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As Filed with the Securities and Exchange Commission on March 13, 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. 11 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 14 [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)
______ on (date) pursuant to paragraph (b)
______ 60 days after filing pursuant to paragraph (a)(1)
______ on (date) pursuant to paragraph (a)(1)
X 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.
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May __, 2000
prospectus
ProFunds No-Load Mutual Funds
OTC ProFund
[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.
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Table of Contents
1 Objective
7 Strategy
9 Share Price, Classes & Tax Information
13 Shareholder Services Guide
21 ProFunds Management
ProFund Advisors LLC
Investment Advisor
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Objective
The OTC ProFund - seeks daily investment results that correspond to the
performance of the NASDAQ 100 Index(TM). 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. ProFunds' Board of
Trustees may change the ProFund's investment objective without shareholder
approval if, for example, it believes another benchmark might better suit
shareholder needs.
Strategy
ProFund Advisors, the ProFund's investment advisor, uses quantitative and
statistical analysis it developed in seeking to achieve the ProFund's
investment objective. This analysis determines the type, quantity and mix
of investment positions that the ProFund should hold to approximate the
performance of the NASDAQ 100 Index(TM).
The ProFund principally invests 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.
The ProFund invests in the above instruments generally as a substitute for
investing directly in stocks. In addition, the ProFund may invest in a
combination of stocks that in ProFund Advisors' opinion should simulate the
movement of the NASDAQ 100 Index(TM).
Risks
Like all investments, the ProFund entails risk. ProFund Advisors cannot
guarantee that the ProFund will achieve its objective. As with any mutual
fund, the ProFund could lose money, or its performance could trail that of
other investment alternatives.
In addition, the ProFund presents 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 ProFund. The
risks are described below.
. Market Risk. The ProFund is subject to market risks that will affect the
value of its shares, including general economic and market conditions, as
well as developments
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that impact specific industries or companies. Shareholders in the ProFund
should lose money when the NASDAQ 100 Index(TM) declines.
. Liquidity Risk. In certain circumstances, such as a disruption of the
orderly markets for the financial instruments in which the ProFund
invests, the ProFund 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 ProFund from limiting losses or
realizing gains.
. Correlation Risk. While ProFund Advisors expects that the ProFund will
track the NASDAQ 100 Index(TM) with an average correlation of 0.90% or
better over a year, there can be no guarantee that the ProFund will be
able to achieve this level of correlation. A failure to achieve a high
degree of correlation may prevent the ProFund from achieving its
investment goal.
. Non-Diversification Risk. The ProFund is classified as "non-diversified"
under the federal securities laws. It has the ability to concentrate a
relatively high percentage of its investments in the securities of a
small number of companies. This would make the performance of the ProFund
more susceptible to a single economic, political or regulatory event than
a more diversified mutual fund might be. Nevertheless, the ProFund
intends to invest on a diversified basis.
. Risks of Aggressive Investment Techniques. The ProFund uses 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.
Who May Want to Consider Investing in the ProFund
The ProFund may be appropriate for investors who want to receive investment
results approximating the performance of the NASDAQ 100 Index(TM).
The ProFund may also 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.
. want their investment to track the performance of the NASDAQ 100
Index(TM).
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Performance
Because the ProFund is newly formed and has no investment track record, it
has no performance to compare against other mutual funds or broad measures
of securities market performance, such as an indexes.
Fees and Expenses
The tables below describe the fees and expenses you may pay if you buy and
hold shares of the ProFund during its first year of operations. The 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 ProFund.
Annual Operating Expenses--INVESTOR CLASS Shares
(percentage of average daily net assets)
Management fees 0.75%
Distribution (12b-1) fees none
Other expenses 0.50%
Total annual operating expenses 1.25%
____________
* Based on estimated expenses to be incurred in the first year of
operations.
Annual Operating Expenses--SERVICE CLASS Shares
(percentage of average daily net assets)
Management fees 0.75%
Distribution (12b-1) fees none
Other expenses 0.50%
Total annual operating expenses 1.25%
____________
* Based on estimated expenses to be incurred in the first year of
operations.
** Includes a shareholder services plan fee equal, on an annual basis, to a
maximum of 1.00% of average daily net assets of Service Class shares.
See "Share Price, Classes and Tax Information -- Classes of Shares"
beginning on page 10 for more information.
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Expense Examples
The following examples illustrate the expenses you would have incurred on a
$10,000 investment in the 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 ProFund earns an
annual return of 5% over the periods shown, that you reinvest all dividends
and distributions, and that gross operating expenses remain constant.
Because these examples are hypothetical and for comparison only, your
actual costs will be different.
INVESTOR CLASS Expense Examples
1 year 3 years
------ -------
OTC ProFund $ $
SERVICE CLASS Expense Examples
1 year 3 years
------ -------
OTC ProFund $ $
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strategy
What the ProFund Does
The 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 objectives regardless of market conditions, trends or
direction.
. Seeks to provide correlation with its benchmark on a daily basis.
What the ProFund Does Not Do
ProFund Advisors does not:
. Conduct conventional stock research or analysis or forecast stock market
movement in managing the ProFund's assets.
. Invest the ProFund's 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 ProFund's benchmark index.
. Seek to invest to realize dividend income from the Profund's
investments.
. Seek to provide correlation with the Profund's benchmark over a period
of time other than daily, such as monthly or annually, since
mathematical compounding prevents the Profund from achieving such
results.
Important Concepts
. 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.
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Portfolio Turnover
ProFund Advisors expects a significant portion of the ProFund's assets to
come from professional money managers and investors who use the ProFund as
part of "market timing" investment strategies. These strategies often call
for frequent trading of the ProFund's shares to take advantage of
anticipated changes in market conditions. Although ProFund Advisors
believes its accounting methodology should minimize the effect on the
ProFund of such trading, market timing trading could increase the rate of
the ProFund's portfolio turnover, forcing realization of substantial
capital gains and losses and increasing transaction expenses. In addition,
while the ProFund does not expect it, large movements of assets into and
out of the ProFund may negatively impact its ability to achieve its
investment objective or its level of operating expenses.
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Share Price, Classes & Tax
information
Calculating the ProFund's Share Price
The 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.
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 the 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 ProFund values 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 ProFund uses the following methods for arriving at the current market
price of investments held by the ProFund:
. 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.
. 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.
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
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might actually command if the ProFund 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
("SAI") 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.
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Dividends and Distributions
The ProFund intends to distribute to its shareholders every year all of the
year's net investment income and net capital gains. The ProFund will
reinvest these distributions in additional shares unless a shareholder has
written to request a direct cash distribution.
Tax Consequences
The ProFund does not ordinarily pay income tax on its net investment income
(which includes short-term capital gains) and net capital gain 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 the 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 the 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 ProFund 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 the
ProFund shares may be treated as a sale.
The tax consequences for tax deferred retirement accounts or non-taxable
shareholders will be different.
Please keep in mind:
. Whether a distribution by the 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 the 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, the 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
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U.S. federal income tax liability. The shareholder also may be subject
to a $50 fee to reimburse the ProFund for any penalty that the IRS may
impose.
Please see the SAI 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 ProFund.
Classes of Shares
Investors in the ProFund 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, the 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.
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
. investment advisory services.
Holders of the ProFund's Service Class shares pay all fees and expenses
applicable to these shares. The authorized firms may charge extra for
services beyond those specified above, but they must furnish clients who
own Service Class shares with a schedule explaining those fees.
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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 the ProFund's shares in whole or in part.
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
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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, 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 on page 13
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. 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.
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 ProFund 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:
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UMB Bank, N.A.
Kansas City, MO
Routing/ABA #:101000695
ProFunds DDA #9870857952
For further credit to: Your name, the name of the ProFund, 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.
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 and accept your purchase order in good order. In 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 the
ProFund. 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 the 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 ProFund.
. 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 ProFund shares.
Exchanges
Shareholders can exchange shares of either class of the ProFund for shares
of either class of another ProFund, which are not described in this
prospectus, free of
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charge. ProFunds can only honor exchanges between accounts registered in
the same name, and having the same address and taxpayer identification
number. Exchange orders including the UltraEurope Profund, which is not
described in this prospectus, are subject to certain restrictions not
described in this prospectus.
ProFunds accepts exchange orders by phone, in writing or through the
Internet. 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 10:30 a.m. and 11:30 a.m. 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 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.
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.
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. 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 OTC
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 OTC 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 will not be invested during the intervening period and will
not earn interest during that time.
For example, assume you were to exchange OTC ProFund for UltraEurope
ProFund and the order was placed before 3:50 p.m. Eastern time, on a
business day of the OTC ProFund. The net asset values of UltraEurope and
OTC 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 OTC 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 OTC 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.
. 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,
for the account's current value.
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. You may exchange, on a regular basis, shares of the Money Market
ProFund (described in another prospectus) 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 ProFund 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).
Redeeming ProFund Shares
You can redeem all or part of your shares at the price next determined
after we receive your request. The ProFund only accepts 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. ProFunds may not receive or accept phone redemption
orders at any other time. 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.
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.
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.
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. 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.
. 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.
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, as appropriate, is closed (other than customary weekend
or holiday closings) or trading on the NYSE 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 is not
reasonably practicable; or (iii) for such other periods as the SEC, by
order, may permit for protection of ProFunds' investors.
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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.
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ProFunds
management
Board of Trustees and Officers
The ProFunds' Board of Trustees is responsible for the general supervision
of the ProFund. The ProFunds' officers are responsible for day-to-day
operations of the ProFund.
Investment Advisor
ProFund Advisors LLC, located at 7900 Wisconsin Avenue, Suite 300,
Bethesda, Maryland 20814, serves as the investment advisor to the ProFund,
providing investment advice and management services. ProFund Advisors
oversees the investment and reinvestment of the assets in the ProFund. It
receives fees equal to 0.75% of the average daily net assets of the
ProFund. 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) ProFunds. 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.).
Louis M. Mayberg, President of ProFund Advisors LLC, co-founded National
Capital Companies, LLC, 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 29 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. He earned his degrees at
University of Kentucky. Dr. Seale also holds an appointment as Professor of
Finance at George Washington University.
The ProFund is managed by an investment team chaired by Dr. Seale.
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Other Service Providers
BISYS ProFund Services ("BISYS"), located at 3435 Stelzer Road, Suite 1000,
Columbus, Ohio 43219, acts as the administrator to the ProFund, providing
operations, compliance and administrative services. The 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 ProFund. It is anticipated that the ProFund will pay a fee of 0.15%
of average daily net assets for these services.
Other Information
"NASDAQ 100 Indextm" is a trademark of the NASDAQ Stock Markets, Inc.
("NASDAQ"). The ProFund is not sponsored, endorsed, sold or promoted by
NASDAQ and NASDAQ makes no representation regarding the advisability of
investing in the ProFund.
If the 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.
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You can find more detailed information about the ProFund, in its current
Statement of Additional Information, dated ________, 2000, which we have filed
electronically with the Securities 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 if you have
questions about investing in the ProFund, 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 the ProFund on the SEC's website
(http://www.sec.gov), or you can get copies of this information, after payments
of a duplicating fee, by writing to the Public Reference Section of the SEC,
Washington D.C. 20549-0102. Information about the ProFund, including its
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 OF PROFUNDS]
<PAGE>
PROFUNDS
STATEMENT OF ADDITIONAL INFORMATION
OTC PROFUND
MAY __, 2000
7900 WISCONSIN AVENUE, SUITE 300
BETHESDA, MARYLAND 20814
(888) 776-3637 RETAIL SHAREHOLDERS
(888) 776-5717 (FINANCIAL PROFESSIONALS ONLY)
This Statement of Additional Information relates to one series of ProFund
the OTC ProFund (the "ProFund"). The ProFund offers two classes of shares:
Service Shares and Investor Shares. The ProFund 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. The ProFund seeks
investment results that correspond each day to the NASDAQ 100 IndexTM. The
ProFund may be used independently or in combination with other ProFunds as part
of an overall investment strategy. Additional ProFunds may be created from time
to time. The ProFund involves special risks, some not traditionally associated
with
mutual funds. Investors should carefully review and evaluate these risks in
considering an investment in the ProFund to determine whether an investment in
the ProFund is appropriate. The ProFund alone does not constitute a balanced
investment plan. The 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 ProFund's investment
objectives will be achieved.
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the ProFund's Prospectus, dated May ______, 2000, as
supplemented from time to time, which incorporates this Statement of Additional
Information by reference. Words or phrases used in this Statement of Additional
Information without definition have the same meanings assigned 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.
<PAGE>
TABLE OF CONTENTS
PAGE
----
ProFunds....................................................... 3
Investment Policies and Techniques............................. 3
Investment Restrictions........................................ 12
Determination of Net Asset Value .............................. 14
Portfolio Transactions and Brokerage........................... 14
Management of ProFunds......................................... 15
Costs and Expenses............................................. 18
Organization and Description of Shares of Beneficial Interest.. 18
Taxation....................................................... 19
Performance Information........................................ 23
Financial Statements........................................... 24
Appendix -- Description of Securities Ratings.................. A-1
2
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PROFUNDS
ProFunds (the "Trust") is an open-end management investment company, and is
currently comprised of forty-one separate series as of the date hereof of the
series is described herein. All of the ProFunds 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 ProFund. In addition, set forth below is further
information relating to the ProFund. The discussion below supplements and should
be read in conjunction with the Prospectus.
Certain investment restrictions of the ProFund specifically identified as
fundamental policies may not be changed without the affirmative vote of at least
the majority of the outstanding shares of the ProFund, as defined in the
Investment Company Act of 1940, as amended (the "1940 Act"). All other
investment policies of the ProFund not specified as fundamental (including the
benchmark of the ProFund) may be changed by the Trustees of the Trust without
the approval of shareholders.
The ProFund may consider changing its benchmark if, for example, the
current benchmark becomes unavailable, the ProFund believes the current
benchmark no longer serves the investment needs of a majority of shareholders or
another benchmark better serves their needs, or the financial or economic
environment makes it difficult for the ProFund's investment results to
correspond sufficiently to its current benchmark. If believed appropriate, the
ProFund may specify a benchmark for itself that is "leveraged" or proprietary.
Of course, there can be no assurance that the ProFund will achieve its
objective.
Fundamental securities analysis is not generally used by ProFund Advisors
LLC (the "Advisor"), the ProFund's investment adviser, in seeking to correlate
with the benchmark. Rather, the Advisor primarily uses statistical and
quantitative analysis to determine the investments the ProFund makes and
techniques it employs. While the Advisor attempts to minimize any "tracking
error" (that statistical measure of the difference between the investment
results of the ProFund and the performance of its benchmark), certain factors
will tend to cause the ProFund's investment results to vary from a perfect
correlation to its benchmark. The ProFund, however, does not expect that its
total returns will vary adversely from its current benchmark by more than ten
percent over the course of a year. See "Special Considerations" on page 12.
It is the policy of the ProFund to pursue its investment objectives of
correlating with its benchmark regardless of market conditions, to remain nearly
fully invested and not to take defensive positions.
The investment strategies of the ProFund discussed below, and as discussed
in the Prospectus, may be used by the 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 the ProFund will result in the achievement of the ProFund's
objectives.
The investment objective of the ProFund is to provide daily investment
results that correspond to the performance of the NASDAQ 100 IndexTM.
The ProFund does not intend to hold the 100 securities included in the
NASDAQ 100 IndexTM. Instead, the 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 ProFund
will invest, under normal conditions, at least 65% of its total assets in
securities traded on the over-the-counter markets and instruments with values
that are representative of such securities such as futures and option contracts
on such securities or the NASDAQ 100 IndexTM.
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Companies whose securities are traded on the over-the-counter ("OTC")
markets generally have smaller market capitalization or are newer companies than
those listed on the NYSE or the American Stock Exchange (the "AMEX"). OTC
companies often have limited product lines, or relatively new products or
services, and may lack established markets, depth of experienced management, or
financial resources and the ability to generate funds. The securities of these
companies may have limited marketability and may be more volatile in price than
securities of larger capitalized or more well-known companies. Among the reasons
for the greater price volatility of securities of certain smaller OTC companies
are the less certain growth prospects of comparably smaller firms, the lower
degree of liquidity in the OTC markets for such securities, and the greater
sensitivity of smaller capitalization companies to changing economic conditions
than larger capitalization, exchange-traded securities. Conversely, because many
of these OTC securities may be overlooked by investors and undervalued in the
marketplace, there is potential for significant capital appreciation.
FUTURES CONTRACTS AND RELATED OPTIONS
The ProFund may purchase or sell stock index futures contracts and options
thereon as a substitute for a comparable market position in the underlying
securities 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 the ProFund purchases a put or call option on a futures contract, the
ProFund pays a premium for the right to sell or purchase the underlying futures
contract for a specified price upon exercise at any time during the option
period. By writing (selling) a put or call option on a futures contract, the
ProFund receives a premium in return for granting to the purchaser of the option
the right to sell to or buy from the ProFund the underlying futures contract for
a specified price upon exercise at any time during the option period.
Whether the ProFund realizes a gain or loss from futures activities depends
generally upon movements in the underlying commodity. The extent of the
ProFund's loss from an unhedged short position in futures contracts or from
writing options on futures contracts is potentially unlimited. The ProFund may
engage in related closing transactions with respect to options on futures
contracts. The ProFund will 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 the ProFund purchases or sells a stock index futures contract, or
sells an option thereon, the ProFund "covers" its position. To cover its
position, the ProFund may enter into an offsetting position or maintain with its
custodian bank (and mark-to-market on a daily basis) a segregated account
consisting of liquid instruments that, when added to any amounts deposited with
a futures commission merchant as margin, are equal to the market value of the
futures contract or otherwise "cover" its position.
The ProFund 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 the ProFund would be excluded from the definition of
a "commodity pool operator." Under Section 4.5 of the CFTC Regulations, the
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 ProFund will cover its positions when it writes a futures contract or
option on a futures contract. The ProFund may "cover" its long position in a
futures contract by purchasing a put option on the same futures contract
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<PAGE>
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. The 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. The 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.
The 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. The 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. The 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. The ProFund may also cover its
sale of a put option by taking positions in instruments the prices of which are
expected to move relatively consistently with the put option.
Although the ProFund intends to sell futures contracts only if there is an
active market for such contracts, no assurance can be given that a liquid market
will exist for any particular contract at any particular time. Many futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a price
beyond that limit or trading may be suspended for specified periods during the
day. Futures contract prices could move to the limit for several consecutive
trading days with little or no trading, thereby preventing prompt liquidation of
futures positions and potentially subjecting the ProFund to substantial losses.
If trading is not possible, or if the ProFund determines not to close a futures
position in anticipation of adverse price movements, the ProFund will be
required to make daily cash payments of variation margin. The risk that the
ProFund will be unable to close out a futures position will be minimized by
entering into such transactions on a national exchange with an active and liquid
secondary market.
INDEX OPTIONS
The 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" on page 19.
A stock index fluctuates with changes in the market values of the stocks
included in the index. Options on stock indexes give the holder the right to
receive an amount of cash upon exercise of the option. Receipt of this cash
amount will depend upon the closing level of the stock index upon which the
option is based being greater than (in the case of a call) or less than (in the
case of a put) the exercise price of the option. The amount of cash received, if
any, will be the difference between the closing price of the index and the
exercise price of the option, multiplied by a specified dollar multiple. The
writer (seller) of the option is obligated, in return for the premiums received
from the purchaser of the option, to make delivery of this amount to the
purchaser. All settlements of index options transactions are in cash.
Index options are subject to substantial risks, including the risk of
imperfect correlation between the option price and the value of the underlying
securities composing the stock index selected and the risk that there might not
be a liquid secondary market for the option. Because the value of an index
option depends upon movements in the level of the index rather than the price of
a particular stock, whether the ProFund will realize a gain or loss from the
purchase or writing (sale) of options on an index depends upon movements in the
level of stock prices in the stock market generally or, in the case of certain
indexes, in an industry or market segment, rather than upon movements in the
price of a particular stock. Whether the ProFund will realize a profit or loss
by the use of options on stock
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indexes will depend on movements in the direction of the stock market generally
or of a particular industry or market segment. This requires different skills
and techniques than are required for predicting changes in the price of
individual stocks. The ProFund will not enter into an option position that
exposes the ProFund to an obligation to another party, unless the ProFund either
(i) owns an offsetting position in securities or other options and/or (ii)
maintains with the ProFund's custodian bank liquid instruments that, when added
to the premiums deposited with respect to the option, are equal to the market
value of the underlying stock index not otherwise covered.
The ProFund may engage in transactions in stock index options listed on
national securities exchanges or traded in the over-the-counter market as an
investment vehicle for the purpose of realizing the ProFund's investment
objective. Options on indexes are settled in cash, not by delivery of
securities. The exercising holder of an index option receives, instead of a
security, cash equal to the difference between the closing price of the
securities index and the exercise price of the option.
Some stock index options are based on a broad market index such as the S&P
500 Index, the NYSE Composite Index, or the AMEX Major Market Index, or on a
narrower index such as the Philadelphia Stock Exchange Over-the-Counter Index.
Options currently are traded on the Chicago Board Options Exchange (the "CBOE"),
the AMEX, and other exchanges ("Exchanges"). Purchased over-the-counter options
and the cover for written over-the-counter options will be subject to the
ProFund's 15% limitation on investment in illiquid securities. See "Illiquid
Securities" on page 11.
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 the ProFund may buy or sell;
however, the Advisor intends to comply with all limitations.
OPTIONS ON SECURITIES
The ProFund may buy and write (sell) options on securities for the purpose
of realizing its investment objective. By buying a call option, the ProFund has
the right, in return for a premium paid during the term of the option, to buy
the securities underlying the option at the exercise price. By writing a call
option on securities, the 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, the ProFund has the right, in
return for a premium paid during the term of the option, to sell the securities
underlying the option at the exercise price. By writing a put option, the
ProFund becomes obligated during the term of the option to purchase the
securities underlying the option at the exercise price 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, the
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, the 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 the ProFund
writes a put option, the ProFund will
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<PAGE>
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 the 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 the 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, the 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. The ProFund will realize a gain (or a loss) on a closing
purchase transaction with respect to a call or a put option previously written
by the ProFund if the premium, plus commission costs, paid by the ProFund to
purchase the call or put option to close the transaction is less (or greater)
than the premium, less commission costs, received by the ProFund on the sale of
the call or the put option. The ProFund also will realize a gain if a call or
put option which the ProFund has written lapses unexercised, because the ProFund
would retain the premium.
Although certain securities exchanges attempt to provide continuously
liquid markets in which holders and writers of options can close out their
positions at any time prior to the expiration of the option, no assurance can be
given that a market will exist at all times for all outstanding options
purchased or sold by the ProFund. If an options market were to become
unavailable, the ProFund would be unable to realize its profits or limit its
losses until the ProFund could exercise options it holds, and the ProFund would
remain obligated until options it wrote were exercised or expired.
SWAP AGREEMENTS
The 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 ProFund calculate the obligations
of the parties to the agreement on a "net basis." Consequently, the 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").
The 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 the 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 ProFund's illiquid
investment limitations. The 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.
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The 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 the ProFund is contractually obligated to make. If
the other party to a swap agreement defaults, the ProFund's risk of loss
consists of the net amount of payments that such ProFund is contractually
entitled to receive, if any. The net amount of the excess, if any, of the
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 the 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 ProFund and its
Advisor believe that transactions do not constitute senior securities under the
1940 Act and, accordingly, will not treat them as being subject to the ProFund's
borrowing restrictions.
The swap market has grown substantially in recent years with a large number
of banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid in comparison with the markets for other similar
instruments which are traded in the over-the-counter market. The Advisor, under
the supervision of the Board of Trustees, are responsible for determining and
monitoring the liquidity of the ProFunds' transactions in swap agreements.
The use of equity swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. Reasons for the absence of liquid secondary
market on an exchange include the following: (i) there may be insufficient
trading interest in certain options; (ii) restrictions may be imposed by an
exchange on opening or closing transactions or both; (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange or
the OCC may not at all times be adequate to handle current trading volume; or
(vi) one or more exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of options (or a
particular class or series of options) would cease to exist, although
outstanding options on that exchange that had been issued by the OCC as a result
of trades on that exchange would continue to be exercisable in accordance with
their terms.
U.S. GOVERNMENT SECURITIES
The ProFund also may invest in U.S. government securities in pursuit of its
investment objectives, as "cover" for the investment techniques the ProFund
employs, or for liquidity purposes.
Yields on U.S. government securities are dependent on a variety of factors,
including the general conditions of the money and bond markets, the size of a
particular offering, and the maturity of the obligation. Debt securities with
longer maturities tend to produce higher yields and are generally subject to
potentially greater capital appreciation and depreciation than obligations with
shorter maturities and lower yields. The market value of U.S. government
securities generally varies inversely with changes in market interest rates. An
increase in interest rates, therefore, would generally reduce the market value
of the ProFund's portfolio investments in U.S. government securities, while a
decline in interest rates would generally increase the market value of the
ProFund's portfolio investments in these securities.
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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
The ProFund may enter into repurchase agreements with financial
institutions. Under a repurchase agreement, the ProFund purchases a debt
security and simultaneously agrees to sell the security back to the seller at a
mutually agreed-upon future price and date, normally one day or a few days
later. The resale price is greater than the purchase price, reflecting an
agreed-upon market interest rate during the purchaser's holding period. While
the maturities of the underlying securities in repurchase transactions may be
more than one year, the term of each repurchase agreement will always be less
than one year. The ProFund follows 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, the 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. The ProFund also may
experience difficulties and incur certain costs in exercising its rights to the
collateral and may lose the interest the ProFund expected to receive under the
repurchase agreement. Repurchase agreements usually are for short periods, such
as one week or less, but may be longer. It is the current policy of the ProFund
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% of the ProFund's total net assets. The investments of
the ProFund 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, the ProFund may temporarily invest all
or part of the ProFund's assets in cash or cash equivalents, which include, but
are not limited to, short-term money market instruments, U.S. government
securities, certificates of deposit, bankers acceptances, or repurchase
agreements secured by U.S. government securities.
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REVERSE REPURCHASE AGREEMENTS
The ProFund may use reverse repurchase agreements as part of the ProFund's
investment strategy. Reverse repurchase agreements involve sales by the ProFund
of portfolio assets concurrently with an agreement by the ProFund to repurchase
the same assets at a later date at a fixed price. Generally, the effect of such
a transaction is that the ProFund 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 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 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 intends to use the
reverse repurchase technique only when it will be to the ProFund's advantage to
do so. The ProFund will establish a segregated account with its custodian bank
in which the ProFund will maintain cash or liquid instruments equal in value to
the ProFund's obligations in respect of reverse repurchase agreements.
BORROWING
The ProFund may borrow money for cash management purposes or investment
purposes. The ProFund may also enter into reverse repurchase agreements, which
may be viewed as a form of borrowing, with financial institutions. However, to
the extent the 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 ProFund. 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 the ProFund's assets will fluctuate in value, whereas the interest
obligations on borrowings may be fixed, the net asset value per share of the
ProFund will increase more when the ProFund's portfolio assets increase in value
and decrease more when the ProFund's portfolio assets decrease in value than
would otherwise be the case. Moreover, interest costs on borrowings may
fluctuate with changing market rates of interest and may partially offset or
exceed the returns on the borrowed funds. Under adverse conditions, the 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, the 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 ProFund is 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 ProFund is 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, the ProFund 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 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 ProFund any income
accruing thereon, and the ProFund may invest the cash collateral in portfolio
securities, thereby earning additional income. The ProFund will not lend more
than 331/3% of the value of the ProFund's total assets. Loans would be subject
to termination by the ProFund 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 ProFund and that
the ProFund'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. The ProFund may pay reasonable finders, borrowers, administrative,
and custodial fees in connection with a loan.
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WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
The 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 the ProFund makes the
commitment to purchase securities on a when-issued or delayed-delivery basis,
the ProFund will record the transaction and thereafter reflect the value of the
securities, each day, in determining the ProFund's net asset value. The ProFund
will not purchase securities on a when-issued or delayed-delivery basis if, as a
result, more than 15% of it'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 ProFund 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 the 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 ProFund 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 the ProFund invests in, and, thus, is a shareholder of, another
investment company, the ProFund's shareholders will indirectly bear the
ProFund's proportionate share of the fees and expenses paid by such other
investment company, including advisory fees, in addition to both the management
fees payable directly by the ProFund to the ProFund's own investment adviser and
the other expenses that the ProFund bears directly in connection with the
ProFund's own operations.
ILLIQUID SECURITIES
While the ProFund does not anticipate doing so, the ProFund 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. The ProFund will
not invest more than 15% of the ProFund's net assets in illiquid securities. The
term "illiquid securities" for this purpose means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the ProFund has valued the securities. Under
the current guidelines of the staff of the Securities and Exchange Commission
(the "Commission"), illiquid securities also are considered to include, among
other securities, purchased over-the-counter options, certain cover for over-
the-counter options, repurchase agreements with maturities in excess of seven
days, and certain securities whose disposition is restricted under the Federal
securities laws. The ProFund 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, the
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 the
ProFund have delegated this responsibility for determining the liquidity of Rule
144A restricted securities which may be invested in by the ProFund 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
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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 TURNOVER
As discussed in the Prospectus, the ProFund anticipates that its investors,
as part of their strategy, will frequently exchange shares of the ProFund for
shares in other ProFunds pursuant to the exchange policy, as well as frequently
redeem shares of the ProFund (see "Shareholders' Guide - How to Exchange Shares
of the ProFunds" in the Prospectus). The nature of the ProFund will cause the
ProFund 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 ProFund. In
addition, the ProFund's portfolio turnover level may adversely affect the
ability of the ProFund to achieve its investment objective. Because the
ProFund's portfolio turnover rate to a great extent will depend on the purchase,
redemption, and exchange activity of the ProFund's investors, it is difficult to
estimate what the ProFund's actual turnover rate will be in the future.
"Portfolio Turnover Rate" is defined under the rules of the Commission as the
value of the securities purchased or securities sold, excluding all securities
whose maturities at time of acquisition were one year or less, divided by the
average monthly value of such securities owned during the year. Based on this
definition, instruments with remaining maturities of less than one year are
excluded from the calculation of portfolio turnover rate. Instruments excluded
from the calculation of portfolio turnover generally would include the futures
contracts and option contracts in which the ProFund invests 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 the
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 ProFund present
certain risks, some of which are further described below.
TRACKING ERROR. While the ProFund does not expect that its return over a
year will deviate adversely from NASDAQ 100TM by more than ten percent, several
factors may affect its 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
ProFund; (2) less than all of the securities in the NASDAQ 100TM being held by
the ProFund and securities not included in the NASDAQ 100TM being held by the
ProFund; (3) an imperfect correlation between the performance of instruments
held by the ProFund, such as futures contracts and options, and the performance
of the underlying securities in the cash market; (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 the 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 the ProFund trade, resulting in the inability of the
ProFund to execute intended portfolio transactions. While a close correlation of
the ProFund to its benchmark may be achieved on any single trading day, over
time the cumulative percentage increase or decrease in the net asset value of
the shares of the ProFund may diverge significantly from the cumulative
percentage decrease or increase in the benchmark due to a compounding effect.
NON-DIVERSIFIED STATUS. The ProFund is a "non-diversified" series. The
ProFund is considered "non-diversified" because a relatively high percentage of
the ProFund's assets may be invested in the securities of a limited number of
issuers, primarily within the same economic sector. 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. The ProFund's classification as a "non-
diversified" investment company means that the proportion of the ProFund's
assets that may be invested in the securities of a single issuer is not limited
by the 1940 Act. The ProFund, however, intends to seek to qualify as a
"regulated investment company" for purposes of the Code, which imposes
diversification requirements on the ProFund that are less restrictive than the
requirements applicable to the "diversified" investment companies under the 1940
Act.
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INVESTMENT RESTRICTIONS
The ProFund has 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, 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 the 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.
The 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 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 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 331/3%
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 1933 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
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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 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.
The net asset value of each class of shares of the ProFund serves as the
basis for the purchase and redemption price of that class of shares. The net
asset value per share of each class of the ProFund is calculated by dividing the
market value of the ProFund's assets attributed to a specific class less all
liabilities attributed to the specific class, by the number of outstanding
shares of the class. If market quotations are not readily available, a security
will be valued at fair value by the Trustees of ProFunds or by the Advisor using
methods established or ratified by the Trustees of ProFunds.
The securities in the portfolio of the ProFund, except as otherwise noted,
that are listed or traded on a stock exchange, are valued on the basis of the
last sale on that day or, lacking any sales, at a price that is the mean between
the closing bid and asked prices. Other securities that are traded on the OTC
markets are priced using NASDAQ, which provides information on bid and asked
prices quoted by major dealers in such stocks. Bonds, other than convertible
bonds, are valued using a third-party pricing system. Convertible bonds are
valued using this pricing system only on days when there is no sale reported.
Short-term debt securities are valued using this pricing system only on days
when there is no sale reported. Short-term debt securities are valued at
amortized cost, which approximates market value. When market quotations are not
readily available, securities and other assets are valued at fair value as
determined in good faith under procedures established by and under the general
supervision and responsibility of the ProFunds' Board of Trustees.
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 established future exchanges. Options on
securities and indices purchased by the 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 that cause the
exchange to close prior to the close of the NYSE, futures contracts will be
valued on the basis of 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 the ProFund, the
selection of brokers and dealers to effect the transactions, and the negotiation
of brokerage commissions, if any. The Advisor expects that the ProFund may
execute brokerage or other agency transactions through registered
broker-dealers, for a commission, in conformity with the 1940 Act, the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder. 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.
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The policy of the ProFund regarding purchases and sales of securities for
the 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,
the 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. The 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 the 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 the ProFund
directly. While the receipt of such information and services is useful in
varying degrees and would generally reduce the amount of research or services
otherwise performed by the Advisor and thereby reduce the Advisor's expenses,
this information and these services are of indeterminable value and the
management fee paid to the Advisor is not reduced by any amount that may be
attributable to the value of such information and services.
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 ProFund are the
responsibilities of the 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): 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.
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NIMISH BHATT: (birthdate: June 6, 1963) Treasurer; BISYS Fund Services,
Vice President, Tax and Financial Services; Evergreen Funds/First Union Bank,
Assistant Vice President; Price Waterhouse LLP, Senior Tax Consultant. His
address is 3435 Stelzer Road, Columbus, Ohio 43219.
MICHAEL C. WACHS (birthdate: October 21, 1961): Trustee; Delancy Investment
Group, Inc., Vice President; First Union National Bank, Vice President/Senior
Underwriter; First Union Capital Markets Corp., Vice President; Vice
President/Senior Credit Officer; Vice President/Team Leader. His address is 1528
Powder Mill Lane, Wynnewood, Pennsylvania 19096.
RUSSELL S. REYNOLDS, III (birthdate: July 21, 1957): Trustee; Directorship,
Inc., Managing Director, Chief Financial Officer and Secretary; Quadcom
Services, Inc., President. His address is 7 Stag Lane, Greenwich, Connecticut
06831.
_______________
* This Trustee is deemed to be an "interested person" within the meaning of
Section 2(a)(19) of the 1940 Act, inasmuch as this person is affiliated
with the Advisor, as described herein.
PROFUNDS TRUSTEE COMPENSATION TABLE
The following table reflects actual fees paid to the Trustees for the year
ended December 31, 1999.
TRUSTEE NAME: POSITION COMPENSATION
- ---------------------- ------------
Michael L. Sapir, Trustee, Chairman and Chief Executive Officer None
Louis M. Mayberg, Trustee, President, None
Secretary
Michael C. Wachs, Trustee $3,750
Russell S. Reynolds, III, Trustee $5,000
PROFUND ADVISORS LLC
Under an investment advisory agreement between the ProFund and the Advisor,
dated May __, 2000, the ProFund pays the Advisor a fee at an annualized rate,
based on its average daily net assets, of 0.75%. The Advisor manages the
investment and the reinvestment of the assets of the ProFunds, in accordance
with the investment objectives, policies, and limitations of the ProFund,
subject to the general supervision and control of Trustees and the officers of
ProFunds. The Advisor bears all costs associated with providing these advisory
services. The Advisor, from its own resources, including profits from advisory
fees received from the ProFunds, 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 the
ProFund's shares. The Advisors address is 7900 Wisconsin Avenue, Suite 300,
Bethesda, Maryland 20814.
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 ProFund. The Administrator provides the ProFund
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 ProFund under Federal and state
securities laws. The Administrator also maintains the shareholder account
records for the ProFund, distributes dividends and distributions payable by the
ProFund, and produces statements with respect to account activity for the
ProFund and their shareholders. The Administrator pays all fees and expenses
that
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are directly related to the services provided by the Administrator to the
ProFund; the 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 ProFund under the service agreement.
For its services as Administrator, the ProFund pays BISYS an annual fee
ranging from 0.15% of average daily net assets of $0 to $300 million to 0.05% of
average daily net assets of $1 billion and over. BISYS Funds Services, Inc.
("BFSI"), an affiliate of BISYS, acts as transfer agent and fund accounting
agent for the ProFund, for which it receives additional fees. Additionally,
ProFunds and BISYS and BFSI have entered into an Omnibus Fee Agreement in which
the amount of compensation due and payable to BISYS shall be the greater of (i)
the aggregate fee amount due and payable for services pursuant to the
Administration, Fund Accounting and Transfer Agency Agreements and (ii) the
minimum relationship fee described as specific dollar amounts payable over a
period of ten calendar quarters ($1,100,000). The address for BISYS and BFSI is
3435 Stelzer Road, Suite 1000, Columbus, Ohio 43219.
The Adviser, pursuant to a separate Management Services Agreement, performs
certain client support and other administrative services on behalf of the
ProFund. For these services, the ProFund will pay to the Advisor a fee at the
annual rate of 0.15% of its average daily net assets.
UMB Bank, N.A. acts as custodian to the ProFund. UMB Bank, N.A.'s address
is 928 Grand Avenue, Kansas City, Missouri.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP serves as independent auditor to the ProFunds.
PricewaterhouseCoopers LLP provides audit services, tax return preparation and
assistance and consultation in connection with certain SEC filings.
PricewaterhouseCoopers LLP is located at 100 East Broad Street, Columbus, Ohio
43215.
LEGAL COUNSEL
Dechert Price & Rhoads serves as counsel to the ProFunds. The firm's
address is 1775 Eye Street, N.W., Washington, DC 20006-2401.
DISTRIBUTOR
Concord Financial Group, Inc. will serve as the distributor and principal
underwriter in all fifty states and the District of Columbia. Concord Financial
Group, Inc. receives no compensation from the ProFund for serving as
distributor. Concord Financial Group, Inc.'s address is 3435 Stelzer Road,
Columbus, Ohio 43219.
SHAREHOLDER SERVICES PLAN
The ProFund has adopted a Shareholder Services Plan (the "Plan") which
provides that the ProFund will make payments equal to 1.00% (on an annual basis)
of the average daily value of the net assets of the ProFund's Adviser shares
attributable to or held in the name of investment advisers and other authorized
institutions that sell Service Shares ("Authorized Firms") for providing account
administration services to their clients who are beneficial owners of such
shares. The Administrator may act as an Authorized Firm. The Trust will enter
into agreements ("Shareholder Services Agreements") with Authorized Firms that
purchase Service Shares on behalf of their clients. The Shareholder Services
Agreements will provide for compensation to the Authorized Firms in an amount up
to 1.00% (on an annual basis) of the average daily net assets of the Service
shares of the ProFund attributable to or held in the name of the Authorized Firm
for its clients. The ProFund 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, have 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. 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
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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 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 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
ProFund and holders of Service Shares of the ProFund. 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 the 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
the ProFund's Service Shares and growth of the ProFund. In light of this, the
ProFund intends to observe the procedural requirements of Rule 12b-1 under the
1940 Act on considering the continued appropriateness of the Plan and
Shareholder Services Agreements.
COSTS AND EXPENSES
The ProFund bears all expenses of its operations other than those assumed
by the Advisor or the Administrator. The ProFund expenses include: the
management fee; the servicing fee (including administrative, transfer agent, and
shareholder servicing fees); custodian and accounting fees and expenses, legal
and auditing fees; securities valuation expenses; fidelity bonds and other
insurance premiums; expenses of preparing and printing prospectuses,
confirmations, proxy statements, and shareholder reports and notices;
registration Trustees and expenses; proxy and annual meeting expenses, if any;
all Federal, state, and local taxes (including, without limitation, stamp,
excise, income, and franchise taxes); organizational costs; and non-interested
Trustees' fees and expenses.
ORGANIZATION AND DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
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 forty-one separately managed series. Other separate series may be
added in the future. The 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 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 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.
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If the 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.
TAXATION
Set forth below is a discussion of certain U.S. federal income tax issues
concerning the ProFund and the purchase, ownership, and disposition of ProFund
shares. This discussion does not purport to be complete or to deal with all
aspects of federal income taxation that may be relevant to shareholders in light
of their particular circumstances, nor to certain types of shareholders subject
to special treatment under the federal income tax laws (for example, banks and
life insurance companies). This discussion is based upon present provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), the regulations
promulgated thereunder, and judicial and administrative ruling authorities, all
of which are subject to change, which change may be retroactive. Prospective
investors should consult their own tax advisors with regard to the federal tax
consequences of the purchase, ownership, or disposition of ProFund shares, as
well as the tax consequences arising under the laws of any state, foreign
country, or other taxing jurisdiction.
Dividends out of net ordinary income and distribution of net short-term
capital gains are taxable to the recipient U.S. shareholders as ordinary income,
whether received in cash or reinvested in ProFund shares. Dividends from net
ordinary income may be eligible for the corporate dividends-received deduction.
The excess of net long-term capital gains over the net short-term capital
losses realized and distributed by the ProFund to its U.S. shareholders as
capital gains distributions is taxable to the shareholders as gain from the sale
of a capital asset held for more than one year, regardless of the length of time
a shareholder has held the ProFund shares. 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
the ProFund during October, November or December of a year to shareholder of
record as of a specified date in such a month that is paid during January of the
following year will be deemed to be received by shareholders on December 31 of
the prior year.
Any dividend or distribution paid by the ProFund has the effect of reducing
the ProFund's net asset value per share. Investors should be careful to consider
the tax effect of buying shares shortly before a distribution by the ProFund.
The price of shares purchased at that time will include the amount of the
forthcoming distribution, but the distribution will be taxable to the
shareholder.
A dividend or capital gains distribution with respect to shares of the
ProFund held by a tax-deferred or qualified plan, such as an IRA, retirement
plan or corporate pension or profit sharing plan, will not be taxable to the
plan. Distribution from such plans will be taxable to individual participants
under applicable tax rules without regard to the character of the income earned
by the qualified plan.
Shareholders will be advised annually as to the federal tax status of
dividends and capital gains distributions made by the ProFund for the preceding
year. Distributions by the ProFund generally will be subject to state and local
taxes.
The ProFund intends to qualify and elects 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, the 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
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than 25% of the value of its total assets is invested in the securities of any
one issuer (other than U.S. government securities and the securities of other
regulated investment companies).
As a regulated investment company, the 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. The 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, the 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 ProFund intends to make distributions in
accordance with the calendar year distribution requirement. A distribution will
be treated as paid on December 31 of a calendar year if it is declared by the
ProFund in October, November or December of that year with a record date in such
a month and paid by the ProFund during January of the following year. Such
distributions will be taxable to shareholders in the calendar year in which the
distributions are declared, rather than the calendar year in which the
distributions are received.
MARKET DISCOUNT
If the 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 the 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 ProFund 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 the 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 ProFund 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 the 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
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losses; however foreign currency gains or losses arising from certain section
1256 contracts are ordinary in character. Also, section 1256 contracts held by
the 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
ProFund may result in "straddles" for federal income tax purposes. The straddle
rules may affect the character of gains (or losses) realized by the 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 the 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 ProFund are not
entirely clear. The straddle rules may increase the amount of short-term capital
gain realized by the ProFund, which is taxed as ordinary income when distributed
to shareholders. Because application of the straddle rules may affect the
character of gains or losses, defer losses and/or accelerate the recognition of
gains or losses from the affected straddle positions, the amount which must be
distributed to shareholders as ordinary income or long-term capital gain may be
increased or decreased substantially as compared to a fund that did not engage
in such transactions.
CONSTRUCTIVE SALES
Recently enacted rules may affect the timing and character of gain if the
ProFund engages in transactions that reduce or eliminate its risk of loss with
respect to appreciated financial positions. If the ProFund enters into certain
transactions in property while holding substantially identical property, the
ProFund would be treated as if it had sold and immediately repurchased the
property and would be taxed on any gain (but not loss) from the constructive
sale. The character of gain from a constructive sale would depend upon the
ProFund's holding period in the property. Loss from a constructive sale would be
recognized when the property was subsequently disposed of, and its character
would depend on the ProFund's holding period and the application of various loss
deferral provisions of the Code.
PASSIVE FOREIGN INVESTMENT COMPANIES
The ProFund may invest in shares of foreign corporations that may be
classified under the Code as passive foreign investment companies ("PFICs"). In
general, a foreign corporation is classified as a PFIC if at least one-half of
its assets constitute investment-type assets, or 75% or more of its gross income
is investment-type income. If the 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. The ProFund will
itself be subject to tax on the portion, if any, of an excess distribution that
is so allocated to prior ProFund taxable years and an interest factor will be
added to the tax, as if the tax had been payable in such prior taxable years.
Certain distributions from a PFIC as well as gain from the sale of PFIC shares
are treated as excess distributions. Excess distributions are characterized as
ordinary income even though, absent application of the PFIC rules, certain
excess distributions might have been classified as capital gains.
The ProFund may be eligible to elect alternative tax treatment with respect
to PFIC shares. Under an election that currently is available in some
circumstances, the 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.
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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 the ProFund to a corporate shareholder, to the extent such dividends are
attributable to dividends received from U.S. corporations by the ProFund, may
qualify for the dividends received deduction. However, the revised alternative
minimum tax applicable to corporations may deduct the value of the dividends
received deduction. Distributions of net capital gains (the excess of net long-
term capital gains over net short-term capital losses), if any, designated by
the ProFund as capital gain dividends, whether paid in cash or in shares, are
taxable as gain from the sale or exchange of an asset held for more than one
year, regardless of how long the shareholder has held the ProFund's shares.
Capital gains dividends are not eligible for the dividends received deduction.
Shareholders will be notified annually as to the U.S. federal tax status of
distributions, and shareholders receiving distributions in the form of newly
issued shares will receive a report as to the net asset value of the shares
received.
If the net asset value of shares is reduced below a shareholder's cost as a
result of a distribution by the 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 the 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, the ProFund will change the distribution option
so that all distributions are automatically reinvested in additional shares. The
ProFund will not pay interest on uncashed distribution checks.
DISPOSITION OF SHARES
Upon a redemption, sale or exchange of shares of the 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 the 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
The 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
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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
The 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, the ProFund may on its tax return treat
as a distribution of investment company taxable income and net capital gain the
portion of redemption proceeds paid to redeeming shareholders that represents
the redeeming shareholders' portion of the ProFund's undistributed investment
company taxable income and net capital gain. This practice, which involves the
use of equalization accounting, will have the effect of reducing the amount of
income and gains that the ProFund is required to distribute as dividends to
shareholders in order for the ProFund to avoid federal income tax and excise
tax. This practice may also reduce the amount of distributions required to be
made to nonredeeming shareholders and the amount of any undistributed income
will be reflected in the value of the ProFund's shares; the total return on a
shareholder's investment will not be reduced as a result of the ProFund's
distribution policy. Investors who purchase shares shortly before the record
date of a distribution will pay the full price for the shares and then receive
some portion of the price back as a taxable distribution.
PERFORMANCE INFORMATION
TOTAL RETURN CALCULATIONS
From time to time, the ProFund may advertise the total return of the
ProFund for prior periods. Any such advertisement would include at least average
annual total return quotations for one, five, and ten-year periods, or for the
life of the ProFund. Other total return quotations, aggregate or average, over
other time periods for the ProFund also may be included.
The total return of the ProFund for a particular period represents the
increase (or decrease) in the value of a hypothetical investment in the ProFund
from the beginning to the end of the period. Total return is calculated by
subtracting the value of the initial investment from the ending value and
showing the difference as a percentage of the initial investment; this
calculation assumes that the initial investment is made at the current net asset
value and that all income dividends or capital gains distributions during the
period are reinvested in shares of the ProFund at net asset value. Total return
is based on historical earnings and asset value fluctuations and is not intended
to indicate future performance. No adjustments are made to reflect any income
taxes payable by shareholders on dividends and distributions paid by the
ProFund.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equal the initial amount invested to the ending redeemable value.
COMPARISONS OF INVESTMENT PERFORMANCE
In conjunction with performance reports, promotional literature, and/or
analyses of shareholder service for the 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, and Wilshire Associates,
all of which are unmanaged market indicators. Such comparisons can be a useful
measure of the quality of the ProFund's investment performance. Performance
information for the ProFund may be compared to various unmanaged indexes,
including, but not limited to its current benchmark, the NASDAQ 100 IndexTM.
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,
----- ------ -------------------- -----------------
23
<PAGE>
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 the 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 ProFund in performance reports, will be drawn from the
"Small Company Growth ProFunds" grouping for the ProFund. In addition, the
broad-based Lipper groupings may be used for comparison to the ProFund.
Further information about the performance of the ProFund will be contained
in the ProFund's annual reports to shareholders, which may be obtained without
charge by writing to the ProFund at the address or telephoning the ProFund at
the telephone number set forth on the cover page of this SAI. However, because
the ProFund has no history of investment operations, it has not yet prepared any
shareholder reports.
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,
the Advisor also makes its own evaluation of these securities, subject to review
by the Board of Trustees. After purchase by the Portfolio, an obligation may
cease to be rated or its rating may be reduced below the minimum required for
purchase by the Portfolio. Neither event would require the Portfolio to
eliminate the obligation from its portfolio, but the Advisor 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 Profund is not sponsored, endorsed, sold or promoted by the NASDAQ
Stock Markets, Inc. ("NASDAQ"). NASDAQ make no representation or warranty,
express or implied, to its owners of shares of the ProFund or any member of the
public regarding the advisability of investing in securities generally or in the
ProFund particularly or the ability of the NASDAQ 100 IndexTM to track general
stock market performance. NASDAQ's only relationship to the ProFund (the
"Licensee") is the licensing of certain trademarks and trade names of NASDAQ and
of the NASDAQ 100 IndexTM . NASDAQ has no obligation to take the needs of the
Licensee or owners of the shares of the ProFund into consideration in
determining, composing or calcualating the NASDAQ 100 IndexTM. NASDAQ is not
responsible for and has not participated in the determination or calculation of
the equation by which the shares of the ProFund is to be converted into cash.
NASDAQ has no obligation or liability in connection with administration,
marketing or trading of the ProFund.
FINANCIAL STATEMENTS
Since the ProFund had not commenced operations 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 REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE PROFUND. THIS STATEMENT OF ADDITIONAL
INFORMATION DOES NOT CONSTITUTE AN OFFERING BY THE PROFUND IN ANY JURISDICTION
IN WHICH SUCH AN OFFERING MAY NOT LAWFULLY BE MADE.
24
<PAGE>
APPENDIX
DESCRIPTION OF SECURITIES RATINGS
DESCRIPTION OF S&P'S CORPORATE RATINGS:
AAA-Bonds rated AAA have the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA-Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issuers only in small degree.
S&P's letter ratings may be modified by the addition of a plus or a minus
sign, which is used to show relative standing within the major categories,
except in the AAA rating category.
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS:
Aaa-Bonds which are rated Aaa are judged to be the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt-
edge". Interest payments are protected by a large or exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa-Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
Moody's applies the numerical modifiers 1, 2 and 3 to each generic rating
classification from Aa through B. The modifier 1 indicates that the security
ranks in the higher end of its generic category; the modifier 2 indicates a mid-
range ranking; and the modifier 3 indicates that the issue ranks in the lower
end of its generic rating category.
DESCRIPTION OF FITCH INVESTORS SERVICE'S CORPORATE BOND RATINGS:
AAA-Securities of this rating are regarded as strictly high-grade, broadly
marketable, suitable for investment by trustees and fiduciary institutions, and
liable to slight market fluctuation other than through changes in the money
rate. The factor last named is of importance varying with the length of
maturity. Such securities are mainly senior issues of strong companies, and are
most numerous in the railway and public utility fields, though some industrial
obligations have this rating. The prime feature of an AAA rating is showing of
earnings several times or many times interest requirements with such stability
of applicable earnings that safety is beyond reasonable question whatever
changes occur in conditions. Other features may enter in, such as a wide margin
of protection through collateral security or direct lien on specific property as
in the case of high class equipment certificates or bonds that are first
mortgages on valuable real estate. Sinking funds or voluntary reduction of the
debt by call or purchase are often factors, while guarantee or assumption by
parties other than the original debtor may also influence the rating.
AA-Securities in this group are of safety virtually beyond question, and as
a class are readily salable while many are highly active. Their merits are not
greatly unlike those of the AAA class, but a security so rated may be of junior
though strong lien in many cases directly following an AAA security or the
margin of safety is less strikingly broad. The issue may be the obligation of a
small company, strongly secure but influenced as the ratings by the lesser
financial power of the enterprise and more local type of market.
A-1
<PAGE>
DESCRIPTION OF DUFF & PHELPS' CORPORATE BOND RATINGS:
AAA-Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury Funds.
AA+, AA-High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
DESCRIPTION OF S&P'S MUNICIPAL BOND RATINGS:
AAA-Prime-These are obligations of the highest quality. They have the
strongest capacity for timely payment of debt service.
General Obligation Bonds-In a period of economic stress, the issuers will
suffer the smallest declines in income and will be least susceptible to
autonomous decline. Debt burden is moderate. A strong revenue structure appears
more than adequate to meet future expenditure requirements. Quality of
management appears superior.
Revenue Bonds-Debt service coverage has been, and is expected to remain,
substantial; stability of the pledged revenues is also exceptionally strong due
to the competitive position of the municipal enterprise or to the nature of the
revenues. Basic security provisions (including rate covenant, earnings test for
issuance of additional bonds and debt service reserve requirements) are
rigorous. There is evidence of superior management.
AA-High Grade-The investment characteristics of bonds in this group are
only slightly less marked than those of the prime quality issues. Bonds rated AA
have the second strongest capacity for payment of debt service.
S&P's letter ratings may be modified by the addition of a plus or a minus
sign, which is used to show relative standing within the major rating
categories, except in the AAA rating category.
DESCRIPTION OF MOODY'S MUNICIPAL BOND RATINGS:
Aaa-Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa-Bonds which are rated Aa judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities, or fluctuation of protective elements
may be of greater amplitude, or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
Moody's may apply the numerical modifier in each generic rating
classification from Aa through B. The modifier 1 indicates that the security
within its generic rating classification possesses the strongest investment
attributes.
DESCRIPTION OF S&P'S MUNICIPAL NOTE RATINGS:
Municipal notes with maturities of three years or less are usually given
note ratings (designated SP-1 or SP-2) to distinguish more clearly the credit
quality of notes as compared to bonds. Notes rated SP-1 have a very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given the designation of SP-1+.
Notes rated SP-2 have a satisfactory capacity to pay principal and interest.
A-2
<PAGE>
DESCRIPTION OF MOODY'S MUNICIPAL NOTE RATINGS:
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade (MIG) and for variable rate demand
obligations are designated Variable Moody's Investment Grade (VMIG). This
distinction recognizes the differences between short-term credit risk and long-
term risk. Loans bearing the designation MIG-1/VMIG-1 are of the best quality,
enjoying strong protection from established cash flows of funds for their
servicing or from established and broad-based access to the market for
refinancing, or both. Loans the designation MIG-2/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-3
<PAGE>
A-Obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is strong, although
adverse changes in business, economic or financial conditions may lead to
increased investment risk.
BBB-Capacity for timely repayment of principal and interest is adequate,
although adverse changes in business, economic or financial conditions are more
likely to lead to increased investment risk than for obligations in higher
categories.
BB-Obligations for which there is a possibility of investment risk
developing. Capacity for timely repayment of principal and interest exists, but
is susceptible over time to adverse changes in business, economic or financial
conditions.
B-Obligations for which investment risk exists. Timely repayment of
principal and interest is not sufficiently protected against adverse changes in
business, economic or financial conditions.
CCC-Obligations for which there is a current perceived possibility of
default. Timely repayment of principal and interest is dependent on favorable
business, economic or financial conditions.
CC-Obligations which are highly speculative or which have a high risk of
default.
C-Obligations which are currently in default.
Notes: "+" or "-".
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'.
A-4
<PAGE>
TWB-3-The lowest investment-grade category; indicates that while the
obligation is more susceptible to adverse developments (both internal and
external) than those with higher ratings, the capacity to service principal and
interest in a timely fashion is considered adequate.
TWB-4-The lowest rating category; this rating is regarded as non-investment
grade and therefore speculative.
DESCRIPTION OF THOMSON BANKWATCH LONG-TERM RATINGS:
AAA-The highest category; indicates that the ability to repay principal and
interest on a timely basis is extremely high.
AA-The second -highest category; indicates a very strong ability to repay
principal and interest on a timely basis, with limited incremental risk compared
to issues rated in the highs category.
A-The third-highest category; indicates the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
BBB-The lowest investment-grade category; indicates an acceptable capacity
to repay principal and interest. Issues rated "BBB" are, however, more
vulnerable to adverse developments (both internal and external) than obligations
with higher ratings.
NON-INVESTMENT GRADE (ISSUES REGARDED AS HAVING SPECULATIVE CHARACTERISTICS IN
THE LIKELIHOOD OF TIMELY REPAYMENT OF PRINCIPAL AND INTEREST.)
BB-While not investment grade, the "BB" rating suggests that the likelihood
of default is considerably less than for lower-rated issues. However, there are
significant uncertainties that could affect the ability to adequately service
debt obligations.
B-Issues rated "B" show a higher degree of uncertainty and therefore
greater likelihood of default than higher-rated issues. Adverse development
could well negatively affect the payment of interest and principal on a timely
basis.
CCC-Issues rate "CCC" clearly have a high likelihood of default, with
little capacity to address further adverse changes in financial circumstances.
CC-"CC" is applied to issues that are subordinate to other obligations
rated "CCC" and are afforded less protection in the event of bankruptcy or
reorganization.
D-Default
These long-term debt ratings can also be applied to local currency debt. In
such cases the ratings defined above will be preceded by the designation "local
currency".
A RATING IN THE LONG-TERM DEBT CATEGORIES MAY INCLUDE A PLUS (+) OR MINUS (-)
DESIGNATION, WHICH INDICATES WHERE WITHIN THE RESPECTIVE CATEGORY THE ISSUE IS
PLACED.
A-5
<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 One 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)
<PAGE>
(d)(4) Investment Advisory Agreement for UltraEurope and
UltraShort Europe ProFunds (4)
(d)(5) Form of Amended and Restated Investment Advisory
Agreement (8)
(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)
(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 ('40 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)
(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
(previously o(2))(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)
(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.
<PAGE>
(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.
(8) Previously filed on December 23, 1999 as part of Post-Effective Amendment
No. 10 and incorporated by reference herein.
* To be filed by Amendment
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 under certain circumstances. Such officers 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
<PAGE>
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 Registrant provides that if of the 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.
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:
Name Principal Position and Offices Position and Offices
with CFG with Registrant
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
<PAGE>
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 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 has duly caused this Post-Effective
Amendment No. 11 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Washington, D.C. on this 13th day of
March, 2000.
PROFUNDS
/S/ MICHAEL L. SAPIR*
Michael L. Sapir, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Post-Effective
Amendment No. 11 to the Registration Statement to be signed by the following
persons in the capacities and on the date indicated.
Signatures Title Date
/s/ MICHAEL L. SAPIR* Trustee, President March 13, 2000
Michael L. Sapir
/s/ LOUIS MAYBERG* Trustee, Secretary March 13, 2000
Louis Mayberg
/s/ RUSSELL S. REYNOLDS, III* Trustee March 13, 2000
Russell S. Reynolds, III
/s/ MICHAEL WACHS* Trustee March 13, 2000
Michael Wachs
/s/ GARY TENKMAN* Treasurer March 13, 2000
GARY TENKMAN
*By: /s/ KEITH T. ROBINSON
Keith T. Robinson
as Attorney-in-Fact
