ANNUAL REPORT SEPTEMBER 30, 2000
PRUDENT BEAR FUND
NO LOAD SHARES
CLASS C SHARES
PRUDENT SAFE HARBOR FUND
PRUDENT BEAR
FUNDS, INC.
PRUDENT BEAR FUND
PRUDENT BEAR FUND - S&P 500 NASDAQ COMPOSITE
DATE NO LOAD SHARES $4,441 $25,164 $35,469
---- --------------------- ------- ----------------
12/28/95 $10,000 $10,000 $10,000
3/31/96 $9,519 $10,536 $10,479
9/30/96 $8,880 $11,349 $11,694
3/31/97 $9,018 $12,625 $11,663
9/30/97 $7,420 $15,940 $16,114
3/31/98 $6,822 $18,685 $17,570
9/30/98 $7,691 $17,381 $16,231
3/31/99 $4,866 $22,133 $23,609
9/30/99 $4,910 $22,215 $26,359
3/31/00 $4,136 $26,105 $43,937
9/30/00 $4,441 $25,164 $35,469
PRUDENT BEAR FUND - S&P 500 NASDAQ COMPOSITE
DATE CLASS C SHARES $8,423 $11,825 $15,589
---- --------------------- ------- ----------------
2/8/99 $10,000 $10,000 $10,000
3/31/99 $9,331 $10,401 $10,376
6/30/99 $8,076 $11,134 $11,328
9/30/99 $9,394 $10,439 $11,585
12/31/99 $7,945 $11,993 $17,175
3/31/00 $7,859 $12,268 $19,310
6/30/00 $8,184 $11,941 $16,829
9/30/00 $8,423 $11,825 $15,589
For the period ended September 30, 2000
Annualized Since
Commencement
One Year of Operations
-------- --------------
Prudent Bear Fund -
No Load Shares (9.55)% (15.66)%
S&P 500 13.28% 21.37%
NASDAQ Composite 34.57% 30.44%
For the period ended September 30, 2000
Annualized Since
Commencement
One Year of Operations
-------- --------------
Prudent Bear Fund -
Class C Shares (10.33)% (9.90)%
S&P 500 13.28% 10.72%
NASDAQ Composite 34.57% 30.95%
The Standard & Poor's 500 Index (S&P 500) is a capital-weighted index,
representing the aggregate market value of the common equity of 500 stocks
primarily traded on the New York Stock Exchange. The NASDAQ Composite Index is a
broad-based capitalization-weighted index of all NASDAQ stocks. These charts
assume an initial gross investment of $10,000 made on 12/28/95 and 2/08/99
(commencement of operations) for the No Load Shares and Class C Shares,
respectively. Returns shown include the reinvestment of all dividends. Past
performance is not predictive of future performance. Investment return and
principal value will fluctuate, so that your shares, when redeemed, may be worth
more or less than the original cost.
PRUDENT SAFE HARBOR FUND
SALOMON SMITH BARNEY EUROPEAN
PRUDENT SAFE HARBOR WORLD GOVERNMENT BOND INDEX
DATE FUND $9,340 (WGBI) $9,436
---- ------------------- -----------------------------
2/2/00 $10,000 $10,000
3/31/00 $9,878 $10,035
6/30/00 $9,709 $10,057
9/30/00 $9,340 $9,436
For the period ended September 30, 2000
2/02/00(1)<F1>
through
9/30/00
--------------
Prudent Safe Harbor Fund (6.60)%
Salomon Smith Barney European
World Government Bond Index (WGBI) (5.64)%
(1)<F1> Commencement of operations.
The Salomon Smith Barney European World Government Bond Index (WGBI) consists of
those fifteen sectors of the Salomon Smith Barney WGBI that are geographically
located in Europe, namely Austria, Belgium, Denmark, Finland, France, Greece,
Germany, Ireland, Italy, the Netherlands, Portugal, Spain, Sweden, Switzerland
and the United Kingdom. These charts assume an initial gross investment of
$10,000 made on 2/02/00 (commencement of operations). Returns shown include the
reinvestment of all dividends. Past performance is not predictive of future
performance. Investment return and principal value will fluctuate, so that your
shares, when redeemed, may be worth more or less than the original cost.
PRUDENT BEAR FUNDS, INC.
November 22, 2000
Dear Shareholder,
It was another extraordinary quarter for the U.S. stock market, in what we
consider a historic period for the U.S. financial system and economy. While
considerable selling pressure developed within the technology sector, the New
York Stock Exchange Financial index gained 20% for the quarter. This unusual
dichotomy was prevalent in the credit market as well. Strains increased in the
corporate debt market and liquidity evaporated in the junk bond market. In
contrast, a major rally unfolded in Treasuries, agencies, mortgage-back and
asset-backed securities. While we can build a strong case that we are now in the
early stages of what we anticipate will be a devastating credit crunch for many
companies, particularly throughout the vast technology arena, extreme money and
credit excesses run unabated throughout the real estate and consumer areas. In a
word, the U.S. financial system is becoming more dysfunctional by the week. The
current course is likely to only exacerbate already momentous financial and
economic distortions, with a growing risk of heightened general inflation. We
certainly did not anticipate that general market bullishness would persevere
through a collapsing of the Internet bubble, and a brutal bear market for many
technology companies.
For the six months ended September 30, 2000, The Prudent Bear Fund (No Load
Shares) gained 7.4%, while the S&P 500 declined by 4.2% and the NASDAQ lost
19.7%. The Prudent Safe Harbor Fund lost 5.5% for the six months, in what was an
extraordinarily strong period for the dollar. For the year ended 9/30/00, the
Prudent Bear Fund (No Load Shares) declined by 9.6% vs. a NASDAQ Composite
advance of 34.6%, and since its inception in February, the Prudent Safe Harbor
Fund has declined by 6.6%.
Consistent with our investment philosophy, the Prudent Bear Fund held more short
equity positions than long positions throughout the period. We certainly did not
anticipate that the current financial euphoria would last as long as it has; as
a consequence, the stock market bubble has simply grown bigger and bigger.
Nevertheless, given current inflationary pressures, concomitant with significant
dislocation in the credit markets and speculative excesses being engendered by a
debt-laden but still strong economy, we remain confident that the bubble has
burst. While discussion of overheated asset prices is generally directed at
stock prices, we believe that this asset bubble encompasses virtually all
financial assets (stock, corporate bonds, mortgage-backs, securitizations,
etc.), as well as residential and commercial real estate, radio/TV/cable/media
franchises, fine art, etc. Indeed, there is virtually no asset class left
untouched by the mania.
HOW WE GOT HERE
We are a believer that our current boom has been fueled by excessive credit
growth, making our prosperity very tenuous and our economy extraordinarily
imbalanced. The private sector is taking on debt so rapidly that the annual
increase in household and corporate debt now approaches 6% of GDP. In other G-7
economies historically, this degree of leverage has precipitated recessions and
debt crises.
Years of credit excess have increasingly been transmitted into extraordinary
income and spending growth, leading to significant distortions and imbalances in
the financial sector and the economy as a whole. It should be recognized as a
"textbook" inflationary asset bubble. We also believe strongly in the crucial
concept that MONEY AND CREDIT EXCESSES HAVE SET IN MOTION PROCESSES THAT ARE
CORRUPTING MARKET-PRICING MECHANISMS. And the longer such excesses are
accommodated (by the chief financial system regulator, the central bank), the
greater and more problematic the imbalances to both the financial system and
real economy become. These extremes take the economy further from stable
equilibrium, or let's call it "reality." Importantly, distortions beget greater
distortions; financial excess breeds economic maladjustments, and the
consequence is financial and economic instability. Unfortunately, the U.S.
system has experienced so many years of egregious credit excesses that our
financial and economic systems are terribly maladjusted, dysfunctional and
acutely unstable. For too many years, the system has allowed the consumer,
corporate, and financial sectors to take on too much leverage, leverage that
will prove unmanageable come the next downturn. For too long, this debt buildup,
and the corresponding reluctance of the financial and monetary authorities to
curb it, have led the system toward ever-greater misallocation of resources, and
an alarming deterioration in overall creditworthiness.
We think a very important lesson about the power of markets waits just around
the corner. To be sure, credit excesses and the proliferation of derivatives,
and the behavior of powerful financial institutions can distort market forces
temporarily. And months can go by while the Fed tinkers with interest rates and
hopes and prays that there really is such a thing as a "New Paradigm." Over on
Wall Street, the bulls can run the propaganda machine, play "business as usual,"
and dream of "a permanent plateau of prosperity" (to employ Irving Fisher's
memorable phrase immediately preceding the 1929 crash). But at the end of the
day, market forces will, as they always do, prevail. When this inevitable day of
reckoning arrives, "soft landing" will not be an apt metaphor.
THE CURRENT CRISIS
Recently, the U.S. credit markets and particularly the junk bond market have
been in extreme dislocation and are extraordinarily fragile. Very few analysts
have recognized this important development and the credit market's perilous
condition. The Argentine bond market is now in trouble with acute illiquidity,
while emerging bond market spreads have widened sharply across the board.
Concurrently, global currency markets are in almost complete disarray with
nearly every major currency in virtual freefall against the dollar.
Currently, the credit markets are at risk for a severe liquidity crisis. Risky
credits are increasingly losing access to the commercial paper market, with some
borrowers apparently struggling to roll short-term debts. It is unmistakable
that the current unfolding problems are not cyclical in nature, but structural,
and this time, not so easily mitigated. It is now credit availability, and not
the price of credit, that has become the key issue for the great U.S. financial
and economic bubble.
With rapidly deteriorating fundamentals of many companies, especially in the
telecom field, it is not surprising that financing sources are rapidly running
dry. That is the nature of credit bubbles. As junk debt returns have lagged
other sectors, junk bond funds are suffering outflows. According to TrimTabs.com
Investment Research, $9.9 billion in outflows have occurred so far this year.
With investor demand waning, issuance of junk debt during the past nine months
has dropped by almost 50% to $38 billion. In contrast, investment grade debt
issuance jumped 8% to $335 billion. So, the predicament should be obvious: A
massive telecommunications sector whose lifeblood is junk debt and leveraged
lending, has found itself running increasingly cash-flow negative, at the same
time increasingly nervous investors are fleeing the sector, and heavily exposed
bankers have begun to panic as their ability to syndicate loans to other lenders
has been curtailed recently.
And if lenders are losing their ability to pass this risk onto the marketplace,
they either have to cut back on lending or balloon their balance sheets with
riskier credits. No doubt about it, the game was much more fun for the lenders
when they could easily offload risky credits to third parties. We suspect that
the recent significant growth of bank credit may be related to difficulties in
distributing credits to other entities or the capital markets. Could liquidity
be waning in the securitization marketplaceo Well, only time will tell, but any
nasty development within the financial sector will only hurt an already
vulnerable dollar.
HIGH TECH DISASTER AT HAND
We are also in the early stages of what will prove to be a devastating high tech
industry shakeout, the inevitable outcome after years of truly massive and
unprecedented credit and speculative excess. Companies will struggle, and many
will fail, in an environment fraught with extreme imbalances and distortions,
the consequences of massive credit-induced (mal/over) investment. The technology
sector is by nature rife with hyper-uncertainty and wild boom and bust cycles.
This wild credit expansion increased instability by allowing the supply side to
grow unfettered. Today, many companies have little hope for sustainable
profits.
Throw in an unprecedented systemic credit bubble, with a trillion dollar flood
of money and credit rushing to play, and an uncontrollable quagmire develops. We
suspect that many companies have little means to accurately gauge future demand
for their respective products. First, the extent to which order books have been
distorted by the double ordering that emanated from previous shortages is
unknown. There is furthermore the uncertainty that comes with customers losing
financing. Indeed, the entire technology super-industry bubble has been at the
epicenter of the Great American Credit Bubble, and global credit excess
generally. As such, the critical issue today is certainly not productivity, but
acute systemic financial fragility.
MANAGEMENT'S MOTIVATIONS SHOULD BE QUESTIONED
One of our reasons for believing that this upcoming decline in the economy will
be so substantial relates to the actions taken by American consumers and
business people. Let me highlight a couple of examples. In a long lasting boom,
optimists come out ahead. In a credit-induced mania, the most reckless risk-
takers make the most money. In the current environment, profitability and
generating positive cash flow is unimportant as long as Wall Street stands ready
to lend or provide equity capital. Unfortunately, motivations have become
contorted with this massive boom. Instead of investors becoming only optimistic
about the future, they also became reckless and naive. They desired growth at
virtually any price, so Wall Street and company managements determined that they
would have it. But to grow quickly can be problematic once profits become
necessary. Investors assume that corporate management has a master plan to
attain profitability within a short period of time. This assumption is often
erroneous in our opinion and should be explained. If an Internet company or
telecom company can grow sales quickly but fails to generate positive cash flow,
that's fine, as long as its operations can be externally funded and its
promoters remain happy. Wall Street remains happy with a client with strong
top-line growth and negative cash flow as it simply means the client will keep
coming back for more financings and pay greater fees. As long as Wall Street
promotion keeps the stock going up, managements' stock options continue to vest
and they make millions. Warren Buffett summed up this behavior recently when he
said that this boom is not so much about wealth creation as it is about "wealth
transfer."
NO ONE WANTS THE PARTY TO END
Investors should realize that virtually no one wants an asset bubble to end.
There are too many beneficiaries of the bubble and there will be too many
casualties when it does eventually end. Our policymakers certainly do not want
the bubble to end. They don't want to be blamed for the fallout. Wall Street, of
course, wants the bubble to go on indefinitely, as they make infinitely more
money from a bull market. On the other hand, their institutions could be
destroyed in a major bear market. Over the life of the boom, the financial
infrastructure developed to profit from credit creation and asset inflation has
grown to possess immense power. Additionally, industrial and financial
corporations do not want the boom to end as it will both hurt their profits and
make their most recent expansion plans appear reckless. Then there are
individuals, enjoying their greatest prosperity from rising incomes, levitating
stock prices and record-high real estate prices, who certainly do not want to
see the party called to a close.
Seemingly, the easiest way to avoid the inevitable hangover is to put one's head
under a pillow, attempt to go back to sleep, and hope it goes away. Another
method of avoiding a hangover is to keep drinking to defer its onset. The
problem with both remedies is the hangover is not rectified, but only deferred.
This is exactly the problem we face with an asset and economic bubble of this
proportion. There is no way to fix the problem now, other than going through the
painful requisite market and economic adjustments, basically ceasing to live
well beyond our means and over time, working off the imbalances. Excessive
credit growth is the destructive alcohol merely deferring the hangover, as well
as corroding the body's health at the same time. When you see the "fix" being
applied is additional money and credit growth, you know that the system is not
being cleansed, but that the eventual outcome will be all the worse.
THE DOLLAR REMAINS AT RISK
It has been widely believed that as economic growth rates from abroad picked up,
the U.S. current account deficit would fall significantly as was the case during
the latter part of the 1980s. But this thesis is not being borne out by
reality. The recovery in economic growth outside the U.S. in Asia and Europe
has not engendered any corresponding fall in the U.S. deficit. Indeed, we
believe that any comparison with the conditions that prevailed during the 1980s
merely serves to highlight how difficult deficit reduction will prove to be in
the current global economic environment. Above all else, we do not share the
view expressed by so many (notably Federal Reserve governors McTeer and Poole)
that the current account deficit merely reflects the fundamentally superior
returns available in the dynamic "new economy" of the U.S., the widespread
belief in which has served to attract so much trend-following capital from
abroad. Indeed, while the dollar's status as the world's major reserve currency
has perhaps encouraged foreigners to tolerate the U.S. getting into debt more
deeply than they would another country, we believe that in the long run, any
indebted country caught in explosive debt trap dynamics--even the issuer of the
world's reserve currency--will prove to be an untenable borrower. American
profligacy might ultimately undermine the dollar's status as the major reserve
currency as a consequence.
Indeed, in its reliance on ever growing foreign capital flows, the U.S. economy
resembles the condition of many of the Asian nations when the latter erupted
into economic crisis in 1997-98. Like the U.S. today, foreign lenders for a
long time chose to ignore the deteriorating symptoms in Asia. Seduced by the
promise of seemingly perpetually high growth rates in these "miracle" economies,
lending accelerated even as the financial fragility in their respective
economies mounted.
This is really where the U.S. stands today in relation to its own foreign
creditors. The reverence for Asia's tiger economies has been replaced by a
glorification of America's "new economy." We believe as the U.S. debt position
becomes ever more untenable, more foreign investors will come to share our view.
This is certainly a concern highlighted in the BIS report, which argued that the
imbalance between rapid growth in the U.S. and slower growth elsewhere would
have to be corrected, and that large movements in exchange rates (i.e., a weaker
dollar) were likely to follow such a correction. The risk in our view, however,
is that such a correction may degenerate into a fully-fledged run on the dollar.
Should U.S. domestic demand be reined in further, as the BIS advocates, returns
on domestic investment are likely to diminish, particularly if such tightening
triggers a market collapse. Then there is a major risk that perceptions among
foreign creditors will shift from the now prevailing sentiment of the U.S. as a
great place to do business backed by the security of the world's reserve
currency, to being viewed as the world's greatest profligate on the threshold of
debt trap dynamics. A quantum change in portfolio preferences will likely
ensue. Because holdings of "reserve currency" dollars are already so great,
even a marginal shift in portfolio preferences could have a huge impact on the
dollar's external value.
Please visit our website at www.prudentbear.com for more information about why
-------------------
we are convinced that a long bear market has begun. New additions are
highlighted in the top, right part of the page. On our website, you will also
find a version of this shareholder letter which explores the above issues in
more detail. The expanded version also includes our thoughts on why we believe
the Federal Reserve has lost the ability to keep the boom intact. If you do not
have access to the internet, please call and we will send you the more detailed
version.
Sincerely,
/s/David W. Tice
David W. Tice
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Prudent Bear Funds, Inc.
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments and securities sold short, and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Prudent Bear Fund and Prudent Safe Harbor Fund (constituting Prudent Bear Funds,
Inc., hereafter referred to as the "Funds") at September 30, 2000, the results
of their operations, the changes in their net assets and the financial
highlights for each of the periods indicated, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Funds' management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States of America, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at September 30, 2000 by correspondence with the custodian and
brokers, provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
November 14, 2000
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 2000
<TABLE>
PRUDENT BEAR PRUDENT SAFE
FUND HARBOR FUND
------------ -----------
<S> <C> <C>
ASSETS:
Investments, at value (cost $137,980,151 and $1,732,551, respectively) $140,150,029 $1,676,125
Cash 292,255 2,950
Deposit at brokers for short sales 4,082,995 --
Receivable from broker for proceeds on securities sold short 89,666,174 --
Receivable for investments sold 6,156,035 --
Receivable for futures contracts 862,750 --
Capital shares sold 4,558,738 15,100
Receivable from Adviser -- 3,697
Dividend receivable 1,045 861
Interest receivable 2,329,330 32,825
Organizational expenses, net of accumulated amortization 1,655 --
Other assets 21,982 5,794
------------ ----------
Total Assets 248,122,988 1,737,352
------------ ----------
LIABILITIES:
Securities sold short, at value (Proceeds of $88,512,587 and $0, respectively) 81,942,672 --
Payable for securities purchased 8,615,324 245,781
Capital shares redeemed 2,856,997 20,038
Payable to Adviser 145,817 --
Dividends payable on short positions 50,186 --
Accrued expenses and other liabilities 308,411 49,906
------------ ----------
Total Liabilities 93,919,407 315,725
------------ ----------
NET ASSETS $154,203,581 $1,421,627
------------ ----------
------------ ----------
NET ASSETS CONSIST OF:
Capital stock $272,165,447 $1,485,045
Accumulated undistributed net investment income 5,777,351 254
Accumulated undistributed net realized loss on investments sold,
securities sold short, option contracts expired or closed, and foreign currencies (134,252,825) (6,562)
Net unrealized appreciation (depreciation) on:
Investments 2,169,878 (56,426)
Foreign currencies (680) (684)
Short positions 6,569,915 --
Futures contracts 1,774,495 --
------------ ----------
TOTAL NET ASSETS $154,203,581 $1,421,627
------------ ----------
------------ ----------
NO LOAD SHARES:
Net Assets $153,335,957 $1,421,627
Shares outstanding (250,000,000 shares of $.0001 par value authorized) 39,022,767 154,688
Net Asset Value, Redemption Price and Offering Price Per Share $3.93 $9.19
------------ ----------
------------ ----------
CLASS C SHARES:
Net Assets $ 867,624
Shares outstanding (250,000,000 shares of $.0001 par value authorized) 223,717
Net Asset Value, Redemption Price and Offering Price Per Share $3.88
------------
------------
</TABLE>
See notes to the financial statements.
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 2000
<TABLE>
PRUDENT BEAR PRUDENT SAFE
FUND HARBOR FUND*<F2>
------------ ----------------
<S> <C> <C>
INVESTMENT INCOME:
Interest income $ 10,532,400 $ 24,030
Dividend income on long positions
(net of foreign taxes withheld of $19,403 and $0, respectively) 623,339 2,967
------------ --------
Total investment income 11,155,739 26,997
------------ --------
EXPENSES:
Investment advisory fee 2,121,969 3,636
Administration fee 118,971 30,166
Shareholder servicing and accounting costs 232,686 36,038
Custody fees 116,385 6,298
Federal and state registration 48,208 10,300
Professional fees 121,418 35,066
Distribution expense - No Load shares 422,599 1,212
Distribution expense - Class C shares 7,179 --
Reports to shareholders 32,190 346
Directors' fees and expenses 5,972 2,232
Amortization of organizational expenses 6,032 --
Other 31,264 342
------------ --------
Total operating expenses before expense reductions,
expense reimbursements and dividends on short positions 3,264,873 125,636
Expense reductions (see Note 5) (169,377) --
Expense reimbursement from Adviser -- (116,925)
Dividends on short positions (net of foreign taxes withheld of $236 and $0, respectively) 479,588 --
------------ --------
Total expenses 3,575,084 8,711
------------ --------
NET INVESTMENT INCOME 7,580,655 18,286
------------ --------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) on:
Long transactions 11,953,003 (6,798)
Short transactions (24,593,837) --
Option contracts expired or closed (11,728,637) --
Futures contracts closed (10,260,593) --
Foreign currency translation (9,151) 236
------------ --------
Net realized loss (34,639,215) (6,562)
Change in unrealized appreciation (depreciation) on:
Investments (1,025,552) (56,426)
Short positions (4,128,327) --
Written options -- --
Futures contracts 1,194,660 --
Foreign currency 318 (684)
------------ --------
Net unrealized loss (3,958,901) (57,110)
------------ --------
Net realized and unrealized loss on investments (38,598,116) (63,672)
------------ --------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(31,017,461) $(45,386)
------------ --------
------------ --------
</TABLE>
*<F2> For period February 2, 2000 (commencement of operations) to September
30, 2000.
See notes to the financial statements.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
PRUDENT SAFE
PRUDENT BEAR FUND HARBOR FUND
------------------------------------------- -----------------------
FEBRUARY 2, 2000(1)<F3>
YEAR ENDED YEAR ENDED THROUGH
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 2000
------------------ ------------------ -----------------------
<S> <C> <C> <C>
OPERATIONS:
Net investment income $ 7,580,655 $ 5,851,223 $ 18,286
Net realized gain (loss) on:
Long transactions 11,953,003 (7,029,855) (6,798)
Short transactions (24,593,837) (44,954,560) --
Option contracts expired or closed (11,728,637) (26,291,443) --
Futures contracts closed (10,260,593) (954,844) --
Foreign currency translation (9,151) -- 236
Change in unrealized appreciation (depreciation) on:
Investments (1,025,552) 9,821,465 (56,426)
Short positions (4,128,327) (8,663,155) --
Written options -- (49,630) --
Futures contracts 1,194,660 579,835 --
Foreign currency 318 -- (684)
------------ ------------ ----------
Net decrease in net assets resulting from operations (31,017,461) (71,690,964) (45,386)
------------ ------------ ----------
DISTRIBUTIONS TO SHAREHOLDERS
FROM NET INVESTMENT INCOME (5,807,210) (4,243,854) (18,032)
------------ ------------ ----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 586,461,842 571,891,273 2,541,107
Shares issued to holders in reinvestment of dividends 5,067,325 3,546,118 16,582
Cost of shares redeemed (621,169,285) (452,525,566) (1,072,644)
------------ ------------ ----------
Net increase (decrease) in net assets resulting from
capital share transactions (29,640,118) 122,911,825 1,485,045
------------ ------------ ----------
TOTAL INCREASE (DECREASE) IN NET ASSETS (66,464,789) 46,977,007 1,421,627
NET ASSETS:
Beginning of period 220,668,370 173,691,363 --
------------ ------------ ----------
End of period (including undistributed net investment
income of $5,777,351, $4,103,787 and $254, respectively) $154,203,581 $220,668,370 $1,421,627
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
(1)<F3> Commencement of operations.
See notes to the financial statements.
PRUDENT BEAR FUND
FINANCIAL HIGHLIGHTS
Selected per share data is based on a share of beneficial interest outstanding
throughout each period.
<TABLE>
CLASS C
NO LOAD CLASS C NO LOAD SHARES
SHARES SHARES SHARES FEB. 8, DEC. 28,
YEAR YEAR YEAR 1999(1)<F4> YEAR YEAR 1995(1)<F4>
ENDED ENDED ENDED THROUGH ENDED ENDED THROUGH
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
2000 2000 1999 1999 1998 1997 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Data:
Net asset value,
beginning of period $4.51 $4.49 $7.34 $4.78 $7.29 $8.88 $10.00
----- ----- ----- ----- ----- ----- ------
Income from investment operations:
Net investment
income(2)<F5> 0.18(3)<F6> 0.15(3)<F6> 0.19(3)<F6> 0.09(3)<F6> 0.29(3)<F6> 0.62(3)<F6> 0.09
Net realized and unrealized
(losses) on investments (0.62) (0.62) (2.82) (0.38) (0.01) (2.06) (1.21)
----- ----- ----- ----- ----- ----- ------
Total from investment
operations (0.44) (0.47) (2.63) (0.29) 0.28 (1.44) (1.12)
----- ----- ----- ----- ----- ----- ------
Less distributions from net
investment income (0.14) (0.14) (0.20) -- (0.23) (0.15) --
----- ----- ----- ----- ----- ----- ------
Net asset value,
end of period $3.93 $3.88 $4.51 $4.49 $7.34 $7.29 $ 8.88
----- ----- ----- ----- ----- ----- ------
----- ----- ----- ----- ----- ----- ------
Total return -9.55% -10.33% -36.17% -6.07%(4) 3.66% -16.44% -11.20%(4)
<F7> <F7>
Supplemental data and ratios:
Net assets,
end of period (000's) $153,336 $868 $220,462 $207 $173,691 $26,500 $7,326
Ratio of net operating
expenses to average
net assets(5)<F8> 1.83%(6) 2.58%(6) 1.97% 2.74%(7) 2.08% 2.59% 2.75%(7) (8)
<F9> <F10> <F10> <F11>
Ratio of dividends on
short positions to
average net assets 0.28% 0.28% 0.28% 0.32%(7) 0.28% 0.34% 0.34%(7)
<F10> <F10>
Ratio of net investment
income to average
net assets 4.48% 3.73% 4.09% 3.25%(7) 4.34% 7.75% 4.07%(7) (8)
<F10> <F10> <F11>
Portfolio
turnover rate(9)<F12> 417.53% 417.53% 536.56% 536.56% 480.25% 413.25% 91.31%
</TABLE>
(1)<F4> Commencement of operations.
(2)<F5> Net investment income before dividends on short positions for the No
Load Shares for the periods ended September 30, 2000, September 30,
1999, September 30, 1998, September 30, 1997 and September 30, 1996
was $0.19, $0.21, $0.30, $0.65 and $0.10, respectively, and for the
periods ended September 30, 2000 and September 30, 1999 for the
Class C Shares was $0.15 and $0.09, respectively.
(3)<F6> Net investment income per share represents net investment income
divided by the average shares outstanding throughout the period.
(4)<F7> Not annualized.
(5)<F8> The net 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, 2000, September
30, 1999, September 30, 1998, September 30, 1997 and September 30,
1996 was 2.11%, 2.25%, 2.36%, 2.93% and 3.09%, respectively, and for
the periods ended September 30, 2000 and September 30, 1999 for the
Class C Shares was 2.86% and 3.06%, respectively.
(6)<F9> The net operating expense ratio includes expense reductions for soft
dollar credits. The ratio excluding expense reductions for the No
Load Shares and the Class C Shares for the period ended September
30, 2000 was 1.93% and 2.68%, respectively.
(7)<F10> Annualized.
(8)<F11> Without expense reimbursements of $104,260 for the period ended
September 30, 1996, the ratio of net 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)%.
(9)<F12> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
See notes to the financial statements.
PRUDENT SAFE HARBOR FUND
FINANCIAL HIGHLIGHTS
Selected per share data is based on a share of beneficial interest outstanding
throughout each period.
FEBRUARY 2, 2000(1)<F13>
THROUGH
SEPTEMBER 30, 2000
------------------
Per Share Data:
Net asset value, beginning of period $10.00
------
Income from investment operations:
Net investment income 0.24(2)<F14>
Net realized and unrealized (losses) on investments (0.90)
------
Total from investment operations (0.66)
------
Less distributions from net investment income (0.15)
------
Net asset value, end of period $ 9.19
------
------
Total return -6.60%(3)<F15>
Supplemental data and ratios:
Net assets, end of period $1,421,627
Ratio of net operating expenses
to average net assets(5)<F17> 1.80%(4)<F16>
Ratio of net investment income
to average net assets(5)<F17> 3.77%(4)<F16>
Portfolio turnover rate 180.29%
(1)<F13> Commencement of operations.
(2)<F14> Net investment income per share represents net investment income
divided by the average shares outstanding throughout the period.
(3)<F15> Not annualized.
(4)<F16> Annualized.
(5)<F17> Without expense reimbursements of $116,925 for the period ended
September 30, 2000, the ratio of operating expenses to average net
assets would have been 25.91% and the ratio of net investment loss
to average net assets would have been (20.34)%.
See notes to the financial statements.
PRUDENT BEAR FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2000
SHARES VALUE
------ -----
COMMON STOCKS -- 24.8%*<F18>
AEROSPACE -- 0.2%*<F18>
10,000 Raytheon Company - Class B(5)<F25> $ 284,375
------------
BASIC MATERIALS -- 7.8%*<F18>
45,000 Apex Silver Mines Limited**<F19> (5)<F25> 455,625
500,000 Birch Mountain Resources
Ltd.**<F19> (3)<F23> (5)<F25> 468,148
884,874 Black Hawk Mining Inc.**<F19> (3)<F23> 67,633
247,740 Campbell Resources Inc.**<F19> (3)<F23> 139,354
4,375,500 Canarc Resource Corporation**<F19> (3)<F23> (5)<F25> 814,263
337,500 Canyon Resources Corporation**<F19> 295,312
30,000 Chesapeake Energy Corporation**<F19> 215,625
310,000 Donner Minerals Ltd.**<F19> (3)<F23> 26,785
73,700 Dundee Precious
Metals, Inc. - Class A**<F19> (3)<F23> 357,577
7,578,800 Dynatec Corporation**<F19> (3)<F23> (5)<F25> 1,385,199
6,415,060 ECU Silver Mining Inc.**<F19> (3)<F23> 341,091
50 Exploration Capital Partners, LP
(Acquired 10/14/98,
Cost $1,000,000)**<F19> (4)<F24> r<F20> 1,257,851
56,800 Francisco Gold Corporation**<F19> (3)<F23> 226,505
33,500 Golden Queen Mining Co. Ltd.**<F19> 6,365
1,362,500 Golden Star Resources Ltd.**<F19> (5)<F25> 1,107,031
90,000 Harmony Gold Mining
Company Limited - ADR(3)<F23> (5)<F25> 461,250
2,150,000 International Uranium
Corporation**<F19> (3)<F23> (5)<F25> 471,554
100,000 KeyWest Energy Corporation**<F19> (3)<F23> 81,749
990,738 Maxam Gold Corporation**<F19> (6)<F26> 40,620
20,000 Meridian Gold Inc.**<F19> 136,250
350,000 Metalline Mining Co. Inc.
(Acquired 4/8/99,
Cost $350,000)**<F19> (2)<F22> (4)<F24> r<F20> 706,580
100,000 Metalline Mining Co. Inc.
(Acquired 6/28/00,
Cost $325,000)**<F19> (2)<F22> (4)<F24> r<F20> 201,880
405,818 Minefinders Corporation Ltd.**<F19>
(Acquired 9/27/00,
Cost $279,709)**<F19> (2)<F22> (4)<F24> r<F20> 279,158
379,200 Miramar Mining Corporation**<F19> (3)<F23> 326,112
261,399 Pan American
Silver Corporation**<F19> (3)<F23> (5)<F25> 931,234
800,000 Rio Narcea Gold Mines
Ltd.**<F19> (3)<F23> (5)<F25> 451,947
100,000 Southwestern Gold
Corporation**<F19> (3)<F23> 269,175
80,480 TVX Gold Inc.**<F19> (3)<F23> 130,780
820,000 Xenolix Technologies, Inc.**<F19> 205,000
1,000,000 Xenolix Technologies, Inc.
(Acquired 3/07/00,
Cost $749,600)**<F19> (2)<F22> (4)<F24> r<F20> 212,500
------------
12,070,153
------------
CHEMICALS -- 0.2%*<F18>
69,250 Pioneer Companies, Inc. - Class A**<F19> 283,492
------------
CONSUMER-CYCLICALS -- 0.2%*<F18>
10,000 Crown Cork & Seal Company, Inc. 106,875
845,000 LS Capital Corporation**<F19> 11,416
300,000 LS Capital Corporation
(Acquired 2/19/98,
Cost $87,000)**<F19> (2)<F22> (4)<F24> r<F20> 3,450
5,000 Lowe's Companies, Inc.(1)<F21> (5)<F25> 224,375
------------
346,116
------------
ENTERTAINMENT & LEISURE -- 1.3%*<F18>
5,000 Amazon.com, Inc.**<F19> (1)<F21> (5)<F25> 192,188
216,660 Restaurant Brands New
Zealand Limited(3)<F23> 100,403
45,000 Univision
Communications Inc.**<F19> (1)<F21> (5)<F25> 1,681,875
------------
1,974,466
------------
FREIGHT -- 0.1%*<F18>
10,000 TNT Post Group N.V. - ADR 232,500
------------
HEALTH CARE -- 8.6%*<F18>
63,002 Avigen, Inc.**<F19> 2,504,329
8,925 Avigen, Inc.
(Acquired 11/11/99,
Cost $199,697)**<F19> (2)<F22> (4)<F24> r<F20> 337,030
55,000 InSite Vision Incorporated**<F19> 419,375
143,712 InSite Vision Incorporated
(Acquired 4/28/00,
Cost $599,947)**<F19> (2)<F22> (4)<F24> r<F20> 923,795
407,500 Neurobiological
Technologies, Inc.**<F19> (5)<F25> 3,361,875
287,999 NexMed, Inc.**<F19> (5)<F25> 5,651,980
1,500 QLT Inc.**<F19> (1)<F21> (5)<F25> 106,312
------------
13,304,696
------------
OIL -- 0.3%*<F18>
30,000 BP Prudhoe Bay Royalty Trust 416,250
------------
STEEL -- 0.1%*<F18>
108,000 The LTV Corporation**<F19> 141,750
------------
TECHNOLOGY -- 4.2%*<F18>
2,000 Advanced Micro Devices,
Inc.**<F19>(1)<F21> (5)<F25> 47,250
1,025,000 Aura Systems, Inc.**<F19> (5)<F25> 984,000
2,600,000 Aura Systems, Inc.
(Acquired 12/08/99,
Cost $702,000)**<F19> (2)<F22> (4)<F24> r<F20> 2,371,200
5,314 CMGI Inc.**<F19> (1)<F21> (5)<F25> 148,460
2,000 eBay Inc.**<F19> (1)<F21> (5)<F25> 137,375
8,500 Gateway, Inc.**<F19> (1)<F21> (5)<F25> 397,375
5,000 Intel Corporation(1)<F21> (5)<F25> 207,812
2,000 International Business
Machines Corporation(1)<F21> (5)<F25> 225,000
3,000 Internet Capital Group,
Inc.**<F19> (1)<F21> (5)<F25> 52,312
3,500 Lucent Technologies Inc.(1)<F21> (5)<F25> 106,969
4,000 Micron Technology, Inc.**<F19> (1)<F21> (5)<F25> 184,000
13,000 MIPS Technologies,
Inc. - Class A**<F19> (1)<F19> (5)<F25> 598,000
3,000 Rambus Inc.**<F19> (1)<F21> (5)<F25> 236,813
3,000 Red Hat, Inc.**<F19> (1)<F21> (5)<F25> 51,188
5,000 Sawtek Inc.**<F19> (1)<F21> (5)<F25> 192,578
8,000 TriQuint Semiconductor,
Inc.**<F19> (1)<F21> (5)<F25> 291,500
4,000 Ventro Corporation**<F19> (1)<F21> (5)<F25> 44,000
15,000 VisuaLABS Inc.**<F19> (3)<F23> 129,603
------------
6,405,435
------------
TELECOMMUNICATIONS -- 0.1%*<F18>
5,000 Net2Phone, Inc.**<F19> (1)<F21> (5)<F25> 112,500
1,000 Nortel Networks Corporation(1)<F21> (5)<F25> 59,563
------------
172,063
------------
TEXTILE -- 1.6%*<F18>
423,000 Cone Mills Corporation**<F19> (5)<F25> 1,903,500
350,000 DHB Capital Group Inc.**<F19> (5)<F25> 612,500
------------
2,516,000
------------
TRANSPORTATION -- 0.1%*<F18>
250 Crowley Maritime Corp.**<F19> 150,000
------------
TOTAL COMMON STOCKS
(Cost $36,242,278) 38,297,296
------------
CONTRACTS (100 SHARES PER CONTRACT)
-----------------------------------
CALL OPTIONS
PURCHASED -- 0.2%*<F18>
ASA Limited:
700 Expiration January 2001
Exercise Price $17.50 83,125
500 Expiration January 2001
Exercise Price $20.00 25,000
100 BP Amoco Plc - ADR
Expiration October 2000,
Exercise Price $55.00 9,687
100 Devon Energy Corporation
Expiration October 2000,
Exercise Price $55.00 60,500
150 Intel Corporation
Expiration October 2000,
Exercise Price $52.50 4,219
600 Newmont Mining Corporation
Expiration October 2000,
Exercise Price $20.00 13,125
Placer Dome Inc.:
1,000 Expiration November 2000,
Exercise Price $10.00 62,500
1,000 Expiration December 2000,
Exercise Price $10.00 84,400
------------
TOTAL CALL
OPTIONS PURCHASED
(Cost $474,199) 342,556
------------
PUT OPTIONS
PURCHASED -- 5.4%*<F18>
150 Alcatel - ADR
Expiration November 2000,
Exercise Price $65.00 94,687
45 Allergan, Inc.
Expiration October 2000,
Exercise Price $65.00 561
150 Alliance Capital Management
Holding L.P.
Expiration November 2000,
Exercise Price $50.00 33,750
150 Ambac Financial Group, Inc.
Expiration November 2000,
Exercise Price $65.00 17,812
100 American Express Company
Expiration November 2000,
Exercise Price $55.00 11,875
American International Group, Inc.:
100 Expiration November 2000,
Exercise Price $85.00 7,187
170 Expiration November 2000,
Exercise Price $90.00 27,094
AmeriCredit Corp.:
100 Expiration November 2000,
Exercise Price $22.50 2,500
100 Expiration February 2001,
Exercise Price $25.00 15,000
The AMEX Biotechnology Index:
50 Expiration October 2000,
Exercise Price $320.00 1,250
75 Expiration October 2000,
Exercise Price $600.00 31,875
35 Expiration November 2000,
Exercise Price $630.00 66,062
300 Apple Computer, Inc.
Expiration October 2000,
Exercise Price $50.00 727,500
Applied Micro Circuits Corporation:
150 Expiration November 2000,
Exercise Price $160.00 88,125
40 Expiration November 2000,
Exercise Price $195.00 66,500
50 Ariba, Inc.
Expiration November 2000,
Exercise Price $155.00 121,875
100 Atlas Air, Inc.
Expiration October 2000,
Exercise Price $35.00 1,875
Bank of America Corporation:
100 Expiration October 2000,
Exercise Price $50.00 10,000
200 Expiration November 2000,
Exercise Price $50.00 36,875
100 Expiration November 2000,
Exercise Price $55.00 42,500
100 BEA Systems, Inc.
Expiration November 2000,
Exercise Price $70.00 48,125
100 Best Buy Co., Inc.
Expiration October 2000,
Exercise Price $60.00 18,125
100 The Boeing Company
Expiration November 2000,
Exercise Price $60.00 18,750
75 Broadcom Corporation - Class A
Expiration November 2000,
Exercise Price $190.00 37,500
50 Brocade Communications Systems, Inc.
Expiration November 2000,
Exercise Price $240.00 102,500
150 Cabletron Systems, Inc.
Expiration October 2000,
Exercise Price $30.00 34,687
100 Calpine Corporation
Expiration October 2000,
Exercise Price $80.00 3,125
Capital One Financial Corporation:
50 Expiration October 2000,
Exercise Price $60.00 1,562
50 Expiration November 2000,
Exercise Price $60.00 5,625
50 Expiration December 2000,
Exercise Price $60.00 9,375
200 Celestica Inc.
Expiration November 2000,
Exercise Price $75.00 185,000
100 The Charles Schwab Corporation
Expiration October 2000,
Exercise Price $35.00 18,125
100 The Chase Manhattan Corporation
Expiration November 2000,
Exercise Price $45.00 19,687
200 CIENA Corporation
Expiration January 2001,
Exercise Price $72.50 46,250
Citigroup Inc.:
133 Expiration October 2000,
Exercise Price $56.25 39,900
100 Expiration November 2000,
Exercise Price $55.00 30,000
133 Expiration December 2000,
Exercise Price $52.50 32,419
100 Conseco, Inc.
Expiration November 2000,
Exercise Price $10.00 26,250
100 Dain Rauscher Corporation
Expiration November 2000,
Exercise Price $70.00 2,500
300 Dell Computer Corporation
Expiration November 2000,
Exercise Price $35.00 153,750
The Dow Jones Industrial Average:
300 Expiration November 2000,
Exercise Price $106.00 63,750
700 Expiration November 2000,
Exercise Price $110.00 306,250
450 Expiration November 2000,
Exercise Price $112.00 255,937
100 Expiration November 2000,
Exercise Price $120.00 127,500
EMC Corporation:
200 Expiration November 2000,
Exercise Price $90.00 67,500
150 Expiration January 2001,
Exercise Price $75.00 35,625
Fannie Mae:
100 Expiration October 2000,
Exercise Price $55.00 630
200 Expiration November 2000,
Exercise Price $60.00 10,000
100 Expiration December 2000,
Exercise Price $55.00 3,750
100 Expiration December 2000,
Exercise Price $60.00 9,380
100 Flextronics International Ltd.
Expiration November 2000,
Exercise Price $75.00 45,625
Freddie Mac:
100 Expiration November 2000,
Exercise Price $47.50 13,437
100 Expiration January 2001,
Exercise Price $47.50 4,687
150 General Electric Company
Expiration November 2000,
Exercise Price $55.00 23,906
100 Golden West Financial Corporation
Expiration November 2000,
Exercise Price $45.00 6,250
100 The Goldman Sachs Group, Inc.
Expiration November 2000,
Exercise Price $110.00 55,000
100 Harley-Davidson, Inc.
Expiration November 2000,
Exercise Price $40.00 5,000
150 Hewlett-Packard Company
Expiration November 2000,
Exercise Price $95.00 103,125
Household International, Inc.:
100 Expiration October 2000,
Exercise Price $45.00 1,875
100 Expiration November 2000,
Exercise Price $50.00 10,625
50 Human Genome Sciences, Inc.
Expiration November 2000,
Exercise Price $140.00 37,187
50 The Inter@ctive Week Internet Index
Expiration October 2000,
Exercise Price $460.00 48,750
International Business
Machines Corporation:
300 Expiration November 2000,
Exercise Price $100.00 79,680
100 Expiration November 2000,
Exercise Price $110.00 58,125
100 Expiration November 2000,
Exercise Price $120.00 112,500
The Internet Architect
HOLDRs Trust:
200 Expiration October 2000,
Exercise Price $95.00 85,000
150 Expiration October 2000,
Exercise Price $100.00 107,813
85 Expiration November 2000,
Exercise Price $85.00 18,032
1,050 Expiration November 2000,
Exercise Price $90.00 420,000
520 Expiration November 2000,
Exercise Price $95.00 334,750
The Internet HOLDRs Trust:
200 Expiration November 2000,
Exercise Price $80.00 43,750
200 Expiration November 2000,
Exercise Price $90.00 103,750
100 Expiration November 2000,
Exercise Price $100.00 91,250
The Internet Infrastructure
HOLDRs Trust:
700 Expiration November 2000,
Exercise Price $45.00 78,750
590 Expiration November 2000,
Exercise Price $50.00 143,812
150 Expiration November 2000,
Exercise Price $55.00 66,563
J.P. Morgan & Co.:
50 Expiration October 2000,
Exercise Price $140.00 2,656
100 Expiration December 2000,
Exercise Price $110.00 3,438
150 Juniper Networks, Inc.
Expiration November 2000,
Exercise Price $170.00 101,250
100 Knight Trading Group, Inc.
Expiration November 2000,
Exercise Price $30.00 13,750
100 Kohl's Corporation
Expiration October 2000,
Exercise Price $52.50 10,625
200 Lehman Brothers Holdings Inc.
Expiration October 2000,
Exercise Price $85.00 2,500
50 Marsh & McLennan Companies, Inc.
Expiration November 2000,
Exercise Price $120.00 10,313
MBIA, Inc.:
100 Expiration November 2000,
Exercise Price $50.00 1,875
100 Expiration November 2000,
Exercise Price $55.00 3,750
150 Expiration November 2000,
Exercise Price $65.00 21,563
250 MBNA Corporation
Expiration December 2000,
Exercise Price $25.00 3,125
Merrill Lynch & Co., Inc.:
100 Expiration October 2000,
Exercise Price $65.00 25,000
400 Expiration January 2001,
Exercise Price $40.00 21,250
Metris Companies Inc.:
50 Expiration October 2000,
Exercise Price $30.00 1,250
100 Expiration January 2001,
Exercise Price $35.00 24,375
150 Morgan Stanley Dean Witter & Co.
Expiration November 2000,
Exercise Price $90.00 75,938
100 Motorola, Inc.
Expiration October 2000,
Exercise Price $31.625 41,250
Nasdaq - 100 Shares:
250 Expiration October 2000,
Exercise Price $91.00 118,750
200 Expiration October 2000,
Exercise Price $93.00 117,500
250 Expiration November 2000,
Exercise Price $88.00 129,688
Network Appliance, Inc.:
100 Expiration November 2000,
Exercise Price $110.00 70,000
50 Expiration November 2000,
Exercise Price $125.00 66,250
100 Expiration December 2000,
Exercise Price $110.00 96,250
100 NEXTLINK Communications,
Inc. - Class A
Expiration October 2000,
Exercise Price $20.00 1,250
100 99 Cents Only Stores
Expiration December 2000,
Exercise Price $45.00 13,750
200 Nokia Oyj - ADR
Expiration October 2000,
Exercise Price $40.00 48,125
100 Nortel Networks Corporation
Expiration October 2000,
Exercise Price $65.00 73,125
200 Palm, Inc.
Expiration November 2000,
Exercise Price $50.00 73,750
The Philadelphia Wireless Telecom Index:
200 Expiration November 2000,
Exercise Price $175.00 135,000
250 Expiration November 2000,
Exercise Price $180.00 196,875
250 Expiration November 2000,
Exercise Price $190.00 293,750
100 Expiration December 2000,
Exercise Price $180.00 97,500
50 Providian Financial Corporation
Expiration November 2000,
Exercise Price $110.00 11,563
250 Qwest Communications
International Inc.
Expiration October 2000,
Exercise Price $42.50 11,719
300 Raymond James Financial, Inc.
Expiration November 2000,
Exercise Price $25.00 9,375
Russell 2000 Index:
50 Expiration October 2000,
Exercise Price $510.00 48,125
100 Expiration November 2000,
Exercise Price $500.00 130,000
300 S&P 100 Index
Expiration October 2000,
Exercise Price $720.00 114,375
50 S&P Retail Index
Expiration October 2000,
Exercise Price $790.00 61,250
50 Semiconductor HOLDRs Trust
Expiration November 2000,
Exercise Price $85.00 75,500
Siebel Systems, Inc.:
50 Expiration November 2000,
Exercise Price $67.50 2,813
50 Expiration January 2001,
Exercise Price $95.00 43,750
70 Silicon Valley Bancshares
Expiration November 2000,
Exercise Price $50.00 15,313
Stilwell Financial, Inc.:
50 Expiration October 2000,
Exercise Price $45.00 13,750
100 Expiration November 2000,
Exercise Price $45.00 35,630
100 Expiration December 2000,
Exercise Price $45.00 43,125
100 STMicroelectronics N.V. - NYS
Expiration January 2001,
Exercise Price $55.00 106,250
150 Sun Microsystems, Inc.
Expiration November 2000,
Exercise Price $115.00 113,438
50 SunTrust Banks, Inc.
Expiration January 2001,
Exercise Price $45.00 6,563
100 T. Rowe Price Associates, Inc.
Expiration November 2000,
Exercise Price $45.00 16,250
100 TIBCO Software Inc.
Expiration November 2000,
Exercise Price $75.00 48,750
Tiffany & Co.:
100 Expiration November 2000,
Exercise Price $35.00 15,000
100 Expiration November 2000,
Exercise Price $37.50 25,000
100 Tucker Anthony Sutro Corporation
Expiration December 2000,
Exercise Price $22.50 11,875
200 UAL Corporation
Expiration January 2001,
Exercise Price $40.00 57,500
Waddell & Reed Financial,
Inc. - Class A:
100 Expiration November 2000,
Exercise Price $35.00 53,750
25 Expiration December 2000,
Exercise Price $30.00 6,563
200 The Walt Disney Company
Expiration October 2000,
Exercise Price $40.00 45,000
Wells Fargo & Company:
100 Expiration October 2000,
Exercise Price $45.00 8,750
100 Expiration November 2000,
Exercise Price $45.00 15,000
------------
TOTAL PUT
OPTIONS PURCHASED
(Cost $8,145,659) 8,259,170
------------
SHARES
------
PREFERRED STOCK -- 1.4%*<F18>
57,000 Freeport-McMoRan
Copper & Gold, Inc.**<F19> 765,937
28,200 Freeport-McMoRan Copper
& Gold, Inc. - Series Gold**<F19> 498,787
109,900 Freeport-McMoRan Copper &
Gold, Inc. - Series Silver**<F19> 954,756
------------
TOTAL PREFERRED
STOCK (Cost $3,002,487) 2,219,480
------------
WARRANTS -- 0.5%*<F18>
12,500 Apex Silver Mines Limited
Expiration November 2002,
Exercise Price $18.00
(Acquired 11/03/99, Cost $12)(4)<F24> r<F20> 13
1,785 Avigen, Inc.
Expiration November 2004,
Exercise Price $27.96
(Acquired 11/11/99, Cost $223)(4)<F24> r<F20> 19,993
1,887,780 ECU Silver Mining Inc.
Expiration May 2001,
Exercise Price $0.25 CN
(Acquired 11/22/99, Cost $1,888)(4)<F24> r<F20> 1,255
50,299 InSite Vision Incorporated
Expiration April 2004,
Exercise Price $5.6363
(Acquired 4/28/00, Cost $50)(4)<F24> r<F20> 82,355
202,909 Minefinders Corporation Ltd.
Expiration September 2002,
Exercise Price $1.35 CN
(Acquired 9/27/00, Cost $20,291)(4)<F24> r<F20> 20,291
3,285 NEXLAND, Inc.
Expiration August 2001,
Exercise Price $2.50(4)<F24> 0
87,500 Neurobiological Technologies, Inc.
Expiration November 2004,
Exercise Price $1.75
(Acquired 11/05/99, Cost $88)(4)<F24> r<F20> 568,750
400,000 Xenolix Technologies, Inc.
Expiration March 2001,
Exercise Price $2.00
(Acquired 3/07/00, Cost $400)(4)<F24> r<F20> 400
------------
TOTAL WARRANTS
(Cost $22,952) 693,057
------------
PRINCIPAL
AMOUNT
------
CONVERTIBLE DEBENTURES -- 0.2%*<F18>
300,000 Golden Phoenix Minerals, Inc.
12.00%, 01/15/2005
(Acquired 1/14/00,
Cost $300,000)(4)<F24> r<F20> 300,000
------------
U.S. TREASURY
OBLIGATIONS -- 55.3%*<F18>
U.S. Treasury Notes:
45,554,000 6.50%, 3/31/2002(5)<F25> 45,781,770
10,200,000 6.375%, 4/30/2002(5)<F25> 10,241,443
10,675,000 6.625%, 5/31/2002(5)<F25> 10,765,076
9,400,000 6.375%, 6/30/2002(5)<F25> 9,447,000
1,000,000 6.25%, 7/31/2002(5)<F25> 1,003,438
8,091,000 6.125%, 8/31/2002(5)<F25> 8,103,646
------------
TOTAL U.S. TREASURIES
(Cost $85,054,600) 85,342,373
------------
FOREIGN TREASURY
OBLIGATIONS -- 0.4%*<F18>
FRANCE -- 0.1%*<F18>
French Treasury Notes:
60,000 3.00%, 07/12/2001 52,127
71,000 5.50%, 10/12/2001 62,904
72,000 4.00%, 01/12/2002 62,640
------------
177,671
------------
GERMANY -- 0.1%*<F18>
Bundesschatzanweisungen:
71,000 3.50%, 09/14/2001 61,785
72,000 4.00%, 12/14/2001 62,766
25,000 5.00%, 09/13/2002 22,050
------------
146,601
------------
SWITZERLAND -- 0.2%*<F18>
Swiss Government Bonds:
40,000 7.00%, 07/09/2001 23,721
120,000 5.50%, 10/07/2001 70,716
125,000 6.50%, 02/05/2002 75,006
120,000 4.50%, 07/08/2002 70,463
------------
239,906
------------
TOTAL FOREIGN
TREASURY OBLIGATIONS
(Cost $605,692) 564,178
------------
SHORT-TERM
INVESTMENTS -- 2.7%*<F18>
U.S. TREASURIES -- 2.4%*<F18>
U.S. Treasury Bills:
$ 200,000 5.98%, 11/02/2000(5)<F25> 198,937
1,000,000 5.92%, 12/14/2000(5)<F25> 987,833
1,000,000 5.96%, 12/21/2000(5)<F25> 986,600
1,600,000 5.98%, 12/28/2000(5)<F25> 1,576,606
------------
3,749,976
------------
SHARES
------
MUTUAL FUNDS -- 0.3%*<F18>
381,943 Star Treasury Fund(5)<F25> 381,943
------------
TOTAL SHORT-TERM
INVESTMENTS
(Cost $4,132,284) 4,131,919
------------
TOTAL INVESTMENTS
(Cost $137,980,151)
(see note 1) $140,150,029
------------
------------
NOTES TO SCHEDULE OF INVESTMENTS
CN - Canadian Dollars
ADR - American Depository Receipt
NYS - New York Shares
*<F18> Calculated as a percentage of net assets.
**<F19> Non-income producing security.
r<F20> Restricted security.
(1)<F21> Shares are held to cover all or a portion of a corresponding short
position.
(2)<F22> Private placement issue (trades at a discount to market value).
(3)<F23> Foreign security.
(4)<F24> Fair valued security.
(5)<F25> All or a portion of the securities have been committed as collateral
for open short positions.
(6)<F26> Holding entitles Fund to 525,738 voting rights for Maxam Gold
Corporation Preferred and 52,574 voting rights for MCM Custom Milling
Corporation.
See notes to Schedule of Investments on page 20 and notes to the financial
statements.
SCHEDULE OF SECURITIES SOLD SHORT
SEPTEMBER 30, 2000
SHARES VALUE
------ -----
17,500 Accelerated Networks, Inc. $ 295,312
32,000 Adaptive Broadband Corporation 624,000
14,000 ADC Telecommunications, Inc. 376,469
30,000 Advanced Energy Industries, Inc. 990,000
11,000 Advanced Micro Devices, Inc. 259,875
19,000 Advanced Radio Telecom Corp. 161,500
5,500 Aether Systems, Inc. 580,250
2,000 Affymetrix, Inc. 99,750
6,000 Akamai Technologies, Inc. 315,094
6,000 Alcatel - ADR 377,250
25,000 Allegiance Telecom, Inc. 931,250
15,000 Alliance Semiconductor Corporation 298,125
11,000 Amazon.com, Inc. 422,812
4,000 AmeriCredit Corp. 115,250
2,000 ANADIGICS, Inc. 44,250
15,000 Andrew Corporation 392,812
20,000 Apple Computer, Inc. 515,000
12,500 Applebee's International, Inc. 287,500
7,000 Applied Materials, Inc. 415,187
3,000 Art Technology Group, Inc. 284,250
10,000 ATS Medical, Inc. 150,625
12,000 AT&T Wireless Group 250,500
2,500 Avici Systems Inc. 237,812
53,002 Avigen, Inc. 2,106,829
2,000 B2B Internet HOLDRs Trust 94,375
10,000 Barnes & Noble, Inc. 196,875
7,000 Best Buy Co., Inc. 445,375
10,000 BriteSmile, Inc. 83,750
500 Broadcom Corporation - Class A 121,875
1,000 Brocade Communications Systems, Inc. 236,000
2,000 Brooks Automation, Inc. 66,250
10,000 Buca, Inc. 106,250
15,000 California Amplifier, Inc. 345,000
3,000 Capital One Financial Corporation 210,187
3,000 The Charles Schwab Corporation 106,500
10,000 The Chase Manhattan Corporation 461,875
2,000 CheckFree Corp. 83,781
10,000 The Cheesecake Factory Incorporated 432,500
6,000 Cisco Systems, Inc. 331,500
15,000 Citrix Systems, Inc. 300,937
6,000 Clear Channel Communications, Inc. 339,000
5,000 The Clorox Company 197,812
7,314 CMGI Inc. 204,335
5,000 The Coca-Cola Company 275,625
3,000 Conexant Systems, Inc. 125,625
11,000 Copper Mountain Networks, Inc. 412,500
12,000 Covad Communications Group, Inc. 160,500
19,000 Credence Systems Corporation 570,000
18,000 Credit Acceptance Corporation 113,625
10,000 Cutter & Buck Inc. 124,375
18,000 Dell Computer Corporation 554,625
20,000 Dendrite International, Inc. 536,250
65,000 DIAMONDS Trust, Series I 6,930,625
10,000 Digital River, Inc. 64,375
12,000 Ditech Communications Corporation 492,000
13,000 DMC Stratex Networks, Inc. 208,812
2,000 eBay Inc. 137,375
11,000 EchoStar Communications
Corporation - Class A 580,250
15,000 e.Digital Corporation 64,219
10,000 Efficient Networks, Inc. 373,125
3,000 E.piphany, Inc. 231,187
5,000 E*TRADE Group, Inc. 82,187
7,000 Extensity, Inc. 147,000
5,000 F5 Networks, Inc. 170,000
7,000 The Gap, Inc. 140,875
14,000 Gateway, Inc. 654,500
10,000 General Electric Company 576,875
8,000 General Mills, Inc. 284,000
19,000 The Gillette Company 586,625
5,000 Globalstar Telecommunications Limited 43,125
4,500 GlobeSpan, Inc. 549,000
9,500 Hewlett-Packard Company 921,500
12,000 The Home Depot, Inc. 636,750
5,000 Household International, Inc. 283,125
3,000 Integrated Silicon Solution, Inc. 42,562
6,500 Intel Corporation 270,156
10,000 International Business
Machines Corporation 1,125,000
9,000 International FiberCom, Inc. 131,625
4,000 Internet Capital Group, Inc. 69,750
13,000 The Interpublic Group of Companies, Inc. 442,812
4,000 JDS Uniphase Corporation 378,750
18,920 Jupiter Media Metrix, Inc. 301,537
17,000 Kohl's Corporation 980,688
8,000 Level 3 Communications, Inc. 617,000
9,000 Lowe's Companies, Inc. 403,875
39,500 Lucent Technologies Inc. 1,207,219
13,000 M-Systems Flash Disk Pioneers Ltd. 496,438
35,000 MAX Internet Communications, Inc. 21,875
9,000 Maxim Pharmaceuticals, Inc. 546,750
15,000 McLeodUSA Incorporated - Class A 214,688
3,000 Metris Companies Inc. 118,500
3,500 Metromedia Fiber
Network, Inc. - Class A 85,094
21,000 Microchip Technology Incorporated 694,313
24,000 Micron Technology, Inc. 1,104,000
13,000 MIPS Technologies, Inc. - Class A 598,000
15,000 Motient Corporation 211,875
10,000 Motorola, Inc. 282,500
65,000 Nasdaq - 100 Shares 5,764,688
23,000 Navistar International Corporation 688,563
5,000 Net2Phone, Inc. 112,500
14,000 Netro Corporation 829,500
272,100 Neurobiological Technologies, Inc. 2,244,825
2,000 Next Level Communications, Inc. 132,250
33,000 NEXTLINK Communications,
Inc. - Class A 1,161,188
22,000 Nokia Oyj - ADR 875,875
5,000 Nortel Networks Corporation 297,813
15,000 Osicom Technologies, Inc. 371,250
5,000 Outback Steakhouse, Inc. 135,625
5,000 Papa John's International, Inc. 125,312
7,000 Paradyne Networks, Inc. 37,844
11,500 Pharmacyclics, Inc. 570,688
8,000 PSINet Inc. 77,000
6,000 QLT Inc. 425,250
14,000 RadioShack Corporation 904,750
3,000 Rambus Inc. 236,813
3,000 RealNetworks, Inc. 119,250
3,000 Red Hat, Inc. 51,188
10,000 Regions Financial Corporation 226,875
37,000 RF Micro Devices, Inc. 1,184,000
7,000 SAP AG - ADR 430,500
37,000 Sawtek Inc. 1,425,078
10,000 Scient Corporation 209,375
2,000 Silicon Valley Bancshares 116,469
65,000 S&P 500 Depositary Receipt 9,335,625
10,000 Starbucks Corporation 400,625
5,000 STMicroelectronics N.V. - NYS 238,125
5,000 Sycamore Networks, Inc. 540,000
16,000 Tanox, Inc. 542,000
11,000 Target Corporation 281,875
5,000 Telaxis Communications Corporation 30,469
14,000 Telecom HOLDRs Trust 927,500
60,000 Telefonaktiebolaget LM Ericsson AB 888,750
10,000 Teligent, Inc. - Class A 130,000
1,000 Tellabs, Inc. 47,750
6,000 Terayon Communication Systems, Inc. 203,625
9,000 Terex Corporation 117,563
18,000 Texas Instruments Incorporated 849,375
5,000 Tower Semiconductor Ltd. 110,000
10,000 Trintech Group PLC - ADR 201,250
8,000 TriQuint Semiconductor, Inc. 291,500
10,000 Triton Network Systems, Inc. 131,250
12,500 United Therapeutics Corporation 1,092,188
51,000 Univision Communications Inc. 1,906,125
4,000 Ventro Corporation 44,000
8,000 Vignette Corporation 239,000
8,000 Vishay Intertechnology, Inc. 246,000
4,000 Vitesse Semiconductor Corporation 355,750
5,000 Vyyo Inc. 150,000
11,000 Wal-Mart Stores, Inc. 529,375
5,000 The Walt Disney Company 191,250
156 WebMD Corporation 2,379
3,000 Whole Foods Market, Inc. 161,063
10,000 Wild Oats Markets, Inc. 117,500
3,000 Williams-Sonoma, Inc. 104,250
30,000 Winstar Communications, Inc. 465,000
500 Yahoo! Inc. 45,500
-----------
TOTAL SECURITIES
SOLD SHORT
(Proceeds $88,512,587) $81,942,672
-----------
-----------
See notes to the financial statements.
PRUDENT SAFE HARBOR FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2000
SHARES VALUE
------ -----
COMMON STOCKS -- 10.5%
AUSTRALIA -- 2.7%
72,311 Normandy Mining Limited $ 39,048
----------
SOUTH AFRICA -- 7.8%
3,000 AngloGold Limited - ADR 55,125
10,900 Harmony Gold Mining
Company Limited - ADR 55,863
----------
110,988
----------
TOTAL COMMON STOCK
(Cost $169,377) 150,036
----------
PRINCIPAL
AMOUNT
------
U.S. TREASURY
OBLIGATIONS -- 49.6%
U.S. Treasury Notes:
13,000 6.375%, 01/31/2002 13,029
180,000 6.50%, 03/31/2002 180,900
38,000 6.375%, 04/30/2002 38,154
13,000 6.625%, 05/31/2002 13,110
8,000 6.375%, 06/30/2002 8,040
125,000 6.25%, 07/31/2002 125,430
326,000 6.125%, 08/31/2002 326,510
----------
TOTAL U.S. TREASURIES
(Cost $705,254) 705,173
----------
FOREIGN TREASURY
OBLIGATIONS -- 43.7%
DENMARK -- 2.6%
300,000 Kingdom of Denmark Bond
8.00%, 11/15/2001 36,281
----------
FRANCE -- 8.5%
French Treasury Notes:
40,000 3.00%, 07/12/2001 34,752
50,000 5.50%, 10/12/2001 44,299
48,000 4.00%, 01/12/2002 41,760
----------
120,811
----------
GERMANY -- 12.0%
Bundesschatzanweisungen:
21,000 3.00%, 06/15/2001 18,283
50,000 3.50%, 09/14/2001 43,511
49,000 4.00%, 12/14/2001 42,716
75,000 5.00%, 09/13/2002 66,150
----------
170,660
----------
NORWAY -- 4.0%
500,000 Norwegian Government Bond
9.50%, 10/31/2002 57,455
----------
SWITZERLAND -- 16.6%
Swiss Government Bonds:
60,000 7.00%, 07/09/2001 35,581
80,000 5.50%, 10/07/2001 47,144
75,000 6.50%, 02/05/2002 45,003
80,000 4.50%, 07/08/2002 46,975
100,000 6.25%, 01/07/2003 61,043
----------
235,746
----------
TOTAL FOREIGN
TREASURY OBLIGATIONS
(Cost $657,917) 620,953
----------
SHORT-TERM
INVESTMENTS -- 14.1%
U.S. TREASURIES -- 13.2%
U.S. Treasury Bills:
29,000 5.77%, 10/19/2000 28,916
24,000 5.90%, 11/09/2000 23,847
26,000 5.92%, 11/16/2000 25,803
30,000 5.93%, 12/07/2000 29,669
24,000 5.96%, 12/21/2000 23,678
56,000 5.98%, 12/28/2000 55,181
----------
187,094
----------
SHARES
------
MUTUAL FUNDS -- 0.9%
12,869 Star Treasury Fund 12,869
----------
TOTAL SHORT-TERM
INVESTMENTS
(Cost $200,003) 199,963
----------
TOTAL INVESTMENTS
(Cost $1,732,551) -- 117.9% 1,676,125
Liabilities, less
Other Assets -- (17.9)% (254,498)
----------
Total Net Assets -- 100.0% $1,421,627
----------
----------
ADR - American Depository Receipt
See notes to the financial statements.
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Prudent Bear Funds, Inc. (the "Company") was incorporated on October 25,
1995, as a Maryland Corporation and is registered as a diversified open-end
management investment company under the Investment Company Act of 1940
("1940 Act"). The Company currently consists of two series: thePrudent Bear
Fund and the Prudent Safe Harbor Fund (each a "Fund" and collectively the
"Funds"). The investment objectives of the Funds are set forth below.
The investment objective of the Prudent Bear Fund is capital appreciation,
which it seeks to obtain 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.
The Prudent Bear Fund commenced operations on December 28, 1995.
The costs incurred by the Prudent Bear Fund in connection with the
organization, initial registration and public offering of shares,
aggregating $30,100, have been paid by the Adviser. The Prudent Bear Fund
has reimbursed the Adviser. These costs are being amortized over the period
of benefit, but not to exceed sixty months from the Prudent Bear Fund's
commencement of operations.
The Prudent Bear Fund has issued two classes of shares: No Load and Class C
shares. The No Load shares are subject to a 0.25% 12b-1 fee, while the
Class C shares are subject to a 1.00% 12b-1 fee, as described in accordance
with the Fund's prospectuses. Each class of shares has identical rights and
privileges except with respect to 12b-1 fees and voting rights on matters
affecting a single class of shares.
The investment objective of the Prudent Safe Harbor Fund is current income
and capital appreciation through investments primarily in liquid securities
issued by major industrialized nations, and equity securities of companies
that mine gold and gold bullion. The Prudent Safe Harbor Fund commenced
operations on February 2, 2000.
The following is a summary of significant accounting policies consistently
followed by the Funds.
a) Investment Valuation - Common stocks, preferred 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 stocks is taken
from the exchange where the security is primarily traded. Common
stocks and securities sold short which are listed on an exchange or
the NASDAQ Stock Market but which are not traded on the valuation date
are valued at the average of the current bid and asked price. Unlisted
equity securities for which market quotations are readily available
are valued at the latest quoted bid price. Debt securities are valued
at the latest bid price. Mutual fund investments are valued at the net
asset value on the day the valuation is made. Other assets and
securities for which no quotations are readily available are valued at
fair value as determined in good faith by management in accordance
with procedures approved by the Board of Directors. At September 30,
2000, such securities represent 4.7% of net assets, at value, in the
Prudent Bear Fund. The Prudent Safe Harbor Fund, at September 30,
2000, had no fair valued security investments. Short-term debt
instruments (those with remaining maturities of 60 days or less) are
valued at amortized cost, which approximates market value.
b) Short Positions - The Funds may engage in short sale transactions. For
financial statement purposes, an amount equal to the settlement amount
is included in the Statement of Assets and Liabilities as an asset and
an equivalent liability. The amount of the liability is subsequently
marked-to-market to reflect the current value of the short position.
Subsequent fluctuations in the market prices of securities sold, but
not yet purchased, may require purchasing the securities at prices
which may differ from the market value reflected on the Statement of
Assets and Liabilities. The Funds are liable for any dividends paid on
securities sold short. The Prudent Bear Fund's receivables from
brokers for proceeds on securities sold short are with two major
security dealers. The Funds do not require the brokers to maintain
collateral in support of these receivables.
c) Written Option Accounting - The Funds write (sell) put and call
options. When the Funds write (sell) an option, an amount equal to the
premium received by the Funds is included in the Statement of Assets
and Liabilities as an asset and an equivalent liability. The amount of
the liability is subsequently marked-to-market to reflect the current
value of the option written. By writing an option, the Funds may
become obligated during the term of the option to deliver (with
respect to a call option) or purchase (with respect to a put option)
the securities underlying the option at the exercise price if the
option is exercised. Option contracts are valued at the average of the
current bid and asked price reported on the day of valuation. When an
option expires on its stipulated expiration date the Funds realize a
gain. When the Funds enter into a closing purchase transaction, the
Funds realize a gain or loss if the cost of the closing purchase
transaction differs from the premium received when the option was sold
without regard to any unrealized gain or loss on the underlying
security, and the liability related to such option is eliminated. If a
call option written by a Fund is exercised, the proceeds of the sale
of the underlying security will be increased by the premium originally
received and the Fund will realize a gain or loss on the sale of the
security. If a put option written by a Fund is exercised, the Fund's
basis in the underlying security will be reduced by the premium
originally received.
d) Collateral on Short Sales, Written Options and Futures Contracts - As
collateral for short positions, written options and futures contracts,
the Funds are required under the 1940 Act to maintain assets
consisting of cash or liquid securities. For short positions, this
collateral must equal the market value of the securities sold short.
For written options, this collateral must equal the market value of
the purchase obligation for put options or the market value of the
instrument underlying the contract for call options. For futures
contracts, this collateral must equal the market value of the purchase
obligation for long futures contracts or the market value of the
instrument underlying the contract for short futures contracts. All
collateral is required to be adjusted daily.
e) Federal Income Taxes - No provision for federal income taxes has been
made since the Funds have complied to date with the provisions of the
Internal Revenue Code applicable to regulated investment companies and
intend to continue to so comply in future years and to distribute
investment company net taxable income and net capital gains to
shareholders. Additionally, the Funds intend to make all required
distributions to avoid being liable for federal excise taxes.
f) Purchased Option Accounting - Premiums paid for option contracts
purchased are included in the Statement of Assets and Liabilities as
an asset. Option contracts are valued at the average of the current
bid and asked price reported on the day of valuation. When option
contracts expire or are closed, realized gains or losses are
recognized without regard to any unrealized gains or losses on the
underlying securities. Put options contracts are held by the Funds for
trading purposes and call option contracts are held by the Funds for
trading and hedging purposes.
g) Distributions to Shareholders - Dividends from net investment income
are declared and paid annually for the Prudent Bear Fund and quarterly
for the Prudent Safe Harbor Fund. Distributions of net realized
capital gains, if any, will be declared and paid at least annually for
both Funds.
h) Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
i) Other - Investment and shareholder transactions are recorded on trade
date. The Funds determine the gain or loss realized from investment
transactions by comparing the original cost of the security lot sold
with the net sales proceeds. Dividend income is recognized on the ex-
dividend date or as soon as information is available to the Fund, and
interest income is recognized on an accrual basis. Investment income
for the Prudent Bear Fund includes $3,753,228 of interest earned on
receivables from brokers for proceeds on securities sold short. There
was no interest earned on receivables from brokers for proceeds on
securities sold short for the Prudent Safe Harbor Fund. Generally
accepted accounting principles require that permanent financial
reporting and tax differences be reclassified in the capital accounts.
j) Futures Contracts and Options on Futures Contracts - The Prudent Bear
Fund may purchase and sell stock index futures contracts and options
on such futures contracts, while the Prudent Safe Harbor Fund may
purchase and sell debt futures contracts and options on such futures
contracts. Upon entering into a contract, the Funds deposit and
maintain as collateral such initial margin as required by the exchange
on which the transaction is effected. Pursuant to the contract, the
Funds agree to receive from or pay to the futures commission merchant
an amount of cash equal to the daily fluctuation in the value of the
contract. Such receipts or payments are known as variation margin and
are recorded by the Funds as unrealized gains and losses. When the
contract is closed, the Funds record a realized gain or loss equal to
the difference between the value of the contract at the time it was
opened and the value at the time it was closed.
k) Risks of Options, Futures Contracts and Options onFutures Contracts -
The risks inherent in the use of options, futures contracts, and
options on futures contracts include: 1) adverse changes in the value
of such instruments; 2) imperfect correlation between the price of
options and futures contracts and options thereon and movements in the
price of the underlying securities, index or futures contracts; 3) the
possible absence of a liquid secondary market for any particular
instrument at any time; 4) the possible need to defer closing out
certain positions to avoid adverse tax consequences; and 5) the
possible nonperformance by the counterparty under the terms of the
contract.
l) Restricted Securities - The Prudent Bear Fund owns investment
securities which are unregistered and thus restricted as to resale.
These securities are valued by the Fund after giving due consideration
to pertinent factors including recent private sales, market conditions
and the issuer's financial performance. Where future disposition of
these securities requires registration under the Securities Act of
1933, the Fund has the right to include these securities in such
registration, generally without cost to the Fund. The Fund has no
right to require registration of unregistered securities. At September
30, 2000, the Fund had restricted securities with an aggregate market
value of $7,286,501 representing 4.7% of the net assets of the Fund.
m) Foreign Securities - Investing in securities of foreign companies and
foreign governments involves special risks and consideration not
typically associated with investing in U.S. companies and the U.S.
government. These risks include revaluation of currencies and future
adverse political and economic developments. Moreover, securities of
many foreign companies and foreign governments and their markets may
be less liquid and their prices more volatile than those of securities
of comparable U.S. companies and the U.S. government.
n) Foreign Currency Translations - The books and records of the Funds are
maintained in U.S. dollars. Foreign currency transactions are
translated into U.S. dollars on the following basis: (i) market value
of investment securities, assets and liabilities at the daily rates of
exchange, and (ii) purchases and sales of investment securities,
dividend and interest income and certain expenses at the rates of
exchange prevailing on the respective dates of such transactions. For
financial reporting purposes, the Funds do not isolate changes in the
exchange rate of investment securities from the fluctuations arising
from changes in the market price of such securities. However, for
federal income tax purposes the Funds do isolate and treat as ordinary
income the effect of changes in foreign exchange rates on realized
gain or loss from the sale of investment securities and payables and
receivables arising from trade date and settlement date differences.
2. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Funds were as follows:
Prudent Bear Fund
Year Ended
No Load Shares: September 30, 2000
--------------------------------
$ Shares
------------ -----------
Shares sold $583,903,706 143,156,662
Shares issued to holders in
reinvestment of dividends 5,048,652 1,332,094
Shares redeemed (619,322,314) (154,375,320)
------------ -----------
Net decrease $(30,369,956) (9,886,564)
------------
------------
Shares Outstanding:
Beginning of period 48,909,331
-----------
End of period 39,022,767
-----------
-----------
Year Ended
Class C Shares: September 30, 2000
--------------------------------
$ Shares
------------ -----------
Shares sold $ 2,558,136 654,058
Shares issued to holders in
reinvestment of dividends 18,673 4,953
Shares redeemed (1,846,971) (481,395)
------------ -----------
Net increase $ 729,838 177,616
------------
------------
Shares Outstanding:
Beginning of period 46,101
-----------
End of period 223,717
-----------
-----------
Year Ended
No Load Shares: September 30, 1999
--------------------------------
$ Shares
------------ -----------
Shares sold $571,689,896 109,523,844
Shares issued to holders in
reinvestment of dividends 3,546,118 703,596
Shares redeemed (452,521,309) (84,981,005)
------------ -----------
Net increase $122,714,705 25,246,435
------------
------------
Shares Outstanding:
Beginning of period 23,662,896
-----------
End of period 48,909,331
-----------
-----------
February 8, 1999*<F27>
Class C Shares: through September 30, 1999
--------------------------------
$ Shares
------------ -----------
Shares sold $ 201,377 47,147
Shares issued to holders in
reinvestment of dividends -- --
Shares redeemed (4,257) (1,046)
------------ -----------
Net increase $ 197,120 46,101
------------ -----------
------------ -----------
Prudent Safe Harbor Fund
February 2, 2000*<F27>
through September 30, 2000
--------------------------------
$ Shares
------------ -----------
Shares sold $ 2,541,107 264,954
Shares issued to holders in
reinvestment of dividends 16,582 1,765
Shares redeemed (1,072,644) (112,031)
------------ -----------
Net increase $ 1,485,045 154,688
------------ -----------
------------ -----------
*<F27> commencement of operations
3. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of investments, excluding short-term
investments, options and short positions, by the Funds for the periods
ending September 30, 2000, were as follows:
Prudent Bear Fund Prudent Safe Harbor Fund
----------------- ------------------------
Purchases $398,741,260 $2,726,555
Sales $448,315,791 $1,185,415
Included in these amounts were purchases and sales of long-term U.S.
government securities, for the periods ending September 30, 2000, as
follows:
Prudent Bear Fund Prudent Safe Harbor Fund
----------------- ------------------------
Purchases $320,078,275 $1,887,820
Sales $356,178,865 $1,175,920
At September 30, 2000, gross unrealized appreciation and depreciation of
investments for tax purposes were as follows:
Prudent Bear Fund
Appreciation $ 11,642,049
(Depreciation) (15,052,587)
------------
Net depreciation on investments $ (3,410,538)
------------
------------
Prudent Safe Harbor Fund
Appreciation $ 663
(Depreciation) (58,450)
------------
Net depreciation on investments $ (57,787)
------------
------------
At September 30, 2000, the cost of investments for federal income tax
purposes for the Prudent Bear Fund and the Prudent Safe Harbor Fund were
$143,560,567 and $1,733,912, respectively.
At September 30, 2000, the Prudent Bear Fund had accumulated net realized
capital loss carryovers of $85,540,423, with $1,076,667 expiring in 2006
and $84,463,756 expiring in 2008. To the extent the Prudent Bear Fund
realizes future net capital gains, taxable distributions to its
shareholders will be offset by any unused capital loss carryover. In
addition, the Prudent Bear Fund realized, on a tax basis, post-October
capital and currency losses through September 30, 2000 of $38,645,433, and
$9,151, respectively, which are not recognized for tax purposes until the
first day of the following fiscal year.
4. INVESTMENT ADVISORY AND OTHER AGREEMENTS
The Funds have entered into Investment Advisory Agreements with David W.
Tice & Associates, Inc. Pursuant to its advisory agreements with the Funds,
the Investment Adviser is entitled to receive a fee, calculated daily and
payable monthly, at the annual rate of 1.25% and 0.75% for the Prudent Bear
Fund and the Prudent Safe Harbor Fund, respectively, as applied to the
Funds' daily net assets. Certain officers of the Adviser are also officers
of the Funds. For the periods February 2, 2000 through May 3, 2000, and May
4, 2000 through September 30, 2000, the Adviser agreed to waive its
investment advisory fee and/or reimburse the Fund's operating expenses
(exclusive of brokerage, interest, taxes, short dividends and extraordinary
expenses) to the extent necessary to ensure that the Prudent Safe Harbor
Fund's total operating expenses did not exceed 3.00% and 1.50%,
respectively, of the average net assets. During the period ended September
30, 2000, the Adviser reimbursed the Prudent Safe Harbor Fund $116,925.
Firstar Mutual Fund Services, LLC ("Firstar") serves as transfer agent,
administrator and accounting services agent for the Funds. Firstar Bank,
N.A. serves as custodian for the Funds.
5. EXPENSE REDUCTIONS
The Adviser had directed certain of the Prudent Bear Fund portfolio trades
to brokers at best price and execution and has generated directed brokerage
credits to reduce certain Firstar service provider fees. Shareholders
benefit under this arrangement as the net expenses of the Prudent Bear Fund
do not include such service provider fees. For the period ended September
30, 2000, the Prudent Bear Fund's expenses were reduced $169,377 by
utilizing directed brokerage credits resulting in an expense ratio of 1.83%
and 2.58% being charged to No Load shareholders and Class C shareholders,
respectively. In accordance with Securities and Exchange Commission
requirements, such amount is required to be shown as an expense and has
been included in each of the Firstar fees in the Statement of Operations.
6. FUTURES CONTRACTS
At September 30, 2000, the Prudent Bear Fund had entered into stock index
futures contracts. The net unrealized appreciation of $1,774,495 is
included in the net unrealized appreciation section of the accompanying
financial statements. The terms of the open contracts are as follows:
Number of Underlying Market Value of Unrealized
Contracts Instrument Underlying Instrument Appreciation
--------- ---------- --------------------- ------------
(41) NASDAQ 100 Index
December 2000 $14,846,100 $ 955,720
(54) S&P 500 Index
December 2000 19,624,950 818,775
----------
$1,774,495
----------
----------
7. OPTION CONTRACTS WRITTEN
The premium amount and the number of option contracts written for the
Prudent Bear Fund during the period ended September 30, 2000, were as
follows:
Premium Amount Number of Contracts
-------------- -------------------
Options outstanding at
September 30, 1999 $ -- --
Options written 772,588 875
Options closed (513,569) (525)
Options exercised (79,745) (100)
Options expired (179,274) (250)
--------- ----
Options outstanding at
September 30, 2000 $ -- --
--------- ----
--------- ----
8. SERVICE AND DISTRIBUTION PLAN
The Funds have adopted Service and Distribution Plans (the "Plans")
pursuant to Rule 12b-1 under the 1940 Act. The Plans authorize payments by
the Funds in connection with the distribution of their shares at an annual
rate, as determined from time to time by the Board of Directors, of up to
0.25% of the Funds' average daily net assets for the Prudent Bear No Load
shares and Prudent Safe Harbor Fund and up to 1.00% for the Prudent Bear
Class C shares. The currently approved rate for the Prudent Bear No Load
shares and the Prudent Safe Harbor Fund is 0.25% of average daily net
assets. The currently approved rate for the Prudent Bear Class C shares is
1.00% of average daily net assets. Payments made pursuant to the Plans may
only be used to pay distribution expenses in the year incurred. Amounts
paid under the Plans by the Funds may be spent by the Funds on any
activities or expenses primarily intended to result in the sale of shares
of the Funds, including but not limited to, advertising, compensation for
sales and marketing activities of financial institutions and others such as
dealers and distributors, shareholder account servicing, the printing and
mailing of prospectuses to other than current shareholders and the printing
and mailing of sales literature. The Prudent Bear Fund incurred $422,599
for the No Load Shares and $7,179 for the Class C Shares pursuant to the
Plans for the period ended September 30, 2000. The Prudent Safe Harbor Fund
incurred $1,212 pursuant to the Plan for the period ended September 30,
2000.
PRUDENT BEAR FUNDS, INC.
INVESTMENT ADVISER
DAVID W. TICE & ASSOCIATES, INC.
8140 WALNUT HILL LANE, SUITE 300
DALLAS, TEXAS 75231
HTTP://WWW.PRUDENTBEAR.COM
ADMINISTRATOR, TRANSFER AGENT,
DIVIDEND PAYING AGENT &
SHAREHOLDER SERVICING AGENT
FIRSTAR MUTUAL FUND SERVICES, LLC
615 EAST MICHIGAN STREET
P.O. BOX 701
MILWAUKEE, WISCONSIN 53201
CUSTODIAN
FIRSTAR BANK, N.A.
P.O. BOX 701
MILWAUKEE, WISCONSIN 53201
INDEPENDENT ACCOUNTANTS
PRICEWATERHOUSECOOPERS LLP
MILWAUKEE, WISCONSIN
LEGAL COUNSEL
FOLEY & LARDNER
MILWAUKEE, WISCONSIN
