SEMI-ANNUAL REPORT MARCH 31, 1997
(LOGO)
PRUDENT
BEAR
FUND
PRUDENT BEAR FUND
March 1997
Dear Shareholders
This completes our first fifteen months of the Prudent Bear Fund, and the month
of March was one of our best yet in terms of performance. The Fund's return for
the six months ended 3/31/97 was 1.6%. This compared favorably to a return for
the S&P 500 of +11.2%, and -0.3%, for the NASDAQ Composite, given that the Fund
was invested mostly in short sales over the period. We were especially pleased
with our performance for the short market downturn from 1/23/97 to 3/31/97. Over
this period, the S&P 500 declined by 2.6%, the NASDAQ fell by 11.4%, and the
Prudent Bear Fund gained 10.8%. This was one of the most significant market
sell-offs since 1990, but the Dow Jones average still corrected by less than
10%.
Mutual fund investors continue to pour money into the market, but at a much
slower rate than last year and many mutual fund investors have seen their
investment decline by more than 25% over the last nine months. We believe that
this slowdown in fund inflows is important because there really are no valuation
underpinnings to the current stock market. By every measure except the
cyclically-distorted and sometimes-manipulated price/earnings (P/E) ratio, the
market's current valuation stands at all-time record levels. Historically,
investors have not earned high returns by buying at a record valuation level and
holding until a new record high is attained. Much more money has been made by
buying low and selling high, which certainly makes common sense, but this
principle does eventually require a "sale." It is also logically intuitive
that investors don't usually earn high profits by following what everyone else
is doing. This fact makes it more obvious that we stand very close to a market
peak, since nearly everyone is now invested in the stock market.
Even the Chairman of the Federal Reserve Board, Alan Greenspan, is concerned
about the stock market's valuation level and the surrounding mania. Mr.
Greenspan is a professional who chooses each word very carefully for his
prepared speeches. In his speech this Spring, Mr. Greenspan referred to the
stock market as a "BUBBLE," and he also expressed concern about the
"irrational exuberance" in the market. Only twice before in history, has the
Federal Reserve chairman chosen to "talk down" and warn investors about the
stock market. Those warnings, which occurred in 1929 and 1965, were both
ridiculed at the time. However, both warnings were followed within a year by the
advent of longer-term bear markets where it required investors more than two
decades to recover their initial investment in inflation-adjusted dollars. The
importance of what Mr. Greenspan said cannot be underestimated, as well as
recent cautious statements about the market by Warren Buffet and "perma-bull"
John Templeton. We believe that all of these well-respected individuals are
essentially saying that we are close to the end, and that no one knows how much
longer the bull market can last, but that we are in a period where it requires a
"greater fool" to keep buying to keep the market rising. This is characteristic
of a "bubble", and is a classic requirement of a "pyramid scheme". This is a
very dangerous time to be investing in the stock market, and investors should
carefully consider their asset allocation and should reduce their exposure to
equities.
The economy grew strongly in the 1st quarter and inflation has remained tame.
This seems like the best of all possible worlds, but investors forget that
historically the most severe bear markets have started in periods of low
inflation. The Federal Reserve chose to raise interest rates because Mr.
Greenspan was concerned about wage rates rising and the economy growing too
quickly, causing inflation to return. Corporate profits have grown much faster
than sales in the 1990's largely because of slower growth in wage and salaries,
greater use of stock options and interest rate reductions, thus allowing profits
to grow as a percentage of revenue. Now, labor cost pressures are increasing.
The "bulls" have argued that we will not have any more recessions because
businesses now keep their inventory in-line and therefore there will be no more
inventory cycles. We believe that the next recession could be caused from a
decline in consumer spending brought on by a deteriorating consumer debt
situation and/or a falling stock market. Shifting from an environment of
expansive consumer credit to a tightening environment could cause a dramatic
slowdown in the economy. We also would not be surprised if the market decline
began due to the Fed continuing to raise rates, a slowdown in corporate profits,
higher long-term interest rates potentially caused by a falling dollar, or the
high tech sector disappointing investors. No one can predict exactly what will
emerge as the catalyst for the secular bear market that we fully expect to
occur, but we are confident that investors should prepare themselves for the
possibility for such a decline.
It is very lonely to be a "bear" in a mania-like bull market. Caution is usually
ridiculed at market tops. In a period like the present, to be cautious is both
realistic and prudent. Investors make the most money investing in stocks when
the overall market is cheap, and they earn the lowest returns or suffer the
largest losses when the market is the most expensive. This principle has yet to
be learned by the 80% of mutual fund investors who have entered the market since
1990.
Prudent Bear investors need not be convinced that a significant market decline
lies ahead. An investment in the Prudent Bear Fund can serve as an ideal vehicle
to reduce the allocation to stocks to reduce risk just in case the market does
not continue to rise 20% per year. If the market continues to go up, and our
Fund should lose money, then these losses should be considered as a lost
"opportunity cost" of not being more fully invested. This is similar to having
to pay for health or homeowners' insurance that we didn't need during one year.
Reducing your allocation to stocks through the use of a portfolio of short sales
is a technique that has been used by the wealthiest of investors for decades. We
are more confident than ever that now is a time for caution. We appreciate your
continued confidence.
/s/David W. Tice
David W. Tice
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1997
(UNAUDITED)
ASSETS:
Investments, at value (cost $19,584,001) $19,357,620
Receivable from broker for proceeds
on securities sold short 16,602,361
Receivable for investments sold 47,663
Interest receivable 12,453
Organizational expenses, net of
accumulated amortization 22,732
Other assets 29,767
-----------
Total Assets 36,072,596
-----------
LIABILITIES:
Securities sold short, at value
(Proceeds of $14,905,566) 13,398,968
Payable for securities purchased 540,092
Options written, at value
(Premiums received $124,289) 107,625
Payable to Adviser 45,638
Accrued expenses and other liabilities 39,001
-----------
Total Liabilities 14,131,324
-----------
NET ASSETS $21,941,272
===========
NET ASSETS CONSIST OF:
Capital stock $22,088,180
Accumulated undistributed net
investment income 109,456
Accumulated undistributed net realized loss
on investments sold, securities sold short
and option contracts expired or closed (1,553,245)
Net unrealized appreciation
(depreciation) on:
Investments (226,381)
Short positions 1,506,598
Written options 16,664
-----------
Total Net Assets $21,941,272
===========
Shares outstanding
(250,000,000 shares of $.0001
par value authorized) 2,476,950
Net Asset Value, Redemption Price
and Offering Price Per Share $8.86
=====
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
INVESTMENT INCOME:
Interest income $383,458
Dividend income on long positions 8,050
-----------
Total investment income 391,508
-----------
EXPENSES:
Investment advisory fee 72,423
Administration fee 13,070
Shareholder servicing and accounting costs 25,220
Custody fees 4,706
Federal and state registration 21,602
Professional fees 22,692
Reports to shareholders 8,056
Directors' fees and expenses 431
Amortization of organizational expenses 2,999
Distribution expense 14,485
Other 654
-----------
Total operating expenses before
reimbursement and dividends on
short positions 186,338
Less: Reimbursement from Adviser (26,785)
-----------
Net expenses before dividends on
short positions 159,553
Dividends on short positions 15,739
-----------
Total expenses 175,292
-----------
NET INVESTMENT INCOME 216,216
-----------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized (loss) on:
Long transactions (159,282)
Short transactions (1,018,870)
Option contracts expired or closed (345,697)
Change in unrealized appreciation
(depreciation) on:
Investments (185,706)
Short positions 1,986,316
Written options 16,664
-----------
Net realized and unrealized
gain on investments 293,425
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 509,641
===========
See notes to the financial statements.
STATEMENT OF CHANGES IN NET ASSETS
October 1, 1996 December 28, 1995<F1>
through through
March 31, 1997 September 30, 1996
-------------- ------------------
OPERATIONS: (Unaudited)
Net investment income $ 216,216 $ 71,915
Net realized gain (loss):
Long transactions (159,282) 19,578
Short transactions (1,018,870) (16,081)
Option contracts expired or closed (345,697) (32,228)
Change in unrealized
appreciation (depreciation) on:
Investments (185,706) (40,675)
Short positions 1,986,316 (479,718)
Written options 16,664 -
----------- -----------
Net increase (decrease) in net
assets resulting from operations 509,641 (477,209)
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS
FROM NET INVESTMENT INCOME (183,831) -
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 23,878,640 9,649,045
Shares issued to holders in
reinvestment of dividends 137,320 -
Cost of shares redeemed (9,726,153) (1,846,181)
----------- -----------
Net increase in net assets
resulting from
capital share transactions 14,289,807 7,802,864
----------- -----------
TOTAL INCREASE IN NET ASSETS 14,615,617 7,325,655
NET ASSETS:
Beginning of period 7,325,655 0
----------- -----------
End of period (including
undistributed net
investment income of $109,456
and $74,973, respectively) $21,941,272 $7,325,655
=========== ===========
<F1> Commencement of operations.
See notes to the financial statements.
FINANCIAL HIGHLIGHTS
October 1, 1996 December 28, 1995<F1>
through through
March 31, 1997 September 30, 1996
Per Share Data: -------------- ------------------
(Unaudited)
Net asset value, beginning
of period $8.88 $10.00
----------- -----------
Income from investment operations:
Net investment income<F2> 0.16<F3> 0.09
Net realized and unrealized
(losses) on investments (0.03) (1.21)
----------- -----------
Total from investment operations 0.13 (1.12)
----------- -----------
Less distributions from net
investment income (0.15) -
----------- -----------
Net asset value, end of period $8.86 $8.88
=========== ===========
Total return<F4> 1.56% -11.20%
Supplemental data and ratios:
Net assets, end of period $21,941,272 $7,325,655
Ratio of operating expenses to
average net assets<F5><F6><F7> 2.75% 2.75%
Ratio of dividends on short positions
to average net assets<F6> 0.27% 0.34%
Ratio of net investment income to
average net assets<F6><F7> 3.73% 4.07%
Portfolio turnover rate<F4> 96.20% 91.31%
Average commission rate paid $0.0550 $0.0502
<F1> Commencement of operations.
<F2> Net investment income before dividends on short positions for the periods
ended March 31, 1997 and September 30, 1996 was $0.16 and $0.10,
respectively.
<F3> Net investment income per share represents net investment income divided by
the average shares outstanding throughout the period.
<F4> Not annualized.
<F5> The operating expense ratio excludes dividends on short positions. The
ratio including dividends on short positions for the periods ended March
31, 1997 and September 30, 1996 was 3.02% and 3.09%, respectively.
<F6> Annualized.
<F7> Without expense reimbursements of $26,785 and $104,260 for the periods
ended March 31, 1997 and September 30, 1996, respectively, the ratio of
operating expenses to average net assets would have been 3.22% and 8.64%
and the ratio of net investment income to average net assets would have
been 3.26% and (1.83)%.
See notes to the financial statements.
SCHEDULE OF INVESTMENTS
MARCH 31, 1997
(UNAUDITED)
SHARES VALUE
------ -----
MUTUAL FUNDS - 2.3%*
$500,000 Portico Institutional Money Market Fund<F1>
(Cost $500,000) $ 500,000
----------
COMMON STOCKS - 19.8%*
BASIC MATERIALS - 1.0%*
11,700 Stillwater Mining Company** 229,613
----------
CAPITAL GOODS - 3.3%*
35,600 Astrotech International Corporation**<F1> 220,275
60,000 Baldwin Technology Company, Inc.**<F1> 187,500
10,000 Durakon Inds Inc.** 113,750
18,300 Harding Lawson Associates Group** 125,813
20,000 Utilx Corporation** 87,500
----------
734,838
----------
CONSUMER-CYCLICAL - 2.8%*
45,000 ADDvantage Media Group, Inc.** 239,062
7,800 Boomtown, Inc.**<F1> 55,575
8,300 Fedders Corporation<F1> 48,762
5,500 Hagger Corporation 77,344
5,000 Hollywood Park, Inc.**<F1> 64,375
4,000 Jackpot Enterprises, Inc. 40,000
15,600 Serv-Tech, Inc.**<F1> 84,825
----------
609,943
----------
CONSUMER STAPLES - 0.8%*
700 Clorox Company<F1><F2> 78,488
7,100 Iwerks Entertainment, Inc.** 32,838
4,400 Sullivan Dental Products, Inc. 64,350
----------
175,676
----------
ENERGY - 0.4%*
8,000 American Oilfield Divers, Inc.**<F1> 90,000
----------
FINANCIALS - 0.6%*
3,800 Hilb, Rogal & Hamilton Company 51,775
1,700 The PMI Group, Inc.<F1><F2> 85,213
----------
136,988
----------
HEALTH CARE - 1.1%*
100,000 Cortech, Inc.<F1> 87,500
3,400 IDEXX Laboratories, Inc.**<F2> 47,600
12,000 U.S. Diagnostic, Inc.**<F1><F2> 97,500
----------
232,600
----------
TECHNOLOGY - 9.1%*
15,600 ANTEC Corporation**<F1> 122,850
20,000 Applied Signal Technology, Inc.** 90,000
3,000 Ascend Communications, Inc.**<F2> 122,250
3,500 Atmel Corporation**<F2> 83,781
15,000 Caere Corporation** 106,875
15,500 Cirrus Logic, Inc.**<F1><F2> 187,937
SHARES VALUE
------ -----
3,000 Cisco Systems, Inc.**<F2> $ 144,375
4,400 COMFORCE Corporation**<F2> 34,100
9,000 Data Dimensions, Inc.**<F1> 210,375
3,900 Gateway 2000, Inc.**<F2> 199,875
14,000 Gilbert Associates Inc.<F1> 238,000
10,000 Paging Network, Inc.**<F1><F2> 81,250
15,400 Trident Microsystems, Inc.**<F2> 207,900
2,000 Western Digital Corporation**<F2> 113,250
1,200 Xylan Corporation**<F2> 23,100
16,000 Zycad Corporation**<F2> 26,500
----------
1,992,418
----------
TRANSPORTATION - 0.7%*
7,300 America West Airlines, Inc. - Class B**<F1> 114,062
5,300 Western Pacific Airlines, Inc.**<F1> 35,775
----------
149,837
----------
TOTAL COMMON STOCKS
(Cost $4,609,703) 4,351,913
----------
CONTRACTS (100 SHARES PER CONTRACT)
- -----------------------------------
PUT OPTIONS PURCHASED - 1.4%*
Kulicke & Soffa Ind
300 Expiration April 1997,
Exercise Price $15.00 3,750
200 Expiration April 1997,
Exercise Price $17.50 5,000
MBIA Inc.
100 Expiration May 1997,
Exercise Price $85.00 9,375
48 Expiration May 1997,
Exercise Price $90.00 9,300
50 Morgan Stanley & Company High Tech Index
Expiration June 1997,
Exercise Price $350.00 98,750
200 S&P 500 Index
Expiration June 1997,
Exercise Price $700.00 175,000
----------
TOTAL PUT OPTIONS PURCHASED
(Cost $269,183) 301,175
----------
SCHEDULE OF INVESTMENTS (CONT.)
MARCH 31, 1997
(UNAUDITED)
PRINCIPAL
AMOUNT VALUE
-------- -----
SHORT-TERM INVESTMENTS - 64.7%*
U.S. TREASURIES - 55.6%*<F1>
U.S. Treasury Bills:
$2,000,000 4.92%, 05/15/1997 $ 1,987,973
2,900,000 4.96%, 05/22/1997 2,879,787
3,200,000 5.64%, 05/29/1997 3,173,810
4,200,000 6.59%, 06/05/1997 4,160,793
----------
TOTAL U.S. TREASURIES 12,202,363
----------
VARIABLE RATE DEMAND NOTES - 9.1%*
698,524 Johnson Controls, Inc. 698,524
392,645 Sara Lee Corporation 392,645
573,000 American Family Financial Services, Inc. 573,000
338,000 Wisconsin Electric Power Co. 338,000
----------
TOTAL VARIABLE RATE DEMAND NOTES 2,002,169
----------
TOTAL SHORT-TERM INVESTMENTS
(Cost $14,205,115) 14,204,532
----------
TOTAL INVESTMENTS
(Cost $19,584,001) $19,357,620
==========
* Calculated as a percentage of net assets.
** Non-income producing security.
<F1> All or a portion of the securities have been committed as collateral for
open short positions and written options.
<F2> Shares are held to cover all or a portion of a corresponding short
position.
See notes to the financial statements.
SCHEDULE OF CALL OPTIONS WRITTEN
MARCH 31, 1997
(UNAUDITED)
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ----------------------------------- -----
150 Kulicke & Soffa Ind
Expiration April 1997,
Exercise Price $20.00 $31,875
40 MBIA Inc.
Expiration May 1997,
Exercise Price $100.00 9,500
----------
TOTAL CALL OPTIONS WRITTEN
(Premiums received $70,191) $41,375
==========
SCHEDULE OF PUT OPTIONS WRITTEN
MARCH 31, 1997
(UNAUDITED)
CONTRACTS (100 SHARES PER CONTRACT)
- -----------------------------------
200 S&P 500 Index
Expiration June 1997,
Exercise Price $650.00
(Premiums received $54,098) $66,250
=======
See notes to the financial statements.
SCHEDULE OF SECURITIES SOLD SHORT
MARCH 31, 1997
(UNAUDITED)
SHARES VALUE
----- -----
13,000 Accustaff, Inc. $ 217,750
5,100 Advanta Corporation - Class A 137,062
1,050 Advanta Corporation - Class B 27,169
4,500 Affiliated Computer Services, Inc. 102,937
6,000 Aphton Corporation 84,000
6,500 Applebee's International, Inc. 156,812
2,000 Arrow International, Inc. 60,500
3,000 Ascend Communications, Inc. 122,250
3,500 Atmel Corporation 83,781
18,000 Axciom Corporation 258,750
4,000 Banc One Corporation 159,000
3,500 Becton Dickinson and Company 157,500
10,400 Belco Oil & Gas Corporation 188,500
7,400 Black & Decker Corporation 237,725
6,700 CDW Computer Corporation Centers, Inc. 301,919
2,700 CMAC Investment Corporation 90,112
14,300 CNS, Inc. 141,212
1,520 Caterpillar Inc. 121,980
20,000 Cellular Technical Services Company 181,250
13,900 Chesapeake Energy Corporation 290,162
1,800 Circuit City Stores, Inc. 60,075
15,500 Cirrus Logic, Inc. 187,937
3,000 Cisco Systems, Inc. 144,375
700 Clorox Company 78,487
4,400 COMFORCE Corporation 34,100
5,150 Compaq Computers Corporation 394,619
10,700 CompUSA, Inc. 168,525
9,100 ContiFinancial Corporation 282,100
15,500 EchoStar Communications Corporation 317,750
3,000 Franklin Resources, Inc. 153,000
3,900 Gateway 2000, Inc. 199,875
10,300 Gentex Corporation 203,425
4,600 HBO & Company 218,500
6,400 Harley-Davidson, Inc. 216,800
1,800 Hershey Foods Corporation 90,000
3,400 IDEXX Laboratories, Inc. 47,600
1,600 International Business Machines Corporation 219,800
15,500 Iomega Corporation 251,875
5,500 Level One Communications, Inc. 151,250
4,000 Lucent Technologies, Inc. 211,000
2,300 MBIA, Inc. 220,513
10,000 MBNA Corporation 278,750
SHARES VALUE
----- -----
4,500 Maxim Integrated Products, Inc. $ 217,688
4,000 McAfee Associates, Inc. 177,000
3,000 McDonald's Corporation 141,750
5,800 Millipore Corporation 245,775
10,100 The Money Store, Inc. 212,100
4,000 Motorola, Inc. 241,500
13,600 Natures Sunshine Product, Inc. 197,200
3,500 Novellus Systems, Inc. 241,500
13,800 Olympic Financial Ltd. 127,650
17,000 PLC Systems, Inc. 301,750
3,750 The PMI Group, Inc. 187,969
28,100 Paging Network, Inc. 228,313
3,500 Paychex, Inc. 143,938
8,800 Petsmart, Inc. 178,200
1,900 Philip Morris Companies, Inc. 216,838
5,000 Polaroid Corporation 198,750
1,600 The Procter & Gamble Company 184,000
8,000 Richfield Holdings, Inc. 150,000
10,000 S3 Incorporated 130,000
15,500 Safeskin Corporation 280,938
7,050 The Sports Authority, Inc. 131,306
5,200 Sunbeam Corporation, Inc. 156,000
5,400 Tommy Hilfiger Corporation 282,150
15,400 Trident Microsystems, Inc. 207,900
5,500 Ugly Duckling Corporation 101,063
10,500 United Companies Financial Corporation 216,563
5,400 USAir Group, Inc. 132,300
25,000 U.S. Diagnostic, Inc. 203,125
2,000 Western Digital Corporation 113,250
2,000 Wrigley (Wm) Jr Company 116,750
1,200 Xylan Corporation 23,100
9,000 Yahoo! Inc. 253,125
18,000 Zenith Electronics 182,250
16,000 Zycad Corporation 26,500
----------
TOTAL SECURITIES SOLD SHORT
(Proceeds $14,905,566) $13,398,968
==========
See notes to the financial statements.
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 1997 (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. In seeking its investment objective of capital appreciation,
the Fund will invest primarily in common stocks and warrants, engage in
short sales, and effect transactions in stock futures contracts, options
on stock index futures contracts and options on securities and stock
indexes. 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 $27,849, 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
average of the current bid and asked 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. Mutual fund investments are valued at the net asset value on
the day the valuation is made. 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 and other liquid
securities in the amount of $14,439,413 have been committed as
collateral for open short investment positions and are on deposit in a
segregated account 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 has complied to date with the provisions of the
Internal Revenue Code applicable to regulated investment companies and
intends to continue to so comply in future years and to distribute
investment company net taxable income and net capital gains to
shareholders.
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 average of the current
bid and asked 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. Put option contracts are held by the Fund for
trading purposes and call option contracts are held by the Fund for
hedging purposes.
e) Written Option Accounting - The Fund writes call options for trading
purposes and writes put options for hedging purposes. When the Fund
sells an option, an amount equal to the premium received by the Fund
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 option written.
Option contracts are valued at the average of the current bid and
asked price reported on the day of valuation. When an option expires
on its stipulated expiration date or the Fund enters into a closing
purchase transaction, the Fund realizes a gain or loss if the cost of
the closing purchase transaction differs
NOTES TO THE FINANCIAL STATEMENTS (continued)
(UNAUDITED)
from the premium received when the option was sold without regard to
any unrealized gain or loss on the underlying security, and the
liability related to such option is eliminated. When an option is
exercised, the Fund realizes a gain or loss from the sale of the
underlying security, and the proceeds from such sale are increased by
the premium originally received.
f) 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.
g) Use of 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 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.
h) 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 comparing
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 $149,080 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 were as follows:
October 1, 1996 December 28, 1995
through through
March 31, 1997 September 30, 1996
-------------- ------------------
Shares sold 2,774,123 1,026,211
Shares issued to holders in
reinvestment of dividends 16,193 -
Shares redeemed (1,138,200) (201,377)
----------- ---------
Net increase 1,652,116 824,834
=========== =========
3. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of investments, excluding short-term
investments, options and short positions, by the Fund for the period
October 1, 1996 through March 31, 1997, were $4,721,382 and $857,741,
respectively.
At March 31, 1997, gross unrealized appreciation and depreciation of
investments for tax purposes were as follows:
Appreciation $ 338,888
(Depreciation) (661,858)
----------
Net depreciation on investments $(322,970)
==========
At March 31, 1997, the cost of investments for federal income tax purposes
was $19,680,590.
At September 30, 1996, the Fund had accumulated net realized capital loss
carryovers of $29,396 expiring in 2004. To the extent the Fund realizes
future net capital gains, taxable distributions to its shareholders will be
offset by any unused capital loss carryover.
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, dividends on short positions 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.
NOTES TO THE FINANCIAL STATEMENTS (continued)
(UNAUDITED)
5. SHORT POSITIONS
For financial statement purposes, an amount equal to the settlement
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 securities. These
segregated assets are required to be adjusted daily to reflect changes in
the value of the securities sold short.
6. OPTION CONTRACTS WRITTEN
The premium amount and the number of option contracts written during the
period October 1, 1996 through March 31, 1997, were as follows:
Premium Amount Number of Contracts
-------------- -------------------
Options outstanding at
September 30, 1996 $ 0 -
Options written 124,289 390
Options closed - -
Options exercised - -
Options expired - -
-------- --------
Options outstanding at
March 31, 1997 $124,289 390
======== ========
7. 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 payments of $15,416 pursuant to the Plan for the six months ended
March 31, 1997.
PRUDENT BEAR FUND
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
