ANNUAL REPORT SEPTEMBER 30, 1997
PRUDENT BEAR FUND
November, 1997
Dear Shareholders
September 30, 1997 marked the end of the fiscal year of the Prudent Bear Fund,
and for the annual period, the Fund lost 16.4%, while the S&P 500 gained 40%.
Consistent with our investment philosophy, the Fund held more "short" equity
positions than "long" equity positions throughout the fiscal year. We are not
happy with this absolute performance but are pleased about how the Fund
performed relative to the market. We did not anticipate that the mania would
last as long as it has, and the stock market "bubble" has grown bigger and
bigger. We remain more confident than ever that we are in the final stages of a
mania that will end in a horrific decline that will catch investors by surprise.
The problem is timing the eventual end of this bull market. In periods like
this, the stock market does not seem to discount future events, but instead
waits until the events actually occur. This has delayed the onset of the secular
bear market that we have expected for some time.
We are convinced that we are months, if not weeks away from significant declines
in the US stock market. In October, when the market experienced the first
decline in many months, the Prudent Bear Fund responded by being the #1
performer among 3,703 equity mutual funds, according to Morningstar. We may have
already begun the long expected bear market, but even if we do experience
another "new high" for the market indices, we do not expect the bull market to
last much longer, given the recent upheaval that has occurred in Asia.
We have been pleased with the Fund's relative performance in what has been an
overall dramatic "up" period for the market as well as the returns achieved in
the short declines. Later in this letter, I will focus on how this "relative
outperformance' achieved through our research expertise and individual stock
selection can help investors "hedge" their portfolios.
MARKET COMMENTARY
ASIAN PROBLEMS - Most market pundits have come out to say that the recent Asian
currency and stock market declines will not cause major problems for the U.S.
Noted Wall Street strategist, Abby Joseph Cohen said recently that slower Asian
growth will have "only a mild impact on the U.S., and the corporate profit
outlook remains robust." We believe that Ms. Cohen's comment is representative
of Wall Street's complacency about this severe Asian problem, which we believe
will have a tremendous impact on the world economy and the American stock
market. The Asian miracle was one of the foundations of the "new era"
thinking, which has been the primary justification for the runaway American
stock market. American companies were supposed to be able to sell goods and
services to the developing Asian economies, which would continue to enrich U.S.
shareholders. Now, this vision could well prove to be a mirage, just as Alan
Greenspan cautioned in a recent speech when he described past "new era"
promises. There will be a dramatic slowdown in all of the Asian economies which
will severely hurt their imports of American goods.
LOWER CORPORATE PROFITS - A second major ramification of the dramatic Asian
currency collapse is that an increased amount of supply will become available to
the export markets, with roughly 30% cheaper prices, resulting from currency
devaluations. We believe that the biggest problem currently facing US companies
is that supply far exceeds demand, and that prices in many industries could soon
start to fall, which will dramatically hurt corporate profits. Highly-respected
General Electric Chairman Jack Welch said in a recent FINANCIAL TIMES interview:
"there is excess global capacity in virtually every industry." In fact, we
believe that the world economy faces a significant risk of global deflation.
Prices are already falling in flat-rolled steel, commodity chemicals,
automobiles, and most aspects of high tech industries.
We expect a decline in corporate profits to be caused by this condition of
global excess capacity far exceeding demand. This may occur first in the high-
tech sector where there have been massive capacity additions, and now demand is
beginning to slow. Intel has already started to signal investors about a
slowdown in 1998 earnings. We believe that once investors realize that the high
tech sector will not report the stellar earnings growth that is now expected,
this realization could either ignite or exacerbate a significant stock market
decline.
Investors are complacent about the Asian economic problems because they believe
that "all is well" domestically. This is exactly what occurred in the late
1920's as the US economy "rocked along" while international markets began to
fall apart. It is also terribly naive to have the attitude that these problems
are confined to only a few small foreign countries, and therefore the impact on
the US will be minor. Unfortunately, the Southeast Asian problem has spread to
other countries already, as Brazil has suffered a significant economic impact
and the Japanese stock market has reached a two-year low.
JAPANESE PROBLEMS - It is the Japanese market that concerns us the most. The
Japanese banks and insurance companies were already in precarious condition
before the Southeast Asian problems, and they have loaned more money to the
Asian Tiger markets than anyone. We expect that many of these loans may well go
into default. A major source of capital for the Japanese institutions has been
their unrealized gains from holdings of stock in other Japanese companies.
It has been widely reported that with the Nikkei average at 16,000, most of
these unrealized gains will disappear. Without these unrealized gains, it is
widely believed that many Japanese institutions will have trouble meeting their
capital ratios required by the Bank for International Settlements. The Nikkei
average is now at 16,000 and this spells trouble for the entire Japanese
economy. Our major concern is that the Japanese banks and insurance companies
may be forced to sell U.S. Treasury securities. Of course, this could be
disastrous for the US market, as it could cause US interest rates to skyrocket.
MARKET TIMING ISSUES
We would also like to caution investors against trying to time the exact moment
when the market will decline. It makes good common sense to play the
probabilities and reduce one's exposure to the stock market. Realize that we are
at the end of a mania, and that there's no way you'll "get out" at the exact
top. However, people have been letting their greed overcome their caution and
logic in trying to "squeeze out" every nickel of profit from this phenomenal
bull market.
There is a great quote by a famous economist from 40 years ago that typifies the
feelings held today by most stock market investors. The quote is: "these
superficially more astute people...are in to ride the upward wave: their
particular genius, they are convinced, will allow them to get out before the
speculation runs its course. They will get the maximum reward from the increase
as it continues, they will be out before the eventual fall." He then said that
this erroneous thinking leads inevitably to a collapse. Some event will trigger
an ultimate reversal. "Thus the rule, supported by the experience of centuries:
the speculative episode always ends not with a whimper but with a bang."
USE OF PRUDENT BEAR AS A "HEDGE"
I would like to make a comment about the use of our fund in a "bull market."
We are not happy about losing money, but since the fund's inception, the stock
market has remained extremely overvalued. We should remind investors that we
never intended to operate the Prudent Bear Fund as a short-term market timing
vehicle. Our first objective when the stock market is overvalued is to achieve
approximately the inverse return of the market in major declines. We have been
able to accomplish this during each of the last three minor corrections that
have occurred in the last two years. Our second objective when the stock market
is overvalued is to lose as little money as possible while the market is rising,
as long as we ensure that we are positioned to achieve our first objective. With
only a 16% overall loss versus a 40% increase in the market, we believe our fund
has performed quite well in an environment that even Alan Greenspan has labeled
a "stock market bubble." For some investors, our fund can be used as an
efficient asset allocation vehicle to complement "long" mutual funds. Since
our inception, a portfolio of 80% S&P500 index stocks and 20% Prudent Bear would
have outperformed a portfolio consisting of 60% S&P stocks and 40% cash
equivalents yielding 5%. This outperformance is because the Prudent Bear Fund
has lost much less than the inverse of the overall market return.
80% Stocks / 20% Prudent Bear 29.1%
60% Stocks / 40% Cash 26.3%
RESEARCH ORIENTATION HELPS PERFORMANCE
It is our heavy emphasis on research that has allowed us to generate this
outperformance relative to the inverse of the market averages. My firm's team of
six analysts helps me identify the very best stocks to be included in the
Prudent Bear portfolio, on both the "long" and "short" side. We spend hours
conducting due diligence on hundreds of companies to optimize our portfolio.
This research orientation and individual stock selection has served us well and
differentiates us from other competitive investment vehicles which are commonly
used as "hedges" against a significant stock market decline.
We appreciate your continued confidence, and applaud your choice of caution and
prudence over an attitude of continuing to "follow the crowd." I believe
strongly that this attitude will soon prove highly profitable even though
investors who have been cautious in the past have been rewarded with lower
returns and derision from their peers. "Bubbles always burst," and this one
will be no different. There will always be cycles, and in our opinion, this one
is within months of ending.
/S/David W. Tice
David W. Tice
Portfolio Manager
12/28/95 03/31/96 09/30/96 03/31/97 09/30/97
-------- -------- -------- -------- --------
Prudent Bear Fund $10,000 $ 9,519 $ 8,880 $ 9,018 $ 7,420
S&P 500 $10,000 $10,536 $11,349 $12,625 $15,940
NASDAQ Composite $10,000 $10,479 $11,694 $11,663 $16,114
For the period ended September 30, 1997
Annualized
Since
Commencement
One Year of Operations
-------- -------------
Prudent Bear Fund (16.4)% (15.6)%
S&P 500 40.5% 30.7%
NASDAQ Composite 37.8% 31.5%
The Standard & Poor's 500 Index (S&P 500) is a capital-weighted index,
representing the aggregate market value of the common equity of 500 stocks
primarily traded on the New York Stock Exchange. The NASDAQ Composite Index is a
broad-based capitalization-weighted index of all NASDAQ stocks. This chart
assumes an initial gross investment of $10,000 made on 12/28/95 (commencement of
operations). Returns shown include the reinvestment of all dividends. Past
performance is not predictive of future performance. Investment return and
principal value will fluctuate, so that your shares, when redeemed, may be worth
more or less than the original cost.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
Prudent Bear Fund
In our opinion, the accompanying statement of assets and liabilities, including
the schedules of investments, of call options written and of securities sold
short, and the related statements of operations and of changes in net assets and
the financial highlights present fairly, in all material respects, the financial
position of Prudent Bear Fund (the "Fund") at September 30, 1997, the results
of its operations for the year then ended, and the changes in its net assets
and the financial highlights for the year then ended and for the period December
28, 1995 (commencement of operations) through September 30, 1996, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at September 30, 1997 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations from brokers were not received, provide
a reasonable basis for the opinion expressed above.
/S/ Price Waterhouse LLP
Milwaukee, Wisconsin
November 7, 1997
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997
ASSETS:
Investments, at value (cost $23,449,973) $24,400,574
Cash 17,177
Deposit at brokers for short sales 1,688,016
Receivable from broker for proceeds
on securities sold short 20,789,718
Receivable for investments sold 2,024,298
Capital shares sold 201,820
Interest receivable 21,073
Other receivables 15,591
Organizational expenses, net of
accumulated amortization 19,717
Other assets 15,202
-----------
Total Assets 49,193,186
-----------
LIABILITIES:
Securities sold short, at value
(Proceeds of $22,003,064) 21,456,464
Payable for securities purchased 940,956
Options written, at value
(Premiums received $157,426) 172,500
Capital shares redeemed 28,822
Payable to Adviser 28,606
Accrued expenses and other liabilities 66,129
-----------
Total Liabilities 22,693,477
-----------
NET ASSETS $26,499,709
===========
NET ASSETS CONSIST OF:
Capital stock $32,501,485
Accumulated undistributed net
investment income 1,367,233
Accumulated undistributed net realized loss
on investments sold, securities sold short
and option contracts expired or closed (8,851,136)
Net unrealized appreciation
(depreciation) on:
Investments 950,601
Short positions 546,600
Written options (15,074)
-----------
Total Net Assets $26,499,709
===========
Shares outstanding
(250,000,000 shares of $.0001
par value authorized) 3,634,136
Net Asset Value, Redemption Price
and Offering Price Per Share $7.29
=====
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1997
INVESTMENT INCOME:
Interest income $1,317,909
Dividend income on long positions 709,341
------------
Total investment income 2,027,250
------------
EXPENSES:
Investment advisory fee 237,306
Administration fee 24,914
Shareholder servicing and accounting costs 50,008
Custody fees 13,090
Federal and state registration 39,544
Professional fees 51,533
Distribution expense 47,461
Reports to shareholders 18,487
Directors' fees and expenses 1,230
Amortization of organizational expenses 6,015
Other 1,752
------------
Total operating expenses before
dividends on short positions 491,340
Dividends on short positions 64,028
------------
Total expenses 555,368
------------
NET INVESTMENT INCOME 1,471,882
------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized (loss) on:
Long transactions (1,186,456)
Short transactions (5,853,271)
Option contracts expired or closed (1,782,678)
Change in unrealized appreciation
(depreciation) on:
Investments 991,276
Short positions 1,026,318
Written options (15,074)
------------
Net realized and unrealized
loss on investments (6,819,885)
------------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS $(5,348,003)
============
See notes to the financial statements.
STATEMENT OF CHANGES IN NET ASSETS
December 28, 1995 <F1>
Year ended through
September 30, 1997 September 30, 1996
OPERATIONS: ------------------ ------------------
Net investment income $1,471,882 $ 71,915
Net realized gain (loss):
Long transactions (1,186,456) 19,578
Short transactions (5,853,271) (16,081)
Option contracts expired or closed (1,782,678) (32,228)
Change in unrealized appreciation
(depreciation) on:
Investments 991,276 (40,675)
Short positions 1,026,318 (479,718)
Written options (15,074) -
---------- ---------
Net (decrease) in net assets resulting
from operations (5,348,003) (477,209)
---------- ---------
DISTRIBUTIONS TO SHAREHOLDERS
FROM NET INVESTMENT INCOME (183,831) <F2> -
---------- ---------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 77,048,623 9,649,045
Shares issued to holders in reinvestment
of dividends 137,320 -
Cost of shares redeemed (52,480,055) (1,846,181)
---------- ---------
Net increase in net assets resulting
from capital share transactions 24,705,888 7,802,864
---------- ---------
TOTAL INCREASE IN NET ASSETS 19,174,054 7,325,655
NET ASSETS:
Beginning of period 7,325,655 0
---------- ---------
End of period (including undistributed
net investment income of $1,367,233
and $74,973, respectively) $26,499,709 $7,325,655
========== =========
<F1> Commencement of operations.
<F2> Total distribution is ordinary income, of which 2.9% is eligible for the
corporate dividends received deduction.
See notes to the financial statements.
FINANCIAL HIGHLIGHTS
December 28, 1995<F1>
Year ended through
Per Share Data: September 30, 1997 September 30, 1996
----------------- ------------------
Net asset value, beginning of period $8.88 $10.00
----- ------
Income from investment operations:
Net investment income <F2> 0.62<F3> 0.09
Net realized and unrealized (losses)
on investments (2.06) (1.21)
----- ------
Total from investment operations (1.44) (1.12)
----- ------
Less distributions from net investment income (0.15) -
----- ------
Net asset value, end of period $7.29 $8.88
===== ======
Total return <F4> (16.44%) (11.20%)
Supplemental data and ratios:
Net assets, end of period $26,499,709 $7,325,655
Ratio of operating expenses to
average net assets <F5> <F6> <F7> 2.59% 2.75%
Ratio of dividends on short positions
to average net assets <F6> 0.34% 0.34%
Ratio of net investment income to
average net assets <F6> <F7> 7.75% 4.07%
Portfolio turnover rate 413.25% 91.31%
Average commission rate paid $0.0565 $0.0502
<F1> Commencement of operations.
<F2> Net investment income before dividends on short positions for the periods
ended September 30, 1997 and September 30, 1996 was $0.65 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 for the period December 28, 1995 through September 30,
1996.
<F5> The operating expense ratio excludes dividends on short positions. The
ratio including dividends on short positions for the periods ended
September 30, 1997 and September 30, 1996 was 2.93% and 3.09%,
respectively.
<F6> Annualized for the period December 28, 1995 through September 30, 1996.
<F7> Without expense reimbursements of $104,260 for the period ended September
30, 1996, the ratio of operating expenses to average net assets would
have been 8.64% and the ratio of net investment loss to average net
assets would have been (1.83)%.
See notes to the financial statements.
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997
SHARES VALUE
- ------ -----
COMMON STOCKS - 27.1%*
BASIC MATERIALS - 4.5%*
20,000 Crystallex International Corp.** $ 102,500
107,000 International Precious Metals Corporation**<F1> 628,625
67,900 Naxos Resources Ltd.** 449,838
----------
1,180,963
----------
CAPITAL GOODS - 4.8%*
60,000 Baldwin Technology Company, Inc.**<F1> 318,750
10,000 Durakon Industries, Inc.**<F1> 87,500
68,300 Harding Lawson Associates Group, Inc.**<F1> 665,925
6,286 Philip Services Corp.** 114,719
20,000 UTILX Corporation**<F1> 92,500
----------
1,279,394
----------
CONSUMER-CYCLICALS - 5.5%*
95,000 ADDvantage Media Group, Inc.**<F1> 338,438
8,300 Fedders Corporation<F1> 49,800
29,875 Hollywood Park, Inc.**<F1> 565,758
305,000 LS Capital Corporation**<F1> 285,937
17,200 Salient 3 Communications, Inc. - Class A<F1> 215,000
----------
1,454,933
----------
CONSUMER STAPLES - 1.4%*
22,500 CellularVision USA, Inc.**<F1> 177,188
2,000 The Walt Disney Company 162,870
7,100 Iwerks Entertainment, Inc.**<F1> 28,400
----------
368,458
----------
FINANCIALS - 4.8%*
10,000 Advanta Corporation - Class A<F1> 291,250
4,500 Banc One Corporation<F1> 251,343
15,000 Banc Plus Corporation**<F1> 193,125
10,000 Capital One Financial Corporation<F1> 457,500
3,800 Hilb, Rogal and Hamilton Company<F1> 69,825
----------
1,263,043
----------
HEALTH CARE - 1.6%*
100,000 Cortech, Inc.**<F1> 70,312
40,000 ENDOcare, Inc.** 152,500
3,400 IDEXX Laboratories, Inc.**<F1> 56,950
20,000 Lakeland Industries, Inc.**<F1> 155,000
----------
434,762
----------
TECHNOLOGY - 4.5%*
50,000 Aeroflex Incorporated**<F1> 506,250
31,000 ANTEC Corporation** 364,250
20,000 Applied Signal Technology, Inc.**<F1> 193,750
5,000 RF Monolithics, Inc.**<F1> 126,250
----------
1,190,500
----------
TOTAL COMMON STOCKS
(Cost $5,899,619) 7,172,053
----------
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ----------------------------------- -----
PUT OPTIONS PURCHASED - 2.4%*
Agouron Pharmaceuticals, Inc.:
75 Expiration October 1997,
Exercise Price $45.00 $ 12,656
170 Expiration October 1997,
Exercise Price $50.00 65,875
60 ASM Lithography Holding N.V.
Expiration October 1997,
Exercise Price $95.00 33,750
300 Boston Chicken, Inc.
Expiration November 1997,
Exercise Price $15.00 43,125
60 C-Cube Microsystems, Inc.
Expiration November 1997,
Exercise Price $22.50 938
Chesapeake Energy Corporation:
150 Expiration December 1997,
Exercise Price $10.00 14,531
500 Expiration December 1997,
Exercise Price $7.50 15,625
200 Cityscape Financial
Expiration October 1997,
Exercise Price $15.00 107,500
30 Intel Corporation
Expiration October 1997,
Exercise Price $95.00 14,400
100 Medicis Pharmaceutical Corporation
Expiration October 1997,
Exercise Price $40.00 7,500
500 Micron Technology
Expiration October 1997,
Exercise Price $25.00 6,250
50 Morgan Stanley High Tech
Expiration December 1997,
Exercise Price $395.00 13,750
75 Organogenesis
Expiration October 1997,
Exercise Price $20.00 937
300 PLC Systems, Inc.
Expiration October 1997,
Exercise Price $12.50 11,250
Presstek, Inc.:
50 Expiration October 1997,
Exercise Price $35.00 4,062
100 Expiration October 1997,
Exercise Price $40.00 29,300
50 S&P 100 Index
Expiration November 1997,
Exercise Price $800.00 22,813
See notes to the financial statements.
SCHEDULE OF INVESTMENTS (CONT.)
SEPTEMBER 30, 1997
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ---------------------------------- -----
PUT OPTIONS PURCHASED (CONT.)
100 S&P 500 Index
Expiration December 1997,
Exercise Price $820.00 $ 67,500
50 S&P Midcap Index
Expiration December 1997,
Exercise Price $325.00 37,500
200 Ugly Duckling Corporation
Expiration October 1997,
Exercise Price $15.00 15,000
200 Western Digital Corporation
Expiration October 1997,
Exercise Price $45.00 103,750
------------
TOTAL PUT OPTIONS PURCHASED
(Cost $910,744) 628,012
------------
CALL OPTIONS PURCHASED - 0.9%*
100 Ascend Communications, Inc.
Expiration October 1997,
Exercise Price $30.00 33,125
100 Diamond Multimedia Systems, Inc.
Expiration October 1997,
Exercise Price $7.50 48,125
500 ImClone Systems Incorporated
Expiration November 1997,
Exercise Price $5.00 156,250
------------
TOTAL CALL OPTIONS PURCHASED
(Cost $278,250) 237,500
------------
PRINCIPAL
AMOUNT
- ---------
SHORT-TERM INVESTMENTS - 61.8%*
U.S. TREASURIES - 52.9%*<F1>
U.S. Treasury Bills:
$3,600,000 5.03%, 10/02/1997 3,599,504
3,500,000 5.39%, 11/20/1997 3,475,354
4,000,000 5.14%, 12/11/1997 3,961,579
3,000,000 4.66%, 12/18/1997 2,969,709
------------
TOTAL U.S. TREASURIES 14,006,146
------------
PRINCIPAL
AMOUNT VALUE
- --------- -----
VARIABLE RATE DEMAND NOTES - 8.9%*
$270,039 General Mills, Inc. $ 270,039
728,645 Johnson Controls, Inc. 728,645
757,897 Pitney Bowes, Inc. 757,897
132,987 Sara Lee Corporation 132,987
467,295 Wisconsin Electric Power Co. 467,295
------------
TOTAL VARIABLE RATE DEMAND NOTES 2,356,863
------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $16,361,360) 16,363,009
------------
TOTAL INVESTMENTS
(Cost $23,449,973) $24,400,574
============
* 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.
SCHEDULE OF CALL OPTIONS WRITTEN
SEPTEMBER 30, 1997
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ----------------------------------- ----------
300 Boston Chicken, Inc.
Expiration November 1997,
Exercise Price $15.00 $ 31,875
100 Medicis Pharmaceutical Corporation
Expiration October 1997,
Exercise Price $40.00 63,750
300 PLC Systems, Inc.
Expiration October 1997,
Exercise Price $12.50 60,000
200 Ugly Duckling Corporation
Expiration October 1997,
Exercise Price $15.00 16,875
------------
TOTAL CALL OPTIONS WRITTEN
(Premiums received $157,426) $172,500
============
See notes to the financial statements.
SCHEDULE OF SECURITIES SOLD SHORT
SEPTEMBER 30, 1997
SHARES VALUE
------ -----
14,100 Advanta Corporation - Class A $ 410,663
7,550 Advanta Corporation - Class B 205,737
10,000 Agouron Pharmaceuticals, Inc. 481,250
8,900 Amgen, Inc. 426,644
20,500 Aphton Corporation 281,875
18,200 Applebee's International, Inc. 455,000
13,800 Arcadia Financial, Ltd. 156,975
7,000 Arrow International, Inc. 231,875
9,000 Ascend Communications, Inc. 291,375
15,000 Avant! Corporation 436,875
8,977 Banc One Corporation 499,539
6,000 Becton Dickinson & Company 287,250
20,400 Belco Oil & Gas Corporation 444,975
10,000 C-Cube Microsystems, Inc. 340,000
5,000 CDW Computer Centers, Inc. 323,750
24,300 CNS, Inc. 203,513
18,000 CalEnergy Company, Inc. 598,500
17,000 Capital One Financial Corporation 777,750
6,000 Caterpillar Inc. 323,625
75,000 Cellular Technical Services Company 435,937
110,100 Chesapeake Energy Corporation 1,252,388
8,600 Computer Learning Centers, Inc. 335,400
14,300 ContiFinancial Corporation 464,750
3,200 Dell Computer Corporation 310,000
4,500 The Walt Disney Company 362,812
32,300 ESS Technology, Inc. 490,556
18,200 Gateway 2000, Inc. 572,163
3,000 Gillette Company 258,937
2,800 Green Tree Financial Corporation 131,600
3,400 IDEXX Laboratories, Inc. 56,950
18,000 IKON Office Solutions, Inc. 460,125
10,000 Innovex, Inc. 322,500
10,000 K2, Inc. 251,250
8,400 Lam Research Corporation 390,600
8,000 Estee Lauder Companies 370,000
10,500 Level One Communications, Inc. 422,625
SHARES VALUE
------ -----
9,000 McAfee Associates, Inc. $ 477,000
17,700 Micron Technology, Inc. 613,969
2,500 Microsoft Corporation 330,781
8,000 Nike, Inc. - Class B 424,000
1,600 Novellus Systems, Inc. 201,600
30,200 PLC Systems Inc. 426,575
8,800 PETsMART, Inc. 91,300
5,000 Presstek, Inc. 198,750
5,000 RF Monolithics, Inc. 126,250
12,000 Regal Cinemas, Inc. 322,500
12,000 Remedy Corporation 413,250
4,800 SCI Systems, Inc. 237,900
7,000 STB Systems, Inc. 255,500
8,000 Spine-Tech, Inc. 301,000
7,050 The Sports Authority, Inc. 131,306
7,500 3Com Corporation 384,375
7,300 Tommy Hilfiger Corporation 364,544
15,000 Total System Services, Inc. 358,125
10,500 Ugly Duckling Corporation 160,125
19,900 United Companies Financial Corporation 626,850
13,000 U.S. Diagnostic Inc. 99,125
9,300 VIVUS Inc. 348,750
8,000 Western Digital Corporation 320,500
18,000 Zenith Electronics Corporation 176,625
-----------
TOTAL SECURITIES SOLD SHORT
(Proceeds $22,003,064) $21,456,464
===========
See notes to the financial statements.
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
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 $19,355,916 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 two major security
dealers. The Fund does not require the brokers 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. Additionally, the Fund intends to make all required
distributions to avoid federal excise tax.
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 trading and 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. By
writing an option, the Fund may become obligated during the term of the
option to deliver or purchase the securities underlying the option at
the exercise price if the option is exercised.
NOTES TO THE FINANCIAL STATEMENTS (continued)
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 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 premium originally received decreases the
cost basis of the underlying security (or increases the proceeds on
securities sold short) and the Fund realizes a gain or loss from the
sale of the security (or closing of the short sale).
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 on 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 $653,121 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 in the capital accounts.
2. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Fund were as follows:
December 28, 1995
Year ended through
September 30, 1997 September 30, 1996
------------------ -------------------
Shares sold 9,350,759 1,026,211
Shares issued to holders in
reinvestment of dividends 16,193 -
Shares redeemed (6,557,650) (201,377)
---------- --------
Net increase 2,809,302 824,834
========== ========
3. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of investments, excluding short-term
investments, options and short positions, by the Fund for the year ended
September 30, 1997, were $35,597,653 and $29,415,109, respectively.
At September 30, 1997, gross unrealized appreciation and depreciation of
investments for tax purposes were as follows:
Appreciation $1,701,979
(Depreciation) (646,962)
----------
Net appreciation on investments $1,055,017
==========
At September 30, 1997, the cost of investments for federal income tax
purposes was $23,345,557.
At September 30, 1997, the Fund had accumulated net realized capital loss
carryovers of $38,537, $29,396 expiring in 2004 and $9,141 expiring in
2005. To the extent the Fund realizes future net capital gains, taxable
distributions to its shareholders will be offset by any unused capital
loss carryover. In addition, the Fund realized, on a tax basis, post-
October losses of $8,776,029 which are not recognized for tax purposes
until the first day of the following fiscal year.
NOTES TO THE FINANCIAL STATEMENTS (continued)
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.
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 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
year ended September 30, 1997, were as follows:
Premium Amount Number of Contracts
-------------- -------------------
Options outstanding at
September 30, 1996 $ 0 -
Options written 309,645 1,400
Options closed (124,289) (390)
Options exercised - -
Options expired (27,930) (110)
-------- -----
Options outstanding at
September 30, 1997 $157,426 900
======== =====
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. The currently approved rate
is 0.25% of average daily 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 incurred $47,461
pursuant to the Plan for the year ended September 30, 1997.
PRUDENT BEAR FUND ANNUAL REPORT SEPTEMBER 30, 1997
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
