<PAGE> 1
ULTRASHORT OTC PROFUND
7900 WISCONSIN AVENUE, SUITE 300
BETHESDA, MARYLAND 20814
(888) 776-5717 (REGISTERED INVESTMENT ADVISERS ONLY)
(888) PRO-FNDS ((888) 776-3637) (FOR ALL OTHERS)
This prospectus describes the UltraShort OTC ProFund (the "ProFund").
The ProFund seeks investment results that correspond each day to twice (200%) of
the inverse (opposite) of the performance of the NASDAQ 100 Index(TM). The
ProFund offers two classes of shares: Service Shares and Investor Shares. The
ProFund may be used by professional money managers and investors to seek profits
during periods when the NASDAQ 100 Index(TM) decreases in value or to hedge an
existing investment portfolio. Sales are made without any sales charge at net
asset value.
The ProFund involves special risks, some not traditionally associated
with mutual funds. Unlike that of most equity mutual funds, the value of shares
of the ProFund should normally fall when the price of shares of companies within
its market segment rise. In addition, the ProFund's risks include those related
to the use of aggressive and leveraged investment techniques, high portfolio
turnover and possible tracking error. Investors should carefully review and
evaluate these risks in considering an investment in the ProFund to determine
whether an investment in the ProFund is appropriate. The ProFund alone does not
constitute a balanced investment plan and is not intended for investors whose
principal objective is current income or preservation of capital. See "Special
Risk Considerations." Because of the inherent risks in any investment, there can
be no assurance that the ProFund's investment objectives will be achieved.
This prospectus relates only to the UltraShort OTC ProFund. Interested
persons who wish to obtain a copy of the prospectus for the Bull ProFund,
UltraBull ProFund, Bear ProFund, UltraBear ProFund, UltraOTC ProFund and Money
Market ProFund may contact ProFunds at the address above or by telephoning
ProFunds at the telephone numbers listed above. 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 ProFund
before investing. A Statement of Additional Information ("SAI"), dated November
10, 1997, as supplemented from time to time, containing additional information
about the ProFund 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.
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 May 1, 1998
<PAGE> 2
FEES AND EXPENSES
The following table illustrates all expenses and fees that a
shareholder of the ProFund will incur in the first year of operations:
INVESTOR SERVICE
CLASS CLASS
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases None None
Sales Load Imposed on Reinvested Dividends None None
Deferred Sales Load None None
Redemption Fees(1) None None
Exchange Fees None None
ANNUAL FUND OPERATING EXPENSES:
Advisory Fees 0.75% 0.75%
12b-1 Fees None None
Other Expenses(2)(3) 0.58% 1.58%
Total ProFund Operating Expenses 1.33% 2.33%
(1) The ProFund charges $15 for each wire transfer of redemption proceeds;
this charge may be waived at the discretion of ProFunds.
(2) Based on estimated expenses to be incurred in the ProFund's first year
of operations. Other expenses include fees of .15% for administration
and shareholder services. The fee under the Shareholder Services Plan
is calculated on the basis of the average net assets of the ProFund's
Service Shares at an annual rate not to exceed 1.00%.
(3) Without waiver of administration fees, "Other Expenses" and "Total
Operating Expenses" would be 0.67% and 1.42%, respectively, for the
Investor Class and 1.67% and 2.42%, respectively, for the Service
Class.
EXAMPLES
Assuming hypothetical investments of $1,000 in Investor Shares and
Service Shares, a 5% annual return, and redemption at the end of each time
period, an investor in the ProFund would pay operating expenses as follows:
1 YEAR 3 YEARS
Investor Class $14 $42
Service Class $24 $73
The preceding table of fees and expenses is provided to assist
investors in understanding the various costs and expenses which may be borne
directly or indirectly by an investor. 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 ProFund
and the services provided to the ProFund, see "Management of the ProFund" 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.
2
<PAGE> 3
SPECIAL CONSIDERATIONS
The ProFund presents 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 ProFund in determining
the appropriateness of investing in the ProFund.
TRACKING ERROR
While the ProFund does not expect that its return over a year will
deviate adversely from its respective benchmark by more than ten percent,
several factors may affect its ability to achieve this correlation. Among these
factors are: (1) expenses, including brokerage (which may be increased by high
portfolio turnover) and the cost of the investment techniques employed by the
ProFund; (2) an imperfect correlation between the performance of instruments
held by the ProFund, such as futures contracts and options, and the performance
of the underlying securities in the cash market; (3) bid-ask spreads (the effect
of which may be increased by portfolio turnover); (4) the ProFund holding
instruments traded in a market that has become illiquid or disrupted; (5)
ProFund share prices being rounded to the nearest cent; (6) changes to the
benchmark index that are not disseminated in advance; (7) the need to conform
the ProFund's portfolio holdings to comply with investment restrictions or
policies or regulatory or tax law requirements, and (8) early and unanticipated
closings of the markets on which the holdings of the ProFund trade, resulting in
the inability of the ProFund to execute intended portfolio transactions. While a
close correlation of the 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 the ProFund may diverge significantly from the
accumulative percentage decrease or increase in the benchmark due to a
compounding effect.
AGGRESSIVE INVESTMENT TECHNIQUES
The 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. The
ProFund expects that it will primarily use these techniques in seeking to
achieve its objective and that a significant portion (up to 100%) of the assets
of the ProFund will be held in liquid instruments in a segregated account by the
ProFund as "cover" for these investment techniques.
Participation in the options or futures markets by the 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 ProFund intends to regularly use leveraged investment techniques in
pursuing its investment objective. Utilization of leveraging involves special
risks and should be considered to be speculative. Leverage exists when the
ProFund achieves the right to a return on a capital base that
3
<PAGE> 4
exceeds the amount the ProFund has invested. Leverage creates the potential for
greater gains to shareholders of the ProFund 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 the ProFund's 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 the
ProFund achieves its investment objective, during market conditions adverse to
the Fund's objective (i.e., during a rising market), shareholders should
experience a loss of approximately twice the amount they would have incurred had
the ProFund not been leveraged.
PORTFOLIO TURNOVER
The ProFund anticipates that its investors, as part of an
asset-allocation or market-timing investment strategy, will frequently exchange
its shares of the ProFund for shares in other ProFunds pursuant to the exchange
policy (see "How to Exchange Shares of ProFunds"), which would cause the ProFund
to experience high portfolio turnover. A higher portfolio turnover rate would
likely involve correspondingly greater brokerage commissions and other expenses
which would be borne by the ProFund. In addition, the 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 Securities and
Exchange Commission (the "Commission"), the portfolio turnover rate for the
ProFund is calculated without regard to instruments, including options and
futures contracts, having a maturity of less than one year. The ProFund
typically holds most of its investments in short-term options and futures
contracts and other instruments which are excluded for purposes of computing
portfolio turnover. Therefore, based on the Commission's portfolio turnover
formula, the ProFund expects a portfolio turnover rate of approximately 0%.
NON-DIVERSIFIED STATUS
The ProFund is a "non-diversified" series. The 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. The 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. The ProFund's classification as a "non-diversified" investment 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"). The ProFund, however, intends to seek to qualify as a
"regulated investment company" for purposes of the Internal Revenue Code, which
imposes diversification requirements on the ProFund that are less restrictive
than the requirements applicable to "diversified" investment companies under the
1940 Act.
INVESTMENT OBJECTIVE
GENERAL
The ProFund seeks investment results that correspond each day to twice
of the inverse (opposite) of the performance of the NASDAQ 100 Index(TM). It is
the policy of the ProFund to pursue its investment objective of correlating with
its benchmark regardless of market conditions, to remain nearly fully invested
and not to take defensive positions.
4
<PAGE> 5
Fundamental securities analysis is not generally used by ProFund
Advisors LLC (the "Advisor") in seeking to correlate with the ProFund's
benchmark. Rather, the Advisor primarily uses statistical and quantitative
analysis to determine the investments the 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 the
ProFund and the performance of its benchmark), certain factors will tend to
cause the ProFund's investment results to vary from a perfect correlation to its
benchmark. The ProFund, however, does not expect that its total returns will
vary adversely from its respective current benchmarks by more than ten percent
over the course of a year, although there can be no guarantee with respect to
such correlation. See "Special Considerations."
The ProFund is designed to allow investors to seek to profit from
anticipated decreases in the NASDAQ 100 Index(TM) or to hedge an existing
portfolio of securities or mutual fund shares. The ProFund's investment
objective is to provide investment results that will inversely correlate to 200%
of the performance of the NASDAQ 100 Index(TM). The ProFund seeks to achieve
this inverse correlation on each trading day.
If the ProFund achieved a perfect inverse correlation for any single
trading day, the net asset value of the shares of the ProFund would increase for
that day proportional to twice any decrease in the level of the NASDAQ 100
Index(TM). Conversely, the net asset value of the shares of the ProFund would
decrease for that day proportional to twice any increase in the level of the
NASDAQ 100 Index(TM) for that day.
For example, if the NASDAQ 100 Index(TM) were to decrease by 1% on a
particular day, investors in the ProFund should experience a gain in net asset
value of approximately 2% for that day. Conversely, if the NASDAQ 100 Index(TM)
were to increase by 1% by the close of business on a particular trading day,
investors in the ProFund would experience a loss in net asset value of
approximately 2%.
In pursuing its investment objective, the ProFund generally does not
invest in traditional securities, such as common stock of operating companies.
Rather, the ProFund employs 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 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. The ProFund 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. Due to the nature of the ProFund, investors could experience
substantial losses during sustained periods of rising equity prices.
The NASDAQ 100 Index(TM) 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 Index is proportionately
represented by its market capitalization in relation to the total market value
of the NASDAQ 100 Index(TM). The NASDAQ 100 Index(TM) 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 ProFund.
5
<PAGE> 6
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 comparable smaller firms, the lower
degree of liquidity in the OTC markets for such securities, and the greater
sensitivity of smaller capitalized companies to changing economic conditions
than larger capitalized, 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.
INVESTMENT POLICIES AND TECHNIQUES
FUTURES CONTRACTS AND RELATED OPTIONS
The 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 ProFund anticipates that that it will primarily
engage in transactions in futures contracts and related options on the Chicago
Mercantile Exchange ("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 the 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,
the 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 the 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 ProFund may
engage in related closing transactions with respect to options on futures
contracts. The ProFund will only engage in transactions in futures contracts and
options thereupon that are traded on a United States exchange or board of trade.
When the ProFund purchases or sells a stock index futures contract, or
sells an option thereon, the ProFund "covers" its position. To cover its
position, the 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.
6
<PAGE> 7
Although the ProFund intends 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 the ProFund to substantial losses.
If trading is not possible, or if the 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 ProFund may purchase and write options on stock indexes to create
investment exposure consistent with its investment objectives, hedge or limit
the exposure of their positions and to create synthetic money market positions.
See "Taxes."
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 the 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 industry or market segment, rather than upon movements in the
price of a particular stock. Whether the 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. The 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 ProFund may buy options and write (sell) options on securities. By
buying a call option, the ProFund has the right, in return for a premium paid
during the term of the option, to buy the
7
<PAGE> 8
securities underlying the option at the exercise price. By writing (selling) a
call option and receiving a premium, the 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, the 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, the 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 ProFund will be conducted on recognized
securities exchanges. The ProFund will not write options on securities unless it
covers its position as described under "Index Options Transactions".
The 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 the 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 the 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 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.
8
<PAGE> 9
U.S. GOVERNMENT SECURITIES
The ProFund may invest in U.S. government securities in pursuit of its
investment objectives, as "cover" for the investment techniques the ProFund
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 rates, therefore, would generally reduce
the market value of the ProFund's portfolio investments in U.S. government
securities, while a decline in interest rates would generally increase the
market value of the 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 the 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, the 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.
The 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 will monitor the creditworthiness of each of the firms which is a party
to a repurchase agreement with the ProFund. 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. The
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 ProFund to treat repurchase agreements that do not 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 its investment policies.
9
<PAGE> 10
CASH RESERVES
As a cash reserve, for liquidity purposes, or as "cover" for positions
it has taken, the 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.
OTHER INVESTMENT POLICIES
The ProFund also may engage in certain other investment practices
described below. However, the ProFund does not presently intend to invest more
than 5% of its net assets in any of these practices. The ProFund may purchase
securities on a when-issued or delayed-delivery basis, and also may lend
portfolio securities to brokers, dealers, and financial institutions. The
ProFund may borrow money for investment purposes or invest in illiquid
securities. The ProFund 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 more-detailed explanation of these investment
practices, including the risks associated with each practice, is included in the
Statement of Additional Information. In addition, see the discussion of risk
factors involved in investing in non-diversified funds under "Special
Considerations" -- "Non-Diversified Status".
SHAREHOLDERS' GUIDE
HOW TO INVEST IN THE PROFUND
General
-------
The shares of the 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 the 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 the ProFund. The ProFund, 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 the ProFund. ProFundS reserves the right to reject
or refuse, at the ProFund's discretion, any order for the purchase of the
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
10
<PAGE> 11
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
------------------------------
New accounts opened by Self-Directed Accounts with initial minimum
purchases of $50,000 and by registered investment advisers, may use the
following procedures. First, fill out an application and fax the completed
application, along with the request for a confirmation number to 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 ProFunds along with
the following instructions:
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 ProFund
at 888-PRO-FNDS and inform the ProFund 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 the ProFund and will be placed
at the next determined net asset value on the next business day. If the primary
exchange or market on which the 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 the ProFund for wire transfer requests do not constitute a
purchase order until the wire transfer has been received by the ProFund. The
ProFund is not liable for any loss incurred due to a wire transfer not having
been received.
Purchase Through Securities Dealers
-----------------------------------
Investments in the ProFund 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 PROFUND
Shares of the ProFund may be exchanged, without any charge, for shares
of Bull ProFund, UltraBull ProFund, Bear ProFund, UltraBear ProFund, UltraOTC
ProFund and Money Market ProFund on the basis of the respective net asset values
of the shares involved. Before any exchange may be made, shareholders must
receive a prospectus relating to the other ProFunds by contacting ProFunds by
letter or by telephone at the address or numbers indicated on the cover of this
Prospectus. Thereafter, 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 BE MADE BETWEEN 8:00 AM AND 3:50 PM AND BETWEEN 4:30 PM
AND 9:00 PM EASTERN TIME. Telephone requests for share exchanges will receive
the net asset value per share next determined. If the primary exchange or
11
<PAGE> 12
market on which the 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.
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:
o Name and telephone number;
o Account name and number;
o Taxpayer identification number;
o Number of or percentage of shares or dollar value of shares to
be exchanged;
o The name of the ProFund from which the exchange is to be made;
and
o The name of the ProFund 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 BE MADE BETWEEN 8:00 AM AND 3:50 PM AND 4:30 PM AND
9:00 PM EASTERN TIME. Telephone requests for share redemptions will receive the
net asset value per share next determined. If the primary exchange or market on
which the 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.
Payment of the redemption proceeds will be made within seven days after
the ProFund's receipt of the request for redemption. For investments that have
been made by check, payment on withdrawal requests will be delayed until the
ProFund's transfer agent is reasonably satisfied that the purchase payment has
been collected by the ProFund (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.
12
<PAGE> 13
Wire Of Withdrawals
-------------------
Shareholders may request payment by wire of withdrawal proceeds from
the ProFund. The ProFund charges $15 for each wire transfer of redemption
proceeds; this charge may be waived at the discretion of the ProFund.
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
ProFund 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
ProFund will employ reasonable procedures to confirm that the telephone
instructions are genuine; and if the ProFund does not employ such procedures,
then the ProFund may be liable for any losses due to unauthorized or fraudulent
instructions. The ProFund follows specific procedures for transactions initiated
by telephone, including, among others, requiring some form of personal form of
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 ProFund 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 ProFund
(the "Automatic Investment Plan"), and redemptions from the ProFund (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. For more information, including
terms and conditions, about automatic investment, exchange and withdrawal
features, please call the ProFunds at 888-PRO-FNDS.
13
<PAGE> 14
DIVIDENDS AND DISTRIBUTIONS
General
-------
All income dividends and capital gains distributions of the 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 the 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.
The ProFund intends to distribute annually any net investment income
and net realized capital gains to shareholders. The ProFund may declare a
special distribution for the ProFund if the ProFund believes that such a
distribution would be in the best interests of its shareholders.
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 the ProFund:
o Keogh Accounts - Defined Contribution Plans (Profit-Sharing
Plans)
o Keogh Accounts
o Money Purchase Plans
o Pension Plans
o Internal Revenue Code Section 403(b) Plans
All of ProFunds' IRA distribution requests must be made in writing to
BISYS Fund Services, Inc. ("BFSI"), the ProFund's transfer agent. Any additional
deposits to the ProFund must distinguish the type and year of the contribution.
For more information on ProFund IRAs, or any other retirement plan,
please call the ProFund at 888-PRO-FNDS. Shareholders are advised to consult a
tax adviser on ProFund IRA contribution and withdrawal requirements and
restrictions.
MISCELLANEOUS
Involuntary Redemptions of Small Accounts
-----------------------------------------
Because of the administrative expense of handling small accounts,
ProFunds reserves the right to redeem involuntarily an investor's account,
including a retirement account, which falls below the applicable minimum
investment in total value in 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 advisers about
such tax consequences. ProFunds reserves the right to modify its minimum
14
<PAGE> 15
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"),
or 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 the 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 ProFund's investors.
"Undeliverable" or "Uncashed" Dividend Checks
---------------------------------------------
If you elect to receive distribution 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 ProFund 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 canceled and will be reinvested in the ProFund 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, ProFunds
also may make a charge of $25 for items returned for insufficient or
uncollectible funds.
No Certificates
---------------
In the interest of economy and convenience, physical certificates
representing the ProFund's shares are not issued. Shares of the ProFund are
recorded on a register by BFSI.
TAXES
The ProFund 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 ProFund intends 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 the 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 ProFund expects that such
dividends will be taxable to shareholders as long-term gain, although the matter
is not free from doubt. If a
15
<PAGE> 16
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 the 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 the 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 the
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 the
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.
Shareholders will be advised annually as to the federal tax status of
dividends and capital gains distribution made by the ProFund for the preceding
year. Distributions by the ProFund 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 ProFund is 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.
MANAGEMENT OF THE PROFUND
INVESTMENT ADVISORS
ProFund Advisors LLC
--------------------
The ProFund is 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
(the "Advisor"). Louis M. Mayberg and Michael L. Sapir own a controlling
interest in the Advisor.
Under an investment advisory agreement between ProFunds and the
Advisor, dated October 28, 1997, as amended February 18, 1998, the ProFund pays
the Advisor a fee at an annualized rate, based on the average daily net assets
of the ProFund, of 0.75%. The Advisor manages the investment and the
reinvestment of the assets of the ProFund, in accordance with the investment
objectives, policies, and limitations of the ProFund, subject to the general
supervision and control of ProFunds' Board of Trustees and officers. The Advisor
bears all costs associated with providing these advisory services and the
expenses of the ProFund who are affiliated persons of the Advisor. The Advisor,
from its own resources, including profits from advisory fees received from the
ProFund, also
16
<PAGE> 17
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 a recently created entity, the ProFund 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 ProFund, 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 Rydex(TM)
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 ProFunds' Director of Portfolio, 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 Commodities Futures Trading Commission.
SERVICE PROVIDERS
Administrator, Transfer Agent, Fund Accounting Agent and Custodian
------------------------------------------------------------------
BISYS acts as Administrator to the ProFund. BISYS provides
administrative services necessary for the operation of the ProFund, 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 ProFund, including coordination of the services performed by the Advisor,
custodians, independent accountants, legal counsel and others. In addition,
BISYS furnishes office space and facilities required for conducting the business
of the ProFund and pays the compensation of ProFund's officers and employees
affiliated with BISYS.
For its services as Administrator, the 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 ProFund, 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. 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 ProFund. For these services, the ProFund will pay to
ProFund Advisors LLC a fee at the annual rate of 0.15% of its average daily net
assets for the ProFund.
UMB Bank, N.A. acts as custodian to the ProFunds; its address is 928
Grand Avenue, Kansas City, Missouri.
17
<PAGE> 18
Distributor
-----------
Concord Financial Group, Inc. serves 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 ProFund
for serving as distributor. Concord Financial Group, Inc.'s address is 3435
Stelzer Road, Columbus, Ohio 43215.
Shareholder Services Plan - Service Shares
------------------------------------------
The ProFund has adopted a Shareholder Services Plan (the "Plan") and
related agreement ("Shareholder Services Agreement"). The Plan provides that the
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
the 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
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 the 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 Agreements,
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.
The ProFund will accrue payments made pursuant to the Plan daily. The
payments under the Plan which are required to be accrued to the ProFund's
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 ProFund bears all expenses of its operations other than those
assumed by the Advisor or BISYS. Expenses of the ProFund 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
18
<PAGE> 19
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, the
Advisor may from time to time agree to voluntarily waive or reduce its fees,
while retaining its ability to be reimbursed for such fees prior to the end of
each fiscal year.
PORTFOLIO TRADING PRACTICES
The Advisor determines which instruments to purchase and sell for the
ProFund, selects brokers and dealers to effect the transactions, and negotiates
commissions. The Advisor expects that the ProFund 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 ProFund.
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.
In addition to the UltraShort OTC ProFund, the Trust consists of six other
separately managed series: Bull ProFund, UltraBull ProFund, Bear ProFund,
UltraBear ProFund, UltraOTC ProFund and Money Market ProFund. Shares of the
other ProFunds are offered by a separate prospectus. 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.
19
<PAGE> 20
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 ProFund is determined as of
the close of business on each day the CME is open for business, normally 4:15
PM. Currently, the CME and the NYSE are closed on weekends, and the following
holiday closings have been scheduled for 1998: (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
the 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 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 the 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 the ProFund is calculated by dividing the
market value of the ProFund's assets attributed to a specific class, 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 securities in the ProFund's portfolio, 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 (National Association of Securities Dealers
Automated Quotations), which provides information on bid and asked prices quoted
by major dealers in such stocks. Bonds, other than convertible bonds, are valued
using a third-party pricing system. 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 ProFunds' Board of Trustees.
20
<PAGE> 21
Puts, calls and futures contracts purchased and held by the ProFund 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 PM Eastern Time and the close of the
regular session of commodities exchanges is 4:15 PM Eastern Time.) Options on
securities and indices purchased by the 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 ProFund will
be either the closing price of that contract or the bid price. Conversely, the
value of a futures contract sold by the ProFund 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 objective (except the specific benchmark which is
tracked by the ProFund) and certain investment restrictions of the ProFund
specifically identified as fundamental policies may not be changed without the
affirmative vote of at least the majority of the outstanding shares of the
ProFund, as defined in the 1940 Act. All other investment policies of the
ProFund not specified as fundamental (including the benchmark of the ProFund)
may be changed by the Trustees of ProFunds without the approval of shareholders.
The ProFund may consider changing its benchmark if, for example, the
current benchmark becomes unavailable; the ProFund believes 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,
ProFunds may specify a benchmark for the ProFund that is "leveraged" or
proprietary. Of course, there can be no assurance that the ProFund will achieve
its objective.
TRUSTEES AND OFFICERS
ProFunds has a Board of Trustees which is responsible for the general
supervision of ProFunds' business. The day-to-day operations of the ProFund are
the responsibility of the ProFund's officers.
AUDITORS
Coopers & Lybrand LLP are the auditors of and the independent public
accountants for ProFund.
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 PROFUND IN ANY
JURISDICTION IN WHICH SUCH AN OFFERING MAY NOT LAWFULLY BE MADE.
21
