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PROSPECTUS
[LOGO]
100 South Royal Street
Alexandria, Virginia 22314
1311 Mamaroneck Avenue
White Plains, New York 10605
(800) 851-0511
ADVISOR CLASS SHARES
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PLUS FUNDS SHORT FUNDS
The Potomac OTC Plus Fund The Potomac OTC/Short Fund
The Potomac Dow 30-SM- Plus Fund The Potomac Dow 30-SM-/Short Fund
The Potomac Small Cap Plus Fund The Potomac Small Cap/Short Fund
The Potomac Internet Plus Fund The Potomac Internet/Short Fund
The Potomac U.S. Plus Fund The Potomac U.S./Short Fund
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MONEY MARKET FUND
The Potomac U.S. Government
Money Market Fund
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.
November 17, 1999, as supplemented on
February 1, 2000
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TABLE OF CONTENTS
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OVERVIEW OF THE POTOMAC FUNDS............................... 2
THE POTOMAC FUNDS........................................... 3
The Potomac OTC Funds....................................... 3
The Potomac Dow 30-SM- Funds................................ 3
The Potomac Small Cap Funds................................. 4
The Potomac Internet Funds.................................. 5
The Potomac U.S. Funds...................................... 6
Investment Techniques and Policies.......................... 7
Risk Factors................................................ 8
The Potomac U.S. Government Money Market Fund............... 10
Performance of The Potomac Funds............................ 11
Fees and Expenses of Advisor Class Shares of The Potomac
Funds................................................... 12
ABOUT YOUR INVESTMENT....................................... 14
Your Account................................................ 14
Rule 12b-1 Fees............................................. 14
How to Invest in Advisor Class Shares of The Potomac
Funds................................................... 15
How to Exchange Advisor Class Shares of The Potomac Funds... 15
How to Sell Advisor Class Shares of The Potomac Funds....... 16
Prices of Advisor Class Shares of The Potomac Funds......... 16
Account and Transaction Policies............................ 17
ADDITIONAL INFORMATION...................................... 18
Management of The Potomac Funds............................. 18
Distributions and Taxes..................................... 18
Master/Feeder Structure Option.............................. 19
FINANCIAL HIGHLIGHTS........................................ 20
MORE INFORMATION ON THE POTOMAC FUNDS....................... Back Cover
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OVERVIEW OF THE POTOMAC FUNDS
This Prospectus offers the Advisor Class shares of The Potomac Funds. The
Advisor Class is made available exclusively through your investment advisor,
bank, trust company or other authorized representative (Financial Advisor).
The Potomac Funds consist primarily of pairs of funds. Each pair consists
of one "plus" fund and one "short" fund. Each "plus" fund is designed to provide
a return that is greater than the return provided by its target index when the
value of the target index rises. Unlike traditional index funds, each "plus"
fund (except for The Potomac U.S. Plus Fund) seeks to provide a return that is
equal to 125% of the return of its target index. The Potomac U.S. Plus Fund
seeks to provide a return that is equal to 150% of the return of its target
index. Each "short" fund is designed to provide investment results that are
opposite of the return of its target index.
As an example, each of The Potomac OTC Plus Fund and The Potomac OTC/Short
Fund is targeted to the Nasdaq 100 Index-TM- (Nasdaq 100 Index). If, for a given
period of time, the Nasdaq 100 Index gains 20%, the OTC Plus Fund is designed to
gain approximately 25% (which is equal to 125% of 20%), while the OTC/Short Fund
is designed to lose 20%. Conversely, if the Nasdaq 100 Index loses 10%, the
OTC/Short Fund is designed to gain 10%, while the OTC Plus Fund is designed to
lose 12.5%.
To achieve these results, The Potomac Funds use aggressive investment
techniques such as engaging in futures and options transactions. As a result,
The Potomac Funds are designed principally for experienced investors who intend
to follow an asset allocation strategy. There is no assurance that The Potomac
Funds will achieve their objectives.
The Potomac Funds also offer a money market fund which is designed to
provide stability of principal, liquidity and current income.
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THE POTOMAC FUNDS
THE POTOMAC OTC FUNDS
OBJECTIVES
THE POTOMAC OTC PLUS FUND seeks to provide investment returns that
correspond to 125% of the performance of the Nasdaq 100 Index-TM-. If it is
successful in meeting its objective, the net asset value of OTC Plus Fund shares
should increase approximately one and a quarter as much as the Nasdaq 100 Index
when the aggregate prices of the securities in that index rise on a given day.
Conversely, the net asset value of shares of the OTC Plus Fund should decrease
approximately one and a quarter as much when the aggregate prices of the
securities in the Nasdaq 100 Index decline on that day.
THE POTOMAC OTC/SHORT FUND seeks to provide investment returns that
inversely correspond (opposite) to the performance of the Nasdaq 100 Index. If
it is successful in meeting its objective, the net asset value of OTC/Short Fund
shares should increase in direct proportion to any decrease in the level of the
Nasdaq 100 Index. Conversely, the net asset value of shares in the OTC/Short
Fund should decrease in direct proportion to any increase in the level of the
Nasdaq 100 Index.
CORE INVESTMENTS
In attempting to achieve their objectives, The Potomac OTC Funds primarily
invest directly in the securities of the companies that comprise the Nasdaq 100
Index. In addition, THE POTOMAC OTC PLUS FUND enters into long positions in
stock index futures contracts, options on stock index futures contracts and
options on securities and on stock indices to produce economically leveraged
investment results. THE POTOMAC OTC/SHORT FUND also enters into short positions
in the securities of the companies that comprise the Nasdaq 100 Index, stock
index futures contracts, options on stock index futures contracts and options on
securities and on stock indices. On a day-to-day basis, the Funds hold U.S.
Government securities and repurchase agreements to collateralize these futures
and options contracts.
TARGET INDEX
The NASDAQ 100 INDEX-TM- is a capitalization-weighted index composed of
100 of the largest non-financial domestic companies listed on the National
Market tier of The Nasdaq Stock Market. All companies listed on the index have a
minimum market capitalization of $500 million and an average daily trading
volume of at least 100,000 shares. The Nasdaq 100 Index was created in 1985. The
Nasdaq Stock Market is not a sponsor of, or in any way affiliated with, The
Potomac Funds.
THE POTOMAC DOW 30-SM- FUNDS
OBJECTIVES
THE POTOMAC DOW 30-SM- PLUS FUND seeks daily investment results that
correspond to 125% of the performance of the Dow Jones Industrial Average-SM-
(Dow). If it is successful in meeting its objective, the net asset value of Dow
30 Plus Fund shares should increase approximately one and a quarter as much as
the
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Dow when the aggregate prices of the securities that comprise the Dow rise on a
given day. Conversely, the net asset value of shares of the Dow 30 Plus Fund
should decrease approximately one and a quarter as much when the aggregate
prices of the securities in the Dow decline on that day.
THE POTOMAC DOW 30-SM-/SHORT FUND seeks to provide investment returns that
inversely correspond (opposite) to the performance of the Dow. If it is
successful in meeting its objective, the net asset value of the Dow 30/Short
Fund shares should increase in direct proportion to any decrease in the level of
the Dow. Conversely, the net asset value of shares in the Dow 30/Short Fund
should decrease in direct proportion to any increase in the level of the Dow.
The Potomac Dow 30 Funds' investment objectives are not fundamental
policies and may be changed by the Potomac Funds' Board of Trustees without
shareholder approval.
CORE INVESTMENTS
In attempting to achieve their objectives, The Potomac Dow 30 Funds
primarily invest directly in the securities of the companies that comprise the
Dow. In addition, THE POTOMAC DOW 30-SM- PLUS FUND enters into long positions in
stock index futures contracts, options on stock index futures contracts and
options on securities and on stock indices to produce economically leveraged
investment results. The Fund also may invest in DIAMONDS, which are
publicly-traded index securities based on the Dow. This allows the Fund to
invest in a portfolio of securities consisting of all of the component common
stocks of the Dow. THE POTOMAC DOW 30-SM-/SHORT FUND also enters into short
positions in the securities of the companies that comprise the Dow, stock index
futures contracts, options on stock index futures contracts and options on
securities and on stock indices. On a day-to-day basis, the Funds hold U.S.
Government securities and repurchase agreements to collateralize these futures
and options contracts.
TARGET INDEX
The DOW JONES INDUSTRIAL AVERAGE-SM- consists of 30 of the most widely
held and actively traded stocks listed on the U.S. stock markets. The stocks in
the Dow represent companies that typically are dominant firms in their
respective industries. Dow Jones, Dow Jones Industrial Average-SM-, DJIA-SM-,
and Dow 30-SM- are service marks of Dow Jones & Company, Inc. Dow Jones has no
relationship to The Potomac Funds, other than the licensing of those service
marks for use in connection with the Funds' materials. Dow Jones does not
sponsor, endorse, sell or promote any of The Potomac Funds.
THE POTOMAC SMALL CAP FUNDS
OBJECTIVES
THE POTOMAC SMALL CAP PLUS FUND seeks to provide investment returns that
correspond to 125% of the performance of the Russell 2000-Registered Trademark-
Index (Russell 2000 Index). If it is successful in meeting its objective, the
net asset value of Small Cap Plus Fund shares should increase approximately one
and a quarter as much as the Russell 2000 Index when the aggregate prices of the
securities in that index rise on a given day. Conversely, the net asset value of
shares of the Small Cap Plus Fund should decrease approximately one and a
quarter as much when the aggregate prices of the securities in the Russell 2000
Index decline on that day.
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THE POTOMAC SMALL CAP/SHORT FUND seeks to provide investment returns that
inversely correspond (opposite) to the performance of the Russell 2000 Index. If
it is successful in meeting its objective, the net asset value of Small
Cap/Short Fund shares should increase in direct proportion to any decrease in
the level of the Russell 2000 Index. Conversely, the net asset value of shares
in the Small Cap/Short Fund should decrease in direct proportion to any increase
in the level of the Russell 2000 Index.
The Potomac Small Cap Funds' investment objectives are not fundamental
policies and may be changed by the Potomac Funds' Board of Trustees without
shareholder approval.
CORE INVESTMENTS
In attempting to achieve their objectives, The Potomac Small Cap Funds
primarily invest directly in the securities of the companies that comprise the
Russell 2000 Index. In addition, THE POTOMAC SMALL CAP PLUS FUND enters into
long positions in stock index futures contracts, options on stock index futures
contracts and options on securities and on stock indices to produce economically
leveraged investment results. THE POTOMAC SMALL CAP/SHORT FUND also enters into
short positions in the securities of the companies that comprise the Russell
2000, stock index futures contracts, options on stock index futures contracts
and options on securities and on stock indices. On a day-to-day basis, the Funds
hold U.S. Government securities and repurchase agreements to collateralize these
futures and options contracts.
TARGET INDEX
The RUSSELL 2000-Registered Trademark- INDEX is comprised of the smallest
2000 companies in the Russell 3000 Index. As of May 31, 1999, the average market
capitalization of the companies included in the Russell 2000 was approximately
$526.4 million. That compares to $4.4 billion for the Russell 3000. The smallest
2000 companies represent approximately 8% of the total market capitalization of
the Russell 3000. The Frank Russell Company is not a sponsor of, or in any way
affiliated with, The Potomac Funds.
THE POTOMAC INTERNET FUNDS
OBJECTIVES
THE POTOMAC INTERNET PLUS FUND seeks to provide investment results that
correspond to 125% of the performance of the Dow Jones Composite Internet
Index-SM- (Internet Index). If it is successful in meeting its objective, the
net asset value of Internet Plus Fund shares should increase approximately one
and a quarter as much as the Internet Index when the aggregate prices of the
securities in that index rise on a given day. Conversely, the net asset value of
shares of the Internet Plus Fund should decrease approximately one and a quarter
as much when aggregate prices of the securities in the Internet Index decline on
that day.
THE POTOMAC INTERNET/SHORT FUND seeks to provide investment returns that
inversely correspond (opposite) to the performance of the Internet Index. If it
is successful in meeting its objective, the net asset value of Internet/Short
Fund shares should increase in direct proportion to any decrease in the level of
the Internet Index. Conversely, the net asset value of shares in the
Internet/Short Fund should decrease in direct proportion to any increase in the
level of the Internet Index.
The Potomac Internet Funds' investment objectives are not fundamental
policies and may be changed by The Potomac Funds' Board of Trustees without
shareholder approval.
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CORE INVESTMENTS
In attempting to achieve their objectives, The Potomac Internet Funds
primarily invest directly in the securities of the companies that comprise the
Internet Index. In addition, THE POTOMAC INTERNET PLUS FUND enters into long
positions in stock index futures contracts, options on stock index futures
contracts and options on securities and on stock indices to produce economically
leveraged investment results. THE POTOMAC INTERNET/SHORT FUND also enters into
short positions in the securities of the companies that comprise the Internet
Index, stock index futures contracts, options on stock index futures contracts
and options on securities and on stock indices. On a day-to-day basis, the Funds
hold U.S. Government securities and repurchase agreements to collateralize these
futures and options contracts.
TARGET INDEX
THE DOW JONES COMPOSITE INTERNET INDEX-SM- is a modified
capitalization-weighted index designed to track the performance of companies
that are involved in Internet related activities. The Internet Index tracks 40
e-commerce and Internet services companies that generate at least 50% of their
revenues from the Internet and have a three-month average market capitalization
of at least $100 million. Dow Jones and Dow Jones Composite Internet Index-SM-
are service marks of Dow Jones & Company, Inc. Dow Jones has no relationship to
The Potomac Funds, other than the licensing of the Internet Index for use in
connection with The Potomac Funds' materials. Dow Jones does not sponsor,
endorse, sell or promote any of The Potomac Funds.
THE POTOMAC U.S. FUNDS
OBJECTIVES
THE POTOMAC U.S. PLUS FUND seeks to provide investment returns that
correspond to 150% of the performance of the Standard & Poor's 500 Composite
Stock Price Index-TM- (S&P 500 Index). If it is successful in meeting its
objective, the net asset value of U.S. Plus Fund shares should increase
approximately one and a half as much as the S&P 500 Index when the aggregate
prices of the securities in that index rise on a given day. Conversely, the net
asset value of shares of the U.S. Plus Fund should decrease approximately one
and a half as much when the aggregate prices of the securities in the S&P 500
Index decline on that day.
THE POTOMAC U.S./SHORT FUND seeks to provide investment returns that
inversely correspond (opposite) to the performance of the S&P 500 Index. If it
is successful in meeting its objective, the net asset value of U.S./Short Fund
shares should increase in direct proportion to any decrease in the level of the
S&P 500 Index. Conversely, the net asset value of shares in the U.S./Short Fund
should decrease in direct proportion to any increase in the level of the S&P 500
Index.
CORE INVESTMENTS
Unlike traditional index funds, The Potomac U.S. Funds do not invest
directly in the securities of the companies that comprise the S&P 500 Index.
Rather, THE POTOMAC U.S. PLUS FUND invests significantly in Standard & Poor's
Depositary Receipts (SPDRs), which are publicly-traded index securities based on
the S&P 500 Index. This allows the Fund to invest in a portfolio of securities
consisting of all of the component
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common stocks of the S&P 500 Index. The Fund also enters into long positions in
stock index futures contracts, options on stock index futures contracts and
options on securities and on stock indices to produce economically leveraged
investment results. THE POTOMAC U.S./SHORT FUND enters into short positions in
SPDRs, options on stock index futures contracts and options on securities and on
stock indices. On a day-to-day basis, the Funds hold U.S. Government securities
and repurchase agreements to collateralize these futures and options contracts.
TARGET INDEX
The STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX-TM- is a
capitalization-weighted index composed of 500 common stocks. Standard & Poor's
selects the 500 stocks comprising the S&P 500 Index on the basis of market
values and industry diversification. Most of the stocks in the S&P 500 Index are
issued by the 500 largest companies, in terms of the aggregate market value of
their outstanding stock, and generally are listed on the New York Stock
Exchange. Standard & Poor's is not a sponsor of, or in any way affiliated with,
The Potomac Funds.
INVESTMENT TECHNIQUES AND POLICIES
Rafferty Asset Management, LLC (Rafferty), the investment advisor to The
Potomac Funds, uses a number of investment techniques in an effort to achieve
the stated goal for each Fund. Rafferty attempts to magnify the returns of each
Plus Fund's target index while the Short Funds are managed to provide returns
inverse (opposite) of each Short Fund's target index. Rafferty generally does
not use fundamental securities analysis to accomplish such correlation. Rather,
Rafferty primarily uses statistical and quantitative analysis to determine the
investments each Fund makes and techniques it employs. As a consequence, if a
Fund is performing as designed, the return of the target index will dictate the
return for that Fund.
Each Plus Fund invests significantly in futures contracts on stock
indexes, options on futures contracts and financial instruments such as options
on securities and stock indexes options. Rafferty uses these types of
investments to produce economically "leveraged" investment results. Leveraging
allows Rafferty to generate a return that is larger than what would be generated
on the invested capital without leverage, thus changing small market movements
into larger changes in the value of the investments of a Plus Fund.
While Rafferty attempts to minimize any "tracking error" (the statistical
measure of the difference between the investment results of a Fund and the
performance of its benchmark), certain factors will tend to cause a Fund's
investment results to vary from the stated objective. Rafferty, however, does
not expect that a Fund's total returns will vary from its objective by more than
10% over a twelve-month period.
It is the policy of each Fund to pursue its investment objective
regardless of market conditions and not to take defensive positions. A Fund will
not adopt defensive positions by investing in cash or other instruments in
anticipation of an adverse climate for its target index. However, because it may
be difficult for a Fund to achieve its' stated investment objective with a low
level of assets, Rafferty may invest the assets of The Potomac Dow 30 Funds, The
Potomac Small Cap/Short Fund and The Potomac Internet Funds in short-term U.S.
Government securities until the level of net assets is sufficient to permit
investment in the appropriate investments. As a result, those Funds may not
achieve their investment objectives during this
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period. To find out if a Fund has sufficient assets to invest to attempt to meet
its objective, you may call (888) 976-8662.
RISK FACTORS
An investment in the Funds entails risks. The Funds could lose money, or
their performance could trail that of other investment alternatives. Rafferty
cannot guarantee that any of the Funds will achieve its objective. In addition,
the Funds 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 Funds. These and other risks are described
below.
RISKS OF INVESTING IN EQUITY SECURITIES AND DERIVATIVES
The Funds may invest in publicly issued equity securities, including
common stocks, as well as instruments that attempt to track the price movement
of stock indices. Investments in common stocks and derivatives in general are
subject to market risks that may cause their prices to fluctuate over time.
Fluctuations in the value of common stocks in which the Funds invest will cause
the net asset value of the Funds to fluctuate.
RISKS OF AGGRESSIVE INVESTMENT TECHNIQUES
The Funds use investment techniques that may be considered aggressive.
Risks associated with the use of futures contracts, and options on securities,
securities indices, and 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. These
instruments may increase the volatility of the Funds and may involve a small
investment of cash relative to the magnitude of the risk assumed. Investors
should be aware that while index futures and options contracts closely correlate
with the applicable indices over long periods, shorter-term deviations occur. As
a result, a Fund's short-term performance will reflect such deviation from its
benchmark.
LEVERAGE RISK
Each Plus Fund employs leveraged investment techniques. Use of leverage
can magnify the effects of changes in the value of these Plus Funds and makes
them more volatile. The leveraged investment techniques that these Plus Funds
employ should cause investors in these Plus Funds to lose more money in adverse
environments.
INVERSE CORRELATION RISK
Each Short Fund is negatively correlated to its target index and should
lose money when its target index rises -- a result that is the opposite from
traditional equity mutual funds.
RISK OF POOR TRACKING
While Rafferty does not expect that the return of any of the Funds will
deviate adversely from their respective investment objectives by more than 10%,
several factors may affect a Fund's ability to achieve its
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target. As a consequence, there can be no guarantee that the Funds will be able
to achieve this level of correlation. A failure to achieve a high degree of
correlation may prevent a Fund from achieving its investment goal.
RISK OF TRADING HALTS
In certain circumstances, an exchange may halt trading in securities held
by a Fund. If such trading halts are instituted at the close of a trading day, a
Fund will not be able to execute purchase or sales transactions in the specific
option or futures contracts affected. In such an event, a Fund also may be
unable to accurately price its outstanding contracts. If a Fund is affected by
such a halt, it may reject investors' orders for purchases, redemptions, or
exchanges received earlier during the business day.
RISK OF EARLY CLOSING
The normal close of trading of securities listed on the Nasdaq and NYSE is
4:00 p.m. Eastern time. Unanticipated early closings may result in a Fund being
unable to sell or buy securities on that day. If an exchange closes early on a
day when one or more of the Funds needs to execute a high volume of securities
trades late in the trading day a Fund might incur substantial trading losses.
HIGH PORTFOLIO TURNOVER
Rafferty expects a significant portion of The Potomac Funds' assets to
come from professional money managers and investors who use the Funds as part of
"asset allocation" and "market timing" investment strategies. These strategies
often call for frequent trading to take advantage of anticipated changes in
market conditions. Frequent trading could increase the rate of the Funds'
portfolio turnover, forcing realization of substantial capital gains and losses
and increasing transaction expenses. In addition, while Rafferty does not expect
it, large movements of assets into and out of the Funds may negatively impact
their abilities to achieve their investment objectives or their level of
operating expenses.
RISK OF NON-DIVERSIFICATION
The Funds (except the Money Market Fund) are non-diversified, which means
that they may invest a high percentage of their assets in a limited number of
securities. Since the Funds' are non-diversified, their net asset values and
total returns may fluctuate more or fall greater in times of weaker markets than
a diversified mutual fund.
RISKS OF INVESTING IN INTERNET COMPANIES
The Potomac Internet Funds concentrate their investments in Internet
companies. In addition, the OTC Funds may invest a substantial portion of their
assets in Internet companies listed on the Nasdaq 100 Index. The market prices
of Internet-related stocks tend to exhibit a greater degree of market risk and
sharp price fluctuations than other types of investments. These stocks may fall
in- and out-of-favor with investors rapidly, which may cause sudden selling and
dramatically lower market prices. Internet stocks also may be affected adversely
by changes in technology, consumer and business purchasing patterns, government
regulation and/or obsolete products or services. In addition, a rising interest
rate environment tends to
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negatively affect Internet companies. Those Internet companies having high
market valuations may appear less attractive to investors, which may cause sharp
decreases in the companies' market prices. Further, those Internet companies
seeking to finance their expansion would have increased borrowing costs, which
may negatively impact their earnings. As a result, these factors may negatively
affect the performance of the Internet Index and the Nasdaq 100 Index.
RISKS OF INVESTING IN SMALL CAPITALIZATION COMPANIES
Investing in the securities of small capitalization companies involves
greater risks and the possibility of greater price volatility than investing in
larger capitalization and more established companies. Smaller companies may have
limited operating history, product lines, and financial resources, and the
securities of these companies may lack sufficient market liquidity. Any of these
factors may negatively impact the performance of the Russell 2000 Index.
THE POTOMAC U.S. GOVERNMENT MONEY MARKET FUND
OBJECTIVE
THE POTOMAC U.S. GOVERNMENT MONEY MARKET FUND seeks to provide security of
principal, current income and liquidity.
CORE INVESTMENTS
THE POTOMAC U.S. GOVERNMENT MONEY MARKET FUND seeks to achieve these
objectives by investing in high quality, U.S. dollar-denominated short-term
obligations that have been determined by the Trustees or by Rafferty to present
minimal credit risk. The Fund invests exclusively in obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and
repurchase agreements that are fully collateralized by such obligations.
INVESTMENT TECHNIQUES AND POLICIES
In order to maintain a stable share price, the Fund maintains an average
dollar-weighted maturity of 90 days or less. Securities purchased by the Fund
generally have remaining maturities of 397 days or less, although instruments
subject to repurchase agreements may bear longer final maturities. The average
dollar-weighted maturity of the Fund will not exceed 90 days.
RISK FACTORS
- The yield paid by the Fund is subject to changes in interest rates. As a
result, there is risk that a decline in short-term interest rates would
lower its yield and the overall return on your investment.
- Although the Fund seeks to preserve the value of your investment at $1.00
per share, it is possible to lose money by investing in the Fund.
- Your investment in the Fund is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government institution.
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PERFORMANCE OF THE POTOMAC FUNDS
The Advisor Class shares are a new class of shares offered by The Potomac
Funds. Accordingly, they do not have any performance history of their own. The
annual performance illustrated in the bar chart and tables below represents the
actual historical performance for a different class of shares not offered in
this Prospectus for the U.S. Plus Fund, U.S./Short Fund, OTC Plus Fund,
OTC/Short Fund and the U.S. Government Money Market Fund. Because the other
class had lower expenses, its performance was higher than the Advisor Class of
the Funds would have received in the same time period.
The tables below provide some indication of the risks of an investment in
these Funds by comparing the performance of the other class of shares with a
broad measure of market performance and by illustrating their highest and lowest
quarterly returns during the calendar year 1999. Because this information is
based on past performance, it's not a guarantee of future results.
[LOGO]
During the calendar year 1999, the highest and lowest return of the Funds
for a quarter during the period of the bar chart was as follows:
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FUND HIGHEST QUARTERLY RETURN (%) LOWEST QUARTERLY RETURN (%)
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OTC Plus Fund 68.51 (4th quarter) 5.06 (3rd quarter)
OTC/Short Fund -6.47 (3rd quarter) -35.73 (4th quarter)
U.S. Plus Fund 20.90 (4th quarter) -9.84 (3rd quarter)
U.S./Short Fund 7.05 (3rd quarter) -12.74 (4th quarter)
U.S. Government Money Market Fund 1.11 (4th quarter) 0.88 (1st quarter)
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The table below shows what the Funds' average annual total returns would
equal if you average out actual performance over various lengths of time.
AVERAGE ANNUAL RETURNS (for the periods ended December 31, 1999):
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FUND ONE YEAR (%) SINCE INCEPTION (%) INCEPTION DATES
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OTC Plus Fund 129.22 91.49 October 20, 1997
Nasdaq 100 Index** 101.95 74.71 October 20, 1997
OTC/Short Fund -56.81 -49.85 October 16, 1997
Nasdaq 100 Index** 101.95 73.42 October 16, 1997
U.S. Plus Fund 24.45 27.67 October 20, 1997
S&P 500 Index* 19.53 21.63 October 20, 1997
U.S./Short Fund -14.44 -19.95 November 7, 1997
S&P 500 Index* 19.53 23.95 November 7, 1997
U.S. Government Money Market
Fund 4.03 4.19 October 20, 1997
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* The S&P 500 is an unmanaged index of 500 U.S. stocks and gives a
broad look at how 500 of the largest companies in aggregate market
value have performed.
** The Nasdaq 100 is an unmanaged index composed of 100 of the largest
non-financial domestic companies with a minimum market capitalization
of $500 million and an average daily trading volume of at least
100,000 shares.
FEES AND EXPENSES OF ADVISOR CLASS SHARES OF THE POTOMAC FUNDS
The tables below describe the fees and expenses that you may pay if you
buy and hold Advisor Class shares of the Funds. The expenses below for the U.S.
Funds, OTC Funds, Small Cap Plus Fund and Money Market Fund are based on actual
expenses. For the Internet Funds, Dow 30 Funds and the Small Cap/Short Fund, the
expenses below are based on estimated expenses.
SHAREHOLDER FEES (fees paid directly from your investment)
<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a % of
offering price)........................................... None
Maximum Deferred Sales Charge (as a % of original purchase
price or sales proceeds, whichever is less)............... None
Wire Redemption Fee......................................... $12.00
</TABLE>
- ---------------------------------------------------------------
12
<PAGE>
ANNUAL OPERATING EXPENSES (expenses that are deducted from Fund assets)
<TABLE>
<CAPTION>
OTC PLUS DOW 30 PLUS+ SMALL CAP PLUS INTERNET PLUS+ U.S. PLUS
-------- ------------ -------------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Management Fees 0.75 0.75 0.75 0.75 0.75
Distribution (12b-1) Fees 1.00 1.00 1.00 1.00 1.00
Other Expenses* 0.67 0.75 0.68 0.75 0.77
---- ---- ---- ---- ----
Total Annual Operating Expenses* 2.42 2.50 2.43 2.50 2.52
Fee Waiver and/or Reimbursement* 0.00 0.00 0.00 0.00 0.02
---- ---- ---- ---- ----
Net Expenses 2.42 2.50 2.43 2.50 2.50
==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
SMALL CAP/ INTERNET/ MONEY MARKET
OTC/SHORT DOW 30/SHORT+ SHORT+ SHORT+ U.S./SHORT FUND
--------- ------------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Management Fees 0.90 0.90 0.90 0.90 0.90 0.50
Distribution (12b-1)
Fees 1.00 1.00 1.00 1.00 1.00 1.00
Other Expenses* 0.97 1.06 1.21 1.02 1.00 0.70
---- ---- ---- ---- ---- ----
Total Annual
Operating Expenses* 2.87 2.96 3.11 2.92 2.90 2.20
Fee Waiver and/or
Reimbursement* 0.22 0.31 0.46 0.27 0.25 0.20
---- ---- ---- ---- ---- ----
Net Expenses 2.65 2.65 2.65 2.65 2.65 2.00
==== ==== ==== ==== ==== ====
</TABLE>
- ------------------------
* Rafferty Asset Management, Inc. has contractually agreed to reimburse the
Advisor Class shares of the Funds for Other Expenses through August 31, 2002
to the extent that the Advisor Class' Total Annual Fund Operating Expenses
exceed 2.50% for the Plus Funds, 2.65% for the Short Funds and 2.00% for the
Money Market Fund. If overall expenses fall below these percentage
limitations, then the Funds may reimburse Rafferty within the following three
years.
+ Based on estimated Advisor Class expenses to be incurred in the first year of
operations.
EXPENSE EXAMPLE
The tables below are intended to help you compare the cost of investing in
the Advisor Class of The Potomac Funds with the cost of investing in other
mutual funds. The tables show what you would have paid if you invested $10,000
in the Advisor Class of each Fund over the periods shown and then redeemed all
your shares at the end of those periods. It also assumes that your investment
has a 5% return each year and the operating expenses remain the same through the
first year. The expenses shown for the first and third years are calculated
based on the Net Expenses shown above, taking into account any fee waivers and
expense reimbursements. For the other years, the expenses are based on Total
Annual Operating Expenses. Because the Dow Funds, the Internet Funds, and the
Small Cap/Short Fund were not operational during the
- --------------------------------------------------------------------------------
13
<PAGE>
prior fiscal year, expenses for 5 Years and 10 Years are not required to be
shown. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OTC Plus Fund.............................. $245 $755 $1,291 $2,756
OTC/Short Fund............................. $268 $823 $1,513 $3,195
Dow 30 Plus Fund........................... $253 $779 n/a n/a
Dow 30/Short Fund.......................... $268 $823 n/a n/a
Small Cap Plus Fund........................ $253 $758 $1,296 $2,766
Small Cap/Short Fund....................... $268 $823 n/a n/a
Internet Plus Fund......................... $253 $779 n/a n/a
Internet/Short Fund........................ $268 $823 n/a n/a
U.S. Plus Fund............................. $253 $779 $1,340 $2,856
U.S./Short Fund............................ $268 $823 $1,528 $3,223
U.S. Government Money Market Fund.......... $203 $627 $1,180 $2,534
</TABLE>
- --------------------------------------------------------------------------------
ABOUT YOUR INVESTMENT
YOUR ACCOUNT
You may open an account for the Advisor Class shares and conduct other
Fund transactions through your Financial Advisor. You will not pay any sales
charges but the Funds' Advisor Class shares have ongoing Rule 12b-1 fees of up
to 1.00% of their average daily net assets as discussed below. You also may be
subject to other charges assessed by your Financial Advisor.
RULE 12B-1 FEES
The Potomac Funds, on behalf of the Advisor Class, has adopted a
distribution plan under Rule 12b-1. The plan allows the Funds to pay
distribution and sales fees for the sale of the Funds' shares and for other
shareholder services. Because these fees are paid out of the Funds' Advisor
Class' assets on an on-going basis, over time these fees will increase the cost
of your investment and may cost you more than paying other types of sales
charges.
Under the plan, the fees may amount to up to 1.00% of the Advisor Class'
average daily net assets. The Potomac Funds' Board of Trustees has authorized
each Fund to pay Rule 12b-1 fees equal to 1.00% of the average daily net assets
of the Advisor Class. Under an agreement with the Funds, your Financial Advisor
may receive these fees from the Funds. In exchange, your Financial Advisor may
provide a number of services, such as:
- placing your orders and issuing confirmations,
- providing investment advice, research and other advisory services,
- handling correspondence for individual accounts,
- ---------------------------------------------------------------
14
<PAGE>
- acting as the sole shareholder of record for individual shareholders,
- issuing shareholder statements and reports and
- executing daily investment "sweep" functions.
For more specific information on these and other services, you should
speak to your Financial Advisor. Your Financial Advisor may charge additional
account fees for services beyond those specified above.
HOW TO INVEST IN ADVISOR CLASS SHARES OF THE POTOMAC FUNDS
You may invest in the Advisor Class of the Funds through traditional
investment accounts, individual retirement accounts (including Roth IRAs),
self-directed or company sponsored retirement plans or other products as
available from your Financial Advisor. Applications and descriptions of any
services fees for retirement or other accounts are available from your Financial
Advisor.
MINIMUM INVESTMENT:
The minimum initial and subsequent investments set forth below may be
invested in as many of The Potomac Funds as you wish. However, you must invest
at least $1,000 in any one of the Funds. For example, if you decide to invest
$10,000 in three of the Funds, you may allocate your minimum initial investment
as $8,000, $1,000 and $1,000.
<TABLE>
<CAPTION>
MINIMUM INITIAL INVESTMENT SUBSEQUENT INVESTMENT
-------------------------- ---------------------
<S> <C> <C>
Regular Accounts $10,000 $1,000
Retirement Accounts $10,000 $ 0
</TABLE>
TO PURCHASE ADVISOR CLASS SHARES:
- Contact your Financial Advisor.
- Your Financial Advisor will help you complete the necessary paperwork,
mail your Account Application to The Potomac Funds and place your order to
purchase shares of the Advisor Class shares of the Funds.
- Cash, credit cards, credit card checks and third-party checks will not be
accepted by the Funds.
- All purchases must be made in U.S. dollars through a U.S. bank.
- If your check does not clear due to insufficient funds, you will be
charged a $25.00 fee.
HOW TO EXCHANGE ADVISOR CLASS SHARES OF THE POTOMAC FUNDS
You may exchange Advisor Class shares of your current Fund(s) for Advisor
Class shares of the same class of any other Fund without any charges. To make an
exchange:
- Contact your Financial Advisor.
- Provide your name, account number, which Funds are involved, and the
number, percentage or dollar value of shares to be exchanged.
- --------------------------------------------------------------------------------
15
<PAGE>
- The Funds can only honor exchanges between accounts registered in the same
name and having the same address and taxpayer identification number.
- You must exchange at least a $1,000 or, if your account value is less than
that, your entire account balance will be exchanged.
HOW TO SELL ADVISOR CLASS SHARES OF THE POTOMAC FUNDS
You may sell all or part of your investment in the Funds at the next
determined net asset value after the Funds have received your order from your
Financial Advisor.
TO SELL ADVISOR CLASS SHARES:
- Contact your Financial Advisor.
- He or she will place your order to sell Advisor Class shares of the Funds.
- Payment can be directed to your advisory account normally within three
days after your Financial Advisor places your order.
- For investments that have been made by check, payment on sales requests
may be delayed until The Potomac Funds' Transfer Agent is reasonably
satisfied that the purchase payment has been collected by the Fund, which
may require up to 10 business days.
- Your request will be processed the same day if you call between 9:00 AM
AND 3:40 P.M. Eastern time (or 1:00 p.m. for the Money Market Fund).
PRICES OF ADVISOR CLASS SHARES OF THE POTOMAC FUNDS
A Fund's share price is known as its net asset value (NAV). For all of the
Funds except the U.S. Government Money Market Fund, the Advisor Class share
prices are calculated fifteen minutes after the close of regular trading,
usually at 4:15 pm Eastern time, each day the New York Stock Exchange (NYSE) is
open for business. The U.S. Government Money Market Fund's Advisor Class share
price is calculated at 1:15 pm Eastern time each day the NYSE and Federal Bank
of New York are open. Share price is calculated by dividing a class' net assets
by its shares outstanding. The Funds use the following methods to price
securities held in their portfolios:
- equity securities, OTC securities, options and futures are valued at their
last sales price, or if not available, the average of the last bid and ask
- options on futures are valued at their closing price
- short-term debt securities and money market securities are valued using
the "amortized" cost method
- securities for which a price is unavailable will be valued at fair value
estimates by the investment advisor under the supervision of the Board of
Trustees
- ---------------------------------------------------------------
16
<PAGE>
ACCOUNT AND TRANSACTION POLICIES
ORDER POLICIES
You may buy and sell Advisor Class shares of the Funds at their NAV
computed after your order has been received in good order. Purchase and sell
orders will be processed the same day at that day's NAV if received by
3:40 p.m. Eastern Time (or 1:00 p.m. for the Money Market Fund). The Funds will
not accept and process any orders for that day received after this time.
There are certain times when you may be unable to sell Advisor
Class shares of the Funds or proceeds may be delayed. This may occur during
emergencies, unusual market conditions or when the Funds cannot determine the
value of its assets or sell its holdings. The Funds reserve the right to reject
any purchase order or suspend offering of their shares.
TELEPHONE TRANSACTIONS
For your protection, the Funds may require some form of personal
identification prior to accepting your telephone request such as verification of
your social security number, account number or other information. We also may
record the conversation for accuracy. During times of unusually high market
activity or extreme market changes, you should be aware that it may be difficult
to place your request in a timely manner.
SIGNATURE GUARANTEES
In certain instances when you sell Advisor Class shares of the Funds, we
will need your signature guaranteed. Signatures guarantees may be available at
your bank, stockbroker or a national securities exchange. Your signature must be
guaranteed under the following circumstances:
- if your account registration or address has changed in the last 30 days
- if the proceeds of your sale are mailed to an address other than the one
listed with the Funds
- if the proceeds are payable to a third party
- if the sale is greater than $100,000
- if the wire instructions on the account are being changed
- if there are other unusual situations as determined by the Funds' Transfer
Agent
LOW BALANCE ACCOUNTS
If your total account balance falls below $10,000, then we may sell your
Advisor Class shares of the Funds. We will inform you in writing 30 days prior
to selling your Advisor Class shares. If you do not bring your total account
balance up to $10,000 within 30 days, we may sell your Advisor Class shares and
send you the proceeds. We will not sell your Advisor Class shares if your
account value falls due to market fluctuations.
MONEY MARKET FUND CHECKING POLICIES
You may write checks against your Money Market Fund account if you request
and complete a signature card. With these checks, you may sell Advisor
Class shares of the Fund simply by writing a check for at least $500. You may
not write a check to close your account. If you place a stop payment order on a
check, we will charge you $25.
- --------------------------------------------------------------------------------
17
<PAGE>
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
MANAGEMENT OF THE POTOMAC FUNDS
INVESTMENT ADVISOR
Rafferty Asset Management, LLC (Rafferty) provides investment services to
the Funds. Rafferty attempts to manage the investment of the Funds' assets
consistent with their investment objectives, policies and limitations. Rafferty
has been managing mutual funds since June 1997 and has approximately $300
million assets under management as of October 1999. Rafferty is located at 1311
Mamaroneck Avenue, White Plains, New York 10605.
Under an investment advisory agreement between The Potomac Funds and
Rafferty, the Funds pay Rafferty the following fees at an annualized rate based
on a percentage of the Funds' daily net assets. The fees charged and the
contractual fees are the same.
<TABLE>
<CAPTION>
ADVISORY FEES CHARGED
---------------------
<S> <C>
Plus Funds 0.75
Short Funds 0.90
U.S. Government Money Market Fund 0.50
</TABLE>
PORTFOLIO MANAGEMENT
An investment committee of Rafferty employees has the day-to-day
responsibility for managing the Potomac Funds.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
Each Fund, except the Money Market Fund, distributes dividends from net
investment income annually. The Money Market Fund usually distributes dividends
from its net investment income monthly. Net investment income generally consists
of interest income and dividends received on investments, less expenses.
Each Fund, except the Money Market Fund, also distributes any realized net
capital gains annually. A Fund has capital gains when it sells its portfolio
assets for a profit. The tax consequences will vary depending on how long a Fund
has held the asset. Distributions of net gains on the sale of an asset held for
one year or less are taxed as ordinary income. Sales of assets held longer than
one year (long-term capital gains) are taxed at lower capital gains rates.
Dividends and net capital gains will be reinvested automatically at NAV
unless you request otherwise in writing. Normally, distributions are taxable
events for shareholders whether or not the distributions are received in cash or
reinvested.
- ---------------------------------------------------------------
18
<PAGE>
TAXES
The following table illustrates the potential tax liabilities for taxable
accounts:
<TABLE>
<CAPTION>
TYPE OF TRANSACTION TAX STATUS*
- ------------------------------------------ ------------------------------------------
<S> <C>
Dividends Ordinary income rate
Short-term capital gains Ordinary income rate
Long-term capital gains Long-term capital gains rate
Sale or exchange of Fund shares owned for Long-term capital gains or losses (capital
more than one year gains rate)
Sale or exchange of Fund shares owned for Gains are taxed at the same rate as
less than one year ordinary income; losses are subject to
special rules
</TABLE>
- ------------------------
* Tax consequences for tax-deferred retirement accounts or non-taxable
shareholders may be different. You should consult your tax specialist for more
information about your personal situation.
If you are a non-retirement account holder, then each year, we will send
you a Form 1099 that tells you the amount of Fund distributions you received for
the prior calendar year, the tax status of these distributions and a list of
reportable sale transactions. Normally, distributions are taxable in the year
you receive them. However, any distributions declared in the last three months
of the year and paid in January of the following year generally are taxable as
if received on December 31 of the year they are declared.
If you are a non-corporate shareholder and do not provide the Funds with
your correct taxpayer identification number (normally your social security
number), the Funds are required to withhold 31% of all dividends, other
distributions and sale proceeds payable to you. If you are otherwise subject to
backup withholding, we also are required to withhold and pay to the IRS 31% of
your distributions. Any tax withheld may be applied against your tax liability
when you file your tax return. You may be subject to a $50 fee for any penalties
imposed on the Funds by the IRS.
MASTER/FEEDER STRUCTURE OPTION
The Funds may in the future operate under a master/feeder structure. This
means that each Fund would be a "feeder" fund that attempts to meet its
objective by investing all its investable assets in a "master" fund with the
same investment objective. The "master" fund would purchase securities for
investment. It is expected that any such investment company would be managed by
Rafferty in substantially the same manner as the Funds. If permitted by law at
that time, the Board of Trustees may approve the implementation of such a
structure for the Funds without seeking shareholder approval. However, the
Trustees' decision will be made only if the investments in the master funds are
in the best interests of the Funds and their shareholders. In making that
determination, the Trustees will consider, among other things, the benefits to
shareholders and/or the opportunity to reduce costs and achieve operational
efficiencies. You also will receive 30 days notice prior to the implementation
of the master/feeder structure.
- --------------------------------------------------------------------------------
19
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights tables are intended to help you understand each
Fund's financial performance since the Funds' commenced operation. The
information in the tables has been audited by PricewaterhouseCoopers LLP, the
Funds' independent accountants. Certain information reflects financial results
for a single Fund share. The total returns in the table represent the rate that
an investor would have earned (or lost) on an investment in the Fund (assuming
reinvestment of all dividends and distributions). Financial highlights are not
available for The Potomac Small Cap/Short Fund, The Potomac Dow 30 Funds and The
Potomac Internet Funds because they have not commenced active operations. More
information about the Funds may be found in their Annual and Semi-Annual
Reports, which you may obtain upon request.
<TABLE>
<CAPTION>
For a fund share outstanding throughout the period
U.S. PLUS FUND U.S./SHORT FUND(6)
POTOMAC FUNDS -------------------------------------------- --------------------------------------------
YEAR ENDED OCTOBER 20, 1997(1) YEAR ENDED NOVEMBER 7, 1997(1)
AUGUST 31, 1999 TO AUGUST 31, 1998 AUGUST 31, 1999 TO AUGUST 31, 1998
------------------ -------------------- ------------------ --------------------
<S> <C> <C> <C> <C>
PER SHARE DATA:
NET ASSET VALUE, BEGINNING OF
PERIOD..................... $ 9.76 $ 10.00 $ 47.30 $ 50.00
----------- -------- ---------- ----------
INCOME (LOSS) FROM INVESTMENT
OPERATIONS:
Net investment income
(loss)(4).................. 0.31 0.36 1.05 1.15
Net realized and unrealized
gain (loss) on
investments(7)............. 4.59 (0.58) (13.91) (3.85)
----------- -------- ---------- ----------
Total from investment
operations............. 4.90 (0.22) (12.86) (2.70)
----------- -------- ---------- ----------
LESS DISTRIBUTIONS:
Dividends from net investment
income..................... -- (0.02) -- --
Distributions from realized
gains...................... (0.10) -- (0.05) --
----------- -------- ---------- ----------
Total distributions...... (0.10) (0.02) (0.05) --
----------- -------- ---------- ----------
NET ASSET VALUE, END OF
PERIOD..................... $ 14.56 $ 9.76 $ 34.39 $ 47.30
=========== ======== ========== ==========
TOTAL RETURN................. 50.38% (2.23%)(2) (26.77%) (5.40%)(2)
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period.... $16,472,869 $466,997 $4,392,851 $7,768,652
Ratio of net expenses to
average net assets:
Before expense
reimbursement............ 1.52% 2.52%(3) 1.90% 5.29%(3)
After expense
reimbursement............ 1.50% 1.50%(3) 1.64% 1.57%(3)
Ratio of net investment
income (loss) to average
net assets:
Before expense
reimbursement............ 2.32% 2.68%(3) 2.23% (0.46%)(3)
After expense
reimbursement............ 2.34% 3.70%(3) 2.49% 3.26%(3)
Portfolio turnover rate(5)... 0.00% 0.00% 0.00% 0.00%
</TABLE>
(1)COMMENCEMENT OF OPERATIONS.
(2)NOT ANNUALIZED.
(3)ANNUALIZED.
(4)NET INVESTMENT INCOME (LOSS) PER SHARE REPRESENTS NET INVESTMENT INCOME
(LOSS) DIVIDED BY THE DAILY AVERAGE SHARES OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH PERIOD.
(5)PORTFOLIO TURNOVER RATIO IS CALCULATED WITHOUT REGARD TO SHORT-TERM
SECURITIES HAVING A MATURITY OF LESS THAN ONE YEAR. INVESTMENTS IN OPTIONS,
FUTURES CONTRACTS AND REPURCHASE AGREEMENTS ARE DEEMED SHORT-TERM SECURITIES.
(6)THE PER SHARE DATA REFLECTS A REVERSE STOCK SPLIT WHEREBY SHAREHOLDERS
RECEIVED 1 SHARE FOR EACH 5 SHARES HELD. THIS REVERSE SPLIT OCCURRED ON JUNE 7,
1999.
(7)THE AMOUNTS SHOWN MAY NOT CORRELATE WITH AGGREGATE GAINS AND LOSSES OF
PORTFOLIO SECURITIES DUE TO THE TIMING OF SUBSCRIPTIONS AND REDEMPTIONS OF FUND
SHARES.
20
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights tables are intended to help you understand each
Fund's financial performance since the Funds' commenced operation. The
information in the tables has been audited by PricewaterhouseCoopers LLP, the
Funds' independent accountants. Certain information reflects financial results
for a single Fund share. The total returns in the table represent the rate that
an investor would have earned (or lost) on an investment in the Fund (assuming
reinvestment of all dividends and distributions). Financial highlights are not
available for The Potomac Small Cap/Short Fund, The Potomac Dow 30 Funds and The
Potomac Internet Funds because they have not commenced active operations. More
information about the Funds may be found in their Annual and Semi-Annual
Reports, which you may obtain upon request.
<TABLE>
<CAPTION>
For a fund share outstanding throughout the period
OTC PLUS FUND OTC/SHORT FUND(9)
POTOMAC FUNDS -------------------------------------------- --------------------------------------------
YEAR ENDED OCTOBER 20, 1997(1) YEAR ENDED OCTOBER 16, 1997(1)
AUGUST 31, 1999 TO AUGUST 31, 1998 AUGUST 31, 1999 TO AUGUST 31, 1998
------------------ -------------------- ------------------ --------------------
<S> <C> <C> <C> <C>
PER SHARE DATA:
NET ASSET VALUE, BEGINNING OF
PERIOD..................... $ 10.41 $ 10.00 $ 41.90 $ 50.00
----------- ---------- ----------- -----------
INCOME (LOSS) FROM INVESTMENT
OPERATIONS:
Net investment income
(loss)(4).................. (0.23) (0.11) 0.398 0.458
Net realized and unrealized
gain (loss) on
investments(10)............ 14.48 0.52 (25.22) (8.55)
----------- ---------- ----------- -----------
Total from investment
operations............. 14.25 0.41 (24.83) (8.10)
----------- ---------- ----------- -----------
LESS DISTRIBUTIONS:
Dividends from net investment
income..................... -- -- -- --
Distributions from realized
gains...................... (0.06) -- (0.01) --
----------- ---------- ----------- -----------
Total distributions...... (0.06) -- (0.01) --
----------- ---------- ----------- -----------
NET ASSET VALUE, END OF
PERIOD..................... $ 24.60 $ 10.41 $ 17.06 $ 41.90
=========== ========== =========== ===========
TOTAL RETURN................. 137.18% 4.10%(2) (59.25%) (16.20%)(2)
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period.... $76,682,387 $7,680,546 $10,863,451 $19,168,538
Ratio of net expenses to
average net assets:
Before expense
reimbursement............ 1.50% 3.21%(3) 1.87% 3.70%(3)
After expense
reimbursement............ 1.50% 1.50%(3) 1.65%(6) 1.64%(3,6)
Ratio of net investment
income (loss) to average
net assets:
Before expense
reimbursement............ (1.16%) (2.84%)(3) 1.47% (0.74%)(3)
After expense
reimbursement............ (1.16%) (1.13%)(3) 1.69%(7) 1.32%(3,7)
Portfolio turnover rate(5)... 1,000.39% 2,324.63% 3,048.52% 3,346.25%
</TABLE>
(1)COMMENCEMENT OF OPERATIONS.
(2)NOT ANNUALIZED.
(3)ANNUALIZED.
(4)NET INVESTMENT INCOME (LOSS) PER SHARE REPRESENTS NET INVESTMENT INCOME
(LOSS) DIVIDED BY THE DAILY AVERAGE SHARES OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH PERIOD.
(5)PORTFOLIO TURNOVER RATIO IS CALCULATED WITHOUT REGARD TO SHORT-TERM
SECURITIES HAVING A MATURITY OF LESS THAN ONE YEAR. INVESTMENTS IN OPTIONS,
FUTURES CONTRACTS AND REPURCHASE AGREEMENTS ARE DEEMED SHORT-TERM SECURITIES.
(6)THE OPERATING EXPENSE RATIO EXCLUDED DIVIDENDS ON SHORT POSITIONS. THE RATIO
INCLUDING DIVIDENDS ON SHORT POSITIONS FOR THE YEAR ENDED AUGUST 31, 1999 AND
THE PERIOD ENDED AUGUST 31, 1998 WAS 1.74% AND 1.78%, RESPECTIVELY.
(7)THE NET INVESTMENT INCOME RATIO INCLUDED DIVIDENDS ON SHORT POSITIONS. THE
RATIO EXCLUDING DIVIDENDS ON SHORT POSITIONS FOR THE YEAR ENDED AUGUST 31, 1999
AND THE PERIOD ENDED AUGUST 31, 1998 WAS 1.78% AND 1.46%, RESPECTIVELY.
(8)NET INVESTMENT INCOME BEFORE DIVIDENDS ON SHORT POSITIONS FOR THE YEAR ENDED
AUGUST 31, 1999 AND THE PERIOD ENDED AUGUST 31, 1998 WAS $0.41 AND $0.50,
RESPECTIVELY.
(9)THE PER SHARE DATA REFLECTS A REVERSE STOCK SPLIT WHEREBY SHAREHOLDERS
RECEIVED 1 SHARE FOR EACH 5 SHARES HELD. THIS REVERSE SPLIT OCCURRED ON JUNE 7,
1999.
(10)THE AMOUNTS SHOWN MAY NOT CORRELATE WITH AGGREGATE GAINS AND LOSSES OF
PORTFOLIO SECURITIES DUE TO THE TIMING OF SUBSCRIPTIONS AND REDEMPTIONS OF FUND
SHARES.
21
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights tables are intended to help you understand each
Fund's financial performance since the Funds' commenced operation. The
information in the tables has been audited by PricewaterhouseCoopers LLP, the
Funds' independent accountants. Certain information reflects financial results
for a single Fund share. The total returns in the table represent the rate that
an investor would have earned (or lost) on an investment in the Fund (assuming
reinvestment of all dividends and distributions). Financial highlights are not
available for The Potomac Small Cap/Short Fund, The Potomac Dow 30 Funds and The
Potomac Internet Funds because they have not commenced active operations. More
information about the Funds may be found in their Annual and Semi-Annual
Reports, which you may obtain upon request. For a fund share outstanding
throughout the period
<TABLE>
<CAPTION>
For a fund share outstanding throughout the period
SMALL CAP U.S. GOVERNMENT
PLUS FUND MONEY MARKET FUND
POTOMAC FUNDS --------------------- --------------------------------------------
FEBRUARY 22, 1999(1) YEAR ENDED OCTOBER 20, 1997(1)
TO AUGUST 31, 1999 AUGUST 31, 1999 TO AUGUST 31, 1998
--------------------- ------------------ --------------------
<S> <C> <C> <C>
PER SHARE DATA:
NET ASSET VALUE, BEGINNING OF PERIOD................ $ 10.00 $ 1.00 $ 1.00
---------- ----------- ----------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss)(4)..................... 0.18 0.04 0.04
Net realized and unrealized gain (loss) on
investments(6).................................... 0.92 -- --
---------- ----------- ----------
Total from investment operations................ 1.10 0.04 0.04
---------- ----------- ----------
LESS DISTRIBUTIONS:
Dividends from net investment income................ -- (0.04) (0.04)
Distributions from realized gains................... -- -- --
---------- ----------- ----------
Total distributions............................. -- (0.04) (0.04)
---------- ----------- ----------
NET ASSET VALUE, END OF PERIOD...................... $ 11.10 $ 1.00 $ 1.00
========== =========== ==========
TOTAL RETURN........................................ 11.00%(2) 3.89% 3.89%(2)
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period........................... $7,033,622 $50,222,733 $9,370,384
Ratio of net expenses to average net assets:
Before expense reimbursement...................... 1.50%(3) 1.20% 3.70%(3)
After expense reimbursement....................... 1.50%(3) 0.99% 1.00%(3)
Ratio of net investment income (loss) to average net
assets:
Before expense reimbursement...................... 3.03%(3) 3.68% 1.66%(3)
After expense reimbursement....................... 3.03%(3) 3.89% 4.36%(3)
Portfolio turnover rate(5).......................... 0.00% N/A N/A
</TABLE>
(1)COMMENCEMENT OF OPERATIONS.
(2)NOT ANNUALIZED.
(3)ANNUALIZED.
(4)NET INVESTMENT INCOME (LOSS) PER SHARE REPRESENTS NET INVESTMENT INCOME
(LOSS) DIVIDED BY THE DAILY AVERAGE SHARES OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH PERIOD.
(5)PORTFOLIO TURNOVER RATIO IS CALCULATED WITHOUT REGARD TO SHORT-TERM
SECURITIES HAVING A MATURITY OF LESS THAN ONE YEAR. INVESTMENTS IN OPTIONS,
FUTURES CONTRACTS AND REPURCHASE AGREEMENTS ARE DEEMED SHORT-TERM SECURITIES.
(6)THE AMOUNTS SHOWN MAY NOT CORRELATE WITH AGGREGATE GAINS AND LOSSES OF
PORTFOLIO SECURITIES DUE TO THE TIMING OF SUBSCRIPTIONS AND REDEMPTIONS OF FUND
SHARES.
22
<PAGE>
MORE INFORMATION ON THE POTOMAC FUNDS
STATEMENT OF ADDITIONAL INFORMATION (SAI):
The Funds' SAI contains more information on the Funds and their investment
policies. The SAI is incorporated in this Prospectus by reference (it is legally
part of this Prospectus). A current SAI is on file with the Securities and
Exchange Commission (SEC).
ANNUAL AND SEMI-ANNUAL REPORTS TO SHAREHOLDERS:
The Funds' reports provide additional information on their investment
holdings, performance data and a letter discussing the market conditions and
investment strategies that significantly affected the Funds' performance during
that period.
CALL OR WRITE TO OBTAIN THE SAI OR FUND REPORTS FREE OF CHARGE:
<TABLE>
<S> <C>
Write to: The Potomac Funds
P.O. Box 1993
Milwaukee, Wisconsin 53201-1993
Call: (800) 851-0511
</TABLE>
Copies of these documents and other information about the Funds are available
from the SEC Public Reference Room in Washington, D.C. The Public Reference
Room can be reached at (800) 732-0330 or by mailing a request, including a
duplicating fee to SEC's Public Reference Section, 450 Fifth Street NW,
Washington, D.C. 20549-6009. You also may find information on the Funds at the
SEC's Internet website at http://www.sec.gov.
Rafferty Capital Markets, Inc., Distributor
1311 Mamaroneck Avenue
White Plains, New York 10605
SEC File Number: 811-8243
PROSPECTUS
November 17, 1999, as supplemented on
February 1, 2000
[LOGO]
100 South Royal Street
Alexandria, Virginia 22319
1311 Mamaroneck Avenue
White Plains, New York 10605
(800) 851-0511
