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PROSPECTUS
THE POTOMAC FUNDS
Enhanced Investment Strategies
BROKER CLASS
100 South Royal Street
Alexandria, Virginia 22314
1311 Mamaroneck Avenue
White Plains, New York 10605
(800) 851-0511
PLUS FUNDS
The Potomac OTC Plus Fund
The Potomac Dow 30-SM- Plus Fund
The Potomac Small Cap Plus Fund
The Potomac Internet Plus Fund
The Potomac U.S. Plus Fund
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 16, 2000
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TABLE OF CONTENTS
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Page
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OVERVIEW OF THE POTOMAC FUNDS............................... 2
THE POTOMAC FUNDS........................................... 3
The Potomac OTC Plus Fund................................... 3
The Potomac Dow 30-SM- Plus Fund............................ 3
The Potomac Small Cap Plus Fund............................. 4
The Potomac Internet Plus Fund.............................. 5
The Potomac U.S. Plus Fund.................................. 6
Investment Techniques and Policies.......................... 6
Risk Factors................................................ 7
The Potomac U.S. Government Money Market Fund............... 9
Performance of The Potomac Funds............................ 10
Fees and Expenses of Broker Class Shares of The Potomac
Funds................................................... 11
ABOUT YOUR INVESTMENT....................................... 13
Your Account................................................ 13
Rule 12b-1 Fees............................................. 14
How to Invest in Broker Class Shares of The Potomac Funds... 15
How to Exchange Broker Class Shares of The Potomac Funds.... 15
How to Sell Broker Class Shares of The Potomac Funds........ 16
Prices of Broker 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........................................ 21
MORE INFORMATION ON THE POTOMAC FUNDS....................... Back Cover
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OVERVIEW OF THE POTOMAC FUNDS
This Prospectus offers the Broker Class shares of The Potomac Plus Funds.
The Broker Class is made available exclusively through a participating broker or
dealer (Broker).
Each Potomac "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.
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 PLUS FUND
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.
CORE INVESTMENTS
In attempting to achieve its objective, THE POTOMAC OTC PLUS FUND
primarily invest directly in the securities of the companies that comprise the
Nasdaq 100 Index. In addition, the 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. On a day-to-day basis, the Fund holds 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- PLUS FUND
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 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 Plus Fund's investment objective is not a fundamental
policy and may be changed by the Potomac Funds' Board of Trustees without
shareholder approval.
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CORE INVESTMENTS
In attempting to achieve its objective, THE POTOMAC DOW 30 -SM- PLUS FUND
primarily invests directly in the securities of the companies that comprise the
Dow. In addition, the Dow 30 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. On a
day-to-day basis, the Fund holds 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 PLUS FUND
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.
The Potomac Small Cap Plus Fund's investment objective is not a
fundamental policy and may be changed by the Potomac Funds' Board of Trustees
without shareholder approval.
CORE INVESTMENTS
In attempting to achieve its objective, THE POTOMAC SMALL CAP PLUS FUND
primarily invests directly in the securities of the companies that comprise the
Russell 2000 Index. In addition, the 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. On a day-to-day basis, the Fund holds U.S.
Government securities and repurchase agreements to collateralize these futures
and options contracts.
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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 PLUS FUND
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 Fund's investment objective is not a fundamental
policy and may be changed by The Potomac Funds' Board of Trustees without
shareholder approval.
CORE INVESTMENTS
In attempting to achieve their objectives, THE POTOMAC INTERNET PLUS FUND
primarily invests directly in the securities of the companies that comprise the
Internet Index. In addition, the 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. On a day-to-day basis, the Fund holds 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.
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THE POTOMAC U.S. PLUS FUND
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.
CORE INVESTMENTS
Unlike traditional index funds, THE POTOMAC U.S. PLUS FUND does not invest
directly in the securities of the companies that comprise the S&P 500 Index.
Rather, the 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 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.
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 each
of The Potomac Plus 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. 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
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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 Plus Fund
and The Potomac Internet Plus Fund 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 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.
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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.
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 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.
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RISKS OF INVESTING IN INTERNET COMPANIES
The Potomac Internet Plus Fund concentrates its investments in Internet
companies. In addition, the The Potomac OTC Plus Fund 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 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.
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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.
PERFORMANCE OF THE POTOMAC FUNDS
The Broker 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 the Funds' Investor Class of shares not
offered in this Prospectus for the U.S. Plus Fund, OTC Plus Fund, and the U.S.
Government Money Market Fund. Because the Investor Class had lower expenses, its
performance was higher than the Broker 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 Investor Class of shares with a
broad measure of market performance and by illustrating their highest and lowest
quarterly returns since their inception. Because this information is based on
past performance, it's not a guarantee of future results.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
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1998 1999
<S> <C> <C>
U.S. Plus Fund 34.60% 24.45%
OTC Plus Fund 104.22% 129.22%
Government Money Market Fund 4.33% 4.03%
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Since their inception, the highest and lowest return of the Investor Class
of the Funds for a quarter during the period of the bar chart was as follows:
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<CAPTION>
FUND HIGHEST QUARTERLY RETURN (%) LOWEST QUARTERLY RETURN (%)
- --------------------------- ------------------------------------------- --------------------------------------------
<S> <C> <C>
OTC Plus Fund 68.51 (4th quarter of 1999) 0.08 (3rd quarter of 1998)
U.S. Plus Fund 31.88 (4th quarter of 1998) -17.38 (3rd quarter of 1998)
U.S. Government Money
Market Fund 1.11 (4th quarter of 1999) 0.88 (1st quarter of 1998)
</TABLE>
The table below shows what the Funds' Investor Class 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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<CAPTION>
FUND ONE YEAR (%) SINCE INCEPTION (%)+
- ---------------------------------------------- ------------ --------------------
<S> <C> <C>
OTC Plus Fund 129.22 91.49
Nasdaq 100 Index* 101.95 74.71
U.S. Plus Fund 24.45 27.67
S&P 500 Index** 19.53 21.63
U.S. Government Money Market Fund 4.03 4.19
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+ The Investor Class of each Fund commenced operations on October 20,
1997.
* 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.
** 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.
FEES AND EXPENSES OF BROKER CLASS SHARES OF THE POTOMAC FUNDS
The tables below describe the fees and expenses that you may pay if you
buy and hold Broker Class shares of the Funds. The expenses below for the U.S.
Plus Fund, OTC Plus Fund, Small Cap Plus Fund and Money Market Fund are based on
actual expenses. For the Internet Plus Fund and the Dow 30 Plus Fund, the
expenses below are based on estimated expenses.
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SHAREHOLDER FEES (fees paid directly from your investment)
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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)............... 5.00%*
Wire Redemption Fee......................................... $12.00
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* Declining over a six-year period as follows: 5% during the first
year, 4% during the second year, 3% during the third and fourth
years, 2% during the fifth year, 1% during the sixth year and 0%
thereafter. Broker Class shares will convert to Investor
Class shares approximately eight years after purchase.
ANNUAL OPERATING EXPENSES (expenses that are deducted from Fund assets)
<TABLE>
<CAPTION>
MONEY MARKET
OTC PLUS DOW 30 PLUS+ SMALL CAP PLUS INTERNET PLUS+ U.S. PLUS FUND
-------- ------------ -------------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Management Fees 0.75 0.75 0.75 0.75 0.75 0.50
Distribution (12b-1)
Fees 1.00 1.00 1.00 1.00 1.00 1.00
Other Expenses* 0.67 0.75 0.68 0.75 0.77 0.70
---- ---- ---- ---- ---- ----
Total Annual
Operating Expenses* 2.42 2.50 2.43 2.50 2.52 2.20
Fee Waiver and/or
Reimbursement* 0.00 0.00 0.00 0.00 0.02 0.20
---- ---- ---- ---- ---- ----
Net Expenses 2.42 2.50 2.43 2.50 2.50 2.00
==== ==== ==== ==== ==== ====
</TABLE>
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* Rafferty Asset Management, LLC has contractually agreed to reimburse the
Broker Class shares of the Funds for Other Expenses through August 31, 2002 to
the extent that the Broker Class' Total Annual Fund Operating Expenses exceed
2.50% for the Plus 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 Broker 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 Broker 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
Broker 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 Plus Fund and the Internet Plus Fund were
not operational during the prior fiscal year,
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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:
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<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OTC Plus
Assuming redemption at end of period..... $758 $1,061 $1,518 $2,756
Assuming no redemption................... $245 $ 755 $1,291 $2,756
Dow 30 Plus
Assuming redemption at end of period..... $766 $1,083 n/a n/a
Assuming no redemption................... $253 $ 779 n/a n/a
Small Cap Plus
Assuming redemption at end of period..... $759 $1,064 $1,523 $2,766
Assuming no redemption................... $246 $ 758 $1,296 $2,766
Internet Plus
Assuming redemption at end of period..... $766 $1,083 n/a n/a
Assuming no redemption................... $253 $ 779 n/a n/a
U.S. Plus
Assuming redemption at end of period..... $766 $1,083 $1,567 $2,856
Assuming no redemption................... $253 $ 779 $1,340 $2,856
U.S. Government Money Market
Assuming redemption at end of period..... $718 $ 939 $1,409 $2,534
Assuming no redemption................... $203 $ 627 $1,180 $2,534
</TABLE>
- --------------------------------------------------------------------------------
ABOUT YOUR INVESTMENT
YOUR ACCOUNT
You may open an account for the Broker Class shares and conduct other Fund
transactions through a participating Broker. You will not pay any sales charges
at the time you invest but your investment is subject to a contingent deferred
sales charge (CDSC). This means that if you sell shares of a Fund within 6 years
of purchase, you may have to pay a sales charge of up to 5% on the value of the
shares to be sold. However, you will not be charged a CDSC when you exchange
Broker Class shares of one Fund for another. The Funds' Broker Class shares also
have ongoing Rule 12b-1 fees of up to 1.00% of their average daily net assets as
discussed below.
The table below lists the different CDSCs that apply if you sell Broker
Class shares within 6 years of purchase. The CDSC is calculated by multiplying
your original purchase cost or the current market value, whichever is less by
one of the percentages listed in the table. The longer you hold your shares, the
less of a CDSC you would pay. You may sell shares after 6 years with no CDSC.
- --------------------------------------------------------------------------------
13
<PAGE>
BROKER CLASS DEFERRED SALES CHARGES
<TABLE>
<CAPTION>
SALES DURING: CDSC ON SHARES BEING SOLD:
- ------------- --------------------------
<S> <C>
1st year............... 5%
2nd year............... 4%
3rd year............... 3%
4th year............... 3%
5th year............... 2%
6th year............... 1%
After 6 years.......... None
</TABLE>
If you buy Broker Class shares through certain designated Brokers with
proceeds from the redemption of another mutual fund for which you paid a CDSC
(other than a Potomac mutual fund), those Brokers will reimburse to you all or a
designated portion the CDSC. Please contact the Distributor to obtain a list of
those designated Brokers.
WAIVER OF CDSC:
The CDSC for Broker Class shares currently is waived if the shares are
sold:
- to make certain distributions from retirement plans,
- due to shareholder death or disability (including shareholders who own
shares in joint tenancy with a spouse), or
- to close shareholder accounts that do not comply with the low balance
account requirements.
CONVERSION OF BROKER CLASS SHARES:
If you hold your Broker Class shares for 8 years, we automatically will
convert them to Investor Class shares at no cost. In addition, we will convert
any Broker Class shares purchased with reinvested dividends or distributions.
At the time of the conversion, you will receive Investor Class shares in
an amount equal to the value of your Broker Class shares. Because both classes
have different prices, you may receive more or less Investor Class shares after
the conversion. However, the dollar amount converted will not change so that you
have not lost any money due to the conversion.
RULE 12b-1 FEES
The Potomac Funds, on behalf of the Broker 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' Broker
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.
- ---------------------------------------------------------------
14
<PAGE>
Under the plan, the annual fees may amount to up to 1.00% of the Broker
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 Broker Class.
HOW TO INVEST IN BROKER CLASS SHARES OF THE POTOMAC FUNDS
You may invest in the Broker 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 Broker. Applications and descriptions of any services fees
for retirement or other accounts are available from your Broker.
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 BROKER CLASS SHARES:
- Contact your Broker.
- Your Broker will help you complete the necessary paperwork, mail your
Account Application to The Potomac Funds and place your order to purchase
shares of the Broker 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 BROKER CLASS SHARES OF THE POTOMAC FUNDS
You may exchange Broker Class shares of your current Fund(s) for Broker
Class shares of the same class of any other Fund without any charges. To make an
exchange:
- Contact your Broker.
- 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 BROKER 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
Broker.
TO SELL BROKER CLASS SHARES:
- Contact your Broker.
- He or she will place your order to sell Broker Class shares of the Funds.
- Payment can be directed to your advisory account normally within three
days after your Broker 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 A.M.
AND 3:40 P.M. Eastern time (or 1:00 p.m. for the Money Market Fund).
PRICES OF BROKER 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 as of fifteen minutes after the close of regular trading,
usually at 4:15 p.m. 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 as of 1:15 p.m. Eastern time each day the NYSE
and Federal Bank of New York are open. Share price is calculated by dividing the
Broker 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
prices
- 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 Broker 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 Broker
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 Broker 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
Broker Class shares of the Funds. We will inform you in writing 30 days prior to
selling your Broker Class shares. If you do not bring your total account balance
up to $10,000 within 30 days, we may sell your Broker Class shares and send you
the proceeds. We will not sell your Broker Class shares if your account value
falls due to market fluctuations.
- --------------------------------------------------------------------------------
17
<PAGE>
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 Broker
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.
- --------------------------------------------------------------------------------
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 $445
million assets under management as of January 31, 2000. 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
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.
- ---------------------------------------------------------------
18
<PAGE>
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.
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
- --------------------------------------------------------------------------------
19
<PAGE>
"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.
- ---------------------------------------------------------------
20
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights tables are intended to help you understand the
financial performance of the Funds' Investor Class shares 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 Investor Class share. The
total returns in the table represent the rate that an investor would have earned
(or lost) on an investment in the Investor Class (assuming reinvestment of all
dividends and distributions). Financial highlights are not available for The
Potomac Dow 30 Plus Fund and The Potomac Internet Plus Fund because they have
not completed their first semi-annual period. More information about the
Investor Class shares may be found in their Annual and Semi-Annual Reports,
which you may obtain upon request.
<TABLE>
<CAPTION>
For an Investor Class share outstanding throughout the period
U.S. PLUS FUND OTC PLUS FUND(6)
POTOMAC FUNDS - INVESTOR CLASS -------------------------------------------- --------------------------------------------
YEAR ENDED OCTOBER 20, 1997(1) YEAR ENDED OCTOBER 20, 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 $ 10.41 $ 10.00
----------- -------- ----------- ----------
INCOME (LOSS) FROM INVESTMENT
OPERATIONS:
Net investment income
(loss)(4)................... 0.31 0.36 (0.23) (0.11)
Net realized and unrealized
gain (loss) on
investments(6).............. 4.59 (0.58) 14.48 (0.52)
----------- -------- ----------- ----------
Total from investment
operations.............. 4.90 (0.22) 14.25 (0.41)
----------- -------- ----------- ----------
LESS DISTRIBUTIONS:
Dividends from net investment
income...................... -- (0.02) -- --
Distributions from realized
gains (0.10) -- (0.06) --
----------- -------- ----------- ----------
Total distributions (0.10) (0.02) (0.06) --
----------- -------- ----------- ----------
Net Asset Value, End of
Period...................... $ 14.56 $ 9.76 $ 24.60 $ 10.41
=========== ======== =========== ==========
TOTAL RETURN.................. 50.38% (2.23%)(2) 137.18% (4.10%)(2)
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period..... $16,472,869 $466,997 $76,682,387 $7,680,546
Ratio of net expenses to
average net assets:
Before expense
reimbursement............. 1.52% 2.52%(3) 1.50% 3.21%(3)
After expense
reimbursement............. 1.50% 1.50%(3) 1.50% 1.50%(3)
Ratio of net investment income
(loss) to average net
assets:
Before expense
reimbursement............. 2.32% 2.68%(3) 1.16% (2.84%)(3)
After expense
reimbursement............. 2.34% 3.70%(3) 1.16% (1.13%)(3)
Portfolio turnover rate(5).... 0.00% 0.00% 1,000.39% 2,324.63%
</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.
21
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights tables are intended to help you understand the
financial performance of the Funds' Investor Class shares 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 Investor Class share. The
total returns in the table represent the rate that an investor would have earned
(or lost) on an investment in the Investor Class (assuming reinvestment of all
dividends and distributions). Financial highlights are not available for The
Potomac Dow 30 Plus Fund and The Potomac Internet Plus Fund because they have
not completed their first semi-annual period. More information about the
Investor Class shares may be found in their Annual and Semi-Annual Reports,
which you may obtain upon request.
<TABLE>
<CAPTION>
For an Investor Class share outstanding throughout the period
SMALL CAP U.S. GOVERNMENT
PLUS FUND MONEY MARKET FUND
POTOMAC FUNDS - INVESTOR CLASS --------------------- --------------------------------------------
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
THE POTOMAC FUNDS
Enhanced Investment Strategies
BROKER CLASS
November 17, 1999, as supplemented on
February 16, 2000
