PRUDENT BEAR FUND
SEMI ANNUAL REPORT
March 31, 1996
May 1996
Dear Shareholders
I would like to welcome you as a shareholder of the PRUDENT BEAR FUND. We have
just completed the Fund's first quarter of operations. The net assets value of
the Fund at 3/31/96 was $9.52.We started this Fund to give investors the
opportunity to profit from a decline in an overvalued market. Through
participation in short selling, a practice which until recently has been largely
unavailable to mutual fund investors, our investors should see positive returns
when this bull market mania reverses. Our Fund may be the only fund in the
country that is now more invested in individual "short" positions than "long"
positions. In managing the Fund, we utilized our experience as an adviser to
mutual fund managers and investment advisers over the last eight years. While we
endeavor to make money through short-sales in extremely overvalued markets, the
Fund will be more traditionally managed in markets when the market's valuation
is more rational.
Ours is a very contrarian strategy, as most professional mutual fund managers
today are 100% invested in stocks in an effort to "swing for the fences." In the
current market environment, those managers who have taken on the most risk, have
generated the highest returns, and have been proclaimed the best and the
brightest. Since their portfolios have appreciated the most, their assets under
management have grown dramatically, giving them more money to invest using the
same style. As a consequence these types of stocks appreciate even further.
Nowhere in this process, has anyone asked any questions about "risk." The only
emphasis has been on short-term "return." We believe all investments should be
made using the principle of "risk vs. return," even in this market.
We believe this investment style has little in common with the traditional
investment discipline using fundamental valuation principles. In this
speculative environment that has become a mania, making money in the stock
market seems easy. Unfortunately, it is periods such as this that are the most
dangerous, when the stock market is more likely to begin a "secular bear" trend
that can last for years.
We are value investors who believe strongly that when the market holds little
fundamental value, investors should be very cautious. When markets get to a
mania stage, investors should hold some short positions in their portfolio, and
be mostly out of the market. We are in that stage of the market today, and
therefore the PRUDENT BEAR FUND can help individuals make this strategic asset
allocation.
One problem with this strategy is that it's always difficult to "call the top."
We believe that we are very near the top, but no one knows for sure how far a
mania stage can go. It seems imprudent to play this market gambling to make a
few more points on the upside but taking the risk to lose tens of points on the
downside. The risk/return trade-off simply doesn't favor this decision. Yet
there are many people who know that the market is dramatically overvalued, who
keep buying because they are convinced that they can get out at the exact time
that the market begins to decline. The problem is that no one "rings a bell"
when the market changes direction. It is likely that this time, if the catalyst
is big enough, the market could decline too quickly for everyone to get out. The
May 1996 cover story in Worth Magazine makes this exact point. Let me provide a
couple of important quotes that were made in this excellent article about the
current stock market:
"Bubbles, can also remain inflated for a long time, which is precisely
the problem investors face today. We know the bubble will burst
eventually, but when? Should we just sit out the action in the meantime?
... The trouble is that it's impossible to predict the end of a pyramid
scheme. Logic doesn't help.... the only safe choice is to get out
tomorrow (or yesterday, if we're too late to the newsstands with this
issue). That's why bubbles collapse so quickly. ... Fundamentals won't
help predict the end, either ... But the instant that people cease to
believe in the market, their apostasy will prick the bubble. ... Here are
three axioms to live by: All bubbles burst. No one can predict when,
except by chance. And the door is never wide enough to let all those who
want to get out rush through at once."
We couldn't have said it better ourselves. We recommend that all shareholders
read a copy of this important article and we will be glad to send you one if you
call us. Share it with your friends for their benefit. We are left with the
realization that no one is going to "ring a bell" for us or anyone else, so we
will remain invested using our investment strategy of being net short now that
the dividend yield on the Standard & Poor's 500 index is about 2.0%.
Unfortunately, being net-short in a rising market can cause losses, and this has
been the case in our performance through 3/31/96. The PRUDENT BEAR FUND declined
by 4.8% for the first quarter.
Our strategy going forward is to attempt to be invested in the most optimal
individual short positions using prudent risk/reward judgment. We will allocate
our portfolio in short positions that we believe have excellent long-term profit
potential and that are also showing current signs of deterioration. We are
concerned about short-term timing, but timing short sales is very difficult in a
raging bull market. We believe the two areas of the market that possess the most
short-selling potential and also show current fundamental signs of deterioration
are the technology and the consumer debt sectors. These stocks have tremendous
profit potential for short sales because their prices are so outrageously
valued, and the disintegration of their businesses has also already begun.
In our opinion, technology stocks are set up for a decline of the magnitude seen
in 1984 and 1985 when many technology issues fell 70%-80%. As a consequence,
approximately 40% of our short positions are in technology stocks including PC
makers, chip companies and semiconductor manufacturing companies. Merrill
Lynch's top semiconductor analyst has already stated that we are on-course for a
collapse similar to the mid-80s period. Memory prices have already fallen by
more than 70% as PC demand has slowed, and tremendous new supply has come onto
the market. Even more capacity is coming online in the next couple of years,
which we believe will overwhelm any growth in demand. Memory prices are trading
at near production cost, even before this new capacity comes onstream. This same
phenomena is occurring all across the high-tech sector as capacity has exploded
with the new capital raised in the high-tech boom. The exact same thing happened
in 1984-85 causing many high tech companies to go out of business and others to
earn sub-par returns on capital for years. We are highly confident that this
will occur again.
In the consumer finance sector, where we have approximately 20% of our short
positions, we have observed extreme mania as well. Hundreds of banks and
financial institutions have sent literally billions of credit solicitations to
an increasingly over-leveraged American populace. We believe that this will end
very badly for all concerned, as total consumer debt including auto leasing and
home-equity loans is at a record-level. Consumer delinquencies have reached a
10-year high, despite the economy still growing. Personal bankruptcies are also
setting records. We believe there is a major disaster waiting to happen as
delinquency rates have been rising substantially for the last two quarters. It
should worsen as all the recently established deferred retail payment plans come
due. Yet, Wall Street has ignored this deterioration, and consumer finance
stocks have continued to rise. Throughout history, every time that banks have
fallen in love with a lending area, they overlend and a disaster results.
Remember, third world debt, oil & gas, real estate and LBOs were all areas where
banks were crushed after providing easy credit. This time, every bank has
dramatically expanded their consumer credit lending side. It's simply been too
easy, and dozens of banks and credit card companies are going to get "burned
badly."
Our other short positions are in various industries with no particular industry
concentration. Our portfolio is roughly 40%-45% short in total at the present
time. Our "long" positions currently account for about 10% of our portfolio
although we held no long positions at 3/31/96. We currently hold ten stocks on
the "long" side in various industry groups in out-of-favor common stocks. Unlike
some other funds with a contrarian strategy, we have not made a major investment
in gold mining shares. We do own a position in the largest platinum mining
company in North America, but we are not completely convinced that gold mining
stocks are going to go through the roof. This posture definitely hurt our
relative return in the 1st quarter as compared to other "contrarian" funds as
gold mining shares did very well. We also own a few "put" options on a couple of
different market indices to help the Fund profit from a significant and quick
decline.
We have never seen so many opportunities available on the short side. We are
excited about being able to provide our shareholders with an effective hedge of
what is an outrageously overvalued stock market. You can count on us to help
protect your assets in the hostile market environment that we fear lies directly
ahead. Please call us and encourage others to call for our extensive menu-driven
commentary at 1-888-PRU-BEAR. We thank you for your continued confidence.
/s/ David W. Tice
David W. Tice
Statement of Assets and Liabilities
March 31, 1996
(Unaudited)
ASSETS:
Investments, at value (cost $1,005,777) $ 999,941
Receivable from broker for proceeds
on securities sold short 359,919
Receivable from adviser 1,644
Interest receivable 1,201
Other receivables 660
Organizational expenses, net of
accumulated amortization 30,041
Other assets 1,460
----------
1,394,866
LIABILITIES: ----------
Securities sold short, at value
(Proceeds of $359,919) 365,975
Accrued expenses and other liabilities 28,300
----------
Total Liabilities 394,275
----------
NET ASSETS: $1,000,591
==========
NET ASSETS CONSIST OF:
Capital Stock $1,010,535
Accumulated undistributed net
investment income 4,109
Accumulated undistributed net realized loss
on options expired or closed (2,161)
Net unrealized depreciation on:
Investments (5,836)
Short positions (6,056)
----------
Total Net Assets $1,000,591
==========
Shares outstanding
(500,000,000 shares of $.0001
par value authorized) 105,092
Net Asset Value, Redemption Price
and Offering Price Per Share $9.52
=====
Statement of Operations
December 28, 1995<F1> through March 31, 1996
(Unaudited)
INVESTMENT INCOME:
Interest income $ 4,821
--------
EXPENSES:
Investment advisory fee 1,039
Administration fee 6,079
Shareholder servicing and accounting costs 8,997
Custody fees 875
Federal and state registration 5,492
Professional fees 7,684
Reports to shareholders 1,824
Directors' fees and expenses 608
Amortization of organizational fees 1,540
Distribution expense 208
Other 608
-------
Total operating expenses before
reimbursement and dividends on
short positions 34,954
Less: Reimbursement from Adviser (32,764)
--------
Net expenses before dividends on
short positions 2,190
Dividends on short positions 62
--------
Total expenses 2,252
--------
NET INVESTMENT INCOME 2,569
--------
REALIZED AND UNREALIZED
LOSS ON INVESTMENTS:
Realized loss on investments (2,161)
Change in unrealized depreciation on:
Investments (5,836)
Short positions (6,056)
--------
Net realized and unrealized
loss on investments (14,053)
--------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS $(11,484)
=========
<F1> Commencement of Operations
See notes to the financial statements.
Statement of Changes in Net Assets
December 28, 1995<F2> through March 31, 1996
(Unaudited)
OPERATIONS:
Net Investment Income $ 2,569
Net realized loss on option contracts
expired or closed (2,161)
Change in unrealized depreciation on:
Investments (5,836)
Short positions (6,056)
--------
Net decrease in net assets from operations (11,484)
--------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 1,023,777
Cost of shares redeemed (11,702)
---------
Net increase in net assets from
capital share transactions 1,012,075
---------
TOTAL INCREASE IN NET ASSETS 1,000,591
NET ASSETS:
Beginning of period 0
End of period (including undistributed ---------
net investment income of $4,109) $1,000,591
==========
<F2> Commencement of operations.
Financial Highlights
December 28, 1995<F3> through March 31, 1996
(Unaudited)
Per Share Data:
Net asset value, beginning of period $10.00
------
Income from investment operations:
Net investment income 0.02
Net realized and unrealized losses
on investments (0.50)
------
Total from investment operations (0.48)
------
Net asset value, end of period $ 9.52
======
Total return <F4> (4.80)%
Supplemental data and ratios:
Net assets, end of period $1,000,591
Ratio of operating expenses to
average net assets <F5> <F6> <F7> 2.75%
Ratio of dividends on short positions to
average net assets <F6> 0.08%
Ratio of net investment income to
average net assets <F6> <F7> 3.22%
Portfolio turnover rate 0.00%
Average commission rate paid $0.0573
<F3> Commencement of operations.
<F4> Not annualized for the period December 28, 1995 through March 31, 1996.
<F5> For the period ended March 31, 1996, the operating expense ratio excludes
dividends on short positions. The ratio including dividends on short positions
for the period ended March 31, 1996, was 2.83%.
<F6> Annualized for the period December 28, 1995 through March 31, 1996.
<F7> Without expense reimbursements of $32,764 for the period December 28, 1995
through March 31, 1996 the ratio of operating expenses to average net assets
would have been 43.86% and the ratio of net investment income to average
net assets would have been (37.89)%.
See notes to financial statements.
SCHEDULE OF INVESTMENTS
March 31, 1996
(Unaudited)
Shares Value
------ -----
MUTUAL FUNDS -- 4.9% <F8>
$ 49,000 Portico Institutional Money Market Fund
(Cost $49,000) $ 49,000
Contracts (100 shares per contract)
- ----------------------------------
PUT OPTIONS PURCHASED -- 0.6% <F8>
1,000 Morgan Stanley & Company High Tech Index
Expiration April 1996, Exercise Price $270.00 750
1,500 Morgan Stanley & Company High Tech Index
Expiration April 1996, Exercise Price $285.00 2,719
500 Phily Semiconductor Index
Expiration April 1996, Exercise Price $160.00 719
100 S&P 500
Expiration June 1996, Exercise Price $580.00 413
100 S&P 500
Expiration June 1996, Exercise Price $625.00 1,100
-----
TOTAL PUT OPTIONS PURCHASED
(Cost $11,313) 5,701
-----
Principal Amount
- ----------------
SHORT-TERM INVESTMENTS -- 94.4% <F8> <F9>
U.S. TREASURIES -- 57.8% <F8>
U.S. Treasury Bills:
$150,000 5.07%, 5/16/96 149,115
135,000 4.71%, 6/06/96 133,755
100,000 5.04%, 6/13/96 98,978
100,000 5.02%, 7/11/96 98,586
100,000 5.38%, 7/25/96 98,386
-------
TOTAL U.S. TREASURIES 578,820
-------
VARIABLE RATE DEMAND NOTES -- 36.6% <F8>
49,000 American Family Financial Services, Inc. 49,000
25,392 Eli Lilly & Company 25,392
49,000 General Mills Inc. 49,000
49,000 Pitney Bowes Credit Corp. 49,000
49,000 Sara Lee Corp. 49,000
49,000 Southwestern Bell Corp. 49,000
47,028 Warner-Lambert Co. 47,028
49,000 Wisconsin Electric Power Co. 49,000
-------
TOTAL VARIABLE RATE DEMAND NOTES 366,420
-------
TOTAL SHORT-TERM INVESTMENTS
(Cost $945,464) 945,240
--------
TOTAL INVESTMENTS (Cost $1,005,777) $999,941
========
<F8> Calculated as a percentage of net assets.
<F9> Securities have been committed as collateral for open short positions.
See notes to the financial statements.
SCHEDULE OF SECURITIES SOLD SHORT
March 31, 1996
(Unaudited)
Shares Value
------ -----
150 Advanta Corporation Class B $ 7,125
800 American Power Conversion Corporation 8,000
1,300 Applebees International, Inc. 32,500
200 Arrow International, Inc. 8,325
900 Chesapeake Energy Corporation 41,625
1,700 Cirrus Logic, Inc. 30,706
50 Coca-Cola Company 4,131
50 Compaq Computers Corporation 1,931
450 First USA, Inc. 25,481
800 Gentex Corporation 23,800
400 Komag, Inc. 9,700
50 Merck & Company 3,113
650 Micro Warehouse, Inc. 26,975
650 Micron Technology, Inc. 20,394
1,000 Money Store, Inc. 27,875
500 Novellus Systems, Inc. 22,250
50 The PMI Group, Inc. 2,181
300 Paging Network, Inc. 7,500
300 Patterson Dental Company 9,075
300 Philip Morris Company, Inc. 26,325
100 Premark International 5,363
800 Ultratech Stepper, Inc. 14,100
300 Valujet, Inc. 7,500
------
TOTAL SECURITIES SOLD SHORT
(Proceeds $359,919) $365,975
========
Notes to the Financial Statements (Unaudited)
1.ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Prudent Bear Funds, Inc. (the "Company") was incorporated on October 25,1995,
as a Maryland Corporation and is registered as an open-end management
investment company under the Investment Company Act of 1940 ("1940 Act"). The
Company currently consists of one series, Prudent Bear Fund (the "Fund"). The
investment objective of the Fund is capital appreciation. The Fund issued and
sold 10,000 shares of its capital stock at $10 per share on December 13, 1995.
The Fund commenced operations on December 28, 1995.
The costs incurred in connection with the organization, initial registration
and public offering of shares, aggregating $31,581, have been paid by the
Adviser. The Fund will reimburse the Adviser. These costs are being amortized
over the period of benefit, but not to exceed sixty months from the Fund's
commencement of operations.
The following is a summary of significant accounting policies consistently
followed by the Fund.
a) Investment Valuation - Common stocks and securities sold short that are
listed on a security exchange or quoted on the NASDAQ Stock Market are valued
at the last quoted sales price on the day the valuation is made. Price
information on listed stocks is taken from the exchange where the security is
primarily traded. Common stocks and securities sold short which are listed on
an exchange or the NASDAQ Stock Market but which are not traded on the
valuation date are valued at the latest quoted bid price. Unlisted equity
securities for which market quotations are readily available are valued at the
latest quoted bid price. Debt securities are valued at the latest bid price.
Other assets and securities for which no quotations are readily available are
valued at fair value as determined in good faith by management in accordance
with procedures approved by the Board of Directors. Short-term instruments
(those with remaining maturities of 60 days or less) are valued at amortized
cost, which approximates market value.
b) Transactions with Brokers for Short Sales - Treasury securities in the
amount of $578,820 have been committed as collateral for open short investment
positions and are on deposit in segregated accounts with the custodian. The
Fund's receivable from broker for proceeds on securities sold short is with one
major security dealer. The Fund does not require the broker to maintain
collateral in support of the receivable from broker for proceeds on securities
sold short.
c) Federal Income Taxes - No provision for federal income taxes has been made
since the Fund intends to comply with the provisions of the Internal Revenue
Code available to regulated investment companies in the current and future
years.
d) Purchased Option Accounting - Premiums paid for option contracts purchased
are included in the Statement of Assets and Liabilities as an asset. Option
contracts are valued at the latest bid price reported on the day of valuation.
When option contracts expire or are closed, realized gains or losses are
recognized without regard to any unrealized gains or losses on the underlying
securities.
e) Distributions to Shareholders - Dividends from net investment income are
declared and paid annually. Distributions of net realized capital gains, if
any, will be declared at least annually.
f) Use of Estimates - The preparation of financial state ments in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
g) Other - Investment and shareholder transactions are recorded no later than
the first business day after the trade date. The Fund determines the gain or
loss realized from investment transactions by com paring the original cost of
the security lot sold with the net sales proceeds. Dividend income is
recognized on the ex-dividend date or as soon as information is available to
the Fund, and interest income is recognized on an accrual basis. Investment
income includes $801 of interest earned on receivables from brokers for
proceeds on securities sold short. Generally accepted accounting principles
require that permanent financial reporting and tax differences be reclassified
to capital stock.
2.CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Fund for the period December 28, 1995 through
March 31, 1996 were as follows:
Shares sold 106,333
Shares redeemed (1,241)
-------
Net increase 105,092
=======
3.INVESTMENT TRANSACTIONS
There were no purchases or sales of long-term investments by the Fund for the
period December 28, 1995 through March 31, 1996.
At March 31, 1996, gross unrealized appreciation and depreciation of
investments were as follows:
Appreciation $ 0
(Depreciation) (5,836)
--------
Net depreciation on investments $(5,836)
========
At March 31, 1996, the cost of investments for federal income tax purposes was
$1,005,777.
4.INVESTMENT ADVISORY AND OTHER AGREEMENTS
The Fund has entered into an Investment Advisory Agreement with David W. Tice &
Associates, Inc. Pursuant to its advisory agreement with the Fund, the
Investment Adviser is entitled to receive a fee, calculated daily and payable
monthly, at the annual rate of 1.25% as applied to the Fund's daily net assets.
The Investment Adviser agrees to reimburse its management fee and other
expenses to the extent that total operating expenses (exclusive of interest,
taxes, brokerage commissions and other costs incurred in connection with the
purchase or sale of portfolio securities, and extraordinary items) exceed the
annual rate of 2.75% of the net assets of the Fund, computed on a daily basis.
Firstar Trust Company, a subsidiary of Firstar Corporation, a publicly held
bank holding company, serves as custodian, transfer agent, administrator and
accounting services agent for the Fund.
5.SHORT POSITIONS
For financial statement purposes, an amount equal to the settle ment amount is
included in the Statement of Assets and Liabilities as an asset and an
equivalent liability. The amount of the liability is subsequently marked-to-
market to reflect the current value of the short position. Subsequent
fluctuations in the market prices of securities sold, but not yet purchased,
may require purchasing the securities at prices which may differ from the
market value reflected on the Statement of Assets and Liabilities. The Fund is
liable for any dividends payable on securities while those securities are in a
short position. As collateral for its short positions, the Fund is required
under the 1940 Act to maintain segregated assets consisting of cash or liquid
high-grade debt obligations. These segregated assets are required to be
adjusted daily to reflect changes in the value of the securities sold short.
6. SERVICE AND DISTRIBUTION PLAN
The Fund has adopted a Service and Distribution Plan (the "Plan") pursuant to
Rule 12b-1 under the 1940 Act. The Plan authorizes payments by the Fund in
connection with the distribution of its shares at an annual rate, as determined
from time to time by the Board of Directors, of up to 0.25% of the Fund's
average daily net assets. Payments made pursuant to the Plan may only be used
to pay distribution expenses in the year incurred. Amounts paid under the Plan
by the Fund may be spent by the Fund on any activities or expenses primarily
intended to result in the sale of shares of the Fund, including but not limited
to, advertising, compensation for sales and marketing activities of financial
institutions and others such as dealers and distributors, shareholder account
servicing, the printing and mailing of prospectuses to other than current
shareholders and the printing and mailing of sales literature. The Fund made no
payments pursuant to the Plan for the period ended March 31, 1996.
Investment Adviser
David W. Tice & Associates, Inc.
8140 Walnut Hill Lane, Suite 405
Dallas, Texas 75231
http://www.tice.com
Administrator, Transfer Agent,
Dividend Paying Agent,
Shareholder Servicing Agent &
Custodian
Firstar Trust Company
615 East Michigan Street
P.O. Box 701
Milwaukee, Wisconsin 53201
Independent Accountants
Price Waterhouse LLP
Milwaukee, Wisconsin
Legal Counsel
Foley & Lardner
Milwaukee, Wisconsin
