UltraEurope ProFund
[GRAPHIC OMITTED] UltraShort Europe ProFund
7900 Wisconsin Avenue, Suite 300, Bethesda, Maryland 20814
(888) 776-5717 (Financial Professionals Only)
(888) PRO-FNDS ((888) 776-3637) ((614) 470-8122)
(For All Others)
www.profunds.com
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This prospectus describes the UltraEurope ProFund and UltraShort Europe
ProFund (the "ProFunds"). UltraEurope ProFund seeks daily investment results
that corresponds to twice (200%) the performance of the ProFunds Europe Index
("PEI"). UltraShort Europe ProFund seeks daily investment results that
corresponds to twice (200%) the inverse (opposite) of the performance of the
PEI. The PEI was created by ProFund Advisors LLC (the "Advisor"), ProFunds'
investment advisor. The PEI is equal to the average of the performance
(determined once a day as of one-half hour after the opening of the referenced
exchange) of three large capitalization European equity indices: Great Britain's
FTSE-100, Germany's Deutsche Aktienindex ("DAX"), and France's CAC-40. Each of
the three markets is weighted equally. Sales are made without any sales charge
at net asset value.
The ProFunds involve special risks, some not traditionally associated with
mutual funds. Unlike that of most equity mutual funds, the value of shares of
UltraShort Europe ProFund should normally fall when the prices of shares of
companies within its market segment rise. In addition, the ProFunds' 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 ProFunds to determine whether an investment in the ProFunds is appropriate.
The ProFunds alone do not constitute a balanced investment plan and are 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 ProFunds'
investment objectives will be achieved.
This prospectus relates only to UltraEurope ProFund and UltraShort Europe
ProFund. Interested persons who wish to obtain a copy of the prospectus for the
Bull ProFund, UltraBull ProFund, Ultra OTCProFund, Bear ProFund, UltraBear
ProFund, UltraShort OTC 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 ProFunds before investing. A Statement of Additional
Information ("SAI"), dated March 15, 1999, as supplemented from time to time,
containing additional information about the 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.
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 March 15, 1999
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FEES AND EXPENSES
The following table illustrates all expenses and fees that a shareholder
of the ProFunds will incur in the first year of operations:
INVESTOR SERVICE
SHARES SHARES
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 0.90% 0.90%
12b-1 Fees None None
Other Expenses(2) 0.58% 1.58%
Total ProFund Operating Expenses 1.48% 2.48%
(1) The ProFunds charge $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 ProFunds' 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 each ProFund's Service
Shares at an annual rate not to exceed 1.00%.
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 ProFunds would pay operating expenses as follows:
1 YEAR 3 YEARS
Investor Shares $14 $42
Service Shares $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 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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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 each 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 a 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 ProFunds 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 ProFunds
expect that they will primarily use these techniques in seeking to achieve their
investment objectives and that a significant portion (up to 100%) of the assets
of each 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 ProFunds 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
Objectives and Policies."
LEVERAGE
The ProFunds 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 a 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 a 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 ProFunds achieve
their investment
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objectives, during market conditions adverse to a ProFund's objective,
shareholders should experience a loss of approximately twice the amount they
would have incurred had the ProFund not been leveraged.
PORTFOLIO TURNOVER
The ProFunds anticipate that their investors, as part of an
asset-allocation or market-timing investment strategy, will frequently exchange
shares of a ProFund for shares in other ProFunds pursuant to the exchange policy
(see "Shareholders' Guide - How to Exchange Shares of ProFunds"), which would
cause the ProFunds 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 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 Securities and Exchange Commission (the "Commission"), the portfolio
turnover rate for a ProFund is calculated without regard to instruments,
including options and futures contracts, having a maturity of less than one
year. The ProFunds typically hold most of their 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, each ProFund expects a portfolio turnover rate of
approximately 0%.
NON-DIVERSIFIED STATUS
The ProFunds are "non-diversified." The ProFunds are considered
"non-diversified" because a relatively high percentage of each ProFund's assets
may be invested in the securities of a limited number of issuers, primarily
within the same economic sector. Each 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 ProFunds' classification as "non-diversified" investment companies
means that the proportion of the ProFunds' 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 ProFunds, however, intend to seek to qualify as a
"regulated investment company" for purposes of the Internal Revenue Code, which
imposes diversification requirements on the ProFunds that are less restrictive
than the requirements applicable to "diversified" investment companies under the
1940 Act.
INVESTMENT OBJECTIVES AND POLICIES
The ProFunds may be used by professional money managers and investors as
part of an asset-allocation or market-timing investment strategy, to create
investment exposure to a particular segment of the securities market or to hedge
an existing investment portfolio.
The investment objective of the UltraEurope ProFund is to provide
investment returns that correspond to 200% of the daily performance of the
ProFunds Europe Index ("PEI"). The PEI was created by ProFund Advisors LLC (the
"Advisor"), ProFunds' investment advisor. The PEI is equal to the average of the
performance of three large capitalization European equity indices: the FTSE-100,
the Deutsche Aktienindex ("DAX"), and the CAC-40. For these purposes, the
performance of an index is measured by comparing its level one-half hour
following the opening of the referenced stock exchange with the index's level as
of the same time on the prior business day. The UltraEurope ProFund seeks to
achieve this correlation on each business day. Under its investment objective,
the UltraEurope ProFund should produce greater gains to investors when the PEI
rises and greater losses when the PEI declines over the corresponding gain or
loss of the PEI itself.
The UltraShort Europe ProFund is designed to allow investors to seek to
profit from anticipated decreases in the PEI or to hedge an existing portfolio
of securities or mutual fund shares. The UltraShort
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Europe ProFund's investment objective is to provide investment results that will
inversely correlate to 200% of the performance of the PEI. The UltraShort Europe
ProFund seeks to achieve this inverse correlation on each business day.
If the UltraShort Europe 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 PEI. Conversely, the net asset value of the shares of the UltraShort Europe
ProFund would decrease for that day proportional to twice any increase in the
level of the PEI for that day.
For example, if the PEI were to decrease by 1% on a particular day,
investors in the UltraShort Europe ProFund should experience a gain in net asset
value of approximately 2% for that day. Conversely, if the PEI were to increase
by 1% by the close of business on a particular trading day, investors in the
UltraShort Europe ProFund would experience a loss in net asset value of
approximately 2%.
In pursuing their investment objectives, the ProFunds generally do not
invest in traditional securities, such as common stock of operating companies.
Rather, the ProFunds 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.
Fundamental securities analysis is not generally used by the Advisor in
seeking to correlate with a 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 a 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. Each 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."
It is the policy of the 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.
Investing in foreign companies or financial instruments by these ProFunds
(directly or indirectly) may involve risks not typically associated with
investing in U.S. companies. The value of securities denominated in foreign
currencies, and of dividends from such securities, can change significantly when
foreign currencies strengthen or weaken relative to the U.S. Dollar. Foreign
securities markets generally have less trading volume and less liquidity than
U.S. markets, and prices in some foreign markets can be extremely volatile. Many
foreign countries lack uniform accounting and disclosure standards. Because
these ProFunds will invest indirectly in foreign markets, they will be subject
to the market, economic, and political risks prevalent in these foreign markets.
Changes in foreign exchange rates will affect the value of securities or
financial instruments denominated or quoted in currencies other than the U.S.
Dollar, and the ProFunds will not engage in activities designed to hedge against
foreign currency exchange rate fluctuations. Foreign currency exchange rates may
fluctuate significantly over short periods of time. They generally are
determined by forces of supply and demand in the foreign exchange markets and
the relative merits of investments in different countries, actual or perceived
changes in interest rates and other complex factors, as seen from an
international perspective. Currency exchange rates also can be affected
unpredictably by intervention (or the failure to intervene) by U.S. or foreign
governments or central banks, by currency controls or by political developments
in the U.S. or abroad.
On January 1, 1999, the European Monetary Union (EMU) implemented a new
currency unit, the euro, which is expected to reshape financial markets, banking
systems and monetary policies, in Europe and other parts of the world. Although
it is not possible to predict the impact of the euro implementation plan
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on the ProFunds, the transition to the euro may change the economic environment
and behavior of investors, particularly in European markets.
COMPONENT INDICES
The FTSE-100 is a capitalization-weighted index of the 100 most highly
capitalized companies traded on the London Stock Exchange. As of June 30, 1998,
the three stocks representing the highest approximate percentage of
capitalization in the index are Glaxo Wellcome (6.12%), British Telecom (5.05%),
and British Petroleum (4.61%).
The DAX is a total rate of return index of 30 selected German blue-chip
stocks traded on the Frankfurt Stock Exchange. As of June 30, 1998, the three
stocks representing the highest approximate percentage of capitalization in the
index are Allianz, AG (10.54%), SAP, AG (8.58%), and Daimler-Benz (7.24%).
The CAC-40 is a capitalization-weighted index of 40 companies listed on
the Paris Stock Exchange (the Bourse). As of June 30, 1998, the three stocks
representing the highest approximate percentage of capitalization in the index
are France Telecom (9.8%), AXA-UAP (6.9%), and L'Oreal (5.9%).
FUTURES CONTRACTS AND RELATED OPTIONS
The ProFunds may purchase or sell stock index futures contracts and
options thereon as a substitute for a comparable market position in the
underlying securities or to satisfy regulatory requirements. 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 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 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 engage in transactions in futures contracts and
related options that are traded on a U.S. exchange or that have been approved
for sale in the U.S. by the Commodities Futures Trading Commission.
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.
Although the ProFunds intend to buy or 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 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,
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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 an
exchange with an active and liquid secondary market.
INDEX OPTIONS TRANSACTIONS
The ProFunds may purchase and write options on stock indexes that are
traded on U.S. and foreign exchanges and options traded over-the-counter with
broker-dealers, financial institutions or other parties. The ProFunds will enter
into option transactions to create investment exposure consistent with their
investment objectives or hedge or limit the exposure of their positions.
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 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. Use of
such options 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.
Over-the-counter options are purchased or written by the ProFunds in
privately negotiated transactions. Such options are subject to the ProFunds'
illiquid investment limitations. It may not be possible for a ProFund to dispose
of an option it has purchased or terminate its obligations under an option it
has written at a time when the Advisor believes it would be advantageous to do
so. In addition, over-the-counter options involve the risk that the counterparty
participating is such transactions will not fulfill their obligation.
Swap Agreements
The ProFunds may enter into equity index or interest rate swap agreements
for purposes of attempting to gain exposure to the stocks making up an index of
securities in a market without actually purchasing those stocks, or to hedge a
position. Swap agreements are two-party contracts entered into primarily by
institutional investors for periods ranging from a day to more than one year. In
a standard "swap" transaction, two
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parties agree to exchange the returns (or differentials in rates of return)
earned or realized on particular predetermined investments or instruments. The
gross returns to be exchanged or "swapped" between the parties are calculated
with respect to a "notional amount," i.e., the return on or increase in value of
a particular dollar amount invested in a "basket" of securities representing a
particular index. Forms of swap agreements include equity index caps, under
which, in return for a premium, one party agrees to make payments to the other
to the extent that the index exceeds a specified rate, or "cap"; equity index
floors, under which, in return for a premium, one party agrees to make payments
to the other to the extent that the index falls below a specified level, or
"floor"; and equity index collars, under which a party sells a cap and purchases
a floor or vice versa in an attempt to protect itself against movements
exceeding given minimum or maximum levels.
Most swap agreements entered into by the ProFunds calculate the
obligations of the parties to the agreement on a "net basis." Consequently, a
ProFund's current obligations (or rights) under a swap agreement will generally
be equal only to the net amount to be paid or received under the agreement based
on the relative values of the positions held by each party to the agreement (the
"net amount").
A ProFund's current obligations under a swap agreement will be accrued
daily (offset against any amounts owing to the ProFund) and any accrued but
unpaid net amounts owed to a swap counterparty will be covered by segregating
assets determined to be liquid. Obligations under swap agreements so covered
will not be construed to be "senior securities" for purposes of a ProFund's
investment restriction concerning senior securities. Because they are two party
contracts and because they may have terms of greater than seven days, swap
agreements may be considered to be illiquid for the ProFunds' illiquid
investment limitations. A ProFund will not enter into any swap agreement unless
the Advisor believes that the other party to the transaction is creditworthy. A
ProFund bears the risk of loss of the amount expected to be received under a
swap agreement in the event of the default or bankruptcy of a swap agreement
counterparty.
SHORT SALES
The UltraShort Europe 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 the 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
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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 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 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 mature within
seven days (or which may not be terminated within seven calendar days upon
notice by the ProFund) as illiquid for 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 "Shareholders' Guide - How to Exchange Shares of the
ProFunds"), which would
- ------------------------------------------------------ PROSPECTUS 9 ------------
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- ---------[GRAPHIC OMITTED]------------------------------------------------------
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.
OTHER INVESTMENT POLICIES
The ProFunds also may engage in certain other investment practices.
However, neither 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 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.
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." Send
the check along with the application to:
MAIL: OVERNIGHT:
ProFunds ProFunds
P.O. Box 182800 c/o BISYS
Columbus, OH 43218-2800 3435 Stelzer Road
Columbus, OH 43219
The net asset value of shares purchased by mail will be computed based
upon the price of shares next computed after the receipt and acceptance of an
investment request by mail.
HOW TO INVEST BY WIRE TRANSFER
INITIAL INVESTMENT IN A NEW ACCOUNT: First, complete an application and
fax it to ProFunds at (800) 782-4797 (toll-free) or (614) 470-8718. Next, call
ProFunds at (888) 776-3637 (toll-free) or (614) 470-8122 to A) confirm receipt
of the faxed application, B) request your new account number, C) inform ProFunds
of
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- --------------------------ULTRAEUROPE PROFUND/ULTRASHORT EUROPE PROFUND---------
the amount to be wired and D) receive a confirmation number for your purchase
order. After receiving your confirmation number, instruct your bank to transfer
money by wire to:
UMB BANK, N.A.
928 GRAND AVENUE
KANSAS CITY, MISSOURI 64141
ROUTING/ABA #: 101000695
FOR ACCOUNT OF PROFUNDS
DDA #9870857952
FOR FURTHER CREDIT TO: YOUR NAME AND PROFUNDS ACCOUNT NUMBER
CONFIRMATION NUMBER: THE CONFIRMATION NUMBER GIVEN TO YOU BY THE
PROFUNDS REPRESENTATIVE
After faxing a copy of the completed application, send the original to
ProFunds via mail or overnight delivery. The addresses are shown above under
"How to Invest by Mail."
SUBSEQUENT INVESTMENTS IN EXISTING ACCOUNTS: First, call ProFunds at (888)
776-3637 (toll-free) or (614) 470-8122 to inform ProFunds of the amount to be
wired and receive a confirmation number for your purchase order. After receiving
your confirmation number, instruct your bank to transfer money by wire using the
address and details as shown above. Your bank may charge a fee for such
services.
DEADLINES FOR WIRE TRANSFERS. Wire transfer requests may be made between
8:00 AM and 8:00 PM Eastern Time. However, wire transfers must be received by
6:00 PM Eastern Time to receive the next business day's net asset value. Wire
transfer requests received after 6:00 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. 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.
PURCHASES THROUGH SECURITIES BROKERS OR DEALERS
Investments in the ProFunds may be made through securities brokers or
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 a ProFund may be exchanged, without any charge, for shares of
another ProFund 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 FROM 4:30 PM TO 8:00
PM EASTERN TIME. 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 phone number noted on the cover page. Telephone
requests for share exchanges will receive the net asset value per share next
determined. 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.
Due to differences regarding when exchange requests may be made with
respect to the various ProFunds and the times as of which the net asset values
of their shares are determined, a considerable amount of time may elapse between
receipt of a request for a share exchange and the time at which the exchange is
completed. Proceeds from redemptions in exchange requests will remain uninvested
and will not accrue interest or dividends during this time. 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."
- ------------------------------------------------------ PROSPECTUS 11 -----------
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- ---------[GRAPHIC OMITTED]------------------------------------------------------
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 ProFunds from which the exchange is to be made; and
o 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 from 4:30 PM to
8:00 PM. Telephone requests for share redemptions will receive the net asset
value per share next determined. 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. Redemption
proceeds generally will be mailed or wired on the business day following the day
the redemption value is determined. Payment of redemption proceeds will be made
within seven days after the day the redemption value is determined. 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).
WIRING OF REDEMPTION PROCEEDS
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.
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
the 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 national securities exchange, registered securities association,
clearing agency, or a savings association. (A notarized signature cannot serve
as a guarantee for this purpose.)
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SPECIAL INFORMATION REGARDING TELEPHONE REQUESTS FOR REDEMPTION 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 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 amounts are $100 per purchase and $500
per redemption. 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
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 ProFund shareholders
at least quarterly.
The ProFunds intend to distribute annually any net investment income and
net realized capital gains to shareholders. The ProFunds may declare a special
distribution if they believe 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, Roth 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:
o Keogh Accounts - Defined Contribution Plans (Profit-Sharing Plans)
o Profit Sharing Plans
o Money Purchase Plans
o Pension Plans
o Internal Revenue Code Section 403(b)(7) Plans
- ------------------------------------------------------ PROSPECTUS 13 -----------
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- ---------[GRAPHIC OMITTED]------------------------------------------------------
All distributions for Fund-sponsored retirement plans must be made by
completing the appropriate distribution form. Any additional deposits to the
ProFunds must distinguish the type and year of the contribution.
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")
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 a ProFund's investments or the determination of its net asset value
is not reasonably practicable; or (iii) for such other periods as 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 applicable ProFund(s) 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 applicable ProFund(s) 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 BISYS Fund Services, Inc.
- ------ 14 ----------------------------------------------------------------------
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- --------------------------ULTRAEUROPE PROFUND/ULTRASHORT EUROPE PROFUND---------
TAXES
Each of the ProFunds intends to qualify and elect to be treated 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 distributions 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 shareholders as long-term capital gain
regardless of the length of time a shareholder has held the ProFund shares, and
the rate of tax will depend upon the ProFund's holding period for the assets
whose sale produces the gain. 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. Any
gains or losses recognized by the ProFunds from over-the-counter option
transactions generally constitute short-term capital gains or losses.
The amount of an income dividend or capital gains distribution declared by
a ProFund during October, November or December of a year to shareholders 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.
Shareholders will be advised annually as to the federal tax status of
dividends and capital gains distributions 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 proceeds. 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.
- ------------------------------------------------------ PROSPECTUS 15 -----------
<PAGE>
- ---------[GRAPHIC OMITTED]------------------------------------------------------
MANAGEMENT OF THE PROFUNDS
INVESTMENT ADVISOR
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 ProFunds and the
Advisor, dated February 23, 1999, the ProFunds each pay the Advisor a fee at an
annualized rate, based on the average daily net assets for each respective
ProFund, of 0.90%. 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' Trustees and officers, 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.
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-six years of
experience with respect to the commodity futures markets, including serving for
five years pursuant to a presidential appointment as commissioner on the United
States Commodities Futures Trading Commission. The ProFunds' Administrator,
BISYS Fund Services Limited Partnership, provides operations, compliance and
administrative services for investment companies.
SERVICE PROVIDERS
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. 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. BISYS
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- --------------------------ULTRAEUROPE PROFUND/ULTRASHORT EUROPE PROFUND---------
Fund Services, Inc. ("BFSI") acts as transfer agent and fund accounting agent
for the ProFunds, for which it receives additional fees. The address of BISYS
and BFSI is 3435 Stelzer Road, Columbus, OH 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 ProFund will pay to
ProFund Advisors LLC a fee at the annual rate of 0.15% of its average daily net
assets.
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, OH 43219.
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
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.
- ------------------------------------------------------ PROSPECTUS 17 -----------
<PAGE>
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YEAR 2000
Like other funds and business organizations around the world, the ProFunds
could be adversely affected if the computer systems used by the Advisor and the
ProFunds' other service providers do not properly process and calculate
date-related information for the Year 2000 and beyond. In addition, Year 2000
issues may adversely affect companies in which the ProFunds invest where, for
example, such companies incur substantial costs to address Year 2000 issues or
suffer losses caused by the failure to adequately or timely do so.
The ProFunds have been assured that the Advisor and the ProFunds' other
service providers have developed and are implementing clearly defined and
documented plans intended to minimize risks to services critical to the
ProFunds' operations associated with Year 2000 issues. Internal efforts include
a commitment to dedicate adequate staff and funding to identify and remedy Year
2000 issues, and specific actions such as inventorying software systems,
determining inventory items that may not function properly after December 31,
1999, reprogramming or replacing such systems, and retesting for Year 2000
readiness. The Advisor and service providers are likewise seeking assurances
from their respective vendors and suppliers that such entities are addressing
any Year 2000 issues, and each provider intends to engage, where appropriate, in
private and industry or "streetwide" interface testing of systems for Year 2000
readiness.
In the event that any systems upon which the ProFunds are dependent are
not Year 2000 ready by December 31, 1999, administrative errors and account
maintenance failures would likely occur. While the ultimate costs or
consequences of incomplete or untimely resolution of Year 2000 issues by the
Advisor or the ProFunds' service providers cannot be accurately assessed at this
time, the ProFunds currently have no reason to believe that the Year 2000 plans
of the Advisor and the ProFunds' service providers will not be completed by
December 31, 1999, or that the anticipated costs associated with full
implementation of their plans will have a material adverse impact on either
their business operations or financial conditions of those of the ProFunds. The
ProFunds and the Advisor will continue to closely monitor developments relating
to this issue, including development by the Advisor and the ProFunds' service
providers of contingency plans for providing back-up computer services in the
event of a systems failure or the inability of any provider to achieve Year 2000
readiness. Separately, the Advisor will monitor potential investment risk
related to Year 2000 issues.
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, 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 securities to purchase and sell for each
ProFund, selects brokers and dealers to effect the transactions, and negotiates
commissions. The Advisor expects that the ProFunds may execute brokerage or
other agency transactions through registered broker-dealers, for a commission,
in con-
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- --------------------------ULTRAEUROPE PROFUND/ULTRASHORT EUROPE PROFUND---------
formity 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 ProFunds.
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 nine 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 ProFunds 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.
- ------------------------------------------------------ PROSPECTUS 19 -----------
<PAGE>
- ---------[GRAPHIC OMITTED]------------------------------------------------------
DETERMINATION OF NET ASSET VALUE
The net asset values of the shares of the ProFunds are determined as of
one-half hour following the opening of the last of the three European exchanges
to open (ordinarily, 4:30 AM Eastern Time) on each day the NYSE, London Stock
Exchange, Frankfurt Stock Exchange and Paris Stock Exchange are open for
business. Currently, the NYSE is closed on weekends, and the following holiday
closings have been scheduled for 1999: (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. The London Stock Exchange, Frankfurt Stock Exchange
or Paris Stock Exchange are closed on the following days: New Year's Day, Good
Friday, Easter Monday, Labor Day (May 1), Early May Bank Holiday, VE Day (May
8), Late May Bank Holiday, Ascension, Pentecost, August Bank Holiday, German
Unity Day, Armistice Day, Christmas Day, and the next business day after
Christmas Day. 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
aforementioned exchanges may modify their holiday schedules 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, 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 portfolio of a 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 and asked prices
quoted by major dealers in such stocks. Bonds, other than 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.
Futures contracts are valued at their last sale price as of one-half hour
after the opening of the exchange on which the underlying securities are traded.
Options on futures contracts generally are valued at fair value as determined
with reference to established futures exchanges. Options on securities and
indices purchased by a ProFund are valued at their last sale price as of
one-half hour after the opening of the exchange on which the underlying
securities are traded.
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.
- ------ 20 ----------------------------------------------------------------------
<PAGE>
- --------------------------ULTRAEUROPE PROFUND/ULTRASHORT EUROPE PROFUND---------
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 share-holders
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
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
PricewaterhouseCoopers LLP are the auditors of and the independent
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.
- ------------------------------------------------------ PROSPECTUS 21 -----------
<PAGE>
[GRAPHIC OMITTED]
INVESTMENT ADVISOR
-----------------------------------------------
ProFund Advisors LLC
7900 Wisconsin Avenue, Suite 300
Bethesda, Maryland 20814
ADMINISTRATOR, TRANSFER AGENT,
FUND ACCOUNTING AGENT
-----------------------------------------------
BISYS Fund Services, Inc.
3435 Stelzer Road
Columbus, OH 43219-3035
PROFUNDS COUNSEL
-----------------------------------------------
Dechert Price & Rhoads
1775 Eye Street, N.W.
Washington, D.C. 20006
INDEPENDENT AUDITORS
-----------------------------------------------
PricewaterhouseCoopers LLP
100 East Broad Street, Suite 2100
Columbus, Ohio 43215-3671
CUSTODIAN
-----------------------------------------------
UMB Bank, N.A.
928 Grand Avenue
Kansas City, Missouri 64141
================================================================================
[GRAPHIC OMITTED]
ULTRAEUROPE PROFUND
ULTRASHORT EUROPE PROFUND
================================================================================
PROSPECTUS
MARCH 15, 1999
<PAGE>
PROFUNDS
STATEMENT OF ADDITIONAL INFORMATION
7900 WISCONSIN AVENUE, SUITE 300
BETHESDA, MARYLAND 20814
(888) 776-5717 (REGISTERED INVESTMENT ADVISERS ONLY)
(888) PRO-FNDS ((888) 776-3637) (FOR ALL OTHERS)
www.profunds.com
This statement of additional information describes nine 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 April 24, 1998, as
supplemented and, with respect to the UltraEurope ProFund and the UltraShort
Europe ProFund, March 15, 1999, each of which incorporates this Statement of
Additional Information by reference. A copy of each Prospectus is available,
without charge, upon request at the address above or by telephoning at the
telephone numbers above.
The date of this Statement of Additional Information is March 15, 1999.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
PAGE
---
ProFunds............................................................ 3
Investment Policies and Techniques.................................. 3
Investment Restrictions............................................. 10
Portfolio Transactions and Brokerage................................ 15
Management of ProFunds.............................................. 18
Costs and Expenses.................................................. 25
Capitalization...................................................... 25
Taxation............................................................ 30
Performance Information............................................. 34
Financial Statements................................................ 36
Appendix -- Description of Securities Ratings....................... A-1
B-2
<PAGE>
PROFUNDS
ProFunds (the "Trust") is an open-end management investment company, and
currently comprises nine 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 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 Prospectuses).
INVESTMENT POLICIES AND TECHNIQUES
GENERAL
Reference is made to the sections entitled "Investment Objectives" and
"Investment Policies and Techniques" in the ProFunds' Prospectuses 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
Prospectuses. 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 Prospectuses, 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
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<PAGE>
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 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 or to hedge or limit the exposure of their
positions. 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, except for the UltraEurope ProFund and the
UltraShort Europe ProFund, 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
B-4
<PAGE>
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 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.
SWAP AGREEMENTS
Each non-money market ProFund may enter into swap agreements to invest
in a market without owning or taking physical custody of securities in
circumstances in which direct investment is restricted for legal reasons or is
otherwise impracticable. The counterparty to any swap agreement will typically
be a bank, investment banking firm or broker/dealer. The counterparty will
generally agree to pay the ProFund the amount, if any, by which the notional
amount of the swap agreement would have increased in value had it been invested
in the particular stocks, plus the dividends that would have been received on
those stocks. The ProFund will agree to pay to the counterparty a floating rate
of interest on the notional amount of the swap agreement plus the amount, if
any, by which the notional amount would have decreased in value had it been
invested in such stocks. Therefore, the return to the ProFund on any swap
agreement should be the gain or loss on the notional amount plus dividends on
the stocks less the interest paid by the ProFund on the notional amount.
Swap agreements typically are settled on a net basis, which means that
the two payment streams are netted out, with the ProFund receiving or paying, as
the case may be, only the net amount of the two payments. Payments may be made
at the conclusion of a swap agreement or periodically during its term. Swap
agreements do not involve the delivery of securities or other underlying assets.
Accordingly, the risk of loss with respect to swap agreements is limited to the
net amount of payments that a ProFund is
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<PAGE>
contractually obligated to make. If the other party to a swap agreement
defaults, a ProFund's risk of loss consists of the net amount of payments that
such Fund is contractually entitled to receive, if any. The net amount of the
excess, if any, of a ProFund's obligations over its entitlements with respect to
each equity swap will be accrued on a daily basis and an amount of cash or
liquid assets, having an aggregate net asset value at least equal to such
accrued excess will be maintained in a segregated account by a ProFund's
custodian. Inasmuch as these transactions are entered into for hedging purposes
or are offset by segregated cash or liquid assets, as permitted by applicable
law, the ProFunds and their Advisor believe that transactions do not constitute
senior securities under the Investment Company Act of 1940, as amended (the
"1940 Act") and, accordingly, will not treat them as being subject to a
ProFund's borrowing restrictions.
The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals and as
agents utilizing standardized swap documentation. As a result, the swap market
has become relatively liquid in comparison with the markets for other similar
instruments which are traded in the over-the-counter market. The Advisor, under
the supervision of the Board of Trustees, are responsible for determining and
monitoring the liquidity of the ProFunds' transactions in swap agreements.
The use of equity swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. Reasons for the absence of liquid secondary
market on an exchange include the following: (I) there may be insufficient
trading interest in certain options; (ii) restrictions may be imposed by an
exchange on opening or closing transactions or both; (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange or
the OCC may not at all times be adequate to handle current trading volume; or
(vi) one or more exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange (or in the class or series of options) would cease to exist,
although outstanding options on that exchange that had been issued by the OCC as
a result of trades on that exchange would continue to be exercisable in
accordance with their terms.
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
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<PAGE>
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.
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
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investment considerations would not favor such sales.
As required by 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 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.
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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.
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
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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.
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, the UltraBear
ProFund, the UltraEurope ProFund and the UltraShort Europe 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.
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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-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
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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.
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
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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.
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;
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(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 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
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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");
(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.
B-15
<PAGE>
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 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.
B-16
<PAGE>
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 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
B-17
<PAGE>
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.
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.
NIMISH BHATT: (birthdate: June 6, 1963): Treasurer; BISYS Fund Services,
Vice President, Tax and Financial Services; Evergreen Funds/First Union Bank,
Assistant Vice President; Price Waterhouse LLP, Senior Tax Consultant. His
address is 3435 Stelzer Road, Columbus, Ohio 43219.
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.
*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.
B-18
<PAGE>
TRUSTEE COMPENSATION TABLE
The following table reflects actual 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 $1,540
Michael C. Wachs, Trustee $1,540
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 Hancock Home 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;
Retiredformerly Vice President of International Business Machines ("IBM") and
President of the National Services and the Field Engineering Divisions of IBM.
His address is 12 Hitching Post Lane, Chappaqua, New York 10514.
S. LELAND DILL (birthdate: March 28, 1930): Portfolio Trustee; Retired;
Director, 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:
JOHN Y. KEEFER (birthdate: July 14, 1942): President and Chief Executive
Officer; President, Forum Financial Group. His address is 2 Portland Square,
Portland, Maine 04101.
JOSEPH A. FINELLI (birthdate: January 24, 1957): Treasurer, Vice President,
BT Alex. Brown Incorporated and Vice President, Investment Company Capital Corp.
(registered investment adviser), September 1995 to present; formerly, Vice
President and Treasurer, The Delaware Group of Funds (registered investment
companies) and Vice President, Delaware Management Company Inc. (investments),
1980 to August 1995. His address is One South Street, Baltimore, Maryland 21202.
DANIEL O. HIRSCH (birthdate: March 27, 1954): Secretary; Principal, BT
Alex. Brown since July
B-19
<PAGE>
1998; Assistant General Counsel in the Office of the General Counsel at the
United States Securities and Exchange Commissions from 1993 to 1998. His address
is 2901 Dorset Avenue, Chevy Chase, Maryland 20815.
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, 1997.
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION
NAME OF FROM CASH TOTAL COMPENSATION
PERSON; POSITION MANAGEMENT PORTFOLIO* FROM FUND COMPLEX *
---------------- --------------- -------------
<S> <C> <C>
Charles P. Biggar
Trustee, BT Institutional Funds and Portfolio $641 $27,500
S. Leland Dill
Trustee, BT Investment Funds and Portfolio $641 $27,500
Philip Saunders, Jr
Trustee, BT Investment Funds and Portfolio $641 $27,500
</TABLE>
* Aggregated information is furnished for the BT Family of Funds which
consists of the following: BT Investment 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.
As of April 1, 1998, 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 February 23, 1999, each such
ProFund pays the Advisor a fee at an annualized rate, based on its average daily
net assets of 0.75% (0.90% in the case of each of the UltraEurope ProFund and
the UltraShort Europe ProFund). 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.
B-20
<PAGE>
For the fiscal year ended December 31, 1997, the Advisor was entitled to,
and voluntarily waived, advisory fees in the following amounts for each of the
ProFunds:
ADVISORY FEES
FYE 12/31/97
EARNED WAIVED
------ ------
Bull ProFund $ 28 $ 28
UltraBull ProFund 1,609 1,609
Bear ProFund 52 52
UltraBear ProFund 615 615
UltraOTC ProFund 751 751
Money Market ProFund --- ---
The UltraShort OTC ProFund, UltraEurope ProFund, and UltraShort Europe
ProFund had not commenced operations as of December 31, 1997.
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, 1997, 1996 and 1995, Bankers Trust
earned $6,544,181, $4,935,288 and $3,847,729, respectively, in compensation for
investment advisory services provided to the Portfolio. During the same periods,
Bankers Trust reimbursed $940,530, $761,230 and $578,251, 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.
B-21
<PAGE>
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 Administrators provide 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 Administrators also maintain the shareholder account
records for ProFunds, distribute dividends and distributions payable by the
ProFunds, and produce statements with respect to account activity for the
ProFunds and their shareholders. The Administrators pay all fees and expenses
that are directly related to the services provided by the Administrators to
ProFunds; each ProFund reimburses the Administrators for all fees and expenses
incurred by the Administrators which are not directly related to the services
the Administrators provide to the ProFunds under the service agreements.
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, 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 between the Trust and BISYS and/or BFSI 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.
For the fiscal year ended December 31, 1997, BISYS, as Administrator, was
entitled to, and voluntarily waived, administration fees in the following
amounts for each of the ProFunds:
ADMINISTRATION FEES
FYE 12/31/97
EARNED WAIVED
------ ------
Bull ProFund $ 6 $ 6
UltraBull ProFund 322 322
Bear ProFund 10 10
UltraBear ProFund 123 123
UltraOTC Profund 150 150
Money Market ProFund 422 422
The UltraShort OTC ProFund, UltraEurope ProFund, and UltraShort Europe
ProFund had not commenced operations as of December 31, 1997.
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
B-22
<PAGE>
ProFund.
For the fiscal year ended December 31, 1997, ProFunds Advisors LLC was
entitled to, and voluntarily waived, management services fees in the following
amounts for each of the ProFunds:
MANAGEMENT SERVICES FEES
FYE 12/31/97
EARNED WAIVED
------ ------
Bull ProFund $ 6 $ 6
UltraBull ProFund 322 322
Bear ProFund 10 10
UltraBear ProFund 123 123
UltraOTC Profund 150 150
Money Market ProFund 984 984
The UltraShort OTC ProFund, UltraEurope ProFund, and UltraShort Europe
ProFund had not commenced operations as of December 31, 1997.
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.
For the fiscal years ended December 31, 1997, 1996 and 1995, Bankers Trust
earned compensation of $2,181,394, $1,645,096 and $1,282,576, 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
PricewaterhouseCoopers LLP serves as independent auditors to the ProFunds.
PricewaterhouseCoopers LLP provides audit services, tax return preparation and
assistance and consultation in connection with certain SEC filings.
PricewaterhouseCoopers LLP is located at 100 East Broad Street, Columbus, Ohio
43215.
LEGAL COUNSEL
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<PAGE>
Dechert Price & Rhoads serves as counsel to the ProFunds. The firm's
address is 1775 Eye Street, N.W., Washington, DC 20006-2401,
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. 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 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.
B-24
<PAGE>
For the fiscal year ended December 31, 1997, each ProFund was entitled to,
and voluntarily waived, shareholder services fees in the following amounts:
SHAREHOLDER SERVICES FEES
FYE 12/31/97
EARNED WAIVED
------ ------
Bull ProFund $ 0 $ 0
UltraBull ProFund 773 773
Bear ProFund 0 0
UltraBear ProFund 0 0
UltraOTC Profund 379 379
Money Market ProFund 0 0
The UltraShort OTC ProFund, UltraEurope ProFund, and UltraShort Europe
ProFund had not commenced operations as of December 31, 1997.
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.
CAPITALIZATION
As of April 6, 1998, no person owned of record, or to the knowledge of
management beneficially owned five percent or more of the outstanding shares of
the ProFunds or classes except as set forth below:
MONEY MARKET PROFUND--INVESTOR SHARES TOTAL SHARES PERCENTAGE
- ------------------------------------- ------------ ----------
Stephen P. McCaffrey 475,616.260 26.65%
TRST Stephen P. McCaffrey Family Trust
DTD 1/27/93
4934 Via Cinta
San Diego, CA 92122
Steven Starkman and Cathy Starkman JTWROS 95,567.780 5.35%
504 Windover Circle
Buffalo Grove, IL 60089
Elliot Schildkrout 141,010.850 7.90%
TRST Elliot Schildkrout Pension Plan
DTD 5/13/97
45 Monadnock Road
Newton, MA 02167
Leonard R. Lumpkin 91,607.310 5.13%
624 Quail Drive
Los Angeles, CA 90065
B-25
<PAGE>
Fifth Third Bank, Custodian 90,000.000 5.04%
Patrick J. Harvey IRA
3 Delwood Road
Chester, NJ 07930
MONEY MARKET PROFUND--SERVICE SHARES TOTAL SHARES PERCENTAGE
- ------------------------------------ ------------ ----------
Independent Trust Corp--Cust. Funds 85 284,730.955 15.46%
15255 S. 94th Ave., Ste. 300
Orland Park, IL 60462
Paul Levine 504,088.170 27.37%
127 Kennard Road
Newberg, ME 04444
Trust Company of America 943,283.000 51.22%*
BO DGS
7103 S. Revere Pky
Englewood, CO 80112
*Disclaims beneficial ownership.
BULL PROFUND--INVESTOR SHARES
None.
BULL PROFUND--SERVICE SHARES TOTAL SHARES PERCENTAGE
- ---------------------------- ------------ ----------
Donaldson Lufkin & Jenrette Securities Corp. 524.476 6.18%
P.O. Box 2052
Jersey City, NJ 07303
Fifth Third Bank, Custodian 895.834 11.64%
John Lindner IRA
W. 998 Mary's Court
Rubicon, WI 53078
Fifth Third Bank, Custodian 1,381.274 17.95%
Jacquelynne J. Brisk IRA
W230 56248 Charles Drive
Waukesha, WI 53186
Fifth Third Bank, Custodian 768.675 9.99%
Truman J. Seiler III IRA
N49 W20320 Lisbon Road
Menomonee Falls, WI 53051
Fifth Third Bank, Custodian 723.670 9.40%
Barbara J. Seiler III IRA
N49 W20320 Lisbon Road
Menomonee Falls, WI 53051
Fifth Third Bank, Custodian 823.454 10.70%
Raynold A. Uecker IRA
B-26
<PAGE>
W160 N. 9664 Colonial Drive
Germantown, WI 53022
Fifth Third Bank, Custodian 1,399.687 18.19%
May Huey Yu Lau IRA
25152 Calle Busca
Lake Forest, CA 92630
Fifth Third Bank, Custodian 402.145 5.23%
Jean Siegert IRA
4882 Pine Street
La Mesa, CA 91941
ULTRABULL PROFUND--INVESTOR SHARES TOTAL SHARES PERCENTAGE
- ---------------------------------- ------------ ----------
Donaldson Lufkin & Jenrette Securities Corp. 387,448.551 27.12%*
P.O. Box 2052
Jersey City, NJ 07303
First Trust Corporation 770,253.531 53.92%*
Attn Datalynx House
P.O. Box 173736
Denver, CO 80217-3736
ULTRABULL PROFUND--SERVICE SHARES TOTAL SHARES PERCENTAGE
- --------------------------------- ------------ ----------
Independent Trust Corp. 58,734.818 22.38%
Cust. Funds 85
15255 S. 94th Ave, Ste. 300
Orland Park, IL 60462
Donaldson Lufkin & Jenrette Securities Corporation 199,215.936 75.92%*
*Disclaims beneficial ownership
BEAR PROFUND--INVESTOR CLASS SHARES TOTAL SHARES PERCENTAGE
- ----------------------------------- ------------ ----------
National Capital Group, Inc. 2,285.714 64.53%
7900 Wisconsin Ave. Ste. 300
Bethesda, MD 20814
Fifth Third Bank, Custodian 911.339 25.73%
Wayne Chu SEP IRA
18186 Chieftain Ct.
San Diego, CA 92127
Marjorie S. Wurman and Andrew L. Wurman JTEROS 344.037 9.71%
11810 Kiva Dr.
Botnton Beach, FL 33437
B-27
<PAGE>
BEAR PROFUND--SERVICE SHARES TOTAL SHARES PERCENTAGE
- ---------------------------- ------------ ----------
Fifth Third Bank, Custodian 336.336 10.53%
Daniel Shui-Yum Tam IRA
12584 Sora Way
San Diego, CA 92129
Fifth Third Bank, Custodian 328.895 10.29%
Shirley Tam IRA
12584 Sora Way
San Diego, CA 92129
Fifth Third Bank, Custodian 296.210 9.27%
Wayne D. Gruenewald IRA
503 Roselle Ave.
El Cajon, CA 92021
Fifth Third Bank, Custodian 1,734.428 54.28%
May Huey Yu Lau IRA
25152 Calle Busca
Lake Forest, CA 92630
Fifth Third Bank, Custodian 498.320 15.60%
Jean Siegert IRA
4882 Pine Street
Le Mesa, CA 91941
ULTRABEAR PROFUND--INVESTOR SHARES TOTAL SHARES PERCENTAGE
- ---------------------------------- ------------ ----------
Donaldson Lufkin & Jenrette Securities Corp. 6,362.242 9.92%
P.O. Box 2052
Jersey City, NJ 07303
Clayton A. Cardinal and Joan Cardinal JTWROS 12,978.135 20.23%
48 Millstone Ct.
Langhorne, PA 19047-1538
Spring Creek Limited Partnership 12,376.239 19.29%
c/o Elliot Mchildkrout
45 Monadnock Road
Chestnut Hill, MA 02167
Fifth Third Bank, Custodian 3,627.570 5.65%
Betty J. Hartley IRA
P.O. Box 1020
Mesquite, NV 89024
Betty J. Hartley 4,279.710 6.67%
P.O. Box 1020
Mesquite, NV 89024
Orion Partners I -- Bellatrix 6,206.339 9.67%
P.O. Box 1437
Mesquite, NV 89024
B-28
<PAGE>
Orion Partners I -- Melissa 6,723.305 10.48%
P.O. Box 1437
Mesquite, NV 89024
Fifth Third Bank, Custodian 6,514.258 10.15%
Thomas A. Loss SEP IRA
1330 Josephine Street
Berkeley, CA 94703
ULTRABEAR PROFUND--SERVICE SHARES TOTAL SHARES PERCENTAGE
- --------------------------------- ------------ ----------
Donaldson Lufkin & Jenrette Securities Corp. 6,581.950 60.70%*
P.O. Box 2052
Jersey City, NJ 07303
Carlos Flores and Maria L. Flores JTWROS 4,260.324 39.29%
P.O. Box 1363
Mesquite, NV 89024
ULTRAOTC PROFUND--INVESTOR SHARES TOTAL SHARES PERCENTAGE
- --------------------------------- ------------ ----------
Donaldson Lufkin & Jenrette Securities Corp. 573,848.421 57.46%
P.O. Box 2052
Jersey City, NJ 07303
First Trust Corporation 179,298.246 17.95%
Attn: Datalynx House
P.O. Box 173736
Denver, CO 80217-3736
*Disclaims beneficial ownership.
ULTRAOTC PROFUND--SERVICE SHARES TOTAL SHARES PERCENTAGE
- --------------------------------
Independent Trust Corp. 29,008.741 5.63%
Cust Funds 85
15255 S. 94th Ave., Ste 300
Donaldson Lufkin & Jenrette Securities Corp. 100,434.162 19.49%
P.O. Box 2052
Jersey City, NJ 07303
Ernst & Co. 186,504.379 36.19%
Attn: Mutual Funds Dept.
1 Battery Park Place
New York, NY 10004
Fifth Third Bank, Custodian 36,816.008 7.14%
James N. Brannan IRA
4781 West 212th Street
Fairview Park, OH 44126
B-29
<PAGE>
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 a 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
B-30
<PAGE>
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.
B-31
<PAGE>
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
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<PAGE>
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
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<PAGE>
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.
The aggregate return for each ProFund for the period ended December 31,
1997, since inception was as follows:
INVESTOR SHARES
INCEPTION DATE AGGREGATE RETURN
-------------- ----------------
Bull ProFund 12/02/97 -1.10%
UltraBull ProFund 11/28/97 2.90%
Bear ProFund 12/31/97 0.00%
UltraBear ProFund 12/23/97 3.60%
UltraOTC ProFund 12/02/97 -16.40%
Money Market ProFund 11/17/97 0.61%
SERVICE SHARES
INCEPTION DATE AGGREGATE RETURN
-------------- ----------------
Bull ProFund 12/02/97 -1.10%
UltraBull ProFund 11/28/97 2.90%
Bear ProFund 12/31/97 0.00%
UltraBear ProFund 12/23/97 3.50%
UltraOTC ProFund 12/02/97 -16.40%
Money Market ProFund 11/17/97 0.21%
This performance data represents past performance and is not an indication
of future results. The UltraShort OTC ProFund, UltraEurope ProFund, and
UltraShort Europe ProFund had not commenced operations as of December 31, 1997.
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
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<PAGE>
the Money Market ProFund refers to the income generated by an investment in the
Money Market ProFund 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.
For the seven-day period ended December 31, 1997, the seven-day
effective yield for the Investor Shares and Service Shares of the Money Market
ProFund was 4.86% and 3.84%, respectively.
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, the UltraBear ProFund, the UltraEurope ProFund and the
UltraShort Europe 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 and the UltraShort OTC
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, the
UltraBear ProFund, the UltraEurope ProFund and the UltraShort Europe ProFund and
from the "Small Company Growth ProFunds" grouping for the UltraOTC ProFund and
the UltraShort OTC 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 SAI.
B-35
<PAGE>
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 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
The Report of Independent Accountants and Financial Statements of the
ProFunds for the fiscal year ended December 31, 1997 are incorporated herein by
reference to the Trust's Annual Report, such Financial Statements having been
audited by PricewaterhouseCoopers LLP, independent accountants, and is so
included and incorporated by reference in reliance upon the report of said firm,
which report is given upon their authority as experts in auditing and
accounting. Copies of such Annual Report are available without charge upon
request by writing to ProFunds, 3435 Stelzer Road, Columbus, Ohio 43219-8006 or
telephoning (888) 776-3637.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUSES, OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THE PROSPECTUSES 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.
B-36
<PAGE>
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:
A-1
<PAGE>
AAA-Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury Funds.
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.
A-2
<PAGE>
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:
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.
A-3
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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 "-".
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.
A-4
<PAGE>
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.)
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
