<PAGE>
As Filed with the Securities and Exchange Commission on May 1, 2000
Registration Nos. 333-28339; 811-08239
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [_]
Post-Effective Amendment No. 13 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 16 [X]
ProFunds
(Exact Name of Registrant as Specified in Charter)
7900 Wisconsin Avenue, Suite 300
Bethesda, Maryland 20814
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (301) 657-1970
Michael L. Sapir With copy to:
Chairman William J. Tomko
PROFUND Advisors LLC President
7900 Wisconsin Avenue, Suite 300 BISYS Fund Services
Bethesda, Maryland 20814 3435 Stelzer Road
Columbus, Ohio 43219
(Name and Address of Agent for Service Process)
Approximate Date of Commencement of the Proposed Public Offering of the
Securities:
It is proposed that this filing will become effective:
______ immediately upon filing pursuant to paragraph (b)
X on May 1, 2000 pursuant to paragraph (b)
- ------
______ 60 days after filing pursuant to paragraph (a)(1)
______ on (date) pursuant to paragraph (a)(1)
______ 75 days after filing pursuant to paragraph (a)(2)
______ on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following:
______ This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
EXPLANATORY NOTE
This Post-Effective Amendment No. 13 to Registrant's Registration Statement
on Form N-1A is filed for the purpose of updating financial and other
information, as required by Section 10(a)(3) of the Securities Act of 1933 and
Rule 8b-16 under the Investment Company Act of 1940, with respect to: (1) the 10
"Benchmark" ProFunds and the Money Market ProFund described in the prospectus
and statement of additional information set forth herein; and (2) the 11 "VP"
ProFunds described in two prospectuses and statements of additional information
set forth herein. This Post-Effective Amendment No. 13 does not relate to the
17 "UltraSector" ProFunds series of Registrant, disclosure concerning which is
hereby incorporated by reference from the prospectus and statement of additional
information describing the UltraSector ProFunds as set forth in Post-Effective
Amendment No. 12 to Registrant's Registration Statement as filed on April 20,
2000 pursuant to Rule 485(a)(1) under the Securities Act of 1933.
<PAGE>
May 1, 2000
Prospectus
[PHOTO APPEARS HERE]
ProFunds Mutual Funds
Bull ProFund
UltraBull ProFund
UltraMid-Cap ProFund
UltraSmall-Cap ProFund
UltraOTC ProFund
UltraEurope ProFund
UltraJapan ProFund
Bear ProFund
UltraBear ProFund
UltraShort OTC ProFund
Money Market ProFund [PROFUNDS LOGO]
Like shares of all mutual funds, these securities have not been approved or
disapproved by the Securities and Exchange Commission nor has the Securities and
Exchange Commission passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
<PAGE>
Table of Contents
1 Benchmark ProFunds
19 Benchmark ProFunds Strategy
23 Money Market ProFund
31 Share Prices, Classes & Tax Information
37 Shareholder Services Guide
49 ProFunds Management
53 Financial Highlights
ProFund Advisors LLC
Bankers Trust Company
[PROFUNDS LOGO] Investment Advisors
<PAGE>
Benchmark
ProFunds
Overview
The no-load Benchmark ProFunds each seek to achieve a daily return
equal to the performance of a particular stock market benchmark.*
. For example, the Bull ProFund seeks to match the daily performance
of a stock market index--the S&P 500 Composite Stock Price Index(R)
("S&P 500 Index")--like a conventional index fund.
. Unlike conventional index funds, certain ProFunds seek to double
the daily return of a specified stock market index.
. Other ProFunds seek to produce a daily return of the inverse
(opposite) or double the inverse (opposite) of a particular stock
market index. The value of these ProFunds should go up when the index
underlying their benchmark goes down, and their value should go down
when the index goes up.
* A benchmark can be any standard of investment performance to which a
mutual fund seeks to match its return, such as a stock index. A stock
index reflects the price of a group of stocks of specified companies.
For example, UltraBull ProFund has a benchmark of twice the daily
return of the S&P 500 Index.
Benchmark ProFunds 1
<PAGE>
These ProFunds seek to match or double an index's daily performance:
<TABLE>
<CAPTION>
ProFund Index Daily Objective Types of Companies in Index
<S> <C> <C> <C>
Bull S&P 500 Match Diverse, widely traded,
large capitalization
UltraBull S&P 500 Double Diverse, widely traded,
large capitalization
UltraMid-Cap S&P MidCap 400 Double Diverse, widely traded, mid-
sized capitalization companies
UltraSmall-Cap Russell 2000 Double Diverse, small capitalization
UltraOTC NASDAQ 100 Double Large capitalization, most
with technology and/or
growth orientation
UltraEurope ProFunds Europe Double Large capitalization, widely
traded European stocks
UltraJapan Nikkei 225 Double Large capitalization, widely
Stock Average traded Japanese stocks
</TABLE>
These ProFunds seek to match or double the inverse (opposite) of an index's
daily performance:
<TABLE>
<CAPTION>
ProFund Index Daily Objective Types of Companies in Index
<S> <C> <C> <C>
Bear S&P 500 Inverse Diverse, widely traded,
large capitalization
UltraBear S&P 500 Double the Diverse, widely traded,
inverse large capitalization
UltraShort OTC NASDAQ 100 Double the Large capitalization, most
inverse with technology and/or
growth orientation
</TABLE>
The ProFunds also offer the Money Market ProFund, which is discussed
later in this prospectus.
2 Benchmark ProFunds
<PAGE>
Benchmark ProFunds' Objectives
The investment objective of each of the Benchmark ProFunds is set
forth below:
. Bull ProFund--seeks daily investment results that correspond to
the performance of the S&P 500 Index.
. UltraBull ProFund--seeks daily investment results that correspond
to twice (200%) the performance of the S&P 500 Index. If the UltraBull
ProFund is successful in meeting its objective, it should gain
approximately twice as much as the Bull ProFund when the prices of the
securities in the S&P 500 Index rise on a given day and should lose
approximately twice as much when such prices decline on that day.
. UltraMid-Cap ProFund--seeks daily investment results that
correspond to twice (200%) the performance of the S&P MidCap 400
Index. If the UltraMid-Cap ProFund is successful in meeting its
objective, it should gain approximately twice as much as the S&P
MidCap 400 Index when the prices of the securities in that index rise
on a given day and should lose approximately twice as much when such
prices decline on that day.
. UltraSmall-Cap ProFund--seeks daily investment results that
correspond to twice (200%) the performance of the Russell 2000(R)
Index. If the UltraSmall-Cap ProFund is successful in meeting its
objective, it should gain approximately twice as much as the Russell
2000(R) Index when the prices of the securities in that index rise
on a given day and should lose approximately twice as much when such
prices decline on that day.
. UltraOTC ProFund--seeks daily investment results that correspond to
twice (200%) the performance of the NASDAQ 100 Index(TM). If the
UltraOTC ProFund is successful in meeting its objective, it should
gain approximately twice as much as the growth oriented NASDAQ 100
Index(TM) when the prices of the securities in that index rise on a
given day and should lose approximately twice as much when such prices
decline on that day.
. UltraEurope ProFund--seeks daily investment results that correspond
to twice (200%) the performance of the ProFunds Europe Index. If the
UltraEurope ProFund is successful in meeting its objective, it should
gain approximately twice as much as the ProFunds Europe Index when the
prices of the securities in that index rise on a given day and should
lose approximately twice as much when such prices decline on that day.
Benchmark ProFunds 3
<PAGE>
. UltraJapan ProFund--seeks daily investment results that correspond
to twice (200%) the performance of the Nikkei 225 Stock Average. If
the UltraJapan ProFund is successful in meeting its objective, it
should gain approximately twice as much as the Nikkei 225 Stock
Average when the prices of the securities in that index rise on a
given day and should lose approximately twice as much when such prices
decline on that day.
. Bear ProFund--seeks daily investment results that correspond to the
inverse (opposite) of the performance of the S&P 500 Index. If the
Bear ProFund is successful in meeting its objective, the net asset
value of Bear ProFund shares will increase in direct proportion to any
decrease in the level of the S&P 500 Index. Conversely, the net asset
value of Bear ProFund shares will decrease in direct proportion to any
increase in the level of the S&P 500 Index.
. UltraBear ProFund--seeks daily investment results that correspond
to twice (200%) the inverse (opposite) of the performance of the S&P
500 Index. The net asset value of shares of the UltraBear ProFund
should increase or decrease approximately twice as much as does that
of the Bear ProFund on any given day.
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.
. UltraShort OTC ProFund--seeks daily investment results that
correspond to twice (200%) the inverse (opposite) of the performance
of the NASDAQ 100 Index(TM). This ProFund operates similar to the
UltraBear ProFund, but UltraShort OTC ProFund is benchmarked to the
NASDAQ 100 Index(TM).
The securities indexes that these ProFunds use as their benchmarks are
described below under "Benchmark Indexes."
4 Benchmark ProFunds
<PAGE>
Strategy
ProFund Advisors LLC ("ProFund Advisors"), the Benchmark ProFunds'
investment advisor, uses quantitative and statistical analysis it
developed in seeking to achieve each Benchmark ProFund's investment
objective. This analysis determines the type, quantity and mix of
investment positions that a Benchmark ProFund should hold to
approximate the performance of its benchmark.
The Bull, UltraBull, UltraMid-Cap, UltraSmall-Cap, UltraOTC,
UltraEurope and UltraJapan ProFunds principally invest in:
. Futures contracts on stock indexes, and options on futures
contracts; and
. Financial instruments such as equity caps, collars, floors, and
options on securities and stock indexes.
These ProFunds invest in the above instruments generally as a
substitute for investing directly in stocks. In addition, these
ProFunds may invest in a combination of stocks that in ProFund
Advisors' opinion, should simulate the movement of the appropriate
benchmark index.
The Ultra ProFunds generally invest in the above instruments to
produce economically "leveraged" investment results. Leverage is a
way to change small market movements into larger changes in the value
of a Benchmark ProFund's investments.
The UltraEurope ProFund invests in financial instruments with values
that reflect the performance of stocks of European companies.
The UltraJapan ProFund invests in financial instruments including
American Depository Receipts ("ADRs") with values that reflect the
performance of stocks issued by certain Japan-based companies.
The Bear, UltraBear and UltraShort OTC ProFunds generally do not
invest in traditional securities, such as common stock of operating
companies. Rather, these ProFunds principally invest in futures
contracts, options contracts and other financial instruments, and
engage in short sales. Using these techniques, these ProFunds 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.
Benchmark ProFunds 5
<PAGE>
Benchmark ProFunds' Risks
Like all investments, the ProFunds entail risk. ProFund Advisors
cannot guarantee that any of the Benchmark ProFunds will achieve its
objective. As with any mutual fund, the Benchmark ProFunds could lose
money, or their performance could trail that of other investment
alternatives.
In addition, the Benchmark ProFunds present some risks not
traditionally associated with most mutual funds. It is important that
investors closely review and understand these risks before making an
investment in the ProFunds.
The following chart summarizes certain risks associated with the
Benchmark ProFunds:
<TABLE>
<CAPTION>
Inverse Small Mid-
Market Leverage Correlation Foreign Capitalization Capitalization
Risk Risk Risk Risk Risk Risk
<S> <C> <C> <C> <C> <C> <C>
Bull X
UltraBull X X
UltraMid-Cap X X X
UltraSmall-Cap X X X
UltraOTC X X
UltraEurope X X X
UltraJapan X X X
Bear X X
UltraBear X X X
UltraShort OTC X X X
</TABLE>
These and other risks are described below.
6 Benchmark ProFunds
<PAGE>
Certain Risks Associated with Particular ProFunds
. Leverage Risk The Ultra ProFunds employ leveraged investment
techniques. Leverage is the ability to get a return on a capital base
that is larger than a ProFund's investment. Use of leverage can
magnify the effects of changes in the value of these ProFunds and
makes them more volatile. The leveraged investment techniques that
the Ultra ProFunds employ should cause investors in these ProFunds to
lose more money in adverse environments.
. Inverse Correlation Risk Shareholders in the negatively correlated
ProFunds should lose money when the index underlying their benchmark
rises -- a result that is the opposite from traditional equity mutual
funds.
. Foreign Investment Risk The UltraEurope ProFund and the UltraJapan
ProFund entail the risk of foreign investing, which may involve risks
not typically associated with investing in U.S. securities alone:
. Many foreign countries lack uniform accounting and disclosure
standards, or have standards that differ from U.S. standards.
Accordingly, these ProFunds may not have access to adequate or
reliable company information.
. UltraEurope ProFund and UltraJapan ProFund will be subject to the
market, economic and political risks of the countries where they
invest or where the companies represented in the benchmark indexes
are located. Because it may invest, directly or indirectly, a large
portion of its assets in Japanese stocks, the UltraJapan ProFund's
performance may be particularly susceptible to economic, political or
regulatory events affecting Japanese companies and Japan, generally.
. Securities purchased by these ProFunds may be priced in foreign
currencies. Their value could change significantly as the currencies
strengthen or weaken relative to the U.S. dollar. ProFund Advisors
does not engage in activities designed to hedge against foreign
currency fluctuations.
. On January 1, 1999, the eleven nations of the European Monetary
Union, including Germany and France, began the process of introducing
a uniform currency. The new currency, the euro, is expected to
reshape financial markets, banking systems and monetary policy in
Europe and throughout the world. The
Benchmark ProFunds 7
<PAGE>
continued transition to the euro may also have a worldwide impact on
the economic environment and behavior of investors.
. Valuation Time Risk UltraJapan ProFund generally values its assets
as of the close of the New York Stock Exchange. Such valuation will
reflect market perceptions and trading activity on the U.S. financial
market since the calculation of the closing level of the Nikkei 225
Stock Average. The Nikkei 225 Stock Average is determined in the early
morning U.S. Eastern time prior to the opening of the New York Stock
Exchange. As a result, the day-to-day correlation of the UltraJapan
ProFund's performance may vary from the closing performance of the
Nikkei 225 Stock Average. However, ProFunds believes that over time
the UltraJapan ProFund's performance will correlate highly with the
movement of the Nikkei 225 Stock Average.
. Small Company Investment Risk The UltraSmall-Cap ProFund could
experience greater risks than a fund which invests primarily in large
capitalized, widely traded companies, such as:
. Small company stocks tend to have greater fluctuations in price
than the stocks of large companies.
. There can be a shortage of reliable information on certain small
companies, which at times can pose a risk.
. Small companies tend to lack the financial and personnel resources
to handle industry wide setbacks and as a result such setbacks could
have a greater effect on the companies share prices.
. Small company stocks are typically less liquid then large company
stocks and liquidating positions in turbulent market conditions could
become difficult.
. Mid-Cap Company Investment Risk The UltraMid-Cap ProFund could
experience risks that a fund which invests in primarily large
capitalized, widely traded companies would not. Such risks could
include:
. Mid-Cap company stocks tend to have greater fluctuations in price
than the stocks of large companies, but not as drastic as the stocks
of small companies.
. Stocks of mid-sized companies could be more difficult to liquidate
during market downturns compared to larger, more widely-traded
companies.
8 Benchmark ProFunds
<PAGE>
Risks in Common
Each Benchmark ProFund faces certain risks:
. Market Risk The Benchmark ProFunds are subject to market risks
that will affect the value of their shares, including general economic
and market conditions, as well as developments that impact specific
industries or companies. Shareholders in the positively correlated
ProFunds should lose money when the index underlying their benchmark
declines. Shareholders in the negatively correlated ProFunds should
lose money when the index underlying their benchmark rises. These
indexes are discussed in the next section.
. Liquidity Risk In certain circumstances, such as a disruption of
the orderly markets for the financial instruments in which ProFunds
invest, ProFunds might not be able to dispose of certain holdings
quickly or at prices that represent true market value in the judgment
of ProFund Advisors. This may prevent ProFunds from limiting losses or
realizing gains.
. Correlation Risk While ProFund Advisors expects that each of the
Benchmark ProFunds will track its benchmark with an average
correlation of .90 or better over a year, there can be no guarantee
that the ProFunds will be able to achieve this level of correlation. A
failure to achieve a high degree of correlation may prevent a
Benchmark ProFund from achieving its investment goal.
. Non-Diversification Risk The Benchmark ProFunds are classified as
"non-diversified" under the federal securities laws. They have the
ability to concentrate a relatively high percentage of their
investments in the securities of a small number of companies. This
would make the performance of a Benchmark ProFund more susceptible to
a single economic, political or regulatory event than a more
diversified mutual fund might be. Nevertheless, the Benchmark ProFunds
intend to invest on a diversified basis.
. Risks of Aggressive Investment Techniques The Benchmark ProFunds
use investment techniques that may be considered aggressive. Risks
associated with the use of options, futures contracts, and options on
futures contracts include potentially dramatic price changes (losses)
in the value of the instruments and imperfect correlations between the
price of the contract and the underlying security or index.
Benchmark ProFunds 9
<PAGE>
Benchmark Indexes
. The S&P 500 Index is a widely used measure of large U.S. company
stock performance. It consists of the common stocks of 500 major
corporations selected for their size and the frequency and ease with
which their stocks trade. Standard & Poor's also attempts to assure
that the Index reflects the full range and diversity of the American
economy. The companies in the S&P 500 account for nearly three-
quarters of the value of all U.S. stocks.
. The S&P MidCap 400 Index, is a widely used measure of medium
capitalized U.S. company stock performance. It consists of the common
stocks of 400 major corporations selected for their size and the
frequency and ease with which their stocks trade. Standard &Poor's
also attempts to assure that the Index reflects the full range and
diversity of the American economy.
. The Russell 2000(R) Index, is an unmanaged index consisting of
2,000 small company common stocks. The Index comprises 2,000 of the
smallest U.S. domiciled publicly traded common stocks that are
included in the Russell 3000(R) Index. These common stocks represent
approximately 8% of the total market capitalization of the Russell
3000(R) Index which, in turn, represents approximately 98% of the
publicly traded U.S. equity market.
. The NASDAQ 100 Index(TM) contains 100 of the largest and most
active non-financial domestic and international issues listed on the
NASDAQ Stock Market based on market capitalization. Eligibility
criteria for the NASDAQ 100 Index(TM) includes a minimum average daily
trading volume of 100,000 shares. If the security is a foreign
security, the company must have a world wide market value of at least
$10 billion, a U.S. market value of at least $4 billion, and average
trading volume of at least 200,000 shares per day.
10 Benchmark ProFunds
<PAGE>
. ProFunds Europe Index ("PEI") is a combined measure of European
stock performance created by ProFund Advisors from the leading stock
indexes of Europe's three largest economies giving equal weight to
each index each day. The PEI averages the daily results of:
. The Financial Times Stock Exchange 100 Index ("FTSE-100"), a
capitalization-weighted index of the 100 most highly capitalized
companies traded on the London Stock Exchange.
. The Deutsche Aktienindex ("DAX"), is a total rate of return index
of 30 selected German blue-chip stocks traded on the Frankfurt Stock
Exchange.
. The CAC-40, a capitalization-weighted index of 40 companies listed
on the Paris Stock Exchange (the Bourse).
. The Nikkei 225 Stock Average, is a price-weighted index of 225
large, actively traded Japanese stocks traded on the Tokyo Stock
Exchange. The index is computed and distributed by the Nihon Keizai
Shimbun (NKS).
ProFunds' Board of Trustees may change investment objectives without
shareholder approval if, for example, it believes another benchmark
might better suit shareholder needs.
Who May Want to Consider a ProFunds Investment
The Bull ProFund may be appropriate for investors who want to receive
investment results approximating the performance of the S&P 500 Index.
The Ultra ProFunds may be appropriate for investors who:
. believe that over the long term, the value of a particular index
will increase/decrease, and that by investing with the objective of
doubling the index's daily return, or the inverse of the index's daily
return, they will achieve superior results over time. Investors in
these ProFunds should understand that since each Ultra ProFund seeks
to double the daily performance of its benchmark index, it should have
twice the volatility of a conventional index fund and twice the
potential risk of loss.
Benchmark ProFunds 11
<PAGE>
. are seeking to match an index's daily return with half the
investment required of conventional stock index mutual funds.
An investor might invest $100,000 in a conventional S&P 500 Index
Fund. Alternatively that same investor could invest half that amount
--$50,000-- in UltraBull ProFund and target the same daily return.
The Bear, UltraBear and UltraShort OTC ProFunds may be appropriate for
investors who:
. expect the underlying index to go down and desire to earn a profit
as a result of the index declining.
. want to protect (or hedge) the value of a diversified portfolio of
stocks and/or stock mutual funds from a stock market downturn that
they anticipate.
An investor with a diversified portfolio of stocks or stock mutual
funds valued at $100,000 might be concerned that the general stock
market could decline or be volatile for the next six months. The
investor could try to protect the portfolio against downturns in the
stock market by investing $50,000 in Bear, UltraBear or UltraShort
OTC ProFund-or in a combination of these ProFunds. Of course, the
investor likely would also be giving up gains that the portfolio
would otherwise produce if the markets go up rather than down in
value. ProFunds cannot assure that doing so would protect against
market downturns.
All of the ProFunds may be appropriate for investors who:
. are executing a strategy that relies on frequent buying, selling
or exchanging among stock mutual funds, since the ProFunds do not
limit how often an investor may exchange among the ProFunds and do not
impose any transaction fee when investors buy, sell or exchange a
ProFund, other than a $15 wire redemption fee.
. want the impact of their investment to range from double an index
to double the inverse of the index based on their current view,
positive or negative, of the index.
12 Benchmark ProFunds
<PAGE>
Benchmark ProFunds' Performance
The bar chart and tables in this section can help you evaluate the
potential risks of investing in the Benchmark ProFunds. The bar chart
shows the annual returns for the Investor Class shares of each
Benchmark ProFund available to the public for a year or more as of
December 31, 1999 (which excludes the newly formed UltraMid-Cap,
UltraSmall-Cap, UltraEurope and UltraJapan ProFunds). The first table
compares each such ProFund's return for Investor Class shares in 1999
and since inception with its relevant benchmark index. The second
table compares each such ProFund's return for Service Class shares in
1999 and since inception with its relevant benchmark index. Of course,
how a Benchmark ProFund has performed in the past is not necessarily
an indication of how it will perform in the future.
Annual Returns as of December 31 each year
[CHART APPEARS HERE]
Bull ProFund
17.18%........................................ 1999
26.57%....................................... 1998
UltraBull ProFund
29.56%...................................... 1999
42.95%.................................... 1998
UltraOTC ProFund
233.25%............. 1999
185.34%..................... 1998
Bear ProFund
-12.32% ........................................... 1999
-19.46% ........................................... 1998
UltraBear ProFund
-30.54% ........................................... 1999
-38.34% ........................................... 1998
UltraShort OTC ProFund
-80.36% ........................................... 1999
During the period covered in the chart above, the highest and lowest
returns of the Investor Class shares of each of these Benchmark
ProFunds in any calendar quarter were as follows:
<TABLE>
<CAPTION>
Highest Quarterly Lowest Quarterly
Return (%) Return (%)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Bull ProFund Q4 1998 (20.37%) Q3 1998 (-9.96%)
UltraBull ProFund Q4 1998 (41.34%) Q3 1998 (-22.48%)
UltraOTC ProFund Q4 1999 (126.35%) Q3 1998 (-5.16%)
Bear ProFund Q3 1998 (11.11%) Q4 1998 (-17.06%)
UltraBear ProFund Q3 1998 (17.87%) Q4 1998 (-32.26%)
UltraShort OTC ProFund Q3 1999 (-11.72%) Q4 1999 (-58.87%)
</TABLE>
Benchmark ProFunds 13
<PAGE>
Average Annual INVESTOR CLASS Share Returns
as of December 31, 1999
<TABLE>
<CAPTION>
One Year Since Inception Inception Date
<S> <C> <C> <C>
Bull ProFund 17.18% 20.20% 12/02/97
S&P 500 Index* 19.53% 22.00%
UltraBull ProFund 29.56% 36.08% 11/28/97
S&P 500 Index* 19.53% 22.86%
UltraOTC ProFund 233.25% 170.63% 12/02/97
NASDAQ 100 Index(TM)* 101.95% 83.27%
Bear ProFund -12.32% -15.95% 12/31/97
S&P 500 Index* 19.53% 23.05%
UltraBear ProFund -30.54% -33.06% 12/23/97
S&P 500 Index* 19.53% 24.78%
UltraShort OTC ProFund -80.36% -82.45% 6/02/98
NASDAQ 100 Index(TM)* 101.95% 105.54%
</TABLE>
Average Annual SERVICE CLASS Share Returns
as of December 31, 1999
<TABLE>
<CAPTION>
One Year Since Inception Inception Date
<S> <C> <C> <C>
Bull ProFund 15.97% 19.20% 12/02/97
S&P 500 Index* 19.53% 22.00%
UltraBull ProFund 28.42% 34.85% 11/28/97
S&P 500 Index* 19.53% 22.86%
UltraOTC ProFund 229.73% 168.67% 12/02/97
NASDAQ 100 Index(TM)* 101.95% 83.27%
Bear ProFund -13.32% -16.73% 12/31/97
S&P 500 Index* 19.53% 23.05%
UltraBear ProFund -31.20% -33.47% 12/23/97
S&P 500 Index* 19.53% 24.78%
UltraShort OTC ProFund -80.62% -82.61% 6/02/98
NASDAQ 100 Index(TM)* 101.95% 105.54%
</TABLE>
*Excludes dividends.
14 Benchmark ProFunds
<PAGE>
Annual Benchmark ProFund Operating Expenses
The tables below describe the fees and expenses you may pay if you buy
and hold shares in any of the Benchmark ProFunds. The ProFunds are
"no-load" mutual funds. You pay no sales charge when you buy or sell
shares, or when you reinvest dividends.
Shareholder Fees - INVESTOR CLASS SHARES and SERVICE CLASS SHARES
(paid directly from your investment)
Wire Redemption Fee* $15
* This charge may be waived at the discretion of the ProFunds.
Annual Operating Expenses--INVESTOR CLASS Shares
(percentage of average daily net assets)
<TABLE>
<CAPTION>
Bull UltraBull UltraMid-Cap UltraSmall-Cap UltraOTC
ProFund ProFund ProFund/1/ ProFund/1/ ProFund
<S> <C> <C> <C> <C> <C>
Management fees 0.75% 0.75% 0.75% 0.75% 0.75%
Other expenses 0.78% 0.61% 0.56% 0.59% 0.58%
Total annual 1.53% 1.36% 1.31% 1.34% 1.33%
operating expenses
<CAPTION>
UltraEurope UltraJapan Bear UltraBear UltraShort OTC
ProFund ProFund/1/ ProFund ProFund ProFund
<S> <C> <C> <C> <C> <C>
Management fees 0.90% 0.90% 0.75% 0.75% 0.75%
Other expenses 1.63% 0.37% 0.93% 0.68% 0.70%
Total annual 2.53% 1.27% 1.68% 1.43% 1.45%
operating expenses
</TABLE>
/1/ Based on estimated expenses to be incurred in the first year of operations.
Benchmark ProFunds 15
<PAGE>
Annual Operating Expenses--SERVICE CLASS Shares
(percentage of average daily net assets)
<TABLE>
<CAPTION>
Bull UltraBull UltraMid-Cap UltraSmall-Cap UltraOTC
ProFund ProFund ProFund/1/ ProFund/1/ ProFund
<S> <C> <C> <C> <C> <C>
Management fees 0.75% 0.75% 0.75% 0.75% 0.75%
Service fee/2/ 1.00% 1.00% 1.00% 1.00% 1.00%
Other expenses 0.73% 0.61% 0.56% 0.59% 0.57%
Total annual 2.48% 2.36% 2.31% 2.34% 2.32%
operating expenses
<CAPTION>
UltraEurope UltraJapan Bear UltraBear UltraShort OTC
ProFund ProFund/1/ ProFund ProFund ProFund
<S> <C> <C> <C> <C> <C>
Management fees 0.90% 0.90% 0.75% 0.75% 0.75%
Service fee/2/ 1.00% 1.00% 1.00% 1.00% 1.00%
Other expenses 1.68% 0.37% 1.16% 0.67% 0.71%
Total annual 3.58% 2.27% 2.91% 2.42% 2.46%
operating expenses
</TABLE>
/1/ Based on estimated expenses to be incurred in the first year of operations.
/2/ ProFunds has adopted a Shareholder Services Plan pursuant to which each
ProFund may pay fees of up to 1.00% of the net asset value of the ProFund's
Service Class shares to financial intermediaries that agree to provide
services to customers holding Service Class shares. For additional
information concerning the terms of the Shareholder Services Plan and
related service agreements with financial intermediaries, see "Share Prices,
Classes and Tax Information -- Classes of Shares."
16 Benchmark ProFunds
<PAGE>
Expense Examples
The following examples illustrate the expenses you would have incurred
on a $10,000 investment in each Benchmark ProFund, and are intended to
help you compare the cost of investing in the Benchmark ProFunds
compared to other mutual funds. The examples assume that you invested
for the time periods shown and redeemed all of your shares at the end
of each period, that each ProFund earned an annual return of 5% over
the periods shown, that you reinvested all dividends and
distributions, and that gross operating expenses remained constant.
Because these examples are hypothetical and for comparison only, your
actual costs will be different.
INVESTOR CLASS Expense Examples
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Bull ProFund $156 $483 $834 $1,824
UltraBull ProFund $138 $431 $745 $1,635
UltraMid-Cap ProFund/1/ $133 $415 N/A N/A
UltraSmall-Cap ProFund/1/ $136 $425 N/A N/A
UltraOTC ProFund $135 $421 $729 $1,601
UltraEurope ProFund $256 $788 $1,345 $2,866
UltraJapan ProFund/1/ $129 $403 N/A N/A
Bear ProFund $171 $530 $913 $1,987
UltraBear ProFund $146 $452 $782 $1,713
UltraShort OTC ProFund $148 $459 $792 $1,735
</TABLE>
/1/ The Securities and Exchange Commission requires that this ProFund estimate
expenses for one and three years only.
Benchmark ProFunds 17
<PAGE>
SERVICE CLASS Expense Examples
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Bull ProFund $251 $773 $1,321 $2,816
UltraBull ProFund $239 $736 $1,260 $2,696
UltraMid-Cap ProFund/1/ $233 $718 N/A N/A
UltraSmall-Cap ProFund/1/ $237 $730 N/A N/A
UltraOTC ProFund $235 $724 $1,240 $2,656
UltraEurope ProFund $361 $1,097 $1,855 $3,845
UltraJapan ProFund/1/ $230 $709 N/A N/A
Bear ProFund $294 $901 $1,533 $3,233
UltraBear ProFund $245 $755 $1,291 $2,756
UltraShort OTC ProFund $249 $767 $1,311 $2,796
</TABLE>
/1/ The Securities and Exchange Commission requires that this ProFund estimate
expenses for one and three years only.
18 Benchmark ProFunds
<PAGE>
Benchmark ProFunds
strategy
What the Benchmark ProFunds Do
Each Benchmark ProFund:
. Seeks to provide its shareholders with predictable investment
returns approximating its benchmark by investing in securities and
other financial instruments, such as futures and options on futures.
. Uses a mathematical and quantitative approach.
. Pursues its objective regardless of market conditions, trends or
direction.
. Seeks to provide correlation with its benchmarks on a daily basis.
What the Benchmark ProFunds Do Not Do
ProFund Advisors does not:
. Conduct conventional stock research or analysis or forecast stock
market movement in managing the Benchmark ProFunds' assets.
. Invest the Benchmark ProFunds' assets in stocks or instruments
based on ProFund Advisors' view of the fundamental prospects of
particular companies.
. Adopt defensive positions by investing in cash or other instruments
in anticipation of an adverse climate for the ProFunds' benchmark
indexes.
. Seek to invest to realize dividend income from their investments.
Benchmark ProFunds Strategy 19
<PAGE>
In addition, the Benchmark ProFunds do not seek to provide correlation
with their benchmark over a period of time other than daily, such as
monthly or annually, since mathematical compounding prevents these
Benchmark ProFunds from achieving such results.
Important Concepts
. Leverage offers a means of magnifying small market movements, up or
down, into large changes in an investment's value.
. Futures, or futures contracts, are contracts to pay a fixed price
for an agreed-upon amount of commodities or securities, or the cash
value of the commodity or securities, on an agreed-upon date.
. Option contracts grant one party a right, for a price, either to
buy or sell a security or futures contract at a fixed sum during a
specified period or on a specified day.
. Selling short, or borrowing stock to sell to a third party, is a
technique that may be employed by the ProFunds to seek gains when
their benchmark index declines. If a ProFund replaces the security to
the lender at a price lower than the price at which it borrowed the
security plus interest incurred, the ProFund makes a profit on the
difference. If the current market price is greater when the time comes
to replace the stock, the ProFund will incur a loss on the
transaction.
. ADRs represent the right to receive securities of foreign issuers
deposited in a bank or trust company. ADRs are an alternative to
purchasing the underlying securities in their national markets and
currencies. Investment in ADRs has certain advantages over direct
investment in the underlying foreign securities since:(i) ADRs are
U.S. dollar-denominated investments that are easily transferable and
for which market quotations are readily available, and (ii) issuers
whose securities are represented by ADRs are generally subject to
auditing, accounting and financial reporting standards similar to
those applied to domestic issuers.
20 Benchmark ProFunds Strategy
<PAGE>
Portfolio Turnover
ProFund Advisors expects a significant portion of the Benchmark
ProFunds' assets to come from professional money managers and
investors who use ProFunds as part of "market timing" investment
strategies. These strategies often call for frequent trading of
ProFund shares to take advantage of anticipated changes in market
conditions. Although ProFund Advisors believes its accounting
methodology should minimize the effect on ProFunds of such trading,
market timing trading could increase the rate of ProFunds' portfolio
turnover, forcing realization of substantial capital gains and losses
and increasing transaction expenses. In addition, while ProFunds does
not expect it, large movements of assets into and out of the ProFunds
may negatively impact their abilities to achieve their investment
objectives or their level of operating expenses.
Benchmark ProFunds Strategy 21
<PAGE>
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22
<PAGE>
Money Market
ProFund
Objective
The Money Market ProFund invests its assets in the Cash Management
Portfolio (the "Portfolio"), a separate investment company managed by
Bankers Trust Company. This structure is sometimes referred to as a
"master-feeder" structure. The objective of the Money Market ProFund
and the Portfolio are identical: both seek a high level of current
income consistent with liquidity and preservation of capital.
Strategy
The Money Market ProFund invests all of its investable assets in the
Portfolio. The Portfolio may invest in high-quality, short-term,
dollar-denominated money market securities paying a fixed, variable
or floating interest rate. These include:
. Debt securities issued by U.S. and foreign banks, financial
institutions, corporations, or other entities, including certificates
of deposit, euro-time deposits, commercial paper (including asset-
backed commercial paper), notes, funding agreements and U.S.
government securities.
. U.S. government securities that are issued or guaranteed by the
U.S. Treasury, or by agencies or instrumentalities of the U.S.
Government.
. Repurchase agreements, which are agreements to buy securities at
one price, with a simultaneous agreement to sell back the securities
at a future date at an agreed-upon price.
Money Market ProFund 23
<PAGE>
. Asset-backed securities, which are generally participations in a
pool of assets whose payment is derived from the payments generated by
the underlying assets. Payments on the asset-backed security generally
consist of interest and/or principal.
Because many of the Portfolio's principal investments are issued or
credit-enhanced by banks, the Portfolio may invest more than 25% of
its total assets in obligations of domestic banks.
The Portfolio may invest in other types of instruments, as described
in the Statement of Additional Information.
In order to maintain a stable share price, the Portfolio maintains a
dollar-weighted average maturity of 90 days or less. Generally,
securities in the Portfolio are valued in U.S. dollars and have
remaining maturities of 397 days (about 13 months) or less on their
purchase date. The Portfolio may also invest in longer term securities
that have features that reduce their maturities to 397 days or less on
their purchase date. The Portfolio buys U.S. government debt
obligations, money market instruments and other debt obligations that
at the time of purchase:
. have received the highest short-term rating from two nationally
recognized statistical rating organizations;
. have received the highest short-term rating from one rating
organization (if only one organization rates the security);
. if unrated, are determined to be of similar quality by the
Portfolio's investment advisor; or
. have no short-term rating, but are rated within the three highest
long-term rating categories, or are determined to be of similar
quality by the Portfolio's investment advisor.
If a security no longer meets the Portfolio's requirements, the
investment advisor will attempt to sell that security within a
reasonable time, unless selling the security would not be in the
Portfolio's best interest.
24 Money Market ProFund
<PAGE>
Risks
Interest Rate Risk
Money market instruments, like all debt securities, face the risk that
the securities will decline in value because of changes in interest
rates. Generally, investments subject to interest rate risk will
decrease in value when interest rates rise and increase when interest
rates decline.
Credit Risk
A money market instrument's credit quality depends on the issuer's
ability to pay interest on the security and repay the debt: the lower
the credit rating, the greater the risk that the security's issuer
will default, or fail to meet its payment obligations. The credit risk
of a security may also depend on the credit quality of any bank or
financial institution that provides credit enhancement for it.
Repurchase Agreement Risk
A repurchase agreement exposes the Portfolio to the risk that the
party that sells the securities defaults on its obligation to
repurchase them. In this circumstance, the Portfolio can lose money
because:
. it may not be able to sell the securities at the agreed-upon time
and price; or
. the securities lose value before they can be sold.
Market Risk
Although individual securities may outperform their market, the entire
market may decline as a result of rising interest rates, regulatory
developments or deteriorating economic conditions.
Security Selection Risk
While the Portfolio invests in short-term securities, which by nature
should be relatively stable investments, the risk remains that the
securities selected will not perform as expected. This could cause the
Portfolio's returns to lag behind those of similar money market funds.
Money Market ProFund 25
<PAGE>
Concentration Risk
Because the Portfolio may invest more than 25% of its total assets in
the financial services industry, it may be vulnerable to setbacks in
that industry. Banks and other financial service companies are highly
dependent on short-term interest rates and can be adversely affected
by downturns in the U.S. and foreign economies or changes in banking
regulations.
Prepayment Risk
When a bond issuer, such as an issuer of asset-backed securities,
retains the right to pay off a high-yielding bond before it comes due,
the Portfolio may have no choice but to reinvest the proceeds at lower
interest rates. Thus, prepayment may reduce the Portfolio's income. It
may also create a capital gains tax liability, because bond issuers
usually pay a premium for the right to pay off bonds early.
Organizational Structure
The Money Market ProFund is a feeder fund that invests all of its
assets in a master fund, the Portfolio. The Money Market ProFund and
the Portfolio have the same investment objective.
The Portfolio may accept investments from other feeder funds. The
feeders bear the Portfolio's expenses in proportion to their assets.
Each feeder can set its own transaction minimums, fund-specific
expenses and other requirements. The Money Market ProFund's Trustees
may withdraw its assets from the Portfolio if they believe doing so is
in the shareholders' best interests. If the Trustees withdraw the
Money Market ProFund's assets, they would then consider whether the
Money Market ProFund should hire its own investment advisor and invest
its assets directly in appropriate instruments, invest in a different
fund, or take other action.
An investment in the Money Market ProFund is not a deposit of a bank,
nor is it insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency. While the Money Market
ProFund tries to maintain a stable net asset
26 Money Market ProFund
<PAGE>
value of $1.00 per share, there is no guarantee that the Money Market
ProFund will do so, and you could lose money by investing in this
ProFund.
Considering a Money Market ProFund Investment
Investors can take advantage of the Money Market ProFund in at least
two ways:
. during periods when investors want to maintain a neutral exposure
to the stock market, the income earned from an investment in the Money
Market ProFund can keep their capital at work.
. the Money Market ProFund can be invested in conjunction with other
ProFunds to adjust an investor's target exposure to an index.
For instance, an investor who desires to target a daily return of 1.5
times the daily performance of the S&P 500 Index could allocate 75%
of his or her investment to the UltraBull ProFund and 25% of the
investment to the Money Market ProFund.
Money Market ProFund's Total Returns and Expenses
The bar chart and tables in this section can help you evaluate the
potential risk of investing in the Money Market ProFund. The bar chart
shows the annual returns for the Investor Class shares of the Money
Market ProFund. The first table shows the Money Market ProFund's
return for Investor Class shares in 1999 and since inception. The
second table shows the return for Service Class shares in 1999 and
since inception. Of course, how the Money Market ProFund has performed
in the past is not necessarily an indication of how it will perform in
the future.
Annual Returns as of December 31 each year
Money Market ProFund
4.48% ................................ 1999
4.84% ................................ 1998
During the periods covered in the chart above, the highest return in
any calendar quarter for the Money Market ProFund's Investor Class
shares was Q4 1999 (1.23%), and its lowest quarterly return was Q2
1999 (1.03%).
Money Market ProFund 27
<PAGE>
Average Annual INVESTOR CLASS Share Returns
as of December 31, 1999
One Year Since Inception Inception Date
Money Market ProFund 4.48% 4.69% 11/17/97
The 7-day yield (the income yield for the previous seven days
projected over a full year) was 5.12% for Money Market ProFund's
Investor Class shares as of December 31, 1999. To learn the current
7-day yield, call ProFunds at (888) 776-3637.
Average Annual SERVICE CLASS Share Returns
as of December 31, 1999
One Year Since Inception Inception Date
Money Market ProFund 3.44% 3.43% 11/17/97
The 7-day yield (the income yield for the previous seven days
projected over a full year) was 4.12% for Money Market ProFund's
Service Class shares as of December 31, 1999. To learn the current
7-day yield, call ProFunds at (888) 776-3637.
Annual Money Market ProFund Operating Expenses
The tables on the following page describe the fees and expenses,
including the Money Market ProFund's prorated Portfolio expenses, you
may pay if you buy and hold shares of the Money Market ProFund. The
Money Market ProFund is a "no-load" mutual fund. You pay no sales
charge when you buy or sell shares or when you reinvest dividends.
Shareholder Fees - INVESTOR CLASS SHARES and SERVICE CLASS SHARES
(paid directly from your investment)
Wire Redemption Fee* $15
* This charge may be waived at the discretion of the ProFunds.
28 Money Market ProFund
<PAGE>
Annual Operating Expenses-INVESTOR CLASS Shares
(percentage of average daily net assets)
Management fees 0.15%
Other expenses 0.68%
Total annual operating expenses 0.83%
Annual Operating Expenses-SERVICE CLASS Shares
(percentage of average daily net assets)
Management fees 0.15%
Service fee(1) 1.00%
Other expenses 0.68%
Total annual operating expenses 1.83%
/1/ ProFunds has adopted a Shareholder Services Plan pursuant to which
each ProFund may pay fees of up to 1.00% of the net asset value of the
ProFund's Service Class shares to financial intermediaries that agree
to provide services to customers holding Service Class shares. For
additional information concerning the terms of the Shareholder
Services Plan and related service agreements with financial
intermediaries, see "Share Prices, Classes and Tax Information --
Classes of Shares."
Expense Examples
The examples below illustrate the expenses you would have incurred on
a $10,000 investment in each class of shares of the Money Market
ProFund, and are intended to help you compare the cost of investing in
the ProFund compared to other mutual funds. The examples assume that
you invested for the time periods shown and redeemed all of your
shares at the end of each period, that the Money Market ProFund earned
an annual return of 5% over the periods shown, that you reinvested all
dividends and distributions, and that gross operating expenses
remained constant. Because this example is hypothetical and for
comparison only, your actual costs will be different.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Investor Class Shares $ 85 $265 $460 $1,025
Service Class Shares $186 $576 $990 $2,148
</TABLE>
Money Market ProFund 29
<PAGE>
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30
<PAGE>
Share Prices, Classes & Tax
information
Calculating the ProFunds' Share Prices
Except for the UltraEurope ProFund, each Benchmark ProFund calculates
daily share prices on the basis of the net asset value of each class
of shares at the close of regular trading on the New York Stock
Exchange ("NYSE") (normally, 4:00 p.m., Eastern time) every day the
NYSE and the Chicago Mercantile Exchange are open for business.
The UltraEurope ProFund calculates daily share prices on the basis of
the net asset value of each class of shares at the latest close of
trading on the three exchanges tracked by the PEI: the London Stock
Exchange, the Frankfurt Stock Exchange or the Paris Bourse (normally,
11:30 a.m., Eastern time), on each day that all three of these
exchanges and the NYSE are open.
Purchases and redemptions of shares are effected at the net asset
value per share next determined after receipt and acceptance of an
order. If portfolio investments of a ProFund are traded in markets on
days when the ProFund's principal trading market(s) is closed, the
ProFund's net asset value may vary on days when investors cannot
purchase or redeem shares.
The ProFunds value shares of each class of shares by dividing the
market value of the assets attributable to each class, less the
liabilities attributable to the class, by the number of the class's
outstanding shares. The ProFunds use the following methods for
arriving at the current market price of investments held by the
Benchmark ProFunds:
Share Prices, Classes & Tax Information 31
<PAGE>
. securities listed and traded on exchanges--the last price the stock
traded at on a given day, or if there were no sales, the mean between
the closing bid and asked prices.
. securities traded over-the-counter--NASDAQ-supplied information on
the prevailing bid and asked prices.
. futures contracts and options on indexes and securities--the last
sale price prior to the close of regular trading on the NYSE (for all
Benchmark ProFunds except UltraEurope ProFund).
. futures prices used to calculate net asset values for the
UltraEurope ProFund will be the last transaction prices for the
respective futures contracts that occur immediately prior to the close
of the underlying stock exchange.
. options on futures contracts--priced at fair value determined with
reference to established future exchanges.
. bonds and convertible bonds generally are valued using a third-
party pricing system.
. short-term debt securities are valued at amortized cost, which
approximates market value.
. the foreign exchange rates used to calculate the net asset values
for the UltraEurope ProFund will be the mean of the bid price and the
asked price for the respective foreign currency occurring immediately
before the last underlying stock exchange closes.
When price quotes are not readily available, securities and other
assets are valued at fair value in good faith under procedures
established by, and under the general supervision and responsibility
of, the ProFunds' Board of Trustees. This procedure incurs the
unavoidable risk that the valuation may be higher or lower than the
securities might actually command if the ProFunds sold them. In the
event that a trading halt closes the NYSE or a futures exchange early,
portfolio investments may be valued at fair value, or in a manner that
is different from the discussion above. See the Statement of
Additional Information for more details.
The New York Stock Exchange and the Chicago Mercantile Exchange, a
leading market for futures and options, are open every week, Monday
through Friday, except when the following holidays are celebrated: New
Year's Day, Martin Luther King, Jr. Day (the third Monday in January),
Presidents' Day (the third Monday in February), Good Friday, Memorial
Day (the last Monday in May), July 4th, Labor Day (the first Monday in
September),
32 Share Prices, Classes & Tax Information
<PAGE>
Thanksgiving Day (the fourth Thursday in November) and Christmas Day.
Either or both of these Exchanges may close early on the business day
before each of these holidays. Either or both of these Exchanges also
may close early on the day after Thanksgiving Day and the day before
Christmas holiday.
The London Stock Exchange, Frankfurt Stock Exchange or Paris Bourse
closes for the following holidays in 2000: May Day (May 1), Spring
Bank Holiday (May 29), Ascension (June 1), Pentecost Monday (June 12),
Corpus Christi Day (June 22), Independence Day (July 14), Bastille Day
(July 14), Assumption Day (August 15), Summer Bank Holiday (August
28), German Unity Day (October 3), All Saints Day (November 1),
Armistice Day (November 11), Christmas Day, and Boxing Day (observed
December 26). Holidays scheduled for 2001 include: New Year's Day
(January 1), Good Friday (April 13) and Easter Monday (April 16).
Please note that holiday schedules are subject to change without
notice.
Calculating the Money Market ProFund's Share Price
The Money Market ProFund calculates daily share prices on the basis of
the net asset value of each class of shares at the close of regular
trading on the NYSE (normally, 4:00 p.m., Eastern time) every day the
NYSE is open for business except for two additional bank holidays,
Columbus Day and Veterans' Day. Purchases and redemptions of shares
are effected at the net asset value per share next determined after
receipt and acceptance of an order. On the day before certain holidays
are observed, the bond markets or other primary trading markets for
the Portfolio may close early. They may also close early on the day
after Thanksgiving and the day before Christmas Eve. If the Bond
Market Association recommends an early close of the bond markets, the
Money Market ProFund may also close early. The Money Market ProFund
will cease taking purchase orders at such times. The Money Market
ProFund's net asset value per share for each class of shares will
normally be $1.00, although Bankers Trust Company cannot guarantee
that this will always be the case. The Portfolio uses the amortized
cost method to account for any premiums or discounts above or below
the face value of any securities it buys. This method does not reflect
daily fluctuations in market value.
Share Prices, Classes & Tax Information 33
<PAGE>
Dividends and Distributions
Each of the Benchmark ProFunds intends to distribute to its
shareholders every year all of the year's net investment income and
net capital gains. Each Benchmark ProFund will reinvest these
distributions in additional shares unless a shareholder has written
to request a direct cash distribution.
The Money Market ProFund declares dividends from its net income daily
and pays the dividends on a monthly basis. The Money Market ProFund
will pay annually any long-term capital gains as well as any short-
term capital gains that it did not distribute during the year, but it
reserves the right to include in the daily dividend any short-term
capital gains on securities that it sells.
The Money Market ProFund may revise these policies, postpone the
payment of dividends and interest or take other actions in order to
maintain a constant net asset value of $1.00 per share.
Tax Consequences
A ProFund does not ordinarily pay income tax on its net investment
income (which includes short-term capital gains) and net capital gains
that it distributes to shareholders, but individual shareholders pay
tax on the dividends and distributions they receive. Shareholders will
generally be taxed regardless of how long they have held ProFund
shares and regardless of whether they receive cash or choose to have
distributions and dividends reinvested. Distributions and dividends
generally will be taxable as either ordinary income or long-term
capital gains. For example, if a ProFund designates a particular
distribution as a long-term capital gains distribution, it will be
taxable to shareholders at their long-term capital gains rate.
Dividends and distributions may also be subject to state and local
taxes.
Every year the ProFunds will send shareholders tax information on the
dividends and distributions for the previous year.
If shareholders sell or redeem their ProFund shares, they may have a
capital gain or loss, which will be long-term or short-term, generally
depending upon how long they have held the shares. An exchange of
ProFund shares may be treated as a sale.
34 Share Prices, Classes & Tax Information
<PAGE>
The tax consequences for tax deferred retirement accounts or non-
taxable shareholders will be different.
Please keep in mind:
. Whether a distribution by a ProFund is taxable to shareholders as
ordinary income or at the lower capital gains rate depends on whether
it is long-term capital gains of the ProFund, not on how long an
investor has owned shares of the ProFund.
. Dividends and distributions declared by a ProFund in October,
November or December of one year and paid in January of the next year
may be taxable in the year the ProFund declared them.
. As with all mutual funds, a ProFund may be required to withhold
U.S. federal income tax at the rate of 31% of all taxable
distributions and redemption proceeds, payable to shareholders who
fail to provide the ProFund with correct taxpayer identification
numbers or to make required certifications, or who have been notified
by the IRS that they are subject to backup withholding. Backup
withholding is not an additional tax; rather, it is a way in which the
IRS ensures it will collect taxes otherwise due. Any amounts withheld
may be credited against the shareholder's U.S. federal income tax
liability. You also may be subject to a $50 fee to reimburse the
ProFunds for any penalty that the IRS may impose.
Please see the Statement of Additional Information for more
information. Because each investor's tax circumstances are unique and
because the tax laws are subject to change, ProFund Advisors
recommends that shareholders consult their tax advisors about federal,
state, local and foreign tax consequences of investment in the
ProFunds.
Classes of Shares
Investors in any of the ProFunds can purchase either Investor Class
shares directly, or Service Class shares through an authorized firm,
such as a registered investment advisor, a bank or a trust company.
Under a shareholder services plan for Service Class shares, each
ProFund may pay an authorized firm up to 1.00% on an annualized basis
of average daily net assets attributable to its customers who are
Service Class shareholders.
Share Prices, Classes & Tax Information 35
<PAGE>
For this fee, the authorized firms may provide a variety of services,
such as:
. receiving and processing shareholder orders,
. performing the accounting for the shareholder's account,
. maintaining retirement plan accounts,
. answering questions and handling correspondence for individual
accounts,
. acting as the sole shareholder of record for individual
shareholders,
. issuing shareholder reports and transaction confirmations,
. executing daily investment "sweep" functions, and
. furnishing investment advisory services.
Service Class shareholders pay all fees and expenses applicable to
Service Class shares.
Because ProFunds adopted the shareholder services plan to compensate
authorized firms for providing the types of services described above,
ProFunds believes the shareholder services plan is not covered by Rule
12b-1 under the Investment Company Act of 1940, which relates to
payment of distribution fees. ProFunds does, however, follow the
procedural requirements of Rule 12b-1 in connection with the
implementation and administration of the shareholder services plan.
An authorized firm generally represents in a service agreement used in
connection with the shareholder services plan that all compensation
payable to the authorized firm from its customers in connection with
the investment of their assets in ProFunds will be disclosed by the
authorized firm to its customers. It also generally provides that all
such compensation will be authorized by the authorized firm's
customers.
ProFunds does not monitor the actual services being performed by an
authorized firm under the plan and related service agreement. ProFunds
also does not monitor the reasonableness of the total compensation
that an authorized firm may receive, including any service fee that an
authorized firm may receive from ProFunds and any compensation the
authorized firm may receive directly from its clients.
36 Share Prices, Classes & Tax Information
<PAGE>
Shareholder Services
guide
Contacting ProFunds
By telephone: (888) 776-3637 or (614) 470-8122--
for investors
(888) 776-5717--a phone line dedicated
for use by financial professionals only
By mail: ProFunds
P.O. Box 182800
Columbus, OH 43218-2800
By overnight mail: ProFunds
c/o BISYS Fund Services
3435 Stelzer Road
Columbus, OH 43219
Minimum Investments
. $5,000 for discretionary accounts controlled by a financial
professional.
. $15,000 for self-directed accounts controlled directly by
investors.
These minimums apply to all accounts, including retirement plans, and
apply to the total value of an investor's initial ProFunds investment.
ProFunds reserves the right to reject or refuse, at its discretion,
any order for the purchase of a ProFund's shares in whole or in part.
Shareholder Services Guide 37
<PAGE>
Shareholder
Services
Guide
Opening Your ProFunds Account
By mail: Send a completed application, along with a check payable to
"ProFunds," to the aforementioned address. Cash, credit cards and
credit card checks are not accepted. Please contact ProFunds in
advance if you wish to send third party checks. All purchases must be
made in U.S. dollars through a U.S. bank.
By wire transfer: First, complete an application and fax it to
ProFunds at (800) 782-4797 (toll-free) or (614) 470-8718. Next, call
ProFunds at (888) 776-3637 (toll-free) or (614) 470-8122 to a) confirm
receipt of the faxed application, b) request your new account number,
c) inform ProFunds of the amount to be wired and d) receive a
confirmation number for your purchase order. After receiving your
confirmation number, instruct your bank to transfer money by wire to:
UMB Bank, N.A.
Kansas City, MO
Routing/ABA #:101000695
ProFunds DDA #9870857952
For further credit to: Your name, the name of the ProFund(s), and
your ProFunds account number
Confirmation number: The confirmation number given to you by the
ProFunds representative
After faxing a copy of the completed application, send the original to
ProFunds via mail or overnight delivery. The addresses are shown above
under "Contacting ProFunds-By mail."
Instructions, written or telephonic, given to ProFunds for wire
transfer requests do not constitute a purchase order until the wire
transfer has been received by ProFunds. The ProFunds are not liable
for any loss incurred due to a wire transfer not having been received.
Please note that your bank may charge a fee to send or receive wires.
38 Shareholder Services Guide
<PAGE>
Shareholder
Services
Guide
Establishing Accounts For Tax-Sheltered Retirement Plans
The ProFunds sponsor Individual Retirement Accounts ("IRAs") that
enable individual investors to set up their own retirement savings
programs. ProFund Advisors charges an annual fee of $15 per social
security number for all types of IRAs to pay for the extra maintenance
and tax reporting that these plans require. Investors in other types
of retirement plans also may invest in the ProFunds. For additional
information and an application, contact ProFunds directly by phone or
at the above address.
Purchasing Additional ProFunds Shares
By mail: Send a check payable to "ProFunds", noting the ProFund and
account number, to the aforementioned address. Cash, credit cards, and
credit card checks are not accepted. Please contact ProFunds in
advance if you wish to send third party checks. All purchases need to
be made in U.S. dollars through a U.S. bank.
By wire transfer: Call ProFunds to inform us of the amount you will
be wiring and receive a confirmation number.
You can then instruct your bank to transfer your funds to:
UMB Bank, N.A.
Kansas City, MO
Routing/ABA #:101000695
ProFunds DDA #9870857952
For further credit to: Your name, the name of the ProFund(s), and
your ProFunds account number.
Confirmation number: The confirmation number given to you by the
ProFunds representative.
Instructions, written or telephonic, given to ProFunds for wire
transfer requests do not constitute a purchase order until the wire
transfer has been received by ProFunds. ProFunds is not liable for any
loss incurred due to a wire transfer not having been received.
Please note that your bank may charge a fee to send or receive wires.
Shareholder Services Guide 39
<PAGE>
Shareholder
Services
Guide
Please keep in mind when purchasing shares:
. The minimum subsequent purchase amount is $100.
. ProFunds prices shares you purchase at the price per share next
computed after we receive your purchase order in good order. To be in
good order, a purchase order must include a properly completed
application and wire, check or other form of payment.
. A wire order is considered in good order only if (i) you have
called ProFunds under the procedures described above and (ii) ProFunds
receives and accepts your wire. ProFunds only accepts wires during the
times it processes wires: between 8:00 a.m. and 3:30 p.m., Eastern
time for all ProFunds except that UltraEurope ProFund does not receive
and process wires from 11:00 a.m. through noon, Eastern time. Wires
received after ProFunds' wire processing times will be processed as of
the next time that orders are processed. If the primary exchange or
market, on which a ProFund transacts business closes early, the above
cut-off time will be 25 minutes prior to the close of such exchange or
market.
. If your purchase is cancelled, you will be responsible for any
losses that may result from any decline in the value of the cancelled
purchase. ProFunds (or its agents) have the authority to redeem
shares in your account(s) to cover any losses due to fluctuations in
share price. Any profit on a cancelled transaction will accrue to the
ProFunds.
. Securities brokers and dealers have the responsibility of
transmitting your orders promptly. Brokers and dealers may charge
transaction fees on the purchase and/or sale of ProFunds shares.
40 Shareholder Services Guide
<PAGE>
Shareholder
Services
Guide
Exchanges
Shareholders can exchange shares of either class of any ProFund for
shares of either class of another ProFund, including ProFunds not
described in this prospectus, free of charge. ProFunds can only honor
exchanges between accounts registered in the same name, and having
the same address and taxpayer identification number.
ProFunds accepts exchange orders by phone, in writing or through the
Internet, except that the ProFunds do not accept exchange orders
through the Internet for the UltraEurope ProFund. You will need to
specify the number of shares, or the percentage or dollar value of the
shares you wish to exchange, and the ProFunds (and classes of shares)
involved in the transaction.
By telephone: Exchange orders between ProFunds can be accepted by
phone between 8:00 a.m. and 3:50 p.m. and between 4:30 p.m. and 9:00
p.m., Eastern time, with the exception that ProFunds does not accept
exchange orders involving the UltraEurope ProFund between 11:00 a.m.
and noon, Eastern time. If the primary exchange or market (generally,
the CME) on which a ProFund transacts business closes early, the above
cut-off time will be 25 minutes prior to the close of such exchange or
market.
By Internet: Shareholders may transact on-line exchanges of shares of
the ProFunds, except exchanges of shares of the UltraEurope ProFund,
at ProFunds' website (www.profunds.com). To access this service
through the website, click on the "Trade/ Access Account" Icon and you
will be prompted to enter your Social Security Number. Follow the
instructions to establish your Personal Identification Number (PIN)
which will allow you to execute exchanges between ProFunds and access
ProFunds account information. Internet exchange orders between the
ProFunds can be accepted between 8:00 a.m. and 3:55 p.m. and between
4:30 p.m. and 9:00 p.m., Eastern time. If the primary
Shareholder Services Guide 41
<PAGE>
Shareholder
Services
Guide
exchange or market on which a ProFund transacts business closes early,
the above cut off time will be 25 minutes prior to the close of such
exchange or market.
Internet exchange transactions are extremely convenient, but are not
free from risk. To ensure that all Internet transactions are safe,
secure and as risk-free as possible, ProFunds has instituted certain
safeguards and procedures for determining the identity of website
users. As a result, neither ProFunds nor its transfer agent will be
responsible for any loss, liability, cost or expense for following
Internet instructions they reasonably believe to be genuine. If you or
your intermediary make exchange requests by the Internet, you will
generally bear the risk of loss.
The ProFunds may terminate the ability to exchange ProFund shares on
its website at any time, in which case you may continue to exchange
shares by phone or in writing.
Please keep in mind when exchanging shares:
. An exchange actually is a redemption (sale) of shares of one
ProFund and a purchase of shares of another ProFund.
. If both ProFunds involved in the exchange have their respective net
asset values calculated at the same time then both the sale and the
buy will occur simultaneously.
For example, assume you were to exchange Money Market ProFund for
UltraOTC ProFund and the order was placed before 3:50 p.m., Eastern
time, on any business day. The net asset values for both ProFunds
involved in the transaction are computed at the same time. Therefore,
both the price of the shares sold out of Money Market ProFund and the
shares purchased into UltraOTC ProFund would be determined
simultaneously when the net asset values are next computed, normally
4:00 p.m., Eastern time.
. If the exchange involves ProFunds that calculate their net asset
values at different times, you will receive the net asset value next
computed for the redemption transaction. The purchase transaction will
receive the price next determined after the redemption transaction is
completed, with one exception as described below. The proceeds from
the redemption transaction
42 Shareholder Services Guide
<PAGE>
Shareholder
Services
Guide
will not be invested during the intervening period and will not earn
interest during that time.
For example, assume you were to exchange UltraBull ProFund for
UltraEurope ProFund and the order was placed prior to 3:50 p.m.,
Eastern time, on a business day of the UltraBull ProFund. The net
asset values of UltraEurope and UltraBull ProFunds are not determined
at the same time. As a result, the components of the exchange would
be valued at two different times. First, the sale from UltraBull
ProFund would be priced using the next computed net asset value,
which would be determined normally at 4:00 p.m., Eastern time, on
such day. Second, the buy into UltraEurope ProFund would receive the
net asset value of UltraEurope ProFund next determined after the
redemption from UltraBull ProFund. That determination of the net
asset value of UltraEurope ProFund would normally take place at 11:30
a.m., Eastern time, on the next business day of UltraEurope ProFund.
An exception to the above exchange transaction policies covers
exchange requests from the Money Market ProFund to the UltraEurope
ProFund, received after 4:00 p.m. on one business day and prior to
11:00 a.m. on the next business day. In such an exchange, you will
receive the price next computed after the exchange request is made for
both the redemption and the purchase transactions involved in the
exchange. You will be responsible for any losses if sufficient
redemption proceeds are not available to pay the purchase price of
shares purchased.
. Please note that during certain periods, it may take several days
for exchanges to be completed due to holidays.
. The minimum exchange for self-directed accounts is $1,000 or, if
less, the account's current value.
. You may exchange, on a regular basis, shares of the Money Market
ProFund for shares of other ProFunds through an Automatic Exchange
Plan. For more information on this option, please call ProFunds at
888-776-3637.
. Before executing an exchange between the ProFunds described in this
prospectus for shares of another ProFund, a shareholder must first
review the prospectus related to the other ProFund. Such prospectus
may be obtained by contacting the ProFunds by letter or telephone at
the address or phone number noted on the back cover of this
prospectus, or by visiting the ProFunds' website (www.profunds.com).
Shareholder Services Guide 43
<PAGE>
Shareholder
Services
Guide
Redeeming ProFund Shares
You can redeem all or part of your shares at the price next determined
after we receive your request. ProFunds other than UltraEurope ProFund
only accept redemption orders by phone between 8:00 a.m. and 3:50 p.m.
and between 4:30 p.m. and 9:00 p.m., Eastern time. UltraEurope ProFund
accepts telephone redemption orders only between 8:00 a.m. and 11:00
a.m. and noon and 9:00 p.m., Eastern time. ProFunds may not receive or
accept phone redemption orders at any other time. If the primary
exchange or market on which a ProFund (other than the UltraEurope
ProFund) transacts business closes early, the above cut-off time will
be 25 minutes prior to the close of such exchange or market.
Written Redemptions
To redeem all or part of your shares in writing, your request needs to
include the following information:
. the name of the ProFund(s),
. the account number(s),
. the amount of money or number of shares being redeemed,
. the name(s) of the account owners,
. the signature(s) of all registered account owners, and
. your daytime telephone number.
Wire Redemptions
If your account is authorized for wire redemption, your proceeds will
be wired directly into the bank account you have designated. The
ProFunds charge a $15 service fee for a wire transfer of redemption
proceeds, and your bank may charge an additional fee to receive the
wire. If you would like to establish this option on an existing
account, please call ProFunds to request the appropriate form. Wire
redemptions are not available for retirement accounts.
44 Shareholder Services Guide
<PAGE>
Shareholder
Services
Guide
Signature Guarantee
Certain redemption requests must include a signature guarantee. Your
request needs to be in writing and include a signature guarantee if
any of the following situations apply:
. Your account registration or address has changed within the last 30
calendar days.
. The check is being mailed to a different address than the one on
your account.
. The check or wire is being made payable to someone other than the
account owner.
. The redemption proceeds are being transferred to an account with a
different registration.
. You wish to redeem more than $100,000.
. You are adding or changing wire instructions on your account.
. Other unusual situations as determined by ProFund's transfer agent.
Signature guarantees may be provided by an eligible guarantor
institution such as a commercial bank, an NASD member firm such as a
stock broker, a savings association or a national securities exchange.
Please keep in mind when redeeming shares:
. Redemptions from self-directed accounts must be for at least $1,000
or, if less, for the account's entire current value. The remaining
balance needs to be above the applicable minimum investment.
. The ProFunds normally remit redemption proceeds within seven days
of redemption. For redemption of shares purchased by check or
Automatic Investment, ProFunds may wait up to 15 days before sending
redemption proceeds to assure that its transfer agent has collected
the purchase payment.
. ProFunds will remit payment of telephone redemptions only to the
address or bank of record on the account application. You must submit,
in writing, a request for payment to any other address, along with a
signature guarantee from a financial service organization.
Shareholder Services Guide 45
<PAGE>
Shareholder
Services
Guide
. To redeem shares in a retirement account, your request needs to be
in writing, except for exchanges to other ProFunds, which can be
requested by phone or in writing. Call the ProFunds to request a
retirement distribution form.
. Involuntary Redemptions: ProFunds reserves the right to redeem
involuntarily an investor's account, including a retirement account,
which falls below the applicable minimum investment in total value in
the ProFunds due to redemption. In addition, both a request for a
partial redemption by an investor whose account balance is below the
minimum investment and a request for partial redemption by an investor
that would bring the account below the minimum investment will be
treated as a request by the investor for a complete redemption of the
account.
. Redemption proceeds from the UltraEurope ProFund are made within
seven business days after the business date of the redemption. The
business date of these redemptions may be the business day following
the day your redemption request reaches ProFunds.
. Money Market ProFund shares begin accruing dividends on the day
ProFund's transfer agent, BISYS Fund Services, receives a purchase
order and payment in the form of a Federal funds wire. Purchases by
check begin earning dividends the business day following the business
day the check is received. They continue to earn dividends until the
business day that BISYS Fund Services has processed the redemption
order.
Suspension of Redemptions
Your right of redemption may be suspended, or the date of payment
postponed: (i) for any period during which the NYSE or the Federal
Reserve Bank of New York is closed (other than customary weekend or
holiday closings) or trading on the NYSE, or other securities
exchanges or markets as appropriate, is restricted, as determined by
the Securities and Exchange Commission ("SEC"); (ii) for any period
during which an emergency exists, as determined by the SEC, so that
disposal of a ProFund's investments or the determination of its net
asset value
46 Shareholder Services Guide
<PAGE>
Shareholder
Services
Guide
is not reasonably practicable; or (iii) for such other periods as the
SEC, by order, may permit for protection of ProFunds' investors.
Draft Checks
You may elect to redeem shares of the Money Market ProFund by draft
check ($500 minimum) made payable to the order of any person or
institution. If you are interested in this option, you must submit a
completed signature card to ProFunds. You will then be supplied with
draft checks that are drawn on the Money Market ProFund's account.
There is a $25 fee for stop payment requests on draft checks. This
option is not available to Individual Retirement Account shareholders.
Automatic Investment and Redemption Plans
Shareholders may buy and redeem shares automatically on a monthly,
bimonthly, quarterly or annual basis. The minimum automatic purchase
is $100 and the minimum automatic redemption is $500. These minimums
are waived for IRA shareholders 70 1/2 years of age or older.
About Telephone Transactions
. It may be difficult to reach ProFunds by telephone during periods
of heavy market activity or other times. If you are unable to reach us
by telephone, consider sending written instructions.
. You may initiate numerous transactions by telephone. Please note,
however, that the ProFunds and their agents will not be responsible
for losses resulting from unauthorized transactions when procedures
designed to verify the identity of the caller are followed.
Shareholder Services Guide 47
<PAGE>
[This page intentionally left blank]
48
<PAGE>
ProFunds
management
Board of Trustees and Officers
The ProFunds' Board of Trustees is responsible for the general
supervision of the ProFunds. The ProFunds' officers are responsible
for day-to-day operations of the ProFunds.
Investment Advisors
ProFund Advisors LLC
ProFund Advisors LLC, located at 7900 Wisconsin Avenue, Suite 300,
Bethesda, Maryland 20814, serves as the investment advisor to all of
the ProFunds except for the Money Market ProFund, providing investment
advice and management services. ProFund Advisors oversees the
investment and reinvestment of the assets in each Benchmark ProFund.
It is entitled to receive fees equal to 0.75% of the average daily net
assets of each Benchmark ProFund, except the UltraEurope ProFund and
UltraJapan ProFund, for which it is entitled to receive fees equal to
0.90% of the average daily net assets of each such ProFund. ProFund
Advisors bears the costs of providing advisory services. During the
year ended December 31, 1999 each operating Benchmark ProFund (which
excludes the UltraMid-Cap, UltraSmall-Cap and UltraJapan ProFunds)
paid ProFund Advisors fees in the following amounts:
Fees Paid (as a percentage of average daily net assets)
Bull ProFund 0.69% Bear ProFund 0.58%
UltraBull ProFund 0.75% UltraBear ProFund 0.75%
UltraOTC ProFund 0.75% UltraShort OTC ProFund 0.75%
UltraEurope ProFund 0.00%
ProFunds Management 49
<PAGE>
Michael L. Sapir, Chairman and Chief Executive Officer of ProFund
Advisors LLC, formerly served as senior vice president of Padco
Advisors, Inc., which advised Rydex(R) Funds. In addition, Mr. Sapir
practiced law, primarily representing financial institutions for over
13 years, most recently as a partner in a Washington-based law firm.
He holds degrees from Georgetown University Law Center (J.D.) and
University of Miami (M.B.A. and B.A.).
Louis M. Mayberg, President of ProFund Advisors LLC, co-founded
National Capital Companies, L.L.C., an investment bank specializing in
financial service companies mergers and acquisitions and equity
underwritings in 1986, and managed its financial services hedge fund.
He holds a Bachelor of Business Administration degree with a major in
Finance from George Washington University.
William E. Seale, Ph.D., Director of Portfolio for ProFund Advisors
LLC, has more than 30 years of experience in the financial markets.
His background includes a five-year presidential appointment as a
commissioner of the U.S. Commodity Futures Trading Commission and
Chairman of the Finance Department at George Washington University.
He earned his degrees at University of Kentucky.
Each Benchmark ProFund is managed by an investment team chaired by Dr.
Seale.
Bankers Trust Company
The Money Market ProFund seeks to achieve its investment objective by
investing all of its assets in a portfolio managed by Bankers Trust
Company, with headquarters at 130 Liberty Street, New York, NY 10006.
Bankers Trust makes the Portfolio's investment decisions and assumes
responsibility for the securities the Portfolio owns. It receives a
fee equal to 0.15% of the average daily net assets of the Portfolio.
As of December 31, 1999, Bankers Trust had total assets of
approximately $270 billion under management. Bankers Trust
50 ProFunds Management
<PAGE>
Company is dedicated to servicing the needs of corporations,
governments, financial institutions and private clients and has
invested retirement assets on behalf of the nation's largest
corporations for more than 50 years. The scope of the firm's
capability is broad--it is a leader in both the active and passive
quantitative investment disciplines and maintains a major presence in
stock and bond markets worldwide.
Other Service Providers
BISYS Fund Services, located at 3435 Stelzer Road, Suite 1000,
Columbus, Ohio 43219, acts as the administrator to the ProFunds,
providing operations, compliance and administrative services. Each
ProFund pays BISYS a fee, on a sliding scale, for its administrative
services. For average daily net assets up to $300 million, the fee is
0.15% of the assets, and it declines to 0.05% for average daily net
assets of $1 billion or more.
ProFund Advisors also performs client support and administrative
services for the ProFunds. ProFund Advisors is entitled to receive
fees equal to 0.15% of average daily net assets of each Benchmark
ProFund for such services. During the year ended December 31, 1999,
each operating Benchmark ProFund (which excludes the UltraMid-Cap,
UltraSmall-Cap and UltraJapan ProFunds) paid ProFund Advisors fees in
the following amounts:
Fees Paid (as a percentage of average daily net assets)
Bull ProFund 0.08% Bear ProFund 0.02%
UltraBull ProFund 0.15% UltraBear ProFund 0.15%
UltraOTC ProFund 0.15% UltraShort OTC ProFund 0.15%
UltraEurope ProFund 0.00%
During the year ended December 31, 1999, ProFund Advisors received
fees equal to 0.35% of average daily net assets from the Money Market
ProFund for client support and administrative services, and for feeder
fund management, administration and reporting with respect to the
Money Market ProFund's relationship to the Portfolio.
ProFunds Management 51
<PAGE>
Other Information
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's
500(R),""500(R)", and "S&P MidCap 400 Index" are trademarks of The
McGraw-Hill Companies, Inc. and have been licensed for use by
ProFunds. "Russell 2000(R) Index" is a trademark of the FrankRussell
Company. "NASDAQ 100 Index" is a trademark of the NASDAQ Stock
Markets, Inc. ("NASDAQ"). The ProFunds are not sponsored, endorsed,
sold or promoted by Standard & Poor's or NASDAQ or the Frank Russell
Company and neither Standard & Poor's nor NASDAQ nor the Frank Russell
Company makes any representation regarding the advisability of
investing in ProFunds.
If a ProFund does not grow to a size to permit it to be economically
viable, the Fund may cease operations. In such an event, investors may
be required to liquidate or transfer their investments at an
inopportune time.
(Please see the Statement of Additional Information which sets forth
certain additional disclaimers and limitations of liabilities on
behalf of S&P).
52 ProFunds Management
<PAGE>
Financial
highlights
The following tables provide a picture of the performance of each
share class of the ProFunds for each year ended December 31 since
inception. No information is presented for the UltraMid-Cap ProFund,
UltraSmall-Cap ProFund and UltraJapan ProFund as these ProFunds were
not in existence as of December 31, 1999. The total return information
selected represents the rate of return and the per share operating
performance that an investor would have earned on an investment in a
ProFund, assuming reinvestment of all dividends and distributions.
This information has been audited by PricewaterhouseCoopers LLP,
independent accountants, whose report on the financial statements of
the ProFunds appears in the ProFunds' annual report for the fiscal
year ended December 31, 1999. The annual report is available free of
charge by phoning 888-776-3637.
Financial Highlights 53
<PAGE>
Bull ProFund
Financial Highlights
For a share of beneficial interest outstanding
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Investor Class Service Class
For the For the For the period For the For the For the period
year year from Dec. 2, year year from Dec. 2,
Ended Ended 1997/(a)/ Ended Ended 1997/(a)/
Dec. 31, Dec. 31, to Dec. 31, Dec. 31, Dec. 31, to Dec. 31,
1999 1998 1997 1999 1998 1997
---------------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, $62.48 $49.45 $50.00 $62.12 $49.45 $50.00
beginning of period ------ ------ ------ ------ ------ ------
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 0.34 1.63/(d)/ 0.10 0.11 1.08/(d)/ --
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized 10.41 11.49 (0.65) 9.79 11.64 (0.55)
gain/(loss) on investment ------ ------ ------ ------ ------ ------
transactions and futures contracts
- -----------------------------------------------------------------------------------------------------------------------------
Total income/(loss) from 10.75 13.12 (0.55) 9.90 12.72 (0.55)
investment operations
- -----------------------------------------------------------------------------------------------------------------------------
Distribution to Shareholders from:
Net investment income (0.02) (0.04) -- -- --/(e)/ --
- -----------------------------------------------------------------------------------------------------------------------------
Net realized gains on (0.01) (0.05) -- (0.01) (0.05) --
investment transactions ------ ------ ------ ------ ------ ------
and futures contracts
- -----------------------------------------------------------------------------------------------------------------------------
Total distributions (0.03) (0.09) -- (0.01) (0.05) --
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $73.20 $62.48 $49.45 $72.01 $62.12 $49.45
====== ====== ====== ====== ====== ======
- -----------------------------------------------------------------------------------------------------------------------------
Total Return 17.18% 26.57% (1.10)%/(b)/ 15.97% 25.68% (1.10)%/(b)/
- -----------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of period $116,208,049 $7,543,922 $46,281 $30,879,600 $589,547 $10
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to 1.40% 1.63% 1.33%/(c)/ 2.35% 2.67% 1.33%/(c)/
average net assets
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment 1.96% 2.84% 2.97%/(c)/ 0.70% 1.89% 0.00%/(c)/
income to average
net assets
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net 1.53% 2.40% 423.48%/(c)/ 2.48% 3.30% 424.48%/(c)/
assets (before reimbursements)*
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover/(f)/ 1288% -- -- 1288% -- --
</TABLE>
*During the period, certain fees were voluntarily reduced and/or reimbursed. If
such voluntary fee reductions and/or reimbursements had not occurred, the ratio
would have been as indicated.
/(a)/ Commencement of operations.
/(b)/ Not annualized.
/(c)/ Annualized.
/(d)/ Per share net investment income has been calculated using the daily
average shares method.
/(e)/ Distribution per share was less than $0.005
/(f)/ Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
54 Financial Highlights
<PAGE>
UltraBull ProFund
Financial Highlights
For a share of beneficial interest outstanding
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Investor Class Service Class
For the For the For the period For the For the For the period
year year from Nov. 28, year year from Nov.28,
ended ended 1997/(a)/ ended ended 1997/(a)/
Dec. 31, Dec. 31, to Dec. 31, Dec. 31, Dec. 31, to Dec. 31,
1999 1998 1997 1999 1998 1997
----------------------------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, $18.36 $12.86 $12.50 $18.19 $12.86 $12.50
beginning of period* ------ ------ ------ ------ ------ ------
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.35 0.39/(d)/ 0.01 0.08 0.24/(d)/ 0.01
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized 5.08 5.13 0.35 5.09 5.10 0.35
gain on investment transactions ------ ------ ------ ------ ------ ------
and futures contracts
- ------------------------------------------------------------------------------------------------------------------------------------
Total income from 5.43 5.52 0.36 5.17 5.34 0.36
investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Distribution to Shareholders from:
Net investment income (0.03) (0.01) -- -- --/(e)/ --
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment -- (0.01) -- -- (0.01) --
transactions and futures contracts
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized gains on
investments and futures contracts (0.09) -- -- (0.09) -- --
------ ------ ------ ------ ------ ------
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.12) (0.02) -- (0.09) (0.01) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $23.67 $18.36 $12.86 $23.27 $18.19 $12.86
====== ====== ====== ====== ====== ======
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 29.56% 42.95% 2.90%/(b)/ 28.42% 41.48% 2.90%/(b)/
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets at end of period $155,987,050 $90,854,397 $6,043,740 $70,219,680 $10,991,484 $2,394,297
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to 1.34% 1.50% 1.33%/(c)/ 2.34% 2.39% 1.33%/(c)/
average net assets
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment 1.99% 2.43% 2.26%/(c)/ 0.79% 1.53% 1.69%/(c)/
income to average
net assets
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net 1.36% 1.70% 12.69%/(c)/ 2.36% 2.84% 13.69%/(c)/
assets (before reimbursements)**
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover/(f)/ 764% -- -- 764% -- --
</TABLE>
* Adjusted for 4:1 stock split that occurred on July 16, 1999.
** During the period, certain fees were voluntarily reduced and/or
reimbursed. If such voluntary fee reductions and/or reimbursements had not
occurred, the ratio would have been as indicated.
/(a)/ Commencement of operations.
/(b)/ Not annualized.
/(c)/ Annualized.
/(d)/ Per share net investment income has been calculated using the daily
average shares method.
/(e)/ Distribution per share was less than $0.005
/(f)/ Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
Financial Highlights 55
<PAGE>
UltraOTC ProFund
Financial Highlights
For a share of beneficial interest outstanding
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Investor Class Service Class
For the For the For the period For the For the For the period
year year from Dec. 2, year year from Dec. 2,
ended ended 1997/(a)/ ended ended 1997/(a)/
Dec. 31, Dec. 31, to Dec. 31, Dec. 31, Dec. 31, to Dec. 31,
1999 1998 1997 1999 1998 1997
-------------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, $29.82 $10.45 $12.50 $29.68 $10.45 $12.50
beginning of period* ------ ------ ------ ------ ------ ------
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income (0.16) 0.20/(d)/ 0.08 (0.64) 0.10/(d)/ --
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized 69.68 19.17 (2.13) 68.82 19.13 (2.05)
gain/(loss) on investment ------ ------ ------ ------ ------ ------
transactions and futures contracts
- -----------------------------------------------------------------------------------------------------------------------------------
Total income/(loss) from 69.52 19.37 (2.05) 68.18 19.23 (2.05)
investment operations
- -----------------------------------------------------------------------------------------------------------------------------------
Distribution to Shareholders from:
Net investment income --/(e)/ --/(e)/ -- -- --/(e)/ --
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized gains on investments (0.46) -- -- (0.46) -- --
and futures contracts ------ ------ ------ ------ ------ ------
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.46) -- -- (0.46) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $98.88 $29.82 $10.45 $97.40 $29.68 $10.45
====== ====== ====== ====== ====== ======
- -----------------------------------------------------------------------------------------------------------------------------------
Total return 233.25% 185.34% (16.40)%/(b)/ 229.73% 183.98% (16.40)%/(b)/
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of period $1,216,220,142 $239,017,203 $256,184 $134,837,724 $32,391,937 $663,984
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to 1.31% 1.47% 1.07%/(c)/ 2.30% 2.38% 1.75%/(c)/
average net assets
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment (0.50)% 1.05% 2.73%/(c)/ (1.49)% 0.07% (0.06)%/(c)/
income to average
net assets
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net 1.33% 1.67% 21.74%/(c)/ 2.32% 2.61% 23.42%/(c)/
assets (before reimbursements)**
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover/(f)/ 670% 156% -- 670% 156% --
</TABLE>
* Adjusted for 4:1 stock split that occurred on July 16, 1999.
** During the period, certain fees were voluntarily reduced and/or
reimbursed. If such voluntary fee reductions and/or reimbursements had not
occurred, the ratio would have been as indicated.
/(a)/ Commencement of operations.
/(b)/ Not annualized.
/(c)/ Annualized.
/(d)/ Per share net investment income has been calculated using the daily
average shares method.
/(e)/ Distribution per share was less than $0.005
/(f)/ Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
56 Financial Highlights
<PAGE>
UltraEurope ProFund
Financial Highlights
For a share of beneficial interest outstanding
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Investor Class Service Class
For the period For the period
from March 15, from March 15,
1999/(a)/ 1999/(a)/
through Dec. 31, through Dec. 31,
1999 1999
-------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $30.00 $30.00
------ ------
- --------------------------------------------------------------------------------------------
Net investment income 0.19 0.03
- --------------------------------------------------------------------------------------------
Net realized and unrealized gain/(loss) 10.80 10.69
on investment transactions and ------ ------
futures contracts
- --------------------------------------------------------------------------------------------
Total income/(loss) from investment operations 10.99 10.72
- --------------------------------------------------------------------------------------------
Distribution to Shareholders from:
Net investment income -- --
- --------------------------------------------------------------------------------------------
Total distributions -- --
- --------------------------------------------------------------------------------------------
Net asset value, end of period $40.99 $40.72
====== ======
- --------------------------------------------------------------------------------------------
Total Return 36.63%/(b)/ 35.73%/(b)/
- --------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of period $5,560,299 $18,960,052
- --------------------------------------------------------------------------------------------
Ratio of expenses to average net assets 1.53%/(c)/ 2.50%/(c)/
- --------------------------------------------------------------------------------------------
Ratio of net investment income to average 1.79%/(c)/ 0.46%/(c)/
net assets
- --------------------------------------------------------------------------------------------
Ratio of expenses to average net assets 2.53%/(c)/ 3.58%/(c)/
(before reimbursements)*
- --------------------------------------------------------------------------------------------
Portfolio Turnover/(d)/ 514% 514%
</TABLE>
* During the period, certain fees were voluntarily reduced and/or
reimbursed. If such voluntary fee reductions and/or reimbursements had not
occurred, the ratio would have been as indicated.
/(a)/ Commencement of operations.
/(b)/ Not annualized.
/(c)/ Annualized.
/(d)/ Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
Financial Highlights 57
<PAGE>
Bear ProFund
Financial Highlights
For a share of beneficial interest outstanding
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Investor Class Service Class
For the For the For the period For the For the For the period
year year from Dec. 31, year year from Dec. 31,
ended ended 1997/(a)/ ended ended 1997/(a)/
Dec. 31, Dec. 31, to Dec. 31, Dec. 31, Dec. 31, to Dec. 31,
1999 1998 1997 1999 1998 1997
---------------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, $39.88 $50.00 $50.00 $39.76 $50.00 $50.00
beginning of period ------ ------ ------ ------ ------ ------
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 1.10/(d)/ 1.47/(d)/ -- 0.63/(d)/ 0.87/(d)/ --
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized (5.97) (11.22) -- (5.92) (10.88) --
(loss) on investment transactions ------ ------ ------ ------ ------ ------
and futures contracts
- -----------------------------------------------------------------------------------------------------------------------------
Total (loss) from (4.87) (9.75) -- (5.29) (10.01) --
investment operations
- -----------------------------------------------------------------------------------------------------------------------------
Distribution to Shareholders from:
Net investment income (4.83) (0.37) -- (4.61) (0.23) --
- -----------------------------------------------------------------------------------------------------------------------------
Net realized gains on -- --/(e)/ -- -- --/(e)/ --
investment transactions ------ ------ ------ ------ ------ ------
and futures contracts
- -----------------------------------------------------------------------------------------------------------------------------
Total distributions (4.83) (0.37) -- (4.61) (0.23) --
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $30.18 $39.88 $50.00 $29.86 $39.76 $50.00
====== ====== ====== ====== ====== ======
- -----------------------------------------------------------------------------------------------------------------------------
Total return (12.32)% (19.46)% 0.00%/(b)/ (13.32)% (20.04)% 0.00%/(b)/
- -----------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of period $2,330,573 $4,166,787 $2,516,412 $1,095,326 $379,670 $10
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to 1.40% 1.54% 0.00%/(c)/ 2.23% 2.49% 0.00%/(c)/
average net assets
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment 2.86% 3.12% 0.00%/(c)/ 1.69% 1.90% 0.00%/(c)/
income to average
net assets
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net 1.68% 3.26% 325.97%/(c)/ 2.91% 4.09% 326.97%/(c)/
assets (before reimbursements)*
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover/(f)/ 1215% -- -- 1215% -- --
</TABLE>
* During the period, certain fees were voluntarily reduced and/or
reimbursed. If such voluntary fee reductions and/or reimbursements had not
occurred, the ratio would have been as indicated.
/(a)/ Commencement of operations.
/(b)/ Not annualized.
/(c)/ Annualized.
/(d)/ Per share net investment income has been calculated using the daily
average shares method.
/(e)/ Distribution per share was less than $0.005
/(f)/ Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
58 Financial Highlights
<PAGE>
UltraBear ProFund
Financial Highlights
For a share of beneficial interest outstanding
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Investor Class Service Class
For the For the For the period For the For the For the period
year year from Dec. 23, year year from Dec. 23,
ended ended 1997/(a)/ ended ended 1997/(a)/
Dec. 31, Dec. 31, to Dec. 31, Dec. 31, Dec. 31, to Dec. 31,
1999 1998 1997 1999 1998 1997
-------------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, $31.88 $51.80 $50.00 $31.83 $51.75 $50.00
beginning of period ------ ------ ------ ------ ------- ------
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income 0.84 1.16/(d)/ 6,082.50/(e)/ 0.54 0.75/(d)/ --
- ----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized (10.55) (21.04) (6,080.70)/(e)/ (10.45) (20.67) 1.75
gain/(loss) on investment ------ ------ ------ ------ ------- ------
transactions and futures contracts
- ----------------------------------------------------------------------------------------------------------------------------
Total income/(loss) from (9.71) (19.88) 1.80 (9.91) (19.92) 1.75
investment operations
- ----------------------------------------------------------------------------------------------------------------------------
Distribution to Shareholders from:
Net investment income (0.86) (0.04) -- (0.41) -- --
- ----------------------------------------------------------------------------------------------------------------------------
Total distributions (0.86) (0.04) -- (0.41) -- --
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $21.31 $31.88 $51.80 $21.51 $31.83 $51.75
====== ====== ====== ====== ====== ======
- ----------------------------------------------------------------------------------------------------------------------------
Total Return (30.54)% (38.34)% 3.60%/(b)/ (31.20)% (38.45)% 3.50%/(b)/
- ----------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of period $32,534,046 $27,939,876 $21 $4,289,259 $3,012,328 $10
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to 1.41% 1.57% 1.33%/(c)/ 2.41% 2.45% 1.33%/(c)/
average net assets
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment 2.20% 2.73% 2.97%/(c)/ 1.21% 1.74% 0.00%/(c)/
income to average
net assets
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net 1.43% 1.78% 32.39%/(c)/ 2.42% 2.74% 33.39%/(c)/
assets (before reimbursements)*
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover/(f)/ 1137% -- -- 1137% -- --
</TABLE>
* During the period, certain fees were voluntarily reduced and/or
reimbursed. If such voluntary fee reductions and/or reimbursements had not
occurred, the ratio would have been as indicated.
/(a)/ Commencement of operations.
/(b)/ Not annualized.
/(c)/ Annualized.
/(d)/ Per share net investment income has been calculated using the daily
average shares method.
/(e)/ The amount shown for a share outstanding throughout the period does not
accord with the earned income or the change in aggregate gains and losses
in the portfolio of securities during the period because of the timing of
sales and purchases of fund shares in relation to fluctuating market
values during the period.
/(f)/ Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
Financial Highlights 59
<PAGE>
UltraShort OTC ProFund
Financial Highlights
For a share of beneficial interest outstanding
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Investor Class Service Class
For the period For the period
For the from June 2, 1998/(a)/ For the from June 2, 1998/(a)/
year ended through year ended through
Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1999 Dec. 31, 1998
------------- ------------- ------------- ----------------------
<S> <C> <C> <C> <C>
Net asset value, $243.60 $750.00 $243.60 $750.00
beginning of period* ------- ------- ------- -------
- ------------------------------------------------------------------------------------------------------------------
Net investment income 1.82 3.90/(d)/ 1.11 1.50/(d)/
- ------------------------------------------------------------------------------------------------------------------
Net realized and unrealized (197.61) (510.30) (197.45) (507.90)
(loss) on investment transactions ------- ------- ------- -------
and futures contracts
- ------------------------------------------------------------------------------------------------------------------
Total (loss) from (195.79) (506.40) (196.34) (506.40)
investment operations
- ------------------------------------------------------------------------------------------------------------------
Distribution to Shareholders from:
Net investment income (1.83) --/(e)/ (0.89) --
- ------------------------------------------------------------------------------------------------------------------
Total distributions (1.83) --/(e)/ (0.89) --
- ------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $45.98 $243.60 $46.37 $243.60
====== ======= ====== =======
- ------------------------------------------------------------------------------------------------------------------
Total Return (80.36)% (67.48)%/(b)/ (80.62)% (67.50)%/(b)/
- ------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of period $38,254,638 $19,465,372 $1,009,722 $855,392
- ------------------------------------------------------------------------------------------------------------------
Ratio of expenses to 1.44% 1.83%/(c)/ 2.45% 2.92%/(c)/
average net assets
- ------------------------------------------------------------------------------------------------------------------
Ratio of net investment 2.18% 1.55%/(c)/ 1.21% 0.54%/(c)/
income to average
net assets
- ------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net 1.45% 1.98%/(c)/ 2.46% 3.06%/(c)/
assets (before reimbursements)**
- ------------------------------------------------------------------------------------------------------------------
Portfolio Turnover/(f)/ 1185% -- 1185% --
</TABLE>
* Adjusted for 15:1 reverse stock split that occurred on February 11, 2000.
** During the period, certain fees were voluntarily reduced and/or
reimbursed. If such voluntary fee reductions and/or reimbursements had not
occurred, the ratio would have been as indicated.
/(a)/ Commencement of operations.
/(b)/ Not annualized.
/(c)/ Annualized.
/(d)/ Per share net investment income has been calculated using the daily
average shares method.
/(e)/ Distribution per share was less than $0.005
/(f)/ Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
60 Financial Highlights
<PAGE>
Money Market ProFund
Financial Highlights
For a share of beneficial interest outstanding
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Investor Class Service Class
For the For the For the period For the For the For the period
year year from Nov. 17, year year from Nov. 17,
ended ended 1997/(a)/ ended ended 1997/(a)
Dec. 31, Dec. 31, to Dec. 31, Dec. 31, Dec. 31, to Dec.31,
1999 1998 1997 1999 1998 1997
---------------------------------------------- ----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
beginning of period ------- ------- ------- ------- ------- -------
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.044 0.047/(d)/ 0.006 0.034 0.037/(d)/ --
- ----------------------------------------------------------------------------------------------------------------------------------
Total income from 0.044 0.047 0.006 0.034 0.037 --
investment operations
- ----------------------------------------------------------------------------------------------------------------------------------
Distribution to Shareholders from:
Net investment income (0.044) (0.047) (0.006) (0.034) (0.037) --
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.044) (0.047) (0.006) (0.034) (0.037) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= ======= =======
- ----------------------------------------------------------------------------------------------------------------------------------
Total Return 4.48% 4.84% 0.61%/(b)/ 3.44% 3.81% 0.21%/(b)/
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of period $198,555,252 $62,026,228 $286,962 $107,944,066 $15,406,187 $2,510
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to 0.83%/(e)/ 0.85%/(e)/ 0.83%/(c),(e)/ 1.83%/(e)/ 1.87%/(e)/ 1.83%/(c),(e)/
average net assets
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment 4.46% 4.81% 4.92%(c) 3.45% 3.43% 2.53%/(c)/
income to average
net assets
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net 0.83%/(e)/ 1.18%/(e)/ 9.52%/(c),(e)/ 1.83%/(e)/ 2.18%/(e)/ 10.52%/(c),(e)/
assets (before reimbursements)*
</TABLE>
* During the period, certain fees were voluntarily reduced and/or
reimbursed. If such voluntary fee reductions and/or reimbursements had not
occurred, the ratio would have been as indicated.
/(a)/ Commencement of operations.
/(b)/ Not annualized.
/(c)/ Annualized.
/(d)/ Per share net investment income has been calculated using the daily
average shares method.
/(e)/ The Money Market ProFund expense ratio includes the expense allocation of
the Portfolio.
Financial Highlights 61
<PAGE>
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62
<PAGE>
[This page intentionally left blank]
63
<PAGE>
[This page intentionally left blank]
64
<PAGE>
Additional Information about ProFunds' investments is available in ProFunds'
annual and semi-annual reports to shareholders. In ProFunds' annual report you
will find a discussion of the market conditions and investment strategies that
significantly affected performance during the last fiscal year.
You can find more detailed information about ProFunds in its current
Statement of Additional Information, dated May 1, 2000, which we have filed
electronically with the Securities and Exchange Commission (SEC) and which is
incorporated by reference into, and is legally a part of, this prospectus. To
receive your free copy of a Statement of Additional Information, or the annual
or semi-annual reports, or if you have questions about investing in ProFunds,
write us at:
ProFunds
P.O. Box 182800
Columbus, OH 43218-2800
or call our toll-free numbers:
(888) PRO-FNDS (888) 776-3637 For Investors
(888) PRO-5717 (888) 776-5717 Financial Professionals Only
or visit our website www.profunds.com
You can find other information about ProFunds on the SEC's website
(http://www.sec.gov), or you can get copies of this information, after payment
of a duplicating fee, by writing to the Public Reference Section of the SEC,
Washington, D.C. 20549-6009. Information about the ProFunds, including their
Statement of Additional Information, can be reviewed and copied at the SEC's
Public Reference Room in Washington, D.C. For information on the Public
Reference Room, call the SEC at (800) SEC-0330.
ProFunds Executive Offices
Bethesda, MD
[ProFunds Logo]
Innovations in Indexing
811-08239
PROBK
<PAGE>
- --------------------------------------------------------------------------------
MAY 1, 2000
PROSPECTUS
THE PROFUNDS VP
PROFUND VP ULTRAOTC
PROFUND VP ULTRASMALL-CAP (FORMERLY, PROFUND VP SMALL CAP)
PROFUND VP EUROPE 30
[LOGO OMITTED]
This prospectus should be read in conjunction with the separate account's
prospectus describing the variable insurance contract in which you invest.
Please read both prospectuses and retain them for future reference.
Like shares of all mutual funds, these securities have not been approved or
disapproved by the Securities and Exchange Commission nor has the Securities and
Exchange Commission passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
1 ProFunds VP Overview
9 ProFunds VP Strategy
13 General Information
19 ProFunds VP Management
23 Similar Fund Performance
25 Financial Highlights
[LOGO OMITTED] PROFUND ADVISORS LLC
INVESTMENT ADVISORS
<PAGE>
----------------------
THE PROFUNDS VP
overview
----------------------
OBJECTIVES
The ProFunds included in this prospectus ("ProFunds VP") each
seek to achieve a daily return equal to the performance of a
particular stock market BENCHMARK.*
o PROFUND VP ULTRAOTC ("ULTRAOTC VP")--seeks daily investment
results that correspond to twice (200%) the performance of the
NASDAQ 100 Index(TM). If UltraOTC VP is successful in meeting
its objective, it should gain approximately twice as much as
the growth oriented NASDAQ 100 Index(TM) when the prices of
the securities in that index rise on a given day and should
lose approximately twice as much when such prices decline.
o PROFUND VP ULTRASMALL-CAP ("ULTRASMALL-CAP VP")--seeks daily
investment results that correspond to twice (200%) the
performance of the Russell 2000(R) Index. If the
UltraSmall-Cap VP is successful in meeting its objective, it
should gain approximately twice as much as the Russell 2000(R)
Index when the prices of the securities in that index rise on
a given day and should lose approximately twice as much when
such prices decline.
Prior to May 1, 2000, UltraSmall-Cap VP was named "ProFund VP
Small Cap" and sought daily investment results that
corresponded to the performance of the Russell 2000(R) Index.
o PROFUND VP EUROPE 30 ("EUROPE 30 VP")--seeks daily
investment results that correspond to the performance of the
ProFunds Europe 30 Index.
The securities indexes that the ProFunds VP use as their
benchmarks are described below under "Benchmark Indexes."
*A benchmark can be any standard of investment performance to
which a mutual fund seeks to match its return, such as a stock
index. A stock index reflects the price of a group of stocks
of specified companies.
PROFUNDS VP OVERVIEW 1
<PAGE>
THE FOLLOWING CHART SUMMARIZES THE PROFUNDS VP:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
PROFUNDS VP INDEX DAILY OBJECTIVE TYPES OF COMPANIES IN INDEX
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UltraOTC VP NASDAQ 100 Double Large capitalization, most with
technology and/or growth
orientation
UltraSmall-Cap VP Russell 2000 Double Diverse, small capitalization
Europe 30 VP ProFunds Europe 30 Match Large capitalization European
stocks represented by American
Depository Receipts
- --------------------------------------------------------------------------------------------------
</TABLE>
STRATEGY
The investments made by a ProFund VP and the results achieved
by the ProFund VP at any given time are not expected to be the
same as those made by other mutual funds for which ProFund
Advisors LLC ("ProFund Advisors") acts as investment advisor,
including mutual funds with names, investment objectives and
policies similar to the ProFund VP. Investors should carefully
consider their investment goals and willingness to tolerate
investment risk before allocating their investment to a
ProFund VP.
ProFund Advisors uses quantitative and statistical analysis it
developed in seeking to achieve each ProFund VP's investment
objective. This analysis determines the type, quantity and mix
of investment positions that a ProFund VP should hold to
approximate the performance of its benchmark.
ULTRAOTC VP, ULTRASMALL-CAP VP, and EUROPE 30 VP may invest in
stocks that ProFund Advisors believe should simulate the
movement of the applicable underlying index. In addition all
the ProFunds VP may invest in the following instruments as a
substitute for investing directly in stocks, achieving
leverage for UltraOTC VP and UltraSmall-Cap VP and for other
purposes:
o Futures contracts on stock indexes, and options on futures
contracts; and
2 PROFUNDS VP OVERVIEW
<PAGE>
o Financial instruments such as equity caps, collars and
floors, swaps, depository receipts, and options on securities
and stock indexes.
ULTRAOTC VP and ULTRASMALL-CAP VP (THE "ULTRA PROFUNDSVP")
generally invest in the above instruments to produce
economically "leveraged" investment results. Leverage is a way
to change small market movements into larger changes in the
value of a ProFunds VP's investments.
INVESTMENT RISKS
Like all investments, the ProFunds VP entail risk. ProFund
Advisors cannot guarantee that any of the ProFunds VP will
achieve its objective. As with any mutual fund, the ProFunds
VP could lose money, or their performance could trail that of
other investment alternatives.
In addition, the ProFunds VP may present some risks not
traditionally associated with most mutual funds. It is
important that investors closely review and understand these
risks before making an investment in the ProFunds VP.
The following chart summarizes certain risks associated with
the ProFunds VP:
<TABLE>
<CAPTION>
MARKET RISK LEVERAGE RISK FOREIGN RISK SMALL CAPITALIZATION RISK
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
UltraOTC VP X X
UltraSmall-Cap VP X X X
Europe 30 VP X X
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
These and other risks are described below.
PROFUNDS VP OVERVIEW 3
<PAGE>
CERTAIN RISKS ASSOCIATED WITH PARTICULAR PROFUNDS
o LEVERAGE RISK The Ultra ProFunds VP employ leveraged
investment techniques. Leverage is the ability to get a return
on a capital base that is larger than a ProFund VP's
investment. Use of leverage can magnify the effects of changes
in the value of a ProFund VP and makes it more volatile. The
leveraged investment techniques that the Ultra ProFunds VP
employ should cause investors in these Ultra ProFunds VP to
lose more money in adverse environments.
o SMALL COMPANY INVESTMENT RISK The UltraSmall-Cap VP could
experience greater risks than a fund which invests primarily
in large capitalized, widely traded companies, such as:
o Small company stocks tend to have greater fluctuations
in price than the stocks of larger companies.
o There can be a shortage of reliable information on
certain small companies, which at times can pose risk.
o Small companies tend to lack the financial and personnel
resources to handle industry wide setbacks and, as a
result, such setbacks could have a greater effect on the
small companies' share prices.
o Small company stocks are typically less liquid than
large company stocks and liquidating positions in
turbulent market conditions could become difficult.
o FOREIGN INVESTMENT RISK Europe 30 VP entails the risk of
foreign investing, which may involve risks not typically
associated with investing in U.S. securities alone:
o Many foreign countries lack uniform accounting and
disclosure standards, or have standards that differ from
U.S. standards. Accordingly, Europe 30 VP may not have
access to adequate or reliable company information.
o Europe 30 VP will be subject to the market, economic and
political risks of the countries where it invests or where
the companies represented in its benchmark are located.
4 PROFUNDS VP OVERVIEW
<PAGE>
o The value of American Depository Receipts ("ADRs") could
change significantly as the currencies strengthen or
weaken relative to the U.S. dollar. ProFund Advisors does
not engage in activities designed to hedge against foreign
currency fluctuations.
o On January 1, 1999, the eleven nations of the European
Monetary Union, including Germany and France, began the
process of introducing a uniform currency. The new
currency, the euro, is expected to reshape financial
markets, banking systems and monetary policy in Europe and
throughout the world. The continued transition to the euro
may also have a worldwide impact on the economic
environment and behavior of investors.
RISKS IN COMMON
Each ProFund VP faces certain risks:
o MARKET RISK The ProFunds VP are subject to market risks that
will affect the value of their shares, including general
economic and market conditions, as well as developments that
impact specific industries or companies. Shareholders in the
ProFunds VP should lose money when the index underlying their
benchmark declines. These indexes are discussed in the next
section.
o LIQUIDITY RISK In certain circumstances, such as a
disruption of the orderly markets for the financial
instruments in which they invest, the ProFunds VP might not be
able to dispose of certain holdings quickly or at prices that
represent true market value in the judgment of ProFund
Advisors. This may prevent the ProFunds VP from limiting
losses or realizing gains.
PROFUNDS VP OVERVIEW 5
<PAGE>
o CORRELATION RISK While ProFund Advisors expects that each of
the ProFunds VP will track its benchmark with an average
correlation of .90 or better over a year, there can be no
guarantee that the ProFunds VP will be able to achieve this
level of correlation. The ability of a ProFund VP to track its
benchmark may be affected by numerous factors. Actual
purchases and sales of the shares of the ProFunds VP by
insurance company separate accounts may differ from estimated
transactions reported to the ProFunds VP by the insurance
companies prior to the time the ProFunds VP share prices are
calculated. Any such difference could significantly and
adversely affect the performance and correlation of the
ProFunds VP. A failure to achieve a high degree of correlation
may prevent a ProFund VP from achieving its investment goal.
o NON-DIVERSIFICATION RISK The ProFunds VP are classified as
"non-diversified" under the federal securities laws. They have
the ability to concentrate a relatively high percentage of
their investments in the securities of a small number of
companies, if ProFund Advisors determines that doing so is the
most efficient means of tracking the relevant benchmark. This
would make the performance of a ProFund VP more susceptible to
a single economic, political or regulatory event than a more
diversified mutual fund might be. Nevertheless, the ProFunds
VP intend to invest on a diversified basis.
o RISKS OF AGGRESSIVE INVESTMENT TECHNIQUES The ProFunds VP
use investment techniques that may be considered aggressive.
Risks associated with the use of options, futures contracts,
and options on futures contracts include potentially dramatic
price changes (losses) in the value of the instruments and
imperfect correlations between the price of the contract and
the underlying security or index.
6 PROFUNDS VP OVERVIEW
<PAGE>
BENCHMARK INDEXES
o THE NASDAQ 100(TM) INDEX contains 100 of the largest and
most active non-financial domestic and international issues
listed on the NASDAQ Stock Market ("NASDAQ") based on market
capitalization. Eligibility criteria for the NASDAQ 100(TM)
Index includes a minimum average daily trading volume of
100,000 shares. If the security is a foreign security, the
company must have a world wide market value of at least $10
billion, a U.S. market value of at least $4 billion, and
average trading volume of at least 200,000 shares per day.
o THE RUSSELL 2000(R) INDEX is an unmanaged index consisting
of 2,000 small company common stocks. The Index comprises
2,000 of the smallest U.S. domiciled publicly traded common
stocks that are included in the Russell 3000(R) Index. These
common stocks represent approximately 8% of the total market
capitalization of the Russell 3000(R) Index which, in turn,
represents approximately 98% of the publicly traded U.S.
equity market.
o PROFUNDS EUROPE 30 INDEX, created by ProFund Advisors, is
composed of the 30 European companies whose securities are
traded on U.S. exchanges or on the NASDAQ as ADRs with the
highest market capitalization determined annually. The
component companies of the Index as of the date of this
Prospectus are listed in an appendix to the Statement of
Additional Information.
The Board of Trustees may change a ProFund VP's investment
objective without shareholder approval including, for example,
it believes another benchmark might better suit shareholder
needs.
PROFUNDS VP OVERVIEW 7
<PAGE>
WHO MAY WANT TO CONSIDER AN INVESTMENT
EUROPE 30 VP may be appropriate for investors who want to
receive investment results approximating the performance of
the ProFunds Europe 30 Index.
ULTRAOTC VP and ULTRASMALL-CAP VP may be appropriate for
investors who:
o believe that over the long term, the value of a particular
index will increase, and that by investing with the objective
of doubling the index's daily return they will achieve
superior results over time. Since each Ultra ProFund VP seeks
to double the daily performance of its benchmark index, it
should have twice the volatility of a conventional index fund
and twice the potential risk of loss.
o are seeking to match an index's daily return with half the
investment required of conventional stock index mutual funds.
--------------------------------------------------------------
An investor might invest $100,000 in a NASDAQ 100 Index
Fund. Alternatively that same investor could invest half
that amount-$50,000-in UltraOTC VP and target the same
daily return.
--------------------------------------------------------------
ALL OF THE PROFUNDS VP may be appropriate for investors who
are executing a strategy that relies on frequent buying,
selling or exchanging among stock mutual funds, since the
ProFunds VP do not limit how often an investor may exchange
among ProFunds VP.
FUND PERFORMANCE
Because the ProFunds VP have less than one calendar year of
performance, past-performance information is not provided for
comparison against the performance of other mutual funds or
broad measures of securities market performance, such as
securities indexes.
8 PROFUNDS VP OVERVIEW
<PAGE>
--------------------
PROFUNDS VP
strategy
--------------------
WHAT THE PROFUNDS VP DO
Each ProFund VP:
o Seeks to provide its investors with predictable investment
returns approximating its benchmark by investing in securities
and other financial instruments, such as futures and options
on futures.
o Uses a mathematical and quantitative approach.
o Pursues its objective regardless of market conditions,
trends or direction.
o Seeks to provide correlation with its benchmark on a daily
basis.
WHAT THE PROFUNDS VP DO NOT DO
ProFund Advisors does not:
o Conduct conventional stock research or analysis or forecast
stock market movement in managing the assets of the ProFunds
VP.
o Invest the assets of the ProFunds VP in stocks or
instruments based on ProFund Advisors' view of the fundamental
prospects of particular companies.
o Adopt defensive positions by investing in cash or other
instruments in anticipation of an adverse climate for the
benchmark indexes of the ProFunds VP.
o Invest to realize dividend income from their investments.
PROFUNDS VP STRATEGY 9
<PAGE>
o Attempt to provide correlation with a benchmark over a
period of time other than daily, such as monthly or annually,
since mathematical compounding prevents the ProFunds VP from
achieving such results.
IMPORTANT CONCEPTS
o LEVERAGE offers a means of magnifying small market
movements, up or down, into large changes in an investment's
value.
o FUTURES, or FUTURES CONTRACTS, are contracts to pay a fixed
price for an agreed-upon amount of commodities or securities,
or the cash value of the commodity or securities, on an
agreed-upon date.
o OPTION CONTRACTS grant one party a right, for a price,
either to buy or sell a security or futures contract at a
fixed sum during a specified period or on a specified day.
o AMERICAN DEPOSITORY RECEIPTS represent the right to receive
securities of foreign issuers deposited in a bank or trust
company. ADRs are an alternative to purchasing the underlying
securities in their national markets and currencies.
Investment in ADRs has certain advantages over direct
investment in the underlying foreign securities since: (i)
ADRs are U.S. dollar-denominated investments that are easily
transferable and for which market quotations are readily
available, and (ii) issuers whose securities are represented
by ADRs are generally subject to auditing, accounting and
financial reporting standards similar to those applied to
domestic issuers.
10 PROFUNDS VP STRATEGY
<PAGE>
PORTFOLIO TURNOVER
ProFund Advisors expects a significant portion of the assets
of the ProFunds VP to come from professional money managers
and investors who use the ProFunds VP as part of "market
timing" investment strategies. These strategies often call for
frequent trading of ProFund VP shares to take advantage of
anticipated changes in market conditions. Although ProFund
Advisors believes its accounting methodology should minimize
the effect on the ProFunds VP of such trading, market timing
trading could increase the rate of portfolio turnover,
increasing transaction expenses. In addition, while the
ProFunds VP do not expect it, large movements of assets into
and out of the ProFunds VP may negatively impact their
abilities to achieve their investment objectives or their
levels of operating expenses.
PROFUNDS VP STRATEGY 11
<PAGE>
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12
<PAGE>
--------------------
GENERAL
information
--------------------
CALCULATING THE FUNDS' SHARE PRICES
Each ProFund VP calculates daily share prices on the basis of
the net asset value of its shares at the close of regular
trading on the New York Stock Exchange ("NYSE") (normally,
4:00 p.m., Eastern time) every day the NYSE and the Chicago
Mercantile Exchange are open for business.
Purchases and redemptions of shares are effected at the net
asset value per share next determined after receipt and
acceptance of an order. If portfolio investments of a ProFund
VP are traded in markets on days when the ProFund VP's
principal trading market(s) is closed, the ProFund VP's net
asset value may vary on days when investors cannot purchase or
redeem shares.
The ProFunds VP value shares by dividing the market value of
the assets attributable to a ProFund VP, less the liabilities
attributable to the ProFund VP, by the number of its
outstanding shares. The ProFunds VP use the following methods
for arriving at the current market price of investments held
by them:
o securities listed and traded on exchanges--the last price
the stock traded at on a given day, or if there were no sales,
the mean between the closing bid and asked prices.
o securities traded over-the-counter--NASDAQ-supplied
information on the prevailing bid and asked prices.
GENERAL INFORMATION 13
<PAGE>
o futures contracts and options on indexes and securities--the
last sale price prior to the close of regular trading on the
NYSE.
o options on futures contracts--priced at fair value
determined with reference to established future exchanges.
o bonds and convertible bonds generally are valued using a
third-party pricing system.
o short-term debt securities are valued at amortized cost,
which approximates market value.
When price quotes are not readily available, securities and
other assets are valued at fair value in good faith under
procedures established by, and under the general supervision
and responsibility of, the Board of Trustees. This procedure
incurs the unavoidable risk that the valuation may be higher
or lower than the securities might actually command if the
ProFunds VP sold them. In the event that a trading halt closes
the NYSE or a futures exchange early, portfolio investments
may be valued at fair value, or in a manner that is different
from the discussion above. See the Statement of Additional
Information for more details.
THE NEW YORK STOCK EXCHANGE and the CHICAGO MERCANTILE
EXCHANGE, a leading market for futures and options, are open
every week, Monday through Friday, except when the following
holidays are celebrated: New Year's Day, Martin Luther King,
Jr. Day (the third Monday in January), Presidents' Day (the
third Monday in February), Good Friday, Memorial Day (the last
Monday in May), July 4th, Labor Day (the first Monday in
September), Thanksgiving Day (the fourth Thursday in November)
and Christmas Day. Either or both of these Exchanges may close
early on the business day before each of these holidays.
Either or both of these Exchanges also may close early on the
day after Thanksgiving Day and the day before Christmas
holiday.
14 GENERAL INFORMATION
<PAGE>
PURCHASING AND REDEEMING SHARES
Shares of the ProFunds VP are available for purchase by
insurance company separate accounts to serve as an investment
medium for variable insurance contracts, and by qualified
pension and retirement plans, certain insurance companies, and
ProFund Advisors. Shares of the ProFunds VP are purchased or
redeemed at the net asset value per share next determined
after receipt of a purchase order or redemption request.
Payment for shares redeemed normally will be made within seven
days. The ProFunds VP intend to pay cash for all shares
redeemed, but under abnormal conditions which make payment in
cash unwise, payment may be made wholly or partly in portfolio
securities at their then market value equal to the redemption
price. A shareholder may incur brokerage costs in converting
such securities to cash. Payment for shares may be delayed
under extraordinary circumstances or as permitted by the
Securities and Exchange Commission in order to protect
remaining investors.
Investors do not deal directly with the ProFunds VP to
purchase or redeem shares. Please refer to the prospectus for
the separate account for information on the allocation of
premiums and on transfers of accumulated value among
sub-accounts of the separate accounts that invest in the
ProFunds VP.
The ProFunds VP currently do not foresee any disadvantages to
investors if the ProFunds VP served as investment media for
both variable annuity contracts and variable life insurance
policies. However, it is theoretically possible that the
interest of owners of annuity contracts and insurance policies
for which a ProFund VP served as an investment medium might at
some time be in conflict due to differences in tax treatment
or other considerations. The Board of Trustees and each
participating insurance company would be required to monitor
events to identify any material conflicts between variable
annuity contract owners and variable life insurance policy
owners, and would have to determine what action, if any,
should be taken in the event of such a conflict. If
GENERAL INFORMATION 15
<PAGE>
such a conflict occurred, an insurance company participating
in the ProFund VP might be required to redeem the investment
of one or more of its separate accounts from the ProFund VP,
which might force the ProFund VP to sell securities at
disadvantageous prices.
The ProFunds VP reserve the right to discontinue offering
shares at any time, or to cease investment operations
entirely. In the event that a ProFund VP ceases offering its
shares, any investments allocated to the ProFund VP may,
subject to any necessary regulatory approvals, be invested in
another ProFund VP deemed appropriate by the Board of
Trustees.
DISTRIBUTION OF SHARES
Under a distribution plan adopted by the Board of Trustees,
each ProFund VP may pay financial intermediaries an annual fee
of up to 0.25% of its average daily net assets as
reimbursement or compensation for providing or procuring a
variety of services relating to the promotion, sale and
servicing of shares of the ProFund VP. Over time, fees paid
under the plan will increase the cost of your investment and
may cost you more than other types of sales charges.
TAX INFORMATION
Each ProFund VP intends to diversify its investments in a
manner intended to comply with tax requirements generally
applicable to mutual funds. In addition, each ProFund VP will
diversify its investments so that on the last day of each
quarter of a calendar year, no more than 55% of the value of
its total assets is represented by any one investment, no more
than 70% is represented by any two investments, no more than
80% is represented by any three investments, and no more than
90% is represented by any four investments. For this purpose,
securities of a single issuer are treated as one investment
and each U.S. Government agency or instrumentality is treated
as
16 GENERAL INFORMATION
<PAGE>
a separate issuer. Any security issued, guaranteed, or insured
(to the extent so guaranteed or insured) by the U.S.
Government or an agency or instrumentality of the U.S.
Government is treated as a security issued by the U.S.
Government or its agency or instrumentality, whichever is
applicable.
If a ProFund VP fails to meet this diversification requirement,
income with respect to variable insurance contracts invested
in that ProFund VP at any time during the calendar quarter in
which the failure occurred could become currently taxable to
the owners of the contracts. Similarly, income for the prior
periods with respect to such contracts also could be taxable,
most likely in the year of the failure to achieve the required
diversification. Other adverse tax consequences could also
ensue.
Since the shareholders of the ProFunds VP will be separate
accounts, no discussion is included here as to the federal
income tax consequences at the shareholder level.
FOR INFORMATION CONCERNING THE FEDERAL INCOME TAX CONSEQUENCES
TO PURCHASERS OF THE VARIABLE LIFE INSURANCE POLICIES AND
VARIABLE ANNUITY CONTRACTS, SEE THE PROSPECTUS FOR THE
RELEVANT VARIABLE INSURANCE CONTRACT. SEE THE STATEMENT OF
ADDITIONAL INFORMATION FOR MORE INFORMATION ON TAXES.
GENERAL INFORMATION 17
<PAGE>
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18
<PAGE>
--------------------
PROFUNDS VP
management
--------------------
BOARD OF TRUSTEES AND OFFICERS
The ProFunds VP are series of ProFunds (the "Trust"), a
registered investment company. The Board of Trustees is
responsible for the general supervision of all series of the
Trust, including the ProFunds VP. The Trust's officers are
responsible for day-to-day operations of the ProFunds VP.
INVESTMENT ADVISOR
PROFUND ADVISORS LLC, located at 7900 Wisconsin Avenue,
Suite 300, Bethesda, Maryland 20814, serves as the investment
advisor to the ProFunds VP, providing investment advice and
management services. ProFund Advisors oversees the investment
and reinvestment of the assets in each ProFund VP. It receives
fees equal to 0.75% of the average daily net assets of each
ProFund VP.
MICHAEL L. SAPIR, Chairman and Chief Executive Officer of
ProFund Advisors LLC, served as senior vice president of Padco
Advisors, Inc., which advised Rydex(R)Funds. In addition, Mr.
Sapir practiced law, primarily representing financial
institutions, for over 13 years, most recently as a partner in
a Washington-based law firm. He holds degrees from Georgetown
University Law Center (J.D.) and University of Miami (M.B.A.
and B.A.).
PROFUNDS VP MANAGEMENT 19
<PAGE>
LOUIS M. MAYBERG, President of ProFund Advisors LLC,
co-founded National Capital Companies, L.L.C., an investment
bank specializing in financial services companies' mergers and
acquisitions and equity underwritings in 1986, and managed its
financial services hedge fund. He holds a Bachelor of Business
Administration degree with a major in Finance from George
Washington University.
WILLIAM E. SEALE, PH.D., Director of Portfolio for ProFund
Advisors LLC, has more than 30 years of experience in the
financial markets. His background includes a five-year
presidential appointment as a commissioner of the U.S.
Commodity Futures Trading Commission and chairman of the
Finance Department at George Washington University. He earned
his degrees at University of Kentucky.
Each ProFund VP is managed by an investment team chaired by
Dr. Seale.
OTHER SERVICE PROVIDERS
BISYS Fund Services, located at 3435 Stelzer Road, Suite 1000,
Columbus, Ohio 43219, acts as the administrator to the
ProFunds VP, providing operations, compliance and
administrative services. Each ProFund VP pays BISYS a fee for
its administrative services. Before any waiver that may be in
effect, the fee is 0.05% of average daily net assets.
ProFund Advisors also performs client support and
administrative services for the ProFunds VP. The ProFunds VP
each pay a fee equal, on an annual basis, to 0.15% of average
daily net assets for these services.
20 PROFUNDS VP MANAGEMENT
<PAGE>
OTHER INFORMATION
"NASDAQ 100 Index" and the "Russell 2000 Index" are trademarks
of the NASDAQ and of the Frank Russell Company, respectively.
The ProFunds VP are not sponsored, endorsed, sold or promoted
by NASDAQ or by the Frank Russell Company. Also, NASDAQ and
the Frank Russell Company do not make any representation
regarding the advisability of investing in the ProFunds VP.
PROFUNDS VP MANAGEMENT 21
<PAGE>
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22
<PAGE>
--------------------
SIMILAR FUND
performance
--------------------
The following table provides information concerning the
historical total return performance of the Investor Class
shares of the UltraOTC ProFund (the "Similar Fund"), a series
of the Trust, which is similar to UltraOTC VP. The Similar
Fund's investment objective, policies and strategies are
substantially similar to those of UltraOTC VP, and it is
currently managed by the same investment team. While the
investment objective, policies and risks of the Similar Fund
and UltraOTC VP are similar, the performance of the Similar
Fund and UltraOTC VP will vary. The data is provided to
illustrate the past performance of ProFund Advisors in
managing a substantially similar investment portfolio and does
not represent the past performance of UltraOTC VP or the
future performance of UltraOTC VP or its investment team.
Consequently, potential investors should not consider this
performance data as an indication of the future performance of
UltraOTC VP or of its investment team.
The performance data shown below reflects the net operating
expenses of the Similar Fund, which are lower than the
estimated operating expenses of UltraOTC VP. Performance would
have been lower for the Similar Fund if the expenses of
UltraOTC VP were used. In addition, the Similar Fund, unlike
UltraOTC VP, is not sold to insurance company separate
accounts to fund variable insurance contracts. As a result,
the performance results presented below do not take into
account charges or deductions against a separate account or
variable insurance contract for cost
SIMILAR FUND PERFORMANCE 23
<PAGE>
of insurance charges, premium loads, administrative fees,
maintenance fees, premium taxes, mortality and expense risk
charges, or other charges that may be incurred under a
variable insurance contract for which UltraOTC VP serves as an
underlying investment vehicle. By contrast, investors with
contract value allocated to UltraOTC VP will be subject to
charges and expenses relating to variable insurance contracts
and separate accounts.
The Similar Fund's performance data shown below is calculated
in accordance with standards prescribed by the Securities and
Exchange Commission for the calculation of average annual
total return information. The investment results of the
Similar Fund presented below are unaudited and are not
intended to predict or suggest results that might be
experienced by the Similar Fund or UltraOTC VP. Share prices
and investment returns will fluctuate reflecting market
conditions. The performance data for the benchmark index
identified below does not reflect the fees or expenses of the
Similar Fund or UltraOTC VP.
AVERAGE ANNUAL TOTAL RETURN FOR THE SIMILAR FUND AND FOR ITS BENCHMARK INDEX FOR
PERIODS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SIMILAR FUND/BENCHMARK INDEX ONE YEAR SINCE INCEPTION INCEPTION DATE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UltraOTC ProFund# 233.25% 170.63% 12/02/97
NASDAQ 100 Index(TM)* 101.95% 83.27%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
#The Similar Fund performance information set forth above reflects fee waivers
and/or expense reimbursements. Absent such waivers and/or reimbursements,
Similar Fund performance would have been lower.
*Excludes dividends.
24 SIMILAR FUND PERFORMANCE
<PAGE>
--------------------
FINANCIAL
highlights
--------------------
The following tables provide a picture of the financial
performance of each ProFund VP for the period from October 19,
1999 (commencement of operations) through December 31, 1999.
Certain information reflects financial results for a single
share. The total return information selected represents the
rate of return that an investor would have earned on an
investment in a ProFund VP, assuming reinvestment of all
dividends and distributions. This information has been audited
by PricewaterhouseCoopers LLP, independent accountants, whose
report on the financial statements of the ProFunds VP appears
in the ProFunds VP's annual report for the fiscal year ended
December 31, 1999. The annual report is available free of
charge by phoning 888-776-3637.
FINANCIAL HIGHLIGHTS 25
<PAGE>
ULTRAOTC VP
FINANCIAL HIGHLIGHTS
For a share of beneficial interest outstanding
- --------------------------------------------------------------------------------
For the period from
October 19, 1999(a)
through
December 31, 1999
---------------------
NET ASSET VALUE, BEGINNING OF PERIOD $30.00
------
- --------------------------------------------------------------------------------
Net investment income (0.06)
- --------------------------------------------------------------------------------
Net realized and unrealized gain/(loss) on investment
transactions and futures contracts 40.99
------
- --------------------------------------------------------------------------------
Total income/(loss) from investment operations 40.93
------
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $70.93
======
- --------------------------------------------------------------------------------
TOTAL RETURN 136.43%(b)
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $67,897,587
- --------------------------------------------------------------------------------
Ratio of expenses to average net assets 1.65%(c)
- --------------------------------------------------------------------------------
Ratio of net investment income to average net assets (0.77)%(c)
- --------------------------------------------------------------------------------
Ratio of expenses to average net assets 1.97%(c)
PORTFOLIO TURNOVER 101%
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reduction had not occurred, the ratio would have been as indicated.
(a) Commencement of operations.
(b) Not annualized.
(c) Annualized.
26 FINANCIAL HIGHLIGHTS
<PAGE>
ULTRASMALL-CAP VP
(FORMALLY, PROFUND VP SMALL CAP)
FINANCIAL HIGHLIGHTS
For a share of beneficial interest outstanding
- --------------------------------------------------------------------------------
For the period from
October 19, 1999(a)
through
December 31, 1999
---------------------
NET ASSET VALUE, BEGINNING OF PERIOD $30.00
------
- --------------------------------------------------------------------------------
Net investment income 0.06
- --------------------------------------------------------------------------------
Net realized and unrealized gain/(loss) on investment
transactions and futures contracts 5.93
------
- --------------------------------------------------------------------------------
Total income/(loss) from investment operations 5.99
------
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $35.99
======
- --------------------------------------------------------------------------------
TOTAL RETURN 19.97%(b)
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $9,803,920
- --------------------------------------------------------------------------------
Ratio of expenses to average net assets 1.70%(c)
- --------------------------------------------------------------------------------
Ratio of net investment income to average net assets 1.75%(c)
- --------------------------------------------------------------------------------
Ratio of expenses to average net assets 2.53%(c)
PORTFOLIO TURNOVER 686%
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reduction had not occurred, the ratio would have been as indicated.
(a) Commencement of operations.
(b) Not annualized.
(c) Annualized.
FINANCIAL HIGHLIGHTS 27
<PAGE>
EUROPE 30 VP
FINANCIAL HIGHLIGHTS
For a share of beneficial interest outstanding
- --------------------------------------------------------------------------------
For the period from
October 19, 1999(a)
through
December 31, 1999
---------------------
- --------------------------------------------------------------------------------
Net asset value, beginning of period $30.00
------
- --------------------------------------------------------------------------------
Net investment income (0.04)
- --------------------------------------------------------------------------------
Net realized and unrealized gain/(loss) on investment
transactions and futures contracts 6.86
------
- --------------------------------------------------------------------------------
Total income/(loss) from investment operations 6.82
------
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $36.82
======
- --------------------------------------------------------------------------------
TOTAL RETURN 22.73%(b)
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $3,262,131
- --------------------------------------------------------------------------------
Ratio of expenses to average net assets 1.78%(c)
- --------------------------------------------------------------------------------
Ratio of net investment income to average net assets (1.00)%(c)
- --------------------------------------------------------------------------------
Ratio of expenses to average net assets 2.39%(c)
- --------------------------------------------------------------------------------
PORTFOLIO TURNOVER 100%
- --------------------------------------------------------------------------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reduction had not occurred, the ratio would have been as indicated.
(a) Commencement of operations.
(b) Not annualized.
(c) Annualized.
28 FINANCIAL HIGHLIGHTS
<PAGE>
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29
<PAGE>
- --------------------------------------------------------------------------------
Additional Information about ProFunds VP's investments is
available in ProFunds VP's Annual Report to shareholders. In
ProFunds VP's Annual Report you will find a discussion of the
market conditions and investment strategies that significantly
affected performance for the fiscal year ended December 31,
1999.
You can find more detailed information about each of the
ProFunds VP in their current Statement of Additional
Information, dated May 1, 2000, which we have filed
electronically with the Securities and Exchange Commission
(SEC) and which is incorporated by reference into, and is
legally a part of, this prospectus. To receive your free copy
of a Statement of Additional Information, or the annual
report, or if you have questions about investing in the
ProFunds VP, write to:
PROFUNDS
P.O. BOX 182800
COLUMBUS, OH 43218-2800
or call our toll-free numbers:
(888) PRO-FNDS (888) 776-3637 FOR INVESTORS
(888) PRO-5717 (888) 776-5717 FINANCIAL PROFESSIONALS ONLY
or visit our website WWW.PROFUNDS.COM
You can find other information about the ProFunds VP on the
SEC's website (http://www.sec.gov), or you can get copies of
this information, after payment of a duplicating fee, by
writing to the Public Reference Section of the SEC,
Washington, D.C. 20549-6102. Information about the the
ProFunds VP, including their Statement of Additional
Information, can be reviewed and copied at the SEC's Public
Reference Room in Washington, D.C. For information on the
Public Reference Room, call the SEC at 1-202-942-8090.
PROFUNDS EXECUTIVE OFFICES
BETHESDA, MD
[LOGO OMITTED]
INNOVATIONS IN INDEXING
811-08239
VPPROBK
- --------------------------------------------------------------------------------
<PAGE>
May 1, 2000
PROSPECTUS
The ProFunds VP
ProFund VP Bull
ProFund VP UltraBull
ProFund VP UltraEurope
ProFund VP Bear
ProFund VP UltraBear
ProFund VP UltraShort OTC
ProFund VP UltraShort Europe
ProFund VP Money Market
[Logo]
This prospectus should be read in conjunction with the separate account's
prospectus describing the variable insurance contract in which you invest.
Please read both prospectuses and retain them for future reference.
Like shares of all mutual funds, these securities have not been approved or
disapproved by the Securities and Exchange Commission, nor has the Securities
and Exchange Commission passed upon the accuracy or adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
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TABLE OF CONTENTS
-----------------
Page
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Benchmark ProFunds VP............ 1
Benchmark ProFunds VP Strategy... 15
Money Market VP.................. 18
Money Market VP Strategy......... 22
General Information.............. 26
ProFunds VP Management........... 32
Similar Fund Performance......... 35
ProFund Advisors LLC
Investment Advisor
<PAGE>
Benchmark ProFunds VP
Overview
The Benchmark ProFunds VP each seek to achieve a daily return equal to the
performance of a particular stock market benchmark.*
o For example, Bull VP seeks to match the daily performance of a stock market
index--the S&P 500 Composite Stock Price Index(R) ("S&P 500 Index")--like a
conventional index fund.
o Unlike conventional index funds, certain ProFunds VP seek to double the daily
return of a specified stock market index.
o Other ProFunds VP seek to produce a daily return of the inverse (opposite) or
double the inverse (opposite) of a particular stock market index. The value of
these ProFunds VP should go up when the index underlying their benchmark goes
down, and their value should go down when the index goes up.
* A benchmark can be any standard of investment performance to which a mutual
fund seeks to match its return, such as a stock index. A stock index reflects
the price of a group of stocks of specified companies For example, UltraBull
VP has a benchmark of twice the daily return of the S&P 500 Index.
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These ProFunds VP seek to match or double an index's daily performance:
<TABLE>
<CAPTION>
ProFund VP Index Daily Objective Types of Companies in Index
- ---------- ----- --------------- ---------------------------
<S> <C> <C> <C>
Bull VP S&P 500 Match Diverse, widely traded, large
capitalization
UltraBull VP S&P 500 Double Diverse, widely traded, large
capitalization
UltraEurope VP ProFunds Europe Double Large capitalization, widely traded
European stocks
</TABLE>
These ProFunds VP seek to match or double the inverse (opposite) of an index's
daily performance:
<TABLE>
<CAPTION>
ProFund VP Index Daily Objective Types of Companies in Index
- ---------- ----- --------------- ---------------------------
<S> <C> <C> <C>
Bear VP S&P 500 Inverse Diverse, widely traded, large
capitalization
UltraBear VP S&P 500 Double the inverse Diverse, widely traded, large
capitalization
UltraShort OTC VP NASDAQ 100 Double the inverse Large capitalization, most with
technology and/or growth orientation
UltraShort Europe VP ProFunds Europe Double the inverse Large capitalization, widely traded
European stocks
</TABLE>
The ProFunds VP include Money Market VP, which is discussed later in this
prospectus.
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Benchmark ProFunds VP Objectives
The investment objective of each of the Benchmark ProFunds VP is set forth
below:
o ProFund VP Bull ("Bull VP") - seeks daily investment results that correspond
to the performance of the S&P 500 Index.
o ProFund VP UltraBull ("UltraBull VP") - seeks daily investment results that
correspond to twice (200%) the performance of the S&P 500 Index. If UltraBull
VP is successful in meeting its objective, it should gain approximately twice as
much as Bull VP when the prices of the securities in the S&P 500 Index rise on a
given day and should lose approximately twice as much when such prices decline
on that day.
o ProFund VP UltraEurope ("UltraEurope VP")- seeks daily investment results
that correspond to twice (200%) the performance of the ProFunds Europe Index.
o ProFund VP Bear ("Bear VP") - seeks daily investment results that correspond
to the inverse (opposite) of the performance of the S&P 500 Index. If Bear VP
is successful in meeting its objective, the net asset value of Bear VP shares
will increase in direct proportion to any decrease in the level of the S&P 500
Index. Conversely, the net asset value of Bear VP shares will decrease in
direct proportion to any increase in the level of the S&P 500 Index.
o ProFund VP UltraBear ("UltraBear VP") - seeks daily investment results that
correspond to twice (200%) the inverse (opposite) of the performance of the S&P
500 Index. The net asset value of shares of UltraBear VP should increase or
decrease approximately twice as much as does that of Bear VP on any given day.
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For example, if the S&P 500 Index were to decrease by 1% on a particular day,
investors in Bear VP should experience a gain in net asset value of
approximately 1% for that day. UltraBear VP 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 Bear VP and UltraBear VP would experience a loss in
net asset value of approximately 1% and 2% respectively.
o ProFund VP UltraShort OTC ("UltraShort OTC VP") - seeks daily investment
results that correspond to twice (200%) the inverse (opposite) of the
performance of the NASDAQ 100 Index(TM). This ProFund VP operates similarly to
UltraBear VP, but UltraShort OTC VP is benchmarked to the NASDAQ 100 Index(TM).
o ProFund VP UltraShort Europe ("UltraShort Europe VP") - seeks daily
investment results that correspond to twice (200%) the inverse (opposite) of the
performance of the ProFunds Europe Index. This ProFund VP should reflect twice
the inverse (opposite) of the performance of the European companies included in
the ProFunds Europe Index.
The securities indexes that these ProFunds VP use as their benchmarks are
described below under "Benchmark Indexes."
Strategy
The investments made by a ProFund VP and the results achieved by the ProFund VP
at any given time are not expected to be the same as those made by other mutual
funds for which ProFund Advisors LLC ("ProFund Advisors") acts as investment
advisor, including mutual funds with names, investment objectives and policies
similar to the ProFund VP. Investors should carefully consider their investment
goals and willingness to tolerate investment risk before allocating their
investment to a ProFund VP.
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ProFund Advisors uses quantitative and statistical analysis it developed in
seeking to achieve each ProFund's VP investment objective. This analysis
determines the type, quantity and mix of investment positions that a Benchmark
ProFund VP should hold to approximate the performance of its benchmark.
Bull VP, UltraBull VP and UltraEurope VP principally invest in:
o Futures contracts on stock indexes, and options on futures contracts; and
o Financial instruments such as equity caps, collars and floors, swaps,
depository receipts, and options on securities and stock indexes.
These ProFunds VP invest in the above instruments generally as a substitute for
investing directly in stocks. In addition, these ProFunds VP may invest in a
combination of stocks that in ProFund Advisors' opinion should simulate the
movement of the appropriate benchmark index.
The UltraBull VP, UltraEurope VP, UltraBear VP and UltraShort OTC ProFunds (the
"Ultra ProFunds VP") generally invest in the above instruments to produce
economically "leveraged" investment results. Leverage is a way to change small
market movements into larger changes in the value of a Benchmark ProFund VP's
investments.
Bear VP, UltraBearVP, UltraShort OTC VP and UltraShort Europe VP generally do
not invest in traditional securities, such as common stock of operating
companies. Rather, these ProFunds VP principally invest in futures contracts,
options contracts and other financial instruments, and engage in short sales.
Using these techniques, these ProFunds VP 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
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the date on which the ProFund VP terminates the position. These ProFunds VP will
generally realize a gain if the underlying security or index declines in price
between those dates.
UltraEurope VP and UltraShort Europe VP invest in financial instruments with
values that reflect the performance of stocks of European companies.
Benchmark ProFund VP's Risks
Like all investments, the ProFunds VP entail risk. ProFund Advisors cannot
guarantee that any of the Benchmark ProFunds VP will achieve its objective. As
with any mutual fund, the Benchmark ProFunds VP could lose money, or their
performance could trail that of other investment alternatives.
In addition, the Benchmark ProFunds VP present some risks not traditionally
associated with most mutual funds. It is important that investors closely
review and understand these risks before making an investment in the
ProFunds VP.
The following chart summarizes certain risks associated with the Benchmark
ProFunds VP:
<TABLE>
<CAPTION>
Inverse
Market Risk Leverage Risk Correlation Risk Foreign Risk
----------- ------------- ---------------- ------------
<S> <C> <C> <C> <C>
Bull VP X
UltraBull VP X X
UltraEurope VP X X X
Bear VP X X
UltraBear VP X X X
UltraShortOTC VP X X X
UltraShortEurope VP X X X X
</TABLE>
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These and other risks are described below.
Certain Risks Associated with Particular ProFunds VP
Leverage Risk The Ultra ProFunds VP employ leveraged investment techniques.
Leverage is the ability to get a return on a capital base that is larger than a
ProFund's VP investment. Use of leverage can magnify the effects of changes in
the value of these ProFunds VP and makes them more volatile. The leveraged
investment techniques that the Ultra ProFunds VP employ should cause investors
in these ProFunds VP to lose more money in adverse environments.
Inverse Correlation Risk Shareholders in the negatively correlated ProFunds VP
should lose money when the index underlying their benchmark rises - a result
that is the opposite from traditional equity mutual funds.
Foreign Investment Risk UltraEurope VP and UltraShort Europe VP entail the risk
of foreign investing, which may involve risks not typically associated with
investing in U.S. securities alone:
o Many foreign countries lack uniform accounting and disclosure standards,
or have standards that differ from U.S. standards. Accordingly, these
ProFunds VP may not have access to adequate or reliable company
information.
o UltraEurope VP and UltraShort Europe VP will be subject to the market,
economic and political risks of the countries where they invest or where
the companies represented in their benchmarks are located.
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o Securities purchased by these two ProFunds VP may be priced in foreign
currencies. The value of securities denominated in foreign currencies
could change significantly as the currencies strengthen or weaken relative
to the U.S. dollar. ProFund Advisors does not engage in activities
designed to hedge against foreign currency fluctuations.
o On January 1, 1999, the eleven nations of the European Monetary Union,
including Germany and France, began the process of introducing a uniform
currency. The new currency, the euro, is expected to reshape financial
markets, banking systems and monetary policy in Europe and throughout the
world. The continued transition to the euro may also have a worldwide
impact on the economic environment and behavior of investors.
Risks in Common
Each Benchmark ProFund VP faces certain risks in common:
Market Risk The Benchmark ProFunds VP are subject to market risks that will
affect the value of their shares, including general economic and market
conditions, as well as developments that impact specific industries or
companies. Shareholders in the positively correlated ProFunds VP should lose
money when the index underlying their benchmark declines. Shareholders in the
negatively correlated ProFunds VP should lose money when the index underlying
their benchmark rises. These indexes are discussed in the next section.
Liquidity Risk In certain circumstances, such as a disruption of the orderly
markets for the financial instruments in which they invest, the ProFunds VP
might not be able to dispose of certain holdings quickly or at prices that
represent true market value in the judgment of ProFund Advisors. This may
prevent the ProFunds VP from limiting losses or realizing gains.
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<PAGE>
Correlation Risk While ProFund Advisors expects that each of the Benchmark
ProFunds VP will track its benchmark with an average correlation of .90 or
better over a year, there can be no guarantee that the ProFunds VP will be able
to achieve this level of correlation. Actual purchases and sales of the shares
of the ProFunds VP by insurance company separate accounts may differ from
estimated trades submitted prior to the time that the ProFunds VP calculate
their share prices. Any such difference may adversely affect the performance or
correlation of the ProFunds VP, and particularly the performance or correlation
of the Ultra ProFunds VP. A failure to achieve a high degree of correlation may
prevent a Benchmark ProFund VP from achieving its investment goal.
Non-Diversification Risk The Benchmark ProFunds VP are classified as "non-
diversified" under the federal securities laws. They have the ability to
concentrate a relatively high percentage of their investments in the securities
of a small number of companies, if ProFund Advisors determines that doing so is
the most efficient means of tracking the relevant benchmark. This would make
the performance of a Benchmark ProFund VP more susceptible to a single economic,
political or regulatory event than a more diversified mutual fund might be.
Nevertheless, the Benchmark ProFunds VP intend to invest on a diversified basis.
Risks of Aggressive Investment Techniques The Benchmark ProFunds VP use
investment techniques that may be considered aggressive. Risks associated with
the use of options, futures contracts, and options on futures contracts include
potentially dramatic price changes (losses) in the value of the instruments and
imperfect correlations between the price of the contract and the underlying
security or index.
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Benchmark Indexes
o The S&P 500 Index is a widely used measure of large U.S. company stock
performance. It consists of the common stocks of 500 major corporations
selected for their size and the frequency and ease with which their stocks
trade. Standard & Poor's also attempts to assure that the Index reflects the
full range and diversity of the American economy. The companies in the S&P 500
account for nearly three-quarters of the value of all U.S. stocks.
o The NASDAQ 100 Index contains 100 of the largest and most active non-
financial domestic and international issues listed on the NASDAQ Stock Market
based on market capitalization. Eligibility criteria for the NASDAQ 100 Index
includes a minimum average daily trading volume of 100,000 shares. If the
security is a foreign security, the company must have a world wide market value
of at least $10 billion, a U.S. market value of at least $4 billion, and average
trading volume of at least 200,000 shares per day.
o ProFunds Europe Index ("PEI") is a combined measure of European stock
performance created by ProFund Advisors from the leading stock indexes of
Europe's three largest economies giving equal weight to each index each day.
The PEI averages the daily results of:
o The Financial Times Stock Exchange 100 ("FTSE-100") Share Index, a
capitalization-weighted index of the 100 most highly capitalized companies
traded on the London Stock Exchange.
o The Deutsche Aktienindex ("DAX"), is a total rate of return index of 30
selected German blue-chip stocks traded on the Frankfurt Stock Exchange.
o The CAC-40, a capitalization-weighted index of 40 companies listed on
the Paris Stock Exchange (the Bourse).
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The Board of Trustees may change benchmarks without shareholder approval if, for
example, it believes another benchmark might better suit shareholder needs.
Who May Want to Consider an Investment
Bull VP may be appropriate for investors who want to receive investment results
approximating the performance of the S&P 500 Index.
UltraBull VP, UltraOTC VP and UltraEurope VP may be appropriate for investors
who:
o believe that over the long term, the value of a particular index will
increase, and that by investing with the objective of doubling the index's daily
return they will achieve superior results over time. Investors in these
ProFunds VP should understand that since these Ultra ProFunds VP seeks to double
the daily performance of its benchmark index, it should have twice the
volatility of a conventional index fund and twice the potential risk of loss.
o are seeking to match an index's daily return with half the investment
required of conventional stock index mutual funds.
An investor might invest $100,000 in a conventional S&P 500 Index ProFund VP.
Alternatively that same investor could invest half that amount-$50,000-in
UltraBull VP and target the same daily return.
Bear VP, UltraBear VP, UltraShort OTC VP and UltraShort Europe VP may be
appropriate for investors who:
o expect the underlying index to go down and desire to earn a profit as a
result of the index declining.
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o want to protect (or hedge) the value of a diversified portfolio of stocks
and/or stock mutual funds from a stock market downturn that they anticipate.
An investor with a diversified portfolio of stocks or stock mutual funds valued
at $100,000 might be concerned that the general stock market could decline or be
volatile for the next six months. The investor could try to protect the
portfolio against downturns in the stock market by investing $50,000 in Bear VP,
UltraBear VP, UltraShort OTC VP or UltraShort Europe VP - or in a combination of
these ProFunds VP. Of course, the investor likely would also be giving up gains
that the portfolio would otherwise produce if the markets go up rather than down
in value. The ProFunds VP cannot assure that doing so would protect against
market downturns.
All of the ProFunds VP may be appropriate for investors who:
o are executing a strategy that relies on frequent buying, selling or
exchanging among stock mutual funds.
o want the impact of their investment to range from double an index to double
the inverse of the index based on their current view, positive or negative, of
the index.
Benchmark ProFunds VP Performance
Because the ProFunds VP are newly formed and have no investment track record,
they have no performance to compare against other mutual funds or broad measures
of securities market performance, such as indexes.
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Annual Benchmark ProFund VP Operating Expenses
The tables below describe the estimated fees and expenses you may pay if you buy
and hold shares in any of the Benchmark ProFunds VP. These expenses are
reflected in the share prices of the ProFunds VP.
Annual Operating Expenses
(percentage of average daily net assets)
<TABLE>
<CAPTION>
Bull VP UltraBull VP UltraEuropeVP Bear VP
------- ------------ ------------- -------
<S> <C> <C> <C> <C>
Management 0.75% 0.75% 0.90% 0.75%
Fees
Distribution 0.25% 0.25% 0.25% 0.25%
(12b-1) Fees
Other Expenses [0.67%] [0.67%] [0.67%] [0.67%]
Total Annual [1.67%] [1.67%] [1.92%] [1.67%]
Operating
Expenses
<CAPTION>
UltraBear VP UltraShortOTC VP UltraShort Europe VP
------------ ---------------- --------------------
<S> <C> <C> <C>
Management 0.75% 0.75% 0.90%
Fees
Distribution 0.25% 0.25% 0.25%
(12b-1) Fees
Other Expenses [0.67%] [0.67%] [0.67%]
Total Annual [1.67%] [1.67%] [1.92%]
Operating
Expenses
</TABLE>
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Expense Examples
The following examples illustrate the expenses you would incur on a $10,000
investment in each Benchmark ProFund VP, and are intended to help you compare
the cost of investing in the Benchmark ProFunds VP compared to other mutual
funds. The examples assume that you invest for the time periods shown and
redeem all of your shares at the end of each period, that each ProFund VP earns
an annual return of 5% over the periods shown, that you reinvest all dividends
and distributions, and that gross operating expenses remain constant. The
examples do not reflect separate account or insurance contract fees and charges.
Because these examples are hypothetical and for comparison only, your actual
costs will be different.
<TABLE>
<CAPTION>
1 Year 3 Years
-------- ---------
<S> <C> <C>
UltraBull VP $____ $____
Bull VP $____ $____
Bear VP $____ $____
UltraBear VP $____ $____
UltraShort OTC VP $____ $____
UltraEurope VP $____ $____
UltraShort Europe VP $____ $____
</TABLE>
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Benchmark ProFunds' VP
Strategy
What the Benchmark ProFunds VP Do
Each Benchmark ProFund VP:
o Seeks to provide its investors with predictable investment returns
approximating its benchmark by investing in securities and other financial
instruments, such as futures and options on futures.
o Uses a mathematical and quantitative approach.
o Pursues its objective regardless of market conditions, trends or direction.
o Seeks to provide correlation with its benchmark on a daily basis.
What the Benchmark ProFunds VP Do Not Do
ProFund Advisors does not:
o Conduct conventional stock research or analysis or forecast stock market
movement in managing the assets of the Benchmark ProFunds VP.
o Invest the assets of the Benchmark ProFunds VP in stocks or instruments based
on ProFund Advisors' view of the fundamental prospects of particular companies.
o Adopt defensive positions by investing in cash or other instruments in
anticipation of an adverse climate for their benchmark indexes.
o Seek to invest to realize dividend income from their investments.
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In addition, the Benchmark ProFunds VP do not seek to provide correlation with
their benchmark over a period of time other than daily, such as monthly or
annually, since mathematical compounding prevents these Benchmark ProFunds VP
from achieving such results.
Important Concepts
o Leverage offers a means of magnifying small market movements, up or down,
into large changes in an investment's value.
o Futures, or futures contracts, are contracts to pay a fixed price for an
agreed-upon amount of commodities or securities, or the cash value of the
commodity or securities, on an agreed-upon date.
o Option contracts grant one party a right, for a price, either to buy or sell
a security or futures contract at a fixed sum during a specified period or on a
specified day.
o American Depository Receipts ("ADRs") represent the right to receive
securities of foreign issuers deposited in a bank. ADRs are an alternative to
purchasing the underlying securities in their national markets and currencies.
Investment in ADRs has certain advantages over direct investment in the
underlying foreign securities since: (i) ADRs are U.S. dollar-denominated
investments that are easily transferable and for which market quotations are
readily available, and (ii) issuers whose securities are represented by ADRs are
generally subject to auditing, accounting and financial reporting standards
similar to those applied to domestic issuers.
o Selling short, or borrowing stock to sell to a third party, is a technique
that may be employed by the ProFunds VP to seek gains when their benchmark index
declines. If a ProFund VP replaces the security to the lender at a price lower
than the price at which it borrowed the security
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plus interest incurred, it makes a profit on the difference. If the current
market price is greater when the time comes to replace the stock, the ProFund VP
will incur a loss on the transaction.
Portfolio Turnover
ProFund Advisors expects a significant portion of the assets of the Benchmark
ProFunds VP to come from professional money managers and investors who use the
ProFunds VP as part of "market timing" investment strategies. These strategies
often call for frequent trading of ProFund VP shares to take advantage of
anticipated changes in market conditions. Although ProFund Advisors believes
its accounting methodology should minimize the effect on the ProFunds VP of such
trading, market timing trading could increase the rate of the ProFunds' VP
portfolio turnover, increasing transaction expenses. In addition, while the
ProFunds VP do not expect it, large movements of assets into and out of the
ProFunds VP may negatively impact their abilities to achieve their investment
objectives or their levels of operating expenses.
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Money Market VP
Objective
As its investment objective, Money Market VP seeks as high a level of current
income as is consistent with liquidity and preservation of capital. This
ProFund VP seeks this objective by investing in high quality short-term money
market instruments.
Strategy
Money Market VP invests for current income. In order to maintain a stable share
price, it maintains a dollar-weighted average maturity of 90 days or less.
Generally, securities in Money Market VP are valued in U.S. dollars and have
remaining maturities of 397 days (about 13 months) or less on their purchase
date. Money Market VP may also invest in long-term securities that have
features that reduce their maturities to 397 days or less on their purchase
date. Money Market VP buys U.S. government debt obligations, money market
instruments and other debt obligations that at the time of purchase:
o have received the highest short-term rating from two nationally recognized
statistical rating organizations; or
o have received the highest short-term rating from one rating organization (if
only one organization rates the security);
o if unrated, are determined to be of similar quality by ProFund Advisors; or
o have no short-term rating, but are rated within the three highest long-term
rating categories, or are determined to be of similar quality by ProFund
Advisors.
Risks
All money market instruments, including U.S. government debt obligations, are
subject to interest rate risk, which is the risk that an investment will change
in value when interest rates change.
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Generally, investments subject to interest rate risk will decrease in value when
interest rates rise and increase when interest rates decline.
Money market instruments are subject to credit risk, which is the risk that the
issuer of the instrument will default, or fail to meet its payment obligations.
In addition, they may change in value if an issuer's creditworthiness changes,
although such a circumstance would be extremely unlikely in the case of U.S.
government debt obligations.
An investment in Money Market VP is not a deposit of a bank, nor is it insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. While Money Market VP tries to maintain a stable net asset
value of $1.00 per share, there is no guarantee that it will do so, and you
could lose money by investing in this ProFund VP.
Considering a Money Market VP Investment
Investors can take advantage of Money Market VP in two ways:
o during periods when investors want to maintain a neutral exposure to the
stock market, the income earned from an investment in Money Market VP can keep
their capital at work.
o Money Market VP can be invested in conjunction with other ProFunds VP to
adjust an investor's target exposure to an index.
For instance, an investor who desires to target a daily return of 1.5 times the
daily performance of the S&P 500 Index could allocate 75% of his or her
investment to UltraBull VP and 25% of the investment to Money Market VP.
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Money Market VP Performance
Because Money Market VP is newly formed and has no investment track record, it
has no performance information to compare against other mutual funds, or a broad
measure of securities market performance.
Annual Operating Expenses
The table below describes the estimated fees and expenses you may pay if you buy
and hold shares of Money Market VP. Theses fees and expenses are reflected in
the share price of Money Market VP.
Annual Operating Expenses
(percentage of average daily net assets)
Management Fees ____%
Distribution (12b-1) Fees 0.25%
Other Expenses ____%
Total Annual Operating ____%
Expenses
Expense Examples
The examples below illustrate the expenses you would incur on a $10,000
investment shares of Money Market VP, and are intended to help you compare the
cost of investing in this ProFund VP compared to other mutual funds. They
assume that you invest for the time periods shown and redeem all of your shares
at the end of each period, that Money Market VP earns an annual return of 5%
over the periods shown, that you reinvest all dividends and distributions, and
that gross operating expenses remain constant. They do not reflect separate
account or insurance contract fees and charges. Because these examples are
hypothetical and for comparison only, your actual costs will be different.
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1 Year 3 Years
-------- ---------
$___ $___
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Money Market VP
Strategy
Money Market VP may invest in high-quality, short-term, dollar-denominated money
market instruments paying a fixed, variable or floating interest rate. These
include:
o Debt securities issued by U.S. and foreign banks, financial institutions, and
corporations, including certificates of deposit, euro-time deposits, commercial
paper (including asset-backed commercial paper), notes, funding agreements and
U.S. government securities. Securities that do not satisfy the maturity
restrictions for a money market fund may be specifically structured so that they
are eligible investments for money market funds. For example, some securities
have features which have the effect of shortening the security's maturity.
o U.S. government securities that are issued or guaranteed by the U.S.
Treasury, or by agencies or instrumentalities of the U.S. Government.
o Repurchase agreements, which are agreements to buy securities at one price,
with a simultaneous agreement to sell back the securities at a future date at an
agreed-upon price.
o Asset-backed securities, which are generally participations in a pool of
assets whose payment is derived from the payments generated by the underlying
assets. Payments on the asset-backed security generally consist of interest
and/or principal.
Because many of Money Market VP's principal investments are issued or credit-
enhanced by banks, it may invest more than 25% of its total assets in
obligations of domestic banks. Money Market VP may invest in other types of
instruments, as described in the Statement of Additional Information.
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Specific Risks and Measures Taken to Limit Them
Credit Risk
A money market instrument's credit quality depends on the issuer's ability to
pay interest on the security and repay the debt: the lower the credit rating,
the greater the risk that the security's issuer will default, or fail to meet
its payment obligations. The credit risk of a security may also depend on the
credit quality of any bank or financial institution that provides credit
enhancement for it. Money Market VP only buys high quality securities with
minimal credit risk. If a security no longer meets Money Market VP's credit
rating requirements, ProFund Advisors will attempt to sell that security within
a reasonable time, unless selling the security would not be in Money Market VP's
best interest.
Repurchase Agreement Risk
A repurchase agreement exposes Money Market VP to the risk that the party that
sells the securities defaults on its obligation to repurchase them. In this
circumstance, Money Market VP can lose money because:
o it may not be able to sell the securities at the agreed-upon time and price;
or
o the securities lose value before they can be sold.
ProFund Advisors seeks to reduce Money Market VP's risk by monitoring, under the
supervision of the Board of Trustees, the creditworthiness of the sellers with
whom it enters into repurchase agreements. ProFund Advisors also monitors the
value of the securities to ensure that they are at least equal to the total
amount of the repurchase obligations, including interest.
Interest Rate Risk
Money market instruments, like all debt securities, face the risk that the
securities will decline in value because of changes in interest rates.
Generally, investments subject to interest rate risk will
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decrease in value when interest rates rise and increase when interest rates
decline. To minimize such price fluctuations, Money Market VP adheres to the
following practices:
o it limits the dollar-weighted average maturity of the securities held by
Money Market VP to 90 days or less. Generally, rates of short-term investments
fluctuate less than longer-term bonds.
o it primarily buys securities with remaining maturities of 13 months or less.
This reduces the risk that the issuer's creditworthiness will change, or that
the issuer will default on the principal and interest payments of the
obligations.
Market Risk
Although individual securities may outperform their market, the entire market
may decline as a result of rising interest rates, regulatory developments or
deteriorating economic conditions.
Security Selection Risk
While Money Market VP invests in short-term securities, which by nature are
relatively stable investments, the risk remains that the securities selected
will not perform as expected. This could cause its returns to lag behind those
of similar money market funds. ProFund Advisors attempts to limit this risk by
diversifying Money Market VP's investments so that a single setback need not
undermine the pursuit of its objective and by investing in money market
instruments that receive the highest short-term debt ratings as described above.
Concentration Risk
Because Money Market VP may invest more than 25% of its total assets in the
financial services industry, it may be vulnerable to setbacks in that industry.
Banks and other financial service companies are highly dependent on short-term
interest rates and can be adversely affected by downturns in the U.S. and
foreign economies or changes in banking regulations.
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<PAGE>
Prepayment Risk
When a bond issuer, such as an issuer of asset-backed securities, retains the
right to pay off a high-yielding bond before it comes due, Money Market VP may
have no choice but to reinvest the proceeds at lower interest rates. Thus,
prepayment may reduce its income. It may also create a capital gains tax
liability, because bond issuers usually pay a premium for the right to pay off
bonds early.
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General Information
Calculating the Benchmark Funds' Share Prices
Except for UltraEurope VP and UltraShort Europe VP, each Benchmark ProFund VP
calculates daily share prices on the basis of the net asset value of its shares
at the close of regular trading on the New York Stock Exchange ("NYSE")
(normally, 4:00 p.m., Eastern time) every day the NYSE and the Chicago
Mercantile Exchange are open for business. UltraEurope VP and UltraShort Europe
VP calculate their daily share prices on the basis of net asset value of their
shares at the latest close of trading of the three exchanges tracked by the PEI:
the London Stock Exchange, the Frankfurt Stock Exchange and the Paris Bourse
(normally, 11:30 a.m., Eastern time), on each day that all three of these
exchanges and the NYSE are open.
Purchases and redemptions of shares are effected at the net asset value per
share next determined after receipt and acceptance of an order. If portfolio
investments of a ProFund VP are traded in markets on days when the ProFund's VP
principal trading market(s) is closed, the ProFund's VP net asset value may vary
on days when investors cannot purchase or redeem shares.
The ProFunds VP value shares by dividing the market value of the assets
attributable to a ProFund VP, less the liabilities attributable to the ProFund
VP, by the number of its outstanding shares. The Benchmark ProFunds VP use the
following methods for arriving at the current market price of investments held
by them:
o securities listed and traded on exchanges--the last price the stock traded at
on a given day, or if there were no sales, the mean between the closing bid and
asked prices;
o securities traded over-the-counter--NASDAQ-supplied information on the
prevailing bid and asked prices;
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<PAGE>
o futures contracts and options on indexes and securities--the last sale price
prior to the close of regular trading on the NYSE (for all Benchmark ProFunds VP
except UltraEurope VP and UltraShort Europe VP);
o futures prices used to calculate net asset values for UltraEurope VP and
UltraShort Europe VP will be the last transaction prices for the respective
futures contracts that occur immediately prior to the close of the underlying
stock exchange;
o options on futures contracts--priced at fair value determined with reference
to established future exchanges;
o bonds and convertible bonds generally are valued using a third-party pricing
system;
o short-term debt securities are valued at amortized cost, which approximates
market value;
o the foreign exchange rates used to calculate the net asset values for
UltraEurope VP and UltraShort Europe VP will be the mean of the bid price and
the asked price for the respective foreign currency occurring immediately before
the last underlying stock exchange closes.
When price quotes are not readily available, securities and other assets are
valued at fair value in good faith under procedures established by, and under
the general supervision and responsibility of, the Board of Trustees. This
procedure incurs the unavoidable risk that the valuation may be higher or lower
than the securities might actually command if the ProFunds VP sold them. In the
event that a trading halt closes the NYSE or a futures exchange early, portfolio
investments may be valued at fair value, or in a manner that is different from
the discussion above. See the Statement of Additional Information for more
details.
The New York Stock Exchange and the Chicago Mercantile Exchange, a leading
market for futures and options, are open every week, Monday through Friday,
except when the following holidays are celebrated: New Year's Day, Martin Luther
King, Jr. Day (the third Monday in
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January), Presidents' Day (the third Monday in February), Good Friday, Memorial
Day (the last Monday in May), July 4th, Labor Day (the first Monday in
September), Thanksgiving Day (the fourth Thursday in November) and Christmas
Day. Either or both of these Exchanges may close early on the business day
before each of these holidays. Either or both of these Exchanges also may close
early on the day after Thanksgiving Day and the day before Christmas holiday.
The London Stock Exchange, Frankfurt Stock Exchange or Paris Bourse closes for
the following holidays in 2000: May Day (May 1), Spring Bank Day (May 29),
Ascension (June 1), Pentecost Monday (May 12), Corpus Christi Day (June 22),
Independence Day (July 14), Bastille Day (July 14), Assumption Day (August 15),
Summer Bank Holiday (August 28), German Unity Day (October 3), All Saints Day
(November 1), Armistice Day (November 11), Christmas Day (December 25) and
Boxing Day (December 26). Holidays scheduled for 2001 include: New Years Day
(January 1), Good Friday (April 13) and Easter Monday (April 16). Please note
that holiday schedules are subject to change without notice.
Calculating Money Market VP's Share Price
Money Market VP calculates daily share prices on the basis of the net asset
value of its shares at the close of regular trading on the NYSE (normally, 4:00
p.m., Eastern time) every day the NYSE is open for business, except two
additional holidays, Columbus Day and Veterans Day. Purchases and redemptions
of shares are effected at the net asset value per share next determined after
receipt and acceptance of an order. If the market for the primary investments
in Money Market VP closes early, Money Market VP may close early, and it will
cease taking purchase orders at that time. Money Market VP's net asset value
per share will normally be $1.00, although ProFund Advisors cannot guarantee
that this will always be the case. Money Market VP uses the amortized cost
method to
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<PAGE>
account for any premiums or discounts above or below the face value of any
securities it buys. This method does not reflect daily fluctuations in market
value.
Purchasing and Redeeming Shares
Shares of the ProFunds VP are available for purchase by insurance company
separate accounts to serve as an investment medium for variable insurance
contracts, and by qualified pension and retirement plans, certain insurance
companies, and ProFund Advisors. Shares of the ProFunds VP are purchased or
redeemed at the net asset value per share next determined after receipt of a
purchase order or redemption request.
Payment for shares redeemed normally will be made within seven days. The
ProFunds VP intend to pay cash for all shares redeemed, but under abnormal
conditions which make payment in cash unwise, payment may be made wholly or
partly in portfolio securities at their then market value equal to the
redemption price. A shareholder may incur brokerage costs in converting such
securities to cash. Payment for shares may be delayed under extraordinary
circumstances or as permitted by the Securities and Exchange Commission in order
to protect remaining investors.
Investors do not deal directly with the ProFunds VP to purchase or redeem
shares. Please refer to the prospectus for the separate account for information
on the allocation of premiums and on transfers of accumulated value among sub-
accounts of the separate accounts that invest in the ProFunds VP.
The ProFunds VP currently do not foresee any disadvantages to investors if the
ProFunds VP served as investment media for both variable annuity contracts and
variable life insurance policies. However, it is theoretically possible that
the interest of owners of annuity contracts and insurance policies for which a
ProFund VP served as an investment medium might at some time be in conflict
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<PAGE>
due to differences in tax treatment or other considerations. The Board of
Trustees and each participating insurance company would be required to monitor
events to identify any material conflicts between variable annuity contract
owners and variable life insurance policy owners, and would have to determine
what action, if any, should be taken in the event of such a conflict. If such a
conflict occurred, an insurance company participating in the ProFund VP might be
required to redeem the investment of one or more of its separate accounts from
the ProFund VP, which might force the ProFund VP to sell securities at
disadvantageous prices.
The ProFunds VP reserve the right to discontinue offering shares at any time.
In the event that a ProFund VP ceases offering its shares, any investments
allocated to the ProFund VP may, subject to any necessary regulatory approvals,
be invested in another ProFund VP deemed appropriate by the Board of Trustees.
Distribution of Shares
Under a distribution plan adopted by the Board of Trustees, each ProFund VP may
pay financial intermediaries an annual fee of up to 0.25% of its average daily
net assets as reimbursement or compensation for providing or procurring a
variety of services relating to the promotion, sale and servicing of shares of
the ProFund VP. Over time, fees paid under the plan will increase the cost of
your investment and may cost you more than other types of sales charges.
Tax Information
Each ProFund VP intends to diversify its investments in a manner intended to
comply with tax requirements generally applicable to mutual funds. In addition,
each ProFund VP will diversify its investments so that on the last day of each
quarter of a calendar year, no more than 55% of the value of its total assets is
represented by any one investment, no more than 70% is represented by any two
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<PAGE>
investments, no more than 80% is represented by any three investments, and no
more than 90% is represented by any four investments. For this purpose,
securities of a given issuer generally are treated as one investment, but each
U.S. Government agency and instrumentality is treated as a separate issuer. Any
security issued, guaranteed, or insured (to the extent so guaranteed or insured)
by the U.S. or an agency or instrumentality of the U.S. is treated as a security
issued by the U.S. Government or its agency or instrumentality, whichever is
applicable.
If a ProFund VP fails to meet this diversification requirement, income with
respect to variable insurance contracts invested in that ProFund VP at any time
during the calendar quarter in which the failure occurred could become currently
taxable to the owners of the contracts. Similarly, income for prior periods
with respect to such contracts also could be taxable, most likely in the year of
the failure to achieve the required diversification. Other adverse tax
consequences also could ensue.
Since the shareholders of the ProFunds VP will be separate accounts, no
discussion is included here as to the federal income tax consequences at the
shareholder level.
For information concerning the federal income tax consequences to purchasers of
the variable life insurance policies and variable annuity contracts, see the
prospectus for the relevant variable insurance contract. See the Statement of
Additional Information for more information on taxes.
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<PAGE>
ProFunds VP Management
Board of Trustees and Officers
The ProFunds VP are series of ProFunds (the "Trust"), a registered investment
company. The Board of Trustees is responsible for the general supervision of
all series of the Trust, including the ProFunds VP. The Trust's officers are
responsible for day-to-day operations of the ProFunds VP.
Investment Advisor
ProFund Advisors LLC, located at 7900 Wisconsin Avenue, Suite 300, Bethesda,
Maryland 20814, serves as the investment advisor to the ProFunds VP, providing
investment advice and management services. ProFund Advisors oversees the
investment and reinvestment of the assets in each ProFund VP. It receives fees
equal to 0.75% of the average daily net assets of each Benchmark ProFund VP,
except UltraEurope VP and ProFund VP UltraShort Europe VP, for which it receives
a fee equal to 0.90% of the average daily net assets. ProFund Advisors also
receives an investment advisory fee equal to [ ]% of the average daily net
assets of Money Market VP. ProFund Advisors bears the costs of advisory
services.
Michael L. Sapir, Chairman and Chief Executive Officer of ProFund Advisors LLC,
served as senior vice president of Padco Advisors, Inc., which advised Rydex(R)
Funds. In addition, Mr. Sapir practiced law for over 13 years, most recently as
a partner in a Washington-based law firm. As an attorney, Mr. Sapir advised and
represented mutual funds and other financial institutions. He holds degrees
from Georgetown University Law Center (J.D.) and University of Miami (M.B.A. and
B.A.).
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<PAGE>
Louis M. Mayberg, President of ProFund Advisors LLC, co-founded National Capital
Companies, L.L.C., an investment bank in 1986, and manages its hedge fund. He
holds a Bachelor of Business Administration degree with a major in Finance from
George Washington University.
William E. Seale, Ph.D., Director of Portfolio for ProFund Advisors LLC, has
more than 30 years of experience in the commodity futures markets. His
background includes a five-year presidential appointment as a commissioner of
the U.S. Commodity Futures Trading Commission and Chairman of the Finance
Department at George Washington University. He earned his degrees at University
of Kentucky.
Each Benchmark ProFund VP is managed by an investment team chaired by Dr. Seale.
Other Service Providers
BISYS Fund Services, located at 3435 Stelzer Road, Suite 1000, Columbus, Ohio
43219, acts as the administrator to the ProFunds VP, providing operations,
compliance and administrative services. Each ProFund VP pays BISYS a fee for
its administrative services. The fee is equal to 0.05% of average daily net
assets.
ProFund Advisors also performs client support and administrative services for
the ProFunds VP. The Benchmark ProFunds VP each pay a fee equal, on an annual
basis, to 0.15% of average daily net assets for these services. ProFund
Advisors may receive a fee equal, on an annual basis, to 0.35% of average daily
net assets from Money Market VP for these services.
Other Information
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500(R)," and
"500(R)" are trademarks of The McGraw-Hill Companies, Inc. and have been
licensed for use by the Trust. "NASDAQ 100 Index" is a trademark of the NASDAQ
Stock Markets, Inc. ("NASDAQ") and is
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<PAGE>
licensed for use by the Trust. The ProFunds VP are not sponsored, endorsed, sold
or promoted by Standard & Poor's or NASDAQ and neither Standard & Poor's nor
NASDAQ makes any representation regarding the advisability of investing in the
ProFunds VP.
(Please see the Statement of Additional Information, which sets forth certain
additional disclaimers and limitations of liabilities on behalf of S&P).
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<PAGE>
Similar Fund Performance
The following table provides information concerning the historical total return
performance of the Investor Class shares of the Bull ProFund, UltraBull ProFund,
Bear ProFund and UltraBear ProFund (the "Similar Funds"), each a series of the
Trust, which are similar to Bull VP, UltraBull VP, Bear VP, and UltraBear VP,
respectively. Each Similar Funds' investment objectives, policies and
strategies are substantially similar to those of its corresponding ProFund VP,
and each is currently managed by the same investment team. While the investment
objectives, policies and risks of the Similar Funds and the ProFunds VP are
similar, the performance of a Similar Fund and its corresponding ProFund VP will
vary. The data is provided to illustrate the past performance of ProFund
Advisors in managing a substantially similar investment portfolio and does not
represent the past performance of the ProFunds VP or the future performance of
the ProFunds VP or their investment team. Consequently, potential investors
should not consider this performance data as an indication of the future
performance of the ProFunds VP or of their investment team.
The performance data shown below reflects the net operating expenses of the
Similar Funds, which are lower than the estimated operating expenses of the
ProFunds VP. Performance would have been lower for each Similar Fund if the
expenses of its corresponding ProFund VP were used. In addition, the Similar
Funds, unlike the ProFunds VP, are not sold to insurance company separate
accounts to fund variable insurance contracts. As a result, the performance
results presented below do not take into account charges or deductions against a
separate account or variable insurance contract for cost of insurance charges,
premium loads, administrative fees, maintenance fees, premium taxes, mortality
and expense risk charges, or other charges that may be incurred under a variable
insurance contract for which the ProFunds VP serve as an underlying investment
vehicle.
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<PAGE>
By contrast, investors with contract value allocated to the ProFunds VP will be
subject to charges and expenses relating to variable insurance contracts and
separate accounts.
The Similar Funds' performance data shown below is calculated in accordance with
standards prescribed by the Securities and Exchange Commission for the
calculation of average annual total return information. The investment results
of the Similar Funds presented below are unaudited and are not intended to
predict or suggest results that might be experienced by the Similar Funds or the
ProFunds VP. Share prices and investment returns will fluctuate reflecting
market conditions. The performance data for the benchmark index identified
below does not reflect the fees or expenses of the Similar Funds or the ProFunds
VP.
Average Annual Total Return for the Similar Funds and for their Benchmark
Indexes for Periods Ended December 31, 1999
<TABLE>
<CAPTION>
Similar Fund/Benchmark Index One Year Since Inception Inception Date
- ---------------------------- -------- --------------- --------------
<S> <C> <C> <C>
Bull ProFund 17.18% 20.20% 12/02/97
S&P 500 Index* 19.53% 22.00%
UltraBull ProFund 29.56% 36.08% 11/28/97
S&P 500 Index* 19.53% 22.86%
Bear ProFund -12.32% -15.95% 12/31/97
S&P 500 Index* 19.53% 23.05%
UltraBear ProFund -30.54% -33.06% 12/23/97
S&P 500 Index* 19.53% 24.78%
</TABLE>
_____________
* Excludes dividends.
# The Similar Fund performance information set forth above reflects fee waivers
and/or expense reimbursements. Absent such waivers and/or reimbursements,
Similar Fund performance would have been lower.
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<PAGE>
[Back Cover]
You can find more detailed information about each of the ProFunds VP in their
current Statement of Additional Information, dated May 1, 2000, which we have
filed electronically with the Securities and Exchange Commission (SEC) and which
is incorporated by reference into, and is legally a part of, this prospectus
dated May 1, 2000. To receive your free copy of a Statement of Additional
Information, or if you have questions about the ProFunds VP, write to us at:
ProFunds
P.O. Box 182800
Columbus, OH 43218-2800
or call our toll-free numbers:
(888) PRO-FNDS (888) 776-3637 For Investors
(888) PRO-5717 (888) 776-5717 Financial Professionals Only
or visit our website www.profunds.com.
You can find other information about the ProFunds VP on the SEC's website
(http://www.sec.gov), or you can get copies of this information, after payment
of a duplicating fee, by writing to the Public Reference Section of the SEC,
Washington, D.C. 20549-0102. Information about the ProFunds VP, including their
Statement of Additional Information, can be reviewed and copied at the SEC's
Public Reference Room in Washington, D.C. For information on the Public
Reference Room, call the SEC at 1-202-942-8090.
ProFunds Executive Offices
Bethesda, MD
[Logo]
811-08239
119431.5.03
<PAGE>
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 the Bull ProFund,
UltraBull ProFund, UltraOTC ProFund, UltraEurope ProFund, UltraSmall-Cap
ProFund, UltraMid-Cap ProFund, UltraJapan ProFund, Bear ProFund, UltraBear
ProFund, UltraShort OTC ProFund and Money Market ProFund (each, a "ProFund", and
collectively, the "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 ("SAI") is not a prospectus. It
should be read in conjunction with ProFunds' Prospectus, dated May 1, 2000,
which incorporates this Statement of Additional Information by reference. The
financial statements and related report of the independent accountants included
in the ProFunds' annual report for the fiscal year ended December 31, 1999 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, 2000.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ProFunds...................................................... 3
Investment Policies and Techniques............................ 3
Investment Restrictions....................................... 21
Portfolio Transactions and Brokerage.......................... 27
Management of ProFunds........................................ 30
Costs and Expenses............................................ 39
Capitalization................................................ 39
Taxation...................................................... 43
Performance Information....................................... 48
Financial Statements.......................................... 50
Appendix -- Description of Securities Ratings................. A-1
</TABLE>
2
<PAGE>
PROFUNDS
ProFunds (the "Trust") is an open-end management investment company, and
currently comprises thirty-nine separate series. Eleven of which are discussed
herein. 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 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 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
Investment Company Act of 1940, as amended (the "1940 Act"). The investment
objectives and 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.
A non-money market ProFund may consider changing its benchmark if, for
example, the current benchmark becomes unavailable; the ProFund 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 its investment results to correspond
sufficiently to its current benchmark. If believed appropriate, a ProFunds may
specify a benchmark for itself 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.
3
<PAGE>
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
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technique may be affected by any premium or amounts in lieu of dividends or
interest that the ProFund pays or receives as the result of the transaction.
THE ULTRAOTC PROFUND 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 Index(TM).
The UltraOTC ProFund does not intend to hold the 100 securities included in
the NASDAQ 100 Index(TM). 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 ("OTC") 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 Index(TM). 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 Index(TM) 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 Index. 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 Index(TM). 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 Index for that day.
For example, if the NASDAQ 100 Index(TM) 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 Index 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 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
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of these companies may have limited marketability and may be more volatile in
price than securities of larger capitalized or more well-known companies. Among
the reasons for the greater price volatility of securities of certain smaller
OTC companies are the less certain growth prospects of comparably smaller firms,
the lower degree of liquidity in the OTC markets for such securities, and the
greater sensitivity of smaller capitalization companies to changing economic
conditions than larger capitalization, exchange-traded securities. Conversely,
because many of these OTC securities may be overlooked by investors and
undervalued in the marketplace, there is potential for significant capital
appreciation.
THE ULTRAEUROPE PROFUND
The investment objective of the UltraEurope ProFund is to provide
investment returns that correspond to 200% of the daily performance of the
ProFunds Europe Index ("PEI"). 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.
In attempting to achieve its objectives, the UltraEurope ProFund expect
that a substantial portion of its 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 UltraEurope ProFund pays or
receives as the result of the transaction. The UltraEurope ProFund may also
invest in shares of individual securities which are expected to track the
PEI.
Investing in foreign companies or financial instruments by the UltraEurope
ProFund (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 the
UltraEurope ProFund will invest indirectly in foreign markets, it 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 ProFund 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.
ULTRASMALL-CAP PROFUND
The investment objective of the UltraSmall-Cap ProFund is to provide daily
investment results that correspond to twice (200%) the performance of the
Russell 2000(R) Index.
The UltraSmall-Cap ProFund does not intend to hold the 2,000 securities
included in the Russell 2000(R) Index. Instead, the UltraSmall-Cap ProFund
intends to engage in transactions in equities, stock index futures contracts,
options on stock index futures contracts, and options on securities and stock
indexes. As a nonfundamental policy, the UltraSmall-Cap ProFund will invest,
under normal conditions, at least 65% of its total assets in the securities
comprising the Russell 2000(R) Index and instruments with values that are
representative of such securities, such as futures and option contracts on such
securities or such index.
The Russell 2000(R) Index is a capitalization-weighted index of domestic
equities traded on the NYSE, AMEX and NASDAQ Stock Market, Inc. ("NASDAQ"). The
index represents the bottom 2,000 companies of the 3,000 U.S. stocks with the
largest market capitalizations. As of June 30, 1999, the market capitalization
of these 2,000
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companies represented about 8% of the total market capitalization of the 3,000
companies. Companies whose stock comprises the Russell 2000(R) Index 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 smaller companies whose stock
comprises the Russell 2000(R) Index are the less certain growth prospects of
smaller firms, the lower degree of liquidity in the markets for such securities,
and the greater sensitivity of smaller capitalization companies to changing
economic conditions than larger capitalization companies. Conversely, because
many of these securities may be overlooked by investors and undervalued in the
marketplace, there is potential for significant capital appreciation.
ULTRAMID-CAP PROFUND
The investment objective of the UltraMid-Cap ProFund is to provide daily
investment results that correspond to twice (200%) the performance of the S&P
MidCap 400 Index(R).
The UltraMid-Cap ProFund does not intend to hold the 400 securities
included in the S&P Mid-Cap 400 Index(R). Instead, the UltraMid-Cap ProFund
intends to engage in transactions in equities, stock index futures contracts,
options on stock index futures contracts, and options on securities and stock
indexes. As a nonfundamental policy, the UltraMid-Cap ProFund will invest, under
normal conditions, at least 65% of its total assets in the securities comprising
the S&P Mid-Cap 400 Index(R) and instruments with values that are representative
of such securities, such as futures and option contracts on such securities or
such index.
The S&P MidCap 400 Index(R) is a widely used measure of medium capitalized
U.S. company stock performance. It consists of the common stocks of 400 major
corporations selected for their size and the frequency and ease which their
stocks trade. Standard & Poor's also attempts to assure that the Index reflects
the full range and diversity of the American economy. The securities of medium
capitalization companies, while typically not as volatile as the securities of
small capitalization companies, may be more volatile than securities of larger
or more well-known companies.
ULTRAJAPAN PROFUND
The investment objective of the UltraJapan ProFund is to provide daily
investment results that correspond to twice (200%) the performance of the Nikkei
225 Stock Average.
The UltraJapan ProFund does not intend to hold the 225 securities included
in the Nikkei 225 Stock Average. Instead, the UltraJapan ProFund intends to
engage in transactions in equities, stock index futures contracts, options on
stock index futures contracts, and options on securities and stock indexes. As a
nonfundamental policy, the UltraJapan ProFund will invest, under normal
conditions, at least 65% of its total assets in the securities comprising the
Nikkei 225 Stock Average and instruments with values that are representative of
such securities, such as futures and option contracts on such securities or such
index.
The Nikkei 225 Stock Average is a price-weighted index of 225 large,
actively traded Japanese stocks traded on the Tokyo Stock Exchange. The index is
computed and distributed by the Nihon Keizai Shimbun ("NKS")
Investing in foreign companies or financial instruments by this ProFund 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 this ProFund will invest directly
or indirectly, in foreign markets, it will be subject to certain of the market,
economic and political risks prevalent in these foreign markets, and
particularly the Japanese markets.
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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 this ProFund 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.
By investing in American Depository Receipts ("ADRs") under normal market
conditions, the UltraJapan ProFund may reduce some of the risks of investing in
foreign securities. ADRs are denominated in the U.S. Dollar, which reduces the
risk of currency fluctuations during the settlement period for either purchases
or sales. Further, the information available for ADRs is subject to accounting,
auditing and financial reporting standards of the domestic market or exchange on
which they are traded, which standards are more uniform and more exacting than
those to which many foreign issuers may be subject. However, ADRs do not
eliminate all the risk inherent in investing in the securities of foreign
issuers.
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.
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When a ProFund purchases a put or call option on a futures contract, the
ProFund pays a premium for the right to sell or purchase the underlying futures
contract for a specified price upon exercise at any time during the option
period. By writing (selling) a put or call option on a futures contract, a
ProFund receives a premium in return for granting to the purchaser of the option
the right to sell to or buy from the ProFund the underlying futures contract for
a specified price upon exercise at any time during the option period.
Whether a ProFund realizes a gain or loss from futures activities depends
generally upon movements in the underlying commodity. The extent of the
ProFund's loss from an unhedged short position in futures contracts or from
writing options on futures contracts is potentially unlimited. The ProFunds may
engage in related closing transactions with respect to options on futures
contracts. The ProFunds will 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.
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Although the ProFunds intend to sell futures contracts only if there is an
active market for such contracts, no assurance can be given that a liquid market
will exist for any particular contract at any particular time. Many futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a price
beyond that limit or trading may be suspended for specified periods during the
day. Futures contract prices could move to the limit for several consecutive
trading days with little or no trading, thereby preventing prompt liquidation of
futures positions and potentially subjecting a ProFund to substantial losses. If
trading is not possible, or if a ProFund determines not to close a futures
position in anticipation of adverse price movements, the ProFund will be
required to make daily cash payments of variation margin. The risk that the
ProFund will be unable to close out a futures position will be minimized by
entering into such transactions on a national exchange with an active and liquid
secondary market.
INDEX OPTIONS
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 OTC 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 OTC options and the cover
for written OTC options will be subject to the respective ProFund's 15%
limitation on investment in illiquid securities. See "Illiquid Securities."
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Each of the Exchanges has established limitations governing the maximum
number of call or put options on the same index which may be bought or written
(sold) by a single investor, whether acting alone or in concert with others
(regardless of whether such options are written on the same or different
Exchanges or are held or written on one or more accounts or through one or more
brokers). Under these limitations, option positions of all investment companies
advised by the same investment adviser are combined for purposes of these
limits. Pursuant to these limitations, an Exchange may order the liquidation of
positions and may impose other sanctions or restrictions. These position limits
may restrict the number of listed options which a ProFund may buy or sell;
however, the Advisor intends to comply with all limitations.
OPTIONS ON SECURITIES
The non-money market ProFunds may buy and write (sell) options on
securities for the purpose of realizing their respective ProFund's investment
objective. By 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.
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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. 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.
SHORT SALES
The Bear ProFund, the UltraBear ProFund and the UltraShort OTC 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").
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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.
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 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.
AMERICAN DEPOSITORY RECEIPTS
For many foreign securities, U.S. Dollar denominated ADRs, which are traded
in the United States on exchanges or over-the-counter, are issued by domestic
banks. ADRs represent the right to receive securities of foreign issuers
deposited in a domestic bank or a correspondent bank. ADRs do not eliminate all
the risk inherent in investing in the securities of foreign issuers. However, by
investing in ADRs rather than directly in foreign issuers' stock, the UltraJapan
ProFund can avoid currency risks during the settlement period for either
purchase or sales.
In general, there is a large, liquid market in the United States for many
ADRs. The information available for ADRs is subject to the accounting, auditing
and financial reporting standards of the domestic market or exchange on which
they are traded, which standards are more uniform and more exacting than those
to which many foreign issuers may be subject. Certain ADRs, typically those
denominated as unsponsored, require the holders thereof to
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bear most of the costs of such facilities, while issuers of sponsored facilities
normally pay more of the costs thereof. The depository of an unsponsored
facility frequently is under no obligation to distribute shareholder
communications received from the issuer of the deposited securities or to pass
through the voting rights to facility holders with respect to the deposited
securities, whereas the depository of a sponsored facility typically distributes
shareholder communications and passes through the voting rights.
The UltraJapan ProFund may invest in both sponsored and unsponsored ADRs.
Unsponsored ADRs programs are organized independently and without the
cooperation of the issuer of the underlying securities. As result, available
information concerning the issuers may not be as current for sponsored ADRs, and
the prices of unsponsored depository receipts may be more volatile than if such
instruments were sponsored by the issuer.
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.
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
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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.
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
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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 1940 Act, a ProFund must maintain continuous asset
coverage (total assets, including assets acquired with borrowed funds, less
liabilities exclusive of borrowings) of 300% of all amounts borrowed. If at any
time the value of the ProFund's assets should fail to meet this 300% coverage
test, the ProFund, within three days (not including Sundays and holidays), will
reduce the amount of the ProFund's borrowings to the extent necessary to meet
this 300% coverage. Maintenance of this percentage limitation may result in the
sale of portfolio securities at a time when investment considerations otherwise
indicate that it would be disadvantageous to do so. In addition to the
foregoing, the ProFunds are authorized to borrow money from a bank as a
temporary measure for extraordinary or emergency purposes in amounts not in
excess of 5% of the value of the ProFund's total assets. This borrowing is not
subject to the foregoing 300% asset coverage requirement. The ProFunds are
authorized to pledge portfolio securities as the Advisor deems appropriate in
connection with any borrowings.
LENDING OF PORTFOLIO SECURITIES
Subject to the investment restrictions set forth below, each of the
ProFunds and the Portfolio may lend its portfolio securities to brokers,
dealers, and financial institutions, provided that cash equal to at least 100%
of the market value of the securities loaned is deposited by the borrower with
the ProFund/Portfolio and is maintained each business day in a segregated
account pursuant to applicable regulations. While such securities are on loan,
the borrower will pay the lending ProFund/Portfolio any income accruing thereon,
and the ProFund/Portfolio may invest the cash collateral in portfolio
securities, thereby earning additional income. A ProFund/Portfolio will not lend
more than 33 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 Pro Fund 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.
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The Trust will also establish a segregated account with the Trust's
custodian bank in which the ProFunds will maintain liquid instruments equal to
or greater in value than the ProFund's purchase commitments for such when-issued
or delayed-delivery securities, or the Trust does not believe that a ProFund's
net asset value or income will be adversely affected by the ProFund's purchase
of securities on a when-issued or delayed delivery basis.
INVESTMENTS IN OTHER INVESTMENT COMPANIES
The ProFunds 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 OTC 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.
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
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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.
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.
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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.
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
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
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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.
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. Each UltraProFund 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
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as the Money Market ProFund. Therefore, an investor's interest in the
Portfolio's securities is indirect. In addition to selling a beneficial interest
to the Money Market ProFund, the Portfolio may sell beneficial interests to
other mutual funds or institutional investors. Such investors will invest in the
Portfolio on the same terms and conditions and will pay a proportionate share of
the Portfolio's expenses. However, the other investors investing in the
Portfolio are not required to sell their shares at the same public offering
price as the Money Market ProFund or subject to comparable variations in sales
loads and other operating expenses. Therefore, investors in the Money Market
ProFund should be aware that these differences may result in differences in
returns experienced by investors in the different funds that may invest in the
Portfolio. Such differences in returns are also present in other mutual fund
structures. Information concerning other holders of interests in the Portfolio
is available from Bankers Trust at 1-800-368-4031.
The ProFunds' Board of Trustees believes that the Money Market ProFund will
achieve certain efficiencies and economies of scale through the master-feeder
structure, and that the aggregate expenses of the Money Market ProFund will be
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.
INVESTMENT RESTRICTIONS
The ProFunds and the Portfolio have adopted certain investment restrictions
as fundamental policies which cannot be changed without the approval of the
holders of a "majority" of the outstanding shares of the ProFund or the
Portfolio, as that term is defined in the 1940 Act. The term "majority" is
defined in the 1940 Act as the lesser of: (i) 67% or more of the shares of the
series present at a meeting of shareholders, if the holders of more than 50% of
the outstanding shares of the ProFund are present or represented by proxy; or
(ii) more than 50% of the outstanding shares of the series. (All policies of a
ProFund not specifically identified in this Statement of Additional Information
or the Prospectus as fundamental may be changed without a vote of the
shareholders of the ProFund.) For purposes of the following limitations, all
percentage limitations apply immediately after a purchase or initial investment.
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A non-money market ProFund may not:
1. Invest more than 25% of its total assets, taken at market value
at the time of each investment, in the securities of issuers in
any particular industry (excluding the U.S. government and its
agencies and instrumentalities).
2. Make investments for the purpose of exercising control or
management.
3. Purchase or sell real estate, except that, to the extent
permitted by applicable law, the ProFund may invest in securities
directly or indirectly secured by real estate or interests
therein or issued by companies that invest in real estate or
interests therein.
4. Make loans to other persons, except that the acquisition of
bonds, debentures or other corporate debt securities and
investment in government obligations, commercial paper, pass-
through instruments, certificates of deposit, bankers'
acceptances and repurchase agreements and purchase and sale
contracts and any similar instruments shall not be deemed to be
the making of a loan, and except further that the ProFund may
lend its portfolio securities, provided that the lending of
portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Prospectus and
this Statement of Additional Information, as they may be amended
from time to time.
5. Issue senior securities to the extent such issuance would violate
applicable law.
6. Borrow money, except that the ProFund (i) may borrow from banks
(as defined in the Investment Company Act of 1940) in amounts up
to 33 1/3% of its total assets (including the amount borrowed),
(ii) may, to the extent permitted by applicable law, borrow up to
an additional 5% of its total assets for temporary purposes,
(iii) may obtain such short-term credit as may be necessary for
the clearance of purchases and sales of portfolio securities,
(iv) may purchase securities on margin to the extent permitted by
applicable law and (v) may enter into reverse repurchase
agreements. The ProFund may not pledge its assets other than to
secure such borrowings or, to the extent permitted by the
ProFund's investment policies as set forth in the Prospectus and
this Statement of Additional Information, as they may be amended
from time to time, in connection with hedging transactions, short
sales, when-issued and forward commitment transactions and
similar investment strategies.
7. Underwrite securities of other issuers, except insofar as the
ProFund technically may be deemed an underwriter under the
Securities Act of 1933, as amended (the "Securities Act"), in
selling portfolio securities.
8. Purchase or sell commodities or contracts on commodities, except
to the extent the ProFund may do so in accordance with applicable
law and the ProFund's Prospectus and Statement of Additional
Information, as they may be amended from time to time.
THE FOLLOWING FUNDAMENTAL INVESTMENT RESTRICTIONS AND NON-FUNDAMENTAL
INVESTMENT OPERATING POLICIES HAVE BEEN ADOPTED BY THE TRUST, WITH RESPECT TO
THE MONEY MARKET PROFUND, AND BY THE PORTFOLIO. UNLESS AN INVESTMENT INSTRUMENT
OR TECHNIQUE IS DESCRIBED IN THE PROSPECTUS OR ELSEWHERE HEREIN, THE MONEY
MARKET PROFUND AND THE PORTFOLIO MAY NOT INVEST IN THAT INVESTMENT INSTRUMENT OR
ENGAGE IN THAT INVESTMENT TECHNIQUE.
The investment restrictions below have been adopted by the Trust with
respect to the Money Market ProFund and by the Portfolio as fundamental policies
(as defined above). Whenever the Money Market ProFund is requested to vote on a
change in the investment restrictions of the Portfolio, the Trust will hold a
meeting of the Money Market ProFund shareholders and will cast its votes as
instructed by the shareholders. The Money Market ProFund shareholders who do not
vote will not affect the Trust's votes at the Portfolio meeting. The percentage
of
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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
market.
2. Pledge, hypothecate, mortgage or otherwise encumber more than 5%
of the total assets of the ProFund or the Portfolio, as the case
may be, and only to secure borrowings for temporary or emergency
purposes.
3. Invest more than 5% of the total assets of the ProFund or the
Portfolio, as the case may be, in any one issuer (other than U.S.
government obligations) or purchase more than 10% of any class of
securities of any one issuer; provided, however, that (i) up to
25% of the assets of the ProFund and the Portfolio may be
invested without regard to this restriction; provided, however,
that nothing in this investment restriction shall prevent the
Trust from investing all or part of a ProFund's assets in an
open-end management investment company with substantially the
same investment objectives as the ProFund.
4. Invest more than 25% of the total assets of the ProFund or the
Portfolio, as the case may be, in the securities of issuers in
any single industry; provided that: (i) this limitation shall not
apply to the purchase of U.S. government obligations; (ii) under
normal market conditions more than 25% of the total assets of the
Money Market ProFund and the Portfolio will be invested in
obligations of 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
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ProFund's assets in an open-end management investment company
with substantially the same investment objective as the ProFund.
10. Purchase more than 10% of the voting securities of any issuer or
invest in companies for the purpose of exercising control or
management; provided, however, that nothing in this investment
restriction shall prevent the Trust from investing all or part of
the ProFund's assets in an open-end management investment company
with substantially the same investment objectives as the ProFund.
11. Purchase securities of other investment companies, except to the
extent permitted under the 1940 Act or in connection with a
merger, consolidation, reorganization, acquisition of assets or
an offer of exchange; provided, however, that nothing in this
investment restriction shall prevent the Trust from investing all
or part of the ProFunds' assets in an open-end management
investment company with substantially the same investment
objectives as the ProFund.
12. Issue any senior securities, except insofar as it may be deemed
to have issued a senior security by reason of (i) entering into a
reverse repurchase agreement or (ii) borrowing in accordance with
terms described in the Prospectus and this SAI.
13. Purchase or retain the securities of any issuer if any of the
officers or trustees of the ProFund or the Portfolio or Bankers
Trust owns individually more than 1/2 of 1% of the securities of
such issuer, and together such officers and directors own more
than 5% of the securities of such issuer.
14. Invest in warrants, except that the ProFund or the Portfolio may
invest in warrants if, as a result, the investments (valued in
each case at the lower of cost or market) would not exceed 5% of
the value of the net assets of the ProFund or the Portfolio, as
the case may be, of which not more than 2% of the net assets of
the ProFund or the Portfolio, as the case may be, may be invested
in warrants not listed on a recognized domestic stock exchange.
Warrants acquired by the ProFund or the Portfolio as part of a
unit or attached to securities at the time of acquisition are not
subject to this limitation.
ADDITIONAL RESTRICTIONS. In order to comply with certain statutes and
policies, the Portfolio (or, 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 market), except that the Portfolio
(ProFund) may borrow for temporary or emergency purposes up to
1/3 of its net assets;
(ii) pledge, mortgage or hypothecate for any purpose in excess of
10% of the Portfolio's (ProFund's) total assets (taken at
market value), provided that collateral arrangements with
respect to options and futures, including deposits of initial
deposit and variation margin, are not considered a pledge of
assets for purposes of this restriction;
(iii) purchase any security or evidence of interest therein on
margin, except that such short-term credit as may be necessary
for the clearance of purchases and sales of securities may be
obtained and except that deposits of initial deposit and
variation margin may be made in connection with the purchase,
ownership, holding or sale of futures;
(iv) sell any security which it does not own unless by virtue of its
ownership of other securities it has at the time of sale a
right to obtain securities, without payment of further
consideration, equivalent in kind and amount to the securities
sold and provided that if such right is conditional the sale is
made upon the same conditions;
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(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;
(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.
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DETERMINATION OF NET ASSET VALUE
The net asset values of the shares of the ProFunds (except the UltraEurope
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 are
determined as of the latest close of trading on three exchanges tracked by the
PEI (ordinarily 11:30 a.m. 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.
The net asset value of each class of shares of a ProFund serves as the
basis for the purchase and redemption price of the 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 Trust's Board of Trustees.
Except for the UltraEurope 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.
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For the UltraEurope 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
the UltraEurope ProFund 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.
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
27
<PAGE>
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.
OTC 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.
28
<PAGE>
Pursuant to the rule, the Board of Trustees of the Portfolio also has
established procedures designed to allow investors in the Portfolio, such as the
Money Market ProFund, to stabilize, to the extent reasonably possible, the
investors' price per share as computed for the purpose of sales and redemptions
at $1.00. These procedures include review of the Portfolio's holdings by the
Portfolio's Board of Trustees, at such intervals as it deems appropriate, to
determine whether the value of the Portfolio's assets calculated by using
available market quotations or market equivalents deviates from such valuation
based on amortized cost.
The rule also provides that the extent of any deviation between the value
of the Portfolio's assets based on available market quotations or market
equivalents and such valuation based on amortized cost must be examined by the
Portfolio's Board of Trustees. In the event the Portfolio's Board of Trustees
determines that a deviation exists that may result in material dilution or other
unfair results to investors or existing shareholders, pursuant to the rule, the
Portfolio's Board of Trustees must cause the Portfolio to take such corrective
action as such Board of Trustees regards as necessary and appropriate,
including: selling portfolio instruments prior to maturity to realize capital
gains or losses or to shorten average portfolio maturity; withholding dividends
or paying distributions from capital or capital gains; redeeming shares in kind;
or valuing the Portfolio's assets by using available market quotations.
Each investor in the Portfolio, including the Money Market ProFund, may add
to or reduce its investment in the Portfolio on each day the Portfolio
determines its Net Asset Value ("NAV"). At the close of each such business day,
the value of each investor's beneficial interest in the Portfolio will be
determined by multiplying the NAV of the Portfolio by the percentage, effective
for that day, which represents that investor's share of the aggregate beneficial
interests in the Portfolio. Any additions or withdrawals, which are to be
effected as of the close of business on that day, will then be effected. The
investor's percentage of the aggregate beneficial interests in the Portfolio
will then be recomputed as the percentage equal to the fraction (i) the
numerator of which is the value of such investor's investment in the Portfolio
as of the close of business on such day plus or minus, as the case may be, the
amount of net additions to or withdrawals from the investor's investment in the
Portfolio effected as of the close of business on such day, and (ii) the
denominator of which is the aggregate NAV of the Portfolio as of the close of
business on such day plus or minus, as the case may be, the amount of net
additions to or withdrawals from the aggregate investments in the Portfolio by
all investors in the Portfolio. The percentage so determined will then be
applied to determine the value of the investor's interest in the Portfolio as of
the close of the following business day.
For the fiscal years ended December 31, 1998 and 1999, each non-money
ProFund paid brokerage commissions in the following amounts:
BROKERAGE COMMISSIONS
FYE 12/31
1998 1999
---- ----
Bull ProFund $ 4,605 $ 103,401
UltraBull ProFund 70,575 273,433
Bear ProFund 3,005 14,180
UltraBear ProFund 50,160 112,090
UltraOTC ProFund 726,475 1,762,180
UltraShort OTC ProFund 44,560 170,455
UltraEurope ProFund -- 21,312
29
<PAGE>
The UltraEurope ProFund had not commenced operations as of December 31,
1998. The UltraSmall-Cap ProFund, UltraMid-Cap ProFund and UltraJapan ProFund
had not commenced operations as of December 31, 1999.
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 Trust are the
responsibilities of Trust's 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 the Advisor.
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; 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.
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.
GARY R. TENKMAN: (birthdate: September 16, 1970): Treasurer; BISYS Fund
Services, Vice President, Financial Services; Ernst & Young LLP, Audit Manager,
Investment Management Services Group. His address is 3435 Stelzer Road,
Columbus, Ohio 43219.
*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, 1999.
NAME OF
PERSON: POSITION COMPENSATION
- ---------------- ------------
Michael L. Sapir, Trustee, Chairman and Chief Executive Officer None
Louis M. Mayberg, Trustee, President, Secretary None
Russell S. Reynolds, III, Trustee $5,500
Michael C. Wachs, Trustee $5,500
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<PAGE>
As of April 3, 2000, the Trustees and Officers of the ProFunds beneficially
owned in the aggregate less than 1% of the shares of each ProFund.
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
TRUSTEES OF THE PORTFOLIO:
CHARLES P. BIGGAR (birth date: October 13, 1930) - Trustee of the
Portfolio; Trustee of each of the other investment companies in the Deutsche
Asset Management 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.
S. LELAND DILL (birth date: March 28, 1930) - Trustee of the Portfolio;
Trustee of each of the other investment companies in the Deutsche Asset
Management Fund Complex; Retired; former Partner, KPMG Peat Marwick; Director,
Coutts (U.S.A.) International; Trustee, Phoenix-Zweig Series Trust/2/ and
Phoenix-Euclid Market Neutral Fund/2/; 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 Portfolio;
Trustee of each of the other investment companies in the Deutsche Asset
Management 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 Portfolio;
Trustee of each of the other investment companies in the Deutsche Asset
Management 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
Portfolio; Trustee of each of the other investment companies in the Deutsche
Asset Management Fund Complex; Jacob Safra Professor of International Banking
and Professor of Finance Department, 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 Portfolio;
Trustee of each of the other investment companies in the Deutsche Asset
Management Fund Complex; Retired; formerly, Assistant Treasurer of
_______________________________
/1/ The "Deutsche Asset Management 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.
/2/ An investment company registered under the 1940 Act.
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<PAGE>
IBM Corporation (until 1986); Trustee and Member, Investment Operations
Committee, Allmerica Financial Mutual Funds (1992 - present); Member, Pension
and Thrift Plans Investment Committee, Unilever U.S. Corporation (1989 -
present)/3/; Director, TWA Pilots Directed Account Plan and 401(k) Plan (1988-
present). His address is 99 Jordan Lane, Stamford, Connecticut 06903.
PHILIP SAUNDERS, JR. (birth date: October 11, 1935) - Trustee of the
Portfolio; Trustee of each of the other investment companies in the Deutsche
Asset Management Fund Complex; Principal, Philip Saunders Associates (Economic
and Financial Consulting); 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
Portfolio; Trustee of each of the other investment companies in the Deutsche
Asset Management Fund Complex; Retired; Corporate Vice President, Newmont Mining
Corporation (prior to 1987); Director, Canada Life Insurance of New York (Since
1987). 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.
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 Portfolio;
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 Portfolio; 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 Portfolio;
Director 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.
Mssrs. Hirsch, Keffer and Rizzo also hold similar positions for other
investment companies for which ICC Distributors, Inc., or an affiliate, serves
as principal underwriter.
_____________________________
/3/ A publicly held company with securities registered pursuant to Section 12
of the Securities and Exchange Act of 1934, as amended.
/4/ Underwriter/distributor for the Portfolio. Mr. Keffer owns 100% of the
shares of ICC Distributors, Inc.
32
<PAGE>
PORTFOLIO TRUSTEE COMPENSATION TABLE
The following table reflects fees paid to the Portfolio Trustees for the
year ended December 31, 1999.
AGGREGATE COMPENSATION
NAME OF FROM CASH TOTAL COMPENSATION
PERSON; POSITION MANAGEMENT PORTFOLIO* FROM FUND COMPLEX**
- ---------------- --------------------- -------------------
Charles P. Biggar $1,235 $43,750
Trustee, Portfolio
S. Leland Dill $1,075 $43,750
Trustee, Portfolio
Martin J. Gruber $ 212 $45,000
Trustee, Portfolio
Richard Hale None None
Trustee, Portfolio
Richard Herring $ 189 $43,750
Trustee, Portfolio
Bruce E. Langton $ 212 $43,750
Trustee, Portfolio
Philip Saunders, Jr. $1,108 $45,000
Trustee, Portfolio
Harry Van Benschoten $ 212 $45,000
Trustee, Portfolio
* The information provided is for Cash Management Portfolio for the
Portfolio's most recent fiscal year ended December 31, 1999.
** Aggregated information is furnished for the Deutsche Asset Management
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.
INVESTMENT ADVISERS
PROFUND ADVISORS LLC
Under an investment advisory agreement between the Advisor and the Trust,
on behalf of each ProFund other than the Money Market ProFund, dated October 28,
1997 and amended February 18, 1998 and as amended and restated October 15, 1999
and January 24, 2000 (the "Agreement"), each such ProFund, except the
UltraEurope ProFund and the UltraJapan ProFund, pays the Advisor a fee at an
annualized rate, based on its average daily net assets of 0.75%. Under the
Agreement, each the UltraEurope ProFund and the UltraJapan 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,
33
<PAGE>
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. The Advisor's address is 7900 Wisconsin
Avenue, Suite 300, Bethesda, Maryland 20814.
For the fiscal years ended December 31, 1997, 1998 and 1999, the Advisor was
entitled to, and voluntarily waived, advisory fees in the following amounts for
each of the ProFunds:
ADVISORY FEES
FYE 12/31
<TABLE>
<CAPTION>
1997 1998 1999
Earned Waived Earned Waived Earned Waived
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Bull ProFund $ 28 $ 28 $ 21,580 $16,135 $ 256,852 $ 19,821
UltraBull ProFund 1,609 1,609 247,991 13,585 1,126,462 --
Bear ProFund 52 52 11,044 10,205 104,541 23, 324
UltraBear ProFund 615 615 126,301 -- 458,760 --
UltraOTC ProFund 751 751 419,023 -- 3,446,266 --
UltraShort OTC ProFund 38,021 -- 499,786 --
UltraEurope ProFund 41,329 41,329
</TABLE>
The UltraShort OTC ProFund had not commenced operations as of December 31,
1997. The UltraEurope ProFund had not commenced operations as of December 31,
1998. The UltraSmall-Cap ProFund, UltraMid-Cap ProFund and UltraJapan ProFund
had not commenced operations as of December 31, 1999
BANKERS TRUST
Under the terms of an investment advisory agreement (the "Advisory
Agreement") between the Portfolio and Bankers Trust, Bankers Trust manages the
Portfolio subject to the supervision and direction of the Board of Trustees of
the Portfolio. Bankers Trust will: (i) act in strict conformity with the
Portfolio's Declaration of Trust, the 1940 Act and the Investment Advisers Act
of 1940, as the same may from time to time be amended; (ii) manage the Portfolio
in accordance with the Portfolio's and/or the Money Market ProFund's investment
objectives, restrictions and policies, as stated herein and in the Prospectus;
(iii) make investment decisions for the Portfolio; and (iv) place purchase and
sale orders for securities and other financial instruments on behalf of the
Portfolio.
Bankers Trust is a wholly owned subsidiary of Deutsche Bank. Deutsche Bank
is a banking company with limited liability organized under the laws of the
Federal Republic of Germany. Deutsche Bank is the parent company of a group
consisting of banks, capital markets companies, fund management companies,
mortgage banks, a property finance company, installments financing and leasing
companies, insurance companies, research and consultancy companies and other
domestic and foreign companies.
Bankers Trust, subject to the supervision and direction of the Board of
Trustees of the Portfolio, manages the Portfolio in accordance with the
Portfolio's investment objectives and stated investment policies, makes
investment decisions for the Portfolio, places orders to purchase and sell
securities and other financial instruments on behalf of the Portfolio and
employs professional investment managers and securities analysts who provide
research services to the Portfolio. Bankers Trust may utilize the expertise of
any of its worldwide subsidiaries or affiliates to assist it in its role as
investment adviser. All orders for investment transactions on behalf of the
Portfolio are placed by Bankers Trust with brokers, dealers and other financial
intermediaries that it selects, including those affiliated with Bankers Trust. A
Bankers Trust affiliate will be used in connection with a purchase or sale of an
investment for the Portfolio only if Bankers Trust believes that the affiliate's
charge for transaction does not exceed usual and customary levels. The Portfolio
will not invest in obligations for which Bankers Trust or any of its affiliates
is the ultimate obligor or accepting bank. The Portfolio may, however, invest in
the obligations of correspondents or customers of Bankers Trust.
34
<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, 1999, 1998 and 1997 Banker's Trust
earned $10,613,250, $ 8,019,093, and $6,544,181 respectively, in compensation
for investment advisory services provided to the Portfolio. During the same
periods, Bankers Trust reimbursed $1,445,608, $1,151,727 and $940,530,
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.
On March 11, 1999, Bankers Trust announced that it had reached an agreement
with the United States Attorney's Office in the Southern District of New York to
resolve an investigation concerning inappropriate transfers of unclaimed funds
and related record-keeping problems that occurred between 1994 and early 1996.
Bankers Trust pleaded guilty to misstating entries in the bank's books and
records and agreed to pay a $63.5 million fine to state and federal authorities.
On July 26, 1999, the federal criminal proceedings were concluded with Bankers
Trust's formal sentencing. The events leading up to the guilty pleas did not
arise out of the investment advisory or mutual fund management activities of
Bankers Trust or its affiliates.
As a result of the plea, absent an order from the SEC, Bankers Trust would
not be able to continue to provide investment advisory services to the Funds.
The SEC has granted a temporary order to permit Bankers Trust and its affiliates
to continue to provide investment advisory services to registered investment
companies. There is no assurance that the SEC will grant a permanent order.
CODE OF ETHICS
The Trust and the Advisor each have adopted a code of ethics, as required
by applicable law, which is designed to prevent affiliated persons of the Trust
and the Advisor from engaging in deceptive, manipulative, or fraudulent
activities in connection with securities held or to be acquired by the ProFunds
(which may also be held by persons subject to a code). There can be no assurance
that the codes will be effective in preventing such activities.
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
35
<PAGE>
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.
For the fiscal years ended December 31, 1997, 1998 and 1999, 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
<TABLE>
<CAPTION>
1997 1998 1999
Earned Waived Earned Waived Earned Waived
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Bull ProFund $ 6 $ 6 $ 4,316 $ 876 $ 42,221 $ 1,621
UltraBull ProFund 322 322 49,599 6,321 218,932 19,797
Bear ProFund 10 10 2,208 944 19,034 429
UltraBear ProFund 123 123 25,260 2,500 96,949 11,660
UltraOTC ProFund 150 150 83,805 7,605 691,106 87,526
Money Market ProFund 422 422 49,213 5,728 189,248 --
UltraShort OTC ProFund -- -- 6,616 -- 100,112 10,042
UltraEurope ProFund -- -- -- -- 6,888 --
</TABLE>
The UltraShort OTC ProFund had not commenced operation as of December 31,
1997. The UltraEurope ProFund had not commenced operations as of December 31,
1998. The UltraSmall-Cap ProFund, UltraMid-Cap ProFund and UltraJapan ProFund
had not commenced operations as of December 31, 1999.
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, 1998 and 1999, ProFund
Advisors LLC was entitled to, and voluntarily waived, management services fees
in the following amounts for each of the ProFunds:
36
<PAGE>
MANAGEMENT SERVICES FEES
FYE 12/31
<TABLE>
<CAPTION>
1997 1998 1999
Earned Waived Earned Waived Earned Waived
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Bull ProFund $ 6 $ 6 $ 4,316 $ 4,316 $ 51,512 $22,746
UltraBull ProFund 322 322 49,599 -- 225,294 --
Bear ProFund 10 10 2,209 2,209 20,908 17,841
UltraBear ProFund 123 123 25,260 4,986 91,752 --
UltraOTC ProFund 150 150 83,805 10,681 689,257 --
Money Market ProFund 984 984 114,832 55,586 744,520 --
UltraShort OTC ProFund -- -- 6,985 934 99,958 --
UltraEurope ProFund -- -- -- -- 6,888 6,888
</TABLE>
The UltraShort OTC ProFund had not commenced operation as of December 31,
1997. The UltraEurope ProFund had not commenced operations as of December 31,
1998. The UltraSmall-Cap ProFund, UltraMid-Cap ProFund and UltraJapan ProFund
had not commenced operations as of December 31, 1999.
Under an Administration and Services Agreement, Bankers Trust is obligated
on a continuous basis to provide such administrative services as the Board of
Trustees of the Portfolio reasonably deems necessary for the proper
administration of the Portfolio. Bankers Trust will generally assist in all
aspects of the Portfolio's operations and will: supply and maintain office
facilities (which may be in Bankers Trust's own offices); statistical and
research data, data processing services, clerical, accounting, bookkeeping and
recordkeeping services (including, without limitation, the maintenance of such
books and records as are required under the 1940 Act and the rules thereunder,
except as maintained by other agents of the Portfolio); internal auditing,
executive and administrative services; and information and supporting data for
reports to and filings with the Commission and various state Blue Sky
authorities; supply supporting documentation for meetings of the Board of
Trustees; provide monitoring reports and assistance regarding compliance with
the Portfolio's Declaration of Trust, by-laws, investment objectives and
policies and with federal and state securities laws; arrange for appropriate
insurance coverage; calculate the net asset value, net income and realized
capital gains or losses of the Portfolio; and negotiate arrangements with, and
supervise and coordinate the activities of, agents and others retained to supply
services. Pursuant to a sub-administration agreement (the "Sub-Administration
Agreement") Federated Securities Company performs sub-administration duties for
the Portfolio as from time to time may be agreed upon by Bankers Trust and
Federated Securities Company. The Sub-Administration Agreement provides that
Federated Securities Company will receive such compensation as from time to time
may be agreed upon by Federated Securities Company and Bankers Trust. All such
compensation will be paid by Bankers Trust.
For the fiscal years ended December 31, 1999, 1998 and 1997, Bankers Trust
earned compensation of $3,539,131, $2,673,031 and $2,181,394, 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
37
<PAGE>
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 may make payments of up to 1.00% (on an annual basis)
of the average daily value of the net assets of such ProFund's Service 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 the ProFunds. In
the Trustees' quarterly review of the Plan and Shareholder Services Agreements,
they will consider their continued appropriateness and the level of compensation
provided therein.
The intent of the Plan and Shareholder Services Agreements is to procure
quality shareholder services on behalf of ProFund shareholders; in adopting the
Plan and Shareholder Services Agreements, the Trustees considered the fact that
such shareholder services may have the effect of enhancing distribution of
ProFund Service Shares and growth of the ProFunds. In light of this, the
ProFunds intend to observe the procedural requirements of Rule 12b-1 under the
1940 Act in considering the continued appropriateness of the Plan and
Shareholder Services Agreements.
For the last fiscal year ended December 31, 1999, each ProFund paid
shareholder services fees to authorized firms in the following amounts:
SHAREHOLDER SERVICES FEES
FYE 12/31
Bull ProFund $ 67,494
UltraBull ProFund 320,281
Bear ProFund 6,925
UltraBear ProFund 85,433
UltraOTC ProFund 596,659
Money Market ProFund 620,680
UltraShort OTC ProFund 18,370
UltraEurope ProFund 31,660
38
<PAGE>
The UltraSmall-Cap ProFund, UltraMid-Cap ProFund and UltraJapan ProFund had not
commenced operation as of December 31, 1999.
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; administrative and transfer agency and shareholder servicing fees;
custodian and accounting fees and expenses, legal and auditing fees; securities
valuation expenses; fidelity bonds and other insurance premiums; expenses of
preparing and printing prospectuses, confirmations, proxy statements, and
shareholder reports and notices; registration fees and expenses; proxy and
annual meeting expenses, if any; all Federal, state, and local taxes (including,
without limitation, stamp, excise, income, and franchise taxes); organizational
costs; and 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 thirty-nine separately managed series. Other separate
series may be added in the future. Each ProFund offers two classes of shares:
the Service Shares and the Investor Shares.
All shares of the 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.
If a ProFund does not grow to a size to permit it to be economically
viable, the ProFund may cease operations. In such an event, investors may be
required to liquidate or transfer their investments at an inopportune time.
CAPITALIZATION
As of April 3, 2000, 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
- --------------------------------------- -------------- -----------
Independent Trust Corp 91,728,738.700 26.3689%
Funds 84
15255 S 94th Ave 3rd Floor
39
<PAGE>
Orland Park, IL 60462
MONEY MARKET PROFUND--SERVICE SHARES TOTAL SHARES PERCENTAGE
- --------------------------------------- -------------- ----------
Fred Kavli 15,643,748.991 10.1009%
14501 E. Los Angeles Ave.
Moorpark, CA 93021
BULL PROFUND--INVESTOR SHARES TOTAL SHARES PERCENTAGE
- ----------------------------- ------------ ----------
National Investor Services Corp 80,660.494 19.5783%
Exclusive Benefit of Customers
55 Water St. 32nd FL
New York, NY 10041-3299
Dawn & Co. 63,088.549 15.3150%
346 Main St.
Kensington, CT 06037
Charles Schwab and Co. Inc. 56,064.766 13.6100%
Special Custody Account of Customers
101 Montgomery St.
San Francisco, CA 94104
FMCO 51,441.438 12.4876%
One Financial Plaza
Holland, MI 49423
Independent Trust Corp 46,417.553 11.2661%
Funds CMSI
15255 S 94th Ave 3rd Floor
Orland Park, IL 60462
BULL PROFUND--SERVICE SHARES TOTAL SHARES PERCENTAGE
- ----------------------------------------- ------------- ----------
National Investor Services Corp 34,939.610 59.0523%
Exclusive Benefit of Customers
55 Water St. 32nd FL
New York, NY 10041
First Trust Corporation 10,715.961 18.1113%
P.O. Box 173736
Denver, CO 80217
ULTRABULL PROFUND--INVESTOR SHARES TOTAL SHARES PERCENTAGE
- ----------------------------------------- ------------- ----------
National Investor Services Corp 1,689,851.753 24.9493%
Exclusive Benefit of Customers
55 Water St. 32nd FL
New York, NY 10041-3299
Charles Schwab and Co. Inc. 1,062,166.389 15.6820%
Special Custody Account of Customers
40
<PAGE>
101 Montgomery St.
San Francisco, CA 94104
ULTRABULL PROFUND--SERVICE SHARES TOTAL SHARES PERCENTAGE
- --------------------------------- ------------ ----------
Southwest Securities Inc. 549,535.693 23.3179%
Special Custody Account of Customers
101 Montgomery St.
San Francisco, CA 94104
National Investor Services Corp 284,312.026 10.2066%
Exclusive Benefit of Customers
55 Water St. 32nd FL
New York, NY 10041-3299
BEAR PROFUND--INVESTOR CLASS SHARES TOTAL SHARES PERCENTAGE
- ----------------------------------- ------------ ----------
Charles Schwab and Co. Inc. 21,107.445 35.9618%
Special Custody Account of Customers
101 Montgomery St.
San Francisco, CA 94104
BEAR PROFUND--SERVICE SHARES TOTAL SHARES PERCENTAGE
- ---------------------------- ------------ ----------
Edward D. Meyer 5,719.233 62.4333%
2918 Sandy Hollow
Rockford, IL 61109
National Investors Services Corp. 1,154.707 12.5052%
Exclusive Benefit of Customers
56 Water St., 32/nd/ fl
New York, NY 10041
ULTRABEAR PROFUND--INVESTOR SHARES TOTAL SHARES PERCENTAGE
- ---------------------------------- ------------ ----------
Charles Schwab and Co. Inc. 402,876.982 25.9749%
Special Custody Account of Customers
101 Montgomery St.
San Francisco, CA 94104
National Investors Services Corp. 188,008.944 12.1216%
Exclusive Benefit of Customers
56 Water St., 32/nd/ Floor
New York, NY 10041
ULTRABEAR PROFUND--SERVICE SHARES TOTAL SHARES PERCENTAGE
- --------------------------------- ------------ ----------
NFSC FEBO AFS-245577 84,609.682 17.9098%
Sabrina Vezaley
6140 SW 88/th/ St.
Miami, FL 33156
Trust Company of America, PSI 50,143.568 10.6142%
7103 S. Revere PKY
Englewood, CO 80112
41
<PAGE>
ULTRAOTC PROFUND--INVESTOR SHARES TOTAL SHARES PERCENTAGE
- --------------------------------- ------------ ----------
Charles Schwab and Co., Inc. 3,380,431.303 26.2563%
Special Custody Account of Customers
101 Montgomery St.
San Francisco, CA 94104
National Investor Services Corp. 2,706,952.205 21.0254%
Exclusive Benefit of Customers
55 Water St. 32nd FL
New York, NY 10041-3299
ULTRAOTC PROFUND--SERVICE SHARES TOTAL SHARES PERCENTAGE
- -------------------------------- ------------ ----------
Donaldson Lufkin & Jenrette Sec Corp 239,768.287 13.8349%
P.O. Box 2052
Jersey City, NJ 07303
Stockton Nominee Partnership 305,118.588 17.6057%
3001 E. Camelback Rd No. 100
Phoenix, AZ 86016
ULTRASHORT OTC PROFUND--INVESTOR SHARES TOTAL SHARES PERCENTAGE
- --------------------------------------- ------------ ----------
Charles Schwab and Co., Inc. 467,084.655 25.0015%
Special Custody Account of Customers
101 Montgomery St.
San Francisco, CA 94104
National Investor Services Corp. 223,315.830 11.9533%
Exclusive Benefit of Customers
55 Water St. 32nd FL
New York, NY 10041
ULTRASHORT OTC PROFUND--SERVICE SHARES TOTAL SHARES PERCENTAGE
- -------------------------------------- ------------ ----------
Scottsdale Securities Inc. FBO 33,444.815 31.8592%
Gregory S. Young
P.O. Box 31759
St. Louis, MO 63131
ULTRAEUROPE PROFUND--INVESTOR SHARES TOTAL SHARES PERCENTAGE
- ------------------------------------ ------------ ----------
First Trust Corporation 23,158.328 19.2558%
P.O. Box 173736
Denver, CO 80217
ULTRAEUROPE PROFUND--SERVICE SHARES TOTAL SHARES PERCENTAGE
- ----------------------------------- ------------ ----------
Trust Company of America, FSI 3,679.000 18.4712%
7103 S. Revere PKY
42
<PAGE>
Englewood, CO 80112
Donaldson Lufkin & Jenrette Sec Corp 3,157.277 15.8518%
P.O. Box 2052
Jersey City, NJ 07303
ULTRASMALL-CAP PROFUND--SERVICE SHARES TOTAL SHARES PERCENTAGE
- -------------------------------------- ------------ ----------
Donaldson Lufkin & Jenrette Sec Corp 50,468.203 24.3118%
P.O. Box 2052
Jersey City, NJ 07303
Fred Kavli 28,425.085 13.6958%
14501 E. Los Angeles Ave.
Moorpark, CA 93021
ULTRAMID-CAP PROFUND--SERVICE SHARES TOTAL SHARES PERCENTAGE
- ------------------------------------ ------------ ----------
FJ O'Neil Charitable Corporation 21,293.632 16.6064%
3550 Lander Rd, Room 140
Pepper Pike, OH 44124
Trust Company of America, DGS 15,993.598 12.4730%
7103 S. Revere PKY
Englewood, CO 80112
ULTRAJAPAN PROFUND--INVESTOR SHARES TOTAL SHARES PERCENTAGE
- ----------------------------------- ------------ ----------
Key Group Investors Limited Partnership 50,568.900 45.5013%
P.O. Box 5485
Beverly Farms, MA 01915
ULTRAJAPAN PROFUND--SERVICE SHARES TOTAL SHARES PERCENTAGE
- ---------------------------------- ------------ ----------
FJ O'Neil Charitable Corporation 40,488.844 72.7393%
3550 Lander Rd, Room 140
Pepper Pike, OH 44124
A shareholder who beneficially owns, directly or indirectly, more than 25% of
a ProFund's voting securities may be deemed a "control person" (as defined in
the 1940 Act) of the ProFund.
TAXATION
Set forth below is a discussion of certain U.S. federal income tax issues
concerning the ProFunds and the purchase, ownership, and disposition of ProFund
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.
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<PAGE>
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.
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 RIC, 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
44
<PAGE>
paid by the ProFund during January of the following year. Such distributions
will be taxable to shareholders in the calendar year in which the distributions
are declared, rather than the calendar year in which the distributions are
received.
MARKET DISCOUNT
If ProFund purchases a debt security at a price lower than the stated
redemption price of such debt security, the excess of the stated redemption
price over the purchase price is "market discount". If the amount of market
discount is more than a de minimis amount, a portion of such market discount
must be included as ordinary income (not capital gain) by the ProFund in each
taxable year in which the ProFund owns an interest in such debt security and
receives a principal payment on it. In particular, the ProFund will be required
to allocate that principal payment first to the portion of the market discount
on the debt security that has accrued but has not previously been includable in
income. In general, the amount of market discount that must be included for each
period is equal to the lesser of (i) the amount of market discount accruing
during such period (plus any accrued market discount for prior periods not
previously taken into account) or (ii) the amount of the principal payment with
respect to such period. Generally, market discount accrues on a daily basis for
each day the debt security is held by a ProFund at a constant rate over the time
remaining to the debt security's maturity or, at the election of the ProFund, at
a constant yield to maturity which takes into account the semi-annual
compounding of interest. Gain realized on the disposition of a market discount
obligation must be recognized as ordinary interest income (not capital gain) to
the extent of the "accrued market discount."
ORIGINAL ISSUE DISCOUNT
Certain debt securities acquired by the ProFunds may be treated as debt
securities that were originally issued at a discount. Original issue discount
can generally be defined as the difference between the price at which a security
was issued and its stated redemption price at maturity. Although no cash income
is actually received by a ProFund, original issue discount that accrues on a
debt security in a given year generally is treated for federal income tax
purposes as interest and, therefore, such income would be subject to the
distribution requirements applicable to regulated investment companies.
Some debt securities may be purchased by the ProFunds at a discount that
exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for federal income tax purposes
(see above).
OPTIONS, FUTURES AND FOREIGN CURRENCY FORWARD CONTRACTS
Any regulated futures contracts and certain options (namely, nonequity
options and dealer equity options) in which a ProFund may invest may be "section
1256 contracts." Gains (or losses) on these contracts generally are considered
to be 60% long-term and 40% short-term capital gains or losses; however foreign
currency gains or losses arising from certain section 1256 contracts are
ordinary in character. Also, section 1256 contracts held by a ProFund at the end
of each taxable year (and on certain other dates prescribed in the Code) are
"marked to market" with the result that unrealized gains or losses are treated
as though they were realized.
Transactions in options, futures and forward contracts undertaken by the
ProFunds may result in "straddles" for federal income tax purposes. The straddle
rules may affect the character of gains (or losses) realized by a ProFund, and
losses realized by the ProFund on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which the losses are
realized. In addition, certain carrying charges (including interest expense)
associated with positions in a straddle may be required to be capitalized rather
than deducted currently. Certain elections that a ProFund may make with respect
to its straddle positions may also affect the amount, character and timing of
the recognition of gains or losses from the affected positions.
Because only a few regulations implementing the straddle rules have been
promulgated, the consequences of such transactions to the ProFunds are not
entirely clear. The straddle rules may increase the amount of short-term capital
gain realized by a ProFund, which is taxed as ordinary income when distributed
to shareholders. Because application of the straddle rules may affect the
character of gains or losses, defer losses and/or
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<PAGE>
accelerate the recognition of gains or losses from the affected straddle
positions, the amount which must be distributed to shareholders as ordinary
income or long-term capital gain may be increased or decreased substantially as
compared to a fund that did not engage in such transactions.
CONSTRUCTIVE SALES
Recently enacted rules may affect the timing and character of gain if a
ProFund engages in transactions that reduce or eliminate its risk of loss with
respect to appreciated financial positions. If the ProFund enters into certain
transactions in property while holding substantially identical property, the
ProFund would be treated as if it had sold and immediately repurchased the
property and would be taxed on any gain (but not loss) from the constructive
sale. The character of gain from a constructive sale would depend upon the
ProFund's holding period in the property. Loss from a constructive sale would be
recognized when the property was subsequently disposed of, and its character
would depend on the ProFund's holding period and the application of various loss
deferral provisions of the Code.
PASSIVE FOREIGN INVESTMENT COMPANIES
The ProFunds 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 ProFunds 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.
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<PAGE>
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.
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.
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PERFORMANCE INFORMATION
TOTAL RETURN CALCULATIONS
From time to time, each of the non-money market ProFunds may advertise its
total return for prior periods. Any such advertisement would include at least
average annual total return quotations for one, five, and ten-year periods, or
for the life of the ProFund. Other total return quotations, aggregate or
average, over other time periods for the ProFund also may be included.
The total return of a ProFund for a particular period represents the
increase (or decrease) in the value of a hypothetical investment in the ProFund
from the beginning to the end of the period. Total return is calculated by
subtracting the value of the initial investment from the ending value and
showing the difference as a percentage of the initial investment; this
calculation assumes that the initial investment is made at the current net asset
value and that all income dividends or capital gains distributions during the
period are reinvested in shares of the ProFund at net asset value. Total return
is based on historical earnings and net 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, 1999, were as follows:
<TABLE>
<CAPTION>
INVESTOR SHARES
RETURN
INCEPTION DATE SINCE INCEPTION 1YR. RETURN
-------------- --------------- -----------
<S> <C> <C> <C>
Bull ProFund 12/02/97 20.20% 17.18%
UltraBull ProFund 11/28/97 36.08% 29.56%
Bear ProFund 12/31/97 -15.95% -12.32%
UltraBear ProFund 12/23/97 -33.06% -30.54%
UltraOTC ProFund 12/02/97 170.63% 233.25%
Money Market ProFund 11/17/97 4.69% 4.48%
UltraShort OTC ProFund 6/02/98 -82.45% -80.36%
UltraEurope ProFund 3/15/99 36.63% N/A
<CAPTION>
SERVICE SHARES
RETURN
INCEPTION DATE SINCE INCEPTION 1YR. RETURN
-------------- --------------- -----------
<S> <C> <C> <C>
Bull ProFund 12/02/97 19.20% 15.97%
UltraBull ProFund 11/28/97 34.85% 28.42%
Bear ProFund 12/31/97 -16.73% -13.32%
UltraBear ProFund 12/23/97 -33.47% -31.20%
UltraOTC ProFund 12/02/97 168.67% 229.73%
Money Market ProFund 11/17/97 3.43% 3.44%
UltraShort OTC ProFund 6/02/98 -82.61% -80.62%
UltraEurope ProFund 3/15/99 35.73% N/A
</TABLE>
This performance data represents past performance and is not an indication
of future results.
The UltraSmall-Cap ProFund, UltraMid-Cap ProFund and UltraJapan ProFund had
not commenced operations as of December 31, 1999.
YIELD CALCULATIONS
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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.
For the seven-day period ended December 31, 1999, the seven-day effective
yield for the Investor Shares and Service Shares of the Money Market ProFund was
5.25% and 4.21%, 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
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<PAGE>
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.
Other Information
The ProFunds are not sponsored, endorsed, sold or promoted by Standard &
Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"), NASDAQ Stock
Markets, Inc. ("NASDAQ") or Frank Russell Company. S&P, NASDAQ and the Frank
Russell Company make no representation or warranty, express or implied, to the
owners of shares of the ProFunds or any member of the public regarding the
advisability of investing in securities generally or in the ProFunds
particularly or the ability of the S&P 500 Index(R), NASDAQ 100 Index or the
Russell 2000(R) Index, respectively, to track general stock market performance.
S&P's, NASDAQ's and Frank Russell Company's only relationship to the ProFunds
(the "Licensee") is the licensing of certain trademarks and trade names of S&P,
NASDAQ and the Frank Russell Company, respectively, and of the S&P 500 Index(R),
NASDAQ 100 Index and Russell 2000(R) Index, respectively. S&P, NASDAQ and the
Frank Russell Company have no obligation to take the needs of the Licensee or
owners of the shares of the ProFunds into consideration in determining,
composing or calculating the S&P 500 Index(R), the NASDAQ 100 Index and the
Russell 2000(R) Index , respectively. S&P, NASDAQ and the Frank Russell Company
are not responsible for and have not participated in the determination or
calculation of the equation by which the shares of ProFunds are to be converted
into cash. S&P, NASDAQ and the Frank Russell Company have no obligation or
liability in connection with the administration, marketing or trading of
ProFunds.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500
INDEX(R) 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(R) 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(R) OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING
ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL,
PUNITIVE, 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, 1999 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.
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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.
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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.
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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.
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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.
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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 the ProFund VP UltraOTC
("UltraOTC VP"), ProFund VP UltraSmall-Cap ("UltraSmall-Cap VP") (formerly,
ProFund VP Small Cap) and ProFund VP Europe 30 ("Europe 30 VP") (collectively,
the "ProFunds VP"); three series of the ProFunds. The ProFunds VP 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. Each ProFund VP seeks investment results that correspond each day to
a specified benchmark. The ProFunds VP may be used independently or in
combination with each other as part of an overall investment strategy.
Shares of the ProFunds VP are available for purchase by insurance company
separate accounts to serve as an investment medium for variable insurance
contracts, and by qualified pension and retirement plans, certain insurance
companies, and ProFund Advisors LLC (the "Advisor").
The ProFunds VP 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 VP to determine whether an investment
in a particular ProFund VP is appropriate. None of the ProFunds VP alone
constitutes a balanced investment plan. Each ProFund VP 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 investment objectives of the ProFunds VP will be achieved.
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Prospectus, dated May 1, 2000, as supplemented from
time to time, which incorporates this Statement of Additional Information by
reference. The financial statements and related report of the independent
accountants included in the annual report of the ProFunds VP for the fiscal year
ended December 31, 1999 are incorporated by reference into this Statement of
Additional Information. Words or phrases used in the Statement of Additional
Information without definition have the same meaning as ascribed to them in the
Prospectus. 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, 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ProFunds........................................................ 3
Investment Policies and Techniques.............................. 3
Investment Restrictions......................................... 16
Determination of Net Asset Value................................ 17
Portfolio Transactions and Brokerage............................ 17
Management of ProFunds.......................................... 19
Costs and Expenses.............................................. 24
Organization and Description of Shares of Beneficial Interest... 24
Taxation........................................................ 25
Performance Information......................................... 28
Financial Statements............................................ 31
Appendix -- Europe 30 Index.................................... 31
</TABLE>
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PROFUNDS
ProFunds (the "Trust") is an open-end management investment company, and
currently comprises thirty-nine separate series. The three series described in
this Statement of Additional Information ("SAI") are offered to insurance
company separate accounts and qualified pension and retirement plans and are
discussed herein. All of the ProFunds VP are classified as non-diversified,
although they currently intend to operate in a diversified manner.
INVESTMENT POLICIES AND TECHNIQUES
GENERAL
Reference is made to the Prospectus for a discussion of the investment
objectives and policies of the ProFunds VP. In addition, set forth below is
further information relating to the ProFunds VP. The discussion below
supplements and should be read in conjunction with the Prospectus.
The investment restrictions of the ProFunds VP 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 VP, as defined in the
Investment Company Act of 1940, as amended (the "1940 Act"). The investment
objective and all other investment policies of the ProFunds VP not specified as
fundamental (including the benchmarks of the ProFunds VP) may be changed by the
trustees of the ProFunds VP without the approval of shareholders.
A ProFund VP may consider changing its benchmark if, for example, the current
benchmark becomes unavailable, the ProFund VP believes the current benchmark no
longer serves the investment needs of a majority of shareholders or another
benchmark better serves their needs, or the financial or economic environment
makes it difficult for its investment results to correspond sufficiently to its
current benchmark. If believed appropriate, a ProFund VP may specify a
benchmark for itself that is "leveraged" or proprietary. Of course, there can
be no assurance that a ProFund VP 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 ProFund VP 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 VP and the performance of
its benchmark), certain factors will tend to cause a ProFund VP's investment
results to vary from a perfect correlation to its benchmark. The ProFunds VP,
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 ProFunds VP 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 VP discussed below, and as discussed
in the Prospectus, may be used by a ProFund VP if, in the opinion of the
Advisor, these strategies will be advantageous to the ProFunds VP. The ProFunds
VP are free to reduce or eliminate the ProFunds VP's activity in any of those
areas without changing the ProFunds VP fundamental investment policies. There
is no assurance that any of these strategies or any other strategies and methods
of investment available to a ProFund VP will result in the achievement of its
objectives.
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ULTRAOTC VP
The investment objective of UltraOTC VP is to provide daily investment results
that correspond to twice (200%) the performance of the NASDAQ 100 Index(TM).
UltraOTC VP does not intend to hold the 100 securities included in the NASDAQ
100 Index(TM). Instead, UltraOTC VP 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, UltraOTC VP will
invest, under normal conditions, at least 65% of its total assets in securities
traded on the over-the-counter ("OTC") markets and instruments with values that
are representative of such securities such as futures and option contracts in
such securities or indices.
If the UltraOTC VP achieved a perfect correlation for any single trading day,
the net asset value of the shares of UltraOTC VP would increase for that day
proportional to twice any increase in the level of the NASDAQ 100 Index(TM).
Conversely, the net asset value of the shares of UltraOTC VP would decrease for
that day proportional to twice any decrease in the level of the NASDAQ 100
Index(TM) for that day.
For example, if the NASDAQ 100 Index(TM) were to increase by 1% on a
particular day, investors in UltraOTC VP should experience a gain in net asset
value of approximately 2% for that day. Conversely, if the NASDAQ 100 Index(TM)
were to decrease by 1% by the close of business on a particular trading day,
investors in UltraOTC VP would experience a loss in net asset value of
approximately 2%.
Companies whose securities are traded on the OTC markets generally have
smaller market capitalization or are newer companies than those listed on the
New York Stock Exchange ("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.
ULTRASMALL-CAP VP
The investment objective of UltraSmall-Cap VP is to provide daily investment
results that correspond to twice (200%) the performance of the Russell 2000(R)
Index.
UltraSmall Cap VP does not intend to hold the 2,000 securities included in the
Russell 2000(R) Index. Instead, UltraSmall Cap VP intends to engage in
transactions in equities, stock index futures contracts, options on stock index
futures contracts, and options on securities and stock indexes. As a
nonfundamental policy, UltraSmall Cap VP will invest, under normal conditions,
at least 65% of its total assets in the securities comprising the Russell
2000(R) Index and instruments with values that are representative of such
securities, such as futures and option contracts on such securities or such
index.
If the UltraSmall Cap VP achieved a perfect correlation for any single trading
day, the net asset value of the shares of UltraSmall Cap VP would increase for
that day proportional to twice any increase in the level of the Russell 2000(R)
Index. Conversely, the net asset value of the shares of UltraSmall Cap VP would
decrease for that day proportional to twice any decrease in the level of the
Russell 2000(R) Index for that day.
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<PAGE>
For example, if the Russell 2000(R) Index were to increase by 1% on a
particular day, investors in UltraSmall Cap VP should experience a gain in net
asset value of approximately 2% for that day. Conversely, if the Russell
2000(R) Index were to decrease by 1% by the close of business on a particular
trading day, investors in UltraSmall Cap VP would experience a loss in net asset
value of approximately 2%.
The Russell 2000(R) Index is a capitalization-weighted index of domestic
equities traded on the NYSE, AMEX and NASDAQ Stock Markets, Inc. ("NASDAQ"). The
index represents the bottom 2,000 companies of the 3,000 U.S. stocks with the
largest market capitalizations. As of June 30, 1999, the market capitalization
of these 2,000 companies represented about 8% of the total market capitalization
of the 3,000 companies. Companies whose stock comprises the Russell 2000(R)
Index 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 smaller companies whose stock
comprises the Russell 2000(R) Index are the less certain growth prospects of
smaller firms, the lower degree of liquidity in the markets for such securities,
and the greater sensitivity of smaller capitalization companies to changing
economic conditions than larger capitalization companies. Conversely, because
many of these securities may be overlooked by investors and undervalued in the
marketplace, there is potential for significant capital appreciation.
EUROPE 30 VP
The investment objective of Europe 30 VP is to provide daily investment
results that correspond to the performance of the ProFunds Europe 30 Index
("PEI").
If Europe 30 VP achieved a perfect correlation for any single trading day, the
net asset value of the shares of this ProFund VP would increase for that day
proportional to any increase in the level of the PEI. Conversely, the net asset
value of the shares of Europe 30 VP would decrease for that day proportional to
any decrease in the level of the PEI for that day.
Investing in foreign companies or financial instruments by this ProFund VP 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 this ProFund VP will invest
indirectly in foreign markets, it will be subject to certain of 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 this ProFund VP 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.
By investing in American Depository Receipts ("ADRs") under normal market
conditions, Europe 30 VP may reduce some of the risks of investing in foreign
securities. ADRs are denominated in the U.S. Dollar, which reduces the risk of
currency fluctuations during the settlement period for either purchase or sales.
Further, the information available for ADRs is subject to the accounting,
auditing and financial reporting standards of the domestic market or exchange on
which they are traded, which standards are more uniform
5
<PAGE>
and more exacting than those to which many foreign issuers may be subject.
However, ADRs do not eliminate all the risk inherent in investing in the
securities of foreign issuers.
FUTURES CONTRACTS AND RELATED OPTIONS
The ProFunds VP 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 VP purchases a put or call option on a futures contract, the
ProFund VP 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 VP receives a premium in return for granting to the purchaser of the
option the right to sell to or buy from the ProFund VP the underlying futures
contract for a specified price upon exercise at any time during the option
period.
Whether a ProFund VP realizes a gain or loss from futures activities depends
generally upon movements in the underlying commodity. The extent of the ProFund
VP's loss from an unhedged short position in futures contracts or from writing
options on futures contracts is potentially unlimited. The ProFunds VP may
engage in related closing purchase or sale transactions with respect to options
on futures contracts by buying an option of the same series as an option
previously written by a ProFund VP, or selling an option of the same series as
an option previously purchased by a ProFund VP. The ProFunds VP 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 VP purchases or sells a stock index futures contract, or sells
an option thereon, the ProFund VP "covers" its position. To cover its position,
a ProFund VP 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 ProFunds VP 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 promulgated by the Commodity
Futures Trading Commission (the "CFTC Regulations") under the Commodity Exchange
Act under which each of these ProFunds VP would be excluded from the definition
of a "commodity pool operator." Under Section 4.5 of the CFTC Regulations, a
ProFund VP may engage in futures transactions, either for "bona fide hedging"
purposes, as this term is defined in the CFTC Regulations, or for non- bona fide
hedging purposes to the extent that the aggregate initial margins and option
premiums required to establish such non- bona fide hedging positions do not
exceed 5% of the liquidation value of the ProFund VP'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 VP will cover their positions when they write a futures contract
or option on a futures contract. A ProFund VP 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 VP will maintain in a segregated account cash
or liquid instruments equal in value to the difference
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between the strike price of the put and the price of the futures contract. A
ProFund VP 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 VP 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 VP 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 VP 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 futures contract. A ProFund VP 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 VP 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 VP 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 VP 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 VP 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 VP to substantial losses.
If trading is not possible, or if a ProFund VP determines not to close a futures
position in anticipation of adverse price movements, the ProFund VP will be
required to make daily cash payments of variation margin. The risk that the
ProFund VP will be unable to close out a futures position will be minimized by
entering into such transactions on a national exchange with an active and liquid
secondary market.
INDEX OPTIONS
The ProFunds VP may purchase and write options on stock indexes to create
investment exposure consistent with their investment objectives, to 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 VP 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
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ProFund VP 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 VP will not enter into an option position that exposes the
ProFund VP to an obligation to another party, unless the ProFund VP either (i)
owns an offsetting position in securities or other options and/or (ii) maintains
with the ProFund VP'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 ProFunds VP may engage in transactions in stock index options listed on
national securities exchanges or traded in the OTC market as an investment
vehicle for the purpose of realizing their investment objectives. 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 OTC options and the
cover for written OTC options will be subject to the 15% limitation on
investment in illiquid securities by the ProFunds VP. 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 VP may buy or sell; however, the
Advisor intends to comply with all limitations.
OPTIONS ON SECURITIES
Each ProFund VP may buy and write (sell) options on securities for the purpose
of realizing its investment objectives. By buying a call option, a ProFund VP
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 VP 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 VP 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
VP 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 VP may cover its position by owning the underlying security on which the
option is written. Alternatively, the ProFund VP 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
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by the ProFund VP 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 VP 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 VP. When a ProFund VP writes a put option, the ProFund VP
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 VP to write call options on stocks held by the
ProFund VP 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 VP that writes an option wishes to terminate the ProFund VP's
obligation, the ProFund VP may effect a "closing purchase transaction." The
ProFund VP accomplishes this by buying an option of the same series as the
option previously written by the ProFund VP. 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 VP which is the holder of an option
may liquidate its position by effecting a "closing sale transaction." The
ProFund VP accomplishes this by selling an option of the same series as the
option previously purchased by the ProFund VP. 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 VP 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 VP if the premium, plus commission costs, paid by the ProFund VP
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 VP on the sale
of the call or the put option. The ProFund VP also will realize a gain if a
call or put option which the ProFund VP has written lapses unexercised, because
the ProFund VP 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 VP. If an options market were to become unavailable, the ProFund VP
would be unable to realize its profits or limit its losses until the ProFund VP
could exercise options it holds, and the ProFund VP would remain obligated until
options it wrote were exercised or expired. Reasons for the absence of a 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.
SWAP AGREEMENTS
The ProFunds VP 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
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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 VP calculate the obligations
of the parties to the agreement on a "net basis." Consequently, a ProFund VP'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 VP's current obligations under a swap agreement will be accrued
daily (offset against any amounts owing to the ProFund VP) 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 VP'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 ProFund VP illiquid
investment limitations. A ProFund VP will not enter into any swap agreement
unless the Advisor believes that the other party to the transaction is
creditworthy. A ProFund VP 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 ProFund VP 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
VP 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 VP 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 VP 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 VP on the notional amount.
Swap agreements typically are settled on a net basis, which means that the two
payment streams are netted out, with the ProFund VP 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 VP is contractually obligated to make. If
the other party to a swap agreement defaults, a ProFund VP's risk of loss
consists of the net amount of payments that such ProFund VP is contractually
entitled to receive, if any. The net amount of the excess, if any, of a ProFund
VP'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 VP'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
VP and their Advisor believe that transactions do not constitute senior
securities under the 1940 Act and, accordingly, will not treat them as being
subject to a ProFund VP'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 OTCmarket. The Advisor, under the
supervision of the Board of Trustees, are responsible for determining and
monitoring the liquidity of the ProFund VP 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.
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AMERICAN DEPOSITORY RECEIPTS
For many foreign securities, U.S. Dollar denominated ADRs, which are traded in
the United States on exchanges or over-the-counter, are issued by domestic
banks. ADRs represent the right to receive securities of foreign issuers
deposited in a domestic bank or a correspondent bank. ADRs do not eliminate all
the risk inherent in investing in the securities of foreign issuers. However,
by investing in ADRs rather than directly in foreign issuers' stock, Europe 30
VP can avoid currency risks during the settlement period for either purchase or
sales.
In general, there is a large, liquid market in the United States for many
ADRs. The information available for ADRs is subject to the accounting, auditing
and financial reporting standards of the domestic market or exchange on which
they are traded, which standards are more uniform and more exacting than those
to which many foreign issuers may be subject. Certain ADRs, typically those
denominated as unsponsored, require the holders thereof to bear most of the
costs of such facilities, while issuers of sponsored facilities normally pay
more of the costs thereof. The depository of an unsponsored facility frequently
is under no obligation to distribute shareholder communications received from
the issuer of the deposited securities or to pass through the voting rights to
facility holders with respect to the deposited securities, whereas the
depository of a sponsored facility typically distributes shareholder
communications and passes through the voting rights.
Europe 30 VP may invest in both sponsored and unsponsored ADRs. Unsponsored
ADR programs are organized independently and without the cooperation of the
issuer of the underlying securities. As a result, available information
concerning the issuers may not be as current as for sponsored ADRs, and the
prices of unsponsored depository receipts may be more volatile than if such
instruments were sponsored by the issuer.
U.S. GOVERNMENT SECURITIES
Each ProFund VP also may invest in U.S. government securities in pursuit of
its investment objectives, as "cover" for the investment techniques these
ProFunds VP 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 VP's portfolio investments in U.S. government securities, while a
decline in interest rates would generally increase the market value of a ProFund
VP's portfolio investments in these securities.
U.S. government securities include U.S. Treasury securities, which are backed
by the full faith and credit of the U.S. Treasury and which differ only in their
interest rates, maturities, and times of issuance. U.S. Treasury bills have
initial maturities of one year or less; U.S. Treasury notes have initial
maturities of one to ten years; and U.S. Treasury bonds generally have initial
maturities of greater than ten years. Certain U.S. government securities are
issued or guaranteed by agencies or instrumentalities of the U.S. government
including, but not limited to, obligations of U.S. government agencies or
instrumentalities, such as the Federal National Mortgage Association, the
Government National Mortgage Association, the Small Business Administration, the
Federal Farm Credit Administration, the Federal Home Loan Banks, Banks for
Cooperatives (including the Central Bank for Cooperatives), the Federal Land
Banks, the Federal Intermediate Credit Banks, the Tennessee Valley Authority,
the Export-Import Bank of the United States, the Commodity Credit Corporation,
the Federal Financing Bank, the Student Loan Marketing Association, and the
National Credit Union Administration. Some obligations issued or guaranteed by
U.S. government agencies and instrumentalities, including, for example,
Government National Mortgage Association pass-through certificates, are
supported by the full faith and credit of the U.S. Treasury. Other obligations
issued by or guaranteed by Federal agencies, such as those securities issued by
the Federal National Mortgage Association, are supported by the discretionary
authority of the U.S. government to purchase certain obligations of the federal
agency, while other obligations issued by or guaranteed by federal agencies,
such as those of the Federal Home Loan Banks, are supported by the right of the
issuer to borrow
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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 VP may enter into repurchase agreements with financial
institutions. Under a repurchase agreement, a ProFund VP 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 VP 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. 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 VP 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 VP could suffer a
loss. A ProFund VP also may experience difficulties and incur certain costs in
exercising its rights to the collateral and may lose the interest the ProFund VP
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 VP 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 VP, amounts to more than 15% of its
total net assets. The investments of each of the ProFunds VP in repurchase
agreements at times may be substantial when, in the view of the Advisor,
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 VP may temporarily invest
all or part of the ProFund VP'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.
REVERSE REPURCHASE AGREEMENTS
The ProFunds VP may use reverse repurchase agreements as part of their
investment strategies. Reverse repurchase agreements involve sales by a ProFund
VP of portfolio assets concurrently with an agreement by the ProFund VP to
repurchase the same assets at a later date at a fixed price. Generally, the
effect of such a transaction is that the ProFund VP 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 VP 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 VP 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 VP intend to use the reverse repurchase technique only when it will be
to the ProFund VP's advantage to do so. The ProFund VP will establish a
segregated account with its custodian bank in which the ProFund VP will maintain
cash or liquid instruments equal in value to the ProFund VP's obligations in
respect of reverse repurchase agreements.
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BORROWING
The ProFunds VP may borrow money for cash management purposes or investment
purposes. Each of the ProFunds VP 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 VP "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 VP. 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 VP's assets will
fluctuate in value, whereas the interest obligations on borrowings may be fixed,
the net asset value per share of the ProFund VP will increase more when the
ProFund VP's portfolio assets increase in value and decrease more when the
ProFund VP'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 VP 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 1940 Act, a ProFund VP 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 VP's assets should fail to meet this 300% coverage
test, the ProFund VP, within three days (not including Sundays and holidays),
will reduce the amount of the ProFund VP'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 VP 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 VP's total assets. This borrowing is
not subject to the foregoing 300% asset coverage requirement. The ProFunds VP
are authorized to pledge portfolio securities as the Advisor deems appropriate
in connection with any borrowings.
LENDING OF PORTFOLIO SECURITIES
Each of the ProFunds VP 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 VP 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 VP any income accruing thereon, and the ProFund VP may
invest the cash collateral in portfolio securities, thereby earning additional
income. A ProFund VP will not lend more than 33 1/3% of the value of the
ProFund VP's total assets. Loans would be subject to termination by the lending
ProFund VP 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 VP. 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 VP may pay reasonable
finders, borrowers, administrative, and custodial fees in connection with a
loan.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
Each ProFund VP, 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 VP
makes the commitment to purchase securities on a when-issued or delayed-delivery
basis, the ProFund VP will record the transaction and thereafter reflect the
value of the securities, each day, in determining the ProFund VP's net asset
value. Each ProFund VP will not purchase securities on a when-issued or
delayed-delivery basis if, as a result,
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more than 15% of the ProFund VP's net assets would be so invested. At the time
of delivery of the securities, the value of the securities may be more or less
than the purchase price.
The Trust will also establish a segregated account with the Trust's custodian
bank in which the ProFunds VP will maintain liquid instruments equal to or
greater in value than the ProFund VP's purchase commitments for such when-issued
or delayed-delivery securities, or the Trust does not believe that a ProFund
VP's net asset value or income will be adversely affected by the ProFund VP's
purchase of securities on a when-issued or delayed delivery basis.
INVESTMENTS IN OTHER INVESTMENT COMPANIES
The ProFunds VP 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 VP invests in, and, thus, is a shareholder of,
another investment company, the ProFund VP's shareholders will indirectly bear
the ProFund VP'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 VP to the ProFund VP's own investment
adviser and the other expenses that the ProFund VP bears directly in connection
with the ProFund VP's own operations.
ILLIQUID SECURITIES
While none of the ProFunds VP anticipates doing so, each of the ProFunds VP
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 VP will not invest more than 15% of the ProFund VP'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 VP 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 OTC options, certain cover for OTC
options, repurchase agreements with maturities in excess of seven days, and
certain securities whose disposition is restricted under the Federal securities
laws. The ProFund VP may not be able to sell illiquid securities when the
Advisor considers it desirable to do so or may have to sell such securities at a
price that is lower than the price that could be obtained if the securities were
more liquid. In addition, the sale of illiquid securities also may require more
time and may result in higher dealer discounts and other selling expenses than
does the sale of securities that are not illiquid. Illiquid securities also may
be more difficult to value due to the unavailability of reliable market
quotations for such securities, and investments in illiquid securities may have
an adverse impact on net asset value.
Institutional markets for restricted securities have developed as a result of
the promulgation of Rule 144A under the 1933 Act, which provides a safe harbor
from 1933 Act registration requirements for qualifying sales to institutional
investors. When Rule 144A restricted securities present an attractive
investment opportunity and otherwise meet selection criteria, a ProFund VP 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 VP have delegated this
responsibility for determining the liquidity of Rule 144A restricted securities
which may be invested in by a ProFund VP to the Advisor. 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 VP's liquidity.
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PORTFOLIO TURNOVER
The nature of the ProFunds VP will cause the ProFunds VP 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 VP. In addition, a ProFund VP's
portfolio turnover level may adversely affect the ability of the ProFund VP to
achieve its investment objective. Because each ProFund VP's portfolio turnover
rate to a great extent will depend on the purchase, redemption, and exchange
activity of the ProFund VP's investors, it is difficult to estimate what the
ProFund VP'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 ProFunds VP 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 VP is calculated without regard to instruments, including options
and futures contracts, having a maturity of less than one year.
SPECIAL CONSIDERATIONS
To the extent discussed above and in the prospectus, the ProFunds VP present
certain risks, some of which are further described below.
TRACKING ERROR. While the ProFunds VP 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 VP expenses, including brokerage (which may
be increased by high portfolio turnover) and the cost of the investment
techniques employed by the ProFunds VP; (2) less than all of the securities in
the benchmark being held by a ProFund VP and securities not included in the
benchmark being held by a ProFund VP; (3) an imperfect correlation between the
performance of instruments held by a ProFund VP, 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) a ProFund VP 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 VP'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 VP
trade, resulting in the inability of the ProFund VP to execute intended
portfolio transactions. While a close correlation of any ProFund VP 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 VP may diverge significantly from the cumulative percentage decrease or
increase in the benchmark due to a compounding effect.
LEVERAGE. UltraOTC VP and UltraSmall Cap VP intend to 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 VP achieves the right to a return on a capital
base that exceeds the amount the ProFund VP has invested. Leverage creates the
potential for greater gains to shareholders of these ProFund VP 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 ProFund VP's shares. Leverage may involve the creation of a liability
that does not entail any interest costs or the creation of a liability that
requires the ProFund VP to pay interest which would decrease the ProFund VP's
total return to shareholders. If these ProFunds VP 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 VP not been leveraged.
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NON-DIVERSIFIED STATUS. Each ProFund VP is a "non-diversified" series.
Each ProFund VP is considered "non-diversified" because a relatively high
percentage of the ProFund VP's assets may be invested in the securities of a
limited number of issuers, primarily within the same economic sector. That
ProFund VP'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 VP's
classification as a "non-diversified" investment company means that the
proportion of the ProFund VP's assets that may be invested in the securities of
a single issuer is not limited by the 1940 Act. Each ProFund VP, however,
intends to seek to qualify as a "regulated investment company" for purposes of
the Internal Revenue Code, which imposes diversification requirements on
these ProFund VP that are less restrictive than the requirements applicable to
the "diversified" investment companies under the 1940 Act.
INVESTMENT RESTRICTIONS
The ProFunds VP 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 a ProFund VP, 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 VP are present or represented by proxy; or (ii) more than 50% of the
outstanding shares of the series. (All policies of a ProFund VP 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 VP.) For purposes of the following limitations, all percentage
limitations apply immediately after a purchase or initial investment.
A ProFund VP 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 or
repurchase agreements with respect thereto).
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 VP 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 VP 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 VP (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 VP may not pledge
its assets other than to secure such borrowings or, to the extent permitted by
the ProFund VP'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.
16
<PAGE>
7. Underwrite securities of other issuers, except insofar as the ProFund VP
technically may be deemed an underwriter under the Securities Act of 1933, as
amended, in selling portfolio securities.
8. Purchase or sell commodities or contracts on commodities, except to the
extent the ProFund VP may do so in accordance with applicable law and the
ProFund VP's Prospectus and Statement of Additional Information, as they may be
amended from time to time.
DETERMINATION OF NET ASSET VALUE
The net asset values of the shares of the ProFunds VP 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.
To the extent that portfolio securities of a ProFund VP are traded in other
markets on days when the ProFund VP's principal trading market(s) is closed, the
ProFund VP's net asset value may be affected on days when investors do not have
access to the ProFund VP to purchase or redeem shares. Although the ProFunds VP
expect the same holiday schedules to be observed in the future, the exchanges
may modify their holiday schedules at any time.
The net asset value of shares of a ProFund VP serves as the basis for the
purchase and redemption price of the shares. The net asset value per share of a
ProFund VP is calculated by dividing the market value of the ProFund VP's
assets, less all liabilities attributed to the ProFund VP, by the number of
outstanding shares of the ProFund VP. If market quotations are not readily
available, a security will be valued at fair value by the Trustees of the Trust
or by the Advisor using methods established or ratified by the Trustees of the
Trust.
The securities in the portfolio of a ProFund VP, 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 Trust's Board of Trustees.
Futures contracts maintained by ProFunds VP 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 established futures
exchanges. Options on securities and indices purchased by a ProFund VP 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 positions
traded on such exchange and held by a ProFund VP will be valued on the basis of
the day's settlement prices on the futures exchange or fair value.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the general supervision by the Trustees, the Advisor is responsible
for decisions to buy and sell securities for each of the ProFunds VP, the
selection of brokers and dealers to effect the transactions, and the negotiation
of brokerage commissions, if any. The Advisor expects that the ProFunds VP may
17
<PAGE>
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 VP 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 VP 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 VP and the
other client accounts.
The policy of each ProFund VP regarding purchases and sales of securities for
a ProFund VP'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 VP'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 VP believes
that a requirement always to seek the lowest possible commission cost could
impede effective portfolio management and preclude the ProFund VP 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 VP'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 VP 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 VP 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.
18
<PAGE>
For the period from October 19, 1999 (the commencement of operations) to
December 31, 1999, each ProFund VP paid brokerage commissions in the
following amount:
<TABLE>
<CAPTION>
BROKERAGE COMMISSIONS
FYE 12/31/99
------------------------
<S> <C>
UltraOTC VP $13,904
UltraSmall-Cap VP 37,300
Europe 30 VP 2,856
</TABLE>
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 Trust are the
responsibilities of Trust's officers. The names and addresses (and ages) of the
Trustees of the Trust, the officers of the Trust, 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 the Advisor.
TRUSTEES AND OFFICERS OF PROFUNDS
MICHAEL L. SAPIR* (birthdate: May 19, 1958). Currently: Trustee, Chairman
and Chief Executive Officer of ProFunds; Chairman and Chief Executive Officer of
the Advisor. Formerly: Principal, Law Offices of Michael L. Sapir; Senior Vice
President, General Counsel, Padco Advisors, Inc.; Partner, Jorden Burt Berenson
& Klingensmith. His address is 7900 Wisconsin Avenue, Suite 300, Bethesda,
Maryland 20814.
LOUIS M. MAYBERG* (birthdate: August 9, 1962). Currently: Trustee and
Secretary of ProFunds; President, the Advisor. Formerly: President, Potomac
Securities, Inc.; Managing Director, National Capital Companies, LLC. His
address is 7900 Wisconsin Avenue, Suite 300, Bethesda, Maryland 20814.
MICHAEL C. WACHS (birthdate: October 21, 1961). Currently: Trustee of
ProFunds; Vice President, Delancy Investment Group, Inc. Formerly: Vice
President/Senior Underwriter, First Union National Bank; Vice President, Vice
President/Senior Credit Officer and Vice President/Team Leader, First Union
Capital Markets Corp. His address is 1528 Powder Mill Lane, Wynnewood,
Pennsylvania 19096.
RUSSELL S. REYNOLDS, III (birthdate: July 21, 1957). Currently: Trustee of
ProFunds; Managing Director, Chief Financial Officer and Secretary,
Directorship, Inc. Formerly: President, Quadcom Services, Inc. His address is
7 Stag Lane, Greenwich, Connecticut 06831.
GARY R. TENKMAN: (birthdate: September 16, 1970): Currently: Treasurer of
ProFunds; Vice President - Financial Services, BISYS Fund Services; Audit
Manager - Investment Management Services Group, Ernst & Young LLP. His address
is 3435 Stelzer Road, Columbus, Ohio 43219.
*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 for serving as an officer or
Trustee of the Trust.
19
<PAGE>
PROFUNDS TRUSTEE COMPENSATION TABLE
The following table reflect fees paid to the Trustees for the year ended
December 31, 1999.
<TABLE>
<CAPTION>
NAME OF
PERSON: POSITION COMPENSATION
- ----------------- ------------------------
<S> <C>
Michael L. Sapir, Chairman and Chief Executive Officer None
Louis M. Mayberg, Trustee, President, Secretary None
Russell S. Reynolds, III, Trustee $5,500
Michael C. Wachs, Trustee $5,500
</TABLE>
As of April 3, 2000, the Trustees and Officers of the ProFunds beneficially
owned in the aggregate less than 1% of the shares of each ProFund VP.
PROFUND ADVISORS LLC
Under an investment advisory agreement between the Trust, on behalf of the
ProFunds VP, and the Advisor, dated October 18, 1999, each of the ProFunds VP
pays the Advisor a fee at an annualized rate, based on its average daily net
assets, of 0.75%. The Advisor manages the investment and the reinvestment of
the assets of each of the ProFunds VP, in accordance with the investment
objectives, policies, and limitations of each ProFund VP, subject to the general
supervision and control of Trustees and the officers of ProFunds VP. 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 ProFunds VP, provided such fees 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 ProFund VP shares. The
Advisor's address is 7900 Wisconsin Avenue, Suite 300, Bethesda, Maryland 20814.
For the period from October 19, 1999 (commencement of operations) to December
31, 1999, the Advisor was entitled to, and voluntarily waived, advisory fees in
the following amounts for each of the ProFunds VP:
ADVISORY FEES
FYE 12/31/99
<TABLE>
<CAPTION>
Earned Waived
------------------------------------------
<S> <C> <C>
UltraOTC VP $55,095 $6,554
UltraSmall-Cap VP 7,551 6,071
Europe 30 VP 2,323 1,195
</TABLE>
CODE OF ETHICS
The Trust and the Advisor each have adopted a code of ethics, as required by
applicable law, which is designed to prevent affiliate persons of the Trust and
the Advisor from engaging in deceptive, manipulative, or fraudulent activities
in connection with securities held or to be acquired by the ProFunds VP (which
may also be held by persons subject to a code). There can be no assurance that
the codes will be effective in preventing such activities.
20
<PAGE>
ADMINISTRATION, TRANSFER AGENT, FUND ACCOUNTING AGENT AND CUSTODIAN
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services ("BISYS")
acts as Administrator to the ProFunds VP. The Administrator provides the
ProFunds VP 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 the ProFunds VP under Federal and
state securities laws. The Administrator also maintains the shareholder account
records for the ProFunds VP, distributes dividends and distributions payable by
the ProFunds VP, and produces statements with respect to account activity for
the ProFunds VP and their shareholders. The Administrator pays all fees and
expenses that are directly related to the services provided by the Administrator
to the ProFunds VP; each ProFund VP 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 VP under the service
agreement.
BISYS and its affiliate, BISYS Fund Services, Inc. ("BFSI"), have entered into
an Omnibus Fee Agreement with ProFunds pursuant to which BISYS is entitled to
receive fee payments for the provision of administration services and BISYS is
entitled to receive on behalf of BFSI fee payments for the provision of fund
accounting and transfer agency services. Pursuant to such agreement, BISYS is
entitled to receive the greater of (i) the aggregate fee amount set forth in a
contractual fee schedule or (ii) the fee amount set forth in a minimum
relationship fee schedule. The contractual fee schedule calls for the payment of
(i) an annual fee of five one-hundredths of one percent (.05%) of the average
daily net assets of the ProFunds VP for administration services, (ii) an annual
fee of $37,000 for transfer agency services and (iii) an annual fee for fund
accounting services based on the following schedule: three one-hundredths of one
percent (.03%) of each ProFund VP's average daily net assets up to $300
million; two one-hundredths of one percent (.02%) of each ProFund VP's average
daily net assets in excess of $300 million up to $500 million; one one-
hundredths of one percent (.01%) of each ProFund VP's average daily net assets
in excess of $500 million. The minimum relationship fee schedule sets forth
specific dollar amounts for ten calendar quarters. The aggregate amount payable
under such schedule is $1,100,000. The address for BISYS and BFSI is 3435
Stelzer Road, Suite 1000, Columbus, Ohio 43219.
For the period from October 19, 1999 (commencement of operations) to December
31, 1999, BISYS, as Administrator, was entitled to, and voluntarily waived,
administration fees in the following amounts for each of the ProFunds VP:
ADMINISTRATION FEES
FYE 12/31/99
<TABLE>
<CAPTION>
Earned Waived
-----------------------------------------
<S> <C> <C>
UltraOTC VP $3,633 $3,633
UltraSmall-Cap VP 503 503
Europe 30 VP 155 155
</TABLE>
The Advisor, pursuant to a separate Management Services Agreement, performs
certain client support and other administrative services on behalf of the
ProFunds VP. For these services, each ProFund VP will pay to the Advisor a fee
at the annual rate of .15% of its average daily net assets for all ProFunds VP.
For the period from October 19, 1999 (commencement of operations) to December
31, 1999, ProFunds Advisors LLC was entitled to, and voluntarily waived,
management services fees in the following amounts for each of the ProFunds VP:
21
<PAGE>
MANAGEMENT SERVICES FEES
FYE 12/31/99
<TABLE>
<CAPTION>
Earned Waived
---------------------------------------
<S> <C> <C>
UltraOTC VP $10,900 $10,900
UltraSmall-Cap VP 1,510 1,510
Europe 30 VP 465 465
</TABLE>
UMB Bank, N.A. acts as custodian to the ProFunds VP. UMB Bank, N.A.'s address
is 928 Grand Avenue, Kansas City, Missouri.
ADMINISTRATIVE SERVICES
The Trust, on behalf of the ProFunds VP, has entered into an administrative
services agreement with American Skandia Life Assurance Corporation ("American
Skandia") pursuant to which American Skandia will provide administrative
services with respect to these ProFunds VP. These services may include, but are
not limited to: coordinating matters relating to the operation of American
Skandia's separate account with these ProFunds VP, including necessary
coordination with other service providers; coordinating the preparation of
necessary documents to be submitted to regulatory authorities; providing
assistance to variable contract owners who use or intend to use the ProFunds VP
as funding vehicles for their variable contracts; coordinating with the Advisor
regarding investment limitations and parameters to which these ProFunds VP are
subject; and generally assisting with compliance with applicable regulatory
requirements. For these services, the Trust pays American Skandia a quarterly
fee equal on an annual basis to 0.25% of the average daily net assets of each
ProFund VP that were invested in such ProFund VP through American Skandia's
separate account.
From time to time the ProFunds VP and/or the Advisor may enter into
arrangements under which certain administrative services may be performed by
other insurance companies that purchase shares of the ProFunds VP. These
administrative services may include, among other things, the services set forth
above, as well as responding to ministerial inquiries concerning the ProFunds VP
investment objectives, investment programs, policies and performance,
transmitting, on behalf of the ProFunds VP, proxy statements, annual reports,
updated prospectuses, and other communications regarding the ProFunds VP, and
providing any related services as the ProFunds VP or their investors may
reasonably request. Depending on the arrangements, the ProFunds VP and/or the
Advisor may compensate such insurance companies or their agents directly or
indirectly for the administrative services. To the extent the ProFunds VP
compensate the insurance company for these services, the ProFunds VP will pay
the insurance company an annual fee that will vary depending upon the number of
investors that utilize the ProFunds VP as the funding medium for their
contracts. The insurance company may impose other account or service charges.
See the prospectus for the separate account of the insurance company for
additional information regarding such charges.
For the period from October 19, 1999 (commencement of operations) to December
31, 1999, American Skandia received the following administrative services fees
for each of the ProFunds VP:
ADMINISTRATIVE SERVICES FEES
FYE 12/31/99
<TABLE>
<S> <C>
UltraOTC VP $18,166
UltraSmall-Cap VP 2,517
Europe 30 VP 774
</TABLE>
22
<PAGE>
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP serves as independent auditors to the ProFunds VP.
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 VP. The firm's
address is 1775 Eye Street, N.W., Washington, DC 20006-2401.
DISTRIBUTION PLAN
Pursuant to a Distribution Plan, the ProFunds VP may reimburse or compensate
financial intermediaries from their assets for services rendered and expenses
borne in connection with activities primarily intended to result in the sale of
shares of the ProFunds VP. It is anticipated that a portion of the amounts paid
by the ProFunds VP will be used to defray various costs incurred in connection
with the printing and mailing of prospectuses, statements of additional
information, and any supplements thereto and shareholder reports, and holding
seminars and sales meetings with wholesale and retail sales personnel designed
to promote the distribution of the Funds' shares. The ProFunds VP also may
reimburse or compensate financial intermediaries and third-party broker-dealers
for their services in connection with the distribution of the shares of the
ProFunds VP.
The Distribution Plan provides that the Trust, on behalf of each ProFund VP,
will pay annually up to 0.25% of the average daily net assets of a ProFund VP in
respect of activities primarily intended to result in the sale of its shares.
Under the terms of the Distribution Plan and related agreements, each ProFund VP
is authorized to make quarterly payments that may be used to reimburse or
compensate entities providing distribution and shareholder servicing with
respect to the shares of the ProFund VP for such entities' fees or expenses
incurred or paid in that regard.
The Distribution Plan is of a type known as a "compensation" plan because
payments may be made for services rendered to the ProFunds VP regardless of the
level of expenditures by the financial intermediaries. The Trustees will,
however, take into account such expenditures for purposes of reviewing
operations under the Distribution Plan in connection with their annual
consideration of the Distribution Plan's renewal. Expenditures under the
Distribution Plan may include, without limitation: (a) the printing and mailing
of ProFunds VP prospectuses, statements of additional information, any
supplements thereto and shareholder reports for prospective investors; (b) those
relating to the development, preparation, printing and mailing of
advertisements, sales literature and other promotional materials describing
and/or relating to the ProFunds VP; (c) holding seminars and sales meetings
designed to promote the distribution of the ProFunds VP shares; (d) obtaining
information and providing explanations to wholesale and retail distributors of
contracts regarding the investment objectives and policies and other information
about the ProFunds VP, including the performance of the ProFunds VP; (e)
training sales personnel regarding the ProFunds VP; and (f) financing any other
activity that is primarily intended to result in the sale of shares of the
ProFunds VP. In addition, a financial intermediary may enter into an agreement
with the Trust under which it would be entitled to receive compensation for,
among other things, making the ProFunds VP available to its contract owners as
funding vehicles for variable insurance contracts.
The Distribution Plan and any related agreement that is entered into by the
Trust in connection with the Distribution Plan will continue in effect for a
period of more than one year only so long as continuance is specifically
approved at least annually by a vote of a majority of the Trust's Board of
Trustees, and of a majority of the Trustees who are not "interested persons" of
the Trust and who have no financial interest in the operation of the
Distribution Plan (the "Independent Trustees"), cast in person at a meeting
called for the
23
<PAGE>
purpose of voting on the Distribution Plan or any related agreement, as
applicable. In addition, the Distribution Plan and any related agreement may be
terminated as to a ProFund VP at any time, without penalty, by vote of a
majority of the outstanding shares of the ProFund VP or by vote of a majority of
the Independent Trustees. The Distribution Plan also provides that it may not be
amended to increase materially the amount (up to 0.25% of average daily net
assets annually) that may be spent for distribution of shares of any ProFund VP
without the approval of shareholders of that ProFund VP.
For the period from October 19, 1999 (commencement of operations) to December
31, 1999, each ProFund VP paid the following amount pursuant to the Distribution
Plan for shareholder servicing with respect to the shares of the ProFund VP:
DISTRIBUTION PLAN FEES
FYE 12/31/99
<TABLE>
<S> <C>
UltraOTC VP $18,166
UltraSmall-Cap VP 2,517
Europe 30 VP 774
</TABLE>
COSTS AND EXPENSES
Each ProFund VP bears all expenses of its operations other than those assumed
by the Advisor or the Administrator. ProFund VP expenses include: the
management fee; administrative and transfer agent fees; custodian and accounting
fees and expenses, legal and auditing fees; securities valuation expenses;
fidelity bonds and other insurance premiums; expenses of preparing and printing
prospectuses, confirmations, proxy statements, and shareholder reports and
notices; registration fees and expenses; proxy and annual meeting expenses, if
any; all Federal, state, and local taxes (including, without limitation, stamp,
excise, income, and franchise taxes); organizational costs; and non-interested
Trustees' fees and expenses.
ORGANIZATION AND DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
ProFunds 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 thirty-nine separately managed series, three of which are described
herein.
All shares of the ProFunds VP 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 only 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 of such Trustees. If requested by shareholders of at least 10%
of the outstanding shares of the Trust, the Trust will call a meeting of
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 Trust 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 shareholder held personally liable for the obligations of the Trust. The
risk of a Trust shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Trust itself would not be
able to meet the Trust's obligations. This risk should be considered remote.
24
<PAGE>
If a ProFund does not grow to a size to permit it to be economically viable, the
Fund may cease operations. In such an event, investors may be required to
liquidate or transfer their investments at an inopportune time.
CAPITALIZATION
As of April 3, 2000, no person owned of record, or to the knowledge of
management beneficially owned, five percent or more of the outstanding shares of
the ProFunds VP except as set forth below:
<TABLE>
<CAPTION>
ULTRAOTC VP TOTAL SHARES PERCENTAGE
- ----------- ------------ ----------
<S> <C> <C>
America Skandia Life Assurance Corp. 2,319,515.529 95.5715%
One Corporate Drive
Shelton, CT 06484
ULTRASMALL-CAP VP TOTAL SHARES PERCENTAGE
- --------------------------------------- ------------- ----------
America Skandia Life Assurance Corp. 2,546,850.952 89.6626%
One Corporate Drive
Shelton, CT 06484
ULTRAJAPAN VP TOTAL SHARES PERCENTAGE
- ------------- ------------ ----------
America Skandia Life Assurance Corp. 2,524,319.686 99.6944%
One Corporate Drive
Shelton, CT 06484
</TABLE>
A shareholder who beneficially owns, directly or indirectly, more than 25%
of a ProFund's voting securities may be deemed a "control person" (as defined in
the 1940 Act) of the ProFund.
TAXATION
Set forth below is a discussion of certain U.S. federal income tax issues
concerning the ProFunds VP and the purchase, ownership, and disposition of
ProFund VP 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 VP shares, as well as the tax consequences arising under
the laws of any state, foreign country, or other taxing jurisdiction.
Each of the ProFunds VP 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
VP 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 VP'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 VP's total assets and
10% of the outstanding voting securities of such issuer, and (ii) not more
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<PAGE>
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 RIC, a ProFund VP 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 VP'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 VP 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 VP level. To avoid the tax, each ProFund VP 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 VP 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 VP in October, November or December of that year with a record date in
such a month and paid by the ProFund VP during January of the following year.
Such distributions will be taxable to shareholders in the calendar year in which
the distributions are declared, rather than the calendar year in which the
distributions are received.
MARKET DISCOUNT
If a ProFund VP 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 VP in each
taxable year in which the ProFund VP owns an interest in such debt security and
receives a principal payment on it. In particular, the ProFund VP 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 VP at a constant
rate over the time remaining to the debt security's maturity or, at the election
of the ProFund VP, at a constant yield to maturity which takes into account the
semi-annual compounding of interest. Gain realized on the disposition of a
market discount obligation must be recognized as ordinary interest income (not
capital gain) to the extent of the "accrued market discount."
ORIGINAL ISSUE DISCOUNT
Certain debt securities acquired by the ProFunds VP 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 VP, 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 VP 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).
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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 VP 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 VP 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 VP may result in "straddles" for federal income tax purposes. The
straddle rules may affect the character of gains (or losses) realized by a
ProFund VP, and losses realized by the ProFund VP 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 VP
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 VP are not
entirely clear. The straddle rules may increase the amount of short-term
capital gain realized by a ProFund VP, which is taxed as ordinary income when
distributed to shareholders. Because application of the straddles 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 VP engages in transactions that reduce or eliminate its risk of loss
with respect to appreciated financial positions. If the ProFund VP enters into
certain transactions in property while holding substantially identical property,
the ProFund VP 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 VP'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 VP's holding period and the application of
various loss deferral provisions of the Code.
PASSIVE FOREIGN INVESTMENT COMPANIES
The ProFunds VP 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 VP receives a so-called "excess
distribution" with respect to PFIC stock, the ProFund VP 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 VP 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 VP held the PFIC
shares. Each ProFund VP will itself be subject to tax on the portion, if any,
of an excess distribution that is so allocated to prior ProFund VP 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.
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The ProFunds VP 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 VP 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 VP'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 VP shares would be
deductible as ordinary losses to the extent of any net mark-to-market gains
included in income in prior years.
BACKUP WITHHOLDING
Each ProFund VP 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 VP with the shareholder's correct taxpayer
identification number or social security number, (2) the IRS notifies the
shareholder or the ProFund VP 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 VP 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 VP 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 VP'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 VP is required to distribute as
dividends to shareholders in order for the ProFund VP 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 VP's shares;
the total return on a shareholder's investment will not be reduced as a result
of the ProFund VP'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 ProFunds VP may advertise its total return 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 VP. Other total return quotations, aggregate or average, over other
time periods for the ProFund VP also may be included.
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<PAGE>
The total return of a ProFund VP for a particular period represents the
increase (or decrease) in the value of a hypothetical investment in the ProFund
VP 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 VP at net asset value. Total
return is based on historical earnings and net 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 VP.
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 VP for the period October 19, 1999
(commencement of operations) to December 31, 1999, were as follows:
<TABLE>
<S> <C>
UltraOTC VP 136.43%
UltraSmall-Cap VP 19.97%
Europe 30 VP 22.73%
</TABLE>
COMPARISONS OF INVESTMENT PERFORMANCE
In conjunction with performance reports, promotional literature, and/or
analyses of shareholder service for a ProFund VP, comparisons of the performance
information of the ProFund VP 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
Deutche Aktienindex, all of which are unmanaged market indicators. Such
comparisons can be a useful measure of the quality of a ProFund VP's investment
performance. In particular, performance information for UltraOTC VP may be
compared to various unmanaged indexes, including, but not limited to its current
benchmark, the NASDAQ 100 Index(TM); and performance information for UltraSmall
Cap VP may be compared to various unmanaged indexes, including, but not limited
to, its current benchmark, the Russell 2000(R) 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 VP 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 VP in performance reports, will be
drawn from the "Small Company Growth Funds" grouping for UltraOTC VP and
UltraSmall Cap VP. In addition, the broad-based Lipper groupings may be used
for comparison to any of the ProFunds VP. Further information about the
performance of the ProFunds VP is contained in the ProFunds VP annual reports to
shareholders, which may be obtained without charge by writing to the ProFunds VP
at the address or telephoning the ProFunds VP at the telephone number set forth
on the cover page of this SAI.
29
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Other Information
-----------------
The ProFunds VP are not sponsored, endorsed, sold or promoted by the NASDAQ
Stock Markets, Inc. ("NASDAQ") or the Frank Russell Company. NASDAQ or the
Frank Russell Company make no representation or warranty, express or implied, to
the owners of shares of the ProFunds VP or any member of the public regarding
the advisability of investing in securities generally or in the ProFunds VP
particularly or the ability of the NASDAQ 100 Index(TM) or the Russell(R)2000
Index to track general stock market performance. NASDAQ's and the Frank Russell
Company's only relationship to the ProFunds VP (the "Licensee") is the licensing
of certain trademarks and trade names of NASDAQ and the Frank Russell Company,
respectively, and of the NASDAQ 100 Index(TM) and the Russell(R)2000 Index,
respectively. NASDAQ and the Frank Russell Company have no obligation to take
the needs of the Licensee or the owners of shares of the ProFunds VP into
consideration in determining, composing or calculating the NASDAQ 100 Index(TM)
and the Russell(R)2000 Index, respectively. NASDAQ and the Frank Russell
Company are not responsible for and have not participated in the determination
or calculation of the equation by which the shares of the ProFunds VP are to be
converted into cash. NASDAQ and the Frank Russell Company have no obligation or
liability in connection with the administration, marketing or trading of the
ProFunds VP.
FINANCIAL STATEMENTS
The Report of Independent Accountants and Financial Statements of the ProFunds
VP for the fiscal year ended December 31, 1999 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, or, for financial professionals only, (888) 776-5717
or, for financial professionals only, (888) 776-5717.
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, IN CONNECTION WITH THE OFFERING MADE BY THE 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.
30
<PAGE>
APPENDIX A
EUROPE 30 INDEX
Company Name
- ------------
BP Amoco PLC
Royal Dutch Petro
Deutsche Telekom AG
Vodafone Airtouch PLC
HSBC Holdings PLC
Nokia Corp
British Telecom PLC
Glaxo Holdings PLC
Shell Transport & Trading
France Telecom SA
Smithkline Beecham
Astrazeneca
Ericsson (LM) Tel
Aegon
ING Groep
Telecon Italia SPA
Telefonica
ENI SPA
Barclays PLC
AXA Adrock
Unilever N V
Total Fina SA
Banco Santander
Diageo PLC
ABN Amro Holding NV
Philips Electronics
Veba AG
LVMH
Banco Bilboa Vizcaya
Alkatel
31
<PAGE>
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 eight series of the
ProFunds (the "Pro Funds VP"): seven non-money market ("Benchmark") ProFunds VP
and the ProFund VP Money Market ("Money Market VP"). The ProFunds VP 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. Each Benchmark ProFund VP seeks investment results that
correspond each day to a specified benchmark. Money Market VP seeks as high a
level of current income as is consistent with liquidity and preservation of
capital. The ProFunds VP may be used independently or in combination with each
other as part of an overall investment strategy. Additional ProFunds VP may be
created from time to time.
Shares of the ProFunds VP are available for purchase by insurance company
separate accounts to serve as an investment medium for variable insurance
contracts, and by qualified pension and retirement plans, certain insurance
companies, and ProFund Advisors LLC (the "Advisor").
The ProFunds VP 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 VP to determine whether an investment
in a particular ProFund VP is appropriate. None of the ProFunds VP alone
constitutes a balanced investment plan. Each Benchmark ProFund VP 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 investment objectives of the ProFunds VP will be
achieved.
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Prospectus, dated May 1, 2000, as supplemented from
time to time, which incorporates this Statement of Additional Information by
reference. Words or phrases used in the Statement of Additional Information
without definition have the same meaning as ascribed to them in the Prospectus.
A copy of the Prospectus 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, 2000.
<PAGE>
TABLE OF CONTENTS
PAGE
----
ProFunds........................................................ 2
Investment Policies and Techniques.............................. 2
Investment Restrictions......................................... 20
Determination of Net Asset Value................................ 21
Portfolio Transactions and Brokerage............................ 23
Management of ProFunds.......................................... 24
Costs and Expenses.............................................. 29
Organization and Description of Shares of Beneficial Interest... 30
Taxation........................................................ 30
Performance Information......................................... 33
Financial Statements............................................ 35
2
<PAGE>
PROFUNDS
ProFunds (the "Trust") is an open-end management investment company, and
currently comprises thirty-nine separate series. Eleven of these series, the
ProFunds VP, are offered to insurance company separate accounts and qualified
pension and retirement plans and are discussed herein. All of the ProFunds VP,
except for Money Market VP, are classified as non-diversified, although they
currently intend to operate in a diversified manner. Other series may be added
in the future.
INVESTMENT POLICIES AND TECHNIQUES
GENERAL
Reference is made to the Prospectus for a discussion of the investment
objectives and policies of the ProFunds VP. In addition, set forth below is
further information relating to the ProFunds VP. The discussion below
supplements and should be read in conjunction with the Prospectus.
The investment restrictions of the ProFunds VP 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 VP, as defined in the
Investment Company Act of 1940, as amended (the "1940 Act"). The investment
objective and all other investment policies of the ProFunds VP not specified as
fundamental (including the benchmarks of the ProFunds VP) may be changed by the
trustees of the ProFunds VP without the approval of shareholders.
A Benchmark ProFund VP may consider changing its benchmark if, for example,
the current benchmark becomes unavailable, the ProFunds VP believes the current
benchmark no longer serves the investment needs of a majority of shareholders or
another benchmark better serves their needs, or the financial or economic
environment makes it difficult for its investment results to correspond
sufficiently to its current benchmark. If believed appropriate, a Benchmark
ProFund VP may specify a benchmark for itself that is "leveraged" or
proprietary. Of course, there can be no assurance that a ProFund VP 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 Benchmark ProFund VP 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 Benchmark ProFund VP and the
performance of its benchmark), certain factors will tend to cause a Benchmark
ProFund VP's investment results to vary from a perfect correlation to its
benchmark. The Benchmark ProFunds VP, 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 Benchmark ProFunds VP 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 VP discussed below, and as discussed
in the Prospectus, may be used by a ProFund VP if, in the opinion of the
Advisor, these strategies will be advantageous to the ProFunds VP. The ProFunds
VP are free to reduce or eliminate the ProFunds VP's activity in any of those
areas without changing the ProFunds' VP fundamental investment policies. There
is no assurance that any of these strategies or any other strategies and methods
of investment available to a ProFund VP will result in the achievement of the
objectives.
3
<PAGE>
BULL VP AND ULTRABULL VP
The investment objective of Bull VP is to provide daily investment results
that correspond to the performance of the S&P 500 Index. The investment
objective of UltraBull VP is to provide daily investment results that correspond
to twice (200%) the performance of the S&P 500 Index. These ProFunds VP seek to
achieve this correlation on each trading day. Under their investment
objectives, UltraBull VP 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 Bull VP.
In attempting to achieve their objectives, Bull VP and UltraBull VP 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 VP pays
or receives as the result of the transaction. These ProFunds VP may also invest
in shares of individual securities which are expected to track the S&P 500
Index.
BEAR VP AND ULTRABEAR VP
Bear VP and UltraBear VP 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 VP's investment objective is to
provide daily investment results that correspond to the inverse (opposite) of
the performance of the S&P 500 Index. UltraBear VP's investment objective is to
provide daily investment results that correspond to twice (200%) the inverse
(opposite) of the performance of the S&P 500 Index.
If Bear VP achieved a perfect inverse correlation for any single trading day,
the net asset value of the shares of Bear VP 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 Bear VP 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 UltraBear VP on the same days would increase
or decrease approximately twice as much as the price change of Bear VP.
For example, if the S&P 500 Index were to decrease by 1% on a particular day,
investors in Bear VP should experience a gain in net asset value of
approximately 1% for that day. UltraBear VP 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 Bear VP and UltraBear VP would experience a loss in
net asset value of approximately 1% and 2%, respectively.
Due to the nature of Bear VP and UltraBear VP, investors in these ProFunds VP
could experience substantial losses during sustained periods of rising equity
prices, with losses to investors in UltraBear approximately twice as large as
the losses to investors in the Bear VP. 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, Bear VP and UltraBear VP generally do
not invest in traditional securities, such as common stock of operating
companies. Rather, Bear VP and UltraBear VP 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, Bear VP and UltraBear VP 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 VP terminates
the position. These ProFunds VP 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 VP pays or receives as the result
of the transaction.
4
<PAGE>
ULTRASHORT OTC VP
The investment objective of UltraShort OTC VP is to provide daily investment
results that correspond to twice (200%) the inverse (opposite) of the
performance of the NASDAQ 100 Index(TM). It is the policy of UltraShort OTC VP
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.
UltraShort OTC VP is designed to allow investors to seek to profit from
anticipated decreases in the NASDAQ 100 Index(TM) or to hedge an existing
portfolio of securities or mutual fund shares. UltraShort OTC VP's investment
objective is to provide investment results that will inversely correlate to 200%
of the performance of the NASDAQ 100 Index(TM). UltraShort OTC VP seeks to
achieve this inverse correlation on each trading day.
If the ProFund VP achieved a perfect inverse correlation for any single
trading day, the net asset value of the shares of UltraShort OTC VP would
increase for that day proportional to twice any decrease in the level of the
NASDAQ 100 Index(TM). Conversely, the net asset value of the shares of
UltraShort OTC VP would decrease for that day proportional to twice any increase
in the level of the NASDAQ 100 Index(TM) for that day.
For example, if the NASDAQ 100 Index(TM) were to decrease by 1% on a
particular day, investors in UltraShort OTC VP should experience a gain in net
asset value of approximately 2% for that day. Conversely, if the NASDAQ 100
Index(TM) were to increase by 1% by the close of business on a particular
trading day, investors in UltraShort OTC VP would experience a loss in net asset
value of approximately 2%.
In pursuing its investment objective, UltraShort OTC VP generally does not
invest in traditional securities, such as common stock of operating companies.
Rather, UltraShort OTC VP 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, UltraShort OTC VP 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 UltraShort OTC VP terminates
the position. UltraShort OTC VP 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 UltraShort OTC VP pays or receives as the
result of the transaction. Due to the nature of UltraShort OTC VP, 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 New York Stock Exchange ("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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ULTRAEUROPE VP AND ULTRASHORT EUROPE VP
The investment objective of UltraEurope VP is to provide daily investment
results that correspond to twice (200%) the performance of the PEI. Under its
investment objective, UltraEurope VP 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.
UltraShort Europe VP 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. UltraShort Europe VP's investment objective is to
provide daily investment results that correspond to twice (200%) the inverse
(opposite) of the performance of the PEI.
If UltraShort Europe VP achieved a perfect inverse correlation for any single
trading day, the net asset value of the shares of this ProFund VP 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 UltraShort Europe VP 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 UltraShort Europe VP 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 UltraShort
Europe VP would experience a loss in net asset value of approximately 2%.
In pursuing their investment objectives, UltraEurope VP and UltraShort Europe
VP generally do not invest in traditional securities, such as common stock of
operating companies. Rather, UltraEurope VP and UltraShort Europe VP 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 VP
(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 VP will invest indirectly in foreign markets, they will
be subject to certain of 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 these ProFunds VP 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.
By investing in American Depository Receipts ("ADRs") under normal market
conditions, a ProFund VP may reduce some of the risks of investing in foreign
securities. ADRs are denominated in the U.S. Dollar, which reduces the risk of
currency fluctuations during the settlement period for either purchase or sales.
Further, the information available for ADRs is subject to the accounting,
auditing and financial reporting standards of the domestic market or exchange on
which they are traded, which standards are more uniform and more exacting than
those to which many foreign issuers may be subject. However, ADRs do not
eliminate all the risk inherent in investing in the securities of foreign
issuers.
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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 policy in Europe and other parts of the world. Although it
is not possible to predict the impact of the Euro implementation plan on
UltraEurope VP and UltraShort Europe VP, the transition to the Euro may change
the economic environment and behavior of investors, particularly in European
markets.
MONEY MARKET VP
Money Market VP seeks as high a level of current income as is consistent with
liquidity and the preservation of capital. It seeks this objective by investing
in high quality money market instruments. Money Market VP 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.
There can be no assurance that the investment objective of Money Market VP
will be achieved.
Money Market VP invests in money market instruments, including corporate debt
obligations, U.S. government securities, bank obligations and repurchase
agreements. Money Market VP follows practices which are designed to enable
Money Market VP to maintain a $1.00 share price: limiting dollar-weighted
average maturity of the securities held by Money Market VP 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, Money
Market VP 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 Money Market VP 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 VP (other than Money Market VP) 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 VP purchases a put or call option on a futures contract, the
ProFund VP 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 VP receives a premium in return for granting to the purchaser of the
option the right to sell to or buy from the ProFund VP the underlying futures
contract for a specified price upon exercise at any time during the option
period.
Whether a ProFund VP realizes a gain or loss from futures activities depends
generally upon movements in the underlying commodity. The extent of the ProFund
VP's loss from an unhedged short position in futures contracts or from writing
options on futures contracts is potentially unlimited. The ProFunds VP may
engage in related closing purchase or sale transactions with respect to options
on futures contracts by buying an option of the same series as an option
previously written by a ProFund VP, or selling an option of the same series as
an option previously purchased by a ProFund VP. The ProFunds VP 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.
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When a ProFund VP purchases or sells a stock index futures contract, or sells
an option thereon, the ProFund VP "covers" its position. To cover its position,
a ProFund VP 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 Benchmark ProFunds VP 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 promulgated by the Commodity
Futures Trading Commission (the "CFTC Regulations") under the Commodity Exchange
Act under which each of these ProFunds VP would be excluded from the definition
of a "commodity pool operator." Under Section 4.5 of the CFTC Regulations, a
ProFund VP may engage in futures transactions, either for "bona fide hedging"
purposes, as this term is defined in the CFTC Regulations, or for non- bona fide
hedging purposes to the extent that the aggregate initial margins and option
premiums required to establish such non- bona fide hedging positions do not
exceed 5% of the liquidation value of the ProFund VP'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 VP will cover their positions when they write a futures contract
or option on a futures contract. A ProFund VP 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 VP 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 VP 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 VP 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 VP 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 VP 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 VP 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 VP 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 VP 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 VP 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 VP 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 VP to substantial losses.
If trading is not possible, or if a ProFund VP determines not to close a futures
position in anticipation of adverse price movements, the ProFund VP will be
required to make daily cash payments of variation margin. The risk that the
ProFund VP will be unable
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to close out a futures position will be minimized by entering into such
transactions on a national exchange with an active and liquid secondary market.
INDEX OPTIONS
The ProFunds VP (other than Money Market VP) may purchase and write options on
stock indexes to create investment exposure consistent with their investment
objectives, to 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 VP 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 VP 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 VP will not enter into an
option position that exposes the ProFund VP to an obligation to another party,
unless the ProFund VP either (i) owns an offsetting position in securities or
other options and/or (ii) maintains with the ProFund VP'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 Benchmark ProFunds VP may engage in transactions in stock index options
listed on national securities exchanges or traded in the OTC market as an
investment vehicle for the purpose of realizing their investment objectives.
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 OTC options and the
cover for written OTC options will be subject to the 15% limitation on
investment in illiquid securities by the ProFunds VP. 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 VP may buy or sell; however, the
Advisor intends to comply with all limitations.
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OPTIONS ON SECURITIES
Each Benchmark ProFund VP may buy and write (sell) options on securities for
the purpose of realizing its investment objectives. By buying a call option, a
ProFund VP 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 VP 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 VP 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 VP 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 VP may cover its position by owning the underlying
security on which the option is written. Alternatively, the ProFund VP 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 VP
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 VP 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 VP. When a ProFund VP writes a put option, the ProFund VP 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 VP to write call options on stocks held by the ProFund VP 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 VP that writes an option wishes to terminate the ProFund VP's
obligation, the ProFund VP may effect a "closing purchase transaction." The
ProFund VP accomplishes this by buying an option of the same series as the
option previously written by the ProFund VP. 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 VP which is the holder of an option
may liquidate its position by effecting a "closing sale transaction." The
ProFund VP accomplishes this by selling an option of the same series as the
option previously purchased by the ProFund VP. 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 VP 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 VP if the premium, plus commission costs, paid by the ProFund VP
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 VP on the sale
of the call or the put option. The ProFund VP also will realize a gain if a
call or put option which the ProFund VP has written lapses unexercised, because
the ProFund VP 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 VP. If an options market were to become unavailable, the ProFund VP
would be unable to realize its profits or limit its losses until the ProFund VP
could exercise options it holds, and the ProFund
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VP would remain obligated until options it wrote were exercised or expired.
Reasons for the absence of a 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.
SHORT SALES
Bear VP, UltraBear VP, UltraShort OTC VP and UltraShort Europe VP may engage
in short sales transactions under which the ProFund VP sells a security it does
not own. To complete such a transaction, the ProFund VP must borrow the
security to make delivery to the buyer. The ProFund VP 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 VP. Until the security is
replaced, the ProFund VP 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 VP 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 VP closes its short position or replaces the borrowed
security, the ProFund VP 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 VP (other than Money Market VP) 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 VP calculate the obligations
of the parties to the agreement on a "net basis." Consequently, a ProFund VP'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 VP's current obligations under a swap agreement will be accrued
daily (offset against any amounts owing to the ProFund VP) 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 VP's
investment restriction concerning senior securities. Because they are two party
contracts and because they may have
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terms of greater than seven days, swap agreements may be considered to be
illiquid for the ProFund VP illiquid investment limitations. A ProFund VP will
not enter into any swap agreement unless the Advisor believes that the other
party to the transaction is creditworthy. A ProFund VP 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 Benchmark ProFund VP 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 VP 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 VP 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 VP 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 VP on the notional amount.
Swap agreements typically are settled on a net basis, which means that the two
payment streams are netted out, with the ProFund VP 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 VP is contractually obligated to make. If
the other party to a swap agreement defaults, a ProFund VP's risk of loss
consists of the net amount of payments that such ProFund VP is contractually
entitled to receive, if any. The net amount of the excess, if any, of a ProFund
VP'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 VP'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
VP and their Advisor believe that transactions do not constitute senior
securities under the 1940 Act and, accordingly, will not treat them as being
subject to a ProFund VP'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 OTCmarket. The Advisor, under the
supervision of the Board of Trustees, are responsible for determining and
monitoring the liquidity of the ProFund VP 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.
AMERICAN DEPOSITORY RECEIPTS
For many foreign securities, U.S. Dollar denominated ADRs, which are traded in
the United States on exchanges or over-the-counter, are issued by domestic
banks. ADRs represent the right to receive securities of foreign issuers
deposited in a domestic bank or a correspondent bank. ADRs do not eliminate all
the risk inherent in investing in the securities of foreign issuers. However,
by investing in ADRs rather than directly in foreign issuers' stock, a ProFund
VP can avoid currency risks during the settlement period for either purchase or
sales.
In general, there is a large, liquid market in the United States for many
ADRs. The information available for ADRs is subject to the accounting, auditing
and financial reporting standards of the domestic market or exchange on which
they are traded, which standards are more uniform and more exacting than those
to which many foreign issuers may be subject. Certain ADRs, typically those
denominated as unsponsored, require the
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holders thereof to bear most of the costs of such facilities, while issuers of
sponsored facilities normally pay more of the costs thereof. The depository of
an unsponsored facility frequently is under no obligation to distribute
shareholder communications received from the issuer of the deposited securities
or to pass through the voting rights to facility holders with respect to the
deposited securities, whereas the depository of a sponsored facility typically
distributes shareholder communications and passes through the voting rights.
UltraEurope VP may invest in both sponsored and unsponsored ADRs. Unsponsored
ADR programs are organized independently and without the cooperation of the
issuer of the underlying securities. As a result, available information
concerning the issuers may not be as current as for sponsored ADRs, and the
prices of unsponsored depository receipts may be more volatile than if such
instruments were sponsored by the issuer.
U.S. GOVERNMENT SECURITIES
Each ProFund VP also may invest in U.S. government securities in pursuit of
its investment objectives, as "cover" for the investment techniques these
ProFunds VP 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 VP's portfolio investments in U.S. government securities, while a
decline in interest rates would generally increase the market value of a ProFund
VP's portfolio investments in these securities.
U.S. government securities include U.S. Treasury securities, which are backed
by the full faith and credit of the U.S. Treasury and which differ only in their
interest rates, maturities, and times of issuance. U.S. Treasury bills have
initial maturities of one year or less; U.S. Treasury notes have initial
maturities of one to ten years; and U.S. Treasury bonds generally have initial
maturities of greater than ten years. Certain U.S. government securities are
issued or guaranteed by agencies or instrumentalities of the U.S. government
including, but not limited to, obligations of U.S. government agencies or
instrumentalities, such as the Federal National Mortgage Association, the
Government National Mortgage Association, the Small Business Administration, the
Federal Farm Credit Administration, the Federal Home Loan Banks, Banks for
Cooperatives (including the Central Bank for Cooperatives),the Federal Land
Banks, the Federal Intermediate Credit Banks, the Tennessee Valley Authority,
the Export-Import Bank of the United States, the Commodity Credit Corporation,
the Federal Financing Bank, the Student Loan Marketing Association, and the
National Credit Union Administration. Some obligations issued or guaranteed by
U.S. government agencies and instrumentalities, including, for example,
Government National Mortgage Association pass-through certificates, are
supported by the full faith and credit of the U.S. Treasury. Other obligations
issued by or guaranteed by Federal agencies, such as those securities issued by
the Federal National Mortgage Association, are supported by the discretionary
authority of the U.S. government to purchase certain obligations of the federal
agency, while other obligations issued by or guaranteed by federal agencies,
such as those of the Federal Home Loan Banks, are supported by the right of the
issuer to borrow from the U.S. Treasury. While the U.S. government provides
financial support to such U.S. government-sponsored Federal agencies, no
assurance can be given that the U.S. government will always do so, since the
U.S. Government is not so obligated by law. U.S. Treasury notes and bonds
typically pay coupon interest semi-annually and repay the principal at maturity.
REPURCHASE AGREEMENTS
Each of the ProFunds VP may enter into repurchase agreements with financial
institutions. Under a repurchase agreement, a ProFund VP 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
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one year. The ProFunds VP 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. 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 VP 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 VP could suffer a
loss. A ProFund VP also may experience difficulties and incur certain costs in
exercising its rights to the collateral and may lose the interest the ProFund VP
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 VP 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 a ProFund VP, amounts to more than 15% (10% with
respect to Money Market VP) of its total net assets. The investments of each of
the ProFunds VP in repurchase agreements at times may be substantial when, in
the view of the Advisor, 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 VP may temporarily invest
all or part of the ProFund VP'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.
REVERSE REPURCHASE AGREEMENTS
The ProFunds VP may use reverse repurchase agreements as part of their
investment strategies. Reverse repurchase agreements involve sales by a ProFund
VP of portfolio assets concurrently with an agreement by the ProFund VP to
repurchase the same assets at a later date at a fixed price. Generally, the
effect of such a transaction is that the ProFund VP 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 VP 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 VP 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 VP intend to use the reverse repurchase technique only when it will
be to the ProFund VP's advantage to do so. The ProFund VP will establish a
segregated account with its custodian bank in which the ProFund VP will maintain
cash or liquid instruments equal in value to the ProFund VP's obligations in
respect of reverse repurchase agreements.
BORROWING
The ProFunds VP may borrow money for cash management purposes or investment
purposes. Each of the ProFunds VP 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 VP "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 VP. 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 VP's assets will
fluctuate in value, whereas the interest obligations on borrowings may be fixed,
the net asset value per share of the ProFund VP will increase more when the
ProFund VP's portfolio assets increase in value and decrease more when the
ProFund VP'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
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conditions, a ProFund VP 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 1940 Act, a ProFund VP 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 VP's assets should fail to meet this 300% coverage
test, the ProFund VP, within three days (not including Sundays and holidays),
will reduce the amount of the ProFund VP'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 VP 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 VP's total assets. This borrowing is
not subject to the foregoing 300% asset coverage requirement. The ProFunds VP
are authorized to pledge portfolio securities as the Advisor deems appropriate
in connection with any borrowings.
LENDING OF PORTFOLIO SECURITIES
Each of the ProFunds VP 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 VP 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 VP any income accruing thereon, and the ProFund VP may
invest the cash collateral in portfolio securities, thereby earning additional
income. A ProFund VP will not lend more than 33 1/3% of the value of the
ProFund VP's total assets. Loans would be subject to termination by the lending
ProFund VP 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 VP. 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 VP may pay reasonable
finders, borrowers, administrative, and custodial fees in connection with a
loan.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
Each Benchmark ProFund VP, 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 VP makes the commitment to purchase securities on a when-issued
or delayed-delivery basis, the ProFund VP will record the transaction and
thereafter reflect the value of the securities, each day, in determining the
ProFund VP's net asset value. Each Benchmark ProFund VP will not purchase
securities on a when-issued or delayed-delivery basis if, as a result, more than
15% of the ProFund VP's net assets would be so invested. At the time of
delivery of the securities, the value of the securities may be more or less than
the purchase price.
The Trust will also establish a segregated account with the Trust's custodian
bank in which the ProFunds VP will maintain liquid instruments equal to or
greater in value than the ProFund VP's purchase commitments for such when-issued
or delayed-delivery securities, or the Trust does not believe that a ProFund
VP's net asset value or income will be adversely affected by the ProFund VP's
purchase of securities on a when-issued or delayed delivery basis.
INVESTMENTS IN OTHER INVESTMENT COMPANIES
The ProFunds VP 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 VP invests in, and, thus, is a shareholder of,
another investment company, the ProFund VP's shareholders will indirectly bear
the ProFund VP's proportionate share of the fees and expenses paid by such other
investment company,
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including advisory fees, in addition to both the management fees payable
directly by the ProFund VP to the ProFund VP's own investment adviser and the
other expenses that the ProFund VP bears directly in connection with the ProFund
VP's own operations.
ILLIQUID SECURITIES
While none of the ProFunds VP anticipates doing so, each of the ProFunds VP
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 VP will not invest more than 15% (10% with respect to Money Market VP)
of the ProFund VP'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 VP 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 OTC
options, certain cover for OTC options, repurchase agreements with maturities in
excess of seven days, and certain securities whose disposition is restricted
under the Federal securities laws. The ProFund VP may not be able to sell
illiquid securities when the Advisor 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.
At the time of investment, Money Market VP'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 Money
Market VP), 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 Money Market VP's net
assets. If changes in the liquidity of certain securities cause Money Market to
exceed such 10% limit, Money Market VP 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 Money
Market VP.
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 VP 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 VP have delegated this
responsibility for determining the liquidity of Rule 144A restricted securities
which may be invested in by a ProFund VP to the Advisor. 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 VP's liquidity.
PORTFOLIO QUALITY AND MATURITY (MONEY MARKET VP)
Money Market VP will maintain a dollar-weighted average maturity of 90 days or
less. All securities in which Money Market VP 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")
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(or one such NRSRO if that NRSRO is the only such NRSRO which rates the
security), or if unrated, are believed by the Advisor, under the supervision of
Board of Trustees, to be of comparable quality. Currently, there are five rating
agencies which have been designated by the Commission 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. The Advisor, acting under the supervision of and
procedures adopted by the Board of Trustees, will also determine that all
securities purchased by Money Market VP present minimal credit risks. The
Advisor will cause Money Market VP 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 Money Market VP.
OBLIGATIONS OF BANKS AND OTHER FINANCIAL INSTITUTIONS (MONEY MARKET VP)
Money Market VP 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 the Advisor, acting under the supervision of the Board of
Trustees, to be of comparable quality. Bank obligations in which Money Market
VP 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 Money Market VP'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 the Advisor, acting under the supervision of the
Board of Trustees, deems the instruments to present minimal credit risk, Money
Market VP 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, Money Market VP will invest more than 25% of its assets in the
foreign and domestic bank obligations described above. Money Market VP's
concentration of its investments in bank obligations will cause Money Market VP
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 VP)
COMMERCIAL PAPER. Money Market VP 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 Money Market VP 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 objections, or if not rated, must
be believed by the Advisor, acting under the supervision of the Board of
Trustees, to be of comparable quality. Any commercial paper issued by a foreign
entity and purchased by Money Market VP 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.
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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 Money Market VP and the issuer, they are not normally
traded. Although no active secondary market may exist for these notes, Money
Market VP 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 the Advisor, acting
under the supervision of the Board of Trustees, 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, Money
Market VP 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. Money Market VP 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 the
Advisor, 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.
CREDIT ENHANCEMENT. Certain of Money Market VP'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 Money Market
VP and affect Money Market VP's share price. Money Market VP may have more than
25% of its total assets invested in securities credit-enhanced by banks.
ASSET-BACKED SECURITIES. Money Market VP 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
The nature of the ProFunds VP will cause the ProFunds VP 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 VP. In addition, a ProFund VP's
portfolio turnover level may adversely affect the ability of the ProFund VP to
achieve its investment objective. Because each ProFund VP's portfolio turnover
rate to a great extent will depend on the purchase, redemption, and exchange
activity of the ProFund VP's investors, it is difficult to estimate what the
ProFund VP'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 Benchmark ProFunds VP 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 VP is calculated without regard to instruments, including
options and futures contracts, having a maturity of less than one year.
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SPECIAL CONSIDERATIONS
To the extent discussed above and in the prospectus, the ProFunds VP present
certain risks, some of which are further described below.
TRACKING ERROR. While the Benchmark ProFunds VP 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 VP expenses, including
brokerage (which may be increased by high portfolio turnover) and the cost of
the investment techniques employed by the ProFunds VP; (2) less than all of the
securities in the benchmark being held by a ProFund VP and securities not
included in the benchmark being held by a ProFund VP; (3) an imperfect
correlation between the performance of instruments held by a ProFund VP, 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 VP 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 VP'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 VP trade, resulting in the inability of the ProFund VP to execute
intended portfolio transactions. While a close correlation of any ProFund VP 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 VP may diverge significantly from the cumulative percentage
decrease or increase in the benchmark due to a compounding effect.
LEVERAGE. UltraBull VP, UltraBear VP, UltraEurope VP, UltraShort OTC VP and
UltraShort Europe VP 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 VP achieves the right to a return on a capital base that exceeds the
amount the ProFund VP has invested. Leverage creates the potential for greater
gains to shareholders of these ProFund VP 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 ProFund VP's shares.
Leverage may involve the creation of a liability that does not entail any
interest costs or the creation of a liability that requires the ProFund VP to
pay interest which would decrease the ProFund VP's total return to shareholders.
If these ProFunds VP 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 VP not been leveraged.
NON-DIVERSIFIED STATUS. Each Benchmark ProFund VP is a "non-diversified"
series. Each Benchmark ProFund VP is considered "non-diversified" because a
relatively high percentage of the ProFund VP's assets may be invested in the
securities of a limited number of issuers, primarily within the same economic
sector. That ProFund VP'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 VP's
classification as a "non-diversified" investment company means that the
proportion of the ProFund VP's assets that may be invested in the securities of
a single issuer is not limited by the 1940 Act. Each ProFund VP, however,
intends to seek to qualify as a "regulated investment company" for purposes of
the Internal Revenue Code, which imposes diversification requirements on
these ProFund VP that are less restrictive than the requirements applicable to
the "diversified" investment companies under the 1940 Act.
INVESTMENT RESTRICTIONS
The ProFunds VP 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 a ProFund VP, 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 VP are present or represented by proxy; or (ii) more than
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50% of the outstanding shares of the series. (All policies of a ProFund VP 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 VP.) For purposes of the following limitations, all percentage
limitations apply immediately after a purchase or initial investment.
A ProFund VP 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 or
repurchase agreements with respect thereto). With respect to Money Market VP,
this restriction does not apply to securities or obligations issued by U.S.
banks.
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 VP 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 VP 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 VP (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 VP may not pledge
its assets other than to secure such borrowings or, to the extent permitted by
the ProFund VP's investment policies as set forth in the Prospectus and this
Statement of Additional Information, as they may be amended from time to time,
in connection with hedging transactions, short sales, when-issued and forward
commitment transactions and similar investment strategies.
7. Underwrite securities of other issuers, except insofar as the ProFund VP
technically may be deemed an underwriter under the Securities Act of 1933, as
amended, in selling portfolio securities.
8. Purchase or sell commodities or contracts on commodities, except to the
extent the ProFund VP may do so in accordance with applicable law and the
ProFund VP's Prospectus and Statement of Additional Information, as they may be
amended from time to time.
DETERMINATION OF NET ASSET VALUE
The net asset values of the shares of the ProFunds VP (except UltraEurope VP
and UltraShort Europe VP) 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 Money Market
VP, net asset value is determined as of the close of business on each day the
NYSE is open for business.)
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The net asset values of the shares of UltraEurope VP and UltraShort Europe VP
are determined as of the latest close of trading of 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 VP are traded in other markets on days when
the ProFund VP's principal trading market(s) is closed, the ProFund VP's net
asset value may be affected on days when investors do not have access to the
ProFund VP to purchase or redeem shares. Although the ProFunds VP expect the
same holiday schedules to be observed in the future, the exchanges may modify
their holiday schedules at any time.
The net asset value of shares of a ProFund VP serves as the basis for the
purchase and redemption price of the shares. The net asset value per share of a
ProFund VP is calculated by dividing the market value of the ProFund VP's
assets, less all liabilities attributed to the ProFund VP, by the number of
outstanding shares of the ProFund VP. If market quotations are not readily
available, a security will be valued at fair value by the Trustees of the Trust
or by the Advisor using methods established or ratified by the Trustees of the
Trust. Money Market VP'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 securities in the portfolio of a Benchmark ProFund VP, 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 the NASDAQ Stock Market, Inc., 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
Trust's Board of Trustees.
Except for futures contracts held by UltraEurope VP and UltraShort Europe VP,
futures contracts maintained by ProFunds VP 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 established futures exchanges.
Options on securities and indices purchased by a ProFund VP 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 positions
traded on such exchange and held by a ProFund VP will be valued on the basis of
the day's settlement prices on the futures exchange or fair value.
For UltraEurope VP and UltraShort Europe VP, 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.
AMORTIZED COST VALUATION
Money Market VP will utilize the amortized cost method in valuing its
portfolio securities, which does not take into account unrealized capital gains
or losses. This method involves valuing each security held by Money Market VP
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 Money Market VP will
not be reflected in Money Market VP's net asset value. The Board of Trustees
will monitor the valuation of assets of this method and will make such changes
as it deems necessary to assure that the assets of Money Market VP are valued
fairly in good faith.
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Money Market VP's use of the amortized cost method of valuing its securities
is permitted by a rule adopted by the Commission. Under this rule, Money Market
VP 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 also has established procedures
designed 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 Money Market VP's holdings by the Board of
Trustees, at such intervals as it deems appropriate, to determine whether the
value of Money Market VP'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
Money Market VP's assets based on available market quotations or market
equivalents and such valuation based on amortized cost must be examined by the
Board of Trustees. In the event the 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 Board of Trustees
must cause Money Market VP to take such corrective action as the 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 Money Market VP's
assets by using available market quotations.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the general supervision by the Trustees, the Advisor is responsible
for decisions to buy and sell securities for each of the ProFunds VP, the
selection of brokers and dealers to effect the transactions, and the negotiation
of brokerage commissions, if any. The Advisor expects that the ProFunds VP 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 VP 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 VP 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 VP and the
other client accounts.
The policy of each ProFund VP regarding purchases and sales of securities for
a ProFund VP'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 VP'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 VP believes
that a requirement always to seek the lowest possible commission cost could
impede effective portfolio management and preclude the ProFund VP 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. Similarly, purchases and sales of securities on behalf of
Money Market VP usually are principal transactions. Such transactions are made
on a net basis and do not involve payment of brokerage commissions. The cost of
securities
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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 VP'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 VP 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 VP 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.
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 Trust are the
responsibilities of Trust's officers. The names and addresses (and ages) of the
Trustees of the Trust, the officers of the Trust, 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 the Advisor.
TRUSTEES AND OFFICERS OF PROFUNDS
MICHAEL L. SAPIR* (birthdate: May 19, 1958). Currently: Trustee, Chairman
and Chief Executive Officer of ProFunds; Chairman and Chief Executive Officer of
the Advisor. Formerly: Principal, Law Offices of Michael L. Sapir; Senior Vice
President, General Counsel, Padco Advisors, Inc.; Partner, Jorden Burt Berenson
& Klingensmith. His address is 7900 Wisconsin Avenue, Suite 300, Bethesda,
Maryland 20814.
LOUIS M. MAYBERG* (birthdate: August 9, 1962). Currently: Trustee and
Secretary of ProFunds; President, the Advisor. Formerly: President, Potomac
Securities, Inc.; Managing Director, National Capital Companies, LLC. His
address is 7900 Wisconsin Avenue, Suite 300, Bethesda, Maryland 20814.
MICHAEL C. WACHS (birthdate: October 21, 1961). Currently: Trustee of
ProFunds; Vice President, Delancy Investment Group, Inc. Formerly: Vice
President/Senior Underwriter, First Union National Bank; Vice President, Vice
President/Senior Credit Officer and Vice President/Team Leader, First Union
Capital Markets Corp. His address is 1528 Powder Mill Lane, Wynnewood,
Pennsylvania 19096.
RUSSELL S. REYNOLDS, III (birthdate: July 21, 1957). Currently: Trustee of
ProFunds; Managing Director, Chief Financial Officer and Secretary,
Directorship, Inc. Formerly: President, Quadcom Services, Inc. His address is
7 Stag Lane, Greenwich, Connecticut 06831.
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GARY R. TENKMAN: (birthdate: September 16, 1970): Currently: Treasurer of
the ProFunds; Vice President - Financial Services, BISYS Fund Services; Audit
Manager - Investment Management Services Group, Ernst & Young LLP. His address
is 3435 Stelzer Road, Columbus, Ohio 43219.
*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 reflect fees paid to the Trustees for the year ended
December 31, 1999.
<TABLE>
<CAPTION>
NAME OF
PERSON: POSITION COMPENSATION
- ----------------- ------------
<S> <C>
Michael L. Sapir, Chairman and Chief Executive Officer None
Louis M. Mayberg, Trustee, President, Secretary None
Russell S. Reynolds, III, Trustee $5,500
Michael C. Wachs, Trustee $5,500
</TABLE>
As of April 3, 2000, the Trustees and Officers of the ProFunds beneficially
owned in the aggregate less than 1% of the shares of each ProFund.
PROFUND ADVISORS LLC
Under an investment advisory agreement between the Trust, on behalf of the
ProFunds VP, and the Advisor, dated October 18, 1999, each of Bull VP, UltraBull
VP, Bear VP, UltraBear VP, UltraShort OTC VP and Money Market VP, pays the
Advisor a fee at an annualized rate, based on its average daily net assets, of
0.75%, and each of UltraEurope VP and UltraShort Europe VP 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
ProFunds VP, in accordance with the investment objectives, policies, and
limitations of each ProFund VP, subject to the general supervision and control
of Trustees and the officers of ProFunds VP. 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 ProFunds VP,
provided such fees 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 ProFund VP shares. The Advisor's address is 7900
Wisconsin Avenue, Suite 300, Bethesda, Maryland 20814.
CODE OF ETHICS
The Trust and the Advisor each have adopted a code of ethics, as required by
applicable law, which is designed to prevent affiliate persons of the Trust and
the Advisor from engaging in deceptive, manipulative, or fraudulent activities
in connection with securities held or to be acquired by the ProFunds VP (which
may also be held by persons subject to a code). There can be no assurance that
the codes will be effective in preventing such activities.
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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 VP. The Administrator provides the
ProFunds VP 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 the ProFunds VP under Federal and
state securities laws. The Administrator also maintains the shareholder account
records for the ProFunds VP, distributes dividends and distributions payable by
the ProFunds VP, and produces statements with respect to account activity for
the ProFunds VP and their shareholders. The Administrator pays all fees and
expenses that are directly related to the services provided by the Administrator
to the ProFunds VP; each ProFund VP 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 VP under the service
agreement.
BISYS and its affiliate, BISYS Fund Services, Inc. ("BFSI"), have entered into
an Omnibus Fee Agreement with ProFunds pursuant to which BISYS is entitled to
receive fee payments for the provision of administration services and BISYS is
entitled to receive on behalf of BFSI fee payments for the provision of fund
accounting and transfer agency services. Pursuant to such agreement, BISYS is
entitled to receive the greater of (i) the aggregate fee amount set forth in a
contractual fee schedule or (ii) the fee amount set forth in a minimum
relationship fee schedule. The contractual fee schedule calls for the payment of
(i) an annual fee of five one-hundredths of one percent (.05%) of the average
daily net assets of the ProFunds VP for administration services, (ii) an annual
fee of $37,000 for transfer agency services and (iii) an annual fee for fund
accounting services based on the following schedule: three one-hundredths of one
percent (.03%) of each ProFund VP's average daily net assets up to $300
million; two one-hundredths of one percent (.02%) of each ProFund VP's average
daily net assets in excess of $300 million up to $500 million; one one-
hundredths of one percent (.01%) of each ProFund's average daily net assets in
excess of $500 million. The minimum relationship fee schedule sets forth
specific dollar amounts for ten calendar quarters. The aggregate amount payable
under such schedule is $1,100,000. The address for BISYS and BFSI is 3435
Stelzer Road, Suite 1000, Columbus, Ohio 43219.
The Advisor, pursuant to a separate Management Services Agreement, performs
certain client support and other administrative services on behalf of the
ProFunds VP. These services include, in general, assisting the Board of
Trustees of the Trust in all aspects of the administration and operation of
Money Market VP. For these services, each ProFund VP will pay to the Advisor a
fee at the annual rate of .15% of its average daily net assets for all Benchmark
ProFunds VP.
UMB Bank, N.A. acts as custodian to the Benchmark ProFunds VP. UMB Bank,
N.A.'s address is 928 Grand Avenue, Kansas City, Missouri.
ADMINISTRATIVE SERVICES
The Trust, on behalf of the [ ], has entered into an administrative
services agreement with American Skandia Life Assurance Corporation ("American
Skandia") pursuant to which American Skandia will provide administrative
services with respectHP Authorized CustomerFinancial Printing GroupThe Trust, on
behalf of the [ ], has entered into an administrative services
agreement with American Skandia Life Assurance Corporation ("American Skandia")
pursuant to which American Skandia will provide administrative services with
respect to these ProFunds VP. These services may include, but are not limited
to: coordinating matters relating to the operation of American Skandia's
separate account with these ProFunds VP, including necessary coordination with
other service providers; coordinating the preparation of necessary documents to
be submitted to regulatory authorities; providing assistance to variable
contract powers who use or intend to use the ProFunds VP as funding vehicles for
their variable contracts; coordinating with the Advisor regarding investment
limitations and parameters to which these ProFunds VP are subject; and generally
assisting with compliance with applicable regulatory requirements. For these
services, the Trust pays American Skandia a quarterly fee equal on an annual
basis to ___% of the average daily net assets of each ProFund VP that were
invested in such ProFund VP through American Skandia's separate account.
From time to time the ProFunds VP and/or the Advisor may enter into
arrangements under which certain administrative services may be performed by
insurance companies that purchase shares of the ProFunds VP. These
administrative services may include, among other things, the services set forth
above, as well as responding to ministerial inquiries concerning the ProFunds VP
investment objectives, investment programs, policies and performance,
transmitting, on behalf of the ProFunds VP, proxy statements, annual reports,
updated prospectuses, and other communications regarding the ProFunds VP, and
providing any related services as the ProFunds VP or their investors may
reasonably request. Depending on the arrangements, the ProFunds VP and/or the
Advisor may compensate such insurance companies or their agents directly or
indirectly for the administrative services. To the extent the ProFunds VP
compensate the insurance company for these services, the ProFunds VP will pay
the insurance company an annual fee that will vary depending upon the number of
investors that utilize the ProFunds VP as the funding medium for their
contracts. The insurance company may impose other account or service charges.
See the prospectus for the separate account of the insurance company for
additional information regarding such charges.
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INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP serves as independent auditors to the ProFunds VP.
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 VP. The firm's
address is 1775 Eye Street, N.W., Washington, DC 20006-2401.
DISTRIBUTION PLAN
Pursuant to a Distribution Plan, the ProFunds VP may reimburse or compensate
financial intermediaries from their assets for services rendered and expenses
borne in connection with activities primarily intended to result in the sale of
shares of the ProFunds VP. It is anticipated that a portion of the amounts paid
by the ProFunds VP will be used to defray various costs incurred in connection
with the printing and mailing of prospectuses, statements of additional
information, and any supplements thereto and shareholder reports, and holding
seminars and sales meetings with wholesale and retail sales personnel designed
to promote the distribution of the Funds' shares. The ProFunds VP also may
reimburse or compensate financial intermediaries and third-party broker-dealers
for their services in connection with the distribution of the shares of the
ProFunds VP.
The Distribution Plan provides that the Trust, on behalf of each ProFund VP,
will pay annually up to 0.25% of the average daily net assets of a ProFund VP in
respect of activities primarily intended to result in the sale of its shares.
Under the terms of the Distribution Plan and related agreements, each ProFund VP
is authorized to make quarterly payments that may be used to reimburse or
compensate entities providing distribution and shareholder servicing with
respect to the shares of the ProFund VP for such entities' fees or expenses
incurred or paid in that regard.
The Distribution Plan is of a type known as a "compensation" plan because
payments may be made for services rendered to the ProFunds VP regardless of the
level of expenditures by the financial intermediaries. The Trustees will,
however, take into account such expenditures for purposes of reviewing
operations under the Distribution Plan in connection with their annual
consideration of the Distribution Plan's renewal. Expenditures under the
Distribution Plan may include, without limitation: (a) the printing and mailing
of ProFunds VP prospectuses, statements of additional information, any
supplements thereto and shareholder reports for prospective investors; (b) those
relating to the development, preparation, printing and mailing of
advertisements, sales literature and other promotional materials describing
and/or relating to the ProFunds VP; (c) holding seminars and sales meetings
designed to promote the distribution of the ProFunds VP shares; (d) obtaining
information and providing explanations to wholesale and retail distributors of
contracts regarding the investment objectives and policies and other information
about the ProFunds VP, including the performance of the ProFunds VP; (e)
training sales personnel regarding the ProFunds VP; and (f) financing any other
activity that is primarily intended to result in the sale of shares of the
ProFunds VP. In addition, a financial intermediary may enter into an agreement
with the Trust under which it would be entitled to receive compensation for,
among other things, making the ProFunds VP available to its contract owners as
funding vehicles for variable insurance contracts.
The Distribution Plan and any related agreement that is entered into by the
Trust in connection with the Distribution Plan will continue in effect for a
period of more than one year only so long as continuance is specifically
approved at least annually by a vote of a majority of the Trust's Board of
Trustees, and of a majority of the Trustees who are not "interested persons" of
the Trust and who have no financial interest in the operation of the
Distribution Plan (the "Independent Trustees"), cast in person at a meeting
called for the purpose of voting on the Distribution Plan or any related
agreement, as applicable. In addition, the Distribution Plan and any related
agreement may be terminated as to a ProFund VP at any time, without penalty, by
vote of a majority of the outstanding shares of the ProFund VP or by vote of a
majority of the
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<PAGE>
Independent Trustees. The Distribution Plan also provides that it may not be
amended to increase materially the amount (up to 0.25% of average daily net
assets annually) that may be spent for distribution of shares of any ProFund VP
without the approval of shareholders of that ProFund VP.
COSTS AND EXPENSES
Each ProFund VP bears all expenses of its operations other than those assumed
by the Advisor or the Administrator. ProFund VP expenses include: the
management fee; administrative and transfer agent fees; custodian and accounting
fees and expenses, legal and auditing fees; securities valuation expenses;
fidelity bonds and other insurance premiums; expenses of preparing and printing
prospectuses, confirmations, proxy statements, and shareholder reports and
notices; registration fees and expenses; proxy and annual meeting expenses, if
any; all Federal, state, and local taxes (including, without limitation, stamp,
excise, income, and franchise taxes); organizational costs; and non-interested
Trustees' fees and expenses.
ORGANIZATION AND DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
ProFunds 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 thirty-nine separately managed series, eleven of which are described
herein. Other separate series may be added in the future. As of the date of
this SAI, the eight series described herein have not been offered to the public.
All shares of the ProFunds VP 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 only 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 of such Trustees. If requested by shareholders of at least 10%
of the outstanding shares of the Trust, the Trust will call a meeting of
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 Trust 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 shareholder held personally liable for the obligations of the Trust. The
risk of a Trust shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Trust itself would not be
able to meet the Trust's obligations. This risk should be considered remote.
If a ProFund does not grow to a size to permit it to be economically viable,
the Fund may cease operations. In such an event, investors may be required to
liquidate or transfer their investments at an inopportune time.
CAPITALIZATION
As of April 3, 2000, no person owned of record, or to the knowledge of
management beneficially owned five percent or more of the outstanding shares of
the ProFunds VP.
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TAXATION
Set forth below is a discussion of certain U.S. federal income tax issues
concerning the ProFunds VP and the purchase, ownership, and disposition of
ProFund VP 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 VP shares, as well as the tax consequences arising under
the laws of any state, foreign country, or other taxing jurisdiction.
Each of the ProFunds VP 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
VP 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 VP'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 VP'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 RIC, a ProFund VP 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 VP'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 VP 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 VP level. To avoid the tax, each ProFund VP 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 VP 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 VP in October, November or December of that year with a record date in
such a month and paid by the ProFund VP during January of the following year.
Such distributions will be taxable to shareholders in the calendar year in which
the distributions are declared, rather than the calendar year in which the
distributions are received.
MARKET DISCOUNT
If a ProFund VP 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 VP in each
taxable year in which the ProFund VP owns an interest in such debt security and
receives a principal payment on it. In particular, the ProFund VP 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
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<PAGE>
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 VP at a constant
rate over the time remaining to the debt security's maturity or, at the election
of the ProFund VP, at a constant yield to maturity which takes into account the
semi-annual compounding of interest. Gain realized on the disposition of a
market discount obligation must be recognized as ordinary interest income (not
capital gain) to the extent of the "accrued market discount."
ORIGINAL ISSUE DISCOUNT
Certain debt securities acquired by the ProFunds VP 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 VP, 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 VP 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 VP 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 VP 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 VP may result in "straddles" for federal income tax purposes. The
straddle rules may affect the character of gains (or losses) realized by a
ProFund VP, and losses realized by the ProFund VP 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 VP
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 VP are not
entirely clear. The straddle rules may increase the amount of short-term
capital gain realized by a ProFund VP, which is taxed as ordinary income when
distributed to shareholders. Because application of the straddles 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 VP engages in transactions that reduce or eliminate its risk of loss
with respect to appreciated financial positions. If the ProFund VP enters into
certain transactions in property while holding substantially identical property,
the
29
<PAGE>
ProFund VP 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 VP'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 VP's holding period and the application of
various loss deferral provisions of the Code.
PASSIVE FOREIGN INVESTMENT COMPANIES
The ProFunds VP 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 VP receives a so-called "excess
distribution" with respect to PFIC stock, the ProFund VP 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 VP 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 VP held the PFIC
shares. Each ProFund VP will itself be subject to tax on the portion, if any,
of an excess distribution that is so allocated to prior ProFund VP 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 ProFunds VP 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 VP 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 VP'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 VP shares would be
deductible as ordinary losses to the extent of any net mark-to-market gains
included in income in prior years.
BACKUP WITHHOLDING
Each ProFund VP 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 VP with the shareholder's correct taxpayer
identification number or social security number, (2) the IRS notifies the
shareholder or the ProFund VP 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 VP 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
30
<PAGE>
to avoid federal income or excise tax. Under current law, each ProFund VP 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
VP'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 VP is
required to distribute as dividends to shareholders in order for the ProFund VP
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
VP's shares; the total return on a shareholder's investment will not be reduced
as a result of the ProFund VP'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 ProFunds VP may advertise its total return 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 VP. Other total return quotations, aggregate or average, over other
time periods for the ProFund VP also may be included.
The total return of a ProFund VP for a particular period represents the
increase (or decrease) in the value of a hypothetical investment in the ProFund
VP 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 VP at net asset value. Total
return is based on historical earnings and net 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 VP.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equal the initial amount invested to the ending redeemable value.
YIELD CALCULATIONS
From time to time, Money Market VP 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 Money Market VP refers to the
income generated by an investment in Money Market VP 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 Money
Market VP 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 Money Market VP'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 Money Market VP 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.
31
<PAGE>
COMPARISONS OF INVESTMENT PERFORMANCE
In conjunction with performance reports, promotional literature, and/or
analyses of shareholder service for a ProFund VP, comparisons of the performance
information of the ProFund VP 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
Deutche Aktienindex, all of which are unmanaged market indicators. Such
comparisons can be a useful measure of the quality of a ProFund VP's investment
performance. In particular, performance information for Bull VP, UltraBull VP,
Bear VP and UltraBear VP 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 UltraShort OTC VP 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 VP 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 VP in performance reports, will be
drawn from the "Capital Appreciation Funds" grouping for Bull VP, UltraBull VP,
Bear VP and UltraBear VP. In addition, the broad-based Lipper groupings may be
used for comparison to any of the ProFunds VP. Further information about the
performance of the ProFunds VP will be contained in the ProFunds VP annual
reports to shareholders, which may be obtained without charge by writing to the
ProFunds VP at the address or telephoning the ProFunds VP at the telephone
number set forth on the cover page of this SAI. However, because the ProFunds
VP have no history of investment operations, they have not yet prepared any
shareholder reports.
Other Information
-----------------
The ProFunds are not sponsored, endorsed, sold or promoted by Standard &
Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"), or NASDAQ Stock
Markets, Inc. ("NASDAQ"). S&P and NASDAQ make no representation or warranty,
express or implied, to the owners of shares of the ProFunds VP or any member of
the public regarding the advisability of investing in securities generally or in
the ProFunds VP particularly or the ability of the S&P 500 Index or the NASDAQ
100 Index to track general stock market performance. S&P's and NASDAQ's only
relationship to the ProFunds VP ("Licensee") is the licensing of certain
trademarks and trade names of S&P and NASDAQ, respectively. S&P and NASDAQ have
no obligation to take the needs of the Licensee or the owners of shares of the
ProFunds VP into consideration in determining, composing or calculating the S&P
500 Index and the NASDAQ 100 Index. S&P and NASDAQ are not responsible for and
have not participated in the determination or calculation of the equation by
which the shares of the ProFunds VP are to be converted into cash. S&P and
NASDAQ have no obligation or liability in connection with the administration,
marketing or trading of the ProFunds VP.
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 SHARES OF THE
PROFUNDS VP, 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 MERCHANTABILITY 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
32
<PAGE>
FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE,
INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF
THE POSSIBILITY OF SUCH DAMAGES.
FINANCIAL STATEMENTS
Since the ProFunds VP had not commenced operation as of the date of this
Statement of Additional Information, there are no financial statements to
include in the Statement of Additional Information.
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, IN CONNECTION WITH THE OFFERING MADE BY THE 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.
33
<PAGE>
Part C
Other Information
ITEM 23. Exhibits
(a)(1) Certificate of Trust of ProFunds (the "Registrant")(1)
(a)(2) First Amended Declaration of Trust of the Registrant (2)
(a)(3) Form of Establishment and Designation of Series dated
February 18, 1998(5)
(a)(4) Form of Establishment and Designation of Series dated
February 23, 1999(5)
(a)(5) Form of Establishment and Designation of Eleven Series dated
October 15, 1999(6)
(a)(6) Form of Establishment and Designation of Three Series (7)
(a)(7) Form of Establishment and Designation of Seventeen Series
(8)
(a)(8) Form of Establishment and Designation of Series
(a)(9) Form of Amended Designation of Series
(b) By-laws of Registrant (2)
(c) Not Applicable
(d)(1) Form of Investment Advisory Agreement (2)
(d)(2) Investment Advisory Agreement for Cash Management Portfolio
(7)
(d)(3) Amendment to Investment Advisory Agreement between ProFunds
and ProFund Advisors LLC (7)
(d)(4) Investment Advisory Agreement for UltraEurope and UltraShort
Europe ProFunds (4)
(d)(5) Form of Amended and Restated Investment Advisory Agreement
(8)
(d)(6) Form of Amended and Restated Investment Advisory Agreement
(e) Form of Distribution Agreement and Dealer Agreement (2)
(f) Not Applicable
(g)(1) Form of Custody Agreement with UMB Bank, N.A. (2)
(g)(2) Amendment to Custody Agreement with UMB Bank, N.A. (3)
(g)(3) Form of Foreign Custody Manager Delegation Agreement. To be
filed by Amendment.
(h)(1) Form of Transfer Agency Agreement (2)
(h)(2) Form of Administration Agreement (2)
(h)(3) Form of Administration and Services Agreement incorporated
by reference to Bankers Trust Company's Registration
Statement on Form N-1A (1940 Act file No. 811-06073) filed
with the Commission on April 24, 1996.
(h)(4) Form of Fund Accounting Agreement (2)
(h)(5)(i) Form of Management Services Agreement(2)
(h)(5)(ii) Amendment to Management Services Agreement with
respect to the UltraShort OTC ProFund (3)
<PAGE>
(h)(5)(iii) Form of Amended and Restated Management Services Agreement
(4)
(h)(6) Form of Shareholder Services Agreement related to Adviser
Shares (2)
(h)(7) Form of Omnibus Fee Agreement with BISYS Fund Services LP
(2)
(h)(8) Form of Amendment to Omnibus Fee Agreement (6)
(h)(9) Form of Participation Agreement (6)
(h)(10) Form of Administrative Services Agreement(6)
(i) Opinion and Consent of Counsel to the Registrant (2)
(j) Consent of Independent Auditors
(k) None
(l) Purchase Agreement dated October 10, 1997 between the
Registrant and National Capital Group, Inc. (2)
(m)(1) Form of Distribution Plan (6)
(m)(2) Form of Services Agreement (6)
(n)(1) Multiple Class Plan (previously o(1)) (7)
(n)(2) Form of Amended and Restated Multi-Class Plan (8)
(n)(3) Form of Amended and Restated Multi-Class Plan
(o)(1) Power of Attorney of Cash Management Portfolio (previously
p(1)) (7)
(o)(2) Power of Attorney of ProFunds (previously p(2)) (4)
(o)(3) Power of Attorney of ProFunds
(p)(1) Form of Code of Ethics of Registrant
(p)(2) Form of Code of Ethics of ProFund Advisors LLC
(1) Filed with initial registration statement.
(2) Previously filed on October 29, 1997 as part of Pre-Effective Amendment No.
3 and incorporated by reference herein.
(3) Previously filed on February 24, 1998 as part of Post-Effective Amendment
No. 1 and incorporated by reference herein.
(4) Previously filed on March 2, 1999 as part of Post-Effective Amendment No.4
and incorporated by reference herein.
(5) Previously filed on August 4, 1999 as part of Post-Effective Amendment No.6
and incorporated by reference herein.
(6) Previously filed on October 15, 1999 as part of Post-Effective Amendment
No.8 and incorporated by reference herein.
(7) Previously filed on November 15, 1999 as part of Post-Effective Amendment
No. 9 and incorporated by reference herein.
<PAGE>
(8) Previously filed on December 23, 1999 as part of Post-Effective Amendment
No. 10 and incorporated by reference herein.
ITEM 24. Persons Controlled By or Under Common Control With Registrant.
None.
ITEM 25. Indemnification
The Registrant is organized as a Delaware business trust and is operated
pursuant to a Declaration of Trust, dated as of April 17, 1997 (the
"Declaration of Trust"), that permits the Registrant to indemnify its
trustees and officers under certain circumstances. Such indemnification,
however, is subject to the limitations imposed by the Securities Act of
1933, as amended, and the Investment Company Act of 1940, as amended. The
Declaration of Trust of the Registrant provides that officers and trustees
of the Trust shall be indemnified by the Trust against liabilities and
expenses of defense in proceedings against them by reason of the fact that
they each serve as an officer or trustee of the Trust or as an officer or
trustee of another entity at the request of the entity. This
indemnification is subject to the following conditions:
(a) no trustee or officer of the Trust is indemnified against any
liability to the Trust or its security holders which was the result of
any willful misconduct, bad faith, gross negligence, or reckless
disregard of his duties;
(b) officers and trustees of the Trust are indemnified only for actions
taken in good faith which the officers and trustees believed were in
or not opposed to the best interests of the Trust; and
(c) expenses of any suit or proceeding will be paid in advance only if
the persons who will benefit by such advance undertake to repay the
expenses unless it subsequently is determined that such persons are
entitled to indemnification.
The Declaration of Trust of the Registrant provides that if indemnification
is not ordered by a court, indemnification may be authorized upon
determination by shareholders, or by a majority vote of a quorum of the
trustees who were not parties to the proceedings or, if this quorum is not
obtainable, if directed by a quorum of disinterested trustees, or by
independent legal counsel in a written opinion, that the persons to be
indemnified have met the applicable standard.
<PAGE>
ITEM 26. Business and Other Connections of Investment Advisor
ProFund Advisors LLC (the "Advisor"), a limited liability company formed
under the laws of the State of Maryland on May 8, 1997. Information
relating to the business and other connections of Bankers Trust which
serves as investment adviser to the Cash Management Portfolio and each
director, officer or partner of Bankers Trust are hereby incorporated by
reference to disclosures in Item 28 of BT Institutional funds (accession #
0000862157-97-00007) is filed on March 17, 1997 with the Securities and
Exchange Commission.
ITEM 27. Principal Underwriter
Concord Financial Group, Inc., 3435 Stelzer Road, Columbus, Ohio 43219 acts
solely as interim distributor for the Registrant. The officers of Concord
Financial Group, Inc., all of whose principal business address is set forth
above, are:
<TABLE>
<CAPTION>
Name Principal Position and Offices Position and Offices
with CFG with Registrant
<S> <C> <C>
Lynn J. Magnum Chairman none
Dennis Sheehan Sr. Vice President none
Michael D. Burns Vice President/ none
Chief Compliance Officer
Steven Mintos Executive Vice none
President/Chief Operating Officer
Dale Smith Vice President/ none
Chief Financial Officer
Kevin Dell Vice President none
General Counsel/Secretary
</TABLE>
ITEM 28. Location of Accounts and Records
All accounts, books, and records required to be maintained and preserved by
Section 31(a) of the Investment Company Act of 1940, as
<PAGE>
amended, and Rules 31a-1 and 31a-2 thereunder, will be kept by the
Registrant at:
(1) ProFund Advisors LLC, 7900 Wisconsin Avenue, Suite 300, Bethesda,
Maryland (records relating to its functions as investment adviser and
manager to the portfolios other than the Money Market ProFund);
(2) BISYS Fund Services, 3435 Stelzer Road, Columbus, Ohio (records
relating to the administrator, fund accountant and transfer agent).
(3) UMB Bank, N.A., 928 Grand Avenue, Kansas City, Missouri for each
ProFund (records relating to its function as Custodian)
ITEM 29. Management Services
None.
ITEM 30. Undertakings
(a) Registrant undertakes to call a meeting of shareholders for the
purpose of voting upon the question of removal of a Trustee or
Trustees when requested to do so by the holders of at least 10% of the
Registrant's outstanding shares and, in connection with such meeting,
to comply with the shareholder communications provisions of Section
16(c) of the Investment Company Act of 1940.
(b) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest Annual Report to
shareholders, upon request and without charge.
<PAGE>
SIGNATURES
PROFUNDS
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement under Rule
485(b) under the Securities Act of 1933 and has duly caused this amendment to
its Registration Statement on Form N-1A to be signed on its behalf by the
undersigned, thereunto duly authorized, in Washington, D.C. on April 28, 2000.
PROFUNDS
/S/ MICHAEL L. SAPIR*
Michael L. Sapir, Chairman
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
Signatures Title Date
/s/ MICHAEL L. SAPIR* Trustee, President April 28, 2000
Michael L. Sapir
/s/ LOUIS MAYBERG* Trustee, Secretary April 28, 2000
Louis Mayberg
/s/ RUSSELL S. REYNOLDS, III* Trustee April 28, 2000
Russell S. Reynolds, III
/s/ MICHAEL WACHS* Trustee April 28, 2000
Michael Wachs
/s/ GARY TENKMAN Treasurer April 28, 2000
Gary Tenkman
*By: /s/ KEITH T. ROBINSON
Keith T. Robinson
<PAGE>
as Attorney-in-Fact
Date: April 28, 2000
SIGNATURES
CASH MANAGEMENT PORTFOLIO
CASH MANAGEMENT PORTFOLIO has duly caused this Post-Effective Amendment No.
13 to the Registration Statement on Form N-1A of ProFunds to be signed on its
behalf by the undersigned, there unto duly authorized in the City of Baltimore
and the State of Maryland on the 27th day of April, 2000.
CASH MANAGEMENT PORTFOLIO
/s/ Daniel O. Hirsch
--------------------------------------
Daniel O. Hirsch, Secretary of the
Cash Management Portfolio
This Post-Effective Amendment No. 13 to the Registration Statement on Form
N-1A of ProFunds has been signed below by the following persons in the
capacities and on the date indicated.
Signatures Title Date
/s/ John Y. Keffer* President and April 27, 2000
- -----------------------------
John Y. Keffer Chief Executive Officer
/s/ Charles A. Rizzo* Treasurer and Principal April 27, 2000
- -----------------------------
Charles A. Rizzo Financial Officer
/s/ Charles P. Biggar* Trustee April 27, 2000
- -----------------------------
Charles P. Biggar
/s/ S. Leland Dill* Trustee April 27, 2000
- -----------------------------
S. Leland Dill
/s/ Richard T. Hale* Trustee April 27, 2000
- -----------------------------
Richard T. Hale
/s/ Richard J. Herring* Trustee April 27, 2000
- -----------------------------
Richard J. Herring
<PAGE>
/s/ Bruce E. Langton* Trustee April 27, 2000
- -----------------------------
Bruce E. Langton
/s/ Martin J. Gruber* Trustee April 27, 2000
- -----------------------------
Martin J. Gruber
/s/ Philip Saunders, Jr.* Trustee April 27, 2000
- -----------------------------
Philip Saunders, Jr.
/s/ Harry Van Benschoten* Trustee April 27, 2000
- -----------------------------
Harry Van Benschoten
*By: /s/ Daniel O.Hirsch
----------------------------
Daniel O. Hirsch, Secretary of Cash Management Portfolio
Attorney-in-Fact
Date: April 27, 2000
<PAGE>
EXHIBIT INDEX
Exhibit Description
- ------- -----------
(a)(8) Form of Establishment and Designation of Series
(a)(9) Form of Amended Designation of Series
(d)(6) Form of Amended and Restated Investment Advisory Agreement
(j) Consent of Independent Auditors
(n)(3) Form of Amended and Restated Multi-Class Plan
(o)(3) Power of Attorney
(p)(1) Form of Code of Ethics of Registrant
(p)(2) Form of Code of Ethics of ProFund Advisors LLC
<PAGE>
Exhibit (a)(8)
PROFUNDS
Establishment and Designation of Series
The undersigned, being all of the Trustees of ProFunds (the "Trust"), a Delaware
business trust, acting pursuant to Section 4.9.2 of the Amended and Restated
Declaration of Trust dated October 28, 1997 (the "Declaration of Trust"), hereby
divide the shares of beneficial interest ("Shares") of the Trust into an
additional separate series (the "Fund"), of two classes known as the "Investor"
and "Service" class (each of which bears the expenses attributable to it and
otherwise has the relative rights and preferences set forth in the Declaration
of Trust), the Fund hereby created having the following special and relative
rights:
1. The Fund shall be designated the OTC ProFund.
2. The Fund shall be authorized to invest in cash, securities,
instruments and other property as from time to time described in the then
current prospectus and registration statement materials for the Fund under the
Securities Act of 1933. Each Share of the Fund shall be redeemable, shall
represent a pro rata beneficial interest in the assets of the Fund, and shall be
entitled to receive its pro rata share of net assets allocable to such Shares of
the Fund upon liquidation of the Fund, as provided in the Declaration of Trust.
The proceeds of sales of Shares of the Fund, together with any income and gain
thereon, less any diminution or expenses thereof, shall irrevocably belong to
the Fund, unless otherwise required by law.
3. Each Share of the Fund shall be entitled to one vote for each
dollar of value invested (or fraction thereof in respect of a fractional Share)
on matters on which such Shares shall be entitled to vote, except to the extent
otherwise required by the Investment Company Act of 1940 or when the Trustees
have determined that the matter affects only the interest of Shareholders of
certain series or classes, in which case only the Shareholders of such series or
classes shall be entitled to vote thereon. Any matter shall be deemed to have
been effectively acted upon with respect to the Fund if acted upon as provided
in Rule 18f-2 under such Act, or any successor rule, and in the Declaration of
Trust.
4. The assets and liabilities of the Trust shall be allocated among
the Fund and all other series of the Trust (collectively, the "Funds") as set
forth in the Declaration of Trust, except as described below.
(a) Costs incurred by the Trust on behalf of the Fund in connection
with the organization and registration and public offering of
Shares of the Fund shall be amortized for the Fund over the
lesser of the life of the Fund or such other period as required
by applicable law; costs incurred by the Trust on behalf of pre-
existing Funds in connection with the organization and initial
registration and public offering of Shares of those Funds shall
be amortized for the Funds over the lesser of the life of each
such Fund or such other period as required by applicable law.
<PAGE>
(b) Liabilities, expenses, costs, charges or reserves relating to the
distribution of, and other identified expenses that should
properly be allocated to, the Shares of a particular class may be
charged to and borne solely by such class and the bearing of
expenses solely by a class of Shares may be appropriately
reflected and cause differences in the net asset value
attributable to and the dividend, redemption and liquidation
rights of, the Shares of different classes.
(c) The Trustees may from time to time in particular cases make
specific allocations of assets or liabilities among the Funds or
classes, and each allocation of liabilities, expenses, costs,
charges and reserves by the Trustees shall be conclusive and
binding upon the Shareholders of all Funds and classes for all
purposes.
5. Shares of each class of the Fund may vary between themselves as
to rights of redemption and conversion rights, as may be approved by the
Trustees and set out in the Fund's then-current prospectus.
6. The Trustees (including any successor Trustee) shall have the
right at any time and from time to time to reallocate assets and expenses or to
change the designation of any Fund now or hereafter created or to otherwise
change the special and relative rights of any such Fund, provided that such
change shall not adversely affect the rights of the Shareholders of such Fund.
2
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this instrument as of the
date set forth below.
Date: May __, 2000 _________________________________
Michael Sapir, as Trustee
______________________________________
Louis Mayberg, as Trustee
______________________________________
Russell S. Reynolds, III, as Trustee
______________________________________
Michael Wachs, as Trustee
3
<PAGE>
Exhibit (a)(9)
ProFunds
Amended Designation of Series
The undersigned, being all of the Trustees of ProFunds (the "Trust"), a
Delaware business trust, acting pursuant to Section 4.9.2 of the Amended and
Restated Declaration of Trust dated October 28, 1997, hereby redesignate the
shares of beneficial interest of sixteen series of shares of the Trust, without
in any way changing the rights or privileges of any such series or its
shareholders, as follows:
Former Designation New Designation
------------------ ---------------
Basic Materials ProFund Basic Materials UltraSector ProFund
Biotechnology ProFund Biotechnology UltraSector ProFund
Consumer Products ProFund Consumer Non-Cyclical UltraSector ProFund
Electronics ProFund SemiConductor UltraSector ProFund
Energy ProFund Energy UltraSector ProFund
Energy Services ProFund Pharmaceuticals UltraSector ProFund
Financial Services ProFund Financial UltraSector ProFund
Health Care ProFund Healthcare UltraSector ProFund
Internet ProFund Internet UltraSector ProFund
Leisure ProFund Consumer Cyclical UltraSector ProFund
Precious Metals ProFund Precious Metals UltraSector ProFund
Retailing ProFund Wireless Communications UltraSector ProFund
Technology ProFund Technology UltraSector ProFund
Telecommunications ProFund Telecommunications UltraSector ProFund
Transportation ProFund Transportation UltraSector ProFund
Utilities ProFund Utilities UltraSector ProFund
IN WITNESS WHEREOF, the undersigned have executed this instrument the _th
day of May, 2000.
___________________________________
Michael Sapir, as Trustee
_____________________________________
Louis Mayberg, as Trustee
_____________________________________
Russel S. Reynolds, III, as Trustee
_____________________________________
Michael Wachs, as Treustee
<PAGE>
Exhibit (d)(6)
AMENDED AND RESTATED
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this 28th day of October, 1997 and amended as of February 18,
1998 and amended and restated as of October 15, 1999, January 24, 2000 and
May _, 2000, between ProFunds, a Delaware business trust (the "Trust"), and
ProFund Advisors LLC, a Maryland limited liability company (the "Advisor").
WHEREAS, the Advisor is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and is engaged principally in the
business of rendering investment management services; and
WHEREAS, the Trust is registered as an open-end management investment company
under the Investment Company Act of 1940, as amended, (the"1940 Act"); and
WHEREAS, the Trust is authorized to issue shares of beneficial interest
("shares") in separate series with each such series representing interests in a
separate portfolio of securities and other assets; and
WHEREAS, the Trust currently offers thirty-nine series of shares, and may
offer additional portfolios in the future; and
WHEREAS, the Trust desires to retain the services of the Advisor to provide a
continuous program of investment management for the following portfolios of the
Trust: Bull ProFund, UltraBull ProFund, Bear ProFund, UltraBear ProFund, Ultra
OTC ProFund, UltraShort OTC ProFund, UltraEurope ProFund, ProFund VP Bull,
ProFund VP UltraBull, ProFund VP UltraOTC, ProFund VP Europe 30, ProFund VP
UltraEurope, ProFund VP SmallCap, ProFund VP Bear, ProFund VP UltraBear, ProFund
VP UltraShort OTC, ProFund VP UltraShort Europe, ProFund VP Money Market,
UltraSmall-Cap ProFund, UltraMid-Cap ProFund, UltraJapan ProFund, Basic
Materials UltraSector ProFund, Biotechnology UltraSector ProFund, Consumer
Cyclical UltraSector ProFund, Consumer Non-Cyclical UltraSector ProFund, Energy
UltraSector ProFund, Financial UltraSector ProFund, Healthcare UltraSector
ProFund, Industrial UltraSector ProFund, Internet UltraSector ProFund,
Pharmaceuticals UltraSector ProFund, Precious Metals UltraSector ProFund, Real
Estate UltraSector ProFund, Semiconductor UltraSector ProFund, Technology
UltraSector ProFund, Telecommunications UltraSector ProFund, Utilities
UltraSector ProFund, Wireless Communications UltraSector ProFund and OTC ProFund
(each referred to hereinafter as a "Portfolio" and collectively as the
"Portfolios"); and
WHEREAS, the Advisor is willing, in accordance with the terms and conditions
hereof to provide such services to the Trust on behalf of such Portfolios.
<PAGE>
NOW, THEREFORE, in consideration of the mutual agreements set forth herein and
intending to be legally bound hereby, it is agreed between the parties as
follows:
1. APPOINTMENT OF ADVISOR
----------------------
The Trust hereby appoints Advisor to provide the advisory services set forth
herein to the Portfolios and Advisor agrees to accept such appointment and
agrees to render the services set forth herein for the compensation herein
provided. In carrying out its responsibilities under this Agreement, Advisor
shall at all times act in accordance with the investment objectives, policies
and restrictions applicable to the Portfolios as set forth in the then-current
Registration Statement of the Trust, applicable provisions of the 1940 Act and
the rules and regulations promulgated thereunder and other applicable federal
securities laws and regulations.
2. DUTIES OF ADVISOR
-----------------
Advisor shall provide a continuous program of investment management for each
Portfolio. Subject to the general supervision of the Trust's Board of Trustees,
Advisor shall have sole investment discretion with respect to the Portfolios,
including investment research, selection of the securities to be purchased and
sold and the portion of the assets of each Portfolio, if any, that shall be held
uninvested, and the selection of broker-dealers through which securities
transactions in the Portfolios will be executed. Advisor shall manage the
Portfolios in accordance with the objectives, policies and limitations set forth
in the Trust's current Prospectus and Statement of Additional Information.
Specifically, and without limiting the generality of the foregoing, Advisor
agrees that it will:
(a) promptly advise each Portfolio's designated custodian bank and
administrator or accounting agent of each purchase and sale, as the case
may be, made on behalf of the Portfolio, specifying the name and quantity
of the security purchased or sold, the unit and aggregate purchase or sale
price, commission paid, the market on which the transaction was effected,
the trade date, the settlement date, the identity of the effecting broker
or dealer and/or such other information, and in such manner, as may from
time to time be reasonably requested by the Trust;
(b) maintain all applicable books and records with respect to the
securities transactions of the Portfolio. Specifically, but without
limitation, Advisor agrees to maintain with respect to each Portfolio those
records required to be maintained under Rule 31a-1(b)(1), (b)(5) and (b)(6)
under the 1940 Act with respect to transactions in each Portfolio
including, without limitation, records which reflect securities purchased
or sold in the Portfolio, showing for each such transaction, the market on
which the transaction was effected, the trade date, the settlement date,
and the identity of the executing broker or dealer. Advisor will preserve
such records in the manner and for the periods prescribed by Rule 31a-2
under the 1940 Act. Advisor acknowledges and agrees that all such records
it maintains for the Trust are the property of the Trust and Advisor will
surrender promptly to the Trust any such records upon the Trust's request;
2
<PAGE>
(c) provide, in a timely manner, such information as may be reasonably
requested by the Trust or its designated agents in connection with, among
other things, the daily computation of each Portfolio's net asset value and
net income, preparation of proxy statements or amendments to the Trust's
registration statement and monitoring investments made in the Portfolio to
ensure compliance with the various limitations on investments applicable to
the Portfolio, to ensure that the Portfolio will continue to qualify for
the tax treatment accorded to regulated investment companies under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"),
and to ensure that the Portfolios that serve as the investment medium for
variable insurance contracts are managed in conformity with the
requirements of Section 817 of the Code and Treasury Regulatory subsection
1.817-5 thereunder (or any successor or amended provision);
(d) render regular reports to the Trust concerning the performance by
Advisor of its responsibilities under this Agreement. In particular,
Advisor agrees that it will, at the reasonable request of the Board of
Trustees, attend meetings of the Board or its validly constituted
committees and will, in addition, make its officers and employees available
to meet with the officers and employees of the Trust at least quarterly and
at other times upon reasonable notice, to review the investments and
investment programs of the Portfolio;
(e) maintain its policy and practice of conducting its fiduciary
functions independently. In making investment recommendations for the
Portfolios, the Advisor's personnel will not inquire or take into
consideration whether the issuers of securities proposed for purchase or
sale for the Trust's account are customers of the Advisor or of its
affiliates. In dealing with such customers, the Advisor and its affiliates
will not inquire or take into consideration whether securities of those
customers are held by the Trust; and
(f) review periodically and take responsibility for the material
accuracy and completeness of the information supplied by or at the request
of the Advisor for inclusion in Trust's registration statement under the
1940 Act and the Securities Act of 1933.
3. PORTFOLIO TRANSACTIONS
----------------------
Advisor shall be responsible for selecting members of securities exchanges,
brokers and dealers (herein after referred to as "brokers") for the execution of
purchase and sale transactions for the Portfolios. In executing portfolio
transactions and selecting brokers or dealers, if any, the Advisor will use its
best efforts to seek on behalf of a Portfolio the best overall terms available.
In assessing the best overall terms available for any transaction, the Advisor
shall consider all factors it deems relevant, including brokerage and research
services (as those terms are defined in Section 28(e) of the Securities Exchange
Act of 1934) provided to any Portfolio of the Trust and/or other accounts over
which the Advisor or an affiliate of the Advisor exercises investment
discretion. The Advisor may pay to a broker
3
<PAGE>
or dealer who provides such brokerage and research services a commission for
executing a portfolio transaction which is in excess of the amount of commission
another broker or dealer would have charged for effecting that transaction if,
but only if, the Advisor determines in good faith that such commission was
reasonable in relation to the value of the brokerage and research services
provided. The Advisor will report to the Trustees from time to time regarding
its portfolio execution and brokerage practices.
4. EXPENSES AND COMPENSATION
-------------------------
a) Allocation of Expenses
----------------------
The Advisor shall, at its expense, employ or associate with itself
such persons as it believes appropriate to assist in performing its
obligations under this Agreement and provide all advisory services,
equipment, facilities and personnel necessary to perform its obligations
under this Agreement.
The Trust shall be responsible for all its expenses and liabilities,
including, without limitation, compensation of its Trustees who are not
affiliated with the Portfolios' Administrator or the Advisor or any of
their affiliates; taxes and governmental fees; interest charges; fees and
expenses of the Trust's independent accountants and legal counsel; trade
association membership dues; fees and expenses of any custodian (including
for keeping books and accounts and calculating the net asset value of
shares of each Portfolio, transfer agent, registrar and dividend disbursing
agent of the Trust; expenses of issuing, selling, redeeming, registering
and qualifying for sale the Trust's shares of beneficial interest; expenses
of preparing and printing share certificates (if any), prospectuses,
shareholders' reports, notices, proxy statements and reports to regulatory
agencies; the cost of office supplies; travel expenses of all officers,
trustees and employees; insurance premiums; brokerage and other expenses of
executing portfolio transactions; expenses of shareholders' meetings;
organizational expenses; and extraordinary expenses.
b) Compensation
------------
For its services under this Agreement, Advisor shall be entitled to
receive a fee calculated at the applicable annual rate set forth on
Schedule A hereto with respect to the average daily net asset value of each
Portfolio, which will be paid monthly. For the purpose of accruing
compensation, the net asset value of the Portfolios will be determined in
the manner provided in the then-current Prospectus of the Trust.
4
<PAGE>
c) Expense Limitations
-------------------
Advisor may waive all or a portion of its fees provided for hereunder
and such waiver will be treated as a reduction in the purchase price of its
services. Advisor shall be contractually bound hereunder by the terms of
any publicity announced waiver of its fee, or any limitation of the
Portfolio's expenses, as if such waiver were fully set forth herein.
5. LIABILITY OF ADVISOR
--------------------
Neither the Advisor nor its officers, directors, employees, agents or
controlling person ("Associated Person") of the Advisor shall be liable for any
error of judgement or mistake of law or for any loss suffered by the Trust in
connection with the matters to which this Agreement relates including, without
limitation, losses that may be sustained in connection with the purchase,
holding, redemption or sale of any security or other investment by the Trust
except a loss resulting from willful misfeasance, bad faith or gross negligence
on the part of Advisor or such Associated Persons in the performance of their
duties or from reckless disregard by them of their duties under this Agreement.
6. LIABILITY OF THE TRUST AND PORTFOLIOS
-------------------------------------
It is expressly agreed that the obligations of the Trust hereunder shall not
be binding upon any of the Trustees, shareholders, nominees, officers, agents or
employees of the Trust personally, but shall bind only the trust property of the
Trust as provided in the Declaration of Trust. The execution and delivery of
this Agreement have been authorized by the Trustees, and it has been signed by
an officer of the Trust, acting as such, and neither such authorization by such
Trustees nor such execution and delivery by such officer shall be deemed to have
been made by any of them individually or to impose any liability on any of them
personally, but shall bind only the trust property of the Trust as provided in
its Declaration of Trust.
With respect to any obligation of the Trust on behalf of any Portfolio arising
hereunder, the Advisor shall look for payment or satisfaction of such
obligations solely to the assets and property of the Portfolio to which such
obligation relates as though the Trust had separately contracted with the
Advisor by separate written instrument with respect to each Portfolio.
7. DURATION AND TERMINATION OF THIS AGREEMENT
------------------------------------------
(a) Duration. This Agreement shall become effective on the date
--------
hereof. Unless terminated as herein provided, this Agreement shall remain
in full force and effect for two years from the date hereof. Subsequent to
such initial period of effectiveness, this Agreement shall continue in full
force and effect for successive periods of one year thereafter with respect
to each Portfolio so long as such continuance with respect to such
Portfolio is approved at least annually (a) by either the Trustees of the
Trust or by vote of a majority of the outstanding voting securities (as
defined in the 1940 Act) of such Portfolio, and (b), in either event, by
the vote of a majority of the Trustees of the Trust who are not parties to
this Agreement or "interested persons" (as defined in the 1940 Act) of any
such party, cast in person at a meeting called for the purpose of voting on
such approval.
5
<PAGE>
(b) Amendment. Any amendment to this Agreement shall become
---------
effective with respect to a Portfolio upon approval by the Advisor and the
Trustees, and to the extent required by applicable law, a majority of the
outstanding voting securities (as defined in the 1940 Act) of that
Portfolio.
(c) Termination. This Agreement may be terminated with respect to any
-----------
Portfolio at any time, without payment of any penalty, by vote of the
Trustees or by vote of a majority of the outstanding voting securities (as
defined in the 1940 Act) of that Portfolio, or by the Advisor, in each case
upon sixty (60) days' prior written notice to the other party. Any
termination of this Agreement will be without prejudice to the completion
of transactions already initiated by the Advisor on behalf of the Trust at
the time of such termination. The Advisor shall take all steps reasonably
necessary after such termination to complete any such transactions and is
hereby authorization to take such steps. In addition, this Agreement may
be terminated with respect to one or more Portfolios without affecting the
rights, duties or obligations of any of the other Portfolios.
(d) Automatic Termination. This Agreement shall automatically and
---------------------
immediately terminate in the event of its assignment (as defined in the
1940 Act).
(e) Approval, Amendment or Termination by Individual Portfolio. Any
----------------------------------------------------------
approval, amendment or termination of this Agreement by the holders of a
majority of the outstanding voting securities (as defined in the 1940 Act)
of any Portfolio shall be effective to continue, amend or terminate this
Agreement with respect to any such Portfolio notwithstanding (i) that such
action has not been approved by the holders of a majority of the
outstanding voting securities of any other Portfolio affected thereby, and
(ii) that such action has not been approved by the vote of a majority of
the outstanding voting securities of the Trust, unless such action shall be
required by any applicable law or otherwise.
(f) Use of Name. The parties acknowledge and agree that the names
-----------
"ProFunds", "VP ProFunds" (collectively, the "ProFund Names") and any
derivatives thereof, as well as any logos that are now or shall hereafter
be associated with the ProFund Names are the valuable property of the
Advisor. In the event that this Agreement is terminated and the Advisor no
longer acts as Investment Advisor to the Trust, the Advisor reserves the
right to withdraw from the Trust and the Portfolios the uses of the ProFund
Names and logos or any name or logo misleadingly implying a continuing
relationship between the Trust of the Portfolios and the Advisor or any of
its affiliates.
6
<PAGE>
8. SERVICES NOT EXCLUSIVE
----------------------
The services of the Advisor to the Trust hereunder are not to be deemed
exclusive, and the Advisor shall be free to render similar services to others so
long as its services hereunder are not impaired thereby.
9. MISCELLANEOUS
-------------
(a) Notice. Any notice under this Agreement shall be in writing,
------
addressed and delivered or mailed, postage prepaid, to the other party at
such address as such other party may designate in writing for the receipt
of such notices.
(b) Severability. If any provision of this Agreement shall be held
------------
or made invalid by a court decision, statue, rule or otherwise, the
remainder shall not be thereby affected.
(c) Applicable Law. This Agreement shall be construed in accordance
--------------
with and governed by the laws of Maryland.
7
<PAGE>
ProFund Advisors LLC, a Maryland
limited liability company
ATTEST: ___________________________ By: ____________________________________
Michael L. Sapir
Chairman and Chief Executive Officer
Date: May _, 2000
ProFunds, a Delaware business trust
ATTEST: ___________________________ By: ____________________________________
Michael L. Sapir
Trustee and Chairman
Date: May _, 2000
8
<PAGE>
Dated: May _, 2000
Schedule A
----------
to the Amended and Restated Investment Advisory Agreement
between ProFunds and ProFund Advisors LLC
NAME OF FUND COMPENSATION
- ------------ ------------
(at Annual rate expressed as a
percentage of the average daily
net assets of each Fund *
Bull ProFund 0.75%
UltraBull ProFund 0.75%
Bear ProFund 0.75%
UltraBear ProFund 0.75%
UltraOTC ProFund 0.75%
UltraShort OTC ProFund 0.75%
UltraEurope ProFund 0.90%
UltraShort Europe ProFund 0.90%
ProFund VP Bull 0.75%
ProFund VP UltraBull 0.75%
ProFund VP UltraOTC 0.75%
ProFund VP Europe 30 0.75%
ProFund VP UltraEurope 0.90%
ProFund VP SmallCap 0.75%
ProFund VP Bear 0.75%
ProFund VP UltraShort OTC 0.75%
ProFund VP UltraShort Europe 0.90%
ProFund VP Money Market 0.75%
UltraSmall-Cap ProFund 0.75%
UltraMid-Cap ProFund 0.75%
UltraJapan ProFund 0.90%
Basic Materials UltraSector ProFund 0.75%
Biotechnology UltraSector ProFund 0.75%
Consumer Cyclical UltraSector ProFund 0.75%
Consumer Non-Cyclical UltraSector ProFund 0.75%
Energy UltraSector ProFund 0.75%
9
<PAGE>
Financial UltraSector ProFund 0.75%
Healthcare UltraSector ProFund 0.75%
Industrial UltraSector ProFund 0.75%
Internet UltraSector ProFund 0.75%
Pharmaceuticals UltraSector ProFund 0.75%
Precious Metals UltraSector ProFund 0.75%
Real Estate UltraSector ProFund 0.75%
Semiconductor UltraSector ProFund 0.75%
Technology UltraSector ProFund 0.75%
Telecommunications UltraSector ProFund 0.75%
Utilities UltraSector ProFund 0.75%
Wireless Communications UltraSector ProFund 0.75%
OTC ProFund 0.75%
* All fees are computed daily and paid monthly.
PROFUNDS PROFUND ADVISORS LLC
By: ___________________________ By: ______________________________
Title: ________________________ Title: ___________________________
Date: _________________________ Date: ____________________________
10
<PAGE>
Exhibit (J)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in Post-Effective Amendment
No. 13 to the Registration Statement on Form N-1A (File No. 333-28339) of our
report dated February 10, 2000 relating to the financial statements and
financial highlights appearing in the December 31, 1999 Annual Report to the
Shareholders of the ProFunds VP UltraOTC, ProFund VP Europe 30 and the ProFund
VP Small Cap and our report dated February 25, 2000, relating to the financial
statements and financial highlights appearing in the December 31, 1999 Annual
Report to Shareholders of the Bull ProFund, the UltraBull ProFund, the UltraOTC
ProFund, the UltraEurope ProFund, the Bear ProFund, the UltraBear ProFund, the
UltraShort OTC ProFund, the UltraShort Europe ProFund and the Money Market
ProFund which are also incorporated by reference into the Registration
Statement. We also consent to the references to our Firm under the captions
"Financial Highlights" in the Prospectuses and "Financial Statements" and
"Independent Accountants" in the Statements of Additional Information.
Columbus, Ohio
April 28, 2000
<PAGE>
C O M P 0 S I T E
- - - - - - - - -
AMENDED AND RESTATED
MULTIPLE CLASS PLAN PURSUANT TO RULE 18f-3
FOR PROFUNDS
WHEREAS, ProFunds (the "Trust") engages in business as an open-end
management investment company and is registered as such under the Investment
Company Act of 1940, as amended (the "Act");
WHEREAS, shares of beneficial interest of the Trust are currently divided
into a number of separate series, including the Bull ProFund, the UltraBull
ProFund, the Bear ProFund, the UltraBear ProFund, the UltraOTC ProFund, the
UltraShort OTC ProFund, the UltraEurope ProFund, the UltraSmall-Cap ProFund, the
UltraMid-Cap ProFund, the UltraJapan ProFund, the Money Market ProFund, the
Basic Materials UltraSector ProFund, the Biotechnology UltraSector ProFund, the
Consumer Cyclical UltraSector ProFund, the Consumer Non-Cyclical UltraSector
ProFund, the Energy UltraSector ProFund, the Financial UltraSector ProFund, the
Healthcare UltraSector ProFund, the Industrial UltraSector ProFund, the Internet
UltraSector ProFund, the Pharmaceuticals UltraSector ProFund, the Precious
Metals UltraSector ProFund, the Real Estate UltraSector ProFund, the
Semiconductor UltraSector ProFund, the Technology UltraSector ProFund, the
Telecommunications UltraSector ProFund, the Utilities UltraSector ProFund, the
Wireless Communications UltraSector ProFund, and the OTC ProFund (collectively,
the "Funds"); and
WHEREAS, the Trust desires to adopt, on behalf of each of the Funds, an
Amended and Restated Multiple Class Plan pursuant to Rule 18f-3 under the Act
(the "Plan") with respect to each of the Funds.
NOW, THEREFORE, the Trust hereby adopts, on behalf of the Funds, the Plan,
in accordance with Rule 18f-3 under the Act on the following terms and
conditions:
1. Features of the Classes. Each of the Funds issues its shares of
beneficial interest in two classes: "Investor Shares" and "Service Shares."
Shares of each class of a Fund shall represent an equal pro rata interest in
such Fund and, generally, shall have identical voting, dividend, liquidation,
and other rights, preferences, powers, restrictions, limitations, qualifications
and terms and conditions, except that: (a) each class shall have a different
designation; (b) each class of shares shall bear any Class Expenses, as defined
in Section 4 below; and (c) each class shall have separate voting rights on any
matter submitted to shareholders in which the interests of one class differ from
the interests of any other class. In addition, Investor Shares and Service
Shares shall have the features described in Sections 3, 4 and 5 below.
2. Sales Charge Structure. Shares of each class shall be offered at the
then-current net asset value without the imposition of a front-end or contingent
deferred sales charge.
<PAGE>
3. Service Plan.
(a) Service Shares have adopted a shareholder servicing plan pursuant
to which it may pay registered investment advisers, banks, trust companies and
other financial organizations, a fee at an annual rate of up to 1.00% of the
average daily net assets of a Fund's Service Shares attributable to or held in
the name of an Authorized Firm for providing service activities for its clients
who are beneficial owners of Service Shares.
(b) As used herein, the term "service activities" shall mean
activities in connection with the provision of personal, continuing services to
investors in each Fund; receiving, aggregating and processing purchase and
redemption orders; providing and maintaining retirement plan records;
communicating periodically with shareholders and answering questions and
handling correspondence from shareholders about their accounts; acting as the
sole shareholder of record and nominee for shareholders; maintaining account
records and providing beneficial owners with account statements; processing
dividend payments; issuing shareholder reports and transaction confirmations;
providing subaccounting services for Fund shares held beneficially; forwarding
shareholder communications to beneficial owners; receiving, tabulating and
transmitting proxies executed by beneficial owners; performing daily investment
("sweep") functions for shareholders; providing investment advisory services;
and general account administration activities. Overhead and other expenses of
an Authorized Firm related to its "service activities," including telephone and
other communications expenses, may be included in the information regarding
amounts expended for such activities.
4. Allocation of Income and Expenses. (a) The gross income of each Fund
generally shall be allocated to each class on the basis of net assets. To the
extent practicable, certain expenses (other than Class Expenses as defined
below, which shall be allocated more specifically) shall be subtracted from the
gross income on the basis of the net assets of each class of the Fund. These
expenses include:
(1) Expenses incurred by the Trust (including, but not limited to,
fees of Trustees, insurance and legal counsel) not attributable to a particular
Fund or to a particular class of shares of a Fund ("Corporate Level Expenses");
and
(2) Expenses incurred by a Fund not attributable to any particular
class of the Fund's shares (for example, advisory fees, custodial fees, or other
expenses relating to the management of the Fund's assets) ("Fund Expenses").
(b) Expenses attributable to a particular class ("Class Expenses") shall be
limited to: (i) payments made pursuant to a shareholder services plan; (ii)
transfer agent fees attributable to a specific class; (iii) printing and postage
expenses related to preparing and distributing materials such as shareholder
reports, prospectuses and proxies to current shareholders of a specific class;
(iv) Blue Sky registration fees incurred by a class; (v) Securities and Exchange
Commission registration fees incurred by a class; (vi) the expense of
administrative personnel and services to support the shareholders of a specific
class; (vii) litigation or other legal expenses relating solely to one class;
and (viii) Trustees' fees incurred as a result of issues relating to one class.
Expenses in category (i) above must be allocated to the class for which such
expenses are incurred. All other "Class Expenses" listed in categories (ii)-
(viii) above may be allocated to a
<PAGE>
class, but only if the President and Chief Financial Officer have determined,
subject to Board approval or ratification, which of such categories of expenses
will be treated as Class Expenses, consistent with applicable legal principles
under the Act and the Internal Revenue Code of 1986, as amended (the "Code").
Therefore, expenses of a Fund shall be apportioned to each class of shares
depending on the nature of the expense item. Corporate Level Expenses and Fund
Expenses will be allocated among the classes of shares based on their relative
net asset values in relation to the net asset value of the Trust. Approved
Class Expenses shall be allocated to the particular class to which they are
attributable. In addition, certain expenses may be allocated differently if
their method of imposition changes. Thus, if a Class Expense can no longer be
attributed to a class, it shall be charged to a Fund for allocation among
classes, as determined by the Board of Trustees. Any additional Class Expenses
not specifically identified above which are subsequently identified and
determined to be properly allocated to one class of shares shall not be so
allocated until approved by the Board of Trustees of the Trust in light of the
requirements of the Act and the Code.
5. Exchange Privileges. Shareholders may exchange shares of one class of
a Fund at net asset value without any sales charge for shares of any other class
of the Fund or for shares of any class offered by another Fund, provided that
the amount to be exchanged meets the applicable minimum investment requirements
and the exchange is made in states where it is legally authorized.
6. Conversion Features. The Funds currently do not offer a conversion
feature.
7. Quarterly and Annual Reports. The Trustees shall receive quarterly and
annual statements concerning all allocated Class Expenses and servicing
expenditures. In the statements, only expenditures properly attributable to the
servicing of a particular class of shares will be used to justify any servicing
fee or other expenses charged to that class. Expenditures not related to the
servicing of a particular class shall not be presented to the Trustees to
justify any fee attributable to that class.
8. Accounting Methodology. The following procedures shall be implemented
in order to meet the objective of properly allocating income and expenses among
the Funds:
(1) On a daily basis, a fund accountant shall calculate the
shareholder services fee to be charged to the Service Shares by calculating the
average daily net asset value of such shares outstanding and applying the
applicable fee rate of the class to the result of that calculation.
(2) The fund accountant will allocate all other designated Class
Expenses, if any, to the respective classes.
(3) The fund accountant shall allocate income and Corporate Level and
Fund Expenses among the respective classes of shares based on the net asset
value of each class in relation to the net asset value of the Fund for Fund
Expenses, and in relation to the net asset value of the Trust for Corporate
Level Expenses. These calculations shall be based on net asset
<PAGE>
values for all Funds except the Money Market ProFund, for which it will be based
on the relative value of settled shares.
(4) The fund accountant shall then complete a worksheet developed for
purposes of complying with Section 8 of this Plan, using the allocated income
and expense calculations from paragraph (3) above, and the additional fees
calculated from paragraphs (1) and (2) above.
(5) The fund accountant shall develop and use appropriate internal
control procedures to assure the accuracy of its calculations and appropriate
allocation of income and expenses in accordance with this Plan.
9. Waiver or Reimbursement of Expenses. Expenses may be waived or
reimbursed by the adviser to the Trust or any other provider of services to the
Trust without the prior approval of the Trust's Board of Trustees.
10. Effectiveness of Plan. This Plan shall not take effect until it has
been approved by votes of a majority of both (a) the Trustees of the Trust and
(b) the independent Trustees.
11. Material Modifications. This Plan may not be amended to modify
materially its terms unless such amendment is approved in the manner provided
for initial approval in paragraph 10 hereof.
12. Limitation of Liability. The Trustees of the Trust and the
shareholders of each Fund shall not be liable for any obligations of the Trust
or any Fund under this Plan, and any person, in asserting any rights or claims
under this Plan, shall look only to the assets and property of the Trust or such
Funds in settlement of such right or claim, and not to such Trustees or
shareholders.
IN WITNESS WHEREOF, the Trust, on behalf of the Funds, has adopted this
Amended and Restated Multiple Class Plan as of May __, 2000.
PROFUNDS
By:
---------------------------------------
Title: Secretary
<PAGE>
Exhibit (O)(3)
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Keith T. Robinson, his true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution for him, and in his name, place or stead, in any and in all
capacities (until revoked in writing) to sign any and all amendments to the
Registration Statement of the ProFunds (including post-effective amendments and
supplements thereto), and to file the same with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent, full power and authority to do
and perform each and every other act and thing ratifying and confirming all that
said attorney-in-fact and agent, or his substitute or substitutes may lawfully
do or cause to be done by virtue hereof.
January 24, 2000
/s/ Gary Tenkman
----------------------
Gary Tenkman
<PAGE>
Exhibit (P)(1)
ProFunds
CODE OF ETHICS
Dated ___, 2000
The following Code of Ethics is adopted by ProFunds (the "Trust")
pursuant to Rule 17j-1 under the Investment Company Act of 1940 (the "Act").
This Code is intended to ensure that all acts, practices and courses of business
engaged in by access persons (as defined) of the Trust reflect high standards
and comply with the requirements of Section 17(j) of the Act and Rule 17j-1
thereunder. Any such access person shall not be subject to this Code of Ethics
if such person is subject to another organization's code of ethics that has been
approved by the Board of Trustees of the Trust.
I. Definitions
A. "Access person" means any director, trustee, officer, general partner,
managing member, or advisory person (as defined) of the Trust or ProFund
Advisors LLC ("ProFund Advisors").
B. "Advisory person" means (1) any employee of the Trust or ProFund
Advisors (or of any company in a control relationship to the Trust or ProFund
Advisors) who, in connection with his or her regular functions or duties, makes,
participates in, or obtains information regarding the purchase or sale of a
security (as defined) by the Trust, or whose functions relate to the making of
any recommendations with respect to such purchases or sales; and (2) any natural
person in a control relationship to the Trust or ProFund Advisors who obtains
information concerning recommendations made to the Trust with regard to the
purchase or sale of a security by the Trust.
C. "Beneficial ownership" shall be interpreted in the same manner as it
would be under Rule 16a-1(a)(2) in determining whether a person is subject to
the provisions of Section 16 of the Securities Exchange Act of 1934 and the
rules and regulations thereunder.
D. "Control" shall have the same meaning as that set forth in Section
2(a)(9) of the Act. Section 2(a)(9) provides that "control" generally means the
power to exercise a controlling influence over the management or polices of a
company, unless such power is solely the result of an official position with
such company.
E. A "security held or to be acquired" means: (1) any security which,
within the most recent 15 days: (a) is or has been held by the Trust; or (b) is
being or has been considered by the Trust or ProFund Advisors for purchase by
the Trust; and (2) any option to purchase or sell, and any security convertible
into or exchangeable for, a security described in clause (1) above.
<PAGE>
F. An "initial public offering" means an offering of securities
registered under the Securities Act of 1933, the issuer of which, immediately
before the registration, was not subject to the reporting requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934.
G. "Investment personnel" means: (1) any employee of the Trust or
ProFund Advisors (or of any company in a control relationship to the Trust or
ProFund Advisors) who, in connection with his or her regular functions or
duties, makes or participates in making recommendations regarding the purchase
or sale of securities by the Trust; and (2) any natural person who controls the
Trust or ProFund Advisors and who obtains information concerning recommendations
made to the Trust regarding the purchase or sale of securities by the Trust.
H. A "limited offering" means an offering that is exempt from
registration under the Securities Act of 1933 pursuant to Section 4(2) or
Section 4(6) or pursuant to Rule 504, Rule 505, or Rule 506 under the Securities
Act of 1933.
I. "Purchase or sale" for purposes of this Code of Ethics and each
Exhibit or other appendix hereto includes, among other things, the writing of an
option to purchase or sell a security.
J. "Security" shall have the meaning set forth in Section 2(a)(36) of the
Act, except that it shall not include direct obligations of the Government of
the United States, bankers' acceptances, bank certificates of deposit,
commercial paper and high quality short-term debt instruments, including
repurchase agreements, and shares of registered open-end investment companies,
or such other securities as may be excepted under the provisions of Rule 17j-1.
II. Prohibitions
A. Generally. Rule 17j-l under the Act makes it unlawful for any
affiliated person of the Trust, Concord Financial Group, Inc., or any affiliated
person of ProFund Advisors or Concord Financial Group, Inc., directly or
indirectly, in connection with the purchase or sale of a security held or to be
acquired by the Trust:
(1) To employ any device, scheme or artifice to defraud the Trust;
(2) To make to the Trust any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements made to
the Trust, in light of the circumstances under which they are made, not
misleading;
(3) To engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon the Trust; or
(4) To engage in any manipulative practice with respect to the Trust.
It is the policy of the Trust that no access person shall engage in
any act, practice or course of conduct that would violate the provisions of Rule
17j-1 set forth above.
2
<PAGE>
B. Initial Public Offerings and Limited Offerings. No investment
personnel may acquire any direct or indirect beneficial ownership in any
securities in an initial public offering or in a limited offering unless the
President of the Trust (or his or her delegate) or the Chief Compliance Officer
of ProFund Advisors (or his or her delegate) has authorized the transaction in
advance.
III. Procedures
A. Reporting. In order to provide the Trust with information to enable
it to determine with reasonable assurance whether the provisions of Rule 17j-1
are being observed by its access persons, each access person of the Trust, other
than a Trustee who is not an "interested person" (as defined in the Act) of the
Trust, shall submit the following reports in the forms attached hereto as
Exhibits A-D to the Trust's President (or his or her delegate) showing all
transactions in securities in which the person has, or by reason of such
transaction acquires, any direct or indirect beneficial ownership:
(1) Initial Holding Report. Exhibit A shall initially be filed no
later than 10 days after that person becomes an access person.
(2) Periodic Reports. Exhibits B and C shall be filed no later than
10 days after the end of each calendar quarter, but transactions over which such
person had no direct or indirect influence or control need not be reported. No
such periodic report needs to be made if the report would duplicate information
contained in broker trade confirmations or account statements received by the
Trust no later than 10 days after the end of each calendar quarter and/or
information contained in the Trust's records.
(3) Annual Report. Exhibit D must be submitted by each access person
within 30 days after the end of each calendar year.
B. Independent Trustees. A Trustee who is not an "interested person" of
the Trust shall not be required to submit the reports required under paragraph
III.A, except that such a Trustee shall file a Securities Transaction Report in
the form attached as Exhibit B with respect to a transaction in a security where
he or she knew at the time of the transaction or, in the ordinary course of
fulfilling his or her official duties as a Trustee, should have known that
during the 15 day period immediate preceding or after the date of the
transaction, such security is or was purchased or sold by the Trust, or was
considered for purchase or sale by ProFund Advisors or the Trust. No report is
required if the Trustee had no direct or indirect influence or control over the
transaction.
C. Notification. The Trust's President (or his or her delegate) shall
notify each access person of the Trust who may be required to make reports
pursuant to this Code of Ethics that such person is subject to reporting
requirements and shall deliver a copy of this Code of Ethics to each such
person.
3
<PAGE>
IV. Review and Enforcement
A. Review.
(1) The President of the Trust (or his or her delegate) shall from
time to time review the reported personal securities transactions of access
persons for compliance with the requirements of this Code of Ethics.
(2) If the President of the Trust (or his or her delegate) determines
that a violation of this Code of Ethics may have occurred, before making a final
determination that a material violation has been committed by an individual, the
President of the Trust (or his or her delegate) may give such person an
opportunity to supply additional information regarding the transaction in
question.
B. Enforcement.
(1) If the President of the Trust (or his or her delegate) determines
that a material violation of this Code of Ethics has occurred, he or she shall
promptly report the violation to the Trustees of the Trust. The Trustees, with
the exception of any person whose transaction is under consideration, shall take
such actions as they consider appropriate, including imposition of any sanctions
that they consider appropriate.
(2) No person shall participate in a determination of whether he or
she has committed a violation of this Code of Ethics or in the imposition of any
sanction against himself or herself. If, for example, a securities transaction
of the President of the Trust is under consideration, a Trustee of the Trust
designated for the purpose by the Trustees of the Trust shall act in all
respects in the manner prescribed herein for the President.
C. Reporting to Board. No less frequently than annually, the Trust shall
furnish to the Trust's Board of Trustees, and the Board must consider, a written
report that:
(1) Describes any issues arising under the Code of Ethics or
procedures since the last report to the Board of Trustees, including, but not
limited to, information about material violations of the Code of Ethics or
procedures and sanctions imposed in response to the material violations; and
(2) Certifies that the Trust has adopted procedures reasonably
necessary to prevent access person from violating the Code of Ethics.
V. Records
The Trust shall maintain records in the manner and to the extent set
forth below, under the conditions described in Rule 31a-2(f)(1) under the Act,
which records shall be available for appropriate examination by representatives
of the Securities and Exchange Commission.
4
<PAGE>
. A copy of this Code of Ethics and any other code of ethics which is, or at
any time within the past five years has been, in effect shall be preserved
in an easily accessible place;
. A record of any violation of this Code of Ethics and of any action taken as
a result of such violation shall be preserved in an easily accessible place
for a period of not less than five years following the end of the fiscal
year in which the violation occurs;
. A copy of each report made pursuant to this Code of Ethics by an access
person, including any information provided in lieu of reports, shall be
preserved by the Trust for a period of not less than five years from the
end of the fiscal year in which it is made, the first two years in an
easily accessible place;
. A list of all persons who are, or within the past five years have been,
required to make reports pursuant to this Code of Ethics, or who are or
were responsible for reviewing these reports, shall be maintained in an
easily accessible place;
. A copy of each report to the Board shall be preserved by the Trust for at
least five years after the end of the fiscal year in which it is made, the
first two years in an easily accessible place; and
. The Trust shall preserve a record of any decision, and the reasons
supporting the decision, to approve the acquisition by investment personnel
of securities under Section II.B of this Code of Ethics for at least five
years after the end of the fiscal year in which the approval is granted,
the first two years in an easily accessible place.
VI. Miscellaneous
A. Confidentiality. All reports of securities transactions and any other
information filed with the Trust pursuant to this Code of Ethics shall be
treated as confidential, except as regards appropriate examinations by
representatives of the Securities and Exchange Commission.
B. Amendment; Interpretation of Provisions. The Trustees may from time
to time amend this Code of Ethics or adopt such interpretations of this Code of
Ethics as they deem appropriate.
5
<PAGE>
ANNUAL CERTIFICATION OF
PROFUNDS
The undersigned hereby certifies on behalf of ProFunds (the "Trust"), to
the Board of Trustees pursuant to Rule 17j-1(c)(2)(B) under the Investment
Company Act of 1940, and pursuant to Section IV.C(2) of the Trust's Code of
Ethics, that the Trust has adopted procedures that are reasonably necessary to
prevent access persons from violating the Code of Ethics.
Date: ______________________ ____________________________________
President
<PAGE>
EXHIBIT A
---------
ProFunds
Initial Holdings Report
To the President:
As of the below date, I held the following position in these securities in
which I may be deemed to have a direct or indirect beneficial ownership, and
which are required to be reported pursuant to the Trust's Code of Ethics:
Broker/Dealer or
No. of Principal Bank Where
Security Shares Amount Account is Held
-------- ------ ------ ---------------
This report (i) excludes holdings with respect to which I had no direct or
indirect influence or control, and (ii) is not an admission that I have or had
any direct or indirect beneficial ownership in the securities listed above.
Date: ____________________________ Signature: _________________________
A-1
<PAGE>
EXHIBIT B
---------
ProFunds
Securities Transaction Report
For the Calendar Quarter Ended _________________
To the President:
During the quarter referred to above, the following transactions were
effected in securities in which I may be deemed to have had, or by reason of
such transaction acquired, direct or indirect beneficial ownership, and which
are required to be reported pursuant to the Trust's Code of Ethics:
<TABLE>
<CAPTION>
Broker/
Nature of Dealer or
Security Principal Transaction Bank Through
(including interest and Date of No. of Amount of (Purchase, Whom
maturity date, if any) Transaction Shares Transaction Sale, Other) Price Effected
---------------------- ----------- ------ ----------- ------------ ----- --------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
This report (i) excludes transactions with respect to which I had no direct
or indirect influence or control, and (ii) is not an admission that I have or
had any direct or indirect beneficial ownership in the securities listed above.
Date: ____________________________ Signature: _________________________
B-1
<PAGE>
EXHIBIT C
---------
ProFunds
Account Establishment Report
For the Calendar Quarter Ended _________________
To the President:
During the quarter referred to above, the following accounts were
established for securities in which I may be deemed to have a direct or indirect
beneficial ownership, and is required to be reported pursuant to the Trust's
Code of Ethics:
Broker/Dealer or
Bank Where Date
Account Was Account Was
Established Established
----------- -----------
Date: ____________________________ Signature: _________________________
C-1
<PAGE>
EXHIBIT D
---------
ProFunds
Annual Holdings Report
To the President:
As of December 31, ___, I held the following positions in securities in
which I may be deemed to have a direct or indirect beneficial ownership, and
which are required to be reported pursuant to the Trust's Code of Ethics:
Broker/Dealer or
No. of Principal Bank Where
Security Shares Amount Account is Held
- -------- ------ ------ ---------------
This report is not an admission that I have or had any direct or indirect
beneficial ownership in the securities listed above.
Date: ____________________________ Signature: _________________________
D-1
<PAGE>
Exhibit (P)(2)
ProFund Advisors LLC
CODE OF ETHICS
Dated _______, 2000
The following Code of Ethics is adopted by ProFund Advisors LLC ("ProFund
Advisors"), the investment adviser to ProFunds (the "Trust"), pursuant to Rule
17j-1 under the Investment Company Act of 1940 (the "Act"). This Code of Ethics
is intended to ensure that all acts, practices and courses of business engaged
in by access persons (as defined) of ProFund Advisors reflect high standards and
comply with the requirements of Section 17(j) of the Act and Rule 17j-1
thereunder.
I. Definitions
A. "Access Person" means any director, trustee, officer, general partner,
managing member, or advisory person (as defined) of ProFund Advisors.
B. "Advisory Person" means (1) any employee of ProFund Advisors (or of
any company in a control relationship to ProFund Advisors) who, in connection
with his or her regular functions or duties, makes, participates in, or obtains
information regarding the purchase or sale of a security (as defined in this
Code of Ethics) by the Trust, or whose functions relate to the making of any
recommendations with respect to such purchases or sales; and (2) any natural
person in a control relationship to ProFund Advisors who obtains information
concerning recommendations made to the Trust with regard to the purchase or sale
of a security by the Trust.
C. "Beneficial Ownership" shall be interpreted in the same manner as it
would be under Rule 16a-1(a)(2) in determining whether a person subject to the
provisions of Section 16 of the Securities Exchange Act of 1934 and the rules
and regulations thereunder.
D. "Control" shall have the same meaning as that set forth in Section
2(a)(9) of the Act. Section 2(a)(9) provides that "control" generally means the
power to exercise a controlling influence over the management or policies of a
company, unless such power is solely the result of an official position with
such company.
E. A "security held or to be acquired" means: (1) any security which,
within the most recent 15 days: (a) is or has been held by the Trust; or (b) is
being considered by ProFund Advisors or the Trust for purchase by the Trust; and
(2) any option to purchase or sell, and any security convertible onto or
exchangeable for, a security described in clause (1) above.
F. An "initial public offering" means an offering of securities
registered under the Securities Act of 1933, the issuer of which, immediately
before the registration, was not subject to the reporting requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934.
G. "Investment personnel" means: (1) any employee of ProFund Advisors (or
any company in a control relationship to ProFund Advisors) who, in connection
with his or her
<PAGE>
regular functions or duties, makes or participates in making recommendations
regarding the purchase or sale of securities by the Trust; and (2) any natural
person who controls ProFund Advisors or the Trust and who obtains information
concerning recommendations made to the Trust regarding the purchase or sale of
securities by the Trust.
H. A "limited offering" means an offering that is exempt from
registration under the Securities Act of 1933 pursuant to Section 4(2) or
Section 4(6) or pursuant to Rule 504, Rule 505, or Rule 506 under the Securities
Act of 1933.
I. "Portfolio manager" means an employee of ProFund Advisors who is
authorized to make investment decisions on behalf of the Trust.
J. "Purchase or sale" for purposes of this Code of Ethics and each
Appendix thereto includes, among other things, the writing of an option to
purchase or sell a security.
K. "Security" shall have the meaning set forth in Section 2(a)(36) of the
Act, except that it shall not include direct obligations of the Government of
the United States, bankers' acceptances, bank certificates of deposit,
commercial paper and high quality short-term debt instruments, including
repurchase agreements, and shares of registered open-end investment companies,
or such other securities as may be excepted under the provisions of Rule 17j-1.
II. Legal Requirement
Rule 17j-l under the Investment Company Act of 1940 makes it unlawful
for ProFund Advisors, as investment adviser of the Trust, or any affiliated
person of ProFund Advisors in connection with the purchase and sale by such
person of a security held or to be acquired by the Trust:
(1) To employ any device, scheme or artifice to defraud the Trust;
(2) To make to the Trust any untrue statement of a material fact or omit
to state to the Trust a material fact necessary in order to make the statements
made, in light of the circumstances under which they are made, not misleading;
(3) To engage in any act, practice, or course of business which operates
or would operate as a fraud or deceit upon the Trust; or
(4) To engage in any manipulative practice with respect to the Trust.
To assure compliance with these restrictions, ProFund Advisors adopts and
agrees to be governed by the provisions contained in this Code of Ethics.
-2-
<PAGE>
III. General Principles
ProFund Advisors and each of its access persons shall be governed by the
following principles:
A. No access person shall engage in any act, practice or course of
conduct that would violate the provisions of Rule 17j-l set forth above;
B. The interests of the Trust and its shareholders are paramount and come
before the interests of any access person or employee;
C. Personal investing activities of all access persons shall be conducted
in a manner that shall avoid actual or potential conflicts of interest with the
Trust and its shareholders; and
D. Access persons shall not use such positions, or any investment
opportunities presented by virtue of such positions, to the detriment of the
Trust and its shareholders.
IV. Substantive Restrictions
A. Blackout Periods. The price paid or received by the Trust for any
investment should not be affected by a buying or selling interest on the part of
an access person, or otherwise result in an inappropriate advantage to the
access person. To that end:
(1) No access person shall enter an order for the purchase or sale of
an investment which the Trust is, or is considering, purchasing or selling until
the day after the Trust's transactions in that investment have been completed,
unless the Compliance Officer determines that it is clear that, in view of the
nature of the investment and the market for such investment, the order of the
access person will not affect the price paid or received by the Trust; and
(2) A portfolio manager of ProFund Advisors may not buy or sell a
security within seven days before or after the Trust trades in the security.
B. Initial Public Offerings and Limited Offerings.
(1) No investment personnel may acquire any direct or indirect
beneficial ownership in any securities in an initial public offering or in a
limited offering unless the Compliance Officer of ProFund Advisors has
authorized the transaction in advance.
(2) Investment personnel who have been authorized to acquire
securities in a limited offering must disclose his or her interest if he or she
is involved in the Trust's consideration of an investment in such issuer. Any
decision to acquire such issuer's securities on behalf of the Trust shall be
subject to review by investment personnel with no personal interest in the
issuer.
-3-
<PAGE>
C. Acceptance of Gifts. Investment personnel must not accept gifts in
excess of limits contained in the Conduct Rules of the National Association of
Securities Dealers, Inc. from any entity doing business with or on behalf of
ProFund Advisors or the Trust.
D. Service on Boards. Investment personnel shall not serve on the boards
of directors of publicly traded companies, or in any similar capacity, absent
the prior approval of such service by the Compliance Officer following the
receipt of a written request for such approval. In the event such a request is
approved, procedures shall be developed to avoid potential conflicts of
interest.
E. Disgorgement. Any profits derived from securities transactions in
violation of paragraphs IV.A-IV.B, above, shall be forfeited and paid to the
Trust for the benefit of its or their shareholders. Gifts accepted in violation
of paragraph IV.C shall be forfeited, if practicable, and/or dealt with in any
manner determined appropriate and in the best interests of the Trust and its
shareholders.
F. Exemptions. The restrictions of this Section IV shall not apply to
the following transactions unless the Compliance Officer determines that such
transactions violate the provisions of Section III of this Code of Ethics:
(1) Reinvestments of dividends pursuant to a plan;
(2) Transactions in instruments which are excepted from the
definition of security in this Code of Ethics.
(3) Transactions in which direct or indirect beneficial ownership is
not acquired or disposed of;
(4) Transactions in accounts as to which an access person has no
investment control;
(5) Transactions in accounts of an access person for which investment
discretion is not maintained by the access person but is granted to any of the
following that are unaffiliated with ProFund Advisors: a registered broker-
dealer, registered investment adviser or other investment manager acting in a
similar fiduciary capacity, provided the following conditions are satisfied:
--------
(a) The terms of the account agreement ("Agreement") must be in
writing and furnished to the Compliance Officer prior to any transactions;
(b) Any amendment to the Agreement must be furnished to the
Compliance Officer prior to its effective date;
(c) The Agreement must require the account manager to comply
with the reporting provisions of paragraph 2 of Section V.A; and
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<PAGE>
(d) The exemption provided by this Section IV.F(5) shall not be
available for a transaction or class of transactions which is suggested or
directed by the access person or as to which the access person acquires advance
information.
(6) Transactions in securities in connection with an employer
sponsored or other tax qualified plan, such as a 401(k) plan, an IRA, or ESOP,
in an amount not exceeding $1,000 in any calendar month; and
(7) Transactions in securities or other investments that are not
permissible investments for the Trust.
V. Procedures
A. Reporting. In order to provide ProFund Advisors with information to
enable it to determine with reasonable assurance whether the provisions of Rule
17j-1 are being observed by its access persons, each access person of ProFund
Advisors shall submit the following reports in the forms attached hereto as
Exhibits A-D to ProFund Advisors' Compliance Officer (or his or her delegate)
showing all transactions in securities in which the person has, or by reason of
such transaction acquires, any direct or indirect beneficial ownership:
(1) Initial Holding Report. Exhibit A shall initially be filed no
later than 10 days after that person becomes an access person.
(2) Periodic Reports. Exhibits B and C shall be filed no later than
10 days after the end of each calendar quarter, but transactions over which such
person had no direct or indirect influence or control need not be reported. No
such periodic report needs to be made if the report would duplicate information
required to be recorded under Rule 204-2(a)(12) or Rule 204-2(a)(13) under the
Investment Advisers Act of 1940, or information contained in broker trade
confirmations or account statements received by ProFund Advisors no later than
10 days after the end of each calendar quarter and/or information contained in
ProFund Advisors' records.
(3) Annual Report. Exhibit D must be submitted by each access person
within 30 days after the end of each calendar year.
B. Duplicate Copies. Each access person, with respect to each brokerage
account in which such access person has any beneficial interest shall arrange
that the broker shall mail directly to the Compliance Officer at the same time
they are mailed or furnished to such access person (a) duplicate copies of the
broker's trade confirmation covering each transaction in securities in such
account and (b) copies of periodic statements with respect to the account.
C. Notification; Annual Certification. The Compliance Officer (or his or
her delegate) shall notify each access person of ProFund Advisors who may be
required to make reports pursuant to this Code of Ethics, that such person is
subject to reporting requirements and shall deliver a copy of this Code of
Ethics to each such person. The Compliance Officer shall annually obtain written
assurances in the form attached hereto from each access person that he or
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<PAGE>
she is aware of his or her obligations under this Code of Ethics and has
complied with the Code of Ethics and with its reporting requirements.
VI. Review and Enforcement
A. Review.
(1) The Compliance Officer (or his or her delegate) shall from time
to time review the reported personal securities transactions of access persons
for compliance with the requirements of this Code of Ethics.
(2) If the Compliance Officer (or his or her delegate) determines
that a violation of this Code of Ethics may have occurred, before making a final
determination that a material violation has been committed by an individual, the
Compliance Officer (or his or her delegate) may give such person an opportunity
to supply additional information regarding the matter in question.
B. Enforcement.
(1) If the Compliance Officer (or his or her delegate) determines
that a material violation of this Code of Ethics has occurred, he or she shall
promptly report the violation to the Trustees of the Trust. The Trustees, with
the exception of any person whose transaction is under consideration, shall take
actions as they consider appropriate, including imposition of any sanctions they
consider appropriate.
(2) No person shall participate in a determination of whether he or
she has committed a violation of this Code of Ethics or in the imposition of any
sanction against himself or herself.
C. Reporting to Board. No less frequently than annually, ProFund
Advisors shall furnish to the Trust's Board of Trustees, and the Board must
consider, a written report that:
(1) Describes any issues arising under the Code of Ethics or
procedures since the last report to the Board of Trustees, including, but not
limited to, information about material violations of the Code of Ethics or
procedures and sanctions imposed in response to the material violations; and
(2) Certifies that ProFund Advisors has adopted procedures reasonably
necessary to prevent access persons from violating this Code of Ethics.
VII. Records
ProFund Advisors shall maintain records in the manner and to the extent set
forth below, which records shall be available for appropriate examination by
representatives of the Securities and Exchange Commission.
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<PAGE>
. A copy of this Code of Ethics and any other code of ethics which is, or at
any time within the past five years has been, in effect shall be preserved
in an easily accessible place;
. A record of any violation of this Code of Ethics and of any action taken
as a result of such violation shall be preserved in an easily accessible
place for a period of not less than five years following the end of the
fiscal year in which the violation occurs;
. A copy of each report made pursuant to this Code of Ethics by an access
person, including any information provided in lieu of reports, shall be
preserved by ProFund Advisors for a period of not less than five years
from the end of the fiscal year in which it is made, the first two years
in an easily accessible place;
. A list of all persons who are, or within the past five years have been,
required to make reports pursuant to this Code of Ethics, or who are or
were responsible for reviewing these reports, shall be maintained in an
easily accessible place;
. A copy of each report to the Board shall be preserved by ProFund Advisors
for at least five years after the end of the fiscal year in which it is
made, the first two years in an easily accessible place; and
. ProFund Advisors shall preserve a record of any decision, and the reasons
supporting the decision, to approve the acquisition by investment
personnel of securities under Section IV.B of this Code of Ethics for at
least five years after the end of the fiscal year in which the approval is
granted, the first two years in an easily accessible place.
VIII. Confidentiality
All reports of securities transactions and any other information filed
with ProFund Advisors pursuant to this Code of Ethics, shall be treated as
confidential, except as regards appropriate examinations by representatives of
the Securities and Exchange Commission
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<PAGE>
ANNUAL CERTIFICATION OF
PROFUND ADVISORS LLC
The undersigned hereby certifies on behalf of ProFund Advisors LLC
("ProFund Advisors") to the Board of Trustees of ProFunds pursuant to Rule 17j-
1(c)(2)(B) under the Investment Company Act of 1940, and pursuant to Section
VI.C(2) of ProFund Advisors' Code of Ethics, that ProFund Advisors has adopted
procedures that are reasonably necessary to prevent access persons from
violating the Code of Ethics.
Date:________________________ ________________________________________
Compliance Officer
<PAGE>
ANNUAL CERTIFICATE OF COMPLIANCE
____________________________
Name (please print)
This is to certify that the attached Code of Ethics was distributed to me
on ____________, 20___. I have read and understand the Code of Ethics, and I
understand my obligations thereunder. I certify that I have complied with the
Code of Ethics during the course of my association with ProFund Advisors, LLC,
and that I will continue to do so in the future. Moreover, I agree to promptly
report to the Compliance Officer any violation or possible violation of the Code
of Ethics of which I become aware.
I understand that violation of the Code of Ethics will be grounds for
disciplinary action or dismissal and may also be a violation of federal and/or
state securities laws.
_____________________________________
Signature
_____________________________________
Date
<PAGE>
EXHIBIT A
---------
ProFund Advisors
Initial Holdings Report
To the Compliance Officer:
As of the below date, I held the following position in these securities in
which I may be deemed to have a direct or indirect beneficial ownership, and
which are required to be reported pursuant to ProFund Advisors' Code of Ethics:
Broker/Dealer or
No. of Principal Bank Where
Security Shares Amount Account is Held
-------- ------ ------ ---------------
This report (i) excludes holdings with respect to which I had no direct or
indirect influence or control, and (ii) is not an admission that I have or had
any direct or indirect beneficial ownership in the securities listed above.
Date: ____________________________ Signature: ______________________________
A-1
<PAGE>
EXHIBIT B
---------
ProFund Advisors
Securities Transaction Report
For the Calendar Quarter Ended _________________
To the Compliance Officer:
During the quarter referred to above, the following transactions were
effected in securities in which I may be deemed to have had, or by reason of
such transaction acquired, direct or indirect beneficial ownership, and which
are required to be reported pursuant to ProFund Advisors' Code of Ethics:
<TABLE>
<CAPTION>
Broker/
Nature of Dealer or
Security Principal Transaction Bank Through
(including interest and Date of No. of Amount of (Purchase, Whom
maturity date, if any) Transaction Shares Transaction Sale, Other) Price Effected
---------------------- ----------- ------ ----------- ------------ ----- --------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
This report (i) excludes transactions with respect to which I had no direct
or indirect influence or control, and (ii) is not an admission that I have or
had any direct or indirect beneficial ownership in the securities listed above.
Date: ____________________________ Signature: ______________________________
B-1
<PAGE>
EXHIBIT C
---------
ProFund Advisors
Account Establishment Report
For the Calendar Quarter Ended _________________
To the Compliance Officer:
During the quarter referred to above, the following accounts were
established for securities in which I may be deemed to have a direct or indirect
beneficial ownership, and is required to be reported pursuant to ProFund
Advisors' Code of Ethics:
Broker/Dealer or
Bank Where Date
Account Was Account Was
Established Established
----------- -----------
Date: ____________________________ Signature: ______________________________
C-1
<PAGE>
EXHIBIT D
---------
ProFund Advisors
Annual Holdings Report
To the Compliance Officer:
As of December 31, ___, I held the following positions in securities in
which I may be deemed to have a direct or indirect beneficial ownership, and
which are required to be reported pursuant to ProFund Advisors' Code of Ethics:
Broker/Dealer or
No. of Principal Bank Where
Security Shares Amount Account is Held
-------- ------ ------ ---------------
This report is not an admission that I have or had any direct or indirect
beneficial ownership in the securities listed above.
Date: ____________________________ Signature: _________________________
D-1
