PRUDENT BEAR FUND SEMI-ANNUAL REPORT MARCH 31, 1998
- ----------------------------------------------------------------------------
(PHOTO)
PRUDENT
BEAR
FUND
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 &
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
<PAGE>
PRUDENT BEAR FUND
May 1998
Dear Shareholder
The last six months have been very volatile. The most significant decline in the
last year occurred in October. However, 1998's first quarter saw a nearly
parabolic rise in stock prices, with the NASDAQ average rising 18% and the
NASDAQ-100 (NDX) increasing 26% for the quarter. As could be expected, the
Prudent Bear Fund performed extremely well in 1997's fourth quarter, but did not
fare so well in 1998's first quarter. Overall, for the six months, the Fund
declined by 8.1%, while the S&P 500 advanced by 17.2% and the NASDAQ average
gained 9.1%.
It has been difficult to generate good performance by being short in a rapidly
rising market. This last quarter has had a "speculative blow-off" feel to it,
which is common to the end of bull markets, which has made shorting stocks
extremely painful. I have attempted to rationally select individual short sale
investments to be profitable or minimize losses while remaining 70% invested on
the short side. However, rational thinking has often been counterproductive in
what has often been an irrational market. I have lost count of the number of
situations we have been in, where we were right fundamentally, but the stock
price moved up regardless. Additionally, in a diversified portfolio, there is a
more substantial "market" influence to the overall return. The good news is that
it is inarguable that the fundamentals are now in our favor. Operating results
of American companies are badly deteriorating, and it seems that the market is
now starting to respond to some bad news for individual companies. Therefore,
the fund's future has never been brighter, with the stock prices of companies in
badly deteriorating condition at record levels.
Our intent is to ensure that we are invested on the short side, when the massive
market decline that I expect eventually arrives. I will not attempt to time the
market, as I do not believe that Prudent Bear investors want to take the risk of
the portfolio manager being able to determine exactly when the stock market will
begin its long term decline. I have kept the fund very aggressively invested on
the short side during this entire six-month period, as I believe that the market
decline is very close at hand.
I believe that the end of this "bubble" stock market is close because the
corporate earnings growth bonanza is over. It was interesting to read the
commentary of Warren Buffett in his recent comments to shareholders. "...we did
not consider the market overvalued if 1) interest rates remained where they were
or fell, and 2) American business continued to earn the remarkable returns on
equity that it had recently recorded... If they stay there - and if interest
rates hold near recent levels - there is no reason to think of stocks as
generally overvalued. On the other hand, returns on equity are not a sure thing
to remain at, or even near, their present levels."
What Warren Buffett is saying, of course, is that stocks just might not be
overvalued if everything stays the same. That is to say if these ideal economic
conditions, low interest rates and high returns on equity, continue. Federal
Reserve Chairman, Alan Greenspan has essentially said the same, using nearly the
same caveat about corporate earnings.
However, the strong earnings growth - the factor driving the market higher over
the past five years - is OVER. The bad news is that profit growth has evaporated
even with an extremely strong US economy. Fourth quarter earnings, as measured
by economists in the national income accounts, were 2.3% lower vs. the prior
year. This weakness in 4th quarter results doesn't appear to be an aberration,
as weak earnings are now starting to creep into the public company aggregate
figures. The "light bulb" just seems to have clicked on with Wall Street
analysts, who over a three-month period, dropped their 1st quarter estimates
from a hefty +14% to a paltry 2% gain. That's a huge downward revision, even by
Wall Street standards. Actual earnings came in rising at an estimated 3%-4%
clip, but most beat the revised lower expectations, keeping the CNBC
commentators happy. A Merrill Lynch strategist has now started talking about an
earnings recession for the remainder of 1998. But at today's valuations, with
the P/E and price/book value of the S&P 400 at 31 and 7.7, respectively, it's
unrealistic to expect even higher P/Es if companies begin to fall short on the
"E." Market multiples have moved from 5 to 30 since the inception of the Great
Bull. The P/E on NASDAQ stocks is closer to 70.
One of the most significant reasons for lower corporate earnings is that
employee compensation is rising faster than a company's ability to raise prices.
For the last seven years, Corporate America has enjoyed increased productivity
without a commensurate rise in employee compensation. This is highly unusual, as
traditionally, increases in productivity have been accompanied by a roughly
equal rise in real wages. Productivity is where wage growth comes from - the
ability of workers to do more with less. But since 1991, real wages have not
kept up with productivity growth. Credit massive white-collar layoffs, offshore
manufacturing, or shifting more employee compensation to stock options, but the
fact is, history suggests the gap between wages and productivity will close.
This is happening already. The
<PAGE>
PRUDENT BEAR FUND
Employment Cost Index advanced by 3.3% in 1997, while inflation was a mere 1.7%.
This was higher real compensation growth than we've seen in some time, yet
productivity growth declined slightly from 1996 to 1997. I expect greater
increases in compensation expense later this year. Unions are gaining some
strength after years of losing ground, and in some industries, a shortage of
workers has kindled bidding wars for employees.
None of this matters, of course, if companies can raise prices at will. The
problem is they can't. Heavy investment in equipment has left corporate America
with too much capacity just as major trading partners are buying less U.S.
goods. The combination of overcapacity and repercussions from the Asian problem
led Business Week to rank the pricing power of U.S. corporations as the weakest
in thirty-five years. Investors forget how much operating leverage that exists
in businesses, and how a modest squeeze in gross profit margin can cause
earnings to fall by 30% or more.
In addition to these real-world operating problems, there is a quality of
earnings question that won't hide forever. Accounting shenanigans have allowed
many companies to overstate their true profitability. The gamesmanship has
included massive restructuring charges, aggressive merger bookkeeping and stock
option accounting which understates true expense. Buffet's protege, Charlie
Munger was quoted in Fortune saying that current accounting for employee stock
options is "weak, corrupt and contemptible." Earnings cannot stay up through
gamesmanship forever. Meanwhile, the same companies are taking on the biggest
operating and financial challenges in their history with a competitive Battle
Royal and slower sales growth than they have seen in years. I see virtually no
way for corporate earnings to remain at today's record levels, meaning that
Warren Buffett's caveat will come into play - returns on equity will not remain
at their present levels.
Looking at the financial markets and economy from a bigger perspective, it has
become increasingly clear to me that the U.S. economy is in the midst of a
massive "bubble". Not only is the US stock market so tremendously overvalued
that it is likely to fall by more than 40%, but we also have a terribly
maladjusted economy that has been made buoyant by excess credit creation. Our
economy has benefited from a massive stimulus from monetary ease and
accommodative credit conditions. Long periods of economic "boom" with
overaggressive financing cause business eventually to build too much capacity.
This is a tremendous problem as we have "excess global capacity in virtually
every industry," according to GE Chairman, Jack Welch. Wachovia Bank Chairman,
John Medlin, Jr. said that banks' credit standards are at the weakest point in
his 40-year career as a banker. Another gigantic problem is that the global
excess investment is there to largely satisfy an American consumer now that the
Asian growth story has collapsed, with no recovery in sight. Business Week said
in November, "after the latest round of devaluations, every region except for
the U.S. will be a net exporter making the global economy dangerously dependent
on the U.S. as the consumer of last resort." However, the problem is that the
typical American has already over-consumed beyond everyone's wildest
expectations. Who would have thought that financial institutions would lend up
to 125% of an American home's value? Household debt is now at an all-time record
high. This easy credit plus a feeling of wealth from $4 trillion in stock market
appreciation over the last couple of years, has caused Americans to consume at
record levels. No wonder everyone feels so good, "it's been a great party!"
This "bubble economy" situation makes it more likely that the stock market will
eventually decline by more than 40%. The current environment is amazingly
similar to that of the "Roaring 1920s" when the economy was vibrant, interest
rates and inflation were low, and the stock market boomed. How many pundits have
you heard, argue that "low inflation justifies current stock prices?" The
problem is that this low inflation is an average of the mild deflation in
product prices and the inflation in many areas from this excessive credit and
monetary stimulus. This excessive credit simply has created more overspending by
the consumer and over-investment by business, which will eventually exacerbate
the coming deflation. Just like the 1920s, this same camouflage has fooled all
the economists, who think the low inflation is a guarantee of future prosperity.
But, the problem is, when an economic boom is based on a "bubble", eventually
the "bubble" pops, and the result will be ugly. At that time, the Prudent Bear
Fund will be there for you. Tell your friends and those you care about to think
(a) more about risk and less about return, (b) more about return "OF" principal
and less about return "ON" investment, and (c) more about FEAR and less about
GREED. This is a phenomenal period that we are now living through, but it will
be even more interesting and rewarding for those who are cautious, in the near
future. Hang in there.
/s/ David W. Tice
David W. Tice
<PAGE>
PRUDENT BEAR FUND
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1998
(UNAUDITED)
ASSETS:
Investments, at value (cost $54,333,896) $ 51,684,484
Deposit at brokers for short sales 2,419,869
Receivable from broker for proceeds
on securities sold short 39,558,418
Receivable for investments sold 6,215,170
Capital shares sold 43,892
Interest receivable 38,908
Other receivables 42,874
Organizational expenses, net of
accumulated amortization 16,717
Other assets 47,788
------------
Total Assets 100,068,120
------------
LIABILITIES:
Securities sold short, at value
(Proceeds of $44,212,952) 43,268,690
Payable for securities purchased 612,363
Options written, at value
(Premiums received $269,641) 460,687
Payable for written options closed 175,900
Payable to Adviser 57,537
Accrued expenses and other liabilities 320,270
------------
Total Liabilities 44,895,447
------------
NET ASSETS $ 55,172,673
============
NET ASSETS CONSIST OF:
Capital stock $ 72,312,349
Accumulated undistributed net
investment income 714,508
Accumulated undistributed net realized loss
on investments sold, securities sold short
and option contracts expired or closed (15,957,988)
Net unrealized appreciation
(depreciation) on:
Investments (2,649,412)
Short positions 944,262
Written options (191,046)
------------
Total Net Assets $ 55,172,673
============
Shares outstanding
(250,000,000 shares of $.0001
par value authorized) 8,479,038
Net Asset Value, Redemption Price
and Offering Price Per Share $6.51
=====
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
INVESTMENT INCOME:
Interest income $ 1,806,054
Dividend income on long positions 8,734
------------
Total investment income 1,814,788
------------
EXPENSES:
Investment advisory fee 333,939
Administration fee 12,376
Shareholder servicing and accounting costs 29,120
Custody fees 14,560
Federal and state registration 23,660
Professional fees 34,034
Distribution expense 66,788
Reports to shareholders 10,374
Directors' fees and expenses 3,094
Amortization of organizational expenses 2,999
Other 1,092
------------
Total operating expenses before
dividends on short positions 532,036
Dividends on short positions 40,970
------------
Total expenses 573,006
------------
NET INVESTMENT INCOME $ 1,241,782
------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized gain (loss) on:
Long transactions 180,676
Short transactions (2,897,646)
Option contracts expired or closed (3,726,424)
Futures contracts closed (663,458)
Change in unrealized appreciation
(depreciation) on:
Investments (3,600,013)
Short positions 397,663
Written options (175,972)
------------
Net realized and unrealized
loss on investments (10,485,174)
------------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS ($ 9,243,392)
=============
See notes to the financial statements.
<PAGE>
PRUDENT BEAR FUND
STATEMENT OF CHANGES IN NET ASSETS
Six Months Ended
March 31, 1998 Year Ended
(Unaudited) September 30, 1997
----------------- ------------------
OPERATIONS:
Net investment income $ 1,241,782 $ 1,471,882
Net realized gain (loss):
Long transactions 180,676 (1,186,456)
Short transactions (2,897,646) (5,853,271)
Option contracts expired or closed (3,726,424) (1,782,678)
Futures contracts closed (663,458) -
Change in unrealized appreciation
(depreciation) on:
Investments (3,600,013) 991,276
Short positions 397,663 1,026,318
Written options (175,972) (15,074)
------------- -------------
Net (decrease) in net assets resulting
from operations (9,243,392) (5,348,003)
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM NET INVESTMENT INCOME (1,895,943) (183,831)<F1>
------------- -------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 150,454,242 77,048,623
Shares issued to holders in
reinvestment of dividends 1,507,668 137,320
Cost of shares redeemed (112,149,611) (52,480,055)
------------- -------------
Net increase in net assets resulting
from capital share transactions 39,812,299 24,705,888
------------- -------------
TOTAL INCREASE IN NET ASSETS 28,672,964 19,174,054
NET ASSETS:
Beginning of period 26,499,709 7,325,655
------------- -------------
End of period (including
undistributed net investment income
of $714,508 and $1,367,233,
respectively) $55,172,673 $26,499,709
============= =============
<F1> Total distribution is ordinary income, of which 2.9% is eligible for the
corporate dividends received deduction.
See notes to the financial statements.
<PAGE>
PRUDENT BEAR FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
December 28,
Six Months 1995<F1>
Ended Year Ended through
March 31, September 30, September 30,
Per Share Data: 1998 1997 1996
------------- ------------- -------------
(Unaudited)
<C> <C> <C>
Net asset value, beginning of period $7.29 $8.88 $10.00
------------- ------------- -------------
Income from investment operations:
Net investment income<F2> 0.17<F3> 0.62<F3> 0.09
Net realized and unrealized (losses) on investments (0.72) (2.06) (1.21)
------------- ------------- -------------
Total from investment operations (0.55) (1.44) (1.12)
------------- ------------- -------------
Less distributions from net investment income (0.23) (0.15) -
------------- ------------- -------------
Net asset value, end of period $6.51 $7.29 $8.88
============= ============= =============
Total return<F4> -8.06% -16.44% -11.20%
Supplemental data and ratios:
Net assets, end of period $55,172,673 $26,499,709 $7,325,655
Ratio of operating expenses to average net assets<F5><F6><F7> 1.99% 2.59% 2.75%
Ratio of dividends on short positions to average net assets<F6> 0.15% 0.34% 0.34%
Ratio of net investment income to average net assets<F6><F7> 4.65% 7.75% 4.07%
Portfolio turnover rate 274.89% 413.25% 91.31%
Average commission rate paid $0.0411 $0.0565 $0.0502
<F1> Commencement of operations.
<F2> Net investment income before dividends on short positions for the periods
ended March 31, 1998, September 30, 1997 and September 30, 1996 were
$0.18, $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 six months ended March 31, 1998 or 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 March
31, 1998, September 30, 1997 and September 30, 1996 were 2.14%, 2.93%
and 3.09%, respectively.
<F6> Annualized for the six months ended March 31, 1998 and 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.
<PAGE>
PRUDENT BEAR FUND
SCHEDULE OF INVESTMENTS
MARCH 31, 1998
(UNAUDITED)
SHARES VALUE
- --------- ------
COMMON STOCKS - 30.7%<F1>
BASIC MATERIALS - 10.1%<F1>
57,000 Cambior Inc.<F5> $ 391,875
1,177,400 Campbell Resources Inc.<F2><F5> 551,906
1,166,000 Canarc Resource Corporation<F2><F5><F7> 426,346
450,000 Canyon Resources Corporation<F2><F5> 365,625
3,334 Denstone Resources Ltd.<F2><F5><F7> 1,055
310,000 Donner Minerals Ltd.<F2><F5><F7> 523,159
200,000 Eldorado Gold Corporation<F2><F5><F7> 115,320
12,000 Global Platinum and Gold, Inc.<F2><F5> 15,750
142,800 Golden Star Resources Ltd.<F2><F5> 455,175
434,500 International Precious Metals Corporation<F2><F5> 244,406
41,300 International Rochester Energy Corp.<F2><F5><F7> 36,301
150,000 Kinross Gold Corporation<F2><F5> 609,375
400,000 Maxam Gold Corporation<F2><F5> 248,000
30,100 Naxos Resources Ltd.<F2><F5> 116,638
40,000 Placer Dome Inc.<F5> 527,500
100,000 Randgold & Exploration Company Ltd. - ADR<F2><F5> 143,750
100,000 TVX Gold Inc.<F2><F5> 325,000
1,750,000 William Resources Inc.<F2><F5><F7> 455,303
-------------
5,552,484
-------------
CAPITAL GOODS - 2.0%<F1>
60,000 Baldwin Technology Company, Inc.<F2><F5> 330,000
10,000 Durakon Industries, Inc.<F2><F5> 92,500
54,300 Harding Lawson Associates Group, Inc.<F2><F5> 505,669
6,286 Philip Services Corp.<F2><F5> 65,610
20,000 UTILX Corporation<F2><F5> 110,000
-------------
1,103,779
-------------
COMMUNICATIONS - 0.8%<F1>
10,000 CD Radio Inc.<F2><F5> 218,750
17,200 Salient 3 Communications, Inc. - Class A<F5> 197,800
-------------
416,550
-------------
CONSUMER-CYCLICALS - 3.1%<F1>
95,000 ADDvantage Media Group, Inc.<F2><F5> 201,875
20,000 Computer Learning Centers, Inc.<F2><F8> 335,000
29,875 Hollywood Park, Inc.<F2><F5> 351,031
105,900 ITEX Corporation<F2><F5> 582,450
720,000 LS Capital Corporation<F2><F5> 180,000
300,000 LS Capital Corporation
(Acquired 2/19/98, Cost $87,000)<F2><F4><F6> 63,000
-------------
1,713,356
-------------
CONSUMER STAPLES - 0.0%<F1>
7,100 Iwerks Entertainment, Inc.<F2><F5> 23,075
-------------
ENERGY - 0.3%<F1>
30,000 Chesapeake Energy Corporation<F8> 176,250
-------------
SHARES VALUE
- --------- ------
FINANCIALS - 0.3%<F1>
10,000 Bank Plus Corporation<F2><F5> $ 149,375
-------------
HEALTH CARE - 5.5%<F1>
56,600 BioTime, Inc.<F2><F8> 806,550
215,000 Conceptus, Inc.<F2><F5> 752,500
100,000 Cortech, Inc.<F2><F5> 50,000
25,100 Organogenesis Inc.<F2><F8> 850,263
40,000 Pharmos Corporation<F2><F5> 115,000
20,000 VIVUS, Inc.<F2><F8> 235,000
10,000 Zonagen, Inc.<F2><F8> 220,000
-------------
3,029,313
-------------
TECHNOLOGY - 7.7%<F1>
15,000 Advanced Micro Devices, Inc.<F2><F5> 435,937
18,500 ANTEC Corporation<F2><F5> 277,500
11,300 Applied Signal Technology, Inc.<F2><F5> 203,400
37,500 Aura Systems<F2><F5> 127,734
24,100 Avant! Corporation<F2><F8> 503,088
3,000 BRC Holdings, Inc.<F2><F5> 117,750
20,000 Komag, Incorporated<F2><F5> 290,000
10,000 Lycos, Inc.<F2><F5> 442,500
7,600 Microsoft Corporation<F2><F8> 680,200
50,000 Points North Digital Technologies Inc.<F2><F5><F7> 117,781
30,000 Read-Rite Corporation<F2><F5> 414,375
25,000 Segue Software, Inc.<F2><F5> 325,000
44,000 SoftNet Systems, Inc.<F2><F8> 316,250
-------------
4,251,515
-------------
TRANSPORTATION - 0.9%<F1>
77,100 RailAmerica, Inc.<F2><F5> 515,606
-------------
TOTAL COMMON STOCKS
(Cost $18,846,009) 16,931,303
-------------
See notes to the financial statements.
<PAGE>
PRUDENT BEAR FUND
SCHEDULE OF INVESTMENTS (CONT.)
MARCH 31, 1998
(UNAUDITED)
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ------------------------------------ ------
PUT OPTIONS PURCHASED - 2.2%<F1>
200 Agouron Pharmaceuticals, Inc.
Expiration May 1998,
Exercise Price $30.00 $ 11,250
100 Applied Materials, Inc.
Expiration April 1998,
Exercise Price $35.00 10,312
300 ASM Lithography Holding N.V.
Expiration April 1998,
Exercise Price $80.00 15,938
Baan Company, N.V.:
250 Expiration May 1998,
Exercise Price $32.50 3,125
200 Expiration May 1998,
Exercise Price $45.00 38,125
200 Brightpoint, Inc.
Expiration April 1998,
Exercise Price $20.00 60,000
200 C-Cube Microsystems, Inc.
Expiration April 1998,
Exercise Price $20.00 35,625
CDW Computer Centers, Inc.:
20 Expiration April 1998,
Exercise Price $55.00 2,875
200 Expiration April 1998,
Exercise Price $60.00 63,750
150 CIENA Corporation
Expiration July 1998,
Exercise Price $35.00 23,437
200 Cisco Systems, Inc.
Expiration April 1998,
Exercise Price $60.00 5,000
350 Citicorp
Expiration April 1998,
Exercise Price $110.00 1,094
300 Computer Learning Centers, Inc.
Expiration April 1998,
Exercise Price $20.00 121,875
100 Delta and Pine Land Company
Expiration May 1998,
Exercise Price $30.00 3,750
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ------------------------------------ ------
Donaldson, Lufkin & Jenrette, Inc.:
200 Expiration April 1998,
Exercise Price $55.00 $ 2,500
100 Expiration April 1998,
Exercise Price $60.00 1,250
200 EXCEL Communications, Inc.
Expiration April 1998,
Exercise Price $20.00 3,750
200 Excite, Inc.
Expiration May 1998,
Exercise Price $50.00 100,000
200 General Electric Company
Expiration April 1998,
Exercise Price $70.00 1,250
300 Hewlett-Packard Company
Expiration May 1998,
Exercise Price $55.00 10,312
50 Household International, Inc.
Expiration April 1998,
Exercise Price $120.00 937
300 Intel Corporation
Expiration April 1998,
Exercise Price $75.00 35,625
200 International Business Machines Corporation
Expiration April 1998,
Exercise Price $105.00 61,250
MBIA, Inc.:
5 Expiration May 1998,
Exercise Price $62.50 109
830 Expiration May 1998,
Exercise Price $55.00 10,375
780 Expiration May 1998,
Exercise Price $60.00 12,187
200 MedImmune, Inc.
Expiration April 1998,
Exercise Price $45.00 2,500
200 Micron Technology, Inc.
Expiration April 1998,
Exercise Price $30.00 39,375
Miravant Medical Technologies:
130 Expiration April 1998,
Exercise Price $25.00 2,438
100 Expiration April 1998,
Exercise Price $30.00 11,875
See notes to the financial statements.
<PAGE>
PRUDENT BEAR FUND
SCHEDULE OF INVESTMENTS (CONT.)
MARCH 31, 1998
(UNAUDITED)
CONTRACTS (100 SHARES PER CONTRACT) (CONT.) VALUE
- ------------------------------------ ------
150 Network Associates, Inc.
Expiration April 1998,
Exercise Price $65.00 $ 30,938
200 Nike, Inc. - Class B
Expiration April 1998,
Exercise Price $45.00 30,000
50 PLC Systems Inc.
Expiration April 1998,
Exercise Price $10.00 156
155 SGS-Thomson Microelectronics N.V. - NYS
Expiration April 1998,
Exercise Price $65.00 4,844
200 Superior Energy Services, Inc.
Expiration May 1998,
Exercise Price $10.00 23,750
Transcrypt International, Inc.:
270 Expiration April 1998,
Exercise Price $15.00 109,688
300 Expiration April 1998,
Exercise Price $17.50 191,250
200 United Companies Financial Corporation
Expiration May 1998,
Exercise Price $17.50 33,750
250 United Technologies Corporation
Expiration May 1998,
Exercise Price $65.00 2,344
150 Xilinx, Inc.
Expiration April 1998,
Exercise Price $40.00 53,438
Zonagen, Inc.:
300 Expiration May 1998,
Exercise Price $15.00 13,125
300 Expiration May 1998,
Exercise Price $20.00 48,750
------------
TOTAL PUT OPTIONS PURCHASED
(Cost $1,968,774) $ 1,233,922
------------
CALL OPTIONS PURCHASED - 0.1%<F1>
100 Avant! Corporation
Expiration April 1998,
Exercise Price $15.00 60,000
150 Komag, Incorporated
Expiration May 1998,
Exercise Price $15.00 10,781
------------
TOTAL CALL OPTIONS PURCHASED
(Cost $67,635) 70,781
------------
SHARES VALUE
- ----------- --------
WARRANTS - 0.0%<F1>
LS Capital Corporation
300,000 Expiration March 2000,
Exercise Price $0.60 (Cost $3,000) $ 0
------------
SHORT-TERM INVESTMENTS - 60.6%<F1>
U.S. TREASURIES - 40.7%<F1><F5>
U.S. Treasury Bills:
$ 3,200,000 4.84%, 04/02/1998 3,199,570
4,100,000 4.93%, 04/09/1998 4,095,508
11,700,000 4.94%, 04/23/1998 11,664,679
3,500,000 4.89%, 04/30/1998 3,486,213
------------
TOTAL U.S. TREASURIES 22,445,970
------------
VARIABLE RATE DEMAND NOTES<F3> - 19.9%<F1>
$ 2,662,403 American Family Financial Services, Inc.,
5.2656%<F5> $ 2,662,403
779,841 General Mills, Inc., 5.2925% 779,841
589,790 Johnson Controls, Inc., 5.2925%<F5> 589,790
1,133,385 Pitney Bowes, Inc., 5.2925% 1,133,385
2,227,758 Warner-Lambert Co., 5.2660% 2,227,758
3,609,331 Wisconsin Electric Power Co., 5.2656% 3,609,331
------------
TOTAL VARIABLE RATE DEMAND
NOTES 11,002,508
------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $33,448,478) $33,448,478
------------
TOTAL INVESTMENTS
(Cost $ 54,333,896) $51,684,484
============
<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 March 31, 1998.
<F4> Restricted security.
NYS New York Shares.
<F5> All or a portion of the securities have been committed as collateral for
open short positions.
<F6> Private placement issue (trades at a 15% discount to market value).
<F7> Foreign security.
<F8> Shares are held to cover all or a portion of a corresponding short
position.
See notes to the financial statements.
<PAGE>
PRUDENT BEAR FUND
SCHEDULE OF SECURITIES SOLD SHORT
MARCH 31, 1998
(UNAUDITED)
SHARES VALUE
------ -----
15,000 Action Performance Companies, Inc. $ 527,812
50,000 AgriBioTech, Inc. 784,375
24,000 Altera Corporation 906,000
12,000 America Online, Inc. 819,750
26,000 Applied Materials, Inc. 918,125
500 Arrow Electronics, Inc. 13,531
3,800 Arrow International, Inc. 130,625
24,100 Avant! Corporation 503,088
20,000 Bay Networks, Inc. 542,500
7,000 Best Buy Co., Inc. 466,375
30,000 Bethlehem Steel Corporation 406,875
56,600 BioTime, Inc. 806,550
40,000 Brightpoint, Inc. 687,500
38,400 C-Cube Microsystems, Inc. 715,200
15,000 CDW Computer Centers, Inc. 898,125
24,300 CNS, Inc. 135,169
23,200 CalEnergy Company, Inc. 655,400
105,000 Cellular Technical Services Company 164,062
135,100 Chesapeake Energy Corporation 793,713
30,000 Coinmach Laundry Corporation 633,750
30,000 Columbia Laboratories, Inc. 414,375
45,000 Computer Learning Centers, Inc. 753,750
8,000 Delta and Pine Land Company 416,000
20,000 EchoStar Communications Corporation 440,000
14,000 Electro Scientific Industries, Inc. 540,750
18,500 EMCORE Corporation 289,062
9,500 Excite, Inc. 483,906
54,000 Fairfield Communities, Inc. 1,191,375
12,000 Fastenal Company 520,500
15,000 FIRSTPLUS Financial Group, Inc. 630,000
20,000 Friede Goldman International Inc. 577,500
6,000 Intel Corporation 468,375
38,800 Intelligroup, Inc. 628,075
12,000 International Business Machines Corporation 1,246,500
5,000 JDA Software Group, Inc. 265,625
10,000 K2 Inc. 223,125
10,500 Kulicke and Soffa Industries, Inc. 228,375
27,700 Lam Research Corporation 779,062
7,800 Level One Communications, Inc. 183,300
9,000 Linear Technology Corporation 621,000
10,000 Lukoil Holding - ADR 702,940
20,000 Medicis Pharmaceutical Corporation - Class A 872,500
SHARES VALUE
------ -----
17,000 Micrel, Incorporated $ 644,938
20,000 Microchip Technology, Inc. 420,000
30,200 Micron Technology, Inc. 877,688
7,600 Microsoft Corporation 680,200
10,000 Miravant Medical Technologies 317,500
20,000 NeoMagic Corporation 377,500
21,200 Novellus Systems, Inc. 916,900
40,000 Organogenesis Inc. 1,355,000
25,000 Paging Network, Inc. 384,375
1,000 Polaroid Corporation 44,000
5,000 Presstek, Inc. 115,625
9,000 Rambus Inc. 393,750
50,100 STB Systems, Inc. 1,002,000
55,600 Security First Network Bank 479,550
6,000 Silicon Valley Bancshares 366,375
135,900 SoftNet Systems, Inc. 976,781
25,000 SONUS Pharmaceuticals, Inc. 612,500
52,000 Southern Pacific Funding Corporation 799,500
7,050 The Sports Authority, Inc. 115,444
10,600 Taiwan Semiconductor Manufacturing
Company Ltd. - ADR 274,275
12,000 Telefonos de Mexico SA - ADR 676,500
37,500 Total System Services, Inc. 1,171,875
30,000 Trump Hotels & Casino Resorts, Inc. 275,625
10,500 Ugly Duckling Corporation 113,531
52,500 Ultratech Stepper, Inc. 1,069,688
19,900 United Companies Financial Corporation 354,469
22,000 Veeco Instruments Inc. 818,125
8,000 Vitesse Semiconductor Corporation 377,250
49,800 VIVUS, Inc. 585,150
80,000 WEBS-Hong Kong 885,000
15,900 Xilinx, Inc. 595,256
19,700 Zebra Technologies Corporation - Class A 758,450
18,000 Zenith Electronics Corporation 119,250
15,000 Zonagen, Inc. 330,000
------------
TOTAL SECURITIES SOLD SHORT
(Proceeds $44,212,952) $43,268,690
============
WEBS - World Equity Benchmark Shares
See notes to the financial statements.
PRUDENT BEAR FUND
SCHEDULE OF CALL OPTIONS WRITTEN
MARCH 31, 1998
(UNAUDITED)
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ------------------------------------ ------
200 Agouron Pharmaceuticals, Inc.
Expiration May 1998,
Exercise Price $40.00 $ 43,750
CDW Computer Centers, Inc.:
20 Expiration April 1998,
Exercise Price $65.00 2,250
200 Expiration April 1998,
Exercise Price $70.00 2,500
200 CIENA Corporation
Expiration April 1998,
Exercise Price $45.00 26,250
100 Delta and Pine Land Company
Expiration May 1998,
Exercise Price $35.00 178,750
400 Organogenesis Inc.
Expiration July 1998,
Exercise Price $35.00 162,500
50 PLC Systems Inc.
Expiration April 1998,
Exercise Price $15.00 12,812
100 Transcrypt International, Inc.
Expiration April 1998,
Exercise Price $17.50 1,250
200 United Companies Financial Corporation
Expiration May 1998,
Exercise Price $20.00 13,750
300 Zonagen, Inc.
Expiration May 1998,
Exercise Price $30.00 16,875
------------
TOTAL CALL OPTIONS WRITTEN
(Premiums received $269,641) $460,687
============
See notes to the financial statements.
<PAGE>
PRUDENT BEAR FUND
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 1998 (UNAUDITED)
1.ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Prudent Bear Funds, Inc. (the "Company") was incorporated on October 25,
1995, as a Maryland Corporation and is registered as an open-end management
investment company under the Investment Company Act of 1940 ("1940 Act").
The Company currently consists of one series, Prudent Bear Fund (the
"Fund"). The investment objective of the Fund is capital appreciation. In
seeking its investment objective of capital appreciation, the Fund will
invest primarily in common stocks and warrants, engage in short sales, and
effect transactions in stock futures contracts, options on stock index
futures contracts and options on securities and stock indexes. The Fund
issued and sold 10,000 shares of its capital stock at $10 per share on
December 13, 1995. The Fund commenced operations on December 28, 1995.
The costs incurred in connection with the organization, initial registration
and public offering of shares, aggregating $27,849, have been paid by the
Adviser. The Fund will reimburse the Adviser. These costs are being
amortized over the period of benefit, but not to exceed sixty months from
the Fund's commencement of operations.
The following is a summary of significant accounting policies consistently
followed by the Fund.
a) Investment Valuation - Common stocks and securities sold short that are
listed on a security exchange or quoted on the NASDAQ Stock Market are
valued at the last quoted sales price on the day the valuation is made.
Price information on listed stocks is taken from the exchange where the
security is primarily traded. Common stocks and securities sold short
which are listed on an exchange or the NASDAQ Stock Market but which are
not traded on the valuation date are valued at the average of the current
bid and asked price. Unlisted equity securities for which market
quotations are readily available are valued at the latest quoted bid
price. Debt securities are valued at the latest bid price. Mutual fund
investments are valued at the net asset value on the day the valuation is
made. Other assets and securities for which no quotations are readily
available are valued at fair value as determined in good faith by
management in accordance with procedures approved by the Board of
Directors. Short-term instruments (those with remaining maturities of 60
days or less) are valued at amortized cost, which approximates market
value.
b) Transactions with Brokers for Short Sales - Treasury and other liquid
securities in the amount of $38,024,364 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.
<PAGE>
PRUDENT BEAR FUND
NOTES TO THE FINANCIAL STATEMENTS (continued)
(UNAUDITED)
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
$962,700 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:
Six Months
Ended Year ended
March 31, 1998 September 30, 1997
---------------- ----------------
Shares sold 19,543,234 9,350,759
Shares issued to holders in
reinvestment of dividends 189,644 16,193
Shares redeemed (14,887,976) (6,557,650)
---------------- ----------------
Net increase 4,844,902 2,809,302
================ ================
Shares Outstanding:
Beginning of period 3,634,136 824,834
---------------- ----------------
End of period 8,479,038 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 six months
ended March 31, 1998, were $47,715,474 and $34,951,674, respectively.
At March 31, 1998, gross unrealized appreciation and depreciation of
investments for tax purposes were as follows:
Appreciation $1,304,435
(Depreciation) (4,740,662)
----------------
Net depreciation on investments $(3,436,227)
================
At March 31, 1998, the cost of investments for federal income tax purposes
was $55,120,711.
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 through September 30, 1997 of $8,776,029 which are not recognized for
tax purposes until the first day of the following fiscal year.
<PAGE>
PRUDENT BEAR FUND
NOTES TO THE FINANCIAL STATEMENTS (continued)
(UNAUDITED)
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 six
months ended March 31, 1998, were as follows:
Premium Amount Number of Contracts
---------------- -----------------
Options outstanding at
September 30, 1997 $ 157,426 900
Options written 1,396,455 5,435
Options closed (738,095) (2,450)
Options exercised (30,557) (180)
Options expired (515,587) (1,935)
---------------- ----------------
Options outstanding at
March 31, 1998 $ 269,642 1,770
================ ================
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 $66,788 pursuant to the Plan for the six
months ended March 31, 1998.
</TABLE>
