As filed with the Securities and Exchange Commission on September 8, 2005
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-09761
THE POTOMAC INSURANCE TRUST
---------------------------
(Exact name of registrant as specified in charter)
33 WHITEHALL STREET, 10TH FLOOR
-------------------------------
NEW YORK, NY 10004
------------------
(Address of principal executive offices) (Zip code)
DANIEL D. O'NEILL
-----------------
33 WHITEHALL STREET, 10TH FLOOR
-------------------------------
NEW YORK, NY 10004
------------------
(Name and address of agent for service)
1-646-572-3390
--------------
Registrant's telephone number, including area code
Date of fiscal year end: 12/31/05
--------
Date of reporting period: 6/30/05
-------
ITEM 1. REPORT TO STOCKHOLDERS
LETTER TO SHAREHOLDERS
AUGUST 18, 2005
Dear Shareholders,
This Semi-Annual report covers the period from January 1, 2005 through June 30,
2005, a period during which the markets struggled. After a strong rally from
October through the end of the year, which seemed to be keyed to the resolution
of the U.S. Presidential election, the U.S. equities markets seemed to lose
momentum as 2004 became 2005, with the markets declining sharply during the
first week of 2005. The S&P 500 lost 2.08% during the first week of the year,
while the Nasdaq 100 declined 3.47% and the Russell 2000 declined 5.88%.
The markets continued to decline through the first quarter and into the second
quarter, and by the end of April the S&P 500 had lost 4.00% while the Nasdaq 100
and Russell 2000 had declined 12.25% and 10.76%, respectively. The war in Iraq
continued to weigh on the markets as did worries about the trade deficit and
budget deficit. In addition, the price of oil increased by 35%, from $42.12 per
barrel to $56.50. (As I write this letter, oil is at $63.00, down from a high a
few days ago of $67.18.) The markets seemed to be trying to determine whether
high oil prices will continue and what the impact will be on the overall
economy. The situation in Iraq has not improved and Iran seems increasingly
isolated from the West, as evidenced by the recent Presidential election and the
continuation of nuclear development. All in all, the situation in the Middle
East is uncertain, which leads speculators to push oil higher.
The domestic economic picture has been good though there is concern that too
much of the growth in incomes and job creation is due to an unsustainable bubble
in the housing markets. The Federal Reserve has continued to raise rates, though
it is unclear if the Fed is doing so to check inflation in a growing economy or
to prick a housing bubble by making financing more expensive. In any event,
long-term rates did not respond to the Federal Reserve, meaning the fixed-income
market does not share the Fed's optimism about the economy.
During the period covered by this report, the Evolution VP Managed Equity Fund
declined -1.61% compared to the S&P 500 which declined -1.70%. The Evolution VP
Managed Bond lost -1.97% compared to the Lehman Brothers U.S. Aggregate Bond
Index return of 2.51% while the Dynamic VP High Yield Bond Fund returned 0.15%
compared to the Lehman Brothers U.S. Corporate High Yield Index of 1.11%. The VP
Money Market Fund had a return of 0.32%
As always, we thank you for using Potomac Funds and we look forward to our
mutual success.
Best regards,
/S/ DANIEL O'NEILL
Daniel O'Neill
Potomac Insurance Trust
EXPENSE EXAMPLE (UNAUDITED)
JUNE 30, 2005
As a shareholder of the Evolution VP Managed Bond Fund, the Evolution VP Managed
Equity Fund, the Dynamic VP HY Bond Fund and the VP Money Market Fund (the
"Funds"), you incur two types of costs: (1) transaction costs, including sales
charges (loads) on purchase payments, reinvested dividends, or other
distributions; redemption fees; and exchange fees; and (2) ongoing costs,
including management fees; distribution and/or service fees; and other Fund
expenses. This example is intended to help you understand your ongoing costs (in
dollars) of investing in the Fund and to compare costs with the ongoing costs of
investing in other mutual funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held of the entire period (January 1, 2005 - June 30, 2005).
ACTUAL EXPENSES
The first line of the table below provides information about actual account
values and actual expenses. Although the Fund charges no sales load or
transactions fees, you will be assessed fees for outgoing wire transfers,
returned checks or stop payment orders at prevailing rates charged by U.S.
Bancorp Fund Services, LLC, the Funds' transfer agent. If you request a
redemption be made by wire transfer, currently a $15.00 fee is charged by the
Funds' transfer agent. The example includes, but is not limited to, management
fees, shareholder servicing fees, fund accounting, custody and transfer agent
fees. However, the example below does not include portfolio trading commissions
and related expenses, interest expense or dividends on short positions taken by
the Funds and other extraordinary expenses as determined under generally
accepted accounting principles. To the extent the Funds invest in shares of
other investment companies as part of its investment strategy, you will
indirectly bear your proportionate share of any fees and expenses charged by the
underlying funds in which Funds invest in addition to the expenses of the Funds.
Actual expenses of the underlying funds may vary. You may use the information in
this line, together with the amount you invested, to estimate the expenses that
you paid over the period. Simply divide your account value by $1,000 (for
example, an $8,600 account value divided by $1,000 = 8.6), then multiply the
result by the number in the first line under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table below provides information about hypothetical
account values and hypothetical expenses based on the Funds' actual expense
ratios and an assumed rate of return of 5% per year before expenses, which is
not the Funds' actual return. The hypothetical account values and expenses may
not be used to estimate the actual ending account balance or expenses you paid
for the period. You may use this information to compare the ongoing costs of
investing in the Funds and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as the
$15.00 wire transfer free discussed above. Therefore, the second line of the
table is useful in comparing ongoing costs only, and will not help you determine
the relative costs of owning different funds. In addition, if these
transactional costs were included, your costs would have been higher.
2
<Table>
<Caption>
EVOLUTION VP MANAGED BOND FUND
-------------------------------------------------------------
EXPENSES PAID
BEGINNING ENDING DURING PERIOD
ACCOUNT VALUE ACCOUNT VALUE JANUARY 1, 2005 -
JANUARY 1, 2005 JUNE 30, 2005 JUNE 30, 2005*
--------------- ------------------- -------------------
Actual $1,000.00 $ 980.30 $ 19.80
Hypothetical (5% return before expenses) 1,000.00 1,030.00 20.30
</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 181/365 to reflect
the one-half year period.
<Table>
<Caption>
EVOLUTION VP MANAGED EQUITY FUND
-------------------------------------------------------------
EXPENSES PAID
BEGINNING ENDING DURING PERIOD
ACCOUNT VALUE ACCOUNT VALUE JANUARY 1, 2005 -
JANUARY 1, 2005 JUNE 30, 2005 JUNE 30, 2005*
--------------- ------------------- -------------------
Actual $1,000.00 $ 983.90 $ 19.84
Hypothetical (5% return before expenses) 1,000.00 1,030.00 20.30
</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 181/365 to reflect
the one-half year period.
<Table>
<Caption>
DYNAMIC VP HY BOND FUND
-------------------------------------------------------------
EXPENSES PAID
BEGINNING ENDING DURING PERIOD
ACCOUNT VALUE ACCOUNT VALUE JANUARY 1, 2005 -
JANUARY 1, 2005 JUNE 30, 2005 JUNE 30, 2005
--------------- ------------------- -------------------
Actual $1,000.00 $ 1,001.50 $ 17.21*
Hypothetical (5% return before expenses) 1,000.00 1,032.80 17.48**
</Table>
* Expenses are equal to the Fund's annualized expense ratio of 1.72%,
multiplied by the average account value over the period February 1,
2005 - June 30, 2005, the Fund's commencement date to the end of the period
to reflect the Fund's actual expenses.
** Expenses are equal to the Fund's annualized expense ratio of 1.72%,
multiplied by the average account value over the period, multiplied by
181/365 to reflect the one-half year period.
<Table>
<Caption>
VP MONEY MARKET FUND
-------------------------------------------------------------
EXPENSES PAID
BEGINNING ENDING DURING PERIOD
ACCOUNT VALUE ACCOUNT VALUE JANUARY 1, 2005 -
JANUARY 1, 2005 JUNE 30, 2005 JUNE 30, 2005
--------------- ------------------- -------------------
Actual $1,000.00 $ 1,003.20 $ 18.83*
Hypothetical (5% return before expenses) 1,000.00 1,031.20 19.09**
</Table>
* Expenses are equal to the Fund's annualized expense ratio of 1.88%,
multiplied by the average account value over the period February 1,
2005 - June 30, 2005, the Fund's commencement date to the end of the period
to reflect the Fund's actual expenses.
** Expenses are equal to the Fund's annualized expense ratio of 1.88%,
multiplied by the average account value over the period, multiplied by
181/365 to reflect the one-half year period.
3
EVOLUTION VP MANAGED BOND FUND
ALLOCATION OF FUND HOLDINGS (UNAUDITED)
JUNE 30, 2005
[PIE CHART]
<Table>
Investment Companies 78
Money Market Fund 4
Cash* 18
</Table>
EVOLUTION VP MANAGED EQUITY FUND
ALLOCATION OF FUND HOLDINGS (UNAUDITED)
JUNE 30, 2005
[PIE CHART]
<Table>
Cash* 9
Money Market Fund 9
Investment Companies 23
Consumer Discretionary 18
Consumer Staples 2
Energy 11
Financials 8
Health Care 6
Industrials 6
Information Technology 5
Materials 1
Telecommunication Services 0
Utilities 2
</Table>
THE PERCENTAGES IN THESE GRAPHS ARE CALCULATED BASED ON NET ASSETS.
* CASH AND OTHER ASSETS LESS LIABILITIES.
4
DYNAMIC VP HY BOND FUND
ALLOCATION OF FUND HOLDINGS (UNAUDITED)
JUNE 30, 2005
[PIE CHART]
<Table>
Corporate Bonds 84
Money Market Fund 12
Cash* 4
</Table>
VP MONEY MARKET FUND
ALLOCATION OF FUND HOLDINGS (UNAUDITED)
JUNE 30, 2005
[PIE CHART]
<Table>
Cash* 55
Money Market Funds 23
U.S. Government Agency Obligations 22
</Table>
THE PERCENTAGES IN THESE GRAPHS ARE CALCULATED BASED ON NET ASSETS.
* CASH AND OTHER ASSETS LESS LIABILITIES.
5
EVOLUTION VP MANAGED BOND FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 2005 (UNAUDITED)
<Table>
<Caption>
- ------------------------------------------------------------
SHARES VALUE
- ------------------------------------------------------------
INVESTMENT COMPANIES - 78.0%
3,933 Aberdeen Asia-Pacific Income
Fund, Inc. $ 24,778
4,683 Advent Claymore Convertible
Securities and Income Fund 113,610
1,998 Alliance World Dollar
Government Fund II 24,815
2,177 Blackrock Income Opportunity
Trust 24,665
5,825 Calamos Convertible
Opportunities and Income Fund 113,296
5,055 Corporate High Yield Fund V,
Inc. 74,309
5,351 Corporate High Yield Fund VI,
Inc. 74,111
15,978 Credit Suisse Asset Management
Income Fund, Inc. 73,339
4,976 Evergreen Income Advantage Fund 73,993
1,519 iShares Lehman 1-3 Year
Treasury Bond Fund 123,404
3,200 iShares Lehman 7-10 Year
Treasury Bond Fund 278,272
2,675 iShares Lehman 20+ Year
Treasury Bond Fund 258,673
1,123 iShares Lehman US Treasury
Inflation Protected
Securities Fund 120,419
7,376 Nicholas-Applegate Convertible
& Income Fund 113,590
</Table>
<Table>
<Caption>
- ------------------------------------------------------------
SHARES VALUE
- ------------------------------------------------------------
8,476 Nuveen Preferred and
Convertible Income Fund $ 113,155
5,027 Pimco High Income Fund 74,098
14,647 Putnam High Income Bond Fund 113,807
1,791 Templeton Emerging Markets
Income Fund 24,805
2,777 Templeton Global Income Fund 24,660
----------
TOTAL INVESTMENT COMPANIES
(Cost $1,812,692) $1,841,799
----------
MONEY MARKET FUNDS - 3.6%
86,501 Federated Prime Obligations
Fund - Class I $ 86,501
----------
TOTAL MONEY MARKET FUNDS
(Cost $86,501) $ 86,501
----------
Total Investments
(Cost $1,899,193) - 81.6% $1,928,300
Other Assets in Excess of
Liabilities - 18.4% 434,104
----------
TOTAL NET ASSETS - 100.0% $2,362,404
==========
</Table>
Percentages are calculated as a percent of net assets.
See notes to the financial statements.
6
EVOLUTION VP MANAGED EQUITY FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 2005 (UNAUDITED)
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
COMMON STOCKS - 82.3%
Aerospace & Defense - 1.2%
177 Armor Holdings, Inc.* $ 7,011
232 Engineered Support Systems,
Inc. 8,312
133 Kaman Corp. Class A 2,399
43 Northrop Grumman Corp. 2,376
314 Teledyne Technologies, Inc.* 10,230
136 United Technologies Corp. 6,984
----------
37,312
----------
Air Freight & Logistics - 0.1%
30 Expeditors International
Washington, Inc. 1,494
22 United Parcel Service, Inc.
Class B 1,522
----------
3,016
----------
Auto Components - 0.7%
435 Bandag, Inc. 20,032
41 Johnson Controls, Inc. 2,309
----------
22,341
----------
Automobiles - 0.3%
207 Ford Motor Co. 2,120
63 General Motors Corp. 2,142
92 Harley-Davidson, Inc. 4,563
----------
8,825
----------
Beverages - 0.2%
219 PepsiAmericas, Inc. 5,619
----------
Biotechnology - 0.2%
52 Genzyme Corp.* 3,125
52 Gilead Sciences, Inc.* 2,287
----------
5,412
----------
Capital Markets - 0.9%
67 The Bear Stearns Companies,
Inc. 6,964
45 The Goldman Sachs Group, Inc. 4,591
189 Investment Technology Group,
Inc.* 3,973
371 LaBranche & Company, Inc.* 2,337
117 Lehman Brothers Holdings, Inc. 11,616
----------
29,481
----------
Chemicals - 0.1%
124 Crompton Corp.* 1,754
123 Material Sciences Corp.* 1,791
----------
3,545
----------
Commercial Banks - 1.4%
47 Bank of America Corp. 2,144
53 BB&T Corp. 2,118
</Table>
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
Commercial Banks - 1.4% (Continued)
50 Commerce Bancorp, Inc. $ 1,515
51 Fifth Third Bancorp 2,102
64 KeyCorp 2,122
62 National City Corp. 2,115
516 PrivateBancorp, Inc. 18,256
29 SunTrust Banks, Inc. 2,095
230 US Bancorp 6,716
43 Wachovia Corp. 2,133
35 Wells Fargo & Co. 2,155
28 Westamerica Bancorporation 1,479
----------
44,950
----------
Commercial Services & Supplies - 3.8%
745 Angelica Corp. 18,260
954 Career Education Corp.* 34,926
82 ChoicePoint, Inc.* 3,284
429 Copart, Inc.* 10,210
58 Deluxe Corp. 2,355
153 Heidrick & Struggles
International, Inc.* 3,990
35 HNI Corp. 1,790
270 ITT Educational Services, Inc.* 14,423
3,717 On Assignment, Inc.* 18,511
125 Pre-Paid Legal Services, Inc. 5,581
73 Robert Half International, Inc. 1,823
75 Rollins, Inc. 1,503
62 RR Donnelley & Sons Co. 2,140
120 SOURCECORP, Inc.* 2,379
----------
121,175
----------
Communications Equipment - 0.4%
150 Avocent Corp.* 3,921
583 C-COR, Inc.* 3,994
215 Inter-Tel, Inc. 4,001
----------
11,916
----------
Computers & Peripherals - 0.1%
49 Apple Computer, Inc.* 1,804
----------
Construction & Engineering - 0.2%
90 Dycom Industries, Inc.* 1,783
357 Quanta Services, Inc.* 3,142
83 The Shaw Group, Inc.* 1,785
----------
6,710
----------
</Table>
See notes to the financial statements.
7
EVOLUTION VP MANAGED EQUITY FUND
SCHEDULE OF INVESTMENTS (continued)
JUNE 30, 2005 (UNAUDITED)
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
COMMON STOCKS - 82.3% (CONTINUED)
Consumer Finance - 0.6%
29 Capital One Financial Corp. $ 2,320
3,420 Rewards Network, Inc.* 18,468
----------
20,788
----------
Containers & Packaging - 0.2%
272 Longview Fibre Co. 5,590
----------
Electronic Equipment & Instruments - 0.6%
106 Avnet, Inc.* 2,388
66 CDW Corp. 3,768
35 Dionex Corp.* 1,526
102 Jabil Circuit, Inc.* 3,134
82 Littelfuse, Inc.* 2,284
617 Planar Systems, Inc.* 4,535
62 Tech Data Corp.* 2,270
----------
19,905
----------
Energy Equipment & Services - 1.0%
136 Atwood Oceanics, Inc.* 8,372
177 BJ Services Co. 9,289
188 Hydril* 10,218
40 Lone Star Technologies, Inc.* 1,820
33 Transocean, Inc.* 1,781
----------
31,480
----------
Financial Services - 0.1%
46 Citigroup, Inc. 2,127
60 J.P. Morgan Chase & Co. 2,119
----------
4,246
----------
Food & Staples Retailing - 1.4%
103 Albertson's, Inc. 2,130
152 BJ's Wholesale Club, Inc.* 4,939
70 Costco Wholesale Corp. 3,137
634 Great Atlantic & Pacific Tea
Co.* 18,424
161 Longs Drug Stores Corp. 6,931
231 Sysco Corp. 8,360
----------
43,921
----------
Food Products - 0.4%
92 ConAgra Foods, Inc. 2,131
60 HJ Heinz Co. 2,125
77 Hormel Foods Corp. 2,258
40 Sanderson Farms, Inc. 1,818
</Table>
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
Food Products - 0.4% (Continued)
107 Sara Lee Corp. $ 2,120
22 Wm. Wrigley Jr. Co. 1,514
----------
11,966
----------
Health Care Equipment & Supplies - 2.8%
918 Biosite, Inc.* 50,481
41 Cyberonics, Inc.* 1,779
64 Respironics, Inc.* 2,311
321 SurModics, Inc.* 13,922
812 Viasys Healthcare, Inc.* 18,343
----------
86,836
----------
Health Care Providers & Services - 2.0%
33 Covance, Inc.* 1,481
1,059 Curative Health Services, Inc.* 2,415
225 Dendrite International, Inc.* 3,105
714 LCA-Vision, Inc. 34,600
318 Lincare Holdings, Inc.* 12,987
274 Odyssey HealthCare, Inc.* 3,951
58 Sunrise Senior Living, Inc.* 3,131
----------
61,670
----------
Hotels Restaurants & Leisure - 1.8%
158 Applebee's International, Inc. 4,185
102 Bob Evans Farms, Inc. 2,379
35 Boyd Gaming Corp. 1,790
60 Brinker International, Inc.* 2,403
61 CBRL Group, Inc. 2,370
92 CEC Entertainment, Inc.* 3,872
69 The Cheesecake Factory, Inc.* 2,396
72 Darden Restaurants, Inc. 2,375
63 Jack in the Box, Inc.* 2,389
158 Landry's Restaurants, Inc. 4,754
227 Lone Star Steakhouse & Saloon,
Inc. 6,903
250 McDonald's Corp. 6,937
311 O'Charleys, Inc.* 5,492
40 Outback Steakhouse, Inc. 1,810
90 Panera Bread Co. Class A* 5,588
49 Sonic Corp.* 1,496
----------
57,139
----------
Household Durables - 6.0%
176 Department 56, Inc.* 1,804
87 Hovnanian Enterprises, Inc.
Class A* 5,672
60 KB Home 4,574
659 Lennar Corp. 41,813
</Table>
See notes to the financial statements.
8
EVOLUTION VP MANAGED EQUITY FUND
SCHEDULE OF INVESTMENTS (continued)
JUNE 30, 2005 (UNAUDITED)
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
COMMON STOCKS - 82.3% (CONTINUED)
Household Durables - 6.0% (Continued)
84 MDC Holdings, Inc. $ 6,909
492 Meritage Homes Corp.* 39,114
17 NVR, Inc.* 13,770
401 Standard-Pacific Corp. 35,268
392 Toll Brothers, Inc.* 39,808
----------
188,732
----------
Household Products - 0.1%
43 Clorox Co. 2,396
----------
Insurance - 4.8%
65 Allmerica Financial Corp.* 2,411
71 American Financial Group, Inc. 2,380
50 AmerUs Group Co. 2,402
56 Arthur J. Gallagher & Co. 1,519
405 Chubb Corp. 34,672
60 Cincinnati Financial Corp. 2,374
59 Fidelity National Financial,
Inc. 2,106
921 HCC Insurance Holdings, Inc. 34,878
45 Lincoln National Corp. 2,111
31 Loews Corp. 2,402
155 Metlife, Inc. 6,966
98 Ohio Casualty Corp. 2,370
1,069 Presidential Life Corp. 18,291
60 The St. Paul Travelers
Companies, Inc. 2,372
515 Zenith National Insurance Corp. 34,948
----------
152,202
----------
Internet Software & Services - 0.6%
244 j2 Global Communications, Inc.* 8,403
208 Websense, Inc.* 9,995
----------
18,398
----------
Investment Companies - 22.0%
2,840 iShares MSCI EAFE Index Fund 148,787
835 iShares MSCI Emerging Markets
Index Fund* 59,786
5,192 iShares S&P Latin American 40
Index Fund 482,960
----------
691,533
----------
</Table>
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
IT Services - 0.8%
62 Affiliated Computer Services,
Inc. Class A* $ 3,168
36 CACI International,
Inc. - Class A* 2,274
303 Cognizant Technology Solutions
Corp.* 14,280
222 Convergys Corp.* 3,157
284 Pegasus Solutions, Inc.* 3,167
----------
26,046
----------
Leisure Equipment & Products - 0.7%
648 Nautilus Group, Inc. 18,468
65 SCP Pool Corp. 2,281
----------
20,749
----------
Machinery - 1.8%
190 Clarcor, Inc. 5,558
594 Oshkosh Truck Corp. 46,498
141 Thomas Industries, Inc. 5,634
----------
57,690
----------
Media - 0.6%
130 Arbitron, Inc. 5,577
70 Media General, Inc. Class A 4,533
81 Scholastic Corp.* 3,123
82 Thomas Nelson, Inc. 1,784
188 Time Warner, Inc.* 3,141
----------
18,158
----------
Metals & Mining - 1.0%
82 Allegheny Technologies, Inc. 1,809
176 Cleveland-Cliffs, Inc. 10,166
76 Commercial Metals Co. 1,810
48 Massey Energy Co. 1,811
293 Nucor Corp. 13,367
34 Peabody Energy Corp. 1,769
----------
30,732
----------
Multiline Retail - 0.2%
102 Dillard's, Inc. Class A 2,389
12 Sears Holdings Corp.* 1,799
98 ShopKo Stores, Inc.* 2,382
----------
6,570
----------
Office Electronics - 0.1%
90 Zebra Technologies Corp. Class
A* 3,941
----------
</Table>
See notes to the financial statements.
9
EVOLUTION VP MANAGED EQUITY FUND
SCHEDULE OF INVESTMENTS (continued)
JUNE 30, 2005 (UNAUDITED)
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
COMMON STOCKS - 82.3% (CONTINUED)
Oil & Gas - 10.3%
102 Anadarko Petroleum Corp. $ 8,379
238 Apache Corp. 15,375
152 Burlington Resources, Inc. 8,396
438 Cabot Oil & Gas Corp. 15,199
102 Cimarex Energy Co.* 3,969
122 ConocoPhillips 7,014
165 Devon Energy Corp. 8,362
178 EOG Resources, Inc. 10,110
152 Exxon Mobil Corp. 8,735
223 Murphy Oil Corp. 11,647
1,367 Newfield Exploration Co.* 54,530
170 Noble Energy, Inc. 12,861
109 Occidental Petroleum Corp. 8,385
216 Overseas Shipholding Group 12,884
166 Pioneer Natural Resources Co. 6,985
50 Plains Exploration & Production
Co.* 1,777
135 Pogo Producing Co. 7,009
879 Remington Oil & Gas Corp.* 31,380
215 Southwestern Energy Co.* 10,101
287 St. Mary Land & Exploration Co. 8,317
1,479 Swift Energy Co.* 52,978
108 Unocal Corp. 7,025
23 Valero Energy Corp. 1,820
59 Vintage Petroleum, Inc. 1,798
95 The Williams Companies, Inc. 1,805
246 XTO Energy, Inc. 8,362
----------
325,203
----------
Pharmaceuticals - 0.6%
85 Bristol-Myers Squibb Co. 2,123
216 Forest Laboratories, Inc.* 8,392
94 Johnson & Johnson 6,110
69 Merck & Co., Inc. 2,125
----------
18,750
----------
Road & Rail - 0.0%
76 Heartland Express, Inc. 1,477
----------
Semiconductor & Semiconductor Equipment - 1.0%
2,647 Axcelis Technologies, Inc.* 18,159
156 Cree, Inc.* 3,973
126 Intersil Corp. Class A 2,365
</Table>
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
Semiconductor & Semiconductor Equipment - 1.0%
(Continued)
172 Standard Microsystems Corp.* $ 4,021
61 Varian Semiconductor Equipment
Associates, Inc.* 2,257
----------
30,775
----------
Software - 1.4%
453 Adobe Systems, Inc. 12,965
236 Ansys, Inc.* 8,380
191 EPIQ Systems, Inc.* 3,125
194 Factset Research Systems, Inc. 6,953
276 JDA Software Group, Inc.* 3,141
300 MapInfo Corp.* 3,153
216 Sybase, Inc.* 3,963
107 THQ, Inc.* 3,132
----------
44,812
----------
Specialty Retail - 6.8%
69 Aeropostale, Inc.* 2,318
59 American Eagle Outfitters, Inc. 1,808
116 AutoNation, Inc.* 2,380
93 Bed Bath & Beyond, Inc.* 3,886
35 Best Buy Co, Inc. 2,399
66 Building Material Holding Corp. 4,573
44 Chico's FAS, Inc.* 1,508
240 Circuit City Stores, Inc. 4,150
62 Claire's Stores, Inc. 1,491
96 Cost Plus, Inc.* 2,394
371 The Finish Line, Inc. Class A 7,019
138 GameStop Corp. - Class B* 4,126
80 Guitar Center, Inc.* 4,670
162 Haverty Furniture Companies,
Inc. 2,394
46 K-Swiss, Inc. Class A 1,488
345 Linens 'N Things, Inc.* 8,163
57 Liz Claiborne, Inc. 2,266
36 Michaels Stores, Inc. 1,489
392 Movie Gallery, Inc. 10,361
1,169 O'Reilly Automotive, Inc.* 34,848
168 Pier 1 Imports, Inc. 2,384
2,329 Quiksilver, Inc.* 37,217
103 RadioShack Corp. 2,387
898 Russell Corp. 18,364
133 Stage Stores, Inc.* 5,799
1,290 TBC Corp.* 34,998
</Table>
See notes to the financial statements.
10
EVOLUTION VP MANAGED EQUITY FUND
SCHEDULE OF INVESTMENTS (continued)
JUNE 30, 2005 (UNAUDITED)
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
COMMON STOCKS - 82.3% (CONTINUED)
Specialty Retail - 6.8% (Continued)
158 Timberland Co.* $ 6,118
98 Williams-Sonoma, Inc.* 3,878
----------
214,876
----------
Telecommunications - 0.4%
80 BellSouth Corp. 2,126
133 CenturyTel, Inc. 4,606
558 Cincinnati Bell, Inc.* 2,399
89 SBC Communications, Inc. 2,114
62 Verizon Communications, Inc. 2,142
----------
13,387
----------
Thrifts & Mortgage Finance - 0.1%
52 Washington Mutual, Inc. 2,116
----------
Tobacco - 0.4%
33 Altria Group, Inc. 2,134
27 Reynolds American, Inc. 2,128
184 UST, Inc. 8,401
----------
12,663
----------
Trading Companies & Distributors - 0.3%
37 Fastenal Co. 2,267
242 GATX Corp. 8,349
----------
10,616
----------
Utilities - 1.8%
109 The AES Corp.* 1,785
663 Aquila, Inc.* 2,394
</Table>
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
Utilities - 1.8% (Continued)
1,119 Avista Corp. $ 20,802
902 Cascade Natural Gas Corp. 18,491
55 Constellation Energy Group,
Inc. 3,173
114 Northeast Utilities 2,378
100 Pepco Holdings, Inc. 2,394
192 Sierra Pacific Resources* 2,390
22 TXU Corp. 1,828
----------
55,635
----------
TOTAL COMMON STOCKS
(Cost $2,476,711) $2,593,104
----------
MONEY MARKET FUNDS - 8.6%
270,214 Federated Prime Obligations
Fund - Class I $ 270,214
----------
TOTAL MONEY MARKET FUNDS
(Cost $270,214) $ 270,214
----------
Total Investments
(Cost $2,746,925) - 90.9% $2,863,318
Other Assets in Excess of
Liabilities - 9.1% 285,775
----------
TOTAL NET ASSETS - 100.0% $3,149,093
==========
</Table>
Percentages are calculated as a percent of net assets.
* Non-income producing security.
See notes to the financial statements.
11
DYNAMIC VP HY BOND FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 2005 (UNAUDITED)
<Table>
<Caption>
- -----------------------------------------------------------------
FACE
AMOUNT VALUE
- -----------------------------------------------------------------
CORPORATE BONDS - 92.1%
Grantor Trust - 91.2%
$ 6,940,000 Dow Jones CDX High Yield Note,
2004-1,
8.25%, 06/29/2010 (Cost -
$6,903,361; Acquired - Various
dates between 04/12/2005 and
06/30/2005) (1) $ 6,974,700
21,095,804 TRAINS High Yield Note, 8.28%,
08/01/2015,
(Cost - $22,291,099;
Acquired - Various dates
between 03/29/2005 and
06/14/2005) (1)(2) 22,320,795
-----------
29,295,495
-----------
Hotels - 0.9%
267,000 MGM Mirage, Inc.,
9.375%, 02/15/2010 299,708
-----------
TOTAL CORPORATE BONDS (Cost
$29,469,630) $29,595,203
-----------
<Caption>
- -----------------------------------------------------------------
SHARES VALUE
- -----------------------------------------------------------------
MONEY MARKET FUNDS - 12.8%
4,096,046 Federated Prime Obligations
Fund - Class I $ 4,096,046
-----------
TOTAL MONEY MARKET FUNDS
(Cost $4,096,046) $ 4,096,046
-----------
Total Investments
(Cost $33,565,676) - 104.9% $33,691,249
Liabilities in Excess of Other
Assets - (4.9)% (1,567,602)
-----------
TOTAL NET ASSETS - 100.0% $32,123,647
===========
</Table>
Percentages are calculated as a percent of net assets
(1) Restricted under Rule 144A of the Securities Act of 1933.
(2) Variable rate security.
See notes to the financial statements.
12
VP MONEY MARKET FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 2005 (UNAUDITED)
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
MONEY MARKET FUNDS - 23.1%
715,900 AIM Liquid Assets Portfolio -
Institutional Class $ 715,900
715,900 Fidelity Government
Portfolio - Institutional
Class 715,900
766,169 First American Prime
Obligations Fund - Class Y 766,169
----------
TOTAL MONEY MARKET FUNDS
(Cost $2,197,969) $2,197,969
----------
<Caption>
- ----------------------------------------------------------
FACE
AMOUNT VALUE
- ----------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS - 22.1%
$700,000 Federal Home Loan Bank
Discount Note,
2.975%, Due 07/01/2005 $ 700,000
700,000 Federal National Mortgage
Association Discount Note,
2.10%, 07/01/2005 700,000
700,000 U.S. Treasury Bill,
2.58%, 07/07/2005 699,699
----------
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS
(Cost $2,099,699) $2,099,699
----------
Total Investments
(Cost $4,297,668) - 45.2% $4,297,668
Other Assets in Excess of
Liabilities - 54.8% 5,209,352
----------
TOTAL NET ASSETS - 100.0% $9,507,020
==========
</Table>
Percentages are calculated as a percent of net assets.
See notes to the financial statements.
13
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
JUNE 30, 2005
<Table>
<Caption>
POTOMAC INSURANCE TRUST EVOLUTION VP MANAGED EVOLUTION VP MANAGED DYNAMIC VP HY VP MONEY
BOND FUND EQUITY FUND BOND FUND MARKET FUND
-------------------- -------------------- ------------- -----------
ASSETS:
Investments, at market value (Note
2)................................. $1,928,300 $2,863,318 $33,691,249 $4,297,668
Cash................................. -- -- 182,179 --
Receivable for Investments Sold...... 110,574 113,221 -- --
Receivable for Fund Shares Sold...... 374,109 462,992 -- 5,216,936
Deposit at Broker.................... 59,900 -- -- --
Dividends and interest receivable.... 3,131 1,541 260,217 246
Other assets......................... -- -- 78,431 --
---------- ---------- ----------- ----------
Total Assets..................... 2,476,014 3,441,072 34,212,076 9,514,850
---------- ---------- ----------- ----------
LIABILITIES:
Payable for Investments Purchased.... 50,758 287,907 2,025,623 --
Payable for Fund Shares Redeemed..... 17 27 20,758 8
Payable to Custodian................. 59,900 -- -- --
Accrued expenses and other
liabilities........................ 2,935 4,045 42,048 7,822
---------- ---------- ----------- ----------
Total Liabilities................ 113,610 291,979 2,088,429 7,830
---------- ---------- ----------- ----------
NET ASSETS........................... $2,362,404 $3,149,093 $32,123,647 $9,507,020
========== ========== =========== ==========
NET ASSETS CONSIST OF:
Capital stock........................ $2,358,329 $3,125,602 $32,000,263 $9,507,020
Accumulated undistributed net
investment income (loss)........... 22,765 (12,919) 159,273 --
Accumulated undistributed net
realized gain (loss) on
investments........................ (47,797) (79,983) (161,462) --
Net unrealized appreciation
(depreciation) on:
Investments........................ 29,107 116,393 125,573 --
---------- ---------- ----------- ----------
Total Net Assets................. $2,362,404 $3,149,093 $32,123,647 $9,507,020
========== ========== =========== ==========
CALCULATION OF NET ASSET VALUE PER
SHARE - CLASS A:
Net assets........................... $2,362,404 $3,149,093 $32,123,647 $9,507,020
Shares outstanding
(unlimited shares of beneficial
interest authorized, no par
value)............................. 116,081 151,967 1,603,421 9,507,020
Net Asset Value, Redemption Price and
Offering Price Per Share........... $ 20.35 $ 20.72 $ 20.03 $ 1.00
========== ========== =========== ==========
Cost of Investments.................. $1,899,193 $2,746,925 $33,565,676 $4,297,668
========== ========== =========== ==========
</Table>
See notes to the financial statements.
14
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE PERIOD ENDED JUNE 30, 2005
<Table>
<Caption>
POTOMAC INSURANCE TRUST EVOLUTION VP MANAGED EVOLUTION VP MANAGED
BOND FUND EQUITY FUND
-------------------- --------------------
INVESTMENT INCOME:
Dividend income............................................. $ 24,555 $ 5,914
Interest income............................................. 2,932 4,105
-------- --------
Total investment income................................. 27,487 10,019
-------- --------
EXPENSES:
Investment advisory fees.................................... 6,368 9,002
Distribution expenses....................................... 1,592 2,251
Administration fees......................................... 8,750 8,750
Shareholder servicing fees.................................. 3,380 3,906
Fund accounting fees........................................ 10,269 16,100
Custody fees................................................ 510 2,260
Professional fees........................................... 25,724 27,164
Reports to shareholders..................................... 541 765
Directors' fees and expenses................................ 1,116 1,116
Other....................................................... 41 58
-------- --------
Total expenses before waiver............................ 58,291 71,372
Less: Waiver of expenses by Advisor..................... (45,555) (53,368)
-------- --------
Total expenses.......................................... 12,736 18,004
-------- --------
NET INVESTMENT INCOME (LOSS)................................ 14,751 (7,985)
-------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on:
Investments............................................... (53,920) (80,284)
Capital gain distributions from regulated investment
companies............................................... -- --
-------- --------
(53,920) (80,284)
-------- --------
Change in unrealized appreciation (depreciation) on:
Investments............................................... 22,750 60,591
-------- --------
Net realized and unrealized gain (loss) on
investments........................................... (31,170) (19,693)
-------- --------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS................................................ $(16,419) $(27,678)
======== ========
</Table>
(1) Commencement of operations.
See notes to the financial statements.
15
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE PERIOD ENDED JUNE 30, 2005
<Table>
<Caption>
POTOMAC INSURANCE TRUST DYNAMIC VP HY VP MONEY
BOND FUND MARKET FUND
------------------- -------------------
February 1, 2005(1) February 1, 2005(1)
to June 30, 2005 to June 30, 2005
------------------- -------------------
INVESTMENT INCOME:
Dividend income............................................. $ -- $ --
Interest income............................................. 221,604 52,647
--------- --------
Total investment income................................. 221,604 52,647
--------- --------
EXPENSES:
Investment advisory fees.................................... 27,222 9,504
Distribution expenses....................................... 9,074 --
Administration fees......................................... 7,292 5,833
Shareholder servicing fees.................................. 14,392 8,064
Fund accounting fees........................................ 8,428 6,667
Custody fees................................................ 1,274 654
Professional fees........................................... 30,860 29,032
Reports to shareholders..................................... 3,100 1,594
Directors' fees and expenses................................ 1,116 1,116
Other....................................................... 236 121
--------- --------
Total expenses before waiver............................ 102,994 62,585
Less: Waiver of expenses by Advisor..................... (40,663) (26,887)
--------- --------
Total expenses.......................................... 62,331 35,698
--------- --------
NET INVESTMENT INCOME (LOSS)................................ 159,273 16,949
--------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on:
Investments............................................... (161,462) --
--------- --------
(161,462) --
--------- --------
Change in unrealized appreciation (depreciation) on:
Investments............................................... 125,573 --
--------- --------
Net realized and unrealized gain (loss) on
investments........................................... (35,889) --
--------- --------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS................................................ $ 123,384 $ 16,949
========= ========
</Table>
(1) Commencement of operations.
See notes to the financial statements.
16
STATEMENT OF CHANGES IN NET ASSETS
JUNE 30, 2005
POTOMAC INSURANCE TRUST
<Table>
<Caption>
EVOLUTION VP MANAGED EVOLUTION VP MANAGED
BOND FUND EQUITY FUND
--------------------------------------- ---------------------------------------
Six Months Ended Six Months Ended
June 30, 2005 July 1, 2004(1) June 30, 2005 July 1, 2004(1)
(Unaudited) to December 31, 2004 (Unaudited) to December 31, 2004
---------------- -------------------- ---------------- --------------------
OPERATIONS:
Net investment income (loss)...... $ 14,751 $ 8,014 $ (7,985) $ (4,934)
Net realized gain (loss) on
investments..................... (53,920) (52) (80,284) 301
Capital gain distributions from
regulated investment
companies....................... -- 6,175 -- --
Change in unrealized appreciation
(depreciation) on investments... 22,750 6,357 60,591 55,802
---------- --------- ---------- ----------
Net increase (decrease) in net
assets resulting from
operations.................. (16,419) 20,494 (27,678) 51,169
---------- --------- ---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS -
CLASS A:
Net investment income.............
Net realized gains................
Total distributions...........
CAPITAL SHARE TRANSACTIONS -
CLASS A:
Share sold........................ 1,716,537 974,006 2,396,028 1,233,433
Proceeds from shares issued to
holders in reinvestment of
dividends....................... -- --
Shares redeemed................... (91,265) (290,949) (263,180) (290,679)
---------- --------- ---------- ----------
Net increase (decrease) in net
assets resulting from
beneficial interest
transactions................ 1,625,272 683,057 2,132,848 942,754
---------- --------- ---------- ----------
TOTAL INCREASE (DECREASE) IN NET
ASSETS.......................... 1,608,853 703,551 2,105,170 993,923
---------- --------- ---------- ----------
NET ASSETS:
Beginning of period............... 753,551 50,000(2) 1,043,923 50,000(2)
---------- --------- ---------- ----------
End of period..................... $2,362,404 $ 753,551 $3,149,093 $1,043,923
========== ========= ========== ==========
UNDISTRIBUTED NET INVESTMENT
INCOME (LOSS), END OF PERIOD.... $ 22,765 $ 8,014 $ (12,919) $ --
---------- --------- ---------- ----------
</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.
17
STATEMENT OF CHANGES IN NET ASSETS
JUNE 30, 2005
POTOMAC INSURANCE TRUST
<Table>
<Caption>
DYNAMIC VP HY VP MONEY
BOND FUND MARKET FUND
------------------- -------------------
February 1, 2005(1) February 1, 2005(1)
to June 30, 2005 to June 30, 2005
(Unaudited) (Unaudited)
------------------- -------------------
OPERATIONS:
Net investment income (loss)................................ $ 159,273 $ 16,949
Net realized gain (loss) on investments..................... (161,462) --
Change in unrealized appreciation (depreciation) on
investments............................................... 125,573 --
----------- ------------
Net increase (decrease) in net assets resulting from
operations............................................ 123,384 16,949
----------- ------------
DISTRIBUTIONS TO SHAREHOLDERS - CLASS A:
Net investment income....................................... (16,949)
Net realized gains.......................................... --
------------
Total distributions..................................... (16,949)
CAPITAL SHARE TRANSACTIONS - CLASS A:
Shares sold................................................. 40,937,097 30,591,559
Proceeds from shares issued to holders in reinvestment of
dividends................................................. -- 16,949
Share redeemed.............................................. (8,936,834) (21,101,488)
----------- ------------
Net increase (decrease) in net assets resulting from
beneficial interest transactions...................... 32,000,263 9,507,020
----------- ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS..................... 32,123,647 9,507,020
----------- ------------
NET ASSETS:
Beginning of period......................................... -- --
----------- ------------
End of period............................................... $32,123,647 $ 9,507,020
=========== ============
UNDISTRIBUTED NET INVESTMENT INCOME (LOSS), END OF PERIOD... $ 159,273 $ --
----------- ------------
</Table>
(1) Commencement of operations.
See notes to the financial statements.
18
FINANCIAL HIGHLIGHTS
POTOMAC INSURANCE TRUST
<Table>
<Caption>
EVOLUTION VP MANAGED BOND FUND EVOLUTION VP MANAGED EQUITY FUND
--------------------------------------- ---------------------------------------
CLASS A CLASS A
--------------------------------------- ---------------------------------------
Six Months Ended Six Months Ended
June 30, 2005 July 1, 2004(1) June 30, 2005 July 1, 2004(1)
(Unaudited) to December 31, 2004 (Unaudited) to December 31, 2004
---------------- -------------------- ---------------- --------------------
PER SHARE DATA:
NET ASSET VALUE, BEGINNING OF
PERIOD.......................... $ 20.76 $ 20.00 $ 21.06 $ 20.00
---------- --------- ---------- ----------
INCOME (LOSS) FROM INVESTMENT
OPERATIONS:
Net investment income (loss)(4)... 0.23 0.32 (0.09) (0.15)
Net realized and unrealized gain
(loss) on investments(6)........ (0.64) 0.44 (0.25) 1.21
---------- --------- ---------- ----------
Total from investment
operations.................. (0.41) 0.76 (0.34) 1.06
---------- --------- ---------- ----------
LESS DISTRIBUTIONS:
Dividends from net investment
income.......................... -- -- -- --
Distributions from realized
gains........................... -- -- -- --
---------- --------- ---------- ----------
Total distributions........... -- -- -- --
---------- --------- ---------- ----------
NET ASSET VALUE, END OF PERIOD.... $ 20.35 $ 20.76 $ 20.72 $ 21.06
========== ========= ========== ==========
TOTAL RETURN(7)................... (1.97)%(2) 3.80% (1.61)%(2) 5.30%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period......... $2,362,404 $ 753,551 $3,149,093 $1,043,923
Ratio of net expenses to average
net assets:
Before expense reimbursement.... 9.15%(3) 23.17% 7.93%(3) 20.13%
After expense reimbursement..... 2.00%(3) 2.00% 2.00%(3) 2.00%
Including dividends on short
positions
Ratio of net investment income
(loss) to average net assets:
Before expense reimbursement.... (4.83)%(3) (17.98)% (6.82)%(3) (19.66)%
After expense reimbursement..... 2.32%(3) 3.19% (0.89)%(3) (1.53)%
Portfolio turnover rate(5)........ 426% 7% 691% 2%
</Table>
(1) Commencement of operations.
(2) Not annualized.
(3) Annualized.
(4) Net investment income (loss) per share represents net investment income
(loss) divided by the daily average shares of beneficial interest
outstanding throughout each period.
(5) Portfolio turnover ratio is calculated without regard to short-term
securities having a maturity of less than one year.
(6) The amounts shown may not correlate with aggregate gains and losses of
portfolio securities due to the timing of subscriptions and redemptions of
Fund shares.
(7) All returns reflect reinvested dividends but do not reflect the impact of
taxes.
See notes to the financial statements.
19
FINANCIAL HIGHLIGHTS
POTOMAC INSURANCE TRUST
<Table>
<Caption>
DYNAMIC VP HY VP MONEY
BOND FUND MARKET FUND
------------------- -------------------
February 1, 2005(5) February 1, 2005(1)
to June 30, 2005 to June 30, 2005
------------------- -------------------
PER SHARE DATA:
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 20.00 $ 1.00
----------- ----------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss)(4)............................. 0.34 --
Net realized and unrealized gain (loss) on investments(6)... (0.31) --
----------- ----------
Total from investment operations........................ 0.03 --
----------- ----------
LESS DISTRIBUTIONS:
Dividends from net investment income........................ -- --(8)
Distributions from realized gains........................... -- --
----------- ----------
Total distributions..................................... -- --
----------- ----------
NET ASSET VALUE, END OF PERIOD.............................. $ 20.03 $ 1.00
=========== ==========
TOTAL RETURN(7)............................................. 0.15%(2) 0.32%(2)
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period................................... $32,123,647 $9,507,020
Ratio of net expenses to average net assets:
Before expense reimbursement.............................. 2.84%(3) 3.29%(3)
After expense reimbursement............................... 1.72%(3) 1.88%(3)
Including dividends on short positions
Ratio of net investment income (loss) to average net assets:
Before expense reimbursement.............................. 3.27%(3) (0.52)%(3)
After expense reimbursement............................... 4.39%(3) 0.89%(3)
Portfolio turnover rate(5).................................. 110% 0%
</Table>
(1) Commencement of operations.
(2) Not annualized.
(3) Annualized.
(4) Net investment income (loss) per share represents net investment income
(loss) divided by the daily average shares of beneficial interest
outstanding throughout each period.
(5) Portfolio turnover ratio is calculated without regard to short-term
securities having a maturity of less than one year.
(6) The amounts shown may not correlate with aggregate gains and losses of
portfolio securities due to the timing of subscriptions and redemptions of
Fund shares.
(7) All returns reflect reinvested dividends but do not reflect the impact of
taxes.
(8) Amount is less than $0.01 per share.
See notes to the financial statements.
20
POTOMAC INSURANCE TRUST
NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2005 (UNAUDITED)
1. ORGANIZATION
Potomac Insurance Trust (the "Trust") was organized as a Massachusetts business
trust on December 28, 1999 and is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end management investment company
issuing its shares in series, each series representing a distinct portfolio with
its own investment objective and policies. The series presently in operation are
the Evolution VP Managed Bond Fund, the Evolution VP Managed Equity Fund, the
Dynamic VP HY Bond Fund and the VP Money Market Fund (each a "Fund" and
collectively, the "Funds"). Each Fund is a "non-diversified" series of the Trust
pursuant to the 1940 Act. The Trust offers shares to unaffiliated life insurance
separate accounts (registered as unit investment trusts under the 1940 Act) to
fund the benefits under variable annuity and variable life contracts. The
Evolution VP Managed Bond Fund and Evolution VP Managed Equity Fund commenced
operations on July 1, 2004. The Dynamic VP HY Bond Fund and VP Money Market Fund
commenced operations on February 1, 2005.
The objective of the Evolution Managed Bond Fund is to seek the highest
appreciation on an annual basis consistent with a high tolerance for risk by
investing at least 80% of its assets (plus any borrowing for investment
purposes) in fixed-income securities indirectly through securities that invest
in or are a derivative of fixed-income securities, including exchange traded
funds (ETFs) and other investment companies (fixed-income securities). The
objective of the Evolution Managed Equity Fund is to seek the highest
appreciation on an annual basis consistent with a high tolerance for risk by
investing at least 80% of its assets (plus any borrowing for investment
purposes) in equity securities either directly through individual stocks and
American Depository Receipts (ADRs) or indirectly through securities that invest
in or are a derivative of equity securities. The objective of the Dynamic VP HY
Bond Fund is to seek the maximum total return by investing at least 80% of its
assets (plus any borrowing for investment purposes) in high yield debt
instruments, commonly referred to as "junk bonds," or derivatives of such
instruments. The objective of the VP Money Market Fund is to provide security of
principal, current income and liquidity, by investing in securities generally
having remaining maturities of 397 days or less, although instruments subject to
repurchase agreements may bear longer final maturities. The average
dollar-weighted maturity of the Fund will not exceed 90 days.
Class A shares of the Evolution VP Managed Bond and the Evolution VP Managed
Equity Funds are subject to an annual Rule 12b-1 fee of up to 0.25% of Class A's
average daily net assets. The Class A shares of the Dynamic VP HY Bond Fund are
subject to an annual Rule 12b-1 fee of up to 0.60% of Class A's average daily
net assets. The Board has authorized the VP Money Market Fund to pay Rule 12b-1
fees of an amount equal to the difference between the Fund's Total Annual
Operating Expenses and the expense limit on Total Annual Operating Expenses but
not to exceed 1.00% of the Fund's daily net assets. As of June 30, 2005, the
expense limit on total operating expenses was 1.75% for the VP Money Market
Fund. The Rule 12b-1 fees are to pay the insurance company of the plan sponsor
for its services for servicing shareholder accounts. Because the fees are paid
out of each Fund's net assets on an ongoing basis, the cost of an investment in
a Fund will increase over time.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. These
policies are in conformity with U.S. generally accepted accounting principles.
A) INVESTMENT VALUATION - Securities that are listed on a securities exchange
are valued at the last quoted sales price on the day the valuation is made.
Price information on listed stocks is obtained from the exchange where the
security is primarily traded. If no sale is reported at that time, the mean of
the last bid and asked price is used. Securities traded principally on the
Nasdaq Stock Market are valued at the Nasdaq Official Closing Pricing ("NOCP")
21
provided by Nasdaq each business day. When market quotations for options and
futures positions held by a Fund are readily available, those positions will be
valued based upon such quotations. Options, futures and other securities for
which no quotations are readily available or for which the Advisor has reason to
believe the quotations are not reflective of the fair value of these instruments
as determined in good faith under the supervision of the Board of Trustees.
Short-term investments with a remaining maturity of 60 days or less are valued
at amortized cost, which approximates market value.
B) REPURCHASE AGREEMENTS - Each Fund may enter into repurchase agreements with
banks that are members of the Federal Reserve System or securities dealers who
are members of a national securities exchange or are primary dealers in U.S.
Government securities. In connection with transactions in repurchase agreements,
it is the Trust's policy that the Fund receive, as collateral, securities whose
market value, including accrued interest, at all times will be at least equal to
100% of the amount invested by the Fund in each repurchase agreement. If the
seller defaults, and the value of the collateral declines, realization of the
collateral by the Fund may be delayed or limited.
C) WRITTEN OPTIONS - Each Fund may write (sell) options. When a Fund writes an
option, an amount equal to the premium received is recorded in the Fund's
accounting records as an asset and equivalent liability. The amount of the
liability is subsequently marked-to-market to reflect the current value of the
option written. When an option expires, or if the Fund enters into a closing
purchase transaction, the Fund realizes a gain (or loss if the cost of a closing
purchase transaction exceeds the premium received when the option was sold). As
collateral for uncovered written options, the Fund is required under the 1940
Act to maintain assets consisting of cash, cash equivalents or liquid
securities. This collateral is required to be adjusted daily to reflect the
market value of the purchase obligation for put options or the market value of
the instrument underlying the contract, but not less than the strike price, for
call options.
D) STOCK INDEX FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS - Each Fund
may purchase and sell stock index futures contracts and options on such futures
contracts. Upon entering into a contract, the Fund deposits and maintains as
collateral such initial margin as required by the exchange on which the
transaction is effected. Pursuant to the contract, the Fund agrees to receive
from or pay to the broker an amount of cash equal to the daily fluctuation in
value of the contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains and losses. When the contract
is closed, the Fund records a realized gain or loss equal to the difference
between the value of the contract at the time it was opened and the value at the
time it was closed. As collateral for futures contracts, the Fund is required
under the 1940 Act to maintain assets consisting of cash, cash equivalents or
liquid securities. This collateral is required to be adjusted daily to reflect
the market value of the purchase obligation for long futures contracts or the
market value of the instrument underlying the contract, but not less than the
market price at which the futures contract was established, for short futures
contracts.
E) SHORT POSITIONS - The Evolution VP Managed Bond Fund, the Evolution VP
Managed Equity Fund and the Dynamic VP HY Bond Fund may engage in short sale
transactions. For financial statement purposes, an amount equal to the
settlement amount is included in the Statement of Assets and Liabilities as an
asset and an equivalent liability. The amount of the liability is subsequently
marked-to-market to reflect the current value of the short position. Subsequent
fluctuations in the market prices of securities sold, but not yet purchased, may
require purchasing the securities at prices which may differ from the market
value reflected on the Statement of Assets and Liabilities. The Fund is liable
for any dividends payable on securities while those securities are in a short
position. As collateral for its short positions, the Fund is required under the
1940 Act to maintain assets consisting of cash, cash equivalents or liquid
securities equal to the market value of the securities sold short. This
collateral is required to be adjusted daily.
F) RISKS OF OPTIONS, FUTURES CONTRACTS, OPTIONS ON FUTURES CONTRACTS AND SHORT
POSITIONS - The risks inherent in the use of options, futures contracts, options
on futures contracts and short positions include 1) adverse changes in the value
of such instruments; 2) imperfect correlation between the price of options and
futures contracts and options thereon and movements in the price of the
underlying securities, index or futures contracts; 3) the possible absence of a
liquid secondary market for any particular instrument at any time; 4) the
possible need to defer closing out certain
22
positions to avoid adverse tax consequences; and 5) the possible nonperformance
by the counterparty under the terms of the contract. The Funds designate all
cash, cash equivalents and liquid securities as collateral for written options,
futures contracts and short positions.
G) SECURITY TRANSACTIONS - Investment transactions are recorded on trade date.
The Funds determine the gain or loss realized from the investment transactions
on the basis of identified cost, which is the same basis used for federal income
tax purposes.
H) FEDERAL INCOME TAXES - Each Fund intends to comply with the requirements of
Subchapter M of the Internal Revenue Code necessary to qualify as a regulated
investment company and to make the requisite distributions of income and capital
gains to its shareholders sufficient to relieve it from all or substantially all
federal income taxes. Therefore, no Federal income or excise tax provision is
required.
Net investment income and realized gains and losses for federal income tax
purposes may differ from that reported on the financial statements because of
permanent book-to-tax differences. GAAP requires that permanent differences
between financial reporting and tax reporting be reclassified between various
components of net assets. These differences are primarily due to net operating
losses.
I) INCOME AND EXPENSES - Dividend income is recognized on the ex-dividend
date, and interest income, including amortization of premium and discount is
recognized on an accrual basis. The Funds incur expenses that are directly
attributable to each Fund, such as advisory fees and registration costs.
Expenses that are not directly attributable to a Fund are generally allocated
among the funds comprising the Trust in proportion to their respective average
net assets.
J) DISTRIBUTIONS TO SHAREHOLDERS - Each Fund intends to distribute to its
shareholders at least annually substantially all net investment income and net
realized capital gains, if any. Income and capital gain distributions are
determined in accordance with income tax regulations, which may differ from U.S.
generally accepted accounting principles.
There were no distributions paid during the period ended June 30, 2005 for the
Evolution VP Managed Bond Fund, the Evolution VP Managed Equity Fund and the
Dynamic VP HY Bond Fund. For the period ended, June 30, 2005, the VP Money
Market Fund distributed $16,949 from net investment income.
As of June 30, 2005, the Funds did not have any net capital loss carryforwards
or any deferred post-October losses.
K) USE OF ESTIMATES - The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
23
3. SHARES OF BENEFICIAL INTERESTS TRANSACTIONS
<Table>
<Caption>
EVOLUTION VP MANAGED BOND FUND EVOLUTION VP MANAGED EQUITY FUND
--------------------------------------- ---------------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2005 YEAR ENDED JUNE 30, 2005 YEAR ENDED
(UNAUDITED) DECEMBER 31, 2004(1) (UNAUDITED) DECEMBER 31, 2004(1)
---------------- -------------------- ---------------- --------------------
CLASS A:
Shares sold 84,268 50,832 114,995 64,109
Shares issued to
holders in
reinvestment of
dividends -- -- -- --
Shares redeemed (4,479) (14,540) (12,606) (14,531)
------ ------- ------- -------
Total net increase
(decrease) from
shares of
beneficial
interests
transactions 79,789 36,292 102,389 49,578
====== ======= ======= =======
</Table>
<Table>
<Caption>
DYNAMIC VP HY BOND FUND VP MONEY MARKET FUND
----------------------- --------------------
PERIOD ENDED PERIOD ENDED
JUNE 30, 2005 JUNE 30, 2005
(UNAUDITED) (UNAUDITED)
----------------------- --------------------
CLASS A:
Shares sold 2,055,537 30,591,559
Shares issued to holders in reinvestment of
dividends -- 16,949
Shares redeemed (452,116) (21,101,488)
--------- -----------
Total net increase (decrease) from shares of
beneficial interests transactions 1,603,421 9,507,020
========= ===========
</Table>
(1) Each Fund sold 2,500 shares of beneficial interests to the Advisor upon
seeding of each Fund on April 19, 2005.
4. INVESTMENT TRANSACTIONS
During the period ended June 30, 2005, the aggregate purchases and sales of
investments (excluding short-term investments) were:
<Table>
<Caption>
EVOLUTION VP MANAGED EVOLUTION VP MANAGED DYNAMIC VP HY VP MONEY
BOND FUND EQUITY FUND BOND FUND MARKET FUND
-------------------- -------------------- ------------- -----------
Purchases $5,466,767 $11,447,547 $38,513,835 $ --
Sales 4,290,506 9,755,132 8,878,132 --
</Table>
There were no purchases or sales of long-term U.S. Government Securities during
the period ended June 30, 2005 for any of the Funds.
24
5. INVESTMENT ADVISORY AND OTHER AGREEMENTS
The Funds have entered into an investment advisory agreement with Rafferty Asset
Management, LLC ("Advisor"). The Advisor receives a fee, computed daily and
payable monthly, at the annual rates presented below as applied to each Fund's
daily net assets. In addition, the Advisor has entered into sub-advisory
agreements relating to the Evolution Managed Bond Fund and the Evolution Managed
Equity Fund with Flexible Plan Investments, Ltd., whereby the sub-advisor will
direct investment activities of the Sub-Advised Funds. The Advisor pays, out of
the management fees it receives from the Funds, a fee for these services.
Additionally, the Advisor may waive additional fees it might otherwise normally
charge the Funds. For the period ended June 30, 2005, the Advisor agreed to pay
all operating expenses, in excess of the annual cap on expenses presented below
as applied to each Fund's average daily net assets. The Advisor may recover from
the Funds the expenses paid in excess of the annual cap on expenses for the
three previous years, as long as the recovery does not cause the Fund to exceed
such annual cap on expenses. For the period ended June 30, 2005, the Advisor
paid the following expenses:
<Table>
<Caption>
EVOLUTION VP MANAGED EVOLUTION VP MANAGED DYNAMIC VP HY VP MONEY
BOND FUND EQUITY FUND BOND FUND MARKET FUND
-------------------- -------------------- ------------- -----------
CLASS A:
Annual Advisory rate 1.00% 1.00% 0.75% 0.50%
Annual cap on expenses 2.00% 2.00% 1.75% 1.75%
Waiver of expenses
paid in excess of
annual cap on
expenses $45,555 $53,368 $40,663 $26,887
Advisor expense waiver
recovery $ -- $ -- $ -- $ --
</Table>
Remaining expenses subject to potential recovery expiring in:
<Table>
<Caption>
EVOLUTION VP MANAGED EVOLUTION VP MANAGED DYNAMIC VP HY VP MONEY
BOND FUND EQUITY FUND BOND FUND MARKET FUND
-------------------- -------------------- ------------- -----------
2007 $53,095 $58,373 $ -- $ --
2008 $45,555 $53,368 $40,663 $26,887
</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.
25
POTOMAC INSURANCE TRUST
TRUSTEES AND OFFICERS
(UNAUDITED)
The business and affairs of the Funds are managed under the direction of the
Funds' Board of Trustees. Information pertaining to the Trustees and Officers of
the Funds is set forth below. The SAI includes additional information about the
Funds' Trustees and Officers and is available without charge, upon request by
calling 1-800-851-0511.
<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 31
33 Whitehall St., Board of until removal or Executive Officer of
10th Flr. Trustees since 1997 resignation Rafferty,
New York, NY 1997 -- present; Chief
10004 Executive Officer of
Age: 63 Rafferty Companies,
LLC, 1996 -- present;
Chief Executive Officer
of Rafferty Capital
Markets, Inc.,
1995 -- present.
- ------------------------------------------------------------------------------------------------------------------
Jay F. Higgins* Trustee since 1997 Lifetime of Trust Chairman, Bengal 31
33 Whitehall St., until removal or Partners LLC,
10th Flr. resignation 1998 -- present (NASD
New York, NY Broker Dealer).
10004
Age: 60
- ------------------------------------------------------------------------------------------------------------------
<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: 63
- ---------------------- -------------------
Jay F. Higgins* Dwango North
33 Whitehall St., America Corp
10th Flr. (radio, telephone,
New York, NY communications)
10004
Age: 60
- ---------------------- -------------------
</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. 31
33 Whitehall St., until removal or Boyle Securities, Inc.,
10th Flr. resignation 1981 -- present.
New York, NY
10004
Age: 64
- ------------------------------------------------------------------------------------------------------------------
Daniel J. Byrne Trustee since 1997 Lifetime of Trust President and Chief 31
33 Whitehall St., until removal or Executive Officer of
10th Flr. resignation Byrne Securities Inc.,
New York, NY 1992 -- present;
10004 Trustee, The Opening
Age: 61 Word Program,
Wyandanch, New York.
- ------------------------------------------------------------------------------------------------------------------
Gerald E. Shanley III Trustee since 1997 Lifetime of Trust Business Consultant, 31
33 Whitehall St., until removal or 1985 -- present;
10th Flr. resignation Trustee of Estate of
New York, NY Charles S. Payson,
10004 1987 -- present.
Age: 62
<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: 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
</Table>
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: 38 Hermitage Capital
Management,
1998 -- 1999;
Associate, Akin, Gump,
Strauss, Hauer & Feld,
LLP, 1995 -- 1998 (law
firm).
- ------------------------------------------------------------------------------------------------------------------
Timothy P. Hagan Chief Compliance One year Vice President of
33 Whitehall St., Officer and Chief Rafferty,
10th Flr. Financial Officer 1997 -- present.
New York, NY since 2004
10004
Age: 63
- ------------------------------------------------------------------------------------------------------------------
Philip A. Harding Senior Vice One year Vice President of
33 Whitehall St., President since Rafferty,
10th Flr. 1999 1997 -- present.
New York, NY 10004
Age: 62
- ------------------------------------------------------------------------------------------------------------------
Steven P. Sprague Treasurer and One year Chief Financial Officer
33 Whitehall St., Controller since of Rafferty
10th Flr. 1999
New York, NY 10004
Age: 56
- ------------------------------------------------------------------------------------------------------------------
Eric W. Falkeis Secretary since One year Vice President, U.S.
615 East Michigan 2004 Bancorp Fund Services,
Street LLC, 1997 -- present.
Milwaukee, WI 53202
Age: 32
- ------------------------------------------------------------------------------------------------------------------
Angela M. Brickl Assistant Secretary One year Compliance
615 East Michigan since 2004 Administrator, U.S.
Street Bancorp Fund Services
Milwaukee, WI 53202 LLC, 2003 -- present,
Age: 29 Business Analyst,
Strong Financial Corp.,
2002 -- 2003, Senior
Auditor, Arthur
Andersen 1999 -- 2002
- ------------------------------------------------------------------------------------------------------------------
<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: 38
- ----------------------- -------------------
Timothy P. Hagan None
33 Whitehall St.,
10th Flr.
New York, NY
10004
Age: 63
- ----------------------- -------------------
Philip A. Harding None
33 Whitehall St.,
10th Flr.
New York, NY 10004
Age: 62
- ----------------------- -------------------
Steven P. Sprague None
33 Whitehall St.,
10th Flr.
New York, NY 10004
Age: 56
- ----------------------- -------------------
Eric W. Falkeis None
615 East Michigan
Street
Milwaukee, WI 53202
Age: 32
- ----------------------- -------------------
Angela M. Brickl None
615 East Michigan
Street
Milwaukee, WI 53202
Age: 29
- ----------------------- -------------------
</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 Complex consists of the Potomac Funds which currently offers for
sale to the public 17 portfolios of the 19 currently registered with the SEC
and the Potomac Insurance Trust which currently offers for sale to the
public 4 portfolios of the 12 currently registered with the SEC.
*** Mr. Boyle was an interested Trustee for the period May through September
2004 due to his daughter being employed by Rafferty Capital Markets, LLC.
The Trustees and Officers table is current as of June 30, 2005.
INVESTMENT ADVISOR
Rafferty Asset Management, LLC
33 Whitehall Street, 10th Floor
New York, NY 10004
ADMINISTRATOR, TRANSFER AGENT, DIVIDEND
PAYING AGENT & SHAREHOLDING SERVICING AGENT
U.S. Bancorp Fund Services, LLC
P.O. Box 1993
Milwaukee, WI 53201-1993
CUSTODIAN
U.S. Bank, N.A.
425 Walnut Street
Cincinnati, Ohio 45202
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP
233 S. Wacker Dr.
Chicago, IL 60606
DISTRIBUTOR
Rafferty Capital Markets, LLC
59 Hilton Avenue
Garden City, NY 11530
The Fund's Proxy Voting Policies are available without charge by calling
1-800-851-0511, or by accessing the SEC's website, at www.sec.gov.
The actual voting records relating to portfolio securities during the most
recent twelve month period ended June 30 (starting with the year ending June 30,
2005) will be available without charge by calling 1-800-851-0511 or by accessing
the SEC's website at www.sec.gov.
Beginning with the Funds' first and third quarters ending after July 9, 2004,
the Funds will file complete schedules of portfolio holdings with the SEC on
Form N-Q. The Form N-Q will be available without charge, upon request, by
calling 1-800-851-0511, or by accessing the SEC's website, at www.sec.gov.
This report has been prepared for shareholders and may be distributed to others
only if preceded or accompanied by a current prospectus.
SEMI-ANNUAL
REPORT
June 30, 2005
[THE POTOMAC FUNDS New LOGO]
33 Whitehall Street, 10th Floor
New York, NY 10004
(800) 851-0511
ITEM 2. CODE OF ETHICS.
NOT APPLICABLE FOR SEMI-ANNUAL REPORTS.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
NOT APPLICABLE FOR SEMI-ANNUAL REPORTS.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
NOT APPLICABLE FOR SEMI-ANNUAL REPORTS.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable to open-end investment companies.
2
ITEM 6. SCHEDULE OF INVESTMENTS.
Schedule of Investments is included as part of the report to shareholders filed
under Item 1 of this Form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable to open-end investment companies.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES
Not applicable to open-end investment companies.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASES.
Not applicable to open-end investment companies.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which shareholders may
recommend nominees to the registrant's board of directors/trustees.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The Registrant's President/Chief Executive Officer and Treasurer/Chief
Financial Officer have reviewed the Registrant's disclosure controls
and procedures (as defined in Rule 30a-3(c) under the Investment
Company Act of 1940 (the "Act")) as of a date within 90 days of the
filing of this report, as required by Rule 30a-3(b) under the Act and
Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934.
Based on their review, such officers have concluded that the disclosure
controls and procedures are effective in ensuring that information
required to be disclosed in this report is appropriately recorded,
processed, summarized and reported and made known to them by others
within the Registrant and by the Registrant's service provider.
(b) There were no significant changes in the Registrant's internal controls
over financial reporting that occurred during the Registrant's last
fiscal half-year that has materially affected, or is reasonably likely
to materially affect, the Registrant's internal control over financial
reporting.
ITEM 12. EXHIBITS.
(a) (1) Any code of ethics or amendment thereto, that is subject of the
disclosure required by Item 2, to the extent that the registrant
intends to satisfy Item 2 requirements through filing an exhibit.
1) Incorporate by reference to previous Form N-CSR filing.
3
(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. Filed herewith.
(3) Any written solicitation to purchase securities under Rule 23c-1
under the Act sent or given during the period covered by the report by
or on behalf of the registrant to 10 or more persons. Not applicable to
open-end investment companies.
(b) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. Furnished herewith.
4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) The Potomac Insurance Trust
---------------------------------------------------------
By (Signature and Title) /s/ Daniel D. O'Neill
-----------------------------------------------
Daniel D. O'Neill, President
Date September 7, 2005
----------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ Daniel D. O'Neill
---------------------------------------------
Daniel D. O'Neill, President
Date September 7, 2005
--------------------------------------------------------------
By (Signature and Title)* /s/ Timothy P. Hagan
---------------------------------------------
Timothy P. Hagan, Chief Financial Officer
Date September 7, 2005
--------------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.
5