As filed with the Securities and Exchange Commission on [date]
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-09761
THE POTOMAC INSURANCE TRUST
(Exact name of registrant as specified in charter)
33 WHITEHALL STREET, 10TH FLOOR
NEW YORK, NY 10004
(Address of principal executive offices) (Zip code)
DANIEL D. O'NEILL
33 WHITEHALL STREET, 10TH FLOOR
NEW YORK, NY 10004
(Name and address of agent for service)
1-646-572-3390
Registrant's telephone number, including area code
Date of fiscal year end: DECEMBER 31, 2005
Date of reporting period: DECEMBER 31, 2005
ITEM 1. REPORT TO STOCKHOLDERS
LETTER TO SHAREHOLDERS
FEBRUARY 14, 2006
Dear Shareholders,
For the U.S. equities and fixed income markets, the calendar year 2005 was
uneventful in the aggregate. On a total return basis, all of the major indexes
were up slightly, with the S&P 500, Dow, Nasdaq 100 and Russell 2000 gaining
4.9%, 1.72%, 1.90% and 4.6%, respectively. On the fixed income side, the Lehman
Brothers US Aggregate Bond Index declined 2.42% in price terms but gained 2.43%
on a total return basis.
Volatility in the equities and fixed income markets was low last year, though
commodities, and in particular energy, experienced extreme volatility. Corporate
earnings were generally good despite high energy prices. The markets shrugged
off the terrorist bombings in London but remained wary about the macro problems
in the Middle East. The decline in housing prices which many expected, and which
was predicted to have a negative impact on consumer spending, did not occur.
Energy was the best performing sector again while autos struggled, with
downgrades in the credit ratings of GM and Ford spooking the credit markets at
various points. The twin deficits - budget and trade - remain a serious concern,
and China's July announcement of a currency devaluation proved to be illusory.
Significant increases in short term interest rates - from 2.25% to 4.25% - did
not much impact rates on bonds of longer maturities as the yield on the 10 Year
Treasury Note rose only slightly, moving from 4.22% to 4.39%.
As the domestic bond markets rallied during the first few months of 2005, the VP
Evolution Managed Bond Fund struggled due to overexposure to international bonds
and certain high yield issues. Unfortunately, the Fund had a substantial cash
position at the end of the 1(st) Quarter and missed a market upturn in April and
part of the rally which followed. Although the Bond Fund rotated into and out of
several areas of the market and registered gains, the Fund's performance lagged
the overall bond market during this rally.
The equity markets moved sideways during the first quarter of 2005 and the VP
Evolution Managed Equity Fund declined 1% as the managers struggled to discern
market direction. The Fund's performance improved in the second quarter, with a
modest gain on positions in international ETFs, especially those focused on
Latin America and Europe. Small-caps continued to buoy the markets in the 3(rd)
quarter of 2005, and the Fund took notice and maintained investments in excess
of 30% in that asset class, while at the same time overweighting technology and
energy companies. The 4(th) quarter saw modest gains in most equity indexes as
the Fund continued to overweight technology stocks and international
investments. By the end of the year the energy positions were pared down in
favor of the health care sector.
The VP HY Bond Fund produced a total return of 1.50% from its inception on
February 1, 2005 through December 31, 2005 on a total return basis compared to
2.73% for the Lehman Brothers US Corporate High Yield Index. The Fund's high
level of portfolio turnover contributed to its underperformance relative to the
benchmark.
As always, we thank you for using Potomac Funds and we look forward to our
mutual success.
Best regards,
/S/ DANIEL O'NEILL
Daniel O'Neill
Potomac Insurance Trust
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE; PAST PERFORMANCE DOES
NOT GUARANTEE FUTURE RESULTS. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN
INVESTMENT WILL FLUCTUATE AND AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE HIGHER OR
LOWER THAN THE PERFORMANCE DATA QUOTED. TO OBTAIN PERFORMANCE DATA CURRENT TO
THE MOST RECENT MONTH-END, PLEASE CALL, TOLL-FREE, 1-800-851-0511.
AN INVESTMENT IN ANY OF THE POTOMAC FUNDS IS SUBJECT TO A NUMBER OF RISKS THAT
COULD AFFECT THE VALUE OF ITS SHARES. IT IS IMPORTANT THAT INVESTORS CLOSELY
REVIEW AND UNDERSTAND THESE RISKS BEFORE MAKING AN INVESTMENT. INVESTORS
CONSIDERING AN INVESTMENT MAY OBTAIN A PROSPECTUS BY CALLING 800-851-0511.
INVESTORS SHOULD READ THE PROSPECTUS CAREFULLY FOR MORE COMPLETE INFORMATION,
INCLUDING CHARGES, EXPENSES, AND ADDITIONAL RISKS, BEFORE INVESTING OR SENDING
MONEY.
EVOLUTION VP MANAGED BOND FUND
<Table>
<Caption>
EVOLUTION VP MANAGED BOND FUND LEHMAN U.S. AGGREGATE BOND INDEX
------------------------------ --------------------------------
7/04 10000.00 10000.00
9/04 10175.00 10319.00
12/04 10380.00 10418.00
3/05 9955.00 10368.00
6/05 10175.00 10680.00
9/05 10100.00 10608.00
12/05 9945.00 10643.00
</Table>
<Table>
<Caption>
AVERAGE ANNUAL
TOTAL RETURN(1)
-------------------------
SINCE
1 YEAR INCEPTION
------ ---------------
EVOLUTION VP MANAGED
BOND FUND (4.19%) (0.37%)
LEHMAN U.S. AGGREGATE
BOND INDEX 2.43% 4.23%
</Table>
This chart illustrates the performance of a hypothetical $10,000 investment made
on the Fund's inception, and is not intended to imply any future performance.
The returns shown do not reflect the deduction of taxes that a shareholder would
pay on fund distributions or the redemption of fund shares. The performance of
the Lehman U.S. Aggregate Bond Index does not reflect the deduction of fees
associated with a mutual fund, such as investment management fees. Investors
cannot invest directly in an index, although they can invest in its underlying
securities. During the period shown, Rafferty Asset Management, LLC, waived
and/or reimbursed fees for various expenses. Had these waivers and/or
reimbursements not been in effect, performance would have been lower.
(1) As of December 31, 2005.
(2) Commencement of operations.
2
EVOLUTION VP MANAGED EQUITY FUND
(Chart)
<Table>
<Caption>
EVOLUTION VP MANAGED EQUITY FUND S&P 500 INDEX
-------------------------------- -------------
7/04 10000.00 10000.00
9/04 10015.00 9769.00
12/04 10530.00 10623.00
3/05 10170.00 10348.00
6/05 10365.00 10442.00
9/05 11490.00 10771.00
12/05 11560.00 10750.00
</Table>
<Table>
<Caption>
AVERAGE ANNUAL
TOTAL RETURN(1)
-------------------------
SINCE
1 YEAR INCEPTION
------ ---------------
EVOLUTION VP MANAGED
EQUITY FUND 9.78% 10.12%
S&P 500 INDEX 3.00% 4.93%
</Table>
This chart illustrates the performance of a hypothetical $10,000 investment made
on the Fund's inception, and is not intended to imply any future performance.
The returns shown do not reflect the deduction of taxes that a shareholder would
pay on fund distributions or the redemption of fund shares. The performance of
the S&P 500 Index does not reflect the deduction of fees associated with a
mutual fund, such as investment management fees. Investors cannot invest
directly in an index, although they can invest in its underlying securities.
During the period shown, Rafferty Asset Management, LLC waived and/or reimbursed
fees for various expenses. Had these waivers and/or reimbursements not been in
effect, performance would have been lower.
The performance data shown represents past performance and does not guarantee
future results.
(1) As of December 31, 2005.
(2) Commencement of operations.
3
DYNAMIC VP HY BOND FUND
(Chart)
<Table>
<Caption>
DYNAMIC VP HY BOND FUND LEHMAN U.S. AGGREGATE BOND INDEX
----------------------- --------------------------------
2/05 10000.00 10000.00
3/05 9825.00 9891.29
6/05 10030.00 10188.90
9/05 9950.00 10120.20
12/05 10149.00 10180.00
</Table>
<Table>
<Caption>
TOTAL RETURN(1)
---------------
SINCE
INCEPTION
---------------
DYNAMIC VP HY BOND FUND 1.50%
LEHMAN U.S. AGGREGATE BOND INDEX 1.80%
</Table>
This chart illustrates the performance of a hypothetical $10,000 investment made
on the Fund's inception, and is not intended to imply any future performance.
The returns do not reflect the deduction of taxes that a shareholder would pay
on fund distributions or the redemption of fund shares. The performance of the
Lehman U.S. Aggregate Bond Index does not reflect the deduction of fees
associated with a mutual fund, such as investment management fees. Investors
cannot invest directly in an index, although they can invest in its underlying
securities. During the period shown, Rafferty Asset Management, LLC, waived
and/or reimbursed fees for various expenses. Had these waivers and/or
reimbursements not been in effect, performance would have been lower.
(1) As of December 31, 2005
(2) Commencement of operations.
The performance data shown represents past performance and does guarantee future
results.
4
EXPENSE EXAMPLE
DECEMBER 31, 2005
As a shareholder of the Evolution VP Managed Bond Fund, the Evolution VP Managed
Equity Fund, the Dynamic VP HY Bond Fund and the VP Money Market Fund (the
"Funds"), you incur two types of costs: (1) transaction costs, including sales
charges (loads) on purchase payments, reinvested dividends, or other
distributions; redemption fees; and exchange fees; and (2) ongoing costs,
including management fees; distribution and/or service fees; and other Fund
expenses. This example is intended to help you understand your ongoing costs (in
dollars) of investing in the Fund and to compare costs with the ongoing costs of
investing in other mutual funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period (July 1, 2005 - December 31, 2005).
ACTUAL EXPENSES
The first line of the table below provides information about actual account
values and actual expenses. Although the Fund charges no sales load or
transactions fees, you will be assessed fees for outgoing wire transfers,
returned checks or stop payment orders at prevailing rates charged by U.S.
Bancorp Fund Services, LLC, the Funds' transfer agent. If you request a
redemption be made by wire transfer, currently a $15.00 fee is charged by the
Funds' transfer agent. However, the example below does not include portfolio
trading commissions and related expenses, or other extraordinary expenses as
determined under U.S. generally accepted accounting principles. You may use the
information in this line, together with the amount you invested, to estimate the
expenses that you paid over the period. Simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number in the first line under the heading entitled
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table below provides information about hypothetical
account values and hypothetical expenses based on the Funds' actual expense
ratios and an assumed rate of return of 5% per year before expenses, which is
not the Funds' actual return. The hypothetical account values and expenses may
not be used to estimate the actual ending account balance or expenses you paid
for the period. You may use this information to compare the ongoing costs of
investing in the Funds and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as the
$15.00 wire transfer free discussed above. Therefore, the second line of the
table is useful in comparing ongoing costs only, and will not help you determine
the relative costs of owning different funds. In addition, if these
transactional costs were included, your costs would have been higher.
5
<Table>
<Caption>
EVOLUTION VP MANAGED BOND FUND
--------------------------------------------------------
EXPENSES PAID
BEGINNING ENDING DURING PERIOD
ACCOUNT VALUE ACCOUNT VALUE JULY 1, 2005 -
JULY 1, 2005 DECEMBER 31, 2005 DECEMBER 31, 2005*
------------- ----------------- ------------------
Actual $ 1,000.00 $ 977.40 $ 11.61
Hypothetical (5% return before expenses) 1,000.00 1,013.46 11.82
</Table>
* Expenses are equal to the Fund's annualized expense ratio of 2.33%, multiplied
by the average account value over the period, multiplied by 184/365 to reflect
the one-half year period.
<Table>
<Caption>
EVOLUTION VP MANAGED EQUITY FUND
--------------------------------------------------------
EXPENSES PAID
BEGINNING ENDING DURING PERIOD
ACCOUNT VALUE ACCOUNT VALUE JULY 1, 2005 -
JULY 1, 2005 DECEMBER 31, 2005 DECEMBER 31, 2005*
------------- ----------------- ------------------
Actual $ 1,000.00 $ 1,115.80 $ 10.67
Hypothetical (5% return before expenses) 1,000.00 1,015.12 10.16
</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>
DYNAMIC VP HY BOND FUND
--------------------------------------------------------
EXPENSES PAID
BEGINNING ENDING DURING PERIOD
ACCOUNT VALUE ACCOUNT VALUE JULY 1, 2005 -
JULY 1, 2005 DECEMBER 31, 2005 DECEMBER 31, 2005*
------------- ----------------- ------------------
Actual $ 1,000.00 $ 1,013.50 $ 8.88
Hypothetical (5% return before expenses) 1,000.00 1,016.38 8.89
</Table>
* Expenses are equal to the Fund's annualized expense ratio of 1.75%, multiplied
by the average account value over the period, multiplied by 184/365 to reflect
the one-half year period.
<Table>
<Caption>
VP MONEY MARKET FUND
--------------------------------------------------------
EXPENSES PAID
BEGINNING ENDING DURING PERIOD
ACCOUNT VALUE ACCOUNT VALUE JULY 1, 2005 -
JULY 1, 2005 DECEMBER 31, 2005 DECEMBER 31, 2005*
------------- ----------------- ------------------
Actual $ 1,000.00 $ 1,010.70 $ 8.67
Hypothetical (5% return before expenses) 1,000.00 1,016.59 8.69
</Table>
* Expenses are equal to the Fund's annualized expense ratio of 1.71%, multiplied
by the average account value over the period, multiplied by 184/365 to reflect
the one-half year period.
6
EVOLUTION VP MANAGED BOND FUND
ALLOCATION OF FUND HOLDINGS (UNAUDITED)
DECEMBER 31, 2005
[PIE CHART]
<Table>
<Caption>
CORPORATED BONDS** TREASURY SECURITIES** MONEY MARKET FUND** CASH*
- ------------------ --------------------- ------------------- -----
39 51 7 3
</Table>
EVOLUTION VP MANAGED EQUITY FUND
ALLOCATION OF FUND HOLDINGS (UNAUDITED)
DECEMBER 31, 2005
[PIE CHART]
<Table>
<Caption>
MONEY
MARKET FOREIGN CONSUMER CONSUMER HEALTH
CASH* FUND** SECURITIES** DISCRETIONARY STAPLES ENERGY FINANCIALS CARE INDUSTRIALS
- ----- ------ ------------ ------------- -------- ------ ---------- ------ -----------
1 2 56 6 1 8 3 4 7
<Caption>
INFORMATION
CASH* TECHNOLOGY MATERIALS
- ----- ----------- ---------
1 10 2
</Table>
THE PERCENTAGES IN THESE GRAPHS ARE CALCULATED BASED ON NET ASSETS.
* CASH AND OTHER ASSETS LESS LIABILITIES.
** THESE SECURITIES ARE INVESTMENT COMPANIES THAT PRIMARILY INVEST IN THESE
TYPES OF SECURITIES.
7
DYNAMIC VP HY BOND FUND
ALLOCATION OF FUND HOLDINGS (UNAUDITED)
DECEMBER 31, 2005
[PIE CHART]
<Table>
<Caption>
CORPORATE BONDS MONEY MARKET FUND
- --------------- -----------------
85 15
</Table>
VP MONEY MARKET FUND
ALLOCATION OF FUND HOLDINGS (UNAUDITED)
DECEMBER 31, 2005
[PIE CHART]
<Table>
Cash* 2
Money Market Funds 52
U.S. Government Agency Obligations 46
</Table>
THE PERCENTAGES IN THESE GRAPHS ARE CALCULATED BASED ON NET ASSETS.
* CASH AND OTHER ASSETS LESS LIABILITIES.
8
EVOLUTION VP MANAGED BOND FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2005
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
INVESTMENT COMPANIES - 89.3%
1,782 40/86 Strategic Income Fund $ 16,537
4,700 ACM Managed Income Fund 16,497
1,324 Alliance World Dollar
Government Fund II 16,457
915 Bancroft Convertible Fund 16,516
720 Castle Convertible Fund 16,560
2,127 Ellsworth Convertible Growth
and Income Fund 16,591
1,038 Evergreen Managed Income Fund 16,400
2,698 Franklin Universal Trust 16,620
10,422 iShares GS $ InvesTop
Corporate Bond Fund 1,122,345
12,296 iShares Lehman 7-10 Year
Treasury Bond Fund 1,031,758
8,667 iShares Lehman 20+ Year
Treasury Bond Fund 795,457
1,863 iShares Lehman Aggregate Bond
Fund 187,399
2,735 iShares Lehman US Treasury
Inflation Protected
Securities Fund 281,213
2,757 Managed High Income Portfolio 16,570
1,924 MFS Charter Income Trust 16,546
2,543 MFS Government Markets Income
Trust 16,529
2,637 MFS Intermediate Income Trust 16,429
2,739 MFS Multimarket Income Trust 16,407
</Table>
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
1,162 Neuberger Berman Income
Opportunity Fund $ 16,419
2,716 Putnam Master Intermediate
Income Trust 16,486
2,698 Putnam Premier Income Trust 16,377
1,292 Salomon Brothers Emerging
Markets Floating Rate Fund 16,589
1,279 Salomon Brothers Global High
Income Fund 16,307
975 Salomon Brothers Variable
Rate Strategic Fund 16,331
2,073 Scudder Global High Income
Fund 16,563
----------
TOTAL INVESTMENT COMPANIES
(Cost $3,727,643) $3,747,903
----------
SHORT-TERM INVESTMENT - 7.3%
MONEY MARKET FUND - 7.3%
$305,893 Federated Prime Obligations
Fund - Class I (Cost
$305,893) $ 305,893
----------
TOTAL INVESTMENTS - 96.6%
(Cost $4,033,536) $4,053,796
Other Assets in Excess of
Liabilities - 3.4% 142,769
----------
TOTAL NET ASSETS - 100.0% $4,196,565
==========
</Table>
Percentages are calculated as a percent of net assets.
See notes to the financial statements.
9
EVOLUTION VP MANAGED EQUITY FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2005
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
COMMON STOCKS - 97.4%
Aerospace & Defense - 0.9%
78 Alliant Techsystems, Inc.* $ 5,941
98 Engineered Support Systems,
Inc. 4,081
128 L-3 Communications Holdings,
Inc. 9,517
816 Mercury Computer Systems,
Inc.* 16,834
87 Precision Castparts Corp. 4,507
790 Triumph Group, Inc.* 28,922
----------
69,802
----------
Air Freight & Logistics - 0.2%
105 CNF, Inc. 5,869
120 EGL, Inc.* 4,508
58 Expeditors International of
Washington, Inc. 3,916
49 United Parcel Service,
Inc. - Class B 3,682
----------
17,975
----------
Airlines - 0.6%
2,036 Mesa Air Group, Inc.* 21,297
941 Skywest, Inc. 25,275
----------
46,572
----------
Auto Components - 0.9%
922 Cooper Tire & Rubber Co. 14,125
418 Johnson Controls, Inc. 30,476
1,060 Superior Industries
International, Inc. 23,596
----------
68,197
----------
Beverages - 0.1%
54 Brown-Forman Corp. - Class B 3,743
47 Hansen Natural Corp.* 3,704
----------
7,447
----------
Biotechnology - 0.3%
1,823 Enzo Biochem, Inc.* 22,642
----------
Building Products - 0.6%
146 American Standard Companies,
Inc. 5,833
717 Lennox International, Inc. 20,219
361 Universal Forest Products,
Inc. 19,945
----------
45,997
----------
Capital Markets - 1.1%
79 The Bear Stearns Companies,
Inc. 9,127
39 Franklin Resources, Inc. 3,667
230 The Goldman Sachs Group, Inc. 29,373
125 Investment Technology Group,
Inc.* 4,430
</Table>
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
Capital Markets - 1.1% (Continued)
184 Lehman Brothers Holdings, Inc. $ 23,583
86 Merrill Lynch & Co, Inc. 5,825
164 Morgan Stanley 9,305
----------
85,310
----------
Chemicals - 0.1%
120 International Flavors &
Fragrances, Inc. 4,020
96 The Scotts Miracle-Gro Co. -
Class A 4,343
----------
8,363
----------
Commercial Banks - 0.6%
1,087 Irwin Financial Corp. 23,284
630 PrivateBancorp, Inc. 22,409
----------
45,693
----------
Commercial Services & Supplies - 1.8%
105 Administaff, Inc. 4,415
2,621 Allied Waste Industries, Inc.* 22,908
162 CDI Corp. 4,439
2,152 Central Parking Corp. 29,525
93 ChoicePoint, Inc.* 4,139
43 The Corporate Executive Board
Co. 3,857
286 Education Management Corp.* 9,584
62 ITT Educational Services,
Inc.* 3,665
301 Manpower, Inc. 13,996
509 Mobile Mini, Inc.* 24,127
435 On Assignment, Inc.* 4,746
375 Republic Services, Inc. 14,081
198 Rollins, Inc. 3,903
62 Stericycle, Inc.* 3,651
----------
147,036
----------
Communications Equipment - 1.3%
607 Black Box Corp. 28,760
548 Comtech Telecommunications
Corp.* 16,736
2,043 Ditech Communications Corp.* 17,059
85 Harris Corp. 3,656
601 Plantronics, Inc. 17,008
387 QUALCOMM, Inc. 16,672
----------
99,891
----------
Computers & Peripherals - 1.0%
61 Apple Computer, Inc.* 4,385
1,032 Hewlett-Packard Co. 29,546
</Table>
See notes to the financial statements.
10
EVOLUTION VP MANAGED EQUITY FUND
SCHEDULE OF INVESTMENTS (continued)
DECEMBER 31, 2005
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
COMMON STOCKS - 97.4% (CONTINUED)
Computers & Peripherals - 1.0% (Continued)
112 International Business
Machines Corp. $ 9,207
311 Lexmark International, Inc. -
Class A* 13,942
71 SanDisk Corp.* 4,460
671 Synaptics, Inc.* 16,587
----------
78,127
----------
Construction & Engineering - 0.6%
1,639 The Shaw Group, Inc.* 47,678
----------
Consumer Services - 0.3%
613 Pre-Paid Legal Services, Inc. 23,423
----------
Containers & Packaging - 0.6%
2,004 Myers Industries, Inc. 29,218
320 Temple-Inland, Inc. 14,352
----------
43,570
----------
Distributors - 0.2%
252 Building Material Holding
Corp. 17,189
----------
Electronic Equipment & Instruments - 1.4%
135 CDW Corp. 7,772
759 Flir Systems, Inc.* 16,948
769 Jabil Circuit, Inc.* 28,522
2,140 Newport Corp.* 28,976
1,311 Plexus Corp.* 29,812
----------
112,030
----------
Energy Equipment & Services - 1.0%
102 Cal Dive International, Inc.* 3,661
72 Lone Star Technologies, Inc.* 3,720
124 Nabors Industries Ltd.*(1) 9,393
348 Transocean, Inc.*(1) 24,252
612 Unit Corp.* 33,678
100 Weatherford International
Ltd.*(1) 3,620
----------
78,324
----------
Financial Services - 0.2%
295 Principal Financial Group,
Inc. 13,992
----------
Food & Staples Retailing - 0.4%
1,020 Performance Food Group Co.* 28,937
122 Sysco Corp. 3,788
----------
32,725
----------
</Table>
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
Food Products - 0.4%
379 Archer-Daniels-Midland Co. $ 9,346
462 ConAgra Foods, Inc. 9,369
512 Flowers Foods, Inc. 14,111
----------
32,826
----------
Health Care Equipment & Supplies - 1.8%
2,766 Biolase Technology, Inc. 22,100
105 Biomet, Inc. 3,840
517 Biosite, Inc.* 29,102
1,048 Immucor, Inc.* 24,481
205 Intuitive Surgical, Inc.* 24,040
637 SurModics, Inc.* 23,563
373 Waters Corp.* 14,100
----------
141,226
----------
Health Care Providers & Services - 1.6%
83 American Healthways, Inc.* 3,756
71 Caremark Rx, Inc.* 3,677
302 Cerner Corp.* 27,455
82 Covance, Inc.* 3,981
2,086 Dendrite International, Inc.* 30,059
292 Express Scripts, Inc.* 24,470
375 Humana, Inc.* 20,374
94 Lincare Holdings, Inc.* 3,939
75 Quest Diagnostics, Inc. 3,861
96 Renal Care Group, Inc.* 4,542
----------
126,114
----------
Hotels Restaurants & Leisure - 1.1%
754 Bally Total Fitness Holding
Corp.* 4,735
247 Darden Restaurants, Inc. 9,603
207 International Speedway Corp. -
Class A 9,915
404 Jack in the Box, Inc.* 14,112
4,073 Krispy Kreme Doughnuts, Inc.* 23,379
2,675 Multimedia Games, Inc.* 24,744
75 Papa John's International,
Inc.* 4,448
----------
90,936
----------
Household Durables - 0.9%
638 American Greetings
Corp. - Class A 14,017
103 D.R. Horton, Inc. 3,680
51 KB Home 3,706
219 Lennar Corp. 13,363
26 NVR, Inc.* 18,252
94 Pulte Homes, Inc. 3,700
51 Ryland Group, Inc. 3,679
</Table>
See notes to the financial statements.
11
EVOLUTION VP MANAGED EQUITY FUND
SCHEDULE OF INVESTMENTS (continued)
DECEMBER 31, 2005
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
COMMON STOCKS - 97.4% (CONTINUED)
Household Durables - 0.9% (Continued)
100 Standard-Pacific Corp. $ 3,680
107 Toll Brothers, Inc.* 3,706
----------
67,783
----------
Household Products - 0.2%
249 The Clorox Co. 14,166
----------
Industrial Conglomerates - 0.0%
48 3M Co. 3,720
----------
Insurance - 0.6%
79 AFLAC, Inc. 3,667
54 American International Group,
Inc. 3,684
132 Cincinnati Financial Corp. 5,898
102 Mercury General Corp. 5,938
977 SCPIE Holdings, Inc.* 20,322
107 Torchmark Corp. 5,949
80 Zenith National Insurance
Corp. 3,690
----------
49,148
----------
Internet Software & Services - 0.6%
384 j2 Global Communications,
Inc.* 16,412
784 WebEx Communications, Inc.* 16,958
254 Websense, Inc.* 16,673
----------
50,043
----------
Investment Companies - 55.6%
21,314 iShares MSCI EAFE Index Fund 1,267,331
19,920 iShares MSCI Emerging Markets
Index Fund 1,757,940
1,708 iShares MSCI Pacific ex-Japan
Index Fund 168,477
10,132 iShares S&P Latin American 40
Index Fund 1,244,716
----------
4,438,464
----------
IT Services - 0.6%
606 Acxiom Corp. 13,938
1,818 Convergys Corp.* 28,815
201 CSG Systems International,
Inc.* 4,486
195 Intrado, Inc.* 4,489
----------
51,728
----------
Leisure Equipment & Products - 0.3%
1,106 Jakks Pacific, Inc.* 23,160
----------
</Table>
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
Machinery - 1.5%
84 Ceradyne, Inc.* $ 3,679
132 CLARCOR, Inc. 3,922
88 Harsco Corp. 5,941
100 Illinois Tool Works, Inc. 8,799
430 JLG Industries, Inc. 19,634
113 Kennametal, Inc. 5,767
91 Oshkosh Truck Corp. 4,058
315 Reliance Steel & Aluminum Co. 19,253
637 SPX Corp. 29,155
526 Trinity Industries, Inc. 23,181
----------
123,389
----------
Media - 0.8%
940 Clear Channel Communications,
Inc. 29,563
76 The McGraw-Hill Companies,
Inc. 3,924
1,678 Time Warner, Inc. 29,264
----------
62,751
----------
Metals & Mining - 1.0%
169 Allegheny Technologies, Inc. 6,097
349 Cleveland-Cliffs, Inc. 30,911
109 Freeport-McMoRan Copper &
Gold, Inc. - Class B 5,864
87 Nucor Corp. 5,805
55 Peabody Energy Corp. 4,533
41 Phelps Dodge Corp. 5,899
118 Quanex Corp. 5,896
402 Steel Dynamics, Inc. 14,275
----------
79,280
----------
Office Electronics - 0.2%
396 Zebra Technologies
Corp. - Class A* 16,969
----------
Oil, Gas & Consumable Fuels - 7.2%
193 Apache Corp. 13,224
332 Burlington Resources, Inc. 28,618
530 Cabot Oil & Gas Corp. 23,903
105 Chevron Corp. 5,961
141 Cimarex Energy Co.* 6,065
229 ConocoPhillips 13,323
1,056 Denbury Resources, Inc.* 24,056
382 Devon Energy Corp. 23,890
390 EOG Resources, Inc. 28,614
171 Exxon Mobil Corp. 9,605
508 Forest Oil Corp.* 23,150
519 Frontier Oil Corp. 19,478
</Table>
See notes to the financial statements.
12
EVOLUTION VP MANAGED EQUITY FUND
SCHEDULE OF INVESTMENTS (continued)
DECEMBER 31, 2005
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
COMMON STOCKS - 97.4% (CONTINUED)
Oil, Gas & Consumable Fuels - 7.2% (Continued)
331 Kerr-McGee Corp. $ 30,075
147 Marathon Oil Corp. 8,963
68 Murphy Oil Corp. 3,671
576 Newfield Exploration Co.* 28,840
594 Noble Energy, Inc. 23,938
280 Norsk Hydro ASA - ADR 28,890
155 Occidental Petroleum Corp. 12,381
191 Pogo Producing Co. 9,514
650 Remington Oil & Gas Corp.* 23,725
656 Southwestern Energy Co.* 23,577
781 St. Mary Land & Exploration
Co. 28,749
248 Sunoco, Inc. 19,438
628 Swift Energy Co.* 28,304
664 Valero Energy Corp. 34,262
454 Vintage Petroleum, Inc. 24,212
652 XTO Energy, Inc. 28,649
----------
577,075
----------
Paper & Forest Products - 0.1%
214 Louisiana-Pacific Corp. 5,878
88 Weyerhaeuser Co. 5,838
----------
11,716
----------
Pharmaceuticals - 0.8%
2,423 Bradley Pharmaceuticals, Inc.* 23,018
95 Forest Laboratories, Inc.* 3,865
68 Johnson & Johnson 4,087
264 King Pharmaceuticals, Inc.* 4,467
904 Watson Pharmaceuticals, Inc.* 29,389
----------
64,826
----------
Road & Rail - 0.3%
84 Burlington Northern Santa Fe
Corp. 5,949
201 Heartland Express, Inc. 4,078
344 Norfolk Southern Corp. 15,422
----------
25,449
----------
Semiconductor & Semiconductor Equipment - 2.1%
902 Altera Corp.* 16,714
468 Analog Devices, Inc. 16,787
339 KLA-Tencor Corp. 16,723
464 Lam Research Corp.* 16,556
468 Linear Technology Corp. 16,881
461 Maxim Integrated Products,
Inc. 16,707
1,855 MEMC Electronic Materials,
Inc.* 41,125
</Table>
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
Semiconductor & Semiconductor Equipment - 2.1%
(Continued)
114 Microchip Technology, Inc. $ 3,665
450 Silicon Laboratories, Inc.* 16,497
109 Supertex, Inc.* 4,823
----------
166,478
----------
Software - 2.6%
464 Adobe Systems, Inc. 17,149
960 ANSYS, Inc.* 40,982
949 Autodesk, Inc. 40,759
98 FactSet Research Systems, Inc. 4,034
321 Fair Isaac Corp. 14,179
1,799 JDA Software Group, Inc.* 30,601
2,188 MapInfo Corp.* 27,591
143 SPSS, Inc.* 4,423
1,274 THQ, Inc.* 30,385
----------
210,103
----------
Specialty Retail - 1.5%
333 Barnes & Noble, Inc. 14,209
111 Bed Bath & Beyond, Inc.* 4,013
84 Best Buy Co, Inc. 3,652
92 Chico's FAS, Inc.* 4,042
464 Claire's Stores, Inc. 13,558
799 The Gap Inc. 14,094
1,260 Linens 'n Things, Inc.* 33,516
108 Michaels Stores, Inc. 3,820
652 Office Depot, Inc.* 20,473
173 Staples, Inc. 3,929
96 Tiffany & Co. 3,676
95 Williams-Sonoma, Inc.* 4,099
----------
123,081
----------
Textiles, Apparel & Luxury Goods - 0.4%
2,785 Ashworth, Inc.* 23,533
68 Oxford Industries, Inc. 3,720
125 Timberland Co.* 4,069
----------
31,322
----------
Thrifts & Mortgage Finance - 0.3%
344 Radian Group, Inc. 20,155
----------
Tobacco - 0.1%
78 Altria Group, Inc. 5,828
62 Reynolds American, Inc. 5,911
----------
11,739
----------
</Table>
See notes to the financial statements.
13
EVOLUTION VP MANAGED EQUITY FUND
SCHEDULE OF INVESTMENTS (continued)
DECEMBER 31, 2005
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
COMMON STOCKS - 97.4% (CONTINUED)
Trading Companies & Distributors - 0.1%
82 W.W. Grainger, Inc. $ 5,830
----------
Utilities - 0.5%
520 Constellation Energy Group,
Inc. 29,952
308 WGL Holdings, Inc. 9,258
----------
39,210
----------
TOTAL COMMON STOCKS
(Cost $7,339,847) $7,770,670
----------
</Table>
<Table>
<Caption>
- ----------------------------------------------------------
SHARES VALUE
- ----------------------------------------------------------
SHORT-TERM INVESTMENT - 1.7%
MONEY MARKET FUND - 1.7%
133,779 Federated Prime Obligations
Fund (Cost $133,779) $ 133,779
----------
TOTAL INVESTMENTS - 99.1%
(Cost $7,473,626) $7,904,449
Other Assets in Excess of
Liabilities - 0.9% 76,019
----------
TOTAL NET ASSETS - 100.0% $7,980,468
==========
</Table>
Percentages are calculated as a percent of net assets.
ADR American Depository Receipt
* Non-income producing security.
(1) Foreign security trading on U.S. exchange.
See notes to the financial statements.
14
DYNAMIC VP HY BOND FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2005
<Table>
<Caption>
- -----------------------------------------------------------------
FACE
AMOUNT VALUE
- -----------------------------------------------------------------
CORPORATE BONDS - 88.3%
Grantor Trust - 87.7%
$ 7,929,900 Dow Jones CDX High Yield Note,
2005-T1, 8.75%, 12/29/2010
(Cost $7,895,735;
Acquired - Various dates
between 10/06/2005 and
12/06/2005) (1) $ 7,969,549
22,214,634 TRAINS High Yield Note, 3.96%,
06/15/2015 (Cost $22,684,010;
Acquired - Various dates
between 09/28/2005 and
12/28/2005) (1)(2) 22,863,035
-----------
30,832,584
-----------
Paper and Allied Products - 0.6%
223,000 Jefferson Smurfit Corp. Notes,
8.25%, 10/01/2012 215,195
-----------
TOTAL CORPORATE BONDS (Cost
$30,804,409) $31,047,779
-----------
</Table>
<Table>
<Caption>
- -----------------------------------------------------------------
SHARES VALUE
- -----------------------------------------------------------------
SHORT-TERM INVESTMENT - 14.6%
MONEY MARKET FUND - 14.6%
5,137,584 Federated Prime Obligations
Fund - Class I
(Cost $5,137,584) $ 5,137,584
-----------
TOTAL INVESTMENTS - 102.9% (Cost
$35,941,993) $36,185,363
Liabilities in Excess of Other
Assets - (2.9)% (1,040,988)
-----------
TOTAL NET ASSETS - 100.0% $35,144,375
===========
</Table>
Percentages are calculated as a percent of net assets.
(1) 144A securities are those that are exempt from registration under Rule 144A
of the Securities Act of 1933, as amended. These securities are generally
issued to qualified institutional buyers ("QIBs"), such as the Fund. Any
resale of these securities must generally be effected through a sale that is
exempt from registration (e.g. a sale to another QIB), or the security must
be registered for public sale. At December 31, 2005, the market value of
144A securities was $30,832,584 or 87.7% of net assets.
(2) Variable rate security.
See notes to the financial statements.
15
VP MONEY MARKET FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2005
<Table>
<Caption>
- -------------------------------------------------------------
FACE
AMOUNT VALUE
- -------------------------------------------------------------
SHORT TERM INVESTMENTS - 102.4%
U.S. GOVERNMENT AGENCY OBLIGATIONS - 47.8%
$600,000 Federal Home Loan Bank Discount
Note 3.22%, 01/03/2006 $ 599,899
600,000 Federal National Mortgage
Association Discount Note,
4.45%, 01/03/2006 599,898
600,000 U.S. Treasury Bill, 3.75%,
01/05/2006 599,880
----------
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS (Cost $1,799,677) $1,799,677
----------
</Table>
<Table>
<Caption>
- -------------------------------------------------------------
SHARES VALUE
- -------------------------------------------------------------
- -------------------------------------------------------------
MONEY MARKET FUNDS - 54.6%
617,093 AIM Liquid Assets Portfolio -
Institutional Class $ 617,093
617,094 Fidelity Government Portfolio -
Institutional Class 617,094
819,401 First American Prime Obligations
Fund - Class Y 819,401
----------
TOTAL MONEY MARKET FUNDS
(Cost $2,053,588) $2,053,588
----------
TOTAL SHORT-TERM
INVESTMENTS - 102.4%
(Cost $3,853,265) $3,853,265
Liabilities in Excess of Other
Assets - (2.4)% (90,287)
----------
TOTAL NET ASSETS - 100.0% $3,762,978
==========
</Table>
Percentages are calculated as a percent of net assets.
See notes to the financial statements.
16
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 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)................................. $4,053,796 $7,904,449 $36,185,363 $3,853,265
Cash................................. -- 48,987 1,676 --
Receivable for investments sold...... 178,859 1,238,900 4,984,203 --
Receivable for fund shares sold...... -- -- -- 15,210
Receivable from Investment Adviser... 25,665 23,446 3,916 34,208
Deposit at broker.................... 402,265 -- -- --
Dividends and interest receivable.... 13,737 2,942 339,049 3,883
Other assets......................... 83 134 542 454
---------- ---------- ----------- ----------
Total Assets..................... 4,674,405 9,218,858 41,514,749 3,907,020
---------- ---------- ----------- ----------
LIABILITIES:
Payable for investments purchased.... 430,834 1,179,003 6,310,264 --
Payable for fund shares redeemed..... 12,794 19,512 4,729 97,031
Accrued expenses and other
liabilities........................ 34,212 39,875 55,381 47,011
---------- ---------- ----------- ----------
Total Liabilities................ 477,840 1,238,390 6,370,374 144,042
---------- ---------- ----------- ----------
NET ASSETS........................... $4,196,565 $7,980,468 $35,144,375 $3,762,978
========== ========== =========== ==========
NET ASSETS CONSIST OF:
Capital stock........................ $4,323,111 $7,394,889 $35,412,739 $3,762,978
Accumulated undistributed net
investment income (loss)........... 30,703 4,313 303,460 1,925
Accumulated undistributed net
realized gain (loss) on
investments........................ (177,509) 150,443 (815,194) (1,925)
Net unrealized appreciation
(depreciation) on investments...... 20,260 430,823 243,370 --
---------- ---------- ----------- ----------
Total Net Assets................. $4,196,565 $7,980,468 $35,144,375 $3,762,978
========== ========== =========== ==========
CALCULATION OF NET ASSET VALUE PER
SHARE - CLASS A:
Net assets........................... $4,196,565 $7,980,468 $35,144,375 $3,762,978
Shares of beneficial interest
outstanding (unlimited shares of
beneficial interest authorized, no
par value)......................... 213,956 345,166 1,752,575 3,762,978
Net Asset Value, Redemption Price and
Offering Price Per Share........... $ 19.61 $ 23.12 $ 20.05 $ 1.00
========== ========== =========== ==========
Cost of Investments.................. $4,033,536 $7,473,626 $35,941,993 $3,853,265
========== ========== =========== ==========
</Table>
See notes to the financial statements.
17
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2005
<Table>
<Caption>
POTOMAC INSURANCE TRUST EVOLUTION VP MANAGED EVOLUTION VP MANAGED
BOND FUND EQUITY FUND
-------------------- --------------------
INVESTMENT INCOME:
Dividend income............................................. $ 110,141 $ 64,058
Interest income............................................. 16,102 12,561
--------- --------
Total investment income................................. 126,243 76,619
--------- --------
EXPENSES:
Investment advisory fees.................................... 22,537 36,145
Distribution expenses....................................... 5,634 9,036
Administration fees......................................... 17,500 17,500
Shareholder servicing fees.................................. 10,132 12,854
Fund accounting fees........................................ 20,898 30,501
Custody fees................................................ 1,015 2,420
Professional fees........................................... 24,390 26,126
Reports to shareholders..................................... 1,094 1,754
Directors' fees and expenses................................ 616 616
Other....................................................... 1,885 2,004
--------- --------
Total expenses before waiver/reimbursement and dividends
on short positions.................................... 105,701 138,956
Dividends on short positions............................ 5,318 --
--------- --------
Total expenses before waiver/reimbursement.............. 111,019 138,956
Less: Waiver/reimbursement of expenses by Adviser....... (60,627) (66,665)
--------- --------
Net expenses............................................ 50,392 72,291
--------- --------
NET INVESTMENT INCOME (LOSS)................................ 75,851 4,328
--------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on:
Investments............................................... (174,918) 150,428
Short positions........................................... (3,025) --
Capital gain distributions from regulated investment
companies................................................. 434 --
--------- --------
(177,509) 150,428
--------- --------
Change in net unrealized appreciation (depreciation) on:
Investments............................................... 13,903 375,021
--------- --------
Net realized and unrealized gain (loss) on
investments........................................... (163,606) 525,449
--------- --------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS................................................ $ (87,755) $529,777
========= ========
</Table>
See notes to the financial statements.
18
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 2005
<Table>
<Caption>
POTOMAC INSURANCE TRUST DYNAMIC VP HY VP MONEY
BOND FUND MARKET FUND
-------------------- --------------------
February 1, 2005(1) February 1, 2005(1)
to December 31, 2005 to December 31, 2005
-------------------- --------------------
INVESTMENT INCOME:
Interest income............................................. $ 985,595 $430,650
--------- --------
Total investment income................................. 985,595 430,650
--------- --------
EXPENSES:
Investment advisory fees.................................... 110,039 61,574
Distribution expenses....................................... 88,031 73,889
Administration fees......................................... 16,042 14,583
Shareholder servicing fees.................................. 5,208 4,431
Fund accounting fees........................................ 18,621 16,667
Custody fees................................................ 5,091 4,109
Professional fees........................................... 30,719 30,006
Reports to shareholders..................................... 7,112 5,461
Directors' fees and expenses................................ 616 616
Other....................................................... 2,970 2,762
--------- --------
Total expenses before waiver/reimbursement.............. 284,449 214,098
Less: Waiver/reimbursement of expenses by Adviser....... (28,879) --
--------- --------
Net expenses............................................ 255,570 214,098
--------- --------
NET INVESTMENT INCOME (LOSS)................................ 730,025 216,552
--------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on:
Investments............................................... (815,194) (1,925)
--------- --------
(815,194) (1,925)
--------- --------
Net unrealized appreciation (depreciation) on:
Investments............................................... 243,370 --
--------- --------
Net realized and unrealized gain (loss) on
investments........................................... (571,824) --
--------- --------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS................................................ $ 158,201 $214,627
========= ========
</Table>
(1) Commencement of operations.
See notes to the financial statements.
19
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 2005
<Table>
<Caption>
POTOMAC INSURANCE TRUST EVOLUTION VP MANAGED EVOLUTION VP MANAGED
BOND FUND EQUITY FUND
---------------------------------------- ----------------------------------------
Year Ended July 1, 2004(1) to Year Ended July 1, 2004(1) to
December 31, 2005 December 31, 2004 December 31, 2005 December 31, 2004
----------------- -------------------- ----------------- --------------------
OPERATIONS:
Net investment income (loss)... $ 75,851 $ 8,014 $ 4,328 $ (4,934)
Net realized gain (loss) on
investments.................. (177,943) (52) 150,428 301
Capital gain distributions from
regulated investment
companies.................... 434 6,175 -- --
Change in net unrealized
appreciation (depreciation)
on investments............... 13,903 6,357 375,021 55,802
---------- --------- ---------- ----------
Net increase (decrease) in
net assets resulting from
operations............... (87,755) 20,494 529,777 51,169
---------- --------- ---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS -
CLASS A:
Net investment income.......... (52,933) -- -- --
Net realized gains............. (6,352) -- -- --
---------- --------- ---------- ----------
Total distributions........ (59,285) -- -- --
---------- --------- ---------- ----------
BENEFICIAL INTEREST
TRANSACTIONS - CLASS A:
Shares sold.................... 3,759,605 974,006 6,819,351 1,233,433
Proceeds from shares issued to
holders in reinvestment of
distributions................ 59,285 -- -- --
Shares redeemed................ (228,836) (290,949) (412,583) (290,679)
---------- --------- ---------- ----------
Net increase (decrease) in
net assets resulting from
beneficial interest
transactions............. 3,590,054 683,057 6,406,768 942,754
---------- --------- ---------- ----------
TOTAL INCREASE (DECREASE) IN
NET ASSETS................... 3,443,014 703,551 6,936,545 993,923
---------- --------- ---------- ----------
NET ASSETS:
Beginning of period............ 753,551 50,000(2) 1,043,923 50,000(2)
---------- --------- ---------- ----------
End of period.................. $4,196,565 $ 753,551 $7,980,468 $1,043,923
========== ========= ========== ==========
ACCUMULATED UNDISTRIBUTED NET
INVESTMENT INCOME (LOSS), END
OF PERIOD.................... $ 30,703 $ 8,014 $ 4,313 $ --
---------- --------- ---------- ----------
</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.
20
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED DECEMBER 31, 2005
<Table>
<Caption>
POTOMAC INSURANCE TRUST DYNAMIC VP HY VP MONEY
BOND FUND MARKET FUND
-------------------- --------------------
February 1, 2005(1) February 1, 2005(1)
to December 31, 2005 to December 31, 2005
-------------------- --------------------
OPERATIONS:
Net investment income (loss)................................ $ 730,025 $ 216,552
Net realized gain (loss) on investments..................... (815,194) (1,925)
Net unrealized appreciation (depreciation) on investments... 243,370 --
------------ ------------
Net increase (decrease) in net assets resulting from
operations............................................ 158,201 214,627
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS - CLASS A:
Net investment income....................................... (426,565) (214,627)
------------ ------------
Total distributions..................................... (426,565) (214,627)
------------ ------------
BENEFICIAL INTEREST TRANSACTIONS - CLASS A:
Shares sold................................................. 111,694,991 89,030,818
Proceeds from shares issued to holders in reinvestment of
distributions............................................. 426,565 215,114
Share redeemed.............................................. (76,708,817) (85,482,954)
------------ ------------
Net increase (decrease) in net assets resulting from
beneficial interest transactions...................... 35,412,739 3,762,978
------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS..................... 35,144,375 3,762,978
------------ ------------
NET ASSETS:
Beginning of period......................................... -- --
------------ ------------
End of period............................................... $ 35,144,375 $ 3,762,978
============ ============
ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME (LOSS), END
OF PERIOD................................................. $ 303,460 $ 1,925
------------ ------------
</Table>
(1) Commencement of operations.
See notes to the financial statements.
21
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
POTOMAC INSURANCE TRUST EVOLUTION VP MANAGED BOND FUND EVOLUTION VP MANAGED EQUITY FUND
---------------------------------------- ----------------------------------------
CLASS A CLASS A
---------------------------------------- ----------------------------------------
Year Ended July 1, 2004(1) Year Ended July 1, 2004(1)
December 31, 2005 to December 31, 2004 December 31, 2005 to December 31, 2004
----------------- -------------------- ----------------- --------------------
PER SHARE DATA:
NET ASSET VALUE, BEGINNING OF
PERIOD....................... $ 20.76 $ 20.00 $ 21.06 $ 20.00
---------- -------- ---------- ----------
INCOME (LOSS) FROM INVESTMENT
OPERATIONS:
Net investment income
(loss)(4).................... 0.67(8) 0.32 0.03 (0.15)
Net realized and unrealized
gain (loss) on
investments(6)............... (1.54) 0.44 2.03 1.21
---------- -------- ---------- ----------
Total from investment
operations............... (0.87) 0.76 2.06 1.06
---------- -------- ---------- ----------
LESS DISTRIBUTIONS:
Dividends from net investment
income....................... (0.25) -- -- --
Distributions from realized
gains........................ (0.03) -- -- --
---------- -------- ---------- ----------
Total distributions........ (0.28) -- -- --
---------- -------- ---------- ----------
NET ASSET VALUE, END OF
PERIOD....................... $ 19.61 $ 20.76 $ 23.12 $ 21.06
========== ======== ========== ==========
TOTAL RETURN(7)................ (4.19)% 3.80%(2) 9.78% 5.30%(2)
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period...... $4,196,565 $753,551 $7,980,468 $1,043,923
Ratio of net expenses to
average net assets excluding
short dividends:
Before expense
waiver/reimbursement....... 4.69% 23.17%(3) 3.84% 20.13%(3)
After expense
waiver/reimbursement....... 2.00% 2.00%(3) 2.00% 2.00%(3)
Ratio of net expenses to
average net assets including
short dividends:
Before expense
waiver/reimbursement....... 4.93%
After expense
waiver/reimbursement....... 2.24%
Ratio of net investment income
(loss) to average net assets
including short dividends:
Before expense
waiver/reimbursement....... 0.68% (17.98%)(3) (1.72)% (19.66%)(3)
After expense
waiver/reimbursement....... 3.37%(9) 3.19%(3) 0.12% (1.53%)(3)
Portfolio turnover rate(5)..... 978% 7% 1001% 2%
</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, if any, but do not reflect the
impact of taxes.
(8) Net investment income (loss) before dividends on short positions for the
year ended December 31, 2005 was $0.72.
(9) The net investment income (loss) ratio included dividends on short
positions. The ratio excluding dividends on short positions for the year
ended December 31, 2005 was 3.60%.
See notes to the financial statements.
22
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
POTOMAC INSURANCE TRUST DYNAMIC VP HY VP MONEY
BOND FUND MARKET FUND
-------------------- --------------------
CLASS A CLASS A
-------------------- --------------------
February 1, 2005(1) February 1, 2005(1)
to December 31, 2005 to December 31, 2005
-------------------- --------------------
PER SHARE DATA:
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 20.00 $ 1.00
----------- ----------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss)(4)............................. 0.90 0.02
Net realized and unrealized gain (loss) on investments(6)... (0.60) --
----------- ----------
Total from investment operations........................ 0.30 0.02
----------- ----------
LESS DISTRIBUTIONS:
Dividends from net investment income........................ (0.25) (0.02)
----------- ----------
Total distributions..................................... (0.25) (0.02)
----------- ----------
NET ASSET VALUE, END OF PERIOD.............................. $ 20.05 $ 1.00
=========== ==========
TOTAL RETURN(7)............................................. 1.50%(2) 1.39%(2)
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period................................... $35,144,375 $3,762,978
Ratio of net expenses to average net assets:
Before expense waiver/reimbursement....................... 1.94%(3) 1.74%(3)
After expense waiver/reimbursement........................ 1.74%(3) 1.74%(3)
Ratio of net investment income (loss) to average net assets:
Before expense waiver/reimbursement....................... 4.78%(3) 1.76%(3)
After expense waiver/reimbursement........................ 4.98%(3) 1.76%(3)
Portfolio turnover rate(5).................................. 654% 0%
</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, if any, but do not reflect the
impact of taxes.
See notes to the financial statements.
23
POTOMAC INSURANCE FUND
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2005
1. ORGANIZATION
Potomac Insurance Trust (the "Trust") was organized as a Massachusetts business
trust on December 28, 1999 and is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end management investment company
issuing its shares in series, each series representing a distinct portfolio with
its own investment objective and policies. The series presently in operation are
the Evolution VP Managed Bond Fund, the Evolution VP Managed Equity Fund, the
Dynamic VP HY Bond Fund and the VP Money Market Fund (each a "Fund" and
collectively, the "Funds"). Each Fund is a "non-diversified" series of the Trust
pursuant to the 1940 Act. The Trust offers Class A shares to unaffiliated life
insurance separate accounts (registered as unit investment trusts under the 1940
Act) to fund the benefits under variable annuity and variable life contracts.
The Evolution VP Managed Bond Fund and Evolution VP Managed Equity Fund
commenced operations on July 1, 2004. The Dynamic VP HY Bond Fund and VP Money
Market Fund commenced operations on February 1, 2005.
The objective of the Evolution VP Managed Bond Fund is to seek the highest
appreciation on an annual basis consistent with a high tolerance for risk by
investing at least 80% of its assets (plus any borrowing for investment
purposes) in fixed-income securities indirectly through securities that invest
in or are a derivative of fixed-income securities, including exchange traded
funds (ETFs) and other investment companies (fixed-income securities). The
objective of the Evolution VP Managed Equity Fund is to seek the highest
appreciation on an annual basis consistent with a high tolerance for risk by
investing at least 80% of its assets (plus any borrowing for investment
purposes) in equity securities either directly through individual stocks and
American Depository Receipts (ADRs) or indirectly through securities that invest
in or are a derivative of equity securities. The objective of the Dynamic VP HY
Bond Fund is to seek the maximum total return (income plus capital appreciation)
by investing primarily in debt instruments, including convertible securities,
and derivatives of such instruments, with an emphasis on lower-quality debt
instruments. The objective of the VP Money Market Fund is to provide security of
principal, current income and liquidity by investing in securities generally
having remaining maturities of 397 days or less, although instruments subject to
repurchase agreements may bear longer final maturities. The average
dollar-weighted maturity of the Fund will not exceed 90 days.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. These
policies are in conformity with U.S. generally accepted accounting principles.
A) INVESTMENT VALUATION - Equity securities, OTC securities, closed-end
investment companies, options, and futures and options on futures are valued at
their last sales price, or if not available, the mean of the last bid and asked
price. Price information on listed stocks is obtained from the exchange where
the security is primarily traded. If no sale is reported at that time, the mean
of the last bid and asked price is used. Securities traded principally on the
NASDAQ Stock Market are valued at the NASDAQ Official Closing Price ("NOCP")
provided by NASDAQ each business day. Securities for which quotations are not
readily available, the Funds' pricing service does not provide valuation for
such securities, the Funds' pricing service provides a valuation that in the
judgment of Rafferty Asset Managements, LLC (the "Adviser") does not represent
fair value, or the Funds or Adviser believes the market price is stale will be
valued at fair value under the supervision of the Board of Trustees. Instruments
with a remaining maturity of 60 days or less are valued at amortized cost, which
approximates market value. Other debt securities are valued by using the closing
bid and asked prices provided by the Funds' pricing service, or, if such prices
are unavailable, by a pricing matrix method.
24
B) REPURCHASE AGREEMENTS - Each Fund may enter into repurchase agreements with
institutions that are members of the Federal Reserve System or securities
dealers who are members of a national securities exchange or are primary dealers
in U.S. government securities. In connection with transactions in repurchase
agreements, it is the Trust's policy that the Fund receive, as collateral, cash
and/or securities (primarily U.S. government securities) whose market value,
including accrued interest, at all times will be at least equal to 100% of the
amount invested by the Fund in each repurchase agreement. If the seller
defaults, and the value of the collateral declines, realization of the
collateral by the Fund may be delayed or limited.
C) SHORT POSITIONS - Each Fund, other than the VP Money Market Fund, may
engage in short sale transactions. For financial statement purposes, an amount
equal to the settlement amount is included in the Statement of Assets and
Liabilities as an asset and an equivalent liability. The amount of the liability
is subsequently marked-to-market to reflect the current value of the short
position. Subsequent fluctuations in the market prices of short positions may
require purchasing the securities at prices which may differ from the market
value reflected on the Statement of Assets and Liabilities. The Fund is liable
to the buyer for any dividends payable on securities while those securities are
in a short position. As collateral for its short positions, the Fund is required
under the 1940 Act to maintain assets consisting of cash, cash equivalents or
liquid securities equal to the market value of the securities sold short. This
collateral is required to be adjusted daily.
D) CONCENTRATION OF RISK - Dynamic VP HY Bond Fund invests in the Dow Jones
CDX High Yield Note ("CDX") and TRAINS (Targeted Return Securities Trust(SM))
High Yield Notes ("TRAINS"), which represent trusts of pooled investments. The
TRAINS invest in a portfolio of high-yield debt securities, rated below
investment grade and therefore have greater credit and liquidity risk than
investment grade obligations. The high yield debt securities are generally
unsecured and may be subordinated to other obligations of the issuer thereof.
Upon a downgrade of an underlying securities' rating to a specified level, the
TRAINS may distribute the respective security on a pro-rata basis to the
respective holders. The TRAINS may also invest in one or more interest rate swap
or other swap transactions.
The CDX invests in a portfolio of credit default swap agreements and a
repurchase agreement. Credit default swap agreements involve commitments to
pay/receive a fixed interest rate in exchange for receipt/payment of the
referenced obligation if a credit event affecting the referenced obligation
occurs. The CDX is providing credit protection to the counterparties of the
respective credit default swap agreements in exchange for a fixed interest rate
payment, therefore there is credit risk with respect to the referenced entities
of these credit default swap agreements. If a credit event occurs with respect
to a referenced entity, the Fund's principal amount in the CDX will be reduced
by its pro-rata interest in the respective credit default swap agreement. A
credit event may include a failure to pay interest or principal, bankruptcy, or
restructuring. Any recoverable amounts of the liquidation of the referenced
obligation will be allocated pro rata to the holders of the CDX.
E) SECURITY TRANSACTIONS - Investment transactions are recorded on trade date.
The Funds determine the gain or loss realized from investment transactions by
comparing the identified cost, which is the same basis used for federal income
tax purposes, with the net sales proceeds.
F) FEDERAL INCOME TAXES - Each Fund intends to comply with the requirements of
Subchapter M of the Internal Revenue Code necessary to qualify as a regulated
investment company and to make the requisite distributions of income and capital
gains to its shareholders sufficient to relieve it from all or substantially all
federal income taxes.
Net investment income and realized gains and losses for federal income tax
purposes may differ from that reported on the financial statements because of
permanent book-to-tax differences. U.S. generally accepted accounting principles
require that permanent differences between financial reporting and tax reporting
be reclassified between various components of net assets. These differences are
primarily due to adjustments for the sale of Real Estate Investment Trusts and
distribution adjustments and have no effect on net assets or net asset value per
share.
25
On the Statement of Assets and Liabilities, the following adjustments were made:
<Table>
<Caption>
ACCUMULATED NET ACCUMULATED
INVESTMENT REALIZED GAIN CAPITAL
INCOME OR LOSS OR LOSS STOCK
--------------- ------------- -------
Evolution VP Managed Bond Fund $(229) $229 $ --
Evolution VP Managed Equity Fund (15) 15 --
Dynamic VP HY Bond Fund -- -- --
VP Money Market Fund -- -- --
</Table>
G) INCOME AND EXPENSES - Dividend income is recorded on the ex-dividend date.
Interest income, including amortization of premium and discount, is recognized
on an accrual basis. The Funds are charged for those expenses that are directly
attributable to each Fund, such as advisory fees and registration costs.
Expenses that are not directly attributable to a Fund are generally allocated
among the Funds comprising the Trust in proportion to their respective average
net assets.
H) DISTRIBUTIONS TO SHAREHOLDERS - Each Fund, other than the VP Money Market
Fund, generally pays dividends from substantially all of its net investment
income and distributes net realized capital gains, if any, at least annually.
The VP Money Market Fund ordinarily will declare dividends from net investment
income on a daily basis and distribute those dividends monthly. Income and
capital gain distributions are determined in accordance with income tax
regulations, which may differ from U.S. generally accepted accounting
principles. The Funds also may utilize earnings and profits distributed to
shareholders on redemption of shares as part of the dividends paid deduction.
Distributions to shareholders are recorded on the ex-dividend date.
During the periods ended December 31, 2005 and December 31, 2004, the tax
character of distributions of the Funds were as follows:
<Table>
<Caption>
EVOLUTION VP MANAGED BOND FUND
---------------------------------------------
YEAR ENDED PERIOD ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004(1)
----------------- --------------------
Distributions paid from:
Ordinary Income
Class A $53,162 $ --
Long-term capital gain
Class A 6,123 --
------- --------
Total distributions paid $59,285 $ --
======= ========
</Table>
26
<Table>
<Caption>
DYNAMIC VP HY BOND FUND VP MONEY MARKET FUND
----------------------- --------------------
PERIOD ENDED PERIOD ENDED
DECEMBER 31, 2005(2) DECEMBER 31, 2005(2)
----------------------- --------------------
Distributions paid from:
Ordinary Income
Class A $426,565 $214,627
Long-term capital gain
Class A -- --
-------- --------
Total distributions paid $426,565 $214,627
======== ========
</Table>
(1) Commenced operations on July 1, 2004.
(2) Commenced operations on February 1, 2005.
There were no distributions from the Evolution VP Managed Equity Fund for the
periods ended December 31, 2005 and December 31, 2004.
As of December 31, 2005, the Evolution VP Managed Bond Fund, the Dynamic VP HY
Bond Fund and the VP Money Market Fund had capital loss carryforwards of
$143,203, $756,247 and $1,925, respectively, which expire in 2013. These amounts
may be used to offset future capital gains.
The Evolution VP Managed Bond Fund had post October losses of $4,435.
As of December 31, 2005, the components of distributable earnings on a tax basis
were as follows:
<Table>
<Caption>
EVOLUTION VP EVOLUTION VP
MANAGED BOND MANAGED EQUITY DYNAMIC VP HY VP MONEY
FUND FUND BOND FUND MARKET FUND
------------ -------------- ------------- -----------
Cost basis of investments for federal
income tax purposes $4,059,968 $7,630,524 $36,000,940 $3,853,265
---------- ---------- ----------- ----------
Unrealized appreciation 22,726 505,614 252,841 --
Unrealized depreciation (28,898) (231,689) (68,418) --
---------- ---------- ----------- ----------
Net unrealized
appreciation/depreciation (6,172) 273,925 184,423 --
---------- ---------- ----------- ----------
Undistributed ordinary income/(loss) 30,703 362,647 303,460 1,925
Undistributed long-term gain/(loss) -- 187 -- --
---------- ---------- ----------- ----------
Distributable earnings 30,703 362,834 303,460 1,925
---------- ---------- ----------- ----------
Other accumulated gain/(loss) (151,077) (51,180) (756,247) (1,925)
---------- ---------- ----------- ----------
Total Accumulated gain/(loss) $ (126,546) $ 585,579 $ (268,364) $ --
========== ========== =========== ==========
</Table>
I) USE OF ESTIMATES - The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
27
3. SHARES OF BENEFICIAL INTEREST TRANSACTIONS
The beneficial interest transactions for Class A shares during the periods ended
December 31, 2005 and December 31, 2004 for the Funds were as follows:
<Table>
<Caption>
EVOLUTION VP MANAGED BOND FUND EVOLUTION VP MANAGED EQUITY FUND
------------------------------ --------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004(1,2) 2005 2004(1,2)
------------ ------------ ------------- -------------
Shares sold 185,956 50,832 314,849 64,109
Shares issued to holders in
reinvestment of dividends 3,022 -- --
Shares redeemed (11,314) (14,540) (19,261) (14,531)
------- ------- ------- -------
Total net increase from
shares of beneficial
interest transactions 177,664 36,292 295,588 49,578
======= ======= ======= =======
</Table>
<Table>
<Caption>
DYNAMIC VP HY BOND FUND VP MONEY MARKET FUND
----------------------- --------------------
PERIOD ENDED PERIOD ENDED
DECEMBER 31, 2005(3) DECEMBER 31, 2005(3)
----------------------- --------------------
Shares sold 5,572,131 89,030,818
Shares issued to holders in reinvestment of
dividends 21,339 215,114
Shares redeemed (3,840,895) (85,482,954)
---------- ------------
Total net increase from shares of beneficial
interest transactions 1,752,575 3,762,978
========== ============
</Table>
(1) Each Fund sold 2,500 shares of beneficial interest to the Advisor upon
seeding of each Fund on April 29, 2004.
(2) Commenced operations on July 1, 2004.
(3) Commenced operations on February 1, 2005.
4. INVESTMENT TRANSACTIONS
During the period ended December 31, 2005, the aggregate purchases and sales of
investments (excluding short-term investments) for each Fund were as follows:
<Table>
<Caption>
EVOLUTION VP MANAGED EVOLUTION VP MANAGED DYNAMIC VP HY VP MONEY
BOND FUND EQUITY FUND BOND FUND MARKET FUND
-------------------- -------------------- ------------- -----------
Purchases $19,273,519 $39,788,090 $139,047,917 $ --
Sales 16,060,007 33,448,623 107,406,492 --
</Table>
There were no purchases or sales of long-term U.S. government securities during
the period ended December 31, 2005 for any of the Funds.
5. INVESTMENT ADVISORY AND OTHER AGREEMENTS
The Funds have entered into an investment advisory agreement with the Advisor.
The Advisor receives a fee, computed daily and payable monthly, at the annual
rates presented below as applied to each Fund's average daily net assets. In
addition, the Advisor has entered into sub-advisory agreements relating to the
Evolution VP Managed Bond Fund and
28
the Evolution VP Managed Equity Fund with Flexible Plan Investments, Ltd., and
for Dynamic VP HY Bond Fund with Transamerica Investment Services, Inc., whereby
the sub-advisors will direct investment activities of the Funds. The Advisor
pays, out of the management fees it receives from the Funds, a fee for these
sub-advisory services. For the year ended December 31, 2005, the Advisor agreed
to waive all operating expenses (excluding dividends on short positions), in
excess of the annual cap on expenses presented below as applied to each Fund's
average daily net assets. The Advisor may recover from the Funds the expenses
paid in excess of the annual cap on expenses for the three previous years, as
long as the recovery does not cause the Fund to exceed such annual cap on
expenses. For the year ended December 31, 2005, the Advisor waived the following
expenses:
<Table>
<Caption>
EVOLUTION VP EVOLUTION VP DYNAMIC VP HY VP MONEY
MANAGED BOND FUND MANAGED EQUITY FUND BOND FUND MARKET FUND
----------------- ------------------- ------------- -----------
CLASS A:
Annual Advisory rate 1.00% 1.00% 0.75% 0.50%
Annual cap on expenses 2.00% 2.00% 1.75%* 1.75%
Expenses paid in excess
of annual cap on
expenses -- 2005 $60,627 $66,665 $28,879 $ --
Advisor expense waiver
recovery -- 2005 $ -- $ -- $ -- $ --
</Table>
* For the period February 1, 2005 to April 28, 2005, the annual cap on expenses
was 1.61% for the Dynamic VP HY Bond Fund.
Remaining expenses subject to potential recovery expiring in:
<Table>
<Caption>
EVOLUTION VP EVOLUTION VP DYNAMIC VP HY VP MONEY
MANAGED BOND FUND MANAGED EQUITY FUND BOND FUND MARKET FUND
----------------- ------------------- ------------- -----------
2007 $53,095 $58,373 N/A N/A
2008 $60,627 $66,665 $28,879 $ --
</Table>
Class A shares of the Evolution VP Managed Bond and the Evolution VP Managed
Equity Funds are subject to an annual Rule 12b-1 fee of up to 0.25% of Class A's
average daily net assets. The Class A shares of the Dynamic VP HY Bond Fund are
subject to an annual Rule 12b-1 fee of up to 0.60% of Class A's average daily
net assets. The Board has authorized the VP Money Market Fund to pay Rule 12b-1
fees of up to 1.00% of the Fund's average daily net assets. The VP Money Market
Fund is currently paying 0.60% of the Fund's average daily net assets as Rule
12b-1 fees. The Rule 12b-1 fees are to pay the insurance company of the plan
sponsor for its services for servicing shareholder accounts. Because the fees
are paid out of each Fund's net assets on an ongoing basis, the cost of an
investment in a Fund will increase over time.
The Advisor paid directly all offering costs and organizational expenses
associated with the registration and seeding of each Fund.
Rafferty Capital Markets, LLC (the "Distributor") serves as principal
underwriter of the Funds and acts as the Funds' distributor in an offering of
the Funds' shares. The Distributor is an affiliate of the Advisor. There were no
12b-1 fees retained by the Distributor for the period ended December 31, 2005.
In the ordinary course of business, the Funds enter into contracts that contain
a variety of indemnification provisions pursuant to which the Funds agree to
indemnify third parties upon occurrence of specified events. Each Fund's maximum
exposure relating to these indemnification agreements is unknown. However, the
Funds have not had prior claims or losses in connection with these provisions
and believe the risk of loss is remote.
29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and
Board of Trustees of the Potomac Insurance Trust
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of Potomac Insurance Trust (comprising the
Evolution VP Managed Bond Fund, Evolution VP Managed Equity Fund, Dynamic VP HY
Bond Fund and VP Money Market Fund) (the "Funds"), as of December 31, 2005, and
the related statements of operations and changes in net assets, and the
financial highlights for each of the periods indicated therein. These financial
statements and financial highlights are the responsibility of the Funds'
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Funds' internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Funds' internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of December 31, 2005, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the Funds constituting the Potomac Insurance Trust at December 31, 2005, the
results of their operations, the changes in their net assets, and their
financial highlights for each of the periods indicated therein in conformity
with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
February 3, 2006
POTOMAC INSURANCE TRUST
TRUSTEES AND OFFICERS
(UNAUDITED)
The business and affairs of the Funds are managed under the direction of the
Funds' Board of Trustees. Information pertaining to the Trustees and Officers of
the Funds is set forth below. The SAI includes additional information about the
Funds' Trustees and Officers and is available without charge, upon request by
calling 1-800-851-0511.
<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 39
33 Whitehall St., Board of until removal or Executive Officer of
10th Flr. Trustees since 1997 resignation Rafferty,
New York, NY 1997 -- present; Chief
10004 Executive Officer of
Age: 63 Rafferty Companies,
LLC, 1996 -- present;
Chief Executive Officer
of Rafferty Capital
Markets, Inc.,
1995 -- present.
- ------------------------------------------------------------------------------------------------------------------
Jay F. Higgins* Trustee since 1997 Lifetime of Trust Chairman, Bengal 39
33 Whitehall St., until removal or Partners LLC,
10th Flr. resignation 1998 -- present (NASD
New York, NY Broker Dealer).
10004
Age: 60
- ------------------------------------------------------------------------------------------------------------------
<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. 39
33 Whitehall St., until removal or Boyle Securities, Inc.,
10th Flr. resignation 1981 -- present.
New York, NY
10004
Age: 64
- ------------------------------------------------------------------------------------------------------------------
Daniel J. Byrne Trustee since 1997 Lifetime of Trust President and Chief 39
33 Whitehall St., until removal or Executive Officer of
10th Flr. resignation Byrne Securities Inc.,
New York, NY 1992 -- present;
10004 Trustee, The Opening
Age: 61 Word Program,
Wyandanch, New York.
- ------------------------------------------------------------------------------------------------------------------
Gerald E. Shanley III Trustee since 1997 Lifetime of Trust Business Consultant, 39
33 Whitehall St., until removal or 1985 -- present;
10th Flr. resignation Trustee of Estate of
New York, NY Charles S. Payson,
10004 1987 -- present.
Age: 62
<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
Ron Fernandes Chief Executive One year President, SunLife
33 Whitehall St., Officer since 2006 Distributors, Inc. and
10th Flr. Executive Vice
New York, NY 10004 President, SunLife
Age: 64 Retirement, Products
and Services,
1999 - 2002; Vice
Chairman, Wheat
Benefits Services and
Senior Managing
Director Retirement
Services, Wheat First
Union Securities,
1995-1999
- ------------------------------------------------------------------------------------------------------------------
Daniel D. O'Neill President since One year Managing Director of
33 Whitehall St., 1999 Rafferty,
10th Flr. Chief Operating 1999 -- present;
New York, NY 10004 Officer and Chief
Age: 38 Investment Officer
since 2006,
- ------------------------------------------------------------------------------------------------------------------
David VerMeulen Executive Vice One year Senior Vice President--
33 Whitehall St., President -- Chief Income Services Group,
10th Flr. Marketing Officer Fidelity Investments,
New York, NY 10004 since 2006 2003 -- 2004; Executive
Age: 57 Vice
President -- Business
Services, SunLife
Distributors,
2000 -- 2002.
- ------------------------------------------------------------------------------------------------------------------
William Franca Executive Vice One year Senior Vice President--
33 Whitehall St., President -- Head National Sales,
10th Flr. of Distribution Massachusetts Financial
New York, NY 10004 since 2006 Services/SunLife
Age: 49 Financial Distributors,
2002 -- 2004; Executive
Vice President,
Distribution, SunLife,
2001 -- 2002.
- ------------------------------------------------------------------------------------------------------------------
Timothy P. Hagan Chief Compliance One year Vice President of
33 Whitehall St., Officer and Chief Rafferty,
10th Flr. Financial Officer 1997 -- present.
New York, NY since 2004
10004
Age: 64
- ------------------------------------------------------------------------------------------------------------------
Philip A. Harding Senior Vice One year Vice President of
33 Whitehall St., President Sales and Rafferty,
10th Flr. Marketing since 1997 -- present.
New York, NY 10004 1999
Age: 63
<Caption>
OTHER
TRUSTEESHIPS
NAME, ADDRESS AND AGE: HELD BY TRUSTEE
- ----------------------- -------------------
OFFICERS
Ron Fernandes None
33 Whitehall St.,
10th Flr.
New York, NY 10004
Age: 64
- ----------------------- -------------------
Daniel D. O'Neill None
33 Whitehall St.,
10th Flr.
New York, NY 10004
Age: 38
- ----------------------- -------------------
David VerMeulen None
33 Whitehall St.,
10th Flr.
New York, NY 10004
Age: 57
- ----------------------- -------------------
William Franca None
33 Whitehall St.,
10th Flr.
New York, NY 10004
Age: 49
- ----------------------- -------------------
Timothy P. Hagan None
33 Whitehall St.,
10th Flr.
New York, NY
10004
Age: 64
- ----------------------- -------------------
Philip A. Harding None
33 Whitehall St.,
10th Flr.
New York, NY 10004
Age: 63
</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**:
- ------------------------------------------------------------------------------------------------------------------
Todd Kellerman Vice President One year Vice President of
33 Whitehall St., since 2006 Corporate Development
10th Flr. Raven Holdings, Inc.,
New York, NY 10004 2003 -- 2005; Business
Age: 33 Consultant,
2002 -- 2003; Senior
Consultant -- Business
Consulting, Arthur
Andersen, 1999 -- 2000.
- ------------------------------------------------------------------------------------------------------------------
Sean Smyth Vice President -- One year Lead Portfolio Manager
33 Whitehall St., Portfolio of Rafferty,
10th Flr. Management since 2005 -- present;
New York, NY 10004 2005 Portfolio Manager,
Age: 34 Gartmore Global
Investments,
2000 -- 2005.
- ------------------------------------------------------------------------------------------------------------------
Louis Flamino Vice President: One year Wholesaler of Rafferty,
33 Whitehall St., Sales and Marketing 1999 -- present
10th Flr. since 2005
New York, NY 10004
Age: 30
- ------------------------------------------------------------------------------------------------------------------
Neil Kelly Vice President: One year Wholesaler of Rafferty,
33 Whitehall St., Sales and Marketing 2004 -- present, First
10th Flr. since 2005 Vice President, Salomon
New York, NY 10004 Smith Barney,
Age: 43 1997 -- 2003
- ------------------------------------------------------------------------------------------------------------------
Steven P. Sprague Treasurer and One year Chief Financial Officer
33 Whitehall St., Controller since of Rafferty
10th Flr. 1999
New York, NY 10004
Age: 57
- ------------------------------------------------------------------------------------------------------------------
Eric W. Falkeis Secretary since One year Vice President, U.S.
615 East Michigan 2004 Bancorp Fund Services,
Street LLC, 1997 -- present.
Milwaukee, WI 53202
Age: 33
- ------------------------------------------------------------------------------------------------------------------
<Caption>
OTHER
TRUSTEESHIPS
NAME, ADDRESS AND AGE: HELD BY TRUSTEE
- ----------------------- -------------------
Todd Kellerman None
33 Whitehall St.,
10th Flr.
New York, NY 10004
Age: 33
- ----------------------- -------------------
Sean Smyth None
33 Whitehall St.,
10th Flr.
New York, NY 10004
Age: 34
- ----------------------- -------------------
Louis Flamino None
33 Whitehall St.,
10th Flr.
New York, NY 10004
Age: 30
- ----------------------- -------------------
Neil Kelly None
33 Whitehall St.,
10th Flr.
New York, NY 10004
Age: 43
- ----------------------- -------------------
Steven P. Sprague None
33 Whitehall St.,
10th Flr.
New York, NY 10004
Age: 57
- ----------------------- -------------------
Eric W. Falkeis None
615 East Michigan
Street
Milwaukee, WI 53202
Age: 33
- ----------------------- -------------------
</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 25 portfolios of the 27 currently registered with the SEC
and the Potomac Insurance Trust which currently offers for sale 4 portfolios
of the 12 currently registered with the SEC.
*** Mr. Boyle was an interested Trustee for the period May through September
2004 due to his daughter being employed by Rafferty Capital Markets, LLC.
The Trustees and Officers table is current as of February 1, 2006.
POTOMAC INSURANCE TRUST
APPROVAL OF INVESTMENT ADVISORY AGREEMENT
(UNAUDITED)
POTOMAC VP MONEY MARKET FUND
OVERVIEW
The Board of Trustees considered the reappointment of Rafferty Asset Management,
LLC ("Rafferty") as adviser to the Potomac VP Money Market Fund and the renewal
of the Investment Advisory Agreement (the "Agreement") at a meeting held on
November 18, 2005. As part of the approval process, legal counsel to the Fund
and the independent Trustees sent information request letters to Rafferty
seeking certain relevant information. Responses by Rafferty were provided to the
Trustees for their review prior to their meeting. The Board was provided with
the opportunity to request any additional materials. The Board posed questions
to management personnel of Rafferty regarding certain key aspects of the
material submitted in support of the renewal.
Provided below is a summary of certain of the factors the Board considered at
the November meeting in renewing the Agreement between Rafferty and the Potomac
Insurance Trust (the "Trust") for the Fund. The Board did not identify any
particular information that was most relevant to its consideration on whether to
renew the Agreement and each Trustee may have afforded different weight to the
various factors.
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED
The Board reviewed the scope of the services provided under the Agreement and
noted that there would be no significant changes in the services provided by
Rafferty. The Board considered Rafferty's representation that it has the
financial resources, commitment and appropriate staffing to continue to provide
the same scope and quality of services to the Fund. The Board also considered
Rafferty's ability to adopt and implement compliance and control functions for
the Fund and noted that information concerning portfolio management and a report
from the chief compliance officer are provided on a periodic basis to the Board.
Based on these and other considerations, the Board determined that, in the
exercise of its business judgment, the nature, extent and quality of the
services provided by Rafferty to the Fund under the Agreement were fair and
reasonable.
PERFORMANCE OF THE FUND AND FUND EXPENSES
The Board considered that the Fund was created as a convenience to professional
money managers and investors who use "asset allocation" and/or "market timing"
strategies. In addition, the Board considered Rafferty's representation that the
Fund's performance and fees were comparable to other money market funds used by
managers and investors utilizing the above-mentioned strategies. The Board also
considered Rafferty's representation that Rafferty is committed to continue the
expense limitation on the Fund's total operating expenses through the Fund's
2006 fiscal year. Based on these and other considerations, the Board determined
that, in the exercise of its business judgment, the performance of the Fund was
satisfactory and the expenses of the Fund were reasonable.
COSTS OF SERVICES PROVIDED TO THE FUND AND PROFITS REALIZED
The Board considered the fees paid to Rafferty on an annual basis since the
Fund's commencement, including any fee waivers and recoupment of fees previously
waived. In addition, the Board considered (as noted above) Rafferty's
representation that its fees are comparable to other money market funds used by
managers and investors utilizing the above-mentioned strategies and that
Rafferty is committed to continue the expense limitation on the Fund's total
operating expenses through each fund's 2006 fiscal year. The Board also
considered Rafferty's representation that the
Fund has not had enough assets to make it profitable to Rafferty. Based on these
considerations, the Board determined that, in the exercise of its business
judgment, the costs of services provided and profits realized by Rafferty under
the Agreement were fair and reasonable.
ECONOMIES OF SCALE
The Board considered Rafferty's representation that it believes that asset
levels at this time are not sufficient to warrant a reduction in fee rates or
the addition of breakpoints. Based on these and other considerations the Board
determined that, in the exercise of its business judgment, the Funds have not
reached economies of scale requiring a reduction in fee rates or additions of
breakpoints.
CONCLUSION
Based on, but not limited to, the above considerations and determinations, the
Board determined that the Agreement was fair and reasonable in light of the
services to be performed, fees, expenses and such other matters as the Board
considered relevant in the exercise of its business judgment. On this basis, the
Board unanimously approved the Agreement.
INVESTMENT ADVISOR
Rafferty Asset Management, LLC
33 Whitehall Street, 10th Floor
New York, NY 10004
SUB-ADVISOR
Flexible Plan Investment, Ltd.
3883 Telegraph Road
Bloomfield Hills, MI 48302
ADMINISTRATOR, TRANSFER AGENT, DIVIDEND
PAYING AGENT & SHAREHOLDING SERVICING AGENT
U.S. Bancorp Fund Services, LLC
P.O. Box 1993
Milwaukee, WI 53201-1993
CUSTODIAN
U.S. Bank, N.A.
425 Walnut Street
Cincinnati, Ohio 45202
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP
233 S. Wacker Dr.
Chicago, IL 60606
DISTRIBUTOR
Rafferty Capital Markets, LLC
59 Hilton Avenue
Garden City, NY 11530
The Fund's Proxy Voting Policies are available without charge by calling
1-800-851-0511, or by accessing the SEC's website, at www.sec.gov.
The actual voting records relating to portfolio securities during the most
recent twelve month period ended June 30 is available without charge by calling
1-800-851-0511 or by accessing the SEC's website at www.sec.gov.
The Funds for the first and third quarters of each fiscal year file complete
schedules of portfolio holdings with the SEC on Form N-Q. The Form N-Qs are
available without charge, upon request, by calling 1-800-851-0511, or by
accessing the SEC's website, at www.sec.gov. The Funds Form N-Q may be reviewed
and copied at the Commission's Public Reference Room in Washington, DC, and
information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330.
This report has been prepared for shareholders and may be distributed to others
only if preceded or accompanied by a current prospectus.
ANNUAL
REPORT
December 31, 2005
[THE POTOMAC FUNDS New LOGO]
33 Whitehall Street, 10th Floor
New York, NY 10004
(800) 851-0511
ITEM 2. CODE OF ETHICS.
The registrant has adopted a code of ethics that applies to the registrant's
principal executive officer and principal financial officer. The registrant has
not made any amendments to its code of ethics during the period covered by this
report. The registrant has not granted any waivers from any provisions of the
code of ethics during the period covered by this report.
UNDERTAKE TO PROVIDE A COPY TO ANY PERSON WITHOUT CHARGE: The registrant
undertakes to provide to any person without charge, upon request, a copy of its
code of ethics by mail when they call the registrant at 1-800-851-0511.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The registrant's board of trustees has determined that there is at least one
audit committee financial expert serving on its audit committee. Gerald E.
Shanley III is the "audit committee financial expert" and is considered to be
"independent" as each term is defined in Item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The registrant has engaged its principal accountant to perform audit services,
audit-related services, tax services and other services during the past two
fiscal years. "Audit services" refer to performing an audit of the registrant's
annual financial statements or services that are normally provided by the
accountant in connection with statutory and regulatory filings or engagements
for those fiscal years. "Audit-related services" refer to the assurance and
related services by the principal accountant that are reasonably related to the
performance of the audit. "Tax services" refer to professional services rendered
by the principal accountant for tax compliance, tax advice, and tax planning.
There were no "Other services" provided by the principal accountant. The
following table details the aggregate fees billed or expected to be billed for
each of the last two fiscal years for audit fees, audit-related fees, tax fees
and other fees by the principal accountant.
FYE 12/31/2005 FYE 12/31/2004
-------------- --------------
Audit Fees $78,000 $39,000
Audit-Related Fees --
Tax Fees 12,000 8,000
All Other Fees --
The Audit Committee Charter provides that the audit committee (comprised of the
Independent Trustees of registrant) is responsible for pre-approval of all
auditing services performed for the registrant. The Audit Committee also is
responsible for pre-approval (subject to the de minimus exception for non-audit
services described in the Securities Exchange Act of 1934, as amended,
2
and applicable rule thereunder) of all non-auditing services performed for the
registrant or for any service affiliate of registrant. Registrant's Audit
Committee pre-approved all fees described above which Ernst & Young billed to
registrant.
The following table indicates the non-audit fees billed by the registrant's
accountant for services to the registrant and to the registrant's investment
adviser (and any other controlling entity, etc.--not sub-adviser) for the last
year. The audit committee of the board of trustees/directors has considered
whether the provision of non-audit services that were rendered to the
registrant's investment adviser is compatible with maintaining the principal
accountant's independence and has concluded that the provision of such non-audit
services by the accountant has not compromised the accountant's independence.
Non-Audit Related Fees FYE 12/31/2005 FYE 12/31/2004
- ---------------------- -------------- --------------
Registrant -- --
Registrant's Investment Adviser -- --
Registrant's Audit Committee has considered the non-audit services provided to
the registrant and registrant's investment adviser and any entity controlling,
controlled by, or under common control with registrant's investment adviser as
described above and determined that these services do not compromise Ernst &
Young's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable to open-end investment companies.
ITEM 6. SCHEDULE OF INVESTMENTS.
Schedule of Investments is included as part of the report to shareholders filed
under Item 1 of this Form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable to open-end investment companies.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable to open-end investment companies.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASES.
Not applicable to open-end investment companies.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which shareholders may
recommend nominees to the registrant's board of directors/trustees.
3
ITEM 11. CONTROLS AND PROCEDURES.
(a) The Registrant's President/Chief Executive Officer and Treasurer/Chief
Financial Officer have concluded that the Registrant's disclosure controls
and procedures (as defined in Rule 30a-3(c) under the Investment Company
Act of 1940 (the "1940 Act")) are effective as of a date within 90 days of
the filing date of the report that includes the disclosure required by this
paragraph, based on the evaluation of these controls and procedures
required by Rule 30a-3(b) under the 1940 Act and Rules 15d-15(b) under the
Securities Exchange Act of 1934, as amended.
(b) There were no significant changes in the Registrant's internal controls
over financial reporting that occurred during the Registrant's last fiscal
half-year that has materially affected, or is reasonably likely to
materially affect, the Registrant's internal control over financial
reporting.
ITEM 12. EXHIBITS.
(a) (1) Any code of ethics or amendment thereto, that is subject of the
disclosure required by Item 2, to the extent that the registrant intends to
satisfy Item 2 requirements through filing an exhibit. Filed herewith.
(b) (2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. Filed herewith.
(3) Any written solicitation to purchase securities under Rule 23c-1 under
the Act sent or given during the period covered by the report by or on
behalf of the registrant to 10 or more persons. Not applicable to open-end
investment companies.
(c) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) The Potomac Insurance Trust
By (Signature and Title)* /s/ Daniel D. O'Neill
--------------------------------------------
Daniel D. O'Neill, President
Date March 7, 2006
---------------------
4
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ Daniel D. O'Neill
--------------------------------------------
Daniel D. O'Neill, President
Date March 7, 2006
---------------------
By (Signature and Title)* /s/ Timothy P. Hagan
--------------------------------------------
Timothy P. Hagan, Chief Financial Officer
Date March 8, 2006
---------------------
* Print the name and title of each signing officer under his or her
signature.
5