SEMI-ANNUAL REPORT MARCH 31, 2000
PRUDENT BEAR FUND
NO LOAD SHARES
CLASS C SHARES
PRUDENT SAFE HARBOR FUND
PRUDENT BEAR
FUNDS, INC.
PRUDENT BEAR FUNDS, INC.
May 19, 2000
Dear Shareholder:
For the six months ended March 31, 2000, The Prudent Bear Fund lost 15.8%, while
the S&P 500 gained 17.5% and the NASDAQ 100 rose 82.7%. From the lows on
October 18, 1999 to the record high on March 10, 2000, the NASDAQ Composite
advanced an astonishing 87.9%. It was a historic speculative run and what
certainly now appears to be a "textbook" blow-off top to one of the greatest
bull markets ever. As such, it was an extremely challenging environment for
those of us short the market. We at Prudent Bear, while always maintaining
short exposure to the market, took dramatic risk-management measures to protect
shareholder assets, covering over 100 short positions over several trading
sessions early in the advance. These efforts helped to keep Prudent Bear losses
during this extraordinary period to less than 21%.
We did not anticipate that the mania would last as long as it has, and that the
stock market bubble would continue to grow bigger and bigger. Nevertheless, due
to the current dislocations that are occurring in the credit markets and the
inflation and excesses now being created by a "white hot" economy, we remain
confident that we are in the final stages of a mania that will end in a horrific
decline, catching most investors by surprise.
At our recent symposium, "The U.S. Credit Bubble and its Aftermath", that was
held in New York City in September 1999, we made our views on the economy and
financial markets quite clear. The economy and stock market have been on an
unsustainable credit-induced rampage. Private expenditures by American firms
and households have exploded to an unprecedented degree relative to incomes.
The U.S. household savings rate has turned negative, and household debt relative
to income is at a record high.
In the business world, capital spending is growing twice as fast as corporate
America's ability to pay for it. Thus, this spending spree, coupled with record
stock repurchases amounting to more than 3% of GDP, is being funded largely with
debt. Corporate debt now represents 45% of American GDP. The last time we
approached these levels was in the late 1980s, and a banking crisis ensued.
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 industrialized
economies, this degree of leverage has historically precipitated recessions and
debt crises.
THE CURRENT CRISIS
Recently, Doug Noland, our market strategist, has observed that the U.S. credit
markets have been in extreme dislocation. Very few analysts have commented on
this important development. Most credit spreads have widened dramatically over
the past two months and government sponsored enterprises (GSE's) are now paying
the highest interest rates for their debt since 1997. We believe that this is a
seminal event, which may ultimately prove to be comparable to the breakdown of
the Thai baht in July of 1997. The breakdown of the Thai baht launched the
global crisis in 1997 that, as George Soros pointed out, brought the global
capitalist system to the brink of disintegration. As was the case with the
initial baht devaluation, there appears to be no recognition of the critical
importance of these widening credit spreads and the implications they have for
the U.S. financial system. As we are moving into uncharted territory with
respect to these spreads, we believe that many of the speculators' mathematical
computer models that have been at the root of unprecedented and endemic
leveraging and speculation must be failing. The very nature of these models,
which rely on historical data and constant liquidity, makes them prone to falter
when unexpected and outsized events occur, as the now infamous Long-Term Capital
Management episode made so readily clear in the near financial meltdown of 1998.
The dynamic, rapidly changing, and chaotic nature of today's out-of-control
capital markets is in direct conflict with the premise behind these models,
which is a reliance on a stable, "non-bubble-like" environment. Unfortunately,
that is not the environment we are operating in, as we have been so diligent in
pointing out in our regular market commentaries at www.prudentbear.com.
From a Macro Perspective, two momentous "pegs" have for some time induced
unprecedented leverage and speculation as well as economic distortions and
imbalances that have finally culminated in the current financial dislocation
that is presently unfolding in the U.S. financial markets. First, the U.S. has
a central bank that pegs short-term interest rates, while virtually promising to
forewarn the speculators of any imminent rate increases. A second "peg" has
been created through the implied government guarantees and "too big to fail"
doctrine that has garnered the GSE's unlimited access to the capital markets.
Consequently, a treacherous moral hazard problem has been created. These two
"pegs" have for some time fostered an extraordinary opportunity for interest
rate speculation. Such conditions have not gone unnoticed by a leveraged
speculating community that has grown to unimaginable size and power. Therefore,
the ingredients for unprecedented credit excess can be found in the following:
the Federal Reserve "pegging" short-term borrowing rates for the speculators,
the unregulated, unfettered and overzealous financial sector accommodating an
unlimited supply of borrowable short-term funds, and finally GSE's creating a
virtually endless supply of securities with the implicit backing of the U.S.
taxpayer.
The leveraged speculators' computer models were developed from a history of
relatively stable and predictable relationships among interest rate spreads
between public and private sector debt. However, it is unmistakable that a huge
and growing disparity between the marginal quantities of private and public
sector debt issuance has distorted previous pricing relationships.
Consequently, these old models have been rendered defective.
With new mortgage debt creation at double the rate of just a few years ago,
models for hedging mortgage securities have also faltered. Spreads between
Treasury rates and mortgage securities have widened sharply over the past weeks
to levels not seen since the crisis of 1998, and significant losses will now
likely precipitate an ongoing liquidation. If it were not for Fannie Mae and
Freddie Mac's aggressive mortgage purchases and ballooning of their balance
sheets, particularly since the severe crisis back in 1998, the leveraged players
would have choked on an oversupply of mortgage paper long before now. Support
for the mortgage market has at the same time created an enormous issuance of
agency securities to fund these bloated GSE balance sheets. Agency securities,
with fixed maturities and implied government guarantees, have made truly
wonderful vehicles for the leveraged speculators. These characteristics have
also made agency securities popular vehicles for the holders of dollars we
continue to flood the world with in order to fund our massive trade deficits.
Untold leverage has developed both domestically and internationally in agency
securities.
The tremendous wildcard in this perilous environment is the interest rate
derivative marketplace, which has allowed institutions to borrow short and lend
long. However, with short term interest rates rising rapidly and the U.S.
commercial banking sector holding almost $30 trillion of interest rate
contracts, including almost $20 trillion of swaps, we would expect that many
counterparties will have significant losses.
The financial sector has once again responded to this developing systemic stress
by aggressively creating additional money and credit. This is not necessarily
surprising, but we do not believe that such familiar measures will in the end be
successful this time around. In fact, we see a larger debacle as this mechanism
only throws additional liquidity onto an already over-liquefied household
sector. These types of crises typically take much longer to culminate than one
would expect. However, at some point a "critical mass" takes hold, and at that
point events begin to progress very rapidly. For now, Wall Street is enjoying
the game of "Hear No Evil, See No Evil, Speak No Evil." Egregious leverage and
speculation have permeated the U.S. credit market through interest rate
derivatives and particularly in mortgage and agency securities. This reckless
leverage and speculation is not limited to the credit markets, it also underpins
the U.S. stock market. The U.S. has a corporate debt bubble, a consumer debt
bubble, a precariously over leveraged U.S. financial sector, an acutely
vulnerable dollar, and a U.S. economy with unprecedented distortions and
imbalances.
We have already seen several leveraged speculators falter, which has been our
expectation. Leveraged speculators typically don't perform well in a rising
interest rate environment. We have long felt that this leveraged credit bubble
would come apart at the seams with rapidly rising interest rates. We have seen
just the beginning of the unwinding of leveraged speculation, as interest rates
will have to rise much higher to slow down the economy and break the stock
market bubble. In February, Alan Greenspan promised that he would continue to
raise interest rates to slow down the economy and the stock market. After five
FED rate increases, the economy is still white-hot, real estate prices are
skyrocketing, and inflation rates continue to accelerate. Clearly, the FED
still has more work to do. This will be extremely dangerous given the perilous
state of our leveraged credit markets.
RELIANCE ON FOREIGN INVESTORS
Because foreign investors have been financing our profligacy, America's credit
bubble also represents the key to our concerns about our American currency.
Rampant credit expansion has not just given us an overvalued stock market. It
has also created a distorted economy by financing uneconomic businesses.
Foreigners, for the moment, are continuing to finance these excesses in the US
economy. This only further perpetuates imbalances and rising levels of debt
that will likely never be repaid to our foreign lenders.
Our reliance on foreign investors is so extreme that we can compare the current
state of the U.S. economy to that of emerging Asia prior to the latter's
financial crisis in 1997-1998. Like our so-called "New Era economy", the Asian
countries of 1997 boasted government budget surpluses, but some countries, such
as Malaysia, Thailand, and Korea, suffered from massive current account and
private sector deficits. That was a deadly combination when the crisis came
because private household and corporate borrowers, who are weaker than
government and quasi-public institutions, proved to be acutely vulnerable when
foreign sources of finance withdrew en masse.
How much does the American economy rely on foreigners for capitalo The U.S.
current account deficit is now in excess of 4% of GDP. That's a high for the
post-war period. Chronic current account deficits throughout the 1990s made the
U.S. a significant net debtor nation, more akin to countries which spawned the
LDC crisis in the early 1980s than the 1980s version of America itself. Recall,
it was in the 1980s that we discovered "debt trap dynamics" where net debtor
nations found themselves with debts rising inexorably higher relative to GDP.
As consumers and businesses tried mightily to service this debt, growth and
profitability suffered. No less an authority than our current Treasury
Secretary, Lawrence Summers, wrote extensively about the dangers of debt trap
dynamics when he was chief economist to the World Bank during the 1980s.
Mr. William Poole, President of the Federal Reserve Bank of St. Louis has
stated:
"There is no necessary reason why the trade deficit cannot continue
forever. The United States is such a wonderful place in which to
invest today. You should not believe that there is any necessary day
of reckoning as a consequence of the current trade deficit. I don't
think the trade deficit is a problem."
We disagree vehemently. First, much of what is considered "foreign investment"
is likely more accurately described as "hot money" flows from the leveraged
speculating community. Although these flows have supported the dollar for some
time, heavy reliance on such sources presents a very tenuous situation. Indeed,
we believe that America's foreign creditors will eventually say, "enough is
enough" and head for the exits, selling their dollars. We certainly see great
potential for exactly this outcome in the near future as foreign investors come
to better recognize the true fragile underpinning of the current U.S. boom.
Once this happens, one of two equilibrating forces must be set in motion. The
dollar must fall and/or interest rates must rise. If foreign holders of dollar
obligations sell, this will trigger a sharp decline in our currency.
Alternatively, they could demand a much higher interest rate to hold these
dollars along with the additional dollars thrust at them by the ongoing U.S.
current account deficit. In either case, it will mark a dramatic shift in the
financial landscape.
The complacency over our reliance on foreign investors, which Mr. Greenspan and
his cohorts have actively helped foster, has resulted in a U.S. household sector
that is more deeply involved in the stock market than ever before. Such
widespread participation has economic consequences well beyond the dangers posed
to financial assets per se. When the U.S. stock market bubble does finally
burst, there will be a substantial decline in U.S. consumption. We also believe
the bursting of the bubble will result in a severe recession, which will be
deemed inexcusable by the U.S. body politic. The coming downturn will
consequently be exacerbated by the destruction of the personal wealth of tens of
millions of unsophisticated investors as stock prices crash from unprecedented
levels. This will likely be accompanied by a significant easing of monetary
policy, with further negative implications for the external value of the dollar.
In such a situation, prudent investors may wish to avoid the risk of stocks and
long maturity bonds as well as unstable money market instruments, while taking
advantage of "hard assets" and currencies that should strengthen against the
dollar. This is why we started the Prudent Safe Harbor Fund, which has been
designed to provide protection for an investor's global purchasing power. The
fund was launched on February 2, 2000. For two months, due to the strong rally
in the dollar, it has generated a loss of 1.2%. We are extremely confident that
this fund represents an ideal vehicle to help ride out the coming economic storm
and to protect your family's savings from a tumultuous financial tragedy that
will see the U.S. dollar decline significantly. Although the dollar has been
strong recently, this recent rise reminds us of the dislocation experienced by
the dollar vs. the yen in 1995 that preceded a major decline in the yen, as the
yen fell from 80 to 140 in a number of months. Being invested in short term
securities of countries with strong current account surpluses, and holding
physical title to gold bullion makes a great deal of sense in the tumultuous
economic environment we expect over the next few years. In an environment of
continued dislocation, we believe it's important to avoid the potential danger
of directly or indirectly holding commercial paper, repo's, bank CD's, agencies,
mortgage-back securities, and loan syndications.
This fund is small now and until it increases in size, David W. Tice &
Associates, Inc. will be absorbing many of the fund's expenses to keep its
overall expense load at 1.50%.
BUBBLE SUPPLY/DEMAND DYNAMICS
The normal consumer price resistance which generally accompanies substantially
higher prices in a regular functioning economy does not seem to apply in the
midst of a speculative bubble. Normally, when the price of a good or service
increases, it causes demand to decline and supply to increase. Price is the
equilibrating mechanism providing that supply and demand come into balance.
However, in an investment mania where the price of an investment asset rises,
the demand for that asset continues to rise and supply contracts, causing the
price to rise even further. An illusion of "personal balance sheet" expansion
is created as the asset held by the individual increases in value.
Consequently, a wealth effect is created in the investor's mind that encourages
him to buy more and more and to often employ leverage as expectations become
even more euphoric. This process largely helps to explain why Americans
continue to consume more than they save. However, when the bubble is pierced
and prices decline, the principle works in reverse. The further the asset
declines in price, the greater the supply and the less the demand. Personal
assets, such as stocks or real estate, which had hitherto facilitated greater
spending and borrowing as they rose in value, now engender forced sales as they
contract in value, thereby pushing down their value even further. This vicious
cycle creates a "crash" in the asset price. Given the presence of massive
leverage and the accompanying financial fragilities we have outlined above, we
envision no way for this asset bubble to end in a "soft landing."
There are signs that this process is now underway, most notably in the area of
high tech. In his eloquent history of speculative manias, Devil Take the
Hindmost, Edward Chancellor describes how the final stages of all manias in
history have been characterized by cognitive dissonance. The causes or sources
of the end of the mania become increasingly apparent, and yet the market mania
continues on its course. Information accumulates to contest the collective
fantasy, but mania-bound investors persist in their speculative behavior because
it remains just too rewarding to forego. Finally, the evidence against the
expectations embodied in soaring prices becomes so overwhelming that it intrudes
upon the collective fantasy. It demands recognition, and the bubble bursts.
Often it is a change in the margin of hitherto easy credit conditions, which
engenders this change in perception. In any case, whatever the proximate cause,
once the back of a speculative bubble is truly broken, supply and demand begins
to shift adversely as described in the foregoing paragraph.
We believe that market participants have entertained severe cognitive dissonance
for some time now with respect to the high tech sub-sector of the U.S. stock
market. Four years ago, global semiconductor revenues peaked, but until last
month, semiconductor stocks continued to soar, with the Philadelphia index of
semiconductor stocks, the SOX index, gaining over 200% in the 52 weeks ended
April 30th. At the beginning of 1995, the SOX index sold at 150. In March, it
hit 1360. The experiences of Micron Technology over the last three years should
make it clear to any investor that its business is a cyclical and perilous one,
even in an economic expansion. Competitive pressures from the Far East, notably
Taiwan and Korea, are intensifying. Additionally, Applied Micro Devices (AMD)
has had successful production runs of a chip superior to that of Intel at the
high-end of its product line, as competition continues to heat up.
Despite help from early upgrading purchases forced on users by the need to
become Y2K compliant, global revenues from PC's, which are the heart of the
information technology industry, stopped growing three years ago. Yet, stocks
in this sector made new highs just recently, even as revenues and orders have
continued to disappoint.
With few exceptions, the more seasoned Internet issues fail to move any closer
to significant profitability. Some have seen early profits recede or evaporate
altogether. One (the first of many, we suspect) has filed for Chapter 11
bankruptcy. Most Internet Service Providers (ISPs) have watched costs outpace
their meager revenue despite increasing volumes. Yet these stocks also have
shot up to the stars.
Reality is now beginning to intrude in a rather harsh way. The proximate cause
cited is the U.S. Justice Department's attempt to break up Microsoft. Yet in
advance of this judgment, Microsoft's sales growth had slowed dramatically,
despite the fact that this is a monopoly and has not suffered the competitive
pressures of hardware companies. Dell has heretofore been the fastest grower in
the computer industry because of its successful direct marketing strategy. Yet
even in the case of Dell, the growth of its sales has tapered off in recent
years. This weakness in growth at Dell has even more ominous implications for
the other less successful computer manufacturers. Intel, which has had a near
monopoly in microprocessors, has recently reported price degradation for
microprocessors and some competition from AMD. Consequently, Intel's revenue
growth has fallen to single digits over the last two years. Cisco and Lucent
are at the cutting edge of telecom technology. They provide the equipment of
the Internet. Both have had sustained high growth rates in sales. However,
internal growth has been much less than overall sales growth because of
aggressive acquisition policies. They have made their acquisitions with stock.
The companies they have purchased have tended to have much lower price-to-sales
ratios than their own, thereby contributing percentage gains to their revenues
that exceed the related increases in their shares outstanding. Even though
there have been euphoric expectations surrounding the growth of the Internet, it
is worth noting that Cisco and Lucent have also experienced a slowing in revenue
growth in recent years. Perhaps most noteworthy is the case of Lucent
Technologies. After a long period of sustained 20% annual sales growth, Lucent
reported no sales growth year-over-year in its most recent quarter and would
have reported a substantial decline in operating earnings without significant
cutbacks to R&D expense.
These are not marginal companies. They constitute the blue chip names behind
the meteoric rise in the NASDAQ. If their underlying fundamentals are
deteriorating, it is unrealistic to expect any kind of meaningful recovery for
the peripheral players in the high tech sector and for this reason, the NASDAQ
has fallen more than 33% off its high as this letter is finalized.
Why, then, was the tremendous rally in high tech stocks so extremeo The answer
lies largely in the unrealistic euphoric expectations spawned by the stock
market bubble. The outsized expectations for these businesses revolve around
the continuation of the very asset bubble that they have become such an integral
part of, namely the enormous bubble in U.S. financial assets. Access to credit
and speculatively financed demand are easy to come by as long as the bubble
continues unfettered, but once the bubble bursts, so do the assumptions upon
which these wild expectations have been based.
When good times roll and manias take over asset markets, investors cease to
focus on fundamentals. They no longer expect reversion to the mean. Instead
their expectations become extrapolative, euphoric, and ultimately unrealistic.
This begins to have real economic consequences. When market signals become so
distorted as a consequence of easy credit conditions and concomitant speculative
bubbles, uneconomic business decisions are made. Capital markets cease to
function properly as more and more money gets funnelled into increasingly
"bubble-ized" industries. This activity only exacerbates these economic
distortions. Loss-making businesses rely on a seemingly endless stream of
public offerings to maintain substantial, loss-making businesses, as Ponzi-like
financing schemes proliferate. These are the current conditions prevailing.
As credit market conditions continue to deteriorate, as discussed earlier, this
easy access to financing will cease. Companies will start to experience genuine
financing difficulties, bankruptcies will inevitably ensue, and the economy will
start a recession.
CONCLUSION
Over the past several years, I have worked diligently to recruit and develop a
top-notch team of market professionals. I am now quite confident that we have
outstanding analysts from both the "macro" and "micro" perspective whose talent
and experience will prove a great asset for Prudent Bear shareholders over what
will certainly prove to be an extraordinary environment going forward. We
expect that our analytical capabilities will become more valuable in the
developing environment, where in the recent past, strong fundamental analysis
often proved counter productive.
We are not looking forward to the financial market and economic turmoil that
lies ahead. It will be terribly painful and traumatic for our country's
citizens, but unfortunately it's the price we'll pay for the excesses created by
an out-of-control financial system that recklessly created mountains of debt.
We will work diligently to provide a "hedge" against the financial market
implosion that seems unavoidable. Please visit our website at
www.prudentbear.com for continuing analysis of the impending financial crisis.
/s/ David W. Tice
David W. Tice
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 2000
(UNAUDITED)
PRUDENT BEAR PRUDENT SAFE
FUND HARBOR FUND
------------ -----------
ASSETS:
Investments, at value (cost $147,482,183 and
$543,054, respectively) $148,309,198 $538,714
Cash 3,328,895 --
Deposit at brokers for short sales 4,037,128 --
Receivable from broker for proceeds on
securities sold short 61,435,349 --
Receivable for investments sold 14,390,674 --
Capital shares sold 6,491,734 5,000
Dividend receivable 64,201 172
Interest receivable 1,248,280 1,955
Organizational expenses, net of
accumulated amortization 4,670 --
Other assets 49,694 13,942
------------ --------
Total Assets 239,359,823 559,783
------------ --------
LIABILITIES:
Securities sold short, at value (Proceeds of
$73,692,953 and $0, respectively) 77,899,239 --
Payable for securities purchased 1,658,074 --
Payable for futures contracts 805,632 --
Capital shares redeemed 1,697,717 --
Payable to Adviser 172,298 380
Dividends payable on short positions 51,689 --
Accrued expenses and other liabilities 198,776 32,248
------------ --------
Total Liabilities 82,483,425 32,628
------------ --------
NET ASSETS $156,876,398 $527,155
------------ --------
------------ --------
NET ASSETS CONSIST OF:
Capital stock $283,788,427 $531,566
Accumulated undistributed net investment income 1,613,005 --
Accumulated undistributed net realized loss on
investments sold, securities sold short,
option contracts expired or closed, and
foreign currencies (123,658,166) (58)
Net unrealized appreciation (depreciation) on:
Investments 827,015 (4,340)
Foreign currencies (2,065) (13)
Short positions (4,206,286) --
Futures contracts (1,485,532) --
------------ --------
TOTAL NET ASSETS $156,876,398 $527,155
------------ --------
------------ --------
NO LOAD SHARES:
Net Assets $156,395,504 $527,155
Shares outstanding (250,000,000 shares of
$.0001 par value authorized) 42,756,146 53,535
Net Asset Value, Redemption Price and
Offering Price Per Share $3.66 $9.85
------------ --------
------------ --------
CLASS C SHARES:
Net Assets $ 480,894
Shares outstanding (250,000,000 shares of
$.0001 par value authorized) 132,761
Net Asset Value, Redemption Price and Offering
Price Per Share $3.62
------------
------------
See notes to the financial statements.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
PRUDENT BEAR PRUDENT SAFE
FUND HARBOR FUND
------------ -----------
INVESTMENT INCOME:
Interest income $ 4,936,479 $2,393
Dividend income on long positions
(net of foreign taxes withheld of $17,204
and $0, respectively) 150,704 226
------------ -------
Total investment income 5,087,183 2,619
------------ -------
EXPENSES:
Investment advisory fee 1,134,241 316
Administration fee 62,169 7,257
Shareholder servicing and accounting costs 110,790 10,797
Custody fees 55,265 4,071
Federal and state registration 22,286 4,317
Professional fees 53,212 8,201
Distribution expense - No Load shares 226,276 105
Distribution expense - Class C shares 2,287 --
Reports to shareholders 16,086 413
Directors' fees and expenses 2,944 354
Amortization of organizational expenses 3,016 --
Other 15,709 59
------------ -------
Total operating expenses before expense
reductions, expense reimbursements and
dividends on short positions 1,704,281 35,890
Expense reductions (see Note 5) (152,032) --
Expense reimbursement from Advisor -- (34,626)
Dividends on short positions (net of foreign
taxes withheld of $14 and $0, respectively) 221,916 --
------------ -------
Total expenses 1,774,165 1,264
------------ -------
NET INVESTMENT INCOME 3,313,018 1,355
------------ -------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) on:
Long transactions 12,881,229 (248)
Short transactions (19,434,420) --
Option contracts expired or closed (4,342,347) --
Futures contracts closed (13,043,914) --
Foreign currency translation -- 190
------------ -------
Net realized loss (23,939,452) (58)
Change in unrealized appreciation/depreciation on:
Investments (2,368,415) (4,340)
Short positions (14,904,528) --
Written options -- --
Futures contracts (2,065,367) --
Foreign currency (1,067) (13)
------------ -------
Net unrealized loss (19,339,377) (4,353)
------------ -------
Net realized and unrealized loss
on investments (43,278,829) (4,411)
------------ -------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS $(39,965,811) $(3,056)
------------ -------
------------ -------
See notes to the financial statements.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
PRUDENT SAFE
PRUDENT BEAR FUND HARBOR FUND
------------------------------------- -----------------------
FEBRUARY 2, 2000(1)<F1>
SIX MONTHS ENDED YEAR ENDED THROUGH
MARCH 31, 2000 SEPTEMBER 30, 1999 MARCH 31, 2000
---------------- ------------------ -----------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
OPERATIONS:
Net investment income $ 3,313,018 $ 5,851,223 $ 1,355
Net realized gain (loss) on:
Long transactions 12,881,229 (7,029,855) (248)
Short transactions (19,434,420) (44,954,560) --
Option contracts expired or closed (4,342,347) (26,291,443) --
Futures contracts closed (13,043,914) (954,844) --
Foreign currency translation -- -- 190
Change in unrealized appreciation (depreciation) on:
Investments (2,368,415) 9,821,465 (4,340)
Short positions (14,904,528) (8,663,155) --
Written options -- (49,630) --
Futures contracts (2,065,367) 579,835 --
Foreign currency (1,067) -- (13)
------------ ------------ --------
Net (decrease) in net assets resulting from operations (39,965,811) (71,690,964) (3,056)
------------ ------------ --------
DISTRIBUTIONS TO SHAREHOLDERS
FROM NET INVESTMENT INCOME (5,806,910) (4,243,854) (1,492)
------------ ------------ --------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 369,137,655 571,891,273 585,613
Shares issued to holders in reinvestment of dividends 5,067,325 3,546,118 1,410
Cost of shares redeemed (392,224,231) (452,525,566) (55,320)
------------ ------------ --------
Net increase in net assets resulting from
capital share transactions (18,019,251) 122,911,825 531,703
------------ ------------ --------
TOTAL INCREASE (DECREASE) IN NET ASSETS (63,791,972) 46,977,007 527,155
NET ASSETS:
Beginning of period 220,668,370 173,691,363 --
------------ ------------ --------
End of period (including undistributed net investment
income of $1,610,940, $4,103,787, and $0 respectively) $156,876,398 $220,668,370 $527,155
------------ ------------ --------
------------ ------------ --------
</TABLE>
(1)<F1> 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>
NO LOAD CLASS C NO LOAD CLASS C
SHARES SHARES SHARES SHARES
SIX MONTHS SIX MONTHS YEAR FEB. 8, 1999(1)<F2> YEAR YEAR DEC. 28, 1995(1)<F2>
ENDED ENDED ENDED THROUGH ENDED ENDED THROUGH
MAR. 31, MAR. 31, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
2000 2000 1999 1999 1998 1997 1996
---- ---- ---- ---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<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)<F3> 0.07(3)<F4> 0.06(3)<F4> 0.19(3)<F4> 0.09(3)<F4> 0.29(3)<F4> 0.62(3)<F4> 0.09
Net realized and unrealized
(losses) on investments (0.78) (0.79) (2.82) (0.38) (0.01) (2.06) (1.21)
----- ----- ----- ----- ----- ----- ------
Total from investment
operations (0.71) (0.73) (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 $3.66 $3.62 $4.51 $4.49 $7.34 $7.29 $ 8.88
----- ----- ----- ----- ----- ----- ------
----- ----- ----- ----- ----- ----- ------
Total return -15.76%(4) -16.34%(4) -36.17% -6.07%(4) 3.66% -16.44% -11.20%(4)
<F5> <F5> <F5> <F5>
Supplemental data and ratios:
Net assets,
end of period (000's) $156,396 $481 $220,462 $207 $173,691 $26,500 $7,326
Ratio of operating
expenses to average
net assets(5)<F6> 1.71%(6) 2.46%(6) 1.97% 2.74%(7) 2.08% 2.59% 2.75%(7) (8)
<F7> <F7> <F8> <F8> <F9>
Ratio of dividends on
short positions
to average net assets 0.24% 0.24% 0.28% 0.32%(7) 0.28% 0.34% 0.34%(7)
<F8> <F8>
Ratio of net investment
income to average
net assets 3.65% 2.90% 4.09% 3.25%(7) 4.34% 7.75% 4.07%(7) (8)
<F8> <F8> <F9>
Portfolio
turnover rate(9)<F10> 221.40% 221.40% 536.56% 536.56% 480.25% 413.25% 91.31%
</TABLE>
(1)<F2> Commencement of operations.
(2)<F3> Net investment income before dividends on short positions for the No
Load Shares for the periods ended March 31, 2000, September 30, 1999,
September 30, 1998, September 30, 1997 and September 30, 1996 was
$0.08, $0.21, $0.30, $0.65 and $0.10, respectively, and for the
periods ended March 31, 2000 and September 30, 1999 for the Class C
Shares was $0.06 and $0.09, respectively.
(3)<F4> Net investment income per share represents net investment income
divided by the average shares outstanding throughout the period.
(4)<F5> Not annualized.
(5)<F6> The operating expense ratio excludes dividends on short positions.
The ratio including dividends on short positions for the No Load
Shares for the periods ended March 31, 2000, September 30, 1999,
September 30, 1998, September 30, 1997 and September 30, 1996 was
1.95%, 2.25%, 2.36%, 2.93% and $3.09%, respectively, and for the
periods ended March 31, 2000 and September 30, 1999 for the Class C
Shares was 2.70% and 3.06%, respectively.
(6)<F7> The 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 March 31, 2000
was 1.88% and 2.63%, respectively.
(7)<F8> Annualized.
(8)<F9> 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)%.
(9)<F10> 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
FEBRUARY 2, 2000(1)<F11>
THROUGH
MARCH 31, 2000
--------------
(UNAUDITED)
Per Share Data:
Net asset value, beginning of period $10.00
------
Income from investment operations:
Net investment income(2)<F12> 0.05
Net realized and unrealized (losses) on investments (0.17)
------
Total from investment operations (0.12)
------
Less distributions from net investment income (0.03)
------
Net asset value, end of period $ 9.85
------
------
Total return(3)<F13> -1.22%
Supplemental data and ratios:
Net assets, end of period $527,155
Ratio of operating expenses to
average net assets(4)<F14> (5)<F15> 3.00%
Ratio of net investment income to
average net assets(5)<F15> 3.22%
Portfolio turnover rate 12.20%
(1)<F11> Commencement of operations.
(2)<F12> Net investment income per share represents net investment income
divided by the average shares outstanding throughout the period.
(3)<F13> Not annualized.
(4)<F14> Annualized.
(5)<F15> Without expense reimbursements of $34,626 for the period ended March
31, 2000, the ratio of operating expenses to average net assets would
have been 85.18% and the ratio of net investment loss to average net
assets would have been (78.96)%.
See notes to the financial statements.
PRUDENT BEAR FUND
SCHEDULE OF INVESTMENTS
MARCH 31, 2000
(UNAUDITED)
SHARES VALUE
------ -----
COMMON STOCKS -- 20.6%*<F16>
AEROSPACE -- 0.1%*<F16>
10,000 Raytheon Company - Class B $ 177,500
------------
BASIC MATERIALS -- 10.2%*<F16>
25,000 AngloGold Limited - ADR(3)<F21> 600,000
45,000 Apex Silver Mines Limited**<F17> 455,625
638,900 Birch Mountain
Resources Ltd.**<F17> (3)<F21> 924,156
884,874 Black Hawk Mining Inc.**<F17> (3)<F21> 63,998
2,477,400 Campbell Resources Inc.**<F17> (3)<F21> (5)<F23> 619,350
4,375,500 Canarc Resource
Corporation**<F17> (3)<F21> (5)<F23> 934,292
337,500 Canyon Resources
Corporation**<F17> (5)<F23> 379,687
310,000 Donner Minerals Ltd.**<F17> (3)<F21> (5)<F23> 38,435
73,700 Dundee Precious
Metals, Inc. - Class A**<F17> (3)<F21> 418,808
7,578,800 Dynatec Corporation**<F17> (3)<F21> (5)<F23> 1,722,692
2,639,500 ECU Silver Mining Inc.**<F17> (3)<F21> 345,437
3,775,560 ECU Silver Mining Inc.
(Acquired 11/22/99,
Cost $383,112)**<F17> (2)<F20>
(3)<F21> (4)<F22> r<F18> 444,704
50 Exploration Capital Partners, LP
(Acquired 10/14/98,
Cost $1,000,000)**<F17> (4)<F22> r<F18> 1,284,043
56,800 Francisco Gold Corporation**<F17> (3)<F21> 230,831
55,000 Goldcorp Inc. - Class A**<F17> (3)<F21> 330,000
33,500 Golden Queen Mining
Co. Ltd.**<F17> 7,035
1,362,500 Golden Star Resources Ltd.**<F17> (5)<F23> 1,532,812
90,000 Harmony Gold Mining
Company Limited - ADR(3)<F21> 551,250
2,150,000 International Uranium
Corporation**<F17> (3)<F21> 340,612
990,738 Maxam Gold Corporation**<F17> 89,166
350,000 Metalline Mining Co. Inc.
(Acquired 4/8/99,
Cost $350,000)**<F17> (2)<F20> (4)<F22> r<F18> 780,955
1,000,000 MG Natural Resources Corp.**<F17> 425,000
20,000 MG Natural Resources Corp.
(Acquired 3/08/00,
Cost $11,200)**<F17> (2)<F20> (4)<F22> r<F18> 7,000
1,050,000 Miramar Mining
Corporation**<F17> (3)<F21> 535,500
261,399 Pan American Silver
Corporation**<F17> (3)<F21> 996,584
55,833 Randgold & Exploration
Company Ltd. - ADR**<F17> (3)<F21> 188,436
800,000 Rio Narcea Gold Mines
Ltd.**<F17> (3)<F21> 859,623
100,000 Southwestern Gold
Corporation**<F17> (3)<F21> 344,400
402,400 TVX Gold Inc.**<F17> (3)<F21> (5)<F23> 301,800
1,750,000 William Resources Inc.**<F17> (3)<F21> 235,053
------------
15,987,284
------------
CHEMICALS -- 0.6%*<F16>
3,000 The Dow Chemical Company 342,000
15,000 Hercules Incorporated 241,875
69,050 Pioneer Companies, Inc. -
Class A**<F17> 379,775
------------
963,650
------------
CONSUMER-CYCLICALS -- 0.1%*<F16>
845,000 LS Capital Corporation**<F17> 84,500
300,000 LS Capital Corporation
(Acquired 2/19/98,
Cost $87,000)**<F17> (2)<F20> (4)<F22> r<F18> 25,500
------------
110,000
------------
OIL -- 0.2%*<F16>
30,000 BP Prudhoe Bay
Royalty Trust 316,875
------------
ENTERTAINMENT & LEISURE -- 0.1%*<F16>
216,660 Restaurant Brands New
Zealand Limited(3)<F21> 135,601
------------
FINANCIAL SERVICES -- 0.1%*<F16>
10,000 Associates First Capital
Corporation - Class A(1)<F19> 214,375
------------
HEALTH CARE -- 6.3%*<F16>
53,002 Avigen, Inc.**<F17> 2,355,276
8,925 Avigen, Inc.
(Acquired 11/11/99,
Cost $199,697)**<F17> (2)<F20> (4)<F22> r<F18> 376,774
5,700 Imatron Inc.**<F17> 20,306
437,500 Neurobiological
Technologies, Inc.**<F17> 2,625,000
280,999 NexMed, Inc. 4,460,859
------------
9,838,215
------------
TECHNOLOGY -- 1.4%*<F16>
825,000 Aura Systems, Inc.**<F17> 313,500
2,600,000 Aura Systems, Inc.
(Acquired 12/08/99,
Cost $702,000)**<F17> (2)<F20> (4)<F22> r<F18> 938,600
1,000 eBay Inc.**<F17> (1)<F19> 176,000
2,000 Micron Technology, Inc.**<F17> (1)<F19> 252,000
3,286 NEXLAND, Inc.**<F17> 19,305
3,000 Red Hat, Inc.**<F17> (1)<F19> 127,125
5,000 uBid, Inc.**<F17> (1)<F19> 146,562
15,000 VisuaLABS Inc.**<F17> (3)<F21> 170,478
------------
2,143,570
------------
TELECOMMUNICATIONS -- 0.3%*<F16>
5,000 Global Light
Telecommunications Inc.**<F17> 102,500
5,000 Net2Phone, Inc.**<F17> (1)<F19> 295,625
------------
398,125
------------
TEXTILE -- 1.2%*<F16>
310,000 Cone Mills Corporation**<F17> 1,336,875
350,000 DHB Capital Group Inc.**<F17> 623,437
------------
1,960,312
------------
TOTAL COMMON STOCKS
(Cost $29,738,979) 32,245,507
------------
CONTRACTS (100 SHARES PER CONTRACT)
- -----------------------------------
CALL OPTIONS
PURCHASED -- 0.2%*<F16>
500 Borden Chemicals and
Plastics Limited Partnership
Expiration May 2000
Exercise Price $7.50 7,812
Gold 100 Ounce Futures:
2,558 Expiration June 2000,
Exercise Price $350.00(4)<F22> 102,320
3,500 Expiration June 2000,
Exercise Price $370.00(4)<F22> 140,000
300 The Philadelphia Stock
Exchange Gold and Silver Index
Expiration May 2000,
Exercise Price $70.00 41,250
------------
TOTAL CALL
OPTIONS PURCHASED
(Cost $474,753) 291,382
------------
PUT OPTIONS
PURCHASED -- 3.0%*<F16>
150 Akamai Technologies, Inc.
Expiration April 2000,
Exercise Price $200.00 646,875
150 American Express Company
Expiration April 2000,
Exercise Price $125.00 5,625
American International Group, Inc.:
100 Expiration May 2000,
Exercise Price $90.00 6,875
100 Expiration May 2000,
Exercise Price $95.00 13,130
50 The AMEX Securities
Broker/Dealer Index
Expiration May 2000,
Exercise Price $460.00 51,250
100 Anesta Corp.
Expiration April 2000,
Exercise Price $20.00 66,250
150 Apple Computer, Inc.
Expiration April 2000,
Exercise Price $90.00 4,215
Bank of America Corporation:
100 Expiration May 2000,
Exercise Price $45.00 6,250
200 Expiration May 2000,
Exercise Price $47.50 22,500
20 Calpine Corporation
Expiration April 2000,
Exercise Price $60.00 250
Capital One Financial Corporation:
100 Expiration May 2000,
Exercise Price $40.00 9,375
100 Expiration May 2000,
Exercise Price $45.00 25,000
The Chase Manhattan Corporation:
200 Expiration April 2000,
Exercise Price $80.00 27,500
100 Expiration May 2000,
Exercise Price $85.00 45,625
65 CheckFree Holdings Corporation
Expiration May 2000,
Exercise Price $60.00 39,000
Cintas Corporation:
100 Expiration April 2000,
Exercise Price $30.00 2,812
100 Expiration May 2000,
Exercise Price $30.00 4,687
100 Cisco Systems, Inc.
Expiration May 2000,
Exercise Price $72.50 42,500
Citigroup Inc.:
100 Expiration April 2000,
Exercise Price $50.00 1,875
100 Expiration April 2000,
Exercise Price $55.00 8,437
100 Expiration May 2000,
Exercise Price $55.00 17,813
100 Countrywide Credit Industries, Inc.
Expiration May 2000,
Exercise Price $30.00 40,000
100 Dollar General Corporation
Expiration May 2000,
Exercise Price $22.50 3,750
100 EchoStar Communications
Corporation - Class A
Expiration May 2000,
Exercise Price $60.00 20,000
150 The Estee Lauder Companies Inc.
Expiration April 2000,
Exercise Price $45.00 8,438
Exodus Communications, Inc.:
100 Expiration May 2000,
Exercise Price $110.00 65,000
100 Expiration May 2000,
Exercise Price $130.00 141,250
Fannie Mae:
200 Expiration April 2000,
Exercise Price $50.00 9,375
100 Expiration April 2000,
Exercise Price $60.00 45,000
100 Expiration May 2000,
Exercise Price $55.00 28,437
100 Expiration May 2000,
Exercise Price $60.00 56,880
Freddie Mac:
100 Expiration April 2000,
Exercise Price $40.00 5,000
100 Expiration May 2000,
Exercise Price $45.00 35,000
General Electric Company:
100 Expiration April 2000,
Exercise Price $120.00 937
200 Expiration May 2000,
Exercise Price $135.00 34,375
100 Expiration May 2000,
Exercise Price $145.00 36,250
The Goldman Sachs Group, Inc.:
100 Expiration April 2000,
Exercise Price $90.00 16,875
100 Expiration April 2000,
Exercise Price $95.00 26,875
50 Expiration April 2000,
Exercise Price $105.00 34,375
100 Expiration May 2000,
Exercise Price $100.00 72,500
100 Harley-Davidson, Inc.
Expiration May 2000,
Exercise Price $70.00 11,250
150 The Home Depot, Inc.
Expiration May 2000,
Exercise Price $55.00 14,063
100 Household International, Inc.
Expiration May 2000,
Exercise Price $35.00 18,750
Intel Corporation:
300 Expiration April 2000,
Exercise Price $85.00 1,890
100 Expiration May 2000,
Exercise Price $120.00 53,750
100 The Inter@ctive Week
Internet Index
Expiration April 2000,
Exercise Price $600.00 240,000
The Internet HOLDRs Trust:
100 Expiration April 2000,
Exercise Price $160.00 65,000
100 Expiration April 2000,
Exercise Price $165.00 87,500
100 Knight/Trimark Group,
Inc. - Class A
Expiration April 2000,
Exercise Price $50.00 37,500
100 Kohl's Corporation
Expiration May 2000,
Exercise Price $85.00 21,880
Lehman Brothers Holdings Inc.:
50 Expiration April 2000,
Exercise Price $80.00 2,500
100 Expiration May 2000,
Exercise Price $90.00 48,125
200 MBNA Corporation
Expiration May 2000,
Exercise Price $25.00 33,750
Merrill Lynch & Co., Inc.:
200 Expiration April 2000,
Exercise Price $85.00 7,500
100 Expiration May 2000,
Exercise Price $100.00 53,125
Metris Companies Inc.:
100 Expiration May 2000,
Exercise Price $30.00 6,875
100 Expiration May 2000,
Exercise Price $35.00 21,880
200 Expiration July 2000,
Exercise Price $25.00 16,250
J.P. Morgan & Co. Incorporated:
100 Expiration April 2000,
Exercise Price $110.00 4,688
100 Expiration April 2000,
Exercise Price $115.00 7,188
Morgan Stanley
Dean Witter & Co.:
200 Expiration April 2000,
Exercise Price $62.50 5,000
200 Expiration April 2000,
Exercise Price $75.00 31,250
50 Expiration April 2000,
Exercise Price $80.00 16,875
NASDAQ-100 Shares:
200 Expiration April 2000,
Exercise Price $96.00 29,375
1,200 Expiration April 2000,
Exercise Price $99.00 236,250
800 Expiration April 2000,
Exercise Price $100.00 175,000
200 Expiration April 2000,
Exercise Price $104.00 67,500
100 Expiration April 2000,
Exercise Price $110.00 58,125
250 Northern Trust Corporation
Expiration April 2000,
Exercise Price $50.00 3,125
100 Orthodontic Centers of
America, Inc.
Expiration April 2000,
Exercise Price $17.50 7,500
50 Papa John's International, Inc.
Expiration April 2000,
Exercise Price $30.00 2,188
100 Philadelphia Semiconductor Index
Expiration April 2000,
Exercise Price $830.00 23,125
100 Rambus Inc.
Expiration May 2000,
Exercise Price $55.00 5,000
Russell 2000 Index:
150 Expiration April 2000,
Exercise Price $550.00 300,000
250 Expiration April 2000,
Exercise Price $560.00 556,250
100 Expiration May 2000,
Exercise Price $510.00 138,750
S&P 100 Index:
600 Expiration April 2000,
Exercise Price $700.00 48,750
200 Expiration April 2000,
Exercise Price $715.00 21,875
100 Expiration April 2000,
Exercise Price $805.00 122,500
100 Expiration May 2000,
Exercise Price $770.00 115,625
100 Expiration May 2000,
Exercise Price $785.00 148,750
100 Siebel Systems, Inc.
Expiration April 2000,
Exercise Price $105.00 45,630
140 Solectron Corporation
Expiration April 2000,
Exercise Price $32.50 3,500
200 Wells Fargo & Company
Expiration May 2000,
Exercise Price $35.00 11,250
100 The Walt Disney Company
Expiration May 2000,
Exercise Price $37.50 9,375
------------
TOTAL PUT
OPTIONS PURCHASED
(Cost $6,156,241) 4,664,193
------------
SHARES
------
PREFERRED STOCK -- 1.8%*<F16>
57,000 Freeport-McMoRan Copper
& Gold, Inc.**<F17> 936,938
29,200 Freeport-McMoRan Copper
& Gold, Inc. - Series Gold**<F17> 594,950
109,900 Freeport-McMoRan Copper
& Gold, Inc. - Series Silver**<F17> 1,360,012
------------
TOTAL PREFERRED
STOCK PURCHASED
(Cost $3,021,484) 2,891,900
------------
WARRANTS -- 0.3%*<F16>
12,500 Apex Silver Mines Limited
Expiration November 2002,
Exercise Price $18.00
(Acquired 11/03/99,
Cost $12)(4)<F22> r<F18> 13
1,785 Avigen, Inc.
Expiration November 2004,
Exercise Price $27.96
(Acquired 11/11/99,
Cost $223)(4)<F22> r<F18> 27,942
1,887,780 ECU Silver Mining Inc.
Expiration May 2001,
Exercise Price $0.25 CN
(Acquired 11/22/99,
Cost $1,888)(4)<F22> r<F18> 1,300
400,000 MG Natural Resources Corp.
Expiration March 2001,
Exercise Price $2.00
(Acquired 3/07/00,
Cost $400)(4)<F22> r<F18> 400
3,285 NEXLAND, Inc.
Expiration August 2001,
Exercise Price $2.50
(Acquired Multiple Dates,
Cost $0)(4)<F22> r<F18> 0
87,500 Neurobiological Technologies, Inc.
Expiration November 2004,
Exercise Price $1.75
(Cost $88)(4)<F22> 371,875
------------
TOTAL WARRANTS
PURCHASED
(Cost $2,611) 401,530
------------
PRINCIPAL
AMOUNT
------
CONVERTIBLE DEBENTURE -- 0.2%*<F16>
$ 300,000 Golden Phoenix Minerals, Inc.
12.00%, 01/15/2005
(Acquired 1/14/00,
Cost $300,000)(4)<F22> r<F18> 300,000
------------
U.S. TREASURY
OBLIGATIONS -- 67.3%*<F16>
U.S. TREASURY NOTES -- 52.8%*<F16>
450,000 5.25%, 05/31/2001(5)<F23> 443,531
321,000 5.875%, 10/31/2001(5)<F23> 317,690
3,500,000 6.25%, 10/31/2001(5)<F23> 3,484,688
15,080,000 5.875%, 11/30/2001(5)<F23> 14,924,495
15,900,000 6.125%, 12/31/2001(5)<F23> 15,785,727
44,650,000 6.50%, 02/28/2002(5)<F23> 44,636,069
3,188,000 6.50%, 03/31/2002(5)<F23> 3,188,000
------------
82,780,200
------------
U.S. TREASURY BOND -- 14.5%*<F16>
22,852,000 6.375%, 01/31/2002(5)<F23> 22,794,870
------------
TOTAL U.S. TREASURIES
(Cost $105,848,591) 105,575,070
------------
SHORT-TERM
INVESTMENTS -- 1.2%*<F16>
U.S. TREASURIES -- 1.0%*<F16>
1,570,000 U.S. Treasury Bill
5.59%, 06/29/2000(5)<F23> 1,548,298
MUTUAL FUNDS -- 0.2%*<F16>
391,318 Star Treasury Fund 391,318
------------
TOTAL SHORT-TERM
INVESTMENTS
(Cost $1,939,524) 1,939,616
------------
TOTAL INVESTMENTS
(Cost $147,482,183)
(See Note 1) $148,309,198
------------
------------
CN - Canadian Dollars
ADR - American Depository Receipt
GDR - Global Depository Receipt
NYS - New York Shares
*<F16> Calculated as a percentage of net assets.
**<F17> Non-income producing security.
r<F18> Restricted security.
(1)<F19> Shares are held to cover all or a portion of a corresponding short
position.
(2)<F20> Private placement issue (trades at a discount to market value).
(3)<F21> Foreign security.
(4)<F22> Fair valued security.
(5)<F23> All or a portion of the securities have been committed as collateral
for open short positions.
See notes to the financial statements.
SCHEDULE OF SECURITIES SOLD SHORT
MARCH 31, 2000
(UNAUDITED)
SHARES VALUE
- ------ -----
10,000 Adaptive Broadband Corporation $ 535,000
6,500 Affymetrix, Inc. 964,844
4,000 Akamai Technologies, Inc. 643,250
10,000 Alexion Pharmaceuticals, Inc. 697,500
4,000 Allergan, Inc. 200,000
6,000 Amazon.com, Inc. 402,000
2,000 Ambac Financial Group, Inc. 100,750
10,000 America Online, Inc. 672,500
5,000 American Eagle Outfitters, Inc. 189,688
4,000 AmeriCredit Corp. 65,250
23,000 Ancor Communications,
Incorporated 945,875
10,000 Apex Inc. 371,250
17,000 Associates First Capital
Corporation - Class A 364,437
14,500 At Home Corporation - Series A 477,594
3,000 Autodesk, Inc. 136,500
53,002 Avigen, Inc. 2,355,276
5,000 Avis Rent A Car, Inc. 88,125
4,000 B2B Internet HOLDRs Trust 272,000
12,000 Bank of America Corporation 629,250
10,000 Bank One Corporation 343,750
10,000 Barnes & Noble, Inc. 230,000
7,000 The Bear Stearns Companies Inc. 319,375
10,000 Breakaway Solutions, Inc. 455,000
4,000 Bristol-Myers Squibb Company 231,000
1,500 Brocade Communications
Systems, Inc. 268,969
3,000 Brown-Forman Corporation -
Class B 163,312
27,000 CDnow, Inc. 102,094
20,000 Callaway Golf Company 310,000
10,000 Capital One Financial Corporation 479,375
4,000 Celera Genomics 366,250
15,000 Cell Pathways, Inc. 515,625
2,000 The Chase Manhattan Corporation 174,375
25,000 Cheap Tickets, Inc. 353,125
10,000 Citigroup Inc. 593,125
6,000 Clear Channel Communications, Inc. 414,375
10,000 The Coca-Cola Company 469,375
20,000 Coca-Cola Enterprises Inc. 431,250
6,000 Computer Associates
International, Inc. 355,125
5,000 Conexant Systems, Inc. 355,000
6,000 Covad Communications
Group, Inc. 435,000
15,000 Credit Acceptance Corporation 81,562
13,000 Cyberian Outpost, Inc. 110,500
4,000 Dell Computer Corporation 215,750
30,000 Dendrite International, Inc. 628,125
6,000 DIAMONDS Trust, Series I 656,625
10,000 Digital River, Inc. 215,000
2,000 Dollar General Corporation 53,750
1,500 DoubleClick Inc. 140,437
15,000 e.Digital Corporation 150,937
9,000 EarthLink, Inc. 174,937
1,000 eBay, Inc. 176,000
54,000 Egghead.com, Inc. 379,687
4,000 The Estee Lauder Companies
Inc. - Class A 200,250
10,000 Fannie Mae 564,375
4,000 Fox Entertainment Group,
Inc. - Class A 119,750
10,000 Freddie Mac 441,875
12,000 Gateway Inc. 636,000
10,000 The Gillette Company 376,875
2,000 The Goldman Sachs Group, Inc. 210,250
3,000 Great Plains Software, Inc. 160,125
3,000 Harley-Davidson, Inc. 238,125
1,500 Hewlett-Packard Company 198,844
3,000 The Home Depot, Inc. 193,500
10,000 HotJobs.com, Ltd. 252,500
19,000 Household International, Inc. 708,937
5,000 Human Genome Sciences, Inc. 415,312
6,000 ImageX.com, Inc. 120,750
4,000 International Business
Machines Corporation 472,000
15,000 Internet America, Inc. 126,562
4,000 Internet Architect HOLDRs Trust 389,250
7,000 Internet Capital Group, Inc. 632,188
7,000 The Internet HOLDRs Trust 1,164,625
5,000 J.P. Morgan & Co. Incorporated 658,750
4,000 Johnson Controls, Inc. 216,250
30,000 Juno Online Services, Inc. 472,500
10,000 Jupiter Communications, Inc. 230,000
6,700 Keebler Foods Company 192,206
800 Kellogg Company 20,500
10,000 King Pharmaceuticals, Inc. 315,000
2,000 Lehman Brothers Holdings Inc. 194,000
2,000 Level 3 Communications, Inc. 211,500
4,000 Liberate Technologies, Inc. 251,000
7,000 Lionbridge Technologies, Inc. 106,750
2,000 LookSmart, Ltd. 88,000
6,000 Lucent Technologies Inc. 364,500
1,500 Lycos, Inc. 105,375
2,000 MBIA, Inc. 104,125
23,000 MBNA Corporation 586,500
10,000 MCI WorldCom, Inc. 453,125
10,000 MTI Technology Corporation 263,750
25,000 MAX Internet Communications, Inc. 284,375
9,000 The McGraw-Hill Companies, Inc. 409,500
1,000 McLeodUSA Incorporated - Class A 84,812
2,000 Merrill Lynch & Co., Inc. 210,000
13,500 Metricom, Inc. 626,063
6,000 Metris Companies Inc. 233,250
2,000 Micron Technology, Inc. 252,000
2,000 Millennium Pharmaceuticals, Inc. 259,750
5,000 MIPS Technologies, Inc. - Class A 278,125
2,000 Morgan Stanley Dean Witter & Co. 163,125
1,500 Motorola, Inc. 213,563
20,000 MyPoints.com, Inc. 536,250
134,000 NASDAQ-100 Shares 14,689,750
3,000 NaviSite, Inc. 365,250
5,000 Navistar International Corporation 200,625
14,000 Net.B@nk, Inc. 182,000
20,000 Net2Phone, Inc. 1,182,500
15,000 NETRIX Corporation 302,813
10,000 Network Peripherals Inc. 355,000
11,000 Neurobiological Technologies, Inc. 66,000
15,000 Novoste Corporation 600,000
12,000 Open Market, Inc. 309,000
5,000 Paine Webber Group Inc. 220,000
3,000 Parametric Technology Corporation 63,187
7,000 Priceline.com Incorporated 560,000
10,000 Providian Financial Corporation 866,250
5,000 QLT PhotoTherapeutics Inc. 276,250
5,500 QUALCOMM Inc. 821,219
10,000 Radiant Systems, Inc. 628,750
18,000 Red Hat, Inc. 762,750
12,000 Rhythms NetConnections Inc. 441,750
3,000 SCI Systems, Inc. 161,438
65,000 S&P 500 Depositary Receipt 9,786,563
15,000 SangStat Medical Corporation 415,313
15,000 The ServiceMaster Company 168,750
3,000 Silicon Valley Bancshares 215,625
9,000 Telecom HOLDRs Trust 820,688
2,000 Telefonaktiebolaget LM
Ericsson AB - ADR 187,625
10,000 Tiffany & Co. 836,250
17,500 Trimeris, Inc. 873,906
15,000 uBid, Inc. 439,688
2,500 Ultratech Stepper, Inc. 35,625
32,000 Unisys Corporation 816,000
1,900 United Therapeutics Corporation 147,725
9,000 VA Linux Systems, Inc. 543,375
8,000 Ventro Corporation 453,000
3,000 VeriSign, Inc. 448,500
3,000 VerticalNet, Inc. 408,000
8,000 The Walt Disney Company 331,000
10,000 Washington Mutual, Inc. 265,000
13,000 Wells Fargo & Company 532,188
4,000 Whole Foods Market, Inc. 165,750
15,000 Wild Oats Markets, Inc. 307,500
3,000 Winstar Communications, Inc. 180,000
-----------
TOTAL SECURITIES
SOLD SHORT
(Proceeds $73,692,953) $77,899,239
-----------
-----------
See notes to the financial statements.
PRUDENT SAFE HARBOR FUND
SCHEDULE OF INVESTMENTS
MARCH 31, 2000
(UNAUDITED)
SHARES VALUE
------ -----
COMMON STOCKS -- 2.9%
AUSTRALIA -- 1.1%
12,000 Normandy Mining Limited*<F24> $ 5,760
--------
SOUTH AFRICA -- 1.8%
200 AngloGold Limited - ADR 4,800
800 Harmony Gold Mining
Company Limited - ADR 4,900
--------
9,700
--------
TOTAL COMMON STOCK
(Cost $19,085) 15,460
--------
PRINCIPAL
AMOUNT
------
U.S. TREASURY
OBLIGATIONS -- 11.3%
$60,000 U.S. Treasury Bond
6.375%, 01/31/2002
(Cost $59,888) 59,850
--------
FOREIGN TREASURY
OBLIGATIONS -- 10.9%
FRANCE -- 2.8%
15,000 French Treasury Note
5.50%, 10/12/2001 14,595
--------
GERMANY -- 8.1%
Bundesschatzanweisungen:
15,000 3.00%, 06/15/2001 14,157
15,000 3.50%, 09/14/2001 14,205
15,000 4.00%, 12/14/2001 14,264
--------
42,626
--------
TOTAL FOREIGN TREASURY
OBLIGATIONS
(Cost $57,891) 57,221
--------
SHORT-TERM
INVESTMENTS -- 77.1%
U.S. TREASURIES -- 76.0%
U.S. Treasury Bills:
41,000 5.25%, 04/20/2000 $ 40,886
198,000 5.59%, 04/27/2000 197,200
164,000 5.50%, 06/01/2000 162,471
--------
400,557
--------
MUTUAL FUNDS -- 1.1%
5,626 Star Treasury Fund 5,626
--------
TOTAL SHORT-TERM
INVESTMENTS
(Cost $406,190) 406,183
--------
TOTAL INVESTMENTS
(Cost $543,054) -- 102.2% 538,714
Liabilities, less
Other Assets -- (2.2)% (11,559)
--------
Total Net Assets -- 100.0% $527,155
--------
--------
ADR - American Depository Receipt
*<F24> Non-income producing security.
See notes to the financial statements.
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Prudent Bear Funds, Inc. (the "Company") was incorporated on October 25,
1995, as a Maryland Corporation and is registered as 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 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 the major industrialized nations, 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 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 March 31, 2000, such securities represent 3.2% of
investments, at value in the Prudent Bear Fund. The Prudent Safe Harbor
Fund, at March 31, 2000, had no fair value security investments. Short-
term instruments (those with remaining maturities of 60 days or less)
are value 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. For the Prudent Bear Fund, treasury and other liquid
securities in the amount of $112,652,436 have been committed as
collateral for short sales and futures contracts as of March 31, 2000.
The Prudent Safe Harbor Fund did not have any collateral committed for
short sales and futures contracts as of March 31, 2000.
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, 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 $1,564,307 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 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 March 31, 2000, the Fund had
restricted securities with an aggregate market value of $4,187,231
representing 2.8% 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
Six Months Ended
No Load Shares: March 31, 2000
---------------------------
$ Shares
------------ -----------
Shares sold $367,604,260 88,003,922
Shares issued to holders in
reinvestment of dividends 5,048,652 1,332,093
Shares redeemed (391,035,290) (95,489,200)
------------ -----------
Net decrease $(18,382,378) (6,153,185)
------------
------------
Shares Outstanding:
Beginning of period 48,909,331
-----------
End of period 42,756,146
-----------
-----------
Six Months Ended
Class C Shares: March 31, 2000
---------------------------
$ Shares
------------ -----------
Shares sold $ 1,533,395 385,321
Shares issued to holders in
reinvestment of dividends 18,673 4,953
Shares redeemed (1,188,941) (303,614)
------------ -----------
Net increase $ 363,127 86,660
------------
------------
Shares Outstanding:
Beginning of period 46,101
-----------
End of period 132,761
-----------
-----------
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*<F25>
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*<F25>
through March 31, 2000
---------------------------
$ Shares
------------ -----------
Shares sold $ 585,613 58,994
Shares issued to holders in
reinvestment of dividends 1,410 143
Shares redeemed (55,320) (5,602)
------------ -----------
Net increase $ 531,703 53,535
------------ -----------
------------ -----------
*<F25> 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 March 31, 2000, were as follows:
Prudent Bear Fund Prudent Safe Harbor Fund
----------------- ------------------------
Purchases $259,193,767 $146,605
Sales $295,922,583 $9,495
Included in these amounts were purchases of long-term U.S. government
securities of $199,213,528 and $59,888 for the Prudent Bear Fund and the
Prudent Safe Harbor Fund, respectively, for the periods ending March 31,
2000.
At March 31, 2000, gross unrealized appreciation and depreciation of
investments for tax purposes were as follows:
Prudent Bear Fund
Appreciation $ 8,480,265
(Depreciation) (11,176,608)
------------
Net depreciation on investments $ (2,696,343)
------------
------------
Prudent Safe Harbor Fund
Appreciation $ --
(Depreciation) (4,340)
------------
Net depreciation on investments $ (4,340)
------------
------------
At March 31, 2000, the costs of investments for federal income tax purposes
for the Prudent Bear Fund and the Prudent Safe Harbor Fund were $151,005,541
and $543,054, respectively.
At September 30, 1999, the Prudent Bear Fund had an accumulated net realized
capital loss carryover of $1,076,667 expiring in 2006. To the extent the
Fund realizes future net capital gains, taxable distributions to its
shareholders will be offset by any unused capital loss carryover. In
addition, the Fund realized, on a tax basis, post-October losses through
September 30, 1999 of $89,679,561 which are not recognized for tax purposes
until the first day of the following fiscal year.
4. INVESTMENT ADVISORY AND OTHER AGREEMENTS
The 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 fiscal period ending 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% of
the average net assets. During the period ended March 31, 2000, the Adviser
reimbursed the Prudent Safe Harbor Fund $34,626.
Firstar Mutual Fund Services, LLC 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 be used against 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 six
months ended March 31, 2000, the Prudent Bear Fund's expenses were reduced
$152,032 by utilizing directed brokerage credits resulting in an expense
ratio of 1.71% being charged to shareholders. 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 March 31, 2000, the Prudent Bear Fund had entered into stock index
futures contracts. The net unrealized depreciation of $1,485,532 is included
in the net unrealized depreciation section of the accompanying financial
statements. The terms of the open contracts are as follows:
Number of Underlying MarketValue of Unrealized
Contracts Instrument Underlying Instrument Depreciation
--------- ---------- --------------------- ------------
(47) NASDAQ 100 Index
June 2000 $20,947,900 $ (453,282)
(35) S&P 500 Index
June 2000 13,258,875 (1,032,250)
-----------
$(1,485,532)
-----------
-----------
7. OPTION CONTRACTS WRITTEN
The premium amount and the number of option contracts written for the
Prudent Bear Fund during the six months ended March 31, 2000, were as
follows:
Premium Amount Number of Contracts
-------------- -------------------
Options outstanding at
September 30, 1999 $ -- --
Options written 239,087 450
Options closed (159,342) (350)
Options exercised (79,745) (100)
Options expired -- --
--------- ----
Options outstanding at
March 31, 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 assets. The currently
approved rate for the Prudent Bear Class C shares is 1.00% of average daily
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 $226,276 for the No Load Shares
and $2,287 for the Class C Shares pursuant to the Plans for the six months
ended March 31, 2000. The Prudent Safe Harbor Fund incurred $105 pursuant to
the Plan for the period ended March 31, 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
