Securities Act Registration No. 33-98726
Investment Company Act Reg. No. 811-9120
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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 7 |X|
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 8 |X|
(Check appropriate box or boxes.)
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PRUDENT BEAR FUNDS, INC.
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(Exact Name of Registrant as Specified in Charter)
8140 Walnut Hill Lane
Suite 300
Dallas, Texas 75231
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(Address of Principal Executive Offices) (Zip Code)
(214) 696-5474
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(Registrant's Telephone Number, including Area Code)
Copy to:
David W. Tice
David W. Tice & Associates, Inc. Richard L. Teigen
8140 Walnut Hill Lane Foley & Lardner
Suite 300 777 East Wisconsin Avenue
Dallas, Texas 75231 Milwaukee, Wisconsin 53202
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(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon as practicable after the
Registration Statement becomes effective.
It is proposed that this filing become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
|X| on January 31, 2000 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a) (1)
[ ] on (date) pursuant to paragraph (a) (1)
[ ] 75 days after filing pursuant to paragraph (a) (2)
[ ] on (date) pursuant to paragraph (a) (2) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
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<PAGE>
PRUDENT BEAR FUND
PRUDENT SAFE HARBOR FUND
PRUDENT BEAR
FUNDS, INC.
NO LOAD SHARES
PROSPECTUS JANUARY 31, 2000
NO LOAD SHARES
PRUDENT BEAR FUND
PRUDENT SAFE HARBOR FUND
The Prudent Bear Fund is a mutual fund seeking capital appreciation. The
Prudent Safe Harbor Fund is a mutual fund seeking to provide current income and
capital appreciation in a volatile economic environment.
Please read this Prospectus and keep it for future reference. It contains
important information, including information on how the Prudent Bear Fund and
the Prudent Safe Harbor Fund invest and the services they offer to shareholders.
Prudent Bear Funds, Inc.
8140 Walnut Hill Lane
Suite 300
Dallas, Texas 75231
1-888-PRU-BEAR (Fund Information)
1-888-778-2327
1-800-771-1848 (Account Information)
http://www.prudentbear.com
TABLE OF CONTENTS
Questions Every Investor Should Ask Before
Investing in the Prudent Bear Funds 2
Fees and Expenses 5
Investment Objectives and Strategies 6
Management of the Funds 8
The Funds' Share Price 9
Purchasing No Load Shares 9
Redeeming No Load Shares 11
Exchanging No Load Shares 14
Dividends, Distributions and Taxes 14
Financial Highlights 15
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
QUESTIONS EVERY INVESTOR
SHOULD ASK BEFORE INVESTING
IN THE PRUDENT BEAR FUNDS
1. WHAT ARE THE FUNDS' GOALS?
PRUDENT BEAR FUND
The Prudent Bear Fund seeks capital appreciation.
PRUDENT SAFE HARBOR FUND
The Prudent Safe Harbor Fund seeks current income and capital appreciation.
2. WHAT ARE THE FUNDS' PRINCIPAL INVESTMENT STRATEGIES?
PRUDENT BEAR FUND
The Prudent Bear Fund seeks capital appreciation primarily through short
sales of equity securities when overall market valuations are high and through
long positions in value-oriented equity securities when overall market
valuations are low. When the dividend yield on the stocks comprising the
Standard & Poor's Composite Index of 500 Stocks ("S&P 500") is less than 3%
(i.e. overall market valuations are high), the Prudent Bear Fund will hold more
"short" equity positions than "long" equity positions. Its "short" equity
positions will primarily consist of short sales of common stocks and purchases
of put options on common stocks. In effecting short sales and purchasing put
options the Prudent Bear Fund's investment adviser, David W. Tice & Associates,
Inc. (the "Adviser") utilizes "bottom-up" investment analysis. This means the
Adviser bases investment decisions on company-specific fundamental factors.
When the S&P 500 dividend yield is greater than 6% (i.e. overall market
valuations are low), the Prudent Bear Fund will hold more "long" equity
positions than "short" equity positions. Its "long" equity positions will
primarily consist of U.S. common stocks. In selecting common stocks, the
Adviser takes a "value" investment approach utilizing "bottom-up" investment
analysis.
When the S&P 500 dividend yield is between 3% and 6%, the Adviser will
allocate the Prudent Bear Fund's portfolio between "short" equity and "long"
equity positions in its discretion. At all times the Prudent Bear Fund will
have both "short" and "long" equity positions as the Adviser believes in all
market conditions there will exist some companies whose stocks are undervalued
by the market and some companies whose stocks are overvalued by the market.
While the Adviser believes the S&P 500 dividend yield is a reasonable long-
term measure of stock price over or under valuation, the Adviser also considers
other factors in the economy in relation to the S&P 500 dividend yield. If the
S&P 500 dividend yield is within historic ranges relative to interest rates and
other economic variables, the Adviser would likely apply the "3%" and "6%"
guidelines described above. However if, for example, interest rates rose
dramatically so that a 6% S&P 500 dividend yield was not in its historic
relation to interest rates, the Adviser might hold more "short" equity positions
than "long" equity positions until it believed conditions warranted a shift in
portfolio allocation.
The Adviser actively manages the Prudent Bear Fund's portfolio. The Prudent
Bear Fund's annual portfolio turnover rate usually will exceed 100%.
PRUDENT SAFE HARBOR FUND
The Prudent Safe Harbor Fund seeks current income and capital appreciation in
a volatile economic environment. If the Prudent Safe Harbor Fund is successful
in achieving its investment objectives, investors should be able to maintain
their purchasing power on a global basis. The Prudent Safe Harbor Fund
primarily invests in:
o Liquid securities issued by the major industrialized nations (e.g. United
States, Canada, members of the European Economic Union, Japan, Australia,
New Zealand and Switzerland) as well as other countries with sound
economic and financial systems
o Equity securities of companies that mine gold
o Gold bullion
The Prudent Safe Harbor Fund's investment adviser, also David W. Tice &
Associates, Inc., Believes that the current global economic environment is
highly uncertain. It believes that such an uncertain environment could be
conducive to governments making errors in fiscal and monetary policy that
represent risks to investors in dollar-denominated securities. For example,
monetary authorities could accommodate excessive credit as well as excessively
expand the supply of money. The Adviser believes that one result of such errors
could be a significant deterioration in the value of the U.S. dollar relative to
other currencies. The Prudent Safe Harbor Fund will attempt to capitalize on
currency fluctuations by investing in securities issued by governments whose
currency the Adviser believes will appreciate in relative value. In determining
whether or not a currency will appreciate in relative value, the Adviser will
consider the issuing country's economic fundamentals, particularly the
stringency of its monetary and fiscal policies.
The Adviser believes that investments in gold bullion have capital
appreciation potential in such a volatile economic environment. The Prudent
Safe Harbor Fund will invest in gold bullion when the Adviser believes its
dollar value will appreciate. The Prudent Safe Harbor Fund may also invest in
equity securities of companies that mine gold, but will concentrate on companies
which have existing projects currently in operation.
In making investments for the Prudent Safe Harbor Fund, the Adviser utilizes
a "top-down" investment analysis. This means it bases investment decisions on
macro-economic factors such as inflationary trends, interest rate movements,
economic statistics and monetary policy.
The Adviser actively manages the Prudent Safe Harbor Fund's portfolio. The
Prudent Safe Harbor Fund's annual portfolio turnover rate usually will exceed
100%.
3. WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN THE FUNDS?
Investors in each of the Funds may lose money. There are risks associated
with the types of securities in which these Funds invest. These risks include:
PRUDENT BEAR FUND
o MARKET RISK: The prices of the securities in which the Prudent Bear Fund
invests change adversely compared to the Adviser's expectations for a
number of reasons.
o ASSET ALLOCATION RISK: The Prudent Bear Fund's investment results will
suffer if there is a general stock market advance when the Fund has
significant "short" equity positions, or if there is a general stock
market decline when the Fund has significant "long" equity positions.
This risk is in addition to the market risks associated with each of the
Fund's investments.
o SHORT SALES RISK: The Prudent Bear Fund's investment performance will
suffer if a security that it has sold short appreciates in value. The
Fund's investment performance may also suffer if it is required to close
out a short position earlier than it had intended. This would occur if
the securities lender required it to deliver the securities the Fund
borrowed at the commencement of the short sale and the Fund was unable to
borrow the securities from other securities lenders.
o OPTIONS INVESTING RISK: If the Prudent Bear Fund purchases an option and
the price of the underlying stock fails to move in the direction the
Adviser expected, the Fund will lose most or all of the amount the Fund
paid for the option, plus commission costs. If the Prudent Bear Fund
writes ("sells") an option and the price of the underlying stock fails to
move in the direction the Adviser expected, the Fund's losses could easily
exceed the proceeds it received when it wrote the option.
o VALUE INVESTING RISK: The Prudent Bear Fund's investment adviser may be
incorrect in its assessment of a company's value and the stocks the Fund
holds may not reach what the investment adviser believes are their
intrinsic value. Similarly, the stocks the Fund sells short may not
decline to the price that the investment adviser thinks reflects their
intrinsic value. From time to time, "value" investing falls out of favor
with investors. During these periods, the Fund's relative performance
will suffer.
o HIGH PORTFOLIO TURNOVER RISK: High portfolio turnover necessarily results
in correspondingly greater transaction costs (such as brokerage
commissions or markups or markdowns) which the Prudent Bear Fund must pay
and increased realized gains (or losses) to investors. Distributions to
shareholders of short-term capital gains are taxed as ordinary income
under federal income tax laws. The Prudent Bear Fund's portfolio turnover
rate is not calculated with regard to securities, including options and
futures contracts, having a maturity of less than one year. Consequently
the transaction costs incurred by the Fund are likely to be greater than
the transaction costs incurred by a mutual fund investing exclusively in
common stocks that has a similar portfolio turnover rate.
PRUDENT SAFE HARBOR FUND
o MARKET RISK: The prices of the securities in which the Prudent Safe
Harbor Fund invests may decline for a number of reasons.
o INTEREST RATE RISK: In general the value of debt securities falls when
interest rates rise. Longer term obligations are usually more sensitive
to interest rate changes than shorter term obligations.
o FOREIGN CURRENCY RISK: The U.S. dollar value of securities denominated in
foreign currencies may be affected unfavorably by changes in foreign
currency exchange rates. An increase in the U.S. dollar relative to these
other currencies will adversely affect the Prudent Safe Harbor Fund.
o GOLD INVESTING RISK: The prices of gold and the prices of common stocks
of companies that mine gold have been subject to substantial price
fluctuations over short periods of time. They may be adversely affected
by unpredictable international monetary and political developments such as
currency devaluations or revolutions, economic and social conditions
within a country, trade imbalances, or trade or currency restrictions
between countries.
o HIGH PORTFOLIO TURNOVER RISK: High portfolio turnover necessarily results
in correspondingly greater transaction costs (such as brokerage
commissions or markups or markdowns) which the Prudent Safe Harbor Fund
must pay and increased realized gains (or losses) to investors.
Distributions to shareholders of short-term capital gains are taxed as
ordinary income under federal income tax laws.
Because of these risks each of the Funds is a suitable investment only for
those investors who have long-term investment goals. Prospective investors who
are uncomfortable with an investment that will fluctuate in value should not
invest in these Funds.
4. HOW HAVE THE FUNDS PERFORMED?
The bar chart and table that follow provide some indication of the risks of
investing in the Prudent Bear Fund by showing changes in its performance from
year to year and how its average annual returns over various periods compare to
the performance of the S&P 500 and the Nasdaq Composite Index. (The Prudent
Safe Harbor Fund will commence operations on February 1, 2000.) Please remember
that the Prudent Bear Fund's past performance is not necessarily an indication
of its future performance. It may perform better or worse in the future.
PRUDENT BEAR FUND
(Total return per calendar year)
1996 -13.69%
1997 -4.33%
1998 -34.08%
1999 -23.40%
Note: During the four year period shown on the bar chart, the Fund's highest
total return for a quarter was 21.93% (quarter ended September 30, 1998)
and the lowest total return for a quarter was -29.23% (quarter ended
December 31, 1998).
AVERAGE ANNUAL SINCE THE
TOTAL RETURNS INCEPTION DATE
(FOR THE OF THE FUND
PERIODS ENDING PAST YEAR (DECEMBER 28,
DECEMBER 31, 1999) 1995)
------------------ --------- -------------
Prudent Bear Fund -23.40% -19.58%
S&P 500*<F1> 21.04% 26.29%
Nasdaq Composite Index**<F2> 86.13% 40.44%
*<F1> The S&P 500 is a widely recognized unmanaged index of common stock
prices.
**<F2> The Nasdaq Composite Index covers over 4,500 stocks traded over the
counter. It represents many small company stocks but is heavily
influenced by about 100 of the largest Nasdaq stocks. It is a value-
weighted index calculated on price change only and does not include
income.
FEES AND EXPENSES
The table below describes the fees and expenses that you may pay if you buy
and hold No Load shares of the Prudent Bear Fund or the Prudent Safe Harbor
Fund.
SHAREHOLDER FEES
(fees paid directly from your investment)
PRUDENT
PRUDENT SAFE
BEAR HARBOR
FUND FUND
------- -------
Maximum Sales Charge No Sales No Sales
(Load) Imposed on Charge Charge
Purchases (as a percentage
of offering price)
Maximum Deferred No No
Sales Charge (Load) Deferred Deferred
Sales Sales
Charge Charge
Maximum Sales Charge No Sales No Sales
(Load) Imposed on Charge Charge
Reinvested Dividends
and Distributions
Redemption Fee None(1)<F3> None(1)<F3>
Exchange Fee None(2)<F4> None(2)<F4>
(1)<F3> Our transfer agent charges a fee of $12.00 for each wire redemption.
(2)<F4> Our transfer agent charges a fee of $5.00 for each telephone exchange.
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
PRUDENT
PRUDENT SAFE
BEAR HARBOR
FUND FUND
------- -------
Management Fees 1.25% 0.75%
Distribution and/or Service
(12b-1) Fees 0.25% 0.25%
Other Expenses
Dividends on
Short Positions 0.28% 0.00%
All remaining
Other Expenses 0.47% 0.90%*<F5>
----- -----
Total Other Expenses 0.75% 0.90%*<F5>
----- -----
Total Annual Fund
Operating Expenses 2.25% 1.90%*<F5>
----- -----
----- -----
*<F5> Based on estimates for the fiscal year ending September 30, 2000.
EXAMPLE
This Example is intended to help you compare the cost of investing in each of
the Funds with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in a Fund for the time periods
indicated and then redeem all of your shares at the end of these periods. The
Example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions, your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Prudent
Bear Fund $228 $703 $1,205 $2,585
Prudent Safe
Harbor Fund $193 $597
INVESTMENT OBJECTIVES AND STRATEGIES
INVESTMENT OBJECTIVES
The Prudent Bear Fund seeks capital appreciation. The Prudent Safe Harbor
Fund seeks current income and capital appreciation. The Prudent Bear Fund and
the Prudent Safe Harbor Fund will not take temporary defensive positions. In
order to provide a degree of flexibility, each Fund may change its investment
objective without obtaining shareholder approval. Please remember that an
investment objective is not a guarantee. An investment in the Prudent Bear Fund
or the Prudent Safe Harbor Fund might not appreciate and investors could lose
money.
Although neither the Prudent Bear Fund and the Prudent Safe Harbor Fund take
temporary defensive positions, each Fund will invest in money market instruments
and hold some cash so that it can pay expenses, satisfy redemption requests or
take advantage of investment opportunities. As a consequence of some of the
investment techniques utilized by the Prudent Bear Fund, particularly effecting
short sales, a significant portion of its assets (up to 100%) will be held in
liquid securities, including money market instruments, as "cover" for these
investment techniques. These assets may not be sold while the corresponding
transaction, such as a short sale, is open unless they are replaced by similar
assets. As a result, the commitment of a large portion of the Prudent Bear
Fund's assets to "cover" investment techniques may make it more difficult for
the Fund to meet redemption requests or pay its expenses.
PRINCIPAL INVESTMENT STRATEGIES
PRUDENT BEAR FUND
The Adviser believes that the best opportunities to make both "short" and
"long" equity investments is when the market's perception of the values of
individual companies (measured by the stock price) differs widely from the
Adviser's assessment of the intrinsic values of such companies. Such
opportunities arise as a result of a variety of market inefficiencies,
including, among others, imperfect information, overly optimistic or pessimistic
forecasts by Wall Street analysts, and swings in investor psychology. These
inefficiencies can cause substantially mispriced securities. The Adviser
attempts to:
o Identify potential opportunities where significant market
perception/reality gaps may exist, and
o Invest in the anticipation of changes in the market perception that will
bring the stock price closer to the Adviser's estimate of value.
The Prudent Bear Fund is not a "market timing" fund. However, it does
increase or decrease (to a degree or dramatically) the amount of its "short"
equity investments compared to its "long" equity investments in response to
changes in the Adviser's assessment of market conditions and its evaluation of
the S&P 500 dividend yield. In making investment decisions for the Prudent Bear
Fund, the Adviser primarily invests in individual stocks, put options on
individual stocks, or effects short sales in individual stocks rather than
investing in or selling short index-based securities.
From time to time the Prudent Bear Fund may utilize the following investment
tactics. These investment tactics are not principal investment strategies of the
Prudent Bear Fund.
o INDEX-BASED INVESTMENT COMPANIES: The Prudent Bear Fund may invest in or
sell short securities of investment companies that hold securities
comprising a recognized securities index such as SPDRs, which hold the
component stocks of the S&P 500, or WEBS which hold stocks of specified
foreign equity market indices. These securities may trade at discounts
to their net asset value. As an investor in securities of index-based
investment companies, the Prudent Bear Fund will indirectly bear its
proportionate share of the expenses of those investment companies.
o FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS: The Prudent Bear Fund
may purchase and sell stock index futures contracts as well as other
futures contracts, such as gold futures. Futures contracts and options
present risks of the possible inability to close a future contract when
desired, losses due to unanticipated market movements which are
potentially unlimited, and the possible inability of the Adviser to
correctly predict the direction of securities prices, interest rates,
currency exchange rates and other factors.
o PRIVATE PLACEMENTS: The Prudent Bear Fund may purchase restricted
securities in private placements. The Prudent Bear Fund may not be able
to sell these securities at the prices at which it has valued them without
experiencing delays or additional costs, if at all.
PRUDENT SAFE HARBOR FUND
The Prudent Safe Harbor Fund invests primarily in debt securities issued by
the U.S. and other developed countries, gold bullion and common stocks of
companies that mine gold. In selecting investments in debt securities, the
Prudent Safe Harbor Fund's investment adviser:
o considers whether the currency in which the debt security is denominated
is likely to rise or fall relative to the dollar primarily by comparing
economic situations, particularly whether the issuing country has
maintained prudent monetary and fiscal policies o evaluates the
relative available interest rates
o then invests in the liquid debt securities having the most attractive
yield based on an evaluation of risk and return.
Since the Prudent Safe Harbor Fund's primary consideration in selecting
investments in debt securities is currency movements as it relates to stability
of global purchasing power, it keeps its average portfolio maturity short.
Typically the average maturity of the Prudent Safe Harbor Fund's portfolio of
debt securities will be less than eighteen months. Similarly, the Prudent Safe
Harbor Fund attempts to minimize credit risk by only investing in securities
rated in the highest two rating categories of a nationally recognized rating
agency.
When investing in gold or in equity securities of companies that mine gold,
the Prudent Safe Harbor Fund's investment adviser first considers whether the
dollar price of gold is likely to increase. The Prudent Safe Harbor Fund will
only invest in those equity securities of gold companies which the Adviser
believes will increase if the dollar price of gold increases. The Prudent Safe
Harbor Fund will not invest in equity securities of gold mining companies that
have significantly reduced the exposure of their net income to fluctuations in
gold prices through the use of futures contracts or other hedging techniques.
From time to time the Prudent Safe Harbor Fund may invest in liquid equity
securities of companies owning significant assets (e.g. timber, oil or other
"hard assets") that the Adviser believes would increase in value if the dollar
declines in value relative to other currencies. The Prudent Safe Harbor Fund
does not expect that such securities would represent a major portion of its
portfolio.
MANAGEMENT OF THE FUNDS
DAVID W. TICE & ASSOCIATES, INC. MANAGES THE INVESTMENTS OF THE PRUDENT BEAR
FUND AND THE PRUDENT SAFE HARBOR FUND.
David W. Tice & Associates, Inc. (the "Adviser") is the investment adviser to
each of the Prudent Bear Fund and the Prudent Safe Harbor Fund. The Adviser's
address is:
8140 Walnut Hill Lane
Suite 300
Dallas, Texas 75231
As investment adviser, the Adviser manages the investment portfolio of each
Fund. The Adviser makes the decisions as to which securities to buy and which
securities to sell. During the last fiscal year, the Prudent Bear Fund paid the
Adviser an annual investment advisory fee equal to 1.25% of the Prudent Bear
Fund's average net assets. The Prudent Safe Harbor Fund (which will commence
operations on February 1, 2000) will pay the Adviser an annual advisory equal to
0.75% of its average net assets.
David W. Tice is primarily responsible for the day-to-day management of the
portfolio of the Prudent Bear Fund and has been so since its inception. He also
will be the portfolio manager of the Prudent Safe Harbor Fund. Mr. Tice is the
President and founder of the Adviser. The Adviser has been conducting an
investment advisory business since 1993. Prior to incorporating the Adviser,
Mr. Tice conducted the same investment advisory business as a sole
proprietorship since 1988. Mr. Tice is a Chartered Financial Analyst and a
Certified Public Accountant. He is also president and sole shareholder of BTN
Research, Inc., a registered broker-dealer.
DISTRIBUTION FEES
Each of the Prudent Bear Fund and the Prudent Safe Harbor Fund has adopted a
distribution plan pursuant to Rule 12b-1 under the Investment Company Act. This
Plan allows each of the Funds to use up to 0.25% of its average daily net assets
to pay sales, distribution and other fees for the sale of its shares and for
services provided to investors. Because these fees are paid out of a Fund's
assets, over time these fees will increase the cost of your investment and may
cost you more than paying other types of sales charges.
THE FUNDS' SHARE PRICE
The price at which investors purchase No Load shares of each Fund and at
which shareholders redeem No Load shares of each Fund is called its net asset
value. Each Fund calculates its net asset value as of the close of regular
trading on the New York Stock Exchange (normally 4:00 p.m. Eastern Time) on
each day the New York Stock Exchange is open for trading. The New York Stock
Exchange is closed on holidays and weekends. Each Fund calculates its net asset
value based on the market prices of the securities (other than money market
instruments) it holds. Each Fund values most money market instruments it holds
at their amortized cost. Each Fund will process purchase orders that it
receives and accepts and redemption orders that it receives prior to the close
of regular trading on a day that the New York Stock Exchange is open at the net
asset value determined LATER THAT DAY. It will process purchase orders that it
receives and accepts and redemption orders that it receives AFTER the close of
regular trading at the net asset value determined at the close of regular
trading on the NEXT DAY the New York Stock Exchange is open. If an investor
sends a purchase order or redemption request to the Funds' corporate address,
instead of to its transfer agent, the Funds will forward it to the transfer
agent and the effective date of the purchase order or redemption request will be
delayed until the purchase order or redemption request is received by the
transfer agent.
The Prudent Safe Harbor Fund may hold securities that are primarily traded in
foreign securities markets that trade on weekends or other days when the Prudent
Safe Harbor Fund does not calculate its net asset value. To the extent it does
so, its net asset value may change on days when investors cannot purchase or
redeem No Load shares.
PURCHASING NO LOAD SHARES
HOW TO PURCHASE NO LOAD SHARES FROM THE FUNDS
1. Read this Prospectus carefully.
2. Determine how much you want to invest keeping in mind the following
minimums:
A. NEW ACCOUNTS
o Individual Retirement Accounts $1,000
o All other Accounts $2,000
B. EXISTING ACCOUNTS
o Dividend reinvestment No Minimum
o All other investments
(by mail) $ 100
(by wire) $1,000
3. Complete the New Account Application accompanying this Prospectus,
carefully following the instructions. For additional investments, complete
the remittance form attached to your individual account statements. (The
Funds have additional New Account Applications and remittance forms if you
need them.) If you have any questions, please call 1-800-711-1848.
4. Make your check payable to the full name of the Fund you intend to
purchase. All checks must be drawn on U.S. banks. The Funds will not
accept cash or third party checks. FIRSTAR MUTUAL FUND SERVICES, LLC, THE
FUNDS' TRANSFER AGENT, WILL CHARGE A $25 FEE AGAINST A SHAREHOLDER'S
ACCOUNT FOR ANY PAYMENT CHECK RETURNED FOR INSUFFICIENT FUNDS. THE
SHAREHOLDER WILL ALSO BE RESPONSIBLE FOR ANY LOSSES SUFFERED BY A FUND AS A
RESULT.
5. Send the application and check to:
BY FIRST CLASS MAIL
Prudent Bear Funds, Inc.
c/o Firstar Mutual Fund Services, LLC
P.O. Box 701
Milwaukee, WI 53201-0701
BY OVERNIGHT DELIVERY SERVICE
OR EXPRESS MAIL
PRUDENT BEAR FUNDS, INC.
c/o Firstar Mutual Fund Services, LLC
3rd Floor
615 East Michigan Street
Milwaukee, WI 53202-5207
PLEASE DO NOT SEND LETTERS BY OVERNIGHT DELIVERY SERVICE OR EXPRESS MAIL TO THE
POST OFFICE BOX ADDRESS.
If you wish to open an account by wire, please call 1-800-711-1848 prior to
wiring funds in order to obtain a confirmation number and to ensure prompt and
accurate handling of funds. YOU SHOULD WIRE FUNDS TO:
Firstar Bank, N.A.
777 East Wisconsin Avenue
Milwaukee, WI 53202
ABA #075000022
CREDIT:
Firstar Mutual Fund Services, LLC
Account #112-952-137
FURTHER CREDIT:
(name of Fund to be purchased)
(shareholder registration)
(shareholder account number, if known)
You should then send a properly signed New Account Application marked
"FOLLOW-UP" to either of the addresses listed above. PLEASE REMEMBER THAT
FIRSTAR BANK, N.A. MUST RECEIVE YOUR WIRED FUNDS PRIOR TO THE CLOSE OF REGULAR
TRADING ON THE NEW YORK STOCK EXCHANGE FOR YOU TO RECEIVE SAME DAY PRICING. THE
FUNDS AND FIRSTAR BANK, N.A. ARE NOT RESPONSIBLE FOR THE CONSEQUENCES OF DELAYS
RESULTING FROM THE BANKING OR FEDERAL RESERVE WIRE SYSTEM, OR FROM INCOMPLETE
WIRING INSTRUCTIONS.
PURCHASING NO LOAD SHARES FROM BROKER-DEALERS, FINANCIAL INSTITUTIONS AND OTHERS
Some broker-dealers may sell shares of the Prudent Bear Fund or the Prudent
Safe Harbor Fund. These broker-dealers may charge investors a fee either at the
time of purchase or redemption. The fee, if charged, is retained by the broker-
dealer and not remitted to the Funds or the Adviser. Some broker-dealers may
purchase and redeem shares on a three day settlement basis.
The Funds may enter into agreements with broker-dealers, financial
institutions or other service providers ("Servicing Agents") that may include
the Funds as investment alternatives in the programs they offer or administer.
Servicing agents may:
o Become shareholders of record of the Funds. This means all requests to
purchase additional shares and all redemption requests must be sent
through the Servicing Agent. This also means that purchases made through
Servicing Agents are not subject to the Funds' minimum purchase
requirements.
o Use procedures and impose restrictions that may be in addition to, or
different from, those applicable to investors purchasing shares directly
from the Funds.
o Charge fees to their customers for the services they provide them. Also,
the Funds and/or the Adviser may pay fees to Servicing Agents to compensate
them for the services they provide their customers.
o Be allowed to purchase shares by telephone with payment to follow the next
day. If the telephone purchase is made prior to the close of regular
trading on the New York Stock Exchange, it will receive same day pricing.
o Be authorized to accept purchase orders on behalf of the Funds. This
means that a Fund will process the purchase order at the net asset value
which is determined following the Servicing Agent's acceptance of the
customer's order.
If you decide to purchase No Load shares through Servicing Agents, please
carefully review the program materials provided to you by the Servicing Agent.
When you purchase No Load shares of the Funds through a Servicing Agent, it is
the responsibility of the Servicing Agent to place your order with the Funds on
a timely basis. If the Servicing Agent does not, or if it does not pay the
purchase price to the Funds within the period specified in its agreement with
the Funds, it may be held liable for any resulting fees or losses.
OTHER INFORMATION ABOUT PURCHASING NO LOAD SHARES OF THE FUNDS
The Funds may reject any purchase order for any reason. The Funds will not
accept initial purchase orders made by telephone unless they are from a
Servicing Agent which has an agreement with the Fund.
The Funds will not issue certificates evidencing shares purchased unless the
investor makes a written request for a certificate. The Funds will send
investors a written confirmation for all purchases of No Load shares whether or
not evidenced by certificates.
The Funds offer an automatic investment plan allowing shareholders to make
purchases of No Load shares on a regular and convenient basis. The Funds also
offer a telephone purchase option permitting shareholders to make additional
purchases by telephone. The Funds offer the following retirement plans:
o Traditional IRA
o Roth IRA
o SEP-IRA
Investors can obtain further information about the automatic investment plan,
the telephone purchase plan and the IRAs by calling the Funds at 1-800-711-1848.
The Funds recommend that investors consult with a competent financial and tax
advisor regarding the IRAs before investing through them.
REDEEMING NO LOAD SHARES
HOW TO REDEEM (SELL) NO LOAD SHARES BY MAIL
1. Prepare a letter of instruction containing:
o the name of the Fund(s)
o account number(s)
o the amount of money or number of shares being redeemed
o the name(s) on the account
o daytime phone number
o additional information that the Funds may require for redemptions by
corporations, executors, administrators, trustees, guardians, or others
who hold shares in a fiduciary or representative capacity. Please
contact the Funds' transfer agent, Firstar Mutual Fund Services, LLC, in
advance, at 1-800-711-1848 if you have any questions.
2. Sign the letter of instruction exactly as the shares are registered. Joint
ownership accounts must be signed by all owners.
3. If there are certificates representing your shares, enclose the
certificates and execute a stock power exactly as your shares are
registered.
4. Have the signatures guaranteed by a commercial bank or trust company in the
United States, a member firm of the New York Stock Exchange or other
eligible guarantor institution in the following situations:
o The redemption request includes a change of address
o The redemption proceeds are to be sent to a person other than the person
in whose name the shares are registered
o The redemption proceeds are to be sent to an address other than the
address of record
A NOTARIZED SIGNATURE IS NOT AN ACCEPTABLE SUBSTITUTE FOR A SIGNATURE GUARANTEE.
5. Send the letter of instruction to:
BY FIRST CLASS MAIL
Prudent Bear Funds, Inc.
c/o Firstar Mutual Fund Services, LLC
Shareholder Services Center
P. O. Box 701
Milwaukee, WI 53201-0701
BY OVERNIGHT DELIVERY SERVICE
OR EXPRESS MAIL
Prudent Bear Funds, Inc.
C/O FIRSTAR MUTUAL FUND SERVICES, LLC
3rd Floor
615 East Michigan Street
Milwaukee, WI 53202-5207
PLEASE DO NOT SEND LETTERS OF INSTRUCTION BY OVERNIGHT DELIVERY SERVICE OR
EXPRESS MAIL TO THE POST OFFICE BOX ADDRESS.
HOW TO REDEEM (SELL) NO LOAD SHARES
BY TELEPHONE
1. Instruct Firstar Mutual Fund Services, LLC that you want the option of
redeeming No Load shares by telephone. This can be done by completing the
New Account Application. If you have already opened an account, you may
write to Firstar Mutual Fund Services, LLC requesting this option. When
you do so, please sign the request exactly as your account is registered
and have the signatures guaranteed. Shares held in individual retirement
accounts and shares represented by certificates cannot be redeemed by
telephone.
2. Assemble the same information that you would include in the letter of
instruction for a written redemption request.
3. Call Firstar Mutual Fund Services, LLC at 1-800-711-1848. PLEASE DO NOT
CALL THE FUNDS OR THE ADVISER.
HOW TO REDEEM (SELL) NO LOAD SHARES THROUGH SERVICING AGENTS
If your No Load shares are held by a Servicing Agent, you must redeem your
shares through the Servicing Agent. Contact the Servicing Agent for
instructions on how to do so.
REDEMPTION PRICE
The redemption price per share you receive for redemption requests is the
next determined net asset value after:
o Firstar Mutual Fund Services, LLC receives your written request in proper
form with all required information.
o Firstar Mutual Fund Services, LLC receives your authorized telephone
request with all required information.
o A Servicing Agent that has been authorized to accept redemption requests on
behalf of the Funds receives your request in accordance with its
procedures.
PAYMENT OF REDEMPTION PROCEEDS
o For those shareholders who redeem No Load shares by mail, Firstar Mutual
Fund Services, LLC will mail a check in the amount of the redemption
proceeds no later than the seventh day after it receives the redemption
request in proper form with all required information.
o For those shareholders who redeem by telephone, Firstar Mutual Fund
Services, LLC will either mail a check in the amount of the redemption
proceeds no later than the seventh day after it receives the redemption
request, or transfer the redemption proceeds to your designated bank
account if you have elected to receive redemption proceeds by wire.
Firstar Mutual Fund Services, LLC generally wires redemption proceeds on
the business day following the calculation of the redemption price.
However, the Funds may direct Firstar Mutual Fund Services, LLC to pay the
proceeds of a telephone redemption on a date no later than the seventh day
after the redemption request.
o For those shareholders who redeem shares through Servicing Agents, the
Servicing Agent will transmit the redemption proceeds in accordance with
its redemption procedures.
OTHER REDEMPTION CONSIDERATIONS
When redeeming No Load shares of the Funds, shareholders should consider the
following:
o The redemption may result in a taxable gain.
o Shareholders who redeem No Load shares held in an IRA must indicate on
their redemption request whether or not to withhold federal income taxes.
If not, these redemptions will be subject to federal income tax
withholding.
o The Funds may delay the payment of redemption proceeds for up to seven
days in all cases.
o If you purchased No Load shares by check, the Funds may delay the payment
of redemption proceeds until they are reasonably satisfied the check has
cleared (which may take up to 12 days from the date of purchase).
o Firstar Mutual Fund Services, LLC will send the proceeds of telephone
redemptions to an address or account other than that shown on its records
only if the shareholder has sent in a written request with signatures
guaranteed.
o The Funds reserve the right to refuse a telephone redemption request if
they believe it is advisable to do so. The Funds and Firstar Mutual Fund
Services, LLC may modify or terminate their procedures for telephone
redemptions at any time. Neither the Funds nor Firstar Mutual Fund
Services, LLC will be liable for following instructions for telephone
redemption transactions that they reasonably believe to be genuine,
provided they use reasonable procedures to confirm the genuineness of the
telephone instructions. They may be liable for unauthorized transactions
if they fail to follow such procedures. These procedures include
requiring some form of personal identification prior to acting upon the
telephone instructions and recording all telephone calls. During periods
of substantial economic or market change, you may find telephone
redemptions difficult to implement. If a shareholder cannot contact
Firstar Mutual Fund Services, LLC by telephone, he or she should make a
redemption request in writing in the manner described earlier.
o Firstar Mutual Fund Services, LLC currently charges a fee of $12 when
transferring redemption proceeds to your designated bank account by wire.
o If your account balance falls below $1,000 because you redeem shares, you
will be given 60 days to make additional investments so that your account
balance is $1,000 or more. If you do not, the Funds may close your
account and mail the redemption proceeds to you.
o The Funds may pay redemption requests "in kind." This means that the Funds
may pay redemption requests entirely or partially with securities rather
than with cash.
EXCHANGING NO LOAD SHARES
No Load Shares of the Prudent Bear Fund may be exchanged for No Load Shares
of the Prudent Safe Harbor Fund and No Load Shares of the Prudent Safe Harbor
Fund may be exchanged for No Load Shares of the Prudent Bear Fund at their
relative net asset values. You may have a taxable gain or loss as a result of
an exchange because the Internal Revenue Code treats an exchange as a sale of
shares.
HOW TO EXCHANGE SHARES
1. Read this Prospectus carefully.
2. Determine the number of shares you want to exchange keeping in mind that
exchanges are subject to a $1,000 minimum.
3. Call Firstar Mutual Fund Services, LLC at
1-800-711-1848. You may also make an exchange by writing to the Prudent
Bear Funds, Inc. c/o Firstar Mutual Fund Services, LLC, 3rd Floor, P. O.
Box 701, Milwaukee, Wisconsin 53201-0701. Firstar Mutual Fund Services,
LLC charges a fee of $5.00 for each telephone exchange. There is no charge
for a written exchange.
DIVIDENDS, DISTRIBUTIONS
AND TAXES
The Prudent Bear Fund distributes substantially all of its net investment
income and substantially all of its capital gains annually. The Prudent Safe
Harbor Fund will distribute substantially all of its net investment income at
least quarterly and substantially all of its capital gains annually. You have
two distribution options:
o AUTOMATIC REINVESTMENT OPTION - Both dividend and capital gains
distributions will be reinvested in additional Fund shares.
o ALL CASH OPTION - Both dividend and capital gains distributions will be
paid in cash.
You may make this election on the New Account Application. You may change
your election by writing to Firstar Mutual Fund Services, LLC or by calling 1-
800-711-1848.
Each Fund's distributions, whether received in cash or additional No Load
shares of the Fund, may be subject to federal and state income tax. These
distributions may be taxed as ordinary income and capital gains (which may be
taxed at different rates depending on the length of time the Fund holds the
assets generating the capital gains).
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the
Prudent Bear Fund's financial performance for the period of its operations.
Certain information reflects financial results for a single Fund No Load share.
The total returns in the tables represent the rate that an investor would have
earned on an investment in a Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by PricewaterhouseCoopers
LLP, whose report, along with the Fund's financial statements, are included in
the 1999 Annual Report which is available upon request. The Prudent Safe Harbor
Fund will commence operations on February 1, 2000.
<TABLE>
PRUDENT BEAR FUND
FOR THE YEARS ENDED SEPTEMBER 30,
----------------------------------------------------
1999 1998 1997 1996(1)<F6>
---- ---- ---- -----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 7.34 $ 7.29 $ 8.88 $10.00
Income from investment operations:
Net investment income(2)<F7> 0.19(3)<F8> 0.29(3)<F8> 0.62(3)<F8> 0.09
Net realized and unrealized (losses) on investments (2.82) (0.01) (2.06) (1.21)
------ ------ ------ ------
Total from investment operations (2.63) 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 $ 7.34 $ 7.29 $ 8.88
------ ------ ------ ------
------ ------ ------ ------
TOTAL INVESTMENT RETURN -36.17% 3.66% -16.44% -11.20%(4)<F9>
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period (000s) $220,462 $173,691 $26,500 $7,326
Ratio of operating expenses to
average net assets(5)<F10> 1.97% 2.08% 2.59% 2.75%(6)<F11>(7)<F12>
Ratio of dividends on short positions to
average net assets 0.28% 0.28% 0.34% 0.34%(6)<F11>
Ratio of net investment income to
average net assets 4.09% 4.34% 7.75% 4.07%(6)<F11>(7)<F12>
Portfolio turnover rate(8)<F13> 536.56% 480.25% 413.25% 91.31%
(1)<F6> The Fund commenced operations on December 28, 1995.
(2)<F7> Net investment income before dividends on short positions 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.
(3)<F8> Net investment income per share represents net investment income divided by the average shares outstanding throughout the
period.
(4)<F9> Not annualized.
(5)<F10> The operating expense ratio excludes dividends on short positions. The ratio including dividends on short positions 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.
(6)<F11> Annualized.
(7)<F12> 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)%.
(8)<F13> Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between the classes of shares
issued.
</TABLE>
To learn more about the Prudent Bear Fund and the Prudent Safe Harbor Fund you
may want to read their Statement of Additional Information (or "SAI") which
contains additional information about these Funds. The Prudent Bear Fund and
the Prudent Safe Harbor Fund have incorporated by reference the SAI into the
Prospectus. This means that you should consider the contents of the SAI to be
part of the Prospectus.
You also may learn more about the Funds' investments by reading their annual
and semi-annual reports to shareholders. The annual report includes a
discussion of the market conditions and investment strategies that significantly
affected the performance of the Funds during their last fiscal year.
The SAI and the annual and semi-annual reports are all available to
shareholders and prospective investors without charge, simply by calling 1-800-
711-1848.
Prospective investors and shareholders who have questions about the Prudent
Bear Fund or the Prudent Safe Harbor Fund may also call the above number or
write to the following address:
Prudent Bear Funds, Inc.
8140 Walnut Hill Lane
Suite 300
Dallas, Texas 75231
The general public can review and copy information about the Prudent Bear
Fund and the Prudent Safe Harbor Fund (including the SAI) at the Securities and
Exchange Commission's Public Reference Room in Washington, D.C. (Please call
1-202-942-8090 for information on the operations of the Public Reference Room.)
Reports and other information about these Funds are also available on the EDGAR
Database at the Securities and Exchange Commission's Internet site at
http://www.sec.gov and copies of this information may be obtained, upon payment
of a duplicating fee, by electronic request at the following E-mail address:
[email protected], or by writing to:
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-6009
Please refer to the Investment Company Act File No. 811-9120 of the Prudent
Bear Fund and the Prudent Safe Harbor Fund, when seeking information about these
Funds from the Securities and Exchange Commission.
PRUDENT
BEAR
FUND
CLASS C SHARES
PROSPECTUS JANUARY 31, 2000
CLASS C SHARES
PRUDENT BEAR FUND
The Prudent Bear Fund is a mutual fund seeking capital appreciation. Please
read this Prospectus and keep it for future reference. It contains important
information, including information on how the Prudent Bear Fund invests and the
services it offers to shareholders.
Prudent Bear Funds, Inc.
8140 Walnut Hill Lane
Suite 300
Dallas, Texas 75231
1-888-PRU-BEAR (Fund Information)
1-888-778-2327
1-800-771-1848 (Account Information)
http://www.prudentbear.com
TABLE OF CONTENTS
Questions Every Investor Should Ask Before
Investing in the Prudent Bear Fund 2
Fees and Expenses 4
Investment Objective and Strategies 5
Management of the Fund 6
The Fund's Share Price 6
Purchasing Class C Shares 7
Redeeming Class C Shares 9
Dividends, Distributions and Taxes 11
Financial Highlights 13
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
QUESTIONS EVERY INVESTOR
SHOULD ASK BEFORE INVESTING
IN THE PRUDENT BEAR FUND
1. WHAT ARE THE FUND'S GOALS?
The Prudent Bear Fund seeks capital appreciation.
2. WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?
The Prudent Bear Fund seeks capital appreciation primarily through short
sales of equity securities when overall market valuations are high and through
long positions in value-oriented equity securities when overall market
valuations are low. When the dividend yield on the stocks comprising the
Standard & Poor's Composite Index of 500 Stocks ("S&P 500") is less than 3%
(i.e. overall market valuations are high), the Prudent Bear Fund will hold more
"short" equity positions than "long" equity positions. Its "short" equity
positions will primarily consist of short sales of common stocks and purchases
of put options on common stocks. In effecting short sales and purchasing put
options the Prudent Bear Fund's investment adviser, David W. Tice & Associates,
Inc. (the "Adviser") utilizes "bottom-up" investment analysis. This means the
Adviser bases investment decisions on company-specific fundamental factors.
When the S&P 500 dividend yield is greater than 6% (i.e. overall market
valuations are low), the Prudent Bear Fund will hold more "long" equity
positions than "short" equity positions. Its "long" equity positions will
primarily consist of U.S. common stocks. In selecting common stocks, the
Adviser takes a "value" investment approach utilizing "bottom-up" investment
analysis.
When the S&P 500 dividend yield is between 3% and 6%, the Adviser will
allocate the Prudent Bear Fund's portfolio between "short" equity and "long"
equity positions in its discretion. At all times the Prudent Bear Fund will
have both "short" and "long" equity positions as the Adviser believes in all
market conditions there will exist some companies whose stocks are undervalued
by the market and some companies whose stocks are overvalued by the market.
While the Adviser believes the S&P 500 dividend yield is a reasonable long-
term measure of stock price over or under valuation, the Adviser also considers
other factors in the economy in relation to the S&P 500 dividend yield. If the
S&P 500 dividend yield is within historic ranges relative to interest rates and
other economic variables, the Adviser would likely apply the "3%" and "6%"
guidelines described above. However if, for example, interest rates rose
dramatically so that a 6% S&P 500 dividend yield was not in its historic
relation to interest rates, the Adviser might hold more "short" equity positions
than "long" equity positions until it believed conditions warranted a shift in
portfolio allocation.
The Adviser actively manages the Prudent Bear Fund's portfolio. The Prudent
Bear Fund's annual portfolio turnover rate usually will exceed 100%.
3. WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN THE FUND?
Investors in the Fund may lose money. There are risks associated with the
types of securities in which the Fund invests. These risks include:
o MARKET RISK: The prices of the securities in which the Prudent Bear Fund
invests may change adversely compared to the Adviser's expectations for a
number of reasons.
o ASSET ALLOCATION RISK: The Prudent Bear Fund's investment results will
suffer if there is a general stock market advance when the Fund has
significant "short" equity positions, or if there is a general stock
market decline when the Fund has significant "long" equity positions.
This risk is in addition to the market risks associated with each of the
Fund's investments.
o SHORT SALES RISK: The Prudent Bear Fund's investment performance will
suffer if a security that it has sold short appreciates in value. The
Fund's investment performance may also suffer if it is required to close
out a short position earlier than it had intended. This would occur if
the securities lender required it to deliver the securities the Fund
borrowed at the commencement of the short sale and the Fund was unable to
borrow the securities from other securities lenders.
o OPTIONS INVESTING RISK: If the Prudent Bear Fund purchases an option and
the price of the underlying stock fails to move in the direction the
Adviser expected, the Fund will lose most or all of the amount the Fund
paid for the option, plus commission costs. If the Prudent Bear Fund
writes ("sells") an option and the price of the underlying stock fails to
move in the direction the Adviser expected, the Fund's losses could easily
exceed the proceeds it received when it wrote the option.
o VALUE INVESTING RISK: The Prudent Bear Fund's investment adviser may be
incorrect in its assessment of a company's value and the stocks the Fund
holds may not reach what the investment adviser believes are their
intrinsic value. Similarly the stocks the Fund sells short may not
decline to the price that the investment adviser thinks reflects their
intrinsic value. From time to time, "value" investing falls out of favor
with investors. During these periods, the Fund's relative performance
will suffer.
o HIGH PORTFOLIO TURNOVER RISK: High portfolio turnover necessarily
results in correspondingly greater transaction costs (such as brokerage
commissions or markups or markdowns) which the Prudent Bear Fund must pay
and increased realized gains (or losses) to investors. Distributions to
shareholders of short-term capital gains are taxed as ordinary income
under federal income tax laws. The Prudent Bear Fund's portfolio turnover
rate is not calculated with regard to securities, including options and
futures contracts, having a maturity of less than one year. Consequently
the transaction costs incurred by the Fund are likely to be greater than
the transaction costs incurred by a mutual fund investing exclusively in
common stocks that has a similar portfolio turnover rate.
Because of these risks the Fund is a suitable investment only for those
investors who have long-term investment goals. Prospective investors who are
uncomfortable with an investment that will fluctuate in value should not invest
in the Fund.
4. HOW HAS THE FUND PERFORMED?
The bar chart and table that follow provide some indication of the risks of
investing in the Prudent Bear Fund by showing changes in its performance from
year to year and how its average annual returns over various periods compare to
the performance of the S&P 500 and the Nasdaq Composite Index. Please remember
that the Prudent Bear Fund's past performance is not necessarily an indication
of its future performance. It may perform better or worse in the future.
PRUDENT BEAR FUND
(Total return per calendar year)
1996 -13.69%
1997 -4.33%
1998 -34.08%
1999 -23.40%
Note: During the four year period shown on the bar chart, the Fund's highest
total return for a quarter was 21.93% (quarter ended September 30, 1998)
and the lowest total return for a quarter was -29.23% (quarter ended
December 31, 1998). The total returns shown are for the No Load shares
of the Prudent Bear Fund which are not being offered in this Prospectus.
The annual returns for the Class C shares would have been substantially
similar, albeit lower, because the Class C shares invest in the same
portfolio of securities. The annual returns would differ only to the
extent that the Class C shares have higher annual expenses.
AVERAGE ANNUAL SINCE THE
TOTAL RETURNS INCEPTION DATE
(FOR THE OF THE FUND
PERIODS ENDING PAST YEAR (DECEMBER 28,
DECEMBER 31, 1999)*<F14> 1995)
----------------------- --------- -------------
Prudent Bear Fund -23.40% -19.58%
S&P 500**<F15> 21.04% 26.29%
Nasdaq Composite Index ***<F16> 86.13% 40.44%
*<F14> Returns are for the Prudent Bear Fund No Load Shares.
**<F15> The S&P 500 is a widely recognized unmanaged index of common stock
prices.
***<F16> The Nasdaq Composite Index covers over 4,500 stocks traded over the
counter. It represents many small company stocks but is heavily
influenced by about 100 of the largest Nasdaq stocks. It is a value-
weighted index calculated on price change only and does not include
income.
FEES AND EXPENSES
The table below describes the fees and expenses that you may pay if you buy
and hold Class C shares of the Prudent Bear Fund.
SHAREHOLDER FEES
(fees paid directly from your investment)
Maximum Sales Charge (Load) No Sales
Imposed on Purchases (as a Charge
percentage of offering price)
Maximum Deferred Sales No Deferred
Charge (Load) Sales Charge
Maximum Sales Charge (Load) No Sales
Imposed on Reinvested Dividends Charge
And Distributions
Redemption Fee 1.0%(1)<F17>
Exchange Fee None
(1)<F17> The Fund imposes a 1% redemption fee on shares held for less than one
year. Our transfer agent charges a fee of $12.00 for each wire
redemption.
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
Management Fees 1.25%
Distribution and/or Service (12b-1) Fees 1.00%
Other Expenses
Dividends on Short Positions 0.32%
All remaining Other Expenses 0.49%
-----
Total Other Expenses 0.81%
-----
Total Annual Fund Operating Expenses 3.06%
-----
-----
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of these periods. The
Example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions, your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$309 $945 $1,606 $3,374
INVESTMENT OBJECTIVE AND STRATEGIES
INVESTMENT OBJECTIVE
The Prudent Bear Fund seeks capital appreciation. The Prudent Bear Fund will
not take temporary defensive positions. In order to provide a degree of
flexibility, the Fund may change its investment objective without obtaining
shareholder approval. Please remember that an investment objective is not a
guarantee. An investment in the Prudent Bear Fund might not appreciate and
investors could lose money.
Although the Prudent Bear Fund will not take temporary defensive positions,
it will invest in money market instruments and hold some cash so that it can pay
expenses, satisfy redemption requests or take advantage of investment
opportunities. As a consequence of some of the investment techniques utilized
by the Prudent Bear Fund, particularly effecting short sales, a significant
portion of its assets (up to 100%) will be held in liquid securities, including
money market instruments, as "cover" for these investment techniques. These
assets may not be sold while the corresponding transaction, such as a short
sale, is open unless they are replaced by similar assets. As a result, the
commitment of a large portion of the Prudent Bear Fund's assets to "cover"
investment techniques may make it more difficult for the Fund to meet redemption
requests or pay its expenses.
PRINCIPAL INVESTMENT STRATEGIES
The Adviser believes that the best opportunities to make both "short" and
"long" equity investments is when the market's perception of the values of
individual companies (measured by the stock price) differs widely from the
Adviser's assessment of the intrinsic values of such companies. Such
opportunities arise as a result of a variety of market inefficiencies,
including, among others, imperfect information, overly optimistic or pessimistic
forecasts by Wall Street analysts, and swings in investor psychology. These
inefficiencies can cause substantially mispriced securities. The Adviser
attempts to:
o Identify potential opportunities where significant market
perception/reality gaps may exist, and
o Invest in the anticipation of changes in the market perception that will
bring the stock price closer to the Adviser's estimate of value.
The Prudent Bear Fund is not a "market timing" fund. However, it does
increase or decrease (to a degree or dramatically) the amount of its "short"
equity investments compared to its "long" equity investments in response to
changes in the Adviser's assessment of market conditions and its evaluation of
the S&P 500 dividend yield. In making investment decisions for the Prudent Bear
Fund, the Adviser primarily invests in individual stocks, put options on
individual stocks, or effects short sales in individual stocks rather than
investing in or selling short index-based securities.
From time to time the Prudent Bear Fund may utilize the following investment
tactics. These investment tactics are not principal investment strategies of
the Prudent Bear Fund.
o INDEX-BASED INVESTMENT COMPANIES: The Prudent Bear Fund may invest in or
sell short securities of investment companies that hold securities
comprising a recognized securities index such as SPDRs, which hold the
component stocks of the S&P 500, or WEBS which hold stocks of specified
foreign equity market indices. These securities may trade at discounts
to their net asset value. As an investor in securities of index-based
investment companies, the Prudent Bear Fund will indirectly bear its
proportionate share of the expenses of those investment companies.
o FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS: The Prudent Bear Fund
may purchase and sell stock index futures contracts as well as other
futures contracts, such as gold futures. Futures contracts and options
present risks of the possible inability to close a future contract when
desired, losses due to unanticipated market movements which are
potentially unlimited, and the possible inability of the Adviser to
correctly predict the direction of securities prices, interest rates,
currency exchange rates and other factors.
o PRIVATE PLACEMENTS: The Prudent Bear Fund may purchase restricted
securities in private placements. The Prudent Bear Fund may not be able
to sell these securities at the prices at which it has valued them without
experiencing delays or additional costs, if at all.
MANAGEMENT OF THE FUND
DAVID W. TICE & ASSOCIATES, INC. MANAGES THE INVESTMENTS OF THE PRUDENT BEAR
FUND.
David W. Tice & Associates, Inc. (the "Adviser") is the investment adviser to
the Prudent Bear Fund. The Adviser's address is:
8140 Walnut Hill Lane
Suite 300
Dallas, Texas 75231
As investment adviser, the Adviser manages the investment portfolio of the
Fund. The Adviser makes the decisions as to which securities to buy and which
securities to sell. The Prudent Bear Fund pays the Adviser an annual investment
advisory fee equal to 1.25% of the Prudent Bear Fund's average net assets.
David W. Tice is primarily responsible for the day-to-day management of the
portfolio of the Prudent Bear Fund and has been so since its inception. Mr.
Tice is the President and founder of the Adviser. The Adviser has been
conducting an investment advisory business since 1993. Prior to incorporating
the Adviser, Mr. Tice conducted the same investment advisory business as a sole
proprietorship since 1988. Mr. Tice is a Chartered Financial Analyst and a
Certified Public Accountant. He is also president and sole shareholder of BTN
Research, Inc., a registered broker-dealer.
DISTRIBUTION FEES
The Prudent Bear Fund has adopted a distribution plan pursuant to Rule 12b-1
under the Investment Company Act. This Plan allows the Fund to use up to 1.00%
of its average daily net assets to pay sales, distribution and other fees for
the sale of its shares and for services provided to investors. Because these
fees are paid out of the Fund's assets, over time these fees will increase the
cost of your investment and may cost you more than paying other types of sales
charges.
THE FUND'S SHARE PRICE
The price at which investors purchase Class C shares of the Fund and at which
shareholders redeem Class C shares of the Fund is called its net asset value.
The Fund calculates its net asset value as of the close of regular trading on
the New York Stock Exchange (normally 4:00 p.m. Eastern Time) on each day the
New York Stock Exchange is open for trading. The New York Stock Exchange is
closed on holidays and weekends. The Fund calculates its net asset value based
on the market prices of the securities (other than money market instruments) it
holds. The Fund values most money market instruments it holds at their
amortized cost. The Fund will process purchase orders that it receives and
accepts and redemption orders that it receives prior to the close of regular
trading on a day that the New York Stock Exchange is open at the net asset value
determined LATER THAT DAY. It will process purchase orders that it receives and
accepts and redemption orders that it receives AFTER the close of regular
trading at the net asset value determined at the close of regular trading on the
NEXT DAY the New York Stock Exchange is open. If an investor sends a purchase
order or redemption request to the Fund's corporate address, instead of to its
transfer agent, the Fund will forward it to the transfer agent and the effective
date of the purchase order or redemption request will be delayed until the
purchase order or redemption request is received by the transfer agent.
PURCHASING CLASS C SHARES
HOW TO PURCHASE CLASS C SHARES FROM THE FUND
1. Read this Prospectus carefully.
2. DETERMINE HOW MUCH YOU WANT TO INVEST KEEPING IN MIND THE FOLLOWING
MINIMUMS:
A. NEW ACCOUNTS
o Individual Retirement Accounts $1,000
o All other Accounts $2,000
B. EXISTING ACCOUNTS
o Dividend reinvestment No Minimum
o All other investments
(by mail) $ 100
(by wire) $1,000
3. Complete the New Account Application accompanying this Prospectus,
carefully following the instructions. For additional investments, complete
the remittance form attached to your individual account statements. (The
Fund has additional New Account Applications and remittance forms if you
need them.) If you have any questions, please call 1-800-711-1848.
4. Make your check payable to the full name of the Fund. All checks must be
drawn on U.S. banks. The Fund will not accept cash or third party checks.
FIRSTAR MUTUAL FUND SERVICES, LLC, THE FUND'S TRANSFER AGENT, WILL CHARGE A
$25 FEE AGAINST A SHAREHOLDER'S ACCOUNT FOR ANY PAYMENT CHECK RETURNED FOR
INSUFFICIENT FUNDS. THE SHAREHOLDER WILL ALSO BE RESPONSIBLE FOR ANY
LOSSES SUFFERED BY THE FUND AS A RESULT.
5. Send the application and check to:
BY FIRST CLASS MAIL
Prudent Bear Funds, Inc.
c/o Firstar Mutual Fund Services, LLC
P.O. Box 701
Milwaukee, WI 53201-0701
BY OVERNIGHT DELIVERY SERVICE
OR EXPRESS MAIL
Prudent Bear Funds, Inc.
C/O FIRSTAR MUTUAL FUND SERVICES, LLC
3rd Floor
615 East Michigan Street
Milwaukee, WI 53202-5207
PLEASE DO NOT SEND LETTERS BY OVERNIGHT DELIVERY SERVICE OR EXPRESS MAIL TO THE
POST OFFICE BOX ADDRESS.
If you wish to open an account by wire, please call 1-800-711-1848 prior to
wiring funds in order to obtain a confirmation number and to ensure prompt and
accurate handling of funds. YOU SHOULD WIRE FUNDS TO:
Firstar Bank, N.A.
777 East Wisconsin Avenue
Milwaukee, WI 53202
ABA #075000022
CREDIT:
Firstar Mutual Fund Services, LLC
Account #112-952-137
FURTHER CREDIT:
(name of Fund to be purchased)
(shareholder registration)
(shareholder account number, if known)
You should then send a properly signed New Account Application marked
"FOLLOW-UP" to either of the addresses listed above. PLEASE REMEMBER THAT
FIRSTAR BANK, N.A. MUST RECEIVE YOUR WIRED FUNDS PRIOR TO THE CLOSE OF REGULAR
TRADING ON THE NEW YORK STOCK EXCHANGE FOR YOU TO RECEIVE SAME DAY PRICING. THE
FUND AND FIRSTAR BANK, N.A. ARE NOT RESPONSIBLE FOR THE CONSEQUENCES OF DELAYS
RESULTING FROM THE BANKING OR FEDERAL RESERVE WIRE SYSTEM, OR FROM INCOMPLETE
WIRING INSTRUCTIONS.
PURCHASING CLASS C SHARES FROM BROKER-DEALERS, FINANCIAL INSTITUTIONS AND OTHERS
Some broker-dealers may sell shares of the Prudent Bear Fund. These broker-
dealers may charge investors a fee either at the time of purchase or redemption.
The fee, if charged, is retained by the broker-dealer and not remitted to the
Fund or the Adviser. Some broker-dealers may purchase and redeem shares on a
three day settlement basis.
The Fund may enter into agreements with broker-dealers, financial
institutions or other service providers ("Servicing Agents") that may include
the Fund as an investment alternative in the programs they offer or administer.
Servicing agents may:
o Become shareholders of record of the Fund. This means all requests to
purchase additional shares and all redemption requests must be sent
through the Servicing Agent. This also means that purchases made through
Servicing Agents are not subject to the Fund's minimum purchase
requirements.
o Use procedures and impose restrictions that may be in addition to, or
different from, those applicable to investors purchasing shares directly
from the Fund.
o Charge fees to their customers for the services they provide them. Also,
the Fund and/or the Adviser may pay fees to Servicing Agents to compensate
them for the services they provide their customers.
o Be allowed to purchase shares by telephone with payment to follow the next
day. If the telephone purchase is made prior to the close of regular
trading on the New York Stock Exchange, it will receive same day pricing.
o Be authorized to accept purchase orders on behalf of the Fund. This means
that the Fund will process the purchase order at the net asset value which
is determined following the Servicing Agent's acceptance of the customer's
order.
If you decide to purchase Class C shares through Servicing Agents, please
carefully review the program materials provided to you by the Servicing Agent.
When you purchase Class C shares of the Fund through a Servicing Agent, it is
the responsibility of the Servicing Agent to place your order with the Fund on a
timely basis. If the Servicing Agent does not, or if it does not pay the
purchase price to the Fund within the period specified in its agreement with the
Fund, it may be held liable for any resulting fees or losses.
OTHER INFORMATION ABOUT PURCHASING CLASS C SHARES OF THE FUND
The Fund may reject any purchase order for any reason. The Fund will not
accept initial purchase orders made by telephone unless they are from a
Servicing Agent which has an agreement with the Fund.
The Fund will not issue certificates evidencing shares purchased unless the
investor makes a written request for a certificate. The Fund will send
investors a written confirmation for all purchases of Class C shares whether or
not evidenced by certificates.
The Fund offers an automatic investment plan allowing shareholders to make
purchases of Class C shares on a regular and convenient basis. The Fund also
offers a telephone purchase option permitting shareholders to make additional
purchases by telephone. The Fund offers the following retirement plans:
o Traditional IRA
o Roth IRA
o SEP-IRA
Investors can obtain further information about the automatic investment plan,
the telephone purchase plan and the IRAs by calling the Fund at
1-800-711-1848. The Fund recommends that investors consult with a competent
financial and tax advisor regarding the IRAs before investing through them.
REDEEMING CLASS C SHARES
HOW TO REDEEM (SELL) CLASS C SHARES BY MAIL
1. Prepare a letter of instruction containing:
o the name of the Fund
o account number(s)
o the amount of money or number of shares being redeemed
o the name(s) on the account
o daytime phone number
o additional information that the Fund may require for redemptions by
corporations, executors, administrators, trustees, guardians, or others
who hold shares in a fiduciary or representative capacity. Please
contact the Fund's transfer agent, Firstar Mutual Fund Services, LLC, in
advance, at 1-800-711-1848 if you have any questions.
2. Sign the letter of instruction exactly as the shares are registered. Joint
ownership accounts must be signed by all owners.
3. If there are certificates representing your shares, enclose the
certificates and execute a stock power exactly as your shares are
registered.
4. Have the signatures guaranteed by a commercial bank or trust company in the
United States, a member firm of the New York Stock Exchange or other
eligible guarantor institution in the following situations:
o The redemption request includes a change of address
o The redemption proceeds are to be sent to a person other than the
person in whose name the shares are registered
o The redemption proceeds are to be sent to an address other than the
address of record
A NOTARIZED SIGNATURE IS NOT AN ACCEPTABLE SUBSTITUTE FOR A SIGNATURE GUARANTEE.
5. Send the letter of instruction to:
BY FIRST CLASS MAIL
Prudent Bear Funds, Inc.
c/o Firstar Mutual Fund Services, LLC
Shareholder Services Center
P. O. Box 701
Milwaukee, WI 53201-0701
BY OVERNIGHT DELIVERY SERVICE
OR EXPRESS MAIL
Prudent Bear Funds, Inc.
c/o Firstar Mutual Fund Services, LLC
3rd Floor
615 East Michigan Street
Milwaukee, WI 53202-5207
PLEASE DO NOT SEND LETTERS OF INSTRUCTION BY OVERNIGHT DELIVERY SERVICE OR
EXPRESS MAIL TO THE POST OFFICE BOX ADDRESS.
HOW TO REDEEM (SELL) CLASS C SHARES
BY TELEPHONE
1. Instruct Firstar Mutual Fund Services, LLC that you want the option of
redeeming Class C shares by telephone. This can be done by completing the
New Account Application. If you have already opened an account, you may
write to Firstar Mutual Fund Services, LLC requesting this option. When
you do so, please sign the request exactly as your account is registered
and have the signatures guaranteed. Shares held in individual retirement
accounts and shares represented by certificates cannot be redeemed by
telephone.
2. Assemble the same information that you would include in the letter of
instruction for a written redemption request.
3. Call Firstar Mutual Fund Services, LLC at 1-800-711-1848. PLEASE DO NOT
CALL THE FUND OR THE ADVISER.
HOW TO REDEEM (SELL) CLASS C SHARES THROUGH SERVICING AGENTS
If your Class C shares are held by a Servicing Agent, you must redeem your
shares through the Servicing Agent. Contact the Servicing Agent for
instructions on how to do so.
REDEMPTION PRICE
The redemption price per share you receive for redemption requests is the
next determined net asset value after:
o Firstar Mutual Fund Services, LLC receives your written request in proper
form with all required information.
o Firstar Mutual Fund Services, LLC receives your authorized telephone
request with all required information.
o A Servicing Agent that has been authorized to accept redemption requests
on behalf of the Fund receives your request in accordance with its
procedures.
REDEMPTION FEE
The Fund imposes a 1% redemption fee on shares that are redeemed before they
have been held for one year. For purposes of calculating the one year period,
the Fund uses a "first-in, first-out" method, meaning the date of any redemption
will be compared to the earliest purchase date. The Fund does not impose
redemption fees on shares purchased with reinvested dividends and distributions.
PAYMENT OF REDEMPTION PROCEEDS
o For those shareholders who redeem Class C shares by mail, Firstar Mutual
Fund Services, LLC will mail a check in the amount of the redemption
proceeds no later than the seventh day after it receives the redemption
request in proper form with all required information.
o For those shareholders who redeem by telephone, Firstar Mutual Fund
Services, LLC will either mail a check in the amount of the redemption
proceeds no later than the seventh day after it receives the redemption
request, or transfer the redemption proceeds to your designated bank
account if you have elected to receive redemption proceeds by wire.
Firstar Mutual Fund Services, LLC generally wires redemption proceeds on
the business day following the calculation of the redemption price.
However, the Fund may direct Firstar Mutual Fund Services, LLC to pay the
proceeds of a telephone redemption on a date no later than the seventh day
after the redemption request.
o For those shareholders who redeem shares through Servicing Agents, the
Servicing Agent will transmit the redemption proceeds in accordance with
its redemption procedures.
OTHER REDEMPTION CONSIDERATIONS
When redeeming Class C shares of the Fund, shareholders should consider the
following:
o The redemption may result in a taxable gain.
o Shareholders who redeem Class C shares held in an IRA must indicate on
their redemption request whether or not to withhold federal income taxes.
If not, these redemptions will be subject to federal income tax
withholding.
o The Fund may delay the payment of redemption proceeds for up to seven days
in all cases.
o If you purchased Class C shares by check, the Fund may delay the payment
of redemption proceeds until they are reasonably satisfied the check has
cleared (which may take up to 12 days from the date of purchase).
o Firstar Mutual Fund Services, LLC will send the proceeds of telephone
redemptions to an address or account other than that shown on its records
only if the shareholder has sent in a written request with signatures
guaranteed.
o The Fund reserves the right to refuse a telephone redemption request if it
believes it is advisable to do so. The Fund and Firstar Mutual Fund
Services, LLC may modify or terminate their procedures for telephone
redemptions at any time. Neither the Fund nor Firstar Mutual Fund
Services, LLC will be liable for following instructions for telephone
redemption transactions that they reasonably believe to be genuine,
provided they use reasonable procedures to confirm the genuineness of the
telephone instructions. They may be liable for unauthorized transactions
if they fail to follow such procedures. These procedures include
requiring some form of personal identification prior to acting upon the
telephone instructions and recording all telephone calls. During periods
of substantial economic or market change, you may find telephone
redemptions difficult to implement. If a shareholder cannot contact
Firstar Mutual Fund Services, LLC by telephone, he or she should make a
redemption request in writing in the manner described earlier.
o Firstar Mutual Fund Services, LLC currently charges a fee of $12 when
transferring redemption proceeds to your designated bank account by wire.
o If your account balance falls below $1,000 because you redeem shares, you
will be given 60 days to make additional investments so that your account
balance is $1,000 or more. If you do not, the Fund may close your account
and mail the redemption proceeds to you.
o The Fund may pay redemption requests "in kind." This means that the Fund
may pay redemption requests entirely or partially with securities rather
than with cash.
DIVIDENDS, DISTRIBUTIONS
AND TAXES
The Prudent Bear Fund distributes substantially all of its net investment
income and substantially all of its capital gains annually. You have two
distribution options:
o AUTOMATIC REINVESTMENT OPTION - Both dividend and capital gains
distributions will be reinvested in additional Fund shares.
o ALL CASH OPTION - Both dividend and capital gains distributions will be
paid in cash.
You may make this election on the New Account Application. You may change
your election by writing to Firstar Mutual Fund Services, LLC or by calling 1-
800-711-1848.
The Fund's distributions, whether received in cash or additional Class C
shares of the Fund, may be subject to federal and state income tax. These
distributions may be taxed as ordinary income and capital gains (which may be
taxed at different rates depending on the length of time the Fund holds the
assets generating the capital gains).
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the
Prudent Bear Fund's financial performance for the period of its operations.
Certain information reflects financial results for a single Fund No Load share
and certain information reflects financial results for a single Fund Class C
share. (No Class C shares were issued until February 8, 1999.) The total
returns in the tables represent the rate that an investor would have earned on
an investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by PricewaterhouseCoopers
LLP, whose report, along with the Fund's financial statements, are included in
the 1999 Annual Report which is available upon request.
<TABLE>
PRUDENT BEAR FUND
CLASS C SHARES
FEB. 8, 1999(1)<F18> NO LOAD FOR THE YEARS ENDED SEPTEMBER 30,
THROUGH SEPT. 30, SHARES -----------------------------------
1999 1999 1998 1997 1996(1)<F18>
--------------------- ---- ---- ---- ------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 4.78 $ 7.34 $ 7.29 $ 8.88 $10.00
Income from investment operations:
Net investment income(2)<F19> 0.09(3)<F20> 0.19(3)<F20> 0.29(3)<F20> 0.62(3)<F20> 0.09
Net realized and unrealized (losses)
on investments (0.38) (2.82) (0.01) (2.06) (1.21)
------ ------ ------ ------ ------
Total from investment operations (0.29) (2.63) 0.28 (1.44) (1.12)
------ ------ ------ ------ ------
Less distributions from net investment
income: -- (0.20) (0.23) (0.15) --
------ ------ ------ ------ ------
Net asset value, end of period $ 4.49 $ 4.51 $ 7.34 $ 7.29 $ 8.88
------ ------ ------ ------ ------
------ ------ ------ ------ ------
TOTAL INVESTMENT RETURN -6.07%(4)<F21> -36.17% 3.66% -16.44% -11.20%(4)<F21>
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period (000s) $207 $220,462 $173,691 $26,500 $7,326
Ratio of operating expenses to
average net assets (5)<F22> 2.74%(6)<F23> 1.97% 2.08% 2.59% 2.75%(6)<F23>(7)<F24>
Ratio of dividends on short positions to
average net assets 0.32%(6)<F23> 0.28% 0.28% 0.34% 0.34%(6)<F23>
Ratio of net investment income to
average net assets 3.25%(6)<F23> 4.09% 4.34% 7.75% 4.07%(6)<F23>(7)<F24>
Portfolio turnover rate(8)<F25> 536.56% 536.56% 480.25% 413.25% 91.31%
(1)<F18> The Fund commenced operations on December 28, 1995. The Class C shares were first issued on February 8, 1999.
(2)<F19> 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.
(3)<F20> Net investment income per share represents net investment income divided by the average shares outstanding throughout the
period.
(4)<F21> Not annualized.
(5)<F22> 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%.
(6)<F23> Annualized.
(7)<F24> 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)%.
(8)<F25> Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between the classes of shares
issued.
</TABLE>
To learn more about the Prudent Bear Fund, you may want to read its Statement
of Additional Information (or "SAI") which contains additional information about
the Fund. The Prudent Bear Fund has incorporated by reference the SAI into the
Prospectus. This means that you should consider the contents of the SAI to be
part of the Prospectus.
You also may learn more about the Fund's investments by reading their annual
and semi-annual reports to shareholders. The annual report includes a
discussion of the market conditions and investment strategies that significantly
affected the performance of the Fund during their last fiscal year.
The SAI and the annual and semi-annual reports are all available to
shareholders and prospective investors without charge, simply by calling 1-800-
711-1848.
Prospective investors and shareholders who have questions about the Prudent
Bear Fund may also call the above number or write to the following address:
Prudent Bear Funds, Inc.
8140 Walnut Hill Lane
Suite 300
Dallas, Texas 75231
The general public can review and copy information about the Prudent Bear
Fund (including the SAI) at the Securities and Exchange Commission's Public
Reference Room in Washington, D.C. (Please call 1-202-942-8090 for information
on the operations of the Public Reference Room.) Reports and other information
about the Fund are also available on the EDGAR Database at the Securities and
Exchange Commission's Internet site at http://www.sec.gov and copies of this
information may be obtained, upon payment of a duplicating fee, by electronic
request at the following E-mail address: [email protected], or by writing to:
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-6009
Please refer to the Investment Company Act File No. 811-9120 of the Prudent
Bear Fund when seeking information about the Fund from the Securities and
Exchange Commission.
PRUDENT BEAR
LARGE CAP FUND
NO LOAD SHARES
PROSPECTUS JANUARY 31, 2000
NO LOAD SHARES
PRUDENT BEAR LARGE CAP FUND
The Prudent Bear Large Cap Fund seeks capital appreciation in a declining
equity market. Please read this Prospectus and keep it for future reference.
It contains important information, including information on how the Prudent Bear
Large Cap Fund invests and the services it offers to shareholders.
Prudent Bear Funds, Inc.
8140 Walnut Hill Lane
Suite 300
Dallas, Texas 75231
1-888-PRU-BEAR (Fund Information)
1-888-778-2327
1-800-771-1848 (Account Information)
http://www.prudentbear.com
TABLE OF CONTENTS
Questions Every Investor Should Ask
Before Investing in the Prudent Bear
Large Cap Fund 2
Fees and Expenses 3
Investment Objective and Strategies 4
Management of the Fund 5
The Fund's Share Price 5
Purchasing No Load Shares 5
Redeeming No Load Shares 7
Exchanging No Load Shares 10
Dividends, Distributions and Taxes 10
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.QUESTIONS EVERY INVESTOR
SHOULD ASK BEFORE INVESTING IN THE PRUDENT BEAR LARGE CAP FUND
1. WHAT IS THE FUND'S GOAL?
The Prudent Bear Large Cap Fund seeks capital appreciation.
2. WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?
The Prudent Bear Large Cap Fund seeks capital appreciation in declining
equity markets. If the Fund is successful in achieving its objective, it will
provide investment results that approximate or exceed the investment results of
the inverse of a blended average of the Standard & Poor's Index of 100 highly
capitalized stocks ("S&P 100") and the NASDAQ Index of the 100 largest OTC
stocks ("NDX"). To accomplish its objective, the Prudent Bear Large Cap Fund
primarily will use the following two investment tactics:
o SHORT SELLING OF INDIVIDUAL COMMON STOCKS - It's investment adviser, David
W. Tice & Associates, Inc., will select individual stocks from among the
200 stocks included in the S&P 100 and the NDX to sell short. Stocks will
be selected from those included in the indices using a "bottom-up"
investment analysis based on company-specific fundamental factors. In
selecting stocks for short sales, the Adviser will endeavor to maintain an
industry weighting comparable to that of the two indices.
o INDEX FUTURES, OPTIONS ON INDEX FUTURES AND OPTIONS ON STOCK INDICES - The
Prudent Bear Large Cap Fund may sell futures contracts on the Standard &
Poor's Composite Index of 500 Stocks ("S&P 500") and NDX and may purchase
put options on those indices as well as futures contracts on those
indices.
Based on the Adviser's assessment of market conditions, the Adviser will
utilize the investment tactics that best accommodate the flow of funds into and
out of the Prudent Bear Large Cap Fund. The Adviser actively manages the
Prudent Bear Large Cap Fund's portfolio. The Prudent Bear Large Cap Fund's
annual portfolio turnover rate usually will exceed 100%.
3. WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN THE FUND?
Investors in the Fund may lose money. There are risks associated with the
types of securities in which the Fund invests. These risks include:
o MARKET RISK: The prices of the securities or the performance of the
target indices in which the Prudent Bear Large Cap Fund invests may move
against the Fund for a number of reasons.
o ASSET ALLOCATION RISK: The Prudent Bear Large Cap Fund will be "short"
the market in substantially all situations and its investment results will
suffer if there is a general stock market advance. This risk is in
addition to the market risks associated with each of the Fund's
investments.
o SHORT SALES RISK: The Prudent Bear Large Cap Fund's investment
performance will suffer if a security that it has sold short appreciates
in value.
o OPTIONS ON INDICES AND INDEX FUTURES INVESTING RISK: If the Prudent Bear
Large Cap Fund purchases an option on an index or an index future and the
index fails to move in the direction the Adviser expected, the Fund will
lose most or all of the amount the Fund paid for the option, plus
commission costs. If the Prudent Bear Large Cap Fund writes ("sells") an
option on an index or an index future and the index fails to move in the
direction the Adviser expected, the Fund's losses could easily exceed the
proceeds it received when it wrote the option.
o FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS RISK: The Prudent Bear
Large Cap Fund may purchase and sell stock index futures and options on
stock index futures contracts. Futures contracts present risks of the
possible inability to close a future contract when desired, losses due to
unanticipated market movements which are potentially unlimited, and the
possible inability of the Adviser to correctly predict the direction of
securities prices.
o HIGH PORTFOLIO TURNOVER RISK: High portfolio turnover necessarily results
in correspondingly greater transaction costs (such as brokerage
commissions or markups or markdowns) which the Prudent Bear Large Cap Fund
must pay and increased realized gains (or losses) to investors.
Distributions to shareholders of short-term capital gains are taxed as
ordinary income under federal income tax laws. The Prudent Bear Large Cap
Fund's portfolio turnover rate is not calculated with regard to
securities, including options and futures contracts, having a maturity of
less than one year. Consequently the transaction costs incurred by the
Fund are likely to be greater than the transaction costs incurred by a
mutual fund investing exclusively in common stocks that has a similar
portfolio turnover rate.
Because of these risks the Fund is a suitable investment only for those
investors who have long-term investment goals. Prospective investors who are
uncomfortable with an investment that will fluctuate in value should not invest
in the Fund.
FEES AND EXPENSES
The table below describes the fees and expenses that you may pay if you buy
and hold No Load shares of the Prudent Bear Large Cap Fund.
SHAREHOLDER FEES
(fees paid directly from your investment)
Maximum Sales Charge (Load) No Sales
Imposed on Purchases (as a Charge
percentage of offering price)
Maximum Deferred Sales No Deferred
Charge (Load) Sales Charge
Maximum Sales Charge (Load) No Sales
Imposed on Reinvested Charge
Dividends and Distributions
Redemption Fee None(1)<F26>
Exchange Fee None(2)<F27>
(1)<F26> Our transfer agent charges a fee of $12.00 for each wire redemption.
(2)<F27> Our transfer agent charges a fee of $5.00 for each telephone exchange.
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
Management Fees 0.75%
Distribution and/or Service (12b-1) Fees 0.25%
Other Expenses
Dividends on Short Positions 0.20%*<F28>
All remaining Other Expenses 0.90%*<F28>
-----
Total Other Expenses 1.10%*<F28>
-----
Total Annual Fund Operating Expenses 2.10%*<F28>
-----
-----
*<F28> Based on estimates for the fiscal year ending September 30, 2000.
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of these periods. The
Example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions, your costs would be:
1 YEAR 3 YEARS
------ -------
$213 $658
INVESTMENT OBJECTIVE AND STRATEGIES
INVESTMENT OBJECTIVE
The Prudent Bear Large Cap Fund seeks capital appreciation. The Prudent Bear
Large Cap Fund may take temporary defensive positions if the Adviser believes
equity markets are likely to rise significantly after having declined
significantly. This means the Prudent Bear Large Cap Fund will invest some or
all of its assets in money market instruments (like U.S. Treasury Bills,
commercial paper or repurchase agreements). The Prudent Bear Large Cap Fund
will not be able to achieve its investment objective of capital appreciation to
the extent that it invests in money market instruments since these securities
earn interest but do not appreciate in value. In order to provide a degree of
flexibility, the Fund may change its investment objective without obtaining
shareholder approval. Please remember that an investment objective is not a
guarantee. An investment in the Prudent Bear Large Cap Fund might not
appreciate and investors could lose money.
Even when not taking a temporary defensive position, the Prudent Bear Large
Cap Fund will invest in money market instruments and hold some cash so that it
can pay expenses, satisfy redemption requests or take advantage of investment
opportunities. As a consequence of some of the investment techniques utilized
by the Prudent Bear Large Cap Fund, particularly effecting short sales, a
significant portion of its assets (up to 100%) will be held in liquid
securities, including money market instruments, as "cover" for these investment
techniques. These assets may not be sold while the corresponding transaction,
such as a short sale, is open unless they are replaced by similar assets. As a
result, the commitment of a large portion of the Prudent Bear Large Cap Fund's
assets to "cover" investment techniques may make it more difficult for the Fund
to meet redemption requests or pay its expenses.
PRINCIPAL INVESTMENT STRATEGIES
The Prudent Bear Large Cap Fund is designed to provide a means for investors
to protect a portfolio from declines in the equity markets resulting from the
relative over-valuation of common stocks or other reasons. The Prudent Bear
Large Cap Fund attempts to do so by selecting investments that move inversely
with recognized common stock indices.
The Prudent Bear Large Cap Fund is not a "market timing" fund. At most
times, it will maintain a portfolio of short positions, as the Adviser believes
that the equity markets currently are, in general, over-valued and are more
likely to decline significantly than to advance significantly. In making
investment decisions for the Prudent Bear Large Cap Fund, the Adviser may sell
short index-based securities in addition to effecting short sales in individual
stocks.
From time to time the Prudent Bear Large Cap Fund may utilize the following
investment tactic. This investment tactic is not a principal investment
strategy of the Prudent Bear Large Cap Fund.
o INDEX BASED INVESTMENT COMPANIES: The Prudent Bear Large Cap Fund may
sell short securities of investment companies that hold securities
comprising a recognized securities index such as SPDRs, which hold the
component stocks of the S&P 100 (as well as the other stocks in the S&P
500) or the NDX. These securities may trade at discounts to their net
asset value. As an investor in securities of index based investment
companies, the Prudent Bear Large Cap Fund will indirectly bear its
proportionate share of the expenses of those investment companies.
MANAGEMENT OF THE FUND
DAVID W. TICE & ASSOCIATES, INC. MANAGES THE INVESTMENTS OF THE PRUDENT BEAR
LARGE CAP FUND.
David W. Tice & Associates, Inc. (the "Adviser") is the investment adviser to
the Prudent Bear Large Cap Fund. The Adviser's address is:
8140 Walnut Hill Lane
Suite 300
Dallas, Texas 75231
As investment adviser, the Adviser manages the investment portfolio of the
Fund. The Adviser makes the decisions as to which securities to buy and which
securities to sell. The Prudent Bear Large Cap Fund will pay the Adviser an
annual advisory fee equal to 0.75% of its average net assets.
David W. Tice will be primarily responsible for the day-to-day management of
the portfolio of the Prudent Bear Large Cap Fund. Mr. Tice is the President and
founder of the Adviser. The Adviser has been conducting an investment advisory
business since 1993. Prior to incorporating the Adviser, Mr. Tice conducted the
same investment advisory business as a sole proprietorship since 1988. Mr. Tice
is a Chartered Financial Analyst and a Certified Public Accountant. He is also
president and sole shareholder of BTN Research, Inc., a registered broker-
dealer.
DISTRIBUTION FEES
The Prudent Bear Large Cap Fund has adopted a distribution plan pursuant to
Rule 12b-1 under the Investment Company Act. This Plan allows the Fund to use
up to 0.25% of its average daily net assets to pay sales, distribution and other
fees for the sale of its shares and for services provided to investors. Because
these fees are paid out of the Fund's assets, over time these fees will increase
the cost of your investment and may cost you more than paying other types of
sales charges.
THE FUND'S SHARE PRICE
The price at which investors purchase No Load shares of the Fund and at which
shareholders redeem No Load shares of the Fund is called its net asset value.
The Fund calculates its net asset value as of the close of regular trading on
the New York Stock Exchange (normally 4:00 p.m. Eastern Time) on each day the
New York Stock Exchange is open for trading. The New York Stock Exchange is
closed on holidays and weekends. The Fund calculates its net asset value based
on the market prices of the securities (other than money market instruments) it
holds. The Fund values most money market instruments it holds at their
amortized cost. The Fund will process purchase orders that it receives and
accepts and redemption orders that it receives prior to the close of regular
trading on a day that the New York Stock Exchange is open at the net asset value
determined LATER THAT DAY. It will process purchase orders that it receives and
accepts and redemption orders that it receives AFTER the close of regular
trading at the net asset value determined at the close of regular trading on the
NEXT DAY the New York Stock Exchange is open. If an investor sends a purchase
order or redemption request to the Fund's corporate address, instead of to its
transfer agent, the Fund will forward it to the transfer agent and the effective
date of the purchase order or redemption request will be delayed until the
purchase order or redemption request is received by the transfer agent.
PURCHASING NO LOAD SHARES
HOW TO PURCHASE NO LOAD SHARES FROM THE FUND
1. Read this Prospectus carefully.
2. Determine how much you want to invest keeping in mind the following
minimums:
A. NEW ACCOUNTS
o Individual Retirement Accounts $1,000
o All other Accounts $2,000
B. EXISTING ACCOUNTS
o Dividend reinvestment No Minimum
o All other investments
(by mail) $ 100
(by wire) $1,000
3. Complete the New Account Application accompanying this Prospectus,
carefully following the instructions. For additional investments, complete
the remittance form attached to your individual account statements. (The
Fund has additional New Account Applications and remittance forms if you
need them.) If you have any questions, please call 1-800-711-1848.
4. Make your check payable to the full name of the Fund. All checks must be
drawn on U.S. banks. The Fund will not accept cash or third party checks.
FIRSTAR MUTUAL FUND SERVICES, LLC, THE FUND'S TRANSFER AGENT, WILL CHARGE A
$25 FEE AGAINST A SHAREHOLDER'S ACCOUNT FOR ANY PAYMENT CHECK RETURNED FOR
INSUFFICIENT FUNDS. THE SHAREHOLDER WILL ALSO BE RESPONSIBLE FOR ANY
LOSSES SUFFERED BY THE FUND AS A RESULT.
5. Send the application and check to:
BY FIRST CLASS MAIL
Prudent Bear Funds, Inc.
c/o Firstar Mutual Fund Services, LLC
P.O. Box 701
Milwaukee, WI 53201-0701
BY OVERNIGHT DELIVERY SERVICE
OR EXPRESS MAIL
Prudent Bear Funds, Inc.
c/o Firstar Mutual Fund Services, LLC
3rd Floor
615 East Michigan Street
Milwaukee, WI 53202-5207
PLEASE DO NOT SEND LETTERS BY OVERNIGHT DELIVERY SERVICE OR EXPRESS MAIL TO THE
POST OFFICE BOX ADDRESS.
If you wish to open an account by wire, please call 1-800-711-1848 prior to
wiring funds in order to obtain a confirmation number and to ensure prompt and
accurate handling of funds. YOU SHOULD WIRE FUNDS TO:
Firstar Bank, N.A.
777 EAST WISCONSIN AVENUE
Milwaukee, WI 53202
ABA #075000022
CREDIT:
Firstar Mutual Fund Services, LLC
Account #112-952-137
FURTHER CREDIT:
(name of Fund to be purchased)
(shareholder registration)
(shareholder account number, if known)
You should then send a properly signed New Account Application marked
"FOLLOW-UP" to either of the addresses listed above. PLEASE REMEMBER THAT
FIRSTAR BANK, N.A. MUST RECEIVE YOUR WIRED FUNDS PRIOR TO THE CLOSE OF REGULAR
TRADING ON THE NEW YORK STOCK EXCHANGE FOR YOU TO RECEIVE SAME DAY PRICING. THE
FUND AND FIRSTAR BANK, N.A. ARE NOT RESPONSIBLE FOR THE CONSEQUENCES OF DELAYS
RESULTING FROM THE BANKING OR FEDERAL RESERVE WIRE SYSTEM, OR FROM INCOMPLETE
WIRING INSTRUCTIONS.
PURCHASING NO LOAD SHARES FROM BROKER-DEALERS, FINANCIAL INSTITUTIONS AND OTHERS
Some broker-dealers may sell shares of the Prudent Bear Large Cap Fund.
These broker-dealers may charge investors a fee either at the time of purchase
or redemption. The fee, if charged, is retained by the broker-dealer and not
remitted to the Fund or the Adviser. Some broker-dealers may purchase and
redeem shares on a three day settlement basis.
The Fund may enter into agreements with broker-dealers, financial institutions
or other service providers ("Servicing Agents") that may include the Fund as
investment alternatives in the programs they offer or administer. Servicing
agents may:
o Become shareholders of record of the Fund. This means all requests to
purchase additional shares and all redemption requests must be sent
through the Servicing Agent. This also means that purchases made through
Servicing Agents are not subject to the Fund's minimum purchase
requirements.
o Use procedures and impose restrictions that may be in addition to, or
different from, those applicable to investors purchasing shares directly
from the Fund.
o Charge fees to their customers for the services they provide them. Also,
the Fund and/or the Adviser may pay fees to Servicing Agents to compensate
them for the services they provide their customers.
o Be allowed to purchase shares by telephone with payment to follow the next
day. If the telephone purchase is made prior to the close of regular
trading on the New York Stock Exchange, it will receive same day pricing.
o Be authorized to accept purchase orders on behalf of the Fund. This means
that the Fund will process the purchase order at the net asset value which
is determined following the Servicing Agent's acceptance of the customer's
order.
If you decide to purchase No Load shares through Servicing Agents, please
carefully review the program materials provided to you by the Servicing Agent.
When you purchase No Load shares of the Fund through a Servicing Agent, it is
the responsibility of the Servicing Agent to place your order with the Fund on a
timely basis. If the Servicing Agent does not, or if it does not pay the
purchase price to the Fund within the period specified in its agreement with the
Fund, it may be held liable for any resulting fees or losses.
OTHER INFORMATION ABOUT PURCHASING NO LOAD SHARES OF THE FUND
The Fund may reject any purchase order for any reason. The Fund will not
accept initial purchase orders made by telephone unless they are from a
Servicing Agent which has an agreement with the Fund.
The Fund will not issue certificates evidencing shares purchased unless the
investor makes a written request for a certificate. The Fund will send
investors a written confirmation for all purchases of No Load shares whether or
not evidenced by certificates.
The Fund offers an automatic investment plan allowing shareholders to make
purchases of No Load shares on a regular and convenient basis. The Fund also
offers a telephone purchase option permitting shareholders to make additional
purchases by telephone. The Fund offers the following retirement plans:
o Traditional IRA
o Roth IRA
o SEP-IRA
Investors can obtain further information about the automatic investment plan,
the telephone purchase plan and the IRAs by calling the Fund at
1-800-711-1848. The Fund recommends that investors consult with a competent
financial and tax advisor regarding the IRAs before investing through them.
REDEEMING NO LOAD SHARES
HOW TO REDEEM (SELL) NO LOAD SHARES BY MAIL
1. Prepare a letter of instruction containing:
o the name of the Fund
o account number(s)
o the amount of money or number of shares being redeemed
o the name(s) on the account
o daytime phone number
o additional information that the Fund may require for redemptions by
corporations, executors, administrators, trustees, guardians, or others
who hold shares in a fiduciary or representative capacity. Please
contact the Fund's transfer agent, Firstar Mutual Fund Services, LLC, in
advance, at 1-800-711-1848 if you have any questions.
2. Sign the letter of instruction exactly as the shares are registered. Joint
ownership accounts must be signed by all owners.
3. If there are certificates representing your shares, enclose the
certificates and execute a stock power exactly as your shares are
registered.
4. Have the signatures guaranteed by a commercial bank or trust company in the
United States, a member firm of the New York Stock Exchange or other
eligible guarantor institution in the following situations:
o The redemption request includes a change of address
o The redemption proceeds are to be sent to a person other than the person
in whose name the shares are registered
o The redemption proceeds are to be sent to an address other than the
address of record
A NOTARIZED SIGNATURE IS NOT AN ACCEPTABLE SUBSTITUTE FOR A SIGNATURE GUARANTEE.
5. Send the letter of instruction to:
BY FIRST CLASS MAIL
Prudent Bear Funds, Inc.
c/o Firstar Mutual Fund Services, LLC
Shareholder Services Center
P. O. Box 701
Milwaukee, WI 53201-0701
BY OVERNIGHT DELIVERY SERVICE
OR EXPRESS MAIL
Prudent Bear Funds, Inc.
c/o Firstar Mutual Fund Services, LLC
3rd Floor
615 East Michigan Street
Milwaukee, WI 53202-5207
PLEASE DO NOT SEND LETTERS OF INSTRUCTION BY OVERNIGHT DELIVERY SERVICE OR
EXPRESS MAIL TO THE POST OFFICE BOX ADDRESS.
HOW TO REDEEM (SELL) NO LOAD SHARES
BY TELEPHONE
1. Instruct Firstar Mutual Fund Services, LLC that you want the option of
redeeming No Load shares by telephone. This can be done by completing the
New Account Application. If you have already opened an account, you may
write to Firstar Mutual Fund Services, LLC requesting this option. When
you do so, please sign the request exactly as your account is registered
and have the signatures guaranteed. Shares held in individual retirement
accounts and shares represented by certificates cannot be redeemed by
telephone.
2. Assemble the same information that you would include in the letter of
instruction for a written redemption request.
3. Call Firstar Mutual Fund Services, LLC at 1-800-711-1848. PLEASE DO NOT
CALL THE FUND OR THE ADVISER.
HOW TO REDEEM (SELL) NO LOAD SHARES THROUGH SERVICING AGENTS
If your No Load shares are held by a Servicing Agent, you must redeem your
shares through the Servicing Agent. Contact the Servicing Agent for
instructions on how to do so.
REDEMPTION PRICE
The redemption price per share you receive for redemption requests is the
next determined net asset value after:
o Firstar Mutual Fund Services, LLC receives your written request in proper
form with all required information.
o Firstar Mutual Fund Services, LLC receives your authorized telephone
request with all required information.
o A Servicing Agent that has been authorized to accept redemption requests
on behalf of the Fund receives your request in accordance with its
procedures.
PAYMENT OF REDEMPTION PROCEEDS
o For those shareholders who redeem No Load shares by mail, Firstar Mutual
Fund Services, LLC will mail a check in the amount of the redemption
proceeds no later than the seventh day after it receives the redemption
request in proper form with all required information.
o For those shareholders who redeem by telephone, Firstar Mutual Fund
Services, LLC will either mail a check in the amount of the redemption
proceeds no later than the seventh day after it receives the redemption
request, or transfer the redemption proceeds to your designated bank
account if you have elected to receive redemption proceeds by wire.
Firstar Mutual Fund Services, LLC generally wires redemption proceeds on
the business day following the calculation of the redemption price.
However, the Fund may direct Firstar Mutual Fund Services, LLC to pay the
proceeds of a telephone redemption on a date no later than the seventh day
after the redemption request.
o For those shareholders who redeem shares through Servicing Agents, the
Servicing Agent will transmit the redemption proceeds in accordance with
its redemption procedures.
OTHER REDEMPTION CONSIDERATIONS
When redeeming No Load shares of the Fund, shareholders should consider the
following:
o The redemption may result in a taxable gain.
o Shareholders who redeem No Load shares held in an IRA must indicate on
their redemption request whether or not to withhold federal income taxes.
If not, these redemptions will be subject to federal income tax
withholding.
o The Fund may delay the payment of redemption proceeds for up to seven days
in all cases.
o If you purchased No Load shares by check, the Fund may delay the payment
of redemption proceeds until they are reasonably satisfied the check has
cleared (which may take up to 12 days from the date of purchase).
o Firstar Mutual Fund Services, LLC will send the proceeds of telephone
redemptions to an address or account other than that shown on its records
only if the shareholder has sent in a written request with signatures
guaranteed.
o The Fund reserves the right to refuse a telephone redemption request if it
believes it is advisable to do so. The Fund and Firstar Mutual Fund
Services, LLC may modify or terminate their procedures for telephone
redemptions at any time. Neither the Fund nor Firstar Mutual Fund
Services, LLC will be liable for following instructions for telephone
redemption transactions that they reasonably believe to be genuine,
provided they use reasonable procedures to confirm the genuineness of the
telephone instructions. They may be liable for unauthorized transactions
if they fail to follow such procedures. These procedures include
requiring some form of personal identification prior to acting upon the
telephone instructions and recording all telephone calls. During periods
of substantial economic or market change, you may find telephone
redemptions difficult to implement. If a shareholder cannot contact
Firstar Mutual Fund Services, LLC by telephone, he or she should make a
redemption request in writing in the manner described earlier.
o Firstar Mutual Fund Services, LLC currently charges a fee of $12 when
transferring redemption proceeds to your designated bank account by wire.
o If your account balance falls below $1,000 because you redeem shares, you
will be given 60 days to make additional investments so that your account
balance is $1,000 or more. If you do not, the Fund may close your account
and mail the redemption proceeds to you.
o The Fund may pay redemption requests "in kind." This means that the Fund
may pay redemption requests entirely or partially with securities rather
than with cash.
EXCHANGING NO LOAD SHARES
No Load Shares of any of the Prudent Bear Fund, the Prudent Safe Harbor Fund
and the Prudent Bear Large Cap Fund may be exchanged for No Load Shares of any
other of the Prudent Bear Fund, Prudent Safe Harbor Fund and the Prudent Bear
Large Cap Fund at their relative net asset values. (The Prudent Bear Fund and
the Prudent Safe Harbor Fund are described in a different prospectus.) You may
have a taxable gain or loss as a result of an exchange because the Internal
Revenue Code treats an exchange as a sale of shares.
HOW TO EXCHANGE SHARES
1. Read this Prospectus and the prospectus for the Prudent Bear Fund and
Prudent Safe Harbor Fund carefully.
2. Determine the number of shares you want to exchange keeping in mind that
exchanges are subject to a $1,000 minimum.
3. Call Firstar Mutual Fund Services, LLC at 1-800-711-1848. You may also
make an exchange by writing to the Prudent Bear Funds, Inc. c/o Firstar
Mutual Fund Services, LLC, 3rd Floor, P. O. Box 701, Milwaukee, Wisconsin
53201-0701. Firstar Mutual Fund Services, LLC charges a fee of $5.00 for
each telephone exchange. There is no charge for a written exchange.
DIVIDENDS, DISTRIBUTIONS
AND TAXES
The Prudent Bear Large Cap Fund will distribute substantially all of its net
investment income and substantially all of its capital gains annually. You have
two distribution options:
o AUTOMATIC REINVESTMENT OPTION - Both dividend and capital gains
distributions will be reinvested in additional Fund shares.
o ALL CASH OPTION - Both dividend and capital gains distributions will be
paid in cash.
You may make this election on the New Account Application. You may change
your election by writing to Firstar Mutual Fund Services, LLC or by calling 1-
800-711-1848.
The Fund's distributions, whether received in cash or additional No Load
shares of the Fund, may be subject to federal and state income tax. These
distributions may be taxed as ordinary income and capital gains (which may be
taxed at different rates depending on the length of time the Fund holds the
assets generating the capital gains).
To learn more about the Prudent Bear Large Cap Fund you may want to read its
Statement of Additional Information (or "SAI") which contains additional
information about the Fund. The Prudent Bear Large Cap Fund has incorporated by
reference the SAI into the Prospectus. This means that you should consider the
contents of the SAI to be part of the Prospectus.
You also may learn more about the Fund's investments by reading its annual
and semi-annual reports to shareholders. The annual report includes a
discussion of the market conditions and investment strategies that significantly
affected the performance of the Fund during their last fiscal year.
The SAI and the annual and semi-annual reports are all available to
shareholders and prospective investors without charge, simply by calling 1-800-
711-1848.
Prospective investors and shareholders who have questions about the Prudent
Bear Large Cap Fund may also call the above number or write to the following
address:
Prudent Bear Funds, Inc.
8140 Walnut Hill Lane
Suite 300
Dallas, Texas 75231
The general public can review and copy information about the Prudent Bear
Large Cap Fund (including the SAI) at the Securities and Exchange Commission's
Public Reference Room in Washington, D.C. (Please call 1-202-942-8090 for
information on the operations of the Public Reference Room.) Reports and other
information about the Fund are also available on the EDGAR Database at the
Securities and Exchange Commission's Internet site at http://www.sec.gov and
copies of this information may be obtained, upon payment of a duplicating fee,
by electronic request at the following E-mail address: [email protected], or by
writing to:
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-6009
Please refer to the Investment Company Act File No. 811-9120 of the Prudent
Bear Large Cap Fund when seeking information about the Fund from the Securities
and Exchange Commission.
STATEMENT OF ADDITIONAL INFORMATION January 31, 2000
PRUDENT BEAR FUND
PRUDENT SAFE HARBOR FUND
PRUDENT BEAR FUNDS, INC.
8140 Walnut Hill Lane
Suite 300
Dallas, Texas 75231
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Prospectus of Prudent Bear Funds, Inc.
for the No Load Shares of the Prudent Bear Fund and the Prudent Safe Harbor Fund
and the Prospectus for the Class C Shares of the Prudent Bear Fund, both of
which are dated January 31, 2000. Requests for copies of the Prospectuses should
be made by writing to Prudent Bear Funds, Inc., 8140 Walnut Hill Lane, Suite
300, Dallas, Texas 75231, Attention: Corporate Secretary, or by calling (214)
696-5474.
The following financial statements are incorporated by reference to
the Annual Report, dated September 30, 1999 of Prudent Bear Funds, Inc. (File
No. 811-9120) as filed with the Securities and Exchange Commission on December
3, 1999:
(Prudent Bear Fund only)
o Statement of Assets and Liabilities
o Statement of Operations
o Statement of Changes in Net Assets
o Financial Highlights
o Schedule of Investments
o Schedule of Securities Sold Short
o Notes to the Financial Statements
o Report of Independent Accountants
Shareholders may obtain a copy of the Annual Report, without charge, by calling
1-800-711-1848.
<PAGE>
Prudent Bear Funds, Inc.
TABLE OF CONTENTS Page No.
----------------- --------
FUND HISTORY AND CLASSIFICATION................................................1
INVESTMENT RESTRICTIONS........................................................1
INVESTMENT CONSIDERATIONS......................................................3
DIRECTORS AND OFFICERS OF THE CORPORATION.....................................16
OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS............................18
INVESTMENT ADVISER, ADMINISTRATOR, CUSTODIAN, TRANSFER AGENT AND
ACCOUNTING SERVICES AGENT................................................18
DETERMINATION OF NET ASSET VALUE..............................................22
DISTRIBUTION OF SHARES........................................................23
AUTOMATIC INVESTMENT PLAN AND TELEPHONE PURCHASES.............................24
REDEMPTION OF SHARES..........................................................25
SYSTEMATIC WITHDRAWAL PLAN....................................................25
ALLOCATION OF PORTFOLIO BROKERAGE.............................................26
TAXES.........................................................................27
SHAREHOLDER MEETINGS..........................................................30
PERFORMANCE INFORMATION.......................................................31
CAPITAL STRUCTURE.............................................................33
DESCRIPTION OF SECURITIES RATINGS.............................................34
INDEPENDENT ACCOUNTANTS.......................................................36
No person has been authorized to give any information or to make any
representations other than those contained in this Statement of Additional
Information and Prospectus dated January 31, 2000 and, if given or made, such
information or representations may not be relied upon as having been authorized
by Prudent Bear Funds, Inc.
This Statement of Additional Information does not constitute an offer
to sell securities.
(i)
<PAGE>
FUND HISTORY AND CLASSIFICATION
Prudent Bear Funds, Inc., a Maryland corporation incorporated or
October 25, 1995 (the "Corporation"), is an open-end management investment
company consisting of three diversified portfolios: the Prudent Bear Fund, the
Prudent Safe Harbor Fund, and the Prudent Bear Large Cap Fund (individually a
"Fund" and collectively the "Funds"). This Statement of Additional Information
provides information about the Prudent Bear Fund and the Prudent Safe Harbor
Fund. The Corporation is registered under the Investment Company Act of 1940
(the "Act").
INVESTMENT RESTRICTIONS
The Funds have adopted the following investment restrictions which are
matters of fundamental policy. Each Fund's investment restrictions cannot be
changed without approval of the holders of the lesser of: (i) 67% of that Fund's
shares present or represented at a shareholder's meeting at which the holders of
more than 50% of such shares are present or represented; or (ii) more than 50%
of the outstanding shares of that Fund.
1. Neither Fund will purchase securities of any issuer if the purchase
would cause more than 5% of the value of the Fund's total assets to be
invested in securities of such issuer (except securities of the U.S.
government or any agency or instrumentality thereof), or purchase more than
10% of the outstanding voting securities of any one issuer, except that up
to 25% of each Fund's total assets may be invested without regard to these
limitations.
2. Each Fund may sell securities short to the extent permitted by the
Act.
3. Neither Fund will purchase securities on margin (except for such
short term credits as are necessary for the clearance of transactions);
provided, however, that each Fund may (i) borrow money to the extent set
forth in investment restriction no. 4; (ii) purchase or sell futures
contracts and options on futures contracts; (iii) make initial and
variation margin payments in connection with purchases or sales of futures
contracts or options on futures contracts; and (iv) write or invest in put
or call options.
4. Each Fund may borrow money or issue senior securities to the extent
permitted by the Act.
5. Each Fund may pledge or hypothecate its assets to secure its
borrowings.
6. Neither Fund will act as an underwriter or distributor of
securities other than of its shares (except to the extent that the Fund may
be deemed to be an underwriter within the meaning of the Securities Act of
1933, as amended (the "Securities Act"), in the disposition of restricted
securities).
1
<PAGE>
7. Neither Fund will make loans, including loans of securities, except
each Fund may acquire debt securities from the issuer or others which are
publicly distributed or are of a type normally acquired by institutional
investors and each Fund may enter into repurchase agreements.
8. Neither Fund will invest 25% or more of its total assets at the
time of purchase in securities of issuers whose principal business
activities are in the same industry.
9. Neither Fund will make investments for the purpose of exercising
control or management of any company.
10. Neither Fund will purchase or sell real estate or real estate
mortgage loans or make any investments in real estate limited partnerships.
11. Neither Fund will purchase or sell commodities or commodity
contracts except (a) the Prudent Safe Harbor Fund may purchase or sell gold
and other precious metals and; (b) each of the Funds may enter into futures
contracts and options on futures contracts.
12. The Prudent Bear Fund will not purchase or sell any interest in
any oil, gas or other mineral exploration or development program, including
any oil, gas or mineral leases. This investment restriction shall not
prohibit the Prudent Bear Fund from purchasing securities of "C"
corporations or of companies that invest in "C" corporations.
The Funds have adopted certain other investment restrictions which are
not fundamental policies and which may be changed by the Corporation's Board of
Directors without shareholder approval. These additional restrictions are as
follows:
1. Neither Fund will acquire or retain any security issued by a
company, an officer or director of which is an officer or director of the
Corporation or an officer, director or other affiliated person of any
Fund's investment adviser.
2. Neither Fund will invest more than 5% of such Fund's total assets
in securities of any issuer which has a record of less than three (3) years
of continuous operation, including the operation of any predecessor
business of a company which came into existence as a result of a merger,
consolidation, reorganization or purchase of substantially all of the
assets of such predecessor business.
3. Neither Fund will purchase illiquid securities if, as a result of
such purchase, more than 15% of the value of its net assets would be
invested in such securities.
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4. Each Fund's investments in warrants will be limited to 5% of such
Fund's net assets. Included within such 5%, but not to exceed 2% of the
value of such Fund's net assets, may be warrants which are not listed on
either the New York Stock Exchange or the American Stock Exchange.
5. Neither Fund will purchase the securities of other investment
companies except: (a) as part of a plan of merger, consolidation or
reorganization approved by the shareholders of such Fund; (b) securities of
registered open-end investment companies; or (c) securities of registered
closed-end investment companies on the open market where no commission
results, other than the usual and customary broker's commission. No
purchases described in (b) and (c) will be made if as a result of such
purchases (i) a Fund and its affiliated persons would hold more than 3% of
any class of securities, including voting securities, of any registered
investment company; (ii) more than 5% of such Fund's net assets would be
invested in shares of any one registered investment company; and (iii) more
than 25% of such Fund's net assets would be invested in shares of
registered investment companies.
The aforementioned percentage restrictions on investment or
utilization of assets refer to the percentage at the time an investment is made.
If these restrictions are adhered to at the time an investment is made, and such
percentage subsequently changes as a result of changing market values or some
similar event, no violation of a Fund's fundamental restrictions will be deemed
to have occurred. Any changes in a Fund's investment restrictions made by the
Board of Directors will be communicated to shareholders prior to their
implementation.
INVESTMENT CONSIDERATIONS
Illiquid Securities
Each Fund may invest up to 15% of its net assets in securities for
which there is no readily available market ("illiquid securities"). The 15%
limitation includes certain securities whose disposition would be subject to
legal restrictions ("restricted securities"). However certain restricted
securities that may be resold pursuant to Rule 144A under the Securities Act may
be considered liquid. Rule 144A permits certain qualified institutional buyers
to trade in privately placed securities not registered under the Securities Act.
Institutional markets for restricted securities have developed as a result of
Rule 144A, providing both ascertainable market values for Rule 144A securities
and the ability to liquidate these securities to satisfy redemption requests.
However an insufficient number of qualified institutional buyers interested in
purchasing Rule 144A securities held by a Fund could adversely affect their
marketability, causing the Fund to sell securities at unfavorable prices. The
Board of Directors of the Corporation has delegated to David W. Tice &
Associates, Inc. (the "Adviser") the day-to-day determination of the liquidity
of a security although it has retained oversight and ultimate responsibility for
such determinations. Although no definite
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quality criteria are used, the Board of Directors has directed the Adviser to
consider such factors as (i) the nature of the market for a security (including
the institutional private resale markets); (ii) the terms of these securities or
other instruments allowing for the disposition to a third party or the issuer
thereof (e.g. certain repurchase obligations and demand instruments); (iii) the
availability of market quotations; and (iv) other permissible factors.
Restricted securities may be sold in private negotiated or other
exempt transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act. When registration is required,
a Fund may be obligated to pay all or part of the registration expenses and a
considerable time may elapse between the decision to sell and the sale date. If,
during such period, adverse market conditions were to develop, the Fund might
obtain a less favorable price than the price which prevailed when it decided to
sell. Restricted securities will be priced at fair value as determined in good
faith by the Board of Directors.
Registered Investment Companies
Each Fund may invest up to 25% of its net assets in shares of
registered investment companies. However, under normal market conditions, a Fund
will not invest more than 5% of its net assets in such shares. Each Fund will
not purchase or otherwise acquire shares of any registered investment company
(except as part of a plan of merger, consolidation or reorganization approved by
the shareholders of the Fund) if (a) a Fund and its affiliated persons would own
more than 3% of any class of securities of such registered investment company or
(b) more than 5% of its net assets would be invested in the shares of any one
registered investment company. If a Fund purchases more than 1% of any class of
security of a registered open-end investment company, such investment will be
considered an illiquid investment.
Borrowing
Each Fund may borrow money for investment purposes. Borrowing for
investment purposes is known as leveraging. Leveraging investments, by
purchasing securities with borrowed money, is a speculative technique which
increases investment risk, but also increases investment opportunity. Since
substantially all of a Fund's assets will fluctuate in value, whereas the
interest obligations on borrowings may be fixed, the net asset value per share
of a Fund, when it leverages its investments, will increase more when the Fund's
portfolio assets increase in value and decrease more when the portfolio assets
decrease in value than would otherwise be the case. Interest costs on borrowings
may partially offset or exceed the returns on the borrowed funds. Under adverse
conditions, a Fund might have to sell portfolio securities to meet interest or
principal payments at a time investment considerations would not favor such
sales. As required by the Act, each Fund must maintain continuous asset coverage
(total assets, including assets acquired with borrowed funds, less liabilities
exclusive of borrowings) of 300% of all amounts borrowed. If, at any time, the
value of a Fund's assets should fail to meet this 300% coverage test, the Fund
within three business days will reduce the amount of the Fund's borrowings to
the extent necessary to meet this 300% coverage.
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Maintenance of this percentage limitation may result in the sale of portfolio
securities as a time when investment considerations otherwise indicate that it
would be disadvantageous to do so.
In addition to borrowing for investment purposes, each Fund is
authorized to borrow money from banks as a temporary measure for extraordinary
or emergency purposes in amounts not in excess of 5% of the value of the Fund's
total assets. For example a Fund may borrow money to facilitate management of
the Fund's portfolio by enabling the Fund to meet redemption requests when the
liquidation of portfolio investments would be inconvenient or disadvantageous.
Such borrowings will be promptly repaid and are not subject to the foregoing
300% asset coverage requirement.
Portfolio Turnover
Each Fund will generally purchase and sell securities and effect
transactions in futures contracts without regard to the length of time the
security has been held or the futures contract open and, accordingly, it can be
expected that the rate of portfolio turnover may be substantial. Each Fund may
sell a given security or close a futures contract, no matter for how long or
short a period it has been held in the portfolio, and no matter whether the sale
is at a gain or loss, if the Adviser believes that it is not fulfilling its
purpose. Since investment decisions are based on the anticipated contribution of
the security in question to the Fund's investment objective, the rate of
portfolio turnover is irrelevant when the Adviser believes a change is in order
to achieve those objectives, and the Fund's annual portfolio turnover rate may
vary from year to year. Pursuant to Securities and Exchange Commission
requirements, the portfolio turnover rate of each Fund is calculated without
regard to securities, including options and futures contracts, having a maturity
of less than one year. Each Fund may hold a significant portion of its assets in
assets which are excluded for purposes of calculating portfolio turnover.
High portfolio turnover in any year will result in the payment by the
Fund of above-average transaction costs and could result in the payment by
shareholders of above-average amounts of taxes on realized investment gains.
Short Sales
Each Fund may seek to realize additional gains through short sale
transactions in securities listed on one or more national securities exchanges,
or in unlisted securities. Short selling involves the sale of borrowed
securities. At the time a short sale is effected, a Fund incurs an obligation to
replace the security borrowed at whatever its price may be at the time the Fund
purchases it for delivery to the lender. The price at such time may be more or
less than the price at which the security was sold by the Fund. Until the
security is replaced, the Fund is required to pay the lender amounts equal to
any dividend or interest which accrue during the period of the loan. To borrow
the security, the Fund also may be required to pay a premium, which would
increase the cost of the security sold. The proceeds of the short sale will be
retained by the broker, to the extent necessary to meet margin requirements,
until the short position is closed.
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Until a Fund closes its short position or replaces the borrowed
security, the Fund will: (a) maintain cash or liquid securities at such a level
that the amount deposited in the account plus the amount deposited with the
broker as collateral will equal the current value of the security sold short; or
(b) otherwise cover the Fund's short position.
Futures Contracts and Options Thereon
The Prudent Bear Fund may purchase and write (sell) stock index
futures contracts as a substitute for a comparable market position in the
underlying securities. The Prudent Safe Harbor Fund may purchase and write
(sell) Debt Futures. Debt Futures are futures contracts on debt securities. The
Prudent Bear Fund and the Prudent Safe Harbor Fund may purchase and write (sell)
futures contracts on gold ("Gold Futures"). A futures contract obligates the
seller to deliver (and the purchaser to take delivery of) the specified
commodity on the expiration date of the contract. A stock index futures contract
obligates the seller to deliver (and the purchaser to take) an amount of cash
equal to a specific dollar amount times the difference between the value of a
specific stock index at the close of the last trading day of the contract and
the price at which the agreement is made. No physical delivery of the underlying
stocks in the index or of the debt security with respect to a Debt Future or of
gold with respect to a Gold Future is made. It is the practice of holders of
futures contracts to close out their positions on or before the expiration date
by use of offsetting contract positions and physical delivery is thereby
avoided.
The Prudent Bear Fund may purchase put and call options and write put
and call options on stock index futures contracts and the Prudent Safe Harbor
Fund may purchase put and call options and write put and call options on Debt
Futures. The Prudent Bear Fund and the Prudent Safe Harbor Fund may purchase put
and call options and write put and call options on Gold Futures. When a Fund
purchases a put or call option on a futures contract, the Fund pays a premium
for the right to sell or purchase the underlying futures contract for a
specified price upon exercise at any time during the option period. By writing a
call option on a futures contract, a Fund receives a premium in return for
granting to the purchaser of the option the right to buy from the Fund the
underlying futures contract for a specified price upon exercise at any time
during the option period. By writing a put option on a futures contract, a Fund
receives a premium in return for granting to the purchaser of the option, the
right to sell to the Fund the underlying futures contract for a specified price
upon exercise at any time during the option period.
Some futures and options strategies tend to hedge a Fund's equity,
debt or gold positions against price fluctuations, while other strategies tend
to increase market exposure. Whether a Fund realizes a gain or loss from futures
activities depends generally upon movements in the underlying stock index, Debt
Future or gold. The extent of a Fund's loss from an unhedged short position in
futures contracts or call options on futures contracts is potentially unlimited.
The Funds may engage in related closing transactions with respect to options on
futures contracts. The Funds will purchase or write options only on futures
contracts that are traded on a United States exchange or board of trade.
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Each Fund may purchase and sell futures contracts and options thereon
only to the extent that such activities would be consistent with the
requirements of Section 4.5 of the regulations under the Commodity Exchange Act
promulgated by the Commodity Futures Trading Commission (the "CFTC
Regulations"), under which the Fund would be excluded from the definition of a
"commodity pool operator." Under Section 4.5 of the CFTC Regulations, a Fund may
engage in futures transactions, either for "bona fide hedging" purposes, as this
term is defined in the CFTC Regulations, or for non-hedging purposes to the
extent that the aggregate initial margins and premiums required to establish
such non-hedging positions do not exceed 5% of the liquidation value of the
Fund's portfolio. In the case of an option on a futures contract that is
"in-the-money" at the time of purchase (i.e., the amount by which the exercise
price of the put option exceeds the current market value of the underlying
instrument or the amount by which the current market value of the underlying
instrument exceeds the exercise price of the call option), the in-the-money
amount may be excluded in calculating this 5% limitation.
When a Fund purchases or sells a futures contract, the Fund "covers"
its position. To cover its position, the Fund maintains (and marks-to-market on
a daily basis) cash or liquid securities that, when added to any amounts
deposited with a futures commission merchant as margin, are equal to its
obligations on the futures contract or otherwise cover its position. If a Fund
continues to engage in the described securities trading practices and properly
maintains assets, such assets will function as a practical limit on the amount
of leverage which the Fund may undertake and on the potential increase in the
speculative character of the Fund's outstanding portfolio securities.
Additionally, such maintained assets will assure the availability of adequate
funds to meet the obligations of the Fund arising from such investment
activities.
Each Fund may cover its long position in a futures contract by
purchasing a put option on the same futures contract with a strike price (i.e.,
an exercise price) as high or higher than the price of the futures contract, or,
if the strike price of the put is less than the price of the futures contract,
the Fund will maintain cash or high-grade liquid debt securities equal in value
to the difference between the strike price of the put and the price of the
futures contract. Each Fund may also cover its long position in a futures
contract by taking a short position in the instruments underlying the futures
contract, or by taking positions in instruments the prices of which are expected
to move relatively consistently with the futures contract. Each Fund may cover
its short position in a futures contract by taking a long position in the
instruments underlying the futures contract, or by taking positions in
instruments the prices of which are expected to move relatively consistently
with the futures contract.
Each Fund may cover its sale of a call option on a futures contract by
taking a long position in the underlying futures contract at a price less than
or equal to the strike price of the call option, or, if the long position in the
underlying futures contract is established at a price greater than the strike
price of the written call, the Fund will maintain cash or liquid securities
equal in value to the difference between the strike price of the call and the
price of the futures contract. Each Fund may also cover its sale of a call
option by taking positions in
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instruments the prices of which are expected to move relatively consistently
with the call option. Each Fund may cover its sale of a put option on a futures
contract by taking a short position in the underlying futures contract at a
price greater than or equal to the strike price of the put option, or if the
short position in the underlying futures contract is established at a price less
than the strike price of the written put, the Fund will maintain cash or liquid
securities equal in value to the difference between the strike price of the put
and the price of the futures contract. Each Fund may also cover its sale of a
put option by taking positions in instruments the prices of which are expected
to move relatively consistently with the put option.
Although the Funds intend to purchase and sell futures contracts only
if there is an active market for such contracts, no assurance can be given that
a liquid market will exist for any particular contract at any particular time.
Many futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the daily
limit has been reached in a particular contract, no trades may be made that day
at a price beyond that limit or trading may be suspended for specified periods
during the day. Futures contract prices could move to the limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of futures positions and potentially subjecting the Fund to
substantial losses. If trading is not possible, or the Fund determines not to
close a futures position in anticipation of adverse price movements, the Fund
will be required to make daily cash payments of variation margin. The risk that
a Fund will be unable to close out a futures position will be minimized by
entering into such transactions on a national exchange with an active and liquid
secondary market.
Index Options Transactions
The Prudent Bear Fund may purchase put and call options and write put
and call options on stock indexes. A stock index fluctuates with changes in the
market values of the stocks included in the index. Options on stock indexes give
the holder the right to receive an amount of cash upon exercise of the options.
Receipt of this cash amount will depend upon the closing level of the stock
index upon which the option is based being greater than (in the case of a call)
or less than (in the case of a put) the exercise price of the option. The amount
of cash received, if any, will be the difference between the closing price of
the index and the exercise price of the option, multiplied by a specified dollar
multiple. The writer (seller) of the option is obligated, in return for the
premiums received from the purchaser of the option, to make delivery of this
amount to the purchaser. Unlike the options on securities discussed below, all
settlements of index options transactions are in cash.
Some stock index options are based on a broad market index such as the
S&P 500 Index, the NYSE Composite Index or the AMEX Major Market Index, or on a
narrower index such as the Philadelphia Stock Exchange Over-the-Counter Index.
Options currently are traded on the Chicago Board of Options Exchange, the AMEX
and other exchanges. Over-the-counter index options, purchased over-the-counter
options and the cover for any written over-the-counter options would be subject
to the Fund's 15% limitation on investment in illiquid securities. See "Illiquid
Securities."
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Each of the exchanges has established limitations governing the
maximum number of call or put options on the same index which may be bought or
written (sold) by a single investor, whether acting alone or in concert with
others (regardless of whether such options are written on the same or different
exchanges or are held or written on one or more accounts or through one or more
brokers). Under these limitations, options positions of certain other accounts
advised by the same investment adviser are combined for purposes of these
limits. Pursuant to these limitations, an exchange may order the liquidation of
positions and may impose other sanctions or restrictions. These position limits
may restrict the number of listed options which the Fund may buy or sell;
however, the Adviser intends to comply with all limitations.
Index options are subject to substantial risks, including the risk of
imperfect correlation between the option price and the value of the underlying
securities comprising the stock index selected and the risk that there might not
be a liquid secondary market for the option. Because the value of an index
option depends upon movements in the level of the index rather than the price of
a particular stock, whether the Fund will realize a gain or loss from the
purchase or writing of options on an index depends upon movements in the level
of stock prices in the stock market generally or, in the case of certain
indexes, in an industry or market segment, rather than upon movements in the
price of a particular stock. Trading in index options requires different skills
and techniques than are required for predicting changes in the prices of
individual stocks. The Fund will not enter into an option position that exposes
the Fund to an obligation to another party, unless the Fund either (i) owns an
offsetting position in securities or other options; and/or (ii) maintains (and
marks-to-market, on a daily basis) cash or liquid securities that, when added to
the premiums deposited with respect to the option, are equal to its obligations
under the option positions that are not otherwise covered.
The Adviser may utilize index options as a technique to leverage the
portfolio of the Prudent Bear Fund. If the Adviser is correct in its assessment
of the future direction of stock prices, the share price of the Fund will be
enhanced. If the Adviser has the Fund take a position in options and stock
prices move in a direction contrary to the Adviser's forecast however, the Fund
would incur losses greater than the Fund would have incurred without the options
position.
Options on Securities
Each Fund may buy put and call options and write (sell) put and call
options on securities. By writing a call option and receiving a premium, the
Fund may become obligated during the term of the option to deliver the
securities underlying the option at the exercise price if the option is
exercised. By writing a put option and receiving a premium, the Fund may become
obligated during the term of the option to purchase the securities underlying
the option at the exercise price if the option is exercised. By buying a put
option, the Fund has the right, in return for a premium paid during the term of
the option, to sell the securities underlying the option at the exercise price.
By buying a call option, the Fund has the right, in return for a premium paid
during the term of the option, to purchase the securities underlying
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the option at the exercise price. Options on securities written by the Funds
will be traded on recognized securities exchanges.
When writing call options on securities, a Fund may cover its position
by owning the underlying security on which the option is written. Alternatively,
the Fund may cover its position by owning a call option on the underlying
security, on a share for share basis, which is deliverable under the option
contract at a price no higher than the exercise price of the call option written
by the Fund or, if higher, by owning such call option and depositing and
maintaining cash or liquid securities equal in value to the difference between
the two exercise prices. In addition, a Fund may cover its position by
depositing and maintaining cash or liquid securities equal in value to the
exercise price of the call option written by the Fund. The principal reason for
the Fund to write call options on securities held by the Fund is to attempt to
realize, through the receipt of premiums, a greater return than would be
realized on the underlying securities alone.
When writing put options on securities, a Fund may cover its position
by owning a put option on the underlying security, on a share for share basis,
which is deliverable under the option contract at a price no lower than the
exercise price of the put option written by the Fund or, if lower, by owning
such put option and depositing and maintaining cash or liquid securities equal
in value between the two exercise prices. In addition a Fund may cover its
position by depositing and maintaining cash or liquid securities equal in value
to the exercise price of the put option written by the Fund.
When a Fund wishes to terminate the Fund's obligation with respect to
an option it has written, the Fund may effect a "closing purchase transaction."
The Fund accomplishes this by buying an option of the same series as the option
previously written by the Fund. The effect of the purchase is that the writer's
position will be canceled. However, a writer may not effect a closing purchase
transaction after the writer has been notified of the exercise of an option.
When a Fund is the holder of an option, it may liquidate its position by
effecting a "closing sale transaction." The Fund accomplishes this by selling an
option of the same series as the option previously purchased by the Fund. There
is no guarantee that either a closing purchase or a closing sale transaction can
be effected. If any call or put option is not exercised or sold, the option will
become worthless on its expiration date.
A Fund will realize a gain (or a loss) on a closing purchase
transaction with respect to a call or put option previously written by the Fund
if the premium, plus commission costs, paid by the Fund to purchase the call
option or put option is less (or greater) than the premium, less commission
costs, received by the Fund on the sale of the call option or put option. The
Fund also will realize a gain if a call option or put option which the Fund has
written lapses unexercised, because the Fund would retain the premium.
A Fund will realize a gain (or a loss) on a closing sale transaction
with respect to a call or a put option previously purchased by the Fund if the
premium, less commission costs, received by the Fund on the sale of the call or
the put option is greater (or less) than the premium, plus commission costs,
paid by the Fund to purchase the call or the put option. If a
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put or a call option which the Fund has purchased expires out-of-the-money, the
option will become worthless on the expiration date, and the Fund will realize a
loss in the amount of the premium paid, plus commission costs.
Although certain securities exchanges attempt to provide continuously
liquid markets in which holders and writers of options can close out their
positions at any time prior to the expiration of the option, no assurance can be
given that a market will exist at all times for all outstanding options
purchased or sold by the Funds. In such event, a Fund would be unable to realize
its profits or limit its losses until the Fund would exercise options it holds
and the Fund would remain obligated until options it wrote were exercised or
expired.
Because option premiums paid or received by the Fund are small in
relation to the market value of the investments underlying the options, buying
and selling put and call options can be more speculative than investing directly
in common stocks.
Combined Option Positions
Each Fund may purchase and write options (subject to the limitations
described above) in combination with each other to adjust the risk and return
characteristics of the overall positions. Because combined options involve
multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
U.S. Treasury Securities
Each Fund may invest in U.S. Treasury Securities as "cover" for the
investment techniques the Fund employs. Each Fund may also invest in U.S.
Treasury Securities as part of a cash reserve or for liquidity purposes and the
Prudent Safe Harbor Fund may also invest in U.S. Treasury securities as part of
its principal investment strategy. U.S. Treasury Securities are backed by the
full faith and credit of the U.S. Treasury. U.S. Treasury Securities differ only
in their interest rates, maturities and dates of issuance. Treasury Bills have
maturities of one year or less. Treasury Notes have maturities of one to ten
years and Treasury Bonds generally have maturities of greater than ten years at
the date of issuance. Yields on short-, intermediate- and long-term U.S.
Treasury Securities are dependent on a variety of factors, including the general
conditions of the money and bond markets, the size of a particular offering and
the maturity of the obligation. Debt securities with longer maturities tend to
produce higher yields and are generally subject to potentially greater capital
appreciation and depreciation than obligations with shorter maturities and lower
yields. The market value of U.S. Treasury Securities generally varies inversely
with changes in market interest rates. An increase in interest rates, therefore,
would generally reduce the market value of a Fund's portfolio investments in
U.S. Treasury Securities, while a decline in interest rates would generally
increase the market value of a Fund's portfolio investments in these securities.
U.S. Treasury Securities may be purchased at a discount. Such
securities, when retired, may include an element of capital gain. Capital gains
or losses also may be realized upon the sale of U.S. Treasury Securities.
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Warrants and Convertible Securities
Each Fund may purchase rights and warrants to purchase equity
securities. Investments in rights and warrants are pure speculation in that they
have no voting rights, pay no dividends and have no rights with respect to the
assets of the corporation issuing them. Rights and warrants basically are
options to purchase equity securities at a specific price valid for a specific
period of time. They do not represent ownership of the securities, but only the
right to buy them. Rights and warrants differ from call options in that rights
and warrants are issued by the issuer of the security which may be purchased on
their exercise, whereas call options may be written or issued by anyone. The
prices of rights (if traded independently) and warrants do not necessarily move
parallel to the prices of the underlying securities. Rights and warrants involve
the risk that a Fund could lose the purchase value of the warrant if the warrant
is not exercised prior to its expiration. They also involve the risk that the
effective price paid for the warrant added to the subscription price of the
related security may be greater than the value of the subscribed security's
market price.
Each Fund may also invest in convertible securities (debt securities
or preferred stocks of corporations which are convertible into or exchangeable
for common stocks). The Adviser will select only those convertible securities
for which it believes (a) the underlying common stock is a suitable investment
for the Fund and (b) a greater potential for total return exists by purchasing
the convertible security because of its higher yield and/or favorable market
valuation. Each Fund may invest up to 5% of its net assets in convertible debt
securities rated less than investment grade. Debt securities rated less than
investment grade are commonly referred to as "junk bonds."
Investments in convertible securities rated less than investment grade
("high yield convertible securities") are subject to a number of risk factors.
The market for high yield convertible securities is subject to substantial
volatility. Issuers of high yield convertible securities may be of low
creditworthiness and the high yield convertible securities are likely to be
subordinated to the claims of senior lenders. The secondary market for high
yield convertible securities may at times become less liquid or respond to
adverse publicity or investor perceptions making it more difficult for the Funds
to value accurately such securities or dispose of them.
Money Market Instruments
Each Fund may invest in cash and money market securities. The Fund may
do so to "cover" investment techniques, when taking a temporary defensive
position or to have assets available to pay expenses, satisfy redemption
requests or take advantage of investment opportunities. The money market
securities in which the Funds invest include U.S. Treasury Bills, commercial
paper, commercial paper master notes and repurchase agreements.
Each Fund may invest in commercial paper or commercial paper master
notes rated, at the time of purchase, A-1 or A-2 by Standard & Poor's
Corporation or Prime-1 or Prime-2 by Moody's Investors Service, Inc. Commercial
paper master notes are demand
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instruments without a fixed maturity bearing interest at rates that are fixed to
known lending rates and automatically adjusted when such lending rates change.
Under a repurchase agreement, a Fund purchases a debt security and
simultaneously agrees to sell the security back to the seller at a mutually
agreed-upon future price and date, normally one day or a few days later. The
resale price is greater than the purchase price, reflecting an agreed-upon
market interest rate during the purchaser's holding period. While the maturities
of the underlying securities in repurchase transactions may be more than one
year, the term of each repurchase agreement will always be less than one year.
The Funds will enter into repurchase agreements only with member banks of the
Federal Reserve system or primary dealers of U.S. Government Securities. The
Adviser will monitor the creditworthiness of each of the firms which is a party
to a repurchase agreement with the Fund. In the event of a default or bankruptcy
by the seller, the Fund will liquidate those securities (whose market value,
including accrued interest, must be at least equal to 100% of the dollar amount
invested by the Fund in each repurchase agreement) held under the applicable
repurchase agreement, which securities constitute collateral for the seller's
obligation to pay. However, liquidation could involve costs or delays and, to
the extent proceeds from the sale of these securities were less than the
agreed-upon repurchase price the Fund would suffer a loss. The Funds also may
experience difficulties and incur certain costs in exercising its rights to the
collateral and may lose the interest the Fund expected to receive under the
repurchase agreement. Repurchase agreements usually are for short periods, such
as one week or less, but may be longer. It is the current policy of the Funds to
treat repurchase agreements that do not mature within seven days as illiquid for
the purposes of its investments policies.
Each Fund may also invest in securities issued by other investment
companies that invest in high quality, short-term debt securities (i.e., money
market instruments). In addition to the advisory fees and other expenses the
Fund bears directly in connection with its own operations, as a shareholder of
another investment company, the Fund would bear its pro rata portion of the
other investment company's advisory fees and other expenses, and such fees and
other expenses will be borne indirectly by the Fund's shareholders.
Foreign Securities and American Depository Receipts
Each of the Funds may invest in common stocks of foreign issuers which
are publicly traded on U.S. exchanges or in the U.S. over-the-counter market
either directly or in the form of American Depository Receipts ("ADRs"). ADRs
are receipts issued by an American bank or trust company evidencing ownership of
underlying securities issued by a foreign issuer. ADR prices are denominated in
United States dollars; the underlying security may be denominated in a foreign
currency. Investments in such securities also involve certain inherent risks,
such as political or economic instability of the issuer or the country of issue,
the difficulty of predicting international trade patterns and the possibility of
imposition of exchange controls. Such securities may also be subject to greater
fluctuations in price than securities of domestic corporations. In addition,
there may be less publicly available information about a foreign company than
about a domestic company. Foreign companies generally are not subject
13
<PAGE>
to uniform accounting, auditing and financial reporting standards comparable to
those applicable to domestic companies. Dividends and interest on foreign
securities may be subject to foreign withholding taxes. To the extent such taxes
are not offset by credits or deductions allowed to investors under U.S. federal
income tax laws, such taxes may reduce the net return to shareholders. Although
the Funds intend to invest in securities of foreign issuers domiciled in nations
which the Adviser considers as having stable and friendly governments, there is
the possibility of expropriation, confiscation, taxation, currency blockage or
political or social instability which could affect investments of foreign
issuers domiciled in such nations.
The Funds will invest only in ADRs which are "sponsored". Sponsored
facilities are based on an agreement with the issuer that sets out rights and
duties of the issuer, the depository and the ADR holder. This agreement also
allocates fees among the parties. Most sponsored agreements also provide that
the depository will distribute shareholder notices, voting instruments and other
communications.
Foreign securities held by the Prudent Safe Harbor Fund may be held by
foreign subcustodians that satisfy certain eligibility requirements. However
foreign subcustodian arrangements are significantly more expensive than domestic
custody.
Foreign Currency Considerations
Even though the Funds may hold securities denominated or traded in
foreign currencies, a Fund's performance is measured in terms of U.S. dollars,
which may subject the Fund to foreign currency risk. Foreign currency risk is
the risk that the U.S. dollar value of foreign securities (and any income
generated therefrom) held by the Fund may be affected favorably or unfavorably
by changes in foreign currency exchange rates and exchange control regulations.
Therefore, the net asset value of a Fund may go up or down as the value of the
dollar rises or falls compared to a foreign currency. To manage foreign currency
fluctuations or facilitate the purchase and sale of foreign securities for a
Fund, the Adviser may engage in foreign currency transactions involving (1) the
purchase and sale of forward foreign currency exchange contracts (agreements to
exchange one currency for another at a future date); (2) options on foreign
currencies; (3) currency futures contracts; or (4) options on currency futures
contracts. Although a Fund may use foreign currency transactions to protect
against adverse currency movements, foreign currency transactions involve the
risk that the Adviser may not accurately predict the currency movements, which
could adversely affect a Fund's total return.
A forward foreign currency contract involves an obligation to purchase
or sell a specific currency at a future date, which may be any fixed number of
days from the date of the contract agreed upon by the parties, at a price set at
the time of the contract. These contracts are principally traded in the
inter-bank market conducted directly between currency traders (usually large
commercial banks) and their customers. A forward contract generally has no
deposit requirement and no commissions are charged at any stage for trades.
When a Fund enters into a contract for the purchase or sale of a
security denominated in a foreign currency, it may desire to "lock in" the U.S.
dollar price of the
14
<PAGE>
security. By entering into a forward contract for the purchase or sale of a
fixed amount of U.S. dollars equal to the amount of foreign currency involved in
the underlying security transaction, a Fund can protect itself against a
possible loss, resulting from an adverse change in the relationship between the
U.S. dollar and the subject foreign currency during the period between the date
the security is purchased or sold and the date on which the payment is made or
received.
When the Adviser believes that a particular foreign currency may
suffer a substantial decline against the U.S. dollar, it may enter into a
forward contract to sell a fixed amount of the foreign currency approximating
the value of some or all of the portfolio securities of a Fund denominated in
such foreign currency ("position hedging"). The precise matching of the forward
contract amounts and the value of the securities involved will not generally be
possible since the future value of such securities in foreign currencies will
change as a consequence of market movements in the value of those securities
between the date the forward contract is entered into and the date it matures.
The projection of short-term currency market movement is extremely difficult and
the successful execution of a short-term hedging strategy is highly uncertain. A
Fund will not enter into such forward contracts or maintain a net exposure to
such contracts where the consummation of the contracts would obligate it to
deliver an amount of foreign currency in excess of the value of its securities
or other assets denominated in that currency. Under normal circumstances, the
Adviser considers the long-term prospects for a particular currency and
incorporate the prospect into its overall long-term diversification strategies.
The Adviser believes that it is important to have the flexibility to enter into
such forward contracts when it determines that the best interests of a Fund will
be served.
At the maturity of a forward contract, a Fund may either sell the
portfolio securities and make delivery of the foreign currency, or it may retain
the securities and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract obligating it to purchase, on
the same maturity date, the same amount of foreign currency.
If a Fund retains the portfolio securities and engages in an
offsetting transaction, the Fund will incur a gain or a loss to the extent that
there has been movement in forward contract prices. If a Fund engages in an
offsetting transaction, it may subsequently enter into a forward contract to
sell the foreign currency. Should forward prices decline during the period when
a Fund entered into the forward contract for the sale of a foreign currency and
the date it entered into an offsetting contract for the purchase of the foreign
currency, the Fund will realize a gain to the extent the price of the currency
it has agreed to sell exceeds the price of the currency it has agreed to
purchase. Should forward prices increase, the Fund will suffer a loss to the
extent that the price of the currency it has agreed to purchase exceeds the
price of the currency it has agreed to sell.
Shareholders should note that: (1) foreign currency hedge transactions
do not protect against or eliminate fluctuations in the prices of particular
portfolio securities (i.e., if the price of such securities declines due to an
issuer's deteriorating credit situation); and (2) it
15
<PAGE>
is impossible to forecast with precision the market value of securities at the
expiration of a forward contract. Accordingly, a Fund may have to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the Fund's securities is less than the amount
of the foreign currency upon expiration of the contract. Conversely, a Fund may
have to sell some of its foreign currency received upon the sale of a portfolio
security if the market value of the Fund's securities exceed the amount of
foreign currency the Fund is obligated to deliver. Each Fund's dealings in
forward foreign currency exchange contracts will be limited to the transactions
described above.
Although the Funds value their assets daily in terms of U.S. dollars,
they do not intend to convert their holdings of foreign currencies into U.S.
dollars on a daily basis. The Funds will do so from time to time and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they realize a profit based on the
difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to a Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
A Fund may purchase and sell currency futures and purchase and write
currency options to increase or decrease its exposure to different foreign
currencies. The uses and risks of currency options and futures are similar to
options and futures relating to securities or indices, as discussed earlier in
the Statement of Additional Information. Currency futures contracts are similar
to forward foreign currency contracts, except that they are traded on exchanges
(and have margin requirements) and are standardized as to contract size and
delivery date. Most currency futures contracts call for payment or delivery in
U.S. dollars. The underlying instrument of a currency option may be a foreign
currency, which generally is purchased or delivered in exchange for U.S.
dollars, or may be a futures contract. The purchaser of a currency call obtains
the right to purchase the underlying currency, and the purchaser of a currency
put obtains the right to sell the underlying currency.
DIRECTORS AND OFFICERS OF THE CORPORATION
As a Maryland corporation, the business and affairs of the Corporation
are managed by its officers under the direction of its Board of Directors. The
name, age, address, principal occupation(s) during the past five years, and
other information with respect to each of the directors and officers of the
Corporation are as follows:
* David W. Tice -- Director, President and Treasurer. Mr. Tice, 44,
has been President of David W. Tice & Associates, Inc. (the "Adviser") since
1993. Between 1988 and 1993 Mr. Tice conducted a predecessor investment advisory
business as a sole proprietorship. Mr. Tice is also the President and sole
shareholder of BTN Research, Inc., a registered broker-dealer. His address is
8140 Walnut Hill Lane, Suite 300, Dallas, TX 75231.
- --------------------
*Messrs. Tice and Jahnke are interested persons of the Corporation (as
defined in the Investment Company Act of 1940).
16
<PAGE>
* Gregg Jahnke -- Director, Vice President and Secretary. Mr. Jahnke,
40, has been employed by both Mr. Tice and the Adviser as an investment analyst
since 1991. Currently he is an analyst and senior strategist of the Adviser.
From 1987 through 1994 Mr. Jahnke also was a securities analyst for JKE Equity
Research, a Fort Worth, Texas investment advisory firm. His address is 8140
Walnut Hill Lane, Suite 300, Dallas, TX 75231.
David Eric Luck -- Director. Mr. Luck, 44, has been President of
Redstone Oil & Gas Company since 1988. His address is 9223 Club Glen Drive,
Dallas, TX 75243.
Buril Ragsdale -- Director. Mr. Ragsdale, 64, has been employed by
ENSEARCH Corporation as a senior development specialist and senior economic
specialist since 1976. His address is 9149 Emberglow Lane, Dallas, TX 75243.
For the fiscal year ended September 30, 2000, the Corporation's
standard method of compensating directors is to pay each director who is not an
interested person of the Corporation a fee of $750 for each meeting of the Board
of Directors attended. (During the fiscal year ended September 30, 1999, the
Corporation paid each director who was not an interested person of the
Corporation a fee of $250 for each meeting of the Board of Directors attended.)
The Corporation also may reimburse its directors for travel expenses incurred in
order to attend meetings of the Board of Directors.
The table below sets forth the compensation paid by the Corporation to
each of the current directors of the Corporation during the fiscal year ended
September 30, 1999:
<TABLE>
COMPENSATION TABLE
<CAPTION>
Total
Compensation
Estimated from Corporation
Aggregate Pension or Retirement Annual and Fund
Name of Compensation Benefits Accrued As Benefits Upon Complex Paid to
Person from Corporation Part of Fund Expenses Retirement Directors*
------ ---------------- --------------------- ---------- ---------
<S> <C> <C> <C> <C>
David W. Tice $0 $0 $0 $0
Gregg Jahnke $0 $0 $0 $0
David Eric Luck $1,000 $0 $0 $1,000
Jerry Marlin, M.D.** $1,000 $0 $0 $1,000
Buril Ragsdale $1,000 $0 $0 $1,000
- -------------
*The Funds are the only investment companies in the Fund Complex.
**Dr. Marlin resigned as a director of the Corporation effective December 2, 1999.
</TABLE>
The Corporation and the Adviser have adopted a code of ethics pursuant
to Rule 17j-1 under the Act. The code of ethics permits personnel subject
thereto to invest in securities, including securities that may be purchased or
held by the Funds. The code of ethics prohibits, among other things, persons
subject thereto from purchasing or selling securities if
17
<PAGE>
they know at the time of such purchase or sale that the security is being
considered for purchase or sale by the Funds or is being purchased or sold by
the Funds.
OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS
Set forth below are the names and addresses of all holders of the
Prudent Bear Fund's shares who as of December 31, 1999 held of record more than
5% of the Fund's then outstanding shares. The shares owned by Charles Schwab &
Co., Inc., National Financial Services Corp., National Investor Services Corp.
and Donaldson Lufkin & Jenrette Securities Corp. were owned of record only. The
Prudent Bear Fund knows of no person who beneficially owned 5% or more of the
Fund's outstanding shares. All officers and directors of the Corporation as a
group beneficially owned less than 1% of the Prudent Bear Fund's outstanding
shares. (The Prudent Safe Harbor Fund and the Prudent Bear Large Cap Fund will
not commence operations until after January 31, 2000.)
Name and Address of Beneficial Owner Number of Percent of
- ------------------------------------ --------- ----------
Shares Class
------ -----
Charles Schwab & Co., Inc. 11,055,599 27.48%
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 6,191,709 15.39%
One World Financial Center
200 Liberty Street
New York, NY 10281-1003
National Investor Services Corp. 3,269,684 8.13%
55 Water Street - Floor 32
New York, NY 10281-1003
Donaldson Lufkin & Jenrette 2,541,863 6.32%
Securities Corp.
P.O. Box 2052
Jersey City, NJ 07303-2052
INVESTMENT ADVISER, ADMINISTRATOR, CUSTODIAN,
TRANSFER AGENT AND ACCOUNTING SERVICES AGENT
The investment adviser to each Fund is David W. Tice & Associates,
Inc., 8140 Walnut Hill Lane, Suite 405, Dallas, Texas 75231 (the "Adviser"). The
Adviser is controlled by David W. Tice, its President and sole shareholder.
18
<PAGE>
Pursuant to the investment advisory agreement entered into between the
Corporation and the Adviser with respect to each Fund (the "Advisory
Agreement"), the Adviser furnishes continuous investment advisory services to
each Fund. The Adviser supervises and manages the investment portfolio of each
Fund and, subject to such policies as the Board of Directors of the Corporation
may determine, directs the purchase or sale of investment securities in the
day-to-day management of each Fund. Under the Advisory Agreement, the Adviser,
at its own expense and without separate reimbursement from the Funds, furnishes
office space and all necessary office facilities, equipment and executive
personnel for managing the Funds and maintaining their organization; bears all
sales and promotional expenses of the Funds, other than distribution expenses
paid by the Funds pursuant to the Funds' Service and Distribution Plans, and
expenses incurred in complying with the laws regulating the issue or sale of
securities; and pays salaries and fees of all officers and directors of the
Corporation (except the fees paid to directors who are not officers of the
Corporation). During the fiscal years ended September 30, 1999, 1998 and 1997,
the Prudent Bear Fund incurred advisory fees of $1,786,648, $868,169 and
$237,306. (The Prudent Safe Harbor Fund will commence operations on February 1,
2000.)
Each Fund pays all of its expenses not assumed by the Adviser,
including, but not limited to, the costs of preparing and printing its
registration statements required under the Securities Act of 1933 and the Act
and any amendments thereto, the expenses of registering its shares with the
Securities and Exchange Commission and in the various states, the printing and
distribution cost of prospectuses mailed to existing shareholders, the cost of
director and officer liability insurance, reports to shareholders, reports to
government authorities and proxy statements, interest charges, brokerage
commissions and expenses incurred in connection with portfolio transactions. The
Corporation also pays the fees of directors who are not officers of the
Corporation, salaries of administrative and clerical personnel, association
membership dues, auditing and accounting services, fees and expenses of any
custodian or trustees having custody of assets of the Funds, expenses of
calculating net asset values and repurchasing and redeeming shares, and charges
and expenses of dividend disbursing agents, registrars and share transfer
agents, including the cost of keeping all necessary shareholder records and
accounts and handling any problems relating thereto.
The Adviser has undertaken to reimburse each Fund to the extent that
its aggregate annual operating expenses, including the investment advisory fee,
but excluding interest, dividends on short positions, taxes, brokerage
commissions and other costs incurred in connection with the purchase or sale of
portfolio securities, and extraordinary items, exceed that percentage of the
average net assets of the Fund for such year, as determined by valuations made
as of the close of each business day of the year, which is the most restrictive
percentage provided by the state laws of the various states in which the shares
of the Funds are qualified for sale or, if the states in which the shares of the
Funds are qualified for sale impose no such restrictions, 3%. As of the date of
this Statement of Additional Information, no such state law provision was
applicable to the Funds. Each Fund monitors its expense ratio on a monthly
basis. If the accrued amount of the expenses of a Fund exceeds the expense
limitation, the Fund creates an account receivable from the Adviser for the
amount of such excess. In such a situation the monthly payment of the Adviser's
fee will be reduced by the amount of such
19
<PAGE>
excess (and if the amount of such excess in any month is greater than the
monthly payment of the Adviser's fee, the Adviser will pay the Fund the amount
of such difference), subject to adjustment month by month during the balance of
the Fund's fiscal year if accrued expenses thereafter fall below this limit.
During the fiscal years ended September 30, 1999, 1998 and 1997, the Adviser was
not required to reimburse the Prudent Bear Fund for excess expenses. (The
Prudent Safe Harbor Fund will commence operations on February 1, 2000.)
Each Advisory Agreement will remain in effect as long as its
continuance is specifically approved at least annually (i) by the Board of
Directors of the Corporation or by the vote of a majority (as defined in the
Act) of the outstanding shares of the applicable Fund, and (ii) by the vote of a
majority of the directors of the Corporation who are not parties to the Advisory
Agreement or interested persons of the Adviser, cast in person at a meeting
called for the purpose of voting on such approval. Each Advisory Agreement
provides that it may be terminated at any time without the payment of any
penalty, by the Board of Directors of the Corporation or by vote of the majority
of the applicable Fund's shareholders on sixty (60) days' written notice to the
Adviser, and by the Adviser on the same notice to the Corporation, and that it
shall be automatically terminated if it is assigned.
Each Advisory Agreement provides that the Adviser shall not be liable
to the Corporation or its shareholders for anything other than willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations or duties. Each Advisory Agreement also provides that the Adviser
and its officers, directors and employees may engage in other businesses, devote
time and attention to any other business whether of a similar or dissimilar
nature, and render services to others.
The administrator to the Corporation is Firstar Mutual Fund Services,
LLC, 615 East Michigan Street, Milwaukee, Wisconsin 53202 (the "Administrator").
Pursuant to separate Fund Administration Servicing Agreements entered into
between the Corporation and the Administrator relating to each Fund (the
"Administration Agreements"), the Administrator maintains the books, accounts
and other documents required by the Act, responds to shareholder inquiries,
prepares each Fund's financial statements and tax returns, prepares certain
reports and filings with the Securities and Exchange Commission and with state
Blue Sky authorities, furnishes statistical and research data, clerical,
accounting and bookkeeping services and stationery and office supplies, keeps up
and maintains each Fund's financial and accounting records and generally assists
in all aspects of the Funds' operations. The Administrator, at its own expense
and without reimbursement from the Funds, furnishes office space and all
necessary office facilities, equipment and executive personnel for performing
the services required to be performed by it under the Administration Agreements.
For the foregoing, the Administrator will receive from (i) the Prudent Bear Fund
a fee, paid monthly, at an annual rate of .07% of the first $200,000,000 of such
Fund's average net assets, .05% of the next $300,000,000 of such Fund's average
net assets, .04% of the next $500,000,000 of such Fund's average net assets, and
.03% of such Fund's average net assets in excess of $1,000,000,000; and (ii)
from the Prudent Safe Harbor Fund a fee, paid monthly, at an annual rate of .08%
of the first $200,000,000 of each such Fund's average net assets, .06% of the
next $300,000,000 of each such Fund's average net assets, .05% of the next
$500,000,000 of
20
<PAGE>
such Fund's average net assets, and .04% of each such Fund's average net assets
in excess of $1,000,000. Notwithstanding the foregoing, the Administrator's
minimum annual fee is $50,000 for the Prudent Bear Fund and $45,000 for the
Prudent Safe Harbor Fund. Each Administration Agreement will remain in effect
until terminated by either party. Each Administration Agreement may be
terminated at any time, without the payment of any penalty, by the Board of
Directors of the Corporation upon the giving of ninety (90) days' written notice
to the Administrator, or by the Administrator upon the giving of ninety (90)
days' written notice to the Corporation. The total fees incurred by the Prudent
Bear Fund pursuant to its Administration Agreement for the fiscal years ended
September 30, 1999, 1998 and 1997 were $95,375, $35,798 and $24,914,
respectively. (The Prudent Safe Harbor Fund will commence operations on February
1, 2000.)
Under the Administration Agreements, the Administrator shall exercise
reasonable care and is not liable for any error or judgment or mistake of law or
for any loss suffered by the Corporation in connection with the performance of
the Administration Agreement, except a loss resulting from willful misfeasance,
bad faith or negligence on the part of the Administrator in the performance of
its duties under the Administration Agreement.
Firstar Bank, NA, an affiliate of Firstar Mutual Fund Services, LLC,
serves as custodian of the assets of the Prudent Bear Fund and the Prudent Safe
Harbor Fund pursuant to Custody Agreements. Under the Custody Agreements,
Firstar Bank, NA has agreed to (i) maintain a separate account in the name of
each Fund, (ii) make receipts and disbursements of money on behalf of each Fund,
(iii) collect and receive all income and other payments and distributions on
account of each Fund's portfolio investments, (iv) respond to correspondence
from shareholders, security brokers and others relating to its duties and (v)
make periodic reports to each Fund concerning each Fund's operations.
Firstar Mutual Fund Services, LLC also serves as transfer agent and
dividend disbursing agent for the Funds under separate Shareholder Servicing
Agent Agreements. As transfer and dividend disbursing agent, Firstar Mutual Fund
Services, LLC has agreed to (i) issue and redeem shares of each Fund, (ii) make
dividend and other distributions to shareholders of each Fund, (iii) respond to
correspondence by Fund shareholders and others relating to its duties, (iv)
maintain shareholder accounts, and (v) make periodic reports to the Funds.
In addition the Corporation has entered into Fund Accounting Servicing
Agreements with Firstar Mutual Fund Services, LLC pursuant to which Firstar
Mutual Fund Services, LLC has agreed to maintain the financial accounts and
records of each Fund and provide other accounting services to the Funds. For its
accounting services, Firstar Mutual Fund Services, LLC is entitled to receive
fees from (i) the Prudent Bear Fund, payable monthly, based on the total annual
rate of $22,000 for the first $40 million in average net assets of the Fund,
.01% on the next $200 million of average net assets, and .005% on average net
assets exceeding $240 million (subject to an annual minimum of $22,000); and
(ii) the Prudent Safe Harbor Fund, payable monthly, based on the total annual
rate of $42,000 for the first $100 million in average net assets of the Fund,
.03% on the next $200 million of average
21
<PAGE>
net assets, and .015% on average net assets exceeding $300 million (subject to
an annual minimum of $42,000). Firstar Mutual Fund Services, LLC is also
entitled to certain out of pocket expenses, including pricing expenses. For the
fiscal years ended September 30, 1999, 1998 and 1997, the Prudent Bear Fund
incurred fees of $60,509, $35,633 and $25,693, respectively, pursuant to its
Fund Accounting Servicing Agreement. (The Prudent Safe Harbor Fund will commence
operations on February 1, 2000.)
DETERMINATION OF NET ASSET VALUE
The net asset value of each Fund will be determined as of the close of
regular trading (currently 4:00 p.m. Eastern time) on each day the New York
Stock Exchange is open for trading. The New York Stock Exchange is open for
trading Monday through Friday except New Year's Day, Dr. Martin Luther King, Jr.
Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Additionally, when any of the aforementioned
holidays falls on a Saturday, the New York Stock Exchange will not be open for
trading on the preceding Friday and when any such holiday falls on a Sunday, the
New York Stock Exchange will not be open for trading on the succeeding Monday,
unless unusual business conditions exist, such as the ending of a monthly or the
yearly accounting period. The New York Stock Exchange also may be closed on
national days of mourning. The staff of the Securities and Exchange Commission
considers the New York Stock Exchange to be closed on any day when it is not
open for trading the entire day. On those days the Funds may, but are not
obligated to, determine their net asset values. The net asset value of the
Prudent Bear Fund is calculated separately for the No Load Shares and the Class
C Shares by adding the value of all portfolio securities and other assets that
are allocated to the No Load Shares or Class C Shares, as the case may be,
subtracting the liabilities charged to the No Load Shares or Class C Shares, as
the case may be, and dividing the result by the number of outstanding shares of
the No Load Shares or the Class C Shares, as the case may be. The No Load Shares
and the Class C Shares bear differing class-specific expenses, such as 12b-1
fees. (The Prudent Safe Harbor Fund will initially offer only one class of
shares, No Load Shares).
Foreign securities trading may not take place on all days when the New
York Stock Exchange is open, or may take place on Saturdays and other days when
the New York Stock Exchange is not open and a Fund's net asset value is not
calculated. When determining net asset value, the Fund values foreign securities
primarily listed and/or traded in foreign markets at their market value as of
the close of the last primary market where the securities traded. Securities
trading in European countries and Pacific Rim countries is normally completed
well before 3:00 P.M. Central Time. Unless material, as determined by the
Adviser under the supervision of the Board of Directors, events affecting the
valuation of Fund securities occurring between the time its net asset value is
determined and the close of the New York Stock Exchange will not be reflected in
such net asset value.
Common stocks and securities sold short that are listed on a
securities 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
securities is taken from the exchange where the
22
<PAGE>
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 prices.
Unlisted equity securities for which market quotations are readily available are
valued at the average of the current bid and asked prices. Options purchased or
written by a Fund are valued at the average of the current bid and asked prices.
The value of a futures contract equals the unrealized gain or loss on the
contract that is determined by marking the contract to the current settlement
price for a like contract acquired on the day on which the futures contract is
being valued. A settlement price may not be moved if the market makes a limit
move in which event the futures contract will be valued at its fair value as
determined by the Adviser in accordance with procedures approved by the Board of
Directors. Debt securities are valued at the latest bid prices furnished by
independent pricing services. Other assets and securities for which no
quotations are readily available are valued at fair value as determined in good
faith by the Adviser in accordance with procedures approved by the Board of
Directors of the Corporation. Short-term instruments (those with remaining
maturities of 60 days or less) are valued at amortized cost, which approximates
market. The Funds price foreign securities in terms of U.S. dollars at the
official exchange rate. Alternatively, they may price these securities at the
average of the current bid and asked prices of such currencies against the
dollar last quoted by a major bank that is a regular participant in the foreign
exchange market, or on the basis of a pricing service that takes into account
the quotes provided by a number of such major banks. If the Funds do not have
any of these alternatives available to them or the alternatives do not provide a
suitable method for converting a foreign currency into U.S. dollars, the Adviser
in accordance with procedures approved by the Board of Directors of the
Corporation will establish a conversion rate for such currency.
DISTRIBUTION OF SHARES
The Corporation has adopted four Service and Distribution Plans (the
"Plans"). There is a Plan for each class of shares of the Corporation (i.e. for
the No Load Shares of the Prudent Bear Fund, the Prudent Safe Harbor Fund and
the Prudent Bear Large Cap Fund and for the Class C Shares of the Prudent Bear
Large Cap Fund). The Plans were adopted in anticipation that the Funds will
benefit from the Plans through increased sales of shares, thereby reducing each
Fund's expense ratio and providing the Adviser with greater flexibility in
management. The three Plans for the No Load Shares authorize payments by each
Fund in connection with the distribution of its No Load Shares at an annual
rate, as determined from time to time by the Board of Directors, of up to 0.25%
of a Fund's average daily net assets. The Plan for the Class C Shares authorizes
payments by the Prudent Bear Fund in connection with the distribution of its
Class C Shares at an annual rate, as determined from time to time by the Board
of Directors, of up to 1.00% of a Fund's average daily net assets. Amounts paid
under a Plan by a 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. To the
extent any activity is one which a Fund may finance without a plan pursuant to
Rule
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12b-1, the Fund may also make payments to finance such activity outside of the
Plan and not subject to its limitations.
Each Plan may be terminated by any Fund at any time by a vote of the
directors of the Corporation who are not interested persons of the Corporation
and who have no direct or indirect financial interest in the Plan or any
agreement related thereto (the "Rule 12b-1 Directors") or by a vote of a
majority of the outstanding shares of either the applicable Fund's No Load
Shares with respect to its Plan or the Prudent Bear Fund's Class C Shares with
respect to its Plan. Messrs. Luck and Ragsdale are currently the Rule 12b-1
Directors. Any change in a Plan that would materially increase the distribution
expenses of a Fund provided for in the Plan requires approval of the Board of
Directors, including the Rule 12b-1 Directors, and a majority of the applicable
Fund's No Load Shares with respect to its Plan and a majority of the Prudent
Bear Fund's Class C Shares with respect to its Plan.
While the Plans are in effect, the selection and nomination of
directors who are not interested persons of the Corporation will be committed to
the discretion of the directors of the Corporation who are not interested
persons of the Corporation. The Board of Directors of the Corporation must
review the amount and purposes of expenditures pursuant to the Plans quarterly
as reported to it by a Distributor, if any, or officers of the Corporation. The
Plans will continue in effect for as long as their continuance is specifically
approved at least annually by the Board of Directors, including the Rule 12b-1
Directors. During the fiscal year ended September 30, 1999, the Prudent Bear
Fund incurred fees of $357,186 pursuant to its Plan for the No Load Shares,
$296,871 of which were used to pay selling dealers, $25,140 of which were used
to pay printing and mailing expenses and $35,175 of which were used to pay
advertising expenses. During the fiscal year ended September 30, 1999, the
Prudent Bear Fund incurred fees of $576 pursuant to its Plan for the Class C
Shares, all of which were used to pay selling dealers. (The Prudent Safe Harbor
Fund will commence operations on February 1, 2000.)
AUTOMATIC INVESTMENT PLAN AND TELEPHONE PURCHASES
The Funds offer an automatic investment option pursuant to which money
will be moved from a shareholder's bank account to the shareholder's Fund
account on the schedule (e.g., monthly, bimonthly [every other month], or
quarterly the shareholder selects. The minimum transaction amount is $100.
The Funds offer a telephone purchase option pursuant to which money
will be moved from a shareholder's bank account to the shareholder's Fund
account upon request. Only bank accounts held at domestic financial institutions
that are Automated Clearing House (ACH) members can be used for telephone
transactions. To have Fund shares purchased at net asset value determined as of
the close of regular trading on a given date, Firstar Mutual Fund Services, LLC
must receive both the purchase order and payment by Electronic Funds Transfer
through the ACH System before the close of regular trading on such date. Most
transfers are completed the same business day. The minimum amount that can be
transferred by telephone is $100.
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REDEMPTION OF SHARES
A shareholder's right to redeem shares of the Funds will be suspended
and the right to payment postponed for more than seven days for any period
during which the New York Stock Exchange is closed because of financial
conditions or any other extraordinary reason and may be suspended for any period
during which (a) trading on the New York Stock Exchange is restricted pursuant
to rules and regulations of the Securities and Exchange Commission, (b) the
Securities and Exchange Commission has by order permitted such suspension or (c)
such emergency, as defined by rules and regulations of the Securities and
Exchange Commission, exists as a result of which it is not reasonably
practicable for the Fund to dispose of its securities or fairly to determine the
value of its net assets.
SYSTEMATIC WITHDRAWAL PLAN
An investor who owns shares of any Fund worth at least $10,000 at the
current net asset value may, by completing an application which may be obtained
from the Corporation or Firstar Mutual Fund Services, LLC, create a Systematic
Withdrawal Plan from which a fixed sum will be paid to the investor at regular
intervals. To establish the Systematic Withdrawal Plan, the investor deposits
Fund shares with the Corporation and appoints it as agent to effect redemptions
of shares held in the account for the purpose of making monthly or quarterly
withdrawal payments of a fixed amount to the investor out of the account. Fund
shares deposited by the investor in the account need not be endorsed or
accompanied by a stock power if registered in the same name as the account;
otherwise, a properly executed endorsement or stock power, obtained from any
bank, broker-dealer or the Corporation is required. The investor's signature
should be guaranteed by a bank, a member firm of a national stock exchange or
other eligible guarantor.
The minimum amount of a withdrawal payment is $100. These payments
will be made from the proceeds of periodic redemptions of shares in the account
at net asset value. Redemptions will be made in accordance with the schedule
(e.g., monthly, bimonthly [every other month], quarterly or yearly, but in no
event more frequently than monthly) selected by the investor. If a scheduled
redemption day is a weekend day or a holiday, such redemption will be made on
the next preceding business day. Establishment of a Systematic Withdrawal Plan
constitutes an election by the investor to reinvest in additional Fund shares,
at net asset value, all income dividends and capital gains distributions payable
by the Fund on shares held in such account, and shares so acquired will be added
to such account. The investor may deposit additional Fund shares in his account
at any time.
Withdrawal payments cannot be considered as yield or income on the
investor's investment, since portions of each payment will normally consist of a
return of capital. Depending on the size or the frequency of the disbursements
requested, and the fluctuation in the value of the Fund's portfolio, redemptions
for the purpose of making such disbursements may reduce or even exhaust the
investor's account.
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<PAGE>
The investor may vary the amount or frequency of withdrawal payments,
temporarily discontinue them, or change the designated payee or payee's address,
by notifying Firstar Mutual Fund Services, LLC in writing thirty (30) days prior
to the next payment.
ALLOCATION OF PORTFOLIO BROKERAGE
Each Fund's securities trading and brokerage policies and procedures
are reviewed by and subject to the supervision of the Corporation's Board of
Directors. Decisions to buy and sell securities for each Fund are made by the
Adviser subject to review by the Corporation's Board of Directors. In placing
purchase and sale orders for portfolio securities for each Fund, it is the
policy of the Adviser to seek the best execution of orders at the most favorable
price in light of the overall quality of brokerage and research services
provided, as described in this and the following paragraphs. Many of these
transactions involve payment of a brokerage commission by a Fund. In some cases,
transactions are with firms who act as principals of their own accounts. In
selecting brokers to effect portfolio transactions, the determination of what is
expected to result in best execution at the most favorable price involves a
number of largely judgmental considerations. Among these are the Adviser's
evaluation of the broker's efficiency in executing and clearing transactions,
block trading capability (including the broker's willingness to position
securities) and the broker's reputation, financial strength and stability. The
most favorable price to a Fund means the best net price without regard to the
mix between purchase or sale price and commission, if any. Over-the-counter
securities may be purchased and sold directly with principal market makers who
retain the difference in their cost in the security and its selling price (i.e.
"markups" when a market maker sells a security and "markdowns" when the market
maker purchases a security). In some instances, the Adviser feels that better
prices are available from non-principal market makers who are paid commissions
directly. The Funds may place portfolio orders with broker-dealers who recommend
the purchase of Fund shares to clients (if the Adviser believes the commissions
and transaction quality are comparable to that available from other brokers) and
may allocate portfolio brokerage on that basis.
In allocating brokerage business for the Funds, the Adviser also takes
into consideration the research, analytical, statistical and other information
and services provided by the broker, such as general economic reports and
information, reports or analyses of particular companies or industry groups,
market timing and technical information, and the availability of the brokerage
firm's analysts for consultation. While the Adviser believes these services have
substantial value, they are considered supplemental to the Adviser's own efforts
in the performance of its duties under the Advisory Agreements. Other clients of
the Adviser may indirectly benefit from the availability of these services to
the Adviser, and the Funds may indirectly benefit from services available to the
Adviser as a result of transactions for other clients. The Advisory Agreements
provide that the Adviser may cause the Funds to pay a broker which provides
brokerage and research services to the Adviser a commission for effecting a
securities transaction in excess of the amount another broker would have charged
for effecting the transaction, if the Adviser determines in good faith that such
amount of commission is reasonable in relation to the value of brokerage and
research services provided by the executing broker viewed in terms of either the
particular transaction or the Adviser's
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overall responsibilities with respect to the Funds and the other accounts as to
which it exercises investment discretion. Brokerage commissions paid by the
Prudent Bear Fund during the fiscal year ended September 30, 1997 were $262,073
on total transactions of $101,104,010; brokerage commissions paid by the Prudent
Bear Fund during the fiscal year ended September 30, 1998 were $2,316,276 on
total transactions of $685,424,031; and brokerage commissions paid by the
Prudent Bear Fund during the fiscal year ended September 30, 1999 were
$3,668,061 on total transactions of $1,631,121,143. During the fiscal year ended
September 30, 1999 brokerage commissions paid by the Prudent Bear Fund to
brokers who provided research services were $591,609 on total transactions of
$410,610,497. (The Prudent Safe Harbor Fund will commence operations on February
1, 2000.)
TAXES
Each Fund intends to qualify annually for and elect tax treatment
applicable to a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). The Prudent Bear Fund has so
qualified in each of its fiscal years. (The Prudent Safe Harbor Fund will
commence operations on February 1, 2000.)
In order to qualify as a regulated investment company under Subchapter
M, each Fund must have at least 90% of its annual gross income derived from
qualified sources and each Fund must have at least 50% of its assets invested in
qualified assets for each quarter during a fiscal year, in addition to meeting
other Code requirements. Certain investment activity of the Funds related to
gold and precious metals may result in gross income that does not qualify for
the 90% annual gross income requirement and may result in the Fund holding
assets that do not qualify for the 50% quarterly asset test.
To reduce the risk that a Fund's investments in gold, futures on gold,
options on gold futures, and similar investments in other precious metals may
result in the Fund's failure to satisfy the requirements of Subchapter M, the
Adviser will endeavor to manage each Fund's portfolio so that (i) less than 10%
of the Fund's gross income each year will be derived from such investments, and
(ii) less than 50% of the value of a Fund's assets, at the end of each quarter,
will be invested in such assets.
If a Fund fails to qualify as a regulated investment company under
Subchapter M in any fiscal year, it will be treated as a corporation for federal
income tax purposes. As such the Fund would be required to pay income taxes on
its net investment income and net realized capital gains, if any, at the rates
generally applicable to corporations. Shareholders of such a Fund would not be
liable for income tax on the Fund's net investment income or net realized
capital gains in their individual capacities. Distributions to shareholders,
whether from the Fund's net investment income or net realized capital gains,
would be treated as taxable dividends to the extent of current or accumulated
earnings and profits of the Fund.
Each Fund intends to distribute substantially all of its net
investment income and net capital gain each fiscal year. Dividends from net
investment income and short-term capital gains are taxable to investors as
ordinary income, while distributions of net long-term capital gains are taxable
as long-term capital gain regardless of the shareholder's holding period for
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the shares. Distributions from each Fund are taxable to investors, whether
received in cash or in additional shares of the Fund.
If a call option written by a Fund expires, the amount of the premium
received by the Fund for the option will be short-term capital gain. If such an
option is closed by a Fund, any gain or loss realized by the Fund as a result of
the closing purchase transaction will be short-term capital gain or loss. If the
holder of a call option exercises the holder's right under the option, any gain
or loss realized by the Fund upon the sale of the underlying security pursuant
to such exercise will be short-term or long-term capital gain or loss to the
Fund depending on the Fund's holding period for the underlying security.
With respect to call options purchased by a Fund, the Fund will
realize short-term or long-term capital gain or loss if such option is sold and
will realize short-term or long-term capital loss if the option is allowed to
expire depending on the Fund's holding period for the call option. If such a
call option is exercised, the amount paid by the Fund for the option will be
added to the basis of the stock or futures contract so acquired.
The Funds may utilize options on stock indexes. Options on
"broadbased" stock indexes are classified as "nonequity options" under the Code.
Gains and losses resulting from the expiration, exercise or closing of such
nonequity options, as well as gains and losses resulting from futures contract
transactions, will be treated as long-term capital gain or loss to the extent of
60% thereof and short-term capital gain or loss to the extent of 40% thereof
(hereinafter "blended gain or loss"). In addition, any nonequity option held by
a Fund on the last day of a fiscal year will be treated as sold for market value
on that date, and gain or loss recognized as a result of such deemed sale will
be blended gain or loss. These tax considerations may have an impact on
investment decisions made by the Fund.
The trading strategies of the Funds may constitute "straddle"
transactions. Straddles may affect the short-term or long-term holding period of
certain investments for distribution characterization, and may cause the
postponement of recognition of losses incurred in certain closing transactions
for tax purposes.
At September 30,1999, the Prudent Bear Fund had an accumulated net
realized capital loss carryover of $1,076,667 expiring in 2006.
The Prudent Bear Fund and the Prudent Safe Harbor Fund may be subject
to foreign withholding taxes on income and gains derived from its investments
outside the U.S. Such taxes would reduce the return on either Fund's
investments. Tax treaties between certain countries and the U.S. may reduce or
eliminate such taxes. If more than 50% of the value of a Fund's total assets at
the close of any taxable year consist of securities of foreign corporations, the
Fund may elect, for U.S. federal income tax purposes, to treat any foreign
country income or withholding taxes paid by it that can be treated as income
taxes under U.S. income tax principles, as paid by its shareholders. For any
year that a Fund makes such an election, each of its shareholders will be
required to include in his income (in addition to taxable dividends actually
received) his allocable share of such taxes paid by such Fund and will be
entitled, subject to certain limitations, to credit his portion of these foreign
taxes against his U.S.
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federal income tax due, if any, or to deduct it (as an itemized deduction) from
his U.S. taxable income, if any. Generally, credit for foreign taxes is subject
to the limitation that it may not exceed the shareholder's U.S. tax attributable
to his foreign source taxable income.
If the pass through election described above is made, the source of
such Fund's income flows through to its shareholders. Certain gains from the
sale of securities and currency fluctuations will not be treated as foreign
source taxable income. In addition, this foreign tax credit limitation must be
applied separately to certain categories of foreign source income, one of which
is foreign source "passive income." For this purpose, foreign "passive income"
includes dividends, interest, capital gains and certain foreign currency gains.
As a consequence, certain shareholders may not be able to claim a foreign tax
credit for the full amount of their proportionate share of the foreign tax paid
by such Fund.
The foreign tax credit can be used to offset only 90% of the
alternative minimum tax (as computed under the Code for purposes of this
limitation) imposed on corporations and individuals. If a Fund does not make the
pass through election described above, the foreign taxes it pays will reduce its
income and distributions by the Fund will be treated as U.S. source income.
Each shareholder will be notified within 60 days after the close of a
Fund's taxable year whether, pursuant to the election described above, the
foreign taxes paid by such Fund will be treated as paid by its shareholders for
that year and, if so, such notification will designate: (i) the foreign taxes
paid; and (ii) such Fund's dividends and distributions that represent income
derived from foreign sources.
Any dividend or capital gain distribution paid shortly after a
purchase of shares of a Fund, will have the effect of reducing the per share net
asset value of such shares by the amount of the dividend or distribution.
Furthermore, if the net asset value of the shares of a Fund immediately after a
dividend or distribution is less than the cost of such shares to the
shareholder, the dividend or distribution will be taxable to the shareholder
even though it results in a return of capital to him.
Redemption of shares will generally result in a capital gain or loss
for income tax purposes. Such capital gain or loss will be long term or short
term, depending upon the holding period. However, if a loss is realized on
shares held for six months or less, and the investor received a capital gain
distribution during that period, then such loss is treated as a long-term
capital loss to the extent of the capital gain distribution received.
The Funds may be required to withhold Federal income tax at a rate of
31% ("backup withholding") from dividend payments and redemption proceeds if a
shareholder fails to furnish the Funds with his social security or other tax
identification number and certify under penalty of perjury that such number is
correct and that he is not subject to backup withholding due to the under
reporting of income. The certification form is included as part of the share
purchase application and should be completed when the account is opened.
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This section is not intended to be a complete discussion of present or
proposed federal income tax laws and the effect of such laws on an investor.
Investors are urged to consult with their respective tax advisers for a complete
review of the tax ramifications of an investment in the Funds.
SHAREHOLDER MEETINGS
The Maryland General Corporation Law permits registered investment
companies, such as the Corporation, to operate without an annual meeting of
shareholders under specified circumstances if an annual meeting is not required
by the Act. The Corporation has adopted the appropriate provisions in its Bylaws
and may, at its discretion, not hold an annual meeting in any year in which the
election of directors is not required to be acted on by shareholders under the
Act.
The Corporation's Bylaws also contain procedures for the removal of
directors by its shareholders. At any meeting of shareholders, duly called and
at which a quorum is present, the shareholders may, by the affirmative vote of
the holders of a majority of the votes entitled to be cast thereon, remove any
director or directors from office and may elect a successor or successors to
fill any resulting vacancies for the unexpired terms of removed directors.
Upon the written request of the holders of shares entitled to not less
than ten percent (10%) of all the votes entitled to be cast at such meeting, the
Secretary of the Corporation shall promptly call a special meeting of
shareholders for the purpose of voting upon the question of removal of any
director. Whenever ten or more shareholders of record who have been such for at
least six months preceding the date of application, and who hold in the
aggregate either shares having a net asset value of at least $25,000 or at least
one percent (1%) of the total outstanding shares, whichever is less, shall apply
to the Corporation's Secretary in writing, stating that they wish to communicate
with other shareholders with a view to obtaining signatures to a request for a
meeting as described above and accompanied by a form of communication and
request which they wish to transmit, the Secretary shall within five business
days after such application either: (1) afford to such applicants access to a
list of the names and addresses of all shareholders as recorded on the books of
the Corporation; or (2) inform such applicants as to the approximate number of
shareholders of record and the approximate cost of mailing to them the proposed
communication and form of request.
If the Secretary elects to follow the course specified in clause (2)
of the last sentence of the preceding paragraph, the Secretary, upon the written
request of such applicants, accompanied by a tender of the material to be mailed
and of the reasonable expenses of mailing, shall, with reasonable promptness,
mail such material to all shareholders of record at their addresses as recorded
on the books unless within five business days after such tender the Secretary
shall mail to such applicants and file with the Securities and Exchange
Commission, together with a copy of the material to be mailed, a written
statement signed by at least a majority of the Board of Directors to the effect
that in their opinion either such material contains untrue statements of fact or
omits to state facts necessary to make the
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statements contained therein not misleading, or would be in violation of
applicable law, and specifying the basis of such opinion.
After opportunity for hearing upon the objections specified in the
written statement so filed, the Securities and Exchange Commission may, and if
demanded by the Board of Directors or by such applicants shall, enter an order
either sustaining one or more of such objections or refusing to sustain any of
them. If the Securities and Exchange Commission shall enter an order refusing to
sustain any of such objections, or if, after the entry of an order sustaining
one or more of such objections, the Securities and Exchange Commission shall
find, after notice and opportunity for hearing, that all objections so sustained
have been met, and shall enter an order so declaring, the Secretary shall mail
copies of such material to all shareholders with reasonable promptness after the
entry of such order and the renewal of such tender.
PERFORMANCE INFORMATION
Each Fund may provide from time to time in advertisements, reports to
shareholders and other communications with shareholders its average annual total
returns. Because of the differences in expenses, the average annual total return
of the Class C Shares will differ from the No Load Shares. An average total
return refers to the rate of return which, if applied to an initial investment
at the beginning of a stated period and compounded over the period, would result
in the redeemable value of the investment at the end of the stated period
assuming reinvestment of all dividends and distribution and reflecting the
effect of all recurring fees. When considering "average" total return figures
for periods longer than one year, shareholders should note that a Fund's annual
total return for any one year in the period might have been greater or less than
the average for the entire period. The Funds may provide "aggregate" total
return figures for various periods, representing the cumulative change in value
of an investment in a Fund for a specific period (again reflecting changes in a
Fund's share price and assuming reinvestment of dividends and distributions).
The Prudent Safe Harbor Fund may cite its yield in advertisements, reports to
shareholders and other communications with shareholders. A quotation of a yield
will reflect the Fund's income over a stated period expressed as a percentage of
the Fund's share price. Again because of the differences in expenses, the yield
of the Class C Shares will differ from the yield of the No Load Shares.
Average annual total return measures both the net investment income
generated by, and the effect of any realized or unrealized appreciation or
depreciation of, the underlying investments in a Fund's investment portfolio.
Each Fund's average annual total return figures are computed in accordance with
the standardized method prescribed by the Securities and Exchange Commission by
determining the average annual compounded rates of return over the periods
indicated, that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
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P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment at the beginning of such period
This calculation (i) assumes all dividends and distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus, and (ii) deducts all recurring fees, such as advisory fees,
charged as expenses to all investor accounts.
Total return is the cumulative rate of investment growth which assumes
that income dividends and capital gains are reinvested. It is determined by
assuming a hypothetical investment at the net asset value at the beginning of
the period, adding in the reinvestment of all income dividends and capital
gains, calculating the ending value of the investment at the net asset value as
of the end of the specified time period, subtracting the amount of the original
investment, and dividing this amount by the amount of the original investment.
This calculated amount is then expressed as a percentage by multiplying by 100.
The average annual total return of the Prudent Bear Fund No Load
Shares for the period from the Fund's commencement of operations (December 28,
1995) through September 30, 1999 was -17.23% and for the one year period ended
September 30, 1999 was -36.17%. The foregoing performance results are based on
historical earnings and should not be considered as representative of the
performance of the Prudent Bear Fund No Load Shares or the Prudent Bear Fund
Class C Shares in the future. Such performance results also reflect
reimbursements made by the Adviser during the period from December 28, 1995
through September 30, 1996 to keep aggregate annual operating expenses of the
Prudent Bear Fund at or below 2.75% of daily net assets. An investment in the No
Load Shares of each Fund or the Class C Shares of the Prudent Bear Fund will
fluctuate in value and at redemption its value may be more or less than the
initial investment. The Prudent Bear Fund Class C Shares were not offered until
November 27, 1998. (The Prudent Safe Harbor Fund will not commence operations
until February 1, 2000.)
The Prudent Safe Harbor Fund's yield is based on a 30-day period and
is computed by dividing the net investment income per share earned during the
period by the net asset value per share on the last day of the period, according
to the following formula:
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a-b
YIELD = 2[(--- + 1)6-1]
cd
Where: a = dividends and interest earned during the
period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
d = the net asset value per share on the
last day of the period.
Capital gains and losses are not included in the yield calculation.
The Prudent Safe Harbor Fund will not commence operations until
February 1, 2000. Yield fluctuations may reflect changes in the Prudent Safe
Harbor Fund's net income, and portfolio changes resulting from net purchases or
net redemptions of its shares may affect the yield. Accordingly, the Prudent
Safe Harbor Fund's yield may vary from day to day, and the yield stated for a
particular past period is not necessarily representative of its future yield.
The Prudent Safe Harbor Fund's yield is not guaranteed, nor is its principal
insured.
Each Fund may also compare its performance to other mutual funds with
similar investment objectives and to the industry as a whole as reported by
Lipper Analytical Services, Inc., Morningstar OnDisc, Money, Forbes, Business
Week and Barron's magazines and The Wall Street Journal. (Lipper Analytical
Services, Inc. and Morningstar OnDisc are independent ranking services that rank
mutual funds based upon total return performance.) Each Fund may also compare
its performance to the Dow Jones Industrial Average, NASDAQ Composite Index,
NASDAQ Industrials Index, Value Line Composite Index, the Standard & Poor's 500
Stock Index, and the Consumer Price Index.
CAPITAL STRUCTURE
The Corporation's Articles of Incorporation permit the Board of
Directors to issue 1,000,000,000 shares of common stock, with a $.0001 par
value. The Board of Directors has the power to designate one or more classes of
shares of common stock and to classify or reclassify any unissued shares of
common stock. Currently the Corporation has authorized three portfolios, the
Prudent Bear Fund, the Prudent Safe Harbor Fund and the Prudent Bear Large Cap
Fund. The Prudent Bear Fund has two classes, the No Load Shares and the Class C
Shares. The Prudent Safe Harbor Fund and the Prudent Bear Large Cap Fund
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have one class only, the No Load Shares. Of the 1,000,000,000 shares of common
stock authorized, 250,000,000 have been designated for each of the four classes.
Each class of shares of each Fund are fully paid and non-assessable;
have no preferences as to conversion, exchange, dividends, retirement or other
features; and have no preemptive rights. Each class of shares bears differing
class specific expenses such as 12b-1 fees. Each class of shares of each Fund
have non-cumulative voting rights, meaning that the holders of more than 50% of
the shares voting for the election of Directors can elect 100% of the Directors
if they so choose. Generally shares are voted in the aggregate and not by each
class or Fund, except where class voting rights (i.e. by Fund or class) is
required by Maryland law or the Act.
The shares of each Fund have the same preferences, limitations and
rights, except that all consideration received from the sale of shares of each
Fund, together with all income, earnings, profits and proceeds thereof, belong
to that Fund and are charged with the liabilities in respect of that Fund and of
that Fund's share of the general liabilities of the Corporation in the
proportion that the total net assets of the Fund bears to the total net assets
of all of the Funds. However the Board of Directors of the Corporation may, in
its discretion direct that any one or more general liabilities of the
Corporation be allocated among the Funds on a different basis. The net asset
value per share of each Fund is based on the assets belonging to that Fund less
the liabilities charged to that Fund, and dividends are paid on shares of each
Fund only out of lawfully available assets belonging to that Fund. In the event
of liquidation or dissolution of the Corporation, the shareholders of each Fund
will be entitled, out of the assets of the Corporation available for
distribution, to the assets belonging to such Fund.
DESCRIPTION OF SECURITIES RATINGS
Each of the Funds may invest in commercial paper and commercial paper
master notes assigned ratings of either Standard & Poor's Corporation ("Standard
& Poor's") or Moody's Investors Service, Inc. ("Moody's"). A brief description
of the ratings symbols and their meanings follows.
Standard & Poor's Commercial Paper Ratings. A Standard & Poor's
commercial paper rating is a current assessment of the likelihood of timely
payment of debt considered short-term in the relevant market. Ratings are graded
into several categories, ranging from A-1 for the highest quality obligations to
D for the lowest. The categories rated A-3 or higher are as follows:
A-1. This highest category indicates that the degree of safety
regarding timely payment is strong. Those issuers determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However the relative degree of safety is not as high as for
issuers designed "A-1".
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A-3. Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designation.
Moody's Short-Term Debt Ratings. Moody's short-term debt ratings are
opinions of the ability of issuers to repay punctually senior debt obligations
which have an original maturity not exceeding one year. Obligations relying upon
support mechanisms such as letters-of-credit and bonds of indemnity are excluded
unless explicitly rated.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:
Prime-1. Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions) have a
strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
The Prudent Safe Harbor Fund may invest in debt securities of foreign
countries rated AAA or AA by Standard & Poor's.
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<PAGE>
Standard & Poor's Characteristics of Sovereign Debt of Foreign Countries.
------------------------------------------------------------------------
AAA Stable, predictable governments with demonstrated track record of
responding flexibly to changing economic and political circumstances.
Prosperous and resilient economies, high per capita incomes. Low
fiscal deficits and government debt, low inflation.
Low external debt.
AA Stable, predictable governments with demonstrated track record of
responding flexibly to changing economic and political circumstances.
Tightly integrated into global trade and financial system.
Differ from AAAs only to a small degree because:
o Economies are smaller, less prosperous and
generally more vulnerable to adverse external
influences (e.g., protection and terms of trade
shocks).
o More variable fiscal deficits, government debt and
inflation.
o Moderate to high external debt.
A Politics evolving toward more open, predictable forms of governance in
environment of rapid economic and social change.
Established trend of integration into global trade and financial
system.
Economies are smaller, less prosperous and generally more vulnerable
to adverse external influences (e.g., protection and terms of trade
shocks).
Usually rapid growth in output and per capita incomes.
Manageable through variable fiscal deficits, government debt and
inflation.
Usually low but variable debt.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 100 East Wisconsin Avenue, Suite 1500,
Milwaukee, Wisconsin 53202, has been selected as the independent accountants for
each of the Funds. As such PricewaterhouseCoopers LLP performs an audit of each
Fund's financial statements and considers each Fund's internal control
structure.
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<PAGE>
STATEMENT OF ADDITIONAL INFORMATION January 31, 2000
PRUDENT BEAR LARGE CAP FUND
PRUDENT BEAR FUNDS, INC.
8140 Walnut Hill Lane
Suite 300
Dallas, Texas 75231
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Prospectus of Prudent Bear Funds, Inc.
for the Prudent Bear Large Cap Fund which is dated January 31, 2000. Requests
for copies of the Prospectus should be made by writing to Prudent Bear Funds,
Inc., 8140 Walnut Hill Lane, Suite 300, Dallas, Texas 75231, Attention:
Corporate Secretary, or by calling (214) 696-5474.
<PAGE>
Prudent Bear Funds, Inc.
TABLE OF CONTENTS Page No.
----------------- --------
FUND HISTORY AND CLASSIFICATION................................................1
INVESTMENT RESTRICTIONS........................................................1
INVESTMENT CONSIDERATIONS......................................................3
DIRECTORS AND OFFICERS OF THE CORPORATION.....................................16
OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS............................17
INVESTMENT ADVISER, ADMINISTRATOR, CUSTODIAN, TRANSFER AGENT AND
ACCOUNTING SERVICES AGENT................................................18
DETERMINATION OF NET ASSET VALUE..............................................21
DISTRIBUTION OF SHARES........................................................22
AUTOMATIC INVESTMENT PLAN AND TELEPHONE PURCHASES.............................23
REDEMPTION OF SHARES..........................................................23
SYSTEMATIC WITHDRAWAL PLAN....................................................24
ALLOCATION OF PORTFOLIO BROKERAGE.............................................24
TAXES.........................................................................25
SHAREHOLDER MEETINGS..........................................................27
PERFORMANCE INFORMATION.......................................................28
CAPITAL STRUCTURE.............................................................30
DESCRIPTION OF SECURITIES RATINGS.............................................30
INDEPENDENT ACCOUNTANTS.......................................................32
No person has been authorized to give any information or to make any
representations other than those contained in this Statement of Additional
Information and Prospectus dated January 31, 2000 and, if given or made, such
information or representations may not be relied upon as having been authorized
by Prudent Bear Funds, Inc.
This Statement of Additional Information does not constitute an offer
to sell securities.
(i)
<PAGE>
FUND HISTORY AND CLASSIFICATION
Prudent Bear Funds, Inc., a Maryland corporation incorporated or
October 25, 1995 (the "Corporation"), is an open-end management investment
company consisting of three diversified portfolios: the Prudent Bear Fund, the
Prudent Safe Harbor Fund, and the Prudent Bear Large Cap Fund (individually a
"Fund" and collectively the "Funds"). This Statement of Additional Information
provides information about the Prudent Bear Large Cap Fund. The Corporation is
registered under the Investment Company Act of 1940 (the "Act").
INVESTMENT RESTRICTIONS
The Fund has adopted the following investment restrictions which are
matters of fundamental policy. The Fund's investment restrictions cannot be
changed without approval of the holders of the lesser of: (i) 67% of the Fund's
shares present or represented at a shareholder's meeting at which the holders of
more than 50% of such shares are present or represented; or (ii) more than 50%
of the outstanding shares of the Fund.
1. The Fund will not purchase securities of any issuer if the purchase
would cause more than 5% of the value of the Fund's total assets to be
invested in securities of such issuer (except securities of the U.S.
government or any agency or instrumentality thereof), or purchase more than
10% of the outstanding voting securities of any one issuer, except that up
to 25% of the Fund's total assets may be invested without regard to these
limitations.
2. The Fund may sell securities short to the extent permitted by the
Act.
3. The Fund will not purchase securities on margin (except for such
short term credits as are necessary for the clearance of transactions);
provided, however, that the Fund may (i) borrow money to the extent set
forth in investment restriction no. 4; (ii) purchase or sell futures
contracts and options on futures contracts; (iii) make initial and
variation margin payments in connection with purchases or sales of futures
contracts or options on futures contracts; and (iv) write or invest in put
or call options.
4. The Fund may borrow money or issue senior securities to the extent
permitted by the Act.
5. The Fund may pledge or hypothecate its assets to secure its
borrowings.
6. The Fund will not act as an underwriter or distributor of
securities other than of its shares (except to the extent that the Fund may
be deemed to be an underwriter within the meaning of the Securities Act of
1933, as amended (the "Securities Act"), in the disposition of restricted
securities).
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<PAGE>
7. The Fund will not make loans, including loans of securities, except
the Fund may acquire debt securities from the issuer or others which are
publicly distributed or are of a type normally acquired by institutional
investors and the Fund may enter into repurchase agreements.
8. The Fund will not invest 25% or more of its total assets at the
time of purchase in securities of issuers whose principal business
activities are in the same industry.
9. The Fund will not make investments for the purpose of exercising
control or management of any company.
10. The Fund will not purchase or sell real estate or real estate
mortgage loans or make any investments in real estate limited partnerships.
11. The Fund will not purchase or sell commodities or commodity
contracts except the Fund may enter into futures contracts and options on
futures contracts.
The Fund has adopted certain other investment restrictions which are
not fundamental policies and which may be changed by the Corporation's Board of
Directors without shareholder approval. These additional restrictions are as
follows:
1. The Fund not will acquire or retain any security issued by a
company, an officer or director of which is an officer or director of the
Corporation or an officer, director or other affiliated person of any
Fund's investment adviser.
2. The Fund will not invest more than 5% of the Fund's total assets in
securities of any issuer which has a record of less than three (3) years of
continuous operation, including the operation of any predecessor business
of a company which came into existence as a result of a merger,
consolidation, reorganization or purchase of substantially all of the
assets of such predecessor business.
3. The Fund will not purchase illiquid securities if, as a result of
such purchase, more than 15% of the value of its net assets would be
invested in such securities.
4. The Fund's investments in warrants will be limited to 5% of the
Fund's net assets. Included within such 5%, but not to exceed 2% of the
value of the Fund's net assets, may be warrants which are not listed on
either the New York Stock Exchange or the American Stock Exchange.
5. The Fund will not purchase the securities of other investment
companies except: (a) as part of a plan of merger, consolidation or
reorganization
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<PAGE>
approved by the shareholders of the Fund; (b) securities of registered
open-end investment companies; or (c) securities of registered closed-end
investment companies on the open market where no commission results, other
than the usual and customary broker's commission. No purchases described in
(b) and (c) will be made if as a result of such purchases (i) the Fund and
its affiliated persons would hold more than 3% of any class of securities,
including voting securities, of any registered investment company; (ii)
more than 5% of the Fund's net assets would be invested in shares of any
one registered investment company; and (iii) more than 25% of the Fund's
net assets would be invested in shares of registered investment companies.
The aforementioned percentage restrictions on investment or
utilization of assets refer to the percentage at the time an investment is made.
If these restrictions are adhered to at the time an investment is made, and such
percentage subsequently changes as a result of changing market values or some
similar event, no violation of the Fund's fundamental restrictions will be
deemed to have occurred. Any changes in the Fund's investment restrictions made
by the Board of Directors will be communicated to shareholders prior to their
implementation.
INVESTMENT CONSIDERATIONS
Illiquid Securities
The Fund may invest up to 15% of its net assets in securities for
which there is no readily available market ("illiquid securities"). The 15%
limitation includes certain securities whose disposition would be subject to
legal restrictions ("restricted securities"). However certain restricted
securities that may be resold pursuant to Rule 144A under the Securities Act may
be considered liquid. Rule 144A permits certain qualified institutional buyers
to trade in privately placed securities not registered under the Securities Act.
Institutional markets for restricted securities have developed as a result of
Rule 144A, providing both ascertainable market values for Rule 144A securities
and the ability to liquidate these securities to satisfy redemption requests.
However an insufficient number of qualified institutional buyers interested in
purchasing Rule 144A securities held by the Fund could adversely affect their
marketability, causing the Fund to sell securities at unfavorable prices. The
Board of Directors of the Corporation has delegated to David W. Tice &
Associates, Inc. (the "Adviser") the day-to-day determination of the liquidity
of a security although it has retained oversight and ultimate responsibility for
such determinations. Although no definite quality criteria are used, the Board
of Directors has directed the Adviser to consider such factors as (i) the nature
of the market for a security (including the institutional private resale
markets); (ii) the terms of these securities or other instruments allowing for
the disposition to a third party or the issuer thereof (e.g. certain repurchase
obligations and demand instruments); (iii) the availability of market
quotations; and (iv) other permissible factors.
3
<PAGE>
Restricted securities may be sold in private negotiated or other
exempt transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act. When registration is required,
the Fund may be obligated to pay all or part of the registration expenses and a
considerable time may elapse between the decision to sell and the sale date. If,
during such period, adverse market conditions were to develop, the Fund might
obtain a less favorable price than the price which prevailed when it decided to
sell. Restricted securities will be priced at fair value as determined in good
faith by the Board of Directors.
Registered Investment Companies
The Fund may invest up to 25% of its net assets in shares of
registered investment companies. However, under normal market conditions, the
Fund will not invest more than 5% of its net assets in such shares. The Fund
will not purchase or otherwise acquire shares of any registered investment
company (except as part of a plan of merger, consolidation or reorganization
approved by the shareholders of the Fund) if (a) the Fund and its affiliated
persons would own more than 3% of any class of securities of such registered
investment company or (b) more than 5% of its net assets would be invested in
the shares of any one registered investment company. If the Fund purchases more
than 1% of any class of security of a registered open-end investment company,
such investment will be considered an illiquid investment.
Borrowing
The Fund may borrow money for investment purposes. Borrowing for
investment purposes is known as leveraging. Leveraging investments, by
purchasing securities with borrowed money, is a speculative technique which
increases investment risk, but also increases investment opportunity. Since
substantially all of the Fund's assets will fluctuate in value, whereas the
interest obligations on borrowings may be fixed, the net asset value per share
of the Fund, when it leverages its investments, will increase more when the
Fund's portfolio assets increase in value and decrease more when the portfolio
assets decrease in value than would otherwise be the case. Interest costs on
borrowings may partially offset or exceed the returns on the borrowed funds.
Under adverse conditions, the Fund might have to sell portfolio securities to
meet interest or principal payments at a time investment considerations would
not favor such sales. As required by the Act, the Fund must maintain continuous
asset coverage (total assets, including assets acquired with borrowed funds,
less liabilities exclusive of borrowings) of 300% of all amounts borrowed. If,
at any time, the value of the Fund's assets should fail to meet this 300%
coverage test, the Fund within three business days will reduce the amount of the
Fund's borrowings to the extent necessary to meet this 300% coverage.
Maintenance of this percentage limitation may result in the sale of portfolio
securities as a time when investment considerations otherwise indicate that it
would be disadvantageous to do so.
In addition to borrowing for investment purposes, the Fund is
authorized to borrow money from banks as a temporary measure for extraordinary
or emergency purposes in
4
<PAGE>
amounts not in excess of 5% of the value of the Fund's total assets. For example
the Fund may borrow money to facilitate management of the Fund's portfolio by
enabling the Fund to meet redemption requests when the liquidation of portfolio
investments would be inconvenient or disadvantageous. Such borrowings will be
promptly repaid and are not subject to the foregoing 300% asset coverage
requirement.
Portfolio Turnover
The Fund will generally purchase and sell securities and effect
transactions in futures contracts without regard to the length of time the
security has been held or the futures contract open and, accordingly, it can be
expected that the rate of portfolio turnover may be substantial. The Fund may
sell a given security or close a futures contract, no matter for how long or
short a period it has been held in the portfolio, and no matter whether the sale
is at a gain or loss, if the Adviser believes that it is not fulfilling its
purpose. Since investment decisions are based on the anticipated contribution of
the security in question to the Fund's investment objective, the rate of
portfolio turnover is irrelevant when the Adviser believes a change is in order
to achieve those objectives, and the Fund's annual portfolio turnover rate may
vary from year to year. Pursuant to Securities and Exchange Commission
requirements, the portfolio turnover rate of the Fund is calculated without
regard to securities, including options and futures contracts, having a maturity
of less than one year. The Fund may hold a significant portion of its assets in
assets which are excluded for purposes of calculating portfolio turnover.
High portfolio turnover in any year will result in the payment by the
Fund of above-average transaction costs and could result in the payment by
shareholders of above-average amounts of taxes on realized investment gains.
Short Sales
The Fund may seek to realize additional gains through short sale
transactions in securities listed on one or more national securities exchanges,
or in unlisted securities. Short selling involves the sale of borrowed
securities. At the time a short sale is effected, the Fund incurs an obligation
to replace the security borrowed at whatever its price may be at the time the
Fund purchases it for delivery to the lender. The price at such time may be more
or less than the price at which the security was sold by the Fund. Until the
security is replaced, the Fund is required to pay the lender amounts equal to
any dividend or interest which accrue during the period of the loan. To borrow
the security, the Fund also may be required to pay a premium, which would
increase the cost of the security sold. The proceeds of the short sale will be
retained by the broker, to the extent necessary to meet margin requirements,
until the short position is closed.
Until the Fund closes its short position or replaces the borrowed
security, the Fund will: (a) maintain cash or liquid securities at such a level
that the amount deposited in the account plus the amount deposited with the
broker as collateral will equal the current value of the security sold short; or
(b) otherwise cover the Fund's short position.
5
<PAGE>
Futures Contracts and Options Thereon
The Fund may purchase and write (sell) stock index futures contracts
as a substitute for a comparable market position in the underlying securities. A
futures contract obligates the seller to deliver (and the purchaser to take
delivery of) the specified commodity on the expiration date of the contract. A
stock index futures contract obligates the seller to deliver (and the purchaser
to take) an amount of cash equal to a specific dollar amount times the
difference between the value of a specific stock index at the close of the last
trading day of the contract and the price at which the agreement is made. No
physical delivery of the underlying stocks in the index is made. It is the
practice of holders of futures contracts to close out their positions on or
before the expiration date by use of offsetting contract positions and physical
delivery is thereby avoided.
The Fund may purchase put and call options and write put and call
options on stock index futures contracts. When the Fund purchases a put or call
option on a futures contract, the Fund pays a premium for the right to sell or
purchase the underlying futures contract for a specified price upon exercise at
any time during the option period. By writing a call option on a futures
contract, the Fund receives a premium in return for granting to the purchaser of
the option the right to buy from the Fund the underlying futures contract for a
specified price upon exercise at any time during the option period. By writing a
put option on a futures contract, the Fund receives a premium in return for
granting to the purchaser of the option, the right to sell to the Fund the
underlying futures contract for a specified price upon exercise at any time
during the option period.
Some futures and options strategies tend to hedge the Fund's equity
positions against price fluctuations, while other strategies tend to increase
market exposure. Whether the Fund realizes a gain or loss from futures
activities depends generally upon movements in the underlying stock index. The
extent of the Fund's loss from an unhedged short position in futures contracts
or call options on futures contracts is potentially unlimited. The Fund may
engage in related closing transactions with respect to options on futures
contracts. The Fund will purchase or write options only on futures contracts
that are traded on a United States exchange or board of trade.
The Fund may purchase and sell futures contracts and options thereon
only to the extent that such activities would be consistent with the
requirements of Section 4.5 of the regulations under the Commodity Exchange Act
promulgated by the Commodity Futures Trading Commission (the "CFTC
Regulations"), under which the Fund would be excluded from the definition of a
"commodity pool operator." Under Section 4.5 of the CFTC Regulations, the Fund
may engage in futures transactions, either for "bona fide hedging" purposes, as
this term is defined in the CFTC Regulations, or for non-hedging purposes to the
extent that the aggregate initial margins and premiums required to establish
such non-hedging positions do not exceed 5% of the liquidation value of the
Fund's portfolio. In the case of an option on a futures contract that is
"in-the-money" at the time of purchase (i.e., the amount by which the exercise
price of the put option exceeds the current market value of the underlying
instrument or the amount by which the current market value of the underlying
instrument
6
<PAGE>
exceeds the exercise price of the call option), the in-the-money amount may be
excluded in calculating this 5% limitation.
When the Fund purchases or sells a futures contract, the Fund "covers"
its position. To cover its position, the Fund maintains (and marks-to-market on
a daily basis) cash or liquid securities that, when added to any amounts
deposited with a futures commission merchant as margin, are equal to its
obligations on the futures contract or otherwise cover its position. If the Fund
continues to engage in the described securities trading practices and properly
maintains assets, such assets will function as a practical limit on the amount
of leverage which the Fund may undertake and on the potential increase in the
speculative character of the Fund's outstanding portfolio securities.
Additionally, such maintained assets will assure the availability of adequate
funds to meet the obligations of the Fund arising from such investment
activities.
The Fund may cover its long position in a futures contract by
purchasing a put option on the same futures contract with a strike price (i.e.,
an exercise price) as high or higher than the price of the futures contract, or,
if the strike price of the put is less than the price of the futures contract,
the Fund will maintain cash or high-grade liquid debt securities equal in value
to the difference between the strike price of the put and the price of the
futures contract. The Fund may also cover its long position in a futures
contract by taking a short position in the instruments underlying the futures
contract, or by taking positions in instruments the prices of which are expected
to move relatively consistently with the futures contract. The Fund may cover
its short position in a futures contract by taking a long position in the
instruments underlying the futures contract, or by taking positions in
instruments the prices of which are expected to move relatively consistently
with the futures contract.
The Fund may cover its sale of a call option on a futures contract by
taking a long position in the underlying futures contract at a price less than
or equal to the strike price of the call option, or, if the long position in the
underlying futures contract is established at a price greater than the strike
price of the written call, the Fund will maintain cash or liquid securities
equal in value to the difference between the strike price of the call and the
price of the futures contract. The Fund may also cover its sale of a call option
by taking positions in instruments the prices of which are expected to move
relatively consistently with the call option. The Fund may cover its sale of a
put option on a futures contract by taking a short position in the underlying
futures contract at a price greater than or equal to the strike price of the put
option, or if the short position in the underlying futures contract is
established at a price less than the strike price of the written put, the Fund
will maintain cash or liquid securities equal in value to the difference between
the strike price of the put and the price of the futures contract. The Fund may
also cover its sale of a put option by taking positions in instruments the
prices of which are expected to move relatively consistently with the put
option.
Although the Fund intends to purchase and sell futures contracts only
if there is an active market for such contracts, no assurance can be given that
a liquid market will exist for any particular contract at any particular time.
Many futures exchanges and boards of trade
7
<PAGE>
limit the amount of fluctuation permitted in futures contract prices during a
single trading day. Once the daily limit has been reached in a particular
contract, no trades may be made that day at a price beyond that limit or trading
may be suspended for specified periods during the day. Futures contract prices
could move to the limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
potentially subjecting the Fund to substantial losses. If trading is not
possible, or the Fund determines not to close a futures position in anticipation
of adverse price movements, the Fund will be required to make daily cash
payments of variation margin. The risk that the Fund will be unable to close out
a futures position will be minimized by entering into such transactions on a
national exchange with an active and liquid secondary market.
Index Options Transactions
The Fund may purchase put and call options and write put and call
options on stock indexes. A stock index fluctuates with changes in the market
values of the stocks included in the index. Options on stock indexes give the
holder the right to receive an amount of cash upon exercise of the options.
Receipt of this cash amount will depend upon the closing level of the stock
index upon which the option is based being greater than (in the case of a call)
or less than (in the case of a put) the exercise price of the option. The amount
of cash received, if any, will be the difference between the closing price of
the index and the exercise price of the option, multiplied by a specified dollar
multiple. The writer (seller) of the option is obligated, in return for the
premiums received from the purchaser of the option, to make delivery of this
amount to the purchaser. Unlike the options on securities discussed below, all
settlements of index options transactions are in cash.
Some stock index options are based on a broad market index such as the
S&P 500 Index, the NYSE Composite Index or the AMEX Major Market Index, or on a
narrower index such as the Philadelphia Stock Exchange Over-the-Counter Index.
Options currently are traded on the Chicago Board of Options Exchange, the AMEX
and other exchanges. Over-the-counter index options, purchased over-the-counter
options and the cover for any written over-the-counter options would be subject
to the Fund's 15% limitation on investment in illiquid securities. See "Illiquid
Securities."
Each of the exchanges has established limitations governing the
maximum number of call or put options on the same index which may be bought or
written (sold) by a single investor, whether acting alone or in concert with
others (regardless of whether such options are written on the same or different
exchanges or are held or written on one or more accounts or through one or more
brokers). Under these limitations, options positions of certain other accounts
advised by the same investment adviser are combined for purposes of these
limits. Pursuant to these limitations, an exchange may order the liquidation of
positions and may impose other sanctions or restrictions. These position limits
may restrict the number of listed options which the Fund may buy or sell;
however, the Adviser intends to comply with all limitations.
8
<PAGE>
Index options are subject to substantial risks, including the risk of
imperfect correlation between the option price and the value of the underlying
securities comprising the stock index selected and the risk that there might not
be a liquid secondary market for the option. Because the value of an index
option depends upon movements in the level of the index rather than the price of
a particular stock, whether the Fund will realize a gain or loss from the
purchase or writing of options on an index depends upon movements in the level
of stock prices in the stock market generally or, in the case of certain
indexes, in an industry or market segment, rather than upon movements in the
price of a particular stock. Trading in index options requires different skills
and techniques than are required for predicting changes in the prices of
individual stocks. The Fund will not enter into an option position that exposes
the Fund to an obligation to another party, unless the Fund either (i) owns an
offsetting position in securities or other options; and/or (ii) maintains (and
marks-to-market, on a daily basis) cash or liquid securities that, when added to
the premiums deposited with respect to the option, are equal to its obligations
under the option positions that are not otherwise covered.
The Adviser may utilize index options as a technique to leverage the
portfolio of the Fund. If the Adviser is correct in its assessment of the future
direction of stock prices, the share price of the Fund will be enhanced. If the
Adviser has the Fund take a position in options and stock prices move in a
direction contrary to the Adviser's forecast however, the Fund would incur
losses greater than the Fund would have incurred without the options position.
Options on Securities
The Fund may buy put and call options and write (sell) put and call
options on securities. By writing a call option and receiving a premium, the
Fund may become obligated during the term of the option to deliver the
securities underlying the option at the exercise price if the option is
exercised. By writing a put option and receiving a premium, the Fund may become
obligated during the term of the option to purchase the securities underlying
the option at the exercise price if the option is exercised. By buying a put
option, the Fund has the right, in return for a premium paid during the term of
the option, to sell the securities underlying the option at the exercise price.
By buying a call option, the Fund has the right, in return for a premium paid
during the term of the option, to purchase the securities underlying the option
at the exercise price. Options on securities written by the Fund will be traded
on recognized securities exchanges.
When writing call options on securities, the Fund may cover its
position by owning the underlying security on which the option is written.
Alternatively, the Fund may cover its position by owning a call option on the
underlying security, on a share for share basis, which is deliverable under the
option contract at a price no higher than the exercise price of the call option
written by the Fund or, if higher, by owning such call option and depositing and
maintaining cash or liquid securities equal in value to the difference between
the two exercise prices. In addition, the Fund may cover its position by
depositing and maintaining cash or liquid securities equal in value to the
exercise price of the call option written by the Fund. The principal reason for
the Fund to write call options on securities held by the Fund is
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<PAGE>
to attempt to realize, through the receipt of premiums, a greater return than
would be realized on the underlying securities alone.
When writing put options on securities, the Fund may cover its
position by owning a put option on the underlying security, on a share for share
basis, which is deliverable under the option contract at a price no lower than
the exercise price of the put option written by the Fund or, if lower, by owning
such put option and depositing and maintaining cash or liquid securities equal
in value between the two exercise prices. In addition the Fund may cover its
position by depositing and maintaining cash or liquid securities equal in value
to the exercise price of the put option written by the Fund.
When the Fund wishes to terminate the Fund's obligation with respect
to an option it has written, the Fund may effect a "closing purchase
transaction." The Fund accomplishes this by buying an option of the same series
as the option previously written by the Fund. The effect of the purchase is that
the writer's position will be canceled. However, a writer may not effect a
closing purchase transaction after the writer has been notified of the exercise
of an option. When the Fund is the holder of an option, it may liquidate its
position by effecting a "closing sale transaction." The Fund accomplishes this
by selling an option of the same series as the option previously purchased by
the Fund. There is no guarantee that either a closing purchase or a closing sale
transaction can be effected. If any call or put option is not exercised or sold,
the option will become worthless on its expiration date.
The Fund will realize a gain (or a loss) on a closing purchase
transaction with respect to a call or put option previously written by the Fund
if the premium, plus commission costs, paid by the Fund to purchase the call
option or put option is less (or greater) than the premium, less commission
costs, received by the Fund on the sale of the call option or put option. The
Fund also will realize a gain if a call option or put option which the Fund has
written lapses unexercised, because the Fund would retain the premium.
The Fund will realize a gain (or a loss) on a closing sale transaction
with respect to a call or a put option previously purchased by the Fund if the
premium, less commission costs, received by the Fund on the sale of the call or
the put option is greater (or less) than the premium, plus commission costs,
paid by the Fund to purchase the call or the put option. If a put or a call
option which the Fund has purchased expires out-of-the-money, the option will
become worthless on the expiration date, and the Fund will realize a loss in the
amount of the premium paid, plus commission costs.
Although certain securities exchanges attempt to provide continuously
liquid markets in which holders and writers of options can close out their
positions at any time prior to the expiration of the option, no assurance can be
given that a market will exist at all times for all outstanding options
purchased or sold by the Fund. In such event, the Fund would be unable to
realize its profits or limit its losses until the Fund would exercise options it
holds and the Fund would remain obligated until options it wrote were exercised
or expired.
10
<PAGE>
Because option premiums paid or received by the Fund are small in
relation to the market value of the investments underlying the options, buying
and selling put and call options can be more speculative than investing directly
in common stocks.
Combined Option Positions
The Fund may purchase and write options (subject to the limitations
described above) in combination with each other to adjust the risk and return
characteristics of the overall positions. Because combined options involve
multiple trades, they result in higher transaction costs and may be more
difficult to open and close out. U.S. Treasury Securities
The Fund may invest in U.S. Treasury Securities as "cover" for the
investment techniques the Fund employs. The Fund may also invest in U.S.
Treasury Securities as part of a cash reserve or for liquidity purposes. U.S.
Treasury Securities are backed by the full faith and credit of the U.S.
Treasury. U.S. Treasury Securities differ only in their interest rates,
maturities and dates of issuance. Treasury Bills have maturities of one year or
less. Treasury Notes have maturities of one to ten years and Treasury Bonds
generally have maturities of greater than ten years at the date of issuance.
Yields on short-, intermediate- and long-term U.S. Treasury Securities are
dependent on a variety of factors, including the general conditions of the money
and bond markets, the size of a particular offering and the maturity of the
obligation. Debt securities with longer maturities tend to produce higher yields
and are generally subject to potentially greater capital appreciation and
depreciation than obligations with shorter maturities and lower yields. The
market value of U.S. Treasury Securities generally varies inversely with changes
in market interest rates. An increase in interest rates, therefore, would
generally reduce the market value of the Fund's portfolio investments in U.S.
Treasury Securities, while a decline in interest rates would generally increase
the market value of the Fund's portfolio investments in these securities.
U.S. Treasury Securities may be purchased at a discount. Such
securities, when retired, may include an element of capital gain. Capital gains
or losses also may be realized upon the sale of U.S. Treasury Securities.
Warrants and Convertible Securities
The Fund may purchase rights and warrants to purchase equity
securities. Investments in rights and warrants are pure speculation in that they
have no voting rights, pay no dividends and have no rights with respect to the
assets of the corporation issuing them. Rights and warrants basically are
options to purchase equity securities at a specific price valid for a specific
period of time. They do not represent ownership of the securities, but only the
right to buy them. Rights and warrants differ from call options in that rights
and warrants are issued by the issuer of the security which may be purchased on
their exercise, whereas call options may be written or issued by anyone. The
prices of rights (if traded independently) and warrants do not necessarily move
parallel to the prices of the underlying securities. Rights and warrants involve
the risk that the Fund could lose the purchase value of the warrant if the
11
<PAGE>
warrant is not exercised prior to its expiration. They also involve the risk
that the effective price paid for the warrant added to the subscription price of
the related security may be greater than the value of the subscribed security's
market price.
The Fund may also invest in convertible securities (debt securities or
preferred stocks of corporations which are convertible into or exchangeable for
common stocks). The Adviser will select only those convertible securities for
which it believes (a) the underlying common stock is a suitable investment for
the Fund and (b) a greater potential for total return exists by purchasing the
convertible security because of its higher yield and/or favorable market
valuation. The Fund may invest up to 5% of its net assets in convertible debt
securities rated less than investment grade. Debt securities rated less than
investment grade are commonly referred to as "junk bonds."
Investments in convertible securities rated less than investment grade
("high yield convertible securities") are subject to a number of risk factors.
The market for high yield convertible securities is subject to substantial
volatility. Issuers of high yield convertible securities may be of low
creditworthiness and the high yield convertible securities are likely to be
subordinated to the claims of senior lenders. The secondary market for high
yield convertible securities may at times become less liquid or respond to
adverse publicity or investor perceptions making it more difficult for the Fund
to value accurately such securities or dispose of them.
Money Market Instruments
The Fund may invest in cash and money market securities. The Fund may
do so to "cover" investment techniques, when taking a temporary defensive
position or to have assets available to pay expenses, satisfy redemption
requests or take advantage of investment opportunities. The money market
securities in which the Fund invests include U.S. Treasury Bills, commercial
paper, commercial paper master notes and repurchase agreements.
The Fund may invest in commercial paper or commercial paper master
notes rated, at the time of purchase, A-1 or A-2 by Standard & Poor's
Corporation or Prime-1 or Prime-2 by Moody's Investors Service, Inc. Commercial
paper master notes are demand instruments without a fixed maturity bearing
interest at rates that are fixed to known lending rates and automatically
adjusted when such lending rates change.
Under a repurchase agreement, the Fund purchases a debt security and
simultaneously agrees to sell the security back to the seller at a mutually
agreed-upon future price and date, normally one day or a few days later. The
resale price is greater than the purchase price, reflecting an agreed-upon
market interest rate during the purchaser's holding period. While the maturities
of the underlying securities in repurchase transactions may be more than one
year, the term of each repurchase agreement will always be less than one year.
The Fund will enter into repurchase agreements only with member banks of the
Federal Reserve system or primary dealers of U.S. Government Securities. The
Adviser will monitor the creditworthiness of each of the firms which is a party
to a repurchase agreement with the Fund. In the event of a default or bankruptcy
by the seller, the Fund will liquidate those
12
<PAGE>
securities (whose market value, including accrued interest, must be at least
equal to 100% of the dollar amount invested by the Fund in each repurchase
agreement) held under the applicable repurchase agreement, which securities
constitute collateral for the seller's obligation to pay. However, liquidation
could involve costs or delays and, to the extent proceeds from the sale of these
securities were less than the agreed-upon repurchase price the Fund would suffer
a loss. The Fund also may experience difficulties and incur certain costs in
exercising its rights to the collateral and may lose the interest the Fund
expected to receive under the repurchase agreement. Repurchase agreements
usually are for short periods, such as one week or less, but may be longer. It
is the current policy of the Fund to treat repurchase agreements that do not
mature within seven days as illiquid for the purposes of its investments
policies.
The Fund may also invest in securities issued by other investment
companies that invest in high quality, short-term debt securities (i.e., money
market instruments). In addition to the advisory fees and other expenses the
Fund bears directly in connection with its own operations, as a shareholder of
another investment company, the Fund would bear its pro rata portion of the
other investment company's advisory fees and other expenses, and such fees and
other expenses will be borne indirectly by the Fund's shareholders.
Foreign Securities and American Depository Receipts
The Fund may invest in common stocks of foreign issuers which are
publicly traded on U.S. exchanges or in the U.S. over-the-counter market either
directly or in the form of American Depository Receipts ("ADRs"). ADRs are
receipts issued by an American bank or trust company evidencing ownership of
underlying securities issued by a foreign issuer. ADR prices are denominated in
United States dollars; the underlying security may be denominated in a foreign
currency. Investments in such securities also involve certain inherent risks,
such as political or economic instability of the issuer or the country of issue,
the difficulty of predicting international trade patterns and the possibility of
imposition of exchange controls. Such securities may also be subject to greater
fluctuations in price than securities of domestic corporations. In addition,
there may be less publicly available information about a foreign company than
about a domestic company. Foreign companies generally are not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic companies. Dividends and interest on foreign securities
may be subject to foreign withholding taxes. To the extent such taxes are not
offset by credits or deductions allowed to investors under U.S. federal income
tax laws, such taxes may reduce the net return to shareholders. Although the
Fund intends to invest in securities of foreign issuers domiciled in nations
which the Adviser considers as having stable and friendly governments, there is
the possibility of expropriation, confiscation, taxation, currency blockage or
political or social instability which could affect investments of foreign
issuers domiciled in such nations.
The Fund will invest only in ADRs which are "sponsored". Sponsored
facilities are based on an agreement with the issuer that sets out rights and
duties of the issuer, the depository and the ADR holder. This agreement also
allocates fees among the parties. Most
13
<PAGE>
sponsored agreements also provide that the depository will distribute
shareholder notices, voting instruments and other communications.
Foreign Currency Considerations
Even though the Fund may hold securities denominated or traded in
foreign currencies, the Fund's performance is measured in terms of U.S. dollars,
which may subject the Fund to foreign currency risk. Foreign currency risk is
the risk that the U.S. dollar value of foreign securities (and any income
generated therefrom) held by the Fund may be affected favorably or unfavorably
by changes in foreign currency exchange rates and exchange control regulations.
Therefore, the net asset value of the Fund may go up or down as the value of the
dollar rises or falls compared to a foreign currency. To manage foreign currency
fluctuations or facilitate the purchase and sale of foreign securities for the
Fund, the Adviser may engage in foreign currency transactions involving (1) the
purchase and sale of forward foreign currency exchange contracts (agreements to
exchange one currency for another at a future date); (2) options on foreign
currencies; (3) currency futures contracts; or (4) options on currency futures
contracts. Although the Fund may use foreign currency transactions to protect
against adverse currency movements, foreign currency transactions involve the
risk that the Adviser may not accurately predict the currency movements, which
could adversely affect the Fund's total return.
A forward foreign currency contract involves an obligation to purchase
or sell a specific currency at a future date, which may be any fixed number of
days from the date of the contract agreed upon by the parties, at a price set at
the time of the contract. These contracts are principally traded in the
inter-bank market conducted directly between currency traders (usually large
commercial banks) and their customers. A forward contract generally has no
deposit requirement and no commissions are charged at any stage for trades.
When the Fund enters into a contract for the purchase or sale of a
security denominated in a foreign currency, it may desire to "lock in" the U.S.
dollar price of the security. By entering into a forward contract for the
purchase or sale of a fixed amount of U.S. dollars equal to the amount of
foreign currency involved in the underlying security transaction, the Fund can
protect itself against a possible loss, resulting from an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during the
period between the date the security is purchased or sold and the date on which
the payment is made or received.
When the Adviser believes that a particular foreign currency may
suffer a substantial decline against the U.S. dollar, it may enter into a
forward contract to sell a fixed amount of the foreign currency approximating
the value of some or all of the portfolio securities of the Fund denominated in
such foreign currency ("position hedging"). The precise matching of the forward
contract amounts and the value of the securities involved will not generally be
possible since the future value of such securities in foreign currencies will
change as a consequence of market movements in the value of those securities
between the date the forward contract is entered into and the date it matures.
The projection of short-term currency
14
<PAGE>
market movement is extremely difficult and the successful execution of a
short-term hedging strategy is highly uncertain. The Fund will not enter into
such forward contracts or maintain a net exposure to such contracts where the
consummation of the contracts would obligate it to deliver an amount of foreign
currency in excess of the value of its securities or other assets denominated in
that currency. Under normal circumstances, the Adviser considers the long-term
prospects for a particular currency and incorporate the prospect into its
overall long-term diversification strategies. The Adviser believes that it is
important to have the flexibility to enter into such forward contracts when it
determines that the best interests of the Fund will be served.
At the maturity of a forward contract, the Fund may either sell the
portfolio securities and make delivery of the foreign currency, or it may retain
the securities and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract obligating it to purchase, on
the same maturity date, the same amount of foreign currency.
If the Fund retains the portfolio securities and engages in an
offsetting transaction, the Fund will incur a gain or a loss to the extent that
there has been movement in forward contract prices. If the Fund engages in an
offsetting transaction, it may subsequently enter into a forward contract to
sell the foreign currency. Should forward prices decline during the period when
the Fund entered into the forward contract for the sale of a foreign currency
and the date it entered into an offsetting contract for the purchase of the
foreign currency, the Fund will realize a gain to the extent the price of the
currency it has agreed to sell exceeds the price of the currency it has agreed
to purchase. Should forward prices increase, the Fund will suffer a loss to the
extent that the price of the currency it has agreed to purchase exceeds the
price of the currency it has agreed to sell.
Shareholders should note that: (1) foreign currency hedge transactions
do not protect against or eliminate fluctuations in the prices of particular
portfolio securities (i.e., if the price of such securities declines due to an
issuer's deteriorating credit situation); and (2) it is impossible to forecast
with precision the market value of securities at the expiration of a forward
contract. Accordingly, the Fund may have to purchase additional foreign currency
on the spot market (and bear the expense of such purchase) if the market value
of the Fund's securities is less than the amount of the foreign currency upon
expiration of the contract. Conversely, the Fund may have to sell some of its
foreign currency received upon the sale of a portfolio security if the market
value of the Fund's securities exceed the amount of foreign currency the Fund is
obligated to deliver. The Fund's dealings in forward foreign currency exchange
contracts will be limited to the transactions described above.
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. The Fund will do so from time to time and investors should be
aware of the costs of currency conversion. Although foreign exchange dealers do
not charge a fee for conversion, they realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to
15
<PAGE>
the Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
The Fund may purchase and sell currency futures and purchase and write
currency options to increase or decrease its exposure to different foreign
currencies. The uses and risks of currency options and futures are similar to
options and futures relating to securities or indices, as discussed earlier in
the Statement of Additional Information. Currency futures contracts are similar
to forward foreign currency contracts, except that they are traded on exchanges
(and have margin requirements) and are standardized as to contract size and
delivery date. Most currency futures contracts call for payment or delivery in
U.S. dollars. The underlying instrument of a currency option may be a foreign
currency, which generally is purchased or delivered in exchange for U.S.
dollars, or may be a futures contract. The purchaser of a currency call obtains
the right to purchase the underlying currency, and the purchaser of a currency
put obtains the right to sell the underlying currency. DIRECTORS AND OFFICERS OF
THE CORPORATION
As a Maryland corporation, the business and affairs of the Corporation
are managed by its officers under the direction of its Board of Directors. The
name, age, address, principal occupation(s) during the past five years, and
other information with respect to each of the directors and officers of the
Corporation are as follows:
* David W. Tice -- Director, President and Treasurer. Mr. Tice, 44,
has been President of David W. Tice & Associates, Inc. (the "Adviser") since
1993. Between 1988 and 1993 Mr. Tice conducted a predecessor investment advisory
business as a sole proprietorship. Mr. Tice is also the President and sole
shareholder of BTN Research, Inc., a registered broker-dealer. His address is
8140 Walnut Hill Lane, Suite 300, Dallas, TX 75231.
* Gregg Jahnke -- Director, Vice President and Secretary. Mr. Jahnke,
40, has been employed by both Mr. Tice and the Adviser as an investment analyst
since 1991. Currently he is an analyst and senior strategist of the Adviser.
From 1987 through 1994 Mr. Jahnke also was a securities analyst for JKE Equity
Research, a Fort Worth, Texas investment advisory firm. His address is 8140
Walnut Hill Lane, Suite 300, Dallas, TX 75231.
David Eric Luck -- Director. Mr. Luck, 44, has been President of
Redstone Oil & Gas Company since 1988. His address is 9223 Club Glen Drive,
Dallas, TX 75243.
Buril Ragsdale -- Director. Mr. Ragsdale, 64, has been employed by
ENSEARCH Corporation as a senior development specialist and senior economic
specialist since 1976. His address is 9149 Emberglow Lane, Dallas, TX 75243.
- ---------------
*Messrs. Tice and Jahnke are interested persons of the Corporation (as
defined in the Investment Company Act of 1940).
16
<PAGE>
For the fiscal year ended September 30, 2000, the Corporation's
standard method of compensating directors is to pay each director who is not an
interested person of the Corporation a fee of $750 for each meeting of the Board
of Directors attended. (During the fiscal year ended September 30, 1999, the
Corporation paid each director who was not an interested person of the
Corporation a fee of $250 for each meeting of the Board of Directors attended.)
The Corporation also may reimburse its directors for travel expenses incurred in
order to attend meetings of the Board of Directors.
The table below sets forth the compensation paid by the Corporation to
each of the current directors of the Corporation during the fiscal year ended
September 30, 1999:
<TABLE>
COMPENSATION TABLE
<CAPTION>
Total
Compensation
Estimated from Corporation
Aggregate Pension or Retirement Annual and Fund
Name of Compensation Benefits Accrued As Benefits Upon Complex Paid to
Person from Corporation Part of Fund Expenses Retirement Directors*
------ ---------------- --------------------- ---------- ---------
<S> <C> <C> <C> <C>
David W. Tice $0 $0 $0 $0
Gregg Jahnke $0 $0 $0 $0
David Eric Luck $1,000 $0 $0 $1,000
Jerry Marlin, M.D.** $1,000 $0 $0 $1,000
Buril Ragsdale $1,000 $0 $0 $1,000
- -------------
*The Funds are the only investment companies in the Fund Complex.
**Dr. Marlin resigned as a director of the Corporation effective December 2, 1999.
</TABLE>
The Corporation and the Adviser have adopted a code of ethics pursuant
to Rule 17j-1 under the Act. The code of ethics permits personnel subject
thereto to invest in securities, including securities that may be purchased or
held by the Funds. The code of ethics prohibits, among other things, persons
subject thereto from purchasing or selling securities if they know at the time
of such purchase or sale that the security is being considered for purchase or
sale by the Funds or is being purchased or sold by the Funds.
OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS
Set forth below are the names and addresses of all holders of the
Prudent Bear Fund's shares who as of December 31, 1999 held of record more than
5% of the Fund's then outstanding shares. The shares owned by Charles Schwab &
Co., Inc., National Financial Services Corp., National Investor Services Corp.
and Donaldson Lufkin & Jenrette Securities Corp. were owned of record only. The
Prudent Bear Fund knows of no person who beneficially owned 5% or more of the
Fund's outstanding shares. All officers and directors of the Corporation as a
group beneficially owned less than 1% of the Prudent Bear Fund's
17
<PAGE>
outstanding shares. (The Prudent Safe Harbor Fund and the Fund will not commence
operations until after January 31, 2000.)
Name and Address of Beneficial Owner Number of Percent of
- ------------------------------------ --------- ----------
Shares Class
------ -----
Charles Schwab & Co., Inc. 11,055,599 27.48%
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corp. 6,191,709 15.39%
One World Financial Center
200 Liberty Street
New York, NY 10281-1003
National Investor Services Corp. 3,269,684 8.13%
55 Water Street - Floor 32
New York, NY 10281-1003
Donaldson Lufkin & Jenrette 2,541,683 6.32%
Securities Corp.
P.O. Box 2052
Jersey City, NJ 07303-2052
INVESTMENT ADVISER, ADMINISTRATOR, CUSTODIAN,
TRANSFER AGENT AND ACCOUNTING SERVICES AGENT
The investment adviser to the Fund is David W. Tice & Associates,
Inc., 8140 Walnut Hill Lane, Suite 405, Dallas, Texas 75231 (the "Adviser"). The
Adviser is controlled by David W. Tice, its President and sole shareholder.
Pursuant to the investment advisory agreement entered into between the
Corporation and the Adviser with respect to the Fund (the "Advisory Agreement"),
the Adviser furnishes continuous investment advisory services to the Fund. The
Adviser supervises and manages the investment portfolio of the Fund and, subject
to such policies as the Board of Directors of the Corporation may determine,
directs the purchase or sale of investment securities in the day-to-day
management of the Fund. Under the Advisory Agreement, the Adviser, at its own
expense and without separate reimbursement from the Fund, furnishes office space
and all necessary office facilities, equipment and executive personnel for
managing the Fund and maintaining its organization; bears all sales and
promotional expenses of the Fund, other than distribution expenses paid by the
Fund pursuant to the Fund's Service and Distribution Plan, and expenses incurred
in complying with the laws regulating the issue or sale of securities; and pays
salaries and fees of all officers and directors
18
<PAGE>
of the Corporation (except the fees paid to directors who are not officers of
the Corporation). (The Fund will commence operations after January 31, 2000.)
The Fund pays all of its expenses not assumed by the Adviser,
including, but not limited to, the costs of preparing and printing its
registration statements required under the Securities Act of 1933 and the Act
and any amendments thereto, the expenses of registering its shares with the
Securities and Exchange Commission and in the various states, the printing and
distribution cost of prospectuses mailed to existing shareholders, the cost of
director and officer liability insurance, reports to shareholders, reports to
government authorities and proxy statements, interest charges, brokerage
commissions and expenses incurred in connection with portfolio transactions. The
Corporation also pays the fees of directors who are not officers of the
Corporation, salaries of administrative and clerical personnel, association
membership dues, auditing and accounting services, fees and expenses of any
custodian or trustees having custody of assets of the Fund, expenses of
calculating net asset values and repurchasing and redeeming shares, and charges
and expenses of dividend disbursing agents, registrars and share transfer
agents, including the cost of keeping all necessary shareholder records and
accounts and handling any problems relating thereto.
The Adviser has undertaken to reimburse the Fund to the extent that
its aggregate annual operating expenses, including the investment advisory fee,
but excluding interest, dividends on short positions, taxes, brokerage
commissions and other costs incurred in connection with the purchase or sale of
portfolio securities, and extraordinary items, exceed that percentage of the
average net assets of the Fund for such year, as determined by valuations made
as of the close of each business day of the year, which is the most restrictive
percentage provided by the state laws of the various states in which the shares
of the Funds are qualified for sale or, if the states in which the shares of the
Funds are qualified for sale impose no such restrictions, 3%. As of the date of
this Statement of Additional Information, no such state law provision was
applicable to the Fund. The Fund monitors its expense ratio on a monthly basis.
If the accrued amount of the expenses of the Fund exceeds the expense
limitation, the Fund creates an account receivable from the Adviser for the
amount of such excess. In such a situation the monthly payment of the Adviser's
fee will be reduced by the amount of such excess (and if the amount of such
excess in any month is greater than the monthly payment of the Adviser's fee,
the Adviser will pay the Fund the amount of such difference), subject to
adjustment month by month during the balance of the Fund's fiscal year if
accrued expenses thereafter fall below this limit. (The Fund will not commence
operations until after January 31, 2000.)
The Advisory Agreement will remain in effect as long as its
continuance is specifically approved at least annually (i) by the Board of
Directors of the Corporation or by the vote of a majority (as defined in the
Act) of the outstanding shares of the Fund, and (ii) by the vote of a majority
of the directors of the Corporation who are not parties to the Advisory
Agreement or interested persons of the Adviser, cast in person at a meeting
called for the purpose of voting on such approval. The Advisory Agreement
provides that it may be terminated at any time without the payment of any
penalty, by the Board of Directors of the Corporation or by vote of the majority
of the Fund's shareholders on sixty (60) days' written
19
<PAGE>
notice to the Adviser, and by the Adviser on the same notice to the Corporation,
and that it shall be automatically terminated if it is assigned.
The Advisory Agreement provides that the Adviser shall not be liable
to the Corporation or its shareholders for anything other than willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations or duties. The Advisory Agreement also provides that the Adviser and
its officers, directors and employees may engage in other businesses, devote
time and attention to any other business whether of a similar or dissimilar
nature, and render services to others.
The administrator to the Corporation is Firstar Mutual Fund Services,
LLC, 615 East Michigan Street, Milwaukee, Wisconsin 53202 (the "Administrator").
Pursuant to the Fund Administration Servicing Agreement entered into between the
Corporation and the Administrator relating to the Fund (the "Administration
Agreement"), the Administrator maintains the books, accounts and other documents
required by the Act, responds to shareholder inquiries, prepares the Fund's
financial statements and tax returns, prepares certain reports and filings with
the Securities and Exchange Commission and with state Blue Sky authorities,
furnishes statistical and research data, clerical, accounting and bookkeeping
services and stationery and office supplies, keeps up and maintains the Fund's
financial and accounting records and generally assists in all aspects of the
Fund's operations. The Administrator, at its own expense and without
reimbursement from the Fund, furnishes office space and all necessary office
facilities, equipment and executive personnel for performing the services
required to be performed by it under the Administration Agreement. For the
foregoing, the Administrator will receive from the Fund a fee, paid monthly, at
an annual rate of .08% of the first $200,000,000 of the Fund's average net
assets, .06% of the next $300,000,000 of the Fund's average net assets, .05% of
the next $500,000,000 of the Fund's average net assets, and .04% of the Fund's
average net assets in excess of $1,000,000. Notwithstanding the foregoing, the
Administrator's minimum annual fee is $45,000. The Administration Agreement will
remain in effect until terminated by either party. The Administration Agreement
may be terminated at any time, without the payment of any penalty, by the Board
of Directors of the Corporation upon the giving of ninety (90) days' written
notice to the Administrator, or by the Administrator upon the giving of ninety
(90) days' written notice to the Corporation. (The Fund will commence operations
after January 31, 2000.)
Under the Administration Agreement, the Administrator shall exercise
reasonable care and is not liable for any error or judgment or mistake of law or
for any loss suffered by the Corporation in connection with the performance of
the Administration Agreement, except a loss resulting from willful misfeasance,
bad faith or negligence on the part of the Administrator in the performance of
its duties under the Administration Agreement.
Firstar Bank, NA, an affiliate of Firstar Mutual Fund Services, LLC,
serves as custodian of the assets of the Fund pursuant to a Custody Agreement.
Under the Custody Agreement, Firstar Bank, NA has agreed to (i) maintain a
separate account in the name of the Fund, (ii) make receipts and disbursements
of money on behalf of the Fund, (iii) collect and
20
<PAGE>
receive all income and other payments and distributions on account of the Fund's
portfolio investments, (iv) respond to correspondence from shareholders,
security brokers and others relating to its duties and (v) make periodic reports
to the Fund concerning the Fund's operations.
Firstar Mutual Fund Services, LLC also serves as transfer agent and
dividend disbursing agent for the Fund under a Shareholder Servicing Agent
Agreement. As transfer and dividend disbursing agent, Firstar Mutual Fund
Services, LLC has agreed to (i) issue and redeem shares of the Fund, (ii) make
dividend and other distributions to shareholders of the Fund, (iii) respond to
correspondence by Fund shareholders and others relating to its duties, (iv)
maintain shareholder accounts, and (v) make periodic reports to the Fund.
In addition the Corporation has entered into a Fund Accounting
Servicing Agreement with Firstar Mutual Fund Services, LLC pursuant to which
Firstar Mutual Fund Services, LLC has agreed to maintain the financial accounts
and records of the Fund and provide other accounting services to the Fund. For
its accounting services, Firstar Mutual Fund Services, LLC is entitled to
receive fees from the Fund, payable monthly, based on the total annual rate of
$39,000 for the first $100 million of average net assets, .02% on the next $200
million of average net assets and .01% on average net assets exceeding $300
million (subject to an annual minimum of $39,000). Firstar Mutual Fund Services,
LLC is also entitled to certain out of pocket expenses, including pricing
expenses. (The Fund will not commence operations until after January 31, 2000.)
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund will be determined as of the close of
regular trading (currently 4:00 p.m. Eastern time) on each day the New York
Stock Exchange is open for trading. The New York Stock Exchange is open for
trading Monday through Friday except New Year's Day, Dr. Martin Luther King, Jr.
Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Additionally, when any of the aforementioned
holidays falls on a Saturday, the New York Stock Exchange will not be open for
trading on the preceding Friday and when any such holiday falls on a Sunday, the
New York Stock Exchange will not be open for trading on the succeeding Monday,
unless unusual business conditions exist, such as the ending of a monthly or the
yearly accounting period. The New York Stock Exchange also may be closed on
national days of mourning. The staff of the Securities and Exchange Commission
considers the New York Stock Exchange to be closed on any day when it is not
open for trading the entire day. On these days the Fund may, but is not
obligated to, determine its net asset value.
Foreign securities trading may not take place on all days when the New
York Stock Exchange is open, or may take place on Saturdays and other days when
the New York Stock Exchange is not open and the Fund's net asset value is not
calculated. When determining net asset value, the Fund values foreign securities
primarily listed and/or traded in foreign markets at their market value as of
the close of the last primary market where the securities traded. Securities
trading in European countries and Pacific Rim countries is
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normally completed well before 3:00 P.M. Central Time. Unless material, as
determined by the Adviser under the supervision of the Board of Directors,
events affecting the valuation of Fund securities occurring between the time its
net asset value is determined and the close of the New York Stock Exchange will
not be reflected in such net asset value.
Common stocks and securities sold short that are listed on a
securities 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
securities 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 prices. Unlisted equity securities for
which market quotations are readily available are valued at the average of the
current bid and asked prices. Options purchased or written by the Fund are
valued at the average of the current bid and asked prices. The value of a
futures contract equals the unrealized gain or loss on the contract that is
determined by marking the contract to the current settlement price for a like
contract acquired on the day on which the futures contract is being valued. A
settlement price may not be moved if the market makes a limit move in which
event the futures contract will be valued at its fair value as determined by the
Adviser in accordance with procedures approved by the Board of Directors. Debt
securities are valued at the latest bid prices furnished by independent pricing
services. Other assets and securities for which no quotations are readily
available are valued at fair value as determined in good faith by the Adviser in
accordance with procedures approved by the Board of Directors of the
Corporation. Short-term instruments (those with remaining maturities of 60 days
or less) are valued at amortized cost, which approximates market. The Fund
prices foreign securities in terms of U.S. dollars at the official exchange
rate. Alternatively, it may price these securities at the average of the current
bid and asked prices of such currencies against the dollar last quoted by a
major bank that is a regular participant in the foreign exchange market, or on
the basis of a pricing service that takes into account the quotes provided by a
number of such major banks. If the Fund does not have any of these alternatives
available to them or the alternatives do not provide a suitable method for
converting a foreign currency into U.S. dollars, the Adviser in accordance with
procedures approved by the Board of Directors of the Corporation will establish
a conversion rate for such currency.
DISTRIBUTION OF SHARES
The Corporation has adopted a Service and Distribution Plan (the
"Plan") for the Fund. The Plan was adopted in anticipation that the Fund will
benefit from the Plan through increased sales of shares, thereby reducing the
Fund's expense ratio and providing the Adviser with greater flexibility in
management. The Plan authorizes payment 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.
Amounts paid under the Plan by the Fund may be spent by the Fund on any
activities or expenses primarily intended to result in the sale of shares of the
Fund, including but not limited to, advertising, compensation for sales and
marketing activities of financial institutions and others such as dealers and
distributors, shareholder account servicing, the printing and mailing of
22
<PAGE>
prospectuses to other than current shareholders and the printing and mailing of
sales literature. To the extent any activity is one which the Fund may finance
without a plan pursuant to Rule 12b-1, the Fund may also make payments to
finance such activity outside of the Plan and not subject to its limitations.
The Plan may be terminated by the Fund at any time by a vote of the
directors of the Corporation who are not interested persons of the Corporation
and who have no direct or indirect financial interest in the Plan or any
agreement related thereto (the "Rule 12b-1 Directors") or by a vote of a
majority of the outstanding shares of the Fund's shares. Messrs. Luck and
Ragsdale are currently the Rule 12b-1 Directors. Any change in the Plan that
would materially increase the distribution expenses of the Fund provided for in
the Plan requires approval of the Board of Directors, including the Rule 12b-1
Directors, and a majority of the Fund's shares.
While the Plan is in effect, the selection and nomination of directors
who are not interested persons of the Corporation will be committed to the
discretion of the directors of the Corporation who are not interested persons of
the Corporation. The Board of Directors of the Corporation must review the
amount and purposes of expenditures pursuant to the Plan quarterly as reported
to it by a Distributor, if any, or officers of the Corporation. The Plan will
continue in effect for as long as its continuance is specifically approved at
least annually by the Board of Directors, including the Rule 12b-1 Directors.
(The Fund will not commence operations until after January 31, 2000.)
AUTOMATIC INVESTMENT PLAN AND TELEPHONE PURCHASES
The Fund offers an automatic investment option pursuant to which money
will be moved from a shareholder's bank account to the shareholder's Fund
account on the schedule (e.g., monthly, bimonthly [every other month], or
quarterly the shareholder selects. The minimum transaction amount is $100.
The Fund offers a telephone purchase option pursuant to which money
will be moved from a shareholder's bank account to the shareholder's Fund
account upon request. Only bank accounts held at domestic financial institutions
that are Automated Clearing House (ACH) members can be used for telephone
transactions. To have Fund shares purchased at net asset value determined as of
the close of regular trading on a given date, Firstar Mutual Fund Services, LLC
must receive both the purchase order and payment by Electronic Funds Transfer
through the ACH System before the close of regular trading on such date. Most
transfers are completed the same business day. The minimum amount that can be
transferred by telephone is $100.
REDEMPTION OF SHARES
A shareholder's right to redeem shares of the Fund will be suspended
and the right to payment postponed for more than seven days for any period
during which the New York Stock Exchange is closed because of financial
conditions or any other extraordinary reason and may be suspended for any period
during which (a) trading on the New York Stock
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Exchange is restricted pursuant to rules and regulations of the Securities and
Exchange Commission, (b) the Securities and Exchange Commission has by order
permitted such suspension or (c) such emergency, as defined by rules and
regulations of the Securities and Exchange Commission, exists as a result of
which it is not reasonably practicable for the Fund to dispose of its securities
or fairly to determine the value of its net assets.
SYSTEMATIC WITHDRAWAL PLAN
An investor who owns shares of the Fund worth at least $10,000 at the
current net asset value may, by completing an application which may be obtained
from the Corporation or Firstar Mutual Fund Services, LLC, create a Systematic
Withdrawal Plan from which a fixed sum will be paid to the investor at regular
intervals. To establish the Systematic Withdrawal Plan, the investor deposits
Fund shares with the Corporation and appoints it as agent to effect redemptions
of shares held in the account for the purpose of making monthly or quarterly
withdrawal payments of a fixed amount to the investor out of the account. Fund
shares deposited by the investor in the account need not be endorsed or
accompanied by a stock power if registered in the same name as the account;
otherwise, a properly executed endorsement or stock power, obtained from any
bank, broker-dealer or the Corporation is required. The investor's signature
should be guaranteed by a bank, a member firm of a national stock exchange or
other eligible guarantor.
The minimum amount of a withdrawal payment is $100. These payments
will be made from the proceeds of periodic redemptions of shares in the account
at net asset value. Redemptions will be made in accordance with the schedule
(e.g., monthly, bimonthly [every other month], quarterly or yearly, but in no
event more frequently than monthly) selected by the investor. If a scheduled
redemption day is a weekend day or a holiday, such redemption will be made on
the next preceding business day. Establishment of a Systematic Withdrawal Plan
constitutes an election by the investor to reinvest in additional Fund shares,
at net asset value, all income dividends and capital gains distributions payable
by the Fund on shares held in such account, and shares so acquired will be added
to such account. The investor may deposit additional Fund shares in his account
at any time.
Withdrawal payments cannot be considered as yield or income on the
investor's investment, since portions of each payment will normally consist of a
return of capital. Depending on the size or the frequency of the disbursements
requested, and the fluctuation in the value of the Fund's portfolio, redemptions
for the purpose of making such disbursements may reduce or even exhaust the
investor's account.
The investor may vary the amount or frequency of withdrawal payments,
temporarily discontinue them, or change the designated payee or payee's address,
by notifying Firstar Mutual Fund Services, LLC in writing thirty (30) days prior
to the next payment.
ALLOCATION OF PORTFOLIO BROKERAGE
The Fund's securities trading and brokerage policies and procedures
are reviewed by and subject to the supervision of the Corporation's Board of
Directors. Decisions
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<PAGE>
to buy and sell securities for the Fund are made by the Adviser subject to
review by the Corporation's Board of Directors. In placing purchase and sale
orders for portfolio securities for the Fund, it is the policy of the Adviser to
seek the best execution of orders at the most favorable price in light of the
overall quality of brokerage and research services provided, as described in
this and the following paragraphs. Many of these transactions involve payment of
a brokerage commission by the Fund. In some cases, transactions are with firms
who act as principals of their own accounts. In selecting brokers to effect
portfolio transactions, the determination of what is expected to result in best
execution at the most favorable price involves a number of largely judgmental
considerations. Among these are the Adviser's evaluation of the broker's
efficiency in executing and clearing transactions, block trading capability
(including the broker's willingness to position securities) and the broker's
reputation, financial strength and stability. The most favorable price to the
Fund means the best net price without regard to the mix between purchase or sale
price and commission, if any. Over-the-counter securities may be purchased and
sold directly with principal market makers who retain the difference in their
cost in the security and its selling price (i.e. "markups" when a market maker
sells a security and "markdowns" when the market maker purchases a security). In
some instances, the Adviser feels that better prices are available from
non-principal market makers who are paid commissions directly. The Fund may
place portfolio orders with broker-dealers who recommend the purchase of Fund
shares to clients (if the Adviser believes the commissions and transaction
quality are comparable to that available from other brokers) and may allocate
portfolio brokerage on that basis.
In allocating brokerage business for the Fund, the Adviser also takes
into consideration the research, analytical, statistical and other information
and services provided by the broker, such as general economic reports and
information, reports or analyses of particular companies or industry groups,
market timing and technical information, and the availability of the brokerage
firm's analysts for consultation. While the Adviser believes these services have
substantial value, they are considered supplemental to the Adviser's own efforts
in the performance of its duties under the Advisory Agreement. Other clients of
the Adviser may indirectly benefit from the availability of these services to
the Adviser, and the Fund may indirectly benefit from services available to the
Adviser as a result of transactions for other clients. The Advisory Agreement
provides that the Adviser may cause the Fund to pay a broker which provides
brokerage and research services to the Adviser a commission for effecting a
securities transaction in excess of the amount another broker would have charged
for effecting the transaction, if the Adviser determines in good faith that such
amount of commission is reasonable in relation to the value of brokerage and
research services provided by the executing broker viewed in terms of either the
particular transaction or the Adviser's overall responsibilities with respect to
the Fund and the other accounts as to which it exercises investment discretion.
(The Fund will not commence operations until after January 31, 2000.)
TAXES
The Fund intends to qualify annually for and elect tax treatment
applicable to a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code").
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In order to qualify as a regulated investment company under Subchapter
M, the Fund must have at least 90% of its annual gross income derived from
qualified sources and the Fund must have at least 50% of its assets invested in
qualified assets for each quarter during a fiscal year, in addition to meeting
other Code requirements.
If the Fund fails to qualify as a regulated investment company under
Subchapter M in any fiscal year, it will be treated as a corporation for federal
income tax purposes. As such the Fund would be required to pay income taxes on
its net investment income and net realized capital gains, if any, at the rates
generally applicable to corporations. Shareholders of the Fund would not be
liable for income tax on the Fund's net investment income or net realized
capital gains in their individual capacities. Distributions to shareholders,
whether from the Fund's net investment income or net realized capital gains,
would be treated as taxable dividends to the extent of current or accumulated
earnings and profits of the Fund.
The Fund intends to distribute substantially all of its net investment
income and net capital gain each fiscal year. Dividends from net investment
income and short-term capital gains are taxable to investors as ordinary income,
while distributions of net long-term capital gains are taxable as long-term
capital gain regardless of the shareholder's holding period for the shares.
Distributions from the Fund are taxable to investors, whether received in cash
or in additional shares of the Fund.
If a call option written by the Fund expires, the amount of the
premium received by the Fund for the option will be short-term capital gain. If
such an option is closed by the Fund, any gain or loss realized by the Fund as a
result of the closing purchase transaction will be short-term capital gain or
loss. If the holder of a call option exercises the holder's right under the
option, any gain or loss realized by the Fund upon the sale of the underlying
security pursuant to such exercise will be short-term or long-term capital gain
or loss to the Fund depending on the Fund's holding period for the underlying
security.
With respect to call options purchased by the Fund, the Fund will
realize short-term or long-term capital gain or loss if such option is sold and
will realize short-term or long-term capital loss if the option is allowed to
expire depending on the Fund's holding period for the call option. If such a
call option is exercised, the amount paid by the Fund for the option will be
added to the basis of the stock or futures contract so acquired.
The Fund may utilize options on stock indexes. Options on "broadbased"
stock indexes are classified as "nonequity options" under the Code. Gains and
losses resulting from the expiration, exercise or closing of such nonequity
options, as well as gains and losses resulting from futures contract
transactions, will be treated as long-term capital gain or loss to the extent of
60% thereof and short-term capital gain or loss to the extent of 40% thereof
(hereinafter "blended gain or loss"). In addition, any nonequity option held by
the Fund on the last day of a fiscal year will be treated as sold for market
value on that date, and gain or loss recognized as a result of such deemed sale
will be blended gain or loss. These tax considerations may have an impact on
investment decisions made by the Fund.
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The trading strategies of the Fund may constitute "straddle"
transactions. Straddles may affect the short-term or long-term holding period of
certain investments for distribution characterization, and may cause the
postponement of recognition of losses incurred in certain closing transactions
for tax purposes.
Any dividend or capital gain distribution paid shortly after a
purchase of shares of the Fund, will have the effect of reducing the per share
net asset value of such shares by the amount of the dividend or distribution.
Furthermore, if the net asset value of the shares of the Fund immediately after
a dividend or distribution is less than the cost of such shares to the
shareholder, the dividend or distribution will be taxable to the shareholder
even though it results in a return of capital to him.
Redemption of shares will generally result in a capital gain or loss
for income tax purposes. Such capital gain or loss will be long term or short
term, depending upon the holding period. However, if a loss is realized on
shares held for six months or less, and the investor received a capital gain
distribution during that period, then such loss is treated as a long-term
capital loss to the extent of the capital gain distribution received.
The Fund may be required to withhold Federal income tax at a rate of
31% ("backup withholding") from dividend payments and redemption proceeds if a
shareholder fails to furnish the Fund with his social security or other tax
identification number and certify under penalty of perjury that such number is
correct and that he is not subject to backup withholding due to the under
reporting of income. The certification form is included as part of the share
purchase application and should be completed when the account is opened.
This section is not intended to be a complete discussion of present or
proposed federal income tax laws and the effect of such laws on an investor.
Investors are urged to consult with their respective tax advisers for a complete
review of the tax ramifications of an investment in the Fund.
SHAREHOLDER MEETINGS
The Maryland General Corporation Law permits registered investment
companies, such as the Corporation, to operate without an annual meeting of
shareholders under specified circumstances if an annual meeting is not required
by the Act. The Corporation has adopted the appropriate provisions in its Bylaws
and may, at its discretion, not hold an annual meeting in any year in which the
election of directors is not required to be acted on by shareholders under the
Act.
The Corporation's Bylaws also contain procedures for the removal of
directors by its shareholders. At any meeting of shareholders, duly called and
at which a quorum is present, the shareholders may, by the affirmative vote of
the holders of a majority of the votes entitled to be cast thereon, remove any
director or directors from office and may elect a successor or successors to
fill any resulting vacancies for the unexpired terms of removed directors.
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Upon the written request of the holders of shares entitled to not less
than ten percent (10%) of all the votes entitled to be cast at such meeting, the
Secretary of the Corporation shall promptly call a special meeting of
shareholders for the purpose of voting upon the question of removal of any
director. Whenever ten or more shareholders of record who have been such for at
least six months preceding the date of application, and who hold in the
aggregate either shares having a net asset value of at least $25,000 or at least
one percent (1%) of the total outstanding shares, whichever is less, shall apply
to the Corporation's Secretary in writing, stating that they wish to communicate
with other shareholders with a view to obtaining signatures to a request for a
meeting as described above and accompanied by a form of communication and
request which they wish to transmit, the Secretary shall within five business
days after such application either: (1) afford to such applicants access to a
list of the names and addresses of all shareholders as recorded on the books of
the Corporation; or (2) inform such applicants as to the approximate number of
shareholders of record and the approximate cost of mailing to them the proposed
communication and form of request.
If the Secretary elects to follow the course specified in clause (2)
of the last sentence of the preceding paragraph, the Secretary, upon the written
request of such applicants, accompanied by a tender of the material to be mailed
and of the reasonable expenses of mailing, shall, with reasonable promptness,
mail such material to all shareholders of record at their addresses as recorded
on the books unless within five business days after such tender the Secretary
shall mail to such applicants and file with the Securities and Exchange
Commission, together with a copy of the material to be mailed, a written
statement signed by at least a majority of the Board of Directors to the effect
that in their opinion either such material contains untrue statements of fact or
omits to state facts necessary to make the statements contained therein not
misleading, or would be in violation of applicable law, and specifying the basis
of such opinion.
After opportunity for hearing upon the objections specified in the
written statement so filed, the Securities and Exchange Commission may, and if
demanded by the Board of Directors or by such applicants shall, enter an order
either sustaining one or more of such objections or refusing to sustain any of
them. If the Securities and Exchange Commission shall enter an order refusing to
sustain any of such objections, or if, after the entry of an order sustaining
one or more of such objections, the Securities and Exchange Commission shall
find, after notice and opportunity for hearing, that all objections so sustained
have been met, and shall enter an order so declaring, the Secretary shall mail
copies of such material to all shareholders with reasonable promptness after the
entry of such order and the renewal of such tender.
PERFORMANCE INFORMATION
The Fund may provide from time to time in advertisements, reports to
shareholders and other communications with shareholders its average annual total
returns. An average total return refers to the rate of return which, if applied
to an initial investment at the beginning of a stated period and compounded over
the period, would result in the redeemable value of the investment at the end of
the stated period assuming reinvestment of all dividends
28
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and distribution and reflecting the effect of all recurring fees. When
considering "average" total return figures for periods longer than one year,
shareholders should note that the Fund's annual total return for any one year in
the period might have been greater or less than the average for the entire
period. The Fund may provide "aggregate" total return figures for various
periods, representing the cumulative change in value of an investment in the
Fund for a specific period (again reflecting changes in the Fund's share price
and assuming reinvestment of dividends and distributions).
Average annual total return measures both the net investment income
generated by, and the effect of any realized or unrealized appreciation or
depreciation of, the underlying investments in the Fund's investment portfolio.
The Fund's average annual total return figures are computed in accordance with
the standardized method prescribed by the Securities and Exchange Commission by
determining the average annual compounded rates of return over the periods
indicated, that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment at the beginning of such period
This calculation (i) assumes all dividends and distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus, and (ii) deducts all recurring fees, such as advisory fees,
charged as expenses to all investor accounts.
Total return is the cumulative rate of investment growth which assumes
that income dividends and capital gains are reinvested. It is determined by
assuming a hypothetical investment at the net asset value at the beginning of
the period, adding in the reinvestment of all income dividends and capital
gains, calculating the ending value of the investment at the net asset value as
of the end of the specified time period, subtracting the amount of the original
investment, and dividing this amount by the amount of the original investment.
This calculated amount is then expressed as a percentage by multiplying by 100.
The Fund may also compare its performance to other mutual funds with
similar investment objectives and to the industry as a whole as reported by
Lipper Analytical Services, Inc., Morningstar OnDisc, Money, Forbes, Business
Week and Barron's magazines and The Wall Street Journal. (Lipper Analytical
Services, Inc. and Morningstar OnDisc are independent ranking services that rank
mutual funds based upon total return performance.) The Fund may also compare its
performance to the Dow Jones Industrial Average, NASDAQ
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Composite Index, NASDAQ Industrials Index, Value Line Composite Index, the
Standard & Poor's 500 Stock Index, and the Consumer Price Index.
CAPITAL STRUCTURE
The Corporation's Articles of Incorporation permit the Board of
Directors to issue 1,000,000,000 shares of common stock, with a $.0001 par
value. The Board of Directors has the power to designate one or more classes of
shares of common stock and to classify or reclassify any unissued shares of
common stock. Currently the Corporation has authorized three portfolios, the
Prudent Bear Fund, the Prudent Safe Harbor Fund and the Prudent Bear Large Cap
Fund. The Prudent Bear Fund has two classes, the No Load Shares and the Class C
Shares. The Prudent Safe Harbor Fund and the Prudent Bear Large Cap Fund have
one class only, the No Load Shares. Of the 1,000,000,000 shares of common stock
authorized, 250,000,000 have been designated for each of the four classes.
Each class of shares of each Fund are fully paid and non-assessable;
have no preferences as to conversion, exchange, dividends, retirement or other
features; and have no preemptive rights. Each class of shares bears differing
class specific expenses such as 12b-1 fees. Each class of shares of each Fund
have non-cumulative voting rights, meaning that the holders of more than 50% of
the shares voting for the election of Directors can elect 100% of the Directors
if they so choose. Generally shares are voted in the aggregate and not by each
class or Fund, except where class voting rights (i.e. by Fund or class) is
required by Maryland law or the Act.
The shares of each Fund have the same preferences, limitations and
rights, except that all consideration received from the sale of shares of each
Fund, together with all income, earnings, profits and proceeds thereof, belong
to that Fund and are charged with the liabilities in respect of that Fund and of
that Fund's share of the general liabilities of the Corporation in the
proportion that the total net assets of the Fund bears to the total net assets
of all of the Funds. However the Board of Directors of the Corporation may, in
its discretion direct that any one or more general liabilities of the
Corporation be allocated among the Funds on a different basis. The net asset
value per share of each Fund is based on the assets belonging to that Fund less
the liabilities charged to that Fund, and dividends are paid on shares of each
Fund only out of lawfully available assets belonging to that Fund. In the event
of liquidation or dissolution of the Corporation, the shareholders of each Fund
will be entitled, out of the assets of the Corporation available for
distribution, to the assets belonging to such Fund.
DESCRIPTION OF SECURITIES RATINGS
The Fund may invest in commercial paper and commercial paper master
notes assigned ratings of either Standard & Poor's Corporation ("Standard &
Poor's") or Moody's Investors Service, Inc. ("Moody's"). A brief description of
the ratings symbols and their meanings follows.
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Standard & Poor's Commercial Paper Ratings. A Standard & Poor's
commercial paper rating is a current assessment of the likelihood of timely
payment of debt considered short-term in the relevant market. Ratings are graded
into several categories, ranging from A-1 for the highest quality obligations to
D for the lowest. The categories rated A-3 or higher are as follows:
A-1. This highest category indicates that the degree of safety
regarding timely payment is strong. Those issuers determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However the relative degree of safety is not as high as for
issuers designed "A-1".
A-3. Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designation.
Moody's Short-Term Debt Ratings. Moody's short-term debt ratings are
opinions of the ability of issuers to repay punctually senior debt obligations
which have an original maturity not exceeding one year. Obligations relying upon
support mechanisms such as letters-of-credit and bonds of indemnity are excluded
unless explicitly rated.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:
Prime-1. Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance
on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions) have a
strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still
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appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 100 East Wisconsin Avenue, Suite 1500,
Milwaukee, Wisconsin 53202, has been selected as the independent accountants for
the Fund. As such PricewaterhouseCoopers LLP performs an audit of the Fund's
financial statements and considers the Fund's internal control structure.
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PART C
OTHER INFORMATION
Item 23. Exhibits
--------
(a)(i) Registrant's Articles of Incorporation.(1)
(a)(ii) Articles Supplementary.(3)
(a)(iii) Articles Supplementary.
(a)(iv) Articles Supplementary.
(b) Registrant's Bylaws.(1)
(c) None.
(d)(i) Investment Advisory Agreement (Prudent Bear Fund).(1)
(d)(ii) Investment Advisory Agreement (Prudent Safe Harbor
Fund).(4)
(d)(iii) Investment Advisory Agreement (Prudent Bear Large Cap
Fund).(4)
(e) None.
(f) None.
(g)(i) Custodian Agreement with Firstar Trust Company
(predecessor to Firstar Bank, NA) (Prudent Bear Fund).(1)
(g)(ii) Custodian Agreement with Firstar Bank, NA (Prudent Safe
Harbor Fund).(4)
(g)(iii) Custodian Agreement with Firstar Bank, NA (Prudent Bear
Large Cap Fund).(4)
(h)(i) Fund Administration Servicing Agreement with Firstar Trust
Company (predecessor to Firstar Mutual Fund Services, LLC)
(Prudent Bear Fund).(1)
S-1
<PAGE>
(h)(ii) Fund Administration Servicing Agreement with Firstar
Mutual Fund Services, LLC (Prudent Safe Harbor Fund).(4)
(h)(iii) Fund Administration Servicing Agreement with Firstar
Mutual Fund Services, LLC (Prudent Bear Large Cap
Fund).(4)
(h)(iv) Transfer Agent Agreement with Firstar Trust Company
(predecessor to Firstar Mutual Fund Services, LLC)
(Prudent Bear Fund).(1)
(h)(v) Transfer Agent Agreement with Firstar Mutual Fund
Services, LLC (Prudent Safe Harbor Fund).(4)
(h)(vi) Transfer Agent Agreement with Firstar Mutual Fund
Services, LLC (Prudent Bear Large Cap Fund).(4)
(h)(vii) Fund Accounting Servicing Agreement with Firstar Trust
Company (predecessor to Firstar Mutual Fund Services, LLC)
(Prudent Bear Fund).(1)
(h)(viii) Fund Accounting Servicing Agreement with Firstar Mutual
Fund Services, LLC (Prudent Safe Harbor Fund). (4)
(h)(ix) Fund Accounting Servicing Agreement with Firstar Mutual
Fund Services, LLC (Prudent Bear Large Cap Fund). (4)
(i) Opinion of Foley & Lardner, counsel for Registrant.
(j) Consent of PricewaterhouseCoopers LLP.
(k) None.
(l) Subscription Agreement.(1)
(m)(i) Service and Distribution Plan for Prudent Bear Fund No
Load Shares.(3)
(m)(ii) Service and Distribution Plan for Prudent Bear Fund Class
C Shares.(3)
(m)(iii) Service and Distribution Plan for Prudent Safe Harbor Fund
No Load Shares.(4)
(m)(iv) Service and Distribution Plan for Prudent Bear Large Cap
Fund No Load Shares.(4)
S-2
<PAGE>
(n) Rule 18f-3 Multi-Class Plan.(4)
(p) Code of Ethics of Prudent Bear Funds, Inc. and David W.
Tice & Associates, Inc.
- ---------------
(1) Previously filed as an exhibit to Pre-Effective Amendment No. 1 to the
Registration Statement and incorporated by reference thereto. Pre-Effective
Amendment No. 1 was filed on December 18, 1995 and its accession number is
0000897069-95-000208.
(2) Previously filed as an exhibit to Post-Effective Amendment No. 3 to the
Registration Statement and incorporated by reference thereto. Post-Effective
Amendment No. 3 was filed on January 27, 1998 and its accession number is
0000897069-98-000014.
(3) Previously filed as an exhibit to Post-Effective Amendment No. 4 to the
Registration Statement and incorporated by reference thereto. Post-Effective
Amendment No. 4 was filed on September 28, 1998 and its accession number is
0000897069-98-000479.
(4) Previously filed as an exhibit to Post-Effective Amendment No. 6 to the
Registration Statement and incorporated by reference thereto. Post-Effective
Amendment No. 6 was filed on November 17, 1999 and its accession number is
0000897069-99-000569.
Item 24. Persons Controlled by or under Common Control with Registrant
-------------------------------------------------------------
Registrant is not controlled by any person. Registrant neither
controls any person nor is under common control with any other person.
Item 25. Indemnification
---------------
Pursuant to the authority of the Maryland General Corporation Law,
particularly Section 2-418 thereof, Registrant's Board of Directors has adopted
the following bylaw which is in full force and effect and has not been modified
or cancelled:
Article VII
GENERAL PROVISIONS
Section 7. Indemnification.
- --------- ---------------
A. The Corporation shall indemnify all of its corporate representatives
against expenses, including attorneys fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred by them in connection with the
defense of any action, suit or proceeding, or threat or claim of such action,
suit or proceeding, whether civil, criminal, administrative, or legislative, no
matter by whom brought, or in any appeal in which they or any of them are made
parties or a party by reason of being or having been a corporate
S-3
<PAGE>
representative, if the corporate representative acted in good faith and in a
manner reasonably believed to be in or not opposed to the best interests of the
corporation and with respect to any criminal proceeding, if he had no reasonable
cause to believe his conduct was unlawful provided that the corporation shall
not indemnify corporate representatives in relation to matters as to which any
such corporate representative shall be adjudged in such action, suit or
proceeding to be liable for gross negligence, willful misfeasance, bad faith,
reckless disregard of the duties and obligations involved in the conduct of his
office, or when indemnification is otherwise not permitted by the Maryland
General Corporation Law.
B. In the absence of an adjudication which expressly absolves the corporate
representative, or in the event of a settlement, each corporate representative
shall be indemnified hereunder only if there has been a reasonable determination
based on a review of the facts that indemnification of the corporate
representative is proper because he has met the applicable standard of conduct
set forth in paragraph A. Such determination shall be made: (i) by the board of
directors, by a majority vote of a quorum which consists of directors who were
not parties to the action, suit or proceeding, or if such a quorum cannot be
obtained, then by a majority vote of a committee of the board consisting solely
of two or more directors, not, at the time, parties to the action, suit or
proceeding and who were duly designated to act in the matter by the full board
in which the designated directors who are parties to the action, suit or
proceeding may participate; or (ii) by special legal counsel selected by the
board of directors or a committee of the board by vote as set forth in (i) of
this paragraph, or, if the requisite quorum of the full board cannot be obtained
therefor and the committee cannot be established, by a majority vote of the full
board in which directors who are parties to the action, suit or proceeding may
participate.
C. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall create a rebuttable presumption that the person was guilty of willful
misfeasance, bad faith, gross negligence or reckless disregard to the duties and
obligations involved in the conduct of his or her office, and, with respect to
any criminal action or proceeding, had reasonable cause to believe that his or
her conduct was unlawful.
D. Expenses, including attorneys' fees, incurred in the preparation of
and/or presentation of the defense of a civil or criminal action, suit or
proceeding may be paid by the corporation in advance of the final disposition of
such action, suit or proceeding as authorized in the manner provided in Section
2-418(F) of the Maryland General Corporation Law upon receipt of: (i) an
undertaking by or on behalf of the corporate representative to repay such amount
unless it shall ultimately be determined that he or she is entitled to be
indemnified by the corporation as authorized in this bylaw; and (ii) a written
affirmation by the corporate representative of the corporate representative's
good faith belief that the standard of conduct necessary for indemnification by
the corporation has been met.
E. The indemnification provided by this bylaw shall not be deemed exclusive
of any other rights to which those indemnified may be entitled under these
bylaws, any agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his or her
S-4
<PAGE>
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person subject to the limitations imposed
from time to time by the Investment Company Act of 1940, as amended.
F. This corporation shall have power to purchase and maintain insurance on
behalf of any corporate representative against any liability asserted against
him or her and incurred by him or her in such capacity or arising out of his or
her status as such, whether or not the corporation would have the power to
indemnify him or her against such liability under this bylaw provided that no
insurance may be purchased or maintained to protect any corporate representative
against liability for gross negligence, willful misfeasance, bad faith or
reckless disregard of the duties and obligations involved in the conduct of his
or her office.
G. "Corporate Representative" means an individual who is or was a director,
officer, agent or employee of the corporation or who serves or served another
corporation, partnership, joint venture, trust or other enterprise in one of
these capacities at the request of the corporation and who, by reason of his or
her position, is, was, or is threatened to be made, a party to a proceeding
described herein.
Insofar as indemnification for and with respect to liabilities arising
under the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of Registrant pursuant to the foregoing provisions or
otherwise, Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by Registrant
of expenses incurred or paid by a director, officer or controlling person or
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of whether such indemnification is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 26. Business and Other Connections of the Investment Adviser
--------------------------------------------------------
Incorporated by reference to pages 16 through 17 of the Statement of
Additional Information pursuant to Rule 411 under the Securities Act of 1933.
Item 27. Principal Underwriters
----------------------
Not Applicable.
Item 28. Location of Accounts and Records
--------------------------------
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act of 1940 and
the rules promulgated thereunder are in the physical possession of Registrant
and Registrant's
S-5
<PAGE>
Administrator as follows: the documents required to be maintained by paragraphs
(5), (6), (7), (10) and (11) of Rule 31a-1(b) will be maintained by the
Registrant at 8140 Walnut Hill Lane, Suite 300, Dallas, Texas 75231; and all
other records will be maintained by the Registrant's Administrator, Firstar
Mutual Fund Services, LLC, 615 East Michigan Street, Milwaukee, Wisconsin.
Item 29. Management Services
-------------------
All management-related service contracts entered into by Registrant
are discussed in Parts A and B of this Registration Statement.
Item 30. Undertakings
------------
Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of Registrant's latest annual report to shareholders, upon
request and without charge.
S-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this amended Registration Statement under
Rule 485(b) under the Securities Act and has duly caused this Amended
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Dallas and State of Texas on the 25th day of
January, 2000.
PRUDENT BEAR FUNDS, INC.
(Registrant)
By: /s/ David W. Tice
-----------------------------------
David W. Tice, President
Pursuant to the requirements of the Securities Act of 1933, this
Amended Registration Statement has been signed below by the following persons in
the capacities and on the date(s) indicated.
Name Title Date
- ---- ----- ----
/s/ David W. Tice President and Treasurer January 25, 2000
- ---------------------------- (Principal Executive,
David W. Tice Financial and Accounting
Officer) and a Director
/s/ Gregg Jahnke Director January 25, 2000
- ----------------------------
Gregg Jahnke
/s/ David Eric Luck Director January 25, 2000
- ----------------------------
David Eric Luck
/s/ Buril Ragsdale Director January 25, 2000
- ----------------------------
Buril Ragsdale
S-7
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Exhibit
---------- -------
(a)(i) Registrant's Articles of Incorporation.*
(a)(ii) Articles Supplementary.*
(a)(iii) Articles Supplementary.
(a)(iv) Articles Supplementary.
(b) Registrant's Bylaws.*
(c) None.
(d)(i) Investment Advisory Agreement (Prudent Bear Fund).*
(d)(ii) Investment Advisory Agreement (Prudent Safe Harbor Fund).*
(d)(iii) Investment Advisory Agreement (Prudent Bear Large Cap
Fund).*
(e) None.
(f) None.
(g)(i) Custodian Agreement with Firstar Trust Company (predecessor
to Firstar Bank, NA) (Prudent Bear Fund).*
(g)(ii) Custodian Agreement with Firstar Bank, NA (Prudent Safe
Harbor Fund).*
(g)(iii) Custodian Agreement with Firstar Bank, NA (Prudent Bear
Large Cap Fund).*
(h)(i) Fund Administration Servicing Agreement with Firstar Trust
Company (predecessor to Firstar Mutual Fund Services, LLC)
(Prudent Bear Fund).*
(h)(ii) Fund Administration Servicing Agreement with Firstar Mutual
Fund Services, LLC (Prudent Safe Harbor Fund).*
<PAGE>
(h)(iii) Fund Administration Servicing Agreement with Firstar Mutual
Fund Services, LLC (Prudent Bear Large Cap Fund).*
(h)(iv) Transfer Agent Agreement with Firstar Trust Company
(predecessor to Firstar Mutual Fund Services, LLC) (Prudent
Bear Fund).*
(h)(v) Transfer Agent Agreement with Firstar Mutual Fund Services,
LLC (Prudent Safe Harbor Fund).*
(h)(vi) Transfer Agent Agreement with Firstar Mutual Fund Services,
LLC (Prudent Bear Large Cap Fund).*
(h)(vii) Fund Accounting Servicing Agreement with Firstar Trust
Company (predecessor to Firstar Mutual Fund Services, LLC)
(Prudent Bear Fund).*
(h)(viii) Fund Accounting Servicing Agreement with Firstar Mutual Fund
Services, LLC (Prudent Safe Harbor Fund).*
(h)(ix) Fund Accounting Servicing Agreement Firstar Mutual Fund
Services, LLC (Prudent Bear Large Cap Fund).*
(i) Opinion of Foley & Lardner, counsel for Registrant.
(j) Consent of PricewaterhouseCoopers LLP.
(k) None.
(l) Subscription Agreement.*
(m)(i) Service and Distribution Plan for Prudent Bear Fund No Load
Shares.*
(m)(ii) Service and Distribution Plan for Prudent Bear Fund Class C
Shares.*
(m)(iii) Service and Distribution Plan for Prudent Safe Harbor Fund
No Load Shares.*
(m)(iv) Service and Distribution Plan for Prudent Bear Large Cap
Fund No Load Shares.*
(n) Rule 18f-3 Multi-Class Plan.*
(p) Code of Ethics of Prudent Bear Funds, Inc. and David W. Tice
& Associates, Inc.
- --------------
* Incorporated by reference.
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
OF
PRUDENT BEAR FUNDS, INC.
Pursuant to Section 2-208 of the Maryland General Corporation Law (the
"MGCL"), Prudent Bear Funds, Inc., a Maryland corporation having its registered
office in Baltimore, Maryland (the "Company"), does hereby certify to the State
Department of Assessments and Taxation of Maryland (the "Department") that:
FIRST: The Company is registered as an open-end investment company
under the Investment Company Act of 1940.
SECOND: Pursuant to Section 2-105(a)(9) of the MGCL and Article IV of
the Company's Articles of Incorporation, the Board of Directors of the Company
duly adopted on November 16, 1999 resolutions: (a) designating 500,000,000
shares of the Company's previously undesignated Common Stock, $.0001 par value,
as follows:
Class Shares
----- ------
D 250,000,000
E 250,000,000
and (b) authorizing and directing the filing of these Articles Supplementary for
record with the Department.
THIRD: The respective preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption of each class of the Company's Common Stock, $.0001 par
value, are as set forth in Section B of Article IV of the Company's Articles of
Incorporation.
FOURTH: These Articles Supplementary shall become effective as of the
time they are accepted by the Department for record.
IN WITNESS WHEREOF, the Company has caused these Articles
Supplementary to be signed in its name and on its behalf by its President and
attested by its Secretary as of the 14th day of December, 1999.
PRUDENT BEAR FUNDS, INC.
By: /s/ David W. Tice
-----------------------------------
David Tice, President
Attest: /s/ Gregg Jahnke
-------------------------------
Gregg Jahnke, Secretary
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
OF
PRUDENT BEAR FUNDS, INC.
Pursuant to Section 2-208.1 of the Maryland General Corporation Law
(the "MGCL"), Prudent Bear Funds, Inc., having its registered office in
Baltimore, Maryland (the "Company"), does hereby certify to the State Department
of Assessments and Taxation of Maryland (the "Department") that:
FIRST: The Company is registered as an open-end investment company
under the Investment Company Act of 1940.
SECOND: Pursuant to Section 2-105(c) of the MGCL and Article IV of the
Company's Articles of Incorporation, the Board of Directors of the Company duly
adopted on November 16, 1999 resolutions: (a) increasing the total number of
shares of Common Stock, $0.0001 par value, that the Company has authority to
issue pursuant to Article IV of the Company's Articles of Incorporation from
500,000,000 shares to 1,000,000,000 shares; and (b) authorizing and directing
the filing of these Articles Supplementary for record with the Department.
THIRD: (a) The total number of shares of stock which the Company was
heretofore authorized to issue was 500,000,000 shares of Common Stock, $0.0001
par value, all of which were designated as follows:
Class Shares
----- ------
A 250,000,000
C 250,000,000
(b) The total number of shares of stock which the Company shall be
authorized to issue upon the filing of these Articles Supplementary for record
with the Department is 1,000,000,000 shares of Common Stock, $0.0001 par value,
of which 500,000,000 shares shall be designated as follows:
Class Shares
----- ------
A 250,000,000
C 250,000,000
and 500,000,000 shares shall be undesignated.
FOURTH: These Articles Supplementary shall become effective as of the
time they are accepted by the Department for record.
<PAGE>
IN WITNESS WHEREOF, the Company has caused these Articles
Supplementary to be signed in its name and on its behalf by its President and
attested by its Secretary as of the 14th day of December, 1999.
PRUDENT BEAR FUNDS, INC.
By: /s/ David W. Tice
-----------------------------------
David Tice, President
Attest: /s/ Gregg Jahnke
-----------------------------------
Gregg Janhke, Secretary
2
FOLEY & LARDNER
ATTORNEYS AT LAW
CHICAGO FIRSTAR CENTER SACRAMENTO
DENVER 777 EAST WISCONSIN AVENUE SAN DIEGO
JACKSONVILLE MILWAUKEE, WISCONSIN 53202-5367 SAN FRANCISCO
LOS ANGELES TELEPHONE (414) 271-2400 TALLAHASSEE
MADISON FACSIMILE (414) 297-4900 TAMPA
MILWAUKEE WASHINGTON, D.C.
ORLANDO WEST PALM BEACH
January 28, 2000
Prudent Bear Funds, Inc.
8140 Walnut Hill Lane, Suite 300
Dallas, TX 75231
Gentlemen:
We have acted as counsel for you in connection with the preparation of
an amendment to your Registration Statement on Form N-1A relating to the sale by
you of an indefinite amount of Prudent Bear Funds, Inc. Common Stock (such
Common Stock being hereinafter referred to as the "Stock") in the manner set
forth in the Amended Registration Statement to which reference is made. In this
connection we have examined: (a) the Amended Registration Statement on Form
N-1A; (b) your Articles of Incorporation and Bylaws, as amended to date; (c)
corporate proceedings relative to the authorization for issuance of the Stock;
and (d) such other proceedings, documents and records as we have deemed
necessary to enable us to render this opinion.
Based upon the foregoing, we are of the opinion that the shares of
Stock when sold as contemplated in the Amended Registration Statement will be
legally issued, fully paid and nonassessable.
We hereby consent to the use of this opinion as an exhibit to the Form
N-1A Registration Statement. In giving this consent, we do not admit that we are
experts within the meaning of Section 11 of the Securities Act of 1933, as
amended, or within the category of persons whose consent is required by Section
7 of said Act.
Very truly yours,
/s/ FOLEY & LARDNER
Foley & Lardner
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form N-1A of our report dated November 12, 1999, relating to the
financial statements and financial highlights which appears in the September 30,
1999 Annual Report to Shareholders of Prudent Bear Fund (one of the portfolios
constituting Prudent Bear Funds, Inc.), which is also incorporated by reference
into the Registration Statement. We also consent to the references to us under
the headings "Financial Highlights" and "Independent Accountants" in such
Registration Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
January 27, 2000
PRUDENT BEAR FUNDS, INC.
and
DAVID W. TICE & ASSOCIATES, INC.
Code of Ethics
Amended effective as of _______________, 2000
I. DEFINITIONS
-----------
A. "Access person" means any director, officer or advisory person of the
Fund or Adviser.
B. "Act" means the Investment Company Act of 1940, as amended.
C. "Adviser" means David W. Tice & Associates, Inc.
D. "Advisory person" means: (i) any employee of the Fund or Adviser or of
any company in a control relationship to the Fund or Adviser, who, in
connection with his or her regular functions or duties, makes,
participates in, or obtains information regarding the purchase or sale
of Covered Securities by Managed Accounts, or whose functions relate
to the making of any recommendations with respect to such purchases or
sales; and (ii) any natural person in a control relationship to the
Fund or Adviser who obtains information concerning recommendations
made to Managed Accounts with regard to the purchase or sale of
Covered Securities by Managed Accounts.
E. A Covered Security is "being considered for purchase or sale" when a
recommendation to purchase or sell the Covered Security has been made
and communicated and, with respect to the person making the
recommendation, when such person seriously considers making such a
recommendation.
F. "Beneficial ownership" shall be interpreted in the same manner as it
would be under Rule 16a-1(a)(2) under the Securities Exchange Act of
1934 in determining whether a person is the beneficial owner of a
security for purposes as such Act and the rules and regulations
promulgated thereunder.
G. "Control" has the same meaning as that set forth in Section 2(a)(9) of
the Act.
H. "Covered Security" means a security as defined in Section 2(a)(36) of
the Act (which includes any note, stock, treasury stock, bond,
debenture, evidence of indebtedness, certificate of interest or
participation in any profit-sharing agreement, collateral-trust
certificate, preorganization certificate or subscription,
<PAGE>
transferable share, investment contract, voting-trust certificate,
certificate of deposit for a security, fractional undivided interest
in oil, gas or other mineral rights, any put, call, straddle, option,
or privilege on any security (including a certificate of deposit) or
on any group or index of securities (including any interest therein or
based on the value thereof), or any put, call, straddle, option, or
privilege entered into on a national securities exchange relating to
foreign currency, or, in general, any interest or instrument commonly
known as a "security," or any certificate of interest or participation
in, temporary or interim security for, receipt for, guarantee of, or
warrant or right to subscribe to or purchase any of the foregoing),
except that it does not include:
(i) Direct obligations of the Government of the United States;
(ii) Bankers' acceptances, bank certificates of deposit,
commercial paper and high quality short-term debt
instruments, including repurchase agreements; and
(iii) Shares issued by open-end registered investment companies.
I. "Disinterested director" means a director of the Fund who is not an
"interested person" of the Fund within the meaning of Section 2(a)(19)
of the Act and the rules and regulations promulgated thereunder.
J. "Fund" means Prudent Bear Funds, Inc. or any series thereof.
K. "Initial Public Offering" means an offering of securities registered
under the Securities Act of 1933, the issuer of which, immediately
before the registration, was not subject to the reporting requirements
of Section 13 or 15(d) of the Securities Exchange Act of 1934.
L. "Investment personnel" means: (i) any employee of the Fund or Adviser
or of any company in a control relationship to the Fund or Adviser
who, in connection with his or her regular functions or duties, makes
or participates in making recommendations regarding the purchase or
sale of securities by Managed Accounts; and (ii) any natural person
who controls the Fund or Adviser and who obtains information
concerning recommendations made to Managed Accounts regarding the
purchase or sale of securities by Managed Accounts.
M. A "Limited Offering" means an offering that is exempt from
registration under the Securities Act of 1933 pursuant to Section 4(2)
or Section 4(6) thereof or pursuant to Rule 504, Rule 505 or Rule 506
thereunder.
N. "Managed Accounts" include the Fund and any other client account for
which the Adviser provides investment management services.
2
<PAGE>
O. "Purchase or sale of a Covered Security" includes, among other things,
the writing of an option to purchase or sell a Covered Security.
II. APPROVAL OF CODE OF ETHICS
--------------------------
A. The Board of Directors of the Fund, including a majority of the
Disinterested directors, shall approve this Code of Ethics and any
material changes thereto. Prior to approving this Code of Ethics and
any material changes thereto, the Board of Directors must determine
that this Code of Ethics contains provisions reasonably necessary to
prevent access persons from violating Rule 17j-1(b) of the Act and
shall receive a certification from the Adviser that it has adopted
such procedures as are reasonably necessary to prevent access persons
of the Adviser from violating this Code of Ethics.
B. No less frequently than quarterly, the President of the Fund and the
Adviser shall furnish a report to the Board of Directors of the Fund:
1. Describing issues arising under the Code of Ethics since the last
report to the Board of Directors, including, but not limited to,
(a) information about material violations of the Code of Ethics
and sanctions imposed in response to such material violations,
(b) purchases or sales approved pursuant to Section III.(h) of
this Code of Ethics and the basis for the approval thereof, and
(c) information described in Section V.D. of this Code of Ethics
with respect to transactions during the past quarter in any
security which Mr. David W. Tice has, or by reason of such
transaction acquires, any direct or indirect beneficial ownership
in the security. Such report shall also include a list of access
persons under the Code of Ethics.
2. Certifying that the Fund and the Adviser have adopted such
procedures as are reasonably necessary to prevent access persons
from violating the Code of Ethics.
C. This Code of Ethics, the certifications required by Sections II.A. and
II.B.(2), and the reports required by Sections II.B. shall be
maintained by the Fund's Administrator. The reports required by
Section V shall be maintained by the Fund's President or designee.
III. EXEMPTED TRANSACTIONS
---------------------
The prohibitions of Section IV of this Code of Ethics shall not apply to:
(a) Purchases or sales effected in any account over which the access
person has no direct or indirect influence or control.
3
<PAGE>
(b) Purchases or sales of Covered Securities which are not eligible
for purchase or sale by any Managed Account; provided, however,
that the prohibitions of Section IV.B of this Code of Ethics
shall apply to such purchases and sales.
(c) Purchases or sales which are non-volitional on the part of either
the access person or Managed Accounts.
(d) Purchases which are part of an automatic dividend reinvestment
plan.
(e) Purchases effected upon the exercise of rights issued by an
issuer pro rata to all holders of a class of its securities, to
the extent such rights were acquired from such issuer, and sales
of such rights so acquired.
(f) Purchases or sales involving 500 shares or less in the aggregate,
if the issuer has a market capitalization (outstanding shares
multiplied by the current price per share) greater than $1
billion.
(g) Purchases or sales of option contracts where the premium paid or
received is $2,500 or less and closing transactions with respect
to such contracts.
(h) Purchases or sales for which the access person has received prior
written approval from the Fund's President. Prior written
approval shall be granted only if the purchase or sale is
consistent with the Section 17(j) of the Act and Rule 17j-1
thereunder; provided, however, the Fund's President may not rely
on this exemption.
IV. PROHIBITED ACTIVITIES
---------------------
A. Except in a transaction exempted by Section III of this Code, no
access person shall purchase or sell, directly or indirectly, any
Covered Security in which he has, or by reason of such transaction
acquires, any direct or indirect beneficial ownership and which to his
actual knowledge at the time of such purchase or sale is being
considered for purchase or sale by Managed Accounts or is being
purchased or sold by Managed Accounts. Before an access person so
purchases or sells a Covered Security, he or she shall report the
proposed purchase or sale to the Adviser's President or designee. The
Adviser's President or designee shall review all Managed Accounts to
determine whether the Covered Security is then being considered for
purchase or sale or is then being purchased or sold for any Managed
Accounts. The access person shall delay so purchasing or selling a
Covered Security until such time as he or she has been informed by the
Adviser's President or designee that the proposed purchase or sale
would not violate this Section IV.A. Notwithstanding the foregoing,
Disinterested directors are not required to "preclear" transactions as
described above unless
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the Disinterested director knows that such security is being
considered for purchase or sale by a Fund or is being purchased or
sold by a Fund.
B. Except in a transaction exempted by Section III of this Code of
Ethics, access persons, excluding Disinterested directors but
including Investment Personnel, (other than the Fund's President) must
obtain approval from the Fund's President before directly or
indirectly acquiring beneficial ownership in any securities in a
Limited Offering. The Fund's President must obtain approval from a
Disinterested director of the Fund before directly or indirectly
acquiring beneficial ownership in any securities in a Limited
Offering. Prior approval shall not be given if the Fund's President or
the Disinterested director, as applicable, believes that the
investment opportunity should be reserved for Managed Accounts or is
being offered to the individual by reason of his or her position with
the Fund or the Adviser.
C. Investment Personnel, may not directly or indirectly acquire
beneficial ownership in any securities in an Initial Public Offering.
D. Investment personnel shall not receive any gift or other thing of more
than de minimis value from any person or entity that does business
with or on behalf of the Fund. The annual receipt of gifts from the
same source valued at $100 or less shall be considered de minimis.
Additionally, the receipt of an occasional dinner, a ticket to a
sporting event or the theater, or comparable entertainment also shall
be considered to be of de minimis value.
E. Except for service which began prior to August 31, 1999, Investment
Personnel shall not serve on the board of directors of publicly traded
companies absent prior authorization of the Board of Directors of the
Fund. The Board of Directors of the Fund may so authorize such board
service only if it determines that such board service is consistent
with the interests of the Fund and its shareholders.
V. REPORTING AND COMPLIANCE PROCEDURES
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A. Except as provided in Section V.B. of this Code of Ethics, every
access person shall report the information described in Section V.C.,
Section V.D. and Section V.E. of this Code of Ethics. All reports
shall be filed with the Adviser's Compliance Officer.
B. 1. A Disinterested director of the Fund need not make a report
pursuant to Section V.C. and V.E. of this Code of Ethics and need
only report a transaction in a Covered Security pursuant to
Section V.D. of this Code of Ethics if such Disinterested
director, at the time of such transaction, knew or, in the
ordinary course of fulfilling his official duties as a director
of the Fund, should have known that, during the 15-day period
immediately preceding the date of the transaction by the
director, such
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Covered Security was purchased or sold by the Fund or was being
considered by the Fund or the Adviser for purchase or sale by the
Fund; provided that (a) any Disinterested director who receives a
schedule of investments and securities of the Fund shall not, by
virtue of receiving the schedule, be deemed to have known or, in
the ordinary course of fulfilling his duties as a director of the
Fund, should have known, a security on the schedule was purchased
or sold by the Fund or was being considered by the Fund or the
Adviser for the purchase or sale by the Fund after two (2) weeks
have elapsed from the date of the schedule in question or (b) any
Disinterested director present at a meeting of the Board of
Directors at which a security is discussed as a candidate for
purchase or sale shall not, by virtue of attending the meeting,
be deemed to have known, or, in the ordinary course of fulfilling
his duties as a director of the Fund, should have known, the
security discussed was being considered by the Fund or the
Adviser for purchase or sale by the Fund after two (2) weeks have
elapsed from the date of the meeting of the Board of Directors.
2. An access person need not make a report with respect to
transactions effected for, and Covered Securities held in, any
account over which the person has no direct or indirect influence
or control.
3. Every access person (other than Disinterested directors) shall
direct his or her brokers to send to the Adviser's President or
designee, on a timely basis, duplicate copies of all broker trade
confirmations or account statements. If submitted in the time
period required by Section V.D., such duplicate copies may
satisfy the access person's obligations under Section V.D.
provided that all of the information required by Section V.D. is
contained in the broker trade confirmations or account statements
or in the records of the Adviser.
C. Every access person shall, no later than ten (10) days after the
person becomes an access person, file an initial holdings report
containing the following information:
1. The title, number of shares and principal amount of each Covered
Security in which the access person had any direct or indirect
beneficial ownership when the person becomes an access person;
2. The name of any broker, dealer or bank with whom the access
person maintained an account in which any securities were held
for the direct or indirect benefit of the access person; and
3. The date that the report is submitted by the access person.
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D. Every access person shall, no later than ten (10) days after the end
of a calendar quarter, file a quarterly transaction report containing
the following information:
1. With respect to any transaction during the quarter in a Covered
Security in which the access person had any direct or indirect
beneficial ownership:
(a) The date of the transaction, the title and the number of
shares, and the principal amount of each security involved;
(b) The nature of the transaction (i.e., purchase, sale or any
other type of acquisition or disposition);
(c) The price of the Covered Security at which the transaction
was effected;
(d) The name of the broker, dealer or bank with or through whom
the transaction was effected; and
(e) The date that the report is submitted by the access person.
2. With respect to any account established by the access person in
which any securities were held during the quarter for the direct
or indirect benefit of the access person:
(a) The name of the broker, dealer or bank with whom the access
person established the account;
(b) The date the account was established; and
(c) The date that the report is submitted by the access person.
E. Every access person shall, no later than January 30 each year, file an
annual holdings report containing the following information as of the
preceding December 31:
1. The title, number of shares and principal amount of each Covered
Security in which the access person had any direct or indirect
beneficial ownership;
2. The name of any broker, dealer or bank with whom the access
person maintains an account in which any securities are held for
the direct or indirect benefit of the access person; and
3. The date that the report is submitted by the access person.
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F. Any report filed pursuant to Section V.C., Section V.D. or Section
V.E. of this Code of Ethics may contain a statement that the report
shall not be construed as an admission by the person making such
report that he has any direct or indirect beneficial ownership in the
security to which the report relates.
G. The Adviser's President or designee shall review all reports filed
pursuant to Section V.C., Section V.D. or Section V.E. of this Code of
Ethics. The Adviser's President or designee shall identify all access
persons who are required to file reports pursuant to this Section V of
this Code of Ethics and must inform such access persons of their
reporting obligation.
VI. SANCTIONS
---------
Upon discovering a violation of this Code of Ethics, the Board of Directors of
the Fund or Adviser may impose such sanctions as it deems appropriate,
including, inter alia, a letter of censure or suspension or termination of the
employment of the violator.