ANNUAL REPORT SEPTEMBER 30, 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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PRUDENT BEAR FUND -
NASDAQ COMPOSITE S&P 500 NO LOAD SHARES
------------------ --------- ---------------------
12/28/95 $10,000 $10,000 $10,000
3/31/96 10,479 10,536 9,519
9/30/96 11,694 11,349 8,880
3/31/97 11,663 12,625 9,018
9/30/97 16,114 15,940 7,420
3/31/98 17,570 18,685 6,822
9/30/98 16,231 17,381 7,691
3/31/99 23,609 22,133 4,866
9/30/99 26,359 22,215 4,910
For the period ended September 30, 1999
Annualized
Since
Commencement
One Year of Operations
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Prudent Bear Fund -
No Load Shares (36.17)% (17.23)%
S&P 500 27.80% 23.64%
NASDAQ Composite 62.37% 29.39%
PRUDENT BEAR FUND -
NASDAQ COMPOSITE S&P 500 CLASS C SHARES
------------------ --------- ---------------------
2/08/99 $10,000 $10,000 $10,000
3/31/99 10,376 10,401 9,331
6/30/99 11,328 11,134 8,076
9/30/99 11,585 10,439 9,394
For the period ended September 30, 1999
2/08/99<F1>
through
9/30/99
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Prudent Bear Fund - Class C Shares (6.07)%
S&P 500 4.39%
NASDAQ Composite 15.85%
<F1> Commencement of operations.
The Standard & Poor's 500 Index (S&P 500) is a capital-weighted index,
representing the aggregate market value of the common equity of 500 stocks
primarily traded on the New York Stock Exchange. The NASDAQ Composite Index is a
broad-based capitalization-weighted index of all NASDAQ stocks. These charts
assume an initial gross investment of $10,000 made on 12/28/95 and 2/08/99
(commencement of operations) for the No Load Shares and Class C Shares,
respectively. Returns shown include the reinvestment of all dividends. Past
performance is not predictive of future performance. Investment return and
principal value will fluctuate, so that your shares, when redeemed, may be worth
more or less than the original cost.
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November 15, 1999
Dear Shareholder:
The year ended 9/30/99 was a disappointing one for the Prudent Bear Fund, with a
36.2% loss. For the full year, the S&P 500 advanced by 27.8% and the NASDAQ
Composite increased by more than 62%. During the first six months of this fiscal
year the fund lost 36.7%, however, for the most recent six months, the Fund
gained 0.9%, while the S&P 500 advanced by 0.4%, the NASDAQ Composite increased
by nearly 12%, and the Morgan Stanley High Tech Index increased by 21%.
In this letter, I will present an analysis of the current market environment,
attempt to dispel a few popular myths about the economy and markets, and discuss
some important portfolio considerations.
Regardless of all the talk of a "new era", there is absolutely no doubt that we
are in the midst of an unprecedented credit bubble. The facts speak for
themselves and it is irrefutable that credit growth has reached new extremes
since the financial system crisis of the summer and autumn of 1998. During the
eighteen months ended this past June, total domestic non-financial debt
increased $1.553 trillion, or more than 10%. At the same time, our financial
system took on unprecedented leverage. Financial sector borrowings grew $1.626
trillion, or almost 30%. Household mortgage debt increased $563 billion, while
corporate debt expanded $642 billion. Since June 30, 1998, broad money supply
(M3) has increased $662 billion, or almost 12%. Money market fund assets have
grown $357 billion, or 30%.
This unprecedented money and credit expansion has had a profound effect, adding
incredible fuel to the US financial and economic bubble. Nowhere has this been
more conspicuous than in the stock market, where, since the lows of early
October 1998, the Dow Jones Industrials gained 40%, the NASDAQ 100 160%, the
Morgan Stanley High Tech index more than 200%, the NASDAQ Telecommunications
index 170%, the Philadelphia Semiconductor index 240%, and The Street.com
Internet index 480%.
This massive injection of credit has also stimulated a tremendous growth in real
estate prices. Some characterize this as "wealth creation", but we believe that
in many areas these rising prices are bubbles that will "pop." The problem with
bursting asset bubbles is that "debt is forever" and therefore still must be
repaid, even after underlying asset prices decline. Strong price increases have
been registered throughout the country with dangerous price bubbles developing
in California, greater Seattle, much of the Northeast and many other major
metropolitan areas. In spite of the spike in real estate prices, Americans'
equity in their own homes has been declining rapidly. That's because increased
homeowner "equity" has been extracted and used to fuel additional gains for the
stock market bubble and an overheated bubble economy. It is now patently clear
that higher stock and real estate prices have become locked in a self-feeding
asset bubble.
The private sector has been on a historic borrowing binge both in the household
and business sectors. Due to accommodative credit conditions and an euphoric
mood, households have added a record amount of debt over the last year.
Residential mortgage borrowings in 1999's first half were 79% higher than they
were in 1997. The government sponsored enterprises (GSE's) of Fannie Mae,
Freddie Mac and the Federal Home Loan Bank System have increased their holdings
of debt by 40% over the last six quarters. Businesses have also increased their
borrowing dramatically over the last eighteen months. Unfortunately, economic
history teaches us that there is no way to avoid the inevitable painful
adjustment after years of excess.
We believe strongly that financial and economic historians will look back and
recognize that this precarious bubble economy and stock market should have been
pierced last fall. After years of reckless speculating and leveraging in the
financial system and endemic credit excess-induced economic distortions to the
real economy, it appeared that the inevitable and necessary adjustment period
was at hand. Let it be stressed here that at junctures like this throughout
financial history there rarely exists a constituency to push policy-makers to
make the requisite policy adjustments to slow the economy, since such
adjustments inevitably entail significant amounts of dislocation and pain. We
note this if only to explain, but certainly not rationalize, the policy actions
(or lack of them) which our monetary officials
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have adopted in the past several months. After all, central bankers are not
elected politicians; their role (in the words of former Fed chairman, William
McChesney Martin), is to take away the punch bowl, before the party really gets
going.
But rather than allowing the natural adjustments to take place, the Federal
Reserve, quasi-government institutions, such as Fannie Mae, Freddie Mac, the
Federal Home Loan Bank System, and many large banks and securities firms instead
aggressively created enough credit and financial market liquidity to keep the
party going. And go on it has, with a momentous and unacceptable cost that we
believe will fester for many years to come. We already have a labor shortage in
this country, with companies being unable to find skilled workers and with the
unemployment rate for college graduates at an extraordinarily low 1.7% rate.
As we analyze the current environment, we are left pondering how our financial
system has been allowed to run so out of control. The U.S. stock market has
developed into no more than a wild and precarious casino dominated by
unprecedented leveraged speculation - a true "house of cards." This is a genuine
travesty as our stock market is the crucial capital allocation mechanism for our
society. When capital is scarce, as it is to a culture that is generating no
current savings, but must borrow from abroad, this allocation of capital becomes
even more critical. One result is that huge sums of capital are being
misallocated into what will be revealed to be imprudent investments. This
"malinvestment" is one of many links from today's stock market bubble to the
U.S. economy. The proliferation of these marginal companies will compound the
inevitable economic downturn.
Why have we not learned anything from the history of past economic bubbles? It
is unfortunate that our financial authorities have chosen to sit back and let
this bubble run, and at critical points where it seems close to ending, they act
to perpetuate it. They believe they can fix the system's problems through
intelligent policy-making, but my phrase for this is that "it's dangerous to
mess with Mother Nature." But that is exactly what policy-makers have done when
they have interfered with free markets to prolong the bubble economy.
Unfortunately, there is going to be a huge price to pay because they have
shunned their responsibility to protect the soundness and stability of our
financial system. Repeated moves to "fix" the system through injections of
liquidity have instead simply added more debt to the system and prolonged, and
thereby worsened, the ultimate outcome. A notable byproduct of this monetary
laxity has been the creation by the Federal Reserve of a climate of "speculation
without tears." Since the Fed began underwriting those who lost money in Mexico,
Korea and Russia, respectively, there has been a clear incentive to employ more
leverage. The Federal Reserve's successive lifeboat launches have as a
consequence created a huge moral hazard problem. In 1993, few hedge funds used
leverage of more than 3-5 times. Today, the banks use many times this figure and
Long Term Capital's rumored leverage was 300 times. But with each inevitable
accident, the Fed has refused to allow market participants to be punished for
the consequences of their folly. As a result, the financial markets have become
even more persuaded of their invincibility, as evidenced by endemic leveraged
speculation.
This is a "textbook" mania and, in this respect, it is not confusing as it bears
much in common with other periods of intense financial speculation. There will
be many books written about this period and analysts and historians will
pontificate for decades about why this happened. We believe policy-makers simply
overestimated their own abilities to control markets and economies when the
failure of centrally planned economies should have made it obvious that such
efforts were ultimately ill-advised. All the same, after a wild year, we are
simply left in awe of the incredible power of a speculative mania and asset
bubble that has been allowed to grow unfettered because the policy-makers were
unwilling to "take the punchbowl away." As much as we have read and studied
previous manias, there is no way to appreciate them until you live through one.
We reiterate that we are not just witnessing an overvalued stock market. We have
a massively distorted real economy, which borrows from foreigners to finance the
continuation of this bubble, thereby perpetuating even more extreme imbalances
and rising levels of debt. Because these conditions have created egregious
excesses that must eventually be corrected, the economy and stock market will
have to go through years of painful adjustment as a consequence, with negative
implications for all US asset classes -stocks, bonds, and the dollar itself.
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THE DOLLAR & OUR CURRENT ACCOUNT DEFICIT
In this regard, we believe it is most illuminating to compare the current state
of the US economy with that of Asia prior to the latter's financial crisis in
1997-98. Like the so-called "miracle economy" of the US circa 1999, the Asian
countries of 1997 had economies marked by fiscal surpluses and low shares of
government as a percentage of GDP. However, in some countries, such as Malaysia,
Thailand, and Korea, there were very large current account deficits that were
matched by large private sector savings deficits. The combination proved to be
especially combustible when the crisis came, since private household and
corporate borrowers, who are weaker debtors than governments and quasi-public
institutions, proved to be especially vulnerable when foreign sources of finance
withdrew en masse.
Let us now look at the US from this perspective. With the US bubble flourishing,
US federal, state, and local governments are generating a combined fiscal
surplus of 1.5% of GDP. The US current account deficit is fast approaching 4% of
GDP. Given the shortfalls in both US household and corporate savings, the large
private sector deficit of the US must now be largely financed with borrowings
from the rest of the world.
This external financing requirement is now growing exponentially. Years of
chronic current account deficits in the 1990s have made the US a significant net
debtor nation akin to those who spawned the LDC crisis in the early 1980s. The
economic models devised during the latter period (by people like then-chief
economist at the World Bank, Lawrence Summers), imply that such an outcome will
place the American economy on an explosive external debt path. These "debt trap
dynamics", in which debt rises inexorably relative to GDP, have catastrophic
implications for economic prospects.
The dollar remains key to the US bubble. One misconception, which we must
dispel, is the belief that the "King Dollar" is destined to flourish
indefinitely. Current excesses are in the process of ensuring a crippled dollar
for years to come. Sure, our behemoth financial sector has an amazing ability
and willingness to perpetuate this aged bubble. But one of these days,
foreigners will almost certainly say, "enough is enough" and head for the exits.
When that day comes, the dollar must fall and/or interest rates must rise. If
foreign holders of dollar obligations sell, they will set in motion a sharp
decline in the value of the dollar. They are also certain to demand much higher
interest rates to hold these dollars. For this reason, we expect a chronic US
current account deficit and mounting external debt to raise US interest rates.
And this rise in US interest rates, by speeding up the compounding of the
interest due on the US external debt, will make the debt trap dynamics into
which the US economy has entered ever more vicious.
To grow our way out of this crisis seems implausible, given that even today the
booming US economy requires increasing amounts of incremental credit to grow at
all. Our economy recently required $5.30 in incremental private credit growth to
generate $1.00 in GDP growth, compared to roughly $1.00-$1.50 from 1962 -1982,
and about $3.00 before last year. This massive amount of incremental credit was
required to perpetrate the nation's financial bubble, as we pointed out in our
semi-annual report six months ago. Domestic household savings rates have
collapsed and are now negative for the first time in the post-war period.
Meanwhile, the corporate sector is, incredibly, retiring equity with debt close
to the tune of 2% of GDP a year through share buybacks. This implies massive
private debt issuance, which is dependent upon foreign creditors.
We are simply amazed by the complacency surrounding the current account and
trade deficits. Admittedly, the economy was able to rectify its current account
imbalances during the 1980s without severe adverse consequences for growth and
US asset values. However, the comparison with the 1980s is highly inappropriate
and misleading. In the 1980s, faced with a high current account deficit, US
policy-makers exhorted our foreign economic partners to take measures to reduce
our burgeoning trade deficit. Our efforts met with some success. Japan adopted
an ultra-easy monetary policy and a boom there and throughout Asia ensued.
Because of boom conditions and a strong current account, Japan also agreed to
orderly marketing arrangements that limited their exports of cars and
semiconductors to the US. Today, Japan is struggling to escape a decade of
recession. Measures to stimulate domestic demand have met so far with limited
success. Japan may well recover, but with interest rates at zero and the fiscal
deficit at 10% of GDP, Japan cannot repeat its "global locomotive act" of the
1980s for the US.
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Europe as well has suffered from long stagnation and huge unemployed resources.
Interest rates are low. The Stability Pact embodied in the Treaty of European
Monetary Union, precludes huge fiscal stimulus. European policy-makers therefore
will not readily adopt policies to reduce the US trade deficit.
The emerging world too has just gone through two years of severe recession and
economic dislocation. The turmoil inflicted on these economies by mobile global
capital flows has been huge. Policy-makers in many of these countries no longer
welcome or trust foreign capital. As a consequence, these countries,
particularly in Asia, now have bunker mentalities that are driving them toward
neo-mercantilist policies. They want to keep their exchange rates undervalued,
cling to current account surpluses, and move with even greater urgency to
develop manufactured exports and substitutes for imports. The most recent trade
data with Asia reflects this new trend. So the historic analogy of the 1980s
should not provide too much comfort to the bulls.
One would think that at least our policy-makers would begin to worry about the
implications of an ever rising current account deficit. Big names like former
Fed governor Larry Lindsey, and MIT economist Paul Krugman, are beginning to
sound the alarm. Given his past academic work, Treasury Secretary Summers must
also be concerned. Further illustrating this apparent complacency on the part of
officialdom is a statement from Mr. William Poole, President of the Federal
Reserve Bank of St. Louis: "There is no necessary reason why the trade deficit
cannot continue forever. The United States is such a wonderful place in which to
invest today. You should not believe that there is any necessary day of
reckoning as a consequence of the current trade deficit. I don't think the trade
deficit is a problem." Many intelligent economists also subscribe to the belief
that the trade deficit is simply filling the gap of what is essentially a
capital account surplus. We disagree completely and believe that massive trade
deficits are flooding the world with dollars in a process that is not
sustainable.
The US has been able to attract capital because of its currently strong capital
markets, vibrant economy and the dollar's status as the world's reserve
currency. But, because the US issues the world's reserve currency, foreigners
have perhaps been willing to tolerate the US getting more deeply into debt than
they would a country such as Mexico, Russia, or Korea. Paradoxically, the
dollar's reserve currency status, temporarily at least, has encouraged further
debt growth and, consequently, even greater vulnerability.
However, in the long run, any indebted country caught in explosive debt spiral -
EVEN THE ISSUER OF THE WORLD'S RESERVE CURRENCY - will prove to be an untenable
borrower. At the point at which this is collectively recognized, the US will go
from being the issuer of the world's reserve currency to the world's greatest
profligate. A quantum change in global portfolio preferences will ensue.
When the stock market eventually collapses as we expect, we believe the dollar
will decline precipitously. However, the currency could also decline first,
helping to burst the US financial bubble. Much depends on the actions of our
major global trade partners. If they grow tired of financing our bubble, or
perhaps lose faith in the Federal Reserve's stewardship over the US financial
system, the dollar will decline.
EFFICIENT ALLOCATION OF CAPITAL & TECHNOLOGY REVOLUTION
On more than one occasion, Federal Reserve Chairman Alan Greenspan has credited
the current US prosperity to the extraordinary efficiency of our financial
system in allocating our economy's savings to productive investment. He has also
spoken at length about the great advances in technology. We, on the other hand,
have long disagreed. It is not our financial system's skill at allocating
capital that is behind the boom, but instead, our system's amazing propensity
towards credit and speculative excess that has and continues to fuel a
precarious financial and economic bubble. "Malinvestment" and allocation to
initial public offerings with little hope of profitability are further
characteristics of the current financial excesses. Furthermore, a recent study
by Professor Robert Gordon of Northwestern University suggests that the increase
in reported US productivity since the beginning of 1996 has been a chimera, as
the vast majority of the increase has come in computer manufacturing, which does
not affect 99% of the rest of our economy. His work concludes that, if anything,
when adjusted for this issue, which largely reflects changes in statistical
procedures and transitory factors,
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trend productivity in the US economy has actually fallen. Furthermore, Gordon's
work provides good evidence that the widespread belief (expressed above by Alan
Greenspan) that the increased application of computers throughout the economy
has resulted in unprecedented gains in productivity which cannot be accurately
measured is, in fact, without substance.
TECHNOLOGY STOCKS: Yet the myth of high tech has continued unabated. In the
past, the high tech industry had a stable cycle with peak revenue growth of 40%
per annum, trough growth on either side of zero, and a fairly constant four-year
cyclicality. Computer and semiconductor companies have followed this revenue
cycle during the past four years. Since 1996, however, revenue growth in these
industries has fallen into an unprecedented protracted phase of decline. But the
stocks have nevertheless soared to an unprecedented degree. Illustrative of this
mania, the six largest high tech companies now account for 14% of the entire
stock market capitalization. These six companies - Microsoft, Dell, Intel, IBM,
Cisco, and Lucent - are valued at a level equivalent to almost half the GDP of
the world's second largest economy, Japan. Are we approaching something here
that is reminiscent of the peak of the Japanese real estate bubble, when the
land around the Imperial Palace in Tokyo was said to be equal to the value of
all the land in the state of California?
There is little sign that industry fundamentals will improve to a point where
they justify today's outrageous valuations. A surge in consumer sales spurred by
price cuts may have just abated. The surge in Y-2K related corporate purchases
has now ended. Sustained global competition amidst market saturation persists.
So removed is the high tech sector from its fundamentals that we doubt if yet
another injection of liquidity in the event of a sharp stock market fall could
reverse the fortunes of this stock group.
STOCK MARKET ACTION & PORTFOLIO COMMENTS: The high tech sector has continued to
provide leadership in this market but the overall breadth of the market is
unimpressive, which traditionally indicates that a major change in direction is
soon forthcoming. We are certainly of the view that the technology sector is in
the midst of an historic speculative run that could mark a top for years to
come.
It has been extraordinarily difficult to manage a mostly short portfolio in the
recent environment, as just when it appears that some air is coming out of this
bubble, weakness abruptly gives way to a turnaround. The rally which usually
follows off the back of such turnarounds then proceeds until it develops into a
panic buying melt-up, which then eventually gives way to an abrupt market
decline. This has been the characteristic pattern of the market over the past
six months or so. Unprecedented proliferation of stock and equity index
derivative trading is a major factor fueling serious market distortions. It is
interesting that both buying puts and writing calls can provide great fuel for
market advances. As stock prices rise, the writers of these call options are
forced to purchase the underlying stocks to protect against further losses.
These purchases only amplify market strength, which incites greater speculation
and more derivative-related purchases. Once you add in aggressive short covering
you have all the ingredients for market dislocation. Almost certainly, these are
the dynamics responsible for the recent near "buyers' panic" in many stocks and
groups, and not the underlying fundamentals. Derivatives are the bubble's best
friend.
With the NASDAQ continuing to lead the market, primarily with high technology
stocks, we still remember how volatile the 1987 market was. In that year, tech
stocks made one final 10% speculative run over a two-week period with the
Pacific Stock Exchange Technology index setting a record high on October 5th,
only two weeks before the crash. Technology stocks were then decimated, losing
about 40% of their value in the fifteen trading sessions following their record
high. This illustrates how quickly the decline
can occur.
I would like to point out one important element relating to our fund. We will
likely lose money in nearly every quarter if the market advances strongly. This
is caused by our regular commitment to gaining significant exposure to a
meaningful market decline through "put" options, and to the diversified nature
of our short stock portfolio. We attempt to keep our losses under control
through careful stock selection, but in this mania and dislocated environment,
the stocks with the most negative fundamental stories often rise the most. We
are managing our positions as tactically as possible, trying to avoid stocks
that are heavily shorted and by emphasizing securities that have been
underperforming the market. This, however, is still a difficult struggle in a
volatile and sharply rising market. Now
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remember, we do not expect this market to keep rising for much longer, but it is
impossible to predict exactly when this mania will end. Currently, the signs are
everywhere that we're close to an end with bonds being in a bear market for over
a year, and with the economy so overheated and distorted that the Fed is being
forced to tighten.
We realize that losses in our fund are incredibly frustrating to shareholders,
as they are to us. However, investors using the Prudent Bear Fund to hedge long
positions when the market is advancing can be considered to be incurring
"opportunity costs" of not being "more long" in a rising market. A portfolio
that is 50% long instead of 80% long is less risky, but will also obviously earn
a lower return in a rising market. Unfortunately, when a bearish fund is used to
accomplish this reduced equity allocation, this lower return will be reflected
in a loss on your mutual fund statement. This is nonetheless a significant
emotional hurdle that must be overcome, as it is always difficult to justify
holding declining investment assets. Another way to look at this hedge is to
equate it with a person's checking account balance. The account balance would be
higher at the end of the year (in hindsight) had he not purchased any health,
homeowners or life insurance. However, most individuals understandably are not
willing to accept the risk of being uninsured. At the end of the year, as a
Monday morning quarterback, one might have wished he had never bought the
insurance, but that feeling should not prevent him from buying the insurance in
the following year. The same point could be made about a Prudent Bear
investment.
A final point should be made about using our fund for risk reduction. Most
individuals possess what I refer to as a "three-legged stool" in their financial
life, comprised of their "paycheck", their house and their investment portfolio.
Today, all of these legs for most individuals are dependent on this strong
"bubble" economy, and therefore the Prudent Bear Fund should be viewed as a risk
reduction vehicle to help "hedge" all three "legs", instead of just an
investment portfolio. Please keep that in mind as you consider the future.
/s/ David W. Tice
David W. Tice
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders
of Prudent Bear Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the schedules of investments and of securities sold short, and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Prudent Bear Fund (the "Fund") at September 30, 1999, the results of its
operations, the changes in its net assets and the financial highlights for each
of the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at September 30, 1999 by correspondence with the
custodian and brokers, and the application of alternative auditing procedures
where broker confirmations were not received, provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
November 12, 1999
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STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1999
ASSETS:
Investments, at value (cost $198,122,355) $201,317,785
Cash 2,189 250
Deposit at brokers for short sales 2,881,854
Receivable from broker for proceeds on securities sold short 140,205,761
Receivable for investments sold 9,525,969
Capital shares sold 5,743,915
Dividend receivable 32,429
Interest receivable 1,893,736
Organizational expenses, net of accumulated amortization 7,686
Other assets 49,925
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Total Assets 363,848,310
------------
LIABILITIES:
Securities sold short, at value (Proceeds of $144,400,013) 133,701,771
Payable for securities purchased 6,312,180
Payable for futures contracts 222,350
Capital shares redeemed 2,358,771
Payable to Adviser 193,102
Dividends payable on short positions 82,398
Accrued expenses and other liabilities 309,368
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Total Liabilities 143,179,940
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NET ASSETS $220,668,370
============
NET ASSETS CONSIST OF:
Capital stock $301,809,790
Accumulated undistributed net investment income 4,103,787
Accumulated undistributed net realized loss on
investments sold, securities sold short and option contracts
expired or closed (99,718,714)
Net unrealized appreciation on:
Investments 3,195,430
Short positions 10,698,242
Futures contracts 579,835
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TOTAL NET ASSETS $220,668,370
============
NO LOAD SHARES:
Net Assets $220,461,576
Shares Outstanding (250,000,000 shares of $.0001 par
value authorized) 48,909,331
Net Asset Value, Redemption Price and Offering Price Per Share $4.51
============
CLASS C SHARES:
Net Assets $206,794
Shares Outstanding (250,000,000 shares of
$.0001 par value authorized) 46,101
Net Asset Value, Redemption Price and Offering Price Per Share $4.49
============
See notes to the financial statements.
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STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1999
INVESTMENT INCOME:
Interest income $8,977,641
Dividend income on long positions (net of foreign
taxes withheld of $11,969) 93,436
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Total investment income 9,071,077
------------
EXPENSES:
Investment advisory fee 1,786,648
Administration fee 95,375
Shareholder servicing and accounting costs 196,890
Custody fees 137,605
Federal and state registration 72,983
Professional fees 101,619
Distribution expense - No Load shares 357,186
Distribution expense - Class C shares 576
Reports to shareholders 33,221
Directors' fees and expenses 2,620
Amortization of organizational expenses 6,015
Other 30,089
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Total operating expenses before dividends on short positions 2,820,827
Dividends on short positions (net of foreign
taxes withheld of $2,774) 399,027
------------
Total expenses 3,219,854
------------
NET INVESTMENT INCOME 5,851,223
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REALIZED AND UNREALIZED GAIN(LOSS)
ON INVESTMENTS:
Realized loss on:
Long transactions (7,029,855)
Short transactions (44,954,560)
Option contracts expired or closed (26,291,443)
Futures contracts closed (954,844)
Change in unrealized appreciation/depreciation on:
Investments 9,821,465
Short positions (8,663,155)
Written options (49,630)
Futures contracts 579,835
------------
Net realized and unrealized loss on investments (77,542,187)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ($71,690,964)
=============
See notes to the financial statements.
<PAGE>
- --------------------------------------------------------------------------------
PRUDENT BEAR FUND
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
Year Ended Year Ended
September 30, 1999 September 30, 1998
-------------------- ------------------
OPERATIONS:
Net investment income $5,851,223 $3,016,706
Net realized loss on:
Long transactions (7,029,855) (916,024)
Short transactions (44,954,560) (6,787,121)
Option contracts expired or closed (26,291,443) (2,373,656)
Futures contracts closed (954,844) (1,560,074)
Change in unrealized appreciation/
depreciation on:
Investments 9,821,465 (7,576,636)
Short positions (8,663,155) 18,814,797
Written options (49,630) 64,704
Futures contracts 579,835 -
------------ ------------
Net increase (decrease) in net assets
resulting from operations (71,690,964) 2,682,696
------------ ------------
DISTRIBUTIONS TO NO LOAD SHARE SHAREHOLDERS
FROM NET INVESTMENT INCOME (4,243,854) (1,895,943)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 571,891,273 457,679,213
Shares issued to holders in
reinvestment of dividends 3,546,118 1,507,668
Cost of shares redeemed (452,525,566) (312,781,980)
------------ ------------
Net increase in net assets resulting from
capital share transactions 122,911,825 146,404,901
------------ ------------
TOTAL INCREASE IN NET ASSETS 46,977,007 147,191,654
NET ASSETS:
Beginning of period 173,691,363 26,499,709
------------ ------------
End of period (including undistributed
net investment income of $4,103,787 and
$2,492,208, respectively) $220,668,370 $173,691,363
============ ============
See notes to the financial statements.
<PAGE>
- --------------------------------------------------------------------------------
PRUDENT BEAR FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected per share data is based on a share of beneficial interest outstanding
throughout each period.
<TABLE>
<CAPTION>
Class C Shares
No Load Shares Feb. 8, 1999<F1> Dec. 28, 1995<F1>
Year Ended through Year Ended Year Ended through
Sept. 30, 1999 Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1996
--------------- ------------------ --------------- ---------------- ----------------
Per Share Data:
<S> <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> 0.19<F3> 0.09<F3> 0.29<F3> 0.62<F3> 0.09
Net realized and unrealized (losses)
on investments (2.82) (0.38) (0.01) (2.06) (1.21)
---------- ---------- ---------- ---------- ----------
Total from investment operations (2.63) (0.29) 0.28 (1.44) (1.12)
---------- ---------- ---------- ---------- ----------
Less distributions from net investment income (0.20) - (0.23) (0.15) -
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $4.51 $4.49 $7.34 $7.29 $8.88
========== ========== ========== ========== ==========
Total return -36.17% -6.07%<F4> 3.66% -16.44% -11.20%<F4>
Supplemental data and ratios:
Net assets, end of period (000's) $220,462 $207 $173,691 $26,500 $7,326
Ratio of operating expenses to average
net assets<F5> 1.97% 2.74%<F6> 2.08% 2.59% 2.75%<F6><F7>
Ratio of dividends on short positions to
average net assets 0.28% 0.32%<F6> 0.28% 0.34% 0.34%<F6>
Ratio of net investment income to
average net assets 4.09% 3.25%<F6> 4.34% 7.75% 4.07%<F6><F7>
Portfolio turnover rate<F8> 536.56% 536.56% 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 September 30, 1999, September 30, 1998,
September 30, 1997 and September 30, 1996 was $0.21, $0.30, $0.65 and
$0.10, respectively, and for the period ended September 30, 1999 for the
Class C Shares was $0.09.
<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 September 30, 1999, September 30, 1998, September 30, 1997
and September 30, 1996 was 2.25%, 2.36%, 2.93% and 3.09%, respectively, and
for the period ended September 30, 1999 for the Class C Shares was 3.06%.
<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
SEPTEMBER 30, 1999
SHARES VALUE
- -------- ------
COMMON STOCKS - 16.4%*
BASIC MATERIALS - 9.3%*
78,500 AngloGold Limited - ADR<F3> $2,467,844
120,000 Ashanti Goldfields Company Ltd. - GDR<F3> 945,000
315,900 Birch Mountain Resources Ltd.**<F3> 253,666
884,874 Black Hawk Mining Inc.**<F3> 93,335
2,477,400 Campbell Resources Inc.**<F3><F5> 851,606
3,775,500 Canarc Resource Corporation**<F3> <F5> 668,003
1,350,000 Canyon Resources Corporation**<F5> 590,625
50,000 Coeur d'Alene Mines Corporation** 234,375
50,000 Compania de Minas Buenaventura S.A. - ADR<F3> 865,625
310,000 Donner Minerals Ltd.**<F3> <F5> 25,315
73,700 Dundee Precious Metals, Inc. - Class A**<F3> 536,638
3,100,000 Dynatec Corporation**<F3> 928,207
2,639,500 ECUSilver Mining Inc.**<F3> 359,238
50 Exploration Capital Partners, LP
(Acquired 10/14/98, Cost $1,000,000)**<F4>r 1,107,198
60,000 Goldcorp Inc. - Class A**<F3> 393,750
442,800 Golden Star Resources Ltd.**<F5> 332,100
55,000 Homestake Mining Company 505,313
30,000 IAMGOLD, International African Mining
Gold Corporation**<F3> 72,474
2,150,000 International Uranium Corporation**<F3> 395,032
200,000 Kinross Gold Corporation**<F3> 575,000
990,738 Maxam Gold Corporation** 128,796
30,000 Meridian Gold Inc.**<F3> 204,375
350,000 Metalline Mining Co. Inc.
(Acquired 4/8/99, Cost $350,000)**<F2><F4>r 1,190,000
1,050,000 Miramar Mining Corporation**<F3> 777,000
440,399 Pan American Silver Corporation**<F3> <F5> 3,192,893
175,000 Pangea Goldfields Inc.**<F3> 404,900
55,833 Randgold & Exploration Company Ltd. - ADR**<F3> 223,332
800,000 Rio Narcea Gold Mines, Ltd.**<F3> 1,061,586
100,000 Southwestern Gold Corporation**<F3> 313,032
552,400 TVX Gold Inc.**<F3> <F5> 690,500
91,500 Viceroy Resource Corporation**<F3> 95,267
1,750,000 William Resources Inc.**<F3> 77,407
-----------
20,559,432
-----------
CHEMICALS - 0.6%*
145,000 Borden Chemicals and Plastics Limited Partnership** 589,062
50,000 Olin Corporation 681,250
-----------
1,270,312
-----------
CONSUMER-CYCLICALS - 0.0%*
1,120,000 LS Capital Corporation**<F5> 23,520
300,000 LS Capital Corporation
(Acquired 2/19/98, Cost $87,000)**<F2><F4> 5,370
-----------
28,890
-----------
SHARES VALUE
- -------- ------
SCHOOLS - 0.0%*
12,600 Computer Learning Centers, Inc.**<F1><F5> $46,462
-----------
ENTERTAINMENT & LEISURE - 0.3%*
1,100,000 Restaurant Brands New Zealand Limited<F3> 738,484
-----------
FINANCIAL SERVICES - 0.4%*
70,000 JBOxford Holdings, Inc. **<F1> 538,125
9,682 Metris Companies Inc.<F1> 285,014
-----------
823,139
-----------
HEALTH CARE - 2.8%*
339,485 Avigen, Inc.** 4,073,820
12,000 Eclipse Surgical Technologies, Inc.** 198,000
100,000 Genome Therapeutics Corp.** 400,000
20,000 The Immune Response Corporation**<F1> 97,500
666,666 NexMed, Inc.
(Acquired 9/30/99, Cost $999,666)**<F4>r 999,666
15,000 Organogenesis Inc.**<F1> 111,563
87,300 Scios Inc.** 321,919
-----------
6,202,468
-----------
TECHNOLOGY - 2.3%*
100,000 AHT Corporation** 290,625
5,000 Amazon.com, Inc.**<F1> 399,687
3,500 DellComputer Corporation**<F1> 146,344
34,000 Digital River, Inc.**<F1> 739,500
200 Exchange Applications, Inc.** 5,812
4,000 Intel Corporation<F1> 297,250
23,000 Microchip Technology Incorporated**<F1> 1,181,625
16,200 Seagate Technology, Inc.**<F1> 499,163
2,000 SoftNet Systems, Inc.**<F1> 48,750
8,000 theglobe.com, inc.**<F1> 109,500
50,000 uBid, Inc.**<F1> 1,318,750
500 Yahoo! Inc.**<F1> 89,750
-----------
5,126,756
-----------
TEXTILE - 0.4%*
160,000 Cone Mills Corporation** 780,000
-----------
TRANSPORTATION - 0.2%*
175,000 Transportacion Maritima Mexicana
SA de CV - ADR<F3> 492,188
-----------
WHOLESALE PRODUCTS - 0.1%*
70,700 Opta Food Ingredients, Inc.** 207,681
-----------
TOTAL COMMON STOCKS
(Cost $37,771,588) 36,275,812
-----------
See notes to the financial statements.
<PAGE>
- --------------------------------------------------------------------------------
PRUDENT BEAR FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONT.)
SEPTEMBER 30, 1999
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ------------------------------------ ------
CALL OPTIONS PURCHASED - 2.5%*
Gold 100 Ounce Futures:
5,000 Expiration June 2000,
Exercise Price $350.00<F4> $2,900,000
6,500 Expiration June 2000,
Exercise Price $370.00<F4> 2,470,000
500 Pan American Silver Corporation
Expiration December 1999,
Exercise Price $5.00 118,750
400 Philadelphia Stock Exchange Gold and Silver Index:
Expiration November 1999,
Exercise Price $100.00 50,000
-----------
TOTAL CALL OPTIONS PURCHASED
(Cost $951,500) 5,538,750
-----------
PUT OPTIONS PURCHASED - 2.5%*
200 ADC Telecommunications, Inc.
Expiration October 1999,
Exercise Price $35.00 200
Alliance Capital Management L.P.:
200 Expiration October 1999,
Exercise Price $30.00 52,500
50 Expiration November 1999,
Exercise Price $25.00 2,812
200 Amazon.com, Inc.
Expiration October 1999,
Exercise Price $60.00 12,500
Ambac Financial Group, Inc.:
100 Expiration November 1999,
Exercise Price $45.00 17,500
100 Expiration November 1999,
Exercise Price $50.00 41,875
200 American Express Company
Expiration October 1999,
Exercise Price $120.00 15,000
AmeriCredit Corp.:
200 Expiration October 1999,
Exercise Price $10.00 200
50 Expiration October 1999,
Exercise Price $12.50 50
250 AMR Corporation
Expiration November 1999,
Exercise Price $55.00 82,812
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ------------------------------------ ------
Apple Computer, Inc.:
100 Expiration October 1999,
Exercise Price $60.00 $16,250
200 Expiration October 1999,
Exercise Price $65.00 80,000
150 Applebee's International, Inc.
Expiration October 1999,
Exercise Price $30.00 3,281
100 Applied Materials, Inc.
Expiration October 1999,
Exercise Price $80.00 46,875
Associates First Capital Corporation - Class A:
100 Expiration October 1999,
Exercise Price $30.00 100
100 Expiration October 1999,
Exercise Price $35.00 8,750
Bally Total Fitness Holding Corporation:
200 Expiration October 1999,
Exercise Price $30.00 28,750
20 Expiration November 1999,
Exercise Price $30.00 5,000
Bank of America Corporation:
100 Expiration October 1999,
Exercise Price $50.00 3,125
100 Expiration October 1999,
Exercise Price $60.00 46,250
100 Expiration November 1999,
Exercise Price $55.00 27,812
200 BankBoston Corporation
Expiration November 1999,
Exercise Price $45.00 65,000
100 Bed Bath & Beyond Inc.
Expiration October 1999,
Exercise Price $27.50 1,563
The Black & Decker Corporation:
100 Expiration October 1999,
Exercise Price $50.00 44,375
100 Expiration November 1999,
Exercise Price $50.00 53,750
100 Carnival Corporation
Expiration October 1999,
Exercise Price $45.00 24,062
See notes to the financial statements.
<PAGE>
- --------------------------------------------------------------------------------
PRUDENT BEAR FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONT.)
SEPTEMBER 30, 1999
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ------------------------------------ ------
The Chase Manhattan Corporation:
200 Expiration October 1999,
Exercise Price $70.00 $14,375
250 Expiration October 1999,
Exercise Price $75.00 57,812
100 Expiration October 1999,
Exercise Price $80.00 55,625
300 Expiration November 1999,
Exercise Price $65.00 29,062
150 The Cheesecake Factory Incorporated
Expiration October 1999,
Exercise Price $30.00 39,375
CIENA Corporation:
150 Expiration October 1999,
Exercise Price $25.00 2,812
150 Expiration October 1999,
Exercise Price $30.00 6,094
100 Cintas Corporation
Expiration October 1999,
Exercise Price $45.00 100
150 Circuit City Stores - Circuit City Group
Expiration October 1999,
Exercise Price $35.00 3,281
Cisco Systems, Inc.:
200 Expiration October 1999,
Exercise Price $50.00 200
100 Expiration October 1999,
Exercise Price $70.00 30,312
Citigroup Inc.:
400 Expiration October 1999,
Exercise Price $40.00 15,000
100 Expiration October 1999,
Exercise Price $42.50 8,437
150 CMGI Inc.
Expiration October 1999,
Exercise Price $80.00 4,687
100 Coulter Pharmaceutical, Inc.
Expiration October 1999,
Exercise Price $25.00 111,250
Countrywide Credit Industries, Inc.:
100 Expiration October 1999,
Exercise Price $30.00 5,625
100 Expiration October 1999,
Exercise Price $35.00 31,875
Cytyc Corporation:
60 Expiration November 1999,
Exercise Price $17.50 60
100 Expiration November 1999,
Exercise Price $25.00 3,125
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ------------------------------------ ------
Dell Computer Corporation:
550 Expiration October 1999,
Exercise Price $42.50 $116,875
300 Expiration November 1999,
Exercise Price $40.00 75,000
DOTindex:
25 Expiration October 1999,
Exercise Price $540.00 6,250
100 Expiration October 1999,
Exercise Price $560.00 41,250
50 Expiration October 1999,
Exercise Price $580.00 36,250
200 Duane Reade Inc.
Expiration October 1999,
Exercise Price $30.00 30,000
100 E*TRADE Group,Inc.
Expiration October 1999,
Exercise Price $22.50 10,625
100 Equifax Inc.
Expiration October 1999,
Exercise Price $30.00 24,375
100 Fairfield Communities, Inc.
Expiration October 1999,
Exercise Price $12.50 16,875
Fannie Mae:
500 Expiration October 1999,
Exercise Price $60.00 32,812
100 Expiration October 1999,
Exercise Price $65.00 30,625
Freddie Mac:
500 Expiration October 1999,
Exercise Price $50.00 32,812
100 Expiration October 1999,
Exercise Price $55.00 33,125
100 First Data Corporation
Expiration October 1999,
Exercise Price $40.00 2,500
Gateway Inc.:
450 Expiration October 1999,
Exercise Price $45.00 126,563
60 Expiration November 1999,
Exercise Price $40.00 14,250
General Electric Company:
200 Expiration October 1999,
Exercise Price $110.00 10,000
100 Expiration October 1999,
Exercise Price $115.00 15,625
200 Expiration November 1999,
Exercise Price $110.00 42,500
See notes to the financial statements.
<PAGE>
- --------------------------------------------------------------------------------
PRUDENT BEAR FUND
- --------------------------------------------------------------------------------
CHEDULE OF INVESTMENTS (CONT.)
SEPTEMBER 30, 1999
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ------------------------------------ ------
300 General Motors Corporation
Expiration October 1999,
Exercise Price $60.00 $19,688
H&R Block, Inc.:
400 Expiration October 1999,
Exercise Price $45.00 97,500
250 Expiration November 1999,
Exercise Price $40.00 35,937
150 Hewlett-Packard Company
Expiration November 1999,
Exercise Price $85.00 48,750
Household International, Inc.:
200 Expiration October 1999,
Exercise Price $35.00 7,500
200 Expiration October 1999,
Exercise Price $40.00 33,750
250 ICOS Corporation
Expiration October 1999,
Exercise Price $25.00 5,469
100 IDEC Pharmaceuticals Corporation
Expiration October 1999,
Exercise Price $90.00 51,875
20 Illinois Tool Works Inc.
Expiration November 1999,
Exercise Price $70.00 5,000
350 Intel Corporation
Expiration October 1999,
Exercise Price $75.00 115,937
International Business Machines Corporation:
100 Expiration October 1999,
Exercise Price $125.00 59,375
100 Expiration November 1999,
Exercise Price $115.00 43,125
200 Linear Technology Corporation
Expiration October 1999,
Exercise Price $60.00 68,750
Lucent Technologies Inc.:
100 Expiration October 1999,
Exercise Price $55.00 1,250
150 Expiration October 1999,
Exercise Price $60.00 10,781
200 Expiration November 1999,
Exercise Price $55.00 21,250
100 Marsh & McLennan Companies, Inc.
Expiration October 1999,
Exercise Price $70.00 34,375
150 Maxim Integrated Products, Inc.
Expiration October 1999,
Exercise Price $65.00 59,063
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ------------------------------------ ------
100 MBIA, Inc.
Expiration November 1999,
Exercise Price $50.00 $43,125
100 MBNA Corporation
Expiration October 1999,
Exercise Price $25.00 23,750
100 MCI WorldCom, Inc.
Expiration October 1999,
Exercise Price $75.00 43,125
100 McDonald's Corporation
Expiration December 1999,
Exercise Price $40.00 10,000
100 Medallion Financial Corp.
Expiration November 1999,
Exercise Price $20.00 12,813
MGIC Investment Corporation:
100 Expiration October 1999,
Exercise Price $40.00 100
100 Expiration November 1999,
Exercise Price $45.00 18,125
100 Expiration December 1999,
Exercise Price $40.00 9,375
250 Micron Technology, Inc.
Expiration October 1999,
Exercise Price $70.00 184,375
Morgan Stanley High Tech Index Pool:
30 Expiration October 1999,
Exercise Price $1,190.00 73,500
50 Expiration October 1999,
Exercise Price $1,200.00 141,250
50 Expiration October 1999,
Exercise Price $1,210.00 160,000
100 Expiration October 1999,
Exercise Price $1,220.00 365,000
Motorola, Inc.:
100 Expiration October 1999,
Exercise Price $85.00 20,313
150 Expiration November 1999,
Exercise Price $80.00 34,219
200 Network Appliance, Inc.
Expiration October 1999,
Exercise Price $55.00 200
100 Oracle Corporation
Expiration October 1999,
Exercise Price $45.00 15,625
200 Orckit Communications Ltd.
Expiration October 1999,
Exercise Price $25.00 200
See notes to the financial statements.
<PAGE>
- --------------------------------------------------------------------------------
PRUDENT BEAR FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONT.)
SEPTEMBER 30, 1999
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ------------------------------------ ------
500 Organogenesis Inc.
Expiration October 1999,
Exercise Price $7.50 $21,875
150 Outback Steakhouse, Inc.
Expiration October 1999,
Exercise Price $25.00 17,813
80 Papa John's International,Inc.
Expiration October 1999,
Exercise Price $35.00 80
Philadelphia Semiconductor Index:
100 Expiration October 1999,
Exercise Price $490.00 150,000
50 Expiration November 1999,
Exercise Price $450.00 76,250
100 Philadelphia Stock Exchange Gold
and Silver Index
Expiration October 1999,
Exercise Price $70.00 4,688
300 The PMIGroup, Inc.
Expiration October 1999,
Exercise Price $40.00 24,375
200 PNC Bank Corp.
Expiration October 1999,
Exercise Price $50.00 8,750
200 Premier Parks Inc.
Expiration October 1999,
Exercise Price $30.00 35,000
50 Pre-Paid Legal Services, Inc.
Expiration October 1999,
Exercise Price $30.00 625
100 Provident Financial Group, Inc.
Expiration October 1999,
Exercise Price $40.00 36,875
100 Radian Group Inc.
Expiration October 1999,
Exercise Price $45.00 28,125
Rambus Inc.:
100 Expiration November 1999,
Exercise Price $60.00 45,625
300 Expiration November 1999,
Exercise Price $70.00 285,000
200 Russell 2000 Index
Expiration October 1999,
Exercise Price $430.00 161,250
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ------------------------------------ ------
S&P 100 Index:
50 Expiration October 1999,
Exercise Price $650.00 $24,688
150 Expiration October 1999,
Exercise Price $680.00 230,625
100 Scientific-Atlanta, Inc.
Expiration November 1999,
Exercise Price $45.00 23,750
70 Sealed Air Corporation
Expiration November 1999,
Exercise Price $50.00 21,438
30 SFX Entertainment, Inc.
Expiration October 1999,
Exercise Price $36.625 19,125
300 Siebel Systems, Inc.
Expiration October 1999,
Exercise Price $65.00 75,000
200 STMicroelectronics N.V. - NYS
Expiration October 1999,
Exercise Price $67.50 17,500
200 SunTrust Banks, Inc.
Expiration October 1999,
Exercise Price $65.00 22,500
200 Sun Microsystems, Inc.
Expiration November 1999,
Exercise Price $85.00 61,250
150 Tandy Corporation
Expiration October 1999,
Exercise Price $42.50 150
100 Telecomunicacoes Brasileiras S.A. - ADR
Expiration October 1999,
Exercise Price $75.00 23,125
250 Telefonaktiebolaget LM Ericsson - ADR
Expiration October 1999,
Exercise Price $30.00 16,406
200 Telefonos de Mexico S.A. - ADR
Expiration October 1999,
Exercise Price $70.00 28,750
100 Tiffany & Co.
Expiration October 1999,
Exercise Price $50.00 3,125
140 United Technologies Corporation
Expiration November 1999,
Exercise Price $55.00 18,375
200 U.S. Bancorp
Expiration October 1999,
Exercise Price $32.50 50,000
See notes to the financial statements.
<PAGE>
- --------------------------------------------------------------------------------
PRUDENT BEAR FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONT.)
SEPTEMBER 30, 1999
CONTRACTS (100 SHARES PER CONTRACT) VALUE
- ------------------------------------ ------
100 Wellpoint Health Networks Inc.
Expiration November 1999,
Exercise Price $60.00 $57,500
200 Wells Fargo Company
Expiration October 1999,
Exercise Price $40.00 27,500
150 Wendy's International, Inc.
Expiration December 1999,
Exercise Price $25.00 16,875
100 Whole Foods Market, Inc.
Expiration November 1999,
Exercise Price $30.00 12,500
100 Yahoo! Inc.
Expiration October 1999,
Exercise Price $170.00 63,125
100 Zonagen, Inc.
Expiration November 1999,
Exercise Price $10.00 70,625
----------
TOTAL PUT OPTIONS PURCHASED
(Cost $5,855,062) 5,452,544
----------
SHARES
- ---------
PREFERRED STOCKS - 1.3%*
57,500 Freeport-McMoRan
Copper & Gold, Inc.** 941,562
56,500 Freeport-McMoRan
Copper & Gold, Inc. - Series Gold** 1,098,219
65,400 Freeport-McMoRan
Copper & Gold, Inc. - Series Silver** 870,637
----------
TOTAL PREFERRED STOCKS
(Cost $2,687,539) 2,910,418
----------
WARRANTS - 0.2%*
52,117 Avigen, Inc.
Expiration December 2003,
Exercise Price $4.76 (Cost $6,515) <F4> 358,461
300,000 LS Capital Corporation
Expiration March 2000,
Exercise Price $0.60
(Acquired 2/19/98, Cost $3,000) <F4>r 0
333,333 NexMed, Inc.
Expiration April 2000,
Exercise Price $2.25
(Acquired 9/30/99, Cost $333) <F4>r 333
----------
TOTAL WARRANTS
(Cost $9,848) 358,794
----------
PRINCIPAL
AMOUNT VALUE
- ----------- -----
U.S. TREASURY NOTES - 55.4%*
$41,000,000 5.25%, 05/31/2001<F5> $40,769,375
10,500,000 5.75%, 06/30/2001<F5> 10,513,125
56,000,000 5.50%, 07/31/2001<F5> 55,860,000
15,000,000 6.25%, 10/31/2001<F5> 15,168,750
-------------
TOTAL U.S. TREASURY NOTES
(Cost $122,375,835) 122,311,250
-------------
SHORT-TERM INVESTMENTS - 12.9%*
U.S. TREASURIES - 12.9%*
U.S. Treasury Bills:
5,542,000 4.55%, 12/02/1999<F5> 5,498,573
16,118,000 4.64%, 12/23/1999<F5> 15,945,569
5,723,000 4.70%, 12/30/1999<F5> 5,655,755
1,400,000 4.77%, 03/09/2000<F5> 1,370,320
-------------
TOTAL U.S. TREASURIES 28,470,217
-------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $28,470,983) 28,470,217
-------------
TOTAL INVESTMENTS
(Cost $198,122,355) $201,317,785
=============
ADR - American Depository Receipt
GDR - Global Depository Receipt
NYS - New York Shares
* Calculated as a percentage of net assets.
** Non-income producing security.
r Restricted security.
<F1> Shares are held to cover all or a portion of a corresponding
short position.
<F2> Private placement issue (trades at a 15% discount to market value).
<F3> Foreign security.
<F4> Fair valued security.
<F5> All or a portion of the securities have been committed as collateral for
open short positions and open futures contracts.
See notes to the financial statements.
<PAGE>
- --------------------------------------------------------------------------------
PRUDENT BEAR FUND
- --------------------------------------------------------------------------------
SCHEDULE OF SECURITIES SOLD SHORT
SEPTEMBER 30, 1999
SHARES VALUE
- -------- ------
17,000 Action Performance Companies, Inc. $358,062
10,000 Actrade International, Ltd. 133,750
10,000 ADC Telecommunications, Inc. 419,375
20,000 Advantage Learning Systems, Inc. 372,500
16,000 Alliance Capital Management L.P. 439,000
5,000 Amazon.com, Inc. 399,687
20,000 Ambac Financial Group, Inc. 947,500
2,000 America Online, Inc. 208,000
53,000 AmeriCredit Corp. 791,687
25,500 Ameritrade Holding Corporation - Class A 468,562
61,500 Ancor Communications, Incorporated 1,491,375
10,000 Andrx Corporation 585,313
50,000 Anesta Corp. 459,375
20,000 The Ashton TechnologyGroup, Inc. 150,000
36,000 Associates First Capital Corporation - Class A 1,296,000
40,000 ATI Technologies Inc. 440,000
38,000 Atlas Air, Inc. 831,250
15,000 audiohighway.com 165,000
23,500 Aware, Inc. 674,156
10,000 BB&T Corporation 323,750
25,000 BackWeb Technologies Ltd. 425,000
33,000 Bank of America Corporation 1,837,687
25,000 BankBoston Corporation 1,084,375
27,000 The Bear Stearns Companies Inc. 1,037,812
78,000 Beyond.com Corporation 955,500
30,000 The Black & Decker Corporation 1,370,625
51,000 Boston Scientific Corporation 1,259,062
3,300 Boyd Gaming Corporation 19,800
18,000 Campbell Soup Company 704,250
28,000 Capital One Financial Corporation 1,092,000
24,000 Carnival Corporation 1,044,000
10,000 Caterpillar Inc. 548,125
32,500 Cell Pathways, Inc. 312,812
20,000 The Chase Manhattan Corporation 1,507,500
8,000 The Charles Schwab Corporation 269,500
15,000 Cheap Tickets, Inc. 485,625
10,000 CheckFree Holdings Corporation 411,250
15,000 The Children's Place Retail Stores, Inc. 399,375
15,000 CIENA Corporation 547,500
15,000 Circuit City Stores - Circuit CityGroup 632,812
10,000 Cisco Systems, Inc. 685,625
35,000 Citigroup Inc. 1,540,000
10,000 Clarent Corporation 509,375
SHARES VALUE
- -------- ------
17,000 The Coca-Cola Company $817,062
50,000 Coca-Cola Enterprises Inc. 1,128,125
23,000 Comdisco, Inc. 444,187
12,600 Computer Learning Centers, Inc. 46,462
21,000 Conseco, Inc. 405,562
10,000 Corporate Express, Inc. 94,062
20,000 Coulter Pharmaceutical, Inc. 278,750
30,000 Countrywide Credit Industries, Inc. 967,500
32,000 Covad Communications Group, Inc. 1,395,000
26,000 Creative Computers, Inc. 165,750
60,000 Credit Acceptance Corporation 360,000
13,500 Critical Path, Inc. 544,641
36,000 Crosswalk.Com, Inc. 252,000
9,200 CVS Corporation 375,475
48,500 Cyberian Outpost, Inc. 444,836
25,000 CyberShop.com Inc. 145,312
10,000 Cytyc Corporation 386,875
35,500 Dell Computer Corporation 1,484,344
45,000 DIAMONDS Trust, Series I 4,663,125
44,000 Digital River, Inc. 957,000
22,500 Dollar General Corporation 694,687
12,000 Donaldson, Lufkin & Jenrette, Inc. 474,750
31,000 Doral Financial Corporation 414,625
15,000 drkoop.com, Inc. 212,812
12,500 E-LOAN, Inc. 269,531
36,000 E*TRADE Group, Inc. 846,000
14,000 Efficient Networks, Inc. 509,250
70,000 Egghead.com, Inc. 490,000
10,000 Elan Corporation plc - ADR 335,625
15,000 Equifax Inc. 421,875
14,000 Fannie Mae 877,625
33,500 FDX Corporation 1,298,125
21,000 Freddie Mac 1,092,000
5,000 Fidelity National Financial, Inc. 75,937
4,000 First Tennessee National Corporation 112,500
10,000 First Union Corporation 355,625
20,200 FIRSTPLUS Financial Group, Inc. 5,050
10,000 4Kids Entertainment, Inc. 312,500
30,000 Franklin Resources, Inc. 922,500
100,000 Full House Resorts, Inc. 181,250
22,000 Gateway Inc. 977,625
5,000 The Goldman Sachs Group,Inc. 305,000
18,000 GreenPoint Financial Corp. 478,125
See notes to the financial statements.
<PAGE>
- --------------------------------------------------------------------------------
PRUDENT BEAR FUND
- --------------------------------------------------------------------------------
SCHEDULE OF SECURITIES SOLD SHORT (CONT.)
SEPTEMBER 30, 1999
SHARES VALUE
- -------- ------
17,000 Harley-Davidson, Inc. $851,062
10,000 Hasbro,Inc. 214,375
30,000 Household International, Inc. 1,203,750
10,000 Hutchinson Technology Incorporated 270,000
37,000 ICOS Corporation 1,091,500
15,000 IDT Corporation 314,062
16,000 Illinois Tool WorksInc. 1,193,000
20,000 The Immune Response Corporation 97,500
1,000 Immunex Corporation 43,375
15,000 Innovex, Inc. 135,000
4,000 IntelCorporation 297,250
10,000 International Business Machines Corporation 1,213,750
58,000 Internet America, Inc. 703,250
22,000 Invacare Corporation 430,375
5,000 Isle of Capri Casinos, Inc. 50,000
14,000 ISS Group, Inc. 381,500
10,000 iTurf Inc. - Class A 105,000
111,000 JB Oxford Holdings, Inc. 853,312
15,000 J.P. Morgan & Co. Incorporated 1,713,750
15,000 K-Swiss Inc. - Class A 473,437
33,500 Knight/Trimark Group, Inc. 992,437
10,000 Kohl's Corporation 661,250
19,500 Kulicke and Soffa Industries, Inc. 474,094
25,000 Liberty Digital, Inc. - Class A 582,813
10,000 Lowe's Companies, Inc. 487,500
23,000 MBIA, Inc. 1,072,375
20,000 MBNA Corporation 456,250
10,000 MCIWorldCom, Inc. 718,750
24,000 MGIC Investment Corporation 1,146,000
10,000 Marsh & McLennan Companies, Inc. 685,000
43,682 Metris Companies Inc. 1,285,889
8,225 Metromedia Fiber Network, Inc. - Class A 201,513
23,000 Microchip Technology Incorporated 1,181,625
14,500 Miravant Medical Technologies 146,813
12,000 Morgan Stanley Dean Witter & Co. 1,070,250
15,000 Motorola, Inc. 1,320,000
16,000 Multex.com Inc. 204,000
85,000 NASDAQ - 100 Shares 10,231,875
18,000 National Discount Brokers Group, Inc. 475,875
33,000 Net.B@nk, Inc. 730,125
15,000 Northwest Airlines Corporation 382,500
20,000 Novoste Corporation 356,875
22,300 NVIDIA Corporation 429,275
SHARES VALUE
- -------- ------
15,000 onlinetradinginc.com $134,063
15,000 Organogenesis Inc. 111,563
4,000 Osteotech, Inc. 54,500
19,000 Paine Webber Group Inc. 688,750
10,500 pcOrder.com, Inc. 368,813
10,000 P.F.Chang's China Bistro, Inc. 216,250
3,100 Photronics, Inc. 69,556
6,000 PMC-Sierra, Inc. 555,000
10,000 The PMI Group, Inc. 408,750
5,000 PNC Bank Corp. 263,438
46,000 Preview Travel,Inc. 747,500
50,000 Prodigy Communications Corporation 887,500
19,000 Provident Financial Group, Inc. 694,688
27,000 Providian Financial Corporation 2,138,063
79,000 quepasa.com, inc. 617,188
22,000 Quicksilver, Inc. 401,500
13,000 Radian Group Inc. 558,188
5,000 Rambus Inc. 331,250
6,500 Regions Financial Corporation 195,000
30,400 ResMed Inc. 1,005,100
55,000 Rhythms NetConnections Inc. 1,897,500
12,000 Rite Aid Corporation 165,750
35,000 Rock Financial Corporation 640,938
13,000 Salon.com Inc. 64,188
50,000 S & P 500 Depositary Receipt 6,437,500
16,200 Seagate Technology, Inc. 499,163
12,000 SFX Entertainment, Inc. 366,000
7,000 Shared Medical Systems Corporation 327,250
25,000 Silicon Valley Bancshares 603,125
10,000 SoftNet Systems, Inc. 243,750
9,800 Southern Pacific Funding Corporation 490
31,000 SportsLine USA, Inc. 916,438
60,000 STAR Telecommunications, Inc. 324,375
5,000 Station Casinos, Inc. 116,250
26,100 Styleclick.com Inc. 179,438
13,000 T. Rowe Price Associates, Inc. 356,688
3,700 Tandy Corporation 191,244
43,500 Telebanc Financial Corporation 1,000,500
15,000 Telecomunicacoes Brasileiras S.A. - ADR 1,124,063
30,000 Telefonos de Mexico S.A. - ADR 2,137,500
25,000 Tellabs, Inc. 1,423,438
42,000 theglobe.com, inc. 574,875
40,000 TheStreet.com, Inc. 725,000
See notes to the financial statements.
<PAGE>
- --------------------------------------------------------------------------------
PRUDENT BEAR FUND
- --------------------------------------------------------------------------------
SCHEDULE OF SECURITIES SOLD SHORT (CONT.)
SEPTEMBER 30, 1999
SHARES VALUE
- -------- ------
10,000 Time Warner Inc. $607,500
12,000 Tommy Hilfiger Corporation 338,250
3,000 Tupperware Corporation 60,750
84,826 uBid, Inc. 2,237,286
29,900 United Companies Financial Corporation 2,990
30,000 United Technologies Corporation 1,779,375
80,000 US Airways Group, Inc. 2,100,000
20,000 Walgreen Co. 507,500
9,000 Wal-Mart Stores, Inc. 428,063
12,000 Webb Interactive Services, Inc. 122,250
35,000 WEBS-Hong Kong 398,125
10,000 Whole Foods Market, Inc. 327,188
2,500 Yahoo! Inc. 448,750
4,200 Zenith Electronics Corporation 252
-------------
TOTAL SECURITIES SOLD SHORT
(Proceeds $144,400,013) $133,701,771
=============
WEBS - World Equity Benchmark Shares
See notes to the financial statements.
<PAGE>
- --------------------------------------------------------------------------------
PRUDENT BEAR FUND
- --------------------------------------------------------------------------------
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
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 a diversified 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
September 30, 1999, such securities represent 4.5% 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) Short Positions - The Fund may engage in short sale transactions. For
financial statement purposes, an amount equal to the settle ment
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. 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
<PAGE>
- --------------------------------------------------------------------------------
PRUDENT BEAR FUND
- --------------------------------------------------------------------------------
NOTES TO THE FINANCIAL STATEMENTS (continued)
loss if the cost of the closing purchase transaction differs from the
premium received when the option was sold without regard to any
unrealized gain or loss on the underlying security, and the liability
related to such option is eliminated. When an option is exercised,
the premium originally received decreases the cost basis of the
underlying security (or increases the proceeds on securities sold
short) and the Fund realizes a gain or loss from the sale of the
security (or closing of the short sale).
d) Collateral on Short Sales, Written Options and Futures Contracts - As
collateral for short positions, written options and futures
contracts, the Fund is required under the 1940 Act to maintain assets
consisting of cash or liquid securities. For short positions, this
collateral must equal the market value of the securities sold short,
but not less than the market value of such securities at the time
they were sold short. For written options, this collateral must equal
the market value of the purchase obligation for put options or the
market value of the instrument underlying the contract for call
options. For futures contracts, this collateral must equal the market
value of the purchase obligation for long futures contracts or the
market value of the instrument underlying the contract for short
futures contracts. All collateral is required to be adjusted daily.
Treasury and other liquid securities in the amount of $157,202,491
have been committed as collateral for short sales and futures
contracts as of September 30, 1999.
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 com paring 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 $4,217,107 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.
j) Futures Contracts and Options on Futures Contracts - The Fund may
purchase and sell stock index futures contracts and options on such
futures contracts. Upon entering into a contract, the Fund deposits
and maintains as collateral such initial margin as required by the
exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an
amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin and
are recorded by the Fund as unrealized gains and losses. When the
contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was
opened and the value at the time it was closed.
<PAGE>
- --------------------------------------------------------------------------------
PRUDENT BEAR FUND
- --------------------------------------------------------------------------------
NOTES TO THE FINANCIAL STATEMENTS (continued)
k) Risks of Options, Futures Contracts and Options on Futures Contracts
- The risks inherent in the use of options, futures contracts,
options on futures contracts and short positions include 1) adverse
changes in the value of such instruments; 2) imperfect correlation
between the price of options and futures contracts and options
thereon and movements in the price of the underlying securities,
index or futures contracts; 3) the possible absence of a liquid
secondary market for any particular instrument at any time; 4) the
possible need to defer closing out certain positions to avoid adverse
tax consequences; and 5) the possible nonperformance by the
counterparty under the terms of the contract.
l) Restricted Securities - The Fund owns investment securities which are
unregistered and thus restricted as to resale. These securities are
valued by the Fund after giving due consideration to pertinent
factors including recent private sales, market conditions and the
issuer's financial performance. Where future disposition of these
securities requires registration under the Securities Act of 1933,
the Fund has the right to include these securities in such
registration, generally without cost to the Fund. The Fund has no
right to require registration of unregistered securities. At
September 30, 1999, the Fund had restricted securities with an
aggregate market value of $3,661,028 representing 1.7% of the net
assets of the Fund.
m) Foreign Securities - Investing in securities of foreign companies and
foreign governments involves special risks and considerations not
typically associated with investing in U.S. companies and the U.S.
government. These risks include revaluation of currencies and future
adverse political and economic developments. Moreover, securities of
many foreign companies and foreign governments and their markets may
be less liquid and their prices more volatile than those of
securities of comparable U.S. companies and the U.S. government.
n) Foreign Currency Translations - The books and records of the Fund are
maintained in U.S. dollars. Foreign currency transactions are
translated into U.S. dollars on the following basis: (i) market value
of investment securities, assets and liabilities at the daily rates
of exchange, and (ii) purchases and sales of investment securities,
dividend and interest income and certain expenses at the rates of
exchange prevailing on the respective dates of such transactions. For
financial reporting purposes, the Fund does not isolate changes in
the exchange rate of investment securities from the fluctuations
arising from changes in the market price of such securities. However,
for federal income tax purposes the Fund does isolate and treat as
ordinary income the effect of changes in foreign exchange rates on
realized gain or loss from the sale of investment securities and
payables and receivables arising from trade date and settlement date
differences.
2. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Fund were as follows:
Year Ended
No Load Shares: September 30, 1999
-------------------
$ Shares
------------- ------------
Shares sold $571,689,896 109,523,844
Shares issued to holders in
reinvestment of dividends 3,546,118 703,596
Shares redeemed (452,521,309) (84,981,005)
--------------- --------------
Net increase $122,714,705 25,246,435
---------------
Shares Outstanding:
Beginning of period 23,662,896
--------------
End of period 48,909,331
==============
February 8, 1999*
Class C Shares: through September 30, 1999
---------------------------
$ Shares
------------- ------------
Shares sold $ 201,377 47,147
Shares issued to holders in
reinvestment of dividends - -
Shares redeemed (4,257) (1,046)
--------------- --------------
Net increase $ 197,120 46,101
=============== ==============
<PAGE>
- --------------------------------------------------------------------------------
PRUDENT BEAR FUND
- --------------------------------------------------------------------------------
NOTES TO THE FINANCIAL STATEMENTS (continued)
Year Ended
No Load Shares: September 30, 1998
---------------------------
$ Shares
------------- ------------
Shares sold $457,679,213 64,975,126
Shares issued to holders in
reinvestment of dividends 1,507,668 189,644
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
==============
* commencement of operations
3. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of investments, excluding short-term
investments, options and short positions, by the Fund for the year ended
September 30, 1999, were $292,831,401 and $152,653,929, respectively.
Included in these amounts were purchases of long-term U.S. government
securities of $122,398,984 for the year ended September 30, 1999.
At September 30, 1999, gross unrealized appreciation and depreciation
ofinvestments for tax purposes were as follows:
Appreciation $11,900,745
(Depreciation) (9,772,196)
--------------
Net appreciation on investments $ 2,128,549
==============
At September 30, 1999, the cost of investments for federal income tax
purposes was $199,189,236.
At September 30, 1999, the Fund had an accumulated net realized capital
loss carryover of $1,076,667 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, 1999 of $89,679,561 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. Certain officers of the Adviser are also officers of the
Fund.
Firstar Mutual Fund Services, LLC serves as transfer agent, administrator
and accounting services agent for the Fund. Firstar Bank Milwaukee, N.A.
serves as custodian for the Fund.
5. FUTURES CONTRACTS
At September 30, 1999, the Fund had entered into stock index futures
contracts. The net unrealized appreciation of $579,835 is included in the
net unrealized appreciation section of the accompanying financial
statements. The terms of the open contracts are as follows:
Number of Underlying Market Value of Unrealized
Contracts Instrument Underlying Instrument Appreciation
--------- ----------- --------------------- -------------
(70) Nasdaq 100 Index
December 1999 $17,069,500 $295,885
(18) S&P 500 Index
December 1999 5,841,900 283,950
----------
$579,835
==========
6. OPTION CONTRACTS WRITTEN
The premium amount and the number of option contracts written during the
year ended September 30, 1999, were as follows:
Premium Amount Number of Contracts
--------------- --------------------
Options outstanding at
September 30, 1998 $ 210,555 800
Options written 2,699,551 4,725
Options closed (2,513,657) (4,675)
Options exercised (74,547) (100)
Options expired (321,902) (750)
------------ --------------
Options outstanding at
September 30, 1999 $ - -
============ ==============
<PAGE>
- -----------------------------------------------------------------------------
PRUDENT BEAR FUND
- -----------------------------------------------------------------------------
Notes to the Financial Statements (continued)
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 $357,186 for the No Load Shares and $576 for the Class C
Shares pursuant to the Plans for the year ended September 30, 1999.
<PAGE>
(back cover)
PRUDENT BEAR FUND
- -----------------------------------------
INVESTMENT ADVISER
DAVID W. TICE & ASSOCIATES, INC.
8140 WALNUT HILL LANE, SUITE 300
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
