-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cz+MVWvBE+hHaGGeR4R7cwvaq+OM+NbcQ0FppmOTRnB26GyUH6nHDfGcKdofh7zf H0LlXf4EceIwPp63UfUwBQ== 0000950137-06-002732.txt : 20060308 0000950137-06-002732.hdr.sgml : 20060308 20060308145529 ACCESSION NUMBER: 0000950137-06-002732 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060308 DATE AS OF CHANGE: 20060308 EFFECTIVENESS DATE: 20060308 FILER: COMPANY DATA: COMPANY CONFORMED NAME: POTOMAC INSURANCE TRUST CENTRAL INDEX KEY: 0001102060 IRS NUMBER: 000000000 STATE OF INCORPORATION: MA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-09761 FILM NUMBER: 06672809 BUSINESS ADDRESS: STREET 1: 33 WHITEHALL ST. FL 10 CITY: NEW YORK STATE: NY ZIP: 10004 BUSINESS PHONE: 646-572-3390 MAIL ADDRESS: STREET 1: 33 WHITEHALL ST. FL 10 CITY: NEW YORK STATE: NY ZIP: 10004 0001102060 S000007156 Evolution VP Managed Bond Fund C000019560 Class A 0001102060 S000007157 Evolution VP Managed Equity Fund C000019561 Class A 0001102060 S000007158 Dynamic VP HY Bond Fund C000019562 Class A 0001102060 S000007166 VP Money Market Fund C000019570 Class A N-CSR 1 c02132nvcsr.txt FORM N-CSR As filed with the Securities and Exchange Commission on [date] 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: DECEMBER 31, 2005 Date of reporting period: DECEMBER 31, 2005 ITEM 1. REPORT TO STOCKHOLDERS LETTER TO SHAREHOLDERS FEBRUARY 14, 2006 Dear Shareholders, For the U.S. equities and fixed income markets, the calendar year 2005 was uneventful in the aggregate. On a total return basis, all of the major indexes were up slightly, with the S&P 500, Dow, Nasdaq 100 and Russell 2000 gaining 4.9%, 1.72%, 1.90% and 4.6%, respectively. On the fixed income side, the Lehman Brothers US Aggregate Bond Index declined 2.42% in price terms but gained 2.43% on a total return basis. Volatility in the equities and fixed income markets was low last year, though commodities, and in particular energy, experienced extreme volatility. Corporate earnings were generally good despite high energy prices. The markets shrugged off the terrorist bombings in London but remained wary about the macro problems in the Middle East. The decline in housing prices which many expected, and which was predicted to have a negative impact on consumer spending, did not occur. Energy was the best performing sector again while autos struggled, with downgrades in the credit ratings of GM and Ford spooking the credit markets at various points. The twin deficits - budget and trade - remain a serious concern, and China's July announcement of a currency devaluation proved to be illusory. Significant increases in short term interest rates - from 2.25% to 4.25% - did not much impact rates on bonds of longer maturities as the yield on the 10 Year Treasury Note rose only slightly, moving from 4.22% to 4.39%. As the domestic bond markets rallied during the first few months of 2005, the VP Evolution Managed Bond Fund struggled due to overexposure to international bonds and certain high yield issues. Unfortunately, the Fund had a substantial cash position at the end of the 1(st) Quarter and missed a market upturn in April and part of the rally which followed. Although the Bond Fund rotated into and out of several areas of the market and registered gains, the Fund's performance lagged the overall bond market during this rally. The equity markets moved sideways during the first quarter of 2005 and the VP Evolution Managed Equity Fund declined 1% as the managers struggled to discern market direction. The Fund's performance improved in the second quarter, with a modest gain on positions in international ETFs, especially those focused on Latin America and Europe. Small-caps continued to buoy the markets in the 3(rd) quarter of 2005, and the Fund took notice and maintained investments in excess of 30% in that asset class, while at the same time overweighting technology and energy companies. The 4(th) quarter saw modest gains in most equity indexes as the Fund continued to overweight technology stocks and international investments. By the end of the year the energy positions were pared down in favor of the health care sector. The VP HY Bond Fund produced a total return of 1.50% from its inception on February 1, 2005 through December 31, 2005 on a total return basis compared to 2.73% for the Lehman Brothers US Corporate High Yield Index. The Fund's high level of portfolio turnover contributed to its underperformance relative to the benchmark. 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 THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE; PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE AND AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE DATA QUOTED. TO OBTAIN PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, PLEASE CALL, TOLL-FREE, 1-800-851-0511. AN INVESTMENT IN ANY OF THE POTOMAC FUNDS IS SUBJECT TO A NUMBER OF RISKS THAT COULD AFFECT THE VALUE OF ITS SHARES. IT IS IMPORTANT THAT INVESTORS CLOSELY REVIEW AND UNDERSTAND THESE RISKS BEFORE MAKING AN INVESTMENT. INVESTORS CONSIDERING AN INVESTMENT MAY OBTAIN A PROSPECTUS BY CALLING 800-851-0511. INVESTORS SHOULD READ THE PROSPECTUS CAREFULLY FOR MORE COMPLETE INFORMATION, INCLUDING CHARGES, EXPENSES, AND ADDITIONAL RISKS, BEFORE INVESTING OR SENDING MONEY. EVOLUTION VP MANAGED BOND FUND
EVOLUTION VP MANAGED BOND FUND LEHMAN U.S. AGGREGATE BOND INDEX ------------------------------ -------------------------------- 7/04 10000.00 10000.00 9/04 10175.00 10319.00 12/04 10380.00 10418.00 3/05 9955.00 10368.00 6/05 10175.00 10680.00 9/05 10100.00 10608.00 12/05 9945.00 10643.00
AVERAGE ANNUAL TOTAL RETURN(1) ------------------------- SINCE 1 YEAR INCEPTION ------ --------------- EVOLUTION VP MANAGED BOND FUND (4.19%) (0.37%) LEHMAN U.S. AGGREGATE BOND INDEX 2.43% 4.23%
This chart illustrates the performance of a hypothetical $10,000 investment made on the Fund's inception, and is not intended to imply any future performance. The returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The performance of the Lehman U.S. Aggregate Bond Index does not reflect the deduction of fees associated with a mutual fund, such as investment management fees. Investors cannot invest directly in an index, although they can invest in its underlying securities. During the period shown, Rafferty Asset Management, LLC, waived and/or reimbursed fees for various expenses. Had these waivers and/or reimbursements not been in effect, performance would have been lower. (1) As of December 31, 2005. (2) Commencement of operations. 2 EVOLUTION VP MANAGED EQUITY FUND (Chart)
EVOLUTION VP MANAGED EQUITY FUND S&P 500 INDEX -------------------------------- ------------- 7/04 10000.00 10000.00 9/04 10015.00 9769.00 12/04 10530.00 10623.00 3/05 10170.00 10348.00 6/05 10365.00 10442.00 9/05 11490.00 10771.00 12/05 11560.00 10750.00
AVERAGE ANNUAL TOTAL RETURN(1) ------------------------- SINCE 1 YEAR INCEPTION ------ --------------- EVOLUTION VP MANAGED EQUITY FUND 9.78% 10.12% S&P 500 INDEX 3.00% 4.93%
This chart illustrates the performance of a hypothetical $10,000 investment made on the Fund's inception, and is not intended to imply any future performance. The returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The performance of the S&P 500 Index does not reflect the deduction of fees associated with a mutual fund, such as investment management fees. Investors cannot invest directly in an index, although they can invest in its underlying securities. During the period shown, Rafferty Asset Management, LLC waived and/or reimbursed fees for various expenses. Had these waivers and/or reimbursements not been in effect, performance would have been lower. The performance data shown represents past performance and does not guarantee future results. (1) As of December 31, 2005. (2) Commencement of operations. 3 DYNAMIC VP HY BOND FUND (Chart)
DYNAMIC VP HY BOND FUND LEHMAN U.S. AGGREGATE BOND INDEX ----------------------- -------------------------------- 2/05 10000.00 10000.00 3/05 9825.00 9891.29 6/05 10030.00 10188.90 9/05 9950.00 10120.20 12/05 10149.00 10180.00
TOTAL RETURN(1) --------------- SINCE INCEPTION --------------- DYNAMIC VP HY BOND FUND 1.50% LEHMAN U.S. AGGREGATE BOND INDEX 1.80%
This chart illustrates the performance of a hypothetical $10,000 investment made on the Fund's inception, and is not intended to imply any future performance. The returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The performance of the Lehman U.S. Aggregate Bond Index does not reflect the deduction of fees associated with a mutual fund, such as investment management fees. Investors cannot invest directly in an index, although they can invest in its underlying securities. During the period shown, Rafferty Asset Management, LLC, waived and/or reimbursed fees for various expenses. Had these waivers and/or reimbursements not been in effect, performance would have been lower. (1) As of December 31, 2005 (2) Commencement of operations. The performance data shown represents past performance and does guarantee future results. 4 EXPENSE EXAMPLE DECEMBER 31, 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 for the entire period (July 1, 2005 - December 31, 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. However, the example below does not include portfolio trading commissions and related expenses, or other extraordinary expenses as determined under U.S. generally accepted accounting principles. 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. 5
EVOLUTION VP MANAGED BOND FUND -------------------------------------------------------- EXPENSES PAID BEGINNING ENDING DURING PERIOD ACCOUNT VALUE ACCOUNT VALUE JULY 1, 2005 - JULY 1, 2005 DECEMBER 31, 2005 DECEMBER 31, 2005* ------------- ----------------- ------------------ Actual $ 1,000.00 $ 977.40 $ 11.61 Hypothetical (5% return before expenses) 1,000.00 1,013.46 11.82
* Expenses are equal to the Fund's annualized expense ratio of 2.33%, multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.
EVOLUTION VP MANAGED EQUITY FUND -------------------------------------------------------- EXPENSES PAID BEGINNING ENDING DURING PERIOD ACCOUNT VALUE ACCOUNT VALUE JULY 1, 2005 - JULY 1, 2005 DECEMBER 31, 2005 DECEMBER 31, 2005* ------------- ----------------- ------------------ Actual $ 1,000.00 $ 1,115.80 $ 10.67 Hypothetical (5% return before expenses) 1,000.00 1,015.12 10.16
* Expenses are equal to the Fund's annualized expense ratio of 2.00%, multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.
DYNAMIC VP HY BOND FUND -------------------------------------------------------- EXPENSES PAID BEGINNING ENDING DURING PERIOD ACCOUNT VALUE ACCOUNT VALUE JULY 1, 2005 - JULY 1, 2005 DECEMBER 31, 2005 DECEMBER 31, 2005* ------------- ----------------- ------------------ Actual $ 1,000.00 $ 1,013.50 $ 8.88 Hypothetical (5% return before expenses) 1,000.00 1,016.38 8.89
* Expenses are equal to the Fund's annualized expense ratio of 1.75%, multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.
VP MONEY MARKET FUND -------------------------------------------------------- EXPENSES PAID BEGINNING ENDING DURING PERIOD ACCOUNT VALUE ACCOUNT VALUE JULY 1, 2005 - JULY 1, 2005 DECEMBER 31, 2005 DECEMBER 31, 2005* ------------- ----------------- ------------------ Actual $ 1,000.00 $ 1,010.70 $ 8.67 Hypothetical (5% return before expenses) 1,000.00 1,016.59 8.69
* Expenses are equal to the Fund's annualized expense ratio of 1.71%, multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period. 6 EVOLUTION VP MANAGED BOND FUND ALLOCATION OF FUND HOLDINGS (UNAUDITED) DECEMBER 31, 2005 [PIE CHART]
CORPORATED BONDS** TREASURY SECURITIES** MONEY MARKET FUND** CASH* - ------------------ --------------------- ------------------- ----- 39 51 7 3
EVOLUTION VP MANAGED EQUITY FUND ALLOCATION OF FUND HOLDINGS (UNAUDITED) DECEMBER 31, 2005 [PIE CHART]
MONEY MARKET FOREIGN CONSUMER CONSUMER HEALTH CASH* FUND** SECURITIES** DISCRETIONARY STAPLES ENERGY FINANCIALS CARE INDUSTRIALS - ----- ------ ------------ ------------- -------- ------ ---------- ------ ----------- 1 2 56 6 1 8 3 4 7 INFORMATION CASH* TECHNOLOGY MATERIALS - ----- ----------- --------- 1 10 2
THE PERCENTAGES IN THESE GRAPHS ARE CALCULATED BASED ON NET ASSETS. * CASH AND OTHER ASSETS LESS LIABILITIES. ** THESE SECURITIES ARE INVESTMENT COMPANIES THAT PRIMARILY INVEST IN THESE TYPES OF SECURITIES. 7 DYNAMIC VP HY BOND FUND ALLOCATION OF FUND HOLDINGS (UNAUDITED) DECEMBER 31, 2005 [PIE CHART]
CORPORATE BONDS MONEY MARKET FUND - --------------- ----------------- 85 15
VP MONEY MARKET FUND ALLOCATION OF FUND HOLDINGS (UNAUDITED) DECEMBER 31, 2005 [PIE CHART] Cash* 2 Money Market Funds 52 U.S. Government Agency Obligations 46
THE PERCENTAGES IN THESE GRAPHS ARE CALCULATED BASED ON NET ASSETS. * CASH AND OTHER ASSETS LESS LIABILITIES. 8 EVOLUTION VP MANAGED BOND FUND SCHEDULE OF INVESTMENTS DECEMBER 31, 2005
- ---------------------------------------------------------- SHARES VALUE - ---------------------------------------------------------- INVESTMENT COMPANIES - 89.3% 1,782 40/86 Strategic Income Fund $ 16,537 4,700 ACM Managed Income Fund 16,497 1,324 Alliance World Dollar Government Fund II 16,457 915 Bancroft Convertible Fund 16,516 720 Castle Convertible Fund 16,560 2,127 Ellsworth Convertible Growth and Income Fund 16,591 1,038 Evergreen Managed Income Fund 16,400 2,698 Franklin Universal Trust 16,620 10,422 iShares GS $ InvesTop Corporate Bond Fund 1,122,345 12,296 iShares Lehman 7-10 Year Treasury Bond Fund 1,031,758 8,667 iShares Lehman 20+ Year Treasury Bond Fund 795,457 1,863 iShares Lehman Aggregate Bond Fund 187,399 2,735 iShares Lehman US Treasury Inflation Protected Securities Fund 281,213 2,757 Managed High Income Portfolio 16,570 1,924 MFS Charter Income Trust 16,546 2,543 MFS Government Markets Income Trust 16,529 2,637 MFS Intermediate Income Trust 16,429 2,739 MFS Multimarket Income Trust 16,407
- ---------------------------------------------------------- SHARES VALUE - ---------------------------------------------------------- 1,162 Neuberger Berman Income Opportunity Fund $ 16,419 2,716 Putnam Master Intermediate Income Trust 16,486 2,698 Putnam Premier Income Trust 16,377 1,292 Salomon Brothers Emerging Markets Floating Rate Fund 16,589 1,279 Salomon Brothers Global High Income Fund 16,307 975 Salomon Brothers Variable Rate Strategic Fund 16,331 2,073 Scudder Global High Income Fund 16,563 ---------- TOTAL INVESTMENT COMPANIES (Cost $3,727,643) $3,747,903 ---------- SHORT-TERM INVESTMENT - 7.3% MONEY MARKET FUND - 7.3% $305,893 Federated Prime Obligations Fund - Class I (Cost $305,893) $ 305,893 ---------- TOTAL INVESTMENTS - 96.6% (Cost $4,033,536) $4,053,796 Other Assets in Excess of Liabilities - 3.4% 142,769 ---------- TOTAL NET ASSETS - 100.0% $4,196,565 ==========
Percentages are calculated as a percent of net assets. See notes to the financial statements. 9 EVOLUTION VP MANAGED EQUITY FUND SCHEDULE OF INVESTMENTS DECEMBER 31, 2005
- ---------------------------------------------------------- SHARES VALUE - ---------------------------------------------------------- COMMON STOCKS - 97.4% Aerospace & Defense - 0.9% 78 Alliant Techsystems, Inc.* $ 5,941 98 Engineered Support Systems, Inc. 4,081 128 L-3 Communications Holdings, Inc. 9,517 816 Mercury Computer Systems, Inc.* 16,834 87 Precision Castparts Corp. 4,507 790 Triumph Group, Inc.* 28,922 ---------- 69,802 ---------- Air Freight & Logistics - 0.2% 105 CNF, Inc. 5,869 120 EGL, Inc.* 4,508 58 Expeditors International of Washington, Inc. 3,916 49 United Parcel Service, Inc. - Class B 3,682 ---------- 17,975 ---------- Airlines - 0.6% 2,036 Mesa Air Group, Inc.* 21,297 941 Skywest, Inc. 25,275 ---------- 46,572 ---------- Auto Components - 0.9% 922 Cooper Tire & Rubber Co. 14,125 418 Johnson Controls, Inc. 30,476 1,060 Superior Industries International, Inc. 23,596 ---------- 68,197 ---------- Beverages - 0.1% 54 Brown-Forman Corp. - Class B 3,743 47 Hansen Natural Corp.* 3,704 ---------- 7,447 ---------- Biotechnology - 0.3% 1,823 Enzo Biochem, Inc.* 22,642 ---------- Building Products - 0.6% 146 American Standard Companies, Inc. 5,833 717 Lennox International, Inc. 20,219 361 Universal Forest Products, Inc. 19,945 ---------- 45,997 ---------- Capital Markets - 1.1% 79 The Bear Stearns Companies, Inc. 9,127 39 Franklin Resources, Inc. 3,667 230 The Goldman Sachs Group, Inc. 29,373 125 Investment Technology Group, Inc.* 4,430
- ---------------------------------------------------------- SHARES VALUE - ---------------------------------------------------------- Capital Markets - 1.1% (Continued) 184 Lehman Brothers Holdings, Inc. $ 23,583 86 Merrill Lynch & Co, Inc. 5,825 164 Morgan Stanley 9,305 ---------- 85,310 ---------- Chemicals - 0.1% 120 International Flavors & Fragrances, Inc. 4,020 96 The Scotts Miracle-Gro Co. - Class A 4,343 ---------- 8,363 ---------- Commercial Banks - 0.6% 1,087 Irwin Financial Corp. 23,284 630 PrivateBancorp, Inc. 22,409 ---------- 45,693 ---------- Commercial Services & Supplies - 1.8% 105 Administaff, Inc. 4,415 2,621 Allied Waste Industries, Inc.* 22,908 162 CDI Corp. 4,439 2,152 Central Parking Corp. 29,525 93 ChoicePoint, Inc.* 4,139 43 The Corporate Executive Board Co. 3,857 286 Education Management Corp.* 9,584 62 ITT Educational Services, Inc.* 3,665 301 Manpower, Inc. 13,996 509 Mobile Mini, Inc.* 24,127 435 On Assignment, Inc.* 4,746 375 Republic Services, Inc. 14,081 198 Rollins, Inc. 3,903 62 Stericycle, Inc.* 3,651 ---------- 147,036 ---------- Communications Equipment - 1.3% 607 Black Box Corp. 28,760 548 Comtech Telecommunications Corp.* 16,736 2,043 Ditech Communications Corp.* 17,059 85 Harris Corp. 3,656 601 Plantronics, Inc. 17,008 387 QUALCOMM, Inc. 16,672 ---------- 99,891 ---------- Computers & Peripherals - 1.0% 61 Apple Computer, Inc.* 4,385 1,032 Hewlett-Packard Co. 29,546
See notes to the financial statements. 10 EVOLUTION VP MANAGED EQUITY FUND SCHEDULE OF INVESTMENTS (continued) DECEMBER 31, 2005
- ---------------------------------------------------------- SHARES VALUE - ---------------------------------------------------------- COMMON STOCKS - 97.4% (CONTINUED) Computers & Peripherals - 1.0% (Continued) 112 International Business Machines Corp. $ 9,207 311 Lexmark International, Inc. - Class A* 13,942 71 SanDisk Corp.* 4,460 671 Synaptics, Inc.* 16,587 ---------- 78,127 ---------- Construction & Engineering - 0.6% 1,639 The Shaw Group, Inc.* 47,678 ---------- Consumer Services - 0.3% 613 Pre-Paid Legal Services, Inc. 23,423 ---------- Containers & Packaging - 0.6% 2,004 Myers Industries, Inc. 29,218 320 Temple-Inland, Inc. 14,352 ---------- 43,570 ---------- Distributors - 0.2% 252 Building Material Holding Corp. 17,189 ---------- Electronic Equipment & Instruments - 1.4% 135 CDW Corp. 7,772 759 Flir Systems, Inc.* 16,948 769 Jabil Circuit, Inc.* 28,522 2,140 Newport Corp.* 28,976 1,311 Plexus Corp.* 29,812 ---------- 112,030 ---------- Energy Equipment & Services - 1.0% 102 Cal Dive International, Inc.* 3,661 72 Lone Star Technologies, Inc.* 3,720 124 Nabors Industries Ltd.*(1) 9,393 348 Transocean, Inc.*(1) 24,252 612 Unit Corp.* 33,678 100 Weatherford International Ltd.*(1) 3,620 ---------- 78,324 ---------- Financial Services - 0.2% 295 Principal Financial Group, Inc. 13,992 ---------- Food & Staples Retailing - 0.4% 1,020 Performance Food Group Co.* 28,937 122 Sysco Corp. 3,788 ---------- 32,725 ----------
- ---------------------------------------------------------- SHARES VALUE - ---------------------------------------------------------- Food Products - 0.4% 379 Archer-Daniels-Midland Co. $ 9,346 462 ConAgra Foods, Inc. 9,369 512 Flowers Foods, Inc. 14,111 ---------- 32,826 ---------- Health Care Equipment & Supplies - 1.8% 2,766 Biolase Technology, Inc. 22,100 105 Biomet, Inc. 3,840 517 Biosite, Inc.* 29,102 1,048 Immucor, Inc.* 24,481 205 Intuitive Surgical, Inc.* 24,040 637 SurModics, Inc.* 23,563 373 Waters Corp.* 14,100 ---------- 141,226 ---------- Health Care Providers & Services - 1.6% 83 American Healthways, Inc.* 3,756 71 Caremark Rx, Inc.* 3,677 302 Cerner Corp.* 27,455 82 Covance, Inc.* 3,981 2,086 Dendrite International, Inc.* 30,059 292 Express Scripts, Inc.* 24,470 375 Humana, Inc.* 20,374 94 Lincare Holdings, Inc.* 3,939 75 Quest Diagnostics, Inc. 3,861 96 Renal Care Group, Inc.* 4,542 ---------- 126,114 ---------- Hotels Restaurants & Leisure - 1.1% 754 Bally Total Fitness Holding Corp.* 4,735 247 Darden Restaurants, Inc. 9,603 207 International Speedway Corp. - Class A 9,915 404 Jack in the Box, Inc.* 14,112 4,073 Krispy Kreme Doughnuts, Inc.* 23,379 2,675 Multimedia Games, Inc.* 24,744 75 Papa John's International, Inc.* 4,448 ---------- 90,936 ---------- Household Durables - 0.9% 638 American Greetings Corp. - Class A 14,017 103 D.R. Horton, Inc. 3,680 51 KB Home 3,706 219 Lennar Corp. 13,363 26 NVR, Inc.* 18,252 94 Pulte Homes, Inc. 3,700 51 Ryland Group, Inc. 3,679
See notes to the financial statements. 11 EVOLUTION VP MANAGED EQUITY FUND SCHEDULE OF INVESTMENTS (continued) DECEMBER 31, 2005
- ---------------------------------------------------------- SHARES VALUE - ---------------------------------------------------------- COMMON STOCKS - 97.4% (CONTINUED) Household Durables - 0.9% (Continued) 100 Standard-Pacific Corp. $ 3,680 107 Toll Brothers, Inc.* 3,706 ---------- 67,783 ---------- Household Products - 0.2% 249 The Clorox Co. 14,166 ---------- Industrial Conglomerates - 0.0% 48 3M Co. 3,720 ---------- Insurance - 0.6% 79 AFLAC, Inc. 3,667 54 American International Group, Inc. 3,684 132 Cincinnati Financial Corp. 5,898 102 Mercury General Corp. 5,938 977 SCPIE Holdings, Inc.* 20,322 107 Torchmark Corp. 5,949 80 Zenith National Insurance Corp. 3,690 ---------- 49,148 ---------- Internet Software & Services - 0.6% 384 j2 Global Communications, Inc.* 16,412 784 WebEx Communications, Inc.* 16,958 254 Websense, Inc.* 16,673 ---------- 50,043 ---------- Investment Companies - 55.6% 21,314 iShares MSCI EAFE Index Fund 1,267,331 19,920 iShares MSCI Emerging Markets Index Fund 1,757,940 1,708 iShares MSCI Pacific ex-Japan Index Fund 168,477 10,132 iShares S&P Latin American 40 Index Fund 1,244,716 ---------- 4,438,464 ---------- IT Services - 0.6% 606 Acxiom Corp. 13,938 1,818 Convergys Corp.* 28,815 201 CSG Systems International, Inc.* 4,486 195 Intrado, Inc.* 4,489 ---------- 51,728 ---------- Leisure Equipment & Products - 0.3% 1,106 Jakks Pacific, Inc.* 23,160 ----------
- ---------------------------------------------------------- SHARES VALUE - ---------------------------------------------------------- Machinery - 1.5% 84 Ceradyne, Inc.* $ 3,679 132 CLARCOR, Inc. 3,922 88 Harsco Corp. 5,941 100 Illinois Tool Works, Inc. 8,799 430 JLG Industries, Inc. 19,634 113 Kennametal, Inc. 5,767 91 Oshkosh Truck Corp. 4,058 315 Reliance Steel & Aluminum Co. 19,253 637 SPX Corp. 29,155 526 Trinity Industries, Inc. 23,181 ---------- 123,389 ---------- Media - 0.8% 940 Clear Channel Communications, Inc. 29,563 76 The McGraw-Hill Companies, Inc. 3,924 1,678 Time Warner, Inc. 29,264 ---------- 62,751 ---------- Metals & Mining - 1.0% 169 Allegheny Technologies, Inc. 6,097 349 Cleveland-Cliffs, Inc. 30,911 109 Freeport-McMoRan Copper & Gold, Inc. - Class B 5,864 87 Nucor Corp. 5,805 55 Peabody Energy Corp. 4,533 41 Phelps Dodge Corp. 5,899 118 Quanex Corp. 5,896 402 Steel Dynamics, Inc. 14,275 ---------- 79,280 ---------- Office Electronics - 0.2% 396 Zebra Technologies Corp. - Class A* 16,969 ---------- Oil, Gas & Consumable Fuels - 7.2% 193 Apache Corp. 13,224 332 Burlington Resources, Inc. 28,618 530 Cabot Oil & Gas Corp. 23,903 105 Chevron Corp. 5,961 141 Cimarex Energy Co.* 6,065 229 ConocoPhillips 13,323 1,056 Denbury Resources, Inc.* 24,056 382 Devon Energy Corp. 23,890 390 EOG Resources, Inc. 28,614 171 Exxon Mobil Corp. 9,605 508 Forest Oil Corp.* 23,150 519 Frontier Oil Corp. 19,478
See notes to the financial statements. 12 EVOLUTION VP MANAGED EQUITY FUND SCHEDULE OF INVESTMENTS (continued) DECEMBER 31, 2005
- ---------------------------------------------------------- SHARES VALUE - ---------------------------------------------------------- COMMON STOCKS - 97.4% (CONTINUED) Oil, Gas & Consumable Fuels - 7.2% (Continued) 331 Kerr-McGee Corp. $ 30,075 147 Marathon Oil Corp. 8,963 68 Murphy Oil Corp. 3,671 576 Newfield Exploration Co.* 28,840 594 Noble Energy, Inc. 23,938 280 Norsk Hydro ASA - ADR 28,890 155 Occidental Petroleum Corp. 12,381 191 Pogo Producing Co. 9,514 650 Remington Oil & Gas Corp.* 23,725 656 Southwestern Energy Co.* 23,577 781 St. Mary Land & Exploration Co. 28,749 248 Sunoco, Inc. 19,438 628 Swift Energy Co.* 28,304 664 Valero Energy Corp. 34,262 454 Vintage Petroleum, Inc. 24,212 652 XTO Energy, Inc. 28,649 ---------- 577,075 ---------- Paper & Forest Products - 0.1% 214 Louisiana-Pacific Corp. 5,878 88 Weyerhaeuser Co. 5,838 ---------- 11,716 ---------- Pharmaceuticals - 0.8% 2,423 Bradley Pharmaceuticals, Inc.* 23,018 95 Forest Laboratories, Inc.* 3,865 68 Johnson & Johnson 4,087 264 King Pharmaceuticals, Inc.* 4,467 904 Watson Pharmaceuticals, Inc.* 29,389 ---------- 64,826 ---------- Road & Rail - 0.3% 84 Burlington Northern Santa Fe Corp. 5,949 201 Heartland Express, Inc. 4,078 344 Norfolk Southern Corp. 15,422 ---------- 25,449 ---------- Semiconductor & Semiconductor Equipment - 2.1% 902 Altera Corp.* 16,714 468 Analog Devices, Inc. 16,787 339 KLA-Tencor Corp. 16,723 464 Lam Research Corp.* 16,556 468 Linear Technology Corp. 16,881 461 Maxim Integrated Products, Inc. 16,707 1,855 MEMC Electronic Materials, Inc.* 41,125
- ---------------------------------------------------------- SHARES VALUE - ---------------------------------------------------------- Semiconductor & Semiconductor Equipment - 2.1% (Continued) 114 Microchip Technology, Inc. $ 3,665 450 Silicon Laboratories, Inc.* 16,497 109 Supertex, Inc.* 4,823 ---------- 166,478 ---------- Software - 2.6% 464 Adobe Systems, Inc. 17,149 960 ANSYS, Inc.* 40,982 949 Autodesk, Inc. 40,759 98 FactSet Research Systems, Inc. 4,034 321 Fair Isaac Corp. 14,179 1,799 JDA Software Group, Inc.* 30,601 2,188 MapInfo Corp.* 27,591 143 SPSS, Inc.* 4,423 1,274 THQ, Inc.* 30,385 ---------- 210,103 ---------- Specialty Retail - 1.5% 333 Barnes & Noble, Inc. 14,209 111 Bed Bath & Beyond, Inc.* 4,013 84 Best Buy Co, Inc. 3,652 92 Chico's FAS, Inc.* 4,042 464 Claire's Stores, Inc. 13,558 799 The Gap Inc. 14,094 1,260 Linens 'n Things, Inc.* 33,516 108 Michaels Stores, Inc. 3,820 652 Office Depot, Inc.* 20,473 173 Staples, Inc. 3,929 96 Tiffany & Co. 3,676 95 Williams-Sonoma, Inc.* 4,099 ---------- 123,081 ---------- Textiles, Apparel & Luxury Goods - 0.4% 2,785 Ashworth, Inc.* 23,533 68 Oxford Industries, Inc. 3,720 125 Timberland Co.* 4,069 ---------- 31,322 ---------- Thrifts & Mortgage Finance - 0.3% 344 Radian Group, Inc. 20,155 ---------- Tobacco - 0.1% 78 Altria Group, Inc. 5,828 62 Reynolds American, Inc. 5,911 ---------- 11,739 ----------
See notes to the financial statements. 13 EVOLUTION VP MANAGED EQUITY FUND SCHEDULE OF INVESTMENTS (continued) DECEMBER 31, 2005
- ---------------------------------------------------------- SHARES VALUE - ---------------------------------------------------------- COMMON STOCKS - 97.4% (CONTINUED) Trading Companies & Distributors - 0.1% 82 W.W. Grainger, Inc. $ 5,830 ---------- Utilities - 0.5% 520 Constellation Energy Group, Inc. 29,952 308 WGL Holdings, Inc. 9,258 ---------- 39,210 ---------- TOTAL COMMON STOCKS (Cost $7,339,847) $7,770,670 ----------
- ---------------------------------------------------------- SHARES VALUE - ---------------------------------------------------------- SHORT-TERM INVESTMENT - 1.7% MONEY MARKET FUND - 1.7% 133,779 Federated Prime Obligations Fund (Cost $133,779) $ 133,779 ---------- TOTAL INVESTMENTS - 99.1% (Cost $7,473,626) $7,904,449 Other Assets in Excess of Liabilities - 0.9% 76,019 ---------- TOTAL NET ASSETS - 100.0% $7,980,468 ==========
Percentages are calculated as a percent of net assets. ADR American Depository Receipt * Non-income producing security. (1) Foreign security trading on U.S. exchange. See notes to the financial statements. 14 DYNAMIC VP HY BOND FUND SCHEDULE OF INVESTMENTS DECEMBER 31, 2005
- ----------------------------------------------------------------- FACE AMOUNT VALUE - ----------------------------------------------------------------- CORPORATE BONDS - 88.3% Grantor Trust - 87.7% $ 7,929,900 Dow Jones CDX High Yield Note, 2005-T1, 8.75%, 12/29/2010 (Cost $7,895,735; Acquired - Various dates between 10/06/2005 and 12/06/2005) (1) $ 7,969,549 22,214,634 TRAINS High Yield Note, 3.96%, 06/15/2015 (Cost $22,684,010; Acquired - Various dates between 09/28/2005 and 12/28/2005) (1)(2) 22,863,035 ----------- 30,832,584 ----------- Paper and Allied Products - 0.6% 223,000 Jefferson Smurfit Corp. Notes, 8.25%, 10/01/2012 215,195 ----------- TOTAL CORPORATE BONDS (Cost $30,804,409) $31,047,779 -----------
- ----------------------------------------------------------------- SHARES VALUE - ----------------------------------------------------------------- SHORT-TERM INVESTMENT - 14.6% MONEY MARKET FUND - 14.6% 5,137,584 Federated Prime Obligations Fund - Class I (Cost $5,137,584) $ 5,137,584 ----------- TOTAL INVESTMENTS - 102.9% (Cost $35,941,993) $36,185,363 Liabilities in Excess of Other Assets - (2.9)% (1,040,988) ----------- TOTAL NET ASSETS - 100.0% $35,144,375 ===========
Percentages are calculated as a percent of net assets. (1) 144A securities are those that are exempt from registration under Rule 144A of the Securities Act of 1933, as amended. These securities are generally issued to qualified institutional buyers ("QIBs"), such as the Fund. Any resale of these securities must generally be effected through a sale that is exempt from registration (e.g. a sale to another QIB), or the security must be registered for public sale. At December 31, 2005, the market value of 144A securities was $30,832,584 or 87.7% of net assets. (2) Variable rate security. See notes to the financial statements. 15 VP MONEY MARKET FUND SCHEDULE OF INVESTMENTS DECEMBER 31, 2005
- ------------------------------------------------------------- FACE AMOUNT VALUE - ------------------------------------------------------------- SHORT TERM INVESTMENTS - 102.4% U.S. GOVERNMENT AGENCY OBLIGATIONS - 47.8% $600,000 Federal Home Loan Bank Discount Note 3.22%, 01/03/2006 $ 599,899 600,000 Federal National Mortgage Association Discount Note, 4.45%, 01/03/2006 599,898 600,000 U.S. Treasury Bill, 3.75%, 01/05/2006 599,880 ---------- TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS (Cost $1,799,677) $1,799,677 ----------
- ------------------------------------------------------------- SHARES VALUE - ------------------------------------------------------------- - ------------------------------------------------------------- MONEY MARKET FUNDS - 54.6% 617,093 AIM Liquid Assets Portfolio - Institutional Class $ 617,093 617,094 Fidelity Government Portfolio - Institutional Class 617,094 819,401 First American Prime Obligations Fund - Class Y 819,401 ---------- TOTAL MONEY MARKET FUNDS (Cost $2,053,588) $2,053,588 ---------- TOTAL SHORT-TERM INVESTMENTS - 102.4% (Cost $3,853,265) $3,853,265 Liabilities in Excess of Other Assets - (2.4)% (90,287) ---------- TOTAL NET ASSETS - 100.0% $3,762,978 ==========
Percentages are calculated as a percent of net assets. See notes to the financial statements. 16 STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 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)................................. $4,053,796 $7,904,449 $36,185,363 $3,853,265 Cash................................. -- 48,987 1,676 -- Receivable for investments sold...... 178,859 1,238,900 4,984,203 -- Receivable for fund shares sold...... -- -- -- 15,210 Receivable from Investment Adviser... 25,665 23,446 3,916 34,208 Deposit at broker.................... 402,265 -- -- -- Dividends and interest receivable.... 13,737 2,942 339,049 3,883 Other assets......................... 83 134 542 454 ---------- ---------- ----------- ---------- Total Assets..................... 4,674,405 9,218,858 41,514,749 3,907,020 ---------- ---------- ----------- ---------- LIABILITIES: Payable for investments purchased.... 430,834 1,179,003 6,310,264 -- Payable for fund shares redeemed..... 12,794 19,512 4,729 97,031 Accrued expenses and other liabilities........................ 34,212 39,875 55,381 47,011 ---------- ---------- ----------- ---------- Total Liabilities................ 477,840 1,238,390 6,370,374 144,042 ---------- ---------- ----------- ---------- NET ASSETS........................... $4,196,565 $7,980,468 $35,144,375 $3,762,978 ========== ========== =========== ========== NET ASSETS CONSIST OF: Capital stock........................ $4,323,111 $7,394,889 $35,412,739 $3,762,978 Accumulated undistributed net investment income (loss)........... 30,703 4,313 303,460 1,925 Accumulated undistributed net realized gain (loss) on investments........................ (177,509) 150,443 (815,194) (1,925) Net unrealized appreciation (depreciation) on investments...... 20,260 430,823 243,370 -- ---------- ---------- ----------- ---------- Total Net Assets................. $4,196,565 $7,980,468 $35,144,375 $3,762,978 ========== ========== =========== ========== CALCULATION OF NET ASSET VALUE PER SHARE - CLASS A: Net assets........................... $4,196,565 $7,980,468 $35,144,375 $3,762,978 Shares of beneficial interest outstanding (unlimited shares of beneficial interest authorized, no par value)......................... 213,956 345,166 1,752,575 3,762,978 Net Asset Value, Redemption Price and Offering Price Per Share........... $ 19.61 $ 23.12 $ 20.05 $ 1.00 ========== ========== =========== ========== Cost of Investments.................. $4,033,536 $7,473,626 $35,941,993 $3,853,265 ========== ========== =========== ==========
See notes to the financial statements. 17 STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2005
POTOMAC INSURANCE TRUST EVOLUTION VP MANAGED EVOLUTION VP MANAGED BOND FUND EQUITY FUND -------------------- -------------------- INVESTMENT INCOME: Dividend income............................................. $ 110,141 $ 64,058 Interest income............................................. 16,102 12,561 --------- -------- Total investment income................................. 126,243 76,619 --------- -------- EXPENSES: Investment advisory fees.................................... 22,537 36,145 Distribution expenses....................................... 5,634 9,036 Administration fees......................................... 17,500 17,500 Shareholder servicing fees.................................. 10,132 12,854 Fund accounting fees........................................ 20,898 30,501 Custody fees................................................ 1,015 2,420 Professional fees........................................... 24,390 26,126 Reports to shareholders..................................... 1,094 1,754 Directors' fees and expenses................................ 616 616 Other....................................................... 1,885 2,004 --------- -------- Total expenses before waiver/reimbursement and dividends on short positions.................................... 105,701 138,956 Dividends on short positions............................ 5,318 -- --------- -------- Total expenses before waiver/reimbursement.............. 111,019 138,956 Less: Waiver/reimbursement of expenses by Adviser....... (60,627) (66,665) --------- -------- Net expenses............................................ 50,392 72,291 --------- -------- NET INVESTMENT INCOME (LOSS)................................ 75,851 4,328 --------- -------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain (loss) on: Investments............................................... (174,918) 150,428 Short positions........................................... (3,025) -- Capital gain distributions from regulated investment companies................................................. 434 -- --------- -------- (177,509) 150,428 --------- -------- Change in net unrealized appreciation (depreciation) on: Investments............................................... 13,903 375,021 --------- -------- Net realized and unrealized gain (loss) on investments........................................... (163,606) 525,449 --------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................................ $ (87,755) $529,777 ========= ========
See notes to the financial statements. 18 STATEMENT OF OPERATIONS FOR THE PERIOD ENDED DECEMBER 31, 2005
POTOMAC INSURANCE TRUST DYNAMIC VP HY VP MONEY BOND FUND MARKET FUND -------------------- -------------------- February 1, 2005(1) February 1, 2005(1) to December 31, 2005 to December 31, 2005 -------------------- -------------------- INVESTMENT INCOME: Interest income............................................. $ 985,595 $430,650 --------- -------- Total investment income................................. 985,595 430,650 --------- -------- EXPENSES: Investment advisory fees.................................... 110,039 61,574 Distribution expenses....................................... 88,031 73,889 Administration fees......................................... 16,042 14,583 Shareholder servicing fees.................................. 5,208 4,431 Fund accounting fees........................................ 18,621 16,667 Custody fees................................................ 5,091 4,109 Professional fees........................................... 30,719 30,006 Reports to shareholders..................................... 7,112 5,461 Directors' fees and expenses................................ 616 616 Other....................................................... 2,970 2,762 --------- -------- Total expenses before waiver/reimbursement.............. 284,449 214,098 Less: Waiver/reimbursement of expenses by Adviser....... (28,879) -- --------- -------- Net expenses............................................ 255,570 214,098 --------- -------- NET INVESTMENT INCOME (LOSS)................................ 730,025 216,552 --------- -------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain (loss) on: Investments............................................... (815,194) (1,925) --------- -------- (815,194) (1,925) --------- -------- Net unrealized appreciation (depreciation) on: Investments............................................... 243,370 -- --------- -------- Net realized and unrealized gain (loss) on investments........................................... (571,824) -- --------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................................ $ 158,201 $214,627 ========= ========
(1) Commencement of operations. See notes to the financial statements. 19 STATEMENT OF CHANGES IN NET ASSETS FOR THE YEAR ENDED DECEMBER 31, 2005
POTOMAC INSURANCE TRUST EVOLUTION VP MANAGED EVOLUTION VP MANAGED BOND FUND EQUITY FUND ---------------------------------------- ---------------------------------------- Year Ended July 1, 2004(1) to Year Ended July 1, 2004(1) to December 31, 2005 December 31, 2004 December 31, 2005 December 31, 2004 ----------------- -------------------- ----------------- -------------------- OPERATIONS: Net investment income (loss)... $ 75,851 $ 8,014 $ 4,328 $ (4,934) Net realized gain (loss) on investments.................. (177,943) (52) 150,428 301 Capital gain distributions from regulated investment companies.................... 434 6,175 -- -- Change in net unrealized appreciation (depreciation) on investments............... 13,903 6,357 375,021 55,802 ---------- --------- ---------- ---------- Net increase (decrease) in net assets resulting from operations............... (87,755) 20,494 529,777 51,169 ---------- --------- ---------- ---------- DISTRIBUTIONS TO SHAREHOLDERS - CLASS A: Net investment income.......... (52,933) -- -- -- Net realized gains............. (6,352) -- -- -- ---------- --------- ---------- ---------- Total distributions........ (59,285) -- -- -- ---------- --------- ---------- ---------- BENEFICIAL INTEREST TRANSACTIONS - CLASS A: Shares sold.................... 3,759,605 974,006 6,819,351 1,233,433 Proceeds from shares issued to holders in reinvestment of distributions................ 59,285 -- -- -- Shares redeemed................ (228,836) (290,949) (412,583) (290,679) ---------- --------- ---------- ---------- Net increase (decrease) in net assets resulting from beneficial interest transactions............. 3,590,054 683,057 6,406,768 942,754 ---------- --------- ---------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS................... 3,443,014 703,551 6,936,545 993,923 ---------- --------- ---------- ---------- NET ASSETS: Beginning of period............ 753,551 50,000(2) 1,043,923 50,000(2) ---------- --------- ---------- ---------- End of period.................. $4,196,565 $ 753,551 $7,980,468 $1,043,923 ========== ========= ========== ========== ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME (LOSS), END OF PERIOD.................... $ 30,703 $ 8,014 $ 4,313 $ -- ---------- --------- ---------- ----------
(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. 20 STATEMENT OF CHANGES IN NET ASSETS FOR THE PERIOD ENDED DECEMBER 31, 2005
POTOMAC INSURANCE TRUST DYNAMIC VP HY VP MONEY BOND FUND MARKET FUND -------------------- -------------------- February 1, 2005(1) February 1, 2005(1) to December 31, 2005 to December 31, 2005 -------------------- -------------------- OPERATIONS: Net investment income (loss)................................ $ 730,025 $ 216,552 Net realized gain (loss) on investments..................... (815,194) (1,925) Net unrealized appreciation (depreciation) on investments... 243,370 -- ------------ ------------ Net increase (decrease) in net assets resulting from operations............................................ 158,201 214,627 ------------ ------------ DISTRIBUTIONS TO SHAREHOLDERS - CLASS A: Net investment income....................................... (426,565) (214,627) ------------ ------------ Total distributions..................................... (426,565) (214,627) ------------ ------------ BENEFICIAL INTEREST TRANSACTIONS - CLASS A: Shares sold................................................. 111,694,991 89,030,818 Proceeds from shares issued to holders in reinvestment of distributions............................................. 426,565 215,114 Share redeemed.............................................. (76,708,817) (85,482,954) ------------ ------------ Net increase (decrease) in net assets resulting from beneficial interest transactions...................... 35,412,739 3,762,978 ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS..................... 35,144,375 3,762,978 ------------ ------------ NET ASSETS: Beginning of period......................................... -- -- ------------ ------------ End of period............................................... $ 35,144,375 $ 3,762,978 ============ ============ ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME (LOSS), END OF PERIOD................................................. $ 303,460 $ 1,925 ------------ ------------
(1) Commencement of operations. See notes to the financial statements. 21 FINANCIAL HIGHLIGHTS
POTOMAC INSURANCE TRUST EVOLUTION VP MANAGED BOND FUND EVOLUTION VP MANAGED EQUITY FUND ---------------------------------------- ---------------------------------------- CLASS A CLASS A ---------------------------------------- ---------------------------------------- Year Ended July 1, 2004(1) Year Ended July 1, 2004(1) December 31, 2005 to December 31, 2004 December 31, 2005 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).................... 0.67(8) 0.32 0.03 (0.15) Net realized and unrealized gain (loss) on investments(6)............... (1.54) 0.44 2.03 1.21 ---------- -------- ---------- ---------- Total from investment operations............... (0.87) 0.76 2.06 1.06 ---------- -------- ---------- ---------- LESS DISTRIBUTIONS: Dividends from net investment income....................... (0.25) -- -- -- Distributions from realized gains........................ (0.03) -- -- -- ---------- -------- ---------- ---------- Total distributions........ (0.28) -- -- -- ---------- -------- ---------- ---------- NET ASSET VALUE, END OF PERIOD....................... $ 19.61 $ 20.76 $ 23.12 $ 21.06 ========== ======== ========== ========== TOTAL RETURN(7)................ (4.19)% 3.80%(2) 9.78% 5.30%(2) SUPPLEMENTAL DATA AND RATIOS: Net assets, end of period...... $4,196,565 $753,551 $7,980,468 $1,043,923 Ratio of net expenses to average net assets excluding short dividends: Before expense waiver/reimbursement....... 4.69% 23.17%(3) 3.84% 20.13%(3) After expense waiver/reimbursement....... 2.00% 2.00%(3) 2.00% 2.00%(3) Ratio of net expenses to average net assets including short dividends: Before expense waiver/reimbursement....... 4.93% After expense waiver/reimbursement....... 2.24% Ratio of net investment income (loss) to average net assets including short dividends: Before expense waiver/reimbursement....... 0.68% (17.98%)(3) (1.72)% (19.66%)(3) After expense waiver/reimbursement....... 3.37%(9) 3.19%(3) 0.12% (1.53%)(3) Portfolio turnover rate(5)..... 978% 7% 1001% 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, if any, but do not reflect the impact of taxes. (8) Net investment income (loss) before dividends on short positions for the year ended December 31, 2005 was $0.72. (9) The net investment income (loss) ratio included dividends on short positions. The ratio excluding dividends on short positions for the year ended December 31, 2005 was 3.60%. See notes to the financial statements. 22 FINANCIAL HIGHLIGHTS
POTOMAC INSURANCE TRUST DYNAMIC VP HY VP MONEY BOND FUND MARKET FUND -------------------- -------------------- CLASS A CLASS A -------------------- -------------------- February 1, 2005(1) February 1, 2005(1) to December 31, 2005 to December 31, 2005 -------------------- -------------------- PER SHARE DATA: NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 20.00 $ 1.00 ----------- ---------- INCOME (LOSS) FROM INVESTMENT OPERATIONS: Net investment income (loss)(4)............................. 0.90 0.02 Net realized and unrealized gain (loss) on investments(6)... (0.60) -- ----------- ---------- Total from investment operations........................ 0.30 0.02 ----------- ---------- LESS DISTRIBUTIONS: Dividends from net investment income........................ (0.25) (0.02) ----------- ---------- Total distributions..................................... (0.25) (0.02) ----------- ---------- NET ASSET VALUE, END OF PERIOD.............................. $ 20.05 $ 1.00 =========== ========== TOTAL RETURN(7)............................................. 1.50%(2) 1.39%(2) SUPPLEMENTAL DATA AND RATIOS: Net assets, end of period................................... $35,144,375 $3,762,978 Ratio of net expenses to average net assets: Before expense waiver/reimbursement....................... 1.94%(3) 1.74%(3) After expense waiver/reimbursement........................ 1.74%(3) 1.74%(3) Ratio of net investment income (loss) to average net assets: Before expense waiver/reimbursement....................... 4.78%(3) 1.76%(3) After expense waiver/reimbursement........................ 4.98%(3) 1.76%(3) Portfolio turnover rate(5).................................. 654% 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, if any, but do not reflect the impact of taxes. See notes to the financial statements. 23 POTOMAC INSURANCE FUND NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2005 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 Class A 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 VP 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 VP 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 (income plus capital appreciation) by investing primarily in debt instruments, including convertible securities, and derivatives of such instruments, with an emphasis on lower-quality debt 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. 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 - Equity securities, OTC securities, closed-end investment companies, options, and futures and options on futures are valued at their last sales price, or if not available, the mean of the last bid and asked price. 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 Price ("NOCP") provided by NASDAQ each business day. Securities for which quotations are not readily available, the Funds' pricing service does not provide valuation for such securities, the Funds' pricing service provides a valuation that in the judgment of Rafferty Asset Managements, LLC (the "Adviser") does not represent fair value, or the Funds or Adviser believes the market price is stale will be valued at fair value under the supervision of the Board of Trustees. Instruments with a remaining maturity of 60 days or less are valued at amortized cost, which approximates market value. Other debt securities are valued by using the closing bid and asked prices provided by the Funds' pricing service, or, if such prices are unavailable, by a pricing matrix method. 24 B) REPURCHASE AGREEMENTS - Each Fund may enter into repurchase agreements with institutions 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, cash and/or securities (primarily U.S. government 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) SHORT POSITIONS - Each Fund, other than the VP Money Market 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 short positions 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 to the buyer 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. D) CONCENTRATION OF RISK - Dynamic VP HY Bond Fund invests in the Dow Jones CDX High Yield Note ("CDX") and TRAINS (Targeted Return Securities Trust(SM)) High Yield Notes ("TRAINS"), which represent trusts of pooled investments. The TRAINS invest in a portfolio of high-yield debt securities, rated below investment grade and therefore have greater credit and liquidity risk than investment grade obligations. The high yield debt securities are generally unsecured and may be subordinated to other obligations of the issuer thereof. Upon a downgrade of an underlying securities' rating to a specified level, the TRAINS may distribute the respective security on a pro-rata basis to the respective holders. The TRAINS may also invest in one or more interest rate swap or other swap transactions. The CDX invests in a portfolio of credit default swap agreements and a repurchase agreement. Credit default swap agreements involve commitments to pay/receive a fixed interest rate in exchange for receipt/payment of the referenced obligation if a credit event affecting the referenced obligation occurs. The CDX is providing credit protection to the counterparties of the respective credit default swap agreements in exchange for a fixed interest rate payment, therefore there is credit risk with respect to the referenced entities of these credit default swap agreements. If a credit event occurs with respect to a referenced entity, the Fund's principal amount in the CDX will be reduced by its pro-rata interest in the respective credit default swap agreement. A credit event may include a failure to pay interest or principal, bankruptcy, or restructuring. Any recoverable amounts of the liquidation of the referenced obligation will be allocated pro rata to the holders of the CDX. E) SECURITY TRANSACTIONS - Investment transactions are recorded on trade date. The Funds determine the gain or loss realized from investment transactions by comparing the identified cost, which is the same basis used for federal income tax purposes, with the net sales proceeds. F) 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. 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. U.S. generally accepted accounting principles require that permanent differences between financial reporting and tax reporting be reclassified between various components of net assets. These differences are primarily due to adjustments for the sale of Real Estate Investment Trusts and distribution adjustments and have no effect on net assets or net asset value per share. 25 On the Statement of Assets and Liabilities, the following adjustments were made:
ACCUMULATED NET ACCUMULATED INVESTMENT REALIZED GAIN CAPITAL INCOME OR LOSS OR LOSS STOCK --------------- ------------- ------- Evolution VP Managed Bond Fund $(229) $229 $ -- Evolution VP Managed Equity Fund (15) 15 -- Dynamic VP HY Bond Fund -- -- -- VP Money Market Fund -- -- --
G) INCOME AND EXPENSES - Dividend income is recorded on the ex-dividend date. Interest income, including amortization of premium and discount, is recognized on an accrual basis. The Funds are charged for those 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. H) DISTRIBUTIONS TO SHAREHOLDERS - Each Fund, other than the VP Money Market Fund, generally pays dividends from substantially all of its net investment income and distributes net realized capital gains, if any, at least annually. The VP Money Market Fund ordinarily will declare dividends from net investment income on a daily basis and distribute those dividends monthly. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. The Funds also may utilize earnings and profits distributed to shareholders on redemption of shares as part of the dividends paid deduction. Distributions to shareholders are recorded on the ex-dividend date. During the periods ended December 31, 2005 and December 31, 2004, the tax character of distributions of the Funds were as follows:
EVOLUTION VP MANAGED BOND FUND --------------------------------------------- YEAR ENDED PERIOD ENDED DECEMBER 31, 2005 DECEMBER 31, 2004(1) ----------------- -------------------- Distributions paid from: Ordinary Income Class A $53,162 $ -- Long-term capital gain Class A 6,123 -- ------- -------- Total distributions paid $59,285 $ -- ======= ========
26
DYNAMIC VP HY BOND FUND VP MONEY MARKET FUND ----------------------- -------------------- PERIOD ENDED PERIOD ENDED DECEMBER 31, 2005(2) DECEMBER 31, 2005(2) ----------------------- -------------------- Distributions paid from: Ordinary Income Class A $426,565 $214,627 Long-term capital gain Class A -- -- -------- -------- Total distributions paid $426,565 $214,627 ======== ========
(1) Commenced operations on July 1, 2004. (2) Commenced operations on February 1, 2005. There were no distributions from the Evolution VP Managed Equity Fund for the periods ended December 31, 2005 and December 31, 2004. As of December 31, 2005, the Evolution VP Managed Bond Fund, the Dynamic VP HY Bond Fund and the VP Money Market Fund had capital loss carryforwards of $143,203, $756,247 and $1,925, respectively, which expire in 2013. These amounts may be used to offset future capital gains. The Evolution VP Managed Bond Fund had post October losses of $4,435. As of December 31, 2005, the components of distributable earnings on a tax basis were as follows:
EVOLUTION VP EVOLUTION VP MANAGED BOND MANAGED EQUITY DYNAMIC VP HY VP MONEY FUND FUND BOND FUND MARKET FUND ------------ -------------- ------------- ----------- Cost basis of investments for federal income tax purposes $4,059,968 $7,630,524 $36,000,940 $3,853,265 ---------- ---------- ----------- ---------- Unrealized appreciation 22,726 505,614 252,841 -- Unrealized depreciation (28,898) (231,689) (68,418) -- ---------- ---------- ----------- ---------- Net unrealized appreciation/depreciation (6,172) 273,925 184,423 -- ---------- ---------- ----------- ---------- Undistributed ordinary income/(loss) 30,703 362,647 303,460 1,925 Undistributed long-term gain/(loss) -- 187 -- -- ---------- ---------- ----------- ---------- Distributable earnings 30,703 362,834 303,460 1,925 ---------- ---------- ----------- ---------- Other accumulated gain/(loss) (151,077) (51,180) (756,247) (1,925) ---------- ---------- ----------- ---------- Total Accumulated gain/(loss) $ (126,546) $ 585,579 $ (268,364) $ -- ========== ========== =========== ==========
I) 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. 27 3. SHARES OF BENEFICIAL INTEREST TRANSACTIONS The beneficial interest transactions for Class A shares during the periods ended December 31, 2005 and December 31, 2004 for the Funds were as follows:
EVOLUTION VP MANAGED BOND FUND EVOLUTION VP MANAGED EQUITY FUND ------------------------------ -------------------------------- YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2005 2004(1,2) 2005 2004(1,2) ------------ ------------ ------------- ------------- Shares sold 185,956 50,832 314,849 64,109 Shares issued to holders in reinvestment of dividends 3,022 -- -- Shares redeemed (11,314) (14,540) (19,261) (14,531) ------- ------- ------- ------- Total net increase from shares of beneficial interest transactions 177,664 36,292 295,588 49,578 ======= ======= ======= =======
DYNAMIC VP HY BOND FUND VP MONEY MARKET FUND ----------------------- -------------------- PERIOD ENDED PERIOD ENDED DECEMBER 31, 2005(3) DECEMBER 31, 2005(3) ----------------------- -------------------- Shares sold 5,572,131 89,030,818 Shares issued to holders in reinvestment of dividends 21,339 215,114 Shares redeemed (3,840,895) (85,482,954) ---------- ------------ Total net increase from shares of beneficial interest transactions 1,752,575 3,762,978 ========== ============
(1) Each Fund sold 2,500 shares of beneficial interest to the Advisor upon seeding of each Fund on April 29, 2004. (2) Commenced operations on July 1, 2004. (3) Commenced operations on February 1, 2005. 4. INVESTMENT TRANSACTIONS During the period ended December 31, 2005, the aggregate purchases and sales of investments (excluding short-term investments) for each Fund were as follows:
EVOLUTION VP MANAGED EVOLUTION VP MANAGED DYNAMIC VP HY VP MONEY BOND FUND EQUITY FUND BOND FUND MARKET FUND -------------------- -------------------- ------------- ----------- Purchases $19,273,519 $39,788,090 $139,047,917 $ -- Sales 16,060,007 33,448,623 107,406,492 --
There were no purchases or sales of long-term U.S. government securities during the period ended December 31, 2005 for any of the Funds. 5. INVESTMENT ADVISORY AND OTHER AGREEMENTS The Funds have entered into an investment advisory agreement with the Advisor. The Advisor receives a fee, computed daily and payable monthly, at the annual rates presented below as applied to each Fund's average daily net assets. In addition, the Advisor has entered into sub-advisory agreements relating to the Evolution VP Managed Bond Fund and 28 the Evolution VP Managed Equity Fund with Flexible Plan Investments, Ltd., and for Dynamic VP HY Bond Fund with Transamerica Investment Services, Inc., whereby the sub-advisors will direct investment activities of the Funds. The Advisor pays, out of the management fees it receives from the Funds, a fee for these sub-advisory services. For the year ended December 31, 2005, the Advisor agreed to waive all operating expenses (excluding dividends on short positions), 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 year ended December 31, 2005, the Advisor waived the following expenses:
EVOLUTION VP EVOLUTION VP DYNAMIC VP HY VP MONEY MANAGED BOND FUND MANAGED 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% Expenses paid in excess of annual cap on expenses -- 2005 $60,627 $66,665 $28,879 $ -- Advisor expense waiver recovery -- 2005 $ -- $ -- $ -- $ --
* For the period February 1, 2005 to April 28, 2005, the annual cap on expenses was 1.61% for the Dynamic VP HY Bond Fund. Remaining expenses subject to potential recovery expiring in:
EVOLUTION VP EVOLUTION VP DYNAMIC VP HY VP MONEY MANAGED BOND FUND MANAGED EQUITY FUND BOND FUND MARKET FUND ----------------- ------------------- ------------- ----------- 2007 $53,095 $58,373 N/A N/A 2008 $60,627 $66,665 $28,879 $ --
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 up to 1.00% of the Fund's average daily net assets. The VP Money Market Fund is currently paying 0.60% of the Fund's average daily net assets as Rule 12b-1 fees. 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. The Advisor paid directly all offering costs and organizational expenses associated with the registration and seeding of each Fund. Rafferty Capital Markets, LLC (the "Distributor") serves as principal underwriter of the Funds and acts as the Funds' distributor in an offering of the Funds' shares. The Distributor is an affiliate of the Advisor. There were no 12b-1 fees retained by the Distributor for the period ended December 31, 2005. 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. Each 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. 29 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Trustees of the Potomac Insurance Trust We have audited the accompanying statements of assets and liabilities, including the schedules of investments, of Potomac Insurance Trust (comprising the Evolution VP Managed Bond Fund, Evolution VP Managed Equity Fund, Dynamic VP HY Bond Fund and VP Money Market Fund) (the "Funds"), as of December 31, 2005, and the related statements of operations and changes in net assets, and the financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Funds' management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Funds' internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Funds' internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2005, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of each of the Funds constituting the Potomac Insurance Trust at December 31, 2005, the results of their operations, the changes in their net assets, and their financial highlights for each of the periods indicated therein in conformity with U.S. generally accepted accounting principles. /s/ Ernst & Young LLP Chicago, Illinois February 3, 2006 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 39 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 39 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. 39 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 39 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, 39 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 Ron Fernandes Chief Executive One year President, SunLife 33 Whitehall St., Officer since 2006 Distributors, Inc. and 10th Flr. Executive Vice New York, NY 10004 President, SunLife Age: 64 Retirement, Products and Services, 1999 - 2002; Vice Chairman, Wheat Benefits Services and Senior Managing Director Retirement Services, Wheat First Union Securities, 1995-1999 - ------------------------------------------------------------------------------------------------------------------ Daniel D. O'Neill President since One year Managing Director of 33 Whitehall St., 1999 Rafferty, 10th Flr. Chief Operating 1999 -- present; New York, NY 10004 Officer and Chief Age: 38 Investment Officer since 2006, - ------------------------------------------------------------------------------------------------------------------ David VerMeulen Executive Vice One year Senior Vice President-- 33 Whitehall St., President -- Chief Income Services Group, 10th Flr. Marketing Officer Fidelity Investments, New York, NY 10004 since 2006 2003 -- 2004; Executive Age: 57 Vice President -- Business Services, SunLife Distributors, 2000 -- 2002. - ------------------------------------------------------------------------------------------------------------------ William Franca Executive Vice One year Senior Vice President-- 33 Whitehall St., President -- Head National Sales, 10th Flr. of Distribution Massachusetts Financial New York, NY 10004 since 2006 Services/SunLife Age: 49 Financial Distributors, 2002 -- 2004; Executive Vice President, Distribution, SunLife, 2001 -- 2002. - ------------------------------------------------------------------------------------------------------------------ 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: 64 - ------------------------------------------------------------------------------------------------------------------ Philip A. Harding Senior Vice One year Vice President of 33 Whitehall St., President Sales and Rafferty, 10th Flr. Marketing since 1997 -- present. New York, NY 10004 1999 Age: 63 OTHER TRUSTEESHIPS NAME, ADDRESS AND AGE: HELD BY TRUSTEE - ----------------------- ------------------- OFFICERS Ron Fernandes None 33 Whitehall St., 10th Flr. New York, NY 10004 Age: 64 - ----------------------- ------------------- Daniel D. O'Neill None 33 Whitehall St., 10th Flr. New York, NY 10004 Age: 38 - ----------------------- ------------------- David VerMeulen None 33 Whitehall St., 10th Flr. New York, NY 10004 Age: 57 - ----------------------- ------------------- William Franca None 33 Whitehall St., 10th Flr. New York, NY 10004 Age: 49 - ----------------------- ------------------- Timothy P. Hagan None 33 Whitehall St., 10th Flr. New York, NY 10004 Age: 64 - ----------------------- ------------------- Philip A. Harding None 33 Whitehall St., 10th Flr. New York, NY 10004 Age: 63
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**: - ------------------------------------------------------------------------------------------------------------------ Todd Kellerman Vice President One year Vice President of 33 Whitehall St., since 2006 Corporate Development 10th Flr. Raven Holdings, Inc., New York, NY 10004 2003 -- 2005; Business Age: 33 Consultant, 2002 -- 2003; Senior Consultant -- Business Consulting, Arthur Andersen, 1999 -- 2000. - ------------------------------------------------------------------------------------------------------------------ Sean Smyth Vice President -- One year Lead Portfolio Manager 33 Whitehall St., Portfolio of Rafferty, 10th Flr. Management since 2005 -- present; New York, NY 10004 2005 Portfolio Manager, Age: 34 Gartmore Global Investments, 2000 -- 2005. - ------------------------------------------------------------------------------------------------------------------ Louis Flamino Vice President: One year Wholesaler of Rafferty, 33 Whitehall St., Sales and Marketing 1999 -- present 10th Flr. since 2005 New York, NY 10004 Age: 30 - ------------------------------------------------------------------------------------------------------------------ Neil Kelly Vice President: One year Wholesaler of Rafferty, 33 Whitehall St., Sales and Marketing 2004 -- present, First 10th Flr. since 2005 Vice President, Salomon New York, NY 10004 Smith Barney, Age: 43 1997 -- 2003 - ------------------------------------------------------------------------------------------------------------------ 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: 57 - ------------------------------------------------------------------------------------------------------------------ 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: 33 - ------------------------------------------------------------------------------------------------------------------ OTHER TRUSTEESHIPS NAME, ADDRESS AND AGE: HELD BY TRUSTEE - ----------------------- ------------------- Todd Kellerman None 33 Whitehall St., 10th Flr. New York, NY 10004 Age: 33 - ----------------------- ------------------- Sean Smyth None 33 Whitehall St., 10th Flr. New York, NY 10004 Age: 34 - ----------------------- ------------------- Louis Flamino None 33 Whitehall St., 10th Flr. New York, NY 10004 Age: 30 - ----------------------- ------------------- Neil Kelly None 33 Whitehall St., 10th Flr. New York, NY 10004 Age: 43 - ----------------------- ------------------- Steven P. Sprague None 33 Whitehall St., 10th Flr. New York, NY 10004 Age: 57 - ----------------------- ------------------- Eric W. Falkeis None 615 East Michigan Street Milwaukee, WI 53202 Age: 33 - ----------------------- -------------------
* 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 25 portfolios of the 27 currently registered with the SEC and the Potomac Insurance Trust which currently offers for sale 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 February 1, 2006. POTOMAC INSURANCE TRUST APPROVAL OF INVESTMENT ADVISORY AGREEMENT (UNAUDITED) POTOMAC VP MONEY MARKET FUND OVERVIEW The Board of Trustees considered the reappointment of Rafferty Asset Management, LLC ("Rafferty") as adviser to the Potomac VP Money Market Fund and the renewal of the Investment Advisory Agreement (the "Agreement") at a meeting held on November 18, 2005. As part of the approval process, legal counsel to the Fund and the independent Trustees sent information request letters to Rafferty seeking certain relevant information. Responses by Rafferty were provided to the Trustees for their review prior to their meeting. The Board was provided with the opportunity to request any additional materials. The Board posed questions to management personnel of Rafferty regarding certain key aspects of the material submitted in support of the renewal. Provided below is a summary of certain of the factors the Board considered at the November meeting in renewing the Agreement between Rafferty and the Potomac Insurance Trust (the "Trust") for the Fund. The Board did not identify any particular information that was most relevant to its consideration on whether to renew the Agreement and each Trustee may have afforded different weight to the various factors. NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED The Board reviewed the scope of the services provided under the Agreement and noted that there would be no significant changes in the services provided by Rafferty. The Board considered Rafferty's representation that it has the financial resources, commitment and appropriate staffing to continue to provide the same scope and quality of services to the Fund. The Board also considered Rafferty's ability to adopt and implement compliance and control functions for the Fund and noted that information concerning portfolio management and a report from the chief compliance officer are provided on a periodic basis to the Board. Based on these and other considerations, the Board determined that, in the exercise of its business judgment, the nature, extent and quality of the services provided by Rafferty to the Fund under the Agreement were fair and reasonable. PERFORMANCE OF THE FUND AND FUND EXPENSES The Board considered that the Fund was created as a convenience to professional money managers and investors who use "asset allocation" and/or "market timing" strategies. In addition, the Board considered Rafferty's representation that the Fund's performance and fees were comparable to other money market funds used by managers and investors utilizing the above-mentioned strategies. The Board also considered Rafferty's representation that Rafferty is committed to continue the expense limitation on the Fund's total operating expenses through the Fund's 2006 fiscal year. Based on these and other considerations, the Board determined that, in the exercise of its business judgment, the performance of the Fund was satisfactory and the expenses of the Fund were reasonable. COSTS OF SERVICES PROVIDED TO THE FUND AND PROFITS REALIZED The Board considered the fees paid to Rafferty on an annual basis since the Fund's commencement, including any fee waivers and recoupment of fees previously waived. In addition, the Board considered (as noted above) Rafferty's representation that its fees are comparable to other money market funds used by managers and investors utilizing the above-mentioned strategies and that Rafferty is committed to continue the expense limitation on the Fund's total operating expenses through each fund's 2006 fiscal year. The Board also considered Rafferty's representation that the Fund has not had enough assets to make it profitable to Rafferty. Based on these considerations, the Board determined that, in the exercise of its business judgment, the costs of services provided and profits realized by Rafferty under the Agreement were fair and reasonable. ECONOMIES OF SCALE The Board considered Rafferty's representation that it believes that asset levels at this time are not sufficient to warrant a reduction in fee rates or the addition of breakpoints. Based on these and other considerations the Board determined that, in the exercise of its business judgment, the Funds have not reached economies of scale requiring a reduction in fee rates or additions of breakpoints. CONCLUSION Based on, but not limited to, the above considerations and determinations, the Board determined that the Agreement was fair and reasonable in light of the services to be performed, fees, expenses and such other matters as the Board considered relevant in the exercise of its business judgment. On this basis, the Board unanimously approved the Agreement. INVESTMENT ADVISOR Rafferty Asset Management, LLC 33 Whitehall Street, 10th Floor New York, NY 10004 SUB-ADVISOR Flexible Plan Investment, Ltd. 3883 Telegraph Road Bloomfield Hills, MI 48302 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 is available without charge by calling 1-800-851-0511 or by accessing the SEC's website at www.sec.gov. The Funds for the first and third quarters of each fiscal year file complete schedules of portfolio holdings with the SEC on Form N-Q. The Form N-Qs are available without charge, upon request, by calling 1-800-851-0511, or by accessing the SEC's website, at www.sec.gov. The Funds Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, DC, and information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. This report has been prepared for shareholders and may be distributed to others only if preceded or accompanied by a current prospectus. ANNUAL REPORT December 31, 2005 [THE POTOMAC FUNDS New LOGO] 33 Whitehall Street, 10th Floor New York, NY 10004 (800) 851-0511 ITEM 2. CODE OF ETHICS. The registrant has adopted a code of ethics that applies to the registrant's principal executive officer and principal financial officer. The registrant has not made any amendments to its code of ethics during the period covered by this report. The registrant has not granted any waivers from any provisions of the code of ethics during the period covered by this report. UNDERTAKE TO PROVIDE A COPY TO ANY PERSON WITHOUT CHARGE: The registrant undertakes to provide to any person without charge, upon request, a copy of its code of ethics by mail when they call the registrant at 1-800-851-0511. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. The registrant's board of trustees has determined that there is at least one audit committee financial expert serving on its audit committee. Gerald E. Shanley III is the "audit committee financial expert" and is considered to be "independent" as each term is defined in Item 3 of Form N-CSR. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. The registrant has engaged its principal accountant to perform audit services, audit-related services, tax services and other services during the past two fiscal years. "Audit services" refer to performing an audit of the registrant's annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years. "Audit-related services" refer to the assurance and related services by the principal accountant that are reasonably related to the performance of the audit. "Tax services" refer to professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning. There were no "Other services" provided by the principal accountant. The following table details the aggregate fees billed or expected to be billed for each of the last two fiscal years for audit fees, audit-related fees, tax fees and other fees by the principal accountant.
FYE 12/31/2005 FYE 12/31/2004 -------------- -------------- Audit Fees $78,000 $39,000 Audit-Related Fees -- Tax Fees 12,000 8,000 All Other Fees --
The Audit Committee Charter provides that the audit committee (comprised of the Independent Trustees of registrant) is responsible for pre-approval of all auditing services performed for the registrant. The Audit Committee also is responsible for pre-approval (subject to the de minimus exception for non-audit services described in the Securities Exchange Act of 1934, as amended, 2 and applicable rule thereunder) of all non-auditing services performed for the registrant or for any service affiliate of registrant. Registrant's Audit Committee pre-approved all fees described above which Ernst & Young billed to registrant. The following table indicates the non-audit fees billed by the registrant's accountant for services to the registrant and to the registrant's investment adviser (and any other controlling entity, etc.--not sub-adviser) for the last year. The audit committee of the board of trustees/directors has considered whether the provision of non-audit services that were rendered to the registrant's investment adviser is compatible with maintaining the principal accountant's independence and has concluded that the provision of such non-audit services by the accountant has not compromised the accountant's independence.
Non-Audit Related Fees FYE 12/31/2005 FYE 12/31/2004 - ---------------------- -------------- -------------- Registrant -- -- Registrant's Investment Adviser -- --
Registrant's Audit Committee has considered the non-audit services provided to the registrant and registrant's investment adviser and any entity controlling, controlled by, or under common control with registrant's investment adviser as described above and determined that these services do not compromise Ernst & Young's independence. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable to open-end investment companies. 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. 3 ITEM 11. CONTROLS AND PROCEDURES. (a) The Registrant's President/Chief Executive Officer and Treasurer/Chief Financial Officer have concluded that the Registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the "1940 Act")) are effective as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on the evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act and Rules 15d-15(b) under the Securities Exchange Act of 1934, as amended. (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. Filed herewith. (b) (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. (c) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith. 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 March 7, 2006 --------------------- 4 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 March 7, 2006 --------------------- By (Signature and Title)* /s/ Timothy P. Hagan -------------------------------------------- Timothy P. Hagan, Chief Financial Officer Date March 8, 2006 --------------------- * Print the name and title of each signing officer under his or her signature. 5 EX-99.CODE 2 c02132exv99wcode.txt CODE OF ETHICS EX.99.CODE.ETH CODE OF ETHICS POTOMAC FUNDS POTOMAC INSURANCE TRUST and RAFFERTY ASSET MANAGEMENT, LLC I. INTRODUCTION A. Fiduciary Duty. This Code of Ethics has been adopted by the above named trusts ("Trusts") and Rafferty Asset Management, LLC in compliance with Rule 17j-1 under the Investment Company Act of 1940, as amended. Capitalized terms used in this Code are defined in Appendix 1 to this Code. All Appendices referred to herein are attached to and are a part of this Code. This Code is based on the principle that the trustees, officers, and employees of Rafferty and the Trusts have a fiduciary duty to place the interests of the Funds ahead of their own interests. The Code applies to all Access Persons and focuses principally on preclearance and reporting of personal transactions in securities. Access Persons must avoid activities, interests and relationships that might interfere with making decisions in the best interests of the Funds. As fiduciaries, Access Persons must at all times: 1. Place the interests of the Funds first. Access Persons must scrupulously avoid serving their own personal interests ahead of the interests of the Funds. An Access Person may not induce or cause a Fund to take action, or not to take action, for personal benefit, rather than for the benefit of the Fund. For example, an Access Person would violate this Code by causing a Fund to purchase a Security he or she owned for the purpose of increasing the price of that Security. 2. Avoid taking inappropriate advantage of their positions. Access Persons may not, for example, use their knowledge of portfolio transactions to profit by the market effect of such transactions. Receipt of investment opportunities, prerequisites, or gifts from persons seeking business with the Trusts or Rafferty could call into question the exercise of an Access Person's independent judgment. 3. Conduct all Personal Securities Transactions in full compliance with this Code including the reporting requirements. Doubtful situations should be resolved in favor of the Funds. Technical compliance with the Code's procedures will not automatically insulate from scrutiny any trades that indicate an abuse of fiduciary duties. B. Appendices to the Code. The appendices to this Code are attached to and are a part of the Code. The appendices include the following: 1. Definitions (Appendix 1), 2. Contact Persons (Appendix 2), 3. Certification of Compliance with Code of Ethics (Appendix 3 and 3-I), EX.99.CODE.ETH a) Personal Securities Holdings and Accounts Disclosure Form (Appendix 3-A) 4. Form Letter to Broker, Dealer or Bank (Appendix 4). 5. Report of Securities Transactions (Appendix 5) 6. Initial Public Offering / Private Placement Clearance Form (Appendix 6) C. Application of the Code to Independent Fund Trustees. Notwithstanding the definition of Access Persons, the following provisions do not apply to Independent Fund Trustees and their Immediate Families. 1. Personal Securities Transactions (Section II) 2. Initial, Quaterly and Annual Holdings Reporting Requirements (Section III.A.) 3. Receipt and Giving of Gifts (Section IV.B.) 4. Restrictions on Service as a Director of a Publicly-Traded Company (Section IV.E.) II. PERSONAL SECURITIES TRANSACTIONS A. Prohibited Transactions. 1. Prohibited Securities Transactions. The following Securities Transactions are prohibited and will not be authorized by the Compliance Officer (or a designee) absent exceptional circumstances. The prohibitions apply only to the categories of Access Persons specified. a. Initial Public Offerings (Investment Personnel only). Any purchase of Securities by Investment Personnel in an initial public offering (other than a new offering of a registered open-end investment company). However, if authorized, the Compliance Officer will maintain a record of the reasons for such authorization (see Appendix 6). b. Pending Buy or Sell Orders (Investment Personnel Only). Any purchase or sale of Securities by Investment Personnel on any day during which any Fund has a pending "buy" or "sell" order in the same Security (or Equivalent Security) until that order is executed or withdrawn. c. Intention to Buy or Sell for a Fund (all Investment Personnel). Purchases or sales of Securities by an Investment Person at a time when that Investment Person intends, or knows of another's intention, to purchase or sell that Security (or an Equivalent Security) on behalf of a Fund. This prohibition applies whether the Securities Transaction is in the same direction (e.g., two purchases) or the opposite direction (a purchase and sale) as the transaction of the Fund. 2. Always Prohibited Securities Transactions. The following Securities Transactions are prohibited and will not be authorized under any circumstances. a. Inside Information. Any transaction in a Security while in possession of material nonpublic information regarding the Security or the issuer of the Security. b. Market Manipulation. Transactions intended to raise, lower, or maintain the price of any Security or to create a false appearance of active trading. EX.99.CODE.ETH c. Others. Any other transactions deemed by the Compliance Officer (or a designee) to involve a conflict of interest, possible diversions of a corporate opportunity, or an appearance of impropriety. 3. Private Placements (Investment Personnel only). Acquisition of Beneficial Interests in Securities in a private placement by Investment Personnel is strongly discouraged. The Compliance Officer (or a designee) will give permission only after considering, among other facts, whether the investment opportunity should be reserved for a Fund and whether the opportunity is being offered to the person by virtue of the person's position as an Investment Person. If a private placement transaction is permitted, the Compliance Officer will maintain a record of the reasons for such approval (see Appendix 6). Investment Personnel who have acquired securities in a private placement are required to disclose that investment to the Compliance Officer when they play a part in any subsequent consideration of an investment in the issuer by a Fund, and the decision to purchase securities of the issuer by a Fund must be independently authorized by a Portfolio Manager with no personal interest in the issuer. B. Exemptions. 1. The following Securities Transactions are exempt from the restrictions set forth in Section II.A. a. Mutual Funds. Securities issued by any registered open-end investment companies (including the Funds); b. No Knowledge. Securities Transactions where neither the Access Person nor an Immediate Family member knows of the transaction before it is completed (for example, Securities Transactions effected for an Access Person by a trustee of a blind trust or discretionary trades involving an investment partnership or investment club in which the Access Person is neither consulted nor advised of the trade before it is executed); c. Certain Corporate Actions. Any acquisition of Securities through stock dividends, dividend reinvestments, stock splits, reverse stock splits, mergers, consolidations, spin-offs, or other similar corporate reorganizations or distributions generally applicable to all holders of the same class of Securities; d. Rights. Any acquisition of Securities through the exercise of rights issued by an issuer pro rata to all holders of a class of its Securities, to the extent the rights were acquired in the issue; and e. Miscellaneous. Any transaction in the following: (1) bankers' acceptances, (2) bank certificates of deposit, (3) commercial paper, (4) high quality short-term debt, including repurchase agreements, (5) Securities that are direct obligations of the U.S. Government, and (6) other Securities as may from time to time be designated in writing by the Compliance Officer on the grounds that the risk of abuse is minimal or non-existent. 2. Personal Transactions in Securities that also are being purchased, sold or held by a Fund are exempt from the prohibitions of Sections II.A.1.b, and c, if the Access Person does not, in connection with his or her regular functions or duties, make, participate in, or obtain information regarding the purchase or sale of Securities by that Fund. EX.99.CODE.ETH THE SECURITIES TRANSACTIONS LISTED IN SECTION II IN THIS SUBSECTION ARE NOT EXEMPT FROM THE REPORTING REQUIREMENTS OF THE CODE. 3. Application to Commodities, Futures, Options on Futures and Options on Broad-Based Indices. Commodities, futures (including currency futures and futures on securities comprising part of a broad-based, publicly traded market based index of stocks) and options on futures are not subject to the seven-day blackout and prohibited transaction provisions of Section II.A., but are subject to transaction reporting. III. REPORTING REQUIREMENTS A. Reporting Requirements for all Access Persons Except Independent Fund Trustees 1. Initial Holdings and Accounts Report. Any person who becomes an Access Person of Rafferty or the Funds must submit within 10 days of becoming an Access Person an Initial Holdings and Accounts Report (see Appendix 3-A) to the Compliance Officer listing all Securities accounts and securities that he or she holds in such accounts in which that Access Person (or Immediate Family member) has Beneficial Interest.. 2. Quarterly Reporting Requirements. Every Access Person and members of his or her Immediate Family must arrange for the Compliance Officer to receive directly from any broker, dealer, or bank that effects any Securities Transaction, duplicate copies of each confirmation for each such transaction and periodic statements for each brokerage account in which such Access Person has a Beneficial Interest. Attached hereto as Appendix 4 is a form of letter that may be used to request such documents from such entities. All copies must be received no later than 10 days after the end of the calendar quarter. Each confirmation or statement must disclose the following information: a) the date of the transaction; b) the title (and interest rate and maturity date, if applicable) c) the number of shares and principal amount d) the nature of the transaction (e.g., purchase, sale); e) the price of the Security; and f) the name of the broker, dealer or bank through which the trade was effected. If an Access Person is not able to arrange for duplicate confirmations and periodic statements to be sent that contain the information required above, the Access Person must submit a Quarterly Transaction Report (see Appendix 5) within 10 days after the completion of each calendar quarter to the Compliance Officer. 3. Every Access Person who establishes a Securities account during the quarter in which that Access Person (or Immediate Family member) has Beneficial Interest must submit an Account Report (see Appendix 5) to the Compliance Officer. This report must be submitted to the Compliance Officer within 10 days after the completion of each calendar quarter. 4. Annual Holdings and Accounts Report. Every Access Person must submit an Annual Holdings and Accounts Report (see Appendix 3-A) listing all Securities accounts and securities in which that Access Person (or Immediate Family member) has Beneficial Interest. The information in the Annual Holdings Report must be current as of a date no more than 30 days before the report is submitted. The completed report should be submitted to the Compliance Officer by December 31 following the end of the calendar year. EX.99.CODE.ETH B. Reporting Requirements for Independent Fund Trustees Each Independent Fund Trustee (and their Immediate Families) must report to the Compliance Officer any trade in a Security by any account in which the Independent Fund Trustee has any Beneficial Interest if the Independent Fund Trustee knew or, in the ordinary course of fulfilling his or her duty as a Trustee of the Trusts, should have known that during the 15-day period immediately preceding or after the date of the transaction in a Security by the Trustee such Security (or an Equivalent Security) was or would be purchased or sold by the Fund or such purchase or sale by the Fund was or would be considered by the Fund or by Rafferty for the Fund. Independent Fund Trustees who need to report such transactions should refer to the procedures outlined in Section III.A.2. C. Reporting Requirements for Investment Personnel Each investment person must notify the Chief Compliance officer in writing of each securities transaction, except those exempt transaction listed in Section II B, on the trade date of the transaction. Notification must consist of securities name and number of shares or bonds traded. D. Exemptions, Disclaimers and Availability of Reports 1. A Securities Transaction involving the following circumstances or Securities are exempt from the Reporting Requirements discussed above: (1) neither the Access Person nor an Immediate Family Member had any direct or indirect influence or control over the transaction; (2) Securities directly issued by the U.S. Government; (3) bankers' acceptances; (4) bank certificates of deposit; (5) commercial paper; (6) high quality short-term debt instruments, including repurchase agreements; (7) shares issued by open-end mutual funds; and (7) other Securities as may from time to time be designated in writing by the Compliance Officer on the grounds that the risk of abuse is minimal or non-existent. In addition, no Access Person of Rafferty shall be required to make a Quarterly Transaction Report where such report would duplicate information recorded by Heritage pursuant to Rule 204-2(a) of the Investment Advisers Act of 1940. 2. Disclaimers. Any report of a Securities Transaction for the benefit of a person other than the individual in whose account the transaction is placed may contain a statement that the report should not be construed as an admission by the person making the report that he or she has any direct or indirect beneficial ownership in the Security to which the report relates. 3. Availability of Reports. All information supplied pursuant to this Code may be made available for inspection to the Board of Trustees of the Trusts, the Board of Directors of Rafferty, the Compliance Officer, any party to which any investigation is referred by any of the foregoing, the SEC, any self-regulatory organization of which Rafferty is a member, any state securities commission, and any attorney or agent of the foregoing or of the Trusts. EX.99.CODE.ETH IV. FIDUCIARY DUTIES A. Confidentiality. Access Persons are prohibited from revealing information relating to the investment intentions, activities or portfolios of the Funds except to persons whose responsibilities require knowledge of the information. B. Gifts. The following provisions on gifts apply to all Investment Personnel. 1. Accepting Gifts. On occasion, because of their position with the Trusts, Investment Personnel may be offered, or may receive without notice, gifts from clients, brokers, vendors, or other persons not affiliated with such entities. Acceptance of extraordinary or extravagant gifts is not permissible. Any such gifts must be declined or returned in order to protect the reputation and integrity of the Trusts and Rafferty. Gifts of a nominal value (i.e., gifts whose reasonable value is no more than $100 a year), and customary business meals, entertainment (e.g., sporting events), and promotional items (e.g., pens, mugs, T-shirts) may be accepted. If an Investment Person receives any gift that might be prohibited under this Code, the Investment Person must inform the Compliance Officer. 2. Solicitation of Gifts. Investment Personnel may not solicit gifts or gratuities. 3. Giving Gifts. Investment Personnel may not personally give any gift with a value in excess of $100 per year to persons associated with securities or financial organizations, including exchanges, other member organizations, commodity firms, news media, or clients of Rafferty. C. Corporate Opportunities. Access Persons may not take personal advantage of any opportunity properly belonging to the Trusts or Rafferty. This includes, but is not limited to, acquiring Securities for one's own account that would otherwise be acquired for a Fund. D. Undue Influence. Access Persons may not cause or attempt to cause any Fund to purchase, sell or hold any Security in a manner calculated to create any personal benefit to the Access Person. If an Access Person or Immediate Family member stands to benefit materially from an investment decision for a Fund which the Access Person is recommending or participating in, the Access Person must disclose to those persons with authority to make investment decisions for the Fund (or, if the Access Person in question is a person with authority to make investment decisions for the Fund, to the Compliance Officer) any Beneficial Interest that the Access Person (or Immediate Family member) has in that Security or an Equivalent Security, or in the issuer thereof, where the decision could create a material benefit to the Access Person (or Immediate Family member) or the appearance of impropriety. The person to whom the Access Person reports the interest, in consultation with the Compliance Officer, must determine whether or not the Access Person will be restricted in making investment decisions. E. Service as a Director. No Investment Person may serve on the board of directors of a publicly-held company (other than the Trusts) absent prior written authorization by the Compliance Officer. This authorization will rarely, if ever, be granted and, if granted, normally will require that the affected Investment Person be isolated, through a "Chinese Wall" or other procedures, from those making investment decisions related to the issuer on whose board the person sits. EX.99.CODE.ETH V. COMPLIANCE WITH THIS CODE OF ETHICS A. Compliance Officer Review 1. Investigating Violations of the Code. The Compliance Officer is responsible for investigating any suspected violation of the Code and shall report the results of each investigation to the President of Rafferty. The President of Rafferty together with the Compliance Officer are responsible for reviewing the results of any investigation of any reported or suspected violation of the Code. Any violation of the Code by an Access Person will be reported to the Boards of Trustees of the Trusts no less frequently than each regular quarterly meeting. 2. Annual Reports. The Compliance Officer will review the Code at least once a year, in light of legal and business developments and experience in implementing the Code, and will report to the Boards of Trustees of the Trusts: a. Summarizing existing procedures concerning personal investing and any changes in the procedures made during the past year; b. Identifying any violation requiring significant remedial action during the past year; and c. Identifying any recommended changes in existing restrictions or procedures based on its experience under the Code, evolving industry practices, or developments in applicable laws or regulations. B. Remedies 1. Sanctions. If the Compliance Officer and the President of Rafferty determine that an Access Person has committed a violation of the Code following a report of the Compliance Officer, the Compliance Officer and the President of Rafferty may impose sanctions and take other actions as they deem appropriate, including a letter of caution or warning, suspension of personal trading rights, suspension of employment (with or without compensation), fine, civil referral to the SEC, criminal referral, and termination of the employment of the violator for cause. The Compliance Officer and the President of Rafferty also may require the Access Person to reverse the trade(s) in question and forfeit any profit or absorb any loss derived therefrom. The amount of profit shall be calculated by the Compliance Officer and the President of Rafferty and shall be forwarded to a charitable organization selected by the Compliance Officer and the President of Rafferty. The Compliance Officer and the President of Rafferty may not review his or her own transaction. 2. Sole Authority. The Compliance Officer and the President of Rafferty have sole authority, subject to the review set forth in Section V.B.3 below, to determine the remedy for any violation of the Code, including appropriate disposition of any monies forfeited pursuant to this provision. Failure to promptly abide by a directive to reverse a trade or forfeit profits may result in the imposition of additional sanctions. 3. Review. Whenever the Compliance Officer and the President of Rafferty determine that an Access Person has committed a violation of this Code that merits remedial action, they will report no less frequently than quarterly to the Boards of Trustees of the Trusts, information relating to the investigation of the violation, including any sanctions imposed. The Boards of Trustees of the Trusts may modify such sanctions as it deems appropriate. The Boards of Trustees of the Trusts and the Compliance Officer and the President of Rafferty shall have access to all information considered EX.99.CODE.ETH by the Compliance Officer in relation to the case. The Compliance Officer may determine whether or not to delay the imposition of any sanctions pending review by the applicable Board. C. Exceptions to the Code. Although exceptions to the Code will rarely, if ever, be granted, the Compliance Officer may grant exceptions to the requirements of the Code on a case by case basis if the Compliance Officer finds that the proposed conduct involves negligible opportunity for abuse. All such exceptions must be in writing and must be reported as soon as practicable to the Boards of Trustees of the Trusts at its next regularly scheduled meeting after the exception is granted. D. Compliance Certification. Each current Access Person and each newly-hired Access Person shall certify that he or she has received, read and understands the Code by executing the Certification of Compliance with the Code of Ethics form (see Appendix 3). In addition, by December 31 following the end of the prior calendar year, all Access Persons will be required to re-certify on such form (see Appendix 3) that they have read and understand the Code, that they have complied with the requirements of the Code, and that they have reported all Securities Transactions required to be disclosed or reported pursuant to the requirements of this Code. Independent Fund Trustees should complete Appendix 3-I only. E. Inquiries Regarding the Code. The Compliance Officer will answer any questions about the Code or any other compliance-related matters. August 26, 1997, as amended February 24, 2000 and November 9, 2004 EX.99.CODE.ETH APPENDIX 1 DEFINITIONS "Access Person" means any trustee, director, officer or Advisory Person of Rafferty or the Trusts. "Advisory Person" means (1) any employee of Rafferty and the Trusts (or of any company in a control relationship with such companies) who, in connection with his or her regular functions or duties, makes, participates in, or obtains information regarding the purchase or sale of a security by the Funds, or whose functions relate to the making of any recommendation with respect to such purchases or sales, and (2) any natural person in a control relationship to such companies who obtains information concerning the recommendations made to the Funds with respect to the purchase and sale of securities by the Funds. "Beneficial Interest" means the opportunity, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, to profit, or share in any profit derived from, a transaction in the subject Securities. An Access Person is deemed to have a Beneficial Interest in Securities owned by members of his or her Immediate Family. Common examples of Beneficial Interest include joint accounts, spousal accounts, UTMA accounts, partnerships, trusts and controlling interests in corporations. Any uncertainty as to whether an Access Person has a Beneficial Interest in a Security should be brought to the attention of the Compliance Officer. Such questions will be resolved in accordance with, and this definition shall be subject to, the definition of "beneficial owner" found in Rules 16a-1(a)(2) and (5) promulgated under the Securities Exchange Act of 1934. "Code" means this Code of Ethics, as it may be amended from time to time. "Compliance Officer" means the Compliance Officer of Rafferty and the persons designated in Appendix 2, as such Appendix shall be amended from time to time. "Equivalent Security" means any Security issued by the same entity as the issuer of a subject Security, including options, rights, stock appreciation rights, warrants, preferred stock, restricted stock, phantom stock, bonds, and other obligations of that company or security otherwise convertible into that security. Options on securities are included even if, technically, they are issued by the Options Clearing Corporation or a similar entity. "Fund" and "Funds" mean one or more of the portfolios of the Potomac Funds, an investment company registered under the 1940 Act for which Rafferty serves as investment adviser. "Immediate Family" of an Access Person means any of the following persons who reside in the same household as the Access Person: child stepchild grandchild parent stepparent grandparent spouse sibling mother-in-law father-in-law son-in-law daughter-in-law brother-in-law sister-in-law Immediate Family includes adoptive relationships and any other relationship (whether or not recognized by law) which the Compliance Officer determines could lead to the possible conflicts of interest, diversions of corporate opportunity, or appearances of impropriety which this Code is intended to prevent. EX.99.CODE.ETH "Independent Fund Trustee" means a trustee of a Trust who is not an "interested person" as that term is defined in Section 2(a)(19) of the 1940 Act. "Initial Public Offering" is an offering of securities registered under the Securities Act of 1933 by an issuer who immediately before the registration of such securities was not subject to the reporting requirements of sections 13 or 15(d) of the Securities Exchange Act of 1934. "Investment Personnel" and "Investment Person" mean (1) employees of Rafferty or the Trusts (or of any company in a control relationship to such companies) who, in connection with his or her regular functions or duties, makes or participates in making recommendations regarding the purchase or sale of a security, or (2) any natural person who controls Rafferty or the Trusts and who obtains information concerning recommendations made to the Funds regarding the purchase and sale of securities by the Funds. References to Investment Personnel include Portfolio Managers. "1940 Act" means the Investment Company Act of 1940, as amended. "Private Placement" means a limited offering exempt from registration pursuant to Rules 504, 505 or 506 or under Section 4(2) or 4(6) of the Securities Act of 1933. "Portfolio Manager" means a person who has or shares principal day-to-day responsibility for managing the portfolio of a Fund. "Rafferty" means Rafferty Asset Management, LLC. "SEC" means the Securities and Exchange Commission. "Security" includes stock, notes, bonds, debentures, and other evidences of indebtedness (including loan participations and assignments), limited partnership interests, investment contracts, and all derivative instruments of the foregoing, such as options and warrants. "Security" does not include futures and options on futures, but the purchase and sale of such instruments are nevertheless subject to the reporting requirements of the Code. "Securities Transaction" means a purchase or sale of Securities in which an Access Person or a member of his or her Immediate Family has or acquires a Beneficial Interest. "Trusts" means the Potomac Funds and the Potomac Insurance Trust, each an investment company registered under the 1940 Act. EX.99.CODE.ETH APPENDIX 2 CONTACT PERSONS COMPLIANCE OFFICER 1. Daniel O'Neill 2. Tim Hagan EX.99.CODE.ETH APPENDIX 3 CERTIFICATION OF COMPLIANCE WITH CODE OF ETHICS I acknowledge that I have received the Code of Ethics dated August 26, 1997, as amended on February 24, 2000, and certify that: 1. I have read the Code of Ethics and I understand that it applies to me and to all accounts in which I or a member of my Immediate Family has any Beneficial Interest. 2. In accordance with Section III.A. of the Code of Ethics, I will report or have reported all Securities Transactions in which I have, or a member of my Immediate Family has, a Beneficial Interest, except for transactions exempt from reporting under Section III.C. 3. I have listed on Appendix 3-A of this form all accounts and securities in which I have, or any member of my Immediate Family has, any Beneficial Interest. 4. I will comply or have complied with the Code of Ethics in all other respects. 5. I agree to disgorge and forfeit any profits on prohibited transactions in accordance with the requirements of the Code of Ethics. ---------------------------------------- Access Person's Signature ------------------------------------- Print Name Date: -------------------- SEE NEXT PAGE EX.99.CODE.ETH APPENDIX 3-A PERSONAL SECURITIES HOLDINGS AND ACCOUNTS DISCLOSURE FORM (for use as an Initial or Annual Holdings and Accounts Report) PURSUANT TO SECTION III.A.1 OR III.A.3 OF THE CODE OF ETHICS, PLEASE LIST ALL SECURITIES ACCOUNTS AND SECURITIES HOLDINGS FOR EACH SECURITIES ACCOUNT IN WHICH YOU OR YOUR IMMEDIATE FAMILY MEMBER HAS BENEFICIAL INTEREST. YOU DO NOT NEED TO LIST THOSE SECURITIES THAT ARE EXEMPT PURSUANT TO SECTION III.C. Is this an Initial or Annual Report? ____________________________ Name of Access Person: ____________________________ Name of Account Holder: ____________________________ Relationship to Access Person: ____________________________ SECURITIES HOLDINGS: Attach to this Report your most recent account statement and/or list Securities held below:
Name of Security Quantity Principal Amount Name of Broker/Dealer/Bank - ---------------- -------- ---------------- -------------------------- 1. 2. 3. 4. 5. (Attach separate sheets as necessary)
SECURITIES ACCOUNTS:
Account Name Account Number Date Account Opened Name of Broker/Dealer/Bank - ------------ -------------- ------------------- -------------------------- 1. 2. 3. 4. (Attach separate sheets as necessary)
I certify that this Report and the attached statements (if any) constitute all the Securities accounts and Securities that must be reported pursuant to this Code. - ------------------------------------ Access Person Signature - ------------------------------------ -------------------------- Print Name Date 2 EX.99.CODE.ETH APPENDIX 3-I CERTIFICATION OF COMPLIANCE WITH CODE OF ETHICS (INDEPENDENT FUND TRUSTEES) I acknowledge that I have received the Code of Ethics dated August 26, 1997, as amended on February 24, 2000, and certify that: 1. I have read the Code of Ethics and I understand that it applies to me and to all accounts in which I or a member of my Immediate Family has any Beneficial Interest. 2. I will report or have reported all Securities Transactions required to be reported under Section III.B. of the Code in which I have, or a member of my Immediate Family has, a Beneficial Interest. 3. I will comply or have complied with applicable provisions of the Code of Ethics in all other respects. ---------------------------------------- Trustee's Signature ---------------------------------------- Print Name Date: -------------------- EX.99.CODE.ETH APPENDIX 4 FORM OF LETTER TO BROKER, DEALER OR BANK Subject: Account # _________________ Dear ________________: Rafferty Asset Management, LLC ("Rafferty"), my employer, is a registered investment adviser. In connection with the Code of Ethics adopted by Rafferty, I am required to request that you send duplicate confirmations of individual transactions as well as duplicate periodic statements for the referenced ac ount to my employer. Please note that the confirmations and/or periodic statements must disclose the following information: 1) date of the transaction; 2) the title of the security (including interest rate and maturity date) and price; 3) the number of shares and principal amount; 4) the nature of the transaction (e.g., purchase or sale); and 5) the name of the firm effecting the trade. If you are unable to provide this information, please let me know immediately. Otherwise, please address the confirmations and statements directly to: Mr. Tim Hagan Rafferty Asset Management, LLC 3719 N. Randolph St. Arlington, VA 22207 Your cooperation is most appreciated. If you have any questions regarding these requests, please contact me at . Sincerely, EX.99.CODE.ETH APPENDIX 5 REPORT OF SECURITY TRANSACTIONS FOR QUARTER ENDED _____________ Access Persons other than Independent Fund Trustees: You do not need to report transactions in 1) direct obligations of the U.S. Government, 2) bankers' acceptances, bank CDs, commercial paper, high quality short-term debt instruments, 3) shares of an open-end investment company, and 4) transactions which you had no direct or indirect influence or control. Independent Fund Trustees: If you are an Independent Fund Trustee, then you only need to report a transaction if you, at the time of that transaction, knew or, in the ordinary course of fulfilling your official duties as a Trustee to the Potomac Funds, should have known that, during the 15-day period immediately before or after your transaction in a security, 1) the Funds purchased or sold such security or 2) the Funds or their investment adviser considered purchasing or selling such security. Disclose all securities transactions for the period covered by this Report:
Price at Name/Description of Number Date of Which Bought Name of Security* Shares Transaction Effected Principal Amount or Sold Broker/Dealer/Bank - ------------------- ------ ----------- -------- ---------------- ------- ------------------
* Please disclose the interest rate or maturity date, if applicable. Did you establish any securities accounts during the period covered by this Report? ___ Yes ___ No If Yes, please complete the following: EX.99.CODE.ETH
Date of Name of Broker Account Opening Account Number - -------------- --------------- --------------
____ The above is a record of every transaction in a security or account opened which I had, or in which I acquired, any direct or indirect beneficial ownership during the period indicated above. ____ I certify that the Compliance Officer has received confirmations or account statements pertaining to all transactions executed and that disclose the information required above, and notice of any accounts opened, during the period covered by this Report. ____ I have nothing to report for the period covered by this Report. Date: Signature: -------------------- ----------------------------- EX.99.CODE ETH APPENDIX 6 INITIAL PUBLIC OFFERING / PRIVATE PLACEMENT CLEARANCE FORM (for the use of the Compliance Officer only) The Code of Ethics for Rafferty and the Potomac Funds prohibits any acquisition of securities in an initial public offering (other than shares of open-end investment companies) and private placement by any Investment Person. In cases of exceptional circumstances, however, investments in such securities may be permitted. In these instances, a record of the rationale supporting the approval of such transactions must be completed and retained for a period of 5 years after the end of the fiscal year in which approval is granted. This form should be used for such record keeping purposes. Name of Investment Person: _________________________________ Date of Request: _________________________________ Name of IPO / Private Placement: _________________________________ Date of Offering: _________________________________ Number of Shares/Interests _________________________________ Price: _________________________________ Name of Broker/Dealer/Bank _________________________________ ___ I have cleared the IPO / Private Placement transaction described above. Reasons supporting the decision to approve the above transaction: ---------------------------------------- Name of Compliance Officer ---------------------------------------- Signature of Compliance Officer ---------------------------------------- Date EX-99.302CERT 3 c02132exv99w302cert.txt CERTIFICATIONS PURSUANT TO SECTION 302 EX.99.906CERT CERTIFICATIONS I, Daniel D O'Neill, certify that: 1. I have reviewed this report on Form N-CSR of The Potomac Insurance Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 7, 2006 /s/ Daniel D. O'Neill -------------------- ---------------------------------------- Daniel D. O'Neill President EX.99.906CERT CERTIFICATIONS I, Timothy P. Hagan, certify that: 1. I have reviewed this report on Form N-CSR of The Potomac Insurance Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 8, 2006 /s/ Timothy P. Hagan -------------------- ---------------------------------------- Timothy P. Hagan Chief Financial Officer EX-99.906CERT 4 c02132exv99w906cert.txt CERTIFICATIONS PURSUANT TO SECTION 906 EX.99.906CERT CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of the Potomac Insurance Trust, does hereby certify, to such officer's knowledge, that the report on Form N-CSR of the Potomac Insurance Trust for the year ended December 31, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as applicable, and that the information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Potomac Insurance Trust for the stated period. /s/ Daniel D. O'Neill /s/ Timothy P. Hagan - ------------------------------------- ---------------------------------------- Daniel D. O'Neill Timothy P. Hagan President, The Potomac Insurance Chief Financial Officer, The Potomac Trust Insurance Trust Dated: March 7, 2006 ------------------- This statement accompanies this report on Form N-CSR pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed as filed by The Potomac Insurance Trust for purposes of the Securities Exchange Act of 1934. -----END PRIVACY-ENHANCED MESSAGE-----