PRUDENT BEAR FUND SEMI-ANNUAL REPORT MARCH 31, 1999
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PRUDENT
BEAR
FUND
No-Load Shares
Class C Shares
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PRUDENT BEAR FUND
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May 19, 1999
Dear Shareholder
The six months ended 3/31/99 was an extremely tumultuous period for the global
financial markets, as I will describe in this letter. The period was painful for
our shareholders as the fund lost 36.7% for the six months versus a 27.3% gain
in the S&P 500 and a 45.6% advance in the NASDAQ. We were not at all pleased
with this performance, as we did not handle risk control as well as we should
have. Unfortunately, the stocks with questionable fundamentals often seemed to
rise the most. We are attempting to adapt to the current environment, which
means paying even greater attention to tactical considerations. We are
attempting to keep our losses down, yet at the same time, retain significant
short exposure. This will assure a handsome profit with the arrival of the
significant market decline, that we believe is imminent.
At the date of our annual report (9/30/98), the global financial system and
economy were at the brink of disaster. As George Soros stated at the time, "The
global capitalist system which has been responsible for the remarkable
prosperity of this country in the last decade is coming apart at the seams."
Now, the perception has developed of an almost miraculous return to all being
wonderful again, with a booming U.S. economy, surging global equity markets and
a strong consensus that the global economy is in the midst of a sustainable
recovery.
GLOBAL CRISIS IS NOT RESOLVED
Yes, there is little doubt that on the surface the global crisis has stabilized
from last fall's debacle. Our analysis, however, indicates that the world's
economy is anything but "out of the woods." Granted, the economies in Korea and
Thailand are experiencing moderate recoveries after last year's steep declines,
but this is much the result of surging exports to U.S. consumers. In Europe,
the economies look particularly fragile; the same can be said about China. And
in Japan, the world's second largest economy, things look absolutely dismal.
During April, bank loans in Japan fell 5% from the previous year, while
industrial machinery orders fell almost 9%. This certainly does not bode well
for recovery in Japan or the Asian region.
And contrary to the bullish consensus, we do not believe the global crisis has
been resolved. In fact, we see considerable risk of only greater problems going
forward. While some stability has returned after the devastating piercing of
bubbles throughout Asia, Latin America and Russia, by far the greatest financial
and economic bubble still runs out of control here in the U.S. All the same,
today there exists a naive, and we would say fallacious, notion that any crisis
can be resolved simply by having the world's monetary authorities "print more
money". This school of thought would view no economic crisis in southeast Asia,
nor financial loss in Russia, as more than a short-term inconvenience, one
easily rectified by central bankers simply creating new credit to make the
system whole again. And if the U.S. bubble finds itself again in jeopardy, most
think the Fed need only turn on the "money spigot" to ensure unending bull
markets and permanent prosperity.
MORE CREDIT ONLY FORESTALLED A MORE SEVERE CRISIS
The problem, however, is that today's prescribed cure for any credit-excess-
induced hangover is only another strong shot of credit. And with this in mind,
today we see global central bankers working desperately to "drink their way out
of a bad hangover". Clearly, "printing money" is not a process where dollars
are simply dropped from Apache helicopters. Instead, it occurs through
additional money and credit creation, with the end result being a more highly
leveraged financial system and economy. And just as one more credit card can
provide needed purchasing power to a desperate family or business facing a
liquidity crisis, it certainly only forestalls insolvency, particularly if the
new debt is used imprudently. We believe this analogy holds true with the
Federal Reserve's recent extraordinary efforts to "print money" or better said,
to "create credit" and reliquify financial markets.
The Fed took dramatic action this past autumn, cutting interest rates three
times in a period of about six weeks which patently encouraged an unprecedented
bout of new credit creation. Clearly, the Fed's decision at the time had less
to do with the U.S. economy but, instead, was a response to the fear of a
potential financial market crisis related to the collapse of Long Term Capital
Management and the tenuous state of other speculators (including major banks)
which were helping to finance the global economy. Massive leverage had come to
permeate our financial system, apparently somehow unbeknownst to the Federal
Reserve, as Wall Street and the hedge fund community had borrowed heavily from
Japan and from U.S. money markets to finance hundreds of billions of dollars in
higher yielding securities. This fiasco almost brought our financial system to
the brink of disaster in October '98 with the simultaneous sell-off in the
dollar and
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stocks, as well as dramatically wider spreads throughout the credit markets.
But with this "house of cards" ready to collapse, Mr. Greenspan stepped in to
ensure that even more credit would be created to keep the game going. And,
indeed, the market responded quickly, having grown accustomed to such Fed
accommodation many times before. Looking back, Mr. Greenspan had come to the
rescue back in 1987 after the stock market crash; again in the early '90's with
the banking and S&L crisis; and in 1995 with the Mexican crisis and Orange
County derivative fiasco and bankruptcy. There is little wonder why Mr.
Greenspan is Wall Street's favorite central banker ever. In our opinion,
however, there is little question that historians will look back with great
consternation at the "moral hazard" that he created in the marketplace; each of
his bailouts leading to more egregious booms and eventually more problematic
busts.
INVALUABLE LESSONS FROM HISTORY
Interestingly, back in the 1960's, Mr. Greenspan spoke and wrote extensively
about the Great Depression and the factors that led to this most catastrophic
financial and economic collapse. He adamantly pinned responsibility on a
misguided Federal Reserve that had accommodated excessive credit growth, hence
fueling a dangerous stock market speculative bubble and maladjusted economy.
Mr. Greenspan also used an interesting and quite fitting analogy, stating that
the Federal Reserve in the 1920's repeatedly "put a coin in the fuse box." When
the Fed was confronted with intermittent financial crises, especially in the
late 1920's as much of the world lurched towards financial and economic
collapse, the Fed would move to short-circuit the markets, injecting liquidity
and accommodating unsound credit and speculative excesses. The Fed was
unrelenting in working to forestall financial crisis and recession. And yes,
the Fed did succeed for some time, at least until the "coined" fuse box
eventually succumbed and the "house"-the entire financial system- virtually
incinerated. Back in the 1960's, the astute economist Greenspan understood
clearly the disastrous consequences of central banks interfering with markets,
and how it only stoked the unsound boom and led to a catastrophic collapse.
Let's go back and look at another economist from the past, the great economic
thinker, Dr. Murray Rothbard. Rothbard wrote the classic: AMERICA'S GREAT
DEPRESSION. In this book, Rothbard described the economy in the late 1920's.
Although it is uncomfortable to talk about, it is important to consider, as this
period bears an eerie similarity to today's. Here's what Rothbard said:
"This economy was, in fact, a mixture of two very different, and basically
conflicting forces. On the one hand, America experienced a genuine prosperity,
based on heavy savings and investment in highly productive capital. This great
advance raised American living standards. On the other hand, we also suffered a
significant credit-expansion, with resulting accumulation of malinvested
capital, leading finally and inevitably to economic crisis. Here are two great
economic forces-one that most people would agree to call "good," and the other
"bad"-each separate, but interacting to form the final historical result.
Price, production, and trade indices are the composite effects. We may well
remember the errors of smugness and complacency that our economists, as well as
financial and political leaders, committed during the great boom. Study of
these errors might even chasten our current crop of economic soothsayers, who
presume to foretell the future within a small, precise margin of error. And
yet, we should not scoff unduly at the eulogist who composed paeans to our
economic system as late as 1929. For, insofar as they had in mind the first
strand-the genuine prosperity brought about by high saving and investment-they
were correct. Where they erred gravely was in overlooking the second, sinister
strand of credit expansion."
In today's economy, ignoring egregious credit excesses, such as household debt
having skied from 64% to 98% of personal income over the last fifteen years, Mr.
Greenspan, the economic community, and the Wall Street bulls are constantly
trumpeting the so called miraculous defeat of inflation, stating this as a large
force behind the huge rise in stock prices. Well, again, this sounds all too
similar to the bullish propaganda that was at the heart of the regrettable "new
era" and "permanent prosperity" talk of the late 1920's. In this regard, Mr.
Rothbard stated: "One of the reasons that most economists of the 1920's did not
recognize the existence of an inflationary problem was the widespread adoption
of a stable price level as the goal and criterion for monetary policy. The fact
that general prices were more or less stable during the 1920's told most
economists that there was no inflationary threat, and therefore the events of
the great depression caught them completely unaware. The economists who
emphasized the importance of a stable price level were thus especially deceived,
for they should have concentrated on what was happening to the supply of money."
EXTRAORDINARY FED ACCOMMODATION FUELS THE BUBBLE
Well today, we believe that Mr. Greenspan faces a momentous dilemma after a
similar period of benign consumer inflation and global tumult has led him to
accommodate an historic stock market and economic bubble. With each of his
bailouts only leading to more leverage
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in the system, he appears to be getting near the end of his rope. His latest
move to support the markets in the 4th quarter forced him to throw gas on an
already overheated economy and financial system, an economy already in the midst
of the longest peacetime expansion on record, and a stock market that had
doubled in price in just two years. And with Mr. Greenspan's blessing, M3 money
supply grew $200 billion during the quarter, 40% more than the growth during the
4th quarter of 1997. The Federal Home Loan Bank system extended more than $40
billion of credit during the 4th quarter, more than that extended for all of
1997. Fannie Mae and Freddie Mac lowered mortgage rates, inciting a massive
refinancing boom. These institutions increased their leverage by about $88
billion during the quarter, in a process that added incredible liquidity
throughout the financial system.
Behind this wall of new liquidity, the stock market exploded and the economy
turned red-hot. Rising equity prices created more than $2 trillion of perceived
wealth in the 4th quarter, and consumers and businesses alike rejoiced in the
all-powerful Federal Reserve and proceeded to borrow-and-spend like never
before. Along the way, we also had more than seven million individuals open
online stock trading accounts and the transformation of Wall Street into the
greatest casino ever was complete. In short, the party got way out of hand with
the Fed spiking the punch bowl with some pretty strong stuff.
Indeed, it was truly an historic year for the U.S. financial system as total
credit growth for 1998, combining the financial and non-financial sectors,
expanded by $2.07 trillion. This was 70% greater than total growth in credit in
1997. In a shocking explosion of leverage throughout our financial system, the
financial sector increased borrowings by $1.1 trillion. This compares to
borrowings of $653 billion during 1997, and is actually the first time that debt
expanded more in the financial sector than it did in the non-financial sector.
However, the non-financial sector borrowing boom continued with net additional
household mortgage debt increasing $369 billion, compared to 1997's $237
billion, while net corporate borrowings grew by $343 billion, compared to the
previous year's $258 billion.
This surge in new credit, plus stock market gains in the order of $3 trillion
over the six months, certainly stoked the domestic economy. During Q4-'98 and
Q1-'99, the economy grew at rates of 6.0% and 4.5%, respectively, due largely to
record consumer spending. Fixed business investment also surged, expanding
almost 11% and 18%, respectively. The booming real estate market went ballistic
as residential investment surged 15.6% during the first quarter, after growing
more than 10% during the fourth quarter. As 1998 came to a close, housing
starts and auto sales were at the strongest levels in twelve years and have only
become more extended so far in 1999. As a result of all this spending, the
savings rate fell into negative territory for the first time since the Great
Depression and our current account deficit exploded to more than $20 billion per
month. February's trade deficit, the most recently reported, increased 65% from
last year.
MALINVESTMENT & CREDIT EXCESSES CAUSE BUSTS
It is Rothbard's view, and certainly one we share, that booms caused by run-away
credit expansion lead to inevitable busts. This view has great factual support
today with the catastrophic bust that continues in Japan a decade after their
out-of-control boom, and with the more recent crises in SE Asia and Latin
America. Rothbard stated that credit creation beyond savings leads to
problematic distortions in, as he says, "price, production and trade indices."
This is certainly the case today with momentous inflation occurring not in the
CPI, but in the prices of U.S. stocks, real estate and other assets. And as the
global crisis and massive worldwide overcapacity for most goods and commodities
has kept these prices in check, the immediate consequences for our system's
credit excesses has been over-consumption and huge and unsustainable trade
deficits.
With history as a guide, the inevitable legacy of a credit bubble is a
maladjusted economy; a catastrophe where massive credit excesses feed a
disastrous asset bubble, hopelessly distorting the structures of our financial
system and economy. It is today's combination of debt-financed consumption as
well as malinvestment-the unprecedented borrowing and spending boom by
enterprises that proves uneconomic with the passing of the boom-that will so
impair our economy and financial system for years to come. Just look at
Amazon.com and almost any money-losing Internet company, and you'll see what I
mean. Too many companies today are being financed with billions in capital,
that may never make a profit. Companies are financed today as long as they can
show revenue growth, and this extends beyond just the Internet sector. That
this somehow passes as a "spectacularly" healthy economy (as described by
Greenspan), one that is devoid of troubling excesses, is just unfathomable.
In short, we believe the Fed has made one of the great blunders in the history
of central banking. In a desperate attempt to maintain the U.S. financial and
economic bubble, the Fed has only fomented greater excesses in credit creation
and speculation and certainly has only exacerbated an already perilous
situation. U.S. companies have taken on more debt, as have American families.
Our already over-
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leveraged financial system only became more so. Importantly, more money has
been recklessly thrown at the stock market in what is certainly the greatest
speculative mania of all time. In this process, more capital and credit have
been directed to uneconomic businesses as wild speculation has impaired our
financial system's ability to effectively allocate capital. As a nation, we
have consumed well beyond our means, and our trade deficit has been allowed to
explode, thus jeopardizing the long-term stability of our currency, financial
markets and economic well being.
HOW COULD THIS HAPPEN?
Well, financial bubbles are incredibly seductive. They create an environment
where the economy grows rapidly, financial markets boom and the populace enjoys
the feeling of rapidly expanding wealth and prosperity. Incomes rise, asset
prices rise, and the perception is that money and wealth are in great abundance.
And bull markets, almost by definition, give the perception of endless
liquidity. The critical mistake, however, is extrapolating the bull market
forever. But bull markets just look and feel so good, everything just seems to
fit together very well-it really "feels" like prosperity is truly supported by
strong fundamentals and, of course, everyone so wants to believe it is
permanent. And, importantly, bubbles and speculative manias are possible only
with a truly "great story," one able to captivate investors, bankers,
businessmen and central bankers alike.
But as inflated stock values and credit excesses become increasingly detached
from the cash flow of underlying businesses, as well as from the economy as a
whole, distortions arise leading to great damage to the financial system and
real economy. Over time, the overwhelming focus of major sectors within the
economy shifts away from saving and investing-the cornerstone of real wealth
creation-choosing, instead, to direct energies towards profiting from and
consuming the rewards of the expanding bubble. One of the better examples of
this is the now common occurrence of manufacturing sector workers who were
either laid-off or simply quit to become day traders.
And just as no one seems to see a problem with millions of day traders, the
bulls have even come to a sanguine view of our country's exploding trade
deficit. We could not disagree more. In fact, we view our ballooning trade
deficits as one of the more damaging effects of unprecedented excesses of money
and credit creation within our financial system and economy. And, along with
the resulting stock market bubble, it provides the mechanism that allows us
today to live much beyond our means, both running up way too much debt and
depleting our savings.
INFLATION THREAT WAKEUP CALL MEANS A "NEW BALL GAME"
Importantly, our country's unprecedented credit excesses have, to this point,
largely been manifested in asset inflation and our massive trade deficits. Only
because of the extraordinary circumstance of the global crisis and powerful
worldwide deflationary pressures, did clearly inflationary credit policies here
at home not spur higher prices generally for goods and services. Now, however,
markets are beginning to sense a change. At least recent inflation data has
proved a wakeup call that there is, in fact, considerable risk if the Fed
continues its extraordinary accommodative policies. And while we still view
deflation (particularly in asset prices) as the greatest risk going forward, we
certainly see major risk with the continuation of our massive current account
deficits. In the future, this can only weaken the value of the dollar and lead
to higher import prices. And, importantly, any ebb in dollar confidence would
induce higher risk premiums necessary to entice foreigners to hold our debt. Of
importance today, however, is the market's perception of heightened risk as a
consequence of the Fed remaining too loose for too long. Certainly, this is a
critical sea change in market psychology for both the credit and stock markets
where complacency has reigned since last fall.
For some time, bullish U.S. stock market analysis basically held that virtually
any crisis was constructive for the stock market, as it would only lead to more
central bank accommodation, lower interest rates and more financial market
liquidity. With inflation at bay, it was "easy money" as far as the eye could
see, leaving little worry about fundamentals with a "wall of money" flowing into
the stock market. Well, the credit markets are now on "inflation watch" and we
believe we are witnessing the end of the "easy money" panacea for the stock
market. With interest rates surging and the Federal Reserve now seen as "behind
the curve", it is our view that we are now in a "new ball game".
It is now our strongly held view that the ramifications of an historic credit
and asset bubble are finally beginning to be appreciated by Chairman Greenspan.
Certainly, a careful reading of his most recent speeches suggests an important
shift in his view, a change that clearly did not go unrecognized by the credit
markets. Actually, we are of the view that the financial markets are now at an
important inflection point, with the credit market already responding to ebbing
liquidity. Importantly, there has been a marked slowdown in bank credit, money
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supply and money market fund asset growth, the fuel for the U.S. bubble.
And with the credit markets faltering and interest rates rising, stress has
quickly developed in our highly leveraged financial system. The highly
leveraged speculators have been hit again with losses and have certainly been
forced to dump securities. This initial deleveraging has led to higher interest
rates and increasing difficulties for the derivative players. As such, we see
our credit system acutely vulnerable due to the unprecedented proliferation of
leveraged speculation and truly staggering derivative positions.
So far, though, wild stock market speculation has ignored higher interest rates
and the changing environment. There is, of course, considerable historical
precedence for such a temporary decoupling-1929, 1987 and Japan in 1989 being
disconcerting examples. In this regard, it is our view that rising markets can,
for a time, create their own liquidity, and today this is definitely exacerbated
by the widespread use of derivatives. However, it is only a matter of time
until the stock market succumbs to the change in financial environment. Even
the bulls recognize that this is a liquidity-driven market! When stocks do
begin to falter, we fully expect that liquidity will vanish almost instantly.
Granted, the public has been conditioned to "buy the dips". However, we would
expect considerable selling pressure from institutions and the hedge fund
community, as well as potentially destabilizing derivative-related liquidations.
We do believe that there is huge underlying, and currently unrecognized,
leverage that has fueled the stock market bubble and this will be painfully
uncovered with lower stock prices.
In sum, the bull market is in clear jeopardy with interest rates headed higher
and financial market liquidity waning. This is particularly problematic for our
highly leveraged financial system and acutely speculative and highly overvalued
stock market. With corporate earnings stagnant now for the past two years, the
bulls have justified ever-higher stock market valuations, incessantly citing the
death of inflation, low interest rates, and the "wall of liquidity." Now, in all
accounts, it appears that an important inflection point has been crossed. It is
simply difficult to imagine that our stock market could be more vulnerable to a
major decline than it is today.
PORTFOLIO COMMENTS
We are currently 65% short and 15% long with a 2% holding in put options on
individual securities and market indices. We have a substantial "short"
commitment to technology stocks in the portfolio as well as a growing exposure
to financial stocks. Our long exposure is heavily oriented towards gold and
silver equities. We are very confident in our portfolio and our overall
positioning in what we believe will be the beginning of the end for the greatest
investment mania in more than a century. We appreciate your continued
confidence.
/s/ David W. Tice
David W. Tice
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STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1999 (UNAUDITED)
ASSETS:
Investments, at value (cost $129,298,691) $120,791,357
Cash 4,569
Deposit at brokers for short sales 4,569,869
Receivable from broker for proceeds
on securities sold short 109,280,940
Receivable for investments sold 2,909,125
Capital shares sold 2,397,793
Interest receivable 133,293
Organizational expenses, net of accumulated amortization 10,702
Other assets 83,256
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Total Assets 240,180,904
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LIABILITIES:
Securities sold short, at value (Proceeds of $100,601,109) 92,882,321
Payable for securities purchased 11,863,473
Capital shares redeemed 833,254
Payable to Adviser 140,572
Dividends payable on short positions 41,004
Accrued expenses and other liabilities 188,017
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Total Liabilities 105,948,641
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NET ASSETS $134,232,263
============
NET ASSETS CONSIST OF:
Capital stock $220,052,199
Accumulated undistributed net investment income 1,179,347
Accumulated undistributed net realized loss on
investments sold, securities sold short and option
contracts expired or closed (86,210,737)
Net unrealized appreciation (depreciation) on:
Investments (8,507,334)
Short positions 7,718,788
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NET ASSETS $134,232,263
============
NO LOAD SHARES:
Net Assets $134,181,352
Shares outstanding (250,000,000 shares of $.0001
par value authorized) 30,015,937
Net Asset Value, Redemption Price and
Offering Price Per Share $4.47
============
CLASS C SHARES:
Net Assets $50,911
Shares Outstanding (250,000,000 shares of $.0001
par value authorized) 11,404
Net Asset Value, Redemption Price and
Offering Price Per Share $4.46
============
See notes to the financial statements.
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STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
INVESTMENT INCOME:
Interest income $4,427,292
Dividend income on long positions
(net of foreign taxes withheld of $2,937) 36,388
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Total investment income 4,463,680
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EXPENSES:
Investment advisory fee 881,496
Administration fee 45,215
Shareholder servicing and accounting costs 91,016
Custody fees 66,480
Federal and state registration 39,814
Professional fees 36,782
Distribution expense - No Load shares 176,292
Distribution expense - Class C shares 27
Reports to shareholders 15,291
Directors' fees and expenses 1,456
Amortization of organizational expenses 2,999
Other 15,150
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Total operating expenses before dividends on
short positions 1,372,018
Dividends on short positions 162,769
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Total expenses 1,534,787
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NET INVESTMENT INCOME 2,928,893
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REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Realized loss on:
Long transactions (7,660,139)
Short transactions (36,679,422)
Option contracts expired or closed (20,967,956)
Futures contracts closed (415,208)
Change in unrealized appreciation/depreciation on:
Investments (1,881,299)
Short positions (11,642,609)
Written options (49,630)
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Net realized and unrealized loss on investments (79,296,263)
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NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ($76,367,370)
============
See notes to the financial statements.
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STATEMENT OF CHANGES IN NET ASSETS
Year Ended
Six Months Ended September 30,
March 31, 1999 1998
OPERATIONS: --------------- -------------
(Unaudited)
Net investment income $ 2,928,893 $ 3,016,706
Net realized loss on:
Long transactions (7,660,139) (916,024)
Short transactions (36,679,422) (6,787,121)
Option contracts expired or closed (20,967,956) (2,373,656)
Futures contracts closed (415,208) (1,560,074)
Change in unrealized appreciation/
depreciation on:
Investments (1,881,299) (7,576,636)
Short positions (11,642,609) 18,814,797
Written options (49,630) 64,704
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Net increase (decrease) in net assets
resulting from operations (76,367,370) 2,682,696
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DISTRIBUTIONS TO NO LOAD SHARE SHAREHOLDERS
FROM NET INVESTMENT INCOME (4,243,854) (1,895,943)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 335,416,286 457,679,213
Shares issued to holders in reinvestment
of dividends 3,546,118 1,507,668
Cost of shares redeemed (297,810,280) (312,781,980)
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Net increase in net assets resulting from
capital share transactions 41,152,124 146,404,901
------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (39,459,100) 147,191,654
NET ASSETS:
Beginning of period 173,691,363 26,499,709
------------ ------------
End of period (including undistributed
net investment income of $1,179,346 and
$2,492,208, respectively) $134,232,263 $173,691,363
============ ============
See notes to the financial statements.
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FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
No Load Class C
Shares Shares
Six Months Feb. 8, 1999 Year Year Dec. 28,
Ended <F1> through Ended Ended 1995<F1>
Mar. 31, Mar. 31, Sept. 30, Sept. 30, through
1999 1999 1998 1997 Sept. 30, 1996
------------- ------------- ------------- ------------- -------------
Per Share Data: (Unaudited) (Unaudited)
<C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $7.34 $4.78 $7.29 $8.88 $10.00
------------- ------------- ------------- ------------- -------------
Income from investment operations:
Net investment income<F2> 0.13 0.02<F3> 0.29 <F3> 0.62<F3> 0.09
Net realized and unrealized (losses)
on investments (2.80) (0.34) (0.01) (2.06) (1.21)
------------- ------------- ------------- ------------- -------------
Total from investment operations (2.67) (0.32) 0.28 (1.44) (1.12)
------------- ------------- ------------- ------------- -------------
Less distributions from net investment income (0.20) - (0.23) (0.15) -
------------- ------------- ------------- ------------- -------------
Net asset value, end of period $4.47 $4.46 $7.34 $7.29 $8.88
============= ============= ============= ============= =============
Total return -36.73%<F4> -6.69%<F4> 3.66% -16.44% -11.20%<F4>
Supplemental data and ratios:
Net assets, end of period $134,181,352 $50,911 $173,691,363 $26,499,709 $7,325,655
Ratio of operating expenses to average
net assets<F5><F7> 1.95%<F6> 2.68%<F6> 2.08% 2.59% 2.75%<F6>
Ratio of dividends on short positions to
average net assets 0.23%<F6> 0.26%<F6> 0.28% 0.34% 0.34%<F6>
Ratio of net investment income to average
net assets<F7> 4.15%<F6> 3.09%<F6> 4.34% 7.75% 4.07%<F6>
Portfolio turnover rate<F8> 330.25% 330.25% 480.25% 413.25% 91.31%
</TABLE>
<F1> Commencement of operations.
<F2> Net investment income before dividends on short positions for the No Load
Shares for the periods ended March 31, 1999, September 30, 1998, September
30, 1997 and September 30, 1996 were $0.14, $0.30, $0.65 and $0.10,
respectively, and for the period ended March 31, 1999 for the Class C
Shares was $0.02.
<F3> Net investment income per share represents net investment income divided by
the average shares outstanding throughout the period.
<F4> Not annualized.
<F5> The operating expense ratio excludes dividends on short positions. The
ratio including dividends on short positions for the No Load Shares for the
periods ended March 31, 1999, September 30, 1998, September 30, 1997 and
September 30, 1996 were 2.18%, 2.36%, 2.93% and 3.09%, respectively, and
for the period ended March 31, 1999 for the Class C Shares was 2.94%.
<F6> Annualized.
<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)%.
<F8> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
See notes to the financial statements.
<PAGE>
- --------------------------------------------------------------------------------
PRUDENT BEAR FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
MARCH 31, 1999
(UNAUDITED)
SHARES VALUE
------- ------
COMMON STOCKS - 17.7%*
BASIC MATERIALS - 7.5%*
73,700 BGR Precious Metals, Inc. **<F4> $ 455,510
884,874 Black Hawk Mining Inc. **<F4> 99,437
2,477,400 Campbell Resources Inc. **<F6> 774,187
3,775,500 Canarc Resource Corporation **<F4> <F6> 499,141
1,350,000 Canyon Resources Corporation **<F6> 295,312
50,000 Compania de Minas Buenaventura-ADR 662,500
310,000 Donner Minerals Ltd. **<F4> <F6> 65,574
2,639,500 Ecudor Mines, Inc.**<F4> 697,911
50 Exploration Capital Partners, LP
(Acquired 10/14/98, Cost $1,000,000)**<F1> 1,004,015
442,800 Golden Star Resources Ltd.**<F6> 359,775
2,150,000 International Uranium Corporation**<F4> 767,451
150,000 Kinross Gold Corporation** 318,750
525,738 Maxam Gold Corporation** 115,662
650,000 Miramar Mining Corporation** 487,500
25,000 Newmont Mining Corporation 437,500
250,000 Pan American Silver Corporation** 1,281,250
100,000 Pangea Goldfields Inc.**<F4> 132,205
55,833 Randgold & Exploration Company Ltd.-ADR** 160,520
800,000 Rio Narcea Gold Mines, Ltd.**<F4> 349,022
100,000 Southwestern Gold Corporation**<F4> 340,428
477,400 TVX Gold Inc.**<F6> 596,750
100,000 Viceroy Resource Corporation**<F4> 109,730
1,750,000 William Resources Inc.**<F4> 46,272
----------
10,056,402
----------
CAPITAL GOODS - 0.1%*
60,000 Baldwin Technology Company, Inc.-Class A<F6> 172,500
----------
CONSUMER-CYCLICALS - 0.2%*
21,500 Hollywood Park, Inc.** 221,719
1,120,000 LS Capital Corporation**<F6> 39,200
300,000 LS Capital Corporation
(Acquired 2/19/98, Cost $87,000)**<F3><F5><F1> 8,940
----------
269,859
----------
ENTERTAINMENT & LEISURE - 0.6%*
1,100,000 Restaurant Brands New Zealand Limited<F4> 821,290
----------
SCHEDULE OF INVESTMENTS
MARCH 31, 1999
(UNAUDITED)
SHARES VALUE
------- ------
HEALTH CARE - 3.7%*
125,000 Aronex Pharmaceuticals, Inc.** $390,625
220,000 Aronex Pharmaceuticals, Inc.
(Acquired 2/16/99, Cost $481,250)**<F3><F5><F1> 584,375
300,585 Avigen, Inc.** 1,765,937
287,500 Conceptus, Inc.** 278,516
55,000 Eclipse Surgical Technologies, Inc.** 577,500
102,000 Scios Inc.** 924,375
40,000 Total Renal Care Holdings, Inc.** 440,000
----------
4,961,328
----------
TECHNOLOGY - 4.9%*
45,000 CustomTracks Corporation** 675,000
40,000 Dell Computer Corporation**<F2> 1,635,000
34,000 Digital River, Inc.**<F2> 1,360,000
60,000 Forecross Corporation** 28,800
23,000 Microchip Technology, Incorporated**<F2> 796,375
15,000 Network Associates, Inc.**<F2> 460,313
120,000 S3 Incorporated** 900,000
88,700 SEEC, Inc.**<F6> 349,256
50,000 Trident Microsystems, Inc.** 313,281
----------
6,518,025
----------
TRANSPORTATION - 0.5%*
100,000 Transportacion Maritima Mexicana
SA de CV-ADR** 593,750
----------
WHOLESALE PRODUCTS - 0.2%*
124,300 Opta Food Ingredients, Inc.** 314,634
----------
TOTAL COMMON STOCKS
(Cost $30,426,832) 23,707,788
----------
See notes to the financial statements.
<PAGE>
- --------------------------------------------------------------------------------
PRUDENT BEAR FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONT.)
MARCH 31, 1999
(UNAUDITED)
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ----------------------------------- ------
CALL OPTIONS PURCHASED - 0.1%*
500 Scios Inc.
Expiration July 1999,
Exercise Price $10.00 $71,875
-----------
TOTAL CALL OPTIONS PURCHASED
(Cost $96,250) 71,875
-----------
PUT OPTIONS PURCHASED - 1.8%*
50 Altera Corporation
Expiration April 1999,
Exercise Price $60.00 17,812
75 America Online, Inc.
Expiration April 1999,
Exercise Price $145.00 64,219
500 American Express Company
Expiration April 1999,
Exercise Price $100.00 10,937
150 Ameritrade Holding Corporation - Class A
Expiration April 1999,
Exercise Price $52.50 18,281
50 Applied Materials, Inc.
Expiration April 1999,
Exercise Price $55.00 3,750
Associates First Capital Corporation - Class A:
200 Expiration April 1999,
Exercise Price $40.00 2,500
50 Expiration May 1999,
Exercise Price $45.00 13,125
400 AT&T Corp.
Expiration April 1999,
Exercise Price $70.00 400
50 The Bear Stearns Companies Inc.
Expiration May 1999,
Exercise Price $45.00 16,250
100 Capital One Financial Corporation
Expiration April 1999,
Exercise Price $120.00 100
135 Cisco Systems, Inc.
Expiration April 1999,
Exercise Price $85.00 2,531
50 Compaq Computer Corporation
Expiration April 1999,
Exercise Price $30.00 3,437
50 Conseco, Inc.
Expiration May 1999,
Exercise Price $30.00 9,375
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ----------------------------------- ------
50 Countrywide Credit Industries, Inc.
Expiration May 1999,
Exercise Price $35.00 $8,437
50 Dell Computer Corporation
Expiration April 1999,
Exercise Price $40.00 6,562
50 Donaldson, Lufkin & Jenrette, Inc.
Expiration May 1999,
Exercise Price $60.00 16,250
150 Elan Corporation plc - ADR
Expiration April 1999,
Exercise Price $65.00 22,500
Fannie Mae:
100 Expiration April 1999,
Exercise Price $65.00 5,000
100 Expiration April 1999,
Exercise Price $70.00 21,250
200 Freddie Mac
Expiration April 1999,
Exercise Price $55.00 15,625
50 Gateway 2000, Inc.
Expiration April 1999,
Exercise Price $70.00 20,937
500 General Electric Company
Expiration April 1999,
Exercise Price $95.00 7,812
300 General Motors Corporation
Expiration April 1999,
Exercise Price $80.00 15,000
500 The Gillette Company
Expiration April 1999,
Exercise Price $55.00 20,312
100 Global TeleSystems Group, Inc.
Expiration April 1999,
Exercise Price $55.00 27,500
100 HNC Software Inc.
Expiration April 1999,
Exercise Price $22.50 100
Household International, Inc.:
100 Expiration April 1999,
Exercise Price $45.00 11,250
50 Expiration May 1999,
Exercise Price $45.00 13,125
Intel Corporation:
550 Expiration April 1999,
Exercise Price $115.00 182,187
450 Expiration April 1999,
Exercise Price $120.00 247,500
See notes to the financial statements.
<PAGE>
- --------------------------------------------------------------------------------
PRUDENT BEAR FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONT.)
MARCH 31, 1999
(UNAUDITED)
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ----------------------------------- ------
60 International Business Machines Corporation
Expiration April 1999,
Exercise Price $145.00 $ 60
Kulicke and Soffa Industries, Inc.:
50 Expiration April 1999,
Exercise Price $15.00 50
200 Expiration April 1999,
Exercise Price $22.50 15,000
Lernout & Hauspie Speech Products N.V.:
300 Expiration June 1999,
Exercise Price $25.00 95,625
300 Expiration June 1999,
Exercise Price $30.00 183,750
100 Linear Technology Corporation
Expiration April 1999,
Exercise Price $45.00 7,500
50 Masco Corporation
Expiration April 1999,
Exercise Price $25.00 1,250
500 McDonald's Corporation
Expiration April 1999,
Exercise Price $37.50 500
500 Merck & Co., Inc.
Expiration April 1999,
Exercise Price $75.00 20,312
20 Metris Companies Inc.
Expiration April 1999,
Exercise Price $40.00 6,125
100 Micrel, Incorporated
Expiration April 1999,
Exercise Price $50.00 30,625
100 Microchip Technology, Incorporated
Expiration April 1999,
Exercise Price $30.00 5,312
Morgan Stanley High Tech Index Pool:
75 Expiration April 1999,
Exercise Price $890.00 36,563
200 Expiration April 1999,
Exercise Price $930.00 160,000
50 Expiration April 1999,
Exercise Price $990.00 104,063
100 Motorola, Inc.
Expiration April 1999,
Exercise Price $65.00 5,000
150 New Era of Networks, Inc.
Expiration April 1999,
Exercise Price $65.00 51,563
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ----------------------------------- ------
50 Novellus Systems, Inc.
Expiration April 1999,
Exercise Price $55.00 $ 17,813
Philadelphia Semiconductor Index:
50 Expiration April 1999,
Exercise Price $350.00 36,875
50 Expiration April 1999,
Exercise Price $370.00 73,750
150 PRI Automation, Inc.
Expiration April 1999,
Exercise Price $25.00 68,438
100 Providian Financial Corporation
Expiration April 1999,
Exercise Price $95.00 12,500
50 Rambus Inc.
Expiration April 1999,
Exercise Price $70.00 40,000
200 Russell 2000 Index
Expiration April 1999,
Exercise Price $400.00 175,000
S&P 100 Index:
100 Expiration April 1999,
Exercise Price $605.00 19,688
200 Expiration April 1999,
Exercise Price $630.00 110,000
200 SAP AG-ADR
Expiration April 1999,
Exercise Price $25.00 16,250
250 Siebel Systems, Inc.
Expiration April 1999,
Exercise Price $45.00 50,000
150 Solectron Corporation
Expiration April 1999,
Exercise Price $45.00 8,438
140 STERIS Corporation
Expiration June 1999,
Exercise Price $25.00 31,063
100 STMicroelectronics N.V.
Expiration April 1999,
Exercise Price $85.00 8,750
100 Telefonos de Mexico SA
Expiration April 1999,
Exercise Price $60.00 5,000
500 Wal-Mart Stores, Inc.
Expiration April 1999,
Exercise Price $80.00 14,063
See notes to the financial statements.
<PAGE>
- --------------------------------------------------------------------------------
PRUDENT BEAR FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONT.)
MARCH 31, 1999
(UNAUDITED)
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ----------------------------------- ------
500 The Walt Disney Company
Expiration April 1999,
Exercise Price $30.00 $ 23,438
200 Xilinx, Inc.
Expiration April 1999,
Exercise Price $37.50 20,625
250 Zonagen, Inc.
Expiration August 1999,
Exercise Price $20.00 123,438
-----------
TOTAL PUT OPTIONS PURCHASED
(Cost $4,154,308) 2,382,491
-----------
SHARES
- ------
WARRANTS - 0.0%*
Avigen, Inc.
52,117 Expiration December 2003,
Exercise Price $4.76 (Cost $6,515) 6,515
JVWeb, Inc.
113,600 Expiration May 2001,
Exercise Price $1.00 (Cost $0) 11,360
LS Capital Corporation
300,000 Expiration March 2000,
Exercise Price $0.60 (Cost $3,000) 0
-----------
TOTAL WARRANTS PURCHASED
(Cost $9,515) 17,875
-----------
SHORT-TERM INVESTMENTS - 70.5%*
U.S. TREASURIES - 66.9%*
PRINCIPAL
AMOUNT
------ U.S. Treasury Bills:
$12,000,000 4.30%, 04/01/1999<F6> 12,000,000
16,500,000 4.51%, 04/22/1999<F6> 16,456,617
4,000,000 4.34%, 05/06/1999<F6> 3,983,122
25,800,000 4.43%, 05/27/1999<F6> 25,622,281
16,000,000 4.37%, 06/17/1999<F6> 15,850,448
16,000,000 4.34%, 06/24/1999<F6> 15,837,968
------------
TOTAL U.S. TREASURIES 89,750,436
------------
PRINCIPAL
AMOUNT VALUE
------ -----
VARIABLE RATE DEMAND NOTES# - 3.6%*
$3,127,540 Firstar Bank, 4.6887% $ 3,127,540
626,100 General Mills, Inc., 4.5438% 626,100
348,681 Warner-Lambert Co., 4.5700% 348,681
758,571 Wisconsin Electric Power Co., 4.5696% 758,571
------------
TOTAL VARIABLE RATE DEMAND NOTES 4,860,892
------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $94,611,786) $94,611,328
------------
TOTAL INVESTMENTS
(Cost $129,298,691) (see note 1) $120,791,357
============
* Calculated as a percentage of net assets.
** Non-income producing security.
# 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, 1999.
<F1> Restricted security.
<F2> Shares are held to cover all or a portion of a corresponding
short position.
<F3> Private placement issue (trades at a 15% discount to market
value).
<F4> Foreign security.
<F5> Fair valued security.
<F6> All or a portion of the securities have been committed as
collateral for open short positions.
See notes to the financial statements.
<PAGE>
- --------------------------------------------------------------------------------
PRUDENT BEAR FUND
- --------------------------------------------------------------------------------
SCHEDULE OF SECURITIES SOLD SHORT
MARCH 31, 1999
(UNAUDITED)
SHARES VALUE
------ -----
40,000 Action Performance Companies, Inc. $ 1,205,000
16,600 Advanced Energy Industries, Inc. 391,137
70,000 AmeriCredit Corp. 918,750
19,500 Apollo Group,Inc. - Class A 582,562
30,000 Apple Computer, Inc. 1,078,125
35,000 Applied Materials, Inc. 2,159,062
15,000 Associates First Capital Corporation - Class A 675,000
87,500 Baan Company, N.V. 751,953
50,000 Bally Total Fitness Holding Corporation 1,193,750
20,000 Bank One Corporation 1,101,250
23,948 BankAmerica Corporation 1,691,327
25,000 Barnes & Noble, Inc. 803,125
25,000 Beyond.com Corporation 654,687
13,400 Blue Rhino Corporation 175,875
1,000 Books-A-Million, Inc. 10,187
15,000 Boston Scientific Corporation 608,437
17,000 CMAC Investment Corporation 663,000
3,200 CalEnergy Company, Inc. 89,600
87,500 Cell Pathways, Inc. 650,781
3,000 Cellular Technical Services Company, Inc. 6,750
7,000 Centocor, Inc. 258,562
18,000 The Chase Manhattan Corporation 1,463,625
105,100 Chesapeake Energy Corporation 151,081
64,000 CIENA Corporation 1,440,000
23,500 Citigroup Inc. 1,501,063
25,000 Citrix Systems, Inc. 953,125
24,500 Coca-Cola Enterprises Inc. 741,125
10,000 Coinmach Laundry Corporation 102,500
45,000 Compaq Computer Corporation 1,425,938
105,100 Computer Learning Centers, Inc. 558,344
80,000 Coulter Pharmaceutical, Inc. 1,740,000
15,000 Creative Computers, Inc. 451,875
170,000 Credit Acceptance Corporation 966,875
52,500 Dal-Tile International Inc. 475,781
115,000 Dell Computer Corporation 4,700,625
41,200 Digital River, Inc. 1,648,000
57,400 Doral Financial Corporation 1,054,725
50,000 Duane Reade Inc. 1,393,750
25,000 Elan Corporation plc - ADR 1,743,750
28,000 Fidelity National Financial, Inc. 420,000
33,100 First Alliance Corporation 119,988
15,000 First Tennessee National Corporation 549,375
20,200 FIRSTPLUS Financial Group,Inc. 11,363
100,000 Full House Resorts, Inc. 225,000
40,000 Gateway 2000, Inc. 2,742,500
SHARES VALUE
------ -----
14,400 Global TeleSystems Group, Inc. $ 805,500
27,000 Guitar Center, Inc. 551,813
46,500 HNC Software Inc. 1,522,875
20,000 Hollis-Eden Pharmaceuticals, Inc. 362,500
5,000 Household International, Inc. 228,125
146,660 Image Entertainment, Inc. 861,628
170,000 The Immune Response Corporation 1,498,125
26,500 International Isotopes Inc. 245,125
133,000 Isis Pharmaceuticals, Inc. 1,197,000
22,600 JB Oxford Holdings, Inc. 163,850
37,000 Jabil Circuit, Inc. 1,498,500
60,000 Kulicke and Soffa Industries, Inc. 1,515,000
16,500 Labor Ready, Inc. 430,031
40,000 Lam Research Corporation 1,160,000
5,000 Legato Systems, Inc. 258,125
14,400 Long Beach Financial Corporation 138,600
30,000 Lyondell Chemical Company 410,625
19,000 MBIA, Inc. 1,102,000
35,000 MBNA Corporation 835,625
30,000 MGIC Investment Corporation 1,051,875
49,600 MacroChem Corporation 465,000
44,359 Metris Companies Inc. 1,790,995
10,000 Micrel, Incorporated 500,625
62,000 Microchip Technology, Incorporated 2,146,750
25,000 Micron Technology, Inc. 1,206,250
119,500 Miravant Medical Technologies 821,563
5,000 National City Corporation 331,875
25,000 Network Associates, Inc. 767,188
10,000 New Era of Networks, Inc. 677,500
5,000 Northern Telecom Limited 310,625
70,000 Novoste Corporation 1,680,000
43,700 NVIDIA Corporation 923,163
33,000 Ocwen Financial Corporation 290,813
89,700 Organogenesis Inc. 1,037,156
50,000 Outdoor Systems, Inc. 1,500,000
34,700 PLC Systems Inc. 86,750
25,000 The PMI Group, Inc. 1,159,375
5,000 PRI Automation,Inc. 105,000
40,000 Paging Network, Inc. 187,500
78,900 PathoGenesis Corporation 1,050,356
5,000 Presstek, Inc. 39,375
10,000 Prodigy Communications Corporation 383,750
5,830 Quintiles Transnational Corp. 220,083
40,000 Rambus Inc. 2,575,000
See notes to the financial statements.
<PAGE>
- --------------------------------------------------------------------------------
PRUDENT BEAR FUND
- --------------------------------------------------------------------------------
SCHEDULE OF SECURITIES SOLD SHORT (CONT.)
MARCH 31, 1999
(UNAUDITED)
SHARES VALUE
------ -----
20,000 Sanmina Corporation $1,275,000
50,000 SAP AG - ADR 1,315,625
30,000 Seagate Technology, Inc. 886,875
20,000 Shared Medical Systems Corporation 1,113,750
15,000 Siebel Systems, Inc. 712,500
9,800 Southern Pacific Funding Corporation 1,531
20,000 STERIS Corporation 532,500
10,000 STMicroelectronics N.V. - NYS 971,250
126,500 Sunbeam Corporation 703,656
71,000 Telefonaktiebolaget LM Ericsson - ADR 1,690,688
16,200 Templeton Russia Fund 184,275
56,600 Transcrypt International, Inc. 134,425
50,000 Trimeris, Inc. 637,500
110,000 Trump Hotels & Casino Resorts, Inc. 440,000
29,900 United Companies Financial Corporation 10,764
27,500 Veeco Instruments Inc. 1,015,781
106,000 Vimpel-Communications - ADR 1,643,000
73,400 VIVUS, Inc. 293,600
100,000 WEBS-Hong Kong 975,000
4,200 Zenith Electronics Corporation 1,659
------------
TOTAL SECURITIES SOLD SHORT
(Proceeds $100,601,109) $92,882,321
============
WEBS - World Equity Benchmark Shares
NYS - New York Shares
See notes to the financial statements.
<PAGE>
- --------------------------------------------------------------------------------
PRUDENT BEAR FUND
- --------------------------------------------------------------------------------
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 1999 (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 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 Fund has issued two classes of shares: No Load and Class C shares. The No
Load shares are subject to a 0.25% 12b-1 fee, while the Class C shares are
subject to a 1.00% 12b-1 fee, in accordance with the Fund's prospectuses. Each
class of shares has identical rights and privileges except with respect to 12b-1
fees and voting rights on matters affecting a single class of shares.
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 March 31,
1999, such securities represent 0.8% 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).
<PAGE>
- --------------------------------------------------------------------------------
PRUDENT BEAR FUND
- --------------------------------------------------------------------------------
NOTES TO THE FINANCIAL STATEMENTS (continued)
(UNAUDITED)
d) Collateral on Short Sales and Written Options - Treasury and other liquid
securities in the amount of $92,901,932 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 $2,197,484 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
March 31, 1999
No Load Shares: -------------------------------------
$ Shares
------------ ------------
Shares sold $335,363,979 53,544,225
Shares issued to holders in
reinvestment of dividends 3,546,118 703,596
Shares redeemed (297,810,280) (47,894,780)
------------ ------------
Net increase $41,099,817 6,353,041
------------
Shares Outstanding:
Beginning of period 23,662,896
------------
End of period 30,015,937
============
February 8, 1999
through March 31, 1999
Class C Shares: -------------------------------------
$ Shares
------------ ------------
Shares sold $ 52,307 11,404
Shares issued to holders in
reinvestment of dividends - -
Shares redeemed - -
------------ ------------
Net increase $ 52,307 11,404
------------ ============
Total Increase $ 41,152,124
============
Year Ended
September 30, 1998
No Load Shares: -------------------------------------
$ Shares
------------ ------------
Shares sold $457,679,213 64,975,126
Shares issued to holders in
reinvestment of dividends 1,507,668 189,664
Shares redeemed (312,781,980) (45,136,010)
------------ ------------
Net increase $146,404,901 20,028,760
============
Shares Outstanding:
Beginning of period 3,634,136
------------
End of period 23,662,896
============
<PAGE>
- --------------------------------------------------------------------------------
PRUDENT BEAR FUND
- --------------------------------------------------------------------------------
NOTES TO THE FINANCIAL STATEMENTS (continued)
(UNAUDITED)
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, 1999, were $110,208,396 and $101,838,398, respectively.
At March 31, 1999, gross unrealized appreciation and depreciation of
investments for tax purposes were as follows:
Appreciation $1,471,845
(Depreciation) (10,850,117)
------------
Net depreciation on investments $(9,378,272)
============
At March 31, 1999, the cost of investments for federal income tax purposes
was $130,169,629.
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.
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 six
months ended March 31, 1999, were as follows:
Premium Amount Number of Contracts
-------------- -------------------
Options outstanding at
September 30, 1998 $ 210,555 800
Options written 2,475,033 3,800
Options closed (2,289,139) (3,750)
Options exercised (74,547) (100)
----------- -----------
Options expired (321,902) (750)
Options outstanding at
March 31, 1999 $ 0 0
=========== ===========
7. SERVICE AND DISTRIBUTION PLAN
The Fund has adopted Service and Distribution Plans (the "Plans") pursuant to
Rule 12b-1 under the 1940 Act. The Plans authorize 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 for the No Load shares and up to 1.00%
for the Class C shares. The currently approved rate is 0.25% and 1.00% of
average daily assets for the No Load and Class C shares, respectively.
Payments made pursuant to the Plans may only be used to pay distribution
expenses in the year incurred. Amounts paid under the Plans 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 $176,319 pursuant to the Plans for the six months ended
March 31, 1999.
<PAGE>
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
