As filed with the Securities and Exchange Commission on March 10, 2005
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-09761
THE POTOMAC INSURANCE TRUST
---------------------------
(Exact name of registrant as specified in charter)
33 WHITEHALL STREET, 10TH FLOOR
-------------------------------
NEW YORK, NY 10004
------------------
(Address of principal executive offices) (Zip code)
DANIEL D. O'NEILL
-----------------
33 WHITEHALL STREET, 10TH FLOOR
-------------------------------
NEW YORK, NY 10004
------------------
(Name and address of agent for service)
1-646-572-3390
--------------
Registrant's telephone number, including area code
Date of fiscal year end: DECEMBER 31, 2004
Date of reporting period: DECEMBER 31, 2004
ITEM 1. REPORT TO STOCKHOLDERS.
LETTER TO SHAREHOLDERS
FEBRUARY 24, 2005
Dear Shareholders,
The calendar year 2004, which coincides with the fiscal year for the Potomac
Insurance Trust, was, in retrospect, a better year for the markets than it
seemed. For the year, the S&P 500 Index, a measure of the large cap equity
market, gained 9.45% in price terms, 10.77% on a total return basis. The Nasdaq
100 Index, generally used as a proxy for the technology sector, gained 15.68% in
price terms and 15.94% on a total return basis. The Russell 2000, a measure of
small cap stocks, gained 16.39% in price terms and 17.44% on a total return
basis. The bond market, gained strongly from January through March, declined
from April through June but then rallied strongly through the end of the year
and posted gains for the year, with the Lehman US Aggregate Bond Index gaining
4.4% on a total return basis.
Although both the equity and fixed income markets posted gains in 2004, the
markets did not feel terribly healthy. The bulk of the gains in the equity
markets occurred in the final two months of the year. The total return for the
S&P 500 in November and December was 7.56%, 80% of the 9.45% gain for the year.
Although not exactly the same, the Nasdaq and the Russell also owe the bulk of
their gains to the final two months of the year. Observers of the bond market
left scratching their heads as the bond markets ignored the Federal Reserve,
which raised short-term interest rates from 1.00% in June to 2.25% by December,
and rallied the longer-term bonds in the second half of the year. The Lehman US
Aggregate Bond Index gained 3.90% from July 1 through the end of the year,
almost all of its 4.4% gain for the year.
The situation in Iraq was a clear weight on the markets, as was the lukewarm
economy. Job creation has not been good and the deficits -- budget and
trade -- are a significant concern. Interestingly, however, the markets movement
after the election would seem to indicate that uncertainty about the election
was a major factor in the lack of prior market direction. Unfortunately,
although the markets made a strong move in December perhaps in reaction to the
election results, that move was halted and, to some extent, reversed, in early
January as the markets seemed to move from a post-election rally into a more
sober phase. Since then, Iraq successfully held elections but the results do not
seem to have slowed the violence. As I write this letter, President Bush is
traveling abroad as part of an attempt to repair international relations and,
hopefully, get greater support for our efforts in Iraq. At home, Social Security
has taken center stage, with the markets trying to determine whether there will
be reform and how to pay for it if it comes.
The Potomac Insurance Trust commenced operation in July with the launch of the
Evolution VP Managed Bond Fund and Evolution VP Managed Equity Fund. The
Evolution Funds are sub-advised by Flexible Plan Investments, Ltd. As new Funds
offered in a new product, the Funds were somewhat small during their initial six
months of operations but we are encouraged both by the recent performance and by
the overall strategy. We believe that the Funds, which attempt to identify
changes in the markets and positions their portfolios accordingly, are highly
appropriate to the types of markets in which we find ourselves.
Best regards,
/s/ DANIEL O'NEILL
Daniel O'Neill
The Potomac Insurance Trust
EVOLUTION VP MANAGED BOND FUND
<Table>
<Caption>
EVOLUTION VP MANAGED BOND FUND LEHMAN US AGGREGATE BOND INDEX
------------------------------ ------------------------------
7/1/04(2) 10000 10000
12/31/04 10380 10390
</Table>
<Table>
<Caption>
AVERAGE ANNUAL
TOTAL RETURN(1)
----------------
SINCE
INCEPTION
----------------
EVOLUTION VP MANAGED BOND FUND 3.80%
LEHMAN US AGGREGATE BOND INDEX 3.90%
</Table>
The Evolution VP Managed Bond Fund is designed to be a "value-added" rotational
fund that seeks to overweight those sectors of the bond market that have been
outperforming the broader bond market. The Fund is able to go to the safety of
cash and may use inverse bond funds as the market dictates. The Fund commenced
operations on July 1, 2004. From July 1, 2004 through December 31, 2004, the
Fund gained 3.80% compared to a gain for the Lehman US Aggregate Bond Index of
3.90%. The Fund's performance can be attributed in part to a decision to
capitalize on the decline of the US dollar by overweighting the international
and emerging markets bond sectors. The Fund's performance was helped by the
rising equity market, which propelled convertible bonds to strong gains.
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 US Aggregate Bond Fund 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, 2004.
(2) Commencement of operations.
2
EVOLUTION VP MANAGED EQUITY FUND
<Table>
<Caption>
EVOLUTION VP MANAGED EQUITY
FUND S&P 500 INDEX
--------------------------- -------------
7/1/04(2) 10000.00 10000.00
12/31/04 10530.00 10735.00
</Table>
<Table>
<Caption>
AVERAGE ANNUAL
TOTAL RETURN(1)
----------------
SINCE
INCEPTION
----------------
EVOLUTION VP MANAGED EQUITY FUND 5.30%
S&P 500 INDEX(1) 7.35%
</Table>
The Evolution VP Managed Equity Fund is designed to be a "value-added"
rotational fund that seeks to overweight those sectors and/or asset classes that
have been outperforming the broad equity market. The Fund is able to go to the
safety of cash and can invest in international markets as well as the domestic
equities markets. The Fund commenced operations on July 1, 2004 and struggled
initially. From July 1, 2004 through September 30, 2004 quarter of 2004 the S&P
500 declined 2.30% and the Fund declined more, hurt by the lack of clear trends.
In the 4th quarter the Fund gained over 10% as the S&P 500 gained 8.73% (9.23%
on a total return basis) as the market rallied strongly after the US election.
The Fund's positive performance was due in part to the decision to overweight
small cap stocks, and a move from growth to value. For the period July 1, 2004
through December 31, 2004, the Fund gained 5.30% compared to an S&P 500 gain of
7.35%.
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 US Aggregate Bond Fund 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, 2004.
(2) Commencement of operations.
3
EXPENSE EXAMPLE (UNAUDITED)
DECEMBER 31, 2004
As a shareholder of the Evolution VP Managed Bond Fund and the Evolution VP
Managed Equity Fund (the "Funds"), you incur two types of costs: (1) transaction
costs; and (2) ongoing costs, including management fees; distribution and/or
service (12b-1) 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 these 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, 2004 - December 31, 2004).
ACTUAL EXPENSES
The first line of the table below provides information about actual account
values and actual expenses. 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. 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. These expenses are not included in the
expenses shown in the table. The example includes, but is not limited to,
management fees, shareholder servicing fees, fund accounting, custody and
transfer agent fees. However, the example below does not include portfolio
trading commissions and related expenses.
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.
4
<Table>
<Caption>
EVOLUTION VP MANAGED BOND FUND
-----------------------------------------------------------
EXPENSES PAID
BEGINNING ENDING DURING PERIOD
ACCOUNT VALUE ACCOUNT VALUE JULY 1, 2004 -
JULY 1, 2004 DECEMBER 31, 2004 DECEMBER 31, 2004*
------------- ------------------- -------------------
Actual $1,000.00 $ 1,038.00 $ 10.25
Hypothetical (5% return before expenses) 1,000.00 1,015.08 10.13
</Table>
* 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.
<Table>
<Caption>
EVOLUTION VP MANAGED EQUITY FUND
-----------------------------------------------------------
EXPENSES PAID
BEGINNING ENDING DURING PERIOD
ACCOUNT VALUE ACCOUNT VALUE JULY 1, 2004 -
JULY 1, 2004 DECEMBER 31, 2004 DECEMBER 31, 2004*
------------- ------------------- -------------------
Actual $1,000.00 $ 1,053.00 $ 10.32
Hypothetical (5% return before expenses) 1,000.00 1,015.08 10.13
</Table>
* 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.
5
EVOLUTION VP MANAGED BOND FUND
ALLOCATION OF FUND HOLDINGS (UNAUDITED)
DECEMBER 31, 2004
[CHART]
EVOLUTION VP MANAGED EQUITY FUND
ALLOCATION OF FUND HOLDINGS (UNAUDITED)
DECEMBER 31, 2004
[CHART]
THE PERCENTAGES IN THESE GRAPHS ARE CALCULATED BASED ON NET ASSETS.
* CASH EQUIVALENTS AND OTHER ASSETS LESS LIABILITIES.
6
EVOLUTION MANAGED BOND FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2004
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
INVESTMENT COMPANIES - 92.2%
1,436 Advent Claymore Convertible
Securities and Income Fund $ 37,795
4,333 Alliance World Dollar
Government Fund II 53,643
1,716 Calamos Convertible
Opportunities and Income
Fund 35,504
3,576 Corporate High Yield Fund V,
Inc. 55,964
919 Eaton Vance Senior
Floating-Rate Fund 18,435
3,574 Evergreen Income Advantage
Fund 57,720
2,410 ING Prime Rate Trust 18,027
139 iShares GS $ InvesTop
Corporate Bond Fund 15,503
320 iShares Lehman 7-10 Year
Treasury Bond Fund 27,184
114 iShares Lehman Aggregate Bond
Fund 11,674
1,353 iShares Lehman Treasury
Inflation Protected
Securities Fund 143,161
</Table>
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
2,164 Nicholas-Applegate
Convertible & Income Fund $ 35,987
3,500 Pioneer High Income Trust 59,780
3,791 Templeton Emerging Markets
Income Fund 52,164
5,477 Templeton Global Income Fund 54,387
2,143 Van Kampen Senior Income
Trust 18,044
-----------
TOTAL INVESTMENT COMPANIES
(Cost $688,615) $ 694,972
-----------
Total Investments
(Cost $688,615) - 92.2% $ 694,972
Other Assets in Excess of
Liabilities - 7.8% 58,579
-----------
TOTAL NET ASSETS - 100.0% $ 753,551
===========
</Table>
Percentages are stated as a percent of net assets.
See notes to the financial statements.
7
EVOLUTION VP MANAGED EQUITY FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2004
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
COMMON STOCKS - 88.2%
Aerospace & Defense - 2.8%
176 AAR Corp. (a) $ 2,397
10 Alliant Techsystems, Inc. (a) 654
20 Armor Holdings, Inc. (a) 940
63 DRS Technologies, Inc. (a) 2,691
72 Engineered Support Systems,
Inc. 4,264
40 General Dynamics Corp. 4,184
54 L-3 Communications Holdings,
Inc. 3,955
20 Lockheed Martin Corp. 1,111
53 Moog, Inc. (a) 2,403
46 Northrop Grumman Corp. 2,501
10 Precision Castparts Corp. 657
22 Rockwell Collins, Inc. 868
42 Sequa Corp. (a) 2,568
----------
29,193
----------
Air Freight & Logistics - 0.4%
37 EGL, Inc. (a) 1,106
22 FedEx Corp. 2,167
20 Forward Air Corp. (a) 894
----------
4,167
----------
Airlines - 0.1%
68 Southwest Airlines Co. 1,107
----------
Auto Components - 0.9%
14 ArvinMeritor, Inc. 313
18 BorgWarner, Inc. 975
49 Cooper Tire & Rubber Co. 1,056
191 Intermet Corp. (a) 62
133 Standard Motor Products, Inc. 2,102
38 Superior Industries
International 1,104
102 The Goodyear Tire & Rubber Co.
(a) 1,495
190 Tower Automotive, Inc. (a) 454
214 Visteon Corp. 2,091
----------
9,652
----------
Automobiles - 0.6%
16 General Motors Corp. 641
54 Harley-Davidson, Inc. 3,281
97 Monaco Coach Corp. 1,995
20 Winnebago Industries, Inc. 781
----------
6,698
----------
Beverages - 1.7%
54 Adolph Coors Co. - Class B 4,086
18 Anheuser-Busch Companies, Inc. 913
</Table>
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
Beverages - 1.7% (Continued)
111 Constellation Brands, Inc. -
Class A (a) $ 5,163
97 Pepsi Bottling Group, Inc. 2,623
165 PepsiAmericas, Inc. 3,504
18 PepsiCo, Inc. 940
----------
17,229
----------
Biotechnology - 0.4%
37 Applera Corp - Applied
Biosystems Group 774
14 Charles River Laboratories
International, Inc. (a) 644
22 Enzo Biochem, Inc. (a) 428
43 Regeneron Pharmaceuticals, Inc.
(a) 396
52 Techne Corp. (a) 2,023
----------
4,265
----------
Building Products - 0.7%
19 American Standard Companies,
Inc. (a) 785
44 Griffon Corp. (a) 1,188
158 Simpson Manufacturing Co.,
Inc. 5,514
----------
7,487
----------
Capital Markets - 0.8%
30 Federated Investors, Inc. 912
131 LaBranche & Co, Inc. (a) 1,174
18 Merrill Lynch & Co, Inc. 1,076
22 Piper Jaffray Cos. (a) 1,055
22 SEI Investments Co. 922
32 The Bear Stearns Companies
Inc. 3,274
----------
8,413
----------
Chemicals - 1.2%
18 Cytec Industries, Inc. 925
36 Ecolab, Inc. 1,265
13 Engelhard Corp. 399
27 Georgia Gulf Corp. 1,345
42 Headwaters, Inc. (a) 1,197
122 Material Sciences Corp. (a) 2,195
19 Rohm & Haas Co. 840
11 Sigma-Aldrich Corp. 665
51 The Scotts Co. (a) 3,749
----------
12,580
----------
Commercial Banks - 2.6%
32 Bank of America Corp. 1,504
27 East West Bancorp, Inc. 1,133
</Table>
See notes to the financial statements.
8
EVOLUTION VP MANAGED EQUITY FUND
SCHEDULE OF INVESTMENTS (continued)
DECEMBER 31, 2004
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
COMMON STOCKS -- 88.2% (CONTINUED)
Commercial Banks - 2.6% (Continued)
34 First Bancorp Puerto Rico $ 2,159
27 Hudson United Bancorp 1,063
40 Irwin Financial Corp. 1,136
32 M&T Bank Corp. 3,451
90 National City Corp. 3,379
27 Republic Bancorp Inc. 412
46 SunTrust Banks, Inc. 3,398
69 The South Financial Group Inc 2,245
28 Trustco Bank Corp NY 386
69 UCBH Holdings, Inc. 3,162
73 United Bankshares, Inc. 2,785
18 Wilmington Trust Corp. 651
----------
26,864
----------
Commercial Services & Supplies - 3.3%
16 Adesa, Inc. 340
101 Angelica Corp. 2,732
15 Apollo Group, Inc. (a) 1,211
97 Copart, Inc. (a) 2,553
11 Corinthian Colleges, Inc. (a) 207
26 CPI Corp. 353
37 Deluxe Corp. 1,381
10 Heidrick & Struggles
International, Inc. (a) 343
151 Insurance Auto Auctions, Inc.
(a) 3,385
84 Ionics, Inc. (a) 3,641
43 ITT Educational Services, Inc.
(a) 2,045
113 Labor Ready, Inc. (a) 1,912
15 Laureate Education, Inc. (a) 661
119 Mobile Mini, Inc. (a) 3,932
17 Monster Worldwide, Inc. (a) 572
157 Pre-Paid Legal Services, Inc. 5,895
14 Stericycle, Inc. (a) 643
13 Viad Corp. 370
16 Waste Connections, Inc. (a) 548
50 Watson Wyatt & Co Holdings 1,348
----------
34,072
----------
Communications Equipment - 0.8%
26 Avaya, Inc. (a) 447
24 Brooktrout, Inc. (a) 288
26 C-COR, Inc. (a) 242
60 CommScope, Inc. (a) 1,134
</Table>
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
Communications Equipment - 0.8% (Continued)
63 Corning, Inc. (a) $ 742
233 JDS Uniphase Corp. (a) 739
108 Lucent Technologies, Inc. (a) 406
23 PC-Tel, Inc. (a) 182
98 Plantronics, Inc. 4,064
----------
8,244
----------
Computers & Peripherals - 0.5%
30 Adaptec, Inc. (a) 228
20 Network Appliance, Inc. (a) 665
99 QLogic Corp. (a) 3,636
12 Storage Technology Corp. (a) 379
----------
4,908
----------
Construction & Engineering - 0.3%
17 Fluor Corp. 927
131 The Shaw Group Inc. (a) 2,338
----------
3,265
----------
Construction Materials - 0.4%
45 Florida Rock Industries, Inc. 2,679
19 Texas Industries, Inc. 1,185
----------
3,864
----------
Consumer Finance - 1.0%
15 American Express Co. 846
201 AmeriCredit Corp. (a) 4,914
24 MBNA Corp. 677
78 SLM Corp. 4,164
----------
10,601
----------
Containers & Packaging - 0.5%
94 Chesapeake Corp. 2,553
24 Myers Industries, Inc. 307
54 Sealed Air Corp. (a) 2,877
----------
5,737
----------
Diversified Financial Services - 0.2%
30 Moody's Corp. 2,605
----------
Diversified Telecommunication Services - 1.2%
49 AT&T Corp. 934
108 CenturyTel, Inc. 3,831
643 Cincinnati Bell, Inc. (a) 2,668
73 Citizens Communications Co. 1,007
</Table>
See notes to the financial statements.
9
EVOLUTION VP MANAGED EQUITY FUND
SCHEDULE OF INVESTMENTS (continued)
DECEMBER 31, 2004
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
COMMON STOCKS -- 88.2% (CONTINUED)
Diversified Telecommunication Services - 1.2%
(Continued)
66 Commonwealth Telephone
Enterprises, Inc. (a) $ 3,277
23 SBC Communications, Inc. 593
----------
12,310
----------
Electric Utilities - 2.1%
21 Allete, Inc. 772
12 Ameren Corp. 602
12 CH Energy Group, Inc. 577
14 Cinergy Corp. 583
29 Cleco Corp. 587
13 Consolidated Edison, Inc. 569
31 Duquesne Light Holdings, Inc. 584
50 Entergy Corp. 3,379
45 FPL Group, Inc. 3,364
19 Great Plains Energy, Inc. 575
80 Northeast Utilities 1,508
11 OGE Energy Corp. 292
14 Pepco Holdings, Inc. 298
100 PG&E Corp. (a) 3,328
13 Progress Energy, Inc. 588
55 The Southern Co. 1,844
28 TXU Corp. 1,808
11 UIL Holdings Corp. 564
----------
21,822
----------
Electrical Equipment - 0.1%
36 Magnetek, Inc. (a) 248
77 Power-One, Inc. (a) 687
----------
935
----------
Electronic Equipment & Instruments - 2.9%
124 Daktronics, Inc. (a) 3,086
77 Dionex Corp. (a) 4,364
138 Flir Systems, Inc. (a) 8,803
80 Global Imaging Systems, Inc.
(a) 3,160
11 Jabil Circuit, Inc. (a) 281
57 Keithley Instruments, Inc. 1,123
120 Kemet Corp. (a) 1,074
23 Methode Electronics, Inc. 296
49 Park Electrochemical Corp. 1,062
14 Radisys Corp. (a) 274
106 Sanmina-SCI Corp. (a) 898
42 Scansource, Inc. (a) 2,611
308 Solectron Corp. (a) 1,642
</Table>
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
Electronic Equipment & Instruments - 2.9% (Continued)
29 Tektronix, Inc. $ 876
10 Trimble Navigation Ltd. (a) 330
22 X-Rite, Inc. 352
----------
30,232
----------
Energy Equipment & Services - 1.4%
31 Cal Dive International, Inc.
(a) 1,263
61 CARBO Ceramics, Inc. 4,209
290 Input/Output, Inc. (a) 2,564
137 Maverick Tube Corp. (a) 4,151
27 SEACOR Holdings, Inc. (a) 1,442
17 Tidewater, Inc. 605
23 Veritas DGC, Inc. (a) 516
----------
14,750
----------
Food & Staples Retailing - 0.2%
10 BJ's Wholesale Club, Inc. (a) 291
14 Performance Food Group Co. (a) 377
12 Whole Foods Market, Inc. 1,144
----------
1,812
----------
Food Products - 1.0%
35 Dean Foods Co. (a) 1,153
53 General Mills, Inc. 2,635
25 Hershey Foods Corp. 1,389
15 Kellogg Co. 670
16 Sanderson Farms, Inc. 692
39 Smithfield Foods, Inc. (a) 1,154
12 The JM Smucker Co. 565
37 Wm. Wrigley Jr. Co. 2,560
----------
10,818
----------
Gas Utilities - 0.9%
22 Atmos Energy Corp. 602
128 Cascade Natural Gas Corp. 2,713
100 KeySpan Corp. 3,945
13 Peoples Energy Corp. 571
19 The Laclede Group Inc. 592
38 WGL Holdings, Inc. 1,172
----------
9,595
----------
Health Care Equipment & Supplies - 4.7%
12 Arthrocare Corp. (a) 385
14 Biomet, Inc. 607
17 Boston Scientific Corp. (a) 604
10 C.R. Bard, Inc. 640
10 Conmed Corp. (a) 284
</Table>
See notes to the financial statements.
10
EVOLUTION VP MANAGED EQUITY FUND
SCHEDULE OF INVESTMENTS (continued)
DECEMBER 31, 2004
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
COMMON STOCKS -- 88.2% (CONTINUED)
Health Care Equipment & Supplies - 4.7% (Continued)
37 Cooper Cos, Inc. $ 2,612
67 Diagnostic Products Corp. 3,688
77 ICU Medical, Inc. (a) 2,105
30 Idexx Laboratories, Inc. (a) 1,638
151 Immucor, Inc. (a) 3,550
34 Kensey Nash Corp. (a) 1,174
67 Mentor Corp. 2,261
12 Merit Medical Systems, Inc. (a) 183
22 Millipore Corp. (a) 1,096
151 Possis Medical, Inc. (a) 2,036
34 Resmed, Inc. (a) 1,737
18 Respironics, Inc. (a) 978
84 St Jude Medical, Inc. (a) 3,522
47 Steris Corp. (a) 1,115
166 SurModics, Inc. (a) 5,397
63 Sybron Dental Specialties, Inc.
(a) 2,229
156 Waters Corp. (a) 7,299
119 Wilson Greatbatch
Technologies, Inc. (a) 2,668
22 Zimmer Holdings, Inc. (a) 1,763
----------
49,571
----------
Health Care Providers & Services - 6.2%
27 Aetna, Inc. 3,368
39 AMERIGROUP Corp. (a) 2,951
41 AmerisourceBergen Corp. 2,406
63 Amsurg Corp. (a) 1,861
19 Cardinal Health, Inc. 1,105
16 Cerner Corp. (a) 851
16 Cigna Corp. 1,305
59 Coventry Health Care, Inc. (a) 3,132
92 First Health Group Corp. (a) 1,721
27 HCA, Inc. 1,079
51 Health Management Associates,
Inc. 1,159
40 IMS Health, Inc. 928
83 Lincare Holdings, Inc. (a) 3,540
269 OCA, Inc. (a) 1,708
117 Odyssey HealthCare, Inc. (a) 1,600
37 Pediatrix Medical Group, Inc.
(a) 2,370
97 Priority Healthcare Corp. (a) 2,112
122 Province Healthcare Co. (a) 2,727
125 Sierra Health Services (a) 6,889
120 Sunrise Senior Living, Inc. (a) 5,563
87 Tenet Healthcare Corp. (a) 955
</Table>
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
Health Care Providers & Services - 6.2% (Continued)
32 Triad Hospitals, Inc. (a) $ 1,191
40 United Surgical Partners
International, Inc.
(a) 1,668
70 UnitedHealth Group, Inc. 6,162
51 Wellpoint, Inc. (a) 5,865
----------
64,216
----------
Hotels Restaurants & Leisure - 2.5%
60 Argosy Gaming Co. (a) 2,802
56 Bally Total Fitness Holding
Corp. (a) 237
33 Brinker International, Inc. (a) 1,157
23 CEC Entertainment, Inc. (a) 919
39 Harrah's Entertainment, Inc. 2,609
23 Jack in the Box, Inc. (a) 848
96 Landry's Restaurants, Inc. 2,790
15 Marriott International,
Inc. - Class A 945
26 O'Charleys, Inc. (a) 508
39 Rare Hospitality
International, Inc. (a) 1,243
26 Ruby Tuesday, Inc. 678
95 Ryan's Restaurant Group, Inc.
(a) 1,465
133 Shuffle Master, Inc. (a) 6,264
97 Sonic Corp. (a) 2,959
16 Starbucks Corp. (a) 998
----------
26,422
----------
Household Durables - 6.6%
33 American Greetings 837
208 Applica, Inc. (a) 1,258
47 Centex Corp. 2,800
27 Champion Enterprises, Inc. (a) 319
69 DR Horton, Inc. 2,781
74 KB Home 7,726
51 Libbey, Inc. 1,133
103 MDC Holdings, Inc. 8,903
55 Meritage Homes Corp. (a) 6,198
11 Mohawk Industries, Inc. (a) 1,004
137 Pulte Homes, Inc. 8,741
26 Russ Berrie & Co, Inc. 594
210 Ryland Group, Inc. 12,083
111 Salton, Inc. (a) 628
43 Standard-Pacific Corp. 2,758
14 The Black & Decker Corp. 1,237
139 Toll Brothers, Inc. (a) 9,537
----------
68,537
----------
</Table>
See notes to the financial statements.
11
EVOLUTION VP MANAGED EQUITY FUND
SCHEDULE OF INVESTMENTS (continued)
DECEMBER 31, 2004
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
COMMON STOCKS -- 88.2% (CONTINUED)
Household Products - 0.6%
61 Clorox Co. $ 3,595
19 Colgate-Palmolive Co. 972
12 Procter & Gamble Co. 661
40 Rayovac Corp. (a) 1,222
11 WD-40 Co. 313
----------
6,763
----------
Insurance - 3.3%
33 Allmerica Financial Corp. (a) 1,083
40 AMBAC Financial Group, Inc. 3,285
46 American Financial Group Inc. 1,440
52 AmerUs Group Co. 2,356
10 Arthur J. Gallagher & Co. 325
43 Chubb Corp. 3,307
97 First American Corp. 3,409
76 LandAmerica Financial Group,
Inc. 4,099
13 Loews Corp. 914
39 MBIA, Inc. 2,468
209 Presidential Life Corp. 3,545
65 SCPIE Holdings, Inc. (a) 643
78 Stewart Information Services
Corp. 3,249
46 UICI 1,559
131 UnumProvident Corp. 2,350
----------
34,032
----------
Internet & Catalog Retail - 0.1%
10 eBay, Inc. (a) 1,163
----------
Internet Software & Services - 2.3%
176 Digital Insight Corp. (a) 3,239
174 FindWhat.com (a) 3,085
244 j2 Global Communications, Inc.
(a) 8,418
353 WebEx Communications, Inc. (a) 8,394
12 Yahoo!, Inc. (a) 452
----------
23,588
----------
IT Services - 1.8%
22 CACI International,
Inc. - Class A (a) 1,499
24 Carreker Corp. (a) 206
10 Cognizant Technology
Solutions Corp. (a) 423
60 First Data Corp. 2,553
45 Global Payments, Inc. 2,634
60 Keane, Inc. (a) 882
</Table>
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
IT Services - 1.8% (Continued)
131 Mantech International Corp. -
Class A (a) $ 3,110
120 Startek, Inc. 3,414
115 SunGard Data Systems, Inc. (a) 3,258
18 The BISYS Group, Inc. (a) 296
----------
18,275
----------
Leisure Equipment & Products - 1.5%
42 Hasbro, Inc. 814
391 Meade Instruments Corp. (a) 1,341
123 Nautilus Group, Inc. 2,973
105 Polaris Industries, Inc. 7,142
97 SCP Pool Corp. 3,094
65 Sturm Ruger & Co, Inc. 587
----------
15,951
----------
Machinery - 3.1%
14 AGCO Corp. (a) 306
67 Astec Industries, Inc. (a) 1,153
78 Briggs & Stratton Corp. 3,243
46 Clarcor, Inc. 2,519
120 Federal Signal Corp. 2,119
35 Flowserve Corp. (a) 964
50 Graco, Inc. 1,868
23 IDEX Corp. 932
35 Illinois Tool Works, Inc. 3,244
48 JLG Industries, Inc. 942
76 Oshkosh Truck Corp. 5,197
31 Pall Corp. 897
24 Pentair, Inc. 1,045
55 Reliance Steel & Aluminum Co. 2,143
62 Robbins & Myers, Inc. 1,478
48 Toro Co. 3,905
----------
31,955
----------
Marine - 0.1%
32 Kirby Corp. (a) 1,420
----------
Media - 0.6%
13 4Kids Entertainment, Inc. (a) 273
71 Catalina Marketing Corp. 2,104
116 Emmis Communications Corp. (a) 2,226
32 Entercom Communications Corp.
(a) 1,148
----------
5,751
----------
</Table>
See notes to the financial statements.
12
EVOLUTION VP MANAGED EQUITY FUND
SCHEDULE OF INVESTMENTS (continued)
DECEMBER 31, 2004
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
COMMON STOCKS -- 88.2% (CONTINUED)
Metals & Mining - 2.9%
14 Brush Engineered Materials,
Inc. (a) $ 259
10 Century Aluminum Co. (a) 263
33 Cleveland-Cliffs, Inc. 3,427
28 Commercial Metals Co. 1,416
45 Newmont Mining Corp. 1,998
61 Nucor Corp. 3,193
65 Phelps Dodge Corp. 6,430
91 Ryerson Tull, Inc. 1,433
108 Steel Dynamics, Inc. 4,091
51 Steel Technologies, Inc. 1,403
65 United States Steel Corp. 3,331
145 Worthington Industries 2,839
----------
30,083
----------
Multiline Retail - 0.8%
135 Dillard's Inc. 3,627
39 Dollar Tree Stores, Inc. (a) 1,119
36 Family Dollar Stores, Inc. 1,124
46 ShopKo Stores, Inc. (a) 859
32 Target Corp. 1,662
----------
8,391
----------
Multi-Utilities & Unregulated Power - 1.7%
120 Avista Corp. 2,120
163 Calpine Corp. (a) 642
223 CMS Energy Corp. (a) 2,330
23 Duke Energy Corp. 583
495 Dynegy, Inc. - Class A (a) 2,287
11 Equitable Resources, Inc. 667
64 Questar Corp. 3,261
15 SCANA Corp. 591
38 Sempra Energy 1,394
345 Sierra Pacific Resources (a) 3,623
22 Vectren Corp. 590
----------
18,088
----------
Oil & Gas - 2.0%
18 Anadarko Petroleum Corp. 1,167
28 Burlington Resources, Inc. 1,218
16 Cabot Oil & Gas Corp. 708
40 Devon Energy Corp. 1,557
17 EOG Resources, Inc. 1,213
30 Exxon Mobil Corp. 1,538
45 Occidental Petroleum Corp. 2,626
21 Overseas Shipholding Group 1,159
</Table>
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
Oil & Gas - 2.0% (Continued)
21 Patina Oil & Gas Corp. $ 788
74 Pioneer Natural Resources Co. 2,597
47 Plains Exploration & Production
Co. (a) 1,222
14 Stone Energy Corp. (a) 631
15 Sunoco, Inc. 1,226
10 Swift Energy Co. (a) 289
65 Valero Energy Corp. 2,951
----------
20,890
----------
Paper & Forest Products - 1.0%
24 Bowater, Inc. 1,055
236 Louisiana-Pacific Corp. 6,311
50 Weyerhaeuser Co. 3,361
----------
10,727
----------
Personal Products - 0.1%
26 NBTY, Inc. (a) 624
----------
Pharmaceuticals - 1.1%
85 Alpharma, Inc. 1,441
50 Forest Laboratories, Inc. (a) 2,243
55 Johnson & Johnson 3,488
44 Perrigo Co. 760
26 Sepracor, Inc. (a) 1,544
51 Watson Pharmaceuticals, Inc.
(a) 1,673
----------
11,149
----------
Real Estate - 0.3%
32 New Century Financial Corp Md 2,045
23 Plum Creek Timber Co Inc. 884
----------
2,929
----------
Road & Rail - 1.4%
29 Arkansas Best Corp. 1,302
37 CSX Corp. 1,483
15 Heartland Express, Inc. 337
48 JB Hunt Transport Services,
Inc. 2,153
87 Kansas City Southern (a) 1,543
153 Knight Transportation, Inc. 3,794
13 Landstar System, Inc. (a) 957
72 Norfolk Southern Corp. 2,606
17 Yellow Roadway Corp. (a) 947
----------
15,122
----------
</Table>
See notes to the financial statements.
13
EVOLUTION VP MANAGED EQUITY FUND
SCHEDULE OF INVESTMENTS (continued)
DECEMBER 31, 2004
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
COMMON STOCKS -- 88.2% (CONTINUED)
Semiconductor & Semiconductor Equipment - 2.3%
57 Advanced Micro Devices, Inc.
(a) $ 1,255
46 Alliance Semiconductor Corp.
(a) 170
183 Applied Micro Circuits Corp.
(a) 771
55 Cabot Microelectronics Corp.
(a) 2,203
128 Dupont Photomasks, Inc. (a) 3,381
35 ESS Technology (a) 249
145 Integrated Circuit Systems,
Inc. (a) 3,033
27 International Rectifier Corp.
(a) 1,203
147 LTX Corp. (a) 1,130
92 Micron Technology, Inc. (a) 1,136
18 Microsemi Corp. (a) 313
175 National Semiconductor Corp. 3,141
47 Nvidia Corp. (a) 1,107
33 PMC - Sierra, Inc. (a) 371
108 Silicon Laboratories, Inc. (a) 3,814
59 Skyworks Solutions, Inc. (a) 556
----------
23,833
----------
Software - 4.5%
15 Adobe Systems, Inc. 941
154 Ansys, Inc. (a) 4,937
18 Catapult Communications Corp.
(a) 435
142 Compuware Corp. (a) 919
52 Electronic Arts, Inc. (a) 3,207
14 EPIQ Systems, Inc. (a) 205
18 Factset Research Systems, Inc. 1,052
88 Internet Security Systems (a) 2,046
70 Intuit, Inc. (a) 3,081
63 Kronos, Inc. (a) 3,221
35 Macromedia, Inc. (a) 1,089
66 Macrovision Corp. (a) 1,698
46 Mapinfo Corp. (a) 551
38 Mercury Interactive Corp. (a) 1,731
567 Napster, Inc. (a) 5,330
50 Novell, Inc. (a) 337
396 NYFIX, Inc. (a) 2,451
66 Oracle Corp. (a) 906
134 Phoenix Technologies Ltd (a) 1,107
93 Siebel Systems, Inc. (a) 976
147 Sonic Solutions, Inc. (a) 3,299
123 Symantec Corp. (a) 3,168
77 Talx Corp. 1,986
153 Wind River Systems, Inc. (a) 2,073
----------
46,746
----------
</Table>
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
Specialty Retail - 4.0%
11 Aeropostale, Inc. (a) $ 324
30 AnnTaylor Stores Corp. (a) 646
23 Bed Bath & Beyond, Inc. (a) 916
71 Building Material Holding
Corp. 2,719
58 Chico's FAS, Inc. (a) 2,641
38 Childrens Place (a) 1,407
136 Christopher & Banks Corp. 2,509
51 Cost Plus, Inc. (a) 1,639
102 Foot Locker, Inc. 2,747
10 Genesco, Inc. (a) 311
31 Goody's Family Clothing, Inc. 283
33 Guitar Center, Inc. (a) 1,739
65 Gymboree Corp. (a) 833
119 Hibbett Sporting Goods, Inc.
(a) 3,167
123 Men's Wearhouse, Inc. (a) 3,931
93 Michaels Stores, Inc. 2,787
122 Movie Gallery, Inc. 2,326
26 O'Reilly Automotive, Inc. (a) 1,171
24 Payless Shoesource, Inc. (a) 295
12 PEP Boys-Manny, Moe & Jack 205
71 Tbc Corp New (a) 1,974
24 The Cato Corp. 692
24 Too, Inc. (a) 587
44 Toys "R" Us, Inc. (a) 901
10 Tractor Supply Co. (a) 372
254 Ultimate Electronics, Inc. (a) 312
109 Urban Outfitters, Inc. (a) 4,840
----------
42,274
----------
Textiles, Apparel & Luxury Goods - 1.1%
116 Fossil, Inc. (a) 2,974
16 Haggar Corp. 376
116 K-Swiss, Inc. 3,378
10 Nike, Inc. 907
93 Quiksilver, Inc. (a) 2,770
16 Russell Corp. 312
14 Timberland Co. (a) 877
----------
11,594
----------
Thrifts & Mortgage Finance - 1.3%
82 Countrywide Financial Corp. 3,035
82 Dime Community Bancshares 1,469
64 FirstFed Financial Corp. (a) 3,320
50 Fremont General Corp. 1,259
19 MGIC Investment Corp. 1,309
29 New York Community Bancorp,
Inc. 596
</Table>
See notes to the financial statements.
14
EVOLUTION VP MANAGED EQUITY FUND
SCHEDULE OF INVESTMENTS (continued)
DECEMBER 31, 2004
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
COMMON STOCKS -- 88.2% (CONTINUED)
Thrifts & Mortgage Finance - 1.3% (Continued)
11 Radian Group, Inc. $ 586
50 Sterling Financial Corp. (a) 1,963
12 The PMI Group Inc. 501
----------
14,038
----------
Tobacco - 0.5%
14 Altria Group, Inc. 855
114 DIMON, Inc. 766
71 UST, Inc. 3,416
----------
5,037
----------
Trading Companies & Distributors - 0.5%
10 Fastenal Co. 616
37 Hughes Supply, Inc. 1,197
101 Watsco, Inc. 3,557
----------
5,370
----------
</Table>
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
Wireless Telecommunication Services - 0.3%
365 Boston Communications Group (a) $ 3,373
----------
TOTAL COMMON STOCKS
(Cost $865,335) $ 921,137
----------
TOTAL INVESTMENTS
(Cost $865,335) - 88.2% $ 921,137
Other Assets in Excess of
Liabilities - 11.8% 122,786
----------
TOTAL NET ASSETS - 100.0% $1,043,923
==========
</Table>
Percentages are stated as a percent of net assets.
(a) Non-income producing security.
See notes to the financial statements.
15
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2004
<Table>
<Caption>
POTOMAC INSURANCE TRUST EVOLUTION VP MANAGED EVOLUTION VP MANAGED
BOND FUND EQUITY FUND
-------------------- --------------------
ASSETS:
Investments, at market value (Note 2)....................... $694,972 $ 921,137
Cash........................................................ 48,322 124,287
Receivable for distributions from regulated investment
companies................................................. 6,105 --
Receivable from Investment Advisor.......................... 37,233 40,609
Dividends and interest receivable........................... 5,403 244
Other assets................................................ 29 37
-------- ----------
Total Assets............................................ 792,064 1,086,314
-------- ----------
LIABILITIES:
Accrued expenses and other liabilities...................... 38,513 42,391
-------- ----------
Total Liabilities....................................... 38,513 42,391
-------- ----------
NET ASSETS.................................................. $753,551 $1,043,923
======== ==========
NET ASSETS CONSIST OF:
Paid-in Capital............................................. $733,057 $ 988,121
Accumulated net investment income (loss).................... 8,014 --
Accumulated net realized gain (loss) on investments......... 6,123 --
Net unrealized appreciation (depreciation) on:
Investments............................................... 6,357 55,802
-------- ----------
Total Net Assets........................................ $753,551 $1,043,923
======== ==========
CALCULATION OF NET ASSET VALUE PER SHARE - CLASS A:
Net assets.................................................. $753,551 $1,043,923
Shares of beneficial interest outstanding
(unlimited shares of beneficial interests authorized, no
par value)................................................ 36,292 49,578
Net Asset Value, Redemption Price and Offering Price Per
Share..................................................... $ 20.76 $ 21.06
======== ==========
Cost of Investments......................................... $688,615 $ 865,335
======== ==========
</Table>
See notes to the financial statements.
16
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 2004
<Table>
<Caption>
POTOMAC INSURANCE TRUST EVOLUTION VP MANAGED EVOLUTION VP MANAGED
BOND FUND EQUITY FUND
-------------------- --------------------
July 1, 2004(1) July 1, 2004(1)
to December 31, 2004 to December 31, 2004
-------------------- --------------------
INVESTMENT INCOME:
Dividend income............................................. $12,823 $ 1,141
Interest income............................................. 206 359
------- --------
Total investment income................................. 13,029 1,500
------- --------
EXPENSES:
Investment advisory fees.................................... 2,508 3,217
Distribution fees........................................... 627 804
Administration fees......................................... 10,000 10,000
Shareholder servicing fees.................................. 3,002 3,144
Fund accounting fees........................................ 12,284 16,324
Custody fees................................................ 87 112
Professional fees........................................... 25,272 26,372
Reports to shareholders..................................... 1,751 2,248
Directors' fees and expenses................................ 2,469 2,469
Other....................................................... 110 117
------- --------
Total expenses.......................................... 58,110 64,807
Less: Waiver of expenses by Advisor..................... (53,095) (58,373)
------- --------
Net expenses............................................ 5,015 6,434
------- --------
NET INVESTMENT INCOME (LOSS)................................ 8,014 (4,934)
------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on:
Investments............................................... (52) 301
Capital gain distributions from regulated investment
companies............................................... 6,175 --
------- --------
6,123 301
------- --------
Net unrealized appreciation (depreciation) on:
Investments............................................... 6,357 55,802
------- --------
Net realized and unrealized gain (loss) on
investments........................................... 12,480 56,103
------- --------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS................................................ $20,494 $ 51,169
======= ========
</Table>
(1) Commencement of operations.
See notes to the financial statements.
17
STATEMENT OF CHANGES IN NET ASSETS
DECEMBER 31, 2004
POTOMAC INSURANCE TRUST
<Table>
<Caption>
EVOLUTION VP MANAGED EVOLUTION VP MANAGED
BOND FUND EQUITY FUND
-------------------- --------------------
July 1, 2004(1) July 1, 2004(1)
to December 31, 2004 to December 31, 2004
-------------------- --------------------
OPERATIONS:
Net investment income (loss)................................ $ 8,014 $ (4,934)
Net realized gain (loss) on investments..................... (52) 301
Capital gain distributions from regulated investment
companies................................................. 6,175 --
Net unrealized appreciation (depreciation) on investments... 6,357 55,802
--------- ----------
Net increase (decrease) in net assets resulting from
operations............................................ 20,494 51,169
--------- ----------
BENEFICIAL INTERESTS TRANSACTIONS - CLASS A:
Shares sold................................................. 974,006 1,233,433
Shares redeemed............................................. (290,949) (290,679)
--------- ----------
Net increase (decrease) in net assets resulting from
beneficial interest transactions...................... 683,057 942,754
--------- ----------
TOTAL INCREASE (DECREASE) IN NET ASSETS..................... 703,551 993,923
--------- ----------
NET ASSETS:
Beginning of period......................................... 50,000(2) 50,000(2)
--------- ----------
End of period............................................... $ 753,551 $1,043,923
========= ==========
ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME (LOSS), END
OF PERIOD................................................. $ 8,014 $ --
--------- ----------
</Table>
(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.
18
FINANCIAL HIGHLIGHTS
POTOMAC INSURANCE TRUST
<Table>
<Caption>
EVOLUTION VP MANAGED EVOLUTION VP MANAGED
BOND FUND EQUITY FUND
-------------------- --------------------
CLASS A CLASS A
-------------------- --------------------
July 1, 2004(1) July 1, 2004(1)
to December 31, 2004 to December 31, 2004
-------------------- --------------------
PER SHARE DATA:
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 20.00 $ 20.00
--------- ----------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss)(3)............................. 0.32 (0.15)
Net realized and unrealized gain (loss) on investments...... 0.44 1.21
--------- ----------
Total from investment operations........................ 0.76 1.06
--------- ----------
LESS DISTRIBUTIONS:
Dividends from net investment income........................ -- --
Distributions from realized gains........................... -- --
--------- ----------
Total distributions..................................... -- --
--------- ----------
NET ASSET VALUE, END OF PERIOD.............................. $ 20.76 $ 21.06
========= ==========
TOTAL RETURN(4)............................................. 3.80% 5.30%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period................................... $ 753,551 $1,043,923
Ratio of net expenses to average net assets:
Before expense waiver..................................... 23.17%(2) 20.13%(2)
After expense waiver...................................... 2.00%(2) 2.00%(2)
Ratio of net investment income (loss) to average net assets:
Before expense waiver..................................... (17.98)%(2) (19.66)%(2)
After expense waiver...................................... 3.19%(2)() (1.53)%(2)
Portfolio turnover rate..................................... 7% 2%
</Table>
(1) Commencement of operations.
(2) Annualized.
(3) Net investment income (loss) per share represents net investment income
(loss) divided by the daily average shares of beneficial interest
outstanding throughout each period.
(4) Total returns are not annualized for periods less than one year. All returns
reflect reinvested dividends but do not reflect the deduction of taxes paid
on fund distributions or the redemption of fund shares.
See notes to the financial statements.
19
EVOLUTION VP MANAGED FUNDS
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004
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 and the Evolution VP Managed Equity Fund
(each a "Fund" and collectively, the "Funds"). Each Fund is a "non-diversified"
series of the Trust pursuant to the 1940 Act. The Trust offers shares to
unaffiliated life insurance separate accounts (registered as unit investment
trusts under the 1940 Act) to fund the benefits under variable annuity and
variable life contracts. The Evolution VP Managed Bond Fund and Evolution VP
Managed Equity Fund commenced operations on July 1, 2004.
The objective of the Evolution Managed Bond Fund is to seek the highest
appreciation on an annual basis consistent with a high tolerance for risk by
investing at least 80% of its assets (plus any borrowing for investment
purposes) in fixed-income securities indirectly through securities that invest
in or are a derivative of fixed-income securities, including exchange traded
funds (ETFs) and other registered investment companies. The objective of the
Evolution Managed Equity Fund is to seek the highest appreciation on an annual
basis consistent with a high tolerance for risk by investing at least 80% of its
assets (plus any borrowing for investment purposes) in equity securities either
directly through individual stocks and American Depository Receipts (ADRs) or
indirectly through securities that invest in or are a derivative of equity
securities.
Class A shares are subject to an annual Rule 12b-1 fee of up to 0.25% of Class
A's average daily net assets to pay the insurance company of plan sponsor 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. Rafferty Capital Markets, LLC (the "Distributor") acts as the Funds'
principal underwriter in a continuous public offering of the Funds' shares. The
Distributor is an affiliate of Rafferty Asset Management, LLC (the "Advisor").
For the period ended December 31, 2004, the Distributor received no brokerage
commissions or distribution (12b-1) fees from the Funds.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. These
policies are in conformity with U.S. generally accepted accounting principles.
A) INVESTMENT VALUATION - Securities that are listed on a securities exchange
are valued at the last quoted sales price on the day the valuation is made.
Price information on listed stocks is obtained from the exchange where the
security is primarily traded. If no sale is reported at that time, the mean of
the last bid and asked price is used. Securities traded principally on the
Nasdaq Stock Market are valued at the Nasdaq Official Closing Pricing ("NOCP")
provided by Nasdaq each business day. When market quotations for options and
futures positions held by a Fund are readily available, those positions will be
valued based upon such quotations. Options, futures and other securities for
which no quotations are readily available or for which the Advisor has reason to
believe the quotations are not reflective of the fair value of these instruments
are valued at fair value as determined in good faith under the supervision of
the Board of Trustees. Short-term investments with a remaining maturity of 60
days or less are valued at amortized cost, which approximates market value.
B) REPURCHASE AGREEMENTS - Each Fund may enter into repurchase agreements with
banks that are members of the Federal Reserve System or securities dealers who
are members of a national securities exchange or are primary dealers in U.S.
Government securities. In connection with transactions in repurchase agreements,
it is the Trust's policy that the Fund receive, as collateral, securities whose
market value, including accrued interest, at all times will be
20
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) SECURITY TRANSACTIONS - Investment transactions are recorded on trade date.
The Funds determine the gain or loss realized from the investment transactions
on the basis of identified cost, which is the same basis used for federal income
tax purposes. Distributions from regulated investment companies are recorded on
ex-date.
D) FEDERAL INCOME TAXES - Each Fund intends to comply with the requirements of
Subchapter M of the Internal Revenue Code necessary to qualify as a regulated
investment company and to make the requisite distributions of income and capital
gains to its shareholders sufficient to relieve it from all or substantially all
federal income taxes. Therefore, no Federal income or excise tax provision is
required.
Net investment income and realized gains and losses for Federal Income tax
purposes may differ from that reported on the financial statements because of
permanent book-to-tax differences. U.S. generally accepted accounting principles
requires that permanent differences between financial reporting and tax
reporting be reclassified between various components of net assets. These
differences are primarily due to net operating losses. On the Statement of
Assets and Liabilities, the following adjustments were made:
<Table>
<Caption>
ACCUMULATED NET
ACCUMULATED NET REALIZED GAIN
INVESTMENT INCOME (LOSS) ON
(LOSS) INVESTMENTS PAID-IN CAPITAL
----------------- -------------------- ---------------
Evolution VP Managed Bond Fund $ -- $ -- $ --
Evolution VP Managed Equity Fund 4,934 (301) (4,633)
</Table>
E) INCOME AND EXPENSES - Dividend income is recognized on the ex-dividend
date, and interest income, including amortization of premium and discount is
recognized on an accrual basis. The Funds incur expenses that are directly
attributable to each Fund, such as advisory fees and registration costs.
Expenses that are not directly attributable to a Fund are generally allocated
among the funds comprising the Trust in proportion to their respective average
net assets.
F) DISTRIBUTIONS TO SHAREHOLDERS - Each Fund intends to distribute to its
shareholders at least annually substantially all net investment income and net
realized capital gains, if any. Income and capital gain distributions are
determined in accordance with income tax regulations, which may differ from U.S.
generally accepted accounting principles.
There were no distributions paid during the period ended December 31, 2004 for
the Evolution VP Managed Bond Fund and the Evolution VP Managed Equity Fund.
21
As of December 31, 2004, the components of distributable earnings on a tax basis
were as follows:
<Table>
<Caption>
EVOLUTION VP MANAGED EVOLUTION VP MANAGED
BOND FUND EQUITY FUND
-------------------- --------------------
Cost basis of investments for Federal Income tax
purposes $688,615 $865,335
-------- --------
Gross unrealized appreciation 13,298 63,941
Gross unrealized depreciation (6,941) (8,139)
-------- --------
Net unrealized appreciation/(depreciation) 6,357 55,802
-------- --------
Undistributed ordinary income/(loss) 8,014 --
Undistributed long-term gain/(loss) 6,123 --
-------- --------
Distributable earnings 14,137 --
-------- --------
Other accumulated gain/(loss) -- --
-------- --------
Total accumulated gain/(loss) $ 20,494 $ 55,802
======== ========
</Table>
As of December 31, 2004, the Funds did not have any net capital loss
carryforwards or any deferred post-October losses.
G) 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.
3. SHARES OF BENEFICIAL INTERESTS TRANSACTIONS
Transactions in shares of beneficial interests during the period from July 1,
2004 (commencement of operations) to December 31, 2004 were as follows:
<Table>
<Caption>
EVOLUTION VP MANAGED EVOLUTION VP MANAGED
BOND FUND(1) EQUITY FUND(1)
-------------------- --------------------
CLASS A:
Shares sold 48,332 61,609
Shares redeemed (14,540) (14,531)
------- -------
Total net increase (decrease) from shares of
beneficial interests transactions 33,792 47,078
======= =======
</Table>
(1) Each Fund sold 2,500 shares of beneficial interests to the Advisor upon
seeding of each Fund on April 19, 2004.
4. INVESTMENT TRANSACTIONS
During the period ended December 31, 2004, the aggregate purchases and sales of
investments (excluding short-term investments) were:
<Table>
<Caption>
EVOLUTION VP MANAGED EVOLUTION VP MANAGED
BOND FUND EQUITY FUND
-------------------- --------------------
Purchases $700,552 $871,332
Sales 18,060 6,298
</Table>
22
There were no purchases or sales of long-term U.S. Government Securities during
the period ended December 31, 2004 for any of the Funds.
5. INVESTMENT ADVISORY AND OTHER AGREEMENTS
The Funds have entered into an investment advisory agreement with Rafferty Asset
Management, LLC ("Advisor"). The Advisor receives a fee, computed daily and
payable monthly, at the annual rates presented below as applied to each Fund's
average daily net assets. In addition, the Advisor has entered into sub-advisory
agreements relating to the Evolution Managed Bond Fund and the Evolution Managed
Equity Fund with Flexible Plan Investments, Ltd. (the "Sub-Advisor"), whereby
the Sub-Advisor will direct investment activities of the Funds. The Advisor
pays, out of the management fees it receives from the Funds, a fee to the
Sub-Advisor for these services. Additionally, the Advisor may waive additional
fees it might otherwise normally charge the Funds. For the period ended December
31, 2004, the Advisor agreed to pay all operating expenses, in excess of the
annual cap on expenses presented below as applied to each Fund's average daily
net assets. The Advisor may recover from the Funds the expenses paid in excess
of the annual cap on expenses for the three previous years, as long as the
recovery does not cause the Fund to exceed such annual cap on expenses. For the
period ended December 31, 2004, the Advisor paid the following expenses:
<Table>
<Caption>
EVOLUTION VP MANAGED EVOLUTION VP MANAGED
BOND FUND EQUITY FUND
-------------------- --------------------
CLASS A:
Annual Advisory rate 1.00% 1.00%
Annual cap on expenses 2.00% 2.00%
Waiver of expenses paid in excess of the annual cap
on expenses $53,095 $58,373
Advisor expense waiver recovery $ -- $ --
</Table>
Expenses subject to potential recovery expiring in:
<Table>
<Caption>
EVOLUTION VP MANAGED EVOLUTION VP MANAGED
BOND FUND EQUITY FUND
-------------------- --------------------
2007 $53,095 $58,373
</Table>
The Advisor paid all offering costs and organizational expenses associated with
the registration and seeding of each Fund.
In the ordinary course of business, the Funds enter into contracts that contain
a variety of indemnification provisions pursuant to which the Funds agree to
indemnify third parties upon occurrence of specified events. The Fund's maximum
exposure relating to these indemnification agreements is unknown. However, the
Funds have not had prior claims or losses in connection with these provisions
and believe the risk of loss is remote.
23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and
Board of Trustees of Potomac Insurance Trust:
We have audited the accompanying statements of assets and liabilities of Potomac
Insurance Trust, comprising the Evolution VP Managed Bond Fund and Evolution VP
Managed Equity Fund (the "Funds"), including the schedules of investments, as of
December 31, 2004, and the related statements of operations and changes in net
assets, and the financial highlights for the period from July 1, 2004
(commencement of operations) to December 31, 2004. 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. An audit
includes 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,
2004, by correspondence with the custodian. 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 the
Evolution VP Managed Bond Fund and Evolution VP Managed Equity Fund of the
Potomac Insurance Trust at December 31, 2004, the results of their operations,
changes in their net assets, and the financial highlights for the period from
July 1, 2004 to December 31, 2004, in conformity with U.S. generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
February 11, 2005
THE 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.
<Table>
<Caption>
- ------------------------------------------------------------------------------------------------------------------
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 18
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: 61 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 18
33 Whitehall St., until removal or Partners LLC,
10th Flr. resignation 1998 -- present (NASD
New York, NY Broker Dealer).
10004
Age: 58
- ------------------------------------------------------------------------------------------------------------------
<Caption>
- ---------------------- -------------------
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: 61
- ---------------------- -------------------
Jay F. Higgins* Dwango North
33 Whitehall St., America Corp
10th Flr. (radio, telephone,
New York, NY communications)
10004
Age: 58
- ---------------------- -------------------
</Table>
<Table>
<Caption>
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. 18
33 Whitehall St., until removal or Boyle Securities, Inc.,
10th Flr. resignation 1981 -- present.
New York, NY
10004
Age: 54
- ------------------------------------------------------------------------------------------------------------------
Daniel J. Byrne Trustee since 1997 Lifetime of Trust President and Chief 18
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: 59 Word Program,
Wyandanch, New York.
- ------------------------------------------------------------------------------------------------------------------
Gerald E. Shanley III Trustee since 1997 Lifetime of Trust Business Consultant, 18
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: 60
<Caption>
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: 54
- ----------------------- -------------------
Daniel J. Byrne None
33 Whitehall St.,
10th Flr.
New York, NY
10004
Age: 59
- ----------------------- -------------------
Gerald E. Shanley III None
33 Whitehall St.,
10th Flr.
New York, NY
10004
Age: 60
</Table>
THE POTOMAC INSURANCE TRUST
TRUSTEES AND OFFICERS
(UNAUDITED)
<Table>
<Caption>
PRINCIPAL NUMBER OF
POSITION(S) OCCUPATION DURING PORTFOLIOS
NAME, ADDRESS AND AGE: HELD WITH FUNDS: TERM OF OFFICE: PAST FIVE YEARS: OVERSEEN BY TRUSTEE**:
- ------------------------------------------------------------------------------------------------------------------
OFFICERS
Daniel D. O'Neill Chief Executive One year Managing Director of
33 Whitehall St., Officer since 2003, Rafferty,
10th Flr. President since 1999 -- present;
New York, NY 10004 1999 Portfolio Manager,
Age: 36 Hermitage Capital
Management,
1998 -- 1999;
Associate, Akin, Gump,
Strauss, Hauer & Feld,
LLP, 1995 -- 1998 (law
firm).
- ------------------------------------------------------------------------------------------------------------------
Timothy P. Hagen 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: 60
- ------------------------------------------------------------------------------------------------------------------
Philip A. Harding Senior Vice One year Vice President of
33 Whitehall St., President since Rafferty,
10th Flr. 1999 1997 -- present.
New York, NY 10004
Age: 59
- ------------------------------------------------------------------------------------------------------------------
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: 55
- ------------------------------------------------------------------------------------------------------------------
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: 30
- ------------------------------------------------------------------------------------------------------------------
Angela M. Brickl Assistant Secretary One year Compliance
615 East Michigan since 2004 Administrator, U.S.
Street Bancorp Fund Services
Milwaukee, WI 53202 LLC, 2003 -- present,
Age: 28 Business Analyst,
Strong Financial Corp.,
2002 -- 2003, Senior
Auditor, Arthur
Andersen 1999 -- 2002
- ------------------------------------------------------------------------------------------------------------------
<Caption>
OTHER
TRUSTEESHIPS
NAME, ADDRESS AND AGE: HELD BY TRUSTEE
- ----------------------- -------------------
OFFICERS
Daniel D. O'Neill None
33 Whitehall St.,
10th Flr.
New York, NY 10004
Age: 36
- ----------------------- -------------------
Timothy P. Hagen None
33 Whitehall St.,
10th Flr.
New York, NY
10004
Age: 60
- ----------------------- -------------------
Philip A. Harding None
33 Whitehall St.,
10th Flr.
New York, NY 10004
Age: 59
- ----------------------- -------------------
Steven P. Sprague None
33 Whitehall St.,
10th Flr.
New York, NY 10004
Age: 55
- ----------------------- -------------------
Eric W. Falkeis None
615 East Michigan
Street
Milwaukee, WI 53202
Age: 30
- ----------------------- -------------------
Angela M. Brickl None
615 East Michigan
Street
Milwaukee, WI 53202
Age: 28
- ----------------------- -------------------
</Table>
* 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 Insurance Trust currently offer for sale 2 portfolios of the 20
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 January 1, 2005.
INVESTMENT ADVISOR
Rafferty Asset Management, LLC
33 Whitehall Street, 10th Floor
New York, NY 10004
ADMINISTRATOR, TRANSFER AGENT, DIVIDEND
PAYING AGENT & SHAREHOLDING SERVICING AGENT
U.S. Bancorp Fund Services, LLC
P.O. Box 1993
Milwaukee, WI 53201-1993
CUSTODIAN
U.S. Bank, N.A.
425 Walnut Street
Cincinnati, Ohio 45202
COUNSEL
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036-1800
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP
233 S. Wacker Dr.
Chicago, IL 60606
DISTRIBUTOR
Rafferty Capital Markets, LLC
59 Hilton Avenue
Garden City, NY 11530
The Fund's Proxy Voting Policies are available without charge by calling
1-800-851-0511, or by accessing the SEC's website, at www.sec.gov.
The actual voting records relating to portfolio securities during the most
recent twelve month period ended June 30 (starting with the year ending June 30,
2005) will be available without charge by calling 1-800-851-0511 or by accessing
the SEC's website at www.sec.gov.
Beginning with the Funds' first and third quarters ending after July 9, 2004,
the Funds will file complete schedules of portfolio holdings with the SEC on
Form N-Q. The Form N-Q will be available without charge, upon request, by
calling 1-800-851-0511, or by accessing the SEC's website, at www.sec.gov.
This report has been prepared for shareholders and may be distributed to others
only if preceded or accompanied by a current prospectus.
ANNUAL
REPORT
December 31, 2004
[THE POTOMAC FUNDS 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 for the last fiscal year for
audit fees, audit-related fees, tax fees and other fees by the principal
accountant.
FYE 12/31/2004 FYE 12/31/2003
-------------- --------------
Audit Fees $39,000 None
Audit-Related Fees - None
Tax Fees 8,000 None
All Other Fees - None
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, and
applicable rule thereunder) of all non-auditing services performed for the
registrant or for
1
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 12/31/2004 FYE 12/31/2003
- ---------------------- -------------- --------------
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.
ITEM 11. CONTROLS AND PROCEDURES.
2
(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.
3
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, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)*) /s/ Daniel D. O'Neill
-----------------------------------------------
Daniel D. O'Neill , President
Date March 7, 2005
By (Signature and Title)* /s/ Timothy P Hagan
------------------------------------------------
Timothy P. Hagan, Chief Financial Officer
Date March 4, 2005
* Print the name and title of each signing officer under his or her signature.
4