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)
CITCO Mutual Fund Services, Inc.
83 General Warren Boulevard, Suite 200
Malvern, PA 19355
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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: 11/30/2004
Date of reporting period: 5/31/2004
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 policy making 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.
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IPS FUNDS 2004 SEMI-ANNUAL REPORT
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Dear Fellow Shareholders:
Annual and Semiannual Reports, while they can be informative, are
necessarily limited in the amount of information they can impart, because they
only come out twice a year and tend to be backward-looking - how we have done
and what we owned on the date of the report. While it's nice to know, it's
history. With IPS Funds you can stay far more current than that. Some funds
actually send out reports quarterly, which is an improvement, but still in our
view, not frequent enough.
IPS Funds enables you to keep up with what we are buying and selling
each week, and why, as well as our most current view of where we are, where we
think the stock market and economy are heading, and why. To get in the loop, be
sure to visit our weekly Portfolio Manager Diary at
http://www.ipsfunds.com/ipsdiary/ipsd_view.asp. You can also request to have it
sent to you via email. The Diary frequently goes into considerable detail on
individual stocks, as well as our investment methodology. It updates investors
regarding what we are doing to seek to maximize our risk-adjusted returns.
In addition, unlike most other mutual funds, you can also view the
current portfolio holdings as they change daily at
http://www.ipsfunds.com/holdings/ipsmx.asp for IPS Millennium Fund, and at
http://www.ipsfunds.com/holdings/ipsfx.asp for IPS New Frontier Fund. This is
the Web, not the "Gone World" of Lawrence Ferlingetti where it was expensive to
create and distribute information. There's no reason investors shouldn't be kept
current on what they own. At IPS Funds, we do everything we reasonably can to
keep you informed.
ANALYSIS OF THE STOCK MARKET
You will note in the discussion for each fund below that our cash
position in both funds has increased considerably since our 2003 Annual Report
to you. The reason is simple: we have had a much more difficult time finding
stocks that meet our buy criteria than we did a year ago. As we discussed in our
2003 Annual Report, we have worked hard since 2000 to create a more disciplined
buy and sell investment methodology. The higher cash levels are simply the
fallout of following our discipline.
To recap briefly, in 2001 we began raising our Free Cash Flow (FCF)
yield bar, from -1% up finally to 9%. We again increased our FCF yield bar to
12% in May - the first increase in a year and a half - and increased our
discount rate to reflect higher inflation and a 6.0% yield on the 10-yr. T-Note
rate. This has the effect of requiring us to buy stocks at a price that is at
least a 30% discount to our estimate of fair value based on discounted FCFs, as
has been the case since 2002. Furthermore, when a stock reaches our estimate of
fair value, we begin looking for an exit.
This strategy is intended to ensure that the stocks in your funds, as a
group, are at a discount to estimated fair value. We believe this has for two
years now done a good job of minimizing our risk relative to the stock market,
while still allowing us to earn good returns.
It also shifted our methodology from a market-based, relative return
strategy (more appropriate to structural bull markets like we experienced in
1982 - 1999), to a money market-based, absolute return strategy (more
appropriate to structural bear markets like the one we entered in 2000). We
would like to emphasize that this is not a "value" approach in the commonly
understood sense. We will buy growth stocks no less than any other kind, as long
as they meet our valuation criteria.
Many of your stocks reached or passed our estimate of fair value since
the 2003 Annual Report, and we sold them. Increasingly, though, we cannot find
stocks that are similarly undervalued with which to replace them. As a result,
cash has reached 26.28% for Millennium Fund and 33.38% for New Frontier Fund.
The reason we cannot find new stocks that meet our buy criteria appears
to be that the fundamentals have not kept pace with stock prices. In 2003 stocks
appreciated significantly, but the fundamentals underlying those stock prices
did not. Furthermore, liquidity in many sectors of the stock market is
decreasing, which we view as negative for stocks. We believe liquidity drives
the market in anything, and when it starts decreasing it is generally not a good
sign. This is a result chiefly
COPYRIGHT 2004, IPS ADVISORY, INC. 1
of uncertainty we think. When investors are uncertain of the value of a
security, they are reluctant to buy or sell.
There are a number of reasons for this, all pointing to greater
uncertainty in our view. The economic and fiscal stimuli of the last couple of
years, and their effects, are mostly behind us. There is uncertainty regarding
whether it primed the economic pump sufficiently for the economy to continue on
its own without further massive stimulus, which we can no longer provide.
China is trying hard to reduce the growth rate of an overheated
economy, which will negatively affect the rest of the world, particularly SE
Asia, which has come to rely on China for much of their economic stimulus the
way the rest of the world has come to rely on the U.S. There is growing
uncertainty over how much of an effect this will have on the rest of the world.
Growth in much of the developed world is slowing, especially in
Australia and Europe. Will it continue to get worse, or recover? More
uncertainty. Most of the gains in earnings per share (EPS) over the last two
years have been the result of outsourcing, headcount reduction and the
implementation of technological efficiencies promised in the 1990s, but until
now not fully utilized. Where's future growth in EPS going to come from?
OUR CONCLUSIONS
The economy has really not delivered anywhere near the fundamental
growth in corporate sales and profits that we have seen reflected in the gains
in the stock market. Top-line sales have grown but slowly. EPS gains have been
better, but not due to robust sales growth or capacity constraints that allow
companies to raise prices. This tells us that the short, cyclical bull move of
2003 was due mostly to a deeply oversold condition in the market and massive
economic stimulus, and that gains going forward will be much harder to come by
because the underlying fundamental improvements are not there to support further
gains in our view.
There is some evidence for this premise in the stocks we have owned. To
illustrate this point, we took a look at ten of our best gainers over the last
six months. Most we have sold, but three, KELLWOOD (KWD), REGAL ENTERTAINMENT
(RGC) and KAYDON (KDN) are still owned. We have taken some profits in KELLWOOD
and KAYDON because liquidity was decreasing. Nevertheless, we were curious what
comparison of the sales gains over the last four quarters with the price gains
in the stocks would show. Presumably the biggest price gains are due to the best
sales and profitability improvements.
The result is illuminating, as you can see from the chart below:
COMPANY COMPANY'S COMPANY'S FUND'S COST FUND'S
Q1 '03 SALES Q1 '04 SALES OF SHARES PROFIT/VALUE
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Kellwood (KWD) $ 537,300,000 $ 513,915,000 $ 2,470,327 $ 2,870,294
Regal Entertainment (RGC) 528,100,000 540,500,000 3,682,592 5,093,900
Kaydon (KDN) 68,500,000 83,300,000 1,867,544 2,437,253
Watsco (WSO) 266,300,000 286,400,000 1,323,368 1,983,523
Bandag Tire (BDG) 178,300,000 175,291,000 1,567,155 1,774,040
Freeport MacMoRan (FCX) 524,600,000 360,200,000 2,228,867 5,893,681
Carpenter Technology (CRS) 234,600,000 280,400,000 1,441,000 1,851,501
Ball Corp. (BLL) 910,200,000 1,193,500,000 3,562,867 4,611,336
Benchmark Electronics (BHE) 468,200,000 487,051,000 2,492,506 3,896,858
Precision Cast Parts (PCP) 501,600,000 517,600,000 2,273,016 2,932,290
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TOTALS: $4,217,700,000 $4,438,157,000 $22,909,242 $33,344,676
THE ABOVE TABLE ISN'T MEANT TO IMPLY ANYTHING REGARDING THE LONG-TERM
PROFITABILITY OF THE FUNDS. THE TABLE IS ONLY INTENDED TO ILLUSTRATE OUR VIEW
THAT MUNCH OF THE RECENT STOCK MARKET APPRECIATION WAS NOT DUE TO A COMPARABLE
RECOVERY IN COMPANY BUSINESS. We deliberately selected 10 of our most profitable
positions to see how they correlated with sales increase. As you can see, sales
for the last four quarters were up 5.2% (not bad, actually), but the stock price
increase associated with that sales gain was +45.6%. In fact, except for the
$5.05 in special dividends from REGAL (we did not include the most recent
additional $5.00 special dividend), we didn't include dividends in our gains
above In our opinion, the market in 2003 clearly did not reflect economic
fundamentals, but a rebound from a deeply oversold position. Please see pages
12-14 for a complete listing of the Fund's holdings as of May 31,2004 and pages
4&7 for the fund's standardized performance.
COPYRIGHT 2004, IPS ADVISORY, INC. 2
There has also not been a marked increase in either Cash From
Operations, or in Free Cash Flow, although this is likely due to inventory
rebuilding and increased Accounts Receivable from a turnaround in sales. Thus,
investors, in our judgment, should be extremely wary of expecting returns even
remotely like 2003 for some time to come. This has become a stock picker's
market, and the greatest profits will go to those investors who are the most
highly disciplined in our opinion.
THE FUTURE, THROUGH A GLASS DARKLY
Somewhere along the way over the next several years we believe the
stock market will reach a long-term bottom, although there is no way to know
exactly when. Only the history books will reveal that. But at that moment, on
that day, we believe the long term potential return on stocks will likely be
significantly higher than historic norms.
The last such time was on a summer's day in August, 1982 when inflation
was soaring, unemployment had passed 10% going in the wrong direction, Communism
and the Japanese economic miracle both looked unbeatable, and things were black
indeed. The time before that it was a Spring day in April of 1942 shortly after
Pearl Harbor, and the nation was in a war for its very existence. Such periods
come rarely in an investor's life, at times when absolutely no one wants to
invest in stocks, and perhaps only once when you have finally accumulated enough
money to really make a difference.
It's our view, that the biggest part of the market crash is behind us,
but only time will tell. We believe investors in consultation with their
financial advisors should approach equity investments from a long-term
perspective.
Millennium and New Frontier Funds have put in place the discipline
designed to achieve competitive long-term results, to give us the best chance of
success possible. Thank you for your patience and loyalty.
ROBERT LOEST, Ph.D., CFA GREGORY A. D'AMICO
SENIOR PORTFOLIO MANAGER PRESIDENT
COPYRIGHT 2004, IPS ADVISORY, INC. 3
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IPS MILLENNIUM FUND
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2004 PERFORMANCE & RISK ANALYSIS
IPS MILLENNIUM FUND outperformed the S&P 500 in the first half of FY
2004 as you can see in FIG. 1. However, our monthly risk-adjusted returns fell
relative to the S&P 500, and our Sharpe Ratio, while still strongly positive,
fell in May. The reason was that volatility (standard deviation of monthly
returns - see FIG. 2) of the S&P 500 fell below that of Millennium Fund during
the first half. As a result, we have made adjustments to seek a superior
risk-adjusted return and further lower the volatility. We describe them so that
our investors can have a better understanding of our risk management discipline.
Whenever the risk of the fund (relative to the market) doesn't pay off,
we make whatever changes are needed to work toward reducing volatility,
improving absolute returns and risk-adjusted returns, and focusing on an
absolute return benchmark of the 10-yr. T-Note rate. We have described in
previous reports, and in the Diary, our risk measurement and management
discipline. This is to measure the result of our portfolio buys and sales in
terms of volatility, Sharpe Ratios and other statistical measures of risk and
risk-adjusted returns, and whenever our performance begins to deteriorate
relative to the S&P 500, and relative to an absolute return benchmark (the
10-yr. T-Note), to make changes to seek to outperform on a risk-adjusted basis.
Two courses are open to us. We can attempt to increase return relative to risk,
or to reduce risk relative to return. Because we are having a difficult time
finding companies that meet our buy criteria, the only path open to us is to
reduce our risk.
IPS MILLENNIUM ANNUALIZED TOTAL RETURNS
5/31/04
[TABLE BELOW REPRESENTS A BAR GRAPH IN THE ORIGINAL REPORT.]
1 3 5
YEAR YEARS YEARS INCEPTION
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IPS MILLENNIUM FUND 20.65% -12.64% -7.09% 9.50%
S&P 500 INDEX 18.34% -2.12% -1.53% 11.80%
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. For more current performance
information, please call 1-800-232-9142 or visit the fund's website at
www.ipsfunds.com.
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AVERAGE ANNUAL RETURNS AS OF 5/31/04
6 1 3 5 INCEPTION
MONTHS YEAR YEARS YEARS (01/03/95)
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IPS MILLENNIUM FUND 5.49% 20.65% -12.64% -7.09% 9.50%
S&P 500 INDEX 6.94% 18.34% -2.12% -1.53% 11.80%
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COPYRIGHT 2004, IPS ADVISORY, INC. 4
We have raised our assumption on the 10-yr. T-Note rate from 4.5% to
6.0%, to reflect a significant rise in interest rates over the next year or so.
This increases our discount rate to 8.5% for most stocks, from 7.0% previously,
lowering the price at which we can buy them. In May we raised our Free Cash Flow
(FCF) Yield Bar from 9.0% to 12.0%, in order to ensure we are still paying no
more than a 30% discount to fair value based on FCF. The intent is to reduce our
downside risk and improve our upside potential. We will know if these measures
are sufficient within a few months.
In effect, this is much like steering a sailing ship. One must
frequently adjust for currents, changes in wind and other factors by changing
the ship's speed, ballast, rudder position, how much sail to carry and so forth.
Sometimes it takes some fiddling before the captain knows just what combination
of changes produce the best performance under a particular set of conditions,
and then it takes a while to be certain. Funds are no different, except that the
conditions generally change much more slowly, and persist for longer periods of
time. However, they can be just as unpredictable, and a measurement system must
be in place to indicate when and what changes should be made, and monitor and
measure the success or failure of the changes.
IPS MILLENNIUM RISK VS. BROAD STOCK MARKET
5/31/04
[PLOT POINTS TO THE LINE CHART TO COME]
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 over the course of the year
in where we are finding value. Massive fiscal and monetary stimulus, and a huge
economic recovery, especially in China and SE Asia, have produced major gains
for many industrial and basic materials companies. They have also pushed stock
prices up to the point that it is becoming more difficult to find good companies
that meet our investment discipline. Furthermore, risk has increased due to
global geopolitical instability. As you can see in the pie-chart below, cash has
grown from 21.0% of the fund in the last report to 26.5% as of 5/31/04. This is
simply the result of following our investment discipline. If we cannot find
stocks that meet our buy criteria and that will enable us to seek to outperform
the market with a high degree of probability, in our opinion, then we should be
in cash.
We have taken some very large profits in the INDUSTRIALS, MATERIALS,
and INFORMATION TECHNOLOGY sectors in particular, with significant gains in
BENCHMARK ELECTRONICS (BHE) and FREEPORT MACMORAN (FCX). The result is that our
INDUSTRIALS sector has shrunk from 15.3% of the fund to 4.2%; INFORMATION
TECHNOLOGY is now 4.8% vs. 11.0% formerly; and MATERIALS is now 2.2% vs. 16.1%
six months ago.
COPYRIGHT 2004, IPS ADVISORY, INC. 5
Sectors that have seen growth in assets include FINANCIALS, moving from
5.5% six months ago to 18.8% currently, and UTILITIES, with a smaller growth
from 4.8% to 9.0% of assets currently. We have also made smaller additions to
HEALTHCARE. We sold FIRST HEALTH GROUP (FHCC) for a loss because free cash flow
began deteriorating. We replaced it with KINDRED HEALTHCARE (KIND) and SUNRISE
SENIOR LIVING (SRZ), in order to seek to capitalize on the huge demographic
trend of a rapidly aging population affecting not only the U.S., but other
Western societies, Russia, Japan and China.
[TABLE BELOW REPRESENTS A PIE CHART IN THE ORIGINAL REPORT.]
26.5% CASH 13.9% CONSUMER DISCRETIONARY
1.8% CONSUMER STAPLES 3.0% ENERGY
18.8% FINANCIALS 6.8% HEALTHCARE
4.2% INDUSTRIALS 4.8% INFORMATION TECHNOLOGY
9.2% TELECOMMUNICATIONS 2.2% MATERIALS
9.0% UTILITIES
FIGURE 3. Illustration of sector allocation among portfolio stocks. IPS Funds
employs sector definitions that are not consistent with those used by Standard &
Poor's. The pie chart above is only a snapshot of allocations as of 5/31/04, and
percentages should be expected to change over time.
At the present level of the stock market we do not anticipate becoming
more fully invested, although we will simply follow our discipline wherever it
leads us in terms of where we are invested and how much. We have benefited over
the last 20-plus years from a huge decline in interest rates. This has driven
most asset values much higher, including homes, stocks and bonds. It has taken
attention away from the importance of income, and of careful risk management,
because everything went up.
We believe this will change in 2004, with the bottoming of interest
rates in 2003 and a rise in the 10-yr. T-Note rate (our proxy for risk-free
returns with which stocks must compete) of at least a percent, and perhaps two
percent over the next year or so, and an increase in the risk premium demanded
by investors for investing in stocks. This is likely to be hard on stocks,
especially in a secular bear market. Stock and other asset prices tend to do
well even when interest rates rise, as long as we are in a secular, or
structural, bull market. However, this is emphatically not the case in a
structural bear market. Fed rate increases tend to clobber the stock market.
This is a major part of the longer term rationale behind our increase in our
discount rate, and our recently more stringent valuation discipline.
There are other changes we think will not be helpful for stock or bonds
over the coming years. Among them are a soaring national debt and obligations to
retirees that our government simply cannot meet, and these will likely cause the
government to start inflating their way out of the enormous debt burden. This is
no less true of China, Western Europe and the English-speaking world. This has
inevitably been the recourse of all governments throughout history, and we see
nothing to indicate that it will not be the case this time either.
The huge, positive aspect of this is that we strongly believe these
conditions will, sometime in the future, create a potential return environment
for stocks that most of us are unlikely to see again in our lifetimes. Such
unusual opportunities
COPYRIGHT 2004, IPS ADVISORY, INC. 6
are the pole of highly chaotic geopolitical and economic conditions, and
investors must be prepared for them when they come. The problem is that
investors can never be certain of the turn until some years after the fact. We
believe this means staying more or less fully invested until that time comes,
but in very conservative stocks and investment methodologies that seek to
minimize the downside risk and maximize our income while we wait.
Thank you for the faith you've shown in sticking by us in the tough
early years of a new secular bear market. We believe that our improved sell
discipline will allow our funds to better weather the inevitable storms without
sacrificing returns.
ROBERT LOEST, PH.D., CFA
SENIOR PORTFOLIO MANAGER
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IPS NEW FRONTIER FUND
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2004 PERFORMANCE & RISK ANALYSIS
IPS NEW FRONTIER FUND outperformed the S&P 500 as you can see from
FIGURE 4, and on an absolute return basis for the first six months of 2004. It
has also dramatically shrunk the 3-year annualized return deficit, from
approximately 19% in our last report to 10.5% now. In addition, New Frontier's
SHARPE RATIO (a measure of the margin by which a fund outperforms a risk-free
investment - in our case the 10-yr. T-Note) not only consistently positive, but
higher than that of the overall stock market as represented by the S&P 500, and
was increased throughout the first half of this fiscal year.
Nevertheless, as you can see from FIGURE 5, the market's volatility
recently dropped below that of the fund. If this continues, it will likely
translate into a smaller Sharpe Ratio and a lower risk-adjusted return for the
fund. We have, as a result, increased the discount rate on future Free Cash
Flows (FCFs), forcing us to pay less for companies we like than we have been
doing. For those of you who are interested, we describe this in more detail in
the same section of the report for IPS Millennium Fund above.
IPS NEW FRONTIER ANNUALIZED RETURNS
5/31/04
[TABLE BELOW REPRESENTS A BAR GRAPH IN THE ORIGINAL REPORT.]
1 3 5
YEAR YEARS YEARS INCEPTION
------ ------- ------- -----------
NEW FRONTIER FUND 27.60% -12.72% -14.64% - 6.62%
S&P 500 INDEX 18.34% -2.12% -1.53% 1.45%
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. For more current performance
information, please call 1-800-232-9142 or visit the fund's website at
www.ipsfunds.com.
COPYRIGHT 2004, IPS ADVISORY, INC. 7
AVERAGE ANNUAL RETURNS AS OF 5/31/04
6 1 3 5 INCEPTION
MONTHS YEAR YEARS YEARS (08/03/98)
------ ------ ------- ------- ----------
NEW FRONTIER FUND 7.71% 27.60% -12.72% -14.64% - 6.62%
S&P 500 INDEX 6.94% 18.34% -2.12% -1.53% 1.45%
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Our prospectus for New Frontier allows us to be more aggressive than
Millennium. So far this year, more aggressive funds with a valuation approach
have done significantly better than the overall market, which explains New
Frontier's better risk-adjusted statistics for the first half, but we do not
expect this to last much longer. The "growth" sectors of the stock market are
clearly selling for far more than fair value, and indeed at levels much higher
than has historically been the case, and the risk-reward potential is not only
lower than that of the overall stock market, but the downside risk is greater
than upside potential return. Our discipline will either confirm that hypothesis
or not, and our FCF Yield Bar discipline will be adjusted accordingly.
CHANGES IN THE FUND
New Frontier has undergone some major changes in where we are finding
value over the course of the year. One of our stocks, NEW ENGLAND BUSINESS
SERVICES (NEB) was bought out by DELUXE CORP. (DLX) for a large gain. Because it
was significantly more undervalued than DLX, because NEB reached the proposed
buyout price intra-day, and because the buyout price was almost exactly our
estimate of fair value, clearly there wasn't much point in continuing to hold
it, so we sold for a large gain after only a short holding period.
IPS NEW FRONTIER RISK VS. BROAD STOCK MARKET
5/31/04
[PLOT POINTS TO THE LINE CHART TO COME]
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.
Because it is more difficult to find higher growth companies that meet
New Frontier's criteria for purchase than it is to find slower-growth dividend
payers for Millennium, because of the overvaluation of the growth segment of the
stock market, cash in New Frontier is significantly higher than it was in our
last report to you, and higher than in Millennium. Cash in New Frontier is now
40.6%, up from 15.4% in the last report, as you can see from the pie-chart
sector graphic in FIGURE 6 below.
COPYRIGHT 2004, IPS ADVISORY, INC. 8
Because of the high cash position, we'd like to repeat a point we made
last time. 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 what we believe to be fair value, then look for
what we consider are superior companies that are selling for less than fair
value. Those are the ones we buy. We simply go where the value is, and we don't
avoid undervalued, what we believe to be 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.
[TABLE BELOW REPRESENTS A PIE CHART IN THE ORIGINAL REPORT.]
40.6% CASH 13.9% CONSUMER DISCRETIONARY
.7% CONSUMER STAPLES 12.6% FINANCIALS
7.4% HEALTHCARE 8.9% INDUSTRIALS
11.7% INFORMATION TECH 1.8% TELECOM SERVICES
2.4% MATERIALS
FIGURE 6. Illustration of sector allocation among portfolio stocks. IPS Funds
employs sector definitions that are not consistent with those used by Standard &
Poor's. The pie chart above is only a snapshot of allocations as of 5/31/04, and
percentages should be expected to change over time.
New Frontier Fund has sold off all its ENERGY sector companies, and
sold partial amounts of KELLWOOD (KWD) and REGAL ENTERTAINMENT (RGC) for nice
gains. REGAL is an interesting story. They were formed out of bankruptcy in 2001
by financier Philip Anschutz to become the dominant theatre chain in America. We
like the value play because everyone had been frightened off by the bankruptcy
of virtually every major theatre chain in the country due to 20-plus years of
overbuilding. The company had little debt and had been transformed into a huge
free cash flow cow. It also had some opportunities in a digitally-connected
advertising world that didn't exist before all the theatre bankruptcies, such as
being able to charge far more for advertisements from national firms, not car
dealers and other local merchants, which until the digital age had paid much
lower rates because it was purely local advertising.
Subsequently, RGC paid out $10.05 in two special dividends, following
which the stock was only down about $1.50 from our purchase price and paying an
easily-covered dividend yielding 4.0%. Since we only paid $19.38/share for RGC,
the $10 dividend was a huge return of capital with little reduction in the stock
price. This is the kind of opportunity one can sometimes find in the stock
market when most investors have been frightened off, because cash flow analysis
of the kind we do at IPS Funds is intended to tell us whether investors have a
reason to be frightened, or if investors are being unjustifiably nervous.
Another factor that has surfaced recently in the stock market is that
liquidity for many the fund's holdings is drying up, especially in thinly-traded
stocks. This is inevitably a danger sign, and is a big part of the reason we
have lightened up on several companies with low daily trading volumes such as
BANDAG (BDG), KELLWOOD (KWD) and KAYDON (KDN). Investors emphatically do not
want to be caught with several days trading volume in a stock that's going down
and that they need to get out of.
COPYRIGHT 2004, IPS ADVISORY, INC. 9
In the interests of saving money and trees, we refer you to a fuller
discussion of fund changes for Millennium fund above, since the rest of the
changes are similar for both funds.
ROBERT LOEST, PH.D., CFA
SENIOR PORTFOLIO MANAGER
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** 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. For more current performance
information, please call 1-800-232-9142 or visit the fund's website at
www.ipsfunds.com.
** 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 VALUE LINE ARITHMETIC COMPOSITE INDEX differs from the S&P 500 in that it is
an equal-weighted index of approximately 1,700 stocks of all different sizes
that is more broad-based than the S&P 500 INDEX. Neither the VALUE LINE
ARITHMETIC COMPOSITE INDEX nor the S&P 500 COMPOSITE INDEX figures 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. At any
time you may view the most recent fund portfolio securities on our website at
www.ipsfunds.com.
** 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
Fax: 865.544.0630 Email: info@ipsfunds.com Knoxville, TN 37909
- --------------------------------------------------------------------------------
A NOTE ABOUT DUPLICATE MAILINGS
You will receive the Fund's shareholder report every three 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.
COPYRIGHT 2004, IPS ADVISORY, INC. 10
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
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.
You can also review or obtain a copy of the Proxy Voting Procedures by visiting
the Securities and Exchange Commission's Public Reference Room in Washington,
D.C. or by sending your request and a duplicating fee to the Public Reference
Room Section of the Commission, Washington, DC 20549-6009. Information on the
operation of the Public Reference Room may be obtained by calling the Commission
at 1-202-942-8090 or by sending a message via E-mail to publicinfo@sec.gov.
Reports and other information about the Funds can also be viewed online on the
Commission's Internet site at http://www.sec.gov.
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 2004, IPS ADVISORY, INC. 11
THE IPS MILLENNIUM FUND
SCHEDULE OF INVESTMENTS
MAY 31, 2004 (UNAUDITED)
COMMON STOCKS - 73.05% MARKET
SHARES VALUE
----------- -----------
CONSUMER DISCRETIONARY - 13.77%
Eastman Kodak Co. 140,000 $ 3,665,200
Kellwood Co. 50,000 2,035,000
Regal Entertainment Group 190,000 4,066,000
-----------
9,766,200
-----------
CONSUMER STAPLES - 1.74%
Fresh Del Monte Produce, Inc. 50,000 1,234,000
-----------
ENERGY - 2.96%
Devon Energy Corp. 30,000 1,780,800
TC Pipelines LP 10,000 320,100
-----------
2,100,900
-----------
FINANCIALS - 18.63%
AFLAC, Inc. 70,000 2,842,000
American International Group, Inc. 40,000 2,932,000
Crawford & Co. 30,000 148,500
First Data Corp. 40,000 1,731,600
Phoenix Cos., Inc. 40,000 468,400
Rayonier, Inc. 50,000 2,100,000
W.R. Berkley Corp. 30,000 1,249,500
Washington Mutual, Inc. 40,000 1,747,200
-----------
13,219,200
-----------
HEALTH CARE - 6.74%
Kindred Healthcare, Inc.* 120,000 2,980,800
Sunrise Senior Living, Inc.* 50,000 1,802,000
-----------
4,782,800
-----------
INDUSTRIALS - 4.15%
Bandag, Inc. 30,000 1,271,100
Coinstar, Inc.* 50,000 870,000
Kaydon Corp. 30,000 804,900
-----------
2,946,000
-----------
INFORMATION TECHNOLOGY - 4.78%
Storage Technology Corp.* 120,000 3,390,000
-----------
MATERIALS - 2.20%
Carpenter Technology 20,000 608,400
Wellman, Inc. 120,000 954,000
-----------
1,562,400
-----------
TELECOM SERVICES - 9.15%
Alltel Corp. 50,000 2,531,500
CenturyTel, Inc. 40,000 1,195,600
Verizon Communications, Inc. 80,000 2,766,400
-----------
6,493,500
-----------
The accompanying notes are an integral part of these financial statements
THE IPS MILLENNIUM FUND
SCHEDULE OF INVESTMENTS
MAY 31, 2004 (UNAUDITED)
COMMON STOCKS - 73.05% - CONTINUED MARKET
SHARES VALUE
----------- -----------
UTILITIES - 8.93%
FPL Group, Inc. 60,000 $ 3,825,000
National Fuel Gas Co. 60,000 1,509,000
TransCanada Corp. 50,000 1,000,000
-----------
6,334,000
-----------
TOTAL COMMON STOCK (COST $50,598,432) 51,829,000
-----------
PRINCIPAL
-----------
SHORT-TERM INVESTMENTS - 26.28%
Federated Cash Trust Series II, Rate 0.15%(a) 18,640,553 18,640,553
-----------
TOTAL SHORT-TERM INVESTMENTS (COST $18,640,553) 18,640,553
-----------
TOTAL INVESTMENTS (COST $69,238,985) - 99.33% 70,469,553
OTHER ASSETS LESS LIABILITIES, NET - 0.67% 471,931
-----------
NET ASSETS - 100.00% $70,941,484
===========
(a) Variable rate security, the coupon rate shown represents the rate at May 31,
2004
* Non-income producing security
The accompanying notes are an integral part of these financial statements
THE IPS NEW FRONTIER FUND
SCHEDULE OF INVESTMENTS
MAY 31, 2004 (UNAUDITED)
COMMON STOCKS - 59.35% MARKET
SHARES VALUE
---------- ----------
CONSUMER DISCRETIONARY - 13.94%
Eastman Kodak Co. 4,000 $ 104,720
Kellwood Co. 2,000 81,400
Regal Entertainment Group 14,000 299,600
----------
485,720
----------
CONSUMER STAPLES - 0.71%
Fresh Del Monte Produce, Inc. 1,000 24,680
----------
FINANCIALS - 12.62%
AFLAC, Inc. 2,000 81,200
American International Group, Inc. 1,000 73,300
Crawford & Co. 15,000 74,250
Rayonier, Inc. 2,000 84,000
W.R. Berkley Corp. 2,000 83,300
Washington Mutual, Inc. 1,000 43,680
----------
439,730
----------
HEALTH CARE - 7.38%
Kindred Healthcare, Inc.* 6,000 149,040
Sunrise Senior Living, Inc.* 3,000 108,120
----------
257,160
----------
INDUSTRIALS - 8.86%
Bandag, Inc. 4,000 169,480
Coinstar, Inc.* 8,000 139,200
----------
308,680
----------
INFORMATION TECHNOLOGY - 11.65%
Storage Technology Corp.* 8,000 226,000
Volt Information Sciences, Inc.* 7,000 179,900
----------
405,900
----------
MATERIALS - 2.43%
Carpenter Technology Corp. 2,000 60,840
Wellman, Inc. 3,000 23,850
----------
84,690
----------
TELECOM SERVICES - 1.76%
Optical Cable Corp.* 5,000 26,895
Verizon Communications, Inc. 1,000 34,580
----------
61,475
----------
TOTAL COMMON STOCK (COST $2,006,411) 2,068,035
----------
The accompanying notes are an integral part of these financial statements
THE IPS NEW FRONTIER FUND
SCHEDULE OF INVESTMENTS
MAY 31, 2004 (UNAUDITED)
MARKET
SHARES VALUE
---------- -----------
SHORT-TERM INVESTMENTS - 33.38%
Federated Cash Trust Series II, Rate 0.15%(a) 1,162,836 $1,162,836
----------
TOTAL SHORT-TERM INVESTMENTS (COST $1,162,836) 1,162,836
----------
TOTAL INVESTMENTS (COST $3,169,247) - 92.73% 3,230,871
OTHER ASSETS LESS LIABILITIES, NET - 7.27% 253,140
----------
NET ASSETS - 100.00% $3,484,011
==========
(a) Variable rate security, the coupon rate shown represents the rate at May 31,
2004
* Non-income producing security
The accompanying notes are an integral part of these financial statements
THE IPS FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
MAY 31, 2004 (UNAUDITED)
IPS IPS
MILLENNIUM FUND NEW FRONTIER FUND
--------------- -----------------
ASSETS:
Investments, at value (cost $69,238,985 and $3,169,247, respectively) $ 70,469,553 $ 3,230,871
Receivable for capital shares sold 1,833 3,106
Receivable for investments sold 519,540 252,527
Dividends receivable 59,300 1,705
Interest receivable 2,250 156
------------- -------------
Total Assets 71,052,476 3,488,365
------------- -------------
LIABILITIES:
Payable for capital shares redeemed 27,001 217
Payable to Advisor 83,991 4,137
------------- -------------
Total Liabilities 110,992 4,354
------------- -------------
Total Net Assets 70,941,484 $ 3,484,011
============= =============
NET ASSETS CONSIST OF:
Capital stock 363,874,250 $ 21,706,189
Accumulated net realized loss on investments sold (294,123,667) (18,276,950)
Accumulated undistributed net investment loss (39,667) (6,852)
Net unrealized appreciation on investments 1,230,568 61,624
------------- -------------
Total Net Assets $ 70,941,484 $ 3,484,011
============= =============
Shares outstanding (no par value, unlimited shares authorized) 2,594,295 442,332
Net asset value, redemption price and offering price per share $ 27.35 $ 7.88
============= =============
The accompanying notes are an integral part of these financial statements.
THE IPS FUNDS
STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED MAY 31, 2004 (UNAUDITED)
IPS IPS
MILLENNIUM FUND NEW FRONTIER FUND
--------------- -----------------
INVESTMENT INCOME:
Dividend and interest income $ 522,581 $ 21,272
------------ ------------
Total investment income 522,581 21,272
------------ ------------
EXPENSES:
Investment advisory fee 536,165 25,390
------------ ------------
Total expenses 536,165 25,390
------------ ------------
NET INVESTMENT LOSS (13,584) (4,118)
------------ ------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investment transactions 10,183,477 580,077
Change in unrealized appreciation on investments (5,867,202) (328,720)
------------ ------------
Net realized and unrealized gain on investments 4,316,275 251,357
------------ ------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 4,302,691 $ 247,239
============ ============
The accompanying notes are an integral part of these financial statements.
THE IPS FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
IPS IPS
MILLENNIUM FUND NEW FRONTIER FUND
------------------------------- --------------------------------
SIX-MONTH SIX-MONTH
PERIOD ENDED PERIOD ENDED
MAY 31, 2004 YEAR ENDED MAY 31, 2004 YEAR END
(UNAUDITED) NOVEMBER 30, 2003 (UNAUDITED) NOVEMBER 30, 2003
------------ ----------------- ------------- -----------------
OPERATIONS:
Net investment income (loss) $ (13,584) $ 293,223 $ (4,118) $ (1,360)
Net realized gain on investment transactions 10,183,477 5,755,999 580,077 403,298
Change in unrealized appreciation (depreciation) on
investments (5,867,202) 5,165,824 (328,720) 317,337
----------------------------- -----------------------------
Net increase in net assets resulting from operations 4,302,691 11,215,046 247,239 719,275
----------------------------- -----------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (319,306) -- (2,734) --
Net realized gains -- -- -- --
----------------------------- -----------------------------
Total dividends and distributions (319,306) -- (2,734) --
----------------------------- -----------------------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 2,062,185 26,855,423 178,470 304,324
Shares issued to holders in reinvestment of dividends 310,882 -- 2,690 --
Cost of shares redeemed (14,798,894) (53,329,597) (608,043) (1,082,410)
----------------------------- -----------------------------
Net decrease in net assets resulting from capital share
transactions (12,425,827) (26,474,174) (426,883) (778,086)
----------------------------- -----------------------------
TOTAL DECREASE IN NET ASSETS (8,442,442) (15,259,128) (182,378) (58,811)
----------------------------- -----------------------------
NET ASSETS:
Beginning of period 79,383,926 94,643,054 3,666,389 3,725,200
----------------------------- -----------------------------
End of period* $ 70,941,484 $ 79,383,926 $ 3,484,011 $ 3,666,389
============================= =============================
* 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.
Six-Month
Period Ended Year Ended Year Ended Year Ended Year Ended Year Ended
May 31, 2004 November 30, November 30, November 30, November 30, November 30,
(Unaudited) 2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------- ------------
Per Share Data:
Net asset value, beginning of period $ 26.03 $ 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 1.43 3.52 (6.93) (19.72) (6.30) 28.45
---------- --------- --------- ---------- ---------- ----------
Total from investment operations 1.43 3.60 (7.00) (19.82) (6.26) 28.42
---------- --------- --------- ---------- ---------- ----------
Less distributions:
Dividends from net investment income (0.11) -- -- (0.04) -- (0.02)
Distributions from net realized gains -- -- -- -- (0.38) --
---------- --------- --------- ---------- ---------- ----------
Total dividends and distributions (0.11) -- -- (0.04) (0.38) (0.02)
---------- --------- --------- ---------- ---------- ----------
Net asset value, end of period $ 27.35 $ 26.03 $ 22.43 $ 29.43 $ 49.29 $ 55.93
========== ========= ========= ========== ========== ==========
Total return 5.49% 16.05% (23.79)% (40.25)% (11.36)% 103.23%
Supplemental data and ratios:
Net assets, end of period (000's) $ 70,941 $ 79,384 $ 94,643 $ 184,467 $ 409,247 $ 132,331
Ratio of net operating expenses to average
net assets 1.40% 1.40% 1.34% 1.19% 1.11% 1.39%
Ratio of net investment income (loss) to
average net assets (0.04)% 0.36% (0.27)% (0.23)% 0.08% (0.07)%
Portfolio turnover rate 43.34% 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.
IPS New Frontier Fund
Financial Highlights
Selected per share data is based on a share of common stock outstanding throughout each period.
Six-Month
Period Ended Year Ended Year Ended Year Ended Year Ended Year Ended
May 31, 2004 November 30, November 30, November 30, November 30, November 30,
(Unaudited) 2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------- ------------
Per Share Data:
Net asset value, beginning of period $ 7.37 $ 5.97 $ 8.45 $ 17.04 $ 29.39 $ 12.60
Income from investment operations:
Net investment income (loss) (0.02) (0.01) (0.08) (0.11)(1) (0.25)(1) (0.03)
Net realized and unrealized gain
(loss) on investments 0.54 1.41 (2.40) (8.48) (11.36) 16.84
---------- ---------- ---------- ----------- ----------- -----------
Total from investment operations 0.52 1.40 (2.48) (8.59) (11.61) 16.81
---------- ---------- ---------- ----------- ----------- -----------
Less distributions:
Dividends from net investment income (0.01) -- -- -- -- (0.02)
Distributions from net realized gains -- -- -- -- (0.74) --
---------- ---------- ---------- ----------- ----------- -----------
Total dividends and distributions (0.01) -- -- -- (0.74) (0.02)
---------- ---------- ---------- ----------- ----------- -----------
Net asset value, end of period $ 7.88 $ 7.37 $ 5.97 $ 8.45 $ 17.04 $ 29.39
========== ========== ========== =========== =========== ===========
Total return 7.00% 23.45% (29.35)% (50.41)% (40.92)% 133.37%
Supplemental data and ratios:
Net assets, end of period (000's) $ 3,484 $ 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% 1.40%
Ratio of net investment income
(loss) to average net assets (0.23)% (0.04)% (1.11)% (1.00)% (0.92)% (0.13)%
Portfolio turnover rate 48.58% 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
MAY 31, 2004 (UNAUDITED)
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.
(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.
IPS MILLENNIUM FUND AND IPS NEW FRONTIER FUND
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 2004 (UNAUDITED)
(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:
SIX-MONTH
PERIOD ENDED YEAR ENDED
MAY 31, 2004 NOVEMBER 30, 2003
IPS MILLENNIUM FUND $ Shares $ Shares
------ ------ ------ ------
Shares sold 2,062,185 75,523 26,855,423 1,210,673
Shares issued in reinvestment
of dividends 310,882 11,570 -- --
Shares redeemed (14,798,894) (542,183) (53,329,597) (2,380,589)
------------ -------- ------------ ----------
Net increase (decrease) ($12,425,827) (455,090) ($26,474,174) (1,169,916)
============ ============
SHARES OUTSTANDING:
Beginning of period 3,049,385 4,219,301
--------- ---------
End of period 2,594,295 3,049,385
========= =========
SIX-MONTH
PERIOD ENDED YEAR ENDED
MAY 31, 2004 NOVEMBER 30, 2003
IPS NEW FRONTIER FUND $ Shares $ Shares
------ ------ ------ ------
Shares sold $ 178,470 22,864 $ 304,324 48,206
Shares issued in reinvestment
of dividends 2,690 353 -- --
Shares redeemed (608,043) (78,568) (1,082,410) (174,976)
--------- ------- ---------- --------
Net increase (decrease) ($426,883) (55,351) ($778,086) (126,770)
========= ==========
SHARES OUTSTANDING:
Beginning of period 497,683 624,453
------- -------
End of period 442,332 497,683
======= =======
4. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of investments, excluding short-term
investments, by the Funds for the six-month period ended May 31, 2004, are
summarized below. There were no purchases or sales of long-term U.S.
government securities.
IPS MILLENNIUM FUND IPS NEW FRONTIER FUND
------------------- ---------------------
Purchases $26,608,634 $1,401,490
Sales $41,847,269 $2,689,518
IPS MILLENNIUM FUND AND IPS NEW FRONTIER FUND
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 2004 (UNAUDITED)
At May 31, 2004, gross unrealized appreciation and depreciation of investments
for tax purposes were as follows:
IPS MILLENNIUM FUND IPS NEW FRONTIER FUND
------------------- ---------------------
Unrealized appreciation $ 2,945,842 $137,695
Unrealized depreciation (1,715,274) (77,862)
---------- --------
Net unrealized appreciation on
investments $1,230,568 $ 59,833
========== ========
At May 31, 2004, the cost of investments for federal income tax purposes
for the Millennium Fund and the New Frontier Fund were $69,238,985 and
$3,171,038, 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.
The Funds' tax-basis capital gains and losses are determined only at the
end of the fiscal year.
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
six-month period ended May 31, 2004, for the Millennium Fund and the New
Frontier Fund were $536,165 and $25,390, respectively.
6. BENEFICIAL OWNERSHIP
The beneficial ownership, either directly or indirectly, of more than 25%
of the voting securities of a fund creates a presumption of control of the
fund, under Section 2(a)(9) of the Investment Company Act of 1940. As of
May 31, 2004, Charles Schwab & Co., for the benefit of its customers,
beneficially owned over 49% of the Millennium Fund.
7. DISTRIBUTABLE EARNINGS
The tax character of distributions paid during the fiscal years 2004 and 2003
was as follows:
MILLENNIUM FUND
Distributions paid from: 2004 2003
--------- ---------
Ordinary Income $ 319,306 $ --
Long-Term Capital Gain -- --
--------- -----
$ 319,306 $ --
========= =====
NEW FRONTIER FUND
Distributions paid from: 2004 2003
--------- ---------
Ordinary Income $ 2,734 $ --
Long-Term Capital Gain -- --
--------- -----
$ 2,734 $ --
IPS MILLENNIUM FUND AND IPS NEW FRONTIER FUND
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 2004 (UNAUDITED)
As of May 31, 2004, the components of distributable earnings (accumulated
losses) on a tax basis were as follows:
Millennium New Frontier
-------------- -------------
Undistributed ordinary income
(accumulated losses) $ (39,667) $ (6,852)
Undistributed long-term capital gain
(accumulated losses) (294,123,667) (18,275,159)
Unrealized appreciation/(depreciation) 1,230,568 59,833
-------------- -------------
$ (292,932,766) $ (18,222,178)
-------------- -------------
The difference between book basis and tax basis unrealized appreciation
(depreciation) is attributable primarily to the deferral of wash sales.
8. CHANGES IN CERTIFYING ACCOUNTANT
On January 20, 2004, McCurdy & Associates CPA's, Inc. ("McCurdy") notified the
Funds of its intention to resign as the Funds' independent auditors upon
selection of replacement auditors.
On January 23, 2004, the Funds' Audit Committee and Board of Directors selected
Cohen McCurdy, Ltd. ("Cohen") to replace McCurdy as the Funds' auditors for the
fiscal year ending November 30, 2004, to be effective upon the resignation of
McCurdy.
On March 12, 2004, upon receipt of notice that Cohen was selected as the Funds'
auditor, McCurdy, whose audit practice was acquired by Cohen, resigned as
independent auditors to the Fund. McCurdy's reports on the IPS financial
statements for the fiscal year ended November 30, 2003 contained no adverse
opinion or disclaimer of opinion nor were they qualified or modified as to
uncertainty, audit scope or accounting principles. During the fiscal years
stated above, there were no disagreements with McCurdy on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure which, if not resolved to the satisfaction of McCurdy would
have caused the Advisor to make reference to the subject matter of the
disagreements in connection with its reports on the Funds' financial statements
for such periods.
Neither the Funds nor anyone on its behalf consulted with Cohen on items which
(i) concerned the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on the Funds' financial statements or (ii) concerned the
subject of a disagreement (as defined in paragraph (a)(1)(iv) of Item 304 of
Regulation S-K) or a reportable event (as described in paragraph (a)(1)(v) of
said Item 304).
IPS MILLENNIUM FUND AND IPS NEW FRONTIER FUND
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 2004 (UNAUDITED)
INDEPENDENT TRUSTEES (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
# OF
PORTFOLIOS
TERM OF IN FUND
OFFICE AND PRINCIPAL COMPLEX
POSITION(S) LENGTH OF OCCUPATION(S) OVERSEEN
HELD WITH TIME DURING PAST FIVE BY OTHER DIRECTORSHIPS
NAME, ADDRESS AND AGE THE TRUST SERVED YEARS TRUSTEE HELD BY TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------------------
Veenita Bisaria, CFA, 44, Independent Since Senior Manager Finance, 3 None
12416 Fort West Drive Trustee inception Tennessee 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, 47, 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., 47, Independent Since Account Executive, Colonial 3 None
316 Stonewall Street Trustee inception Life & Accident (1995-
Memphis, TN 38112 of Funds Present); Teacher of history
in 1995 and economics at Austin East
High School in Knoxville,
Tennessee (Prior to 1995).
- ------------------------------------------------------------------------------------------------------------------------------
IPS MILLENNIUM FUND AND IPS NEW FRONTIER FUND
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 2004 (UNAUDITED)
INTERESTED TRUSTEES & OFFICERS (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
# OF
PORTFOLIOS
TERM OF IN FUND
OFFICE AND PRINCIPAL COMPLEX
POSITION(S) LENGTH OF OCCUPATION(S) OVERSEEN
HELD WITH TIME DURING PAST FIVE BY OTHER DIRECTORSHIPS
NAME, ADDRESS AND AGE THE TRUST SERVED YEARS TRUSTEE HELD BY TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------------------
Greg D'Amico*, 40, President, Since President of IPS 3 IPS Advisory, Inc.; Director
9111 Cross Park Dr., Suite E-120, Chief inception Advisory, Inc. of Young Entrepreneurs'
Knoxville, TN 37923 Financial of Funds in Organization (YEO);
Officer, 1995 Personal & Child Safety,
Treasurer LLC (PCS)
and Trustee
- ------------------------------------------------------------------------------------------------------------------------------------
Robert Loest*, 60, Vice Since Chief Executive 3 IPS Advisory, Inc.
9111 Cross Park Dr., Suite E-120, President, inception Officer of IPS
Knoxville, TN 37923 Secretary of Funds in Advisory, Inc.;
and Trustee 1995 Financial Analyst
Charter; Ph.D. in
Biology.
- ------------------------------------------------------------------------------------------------------------------------------------
* An "interested person" of the Trust, as defined in the Investment Company
Act of 1940, due to his relationship with the Advisor.
BOARD COMMITTEES
The Board has the following standing committee as described below:
- --------------------------------------------------------------------------------
AUDIT COMMITTEE
- --------------------------------------------------------------------------------
MEMBERS DESCRIPTION MEETINGS
- ------- ----------- --------
Veenita Bisaria, Responsible for advising the full Board with respect to At least once annually. Last meeting
Independent Trustee accounting, auditing and financial matters affecting the occurred on January 25, 2002.
Woodrow Henderson, Trust.
Independent Trustee
Billy Wayne Stegall, Jr.,
Independent Trustee
IPS iFUND 2004 SEMI ANNUAL REPORT
Fellow Portfolio Managers:
Congratulations! As portfolio managers to the iFund you have
contributed to the fund outperforming the S&P 500 for the one year period ending
May 31, 2004. However we are slightly behind the S&P 500 for the six months
ending May 31, 2004. What's most impressive is that we have generated these
returns while continuing to lower our risk.
There has been a lot of trade activity in the Fund the past six months,
but not much happening on the message boards. It appears most of you are
choosing to vote for buys and sells, but not posting messages. While it is not
required to post message it will help in the decision making, so we encourage
all of you to try and get involved. The more sharing of information and ideas
the better our decisions will be regarding the management of the portfolio. As
the Fund continues to generate new interest, the level of excitement and
participation will continue to grow.
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.
[TABLE BELOW REPRESENTS A BAR GRAPH IN THE ORIGINAL REPORT.]
IPS iFUND ANNUALIZED RETURNS
MAY 31, 2004
INCEPTION
6 MONTHS 1 YEAR 3 YEAR (12/29/00)
-------- ------ ------ ----------
iFUND 1.20% 29.28% -11.06 -15.69%
S&P 500 INDEX 1.60% 18.33% -2.12 -2.84%
FIGURE 1: Past performance is no guarantee of future results. Share price and
investment return will vary so that, when redeemed, an investor's shares may be
worth more, or less, than their original cost.
AVERAGE ANNUAL RETURNS AS OF 5/31/04
INCEPTION
6 MONTHS 1 YEAR 3 YEAR (12/29/00)
-------- ------ ------ ----------
iFUND 1.20% 29.28% -11.06 -15.69%
S&P 500 INDEX 1.60% 18.33% -2.12 -2.84%
- --------------------------------------------------------------------------------
VOLATILITY OF RETURNS
As you can see in figure 2 the iFund's risk continues to decline, but
it is still higher than both the S&P 500 and Value Line Index. The Fund's
volatility, as measured as the Standard Deviation of the most recent 13 monthly
returns, has dropped from 4.98% on November 30, 2003 to 3.32%. This is a nice
decline and with the amount of assets we have in cash at the present time we
would expect the risk to continue to decrease. With the market continuing to
fall the higher cash position has helped protect the fund from declining as much
as the S&P 500 over the past couple months.
IPS iFUND VOLATILITY VS. BROAD STOCK MARKET
June 30, 2004
[PLOT POINTS IN LINE CHART TO COME]
FIGURE 2: Volatility of the Fund on a monthly basis, versus the broad stock
market as represented by the VALUE LINE ARITHMETIC COMPOSITE INDEX, a broad
based, equally weighted index of approximately 1,700 stocks with dividends
reinvested. Risk is measured as the Standard Deviation of the most recent 13
monthly returns.
PORTFOLIO CHANGES
The portfolio has changed a lot over the past six months. We did a lot
of selling, but not much buying and as a result our cash position has more than
double to over 35%. There was an average of 5 1/2 transactions each month, with
December and May being the most active. The health care sector underwent the
most change going from 23.4% of assets at the end of November to just 11.83%.
There were also some changes in the financials sector going from just 1.21% in
November to over 6.8% at the end of May. We sold all of our CHINA FUND (CHN) for
an approximate 100% gain, and we bought AFLAC (AFL) and AMERICAN INTERNATIONAL
GROUP (AIG). The industrials sector was also altered a great deal. We sold
stocks such as KAYDON CORPORATION (KDN), which sold for a 24% gain, and ANGELICA
(AGL), which sold for a 29% gain, and added COINSTAR INC. (CSTR) and WOODWARD
GOVERNOR (WGOV). Both have both already gone up almost 10%. As of May 31 or top
ten stocks represent 33.6% of the portfolio.
- --------------------------------------------------------------------------------
We encourage you to participate and share you thoughts and ideas on
what you see happening in the world around you. It is this sharing that will
allow us all to make better investment decisions. Once again we would like to
thank you for your contributions to the iFund. With your support the fund will
continue to grow and along with that will come a higher level of community
intelligence.
Greg D'Amico Robert Loest, Pd.D., CFA
President Advisor
- --------------------------------------------------------------------------------
THE IPS iFUND
SCHEDULE OF INVESTMENTS
MAY 31, 2004 (UNAUDITED)
COMMON STOCKS - 64.27% MARKET
SHARES VALUE
-------- --------
CONSUMER DISCRETIONARY - 13.22%
Cadbury Schweppes Plc ADR - United Kingdom 125 $ 4,313
CBRL Group, Inc. 60 1,935
Lancaster Colony Corp. 40 1,601
Regal Entertainment Group 105 2,247
--------
10,096
--------
ENERGY - 2.79%
Suncor Energy, Inc. 90 2,129
--------
FINANCIALS - 6.80%
AFLAC, Inc. 45 1,827
American International Group, Inc. 46 3,372
--------
5,199
--------
HEALTH CARE - 11.83%
Amgen, Inc. * 13 711
Kindred Healthcare, Inc.* 92 2,285
Kyphon, Inc.* 60 1,469
Serona SA ADR - Switzerland 110 1,653
Sunrise Assisted Living, Inc.* 50 1,802
Wellpoint Health Networks, Inc.* 10 1,115
--------
9,035
--------
INDUSTRIALS - 6.95%
Bandag, Inc. 45 1,907
Coinstar, Inc.* 100 1,740
Woodward Governor Co. 25 1,661
--------
5,308
--------
INFORMATION TECHNOLOGY - 13.80%
Apple Computer, Inc.* 24 674
Dell Computer Corp.* 45 1,583
Electronic Arts, Inc.* 45 2,287
ProQuest Co.* 35 913
Storage Technology Corp.* 80 2,260
Volt Information Sciences, Inc.* 110 2,827
--------
10,544
--------
MATERIALS - 2.69%
Goldcorp, Inc. 170 2,059
--------
TELECOM SERVICES - 4.10%
Inet Technologies, Inc.* 40 356
Optical Cable Corp.* 340 1,829
Vodafone Group Plc ADR - United Kingdom 40 950
--------
3,135
--------
UTILITIES - 2.09%
FPL Group, Inc. 25 1,594
--------
TOTAL COMMON STOCK (COST $44,379) 49,099
--------
The accompanying notes are an integral part of these financial statements.
THE IPS iFUND
SCHEDULE OF INVESTMENTS
MAY 31, 2004 (UNAUDITED)
MARKET
PRINCIPAL VALUE
--------- --------
SHORT-TERM INVESTMENT - 27.98%
Federated Cash Trust Series II, Rate 0.15%(a) 21,375 $ 21,375
--------
TOTAL SHORT-TERM INVESTMENTS (COST $21,375) 21,375
--------
TOTAL INVESTMENTS (COST $65,754) - 92.25% 70,474
OTHER ASSETS LESS LIABILITIES, NET - 7.75% 5,917
--------
NET ASSETS - 100.00% $ 76,391
========
ADR - American Depository Receipts
(a) Variable rate security, the coupon rate shown represents the rate at May
31, 2004
* Non-income producing security
The accompanying notes are an integral part of these financial statements.
THE IPS iFUND
STATEMENT OF ASSETS AND LIABILITIES MAY 31,
2004 (UNAUDITED)
ASSETS:
Investments, at value (cost $65,754) $ 70,474
Receivable for investments sold 9,244
Dividends receivable 112
Interest receivable 3
---------
Total Assets 79,833
---------
LIABILITIES:
Payable for investments purchased 3,353
Payable to Advisor 89
---------
Total Liabilities 3,442
---------
$ 76,391
=========
NET ASSETS CONSIST OF:
Capital stock $ 114,377
Accumulated net realized loss on investments sold (42,483)
Accumulated undistributed net investment loss (223)
Net unrealized appreciation on investments 4,720
---------
Total Net Assets $ 76,391
=========
Shares outstanding (no par value, unlimited shares authorized) 11,387
Net asset value, redemption price and offering price per share $ 6.71
=========
The accompanying notes are an integral part of these financial statements.
THE IPS iFUND
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED MAY 31, 2004 (UNAUDITED)
INVESTMENT INCOME:
Dividend and interest income $ 333
--------
Total investment income 333
--------
EXPENSES:
Investment advisory fee 556
--------
Total expenses 556
--------
NET INVESTMENT LOSS (223)
--------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investment transactions 15,141
Change in unrealized appreciation (depreciation) on
investments (12,241)
--------
Net realized and unrealized gain on investments 2,900
--------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 2,677
========
The accompanying notes are an integral part of these financial statements.
THE IPS iFUND
STATEMENTS OF CHANGES IN NET ASSETS
SIX-MONTH
PERIOD ENDED
MAY 31, 2004 YEAR ENDED
(UNAUDITED) NOVEMBER 30, 2003
------------ -----------------
OPERATIONS:
Net investment loss $ (223) $ (452)
Net realized gain on investment transactions 15,141 8,113
Change in unrealized appreciation on investments (12,241) 12,740
-------- --------
Net increase in net assets resulting from operations 2,677 20,401
-------- --------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 1,500 9,602
Cost of shares redeemed (8,968) (25,518)
-------- --------
Net decrease in net assets resulting from capital
share transactions (7,468) (15,916)
-------- --------
TOTAL INCREASE (DECREASE) IN NET ASSETS (4,791) 4,485
NET ASSETS:
Beginning of period 81,182 76,697
-------- --------
End of period (Including accumulated undistributed
net invesment income of $0, and $0 respectively) $ 76,391 $ 81,182
======== ========
The accompanying notes are an integral part of these financial statements.
IPS iFUND
FINANCIAL HIGHLIGHTS
Selected per share data is based on a share of common stock outstanding
throughout each period.
------------------ ----------------- ----------------- --------------------
SIX-MONTH PERIOD DECEMBER 29, 2000(1)
ENDED MAY 31, 2004 YEAR ENDED YEAR ENDED THROUGH
(UNAUDITED) NOVEMBER 30, 2003 NOVEMBER 30, 2002 NOVEMBER 30, 2001
------------------ ----------------- ----------------- --------------------
PER SHARE DATA:
Net asset value, beginning of period $ 6.50 $ 5.04 $ 7.09 $ 12.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss (0.02) (0.03) (0.05) (0.02)(2)
Net realized and unrealized
gain (loss) on investments 0.23 1.49 (2.00) (4.89)
------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS 0.21 1.46 (2.05) (4.91)
------- ------- ------- -------
Net asset value, end of period $ 6.71 $ 6.50 $ 5.04 $ 7.09
======= ======= ======= =======
Total return 3.23%(3) 28.97% (28.91)% (40.92)%(3)
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period (000's) $ 76 $ 81 $ 77 $ 95
Ratio of net operating expenses to average net assets 1.40%(4) 1.40% 1.40% 1.40%(4)
Ratio of net investment income to average net assets (0.56)%(4) (0.58)% (0.83)% (0.49)%(4)
Portfolio turnover rate 38.63% 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.
IPS iFUND
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 2004
(UNAUDITED)
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.
IPS iFUND
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 2004
(UNAUDITED)
3. SHARES OF COMMON STOCK
Transactions in shares of common stock were as follows:
SIX-MONTH
PERIOD ENDED
MAY 31, 2004 YEAR ENDED
(UNAUDITED) NOVEMBER 30, 2003
----------------------- -----------------------
IPS iFUND $ Shares $ Shares
-------- -------- -------- --------
Shares sold $ 1,500 226 $ 9,602 1,642
Shares issued in reinvestment
of dividends -- -- -- --
Shares redeemed (8,968) (1,324) (25,518) (4,382)
-------- -------- -------- --------
Net increase (decrease) ($ 7,468) (1,098) ($15,916) (2,740)
======== ======== ======== ========
SHARES OUTSTANDING:
Beginning of period 12,485 15,225
-------- --------
End of period 11.387 12,485
======== ========
4. INVESTMENT TRANSACTIONS
Purchases and sales of securities for the six-month period ended May 31,
2004, excluding short-term investments, aggregated $23,850 and $46,674,
respectively. There were no purchases or sales of long-term U.S. government
securities.
At May 31, 2004, gross unrealized appreciation and depreciation of
investments, based on cost for federal income tax purposes of $65,754 were
as follows:
Unrealized appreciation $ 6,224
Unrealized depreciation (1,504)
-------
Net unrealized appreciation on
investments $ 4,720
=======
The fund's tax-basis capital gains and losses are determined only at the
end of the fiscal year. 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 six-month
period ended May 31, 2004 were $556.
IPS iFUND
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 2004
(UNAUDITED)
6. BENEFICIAL OWNERSHIP
The beneficial ownership, either directly or indirectly, of more than 25%
of the voting securities of a fund creates a presumption of control of the
fund, under Section 2(a)(9) of the Investment Company Act of 1940. As of
May 31, 2004, Gregory A. D'Amico beneficially owned 32% of the Fund.
7. DISTRIBUTABLE EARNINGS
There were no distributions during the fiscal years 2004 and 2003.
As of May 31, 2004, the components of distributable earnings (accumulated
losses) on a tax basis were as follows:
iFund
---------
Undistributed ordinary income
(accumulated losses) $ (223)
Undistributed long-term capital gain
(accumulated losses) (42,483)
Unrealized appreciation/(depreciation) 4,720
---------
$ (37,986)
=========
8. CHANGES IN CERTIFYING ACCOUNTANT
On January 20, 2004, McCurdy & Associates CPA's, Inc. ("McCurdy") notified the
Funds of its intention to resign as the Funds' independent auditors upon
selection of replacement auditors.
On January 23, 2004, the Funds' Audit Committee and Board of Directors selected
Cohen McCurdy, Ltd. ("Cohen") to replace McCurdy as the Funds' auditors for the
fiscal year ending November 30, 2004, to be effective upon the resignation of
McCurdy.
On March 12, 2004, upon receipt of notice that Cohen was selected as the Funds'
auditor, McCurdy, whose audit practice was acquired by Cohen, resigned as
independent auditors to the Fund. McCurdy's reports on the IPS financial
statements for the fiscal year ended November 30, 2003 contained no adverse
opinion or disclaimer of opinion nor were they qualified or modified as to
uncertainty, audit scope or accounting principles. During the fiscal years
stated above, there were no disagreements with McCurdy on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure which, if not resolved to the satisfaction of McCurdy would
have caused the Advisor to make reference to the subject matter of the
disagreements in connection with its reports on the Funds' financial statements
for such periods.
Neither the Funds nor anyone on its behalf consulted with Cohen on items which
(i) concerned the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on the Funds' financial statements or (ii) concerned the
subject of a disagreement (as defined in paragraph (a)(1)(iv) of Item 304 of
Regulation S-K) or a reportable event (as described in paragraph (a)(1)(v) of
said Item 304).
IPS iFUND
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 2004
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------
TERM OF # OF
OFFICE PORTFOLIOS
AND IN FUND OTHER
POSITION(S) LENGTH OF COMPLEX DIRECTORSHIPS
HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN HELD BY
NAME, ADDRESS AND AGE THE TRUST SERVED DURING PAST FIVE YEARS BY TRUSTEE TRUSTEE
- ----------------------------------------------------------------------------------------------------------------------------
Veenita Bisaria, 44, 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); Chartered Financial
Analyst (CFA).
- ----------------------------------------------------------------------------------------------------------------------------
Woodrow Henderson, 47, 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., 47, Independent Since Account Executive, Colonial 3 None
316 Stonewall Street Trustee inception Life & Accident (1995-
Memphis, TN 38112 of Funds Present); Teacher of history
in 1995 and economics at Austin East
High School in Knoxville,
Tennessee (Prior to 1995).
- ----------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES (UNAUDITED)
INTERESTED TRUSTEES & OFFICERS (UNAUDITED)
IPS iFUND
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 2004 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------------
TERM OF # OF
OFFICE PORTFOLIOS
AND IN FUND OTHER
POSITION(S) LENGTH OF COMPLEX DIRECTORSHIPS
HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN HELD BY
NAME, ADDRESS AND AGE THE TRUST SERVED DURING PAST FIVE YEARS BY TRUSTEE TRUSTEE
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Greg D'Amico*, 40, President, Since President of IPS 3 IPS Advisory, Inc.; Director
1225 Weisgarber Road, Chief inception Advisory, Inc. of Young Entrepreneurs'
Suite S-380, Financial of Funds in Organization (YEO);
Knoxville, TN 37909 Officer, 1995 Personal & Child Safety,
Treasurer LLC (PCS)
and Trustee
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Robert Loest*, 60, Vice Since Chief Executive 3 IPS Advisory, Inc.
1225 Weisgarber Road, President, inception Officer of IPS
Suite S-380, Secretary of Funds in Advisory, Inc.;
Knoxville, TN 37909 and Trustee 1995 Financial Analyst
Charter; Ph.D. in
Biology.
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* 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:
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AUDIT COMMITTEE
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MEMBERS DESCRIPTION MEETINGS
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Veenita Bisaria, Responsible for advising the At least once
- ---------------- full Board with respect to annually. Last
Independent Trustee accounting, auditing and meeting occurred
Woodrow Henderson, financial matters affecting on January 25,
Independent Trustee the Trust. 2002.
Billy Wayne Stegall, Jr.,
Independent Trustee
ITEM 2. CODE OF ETHICS.
Not applicable at this time.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable at this time.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable at this time.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS
Included in Semi-Annual Report to Shareholders filed under Item 1 of this form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PURCHASE OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 10. CONTROLS AND PROCEDURES
Based on their evaluation of registrant's disclosure controls and procedures (as
defined in Rule 30a-3(c) under the 1940 Act (17 CFR 270.30a-3(c)) as of June 30,
2004 registrant's principal executive officer and principal financial officer
found registrant's disclosure controls and procedures to be appropriately
designed to ensure that information required to be disclosed by registrant in
the reports that it files under the Securities Exchange Act of 1934 (i) is
accumulated and communicated to registrant's management, including its principal
executive officer and principal financial officer, to allow timely decisions
regarding required disclosure, and (ii) is recorded, processed, summarized and
reported, within the time periods specified in the rules and forms adopted by
the U.S. Securities and Exchange Commission.
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There has been no change in registrant's internal control that occurred during
the reporting period that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting.
ITEM 11. EXHIBITS.
(a) File the exhibits below as part of this form
Exhibit 99.Cert Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act
Exhibit 99.906Cert Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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.
IPS Funds
(Registrant)
By: /s/ Greg D'Amico
-----------------------
Greg D'Amico
President
By: /s/ Robert Loest
-----------------------
Robert Loest
Treasurer
Date 08/09/2004
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: /s/ Greg D'Amico
-----------------------
Greg D'Amico
President
By: /s/ Robert Loest
-----------------------
Robert Loest
Treasurer
Date 08/09/2004
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