May 1, 1999
as revised
February 14, 2000
prospectus
ProFunds No-Load Mutual Funds
Bull ProFund
UltraBull ProFund
UltraOTC ProFund
UltraEurope ProFund
Bear ProFund
UltraBear ProFund
UltraShort OTC ProFund
Money Market ProFund
[LOGO APPEARS HERE]
PROFUNDS
Like shares of all mutual funds, these securities have not been approved or
disapproved by the Securities and Exchange Commission nor has the Securities and
Exchange Commission passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
<PAGE>
Table of Contents
1 Benchmark ProFunds
17 Benchmark ProFunds Strategy
21 Money Market ProFund
27 Money Market ProFund Strategy
31 Share Prices, Classes & Tax Information
37 Shareholder Services Guide
49 ProFunds Management
53 Financial Highlights
[LOGO APPEARS HERE] ProFund Advisors LLC
PROFUNDS Bankers Trust Company
Investment Advisors
<PAGE>
[GRAPHIC APPEARS HERE]
Benchmark
ProFunds
Overview
The no-load Benchmark ProFunds each seek to achieve a daily
return equal to the performance of a particular stock market
benchmark.*
o For example, the Bull ProFund seeks to match the daily
performance of a stock market index--the S&P 500 Composite
Stock Price Index(R) ("S&P 500 Index")--like a conventional
index fund.
o Unlike conventional index funds, certain ProFunds seek to
double the daily return of a specified stock market index.
o Other ProFunds seek to produce a daily return of the inverse
(opposite) or double the inverse (opposite) of a particular
stock market index. The value of these ProFunds should go up
when the index underlying their benchmark goes down, and their
value should go down when the index goes up.
*A stock index reflects the price of a group of stocks of
specified companies. A benchmark can be any standard of
investment performance to which a mutual fund seeks to match
its return. For example, UltraBull ProFund has a benchmark of
twice the daily return of the S&P 500 Index.
Benchmark ProFunds 1
<PAGE>
These ProFunds seek to match or double an Index's daily performance:
<TABLE>
<CAPTION>
ProFund Index Daily Objective Types of Companies in Index
<S> <C> <C> <C>
Bull S&P 500 Match Diverse, widely traded,
large capitalization
UltraBull S&P 500 Double Diverse, widely traded,
large capitalization
UltraOTC NASDAQ 100 Double Large capitalization, most
with technology and/or
growth orientation
UltraEurope ProFunds Europe Double Large capitalization, widely
traded European stocks
</TABLE>
These ProFunds seek to match or double the Inverse (opposite) of an Index's
daily performance:
<TABLE>
<CAPTION>
ProFund Index Daily Objective Types of Companies in Index
<S> <C> <C> <C>
Bear S&P 500 Inverse Diverse, widely traded,
large capitalization
UltraBear S&P 500 Double the inverse Diverse, widely traded,
large capitalization
UltraShort OTC NASDAQ 100 Double the inverse Large capitalization, most
with technology and/or
growth orientation
</TABLE>
The ProFunds also offer the Money Market ProFund, which is
discussed later in this prospectus.
2 Benchmark ProFunds
<PAGE>
Benchmark ProFunds Objectives
The investment objective of each of the Benchmark ProFunds is
set forth below:
o Bull ProFund--seeks daily investment results that correspond
to the performance of the S&P 500 Index.
o UltraBull ProFund--seeks daily investment results that
correspond to twice (200%) the performance of the S&P 500
Index. If the UltraBull ProFund is successful in meeting its
objective, it should gain approximately twice as much as the
Bull ProFund when the prices of the securities in the S&P 500
Index rise on a given day and should lose approximately twice
as much when such prices decline on that day.
o UltraOTC ProFund--seeks daily investment results that
correspond to twice (200%) the performance of the NASDAQ 100
Index(TM). If the UltraOTC ProFund is successful in meeting
its objective, it should gain approximately twice as much as
the growth oriented NASDAQ 100 Index(TM) when the prices of
the securities in that index rise on a given day and should
lose approximately twice as much when such prices decline on
that day.
o UltraEurope ProFund--seeks daily investment results that
correspond to twice (200%) the performance of the ProFunds
Europe Index. If the UltraEurope ProFund is successful in
meeting its objective, it should gain approximately twice as
much as the ProFunds Europe Index when the prices of the
securities in that index rise on a given day and should lose
approximately twice as much when such prices decline on that
day.
o Bear ProFund--seeks daily investment results that correspond
to the inverse (opposite) of the performance of the S&P 500
Index. If the Bear ProFund is successful in meeting its
objective, the net asset value of Bear ProFund shares will
increase in direct proportion to any decrease in the level of
the S&P 500 Index. Conversely, the net asset value of Bear
ProFund shares will decrease in direct proportion to any
increase in the level of the S&P 500 Index.
Benchmark ProFunds 3
<PAGE>
o UltraBear ProFund--seeks daily investment results that
correspond to twice (200%) the inverse (opposite) of the
performance of the S&P 500 Index. The net asset value of
shares of the UltraBear ProFund should increase or decrease
approximately twice as much as does that of the Bear ProFund
on any given day.
[GRAPHIC APPEARS HERE]
For example, if the S&P 500 Index were to decrease by 1% on a
particular day, investors in the Bear ProFund should
experience a gain in net asset value of approximately 1% for
that day. The UltraBear ProFund should realize an increase of
approximately 2% of its net asset value on the same day.
Conversely, if the S&P 500 Index were to increase by 1% by the
close of business on a particular trading day, investors in
the Bear ProFund and the UltraBear ProFund would experience a
loss in net asset value of approximately 1% and 2%
respectively.
o UltraShort OTC ProFund--seeks daily investment results that
correspond to twice (200%) the inverse (opposite) of the
performance of the NASDAQ 100 Index(TM). This ProFund operates
similar to the UltraBear ProFund, but UltraShort OTC ProFund
is benchmarked to the NASDAQ 100 Index(TM).
The securities indexes that these ProFunds use as their
benchmarks are described below under "Benchmark Indexes."
Strategy
ProFund Advisors uses quantitative and statistical analysis it
developed in seeking to achieve each Benchmark ProFund's
investment objective. This analysis determines the type,
quantity and mix of investment positions that a Benchmark
ProFund should hold to approximate the performance of its
benchmark.
4 Benchmark ProFunds
<PAGE>
The Bull, UltraBull, UltraOTC and UltraEurope ProFunds
principally invest in:
o Futures contracts on stock indexes, and options on futures
contracts; and
o Financial instruments such as equity caps, collars, floors,
and options on securities and stock indexes.
These ProFunds invest in the above instruments generally as a
substitute for investing directly in stocks. In addition,
these ProFunds may invest in a combination of stocks that in
ProFund Advisors' opinion should simulate the movement of the
appropriate benchmark index.
The Ultra ProFunds generally invest in the above instruments
to produce economically "leveraged" investment results.
Leverage is a way to change small market movements into larger
changes in the value of a Benchmark ProFund's investments.
The Bear, UltraBear and UltraShort OTC ProFunds generally do
not invest in traditional securities, such as common stock of
operating companies. Rather, these ProFunds principally invest
in futures contracts, options contracts and other financial
instruments, and engage in short sales. Using these
techniques, these ProFunds will generally incur a loss if the
price of the underlying security or index increases between
the date of the employment of the technique and the date on
which the ProFund terminates the position. These ProFunds will
generally realize a gain if the underlying security or index
declines in price between those dates.
The UltraEurope ProFund invests in financial instruments with
values that reflect the performance of stocks of European
companies.
Benchmark ProFunds 5
<PAGE>
Benchmark ProFunds' Risks
Like all investments, the ProFunds entail risk. ProFund
Advisors cannot guarantee that any of the Benchmark ProFunds
will achieve its objective. As with any mutual fund, the
Benchmark ProFunds could lose money, or their performance
could trail that of other investment alternatives.
In addition, the Benchmark ProFunds present some risks not
traditionally associated with most mutual funds. It is
important that investors closely review and understand these
risks before making an investment in the ProFunds.
The following chart summarizes certain risks associated with
the Benchmark ProFunds:
Market Leverage Inverse Correlation Foreign
Risk Risk Risk Risk
Bull X
UltraBull X X
UltraOTC X X
UltraEurope X X X
Bear X X
UltraBear X X X
UltraShort OTC X X X
These and other risks are described below.
Certain Risks Associated with Particular ProFunds
o Leverage Risk The Ultra ProFunds employ leveraged investment
techniques. Leverage is the ability to get a return on a
capital base that is larger than a ProFund's investment. Use
of leverage can magnify the effects of changes in the value of
these ProFunds and makes them more volatile. The leveraged
investment
6 Benchmark ProFunds
<PAGE>
techniques that the Ultra ProFunds employ should cause
investors in these ProFunds to lose more money in adverse
environments.
o Inverse Correlation Risk Shareholders in the negatively
correlated ProFunds should lose money when the index
underlying their benchmark rises -- a result that is the
opposite from traditional equity mutual funds.
o Foreign Investment Risk UltraEurope ProFund entails the risk
of foreign investing, which may involve risks not typically
associated with investing in U.S. securities alone:
o Many foreign countries lack uniform accounting and
disclosure standards, or have standards that differ from
U.S. standards. Accordingly, the UltraEurope ProFund may not
have access to adequate or reliable company information.
o UltraEurope ProFund will be subject to the market,
economic and political risks of the countries where they
invest or where the companies represented in the benchmark
indexes are located.
o Securities purchased by the UltraEurope ProFund may be
priced in foreign currencies. Their value could change
significantly as the currencies strengthen or weaken
relative to the U.S. dollar. ProFund Advisors does not
engage in activities designed to hedge against foreign
currency fluctuations.
o On January 1, 1999, the eleven nations of the European
Monetary Union, including Germany and France, began the
process of introducing a uniform currency. The new currency,
the euro, is expected to reshape financial markets, banking
systems and monetary policy in Europe and throughout the
world. The continued transition to the euro may also have a
worldwide impact on the economic environment and behavior of
investors.
Benchmark ProFunds 7
<PAGE>
Risks in Common
Each Benchmark ProFund faces certain risks in common:
o Market Risk The Benchmark ProFunds are subject to market
risks that will affect the value of their shares, including
general economic and market conditions, as well as
developments that impact specific industries or companies.
Shareholders in the positively correlated ProFunds should lose
money when the index underlying their benchmark declines.
Shareholders in the negatively correlated ProFunds should lose
money when the index underlying their benchmark rises. These
indexes are discussed in the next section.
o Liquidity Risk In certain circumstances, such as a
disruption of the orderly markets for the financial
instruments in which ProFunds invest, ProFunds might not be
able to dispose of certain holdings quickly or at prices that
represent true market value in the judgment of ProFund
Advisors. This may prevent ProFunds from limiting losses or
realizing gains.
o Correlation Risk While ProFund Advisors expects that each of
the Benchmark ProFunds will track its benchmark with an
average correlation of .90 or better over a year, there can be
no guarantee that the ProFunds will be able to achieve this
level of correlation. A failure to achieve a high degree of
correlation may prevent a Benchmark ProFund from achieving its
investment goal.
o Non-Diversification Risk The Benchmark ProFunds are
classified as "non-diversified" under the federal securities
laws. They have the ability to concentrate a relatively high
percentage of their investments in the securities of a small
number of companies. This would make the performance of a
Benchmark ProFund more susceptible to a single economic,
political or regulatory event than a more diversified mutual
fund might be. Nevertheless, the Benchmark ProFunds intend to
invest on a diversified basis.
8 Benchmark ProFunds
<PAGE>
o Risks of Aggressive Investment Techniques The Benchmark
ProFunds use investment techniques that may be considered
aggressive. Risks associated with the use of options, futures
contracts, and options on futures contracts include
potentially dramatic price changes (losses) in the value of
the instruments and imperfect correlations between the price
of the contract and the underlying security or index.
Benchmark Indexes
o The S&P 500 Index is a widely used measure of large U.S.
company stock performance. It consists of the common stocks of
500 major corporations selected for their size and the
frequency and ease with which their stocks trade. Standard &
Poor's also attempts to assure that the Index reflects the
full range and diversity of the American economy. The
companies in the S&P 500 account for nearly three-quarters of
the value of all U.S. stocks.
o The NASDAQ 100 Index contains 100 of the largest and most
active non-financial domestic and international issues listed
on the NASDAQ Stock Market based on market capitalization.
Eligibility criteria for the NASDAQ 100 Index includes a
minimum average daily trading volume of 100,000 shares. If the
security is a foreign security, the company must have a world
wide market value of at least $10 billion, a U.S. market
value of at least $4 billion, and average trading volume of at
least 200,000 shares per day.
o ProFunds Europe Index ("PEI") is a combined measure of
European stock performance created by ProFund Advisors from
the leading stock indexes of Europe's three largest economies
giving equal weight to each index each day. The PEI averages
the daily results of:
o The Financial Times Stock Exchange 100 ("FTSE-100") Share
Index, a capitalization-weighted index of the 100 most
highly capitalized companies traded on the London Stock
Exchange.
Benchmark ProFunds 9
<PAGE>
o The Deutsche Aktienindex ("DAX"), is a total rate of
return index of 30 selected German blue-chip stocks traded
on the Frankfurt Stock Exchange.
o The CAC-40, a capitalization-weighted index of 40
companies listed on the Paris Stock Exchange (the Bourse).
ProFunds' Board of Trustees may change benchmarks without
shareholder approval if, for example, it believes another
benchmark might better suit shareholder needs.
Who May Want to Consider a ProFunds Investment
The Bull ProFund may be appropriate for investors who want to
receive investment results approximating the performance of
the S&P 500 Index.
The UltraBull, UltraOTC and UltraEurope ProFunds may be
appropriate for investors who:
o believe that over the long term, the value of a particular
index will increase, and that by investing with the objective
of doubling the index's daily return they will achieve
superior results over time. Investors in these ProFunds should
understand that since each Ultra ProFund seeks to double the
daily performance of its benchmark index, it should have twice
the volatility of a conventional index fund and twice the
potential risk of loss.
o are seeking to match an index's daily return with half the
investment required of conventional stock index mutual funds.
An investor might invest $100,000 in a conventional S&P 500
Index Fund. Alternatively that same investor could invest
half that amount--$50,000--in UltraBull ProFund and target
the same daily return.
The Bear, UltraBear and UltraShort OTC ProFunds may be
appropriate for investors who:
o expect the underlying index to go down and desire to earn a
profit as a result of the index declining.
o want to protect (or hedge) the value of a diversified
portfolio of stocks and/or stock mutual funds from a stock
market downturn that they anticipate.
10 Benchmark ProFunds
<PAGE>
An investor with a diversified portfolio of stocks or stock
mutual funds valued at $100,000 might be concerned that the
general stock market could decrease or be volatile for the
next six months. The investor could try to protect the
portfolio against downturns in the stock market by investing
$50,000 in Bear, UltraBear or UltraShort OTC ProFund-or in a
combination of these ProFunds. Of course, the investor likely
would also be giving up gains that the portfolio would
otherwise produce if the markets go up rather than down in
value. ProFunds cannot assure that doing so would protect
against market downturns.
All of the ProFunds may be appropriate for investors who:
o are executing a strategy that relies on frequent buying,
selling or exchanging among stock mutual funds, since the
ProFunds do not limit how often an investor may exchange among
the ProFunds and do not impose any transaction fee when
investors buy, sell or exchange a ProFund.
o want the impact of their investment to range from double the
index to double the inverse of the index based on their
current view, positive or negative, of the index.
Benchmark ProFunds 11
<PAGE>
Benchmark ProFunds' Performance
The bar chart and tables in this section can help you evaluate
the potential risks of investing in the Benchmark ProFunds.
The bar chart shows the 1998 return for the Investor Class
shares of each Benchmark ProFund available to the public for a
year or more as of December 31, 1998 (which excludes the newly
formed UltraShort OTC and UltraEurope ProFunds). The first
table compares each such ProFund's return for Investor Class
shares in 1998 and since inception with its relevant benchmark
index. The second table compares each such ProFund's return
for Service Class shares in 1998 and since inception with its
relevant benchmark index. Of course, how a Benchmark ProFund
has performed in the past is not necessarily an indication of
how it will perform in the future.
[BAR CHART APPEARS HERE]
1998 Returns
[____]26.57% Bull ProFund
[_______]42.95% UltraBull ProFund
[___________________]185.34% UltraOTC ProFund
-19.46%[__] Bear ProFund
-38.34%[____] UltraBear ProFund
During the period covered in the chart above, the highest and
lowest return of the Investor Class shares of each of these
Benchmark ProFunds in any calendar quarters were as follows:
<TABLE>
<CAPTION>
Highest Quarterly Lowest Quarterly
Fund Return (%) Return (%)
- -------------------------------------------------------------------------------------
<S> <C> <C>
Bull ProFund Q4 1998 (20.37%) Q3 1998 (-9.95%)
Bear ProFund Q3 1998 (11.11%) Q4 1998 (-17.06%)
UltraBull ProFund Q4 1998 (41.36%) Q3 1998 (-22.46%)
UltraBear ProFund Q3 1998 (17.87%) Q4 1998 (-32.26%)
UltraOTC ProFund Q4 1998 (72.73%) Q3 1998 (-5.15%)
</TABLE>
* Excludes dividends.
12 Benchmark ProFunds
<PAGE>
Average Annual INVESTOR CLASS Share Returns
as of December 31, 1998
One Year Since Inception Inception Date
Bull ProFund 26.57% 23.07% 12/02/97
S&P 500 Index* 26.67% 24.18%
UltraBull ProFund 42.95% 42.34% 11/28/97
S&P 500 Index* 26.67% 26.92%
UltraOTC ProFund 185.34% 123.30% 12/02/97
NASDAQ 100 Index(TM)* 85.31% 70.12%
Bear ProFund -19.46% -19.41% 12/31/97
S&P 500 Index* 26.67% 26.67%
UltraBear ProFund -38.34% -35.43% 12/23/97
S&P 500 Index* 26.67% 28.27%
Average Annual SERVICE CLASS Share Returns
as of December 31, 1998
One Year Since Inception Inception Date
Bull ProFund 25.68% 22.26% 12/02/97
S&P 500 Index* 26.67% 24.18%
UltraBull ProFund 41.48% 40.99% 11/28/97
S&P 500 Index* 26.67% 26.92%
UltraOTC ProFund 183.98% 122.32% 12/02/97
NASDAQ 100 Index(TM)* 85.31% 70.12%
Bear ProFund -20.04% -19.99% 12/31/97
S&P 500 Index* 26.67% 26.67%
UltraBear ProFund -38.45% -35.60% 12/23/97
S&P 500 Index* 26.67% 28.27%
* Excludes dividends.
Benchmark ProFunds 13
<PAGE>
Annual Benchmark ProFund Operating Expenses
The tables below describe the fees and expenses you may pay if
you buy and hold shares in any of the Benchmark ProFunds. The
ProFunds are "no-load" mutual funds. You pay no sales charge
when you buy or sell shares, or when you reinvest dividends.
Shareholder Fees - INVESTOR CLASS SHARES and SERVICE CLASS SHARES
(paid directly from your investment)
Wire Redemption Fee* $15
* This charge may be waived at the discretion of the ProFunds.
Annual Operating Expenses--INVESTOR CLASS Shares
(percentage of average daily net assets)
Bull UltraBull UltraOTC UltraEurope
ProFund* ProFund(dagger) ProFund(dagger)ProFund**
Management fees 0.75% 0.75% 0.75% 0.90%
Distribution none none none none
(12b-1) fees
Other expenses 0.98% 0.55% 0.50% 0.58%
Total annual 1.73% 1.30% 1.25% 1.48%
operating expenses
Fee waiver 0.34%* none none none
Net expenses 1.39% 1.30% 1.25% 1.48%
Bear UltraBear UltraShort OTC
ProFund* ProFund(dagger) ProFund(dagger)
Management fees 0.75% 0.75% 0.75%
Distribution none none none
(12b-1) fees
Other expenses 1.15% 0.59% 0.68%
Total annual 1.90% 1.34% 1.43%
operating expenses
Fee waiver 0.51%* none none
Net expenses 1.39% 1.34% 1.43%
* ProFund Advisors has contractually agreed to waive fees through
December 31, 1999 with respect to the indicated ProFunds.
(dagger) Expenses have been restored to reflect current operating expense
ratios.
** Based on estimated expenses to be incurred in the first year of
operations.
14 Benchmark ProFunds
<PAGE>
Annual Operating Expenses--SERVICE CLASS Shares
(percentage of average daily net assets)
Bull UltraBull UltraOTC UltraEurope
ProFund* ProFund(dagger)ProFund(dagger) ProFund**
Management fees 0.75% 0.75% 0.75% 0.90%
Distribution none none none none
(12b-1) fees
Other expenses 2.02% 1.54% 1.59% 1.58%
Total annual 2.77% 2.29% 2.34% 2.48%
operating expenses
Fee waiver 0.34%* none none none
Net expenses 2.43% 2.29% 2.34% 2.48%
Bear UltraBear UltraShort OTC
ProFund* ProFund(dagger) ProFund(dagger)
Management fees 0.75% 0.75% 0.75%
Distribution none none none
(12b-1) fees
Other expenses 2.15% 1.57% 1.72%
Total annual 2.90% 2.32% 2.47%
operating expenses
Fee waiver 0.51%* none none
Net expenses 2.39% 2.32% 2.47%
* ProFund Advisors has contractually agreed to waive fees through
December 31, 1999 with respect to the indicated ProFunds.
(dagger) Expenses have been restored to reflect current operating expense
ratios.
** Based on estimated expenses to be incurred in the first year of
operations.
Benchmark ProFunds 15
<PAGE>
Expense Examples
The following examples illustrate the expenses you would have
incurred on a $10,000 investment in each Benchmark ProFund,
and are intended to help you compare the cost of investing in
the Benchmark ProFunds compared to other mutual funds. The
examples assume that you invested for the time periods shown
and redeemed all of your shares at the end of each period,
that each ProFund earns an annual return of 5% over the
periods shown, that you reinvest all dividends and
distributions, and that gross operating expenses remain
constant (1 year examples for Bull and Bear ProFunds reflect
current fee waivers). Because these examples are hypothetical
and for comparison only, your actual costs will be different.
INVESTOR CLASS Expense Examples
1 year 3 years 5 years 10 years
UltraBull ProFund $132 $412 $713 $1,568
UltraOTC ProFund $127 $397 $686 $1,511
Bull ProFund $142 $545 $939 $2,041
Bear ProFund $142 $597 $1,026 $2,222
UltraBear ProFund $136 $425 $734 $1,613
UltraShort OTC ProFund $146 $452 $782 $1,713
UltraEurope ProFund(1) $151 $468 N/A N/A
SERVICE CLASS Expense Examples
1 year 3 years 5 years 10 years
UltraBull ProFund $232 $715 $1,225 $2,626
UltraOTC ProFund $237 $730 $1,250 $2,676
Bull ProFund $246 $859 $1,464 $3,099
Bear ProFund $242 $898 $1,528 $3,223
UltraBear ProFund $235 $724 $1,240 $2,656
UltraShort OTC ProFund $250 $770 $1,316 $2,806
UltraEurope ProFund(1) $251 $773 N/A N/A
(1)The Securities and Exchange Commission requires that this ProFund estimate
expenses for one and three years only.
16 Benchmark ProFunds
<PAGE>
[GRAPHIC APPEARS HERE]
Benchmark ProFunds
strategy
What the Benchmark ProFunds Do
Each Benchmark ProFund:
o Seeks to provide its shareholders with predictable
investment returns approximating its benchmarks by investing
in securities and other financial instruments, such as futures
and options on futures.
o Uses a mathematical and quantitative approach.
o Pursues their objectives regardless of market conditions,
trends or direction.
o Seeks to provide correlation with their benchmarks on a
daily basis.
What the Benchmark ProFunds Do Not Do
ProFund Advisors does not:
o Conduct conventional stock research or analysis or forecast
stock market movement in managing the Benchmark ProFunds'
assets.
o Invest the Benchmark ProFunds' assets in stocks or
instruments based on ProFund Advisors' view of the fundamental
prospects of particular companies.
o Adopt defensive positions by investing in cash or other
instruments in anticipation of an adverse climate for the
ProFunds' benchmark indexes.
o Seek to invest to realize dividend income from their
investments.
Benchmark ProFunds Strategy 17
<PAGE>
In addition, the Ultra ProFunds do not seek to provide
correlation with their benchmark over a period of time other
than daily, such as monthly or annually, since mathematical
compounding prevents these ProFunds from achieving such
results.
Important Concepts
o Leverage offers a means of magnifying small market
movements, up or down, into large changes in an investment's
value.
o Futures, or futures contracts, are contracts to pay a fixed
price for an agreed-upon amount of commodities or securities,
or the cash value of the commodity or securities, on an
agreed-upon date.
o Option contracts grant one party a right, for a price,
either to buy or sell a security or futures contract at a
fixed sum during a specified period or on a specified day.
o Selling short, or borrowing stock to sell to a third party,
is a technique that may be employed by the ProFunds to seek
gains when their benchmark index declines. If the ProFund
replaces the security to the lender at a price lower than the
price it borrowed it at plus interest incurred, the ProFund
makes a profit on the difference. If the current market price
is greater when the time comes to replace the stock, the
ProFund will incur a loss on the transaction.
18 Benchmark ProFunds Strategy
<PAGE>
Portfolio Turnover
ProFund Advisors expects a significant portion of the
Benchmark ProFunds' assets to come from professional money
managers and investors who use ProFunds as part of "market
timing" investment strategies. These strategies often call for
frequent trading of ProFund shares to take advantage of
anticipated changes in market conditions. Although ProFund
Advisors believes its accounting methodology should minimize
the effect on ProFunds of such trading, market timing trading
could increase the rate of ProFunds' portfolio turnover,
forcing realization of substantial capital gains and losses
and increasing transaction expenses. In addition, while
ProFunds does not expect it, large movements of assets into
and out of the ProFunds may negatively impact their abilities
to achieve their investment objectives or their level of
operating expenses.
Benchmark ProFunds Strategy 19
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20
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Money Market
ProFund
Objective
The Money Market ProFund invests its assets in the Cash
Management Portfolio (the "Portfolio"), a separate investment
company managed by Bankers Trust Company. This structure is
sometimes referred to as "master-feeder." The objective of the
Money Market ProFund and the Portfolio are identical: both
seek a high level of current income consistent with liquidity
and preservation of capital. The Portfolio seeks this
objective by investing in high quality short-term money market
instruments.
Strategy
Money Market ProFund invests for current income. In order to
maintain a stable share price, the Portfolio maintains a
dollar-weighted average maturity of 90 days or less.
Generally, securities in the Portfolio are valued in U.S.
dollars and have remaining maturities of 397 days (about 13
months) or less on their purchase date. The Portfolio may also
invest in securities that have features that reduce their
maturities to 397 days or less on their purchase date. The
Portfolio buys U.S. government debt obligations, money market
instruments and other debt obligations that at the time of
purchase:
o have received the highest short-term rating from two
nationally recognized statistical rating organizations; or
o have received the highest short-term rating from one rating
organization (if only one organization rates the security);
Money Market ProFund 21
<PAGE>
o if unrated, are determined to be of similar quality by the
Portfolio's investment advisor; or
o have no short-term rating, but are rated in the top three
highest long-term rating categories, or are determined to be
of similar quality by the Portfolio's investment advisor.
Risks
All money market instruments, including U.S. government debt
obligations, are subject to interest rate risk, which is the
risk that an investment will change in value when interest
rates change. Generally, investments subject to interest rate
risk will decrease in value when interest rates rise and
increase when interest rates decline.
Money market instruments are subject to credit risk, which is
the risk that the issuer of the instrument will default, or
fail to meet its payment obligations. In addition, they may
change in value if an issuer's creditworthiness changes,
although such a circumstance would be extremely unlikely in
the case of U.S. government debt obligations.
The Money Market ProFund also will be subject to the effects
of business, economic and regulatory developments that affect
the Portfolio or the financial services industry generally.
An investment in the Money Market ProFund is not a deposit of
a bank, nor is it insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. While
the Money Market ProFund tries to maintain a stable net asset
value of $1.00 per share, there is no guarantee that the Money
Market ProFund will do so, and you could lose money by
investing in this ProFund.
22 Money Market ProFund
<PAGE>
Considering a Money Market ProFund Investment
Investors can take advantage of the Money Market ProFund in
two ways:
o during periods when investors want to maintain a neutral
exposure to the stock market, the income earned from an
investment in the Money Market ProFund can keep their capital
at work.
o the Money Market ProFund can be invested in conjunction with
other ProFunds to adjust an investor's target exposure to an
index.
For instance, an investor who desires to target a daily
return of 1.5 times the daily performance of the S&P 500
Index could allocate 75% of his or her investment to the
UltraBull ProFund and 25% of the investment to the Money
Market ProFund.
Money Market ProFund's Total Returns and Expenses
The bar chart and tables in this section can help you evaluate
the potential risk of investing in Money Market ProFund. The
bar chart shows the 1998 return for the Investor Class shares
of the Money Market ProFund. The first table shows the Money
Market ProFund's return for Investor Class shares in 1998 and
since inception. The second table shows the return for Service
Class shares in 1998 and since inception. Of course, how the
Money Market ProFund has performed in the past is not
necessarily an indication of how it will perform in the
future.
1998 Returns
[__]4.8%.......................Money Market ProFund
During the period covered in the chart above, the highest
return in any calendar quarter for Money Market ProFund's
Investor Class shares was Q4 1998 (1.22%), and its lowest
quarterly return was Q3 1998 (1.14%).
Money Market ProFund 23
<PAGE>
Average Annual INVESTOR CLASS Share Returns
as of December 31, 1998
One Year Since Inception Inception Date
Money Market ProFund 4.84% 4.87% 11/17/97
The 7-day yield, the income yield for the previous seven days
projected over a full year, was 4.41% for Money Market
ProFund's Investor Class shares as of December 31, 1998. To
learn the current 7-day yield, call ProFunds at (888)
776-3637.
Average Annual SERVICE CLASS Share Returns
as of December 31, 1998
One Year Since Inception Inception Date
Money Market ProFund 3.81% 3.41% 11/17/97
The 7-day yield, the income yield for the previous seven days
projected over a full year, was 3.41% for Money Market
ProFund's Service Class shares as of December 31, 1998. To
learn the current 7-day yield, call ProFunds at (888)
776-3637.
Annual Fund Operating Expenses
The tables on the following page describe the fees and
expenses, including the Money Market ProFund's prorated
Portfolio expenses, you may pay if you buy and hold shares of
the Money Market ProFund. The Money Market ProFund is a
"no-load" mutual fund. You pay no sales charge when you buy or
sell shares or when you reinvest dividends.
Shareholder Fees - INVESTOR CLASS SHARES and SERVICE CLASS SHARES
(paid directly from your investment)
Wire Redemption Fee* $15
* This charge may be waived at the discretion of the ProFunds.
24 Money Market ProFund
<PAGE>
Money Market Annual Operating Expenses-INVESTOR CLASS Shares
(percentage of average daily net assets)
Management fees 0.15%
Distribution (12b-1) fees None
Other expenses* 0.68%
Total annual operating expenses* 0.83%
* Expenses have been restated to reflect current operating expense ratios.
Money Market Annual Operating Expenses-SERVICE CLASS Shares
(percentage of average daily net assets)
Management fees 0.15%
Distribution (12b-1) fees None
Other expenses* 1.68%
Total annual operating expenses* 1.83%
* Expenses have been restated to reflect current operating expense ratios.
Expense Examples
The examples below illustrate the expenses you would have
incurred on a $10,000 investment in each class of shares of
the Money Market ProFund, and are intended to help you compare
the cost of investing in the ProFund compared to other mutual
funds. The examples assume that you invested for the time
periods shown and redeemed all of your shares at the end of
each period, that the Money Market ProFund earns an annual
return of 5% over the periods shown, that you reinvest all
dividends and distributions, and that gross operating expenses
remain constant. Because this example is hypothetical and for
comparison only, your actual costs will be different.
1 Year 3 Years 5 Years 10 Years
Investor Shares $85 $265 $460 $1,025
Service Shares $186 $576 $990 $2,148
Money Market ProFund 25
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26
<PAGE>
Money Market ProFund
strategy
The Money Market ProFund invests all of its investable assets
in the Portfolio. The Portfolio may invest in high-quality,
short-term, dollar-denominated money market securities paying
a fixed, variable or floating interest rate. These include:
o Debt securities issued by U.S. and foreign banks, financial
institutions, and corporations, including certificates of
deposit, euro-time deposits, commercial paper (including
asset-backed commercial paper), notes, funding agreements and
U.S. government securities. Securities that do not satisfy the
maturity restrictions for a money market fund may be
specifically structured so that they are eligible investments
for money market funds. For example, some securities have
features which have the effect of shortening the security's
maturity.
o U.S. government securities that are issued or guaranteed by
the U.S. Treasury, or by agencies or instrumentalities of the
U.S. Government.
o Repurchase agreements, which are agreements to buy
securities at one price, with a simultaneous agreement to sell
back the securities at a future date at an agreed-upon price.
o Asset-backed securities, which are generally participations
in a pool of assets whose payment is derived from the payments
generated by the underlying assets. Payments on the
asset-backed security generally consist of interest and/or
principal.
Money Market ProFund Strategy 27
<PAGE>
Because many of the Portfolio's principal investments are
issued or credit-enhanced by banks, the Portfolio may invest
more than 25% of its total assets in obligations of domestic
banks.
The Portfolio may invest in other types of instruments, as
described in the Statement of Additional Information.
Specific Risks and Measures Taken to Limit Them
Credit Risk
A money market instrument's credit quality depends on the
issuer's ability to pay interest on the security and repay the
debt: the lower the credit rating, the greater the risk that
the security's issuer will default, or fail to meet its
payment obligations. The credit risk of a security may also
depend on the credit quality of any bank or financial
institution that provides credit enhancement for it. The
Portfolio only buys high quality securities with minimal
credit risk. If a security no longer meets the Portfolio's
credit rating requirements, Bankers Trust Company will attempt
to sell that security within a reasonable time, unless selling
the security would not be in the Portfolio's best interest.
Repurchase Agreement Risk
A repurchase agreement exposes the Portfolio to the risk that
the party that sells the securities defaults on its obligation
to repurchase them. In this circumstance, the Portfolio can
lose money because:
o it may not be able to sell the securities at the agreed-upon
time and price.
o the securities lose value before they can be sold.
Bankers Trust Company seeks to reduce the Portfolio's risk by
monitoring, under the supervision of the Portfolio's Board of
Trustees, the creditworthiness of the sellers with whom it
enters into repurchase agreements. The Portfolio also monitors
the value of the securities to ensure that they are at least
equal to the total amount of the repurchase obligations,
including interest.
28 Money Market ProFund Strategy
<PAGE>
Interest Rate Risk
Money market instruments, like all debt securities, face the
risk that the securities will decline in value because of
changes in interest rates. Generally, investments subject to
interest rate risk will decrease in value when interest rates
rise and increase when interest rates decline. To minimize
such price fluctuations, the Portfolio adheres to the
following practices:
o Bankers Trust Company limits the dollar-weighted average
maturity of the securities held by the Portfolio to 90 days or
less. Generally, rates of short-term investments fluctuate
less than longer-term bonds.
o Bankers Trust Company primarily buys securities with
remaining maturities of 13 months or less. This reduces the
risk that the issuer's creditworthiness will change, or that
the issuer will default on the principal and interest payments
of the obligations.
Market Risk
Although individual securities may outperform their market,
the entire market may decline as a result of rising interest
rates, regulatory developments or deteriorating economic
conditions.
Security Selection Risk
While the Portfolio invests in short-term securities, which by
nature are relatively stable investments, the risk remains
that the securities selected will not perform as expected.
This could cause the Portfolio's returns to lag behind those
of similar money market funds. Bankers Trust Company attempts
to limit this risk by diversifying the Portfolio's investments
so that a single setback need not undermine the pursuit of its
objective and by investing in money market instruments that
receive the highest short-term debt ratings as described
above.
Concentration Risk
Because the Portfolio may invest more than 25% of its total
assets in the financial services industry, it may be
vulnerable to setbacks in that industry. Banks and other
financial service
Money Market ProFund Strategy 29
<PAGE>
companies are highly dependent on short-term interest rates
and can be adversely affected by downturns in the U.S. and
foreign economies or changes in banking regulations.
Prepayment Risk
When a bond issuer, such as an issuer of asset-backed
securities, retains the right to pay off a high-yielding bond
before it comes due, the Portfolio may have no choice but to
reinvest the proceeds at lower interest rates. Thus,
prepayment may reduce the Portfolio's income. It may also
create a capital gains tax liability, because bond issuers
usually pay a premium for the right to pay off bonds early.
Organizational Structure
The Money Market ProFund is a feeder fund that invests all of
its assets in a master fund, the Portfolio. The ProFund and
the Portfolio have the same investment objective.
The Portfolio may accept investments from other feeder funds.
The feeders bear the Portfolio's expenses in proportion to
their assets. Each feeder can set its own transaction
minimums, fund-specific expenses and other conditions. The
Money Market ProFund's Trustees may withdraw its assets from
the Portfolio if they believe doing so is in the shareholders'
best interests. If the Trustees withdraw the Fund's assets,
they would then consider whether the Fund should hire its own
investment advisor and invest its assets directly in
appropriate instruments, invest in a different fund, or take
other action.
30 Money Market ProFund Strategy
<PAGE>
Share Prices, Classes & Tax
information
Calculating the ProFunds' Share Prices
Except for the UltraEurope ProFund, each Benchmark ProFund
calculates daily share prices on the basis of the net asset
value of each class of shares at the close of regular trading
on the New York Stock Exchange ("NYSE") (normally, 4:00 p.m.,
Eastern time) every day the NYSE and the Chicago Mercantile
Exchange are open for business.
The UltraEurope ProFund calculates daily share prices on the
basis of the net asset value of each class of shares at the
latest close of trading on the three exchanges tracked by the
PEI: the London Stock Exchange, the Frankfurt Stock Exchange
or the Paris Bourse (normally, 11:30 a.m., Eastern time), on
each day that all three of these exchanges and the NYSE are
open.
Purchases and redemptions of shares are effected at the net
asset value per share next determined after receipt and
acceptance of an order. If portfolio investments of a ProFund
are traded in markets on days when the ProFund's principal
trading market(s) is closed, the ProFund's net asset value may
vary on days when investors cannot purchase or redeem shares.
The ProFunds value shares of each class of shares by dividing
the market value of the assets attributable to each class,
less the liabilities attributable to the class, by the number
of the class's
Share Prices, Classes & Tax Information 31
<PAGE>
outstanding shares. The ProFunds use the following methods for
arriving at the current market price of investments held by
the Benchmark ProFunds:
o securities listed and traded on exchanges--the last price
the stock traded at on a given day, or if there were no sales,
the mean between the closing bid and asked prices.
o securities traded over-the-counter--NASDAQ-supplied
information on the prevailing bid and asked prices.
o futures contracts and options on indexes and securities--the
last sale price prior to the close of regular trading on the
NYSE (for all Benchmark ProFunds except UltraEurope ProFund).
o futures prices used to calculate net asset values for the
UltraEurope ProFund will be the last transaction prices for
the respective futures contracts that occur immediately prior
to the close of the underlying stock exchange.
o options on futures contracts--priced at fair value
determined with reference to established future exchanges.
o bonds and convertible bonds generally are valued using a
third-party pricing system.
o short-term debt securities are valued at amortized cost,
which approximates market value.
o the foreign exchange rates used to calculate the net asset
values for the UltraEurope ProFund will be the mean of the bid
price and the asked price for the respective foreign currency
occurring immediately before the last underlying stock
exchange closes.
When price quotes are not readily available, securities and
other assets are valued at fair value in good faith under
procedures established by, and under the general supervision
and responsibility of, the ProFunds' Board of Trustees. This
procedure incurs the unavoidable risk that the valuation may
be higher or lower than the securities might actually command
if the ProFunds sold them. In the event that a trading halt
closes the NYSE or a futures exchange early, portfolio
investments may be valued at fair value, or in a manner that
is different from the discussion above. See the Statement of
Additional Information for more details.
32 Share Prices, Classes & Tax Information
<PAGE>
The New York Stock Exchange and the Chicago Mercantile
Exchange, a leading market for futures and options, are open
every week, Monday through Friday, except when the following
holidays are celebrated: New Year's Day, Martin Luther King,
Jr. Day (the third Monday in January), Presidents' Day (the
third Monday in February), Good Friday, Memorial Day (the last
Monday in May), July 4th, Labor Day (the first Monday in
September), Thanksgiving Day (the fourth Thursday in November)
and Christmas Day. Either or both of these Exchanges may close
early on the business day before each of these holidays.
Either or both of these Exchanges also may close early on the
day after Thanksgiving Day and the day before Christmas
holiday.
The London Stock Exchange, Frankfurt Stock Exchange or Paris
Bourse closes for the following holidays in 1999: May Day (May
3), Ascension (May 13), Pentecost Monday (May 24), Spring Bank
Holiday (May 31), Corpus Christi Day (June 3), Independence
Day (July 5), Bastille Day (July 14), Summer Bank Holiday
(August 30), Labor Day (September 6), All Saints Day (November
1), Thanksgiving Day (November 25), Christmas Eve, Christmas
Day (observed December 27), Boxing Day (observed December 28)
and New Year's Eve. Holidays scheduled for 2000 include: New
Years Day (January 3), Good Friday (April 21) and Easter
Monday (April 24). Please note that holiday schedules are
subject to change without notice.
Calculating the Money Market ProFund's Share Price
The Money Market ProFund calculates daily share prices on the
basis of the net asset value of each class of shares at the
close of regular trading on the NYSE (normally, 4:00 p.m.,
Eastern time) every day the NYSE is open for business except
for two additional bank holidays, Columbus Day and Veterans'
Day. Purchases and redemptions of shares are effected at the
net asset value per share next determined after receipt and
acceptance of an order. If the market for the primary
investments in the Portfolio closes early,
Share Prices, Classes & Tax Information 33
<PAGE>
the Portfolio may close early. The Money Market ProFund will
cease taking purchase orders at that time. The Money Market
ProFund's net asset value per share for each class of shares
will normally be $1.00, although neither ProFund Advisors nor
Bankers Trust Company can guarantee that this will always be
the case. The Portfolio uses the amortized cost method to
account for any premiums or discounts above or below the face
value of any securities it buys. This method does not reflect
daily fluctuations in market value.
Dividends and Distributions
Each of the Benchmark ProFunds intends to distribute to its
shareholders every year all of the year's net investment
income and net capital gains. Each Benchmark ProFund will
reinvest these distributions in additional shares unless a
shareholder has written to request a direct cash distribution.
The Money Market ProFund declares dividends from its net
income daily and pays the dividends on a monthly basis. The
Money Market ProFund will pay annually any long-term capital
gains as well as any short-term capital gains that it did not
distribute during the year, but it reserves the right to
include in the daily dividend any short-term capital gains on
securities that it sells.
The Money Market ProFund may revise these policies, postpone
the payment of dividends and interest or take other actions in
order to maintain a constant net asset value of $1.00 per
share.
Tax Consequences
A ProFund does not ordinarily pay income tax on its net
investment income (which includes short-term capital gains)
and net capital gain that it distributes to shareholders, but
individual shareholders pay tax on the dividends and
distributions they receive. Shareholders will generally be
taxed regardless of how long they have held ProFund shares and
regardless of whether
34 Share Prices, Classes & Tax Information
<PAGE>
they receive cash or choose to have distributions and
dividends reinvested. Distributions and dividends generally
will be taxable as either ordinary income or long-term capital
gains. For example, if a ProFund designates a particular
distribution as a long-term capital gain distribution, it will
be taxable to shareholders at their long-term capital gain
rate. Dividends and distributions may also be subject to state
and local taxes.
Every year the ProFunds will send shareholders tax information
on the dividends and distributions for the previous year.
If shareholders sell or redeem their ProFund shares, they may
have a capital gain or loss, which will be long-term or
short-term, generally depending upon how long they have held
the shares. An exchange of ProFund shares may be treated as a
sale.
The tax consequences for tax deferred retirement accounts or
non-taxable shareholders will be different.
Please keep in mind:
o Whether a distribution by a ProFund is taxable to
shareholders as ordinary income or at the lower capital gains
rate depends on whether it is long-term capital gains of the
ProFund, not on how long an investor has owned shares of the
ProFund.
o Dividends and distributions declared by a ProFund in
October, November or December of one year and paid in January
of the next year may be taxable in the year the ProFund
declared them.
o As with all mutual funds, a ProFund may be required to
withhold U.S. federal income tax at the rate of 31% of all
taxable distributions and redemption proceeds, payable to
shareholders who fail to provide the ProFund with correct
taxpayer identification numbers or to make required
certifications, or who have been notified by the IRS that they
are subject to backup withholding. Backup withholding is not
an additional tax; rather, it is a way in which the IRS
ensures it will collect taxes otherwise due. Any amounts
withheld may be credited against the shareholder's U.S.
federal income tax liability. You also may be subject to a $50
fee to reimburse the ProFunds for any penalty that the IRS may
impose.
Share Prices, Classes & Tax Information 35
<PAGE>
Please see the Statement of Additional Information for more
information. Because each investor's tax circumstances are
unique and because the tax laws are subject to change, ProFund
Advisors recommends that shareholders consult their tax
advisors about federal, state, local and foreign tax
consequences of investment in the ProFunds.
Classes of Shares
Investors in any of the ProFunds can purchase either Investor
Class shares directly, or Service Class shares through an
authorized firm, such as a registered investment advisor, a
bank or a trust company. Under a shareholder services plan for
Service Class shares, each ProFund may pay an authorized firm
up to 1.00% on an annualized basis of average daily net assets
attributable to its customers who are Service Class
shareholders. For this fee, the authorized firms may provide a
variety of services, such as:
o receiving and processing shareholder orders,
o performing the accounting for the shareholder's account,
o maintaining retirement plan accounts,
o answering questions and handling correspondence for
individual accounts,
o acting as the sole shareholder of record for individual
shareholders,
o issuing shareholder reports and transaction confirmations,
o executing daily investment "sweep" functions, and
o investment advisory services.
Holders of a ProFund's Service Class shares pay all fees and
expenses applicable to these shares. The authorized firms may
charge extra for services beyond those specified above, but
they must furnish clients who own Service Class shares with a
schedule explaining those fees.
36 Share Prices, Classes & Tax Information
<PAGE>
[GRAPHIC APPEARS HERE]
Shareholder Services
guide
Contacting ProFunds
By telephone: (888) 776-3637 or (614) 470-8122--
for investors
(888) 776-5717--a phone line dedicated
for use by financial professionals only
By mail: ProFunds
P.O. Box 182800
Columbus, OH 43218-2800
By overnight mail: ProFunds
c/o BISYS Fund Services
3435 Stelzer Road
Columbus, OH 43219
Minimum Investments
o $5,000 for discretionary accounts controlled by a financial
professional.
o $15,000 for self-directed accounts controlled directly by
investors.
These minimums apply to all accounts, including retirement
plans, and apply to the total value of an investor's initial
ProFunds investment. ProFunds reserves the right to reject or
refuse, at its discretion, any order for the purchase of a
ProFund's shares in whole or in part.
Shareholder Services Guide 37
<PAGE>
[LOGO APPEARS HERE]
Shareholder
Services Guide
Opening Your ProFunds Account
By mail: Send a completed application, along with a check
payable to "ProFunds," to the aforementioned address. Cash,
credit cards and credit card checks are not accepted. Please
contact ProFunds in advance if you wish to send third party
checks. All purchases must be made in U.S. dollars through a
U.S. bank.
By wire transfer: First, complete an application and fax it to
ProFunds at (800) 782-4797 (toll-free) or (614) 470-8718.
Next, call ProFunds at (888) 776-3637 (toll-free) or (614)
470-8122 to a) confirm receipt of the faxed application, b)
request your new account number, c) inform ProFunds of the
amount to be wired and d) receive a confirmation number for
your purchase order. After receiving your confirmation number,
instruct your bank to transfer money by wire to:
UMB Bank, N.A.
Kansas City, MO
Routing/ABA #:101000695
ProFunds DDA #9870857952
For further credit to: Your name, the name of the
ProFund(s), and your ProFunds account number
Confirmation number: The confirmation number given to you by
the ProFunds representative
After faxing a copy of the completed application, send the
original to ProFunds via mail or overnight delivery. The
addresses are shown above under "Contacting ProFunds By mail."
Instructions, written or telephonic, given to ProFunds for
wire transfer requests do not constitute a purchase order
until the wire transfer has been received by ProFunds.
ProFunds is not liable for any loss incurred due to a wire
transfer not having been received.
Please note that your bank may charge a fee to send or receive
wires.
38 Shareholder Services Guide
<PAGE>
[LOGO APPEARS HERE]
Shareholder
Services Guide
Establishing Accounts For Tax-Sheltered Retirement Plans
The ProFunds sponsor Individual Retirement Accounts ("IRAs")
that enable individual investors to set up their own
retirement savings programs. ProFund Advisors charges an
annual fee of $15 per social security number for all types of
IRAs to pay for the extra maintenance and tax reporting that
these plans require. Investors in other types of retirement
plans also may invest in the ProFunds. For additional
information and an application, contact ProFunds directly by
phone or at the above address.
Purchasing Additional ProFunds Shares
By mail: Send a check payable to "ProFunds", noting the
ProFund and account number, to the aforementioned address.
Cash, credit cards, and credit card checks are not accepted.
Please contact ProFunds in advance if you wish to send third
party checks. All purchases need to be made in U.S. dollars
through a U.S. bank.
By wire transfer: Call ProFunds to inform us of the amount you
will be wiring and receive a confirmation number.
You can then instruct your bank to transfer your funds to:
UMB Bank, N.A.
Kansas City, MO
Routing/ABA #:101000695
ProFunds DDA #9870857952
For further credit to: Your name, the name of the
ProFund(s), and your ProFunds account number.
Confirmation number: The confirmation number given to you
by the ProFunds representative.
Instructions, written or telephonic, given to ProFunds for
wire transfer requests do not constitute a purchase order
until the wire transfer has been received by ProFunds.
ProFunds is not liable for any loss incurred due to a wire
transfer not having been received.
Please note that your bank may charge a fee to send or receive
wires.
Shareholder Services Guide 39
<PAGE>
[LOGO APPEARS HERE]
Shareholder
Services Guide
Please keep in mind when purchasing shares:
o The minimum subsequent purchase amount is $100.
o ProFunds prices shares you purchase at the price per share
next computed after we receive and accept your purchase order
in good order. In order to be in good order, a purchase order
must include a properly completed application and wire, check
or other form of payment.
o A wire order is considered in good order only if (i) you
have called ProFunds under the procedures described above and
(ii) ProFunds receives and accepts your wire. ProFunds only
accepts wires during the times it processes wires: between
8:00 a.m. and 3:30 p.m., Eastern time for all ProFunds except
that UltraEurope ProFund does not receive and process wires
from 10:30 a.m. through 11:30 a.m., Eastern time. Wires
received after ProFunds' wire processing times will be
processed as of the next time that orders are processed. If
the primary exchange or market, on which a ProFund transacts
business closes early, the above cut-off time will be 25
minutes prior to the close of such exchange or market.
o If your purchase is cancelled, you will be responsible for
any losses that may result from any decline in the value of
the cancelled purchase. ProFunds (or its agents) have the
authority to redeem shares in your account(s) to cover any
losses due to fluctuations in share price. Any profit on a
cancelled transaction will accrue to the ProFunds.
o Securities brokers and dealers have the responsibility of
transmitting your orders promptly. Brokers and dealers may
charge transaction fees on the purchase and/or sale of
ProFunds shares.
40 Shareholder Services Guide
<PAGE>
[LOGO APPEARS HERE]
Shareholder
Services Guide
Exchanges
Shareholders can exchange shares of either class of any
ProFund for shares of either class of another ProFund,
including the ProFunds not described in this prospectus, free
of charge. ProFunds can only honor exchanges between accounts
registered in the same name, and having the same address and
taxpayer identification number.
ProFunds accepts exchange orders by phone, in writing or
through the Internet, except that the ProFunds does not accept
exchange orders through the Internet for the UltraEurope
ProFund. You will need to specify the number of shares, or the
percentage or dollar value of the shares you wish to exchange,
and the ProFunds (and classes of shares) involved in the
transaction.
By telephone: Exchange orders between ProFunds can be accepted
by phone between 8:00 a.m. and 3:50 p.m. and between 4:30 p.m.
and 9:00 p.m., Eastern time, with the exception that ProFunds
does not accept exchange orders involving the UltraEurope
ProFund between 10:30 a.m. and 11:30 a.m., Eastern time. If
the primary exchange or market (generally, the CME) on which a
ProFund (other than the UltraEurope ProFund) transacts
business closes early, the above cut-off time will be 25
minutes prior to the close of such exchange or market.
By Internet: Shareholders may transact on-line exchanges of
shares of the ProFunds, except exchanges of shares of the
UltraEurope ProFund, at ProFunds' website (www.profunds.com).
To access this service through the website, click on the
"Trade/Access Account" Icon and you will be prompted to enter
your Social Security Number. Follow the instructions to
establish your Personal Identification Number (PIN) which will
allow you to execute exchanges between ProFunds and access
ProFunds account information. Internet exchange orders between
the ProFunds can be accepted between 8:00 a.m. and 3:55 p.m.
and between 4:30 p.m. and 9:00 p.m., Eastern time. If the
primary
Shareholder Services Guide 41
<PAGE>
[LOGO APPEARS HERE]
Shareholder
Services Guide
exchange or market on which a ProFund transacts business
closes early, the above cut off time will be 25 minutes prior
to the close of such exchange or market.
Internet exchange transactions are extremely convenient, but
are not free from risk. To ensure that all Internet
transactions are safe, secure and as risk-free as possible,
ProFunds has instituted certain safeguards and procedures for
determining the identity of website users. As a result,
neither ProFunds nor its transfer agent will be responsible
for any loss, liability, cost or expense for following
Internet instructions they reasonably believe to be genuine.
If you or your intermediary make exchange requests by the
Internet, you will generally bear the risk of loss.
The ProFunds may terminate the ability to exchange ProFund
shares on its website at any time, in which case you may
continue to exchange shares by phone or in writing.
Please keep in mind when exchanging shares:
o An exchange actually is a redemption (sale) of shares of one
ProFund and a purchase of shares of another ProFund.
o If both ProFunds involved in the exchange have their
respective net asset values calculated at the same time then
both the sale and the buy will occur simultaneously.
For example, assume you were to exchange Money Market
ProFund for UltraOTC ProFund and the order was placed before
3:50 p.m., Eastern time, on any business day. The net asset
values for both ProFunds involved in the transaction are
computed at the same time. Therefore, both the price of the
shares sold out of Money Market ProFund and the shares
purchased into UltraOTC ProFund would be determined
simultaneously when the net asset values are next computed,
normally 4:00 p.m., Eastern time.
o If the exchange involves ProFunds that calculate their net
asset values at different times, you will receive the net
asset value next computed for the redemption transaction. The
purchase transaction will receive the price next determined
after the redemption transaction is completed, with one
exception as described below. The proceeds from the redemption
transaction
42 Shareholder Services Guide
<PAGE>
[LOGO APPEARS HERE]
Shareholder
Services Guide
will not be invested during the intervening period and will
not earn interest during that time.
For example, assume you were to exchange UltraBull ProFund
for UltraEurope ProFund and the order was placed before 3:50
p.m., Eastern time, on a business day of the UltraBull
ProFund. The net asset values of UltraEurope and UltraBull
ProFunds are not determined at the same time. As a result,
the components of the exchange would be valued at two
different times. First, the sale from UltraBull ProFund
would be priced using the next computed net asset value,
which would be determined normally at 4:00 p.m., Eastern
time, on such day. Second, the buy into UltraEurope ProFund
would receive the net asset value of UltraEurope ProFund
next determined after the redemption from UltraBull ProFund.
That determination of the net asset value of UltraEurope
ProFund would normally take place at 11:30 a.m., Eastern
time, on the next business day of UltraEurope ProFund.
An exception to the above exchange transaction policies covers
exchange requests from the Money Market ProFund to the
UltraEurope ProFund, from after 4:00 p.m. on one business day
until 10:30 a.m. the next business day. In such an exchange,
you will receive the price next computed after the exchange
request is made for both the redemption and the purchase
transactions involved in the exchange. You will be responsible
for any losses if sufficient redemption proceeds are not
available to pay the purchase price of shares purchased.
o Please note that during certain periods, it may take several
days for exchanges to be completed due to holidays.
o The minimum exchange for self-directed accounts is $1,000
or, if less, for the account's current value.
o You may exchange, on a regular basis, shares of the Money
Market ProFund for shares of other ProFunds through an
Automatic Exchange Plan. For more information on this option,
please call ProFunds at 888-776-3637.
o Before executing an exchange between the Profunds described
in this prospectus for shares of another ProFund, a
shareholder must first review the prospectus related to the
other ProFund. Such prospectus may be obtained by contacting
the ProFunds by letter or telephone at the address or phone
number noted on the back cover of this prospectus, or by
visiting the ProFunds' website (www.profunds.com).
Shareholder Services Guide 43
<PAGE>
[LOGO APPEARS HERE]
Shareholder
Services Guide
Redeeming ProFund Shares
You can redeem all or part of your shares at the price next
determined after we receive your request. ProFunds other than
UltraEurope ProFund only accept redemption orders by phone
between 8:00 a.m. and 3:50 p.m. and between 4:30 p.m. and 9:00
p.m., Eastern time. UltraEurope ProFund accepts telephone
redemption orders only between 8:00 a.m. and 10:30 a.m. and
11:30 a.m. and 9:00 p.m., Eastern time. ProFunds may not
receive or accept phone redemption orders at any other time.
If the primary exchange or market on which a ProFund (other
than the UltraEurope ProFund) transacts business closes early,
the above cut-off time will be 25 minutes prior to the close
of such exchange or market.
Written Redemptions
To redeem all or part of your shares in writing, your request
needs to include the following information:
o the name of the ProFund(s),
o the account number(s),
o the amount of money or number of shares being redeemed,
o the name(s) of the account owners,
o the signature(s) of all registered account owners, and
o your daytime telephone number.
Wire Redemptions
If your account is authorized for wire redemption, your
proceeds will be wired directly into the bank account you have
designated. The ProFunds charge a $15 service fee for a wire
transfer of redemption proceeds, and your bank may charge an
additional fee to receive the wire. If you would like to
establish this option on an existing account, please call
ProFunds to request the appropriate form. Wire redemptions are
not available for retirement accounts.
44 Shareholder Services Guide
<PAGE>
Signature Guarantee
Certain redemption requests must include a signature
guarantee. Your request needs to be in writing and include a
signature guarantee if any of the following situations apply:
o Your account registration or address has changed within the
last 30 calendar days.
o The check is being mailed to a different address than the
one on your account.
o The check or wire is being made payable to someone other
than the account owner.
o The redemption proceeds are being transferred to an account
with a different registration.
o You wish to redeem more than $100,000.
o You are adding or changing wire instructions on your
account.
o Other unusual situations as determined by ProFund's transfer
agent.
Signature guarantees may be provided by an eligible guarantor
institution such as a commercial bank, an NASD member firm
such as a stock broker, a savings association or a national
securities exchange.
Please keep in mind when redeeming shares:
o Redemptions from self-directed accounts must be for at least
$1,000 or, if less, for the account's entire current value.
The remaining balance needs to be above the applicable minimum
investment.
o The ProFunds normally remit redemption proceeds within seven
days of redemption. For redemption of shares purchased by
check or Automatic Investment, ProFunds may wait up to 15 days
before sending redemption proceeds to assure that its transfer
agent has collected the purchase payment.
o ProFunds will remit payment of telephone redemptions only to
the address or bank of record on the account application. You
must submit, in writing, a request for payment to any other
address, along with a signature guarantee from a financial
service organization.
Shareholder Services Guide 45
<PAGE>
[LOGO APPEARS HERE]
Shareholder
Services Guide
o To redeem shares in a retirement account, your request needs
to be in writing, except for exchanges to other ProFunds,
which can be requested by phone or in writing. Call the
ProFunds to request a retirement distribution form.
o Involuntary Redemptions: ProFunds reserves the right to
redeem involuntarily an investor's account, including a
retirement account, which falls below the applicable minimum
investment in total value in the ProFunds due to redemption.
In addition, both a request for a partial redemption by an
investor whose account balance is below the minimum investment
and a request for partial redemption by an investor that would
bring the account below the minimum investment will be treated
as a request by the investor for a complete redemption of the
account.
o Redemption proceeds from the UltraEurope ProFund are made
within seven business days after the business date of the
redemption. The business date of these redemptions may be the
business day following the day your redemption request reaches
ProFunds.
o Money Market ProFund shares begin accruing dividends on the
day ProFund's transfer agent, BISYS Fund Services, receives a
purchase order and payment in the form of a Federal funds
wire. Purchases by check begin earning dividends the business
day following the business day the check is received. They
continue to earn dividends until the business day that BISYS
Fund Services has processed the redemption order.
Suspension of Redemptions
Your right of redemption may be suspended, or the date of
payment postponed: (i) for any period during which the NYSE or
the Federal Reserve Bank of New York is closed (other than
customary weekend or holiday closings) or trading on the NYSE,
as appropriate, is restricted, as determined by the Securities
and Exchange Commission; (ii) for any period during which an
emergency exists, as
46 Shareholder Services Guide
<PAGE>
[LOGO APPEARS HERE]
Shareholder
Services Guide
determined by the Securities and Exchange Commission, so that
disposal of a ProFund's investments or the determination of
its net asset value is not reasonably practicable; or (iii)
for such other periods as the Securities and Exchange
Commission, by order, may permit for protection of ProFunds'
investors.
Draft Checks
You may elect to redeem shares of the Money Market ProFund by
draft check ($500 minimum) made payable to the order of any
person or institution. If you are interested in this option,
you must submit a completed signature card to ProFunds. You
will then be supplied with draft checks that are drawn on the
Money Market ProFund's account. There is a $25 fee for stop
payment requests on draft checks. This option is not available
to Individual Retirement Account shareholders.
Automatic Investment and Redemption Plans
Shareholders may buy and redeem shares automatically on a
monthly, bimonthly, quarterly or annual basis. The minimum
automatic purchase is $100 and the minimum automatic
redemption is $500. These minimums are waived for IRA
shareholders 70 1/2 years of age or older.
About Telephone Transactions
o It may be difficult to reach ProFunds by telephone during
periods of heavy market activity or other times. If you are
unable to reach us by telephone, consider sending written
instructions.
o You may initiate numerous transactions by telephone. Please
note, however, that the ProFunds and their agents will not be
responsible for losses resulting from unauthorized
transactions when procedures designed to verify the identity
of the caller are followed.
Shareholder Services Guide 47
<PAGE>
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48
<PAGE>
ProFunds
management
Board of Trustees and Officers
The ProFunds' Board of Trustees is responsible for the general
supervision of the ProFunds. The ProFunds' officers are
responsible for day-to-day operations of the ProFunds.
Investment Advisors
ProFund Advisors LLC
ProFund Advisors LLC, located at 7900 Wisconsin Avenue, Suite
300, Bethesda, Maryland 20814, serves as the investment
advisor to all of the ProFunds except for the Money Market
ProFund, providing investment advice and management services.
ProFund Advisors oversees the investment and reinvestment of
the assets in each Benchmark ProFund. It receives fees equal
to 0.75% of the average daily net assets of each Benchmark
ProFund, except the UltraEurope ProFund, for which it receives
a fee equal to 0.90% of the average daily net assets. ProFund
Advisors bears the costs of advisory services.
Michael L. Sapir, Chairman and Chief Executive Officer of
ProFund Advisors LLC, served as senior vice president of Padco
Advisors, Inc., which advised Rydex(R)Funds. In addition, Mr.
Sapir practiced law for over 13 years, most recently as a
partner in a Washington-based law firm. As an attorney, Mr.
Sapir advised and represented mutual funds and other financial
institutions. He holds degrees from Georgetown University Law
Center (J.D.) and University of Miami (M.B.A. and B.A.).
ProFunds Management 49
<PAGE>
Louis M. Mayberg, President of ProFund Advisors LLC,
co-founded National Capital Companies, L.L.C., an investment
bank in 1986, and manages its hedge fund. He holds a Bachelor
of Business Administration degree with a major in Finance from
George Washington University.
William E. Seale, Ph.D., Director of Portfolio for ProFund
Advisors LLC, has more than 29 years of experience in the
commodity futures markets. His background includes a five-year
presidential appointment as a commissioner of the U.S.
Commodity Futures Trading Commission. He earned his degrees at
University of Kentucky. Dr. Seale also holds an appointment as
Professor of Finance at George Washington University.
Each Benchmark ProFund is managed by an investment team
chaired by Dr. Seale.
Bankers Trust Company
The Money Market ProFund seeks to achieve its investment
objective by investing all of its assets in a portfolio
managed by Bankers Trust Company, with headquarters at 130
Liberty Street, New York, NY 10006. Bankers Trust makes the
Portfolio's investment decisions and assumes responsibility
for the securities the Portfolio owns. It receives a fee equal
to 0.05% of the average daily net assets of the Portfolio.
As of December 31, 1998, Bankers Trust was the eighth largest
bank holding company in the United States, with total assets
of approximately $156 billion. Bankers Trust Company is a
worldwide merchant bank dedicated to servicing the needs of
corporations, governments, financial institutions and private
clients through a global network of over 96 offices in more
than 43 countries.
Bankers Trust Company is a wholly owned subsidiary of Bankers
Trust Corporation. On June 4, 1999, Bankers Trust Corporation
merged with a subsidiary of Deutsche Bank AG ("Deutsche
Bank"). Shareholders of the Money Market ProFund, which
invests its assets in Cash Management Portfolio (the
"Portfolio"),
50 ProFunds Management
<PAGE>
voted at a Special Meeting of Shareholders to approve a new
investment advisory agreement (the "Advisory Agreement")
between the Portfolio and Bankers Trust Company ("Bankers
Trust"). Approval of the Advisory Agreement was sought because
Deutsche Bank became Bankers Trust's parent company, and
therefore, controls its operations as investment adviser.
Under the new investment advisory agreement, the compensation
paid and the services provided would be the same as those
under the Advisory Agreement with Bankers Trust. Deutsche Bank
AG is a major global banking institution that is engaged in a
wide range of financial services, including investment
management, mutual funds, retail and commercial banking,
investment banking and insurance.
Other Service Providers
BISYS Fund Services, located at 3435 Stelzer Road, Suite 1000,
Columbus, Ohio 43219, acts as the administrator to the
ProFunds, providing operations, compliance and administrative
services. Each ProFund pays BISYS a fee, on a sliding scale,
for its administrative services. For average daily net assets
up to $300 million, the fee is 0.15% of the assets, and it
declines to 0.05% for average daily net assets of $1 billion
or more.
ProFund Advisors also performs client support and
administrative services for the ProFunds. The Benchmark
ProFunds each paid a fee of 0.15% of average daily net assets
for these services last year. ProFund Advisors may receive a
fee of 0.35% of average daily net assets from the Money Market
ProFund for these services and for feeder fund management,
administration and reporting in its relationship to the
Portfolio.
Year 2000
Like other funds and business organizations around the world,
the ProFunds could be adversely affected if the computer
systems used by their investment advisors and other service
providers do not properly process and calculate date-related
information for the Year 2000 and beyond. In addition, Year
2000 issues may
ProFunds Management 51
<PAGE>
adversely affect companies in which the ProFunds invest, which
could impact the prices of the ProFunds' shares.
The ProFunds have been assured that their service providers
have developed and are implementing clearly defined and
documented plans intended to minimize risks to services
critical to the ProFunds' operations associated with Year 2000
issues. The service providers are likewise seeking assurances
from their respective vendors and suppliers that these
entities are addressing any Year 2000 issues.
In the event that any systems upon which the ProFunds depend
are not Year 2000 ready by December 31, 1999, administrative
errors and account maintenance failures would likely occur.
While the ultimate costs or consequences of incomplete or
untimely resolution of Year 2000 issues by the ProFunds'
service providers cannot be accurately assessed at this time,
the ProFunds currently have no reason to believe that the Year
2000 plans of the investment advisors and other service
providers will not be completed by December 31, 1999. The
ProFunds will continue to closely monitor developments
relating to this issue.
Other Information
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard &
Poor's 500(R)," and "500(R)" are trademarks of The McGraw-Hill
Companies, Inc. and have been licensed for use by ProFunds.
"NASDAQ 100 Index" is a trademark of the NASDAQ Stock Markets,
Inc. ("NASDAQ"). The ProFunds are not sponsored, endorsed,
sold or promoted by Standard & Poor's or NASDAQ and neither
Standard & Poor's nor NASDAQ makes any representation
regarding the advisability of investing in the Product.
If a ProFund does not grow to a size to permit it to be
economically viable, the Fund may cease operations. In such an
event, investors may be required to liquidate or transfer
their investments at an inopportune time.
(Please see the Statement of Additional Information which sets
forth certain additional disclaimers and limitations of
liabilities on behalf of S&P).
52 ProFunds Management
<PAGE>
Financial
highlights
The following tables provide a picture of the performance
since inception of each share class of the ProFunds in
operation for a year or more as of December 31, 1998. The
information selected represents the rate of return that an
investor would have earned on an investment in the Fund,
assuming reinvestment of all dividends and distributions. This
information has been audited by Pricewaterhouse Coopers LLP,
independent accountants, whose report on the financial
statements of the ProFunds appears in the ProFunds' annual
report for the fiscal year ended December 31, 1998. The annual
report is available free of charge by phoning 888-776-3637.
Financial Highlights 53
<PAGE>
Bull ProFund
Financial Highlights
For a share of beneficial interest outstanding
<TABLE>
<CAPTION>
Adjusted for 5:1 reverse stock split
Investor Class Service Class
For the period For the period
For the year from December For the year from December 2,
Ended 2, 1997(a) Ended 1997(a)
December 31, to December 31, December 31, to December 31,
1998 1997 1998 1997
--------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Net asset value, $49.45 $50.00 $49.45 $50.00
beginning of period ------ ------ ------ ------
- -------------------------------------------------------------------------------------------------------------------
Net investment income 1.63(d) 0.10 1.08(d) --
- -------------------------------------------------------------------------------------------------------------------
Net realized and unrealized 11.49 (0.65) 11.64 (0.55)
gain/(loss) on investment ----- ------- ------- ------
transactions and futures contracts
- -------------------------------------------------------------------------------------------------------------------
Total income/(loss) from 13.12 (0.55) 12.72 (0.55)
investment operations
- -------------------------------------------------------------------------------------------------------------------
Distribution to Shareholders from:
Net investment income (0.04) -- --(e) --
- -------------------------------------------------------------------------------------------------------------------
Net realized gains on (0.05) -- (0.05) --
investment transactions and ----- ----- ------ ------
futures contracts
- -------------------------------------------------------------------------------------------------------------------
Total distributions (0.09) -- (0.05) --
- -------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $62.48 $49.45 $62.12 $49.45
====== ====== ====== ======
- -------------------------------------------------------------------------------------------------------------------
Total Return 26.57% (1.10%)(b) 25.68% (1.10%)(b)
- -------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of period $7,543,922 $46,281 $589,547 $10
- -------------------------------------------------------------------------------------------------------------------
Ratio of expenses to 1.63% 1.33%(c) 2.67% 1.33%(c)
average net assets
- -------------------------------------------------------------------------------------------------------------------
Ratio of net investment 2.84% 2.97%(c) 1.89% 0.00%(c)
income to average
net assets
- -------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net 2.40% 423.48%(c) 3.30% 424.48%(c)
assets (before reimbursements)*
</TABLE>
* During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred,
the ratio would have been as indicated.
(a) Commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Per share net investment income has been calculated using the daily average
shares method.
(e) Distribution per share was less than $0.005
54 Financial Highlights
<PAGE>
UltraBull ProFund
Financial Highlights
For a share of beneficial interest outstanding
<TABLE>
<CAPTION>
Adjusted for 5:1 reverse stock split
Investor Class Service Class
For the period For the period
For the year from November For the year from November 28,
ended 28, 1997(a) ended 1997(a)
December 31, to December 31, December 31, to December 31,
1998 1997 1998 1997
--------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Net asset value, $51.45 $50.00 $51.45 $50.00
beginning of period ------ ------ ------ ------
- -------------------------------------------------------------------------------------------------------------------
Net investment income 1.55(d) 0.05 0.95(d) 0.05
- -------------------------------------------------------------------------------------------------------------------
Net realized and unrealized 20.53 1.40 20.39 1.40
gain on investment transactions ----- ------ ------ ------
and futures contracts
- -------------------------------------------------------------------------------------------------------------------
Total income from 22.08 1.45 21.34 1.45
investment operations
- -------------------------------------------------------------------------------------------------------------------
Distribution to Shareholders from:
Net investment income (0.06) -- --(e) --
- -------------------------------------------------------------------------------------------------------------------
Net realized gains on (0.03) -- (0.03) --
investment transactions and ----- ----- ------ ------
futures contracts
- -------------------------------------------------------------------------------------------------------------------
Total distributions (0.09) -- (0.03) --
- -------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $73.44 $51.45 $72.76 $51.45
====== ====== ====== ======
- -------------------------------------------------------------------------------------------------------------------
Total Return 42.95% (2.90%)(b) 41.48% 2.90%(b)
- -------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets at end of period $90,854,397 $6,043,740 $10,991,484 $2,394,297
- -------------------------------------------------------------------------------------------------------------------
Ratio of expenses to 1.50% 1.33%(c) 2.39% 1.33%(c)
average net assets
- -------------------------------------------------------------------------------------------------------------------
Ratio of net investment 2.43% 2.26%(c) 1.53% 1.69%(c)
income to average net assets
- -------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net 1.70% 12.69%(c) 2.84% 13.69%(c)
assets (before reimbursements)*
</TABLE>
* During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred,
the ratio would have been as indicated.
(a) Commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Per share net investment income has been calculated using the daily average
shares method.
(e) Distribution per share was less than $0.005
Financial Highlights 55
<PAGE>
UltraOTC ProFund
Financial Highlights
For a share of beneficial interest outstanding
<TABLE>
<CAPTION>
Adjusted for 5:1 reverse stock split
Investor Class Service Class
For the period For the period
For the year from December For the year from December 2,
ended 2, 1997(a) ended 1997(a)
December 31, to December 31, December 31, to December 31,
1998 1997 1998 1997
------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
Net asset value, $ 41.80 $50.00 $ 41.80 $50.00
beginning of period ------ ------ ------- ------
- -------------------------------------------------------------------------------------------------------------------
Net investment income 0.81(d) 0.30 0.40(d) --
- -------------------------------------------------------------------------------------------------------------------
Net realized and unrealized 76.66 (8.50) 76.50 (8.20)
gain/(loss) on investment ------ ------ ------- ------
transactions and futures contracts
- -------------------------------------------------------------------------------------------------------------------
Total income/(loss) from 77.47 (8.20) 76.90 (8.20)
investment operations
- -------------------------------------------------------------------------------------------------------------------
Distribution to Shareholders from:
Net investment income --(e) -- --(e) --
- -------------------------------------------------------------------------------------------------------------------
Total distributions -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $119.27 $41.80 $118.70 $41.80
======= ====== ======= ======
- -------------------------------------------------------------------------------------------------------------------
Total return 185.34% (16.40%)(b) 183.98% (16.40%)(b)
- -------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of period $239,017,203 $256,184 $32,391,937 $663,984
- -------------------------------------------------------------------------------------------------------------------
Ratio of expenses to 1.47% 1.07%(c) 2.38% 1.75%(c)
average net assets
- -------------------------------------------------------------------------------------------------------------------
Ratio of net investment 1.05% 2.73%(c) 0.07% (0.06%)(c)
income to average net assets
- -------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net 1.67% 21.74%(c) 2.61% 23.42%(c)
assets (before reimbursements)*
- -------------------------------------------------------------------------------------------------------------------
Portfolio Turnover (f) 156% 156%
</TABLE>
* During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred,
the ratio would have been as indicated.
(a) Commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Per share net investment income has been calculated using the daily average
shares method.
(e) Distribution per share was less than $0.005
(f) Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
56 Financial Highlights
<PAGE>
Bear ProFund
Financial Highlights
For a share of beneficial interest outstanding
<TABLE>
<CAPTION>
Adjusted for 5:1 reverse stock split
Investor Class Service Class
For the period For the period
For the year from December For the year from December 31,
ended 2, 1997(a) ended 1997(a)
December 31, to December 31, December 31, to December 31,
1998 1997 1998 1997
------------------------------ ---------------------------------
<S> <C> <C> <C> <C>
Net asset value, $50.00 $50.00 $50.00 $50.00
beginning of period ------ ------ ------ ------
- -------------------------------------------------------------------------------------------------------------------
Net investment income 1.47(d) -- 0.87(d) --
- -------------------------------------------------------------------------------------------------------------------
Net realized and unrealized (11.22) -- (10.88) --
(loss) on investment transactions ------- ------ ------- ------
and futures contracts
- -------------------------------------------------------------------------------------------------------------------
Total (loss) from (9.75) -- (10.01) --
investment operations
- -------------------------------------------------------------------------------------------------------------------
Distribution to Shareholders from:
Net investment income (0.37) -- (0.23) --
- -------------------------------------------------------------------------------------------------------------------
Net realized gains on --(e) -- --(e) --
investment transactions ----- ------ ------ -------
and futures contracts
- -------------------------------------------------------------------------------------------------------------------
Total distributions (0.37) -- (0.23) --
- -------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $39.88 $50.00 $39.76 $50.00
====== ====== ====== ======
- -------------------------------------------------------------------------------------------------------------------
Total return (19.46%) 0.00%(b) (20.04%) 0.00%(b)
- -------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of period $4,166,787 $2,516,412 $379,670 $10
- -------------------------------------------------------------------------------------------------------------------
Ratio of expenses to 1.54% 0.00%(c) 2.49% 0.00%(c)
average net assets
- -------------------------------------------------------------------------------------------------------------------
Ratio of net investment 3.12% 0.00%(c) 1.90% 0.00%(c)
income to average net assets
- -------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net 3.26% 325.97%(c) 4.09% 326.97%(c)
assets (before reimbursements)*
</TABLE>
* During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred,
the ratio would have been as indicated.
(a) Commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Per share net investment income has been calculated using the daily average
shares method.
(e) Distribution per share was less than $0.005
Financial Highlights 57
<PAGE>
UltraBear ProFund
Financial Highlights
For a share of beneficial interest outstanding
<TABLE>
<CAPTION>
Adjusted for 5:1 reverse stock split
Investor Class Service Class
For the period For the period
For the year from December For the year from December 23,
ended 23, 1997(a) ended 1997(a)
December 31, to December 31, December 31, to December 31,
1998 1997 1998 1997
-------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
Net asset value, $51.80 $50.00 $51.75 $50.00
beginning of period ------ ------ ------ ------
- -------------------------------------------------------------------------------------------------------------------
Net investment income 1.16(d) 6,082.50(e) 0.75(d) --
- -------------------------------------------------------------------------------------------------------------------
Net realized and unrealized (21.04) (6,080.70)(e) 20.67 1.75
gain/(loss) on investment ------ -------- ----- ------
transactions and futures contracts
- -------------------------------------------------------------------------------------------------------------------
Total income/(loss) from (19.88) 1.80 (19.92) 1.75
investment operations
- -------------------------------------------------------------------------------------------------------------------
Distribution to Shareholders from:
Net investment income (0.04) -- -- --
- -------------------------------------------------------------------------------------------------------------------
Total distributions (0.04) -- -- --
- -------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $31.88 $51.80 $31.83 $51.75
====== ====== ====== ======
- -------------------------------------------------------------------------------------------------------------------
Total Return (38.34%) 3.60%(b) (38.45%) 3.50%(b)
- -------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of period $27,939,876 $21 $3,012,328 $10
- -------------------------------------------------------------------------------------------------------------------
Ratio of expenses to 1.57% 1.33%(c) 2.45% 1.33%(c)
average net assets
- -------------------------------------------------------------------------------------------------------------------
Ratio of net investment 2.73% 2.97%(c) 1.74% 0.00%(c)
income to average net assets
- -------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net 1.78% 32.39%(c) 2.74% 33.39%(c)
assets (before reimbursements)*
</TABLE>
* During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred,
the ratio would have been as indicated.
(a) Commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Per share net investment income has been calculated using the daily average
shares method.
(e) The amount shown for a share outstanding throughout the period
does not accord with the earned income or the change in aggregate gains and
losses in the portfolio of securities during the period because of the
timing of sales and purchases of fund shares in relation to fluctuating
market values during the period.
58 Financial Highlights
<PAGE>
UltraShort OTC ProFund
Financial Highlights
For a share of beneficial interest outstanding
<TABLE>
<CAPTION>
Adjusted for 5:1 reverse stock split
Investor Class Service Class
For the period For the period
from June 2, 1998(a) from June 2, 1998(a)
through December 31, 1998 through December 31, 1998
-------------------------- --------------------------
<S> <C> <C>
Net asset value, $50.00 $50.00
beginning of period ------ ------
- -------------------------------------------------------------------------------------------------------------------
Net investment income 0.26(d) 0.10(d)
- -------------------------------------------------------------------------------------------------------------------
Net realized and unrealized (34.02) (33.86)
(loss) on investment transactions ------ -------
and futures contracts
- -------------------------------------------------------------------------------------------------------------------
Total (loss) from (33.76) (33.76)
investment operations
- -------------------------------------------------------------------------------------------------------------------
Distribution to Shareholders from:
Net investment income --(e) --
- -------------------------------------------------------------------------------------------------------------------
Total distributions --(e) --
- -------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $16.24 $16.24
====== ======
- -------------------------------------------------------------------------------------------------------------------
Total Return (67.48%)(d) (67.50%)(b)
- -------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of period $19,465,372 $855,392
- -------------------------------------------------------------------------------------------------------------------
Ratio of expenses to 1.83% 2.92%(c)
average net assets
- -------------------------------------------------------------------------------------------------------------------
Ratio of net investment 1.55% 0.54%(c)
income to average net assets
- -------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net 1.98% 3.06%(c)
assets (before reimbursements)*
</TABLE>
* During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred,
the ratio would have been as indicated.
(a) Commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Per share net investment income has been calculated using the daily average
shares method.
(e) Distribution per share was less than $0.005
Financial Highlights 59
<PAGE>
Money Market ProFund
Financial Highlights
For a share of beneficial interest outstanding
<TABLE>
<CAPTION>
Investor Class Service Class
For the period For the period
For the year from November For the year from November 17,
ended 17, 1997(a) ended 1997(a)
December 31, to December 31, December 31, to December 31,
1998 1997 1998 1997
------------------------------ ----------------------------------
<S> <C> <C> <C> <C>
Net asset value, $1.00 $1.00 $1.00 $1.00
beginning of period ----- ----- ----- -----
- -------------------------------------------------------------------------------------------------------------------
Net investment income 0.05(d) 0.01 0.04(d) --
- -------------------------------------------------------------------------------------------------------------------
Total income from 0.05 0.01 0.04 --
investment operations
- -------------------------------------------------------------------------------------------------------------------
Distribution to Shareholders from:
Net investment income (0.05) (0.01) (0.04) --
- -------------------------------------------------------------------------------------------------------------------
Total distributions (0.05) (0.01) (0.04) --
- -------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00
===== ===== ===== =====
- -------------------------------------------------------------------------------------------------------------------
Total Return 4.84% 0.61%(b) 3.81% 0.21%(b)
- -------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of period $62,026,228 $286,962 $15,406,187 $2,510
- -------------------------------------------------------------------------------------------------------------------
Ratio of expenses to 0.85%(d) 0.83%(c),(e) 1.87%(d) 1.83%(c),(e)
average net assets
- -------------------------------------------------------------------------------------------------------------------
Ratio of net investment 4.81% 4.92%(c) 3.43% 2.53%(c)
income to average net assets
- -------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net 1.18%(d) 9.52%(c),(e) 2.18%(d) 10.52%(c),(e)
assets (before reimbursements)*
</TABLE>
* During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred,
the ratio would have been as indicated.
(a) Commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Per share net investment income has been calculated using the daily average
shares method.
(e) The Money Market ProFund expense ratio includes the expense allocation of
the Portfolio.
60 Financial Highlights
<PAGE>
Additional information about ProFunds' investments is
available in ProFunds' annual and semi-annual reports to
shareholders. In ProFunds' annual report you will find a
discussion of the market conditions and investment strategies
that significantly affected performance during the last fiscal
year.
You can find more detailed information about ProFunds in its
current Statement of Additional Information, dated May 1,
1999, which we have filed electronically with the Securities
and Exchange Commission (SEC) and which is incorporated by
reference into, and is legally a part of, this prospectus. To
receive your free copy of a Statement of Additional
Information, or the annual or semi-annual reports, or if you
have questions about investing in ProFunds, write to us at:
ProFunds
P.O. Box 182800
Columbus, OH 43218-2800
or call our toll-free numbers:
(888) PRO-FNDS (888) 776-3637 For Investors
(888) PRO-5717 (888) 776-5717 Financial Professionals Only
or visit our website www.profunds.com
You can find other information about ProFunds on the SEC's
website (http://www.sec.gov), or you can get copies of this
information, after payment of a duplicating fee, by writing to
the Public Reference Section of the SEC, Washington D.C.
20549-6009. Information about the ProFunds, including their
Statement of Additional Information, can be reviewed and
copied at the SEC's Public Reference Room in Washington, D.C.
For information on the Public Reference Room, call the SEC at
(800) SEC-0330.
ProFunds Executive Offices
Bethesda, MD
[LOGO APPEARS HERE]
PROFUNDS
811-08239
PROBK
<PAGE>
PROFUNDS
STATEMENT OF ADDITIONAL INFORMATION
7900 WISCONSIN AVENUE, SUITE 300
BETHESDA, MARYLAND 20814
(888) 776-3637 RETAIL SHAREHOLDERS
(888) 776-5717 (FINANCIAL PROFESSIONALS ONLY)
This statement of additional information describes eight ProFunds. Each
ProFund offers two classes of shares: Service Shares and Investor Shares. The
ProFunds may be used by professional money managers and investors as part of an
asset-allocation or market-timing investment strategy or to create specified
investment exposure to a particular segment of the securities market or to hedge
an existing investment portfolio. Sales are made without any sales charge at net
asset value. Each non-money-market ProFund seeks investment results that
correspond each day to a specified benchmark. The ProFunds may be used
independently or in combination with each other as part of an overall investment
strategy. Additional ProFunds may be created from time to time.
The ProFunds include the Money Market ProFund. The Money Market ProFund
seeks a high level of current income consistent with liquidity and the
preservation of capital through investment in high quality money market
instruments. Unlike other mutual funds, the Money Market ProFund seeks to
achieve its investment objective by investing all of its investable assets in
the Cash Management Portfolio (the "Portfolio"), a separate investment company
with an identical investment objective. The performance of the Money Market
ProFund will correspond directly to the investment performance of the Portfolio.
The ProFunds involve special risks, some not traditionally associated with
mutual funds. Investors should carefully review and evaluate these risks in
considering an investment in the ProFunds to determine whether an investment in
a particular ProFund is appropriate. None of the ProFunds alone constitutes a
balanced investment plan. Each non-money market Profund is not intended for
investors whose principal objective is current income or preservation of
capital. Because of the inherent risks in any investment, there can be no
assurance that the ProFunds' investment objectives will be achieved.
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with ProFunds' Prospectus, dated May 1, 1999, which
incorporates this Statement of Additional Information by reference. The
financial statements and related report of the independent accountants included
in the Fund's annual report for the fiscal year ended December 31, 1998 are
incorporated by reference into this Statement of Additional Information. A copy
of the Prospectus or Annual Report is available, without charge, upon request to
the address above or by telephoning at the telephone numbers above.
The date of this Statement of Additional Information is May 1, 1999
(revised October 19, 1999 and February 14, 2000)
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
PAGE
ProFunds .............................................................. 3
Investment Policies and Techniques .................................... 3
Investment Restrictions ............................................... 20
Portfolio Transactions and Brokerage .................................. 25
Management of ProFunds ................................................ 28
Costs and Expenses .................................................... 36
Capitalization......................................................... 37
Taxation .............................................................. 41
Performance Information ............................................... 45
Financial Statements .................................................. 48
Appendix -- Description of Securities Ratings ......................... A-1
2
<PAGE>
PROFUNDS
ProFunds (the "Trust") is an open-end management investment company, and
currently comprises eight separate series. Other series may be added in the
future. The ProFunds may be used independently or in combination with each other
as part of an overall investment strategy. Shares of any ProFund may be
exchanged, without any charge, for shares of the same class of any other ProFund
on the basis of the respective net asset values of the shares involved;
provided, that, in connection with exchanges for shares of the ProFund, certain
minimum investment levels are maintained (see "Shareholders Services --
Exchanges " in the Prospectus).
INVESTMENT POLICIES AND TECHNIQUES
GENERAL
Reference is made to the Prospectus for a discussion of the investment
objectives and policies of the ProFunds. In addition, set forth below is further
information relating to the ProFunds. The discussion below supplements and
should be read in conjunction with the Prospectus. Portfolio management is
provided to the non-money market ProFunds by its investment adviser, ProFund
Advisors LLC, a Maryland limited liability company with offices at 7900
Wisconsin Avenue, NW, Bethesda, Maryland (the "Advisor"). The Money Market
ProFund seeks to achieve its investment objective by investing all of its assets
in the Portfolio which has as its investment adviser, Bankers Trust Company
("Bankers Trust").
The investment objectives (except the specific benchmarks which are tracked
by the ProFunds) and certain investment restrictions of the ProFunds
specifically identified as fundamental policies may not be changed without the
affirmative vote of at least the majority of the outstanding shares of that
ProFund, as defined in the 1940 Act. All other investment policies of the
ProFunds not specified as fundamental (including the benchmarks of the ProFunds)
may be changed by the trustees of the ProFunds without the approval of
shareholders.
The non-money market ProFunds may consider changing a ProFund's benchmark
if, for example, the current benchmark becomes unavailable; the ProFunds believe
the current benchmark no longer serves the investment needs of a majority of
shareholders or another benchmark better serves their needs; or the financial or
economic environment makes it difficult for the ProFund's investment results to
correspond sufficiently to its current benchmark. If believed appropriate, the
ProFunds may specify a benchmark for a ProFund that is "leveraged" or
proprietary. Of course, there can be no assurance that a ProFund will achieve
its objective.
Fundamental securities analysis is not generally used by the Advisor in
seeking to correlate with the respective benchmarks. Rather, the Advisor
primarily uses statistical and quantitative analysis to determine the
investments a non-money market ProFund makes and techniques it employs. While
the Advisor attempts to minimize any "tracking error" (that statistical measure
of the difference between the investment results of a ProFund and the
performance of its benchmark), certain factors will tend to cause a ProFund's
investment results to vary from a perfect correlation to its benchmark. The
ProFunds, however, do not expect that their total returns will vary adversely
from their respective current benchmarks by more than ten percent over the
course of a year. See "Special Considerations."
It is the policy of the non-money-market ProFunds to pursue their
investment objectives of correlating with their benchmarks regardless of market
conditions, to remain nearly fully invested and not to take defensive positions.
The investment strategies of the ProFunds discussed below, and as discussed
in the Prospectus, may be used by a ProFund if, in the opinion of the Advisor,
these strategies will be advantageous to the ProFund. The ProFund is free to
reduce or eliminate the ProFund's activity in any of those areas without
changing the ProFund's fundamental investment policies. There is no assurance
that any of these strategies or any other strategies and methods of investment
available to a ProFund will result in the achievement of the ProFund's
objectives.
3
<PAGE>
THE BULL PROFUND AND ULTRABULL PROFUND
The investment objective of the Bull ProFund is to provide investment
returns that correspond to the performance of the S&P 500 Index. The investment
objective of the UltraBull ProFund is to provide investment returns that
correspond to 200% of the performance of the S&P 500 Index. These ProFunds seek
to achieve this correlation on each trading day. Under their investment
objectives, the UltraBull ProFund should produce greater gains to investors when
the S&P 500 Index rises and greater losses when the S&P 500 Index declines over
the corresponding gain or loss of the Bull ProFund.
In attempting to achieve their objectives, the Bull ProFund and the
UltraBull ProFund expect that a substantial portion of their respective assets
usually will be devoted to employing certain specialized investment techniques.
These techniques include engaging in certain transactions in stock index futures
contracts, options on stock index futures contracts, and options on securities
and stock indexes. The amount of any gain or loss on an investment technique may
be affected by any premium or amounts in lieu of dividends or interest income
the ProFund pays or receives as the result of the transaction. These ProFunds
may also invest in shares of individual securities which are expected to track
the S&P 500 Index.
THE BEAR PROFUND AND ULTRABEAR PROFUND
The Bear ProFund and the UltraBear ProFund are designed to allow investors
to speculate on anticipated decreases in the S&P 500 Index or to hedge an
existing portfolio of securities or mutual fund shares. The Bear ProFund's
investment objective is to provide investment results that will inversely
correlate to the performance of the S&P 500 Index. The UltraBear ProFund's
investment objective is to provide investment results that will inversely
correlate to 200% of the performance of the S&P 500 Index. These ProFunds seek
to achieve this inverse correlation on each trading day.
If the Bear ProFund achieved a perfect inverse correlation for any single
trading day, the net asset value of the shares of the Bear ProFund would
increase for that day in direct proportion to any decrease in the level of the
S&P 500 Index. Conversely, the net asset value of the shares of the Bear ProFund
would decrease for that day in direct proportion to any increase in the level of
the S&P 500 Index for that day. The net asset value of the UltraBear ProFund on
the same days would increase or decrease approximately twice as much as the
price change of the Bear ProFund.
For example, if the S&P 500 Index were to decrease by 1% on a particular
day, investors in the Bear ProFund should experience a gain in net asset value
of approximately 1% for that day. The UltraBear ProFund should realize an
increase of approximately 2% of its net asset value on the same day. Conversely,
if the S&P 500 Index were to increase by 1% by the close of business on a
particular trading day, investors in the Bear ProFund and the UltraBear ProFund
would experience a loss in net asset value of approximately 1% and 2%,
respectively.
Due to the nature of the Bear ProFund and the UltraBear ProFund, investors
in these ProFunds could experience substantial losses during sustained periods
of rising equity prices, with losses to investors in the UltraBear ProFund
approximately twice as large as the losses to investors in the Bear ProFund.
This is the opposite likely result expected of investing in a traditional equity
mutual fund in a generally rising stock market.
In pursuing its investment objectives, the Bear ProFund and the
UltraBear ProFund generally do not invest in traditional securities, such as
common stock of operating companies. Rather, the Bear ProFund and the UltraBear
ProFund employ certain investment techniques, including engaging in short sales
and in certain transactions in stock index futures contracts, options on stock
index futures contracts, and options on securities and stock indexes.
Under these techniques, the Bear ProFund and the UltraBear ProFund will
generally incur a loss if the price of the underlying security or index
increases between the date of the employment of the technique and the date on
which the ProFund terminates the position. These ProFunds will generally realize
a gain if the underlying security or index declines in price between those
dates. The amount of any gain or loss on an investment
4
<PAGE>
technique may be affected by any premium or amounts in lieu of dividends or
interest that the ProFund pays or receives as the result of the transaction.
THE ULTRAOTC PROFUND AND THE ULTRASHORT OTC PROFUND
The investment objective of the UltraOTC ProFund is to provide investment
results that correspond to 200% of the performance of the NASDAQ 100 Index(TM).
The UltraOTC ProFund does not intend to hold the 100 securities included in
the NASDAQ 100 Index(TM). Instead, the UltraOTC ProFund intends to engage in
transactions on stock index futures contracts, options on stock index futures
contracts, and options on securities and stock indexes. As a nonfundamental
policy, the UltraOTC ProFund will invest, under normal conditions, at least 65%
of its total assets in securities traded on the over-the-counter markets and
instruments with values that are representative of such securities such as
futures and option contracts in such securities or indices.
The investment objective of the UltraShort OTC ProFund is to provide
investment results that correspond each day to twice of the inverse (opposite)
of the performance of the NASDAQ 100 Index(TM). It is the policy of the
UltraShort OTC ProFund to pursue its investment objective of correlating with
its benchmark regardless of market conditions, to remain nearly fully invested
and not to take defensive positions.
The UltraShort OTC ProFund is designed to allow investors to seek to profit
from anticipated decreases in the NASDAQ 100 Index(TM) or to hedge an existing
portfolio of securities or mutual fund shares. The UltraShort OTC ProFund's
investment objective is to provide investment results that will inversely
correlate to 200% of the performance of the NASDAQ 100 Index(TM). The UltraShort
OTC ProFund seeks to achieve this inverse correlation on each trading day.
If the ProFund achieved a perfect inverse correlation for any single
trading day, the net asset value of the shares of the UltraShort OTC ProFund
would increase for that day proportional to twice any decrease in the level of
the NASDAQ 100 Index(TM). Conversely, the net asset value of the shares of the
UltraShort OTC ProFund would decrease for that day proportional to twice any
increase in the level of the NASDAQ 100 Index(TM) for that day.
For example, if the NASDAQ 100 Index(TM) were to decrease by 1% on a
particular day, investors in the UltraShort OTC ProFund should experience a gain
in net asset value of approximately 2% for that day. Conversely, if the NASDAQ
100 Index(TM) were to increase by 1% by the close of business on a particular
trading day, investors in the UltraShort OTC ProFund would experience a loss in
net asset value of approximately 2%.
In pursuing its investment objective, the UltraShort OTC ProFund generally
does not invest in traditional securities, such as common stock of operating
companies. Rather, the UltraShort OTC ProFund employs certain investment
techniques, including engaging in short sales and in certain transactions in
stock index futures contracts, options on stock index futures contracts, and
options on securities and stock indexes.
Under these techniques, the UltraShort OTC ProFund will generally incur a
loss if the price of the underlying security or index increases between the date
of the employment of the technique and the date on which the UltraShort OTC
ProFund terminates the position. The UltraShort OTC ProFund will generally
realize a gain if the underlying security or index declines in price between
those dates. The amount of any gain or loss on an investment technique may be
affected by any premium or amounts in lieu of dividends or interest that the
UltraShort OTC ProFund pays or receives as the result of the transaction. Due to
the nature of the UltraShort OTC ProFund, investors could experience substantial
losses during sustained periods of rising equity prices. This is the opposite
likely result expected of investing in a traditional equity mutual fund in a
generally rising stock market.
Companies whose securities are traded on the over-the-counter ("OTC")
markets generally have smaller market capitalization or are newer companies than
those listed on the NYSE or the American Stock Exchange (the "AMEX"). OTC
companies often have limited product lines, or relatively new products or
services, and may lack established markets, depth of experienced management, or
financial resources and the ability to generate
5
<PAGE>
funds. The securities of these companies may have limited marketability and may
be more volatile in price than securities of larger capitalized or more
well-known companies. Among the reasons for the greater price volatility of
securities of certain smaller OTC companies are the less certain growth
prospects of comparably smaller firms, the lower degree of liquidity in the OTC
markets for such securities, and the greater sensitivity of smaller
capitalization companies to changing economic conditions than larger
capitalization, exchange-traded securities. Conversely, because many of these
OTC securities may be overlooked by investors and undervalued in the
marketplace, there is potential for significant capital appreciation.
THE ULTRAEUROPE PROFUND
The investment objective of the UltraEurope ProFund is to provide
investment returns that correspond to 200% of the daily performance of the PEI.
Under its investment objective, the UltraEurope ProFund should produce greater
gains to investors when the PEI rises and greater losses when the PEI declines
over the corresponding gain or loss of the PEI itself.
In pursuing its investment objectives, the UltraEurope ProFund generally
does not invest in traditional securities, such as common stock of operating
companies. Rather, the ProFund employs certain investment techniques, including
engaging in short sales and in certain transactions in stock index future
contracts, options on stock index future contracts, and options on securities
and stock indexes.
Investing in foreign companies or financial instruments by the UltraEurope
ProFund (directly or indirectly) may involve risks not typically associated with
investing in U.S. companies. The value of securities denominated in foreign
currencies, and of dividends from such securities, can change significantly when
foreign currencies strengthen or weaken relative to the U.S. Dollar. Foreign
securities markets generally have less trading volume and less liquidity than
U.S. markets, and prices in some foreign markets can be extremely volatile. Many
foreign countries lack uniform accounting and disclosure standards. Because the
UltraEurope ProFund will invest indirectly in foreign markets, it will be
subject to the market, economic and political risks prevalent in these foreign
markets.
Changes in foreign exchange rates will affect the value of securities of
financial instruments denominated or quoted in currencies other than the U.S.
Dollar, and the ProFund will not engage in activities designed to hedge against
foreign currency exchange rate fluctuations. Foreign currency exchange rates may
fluctuate significantly over short periods of time. They generally are
determined by forces of supply and demand in the foreign exchange markets and
the relative merits of investments in different countries, actual or perceived
changes in interest rates and other complex factors, as seen from an
international perspective. Currency exchange rates also can be affected
unpredictably by intervention (or failure to intervene) by U.S. or foreign
governments or central banks, by currency controls or by political developments
in the U.S. or abroad.
On January 1, 1999, the European Monetary Union (EMU) began to implement a
new currency unit, the Euro, which is expected to reshape financial markets,
banking systems and monetary policies, in Europe and other parts of the world.
Although it is not possible to predict the impact of the Euro implementation
plan on the ProFunds, the transition to the Euro may change the economic
environment and behavior of investors, particularly in European markets.
THE MONEY MARKET PROFUND
The Money Market ProFund seeks a high level of current income consistent
with liquidity and the preservation of capital through investment in high
quality money market instruments. The Money Market ProFund offers investors a
convenient means of diversifying their holdings of short-term securities while
relieving those investors of the administrative burdens typically associated
with purchasing and holding these instruments, such as coordinating maturities
and reinvestments, providing for safekeeping and maintaining detailed records.
High quality, short-term instruments may result in a lower yield than
instruments with a lower quality and/or a longer term.
The Money Market ProFund seeks to achieve its investment objective by
investing its assets in the Portfolio, which has the same investment objective
as the Money Market ProFund and is managed by Bankers
6
<PAGE>
Trust, 130 Liberty St. (One Bankers Trust Plaza), New York, New York 10006.
There can be no assurance that the investment objective of either the Money
Market ProFund or the Portfolio will be achieved. The investment objectives of
the Money Market ProFund and the Portfolio are fundamental policies and may not
be changed without the approval of the Money Market ProFund's shareholders or
the Portfolio's investors, respectively. See "Special Information Concerning
MasterFeeder Fund Structure" herein.
The Portfolio invests in money market instruments, including corporate
debt obligations, U.S. government securities, bank obligations and repurchase
agreements. See "Investment Policies and Techniques -- Cash Management
Portfolio" for a discussion of the Portfolio's investment policies. The
Portfolio follows practices which are designed to enable the Money Market
ProFund to maintain a $1.00 share price: limiting dollar-weighted average
maturity of the securities held by the Portfolio to 90 days or less; buying
securities which have remaining maturities of 397 days or less; and buying only
high quality securities with minimal credit risks. Of course, the Money Market
ProFund cannot guarantee a $1.00 share price, but these practices help to
minimize any price fluctuations that might result from rising or declining
interest rates. While the Portfolio invests in high quality money market
securities, you should be aware that your investment is not without risk. All
money market instruments can change in value when interest rates or an issuer's
creditworthiness changes.
FUTURES CONTRACTS AND RELATED OPTIONS
The ProFunds (other than the Money Market ProFund) may purchase or sell
stock index futures contracts and options thereon as a substitute for a
comparable market position in the underlying securities or to satisfy regulation
requirements. A futures contract obligates the seller to deliver (and the
purchaser to take delivery of) the specified commodity on the expiration date of
the contract. A stock index futures contract obligates the seller to deliver
(and the purchaser to take) an amount of cash equal to a specific dollar amount
multiplied by the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of the underlying stocks in the index is
made.
When a ProFund purchases a put or call option on a futures contract, the
ProFund pays a premium for the right to sell or purchase the underlying futures
contract for a specified price upon exercise at any time during the option
period. By writing (selling) a put or call option on a futures contract, a
ProFund receives a premium in return for granting to the purchaser of the option
the right to sell to or buy from the ProFund the underlying futures contract for
a specified price upon exercise at any time during the option period.
Whether a ProFund realizes a gain or loss from futures activities depends
generally upon movements in the underlying commodity. The extent of the
ProFund's loss from an unhedged short position in futures contracts or from
writing options on futures contracts is potentially unlimited. The ProFunds may
engage in related closing transactions with respect to options on futures
contracts. The ProFunds will engage in transactions in futures contracts and
related options that are traded on a U.S. exchange or board of trade or that
have been approved for sale in the U.S. by the Commodity Futures Trading
Commission.
When a ProFund purchases or sells a stock index futures contract, or sells
an option thereon, the ProFund "covers" its position. To cover its position, a
ProFund may enter into an offsetting position or maintain with its custodian
bank (and mark-to-market on a daily basis) a segregated account consisting of
liquid instruments that, when added to any amounts deposited with a futures
commission merchant as margin, are equal to the market value of the futures
contract or otherwise "cover" its position.
The non-money market ProFunds may purchase and sell futures contracts and
options thereon only to the extent that such activities would be consistent with
the requirements of Section 4.5 of the regulations under the Commodity Exchange
Act promulgated by the Commodity Futures Trading Commission (the "CFTC
Regulations"), under which each of these ProFunds would be excluded from the
definition of a "commodity pool operator." Under Section 4.5 of the CFTC
Regulations, a ProFund may engage in futures transactions, either for "bona fide
hedging" purposes, as this term is defined in the CFTC Regulations, or for
non-hedging purposes to the extent that the aggregate initial margins and option
premiums required to establish such non-hedging positions do not exceed 5% of
the liquidation value of the ProFund's portfolio. In the case of an option on
futures contracts that is "in-the-money" at the time of purchase (i.e., the
amount by which the exercise price of the put option exceeds the current market
value of the underlying security or the amount by which the current market value
7
<PAGE>
of the underlying security exceeds the exercise price of the call option), the
in-the-money amount may be excluded in calculating this 5% limitation.
The ProFunds will cover their positions when they write a futures contract
or option on a futures contract. A ProFund may "cover" its long position in a
futures contract by purchasing a put option on the same futures contract with a
strike price (i.e., an exercise price) as high or higher than the price of the
futures contract, or, if the strike price of the put is less than the price of
the futures contract, the ProFund will maintain in a segregated account cash or
liquid instruments equal in value to the difference between the strike price of
the put and the price of the future. A ProFund may also cover its long position
in a futures contract by taking a short position in the instruments underlying
the futures contract, or by taking positions in instruments the prices of which
are expected to move relatively consistently with the futures contract. A
ProFund may cover its short position in a futures contract by taking a long
position in the instruments underlying the futures contract, or by taking
positions in instruments the prices of which are expected to move relatively
consistently with the futures contract.
A ProFund may cover its sale of a call option on a futures contract by
taking a long position in the underlying futures contract at a price less than
or equal to the strike price of the call option, or, if the long position in the
underlying futures contract is established at a price greater than the strike
price of the written (sold) call, the ProFund will maintain in a segregated
account liquid instruments equal in value to the difference between the strike
price of the call and the price of the future. A ProFund may also cover its sale
of a call option by taking positions in instruments the prices of which are
expected to move relatively consistently with the call option. A ProFund may
cover its sale of a put option on a futures contract by taking a short position
in the underlying futures contract at a price greater than or equal to the
strike price of the put option, or, if the short position in the underlying
futures contract is established at a price less than the strike price of the
written put, the ProFund will maintain in a segregated account cash or
high-grade liquid debt securities equal in value to the difference between the
strike price of the put and the price of the future. A ProFund may also cover
its sale of a put option by taking positions in instruments the prices of which
are expected to move relatively consistently with the put option.
Although the ProFunds intend to sell futures contracts only if there is an
active market for such contracts, no assurance can be given that a liquid market
will exist for any particular contract at any particular time. Many futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a price
beyond that limit or trading may be suspended for specified periods during the
day. Futures contract prices could move to the limit for several consecutive
trading days with little or no trading, thereby preventing prompt liquidation of
futures positions and potentially subjecting a ProFund to substantial losses. If
trading is not possible, or if a ProFund determines not to close a futures
position in anticipation of adverse price movements, the ProFund will be
required to make daily cash payments of variation margin. The risk that the
ProFund will be unable to close out a futures position will be minimized by
entering into such transactions on a national exchange with an active and liquid
secondary market.
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INDEX OPTIONS
The ProFunds (other than the Money Market ProFund) may purchase and write
options on stock indexes to create investment exposure consistent with their
investment objectives, hedge or limit the exposure of their positions and to
create synthetic money market positions. See "Taxation" herein.
A stock index fluctuates with changes in the market values of the stocks
included in the index. Options on stock indexes give the holder the right to
receive an amount of cash upon exercise of the option. Receipt of this cash
amount will depend upon the closing level of the stock index upon which the
option is based being greater than (in the case of a call) or less than (in the
case of a put) the exercise price of the option. The amount of cash received, if
any, will be the difference between the closing price of the index and the
exercise price of the option, multiplied by a specified dollar multiple. The
writer (seller) of the option is obligated, in return for the premiums received
from the purchaser of the option, to make delivery of this amount to the
purchaser. All settlements of index options transactions are in cash.
Index options are subject to substantial risks, including the risk of
imperfect correlation between the option price and the value of the underlying
securities composing the stock index selected and the risk that there might not
be a liquid secondary market for the option. Because the value of an index
option depends upon movements in the level of the index rather than the price of
a particular stock, whether a ProFund will realize a gain or loss from the
purchase or writing (sale) of options on an index depends upon movements in the
level of stock prices in the stock market generally or, in the case of certain
indexes, in an industry or market segment, rather than upon movements in the
price of a particular stock. Whether a ProFund will realize a profit or loss by
the use of options on stock indexes will depend on movements in the direction of
the stock market generally or of a particular industry or market segment. This
requires different skills and techniques than are required for predicting
changes in the price of individual stocks. A ProFund will not enter into an
option position that exposes the ProFund to an obligation to another party,
unless the ProFund either (i) owns an offsetting position in securities or other
options and/or (ii) maintains with the ProFund's custodian bank liquid
instruments that, when added to the premiums deposited with respect to the
option, are equal to the market value of the underlying stock index not
otherwise covered.
The non-money market ProFunds may engage in transactions in stock index
options listed on national securities exchanges or traded in the
over-the-counter market as an investment vehicle for the purpose of realizing
the ProFund's investment objective. Options on indexes are settled in cash, not
by delivery of securities. The exercising holder of an index option receives,
instead of a security, cash equal to the difference between the closing price of
the securities index and the exercise price of the option.
Some stock index options are based on a broad market index such as the S&P
500 Index, the NYSE Composite Index, or the AMEX Major Market Index, or on a
narrower index such as the Philadelphia Stock Exchange Over-the-Counter Index.
Options currently are traded on the Chicago Board Options Exchange (the "CBOE"),
the AMEX, and other exchanges ("Exchanges"). Purchased over-the-counter options
and the cover for written over-the-counter options will be subject to the
respective ProFund's 15% limitation on investment in illiquid securities. See
"Illiquid Securities."
Each of the Exchanges has established limitations governing the maximum
number of call or put options on the same index which may be bought or written
(sold) by a single investor, whether acting alone or in concert with others
(regardless of whether such options are written on the same or different
Exchanges or are held or written on one or more accounts or through one or more
brokers). Under these limitations, option positions of all investment companies
advised by the same investment adviser are combined for purposes of these
limits. Pursuant to these limitations, an Exchange may order the liquidation of
positions and may impose other sanctions or restrictions. These position limits
may restrict the number of listed options which a ProFund may buy or sell;
however, the Advisor intends to comply with all limitations.
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OPTIONS ON SECURITIES
The non-money market ProFunds may buy and write (sell) options on
securities for the purpose of realizing their respective ProFund's investment
objective. By buying a call option, a ProFund has the right, in return for a
premium paid during the term of the option, to buy the securities underlying the
option at the exercise price. By writing a call option on securities, a ProFund
becomes obligated during the term of the option to sell the securities
underlying the option at the exercise price if the option is exercised. By
buying a put option, a ProFund has the right, in return for a premium paid
during the term of the option, to sell the securities underlying the option at
the exercise price. By writing a put option, a ProFund becomes obligated during
the term of the option to purchase the securities underlying the option at the
exercise price if the option is exercised. During the term of the option, the
writer may be assigned an exercise notice by the broker-dealer through whom the
option was sold. The exercise notice would require the writer to deliver, in the
case of a call, or take delivery of, in the case of a put, the underlying
security against payment of the exercise price. This obligation terminates upon
expiration of the option, or at such earlier time that the writer effects a
closing purchase transaction by purchasing an option covering the same
underlying security and having the same exercise price and expiration date as
the one previously sold. Once an option has been exercised, the writer may not
execute a closing purchase transaction. To secure the obligation to deliver the
underlying security in the case of a call option, the writer of a call option is
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the Options Clearing Corporation (the "OCC"), an
institution created to interpose itself between buyers and sellers of options.
The OCC assumes the other side of every purchase and sale transaction on an
exchange and, by doing so, gives its guarantee to the transaction. When writing
call options on securities, a ProFund may cover its position by owning the
underlying security on which the option is written. Alternatively, the ProFund
may cover its position by owning a call option on the underlying security, on a
share for share basis, which is deliverable under the option contract at a price
no higher than the exercise price of the call option written by the ProFund or,
if higher, by owning such call option and depositing and maintaining in a
segregated account cash or liquid instruments equal in value to the difference
between the two exercise prices. In addition, a ProFund may cover its position
by depositing and maintaining in a segregated account cash or liquid instruments
equal in value to the exercise price of the call option written by the ProFund.
When a ProFund writes a put option, the ProFund will have and maintain on
deposit with its custodian bank cash or liquid instruments having a value equal
to the exercise value of the option. The principal reason for a ProFund to write
call options on stocks held by the ProFund is to attempt to realize, through the
receipt of premiums, a greater return than would be realized on the underlying
securities alone.
If a ProFund that writes an option wishes to terminate the ProFund's
obligation, the ProFund may effect a "closing purchase transaction." The ProFund
accomplishes this by buying an option of the same series as the option
previously written by the ProFund. The effect of the purchase is that the
writer's position will be canceled by the OCC. However, a writer may not effect
a closing purchase transaction after the writer has been notified of the
exercise of an option. Likewise, a ProFund which is the holder of an option may
liquidate its position by effecting a "closing sale transaction." The ProFund
accomplishes this by selling an option of the same series as the option
previously purchased by the ProFund. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected. If any call or put
option is not exercised or sold, the option will become worthless on its
expiration date. A ProFund will realize a gain (or a loss) on a closing purchase
transaction with respect to a call or a put option previously written by the
ProFund if the premium, plus commission costs, paid by the ProFund to purchase
the call or put option to close the transaction is less (or greater) than the
premium, less commission costs, received by the ProFund on the sale of the call
or the put option. The ProFund also will realize a gain if a call or put option
which the ProFund has written lapses unexercised, because the ProFund would
retain the premium.
Although certain securities exchanges attempt to provide continuously
liquid markets in which holders and writers of options can close out their
positions at any time prior to the expiration of the option, no assurance can be
given that a market will exist at all times for all outstanding options
purchased or sold by a ProFund. If an options market were to become unavailable,
the ProFund would be unable to realize its profits or limit its losses until the
ProFund could exercise options it holds, and the ProFund would remain obligated
until options it wrote were exercised or expired. Reasons for the absence of
liquid secondary market on an exchange include the following: (i) there may be
insufficient trading interest in certain options; (ii) restrictions may be
imposed by an exchange on opening or closing transactions or both; (iii) trading
halts, suspensions or other restrictions may
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be imposed with respect to particular classes or series of options; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or the OCC may not at all times be adequate to
handle current trading volume; or (vi) one or more exchanges could, for economic
or other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options) would cease to
exist, although outstanding options on that exchange that had been issued by the
OCC as a result of trades on that exchange would continue to be exercisable in
accordance with their terms.
SHORT SALES
The Bear ProFund, the UltraBear ProFund and the UltraShort OTC ProFund may
engage in short sales transactions under which the ProFund sells a security it
does not own. To complete such a transaction, the ProFund must borrow the
security to make delivery to the buyer. The ProFund then is obligated to replace
the security borrowed by purchasing the security at the market price at the time
of replacement. The price at such time may be more or less than the price at
which the security was sold by the ProFund. Until the security is replaced, the
ProFund is required to pay to the lender amounts equal to any dividends or
interest which accrue during the period of the loan. To borrow the security, the
ProFund also may be required to pay a premium, which would increase the cost of
the security sold. The proceeds of the short sale will be retained by the
broker, to the extent necessary to meet the margin requirements, until the short
position is closed out.
Until the ProFund closes its short position or replaces the borrowed
security, the ProFund will cover its position with an offsetting position or
maintain a segregated account containing cash or liquid instruments at such a
level that the amount deposited in the account plus the amount deposited with
the broker as collateral will equal the current value of the security sold
short.
SWAP AGREEMENTS
The ProFunds (other than the Money Market ProFund) may enter into equity
index or interest rate swap agreements for purposes of attempting to gain
exposure to the stocks making up an index of securities in a market without
actually purchasing those stocks, or to hedge a position. Swap agreements are
two-party contracts entered into primarily by institutional investors for
periods ranging from a day to more than one year. In a standard "swap"
transaction, two parties agree to exchange the returns (or differentials in
rates of return) earned or realized on particular predetermined investments or
instruments. The gross returns to be exchanged or "swapped" between the parties
are calculated with respect to a "notional amount," i.e., the return on or
increase in value of a particular dollar amount invested in a "basket" of
securities representing a particular index. Forms of swap agreements include
interest rate caps, under which, in return for a premium, one party agrees to
make payments to the other to the extent that interest rates exceed a specified
rate, or "cap"; interest rate floors, under which, in return for a premium, one
party agrees to make payments to the other to the extent that interest rates
fall below a specified level, or "floor"; and interest rate collars, under which
a party sells a cap and purchases a floor or vice versa in an attempt to protect
itself against interest rate movements exceeding given minimum or maximum
levels.
Most swap agreements entered into by the ProFunds calculate the obligations
of the parties to the agreement on a "net basis." Consequently, a ProFund's
current obligations (or rights) under a swap agreement will generally be equal
only to the net amount to be paid or received under the agreement based on the
relative values of the positions held by each party to the agreement (the "net
amount").
A ProFund's current obligations under a swap agreement will be accrued
daily (offset against any amounts owing to the ProFund) and any accrued but
unpaid net amounts owed to a swap counterparty will be covered by segregating
assets determined to be liquid. Obligations under swap agreements so covered
will not be construed to be "senior securities" for purposes of a ProFund's
investment restriction concerning senior securities. Because they are two party
contracts and because they may have terms of greater than seven days, swap
agreements may be considered to be illiquid for the ProFunds' illiquid
investment limitations. A Portfolio will not enter into any swap agreement
unless the Advisor believes that the other party to the transaction is
creditworthy. A ProFund bears the risk of loss of the amount expected to be
received under a swap agreement in the event of the default or bankruptcy of a
swap agreement counterparty.
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Each non-money market ProFund may enter into swap agreements to invest in a
market without owning or taking physical custody of securities in circumstances
in which direct investment is restricted for legal reasons or is otherwise
impracticable. The counterparty to any swap agreement will typically be a bank,
investment banking firm or broker/dealer. The counterparty will generally agree
to pay the ProFund the amount, if any, by which the notional amount of the swap
agreement would have increased in value had it been invested in the particular
stocks, plus the dividends that would have been received on those stocks. The
ProFund will agree to pay to the counterparty a floating rate of interest on the
notional amount of the swap agreement plus the amount, if any, by which the
notional amount would have decreased in value had it been invested in such
stocks. Therefore, the return to the ProFund on any swap agreement should be the
gain or loss on the notional amount plus dividends on the stocks less the
interest paid by the ProFund on the notional amount.
Swap agreements typically are settled on a net basis, which means that the
two payment streams are netted out, with the ProFund receiving or paying, as the
case may be, only the net amount of the two payments. Payments may be made at
the conclusion of a swap agreement or periodically during its term. Swap
agreements do not involve the delivery of securities or other underlying assets.
Accordingly, the risk of loss with respect to swap agreements is limited to the
net amount of payments that a ProFund is contractually obligated to make. If the
other party to a swap agreement defaults, a ProFund's risk of loss consists of
the net amount of payments that such Fund is contractually entitled to receive,
if any. The net amount of the excess, if any, of a ProFund's obligations over
its entitlements with respect to each equity swap will be accrued on a daily
basis and an amount of cash or liquid assets, having an aggregate net asset
value at least equal to such accrued excess will be maintained in a segregated
account by a ProFund's custodian. Inasmuch as these transactions are entered
into for hedging purposes or are offset by segregated cash of liquid assets, as
permitted by applicable law, the ProFunds and their Advisor believe that
transactions do not constitute senior securities under the Investment Company
Act of 1940, as amended (the "1940 Act") and, accordingly, will not treat them
as being subject to a ProFund's borrowing restrictions.
The swap market has grown substantially in recent years with a large number
of banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid in comparison with the markets for other similar
instruments which are traded in the over-the-counter market. The Advisor, under
the supervision of the Board of Trustees, are responsible for determining and
monitoring the liquidity of the ProFunds' transactions in swap agreements.
The use of equity swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions.
U.S. GOVERNMENT SECURITIES
Each non-money market ProFund and the Portfolio also may invest in U.S.
government securities in pursuit of their investment objectives, as "cover" for
the investment techniques these ProFunds employ, or for liquidity purposes.
Yields on U.S. government securities are dependent on a variety of factors,
including the general conditions of the money and bond markets, the size of a
particular offering, and the maturity of the obligation. Debt securities with
longer maturities tend to produce higher yields and are generally subject to
potentially greater capital appreciation and depreciation than obligations with
shorter maturities and lower yields. The market value of U.S. government
securities generally varies inversely with changes in market interest rates. An
increase in interest rates, therefore, would generally reduce the market value
of a ProFund's portfolio investments in U.S. government securities, while a
decline in interest rates would generally increase the market value of a
ProFund's portfolio investments in these securities.
U.S. government securities include U.S. Treasury securities, which are
backed by the full faith and credit of the U.S. Treasury and which differ only
in their interest rates, maturities, and times of issuance. U.S. Treasury bills
have initial maturities of one year or less; U.S. Treasury notes have initial
maturities of one to ten years; and U.S. Treasury bonds generally have initial
maturities of greater than ten years. Certain U.S. government securities are
issued or guaranteed by agencies or instrumentalities of the U.S. government
including, but not limited to, obligations of U.S. government agencies or
instrumentalities, such as the Federal National Mortgage
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Association, the Government National Mortgage Association, the Small Business
Administration, the Federal Farm Credit Administration, the Federal Home Loan
Banks, Banks for Cooperatives (including the Central Bank for Cooperatives),the
Federal Land Banks, the Federal Intermediate Credit Banks, the Tennessee Valley
Authority, the Export-Import Bank of the United States, the Commodity Credit
Corporation, the Federal Financing Bank, the Student Loan Marketing Association,
and the National Credit Union Administration. Some obligations issued or
guaranteed by U.S. government agencies and instrumentalities, including, for
example, Government National Mortgage Association pass-through certificates, are
supported by the full faith and credit of the U.S. Treasury. Other obligations
issued by or guaranteed by Federal agencies, such as those securities issued by
the Federal National Mortgage Association, are supported by the discretionary
authority of the U.S. government to purchase certain obligations of the federal
agency, while other obligations issued by or guaranteed by federal agencies,
such as those of the Federal Home Loan Banks, are supported by the right of the
issuer to borrow from the U.S. Treasury. While the U.S. government provides
financial support to such U.S. government-sponsored Federal agencies, no
assurance can be given that the U.S. government will always do so, since the
U.S. Government is not so obligated by law. U.S. Treasury notes and bonds
typically pay coupon interest semi-annually and repay the principal at maturity.
REPURCHASE AGREEMENTS
Each of the ProFunds may enter into repurchase agreements with financial
institutions. Under a repurchase agreement, a ProFund purchases a debt security
and simultaneously agrees to sell the security back to the seller at a mutually
agreed-upon future price and date, normally one day or a few days later. The
resale price is greater than the purchase price, reflecting an agreed-upon
market interest rate during the purchaser's holding period. While the maturities
of the underlying securities in repurchase transactions may be more than one
year, the term of each repurchase agreement will always be less than one year.
The ProFunds follow certain procedures designed to minimize the risks inherent
in such agreements. These procedures include effecting repurchase transactions
only with large, well-capitalized and well-established financial institutions
whose condition will be continually monitored by the Advisor and, in the case of
the Money Market ProFund, Bankers Trust. In addition, the value of the
collateral underlying the repurchase agreement will always be at least equal to
the repurchase price, including any accrued interest earned on the repurchase
agreement. In the event of a default or bankruptcy by a selling financial
institution, a ProFund will seek to liquidate such collateral which could
involve certain costs or delays and, to the extent that proceeds from any sale
upon a default of the obligation to repurchase were less than the repurchase
price, the ProFund could suffer a loss. A ProFund also may experience
difficulties and incur certain costs in exercising its rights to the collateral
and may lose the interest the ProFund expected to receive under the repurchase
agreement. Repurchase agreements usually are for short periods, such as one week
or less, but may be longer. It is the current policy of the ProFunds not to
invest in repurchase agreements that do not mature within seven days if any such
investment, together with any other liquid assets held by the ProFund, amounts
to more than 15% (10% with respect to the Money Market ProFund) of the ProFund's
total net assets. The investments of each of the ProFunds in repurchase
agreements at times may be substantial when, in the view of the Advisor and, in
the case of the Money Market ProFund, Bankers Trust, liquidity, investment,
regulatory, or other considerations so warrant.
CASH RESERVES
To seek its investment objective as a cash reserve, for liquidity purposes,
or as "cover" for positions it has taken, each ProFund may temporarily invest
all or part of the ProFund's assets in cash or cash equivalents, which include,
but are not limited to, short-term money market instruments, U.S. government
securities, certificates of deposit, bankers acceptances, or repurchase
agreements secured by U.S. government securities.
REVERSE REPURCHASE AGREEMENTS
The non-money market ProFunds and the Portfolio may use reverse repurchase
agreements as part of that ProFund's investment strategy. Reverse repurchase
agreements involve sales by a ProFund/Portfolio of portfolio assets concurrently
with an agreement by the ProFund/Portfolio to repurchase the same assets at a
later date at a fixed price. Generally, the effect of such a transaction is that
the ProFund/Portfolio can recover all or most of the cash invested in the
portfolio securities involved during the term of the reverse repurchase
agreement, while the ProFund/Portfolio will be able to keep the interest income
associated with those portfolio securities. Such
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transactions are advantageous only if the interest cost to the ProFund/Portfolio
of the reverse repurchase transaction is less than the cost of obtaining the
cash otherwise. Opportunities to achieve this advantage may not always be
available, and the ProFund/Portfolios intend to use the reverse repurchase
technique only when it will be to the ProFund/Portfolio's advantage to do so and
the Money Market ProFund will not invest more than 5% of its total assets in
reverse repurchase agreements. The ProFund/Portfolios will establish a
segregated account with their custodian bank in which the ProFund/Portfolio will
maintain cash or liquid instruments equal in value to the ProFund/Portfolio's
obligations in respect of reverse repurchase agreements.
BORROWING
The ProFunds (other than the Portfolio except to the degree the Portfolio
may borrow for temporary or emergency purposes) may borrow money for cash
management purposes or investment purposes. Each of the non-money market
ProFunds may also enter into reverse repurchase agreements, which may be viewed
as a form of borrowing, with financial institutions. However, to the extent a
ProFund "covers" its repurchase obligations as described above in "Reverse
Repurchase Agreements," such agreement will not be considered to be a "senior
security" and, therefore, will not be subject to the 300% asset coverage
requirement otherwise applicable to borrowings by the ProFunds. Borrowing for
investment is known as leveraging. Leveraging investments, by purchasing
securities with borrowed money, is a speculative technique which increases
investment risk, but also increases investment opportunity. Since substantially
all of a ProFund's assets will fluctuate in value, whereas the interest
obligations on borrowings may be fixed, the net asset value per share of the
ProFund will increase more when the ProFund's portfolio assets increase in value
and decrease more when the ProFund's portfolio assets decrease in value than
would otherwise be the case. Moreover, interest costs on borrowings may
fluctuate with changing market rates of interest and may partially offset or
exceed the returns on the borrowed funds. Under adverse conditions, a ProFund
might have to sell portfolio securities to meet interest or principal payments
at a time when investment considerations would not favor such sales.
As required by the Investment Company Act of 1940, as amended (the "1940
Act"), a ProFund must maintain continuous asset coverage (total assets,
including assets acquired with borrowed funds, less liabilities exclusive of
borrowings) of 300% of all amounts borrowed. If at any time the value of the
ProFund's assets should fail to meet this 300% coverage test, the ProFund,
within three days (not including Sundays and holidays), will reduce the amount
of the ProFund's borrowings to the extent necessary to meet this 300% coverage.
Maintenance of this percentage limitation may result in the sale of portfolio
securities at a time when investment considerations otherwise indicate that it
would be disadvantageous to do so. In addition to the foregoing, the ProFunds
are authorized to borrow money from a bank as a temporary measure for
extraordinary or emergency purposes in amounts not in excess of 5% of the value
of the ProFund's total assets. This borrowing is not subject to the foregoing
300% asset coverage requirement. The ProFunds are authorized to pledge portfolio
securities as the Advisor deems appropriate in connection with any borrowings.
LENDING OF PORTFOLIO SECURITIES
Subject to the investment restrictions set forth below, each of the
ProFunds and the Portfolio may lend its portfolio securities to brokers,
dealers, and financial institutions, provided that cash equal to at least 100%
of the market value of the securities loaned is deposited by the borrower with
the ProFund/Portfolio and is maintained each business day in a segregated
account pursuant to applicable regulations. While such securities are on loan,
the borrower will pay the lending ProFund/Portfolio any income accruing thereon,
and the ProFund/Portfolio may invest the cash collateral in portfolio
securities, thereby earning additional income. A ProFund/Portfolio will not lend
more than 33 1/3 of the value of the ProFund's total assets, except that the
Portfolio will not lend more than 20% of the value of its total assets. Loans
would be subject to termination by the lending ProFund/Portfolio on four
business days' notice, or by the borrower on one day's notice. Borrowed
securities must be returned when the loan is terminated. Any gain or loss in the
market price of the borrowed securities which occurs during the term of the loan
inures to the lending ProFund/Portfolio and that ProFund's/Portfolio's
shareholders. There may be risks of delay in receiving additional collateral or
risks of delay in recovery of the securities or even loss of rights in the
securities lent should the borrower of the securities fail financially. A
lending ProFund/Portfolio may pay reasonable finders, borrowers, administrative,
and custodial Trustees in connection with a loan. With respect to the Portfolio,
cash collateral may be invested in a money market
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fund managed by Bankers Trust (or its affiliate) and Bankers Trust may serve as
the Portfolio's lending agent and may share in revenue received from securities
lending transactions as compensation for this service.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
Each non-money market ProFund (and to the extent allowable by its
investment policies, the Money Market ProFund), from time to time, in the
ordinary course of business, may purchase securities on a when-issued or
delayed-delivery basis (i.e., delivery and payment can take place between a
month and 120 days after the date of the transaction). These securities are
subject to market fluctuation and no interest accrues to the purchaser during
this period. At the time a ProFund makes the commitment to purchase securities
on a when-issued or delayed-delivery basis, the ProFund will record the
transaction and thereafter reflect the value of the securities, each day, in
determining the ProFund's net asset value. Each non-money market ProFund will
not purchase securities on a when-issued or delayed-delivery basis if, as a
result, more than 15% of the ProFund's net assets would be so invested. At the
time of delivery of the securities, the value of the securities may be more or
less than the purchase price.
The Portfolio will enter into when-issued or delayed-delivery transactions
for the purpose of acquiring securities and not for the purpose of leverage.
When issued securities purchased by the Portfolio may include securities
purchased on a "when, as and if issued" basis under which the issuance of the
securities depends on the occurrence of a subsequent event. Upon purchasing a
security on a when-issued or delayed-delivery basis, the Portfolio will
identify, as part of a segregated account, cash or liquid securities in an
amount at least equal to the when-issued or delayed-delivery commitment.
The Trust will also establish a segregated account with the Trust's
custodian bank in which the ProFunds will maintain liquid instruments equal to
or greater in value than the ProFund's purchase commitments for such when-issued
or delayed-delivery securities, or the Trust does not believe that a ProFund's
net asset value or income will be adversely affected by the ProFund's purchase
of securities on a when-issued or delayed delivery basis.
INVESTMENTS IN OTHER INVESTMENT COMPANIES
The ProFunds and the Portfolio may invest in the securities of other
investment companies to the extent that such an investment would be consistent
with the requirements of the 1940 Act. If a ProFund / Portfolio invests in, and,
thus, is a shareholder of, another investment company, the ProFund / Portfolio's
shareholders will indirectly bear the ProFund / Portfolio's proportionate share
of the fees and expenses paid by such other investment company, including
advisory fees, in addition to both the management fees payable directly by the
ProFund to the ProFund's own investment adviser and the other expenses that the
ProFund / Portfolio bears directly in connection with the ProFund's / Portfolio
own operations. The Portfolio may invest its assets in other money market funds
with comparable investment objectives. In general, the Portfolio may not (1)
purchase more than 3% of any other money market fund's voting stock; (2) invest
more than 5% of its assets in any single money market fund; and (3) invest more
than 10% of its assets in other money market funds unless permitted to exceed
these limitations by an exemptive order of the SEC.
ILLIQUID SECURITIES
While none of the ProFunds anticipates doing so, each of the ProFunds and
the Portfolio may purchase illiquid securities, including securities that are
not readily marketable and securities that are not registered ("restricted
securities") under the Securities Act of 1933, as amended (the "1933 Act"), but
which can be sold to qualified institutional buyers under Rule 144A of the 1933
Act. A ProFund will not invest more than 15% (10% with respect to the Portfolio)
of the ProFund's/Portfolio's net assets in illiquid securities. The term
"illiquid securities" for this purpose means securities that cannot be disposed
of within seven days in the ordinary course of business at approximately the
amount at which the ProFund has valued the securities. Under the current
guidelines of the staff of the Securities and Exchange Commission (the
"Commission"),illiquid securities also are considered to include, among other
securities, purchased over-the-counter options, certain cover for
over-the-counter options, repurchase agreements with maturities in excess of
seven days, and certain securities whose disposition is restricted under the
Federal securities laws. The ProFund/Portfolio may not be able to sell illiquid
securities when the Advisor or Bankers Trust considers it desirable to do so or
may have to sell such
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securities at a price that is lower than the price that could be obtained if the
securities were more liquid. In addition, the sale of illiquid securities also
may require more time and may result in higher dealer discounts and other
selling expenses than does the sale of securities that are not illiquid.
Illiquid securities also may be more difficult to value due to the
unavailability of reliable market quotations for such securities, and
investments in illiquid securities may have an adverse impact on net asset
value.
At the time of investment, the Portfolio's aggregate holdings of repurchase
agreements having remaining maturities of more than seven calendar days (or
which may not be terminated within seven calendar days upon notice by the
Portfolio), time deposits having remaining maturities of more than seven
calendar days, illiquid securities, restricted securities and securities lacking
readily available market quotations will not exceed 10% of the Portfolio's net
assets. If changes in the liquidity of certain securities cause the Portfolio to
exceed such 10% limit, the Portfolio will take steps to bring the aggregate
amount of its illiquid securities back below 10% of its net assets as soon as
practicable, unless such action would not be in the best interest of the
Portfolio.
Institutional markets for restricted securities have developed as a result
of the promulgation of Rule 144A under the 1933 Act, which provides a safe
harbor from 1933 Act registration requirements for qualifying sales to
institutional investors. When Rule 144A restricted securities present an
attractive investment opportunity and otherwise meet selection criteria, a
ProFund may make such investments. Whether or not such securities are illiquid
depends on the market that exists for the particular security. The Commission
staff has taken the position that the liquidity of Rule 144A restricted
securities is a question of fact for a board of trustees to determine, such
determination to be based on a consideration of the readily-available trading
markets and the review of any contractual restrictions. The staff also has
acknowledged that, while a board of trustees retains ultimate responsibility,
trustees may delegate this function to an investment adviser. Trustees of
ProFunds have delegated this responsibility for determining the liquidity of
Rule 144A restricted securities which may be invested in by a ProFund to the
Advisor or, in the case of the Portfolio, to Bankers Trust. It is not possible
to predict with assurance exactly how the market for Rule 144A restricted
securities or any other security will develop. A security which when purchased
enjoyed a fair degree of marketability may subsequently become illiquid and,
accordingly, a security which was deemed to be liquid at the time of acquisition
may subsequently become illiquid. In such event, appropriate remedies will be
considered to minimize the effect on the ProFund's liquidity.
PORTFOLIO QUALITY AND MATURITY (MONEY MARKET PROFUND AND THE PORTFOLIO)
The Portfolio will maintain a dollar-weighted average maturity of 90 days
or less. All securities in which the Portfolio invests will have or be deemed to
have remaining maturities of 397 days or less on the date of their purchase,
will be denominated in U.S. dollars and will have been granted the required
ratings established herein by two nationally recognized statistical rating
organizations ("NRSRO") (or one such NRSRO if that NRSRO is the only such NRSRO
which rates the security), or if unrated, are believed by Bankers Trust, under
the supervision of the Portfolio's Board of Trustees, to be of comparable
quality. Currently, there are five rating agencies which have been designated by
the Securities and Exchange Commission (the "SEC") as an NRSRO. These
organizations and their highest short-term rating category (which may also be
modified by a "+") are : Duff and Phelps Credit Rating Co., D-1; Fitch IBCA,
Inc., F1; Moody's Investors Service Inc. ("Moody's"), Prime-1; Standard &
Poor's, A-1; and Thomson BankWatch, Inc., T-1. A description of such ratings is
provided in the Appendix. Bankers Trust, acting under the supervision of and
procedures adopted by the Board of Trustees of each Portfolio, will also
determine that all securities purchased by the Portfolio present minimal credit
risks. Bankers Trust will cause the Portfolio to dispose of any security as soon
as practicable if the security is no longer of the requisite quality, unless
such action would not be in the best interest of the Portfolio.
OBLIGATIONS OF BANKS AND OTHER FINANCIAL INSTITUTIONS (MONEY MARKET PROFUND AND
THE PORTFOLIO)
The Portfolio may invest in U.S. dollar-denominated fixed rate or variable
rate obligations of U.S. or foreign institutions, including banks which are
rated in the highest short-term rating category by any two NRSROs (or one NRSRO
if that NRSRO is the only such NRSRO which rates such obligations) or, if not so
rated, are believed by Bankers Trust, acting under the supervision of the Board
of Trustees of the Portfolio, to be of comparable quality. Bank obligations in
which the Portfolio invests include certificates of deposit, bankers'
acceptances, time
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deposits, commercial paper, and other U.S. dollar-denominated instruments issued
or supported by the credit of U.S. or foreign institutions including banks. For
purposes of the Portfolio's investment policies with respect to bank
obligations, the assets of a bank will be deemed to include the assets of its
domestic and foreign branches. Obligations of foreign branches of U.S. banks and
foreign banks may be general obligations of the parent bank in addition to the
issuing bank or may be limited by the terms of a specific obligation and by
government regulation. If Bankers Trust, acting under the supervision of the
Portfolio's Board of Trustees, deems the instruments to present minimal credit
risk, the Portfolio may invest in obligations of foreign banks or foreign
branches of U.S. banks which include banks located in the United Kingdom, Grand
Cayman Island, Nassau, Japan and Canada. Investments in these obligations may
entail risks that are different from those of investments in obligations of U.S.
domestic banks because of differences in political, regulatory and economic
systems and conditions. These risks include, without limitation, future
political and economic developments, currency blockage, the possible imposition
of withholding taxes on interest payments, possible seizure or nationalization
of foreign deposits, and difficulty or inability of pursuing legal remedies and
obtaining judgment in foreign courts, possible establishment of exchange
controls or the adoption of other foreign governmental restrictions that might
affect adversely the payment of principal and interest on bank obligations.
Foreign branches of U.S. banks and foreign banks may also be subject to less
stringent reserve requirements and to different accounting, auditing, reporting
and recordkeeping standards than those applicable to branches of U.S. banks.
Under normal market conditions, the Portfolio will invest more than 25% of its
assets in the foreign and domestic bank obligations described above. The
Portfolio's concentration of its investments in bank obligations will cause the
Portfolio to be subject to the risks peculiar to the domestic and foreign
banking industries to a greater extent than if its investments were not so
concentrated. A description of the ratings set forth above is provided in the
Appendix.
COMMERCIAL PAPER, OTHER DEBT OBLIGATIONS AND CREDIT ENHANCEMENT (MONEY MARKET
PROFUND AND THE PORTFOLIO)
COMMERCIAL PAPER. The Portfolio may invest in fixed rate or variable rate
commercial paper, including variable rate master demand notes, issued by U.S. or
foreign entities. Commercial paper when purchased by the Portfolio must be rated
the highest short-term rating category by any two NRSROs (or one NRSRO if that
NRSRO is the only such NRSRO which rates the obligation) or if not rated, must
be believed by Bankers Trust, acting under the supervision of the Board of
Trustees of the Portfolio, to be of comparable quality. Any commercial paper
issued by a foreign entity and purchased by the Portfolio must be U.S.
dollar-denominated and must not be subject to foreign withholding tax at the
time of purchase. Investing in foreign commercial paper generally involves risks
similar to those described above relating to obligations of foreign banks or
foreign branches of U.S. banks.
Variable rate master demand notes are unsecured instruments that permit the
indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate. Because variable rate master demand notes are direct lending
arrangements between the Portfolio and the issuer, they are not normally traded.
Although no active secondary market may exist for these notes, the Portfolio
will purchase only those notes under which it may demand and receive payment on
principal and accrued interest daily or may resell the note to a third party.
While the notes are not typically rated by credit rating agencies, issuers of
variable rate master demand notes must satisfy Bankers Trust, acting under the
supervision of the Board of Trustees of the Portfolio, that the same criterion
set forth above for issuers of commercial paper are met. In the event an issuer
of a variable rate master demand note defaulted on its payment obligation, the
Portfolio might be unable to dispose of the note because of the absence of a
secondary market and could, for this or other reasons, suffer a loss to the full
extent of the default. The face maturities of variable rate notes subject to a
demand feature may exceed 397 days in certain circumstances.
OTHER DEBT OBLIGATIONS. The Portfolio may invest in deposits, bonds, notes
and debentures and other debt obligations that at the time of purchase have, or
are comparable in priority and security to other securities of such issuer which
have, outstanding short-term obligations meeting the above short-term rating
requirements, or if there are no such short-term ratings, are determined by
Bankers Trust, acting under the supervision of the Board of Trustees, to be of
comparable quality and are rated in the top three highest long-term categories
by the NRSROs rating such security.
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CREDIT ENHANCEMENT. Certain of the Portfolio's acceptable investments may
be credit-enhanced by a guaranty, letter of credit, or insurance. Any
bankruptcy, receivership, default, or change in the credit quality of the party
providing the credit enhancement will adversely affect the quality and
marketability of the underlying security and could cause losses to the Portfolio
and affect the Money Market ProFund's share price. The Portfolio may have more
than 25% of its total assets invested in securities credit-enhanced by banks.
ASSET-BACKED SECURITIES. The Portfolio may also invest in securities
generally referred to as asset-backed securities, which directly or indirectly
represent a participation interest in, or are secured by and payable from, a
stream of payments generated by particular assets, such as motor vehicle or
credit card receivables. Asset-backed securities may provide periodic payments
that consist of interest and/or principal payments. Consequently, the life of an
asset-backed security varies with the prepayment and loss experience of the
underlying assets.
PORTFOLIO TURNOVER
The nature of the ProFunds will cause the ProFunds to experience
substantial portfolio turnover. A higher portfolio turnover rate would likely
involve correspondingly greater brokerage commissions and transaction and other
expenses which would be borne by the ProFunds. In addition, a ProFund's
portfolio turnover level may adversely affect the ability of the ProFund to
achieve its investment objective. Because each ProFund's portfolio turnover rate
to a great extent will depend on the purchase, redemption, and exchange activity
of the ProFund's investors, it is difficult to estimate what the ProFund's
actual turnover rate will be in the future. "Portfolio Turnover Rate" is defined
under the rules of the Commission as the value of the securities purchased or
securities sold, excluding all securities whose maturities at time of
acquisition were one year or less, divided by the average monthly value of such
securities owned during the year. Based on this definition, instruments with
remaining maturities of less than one year are excluded from the calculation of
portfolio turnover rate. Instruments excluded from the calculation of portfolio
turnover generally would include the futures contracts and option contracts in
which the non-money market ProFunds invest since such contracts generally have a
remaining maturity of less than one year. Pursuant to the formula prescribed by
the Commission, the portfolio turnover rate for each ProFund is calculated
without regard to instruments, including options and futures contracts, having a
maturity of less than one year. The Bull ProFund, the UltraBull ProFund, the
Bear ProFund and the UltraBear ProFund typically hold most of their investments
in short-term options and futures contracts, which, therefore, are excluded for
purposes of computing portfolio turnover. Therefore, based on the Commission's
portfolio turnover formula, each of these ProFunds expects a portfolio turnover
rate of approximately 0%.
SPECIAL CONSIDERATIONS
To the extent discussed above and in the prospectus, the ProFunds present
certain risks, some of which are further described below.
TRACKING ERROR. While the non-money market ProFunds do not expect that
their returns over a year will deviate adversely from their respective
benchmarks by more than ten percent, several factors may affect their ability to
achieve this correlation. Among these factors are: (1) ProFund expenses,
including brokerage (which may be increased by high portfolio turnover) and the
cost of the investment techniques employed by the ProFunds; (2) less than all of
the securities in the benchmark being held by a ProFund and securities not
included in the benchmark being held by a ProFund; (3) an imperfect correlation
between the performance of instruments held by a ProFund, such as futures
contracts and options, and the performance of the underlying securities in the
cash market; (4) bid-ask spreads (the effect of which may be increased by
portfolio turnover); (5) holding instruments traded in a market that has become
illiquid or disrupted; (6) ProFund share prices being rounded to the nearest
cent; (7) changes to the benchmark index that are not disseminated in advance;
(8) the need to conform a ProFund's portfolio holdings to comply with investment
restrictions or policies or regulatory or tax law requirements, and (9) early
and unanticipated closings of the markets on which the holdings of a ProFund
trade, resulting in the inability of the ProFund to execute intended portfolio
transactions. While a close correlation of any ProFund to its benchmark may be
achieved on any single trading day, over time the cumulative percentage increase
or decrease in the net asset value of the shares of a ProFund may diverge
significantly from the cumulative percentage decrease or increase in the
benchmark due to a compounding effect.
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LEVERAGE. The UltraBull ProFund, UltraBear ProFund, UltraOTC ProFund,
UltraEurope ProFund and UltraShort OTC ProFund intend to regularly use leveraged
investment techniques in pursuing their investment objectives. Utilization of
leveraging involves special risks and should be considered to be speculative.
Leverage exists when a ProFund achieves the right to a return on a capital base
that exceeds the amount the ProFund has invested. Leverage creates the potential
for greater gains to shareholders of these ProFunds during favorable market
conditions and the risk of magnified losses during adverse market conditions.
Leverage should cause higher volatility of the net asset values of these
ProFunds' shares. Leverage may involve the creation of a liability that does not
entail any interest costs or the creation of a liability that requires the
ProFund to pay interest which would decrease the ProFund's total return to
shareholders. If these ProFunds achieve their investment objectives, during
adverse market conditions, shareholders should experience a loss of
approximately twice the amount they would have incurred had these ProFunds not
been leveraged.
NON-DIVERSIFIED STATUS. Each non-money market ProFund is a
"non-diversified" series. A non-money market ProFund is considered
"non-diversified" because a relatively high percentage of the ProFund's assets
may be invested in the securities of a limited number of issuers, primarily
within the same economic sector. That ProFund's portfolio securities, therefore,
may be more susceptible to any single economic, political, or regulatory
occurrence than the portfolio securities of a more diversified investment
company. A ProFund's classification as a "non-diversified" investment company
means that the proportion of the ProFund's assets that may be invested in the
securities of a single issuer is not limited by the 1940 Act. Each ProFund,
however, intends to seek to qualify as a "regulated investment company" for
purposes of the Internal Revenue Code, which imposes diversification
requirements on these ProFunds that are less restrictive than the requirements
applicable to the "diversified" investment companies under the 1940 Act.
SPECIAL INFORMATION CONCERNING MASTER-FEEDER FUND STRUCTURE
Unlike other open-end management investment companies (mutual funds) which
directly acquire and manage their own portfolio securities, the Money Market
ProFund seeks to achieve its investment objective by investing all of its assets
in the Portfolio, a separate registered investment company with the same
investment objective as the Money Market ProFund. Therefore, an investor's
interest in the Portfolio's securities is indirect. In addition to selling a
beneficial interest to the Money Market ProFund, the Portfolio may sell
beneficial interests to other mutual funds or institutional investors. Such
investors will invest in the Portfolio on the same terms and conditions and will
pay a proportionate share of the Portfolio's expenses. However, the other
investors investing in the Portfolio are not required to sell their shares at
the same public offering price as the Money Market ProFund or subject to
comparable variations in sales loads and other operating expenses. Therefore,
investors in the Money Market ProFund should be aware that these differences may
result in differences in returns experienced by investors in the different funds
that may invest in the Portfolio. Such differences in returns are also present
in other mutual fund structures. Information concerning other holders of
interests in the Portfolio is available from Bankers Trust at 1-800-368-4031.
The ProFunds' Board of Trustees believes that the Money Market ProFund will
achieve certain efficiencies and economies of scale through the master-feeder
structure, and that the aggregate expenses of the Money Market ProFund will be
less than if the Money Market ProFund invested directly in the securities held
by the Portfolio.
Smaller funds investing in the Portfolio may be materially affected by the
actions of larger funds investing in the Portfolio. For example, if a large fund
withdraws from the Portfolio, the remaining funds may experience higher pro rata
operating expenses, thereby producing lower returns (however, this possibility
exists as well for traditionally structured funds which have large institutional
investors). Additionally, the Portfolio may become less diverse, resulting in
increased portfolio concentration and potential risk. Also, funds with a greater
pro rata ownership in the Portfolio could have effective voting control of the
operations of the Portfolio. Except as permitted by the Commission, whenever the
ProFunds are requested to vote on matters pertaining to the Portfolio, the
ProFunds will hold a meeting of shareholders of the Money Market ProFund and
will cast all of its votes in the same proportion as the votes of the Money
Market ProFund's shareholders. Money Market ProFund shareholders who do not vote
will not affect the ProFunds votes at the Portfolio meeting. The percentage of
the Trust's votes representing Money Market ProFund shareholders not voting will
be voted by the Trustees or officers of the ProFunds in the same proportion as
the Money Market ProFund shareholders who do, in fact, vote.
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Certain changes in the Portfolio's investment objective, policies or
restrictions may require the Money Market ProFund to withdraw its interest in
the Portfolio. Such withdrawal could result in a distribution "in kind" of
portfolio securities (as opposed to a cash distribution from the Portfolio). If
securities are distributed, the Money Market ProFund could incur brokerage, tax
or other charges in converting the securities to cash. In addition, the
distribution in kind may result in a less diversified portfolio of investments
or adversely affect the liquidity of the Money Market ProFund. Notwithstanding
the above, there are other means for meeting redemption requests, such as
borrowing.
The Money Market ProFund may withdraw its investment from the Portfolio at
any time, if the Board of Trustees of the ProFunds determines that it is in the
best interests of the shareholders of the Money Market ProFund to do so. Upon
any such withdrawal, the Board of Trustees of the Trust would consider what
action might be taken, including the investment of all the assets of the Money
Market ProFund in another pooled investment entity having the same investment
objective as the Money Market ProFund or the retaining of an investment adviser
to manage the Money Market ProFund's assets in accordance with the investment
policies described above with respect to the Portfolio.
INVESTMENT RESTRICTIONS
The ProFunds and the Portfolio have adopted certain investment restrictions
as fundamental policies which cannot be changed without the approval of the
holders of a "majority" of the outstanding shares of the ProFund or the
Portfolio, as that term is defined in the 1940 Act. The term "majority" is
defined in the 1940 Act as the lesser of: (i) 67% or more of the shares of the
series present at a meeting of shareholders, if the holders of more than 50% of
the outstanding shares of the ProFund are present or represented by proxy; or
(ii) more than 50% of the outstanding shares of the series. (All policies of a
ProFund not specifically identified in this Statement of Additional Information
or the Prospectus as fundamental may be changed without a vote of the
shareholders of the ProFund.) For purposes of the following limitations, all
percentage limitations apply immediately after a purchase or initial investment.
A non-money market ProFund may not:
1. Invest more than 25% of its total assets, taken at market
value at the time of each investment, in the securities of
issuers in any particular industry (excluding the U.S.
government and its agencies and instrumentalities).
2. Make investments for the purpose of exercising control or
management.
3. Purchase or sell real estate, except that, to the extent
permitted by applicable law, the ProFund may invest in
securities directly or indirectly secured by real estate or
interests therein or issued by companies that invest in real
estate or interests therein.
4. Make loans to other persons, except that the acquisition of
bonds, debentures or other corporate debt securities and
investment in government obligations, commercial paper,
pass-through instruments, certificates of deposit, bankers'
acceptances and repurchase agreements and purchase and sale
contracts and any similar instruments shall not be deemed to
be the making of a loan, and except further that the ProFund
may lend its portfolio securities, provided that the lending
of portfolio securities may be made only in accordance with
applicable law and the guidelines set forth in the Prospectus
and this Statement of Additional Information, as they may be
amended from time to time.
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5. Issue senior securities to the extent such issuance would
violate applicable law.
6. Borrow money, except that the ProFund (i) may borrow from
banks (as defined in the Investment Company Act of 1940) in
amounts up to 33 1/3% of its total assets (including the
amount borrowed), (ii) may, to the extent permitted by
applicable law, borrow up to an additional 5% of its total
assets for temporary purposes, (iii) may obtain such
short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities, (iv) may purchase
securities on margin to the extent permitted by applicable law
and (v) may enter into reverse repurchase agreements. The
ProFund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the ProFund's
investment policies as set forth in the Prospectus and this
Statement of Additional Information, as they may be amended
from time to time, in connection with hedging transactions,
short sales, when-issued and forward commitment transactions
and similar investment strategies.
7. Underwrite securities of other issuers, except insofar as the
ProFund technically may be deemed an underwriter under the
Securities Act of 1933, as amended (the "Securities Act"), in
selling portfolio securities.
8. Purchase or sell commodities or contracts on commodities,
except to the extent the ProFund may do so in accordance with
applicable law and the ProFund's Prospectus and Statement of
Additional Information, as they may be amended from time to
time.
THE FOLLOWING FUNDAMENTAL INVESTMENT RESTRICTIONS AND NON-FUNDAMENTAL
INVESTMENT OPERATING POLICIES HAVE BEEN ADOPTED BY THE TRUST, WITH RESPECT TO
THE MONEY MARKET PROFUND, AND BY THE PORTFOLIO. UNLESS AN INVESTMENT INSTRUMENT
OR TECHNIQUE IS DESCRIBED IN THE PROSPECTUS OR ELSEWHERE HEREIN, THE MONEY
MARKET PROFUND AND THE PORTFOLIO MAY NOT INVEST IN THAT INVESTMENT INSTRUMENT OR
ENGAGE IN THAT INVESTMENT TECHNIQUE.
The investment restrictions below have been adopted by the Trust with
respect to the Money Market ProFund and by the Portfolio as fundamental policies
(as defined above). Whenever the Money Market ProFund is requested to vote on a
change in the investment restrictions of the Portfolio, the Trust will hold a
meeting of the Money Market ProFund shareholders and will cast its votes as
instructed by the shareholders. The Money Market ProFund shareholders who do not
vote will not affect the Trust's votes at the Portfolio meeting. The percentage
of the Trust's votes representing ProFund shareholders not voting will be voted
by the Trustees of the Trust in the same proportion as the Fund shareholders who
do, in fact, vote.
Under investment policies adopted by the Money Market ProFund and by the
Portfolio, each of the Money Market ProFund and Portfolio may not:
1. Borrow money, except for temporary or emergency (not
leveraging) purposes in an amount not exceeding 5% of the
value of the ProFund's or the Portfolio's total assets
(including the amount borrowed), as the case may be,
calculated in each case at the lower of cost or market.
2. Pledge, hypothecate, mortgage or otherwise encumber more than
5% of the total assets of the ProFund or the Portfolio, as the
case may be, and only to secure borrowings for temporary or
emergency purposes.
3. Invest more than 5% of the total assets of the ProFund or the
Portfolio, as the case may be, in any one issuer (other than
U.S. government obligations) or purchase more than 10% of any
class of securities of any one issuer; provided, however, that
(i) up to 25% of the assets of the ProFund and the Portfolio
may be invested without regard to this restriction; provided,
however, that nothing in this investment restriction shall
prevent the Trust from investing all or part of a ProFund's
assets in an open-end management investment company with
substantially the same investment objectives as the ProFund.
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4. Invest more than 25% of the total assets of the ProFund or the
Portfolio, as the case may be, in the securities of issuers in
any single industry; provided that: (i) this limitation shall
not apply to the purchase of U.S. government obligations; (ii)
under normal market conditions more than 25% of the total
assets of the Money Market ProFund and the Portfolio will be
invested in obligations of U.S. and foreign banks and other
financial institutions Banks provided, however, that nothing
in this investment restriction shall prevent a Trust from
investing all or part of a ProFund's assets in an open-end
management investment company with substantially the same
investment objectives as the ProFund.
5. Make short sales of securities, maintain a short position or
purchase any securities on margin, except for such short-term
credits as are necessary for the clearance of transactions.
6. Underwrite the securities issued by others (except to the
extent the ProFund or Portfolio may be deemed to be an
underwriter under the Federal securities laws in connection
with the disposition of its portfolio securities) or knowingly
purchase restricted securities, provided, however, that
nothing in this investment restriction shall prevent the Trust
from investing all of the ProFund's assets in an open-end
management investment company with substantially the same
investment objectives as the ProFund.
7. Purchase or sell real estate, real estate investment trust
securities, commodities or commodity contracts, or oil, gas or
mineral interests, but this shall not prevent the ProFund or
the Portfolio from investing in obligations secured by real
estate or interests therein.
8. Make loans to others, except through the purchase of qualified
debt obligations, the entry into repurchase agreements and,
with respect to the ProFund and the Portfolio, the lending of
portfolio securities.
9. Invest more than an aggregate of 10% of the net assets of the
ProFund or the Portfolio's, respectively, (taken, in each
case, at current value) in (i) securities that cannot be
readily resold to the public because of legal or contractual
restrictions or because there are no market quotations readily
available or (ii) other "illiquid" securities (including time
deposits and repurchase agreements maturing in more than seven
calendar days); provided, however, that nothing in this
investment restriction shall prevent the Trust from investing
all or part of the ProFund's assets in an open-end management
investment company with substantially the same investment
objective as the ProFund.
10. Purchase more than 10% of the voting securities of any issuer
or invest in companies for the purpose of exercising control
or management; provided, however, that nothing in this
investment restriction shall prevent the Trust from investing
all or part of the ProFund's assets in an open-end management
investment company with substantially the same investment
objectives as the ProFund.
11. Purchase securities of other investment companies, except to
the extent permitted under the 1940 Act or in connection with
a merger, consolidation, reorganization, acquisition of assets
or an offer of exchange; provided, however, that nothing in
this investment restriction shall prevent the Trust from
investing all or part of the ProFunds' assets in an open-end
management investment company with substantially the same
investment objectives as the ProFund.
12. Issue any senior securities, except insofar as it may be
deemed to have issued a senior security by reason of (i)
entering into a reverse repurchase agreement or (ii) borrowing
in accordance with terms described in the Prospectus and this
SAI.
13. Purchase or retain the securities of any issuer if any of the
officers or trustees of the ProFund or the Portfolio or
Bankers Trust owns individually more than 1/2 of 1% of the
securities of such issuer, and together such officers and
directors own more than 5% of the securities of such issuer.
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14. Invest in warrants, except that the ProFund or the Portfolio
may invest in warrants if, as a result, the investments
(valued in each case at the lower of cost or market) would not
exceed 5% of the value of the net assets of the ProFund or the
Portfolio, as the case may be, of which not more than 2% of
the net assets of the ProFund or the Portfolio, as the case
may be, may be invested in warrants not listed on a recognized
domestic stock exchange. Warrants acquired by the ProFund or
the Portfolio as part of a unit or attached to securities at
the time of acquisition are not subject to this limitation.
ADDITIONAL RESTRICTIONS. In order to comply with certain statutes and
policies, the Portfolio (or, as applicable, the Trust, on behalf of the Money
Market ProFund) will not as a matter of operating policy (except that no
operating policy shall prevent the ProFund from investing all of its assets in
an open-end investment company with substantially the same investment
objective):
(i) borrow money (including through dollar roll transactions) for
any purpose in excess of 10% of the Portfolio's (ProFund's)
total assets (taken at cost), except that the Portfolio
(ProFund) may borrow for temporary or emergency purposes up to
1/3 of its total assets;
(ii) pledge, mortgage or hypothecate for any purpose in excess of
10% of the Portfolio's (ProFund's) total assets (taken at
market value), provided that collateral arrangements with
respect to options and futures, including deposits of initial
deposit and variation margin, are not considered a pledge of
assets for purposes of this restriction;
(iii) purchase any security or evidence of interest therein on
margin, except that such short-term credit as may be necessary
for the clearance of purchases and sales of securities may be
obtained and except that deposits of initial deposit and
variation margin may be made in connection with the purchase,
ownership, holding or sale of futures;
(iv) sell any security which it does not own unless by virtue of
its ownership of other securities it has at the time of sale a
right to obtain securities, without payment of further
consideration, equivalent in kind and amount to the securities
sold and provided that if such right is conditional the sale
is made upon the same conditions;
(v) invest for the purpose of exercising control or management;
(vi) purchase securities issued by any investment company
except by purchase in the open market where no commission or
profit to a sponsor or dealer results from such purchase other
than the customary broker's commission, or except when such
purchase, though not made in the open market, is part of a
plan of merger or consolidation; provided, however, that
securities of any investment company will not be purchased for
the Portfolio (ProFund) if such purchase at the time thereof
would cause (a) more than 10% of the Portfolio's (ProFund's)
total assets (taken at the greater of cost or market value) to
be invested in the securities of such issuers; (b) more than
5% of the Portfolio's (ProFund's) total assets (taken at the
greater of cost or market value) to be invested in any one
investment company; or (c) more than 3% of the outstanding
voting securities of any such issuer to be held for the
Portfolio (ProFund); and, provided further, that the Portfolio
shall not invest in any other open-end investment company
unless the Portfolio (ProFund) (1) waives the investment
advisory fee with respect to assets invested in other open-end
investment companies and (2) incurs no sales charge in
connection with the investment (as an operating policy, each
Portfolio will not invest in another open-end registered
investment company);
(vii) invest more than 15% of the Portfolio's (ProFund's) total net
assets (taken at the greater of cost or market value) in
securities that are illiquid or not readily marketable not
including (a) Rule 144A securities that have been determined
to be liquid by the Board of Trustees; and (b) commercial
paper that is sold under section 4(2) of the 1933 Act which:
(i) is not traded flat or in default as to interest or
principal; and (ii) is rated in one of the two highest
categories by at least two nationally recognized statistical
rating organizations; (iii) is rated one of the two highest
categories by one nationally recognized statistical rating
agency and the Portfolio's
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(ProFund's) Board of Trustees have determined that the
commercial paper is equivalent quality and is liquid;
(viii) with respect to 75% of the Portfolio's total assets, purchase
securities of any issuer if such purchase at the time thereof
would cause the Portfolio (ProFund) to hold more than 10% of
any class of securities of such issuer, for which purposes all
indebtedness of an issuer shall be deemed a single class and
all preferred stock of an issuer shall be deemed a single
class, except that futures or option contracts shall not be
subject to this restriction;
(ix) if the Portfolio is a "diversified" ProFund with respect to
75% of its assets, invest more than 5% of its total assets in
the securities (excluding U.S. government securities) of any
one issuer*;
(x) make short sales of securities or maintain a short position,
unless at all times when a short position is open it owns an
equal amount of such securities or securities convertible into
or exchangeable, without payment of any further consideration,
for securities of the same issue and equal in amount to, the
securities sold short, and unless not more than 10% of the
Portfolio's (ProFund's) net assets (taken at market value) is
represented by such securities, or securities convertible into
or exchangeable for such securities, at any one time (the
Portfolio (ProFund) has no current intention to engage in
short selling).
*With respect to (ix) as an operating policy, the Portfolio may not
invest more than 5% of its total assets in the securities of any one issuer
except for U.S. government obligations and repurchase agreements, which may be
purchased without limitation.
The Money Market ProFund will comply with the state securities laws and
regulations of all states in which it is registered. The Portfolio will comply
with the permitted investments and investment limitations in the securities laws
and regulations of all states in which the Portfolio, or any other registered
investment company investing in the Portfolio, is registered.
DETERMINATION OF NET ASSET VALUE
The net asset values of the shares of the ProFunds (except the UltraEurope
ProFund) are determined as of the close of business of the NYSE (ordinarily,
4:00 p.m. Eastern Time) on each day the NYSE and the Chicago Mercantile Exchange
("CME") are open for business (in the case of the Money Market ProFund, net
asset value is determined as of the close of business on each day the NYSE is
open for business.)
The net asset values of the shares of the UltraEurope ProFund are
determined as of the latest close of trading on three exchanges tracked by the
PEI (ordinarily 11:30 a.m. Eastern Time) on each day the NYSE, London Stock
Exchange, Frankfurt Stock Exchange and Paris Stock Exchange are open for
business (see prospectus for applicable holiday closings).
To the extent that portfolio securities of a ProFund are traded in other
markets on days when the ProFund's principal trading market(s) is closed, the
ProFund's net asset value may be affected on days when investors do not have
access to the ProFund to purchase or redeem shares.
The net asset value of each class of shares of a ProFund serves as the
basis for the purchase and redemption price of that class of shares. The net
asset value per share of each class of a ProFund is calculated by dividing the
market value of the ProFund's assets attributed to a specific class (in the case
of the Money Market ProFund, the value of its investment in the Portfolio), less
all liabilities attributed to the specific class, by the number of outstanding
shares of the class. If market quotations are not readily available, a security
will be valued at fair value by the Trustees of ProFunds or by the Advisor using
methods established or ratified by the Trustees of ProFunds. The Money Market
ProFund's net asset value per share will normally be $1.00. There is no
assurance that the $1.00 net asset value will be maintained.
The Portfolio will utilize the amortized cost method in valuing its
portfolio securities. This method involves valuing each security held by the
Portfolio at its cost at the time of its purchase and thereafter assuming
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a constant amortization to maturity of any discount or premium. Accordingly,
immaterial fluctuations in the market value of the securities held by the
Portfolio will not be reflected in the Money Market ProFund's net asset value.
The Board of Trustees of the Portfolio will monitor the valuation of assets of
this method and will make such changes as it deems necessary to assure that the
assets of the Portfolio are valued fairly in good faith.
The securities in the portfolio of a non-money market ProFund, except as
otherwise noted, that are listed or traded on a stock exchange, are valued on
the basis of the last sale on that day or, lacking any sales, at a price that is
the mean between the closing bid and asked prices. Other securities that are
traded on the OTC markets are priced using NASDAQ, which provides information on
bid and asked prices quoted by major dealers in such stocks. Bonds, other than
convertible bonds, are valued using a third-party pricing system. Convertible
bonds are valued using this pricing system only on days when there is no sale
reported. Short-term debt securities are valued using this pricing system only
on days when there is no sale reported. Short-term debt securities are valued at
amortized cost, which approximates market value. When market quotations are not
readily available, securities and other assets are valued at fair value as
determined in good faith under procedures established by and under the general
supervision and responsibility of the ProFunds' Board of Trustees.
Except for the UltraEurope ProFund, futures contracts are valued at their
last sale price prior to the valuation time. Options on futures contracts
generally are valued at fair value as determined with reference to establish
future exchanges. Options on securities and indices purchased by a ProFund are
valued at their last sale price prior to the valuation time or at fair value. In
the event of a trading halt that closes the NYSE early, futures contracts will
be valued on the basis of settlement prices on futures exchanges, options on
futures will be valued at fair value as determined with reference to such
settlement prices, and options on securities and indices will be valued at their
last sale price prior to the trading halt or at fair value.
In the event a trading halt closes a futures exchange for a given day and
that closure occurs prior to the close of the NYSE on that day, futures
contracts will be valued on the basis of settlement prices on the futures
exchange or fair value.
For the UltraEurope ProFund, futures contracts are valued at their last
transaction prices for the respective futures contracts that occur immediately
prior to the close of the underlying stock exchange. Options on futures
contracts generally are valued at fair value as determined with reference to
established futures exchanges. Options on securities and indices purchased by
the UltraEurope ProFund are valued at their last sale price immediately prior to
the close of the underlying stock exchange.
PORTFOLIO TRANSACTIONS AND BROKERAGE
NON-MONEY MARKET PROFUNDS
Subject to the general supervision by the Trustees, the Advisor is
responsible for decisions to buy and sell securities for each of the ProFunds,
the selection of brokers and dealers to effect the transactions, and the
negotiation of brokerage commissions, if any. The Advisor expects that the
ProFunds may execute brokerage or other agency transactions through registered
broker-dealers, for a commission, in conformity with the 1940 Act, the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder. The Advisor may serve as an investment manager to a number of
clients, including other investment companies. It is the practice of the Advisor
to cause purchase and sale transactions to be allocated among the ProFunds and
others whose assets the Advisor manages in such manner as the Advisor deems
equitable. The main factors considered by the Advisor in making such allocations
among the ProFunds and other client accounts of the Advisor are the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held, and the opinions of the person(s)
responsible, if any, for managing the portfolios of the ProFunds and the other
client accounts.
The policy of each ProFund regarding purchases and sales of securities for
a ProFund's portfolio is that primary consideration will be given to obtaining
the most favorable prices and efficient executions of transactions. Consistent
with this policy, when securities transactions are effected on a stock exchange,
each ProFund's policy is to pay commissions which are considered fair and
reasonable without necessarily determining that the lowest possible commissions
are paid in all circumstances. Each ProFund believes that a requirement always
to seek the
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lowest possible commission cost could impede effective portfolio management and
preclude the ProFund and the Advisor from obtaining a high quality of brokerage
and research services. In seeking to determine the reasonableness of brokerage
commissions paid in any transaction, the Advisor relies upon its experience and
knowledge regarding commissions generally charged by various brokers and on its
judgment in evaluating the brokerage and research services received from the
broker effecting the transaction. Such determinations are necessarily subjective
and imprecise, as in most cases an exact dollar value for those services is not
ascertainable.
Purchases and sales of U.S. government securities are normally transacted
through issuers, underwriters or major dealers in U.S. government securities
acting as principals. Such transactions are made on a net basis and do not
involve payment of brokerage commissions. The cost of securities purchased from
an underwriter usually includes a commission paid by the issuer to the
underwriters; transactions with dealers normally reflect the spread between bid
and asked prices.
In seeking to implement a ProFund's policies, the Advisor effects
transactions with those brokers and dealers who the Advisor believes provide the
most favorable prices and are capable of providing efficient executions. If the
Advisor believes such prices and executions are obtainable from more than one
broker or dealer, the Advisor may give consideration to placing portfolio
transactions with those brokers and dealers who also furnish research and other
services to the ProFund or the Advisor. Such services may include, but are not
limited to, any one or more of the following: information as to the availability
of securities for purchase or sale; statistical or factual information or
opinions pertaining to investment; wire services; and appraisals or evaluations
of portfolio securities. If the broker-dealer providing these additional
services is acting as a principal for its own account, no commissions would be
payable. If the broker-dealer is not a principal, a higher commission may be
justified, at the determination of the Advisor, for the additional services.
The information and services received by the Advisor from brokers and
dealers may be of benefit to the Advisor in the management of accounts of some
of the Advisor's other clients and may not in all cases benefit a ProFund
directly. While the receipt of such information and services is useful in
varying degrees and would generally reduce the amount of research or services
otherwise performed by the Advisor and thereby reduce the Advisor's expenses,
this information and these services are of indeterminable value and the
management fee paid to the Advisor is not reduced by any amount that may be
attributable to the value of such information and services.
MONEY MARKET PROFUND AND THE PORTFOLIO
Decisions to buy and sell securities and other financial instruments for
the Money Market ProFund and the Portfolio are made by Bankers Trust, which also
is responsible for placing these transactions, subject to the overall review of
the Portfolio's Board of Trustees. Although investment requirements for the
Portfolio are reviewed independently from those of the other accounts managed by
Bankers Trust (the "Other Portfolios"), investments of the type the Portfolio
may make may also be made by these Other Portfolios. When the Portfolio and one
or more Other Portfolios or accounts managed by Bankers Trust are prepared to
invest in, or desire to dispose of, the same security or other financial
instrument, available investments or opportunities for sales will be allocated
in a manner believed by Bankers Trust to be equitable to each. In some cases,
this procedure may affect adversely the price paid or received by the Portfolio
or the size of the position obtained or disposed of by the Portfolio.
Purchases and sales of securities on behalf of the Portfolio usually are
principal transactions. These securities are normally purchased directly from
the issuer or from an underwriter or market maker for the securities. The cost
of securities purchased from underwriters includes an underwriting commission or
concession and the prices at which securities are purchased from and sold to
dealers include a dealer's mark-up or mark-down. U.S. government obligations are
generally purchased from underwriters or dealers, although certain newly issued
U.S. government obligations may be purchased directly from the U.S. Treasury or
from the issuing agency or instrumentality.
OTC purchases and sales are transacted directly with principal market
makers except in those cases in which better prices and executions may be
obtained elsewhere and principal transactions are not entered into with persons
affiliated with the Portfolios except pursuant to exemptive rules or orders
adopted by the Commission. Under
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rules adopted by the Commission, broker-dealers may not execute transactions on
the floor of any national securities exchange for the accounts of affiliated
persons, but may effect transactions by transmitting orders for execution.
In selecting brokers or dealers to execute portfolio transactions on behalf
of the Portfolio, Bankers Trust seeks the best overall terms available. In
assessing the best overall terms available for any transaction, Bankers Trust
will consider the factors it deems relevant, including the breadth of the market
in the investment, the price of the investment, the financial condition and
execution capability of the broker or dealer and the reasonableness of the
commission, if any, for the specific transaction and on a continuing basis. In
addition, Bankers Trust is authorized, in selecting parties to execute a
particular transaction and in evaluating the best overall terms available to
consider the brokerage, but not research services (as those terms are defined in
Section 28(e) of the Securities Exchange Act of 1934, as amended) provided to
the Portfolio involved, the other Portfolios and/or other accounts over which
Bankers Trust or its affiliates exercise investment discretion. Bankers Trust's
fees under its agreements with the Portfolios are not reduced by reason of its
receiving brokerage services.
The valuation of the Portfolio's securities is based on their amortized
cost, which does not take into account unrealized capital gains or losses.
Amortized cost valuation involves initially valuing an instrument at its cost
and thereafter assuming a constant amortization to maturity of any discount or
premium, generally without regard to the impact of fluctuating interest rates on
the market value of the instrument. Although this method provides certainty in
valuation, it may result in periods during which value, as determined by
amortized cost, is higher or lower than the price a Portfolio would receive if
it sold the instrument.
The Portfolio's use of the amortized cost method of valuing its securities
is permitted by a rule adopted by the Commission. Under this rule, the Portfolio
must maintain a dollar-weighted average portfolio maturity of 90 days or less,
purchase only instruments having remaining maturities of 397 days or and invest
only in securities determined by or under the supervision of the Board of
Trustees to be of high quality with minimal credit risks.
Pursuant to the rule, the Board of Trustees of the Portfolio also has
established procedures designed to allow investors in the Portfolio, such as the
Money Market ProFund, to stabilize, to the extent reasonably possible, the
investors' price per share as computed for the purpose of sales and redemptions
at $1.00. These procedures include review of the Portfolio's holdings by the
Portfolio's Board of Trustees, at such intervals as it deems appropriate, to
determine whether the value of the Portfolio's assets calculated by using
available market quotations or market equivalents deviates from such valuation
based on amortized cost.
The rule also provides that the extent of any deviation between the value
of the Portfolio's assets based on available market quotations or market
equivalents and such valuation based on amortized cost must be examined by the
Portfolio's Board of Trustees. In the event the Portfolio's Board of Trustees
determines that a deviation exists that may result in material dilution or other
unfair results to investors or existing shareholders, pursuant to the rule, the
Portfolio's Board of Trustees must cause the Portfolio to take such corrective
action as such Board of Trustees regards as necessary and appropriate,
including: selling portfolio instruments prior to maturity to realize capital
gains or losses or to shorten average portfolio maturity; withholding dividends
or paying distributions from capital or capital gains; redeeming shares in kind;
or valuing the Portfolio's assets by using available market quotations.
Each investor in the Portfolio, including the Money Market ProFund, may add
to or reduce its investment in the Portfolio on each day the Portfolio
determines its Net Asset Value ("NAV"). At the close of each such business day,
the value of each investor's beneficial interest in the Portfolio will be
determined by multiplying the NAV of the Portfolio by the percentage, effective
for that day, which represents that investor's share of the aggregate beneficial
interests in the Portfolio. Any additions or withdrawals, which are to be
effected as of the close of business on that day, will then be effected. The
investor's percentage of the aggregate beneficial interests in the Portfolio
will then be recomputed as the percentage equal to the fraction (i) the
numerator of which is the value of such investor's investment in the Portfolio
as of the close of business on such day plus or minus, as the case may be, the
amount of net additions to or withdrawals from the investor's investment in the
Portfolio effected as of the close of business on such day, and (ii) the
denominator of which is the aggregate NAV of the Portfolio as of the close of
business on such day plus or minus, as the case may be, the amount of net
additions to or withdrawals from the aggregate investments in the Portfolio by
all investors in the Portfolio.
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The percentage so determined will then be applied to determine the value of the
investor's interest in the Portfolio as of the close of the following business
day.
For the fiscal year ended December 31, 1998, each non-money ProFund paid
brokerage commissions in the following amount:
BROKERAGE COMMISSIONS
FYE 12/31/98
Bull ProFund $ 4,605
UltraBull ProFund 70,575
Bear ProFund 3,005
UltraBear ProFund 50,160
UltraOTC ProFund 726,475
UltraShort OTC Profund 44,560
The UltraEurope ProFund had not commenced operations as of December 31,
1998.
MANAGEMENT OF PROFUNDS
The Board of Trustees is responsible for the general supervision of the
Trust's business. The day-to-day operations of the ProFunds are the
responsibilities of ProFunds' officers. The names and addresses (and ages) of
the Trustees of the Trust and the Portfolio, the officers of the Trust and the
Portfolio, and the officers of the Advisor, together with information as to
their principal business occupations during the past five years, are set forth
below. Fees and expenses for non-interested Trustees will be paid by the Trust;
Trustee expenses for interested Trustees will be paid the Advisor.
TRUSTEES AND OFFICERS OF PROFUNDS
MICHAEL L. SAPIR* (birthdate: May 19, 1958): Trustee, Chairman and Chief
Executive Officer; Chairman and Chief Executive Officer, ProFund Advisors LLC;
Principal, Law Offices of Michael L. Sapir; Rydex Distributors, Inc., President;
Padco Advisors, Inc., Senior Vice President, General Counsel; Jorden Burt
Berenson & Klingensmith, Partner. His address is 7900 Wisconsin Avenue, Suite
300, Bethesda, Maryland 20814.
LOUIS M. MAYBERG* (birthdate: August 9, 1962): Trustee, Secretary; ProFund
Advisors LLC, President; Potomac Securities, Inc., President; National Capital
Companies, LLC, Managing Director. His address is 7900 Wisconsin Avenue, Suite
300, Bethesda, Maryland 20814.
GARY R. TENKMAN: (birthdate: September 16, 1970): Treasurer; BISYS Fund
Services, Vice President, Financial Services; Ernst & Young LLP, Audit Manager,
Investment Management Services Group. His address is 3435 Stelzer Road,
Columbus, Ohio 43219.
MICHAEL C. WACHS (birthdate: October 21, 1961): Trustee; Delancy Investment
Group, Inc., Vice President; First Union National Bank, Vice President/Senior
Underwriter; First Union Capital Markets Corp., Vice President; Vice
President/Senior Credit Officer; Vice President/Team Leader. His address is 1528
Powder Mill Lane, Wynnewood, Pennsylvania 19096.
RUSSELL S. REYNOLDS, III (birthdate: July 21, 1957): Trustee; Directorship,
Inc., Managing Director, Chief Financial Officer and Secretary; Quadcom
Services, Inc., President. His address is 7 Stag Lane, Greenwich, Connecticut
06831.
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*This Trustee is deemed to be an "interested person" within the meaning of
Section 2(a)(19) of the 1940 Act, inasmuch as this person is affiliated with the
Advisor, as described herein.
No director, officer or employee of BISYS or any of its affiliates will
receive any compensation from the Trust or Portfolio for serving as an officer
or Trustee of the Trust or the Portfolio.
PROFUNDS TRUSTEE COMPENSATION TABLE
The following table reflects actual fees paid to the Trustees for the year
ended December 31, 1998.
NAME OF
PERSON: POSITION COMPENSATION
- ---------------- ------------
Michael L. Sapir, Trustee, Chairman and Chief Executive Officer None
Louis M. Mayberg, Trustee, President, None
Secretary
Russell S. Reynolds, III, Trustee $5,000
Michael C. Wachs, Trustee $3,750
TRUSTEES AND OFFICERS OF THE PORTFOLIO:
The Board of Trustees of the Portfolio ("Portfolio Trustees") is composed
of persons experienced in financial matters who meet throughout the year to
oversee the activities of the Portfolio. In addition the Portfolio Trustees
review contractual arrangements with companies that provide services to the
Portfolio.
The Portfolio Trustees and officers of the Portfolio, their birthdates and
their principal occupations during the past five years are set forth below.
Their titles may have varied during that period. Unless otherwise indicated the
address of each officer is Clearing Operations, P.O. Box 897, Pittsburgh,
Pennsylvania 15230-0897.
TRUSTEES OF THE PORTFOLIO(EFFECTIVE OCTOBER 19, 1999):
CHARLES P. BIGGAR (birth date: October 13, 1930) - Trustee of the Trust;
Trustee of each of the other investment companies in the BT Fund Complex(1);
Retired; former Vice President, International Business Machines ("IBM") and
President, National Services and the Field Engineering Divisions of IBM. His
address is 12 Hitching Post Lane, Chappaqua, New York 10514.
S. LELAND DILL (birth date: March 28, 1930) - Trustee of the Trust; Trustee
of each of the other investment companies in the BT Fund Complex; Retired;
Director, Coutts (U.S.A.) International; Trustee, Phoenix-Zweig Trust(2) and
Phoenix-Euclid Market Neutral Fund(2); former Partner, KPMG Peat Marwick;
Director, Vintners
- --------
(1) The "BT Fund Complex" consists of BT Investment Funds, BT Institutional
Funds, BT Pyramid Mutual Funds, BT Advisor Funds, Cash Management
Portfolio, Intermediate Tax Free Portfolio, Tax Free Money Portfolio, NY
Tax Free Money Portfolio, Treasury Money Portfolio, International Equity
Portfolio, Equity 500 Index Portfolio, Capital Appreciation Portfolio,
Asset Management Portfolio, and BT Investment Portfolios.
(2) An investment company registered under the Investment Company Act of 1940,
as amended (the "Act").
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International Company Inc.; Director, Coutts Trust Holdings Ltd., Director,
Coutts Group; General Partner, Pemco(2). His address is 5070 North Ocean Drive,
Singer Island, Florida 33404.
MARTIN J. GRUBER (birth date: July 15, 1937) - Trustee of the Trust;
Trustee of each of the other investment companies in the BT Fund Complex; Nomura
Professor of Finance, Leonard N. Stern School of Business, New York University
(since 1964); Trustee, TIAA(2); Trustee, SG Cowen Mutual Funds(2); Trustee,
Japan Equity Fund(2); Trustee, Taiwan Equity Fund(2). His address is 229 South
Irving Street, Ridgewood, New Jersey 07450.
RICHARD HALE* (birth date: July 17, 1945) - Trustee of the Trust; Trustee
of each of the other investment companies in the BT Fund Complex; Managing
Director, Deutsche Asset Management; Director, Flag Investors Funds2; Managing
Director, Deutsche Banc Alex. Brown Incorporated; Director and President,
Investment Company Capital Corp. His address is 205 Woodbrook Lane, Baltimore,
Maryland 21212.
RICHARD J. HERRING (birth date: February 18, 1946) - Trustee of the Trust;
Trustee of each of the other investment companies in the BT Fund Complex; Jacob
Safra Professor of International Banking, Professor of Finance and Vice Dean,
The Wharton School, University of Pennsylvania (since 1972). His address is 325
South Roberts Road, Bryn Mawr, Pennsylvania 19010.
BRUCE E. LANGTON (birth date: May 10, 1931) - Trustee of the Trust; Trustee
of each of the other investment companies in the BT Fund Complex; Retired;
Trustee, Allmerica Financial Mutual Funds (1992 - present); Member, Pension and
Thrift Plans and Investment Committee, Unilever U.S. Corporation (1989 -
present)(3); Director, TWA Pilots Directed Account Plan and 401(k) Plan
(1988-present). His address is 99 Jordan Lane, Stamford, Connecticut 06903.
PHILIP SAUNDERS, JR. (birth date: October 11, 1935) - Trustee of the Trust;
Trustee of each of the other investment companies in the BT Fund Complex;
Principal, Philip Saunders Associates (Economic and Financial Analysts); former
Director, Financial Industry Consulting, Wolf & Company; President, John Hancock
Home Mortgage Corporation; Senior Vice President of Treasury and Financial
Services, John Hancock Mutual Life Insurance Company, Inc. His address is 445
Glen Road, Weston, Massachusetts 02193.
HARRY VAN BENSCHOTEN (birth date: February 18, 1928) - Trustee of the
Trust; Trustee of each of the other investment companies in the BT Fund Complex;
Retired; Director, Canada Life Insurance of New York. His address is 6581
Ridgewood Drive, Naples, Florida 34108.
* "Interested Person" within the meaning of Section 2(a)(19) of the Act. Mr.
Hale is a Managing Director of Deutsche Asset Management, the U.S. asset
management unit of Deutsche Bank and its affiliates.
The Board has an Audit Committee that meets with the Trust's independent
accountants to review the financial statements of the Trust, the adequacy of
internal controls, and the accounting procedures and policies of the Trust. Each
member of the Board, except Mr. Hale, also is a member of the Audit Committee.
OFFICERS OF THE PORTFOLIO
DANIEL O. HIRSCH (birth date: March 27, 1954) - Secretary of the Trust;
Director, Deutsche Banc Alex. Brown Incorporated and Investment Company Capital
Corp. since July 1998; Assistant General Counsel, Office of the General Counsel,
United States Securities and Exchange Commission from 1993 to 1998. His address
is One South Street, Baltimore, Maryland 21202.
- ---------
(3) A publicly held company with securities registered pursuant to Section 12 of
the Securities and Exchange Act of 1934, as amended.
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JOHN A. KEFFER (birth date: July 14, 1942) - President and Chief Executive
Officer of the Trust; President, Forum Financial Group L.L.C. and its
affiliates; President ICC Distributors, Inc.(4) His address is ICC Distributors,
Inc., Two Portland Square, Portland, Maine 04101.
CHARLES A. RIZZO (birth date: August 5, 1958) - Treasurer of the Trust;
Vice President and Department Head, Deutsche Asset Management since 1998; Senior
Manager, PricewaterhouseCoopers LLP from 1993 to 1998. His address is One South
Street, Baltimore, Maryland 21202.
No person who is an officer or director of Bankers Trust is an officer or
Trustee of the Trust.
PORTFOLIO TRUSTEE COMPENSATION TABLE
The following table reflects fees paid to the Portfolio Trustees for the
year ended December 31, 1998.
AGGREGATE COMPENSATION
NAME OF FROM CASH TOTAL COMPENSATION
PERSON; POSITION MANAGEMENT PORTFOLIO* FROM FUND COMPLEX*
- ---------------- --------------------- ------------------
Charles P. Biggar $1,147.52 $36,250
Trustee, BT Institutional Funds
and Portfolio
S. Leland Dill $ 970.55 $36,250
Trustee, Portfolio
Philip Saunders, Jr. $ 977.48 $36,250
Trustee, Portfolio
Under an investment advisory agreement between the Trust, (other than the
Money Market ProFund and UltraEurope ProFund) and the Advisor, dated October 28,
1997 and amended February 18, 1998, each such ProFund pays the Advisor a fee at
an annualized rate, based on its average daily net assets of 0.75%. Under an
investment advisory agreement between the Advisor and UltraEurope ProFund dated
February 23, 1999, each such ProFund pays the Advisor a fee at an annualized
rate, based on its average daily net assets of 0.90%. The Advisor manages the
investment and the reinvestment of the assets of each of the Funds, in
accordance with the investment objectives, policies, and limitations of the
ProFund, subject to the general supervision and control of Trustees and the
officers of ProFunds. The Advisor bears all costs associated with providing
these advisory services. The Advisor, from its own resources, including profits
from advisory fees received from the Funds, provided such
- ------
(4) Underwriter/distributor for the Trust. Mr. Keffer owns 100% of the shares of
ICC Distributors, Inc.
31
<PAGE>
Trustees are legitimate and not excessive, also may make payments to
broker-dealers and other financial institutions for their expenses in connection
with the distribution of ProFunds' shares. The Advisor's address is 7900
Wisconsin Avenue, Suite 300, Bethesda, Maryland 20814.
For the fiscal years ended December 31, 1997 and 1998, the Advisor was
entitled to, and voluntarily waived, advisory fees in the following amounts for
each of the ProFunds:
ADVISORY FEES
FYE 12/31
<TABLE>
<CAPTION>
1997 1998
Earned Waived Earned Waived
-------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Bull ProFund $ 28 $ 28 $21,580 $16,135
UltraBull ProFund 1,609 1,609 247,991 13,585
Bear ProFund 52 52 11,044 10,205
UltraBear ProFund 615 615 126,301 --
UltraOTC ProFund 751 751 419,023 --
UltraShort OTC ProFund 38,021 --
</TABLE>
The UltraShort OTC ProFund had not commenced operations as of December 31,
1997. The UltraEurope Profund had not commenced operations as of December 31,
1998.
BANKERS TRUST
Under the terms of an investment advisory agreement (the "Advisory
Agreement") between the Portfolio and Bankers Trust, Bankers Trust manages the
Portfolio subject to the supervision and direction of the Board of Trustees of
the Portfolio. Bankers Trust will: (i) act in strict conformity with the
Portfolio's Declaration of Trust, the 1940 Act and the Investment Advisers Act
of 1940, as the same may from time to time be amended; (ii) manage the Portfolio
in accordance with the Portfolio's and/or the Money Market ProFund's investment
objectives, restrictions and policies, as stated herein and in the Prospectus;
(iii) make investment decisions for the Portfolio; and (iv) place purchase and
sale orders for securities and other financial instruments on behalf of the
Portfolio.
Bankers Trust bears all expenses in connection with the performance of
services under the Advisory Agreement. The Money Market ProFund and the
Portfolio bear certain other expenses incurred in their operation, including:
taxes, interest, brokerage fees and commissions, if any; fees of Trustees of the
Trust or Portfolio who are not officers, directors or employees of Bankers
Trust, the Advisor, the administrator or any of their affiliates; SEC fees and
state Blue Sky qualification fees, if any; administrative and services fees;
certain insurance premiums, outside auditing and legal expenses, and costs of
maintenance of corporate existence; costs attributable to investor services,
including without limitation, telephone and personnel expenses; and printing
prospectuses and statements of additional information for regulatory purposes
and for distribution to existing shareholders; costs of shareholders' reports
and meetings of shareholders, officers and Trustees of the Trust or the
Portfolio; and any extraordinary expenses.
For the fiscal years ended December 31, 1998, 1997 and 1996, Banker's Trust
earned $ 8,019,093, $6,544,181and $4,935,288 respectively, in compensation for
investment advisory services provided to the Portfolio. During the same periods,
Bankers Trust reimbursed $ 1,151,727, $940,530 and $761,230 respectively, to the
Portfolio to cover expenses.
Bankers Trust may have deposit, loan and other commercial banking
relationships with the issuers of obligations which may be purchased on behalf
of the Portfolio, including outstanding loans to such issuers which could be
repaid in whole or in part with the proceeds of securities so purchased. Such
affiliates deal, trade and invest for their own accounts in such obligations and
are among the leading dealers of various types of such obligations. Bankers
Trust has informed the Portfolio that, in making its investment decisions, it
does not obtain or use material inside information in its possession or in the
possession of any of its affiliates. In making investment recommendations for
the Portfolio, Bankers Trust will not inquire or take into consideration whether
an issuer of
32
<PAGE>
securities proposed for purchase or sale by the Portfolio is a customer of
Bankers Trust, its parent or its subsidiaries or affiliates and, in dealing with
its customers, Bankers Trust, its parent, subsidiaries, and affiliates will not
inquire or take into consideration whether securities of such customers are held
by any fund managed by Bankers Trust or any such affiliate.
ADMINISTRATION, TRANSFER AGENT, FUND ACCOUNTING AGENT AND CUSTODIAN
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services ("BISYS")
acts as Administrator to the ProFunds. The Administrator provides ProFunds with
all required general administrative services, including, without limitation,
office space, equipment, and personnel; clerical and general back office
services; bookkeeping, internal accounting, and secretarial services; the
determination of net asset values; and the preparation and filing of all
reports, registration statements, proxy statements, and all other materials
required to be filed or furnished by ProFunds under Federal and state securities
laws. The Administrator also maintains the shareholder account records for
ProFunds, distributes dividends and distributions payable by the ProFunds, and
produces statements with respect to account activity for the ProFunds and their
shareholders. The Administrator pays all fees and expenses that are directly
related to the services provided by the Administrator to ProFunds; each
For its services as Administrator, each ProFund pays BISYS an annual fee
ranging from 0.15% of average daily net assets of $0 to $300 million to .05% of
average daily net assets of $1 billion and over. BISYS Funds Services, Inc.
("BFSI"), an affiliate of BISYS, acts as transfer agent and fund accounting
agent for the ProFunds, for which it receives additional fees. Additionally,
ProFunds and BISYS and BFSI have entered into an Omnibus Fee Agreement in which
the amount of compensation due and payable to BISYS shall be the greater of (i)
the aggregate fee amount due and payable for services pursuant to the
Administration, Fund Accounting and Transfer Agency Agreements and (ii) the
minimum relationship fee described as specific dollar amounts payable over a
period of ten calendar quarters ($1,100,000). The address for BISYS and BFSI is
3435 Stelzer Road, Suite 1000, Columbus, Ohio 43219.
For the fiscal years ended December 31, 1997 and 1998, BISYS, as
Administrator, was entitled to, and voluntarily waived, administration fees in
the following amounts for each of the ProFunds:
ADMINISTRATION FEES
FYE 12/31
<TABLE>
<CAPTION>
1997 1998
Earned Waived Earned Waived
-------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Bull ProFund $ 6 $ 6 $4,316 $876
UltraBull ProFund 322 322 49,599 6,321
Bear ProFund 10 10 2,208 944
UltraBear ProFund 123 123 25,260 2,500
UltraOTC ProFund 150 150 83,805 7,605
Money Market ProFund 422 422 49,213 5,728
UltraShort OTC ProFund -- -- 6,616 --
</TABLE>
The UltraShort OTC ProFund had not commenced operation as of December 31,
1997. The UltraEurope ProFund had not commenced operations as of December 31,
1998.
ProFunds Advisors LLC, pursuant to a separate Management Services
Agreement, performs certain client support and other administrative services on
behalf of the ProFunds and feeder fund management and administrative services to
the Money Market ProFund. These services include monitoring the performance of
the underlying investment company in which the Money Market ProFund invests,
coordinating the Money Market ProFund's relationship with that investment
company, and communicating with the Trust's Board of Trustees and shareholders
regarding such entity's performance and the Money Market ProFund's two tier
structure and, in general, assisting the Board of Trustees of the Trust in all
aspects of the administration and operation of the Money Market ProFund. For
these services, the ProFunds will pay to ProFunds Advisors LLC a fee at the
annual rate of .15% of its average daily net assets for all non-money market
ProFunds and .35% of its average daily net assets for the Money Market ProFund.
33
<PAGE>
For the fiscal years ended December 31, 1997 and 1998, ProFund Advisors LLC
was entitled to, and voluntarily waived, management services fees in the
following amounts for each of the ProFunds:
MANAGEMENT SERVICES FEES
FYE 12/31
<TABLE>
<CAPTION>
1997 1998
Earned Waived Earned Waived
-------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Bull ProFund $ 6 $ 6 $4,316 $4,316
UltraBull ProFund 322 322 49,599 --
Bear ProFund 10 10 2,209 2,209
UltraBear ProFund 123 123 25,260 4,986
UltraOTC ProFund 150 150 83,805 10,681
Money Market ProFund 984 984 114,832 55,586
UltraShort OTC ProFund -- -- 6,985 934
</TABLE>
The UltraShort OTC ProFund had not commenced operation as of December 31,
1997. The UltraEurope ProFund had not commenced operations as of December 31,
1998.
Under an Administration and Services Agreement, Bankers Trust is obligated
on a continuous basis to provide such administrative services as the Board of
Trustees of the Portfolio reasonably deems necessary for the proper
administration of the Portfolio. Bankers Trust will generally assist in all
aspects of the Portfolio's operations and will: supply and maintain office
facilities (which may be in Bankers Trust's own offices); statistical and
research data, data processing services, clerical, accounting, bookkeeping and
recordkeeping services (including, without limitation, the maintenance of such
books and records as are required under the 1940 Act and the rules thereunder,
except as maintained by other agents of the Portfolio); internal auditing,
executive and administrative services; and information and supporting data for
reports to and filings with the Commission and various state Blue Sky
authorities; supply supporting documentation for meetings of the Board of
Trustees; provide monitoring reports and assistance regarding compliance with
the Portfolio's Declaration of Trust, by-laws, investment objectives and
policies and with federal and state securities laws; arrange for appropriate
insurance coverage; calculate the net asset value, net income and realized
capital gains or losses of the Portfolio; and negotiate arrangements with, and
supervise and coordinate the activities of, agents and others retained to supply
services. Pursuant to a sub-administration agreement (the "Sub-Administration
Agreement") Federated Securities Company performs sub-administration duties for
the Portfolio as from time to time may be agreed upon by Bankers Trust and
Federated Securities Company. The Sub-Administration Agreement provides that
Federated Securities Company will receive such compensation as from time to time
may be agreed upon by Federated Securities Company and Bankers Trust. All such
compensation will be paid by Bankers Trust.
For the fiscal years ended December 31, 1998, 1997 and 1996, Bankers Trust
earned compensation of $2,673,031, $2,181,394 and $1,645,096, respectively, for
administrative and other services provided to the Portfolio.
UMB Bank, N.A. acts as custodian to the non-money market ProFunds. UMB
Bank, N.A.'s address is 928 Grand Avenue, Kansas City, Missouri.
34
<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. will serve as the distributor and principal
underwriter in all fifty states and the District of Columbia. Concord Financial
Group, Inc. receives no compensation from the ProFunds for serving as
distributor. Concord Financial Group, Inc.'s address is 3435 Stelzer Road,
Columbus, Ohio 43219.
SHAREHOLDER SERVICES PLAN
Each ProFund has adopted a Shareholder Services Plan (the "Plan") which
provides that each ProFund will make payments equal to 1.00% (on an annual
basis) of the average daily value of the net assets of such ProFund's Adviser
shares attributable to or held in the name of investment advisers and other
authorized institutions that sell Service Shares ("Authorized Firms") for
providing account administration services to their clients who are beneficial
owners of such shares. The Administrator may act as an Authorized Firm. The
Trust will enter into agreements ("Shareholder Services Agreements") with
Authorized Firms that purchase Service Shares on behalf of their clients. The
Shareholder Services Agreements will provide for compensation to the Authorized
Firms in an amount up to 1.00% (on an annual basis) of the average daily net
assets of the Service shares of the applicable ProFund attributable to or held
in the name of the Authorized Firm for its clients. The ProFunds may pay
different service fee amounts to Authorized Firms, which may provide different
levels of services to their clients or customers.
The Trustees of the Trust, including a majority of the Trustees who are
not interested persons of the Trust and who have no direct or indirect financial
interest in the operation of the Plan or the related Shareholder Services
Agreements, voted to adopt the Plan and Shareholder Services Agreements at a
meeting called for the purpose of voting on such Plan and Shareholder Services
Agreements on October 28, 1997. The Plan and Shareholder Services Agreements
will remain in effect for a period of one year and will continue in effect
thereafter only if such continuance is specifically approved annually by a vote
of the Trustees in the manner described above. All material amendments of the
Plan must also be approved by the Trustees in the manner described above. The
Plan may be terminated at any time by a majority of the Trustees as described
above or by vote of a majority of the outstanding Service shares of the affected
ProFund. The Shareholder Services Agreements may be terminated at any time,
without payment of any penalty, by vote of a majority of the Trustees as
described above or by a vote of a majority of the outstanding Service Shares of
the affected ProFund on not more than 60 days' written notice to any other party
to the Shareholder Services Agreements. The Shareholder Services Agreements
shall terminate automatically if assigned. The Trustees have determined that, in
their judgment, there is a reasonable likelihood that the Plan will benefit the
ProFunds and holders of Service shares of such ProFunds. In the Trustees'
quarterly review of the Plan and Shareholder Services Agreements, they will
consider their continued appropriateness and the level of compensation provided
therein.
The intent of the Plan and Shareholder Services Agreements is to procure
quality shareholder services on behalf of ProFund shareholders; in adopting the
Plan and Shareholder Services Agreements, the Trustees considered the fact that
such shareholder services may have the effect of enhancing distribution of
ProFund Service shares and growth of the ProFunds. In light of this, the
ProFunds intend to observe the procedural requirements of Rule 12b-1 under the
1940 Act on considering the continued appropriateness of the Plan and
Shareholder Services Agreements.
35
<PAGE>
For the fiscal years ended December 31, 1997 and 1998, each ProFund paid,
unless voluntarily waived, shareholder services fees to authorized firms in the
following amounts:
SHAREHOLDER SERVICES FEES
FYE 12/31
<TABLE>
<CAPTION>
1997 1998
Earned Waived Earned Waived
-------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Bull ProFund $ 0 $ 6 $1,976 $ 0
UltraBull ProFund 733 733 43,799 0
Bear ProFund 0 0 2,974 0
UltraBear ProFund 0 0 27,343 0
UltraOTC ProFund 379 379 78,811 0
Money Market ProFund 0 0 65,071 0
UltraShort OTC ProFund 5,390 0
</TABLE>
The UltraShort OTC ProFund had not commenced operation as of December 31,
1997. The UltraEurope ProFund had not commenced operations as of December 31,
1998.
COSTS AND EXPENSES
Each ProFund bears all expenses of its operations other than those assumed
by the Advisor or the Administrator. ProFund expenses include: the management
fee; the servicing fee (including administrative, transfer agent, and
shareholder servicing fees); custodian and accounting fees and expenses, legal
and auditing fees; securities valuation expenses; fidelity bonds and other
insurance premiums; expenses of preparing and printing prospectuses,
confirmations, proxy statements, and shareholder reports and notices;
registration Trustees and expenses; proxy and annual meeting expenses, if any;
all Federal, state, and local taxes (including, without limitation, stamp,
excise, income, and franchise taxes); organizational costs; and non-interested
Trustees' fees and expenses.
ORGANIZATION AND DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
ProFunds (the "Trust") is a registered open-end investment company under
the 1940 Act. The Trust was organized as a Delaware business trust on April 17,
1997, and has authorized capital of unlimited shares of beneficial interest of
no par value which may be issued in more than one class or series. Currently,
the Trust consists of six separately managed series. Other separate series may
be added in the future. Each ProFund offers two classes of shares: the Service
Shares and the Investor Shares.
All shares of the ProFund are freely transferable. The Trust shares do not
have preemptive rights or cumulative voting rights, and none of the shares have
any preference to conversion, exchange, dividends, retirements, liquidation,
redemption, or any other feature. Trust shares have equal voting rights, except
that, in a matter affecting a particular series or class of shares, only shares
of that series or class may be entitled to vote on the matter.
Under Delaware law, the Trust is not required to hold an annual
shareholders meeting if the 1940 Act does not require such a meeting. Generally,
there will not be annual meetings of Trust shareholders. Trust shareholders may
remove Trustees from office by votes cast at a meeting of Trust shareholders or
by written consent. If requested by shareholders of at least 10% of the
outstanding shares of the Trust, the Trust will call a meeting of ProFunds'
shareholders for the purpose of voting upon the question of removal of a Trustee
of the Trust and will assist in communications with other Trust shareholders.
The Declaration of Trust of the ProFunds disclaims liability of the shareholders
or the officers of the Trust for acts or obligations of the Trust which are
binding only on the assets and property of the Trust. The Declaration of Trust
provides for indemnification of the Trust's property for all loss and expense of
any ProFunds shareholder held personally liable for the obligations of the
Trust. The risk of a Trust shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which loss of account of
shareholder liability is limited to
36
<PAGE>
circumstances in which the ProFunds itself would not be able to meet the Trust's
obligations and this risk, thus, should be considered remote.
CAPITALIZATION
As of February 16, 1999, no person owned of record, or to the knowledge of
management beneficially owned five percent or more of the outstanding shares of
the ProFunds or classes except as set forth below:
MONEY MARKET PROFUND--INVESTOR SHARES TOTAL SHARES PERCENTAGE
- ------------------------------------- ------------ ----------
First Trust Corporation 14,230,775.591 9.5901%*
P.O. Box 173736
Denver, CO 80217
Independent Trust Corp 16,071,841.950 10.8308%
Funds 975
15255 S 94th Ave 3rd Floor
Orland Park, IL 60462
NationsBank NA Collateral Pledge Of 15,431,643.310 10.3994%
D&L Partners LP
1610 Des Peres Re Ste 395
St Louis, MO 63131
BULL PROFUND--INVESTOR SHARES TOTAL SHARES PERCENTAGE
- ----------------------------- ------------ ----------
Independent Trust Corp 55,112.465 63.3337%*
Funds CMSI
15255 S 94th Ave 3rd Floor
Orland Park, IL 60462
BULL PROFUND--INVESTOR SHARES TOTAL SHARES PERCENTAGE
- ----------------------------- ------------ ----------
Trust Company Of America 10,394.748 11.9454%
HCM
P.O. Box 6503
Englewood, CO 80115
*Disclaims Beneficial Ownership.
BULL PROFUND--SERVICE SHARES TOTAL SHARES PERCENTAGE
- ---------------------------- ------------ ----------
First Trust Corporation 7,060.235 36.2512%*
P.O. Box 173736
Denver, CO 80217
Liliana P Willis 2,010.798 10.3245%
Jerry B Willis and Assoc. Inc PSP
P.O. Box 83906
Baton Rouge, LA 70884
37
<PAGE>
NFSC FEBO C6A-539961 1,222.746 6.2783%
NFSC FMTC IRA Rollover
FBO Mark F Secrest
22 W 26th St 6e
New York, NY 10010
NFSC FEBCO C6B-52252 1,093.983 5.6171%
NFSC FMTC IRA Rollover
2912 N Commonwealth 3A
Chicago, IL 60657
NFSC FEBCO C6A-027537 1,130.099 5.8026%
Donna Gagliuso
4th Floor
NY, NY 10012
ULTRABULL PROFUND--INVESTOR SHARES TOTAL SHARES PERCENTAGE
- ------------------------------------- ------------ ----------
Donaldson Lufkin & Jenrette Securities Corp. 124,613.215 22.69%*
P.O. Box 2052
Jersey City, NJ 07303
National Investor Services Corp 51,081.613 9.3024%
Exclusive Benefit of Customers
55 Water St. 32nd FL
New York, NY 10041-3299
Charles Schwab and Co. Inc. 153,520.180 27.9574%*
Special Custody Account of Customers
101 Montgomery St.
San Francisco, CA 94104
ULTRABULL PROFUND--SERVICE SHARES TOTAL SHARES PERCENTAGE
- ------------------------------------- ------------ ----------
Donaldson Lufkin & Jenrette 38,381.060 33.5039%*
Securities Corporation
P.O. Box 2052
Jersey City, NJ 07303
*Disclaims beneficial ownership
First Trust Corporation 17,470.722 15.2705%*
P.O. Box 173736
Denver , CO 80217
First Trust Corporation 6,213.493 5.4239%*
P.O. Box 173736
Denver , CO 80217
FJ O'Neill Charitable Corporation 6,381.621 5.5707%
3550 Lander Rd. Room 140
Pepper Pike, OH 44124
38
<PAGE>
BEAR PROFUND--INVESTOR CLASS SHARES TOTAL SHARES PERCENTAGE
- ------------------------------------- ------------ ----------
Charles Schwab and Co. Inc. 26,355.490 54.4271%*
Special Custody Account of Customers
101 Montgomery St.
San Francisco, CA 94104
Sheff Enterprises 3,730.415 7.7037%
988 Blvd. Of the Arts 812
Sarasota, FL 34236
BEAR PROFUND--SERVICE SHARES TOTAL SHARES PERCENTAGE
- ------------------------------------- ------------ ----------
Donaldson Lufkin & Jenrette Sec Corp 558.948 8.8170%*
P.O. Box 2052
Jersey City, NJ 07303
NFSC FEBO M26-846228 5,076.142 80.0727%*
NFSC FMTC IRA
998 Cooper Road
Mountain Grove, MO 65711
NFSC FEBO 168-177636 345.643 5.4523%
FMTC Custodian -Roth IRA
5308 Burning Oak Ct.
Raleigh, NC 27606-9595
ULTRABEAR PROFUND--INVESTOR SHARES TOTAL SHARES PERCENTAGE
- ------------------------------------- ------------ ----------
Donaldson Lufkin & Jenrette 344.966 19.38%*
Securities Corp.
P.O. Box 2052
Jersey City, NJ 07303
Charles Schwab and Co. Inc. 255,486.585 14.3530%*
Special Custody Account of Customers
101 Montgomery St.
San Francisco, CA 94104
*Disclaims beneficial ownership
ULTRABEAR PROFUND--SERVICE SHARES TOTAL SHARES PERCENTAGE
- ------------------------------------- ------------ ----------
Donaldson Lufkin & Jenrette Securities Corp. 37,07620 8.55%*
P.O. Box 2052
Jersey City, NJ 07303
Independent Trust Corp. 48.979.111 11.2990%
Funds 88
15255 S 94th Ave. 3rd Floor
Orland Park, IL 60462
39
<PAGE>
First Trust Corporation 54,368,234 12.5422%*
P.O. Box 173736
Denver, CO 80217-3736
Independent Trust Corp. 58,353.021 13.4615%
Funds 865
15255 S. 94th Ave. Suite 300
Orland Park, IL 60462
Independent Trust Corp. 122,713.982 28.3090%*
Funds 966
15255 S. 94th Ave. 3rd Floor
Orland Park, IL 60462
ULTRAOTC PROFUND--INVESTOR SHARES TOTAL SHARES PERCENTAGE
- ------------------------------------- ------------ ----------
Donaldson Lufkin & Jenrette Securities Corp. 345,350.95 18.72%*
PO Box 2052
Jersey City, NJ 07303
National Investor Services Corp. 156,066.630 8.4600%
Exclusive Benefit of Customers
55 Water St. 32nd FL
New York, NY 10041-3299
Charles Schwab and Co., Inc. 488,550.075 26.4832%*
Special Custody Account of Customers
101 Montgomery St.
San Francisco, CA 94104
ULTRAOTC PROFUND--SERVICE SHARES TOTAL SHARES PERCENTAGE
- ------------------------------------- ------------ ----------
Donaldson Lufkin & Jenrette Securities Corp. 70,386.86 25.92%*
P.O. Box 2052
Jersey City, NJ 07303
*Disclaims beneficial ownership.
ULTRAOTC PROFUND--INVESTOR SHARES TOTAL SHARES PERCENTAGE
- ------------------------------------- ------------ ----------
Donaldson Lufkin & Jenrette Sec Corp. 1,350,778.098 26.5813%*
P.O. Box 2052
Jersey City, NJ 07303
Charles Schwab and Co., Inc. 478,068.202 9.4077%*
Special Custody Account of Customers
101 Montgomery St.
San Francisco, CA 94104
40
<PAGE>
ULTRAOTC PROFUND--SERVICE SHARES TOTAL SHARES PERCENTAGE
- ------------------------------------- ------------ ----------
Donaldson Lufkin & Jenrette Sec Corp 19,536.782 32.2748%*
P.O. Box 2052
Jersey City, NJ 07303
First Trust Corporation 7,522.415 12.4271%*
P.O. Box 173736
Denver, CO 80217
Sterling J. Moritz 5,757.568 9.5115%
2149 N 121st St.
Omaha, NE 68164
Jerry E. Gress 7,302.065 12.0630%
Patricia D. Gress
3303 N. 125 Ave.
Omaha, NE 68164
*Disclaims beneficial ownership.
TAXATION
Set forth below is a discussion of certain U.S. federal income tax issues
concerning the ProFunds and the purchase, ownership, and disposition of ProFund
shares. This discussion does not purport to be complete or to deal with all
aspects of federal income taxation that may be relevant to shareholders in light
of their particular circumstances, nor to certain types of shareholders subject
to special treatment under the federal income tax laws (for example, banks and
life insurance companies). This discussion is based upon present provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), the regulations
promulgated thereunder, and judicial and administrative ruling authorities, all
of which are subject to change, which change may be retroactive. Prospective
investors should consult their own tax advisors with regard to the federal tax
consequences of the purchase, ownership, or disposition of ProFund shares, as
well as the tax consequences arising under the laws of any state, foreign
country, or other taxing jurisdiction.
Dividends out of net ordinary income and distribution of net short-term
capital gains are taxable to the recipient U.S. shareholders as ordinary income,
whether received in cash or reinvested in ProFund shares. Dividends from net
ordinary income may be eligible for the corporate dividends-received deduction.
The excess of net long-term capital gains over the net short-term capital
losses realized and distributed by a ProFund to its U.S. shareholders as capital
gains distributions is taxable to the shareholders as gain from the sale of a
capital asset held for more than one year, regardless of the length of time a
shareholder has held the ProFund shares. If a shareholder holds ProFund shares
for six months or less and during that period receives a distribution taxable to
the shareholder as long-term capital gain, any loss realized on the sale of the
ProFund shares will be long-term loss to the extent of such distribution.
The amount of an income dividend or capital gains distribution declared by
a ProFund during October, November or December of a year to shareholder of
record as of a specified date in such a month that is paid during January of the
following year will be deemed to be received by shareholders on December 31 of
the prior year.
Any dividend or distribution paid by a ProFund has the effect of reducing
the ProFund's net asset value per share. Investors should be careful to consider
the tax effect of buying shares shortly before a distribution by a ProFund. The
price of shares purchased at that time will include the amount of the
forthcoming distribution, but the distribution will be taxable to the
shareholder.
41
<PAGE>
A dividend or capital gains distribution with respect to shares of a
ProFund held by a tax-deferred or qualified plan, such as an IRA, retirement
plan or corporate pension or profit sharing plan, will not be taxable to the
plan. Distribution from such plans will be taxable to individual participants
under applicable tax rules without regard to the character of the income earned
by the qualified plan.
Shareholders will be advised annually as to the federal tax status of
dividends and capital gains distribution made by the ProFunds for the preceding
year. Distributions by ProFunds generally will be subject to state and local
taxes.
Each of the ProFunds intends to qualify and elect to be treated each year
as a regulated investment company (a "RIC") under Subchapter M of the Code. A
RIC generally is not subject to federal income tax on income and gains
distributed in a timely manner to its shareholders. Accordingly, each ProFund
generally must, among other things, (a) derive in each taxable year at least 90%
of its gross income from dividends, interest, payments with respect to certain
securities loans, and gains from the sale or other disposition of stock,
securities or foreign currencies, or other income derived with respect to its
business of investing in such stock, securities or currencies; and (b) diversify
its holdings so that, at the end of each fiscal quarter, (i) at least 50% of the
market value of the ProFund's assets is represented by cash, U.S. government
securities, the securities of other regulated investment companies and other
securities, with such other securities limited, in respect of any one issuer, to
an amount not greater than 5% of the value of the ProFund's total assets and 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total assets is invested in the securities of any one issuer
(other than U.S. government securities and the securities of other regulated
investment companies).
As a RIC, a ProFund generally will not be subject to U.S. federal income
tax on income and gains that it distributes to shareholders, if at least 90% of
the ProFund's investment company taxable income (which includes, among other
items, dividends, interest and the excess of any net short-term capital gains
over net long-term capital losses) for the taxable year is distributed. Each
ProFund intends to distribute substantially all of such income.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax at
the ProFund level. To avoid the tax, each ProFund must distribute during each
calendar year an amount equal to the sum of (1) at least 98% of its ordinary
income (not taking into account any capital gains or losses) for the calendar
year, (2) at least 98% of its capital gains in excess of its capital losses
(adjusted for certain ordinary losses) for a one-year period generally ending on
October 31 of the calendar year, and (3) all ordinary income and capital gains
for previous years that were not distributed during such years. To avoid
application of the excise tax, the ProFunds intend to make distributions in
accordance with the calendar year distribution requirement. A distribution will
be treated as paid on December 31 of a calendar year if it is declared by the
ProFund in October, November or December of that year with a record date in such
a month and paid by the ProFund during January of the following year. Such
distributions will be taxable to shareholders in the calendar year in which the
distributions are declared, rather than the calendar year in which the
distributions are received.
MARKET DISCOUNT
If ProFund purchases a debt security at a price lower than the stated
redemption price of such debt security, the excess of the stated redemption
price over the purchase price is "market discount". If the amount of market
discount is more than a de minimis amount, a portion of such market discount
must be included as ordinary income (not capital gain) by the ProFund in each
taxable year in which the ProFund owns an interest in such debt security and
receives a principal payment on it. In particular, the ProFund will be required
to allocate that principal payment first to the portion of the market discount
on the debt security that has accrued but has not previously been includable in
income. In general, the amount of market discount that must be included for each
period is equal to the lesser of (i) the amount of market discount accruing
during such period (plus any accrued market discount for prior periods not
previously taken into account) or (ii) the amount of the principal payment with
respect to such period. Generally, market discount accrues on a daily basis for
each day the debt security is held by a ProFund at a constant rate over the time
remaining to the debt security's maturity or, at the election of the ProFund, at
a constant yield to maturity which takes into account the semi-annual
compounding of interest. Gain realized on the disposition of a market discount
obligation must be recognized as ordinary interest income (not capital gain) to
the extent of the "accrued market discount."
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ORIGINAL ISSUE DISCOUNT
Certain debt securities acquired by the ProFunds may be treated as debt
securities that were originally issued at a discount. Original issue discount
can generally be defined as the difference between the price at which a security
was issued and its stated redemption price at maturity. Although no cash income
is actually received by a ProFund, original issue discount that accrues on a
debt security in a given year generally is treated for federal income tax
purposes as interest and, therefore, such income would be subject to the
distribution requirements applicable to regulated investment companies.
Some debt securities may be purchased by the ProFunds at a discount that
exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for federal income tax purposes
(see above).
OPTIONS, FUTURES AND FOREIGN CURRENCY FORWARD CONTRACTS
Any Regulated futures contracts and certain options (namely, nonequity
options and dealer equity options) in which a ProFund may invest may be "section
1256 contracts." Gains (or losses) on these contracts generally are considered
to be 60% long-term and 40% short-term capital gains or losses; however foreign
currency gains or losses arising from certain section 1256 contracts are
ordinary in character. Also, section 1256 contracts held by a ProFund at the end
of each taxable year (and on certain other dates prescribed in the Code) are
"marked to market" with the result that unrealized gains or losses are treated
as though they were realized.
Transactions in options, futures and forward contracts undertaken by the
ProFunds may result in "straddles" for federal income tax purposes. The straddle
rules may affect the character of gains (or losses) realized by a ProFund, and
losses realized by the ProFund on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which the losses are
realized. In addition, certain carrying charges (including interest expense)
associated with positions in a straddle may be required to be capitalized rather
than deducted currently. Certain elections that a ProFund may make with respect
to its straddle positions may also affect the amount, character and timing of
the recognition of gains or losses from the affected positions.
Because only a few regulations implementing the straddle rules have been
promulgated, the consequences of such transactions to the ProFunds are not
entirely clear. The straddle rules may increase the amount of short-term capital
gain realized by a ProFund, which is taxed as ordinary income when distributed
to shareholders. Because application of the straddle rules may affect the
character of gains or losses, defer losses and/or accelerate the recognition of
gains or losses from the affected straddle positions, the amount which must be
distributed to shareholders as ordinary income or long-term capital gain may be
increased or decreased substantially as compared to a fund that did not engage
in such transactions.
CONSTRUCTIVE SALES
Recently enacted rules may affect the timing and character of gain if a
ProFund engages in transactions that reduce or eliminate its risk of loss with
respect to appreciated financial positions. If the ProFund enters into certain
transactions in property while holding substantially identical property, the
ProFund would be treated as if it had sold and immediately repurchased the
property and would be taxed on any gain (but not loss) from the constructive
sale. The character of gain from a constructive sale would depend upon the
ProFund's holding period in the property. Loss from a constructive sale would be
recognized when the property was subsequently disposed of, and its character
would depend on the ProFund's holding period and the application of various loss
deferral provisions of the Code.
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PASSIVE FOREIGN INVESTMENT COMPANIES
The ProFunds may invest in shares of foreign corporations that may be
classified under the Code as passive foreign investment companies ("PFICs"). In
general, a foreign corporation is classified as a PFIC if at least one-half of
its assets constitute investment-type assets, or 75% or more of its gross income
is investment-type income. If a ProFund receives a so-called "excess
distribution" with respect to PFIC stock, the ProFund itself may be subject to a
tax on a portion of the excess distribution, whether or not the corresponding
income is distributed by the ProFund to shareholders. In general, under the PFIC
rules, an excess distribution is treated as having been realized ratably over
the period during which the ProFund held the PFIC shares. Each ProFund will
itself be subject to tax on the portion, if any, of an excess distribution that
is so allocated to prior ProFund taxable years and an interest factor will be
added to the tax, as if the tax had been payable in such prior taxable years.
Certain distributions from a PFIC as well as gain from the sale of PFIC shares
are treated as excess distributions. Excess distributions are characterized as
ordinary income even though, absent application of the PFIC rules, certain
excess distributions might have been classified as capital gains.
The ProFunds may be eligible to elect alternative tax treatment with
respect to PFIC shares. Under an election that currently is available in some
circumstances, a ProFund generally would be required to include in its gross
income its share of the earnings of a PFIC on a current basis, regardless of
whether distributions were received from the PFIC in a given year. If this
election were made, the special rules, discussed above, relating to the taxation
of excess distributions, would not apply. In addition, another election would
involve marking to market the ProFund's PFIC shares at the end of each taxable
year, with the result that unrealized gains would be treated as though they were
realized and reported as ordinary income. Any mark-to-market losses and any loss
from an actual disposition of ProFund shares would be deductible as ordinary
losses to the extent of any net mark-to-market gains included in income in prior
years.
DISTRIBUTIONS
Distributions of investment company taxable income are taxable to a U.S.
shareholder as ordinary income, whether paid in cash or shares. Dividends paid
by a ProFund to a corporate shareholder, to the extent such dividends are
attributable to dividends received from U.S. corporations by the ProFund, may
qualify for the dividends received deduction. However, the revised alternative
minimum tax applicable to corporations may deduct the value of the dividends
received deduction. Distributions of net capital gains (the excess of net
long-term capital gains over net short-term capital losses), if any, designated
by the ProFund as capital gain dividends, whether paid in cash or in shares, are
taxable as gain from the sale or exchange of an asset held for more than one
year, regardless of how long the shareholder has held the ProFund's shares.
Capital gains dividends are not eligible for the dividends received deduction.
Shareholders will be notified annually as to the U.S. federal tax status of
distributions, and shareholders receiving distributions in the form of newly
issued shares will receive a report as to the net asset value of the shares
received.
If the net asset value of shares is reduced below a shareholder's cost as a
result of a distribution by a ProFund, such distribution generally will be
taxable even though it represents a return of invested capital. Investors should
be careful to consider the tax implications of buying shares of a ProFund just
prior to a distribution. The price of shares purchased at this time will include
the amount of the forthcoming distribution, but the distribution will generally
be taxable.
If a shareholder has chosen to receive distributions in cash, and the
postal (or other delivery) service is unable to deliver checks to the
shareholder's address of record, ProFunds will change the distribution option so
that all distributions are automatically reinvested in additional shares.
ProFunds will not pay interest on uncashed distribution checks.
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DISPOSITION OF SHARES
Upon a redemption, sale or exchange of shares of a ProFund, a shareholder
will realize a taxable gain or loss depending upon his or her basis in the
shares. A gain or loss will be treated as capital gain or loss if the shares are
capital assets in the shareholder's hands and generally will be long-term,
mid-term or short-term, depending upon the shareholder's holding period for the
shares. Any loss realized on a redemption, sale or exchange will be disallowed
to the extent the shares disposed of are replaced (including through
reinvestment of dividends) within a period of 61 days, beginning 30 days before
and ending 30 days after the shares are disposed of. In such a case the basis of
the shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized by a shareholder on the disposition of a ProFund's shares held by the
shareholder for six months or less will be treated for tax purposes as a
long-term capital loss to the extent of any distributions of capital gain
dividends received or treated as having been received by the shareholder with
respect to such shares.
BACKUP WITHHOLDING
Each ProFund generally will be required to withhold federal income tax at a
rate of 31% ("backup withholding") from dividends paid, capital gain
distributions, and redemption proceeds to shareholders if (1) the shareholder
fails to furnish the ProFund with the shareholder's correct taxpayer
identification number or social security number, (2) the IRS notifies the
shareholder or the ProFund that the shareholder has failed to report properly
certain interest and dividend income to the IRS and to respond to notices to
that effect, or (3) when required to do so, the shareholder fails to certify
that he or she is not subject to backup withholding. Any amounts withheld may be
credited against the shareholder's federal income tax liability.
OTHER TAXATION
Distributions may be subject to additional state, local and foreign taxes,
depending on each shareholder's particular situation. Non-U.S. shareholders and
certain types of U.S. shareholders subject to special treatment under the U.S.
federal income tax laws (e.g. banks and life insurance companies) may be subject
to U.S. tax rules that differ significantly from those summarized above.
EQUALIZATION ACCOUNTING
Each ProFund distributes its net investment income and capital gains to
shareholders as dividends annually to the extent required to qualify as a
regulated investment company under the Code and generally to avoid federal
income or excise tax. Under current law, each ProFund may on its tax return
treat as a distribution of investment company taxable income and net capital
gain the portion of redemption proceeds paid to redeeming shareholders that
represents the redeeming shareholders' portion of the ProFund's undistributed
investment company taxable income and net capital gain. This practice, which
involves the use of equalization accounting, will have the effect of reducing
the amount of income and gains that the ProFund is required to distribute as
dividends to shareholders in order for the ProFund to avoid federal income tax
and excise tax. This practice may also reduce the amount of distributions
required to be made to nonredeeming shareholders and the amount of any
undistributed income will be reflected in the value of the ProFund's shares; the
total return on a shareholder's investment will not be reduced as a result of
the ProFund's distribution policy. Investors who purchase shares shortly before
the record date of a distribution will pay the full price for the shares and
then receive some portion of the price back as a taxable distribution.
PERFORMANCE INFORMATION
TOTAL RETURN CALCULATIONS
From time to time, each of the non-money market ProFunds may advertise the
total return of the ProFund for prior periods. Any such advertisement would
include at least average annual total return quotations for one, five, and
ten-year periods, or for the life of the ProFund. Other total return quotations,
aggregate or average, over other time periods for the ProFund also may be
included.
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<PAGE>
The total return of a ProFund for a particular period represents the
increase (or decrease) in the value of a hypothetical investment in the ProFund
from the beginning to the end of the period. Total return is calculated by
subtracting the value of the initial investment from the ending value and
showing the difference as a percentage of the initial investment; this
calculation assumes that the initial investment is made at the current net asset
value and that all income dividends or capital gains distributions during the
period are reinvested in shares of the ProFund at net asset value. Total return
is based on historical earnings and asset value fluctuations and is not intended
to indicate future performance. No adjustments are made to reflect any income
taxes payable by shareholders on dividends and distributions paid by the
ProFund.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equal the initial amount invested to the ending redeemable value.
The aggregate return for each ProFund for the one year and since inception
periods ended December 31, 1998, were as follows:
<TABLE>
<CAPTION>
INVESTOR SHARES
RETURN
INCEPTION DATE SINCE INCEPTION 1YR. RETURN
-------------- ----------------- -----------
<S> <C> <C> <C>
Bull ProFund 12/02/97 23.07 26.57
UltraBull ProFund 11/28/97 42.34 42.95
Bear ProFund 12/31/97 -19.41 -19.46
UltraBear ProFund 12/23/97 -35.43 -38.34
UltraOTC ProFund 12/02/97 123.30 185.34
Money Market ProFund 11/17/97 4.87 4.84
UltraShort OTC ProFund 6/28/98 -67.48
<CAPTION>
SERVICE SHARES
RETURN
INCEPTION DATE SINCE INCEPTION 1YR. RETURN
-------------- ----------------- -----------
<S> <C> <C> <C>
Bull ProFund 12/02/97 22.26 25.68
UltraBull ProFund 11/28/97 40.99 41.48
Bear ProFund 12/31/97 -19.99 -20.04
UltraBear ProFund 12/23/97 -35.60 -38.45
UltraOTC ProFund 12/02/97 122.32 183.98
Money Market ProFund 11/17/97 3.41 3.81
UltraShort OTC ProFund 6/28/98 -67.50
</TABLE>
This performance data represents past performance and is not an indication
of future results. The UltraEurope ProFund had not commenced operations as of
December 31, 1998.
YIELD CALCULATIONS
From time to time, the Money Market ProFund advertises its "yield" and
"effective yield." Both yield figures are based on historical earnings and are
not intended to indicate future performance. The "yield" of the Money Market
ProFund refers to the income generated by an investment in the Money Market
ProFund over a seven-day period (which period will be stated in the
advertisement). This income is then "annualized." That is, the amount of income
generated by the investment during that week is assumed to be generated each
week over a 52-week period and is shown as a percentage of the investment. The
"effective yield" is calculated similarly, but, when annualized, the income
earned by an investment in the Money Market ProFund is assumed to be reinvested.
The "effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment.
Since yield fluctuates, yield data cannot necessarily be used to compare an
investment in the Money Market ProFund's shares with bank deposits, savings
accounts, and similar investment alternatives which often provide an agreed or
guaranteed fixed yield for a stated period of time. Shareholders of the Money
Market ProFund should remember that yield generally is a function of the kind
and quality of the instrument held in portfolio, portfolio maturity, operating
expenses, and market conditions.
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For the seven-day period ended December 31, 1998, the seven-day effective
yield for the Investor Shares and Service Shares of the Money Market ProFund was
4.86% and 3.84%, respectively.
COMPARISONS OF INVESTMENT PERFORMANCE
In conjunction with performance reports, promotional literature, and/or
analyses of shareholder service for a ProFund, comparisons of the performance
information of the ProFund for a given period to the performance of recognized,
unmanaged indexes for the same period may be made. Such indexes include, but are
not limited to, ones provided by Dow Jones & Company, Standard & Poor's
Corporation, Lipper Analytical Services, Inc., Shearson Lehman Brothers, the
National Association of Securities Dealers, Inc., The Frank Russell Company,
Value Line Investment Survey, the American Stock Exchange, the Philadelphia
Stock Exchange, Morgan Stanley Capital International, Wilshire Associates, the
Financial Times-Stock Exchange, and the Nikkei Stock Average and Deutcher
Aktienindex, all of which are unmanaged market indicators. Such comparisons can
be a useful measure of the quality of a ProFund's investment performance. In
particular, performance information for the Bull ProFund, the UltraBull ProFund,
the Bear ProFund and the UltraBear ProFund may be compared to various unmanaged
indexes, including, but not limited to, the S&P 500 Index or the Dow Jones
Industrial Average; performance information for the UltraOTC ProFund may be
compared to various unmanaged indexes, including, but not limited to its current
benchmark, the NASDAQ 100 Index(TM).
In addition, rankings, ratings, and comparisons of investment performance
and/or assessments of the quality of shareholder service appearing in
publications such as Money, Forbes, Kiplinger's Magazine, Personal Investor,
Morningstar, Inc., and similar sources which utilize information compiled (i)
internally, (ii) by Lipper Analytical Services, Inc. ("Lipper"), or (iii) by
other recognized analytical services, may be used in sales literature. The total
return of each ProFund (other than the Money Market ProFund) also may be
compared to the performances of broad groups of comparable mutual funds with
similar investment goals, as such performance is tracked and published by such
independent organizations as Lipper and CDA Investment Technologies, Inc., among
others. The Lipper ranking and comparison, which may be used by the ProFunds in
performance reports, will be drawn from the "Capital Appreciation ProFunds"
grouping for the Bull ProFund, the UltraBull ProFund, the Bear ProFund and the
UltraBear ProFund and from the "Small Company Growth ProFunds" grouping for the
UltraOTC ProFund. In addition, the broad-based Lipper groupings may be used for
comparison to any of the ProFunds.
Further information about the performance of the ProFunds will be contained
in the ProFunds' annual reports to shareholders, which may be obtained without
charge by writing to the ProFunds at the address or telephoning the ProFunds at
the telephone number set forth on the cover page of this SAI.
RATING SERVICES
The ratings of Moody's Investors Service, Inc. and Standard & Poor's
Ratings Group represent their opinions as to the quality of the securities that
they undertake to rate. It should be emphasized, however, that ratings are
relative and subjective and are not absolute standards of quality. Although
these ratings are an initial criterion for selection of portfolio investments,
Bankers Trust also makes its own evaluation of these securities, subject to
review by the Board of Trustees. After purchase by the Portfolio, an obligation
may cease to be rated or its rating may be reduced below the minimum required
for purchase by the Portfolio. Neither event would require the Portfolio to
eliminate the obligation from its portfolio, but Bankers Trust will consider
such an event in its determination of whether the Portfolio should continue to
hold the obligation. A description of the ratings used herein and in the
Prospectus is set forth in the Appendix to this SAI.
OTHER INFORMATION
The ProFunds are not sponsored, endorsed, sold or promoted by Standard &
Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P") or the NASDAQ
Stock Markets, Inc. ("NASDAQ"). S&P and NASDAQ make no representation or
warranty, express or implied, to the owners of shares of the ProFunds or any
member of the public regarding the advisability of investing in securities
generally or in the ProFunds particularly or the ability of the S&P 500 Index(R)
or the NASDAQ 100 Index(TM), respectively, to track general stock market
performance. S&P's and the NASDAQ's only relationship to the ProFunds (the
"Licensee") is the licensing of certain trademarks and
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<PAGE>
trade names of S&P and NASDAQ, respectively, and of the S&P 500 Index(R) and the
NASDAQ 100 Index(TM), respectively. S&P and NASDAQ have no obligation to take
the needs of the Licensee or owners of the shares of the ProFunds into
consideration in determining, composing or calculating the S&P 500 Index(R) and
NASDAQ 100 Index(TM), respectively. S&P and NASDAQ are not responsible for and
have not participated in the determination or calculation of the equation by
which the shares of ProFunds are to be converted into cash. S&P and NASDAQ have
no obligation or liability in connection with the administration, marketing or
trading of ProFunds.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500
INDEX(R) OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY
ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR
IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE PRODUCT, OR ANY
OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX(R) OR ANY DATA INCLUDED
THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL
WARRANTIES OF MERCHANTIBILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH
RESPECT TO THE S&P 500 INDEX(R) OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING
ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL,
PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
FINANCIAL STATEMENTS
The Report of Independent Accountants and Financial Statements of the
ProFunds for the fiscal year ended December 31, 1998 are incorporated herein by
reference to the Trust's Annual Report, such Financial Statements having been
audited by PricewaterhouseCoopers LLP, independent accountants, and are so
included and incorporated by reference in reliance upon the report of said firm,
which report is given upon their authority as experts in auditing and
accounting. Copies of such Annual Report are available without charge upon
request by writing to ProFunds, 3435 Stelzer Road, Columbus, Ohio 43219-8006 or
telephoning (888) 776-3637.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS, OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
PRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY PROFUNDS.
THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE AN OFFERING BY
PROFUNDS IN ANY JURISDICTION IN WHICH SUCH AN OFFERING MAY NOT LAWFULLY BE MADE.
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APPENDIX
DESCRIPTION OF SECURITIES RATINGS
DESCRIPTION OF S&P'S CORPORATE RATINGS:
AAA-Bonds rated AAA have the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA-Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issuers only in small degree.
S&P's letter ratings may be modified by the addition of a plus or a minus
sign, which is used to show relative standing within the major categories,
except in the AAA rating category.
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS:
Aaa-Bonds which are rated Aaa are judged to be the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edge". Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa-Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
Moody's applies the numerical modifiers 1, 2 and 3 to each generic rating
classification from Aa through B. The modifier 1 indicates that the security
ranks in the higher end of its generic category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
DESCRIPTION OF FITCH INVESTORS SERVICE'S CORPORATE BOND RATINGS:
AAA-Securities of this rating are regarded as strictly high-grade, broadly
marketable, suitable for investment by trustees and fiduciary institutions, and
liable to slight market fluctuation other than through changes in the money
rate. The factor last named is of importance varying with the length of
maturity. Such securities are mainly senior issues of strong companies, and are
most numerous in the railway and public utility fields, though some industrial
obligations have this rating. The prime feature of an AAA rating is showing of
earnings several times or many times interest requirements with such stability
of applicable earnings that safety is beyond reasonable question whatever
changes occur in conditions. Other features may enter in, such as a wide margin
of protection through collateral security or direct lien on specific property as
in the case of high class equipment certificates or bonds that are first
mortgages on valuable real estate. Sinking funds or voluntary reduction of the
debt by call or purchase are often factors, while guarantee or assumption by
parties other than the original debtor may also influence the rating.
AA-Securities in this group are of safety virtually beyond question, and as
a class are readily salable while many are highly active. Their merits are not
greatly unlike those of the AAA class, but a security so rated may be of junior
though strong lien in many cases directly following an AAA security or the
margin of safety is less strikingly broad. The issue may be the obligation of a
small company, strongly secure but influenced as the ratings by the lesser
financial power of the enterprise and more local type of market.
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<PAGE>
DESCRIPTION OF DUFF & PHELPS' CORPORATE BOND RATINGS:
AAA-Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury Funds.
AA+, AA-High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
DESCRIPTION OF S&P'S MUNICIPAL BOND RATINGS:
AAA-Prime-These are obligations of the highest quality. They have the
strongest capacity for timely payment of debt service.
General Obligation Bonds-In a period of economic stress, the issuers will
suffer the smallest declines in income and will be least susceptible to
autonomous decline. Debt burden is moderate. A strong revenue structure appears
more than adequate to meet future expenditure requirements. Quality of
management appears superior.
Revenue Bonds-Debt service coverage has been, and is expected to remain,
substantial; stability of the pledged revenues is also exceptionally strong due
to the competitive position of the municipal enterprise or to the nature of the
revenues. Basic security provisions (including rate covenant, earnings test for
issuance of additional bonds and debt service reserve requirements) are
rigorous. There is evidence of superior management.
AA-High Grade-The investment characteristics of bonds in this group are
only slightly less marked than those of the prime quality issues. Bonds rated AA
have the second strongest capacity for payment of debt service.
S&P's letter ratings may be modified by the addition of a plus or a minus
sign, which is used to show relative standing within the major rating
categories, except in the AAA rating category.
DESCRIPTION OF MOODY'S MUNICIPAL BOND RATINGS:
Aaa-Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa-Bonds which are rated Aa judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities, or fluctuation of protective elements
may be of greater amplitude, or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
Moody's may apply the numerical modifier in each generic rating
classification from Aa through B. The modifier 1 indicates that the security
within its generic rating classification possesses the strongest investment
attributes.
DESCRIPTION OF S&P'S MUNICIPAL NOTE RATINGS:
Municipal notes with maturities of three years or less are usually given
note ratings (designated SP-1 or SP-2) to distinguish more clearly the credit
quality of notes as compared to bonds. Notes rated SP-1 have a very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given the designation of SP-1+.
Notes rated SP-2 have a satisfactory capacity to pay principal and interest.
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DESCRIPTION OF MOODY'S MUNICIPAL NOTE RATINGS:
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade (MIG) and for variable rate demand
obligations are designated Variable Moody's Investment Grade (VMIG). This
distinction recognizes the differences between short-term credit risk and
long-term risk. Loans bearing the designation MIG-1/VMIG-1 are of the best
quality, enjoying strong protection from established cash flows of funds for
their servicing or from established and broad-based access to the market for
refinancing, or both. Loans the designation MIG-2/VMIG-2 are of high quality,
with ample margins of protection, although not as large as the preceding group.
DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS:
Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to posses overwhelming safety characteristics are denoted A-1+.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS:
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or related supporting institutions) are
considered to have a superior capacity for repayment of short-term promissory
obligations.
DESCRIPTION OF FITCH INVESTORS SERVICE'S COMMERCIAL PAPER RATINGS:
F-1+-Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1-Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than the strongest
issue.
DESCRIPTION OF DUFF & PHELPS' COMMERCIAL PAPER RATINGS:
Duff 1+-Highest certainly of timely payment. Short term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk free U.S. Treasury short
term obligations.
Duff 1-Very high certainty of timely +.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS:
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or relating supporting institutions) are
considered to have a superior capacity for repayment of short-term promissory
obligations.
DESCRIPTION OF FITCH INVESTORS SERVICE'S COMMERCIAL PAPER RATINGS:
F-1+-Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment risk.
Capacity for timely repayment of principal and interest is substantial. Adverse
changes in business economic or financial conditions may increase investment
risk albeit not very significantly.
A-Obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is strong, although
adverse changes in business, economic or financial conditions may lead to
increased investment risk.
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BBB-Capacity for timely repayment of principal and interest is adequate,
although adverse changes in business, economic or financial conditions are more
likely to lead to increased investment risk than for obligations in higher
categories.
BB-Obligations for which there is a possibility of investment risk
developing. Capacity for timely repayment of principal and interest exists, but
is susceptible over time to adverse changes in business, economic or financial
conditions.
B-Obligations for which investment risk exists. Timely repayment of
principal and interest is not sufficiently protected against adverse changes in
business, economic or financial conditions.
CCC-Obligations for which there is a current perceived possibility of
default. Timely repayment of principal and interest is dependent on favorable
business, economic or financial conditions.
CC-Obligations which are highly speculative or which have a high risk of
default.
C-Obligations which are currently in default.
Notes: "+" or "-".
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS:
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or related supporting institutions) are
considered to have a superior capacity for repayment of short-term promissory
obligations.
DESCRIPTION OF FITCH INVESTORS SERVICE'S COMMERCIAL PAPER RATINGS:
F-1+-Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely business,
economic or financial conditions.
A3-Obligations supported by an adequate capacity for timely repayment. Such
capacity is more susceptible to adverse changes in business, economic or
financial conditions than for obligations in higher categories.
B-Obligations for which the capacity for timely repayment is susceptible to
adverse changes in business, economic or financial conditions.
C-Obligations for which there is an inadequate capacity to ensure timely
repayment.
D-Obligations which have a high risk of default or which are currently in
default.
DESCRIPTION OF THOMSON BANK WATCH SHORT-TERM RATINGS:
TBW-1-The highest category; indicates a very high likelihood that principal
and interest will be paid on a timely basis.
TBW-2-The second-highest category; while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as of issues rated 'TBW-1'.
TWB-3-The lowest investment-grade category; indicates that while the
obligation is more susceptible to adverse developments (both internal and
external) than those with higher ratings, the capacity to service principal and
interest in a timely fashion is considered adequate.
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TWB-4-The lowest rating category; this rating is regarded as non-investment
grade and therefore speculative. DESCRIPTION OF THOMSON BANKWATCH LONG-TERM
RATINGS:
AAA-The highest category; indicates that the ability to repay principal and
interest on a timely basis is extremely high.
AA-The second -highest category; indicates a very strong ability to repay
principal and interest on a timely basis, with limited incremental risk compared
to issues rated in the highs category.
A-The third-highest category; indicates the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
BBB-The lowest investment-grade category; indicates an acceptable capacity
to repay principal and interest. Issues rated "BBB" are, however, more
vulnerable to adverse developments (both internal and external) than obligations
with higher ratings.
NON-INVESTMENT GRADE (ISSUES REGARDED AS HAVING SPECULATIVE CHARACTERISTICS IN
THE LIKELIHOOD OF TIMELY REPAYMENT OF PRINCIPAL AND INTEREST.)
BB-While not investment grade, the "BB" rating suggests that the likelihood
of default is considerably less than for lower-rated issues. However, there are
significant uncertainties that could affect the ability to adequately service
debt obligations.
B-Issues rated "B" show a higher degree of uncertainty and therefore
greater likelihood of default than higher-rated issues. Adverse development
could well negatively affect the payment of interest and principal on a timely
basis.
CCC-Issues rate "CCC" clearly have a high likelihood of default, with
little capacity to address further adverse changes in financial circumstances.
CC-"CC" is applied to issues that are subordinate to other obligations
rated "CCC" and are afforded less protection in the event of bankruptcy or
reorganization.
D-Default
These long-term debt ratings can also be applied to local currency debt. In
such cases the ratings defined above will be preceded by the designation "local
currency".
A RATING IN THE LONG-TERM DEBT CATEGORIES MAY INCLUDE A PLUS (+) OR MINUS (-)
DESIGNATION, WHICH INDICATES WHERE WITHIN THE RESPECTIVE CATEGORY THE ISSUE IS
PLACED.
128416.1.03
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