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PROFUNDS
STATEMENT OF ADDITIONAL INFORMATION
7900 WISCONSIN AVENUE, SUITE 300
BETHESDA, MARYLAND 20814
(888) 776-3637 RETAIL SHAREHOLDERS
(888) 776-5717 (FINANCIAL PROFESSIONALS ONLY)
This Statement of Additional Information describes the 17 UltraSector
ProFunds, which are the Basic Materials UltraSector ProFund, the Biotechnology
UltraSector ProFund, the Consumer Cyclical UltraSector ProFund, the Consumer
Non-Cyclical UltraSector ProFund, the Energy UltraSector ProFund, the Financial
UltraSector ProFund, the Healthcare UltraSector ProFund, the Industrial
UltraSector ProFund, the Internet UltraSector ProFund, the Pharmaceuticals
UltraSector ProFund, the Precious Metals UltraSector ProFund, the Real Estate
UltraSector ProFund, the Semiconductor UltraSector ProFund, the Technology
UltraSector ProFund, the Telecommunications UltraSector ProFund, the Utilities
UltraSector ProFund and the Wireless Communications UltraSector ProFund
(collectively, the "ProFunds"). Each ProFund offers two classes of shares:
Service Shares and Investor Shares. The ProFunds may be used by professional
money managers and investors as part of an asset-allocation or market-timing
investment strategy or to create specified investment exposure to a particular
segment of the securities market or to hedge an existing investment portfolio.
The ProFunds may be used independently or in combination with each other as part
of an overall investment strategy.
The ProFunds involve special risks, some not traditionally associated with
mutual funds. Investors should carefully review and evaluate these risks in
considering an investment in the ProFunds to determine whether an investment in
a particular ProFund is appropriate. None of the ProFunds alone constitutes a
balanced investment plan. Each 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
investment objectives of the ProFunds will be achieved.
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the ProFunds' Prospectus, dated [ ], 2000, as
supplemented from time to time, which incorporates this Statement of Additional
Information by reference. Words or phrases used in the Statement of Additional
Information without definition have the same meaning as ascribed to them in the
Prospectus. A copy of the Prospectus is available, without charge, upon request
to the address above or by telephoning at the telephone numbers above.
The date of this Statement of Additional Information is [ ], 2000.
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TABLE OF CONTENTS
PAGE
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ProFunds.................................................................
Investment Policies and Techniques.......................................
Investment Restrictions..................................................
Determination of Net Asset Value.........................................
Portfolio Transactions and Brokerage.....................................
Management of ProFunds...................................................
Costs and Expenses.......................................................
Organization and Description of Shares of Beneficial Interest............
Taxation.................................................................
Performance Information..................................................
Financial Statements.....................................................
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PROFUNDS
ProFunds (the "Trust") is an open-end management investment company, and
currently comprises thirty-nine separate series. Seventeen of the series are
discussed herein. All of the ProFunds are classified as non-diversified,
although they currently intend to operate in a diversified manner. Other
series may be added in the future. The ProFunds may be used independently or in
combination with each other as part of an overall investment strategy.
Shares of any ProFund may be exchanged, without any charge, for shares of the
same class of any other ProFund on the basis of the respective net asset
values of the shares involved; provided that, in connection with exchanges
for shares of the ProFund, certain minimum investment levels are maintained
(see "Shareholders Services -- Exchanges " in the Prospectus).
INVESTMENT POLICIES AND TECHNIQUES
GENERAL
Reference is made to the Prospectus for a discussion of the investment
objectives and policies of the ProFunds. In addition, set forth below is
further information relating to the ProFunds. The discussion below supplements
and should be read in conjunction with the Prospectus. Portfolio management is
provided to the ProFunds by its investment adviser, ProFund Advisors LLC, a
Maryland limited liability company with offices at 7900 Wisconsin Avenue, NW,
Bethesda, Maryland (the "Advisor").
Certain investment restrictions of a ProFund specifically identified as
fundamental policies may not be changed without the affirmative vote of at least
the majority of the outstanding shares of that ProFund, as defined in the
Investment Company Act of 1940, as amended (the "1940 Act"). All other
investment objectives or investment policies of the ProFunds not specified as
fundamental (including the benchmarks of the ProFunds) may be changed by the
Trustees of the Trust without the approval of shareholders.
It is the policy of the ProFunds to pursue their investment objectives and
investment strategies regardless of market conditions, to remain nearly fully
invested and not to take defensive positions.
The investment strategies of the ProFunds discussed below, and as discussed in
the Prospectus, may be used by a ProFund if, in the opinion of the Advisor,
these strategies will be advantageous to the ProFunds. The ProFunds are free to
reduce or eliminate the ProFunds' activity in any of those areas without
changing the ProFunds fundamental investment policies. There is no assurance
that any of these strategies or any other strategies and methods of investment
available to a ProFund will result in the achievement of its objective.
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and general investment polices of each ProFund are
described in the Prospectus. Each ProFund seeks to provide daily investment
results, before fees and expenses, that correspond to 150% of the performance of
a specified Dow Jones sector index. The ProFunds invest as described in the
Prospectus in order to produce leveraged investment results. The combination of
sector-specific funds and leveraging may increase the volatility of the
ProFunds.
Additional information concerning the characteristics of the ProFunds'
investments is set forth below.
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EQUITY SECURITIES
The market price of securities owned by a ProFund may go up or down, sometimes
rapidly or unpredictably. Securities may decline in value due to factors
affecting securities markets generally or particular industries represented in
the securities markets. The value of a security may decline due to general
market conditions which are not specifically related to a particular company,
such as real or perceived adverse economic conditions, changes in the general
outlook for corporate earnings, changes in interest or currency rates, or
adverse investor sentiment generally. They may also decline due to factors
which affect a particular industry or industries, such as labor shortages or
increased production costs and competitive conditions within an industry. The
value of a security may also decline for a number of reasons which directly
relate to the issuer, such as management performance, financial leverage and
reduced demand for the issuer's goods or services. Equity securities generally
have greater price volatility than fixed income securities, and the ProFunds are
particularly sensitive to these market risks.
FOREIGN INVESTMENT RISK
Each ProFunds may invest in securities of foreign issuers, and the
Pharmaceuticals UltraSector ProFund and the Precious Metals UltraSector ProFund
may invest in securities traded principally in securities markets outside the
United States and/or securities denominated in foreign currencies (together,
"foreign securities"). Investments in foreign securities may experience more
rapid and extreme changes in value than investments in securities of U.S.
issuers or securities that trade exclusively in U.S. markets. The securities
markets of many foreign countries are relatively small, and foreign securities
often trade with less frequency and volume than domestic securities and are
usually not subject to the same degree of regulation as U.S. issuers. Special
U.S. tax considerations may apply to a ProFund's investment in foreign
securities.
CURRENCY RISK
The ProFunds, and in particular the Pharmaceuticals UltraSector ProFund and
Precious Metals UltraSector ProFund, may invest in securities that trade in, or
receive revenues in, foreign currencies. To the extent that a ProFund does so,
that ProFund will be subject to the risk that those currencies will decline in
value relative to the U.S. dollar. Currency rates in foreign countries may
fluctuate significantly over short periods of time. ProFund assets which are
denominated in foreign currencies may be devalued against the U.S. dollar,
resulting in a loss.
REAL ESTATE INVESTMENT TRUSTS
The Real Estate UltraSector ProFund may invest in real estate investment
trusts ("REITS"). Equity REITs invest primarily in real property while mortgage
REITS make construction, development and long term mortgage loans. Their value
may be affected by changes in the value of the underlying property of the trust,
the creditworthiness of the issuer, property taxes, interest rates, and tax and
regulatory requirements, such as those relating to the environment. REITS are
dependent upon management skill, are not diversified and are subject to heavy
cash flow dependency, default by borrowers, self liquidation and the possibility
of failing to qualify for tax-free status of income under the Internal Revenue
Code and failing to maintain exempt status under the 1940 Act.
FUTURES CONTRACTS AND RELATED OPTIONS
The ProFunds may purchase or sell stock index futures contracts and options
thereon as a substitute for a comparable market position in the underlying
securities or to satisfy regulation requirements. A futures contract obligates
the seller to deliver (and the purchaser to take delivery of) the specified
commodity on the expiration date of the contract. A stock index futures
contract obligates the seller to deliver (and the purchaser to take) an amount
of cash equal to a specific dollar amount multiplied by the difference between
the value of a specific stock index at the close of the last trading day of the
contract and the price at which the agreement is made. No physical delivery of
the underlying stocks in the index is made.
When a ProFund purchases a put or call option on a futures contract, the
ProFund pays a premium for the right to sell or purchase the underlying futures
contract for a specified price upon exercise at any time
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during the option period. By writing (selling) a put or call option on a futures
contract, a ProFund receives a premium in return for granting to the purchaser
of the option the right to sell to or buy from the ProFund the underlying
futures contract for a specified price upon exercise at any time during the
option period.
Whether a ProFund realizes a gain or loss from futures activities depends
generally upon movements in the underlying commodity. The extent of the
ProFund's loss from an unhedged short position in futures contracts or from
writing options on futures contracts is potentially unlimited. The ProFunds may
engage in related closing purchase or sale transactions with respect to options
on futures contracts by buying an option of the same series as an option
previously written by a ProFund, or selling an option of the same series as an
option previously purchased by a ProFund. The ProFunds will engage in
transactions in futures contracts and related options that are traded on a U.S.
exchange or board of trade or that have been approved for sale in the U.S. by
the Commodity Futures Trading Commission.
When a ProFund purchases or sells a stock index futures contract, or sells an
option thereon, the ProFund "covers" its position. To cover its position, a
ProFund may enter into an offsetting position or maintain with its custodian
bank (and mark-to-market on a daily basis) a segregated account consisting of
liquid instruments that, when added to any amounts deposited with a futures
commission merchant as margin, are equal to the market value of the futures
contract or otherwise "cover" its position.
The ProFunds may purchase and sell futures contracts and options thereon only
to the extent that such activities would be consistent with the requirements of
Section 4.5 of the regulations promulgated by the Commodity Futures Trading
Commission (the "CFTC Regulations") under the Commodity Exchange Act under which
each of these ProFunds would be excluded from the definition of a "commodity
pool operator." Under Section 4.5 of the CFTC Regulations, a ProFund may engage
in futures transactions, either for "bona fide hedging" purposes, as this term
is defined in the CFTC Regulations, or for non- bona fide hedging purposes to
the extent that the aggregate initial margins and option premiums required to
establish such non- bona fide hedging positions do not exceed 5% of the
liquidation value of the ProFund's portfolio. In the case of an option on
futures contracts that is "in-the-money" at the time of purchase (i.e., the
amount by which the exercise price of the put option exceeds the current market
value of the underlying security or the amount by which the current market value
of the underlying security exceeds the exercise price of the call option), the
in-the-money amount may be excluded in calculating this 5% limitation.
The ProFunds will cover their positions when they write a futures contract or
option on a futures contract. A ProFund may "cover" its long position in a
futures contract by purchasing a put option on the same futures contract with a
strike price (i.e., an exercise price) as high or higher than the price of the
futures contract, or, if the strike price of the put is less than the price of
the futures contract, the ProFund will maintain in a segregated account cash or
liquid instruments equal in value to the difference between the strike price of
the put and the price of the futures contract. A ProFund may also cover its
long position in a futures contract by taking a short position in the
instruments underlying the futures contract, or by taking positions in
instruments the prices of which are expected to move relatively consistently
with the futures contract. A ProFund may cover its short position in a futures
contract by taking a long position in the instruments underlying the futures
contract, or by taking positions in instruments the prices of which are expected
to move relatively consistently with the futures contract.
A ProFund may cover its sale of a call option on a futures contract by taking
a long position in the underlying futures contract at a price less than or equal
to the strike price of the call option, or, if the long position in the
underlying futures contract is established at a price greater than the strike
price of the written (sold) call, the ProFund will maintain in a segregated
account liquid instruments equal in value to the difference between the strike
price of the call and the price of the futures contract. A ProFund may also
cover its sale of a call option by taking positions in instruments the prices of
which are expected to move relatively consistently with the call option. A
ProFund may cover its sale of a put option on a futures contract by taking a
short position in the underlying futures contract at a price greater than or
equal to the strike price of the put option, or, if the short position in the
underlying futures contract is established at a price less than the strike price
of the written put, the ProFund will maintain in a segregated account cash or
high-grade liquid debt securities equal in value to the difference between the
strike price of the put and the
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price of the future. A ProFund may also cover its sale of a put option by taking
positions in instruments the prices of which are expected to move relatively
consistently with the put option.
Although the ProFunds intend to sell futures contracts only if there is an
active market for such contracts, no assurance can be given that a liquid market
will exist for any particular contract at any particular time. Many futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a price
beyond that limit or trading may be suspended for specified periods during the
day. Futures contract prices could move to the limit for several consecutive
trading days with little or no trading, thereby preventing prompt liquidation of
futures positions and potentially subjecting a ProFund to substantial losses.
If trading is not possible, or if a ProFund determines not to close a futures
position in anticipation of adverse price movements, the ProFund will be
required to make daily cash payments of variation margin. The risk that the
ProFund will be unable to close out a futures position will be minimized by
entering into such transactions on a national exchange with an active and liquid
secondary market.
INDEX OPTIONS
The ProFunds may purchase and write options on stock indexes to create
investment exposure consistent with their investment objectives, to hedge or
limit the exposure of their positions and to create synthetic money market
positions. See "Taxation" herein.
A stock index fluctuates with changes in the market values of the stocks
included in the index. Options on stock indexes give the holder the right to
receive an amount of cash upon exercise of the option. Receipt of this cash
amount will depend upon the closing level of the stock index upon which the
option is based being greater than (in the case of a call) or less than (in the
case of a put) the exercise price of the option. The amount of cash received,
if any, will be the difference between the closing price of the index and the
exercise price of the option, multiplied by a specified dollar multiple. The
writer (seller) of the option is obligated, in return for the premiums received
from the purchaser of the option, to make delivery of this amount to the
purchaser. All settlements of index options transactions are in cash.
Index options are subject to substantial risks, including the risk of
imperfect correlation between the option price and the value of the underlying
securities composing the stock index selected and the risk that there might not
be a liquid secondary market for the option. Because the value of an index
option depends upon movements in the level of the index rather than the price of
a particular stock, whether a ProFund will realize a gain or loss from the
purchase or writing (sale) of options on an index depends upon movements in the
level of stock prices in the stock market generally or, in the case of certain
indexes, in an industry or market segment, rather than upon movements in the
price of a particular stock. Whether a ProFund will realize a profit or loss by
the use of options on stock indexes will depend on movements in the direction of
the stock market generally or of a particular industry or market segment. This
requires different skills and techniques than are required for predicting
changes in the price of individual stocks. A ProFund will not enter into an
option position that exposes the ProFund to an obligation to another party,
unless the ProFund either (i) owns an offsetting position in securities or other
options and/or (ii) maintains with the ProFund's custodian bank liquid
instruments that, when added to the premiums deposited with respect to the
option, are equal to the market value of the underlying stock index not
otherwise covered.
The ProFunds may engage in transactions in stock index options listed on
national securities exchanges or traded in the over-the-counter market as an
investment vehicle for the purpose of realizing their investment objectives.
Options on indexes are settled in cash, not by delivery of securities. The
exercising holder of an index option receives, instead of a security, cash equal
to the difference between the closing price of the securities index and the
exercise price of the option.
Some stock index options are based on a broad market index such as the S&P 500
Index, the NYSE Composite Index, or the AMEX Major Market Index, or on a
narrower index such as the Philadelphia Stock Exchange Over-the-Counter Index.
Options currently are traded on the Chicago Board of Options Exchange (the
"CBOE"), the AMEX, and other exchanges ("Exchanges"). Purchased over-the-
counter
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options and the cover for written over-the-counter options will be subject to
the 15% limitation on investment in illiquid securities by the ProFunds. See
"Illiquid Securities."
Each of the Exchanges has established limitations governing the maximum number
of call or put options on the same index which may be bought or written (sold)
by a single investor, whether acting alone or in concert with others (regardless
of whether such options are written on the same or different Exchanges or are
held or written on one or more accounts or through one or more brokers). Under
these limitations, option positions of all investment companies advised by the
same investment adviser are combined for purposes of these limits. Pursuant to
these limitations, an Exchange may order the liquidation of positions and may
impose other sanctions or restrictions. These position limits may restrict the
number of listed options which a ProFund may buy or sell; however, the Advisor
intends to comply with all limitations.
OPTIONS ON SECURITIES
Each ProFund may buy and write (sell) options on securities for the purpose of
realizing its investment objectives. By buying a call option, a ProFund has the
right, in return for a premium paid during the term of the option, to buy the
securities underlying the option at the exercise price. By writing a call
option on securities, a ProFund becomes obligated during the term of the option
to sell the securities underlying the option at the exercise price if the option
is exercised. By buying a put option, a ProFund has the right, in return for a
premium paid during the term of the option, to sell the securities underlying
the option at the exercise price. By writing a put option, a ProFund becomes
obligated during the term of the option to purchase the securities underlying
the option at the exercise price if the option is exercised. During the term of
the option, the writer may be assigned an exercise notice by the broker-dealer
through whom the option was sold. The exercise notice would require the writer
to deliver, in the case of a call, or take delivery of, in the case of a put,
the underlying security against payment of the exercise price. This obligation
terminates upon expiration of the option, or at such earlier time that the
writer effects a closing purchase transaction by purchasing an option covering
the same underlying security and having the same exercise price and expiration
date as the one previously sold. Once an option has been exercised, the writer
may not execute a closing purchase transaction. To secure the obligation to
deliver the underlying security in the case of a call option, the writer of a
call option is required to deposit in escrow the underlying security or other
assets in accordance with the rules of the Options Clearing Corporation (the
"OCC"), an institution created to interpose itself between buyers and sellers of
options. The OCC assumes the other side of every purchase and sale transaction
on an exchange and, by doing so, gives its guarantee to the transaction. When
writing call options on securities, a ProFund may cover its position by owning
the underlying security on which the option is written. Alternatively, the
ProFund may cover its position by owning a call option on the underlying
security, on a share for share basis, which is deliverable under the option
contract at a price no higher than the exercise price of the call option written
by the ProFund or, if higher, by owning such call option and depositing and
maintaining in a segregated account cash or liquid instruments equal in value to
the difference between the two exercise prices. In addition, a ProFund may
cover its position by depositing and maintaining in a segregated account cash or
liquid instruments equal in value to the exercise price of the call option
written by the ProFund. When a ProFund writes a put option, the ProFund will
have and maintain on deposit with its custodian bank cash or liquid instruments
having a value equal to the exercise value of the option. The principal reason
for a ProFund to write call options on stocks held by the ProFund is to attempt
to realize, through the receipt of premiums, a greater return than would be
realized on the underlying securities alone.
If a ProFund that writes an option wishes to terminate the ProFund's
obligation, the ProFund may effect a "closing purchase transaction." The
ProFund accomplishes this by buying an option of the same series as the option
previously written by the ProFund. The effect of the purchase is that the
writer's position will be canceled by the OCC. However, a writer may not effect
a closing purchase transaction after the writer has been notified of the
exercise of an option. Likewise, a ProFund which is the holder of an option may
liquidate its position by effecting a "closing sale transaction." The ProFund
accomplishes this by selling an option of the same series as the option
previously purchased by the ProFund. There is no guarantee that either a
closing purchase or a closing sale transaction can be effected. If any call or
put option is not exercised or sold, the option will become worthless on its
expiration date. A ProFund will realize a gain (or a loss) on a closing
purchase transaction with respect to a call or a put option previously
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written by the ProFund if the premium, plus commission costs, paid by the
ProFund to purchase the call or put option to close the transaction is less (or
greater) than the premium, less commission costs, received by the ProFund on the
sale of the call or the put option. The ProFund also will realize a gain if a
call or put option which the ProFund has written lapses unexercised, because the
ProFund would retain the premium.
Although certain securities exchanges attempt to provide continuously liquid
markets in which holders and writers of options can close out their positions at
any time prior to the expiration of the option, no assurance can be given that a
market will exist at all times for all outstanding options purchased or sold by
a ProFund. If an options market were to become unavailable, the ProFund would
be unable to realize its profits or limit its losses until the ProFund could
exercise options it holds, and the ProFund would remain obligated until options
it wrote were exercised or expired. Reasons for the absence of a liquid
secondary market on an exchange include the following: (i) there may be
insufficient trading interest in certain options; (ii) restrictions may be
imposed by an exchange on opening or closing transactions or both; (iii) trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the facilities
of an exchange or the OCC may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options) would cease to exist,
although outstanding options on that exchange that had been issued by the OCC as
a result of trades on that exchange would continue to be exercisable in
accordance with their terms.
SWAP AGREEMENTS
The ProFunds may enter into equity index or interest rate swap agreements for
purposes of attempting to gain exposure to the stocks making up an index of
securities in a market without actually purchasing those stocks, or to hedge a
position. Swap agreements are two-party contracts entered into primarily by
institutional investors for periods ranging from a day to more than one year.
In a standard "swap" transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments. The gross returns to be exchanged or "swapped"
between the parties are calculated with respect to a "notional amount," i.e.,
the return on or increase in value of a particular dollar amount invested in a
"basket" of securities representing a particular index. Forms of swap
agreements include interest rate caps, under which, in return for a premium, one
party agrees to make payments to the other to the extent that interest rates
exceed a specified rate, or "cap"; interest rate floors, under which, in return
for a premium, one party agrees to make payments to the other to the extent that
interest rates fall below a specified level, or "floor"; and interest rate
collars, under which a party sells a cap and purchases a floor or vice versa in
an attempt to protect itself against interest rate movements exceeding given
minimum or maximum levels.
Most swap agreements entered into by the ProFunds calculate the obligations of
the parties to the agreement on a "net basis." Consequently, a ProFund's current
obligations (or rights) under a swap agreement will generally be equal only to
the net amount to be paid or received under the agreement based on the relative
values of the positions held by each party to the agreement (the "net amount").
A ProFund's current obligations under a swap agreement will be accrued daily
(offset against any amounts owing to the ProFund) and any accrued but unpaid net
amounts owed to a swap counterparty will be covered by segregating assets
determined to be liquid. Obligations under swap agreements so covered will not
be construed to be "senior securities" for purposes of a ProFund's investment
restriction concerning senior securities. Because they are two party contracts
and because they may have terms of greater than seven days, swap agreements may
be considered to be illiquid for the ProFund illiquid investment limitations. A
ProFund will not enter into any swap agreement unless the Advisor believes that
the other party to the transaction is creditworthy. A ProFund bears the risk of
loss of the amount expected to be received under a swap agreement in the event
of the default or bankruptcy of a swap agreement counterparty.
Each 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
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otherwise impracticable. The counterparty to any swap agreement will typically
be a bank, investment banking firm or broker/dealer. The counterparty will
generally agree to pay the ProFund the amount, if any, by which the notional
amount of the swap agreement would have increased in value had it been invested
in the particular stocks, plus the dividends that would have been received on
those stocks. The ProFund will agree to pay to the counterparty a floating rate
of interest on the notional amount of the swap agreement plus the amount, if
any, by which the notional amount would have decreased in value had it been
invested in such stocks. Therefore, the return to the ProFund on any swap
agreement should be the gain or loss on the notional amount plus dividends on
the stocks less the interest paid by the ProFund on the notional amount.
Swap agreements typically are settled on a net basis, which means that the two
payment streams are netted out, with the ProFund receiving or paying, as the
case may be, only the net amount of the two payments. Payments may be made at
the conclusion of a swap agreement or periodically during its term. Swap
agreements do not involve the delivery of securities or other underlying assets.
Accordingly, the risk of loss with respect to swap agreements is limited to the
net amount of payments that a ProFund is contractually obligated to make. If
the other party to a swap agreement defaults, a ProFund's risk of loss consists
of the net amount of payments that such ProFund is contractually entitled to
receive, if any. The net amount of the excess, if any, of a ProFund's
obligations over its entitlements with respect to each equity swap will be
accrued on a daily basis and an amount of cash or liquid assets, having an
aggregate net asset value at least equal to such accrued excess will be
maintained in a segregated account by a ProFund's custodian. Inasmuch as these
transactions are entered into for hedging purposes or are offset by segregated
cash of liquid assets, as permitted by applicable law, the ProFunds and their
Advisor believe that transactions do not constitute senior securities under the
1940 Act and, accordingly, will not treat them as being subject to a ProFund's
borrowing restrictions.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid in comparison with the markets for other similar
instruments which are traded in the over-the-counter market. The Advisor, under
the supervision of the Board of Trustees, are responsible for determining and
monitoring the liquidity of the ProFund transactions in swap agreements.
The use of equity swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions.
AMERICAN DEPOSITORY RECEIPTS
For many foreign securities, U.S. dollar denominated ADRs, which are traded in
the United States on exchanges or over-the-counter, are issued by domestic
banks. ADRs represent the right to receive securities of foreign issuers
deposited in a domestic bank or a correspondent bank. ADRs do not eliminate all
the risk inherent in investing in the securities of foreign issuers. However,
by investing in ADRs rather than directly in foreign issuers' stock, a ProFund
can avoid currency risks during the settlement period for either purchase or
sales.
In general, there is a large, liquid market in the United States for many
ADRs. The information available for ADRs is subject to the accounting, auditing
and financial reporting standards of the domestic market or exchange on which
they are traded, which standards are more uniform and more exacting than those
to which many foreign issuers may be subject. Certain ADRs, typically those
denominated as unsponsored, require the holders thereof to bear most of the
costs of such facilities, while issuers of sponsored facilities normally pay
more of the costs thereof. The depository of an unsponsored facility frequently
is under no obligation to distribute shareholder communications received from
the issuer of the deposited securities or to pass through the voting rights to
facility holders with respect to the deposited securities, whereas the
depository of a sponsored facility typically distributes shareholder
communications and passes through the voting rights.
A ProFund may invest in both sponsored and unsponsored ADRs. Unsponsored ADR
programs are organized independently and without the cooperation of the issuer
of the underlying securities. As a result,
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available information concerning the issuers may not be as current as for
sponsored ADRs, and the prices of unsponsored depository receipts may be more
volatile than if such instruments were sponsored by the issuer.
U.S. GOVERNMENT SECURITIES
Each ProFund also may invest in U.S. government securities in pursuit of its
investment objectives, as "cover" for the investment techniques these ProFunds
employ, or for liquidity purposes.
Yields on U.S. government securities are dependent on a variety of factors,
including the general conditions of the money and bond markets, the size of a
particular offering, and the maturity of the obligation. Debt securities with
longer maturities tend to produce higher yields and are generally subject to
potentially greater capital appreciation and depreciation than obligations with
shorter maturities and lower yields. The market value of U.S. government
securities generally varies inversely with changes in market interest rates. An
increase in interest rates, therefore, would generally reduce the market value
of a ProFund's portfolio investments in U.S. government securities, while a
decline in interest rates would generally increase the market value of a
ProFund's portfolio investments in these securities.
U.S. government securities include U.S. Treasury securities, which are backed
by the full faith and credit of the U.S. Treasury and which differ only in their
interest rates, maturities, and times of issuance. U.S. Treasury bills have
initial maturities of one year or less; U.S. Treasury notes have initial
maturities of one to ten years; and U.S. Treasury bonds generally have initial
maturities of greater than ten years. Certain U.S. government securities are
issued or guaranteed by agencies or instrumentalities of the U.S. government
including, but not limited to, obligations of U.S. government agencies or
instrumentalities, such as the Federal National Mortgage Association, the
Government National Mortgage Association, the Small Business Administration, the
Federal Farm Credit Administration, the Federal Home Loan Banks, Banks for
Cooperatives (including the Central Bank for Cooperatives), the Federal Land
Banks, the Federal Intermediate Credit Banks, the Tennessee Valley Authority,
the Export-Import Bank of the United States, the Commodity Credit Corporation,
the Federal Financing Bank, the Student Loan Marketing Association, and the
National Credit Union Administration. Some obligations issued or guaranteed by
U.S. government agencies and instrumentalities, including, for example,
Government National Mortgage Association pass-through certificates, are
supported by the full faith and credit of the U.S. Treasury. Other obligations
issued by or guaranteed by Federal agencies, such as those securities issued by
the Federal National Mortgage Association, are supported by the discretionary
authority of the U.S. government to purchase certain obligations of the federal
agency, while other obligations issued by or guaranteed by federal agencies,
such as those of the Federal Home Loan Banks, are supported by the right of the
issuer to borrow from the U.S. Treasury. While the U.S. government provides
financial support to such U.S. government-sponsored Federal agencies, no
assurance can be given that the U.S. government will always do so, since the
U.S. Government is not so obligated by law. U.S. Treasury notes and bonds
typically pay coupon interest semi-annually and repay the principal at maturity.
REPURCHASE AGREEMENTS
Each of the ProFunds may enter into repurchase agreements with financial
institutions. Under a repurchase agreement, a ProFund purchases a debt security
and simultaneously agrees to sell the security back to the seller at a mutually
agreed-upon future price and date, normally one day or a few days later. The
resale price is greater than the purchase price, reflecting an agreed-upon
market interest rate during the purchaser's holding period. While the
maturities of the underlying securities in repurchase transactions may be more
than one year, the term of each repurchase agreement will always be less than
one year. The ProFunds follow certain procedures designed to minimize the risks
inherent in such agreements. These procedures include effecting repurchase
transactions only with large, well-capitalized and well-established financial
institutions whose condition will be continually monitored by the Advisor. In
addition, the value of the collateral underlying the repurchase agreement will
always be at least equal to the repurchase price, including any accrued interest
earned on the repurchase agreement. In the event of a default or bankruptcy by
a selling financial institution, a ProFund will seek to liquidate such
collateral which could involve certain costs or delays and, to the extent that
proceeds from any sale upon a default of the obligation to repurchase were less
than the repurchase price, the ProFund could suffer a loss. A ProFund also may
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experience difficulties and incur certain costs in exercising its rights to the
collateral and may lose the interest the ProFund expected to receive under the
repurchase agreement. Repurchase agreements usually are for short periods, such
as one week or less, but may be longer. It is the current policy of the
ProFunds not to invest in repurchase agreements that do not mature within seven
days if any such investment, together with any other liquid assets held by the
ProFund, amounts to more than 15% of its total net assets. The investments of
each of the ProFunds in repurchase agreements at times may be substantial when,
in the view of the Advisor, liquidity, investment, regulatory, or other
considerations so warrant.
CASH RESERVES
To seek its investment objective, as a cash reserve, for liquidity purposes,
or as "cover" for positions it has taken, each ProFund may temporarily invest
all or part of the ProFund's assets in cash or cash equivalents, which include,
but are not limited to, short-term money market instruments, U.S. government
securities, certificates of deposit, bankers acceptances, or repurchase
agreements secured by U.S. government securities.
REVERSE REPURCHASE AGREEMENTS
The ProFunds may use reverse repurchase agreements as part of their investment
strategies. Reverse repurchase agreements involve sales by a 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 ProFunds intend to use the
reverse repurchase technique only when it will be to a ProFund's advantage to do
so. A 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 ProFunds may borrow money for cash management purposes or investment
purposes. Each of the ProFunds may also enter into reverse repurchase
agreements, which may be viewed as a form of borrowing, with financial
institutions. However, to the extent a ProFund "covers" its repurchase
obligations as described above in "Reverse Repurchase Agreements," such
agreement will not be considered to be a "senior security" and, therefore, will
not be subject to the 300% asset coverage requirement otherwise applicable to
borrowings by the ProFunds. Borrowing for investment is known as leveraging.
Leveraging investments, by purchasing securities with borrowed money, is a
speculative technique which increases investment risk, but also increases
investment opportunity. Since substantially all of a ProFund's assets will
fluctuate in value, whereas the interest obligations on borrowings may be fixed,
the net asset value per share of the ProFund will increase more when the
ProFund's portfolio assets increase in value and decrease more when the
ProFund's portfolio assets decrease in value than would otherwise be the case.
Moreover, interest costs on borrowings may fluctuate with changing market rates
of interest and may partially offset or exceed the returns on the borrowed
funds. Under adverse conditions, a ProFund might have to sell portfolio
securities to meet interest or principal payments at a time when investment
considerations would not favor such sales.
As required by the 1940 Act, a ProFund must maintain continuous asset coverage
(total assets, including assets acquired with borrowed funds, less liabilities
exclusive of borrowings) of 300% of all amounts borrowed. If at any time the
value of the ProFund's assets should fail to meet this 300% coverage test, the
ProFund, within three days (not including Sundays and holidays), will reduce the
amount of the ProFund's borrowings to the extent necessary to meet this 300%
coverage. Maintenance of this percentage limitation may result in the sale of
portfolio securities at a time when investment considerations otherwise indicate
that it would be disadvantageous to do so. In addition to the foregoing, the
ProFunds are authorized to borrow money from a bank as a temporary measure for
extraordinary or emergency purposes
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in amounts not in excess of 5% of the value of the ProFund's total assets. This
borrowing is not subject to the foregoing 300% asset coverage requirement. The
ProFunds are authorized to pledge portfolio securities as the Advisor deems
appropriate in connection with any borrowings.
LENDING OF PORTFOLIO SECURITIES
Each of the ProFunds 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 lending ProFund any income accruing thereon, and the ProFund may invest
the cash collateral in portfolio securities, thereby earning additional income.
A ProFund will not lend more than 33 1/3% of the value of the ProFund's total
assets. Loans would be subject to termination by the lending 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 lending ProFund. There may be risks of delay in receiving
additional collateral or risks of delay in recovery of the securities or even
loss of rights in the securities lent should the borrower of the securities fail
financially. A lending ProFund may pay reasonable finders, borrowers,
administrative, and custodial fees in connection with a loan.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
Each ProFund, from time to time, in the ordinary course of business, may
purchase securities on a when-issued or delayed-delivery basis (i.e., delivery
and payment can take place between a month and 120 days after the date of the
transaction). These securities are subject to market fluctuation and no
interest accrues to the purchaser during this period. At the time a ProFund
makes the commitment to purchase securities on a when-issued or delayed-delivery
basis, the ProFund will record the transaction and thereafter reflect the value
of the securities, each day, in determining the ProFund's net asset value. Each
ProFund will not purchase securities on a when-issued or delayed-delivery basis
if, as a result, more than 15% of the ProFund's net assets would be so invested.
At the time of delivery of the securities, the value of the securities may be
more or less than the purchase price.
The Trust will also establish a segregated account with the Trust's custodian
bank in which the ProFunds will maintain liquid instruments equal to or greater
in value than the ProFund's purchase commitments for such when-issued or
delayed-delivery securities, or the Trust does not believe that a ProFund's net
asset value or income will be adversely affected by the ProFund's purchase of
securities on a when-issued or delayed delivery basis.
INVESTMENTS IN OTHER INVESTMENT COMPANIES
The ProFunds may invest in the securities of other investment companies to the
extent that such an investment would be consistent with the requirements of the
1940 Act. If a ProFund invests in, and, thus, is a shareholder of, another
investment company, the ProFund's shareholders will indirectly bear the
ProFund's proportionate share of the fees and expenses paid by such other
investment company, including advisory fees, in addition to both the management
fees payable directly by the ProFund to the ProFund's own investment adviser and
the other expenses that the ProFund bears directly in connection with the
ProFund's own operations.
ILLIQUID SECURITIES
While none of the ProFunds anticipates doing so, each of the ProFunds 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
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sold to qualified institutional buyers under Rule 144A of the 1933 Act. A
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, a ProFund may make
such investments. Whether or not such securities are illiquid depends on the
market that exists for the particular security. The Commission staff has taken
the position that the liquidity of Rule 144A restricted securities is a question
of fact for a board of trustees to determine, such determination to be based on
a consideration of the readily-available trading markets and the review of any
contractual restrictions. The staff also has acknowledged that, while a board
of trustees retains ultimate responsibility, trustees may delegate this function
to an investment adviser. Trustees of ProFunds have delegated this
responsibility for determining the liquidity of Rule 144A restricted securities
which may be invested in by a ProFund to the Advisor. It is not possible to
predict with assurance exactly how the market for Rule 144A restricted
securities or any other security will develop. A security which when purchased
enjoyed a fair degree of marketability may subsequently become illiquid and,
accordingly, a security which was deemed to be liquid at the time of acquisition
may subsequently become illiquid. In such event, appropriate remedies will be
considered to minimize the effect on the ProFund's liquidity.
PORTFOLIO TURNOVER
The nature of the ProFunds will cause the ProFunds to experience substantial
portfolio turnover. A higher portfolio turnover rate would likely involve
correspondingly greater brokerage commissions and transaction and other expenses
which would be borne by the ProFunds. In addition, a ProFund's portfolio
turnover level may adversely affect the ability of the ProFund to achieve its
investment objective. Because each ProFund's portfolio turnover rate to a great
extent will depend on the purchase, redemption, and exchange activity of the
ProFund's investors, it is difficult to estimate what the ProFund's actual
turnover rate will be in the future. "Portfolio Turnover Rate" is defined under
the rules of the Commission as the value of the securities purchased or
securities sold, excluding all securities whose maturities at time of
acquisition were one year or less, divided by the average monthly value of such
securities owned during the year. Based on this definition, instruments with
remaining maturities of less than one year are excluded from the calculation of
portfolio turnover rate. Instruments excluded from the calculation of portfolio
turnover generally would include the futures contracts and option contracts in
which the ProFunds invest since such contracts generally have a remaining
maturity of less than one year. Pursuant to the formula prescribed by the
Commission, the portfolio turnover rate for each ProFund is calculated without
regard to instruments, including options and futures contracts, having a
maturity of less than one year. Each ProFund expects to typically hold many of
its investments in short-term options and futures contracts, which, therefore,
are excluded for purposes of computing portfolio turnover.
SPECIAL CONSIDERATIONS
To the extent discussed above and in the Prospectus, the ProFunds present
certain risks, some of which are further described below.
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LEVERAGE. Each ProFund intends to use leveraged investment techniques in
pursuing their investment objectives. Utilization of leveraging involves
special risks and should be considered to be speculative. Leverage exists when
a ProFund achieves the right to a return on a capital base that exceeds the
amount the ProFund has invested. Leverage creates the potential for greater
gains to shareholders of these ProFund during favorable market conditions and
the risk of magnified losses during adverse market conditions. Leverage should
cause higher volatility of the net asset values of these ProFund's shares.
Leverage may involve the creation of a liability that does not entail any
interest costs or the creation of a liability that requires the ProFund to pay
interest which would decrease the ProFund's total return to shareholders. If
these ProFunds achieve their investment objectives, during adverse market
conditions, shareholders should experience a loss of approximately one and one-
half the amount they would have incurred had these ProFunds not been leveraged.
NON-DIVERSIFIED STATUS. Each ProFund is a "non-diversified" series. Each
ProFund is considered "non-diversified" because a relatively high percentage of
the ProFund's assets may be invested in the securities of a limited number of
issuers, primarily within the same economic sector. That ProFund's portfolio
securities, therefore, may be more susceptible to any single economic,
political, or regulatory occurrence than the portfolio securities of a more
diversified investment company. A ProFund's classification as a "non-
diversified" investment company means that the proportion of the ProFund's
assets that may be invested in the securities of a single issuer is not limited
by the 1940 Act. Each ProFund, however, intends to seek to qualify as a
"regulated investment company" for purposes of the Internal Revenue Code,
which imposes diversification requirements on these ProFund that are less
restrictive than the requirements applicable to the "diversified" investment
companies under the 1940 Act.
INVESTMENT RESTRICTIONS
The ProFunds have adopted certain investment restrictions as fundamental
policies which cannot be changed without the approval of the holders of a
"majority" of the outstanding shares of a ProFund, as that term is defined in
the 1940 Act. The term "majority" is defined in the 1940 Act as the lesser of:
(i) 67% or more of the shares of the series present at a meeting of
shareholders, if the holders of more than 50% of the outstanding shares of the
ProFund are present or represented by proxy; or (ii) more than 50% of the
outstanding shares of the series. (All policies of a ProFund not specifically
identified in this Statement of Additional Information or the Prospectus as
fundamental may be changed without a vote of the shareholders of the ProFund.)
For purposes of the following limitations, all percentage limitations apply
immediately after a purchase or initial investment.
A ProFund may not:
1. Purchase or sell real estate, except that, to the extent permitted by
applicable law, the ProFunds 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, including REITS.
2. 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.
3. Issue senior securities to the extent such issuance would violate
applicable law.
4. Borrow money, except that the ProFund (i) may borrow from banks (as defined
in the Investment Company Act of 1940) in amounts up to 33 1/3% of its total
assets (including the amount borrowed), (ii) may, to the extent permitted by
applicable law, borrow up to an additional 5% of its total assets for temporary
purposes, (iii) may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities, (iv) may purchase
securities on margin to the extent permitted
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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.
5. Underwrite securities of other issuers, except insofar as the ProFund
technically may be deemed an underwriter under the Securities Act of 1933, as
amended, in selling portfolio securities.
6. Purchase or sell commodities or contracts on commodities, except to the
extent the ProFund may do so in accordance with applicable law and the ProFund's
Prospectus and Statement of Additional Information, as they may be amended from
time to time.
Each ProFund will concentrate its investment in the securities of companies
engaged in a single industry or group of industries in accordance with its
investment objective and policies as disclosed in the ProFunds' Prospectus and
Statement of Additional Information, as they may be revised from time to time.
DETERMINATION OF NET ASSET VALUE
The net asset values of the shares of the ProFunds are determined as of the
close of business of the NYSE (ordinarily, 4:00 p.m. Eastern Time) on each day
the NYSE and the Chicago Mercantile Exchange ("CME") are open for business. To
the extent that portfolio securities of a ProFund are traded in other markets on
days when the ProFund's principal trading market(s) is closed, the ProFund's net
asset value may be affected on days when investors do not have access to the
ProFund to purchase or redeem shares.
The net asset value of shares of a ProFund serves as the basis for the
purchase and redemption price of the class of shares. The net asset value per
share of a ProFund is calculated by dividing the market value of the ProFund's
assets, less all liabilities attributed to the ProFund, by the number of
outstanding shares of the ProFund. If market quotations are not readily
available, a security will be valued at fair value by the Trustees of the Trust
or by the Advisor using methods established or ratified by the Trustees of the
Trust.
The securities in the portfolio of a ProFund, 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 over-the-
counter 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 maintained by ProFunds are valued at their last sale price
prior to the valuation time. Options on futures contracts generally are valued
at fair value as determined with reference to established futures exchanges.
Options on securities and indices purchased by a ProFund are valued at their
last sale price prior to the valuation time or at fair value. In the event of a
trading halt that closes the NYSE early, futures contracts will be valued on the
basis of settlement prices on futures exchanges, options on futures will be
valued at fair value as determined with reference to such settlement prices, and
options on securities and indices will be valued at their last sale price prior
to the trading halt or at fair value.
In the event a trading halt closes a futures exchange for a given day and that
closure occurs prior to the close of the NYSE on that day, futures positions
traded on such exchange and held by a ProFund will be valued on the basis of the
day's settlement prices on the futures exchange or fair value.
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PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the general supervision by the Trustees, the Advisor is responsible
for decisions to buy and sell securities for each of the ProFunds, the selection
of brokers and dealers to effect the transactions, and the negotiation of
brokerage commissions, if any. The Advisor expects that the ProFunds may
execute brokerage or other agency transactions through registered broker-
dealers, for a commission, in conformity with the 1940 Act, the Securities
Exchange Act of 1934, as amended, and the rules and regulations thereunder. The
Advisor may serve as an investment manager to a number of clients, including
other investment companies. It is the practice of the Advisor to cause purchase
and sale transactions to be allocated among the ProFunds and others whose assets
the Advisor manages in such manner as the Advisor deems equitable. The main
factors considered by the Advisor in making such allocations among the ProFunds
and other client accounts of the Advisor are the respective investment
objectives, the relative size of portfolio holdings of the same or comparable
securities, the availability of cash for investment, the size of investment
commitments generally held, and the opinions of the person(s) responsible, if
any, for managing the portfolios of the ProFunds and the other client accounts.
The policy of each ProFund regarding purchases and sales of securities for a
ProFund's portfolio is that primary consideration will be given to obtaining the
most favorable prices and efficient executions of transactions. Consistent with
this policy, when securities transactions are effected on a stock exchange, each
ProFund's policy is to pay commissions which are considered fair and reasonable
without necessarily determining that the lowest possible commissions are paid in
all circumstances. Each ProFund believes that a requirement always to seek the
lowest possible commission cost could impede effective portfolio management and
preclude the ProFund and the Advisor from obtaining a high quality of brokerage
and research services. In seeking to determine the reasonableness of brokerage
commissions paid in any transaction, the Advisor relies upon its experience and
knowledge regarding commissions generally charged by various brokers and on its
judgment in evaluating the brokerage and research services received from the
broker effecting the transaction. Such determinations are necessarily
subjective and imprecise, as in most cases an exact dollar value for those
services is not ascertainable.
Purchases and sales of U.S. government securities are normally transacted
through issuers, underwriters or major dealers in U.S. government securities
acting as principals. Such transactions are made on a net basis and do not
involve payment of brokerage commissions. The cost of securities purchased from
an underwriter usually includes a commission paid by the issuer to the
underwriters; transactions with dealers normally reflect the spread between bid
and asked prices.
In seeking to implement a ProFund's policies, the Advisor effects transactions
with those brokers and dealers who the Advisor believes provide the most
favorable prices and are capable of providing efficient executions. If the
Advisor believes such prices and executions are obtainable from more than one
broker or dealer, the Advisor may give consideration to placing portfolio
transactions with those brokers and dealers who also furnish research and other
services to the ProFund or the Advisor. Such services may include, but are not
limited to, any one or more of the following: information as to the availability
of securities for purchase or sale; statistical or factual information or
opinions pertaining to investment; wire services; and appraisals or evaluations
of portfolio securities. If the broker-dealer providing these additional
services is acting as a principal for its own account, no commissions would be
payable. If the broker-dealer is not a principal, a higher commission may be
justified, at the determination of the Advisor, for the additional services.
The information and services received by the Advisor from brokers and dealers
may be of benefit to the Advisor in the management of accounts of some of the
Advisor's other clients and may not in all cases benefit a ProFund directly.
While the receipt of such information and services is useful in varying degrees
and would generally reduce the amount of research or services otherwise
performed by the Advisor and thereby reduce the 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.
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MANAGEMENT OF PROFUNDS
The Board of Trustees is responsible for the general supervision of the
Trust's business. The day-to-day operations of the Trust are the
responsibilities of 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). Currently: Trustee, Chairman
and Chief Executive Officer of ProFunds; Chairman and Chief Executive Officer of
the Advisor. Formerly: Principal, Law Offices of Michael L. Sapir; Senior Vice
President, General Counsel, Padco Advisors, Inc.; Partner, Jorden Burt Berenson
& Klingensmith. His address is 7900 Wisconsin Avenue, Suite 300, Bethesda,
Maryland 20814.
LOUIS M. MAYBERG* (birthdate: August 9, 1962). Currently: Trustee and
Secretary of ProFunds; President, the Advisor. Formerly: President, Potomac
Securities, Inc.; Managing Director, National Capital Companies, LLC. His
address is 7900 Wisconsin Avenue, Suite 300, Bethesda, Maryland 20814.
MICHAEL C. WACHS (birthdate: October 21, 1961). Currently: Trustee of
ProFunds; Vice President, Delancy Investment Group, Inc. Formerly: Vice
President/Senior Underwriter, First Union National Bank; Vice President, Vice
President/Senior Credit Officer and Vice President/Team Leader, First Union
Capital Markets Corp. His address is 1528 Powder Mill Lane, Wynnewood,
Pennsylvania 19096.
RUSSELL S. REYNOLDS, III (birthdate: July 21, 1957). Currently: Trustee of
ProFunds; Managing Director, Chief Financial Officer and Secretary,
Directorship, Inc. Formerly: President, Quadcom Services, Inc. His address is
7 Stag Lane, Greenwich, Connecticut 06831.
GARY TENKMAN (birthdate: September 16, 1970). Currently: Treasurer of
ProFunds; Vice President, Financial Services, BISYS Fund Services. Formerly:
Audit Manager, Investment Management Services Group. His address is 3435
Stelzer Road, Columbus, Ohio 43219.
*This Trustee is deemed to be an "interested person" within the meaning of
Section 2(a)(19) of the 1940 Act, inasmuch as this person is affiliated with the
Advisor, as described herein.
PROFUNDS TRUSTEE COMPENSATION TABLE
The following table reflect fees paid to the Trustees for the year ended
December 31, 1999.
<TABLE>
<CAPTION>
NAME OF
PERSON: POSITION COMPENSATION
----------------- ------------
<S> <C>
Mchael L. Sapir, Chairman and Chief Executive Officer None
Louis M. Mayberg, Trustee, President, Secretary None
Russell S. Reynolds, III, Trustee $5,500
Michael C. Wachs, Trustee $5,500
</TABLE>
17
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PROFUND ADVISORS LLC
Under an investment advisory agreement between the Trust, on behalf of the
UltraSector ProFunds and the Advisor with respect to the ProFunds, dated
January 24, , 2000, each 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 each of the ProFunds, in
accordance with the investment objectives, policies, and limitations of each
ProFund, subject to the general supervision and control of Trustees and the
officers of the Trust. 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 fees are legitimate
and not excessive, also may make payments to broker-dealers and other financial
institutions for their expenses in connection with the distribution of ProFund
shares. The Advisor's address is 7900 Wisconsin Avenue, Suite 300, Bethesda,
Maryland 20814.
CODE OF ETHICS
The Trust and the Advisor each have adopted a code of ethics, as required by
applicable law, which is designed to prevent affiliate persons of the Trust and
the Advisor from engaging in deceptive, manipulative, or fraudulent activities
in connection with securities held or to be acquired by the ProFunds VP (which
may also be held by persons subject to a code). There can be no assurance that
the codes will be effective in preventing such activities.
ADMINISTRATION, TRANSFER AGENT, FUND ACCOUNTING AGENT AND CUSTODIAN
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services ("BISYS")
acts as Administrator to the ProFunds. The Administrator provides the ProFunds
with all required general administrative services, including, without
limitation, office space, equipment, and personnel; clerical and general back
office services; bookkeeping, internal accounting, and secretarial services; the
determination of net asset values; and the preparation and filing of all
reports, registration statements, proxy statements, and all other materials
required to be filed or furnished by the ProFunds under Federal and state
securities laws. The Administrator also maintains the shareholder account
records for the ProFunds, distributes dividends and distributions payable by the
ProFunds, and produces statements with respect to account activity for the
ProFunds and their shareholders. The Administrator pays all fees and expenses
that are directly related to the services provided by the Administrator to the
ProFunds; each ProFund reimburses the Administrator for all fees and expenses
incurred by the Administrator which are not directly related to the services the
Administrator provides to the ProFunds under the service agreement.
For its services as Administrator, each ProFund pays BISYS an annual fee equal
to .05% of average daily net assets. BISYS Funds Services, Inc. ("BFSI"), an
affiliate of BISYS, acts as transfer agent and fund accounting agent for the
ProFunds, for which it receives additional fees. Additionally, ProFunds and
BISYS and BFSI have entered into an Omnibus Fee Agreement in which the amount of
compensation due and payable to BISYS shall be the greater of (i) the aggregate
fee amount due and payable for services pursuant to the Administration, Fund
Accounting and Transfer Agency Agreements and (ii) the minimum relationship fee
described as specific dollar amounts payable over a period of ten calendar
quarters. The address for BISYS and BFSI is 3435 Stelzer Road, Suite 1000,
Columbus, Ohio 43219.
The Advisor, pursuant to a separate Management Services Agreement, performs
certain client support and other administrative services on behalf of the
ProFunds. For these services, each ProFund will pay to the Advisor a fee at the
annual rate of .15% of its average daily net assets for all ProFunds.
UMB Bank, N.A. acts as custodian to the ProFunds. UMB Bank, N.A.'s address is
928 Grand Avenue, Kansas City, Missouri.
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<PAGE>
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP serves as independent auditors to the ProFunds.
PricewaterhouseCoopers LLP provides audit services, tax return preparation and
assistance and consultation in connection with certain SEC filings.
PricewaterhouseCoopers LLP is located at 100 East Broad Street, Columbus, Ohio
43215.
LEGAL COUNSEL
Dechert Price & Rhoads serves as counsel to the ProFunds. The firm's address
is 1775 Eye Street, N.W., Washington, DC 20006-2401.
DISTRIBUTOR
Concord Financial Group, Inc., 3435 Stelzer Road, Columbus, Ohio 43219,
serves as the distributor and principal underwriter of the ProFunds' shares in
all fifty states and the District of Columbia. Concord Financial Group, Inc.
receives no compensation from the ProFunds for serving as distributor.
SHAREHOLDER SERVICES PLAN
Each ProFund has adopted a Shareholder Services Plan (the "Plan") which
provides that each ProFund will make payments equal to 1.00% (on an annual
basis) of the average daily value of the net assets of such ProFund's Service
Class shares attributable to or held in the name of the investment advisers and
other authorized institutions that sell Service Class 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 Class 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 Class shares of the applicable ProFund
attributable to or held in the name of the Authorized Firm for its clients. The
ProFunds may pay different service fee amounts to Authorized Firms, which may
provide different levels of services to their clients or customers.
The Trustees of the Trust, including a majority of the Trustees who are not
interested persons of the Trust and who have no direct or indirect financial
interest in the operation of the Plan or the related Shareholder Services
Agreements, have voted to adopt the Plan and Shareholder Services Agreements at
a meeting called for the purposes 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. The Plan may be terminated at any time by a
majority of the Trustees as described above or by a vote of a majority of the
outstanding Service Class shares of the affected ProFund. The Shareholder
Services Agreements may be terminated at any time, without payment of any
penalty, by vote of a majority of the Trustees as described above or by a vote
of a majority of the outstanding Service Class shares of the affected ProFund on
not more than 60 days' written notice to any other party to the Shareholder
Services Agreements. The Shareholder Services Agreements shall terminate
automatically if assigned. The Trustees have determined that, in their
judgment, there is a reasonable likelihood that the Plan will benefit the
ProFunds and holders of Service Class shares of the ProFunds. In the Trustees'
quarterly review of the Plan and Shareholder Services Agreements, they will
consider their continued appropriateness and the level of compensation provided
therein.
The intent of the Plan and Shareholder Services Agreements is to procure
quality shareholder services on behalf of ProFund shareholders; in adopting the
Plan and Shareholder Services Agreements, the Trustees considered the fact that
such shareholder services may have the effect of enhancing distribution of
ProFund Service Class shares and the growth of the ProFunds. In light of this,
the ProFunds intend to
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<PAGE>
observe the procedural requirements of Rule 12b-1 under the 1940 Act in
considering the continued appropriateness of the Plan and Shareholder Services
Agreements.
COSTS AND EXPENSES
Each ProFund bears all expenses of its operations other than those assumed by
the Advisor or the Administrator. ProFund expenses include: the management fee;
administrative and transfer agent fees; shareholder servicing fees; custodian
and accounting fees and expenses, legal and auditing fees; securities valuation
expenses; fidelity bonds and other insurance premiums; expenses of preparing and
printing prospectuses, confirmations, proxy statements, and shareholder reports
and notices; registration fees and expenses; proxy and annual meeting expenses,
if any; all Federal, state, and local taxes (including, without limitation,
stamp, excise, income, and franchise taxes); organizational costs; and non-
interested Trustees' fees and expenses.
ORGANIZATION AND DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
ProFunds is a registered open-end investment company under the 1940 Act. The
Trust was organized as a Delaware business trust on April 17, 1997, and has
authorized capital of unlimited shares of beneficial interest of no par value
which may be issued in more than one class or series. Currently, the Trust
consists of thirty-nine separately managed series, seventeen of which are
described herein. Other series may be added in the future. Each ProFund offers
two classes of share: the Service Class shares and the Investor Class shares.
All shares of the ProFunds are freely transferable. The Trust shares do not
have preemptive rights or cumulative voting rights, and none of the shares have
any preference to conversion, exchange, dividends, retirements, liquidation,
redemption, or any other feature. Trust shares have equal voting rights, except
that, in a matter affecting only a particular series or class of shares, only
shares of that series or class may be entitled to vote on the matter.
Under Delaware law, the Trust is not required to hold an annual shareholders
meeting if the 1940 Act does not require such a meeting. Generally, there will
not be annual meetings of Trust shareholders. Trust shareholders may remove
Trustees from office by votes cast at a meeting of Trust shareholders or by
written consent of such Trustees. If requested by shareholders of at least 10%
of the outstanding shares of the Trust, the Trust will call a meeting of
shareholders for the purpose of voting upon the question of removal of a Trustee
of the Trust and will assist in communications with other Trust shareholders.
The Declaration of Trust of the Trust disclaims liability of the shareholders
or the officers of the Trust for acts or obligations of the Trust which are
binding only on the assets and property of the Trust. The Declaration of Trust
provides for indemnification of the Trust's property for all loss and expense of
any shareholder held personally liable for the obligations of the Trust. The
risk of a Trust shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Trust itself would not be
able to meet the Trust's obligations. This risk should be considered remote.
TAXATION
Set forth below is a discussion of certain U.S. federal income tax issues
concerning the ProFunds and the purchase, ownership, and disposition of ProFund
shares. This discussion does not purport to be complete or to deal with all
aspects of federal income taxation that may be relevant to shareholders in light
of their particular circumstances, nor to certain types of shareholders subject
to special treatment under the federal income tax laws (for example, banks and
life insurance companies). This discussion is based upon present provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), the regulations
promulgated thereunder, and judicial and administrative ruling authorities, all
of which are subject to change, which change may be retroactive. Prospective
investors should consult their own tax advisors with regard to the federal tax
consequences of the purchase, ownership, or disposition of ProFund shares, as
well as the tax consequences arising under the laws of any state, foreign
country, or other taxing jurisdiction.
20
<PAGE>
Dividends out of net ordinary income and distribution of net short-term
capital gains are taxable to the recipient U.S. shareholders as ordinary income,
whether received in cash or reinvested in ProFund shares. Dividends from net
ordinary income may be eligible for the corporate dividends-received deduction.
The excess of net long-term capital gains over the net short-term capital
losses realized and distributed by a ProFund to its U.S. shareholders as capital
gains distributions is taxable to the shareholders as gain from the sale of a
capital asset held for more than one year, regardless of the length of time a
shareholder has held the ProFund shares. If a shareholder holds ProFund shares
for six months or less and during that period receives a distribution taxable to
the shareholder as long-term capital gain, any loss realized on the sale of the
ProFund shares will be long-term loss to the extent of such distribution.
The amount of an income dividend or capital gains distribution declared by a
ProFund during October, November or December of a year to shareholder of record
as of a specified date in such a month that is paid during January of the
following year will be deemed to be received by shareholders on December 31 of
the prior year.
Any dividend or distribution paid by a ProFund has the effect of reducing the
ProFund's net asset value per share. Investors should be careful to consider the
tax effect of buying shares shortly before a distribution by a ProFund. The
price of shares purchased at that time will include the amount of the
forthcoming distribution, but the distribution will be taxable to the
shareholder.
A dividend or capital gains distribution with respect to shares of a ProFund
held by a tax-deferred or qualified plan, such as an IRA, retirement plan or
corporate pension or profit sharing plan, will not be taxable to the plan.
Distribution from such plans will be taxable to individual participants under
applicable tax rules without regard to the character of the income earned by the
qualified plan.
Shareholders will be advised annually as to the federal tax status of
dividends and capital gains distribution made by the ProFunds for the preceding
year. Distributions by the ProFunds generally will be subject to state and local
taxes.
Each of the ProFunds intends to qualify and elect to be treated each year as a
regulated investment company (a "RIC") under Subchapter M of the Code. A RIC
generally is not subject to federal income tax on income and gains distributed
in a timely manner to its shareholders. Accordingly, each ProFund generally
must, among other things, (a) derive in each taxable year at least 90% of its
gross income from dividends, interest, payments with respect to certain
securities loans, and gains from the sale or other disposition of stock,
securities or foreign currencies, or other income derived with respect to its
business of investing in such stock, securities or currencies; and (b) diversify
its holdings so that, at the end of each fiscal quarter, (i) at least 50% of the
market value of the ProFund's assets is represented by cash, U.S. government
securities, the securities of other regulated investment companies and other
securities, with such other securities limited, in respect of any one issuer, to
an amount not greater than 5% of the value of the ProFund's total assets and 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total assets is invested in the securities of any one issuer
(other than U.S. government securities and the securities of other regulated
investment companies).
As a RIC, a ProFund generally will not be subject to U.S. federal income tax
on income and gains that it distributes to shareholders, if at least 90% of the
ProFund's investment company taxable income (which includes, among other items,
dividends, interest and the excess of any net short-term capital gains over net
long-term capital losses) for the taxable year is distributed. Each ProFund
intends to distribute substantially all of such income.
Amounts not distributed on a timely basis in accordance with a calendar year
distribution requirement are subject to a nondeductible 4% excise tax at the
ProFund level. To avoid the tax, each ProFund must distribute during each
calendar year an amount equal to the sum of (1) at least 98% of its ordinary
income (not taking into account any capital gains or losses) for the calendar
year, (2) at least 98% of its capital gains in excess of its capital losses
(adjusted for certain ordinary losses) for a one-year period generally ending on
October 31 of the calendar year, and (3) all ordinary income and capital gains
for previous years
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<PAGE>
that were not distributed during such years. To avoid application of the excise
tax, the ProFunds intend to make distributions in accordance with the calendar
year distribution requirement. A distribution will be treated as paid on
December 31 of a calendar year if it is declared by the ProFund in October,
November or December of that year with a record date in such a month and paid by
the ProFund during January of the following year. Such distributions will be
taxable to shareholders in the calendar year in which the distributions are
declared, rather than the calendar year in which the distributions are received.
MARKET DISCOUNT
If a ProFund purchases a debt security at a price lower than the stated
redemption price of such debt security, the excess of the stated redemption
price over the purchase price is the "market discount". If the amount of the
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 the market discount that must
be included for each period is equal to the lesser of (i) the amount of the
market discount accruing during such period (plus any accrued market discount
for prior periods not previously taken into account) or (ii) the amount of the
principal payment with respect to such period. Generally, market discount
accrues on a daily basis for each day the debt security is held by a ProFund at
a constant rate over the time remaining to the debt security's maturity or, at
the election of the ProFund, at a constant yield to maturity which takes into
account the semi-annual compounding of interest. Gain realized on the
disposition of a market discount obligation must be recognized as ordinary
interest income (not capital gain) to the extent of the "accrued market
discount."
ORIGINAL ISSUE DISCOUNT
Certain debt securities acquired by the ProFunds may be treated as debt
securities that were originally issued at a discount. Original issue discount
can generally be defined as the difference between the price at which a security
was issued and its stated redemption price at maturity. Although no cash income
is actually received by a ProFund, original issue discount that accrues on a
debt security in a given year generally is treated for federal income tax
purposes as interest and, therefore, such income would be subject to the
distribution requirements applicable to regulated investment companies.
Some debt securities may be purchased by the ProFunds at a discount that
exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for federal income tax purposes
(see above).
OPTIONS, FUTURES AND FOREIGN CURRENCY FORWARD CONTRACTS
Any regulated futures contracts and certain options (namely, nonequity
options and dealer equity options) in which a ProFund may invest may be "section
1256 contracts." Gains (or losses) on these contracts generally are considered
to be 60% long-term and 40% short-term capital gains or losses; however foreign
currency gains or losses arising from certain section 1256 contracts are
ordinary in character. Also, section 1256 contracts held by a ProFund at the
end of each taxable year (and on certain other dates prescribed in the Code) are
"marked to market" with the result that unrealized gains or losses are treated
as though they were realized.
Transactions in options, futures and forward contracts undertaken by the
ProFunds may result in "straddles" for federal income tax purposes. The
straddle rules may affect the character of gains (or losses) realized by a
ProFund, and losses realized by the ProFund on positions that are part of a
straddle may be deferred under the straddle rules, rather than being taken into
account in calculating the taxable income for the taxable year in which the
losses are realized. In addition, certain carrying charges (including
interest expense) associated with positions in a straddle may be required to be
capitalized rather than deducted currently. Certain elections that a ProFund
may make with respect to its straddle positions may also affect the amount,
character and timing of the recognition of gains or losses from the affected
positions.
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Because only a few regulations implementing the straddle rules have been
promulgated, the consequences of such transactions to the ProFunds are not
entirely clear. The straddle rules may increase the amount of short-term
capital gain realized by a ProFund, which is taxed as ordinary income when
distributed to shareholders. Because application of the straddles rules may
affect the character of gains or losses, defer losses and/or accelerate the
recognition of gains or losses from the affected straddle positions, the amount
which must be distributed to shareholders as ordinary income or long-term
capital gain may be increased or decreased substantially as compared to a fund
that did not engage in such transactions.
CONSTRUCTIVE SALES
Recently enacted rules may affect the timing and character of gain if a
ProFund engages in transactions that reduce or eliminate its risk of loss with
respect to appreciated financial positions. If the ProFund enters into certain
transactions in property while holding substantially identical property, the
ProFund would be treated as if it had sold and immediately repurchased the
property and would be taxed on any gain (but not loss) from the constructive
sale. The character of gain from a constructive sale would depend upon the
ProFund's holding period in the property. Loss from a constructive sale would
be recognized when the property was subsequently disposed of, and its character
would depend on the ProFund's holding period and the application of various loss
deferral provisions of the Code.
PASSIVE FOREIGN INVESTMENT COMPANIES
The ProFunds may invest in shares of foreign corporations that may be
classified under the Code as passive foreign investment companies ("PFICs"). In
general, a foreign corporation is classified as a PFIC if at least one-half of
its assets constitute investment-type assets, or 75% or more of its gross income
is investment-type income. If a ProFund receives a so-called "excess
distribution" with respect to PFIC stock, the ProFund itself may be subject to a
tax on a portion of the excess distribution, whether or not the corresponding
income is distributed by the ProFund to shareholders. In general, under the
PFIC rules, an excess distribution is treated as having been realized ratably
over the period during which the ProFund held the PFIC shares. Each ProFund
will itself be subject to tax on the portion, if any, of an excess
distribution that is so allocated to prior ProFund taxable years and an
interest factor will be added to the tax, as if the tax had been payable in such
prior taxable years. Certain distributions from a PFIC as well as gain from the
sale of PFIC shares are treated as excess distributions. Excess distributions
are characterized as ordinary income even though, absent application of the PFIC
rules, certain excess distributions might have been classified as capital gains.
The ProFunds may be eligible to elect alternative tax treatment with respect
to PFIC shares. Under an election that currently is available in some
circumstances, a ProFund generally would be required to include in its gross
income its share of the earnings of a PFIC on a current basis, regardless of
whether distributions were received from the PFIC in a given year. If this
election were made, the special rules, discussed above, relating to the taxation
of excess distributions, would not apply. In addition, another election would
involve marking to market the ProFund's PFIC shares at the end of each taxable
year, with the result that unrealized gains would be treated as though they were
realized and reported as ordinary income. Any mark-to-market losses and any
loss from an actual disposition of ProFund shares would be deductible as
ordinary losses to the extent of any net mark-to-market gains included in income
in prior years.
DISTRIBUTIONS
Distributions of investment company taxable income are taxable to a U.S.
shareholder as ordinary income, whether paid in cash or shares. Dividends paid
by a ProFund to a corporate shareholder, to the extent such dividends are
attributable to dividends received from U.S. corporations by the ProFund, may
qualify for the dividends received deduction. However, the revised alternative
minimum tax applicable to corporations may deduct the value of the dividends
received deduction. Distributions of net capital gains (the excess of net long-
term capital gains over net short-term capital losses), if any, designated by
the ProFund as capital gain dividends, whether paid in cash or in shares, are
taxable as gain from the sale or
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exchange of an asset held for more than one year, regardless of how long the
shareholder has held the ProFund's shares. Capital gains dividends are not
eligible for the dividends received deduction.
Shareholders will be notified annually as to the U.S. federal tax status of
distributions, and shareholders receiving distributions in the form of newly
issued shares will receive a report as to the net asset value of the shares
received.
If the net asset value of shares is reduced below a shareholder's cost as a
result of a distribution by a ProFund, such distribution generally will be
taxable even though it represents a return of invested capital. Investors should
be careful to consider the tax implications of buying shares of a ProFund just
prior to a distribution. The price of shares purchased at this time will include
the amount of the forthcoming distribution, but the distribution will generally
be taxable.
If a shareholder has chosen to receive distributions in cash, and the postal (
or other delivery ) service is unable to deliver checks to the shareholder's
address of record, the ProFunds will change the distribution option so that all
distributions are automatically reinvested in additional shares. The ProFunds
will not pay interest on uncashed distribution checks.
DISPOSITION OF SHARES
Upon a redemption, sale or exchange of shares of a ProFund, a shareholder will
realize a taxable gain or loss depending upon his or her basis in the shares. A
gain or loss will be treated as capital gain or loss if the shares are capital
assets in the shareholder's hands and generally will be long-term, mid-term or
short-term, depending upon the shareholder's holding period for the shares. Any
loss realized on a redemption, sale or exchange will be disallowed to the extent
the shares disposed of are replaced (including through reinvestment of
dividends) within a period of 61 days, beginning 30 days before and ending 30
days after the shares are disposed of. In such a case the basis of the shares
acquired will be adjusted to reflect the disallowed loss. Any loss realized by a
shareholder on the disposition of a ProFund's shares held by the shareholder for
six months or less will be treated for tax purposes as a long-term capital loss
to the extent of any distributions of capital gain dividends received or treated
as having been received by the shareholder with respect to such shares.
BACKUP WITHHOLDING
Each ProFund generally will be required to withhold federal income tax at a
rate of 31% ("backup withholding") from dividends paid, capital gain
distributions, and redemption proceeds to shareholders if (1) the shareholder
fails to furnish the ProFund with the shareholder's correct taxpayer
identification number or social security number, (2) the IRS notifies the
shareholder or the ProFund that the shareholder has failed to report properly
certain interest and dividend income to the IRS and to respond to notices to
that effect, or (3) when required to do so, the shareholder fails to certify
that he or she is not subject to backup withholding. Any amounts withheld may
be credited against the shareholder's federal income tax liability.
OTHER TAXATION
Distributions may be subject to additional state, local and foreign taxes,
depending on each shareholder's particular situation. Non-U.S. shareholders and
certain types of U.S. shareholders subject to special treatment under the U.S.
federal income tax laws (e.g. banks and life insurance companies) may be subject
to U.S. tax rules that differ significantly from those summarized above.
EQUALIZATION ACCOUNTING
Each ProFund distributes its net investment income and capital gains to
shareholders as dividends annually to the extent required to qualify as a
regulated investment company under the Code and generally to avoid federal
income or excise tax. Under current law, each ProFund may on its tax return
treat as a
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<PAGE>
distribution of investment company taxable income and net capital gain the
portion of redemption proceeds paid to redeeming shareholders that represents
the redeeming shareholders' portion of the ProFund's undistributed investment
company taxable income and net capital gain. This practice, which involves the
use of equalization accounting, will have the effect of reducing the amount of
income and gains that the ProFund is required to distribute as dividends to
shareholders in order for the ProFund to avoid federal income tax and excise
tax. This practice may also reduce the amount of distributions required to be
made to nonredeeming shareholders and the amount of any undistributed income
will be reflected in the value of the ProFund's shares; the total return on a
shareholder's investment will not be reduced as a result of the ProFund's
distribution policy. Investors who purchase shares shortly before the record
date of a distribution will pay the full price for the shares and then receive
some portion of the price back as a taxable distribution.
PERFORMANCE INFORMATION
TOTAL RETURN CALCULATIONS
From time to time, each of the ProFunds may advertise its total return for
prior periods. Any such advertisement would include at least average annual
total return quotations for one, five, and ten-year periods, or for the life of
the ProFund. Other total return quotations, aggregate or average, over other
time periods for the ProFund also may be included.
The total return of a ProFund for a particular period represents the increase
(or decrease) in the value of a hypothetical investment in the ProFund from the
beginning to the end of the period. Total return is calculated by subtracting
the value of the initial investment from the ending value and showing the
difference as a percentage of the initial investment; this calculation assumes
that the initial investment is made at the current net asset value and that all
income dividends or capital gains distributions during the period are reinvested
in shares of the ProFund at net asset value. Total return is based on
historical earnings and net asset value fluctuations and is not intended to
indicate future performance. No adjustments are made to reflect any income
taxes payable by shareholders on dividends and distributions paid by the
ProFund.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equal the initial amount invested to the ending redeemable value.
COMPARISONS OF INVESTMENT PERFORMANCE
In conjunction with performance reports, promotional literature, and/or
analyses of shareholder service for a ProFund, comparisons of the performance
information of the ProFund for a given period to the performance of recognized,
unmanaged indexes for the same period may be made. Such indexes include, but
are not limited to, ones provided by Dow Jones & Company, Standard & Poor's
Corporation, Lipper Analytical Services, Inc., Shearson Lehman Brothers, the
National Association of Securities Dealers, Inc., The Frank Russell Company,
Value Line Investment Survey, the American Stock Exchange, the Philadelphia
Stock Exchange, Morgan Stanley Capital International, Wilshire Associates, the
Financial Times-Stock Exchange, and the Nikkei Stock Average and Deutsche
Aktienindex, all of which are unmanaged market indicators. Such comparisons can
be useful measures of the quality of a ProFund's investment performance.
In addition, rankings, ratings, and comparisons of investment performance
and/or assessments of the quality of shareholder service appearing in
publications such as Money, Forbes, Kiplinger's Magazine, Personal Investor,
Morningstar, Inc., and similar sources which utilize information compiled
(i) internally, (ii) by Lipper Analytical Services, Inc. ("Lipper"), or
(iii) by other recognized analytical services, may be used in sales literature.
The total return of each ProFund 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.
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Further information about the performance of the ProFunds is contained in the
ProFunds annual reports to shareholders, which may be obtained without charge by
writing to the ProFunds at the address or telephoning the ProFunds at the
telephone number set forth on the cover page of this SAI.
FINANCIAL STATEMENTS
Since the ProFunds had not commenced operation as of the date of this
Statement of Additional Information, there are no financial statements to
include in the Statement of Additional Information.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS, OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR PRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY PROFUNDS. THIS STATEMENT OF ADDITIONAL INFORMATION
DOES NOT CONSTITUTE AN OFFERING BY PROFUNDS IN ANY JURISDICTION IN WHICH SUCH AN
OFFERING MAY NOT LAWFULLY BE MADE.
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