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PROSPECTUS
PROFUNDS
November 10, 1997
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PRO FUNDS LOGO
TABLE OF CONTENTS
<TABLE>
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PAGE
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OVERVIEW...................... 3
FEES AND EXPENSES............. 7
Fee Tables.................. 7
Examples.................... 9
SHAREHOLDERS' GUIDE........... 10
How to Invest in the
ProFunds................. 10
How to Exchange Shares of
the ProFunds............. 11
How to Withdraw Money
(Redeem Shares).......... 12
Special Information
Regarding Telephone
Requests for Redemptions
and Exchanges............ 13
How to Make Automatic
Investments, Exchanges
and Withdrawals.......... 14
Dividends and
Distributions............ 14
Tax-Sheltered Retirement
Plans.................... 15
Miscellaneous............... 16
SPECIAL CONSIDERATIONS........ 18
Tracking Error.............. 18
Aggressive Investment
Techniques............... 18
Leverage.................... 19
Non-Diversified Status...... 19
INVESTMENT OBJECTIVES......... 21
General..................... 21
Benchmarks of the ProFunds.. 21
The Bull ProFund and
UltraBull ProFund........ 22
The Bear ProFund and
UltraBear ProFund........ 22
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The Ultra OTC ProFund....... 23
The Money Market ProFund.... 24
INVESTMENT POLICIES AND
TECHNIQUES.................. 26
Futures Contracts and
Related Options.......... 26
Index Options
Transactions............. 27
Options on Securities....... 28
Short Sales................. 29
U.S. Government
Securities............... 29
Repurchase Agreements....... 30
Cash Reserves............... 31
Transaction Expenses........ 31
Other Investment Policies... 31
Cash Management Portfolio... 32
Special Information
Concerning Master-Feeder
Fund Structure........... 36
TAXES......................... 38
MANAGEMENT OF THE PROFUNDS.... 40
Investment Advisors......... 40
Service Providers........... 42
Cost and Expenses........... 44
Portfolio Trading
Practices................ 45
GENERAL INFORMATION ABOUT THE
TRUST....................... 46
Organization and Description
of Shares of Beneficial
Interest................. 46
Determination of Net Asset
Value.................... 46
Fundamental Policies........ 48
Trustees and Officers....... 49
Auditors.................... 49
</TABLE>
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7900 WISCONSIN AVENUE, SUITE 300
BETHESDA, MARYLAND 20814
(888) PRO-5717 (FINANCIAL PROFESSIONALS ONLY)
PRO FUNDS LOGO (888) PRO-FNDS ((888) 776-3637) (FOR ALL OTHERS)
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This prospectus describes six ProFunds. The ProFunds offers two classes of
shares: Service Shares and Investor Shares. The ProFunds may be used by
professional money managers and investors as part of an asset-allocation or
market-timing investment strategy, to create specified investment exposure to a
particular segment of the securities market or to hedge an existing investment
portfolio. Sales are made without any sales charge at net asset value.
Each non-money market ProFund seeks investment results that correspond each
day to a specified benchmark. The following are the non-money market ProFunds
and their benchmarks:
<TABLE>
<CAPTION>
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FUND BENCHMARK
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<S> <C>
Bull ProFund S&P 500 Composite Stock Price Index(TM) ("S&P 500 Index")
UltraBull ProFund Twice (200%) the performance of the S&P 500 Index
Bear ProFund Inverse (opposite) of the performance of the S&P 500
Index
UltraBear ProFund Twice (200%) the inverse (opposite) of the performance of
the S&P 500 Index
UltraOTC ProFund Twice (200%) the performance of the NASDAQ 100 Index(TM)
</TABLE>
The ProFunds also include the Money Market ProFund. The Money Market ProFund
seeks a high level of current income consistent with liquidity and preservation
of capital through investment in high quality money market instruments. UNLIKE
OTHER MUTUAL FUNDS (AND THE OTHER PROFUNDS), THE MONEY MARKET PROFUND SEEKS TO
ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING ALL OF ITS INVESTABLE ASSETS IN
THE CASH MANAGEMENT PORTFOLIO (THE "PORTFOLIO"), A SEPARATE INVESTMENT COMPANY
WITH AN IDENTICAL INVESTMENT OBJECTIVE. THE
Continued on next page
INVESTMENT ADVISORS
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PROFUND ADVISORS LLC BANKERS TRUST COMPANY
Non-Money Market ProFunds Cash Management Portfolio
</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is November 10, 1997
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PRO FUNDS LOGO
Continued from Previous Page
PERFORMANCE OF THE MONEY MARKET PROFUND WILL CORRESPOND DIRECTLY TO THE
INVESTMENT PERFORMANCE OF THE PORTFOLIO. SHARES OF THE MONEY MARKET PROFUND ARE
NOT DEPOSITS OR OBLIGATIONS OF ANY BANK, AND ARE NOT ENDORSED OR GUARANTEED BY
ANY BANK, AND AN INVESTMENT IN THIS PROFUND IS NEITHER INSURED NOR GUARANTEED BY
THE UNITED STATES GOVERNMENT. THE MONEY MARKET PROFUND SEEKS TO MAINTAIN A
CONSTANT $1.00 NET ASSET VALUE PER SHARE, ALTHOUGH THIS CANNOT BE ASSURED.
The ProFunds involve special risks, some not traditionally associated with
mutual funds. Investors should carefully review and evaluate these risks in
considering an investment in the ProFunds to determine whether an investment in
the ProFunds is appropriate. None of the ProFunds alone constitutes a balanced
investment plan and the non-money market ProFunds are not intended for investors
whose principal objective is current income or preservation of capital. See
"Special Considerations." Because of the inherent risks in any investment, there
can be no assurance that the ProFunds' investment objectives will be achieved.
Investors should read this Prospectus and retain it for future reference.
This Prospectus is designed to set forth concisely the information an investor
should know about the ProFunds before investing. A Statement of Additional
Information ("SAI"), dated November 10, 1997, containing additional information
about ProFunds has been filed with the Securities and Exchange Commission and is
incorporated herein by reference. A copy of this SAI is available, without
charge, upon request to ProFunds at the address above or by telephoning ProFunds
at the telephone numbers above.
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OVERVIEW
PROFUNDS
Each ProFund has its own distinct investment objective. There is, of course,
no guarantee that any mutual fund will achieve its investment objective.
The investment objectives of the ProFunds are as follows:
The Bull ProFund and the UltraBull ProFund. The Bull ProFund's investment
objective is to provide investment returns that correspond to the performance of
the S&P 500 Index. The UltraBull ProFund's investment objective is to provide
investment returns that correspond to 200% of the performance of the S&P 500
Index. The UltraBull ProFund should gain more than the Bull ProFund when the
prices of the securities in the S&P 500 Index rise and lose more when such
prices decline.
The Bear ProFund and the UltraBear ProFund. The Bear ProFund's investment
objective is to provide investment results that will inversely correlates to the
performance of the S&P 500 Index. The UltraBear ProFund's investment objective
is to provide investment results that will inversely correlate to 200% of the
performance of the S&P 500 Index.
If the Bear ProFund is successful in meeting its objective, the net asset
value of Bear ProFund shares will increase in direct proportion to any decrease
in the level of the S&P 500 Index. Conversely, the net asset value of Bear
ProFund shares will decrease in direct proportion to any increases in the level
of the S&P 500 Index. The net asset value of shares of the UltraBear ProFund
should increase or decrease approximately twice as much as does that of the Bear
ProFund on any given day.
The UltraOTC ProFund. The investment objective of the UltraOTC ProFund is to
provide investment results that correspond to 200% of the performance of the
NASDAQ 100 Index. The NASDAQ 100 Index includes 100 of the largest non-financial
domestic companies listed on the NASDAQ National Market tier of The NASDAQ Stock
Market.
The Money Market ProFund. The Money Market ProFund seeks, as its investment
objective, a high level of current income consistent with liquidity and
preservation of capital. To achieve its objective, the Money Market ProFund
invests all of its investable assets in the Portfolio, which has the same
investment objective as the Money Market ProFund. This two-tiered investment
approach is commonly referred to as a master-feeder fund structure. See
"Investment Policies and Techniques -- Special Information Concerning
Master-Feeder Fund Structure."
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Prospectus 3
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PRO FUNDS LOGO
A discussion of each ProFund's investment objective and policies is provided
below under "Investment Objectives" and "Investment Policies and Techniques."
SPECIAL RISK CONSIDERATIONS
The ProFunds present certain risks to investors, some that are usually not
associated with mutual funds, which are discussed below and elsewhere in this
Prospectus. Investors should carefully review and evaluate these risks in
considering an investment in the ProFunds to determine whether an investment in
the ProFunds is appropriate. This discussion should be read in conjunction with
the rest of the Prospectus and "Special Considerations."
The ProFunds expect that a substantial portion of the assets of the ProFunds
will be derived from professional money managers and investors who intend to
invest in the ProFunds as part of their tactical investment strategies. These
investors are likely to redeem or exchange their ProFund shares frequently to
take advantage of anticipated changes in market conditions. The strategies
employed by ProFund shareholders may result in considerable assets moving in and
out of the ProFunds. Consequently, the ProFunds expect that they will experience
unusually high portfolio turnover. This portfolio turnover will cause the
realization of capital gains and losses, higher expenses and additional costs.
Additionally, a high portfolio turnover may adversely affect the ability of a
ProFund to meet its investment objective. For further information concerning the
portfolio turnover of the ProFunds, see "Special Considerations" in this
Prospectus.
Shareholders in the Bear ProFund and the UltraBear ProFund should lose money
while prices of the securities in the S&P 500 Index increase. This is the
opposite likely result expected of investing in a traditional equity mutual fund
in a generally rising stock market.
Investors in the UltraBull ProFund and the UltraBear ProFund employ
leveraged investment techniques. Investors in these ProFunds will experience
magnified losses in market conditions that are adverse to their investment
objectives.
While the ProFunds do not expect that their returns over the course of a
year will deviate adversely from their respective current benchmarks by more
than 10%, certain factors may affect their ability to achieve this correlation.
The ProFunds (other than the Money Market ProFund) may engage in certain
aggressive investment techniques, which may include engaging in short sales and
transactions in futures contracts and options on securities, stock indexes, and
futures contracts. Employing these techniques requires special skills and
knowledge. Also, there may be periods when the ProFunds may not be able
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4
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to liquidate their positions. These and other risks are more fully discussed
under "Special Considerations", "Investment Objectives" and "Investment Policies
and Techniques."
Each non-money market ProFund is a "non-diversified" series of the ProFunds.
A ProFund is considered "non-diversified" because a relatively high percentage
of the ProFund's assets may be invested in the securities of a limited number of
issuers, primarily within the same economic sector. Such ProFund's portfolio
securities, therefore, may be more susceptible to any single economic,
political, or regulatory occurrence than the portfolio securities of a more
diversified investment company. See "Special Considerations" for a discussion of
these factors.
PURCHASES, REDEMPTIONS, AND EXCHANGES OF SHARES
The shares of the ProFunds may be purchased and redeemed, without any sales
or redemption charge, at the next determined net asset value per share of the
ProFund. Purchases of shares may be made by check or wire transfer.
The minimum initial investment in the ProFunds for investors who have
engaged a registered investment adviser with discretionary authority over the
shareholder's account is $5,000. The minimum is $15,000 for all other investors.
Shares of any of the ProFunds may be exchanged at any time for shares of the
same class of any other ProFund, without any charge, on the basis of their
relative net asset values next computed.
See "Shareholders Guide" for more information about buying, exchanging and
redeeming ProFund shares.
INVESTMENT ADVISORS
The investment advisor of the non-money market ProFunds is ProFund Advisors
LLC (the "Advisor"). The Advisor is located in Bethesda, Maryland. See
"Management of the ProFunds." The investment advisor of the Portfolio is Bankers
Trust Company ("Bankers Trust"), a wholly-owned subsidiary of Bankers Trust New
York Corporation.
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Prospectus 5
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PRO FUNDS LOGO
ADMINISTRATOR, TRANSFER AGENT, FUND ACCOUNTING AGENT AND CUSTODIAN
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services ("BISYS")
acts as Administrator to the ProFunds. ProFund Advisors LLC, pursuant to a
separate Administration Agreement, performs certain administrative and
shareholder services on behalf of the ProFunds. BISYS Funds Services, Inc.
("BFSI"), an affiliate of BISYS, acts as transfer agent and fund accounting
agent for the ProFunds, for which it receives additional fees. UMB Bank, N.A.
serves as the custodian of the ProFunds' securities and other assets.
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FEES AND EXPENSES
FEE TABLES
The following table illustrates all expenses and fees that a shareholder of
the ProFunds' Investor Shares will incur in the first year of operations:
<TABLE>
<CAPTION>
MONEY
BULL ULTRABULL BEAR ULTRABEAR ULTRAOTC MARKET
PROFUND PROFUND PROFUND PROFUND PROFUND PROFUND
<S> <C> <C> <C> <C> <C> <C>
Shareholder Transaction
Expenses:
Sales Load Imposed On
Purchases.............. None None None None None None
Sales Load Imposed On
Reinvested Dividends... None None None None None None
Deferred Sales Load...... None None None None None None
Redemption Fees(1)....... None None None None None None
Exchange Fees............ None None None None None None
Annual Fund Operating
Expenses:
Advisory Fees............ 0.75% 0.75% 0.75% 0.75% 0.75% 0.15%(2)
12b-1 Fees............... None None None None None None
Other Expenses After
Waiver(3)(4)........... 0.58% 0.58% 0.58% 0.58% 0.58% 0.68%
Total ProFund Operating
Expenses After Waiver.. 1.33% 1.33% 1.33% 1.33% 1.33% 0.83%
</TABLE>
The following table illustrates all expenses and fees that a shareholder of
the ProFunds' Service Shares will incur in the first year of operations:
<TABLE>
<CAPTION>
MONEY
BULL ULTRABULL BEAR ULTRABEAR ULTRAOTC MARKET
PROFUND PROFUND PROFUND PROFUND PROFUND PROFUND
<S> <C> <C> <C> <C> <C> <C>
Shareholder Transaction
Expenses:
Sales Load Imposed on
Purchases............. None None None None None None
Sales Load Imposed on
Reinvested
Dividends............. None None None None None None
Deferred Sales Load..... None None None None None None
Redemption Fees(1)...... None None None None None None
Exchange Fees........... None None None None None None
</TABLE>
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Prospectus 7
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PRO FUNDS LOGO
<TABLE>
<CAPTION>
MONEY
BULL ULTRABULL BEAR ULTRABEAR ULTRAOTC MARKET
PROFUND PROFUND PROFUND PROFUND PROFUND PROFUND
<S> <C> <C> <C> <C> <C> <C>
Annual Fund Operating
Expenses:
Advisory Fees........... 0.75% 0.75% 0.75% 0.75% 0.75% 0.15%(2)
12b-1 Fees.............. None None None None None None
Other Expenses After
Waiver(3)(4).......... 1.58% 1.58% 1.58% 1.58% 1.58% 1.68%
Total ProFund Operating
Expenses After
Waiver................ 2.33% 2.33% 2.33% 2.33% 2.33% 1.83%
</TABLE>
(1) The ProFunds charge $15 for each wire transfer of redemption proceeds;
this charge may be waived at the discretion of the ProFunds.
(2) The Portfolio pays Bankers Trust a .15% advisory fee, of which the Money
Market ProFund bears its pro rata portion. The ProFunds' Board of
Trustees believes that the aggregate per share expenses of the Money
Market ProFund and the Portfolio will be approximately equal to the
expenses the Fund would incur if its assets were invested directly in
money market securities.
(3) Based on estimated expenses to be incurred in the ProFunds' first year
of operations. Other expenses include fees of .15% (.35% in the case of
the Money Market ProFund) for administration and shareholder services,
and in the case of the Portfolio, an administration and services fee of
.05%. The fee under each ProFund's Shareholder Services Plan is
calculated on the basis of the average net assets of each ProFund's
Service Shares at an annual rate not to exceed 1.00%.
(4) Without waiver of administration fees, "Other Expenses" and "Total
Operating Expenses" would be 0.71% and 1.46%, respectively, for the
Investor Class and 1.71% and 2.46%, respectively, for the Service Class
of the non-money market ProFunds. In the case of the Money Market
ProFund, without waiver of administration fees, the amounts would be
0.87% and 1.02%, respectively for the Investor Class and 1.87% and
2.02%, respectively for the Service Class.
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EXAMPLES
Assuming hypothetical investments of $1,000 in Investor Shares of each of
the ProFunds, a 5% annual return, and redemption at the end of each time period,
an investor in each of the ProFunds would pay operating expenses as follows:
<TABLE>
<CAPTION>
3
1 YEAR YEARS
<S> <C> <C>
Bull ProFund..................................................... $ 14 $ 42
UltraBull ProFund................................................ 14 42
Bear ProFund..................................................... 14 42
UltraBear ProFund................................................ 14 42
UltraOTC ProFund................................................. 14 42
Money Market ProFund............................................. 8 26
</TABLE>
Assuming hypothetical investments of $1,000 in Service Shares of each of the
ProFunds, a 5% annual return, and redemption at the end of each time period, an
investor in each of the ProFunds would pay operating expenses as follows:
<TABLE>
<CAPTION>
3
1 YEAR YEARS
<S> <C> <C>
Bull ProFund..................................................... $ 24 $ 73
UltraBull ProFund................................................ 24 73
Bear ProFund..................................................... 24 73
UltraBear ProFund................................................ 24 73
UltraOTC ProFund................................................. 24 73
Money Market ProFund............................................. 19 60
</TABLE>
The preceding tables of fees and expenses are provided to assist investors
in understanding the various costs and expenses which may be borne directly or
indirectly by an investor in each of the ProFunds' Service Shares and Investor
Shares. The fees and expenses of the Money Market ProFund reflect the expenses
of both that ProFund and its pro rata share of the expenses of the Portfolio.
The percentages shown above are based on estimates. The 5% assumed annual return
is for comparison purposes only. For a more complete discussion of the fees
connected with an investment in the ProFunds and the services provided to the
ProFunds, see "Management of the ProFunds" in this Prospectus and in the SAI.
THE PRECEDING EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
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Prospectus 9
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PRO FUNDS LOGO
SHAREHOLDERS'
GUIDE
HOW TO INVEST IN THE PROFUNDS
General
The shares of each ProFund are offered at the net asset value per share next
computed after receipt of the investor's order. No sales charges are imposed on
initial or subsequent investments in a ProFund. See "General Information About
the Trust -- Determination of Net Asset Value".
Minimum Investment
The minimum initial investment in the ProFunds for investors who have
engaged a registered investment adviser with discretionary authority over the
shareholder's account is $5,000. For all other shareholder accounts ("Self-
Directed Accounts"), the minimum initial investment in the ProFunds is $15,000.
These minimums also apply to retirement plan accounts and are determined based
upon the total investment in all ProFunds. ProFunds, at its discretion, may
accept lesser amounts in certain circumstances. There is no minimum amount for
subsequent investments, other than those made pursuant to the automatic
investment plan, in a ProFund. ProFunds reserves the right to reject or refuse,
at ProFunds' discretion, any order for the purchase of a ProFund's shares in
whole or in part.
How to Invest by Mail
Fill out an application and make out a check payable to "ProFunds." Mail the
check along with the application to:
ProFunds
P.O. Box 182800
Columbus, OH 43218-2800
The net asset value of shares purchased by mail will be computed based upon
the price of shares next computed after the receipt of an investment by mail.
How to Invest by Wire Transfer
First, fill out an application and fax the completed application, along with
the request for a confirmation number to the ProFunds at (800) 782-4797. Once
you have received your confirmation number, you must then request that your bank
wire transfer the purchase amount to the applicable ProFund along with the
following instructions:
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Request a wire transfer to:
UMB BANK, N.A.
Routing Number: ABA #101000695
For Account of ProFunds
DDA #9870857952
YOUR NAME
YOUR CONFIRMATION NUMBER
After instructing your bank to transfer money by wire, call the ProFunds at
888-PRO-FNDS and inform the ProFunds as to the amount that you have transferred
and the name of the bank sending the transfer. Wire transfer requests may be
made between 8:00 AM and 9:00 PM Eastern Time. However, wire transfers must be
received by 3:30 PM Eastern Time to receive that day's net asset value. Wire
transfer requests received after 3:30 PM Eastern Time are deemed to be received
on the next business day of ProFunds and will be placed at the next determined
net asset value on the next business day. If the primary exchange or market on
which a ProFund transacts business closes early, the above cut-off time will be
thirty minutes prior to the close of such exchange or market. Your bank may
charge a fee for such services. Instructions, written or telephonic, given to
ProFunds for wire transfer requests do not constitute a purchase order until the
wire transfer has been received by ProFunds. ProFunds is not liable for any loss
incurred due to a wire transfer not having been received.
Purchase Through Securities Dealers
Investments in the ProFunds may be made through securities dealers who have
the responsibility to transmit orders promptly and who may charge a processing
fee.
HOW TO EXCHANGE SHARES OF THE PROFUNDS
Shares of any ProFunds may be exchanged, without any charge, for shares of
the same class of any other ProFunds on the basis of the respective net asset
values of the shares involved. Exchanges may be made by letter or by telephone
at the address or numbers indicated on the cover of this Prospectus. TELEPHONE
REQUESTS FOR SHARE EXCHANGES MAY ONLY BE MADE BETWEEN 8:00 AM AND 3:50 PM AND
BETWEEN 4:30 PM AND 9:00 PM. Telephone requests for share exchanges will receive
the net asset value per share next determined. If the primary exchange or market
on which a ProFund transacts business closes early, the above cut-off time will
be fifteen minutes prior to the close of such exchange or market. The net asset
value of share exchange requests made by mail will be computed based upon the
price of shares next computed after the receipt of the request.
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PRO FUNDS LOGO
Exchanges with respect to Self-Directed Accounts must be for at least $1,000
or 100% of the account value for the ProFund, whichever is less, from which the
transfer is made. See "Shareholders' Guide -- Special Information Regarding
Telephone Requests for Redemptions and Exchanges".
To implement an exchange, shareholders must provide the following
information:
- Name and telephone number;
- Account name and number;
- Taxpayer identification number;
- Number of or percentage of shares or dollar value of shares to be
exchanged;
- The name of the ProFunds from which the exchange is to be made; and
- The name of the ProFunds to which the exchange is to be made.
The privilege to initiate exchange transactions by telephone will be made
available to ProFund shareholders automatically. Exchanges may only be made
between identically registered accounts. The exchange privilege is available
only in states where the exchange legally may be made and may be modified or
discontinued at any time. In addition, see "Shareholders' Guide -- Special
Information Regarding Written and Telephone Requests for Redemptions and
Exchanges" regarding instructions received by telephone.
HOW TO WITHDRAW MONEY (REDEEM SHARES)
General
An investor can withdraw all or any portion of his investment by redeeming
ProFund shares at the next determined net asset value per share after receipt of
the order. Withdrawals may be made by letter or by telephone at the address or
numbers indicated on the cover of this Prospectus. TELEPHONE REQUESTS FOR SHARE
REDEMPTIONS MAY ONLY BE MADE BETWEEN 8:00 AM AND 3:50 PM AND BETWEEN 4:30 PM AND
9:00 PM. Telephone requests for share redemptions will receive the net asset
value per share next determined. If the primary exchange or market on which a
ProFund transacts business closes early, the above cut-off time will be thirty
minutes prior to the close of such exchange or market. The net asset value of
share redemption requests made by mail will be computed based upon the price of
shares next computed after the receipt of the request.
The privilege to initiate redemption transactions by telephone will be made
available to ProFund shareholders automatically. Redemptions from Self-Directed
Accounts must be for at least $1,000 or 100% of the account value for the
ProFund, whichever is less, from which the transfer is made.
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Payment of the redemption proceeds will be made within seven days after the
ProFunds' receipt of the request for redemption. For investments that have been
made by check, payment on withdrawal requests will be delayed until the
ProFunds' transfer agent is reasonably satisfied that the purchase payment has
been collected by the ProFunds (which may require up to 15 business days). An
investor may avoid a delay in receiving redemption proceeds by purchasing shares
with a certified check.
Wire of Withdrawals
Shareholders may request payment by wire of withdrawal proceeds from a
ProFund. The ProFunds charge $15 for each wire transfer of redemption proceeds;
this charge may be waived at the discretion of the ProFunds.
Draft Checks
Investors may elect to redeem shares of the Money Market ProFund by draft
check (minimum check -- $500) made payable to the order of any person or
institution. Upon the ProFunds' receipt of a completed signature card, investors
will be supplied with draft checks which are drawn on the Money Market ProFund's
account. There is a $25 charge for each stop payment request on the draft
checks. Investors are subject to the same rules and regulations that banks apply
to checking accounts. A Money Market ProFund account may not be closed by draft
check. This option is not available to Individual Retirement Account ("IRA")
shareholders.
Redemptions to Third Party or Other Address
Telephone redemptions are sent only to the address of record of the
redeeming investor or to bank accounts specified by the redeeming investor in
his account application. If the investor desires payment of redemption proceeds
to a third party or to a location other than the investor's address of record or
a bank account specified in the investor's account application, this request
must be in writing, and the investor's signature must be guaranteed by a
commercial bank, a broker, dealer, municipal securities dealer, municipal
securities broker, government securities dealer, or government securities
broker, a credit union, a national securities exchange, registered securities
association, clearing agency, or a savings association.
SPECIAL INFORMATION REGARDING TELEPHONE REQUESTS FOR REDEMPTIONS AND EXCHANGES
When acting on telephone instructions believed to be genuine, the ProFunds
will not be liable for any loss resulting from a fraudulent telephone
transaction request, and the investor will bear the risk of any such loss. The
ProFunds will
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Prospectus 13
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PRO FUNDS LOGO
employ reasonable procedures to confirm that the telephone instructions are
genuine; and if the ProFunds do not employ such procedures, then the ProFunds
may be liable for any losses due to unauthorized or fraudulent instructions. The
ProFunds follow specific procedures for transactions initiated by telephone,
including, among others, requiring some form of personal identification prior to
acting upon instructions received by telephone, providing written confirmation
not later than 5 business days after such transaction and/or tape recording of
telephone instructions.
Investors also should be aware that telephone redemptions or exchanges may
be difficult to implement in a timely manner during periods of significant
economic or market changes. If such conditions occur, redemption or exchange
orders can be made by mail. Telephone redemption and exchange privileges may be
terminated or modified by the ProFunds at any time.
HOW TO MAKE AUTOMATIC INVESTMENTS, EXCHANGES AND WITHDRAWALS
Investors may also purchase and redeem ProFund shares by arranging
systematic monthly, bimonthly, quarterly or annual investments into the ProFunds
(the "Automatic Investment Plan"), and redemptions from the ProFunds (the
"Automatic Withdrawal Plan"). The minimum investment amounts are $1,000 per
transfer and minimum withdrawal amounts are $500 per transfer. These minimums
are waived for IRA shareholders 70 1/2 or older. Additionally, investors may
exchange, on a regular basis, shares of the Money Market ProFund for shares of
other ProFunds through ProFunds' Automatic Exchange Plan. For more information,
including terms and conditions, about automatic investment, exchange and
withdrawal features, please call the ProFunds at 888-PRO-FNDS.
DIVIDENDS AND DISTRIBUTIONS
General
All income dividends and capital gains distributions of each ProFund
automatically will be reinvested in additional shares of the ProFund at the net
asset value calculated on the ex-dividend date, unless an investor has requested
otherwise in writing. Dividends and distributions of a ProFund are taxable to
the shareholders of the ProFund, as discussed below under "Taxes," whether such
dividends and distributions are reinvested in additional shares of the ProFund
or received in cash. Statements of account will be sent to the ProFund
shareholders at least quarterly.
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All ProFunds Except Money Market ProFund
The ProFunds, other than the Money Market ProFund intend to distribute
annually any net investment income and net realized capital gains to
shareholders. The ProFunds may declare a special distribution for any of these
ProFunds if the ProFunds believe that such a distribution would be in the best
interests of its shareholders.
Money Market ProFund
Shares begin accruing dividends on the day the purchase order is received in
proper form and payment in the form of federal funds is received by BFSI, the
ProFunds' transfer agent, and continue to earn dividends through the day before
a redemption order for such shares is processed by BFSI. The Money Market
ProFund ordinarily (i) declares dividends of net investment income (and net
short-term capital gains, if any) for shares of the Money Market ProFund on a
daily basis and (ii) distributes such dividends to shareholders of the Money
Market ProFund on a monthly basis. Net realized capital gains will be
distributed annually. The Money Market ProFund's net investment income consists
of its share of the Portfolio's dividends and interest (including discount)
accrued on its securities, less applicable expenses. The Money Market ProFund,
however, may revise this dividend and distribution policy, postpone the payment
of dividends thereunder, or take any other action necessary with respect thereto
in order to facilitate, to the extent possible, the maintenance by the Money
Market ProFund of a constant net asset value per share of $1.00.
TAX-SHELTERED RETIREMENT PLANS
ProFunds sponsors IRAs which enable individuals to establish their own
retirement program (including spousal IRAs, Rollover IRAs, SEP IRAs and Simple
IRAs). Fund-sponsored retirement plans are charged an annual $15.00 maintenance
fee and receive tax reporting services. In addition, investors in the following
retirement plans are eligible to invest in ProFunds:
- Keogh Accounts -- Defined Contribution Plans (Profit-Sharing
Plans)
- Keogh Accounts
- Money Purchase Plans
- Pension Plans
- Internal Revenue Code Section 403(b) Plans
All ProFunds' IRA distribution requests must be made in writing to BFSI, the
ProFunds' transfer agent. Any additional deposits to the ProFunds must
distinguish the type and year of the contribution.
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PRO FUNDS LOGO
For more information on ProFunds IRAs, or any other retirement plan, please
call the ProFunds at 888-PRO-FNDS. Shareholders are advised to consult a tax
adviser on ProFunds IRA contribution and withdrawal requirements and
restrictions.
MISCELLANEOUS
Involuntary Redemptions of Small Accounts
Because of the administrative expense of handling small accounts, the
ProFunds reserve the right to redeem involuntarily an investor's account,
including a retirement account, which falls below the applicable minimum
investment in total value in the ProFunds due to redemptions. In addition, both
a request for a partial redemption by an investor whose account balance is below
the minimum investment and a request for a partial redemption by an investor
that would bring the account balance below the minimum investment will be
treated as a request by the investor for a complete redemption of that account.
Investors holding shares in a retirement account should be aware that any
redemption from a retirement account may result in tax consequences including,
but not limited to, a 10% penalty on the amount withdrawn if the shareholder is
under the age of 59 1/2. Shareholders should consult their tax advisors about
such tax consequences. The ProFunds reserve the right to modify their minimum
investment requirements and the corresponding amounts below which involuntary
redemptions may be effected.
Suspension of Redemptions
The right of redemption may be suspended, or the date of payment postponed:
(i) for any period during which the New York Stock Exchange ("NYSE"), the
Federal Reserve Bank of New York, as appropriate, is closed (other than
customary weekend or holiday closings) or trading on the NYSE, as appropriate,
is restricted; (ii) for any period during which an emergency exists so that
disposal of a ProFund's investments or the determination of its net asset value
is not reasonably practicable; or (iii) for such other periods as the Securities
and Exchange Commission (the "Commission"), by order, may permit for protection
of the ProFunds' investors.
"Undeliverable" or "Uncashed" Dividend Checks
If you elect to receive distributions in cash and checks (1) are returned
and marked as "undeliverable" or (2) remain uncashed for six months, your cash
election will be changed automatically and your future dividend and capital
gains distributions will be reinvested in the ProFunds at the per share net
asset value determined as of the date of payment of the distribution. In
addition, any undeliverable checks or checks that remain uncashed for six months
will be
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canceled and will be reinvested in the ProFunds at the per share net asset value
determined as of the date of cancellation.
Transaction Charges
In addition to charges described elsewhere in this Prospectus, the ProFunds
also may make a charge of $25 for checks returned for insufficient or
uncollectible funds.
No Certificates
In the interest of economy and convenience, physical certificates
representing a ProFund's shares are not issued. Shares of each ProFund are
recorded on a register by BFSI.
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PRO FUNDS LOGO
SPECIAL
CONSIDERATIONS
The ProFunds present certain risks, some not typically associated with
mutual funds. Shareholders should consider the special factors discussed below
that are associated with the investment policies of the ProFunds in determining
the appropriateness of investing in the ProFunds.
TRACKING ERROR
While the ProFunds do not expect that their returns over a year will deviate
adversely from their respective benchmarks by more than ten percent, several
factors may affect their ability to achieve this correlation. Among these
factors are: (1) ProFund expenses, including brokerage (which may be increased
by high portfolio turnover) and the cost of the investment techniques employed
by the ProFunds; (2) less than all of the securities in the benchmark being held
by a ProFund and securities not included in the benchmark being held by a
ProFund; (3) an imperfect correlation between the performance of instruments
held by a ProFund, such as futures contracts and options, and the performance of
the underlying securities in the cash market; (4) bid-ask spreads (the effect of
which may be increased by portfolio turnover); (5) holding instruments traded in
a market that has become illiquid or disrupted; (6) ProFund share prices being
rounded to the nearest cent; (7) changes to the benchmark index that are not
disseminated in advance; (8) the need to conform a ProFund's portfolio holdings
to comply with investment restrictions or policies or regulatory or tax law
requirements, and (9) early and unanticipated closings of the markets on which
the holdings of a ProFund trade, resulting in the inability of the ProFund to
execute intended portfolio transactions. While a close correlation of any
ProFund to its benchmark may be achieved on any single trading day, over time
the cumulative percentage increase or decrease in the net asset value of the
shares of a ProFund may diverge significantly from the cumulative percentage
decrease or increase in the benchmark due to a compounding effect.
AGGRESSIVE INVESTMENT TECHNIQUES
Each of the ProFunds (other than the Money Market ProFund) may engage in
certain aggressive investment techniques which may include engaging in short
sales and transactions in futures contracts and options on securities,
securities indexes, and futures contracts. These ProFunds expect that they will
primarily use these techniques in seeking to achieve their objectives and that a
significant portion (up to 100%) of the assets of these ProFunds will be held in
liquid
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instruments in a segregated account by these ProFunds as "cover" for these
investment techniques.
Participation in the options or futures markets by a ProFund involves
distinct investment risks and transaction costs. 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 fact that the skills needed to use these strategies are
different from those needed to select portfolio securities; and (4) the possible
absence of a liquid secondary market for any particular instrument at any time.
For further information regarding these investment techniques, see "Investment
Policies and Techniques."
LEVERAGE
The UltraBull ProFund and the UltraBear ProFund intend to regularly use
leveraged investment techniques in pursuing their investment objectives.
Utilization of leveraging involves special risks and should be considered to be
speculative. Leverage exists when a ProFund achieves the right to a return on a
capital base that exceeds the amount the ProFund has invested. Leverage creates
the potential for greater gains to shareholders of these ProFunds during
favorable market conditions and the risk of magnified losses during adverse
market conditions. Leverage should cause higher volatility of the net asset
values of these ProFunds' shares. Leverage may involve the creation of a
liability that does not entail any interest costs or the creation of a liability
that requires the ProFund to pay interest which would decrease the ProFund's
total return to shareholders. If these ProFunds achieve their investment
objectives, during adverse market conditions, shareholders should experience a
loss of approximately twice the amount they would have incurred had these
ProFunds not been leveraged.
NON-DIVERSIFIED STATUS
Each non-money market ProFund is a "non-diversified" series. A non-money
market ProFund is considered "non-diversified" because a relatively high
percentage of the ProFund's assets may be invested in the securities of a
limited number of issuers, primarily within the same economic sector. That
ProFund's portfolio securities, therefore, may be more susceptible to any single
economic, political, or regulatory occurrence than the portfolio securities of a
more diversified investment company. A ProFund's classification as a
"non-diversified" in-
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PRO FUNDS LOGO
vestment company means that the proportion of the ProFund's assets that may
be invested in the securities of a single issuer is not limited by the
Investment Company Act of 1940 (the "1940 Act"). Each ProFund, however, intends
to seek to qualify as a "regulated investment company" for purposes of the
Internal Revenue Code, which imposes diversification requirements on these
ProFunds that are less restrictive than the requirements applicable to the
"diversified" investment companies under the 1940 Act.
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INVESTMENT
OBJECTIVES
GENERAL
The ProFunds may be used by professional money managers and investors as
part of an asset-allocation or market-timing investment strategy or to create
specified investment exposure to a particular segment of the securities market
or to hedge an existing investment portfolio. Except for the Money Market
ProFund, each ProFund seeks investment results that correspond each day to a
specified benchmark. The ProFunds may be used independently or in combination
with each other as part of an overall investment strategy. Additional ProFunds
may be created from time to time.
Fundamental securities analysis is not generally used by the Advisor in
seeking to correlate with the respective benchmarks. Rather, the Advisor
primarily uses statistical and quantitative analysis to determine the
investments a ProFund makes and techniques it employs. While the Advisor
attempts to minimize any "tracking error" (that statistical measure of the
difference between the investment results of a ProFund and the performance of
its benchmark), certain factors will tend to cause a ProFund's investment
results to vary from a perfect correlation to its benchmark. The ProFunds,
however, do not expect that their total returns will vary adversely from their
respective current benchmarks by more than ten percent over the course of a
year. See "Special Considerations."
It is the policy of the non-money-market ProFunds to pursue their investment
objectives of correlating with their benchmarks regardless of market conditions,
to remain nearly fully invested and not to take defensive positions.
BENCHMARKS OF THE PROFUNDS
The S&P 500 Index. Standard & Poor's chooses the 500 stocks composing the
S&P 500 Index on the basis of market values and industry diversification. Most
of the stocks in the S&P 500 Index are issued by the 500 largest companies, in
terms of the aggregate market value of their outstanding stock, and such
companies are generally listed on the NYSE. Additional stocks that are not among
the 500 largest market value stocks are included in the S&P 500 Index for
diversification purposes. The S&P 500 Index as referred to in this Prospectus
does not include the effect of dividends paid on the stock of the companies
included in the index. Standard & Poor's will not be a sponsor of, or in any
other way be affiliated with, the ProFunds.
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PRO FUNDS LOGO
The NASDAQ 100 Index. The NASDAQ 100 Index includes 100 of the largest
non-financial domestic companies listed on the NASDAQ National Market tier of
The NASDAQ Stock Market. Launched in January 1985, each security in the NASDAQ
100 Index is proportionately represented by its market capitalization in
relation to the total market value of the NASDAQ 100 Index. The NASDAQ 100 Index
reflects NASDAQ's largest growth companies across major industry groups. All
index components have a minimum market capitalization of $500 million, and an
average daily trading volume of at least 100,000 shares. NASDAQ will not be a
sponsor of, or in any other way be affiliated with, the ProFunds.
THE BULL PROFUND AND ULTRABULL PROFUND
The investment objective of the Bull ProFund is to provide investment
returns that correspond to the performance of the S&P 500 Index. The investment
objective of the UltraBull ProFund is to provide investment returns that
correspond to 200% of the performance of the S&P 500 Index. These ProFunds seek
to achieve this correlation on each trading day. Under their investment
objectives, the UltraBull ProFund should produce greater gains to investors when
the S&P 500 Index rises and greater losses when the S&P 500 Index declines over
the corresponding gain or loss of the Bull ProFund.
In attempting to achieve their objectives, the Bull ProFund and the
UltraBull ProFund expect that a substantial portion of their respective assets
usually will be devoted to employing certain specialized investment techniques.
These techniques include engaging in certain transactions in stock index futures
contracts, options on stock index futures contracts, and options on securities
and stock indexes. The amount of any gain or loss on an investment technique may
be affected by any premium or amounts in lieu of dividends or interest income
the ProFund pays or receives as the result of the transaction. These ProFunds
may also invest in shares of individual securities which are expected to track
the S&P 500 Index.
THE BEAR PROFUND AND ULTRABEAR PROFUND
The Bear ProFund and the UltraBear ProFund are designed to allow investors
to speculate on anticipated decreases in the S&P 500 Index or to hedge an
existing portfolio of securities or mutual fund shares. The Bear ProFund's
investment objective is to provide investment results that will inversely
correlate to the performance of the S&P 500 Index. The UltraBear ProFund's
investment objective is to provide investment results that will inversely
correlate to 200% of the performance of the S&P 500 Index. These ProFunds seek
to achieve this inverse correlation on each trading day.
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If the Bear ProFund achieved a perfect inverse correlation for any single
trading day, the net asset value of the shares of the Bear ProFund would
increase for that day in direct proportion to any decrease in the level of the
S&P 500 Index. Conversely, the net asset value of the shares of the Bear ProFund
would decrease for that day in direct proportion to any increase in the level of
the S&P 500 Index for that day. The net asset value of the UltraBear ProFund on
the same days would increase or decrease approximately twice as much as the
price change of the Bear ProFund.
For example, if the S&P 500 Index were to decrease by 1% on a particular
day, investors in the Bear ProFund should experience a gain in net asset value
of approximately 1% for that day. The UltraBear ProFund should realize an
increase of approximately 2% of its net asset value on the same day. Conversely,
if the S&P 500 Index were to increase by 1% by the close of business on a
particular trading day, investors in the Bear ProFund and the UltraBear ProFund
would experience a loss in net asset value of approximately 1% and 2%,
respectively.
Due to the nature of the Bear ProFund and the UltraBear ProFund, investors
in these ProFunds could experience substantial losses during sustained periods
of rising equity prices, with losses to investors in the UltraBear ProFund
approximately twice as large as the losses to investors in the Bear ProFund.
In pursuing its investment objectives, the Bear ProFund and the UltraBear
ProFund generally do not invest in traditional securities, such as common stock
of operating companies. Rather, the Bear ProFund and the UltraBear ProFund
employ certain investment techniques, including engaging in short sales and in
certain transactions in stock index futures contracts, options on stock index
futures contracts, and options on securities and stock indexes.
Under these techniques, the Bear ProFund and the UltraBear ProFund will
generally incur a loss if the price of the underlying security or index
increases between the date of the employment of the technique and the date on
which the ProFund terminates the position. These ProFunds will generally realize
a gain if the underlying security or index declines in price between those
dates. The amount of any gain or loss on an investment technique may be affected
by any premium or amounts in lieu of dividends or interest that the ProFund pays
or receives as the result of the transaction.
THE ULTRAOTC PROFUND
The investment objective of the UltraOTC ProFund is to provide investment
results that correspond to 200% of the performance of the NASDAQ 100 Index.
The UltraOTC ProFund does not intend to hold the 100 securities included in
the NASDAQ 100 Index. Instead, the UltraOTC ProFund intends to engage in
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PRO FUNDS LOGO
transactions on stock index futures contracts, options on stock index futures
contracts, and options on securities and stock indexes. As a nonfundamental
policy, the UltraOTC ProFund will invest, under normal conditions, at least 65%
of its total assets in securities traded on the over-the-counter markets and
instruments with values that are representative of such securities such as
futures and option contracts in such securities or indices.
Companies whose securities are traded on the over-the-counter ("OTC")
markets generally have smaller market capitalization or are newer companies than
those listed on the NYSE or the American Stock Exchange (the "AMEX"). OTC
companies often have limited product lines, or relatively new products or
services, and may lack established markets, depth of experienced management, or
financial resources and the ability to generate funds. The securities of these
companies may have limited marketability and may be more volatile in price than
securities of larger capitalized or more well-known companies. Among the reasons
for the greater price volatility of securities of certain smaller OTC companies
are the less certain growth prospects of comparably smaller firms, the lower
degree of liquidity in the OTC markets for such securities, and the greater
sensitivity of smaller capitalization companies to changing economic conditions
than larger capitalization, exchange-traded securities. Conversely, because many
of these OTC securities may be overlooked by investors and undervalued in the
marketplace, there is potential for significant capital appreciation.
THE MONEY MARKET PROFUND
The Money Market ProFund seeks a high level of current income consistent
with liquidity and preservation of capital through investment in high quality
money market instruments. The Money Market ProFund offers investors a convenient
means of diversifying their holdings of short-term securities while relieving
those investors of the administrative burdens typically associated with
purchasing and holding these instruments, such as coordinating maturities and
reinvestments, providing for safekeeping and maintaining detailed records. High
quality, short-term instruments may result in a lower yield than instruments
with a lower quality and/or a longer term.
The Money Market ProFund seeks to achieve its investment objective by
investing the assets of the Money Market ProFund in the Portfolio, which has the
same investment objective as the Money Market ProFund and is managed by Bankers
Trust, 280 Park Avenue, New York, New York. There can be no assurances that the
investment objective of either the Money Market ProFund or the Portfolio will be
achieved. The investment objective of the Money Market ProFund and the Portfolio
is a fundamental policy and may not be changed without the approval of the Money
Market ProFund's shareholders or the
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Portfolio's investors, respectively. See "Special Information Concerning Master-
Feeder Fund Structure" herein.
The Portfolio invests in money market instruments, including corporate debt
obligations, U.S. government securities, bank obligations and repurchase
agreements. See "Investment Policies and Techniques -- Cash Management
Portfolio" for a discussion of the Portfolio's investment policies. The
Portfolio follows practices which are designed to enable the Money Market
ProFund to maintain a $1.00 share price: limiting average maturity of the
securities held by the Portfolio to 90 days or less; buying securities which
mature in 397 days or less; and buying only high quality securities with minimal
credit risks. Of course, the Money Market ProFund cannot guarantee a $1.00 share
price, but these practices help to minimize any price fluctuations that might
result from rising or declining interest rates. While the Portfolio invests in
high quality money market securities, you should be aware that your investment
is not without risk. All money market instruments can change in value when
interest rates or an issuer's creditworthiness changes.
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PRO FUNDS LOGO
INVESTMENT POLICIES
AND TECHNIQUES
FUTURES CONTRACTS AND RELATED OPTIONS
The ProFunds (other than the Money Market ProFund) may purchase or sell
stock index futures contracts and options thereon as a substitute for a
comparable market position in the underlying securities. The ProFunds anticipate
that they will primarily engage in transactions in futures contracts and related
options on the CME.
A futures contract obligates the seller to deliver (and the purchaser to
take delivery of) the specified commodity on the expiration date of the
contract. A stock index futures contract obligates the seller to deliver (and
the purchaser to take) an amount of cash equal to a specific dollar amount
multiplied by the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of the underlying stocks in the index is
made.
When a ProFund purchases a put or call option on a futures contract, the
ProFund pays a premium for the right to sell or purchase the underlying futures
contract for a specified price upon exercise at any time during the option
period. By writing (selling) a put or call option on a futures contract, a
ProFund receives a premium in return for granting to the purchaser of the option
the right to sell to or buy from the ProFund the underlying futures contract for
a specified price upon exercise at any time during the option period.
Whether a ProFund realizes a gain or loss from futures activities depends
generally upon movements in the underlying commodity. The extent of the
ProFund's loss from an unhedged short position in futures contracts or from
writing options on futures contracts is potentially unlimited. The ProFunds may
engage in related closing transactions with respect to options on futures
contracts. The ProFunds will only engage in transactions in futures contracts
and options thereupon that are traded on a United States exchange or board of
trade.
When a ProFund purchases or sells a stock index futures contract, or sells
an option thereon, the ProFund "covers" its position. To cover its position, a
ProFund may enter into an offsetting position or maintain with its custodian
bank (and mark-to-market on a daily basis) a segregated account consisting of
liquid instruments that, when added to any amounts deposited with a futures
commission merchant as margin, are equal to the market value of the futures
contract or otherwise "cover" its position.
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Although the ProFunds intend to sell futures contracts only if there is an
active market for such contracts, no assurance can be given that a liquid market
will exist for any particular contract at any particular time. Many futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a price
beyond that limit or trading may be suspended for specified periods during the
day. Futures contract prices could move to the limit for several consecutive
trading days with little or no trading, thereby preventing prompt liquidation of
futures positions and potentially subjecting a ProFund to substantial losses. If
trading is not possible, or if a ProFund determines not to close a futures
position in anticipation of adverse price movements, the ProFund will be
required to make daily cash payments of variation margin. The risk that the
ProFund will be unable to close out a futures position will be minimized by
entering into such transactions on a national exchange with an active and liquid
secondary market.
INDEX OPTIONS TRANSACTIONS
The ProFunds (other than the Money Market ProFund) may purchase and write
options on stock indexes to create investment exposure consistent with their
investment objectives, hedge or limit the exposure of their positions and to
create synthetic money market positions. See "Taxes" herein.
A stock index fluctuates with changes in the market values of the stocks
included in the index. Options on stock indexes give the holder the right to
receive an amount of cash upon exercise of the option. Receipt of this cash
amount will depend upon the closing level of the stock index upon which the
option is based being greater than (in the case of a call) or less than (in the
case of a put) the exercise price of the option. The amount of cash received, if
any, will be the difference between the closing price of the index and the
exercise price of the option, multiplied by a specified dollar multiple. The
writer (seller) of the option is obligated, in return for the premiums received
from the purchaser of the option, to make delivery of this amount to the
purchaser. All settlements of index options transactions are in cash.
Index options are subject to substantial risks, including the risk of
imperfect correlation between the option price and the value of the underlying
securities composing the stock index selected and the risk that there might not
be a liquid secondary market for the option. Because the value of an index
option depends upon movements in the level of the index rather than the price of
a particular stock, whether a ProFund will realize a gain or loss from the
purchase or writing (sale) of options on an index depends upon movements in the
level of stock prices in the stock market generally or, in the case of certain
indexes, in an
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PRO FUNDS LOGO
industry or market segment, rather than upon movements in the price of a
particular stock. Whether a ProFund will realize a profit or loss by the use of
options on stock indexes will depend on movements in the direction of the stock
market generally or of a particular industry or market segment. This requires
different skills and techniques than are required for predicting changes in the
price of individual stocks. A ProFund will not enter into an option position
that exposes the ProFund to an obligation to another party, unless the ProFund
either (i) owns an offsetting position in securities or other options and/or
(ii) maintains with the ProFund's custodian bank liquid instruments that, when
added to the premiums deposited with respect to the option, are equal to the
market value of the underlying stock index not otherwise covered.
OPTIONS ON SECURITIES
The ProFunds (other than the Money Market ProFund), may buy options and
write (sell) options on securities. By buying a call option, a ProFund has the
right, in return for a premium paid during the term of the option, to buy the
securities underlying the option at the exercise price. By writing (selling) a
call option and receiving a premium, a ProFund becomes obligated during the term
of the option to deliver the securities underlying the option at the exercise
price if the option is exercised. By buying a put option, a ProFund has the
right, in return for a premium paid during the term of the option, to sell the
securities underlying the option at the exercise price. By writing a put option,
a ProFund becomes obligated during the term of the option to purchase the
securities underlying the option at the exercise price. Options on securities
written (sold) by the ProFunds will be conducted on recognized securities
exchanges. A ProFund will not write options on securities unless it covers its
position as described under "Index Options Transactions".
A ProFund will realize a gain (or a loss) on a call or a put option
previously purchased by the ProFund if the premium, less commission costs,
received by the ProFund on the sale of the call or the put option to close the
transaction is greater (or less) than the premium, plus commission costs, paid
by the ProFund to purchase the call or the put option. If a put or a call option
which the ProFund has purchased expires out-of-the-money (i.e., the exercise
price of the option is less than the current market value of the underlying
security), the option will become worthless on the expiration date, and the
ProFund will realize a loss in the amount of the premium paid, plus commission
costs.
Although certain securities exchanges attempt to provide continuously liquid
markets in which holders and writers of options can close out their positions
at any time prior to the expiration of the option, no assurance can be given
that a market will exist at all times for all outstanding options purchased or
sold by a
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ProFund. If an options market were to become unavailable, the ProFund would be
unable to realize its profits or limit its losses until the ProFund could
exercise options it holds, and the ProFund would remain obligated until options
it wrote were exercised or expired.
Because option premiums paid or received by a ProFund are small in relation
to the market value of the investments underlying the options, buying and
selling put and call options can be more speculative than investing directly in
common stocks.
SHORT SALES
The Bear ProFund and the UltraBear ProFund may engage in short sales
transactions under which the ProFund sells a security it does not own. To
complete such a transaction, the ProFund must borrow the security to make
delivery to the buyer. The ProFund then is obligated to replace the security
borrowed by purchasing the security at the market price at the time of
replacement. The price at such time may be more or less than the price at which
the security was sold by the ProFund. Until the security is replaced, the
ProFund is required to pay to the lender amounts equal to any dividends or
interest which accrue during the period of the loan. To borrow the security, the
ProFund also may be required to pay a premium, which would increase the cost of
the security sold. The proceeds of the short sale will be retained by the
broker, to the extent necessary to meet the margin requirements, until the short
position is closed out.
Until the ProFund closes its short position or replaces the borrowed
security, the ProFund will cover its position with an offsetting position or
maintain a segregated account containing cash or liquid instruments at such a
level that the amount deposited in the account plus the amount deposited with
the broker as collateral will equal the current value of the security sold
short.
U.S. GOVERNMENT SECURITIES
The ProFunds may invest in U.S. government securities in pursuit of their
investment objectives, as "cover" for the investment techniques these ProFunds
employ, or for liquidity purposes.
Yields on U.S. government securities are dependent on a variety of factors,
including the general conditions of the money and bond markets, the size of a
particular offering, and the maturity of the obligation. Debt securities with
longer maturities tend to produce higher yields and are generally subject to
potentially greater capital appreciation and depreciation than obligations with
shorter maturities and lower yields. The market value of U.S. government
securities generally varies inversely with changes in market interest rates. An
increase in interest
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PRO FUNDS LOGO
rates, therefore, would generally reduce the market value of a ProFund's
portfolio investments in U.S. government securities, while a decline in interest
rates would generally increase the market value of a ProFund's portfolio
investments in these securities.
Some obligations issued or guaranteed by agencies or instrumentalities of
the U.S. government are backed by the full faith and credit of the U.S.
Treasury. Such agencies and instrumentalities may borrow funds from the U.S.
Treasury. However, no assurances can be given that the U.S. government will
provide such financial support to the obligations of the other U.S. government
agencies or instrumentalities in which a ProFund invests, since the U.S.
government is not obligated to do so. These other agencies and instrumentalities
are supported by either the issuer's right to borrow, under certain
circumstances, an amount limited to a specific line of credit from the U.S.
Treasury, the discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality, or the credit of the agency or
instrumentality itself.
REPURCHASE AGREEMENTS
Under a repurchase agreement, a ProFund purchases a debt security and
simultaneously agrees to sell the security back to the seller at a mutually
agreed-upon future price and date, normally one day or a few days later. The
resale price is greater than the purchase price, reflecting an agreed-upon
market interest rate during the purchaser's holding period. While the maturities
of the underlying securities in repurchase transactions may be more than one
year, the term of each repurchase agreement will always be less than one year. A
ProFund will enter into repurchase agreements only with member banks of the
Federal Reserve System or primary dealers of U.S. government securities. The
Advisor and, with respect to the Portfolio, Bankers Trust, will monitor the
creditworthiness of each of the firms which is a party to a repurchase agreement
with any of the ProFunds. In the event of a default or bankruptcy by the seller,
the ProFund will liquidate those securities (whose market value, including
accrued interest, must be at least equal to 100% of the dollar amount invested
by the ProFund in each repurchase agreement) held under the applicable
repurchase agreement, which securities constitute collateral for the seller's
obligation to pay. However, liquidation could involve costs or delays and, to
the extent proceeds from the sales of these securities were less than the
agreed-upon repurchase price, the ProFund would suffer a loss. A ProFund also
may experience difficulties and incur certain costs in exercising its rights to
the collateral and may lose the interest the ProFund expected to receive under
the repurchase agreement. Repurchase agreements usually are for short periods,
such as one week or less, but may be longer. It is the current policy of the
ProFunds to treat repurchase agreements that do not
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mature within seven days (or which may not be terminated within seven calendar
days upon notice by the ProFund) as illiquid for the purposes of their
investment policies.
CASH RESERVES
As a cash reserve, for liquidity purposes, or as "cover" for positions it
has taken, each ProFund may temporarily invest all or part of the ProFund's
assets in cash or cash equivalents, which include, but are not limited to,
short-term money market instruments, U.S. government securities, certificates of
deposit, bankers acceptances, or repurchase agreements secured by U.S.
government securities.
TRANSACTION EXPENSES
The ProFunds anticipate that their investors, as part of an asset-allocation
or market-timing investment strategy, will frequently exchange their shares of a
particular ProFund for shares in other ProFunds pursuant to the exchange policy
(see "How to Exchange Shares of the ProFunds"), which would cause the ProFunds
to experience high portfolio turnover. A higher portfolio turnover rate would
likely involve correspondingly greater brokerage commissions and transaction and
other expenses which would be borne by the ProFunds. In addition, a ProFund's
portfolio turnover level may adversely affect the ability of the ProFund to
achieve its investment objective. Pursuant to the formula prescribed by the
Commission, the portfolio turnover rate for each ProFund is calculated without
regard to instruments, including options and futures contracts, having a
maturity of less than one year. The Bull ProFund, the UltraBull ProFund, the
Bear ProFund and the UltraBear ProFund typically hold most of their investments
in short-term options and futures contracts which are excluded for purposes of
computing portfolio turnover. Therefore, based on the Commission's portfolio
turnover formula, each of these ProFunds expects a portfolio turnover rate of
approximately 0%.
OTHER INVESTMENT POLICIES
The ProFunds also may engage in certain other investment practices described
below. However, none of the ProFunds presently intends to invest more than 5% of
the ProFund's net assets in any of these practices. Each of the ProFunds may
purchase securities on a when-issued or delayed-delivery basis, and also may
lend portfolio securities to brokers, dealers, and financial institutions. Each
ProFund (other than the Money Market ProFund) may borrow money for investment
purposes or invest in illiquid securities. Each of the ProFunds also may invest
in the securities of other investment companies to the extent that such an
investment would be consistent with the requirements of the 1940 Act. A
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PRO FUNDS LOGO
more-detailed explanation of these investment practices, including the risks
associated with each practice, is included in the SAI.
CASH MANAGEMENT PORTFOLIO
Since the investment characteristics of the Money Market ProFund will
correspond directly to those of the Portfolio, set forth below is a discussion
of the various investments and investment policies of the Portfolio. Additional
information about the investment policies of the Portfolio appears in the SAI.
The Portfolio will attempt to achieve its investment objective by investing
in the following money market instruments:
Bank Obligations. The Portfolio may invest in fixed rate or variable rate
obligations of U.S. or foreign banks which have total assets at the time of
purchase in excess of $1 billion and are rated Prime-1 by Moody's Investors
Services, Inc. ("Moody's") or A-1 or higher by Standard & Poor's Ratings Group
("S&P Ratings") or, if not rated, are believed by Bankers Trust, acting under
the supervision of the Board of Trustees of the Portfolio, to be of comparable
quality. Bank obligations in which the Portfolio invests include certificates of
deposit, bankers' acceptances, time deposits and other U.S. dollar-denominated
instruments issued or supported by the credit of U.S. or foreign banks. If
Bankers Trust, acting under the supervision of the Board of Trustees of the
Portfolio, deems the instruments to present minimal credit risk, the Portfolio
may invest in obligations of foreign banks or foreign branches of U.S. banks
which may include subsidiaries of U.S. banks located in the United Kingdom,
Grand Cayman Island, Nassau, Japan and Canada. Investments in these obligations
may entail risks that are different from those of investments in obligations of
domestic banks because of differences in political, regulatory and economic
systems and conditions. These risks include future political and economic
developments, currency blockage, the possible imposition of withholding taxes,
interest payments, differing reserve requirements, reporting and recordkeeping
requirements and accounting standards, possible seizure or nationalization of
foreign deposits, difficulty or inability of pursuing legal remedies and
obtaining judgments in foreign courts, possible establishment of exchange
controls or the adoption of other foreign governmental restrictions that might
affect adversely the payment of principal and interest on bank obligations.
Under normal market conditions, the Portfolio will invest more than 25% of its
assets in the foreign and domestic bank obligations described above. The
Portfolio's concentration of its investments in bank obligations will cause the
Portfolio to be subject to the risks peculiar to the domestic and foreign
banking industries to a greater extent than if its invest-
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ments were not so concentrated. A description of the ratings set forth above is
provided in the Appendix to the SAI.
Commercial Paper. The Portfolio may invest in fixed rate or variable rate
commercial paper, including variable rate master demand notes, issued by U.S.
and foreign corporations. Commercial paper when purchased by the Portfolio must
be rated Prime-1 by Moody's or A-1 or higher by S&P Ratings or, if not rated,
must be believed by Bankers Trust, acting under the supervision of the Board of
Trustees of the Portfolio, to be of comparable quality. Any commercial paper
issued by a foreign corporation and purchased by the Portfolio must be U.S.
dollar-denominated and must not be subject to foreign withholding tax at the
time of purchase. Investing in foreign commercial paper generally involves risks
similar to those described above relating to obligations of foreign banks or
foreign branches of U.S. banks.
Variable rate master demand notes are unsecured instruments that permit the
indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate. Because variable rate master demand notes are direct lending
arrangements between the Portfolio and the issuer, they are not normally traded.
Although no active secondary market may exist for these notes, the Portfolio
will purchase only those notes under which it may demand and receive payment on
principal and accrued interest daily or may resell the note to a third party.
While the notes are not typically rated by credit rating agencies, issuers of
variable rate master demand notes must satisfy Bankers Trust, acting under the
supervision of the Board of Trustees of the Portfolio, that the same criterion
set forth above for issuers of commercial paper are met. In the event an issuer
of a variable rate master demand note defaulted on its payment obligation, the
Portfolio might be unable to dispose of the note because of the absence of a
secondary market and could, for this or other reasons, suffer a loss to the full
extent of the default.
Other Debt Obligations. The Portfolio may invest in bonds, notes and
debentures that at the time of purchase have outstanding short-term ratings
meeting the rating requirements described above, or if such commercial paper is
unrated or if no such commercial paper is outstanding, are rated at least AA by
S&P Ratings or Aa by Moody's. Such obligations, at the time of investment, must
have or be deemed to have less than 397 days to maturity.
U.S. Government Obligations. The Portfolio may invest in obligations issued
and guaranteed by the U.S. Treasury or by agencies or instrumentalities of the
U.S. government. See "Investment Policies and Techniques -- U.S. Government
Securities" herein.
Repurchase Agreements. The Portfolio may engage in repurchase agreement
transactions counterparties approved by the Board of Trustees of the Portfolio.
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PRO FUNDS LOGO
Bankers Trust, acting under the supervision of the Board of Trustees of the
Portfolio, reviews the creditworthiness of those counterparties with which the
Portfolio enters into repurchase agreements and monitors on an ongoing basis the
value of the securities subject to repurchase agreements to ensure that the
value is maintained at the required level. See "Investment Policies and
Techniques -- Repurchase Agreements".
Securities Lending. The Portfolio is permitted to lend up to 20% of the
total value of its securities to brokers, dealers and other financial
organizations. These loans must be secured continuously by cash or equivalent
collateral or a letter of credit at least equal to 100% of the current market
value of the securities loaned plus accrued income. By lending its securities,
the Portfolio can increase its income by continuing to receive income on the
loaned securities as well as by the opportunity to receive interest on the
collateral. During the term of the loan, the Portfolio continues to bear the
risk of fluctuations in the price of loaned securities. There may be risks of
delay in receiving additional collateral or risks of delay in recovery of the
securities or even loss of rights in the securities lent should the borrower of
the securities fail financially.
Reverse Repurchase Agreement. The Portfolio may enter into reverse
repurchase agreements. See "Investment Objectives and Policies" in the SAI for a
more detailed description of reverse repurchase agreements.
Credit Enhancement. Certain of the Portfolio's acceptable investments may be
credit-enhanced by a guaranty, letter of credit, or insurance. Any bankruptcy,
receivership, default, or change in the credit quality of the party providing
the credit enhancement will adversely affect the quality and marketability of
the underlying security and could cause losses to the Portfolio and affect the
Money Market ProFund's share price. The Portfolio may have more than 25% of its
total assets invested in securities credit-enhanced by banks.
Additional Investment Limitations. The Money Market ProFund has the same
investment restrictions as the Portfolio, except that the Money Market ProFund
may invest all of its assets in another open-end investment company with the
same investment objective, such as the Portfolio. The Portfolio may not invest
more than 25% of its total assets in the securities of issuers in any single
industry, except that, under normal market conditions, more than 25% of the
total assets of the Portfolio will be invested in foreign and domestic bank
obligations. As an operating policy, the Portfolio may not invest more than 5%
of its total assets in the securities of any one issuer except for U.S.
government obligations and repurchase agreements, which may be purchased without
limitation. The Portfolio is also authorized to borrow, including entering into
reverse repurchase transactions, in an amount up to 5% of its total assets for
temporary purposes,
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but not for leverage, and to pledge its assets to the same extent in connection
with these borrowings. See the SAI for additional information with respect to
reverse repurchase transactions. At the time of investment, the Portfolio's
aggregate holdings of repurchase agreements having remaining maturities of more
than seven calendar days (or which may not be terminated within seven calendar
days upon notice by the Portfolio), time deposits having remaining maturities of
more than seven calendar days, illiquid securities, restricted securities and
securities lacking readily available market quotations will not exceed 10% of
the Portfolio's net assets. If changes in the liquidity of certain securities
cause the Portfolio to exceed such 10% limit, the Portfolio will take steps to
bring the aggregate amount of its illiquid securities back below 10% of its net
assets as soon as practicable, unless such action would not be in the best
interest of the Portfolio. The SAI contains further information on the Money
Market ProFund's and the Portfolio's investment restrictions.
Portfolio Quality and Maturity. The Portfolio will maintain a
dollar-weighted average maturity of 90 days or less. All securities in which the
Portfolio invests will have or be deemed to have remaining maturities of 397
days or less on the date of their purchase, will be denominated in U.S. dollars
and will have been granted the required ratings established herein by two
nationally recognized statistical rating organizations ("NRSRO") (or one such
NRSRO if that NRSRO is the only such NR which rates the security), or if
unrated, are believed by Bankers Trust, under the supervision of the Portfolio's
Board of Trustees, to be of comparable quality. A description of such ratings is
provided in the Appendix to the SAI. Bankers Trust will cause the Portfolio to
dispose of any security as soon as practicable if the security is no longer of
the requisite quality, unless such action would not be in the best interest of
the Portfolio.
When-Issued and Delayed-Delivery Securities. To secure prices deemed
advantageous at a particular time, the Portfolio may purchase securities on a
when-issued or delayed-delivery basis, in which case delivery of the securities
occurs beyond the normal settlement period; payment for or delivery of the
securities occurs beyond the normal settlement period; and payment for or
delivery of the securities would be made at the same time as the reciprocal
delivery or payment by the other party to the transaction. The Portfolio will
enter into when-issued or delayed-delivery transactions for the purpose of
acquiring securities and not for the purpose of leverage. When issued securities
purchased by the Portfolio may include securities purchased on a "when, as and
if issued" basis under which the issuance of the securities depends on the
occurrence of a subsequent event.
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Securities purchased on a when-issued or delayed-delivery basis may expose
the Portfolio to risk because the securities may experience fluctuations in
value prior to their actual delivery. The Portfolio does not accrue income with
respect to a when-issued or delayed-delivery security prior to its stated
delivery date. Purchasing securities on a when-issued or delayed-delivery basis
can involve the additional risk that the yield available in the market when the
delivery takes place may be higher than that obtained in the transaction itself.
Upon purchasing a security on a when-issued or delayed-delivery basis, the
Portfolio will segregate with the Portfolio's custodian liquid instruments in an
amount at least equal to the when-issued or delayed-delivery commitment.
Asset-Backed Securities. The Portfolio may also invest in securities
generally referred to as asset-backed securities, which directly or indirectly
represent a participation interest in, or are secured by and payable from, a
stream of payments generated by particular assets, such as motor vehicle or
credit card receivables. Asset-backed securities may provide periodic payments
that consist of interest and/or principal payments. Consequently, the life of an
asset-backed security varies with the prepayment and loss experience of the
underlying assets.
SPECIAL INFORMATION CONCERNING MASTER-FEEDER FUND STRUCTURE
Unlike other open-end management investment companies (mutual funds) which
directly acquire and manage their own portfolio securities, the Money Market
ProFund seeks to achieve its investment objective by investing all of its assets
in the Portfolio, a separate registered investment company with the same
investment objective as the Money Market ProFund. Therefore, an investor's
interest in the Portfolio's securities is indirect. In addition to selling a
beneficial interest to the Money Market ProFund, the Portfolio may sell
beneficial interests to other mutual funds or institutional investors. Such
investors will invest in the Portfolio on the same terms and conditions and will
pay a proportionate share of the Portfolio's expenses. However, the other
investors investing in the Portfolio are not required to sell their shares at
the same public offering price as the Money Market ProFund or subject to
comparable variations in sales loads and other operating expenses. Therefore,
investors in the Money Market ProFund should be aware that these differences may
result in differences in returns experienced by investors in the different funds
that may invest in the Portfolio. Such differences in returns are also present
in other mutual fund structures. Information concerning other holders of
interests in the Portfolio is available from Bankers Trust at 1-800-368-4031.
The ProFunds' Board of Trustees believes that the Money Market ProFund will
achieve certain efficiencies and economies of scale through the master-feeder
structure, and that the aggregate expenses of the Money Market ProFund will be
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less than if the Money Market ProFund invested directly in the securities held
by the Portfolio.
Smaller funds investing in the Portfolio may be materially affected by the
actions of larger funds investing in the Portfolio. For example, if a large fund
withdraws from the Portfolio, the remaining funds may experience higher pro rata
operating expenses, thereby producing lower returns (however, this possibility
exists as well for traditionally structured funds which have large institutional
investors). Additionally, the Portfolio may become less diverse, resulting in
increased portfolio concentration and potential risk. Also, funds with a greater
pro rata ownership in the Portfolio could have effective voting control of the
operations of the Portfolio. Except as permitted by the Commission, whenever the
ProFunds are requested to vote on matters pertaining to the Portfolio, the
ProFunds will hold a meeting of shareholders of the Money Market ProFund and
will cast all of its votes in the same proportion as the votes of the Money
Market ProFund's shareholders. Money Market ProFund shareholders who do not vote
will not affect the ProFunds votes at the Portfolio meeting. The percentage of
the Trust's votes representing Money Market ProFund shareholders not voting will
be voted by the Trustees or officers of the ProFunds in the same proportion as
the Money Market ProFund shareholders who do, in fact, vote.
Certain changes in the Portfolio's investment objective, policies or
restrictions may require the Money Market ProFund to withdraw its interest in
the Portfolio. Such withdrawal could result in a distribution "in kind" of
portfolio securities (as opposed to a cash distribution from the Portfolio). If
securities are distributed, the Money Market ProFund could incur brokerage, tax
or other charges in converting the securities to cash. In addition, the
distribution in kind may result in a less diversified portfolio of investments
or adversely affect the liquidity of the Money Market ProFund. Notwithstanding
the above, there are other means for meeting redemption requests, such as
borrowing.
The Money Market ProFund may withdraw its investment from the Portfolio at
any time, if the Board of Trustees of the ProFunds determines that it is in the
best interests of the shareholders of the Money Market ProFund to do so. Upon
any such withdrawal, the Board of Trustees of the Trust would consider what
action might be taken, including the investment of all the assets of the Money
Market ProFund in another pooled investment entity having the same investment
objective as the Money Market ProFund or the retaining of an investment adviser
to manage the Money Market ProFund's assets in accordance with the investment
policies described above with respect to the Portfolio.
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PRO FUNDS LOGO
TAXES
Each of the ProFunds intends to elect to be treated to qualify each year as
a regulated investment company (a "RIC") under Subchapter M of the Internal
Revenue Code of 1986, as amended. A RIC generally is not subject to federal
income tax on income and gains distributed in a timely manner to its
shareholders, the ProFunds intend to make timely distributions in order to avoid
tax liability.
Dividends out of net ordinary income and distribution of net short-term
capital gains are taxable to the recipient U.S. shareholders as ordinary income,
whether received in cash or reinvested in ProFund shares. Dividends from net
ordinary income may be eligible for the corporate dividends-received deduction.
The excess of net long-term capital gains over the net short-term capital
losses realized and distributed by a ProFund to its U.S. shareholders as capital
gains distributions is taxable to the shareholders as gain from the sale of a
capital asset held for more than one year, regardless of the length of time a
shareholder has held the ProFund shares. The ProFunds expect that such dividends
will be taxable to shareholders as long-term gain, although the matter is not
free from doubt. If a shareholder holds ProFund shares for six months or less
and during that period receives a distribution taxable to the shareholder as
long-term capital gain, any loss realized on the sale of the ProFund shares will
be long-term loss to the extent of such distribution.
The amount of an income dividend or capital gains distribution declared by a
ProFund during October, November or December of a year to shareholder of record
as of a specified date in such a month that is paid during January of the
following year will be deemed to be received by shareholders on December 31 of
the prior year.
Any dividend or distribution paid by a ProFund has the effect of reducing
the ProFund's net asset value per share. Investors should be careful to consider
the tax effect of buying shares shortly before a distribution by a ProFund. The
price of shares purchased at that time will include the amount of the
forthcoming distribution, but the distribution will be taxable to the
shareholder.
A dividend or capital gains distribution with respect to shares of a ProFund
held by a tax-deferred or qualified plan, such as an IRA, retirement plan or
corporate pension or profit sharing plan, will not be taxable to the plan.
Distribution from such plans will be taxable to individual participants under
applicable tax rules without regard to the character of the income earned by the
qualified plan.
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Shareholders will be advised annually as to the federal tax status of
dividends and capital gains distribution made by the ProFunds for the preceding
year. Distributions by ProFunds generally will be subject to state and local
taxes.
Certain shareholders are required by law to certify that their tax
identification number is correct and that they are not subject to back-up
withholding. In the absence of this certification, the ProFunds are required to
withhold taxes at the rate of 31% on dividends, capital gains distributions, and
redemption. Amounts withheld may be credited against a shareholder's federal
income tax.
The foregoing is a brief summary of federal income tax consequences of
owning ProFund shares. For more information about federal, state and local
taxes, please see your tax adviser and the SAI.
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PRO FUNDS LOGO
MANAGEMENT
OF THE PROFUNDS
INVESTMENT ADVISORS
ProFund Advisors LLC
The ProFunds are provided investment advice and management services by
ProFund Advisors LLC, a Maryland limited liability company formed on May 8,
1997, with offices at 7900 Wisconsin Avenue, Suite 300, Bethesda, Maryland
20814. Louis M. Mayberg and Michael L. Sapir own a controlling interest in the
Advisor.
Under an investment advisory agreement between the non-money market ProFunds
and the Advisor, dated October 28, 1997, the non-money market ProFunds each pay
the Advisor a fee at an annualized rate, based on the average daily net assets
for each respective ProFund, of 0.75%. The Advisor manages the investment and
the reinvestment of the assets of each of the ProFunds, in accordance with the
investment objectives, policies, and limitations of the ProFunds, subject to the
general supervision and control of the ProFunds' Board of Trustees and officers.
The Advisor bears all costs associated with providing these advisory services
and the expenses of the ProFunds who are affiliated persons of the Advisor. The
Advisor, from its own resources, including profits from advisory fees received
from the ProFunds, also may make payments to broker-dealers and other financial
institutions for their expenses in connection with the distribution of ProFund
shares, and otherwise currently pays all distribution costs for ProFund shares.
As recently created entities, the ProFunds will be subject to all the risks
incident to the creation of a new business, including the absence of a history
of operations. The Advisor is a newly created entity and, as such, prior to the
commencement of operations of the ProFunds, had no previous experience in
providing investment management services to an investment company. Michael L.
Sapir, the Advisor's chairman and chief executive officer, is the former senior
vice president of Padco Advisors, Inc., the investment adviser to the Rydex(R)
Funds and was an attorney in private practice for over thirteen years
specializing in advising issuers of investment products, including mutual funds.
Louis M. Mayberg, the Advisor's president, co-founded an investment banking firm
in 1986 and has been responsible for, among other things, managing the
investment "hedge" fund sponsored by that firm. William E. Seale, Ph.D., the
Advisor's and the ProFunds' portfolio director, has over twenty-five years of
experience with respect to the commodity futures markets, including serving for
five years pursuant to a presidential appointment as commissioner to the United
States Com-
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modities Futures Trading Commission. The ProFunds' Administrator, BISYS,
provides operations, compliance and administrative services for investment
companies.
Bankers Trust
The Money Market ProFund seeks to achieve its investment objective by
investing all of its investable assets in the Portfolio, which has as its
investment adviser, Bankers Trust, a New York banking corporation with principal
offices at 130 Liberty Street, New York, New York 10006, and a wholly-owned
subsidiary of Bankers Trust New York Corporation. Bankers Trust currently
receives an investment management fee for its services to the Portfolio in the
amount of 0.15% of the average daily net assets of the Portfolio.
Bankers Trust conducts a variety of general banking and trust activities and
is a major wholesale supplier of financial services to international and
domestic institutional markets. As of June 30, 1997, Bankers Trust New York
Corporation was the seventh largest bank holding company in the United States
with total assets of approximately $129 billion. Bankers Trust is a worldwide
merchant bank dedicated to servicing the needs of corporations, governments,
financial institutions and private clients through a global network of over 120
offices in more than 50 countries. Investment management is a core business of
Bankers Trust, built on a tradition of excellence from its roots as a trust bank
founded in 1903. The scope of Bankers Trust's investment management capability
is unique due to its leadership positions in both active and passive
quantitative management and its presence in major equity and fixed income
markets around the world. Bankers Trust is one of the nation's largest and most
experienced investment managers, with approximately $240 billion in assets under
management globally.
Bankers Trust has more than 50 years of experience managing retirement
assets for the nation's largest corporations and institutions. In the past,
these clients have been serviced through separate account and commingled fund
structures. Bankers Trust's officers have had extensive experience in managing
investment portfolios having objectives similar to those of the Portfolio.
Bankers Trust, subject to the supervision and direction of the Board of
Trustees of the Portfolio, manages the Portfolio in accordance with the
Portfolio's investment objective and stated investment policies, makes
investment decisions for the Portfolio, places orders to purchase and sell
securities and other financial instruments on behalf of the Portfolio and
employs professional investment managers and securities analysts who provide
research services to the Portfolio. All orders for investment transactions on
behalf of the Portfolio are placed by Bankers Trust with broker-dealers and
other financial intermediaries that it
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PRO FUNDS LOGO
selects, including those affiliated with Bankers Trust. A Bankers Trust
affiliate will be used in connection with a purchase or sale of an investment
for the Portfolio only if Bankers Trust believes that the affiliate's charge for
the transaction does not exceed usual and customary levels. The Portfolio will
not invest in obligations for which Bankers Trust or any of its affiliates is
the ultimate obligor or accepting bank. The Portfolio may, however, invest in
the obligations of correspondents and customers of Bankers Trust.
SERVICE PROVIDERS
Administrator, Transfer Agent, Fund Accounting Agent and Custodian
BISYS acts as Administrator to the ProFunds. BISYS provides administrative
services necessary for the operation of the ProFunds, including, among other
things, (i) preparation of shareholder reports and communications, (ii)
regulatory compliance, such as reports to and filings with the Commission and
state securities commissions, and (iii) general supervision of the operation of
the ProFunds, including coordination of the services performed by the ProFunds'
Advisor, custodians, independent accountants, legal counsel and others. In
addition, BISYS furnishes office space and facilities required for conducting
the business of the ProFunds and pays the compensation of the ProFunds' officers
and employees affiliated with BISYS.
For its services as Administrator, each ProFund pays BISYS an annual fee
ranging from 0.15% of average daily net assets of $0 to $300 million to 0.05% of
average daily net assets of $1 billion and over. BFSI, an affiliate of BISYS,
acts as transfer agent and fund accounting agent for the ProFunds, for which it
receives additional fees. Additionally, ProFunds, BISYS and BFSI have entered
into an Omnibus Fee Agreement in which the amount of compensation due and
payable to BISYS shall be the greater of (i) the aggregate fee amount due and
payable for services pursuant to the Administration, Fund Accounting and
Transfer Agency Agreements and (ii) the minimum relationship fee described as
specific dollar amounts payable over a period of ten calendar quarters. The
address of BISYS and BFSI is 3435 Stelzer Road, Suite 1000, Columbus, Ohio
43219.
ProFunds Advisors LLC, pursuant to a separate Management Services Agreement,
performs certain client support services and other administrative services on
behalf of the ProFunds. For these services, each non-money market ProFund will
pay to ProFunds Advisors LLC a fee at the annual rate of 0.15% of its average
daily net assets. Under this agreement, ProFund Advisors LLC may receive up to
0.35% of the Money Market ProFund's average daily net assets for providing
feeder fund management and administrative services to the Money Market ProFund,
which services include monitoring the performance of the
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underlying investment company in which the Money Market ProFund invests,
coordinating the Money Market ProFund's relationship with such entity,
communicating with the Trust's Board of Trustees and shareholders regarding such
entity's performance and the Money Market ProFund's two-tier structure and, in
general, assisting the Board of Trustees of the Trust in all aspects of the
administration and operation of the Money Market ProFund.
Under an Administration and Services Agreement with the Portfolio, Bankers
Trust calculates the value of the assets of the Portfolio and generally assists
the Board of Trustees of the Portfolio in all aspects of the administration and
operation of the Portfolio. The Administration and Services Agreement provides
for the Portfolio to pay Bankers Trust a fee, computed daily and paid monthly,
at the annual rate of 0.05% of the average daily net assets of the Portfolio.
Under the Administration and Services Agreement, Bankers Trust may delegate one
or more of its responsibilities to others at Bankers Trust's expense.
UMB Bank, N.A. acts as custodian to the ProFunds; its address is 928 Grand
Avenue, Kansas City, Missouri.
Distributor
Concord Financial Group, Inc. will serve as the distributor and principal
underwriter in all fifty states and the District of Columbia. Concord Financial
Group, Inc., an affiliate of BISYS, receives no compensation from the ProFunds
for serving as distributor. Concord Financial Group, Inc.'s address is 3435
Stelzer Road, Columbus, Ohio 43215.
Shareholder Services Plan -- Service Shares
Each ProFund has adopted a Shareholder Services Plan (the "Plan") and
related agreement ("Shareholder Services Agreement"). The Plan provides that
each ProFund will make payments to Authorized Firms (defined below) in an amount
up to 1.00% (on an annual basis) of the average daily value of the net assets of
such ProFund's Service class of shares attributable to or held in the name of an
Authorized Firm for its clients. The Plan provides that the fee will be paid to
registered investment advisers, banks, trust companies and other financial
organizations ("Authorized Firms"), for providing account administration and
other services to their clients who are beneficial owners of such shares.
The services provided by the Authorized Firms may include, among other
things, receiving, aggregating and processing shareholder or beneficial owner
(collectively "shareholder") orders; furnishing shareholder subaccounting;
providing and maintaining retirement plan records; communicating periodically
with shareholders; acting as the sole shareholder of record and nominee for
shareholders; maintaining account records for shareholders; answering questions
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PRO FUNDS LOGO
and handling correspondence from shareholders about their accounts; issuing
various shareholder reports and confirmations for transactions by shareholders;
performing daily investment ("sweep") functions for shareholders; and account
administration services. ProFunds expects that the level of services provided
with respect to these accounts will be more extensive than typically occurs
under shareholder servicing plans.
Holders of Service Shares of a ProFund will bear all fees paid under the
Plan with respect to such shares as well as any other expenses which are
directly attributable to such shares.
Authorized Firms may charge other fees to their clients who are the
beneficial owners of Service Shares in connection with their client accounts.
These fees would be in addition to any amounts received by the Authorized Firms
and would be for services other than those provided under the Shareholder
Service Agreement. Under the terms of the Shareholder Service Agreement,
Authorized Firms are required to provide their clients with a schedule of fees
charged to such clients which relate to the investment of customers' assets in
Service Shares.
Each ProFund will accrue payments made pursuant to the Plan daily. The
payments under the Plan which are required to be accrued to the ProFunds'
Service Shares on any day will not exceed the distributable income to be accrued
to such shares on that day. All inquiries by a beneficial owner of Service
Shares must be directed to such owner's Authorized Firm.
COSTS AND EXPENSES
The ProFunds bear all expenses of their operations other than those assumed
by the Advisor or BISYS. Expenses of the ProFunds include, but are not limited
to: the advisory fee; administrative, transfer agent, and shareholder servicing
fees; custodian and accounting fees and expenses; legal and auditing fees;
securities valuation expenses; fidelity bonds and other insurance premiums;
expenses of preparing and printing prospectuses, confirmations, proxy
statements, and shareholder reports and notices; registration fees and expenses;
proxy and annual meeting expenses, if any; all Federal, state, and local taxes
(including, without limitation, stamp, excise, income, and franchise taxes);
organizational costs; and independent Trustee's fees and expenses. In order to
increase the return to investors, both the Advisor and Bankers Trust may from
time to time agree to voluntarily waive or reduce their respective fees, while
retaining their ability to be reimbursed for such fees prior to the end of each
fiscal year.
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PORTFOLIO TRADING PRACTICES
The Advisor determines which securities to purchase and sell for each non-
money market ProFund, selects brokers and dealers to effect the transactions,
and negotiates commissions. The Advisor expects that the non-money market
ProFunds may execute brokerage or other agency transactions through registered
broker-dealers, for a commission, in conformity with the 1940 Act, the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder. In placing orders for portfolio transactions, the Advisor's policy
is to obtain the most favorable combination of price and efficient execution
available. Brokerage commissions are normally paid on exchange-traded securities
transactions and on options and futures transactions, as well as on common stock
transactions. In order to obtain the brokerage and research services described
below, a commission may sometimes be paid that is higher than the lowest
commission available. The ability to receive research services may be a factor
in the selection of one dealer acting as a principal over another.
When selecting broker-dealers to execute portfolio transactions, the Advisor
considers many factors, including the rate of commission or size of the broker-
dealer's "spread," the size and difficulty of the order, the nature of the
market for the security, the willingness of the broker-dealer to position, the
reliability, financial condition, general execution and operational capabilities
of the broker-dealer, and the research, statistical and economic data furnished
by the broker-dealer to the Advisor. The Advisor may use these services in
connection with all of the Advisor's investment activities, including other
investment accounts the Advisor advises. Conversely, brokers or dealers which
supply research may be selected for execution of transactions for such other
accounts, while the data may be used by the Advisor in providing investment
advisory services to the non-money market ProFunds.
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PRO FUNDS LOGO
GENERAL INFORMATION
ABOUT THE TRUST
ORGANIZATION AND DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
ProFunds (the "Trust") is a registered open-end investment company under the
1940 Act. The Trust was organized as a Delaware business trust on April 17,
1997, and has authorized capital of unlimited shares of beneficial interest of
no par value which may be issued in more than one class or series. Currently,
the Trust consists of six separately managed series. Other separate series may
be added in the future. Each ProFund offers two classes of shares: the Service
Shares and the Investor Shares.
All shares of the ProFund are freely transferable. The Trust shares do not
have preemptive rights or cumulative voting rights, and none of the shares have
any preference to conversion, exchange, dividends, retirements, liquidation,
redemption, or any other feature. Trust shares have equal voting rights, except
that, in a matter affecting a particular series or class of shares, only shares
of that series or class may be entitled to vote on the matter.
Under Delaware law, the Trust is not required to hold an annual shareholders
meeting if the 1940 Act does not require such a meeting. Generally, there will
not be annual meetings of Trust shareholders. Trust shareholders may remove
Trustees from office by votes cast at a meeting of Trust shareholders or by
written consent. If requested by shareholders of at least 10% of the outstanding
shares of the Trust, the Trust will call a meeting of ProFunds' shareholders for
the purpose of voting upon the question of removal of a Trustee of the Trust and
will assist in communications with other Trust shareholders.
The Declaration of Trust of the ProFunds disclaims liability of the
shareholders or the officers of the Trust for acts or obligations of the Trust
which are binding only on the assets and property of the Trust. The Declaration
of Trust provides for indemnification out of the Trust's property for all loss
and expense of any ProFunds shareholder held personally liable for the
obligations of the Trust. The risk of a Trust shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
the ProFunds itself would not be able to meet the Trust's obligations and this
risk, thus, should be considered remote.
DETERMINATION OF NET ASSET VALUE
The net asset values of the shares of the ProFunds are determined as of the
close of business on each day the Chicago Mercantile Exchange ("CME") is open
for business, normally 4:15 PM (in the case of the Money Market ProFund, net
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asset value is determined as of the close of business of each day the NYSE is
open for business). Currently, the CME and the NYSE are closed on weekends, and
the following holiday closings have been scheduled for 1997: (i) New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day, and (ii) the
preceding Friday when any of those holidays falls on a Saturday or the
subsequent Monday when any of these holidays falls on a Sunday. To the extent
that portfolio securities of a ProFund are traded in other markets on days when
the ProFund's principal trading market(s) is closed, the ProFund's net asset
value may be affected on days when investors do not have access to the ProFund
to purchase or redeem shares. Although the ProFunds expect the same holiday
schedules to be observed in the future, the CME and the NYSE may modify its
holiday schedule at any time.
The net asset value of each class of shares of a ProFund serves as the basis
for the purchase and redemption price of that class of shares. The net asset
value per share of each class of a ProFund is calculated by dividing the market
value of the ProFund's assets attributed to a specific class (in the case of the
Money Market ProFund, the value of its investment in the Portfolio), less all
liabilities attributed to the specific class, by the number of outstanding
shares of the class. If market quotations are not readily available, a security
will be valued at fair value by the Trustees of ProFunds or by the Advisor using
methods established or ratified by the Trustees of ProFunds. The Money Market
ProFund's net asset value per share will normally be $1.00. There is no
assurance that the $1.00 net asset value will be maintained.
The Portfolio will utilize the amortized cost method in valuing its
portfolio securities. This method involves valuing each security held by the
Portfolio at its cost at the time of its purchase and thereafter assuming a
constant amortization to maturity of any discount or premium. Accordingly,
immaterial fluctuations in the market value of the securities held by the
Portfolio will not be reflected in the Money Market ProFund's net asset value.
The Board of Trustees of the Portfolio will monitor the valuation of assets of
this method and will make such changes as it deems necessary to assure that the
assets of the Portfolio are valued fairly in good faith.
The securities in the portfolio of a non-money market ProFund, except as
otherwise noted, that are listed or traded on a stock exchange, are valued on
the basis of the last sale on that day or, lacking any sales, at a price that is
the mean between the closing bid and asked prices. Other securities that are
traded on the OTC markets are priced using NASDAQ, which provides information on
bid and asked prices quoted by major dealers in such stocks. Bonds, other than
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Prospectus 47
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PRO FUNDS LOGO
convertible bonds, are valued using a third-party pricing system. Convertible
bonds are valued using this pricing system only on days when there is no sale
reported. Short-term debt securities are valued at amortized cost, which
approximates market value. When market quotations are not readily available,
securities and other assets are valued at fair value as determined in good faith
under procedures established by and under the general supervision and
responsibility of the ProFunds' Board of Trustees.
Puts, calls and futures contracts purchased and held by the ProFunds are
valued at the close of the securities or commodities exchanges on which they are
traded. (Ordinarily, the close of the regular session for options trading on
national securities exchanges is 4:15 p.m. Eastern Time and the close of the
regular session of commodities exchanges is 4:15 p.m. Eastern Time.) Options on
securities and indices purchased by a ProFund generally are valued at their last
bid price in the case of exchange-traded options or, in the case of options
traded in the OTC market, the average of the last bid price as obtained from two
or more dealers unless there is only one dealer, in which case that dealer's
price is used. Futures contracts will be valued with reference to established
futures exchanges. The value of a futures contract purchased by the ProFunds
will be either the closing price of that contract or the bid price. Conversely,
the value of a futures contract sold by the ProFunds will be either the closing
price or the asked price. The value of options on futures contracts is
determined based upon the current settlement price for a like option acquired on
the day on which the option is being valued. A settlement price may not be used
for the foregoing purposes if the market makes a limit move with respect to a
particular commodity.
FUNDAMENTAL POLICIES
The investment objectives (except the specific benchmarks which are tracked
by the ProFunds) and certain investment restrictions of the ProFunds
specifically identified as fundamental policies may not be changed without the
affirmative vote of at least the majority of the outstanding shares of that
ProFund, as defined in the 1940 Act. All other investment policies of the
ProFunds not specified as fundamental (including the benchmarks of the ProFunds)
may be changed by the trustees of the ProFunds without the approval of
shareholders.
The ProFunds may consider changing a ProFund's benchmark if, for example,
the current benchmark becomes unavailable; the ProFunds believe the current
benchmark no longer serves the investment needs of a majority of shareholders or
another benchmark better serves their needs; or the financial or economic
environment makes it difficult for the ProFund's investment results to
correspond sufficiently to its current benchmark. If believed appropriate, the
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ProFunds may specify a benchmark for a ProFund that is "leveraged" or
proprietary. Of course, there can be no assurance that a ProFund will achieve
its objective.
TRUSTEES AND OFFICERS
The ProFunds has a Board of Trustees which is responsible for the general
supervision of ProFunds' business. The day-to-day operations of the ProFunds are
the responsibility of the ProFunds' officers.
AUDITORS
Coopers & Lybrand LLP are the auditors of and the independent public
accountants for ProFunds.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
PRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE PROFUNDS IN ANY
JURISDICTION IN WHICH SUCH AN OFFERING MAY NOT LAWFULLY BE MADE.
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Prospectus 49
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INVESTMENT ADVISOR
- ------------------
ALL NON-MONEY MARKET PROFUNDS
ProFunds Advisors LLC
7900 Wisconsin Avenue, Suite 300
Bethesda, Maryland 20814
MONEY MARKET PROFUND
Bankers Trust Company
130 Liberty Street
New York, NY 10006
ADMINISTRATOR, TRANSFER AGENT, FUND ACCOUNTING AGENT
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BISYS Fund Services
3435 Stelzer Road
Columbus, Ohio 43219-3035
PROFUNDS COUNSEL
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Dechert Price & Rhoads
1500 K Street, N.W.
Washington, D.C. 20005-1208
INDEPENDENT AUDITORS
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Coopers & Lybrand LLP
100 East Broad Street,
Suite 2100
Columbus, Ohio 43215-3671
CUSTODIAN
- ---------
UMB Bank, N.A.
928 Grand Avenue
Kansas City, Missouri 64141
PROFUNDS
<PAGE> 54
PART B
1
<PAGE> 55
PROFUNDS
STATEMENT OF ADDITIONAL INFORMATION
7900 Wisconsin Avenue, Suite 300
Bethesda, Maryland 20814
(888) 776-5717 (Registered Investment Advisers Only)
(888) PRO-FNDS (For All Others)
This prospectus describes six ProFunds. Each ProFund offers two classes of
shares: Service Shares and Investor Shares. The ProFunds may be used by
professional money managers and investors as part of an asset-allocation or
market-timing investment strategy or to create specified investment exposure to
a particular segment of the securities market or to hedge an existing investment
portfolio. Sales are made without any sales charge at net asset value. Each
non-money-market ProFund seeks investment results that correspond each day to a
specified benchmark. The ProFunds may be used independently or in combination
with each other as part of an overall investment strategy. Additional ProFunds
may be created from time to time.
The ProFunds include the Money Market ProFund. The Money Market ProFund
seeks a high level of current income consistent with liquidity and preservation
of capital through investment in high quality money market instruments. Unlike
other mutual funds, the Money Market ProFund seeks to achieve its investment
objective by investing all of its investable assets in the Cash Management
Portfolio (the "Portfolio"), a separate investment company with an identical
investment objective. The performance of the Money Market ProFund will
correspond directly to the investment performance of the Portfolio.
The ProFunds involve special risks, some not traditionally associated with
mutual funds. Investors should carefully review and evaluate these risks in
considering an investment in the ProFunds to determine whether an investment in
a particular ProFund is appropriate. None of the ProFunds alone constitutes a
balanced investment plan and are not intended for investors whose principal
objective is current income or preservation of capital. Because of the inherent
risks in any investment, there can be no assurance that the ProFunds' investment
objectives will be achieved.
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with ProFunds' Prospectus, dated November 10, 1997, which
incorporates this Statement of Additional Information by reference. A copy of
the Prospectus is available, without charge, upon request to at the address
above or by telephoning at the telephone numbers above.
The date of this Statement of Additional Information is November 10, 1997.
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STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
Page
----
THE PROFUNDS....................................................... 4
INVESTMENT POLICIES AND TECHNIQUES................................. 4
INVESTMENT RESTRICTIONS............................................ 10
PORTFOLIO TRANSACTIONS AND BROKERAGE............................... 15
MANAGEMENT OF PROFUNDS............................................. 19
TAXATION........................................................... 23
PERFORMANCE INFORMATION............................................ 23
FINANCIAL STATEMENTS............................................... 26
APPENDIX -- DESCRIPTION OF SECURITIES RATINGS...................... A-1
3
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PROFUNDS
ProFunds (the "Trust") is an open-end management investment company, and
currently comprises six separate series. Other series may be added in the
future. The ProFunds may be used independently or in combination with each other
as part of an overall investment strategy. Shares of any ProFund may be
exchanged, without any charge, for shares of the same class of any other ProFund
on the basis of the respective net asset values of the shares involved;
provided, that, in connection with exchanges for shares of the ProFund, certain
minimum investment levels are maintained (see "Shareholders' Guide -- how to
Exchange Shares of the ProFunds" in the Prospectus).
INVESTMENT POLICIES AND TECHNIQUES
GENERAL
Reference is made to the sections entitled "Investment Objectives" and
"Investment Policies and Techniques" in the ProFund's Prospectus for a
discussion of the investment objectives and policies of the ProFunds. In
addition, set forth below is further information relating to the ProFunds. The
discussion below supplements and should be read in conjunction with the
Prospectus. Portfolio management is provided to the non-money market ProFunds by
its investment adviser, ProFund Advisors LLC, a Maryland limited liability
company with offices at 7900 Wisconsin Avenue, NW, Bethesda, Maryland (the
"Advisor"). The Money Market ProFund seeks to achieve its investment objective
by investing all of its assets in the Portfolio which has as its investment
adviser, Bankers Trust Company ("Bankers Trust").
The investment strategies of the ProFunds discussed below, and as discussed
in the Prospectus, may be used by a ProFund if, in the opinion of the Advisor,
these strategies will be advantageous to the ProFund. The ProFund is free to
reduce or eliminate the ProFund's activity in any of those areas without
changing the ProFund's fundamental investment policies. There is no assurance
that any of these strategies or any other strategies and methods of investment
available to a ProFund will result in the achievement of the ProFund's
objectives.
FUTURES CONTRACTS
The non-money market ProFunds may purchase and sell futures contracts and
options thereon only to the extent that such activities would be consistent with
the requirements of Section 4.5 of the regulations under the Commodity Exchange
Act promulgated by the Commodity Futures Trading Commission (the "CFTC
Regulations"), under which each of these ProFunds would be excluded from the
definition of a "commodity pool operator." Under Section 4.5 of the CFTC
Regulations, a ProFund may engage in futures transactions, either for "bona fide
hedging" purposes, as this term is defined in the CFTC Regulations, or for
non-hedging purposes to the extent that the aggregate initial margins and option
premiums required to establish such non-hedging positions do not exceed 5% of
the liquidation value of the ProFund's portfolio. In the case of an option on
futures contracts that is "in-the-money" at the time of purchase (i.e., the
amount by which the exercise price of the put option exceeds the current market
value of the underlying security or the amount by which the current market value
of the underlying security exceeds the exercise price of the call option), the
in-the-money amount may be excluded in calculating this 5% limitation.
The ProFunds will cover their positions when they write a futures contract
or option on a futures contract. A ProFund may "cover" its long position in a
futures contract by purchasing a put option on the same futures contract with a
strike price (i.e., an exercise price) as high or higher than the price of the
futures contract, or, if the strike price of the put is less than the price of
the futures contract, the ProFund will maintain in a segregated account cash or
liquid instruments equal in value to the difference between the strike price of
the put and the price of the future. A ProFund may also cover its long position
in a futures contract by taking a short position in the instruments underlying
the futures contract, or by taking positions in instruments the prices of which
are expected to move relatively consistently with the futures contract. A
ProFund may cover its short position in a futures contract by taking a long
position in the instruments underlying the futures contract, or by
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taking positions in instruments the prices of which are expected to move
relatively consistently with the futures contract.
A ProFund may cover its sale of a call option on a futures contract by
taking a long position in the underlying futures contract at a price less than
or equal to the strike price of the call option, or, if the long position in the
underlying futures contract is established at a price greater than the strike
price of the written (sold) call, the ProFund will maintain in a segregated
account liquid instruments equal in value to the difference between the strike
price of the call and the price of the future. A ProFund may also cover its sale
of a call option by taking positions in instruments the prices of which are
expected to move relatively consistently with the call option. A ProFund may
cover its sale of a put option on a futures contract by taking a short position
in the underlying futures contract at a price greater than or equal to the
strike price of the put option, or, if the short position in the underlying
futures contract is established at a price less than the strike price of the
written put, the ProFund will maintain in a segregated account cash or
high-grade liquid debt securities equal in value to the difference between the
strike price of the put and the price of the future. A ProFund may also cover
its sale of a put option by taking positions in instruments the prices of which
are expected to move relatively consistently with the put option.
INDEX OPTIONS
The non-money market ProFunds may engage in transactions in stock index
options listed on national securities exchanges or traded in the
over-the-counter market as an investment vehicle for the purpose of realizing
the ProFund's investment objective. Options on indexes are settled in cash, not
by delivery of securities. The exercising holder of an index option receives,
instead of a security, cash equal to the difference between the closing price of
the securities index and the exercise price of the option.
Some stock index options are based on a broad market index such as the S&P
500 Index, the NYSE Composite Index, or the AMEX Major Market Index, or on a
narrower index such as the Philadelphia Stock Exchange Over-the-Counter Index.
Options currently are traded on the Chicago Board Options Exchange (the "CBOE"),
the AMEX, and other exchanges ("Exchanges"). Purchased over-the-counter options
and the cover for written over-the-counter options will be subject to the
respective ProFund's 15% limitation on investment in illiquid securities. See
"Illiquid Securities."
Each of the Exchanges has established limitations governing the maximum
number of call or put options on the same index which may be bought or written
(sold) by a single investor, whether acting alone or in concert with others
(regardless of whether such options are written on the same or different
Exchanges or are held or written on one or more accounts or through one or more
brokers). Under these limitations, option positions of all investment companies
advised by the same investment adviser are combined for purposes of these
limits. Pursuant to these limitations, an Exchange may order the liquidation of
positions and may impose other sanctions or restrictions. These position limits
may restrict the number of listed options which a ProFund may buy or sell;
however, the Advisor intends to comply with all limitations.
OPTIONS ON SECURITIES
The non-money market ProFunds may buy and write (sell) options on
securities for the purpose of realizing their respective ProFund's investment
objective. By writing a call option on securities, a ProFund becomes obligated
during the term of the option to sell the securities underlying the option at
the exercise price if the option is exercised. By writing a put option, a
ProFund becomes obligated during the term of the option to purchase the
securities underlying the option at the exercise price if the option is
exercised. During the term of the option, the writer may be assigned an exercise
notice by the broker-dealer through whom the option was sold. The exercise
notice would require the writer to deliver, in the case of a call, or take
delivery of, in the case of a put, the underlying security against payment of
the exercise price. This obligation terminates upon expiration of the option, or
at such earlier time that the writer effects a closing purchase transaction by
purchasing an option covering the same underlying security and having the same
exercise price and expiration date as the one previously sold. Once an option
has been exercised, the writer may not execute a closing purchase transaction.
To secure the obligation to deliver the underlying security in the case of a
call option, the writer of a call option is required to deposit in escrow the
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underlying security or other assets in accordance with the rules of the Options
Clearing Corporation (the "OCC"), an institution created to interpose itself
between buyers and sellers of options. The OCC assumes the other side of every
purchase and sale transaction on an exchange and, by doing so, gives its
guarantee to the transaction. When writing call options on securities, a ProFund
may cover its position by owning the underlying security on which the option is
written. Alternatively, the ProFund may cover its position by owning a call
option on the underlying security, on a share for share basis, which is
deliverable under the option contract at a price no higher than the exercise
price of the call option written by the ProFund or, if higher, by owning such
call option and depositing and maintaining in a segregated account cash or
liquid instruments equal in value to the difference between the two exercise
prices. In addition, a ProFund may cover its position by depositing and
maintaining in a segregated account cash or liquid instruments equal in value to
the exercise price of the call option written by the ProFund. When a ProFund
writes a put option, the ProFund will have and maintain on deposit with its
custodian bank cash or liquid instruments having a value equal to the exercise
value of the option. The principal reason for a ProFund to write call options on
stocks held by the ProFund is to attempt to realize, through the receipt of
premiums, a greater return than would be realized on the underlying securities
alone.
If a ProFund that writes an option wishes to terminate the ProFund's
obligation, the ProFund may effect a "closing purchase transaction." The ProFund
accomplishes this by buying an option of the same series as the option
previously written by the ProFund. The effect of the purchase is that the
writer's position will be canceled by the OCC. However, a writer may not effect
a closing purchase transaction after the writer has been notified of the
exercise of an option. Likewise, a ProFund which is the holder of an option may
liquidate its position by effecting a "closing sale transaction." The ProFund
accomplishes this by selling an option of the same series as the option
previously purchased by the ProFund. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected. If any call or put
option is not exercised or sold, the option will become worthless on its
expiration date. A ProFund will realize a gain (or a loss) on a closing purchase
transaction with respect to a call or a put option previously written by the
ProFund if the premium, plus commission costs, paid by the ProFund to purchase
the call or put option to close the transaction is less (or greater) than the
premium, less commission costs, received by the ProFund on the sale of the call
or the put option. The ProFund also will realize a gain if a call or put option
which the ProFund has written lapses unexercised, because the ProFund would
retain the premium.
U.S. GOVERNMENT SECURITIES
Each non-money market ProFund and the Portfolio also may invest in U.S.
government securities. U.S. government securities include U.S. Treasury
securities, which are backed by the full faith and credit of the U.S. Treasury
and which differ only in their interest rates, maturities, and times of
issuance. U.S. Treasury bills have initial maturities of one year or less; U.S.
Treasury notes have initial maturities of one to ten years; and U.S. Treasury
bonds generally have initial maturities of greater than ten years. Certain U.S.
government securities are issued or guaranteed by agencies or instrumentalities
of the U.S. government including, but not limited to, obligations of U.S.
government agencies or instrumentalities, such as the Federal National Mortgage
Association, the Government National Mortgage Association, the Small Business
Administration, the Federal Farm Credit Administration, the Federal Home Loan
Banks, Banks for Cooperatives (including the Central Bank for Cooperatives),the
Federal Land Banks, the Federal Intermediate Credit Banks, the Tennessee Valley
Authority, the Export-Import Bank of the United States, the Commodity Credit
Corporation, the Federal Financing Bank, the Student Loan Marketing Association,
and the National Credit Union Administration. Some obligations issued or
guaranteed by U.S. government agencies and instrumentalities, including, for
example, Government National Mortgage Association pass-through certificates, are
supported by the full faith and credit of the U.S. Treasury. Other obligations
issued by or guaranteed by Federal agencies, such as those securities issued by
the Federal National Mortgage Association, are supported by the discretionary
authority of the U.S. government to purchase certain obligations of the federal
agency, while other obligations issued by or guaranteed by federal agencies,
such as those of the Federal Home Loan Banks, are supported by the right of the
issuer to borrow from the U.S. Treasury. While the U.S. government provides
financial support to such U.S. government-sponsored Federal agencies, no
assurance can be given that the U.S. government will always do so, since the
U.S. Government is not so obligated by law. U.S. Treasury notes and bonds
typically pay coupon interest semi-annually and repay the principal at maturity.
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REPURCHASE AGREEMENTS
Each of the ProFunds may enter into repurchase agreements with financial
institutions. The ProFunds follow certain procedures designed to minimize the
risks inherent in such agreements. These procedures include effecting repurchase
transactions only with large, well-capitalized and well-established financial
institutions whose condition will be continually monitored by the Advisor and,
in the case of the Money Market ProFund, Bankers Trust. In addition, the value
of the collateral underlying the repurchase agreement will always be at least
equal to the repurchase price, including any accrued interest earned on the
repurchase agreement. In the event of a default or bankruptcy by a selling
financial institution, a ProFund will seek to liquidate such collateral which
could involve certain costs or delays and, to the extent that proceeds from any
sale upon a default of the obligation to repurchase were less than the
repurchase price, the ProFund could suffer a loss. It is the current policy of
the ProFunds not to invest in repurchase agreements that do not mature within
seven days if any such investment, together with any other liquid assets held by
the ProFund, amounts to more than 15% (10% with respect to the Money Market
ProFund) of the ProFund's total net assets. The investments of each of the
ProFunds in repurchase agreements at times may be substantial when, in the view
of the Advisor and, in the case of the Money Market ProFund, Bankers Trust,
liquidity, investment, regulatory, or other considerations so warrant.
REVERSE REPURCHASE AGREEMENTS
The non-money market ProFunds and the Portfolio may use reverse repurchase
agreements as part of that ProFund's investment strategy. Reverse repurchase
agreements involve sales by a ProFund/Portfolio of portfolio assets concurrently
with an agreement by the ProFund/Portfolio to repurchase the same assets at a
later date at a fixed price. Generally, the effect of such a transaction is that
the ProFund/Portfolio can recover all or most of the cash invested in the
portfolio securities involved during the term of the reverse repurchase
agreement, while the ProFund/Portfolio will be able to keep the interest income
associated with those portfolio securities. Such transactions are advantageous
only if the interest cost to the ProFund/Portfolio of the reverse repurchase
transaction is less than the cost of obtaining the cash otherwise. Opportunities
to achieve this advantage may not always be available, and the
ProFund/Portfolios intend to use the reverse repurchase technique only when it
will be to the ProFund/Portfolio's advantage to do so and the Money Market
ProFund will not invest more than 5% of its total assets in reverse repurchase
agreements. The ProFund/Portfolios will establish a segregated account with
their custodian bank in which the ProFund/Portfolio will maintain cash or liquid
instruments equal in value to the ProFund/Portfolio's obligations in respect of
reverse repurchase agreements.
BORROWING
The ProFunds (other than the Portfolio except to the degree the Portfolio
may borrow for temporary or emergency purposes) may borrow money for cash
management purposes or investment purposes. Each of the non-money market
ProFunds may also enter into reverse repurchase agreements, which may be viewed
as a form of borrowing, with financial institutions. However, to the extent a
ProFund "covers" its repurchase obligations as described above in "Reverse
Repurchase Agreements," such agreement will not be considered to be a "senior
security" and, therefore, will not be subject to the 300% asset coverage
requirement otherwise applicable to borrowings by the ProFunds. Borrowing for
investment is known as leveraging. Leveraging investments, by purchasing
securities with borrowed money, is a speculative technique which increases
investment risk, but also increases investment opportunity. Since substantially
all of a ProFund's assets will fluctuate in value, whereas the interest
obligations on borrowings may be fixed, the net asset value per share of the
ProFund will increase more when the ProFund's portfolio assets increase in value
and decrease more when the ProFund's portfolio assets decrease in value than
would otherwise be the case. Moreover, interest costs on borrowings may
fluctuate with changing market rates of interest and may partially offset or
exceed the returns on the borrowed funds. Under adverse conditions, a ProFund
might have to sell portfolio securities to meet interest or principal payments
at a time when investment considerations would not favor such sales.
As required by the Investment Company Act of 1940, as amended (the "1940
Act"), a ProFund must maintain continuous asset coverage (total assets,
including assets acquired with borrowed funds, less liabilities exclusive of
borrowings) of 300% of all amounts borrowed. If at any time the value of the
ProFund's assets should
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fail to meet this 300% coverage test, the ProFund, within three days (not
including Sundays and holidays), will reduce the amount of the ProFund's
borrowings to the extent necessary to meet this 300% coverage. Maintenance of
this percentage limitation may result in the sale of portfolio securities at a
time when investment considerations otherwise indicate that it would be
disadvantageous to do so. In addition to the foregoing, the ProFunds are
authorized to borrow money from a bank as a temporary measure for extraordinary
or emergency purposes in amounts not in excess of 5% of the value of the
ProFund's total assets. This borrowing is not subject to the foregoing 300%
asset coverage requirement. The ProFunds are authorized to pledge portfolio
securities as the Advisor deems appropriate in connection with any borrowings.
LENDING OF PORTFOLIO SECURITIES
Subject to the investment restrictions set forth below, each of the
ProFunds and the Portfolio may lend its portfolio securities to brokers,
dealers, and financial institutions, provided that cash equal to at least 100%
of the market value of the securities loaned is deposited by the borrower with
the ProFund/Portfolio and is maintained each business day in a segregated
account pursuant to applicable regulations. While such securities are on loan,
the borrower will pay the lending ProFund/Portfolio any income accruing thereon,
and the ProFund/Portfolio may invest the cash collateral in portfolio
securities, thereby earning additional income. A ProFund/Portfolio will not lend
more than 33% of the value of the ProFund's total assets, except that the
Portfolio will not lend more than 20% of the value of its total assets. Loans
would be subject to termination by the lending ProFund/Portfolio on four
business days' notice, or by the borrower on one day's notice. Borrowed
securities must be returned when the loan is terminated. Any gain or loss in the
market price of the borrowed securities which occurs during the term of the loan
inures to the lending ProFund/Portfolio and that ProFund's/Portfolio's
shareholders. A lending ProFund/Portfolio may pay reasonable finders, borrowers,
administrative, and custodial Trustees in connection with a loan.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
Each non-money market ProFund (and to the extent allowable by its
investment policies, the Money Market ProFund), from time to time, in the
ordinary course of business, may purchase securities on a when-issued or
delayed-delivery basis (i.e., delivery and payment can take place between a
month and 120 days after the date of the transaction). These securities are
subject to market fluctuation and no interest accrues to the purchaser during
this period. At the time a ProFund makes the commitment to purchase securities
on a when-issued or delayed-delivery basis, the ProFund will record the
transaction and thereafter reflect the value of the securities, each day, in
determining the ProFund's net asset value. A ProFund will not purchase
securities on a when-issued or delayed-delivery basis if, as a result, more than
15% of the ProFund's net assets would be so invested. At the time of delivery of
the securities, the value of the securities may be more or less than the
purchase price.
The Trust will also establish a segregated account with the Trust's
custodian bank in which the ProFunds will maintain liquid instruments equal to
or greater in value than the ProFund's purchase commitments for such when-issued
or delayed-delivery securities, or the Trust does not believe that a ProFund's
net asset value or income will be adversely affected by the ProFund's purchase
of securities on a when-issued or delayed delivery basis.
INVESTMENTS IN OTHER INVESTMENT COMPANIES
The ProFunds may invest in the securities of other investment companies to
the extent that such an investment would be consistent with the requirements of
the 1940 Act. If a ProFund invests in, and, thus, is a shareholder of, another
investment company, the ProFund's shareholders will indirectly bear the
ProFund's proportionate share of the fees and expenses paid by such other
investment company, including advisory fees, in addition to both the management
fees payable directly by the ProFund to the ProFund's own investment adviser and
the other expenses that the ProFund bears directly in connection with the
ProFund's own operations.
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ILLIQUID SECURITIES
While none of the ProFunds anticipates doing so, each of the ProFunds and
the Portfolio may purchase illiquid securities, including securities that are
not readily marketable and securities that are not registered ("restricted
securities") under the Securities Act of 1933, as amended (the "1933 Act"), but
which can be sold to qualified institutional buyers under Rule 144A of the 1933
Act. A ProFund will not invest more than 15% (10% with respect to the Portfolio)
of the ProFund's/Portfolio's net assets in illiquid securities. The term
"illiquid securities" for this purpose means securities that cannot be disposed
of within seven days in the ordinary course of business at approximately the
amount at which the ProFund has valued the securities. Under the current
guidelines of the staff of the Securities and Exchange Commission (the
"Commission"),illiquid securities also are considered to include, among other
securities, purchased over-the-counter options, certain cover for
over-the-counter options, repurchase agreements with maturities in excess of
seven days, and certain securities whose disposition is restricted under the
Federal securities laws. The ProFund/Portfolio may not be able to sell illiquid
securities when the Advisor or Bankers Trust considers it desirable to do so or
may have to sell such securities at a price that is lower than the price that
could be obtained if the securities were more liquid. In addition, the sale of
illiquid securities also may require more time and may result in higher dealer
discounts and other selling expenses than does the sale of securities that are
not illiquid. Illiquid securities also may be more difficult to value due to the
unavailability of reliable market quotations for such securities, and
investments in illiquid securities may have an adverse impact on net asset
value.
Institutional markets for restricted securities have developed as a result
of the promulgation of Rule 144A under the 1933 Act, which provides a safe
harbor from 1933 Act registration requirements for qualifying sales to
institutional investors. When Rule 144A restricted securities present an
attractive investment opportunity and otherwise meet selection criteria, a
ProFund may make such investments. Whether or not such securities are illiquid
depends on the market that exists for the particular security. The Commission
staff has taken the position that the liquidity of Rule 144A restricted
securities is a question of fact for a board of trustees to determine, such
determination to be based on a consideration of the readily-available trading
markets and the review of any contractual restrictions. The staff also has
acknowledged that, while a board of trustees retains ultimate responsibility,
trustees may delegate this function to an investment adviser. Trustees of
ProFunds have delegated this responsibility for determining the liquidity of
Rule 144A restricted securities which may be invested in by a ProFund to the
Advisor or, in the case of the Portfolio, to Bankers Trust. It is not possible
to predict with assurance exactly how the market for Rule 144A restricted
securities or any other security will develop. A security which when purchased
enjoyed a fair degree of marketability may subsequently become illiquid and,
accordingly, a security which was deemed to be liquid at the time of acquisition
may subsequently become illiquid. In such event, appropriate remedies will be
considered to minimize the effect on the ProFund's liquidity.
BANK OBLIGATIONS (MONEY MARKET PROFUND AND THE PORTFOLIO)
For purposes of the Portfolio's investment policies with respect to bank
obligations, the assets of a bank will be deemed to include the assets of its
domestic and foreign branches. Obligations of foreign branches of U.S. banks and
foreign banks may be general obligations of the parent bank in addition to the
issuing bank or may be limited by the terms of a specific obligation and by
government regulation. If Bankers Trust, acting under the supervision of the
Portfolio's Board of Trustees, deems the instruments to present minimal credit
risk, the Portfolio may invest in obligations of foreign banks or foreign
branches of U.S. banks which include banks located in the United Kingdom, Grand
Cayman Island, Nassau, Japan and Canada. Investments in these obligations may
entail risks that are different from those of investments in obligations of U.S.
domestic banks because of differences in political, regulatory and economic
systems and conditions. These risks include, without limitation, future
political and economic developments, currency blockage, the possible imposition
of withholding taxes on interest payments, possible seizure or nationalization
of foreign deposits, and difficulty or inability of pursuing legal remedies and
obtaining judgment concerning the types of securities and other instruments in
which the Portfolio may invest.
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COMMERCIAL PAPER AND OTHER DEBT OBLIGATIONS (MONEY MARKET PROFUND AND THE
PORTFOLIO)
The commercial paper and other debt obligations in which the Portfolio may
invest are short-term, unsecured negotiable promissory notes of U.S. or foreign
corporations that at the time of purchase meet the rating criteria described in
the Prospectus. Investments in foreign commercial paper generally involve risks
similar to those described above relating to obligations of foreign banks or
foreign branches of U.S. banks.
PORTFOLIO TURNOVER
As discussed in the Prospectus, the ProFunds anticipate that their
investors as part of their strategy, will frequently exchange shares of the
ProFunds for shares in other ProFunds pursuant to the exchange policy, as well
as frequently redeem shares of the ProFunds (see "Shareholders' Guide -- How to
Exchange Shares of the ProFunds" in the Prospectus). The nature of the ProFunds
will cause the ProFunds to experience substantial portfolio turnover. Because
each ProFund's portfolio turnover rate to a great extent will depend on the
purchase, redemption, and exchange activity of the ProFund's investors, it is
difficult to estimate what the ProFund's actual turnover rate will be in the
future. "Portfolio Turnover Rate" is defined under the rules of the Commission
as the value of the securities purchased or securities sold, excluding all
securities whose maturities at time of acquisition were one year or less,
divided by the average monthly value of such securities owned during the year.
Based on this definition, instruments with remaining maturities of less than one
year are excluded from the calculation of portfolio turnover rate. Instruments
excluded from the calculation of portfolio turnover generally would include the
futures contracts and option contracts in which the non-money market ProFunds
invest since such contracts generally have a remaining maturity of less than one
year. Pursuant to the formula prescribed by the Commission, the portfolio
turnover rate for each ProFund is calculated without regard to instruments,
including options and futures contracts, having a maturity of less than one
year. The Bull ProFund, the UltraBull ProFund, the Bear ProFund and the
UltraBear ProFund typically hold most of their investments in short-term options
and futures contracts, which, therefore, are excluded for purposes of computing
portfolio turnover. Therefore, based on the Commission's portfolio turnover
formula, each of these ProFunds expects a portfolio turnover rate of
approximately 0%.
INVESTMENT RESTRICTIONS
The ProFunds and the Portfolio have adopted certain investment restrictions
as fundamental policies which cannot be changed without the approval of the
holders of a "majority" of the outstanding shares of the ProFund or the
Portfolio, as that term is defined in the 1940 Act. The term "majority" is
defined in the 1940 Act as the lesser of: (i) 67% or more of the shares of the
series present at a meeting of shareholders, if the holders of more than 50% of
the outstanding shares of the ProFund are present or represented by proxy; or
(ii) more than 50% of the outstanding shares of the series. (All policies of a
ProFund not specifically identified in this Statement of Additional Information
or the Prospectus as fundamental may be changed without a vote of the
shareholders of the ProFund.) For purposes of the following limitations, all
percentage limitations apply immediately after a purchase or initial investment.
A non-money market ProFund may not:
1. Invest more than 25% of its total assets, taken at market value at
the time of each investment, in the securities of issuers in any
particular industry (excluding the U.S. government and its
agencies and instrumentalities).
2. Make investments for the purpose of exercising control or
management.
3. Purchase or sell real estate, except that, to the extent permitted
by applicable law, the ProFund may invest in securities directly
or indirectly secured by real estate or interests therein or
issued by companies that invest in real estate or interests
therein.
4. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in
government obligations, commercial paper, pass-
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through instruments, certificates of deposit, bankers' acceptances
and repurchase agreements and purchase and sale contracts and any
similar instruments shall not be deemed to be the making of a
loan, and except further that the ProFund may lend its portfolio
securities, provided that the lending of portfolio securities may
be made only in accordance with applicable law and the guidelines
set forth in the Prospectus and this Statement of Additional
Information, as they may be amended from time to time.
5. Issue senior securities to the extent such issuance would violate
applicable law.
6. Borrow money, except that the ProFund (i) may borrow from banks
(as defined in the Investment Company Act of 1940) in amounts up
to 33 1/3% of its total assets (including the amount borrowed),
(ii) may, to the extent permitted by applicable law, borrow up to
an additional 5% of its total assets for temporary purposes, (iii)
may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities, (iv) may
purchase securities on margin to the extent permitted by
applicable law and (v) may enter into reverse repurchase
agreements. The ProFund may not pledge its assets other than to
secure such borrowings or, to the extent permitted by the
ProFund's investment policies as set forth in the Prospectus and
this Statement of Additional Information, as they may be amended
from time to time, in connection with hedging transactions, short
sales, when-issued and forward commitment transactions and similar
investment strategies.
7. Underwrite securities of other issuers, except insofar as the
ProFund technically may be deemed an underwriter under the
Securities Act of 1933, as amended (the "Securities Act"), in
selling portfolio securities.
8. Purchase or sell commodities or contracts on commodities, except
to the extent the ProFund may do so in accordance with applicable
law and the ProFund's Prospectus and Statement of Additional
Information, as they may be amended from time to time.
THE FOLLOWING FUNDAMENTAL INVESTMENT RESTRICTIONS AND NON-FUNDAMENTAL
INVESTMENT OPERATING POLICIES HAVE BEEN ADOPTED BY THE TRUST, WITH RESPECT TO
THE MONEY MARKET PROFUND, AND BY THE PORTFOLIO. UNLESS AN INVESTMENT INSTRUMENT
OR TECHNIQUE IS DESCRIBED IN THE PROSPECTUS OR ELSEWHERE HEREIN, THE MONEY
MARKET PROFUND AND THE PORTFOLIO MAY NOT INVEST IN THAT INVESTMENT INSTRUMENT OR
ENGAGE IN THAT INVESTMENT TECHNIQUE.
The investment restrictions below have been adopted by the Trust with
respect to the Money Market ProFund and by the Portfolio as fundamental policies
(as defined above). Whenever the Money Market ProFund is requested to vote on a
change in the investment restrictions of the Portfolio, the Trust will hold a
meeting of the Money Market ProFund shareholders and will cast its votes as
instructed by the shareholders. The Money Market ProFund shareholders who do not
vote will not affect the Trust's votes at the Portfolio meeting. The percentage
of the Trust's votes representing ProFund shareholders not voting will be voted
by the Trustees of the Trust in the same proportion as the Fund shareholders who
do, in fact, vote.
Under investment policies adopted by the Money Market ProFund and by the
Portfolio, each of the Money Market ProFund and Portfolio may not:
1. Borrow money, except for temporary or emergency (not leveraging)
purposes in an amount not exceeding 5% of the value of the
ProFund's or the Portfolio's total assets (including the amount
borrowed), as the case may be, calculated in each case at the
lower of cost or market.
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2. Pledge, hypothecate, mortgage or otherwise encumber more than 5%
of the total assets of the ProFund or the Portfolio, as the case
may be, and only to secure borrowings for temporary or emergency
purposes.
3. Invest more than 5% of the total assets of the ProFund or the
Portfolio, as the case may be, in any one issuer (other than U.S.
government obligations) or purchase more than 10% of any class of
securities of any one issuer; provided, however, that (i) up to
25% of the assets of the ProFund and the Portfolio may be invested
without regard to this restriction; provided, however, that
nothing in this investment restriction shall prevent the Trust
from investing all or part of a ProFund's assets in an open-end
management investment company with substantially the same
investment objectives as the ProFund.
4. Invest more than 25% of the total assets of the ProFund or the
Portfolio, as the case may be, in the securities of issuers in any
single industry; provided that: (i) this limitation shall not
apply to the purchase of U.S. government obligations; (ii) under
normal market conditions more than 25% of the total assets of the
Money Market ProFund and the Portfolio will be invested in
obligations of foreign and U.S. Banks provided, however, that
nothing in this investment restriction shall prevent a Trust from
investing all or part of a ProFund's assets in an open-end
management investment company with substantially the same
investment objectives as the ProFund.
5. Make short sales of securities, maintain a short position or
purchase any securities on margin, except for such short-term
credits as are necessary for the clearance of transactions.
6. Underwrite the securities issued by others (except to the extent
the ProFund or Portfolio may be deemed to be an underwriter under
the Federal securities laws in connection with the disposition of
its portfolio securities) or knowingly purchase restricted
securities, provided, however, that nothing in this investment
restriction shall prevent the Trust from investing all of the
ProFund's assets in an open-end management investment company with
substantially the same investment objectives as the ProFund.
7. Purchase or sell real estate, real estate investment trust
securities, commodities or commodity contracts, or oil, gas or
mineral interests, but this shall not prevent the ProFund or the
Portfolio from investing in obligations secured by real estate or
interests therein.
8. Make loans to others, except through the purchase of qualified
debt obligations, the entry into repurchase agreements and, with
respect to the ProFund and the Portfolio, the lending of portfolio
securities.
9. Invest more than an aggregate of 10% of the net assets of the
ProFund or the Portfolio's, respectively, (taken, in each case, at
current value) in (i) securities that cannot be readily resold to
the public because of legal or contractual restrictions or because
there are no market quotations readily available or (ii) other
"illiquid" securities (including time deposits and repurchase
agreements maturing in more than seven calendar days); provided,
however, that nothing in this investment restriction shall prevent
the Trust from investing all or part of the ProFund's assets in an
open-end management investment company with substantially the same
investment objective as the ProFund.
10. Purchase more than 10% of the voting securities of any issuer or
invest in companies for the purpose of exercising control or
management; provided, however, that nothing in this investment
restriction shall prevent the Trust from investing all or part of
the ProFund's assets in an open-end management investment company
with substantially the same investment objectives as the ProFund.
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11. Purchase securities of other investment companies, except to the
extent permitted under the 1940 Act or in connection with a
merger, consolidation, reorganization, acquisition of assets or an
offer of exchange; provided, however, that nothing in this
investment restriction shall prevent the Trust from investing all
or part of the ProFunds' assets in an open-end management
investment company with substantially the same investment
objectives as the ProFund.
12. Issue any senior securities, except insofar as it may be deemed to
have issued a senior security by reason of (i) entering into a
reverse repurchase agreement or (ii) borrowing in accordance with
terms described in the Prospectus and this SAI.
13. Purchase or retain the securities of any issuer if any of the
officers or trustees of the ProFund or the Portfolio or Bankers
Trust owns individually more than 1/2 of 1% of the securities of
such issuer, and together such officers and directors own more
than 5% of the securities of such issuer.
14. Invest in warrants, except that the ProFund or the Portfolio may
invest in warrants if, as a result, the investments (valued in
each case at the lower of cost or market) would not exceed 5% of
the value of the net assets of the ProFund or the Portfolio, as
the case may be, of which not more than 2% of the net assets of
the ProFund or the Portfolio, as the case may be, may be invested
in warrants not listed on a recognized domestic stock exchange.
Warrants acquired by the ProFund or the Portfolio as part of a
unit or attached to securities at the time of acquisition are not
subject to this limitation.
Additional Restrictions. In order to comply with certain statutes and
policies, the Portfolio (or Trust, on behalf of the Money Market ProFund) will
not as a matter of operating policy (except that no operating policy shall
prevent the ProFund from investing all of its assets in an open-end investment
company with substantially the same investment objective):
(i) borrow money (including through dollar roll transactions) for any
purpose in excess of 10% of the Portfolio's (ProFund's) total
assets (taken at cost), except that the Portfolio (ProFund) may
borrow for temporary or emergency purposes up to 1/3 of its total
assets;
(ii) pledge, mortgage or hypothecate for any purpose in excess of 10%
of the Portfolio's (ProFund's) total assets (taken at market
value), provided that collateral arrangements with respect to
options and futures, including deposits of initial deposit and
variation margin, are not considered a pledge of assets for
purposes of this restriction;
(iii) purchase any security or evidence of interest therein on margin,
except that such short-term credit as may be necessary for the
clearance of purchases and sales of securities may be obtained and
except that deposits of initial deposit and variation margin may
be made in connection with the purchase, ownership, holding or
sale of futures;
(iv) sell any security which it does not own unless by virtue of its
ownership of other securities it has at the time of sale a right
to obtain securities, without payment of further consideration,
equivalent in kind and amount to the securities sold and provided
that if such right is conditional the sale is made upon the same
conditions;
(v) invest for the purpose of exercising control or management;
(vi) purchase securities issued by any investment company except by
purchase in the open market where no commission or profit to a
sponsor or dealer results from such purchase other than the
customary broker's commission, or except when such purchase,
though not made in the open market, is part of a plan of merger or
consolidation; provided, however, that securities
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of any investment company will not be purchased for the Portfolio
(ProFund) if such purchase at the time thereof would cause (a) more than
10% of the Portfolio's (ProFund's) total assets (taken at the greater of
cost or market value) to be invested in the securities of such issuers;
(b) more than 5% of the Portfolio's (ProFund's) total assets (taken at
the greater of cost or market value) to be invested in any one
investment company; or (c) more than 3% of the outstanding voting
securities of any such issuer to be held for the Portfolio (ProFund);
and, provided further, that the Portfolio shall not invest in any other
open-end investment company unless the Portfolio (ProFund) (1) waives
the investment advisory fee with respect to assets invested in other
open-end investment companies and (2) incurs no sales charge in
connection with the investment (as an operating policy, each Portfolio
will not invest in another open-end registered investment company);
(vii) invest more than 15% of the Portfolio's (ProFund's) total net assets
(taken at the greater of cost or market value) in securities that are
illiquid or not readily marketable not including (a) Rule 144A
securities that have been determined to be liquid by the Board of
Trustees; and (b) commercial paper that is sold under section 4(2) of
the 1933 Act which: (i) is not traded flat or in default as to interest
or principal; and (ii) is rated in one of the two highest categories by
at least two nationally recognized statistical rating organizations;
(iii) is rated one of the two highest categories by one nationally
recognized statistical rating agency and the Portfolio's (ProFund's)
Board of Trustees have determined that the commercial paper is
equivalent quality and is liquid;
(viii) invest more than 5% of the Portfolio's (ProFund's) total assets
in securities issued by issuers which (including predecessors) have been
in operation less than three years;
(ix) invest more than 10% of the Portfolio's (ProFund's) total assets (taken
at the greater of cost or market value) in securities that are
restricted as to resale under the 1933 Act (other than Rule 144A
securities deemed liquid by the Portfolio's (ProFund's) Board of
Trustees);
(x) with respect to 75% of the Portfolio's (ProFund's) total assets,
purchase securities of any issuer if such purchase at the time thereof
would cause the Portfolio (ProFund) to hold more than 10% of any class
of securities of such issuer, for which purposes all indebtedness of an
issuer shall be deemed a single class and all preferred stock of an
issuer shall be deemed a single class, except that futures or option
contracts shall not be subject to this restriction;
(xi) if the Portfolio (ProFund) is a "diversified" ProFund with respect to
75% of its assets, invest more than 5% of its total assets in the
securities (excluding U.S. government securities) of any one issuer;
(xii) purchase or retain in the Portfolio's (ProFund's) portfolio any
securities issued by an issuer any of whose officers, directors,
trustees or security holders is an officer or Trustee of the Portfolio
(Trust), or is an officer or partner of the Adviser, if after the
purchase of the securities of such issuer for the Portfolio (ProFund)
one or more of such persons owns beneficially more than 1/2 of 1% of the
shares or securities, or both, all taken at market value, of such
issuer, and such persons owning more than 1/2 of 1% of such shares or
securities together own beneficially more than 5% of such shares or
securities, or both, all taken at market value;
(xiii) invest more than 5% of the Portfolio's (ProFund's) net assets in
warrants (valued at the lower of cost or market) (other than warrants
acquired by the Portfolio (ProFund) as part of a unit or attached to
securities at the time of purchase), but not more than 2% of the
Portfolio's (ProFund's) net assets may be invested in warrants not
listed on the American Stock Exchange or the New York Stock Exchange,
Inc. ("NYSE");
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(xiv) make short sales of securities or maintain a short position, unless at
all times when a short position is open it owns an equal amount of such
securities or securities convertible into or exchangeable, without
payment of any further consideration, for securities of the same issue
and equal in amount to, the securities sold short, and unless not more
than 10% of the Portfolio's (ProFund's) net assets (taken at market
value) is represented by such securities, or securities convertible into
or exchangeable for such securities, at any one time (the Portfolio
(ProFund) has no current intention to engage in short selling).
The Money Market ProFund will comply with the state securities laws and
regulations of all states in which it is registered. The Portfolio will comply
with the permitted investments and investment limitations in the securities laws
and regulations of all states in which the Portfolio, or any other registered
investment company investing in the Portfolio, is registered.
PORTFOLIO TRANSACTIONS AND BROKERAGE
NON-MONEY MARKET PROFUNDS
Subject to the general supervision by the Trustees, the Advisor is
responsible for decisions to buy and sell securities for each of the ProFunds,
the selection of brokers and dealers to effect the transactions, and the
negotiation of brokerage commissions, if any. The Advisor expects that the
ProFunds may execute brokerage or other agency transactions through registered
broker-dealers, for a commission, in conformity with the 1940 Act, the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder. The Advisor may serve as an investment manager to a number of
clients, including other investment companies. It is the practice of the Advisor
to cause purchase and sale transactions to be allocated among the ProFunds and
others whose assets the Advisor manages in such manner as the Advisor deems
equitable. The main factors considered by the Advisor in making such allocations
among the ProFunds and other client accounts of the Advisor are the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held, and the opinions of the person(s)
responsible, if any, for managing the portfolios of the ProFunds and the other
client accounts.
The policy of each ProFund regarding purchases and sales of securities
for a ProFund's portfolio is that primary consideration will be given to
obtaining the most favorable prices and efficient executions of transactions.
Consistent with this policy, when securities transactions are effected on a
stock exchange, each ProFund's policy is to pay commissions which are considered
fair and reasonable without necessarily determining that the lowest possible
commissions are paid in all circumstances. Each ProFund believes that a
requirement always to seek the lowest possible commission cost could impede
effective portfolio management and preclude the ProFund and the Advisor from
obtaining a high quality of brokerage and research services. In seeking to
determine the reasonableness of brokerage commissions paid in any transaction,
the Advisor relies upon its experience and knowledge regarding commissions
generally charged by various brokers and on its judgment in evaluating the
brokerage and research services received from the broker effecting the
transaction. Such determinations are necessarily subjective and imprecise, as in
most cases an exact dollar value for those services is not ascertainable.
Purchases and sales of U.S. government securities are normally
transacted through issuers, underwriters or major dealers in U.S. government
securities acting as principals. Such transactions are made on a net basis and
do not involve payment of brokerage commissions. The cost of securities
purchased from an underwriter usually includes a commission paid by the issuer
to the underwriters; transactions with dealers normally reflect the spread
between bid and asked prices.
In seeking to implement a ProFund's policies, the Advisor effects
transactions with those brokers and dealers who the Advisor believes provide the
most favorable prices and are capable of providing efficient executions. If the
Advisor believes such prices and executions are obtainable from more than one
broker or dealer, the Advisor may give consideration to placing portfolio
transactions with those brokers and dealers who also furnish research
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<PAGE> 69
and other services to the ProFund or the Advisor. Such services may include, but
are not limited to, any one or more of the following: information as to the
availability of securities for purchase or sale; statistical or factual
information or opinions pertaining to investment; wire services; and appraisals
or evaluations of portfolio securities. If the broker-dealer providing these
additional services is acting as a principal for its own account, no commissions
would be payable. If the broker-dealer is not a principal, a higher commission
may be justified, at the determination of the Advisor, for the additional
services.
The information and services received by the Advisor from brokers and
dealers may be of benefit to the Advisor in the management of accounts of some
of the Advisor's other clients and may not in all cases benefit a ProFund
directly. While the receipt of such information and services is useful in
varying degrees and would generally reduce the amount of research or services
otherwise performed by the Advisor and thereby reduce the Advisor's expenses,
this information and these services are of indeterminable value and the
management fee paid to the Advisor is not reduced by any amount that may be
attributable to the value of such information and services.
MONEY MARKET PROFUND AND THE PORTFOLIO
Decisions to buy and sell securities and other financial instruments for
the Money Market ProFund and the Portfolio are made by Bankers Trust, which also
is responsible for placing these transactions, subject to the overall review of
the Portfolio's Board of Trustees. Although investment requirements for the
Portfolio are reviewed independently from those of the other accounts managed by
Bankers Trust (the "Other Portfolios"), investments of the type the Portfolio
may make may also be made by these Other Portfolios. When the Portfolio and one
or more Other Portfolios or accounts managed by Bankers Trust are prepared to
invest in, or desire to dispose of, the same security or other financial
instrument, available investments or opportunities for sales will be allocated
in a manner believed by Bankers Trust to be equitable to each. In some cases,
this procedure may affect adversely the price paid or received by the Portfolio
or the size of the position obtained or disposed of by the Portfolio.
Purchases and sales of securities on behalf of the Portfolio usually are
principal transactions. These securities are normally purchased directly from
the issuer or from an underwriter or market maker for the securities. The cost
of securities purchased from underwriters includes an underwriting commission or
concession and the prices at which securities are purchased from and sold to
dealers include a dealer's mark-up or mark-down. U.S. government obligations are
generally purchased from underwriters or dealers, although certain newly issued
U.S. government obligations may be purchased directly from the U.S. Treasury or
from the issuing agency or instrumentality.
Over-the-counter purchases and sales are transacted directly with
principal market makers except in those cases in which better prices and
executions may be obtained elsewhere and principal transactions are not entered
into with persons affiliated with the Portfolios except pursuant to exemptive
rules or orders adopted by the Commission. Under rules adopted by the
Commission, broker-dealers may not execute transactions on the floor of any
national securities exchange for the accounts of affiliated persons, but may
effect transactions by transmitting orders for execution.
In selecting brokers or dealers to execute portfolio transactions on
behalf of the Portfolio, Bankers Trust seeks the best overall terms available.
In assessing the best overall terms available for any transaction, Bankers Trust
will consider the factors it deems relevant, including the breadth of the market
in the investment, the price of the investment, the financial condition and
execution capability of the broker or dealer and the reasonableness of the
commission, if any, for the specific transaction and on a continuing bases. In
addition, Bankers Trust is authorized, in selecting parties to execute a
particular transaction and in evaluating the best overall terms available to
consider the brokerage, but not research services (as those terms are defined in
Section 28(e) of the Securities Exchange Act of 1934, as amended) provided to
the Portfolio involved, the other Portfolios and/or other accounts over which
Bankers Trust or its affiliates exercise investment discretion. Bankers Trust's
fees under its agreements with the Portfolios are not reduced by reason of its
receiving brokerage services.
The valuation of the Portfolio's securities is based on their amortized
cost, which does not take into account unrealized capital gains or losses.
Amortized cost valuation involves initially valuing an instrument at its cost
and thereafter assuming a constant amortization to maturity of any discount or
premium, generally without regard to the
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<PAGE> 70
impact of fluctuating interest rates on the market value of the instrument.
Although this method provides certainty in valuation, it may result in periods
during which value, as determined by amortized cost, is higher or lower than the
price a Portfolio would receive if it sold the instrument.
The Portfolio's use of the amortized cost method of valuing its
securities is permitted by a rule adopted by the Commission. Under this rule,
the Portfolio must maintain a dollar-weighted average portfolio maturity of 90
days or less, purchase only instruments having remaining maturities of 397 days
or and invest only in securities determined by or under the supervision of the
Board of Trustees to be of high quality with minimal credit risks.
Pursuant to the rule, the Board of Trustees of the Portfolio also has
established procedures designed to allow investors in the Portfolio, such as the
Money Market ProFund, to stabilize, to the extent reasonably possible, the
investors' price per share as computed for the purpose of sales and redemptions
at $1.00. These procedures include review of the Portfolio's holdings by the
Portfolio's Board of Trustees, at such intervals as it deems appropriate, to
determine whether the value of the Portfolio's assets calculated by using
available market quotations or market equivalents deviates from such valuation
based on amortized cost.
The rule also provides that the extent of any deviation between the
value of the Portfolio's assets based on available market quotations or market
equivalents and such valuation based on amortized cost must be examined by the
Portfolio's Board of Trustees. In the event the Portfolio's Board of Trustees
determines that a deviation exists that may result in material dilution or other
unfair results to investors or existing shareholders, pursuant to the rule, the
Portfolio's Board of Trustees must cause the Portfolio to take such corrective
action as such Board of Trustees regards as necessary and appropriate,
including: selling portfolio instruments prior to maturity to realize capital
gains or losses or to shorten average portfolio maturity; withholding dividends
or paying distributions from capital or capital gains; redeeming shares in kind;
or valuing the Portfolio's assets by using available market quotations.
Each investor in the Portfolio, including the Money Market ProFund, may
add to or reduce its investment in the Portfolio on each day the Portfolio
determines its Net Asset Value ("NAV"). At the close of each such business day,
the value of each investor's beneficial interest in the Portfolio will be
determined by multiplying the NAV of the Portfolio by the percentage, effective
for that day, which represents that investor's share of the aggregate beneficial
interests in the Portfolio. Any additions or withdrawals, which are to be
effected as of the close of business on that day, will then be effected. The
investor's percentage of the aggregate beneficial interests in the Portfolio
will then be recomputed as the percentage equal to the fraction (i) the
numerator of which is the value of such investor's investment in the Portfolio
as of the close of business on such day plus or minus, as the case may be, the
amount of net additions to or withdrawals from the investor's investment in the
Portfolio effected as of the close of business on such day, and (ii) the
denominator of which is the aggregate NAV of the Portfolio as of the close of
business on such day plus or minus, as the case may be, the amount of net
additions to or withdrawals from the aggregate investments in the Portfolio by
all investors in the Portfolio. The percentage so determined will then be
applied to determine the value of the investor's interest in the Portfolio as of
the close of the following business day.
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<PAGE> 71
MANAGEMENT OF PROFUNDS
The Board of Trustees is responsible for the general supervision of the
Trust's business. The day-to-day operations of the ProFunds are the
responsibilities of ProFunds' officers. The names and addresses (and ages) of
the Trustees of the Trust and the Portfolio, the officers of the Trust and the
Portfolio, and the officers of the Advisor, together with information as to
their principal business occupations during the past five years, are set forth
below. Fees and expenses for non-interested Trustees will be paid by the
Trust; Trustee expenses for interested Trustees will be paid by ProFund Advisors
LLC.
TRUSTEES AND OFFICERS OF PROFUNDS
Michael L. Sapir* (birthdate: May 19, 1958): Trustee, Chairman and Chief
Executive Officer; Chairman and Chief Executive Officer, ProFund Advisors LLC;
Principal, Law Offices of Michael L. Sapir; Rydex Distributors, Inc., President;
Padco Advisors, Inc., Senior Vice President, General Counsel; Jorden Burt
Berenson & Klingensmith, Partner. His address is 7900 Wisconsin Avenue, Suite
300, Bethesda, Maryland 20814.
Louis M. Mayberg* (birthdate: August 9, 1962): Trustee, Secretary;
ProFund Advisors LLC, President; Potomac Securities, Inc., President; National
Capital Companies, LLC, Managing Director. His address is 7900 Wisconsin
Avenue, Suite 300, Bethesda, Maryland 20814.
Thresa Dewar: (birthdate: March 13, 1954): Treasurer; BISYS Fund
Services, Vice President, Financial Administration; Healthy You Food Market of
Marco, Inc.; Federated Administrative Services, Vice President and Controller.
Michael C. Wachs (birthdate: October 21, 1961): Trustee; Delancy
Investment Group, Inc., Vice President; First Union National Bank, Vice
President/Senior Underwriter; First Union Capital Markets Corp., Vice President;
Vice President/Senior Credit Officer; Vice President/Team Leader. His address is
1528 Powder Mill Lane, Wynnewood, Pennsylvania 19096.
Russell S. Reynolds, III (birthdate: July 21, 1957): Trustee;
Directorship, Inc., Managing Director, Chief Financial Officer and Secretary;
Quadcom Services, Inc., President. His address is 7 Stag Lane, Greenwich,
Connecticut 06831.
Michael D. Miller (birthdate: May 5, 1971): Vice President; BISYS Fund
Services, Client Service Manager, Transfer Agency Client Relationship Manager,
Supervisor, Client Technology Support.
*This Trustee is deemed to be an "interested person" within the meaning
of Section 2(a)(19) of the 1940 Act, inasmuch as this person is affiliated with
the Advisor, as described herein.
TRUSTEE COMPENSATION TABLE
The following table reflects estimated fees paid to the Trustees for
the year ended December 31, 1997.
Name of
Person: Position Compensation
- ---------------- ------------
Michael L. Sapir, Trustee, Chairman
and Chief Executive Officer None
Louis M. Mayberg, Trustee, President, None
Secretary
Russell S. Reynolds, III
Trustee $1,250
Michael C. Wachs
Trustee $1,250
TRUSTEES AND OFFICERS OF THE PORTFOLIO:
The Board of Trustees of the Portfolio ("Portfolio Trustees") is
composed of persons experienced in financial matters who meet throughout the
year to oversee the activities of the Portfolio. In addition the Portfolio
Trustees review contractual arrangements with companies that provide services to
the Portfolio.
The Portfolio Trustees and officers of the Portfolio, their birthdates
and their principal occupations during the past five years are set forth below.
Their titles may have varied during that period. Unless otherwise indicated the
address of each officer is Clearing Operations, P.O. Box 897, Pittsburgh,
Pennsylvania 15230-0897.
Trustees of the Portfolio:
--------------------------
Philip Saunders, Jr. (birthdate: October 11, 1935): Portfolio Trustee;
Principal, Philip Saunders Associates (Consulting); former Director of Financial
Industry Consulting, Wolf & Company; President, John HancockHome Mortgage
Corporation; and Senior Vice President of Treasury and Financial Services, John
Hancock Mutual Life Insurance Company, Inc. His address is 445 Glen Road,
Weston, Massachusetts 02193.
Charles P. Biggar (birthdate: October 13, 1930): Portfolio Trustee;
Retired; Director of Chase/NBW Bank Advisory Board; Director, Batement, Eichler,
Hill, Richards Inc.; formerly Vice President of International Business Machines
and President of the National Services and the Field Engineering Divisions of
IBM. His address is 12 Hitching Post Lane, Chappaqua, New York 10514.
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<PAGE> 72
S. Leland Dill (birthdate: March 28, 1930): Portfolio Trustee; Retired;
Director, Coutts Group; Coutts (U.S.A.) International; Coutts Trust Holdings
Ltd; director, Sweig Series Trust; formerly Partner of KPMG Peat Marwick;
director, Vinters International Company Inc.; General Partner of Pemco (an
investment company registered under the 1940 Act). His address is 5070 North
Ocean Drive, Singer Island, Florida 33404.
Officers of the Portfolio:
--------------------------
Ronald M. Petnuch (birthdate: February 27, 1960): President and
Treasurer; Senior Vice President, Federated Services Company ("FSC"); formerly,
Director of Proprietary Client Services, Federated Administrative Services
("FAS"), and Associate Corporate Counsel, Federated Investors ("FI").
Charles L. Davis, Jr. (birthdate: March 23, 1960): Vice President and
Assistant Treasurer; Vice President, FAS.
Jay S. Neuman (birthdate: April 22, 1950): Secretary; Corporate Counsel,
FI.
No person who is an officer or director of Bankers Trust is an officer
or Trustee of the Trust or the Portfolio. No director, officer or employee of
BISYS or any of its affiliates will receive any compensation from the Trust or
Portfolio for serving as an officer or Trustee of the Trust or the Portfolio.
PORTFOLIO TRUSTEE COMPENSATION TABLE
The following table reflects fees paid to the Portfolio Trustees for the
year ended December 31, 1996.
<TABLE>
<CAPTION>
Aggregate Compensation
Name of from Cash Total Compensation
Person; Position Management Portfolio* from Fund Complex *
---------------- --------------------- -------------------
<S> <C> <C>
Philip W. Coolidge**
Trustee, BT Institutional Funds,
BT Pyramid Mutual Funds and
Portfolio $ 78.13 $ 140
Charles P. Biggar
Trustee, BT Institutional Funds
and Portfolio $1,796.88 $12,350
S. Leland Dill
Trustee, Portfolio $1,796.88 $ 625
Philip Saunders, Jr.
Trustee, Portfolio $1,796.88 $ 625
</TABLE>
* Aggregated information is furnished for the BT Family of Funds which
consists of the following: BT Investment Funds, BT Institutional Funds,
BT Pyramid Funds, BT Advisor Funds, BT Investment Portfolios, Cash
Management Portfolio, Treasury Money Portfolio, Tax Free Money
portfolio, NY Tax Free Money Portfolio, International Equity Portfolio,
Utility Portfolio, Short Intermediate U.S. Government Securities
Portfolio, Intermediate Tax Free Portfolio, Asset Management Portfolio,
Equity 500 Index Portfolio, and Capital Appreciation Portfolio.
** Mr. Coolidge resigned as a Trustee effective August 11, 1997.
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As of October 20, 1997, the Portfolio Trustees and Officers owned
in the aggregate less than 1% of the shares of the Portfolio.
INVESTMENT ADVISERS
PROFUND ADVISORS LLC
Under an investment advisory agreement between the ProFunds, other than
the Money Market ProFund, and the Advisor, dated October 28, 1997, each such
ProFund pays the Advisor a fee at an annualized rate, based on its average daily
net assets of 0.75%. The Advisor manages the investment and the reinvestment of
the assets of each of the Funds, in accordance with the investment objectives,
policies, and limitations of the ProFund, subject to the general supervision and
control of Trustees and the officers of ProFunds. The Advisor bears all costs
associated with providing these advisory services. The Advisor, from its own
resources, including profits from advisory fees received from the Funds,
provided such Trustees are legitimate and not excessive, also may make payments
to broker-dealers and other financial institutions for their expenses in
connection with the distribution of ProFunds' shares, and otherwise currently
pays all distribution costs for ProFunds' shares.
BANKERS TRUST
Under the terms of an investment advisory agreement (the "Advisory
Agreement") between the Portfolio and Bankers Trust, Bankers Trust manages the
Portfolio subject to the supervision and direction of the Board of Trustees of
the Portfolio. Bankers Trust will: (i) act in strict conformity with the
Portfolio's Declaration of Trust, the 1940 Act and the Investment Advisers Act
of 1940, as the same may from time to time be amended; (ii) manage the Portfolio
in accordance with the Portfolio's and/or the Money Market ProFund's investment
objectives, restrictions and policies, as stated herein and in the Prospectus;
(iii) make investment decisions for the Portfolio; and (iv) place purchase and
sale orders for securities and other financial instruments on behalf of the
Portfolio.
Bankers Trust bears all expenses in connection with the performance of
services under the Advisory Agreement. The Money Market ProFund and the
Portfolio bear certain other expenses incurred in their operation, including:
taxes, interest, brokerage fees and commissions, if any; fees of Trustees of the
Trust or Portfolio who are not officers, directors or employees of Bankers
Trust, the Advisor, the administrator or any of their affiliates; SEC fees and
state Blue Sky qualification fees, if any; administrative and services fees;
certain insurance premiums, outside auditing and legal expenses, and costs of
maintenance of corporate existence; costs attributable to investor services,
including without limitation, telephone and personnel expenses; and printing
prospectuses and statements of additional information for regulatory purposes
and for distribution to existing shareholders; costs of shareholders' reports
and meetings of shareholders, officers and Trustees of the Trust or the
Portfolio; and any extraordinary expenses.
For the fiscal years ended December 31, 1996, 1995 and 1994, Bankers
Trust earned $4,935,288, $3,847,729 and $3,807,085, respectively, in
compensation for investment advisory services provided to the Portfolio. During
the same periods, Bankers Trust reimbursed $761,230, $578,251 and $537,651,
respectively, to the Portfolio to cover expenses.
Bankers Trust may have deposit, loan and other commercial banking
relationships with the issuers of obligations which may be purchased on behalf
of the Portfolio, including outstanding loans to such issuers which could be
repaid in whole or in part with the proceeds of securities so purchased. Such
affiliates deal, trade and invest for their own accounts in such obligations and
are among the leading dealers of various types of such obligations. Bankers
Trust has informed the Portfolio that, in making its investment decisions, it
does not obtain or use material inside information in its possession or in the
possession of any of its affiliates. In making investment recommendations for
the Portfolio, Bankers Trust will not inquire or take into consideration whether
an issuer of securities proposed for purchase or sale by the Portfolio is a
customer of Bankers Trust, its parent or its subsidiaries or affiliates and, in
dealing with its customers, Bankers Trust, its parent, subsidiaries, and
affiliates will not inquire or take into consideration whether securities of
such customers are held by any fund managed by Bankers Trust or any such
affiliate.
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<PAGE> 74
ADMINISTRATION, TRANSFER AGENT, FUND ACCOUNTING AGENT AND CUSTODIAN
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services
("BISYS") acts as Administrator to the ProFunds. The Administrator provides
ProFunds with all required general administrative services, including, without
limitation, office space, equipment, and personnel; clerical and general back
office services; bookkeeping, internal accounting, and secretarial services; the
determination of net asset values; and the preparation and filing of all
reports, registration statements, proxy statements, and all other materials
required to be filed or furnished by ProFunds and the Funds under Federal and
state securities laws. The Administrator also maintains the shareholder account
records for ProFunds, distributes dividends and distributions payable by the
ProFunds, and produces statements with respect to account activity for the
ProFunds and their shareholders. The Administrator pays all fees and expenses
that are directly related to the services provided by the Administrator to
ProFunds; each ProFund reimburses the Administrator for all fees and expenses
incurred by the Administrator which are not directly related to the services the
Administrator provides to the ProFunds under the service agreement.
For its services as Administrator, each ProFund pays BISYS an annual fee
ranging from 0.15% of average daily net assets of $0 to $300 million to .05% of
average daily net assets of $1 billion and over. BISYS Funds Services, Inc.
("BFSI"), an affiliate of BISYS, acts as transfer agent and fund accounting
agent for the ProFunds, for which it receives additional fees. Additionally,
ProFunds and BISYS and BFSI have entered into an Omnibus Fee Agreement in which
the amount of compensation due and payable to BISYS shall be the greater of (i)
the aggregate fee amount due and payable for services pursuant to the
Administration, Fund Accounting and Transfer Agency Agreements and (ii) the
minimum relationship fee described as specific dollar amounts payable over a
period of ten calendar quarters ($1,100,000). The address for BISYS and BFSI is
3435 Stelzer Road, Suite 1000, Columbus, Ohio 43219.
ProFunds Advisors LLC, pursuant to a separate Management Services
Agreement, performs certain client support and other administrative services on
behalf of the ProFunds and feeder fund management and administrative services to
the Money Market ProFund. These services include monitoring the performance of
the underlying investment company in which the Money Market ProFund invests,
coordinating the Money Market ProFund's relationship with that investment
company, and communicating with the Trust's Board of Trustees and shareholders
regarding such entity's performance and the Money Market ProFund's two tier
structure and, in general, assisting the Board of Trustees of the Trust in all
aspects of the administration and operation of the Money Market ProFund. For
these services, the ProFunds will pay to ProFunds Advisors LLC a fee at the
annual rate of .15% of its average daily net assets for all non-money market
ProFunds and .35% of its average daily net assets for the Money Market ProFund.
Under an Administration and Services Agreement, Bankers Trust is
obligated on a continuous basis to provide such administrative services as the
Board of Trustees of the Portfolio reasonably deems necessary for the proper
administration of the Portfolio. Bankers Trust will generally assist in all
aspects of the Portfolio's operations and will: supply and maintain office
facilities (which may be in Bankers Trust's own offices); statistical and
research data, data processing services, clerical, accounting, bookkeeping and
recordkeeping services (including, without limitation, the maintenance of such
books and records as are required under the 1940 Act and the rules thereunder,
except as maintained by other agents of the Portfolio); internal auditing,
executive and administrative services; and information and supporting data for
reports to and filings with the Commission and various state Blue Sky
authorities; supply supporting documentation for meetings of the Board of
Trustees; provide monitoring reports and assistance regarding compliance with
the Portfolio's Declaration of Trust, by-laws, investment objectives and
policies and with federal and state securities laws; arrange for appropriate
insurance coverage; calculate the net asset value, net income and realized
capital gains or losses of the Portfolio; and negotiate arrangements with, and
supervise and coordinate the activities of, agents and others retained to supply
services. Pursuant to a sub-administration agreement (the "Sub-Administration
Agreement") Federated Securities Company performs sub-administration duties for
the Portfolio as from time to time may be agreed upon by Bankers Trust and
Federated Securities Company. The Sub-Administration Agreement provides that
Federated Securities Company will receive such compensation as from time to time
may be agreed upon by Federated Securities Company and Bankers Trust. All such
compensation will be paid by Bankers Trust.
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<PAGE> 75
For the fiscal years ended December 31, 1996, 1995 and 1994, Bankers
Trust earned compensation of $1,645,096, $1,282,576 and $1,269,028,
respectively, for administrative and other services provided to the Portfolio.
UMB Bank, N.A. acts as custodian to the non-money market ProFunds. UMB
Bank, N.A.'s address is 928 Grand Avenue, Kansas City, Missouri.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand LLP serves as independent auditors to the ProFunds.
Coopers & Lybrand LLP provides audit services, tax return preparation and
assistance and consultation in connection with certain SEC filings. Coopers &
Lybrand LLP is located at 100 East Broad Street, Columbus, Ohio 43215.
LEGAL COUNSEL
Dechert Price & Rhoads serves as counsel to the ProFunds. The firm's
address is 1500 K Street, N.W., Washington, DC 20005-1208,
DISTRIBUTOR
Concord Financial Group, Inc. will serve as the distributor and
principal underwriter in all fifty states and the District of Columbia. Concord
Financial Group, Inc. receives no compensation from the ProFunds for serving as
distributor. Concord Financial Group, Inc.'s address is 3435 Stelzer Road,
Columbus, Ohio 43219.
SHAREHOLDER SERVICES PLAN
Each ProFund has adopted a Shareholder Services Plan (the "Plan") which
provides that each ProFund will make payments equal to 1.00% (on an annual
basis) of the average daily value of the net assets of such ProFund's Adviser
shares attributable to or held in the name of investment advisers and other
authorized institutions that sell Service Shares ("Authorized Firms") for
providing account administration services to their clients who are beneficial
owners of such shares. The Administrator may act as an Authorized Firm. The
Trust will enter into agreements ("Shareholder Services Agreements") with
Authorized Firms that purchase Service Shares on behalf of their clients. The
Shareholder Services Agreements will provide for compensation to the Authorized
Firms in an amount up to 1.00% (on an annual basis) of the average daily net
assets of the Service shares of the applicable ProFund attributable to or held
in the name of the Authorized Firm for its clients.
The Trustees of the Trust, including a majority of the Trustees who are
not interested persons of the Trust and who have no direct or indirect financial
interest in the operation of the Plan or the related Shareholder Services
Agreements, voted to adopt the Plan and Shareholder Services Agreements at a
meeting called for the purpose of voting on such Plan and Shareholder Services
Agreements on October 28, 1997. The Plan and Shareholder Services Agreements
will remain in effect for a period of one year and will continue in effect
thereafter only if such continuance is specifically approved annually by a vote
of the Trustees in the manner described above. All material amendments of the
Plan must also be approved by the Trustees in the manner described above. The
Plan may be terminated at any time by a majority of the Trustees as described
above or by vote of a majority of the outstanding Service shares of the affected
ProFund. The Shareholder Services Agreements may be terminated at any time,
without payment of any penalty, by vote of a majority of the Trustees as
described above or by a vote of a majority of the outstanding Service Shares of
the affected ProFund on not more than 60 days' written notice to any other party
to the Shareholder Services Agreements. The Shareholder Services Agreements
shall terminate
22
<PAGE> 76
automatically if assigned. The Trustees have determined that, in their judgment,
there is a reasonable likelihood that the Plan will benefit the ProFunds and
holders of Service shares of such ProFunds. In the Trustees' quarterly review of
the Plan and Shareholder Services Agreements, they will consider their continued
appropriateness and the level of compensation provided therein.
The intent of the Plan and Shareholder Services Agreements is to procure
quality shareholder services on behalf of ProFund shareholders; in adopting the
Plan and Shareholder Services Agreements, the Trustees considered the fact that
such shareholder services may have the effect of enhancing distribution of
ProFund Service shares and growth of the ProFunds. In light of this, the
ProFunds intend to observe the procedural requirements of Rule 12b-1 under the
1940 Act on considering the continued appropriateness of the Plan and
Shareholder Services Agreements.
COSTS AND EXPENSES
Each ProFund bears all expenses of its operations other than those
assumed by the Advisor or the Administrator. ProFund expenses include: the
management fee; the servicing fee (including administrative, transfer agent, and
shareholder servicing fees); custodian and accounting fees and expenses, legal
and auditing fees; securities valuation expenses; fidelity bonds and other
insurance premiums; expenses of preparing and printing prospectuses,
confirmations, proxy statements, and shareholder reports and notices;
registration Trustees and expenses; proxy and annual meeting expenses, if any;
all Federal, state, and local taxes (including, without limitation, stamp,
excise, income, and franchise taxes); organizational costs; and non-interested
Trustees' fees and expenses.
PRINCIPAL HOLDERS OF THE TRUST
As of the date of this Statement of Additional Information, the sole
shareholder of ProFunds is National Capital Group Inc., which would control the
outcome of any matter submitted for consideration by the shareholders of any
ProFund.
TAXATION
Set forth below is a discussion of certain U.S. federal income tax
issues concerning the ProFunds and the purchase, ownership, and disposition of
ProFund share. This discussion does not purport to be complete or to deal with
all aspects of federal income taxation that may be relevant to shareholders in
light of their particular circumstances, nor to certain types of shareholders
subject to special treatment under the federal income tax laws (for example,
banks and life insurance companies). This discussion is based upon present
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the
regulations promulgated thereunder, and judicial and administrative ruling
authorities, all of which are subject to change, which change may be
retroactive. Prospective investors should consult their own tax advisors with
regard to the federal tax consequences of the purchase, ownership, or
disposition of ProFund shares, as well as the tax consequences arising under the
laws of any state, foreign country, or other taxing jurisdiction.
Each ProFund intends to be taxed as a regulated investment company under
Subchapter M of the Code. Accordingly, each ProFund generally must, among other
things, (a) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to certain securities loans, and
gains from the sale or other disposition of stock, securities or foreign
currencies, or other income derived with respect to its business of investing
in such stock, securities or currencies; (b) in each taxable year beginning
before August 6, 1997, derive less than 30% of its gross income from the sale
or other disposition of certain assets held less than three months, namely: (i)
stock or securities; (ii) options, futures, or forward contracts (other than
those on foreign currencies) that are not directly related to the ProFund's
principal business of investing in stock or securities (or options and futures
with respect to stock or securities); and (c) diversify its holdings so that,
at the end of each fiscal quarter, (i) at least 50% of the market value of the
ProFund's assets is represented by cash, U.S. government securities, the
securities of other regulated investment companies and other securities, with
such other securities limited, in respect of any one issuer, to an amount not
greater than 5% of the value of the ProFund's total assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its total assets is invested in the securities of any one issuer
(other than U.S. government securities and the securities of other regulated
investment companies).
As a regulated investment company, a ProFund generally will not be
subject to U.S. federal income tax on income and gains that it distributes to
shareholders, if at least 90% of the ProFund's investment company taxable income
(which includes, among other items, dividends, interest and the excess of any
net short-term capital gains over net long-term capital losses) for the taxable
year is distributed. Each ProFund intends to distribute substantially all of
such income.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax at
the ProFund level. To avoid the tax, each ProFund must distribute during each
calendar year an amount equal to the sum of (1) at least 98% of its ordinary
income (not taking into account any capital gains or losses) for the calendar
year, (2) at least 98% of its capital gains in excess of its capital losses
(adjusted for certain ordinary losses) for a one-year period generally ending on
October 31 of the calendar year, and (3) all ordinary income and capital gains
for previous years that were not distributed during such years. To avoid
application of the excise tax, the ProFunds intend to make distributions in
accordance with the calendar year distribution requirement. A distribution will
be treated as paid on December 31 of a calendar year if it is declared by the
ProFund in October, November or December of that year with a record date in such
a month and paid by the ProFund during January of the following year. Such
distributions will be taxable to shareholders in the calendar year in which the
distributions are declared, rather than the calendar year in which the
distributions are received.
MARKET DISCOUNT
If ProFund purchases a debt security at a price lower than the stated
redemption price of such debt security, the excess of the stated redemption
price over the purchase price is "market discount". If the amount of market
discount is more than a de minimis amount, a portion of such market discount
must be included as ordinary income (not capital gain) by the ProFund in each
taxable year in which the ProFund owns an interest in such debt security and
receives a principal payment on it. In particular, the ProFund will be required
to allocate that principal payment first to the portion of the market discount
on the debt security that has accrued but has not previously been includable in
income. In general, the amount of market discount that must be included for each
period is equal to the lesser of (i) the amount of market discount accruing
during such period (plus any accrued market discount for prior periods not
previously taken into account) or (ii) the amount of the principal payment with
respect to such period. Generally, market discount accrues on a daily basis for
each day the debt security is held by a ProFund at a constant rate over the time
remaining to the debt security's maturity or, at the election of the ProFund, at
a constant yield to maturity which takes into account the semi-annual
compounding of interest. Gain realized on the disposition of a market discount
obligation must be recognized as ordinary interest income (not capital gain) to
the extent of the "accrued market discount."
ORIGINAL ISSUE DISCOUNT
Certain debt securities acquired by the ProFunds may be treated as debt
securities that were originally issued at a discount. Original issue discount
can generally be defined as the difference between the price at which a security
was issued and its stated redemption price at maturity. Although no cash income
is actually received by a ProFund, original issue discount that accrues on a
debt security in a given year generally is treated for federal income tax
purposes as interest and, therefore, such income would be subject to the
distribution requirements applicable to regulated investment companies.
Some debt securities may be purchased by the ProFunds at a discount that
exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for federal income tax purposes
(see above).
OPTIONS, FUTURES AND FOREIGN CURRENCY FORWARD CONTRACTS
Any Regulated futures contracts and certain options (namely, nonequity
options and dealer equity options) in which a ProFund may invest may be "section
1256 contracts." Gains (or losses) on these contracts generally are considered
to be 60% long-term and 40% short-term capital gains or losses; however foreign
currency gains or losses arising from certain section 1256 contracts are
ordinary in character. Also, section 1256 contracts held by a ProFund at the end
of each taxable year (and on certain other dates prescribed in the Code) are
"marked to market" with the result that unrealized gains or losses are treated
as though they were realized.
Transactions in options, futures and forward contracts undertaken by the
ProFunds may result in "straddles" for federal income tax purposes. The straddle
rules may affect the character of gains (or losses) realized by a ProFund, and
losses realized by the ProFund on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which the losses are
realized. In addition, certain carrying charges (including interest expense)
associated with positions in a straddle may be required to be capitalized rather
than deducted currently. Certain elections that a ProFund may make with respect
to its straddle positions may also affect the amount, character and timing of
the recognition of gains or losses from the affected positions.
Because only a few regulations implementing the straddle rules have been
promulgated, the consequences of such transactions to the ProFunds are not
entirely clear. The straddle rules may increase the amount of short-term capital
gain realized by a ProFund, which is taxed as ordinary income when distributed
to shareholders. Because application of the straddle rules may affect the
character of gains or losses, defer losses and/or accelerate the recognition of
gains or losses from the affected straddle positions, the amount which must be
distributed to shareholders as ordinary income or long-term capital gain may be
increased or decreased substantially as compared to a fund that did not engage
in such transactions.
CONSTRUCTIVE SALES
Recently enacted rules may affect the timing and character of gain if a
ProFund engages in transactions that reduce or eliminate its risk of loss with
respect to appreciated financial positions. If the ProFund enters into certain
transactions in property while holding substantially identical property, the
ProFund would be treated as if it had sold and immediately repurchased the
property and would be taxed on any gain (but not loss) from the constructive
sale. The character of gain from a constructive sale would depend upon the
ProFund's holding period in the property. Loss from a constructive sale would be
recognized when the property was subsequently disposed of, and its character
would depend on the ProFund's holding period and the application of various loss
deferral provisions of the Code.
PASSIVE FOREIGN INVESTMENT COMPANIES
The ProFund may invest in shares of foreign corporations that may be
classified under the Code as passive foreign investment companies ("PFICs"). In
general, a foreign corporation is classified as a PFIC if at least one-half of
its assets constitute investment-type assets, or 75% or more of its gross
income is investment-type income. If a ProFund receives a so-called "excess
distribution" with respect to PFIC stock, the ProFund itself may be subject to
a tax on a portion of the excess distribution, whether or not the corresponding
income is distributed by the ProFund to shareholders. In general, under the
PFIC rules, an excess distribution is treated as having been realized ratably
over the period during which the ProFund held the PFIC shares. Each ProFund
will itself be subject to tax on the portion, if any, of an excess distribution
that is so allocated to prior ProFund taxable years and an interest factor will
be added to the tax, as if the tax had been payable in such prior taxable
years. Certain distributions from a PFIC as well as gain from the sale of PFIC
shares are treated as excess distributions. Excess distributions are
characterized as ordinary income even though, absent application of the PFIC
rules, certain excess distributions might have been classified as capital gains.
The ProFund may be eligible to elect alternative tax treatment with
respect to PFIC shares. Under an election that currently is available in some
circumstances, a ProFund generally would be required to include in its gross
income its share of the earnings of a PFIC on a current basis, regardless of
whether distributions were received from the PFIC in a given year. If this
election were made, the special rules, discussed above, relating to the taxation
of excess distributions, would not apply. In addition, another election would
involve marking to market the ProFund's PFIC shares at the end of each taxable
year, with the result that unrealized gains would be treated as though they were
realized and reported as ordinary income. Any mark-to-market losses and any
loss from an actual disposition of ProFund shares would be deductible as
ordinary losses to the extent of any net mark-to-market gains included in
income in prior years.
DISTRIBUTIONS
Distributions of investment company taxable income are taxable to a U.S.
shareholder as ordinary income, whether paid in cash or shares. Dividends paid
by a ProFund to a corporate shareholder, to the extent such dividends are
attributable to dividends received from U.S. corporations by the ProFund, may
qualify for the dividends received deduction. However, the revised alternative
minimum tax applicable to corporations may deduct the value of the dividends
received deduction. Distributions of net capital gains (the excess of net
long-term capital gains over net short-term capital losses), if any, designated
by the ProFund as capital gain dividends, whether paid in cash or in shares, are
taxable as gain from the sale or exchange of an asset held for more than one
year, regardless of how long the shareholder has held the ProFund's shares. The
ProFunds expect that such distributions will be taxable to shareholders as
long-term capital gain, although the matter is not free from doubt. Capital
gains dividends are not eligible for the dividends received deduction.
Shareholders will be notified annually as to the U.S. federal tax status
of distributions, and shareholders receiving distributions in the form of newly
issued shares will receive a report as to the net asset value of the shares
received.
If the net asset value of shares is reduced below a shareholder's cost
as a result of a distribution by a ProFund, such distribution generally will be
taxable even though it represents a return of invested capital. Investors should
be careful to consider the tax implications of buying shares of a ProFund just
prior to a distribution. The price of shares purchased at this time will include
the amount of the forthcoming distribution, but the distribution will generally
be taxable.
DISPOSITION OF SHARES
Upon a redemption, sale or exchange of shares of a ProFund, a
shareholder will realize a taxable gain or loss depending upon his or her basis
in the shares. A gain or loss will be treated as capital gain or loss if the
shares are capital assets in the shareholder's hands and generally will be
long-term, mid-term or short-term, depending upon the shareholder's holding
period for the shares. Any loss realized on a redemption, sale or exchange will
be disallowed to the extent the shares disposed of are replaced (including
through reinvestment of dividends) within a period of 61 days, beginning 30 days
before and ending 30 days after the shares are disposed of. In such a case the
basis of the shares acquired will be adjusted to reflect the disallowed loss.
Any loss realized by a shareholder on the disposition of a ProFund's shares held
by the shareholder for six months or less will be treated for tax purposes as a
long-term capital loss to the extent of any distributions of capital gain
dividends received or treated as having been received by the shareholder with
respect to such shares.
BACKUP WITHHOLDING
Each ProFund generally will be required to withhold federal income tax
at a rate of 31% ("backup withholding") from dividends paid, capital gain
distributions, and redemption proceeds to shareholders if (1) the shareholder
fails to furnish the ProFund with the shareholder's correct taxpayer
identification number or social security number, (2) the IRS notifies the
shareholder or the ProFund that the shareholder has failed to report properly
certain interest and dividend income to the IRS and to respond to notices to
that effect, or (3) when required to do so, the shareholder fails to certify
that he or she is not subject to backup withholding. Any amounts withheld may be
credited against the shareholder's federal income tax liability.
OTHER TAXATION
Distributions may be subject to additional state, local and foreign
taxes, depending on each shareholder's particular situation. Non-U.S.
shareholders and certain types of U.S. shareholders subject to special treatment
under the U.S. federal income tax laws (e.g. banks and life insurance companies)
may be subject to U.S. tax rules that differ significantly from those summarized
above.
EQUALIZATION ACCOUNTING
Each ProFund distributes its net investment income and capital gains to
shareholders as dividends annually to the extent required to qualify as a
regulated investment company under the Code and generally to avoid federal
income or excise tax. Under current law, each ProFund may on its tax return
treat as a distribution of investment company taxable income and net capital
gain the portion of redemption proceeds paid to redeeming shareholders that
represents the redeeming shareholders' portion of the ProFund's undistributed
investment company taxable income and net capital gain. This practice, which
involves the use of equalization accounting, will have the effect of reducing
the amount of income and gains that the ProFund is required to distribute as
dividends to shareholders in order for the ProFund to avoid federal income tax
and excise tax. This practice may also reduce the amount of distributions
required to be made to nonredeeming shareholders and the amount of any
undistributed income will be reflected in the value of the ProFund's shares; the
total return on a shareholder's investment will not be reduced as a result of
the ProFund's distribution policy. Investors who purchase shares shortly before
the record date of a distribution will pay the full price for the shares and
then receive some portion of the price back as a taxable distribution.
PERFORMANCE INFORMATION
TOTAL RETURN CALCULATIONS
From time to time, each of the non-money market ProFunds may advertise
the total return of the ProFund for prior periods. Any such advertisement would
include at least average annual total return quotations for one, five, and
ten-year periods, or for the life of the ProFund. Other total return quotations,
aggregate or average, over other time periods for the ProFund also may be
included.
The total return of a ProFund for a particular period represents the
increase (or decrease) in the value of a hypothetical investment in the ProFund
from the beginning to the end of the period. Total return is calculated by
subtracting the value of the initial investment from the ending value and
showing the difference as a percentage of the initial investment; this
calculation assumes that the initial investment is made at the current net asset
value and that all income dividends or capital gains distributions during the
period are reinvested in shares of the ProFund at net asset value. Total return
is based on historical earnings and asset value fluctuations and is not intended
to indicate future performance. No adjustments are made to reflect any income
taxes payable by shareholders on dividends and distributions paid by the
ProFund.
Average annual total return quotations for periods of two or more years
are computed by finding the average annual compounded rate of return over the
period that would equal the initial amount invested to the ending redeemable
value.
YIELD CALCULATIONS
From time to time, the Money Market ProFund advertises its "yield" and
"effective yield." Both yield figures are based on historical earnings and are
not intended to indicate future performance. The "yield" of the Money Market
ProFund refers to the income generated by an investment in the Money Market
ProFund
23
<PAGE> 77
over a seven-day period (which period will be stated in the advertisement). This
income is then "annualized." That is, the amount of income generated by the
investment during that week is assumed to be generated each week over a 52-week
period and is shown as a percentage of the investment. The "effective yield" is
calculated similarly, but, when annualized, the income earned by an investment
in the Money Market ProFund is assumed to be reinvested. The "effective yield"
will be slightly higher than the "yield" because of the compounding effect of
this assumed reinvestment.
Since yield fluctuates, yield data cannot necessarily be used to compare
an investment in the Money Market ProFund's shares with bank deposits, savings
accounts, and similar investment alternatives which often provide an agreed or
guaranteed fixed yield for a stated period of time. Shareholders of the Money
Market ProFund should remember that yield generally is a function of the kind
and quality of the instrument held in portfolio, portfolio maturity, operating
expenses, and market conditions.
COMPARISONS OF INVESTMENT PERFORMANCE
In conjunction with performance reports, promotional literature, and/or
analyses of shareholder service for a ProFund, comparisons of the performance
information of the ProFund for a given period to the performance of recognized,
unmanaged indexes for the same period may be made. Such indexes include, but are
not limited to, ones provided by Dow Jones & Company, Standard & Poor's
Corporation, Lipper Analytical Services, Inc., Shearson Lehman Brothers, the
National Association of Securities Dealers, Inc., The Frank Russell Company,
Value Line Investment Survey, the American Stock Exchange, the Philadelphia
Stock Exchange, Morgan Stanley Capital International, Wilshire Associates, the
Financial Times-Stock Exchange, and the Nikkei Stock Average and Deutcher
Aktienindex, all of which are unmanaged market indicators. Such comparisons can
be a useful measure of the quality of a ProFund's investment performance. In
particular, performance information for the Bull ProFund, the UltraBull ProFund,
the Bear ProFund and the UltraBear ProFund may be compared to various unmanaged
indexes, including, but not limited to, the S&P 500 Index or the Dow Jones
Industrial Average; performance information for the UltraOTC ProFund may be
compared to various unmanaged indexes, including, but not limited to its current
benchmark, the NASDAQ 100 Index.
In addition, rankings, ratings, and comparisons of investment
performance and/or assessments of the quality of shareholder service appearing
in publications such as Money, Forbes, Kiplinger's Magazine, Personal Investor,
Morningstar, Inc., and similar sources which utilize information compiled (i)
internally, (ii) by Lipper Analytical Services, Inc. ("Lipper"), or (iii) by
other recognized analytical services, may be used in sales literature. The total
return of each ProFund (other than the Money Market ProFund) also may be
compared to the performances of broad groups of comparable mutual funds with
similar investment goals, as such performance is tracked and published by such
independent organizations as Lipper and CDA Investment Technologies, Inc., among
others. The Lipper ranking and comparison, which may be used by the ProFunds in
performance reports, will be drawn from the "Capital Appreciation ProFunds"
grouping for the Bull ProFund, the UltraBull ProFund, the Bear ProFund and the
UltraBear ProFund and from the "Small Company Growth ProFunds" grouping for the
UltraOTC ProFund. In addition, the broad-based Lipper groupings may be used for
comparison to any of the ProFunds.
Further information about the performance of the ProFunds will be
contained in the ProFunds' annual reports to shareholders, which may be obtained
without charge by writing to the ProFunds at the address or telephoning the
ProFunds at telephone number set forth on the cover page of this Prospectus.
RATING SERVICES
The ratings of Moody's Investors Service, Inc. and Standard & Poor's
Ratings Group represent their opinions as to the quality of the securities that
they undertake to rate. It should be emphasized, however, that ratings are
relative and subjective and are not absolute standards of quality. Although
these ratings are an initial criterion for selection of portfolio investments,
Bankers Trust also makes its own evaluation of these securities, subject to
review
24
<PAGE> 78
by the Board of Trustees. After purchase by the Portfolio, an obligation
may cease to be rated or its rating may be reduced below the minimum required
for purchase by the Portfolio. Neither event would require the Portfolio to
eliminate the obligation from its portfolio, but Bankers Trust will consider
such an event in its determination of whether the Portfolio should continue to
hold the obligation. A description of the ratings used herein and in the
Prospectus is set forth in the Appendix to this SAI.
FINANCIAL STATEMENTS
(see attached)
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS, OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
PRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY PROFUNDS.
THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE AN OFFERING BY
PROFUNDS IN ANY JURISDICTION IN WHICH SUCH AN OFFERING MAY NOT LAWFULLY BE MADE.
25
<PAGE> 79
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of the ProFunds:
We have audited the accompanying statement of assets and liabilities of the
Money Market ProFund as of October 15, 1997. This financial statement is the
responsibility of the Money Market ProFund's management. Our responsibility is
to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of the Money Market ProFund as of
October 15, 1997, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
October 17, 1997
<PAGE> 80
PROFUNDS
MONEY MARKET PROFUND
STATEMENT OF ASSETS AND LIABILITIES
AS OF OCTOBER 15, 1997
<TABLE>
<S> <C>
ASSETS:
Cash $100,000
Deferred organization expenses 13,833
--------
Total Assets 113,833
========
LIABILITIES:
Accrued organization expenses 13,833
--------
NET ASSETS: $100,000
========
NET ASSETS CONSIST OF:
Capital - 100,000 shares of
beneficial interest issued and
outstanding; unlimited shares
authorized (par value $0.001) -
Investor Class $100,000
========
NET ASSET VALUE:
Investor Class
($100,000/100,000 shares issued
and outstanding) - offering and
redemption price per share $1.00
</TABLE> ========
See notes to financial statements.
<PAGE> 81
PROFUNDS
MONEY MARKET PROFUND
FINANCIAL STATEMENTS
OCTOBER 15, 1997
1. ORGANIZATION
ProFunds (the "Company"), an open-end management investment company
established as a Delaware business trust, is registered under the
Investment Company Act of 1940 (the "1940 Act"). The Company offers
shares of the following funds: Bull ProFund, UltraBull ProFund, Bear
ProFund, Ultra Bear ProFund, Ultra OTC ProFund and Money Market ProFund
each of which offers Investor Shares and Service Shares. Both classes of
shares have identical rights and privileges except with respect to Service
Organization fees and voting rights on matters affecting a single class of
shares. The accompanying financial statements relates to only the Money
Market ProFund ("The Fund"). The Fund had no operations other than those
actions relating to organizational matters. As of October 15, 1997, all
outstanding shares of the Fund are owned by National Capital Group, Inc.,
which is affiliated with Louis Mayberg, an officer of the Company.
The investment objective of the Fund is to seek to provide investors with
a high level of current income consistent with liquidity and preservation
of capital through investment in high quality money market instruments.
2. ORGANIZATION EXPENSES
All costs incurred by the Company in connection with the organization of
the Company and the initial public offering of shares of the Company,
principally professional fees, have been deferred. Upon commencement of
operations of the Fund, the deferred organization expenses will be
amortized on a straight-line basis over a period of five years. In the
event that any of the initial shares of the Fund are redeemed during the
amortization period by any holder thereof, the redemption proceeds will be
reduced by any unamortized organization expenses in the same proportion as
the number of said shares being redeemed bears to the number of initial
shares that are outstanding at the time of the redemption.
3. RELATED PARTY TRANSACTIONS
ProFund Advisors LLC ("ProFund") serves as the Investment Advisor of the
non money market Profunds. The Fund invests in the Cash Management Portfolio.
The investment advisor of the Cash Management Portfolio is Bankers Trust
Company ("Bankers Trust"), a wholly-owned subsidiary of Bankers Trust New York
Corporation. Under an advisory agreement with Bankers Trust, the Cash
Management Portfolio pays an advisory fee at an annualized rate of 0.15% of the
Cash Management Portfolio's average daily net assets. The Fund bears its pro
rata portion of this advisory fee. BISYS Fund Services ("BISYS") serves the
Funds as Administrator, Fund Accountant, and Transfer Agent. For its services
as Administrator, BISYS will receive fees in the amount of 0.15% of the Fund's
average daily net assets of $0 to $300 million, 0.13% of the Fund's average
daily net assets of $300 million to $500 million, 0.11% of the Fund's average
daily net assets of $500 million to $700 million, .09% of the Fund's average
daily net assets of $700 million to $900 million, .07% of the Fund's average
daily net assets of $900 million to $1 billion and .05% of the Fund's average
daily net assets of $1 billion and over. ProFund also performs certain
administration and client support services. For its services, ProFund receives
a fee at an amount of 0.35% of the Fund's average daily net assets, Concord
Financial Group, Inc., a wholly owned subsidiary of Concord Holding
Corporation, a wholly owned subsidiary of The BISYS Group also serves as
Distributor for the Fund's shares.
<PAGE> 82
Various registered investment advisors banks, trust companies,
broker-dealers (other than the Sponsor) or other financial organizations
(collectively, "Authorized Firms") may provide administrative services for
the Fund, such as maintaining shareholder accounts and records. The Fund
may pay fees to Authorized Firms in amounts up to an annual rate of 1.00%
of the daily net asset value of the Fund's shares owned by shareholders
with whom the Authorized Firms have a servicing relationship.
The law firm of Michael L. Sapir, which is affiliated with an officer of
the Fund has performed various legal services in connection with the
initial registration and organization of the Trust. These costs, in the
amount of $12,500, and the resultant payment liability are reflected in
the Deferred organizational expenses and the accrued organizational
expenses, respectively.
Certain officers of the Company are affiliated with BISYS. Such persons
are not paid directly by the Company for serving in those capacities.
4. ESTIMATES
The preparation of this financial statement requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statement.
<PAGE> 83
APPENDIX
DESCRIPTION OF SECURITIES RATINGS
Description of S&P's corporate ratings:
AAA-Bonds rated AAA have the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA-Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issuers only in small degree.
S&P's letter ratings may be modified by the addition of a plus or a
minus sign, which is used to show relative standing within the major categories,
except in the AAA rating category.
Description of Moody's corporate bond ratings:
Aaa-Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge". Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa-Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
Moody's applies the numerical modifiers 1, 2 and 3 to each generic
rating classification from Aa through B. The modifier 1 indicates that the
security ranks in the higher end of its generic category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks
in the lower end of its generic rating category.
Description of Fitch Investors Service's corporate bond ratings:
AAA-Securities of this rating are regarded as strictly high-grade,
broadly marketable, suitable for investment by trustees and fiduciary
institutions, and liable to but slight market fluctuation other than through
changes in the money rate. The factor last named is of importance varying with
the length of maturity. Such securities are mainly senior issues of strong
companies, and are most numerous in the railway and public utility fields,
though some industrial obligations have this rating. The prime feature of an AAA
rating is showing of earnings several times or many times interest requirements
with such stability of applicable earnings that safety is beyond reasonable
question whatever changes occur in conditions. Other features may enter in, such
as a wide margin of protection through collateral security or direct lien on
specific property as in the case of high class equipment certificates or bonds
that are first mortgages on valuable real estate. Sinking funds or voluntary
reduction of the debt by call or purchase are often factors, while guarantee or
assumption by parties other than the original debtor may also influence the
rating.
AA-Securities in this group are of safety virtually beyond question,
and as a class are readily salable while many are highly active. Their merits
are not greatly unlike those of the AAA class, but a security so rated may be of
junior though strong lien in many cases directly following an AAA security or
the margin of safety is less strikingly broad. The issue may be the obligation
of a small company, strongly secure but influenced as the ratings by the lesser
financial power of the enterprise and more local type of market. Description of
Duff & Phelps' corporate bond ratings:
AAA-Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury Funds.
A-1
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AA+, AA,-High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
Description of S&P's municipal bond ratings:
AAA-Prime-These are obligations of the highest quality. They have the
strongest capacity for timely payment of debt service.
General Obligation Bonds-In a period of economic stress, the issuers
will suffer the smallest declines in income and will be least susceptible to
autonomous decline. Debt burden is moderate. A strong revenue structure appears
more than adequate to meet future expenditure requirements. Quality of
management appears superior.
Revenue Bonds-Debt service coverage has been, and is expected to
remain, substantial; stability of the pledged revenues is also exceptionally
strong due to the competitive position of the municipal enterprise or to the
nature of the revenues. Basic security provisions (including rate covenant,
earnings test for issuance of additional bonds and debt service reserve
requirements) are rigorous. There is evidence of superior management.
AA-High Grade-The investment characteristics of bonds in this group are
only slightly less marked than those of the prime quality issues. Bonds rated AA
have the second strongest capacity for payment of debt service.
S&P's letter ratings may be modified by the addition of a plus or a
minus sign, which is used to show relative standing within the major rating
categories, except in the AAA rating category.
Description of Moody's municipal bond ratings:
Aaa-Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa-Bonds which are rated Aa judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, or fluctuation of
protective elements may be of greater amplitude, or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
Moody's may apply the numerical modifier in each generic rating
classification from Aa through B. The modifier 1 indicates that the security
within its generic rating classification possesses the strongest investment
attributes.
Description of S&P's municipal note ratings:
Municipal notes with maturities of three years or less are usually
given note ratings (designated SP-1 or SP-2) to distinguish more clearly the
credit quality of notes as compared to bonds. Notes rated SP-1 have a very
strong or strong capacity to pay principal and interest. Those issues determined
to possess overwhelming safety characteristics are given the designation of
SP-1+. Notes rated SP-2 have a satisfactory capacity to pay principal and
interest.
Description of Moody's municipal note ratings:
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade (MIG) and for variable rate demand
obligations are designated Variable Moody's Investment Grade (VMIG). This
distinction recognizes the differences between short-term credit risk and
long-term risk. Loans bearing the designation MIG-1/VMIG-1 are of the best
quality, enjoying strong protection from established cash flows of funds for
their servicing or from established and broad-based access to the market for
refinancing, or both. Loans the designation MIG-2/VIMG-2 are of high quality,
with ample margins of protection, although not as large as the preceding group.
Description of S&P commercial paper ratings:
A-2
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Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to posses overwhelming safety characteristics are denoted A-1+.
Description of Moody's Commercial paper ratings:
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or related supporting institutions) are
considered to have a superior capacity for repayment of short-term promissory
obligations.
Description of Fitch Investors Service's commercial paper ratings:
F-1+-Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely payment.
F-1-Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than the strongest
issue.
Description of Duff & Phelps' commercial paper ratings:
Duff 1+-Highest certainly of timely payment. Short term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk free U.S. Treasury short
term obligations.
Duff 1-Very high certainty of timely +.
Description of Moody's Commercial paper ratings:
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or relating supporting institutions) are
considered to have a superior capacity for repayment of short-term promissory
obligations.
Description of Fitch Investors Service's commercial paper ratings:
F-1+-Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely payment
risk. Capacity for timely repayment of principal and interest is substantial.
Adverse changes in business economic or financial conditions may increase
investment risk albeit not very significantly.
A-Obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is strong, although
adverse changes in business, economic or financial conditions may lead to
increased investment risk.
BBB-Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
higher categories.
BB-Obligations for which there is a possibility of investment risk
developing. Capacity for timely repayment of principal and interest exists, but
is susceptible over time to adverse changes in business, economic or financial
conditions.
B-Obligations for which investment risk exists. Timely repayment of
principal and interest is not sufficiently protected against adverse changes in
business, economic or financial conditions.
CCC-Obligations for which there is a current perceived possibility of
default. Timely repayment of principal and interest is dependent on favorable
business, economic or financial conditions.
CC-Obligations which are highly speculative or which have a high risk
of default.
C-Obligations which are currently in default.
Notes: "+" or "-".
A-3
<PAGE> 86
Description of Moody's commercial paper ratings:
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or related supporting institutions) are
considered to have a superior capacity for repayment of short-term promissory
obligations.
Description of Fitch Investors Service's commercial paper ratings:
F-1+-Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely business,
economic or financial conditions.
A3-Obligations supported by an adequate capacity for timely repayment.
Such capacity is more susceptible to adverse changes in business, economic or
financial conditions than for obligations in higher categories.
B-Obligations for which the capacity for timely repayment is
susceptible to adverse changes in business, economic or financial conditions.
C-Obligations for which there is an inadequate capacity to ensure
timely repayment.
D-Obligations which have a high risk of default or which are currently
in default.
Description of Thomson Bank Watch Short-Term Ratings:
TBW-1-The highest category; indicates a very high likelihood that
principal and interest will be paid on a timely basis.
TBW-2-The second-highest category; while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as of issues rated `TBW-1 ` `.
TWB-3-The lowest investment-grade category; indicates that while the
obligation is more susceptible to adverse developments (both internal and
external) than those with higher ratings, the capacity to service principal and
interest in a timely fashion is considered adequate.
TWB-4-The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
Description of Thomson BankWatch Long-Term Ratings:
AAA-The highest category; indicates that the ability to repay principal
and interest on a timely basis is extremely high.
AA-The second -highest category; indicates a very strong ability to
repay principal and interest on a timely basis, with limited incremental risk
compared to issues rated in the highs category.
A-The third-highest category; indicates the ability to repay principal
and interest is strong. Issues rated `a ` ` could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
BBB-The lowest investment-grade category; indicates an acceptable
capacity to repay principal and interest. Issues rated "BBB" are, however, more
vulnerable to adverse developments (both internal and external) than obligations
with higher ratings.
Non-Investment Grade
(Issues regarded as having speculative characteristics in the likelihood of
timely repayment of principal and interest.)
A-4
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BB-While not investment grade, the "BB" rating suggests that the
likelihood of default is considerably less than for lower-rated issues. However,
there are significant uncertainties that could affect the ability to adequately
service debt obligations.
B-Issues rated "B" show a higher degree of uncertainty and therefore
greater likelihood of default than higher-rated issues. Adverse development
could well negatively affect the payment of interest and principal on a timely
basis.
CCC-Issues rate "CCC" clearly have a high likelihood of default, with
little capacity to address further adverse changes in financial circumstances.
CC-"CC" is applied to issues that are subordinate to other obligations
rated "CCC" and are afforded less protection in the event of bankruptcy or
reorganization.
D-Default
These long-term debt ratings can also be applied to local currency
debt. In such cases the ratings defined above will be preceded by the
designation "local currency".
RATING IN THE LONG-TERM DEBT CATEGORIES MY INCLUDE A PLUS (+) OR MINUS (-)
DESIGNATION, WHICH INDICATES WHERE WITHIN THE RESPECTIVE CATEGORY THE ISSUE IS
PLACED.
A-5
