PRUDENT BEAR FUND ANNUAL REPORT SEPTEMBER 30, 1998
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PRUDENT
BEAR
FUND
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PRUDENT BEAR FUND
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S&P 500 NASDAQ COMPOSITE PRUDENT BEAR FUND
------- ---------------- -----------------
12/28/95 $10,000 $10,000 $10,000
3/31/96 $10,536 $10,479 $9,519
9/30/96 $11,349 $11,694 $8,880
3/31/97 $12,625 $11,663 $9,018
9/30/97 $15,940 $16,114 $7,420
3/31/98 $18,685 $17,570 $6,822
9/30/98 $17,381 $16,231 $7,691
For the period ended September 30, 1998
Annualized
Since
Commencement
One Year of Operations
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Prudent Bear Fund 3.66% (9.07)%
S&P 500 9.05% 22.16%
NASDAQ Composite 0.73% 19.17%
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, 1998, the results of
its operations, the changes in its net assets and the financial highlights for
each of the periods indicated, 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, 1998 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
/s/PricewaterhouseCoopers, LLC
Milwaukee, Wisconsin
November 19, 1998
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PRUDENT BEAR FUND
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November 13, 1998
Dear Shareholder
The six months ended 9/30/98 marked an important period in America's financial
history. This period will be remembered in the history books as being crucial
because it marked the end of the "credit bubble", and the probable beginning of
a horrible bear market. It was during this six months that both Russia and the
famous hedge fund, Long Term Capital Management, collapsed, which caused credit
spreads to go through the roof. (Credit spreads measure the difference in yields
between US Treasury securities and riskier securities.) These two events will be
considered as critical to the unwinding of the biggest financial and economic
bubble in modern economic history. For the six months ended 9/30/98, the Prudent
Bear Fund advanced by 12.75%, as compared to a 7.69% loss in the Standard &
Poor's 500. The Fund lost money in the quarter ended 6/30/98, but was the best
performing mutual fund in the entire country in the 9/30/98 quarter.
I will spend the vast majority of my letter focusing on the economy because I am
very confident that I have drawn the right conclusions and these conclusions are
the basis for the underlying positions that I am taking for the fund. Managing
the short portfolio over the last six months has not been easy, and has proved
extraordinarily frustrating for much of this period. It often seems that the
more you know about a company's deteriorating fundamental prospects, the less it
matters, and the faster the stock rises. We will always strive to manage the
fund to deliver excellent results in the bear market that we believe has already
begun. We believe that the October advance was merely a rally in a bear market
that will soon resume, trapping a number of innocent investors who thought that
the downturn was over.
It is amazing to us that so many experts are still operating under the
traditional premise that as long as inflation and interest rates stay low, the
stock market will not suffer a significant decline. Fifty out of 55 economists
essentially made this bold, but preposterous, prediction on July 7th in a Wall
Street Journal poll. The traditional economic model says that inflation and
interest rates have to rise before the stock market normally declines, but these
are not ordinary conditions. It seems extraordinarily clear to us that the
danger facing the U.S. economy is the global deflationary force that is
spiraling towards our shores. The only two historic models to consider in this
unusual circumstance are Japan in the late 1980s and the US situation in the
late 1920s. Both of these secular bear markets unfolded when inflation and
interest rates were falling, and the domestic economy was strong.
OUR RECENT PROSPERITY HAS BEEN FUELED BY A CREDIT BUBBLE
It is now critically important to reassess the long-running US financial and
economic boom, and recognize that what appeared to most as a sound and
prosperous economy was actually much more a product of unprecedented credit
excesses. In particular, financial credit allowed the massive leveraging of
securities on the balance sheets of hedge funds, Wall Street securities firms
and other financial institutions. Indeed, it was this profligate credit creation
mechanism that was largely responsible for the explosive growth of today's $3.7
trillion mortgage and asset-backed securities market and the $430 billion junk
bond market, where issuance of all these securities grew at a 70% rate in the
first half of 1998. This financial excess has also been responsible for the boom
in subprime consumer lending which has created hundreds of billions of high risk
auto, credit card and mortgage debt that has been a great but unappreciated
stimulant for the US economy. Just as the Japanese and Southeast Asian "Tiger"
economies were perceived as economic miracles until the inevitable bursting of
their respective credit bubbles, we see an alarming lack of understanding as to
the true underpinnings of today's financial bubble and terribly maladjusted US
economy. Only the Austrian School of economics, with its focus on credit
excesses as being the root cause of business cycle booms and busts, provides the
most logical basis for understanding the current environment.
History has proven time and again that long periods of economic prosperity with
accommodative financing lead to excesses, usually as (1) confident consumers
over-consume and (2) over-zealous companies borrow aggressively and invest in
building too much capacity. The latter was certainly the case for businesses
throughout Asia as extremely "easy money" led to massive overinvestments in
manufacturing and basic industries. But such excesses have not been limited to
just Asia, as GE Chairman, Jack Welch has said, there is "excess global capacity
in virtually every industry." On the consumer side of the equation, demand has
been boosted by the strong wealth effects from a skyrocketing stock market, but
also from stretching credit use to an extreme. Household debt is now at an all-
time high, having increased from 68% of personal disposable income to 95% over
the last fifteen years. Financial historians will certainly look back with
disbelief at financial institutions lending homeowners up to 125% of their
home's value, providing extra cash to "take a vacation, buy a hot stock" or to
buy more extravagant holiday gifts. Financial companies, which lend for plastic
surgery, hair transplants, taxi medallions, restaurant franchises or, really
just about anything, have proliferated. It hasn't seemed to matter, as this new
ilk of lenders has been able to bundle and securitize these loans, much to the
delight of an insatiable market appetite for risky securities.
But the problem with booms is that they eventually turn to "busts", leaving
overcapacity that becomes ever-more problematic as overindebted consumers and
businesses eventually must retrench. This can easily lead to a "vicious cycle",
as deflationary conditions lead to excess supply, lower prices, unmanageable
debt, default and a severe economic downturn. That is exactly what we are seeing
throughout the Asian region, and this is now spreading elsewhere. Importantly,
the current Asian depression is more of a global problem, as this region, after
years of heavy investment, acts as much as the global price setter as the major
manufacturer of most goods, as well as being the marginal buyer for many basic
commodities. As domestic demand has collapsed following the financial meltdown,
and with greatly depreciated currencies, these economies now have almost
unlimited capacity and considerable pricing flexibility to destroy pricing and,
hence, profitability for producers of goods, worldwide. We see this in many
companies and industries we follow and the long-term implications of this major
development are much unappreciated by Wall Street.
We have shown how the credit bubble fueled the economy and the last leg of this
bull market. We are now highly confident that the bull market in stocks is over
and the economy will deteriorate rapidly, now that the "Humpty Dumpty" of credit
bubbles has fallen off the wall.
THE CREDIT BUBBLE HAS "POPPED"
The turmoil in Russia has been crucial to the end of the global credit cycle
because it was there that the credit bubble first popped. Leveraged speculators
who participated in Russian markets were also involved in leveraged speculation
in most other markets around the globe. However, with massive losses and with
yield spreads that have skyrocketed, these leveraged positions are going to have
to be unwound. The ability and willingness to hold risky paper is disappearing.
This global de-leveraging is important because nothing has a greater impact on
an economic sector than a change from an accommodative credit environment to a
restrictive environment. As we discussed, exceptionally easy credit artificially
prolonged the American business cycle. Tightening credit now spells trouble for
the entire US economy, as it has been the jet fuel that has kept it humming.
Excess capital has been funneled into marginal investments in plant and
equipment, real estate, and common stocks.
There is no better indicator that America's credit bubble has popped than the
disappearing junk bond market. In the first seven months of this year,
corporations floated $110 billion of this low-grade debt. In August, only $3
billion of new junk bonds were issued. In addition, yield spreads have widened
from 2.90 percentage points to 6.60 against Treasuries as investors have rushed
to quality. Incredibly, in a market where investors once bought junk offerings
at a rate of $15 billion a month, finding buyers is now a problem. This will
have a profound effect on thousands of companies with overleveraged balance
sheets that rely heavily on the capital markets for new financing. They are now
finding credit more expensive or possibly unavailable at any cost.
As asset-backed securitizations dry up, as we've seen recently, credit for the
consumer will also be eventually restricted. Subprime home equity lenders have
been virtually shut out of the securitization market, causing Southern Pacific
Funding to claim bankruptcy protection. Other subprime lenders (all held as
short positions in BEARX), such as United Companies Financial and FirstPlus
Financial, have seen their stocks drop 80%-90% in the last five months due to
these troubles. There are also extremely serious problems in the commercial
mortgage arena which have essentially "shut down" much commercial real estate
activity. The "credit crunch" is here, and the last two cuts in short-term rates
by the FED have not solved this problem. Credit spreads remain too high and will
remain so, because it will be impossible to find new buyers to replace the
leveraged purchasers of securities that existed before.
CAN'T THE FED FIX THIS?
Because the primary consequence of a bursting credit and asset bubble is
deflation, most pundits believe the Federal Reserve can "flick a switch" and
provide a quick cure by lowering interest rates and expanding the money supply.
Economist after economist now tell CNBC viewers and Wall Street Journal readers
that there can be no deflation as long as the Fed continues to cut rates.
Multiple stock market strategists follow suit saying that the stock market
should not decline further as long as interest rates are being cut. Yes, central
bankers can add liquidity to the system, but importantly, cannot control where
this liquidity goes, nor can they force bankers to lend or borrowers to borrow.
This is why yield quality spreads rise, as the markets gravitate away from
borrowers more likely to default. Monetary velocity will slow, and banks will
restrict credit once defaults start to rise. The problem in both the global and
American economy is too much credit, and attempting to loosen credit further
will not solve any problems.
In our opinion, reducing interest rates will not save us from the deflationary
problems that our global economy is now having. Lower short-term interest rates
and an attempt to print money will not revive it. Economic jargon calls the
inability of monetary policy to reinvigorate the economy "pushing on a string".
With the current crisis in the current global economy, this theoretical example
is now all too real. The easy money that fueled stock markets and economies
around the world has dried up, and the deflationary forces that accompany the
bust side of the boom will swamp government monetary and fiscal policy until the
excesses are wrung out of the economy. History has shown us twice that even
dramatic reductions in interest rates won't soften the bust side of a credit
boom gone bad.
Japan represents the most recent living proof, where interest rates fell from 7%
to almost 0% over eight years, and where the Japanese central bank has tried
desperately to increase the money supply. Hundreds of billions of dollars of
liquidity were injected into the system by the Bank of Japan but borrowers of
this "hot money" avoided the deflationary conditions within the Japanese
economy, choosing instead to fuel the financial asset bubble in the U.S. and
Europe. Instead of helping the system, the BOJ actions only added to the
instability of the global financial system that must now be dealt with. Even
after all this massive easing, Japanese stocks just hit a 12-year low, and the
IMF expects the Japanese economy to shrink by 2.5% this year. Japan's leaders
say their economy stands on the verge of a "deflationary spiral" and their
devastated banking system requires a massive taxpayer bailout.
In the 1930s, the U.S. also discovered that central bankers were no match for a
ruptured credit bubble. This was the last time our country has experienced
serious deflation. Most economists and Wall Street pundits believe that the
Federal Reserve actually contributed to the economic collapse with tight
monetary policy. Therefore, they claim that we will never have another
deflationary bout, since the FED has learned its lesson and will be extremely
accommodative. However, Murray Rothbard, a great economist who studied this
period closely, found that the FED tried mightily to inject reserves, yet still
there was a contraction in the money supply. After the stock market crash of
1929, the Fed cut the discount rate from 6% to 2% by the end of 1930. The
discount rate dropped to as low as 1.5% in 1931 as the Fed frantically bought
government securities in an attempt to expand the money supply. But the problem
was the "pushing on a string" phenomenon. No matter how hard the Fed tried to
provide "controlled reserves" to the banks by buying securities, it didn't
succeed in increasing the money supply. The money supply actually shrank because
banks were either unable or unwilling to increase their bank lending. Potential
bank customers who were judged reasonable credit risks were unwilling to borrow
because their earnings prospects were deteriorating, and they knew it was
foolish to borrow and buy something today when the price would be lower next
month. Therefore, there was a "demand" problem from potential creditworthy
borrowers. Other entities wanting loans were often deemed to be poor credit
risks in an environment of spiraling credit defaults. The problem was
exacerbated as individuals hoarded cash and increased their savings, causing
monetary velocity to plummet. The same circumstances ensue in every time period
experiencing a full-fledged deflation, making "printing money" a great concept,
but so difficult to accomplish.
There is no doubt that today the Federal Reserve is orchestrating a
reliquification of the credit markets. Importantly, the Fed is much assisted in
this task by a banking system now creating credit at an alarming rate and by
Fannie Mae and Freddie Mac aggressively ballooning their balance sheets with
mortgages. But this is no more than a desperate attempt to perpetuate a bubble
by facilitating even more credit excesses, before the psychological effects of
deflation have set in. This will prove worse than ineffective in the long term,
with the furthering of even more egregious financial and economic dislocations.
More credit may postpone the day of reckoning, but is simply not a cure for too
much credit. We also believe that this policy will be also ineffectual in the
short term as the bond market and currency markets will likely react negatively
and force restraint of the current reckless extension of credit which will
eventually exacerbate the coming recession. The problem in the global economy is
not one of illiquidity, but insolvency.
PORTFOLIO MANAGEMENT COMMENTS
At the date of this letter, we have invested the fund roughly 75% in short sales
and about 12% long, with a significant percentage of that in gold stocks. We
have never been more confident in the stocks we are short, as their fundamental
prospects are deteriorating badly. We are heavily short companies that will be
negatively affected by the end of the credit bubble. We appreciate your
continued confidence.
/s/David W. Tice
David W. Tice
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PRUDENT BEAR FUND
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STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
ASSETS:
Investments, at value (cost $146,241,948) $139,615,913
Cash 509,672
Deposit at brokers for short sales 3,169,869
Receivable from broker for proceeds
on securities sold short 152,854,489
Receivable for investments sold 8,116,789
Capital shares sold 15,002,492
Interest receivable 87,146
Other receivables 159,853
Organizational expenses, net of
accumulated amortization 13,701
Other assets 22,469
-----------
Total Assets 319,552,393
-----------
LIABILITIES:
Securities sold short, at value
(Proceeds of $151,118,295) 131,756,898
Payable for securities purchased 11,155,349
Capital shares redeemed 2,318,292
Options written, at value
(Premiums received $210,555) 160,925
Payable to Adviser 175,648
Dividends payable on short positions 85,008
Accrued expenses and other liabilities 208,910
-----------
Total Liabilities 145,861,030
-----------
NET ASSETS $173,691,363
===========
NET ASSETS CONSIST OF:
Capital stock $178,902,175
Accumulated undistributed net
investment income 2,492,208
Accumulated undistributed net realized loss
on investments sold, securities sold short
and option contracts expired or closed (20,488,012)
Net unrealized appreciation
(depreciation) on:
Investments (6,626,035)
Short positions 19,361,397
Written options 49,630
-----------
NET ASSETS $173,691,363
===========
Shares outstanding
(250,000,000 shares of $.0001
par value authorized)
23,662,896
Net Asset Value, Redemption Price
and Offering Price Per Share $7.34
=====
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
INVESTMENT INCOME:
Interest income $ 4,628,421
Dividend income on long positions
(net of foreign taxes withheld of $578) 27,430
-----------
Total investment income 4,655,851
-----------
EXPENSES:
Investment advisory fee 868,169
Administration fee 35,798
Shareholder servicing and accounting costs 100,630
Custody fees 95,210
Federal and state registration 52,564
Professional fees 71,838
Distribution expense 173,634
Reports to shareholders 22,805
Directors' fees and expenses 3,366
Amortization of organizational expenses 6,015
Other 12,855
-----------
Total operating expenses before
dividends on short positions 1,442,884
Dividends on short positions 196,261
-----------
Total expenses 1,639,145
-----------
NET INVESTMENT INCOME 3,016,706
-----------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized loss on:
Long transactions (916,024)
Short transactions (6,787,121)
Option contracts expired or closed (2,373,656)
Futures contracts closed (1,560,074)
Change in unrealized appreciation
(depreciation) on:
Investments (7,576,636)
Short positions 18,814,797
Written options 64,704
-----------
Net realized and unrealized
loss on investments (334,010)
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 2,682,696
===========
See notes to the financial statements.
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PRUDENT BEAR FUND
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STATEMENT OF CHANGES IN NET ASSETS
Year Ended Year Ended
September 30, 1998 September 30, 1997
------------------ ------------------
OPERATIONS:
Net investment income $ 3,016,706 $ 1,471,882
Net realized loss on:
Long transactions (916,024) (1,186,456)
Short transactions (6,787,121) (5,853,271)
Option contracts expired
or closed (2,373,656) (1,782,678)
Futures contracts closed (1,560,074) -
Change in unrealized appreciation
(depreciation) on:
Investments (7,576,636) 991,276
Short positions 18,814,797 1,026,318
Written options 64,704 (15,074)
------------ ------------
Net increase (decrease) in net
assets resulting from operations 2,682,696 (5,348,003)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM NET INVESTMENT INCOME (1,895,943) (183,831)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 457,679,213 77,048,623
Shares issued to holders in
reinvestment of dividends 1,507,668 137,320
Cost of shares redeemed (312,781,980) (52,480,055)
------------ ------------
Net increase in net assets
resulting from capital share
transactions 146,404,901 24,705,888
------------ ------------
TOTAL INCREASE IN NET ASSETS 147,191,654 19,174,054
NET ASSETS:
Beginning of period 26,499,709 7,325,655
------------ ------------
End of period (including
undistributed net investment
income of $2,492,208 and
$1,367,233, respectively) $173,691,363 $26,499,709
============ ============
See notes to the financial statements.
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PRUDENT BEAR FUND
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FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
December 28, 1995<F1>
Year Ended Year Ended through
Per Share Data: September 30, 1998 September 30, 1997 September 30, 1996
------------------ ------------------ ------------------
<C> <C> <C>
Net asset value, beginning of period $7.29 $8.88 $10.00
------------ ------------ ------------
Income from investment operations:
Net investment income<F2> 0.29<F3> 0.62<F3> 0.09
Net realized and unrealized (losses) on investments (0.01) (2.06) (1.21)
------------ ------------ ------------
Total from investment operations 0.28 (1.44) (1.12)
------------ ------------ ------------
Less distributions from net investment income (0.23) (0.15) -
------------ ------------ ------------
Net asset value, end of period $7.34 $7.29 $8.88
============ ============ ============
Total return<F4> 3.66% -16.44% -11.20%
Supplemental data and ratios:
Net assets, end of period $173,691,363 $26,499,709 $7,325,655
Ratio of operating expenses to average net assets<F5> <F6> <F7> 2.08% 2.59% 2.75%
Ratio of dividends on short positions to average net assets<F6> 0.28% 0.34% 0.34%
Ratio of net investment income to average net assets<F6> <F7> 4.34% 7.75% 4.07%
Portfolio turnover rate 480.25% 413.25% 91.31%
</TABLE>
<F1> Commencement of operations.
<F2> Net investment income before dividends on short positions for the periods
ended September 30, 1998, September 30, 1997 and September 30, 1996
were $0.30, $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, 1998, September 30, 1997 and September 30, 1996 were 2.36%,
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.
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PRUDENT BEAR FUND
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SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1998
SHARES VALUE
------- ------
COMMON STOCKS - 13.7%<F1>
BASIC MATERIALS - 7.4%<F1>
84,000 AngloGold Limited - ADR $ 2,257,500
90,000 Barrick Gold Corporation 1,800,000
104,400 Battle Mountain Gold Company 632,925
48,800 BGR Precious Metals, Inc.<F2><F7> 367,711
42,000 Cambior Inc. 249,375
1,977,400 Campbell Resources Inc.<F2> 803,319
2,466,000 Canarc Resource Corporation<F2><F7> 468,576
850,000 Canyon Resources Corporation<F2> 318,750
50,000 Compania de Minas Buenaventura S.A.-ADR 581,250
310,000 Donner Minerals Ltd.<F2><F7> 75,154
442,800 Golden Star Resources Ltd.<F2> 553,500
30,000 Homestake Mining Company 363,750
434,500 International Precious Metals Corporation<F2><F8> 4,345
200,000 International Uranium Corporation<F2><F7> 58,970
50,000 Kinross Gold Corporation<F2> 153,125
525,738 Maxam Gold Corporation<F2> 78,861
100,000 Newmont Mining Corporation 2,425,000
150,000 Pan American Silver Corporation<F2> 881,250
167,500 Randgold & Exploration Company Ltd. - ADR<F2> 120,391
100,000 Rio Narcea Gold Mines, Ltd.<F2><F7> 183,462
52,400 TVX Gold Inc. 140,825
100,000 Viceroy Resource Corporation<F2><F7> 216,879
1,750,000 William Resources Inc.<F2><F7> 137,597
--------------
12,872,515
--------------
CAPITAL GOODS - 0.3%<F1>
60,000 Baldwin Technology Company, Inc. - Class A<F2> 330,000
10,000 Durakon Industries, Inc.<F2> 107,500
20,000 UTILX Corporation<F2> 77,500
--------------
515,000
--------------
CONSUMER-CYCLICALS - 0.3%<F1>
91,000 ADDvantage Media Group, Inc.<F2> 42,656
7,500 Computer Learning Centers, Inc.<F2><F5> 59,531
29,875 Hollywood Park, Inc.<F2> 309,953
1,120,000 LS Capital Corporation<F2> 100,800
300,000 LS Capital Corporation
(Acquired 2/19/98, Cost $87,000)
<F2><F6><F8><F4> 22,950
--------------
535,890
--------------
CONSUMER PRODUCTS - 0.6%<F1>
41,000 AEP Industries Inc.<F2> 861,000
40,000 Lakeland Industries, Inc.<F2> 270,000
--------------
1,131,000
--------------
ENERGY - 0.1%<F1>
20,000 Calgon Carbon Corporation 148,750
--------------
SHARES VALUE
------- ------
ENTERTAINMENT & LEISURE - 0.2%<F1>
1,000,000 Restaurant Brands New Zealand Limited<F7> $ 400,400
--------------
FINANCIALS - 0.5%<F1>
5,000 Loews Corporation 421,875
25,000 Security First Technologies
Corporation<F2><F5> 371,875
--------------
793,750
--------------
HEALTH CARE - 0.7%<F1>
40,000 Advanced Neuromodulation Systems, Inc.<F2> 265,000
400,500 Conceptus, Inc.<F2> 300,375
50,000 Organogenesis Inc.<F2><F5> 521,875
20,000 VIVUS, Inc.<F2><F5> 69,375
10,000 Zonagen, Inc.<F2><F5> 155,000
--------------
1,311,625
--------------
TECHNOLOGY - 3.4%<F1>
29,300 Applied Magnetics Corporation<F2><F5> 124,525
33,600 Avant! Corporation<F2><F5> 428,400
28,500 BRC Holdings, Inc.<F2> 484,500
60,000 Forecross Corporation<F2><F7><F8> 165,000
30,000 In Focus Systems, Inc.<F2> 180,000
15,000 Intel Corporation<F5> 1,286,250
18,000 MindSpring Enterprises, Inc.<F2><F5> 747,000
88,700 SEEC, Inc.<F2> 426,869
4,100 STB Systems, Inc.<F2><F5> 28,700
44,000 SoftNet Systems, Inc.<F2><F5> 445,500
8,000 Transcrypt International, Inc.<F2><F5> 21,000
43,000 Xilinx, Inc.<F2><F5> 1,505,000
--------------
5,842,744
--------------
WHOLESALE PRODUCTS - 0.2%<F1>
74,300 Opta Food Ingredients, Inc.<F2> 297,200
--------------
TOTAL COMMON STOCKS
(Cost $29,750,261) 23,848,874
--------------
See notes to the financial statements.
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PRUDENT BEAR FUND
- ----------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONT.)
SEPTEMBER 30, 1998
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ----------------------------------- ------
PUT OPTIONS PURCHASED - 6.5%<F1>
300 Amazon.com, Inc.
Expiration October 1998,
Exercise Price $75.00 $ 41,250
300 Ambac Financial Group, Inc.
Expiration November 1998,
Exercise Price $45.00 65,625
300 America Online, Inc.
Expiration October 1998,
Exercise Price $80.00 12,187
50 AmeriCredit Corp.
Expiration October 1998,
Exercise Price $30.00 28,750
500 Associates First Capital Corporation - Class A
Expiration November 1998,
Exercise Price $60.00 125,000
80 Aviron
Expiration October 1998,
Exercise Price $17.50 22,000
300 Bankers Trust Corporation
Expiration January 1999,
Exercise Price $60.00 273,750
300 The Black & Decker Corporation
Expiration November 1998,
Exercise Price $50.00 258,750
350 Capital One Financial Corporation
Expiration October 1998,
Exercise Price $95.00 87,500
500 Centocor, Inc.
Expiration January 1999,
Exercise Price $35.00 150,000
1,500 The Chase Manhattan Corporation
Expiration October 1998,
Exercise Price $45.00 534,375
10 Cintas Corporation
Expiration November 1998,
Exercise Price $45.00 1,437
Cisco Systems, Inc.:
450 Expiration October 1998,
Exercise Price $53.375 23,906
225 Expiration October 1998,
Exercise Price $60.00 45,703
300 Expiration October 1998,
Exercise Price $63.375 105,000
400 Citicorp
Expiration October 1998,
Exercise Price $95.00 215,000
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ----------------------------------- ------
Clear Channel Communications, Inc.:
500 Expiration October 1998,
Exercise Price $40.00 $ 15,625
280 Expiration October 1998,
Exercise Price $45.00 38,500
200 Expiration October 1998,
Exercise Price $47.50 45,000
175 Expiration January 1999,
Exercise Price $40.00 36,094
160 Expiration January 1999,
Exercise Price $47.50 75,000
70 Coca-Cola Enterprises Inc.
Expiration October 1998,
Exercise Price $25.00 6,562
800 Computer Learning Centers, Inc.
Expiration October 1998,
Exercise Price $7.50 45,000
300 Conseco, Inc.
Expiration October 1998,
Exercise Price $25.00 9,375
400 Coulter Pharmaceutical, Inc.
Expiration October 1998,
Exercise Price $20.00 30,000
Dell Computer Corporation:
300 Expiration October 1998,
Exercise Price $55.00 16,875
200 Expiration November 1998,
Exercise Price $47.50 22,500
500 Expiration November 1998,
Exercise Price $60.00 175,000
200 Dollar Tree Stores, Inc.
Expiration October 1998,
Exercise Price $30.00 20,000
700 Donaldson, Lufkin & Jenrette, Inc.
Expiration October 1998,
Exercise Price $30.00 376,250
300 Echostar Communications Corporation - Class A
Expiration December 1998,
Exercise Price $17.50 26,250
100 Elan Corporation plc - ADR
Expiration October 1998,
Exercise Price $60.00 1,875
30 Enhance Financial Services Group Inc.
Expiration December 1998,
Exercise Price $25.00 2,250
500 Excite, Inc.
Expiration November 1998,
Exercise Price $25.00 65,625
See notes to the financial statements.
- ----------------------------------------------------------------------------
PRUDENT BEAR FUND
- ----------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONT.)
SEPTEMBER 30, 1998
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ----------------------------------- ------
300 Freddie Mac
Expiration October 1998,
Exercise Price $40.00 $ 300
300 Global TeleSystems Group, Inc.
Expiration October 1998,
Exercise Price $30.00 46,875
150 Guidant Corporation
Expiration October 1998,
Exercise Price $65.00 9,844
250 The Home Depot, Inc.
Expiration November 1998,
Exercise Price $35.00 34,375
300 Household International, Inc.
Expiration October 1998,
Exercise Price $40.00 121,875
300 Illinois Tool Works Inc.
Expiration October 1998,
Exercise Price $50.00 13,125
The Inter@ctive Week Internet Index:
100 Expiration October 1998,
Exercise Price $300.00 9,375
1,200 Expiration November 1998,
Exercise Price $320.00 1,155,000
200 Expiration November 1998,
Exercise Price $370.00 507,500
Intermedia Communications Inc.:
100 Expiration October 1998,
Exercise Price $40.00 157,500
200 Expiration October 1998,
Exercise Price $22.50 13,750
300 Johnson Controls, Inc.
Expiration October 1998,
Exercise Price $45.00 16,875
100 Labor Ready, Inc.
Expiration November 1998,
Exercise Price $20.00 61,250
200 Lehman Brothers Holdings Inc.
Expiration October 1998,
Exercise Price $35.00 150,000
100 Lincare Holdings Inc.
Expiration November 1998,
Exercise Price $35.00 15,000
750 Lucent Technologies Inc.
Expiration October 1998,
Exercise Price $67.50 243,750
MBIA, Inc.:
230 Expiration October 1998,
Exercise Price $55.00 84,812
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ----------------------------------- ------
400 Expiration November 1998,
Exercise Price $55.00 $ 220,000
MBNA Corporation:
500 Expiration October 1998,
Exercise Price $25.00 15,625
300 Expiration October 1998,
Exercise Price $30.00 71,250
300 Expiration December 1998,
Exercise Price $25.00 33,750
MGIC Investment Corporation:
460 Expiration October 1998,
Exercise Price $40.00 163,875
30 Expiration December 1998,
Exercise Price $40.00 12,937
100 Mattel, Inc.
Expiration October 1998,
Exercise Price $37.50 96,250
150 Medtronic, Inc.
Expiration November 1998,
Exercise Price $55.00 34,687
500 Micrel, Incorporated
Expiration October 1998,
Exercise Price $25.00 84,375
210 MiniMed Inc.
Expiration October 1998,
Exercise Price $50.00 210
800 Northern Telecom Limited
Expiration October 1998,
Exercise Price $30.00 95,000
200 Novellus Systems, Inc.
Expiration December 1998,
Exercise Price $25.00 53,750
Owens Corning:
550 Expiration October 1998,
Exercise Price $35.00 175,312
200 Expiration December 1998,
Exercise Price $35.00 83,750
200 Philadelphia Gold & Silver Index
Expiration October 1998,
Exercise Price $75.00 87,500
350 The PMI Group, Inc.
Expiration December 1998,
Exercise Price $55.00 339,063
200 Papa John's International, Inc.
Expiration October 1998,
Exercise Price $30.00 19,375
200 Providian Financial Corporation
Expiration October 1998,
Exercise Price $70.00 7,500
See notes to the financial statements.
- ----------------------------------------------------------------------------
PRUDENT BEAR FUND
- ----------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONT.)
SEPTEMBER 30, 1998
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ----------------------------------- ------
100 Rambus Inc.
Expiration February 1999,
Exercise Price $35.00 $ 6,875
400 RealNetworks, Inc.
Expiration November 1998,
Exercise Price $20.00 17,500
S&P 100 Index:
300 Expiration October 1998,
Exercise Price $480.00 320,625
250 Expiration October 1998,
Exercise Price $500.00 462,500
S&P 400 Midcap Index:
450 Expiration October 1998,
Exercise Price $270.00 101,250
2,100 Expiration October 1998,
Exercise Price $290.00 997,500
1,000 Expiration October 1998,
Exercise Price $300.00 725,000
200 Sanmina Corporation
Expiration January 1999,
Exercise Price $25.00 58,750
250 SEI Investments Company
Expiration December 1998,
Exercise Price $60.00 84,375
200 Silicon Valley Bancshares
Expiration November 1998,
Exercise Price $25.00 182,500
350 Sotheby's Holdings, Inc. - Class A
Expiration October 1998,
Exercise Price $20.00 85,313
400 Source Media, Inc.
Expiration October 1998,
Exercise Price $10.00 97,500
Sunbeam Corporation:
1,200 Expiration October 1998,
Exercise Price $5.00 33,750
200 Expiration October 1998,
Exercise Price $7.50 21,250
60 Sylvan Learning Systems, Inc.
Expiration November 1998,
Exercise Price $25.00 19,125
United Companies Financial Corporation:
140 Expiration November 1998,
Exercise Price $15.00 105,000
100 Expiration November 1998,
Exercise Price $17.50 93,750
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ----------------------------------- ------
300 United Technologies Coporation
Expiration November 1998,
Exercise Price $75.00 $ 95,625
600 VeriSign, Inc.
Expiration December 1998,
Exercise Price $25.00 202,500
Vitesse Semiconductor Corporation:
550 Expiration October 1998,
Exercise Price $25.00 161,563
370 Expiration January 1999,
Exercise Price $25.00 198,875
300 WinStar Communications, Inc.
Expiration January 1999,
Exercise Price $17.50 34,688
200 Yahoo! Inc.
Expiration October 1998,
Exercise Price $65.00 6,250
--------------
TOTAL PUT OPTIONS PURCHASED
(Cost $11,788,599) 11,345,493
--------------
CALL OPTIONS PURCHASED - 2.1%<F1>
1,000 Barrick Gold Corporation
Expiration October 1998,
Exercise Price $22.50 37,500
500 Deutsche-Mark Spot Option<F8>
Expiration October 1998,
Exercise Price $59.00 365,625
Homestake Mining Company:
500 Expiration October 1998,
Exercise Price $7.50 228,125
500 Expiration January 1999,
Exercise Price $7.50 240,625
700 Expiration January 1999,
Exercise Price $12.50 96,250
500 Newmont Mining Corporation
Expiration October 1998,
Exercise Price $17.50 343,750
Philadelphia Gold & Silver Index:
700 Expiration October 1998,
Exercise Price $70.00 542,500
3,800 Expiration October 1998,
Exercise Price $75.00 1,828,750
--------------
TOTAL CALL OPTIONS PURCHASED
(Cost $4,058,440) 3,683,125
--------------
See notes to the financial statements.
- ----------------------------------------------------------------------------
PRUDENT BEAR FUND
- ----------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONT.)
SEPTEMBER 30, 1998
SHARES VALUE
------- ------
WARRANTS - 0.0%<F1>
JVWeb, Inc.
113,600 Expiration May 2001,
Exercise Price $1.00 (Cost $0) $17,750
LS Capital Corporation
300,000 Expiration March 2000,
Exercise Price $0.60 (Cost $3,000) 0
--------------
TOTAL WARRANTS PURCHASED
(Cost $3,000) 17,750
--------------
SHORT-TERM INVESTMENTS - 58.0%<F1>
U.S. TREASURIES - 57.4%<F1>
PRINCIPAL
AMOUNT: U.S. Treasury Bills:
$ 2,800,000 4.99%, 10/08/1998 2,797,283
9,100,000 4.89%, 10/29/1998 9,065,357
7,000,000 4.64%, 11/12/1998 6,962,107
4,000,000 4.76%, 11/19/1998 3,974,084
2,000,000 4.68%, 11/27/1998 1,985,180
6,700,000 3.98%, 12/03/1998 6,653,334
16,900,000 4.14%, 12/10/1998 16,763,955
13,000,000 4.14%, 12/17/1998 12,884,885
13,000,000 4.15%, 12/24/1998 12,874,121
13,000,000 4.23%, 12/31/1998 12,860,991
13,000,000 4.24%, 01/07/1999 12,849,954
--------------
TOTAL U.S. TREASURIES 99,671,251
--------------
VARIABLE RATE DEMAND NOTES<F3> - 0.6%<F1>
$1,049,420 Sara Lee Corporation, 4.9437% $ 1,049,420
--------------
TOTAL VARIABLE RATE DEMAND
NOTES 1,049,420
--------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $100,641,648) $100,720,671
--------------
TOTAL INVESTMENTS
(Cost $146,241,948) (see note 1) $139,615,913
==============
<F1> Calculated as a percentage of net assets.
<F2> Non-income producing security.
<F3> Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates.
The rates listed are as of September 30, 1998.
<F4> Restricted security.
<F5> Shares are held to cover all or a portion of a corresponding short
position.
<F6> Private placement issue (trades at a 15% discount to market value).
<F7> Foreign security.
<F8> Fair valued security.
See notes to the financial statements.
- ----------------------------------------------------------------------------
PRUDENT BEAR FUND
- ----------------------------------------------------------------------------
SCHEDULE OF SECURITIES SOLD SHORT
SEPTEMBER 30, 1998
SHARES VALUE
------- ------
38,200 Aames Financial Corporation $ 231,588
35,000 Action Performance Companies, Inc. 945,000
22,000 Amazon.com, Inc. 2,455,750
17,000 America Online, Inc. 1,891,250
60,000 AmeriCredit Corp. 1,462,500
25,000 Apollo Group, Inc. - Class A 696,875
15,000 Applebee's International, Inc. 313,125
29,300 Applied Magnetics Corporation 124,525
35,000 Applied Materials, Inc. 883,750
15,000 Arterial Vascular Engineering, Inc. 555,000
35,000 Associates First Capital Corporation - Class A 2,283,750
33,600 Avant! Corporation 428,400
47,300 Aviron 730,194
15,000 Avon Products, Inc. 420,937
30,000 BankAmerica Corporation 1,803,750
40,000 BEA Systems, Inc. 865,000
50,000 Best Buy Co., Inc. 2,075,000
24,000 Bestfoods 1,162,500
50,000 Biomatrix, Inc. 1,950,000
28,000 BioTime, Inc. 252,000
47,000 Biovail Corporation International 1,266,062
35,400 Blue Rhino Corporation 358,425
19,800 Borders Group, Inc. 440,550
61,000 Brightpoint, Inc. 468,937
70,000 CBS Corporation 1,697,500
38,400 C-Cube Microsystems Inc. 672,000
57,000 CMAC Investment Corporation 2,479,500
24,300 CNS, Inc. 92,644
69,900 CTC Communications Corp. 397,556
33,200 CalEnergy Company, Inc. 879,800
25,000 Carnival Corporation 795,312
105,000 Cellular Technical Services Company, Inc. 49,219
100,000 Centocor, Inc. 3,962,500
105,100 Chesapeake Energy Corporation 124,806
10,000 Citicorp 929,375
30,000 Clear Channel Communications, Inc. 1,425,000
21,000 Closure Medical Corporation 441,000
10,000 Coinmach Laundry Corporation 98,750
142,600 Computer Learning Centers, Inc. 1,131,887
30,000 Conseco, Inc. 916,875
55,000 Coulter Pharmaceutical, Inc. 1,368,125
190,000 Credit Acceptance Corporation 1,175,625
50,000 Dal-Tile International Inc. 453,125
30,000 Dell Computer Corporation 1,972,500
86,100 Digital Lightwave, Inc. 158,747
SHARES VALUE
------- ------
16,600 Dispatch Management Services Corp. $ 222,025
81,500 Doral Financial Corporation 1,304,000
30,000 EchoStar Communications Corporation - Class A 720,000
5,000 EMCORE Corporation 39,062
20,000 Envoy Corporation 437,500
36,000 Excite, Inc. 1,469,250
70,000 Exodus Communications, Inc. 1,706,250
73,100 First Alliance Corporation 461,444
170,200 FIRSTPLUS Financial Group, Inc. 1,946,662
100,000 Full House Resorts, Inc. 193,750
35,000 Gateway 2000, Inc. 1,824,375
38,000 Global TeleSystems Group, Inc. 1,282,500
10,000 Great Plains Software, Inc. 472,500
30,000 Guidant Corporation 2,227,500
12,000 Guitar Center, Inc. 225,000
70,000 Household International, Inc. 2,625,000
40,000 IDEC Pharmaceuticals Corporation 950,000
20,000 ISS Group, Inc. 637,500
15,000 Illinois Tool Works Inc. 817,500
65,000 The Immune Response Corporation 747,500
46,000 Inhale Therapeutic Systems 1,288,000
32,000 Intel Corporation 2,744,000
40,000 Intelligroup, Inc. 680,000
36,500 International Isotopes Inc. 465,375
100,000 Isis Pharmaceuticals, Inc. 1,137,500
40,000 Johnson Controls, Inc. 1,860,000
40,000 K2 Inc. 707,500
26,500 Labor Ready, Inc. 387,562
45,000 Lehman Brothers Holdings Inc. 1,271,250
14,400 Long Beach Financial Corporation 133,200
20,000 Lucent Technologies Inc. 1,381,250
24,000 MBIA,Inc. 1,288,500
70,000 MBNA Corporation 2,003,750
49,600 MacroChem Corporation 313,100
30,000 Mattel, Inc. 840,000
35,000 Merrill Lynch & Co., Inc. 1,658,125
27,059 Metris Companies Inc. 1,261,626
75,000 Metromedia Fiber Network, Inc. - Class A 2,456,250
60,000 Micrel, Incorporated 1,590,000
70,000 Microchip Technology, Incorporated 1,531,250
36,000 MindSpring Enterprises, Inc. 1,494,000
20,000 Miravant Medical Technologies 150,000
30,000 Network Appliance, Inc. 1,518,750
11,200 Novellus Systems, Inc. 294,000
See notes to the financial statements.
- ----------------------------------------------------------------------------
PRUDENT BEAR FUND
- ----------------------------------------------------------------------------
SCHEDULE OF SECURITIES SOLD SHORT (CONT.)
SEPTEMBER 30, 1998
SHARES VALUE
------- ------
110,500 Novoste Corporation $1,422,687
33,000 Ocwen Financial Corporation 288,750
85,000 OmniAmerica, Inc. 1,604,375
109,700 Organogenesis Inc. 1,144,994
10,000 Outback Steakhouse, Inc. 263,750
110,000 Outdoor Systems, Inc. 2,145,000
47,500 PLC Systems Inc. 207,813
20,000 The PMI Group, Inc. 915,000
40,000 Paging Network, Inc. 241,250
33,800 PathoGenesis Corporation 1,128,075
25,000 Pegasystems Inc. 384,375
35,000 Peregrine Systems, Inc. 1,408,750
5,000 Presstek, Inc. 41,563
90,000 RealNetworks, Inc. 3,121,875
25,000 Remedy Corporation 225,000
27,400 SEI Investments Company 1,904,300
4,100 STB Systems, Inc. 28,700
25,000 Safeskin Corporation 789,063
25,000 Security First Technologies Corporation 371,875
135,900 SoftNet Systems, Inc. 1,375,988
15,000 Solectron Corporation 720,000
52,000 Southern Pacific Funding Corporation 29,250
90,000 SportsLine USA, Inc. 1,569,375
40,000 Staff Leasing, Inc. 705,000
30,000 STMicroelectronics N.V. - NYS 1,348,125
106,500 Sunbeam Corporation 745,500
29,000 Taiwan Semiconductor Manufacturing
Company Ltd. - ADR 355,250
15,000 Telecomunicacoes Brasileiras S.A. -
Telebras - ADR 1,035,000
10,000 Telefonica S.A. - ADR 1,079,375
16,200 Templeton Russia Fund 131,625
64,600 Transcrypt International, Inc. 169,575
70,000 Triton Energy Limited 695,625
110,000 Trump Hotels & Casino Resorts, Inc. 405,625
10,000 UAL Corporation 648,125
10,500 Ugly Duckling Corporation 54,469
52,500 Ultratech Stepper, Inc. 797,344
29,900 United Companies Financial Corporation 239,200
27,000 US Airways Group, Inc. 1,366,875
35,500 VERITAS Software Corporation 1,961,375
25,000 Vimpel-Communications - ADR 131,250
118,800 VIVUS, Inc. 412,088
150,000 WEBS-Hong Kong 1,050,000
43,000 Xilinx, Inc. 1,505,000
SHARES VALUE
------- ------
10,000 Yahoo! Inc. $ 1,295,000
4,200 Zenith Electronics Corporation 2,394
15,500 Zonagen, Inc. 240,250
--------------
TOTAL SECURITIES SOLD SHORT
(Proceeds $151,118,295) $131,756,898
==============
WEBS - World Equity Benchmark Shares
NYS - New York Shares
See notes to the financial statements.
- ----------------------------------------------------------------------------
PRUDENT BEAR FUND
- ----------------------------------------------------------------------------
SCHEDULE OF CALL OPTIONS WRITTEN
SEPTEMBER 30, 1998
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ----------------------------------- ------
100 ASM Lithography Holding N.V.
Expiration October 1998,
Exercise Price $37.50 $ 100
200 Dell Computer Corporation
Expiration November 1998,
Exercise Price $70.00 91,250
300 Global TeleSystems Group, Inc.
Expiration October 1998,
Exercise Price $35.00 69,375
200 Triton Energy Limited
Expiration November 1998,
Exercise Price $35.00 200
--------
TOTAL CALL OPTIONS WRITTEN
(Premiums received $210,555) $160,925
========
See notes to the financial statements.
- ----------------------------------------------------------------------------
PRUDENT BEAR FUND
- ----------------------------------------------------------------------------
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
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 commenced operations on December 28, 1995.
The costs incurred in connection with the organization, initial
registration and public offering of shares, aggregating $30,100, have been
paid by the Adviser. The Fund has reimbursed 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. At
September 30, 1998, such securities represent 0.3% of investments, at
value. 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 - 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) Written Option Accounting - The Fund writes (sells) call options for
trading purposes and writes put options for hedging purposes. When
the Fund writes (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. 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).
d) Collateral on Short Sales and Written Options - All non-restricted
long securities, excluding options and warrants, have been committed
as collateral for short sales and written options.
e) 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.
f) 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.
g) Distributions to Shareholders - Dividends from net investment income
are declared and paid annually. Distributions of net realized capital
gains, if any, will be declared and paid at least annually.
h) 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.
i) 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 $2,492,321 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:
Year Ended Year ended
September 30, 1998 September 30, 1997
------------------ ------------------
Shares sold 64,975,126 9,350,759
Shares issued to holders in
reinvestment of dividends 189,644 16,193
Shares redeemed (45,136,010) (6,557,650)
------------ ------------
Net increase 20,028,760 2,809,302
Shares Outstanding:
Beginning of period 3,634,136 824,834
------------ ------------
End of period 23,662,896 3,634,136
============ ============
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, 1998, were $116,544,753 and $91,765,256, respectively.
At September 30, 1998, gross unrealized appreciation and depreciation of
investments for tax purposes were as follows:
Appreciation $5,392,339
(Depreciation) (12,590,399)
------------
Net depreciation on investments $(7,198,060)
============
At September 30, 1998, the cost of investments for federal income tax
purposes was $146,813,973.
At September 30, 1998, the Fund had accumulated net realized capital loss
carryovers of $6,808,285, $29,396 expiring in 2004, $9,141 expiring in
2005 and $6,769,748 expiring in 2006. 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 through September 30, 1998
of $9,293,713 which are not recognized for tax purposes until the first
day of the following fiscal year.
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 Mutual Fund Services, LLC serves as transfer agent, administrator
and accounting services agent for the Fund. Firstar Bank Milwaukee, N.A.
serves as custodian 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
assets consisting of cash or liquid securities. These 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, 1998, were as follows:
Premium Amount Number of Contracts
-------------- -------------------
Options outstanding at
September 30, 1997 $ 157,426 900
Options written 3,087,378 10,980
Options closed (1,985,136) (6,557)
Options exercised (129,209) (600)
Options expired (919,904) (3,923)
----------- -----------
Options outstanding at
September 30, 1998 $ 210,555 800
=========== ===========
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 $173,634 pursuant to the
Plan for the year ended September 30, 1998.
INVESTMENT ADVISER
DAVID W. TICE & ASSOCIATES, INC.
8140 WALNUT HILL LANE, SUITE 405
DALLAS, TEXAS 75231
HTTP://WWW.PRUDENTBEAR.COM
ADMINISTRATOR, TRANSFER AGENT,
DIVIDEND PAYING AGENT &
SHAREHOLDER SERVICING AGENT
FIRSTAR MUTUAL FUND SERVICES, LLC
615 EAST MICHIGAN STREET
P.O. BOX 701
MILWAUKEE, WISCONSIN 53201
CUSTODIAN
FIRSTAR BANK MILWAUKEE, N.A.
P.O. BOX 701
MILWAUKEE, WISCONSIN 53201
INDEPENDENT ACCOUNTANTS
PRICEWATERHOUSECOOPERS LLP
MILWAUKEE, WISCONSIN
LEGAL COUNSEL
FOLEY & LARDNER
MILWAUKEE, WISCONSIN
