N-CSRS 1 c97863nvcsrs.txt SEMIANNUAL CERTIFIED SHAREHOLDER REPORT As filed with the Securities and Exchange Commission on September 8, 2005 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-09761 THE POTOMAC INSURANCE TRUST --------------------------- (Exact name of registrant as specified in charter) 33 WHITEHALL STREET, 10TH FLOOR ------------------------------- NEW YORK, NY 10004 ------------------ (Address of principal executive offices) (Zip code) DANIEL D. O'NEILL ----------------- 33 WHITEHALL STREET, 10TH FLOOR ------------------------------- NEW YORK, NY 10004 ------------------ (Name and address of agent for service) 1-646-572-3390 -------------- Registrant's telephone number, including area code Date of fiscal year end: 12/31/05 -------- Date of reporting period: 6/30/05 ------- ITEM 1. REPORT TO STOCKHOLDERS LETTER TO SHAREHOLDERS AUGUST 18, 2005 Dear Shareholders, This Semi-Annual report covers the period from January 1, 2005 through June 30, 2005, a period during which the markets struggled. After a strong rally from October through the end of the year, which seemed to be keyed to the resolution of the U.S. Presidential election, the U.S. equities markets seemed to lose momentum as 2004 became 2005, with the markets declining sharply during the first week of 2005. The S&P 500 lost 2.08% during the first week of the year, while the Nasdaq 100 declined 3.47% and the Russell 2000 declined 5.88%. The markets continued to decline through the first quarter and into the second quarter, and by the end of April the S&P 500 had lost 4.00% while the Nasdaq 100 and Russell 2000 had declined 12.25% and 10.76%, respectively. The war in Iraq continued to weigh on the markets as did worries about the trade deficit and budget deficit. In addition, the price of oil increased by 35%, from $42.12 per barrel to $56.50. (As I write this letter, oil is at $63.00, down from a high a few days ago of $67.18.) The markets seemed to be trying to determine whether high oil prices will continue and what the impact will be on the overall economy. The situation in Iraq has not improved and Iran seems increasingly isolated from the West, as evidenced by the recent Presidential election and the continuation of nuclear development. All in all, the situation in the Middle East is uncertain, which leads speculators to push oil higher. The domestic economic picture has been good though there is concern that too much of the growth in incomes and job creation is due to an unsustainable bubble in the housing markets. The Federal Reserve has continued to raise rates, though it is unclear if the Fed is doing so to check inflation in a growing economy or to prick a housing bubble by making financing more expensive. In any event, long-term rates did not respond to the Federal Reserve, meaning the fixed-income market does not share the Fed's optimism about the economy. During the period covered by this report, the Evolution VP Managed Equity Fund declined -1.61% compared to the S&P 500 which declined -1.70%. The Evolution VP Managed Bond lost -1.97% compared to the Lehman Brothers U.S. Aggregate Bond Index return of 2.51% while the Dynamic VP High Yield Bond Fund returned 0.15% compared to the Lehman Brothers U.S. Corporate High Yield Index of 1.11%. The VP Money Market Fund had a return of 0.32% As always, we thank you for using Potomac Funds and we look forward to our mutual success. Best regards, /S/ DANIEL O'NEILL Daniel O'Neill Potomac Insurance Trust EXPENSE EXAMPLE (UNAUDITED) JUNE 30, 2005 As a shareholder of the Evolution VP Managed Bond Fund, the Evolution VP Managed Equity Fund, the Dynamic VP HY Bond Fund and the VP Money Market Fund (the "Funds"), you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments, reinvested dividends, or other distributions; redemption fees; and exchange fees; and (2) ongoing costs, including management fees; distribution and/or service fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held of the entire period (January 1, 2005 - June 30, 2005). ACTUAL EXPENSES The first line of the table below provides information about actual account values and actual expenses. Although the Fund charges no sales load or transactions fees, you will be assessed fees for outgoing wire transfers, returned checks or stop payment orders at prevailing rates charged by U.S. Bancorp Fund Services, LLC, the Funds' transfer agent. If you request a redemption be made by wire transfer, currently a $15.00 fee is charged by the Funds' transfer agent. The example includes, but is not limited to, management fees, shareholder servicing fees, fund accounting, custody and transfer agent fees. However, the example below does not include portfolio trading commissions and related expenses, interest expense or dividends on short positions taken by the Funds and other extraordinary expenses as determined under generally accepted accounting principles. To the extent the Funds invest in shares of other investment companies as part of its investment strategy, you will indirectly bear your proportionate share of any fees and expenses charged by the underlying funds in which Funds invest in addition to the expenses of the Funds. Actual expenses of the underlying funds may vary. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Funds' actual expense ratios and an assumed rate of return of 5% per year before expenses, which is not the Funds' actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Funds and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as the $15.00 wire transfer free discussed above. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. 2
EVOLUTION VP MANAGED BOND FUND ------------------------------------------------------------- EXPENSES PAID BEGINNING ENDING DURING PERIOD ACCOUNT VALUE ACCOUNT VALUE JANUARY 1, 2005 - JANUARY 1, 2005 JUNE 30, 2005 JUNE 30, 2005* --------------- ------------------- ------------------- Actual $1,000.00 $ 980.30 $ 19.80 Hypothetical (5% return before expenses) 1,000.00 1,030.00 20.30
* Expenses are equal to the Fund's annualized expense ratio of 2.00%, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.
EVOLUTION VP MANAGED EQUITY FUND ------------------------------------------------------------- EXPENSES PAID BEGINNING ENDING DURING PERIOD ACCOUNT VALUE ACCOUNT VALUE JANUARY 1, 2005 - JANUARY 1, 2005 JUNE 30, 2005 JUNE 30, 2005* --------------- ------------------- ------------------- Actual $1,000.00 $ 983.90 $ 19.84 Hypothetical (5% return before expenses) 1,000.00 1,030.00 20.30
* Expenses are equal to the Fund's annualized expense ratio of 2.00%, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.
DYNAMIC VP HY BOND FUND ------------------------------------------------------------- EXPENSES PAID BEGINNING ENDING DURING PERIOD ACCOUNT VALUE ACCOUNT VALUE JANUARY 1, 2005 - JANUARY 1, 2005 JUNE 30, 2005 JUNE 30, 2005 --------------- ------------------- ------------------- Actual $1,000.00 $ 1,001.50 $ 17.21* Hypothetical (5% return before expenses) 1,000.00 1,032.80 17.48**
* Expenses are equal to the Fund's annualized expense ratio of 1.72%, multiplied by the average account value over the period February 1, 2005 - June 30, 2005, the Fund's commencement date to the end of the period to reflect the Fund's actual expenses. ** Expenses are equal to the Fund's annualized expense ratio of 1.72%, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.
VP MONEY MARKET FUND ------------------------------------------------------------- EXPENSES PAID BEGINNING ENDING DURING PERIOD ACCOUNT VALUE ACCOUNT VALUE JANUARY 1, 2005 - JANUARY 1, 2005 JUNE 30, 2005 JUNE 30, 2005 --------------- ------------------- ------------------- Actual $1,000.00 $ 1,003.20 $ 18.83* Hypothetical (5% return before expenses) 1,000.00 1,031.20 19.09**
* Expenses are equal to the Fund's annualized expense ratio of 1.88%, multiplied by the average account value over the period February 1, 2005 - June 30, 2005, the Fund's commencement date to the end of the period to reflect the Fund's actual expenses. ** Expenses are equal to the Fund's annualized expense ratio of 1.88%, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period. 3 EVOLUTION VP MANAGED BOND FUND ALLOCATION OF FUND HOLDINGS (UNAUDITED) JUNE 30, 2005 [PIE CHART] Investment Companies 78 Money Market Fund 4 Cash* 18
EVOLUTION VP MANAGED EQUITY FUND ALLOCATION OF FUND HOLDINGS (UNAUDITED) JUNE 30, 2005 [PIE CHART] Cash* 9 Money Market Fund 9 Investment Companies 23 Consumer Discretionary 18 Consumer Staples 2 Energy 11 Financials 8 Health Care 6 Industrials 6 Information Technology 5 Materials 1 Telecommunication Services 0 Utilities 2
THE PERCENTAGES IN THESE GRAPHS ARE CALCULATED BASED ON NET ASSETS. * CASH AND OTHER ASSETS LESS LIABILITIES. 4 DYNAMIC VP HY BOND FUND ALLOCATION OF FUND HOLDINGS (UNAUDITED) JUNE 30, 2005 [PIE CHART] Corporate Bonds 84 Money Market Fund 12 Cash* 4
VP MONEY MARKET FUND ALLOCATION OF FUND HOLDINGS (UNAUDITED) JUNE 30, 2005 [PIE CHART] Cash* 55 Money Market Funds 23 U.S. Government Agency Obligations 22
THE PERCENTAGES IN THESE GRAPHS ARE CALCULATED BASED ON NET ASSETS. * CASH AND OTHER ASSETS LESS LIABILITIES. 5 EVOLUTION VP MANAGED BOND FUND SCHEDULE OF INVESTMENTS JUNE 30, 2005 (UNAUDITED)
------------------------------------------------------------ SHARES VALUE ------------------------------------------------------------ INVESTMENT COMPANIES - 78.0% 3,933 Aberdeen Asia-Pacific Income Fund, Inc. $ 24,778 4,683 Advent Claymore Convertible Securities and Income Fund 113,610 1,998 Alliance World Dollar Government Fund II 24,815 2,177 Blackrock Income Opportunity Trust 24,665 5,825 Calamos Convertible Opportunities and Income Fund 113,296 5,055 Corporate High Yield Fund V, Inc. 74,309 5,351 Corporate High Yield Fund VI, Inc. 74,111 15,978 Credit Suisse Asset Management Income Fund, Inc. 73,339 4,976 Evergreen Income Advantage Fund 73,993 1,519 iShares Lehman 1-3 Year Treasury Bond Fund 123,404 3,200 iShares Lehman 7-10 Year Treasury Bond Fund 278,272 2,675 iShares Lehman 20+ Year Treasury Bond Fund 258,673 1,123 iShares Lehman US Treasury Inflation Protected Securities Fund 120,419 7,376 Nicholas-Applegate Convertible & Income Fund 113,590
------------------------------------------------------------ SHARES VALUE ------------------------------------------------------------ 8,476 Nuveen Preferred and Convertible Income Fund $ 113,155 5,027 Pimco High Income Fund 74,098 14,647 Putnam High Income Bond Fund 113,807 1,791 Templeton Emerging Markets Income Fund 24,805 2,777 Templeton Global Income Fund 24,660 ---------- TOTAL INVESTMENT COMPANIES (Cost $1,812,692) $1,841,799 ---------- MONEY MARKET FUNDS - 3.6% 86,501 Federated Prime Obligations Fund - Class I $ 86,501 ---------- TOTAL MONEY MARKET FUNDS (Cost $86,501) $ 86,501 ---------- Total Investments (Cost $1,899,193) - 81.6% $1,928,300 Other Assets in Excess of Liabilities - 18.4% 434,104 ---------- TOTAL NET ASSETS - 100.0% $2,362,404 ==========
Percentages are calculated as a percent of net assets. See notes to the financial statements. 6 EVOLUTION VP MANAGED EQUITY FUND SCHEDULE OF INVESTMENTS JUNE 30, 2005 (UNAUDITED)
---------------------------------------------------------- SHARES VALUE ---------------------------------------------------------- COMMON STOCKS - 82.3% Aerospace & Defense - 1.2% 177 Armor Holdings, Inc.* $ 7,011 232 Engineered Support Systems, Inc. 8,312 133 Kaman Corp. Class A 2,399 43 Northrop Grumman Corp. 2,376 314 Teledyne Technologies, Inc.* 10,230 136 United Technologies Corp. 6,984 ---------- 37,312 ---------- Air Freight & Logistics - 0.1% 30 Expeditors International Washington, Inc. 1,494 22 United Parcel Service, Inc. Class B 1,522 ---------- 3,016 ---------- Auto Components - 0.7% 435 Bandag, Inc. 20,032 41 Johnson Controls, Inc. 2,309 ---------- 22,341 ---------- Automobiles - 0.3% 207 Ford Motor Co. 2,120 63 General Motors Corp. 2,142 92 Harley-Davidson, Inc. 4,563 ---------- 8,825 ---------- Beverages - 0.2% 219 PepsiAmericas, Inc. 5,619 ---------- Biotechnology - 0.2% 52 Genzyme Corp.* 3,125 52 Gilead Sciences, Inc.* 2,287 ---------- 5,412 ---------- Capital Markets - 0.9% 67 The Bear Stearns Companies, Inc. 6,964 45 The Goldman Sachs Group, Inc. 4,591 189 Investment Technology Group, Inc.* 3,973 371 LaBranche & Company, Inc.* 2,337 117 Lehman Brothers Holdings, Inc. 11,616 ---------- 29,481 ---------- Chemicals - 0.1% 124 Crompton Corp.* 1,754 123 Material Sciences Corp.* 1,791 ---------- 3,545 ---------- Commercial Banks - 1.4% 47 Bank of America Corp. 2,144 53 BB&T Corp. 2,118
---------------------------------------------------------- SHARES VALUE ---------------------------------------------------------- Commercial Banks - 1.4% (Continued) 50 Commerce Bancorp, Inc. $ 1,515 51 Fifth Third Bancorp 2,102 64 KeyCorp 2,122 62 National City Corp. 2,115 516 PrivateBancorp, Inc. 18,256 29 SunTrust Banks, Inc. 2,095 230 US Bancorp 6,716 43 Wachovia Corp. 2,133 35 Wells Fargo & Co. 2,155 28 Westamerica Bancorporation 1,479 ---------- 44,950 ---------- Commercial Services & Supplies - 3.8% 745 Angelica Corp. 18,260 954 Career Education Corp.* 34,926 82 ChoicePoint, Inc.* 3,284 429 Copart, Inc.* 10,210 58 Deluxe Corp. 2,355 153 Heidrick & Struggles International, Inc.* 3,990 35 HNI Corp. 1,790 270 ITT Educational Services, Inc.* 14,423 3,717 On Assignment, Inc.* 18,511 125 Pre-Paid Legal Services, Inc. 5,581 73 Robert Half International, Inc. 1,823 75 Rollins, Inc. 1,503 62 RR Donnelley & Sons Co. 2,140 120 SOURCECORP, Inc.* 2,379 ---------- 121,175 ---------- Communications Equipment - 0.4% 150 Avocent Corp.* 3,921 583 C-COR, Inc.* 3,994 215 Inter-Tel, Inc. 4,001 ---------- 11,916 ---------- Computers & Peripherals - 0.1% 49 Apple Computer, Inc.* 1,804 ---------- Construction & Engineering - 0.2% 90 Dycom Industries, Inc.* 1,783 357 Quanta Services, Inc.* 3,142 83 The Shaw Group, Inc.* 1,785 ---------- 6,710 ----------
See notes to the financial statements. 7 EVOLUTION VP MANAGED EQUITY FUND SCHEDULE OF INVESTMENTS (continued) JUNE 30, 2005 (UNAUDITED)
---------------------------------------------------------- SHARES VALUE ---------------------------------------------------------- COMMON STOCKS - 82.3% (CONTINUED) Consumer Finance - 0.6% 29 Capital One Financial Corp. $ 2,320 3,420 Rewards Network, Inc.* 18,468 ---------- 20,788 ---------- Containers & Packaging - 0.2% 272 Longview Fibre Co. 5,590 ---------- Electronic Equipment & Instruments - 0.6% 106 Avnet, Inc.* 2,388 66 CDW Corp. 3,768 35 Dionex Corp.* 1,526 102 Jabil Circuit, Inc.* 3,134 82 Littelfuse, Inc.* 2,284 617 Planar Systems, Inc.* 4,535 62 Tech Data Corp.* 2,270 ---------- 19,905 ---------- Energy Equipment & Services - 1.0% 136 Atwood Oceanics, Inc.* 8,372 177 BJ Services Co. 9,289 188 Hydril* 10,218 40 Lone Star Technologies, Inc.* 1,820 33 Transocean, Inc.* 1,781 ---------- 31,480 ---------- Financial Services - 0.1% 46 Citigroup, Inc. 2,127 60 J.P. Morgan Chase & Co. 2,119 ---------- 4,246 ---------- Food & Staples Retailing - 1.4% 103 Albertson's, Inc. 2,130 152 BJ's Wholesale Club, Inc.* 4,939 70 Costco Wholesale Corp. 3,137 634 Great Atlantic & Pacific Tea Co.* 18,424 161 Longs Drug Stores Corp. 6,931 231 Sysco Corp. 8,360 ---------- 43,921 ---------- Food Products - 0.4% 92 ConAgra Foods, Inc. 2,131 60 HJ Heinz Co. 2,125 77 Hormel Foods Corp. 2,258 40 Sanderson Farms, Inc. 1,818
---------------------------------------------------------- SHARES VALUE ---------------------------------------------------------- Food Products - 0.4% (Continued) 107 Sara Lee Corp. $ 2,120 22 Wm. Wrigley Jr. Co. 1,514 ---------- 11,966 ---------- Health Care Equipment & Supplies - 2.8% 918 Biosite, Inc.* 50,481 41 Cyberonics, Inc.* 1,779 64 Respironics, Inc.* 2,311 321 SurModics, Inc.* 13,922 812 Viasys Healthcare, Inc.* 18,343 ---------- 86,836 ---------- Health Care Providers & Services - 2.0% 33 Covance, Inc.* 1,481 1,059 Curative Health Services, Inc.* 2,415 225 Dendrite International, Inc.* 3,105 714 LCA-Vision, Inc. 34,600 318 Lincare Holdings, Inc.* 12,987 274 Odyssey HealthCare, Inc.* 3,951 58 Sunrise Senior Living, Inc.* 3,131 ---------- 61,670 ---------- Hotels Restaurants & Leisure - 1.8% 158 Applebee's International, Inc. 4,185 102 Bob Evans Farms, Inc. 2,379 35 Boyd Gaming Corp. 1,790 60 Brinker International, Inc.* 2,403 61 CBRL Group, Inc. 2,370 92 CEC Entertainment, Inc.* 3,872 69 The Cheesecake Factory, Inc.* 2,396 72 Darden Restaurants, Inc. 2,375 63 Jack in the Box, Inc.* 2,389 158 Landry's Restaurants, Inc. 4,754 227 Lone Star Steakhouse & Saloon, Inc. 6,903 250 McDonald's Corp. 6,937 311 O'Charleys, Inc.* 5,492 40 Outback Steakhouse, Inc. 1,810 90 Panera Bread Co. Class A* 5,588 49 Sonic Corp.* 1,496 ---------- 57,139 ---------- Household Durables - 6.0% 176 Department 56, Inc.* 1,804 87 Hovnanian Enterprises, Inc. Class A* 5,672 60 KB Home 4,574 659 Lennar Corp. 41,813
See notes to the financial statements. 8 EVOLUTION VP MANAGED EQUITY FUND SCHEDULE OF INVESTMENTS (continued) JUNE 30, 2005 (UNAUDITED)
---------------------------------------------------------- SHARES VALUE ---------------------------------------------------------- COMMON STOCKS - 82.3% (CONTINUED) Household Durables - 6.0% (Continued) 84 MDC Holdings, Inc. $ 6,909 492 Meritage Homes Corp.* 39,114 17 NVR, Inc.* 13,770 401 Standard-Pacific Corp. 35,268 392 Toll Brothers, Inc.* 39,808 ---------- 188,732 ---------- Household Products - 0.1% 43 Clorox Co. 2,396 ---------- Insurance - 4.8% 65 Allmerica Financial Corp.* 2,411 71 American Financial Group, Inc. 2,380 50 AmerUs Group Co. 2,402 56 Arthur J. Gallagher & Co. 1,519 405 Chubb Corp. 34,672 60 Cincinnati Financial Corp. 2,374 59 Fidelity National Financial, Inc. 2,106 921 HCC Insurance Holdings, Inc. 34,878 45 Lincoln National Corp. 2,111 31 Loews Corp. 2,402 155 Metlife, Inc. 6,966 98 Ohio Casualty Corp. 2,370 1,069 Presidential Life Corp. 18,291 60 The St. Paul Travelers Companies, Inc. 2,372 515 Zenith National Insurance Corp. 34,948 ---------- 152,202 ---------- Internet Software & Services - 0.6% 244 j2 Global Communications, Inc.* 8,403 208 Websense, Inc.* 9,995 ---------- 18,398 ---------- Investment Companies - 22.0% 2,840 iShares MSCI EAFE Index Fund 148,787 835 iShares MSCI Emerging Markets Index Fund* 59,786 5,192 iShares S&P Latin American 40 Index Fund 482,960 ---------- 691,533 ----------
---------------------------------------------------------- SHARES VALUE ---------------------------------------------------------- IT Services - 0.8% 62 Affiliated Computer Services, Inc. Class A* $ 3,168 36 CACI International, Inc. - Class A* 2,274 303 Cognizant Technology Solutions Corp.* 14,280 222 Convergys Corp.* 3,157 284 Pegasus Solutions, Inc.* 3,167 ---------- 26,046 ---------- Leisure Equipment & Products - 0.7% 648 Nautilus Group, Inc. 18,468 65 SCP Pool Corp. 2,281 ---------- 20,749 ---------- Machinery - 1.8% 190 Clarcor, Inc. 5,558 594 Oshkosh Truck Corp. 46,498 141 Thomas Industries, Inc. 5,634 ---------- 57,690 ---------- Media - 0.6% 130 Arbitron, Inc. 5,577 70 Media General, Inc. Class A 4,533 81 Scholastic Corp.* 3,123 82 Thomas Nelson, Inc. 1,784 188 Time Warner, Inc.* 3,141 ---------- 18,158 ---------- Metals & Mining - 1.0% 82 Allegheny Technologies, Inc. 1,809 176 Cleveland-Cliffs, Inc. 10,166 76 Commercial Metals Co. 1,810 48 Massey Energy Co. 1,811 293 Nucor Corp. 13,367 34 Peabody Energy Corp. 1,769 ---------- 30,732 ---------- Multiline Retail - 0.2% 102 Dillard's, Inc. Class A 2,389 12 Sears Holdings Corp.* 1,799 98 ShopKo Stores, Inc.* 2,382 ---------- 6,570 ---------- Office Electronics - 0.1% 90 Zebra Technologies Corp. Class A* 3,941 ----------
See notes to the financial statements. 9 EVOLUTION VP MANAGED EQUITY FUND SCHEDULE OF INVESTMENTS (continued) JUNE 30, 2005 (UNAUDITED)
---------------------------------------------------------- SHARES VALUE ---------------------------------------------------------- COMMON STOCKS - 82.3% (CONTINUED) Oil & Gas - 10.3% 102 Anadarko Petroleum Corp. $ 8,379 238 Apache Corp. 15,375 152 Burlington Resources, Inc. 8,396 438 Cabot Oil & Gas Corp. 15,199 102 Cimarex Energy Co.* 3,969 122 ConocoPhillips 7,014 165 Devon Energy Corp. 8,362 178 EOG Resources, Inc. 10,110 152 Exxon Mobil Corp. 8,735 223 Murphy Oil Corp. 11,647 1,367 Newfield Exploration Co.* 54,530 170 Noble Energy, Inc. 12,861 109 Occidental Petroleum Corp. 8,385 216 Overseas Shipholding Group 12,884 166 Pioneer Natural Resources Co. 6,985 50 Plains Exploration & Production Co.* 1,777 135 Pogo Producing Co. 7,009 879 Remington Oil & Gas Corp.* 31,380 215 Southwestern Energy Co.* 10,101 287 St. Mary Land & Exploration Co. 8,317 1,479 Swift Energy Co.* 52,978 108 Unocal Corp. 7,025 23 Valero Energy Corp. 1,820 59 Vintage Petroleum, Inc. 1,798 95 The Williams Companies, Inc. 1,805 246 XTO Energy, Inc. 8,362 ---------- 325,203 ---------- Pharmaceuticals - 0.6% 85 Bristol-Myers Squibb Co. 2,123 216 Forest Laboratories, Inc.* 8,392 94 Johnson & Johnson 6,110 69 Merck & Co., Inc. 2,125 ---------- 18,750 ---------- Road & Rail - 0.0% 76 Heartland Express, Inc. 1,477 ---------- Semiconductor & Semiconductor Equipment - 1.0% 2,647 Axcelis Technologies, Inc.* 18,159 156 Cree, Inc.* 3,973 126 Intersil Corp. Class A 2,365
---------------------------------------------------------- SHARES VALUE ---------------------------------------------------------- Semiconductor & Semiconductor Equipment - 1.0% (Continued) 172 Standard Microsystems Corp.* $ 4,021 61 Varian Semiconductor Equipment Associates, Inc.* 2,257 ---------- 30,775 ---------- Software - 1.4% 453 Adobe Systems, Inc. 12,965 236 Ansys, Inc.* 8,380 191 EPIQ Systems, Inc.* 3,125 194 Factset Research Systems, Inc. 6,953 276 JDA Software Group, Inc.* 3,141 300 MapInfo Corp.* 3,153 216 Sybase, Inc.* 3,963 107 THQ, Inc.* 3,132 ---------- 44,812 ---------- Specialty Retail - 6.8% 69 Aeropostale, Inc.* 2,318 59 American Eagle Outfitters, Inc. 1,808 116 AutoNation, Inc.* 2,380 93 Bed Bath & Beyond, Inc.* 3,886 35 Best Buy Co, Inc. 2,399 66 Building Material Holding Corp. 4,573 44 Chico's FAS, Inc.* 1,508 240 Circuit City Stores, Inc. 4,150 62 Claire's Stores, Inc. 1,491 96 Cost Plus, Inc.* 2,394 371 The Finish Line, Inc. Class A 7,019 138 GameStop Corp. - Class B* 4,126 80 Guitar Center, Inc.* 4,670 162 Haverty Furniture Companies, Inc. 2,394 46 K-Swiss, Inc. Class A 1,488 345 Linens 'N Things, Inc.* 8,163 57 Liz Claiborne, Inc. 2,266 36 Michaels Stores, Inc. 1,489 392 Movie Gallery, Inc. 10,361 1,169 O'Reilly Automotive, Inc.* 34,848 168 Pier 1 Imports, Inc. 2,384 2,329 Quiksilver, Inc.* 37,217 103 RadioShack Corp. 2,387 898 Russell Corp. 18,364 133 Stage Stores, Inc.* 5,799 1,290 TBC Corp.* 34,998
See notes to the financial statements. 10 EVOLUTION VP MANAGED EQUITY FUND SCHEDULE OF INVESTMENTS (continued) JUNE 30, 2005 (UNAUDITED)
---------------------------------------------------------- SHARES VALUE ---------------------------------------------------------- COMMON STOCKS - 82.3% (CONTINUED) Specialty Retail - 6.8% (Continued) 158 Timberland Co.* $ 6,118 98 Williams-Sonoma, Inc.* 3,878 ---------- 214,876 ---------- Telecommunications - 0.4% 80 BellSouth Corp. 2,126 133 CenturyTel, Inc. 4,606 558 Cincinnati Bell, Inc.* 2,399 89 SBC Communications, Inc. 2,114 62 Verizon Communications, Inc. 2,142 ---------- 13,387 ---------- Thrifts & Mortgage Finance - 0.1% 52 Washington Mutual, Inc. 2,116 ---------- Tobacco - 0.4% 33 Altria Group, Inc. 2,134 27 Reynolds American, Inc. 2,128 184 UST, Inc. 8,401 ---------- 12,663 ---------- Trading Companies & Distributors - 0.3% 37 Fastenal Co. 2,267 242 GATX Corp. 8,349 ---------- 10,616 ---------- Utilities - 1.8% 109 The AES Corp.* 1,785 663 Aquila, Inc.* 2,394
---------------------------------------------------------- SHARES VALUE ---------------------------------------------------------- Utilities - 1.8% (Continued) 1,119 Avista Corp. $ 20,802 902 Cascade Natural Gas Corp. 18,491 55 Constellation Energy Group, Inc. 3,173 114 Northeast Utilities 2,378 100 Pepco Holdings, Inc. 2,394 192 Sierra Pacific Resources* 2,390 22 TXU Corp. 1,828 ---------- 55,635 ---------- TOTAL COMMON STOCKS (Cost $2,476,711) $2,593,104 ---------- MONEY MARKET FUNDS - 8.6% 270,214 Federated Prime Obligations Fund - Class I $ 270,214 ---------- TOTAL MONEY MARKET FUNDS (Cost $270,214) $ 270,214 ---------- Total Investments (Cost $2,746,925) - 90.9% $2,863,318 Other Assets in Excess of Liabilities - 9.1% 285,775 ---------- TOTAL NET ASSETS - 100.0% $3,149,093 ==========
Percentages are calculated as a percent of net assets. * Non-income producing security. See notes to the financial statements. 11 DYNAMIC VP HY BOND FUND SCHEDULE OF INVESTMENTS JUNE 30, 2005 (UNAUDITED)
----------------------------------------------------------------- FACE AMOUNT VALUE ----------------------------------------------------------------- CORPORATE BONDS - 92.1% Grantor Trust - 91.2% $ 6,940,000 Dow Jones CDX High Yield Note, 2004-1, 8.25%, 06/29/2010 (Cost - $6,903,361; Acquired - Various dates between 04/12/2005 and 06/30/2005) (1) $ 6,974,700 21,095,804 TRAINS High Yield Note, 8.28%, 08/01/2015, (Cost - $22,291,099; Acquired - Various dates between 03/29/2005 and 06/14/2005) (1)(2) 22,320,795 ----------- 29,295,495 ----------- Hotels - 0.9% 267,000 MGM Mirage, Inc., 9.375%, 02/15/2010 299,708 ----------- TOTAL CORPORATE BONDS (Cost $29,469,630) $29,595,203 ----------- ----------------------------------------------------------------- SHARES VALUE ----------------------------------------------------------------- MONEY MARKET FUNDS - 12.8% 4,096,046 Federated Prime Obligations Fund - Class I $ 4,096,046 ----------- TOTAL MONEY MARKET FUNDS (Cost $4,096,046) $ 4,096,046 ----------- Total Investments (Cost $33,565,676) - 104.9% $33,691,249 Liabilities in Excess of Other Assets - (4.9)% (1,567,602) ----------- TOTAL NET ASSETS - 100.0% $32,123,647 ===========
Percentages are calculated as a percent of net assets (1) Restricted under Rule 144A of the Securities Act of 1933. (2) Variable rate security. See notes to the financial statements. 12 VP MONEY MARKET FUND SCHEDULE OF INVESTMENTS JUNE 30, 2005 (UNAUDITED)
---------------------------------------------------------- SHARES VALUE ---------------------------------------------------------- MONEY MARKET FUNDS - 23.1% 715,900 AIM Liquid Assets Portfolio - Institutional Class $ 715,900 715,900 Fidelity Government Portfolio - Institutional Class 715,900 766,169 First American Prime Obligations Fund - Class Y 766,169 ---------- TOTAL MONEY MARKET FUNDS (Cost $2,197,969) $2,197,969 ---------- ---------------------------------------------------------- FACE AMOUNT VALUE ---------------------------------------------------------- U.S. GOVERNMENT AGENCY OBLIGATIONS - 22.1% $700,000 Federal Home Loan Bank Discount Note, 2.975%, Due 07/01/2005 $ 700,000 700,000 Federal National Mortgage Association Discount Note, 2.10%, 07/01/2005 700,000 700,000 U.S. Treasury Bill, 2.58%, 07/07/2005 699,699 ---------- TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS (Cost $2,099,699) $2,099,699 ---------- Total Investments (Cost $4,297,668) - 45.2% $4,297,668 Other Assets in Excess of Liabilities - 54.8% 5,209,352 ---------- TOTAL NET ASSETS - 100.0% $9,507,020 ==========
Percentages are calculated as a percent of net assets. See notes to the financial statements. 13 STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) JUNE 30, 2005
POTOMAC INSURANCE TRUST EVOLUTION VP MANAGED EVOLUTION VP MANAGED DYNAMIC VP HY VP MONEY BOND FUND EQUITY FUND BOND FUND MARKET FUND -------------------- -------------------- ------------- ----------- ASSETS: Investments, at market value (Note 2)................................. $1,928,300 $2,863,318 $33,691,249 $4,297,668 Cash................................. -- -- 182,179 -- Receivable for Investments Sold...... 110,574 113,221 -- -- Receivable for Fund Shares Sold...... 374,109 462,992 -- 5,216,936 Deposit at Broker.................... 59,900 -- -- -- Dividends and interest receivable.... 3,131 1,541 260,217 246 Other assets......................... -- -- 78,431 -- ---------- ---------- ----------- ---------- Total Assets..................... 2,476,014 3,441,072 34,212,076 9,514,850 ---------- ---------- ----------- ---------- LIABILITIES: Payable for Investments Purchased.... 50,758 287,907 2,025,623 -- Payable for Fund Shares Redeemed..... 17 27 20,758 8 Payable to Custodian................. 59,900 -- -- -- Accrued expenses and other liabilities........................ 2,935 4,045 42,048 7,822 ---------- ---------- ----------- ---------- Total Liabilities................ 113,610 291,979 2,088,429 7,830 ---------- ---------- ----------- ---------- NET ASSETS........................... $2,362,404 $3,149,093 $32,123,647 $9,507,020 ========== ========== =========== ========== NET ASSETS CONSIST OF: Capital stock........................ $2,358,329 $3,125,602 $32,000,263 $9,507,020 Accumulated undistributed net investment income (loss)........... 22,765 (12,919) 159,273 -- Accumulated undistributed net realized gain (loss) on investments........................ (47,797) (79,983) (161,462) -- Net unrealized appreciation (depreciation) on: Investments........................ 29,107 116,393 125,573 -- ---------- ---------- ----------- ---------- Total Net Assets................. $2,362,404 $3,149,093 $32,123,647 $9,507,020 ========== ========== =========== ========== CALCULATION OF NET ASSET VALUE PER SHARE - CLASS A: Net assets........................... $2,362,404 $3,149,093 $32,123,647 $9,507,020 Shares outstanding (unlimited shares of beneficial interest authorized, no par value)............................. 116,081 151,967 1,603,421 9,507,020 Net Asset Value, Redemption Price and Offering Price Per Share........... $ 20.35 $ 20.72 $ 20.03 $ 1.00 ========== ========== =========== ========== Cost of Investments.................. $1,899,193 $2,746,925 $33,565,676 $4,297,668 ========== ========== =========== ==========
See notes to the financial statements. 14 STATEMENT OF OPERATIONS (UNAUDITED) FOR THE PERIOD ENDED JUNE 30, 2005
POTOMAC INSURANCE TRUST EVOLUTION VP MANAGED EVOLUTION VP MANAGED BOND FUND EQUITY FUND -------------------- -------------------- INVESTMENT INCOME: Dividend income............................................. $ 24,555 $ 5,914 Interest income............................................. 2,932 4,105 -------- -------- Total investment income................................. 27,487 10,019 -------- -------- EXPENSES: Investment advisory fees.................................... 6,368 9,002 Distribution expenses....................................... 1,592 2,251 Administration fees......................................... 8,750 8,750 Shareholder servicing fees.................................. 3,380 3,906 Fund accounting fees........................................ 10,269 16,100 Custody fees................................................ 510 2,260 Professional fees........................................... 25,724 27,164 Reports to shareholders..................................... 541 765 Directors' fees and expenses................................ 1,116 1,116 Other....................................................... 41 58 -------- -------- Total expenses before waiver............................ 58,291 71,372 Less: Waiver of expenses by Advisor..................... (45,555) (53,368) -------- -------- Total expenses.......................................... 12,736 18,004 -------- -------- NET INVESTMENT INCOME (LOSS)................................ 14,751 (7,985) -------- -------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain (loss) on: Investments............................................... (53,920) (80,284) Capital gain distributions from regulated investment companies............................................... -- -- -------- -------- (53,920) (80,284) -------- -------- Change in unrealized appreciation (depreciation) on: Investments............................................... 22,750 60,591 -------- -------- Net realized and unrealized gain (loss) on investments........................................... (31,170) (19,693) -------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................................ $(16,419) $(27,678) ======== ========
(1) Commencement of operations. See notes to the financial statements. 15 STATEMENT OF OPERATIONS (UNAUDITED) FOR THE PERIOD ENDED JUNE 30, 2005
POTOMAC INSURANCE TRUST DYNAMIC VP HY VP MONEY BOND FUND MARKET FUND ------------------- ------------------- February 1, 2005(1) February 1, 2005(1) to June 30, 2005 to June 30, 2005 ------------------- ------------------- INVESTMENT INCOME: Dividend income............................................. $ -- $ -- Interest income............................................. 221,604 52,647 --------- -------- Total investment income................................. 221,604 52,647 --------- -------- EXPENSES: Investment advisory fees.................................... 27,222 9,504 Distribution expenses....................................... 9,074 -- Administration fees......................................... 7,292 5,833 Shareholder servicing fees.................................. 14,392 8,064 Fund accounting fees........................................ 8,428 6,667 Custody fees................................................ 1,274 654 Professional fees........................................... 30,860 29,032 Reports to shareholders..................................... 3,100 1,594 Directors' fees and expenses................................ 1,116 1,116 Other....................................................... 236 121 --------- -------- Total expenses before waiver............................ 102,994 62,585 Less: Waiver of expenses by Advisor..................... (40,663) (26,887) --------- -------- Total expenses.......................................... 62,331 35,698 --------- -------- NET INVESTMENT INCOME (LOSS)................................ 159,273 16,949 --------- -------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain (loss) on: Investments............................................... (161,462) -- --------- -------- (161,462) -- --------- -------- Change in unrealized appreciation (depreciation) on: Investments............................................... 125,573 -- --------- -------- Net realized and unrealized gain (loss) on investments........................................... (35,889) -- --------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................................ $ 123,384 $ 16,949 ========= ========
(1) Commencement of operations. See notes to the financial statements. 16 STATEMENT OF CHANGES IN NET ASSETS JUNE 30, 2005 POTOMAC INSURANCE TRUST
EVOLUTION VP MANAGED EVOLUTION VP MANAGED BOND FUND EQUITY FUND --------------------------------------- --------------------------------------- Six Months Ended Six Months Ended June 30, 2005 July 1, 2004(1) June 30, 2005 July 1, 2004(1) (Unaudited) to December 31, 2004 (Unaudited) to December 31, 2004 ---------------- -------------------- ---------------- -------------------- OPERATIONS: Net investment income (loss)...... $ 14,751 $ 8,014 $ (7,985) $ (4,934) Net realized gain (loss) on investments..................... (53,920) (52) (80,284) 301 Capital gain distributions from regulated investment companies....................... -- 6,175 -- -- Change in unrealized appreciation (depreciation) on investments... 22,750 6,357 60,591 55,802 ---------- --------- ---------- ---------- Net increase (decrease) in net assets resulting from operations.................. (16,419) 20,494 (27,678) 51,169 ---------- --------- ---------- ---------- DISTRIBUTIONS TO SHAREHOLDERS - CLASS A: Net investment income............. Net realized gains................ Total distributions........... CAPITAL SHARE TRANSACTIONS - CLASS A: Share sold........................ 1,716,537 974,006 2,396,028 1,233,433 Proceeds from shares issued to holders in reinvestment of dividends....................... -- -- Shares redeemed................... (91,265) (290,949) (263,180) (290,679) ---------- --------- ---------- ---------- Net increase (decrease) in net assets resulting from beneficial interest transactions................ 1,625,272 683,057 2,132,848 942,754 ---------- --------- ---------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS.......................... 1,608,853 703,551 2,105,170 993,923 ---------- --------- ---------- ---------- NET ASSETS: Beginning of period............... 753,551 50,000(2) 1,043,923 50,000(2) ---------- --------- ---------- ---------- End of period..................... $2,362,404 $ 753,551 $3,149,093 $1,043,923 ========== ========= ========== ========== UNDISTRIBUTED NET INVESTMENT INCOME (LOSS), END OF PERIOD.... $ 22,765 $ 8,014 $ (12,919) $ -- ---------- --------- ---------- ----------
(1) Commencement of operations. (2) Reflects the value of the Advisor's initial seed money investment on April 19, 2004. See notes to the financial statements. 17 STATEMENT OF CHANGES IN NET ASSETS JUNE 30, 2005 POTOMAC INSURANCE TRUST
DYNAMIC VP HY VP MONEY BOND FUND MARKET FUND ------------------- ------------------- February 1, 2005(1) February 1, 2005(1) to June 30, 2005 to June 30, 2005 (Unaudited) (Unaudited) ------------------- ------------------- OPERATIONS: Net investment income (loss)................................ $ 159,273 $ 16,949 Net realized gain (loss) on investments..................... (161,462) -- Change in unrealized appreciation (depreciation) on investments............................................... 125,573 -- ----------- ------------ Net increase (decrease) in net assets resulting from operations............................................ 123,384 16,949 ----------- ------------ DISTRIBUTIONS TO SHAREHOLDERS - CLASS A: Net investment income....................................... (16,949) Net realized gains.......................................... -- ------------ Total distributions..................................... (16,949) CAPITAL SHARE TRANSACTIONS - CLASS A: Shares sold................................................. 40,937,097 30,591,559 Proceeds from shares issued to holders in reinvestment of dividends................................................. -- 16,949 Share redeemed.............................................. (8,936,834) (21,101,488) ----------- ------------ Net increase (decrease) in net assets resulting from beneficial interest transactions...................... 32,000,263 9,507,020 ----------- ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS..................... 32,123,647 9,507,020 ----------- ------------ NET ASSETS: Beginning of period......................................... -- -- ----------- ------------ End of period............................................... $32,123,647 $ 9,507,020 =========== ============ UNDISTRIBUTED NET INVESTMENT INCOME (LOSS), END OF PERIOD... $ 159,273 $ -- ----------- ------------
(1) Commencement of operations. See notes to the financial statements. 18 FINANCIAL HIGHLIGHTS POTOMAC INSURANCE TRUST
EVOLUTION VP MANAGED BOND FUND EVOLUTION VP MANAGED EQUITY FUND --------------------------------------- --------------------------------------- CLASS A CLASS A --------------------------------------- --------------------------------------- Six Months Ended Six Months Ended June 30, 2005 July 1, 2004(1) June 30, 2005 July 1, 2004(1) (Unaudited) to December 31, 2004 (Unaudited) to December 31, 2004 ---------------- -------------------- ---------------- -------------------- PER SHARE DATA: NET ASSET VALUE, BEGINNING OF PERIOD.......................... $ 20.76 $ 20.00 $ 21.06 $ 20.00 ---------- --------- ---------- ---------- INCOME (LOSS) FROM INVESTMENT OPERATIONS: Net investment income (loss)(4)... 0.23 0.32 (0.09) (0.15) Net realized and unrealized gain (loss) on investments(6)........ (0.64) 0.44 (0.25) 1.21 ---------- --------- ---------- ---------- Total from investment operations.................. (0.41) 0.76 (0.34) 1.06 ---------- --------- ---------- ---------- LESS DISTRIBUTIONS: Dividends from net investment income.......................... -- -- -- -- Distributions from realized gains........................... -- -- -- -- ---------- --------- ---------- ---------- Total distributions........... -- -- -- -- ---------- --------- ---------- ---------- NET ASSET VALUE, END OF PERIOD.... $ 20.35 $ 20.76 $ 20.72 $ 21.06 ========== ========= ========== ========== TOTAL RETURN(7)................... (1.97)%(2) 3.80% (1.61)%(2) 5.30% SUPPLEMENTAL DATA AND RATIOS: Net assets, end of period......... $2,362,404 $ 753,551 $3,149,093 $1,043,923 Ratio of net expenses to average net assets: Before expense reimbursement.... 9.15%(3) 23.17% 7.93%(3) 20.13% After expense reimbursement..... 2.00%(3) 2.00% 2.00%(3) 2.00% Including dividends on short positions Ratio of net investment income (loss) to average net assets: Before expense reimbursement.... (4.83)%(3) (17.98)% (6.82)%(3) (19.66)% After expense reimbursement..... 2.32%(3) 3.19% (0.89)%(3) (1.53)% Portfolio turnover rate(5)........ 426% 7% 691% 2%
(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. (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. (7) All returns reflect reinvested dividends but do not reflect the impact of taxes. See notes to the financial statements. 19 FINANCIAL HIGHLIGHTS POTOMAC INSURANCE TRUST
DYNAMIC VP HY VP MONEY BOND FUND MARKET FUND ------------------- ------------------- February 1, 2005(5) February 1, 2005(1) to June 30, 2005 to June 30, 2005 ------------------- ------------------- PER SHARE DATA: NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 20.00 $ 1.00 ----------- ---------- INCOME (LOSS) FROM INVESTMENT OPERATIONS: Net investment income (loss)(4)............................. 0.34 -- Net realized and unrealized gain (loss) on investments(6)... (0.31) -- ----------- ---------- Total from investment operations........................ 0.03 -- ----------- ---------- LESS DISTRIBUTIONS: Dividends from net investment income........................ -- --(8) Distributions from realized gains........................... -- -- ----------- ---------- Total distributions..................................... -- -- ----------- ---------- NET ASSET VALUE, END OF PERIOD.............................. $ 20.03 $ 1.00 =========== ========== TOTAL RETURN(7)............................................. 0.15%(2) 0.32%(2) SUPPLEMENTAL DATA AND RATIOS: Net assets, end of period................................... $32,123,647 $9,507,020 Ratio of net expenses to average net assets: Before expense reimbursement.............................. 2.84%(3) 3.29%(3) After expense reimbursement............................... 1.72%(3) 1.88%(3) Including dividends on short positions Ratio of net investment income (loss) to average net assets: Before expense reimbursement.............................. 3.27%(3) (0.52)%(3) After expense reimbursement............................... 4.39%(3) 0.89%(3) Portfolio turnover rate(5).................................. 110% 0%
(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. (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. (7) All returns reflect reinvested dividends but do not reflect the impact of taxes. (8) Amount is less than $0.01 per share. See notes to the financial statements. 20 POTOMAC INSURANCE TRUST NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2005 (UNAUDITED) 1. ORGANIZATION Potomac Insurance Trust (the "Trust") was organized as a Massachusetts business trust on December 28, 1999 and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company issuing its shares in series, each series representing a distinct portfolio with its own investment objective and policies. The series presently in operation are the Evolution VP Managed Bond Fund, the Evolution VP Managed Equity Fund, the Dynamic VP HY Bond Fund and the VP Money Market Fund (each a "Fund" and collectively, the "Funds"). Each Fund is a "non-diversified" series of the Trust pursuant to the 1940 Act. The Trust offers shares to unaffiliated life insurance separate accounts (registered as unit investment trusts under the 1940 Act) to fund the benefits under variable annuity and variable life contracts. The Evolution VP Managed Bond Fund and Evolution VP Managed Equity Fund commenced operations on July 1, 2004. The Dynamic VP HY Bond Fund and VP Money Market Fund commenced operations on February 1, 2005. The objective of the Evolution Managed Bond Fund is to seek the highest appreciation on an annual basis consistent with a high tolerance for risk by investing at least 80% of its assets (plus any borrowing for investment purposes) in fixed-income securities indirectly through securities that invest in or are a derivative of fixed-income securities, including exchange traded funds (ETFs) and other investment companies (fixed-income securities). The objective of the Evolution Managed Equity Fund is to seek the highest appreciation on an annual basis consistent with a high tolerance for risk by investing at least 80% of its assets (plus any borrowing for investment purposes) in equity securities either directly through individual stocks and American Depository Receipts (ADRs) or indirectly through securities that invest in or are a derivative of equity securities. The objective of the Dynamic VP HY Bond Fund is to seek the maximum total return by investing at least 80% of its assets (plus any borrowing for investment purposes) in high yield debt instruments, commonly referred to as "junk bonds," or derivatives of such instruments. The objective of the VP Money Market Fund is to provide security of principal, current income and liquidity, by investing in securities generally having 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. Class A shares of the Evolution VP Managed Bond and the Evolution VP Managed Equity Funds are subject to an annual Rule 12b-1 fee of up to 0.25% of Class A's average daily net assets. The Class A shares of the Dynamic VP HY Bond Fund are subject to an annual Rule 12b-1 fee of up to 0.60% of Class A's average daily net assets. The Board has authorized the VP Money Market Fund to pay Rule 12b-1 fees of an amount equal to the difference between the Fund's Total Annual Operating Expenses and the expense limit on Total Annual Operating Expenses but not to exceed 1.00% of the Fund's daily net assets. As of June 30, 2005, the expense limit on total operating expenses was 1.75% for the VP Money Market Fund. The Rule 12b-1 fees are to pay the insurance company of the plan sponsor for its services for servicing shareholder accounts. Because the fees are paid out of each Fund's net assets on an ongoing basis, the cost of an investment in a Fund will increase over time. 2. SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies consistently followed by the Funds in the preparation of their financial statements. These policies are in conformity with U.S. generally accepted accounting principles. A) INVESTMENT VALUATION - Securities that are listed on a securities exchange are valued at the last quoted sales price on the day the valuation is made. Price information on listed stocks is obtained from the exchange where the security is primarily traded. If no sale is reported at that time, the mean of the last bid and asked price is used. Securities traded principally on the Nasdaq Stock Market are valued at the Nasdaq Official Closing Pricing ("NOCP") 21 provided by Nasdaq each business day. When market quotations for options and futures positions held by a Fund are readily available, those positions will be valued based upon such quotations. Options, futures and other securities for which no quotations are readily available or for which the Advisor has reason to believe the quotations are not reflective of the fair value of these instruments as determined in good faith under the supervision of the Board of Trustees. Short-term investments with a remaining maturity of 60 days or less are valued at amortized cost, which approximates market value. B) REPURCHASE AGREEMENTS - Each Fund may enter into repurchase agreements with banks that are members of the Federal Reserve System or securities dealers who are members of a national securities exchange or are primary dealers in U.S. Government securities. In connection with transactions in repurchase agreements, it is the Trust's policy that the Fund receive, as collateral, securities whose market value, including accrued interest, at all times will be at least equal to 100% of the amount invested by the Fund in each repurchase agreement. If the seller defaults, and the value of the collateral declines, realization of the collateral by the Fund may be delayed or limited. C) WRITTEN OPTIONS - Each Fund may write (sell) options. When a Fund writes an option, an amount equal to the premium received is recorded in the Fund's accounting records as an asset and equivalent liability. The amount of the liability is subsequently marked-to-market to reflect the current value of the option written. When an option expires, or if the Fund enters into a closing purchase transaction, the Fund realizes a gain (or loss if the cost of a closing purchase transaction exceeds the premium received when the option was sold). As collateral for uncovered written options, the Fund is required under the 1940 Act to maintain assets consisting of cash, cash equivalents or liquid securities. This collateral is required to be adjusted daily to reflect the market value of the purchase obligation for put options or the market value of the instrument underlying the contract, but not less than the strike price, for call options. D) STOCK INDEX FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS - Each Fund may purchase and sell stock index futures contracts and options on such futures contracts. Upon entering into a contract, the Fund deposits and maintains as collateral such initial margin as required by the exchange on which the transaction is effected. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the Fund as unrealized gains and losses. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. As collateral for futures contracts, the Fund is required under the 1940 Act to maintain assets consisting of cash, cash equivalents or liquid securities. This collateral is required to be adjusted daily to reflect the market value of the purchase obligation for long futures contracts or the market value of the instrument underlying the contract, but not less than the market price at which the futures contract was established, for short futures contracts. E) SHORT POSITIONS - The Evolution VP Managed Bond Fund, the Evolution VP Managed Equity Fund and the Dynamic VP HY Bond Fund may engage in short sale transactions. For financial statement purposes, an amount equal to the settlement amount is included in the Statement of Assets and Liabilities as an asset and an equivalent liability. The amount of the liability is subsequently marked-to-market to reflect the current value of the short position. Subsequent fluctuations in the market prices of securities sold, but not yet purchased, may require purchasing the securities at prices which may differ from the market value reflected on the Statement of Assets and Liabilities. The Fund is liable for any dividends payable on securities while those securities are in a short position. As collateral for its short positions, the Fund is required under the 1940 Act to maintain assets consisting of cash, cash equivalents or liquid securities equal to the market value of the securities sold short. This collateral is required to be adjusted daily. F) RISKS OF OPTIONS, FUTURES CONTRACTS, OPTIONS ON FUTURES CONTRACTS AND SHORT POSITIONS - The risks inherent in the use of options, futures contracts, options on futures contracts and short positions include 1) adverse changes in the value of such instruments; 2) imperfect correlation between the price of options and futures contracts and options thereon and movements in the price of the underlying securities, index or futures contracts; 3) the possible absence of a liquid secondary market for any particular instrument at any time; 4) the possible need to defer closing out certain 22 positions to avoid adverse tax consequences; and 5) the possible nonperformance by the counterparty under the terms of the contract. The Funds designate all cash, cash equivalents and liquid securities as collateral for written options, futures contracts and short positions. G) SECURITY TRANSACTIONS - Investment transactions are recorded on trade date. The Funds determine the gain or loss realized from the investment transactions on the basis of identified cost, which is the same basis used for federal income tax purposes. H) FEDERAL INCOME TAXES - Each Fund intends to comply with the requirements of Subchapter M of the Internal Revenue Code necessary to qualify as a regulated investment company and to make the requisite distributions of income and capital gains to its shareholders sufficient to relieve it from all or substantially all federal income taxes. Therefore, no Federal income or excise tax provision is required. Net investment income and realized gains and losses for federal income tax purposes may differ from that reported on the financial statements because of permanent book-to-tax differences. GAAP requires that permanent differences between financial reporting and tax reporting be reclassified between various components of net assets. These differences are primarily due to net operating losses. I) INCOME AND EXPENSES - Dividend income is recognized on the ex-dividend date, and interest income, including amortization of premium and discount is recognized on an accrual basis. The Funds incur expenses that are directly attributable to each Fund, such as advisory fees and registration costs. Expenses that are not directly attributable to a Fund are generally allocated among the funds comprising the Trust in proportion to their respective average net assets. J) DISTRIBUTIONS TO SHAREHOLDERS - Each Fund intends to distribute to its shareholders at least annually substantially all net investment income and net realized capital gains, if any. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. There were no distributions paid during the period ended June 30, 2005 for the Evolution VP Managed Bond Fund, the Evolution VP Managed Equity Fund and the Dynamic VP HY Bond Fund. For the period ended, June 30, 2005, the VP Money Market Fund distributed $16,949 from net investment income. As of June 30, 2005, the Funds did not have any net capital loss carryforwards or any deferred post-October losses. K) USE OF ESTIMATES - The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 23 3. SHARES OF BENEFICIAL INTERESTS TRANSACTIONS
EVOLUTION VP MANAGED BOND FUND EVOLUTION VP MANAGED EQUITY FUND --------------------------------------- --------------------------------------- SIX MONTHS ENDED SIX MONTHS ENDED JUNE 30, 2005 YEAR ENDED JUNE 30, 2005 YEAR ENDED (UNAUDITED) DECEMBER 31, 2004(1) (UNAUDITED) DECEMBER 31, 2004(1) ---------------- -------------------- ---------------- -------------------- CLASS A: Shares sold 84,268 50,832 114,995 64,109 Shares issued to holders in reinvestment of dividends -- -- -- -- Shares redeemed (4,479) (14,540) (12,606) (14,531) ------ ------- ------- ------- Total net increase (decrease) from shares of beneficial interests transactions 79,789 36,292 102,389 49,578 ====== ======= ======= =======
DYNAMIC VP HY BOND FUND VP MONEY MARKET FUND ----------------------- -------------------- PERIOD ENDED PERIOD ENDED JUNE 30, 2005 JUNE 30, 2005 (UNAUDITED) (UNAUDITED) ----------------------- -------------------- CLASS A: Shares sold 2,055,537 30,591,559 Shares issued to holders in reinvestment of dividends -- 16,949 Shares redeemed (452,116) (21,101,488) --------- ----------- Total net increase (decrease) from shares of beneficial interests transactions 1,603,421 9,507,020 ========= ===========
(1) Each Fund sold 2,500 shares of beneficial interests to the Advisor upon seeding of each Fund on April 19, 2005. 4. INVESTMENT TRANSACTIONS During the period ended June 30, 2005, the aggregate purchases and sales of investments (excluding short-term investments) were:
EVOLUTION VP MANAGED EVOLUTION VP MANAGED DYNAMIC VP HY VP MONEY BOND FUND EQUITY FUND BOND FUND MARKET FUND -------------------- -------------------- ------------- ----------- Purchases $5,466,767 $11,447,547 $38,513,835 $ -- Sales 4,290,506 9,755,132 8,878,132 --
There were no purchases or sales of long-term U.S. Government Securities during the period ended June 30, 2005 for any of the Funds. 24 5. INVESTMENT ADVISORY AND OTHER AGREEMENTS The Funds have entered into an investment advisory agreement with Rafferty Asset Management, LLC ("Advisor"). The Advisor receives a fee, computed daily and payable monthly, at the annual rates presented below as applied to each Fund's daily net assets. In addition, the Advisor has entered into sub-advisory agreements relating to the Evolution Managed Bond Fund and the Evolution Managed Equity Fund with Flexible Plan Investments, Ltd., whereby the sub-advisor will direct investment activities of the Sub-Advised Funds. The Advisor pays, out of the management fees it receives from the Funds, a fee for these services. Additionally, the Advisor may waive additional fees it might otherwise normally charge the Funds. For the period ended June 30, 2005, the Advisor agreed to pay all operating expenses, in excess of the annual cap on expenses presented below as applied to each Fund's average daily net assets. The Advisor may recover from the Funds the expenses paid in excess of the annual cap on expenses for the three previous years, as long as the recovery does not cause the Fund to exceed such annual cap on expenses. For the period ended June 30, 2005, the Advisor paid the following expenses:
EVOLUTION VP MANAGED EVOLUTION VP MANAGED DYNAMIC VP HY VP MONEY BOND FUND EQUITY FUND BOND FUND MARKET FUND -------------------- -------------------- ------------- ----------- CLASS A: Annual Advisory rate 1.00% 1.00% 0.75% 0.50% Annual cap on expenses 2.00% 2.00% 1.75% 1.75% Waiver of expenses paid in excess of annual cap on expenses $45,555 $53,368 $40,663 $26,887 Advisor expense waiver recovery $ -- $ -- $ -- $ --
Remaining expenses subject to potential recovery expiring in:
EVOLUTION VP MANAGED EVOLUTION VP MANAGED DYNAMIC VP HY VP MONEY BOND FUND EQUITY FUND BOND FUND MARKET FUND -------------------- -------------------- ------------- ----------- 2007 $53,095 $58,373 $ -- $ -- 2008 $45,555 $53,368 $40,663 $26,887
The Advisor paid all offering costs and organizational expenses associated with the registration and seeding of each Fund. In the ordinary course of business, the Funds enter into contracts that contain a variety of indemnification provisions pursuant to which the Funds agree to indemnify third parties upon occurrence of specified events. The Fund's maximum exposure relating to these indemnification agreements is unknown. However, the Funds have not had prior claims or losses in connection with these provisions and believe the risk of loss is remote. 25 POTOMAC INSURANCE TRUST TRUSTEES AND OFFICERS (UNAUDITED) The business and affairs of the Funds are managed under the direction of the Funds' Board of Trustees. Information pertaining to the Trustees and Officers of the Funds is set forth below. The SAI includes additional information about the Funds' Trustees and Officers and is available without charge, upon request by calling 1-800-851-0511.
------------------------------------------------------------------------------------------------------------------ PRINCIPAL NUMBER OF POSITION(S) OCCUPATION DURING PORTFOLIOS NAME, ADDRESS AND AGE: HELD WITH THE TRUST: TERM OF OFFICE: PAST FIVE YEARS: OVERSEEN BY TRUSTEE**: ------------------------------------------------------------------------------------------------------------------ INTERESTED TRUSTEES Lawrence C. Rafferty* Chairman of the Lifetime of Trust Chairman and Chief 31 33 Whitehall St., Board of until removal or Executive Officer of 10th Flr. Trustees since 1997 resignation Rafferty, New York, NY 1997 -- present; Chief 10004 Executive Officer of Age: 63 Rafferty Companies, LLC, 1996 -- present; Chief Executive Officer of Rafferty Capital Markets, Inc., 1995 -- present. ------------------------------------------------------------------------------------------------------------------ Jay F. Higgins* Trustee since 1997 Lifetime of Trust Chairman, Bengal 31 33 Whitehall St., until removal or Partners LLC, 10th Flr. resignation 1998 -- present (NASD New York, NY Broker Dealer). 10004 Age: 60 ------------------------------------------------------------------------------------------------------------------ ---------------------- ------------------- OTHER TRUSTEESHIPS NAME, ADDRESS AND AGE: HELD BY TRUSTEE ---------------------- ------------------- INTERESTED TRUSTEES Lawrence C. Rafferty* None 33 Whitehall St., 10th Flr. New York, NY 10004 Age: 63 ---------------------- ------------------- Jay F. Higgins* Dwango North 33 Whitehall St., America Corp 10th Flr. (radio, telephone, New York, NY communications) 10004 Age: 60 ---------------------- -------------------
PRINCIPAL NUMBER OF POSITION(S) OCCUPATION DURING PORTFOLIOS NAME, ADDRESS AND AGE: HELD WITH FUNDS: TERM OF OFFICE: PAST FIVE YEARS: OVERSEEN BY TRUSTEE**: ------------------------------------------------------------------------------------------------------------------ NON-INTERESTED TRUSTEES Kevin G. Boyle*** Trustee since 2002 Lifetime of Trust President, Kevin G. 31 33 Whitehall St., until removal or Boyle Securities, Inc., 10th Flr. resignation 1981 -- present. New York, NY 10004 Age: 64 ------------------------------------------------------------------------------------------------------------------ Daniel J. Byrne Trustee since 1997 Lifetime of Trust President and Chief 31 33 Whitehall St., until removal or Executive Officer of 10th Flr. resignation Byrne Securities Inc., New York, NY 1992 -- present; 10004 Trustee, The Opening Age: 61 Word Program, Wyandanch, New York. ------------------------------------------------------------------------------------------------------------------ Gerald E. Shanley III Trustee since 1997 Lifetime of Trust Business Consultant, 31 33 Whitehall St., until removal or 1985 -- present; 10th Flr. resignation Trustee of Estate of New York, NY Charles S. Payson, 10004 1987 -- present. Age: 62 OTHER TRUSTEESHIPS NAME, ADDRESS AND AGE: HELD BY TRUSTEE ----------------------- ------------------- NON-INTERESTED TRUSTEES Kevin G. Boyle*** None 33 Whitehall St., 10th Flr. New York, NY 10004 Age: 64 ----------------------- ------------------- Daniel J. Byrne None 33 Whitehall St., 10th Flr. New York, NY 10004 Age: 61 ----------------------- ------------------- Gerald E. Shanley III None 33 Whitehall St., 10th Flr. New York, NY 10004 Age: 62
POTOMAC INSURANCE TRUST TRUSTEES AND OFFICERS (UNAUDITED)
PRINCIPAL NUMBER OF POSITION(S) OCCUPATION DURING PORTFOLIOS NAME, ADDRESS AND AGE: HELD WITH FUNDS: TERM OF OFFICE: PAST FIVE YEARS: OVERSEEN BY TRUSTEE**: ------------------------------------------------------------------------------------------------------------------ OFFICERS Daniel D. O'Neill Chief Executive One year Managing Director of 33 Whitehall St., Officer since 2003, Rafferty, 10th Flr. President since 1999 -- present; New York, NY 10004 1999 Portfolio Manager, Age: 38 Hermitage Capital Management, 1998 -- 1999; Associate, Akin, Gump, Strauss, Hauer & Feld, LLP, 1995 -- 1998 (law firm). ------------------------------------------------------------------------------------------------------------------ Timothy P. Hagan Chief Compliance One year Vice President of 33 Whitehall St., Officer and Chief Rafferty, 10th Flr. Financial Officer 1997 -- present. New York, NY since 2004 10004 Age: 63 ------------------------------------------------------------------------------------------------------------------ Philip A. Harding Senior Vice One year Vice President of 33 Whitehall St., President since Rafferty, 10th Flr. 1999 1997 -- present. New York, NY 10004 Age: 62 ------------------------------------------------------------------------------------------------------------------ Steven P. Sprague Treasurer and One year Chief Financial Officer 33 Whitehall St., Controller since of Rafferty 10th Flr. 1999 New York, NY 10004 Age: 56 ------------------------------------------------------------------------------------------------------------------ Eric W. Falkeis Secretary since One year Vice President, U.S. 615 East Michigan 2004 Bancorp Fund Services, Street LLC, 1997 -- present. Milwaukee, WI 53202 Age: 32 ------------------------------------------------------------------------------------------------------------------ Angela M. Brickl Assistant Secretary One year Compliance 615 East Michigan since 2004 Administrator, U.S. Street Bancorp Fund Services Milwaukee, WI 53202 LLC, 2003 -- present, Age: 29 Business Analyst, Strong Financial Corp., 2002 -- 2003, Senior Auditor, Arthur Andersen 1999 -- 2002 ------------------------------------------------------------------------------------------------------------------ OTHER TRUSTEESHIPS NAME, ADDRESS AND AGE: HELD BY TRUSTEE ----------------------- ------------------- OFFICERS Daniel D. O'Neill None 33 Whitehall St., 10th Flr. New York, NY 10004 Age: 38 ----------------------- ------------------- Timothy P. Hagan None 33 Whitehall St., 10th Flr. New York, NY 10004 Age: 63 ----------------------- ------------------- Philip A. Harding None 33 Whitehall St., 10th Flr. New York, NY 10004 Age: 62 ----------------------- ------------------- Steven P. Sprague None 33 Whitehall St., 10th Flr. New York, NY 10004 Age: 56 ----------------------- ------------------- Eric W. Falkeis None 615 East Michigan Street Milwaukee, WI 53202 Age: 32 ----------------------- ------------------- Angela M. Brickl None 615 East Michigan Street Milwaukee, WI 53202 Age: 29 ----------------------- -------------------
* Mr. Rafferty and Mr. Higgins are affiliated with Rafferty. Mr. Rafferty is the Chairman and Chief Executive Officer of Rafferty and Mr. Higgins owns a beneficial interest in Rafferty. ** The Potomac Complex consists of the Potomac Funds which currently offers for sale to the public 17 portfolios of the 19 currently registered with the SEC and the Potomac Insurance Trust which currently offers for sale to the public 4 portfolios of the 12 currently registered with the SEC. *** Mr. Boyle was an interested Trustee for the period May through September 2004 due to his daughter being employed by Rafferty Capital Markets, LLC. The Trustees and Officers table is current as of June 30, 2005. INVESTMENT ADVISOR Rafferty Asset Management, LLC 33 Whitehall Street, 10th Floor New York, NY 10004 ADMINISTRATOR, TRANSFER AGENT, DIVIDEND PAYING AGENT & SHAREHOLDING SERVICING AGENT U.S. Bancorp Fund Services, LLC P.O. Box 1993 Milwaukee, WI 53201-1993 CUSTODIAN U.S. Bank, N.A. 425 Walnut Street Cincinnati, Ohio 45202 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Ernst & Young LLP 233 S. Wacker Dr. Chicago, IL 60606 DISTRIBUTOR Rafferty Capital Markets, LLC 59 Hilton Avenue Garden City, NY 11530 The Fund's Proxy Voting Policies are available without charge by calling 1-800-851-0511, or by accessing the SEC's website, at www.sec.gov. The actual voting records relating to portfolio securities during the most recent twelve month period ended June 30 (starting with the year ending June 30, 2005) will be available without charge by calling 1-800-851-0511 or by accessing the SEC's website at www.sec.gov. Beginning with the Funds' first and third quarters ending after July 9, 2004, the Funds will file complete schedules of portfolio holdings with the SEC on Form N-Q. The Form N-Q will be available without charge, upon request, by calling 1-800-851-0511, or by accessing the SEC's website, at www.sec.gov. This report has been prepared for shareholders and may be distributed to others only if preceded or accompanied by a current prospectus. SEMI-ANNUAL REPORT June 30, 2005 [THE POTOMAC FUNDS New LOGO] 33 Whitehall Street, 10th Floor New York, NY 10004 (800) 851-0511 ITEM 2. CODE OF ETHICS. NOT APPLICABLE FOR SEMI-ANNUAL REPORTS. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. NOT APPLICABLE FOR SEMI-ANNUAL REPORTS. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. NOT APPLICABLE FOR SEMI-ANNUAL REPORTS. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable to open-end investment companies. 2 ITEM 6. SCHEDULE OF INVESTMENTS. Schedule of Investments is included as part of the report to shareholders filed under Item 1 of this Form. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable to open-end investment companies. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES Not applicable to open-end investment companies. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASES. Not applicable to open-end investment companies. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no material changes to the procedures by which shareholders may recommend nominees to the registrant's board of directors/trustees. ITEM 11. CONTROLS AND PROCEDURES. (a) The Registrant's President/Chief Executive Officer and Treasurer/Chief Financial Officer have reviewed the Registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the "Act")) as of a date within 90 days of the filing of this report, as required by Rule 30a-3(b) under the Act and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934. Based on their review, such officers have concluded that the disclosure controls and procedures are effective in ensuring that information required to be disclosed in this report is appropriately recorded, processed, summarized and reported and made known to them by others within the Registrant and by the Registrant's service provider. (b) There were no significant changes in the Registrant's internal controls over financial reporting that occurred during the Registrant's last fiscal half-year that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting. ITEM 12. EXHIBITS. (a) (1) Any code of ethics or amendment thereto, that is subject of the disclosure required by Item 2, to the extent that the registrant intends to satisfy Item 2 requirements through filing an exhibit. 1) Incorporate by reference to previous Form N-CSR filing. 3 (2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. (3) Any written solicitation to purchase securities under Rule 23c-1 under the Act sent or given during the period covered by the report by or on behalf of the registrant to 10 or more persons. Not applicable to open-end investment companies. (b) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith. 4 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) The Potomac Insurance Trust --------------------------------------------------------- By (Signature and Title) /s/ Daniel D. O'Neill ----------------------------------------------- Daniel D. O'Neill, President Date September 7, 2005 ---------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By (Signature and Title)* /s/ Daniel D. O'Neill --------------------------------------------- Daniel D. O'Neill, President Date September 7, 2005 -------------------------------------------------------------- By (Signature and Title)* /s/ Timothy P. Hagan --------------------------------------------- Timothy P. Hagan, Chief Financial Officer Date September 7, 2005 -------------------------------------------------------------- * Print the name and title of each signing officer under his or her signature. 5