadened out into
high quality companies on high volume and a rising advance/decline line.
This has continued in the second half of our fiscal year, with the result
that we have out performed the S&P 500 by a significant margin for the year, as
you will see in the individual reports below, and by an even larger margin for
the second half of the year. Risky, money-losing companies are unlikely to
repeat their performance in 2004. They've already had their run. We expect to
see the best performance in the more profitable segments of the market, such as
the stocks owned by your funds.
Over the last two years we've worked hard on improving our sell discipline,
which we believe was our chief weakness. It is now our greatest strength, and is
responsible both for our dramatically lowered risk, and for our improved
relative and absolute performance since March of 2003. It is our rigorous,
quantitative sell discipline, combined with our focus on paying less than fair
value based on free cash flow, that we depend upon to generate a high
risk-adjusted return.
It is our belief that over the rest of this decade we are likely to see
opportunities in the stock market the likes of which haven't been seen since our
parents or grandparents were young. Such opportunities, though, do not come
without a short-term cost. The last few years have been a painful learning
experience for all of us, but we are now sitting at the table, knives sharpened
and forks ready, waiting for the Main Investment Course for the next couple of
generations. It's unlikely that it will be the technology companies themselves
where most new value is created, either, as we discuss below.
IS PAST PROLOGUE?
If we look back at the telephone, electric appliances, broadcasting and
internal combustion engine in the early part of the 20th Century, there was a
flowering of the basic new technology companies, huge investment in them, over
hiring and overpaying, and a stock market bubble in the late 1920s. Sound
familiar? Following a huge crash, although the best of the new high tech
companies themselves (RCA, AT&T, GM, GE, IBM, etc.) mostly survived, the really
major beneficiaries were all the non-technology companies that took decades to
finally incorporate these new technologies, dramatically improving productivity
(and therefore profitability and living standards). This huge jump in
productivity created very high unemployment, but it also created whole new
markets and economic sectors, and the wealth that has carried the U.S. to a
position of world leadership over the last 60 years.
Copyright 2003, IPS Advisory, Inc.
1
Companies like GENERAL ELECTRIC and other electric motor manufacturers did
very well, because they were the first beneficiaries of the new electricity
infrastructure. However, the entire manufacturing and personal product sectors
were the ultimate, and far larger and more long lived beneficiaries. The reason
is that, as a result of an earlier, fundamental major new technology, safe steam
engines in 1800, manufacturing in the 1800s came to be driven by large steam
engines in the factory's basement.
Over the previous century these steam engines, and the manufacturing
buildings that housed them, were designed around the need to run a large shaft
running vertically upward through the floors of the building. A belt-driven
system ran off this central drive shaft, powering the various machines on each
floor. If a belt broke, the whole system had to be shut down. Businesses could
only run machines directly off the shaft, so everything had to be close to the
shaft. Factories couldn't spread out, they could only build upward.
Electric motors changed all this because you could run a wire anywhere, but
the investment in machinery, real estate, human capital and knowledge related to
the steam engine was enormous. It took decades for business and their employees
to adapt to the new technology, to discard and write off the old drive
shaft-based equipment, factories and real estate, and retrain employees for the
new technologies. But when it did the results were truly enormous increases in
productivity. This in turn resulted in far higher salaries, profitability, and
free cash flows across virtually all sectors of the economy.
WHERE WE ARE TODAY
We are now - in the Semiconductor, Internet and Biotech Age - roughly where
the combined Electricity, Internal Combustion Engine, Broadcasting and first
Telecom revolutions stood, during the market rebound following the Crash of 1929
that kicked off the Great Depression. We are now entering the earliest stages of
the same kind of tectonic transformation, from an electrical business and
manufacturing culture to one based on connectivity, electronics and information.
It's too early still to discern the shape this revolution will take, but the
opportunities will be huge. The successes will be spotlighted directly by
increases in free cash flows, and eventually will be followed by much higher
living standards and totally new markets. But first it will be heralded by much
higher dividends.
This transformation of a previous century happened amid the wreckage of
geopolitical, monetary and economic systems that changed dramatically and upset
the entire world order. Fundamental new technologies change everything, usually
violently. There is opportunity everywhere and always, though. Investors who are
disciplined will have a much better chance of finding those opportunities than
investors who are not. By disciplined, I mean read and understand the financial
statements and footnotes, and do the analysis needed to determine whether a
company is not only well-managed, but undervalued. Good products do not
necessarily equal good companies. Good companies do not necessarily equal good
investments. The consequences of poor investment discipline are likely over the
next decade to be far more drastic than at any time since WW II. The benefits of
a rigorous investment discipline are likely to be far greater over following
decade than during the 1990s.
THE FAULT, DEAR INVESTOR, IS NOT IN OUR STARS, BUT IN OUR GENES....
Here's the problem, though: you and I are not Spock. We all allow emotions
to cloud our judgment - we cannot avoid it. We all have psychological quirks and
mechanisms evolved over millions of years that are appropriate to social or herd
species like horses, people, birds or dogs, but that are totally inappropriate
to investing. One of the most important of these is a hard-wired need to follow
the herd, especially herd leaders. It is this characteristic of herd animals
that primarily is responsible for bubbles and busts in the stock market, and in
other human activities as well from fashion to religion. This tendency is
exacerbated by the natural cycles of major technological changes.
Put simply, without a thoroughly objective, disciplined assessment
mechanism, we cannot trust ourselves to make appropriate judgments about what to
buy, why, when, or at what price we should buy or sell. This is especially true
during periods of major transformation like today. This is not dissimilar from
flying jets, or even prop planes. We are not evolved for high speed, or for
flight in three dimensions like birds. We cannot trust our senses to orient us
properly in many instances when flying. As a result, we have developed
instruments and rules for pilots to follow. Even when their senses tell them
they are right side up, if their instruments tell them they are upside down,
they had better trust their instruments.
Copyright 2003, IPS Advisory, Inc.
2
Most investors are not only doing something we are not evolved to do, most
of us don't even know it, and don't have any instruments that tell us in those
critical, dangerous situations whether we are doing the right thing or not. A
disciplined investment methodology focused on fair value estimates based on free
cash flow at IPS Funds serves as our instrument panel. We don't make judgments
about the markets, whether a stock is a good investment or not, or whether the
economy will drive stocks higher or lower. We fly strictly on instruments. We
don't trust ourselves even if our senses tell us visibility is 50 miles, sunny
and no wind. We just crunch the numbers to determine fair value. We buy only at
well below fair value, and sell when the stock exceeds fair value. Wherever
those stocks are that meet our buy criteria is where we will be in the stock
market.
DEALING SUCCESSFULLY WITH OUR GENES
Follow the discipline. No matter what the discipline is, it will have
weaknesses and missed opportunities. We want IPS Funds investment discipline's
weaknesses and missed opportunities to occur in an environment of very low risk
relative to the stock market. That's the only way we can minimize the inevitable
misses and mistakes. It doesn't reduce the upside opportunities (unless we are
talking about investing in the short term, trading sense), but it does reduce
the downside risk.
Everything we know about investors tells us we cannot be trusted to make
good investment decisions without a real investment discipline. There's no
substitute. Not newsletters, not following a broker's recommendations even if we
understand the research behind it (although we do all of this), not even listing
a set of qualitative criteria we want a potential purchase to meet, and being
disciplined about sticking to it. In the end we have to crunch numbers or we
simply do not know what we are doing. Then we have to objectively measure the
risk our purchases expose us to, and adjust our returns for that risk, or we do
not know if what we are doing works. Our instincts are more likely than not to
be our enemies.
That's why we report objectively to you in our Annual and Semi Annual
reports the risk we are taking. I know of no other mutual fund that does this.
It's our objective assessment of where we screwed up and where we succeeded;
what we did to fix it and whether or not it worked. It's our score card on
ourselves, and we let you see it, warts and all. This is the third report to you
in which we've done this, and if you've read them, you have seen the steady and
dramatic improvement in Millennium and New Frontier Funds over the last 18
months. It will be a permanent feature of our reports to you, and is updated
monthly on our website.
We will not always be right; not every stock we buy will make you money; we
will not always beat the market, and sometimes we will have negative returns.
But we have an investment discipline, and a measurement system for the results
of our discipline that we share with you. If something needs fixing, we will
know it. If we are flying upside down, our instruments will tell us so we can
right the plane. The next several years will present us with investment
opportunities that come along only a couple of times in a lifetime. At IPS Funds
we are ready for them.
ROBERT LOEST, PH.D., CFA GREGORY A. D'AMICO
SENIOR PORTFOLIO MANAGER PRESIDENT
Copyright 2003, IPS Advisory, Inc.
3
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IPS MILLENNIUM FUND
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2003 PERFORMANCE
IPS MILLENNIUM FUND has outperformed the S&P 500 on a risk-adjusted basis,
and on an absolute return basis for the year, and especially for the second half
of our 2003 fiscal year. The total return for MILLENNIUM for the first half of
our FY was 1.47% vs. 3.91% for the S&P 500. For the second half of our FY,
MILLENNIUM'S total return was 14.37% vs. 10.65% for the S&P 500. We believe the
reason for our improved performance is a dramatic improvement in our sell
discipline. Very simply, we no longer hold companies after they have reached
fair value.
IPS MILLENNIUM ANNUALIZED TOTAL RETURNS
[BAR CHART]
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1 Yr. 3 Yrs. 5 Yrs. Inception
IPS Millennium 16.05% -19.15% -0.97% 9.41%
S&P 500 Index 14.98% -5.56% -0.51% 10.42%
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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.
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AVERAGE ANNUAL RETURNS AS OF 11/30/03
-------------------------------------
1 3 5 Inception
Year Years Years (01/03/95)
---- ----- ----- ----------
Fund 16.05% -19.15% -0.97% 9.41%
S&P 500 Index 14.98% -5.56% -0.51% 10.42%
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RISK PROFILE OF THE FUND
The graph in Figure 2 depicts the risk (measured as the standard deviation
of 13 monthly returns on the Y-axis) of Millennium Fund on a monthly basis since
inception. Clearly, in 1999 and 2000 risk got out of hand, and we began to bring
risk down again to more in line with the market. Until the last month of our FY,
risk has been below that of the overall stock market for nearly a year and a
half. Even though we have had much lower risk than the stock market over most of
the last year, we have outperformed it. The high risk in 1999 and 2000 was due
to great companies like Calpine and EMC that we bought at well below fair value
many years ago, but that we held onto at too high a valuation. We have since
dramatically improved our sell discipline, which is responsible for the big
decrease in risk and improved returns.
Copyright 2003, IPS Advisory, Inc.
4
IPS MILLENNIUM RISK VS. BRAOD STOCK MARKET
[LINE GRAPH]
FIGURE 2. Volatility is expressed as the standard deviation of the 13 most
recent monthly returns. Standard deviation is considered a broad, inclusive
measure of risk, unlike beta, which is a narrower definition.
CHANGES IN THE FUND
Millennium has undergone some major changes in where we are finding value
over the course of the year. It's clear that a robust industrial recovery is
gaining momentum, and that consumer and tech stocks are selling at very high
valuations - certainly most of them far above our estimate of fair value based
on free cash flow.
As a result we have taken profits in most of our consumer oriented stocks,
and dramatically expanded the proportion of the portfolio devoted to the
industrial economy (Materials, Industrial Manufacturing, Energy, Utilities).
Consumer has declined from 45.32% of the fund on 11/30/02 to 13.32% of the fund
on 11/30/03. Industrial economy stocks have risen from 7.92% of the fund on
11/30/02 to 40.06% of the fund on 11.30/03.
We'd like to emphasize an important point here. We have not changed
allocations based on some gamble about where we think the economy is going and
why, and on which we could easily be wrong. We've changed allocations because
all we do is fill in the financial statement numbers for our companies,
calculate fair value, then look to see where superior companies are selling for
less than fair value. Those are the ones we buy. We're Spock about this. We
simply go where the value is, and we don't avoid undervalued, well-run companies
with lots of free cash flow just because they happen not to fit into some style
box. We'll buy growth or value, large cap or small, if we think we can make
money on it with low risk.
MANAGEMENT'S DISCUSSION
We cannot resist a discussion of macro factors affecting the market,
though, because it provides us with insight into the dynamics of the market and
economy that may be valuable. Basically, we think we've seen the end of the
consumer economy as we've come to know it since WW II, and that we are in the
early years of a secular bear market. Until recently the U.S. was a youthful
economy building families and spending money - huge sums of money. We mortgaged
our futures for homes, multiple cars, healthcare benefits, retirement and
college for everyone. We've gone from FDR's "A chicken in every pot," to "A car
in every garage," and multiple garages, at that.
Several of the points we make below will sound negative to many of you.
They are emphatically not negative. They are simply what they are: a set of
probabilities for potential trends that must be taken into account in our
thinking and investment decisions. If we do that - if we adjust to the market -
then we should be successful in any kind of market. It is our
- --------------------------------------------------------------------------------
Copyright 2003, IPS Advisory, Inc.
5
misperceptions and erroneous assumptions that undo us. This is why we need a
discipline, and an objective assessment of that discipline, in order to succeed
in secular bear markets.
A funny thing happens at a population median age of 46, though. According
to sociologists, that's the demographic peak for consumer spending. After that
people start saving for retirement, and spend less of their income. Their kids
are mostly gone, they have all the "stuff" they are likely to ever need, they
are downsizing if anything, they are getting older and starting to have health
problems, and the charm of mowing and raking a quarter acre has worn off. The
median age of 46 was reached in the U.S. in 2000. In Japan it was reached in
1989.
Consumers in the U.S. have depleted their savings and have little home
equity. Retirement assets have been dramatically reduced by the bear market, and
they are beginning to save in earnest for retirement. Savings can come only out
of spending. Healthcare costs are soaring even for the young and healthy. These
costs for older employees are likely to significantly reduce living standards
and spendable income, and for those who are retired, the effects will be even
worse. The government cannot pay for its promises, and it knows it. There seems
no doubt that we will be faced in a very few years with a combination of reduced
benefits and higher taxes.
On top of all this, we are entering a golden age for the industrial and
service economies, when huge productivity gains will result from all the new
technologies that have been introduced in the last decade, and that are
embedding themselves in the very genetic material of corporations. The dark side
of this productivity revolution, though, is a dramatic reduction in the need for
employees. The highest periods of productivity and GDP growth over the last
century have inevitably been during the structural bear markets of the oughts &
teens, the 1930s and the 1970s. These have also been the periods of highest
unemployment.
If we look back at these earlier periods of dramatic productivity gains
resulting from fundamental new technological breakthroughs, history teaches us
that the next decade or more is likely to be a period of very high GDP growth,
led mostly by the industrial, or business-to-business, economy and characterized
by unusually high unemployment. We saw such a period especially in the 1930s,
when the new internal combustion engine, electric motors, and the telephone
dramatically enhanced the productivity of human capital, resulting in the need
for far fewer employees. The unemployment rate stayed in the mid-teens for the
whole decade, and did not decline until WW II.
Demographics, healthcare costs, and productivity gains: these are major,
long term factors that are likely to decimate consumer spending for many years.
Yet we know from history that periods like this, following the crash of a
fundamental new technological revolution and its accompanying stock market
bubble, are followed by much higher than normal GDP growth. Given the likely
consequences of these major factors and the lessons of history, our conclusion
is that it will be the industrial sector where most new value will be created,
and the consumer sector, with few exceptions, where growth will shrink and
companies suffer.
This is not why we have invested where we have - we've simply followed free
cash flows and value - but it does fit the facts of history and the way the
current economic scenario appears to be developing, and the industrial economy
is most definitely where we are seeing the greatest values and increases in free
cash flow. Whether we turn out to be right or wrong long term will be an
interesting academic exercise, but however the economy develops, we will be
where the value is.
Our greatest blessing is you, our shareholders and our private management
clients, and the faith you've shown in sticking by us in the tough early years
of a new century. We trust your faith in us has been rewarded this year, and
that our improved sell discipline will allow our funds to better weather the
inevitable storms without sacrificing returns. May the new year bring you health
and happiness.
ROBERT LOEST, PH.D., CFA
SENIOR PORTFOLIO MANAGER
Copyright 2003, IPS Advisory, Inc.
6
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IPS NEW FRONTIER FUND
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2003 PERFORMANCE
IPS NEW FRONTIER FUND has outperformed the S&P 500 on a risk-adjusted
basis, and on an absolute return basis for the year, and especially for the
second half of our 2003 fiscal year. The total return for NEW FRONTIER for the
first half of our FY was 3.57% vs. 3.91% for the S&P 500. For the second half of
our FY, NEW FRONTIER'S total return was 19.26% vs. 10.65% for the S&P 500. We
believe the reason for our improved performance is a dramatic improvement in our
sell discipline. Very simply, we no longer hold companies after they have
reached fair value.
IPS NEW FRONTIER ANNUALIZED RETURNS
[BAR CHART]
- --------------------------------------------------------------------------------
1 Yr. 3 Yrs. 5 Yrs. Inception
IPS New Frontier 23.45% -24.37% -9.80% -8.39%
S&P 500 Index 14.98% -5.56% -0.51% 0.32%
- --------------------------------------------------------------------------------
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 11/30/03
-------------------------------------
1 3 5 Inception
Year Years Years (08/03/98)
---- ----- ----- ----------
FUND 23.45% -24.37% -9.80% -8.39%
S&P 500 INDEX 14.98% -5.56% -0.51% 0.32%
- --------------------------------------------------------------------------------
RISK PROFILE OF THE FUND
The graph in FIGURE 5 depicts the risk (measured as the standard deviation
of 13 monthly returns on the Y-axis) of New Frontier Fund on a monthly basis
since inception. Clearly, in 1999 and 2000 risk got out of hand, and we began to
bring risk down again to more in line with the market. Until the last month of
our FY, risk has been below that of the overall stock market for nearly a year
and a half. Even though we have had much lower risk than the stock market over
most of the last year, we have outperformed it. The high risk in 1999 and 2000
was due to great companies like CALPINE and EMC that we bought at well below
fair value many years ago, but that we held onto at too high a valuation. We
have since dramatically improved our sell discipline, which is responsible for
the big decrease in risk and improvement in returns.
CHANGES IN THE FUND
New Frontier has undergone some major changes in where we are finding value
over the course of the year. It's clear that a robust industrial recovery is
gaining momentum, and that consumer and tech stocks are selling at very high
valuations - certainly most of them far above our estimate of fair value based
on free cash flow. Copyright 2003, IPS Advisory, Inc. 7
Copyright 2003, IPS Advisory, Inc.
7
IPS NEW FRONTIER RISK VS. BROAD STOCK MARKET
[LINE GRAPH]
FIGURE 5. Volatility is expressed as the standard deviation of the 13 most
recent monthly returns. Standard deviation is considered a broad, inclusive
measure of risk, unlike beta, which is a narrower definition.
As a result we have taken profits in most of our consumer oriented stocks,
and dramatically expanded the proportion of the fund's portfolio devoted to the
industrial economy (Materials, Industrial Manufacturing, Energy, Utilities).
Consumer has declined from 48.46% of the fund on 11/30/02 to 14.95% of the fund
on 11/30/03. Industrial economy stocks have risen from 16.73% of the fund on
11/30/02 to 32.88% of the fund on 11/30/03.
We'd like to emphasize an important point here. We have not changed
allocations based on some gamble about where we think the economy is going and
why, and on which we could easily be wrong. We've changed allocations because
all we do is fill in the financial statement numbers for our companies,
calculate fair value, then look to see where superior companies are selling for
less than fair value. Those are the ones we buy. We're Spock about this. We
simply go where the value is, and we don't avoid undervalued, well-run companies
with lots of free cash flow just because they happen not to fit into some style
box. We'll buy pretty much anything if we think we can make money on it with low
risk.
MANAGEMENT'S DISCUSSION
In the interests of saving money and trees, we refer you to the same
heading on p. 5 above for Millennium Fund.
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.
Copyright 2003, IPS Advisory, Inc.
8
** 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 of all different sizes 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. 1/2003
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
---------------- Knoxville, TN 37909
Fax: 865.544.0630 Email: info@ipsfunds.com
-----------------
================================================================================
A NOTE ABOUT DUPLICATE MAILINGS
You will receive the Fund's shareholder report every six months. To reduce Fund
expenses, we try to identify related shareholders in a household and send only
one copy of the report. This process, known as "householding," will continue
indefinitely unless you instruct us otherwise. If you prefer not to have these
documents householded or are currently receiving more than one report per
household, please call us at 800.249.6927. At any time you may view current
shareholder reports on our website, www.ipsfunds.com.
PRIVACY POLICY
We collect nonpublic personal information about you from the following sources:
* Information we receive from you on applications and other forms;
* Information about your transactions with us, our affiliates, or
others; and
* Information we receive from a consumer reporting agency.
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law.
We restrict access to nonpublic personal information about you to those
employees who need to know that information to provide products or services to
you.
We maintain physical, electronic, and procedural safeguards that comply with
federal standards to guard your nonpublic personal information.
PROXY VOTING SUMMARY
Copyright 2003, IPS Advisory, Inc.
9
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 and
Guidelines 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.
Proxies shall be voted in the best interests of shareholders, with an emphasis
on voting against any management proposals that act in general to insulate
companies from the discipline of the market or accountability to shareholders.
In addition, IPSA will generally vote in favor of any shareholder proposals that
will result in restrictions on animal testing, environmental pollution, and
other ethical concerns. Due to the nature and small size of IPSA, in our opinion
there are no material conflicts of interest likely to arise in voting proxies
for our fund shareholders.
Specific guidelines are set forth to address voting in regard to:
A. Corporate Governance;
B. Takeover defense and related actions;
C. Compensation proposals;
D. Capital structure;
E. Social & environmental responsibility;
F. Size of the board;
G. Appointment of Outside Directors;
H. Multiple Directorships;
I. Incentive Stock Award programs;
J. Conflicts of Interest
Copyright 2003, IPS Advisory, Inc.
10
IPS Millenium Fund
Schedule of Investments
November 30, 2003
COMMON STOCKS - 79.05% Shares Value
------------ ------------
Consumer Discretionary - 12.66%
Kellwood Co. 70,000 $ 2,676,800
Eastman Kodak Co. 140,000 3,410,400
Regal Entertainment Group 'A' 190,000 3,959,600
------------
10,046,800
------------
Consumer Staples - 0.67%
Fresh Del Monte Produce, Inc. 20,000 533,600
------------
Financial - 5.48%
AFLAC, Inc. 20,000 719,400
Cendant Corp.* 50,000 1,108,000
Crawford & Co. Class B 30,000 217,500
First Data Corp. 40,000 1,514,000
The Phoenix Cos., Inc. 70,000 787,500
------------
4,346,400
Healthcare - 2.58%
First Health Group Corp.* 100,000 2,050,000
------------
Industrial Manufacturing - 15.34%
Bandag, Inc. 30,000 1,222,500
General Dynamics Corp. 20,000 1,617,400
Hubbell, Inc. 'B' 70,000 3,080,000
Kaydon Corp. 90,000 2,197,800
Precision Castparts Corp. 60,000 2,431,200
Watsco, Inc. 70,000 1,626,800
------------
12,175,700
------------
Information Technology - 4.76%
Storage Technology* 150,000 3,780,000
------------
Materials - 16.08%
Ball Corp. 60,000 3,357,000
Carpenter Technology Corp. 68,000 1,822,400
Freeport-McMoRan Copper & Gold Inc. 'B' 130,000 5,658,900
Lyondell Chemical Co. 130,000 1,929,200
------------
12,767,500
------------
Natural Gas & Energy - 2.69%
Kaneb Services LLC 60,000 1,811,400
TC Pipelines LP 10,000 326,010
------------
2,137,410
------------
Telecommunications - 12.82%
Alltel Corp. 50,000 2,270,500
Benchmark Electronics, Inc.* 135,000 4,958,550
CenturyTel, Inc. 20,000 654,000
Verizon Communication, Inc. 70,000 2,293,900
------------
10,176,950
------------
Utilities - 5.97%
FPL Group, Inc. 60,000 3,813,000
National Fuel Gas Co. 40,000 924,000
------------
4,737,000
------------
TOTAL COMMON STOCK (Cost $55,653,588) 62,751,360
------------
Principal
SHORT-TERM INVESTMENTS - 20.83% Amount
------------
Federated Cash Trust Series II , Rate 0.23%(a) 16,538,773 16,538,773
------------
TOTAL SHORT-TERM INVESTMENTS (Cost $16,538,773) 16,538,773
------------
Total Investments (Cost $72,192,361) - 99.88% 79,290,133
Other Assets less Liabilities, Net - 0.12% 93,793
------------
Total Net Assets - 100.00% $ 79,383,926
============
* Non-income producing security
(a) Variable rate security, the coupon rate shown represents the rate at
November 30, 2003.
The accompanying notes are an integral part of these financial statements.
11
IPS New Frontier Fund
Schedule of Investments
November 30, 2003
COMMON STOCKS - 84.68% Shares Value
------------ ------------
Consumer Discretionary - 10.99%
Kellwood Co. 4,000 $ 152,960
Regal Entertainment Group 'A' 12,000 250,080
------------
403,040
------------
Financial - 9.29%
Cendant Corp.* 4,000 88,640
Crawford & Co. Class B 15,000 108,750
First Data Corp. 2,000 75,700
The Phoenix Cos., Inc. 6,000 67,500
------------
340,590
Healthcare - 3.36%
First Health Group Corp.* 6,000 123,000
------------
Industrial Manufacturing - 36.09%
Bandag, Inc. 6,000 244,500
Carlisle Cos., Inc. 2,000 117,700
Carpenter Technology Corp. 6,000 160,800
Eastman Kodak Co. 6,000 146,160
Freeport-McMoRan Copper & Gold Inc. 'B' 7,000 304,710
Kaydon Corp. 5,000 122,100
Optical Cable Corp.* 1,000 5,750
Precision Castparts Corp. 3,000 121,560
Woodward Governor Co. 2,000 99,760
------------
1,323,040
------------
Information Technology - 8.93%
Storage Technology* 13,000 327,600
------------
Natural Gas & Energy - 5.14%
Kaneb Services LLC 3,000 90,570
TC Pipelines LP 3,000 97,803
------------
188,373
------------
Telecommunications - 10.88%
Alltel Corp. 2,000 90,820
Benchmark Electronics, Inc.* 7,500 275,475
Verizon Communication, Inc. 1,000 32,770
------------
399,065
------------
TOTAL COMMON STOCK (Cost $2,714,363) 3,104,708
------------
Principal
SHORT-TERM INVESTMENTS - 15.29% Amount
------------
Federated Cash Trust Series II , Rate 0.23%(a) 560,725 560,725
------------
TOTAL SHORT-TERM INVESTMENTS (Cost $560,725) 560,725
------------
Total Investments (Cost $3,275,088) - 99.97% 3,665,433
Other Assets less Liabilities, Net - 0.03% 956
------------
Total Net Assets - 100.00% $ 3,666,389
============
* Non-income producing security
(a) Variable rate security, the coupon rate shown represents the rate at
November 30, 2003.
The accompanying notes are an integral part of these financial statements.
12
The IPS Funds
Statements of Assets and Liabilities
November 30, 2003
IPS IPS
Millennium New Frontier
Fund Fund
------------- -------------
ASSETS:
Investments, at value (cost $72,192,361 and $3,275,088, respectively) $ 79,290,133 $ 3,665,433
Receivable for capital shares sold 40,610 200
Dividends receivable 180,760 5,615
Interest receivable 2,366 88
------------- -------------
Total Assets 79,513,869 3,671,336
------------- -------------
LIABILITIES:
Payable for capital shares redeemed 39,224 798
Payable to Advisor 90,719 4,149
------------- -------------
Total Liabilities 129,943 4,947
------------- -------------
Total Net Assets $ 79,383,926 $ 3,666,389
============= =============
NET ASSETS CONSIST OF:
Capital stock $ 376,300,076 $ 22,133,070
Accumulated net realized loss on investments sold (304,307,145) (18,857,026)
Accumulated undistributed net investment income 293,223 --
Net unrealized appreciation on investments 7,097,772 390,345
------------- -------------
Total Net Assets $ 79,383,926 $ 3,666,389
============= =============
Shares outstanding (no par value, unlimited shares authorized) 3,049,385 497,683
Net asset value, redemption price and offering price per share $ 26.03 $ 7.37
============= =============
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
The IPS Funds
Statements of Operations
For the Year Ended November 30, 2003
IPS IPS
Millennium New Frontier
Fund Fund
------------ ------------
INVESTMENT INCOME:
Dividend income $ 1,410,901 $ 46,462
Interest income 11,163 551
------------ ------------
Total investment income 1,422,064 47,013
------------ ------------
EXPENSES:
Investment advisory fee 1,128,841 48,373
------------ ------------
Total expenses 1,128,841 48,373
------------ ------------
NET INVESTMENT INCOME (LOSS) 293,223 (1,360)
------------ ------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investment transactions 5,755,999 403,298
Change in unrealized appreciation on
investments 5,165,824 317,337
------------ ------------
Net realized and unrealized gain on investments 10,921,823 720,635
------------ ------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 11,215,046 $ 719,275
============ ============
The accompanying notes are an integral part of these financial statements.
13
The IPS Funds
Statements of Changes in Net Assets
IPS IPS
Millennium Fund New Frontier Fund
------------------------------ ------------------------------
Year Year Year Year
Ended Ended Ended Ended
November 30, November 30, November 30, November 30,
2003 2002 2003 2002
------------- ------------- ------------- -------------
OPERATIONS:
Net investment income (loss) $ 293,223 $ (368,273) $ (1,360) $ (53,599)
Net realized gain (loss) on investment transactions 5,755,999 (36,207,928) 403,298 (1,963,080)
Change in unrealized appreciation on investments 5,165,824 931,850 317,337 315,715
------------- ------------- ------------- -------------
Net increase (decrease) in net assets
resulting from operations 11,215,046 (35,644,351) 719,275 (1,700,964)
------------- ------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- -- -- --
Net realized gains -- -- -- --
------------- ------------- ------------- -------------
Total dividends and distributions -- -- -- --
------------- ------------- ------------- -------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 26,855,423 288,101,402 304,324 500,492
Shares issued to holders in reinvestment of dividends -- -- -- --
Cost of shares redeemed (53,329,597) (342,281,302) (1,082,410) (1,303,951)
------------- ------------- ------------- -------------
Net decrease in net assets resulting
from capital share transactions (26,474,174) (54,179,900) (778,086) (803,459)
------------- ------------- ------------- -------------
TOTAL DECREASE IN NET ASSETS (15,259,128) (89,824,251) (58,811) (2,504,423)
NET ASSETS:
Beginning of period 94,643,054 184,467,305 3,725,200 6,229,623
------------- ------------- ------------- -------------
End of period* $ 79,383,926 $ 94,643,054 $ 3,666,389 $ 3,725,200
============= ============= ============= =============
* Including accumulated undistributed net
investment income of $ 293,223 $ -- $ -- $ --
============= ============= ============= =============
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
IPS Millennium Fund
Financial Highlights
Selected per share data is based on a share of common stock outstanding throughout each period.
Year Ended Year Ended Year Ended Year Ended Year Ended
November 30, November 30, November 30, November 30, November 30,
2003 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) 0.08 (0.07) (0.10)(1) 0.04 (0.03)
Net realized and unrealized gain
(loss) on investments 3.52 (6.93) (19.72) (6.30) 28.45
---------- ---------- ---------- ---------- ----------
TOTAL FROM INVESTMENT OPERATIONS 3.60 (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 $ 26.03 $ 22.43 $ 29.43 $ 49.29 $ 55.93
========== ========== ========== ========== ==========
Total return 16.05% (23.79%) (40.25)% (11.36)% 103.23%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period (000's) $ 79,384 $ 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 0.36% (0.27%) (0.23%) 0.08% (0.07)%
Portfolio turnover rate 169.37% 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.
14
IPS New Frontier Fund
Financial Highlights
Selected per share data is based on a share of common stock outstanding throughout each period.
Year Ended Year Ended Year Ended Year Ended Year Ended
November 30, November 30, November 30, November 30, November 30,
2003 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) (0.11)(1) (0.25)(1) (0.03)
Net realized and unrealized gain
(loss) on investments 1.41 (2.40) (8.48) (11.36) 16.84
---------- ---------- ---------- ---------- ----------
TOTAL FROM INVESTMENT OPERATIONS 1.40 (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 $ 7.37 $ 5.97 $ 8.45 $ 17.04 $ 29.39
========== ========== ========== ========== ==========
Total return 23.45% (29.35)% (50.41)% (40.92)% 133.37%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period (000's) $ 3,666 $ 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 (0.04)% (1.11)% (1.00)% (0.92)% (0.13)%
Portfolio turnover rate 213.83% 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.
- --------------------------------------------------------------------------------
IPS MILLENNIUM FUND AND IPS NEW FRONTIER FUND
NOTES TO THE FINANCIAL STATEMENTS
NOVEMBER 30, 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 IPS Millennium Fund is a diversified fund. The
principal investment objective of the IPS New Frontier Fund ("New Frontier
Fund") is capital growth. The New Frontier Fund is non-diversified and
therefore can invest a greater percentage of its assets in fewer securities
than a diversified fund. To the extent the Fund invests its assets in fewer
securities, the Fund is subject to greater risk of loss if those securities
decline in value. Nonetheless, the Fund intends to qualify as a registered
investment company for income tax purposes, which means the Fund intends to
fulfill the Internal Revenue Code diversification requirements applicable
to registered investment companies. 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 accounting principles generally
accepted in the United States of America ("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.
15
(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.
(e) Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements; and the reported amounts of revenues
and expenses during the reported period. Actual results could differ
from those estimates.
3. SHARES OF COMMON STOCK
Transactions in shares of common stock were as follows:
YEAR ENDED YEAR ENDED
NOVEMBER 30, 2003 NOVEMBER 30, 2002
IPS MILLENNIUM FUND $ Shares $ Shares
------------- ------------- ------------- -------------
Shares sold $ 26,855,423 1,210,673 $ 288,101,402 11,016,757
Shares issued in reinvestment of dividends -- -- -- --
Shares redeemed (53,329,597) (2,380,589) (342,281,302) (13,066,471)
------------- ------------- ------------- -------------
Net increase (decrease) ($ 26,474,174) (1,169,916) ($ 54,179,900) (2,049,714)
============= =============
SHARES OUTSTANDING:
Beginning of period 4,219,301 6,269,015
------------- -------------
End of period 3,049,385 4,219,301
============= =============
16
YEAR ENDED YEAR ENDED
NOVEMBER 30, 2003 NOVEMBER 30, 2002
IPS NEW FRONTIER FUND $ Shares $ Shares
------------- ------------- ------------- -------------
Shares sold $ 304,324 48,206 $ 500,492 68,451
Shares issued in reinvestment of dividends -- -- -- --
Shares redeemed (1,082,410) (174,976) (1,303,951) (180,957)
------------- ------------- ------------- -------------
Net increase (decrease) ($ 778,086) (126,770) ($ 803,459) (112,506)
============= =============
SHARES OUTSTANDING:
Beginning of period 624,453 736,959
------------- -------------
End of period 497,683 624,453
============= =============
4. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of investments, excluding short-term
investments, by the Funds for the year ended November 30, 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 $119,751,880 $ 6,639,712
Sales $150,490,878 $ 7,770,459
At November 30, 2003, gross unrealized appreciation and depreciation of
investments for tax purposes were as follows:
IPS MILLENNIUM FUND IPS NEW FRONTIER FUND
------------------- ---------------------
Unrealized appreciation $ 9,116,127 $ 478,502
Unrealized depreciation (2,018,355) (89,948)
------------ ------------
Net unrealized appreciation/
(depreciation) on investments $ 7,097,772 $ 388,554
============ ============
At November 30, 2003, the cost of investments for federal income tax
purposes for the Millennium Fund and the New Frontier Fund were $72,192,361
and $3,276,879, respectively. The difference between book cost and tax cost
consists of wash sales of $0 for the Millennium Fund and $1,791 for the New
Frontier Fund.
At November 30, 2003, the Millennium Fund had an accumulated net realized
capital loss carryover of $304,307,145, with $33,149,242 expiring in 2008,
$234,768,275 expiring in 2009, and $36,389,628 expiring in 2010. The New
Frontier Fund, at November 30, 2002, had an accumulated net realized
capital loss carryover of $18,855,235, with $3,303,414 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 earned by IPS Advisory, Inc. during the
year ended November 30, 2003 for the Millennium Fund and the New Frontier
Fund were $1,128,841 and $48,373, respectively.
17
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
November 30, 2003, Charles Schwab & Co., for the benefit of its customers,
beneficially owned 51% of the Millennium Fund.
7. DISTRIBUTABLE EARNINGS
MILLENNIUM FUND. There were no distributions during the fiscal years 2003
and 2002.
NEW FRONTIER FUND. There were no distributions during the fiscal years 2003
and 2002.
As of November 30, 2003, the components of distributable earnings (accumulated
losses) on a tax basis were as follows:
Millennium New Frontier
------------- -------------
Undistributed ordinary income
(accumulated losses) $ 293,223 $ --
Undistributed long-term capital gain
(accumulated losses) (304,307,145) (18,855,235)
Unrealized appreciation/(depreciation) 7,097,772 388,554
------------- -------------
$(296,916,150) $ (18,466,681)
============= =============
The difference between book basis and tax basis unrealized appreciation
(depreciation) is attributable primarily to the deferral of wash sales.
18
INDEPENDENT AUDITOR'S REPORT
----------------------------
To The Shareholders and
Board of Trustees
IPS Funds
We have audited the accompanying statements of assets and liabilities of IPS
Funds (comprising, respectively, the Millennium Fund and the New Frontier Fund),
including the schedules of portfolio investments, as of November 30, 2003, the
related statements of operations for the year then ended, changes in net assets
for 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 Funds' 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
investments and cash held by the custodian as of November 30, 2003 by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
IPS Funds as of November 30, 2003, the results of their operations for the year
then ended, the changes in their 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.
McCurdy & Associates CPA's, Inc.
Westlake, Ohio
December 16, 2003
19
INDEPENDENT TRUSTEES (UNAUDITED).
- ------------------------------------------------------------------------------------------------------------------------------------
# OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX OTHER
HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN DIRECTORSHIPS
NAME, ADDRESS AND AGE THE TRUST TIME SERVED DURING PAST FIVE YEARS BY TRUSTEE HELD BY TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------------------
Veenita Bisaria, 43, Independent Since Financial Analyst, Tennessee 3 None
12416 Fort West Drive Trustee inception Valley Authority (1997-
Knoxville, TN 37922 of Funds Present); Director of Business
in 1995 Planning at Lockheed Martin
Energy Systems (Prior to 1997);
Financial Analyst Charter (CFA).
- ------------------------------------------------------------------------------------------------------------------------------------
Woodrow Henderson, 46, Independent Since Director of Planned Giving for 3 None
6504 Clary Lane Trustee inception the University of Tennessee at
Knoxville, TN 37919 of Funds Knoxville, Juris Doctor.
in 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Billy Wayne Stegall, Jr., 47, Independent Since Account Executive, Colonial 3 None
316 Stonewall Street Trustee inception Life & Accident (1995-Present);
Memphis, TN 38112 of Funds Teacher of history and
in 1995 economics at Austin East High
School in Knoxville, Tennessee
(Prior to 1995).
- ------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES & OFFICERS
- ------------------------------------------------------------------------------------------------------------------------------------
Greg D'Amico*, 40, President, Since President of IPS Advisory, Inc. 3 IPS Advisory, Inc.;
1225 Weisgarber Road, Chief inception Director of Young
Suite S-380, Financial of Funds Entrepreneurs'
Knoxville, TN 37909 Officer, in 1995 Organization (YEO);
Treasurer Personal & Child
and Trustee Safety, LLC (PCS)
- ------------------------------------------------------------------------------------------------------------------------------------
Robert Loest*, 60, Vice Since Chief Executive Officer of IPS 3 IPS Advisory, Inc.
1225 Weisgarber Road, President, inception Advisory, Inc.; Financial
Suite S-380, Secretary of Funds Analyst Charter (CFA); Ph.D.
Knoxville, TN 37909 and Trustee in 1995 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 At least once
Independent Trustee full Board with respect to annually. Last
Woodrow Henderson, accounting, auditing and meeting occurred
Independent Trustee financial matters affecting on January 25,
Billy Wayne Stegall, Jr., the Trust. 2002.
Independent Trustee
20
------------------------------
IPS iFund 2003 Annual Report
------------------------------
Fellow Portfolio Managers:
Congratulations! As portfolio managers of the iFund, you have generated a
return of 28.97% over the fiscal year ending 11-30-2003. Not only have you
competed with the NASDAQ's return of 32.56%, you have done so with much less
risk than the NASDAQ. We are excited with the results of the iFund this year and
see it as a building block for future years. We are being patient while the
connected world COMES TO BETTER APPRECIATE the advantages of the iFund.
The iFund is not the only new application of the new collaborative
potential of the Internet. ANOTHER EXAMPLE is a newspaper in South Korea called
OHMYNEWS. It is just three years old and only 20% of the paper each day is
written by staff journalists. This paper relies mostly on contributions from
ordinary readers all over the country for content. The paper averages about 14
million visits a day in a country of about 40 million people, as reported in the
NEW YORK TIMES on 3-6-03. This is exciting to us because over 70% of South Korea
has high speed INTERNET access. Which seems to mean that a higher percentage of
people who have high speed access have an interest in participating on line in
the world with which we live. This leads them to use different avenues like this
paper to share, provide feedback, and help improve their community. A sense of
control and participation in their community will continue to drive people to
seek applications that provide this opportunity. This encourages us that
business models like the iFund will ENABLE and encourage more COLLABORATIVE
business tasks TO TAKE PLACE SOLELY on the Internet.
As the world becomes more connected, we believe that a community of
investors sharing thoughts, working together and IMPROVING IDEAS THROUGH
feedback will create a new paradigm for mutual fund investment.
IPS iFUND ANNUALIZED RETURNS
[BAR CHART]
- --------------------------------------------------------------------------------
1 YR. INCEPTION
IPS iFUND 28.97% -18.94%
S&P 500 INDEX 14.98% -6.21%
- --------------------------------------------------------------------------------
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 11/30/03
-------------------------------------
INCEPTION
6 MONTHS 1 YR (12/29/00)
iFund 25.24% 28.97% -18.94%
S&P 500 Index 10.65% 14.98% -6.21%
*Does not include reinvestment of dividends
- --------------------------------------------------------------------------------
Copyright 2003, IPS Advisory, Inc.
1
PERFORMANCE
As you can see from the return numbers above, the iFUND had a great year.
October and May were the best performing months with 9.39% and 8.13% returns,
respectively. Some of the stocks that helped the iFund stay in line with the
Nasdaq were OMNIVISION TECHNOLOGIES (OVTI), FREEPORT MCMORAN COPPER & GOLD INC.
(FCX), THE CHINA FUND (CHN) and INVITROGEN (IVGN). The Fund currently holds all
but OVTI, which was sold partially in March and then in its entirety in May 2003
for a 195% and a 275% gain, respectively. To boost the last half of the year,
FCX, CHN and IVGN proved to be strong and steady performers FCX WAS NOMINATED BY
SHAREHOLDERS, WHO THEN VOTED TO BUY IT on March 27, 2003 for $17.00, and by
November 30, 2003, it HAD climbed to $43.53. Similarly, SHAREHOLDERS VOTED TO
BUY CHN in April 2003 for $15.79, and VOTED TO SELL PART OF THE POSITION in
August FOR $29.00, then again in September for $26.08. INVESTORS purchased IVGN
in March 2003 for, $30.34. We added to this position in May at $35.46.
Shareholder CONSENSUS was THAT the position was getting too large for the Fund,
so THEY VOTED to sell some shares in August at $53.94.
Another interesting ASPECT OF THE iFUND IS THE CHANGE IN THE LARGEST
SECTORS over the past year. The iFund started the year equally weighted with
Consumer and Technology stocks. Tech stocks hit a high of 44% of the portfolio
in March, while Consumer stocks shrank to 5.2% of the portfolio. The addition of
NETWORK APPLIANCE, QLOGIC and UNITED TECHNOLOGIES were among the stocks
responsible for THE LARGE COMMITMENT TO Tech. To account for the Consumer
sector's decrease, INVESTORS VOTED TO SELL BEST BUY, PF CHANG'S CHINA BISTRO and
WHOLE FOODS MARKET, among others. Tech and Consumer sectors went through another
transformation in April, when they converged to equal footing again by May 2003
and lasted throughout the remainder of the year.
The largest sector in November 2003, though, was Industrials, which grew
from 3.5% OF THE FUND in December 2002 to 17.46% at the end of our fiscal year.
During this time INVESTORS VOTED TO purchase FREEPORT MCMORAN COPPER & GOLD
INC., KAYDON CORPORATION (KDN) and BANDAG INC. (BDG). FCX, as mentioned before,
turned in a stellar performance for the iFund. Similarly, LEA, which was
purchased in July 2002, appreciated over 70% during the 2003 fiscal year.
Copyright 2003, IPS Advisory, Inc.
2
[LINE GRAPH]
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; and the S&P 500, a major, capitalization weighted
index with dividends reinvested. Risk is measured as the Standard Deviation
of the most recent 13 monthly returns.
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 year.
The iFund's volatility dropped from 7.86% on November 30, 2002 to 4.99% on
November 30, 2003, significantly more than the Value Line's 5.38% on November
30th, 2003. The Value Line Arithmetic Composite's volatility dropped 7.27% on
November 30, 2002 to 5.38% on November 30, 2003. The S&P composite dropped from
5.9% on November 30th, 2002 to 3.76% on November 30th 2003. Our volatility is
still higher then the S&P 500 but we almost doubled the return for the year.
Interestingly, the iFund's improved performance on both an absolute and a
risk-adjusted basis coincides with the decreased in volatility. Perhaps there is
a lesson to be taken from this.
CHANGES FROM WITHIN
We have enjoyed a much more exciting year this year than our first two. The
year began with the same uncertainty, but built momentum after the war to finish
with very respectable returns. With the markets getting better, we have
experienced a more positive response toward, and interest in, the iFund. We have
had conversations with many people who are exploring the opportunity to invest
in the fund. More investors will provide a greater diversity of thought and
ideas, and will make things more exciting for all of us. This is key to the
success of the fund, and we are working hard to share the concept with new
investors.
Please help us by sharing with friends this unique investment concept, and
how they can participate with other investors in running a mutual fund. We see a
world one day that will be filled with investors opening their hand held devices
to share an idea, review some messages and vote on a stock as a normal part of
their day. This accessibility and freedom will allow us to quickly react to
changes and new ideas. When we put all our ideas together and discuss them
openly, we have the opportunity to create something more valuable, and at a
higher level of intelligence, than what we individually started with.
GREGORY A. D'AMICO ROBERT LOEST, PH.D., CFA
PRESIDENT ADVISOR
Copyright 2003, IPS Advisory, Inc.
3
================================================================================
Note 1: 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 were to begin with.
Note 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.
Note 3: 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.
Note 4: 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.
Note 5: 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.
NOTE 6: 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
---------------- Knoxville, TN 37909
Fax: 865.544.0630 Email: info@ipsifund.com
-----------------
Copyright 2003, IPS Advisory, Inc.
4
IPS iFUND
SCHEDULE OF INVESTMENTS
NOVEMBER 30, 2003
COMMON STOCKS - 83.81% SHARES VALUE
------ --------
BIOTECHNOLOGY - 7.84%
Fisher Scientific International, Inc.* 65 2,618
Invitrogen Corp.* 55 3,749
--------
6,367
--------
BUSINESS SERVICES - 6.39%
Angelica Corp. 200 4,130
ProQuest Co.* 35 1,057
--------
5,187
--------
COMPUTER HARDWARE - 1.91%
Dell Computer Corp.* 45 1,552
--------
CONSUMER DISCRETIONARY - 14.82%
Cadbury Schweppes Plc 125 3,259
CBRL Group, Inc. 60 2,475
Regal Entertainment Group 105 2,188
Thor Industries, Inc. 40 2,439
Lancaster Colony Corp. 40 1,670
--------
12,031
--------
CONSUMER RETAIL - 1.88%
99 Cents Only Stores* 55 1,524
--------
DRUGS & MEDICAL EQUIPMENT - 2.12%
Amgen, Inc.* 30 1,725
--------
HEALTHCARE - 13.32%
First Health Group Corp.* 100 2,050
Lincare Holdings, Inc.* 15 448
Kyphon, Inc.* 200 5,480
Serona SA 110 1,901
WellPoint Health Networks, Inc.* 10 935
--------
10,814
--------
Copyright 2003, IPS Advisory, Inc.
5
INDUSTRIAL MANUFACTURING - 17.46%
Bandag, Inc. 45 1,834
Freeport-McMoRan Copper & Gold, Inc. 195 8,488
Kaydon Corp. 85 2,076
Lear Corp.* 30 1,774
--------
14,172
--------
INFORMATION TECHNOLOGY - 4.32%
InVision Technologies, Inc.* 50 1,491
Storage Technology* 80 2,016
--------
3,507
--------
NATURAL GAS EXPLORATION & PRODUCTION - 2.48%
Suncor Energy, Inc. 90 2,012
--------
2,012
--------
SOFTWARE - 4.81%
Autodesk, Inc. 35 813
Electronic Arts, Inc.* 70 3,096
--------
3,909
--------
TELECOMMUNICATIONS - 4.50%
Benchmark Electronics, Inc.* 60 2,204
Inet Technologies, Inc.* 40 514
Vodafone Group Plc ADR* 40 934
--------
3,652
--------
UTILITIES - 1.96%
FPL Group, Inc. 25 1,589
--------
TOTAL COMMON STOCK (Cost $51,588) 68,041
--------
MUTUAL FUNDS - 1.21%
China Fund, Inc. 30 982
--------
TOTAL MUTUAL FUNDS (Cost $474) 982
--------
SHORT-TERM INVESTMENTS - 14.30%
Federated Cash Trust Series II , Rate 0.23% 11,612 11,612
--------
TOTAL SHORT-TERM INVESTMENTS (Cost $11,612) 11,612
--------
TOTAL INVESTMENTS (Cost $63,674) - 99.33% 80,635
Other Assets less Liabilities, Net - 0.67% 547
Total Net Assets - 100.00% $ 81,182
========
* ADR-American Depository Receipts
* (a)Variable rate security, the coupon rate shown represents the rate at
November 30,2003.
* Non-income producing security
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
Copyright 2003, IPS Advisory, Inc.
6
THE IPS iFUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 2003
ASSETS:
Investments, at value (cost $63,674) $ 80,635
Receivable for capital shares sold 600
Dividends receivable 37
Interest receivable 2
------------
Total Assets 81,274
------------
LIABILITIES:
Payable to Advisor 92
------------
Total Liabilities 92
------------
$ 81,182
============
NET ASSETS CONSIST OF:
Capital stock $ 121,845
Accumulated net realized loss on investments sold (57,624)
Net unrealized appreciation on investments 16,961
------------
Total Net Assets $ 81,182
============
Shares outstanding (no par value,
unlimited shares authorized) 12,485
Net asset value, redemption price
and offering price per share $ 6.50
============
The accompanying notes are an integral part of these financial statements.
Copyright 2003, IPS Advisory, Inc.
7
THE IPS iFUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 2003
INVESTMENT INCOME:
Dividend income $ 621
Interest income 18
------------
Total investment income 639
------------
EXPENSES:
Investment advisory fee 1,091
------------
Total expenses 1,091
------------
NET INVESTMENT LOSS (452)
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investment transactions 8,113
Change in unrealized appreciation on
investments 12,740
------------
Net realized and unrealized gain on investments 20,853
------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 20,401
============
The accompanying notes are an integral part of these financial statements.
Copyright 2003, IPS Advisory, Inc.
8
THE IPS iFUND
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
NOVEMBER 30, NOVEMBER 30,
2003 2002
------------ ------------
OPERATIONS:
Net investment loss $ (452) $ (718)
Net realized gain (loss) on investment transactions 8,113 (34,747)
Change in unrealized appreciation on investments 12,740 4,151
------------ ------------
Net increase (decrease) in net assets resulting from operations 20,401 (31,314)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 9,602 14,770
Cost of shares redeemed (25,518) (1,788)
------------ ------------
Net increase (decrease) in net assets resulting
from capital share transactions (15,916) 12,982
------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 4,485 (18,332)
NET ASSETS:
Beginning of period 76,697 95,029
------------ ------------
End of period (Including accumulated undistributed
net invesment income of $0, and $0 respectively) $ 81,182 $ 76,697
============ ============
The accompanying notes are an integral part of these financial statements.
Copyright 2003, IPS Advisory, Inc.
9
IPS iFUND
FINANCIAL HIGHLIGHTS
Selected per share data is based on a share of common stock outstanding throughout each period.
------------ ------------ ------------
DECEMBER 29,
2000 (1)
YEAR ENDED YEAR ENDED THROUGH
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
2003 2002 2001
------------ ------------ ------------
PER SHARE DATA:
Net asset value, beginning of period $ 5.04 $ 7.09 $ 12.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss (0.03) (0.05) (0.02)(2)
Net realized and unrealized
gain (loss) on investments 1.49 (2.00) (4.89)
------------ ------------ ------------
TOTAL FROM INVESTMENT OPERATIONS 1.46 (2.05) (4.91)
------------ ------------ ------------
Net asset value, end of period $ 6.50 $ 5.04 $ 7.09
============ ============ ============
Total return 28.97% (28.91)% (40.92)%(3)
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period (000's) $ 81 $ 77 $ 95
Ratio of net operating expenses to average net assets 1.40% 1.40% 1.40%(4)
Ratio of net investment income to average net assets (0.58)% (0.83)% (0.49)%(4)
Portfolio turnover rate 150.57% 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 2003, IPS Advisory, Inc.
10
IPS iFUND
NOTES TO THE FINANCIAL STATEMENTS
NOVEMBER 30, 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"). The principal
investment objective of the Fund is long-term capital growth. The Fund is
non-diversified and therefore can invest a greater percentage of its assets in
fewer securities than a diversified fund. To the extent the Fund invests its
assets in fewer securities, the Fund is subject to greater risk of loss if those
securities decline in value. Nonetheless, the Fund intends to qualify as a
registered investment company for income tax purposes, which means the Fund
intends to fulfill the Internal Revenue Code diversification requirements
applicable to registered investment companies. 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 accounting principles generally accepted in the
United States of America ("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 GAAP.
(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.
(e) Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
financial statements; and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those
estimates.
3. SHARES OF COMMON STOCK
Transactions in shares of common stock were as follows:
Copyright 2003, IPS Advisory, Inc.
11
YEAR ENDED YEAR ENDED
NOVEMBER 30, NOVEMBER 30,
2003 2002
IPS iFUND $ Shares $ Shares
-------- -------- -------- --------
Shares sold $ 9,602 1,642 $ 14,770 2,166
Shares issued in reinvestment
of dividends -- -- -- --
Shares redeemed (25,518) (4,382) (1,788) (351)
-------- -------- -------- --------
Net increase (decrease) ($15,916) (2,740) $ 12,982 1,815
======== ========
SHARES OUTSTANDING:
Beginning of period 15,225 13,410
-------- --------
End of period 12,485 15,225
======== ========
4. INVESTMENT TRANSACTIONS
Purchases and sales of securities for the year ended November 30, 2003,
excluding short-term investments, aggregated $99,086 and $110,116,
respectively. There were no purchases or sales of long-term U.S. government
securities.
At November 30, 2003, gross unrealized appreciation and depreciation of
investments, based on cost for federal income tax purposes of $63,674 were
as follows:
Unrealized appreciation $ 17,478
Unrealized depreciation (517)
--------
Net unrealized appreciation
on investments $ 16,961
========
At November 30, 2003, the Fund had an accumulated net realized capital loss
carryover of $57,624, with $23,202 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 earned
by IPS Advisory, Inc. during the year ended November 30, 2003 were $1,091.
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 November 30,
2003, Gregory A. D'Amico beneficially owned 29% of the Fund.
Copyright 2003, IPS Advisory, Inc.
12
7. DISTRIBUTABLE EARNINGS
There were no distributions during the fiscal years 2003 and 2002.
As of November 30, 2003, 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) (57,624)
Unrealized appreciation/(depreciation) 16,961
----------
$ (40,663)
----------
INDEPENDENT AUDITOR'S REPORT
----------------------------
To The Shareholders and
Board of Trustees
IPS iFund
We have audited the accompanying statement of assets and liabilities of IPS
iFund, including the schedule of portfolio investments, as of November 30, 2003,
and the related statement of operations for the year then ended, and the
statement of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the two years in the period then
ended and for the period from December 29, 2000 (commencement of operations)
through November 30, 2001. 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
investments and cash held by the custodian as of November 30, 2003 by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
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 IPS
iFund as of November 30, 2003, the results of its operations for the year then
ended, and the changes in its net assets for each of the two years in the period
then ended and its financial highlights for each of the two years in the period
then ended and for the period of December 29, 2000 (commencement of operations)
through November 30, 2001, in conformity with accounting principles generally
accepted in the United States of America.
McCurdy & Associates CPA's, Inc.
Westlake, Ohio
December 16, 2003
INDEPENDENT TRUSTEES (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
# OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX OTHER
HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN DIRECTORSHIPS
NAME, ADDRESS AND AGE THE TRUST TIME SERVED DURING PAST FIVE YEARS BY TRUSTEE HELD BY TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------------------
Veenita Bisaria, 41, Independent Since Financial Analyst, Tennessee 3 None
12416 Fort West Drive Trustee inception Valley Authority
Knoxville, TN 37922 of Funds (1997-Present); Director of
in 1995 Business Planning at Lockheed
Martin Energy Systems (Prior
to 1997); Chartered Financial
Analyst (CFA).
- ------------------------------------------------------------------------------------------------------------------------------------
Woodrow Henderson, 44, Independent Since Director of Planned Giving for 3 None
6504 Clary Lane Trustee inception the University of Tennessee at
Knoxville, TN 37919 of Funds Knoxville.
in 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Billy Wayne Stegall, Jr., 45, Independent Since Account Executive, Colonial 3 None
316 Stonewall Street Trustee inception Life & Accident
Memphis, TN 38112 of Funds (1995-Present); Teacher of
in 1995 history and economics at
Austin East High School in
Knoxville, Tennessee (Prior to
1995).
- ------------------------------------------------------------------------------------------------------------------------------------
Copyright 2003, IPS Advisory, Inc.
INTERESTED TRUSTEES & OFFICERS (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
# OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX OTHER
HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN DIRECTORSHIPS
NAME, ADDRESS AND AGE THE TRUST TIME SERVED DURING PAST FIVE YEARS BY TRUSTEE HELD BY TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------------------
Greg D'Amico*, 39, President, Since President of IPS Advisory, 3 IPS Advisory, Inc.;
1225 Weisgarber Road, Chief inception Inc. Director of Young
Suite S-380, Financial of Funds Entrepreneurs'
Knoxville, TN 37909 Officer, in 1995 Organization (YEO);
Treasurer Personal & Child
and Trustee Safety, LLC (PCS)
- ------------------------------------------------------------------------------------------------------------------------------------
Robert Loest*, 59, Vice Since Chief Executive Officer of IPS 3 IPS Advisory, Inc.
1225 Weisgarber Road, President, inception Advisory, Inc.; Financial
Suite S-380, Secretary of Funds Analyst Charter; Ph.D. in
Knoxville, TN 37909 and Trustee in 1995 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 At least once
Independent Trustee full Board with respect to annually.
Woodrow Henderson, accounting, auditing and Last meeting
Independent Trustee financial matters affecting occurred on
Billy Wayne Stegall, Jr., the Trust. January 25,
Independent Trustee 2002.
Copyright 2003, IPS Advisory, Inc.
ITEM 2. CODE OF ETHICS.
See below. "The Registrant's Code of Ethics is attached hereto as an exhibit. As
of the end of the period covered by this report, the Registrant has adopted a
code of ethics that applies to its principal executive officer, principal
financial officer, principal accounting officer or persons performing similar
functions. No waivers from a provision of the Code were granted during the
period covered by this report."
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The registrant's board of trustees has determined that it does not have an audit
committee financial expert serving on its audit committee. At this time, the
registrant believes that the experience provided by each member of the audit
committee together offer the registrant adequate oversight for the registrant's
level of financial complexity.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The aggregate audit fees billed to The IPS Funds for the last two fiscal years
by the principal accountant were $18,688.00 and $18,354.00 respectively.
Audit-Related Fees. There were no audit related fees, other than those noted
under "Audit Fees" Disclosure, billed to The IPS Funds for the last two fiscal
years by the principal accountant.
Tax Fees. There were no fees billed to the fund for professional services for
tax compliance, tax advice or tax planning.
All Other Fees. The aggregate non-audit fees billed by the Registrant's
principal accountant for the last two fiscal years were $1,225.00 for 2003.
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.
(a) The Principal Executive Officer and the Principal Financial Officer have
concluded that the registrant's disclosure controls and procedures are effective
based on their evaluation of the disclosure controls and procedures as of a date
within 90 days of the filing of this report.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the registrant's fiscal half-year that have
materially affected, or are reasonably likely to materially affect, the
registrant's internal control over financial reporting.
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)* /s/ Greg D'Amico
PRESIDENT AND TREASURER
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Date 2/5/2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ Greg D'Amico
PRESIDENT
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Date 2/5/2004
By (Signature and Title)* /s/ Greg D'Amico
TREASURER
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Date 2/5/2004
* Print the name and title of each signing officer under his or her signature.