PROFUNDS
STATEMENT OF ADDITIONAL INFORMATION
7900 WISCONSIN AVENUE, SUITE 300
BETHESDA, MARYLAND 20814
(888) 776-3637 RETAIL SHAREHOLDERS
(888) 776-5717 (FINANCIAL PROFESSIONALS ONLY)
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 the
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. Each non-money market Profund is 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 May 1, 1999, which
incorporates this Statement of Additional Information by reference. The
financial statements and related report of the independent accountants included
in the Fund's annual report for the fiscal year ended December 31, 1998 are
incorporated by reference into this Statement of Additional Information. A copy
of the Prospectus or Annual Report is available, without charge, upon request to
the address above or by telephoning at the telephone numbers above.
The date of this Statement of Additional Information is May 1, 1999
(revised October 19, 1999)
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STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
PAGE
ProFunds ................................................................ 3
Investment Policies and Techniques ...................................... 3
Investment Restrictions ................................................. 23
Portfolio Transactions and Brokerage .................................... 30
Management of ProFunds .................................................. 33
Costs and Expenses ...................................................... 42
Capitalization........................................................... 43
Taxation ................................................................ 48
Performance Information ................................................ 52
Financial Statements .................................................... 55
Appendix -- Description of Securities Ratings ........................... A-1
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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 the same class of any other ProFund
on the basis of the respective net asset values of the shares involved;
provided, that, in connection with exchanges for shares of the ProFund, certain
minimum investment levels are maintained (see "Shareholders Services --
Exchanges " in the Prospectus).
INVESTMENT POLICIES AND TECHNIQUES
GENERAL
Reference is made to the sections entitled "Specific ProFunds Objectives",
"Strategy", "Risks in Common" and "Considering a ProFunds Investment" in the
ProFund's Prospectus for a discussion of the investment objectives and policies
of the ProFunds. In addition, set forth below is further information relating to
the ProFunds. The discussion below supplements and should be read in conjunction
with the Prospectus. Portfolio management is provided to the non-money market
ProFunds by its investment adviser, ProFund Advisors LLC, a Maryland limited
liability company with offices at 7900 Wisconsin Avenue, NW, Bethesda, Maryland
(the "Advisor"). The Money Market ProFund seeks to achieve its investment
objective by investing all of its assets in the Portfolio which has as its
investment adviser, Bankers Trust Company ("Bankers Trust").
The investment objectives (except the specific benchmarks which are tracked
by the ProFunds) and certain investment restrictions of the ProFunds
specifically identified as fundamental policies may not be changed without the
affirmative vote of at least the majority of the outstanding shares of that
ProFund, as defined in the 1940 Act. All other investment policies of the
ProFunds not specified as fundamental (including the benchmarks of the ProFunds)
may be changed by the trustees of the ProFunds without the approval of
shareholders.
The non-money market ProFunds may consider changing a ProFund's benchmark
if, for example, the current benchmark becomes unavailable; the ProFunds believe
the current benchmark no longer serves the investment needs of a majority of
shareholders or another benchmark better serves their needs; or the financial or
economic environment makes it difficult for the ProFund's investment results to
correspond sufficiently to its current benchmark. If believed appropriate, the
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.
Fundamental securities analysis is not generally used by the Advisor in
seeking to correlate with the respective benchmarks. Rather, the Advisor
primarily uses statistical and quantitative analysis to determine the
investments a non-money market ProFund makes and techniques it employs. While
the Advisor attempts to minimize any "tracking error" (that statistical measure
of the difference between the investment results of a ProFund and the
performance of its benchmark), certain factors will tend to cause a ProFund's
investment results to vary from a perfect correlation to its benchmark. The
ProFunds, however, do not expect that their total returns will vary adversely
from their respective current benchmarks by more than ten percent over the
course of a year. See "Special Considerations."
It is the policy of the non-money-market ProFunds to pursue their
investment objectives of correlating with their benchmarks regardless of market
conditions, to remain nearly fully invested and not to take defensive positions.
The investment strategies of the ProFunds discussed below, and as discussed
in the Prospectus, may be used by a ProFund if, in the opinion of the Advisor,
these strategies will be advantageous to the ProFund. The ProFund is free to
reduce or eliminate the ProFund's activity in any of those areas without
changing the ProFund's fundamental investment policies. There is no assurance
that any of these strategies or any other strategies and methods of investment
available to a ProFund will result in the achievement of the ProFund's
objectives.
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THE BULL PROFUND AND ULTRABULL PROFUND
The investment objective of the Bull ProFund is to provide investment
returns that correspond to the performance of the S&P 500 Index. The investment
objective of the UltraBull ProFund is to provide investment returns that
correspond to 200% of the performance of the S&P 500 Index. These ProFunds seek
to achieve this correlation on each trading day. Under their investment
objectives, the UltraBull ProFund should produce greater gains to investors when
the S&P 500 Index rises and greater losses when the S&P 500 Index declines over
the corresponding gain or loss of the Bull ProFund.
In attempting to achieve their objectives, the Bull ProFund and the
UltraBull ProFund expect that a substantial portion of their respective assets
usually will be devoted to employing certain specialized investment techniques.
These techniques include engaging in certain transactions in stock index futures
contracts, options on stock index futures contracts, and options on securities
and stock indexes. The amount of any gain or loss on an investment technique may
be affected by any premium or amounts in lieu of dividends or interest income
the ProFund pays or receives as the result of the transaction. These ProFunds
may also invest in shares of individual securities which are expected to track
the S&P 500 Index.
THE BEAR PROFUND AND ULTRABEAR PROFUND
The Bear ProFund and the UltraBear ProFund are designed to allow investors
to speculate on anticipated decreases in the S&P 500 Index or to hedge an
existing portfolio of securities or mutual fund shares. The Bear ProFund's
investment objective is to provide investment results that will inversely
correlate to the performance of the S&P 500 Index. The UltraBear ProFund's
investment objective is to provide investment results that will inversely
correlate to 200% of the performance of the S&P 500 Index. These ProFunds seek
to achieve this inverse correlation on each trading day.
If the Bear ProFund achieved a perfect inverse correlation for any single
trading day, the net asset value of the shares of the Bear ProFund would
increase for that day in direct proportion to any decrease in the level of the
S&P 500 Index. Conversely, the net asset value of the shares of the Bear ProFund
would decrease for that day in direct proportion to any increase in the level of
the S&P 500 Index for that day. The net asset value of the UltraBear ProFund on
the same days would increase or decrease approximately twice as much as the
price change of the Bear ProFund.
For example, if the S&P 500 Index were to decrease by 1% on a particular
day, investors in the Bear ProFund should experience a gain in net asset value
of approximately 1% for that day. The UltraBear ProFund should realize an
increase of approximately 2% of its net asset value on the same day. Conversely,
if the S&P 500 Index were to increase by 1% by the close of business on a
particular trading day, investors in the Bear ProFund and the UltraBear ProFund
would experience a loss in net asset value of approximately 1% and 2%,
respectively.
Due to the nature of the Bear ProFund and the UltraBear ProFund, investors
in these ProFunds could experience substantial losses during sustained periods
of rising equity prices, with losses to investors in the UltraBear ProFund
approximately twice as large as the losses to investors in the Bear ProFund.
This is the opposite likely result expected of investing in a traditional equity
mutual fund in a generally rising stock market.
In pursuing its investment objectives, the Bear ProFund and the UltraBear
ProFund generally do not invest in traditional securities, such as common stock
of operating companies. Rather, the Bear ProFund and the UltraBear ProFund
employ certain investment techniques, including engaging in short sales and in
certain transactions in stock index futures contracts, options on stock index
futures contracts, and options on securities and stock indexes.
Under these techniques, the Bear ProFund and the UltraBear ProFund will
generally incur a loss if the price of the underlying security or index
increases between the date of the employment of the technique and the date on
which the ProFund terminates the position. These ProFunds will generally realize
a gain if the underlying security or index declines in price between those
dates. The amount of any gain or loss on an investment technique may be affected
by any premium or amounts in lieu of dividends or interest that the ProFund pays
or receives as the result of the transaction.
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THE ULTRAOTC PROFUND AND THE ULTRASHORT OTC PROFUND
The investment objective of the UltraOTC ProFund is to provide investment
results that correspond to 200% of the performance of the NASDAQ 100 IndexTM.
The UltraOTC ProFund does not intend to hold the 100 securities included in
the NASDAQ 100 IndexTM. Instead, the UltraOTC ProFund intends to engage in
transactions on stock index futures contracts, options on stock index futures
contracts, and options on securities and stock indexes. As a nonfundamental
policy, the UltraOTC ProFund will invest, under normal conditions, at least 65%
of its total assets in securities traded on the over-the-counter markets and
instruments with values that are representative of such securities such as
futures and option contracts in such securities or indices.
The investment objective of the UltraShort OTC ProFund is to provide
investment results that correspond each day to twice of the inverse (opposite)
of the performance of the NASDAQ 100 IndexTM. It is the policy of the UltraShort
OTC ProFund to pursue its investment objective of correlating with its benchmark
regardless of market conditions, to remain nearly fully invested and not to take
defensive positions.
The UltraShort OTC ProFund is designed to allow investors to seek to profit
from anticipated decreases in the NASDAQ 100 IndexTM or to hedge an existing
portfolio of securities or mutual fund shares. The UltraShort OTC ProFund's
investment objective is to provide investment results that will inversely
correlate to 200% of the performance of the NASDAQ 100 IndexTM. The UltraShort
OTC ProFund seeks to achieve this inverse correlation on each trading day.
If the ProFund achieved a perfect inverse correlation for any single
trading day, the net asset value of the shares of the UltraShort OTC ProFund
would increase for that day proportional to twice any decrease in the level of
the NASDAQ 100 IndexTM. Conversely, the net asset value of the shares of the
UltraShort OTC ProFund would decrease for that day proportional to twice any
increase in the level of the NASDAQ 100 IndexTM for that day.
For example, if the NASDAQ 100 IndexTM were to decrease by 1% on a
particular day, investors in the UltraShort OTC ProFund should experience a gain
in net asset value of approximately 2% for that day. Conversely, if the NASDAQ
100 IndexTM were to increase by 1% by the close of business on a particular
trading day, investors in the UltraShort OTC ProFund would experience a loss in
net asset value of approximately 2%.
In pursuing its investment objective, the UltraShort OTC ProFund generally
does not invest in traditional securities, such as common stock of operating
companies. Rather, the UltraShort OTC ProFund employs certain investment
techniques, including engaging in short sales and in certain transactions in
stock index futures contracts, options on stock index futures contracts, and
options on securities and stock indexes.
Under these techniques, the UltraShort OTC ProFund will generally incur a
loss if the price of the underlying security or index increases between the date
of the employment of the technique and the date on which the UltraShort OTC
ProFund terminates the position. The UltraShort OTC ProFund will generally
realize a gain if the underlying security or index declines in price between
those dates. The amount of any gain or loss on an investment technique may be
affected by any premium or amounts in lieu of dividends or interest that the
UltraShort OTC ProFund pays or receives as the result of the transaction. Due to
the nature of the UltraShort OTC ProFund, investors could experience substantial
losses during sustained periods of rising equity prices. This is the opposite
likely result expected of investing in a traditional equity mutual fund in a
generally rising stock market.
Companies whose securities are traded on the over-the-counter ("OTC")
markets generally have smaller market capitalization or are newer companies than
those listed on the NYSE or the American Stock Exchange (the "AMEX"). OTC
companies often have limited product lines, or relatively new products or
services, and may lack established markets, depth of experienced management, or
financial resources and the ability to generate funds. The securities of these
companies may have limited marketability and may be more volatile in price than
securities of larger capitalized or more well-known companies. Among the reasons
for the greater price volatility of securities of certain smaller OTC companies
are the less certain growth prospects of comparably smaller firms, the lower
degree of liquidity in the OTC markets for such securities, and the greater
sensitivity of smaller capitalization companies to changing economic conditions
than larger capitalization, exchange-traded securities. Conversely, because many
of these OTC securities may be overlooked by investors and undervalued in the
marketplace, there is potential for significant capital appreciation.
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THE ULTRAEUROPE AND ULTRASHORT EUROPE PROFUNDS
The investment objective of the UltraEurope ProFund is to provide
investment returns that correspond to 200% of the daily performance of the PEI.
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 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 future contracts, options
on stock index future contracts, and options on securities and stock indexes.
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 of
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 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.
<PAGE>
On January 1, 1999, the European Monetary Union (EMU) began to implement 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 on the ProFunds, the transition to the Euro may change the economic
environment and behavior of investors, particularly in European markets.
THE MONEY MARKET PROFUND
The Money Market ProFund seeks a high level of current income consistent
with liquidity and the preservation of capital through investment in high
quality money market instruments. The Money Market ProFund offers investors a
convenient means of diversifying their holdings of short-term securities while
relieving those investors of the administrative burdens typically associated
with purchasing and holding these instruments, such as coordinating maturities
and reinvestments, providing for safekeeping and maintaining detailed records.
High quality, short-term instruments may result in a lower yield than
instruments with a lower quality and/or a longer term.
The Money Market ProFund seeks to achieve its investment objective by
investing its assets in the Portfolio, which has the same investment objective
as the Money Market ProFund and is managed by Bankers Trust, 130 Liberty St.
(One Bankers Trust Plaza), New York, New York 10006. There can be no assurance
that the investment objective of either the Money Market ProFund or the
Portfolio will be achieved. The investment objectives of the Money Market
ProFund and the Portfolio are fundamental policies and may not be changed
without the approval of the Money Market ProFund's shareholders or the
Portfolio's investors, respectively. See "Special Information Concerning
MasterFeeder Fund Structure" herein.
The Portfolio invests in money market instruments, including corporate debt
obligations, U.S. government securities, bank obligations and repurchase
agreements. See "Investment Policies and Techniques -- Cash Management
Portfolio" for a discussion of the Portfolio's investment policies. The
Portfolio follows practices which are designed to enable the Money Market
ProFund to maintain a $1.00 share price: limiting dollar-weighted average
maturity of the securities held by the Portfolio to 90 days or less; buying
securities which have remaining maturities of 397 days or less; and buying only
high quality securities with minimal credit risks. Of course, the Money Market
ProFund cannot guarantee a $1.00 share price, but these practices help to
minimize any price fluctuations that might result from rising or declining
interest rates. While the Portfolio invests in high quality money market
securities, you should be aware that your investment is not without risk. All
money market instruments can change in value when interest rates or an issuer's
creditworthiness changes.
FUTURES CONTRACTS AND RELATED OPTIONS
The ProFunds (other than the Money Market ProFund) may purchase or sell
stock index futures contracts and options thereon as a substitute for a
comparable market position in the underlying securities or to satisfy regulation
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 at any time during the option
period. By writing (selling) a put or call option on a futures contract, a
ProFund receives a premium in return for granting to the purchaser of the option
the right to sell to or buy from the ProFund the underlying futures contract for
a specified price upon exercise at any time during the option period.
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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 board of trade or that
have been approved for sale in the U.S. by the Commodity 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.
The non-money market ProFunds may purchase and sell futures contracts and
options thereon only to the extent that such activities would be consistent with
the requirements of Section 4.5 of the regulations under the Commodity Exchange
Act promulgated by the Commodity Futures Trading Commission (the "CFTC
Regulations"), under which each of these ProFunds would be excluded from the
definition of a "commodity pool operator." Under Section 4.5 of the CFTC
Regulations, a ProFund may engage in futures transactions, either for "bona fide
hedging" purposes, as this term is defined in the CFTC Regulations, or for
non-hedging purposes to the extent that the aggregate initial margins and option
premiums required to establish such non-hedging positions do not exceed 5% of
the liquidation value of the ProFund's portfolio. In the case of an option on
futures contracts that is "in-the-money" at the time of purchase (i.e., the
amount by which the exercise price of the put option exceeds the current market
value of the underlying security or the amount by which the current market value
of the underlying security exceeds the exercise price of the call option), the
in-the-money amount may be excluded in calculating this 5% limitation.
The ProFunds will cover their positions when they write a futures contract
or option on a futures contract. A ProFund may "cover" its long position in a
futures contract by purchasing a put option on the same futures contract with a
strike price (i.e., an exercise price) as high or higher than the price of the
futures contract, or, if the strike price of the put is less than the price of
the futures contract, the ProFund will maintain in a segregated account cash or
liquid instruments equal in value to the difference between the strike price of
the put and the price of the future. A ProFund may also cover its long position
in a futures contract by taking a short position in the instruments underlying
the futures contract, or by taking positions in instruments the prices of which
are expected to move relatively consistently with the futures contract. A
ProFund may cover its short position in a futures contract by taking a long
position in the instruments underlying the futures contract, or by 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.
Although the ProFunds intend to sell futures contracts only if there is an
active market for such contracts, no assurance can be given that a liquid market
will exist for any particular contract at any particular time. Many futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a price
beyond that limit or trading may be suspended for specified periods during the
day. Futures contract prices could move to the limit for several consecutive
trading days with little or no trading, thereby preventing prompt liquidation of
futures positions and potentially subjecting a ProFund to substantial losses. If
trading is not possible, or if a ProFund determines not to close a futures
position in anticipation of adverse price movements, the ProFund will be
required to make daily cash payments of variation margin. The risk that the
ProFund will be unable to close out a futures position will be minimized by
entering into such transactions on a national exchange with an active and liquid
secondary market.
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INDEX OPTIONS
The ProFunds (other than the Money Market ProFund) may purchase and write
options on stock indexes to create investment exposure consistent with their
investment objectives, hedge or limit the exposure of their positions and to
create synthetic money market positions. See "Taxation" herein.
A stock index fluctuates with changes in the market values of the stocks
included in the index. Options on stock indexes give the holder the right to
receive an amount of cash upon exercise of the option. Receipt of this cash
amount will depend upon the closing level of the stock index upon which the
option is based being greater than (in the case of a call) or less than (in the
case of a put) the exercise price of the option. The amount of cash received, if
any, will be the difference between the closing price of the index and the
exercise price of the option, multiplied by a specified dollar multiple. The
writer (seller) of the option is obligated, in return for the premiums received
from the purchaser of the option, to make delivery of this amount to the
purchaser. All settlements of index options transactions are in cash.
Index options are subject to substantial risks, including the risk of
imperfect correlation between the option price and the value of the underlying
securities composing the stock index selected and the risk that there might not
be a liquid secondary market for the option. Because the value of an index
option depends upon movements in the level of the index rather than the price of
a particular stock, whether a ProFund will realize a gain or loss from the
purchase or writing (sale) of options on an index depends upon movements in the
level of stock prices in the stock market generally or, in the case of certain
indexes, in an industry or market segment, rather than upon movements in the
price of a particular stock. Whether a ProFund will realize a profit or loss by
the use of options on stock indexes will depend on movements in the direction of
the stock market generally or of a particular industry or market segment. This
requires different skills and techniques than are required for predicting
changes in the price of individual stocks. A ProFund will not enter into an
option position that exposes the ProFund to an obligation to another party,
unless the ProFund either (i) owns an offsetting position in securities or other
options and/or (ii) maintains with the ProFund's custodian bank liquid
instruments that, when added to the premiums deposited with respect to the
option, are equal to the market value of the underlying stock index not
otherwise covered.
The non-money market ProFunds may engage in transactions in stock index
options listed on national securities exchanges or traded in the
over-the-counter market as an investment vehicle for the purpose of realizing
the ProFund's investment objective. Options on indexes are settled in cash, not
by delivery of securities. The exercising holder of an index option receives,
instead of a security, cash equal to the difference between the closing price of
the securities index and the exercise price of the option.
Some stock index options are based on a broad market index such as the S&P
500 Index, the NYSE Composite Index, or the AMEX Major Market Index, or on a
narrower index such as the Philadelphia Stock Exchange Over-the-Counter Index.
Options currently are traded on the Chicago Board Options Exchange (the "CBOE"),
the AMEX, and other exchanges ("Exchanges"). Purchased over-the-counter options
and the cover for written over-the-counter options will be subject to the
respective ProFund's 15% limitation on investment in illiquid securities. See
"Illiquid Securities."
Each of the Exchanges has established limitations governing the maximum
number of call or put options on the same index which may be bought or written
(sold) by a single investor, whether acting alone or in concert with others
(regardless of whether such options are written on the same or different
Exchanges or are held or written on one or more accounts or through one or more
brokers). Under these limitations, option positions of all investment companies
advised by the same investment adviser are combined for purposes of these
limits. Pursuant to these limitations, an Exchange may order the liquidation of
positions and may impose other sanctions or restrictions. These position limits
may restrict the number of listed options which a ProFund may buy or sell;
however, the Advisor intends to comply with all limitations.
<PAGE>
OPTIONS ON SECURITIES
The non-money market ProFunds may buy and write (sell) options on
securities for the purpose of realizing their respective ProFund's investment
objective. By buying a call option, a ProFund has the right, in return for a
premium paid during the term of the option, to buy the securities underlying the
option at the exercise price. By writing 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
buying a put option, a ProFund has the right, in return for a premium paid
during the term of the option, to sell the securities underlying the option at
the exercise price. By writing a put option, a ProFund becomes obligated during
the term of the option to purchase the securities underlying the option at the
exercise price if the option is exercised. During the term of the option, the
writer may be assigned an exercise notice by the broker-dealer through whom the
option was sold. The exercise notice would require the writer to deliver, in the
case of a call, or take delivery of, in the case of a put, the underlying
security against payment of the exercise price. This obligation terminates upon
expiration of the option, or at such earlier time that the writer effects a
closing purchase transaction by purchasing an option covering the same
underlying security and having the same exercise price and expiration date as
the one previously sold. Once an option has been exercised, the writer may not
execute a closing purchase transaction. To secure the obligation to deliver the
underlying security in the case of a call option, the writer of a call option is
required to deposit in escrow the 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.
Although certain securities exchanges attempt to provide continuously
liquid markets in which holders and writers of options can close out their
positions at any time prior to the expiration of the option, no assurance can be
given that a market will exist at all times for all outstanding options
purchased or sold by a ProFund. If an options market were to become unavailable,
the ProFund would be unable to realize its profits or limit its losses until the
ProFund could exercise options it holds, and the ProFund would remain obligated
until options it wrote were exercised or expired.
<PAGE>
SHORT SALES
The Bear ProFund, the UltraBear ProFund, the UltraShort OTC ProFund and 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.
SWAP AGREEMENTS
The ProFunds (other than the Money Market ProFund) 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 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
interest rate caps, under which, in return for a premium, one party agrees to
make payments to the other to the extent that interest rates exceed a specified
rate, or "cap"; interest rate floors, under which, in return for a premium, one
party agrees to make payments to the other to the extent that interest rates
fall below a specified level, or "floor"; and interest rate collars, under which
a party sells a cap and purchases a floor or vice versa in an attempt to protect
itself against interest rate 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 Portfolio 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.
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.
<PAGE>
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 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 of 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) 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 in pursuit of their investment objectives, as "cover" for
the investment techniques these ProFunds employ, or for liquidity purposes.
Yields on U.S. government securities are dependent on a variety of factors,
including the general conditions of the money and bond markets, the size of a
particular offering, and the maturity of the obligation. Debt securities with
longer maturities tend to produce higher yields and are generally subject to
potentially greater capital appreciation and depreciation than obligations with
shorter maturities and lower yields. The market value of U.S. government
securities generally varies inversely with changes in market interest rates. An
increase in interest 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.
<PAGE>
U.S. government securities include U.S. Treasury securities, which are
backed by the full faith and credit of the U.S. Treasury and which differ only
in their interest rates, maturities, and times of issuance. U.S. Treasury bills
have initial maturities of one year or less; U.S. Treasury notes have initial
maturities of one to ten years; and U.S. Treasury bonds generally have initial
maturities of greater than ten years. Certain U.S. government securities are
issued or guaranteed by agencies or instrumentalities of the U.S. government
including, but not limited to, obligations of U.S. government agencies or
instrumentalities, such as the Federal National Mortgage Association, the
Government National Mortgage Association, the Small Business Administration, the
Federal Farm Credit Administration, the Federal Home Loan Banks, Banks for
Cooperatives (including the Central Bank for Cooperatives),the Federal Land
Banks, the Federal Intermediate Credit Banks, the Tennessee Valley Authority,
the Export-Import Bank of the United States, the Commodity Credit Corporation,
the Federal Financing Bank, the Student Loan Marketing Association, and the
National Credit Union Administration. Some obligations issued or guaranteed by
U.S. government agencies and instrumentalities, including, for example,
Government National Mortgage Association pass-through certificates, are
supported by the full faith and credit of the U.S. Treasury. Other obligations
issued by or guaranteed by Federal agencies, such as those securities issued by
the Federal National Mortgage Association, are supported by the discretionary
authority of the U.S. government to purchase certain obligations of the federal
agency, while other obligations issued by or guaranteed by federal agencies,
such as those of the Federal Home Loan Banks, are supported by the right of the
issuer to borrow from the U.S. Treasury. While the U.S. government provides
financial support to such U.S. government-sponsored Federal agencies, no
assurance can be given that the U.S. government will always do so, since the
U.S. Government is not so obligated by law. U.S. Treasury notes and bonds
typically pay coupon interest semi-annually and repay the principal at maturity.
REPURCHASE AGREEMENTS
Each of the ProFunds may enter into repurchase agreements with
financial institutions. 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. 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. 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 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.
CASH RESERVES
To seek its investment objective 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.
<PAGE>
REVERSE REPURCHASE AGREEMENTS
The non-money market ProFunds and the Portfolio may use reverse repurchase
agreements as part of that ProFund's investment strategy. Reverse repurchase
agreements involve sales by a ProFund/Portfolio of portfolio assets concurrently
with an agreement by the ProFund/Portfolio to repurchase the same assets at a
later date at a fixed price. Generally, the effect of such a transaction is that
the ProFund/Portfolio can recover all or most of the cash invested in the
portfolio securities involved during the term of the reverse repurchase
agreement, while the ProFund/Portfolio will be able to keep the interest income
associated with those portfolio securities. Such transactions are advantageous
only if the interest cost to the ProFund/Portfolio of the reverse repurchase
transaction is less than the cost of obtaining the cash otherwise. Opportunities
to achieve this advantage may not always be available, and the
ProFund/Portfolios intend to use the reverse repurchase technique only when it
will be to the ProFund/Portfolio's advantage to do so and the Money Market
ProFund will not invest more than 5% of its total assets in reverse repurchase
agreements. The ProFund/Portfolios will establish a segregated account with
their custodian bank in which the ProFund/Portfolio will maintain cash or liquid
instruments equal in value to the ProFund/Portfolio's obligations in respect of
reverse repurchase agreements.
BORROWING
The ProFunds (other than the Portfolio except to the degree the Portfolio
may borrow for temporary or emergency purposes) may borrow money for cash
management purposes or investment purposes. Each of the non-money market
ProFunds may also enter into reverse repurchase agreements, which may be viewed
as a form of borrowing, with financial institutions. However, to the extent a
ProFund "covers" its repurchase obligations as described above in "Reverse
Repurchase Agreements," such agreement will not be considered to be a "senior
security" and, therefore, will not be subject to the 300% asset coverage
requirement otherwise applicable to borrowings by the ProFunds. Borrowing for
investment is known as leveraging. Leveraging investments, by purchasing
securities with borrowed money, is a speculative technique which increases
investment risk, but also increases investment opportunity. Since substantially
all of a ProFund's assets will fluctuate in value, whereas the interest
obligations on borrowings may be fixed, the net asset value per share of the
ProFund will increase more when the ProFund's portfolio assets increase in value
and decrease more when the ProFund's portfolio assets decrease in value than
would otherwise be the case. Moreover, interest costs on borrowings may
fluctuate with changing market rates of interest and may partially offset or
exceed the returns on the borrowed funds. Under adverse conditions, a ProFund
might have to sell portfolio securities to meet interest or principal payments
at a time when investment considerations would not favor such sales.
As required by the Investment Company Act of 1940, as amended (the "1940
Act"), a ProFund must maintain continuous asset coverage (total assets,
including assets acquired with borrowed funds, less liabilities exclusive of
borrowings) of 300% of all amounts borrowed. If at any time the value of the
ProFund's assets should 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.
<PAGE>
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 1/3 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. There may be risks of delay in receiving additional collateral or
risks of delay in recovery of the securities or even loss of rights in the
securities lent should the borrower of the securities fail financially. A
lending ProFund/Portfolio may pay reasonable finders, borrowers, administrative,
and custodial Trustees in connection with a loan. With respect to the Portfolio,
cash collateral may be invested in a money market fund managed by Bankers Trust
(or its affiliate) and Bankers Trust may serve as the Portfolio's lending agent
and may share in revenue received from securities lending transactions as
compensation for this service.
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. Each non-money market 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 Portfolio will enter into when-issued or delayed-delivery transactions
for the purpose of acquiring securities and not for the purpose of leverage.
When issued securities purchased by the Portfolio may include securities
purchased on a "when, as and if issued" basis under which the issuance of the
securities depends on the occurrence of a subsequent event. Upon purchasing a
security on a when-issued or delayed-delivery basis, the Portfolio will
identify, as part of a segregated account, cash or liquid securities in an
amount at least equal to the when-issued or delayed-delivery commitment.
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.
<PAGE>
INVESTMENTS IN OTHER INVESTMENT COMPANIES
The ProFunds and the Portfolio 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 / Portfolio invests in, and,
thus, is a shareholder of, another investment company, the ProFund / Portfolio's
shareholders will indirectly bear the ProFund / Portfolio'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 / Portfolio bears directly in connection with the ProFund's / Portfolio
own operations. The Portfolio may invest its assets in other money market funds
with comparable investment objectives. In general, the Portfolio may not (1)
purchase more than 3% of any other money market fund's voting stock; (2) invest
more than 5% of its assets in any single money market fund; and (3) invest more
than 10% of its assets in other money market funds unless permitted to exceed
these limitations by an exemptive order of the SEC.
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.
<PAGE>
At the time of investment, the Portfolio's aggregate holdings of repurchase
agreements having remaining maturities of more than seven calendar days (or
which may not be terminated within seven calendar days upon notice by the
Portfolio), time deposits having remaining maturities of more than seven
calendar days, illiquid securities, restricted securities and securities lacking
readily available market quotations will not exceed 10% of the Portfolio's net
assets. If changes in the liquidity of certain securities cause the Portfolio to
exceed such 10% limit, the Portfolio will take steps to bring the aggregate
amount of its illiquid securities back below 10% of its net assets as soon as
practicable, unless such action would not be in the best interest of the
Portfolio.
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.
PORTFOLIO QUALITY AND MATURITY (MONEY MARKET PROFUND AND THE PORTFOLIO)
The Portfolio will maintain a dollar-weighted average maturity of 90 days
or less. All securities in which the Portfolio invests will have or be deemed to
have remaining maturities of 397 days or less on the date of their purchase,
will be denominated in U.S. dollars and will have been granted the required
ratings established herein by two nationally recognized statistical rating
organizations ("NRSRO") (or one such NRSRO if that NRSRO is the only such NRSRO
which rates the security), or if unrated, are believed by Bankers Trust, under
the supervision of the Portfolio's Board of Trustees, to be of comparable
quality. Currently, there are five rating agencies which have been designated by
the Securities and Exchange Commission (the "SEC") as an NRSRO. These
organizations and their highest short-term rating category (which may also be
modified by a "+") are : Duff and Phelps Credit Rating Co., D-1; Fitch IBCA,
Inc., F1; Moody's Investors Service Inc. ("Moody's"), Prime-1; Standard &
Poor's, A-1; and Thomson BankWatch, Inc., T-1. A description of such ratings is
provided in the Appendix. Bankers Trust, acting under the supervision of and
procedures adopted by the Board of Trustees of each Portfolio, will also
determine that all securities purchased by the Portfolio present minimal credit
risks. Bankers Trust will cause the Portfolio to dispose of any security as soon
as practicable if the security is no longer of the requisite quality, unless
such action would not be in the best interest of the Portfolio.
<PAGE>
OBLIGATIONS OF BANKS AND OTHER FINANCIAL INSTITUTIONS (MONEY MARKET PROFUND AND
THE PORTFOLIO)
The Portfolio may invest in U.S. dollar-denominated fixed rate or
variable rate obligations of U.S. or foreign institutions, including banks which
are rated in the highest short-term rating category by any two NRSROs (or one
NRSRO if that NRSRO is the only such NRSRO which rates such obligations) or, if
not so rated, are believed by Bankers Trust, acting under the supervision of the
Board of Trustees of the Portfolio, to be of comparable quality. Bank
obligations in which the Portfolio invests include certificates of deposit,
bankers' acceptances, time deposits, commercial paper, and other U.S.
dollar-denominated instruments issued or supported by the credit of U.S. or
foreign institutions including banks. For purposes of the Portfolio's investment
policies with respect to bank obligations, the assets of a bank will be deemed
to include the assets of its domestic and foreign branches. Obligations of
foreign branches of U.S. banks and foreign banks may be general obligations of
the parent bank in addition to the issuing bank or may be limited by the terms
of a specific obligation and by government regulation. If Bankers Trust, acting
under the supervision of the Portfolio's Board of Trustees, deems the
instruments to present minimal credit risk, the Portfolio may invest in
obligations of foreign banks or foreign branches of U.S. banks which include
banks located in the United Kingdom, Grand Cayman Island, Nassau, Japan and
Canada. Investments in these obligations may entail risks that are different
from those of investments in obligations of U.S. domestic banks because of
differences in political, regulatory and economic systems and conditions. These
risks include, without limitation, future political and economic developments,
currency blockage, the possible imposition of withholding taxes on interest
payments, possible seizure or nationalization of foreign deposits, and
difficulty or inability of pursuing legal remedies and obtaining judgment in
foreign courts, possible establishment of exchange controls or the adoption of
other foreign governmental restrictions that might affect adversely the payment
of principal and interest on bank obligations. Foreign branches of U.S. banks
and foreign banks may also be subject to less stringent reserve requirements and
to different accounting, auditing, reporting and recordkeeping standards than
those applicable to branches of U.S. banks. Under normal market conditions, the
Portfolio will invest more than 25% of its assets in the foreign and domestic
bank obligations described above. The Portfolio's concentration of its
investments in bank obligations will cause the Portfolio to be subject to the
risks peculiar to the domestic and foreign banking industries to a greater
extent than if its investments were not so concentrated. A description of the
ratings set forth above is provided in the Appendix.
COMMERCIAL PAPER, OTHER DEBT OBLIGATIONS AND CREDIT ENHANCEMENT (MONEY
MARKET PROFUND AND THE PORTFOLIO)
COMMERCIAL PAPER. The Portfolio may invest in fixed rate or variable rate
commercial paper, including variable rate master demand notes, issued by U.S. or
foreign entities. Commercial paper when purchased by the Portfolio must be rated
the highest short-term rating category by any two NRSROs (or one NRSRO if that
NRSRO is the only such NRSRO which rates the obligation) or if not rated, must
be believed by Bankers Trust, acting under the supervision of the Board of
Trustees of the Portfolio, to be of comparable quality. Any commercial paper
issued by a foreign entity and purchased by the Portfolio must be U.S.
dollar-denominated and must not be subject to foreign withholding tax at the
time of purchase. Investing in foreign commercial paper generally involves risks
similar to those described above relating to obligations of foreign banks or
foreign branches of U.S. banks.
Variable rate master demand notes are unsecured instruments that permit the
indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate. Because variable rate master demand notes are direct lending
arrangements between the Portfolio and the issuer, they are not normally traded.
Although no active secondary market may exist for these notes, the Portfolio
will purchase only those notes under which it may demand and receive payment on
principal and accrued interest daily or may resell the note to a third party.
While the notes are not typically rated by credit rating agencies, issuers of
variable rate master demand notes must satisfy Bankers Trust, acting under the
supervision of the Board of Trustees of the Portfolio, that the same criterion
set forth above for issuers of commercial paper are met. In the event an issuer
of a variable rate master demand note defaulted on its payment obligation, the
Portfolio might be unable to dispose of the note because of the absence of a
secondary market and could, for this or other reasons, suffer a loss to the full
extent of the default. The face maturities of variable rate notes subject to a
demand feature may exceed 397 days in certain circumstances.
OTHER DEBT OBLIGATIONS. The Portfolio may invest in deposits, bonds, notes
and debentures and other debt obligations that at the time of purchase have, or
are comparable in priority and security to other securities of such issuer which
have, outstanding short-term obligations meeting the above short-term rating
requirements, or if there are no such short-term ratings, are determined by
Bankers Trust, acting under the supervision of the Board of Trustees, to be of
comparable quality and are rated in the top three highest long-term categories
by the NRSROs rating such security.
<PAGE>
CREDIT ENHANCEMENT. Certain of the Portfolio's acceptable investments may
be credit-enhanced by a guaranty, letter of credit, or insurance. Any
bankruptcy, receivership, default, or change in the credit quality of the party
providing the credit enhancement will adversely affect the quality and
marketability of the underlying security and could cause losses to the Portfolio
and affect the Money Market ProFund's share price. The Portfolio may have more
than 25% of its total assets invested in securities credit-enhanced by banks.
ASSET-BACKED SECURITIES. The Portfolio may also invest in securities
generally referred to as asset-backed securities, which directly or indirectly
represent a participation interest in, or are secured by and payable from, a
stream of payments generated by particular assets, such as motor vehicle or
credit card receivables. Asset-backed securities may provide periodic payments
that consist of interest and/or principal payments. Consequently, the life of an
asset-backed security varies with the prepayment and loss experience of the
underlying assets.
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. 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. Because each
ProFund's portfolio turnover rate to a great extent will depend on the purchase,
redemption, and exchange activity of the ProFund's investors, it is difficult to
estimate what the ProFund's actual turnover rate will be in the future.
"Portfolio Turnover Rate" is defined under the rules of the Commission as the
value of the securities purchased or securities sold, excluding all securities
whose maturities at time of acquisition were one year or less, divided by the
average monthly value of such securities owned during the year. Based on this
definition, instruments with remaining maturities of less than one year are
excluded from the calculation of portfolio turnover rate. Instruments excluded
from the calculation of portfolio turnover generally would include the futures
contracts and option contracts in which the non-money market ProFunds invest
since such contracts generally have a remaining maturity of less than one year.
Pursuant to the formula prescribed by the Commission, the portfolio turnover
rate for each ProFund is calculated without regard to instruments, including
options and futures contracts, having a maturity of less than one year. The Bull
ProFund, the UltraBull ProFund, the Bear ProFund and the UltraBear ProFund
typically hold most of their investments in short-term options and futures
contracts, which, therefore, are excluded for purposes of computing portfolio
turnover. Therefore, based on the Commission's portfolio turnover formula, each
of these ProFunds expects a portfolio turnover rate of approximately 0%.
<PAGE>
SPECIAL CONSIDERATIONS
To the extent discussed above and in the prospectus, the ProFunds present
certain risks, some of which are further described below.
TRACKING ERROR. While the non-money market ProFunds do not expect that
their returns over a year will deviate adversely from their respective
benchmarks by more than ten percent, several factors may affect their ability to
achieve this correlation. Among these factors are: (1) ProFund expenses,
including brokerage (which may be increased by high portfolio turnover) and the
cost of the investment techniques employed by the ProFunds; (2) less than all of
the securities in the benchmark being held by a ProFund and securities not
included in the benchmark being held by a ProFund; (3) an imperfect correlation
between the performance of instruments held by a ProFund, such as futures
contracts and options, and the performance of the underlying securities in the
cash market; (4) bid-ask spreads (the effect of which may be increased by
portfolio turnover); (5) holding instruments traded in a market that has become
illiquid or disrupted; (6) ProFund share prices being rounded to the nearest
cent; (7) changes to the benchmark index that are not disseminated in advance;
(8) the need to conform a ProFund's portfolio holdings to comply with investment
restrictions or policies or regulatory or tax law requirements, and (9) early
and unanticipated closings of the markets on which the holdings of a ProFund
trade, resulting in the inability of the ProFund to execute intended portfolio
transactions. While a close correlation of any ProFund to its benchmark may be
achieved on any single trading day, over time the cumulative percentage increase
or decrease in the net asset value of the shares of a ProFund may diverge
significantly from the cumulative percentage decrease or increase in the
benchmark due to a compounding effect.
LEVERAGE. The UltraBull ProFund, the UltraBear ProFund, UltraOTC ProFund,
UltraEurope ProFund, UltraShort OTC ProFund and UltraShort Europe ProFund intend
to regularly use leveraged investment techniques in pursuing their investment
objectives. Utilization of leveraging involves special risks and should be
considered to be speculative. Leverage exists when a ProFund achieves the right
to a return on a capital base that exceeds the amount the ProFund has invested.
Leverage creates the potential for greater gains to shareholders of these
ProFunds during favorable market conditions and the risk of magnified losses
during adverse market conditions. Leverage should cause higher volatility of the
net asset values of these ProFunds' shares. Leverage may involve the creation of
a liability that does not entail any interest costs or the creation of a
liability that requires the ProFund to pay interest which would decrease the
ProFund's total return to shareholders. If these ProFunds achieve their
investment objectives, during adverse market conditions, shareholders should
experience a loss of approximately twice the amount they would have incurred had
these ProFunds not been leveraged.
NON-DIVERSIFIED STATUS. Each non-money market ProFund is a
"non-diversified" series. A non-money market ProFund is considered
"non-diversified" because a relatively high percentage of the ProFund's assets
may be invested in the securities of a limited number of issuers, primarily
within the same economic sector. That ProFund's portfolio securities, therefore,
may be more susceptible to any single economic, political, or regulatory
occurrence than the portfolio securities of a more diversified investment
company. A ProFund's classification as a "non-diversified" investment company
means that the proportion of the ProFund's assets that may be invested in the
securities of a single issuer is not limited by the 1940 Act. Each ProFund,
however, intends to seek to qualify as a "regulated investment company" for
purposes of the Internal Revenue Code, which imposes diversification
requirements on these ProFunds that are less restrictive than the requirements
applicable to the "diversified" investment companies under the 1940 Act.
SPECIAL INFORMATION CONCERNING MASTER-FEEDER FUND STRUCTURE
Unlike other open-end management investment companies (mutual funds)
which directly acquire and manage their own portfolio securities, the Money
Market ProFund seeks to achieve its investment objective by investing all of its
assets in the Portfolio, a separate registered investment company with the same
investment objective as the Money Market ProFund. Therefore, an investor's
interest in the Portfolio's securities is indirect. In addition to selling a
beneficial interest to the Money Market ProFund, the Portfolio may sell
beneficial interests to other mutual funds or institutional investors. Such
investors will invest in the Portfolio on the same terms and conditions and will
pay a proportionate share of the Portfolio's expenses. However, the other
investors investing in the Portfolio are not required to sell their shares at
the same public offering price as the Money Market ProFund or subject to
comparable variations in sales loads and other operating expenses. Therefore,
investors in the Money Market ProFund should be aware that these differences may
result in differences in returns experienced by investors in the different funds
that may invest in the Portfolio. Such differences in returns are also present
in other mutual fund structures. Information concerning other holders of
interests in the Portfolio is available from Bankers Trust at 1-800-368-4031.
<PAGE>
The ProFunds' Board of Trustees believes that the Money Market ProFund will
achieve certain efficiencies and economies of scale through the master-feeder
structure, and that the aggregate expenses of the Money Market ProFund will be
less than if the Money Market ProFund invested directly in the securities held
by the Portfolio.
Smaller funds investing in the Portfolio may be materially affected by the
actions of larger funds investing in the Portfolio. For example, if a large fund
withdraws from the Portfolio, the remaining funds may experience higher pro rata
operating expenses, thereby producing lower returns (however, this possibility
exists as well for traditionally structured funds which have large institutional
investors). Additionally, the Portfolio may become less diverse, resulting in
increased portfolio concentration and potential risk. Also, funds with a greater
pro rata ownership in the Portfolio could have effective voting control of the
operations of the Portfolio. Except as permitted by the Commission, whenever the
ProFunds are requested to vote on matters pertaining to the Portfolio, the
ProFunds will hold a meeting of shareholders of the Money Market ProFund and
will cast all of its votes in the same proportion as the votes of the Money
Market ProFund's shareholders. Money Market ProFund shareholders who do not vote
will not affect the ProFunds votes at the Portfolio meeting. The percentage of
the Trust's votes representing Money Market ProFund shareholders not voting will
be voted by the Trustees or officers of the ProFunds in the same proportion as
the Money Market ProFund shareholders who do, in fact, vote.
Certain changes in the Portfolio's investment objective, policies or
restrictions may require the Money Market ProFund to withdraw its interest in
the Portfolio. Such withdrawal could result in a distribution "in kind" of
portfolio securities (as opposed to a cash distribution from the Portfolio). If
securities are distributed, the Money Market ProFund could incur brokerage, tax
or other charges in converting the securities to cash. In addition, the
distribution in kind may result in a less diversified portfolio of investments
or adversely affect the liquidity of the Money Market ProFund. Notwithstanding
the above, there are other means for meeting redemption requests, such as
borrowing.
The Money Market ProFund may withdraw its investment from the Portfolio at
any time, if the Board of Trustees of the ProFunds determines that it is in the
best interests of the shareholders of the Money Market ProFund to do so. Upon
any such withdrawal, the Board of Trustees of the Trust would consider what
action might be taken, including the investment of all the assets of the Money
Market ProFund in another pooled investment entity having the same investment
objective as the Money Market ProFund or the retaining of an investment adviser
to manage the Money Market ProFund's assets in accordance with the investment
policies described above with respect to the Portfolio.
<PAGE>
INVESTMENT RESTRICTIONS
The ProFunds and the Portfolio have adopted certain investment restrictions
as fundamental policies which cannot be changed without the approval of the
holders of a "majority" of the outstanding shares of the ProFund or the
Portfolio, as that term is defined in the 1940 Act. The term "majority" is
defined in the 1940 Act as the lesser of: (i) 67% or more of the shares of the
series present at a meeting of shareholders, if the holders of more than 50% of
the outstanding shares of the ProFund are present or represented by proxy; or
(ii) more than 50% of the outstanding shares of the series. (All policies of a
ProFund not specifically identified in this Statement of Additional Information
or the Prospectus as fundamental may be changed without a vote of the
shareholders of the ProFund.) For purposes of the following limitations, all
percentage limitations apply immediately after a purchase or initial investment.
A non-money market ProFund may not:
1. Invest more than 25% of its total assets, taken at market
value at the time of each investment, in the securities of
issuers in any particular industry (excluding the U.S.
government and its agencies and instrumentalities).
2. Make investments for the purpose of exercising control or
management.
3. Purchase or sell real estate, except that, to the extent
permitted by applicable law, the ProFund may invest in
securities directly or indirectly secured by real estate or
interests therein or issued by companies that invest in real
estate or interests therein.
4. Make loans to other persons, except that the acquisition of
bonds, debentures or other corporate debt securities and
investment in government obligations, commercial paper,
pass-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.
<PAGE>
7. Underwrite securities of other issuers, except insofar as the
ProFund technically may be deemed an underwriter under the
Securities Act of 1933, as amended (the "Securities Act"), in
selling portfolio securities.
8. Purchase or sell commodities or contracts on commodities,
except to the extent the ProFund may do so in accordance with
applicable law and the ProFund's Prospectus and Statement of
Additional Information, as they may be amended from time to
time.
THE FOLLOWING FUNDAMENTAL INVESTMENT RESTRICTIONS AND NON-FUNDAMENTAL
INVESTMENT OPERATING POLICIES HAVE BEEN ADOPTED BY THE TRUST, WITH RESPECT TO
THE MONEY MARKET PROFUND, AND BY THE PORTFOLIO. UNLESS AN INVESTMENT INSTRUMENT
OR TECHNIQUE IS DESCRIBED IN THE PROSPECTUS OR ELSEWHERE HEREIN, THE MONEY
MARKET PROFUND AND THE PORTFOLIO MAY NOT INVEST IN THAT INVESTMENT INSTRUMENT OR
ENGAGE IN THAT INVESTMENT TECHNIQUE.
The investment restrictions below have been adopted by the Trust with
respect to the Money Market ProFund and by the Portfolio as fundamental policies
(as defined above). Whenever the Money Market ProFund is requested to vote on a
change in the investment restrictions of the Portfolio, the Trust will hold a
meeting of the Money Market ProFund shareholders and will cast its votes as
instructed by the shareholders. The Money Market ProFund shareholders who do not
vote will not affect the Trust's votes at the Portfolio meeting. The percentage
of the Trust's votes representing ProFund shareholders not voting will be voted
by the Trustees of the Trust in the same proportion as the Fund shareholders who
do, in fact, vote.
Under investment policies adopted by the Money Market ProFund and by the
Portfolio, each of the Money Market ProFund and Portfolio may not:
1. Borrow money, except for temporary or emergency (not
leveraging) purposes in an amount not exceeding 5% of the
value of the ProFund's or the Portfolio's total assets
(including the amount borrowed), as the case may be,
calculated in each case at the lower of cost or market.
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.
<PAGE>
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 U.S. and foreign banks and other
financial institutions Banks provided, however, that nothing
in this investment restriction shall prevent a Trust from
investing all or part of a ProFund's assets in an open-end
management investment company with substantially the same
investment objectives as the ProFund.
5. Make short sales of securities, maintain a short position or
purchase any securities on margin, except for such short-term
credits as are necessary for the clearance of transactions.
6. Underwrite the securities issued by others (except to the
extent the ProFund or Portfolio may be deemed to be an
underwriter under the Federal securities laws in connection
with the disposition of its portfolio securities) or knowingly
purchase restricted securities, provided, however, that
nothing in this investment restriction shall prevent the Trust
from investing all of the ProFund's assets in an open-end
management investment company with substantially the same
investment objectives as the ProFund.
7. Purchase or sell real estate, real estate investment trust
securities, commodities or commodity contracts, or oil, gas or
mineral interests, but this shall not prevent the ProFund or
the Portfolio from investing in obligations secured by real
estate or interests therein.
8. Make loans to others, except through the purchase of qualified
debt obligations, the entry into repurchase agreements and,
with respect to the ProFund and the Portfolio, the lending of
portfolio securities.
9. Invest more than an aggregate of 10% of the net assets of the
ProFund or the Portfolio's, respectively, (taken, in each
case, at current value) in (i) securities that cannot be
readily resold to the public because of legal or contractual
restrictions or because there are no market quotations readily
available or (ii) other "illiquid" securities (including time
deposits and repurchase agreements maturing in more than seven
calendar days); provided, however, that nothing in this
investment restriction shall prevent the Trust from investing
all or part of the ProFund's assets in an open-end management
investment company with substantially the same investment
objective as the ProFund.
10. Purchase more than 10% of the voting securities of any issuer
or invest in companies for the purpose of exercising control
or management; provided, however, that nothing in this
investment restriction shall prevent the Trust from investing
all or part of the ProFund's assets in an open-end management
investment company with substantially the same investment
objectives as the ProFund.
<PAGE>
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, as applicable, the 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;
<PAGE>
(iii) purchase any security or evidence of interest therein on
margin, except that such short-term credit as may be necessary
for the clearance of purchases and sales of securities may be
obtained and except that deposits of initial deposit and
variation margin may be made in connection with the purchase,
ownership, holding or sale of futures;
(iv) sell any security which it does not own unless by virtue of
its ownership of other securities it has at the time of sale a
right to obtain securities, without payment of further
consideration, equivalent in kind and amount to the securities
sold and provided that if such right is conditional the sale
is made upon the same conditions;
(v) invest for the purpose of exercising control or management;
(vi) purchase securities issued by any investment company except by
purchase in the open market where no commission or profit to a
sponsor or dealer results from such purchase other than the
customary broker's commission, or except when such purchase,
though not made in the open market, is part of a plan of
merger or consolidation; provided, however, that securities 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) with respect to 75% of the Portfolio'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;
<PAGE>
(ix) if the Portfolio 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*;
(x) 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).
*With respect to (ix) as an operating policy, the Portfolio may not
invest more than 5% of its total assets in the securities of any one issuer
except for U.S. government obligations and repurchase agreements, which may be
purchased without limitation.
The 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.
DETERMINATION OF NET ASSET VALUE
The net asset values of the shares of the ProFunds (except the UltraEurope
ProFund and the UltraShort Europe ProFund) are determined as of the close of
business of the NYSE (ordinarily, 4:00 p.m. Eastern Time) on each day the NYSE
and the Chicago Mercantile Exchange ("CME") are open for business (in the case
of the Money Market ProFund, net asset value is determined as of the close of
business on each day the NYSE is open for business.)
The net asset values of the shares of the UltraEurope ProFund and the
UltraShort Europe ProFund are determined as of the latest close of trading on
the three exchanges tracked by the PEI (ordinarily 11:30 AM Eastern Time) on
each day the NYSE, London Stock Exchange, Frankfurt Stock Exchange and Paris
Stock Exchange are open for business (see prospectus for applicable holiday
closings). 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 exchanges may
modify their holiday schedules at any time.
<PAGE>
The net asset value of each class of shares of a ProFund serves as the
basis for the purchase and redemption price of that class of shares. The net
asset value per share of each class of a ProFund is calculated by dividing the
market value of the ProFund's assets attributed to a specific class (in the case
of the Money Market ProFund, the value of its investment in the Portfolio), less
all liabilities attributed to the specific class, by the number of outstanding
shares of the class. If market quotations are not readily available, a security
will be valued at fair value by the Trustees of ProFunds or by the Advisor using
methods established or ratified by the Trustees of ProFunds. The Money Market
ProFund's net asset value per share will normally be $1.00. There is no
assurance that the $1.00 net asset value will be maintained.
The Portfolio will utilize the amortized cost method in valuing its
portfolio securities. This method involves valuing each security held by the
Portfolio at its cost at the time of its purchase and thereafter assuming a
constant amortization to maturity of any discount or premium. Accordingly,
immaterial fluctuations in the market value of the securities held by the
Portfolio will not be reflected in the Money Market ProFund's net asset value.
The Board of Trustees of the Portfolio will monitor the valuation of assets of
this method and will make such changes as it deems necessary to assure that the
assets of the Portfolio are valued fairly in good faith.
The securities in the portfolio of a non-money market ProFund, except as
otherwise noted, that are listed or traded on a stock exchange, are valued on
the basis of the last sale on that day or, lacking any sales, at a price that is
the mean between the closing bid and asked prices. Other securities that are
traded on the OTC markets are priced using NASDAQ, which provides information on
bid and asked prices quoted by major dealers in such stocks. Bonds, other than
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 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.
Except for the UltraEurope ProFund and the UltraShort Europe ProFund,
futures contracts are valued at their last sale price prior to the valuation
time. Options on futures contracts generally are valued at fair value as
determined with reference to establish future exchanges. Options on securities
and indices purchased by a ProFund are valued at their last sale price prior to
the valuation time or at fair value. In the event of a trading halt that closes
the NYSE early, futures contracts will be valued on the basis of settlement
prices on futures exchanges, options on futures will be valued at fair value as
determined with reference to such settlement prices, and options on securities
and indices will be valued at their last sale price prior to the trading halt or
at fair value.
In the event a trading halt closes a futures exchange for a given day and
that closure occurs prior to the close of the NYSE on that day, futures
contracts will be valued on the basis of settlement prices on the futures
exchange or fair value.
For the UltraEurope ProFund and the UltraShort Europe ProFund, futures
contracts are valued at their last transaction prices for the respective futures
contracts that occur immediately prior to the close of the underlying stock
exchange. 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 these ProFunds are valued at their last sale
price immediately prior to the close of the underlying stock exchange.
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.
<PAGE>
The policy of each ProFund regarding purchases and sales of securities for
a ProFund's portfolio is that primary consideration will be given to obtaining
the most favorable prices and efficient executions of transactions. Consistent
with this policy, when securities transactions are effected on a stock exchange,
each ProFund's policy is to pay commissions which are considered fair and
reasonable without necessarily determining that the lowest possible commissions
are paid in all circumstances. Each ProFund believes that a requirement always
to seek the lowest possible commission cost could impede effective portfolio
management and preclude the ProFund and the Advisor from obtaining a high
quality of brokerage and research services. In seeking to determine the
reasonableness of brokerage commissions paid in any transaction, the Advisor
relies upon its experience and knowledge regarding commissions generally charged
by various brokers and on its judgment in evaluating the brokerage and research
services received from the broker effecting the transaction. Such determinations
are necessarily subjective and imprecise, as in most cases an exact dollar value
for those services is not ascertainable.
Purchases and sales of U.S. government securities are normally transacted
through issuers, underwriters or major dealers in U.S. government securities
acting as principals. Such transactions are made on a net basis and do not
involve payment of brokerage commissions. The cost of securities purchased from
an underwriter usually includes a commission paid by the issuer to the
underwriters; transactions with dealers normally reflect the spread between bid
and asked prices.
In seeking to implement a ProFund's policies, the Advisor effects
transactions with those brokers and dealers who the Advisor believes provide the
most favorable prices and are capable of providing efficient executions. If the
Advisor believes such prices and executions are obtainable from more than one
broker or dealer, the Advisor may give consideration to placing portfolio
transactions with those brokers and dealers who also furnish research 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.
<PAGE>
Over-the-counter purchases and sales are transacted directly with principal
market makers except in those cases in which better prices and executions may be
obtained elsewhere and principal transactions are not entered into with persons
affiliated with the Portfolios except pursuant to exemptive rules or orders
adopted by the Commission. Under rules adopted by the Commission, broker-dealers
may not execute transactions on the floor of any national securities exchange
for the accounts of affiliated persons, but may effect transactions by
transmitting orders for execution.
In selecting brokers or dealers to execute portfolio transactions on behalf
of the Portfolio, Bankers Trust seeks the best overall terms available. In
assessing the best overall terms available for any transaction, Bankers Trust
will consider the factors it deems relevant, including the breadth of the market
in the investment, the price of the investment, the financial condition and
execution capability of the broker or dealer and the reasonableness of the
commission, if any, for the specific transaction and on a continuing basis. 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.
<PAGE>
Each investor in the Portfolio, including the Money Market ProFund, may add
to or reduce its investment in the Portfolio on each day the Portfolio
determines its Net Asset Value ("NAV"). At the close of each such business day,
the value of each investor's beneficial interest in the Portfolio will be
determined by multiplying the NAV of the Portfolio by the percentage, effective
for that day, which represents that investor's share of the aggregate beneficial
interests in the Portfolio. Any additions or withdrawals, which are to be
effected as of the close of business on that day, will then be effected. The
investor's percentage of the aggregate beneficial interests in the Portfolio
will then be recomputed as the percentage equal to the fraction (i) the
numerator of which is the value of such investor's investment in the Portfolio
as of the close of business on such day plus or minus, as the case may be, the
amount of net additions to or withdrawals from the investor's investment in the
Portfolio effected as of the close of business on such day, and (ii) the
denominator of which is the aggregate NAV of the Portfolio as of the close of
business on such day plus or minus, as the case may be, the amount of net
additions to or withdrawals from the aggregate investments in the Portfolio by
all investors in the Portfolio. The percentage so determined will then be
applied to determine the value of the investor's interest in the Portfolio as of
the close of the following business day.
For the fiscal year ended December 31, 1998, each non-money ProFund paid
brokerage commissions in the following amount:
BROKERAGE COMMISSIONS
FYE 12/31/98
Bull ProFund $ 4,605
UltraBull ProFund 70,575
Bear ProFund 3,005
UltraBear ProFund 50,160
UltraOTC ProFund 726,475
UltraShort OTC Profund 44,560
The UltraEurope ProFund and UltraShort Europe ProFund had not commenced
operations as of December 31, 1998.
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.
<PAGE>
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.
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.
PROFUNDS TRUSTEE COMPENSATION TABLE
The following table reflects actual fees paid to the Trustees for the year
ended December 31, 1998.
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 $5,000
Michael C. Wachs, Trustee $3,750
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(effective October 19, 1999):
CHARLES P. BIGGAR (birth date: October 13, 1930) - Trustee of the Trust; Trustee
of each of the other investment companies in the BT Fund Complex(1); Retired;
former Vice President, International Business Machines ("IBM") and President,
National Services and the Field Engineering Divisions of IBM. His address is 12
Hitching Post Lane, Chappaqua, New York 10514.
- --------------------
1 The "BT Fund Complex" consists of BT Investment Funds, BT Institutional Funds,
BT Pyramid Mutual Funds, BT Advisor Funds, Cash Management Portfolio,
Intermediate Tax Free Portfolio, Tax Free Money Portfolio, NY Tax Free Money
Portfolio, Treasury Money Portfolio, International Equity Portfolio, Equity 500
Index Portfolio, Capital Appreciation Portfolio, Asset Management Portfolio, and
BT Investment Portfolios.
<PAGE>
S. LELAND DILL (birth date: March 28, 1930) - Trustee of the Trust; Trustee of
each of the other investment companies in the BT Fund Complex; Retired;
Director, Coutts (U.S.A.) International; Trustee, Phoenix-Zweig Trust(2) and
Phoenix-Euclid Market Neutral Fund(2); former Partner, KPMG Peat Marwick;
Director, Vintners International Company Inc.; Director, Coutts Trust Holdings
Ltd., Director, Coutts Group; General Partner, Pemco(2). His address is 5070
North Ocean Drive, Singer Island, Florida 33404.
MARTIN J. GRUBER (birth date: July 15, 1937) - Trustee of the Trust; Trustee of
each of the other investment companies in the BT Fund Complex; Nomura Professor
of Finance, Leonard N. Stern School of Business, New York University (since
1964); Trustee, TIAA(2); Trustee, SG Cowen Mutual Funds(2); Trustee, Japan
Equity Fund(2); Trustee, Taiwan Equity Fund(2). His address is 229 South Irving
Street, Ridgewood, New Jersey 07450.
RICHARD HALE* (birth date: July 17, 1945) - Trustee of the Trust; Trustee of
each of the other investment companies in the BT Fund Complex; Managing
Director, Deutsche Asset Management; Director, Flag Investors Funds(2); Managing
Director, Deutsche Banc Alex. Brown Incorporated; Director and President,
Investment Company Capital Corp. His address is 205 Woodbrook Lane, Baltimore,
Maryland 21212.
RICHARD J. HERRING (birth date: February 18, 1946) - Trustee of the Trust;
Trustee of each of the other investment companies in the BT Fund Complex; Jacob
Safra Professor of International Banking, Professor of Finance and Vice Dean,
The Wharton School, University of Pennsylvania (since 1972). His address is 325
South Roberts Road, Bryn Mawr, Pennsylvania 19010.
BRUCE E. LANGTON (birth date: May 10, 1931) - Trustee of the Trust; Trustee of
each of the other investment companies in the BT Fund Complex; Retired; Trustee,
Allmerica Financial Mutual Funds (1992 - present); Member, Pension and Thrift
Plans and Investment Committee, Unilever U.S. Corporation (1989 - present);(3)
Director. His address is 99 Jordan Lane, Stamford, Connecticut 06903.
PHILIP SAUNDERS, JR. (birth date: October 11, 1935) - Trustee of the Trust;
Trustee of each of the other investment companies in the BT Fund Complex;
Principal, Philip Saunders Associates (Economic and Financial Analysts); former
Director, Financial Industry Consulting, Wolf & Company; President, John Hancock
Home Mortgage Corporation; Senior Vice President of Treasury and Financial
Services, John Hancock Mutual Life Insurance Company, Inc. His address is 445
Glen Road, Weston, Massachusetts 02193.
HARRY VAN BENSCHOTEN (birth date: February 18, 1928) - Trustee of the Trust;
Trustee of each of the other investment companies in the BT Fund Complex;
Retired; Director, Canada Life Insurance of New York. His address is 6581
Ridgewood Drive, Naples, Florida 34108.
* "Interested Person" within the meaning of Section 2(a)(19) of the Act. Mr.
Hale is a Managing Director of Deutsche Asset Management, the U.S. asset
management unit of Deutsche Bank and its affiliates.
- -------------------
2 An investment company registered under the Investment Company Act of 1940, as
amended (the "Act").
3 A publicly held company with securities registered pursuant to Section 12 of
the Securities and Exchange Act of 1934, as amended.
<PAGE>
The Board has an Audit Committee that meets with the Trust's independent
accountants to review the financial statements of the Trust, the adequacy of
internal controls, and the accounting procedures and policies of the Trust. Each
member of the Board, except Mr. Hale, also is a member of the Audit Committee.
Officers of the Portfolio
DANIEL O. HIRSCH (birth date: March 27, 1954) - Secretary of the Trust;
Director, Deutsche Banc Alex. Brown Incorporated and Investment Company Capital
Corp. since July 1998; Assistant General Counsel, Office of the General Counsel,
United States Securities and Exchange Commission from 1993 to 1998. His address
is One South Street, Baltimore, Maryland 21202.
JOHN A. KEFFER (birth date: July 14, 1942) - President and Chief Executive
Officer of the Trust; President, Forum Financial Group L.L.C. and its
affiliates; President ICC Distributors, Inc.(4) His address is ICC Distributors,
Inc., Two Portland Square, Portland, Maine 04101.
CHARLES A. RIZZO (birth date: August 5, 1958) - Treasurer of the Trust; Vice
President and Department Head, Deutsche Asset Management since 1998; Senior
Manager, PricewaterhouseCoopers LLP from 1993 to 1998. His address is One South
Street, Baltimore, Maryland 21202.
No person who is an officer or director of Bankers Trust is an officer or
Trustee of the Trust.
PORTFOLIO TRUSTEE COMPENSATION TABLE
The following table reflects fees paid to the Portfolio Trustees for the
year ended December 31, 1998.
<TABLE>
<S> <C> C>
AGGREGATE COMPENSATION
NAME OF FROM CASH TOTAL COMPENSATION
PERSON; POSITION MANAGEMENT PORTFOLIO* FROM FUND COMPLEX*
Charles P. Biggar $1,147.52 $36,250
Trustee, BT Institutional Funds
and Portfolio
S. Leland Dill $ 970.55 $36,250
Trustee, Portfolio
Philip Saunders, Jr. $ 977.48 $36,250
Trustee, Portfolio
* Aggregated information is furnished for the BT Family of Funds which
consists of the following: BT Investment Funds, BT Institutional Funds,
BT Pyramid Mutual 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,
Intermediate Tax Free Portfolio, Asset Management Portfolio, Equity 500
Index Portfolio, and Capital Appreciation Portfolio.
As of February 1, 1999, the Portfolio Trustees and Officers owned in the
aggregate less than 1% of the shares of the Portfolio.
- ---------------
4 Underwriter/distributor for the Trust. Mr. Keffer owns 100% of the shares of
ICC Distributors, Inc.
<PAGE>
INVESTMENT ADVISERS
PROFUND ADVISORS LLC
Under an investment advisory agreement between the ProFund, (other than the
Money Market ProFund, UltraEurope ProFund and UltraShort Europe ProFund) and the
Advisor, dated October 28, 1997 and amended February 18, 1998, each such ProFund
pays the Advisor a fee at an annualized rate, based on its average daily net
assets of 0.75%. Under an investment advisory agreement between the Advisor and
UltraEurope ProFund and UltraShort Europe ProFund dated February 23, 1999, each
such ProFund pays the Advisor a fee at an annualized rate, based on its average
daily net assets of 0.90%. 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.
For the fiscal years ended December 31, 1997 and 1998, the Advisor was
entitled to, and voluntarily waived, advisory fees in the following amounts for
each of the ProFunds:
ADVISORY FEES
FYE 12/31
1997 1998
Earned Waived Earned Waived
-------------------- ---------------- ------------------- ------------------
Bull ProFund $ 28 $ 28 $21,580 $16,135
UltraBull ProFund 1,609 1,609 247,991 13,585
Bear ProFund 52 52 11,044 10,205
UltraBear ProFund 615 615 126,301 --
UltraOTC ProFund 751 751 419,023 --
UltraShort OTC ProFund 38,021 --
The UltraShort OTC ProFund had not commenced operations as of December 31,
1997. The UltraShort Europe ProFund and UltraEurope Profund had not commenced
operations as of December 31, 1998.
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.
<PAGE>
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, 1998, 1997 and 1996, Banker's Trust
earned $ 8,019,093, $6,544,181and $4,935,288 respectively, in compensation for
investment advisory services provided to the Portfolio. During the same periods,
Bankers Trust reimbursed $ 1,151,727, $940,530 and $761,230 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.
ADMINISTRATION, TRANSFER AGENT, FUND ACCOUNTING AGENT AND CUSTODIAN
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services ("BISYS")
acts as Administrator to the ProFunds. The Administrator provides ProFunds with
all required general administrative services, including, without limitation,
office space, equipment, and personnel; clerical and general back office
services; bookkeeping, internal accounting, and secretarial services; the
determination of net asset values; and the preparation and filing of all
reports, registration statements, proxy statements, and all other materials
required to be filed or furnished by ProFunds under Federal and state securities
laws. The Administrator also maintains the shareholder account records for
ProFunds, distributes dividends and distributions payable by the ProFunds, and
produces statements with respect to account activity for the ProFunds and their
shareholders. The Administrator pays all fees and expenses that are directly
related to the services provided by the Administrator to ProFunds; each
ProFund reimburses the Administrator for all fees and expenses incurred by
the Administrator which are not directly related to the services the
Administrator provides to the ProFunds under the service agreement.
For its services as Administrator, each ProFund pays BISYS an annual fee
ranging from 0.15% of average daily net assets of $0 to $300 million to .05% of
average daily net assets of $1 billion and over. BISYS Funds Services, Inc.
("BFSI"), an affiliate of BISYS, acts as transfer agent and fund accounting
agent for the ProFunds, for which it receives additional fees. Additionally,
ProFunds and BISYS and BFSI have entered into an Omnibus Fee Agreement in which
the amount of compensation due and payable to BISYS shall be the greater of (i)
the aggregate fee amount due and payable for services pursuant to the
Administration, Fund Accounting and Transfer Agency Agreements and (ii) the
minimum relationship fee described as specific dollar amounts payable over a
period of ten calendar quarters ($1,100,000). The address for BISYS and BFSI is
3435 Stelzer Road, Suite 1000, Columbus, Ohio 43219.
<PAGE>
For the fiscal years ended December 31, 1997 and 1998, 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
1997 1998
Earned Waived Earned Waived
-------------------- ---------------- ------------------- ------------------
Bull ProFund $ 6 $ 6 $4,316 $876
UltraBull ProFund 322 322 49,599 6,321
Bear ProFund 10 10 2,208 944
UltraBear ProFund 123 123 25,260 2,500
UltraOTC ProFund 150 150 83,805 7,605
Money Market ProFund 422 422 49,213 5,728
UltraShort OTC ProFund -- -- 6,616 --
The UltraShort OTC ProFund had not commenced operation as of December 31,
1997. The UltraEurope ProFund and UltraShort Europe ProFund had not commenced
operations as of December 31, 1998.
ProFunds Advisors LLC, pursuant to a separate Management Services
Agreement, performs certain client support and other administrative services on
behalf of the ProFunds and feeder fund management and administrative services to
the Money Market ProFund. These services include monitoring the performance of
the underlying investment company in which the Money Market ProFund invests,
coordinating the Money Market ProFund's relationship with that investment
company, and communicating with the Trust's Board of Trustees and shareholders
regarding such entity's performance and the Money Market ProFund's two tier
structure and, in general, assisting the Board of Trustees of the Trust in all
aspects of the administration and operation of the Money Market ProFund. For
these services, the ProFunds will pay to ProFunds Advisors LLC a fee at the
annual rate of .15% of its average daily net assets for all non-money market
ProFunds and .35% of its average daily net assets for the Money Market ProFund.
For the fiscal years ended December 31, 1997 and 1998, ProFund 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
1997 1998
Earned Waived Earned Waived
-------------------- ---------------- ------------------- ------------------
Bull ProFund $ 6 $ 6 $4,316 $4,316
UltraBull ProFund 322 322 49,599 --
Bear ProFund 10 10 2,209 2,209
UltraBear ProFund 123 123 25,260 4,986
UltraOTC ProFund 150 150 83,805 10,681
Money Market ProFund 984 984 114,832 55,586
UltraShort OTC ProFund -- -- 6,985 934
The UltraShort OTC ProFund had not commenced operation as of December 31,
1997. The UltraEurope ProFund and UltraShort Europe ProFund had not commenced
operations as of December 31, 1998.
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.
<PAGE>
For the fiscal years ended December 31, 1998, 1997 and 1996, Bankers Trust
earned compensation of $ 2,673,031 , $2,181,394 and $1,645,096, 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
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. will serve as the distributor and principal
underwriter in all fifty states and the District of Columbia. Concord Financial
Group, Inc. receives no compensation from the ProFunds for serving as
distributor. Concord Financial Group, Inc.'s address is 3435 Stelzer Road,
Columbus, Ohio 43219.
SHAREHOLDER SERVICES PLAN
Each ProFund has adopted a Shareholder Services Plan (the "Plan") which
provides that each ProFund will make payments equal to 1.00% (on an annual
basis) of the average daily value of the net assets of such ProFund's Adviser
shares attributable to or held in the name of investment advisers and other
authorized institutions that sell Service Shares ("Authorized Firms") for
providing account administration services to their clients who are beneficial
owners of such shares. The Administrator may act as an Authorized Firm. The
Trust will enter into agreements ("Shareholder Services Agreements") with
Authorized Firms that purchase Service Shares on behalf of their clients. The
Shareholder Services Agreements will provide for compensation to the Authorized
Firms in an amount up to 1.00% (on an annual basis) of the average daily net
assets of the Service shares of the applicable ProFund attributable to or held
in the name of the Authorized Firm for its clients. The ProFunds may pay
different service fee amounts to Authorized Firms, which may provide different
levels of services to their clients or customers.
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.
<PAGE>
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.
For the fiscal years ended December 31, 1997 and 1998, each ProFund paid,
unless voluntarily waived, shareholder services fees to authorized firms in the
following amounts:
SHAREHOLDER SERVICES FEES
FYE 12/31
1997 1998
Earned Waived Earned Waived
-------------------- ---------------- ------------------- ------------------
Bull ProFund $ 0 $ 6 $1,976 $ 0
UltraBull ProFund 733 733 43,799 0
Bear ProFund 0 0 2,974 0
UltraBear ProFund 0 0 27,343 0
UltraOTC ProFund 379 379 78,811 0
Money Market ProFund 0 0 65,071 0
UltraShort OTC ProFund 5,390 0
The UltraShort OTC ProFund had not commenced operation as of December 31,
1997. The UltraEurope ProFund and the UltraShort Europe ProFund had not
commenced operations as of December 31, 1998.
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.
ORGANIZATION AND DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
ProFunds (the "Trust") is a registered open-end investment company under
the 1940 Act. The Trust was organized as a Delaware business trust on April 17,
1997, and has authorized capital of unlimited shares of beneficial interest of
no par value which may be issued in more than one class or series. Currently,
the Trust consists of six separately managed series. Other separate series may
be added in the future. Each ProFund offers two classes of shares: the Service
Shares and the Investor Shares.
<PAGE>
All shares of the ProFund are freely transferable. The Trust shares do not
have preemptive rights or cumulative voting rights, and none of the shares have
any preference to conversion, exchange, dividends, retirements, liquidation,
redemption, or any other feature. Trust shares have equal voting rights, except
that, in a matter affecting a particular series or class of shares, only shares
of that series or class may be entitled to vote on the matter.
Under Delaware law, the Trust is not required to hold an annual
shareholders meeting if the 1940 Act does not require such a meeting. Generally,
there will not be annual meetings of Trust shareholders. Trust shareholders may
remove Trustees from office by votes cast at a meeting of Trust shareholders or
by written consent. If requested by shareholders of at least 10% of the
outstanding shares of the Trust, the Trust will call a meeting of ProFunds'
shareholders for the purpose of voting upon the question of removal of a Trustee
of the Trust and will assist in communications with other Trust shareholders.
The Declaration of Trust of the ProFunds disclaims liability of the
shareholders or the officers of the Trust for acts or obligations of the Trust
which are binding only on the assets and property of the Trust. The Declaration
of Trust provides for indemnification 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 loss of
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.
CAPITALIZATION
As of February 16, 1999, 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
First Trust Corporation 14,230,775.591 9.5901%*
P.O. Box 173736
Denver, CO 80217
Independent Trust Corp 16,071,841.950 10.8308%
Funds 975
15255 S 94th Ave 3rd Floor
Orland Park, IL 60462
NationsBank NA Collateral Pledge Of 15,431,643.310 10.3994%
D&L Partners LP
1610 Des Peres Re Ste 395
St Louis, MO 63131
BULL PROFUND--INVESTOR SHARES TOTAL SHARES PERCENTAGE
Independent Trust Corp 55,112.465 63.3337%*
Funds CMSI
15255 S 94th Ave 3rd Floor
Orland Park, IL 60462
BULL PROFUND--INVESTOR SHARES TOTAL SHARES PERCENTAGE
Trust Company Of America 10,394.748 11.9454%
HCM
P.O. Box 6503
Englewood, CO 80115
*Disclaims Beneficial Ownership.
<PAGE>
BULL PROFUND--SERVICE SHARES TOTAL SHARES PERCENTAGE
First Trust Corporation 7,060.235 36.2512%*
P.O. Box 173736
Denver, CO 80217
Liliana P Willis 2,010.798 10.3245%
Jerry B Willis and Assoc. Inc PSP
P.O. Box 83906
Baton Rouge, LA 70884
NFSC FEBO C6A-539961 1,222.746 6.2783%
NFSC FMTC IRA Rollover FBO Mark F Secrest 22 W 26th St 6e New York, NY 10010
NFSC FEBCO C6B-52252 1,093.983 5.6171%
NFSC FMTC IRA Rollover
2912 N Commonwealth 3A
Chicago, IL 60657
NFSC FEBCO C6A-027537 1,130.099 5.8026%
Donna Gagliuso
4th Floor
NY, NY 10012
<PAGE>
ULTRABULL PROFUND--INVESTOR SHARES TOTAL SHARES PERCENTAGE
Donaldson Lufkin & Jenrette Securities Corp. 124,613.215 22.69%*
P.O. Box 2052
Jersey City, NJ 07303
National Investor Services Corp 51,081.613 9.3024%
Exclusive Benefit of Customers
55 Water St. 32nd FL
New York, NY 10041-3299
Charles Schwab and Co. Inc. 153,520.180 27.9574%*
Special Custody Account of Customers
101 Montgomery St.
San Francisco, CA 94104
UltraBull ProFund--SERVICE SHARES Total Shares Percentage
Donaldson Lufkin & Jenrette 38,381.060 33.5039%*
Securities Corporation
P.O. Box 2052
Jersey City, NJ 07303
*Disclaims beneficial ownership
First Trust Corporation 17,470.722 15.2705%*
P.O. Box 173736
Denver , CO 80217
First Trust Corporation 6,213.493 5.4239%*
P.O. Box 173736
Denver , CO 80217
FJ O'Neill Charitable Corporation 6,381.621 5.5707%
3550 Lander Rd. Room 140
Pepper Pike, OH 44124
BEAR PROFUND--INVESTOR CLASS SHARES TOTAL SHARES PERCENTAGE
Charles Schwab and Co. Inc. 26,355.490 54.4271%*
Special Custody Account of Customers
101 Montgomery St.
San Francisco, CA 94104
Sheff Enterprises 3,730.415 7.7037%
988 Blvd. Of the Arts 812
Sarasota, FL 34236
BEAR PROFUND--SERVICE SHARES TOTAL SHARES PERCENTAGE
Donaldson Lufkin & Jenrette Sec Corp 558.948 8.8170%*
P.O. Box 2052
Jersey City, NJ 07303
NFSC FEBO M26-846228 5,076.142 80.0727%*
NFSC FMTC IRA
998 Cooper Road
Mountain Grove, MO 65711
NFSC FEBO 168-177636 345.643 5.4523%
FMTC Custodian -Roth IRA
5308 Burning Oak Ct.
Raleigh, NC 27606-9595
<PAGE>
ULTRABEAR PROFUND--INVESTOR SHARES TOTAL SHARES PERCENTAGE
Donaldson Lufkin & Jenrette 344.966 19.38%*
Securities Corp.
P.O. Box 2052
Jersey City, NJ 07303
Charles Schwab and Co. Inc. 255,486.585 14.3530%*
Special Custody Account of Customers
101 Montgomery St.
San Francisco, CA 94104
*Disclaims beneficial ownership
ULTRABEAR PROFUND--SERVICE SHARES TOTAL SHARES PERCENTAGE
Donaldson Lufkin & Jenrette Securities Corp. 37,07620 8.55%*
P.O. Box 2052
Jersey City, NJ 07303
Independent Trust Corp. 48.979.111 11.2990%
Funds 88
15255 S 94th Ave. 3rd Floor
Orland Park, IL 60462
First Trust Corporation 54,368,234 12.5422%*
P.O. Box 173736
Denver, CO 80217-3736
Independent Trust Corp. 58,353.021 13.4615%
Funds 865
15255 S. 94th Ave. Suite 300
Orland Park, IL 60462
Independent Trust Corp. 122,713.982 28.3090%*
Funds 966
15255 S. 94th Ave. 3rd Floor
Orland Park, IL 60462
ULTRAOTC PROFUND--INVESTOR SHARES TOTAL SHARES PERCENTAGE
Donaldson Lufkin & Jenrette Securities Corp. 345,350.95 18.72%*
PO Box 2052
Jersey City, NJ 07303
National Investor Services Corp. 156,066.630 8.4600%
Exclusive Benefit of Customers
55 Water St. 32nd FL
New York, NY 10041-3299
Charles Schwab and Co., Inc. 488,550.075 26.4832%*
Special Custody Account of Customers
101 Montgomery St.
San Francisco, CA 94104
ULTRAOTC PROFUND--SERVICE SHARES TOTAL SHARES PERCENTAGE
Donaldson Lufkin & Jenrette Securities Corp. 70,386.86 25.92%*
P.O. Box 2052
Jersey City, NJ 07303
*Disclaims beneficial ownership.
ULTRAOTC PROFUND--INVESTOR SHARES TOTAL SHARES PERCENTAGE
Donaldson Lufkin & Jenrette Sec Corp. 1,350,778.098 26.5813%*
P.O. Box 2052
Jersey City, NJ 07303
Charles Schwab and Co., Inc. 478,068.202 9.4077%*
Special Custody Account of Customers
101 Montgomery St.
San Francisco, CA 94104
<PAGE>
ULTRAOTC PROFUND--SERVICE SHARES TOTAL SHARES PERCENTAGE
Donaldson Lufkin & Jenrette Sec Corp 19,536.782 32.2748%*
P.O. Box 2052
Jersey City, NJ 07303
First Trust Corporation 7,522.415 12.4271%*
P.O. Box 173736
Denver, CO 80217
Sterling J. Moritz 5,757.568 9.5115%
2149 N 121st St.
Omaha, NE 68164
Jerry E. Gress 7,302.065 12.0630%
Patricia D. Gress
3303 N. 125 Ave.
Omaha, NE 68164
*Disclaims beneficial ownership.
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
shares. 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.
Dividends out of net ordinary income and distribution of net short-term
capital gains are taxable to the recipient U.S. shareholders as ordinary income,
whether received in cash or reinvested in ProFund shares. Dividends from net
ordinary income may be eligible for the corporate dividends-received deduction.
The excess of net long-term capital gains over the net short-term capital
losses realized and distributed by a ProFund to its U.S. shareholders as capital
gains distributions is taxable to the shareholders as gain from the sale of a
capital asset held for more than one year, regardless of the length of time a
shareholder has held the ProFund shares. If a shareholder holds ProFund shares
for six months or less and during that period receives a distribution taxable to
the shareholder as long-term capital gain, any loss realized on the sale of the
ProFund shares will be long-term loss to the extent of such distribution.
The amount of an income dividend or capital gains distribution declared by
a ProFund during October, November or December of a year to shareholder of
record as of a specified date in such a month that is paid during January of the
following year will be deemed to be received by shareholders on December 31 of
the prior year.
Any dividend or distribution paid by a ProFund has the effect of reducing
the ProFund's net asset value per share. Investors should be careful to consider
the tax effect of buying shares shortly before a distribution by a ProFund. The
price of shares purchased at that time will include the amount of the
forthcoming distribution, but the distribution will be taxable to the
shareholder.
<PAGE>
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 distribution made by the ProFunds for the preceding
year. Distributions by ProFunds generally will be subject to state and local
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 Code. A
RIC generally is not subject to federal income tax on income and gains
distributed in a timely manner to its shareholders. 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; and (b) diversify
its holdings so that, at the end of each fiscal quarter, (i) at least 50% of the
market value of the ProFund's assets is represented by cash, U.S. government
securities, the securities of other regulated investment companies and other
securities, with such other securities limited, in respect of any one issuer, to
an amount not greater than 5% of the value of the ProFund's total assets and 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total assets is invested in the securities of any one issuer
(other than U.S. government securities and the securities of other regulated
investment companies).
As a regulated investment company, a ProFund generally will not be subject
to U.S. federal income tax on income and gains that it distributes to
shareholders, if at least 90% of the ProFund's investment company taxable income
(which includes, among other items, dividends, interest and the excess of any
net short-term capital gains over net long-term capital losses) for the taxable
year is distributed. Each ProFund intends to distribute substantially all of
such income.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax at
the ProFund level. To avoid the tax, each ProFund must distribute during each
calendar year an amount equal to the sum of (1) at least 98% of its ordinary
income (not taking into account any capital gains or losses) for the calendar
year, (2) at least 98% of its capital gains in excess of its capital losses
(adjusted for certain ordinary losses) for a one-year period generally ending on
October 31 of the calendar year, and (3) all ordinary income and capital gains
for previous years that were not distributed during such years. To avoid
application of the excise tax, the ProFunds intend to make distributions in
accordance with the calendar year distribution requirement. A distribution will
be treated as paid on December 31 of a calendar year if it is declared by the
ProFund in October, November or December of that year with a record date in such
a month and paid by the ProFund during January of the following year. Such
distributions will be taxable to shareholders in the calendar year in which the
distributions are declared, rather than the calendar year in which the
distributions are received.
MARKET DISCOUNT
If ProFund purchases a debt security at a price lower than the stated
redemption price of such debt security, the excess of the stated redemption
price over the purchase price is "market discount". If the amount of market
discount is more than a de minimis amount, a portion of such market discount
must be included as ordinary income (not capital gain) by the ProFund in each
taxable year in which the ProFund owns an interest in such debt security and
receives a principal payment on it. In particular, the ProFund will be required
to allocate that principal payment first to the portion of the market discount
on the debt security that has accrued but has not previously been includable in
income. In general, the amount of market discount that must be included for each
period is equal to the lesser of (i) the amount of market discount accruing
during such period (plus any accrued market discount for prior periods not
previously taken into account) or (ii) the amount of the principal payment with
respect to such period. Generally, market discount accrues on a daily basis for
each day the debt security is held by a ProFund at a constant rate over the time
remaining to the debt security's maturity or, at the election of the ProFund, at
a constant yield to maturity which takes into account the semi-annual
compounding of interest. Gain realized on the disposition of a market discount
obligation must be recognized as ordinary interest income (not capital gain) to
the extent of the "accrued market discount."
<PAGE>
ORIGINAL ISSUE DISCOUNT
Certain debt securities acquired by the ProFunds may be treated as debt
securities that were originally issued at a discount. Original issue discount
can generally be defined as the difference between the price at which a security
was issued and its stated redemption price at maturity. Although no cash income
is actually received by a ProFund, original issue discount that accrues on a
debt security in a given year generally is treated for federal income tax
purposes as interest and, therefore, such income would be subject to the
distribution requirements applicable to regulated investment companies.
Some debt securities may be purchased by the ProFunds at a discount that
exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for federal income tax purposes
(see above).
OPTIONS, FUTURES AND FOREIGN CURRENCY FORWARD CONTRACTS
Any Regulated futures contracts and certain options (namely, nonequity
options and dealer equity options) in which a ProFund may invest may be "section
1256 contracts." Gains (or losses) on these contracts generally are considered
to be 60% long-term and 40% short-term capital gains or losses; however foreign
currency gains or losses arising from certain section 1256 contracts are
ordinary in character. Also, section 1256 contracts held by a ProFund at the end
of each taxable year (and on certain other dates prescribed in the Code) are
"marked to market" with the result that unrealized gains or losses are treated
as though they were realized.
Transactions in options, futures and forward contracts undertaken by the
ProFunds may result in "straddles" for federal income tax purposes. The straddle
rules may affect the character of gains (or losses) realized by a ProFund, and
losses realized by the ProFund on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which the losses are
realized. In addition, certain carrying charges (including interest expense)
associated with positions in a straddle may be required to be capitalized rather
than deducted currently. Certain elections that a ProFund may make with respect
to its straddle positions may also affect the amount, character and timing of
the recognition of gains or losses from the affected positions.
Because only a few regulations implementing the straddle rules have been
promulgated, the consequences of such transactions to the ProFunds are not
entirely clear. The straddle rules may increase the amount of short-term capital
gain realized by a ProFund, which is taxed as ordinary income when distributed
to shareholders. Because application of the straddle rules may affect the
character of gains or losses, defer losses and/or accelerate the recognition of
gains or losses from the affected straddle positions, the amount which must be
distributed to shareholders as ordinary income or long-term capital gain may be
increased or decreased substantially as compared to a fund that did not engage
in such transactions.
CONSTRUCTIVE SALES
Recently enacted rules may affect the timing and character of gain if a
ProFund engages in transactions that reduce or eliminate its risk of loss with
respect to appreciated financial positions. If the ProFund enters into certain
transactions in property while holding substantially identical property, the
ProFund would be treated as if it had sold and immediately repurchased the
property and would be taxed on any gain (but not loss) from the constructive
sale. The character of gain from a constructive sale would depend upon the
ProFund's holding period in the property. Loss from a constructive sale would be
recognized when the property was subsequently disposed of, and its character
would depend on the ProFund's holding period and the application of various loss
deferral provisions of the Code.
<PAGE>
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.
Capital gains dividends are not eligible for the dividends received deduction.
Shareholders will be notified annually as to the U.S. federal tax status of
distributions, and shareholders receiving distributions in the form of newly
issued shares will receive a report as to the net asset value of the shares
received.
If the net asset value of shares is reduced below a shareholder's cost as a
result of a distribution by a ProFund, such distribution generally will be
taxable even though it represents a return of invested capital. Investors should
be careful to consider the tax implications of buying shares of a ProFund just
prior to a distribution. The price of shares purchased at this time will include
the amount of the forthcoming distribution, but the distribution will generally
be taxable.
If a shareholder has chosen to receive distributions in cash, and the
postal ( or other delivery ) service is unable to deliver checks to the
shareholder's address of record, ProFunds will change the distribution option so
that all distributions are automatically reinvested in additional shares.
ProFunds will not pay interest on uncashed distribution checks.
<PAGE>
DISPOSITION OF SHARES
Upon a redemption, sale or exchange of shares of a ProFund, a shareholder
will realize a taxable gain or loss depending upon his or her basis in the
shares. A gain or loss will be treated as capital gain or loss if the shares are
capital assets in the shareholder's hands and generally will be long-term,
mid-term or short-term, depending upon the shareholder's holding period for the
shares. Any loss realized on a redemption, sale or exchange will be disallowed
to the extent the shares disposed of are replaced (including through
reinvestment of dividends) within a period of 61 days, beginning 30 days before
and ending 30 days after the shares are disposed of. In such a case the basis of
the shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized by a shareholder on the disposition of a ProFund's shares held by the
shareholder for six months or less will be treated for tax purposes as a
long-term capital loss to the extent of any distributions of capital gain
dividends received or treated as having been received by the shareholder with
respect to such shares.
BACKUP WITHHOLDING
Each ProFund generally will be required to withhold federal income tax at a
rate of 31% ("backup withholding") from dividends paid, capital gain
distributions, and redemption proceeds to shareholders if (1) the shareholder
fails to furnish the ProFund with the shareholder's correct taxpayer
identification number or social security number, (2) the IRS notifies the
shareholder or the ProFund that the shareholder has failed to report properly
certain interest and dividend income to the IRS and to respond to notices to
that effect, or (3) when required to do so, the shareholder fails to certify
that he or she is not subject to backup withholding. Any amounts withheld may be
credited against the shareholder's federal income tax liability.
OTHER TAXATION
Distributions may be subject to additional state, local and foreign taxes,
depending on each shareholder's particular situation. Non-U.S. shareholders and
certain types of U.S. shareholders subject to special treatment under the U.S.
federal income tax laws (e.g. banks and life insurance companies) may be subject
to U.S. tax rules that differ significantly from those summarized above.
EQUALIZATION ACCOUNTING
Each ProFund distributes its net investment income and capital gains to
shareholders as dividends annually to the extent required to qualify as a
regulated investment company under the Code and generally to avoid federal
income or excise tax. Under current law, each ProFund may on its tax return
treat as a distribution of investment company taxable income and net capital
gain the portion of redemption proceeds paid to redeeming shareholders that
represents the redeeming shareholders' portion of the ProFund's undistributed
investment company taxable income and net capital gain. This practice, which
involves the use of equalization accounting, will have the effect of reducing
the amount of income and gains that the ProFund is required to distribute as
dividends to shareholders in order for the ProFund to avoid federal income tax
and excise tax. This practice may also reduce the amount of distributions
required to be made to nonredeeming shareholders and the amount of any
undistributed income will be reflected in the value of the ProFund's shares; the
total return on a shareholder's investment will not be reduced as a result of
the ProFund's distribution policy. Investors who purchase shares shortly before
the record date of a distribution will pay the full price for the shares and
then receive some portion of the price back as a taxable distribution.
PERFORMANCE INFORMATION
TOTAL RETURN CALCULATIONS
From time to time, each of the non-money market ProFunds may advertise the
total return of the ProFund for prior periods. Any such advertisement would
include at least average annual total return quotations for one, five, and
ten-year periods, or for the life of the ProFund. Other total return quotations,
aggregate or average, over other time periods for the ProFund also may be
included.
<PAGE>
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 one year and since inception
periods ended December 31, 1998, were as follows:
SHARES
RETURN INVESTOR
INCEPTION DATE SINCE INCEPTION 1YR. RETURN
-------------- ----------------- -----------
Bull ProFund 12/02/97 23.07 26.57
UltraBull ProFund 11/28/97 42.34 42.95
Bear ProFund 12/31/97 -19.41 -19.46
UltraBear ProFund 12/23/97 -35.43 -38.34
UltraOTC ProFund 12/02/97 123.30 185.34
Money Market ProFund 11/17/97 4.87 4.84
UltraShort OTC ProFund 6/28/98 -67.48
SHARES
RETURN SERVICE
INCEPTION DATE SINCE INCEPTION 1YR. RETURN
-------------- ----------------- -----------
Bull ProFund 12/02/97 22.26 25.68
UltraBull ProFund 11/28/97 40.99 41.48
Bear ProFund 12/31/97 -19.99 -20.04
UltraBear ProFund 12/23/97 -35.60 -38.45
UltraOTC ProFund 12/02/97 122.32 183.98
Money Market ProFund 11/17/97 3.41 3.81
UltraShort OTC ProFund 6/28/98 -67.50
</TABLE>
This performance data represents past performance and is not an indication
of future results. The UltraEurope ProFund and UltraShort Europe ProFund had not
commenced operations as of December 31, 1998.
YIELD CALCULATIONS
From time to time, the Money Market ProFund advertises its "yield" and
"effective yield." Both yield figures are based on historical earnings and are
not intended to indicate future performance. The "yield" of the Money Market
ProFund refers to the income generated by an investment in the Money Market
ProFund 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.
<PAGE>
For the seven-day period ended December 31, 1998, 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 and the UltraBear ProFund may be compared to various unmanaged
indexes, including, but not limited to, the S&P 500 Index or the Dow Jones
Industrial Average; performance information for the UltraOTC ProFund may be
compared to various unmanaged indexes, including, but not limited to its current
benchmark, the NASDAQ 100 Index.
In addition, rankings, ratings, and comparisons of investment performance
and/or assessments of the quality of shareholder service appearing in
publications such as Money, Forbes, Kiplinger's Magazine, Personal Investor,
Morningstar, Inc., and similar sources which utilize information compiled (i)
internally, (ii) by Lipper Analytical Services, Inc. ("Lipper"), or (iii) by
other recognized analytical services, may be used in sales literature. The total
return of each ProFund (other than the Money Market ProFund) also may be
compared to the performances of broad groups of comparable mutual funds with
similar investment goals, as such performance is tracked and published by such
independent organizations as Lipper and CDA Investment Technologies, Inc., among
others. The Lipper ranking and comparison, which may be used by the ProFunds in
performance reports, will be drawn from the "Capital Appreciation ProFunds"
grouping for the Bull ProFund, the UltraBull ProFund, the Bear ProFund and the
UltraBear ProFund and from the "Small Company Growth ProFunds" grouping for the
UltraOTC ProFund. In addition, the broad-based Lipper groupings may be used for
comparison to any of the ProFunds.
Further information about the performance of the ProFunds will be contained
in the ProFunds' annual reports to shareholders, which may be obtained without
charge by writing to the ProFunds at the address or telephoning the ProFunds at
the telephone number set forth on the cover page of this SAI.
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.
<PAGE>
Other Information
The Product is not sponsored, endorsed, sold or promoted by Standard &
Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"). S&P makes no
representation or warranty, express or implied, to the owners of the Product or
any member of the public regarding the advisability of investing in securities
generally or in the Product particularly or the ability of the S&P 500 Index to
track general stock market performance. S&P's only relationship to the Licensee
is the licensing of certain trademarks and trade names of S&P and of the S&P 500
Index which is determined, composed and calculated by S&P without regard to the
Licensee or the Product. S&P has no obligation to take the needs of the Licensee
or the owners of the Product into consideration in determining, composing or
calculating the S&P 500 Index. S&P is not responsible for and has not
participated in the determination or calculation of the equation by which the
Product is to be converted into cash. S&P has no obligation or liability in
connection with the administration, marketing or trading of the Product.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500
INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY
ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR
IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE PRODUCT, OR ANY
OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED
THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL
WARRANTIES OF MERCHANTIBILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH
RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY
OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL,
PUNATIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
FINANCIAL STATEMENTS
The Report of Independent Accountants and Financial Statements of the
ProFunds for the fiscal year ended December 31, 1998 are incorporated herein by
reference to the Trust's Annual Report, such Financial Statements having been
audited by PricewaterhouseCoopers LLP, independent accountants, and are 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 PROSPECTUS, OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
PRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY PROFUNDS.
THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE AN OFFERING BY
PROFUNDS IN ANY JURISDICTION IN WHICH SUCH AN OFFERING MAY NOT LAWFULLY BE MADE.
<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 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.
<PAGE>
DESCRIPTION OF DUFF & PHELPS' CORPORATE BOND RATINGS:
AAA-Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury Funds.
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.
<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/VMIG-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.
<PAGE>
BBB-Capacity for timely repayment of principal and interest is adequate,
although adverse changes in business, economic or financial conditions are more
likely to lead to increased investment risk than for obligations in higher
categories.
BB-Obligations for which there is a possibility of investment risk
developing. Capacity for timely repayment of principal and interest exists, but
is susceptible over time to adverse changes in business, economic or financial
conditions.
B-Obligations for which investment risk exists. Timely repayment of
principal and interest is not sufficiently protected against adverse changes in
business, economic or financial conditions.
CCC-Obligations for which there is a current perceived possibility of
default. Timely repayment of principal and interest is dependent on favorable
business, economic or financial conditions.
CC-Obligations which are highly speculative or which have a high risk of
default.
C-Obligations which are currently in default.
Notes: "+" or "-".
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.
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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".
A RATING IN THE LONG-TERM DEBT CATEGORIES MAY INCLUDE A PLUS (+) OR MINUS (-)
DESIGNATION, WHICH INDICATES WHERE WITHIN THE RESPECTIVE CATEGORY THE ISSUE IS
PLACED.
