As filed with the Securities and Exchange Commission on May 8, 2000
1933 Act File No. 333-93813
1940 Act File No. 811-09761
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ X ]
Pre-Effective Amendment No. 1
---- [ X ]
Post-Effective Amendment No. [ ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
Amendment No. 2
----
(Check appropriate box or boxes.)
POTOMAC INSURANCE TRUST
(Exact name of Registrant as Specified in Charter)
1311 Mamaroneck Avenue
White Plains, New York 10605
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code: (914) 614-6320
Daniel D. O'Neill
1311 Mamaroneck Avenue
White Plains, New York 10605
(Name and Address of Agent for Service)
Copy to:
Robert J. Zutz, Esq.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, NW
Washington, D.C. 20036
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Registration Statement
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission acting pursuant to said section 8(a),
may determine.
Page 1 of __ Pages
Exhibit Index Appears on Page __
<PAGE>
THE POTOMAC INSURANCE TRUST
CONTENTS OF REGISTRATION STATEMENT
This registration document is comprised of the following:
Cover Sheet
Contents of Registration Statement
Prospectus for the Potomac Insurance Trust
Statement of Additional Information for the Potomac Insurance Trust
Part C of Form N-1A
Signature Page
Exhibits
<PAGE>
<TABLE>
<CAPTION>
PROSPECTUS
THE POTOMAC INSURANCE TRUST
Enhanced Investment Strategies
100 South Royal Street
Alexandria, Virginia 22314
1311 Mamaroneck Avenue
White Plains, New York 10605
(800) 851-0511
<S> <C> <C> <C> <C>
---------------------------------------------------- ------------------------------------------------------
PLUS FUNDS SHORT FUNDS
---------------------------------------------------- ------------------------------------------------------
The Potomac VP OTC Plus Fund The Potomac VP OTC/Short Fund
The Potomac VP Dow 30 Plus Fund The Potomac VP Dow 30/Short Fund
The Potomac VP Small Cap Plus Fund The Potomac VP Small Cap/Short Fund
The Potomac VP Internet Plus Fund The Potomac VP Internet/Short Fund
The Potomac VP U.S. Plus Fund The Potomac VP U.S./Short Fund
The Potomac VP Japan Plus Fund The Potomac VP Japan/Short Fund
---------------------------------------------------- ------------------------------------------------------
------------------------------------------------
MONEY MARKET FUND
------------------------------------------------
The Potomac VP Money Market Fund
------------------------------------------------
</TABLE>
EACH FUND OFFERS ITS CLASS A AND CLASS B SHARES TO INSURANCE COMPANY SEPARATE
ACCOUNTS THAT FUND VARIABLE ANNUITY CONTRACTS AND LIFE INSURANCE POLICIES. THIS
PROSPECTUS SHOULD BE READ TOGETHER WITH THE PROSPECTUS FOR THOSE CONTRACTS AND
POLICIES.
LIKE SHARES OF ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
May __, 2000
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Page
OVERVIEW OF THE POTOMAC INSURANCE TRUST............................................................................2
THE POTOMAC INSURANCE TRUST........................................................................................3
The Potomac VP OTC Funds........................................................................................3
The Potomac VP Dow 30 Funds.....................................................................................4
The Potomac VP Small Cap Funds..................................................................................5
The Potomac VP Internet Funds...................................................................................6
The Potomac VP U.S. Funds.......................................................................................7
The Potomac VP Japan Funds......................................................................................8
Investment Techniques and Policies..............................................................................8
Risk Factors....................................................................................................9
The Potomac Money Market Fund..................................................................................12
Historical Performance.........................................................................................13
Fees and Expenses of the Funds.................................................................................13
Prior Performance of Related Funds.............................................................................16
ABOUT YOUR INVESTMENT.............................................................................................17
Investing in the Funds.........................................................................................17
Classes of Shares..............................................................................................17
Rule 12b-1 Fees................................................................................................18
Share Prices...................................................................................................18
ADDITIONAL INFORMATION............................................................................................19
Management of the Funds........................................................................................19
Distributions and Taxes........................................................................................19
MORE INFORMATION ON THE POTOMAC INSURANCE TRUST..........................................................BACK COVER
</TABLE>
1
<PAGE>
OVERVIEW OF THE POTOMAC INSURANCE TRUST
This Prospectus describes each of the 13 Funds (Funds) of The Potomac
Insurance Trust. The Funds may be purchased through variable annuity contracts
and variable life insurance policies (Contracts). The Funds also may be
purchased through certain qualified pension and retirement plans.
The Potomac Insurance Trust consists primarily of pairs of funds. Each
pair consists of one "plus" fund and one "short" fund. Each "plus" fund is
designed to provide a return that is greater than the return provided by its
target index when the value of the target index rises. Unlike traditional index
funds, each "plus" fund seeks to provide a return that is equal to 125% of the
return of its target index. Each "short" fund is designed to provide investment
results that are opposite of the return of its target index.
As an example, The Potomac VP OTC Plus Fund and The Potomac VP
OTC/Short Fund are targeted to the Nasdaq 100 Index(TM) (Nasdaq 100 Index). If,
for a given period of time, the Nasdaq 100 Index gains 20%, the VP OTC Plus Fund
is designed to gain approximately 25% (which is equal to 125% of 20%), while the
VP OTC/Short Fund is designed to lose 20%. Conversely, if the Nasdaq 100 Index
loses 10%, the VP OTC/Short Fund is designed to gain 10%, while the VP OTC Plus
Fund is designed to lose 12.5%.
To achieve these results, each "plus" fund and "short" fund uses
aggressive investment techniques such as engaging in futures and options
transactions. As a result, those Funds are designed principally for experienced
investors who intend to follow an asset allocation strategy. There is no
assurance that any Fund will achieve its objective.
The Potomac Insurance Trust also offers a money market fund that is
designed to provide stability of principal, liquidity and current income.
2
<PAGE>
THE POTOMAC INSURANCE TRUST
THE POTOMAC VP OTC FUNDS
OBJECTIVES:
THE POTOMAC VP OTC PLUS FUND seeks to provide investment returns that
correspond to 125% of the performance of the Nasdaq 100 IndexTM. If it is
successful in meeting its objective, the net asset value of VP OTC Plus Fund
shares should increase approximately one and a quarter as much as the Nasdaq 100
Index when the aggregate prices of the securities in that index rise on a given
day. Conversely, the net asset value of shares of the VP OTC Plus Fund should
decrease approximately one and a quarter as much when the aggregate prices of
the securities in the Nasdaq 100 Index decline on that day.
THE POTOMAC VP OTC/SHORT FUND seeks to provide investment returns that
inversely correspond (opposite) to the performance of the Nasdaq 100 Index. If
it is successful in meeting its objective, the net asset value of VP OTC/Short
Fund shares should increase in direct proportion to any decrease in the level of
the Nasdaq 100 Index. Conversely, the net asset value of shares in the VP
OTC/Short Fund should decrease in direct proportion to any increase in the level
of the Nasdaq 100 Index.
The Potomac VP OTC Funds' investment objectives are not fundamental
policies and may be changed by The Potomac Insurance Trust's Board of Trustees
without shareholder approval.
CORE INVESTMENTS:
In attempting to achieve their objectives, the Potomac VP OTC Funds
primarily invest directly in the securities of the companies that comprise the
Nasdaq 100 Index. In addition, THE POTOMAC VP OTC PLUS FUND enters into long
positions in stock index futures contracts, options on stock index futures
contracts and options on securities and on stock indices to produce economically
leveraged investment results. THE POTOMAC VP OTC/SHORT FUND also enters into
short positions in the securities of the companies that comprise the Nasdaq 100
Index, stock index futures contracts, options on stock index futures contracts
and options on securities and on stock indices. On a day-to-day basis, the Funds
hold U.S. Government securities and repurchase agreements to collateralize these
futures and options contracts.
TARGET INDEX:
The NASDAQ 100 INDEX(TM) is a capitalization-weighted index composed of
100 of the largest non-financial domestic companies listed on the National
Market tier of The Nasdaq Stock Market (Nasdaq). All companies listed on the
index have a minimum market capitalization of $500 million and an average daily
trading volume of at least 100,000 shares. The Nasdaq 100 Index was created in
1985. The Nasdaq Stock Market is not a sponsor of, or in any way affiliated
with, The Potomac Insurance Trust.
3
<PAGE>
THE POTOMAC VP DOW 30 FUNDS
OBJECTIVES:
THE POTOMAC VP DOW 30 PLUS FUND seeks daily investment results that
correspond to 125% of the performance of the Dow Jones Industrial AverageSM
(Dow). If it is successful in meeting its objective, the net asset value of VP
Dow 30 Plus Fund shares should increase approximately one and a quarter as much
as the Dow when the aggregate prices of the securities that comprise the Dow
rise on a given day. Conversely, the net asset value of shares of the VP Dow 30
Plus Fund should decrease approximately one and a quarter as much when the
aggregate prices of the securities in the Dow decline on that day.
THE POTOMAC VP DOW 30/SHORT FUND seeks to provide investment returns
that inversely correspond (opposite) to the performance of the Dow. If it is
successful in meeting its objective, the net asset value of the VP Dow 30/Short
Fund shares should increase in direct proportion to any decrease in the level of
the Dow. Conversely, the net asset value of shares in the VP Dow 30/Short Fund
should decrease in direct proportion to any increase in the level of the Dow.
The Potomac VP 30 Funds' investment objectives are not fundamental
policies and may be changed by The Potomac Insurance Trust's Board of Trustees
without shareholder approval.
CORE INVESTMENTS:
In attempting to achieve their objectives, the Potomac VP 30 Funds
primarily invest directly in the securities of the companies that comprise the
Dow. In addition, THE POTOMAC VP 30 PLUS FUND enters into long positions in
stock index futures contracts, options on stock index futures contracts and
options on securities and on stock indices to produce economically leveraged
investment results. The Fund also may invest in DIAMONDS, which are publicly
traded index securities based on the Dow. This allows the Fund to invest in a
portfolio of securities consisting of all of the component common stocks of the
Dow. THE POTOMAC VP DOW 30/SHORT FUND also enters into short positions in the
securities of the companies that comprise the Dow, stock index futures
contracts, options on stock index futures contracts and options on securities
and on stock indices. On a day-to-day basis, the Funds hold U.S. Government
securities and repurchase agreements to collateralize these futures and options
contracts.
TARGET INDEX:
The DOW JONES INDUSTRIAL AVERAGESM consists of 30 of the most widely
held and actively traded stocks listed on the U.S. stock markets. The stocks in
the Dow represent companies that typically are dominant firms in their
respective industries. Dow Jones, Dow Jones Industrial AverageSM, DJIASM, and
Dow 30SM are service marks of Dow Jones & Company, Inc. Dow Jones has no
relationship to The Potomac Insurance Trust and does not sponsor, endorse, sell
or promote any of the Funds.
4
<PAGE>
THE POTOMAC VP SMALL CAP FUNDS
OBJECTIVES:
THE POTOMAC VP SMALL CAP PLUS FUND seeks to provide investment returns
that correspond to 125% of the performance of the Russell 2000(R) Index (Russell
2000 Index). If it is successful in meeting its objective, the net asset value
of VP Small Cap Plus Fund shares should increase approximately one and a quarter
as much as the Russell 2000 Index when the aggregate prices of the securities in
that index rise on a given day. Conversely, the net asset value of shares of the
VP Small Cap Plus Fund should decrease approximately one and a quarter as much
when the aggregate prices of the securities in the Russell 2000 Index decline on
that day.
THE POTOMAC VP SMALL CAP/SHORT FUND seeks to provide investment returns
that inversely correspond (opposite) to the performance of the Russell 2000
Index. If it is successful in meeting its objective, the net asset value of VP
Small Cap/Short Fund shares should increase in direct proportion to any decrease
in the level of the Russell 2000 Index. Conversely, the net asset value of
shares in the VP Small Cap/Short Fund should decrease in direct proportion to
any increase in the level of the Russell 2000 Index.
The Potomac VP Small Cap Funds' investment objectives are not
fundamental policies and may be changed by The Potomac Insurance Trust's Board
of Trustees without shareholder approval.
CORE INVESTMENTS:
In attempting to achieve their objectives, the Potomac VP Small Cap
Funds primarily invest directly in the securities of the companies that comprise
the Russell 2000 Index. In addition, THE POTOMAC VP SMALL CAP PLUS FUND enters
into long positions in stock index futures contracts, options on stock index
futures contracts and options on securities and on stock indices to produce
economically leveraged investment results. THE POTOMAC VP SMALL CAP/SHORT FUND
also enters into short positions in the securities of the companies that
comprise the Russell 2000, stock index futures contracts, options on stock index
futures contracts and options on securities and on stock indices. On a
day-to-day basis, the Funds hold U.S. Government securities and repurchase
agreements to collateralize these futures and options contracts.
TARGET INDEX:
The RUSSELL 2000(R) INDEX is comprised of the smallest 2000 companies
in the Russell 3000 Index. As of May 31, 1999, the average market capitalization
of the companies included in the Russell 2000 was approximately $526.4 million.
That compares to $4.4 billion for the Russell 3000. The smallest 2000 companies
represent approximately 8% of the total market capitalization of the Russell
3000. The Frank Russell Company is not a sponsor of, or in any way affiliated
with, The Potomac Insurance Trust.
5
<PAGE>
THE POTOMAC VP INTERNET FUNDS
OBJECTIVES:
THE POTOMAC VP INTERNET PLUS FUND seeks to provide investment results
that correspond to 125% of the performance of the Dow Jones Composite Internet
IndexSM (Internet Index). If it is successful in meeting its objective, the net
asset value of VP Internet Plus Fund shares should increase approximately one
and a quarter as much as the Internet Index when the aggregate prices of the
securities in that index rise on a given day. Conversely, the net asset value of
shares of the VP Internet Plus Fund should decrease approximately one and a
quarter as much when aggregate prices of the securities in the Internet Index
decline on that day.
THE POTOMAC VP INTERNET/SHORT FUND seeks to provide investment returns
that inversely correspond (opposite) to the performance of the Internet Index.
If it is successful in meeting its objective, the net asset value of VP
Internet/Short Fund shares should increase in direct proportion to any decrease
in the level of the Internet Index. Conversely, the net asset value of shares in
the VP Internet/Short Fund should decrease in direct proportion to any increase
in the level of the Internet Index.
The Potomac VP Internet Funds' investment objectives are not
fundamental policies and may be changed by The Potomac Insurance Trust's Board
of Trustees without shareholder approval.
CORE INVESTMENTS:
In attempting to achieve their objectives, the Potomac VP Internet
Funds primarily invest directly in the securities of the companies that comprise
the Internet Index. In addition, THE POTOMAC VP INTERNET PLUS FUND enters into
long positions in stock index futures contracts, options on stock index futures
contracts and options on securities and on stock indices to produce economically
leveraged investment results. THE POTOMAC VP INTERNET/SHORT FUND also enters
into short positions in the securities of the companies that comprise the
Internet Index, stock index futures contracts, options on stock index futures
contracts and options on securities and on stock indices. On a day-to-day basis,
the Funds hold U.S. Government securities and repurchase agreements to
collateralize these futures and options contracts.
TARGET INDEX:
The DOW JONES COMPOSITE INTERNET INDEXSM is a modified
capitalization-weighted index designed to track the performance of companies
that are involved in Internet related activities. The Internet Index tracks 40
e-commerce and Internet services companies that generate at least 50% of their
revenues from the Internet and have a three-month average market capitalization
of at least $100 million. Dow Jones and Dow Jones Composite Internet IndexSM are
service marks of Dow Jones & Company, Inc. Dow Jones has no relationship to The
Potomac Insurance Trust and does not sponsor, endorse, sell or promote any of
the Funds of The Potomac Insurance Trust.
6
<PAGE>
THE POTOMAC VP U.S. FUNDS
OBJECTIVES:
THE POTOMAC VP U.S. PLUS FUND seeks to provide investment returns that
correspond to 125% of the performance of the Standard & Poor's 500 Composite
Stock Price IndexTM (S&P 500 Index). If it is successful in meeting its
objective, the net asset value of VP U.S. Plus Fund shares should increase
approximately one and a quarter as much as the S&P 500 Index when the aggregate
prices of the securities in that index rise on a given day. Conversely, the net
asset value of shares of the VP U.S. Plus Fund should decrease approximately one
and a quarter as much when the aggregate prices of the securities in the S&P 500
Index decline on that day.
THE POTOMAC VP U.S./SHORT FUND seeks to provide investment returns that
inversely correspond (opposite) to the performance of the S&P 500 Index. If it
is successful in meeting its objective, the net asset value of VP U.S./Short
Fund shares should increase in direct proportion to any decrease in the level of
the S&P 500 Index. Conversely, the net asset value of shares in the VP
U.S./Short Fund should decrease in direct proportion to any increase in the
level of the S&P 500 Index.
The Potomac VP U.S. Funds' investment objectives are not fundamental
policies and may be changed by The Potomac Insurance Trust's Board of Trustees
without shareholder approval.
CORE INVESTMENTS:
In attempting to achieve their objectives, the Potomac VP U.S. Funds
invest directly in the securities of the companies that comprise the S&P 500
Index. In addition, THE POTOMAC VP U.S. PLUS FUND invests significantly in
Standard & Poor's Depositary Receipts (SPDRs), which are publicly-traded index
securities based on the S&P 500 Index. This allows the Fund to invest in a
portfolio of securities consisting of all of the component common stocks of the
S&P 500 Index. The Fund also enters into long positions in stock index futures
contracts, options on stock index futures contracts and options on securities
and on stock indices to produce economically leveraged investment results. THE
POTOMAC VP U.S./SHORT FUND also enters into short positions in the securities of
the companies that comprise the S&P 500 Index, SPDRs, stocking index futures
contracts, options on stock index futures contracts and options on securities
and on stock indices. On a day-to-day basis, the Funds hold U.S. Government
securities and repurchase agreements to collateralize these futures and options
contracts.
TARGET INDEX:
The STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX(TM) is a
capitalization-weighted index composed of 500 common stocks. Standard & Poor's
selects the 500 stocks comprising the S&P 500 Index on the basis of market
values and industry diversification. Most of the stocks in the S&P 500 Index are
issued by the 500 largest companies, in terms of the aggregate market value of
their outstanding stock, and generally are listed on the New York Stock Exchange
(NYSE). Standard & Poor's is not a sponsor of, or in any way affiliated with,
The Potomac Insurance Trust.
7
<PAGE>
THE POTOMAC VP JAPAN FUNDS
OBJECTIVES:
THE POTOMAC VP JAPAN PLUS FUND seeks to provide investment returns that
correspond to 125% of the performance of the Nikkei 225 Stock Average (Nikkei
Index). If it is successful in meeting its objective, the net asset value of VP
Japan Plus Fund shares should increase approximately one and a quarter as much
as the Nikkei Index when the aggregate prices of the securities in that index
rise on a given day. Conversely, the net asset value of shares of the VP Japan
Plus Fund should decrease approximately one and a quarter as much when the
aggregate prices of the securities in the Nikkei Index decline on that day.
THE POTOMAC VP JAPAN/SHORT FUND seeks to provide investment returns
that inversely correspond (opposite) to the performance of the Nikkei Index. If
it is successful in meeting its objective, the net asset value of VP Japan/Short
Fund shares should increase in direct proportion to any decrease in the level of
the Nikkei Index. Conversely, the net asset value of shares in the VP
Japan/Short Fund should decrease in direct proportion to any increase in the
level of the Nikkei Index.
The Potomac VP Japan Funds' investment objectives are not fundamental
policies and may be changed by The Potomac Insurance Trust's Board of Trustees
without shareholder approval.
CORE INVESTMENTS:
In attempting to achieve their objectives, the Potomac VP Japan Funds
will not invest directly in the securities of the companies that comprise the
Nikkei Index. Rather, the Potomac VP Japan Funds intend to invest in American
Depositary Receipts (ADRs) of such companies and other securities that the
investment advisor believes would provide a return that approximates the Nikkei
Index. The Potomac VP Japan Funds also will enter into long and short positions,
respectively, in stock index futures contracts, options on stock index futures
contracts and options on securities and on stock indices. On a day-to-day basis,
the Funds intend to hold U.S. Government securities to collateralize these
futures and options contracts. In addition, the Funds will enter into repurchase
agreements.
TARGET INDEX:
The NIKKEI 225 STOCK AVERAGE is a price-weighted index of the 225
largest Japanese companies listed on the Tokyo Stock Exchange. The Nikkei Index
was first published in 1949 and is generally considered as a proxy for the
Japanese large-capitalization equity market.
INVESTMENT TECHNIQUES AND POLICIES
Rafferty Asset Management, LLC (Rafferty), the investment advisor to
The Potomac Insurance Trust, uses a number of investment techniques in an effort
to achieve the stated goal for each Fund. For the Plus Funds, Rafferty attempts
to magnify the returns of each Fund's target index, while the Short Funds are
8
<PAGE>
managed to provide returns inverse (opposite) of each Short Fund's target index.
Rafferty generally does not use fundamental securities analysis to accomplish
such correlation. Rather, Rafferty primarily uses statistical and quantitative
analysis to determine the investments each Fund makes and techniques it employs.
As a consequence, if a Fund is performing as designed, the return of the target
index will dictate the return for that Fund.
Each Plus Fund invests significantly in futures contracts on stock
indices, options on futures contracts and financial instruments such as options
on securities and stock indices options. Rafferty uses these types of
investments to produce economically "leveraged" investment results. Leveraging
allows Rafferty to generate a return that is larger than what would be generated
on the invested capital without leverage, thus changing small market movements
into larger changes in the value of the investments of a Plus Fund.
While Rafferty attempts to minimize any "tracking error" (the
statistical measure of the difference between the investment results of the Fund
and the performance of its benchmark), certain factors will tend to cause a
Fund's investment results to vary from the stated objective. Rafferty, however,
does not expect that a Fund's total returns will vary from its objective by more
than 10% over a twelve-month period.
It is the policy of each Fund to pursue its investment objective
regardless of market conditions and not to take defensive positions. A Fund will
not adopt defensive positions by investing in cash or other instruments in
anticipation of an adverse climate for its target index. However, because it may
be difficult for a Fund to achieve its stated investment objective with a low
level of assets, Rafferty may invest the assets of a Fund in short-term U.S.
Government securities until the level of net assets is sufficient to permit
investment in the appropriate investments. As a result, a Fund may not achieve
its investment objective during this period. To find out if a Fund has
sufficient assets to invest to attempt to meet its objective, you may call (888)
976-8662.
RISK FACTORS
An investment in the Funds entails risks including the risk that you
could lose money, or that the performance of a Fund could trail that of other
investment alternatives. Rafferty cannot guarantee that any of the Funds will
achieve its objective. In addition, the Funds present some risks not
traditionally associated with most mutual funds. It is important that investors
closely review and understand these risks before making an investment in the
Funds. These and other risks are described below.
RISKS OF INVESTING IN EQUITY SECURITIES AND DERIVATIVES:
The Funds may invest in publicly issued equity securities, including
common stocks, as well as instruments that attempt to track the price movement
of stock indices. Investments in common stocks and derivatives in general are
subject to market risks that may cause their prices to fluctuate over time.
Fluctuations in the value of common stocks in which the Funds invest will cause
the net asset value of the Funds to fluctuate.
9
<PAGE>
RISKS OF AGGRESSIVE INVESTMENT TECHNIQUES:
The Funds use investment techniques that may be considered aggressive.
Risks associated with the use of futures contracts, and options on securities,
securities indices, and on futures contracts include potentially dramatic price
changes (losses) in the value of the instruments and imperfect correlations
between the price of the contract and the underlying security or index. These
instruments may increase the volatility of the Funds and may involve a small
investment of cash relative to the magnitude of the risk assumed. Investors
should be aware that while index futures and options contracts closely correlate
with the applicable indices over long periods, shorter-term deviations occur. As
a result, a Fund's short-term performance will reflect such deviation from its
benchmark.
LEVERAGE RISK:
Each Plus Fund employs leveraged investment techniques. Use of leverage
can magnify the effects of changes in the value of these Plus Funds and makes
them more volatile. The leveraged investment techniques that these Funds employ
should cause investors in these Funds to lose more money in environments adverse
to the Fund's positions.
INVERSE CORRELATION RISK:
Each Short Fund is negatively correlated to its target index and should
lose money when its target index rises - a result that is the opposite from
traditional equity mutual funds.
RISK OF POOR TRACKING:
While Rafferty does not expect that the return of any of the Funds will
deviate adversely from their respective investment objectives by more than 10%,
several factors may affect a Fund's ability to achieve its target. As a
consequence, there can be no guarantee that the Funds will be able to achieve
this level of correlation. A failure to achieve a high degree of correlation may
prevent a Fund from achieving its investment goal.
RISK OF TRADING HALTS:
In certain circumstances, an exchange may halt trading in securities
held by a Fund. If such trading halts are instituted at the close of a trading
day, a Fund will not be able to execute purchase or sales transactions in the
specific option or futures contracts affected. In such an event, a Fund also may
be unable to accurately price its outstanding contracts. If a Fund is affected
by such a halt, it may reject investors' orders for purchases or exchanges
received earlier during the business day, and may reject redemption requests
when it is not reasonably possible for a Fund fairly to determine the value of
its net assets.
RISK OF EARLY CLOSING:
The normal close of trading of securities listed on the Nasdaq and NYSE
is 4:00 p.m. Eastern time. Unanticipated early closings may result in a Fund
10
<PAGE>
being unable to sell or buy securities on that day. If an exchange closes early
on a day when one or more of the Funds needs to execute a high volume of
securities trades late in the trading day a Fund might incur substantial trading
losses.
HIGH PORTFOLIO TURNOVER:
Rafferty expects a significant portion of the Funds' assets to come
from professional money managers and investors who use the Funds as part of
"asset allocation" and "market timing" investment strategies. These strategies
often call for frequent trading to take advantage of anticipated changes in
market conditions. Frequent trading could increase the rate of the Funds'
portfolio turnover and thereby increasing transaction expenses. In addition,
while Rafferty does not expect it, large movements of assets into and out of the
Funds may negatively impact their abilities to achieve their investment
objectives or their targeted level of operating expenses.
RISK OF NON-DIVERSIFICATION:
Each Fund (except the VP Money Market Fund) is non-diversified, which
means that it may invest a high percentage of its assets in a limited number of
securities. Since the Funds are non-diversified, their net asset values and
total returns may fluctuate more or fall greater in times of weaker markets than
a diversified mutual fund.
RISKS OF INVESTING IN INTERNET COMPANIES:
The Potomac VP Internet Funds concentrate their investments in Internet
companies. In addition, The Potomac VP OTC Funds may invest a substantial
portion of their assets in Internet companies listed on the Nasdaq 100 Index.
The market prices of Internet-related stocks tend to exhibit a greater degree of
market risk and sharp price fluctuations than other types of investments. These
stocks may fall in and out of favor with investors rapidly, which may cause
sudden selling and dramatically lower market prices. Internet stocks also may be
affected adversely by changes in technology, consumer and business purchasing
patterns, government regulation and/or obsolete products or services. In
addition, a rising interest rate environment tends to negatively affect Internet
companies. Those Internet companies having high market valuations may appear
less attractive to investors, which may cause sharp decreases in the companies'
market prices. Further, those Internet companies seeking to finance their
expansion would have increased borrowing costs, which may negatively impact
their earnings. As a result, these factors may negatively affect the performance
of the Internet Index and the Nasdaq 100 Index.
RISKS OF INVESTING IN SMALL CAPITALIZATION COMPANIES:
Investing in the securities of small capitalization companies involves
greater risks and the possibility of greater price volatility than investing in
larger capitalization and more established companies. Smaller companies may have
limited operating history, product lines, and financial resources, and the
securities of these companies may lack sufficient market liquidity. Any of these
factors may negatively impact the performance of the Russell 2000 Index.
11
<PAGE>
RISKS OF INVESTING IN JAPANESE COMPANIES:
The Potomac VP Japan Funds may invest without limit indirectly in
Japanese securities through ADRs. Investments in Japanese securities involve
greater risks than investing in domestic securities. As result, the Funds'
returns and net asset values may be affected to a large degree by fluctuations
in currency exchange rates, political, diplomatic or economic conditions and
regulatory requirements in Japan. Japanese laws and accounting, auditing, and
financial reporting standards typically are not as strict as they are in the
United States, and there may be less public information available about foreign
companies.
THE POTOMAC MONEY MARKET FUND
OBJECTIVE:
THE POTOMAC VP MONEY MARKET FUND seeks to provide security of
principal, current income and liquidity.
CORE INVESTMENTS:
THE POTOMAC VP MONEY MARKET FUND seeks to achieve these objectives by
investing in high quality, U.S. dollar-denominated short-term obligations that
have been determined by the Trustees or by Rafferty to present minimal credit
risk. The Fund invests exclusively in obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities and repurchase agreements
that are fully collateralized by such obligations.
INVESTMENT TECHNIQUES AND POLICIES:
In order to maintain a stable share price, the Fund maintains an
average dollar-weighted maturity of 90 days or less. Securities purchased by the
Fund generally have 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.
RISK FACTORS:
o The yield paid by the Fund is subject to changes in interest rates. As
a result, there is risk that a decline in short-term interest rates
would lower its yield and the overall return on your investment.
o Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
o Your investment in the Fund is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government institution.
12
<PAGE>
HISTORICAL PERFORMANCE
This prospectus does not include a bar chart of annual total returns
nor a performance table of average annual total returns because the Funds of the
Potomac Insurance Trust are new funds and they do not have any performance
history.
FEES AND EXPENSES OF THE FUNDS
The tables below describe the fees and expenses that you may pay if you
buy and hold shares of the Funds. The expenses below are based on estimated
expenses. Please refer to your Contract prospectus for information on additional
fees and expenses.
<TABLE>
<CAPTION>
SHAREHOLDER FEES (fees paid directly from your investment)
- ----------------
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------- ------------ -------------
CLASS A CLASS B
- --------------------------------------------------------------------------------------------- ------------ -------------
Maximum Sales Charge Imposed on Purchases (as a % of offering price).................. None None
Maximum Deferred Sales Charge (as a % of original purchase price or sales proceeds, None None
whichever is less)....................................................................
Wire Redemption Fee................................................................... $12.00 $12.00
- --------------------------------------------------------------------------------------------- ------------ -------------
</TABLE>
ANNUAL OPERATING EXPENSES (%) (expenses that are deducted from Fund assets)
- -------------------------
<TABLE>
<CAPTION>
CLASS A SHARES:
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------ ------------- -------------- --------------- ---------------- -------------- --------------
VP OTC VP DOW VP SMALL VP INTERNET VP U.S. VP JAPAN
PLUS 30 PLUS CAP PLUS PLUS PLUS PLUS
- ------------------------------ ------------- -------------- --------------- ---------------- -------------- --------------
Management Fees 0.75 0.75 0.75 0.75 0.75 0.75
Distribution (12b-1) Fees None None None None None None
Other Expenses* 0.86 0.86 0.86 0.86 0.77 0.77
---- ---- ---- ---- ---- ----
Total Annual
Operating Expenses* 1.61 1.61 1.61 1.61 1.52 1.52
==== ==== ==== ==== ==== ====
- ------------------------------ ------------- -------------- --------------- ---------------- -------------- --------------
Fee Waiver and/or 0.11 0.11 0.11 0.11 0.02 0.02
Reimbursement* ==== ==== ==== ==== ==== ====
Net Annual Operating
1.50 1.50 1.50 1.50 1.50 1.50
==== ==== ==== ==== ==== ====
- ------------------------------ ------------- -------------- --------------- ---------------- -------------- --------------
13
<PAGE>
Expenses*
- ------------------------------ -------------- ----------- -------------- ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
VP VP VP VP VP VP VP
OTC/ DOW SMALL INTERNET/ U.S./ JAPAN/ MONEY
SHORT 30/ CAP/ SHORT SHORT SHORT MARKET
SHORT SHORT
- ------------------------------ -------------- ----------- -------------- ------------ ------------ ---------- ------------
Management Fees 0.90 0.90 0.90 0.90 0.90 0.90 0.50
Distribution (12b-1) Fees None None None None None None None
Other Expenses* 1.22 1.22 1.22 1.22 1.22 1.22 0.76
---- ---- ---- ---- ---- ---- ----
Total Annual
Operating Expenses* 2.12 2.12 2.12 2.12 2.12 2.12 1.26
==== ==== ==== ==== ==== ==== ====
- ------------------------------ -------------- ----------- -------------- ------------ ------------ ---------- ------------
Fee Waiver and/or 0.47 0.47 0.47 0.47 0.47 0.47 0.01
Reimbursement* ==== ==== ==== ==== ==== ==== ====
Net Annual Operating
Expenses* 1.65 1.65 1.65 1.65 1.65 1.65 1.25
==== ==== ==== ==== ==== ==== ====
- ------------------------------ -------------- ----------- -------------- ------------ ------------ ---------- ------------
</TABLE>
* Rafferty Asset Management, LLC has contractually agreed to reimburse the
Funds for Other Expenses through December 31, 2002 to the extent that Class
A Total Annual Fund Operating Expenses exceed 1.50% for the Plus Funds,
1.65% for the Short Funds and 1.25% for the Money Market Fund. If overall
expenses fall below these percentage limitations, then the Funds may
reimburse Rafferty within the following three years.
CLASS B SHARES:
<TABLE>
<CAPTION>
- ------------------------------ -------------- ------------ -------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
VP OTC VP DOW VP SMALL VP INTERNET VP U.S. VP JAPAN
PLUS 30 PLUS CAP PLUS PLUS PLUS PLUS
- ------------------------------ -------------- ------------ -------------- ---------------- --------------- --------------
Management Fees 0.75 0.75 0.75 0.75 0.75 0.75
Distribution (12b-1) 1.00 1.00 1.00 1.00 1.00 1.00
Fees
Other Expenses* 0.86 0.86 0.86 0.86 0.77 0.77
---- ---- ---- ---- ---- ----
Total Annual
Operating Expenses* 2.61 2.61 2.61 2.61 2.52 2.52
==== ==== ==== ==== ==== ====
- ------------------------------ -------------- ------------ -------------- ---------------- --------------- --------------
Fee Waiver and/or 0.11 0.11 0.11 0.11 0.02 0.02
Reimbursement* ==== ==== ==== ==== ==== ====
14
<PAGE>
Net Annual Operating
Expenses* 2.50 2.50 2.50 2.50 2.50 2.50
==== ==== ==== ==== ==== ====
- ------------------------------ -------------- ------------ -------------- ---------------- --------------- --------------
- ------------------------------ -------------- ------------- ----------- ------------- ---------- ----------- -----------
VP
VP VP SMALL VP VP VP VP
OTC/ DOW CAP/ INTERNET/ U.S./ JAPAN/ MONEY
SHORT 30/SHORT SHORT SHORT SHORT SHORT MARKET
- ------------------------------ -------------- ------------- ----------- ------------- ---------- ----------- -----------
Management Fees 0.90 0.90 0.90 0.90 0.90 0.90 0.50
Distribution (12b-1) Fees 1.00 1.00 1.00 1.00 1.00 1.00 1.00
Other Expenses* 1.22 1.22 1.22 1.22 1.22 1.22 0.76
---- ---- ---- ---- ---- ---- ----
Total Annual
Operating Expenses* 3.12 3.12 3.12 3.12 3.12 3.12 3.12
==== ==== ==== ==== ==== ==== ====
- ------------------------------ -------------- ------------- ----------- ------------- ---------- ----------- -----------
Fee Waiver and/or 0.47 0.47 0.47 0.47 0.47 0.47 0.01
==== ==== ==== ==== ==== ==== ====
Reimbursement*
Net Annual Operating
Expenses* 2.65 2.65 2.65 2.65 2.65 2.65 2.25
==== ==== ==== ==== ==== ==== ====
- ------------------------------ -------------- ------------- ----------- ------------- ---------- ----------- -----------
</TABLE>
* Rafferty Asset Management, LLC has contractually agreed to reimburse the
Funds for Other Expenses through December 31, 2002 to the extent that Class
B Total Annual Fund Operating Expenses exceed 2.50% for the Plus Funds,
2.65% for the Short Funds and 2.25% for the Money Market Fund. If overall
expenses fall below these percentage limitations, then the Funds may
reimburse Rafferty within the following three years.
EXPENSE EXAMPLE
- ---------------
The tables below are intended to help you compare the cost of investing
in the different Classes of the Funds with the cost of investing in other mutual
funds. The tables show what you would have paid if you invested $10,000 in each
Class of each Fund over the periods shown and then redeemed all your shares at
the end of those periods. It also assumes that your investment has a 5% return
each year and the Classes' operating expenses for Year 1 are net of fee waivers
and/or expense reimbursements. The Year 3 expenses are based on Total Annual
Operating Expenses. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
FUND 1 YEAR 3 YEARS FUND 1 YEAR 3 YEARS
- --------------------------------------------------------------------------------------------------------
VP OTC Plus: VP OTC/Short:
Class A $153 $508 Class A $168 $664
- --------------------------------------------------------------------------------------------------------
15
<PAGE>
- --------------------------------------------------------------------------------------------------------
Class B $253 $811 Class B $268 $963
- --------------------------------------------------------------------------------------------------------
VP Dow 30 Plus: VP Dow 30/Short:
Class A $153 $508 Class A $168 $664
Class B $253 $811 Class B $268 $963
- --------------------------------------------------------------------------------------------------------
VP Small Cap Plus: VP Small Cap/Short:
Class A $153 $508 Class A $168 $664
Class B $253 $811 Class B $268 $963
- --------------------------------------------------------------------------------------------------------
VP Internet Plus: VP Internet/Short:
Class A $153 $508 Class A $168 $664
Class B $253 $811 Class B $268 $963
- --------------------------------------------------------------------------------------------------------
VP U.S. Plus: VP U.S./Short:
Class A $153 $480 Class A $168 $664
Class B $253 $785 Class B $268 $963
- --------------------------------------------------------------------------------------------------------
VP Japan Plus: VP Japan/Short:
Class A $153 $480 Class A $168 $664
Class B $253 $785 Class B $268 $963
- --------------------------------------------------------------------------------------------------------
VP Money Market:
Class A $127 $400
Class B $228 $706
- --------------------------------------------------------------------------------------------------------
</TABLE>
PRIOR PERFORMANCE OF RELATED FUNDS
The Funds are modeled after other funds managed by Rafferty (Related
Funds). The investment objectives, policies and strategies of the Funds and the
Related Funds are substantially similar. The Related Funds are not sold through
Contracts or qualified pension or retirement plans and do not have any sales
charges. The Funds, however, only may be purchased through Contracts or
qualified pension or retirement plans. Contracts impose certain additional
insurance expenses, and redemption charges that will lower the performance of
the Funds compared to the performance of the Related Funds. In addition, there
may be other differences between the Funds and the Related Funds including asset
sizes, cash flows and restrictions relating to purchase, sale and exchange of
the Funds through Contracts or qualified pension or retirement plans.
The chart below provides the average annual returns of three of the
Related Funds (not the Funds of the Potomac Insurance Trust) for the period
ended December 31, 1999. The performance is net of advisory fees and other
expenses and includes fee waivers or expense reimbursements incurred during the
16
<PAGE>
<TABLE>
<CAPTION>
1999 calendar year. The performance shown includes all substantially similar
Related Funds managed by Rafferty. The performance of the Related Funds is
historical and does not guarantee future performance of any Funds offered
through your Contract.
<S> <C> <C> <C> <C>
- ------------------------------------------- ---------------------- ------------------------ ----------------------------
RELATED FUNDS MANAGED BY RAFFERTY ONE YEAR SINCE INCEPTION INCEPTION DATE
- ------------------------------------------- ---------------------- ------------------------ ----------------------------
POTOMAC OTC PLUS FUND 129.22% 91.49% October 20, 1997
POTOMAC OTC/SHORT FUND -56.81% -49.85% October 16, 1997
POTOMAC U.S./SHORT FUND -14.44% -19.95% November 7, 1997
- ------------------------------------------- ---------------------- ------------------------ ----------------------------
</TABLE>
ABOUT YOUR INVESTMENT
INVESTING IN THE FUNDS
The Potomac Insurance Trust offers shares of its Funds to insurance
company separate accounts that serve as investment vehicles for variable annuity
contracts and variable life insurance policies. The Trust also offers shares of
the Funds to certain qualified pension and retirement plans. The separate
accounts and plan sponsors are the shareholders of the Funds and not the
individual contract owners or plan beneficiaries. However, the separate accounts
and plan sponsors may pass through voting rights to the contract owners or plan
beneficiaries.
Contract owners and plan beneficiaries that desire to purchase, sell or
exchange shares in the Funds should consult with the insurance company that
issued their Contracts, the accompanying variable Contract prospectus or their
plan sponsor. An insurance company or plan sponsor may not make available all
Funds and there may be other restrictions and costs for purchases, sales or
exchanges.
CLASSES OF SHARES
Each Fund offers two classes of shares that are sold and redeemed at
net asset value. An insurance company or plan sponsor may not make available
both classes in its Contracts or qualified pension and retirement plans.
o Class A shares are made available only with respect to
Contracts and qualified pension and retirement plans where the
insurance company or plan sponsor receives no payments from
the Funds for its services in selling the Funds' shares or
servicing shareholder accounts.
17
<PAGE>
o Class B shares are made available with respect to Contracts
and qualified pension and retirement plans where the insurance
company or plan sponsor receives payments at an annual rate of
up to 1.00% of that class' average daily net assets for
distribution and servicing activities. As a result, Class B
shares have higher on-going expenses than Class A shares of
the same Fund.
The Trust reserves the right to reject any purchase order or suspend
the offering of Fund shares.
RULE 12B-1 FEES
The Funds have adopted a distribution plan under Rule 12b-1 for each
Class of shares. The Class A plan does not permit the Funds to incur any direct
distribution expenses related to Class A shares. However, it does authorize the
Funds' service providers to pay expenses related to the distribution and sales
of the Funds' Class A shares. The Class B plan allows the Funds to pay
distribution and sales fees for the sale of the Funds' shares and for other
shareholder services. Because these fees are paid out of the Funds' Class B
assets on an on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges. Under
Class B plan, the fees may amount to an annualized rate of 1.00% of that class'
average daily net assets.
SHARE PRICES
A Fund's share price is known as its net asset value per share (NAV).
For all of the Funds except the VP Money Market Fund, the share prices are
calculated as of fifteen minutes after the close of regular trading, usually
4:15 pm Eastern time, each day the NYSE is open for business. The VP Money
Market Fund's share price is calculated as of 1:15 pm Eastern time each day the
NYSE and Federal Reserve Bank of New York are open. Share price is calculated by
dividing a class' net assets by its shares outstanding. The Funds use the
following methods to price securities held in their portfolios:
o equity securities, OTC securities, options and futures are valued at
their last sales price, or if not available, the mean of the last
bid and ask price
o options on futures are valued at their closing price
o short-term debt securities with a maturity of 60 days or less and
money market securities held by a Fund are valued using the
"amortized" cost method
o securities for which a price is unavailable will be valued at fair
value estimates by the investment advisor under the supervision of
the Board of Trustees
18
<PAGE>
ADDITIONAL INFORMATION
MANAGEMENT OF THE FUNDS
INVESTMENT ADVISOR:
Rafferty Asset Management, LLC (Rafferty) provides investment services
to the Funds. Rafferty attempts to manage the investment of the Funds' assets
consistent with their investment objectives, policies and limitations. Rafferty
has been managing mutual funds since June 1997 and has approximately $560
million assets under management as of March 23, 2000. Rafferty is located at
1311 Mamaroneck Avenue, White Plains, New York 10605.
Under an investment advisory agreement between The Potomac Insurance
Trust and Rafferty, the Funds pay Rafferty the following fees at an annualized
rate based on a percentage of the Funds' daily net assets. For the Plus Funds,
the Short Funds and the Money Market Fund the advisory fees charged are 0.75%,
0.90% and 0.50%, respectively.
PORTFOLIO MANAGEMENT:
An investment committee of Rafferty employees has the day-to-day
responsibility for managing the Funds.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS:
Each Fund, except the VP Money Market Fund, distributes dividends from
net investment income annually. The VP Money Market Fund usually declares
dividends from its net investment income daily and distributes them monthly. Net
investment income generally consists of interest income and dividends received
on investments, less expenses. Each Fund, except the VP Money Market Fund, also
distributes any realized net capital gains annually. A Fund has capital gains
when it sells its portfolio assets for a profit.
Dividends and net capital gain distributions will be reinvested
automatically at NAV in shares of the distributing Fund on which the dividend or
distribution was declared unless you request otherwise in writing.
TAXES:
Each Fund intends to qualify for treatment as a regulated investment
company under the Internal Revenue Code of 1986, as amended (Code), so that it
will not have to pay federal income tax on that part of its investment company
taxable income and net capital gain (I.E., the excess of net long-term capital
gain over net short-term capital loss) that it distributes to its shareholders.
Fund shares are offered only to insurance company separate accounts
that fund the Contracts. Under the Code, no tax is imposed on an insurance
19
<PAGE>
company with respect to income of a qualifying separate account properly
allocable to the value of eligible variable annuity or variable life insurance
contracts. See the applicable Contract prospectus for a discussion of the
federal income tax status of (1) the insurance company separate accounts that
purchase and hold Fund shares (Separate Accounts) and (2) the holders of
Contracts funded through the Separate Accounts.
The foregoing is only a summary of some of the important federal income
tax considerations generally affecting the Funds and their shareholders; see the
Statement of Additional Information for a more detailed discussion. See the
applicable Contract prospectus for information regarding the federal income tax
treatment of distributions to the Separate Accounts. Prospective shareholders
are urged to consult their tax advisers.
20
<PAGE>
MORE INFORMATION ON
THE POTOMAC INSURANCE TRUST
This Prospectus is intended only for use when accompanied by a Separate Account
prospectus or qualified pension or retirement plan document.
STATEMENT OF ADDITIONAL INFORMATION (SAI): The Insurance Trust's SAI contains
more information on the Funds and their investment policies. The SAI is
incorporated in this Prospectus by reference (it is legally part of this
Prospectus). A current SAI is on file with the Securities and Exchange
Commission (SEC).
CALL OR WRITE TO OBTAIN THE SAI OR INSURANCE TRUST REPORTS FREE OF CHARGE:
Write to: The Potomac Insurance Trust
P.O. Box 1993
Milwaukee, Wisconsin 53201-1993
Call: (800) 851-0511
Copies of these documents and other information about the Funds are available
from the SEC Public Reference Room in Washington, D.C. The Public Reference Room
can be reached at (800) 732-0330 or by mailing a request, including a
duplicating fee to: SEC's Public Reference Section, 450 Fifth Street NW,
Washington, D.C. 20549-6009. You also may find information on the Funds at the
SEC's Internet website at http://www.sec.gov.
No person has been authorized to give any information or to make any
representation not contained in this Prospectus, or in the SAI incorporated
herein by reference, in connection with the offering made by this Prospectus
and, if given or made, such information or representations must not be relied
upon as having been authorized by The Potomac Insurance Trust or their
distributor. This Prospectus does not constitute an offering by the Funds in any
jurisdiction in which such an offering may not lawfully be made.
SEC File Number: 811-09761
P R O S P E C T U S
__________, 2000
THE POTOMAC INSURANCE TRUST
Enhanced Investment Strategies
1311 Mamaroneck Avenue
White Plains, New York 10605
100 South Royal Street
Alexandria, Virginia 22314
<PAGE>
THE POTOMAC INSURANCE TRUST
STATEMENT OF ADDITIONAL INFORMATION
100 South Royal Street
Alexandria, Virginia 22314
1311 Mamaroneck Avenue
White Plains, New York 10605
(800) 851-0511
The Potomac Insurance Trust (the "Trust") is a management investment company, or
mutual fund, that offers thirteen separate investment portfolios (the "Funds")
through variable annuity contracts and variable life insurance policies of
certain insurance companies (collectively "Contracts") and qualified pension and
retirement plans ("Qualified Plans"). The Funds are designed principally for
experienced investors who intend to follow an asset allocation strategy. The
Funds are not designed for inexperienced or less sophisticated investors. An
important feature of the Trust is that it primarily consists of pairs of Funds,
each of which attempts to provide results correlating to a specific index. Each
"plus" Fund attempts to provide investment results that correlate to its target
index, while each "short" Fund attempts to provide investment results that are
opposite of the return of its target index. In particular, the following Funds
seek investment results that correspond over time to the following target
indices:
<TABLE>
<CAPTION>
FUND TARGET INDEX
<S> <C>
The Potomac VP U.S. Plus Fund 150% of the performance of the Standard & Poor's 500
Composite Stock Price Index(TM)
The Potomac VP U.S./Short Fund Inverse (opposite) of the Standard & Poor's 500
Composite Stock Price
The Potomac VP OTC Plus Fund 125% of the performance of the Nasdaq 100 Stock Index(TM)
The Potomac VP OTC/Short Fund Inverse (opposite) of the Nasdaq 100 Stock Index(TM)
The Potomac VP Dow 30 Plus Fund 125% of the performance of the Dow Jones Industrial Average(SM)
The Potomac VP Dow 30/Short Fund Inverse (opposite) of the Dow Jones Industrial Average(SM)
The Potomac VP Internet Plus Fund 125% of the performance of the Dow Jones Composite Internet
Index(SM)
The Potomac VP Internet/Short Fund Inverse (opposite) of the Dow Jones Composite Internet Index(SM)
The Potomac VP Japan Plus Fund 125% of the performance of the Nikkei 225 Stock Average
The Potomac VP Japan/Short Fund Inverse (opposite) of the Nikkei 225 Stock Average
The Potomac VP Small Cap Plus Fund 125% of the performance of the Russell 2000 Index
The Potomac VP Small Cap/Short Fund Inverse (opposite) of the Russell 2000 Index
</TABLE>
The Trust also offers The Potomac VP Money Market Fund, which seeks security of
principal, current income and liquidity by investing primarily in money market
instruments issued or guaranteed, as to principal and interest, by the U.S.
Government, its agencies or instrumentalities. THE FUND SEEKS TO MAINTAIN A
CONSTANT $1.00 NET ASSET VALUE PER SHARE, ALTHOUGH THIS CANNOT BE ASSURED.
SHARES OF THIS FUND ARE NOT DEPOSITS OR OBLIGATIONS, OR GUARANTEED OR ENDORSED
BY, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY
OTHER AGENCY. AN INVESTMENT IN THIS FUND IS NEITHER INSURED NOR GUARANTEED BY
THE UNITED STATES GOVERNMENT.
This Statement of Additional Information dated May __, 2000 is not a
prospectus. It should be read in conjunction with the Trust's Prospectus dated
May __, 2000. A copy of the Prospectus is available, without charge, upon
request to the Trust at the address or telephone number above.
<PAGE>
TABLE OF CONTENTS
Page
----
THE POTOMAC INSURANCE TRUST..................................................3
CLASSIFICATION OF THE FUNDS..................................................3
INVESTMENT POLICIES AND TECHNIQUES...........................................4
American Depositary Receipts ("ADRs").....................................4
Foreign Securities........................................................4
Illiquid Investments and Restricted Securities............................5
Indexed Securities........................................................5
Investments in Other Investment Companies.................................6
Options, Futures and Other Strategies.....................................7
Repurchase Agreements....................................................14
Short Sales..............................................................14
U.S. Government Securities...............................................15
Other Investment Risks and Practices.....................................16
INVESTMENT RESTRICTIONS.....................................................18
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................22
MANAGEMENT OF THE TRUST.....................................................23
Trustees and Officers....................................................23
Investment Advisor.......................................................25
Fund Administrator, Fund Accountant and Custodian........................26
Distributor..............................................................27
Distribution Plan........................................................27
Independent Accountants..................................................28
DETERMINATION OF NET ASSET VALUE............................................28
PURCHASES AND REDEMPTIONS...................................................29
Redemption in Kind.......................................................29
Receiving Payment........................................................30
PERFORMANCE INFORMATION.....................................................30
Comparative Information..................................................31
Total Return Computations................................................31
Yield Computations.......................................................32
SHAREHOLDER AND OTHER INFORMATION...........................................33
Shareholder Information..................................................33
Other Information........................................................33
DIVIDENDS, OTHER DISTRIBUTIONS AND TAXES....................................34
Dividends and Other Distributions........................................34
Taxes....................................................................34
FINANCIAL STATEMENTS........................................................38
<PAGE>
THE POTOMAC INSURANCE TRUST
The Trust is a Massachusetts business trust organized on December 29, 1999 and
is registered with the Securities and Exchange Commission ("SEC") as an open-end
management investment company under the Investment Company Act of 1940, as
amended ("1940 Act"). The Trust currently consists of thirteen separate series:
The Potomac VP U.S. Plus Fund ("U.S. Plus Fund"), The Potomac VP U.S./Short Fund
("U.S. Short Fund"), The Potomac VP OTC Plus Fund ("OTC Plus Fund"), The Potomac
VP OTC/Short Fund ("OTC/Short Fund"), The Potomac VP Dow 30 Plus Fund ("Dow 30
Plus Fund"), The Potomac VP Dow 30/Short Fund ("Dow 30/Short Fund"), The Potomac
VP Internet Plus Fund ("Internet Plus Fund"), The Potomac VP Internet/Short Fund
("Internet Short Fund"), The Potomac VP Japan Plus Fund ("Japan Plus Fund"), The
Potomac VP Japan/Short Fund ("Japan Short Fund"), The Potomac VP Small Cap Plus
Fund ("Small Cap Plus"), The Potomac VP Small Cap/Short Fund ("Small Cap Short")
and The Potomac VP Money Market Fund ("Money Market Fund") (collectively, the
"Funds"). The Trust may offer additional series in the future.
Each Fund offers two classes of shares: Class A shares and Class B shares. Class
A shares are made available only with respect to the Contracts and Qualified
Plans where the insurance company or Qualified Plan sponsor receives no payments
from the Funds with respect to its services in connection with the distribution
of Fund shares or servicing of shareholder accounts. Class B shares are made
available with respect to the Contracts and Qualified Plans where the insurance
company or Qualified Plan sponsor receives payments at an annual rate of up to
1.00% of that class' average daily net assets for related distribution and
shareholder services. Each Class also may be subject to other charges as
described in the Contracts' prospectuses or Qualified Plan documents.
The Funds are designed principally for experienced investors seeking an asset
allocation vehicle. Except for the Money Market Fund, the Funds provide
investment exposure to various securities markets. Each Fund seeks investment
results that correspond over time to a specific target index. The terms "plus"
and "short" in the Funds' names are not intended to refer to the duration of the
Funds' investment portfolios. The Funds may be used independently or in
combination with each other as part of an overall strategy.
CLASSIFICATION OF THE FUNDS
Each Fund (other than the Money Market Fund) is a "non-diversified" series of
the Trust pursuant to the 1940 Act. A Fund is considered "non-diversified"
because a relatively high percentage of its assets may be invested in the
securities of a limited number of issuers. To the extent that a Fund assumes
large positions in the securities of a small number of issuers, the Fund's net
asset value may fluctuate to a greater extent than that of a diversified company
as a result of changes in the financial condition or in the market's assessment
of the issuers, and the Fund may be more susceptible to any single economic,
political or regulatory occurrence than a diversified company.
A Fund's classification as a "non-diversified" investment company means that the
proportion of its assets that may be invested in the securities of a single
3
<PAGE>
issuer is not limited by the 1940 Act. Each Fund, however, intends to meet
certain diversification standards at the end of each quarter of its tax year.
INVESTMENT POLICIES AND TECHNIQUES
The Funds may engage in the investment strategies discussed below. There is no
assurance that any of these strategies or any other strategies and methods of
investment available to a Fund will result in the achievement of the Fund's
objective.
AMERICAN DEPOSITARY RECEIPTS ("ADRS")
- -------------------------------------
The OTC Plus Fund, OTC/Short Fund, Small Cap Plus Fund, Small Cap/Short Fund,
Internet Plus Fund, Internet/Short Fund, Dow 30/Plus Fund, Dow 30/Short Fund,
Japan Plus Fund and Japan/Short Fund may invest in ADRs. The OTC/Short Fund,
Small Cap/Short Fund, Internet/Short Fund, Dow 30/Short Fund and Japan/Short
Fund may sell ADRs short.
ADRs are U.S. dollar-denominated receipts representing interests in the
securities of a foreign issuer, which securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are receipts typically issued by U.S. banks and trust companies
that evidence ownership of underlying securities issued by a foreign
corporation. ADRs include ordinary shares and New York shares. ADRs may be
purchased through "sponsored" or "unsponsored" facilities. A sponsored facility
is established jointly by the issuer of the underlying security and a
depository, whereas a depository may establish an unsponsored facility without
participation by the issuer of the depository security. Holders of unsponsored
depository receipts generally bear all the costs of such facilities and the
depository of an unsponsored facility frequently is under no obligation to
distribute shareholder communications received from the issuer of the deposited
security or to pass through voting rights to the holders of such receipts of the
deposited securities. ADRs are not necessarily denominated in the same currency
as the underlying securities to which they may be connected. Generally, ADRs in
registered form are designed for use in the U.S. securities market and ADRs in
bearer form are designed for used outside the United States.
FOREIGN SECURITIES
- ------------------
The Japan Funds may have indirect exposure to foreign securities through
investments in stock index futures contracts, options on stock index futures
contracts and options on securities and on stock indices.
Investing in foreign securities carries political and economic risks distinct
from those associated with investing in the United States. Foreign investments
may be affected by actions of foreign governments adverse to the interests of
U.S. investors, including the possibility of expropriation or nationalization of
assets, confiscatory taxation, restrictions on U.S. investment or on the ability
to repatriate assets or to convert currency into U.S. dollars. There may be a
greater possibility of default by foreign governments or foreign-government
sponsored enterprises. Investments in foreign countries also involve a risk of
local political, economic or social instability, military action or unrest or
adverse diplomatic developments.
4
<PAGE>
ILLIQUID INVESTMENTS AND RESTRICTED SECURITIES
- ----------------------------------------------
Each Fund may purchase and hold illiquid investments, No Fund will purchase or
otherwise acquire any security if, as a result, more than 15% (10% for the Money
Market Fund) of its net assets (taken at current value) would be invested in
investments that are illiquid by virtue of the absence of a readily available
market or legal or contractual restrictions on resale. This policy does not
include restricted securities eligible for resale pursuant to Rule 144A under
the Securities Act of 1933, as amended ("1933 Act"), which the Trust's Board of
Trustees ("Board" or "Trustees") or Rafferty Asset Management, LLC ("Rafferty")
has determined under Board-approved guidelines are liquid. None of the Funds,
however, currently anticipates investing in such restricted securities.
The term "illiquid investments" for this purpose means investments that cannot
be disposed of within seven days in the ordinary course of business at
approximately the amount at which a Fund has valued the investments. Investments
currently considered to be illiquid include: (1) repurchase agreements not
terminable within seven days, (2) securities for which market quotations are not
readily available, (3) over-the-counter ("OTC") options and their underlying
collateral, (4) bank deposits, unless they are payable at principal amount plus
accrued interest on demand or within seven days after demand and (5) restricted
securities not determined to be liquid pursuant to guidelines established by the
Board. The assets used as cover for OTC options written by a Fund will be
considered illiquid unless the OTC options are sold to qualified dealers who
agree that the Fund may repurchase any OTC option it writes at a maximum price
to be calculated by a formula set forth in the option agreement. The cover for
an OTC option written subject to this procedure would be considered illiquid
only to the extent that the maximum repurchase price under the formula exceeds
the intrinsic value of the option.
A Fund may not be able to sell illiquid investments when Rafferty considers it
desirable to do so or may have to sell such investments at a price that is lower
than the price that could be obtained if the investments were liquid. In
addition, the sale of illiquid investments may require more time and result in
higher dealer discounts and other selling expenses than does the sale of
investments that are not illiquid. Illiquid investments also may be more
difficult to value due to the unavailability of reliable market quotations for
such investments, and investment in illiquid investments may have an adverse
impact on net asset value.
Rule 144A establishes a "safe harbor" from the registration requirements of the
1933 Act for resales of certain securities to qualified institutional buyers.
Institutional markets for restricted securities that have developed as a result
of Rule 144A provide both readily ascertainable values for certain restricted
securities and the ability to liquidate an investment to satisfy share
redemption orders. An insufficient number of qualified institutional buyers
interested in purchasing Rule 144A-eligible securities held by a Fund, however,
could affect adversely the marketability of such portfolio securities and a Fund
may be unable to dispose of such securities promptly or at reasonable prices.
INDEXED SECURITIES
- ------------------
Each Fund (other than the Money Market Fund) may purchase indexed securities,
which are securities the value of which varies positively or negatively in
relation to the value of other securities, securities indices or other financial
indicators, consistent with its investment objective. Indexed securities may be
5
<PAGE>
debt securities or deposits whose value at maturity or coupon rate is determined
by reference to a specific instrument or statistic. Recent issuers of indexed
securities have included banks, corporations and certain U.S. Government
agencies.
The performance of indexed securities depends to a great extent on the
performance of the security or other instrument to which they are indexed and
also may be influenced by interest rate changes in the United States and abroad.
At the same time, indexed securities are subject to the credit risks associated
with the issuer of the security, and their values may decline substantially if
the issuer's creditworthiness deteriorates. Indexed securities may be more
volatile than the underlying instruments. Certain indexed securities that are
not traded on an established market may be deemed illiquid. See "Illiquid
Investments and Restricted Securities" above.
The U.S. Plus Fund may invest in Standard & Poor's Depositary Receipts
("SPDRs"). SPDRs represent ownership in the SPDR Trust, a unit investment trust
that holds a portfolio of common stocks designed to track the price performance
and dividend yield of the Standard & Poor's 500 Composite Stock Price IndexTM
("S&P 500 Index") and whose shares trade on the American Stock Exchange
("AMEX"). The value of SPDRs fluctuates in relation to changes in the value of
the underlying portfolio of common stocks. The market price of SPDRs, however,
may not be equivalent to the pro rata value of the S&P 500 Index. SPDRs are
subject to the risks of an investment in a broadly based portfolio of common
stocks.
The Dow 30 Plus Fund may invest in DIAMONDSSM. DIAMONDS represent an investment
in a unit investment trust ("DIAMONDS Trust") that owns shares in proportion to
the weightings of the stocks comprising the Dow Jones Industrial AverageSM
("DJIA"). The DIAMONDS Trust is structured so that its shares trade at
approximately 1/100 (one one-hundredth) of the value of the DJIA. The DIAMONDS
Trust's shares trade on the AMEX. An investment in DIAMONDS is subject to risks
similar to those of other diversified stock portfolios, including market
volatility and that the general level of stock prices may decline. Although
DIAMONDS are designed to provide investment results that generally correspond to
the price and yield performance of the DJIA, the DIAMONDS Trust may not be able
to exactly replicate the performance of the DJIA because of trust expenses and
other factors.
Investments in SPDRs and DIAMONDS are considered investments in other investment
companies discussed below.
The Japan Funds may invest in currency-indexed securities. These securities
typically are short-term to intermediate-term debt securities whose maturity
values or interest rates are determined by reference to the values of one or
more specified foreign currencies and may offer higher yields than U.S.
Dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the value of a specified foreign currency increases, resulting in
a security that performs similarly to a foreign-denominated instrument, or their
maturity value may decline when the value of a specified foreign currency
increases, resulting in a security whose price characteristics are similar to a
put on the underlying currency.
INVESTMENTS IN OTHER INVESTMENT COMPANIES
- -----------------------------------------
Each Fund may invest in the securities of other investment companies to the
extent that such an investment would be consistent with the requirements of the
6
<PAGE>
1940 Act. The Money Market Fund will invest only in those investment companies
that invest in the same quality of investments as the Money Market Fund.
Investments in the securities of other investment companies may involve
duplication of advisory fees and certain other expenses. By investing in another
investment company, a Fund becomes a shareholder of that investment company. As
a result, Fund shareholders indirectly will bear a Fund's proportionate share of
the fees and expenses paid by shareholders of the other investment company, in
addition to the fees and expenses Fund shareholders directly bear in connection
with the Fund's own operations.
OPTIONS, FUTURES AND OTHER STRATEGIES
- -------------------------------------
GENERAL. Each Fund (other than the Money Market Fund) may use certain options
(traded on an exchange and OTC, or otherwise), futures contracts (sometimes
referred to as "futures") and options on futures contracts (collectively,
"Financial Instruments") as a substitute for a comparable market position in the
underlying security, to attempt to hedge or limit the exposure of a Fund's
position, to create a synthetic money market position, for certain tax-related
purposes and to effect closing transactions.
The use of Financial Instruments is subject to applicable regulations of the
SEC, the several exchanges upon which they are traded and the Commodity Futures
Trading Commission (the "CFTC"). In addition, a Fund's ability to use Financial
Instruments will be limited by tax considerations. See "Dividends, Other
Distributions and Taxes."
In addition to the instruments, strategies and risks described below and in the
Prospectus, Rafferty may discover additional opportunities in connection with
Financial Instruments and other similar or related techniques. These new
opportunities may become available as Rafferty develops new techniques, as
regulatory authorities broaden the range of permitted transactions and as new
Financial Instruments or other techniques are developed. Rafferty may utilize
these opportunities to the extent that they are consistent with a Fund's
investment objective and permitted by a Fund's investment limitations and
applicable regulatory authorities. The Funds' Prospectus or SAI will be
supplemented to the extent that new products or techniques involve materially
different risks than those described below or in the Prospectus.
SPECIAL RISKS. The use of Financial Instruments involves special considerations
and risks, certain of which are described below. Risks pertaining to particular
Financial Instruments are described in the sections that follow.
(1) Successful use of most Financial Instruments depends upon Rafferty's
ability to predict movements of the overall securities markets, which requires
different skills than predicting changes in the prices of individual securities.
The ordinary spreads between prices in the cash and futures markets, due to the
differences in the natures of those markets, are subject to distortion. Due to
the possibility of distortion, a correct forecast of stock market trends by
Rafferty may still not result in a successful transaction. Rafferty may be
incorrect in its expectations as to the extent of market movements or the time
span within which the movements take place which, thus, may result in the
strategy being unsuccessful.
(2) Options and futures prices can diverge from the prices of their
underlying instruments. Options and futures prices are affected by such factors
as current and anticipated short-term interest rates, changes in volatility of
the underlying instrument and the time remaining until expiration of the
7
<PAGE>
contract, which may not affect security prices the same way. Imperfect or no
correlation also may result from differing levels of demand in the options and
futures markets and the securities markets, from structural differences in how
options and futures and securities are traded, and from imposition of daily
price fluctuation limits or trading halts.
(3) As described below, a Fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Financial Instruments involving obligations to third parties (E.G.,
Financial Instruments other than purchased options). If a Fund were unable to
close out its positions in such Financial Instruments, it might be required to
continue to maintain such assets or accounts or make such payments until the
position expired or matured. These requirements might impair a Fund's ability to
sell a portfolio security or make an investment at a time when it would
otherwise be favorable to do so, or require that a Fund sell a portfolio
security at a disadvantageous time. A Fund's ability to close out a position in
a Financial Instrument prior to expiration or maturity depends on the existence
of a liquid secondary market or, in the absence of such a market, the ability
and willingness of the other party to the transaction (the "counterparty") to
enter into a transaction closing out the position. Therefore, there is no
assurance that any position can be closed out at a time and price that is
favorable to a Fund.
(4) Losses may arise due to unanticipated market price movements, lack of a
liquid secondary market for any particular instrument at a particular time or
due to losses from premiums paid by a Fund on options transactions.
COVER. Transactions using Financial Instruments, other than purchased options,
expose a Fund to an obligation to another party. A Fund will not enter into any
such transactions unless it owns either (1) an offsetting ("covered") position
in securities or other options or futures contracts or (2) cash and liquid
assets with a value, marked-to-market daily, sufficient to cover its potential
obligations to the extent not covered as provided in (1) above. Each Fund will
comply with SEC guidelines regarding cover for these instruments and will, if
the guidelines so require, set aside cash or liquid assets in an account with
its custodian, Firstar Bank Milwaukee, N.A. ("Custodian"), in the prescribed
amount as determined daily.
Assets used as cover or held in an account cannot be sold while the position in
the corresponding Financial Instrument is open, unless they are replaced with
other appropriate assets. As a result, the commitment of a large portion of a
Fund's assets to cover or accounts could impede portfolio management or the
Fund's ability to meet redemption requests or other current obligations.
OPTIONS. The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment and general market conditions. Options that expire
unexercised have no value. Options currently are traded on the Chicago Board
Options Exchange ("CBOE"), the AMEX and other exchanges, as well as the OTC
markets.
By buying a call option on a security, a Fund has the right, in return for the
premium paid, to buy the security underlying the option at the exercise price.
By writing (selling) a call option and receiving a premium, a Fund becomes
obligated during the term of the option to deliver securities underlying the
option at the exercise price if the option is exercised. By buying a put option,
8
<PAGE>
a Fund has the right, in return for the premium, to sell the security underlying
the option at the exercise price. By writing a put option, a Fund becomes
obligated during the term of the option to purchase the securities underlying
the option at the exercise price.
Because options premiums paid or received by a Fund are small in relation to the
market value of the investments underlying the options, buying and selling put
and call options can be more speculative than investing directly in securities.
A Fund may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, a Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, a Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit a Fund to realize profits or limit
losses on an option position prior to its exercise or expiration.
RISKS OF OPTIONS ON SECURITIES. Exchange-traded options in the United States are
issued by a clearing organization affiliated with the exchange on which the
option is listed that, in effect, guarantees completion of every exchange-traded
option transaction. In contrast, OTC options are contracts between a Fund and
its counterparty (usually a securities dealer or a bank) with no clearing
organization guarantee. Thus, when a Fund purchases an OTC option, it relies on
the counterparty from whom it purchased the option to make or take delivery of
the underlying investment upon exercise of the option. Failure by the
counterparty to do so would result in the loss of any premium paid by the Fund
as well as the loss of any expected benefit of the transaction.
A Fund's ability to establish and close out positions in exchange-traded options
depends on the existence of a liquid market. However, there can be no assurance
that such a market will exist at any particular time. Closing transactions can
be made for OTC options only by negotiating directly with the counterparty, or
by a transaction in the secondary market if any such market exists. There can be
no assurance that a Fund will in fact be able to close out an OTC option
position at a favorable price prior to expiration. In the event of insolvency of
the counterparty, a Fund might be unable to close out an OTC option position at
any time prior to its expiration.
If a Fund were unable to effect a closing transaction for an option it had
purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by a Fund could cause material losses because the Fund would be unable
to sell the investment used as cover for the written option until the option
expires or is exercised.
OPTIONS ON INDICES. An index fluctuates with changes in the market values of the
securities included in the index. Options on indices give the holder the right
to receive an amount of cash upon exercise of the option. Receipt of this cash
amount will depend upon the closing level of the index upon which the option is
based being greater than (in the case of a call) or less than (in the case of
put) the exercise price of the option. Some stock index options are based on a
broad market index such as the S&P 500 Index, the NYSE Composite Index or the
Amex Major Market Index, or on a narrower index such as the Philadelphia Stock
Exchange Over-the-Counter Index.
9
<PAGE>
Each of the exchanges has established limitations governing the maximum number
of call or put options on the same index that may be bought or written by a
single investor, whether acting alone or in concert with others (regardless of
whether such options are written on the same or different exchanges or are held
or written on one or more accounts or through one or more brokers). Under these
limitations, option positions of all investment companies advised by Rafferty
are combined for purposes of these limits. Pursuant to these limitations, an
exchange may order the liquidation of positions and may impose other sanctions
or restrictions. These positions limits may restrict the number of listed
options that a Fund may buy or sell.
Puts and calls on indices are similar to puts and calls on securities or futures
contracts except that all settlements are in cash and gain or loss depends on
changes in the index in question rather than on price movements in individual
securities or futures contracts. When a Fund writes a call on an index, it
receives a premium and agrees that, prior to the expiration date, the purchaser
of the call, upon exercise of the call, will receive from the Fund an amount of
cash if the closing level of the index upon which the call is based is greater
than the exercise price of the call. The amount of cash is equal to the
difference between the closing price of the index and the exercise price of the
call times a specified multiple ("multiplier"), which determines the total value
for each point of such difference. When a Fund buys a call on an index, it pays
a premium and has the same rights to such call as are indicated above. When a
Fund buys a put on an index, it pays a premium and has the right, prior to the
expiration date, to require the seller of the put, upon the Fund's exercise of
the put, to deliver to the Fund an amount of cash if the closing level of the
index upon which the put is based is less than the exercise price of the put,
which amount of cash is determined by the multiplier, as described above for
calls. When a Fund writes a put on an index, it receives a premium and the
purchaser of the put has the right, prior to the expiration date, to require the
Fund to deliver to it an amount of cash equal to the difference between the
closing level of the index and the exercise price times the multiplier if the
closing level is less than the exercise price.
RISKS OF OPTIONS ON INDICES. If a Fund has purchased an index option and
exercises it before the closing index value for that day is available, it runs
the risk that the level of the underlying index may subsequently change. If such
a change causes the exercised option to fall out-of-the-money, the Fund will be
required to pay the difference between the closing index value and the exercise
price of the option (times the applicable multiplier) to the assigned writer.
OTC OPTIONS. Unlike exchange-traded options, which are standardized with respect
to the underlying instrument, expiration date, contract size and strike price,
the terms of OTC options (options not traded on exchanges) generally are
established through negotiation with the other party to the option contract.
While this type of arrangement allows a Fund great flexibility to tailor the
option to its needs, OTC options generally involve greater risk than
exchange-traded options, which are guaranteed by the clearing organization of
the exchanges where they are traded.
OTC FOREIGN CURRENCY OPTIONS. OTC foreign currency options that may be used by
the Japan Plus Fund and the Japan Short Fund are European-style options. This
means that the option is exercisable only immediately prior to its expiration.
This is in contrast to American-style options, which are exercisable at any time
prior to the expiration date of the option.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. A futures contract obligates
the seller to deliver (and the purchaser to take delivery of) the specified
10
<PAGE>
security on the expiration date of the contract. An index futures contract
obligates the seller to deliver (and the purchaser to take) an amount of cash
equal to a specific dollar amount times the difference between the value of a
specific index at the close of the last trading day of the contract and the
price at which the agreement is made. No physical delivery of the underlying
securities in the index is made.
When a Fund writes an option on a futures contract, it becomes obligated, in
return for the premium paid, to assume a position in the futures contract at a
specified exercise price at any time during the term of the option. If a Fund
writes a call, it assumes a short futures position. If it writes a put, it
assumes a long futures position. When the Fund purchases an option on a futures
contract, it acquires the right in return for the premium it pays to assume a
position in a futures contract (a long position if the option is a call and a
short position if the option is a put).
Whether a Fund realizes a gain or loss from futures activities depends upon
movements in the underlying security or index. The extent of a Fund's loss from
an unhedged short position in futures contracts or from writing unhedged call
options on futures contracts is potentially unlimited. The Funds only purchase
and sell futures contracts and options on futures contracts that are traded on a
U.S. exchange or board of trade.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a Fund is required to deposit "initial margin"
in an amount generally equal to 10% or less of the contract value. Margin also
must be deposited when writing a call or put option on a futures contract, in
accordance with applicable exchange rules. Unlike margin in securities
transactions, initial margin does not represent a borrowing, but rather is in
the nature of a performance bond or good-faith deposit that is returned to the
Fund at the termination of the transaction if all contractual obligations have
been satisfied. Under certain circumstances, such as periods of high volatility,
the Fund may be required by an exchange to increase the level of its initial
margin payment, and initial margin requirements might be increased generally in
the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
commission merchant daily as the value of the futures position varies, a process
known as "marking-to-market." Variation margin does not involve borrowing, but
rather represents a daily settlement of the Fund's obligations to or from a
futures commission merchant. When a Fund purchases an option on a futures
contract, the premium paid plus transaction costs is all that is at risk. In
contrast, when a Fund purchases or sells a futures contract or writes a call or
put option thereon, it is subject to daily variation margin calls that could be
substantial in the event of adverse price movements. If the Fund has
insufficient cash to meet daily variation margin requirements, it might need to
sell securities at a time when such sales are disadvantageous.
Purchasers and sellers of futures contracts and options on futures can enter
into offsetting closing transactions, similar to closing transactions in
options, by selling or purchasing, respectively, an instrument identical to the
instrument purchased or sold. Positions in futures and options on futures
contracts may be closed only on an exchange or board of trade that provides a
secondary market. However, there can be no assurance that a liquid secondary
market will exist for a particular contract at a particular time. In such event,
it may not be possible to close a futures contract or options position.
11
<PAGE>
Under certain circumstances, futures exchanges may establish daily limits on the
amount that the price of a futures contract or an option on a futures contract
can vary from the previous day's settlement price; once that limit is reached,
no trades may be made that day at a price beyond the limit. Daily price limits
do not limit potential losses because prices could move to the daily limit for
several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.
If a Fund were unable to liquidate a futures contract or an option on a futures
position due to the absence of a liquid secondary market or the imposition of
price limits, it could incur substantial losses. The Fund would continue to be
subject to market risk with respect to the position. In addition, except in the
case of purchased options, the Fund would continue to be required to make daily
variation margin payments and might be required to maintain cash or liquid
assets in an account.
To the extent that a Fund enters into futures contracts or options on futures
contracts, in each case other than for BONA FIDE hedging purposes (as defined by
the Commodity Futures Trading Commission ("CFTC")), the aggregate initial margin
and the premiums required to establish those positions (excluding the amount by
which options are "in-the-money" at the time of purchase) will not exceed 5% of
the liquidation value of the Fund's portfolio, after taking into account
unrealized profits and unrealized losses on any contracts the Fund has entered
into. (In general, a call option on a futures contract is "in-the-money" if the
value of the underlying futures contract exceeds the strike, I.E., exercise,
price of the call. A put option on a futures contract is "in-the-money" if the
value of the underlying futures contract is exceeded by the strike price of the
put.) This policy does not limit to 5% the percentage of a Fund's assets that
are at risk in futures contracts and options on futures contracts.
RISKS OF FUTURES CONTRACTS AND OPTIONS THEREON. The ordinary spreads between
prices in the cash and futures markets (including the options on futures
markets), due to differences in the natures of those markets, are subject to the
following factors, which may create distortions. First, all participants in the
futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions, which could distort the
normal relationships between the cash and futures markets. Second, the liquidity
of the futures market depends on participants entering into offsetting
transactions rather than making or taking delivery. To the extent participants
decide to make or take delivery, liquidity in the futures market could be
reduced, thus producing distortion. Third, from the point of view of
speculators, the deposit requirements in the futures market are less onerous
than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary price
distortions.
FOREIGN CURRENCY STRATEGIES - RISK FACTORS. Each Japan Fund may use options and
futures contracts on Japanese Yen, as described above, and forward contracts on
Japanese Yen, as described below.
The value of Financial Instruments on foreign currencies depends on the value of
the underlying currency relative to the U.S. Dollar. Because foreign currency
transactions occurring in the interbank market might involve substantially
larger amounts than those involved in the use of such Financial Instruments,
12
<PAGE>
each Japan Fund could be disadvantaged by having to deal in the odd-lot market
(generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign currencies
or any regulatory requirement that quotations available through dealers or other
market sources be firm or revised on a timely basis. Quotation information
generally is representative of very large transactions in the interbank market
and thus might not reflect odd-lot transactions where rates might be less
favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the Financial Instruments until they reopen.
Settlement of transactions involving foreign currencies might be required to
take place within the country issuing the underlying currency. Thus, each Japan
Fund might be required to accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign regulations regarding the
maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
FORWARD CURRENCY CONTRACTS. Each Japan Fund may enter into forward currency
contracts to purchase or sell Japanese Yen for a fixed amount of U.S. Dollars. A
forward currency contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days (term) from the
date of the forward currency contract agreed upon by the parties, at a price set
at the time of the forward currency contract. These forward currency contracts
are traded directly between currency traders (usually large commercial banks)
and their customers.
The cost to each Japan Fund of engaging in forward currency contracts varies
with factors such as the currency involved, the length of the contract period
and the market conditions then prevailing. Because forward currency contracts
are usually entered into on a principal basis, no fees or commissions are
involved. When a Japan Fund enters into a forward currency contract, it relies
on the counterparty to make or take delivery of the underlying currency at the
maturity of the contract. Failure by the counterparty to do so would result in
the loss of any expected benefit of the transaction.
As is the case with futures contracts, purchasers and sellers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures contracts, by selling or purchasing,
respectively, an instrument identical to the instrument purchased or sold.
Secondary markets generally do not exist for forward currency contracts, with
the result that closing transactions generally can be made for forward currency
contracts only by negotiating directly with the counterparty. Thus, there can be
no assurance that a Japan Fund would in fact be able to close out a forward
currency contract at a favorable price prior to maturity. In addition, in the
event of insolvency of the counterparty, a Japan Fund may be unable to close out
a forward currency contract at any time prior to maturity. In either event, a
Japan Fund would continue to be subject to market risk with respect to the
position, and would continue to be required to maintain a position in securities
denominated in the foreign currency or to maintain cash or liquid assets in a
segregated account.
13
<PAGE>
The precise matching of forward currency contract amounts and the value of the
securities involved generally will not be possible because the value of such
securities, measured in the foreign currency, will change after the forward
currency contract has been established. Thus, a Japan Fund might need to
purchase or sell foreign currencies in the spot (cash) market to the extent such
foreign currencies are not covered by forward currency contracts.
COMBINED POSITIONS. A Fund may purchase and write options in combination with
each other. For example, a Fund may purchase a put option and write a call
option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract. Another possible combined position would involve writing a call option
at one strike price and buying a call option at a lower price, in order to
reduce the risk of the written call option in the event of a substantial price
increase. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
REPURCHASE AGREEMENTS
- ---------------------
Each Fund may enter into repurchase agreements with banks that are members of
the Federal Reserve System or securities dealers who are members of a national
securities exchange or are primary dealers in U.S. Government Securities
(defined below). Repurchase agreements generally are for a short period of time,
usually less than a week. Under a repurchase agreement, a Fund purchases a U.S.
Government Security and simultaneously agrees to sell the security back to the
seller at a mutually agreed-upon future price and date, normally one day or a
few days later. The resale price is greater than the purchase price, reflecting
an agreed-upon market interest rate during the Fund's holding period. While the
maturities of the underlying securities in repurchase agreement transactions may
be more than one year, the term of each repurchase agreement always will be less
than one year. Repurchase agreements with a maturity of more than seven days are
considered to be illiquid investments. No Fund may enter into such a repurchase
agreement if, as a result, more than 15% (10% in the case of the Money Market
Fund) of the value of its net assets would then be invested in such repurchase
agreements and other illiquid investments. See "Illiquid Investments and
Restricted Securities" above.
Each Fund will always receive, as collateral, securities whose market value,
including accrued interest, at all times will be at least equal to 100% of the
dollar amount invested by the Fund in each repurchase agreement. In the event of
default or bankruptcy by the seller, the Fund will liquidate those securities
(whose market value, including accrued interest, must be at least 100% of the
amount invested by the Fund) held under the applicable repurchase agreement,
which securities constitute collateral for the seller's obligation to repurchase
the security. If the seller defaults, a Fund might incur a loss if the value of
the collateral securing the repurchase agreement declines and might incur
disposition costs in connection with liquidating the collateral. In addition, if
bankruptcy or similar proceedings are commenced with respect to the seller of
the security, realization upon the collateral by a Fund may be delayed or
limited.
SHORT SALES
- -----------
The U.S./Short Fund, the OTC/Short Fund, the Dow 30/Short Fund, the
Internet/Short Fund, the Small Cap/Short Fund and the Japan/Short Fund may
engage in short sale transactions under which the Fund sells a security it does
14
<PAGE>
not own. To complete such a transaction, the Fund must borrow the security to
make delivery to the buyer. The Fund then is obligated to replace the security
borrowed by purchasing the security at the market price at the time of
replacement. The price at such time may be more or less than the price at which
the security was sold by the Fund. Until the security is replaced, the Fund is
required to pay to the lender amounts equal to any dividends that accrue during
the period of the loan. The proceeds of the short sale will be retained by the
broker, to the extent necessary to meet the margin requirements, until the short
position is closed out.
Until a Fund closes its short position or replaces the borrowed stock, the Fund
will: (1) maintain an account containing cash or liquid assets at such a level
that (a) the amount deposited in the account plus that amount deposited with the
broker as collateral will equal the current value of the stock sold short and
(b) the amount deposited in the account plus the amount deposited with the
broker as collateral will not be less than the market value of the stock at the
time the stock was sold short; or (2) otherwise cover the Fund's short position.
The U.S. Plus Fund, the OTC Plus Fund, the Dow 30 Plus Fund, the Internet Plus
Fund, the Small Cap Plus Fund and the Japan Plus Fund each also may engage in
short sales if, at the time of the short sale, the Fund owns or has the right to
acquire an equal amount of the stock being sold at no additional cost ("selling
short against the box").
U.S. GOVERNMENT SECURITIES
- --------------------------
The Money Market Fund invests in securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities ("U.S. Government Securities")
in pursuit of its investment objectives. The other Funds may invest in U.S.
Government Securities in order to deposit such securities as initial or
variation margin, as "cover" for the investment techniques they employ, as part
of a cash reserve and for liquidity purposes.
U.S. Government Securities are high-quality instruments issued or guaranteed as
to principal or interest by the U.S. Treasury or by an agency or instrumentality
of the U.S. Government. Not all U.S. Government Securities are backed by the
full faith and credit of the United States. Some are backed by the right of the
issuer to borrow from the U.S. Treasury; others are backed by discretionary
authority of the U.S. Government to purchase the agencies' obligations; while
others are supported only by the credit of the instrumentality. In the case of
securities not backed by the full faith and credit of the United States, the
investor must look principally to the agency issuing or guaranteeing the
obligation for ultimate repayment.
U.S. Government Securities include Treasury Bills (which mature within one year
of the date they are issued), Treasury Notes (which have maturities of one to
ten years) and Treasury Bonds (which generally have maturities of more than 10
years). All such Treasury securities are backed by the full faith and credit of
the United States.
U.S. Government agencies and instrumentalities that issue or guarantee
securities include the Federal Housing Administration, the Federal National
Mortgage Association ("Fannie Mae"), the Farmers Home Administration, the
Export-Import Bank of the United States, the Small Business Administration, the
Government National Mortgage Association ("Ginnie Mae"), the General Services
Administration, the Central Bank for Cooperatives, the Federal Home Loan Banks,
15
<PAGE>
the Federal Home Loan Mortgage Corporation ("Freddie Mac"), the Farm Credit
Banks, the Maritime Administration, the Tennessee Valley Authority, the
Resolution Funding Corporation and the Student Loan Marketing Association
("Sallie Mae").
Securities issued or guaranteed by U.S. Government agencies and
instrumentalities are not always supported by the full faith and credit of the
United States. Some, such as securities issued by the Federal Home Loan Banks,
are backed by the right of the agency or instrumentality to borrow from the
Treasury. Others, such as securities issued by Fannie Mae, are supported only by
the credit of the instrumentality and by a pool of mortgage assets. If the
securities are not backed by the full faith and credit of the United States, the
owner of the securities must look principally to the agency issuing the
obligation for repayment and may not be able to assert a claim against the
United States in the event that the agency or instrumentality does not meet its
commitment. The Money Market Fund will invest in securities of agencies and
instrumentalities only if Rafferty is satisfied that the credit risk involved is
acceptable.
Yields on short-, intermediate- and long-term U.S. Government Securities are
dependent on a variety of factors, including the general conditions of the money
and bond markets, the size of a particular offering and the maturity of the
obligation. Debt securities with longer maturities tend to produce higher
capital appreciation and depreciation than obligations with shorter maturities
and lower yields. The market value of U.S. Government Securities generally
varies inversely with changes in the market interest rates. An increase in
interest rates, therefore, generally would reduce the market value of a Fund's
portfolio investments in U.S. Government Securities, while a decline in interest
rates generally would increase the market value of a Fund's portfolio
investments in these securities.
OTHER INVESTMENT RISKS AND PRACTICES
- ------------------------------------
BORROWING. The U.S. Plus Fund, OTC Plus Fund, the Internet Plus Fund, the Dow 30
Plus Fund, the Japan Plus Fund and the Small Cap Plus Fund may borrow money for
investment purposes, which is a form of leveraging. Leveraging investments, by
purchasing securities with borrowed money, is a speculative technique that
increases investment risk while increasing investment opportunity. Leverage will
magnify changes in a Fund's net asset value and on a Fund's investments.
Although the principal of such borrowings will be fixed, a Fund's assets may
change in value during the time the borrowing is outstanding. Leverage also
creates interest expenses for a Fund. To the extent the income derived from
securities purchased with borrowed funds exceeds the interest a Fund will have
to pay, that Fund's net income will be greater than it would be if leverage were
not used. Conversely, if the income from the assets obtained with borrowed funds
is not sufficient to cover the cost of leveraging, the net income of a Fund will
be less than it would be if leverage were not used, and therefore the amount
available for distribution to shareholders as dividends will be reduced. The use
of derivatives in connection with leverage creates the potential for significant
loss.
The Funds may borrow money to facilitate management of the Fund's portfolio by
enabling the Fund to meet redemption requests when the liquidation of portfolio
instruments would be inconvenient or disadvantageous. Such borrowing is not for
investment purposes and will be repaid by the borrowing Fund promptly.
As required by the 1940 Act, a Fund must maintain continuous asset coverage
(total assets, including assets acquired with borrowed funds, less liabilities
16
<PAGE>
exclusive of borrowings) of 300% of all amounts borrowed. If at any time the
value of the required asset coverage declines as a result of market fluctuations
or other reasons, a Fund may be required to sell some of its portfolio
investments within three days to reduce the amount of its borrowings and restore
the 300% asset coverage, even though it may be disadvantageous from an
investment standpoint to sell portfolio instruments at that time.
In addition to the foregoing, each Fund may borrow money from a bank as a
temporary measure for extraordinary or emergency purposes in amounts not in
excess of 5% of the value of its total assets. This borrowing is not subject to
the foregoing 300% asset coverage requirement. Each Fund may pledge portfolio
securities as Rafferty deems appropriate in connection with any borrowings.
LENDING PORTFOLIO SECURITIES. Each Fund may lend portfolio securities with a
value not exceeding 33 1/3% (15% in the case of the Money Market Fund) of its
total assets to brokers, dealers, and financial institutions. Borrowers are
required continuously to secure their obligations to return securities on loan
from a Fund by depositing any combination of short-term government securities
and cash as collateral with the Fund. The collateral must be equal to at least
100% of the market value of the loaned securities, which will be marked to
market daily. While a Fund's portfolio securities are on loan, the Fund
continues to receive interest on the securities loaned and simultaneously earns
either interest on the investment of the collateral or fee income if the loan is
otherwise collateralized. The Fund may invest the interest received and the
collateral, thereby earning additional income. Loans would be subject to
termination by the lending Fund on four business days' notice or by the borrower
on one day's notice. Borrowed securities must be returned when the loan is
terminated. Any gain or loss in the market price of the borrowed securities that
occurs during the term of the loan inures to the lending Fund and that Fund's
shareholders. A lending Fund may pay reasonable finders, borrowers,
administrative and custodial fees in connection with a loan. Each Fund currently
has no intention of lending its portfolio securities.
PORTFOLIO TURNOVER. The Trust anticipates that investors in the Funds, as part
of an asset allocation investment strategy, frequently will redeem Fund shares,
as well as exchange their Fund shares for shares of other Funds. A Fund may have
to dispose of certain portfolio investments to maintain sufficient liquid assets
to meet such redemption and exchange requests, thereby causing a high portfolio
turnover. Because each Fund's portfolio turnover rate depends largely on the
purchase, redemption and exchange activity of its investors, it is difficult to
estimate each Fund's actual turnover rate.
A Fund's portfolio turnover rate is calculated by the lesser of the value of the
securities purchased or securities sold, excluding all securities whose
maturities at the time of acquisition were one year or less, divided by the
average monthly value of such securities owned during the year. Based on this
calculation, instruments with remaining maturities of less than one year are
excluded from the portfolio turnover rate. Such instruments generally would
include futures contracts and options, since such contracts generally have a
remaining maturity of less than one year. In any given period, all of a Fund's
investments may have a remaining maturity of less than one year; in which case,
the portfolio turnover rate for that period would be equal to zero. However,
each Fund's portfolio turnover rate, except for the Money Market Fund,
calculated with all securities whose maturities were one year or less is
anticipated to be unusually high. If, for example, options and futures were
17
<PAGE>
included in the calculation, then each Fund's portfolio turnover rate, except
for the Money Market Fund, would be approximately 500%.
TRACKING ERROR
- --------------
While the Funds do not expect their returns over a twelve-month period to
deviate adversely from their respective investment objectives by more than 10%,
several factors may affect a Fund's ability to achieve this correlation. Among
these factors are: (1) Fund expenses, including brokerage expenses and
commissions (which may be increased by high portfolio turnover); (2) less than
all of the securities in the target index being held by a Fund and securities
not included in the target index being held by a Fund; (3) an imperfect
correlation between the performance of instruments held by a Fund, such as
futures contracts and options, and the performance of the underlying securities
in the cash market comprising an index; (4) bid-ask spreads (the effect of which
may be increased by portfolio turnover); (5) a Fund holding instruments that are
illiquid or the market for which becomes disrupted; (6) the need to conform a
Fund's portfolio holdings to comply with its investment restrictions or
policies, or regulatory or tax law requirements; and (7) market movements that
run counter to a leveraged Fund's investments (which will cause divergence
between the Fund and its target index over time due to the mathematical effects
of leveraging).
While index futures and options contracts closely correlate with the applicable
indices over long periods, shorter-term deviation, such as on a daily basis,
does occur with these instruments. As a result, a Fund's short-term performance
will reflect such deviation from its target index.
In the case of the Funds whose net asset values move inversely from their target
indices (the U.S./Short Fund, OTC/Short Fund, Dow 30/Short Fund, Internet/Short
Fund, Japan/Short Fund, the Small Cap/Short Fund) the factor of compounding also
may lead to tracking error. Even if there is a perfect inverse correlation
between a Fund and the return of its applicable target index on a daily basis,
the symmetry between the changes in the benchmark and the changes in the Fund's
net asset value can be altered significantly over time by a compounding effect.
For example, if a Fund achieved a perfect inverse correlation with its target
index on every trading day over an extended period and the level of returns of
that index significantly decreased during that period, a compounding effect for
that period would result, causing an increase in the Fund's net asset value by a
percentage that is somewhat greater than the percentage that the index's returns
decreased. Conversely, if a Fund maintained a perfect inverse correlation with
its target index over an extended period and if the level of returns of that
index significantly increased over that period, a compounding effect would
result, causing a decrease of the Fund's net asset value by a percentage that
would be somewhat less than the percentage that the index returns increased.
INVESTMENT RESTRICTIONS
In addition to the investment policies and limitations described above and
described in the Prospectus, each Fund has adopted the following investment
limitations, which are fundamental policies and may not be changed without the
vote of a majority of the outstanding voting securities of that Fund. Under the
1940 Act, a "vote of the majority of the outstanding voting securities" of a
Fund means the affirmative vote of the lesser of: (1) more than 50% of the
outstanding shares of a Fund or (2) 67% or more of the shares of a Fund present
18
<PAGE>
at a shareholders meeting if more than 50% of the outstanding shares are
represented at the meeting in person or by proxy.
For purposes of the following limitations, all percentage limitations apply
immediately after a purchase or initial investment. Except with respect to
borrowing money, if a percentage limitation is adhered to at the time of the
investment, a later increase or decrease in the percentage resulting from any
change in value or net assets will not result in a violation of such
restrictions. If at any time a Fund's borrowings exceed its limitations due to a
decline in net assets, such borrowings will be reduced promptly to the extent
necessary to comply with the limitation.
EACH FUND, EXCEPT THE MONEY MARKET FUND, HAS ADOPTED THE FOLLOWING INVESTMENT
LIMITATIONS:
A Fund shall not:
1. Lend any security or make any other loan if, as a result, more than 33
1/3% of the value of the Fund's total assets would be lent to other
parties, except (1) through the purchase of a portion of an issue of debt
securities in accordance with the Fund's investment objective, policies and
limitations, or (2) by engaging in repurchase agreements with respect to
portfolio securities.
2. Underwrite securities of any other issuer.
3. Purchase, hold, or deal in real estate or oil and gas interests.
4. Issue any senior security (as such term is defined in Section 18(f) of the
1940 Act) (including the amount of senior securities issued by excluding
liabilities and indebtedness not constituting senior securities), except
(1) that the Fund may issue senior securities in connection with
transactions in options, futures, options on futures and forward contracts,
swaps, caps, floors, collars and other similar investments, (2) as
otherwise permitted herein and in Investment Limitations Nos. 5, 7, and 8,
and (3) the U.S./Short Fund, OTC/Short Fund, Dow 30/Short Fund,
Internet/Short Fund, Japan/Short Fund and Small Cap Plus/Short Fund may
make short sales of securities.
5. Pledge, mortgage, or hypothecate the Fund's assets, except (1) to the
extent necessary to secure permitted borrowings, (2) in connection with the
purchase of securities on a forward-commitment or delayed-delivery basis or
the sale of securities on a delayed-delivery basis, and (3) in connection
with options, futures contracts, options on futures contracts, forward
contracts, swaps, caps, floors, collars and other financial instruments.
6. Invest in physical commodities, except that the Fund may purchase and sell
foreign currency, options, futures contracts, options on futures contracts,
forward contracts, swaps, caps, floors, collars, securities on a
forward-commitment or delayed-delivery basis, and other financial
instruments.
EACH FUND, EXCEPT THE U.S. PLUS FUND, OTC PLUS FUND, DOW 30 PLUS FUND, JAPAN
PLUS FUND, SMALL CAP PLUS FUND AND THE INTERNET PLUS FUND, HAS ADOPTED THE
FOLLOWING INVESTMENT LIMITATION:
19
<PAGE>
A Fund shall not:
7. Borrow money, except (1) as a temporary measure for extraordinary or
emergency purposes and then only in amounts not to exceed 5% of the value
of the Fund's total assets, (2) in an amount up to 33 1/3% of the value of
the Fund's total assets, including the amount borrowed, in order to meet
redemption requests without immediately selling portfolio securities, (3)
to enter into reverse repurchase agreements, and (4) to lend portfolio
securities. For purposes of this investment limitation, the purchase or
sale of options, futures contracts, options on futures contracts, forward
contracts, swaps, caps, floors, collars and other financial instruments
shall not constitute borrowing.
THE U.S. PLUS FUND, OTC PLUS FUND, DOW 30 PLUS FUND, INTERNET PLUS FUND, JAPAN
PLUS FUND AND SMALL CAP PLUS FUND HAVE ADOPTED THE FOLLOWING INVESTMENT
LIMITATION:
A Fund shall not:
8. Make short sales of portfolio securities or purchase any portfolio
securities on margin but may make short sales "against the box," obtain
such short-term credits as are necessary for the clearance of transactions,
and make margin payments in connection with options, futures contracts,
options on futures contracts, forward contracts, swaps, caps, floors,
collars and other financial instruments.
THE U.S. PLUS FUND, OTC PLUS FUND, DOW 30 PLUS FUND, JAPAN PLUS FUND, INTERNET
PLUS FUND AND SMALL CAP PLUS FUND HAVE ADOPTED THE FOLLOWING INVESTMENT
LIMITATION:
A Fund shall not:
9. Borrow money, except (1) to the extent permitted under the 1940 Act (which
currently limits borrowing to no more than 33 1/3% of the value of the
Fund's total assets), (2) as a temporary measure and then only in amounts
not to exceed 5% of the value of the Fund's total assets, (3) to enter into
reverse repurchase agreements, and (4) to lend portfolio securities. For
purposes of this investment limitation, the purchase or sale of options,
futures contracts, options on futures contracts, forward contracts, swaps,
caps, floors, collars and other financial instruments shall not constitute
borrowing.
EACH FUND, EXCEPT THE OTC PLUS FUND AND OTC/SHORT FUND, HAS ADOPTED THE
FOLLOWING INVESTMENT LIMITATION:
A Fund shall not:
10. Invest more than 25% of the value of its total assets in the securities of
issuers in any single industry, provided that there shall be no limitation
on the purchase of obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities.
THE OTC PLUS FUND AND THE OTC/SHORT FUND HAVE ADOPTED THE FOLLOWING INVESTMENT
LIMITATION:
A Fund shall not:
20
<PAGE>
11. Invest more than 25% of the value of its total assets in the securities of
issuers in any single industry, except for the software and hardware
industries when the percentage of the securities of either industry
constitutes more than 25% of the Nasdaq 100 Stock Index ("Nasdaq Index").
There shall be no limitation on the purchase of obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
THE MONEY MARKET FUND HAS ADOPTED THE FOLLOWING INVESTMENT LIMITATIONS:
The Money Market Fund shall not:
1. Make loans, except through the purchase of qualified debt obligations,
loans of portfolio securities and entry into repurchase agreements.
2. Lend the Fund's portfolio securities in excess of 15% of its total assets.
Any loans of the Fund's portfolio securities will be made according to
guidelines established by the Trustees, including the maintenance of cash
collateral of the borrower equal at all times to the current market value
of the securities loaned.
3. Underwrite securities of any other issuer.
4. Purchase, hold, or deal in real estate or oil and gas interests.
5. Issue senior securities, except as permitted by the Fund's investment
objective and policies.
6. Purchase or sell physical commodities; PROVIDED, HOWEVER, that this
investment limitation does not prevent the Fund from purchasing and selling
options, futures contracts, options on futures contracts, forward
contracts, swaps, caps, floors, collars and other financial instruments.
7. Invest in securities of other investment companies, except to the extent
permitted under the 1940 Act.
8. Mortgage, pledge, or hypothecate the Money Market Fund's assets except to
secure permitted borrowings or in connection with options, futures
contracts, options on futures contracts, forward contracts, swaps, caps,
floors, collars and other financial instruments. In those cases, the Money
Market Fund may mortgage, pledge, or hypothecate assets having a market
value not exceeding the lesser of the dollar amount borrowed or 15% of the
value of total assets of the Money Market Fund at the time of the
borrowing.
9. Make short sales of portfolio securities or purchase any portfolio
securities on margin, except to obtain such short-term credits as are
necessary for the clearance of purchases and sales of securities; PROVIDED,
HOWEVER, that this investment limitation does not prevent the Fund from
purchasing and selling options, futures contracts, options on futures
contracts, forward contracts, swaps, caps, floors, collars and other
financial instruments.
In addition, the Money Market Fund does not presently intend to purchase and
sell foreign currency, options, futures contracts, options on futures contracts,
forward contracts, swaps, caps, floors and collars.
21
<PAGE>
EACH FUND HAS ADOPTED THE FOLLOWING NON-FUNDAMENTAL POLICY WHICH MAY BE CHANGED
BY THE VOTE OF THE BOARD WITHOUT SHAREHOLDER APPROVAL:
A Fund shall not hold assets of any issuers, at the end of any calendar
quarter (or within 30 days thereafter), to the extent such holdings would cause
the Fund to fail to comply with the diversification requirements imposed by
section 817(h) of the Internal Revenue Code and the Treasury regulations issued
thereunder on segregated asset accounts used to fund variable annuity contracts
and/or variable life insurance policies.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the general supervision by the Board, Rafferty is responsible for
decisions to buy and sell securities for each Fund, the selection of
broker-dealers to effect the transactions, and the negotiation of brokerage
commissions, if any. Rafferty expects that the Funds may execute brokerage or
other agency transactions through registered broker-dealers, for a commission,
in conformity with the 1940 Act, the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder.
When selecting a broker or dealer to execute portfolio transactions, Rafferty
considers many factors, including the rate of commission or the size of the
broker-dealer's "spread," the size and difficulty of the order, the nature of
the market for the security, operational capabilities of the broker-dealer and
the research, statistical and economic data furnished by the broker-dealer to
Rafferty.
In effecting portfolio transactions for the Funds, Rafferty seeks best execution
of trades either (1) at the most favorable price and efficient execution of
transactions or (2) with respect to agency transactions, at a higher rate of
commission if reasonable in relation to brokerage and research services provided
to the Funds or Rafferty. Such services may include the following: information
as to the availability of securities for purchase or sale; statistical or
factual information or opinions pertaining to investment; wire services; and
appraisals or evaluations of portfolio securities. Each Fund believes that the
requirement always to seek the lowest possible commission cost could impede
effective portfolio management and preclude the Fund and Rafferty from obtaining
a high quality of brokerage and research services. In seeking to determine the
reasonableness of brokerage commissions paid in any transaction, Rafferty relies
upon its experience and knowledge regarding commissions generally charged by
various brokers and on its judgment in evaluating the brokerage and research
services received from the broker effecting the transaction.
Rafferty may use research and services provided to it by brokers in servicing
all the Funds; however, not all such services may be used by Rafferty in
connection with a Fund. While the receipt of such information and services is
useful in varying degrees and generally would reduce the amount of research or
services otherwise performed by Rafferty, this information and these services
are of indeterminable value and would not reduce Rafferty's investment advisory
fee to be paid by the Funds.
Purchases and sales of U.S. Government Securities normally are transacted
through issuers, underwriters or major dealers in U.S. Government Securities
acting as principals. Such transactions are made on a net basis and do not
22
<PAGE>
involve payment of brokerage commissions. The cost of securities purchased from
an underwriter usually includes a commission paid by the issuer to the
underwriters; transactions with dealers normally reflect the spread between bid
and asked prices.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The business affairs of each Fund are managed by or under the direction of the
Board. The Trustees are responsible for managing the Funds' business affairs and
for exercising all the Funds' powers except those reserved to the shareholders.
A Trustee may be removed by the other Trustees or by a two-thirds vote of the
outstanding Trust shares.
The following table lists the Initial Trustee and officers of the Trust, their
age, business address and principal occupation during the past five years.
Unless otherwise noted, an individual's business address is 1311 Mamaroneck
Avenue, White Plains, New York 10605.
<TABLE>
<CAPTION>
Position With Principal Occupation
Name (Age) the Trust During Past Five Years
--------- ------------- ----------------------
<S> <C> <C>
Lawrence C. Rafferty* (57) Chief Executive Officer, Chief Executive Officer and Chairman of the Board
Chairman of the Board of of Trustees of The Potomac Funds, 1997-present;
Trustees Chairman and Chief Executive Officer of Rafferty,
1997-present; Chief Executive Officer of Rafferty
Companies, LLC, 1996-present; Chief Executive
Officer of Cohane Rafferty Securities, Inc.,
1987-present (investment banking); Chief Executive
Officer of Rafferty Capital Markets, Inc.,
1995-present; Trustee of Fairfield University.
Jay F. Higgins* (55) Trustee Managing Partner of CloverLeaf Partners, Inc.,
411 West Putnam Street 1992-1997 (investment banking).
Greenwich, CT 06830
Daniel J. Byrne (54) Trustee President and Chief Executive Officer of Byrne
1325 Franklin Avenue Securities Inc., 1992-present; Partner of Byrne
Suite 285 Capital Management LLP, 1996-present.
Garden City, NY 11530
Gerald E. Shanley III (54) Trustee Business Consultant, 1985-present; Trustee of
12 First Street Estate of Charles S. Payson, 1987-present.
Pelham, NY 10803
Timothy P. Hagan (57) Chief Financial Officer Chief Financial Officer of The Potomac Funds,
100 S. Royal Street 1997-present; Vice President of Rafferty,
Alexandria, VA 22314 1997-present; Vice President of PADCO Advisors,
1993-1997, Vice President of Money Management
Associates, 1981-1993.
23
<PAGE>
Position With Principal Occupation
Name (Age) the Trust During Past Five Years
--------- ------------- ----------------------
Daniel D. O'Neill (31) President President of The Potomac Funds, 1999-present;
Managing Director of the Adviser, 1999-present;
Portfolio Manager, Hermitage Capital Management,
1998-1999; Associate, Akin, Gump, Stauss, Hauer &
Feld, LLP, 1995-1998.
Philip A. Harding (56) Senior Vice President Senior Vice President of The Potomac Funds,
1997-present; Vice President of Rafferty,
1997-present; Vice President of Commerzbank (USA),
1995-1997; Senior Vice President of Sanwa Bank
(USA), 1992-1995.
Mark D. Edwards (42) Vice President Vice President of The Potomac Funds, 1997-present;
100 S. Royal Street Vice President of Rafferty, 1997 to present;
Alexandria, VA 22314 President & Co-Founder of Systems Management
Group, 1990-1997.
Stephen P. Sprague (50) Treasurer, Controller Treasurer, Controller and Assistant Secretary of
and Assistant Secretary The Potomac Funds, 1997-present; Vice President
and Chief Financial Officer of Rafferty,
1997-present; Chief Financial Officer of Rafferty
Companies, LLC, 1994-present; Chief
Accountant--International Sub., Goldman Sachs &
Co., 1983-1993.
Robert J. Zutz (46) Secretary Partner, Kirkpatrick & Lockhart LLP (law firm).
1800 Massachusetts Ave.
Washington, DC 20036
Eric W. Falkeis (26) Assistant Secretary Assistant Secretary of The Potomac Funds,
615 East Michigan Street 1997-present; Assistant Vice President, Firstar
Milwaukee, WI 53202 Mutual Fund Services LLC, 1997-present; Audit
Senior with PricewaterhouseCoopers LLP, 1995-1997.
</TABLE>
24
<PAGE>
- -----------------
* Messrs. Rafferty and Higgins are deemed to be "interested persons" of the
Trust, as defined by the 1940 Act.
The Trust's Declaration of Trust provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of their office.
The Trust pays the Trustees, except Mr. Rafferty, $4,000 annually and $1,000 per
meeting of the Board. Trustees also are reimbursed for any expenses incurred in
attending Board meetings. No officer, director or employee of Rafferty receives
any compensation from the Trust for acting as a Trustee or officer of the Trust.
The following table shows the estimated compensation expected to be paid to each
Trustee for the Trust's fiscal year ended December 31, 2000.
<TABLE>
<CAPTION>
- ------------------------------- -------------------- -------------------------- -------------------- ----------------------
<S> <C> <C> <C> <C> <C>
Pension or Retirement Aggregate
Aggregate Benefits Accrued As Part of Estimated Annual Compensation From
Name of Person, Compensation the Trust's Benefits Upon the Complex Paid to
Position From the Trust Expenses Retirement The Trustees(1)
-------- -------------- -------- ------------ ---------------
- ------------------------------- -------------------- -------------------------- -------------------- ----------------------
Lawrence C. Rafferty, $0 $0 $0 $0
Trustee
Jay F. Higgins, $4,000 $0 $0 $8,000
Trustee
Daniel J. Byrne, $4,000 $0 $0 $8,000
Trustee
Gerald E. Shanley III, $4,000 $0 $0 $8,000
Trustee
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Complex consists of the Trust and The Potomac Funds, a separately
registered investment company.
INVESTMENT ADVISOR
- ------------------
Rafferty Asset Management, LLC, 1311 Mamaroneck Avenue, White Plains, New York
10605, provides investment advice to the Funds. Rafferty was organized as a New
York limited liability corporation in June 1997.
Under an Investment Advisory Agreement between the Trust, on behalf of the
Funds, and Rafferty ("Advisory Agreement"), Rafferty provides a continuous
investment program for each Fund's assets in accordance with its investment
25
<PAGE>
objectives, policies and limitations, and oversees the day-to-day operations of
the Funds, subject to the supervision of the Trustees. Rafferty bears all costs
associated with providing these advisory services and the expenses of the
Trustees who are affiliated with or interested persons of Rafferty. The Trust
bears all other expenses that are not assumed by Rafferty. The Trust also is
liable for nonrecurring expenses as may arise, including litigation to which a
Fund may be a party. The Trust also may have an obligation to indemnify its
Trustees and officers with respect to any such litigation.
Pursuant to the Advisory Agreement, each Fund pays Rafferty the following fee at
an annual rate based on its average daily net assets of:
Plus Funds 0.75%
Short Funds 0.90%
Money Market Fund 0.50%
For the Plus Funds, Rafferty has agreed to waive its fees and/or reimburse
operating expenses to the extent that Fund expenses exceed 1.50% and 2.50% of
average daily net assets of the Class A shares and Class B shares, respectively.
For the Short Funds, Rafferty has agreed to waive its fees and/or reimburse
operating expenses to the extent that Fund expenses exceed 1.65% and 2.65% of
average daily net assets of the Class A shares and Class B shares, respectively.
For Money Market Fund, Rafferty has agreed to waive its fees and/or reimburse
operating expenses to the extent that Fund expenses exceed 1.25% and 2.25% of
average daily net assets of the Class A shares and Class B shares, respectively.
This agreement is effective through December 31, 2002. There is no assurance
that Rafferty will renew the agreement after this date.
The Advisory Agreement was approved by the Trustees (including all Independent
Trustees) and Rafferty, as sole shareholder of each Fund, in compliance with the
1940 Act. The Advisory Agreement will continue in force for a period of two
years after the date of its approval. The Agreement is renewable thereafter from
year to year with respect to each Fund, so long as its continuance is approved
at least annually (1) by the vote, cast in person at a meeting called for that
purpose, of a majority of those Trustees who are not "interested persons" of
Rafferty or the Trust, and (2) by the majority vote of either the full Board or
the vote of a majority of the outstanding shares of a Fund. The Advisory
Agreement automatically terminates on assignment and is terminable on 60 days'
written notice either by the Trust or Rafferty.
FUND ADMINISTRATOR, FUND ACCOUNTANT AND CUSTODIAN
- -------------------------------------------------
Firstar Mutual Fund Services, LLC, 615 East Michigan Street, Milwaukee,
Wisconsin 53202, provides administrative, fund accounting and transfer agent
services to the Funds. Firstar Bank Milwaukee, N.A., 615 East Michigan Street,
Milwaukee, Wisconsin 53202, provides custodian services to the Funds.
Pursuant to a Fund Administration Servicing Agreement ("Service Agreement")
between the Trust and Firstar Mutual Fund Services, LLC ("Administrator"), the
Administrator provides the Trust with administrative and management services
(other than investment advisory services). As compensation for these services,
the Trust pays the Administrator a fee based on each current Fund's average
daily net assets of .10% of the first $200 million, .0875% of the next $500
26
<PAGE>
million of the average daily net assets, and .0625% of the remaining balance.
These fees cover each Fund's two classes of shares. There is no minimum fee. The
Administrator also is entitled to certain out-of-pocket expenses.
Pursuant to a Fund Accounting Servicing Agreement between the Trust and Firstar
Mutual Fund Services, LLC ("Fund Accountant"), the Fund Accountant provides the
Trust with accounting services, including portfolio accounting services, tax
accounting services and furnishing financial reports. As compensation for these
services, the Trust pays the Fund Accountant a fee based on each current Fund's
average daily net assets of .075% of the first $50 million, .0375% of the next
$200 million of the average daily net assets, and .01875% of the remaining
balance. These fees cover each Fund's two classes of shares. There is no minimum
fee. The Fund Accountant also is entitled to certain out-of-pocket expenses,
including pricing expenses.
Pursuant to a Custodian Agreement, Firstar Bank Milwaukee, N.A. also serves as
the Custodian of the Funds' assets. Under the terms of the Custodian Agreement,
the Custodian holds and administers the assets in the Funds' portfolios.
Pursuant to the Custodian Agreement, the Custodian receives an annual fee of
.04375% per Fund based on each Fund's average daily net assets.
DISTRIBUTOR
- -----------
Rafferty Capital Markets, Inc., 1311 Mamaroneck Avenue, White Plains, New York
10605, serves as the distributor ("Distributor") in connection with the offering
of each Fund's shares on a no-load basis. The Distributor and participating
dealers with whom it has entered into dealer agreements offer shares of the
Funds as agents on a best efforts basis and are not obligated to sell any
specific amount of shares.
DISTRIBUTION PLAN
- -----------------
Rule 12b-1 under the 1940 Act provides that an investment company may bear
expenses of distributing its shares only pursuant to a plan adopted in
accordance with the Rule. The Trustees have adopted separate plans for the Class
A shares ("Class A Plan") and Class B shares ("Class B Plan") of each Fund. The
Class A Plan does not permit the Funds to incur any direct distribution expenses
related to Class A shares. However, it does authorize the Funds' investment
adviser and distributor to pay expenses related to the distribution and sales of
the Funds' Class A shares. The Class B Plan authorizes the Trust to pay up to
1.00% of Class B average daily net assets to insurance companies in connection
with the distribution of Class B shares and other service activities. The
insurance companies' services may include printing and mailing of Fund
prospectuses, statements of additional information, shareholder reports, sales
brochures, compensation of insurance company sales personnel, account
maintenance services, or other activities that the Board determines are
primarily intended to result in the sale of Class B shares.
Each Plan was approved by the Trustees and the Independent Trustees of the
Funds. In approving the each Plan, the Trustees determined that there is a
reasonable likelihood that the each Plan will benefit each Fund and its
shareholders. The Trustees will review quarterly and annually a written report
provided by the Treasurer of the amounts expended under the Plan and the
purposes for which such expenditures were made.
27
<PAGE>
INDEPENDENT ACCOUNTANTS
- -----------------------
PricewaterhouseCoopers LLP,100 East Wisconsin Avenue, Suite 1500, Milwaukee,
Wisconsin 53202 serve as the auditors and the independent accountants for the
Trust.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each class of the Funds (except the Money
Market Fund) is determined separately daily, Monday through Friday, as of
fifteen minutes after the close of regular trading on the New York Stock
Exchange ("NYSE") (normally at 4:15 p.m. Eastern time), each day the NYSE is
open for business. The NYSE is not open on New Year's Day, Presidents' Day,
Martin Luther King's Birthday, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, and Christmas Day. The net asset value per share of
the Money Market Fund is determined each day as of 1:15 p.m. Eastern time that
both the NYSE and the Federal Reserve Bank of New York are open for business.
It is the policy of the Money Market Fund to attempt to maintain a constant
price per share of $1.00. There can be no assurance that a $1.00 net asset value
per share will be maintained. The portfolio instruments held by the Money Market
Fund are valued based on the amortized cost valuation method pursuant to Rule
2a-7 under the 1940 Act. This involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, even though the portfolio security may increase or decrease in market
value. Such fluctuations generally are in response to changes in interest rates.
Use of the amortized cost valuation method requires the Money Market Fund to
purchase instruments having remaining maturities of 397 days or less, to
maintain a dollar-weighted average portfolio maturity of 90 days or less, and to
invest only in securities determined by the Trustees to be of high quality with
minimal credit risks. The Money Market Fund may invest in issuers or instruments
that at the time of purchase have received the highest short-term rating by any
two nationally recognized statistical rating organizations ("NRSROs").
Rule 2a-7 requires the Trustees to establish procedures reasonably designed to
stabilize the net asset value per share as computed for purposes of distribution
and redemption. The Board's procedures include monitoring the relationship
between the amortized cost value per share and a net asset value per share based
upon available indications of market value. The Board will decide what, if any,
steps should be taken if there is a difference of more than .5% between the two
methods. The Board will take any steps they consider appropriate (such as
redemption in kind or shortening the average portfolio maturity) to minimize any
material dilution or other unfair results arising from differences between the
two methods of determining net asset value.
A security listed or traded on an exchange, domestic or foreign, or the Nasdaq
Stock Market ("Nasdaq"), is valued at its last sales price on the principal
exchange on which it is traded prior to the time when assets are valued. If no
sale is reported at that time, the mean of the last bid and asked prices is
used. When market quotations for options and futures positions held by a Fund
are readily available, those positions will be valued based upon such
quotations. Securities and other assets for which market quotations are not
readily available, or for which the Adviser has reason to question the validity
of quotations received, are valued at fair value as determined in good faith by
28
<PAGE>
the Board. For valuation purposes, quotations of foreign securities or other
assets denominated in foreign currencies are translated to U.S. Dollar
equivalents using the net foreign exchange rate in effect at the close of the
stock exchange in the country where the security is issued. Short-term
investments having a maturity of 60 days or less are valued at amortized cost,
which approximates market value.
For purposes of determining net asset value per share of a Fund, options and
futures contracts are valued at the closing prices of the exchanges on which
they trade. The value of a futures contract equals the unrealized gain or loss
on the contract that is determined by marking the contract to the current
settlement price for a like contract acquired on the day on which the futures
contract is being valued. The value of options on futures contracts is
determined based upon the current settlement price for a like option acquired on
the day on which the option is being valued. A settlement price may not be used
for the foregoing purposes if the market makes a limit move with respect to a
particular commodity.
OTC securities held by a Fund will be valued at the last sales price or, if no
sales price is reported, the mean of the last bid and asked price is used. The
portfolio securities of a Fund that are listed on national exchanges are valued
at the last sales price of such securities; if no sales price is reported, the
mean of the last bid and asked price is used. Dividend income and other
distributions are recorded on the ex-dividend date.
Illiquid securities, securities for which reliable quotations or pricing
services are not readily available, and all other assets not valued in
accordance with the foregoing principles will be valued at their respective fair
value as determined in good faith by, or under procedures established by, the
Trustees, which procedures may include the delegation of certain
responsibilities regarding valuation to the Adviser or the officers of the
Trust. The officers of the Trust report, as necessary, to the Trustees regarding
portfolio valuation determinations. The Trustees, from time to time, will review
these methods of valuation and will recommend changes that may be necessary to
assure that the investments of the Funds are valued at fair value.
PURCHASES AND REDEMPTIONS
The insurance company separate accounts may purchase and redeem shares of the
Funds on each day the NYSE is open for trading. Purchases and redemptions may be
effected based on the amount of premium payments to be invested or surrendered
and transfer requests, among other things. No fees are charged the separate
accounts when they purchase or redeem shares of the Funds.
REDEMPTION IN KIND
- ------------------
A Fund is obligated to redeem shares for any shareholder for cash during any
90-day period up to $250,000 or 1% of that Fund's net asset value, whichever is
less. Any redemption beyond this amount also will be in cash unless the Trustees
determine that further cash payments will have a material adverse effect on
remaining shareholders. In such a case, a Fund will pay all or a portion of the
remainder of the redemption in portfolio instruments, valued in the same way as
each Fund determines net asset value. The portfolio instruments will be selected
in a manner that the Trustees deem fair and equitable. A redemption in kind is
not as liquid as a cash redemption. If a redemption is made in kind, a
29
<PAGE>
shareholder receiving portfolio instruments could receive less than the
redemption value thereof and could incur certain transaction costs. Shareholders
who receive futures contracts or options on futures contracts in connection with
a redemption in kind may be responsible for making any margin payments due on
those contracts.
RECEIVING PAYMENT
- -----------------
Payment of redemption proceeds will be made within seven days following a Fund's
receipt of your request (if received in good order as described below) for
redemption. For investments that have been made by check, payment on redemption
requests may be delayed until the Transfer Agent is reasonably satisfied that
the purchase payment has been collected by the Trust (which may require up to 10
business days). To avoid redemption delays, purchases may be made by cashiers or
certified check or by direct wire transfers.
A redemption request will be considered to be received in "good order" if:
o the number or amount of shares and the class of shares to be redeemed and
shareholder account number have been indicated;
o any written request is signed by a shareholder and by all co-owners of the
account with exactly the same name or names used in establishing the
account;
o any written request is accompanied by certificates representing the shares
that have been issued, if any, and the certificates have been endorsed for
transfer exactly as the name or names appear on the certificates or an
accompanying stock power has been attached; and
o the signatures on any written redemption request of $100,000 or more and on
any certificates for shares (or an accompanying stock power) have been
guaranteed by a national bank, a state bank that is insured by the Federal
Deposit Insurance Corporation, a trust company or by any member firm of the
New York, American, Boston, Chicago, Pacific or Philadelphia Stock
Exchanges. Signature guarantees also will be accepted from savings banks
and certain other financial institutions that are deemed acceptable by
Firstar Mutual Funds Services, LLC, as transfer agent, under its current
signature guarantee program.
The right of redemption may be suspended or the date of payment postponed for
any period during which (1) the NYSE is closed (other than customary weekend or
holiday closings); (2) trading on the NYSE is restricted; (3) situations where
an emergency exists as a result of which it is not reasonably practicable for a
Fund fairly to determine the value of its net assets or disposal of a Fund's
securities is not reasonably practicable; or (4) the SEC has issued an order for
the protection of Fund shareholders.
PERFORMANCE INFORMATION
From time to time, each Fund may advertise its average annual total return and
compare its performance to that of other mutual funds with similar investment
objectives and to relevant indices. Performance information is computed
separately for those Funds in accordance with the methods discussed below.
Each Fund may include the total return of its classes in advertisements or other
written material. When a Fund advertises the total return of its shares, it will
be calculated for the one-, five-, and ten-year periods or, if such periods have
not yet elapsed, the period since the establishment of that Fund. Each Fund's
30
<PAGE>
performance data quoted in reports, advertising and other promotional materials
represents past performance and is not intended to indicate future performance.
The investment return and principal value for each Fund, except for the Money
Market Fund, will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original costs.
COMPARATIVE INFORMATION
- -----------------------
From time to time, each Fund's performance may be compared with recognized stock
and other indices, such as the S&P 500 Index, the Dow Jones Industrial AverageSM
DJIA, the Nasdaq Index, the Nasdaq Composite IndexTM ("Nasdaq Composite"), the
Nikkei 225 Stock Average ("Nikkei Index"), the Russell 2000 Index ("Russell
2000"), Dow Jones Composite Internet IndexSM ("Internet Index") and various
other domestic, international or global indices. The S&P 500 Index is a broad
index of common stock prices, while the DJIA represents a narrower segment of
industrial companies. Each assumes reinvestment of distributions and is
calculated without regard to tax consequences or operating expenses. The Nasdaq
Composite comparison may be provided to show how the OTC/Plus and the OTC/Short
Funds' total returns compare to the record of a broad average of OTC stock
prices over the same period. The OTC/Plus and the OTC/Short Funds have the
ability to invest in securities not included in the Nasdaq Index or the Nasdaq
Composite, and the OTC/Plus and the OTC/Short Funds' investment portfolio may or
may not be similar in composition to the Nasdaq Index or the Nasdaq Composite.
In addition, a Fund's total return may be compared to the performance of broad
groups of comparable mutual funds with similar investment objectives, as such
performance is tracked and published by such independent organizations as Lipper
Analytical Services, Inc. ("Lipper"), and CDA Investment Technologies, Inc. When
Lipper's tracking results are used, the Fund will be compared to Lipper's
appropriate fund category, that is, by fund objective and portfolio holdings.
Since the assets in all mutual funds are always changing, a Fund may be ranked
within one Lipper asset-size class at one time and in another Lipper asset-size
class at some other time. Footnotes in advertisements and other marketing
literature will include the time period and Lipper asset-size class, as
applicable, for the ranking in question. Performance figures are based on
historical results and are not intended to indicate future performance.
TOTAL RETURN COMPUTATIONS
- -------------------------
For purposes of quoting and comparing the performance of a Fund to that of other
mutual funds and to other relevant market indices in advertisements or in
reports to shareholders, performance for the Fund may be stated in terms of
total return. Such average annual total return quotes for the Funds are
calculated according to the following formula:
n
P(1+T) =ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (either 1, 5 or 10)
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the 1, 5
or 10 year periods, as applicable, at the end of
that period
31
<PAGE>
Under the foregoing formula, the time periods used in advertising will be based
on rolling calendar quarters, updated to the last day of the most recent quarter
prior to submission of the advertising for publication, and will cover 1, 5 and
10 year periods or a shorter period dating from the commencement of a Fund's
operations. In calculating the ending redeemable value, all dividends and
distributions by a Fund are assumed to have been reinvested at net asset value
on the reinvestment dates during the period. Total return, or "T" in the formula
above, is computed by finding the average annual compounded rates of return over
the 1, 5 and 10 year periods (or fractional portion thereof) that would equate
the initial amount invested to the ending redeemable value.
From time to time, each Fund also may include in such advertising a total return
figure that is not calculated according to the formula set forth above in order
to compare more accurately the performance of a Fund with other measures of
investment return. For example, in comparing the total return of a Fund with
data published by Lipper or with market indices, each Fund calculates its
aggregate total return for the specified periods of time by assuming an
investment of $10,000 in Fund shares and assuming the reinvestment of each
dividend or other distribution at net asset value on the reinvestment date.
Percentage increases are determined by subtracting the initial value of the
investment from the ending value and by dividing the remainder by the beginning
value.
YIELD COMPUTATIONS
- ------------------
The Money Market Fund's annualized current yield, as may be quoted from time to
time in advertisements and other communications to shareholders and potential
investors, is computed for a seven-day period by determining the net change,
exclusive of capital changes and including the value of additional shares
purchased with dividends and any dividends declared therefrom (which reflect
deductions of all expenses of the Fund such as advisory fees), in the value of a
hypothetical preexisting account having a balance of one share at the beginning
of the period, subtracting a hypothetical charge reflecting deductions from
shareholder accounts, and dividing the difference by the value of the account at
the beginning of the base period to obtain the base period return, and then
multiplying the base period return by (365/7).
The Money Market Fund's annualized effective yield, as may be quoted from time
to time in advertisements and other communications to shareholders and potential
investors, is computed by determining (for the same stated seven-day period as
the current yield) the net change, exclusive of capital changes and including
the value of additional shares purchased with dividends and any dividends
declared therefrom (which reflect deductions of all expenses of the Fund such as
advisory fees), in the value of a hypothetical preexisting account having a
balance of one share at the beginning of the period, and dividing the difference
by the value of the account at the beginning of the base period to obtain the
base period return, and then compounding the base period return by adding 1,
raising the sum to a power equal to 365 divided by 7, and subtracting 1 from the
result, according to the following formula:
Effective Yield = [(Base Period Return + 1) 365/7] - 1
The yields quoted in any advertisement or other communication represents past
performance and should not be considered a representation of the yields of the
Money Market Fund in the future since the yield is not fixed. Actual yields will
depend not only on the type, quality, and maturities of the investments held by
32
<PAGE>
the Money Market Fund and changes in interest rates on such investments, but
also on changes in the Money Market Fund's expenses during the period.
Yield information may be useful in reviewing the performance of the Money Market
Fund and for providing a basis for comparison with other investment
alternatives. However, unlike bank deposits or other investments, which
typically pay a fixed yield for a stated period of time, the Money Market Fund's
yield will fluctuate.
SHAREHOLDER AND OTHER INFORMATION
SHAREHOLDER INFORMATION
- -----------------------
The insurance companies' separate accounts or Qualified Plan sponsors and not
the individual Contract or Plan owners are the shareholders of the Funds.
However, the Contracts and Qualified Plans may pass through voting rights to the
contract owners. Each share of a Fund gives the shareholder one vote in matters
submitted to shareholders for a vote. Each Class of each Fund have equal voting
rights, except that, in matters affecting only a particular Class or series,
only shares of that Class or series are entitled to vote. Share voting rights
are not cumulative, and shares have no preemptive or conversion rights. Shares
are not transferable. As a Massachusetts business trust, the Trust is not
required to hold annual shareholder meetings. Shareholder approval will be
sought only for certain changes in a Trust's or a Fund's operation and for the
election of Trustees under certain circumstances. Trustees may be removed by the
Trustees or by shareholders at a special meeting. A special meeting of
shareholders shall be called by the Trustees upon the written request of
shareholders owning at least 10% of a Trust's outstanding shares.
OTHER INFORMATION
- -----------------
POTENTIAL CONFLICTS. Shares of the Funds may serve as the underlying investments
for the separate accounts of unaffiliated insurance companies as well as for
both annuity contracts and life insurance policies. Due to differences in tax
treatment or other considerations, the interests of various contract owners
might at some time be in conflict. The Trust does not presently foresee any
conflict. However, the Board intends to monitor events to identify any material
irreconcilable conflict that may arise and to determine what action, if any,
should be taken in response to such conflict. If such conflict were to occur,
one or more insurance companies' separate accounts might be required to withdraw
its investments in one or more of the Funds. This may require a Fund to sell
securities at unfavorable prices.
MASTER/FEEDER STRUCTURE OPTION. The Funds may in the future operate under a
master/feeder structure. This means that each Fund would be a "feeder" fund that
attempts to meet its objective by investing all its investable assets in a
"master" fund with the same investment objective. The "master" fund would
purchase securities for investment. It is expected that any such investment
company would be managed by Rafferty in substantially the same manner as the
Funds. If permitted by law at that time, the Board of Trustees may approve the
implementation of such a structure for the Funds without seeking shareholder
approval. However, the Trustees' decision will be made only if the investments
in the master funds are in the best interests of the Funds and their
33
<PAGE>
shareholders. In making that determination, the Trustees will consider, among
other things, the benefits to shareholders and/or the opportunity to reduce
costs and achieve operational efficiencies. You also will receive 30 days notice
prior to the implementation of the master/feeder structure. Under the Internal
Revenue Code of 1986, as amended ("Code"), the Funds may not presently operate
under a master/feeder structure.
DIVIDENDS, OTHER DISTRIBUTIONS AND TAXES
DIVIDENDS AND OTHER DISTRIBUTIONS
- ---------------------------------
Dividends from net investment income and any distributions of realized net
capital gains are as described in the Prospectus under "Distributions and
Taxes." All distributions from a Fund normally are automatically reinvested
without charge in additional shares of that Fund.
The Money Market Fund ordinarily declares dividends daily from net investment
income and distributes such dividends monthly. Net investment income, for these
purposes, includes accrued interest and accretion of original issue and market
discounts, less amortization of market premium and estimated expenses, and is
calculated immediately prior to the determination of the Fund's net asset value
per share. The Fund distributes its net short-term capital gain, if any,
annually but may make more frequent distributions thereof if necessary to
maintain its net asset value per share at $1.00 or to avoid income or excise
taxes. The Fund does not expect to realize net long-term capital gain and thus
does not anticipate payment of any distributions of net capital gain (I.E., the
excess of net long-term capital gain over net short-term capital loss). The
Trustees may revise this dividend policy, or postpone the payment of dividends,
if the Fund has or anticipates any large unexpected expense, loss or fluctuation
in net assets that, in the Trustees' opinion, might have a significant adverse
effect on its shareholders.
TAXES
- -----
REGULATED INVESTMENT COMPANY STATUS. Each Fund is treated as a separate
corporation for Federal income tax purposes and will seek to qualify as a
regulated investment company ("RIC") under Subchapter M of the Code. Because of
the investment strategies of each Fund, there can be no assurance that any such
Fund will qualify as a RIC. If a Fund so qualifies and satisfies the
distribution requirement under the Code (described in the following paragraph)
for a taxable year, the Fund will not be subject to Federal income tax on the
part of its investment company taxable income (generally consisting of net
investment income, net short-term capital gains and net gains from certain
foreign currency transactions) and net capital gain it distributes to its
shareholders for that year. If a Fund fails to qualify as a RIC for any taxable
year, (a) its taxable income, including net capital gain, will be taxed at
corporate income tax rates (up to 35%) and it will not receive a deduction for
distributions to its shareholders, (b) the shareholders would treat all those
distributions, including distributions of net capital gain, as dividends (that
is, ordinary income) to the extent of the Fund's earnings and profits and (c)
most importantly, each insurance company separate account invested therein would
fail to satisfy the diversification requirements of section 817(h) of the code
(described below), with the result that the Contracts supported by that account
would no longer be eligible for tax deferral.
To qualify for treatment as a RIC under the Code, each Fund must distribute to
its shareholders for each taxable year at least 90% of its investment company
taxable income ("Distribution Requirement") and must meet several additional
34
<PAGE>
requirements. For each Fund, these requirements include the following: (1) the
Fund must derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans, and gains from
the sale or other disposition of securities or foreign currencies, or other
income (including gains from options, futures or forward contracts) derived with
respect to its business of investing in securities or those currencies ("Income
Requirement"); and (2) at the close of each quarter of the Fund's taxable year,
(i) at least 50% of the value of its total assets must be represented by cash
and cash items, U.S. Government Securities, securities of other RICs, and other
securities, with those other securities limited, in respect of any one issuer,
to an amount that does not exceed 5% of the value of the Fund's total assets and
that does not represent more than 10% of the issuer's outstanding voting
securities, and (ii) not more than 25% of the value of its total assets may be
invested in securities (other than U.S. Government Securities or the securities
of other RICs) of any one issuer (collectively, "Diversification Requirements").
Although each Fund intends to satisfy all the foregoing requirements, there is
no assurance that each Fund will be able to do so. The investment by a Fund
other than the Money Market Fund primarily in options and futures positions
entails some risk that such a Fund might fail to satisfy the Diversification
Requirements. There is some uncertainty regarding the valuation of such
positions for purposes of those requirements; accordingly, it is possible that
the method of valuation used by those Funds, pursuant to which each of them
would be treated as satisfying the Diversification Requirements, would not be
accepted in an audit by the Internal Revenue Service, which might apply a
different method resulting in disqualification of one or more of those Funds.
ADDITIONAL DIVERSIFICATION REQUIREMENTS. Each Fund intends to comply with the
diversification requirements imposed by section 817(h) of the Code and the
regulations thereunder. These requirements, which are in addition to the
diversification requirements imposed on the Funds by Subchapter M of the Code,
place certain limitations on the assets of each Separate Account -- and, because
section 817(h) and those regulations treat the assets of each Fund as assets of
the related Separate Account, of each Fund -- that may be invested in securities
of a single issuer. Specifically, the regulations require that, except as
permitted by the "safe harbor" described below, as of the end of each calendar
quarter or within thirty days thereafter no more than 55% of the total assets of
a Fund may be represented by any one investment, no more than 70% by any two
investments, no more than 80% by any three investments, and no more than 90% by
any four investments. For this purpose, all securities of the same issuer are
considered a single investment, and each U.S. government agency and
instrumentality is considered a separate issuer. Section 817(h) provides, as a
safe harbor, that a separate account will be treated as being adequately
diversified if the diversification requirements under Subchapter M are satisfied
and no more than 55% of the value of the account's total assets are cash and
cash items, government securities, and securities of other regulated investment
companies. Failure of a Fund to satisfy the section 817(h) requirements would
result in taxation of the insurance company issuing the Contracts and treatment
of the holders other than as described in the applicable Contract prospectus.
INCOME FROM FOREIGN SECURITIES. Dividends and interest received by a Fund, and
gains realized by a Fund, may be subject to income, withholding or other taxes
imposed by foreign countries and U.S. possessions that would reduce the yield
and/or total return on its securities. Tax conventions between certain countries
and the United States may reduce or eliminate these foreign taxes, however, and
many foreign countries do not impose taxes on capital gains in respect of
investments by foreign investors.
35
<PAGE>
A Fund may invest in the stock of "passive foreign investment companies"
("PFICs"). A PFIC is any foreign corporation (with certain exceptions) that, in
general, meets either of the following tests: (1) at least 75% of its gross
income is passive or (2) an average of at least 50% of its assets produce, or
are held for the production of, passive income. Under certain circumstances, a
Fund will be subject to Federal income tax on a portion of any "excess
distribution" received on the stock of a PFIC or of any gain on disposition of
the stock (collectively, "PFIC income"), plus interest thereon, even if the Fund
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the Fund's investment company
taxable income and, accordingly, will not be taxable to it to the extent it
distributes that income to its shareholders. If a Fund invests in a PFIC and
elects to treat the PFIC as a "qualified electing fund" ("QEF"), then, in lieu
of the foregoing tax and interest obligation, the Fund would be required to
include in income each year its PRO RATA share of the QEF's annual ordinary
earnings and net capital gain -- which probably would have to be distributed by
the Fund to satisfy the Distribution Requirement -- even if those earnings and
gain were not received by the Fund from the QEF. In most instances it will be
very difficult, if not impossible, to make this election because of certain
requirements thereof.
A Fund may elect to "mark to market" its stock in any PFIC. "Marking-to-market,"
in this context, means including in ordinary income each taxable year the
excess, if any, of the fair market value of the PFIC's stock over the Fund's
adjusted basis therein as of the end of that year. Pursuant to the election, the
Fund also would be allowed to deduct (as an ordinary, not capital, loss) the
excess, if any, of its adjusted basis in PFIC stock over the fair market value
thereof as of the taxable year-end, but only to the extent of any net
mark-to-market gains with respect to that stock included by the Fund for prior
taxable years under the election. The Fund's adjusted basis in each PFIC's stock
with respect to which it makes this election would be adjusted to reflect the
amounts of income included and deductions taken there under.
Gains or losses (1) from the disposition of foreign currencies, including
forward currency contracts, (2) on the disposition of each
foreign-currency-denominated debt security that are attributable to fluctuations
in the value of the foreign currency between the date of acquisition and
disposition of the security, and (3) that are attributable to fluctuations in
exchange rates that occur between the time a Fund accrues dividends, interest or
other receivables, or expenses or other liabilities, denominated in a foreign
currency and the time the Fund actually collects the receivables or pays the
liabilities, generally will be treated as ordinary income or loss. These gains
or losses, referred to under the Code as "section 988" gains or losses, will
increase or decrease the amount of a Fund's investment company taxable income to
be distributed to its shareholders.
DERIVATIVES STRATEGIES. The use of derivatives strategies, such as writing
(selling) and purchasing options and futures contracts and entering into forward
currency contracts, involves complex rules that will determine for income tax
purposes the amount, character and timing of recognition of the gains and losses
a Fund realizes in connection therewith. Gain from the disposition of foreign
currencies (except gains that may be excluded by future regulations), and gains
from options, futures and forward currency contracts derived by a Fund with
respect to its business of investing in securities or foreign currencies, will
be treated as qualifying income under the Income Requirement.
36
<PAGE>
Code section 1092 (dealing with straddles) also may affect the taxation of
derivatives in which the Funds may invest. That section defines a "straddle" as
offsetting positions with respect to actively traded personal property; for
these purposes, options, futures and forward contracts are personal property.
Under that section, any loss from the disposition of a position in a straddle
may be deducted only to the extent the loss exceeds the unrealized gain on the
offsetting position(s) of the straddle. In addition, these rules may postpone
the recognition of loss that otherwise would be recognized under the
mark-to-market rules discussed above. The regulations under section 1092 also
provide certain "wash sale" rules, which apply to transactions where a position
is sold at a loss and a new offsetting position is acquired within a prescribed
period, and "short sale" rules applicable to straddles. If a Fund makes certain
elections, the amount, character and timing of recognition of gains and losses
from the affected straddle positions would be determined under rules that vary
according to the elections made. Because only a few of the regulations
implementing the straddle rules have been promulgated, the tax consequences to
the Funds of straddle transactions are not entirely clear.
If a call option written by a Fund lapses (I.E., terminates without being
exercised), the amount of the premium it received for the option will be
short-term capital gain. If a Fund enters into a closing purchase transaction
with respect to a written call option, it will have a short-term capital gain or
loss based on the difference between the premium it received for the option it
wrote and the premium it pays for the option it buys. If such an option is
exercised and a Fund thus sells the securities or futures contract subject to
the option, the premium the Fund received will be added to the exercise price to
determine the gain or loss on the sale. If a call option purchased by a Fund
lapses, it will realize short-term or long-term capital loss, depending on its
holding period for the security or futures contract subject thereto. If a Fund
exercises a purchased call option, the premium it paid for the option will be
added to the basis of the subject securities or futures contract.
If a Fund has an "appreciated financial position" - generally, an interest
(including an interest through an option, futures or forward contract or short
sale) with respect to any stock, debt instrument (other than "straight debt") or
partnership interest the fair market value of which exceeds its adjusted basis -
and enters into a "constructive sale" of the position, the Fund will be treated
as having made an actual sale thereof, with the result that it will recognize
gain at that time. A constructive sale generally consists of a short sale, an
offsetting notional principal contract, or a futures or forward contract entered
into by a Fund or a related person with respect to the same or substantially
identical property. In addition, if the appreciated financial position is itself
a short sale or such a contract, acquisition of the underlying property or
substantially identical property will be deemed a constructive sale. The
foregoing will not apply, however, to any transaction by a Fund during any
taxable year that otherwise would be treated as a constructive sale if the
transaction is closed within 30 days after the end of that year and the Fund
holds the appreciated financial position unhedged for 60 days after that closing
(I.E., at no time during that 60-day period is the Fund's risk of loss regarding
that position reduced by reason of certain specified transactions with respect
to substantially identical or related property, such as having an option to
sell, being contractually obligated to sell, making a short sale or granting an
option to buy substantially identical stock or securities).
37
<PAGE>
FINANCIAL STATEMENTS
THE POTOMAC INSURANCE TRUST
FINANCIAL STATEMENTS
DECEMBER 29, 1999 THROUGH MARCH 14, 2000
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders
of The Potomac Insurance Trust
In our opinion, the accompanying statements of assets and liabilities and
related statements of operations present fairly, in all material respects, the
financial position of each of the portfolios constituting The Potomac Insurance
Trust (hereafter referred to as the "Trust") at March 14, 2000 and the results
of each of their operations for the period from December 29, 1999 through March
14, 2000, in conformity with accounting principles generally accepted in the
United States. These financial statements are the responsibility of the Trust's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these financial
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether these financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
March 24, 2000
<PAGE>
<TABLE>
<CAPTION>
THE POTOMAC INSURANCE TRUST
STATEMENT OF ASSETS AND LIABILITIES
AS OF MARCH 14, 2000
- ------------------------------------------------------------------------------------------------
VP OTV VP DOW 30 VP INTERNET VP SMALL CAP
PLUS FUND PLUS FUND PLUS FUND PLUS FUND
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
ASSETS
Cash $ 25,000 $ 25,000 $ 25,000 $ 25,000
Receivable from Advisor 9,025 9,025 9,025 9,025
---------- ----------- ------------ -------------
Total Assets 34,025 34,025 34,025 34,025
---------- ----------- ------------ -------------
LIABILITIES
Payable to Advisor 9,025 9,025 9,025 9,025
---------- ----------- ------------ -------------
Total Liabilities 9,025 9,025 9,025 9,025
---------- ----------- ------------ -------------
NET ASSETS $ 25,000 $ 25,000 $ 25,000 $ 25,000
---------- ----------- ------------ -------------
NET ASSETS - CLASS A
Net assets $ 12,500 $ 12,500 $ 12,500 $ 12,500
Shares issued and outstanding; unlimited 1,250 1,250 1,250 1,250
shares authorized
Net Asset Value, offering and redemption $ 10.00 $ 10.00 $ 10.00 $ 10.00
price per share
(net assets/shares outstanding)
NET ASSETS - CLASS B
Net assets $ 12,500 $ 12,500 $ 12,500 $ 12,500
Shares issued and outstanding; unlimited 1,250 1,250 1,250 1,250
shares authorized
Net Asset Value, offering and redemption $ 10.00 $ 10.00 $ 10.00 $ 10.00
price per share
(net assets/shares outstanding)
The accompanying notes are an integral part of these financial statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
THE POTOMAC INSURANCE TRUST
STATEMENT OF OPERATIONS
FOR THE PERIOD DECEMBER 29, 1999 (INCEPTION) THROUGH MARCH 14, 2000
- -------------------------------------------------------------------------------------------------
VP OTC VP DOW 30 VP INTERNET VP SMALL
PLUS FUND PLUS FUND PLUS FUND PLUS FUND
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
EXPENSES
Organizational expenses $ 9,025 $ 9,025 $ 9,025 $ 9,025
Less: Expenses to be reimbursed by 9,025 9,025 9,025 9,025
Advisor
------------ ------------ ------------ ------------
Net income $ - $ - $ - $ -
------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
3
<PAGE>
THE POTOMAC INSURANCE TRUST
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION
The Potomac Insurance Trust (the "Trust") was organized as a Massachusetts
business trust on December 29, 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 objectives and
policies. The series presently authorized are: The Potomac VP OTC Plus
Fund ("VP OTC Plus Fund"), The Potomac VP Dow 30 Plus Fund ("VP Dow 30
Plus Fund"), The Potomac VP Internet Plus Fund ("VP Internet Plus Fund"),
The Potomac VP Small Cap Plus Fund ("VP Small Cap Plus Fund"), The Potomac
VP OTC/Short Fund, The Potomac VP Dow 30/Short Fund, The Potomac VP
Internet/Short Fund, The Potomac VP Small Cap/Short Fund, The Potomac VP
U.S. Plus Fund, The Potomac VP U.S./Short Fund, The Potomac VP Japan Plus
Fund, The Potomac VP Japan/Short Fund, and The Potomac VP Money Market
Fund. Pursuant to the 1940 Act, each Fund is a "non-diversified" series of
the Trust. The Trust has the authority to issue an unlimited number of
shares of beneficial interest and has the authority to classify or
reclassify these shares into classes and/or series. Pursuant to such
power, the Board of Trustees has initially designated the authorized
shares of the Trust into two classes, Class A shares and Class B shares.
Each class of shares has identical rights and privileges except with
respect to Distribution Fees (see Note 4) and voting rights affecting a
single class. Each Fund has had no operations other than those related to
organizational matters, including the sale of 1,250 shares of both Class A
and Class B to the initial investor (Rafferty Asset Management, LLC, the
Advisor - see Note 3) of the VP OTC Plus Fund, VP Dow 30 Plus Fund, VP
Internet Plus Fund and VP Small Cap Plus Fund, collectively the "Funds",
on March 14, 2000.
2. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION EXPENSES
Expenses incurred by the Funds in connection with the organization and
initial public offering are expensed as incurred. These expenses were
advanced by the Advisor, and the Advisor has agreed to reimburse the Funds
for these expenses, subject to potential recovery (see Note 3).
FEDERAL INCOME TAXES
The Funds intend to comply with the requirements of the Internal Revenue
Code necessary to qualify as regulated investment companies and to make
the requisite distributions of income and capital gains to their
shareholders sufficient to relieve them from all or substantially all
federal income taxes.
USE OF ESTIMATES
The preparation of financial statements in conformity with 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.
4
<PAGE>
3. INVESTMENT ADVISOR
The VP OTC Plus Fund, VP Dow 30 Plus Fund, VP Internet Plus Fund and VP
Small Cap Plus Fund have an Investment Advisory Agreement (the
"Agreement") with Rafferty Asset Management, LLC (the "Advisor"), with
whom certain officers and trustees of the Trust are affiliated, to furnish
investment advisory services to the Funds. Under the terms of the
Agreement, the Funds compensate the Advisor for its management services at
an annual rate of 0.75% based on their average daily net assets.
The Advisor has agreed to reimburse these Funds' operating expenses,
including organization expenses, through December 31, 2002, to the extent
necessary to ensure that the Funds' operating expenses do not exceed 1.50%
and 2.50% of average daily net assets for Class A and Class B shares,
respectively. Any such waiver or reimbursement is subject to later
adjustment to allow the Advisor to recoup amounts waived or reimbursed to
the extent actual fees and expenses for a fiscal year are less than the
expense limitation of 1.50% and 2.50% for Class A and Class B shares,
respectively, provided, however, that the Advisor shall only be entitled
to recoup such amounts for a period of three years from the date such
amount was waived or reimbursed.
4. DISTRIBUTION PLAN
Pursuant to rule 12b-1 under the 1940 act, the Trustees have adopted
separate distribution plans for Class A shares ("Class A Plan") and Class
B shares ("Class B Plan") of each fund. The Class A Plan does not permit
the Funds to incur any direct distribution expenses related to Class A
shares. The Class B Plan allows the Funds to pay distribution and sales
fees and other shareholder service fees an amount not to exceed an annual
rate of 1.00% of the average daily net assets of the Class B shares.
5
<PAGE>
THE POTOMAC INSURANCE TRUST
PART C OTHER INFORMATION
Item 23. EXHIBITS
--------
(a) Declaration of Trust*
(b) By-Laws*
(c) Voting trust agreement - None
(d)(i) Form of Investment Advisory Agreement between the
Potomac Insurance Trust and Rafferty Asset Management,
LLC - filed herewith
(ii) Form of Fund Administration Servicing Agreement between
the Potomac Insurance Trust and Firstar Mutual Fund
Services, LLC - filed herewith
(e)(i) Form of Distribution Agreement between the Potomac
Insurance Trust and Rafferty Capital Markets, Inc. -
filed herewith
(ii) Form of Dealer Agreement - filed herewith
(iii) Form of Services Agreement - filed herewith
(f) Bonus, profit sharing contracts - None
(g)(i) Form of Custodian Agreement between the Potomac
Insurance Trust and Firstar Bank Milwaukee, NA - filed
herewith
(h)(i) Form of Transfer Agent Agreement between the Potomac
Insurance Trust and Firstar Mutual Fund Services, LLC -
filed herewith
(ii) Form of Fund Accounting Servicing Agreement between the
Potomac Insurance Trust and Firstar Mutual Fund
Services, LLC -filed herewith
(iii) Form of Participation Agreement - filed herewith
(i) Opinion and consent of counsel - filed herewith
(j) Consent of Independent Auditors - filed herewith
(k) Financial statements omitted from prospectus - None
(l) Letter of investment intent -filed herewith
(m)(i) Class A Plan pursuant to Rule 12b-1 - filed herewith
<PAGE>
(ii) Class B Plan pursuant to Rule 12b-1 - filed herewith
(n) Plan pursuant to Rule 18f-3 - filed herewith
(p) Code of Ethics for Trust - filed herewith
Other: Power of Attorney - filed herewith
* Incorporated by reference to the Trust's Initial Registration Statement on
Form N-1A as filed with the Securities and Exchange Commission on December
29, 1999, EDGAR Accession No. 0000898432-99-001184.
Item 24. Persons Controlled by or under
COMMON CONTROL WITH REGISTRANT
------------------------------
None.
Item 25. INDEMNIFICATION
---------------
Article XI, Section 2 of the Trust's Declaration of Trust provides that:
(a) Subject to the exceptions and limitations contained in paragraph (b)
below:
(i) every person who is, or has been, a Trustee or officer of the
Trust (hereinafter referred to as a "Covered Person") shall be indemnified by
the Trust and/or by the appropriate Series to the fullest extent permitted by
law against liability and against all expenses reasonably incurred or paid by
him or her in connection with any claim, action, suit or proceeding in which he
or she becomes involved as a party or otherwise by virtue of his or her being or
having been a Covered Person and against amounts paid or incurred by him or her
in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding" shall
apply to all claims, actions, suits or proceedings (civil, criminal or other,
including appeals), actual or threatened while a Covered Person is in office or
thereafter, and the words "liability" and "expenses" shall include, without
C-2
<PAGE>
limitation, attorneys' fees, costs, judgments, amounts paid in settlement,
fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Covered Person:
(i) who shall have been adjudicated by a court or body before which
the proceeding was brought (A) to be liable to the Trust or its Shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office or (B) not to have
acted in good faith in the reasonable belief that his or her action was in the
best interest of the Trust; or
(ii) in the event of a settlement, unless there has been a
determination that such Covered Person did not engage in willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his or her office, (A) by the court or other body approving the
settlement; (B) by at least a majority of those Trustees who are neither
Interested Persons of the Trust nor parties to the matter based upon a review of
readily available facts (as opposed to a full trial-type inquiry or full
investigation); or (C) by written opinion of independent legal counsel based
upon a review of readily available facts (as opposed to a full trial-type
inquiry); provided, however, that any Shareholder may, by appropriate legal
proceedings, challenge any such determination by the Trustees, or by independent
legal counsel.
(c) The rights of indemnification herein provided may be insured against
by policies maintained by the Trust, shall be severable, shall not be exclusive
of or affect any other rights to which any Covered Person may now or hereafter
be entitled, shall continue as to a person who has ceased to be such Trustee or
officer and shall inure to the benefit of the heirs, executors and
administrators of such a person. Nothing contained herein shall affect any
rights to indemnification to which Trust personnel, other than Trustees and
officers, and other persons may be entitled by contract or otherwise under law.
(d) Expenses in connection with the preparation and presentation of a
defense to any claim, action, suit or proceeding of the character described in
paragraph (a) of this Section 2 may be paid by the Trust from time to time prior
to final disposition thereof upon receipt of an undertaking by or on behalf of
such Covered Person that such amount will be paid over by him or her to the
Trust if it is ultimately determined that he or she is not entitled to
indemnification under this Section 2; provided, however, that:
(i) such Covered Person shall have provided appropriate security for
such undertaking,
(ii) the Trust is insured against losses arising out of any such
advance payments, or
(iii) either a majority of the Trustees who are neither interested
persons of the Trust nor parties to the matter, or independent legal counsel in
a written opinion, shall have determined, based upon a review of readily
available facts (as opposed to a trial-type inquiry or full investigation), that
there is reason to believe that such Covered Person will be found entitled to
indemnification under this Section 2.
According to Article XII, Section 1 of the Declaration of Trust, the Trust
is a trust and not a partnership. Trustees are not liable personally to any
person extending credit to, contracting with or having any claim against the
Trust, a particular Series or the Trustees. A Trustee, however, is not protected
from liability due to willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
Article XII, Section 2 provides that, subject to the provisions of Section
1 of Article XII and to Article XI, the Trustees are not liable for errors of
judgment or mistakes of fact or law, or for any act or omission in accordance
with advice of counsel or other experts or for failing to follow such advice.
Item 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
----------------------------------------------------
Rafferty Asset Management, LLC (the "Adviser"), 1311 Mamaroneck Avenue,
White Plains, New York 10605, offers investment advisory services. Information
as to the officers and directors of the Adviser is included in its current Form
ADV filed with the Securities and Exchange Commission (Registration Number
801-54679).
Item 27. PRINCIPAL UNDERWRITER
---------------------
(a) Rafferty Capital Markets, Inc., 1311 Mamaroneck Avenue, White
Plains, New York 10605, serves as principal underwriter for the Potomac
Insurance Trust, Potomac Funds, Badgley Funds, Homestate Group and Texas Capital
Value Funds.
(b) The director and officers of Rafferty Capital Markets, Inc. are:
C-3
<PAGE>
<TABLE>
<CAPTION>
Positions and Offices with Position and Offices
NAME UNDERWRITER WITH REGISTRANT
- ----------------------- -------------------------- --------------------
<S> <C> <C>
Thomas A. Mulrooney President None
Derek B. Park Senior Vice President, None
Equity
Lawrence C. Rafferty Director Chief Executive
Officer, Chairman of the
Board of Trustees
Stephen P. Sprague Chief Financial Treasurer,Controller,
Officer and Assistant Secretary
</TABLE>
The principal business address of each of the persons listed above is 1311
Mamaroneck Avenue, White Plains, New York 10605.
Item 28. LOCATION OF ACCOUNTS AND RECORDS
--------------------------------
The books and records required to be maintained by Section 31(a) of the
Investment Company Act of 1940 are maintained in the physical possession of the
Potomac Funds' investment adviser, administrator, custodian, subcustodian, or
transfer agent.
Item 29. MANAGEMENT SERVICES
-------------------
Not applicable.
Item 30. UNDERTAKINGS
------------
Registrant hereby undertakes to furnish each person to whom a prospectus
is delivered a copy of its latest annual report to Shareholders, upon request
and without charge.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
C-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant has duly
caused this Pre-Effective Amendment No. 1 to its Registration Statement on Form
N-1A to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of White Plains and the State of New York on May 1, 2000.
POTOMAC INSURANCE TRUST
By: Lawrence C. Rafferty*
---------------------
Lawrence C. Rafferty
Chief Executive Officer
Attest:
/s/ Daniel D. O'Neill
- ---------------------------------
Daniel D. O'Neill
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Pre-Effective Amendment No. 1 to the Registrant's Registration Statement
has been signed below by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
Lawrence C. Rafferty* Chief Executive May 1, 2000
- ------------------------
Lawrence C. Rafferty
Jay F. Higgins* Trustee May 1, 2000
- ---------------------
Jay F. Higgins
Daniel J. Byrne* Trustee May 1, 2000
- ---------------------
Daniel J. Byrne
Gerald E. Shanley Iii* Trustee May 1, 2000
- ------------------------
Gerald E. Shanley III
/s/ Daniel D. O'Neill President May 1, 2000
- ---------------------
Daniel D. O'Neill
*By
Daniel D. O'Neill,
Attorney-In-Fact
<PAGE>
INDEX TO EXHIBITS
Exhibit
NUMBER DESCRIPTION PAGE
- ------ ----------- ----
(a) Declaration of Trust*
(b) By-Laws*
(c) Voting trust agreement - None
(d)(i) Form of Investment Advisory Agreement between the Potomac Insurance
Trust and Rafferty Asset Management, LLC - filed herewith
(ii) Form of Fund Administration Servicing Agreement between the Potomac
Insurance Trust and Firstar Mutual Fund Services, LLC - filed
herewith
(e)(i) Form of Distribution Agreement between the Potomac Insurance Trust
and Rafferty Capital Markets, Inc. - filed herewith
(ii) Form of Dealer Agreement - filed herewith
(iii) Form of Services Agreement - filed herewith
(f) Bonus, profit sharing contracts - None
(g)(i) Form of Custodian Agreement between the Potomac Insurance Trust and
Firstar Bank Milwaukee, NA - filed herewith
(h)(i) Form of Transfer Agent Agreement between the Potomac Insurance Trust
and Firstar Mutual Fund Services, LLC - filed herewith
(ii) Form of Fund Accounting Servicing Agreement between the Potomac
Insurance Trust and Firstar Mutual Fund Services, LLC -filed
herewith
(iii) Form of Participation Agreement - filed herewith
(i) Opinion and consent of counsel - filed herewith
(j) Consent of Independent Auditors - filed herewith
(k) Financial statements omitted from prospectus - None
(l) Letter of investment intent - filed herewith
(m)(i) Class A Plan pursuant to Rule 12b-1 - filed herewith
(ii) Class B Plan pursuant to Rule 12b-1 - filed herewith
(n) Plan pursuant to Rule 18f-3 - filed herewith
(p) Code of Ethics for Trust - filed herewith
<PAGE>
Other: Power of Attorney - filed herewith
* Incorporated by reference to the Trust's Initial Registration Statement on
Form N-1A as filed with the Securities and Exchange Commission on December
29, 1999, EDGAR Accession No. 0000898432-99-001184.
POTOMAC INSURANCE TRUST
FORM OF
INVESTMENT ADVISORY AGREEMENT
This Investment Advisory Agreement is made as of ______________, 2000,
between the Potomac Insurance Trust (the "Trust"), a business trust organized
under the laws of the Commonwealth of Massachusetts with its principal place of
business at 1311 Mamaroneck Avenue, White Plains, New York 10605, and Rafferty
Asset Management, LLC, a New York limited liability corporation (the "Adviser").
WHEREAS, the Trust is registered under the Investment Company Act of 1940,
as amended (the "Act"), as an open-end management investment company consisting
of one or more investment series of shares, each having its own assets and
investment policies;
WHEREAS, the Adviser provides investment advice and is registered with the
Securities and Exchange Commission (the "SEC") as an investment adviser under
the Investment Advisers Act of 1940, as amended (the "Advisers Act"); and
WHEREAS, the Trust desires to retain the Adviser to perform investment
advisory services for each series of the Trust listed in one or more Schedules
attached hereto (collectively, the "Portfolios"), and the Adviser is willing to
perform such services on the terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT. The Trust hereby appoints the Adviser, subject to the
direction and control of the Trust's Board of Trustees (the "Board"), to manage
the investment and reinvestment of the assets of each Portfolio listed on
Schedule A of this Agreement (as such schedule may be amended from time to time)
for the period and on the terms set forth in this Agreement. The Adviser accepts
such appointment and agrees to render the services herein set forth for the
compensation as set forth on Schedule A. In the performance of its duties, the
Adviser will act in the best interests of the Trust and each Portfolio and will
comply with (a) applicable laws and regulations, including, but not limited to,
the 1940 Act, (b) the terms of this Agreement, (c) the Trust's Declaration of
Trust, By-Laws and currently effective registration statement under the
Securities Act of 1933, as amended, and the 1940 Act, and any amendments
thereto, (d) the stated investment objective, policies and restrictions of each
applicable Portfolio, and (e) such other guidelines as the Board reasonably may
establish.
2. DUTIES AS INVESTMENT ADVISER.
(a) Subject to the supervision of the Board, the Adviser will provide a
continuous investment program for each Portfolio, including investment research
and management with respect to all securities, investments and cash equivalents
in each Portfolio. The Adviser will determine from time to time what securities
and other investments will be purchased, retained or sold by each Portfolio. To
carry out such decisions, the Adviser hereby is authorized, as agent and
attorney-in-fact for the Trust, for the account of, at the risk of and in the
name of the Trust, to place orders and issue instructions with respect to those
transactions of the Portfolios. The Adviser will exercise full discretion and
act for each Portfolio in the same manner and with the same force and effect as
such Portfolio itself might or could do with respect to purchases, sales, or
<PAGE>
other transactions, as well as with respect to all other things necessary or
incidental to the furtherance or conduct of such purchases, sales or other
transactions.
(b) The Adviser will place orders pursuant to its investment
determinations for each Portfolio either directly with the issuer or through
other brokers. In the selection of brokers and the placement of orders for the
purchase and sale of portfolio investments for the Portfolios, the Adviser shall
use its best efforts to obtain for the Portfolios the most favorable price and
execution available, except to the extent it may be permitted to pay higher
brokerage commissions for brokerage and research services as described below. In
using its best efforts to obtain the most favorable price and execution
available, the Adviser, bearing in mind the Trust's best interests at all times,
shall consider all factors it deems relevant, including by way of illustration,
price, the size of the transaction, the nature of the market for the security,
the amount of the commission, the timing of the transaction taking into account
market prices and trends, the reputation, experience and financial stability of
the broker involved and the quality of service rendered by the broker in other
transactions. Subject to such policies as the Board may determine, the Adviser
shall not be deemed to have acted unlawfully or to have breached any duty
created by this Agreement or otherwise solely by reason of its having caused a
Portfolio to pay a broker that provides brokerage and research services to the
Adviser an amount of commission for effecting a portfolio investment transaction
in excess of the amount of commission another broker would have charged for
effecting that transaction if the Adviser determines in good faith that such
amount of commission was reasonable in relation to the value of the brokerage
and research services provided by such broker, viewed in terms of either that
particular transaction or the Adviser's overall responsibilities with respect to
the Trust and to other clients of the Adviser as to which the Adviser exercises
investment discretion. In no instance will portfolio securities of any Portfolio
be purchased from or sold to the Adviser or any affiliated person of the
Adviser. The Trust agrees that any entity or person associated with the Adviser
that is a member of a national securities exchange is authorized to effect any
transaction on such exchange for the account of the Trust which is permitted by
Section 11(a) of the Securities Exchange Act of 1934, as amended, and the rules
thereunder, and the Trust has consented to the retention of compensation for
such transactions.
(c) The Adviser will report to the Board at each meeting thereof all
changes in the Portfolios since the prior report, and also will keep the Board
informed of important developments affecting the Trust, Portfolios and the
Adviser, and on its own initiative, will provide the Board from time to time
such information as the Adviser may believe appropriate for this purpose,
whether concerning the individual companies whose securities are included in a
Portfolio's holdings, the industries in which they engage, or the economic,
social or political conditions prevailing in each country in which the Portfolio
maintains investments. The Adviser also make available to the Board upon request
any economic, statistical and investment services normally available to
institutional or other customers of the Adviser.
(d) The Adviser will from time to time employ or associate with such
persons as the Adviser believes to be particularly fitted to assist in the
execution of the Adviser's duties hereunder, the cost of performance of such
duties to be borne and paid by the Adviser. No obligation may be incurred on the
Trust's behalf in any such respect.
(e) Any of the foregoing functions with respect to any or all Portfolios
may be delegated by the Adviser, at the Adviser's expense, to another
appropriate party (including an affiliated party), subject to such approval by
- 2 -
<PAGE>
the Board and shareholders of each affected Portfolio as may be required by the
1940 Act. The Adviser shall oversee the performance of delegated functions by
any such party and shall furnish to the Trust with quarterly evaluations and
analyses concerning the performance of delegated responsibilities by those
parties.
3. SERVICES NOT EXCLUSIVE. The services furnished by the Adviser
hereunder are not to be deemed exclusive and the Adviser shall be free to
furnish similar services to others so long as its services under this Agreement
are not impaired thereby.
4. BOOKS AND RECORDS.
(a) The Adviser shall maintain records for each Portfolio relating to
portfolio transactions and the placing and allocation of brokerage orders as are
required to be maintained by the Trust under Rule 31a-1 of the Act. The Adviser
shall prepare and maintain, or cause to be prepared and maintained, in such form
and in such locations as may be required by applicable law, all documents and
records relating to the services provided by the Adviser pursuant to this
Agreement required to be prepared and maintained by the Trust pursuant to the
rules and regulations of any national, state or local government entity with
jurisdiction over the Trust, including the Internal Revenue Service.
(b) In compliance with the requirements of Rule 31a-3 under the 1940 Act,
the Adviser hereby agrees that all records which it maintains for the Trust are
the property of the Trust and further agrees to surrender promptly to the Trust
any of such records upon the Trust's request. The Adviser further agrees to
preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the records
required to be maintained by Rule 3la-1 under the 1940 Act.
5. EXPENSES. During the term of this Agreement, the Trust will bear all
expenses not specifically assumed by the Adviser incurred in its operations and
the offering of its shares. Expenses borne by the Trust will include, the
following (or each Portfolio's proportionate share of the following): (a)
brokerage commissions relating to securities purchased or sold by the Trust or
any losses incurred in connection therewith; (b) fees payable to and expenses
incurred on behalf of the Trust by the Adviser; (c) expenses of organizing the
Trust and the Portfolios; (d) filing fees and expenses relating to the
registration and qualification of the Trust's shares and the Trust under federal
or state securities laws and maintaining such registrations and qualifications;
(e) distribution fees; (f) fees and salaries payable to the members of the Board
and officers who are not officers or employees of the Adviser or interested
persons (as defined in the 1940 Act) of any investment adviser or distributor of
the Trust; (g) taxes (including any income or franchise taxes) and governmental
fees; (h) costs of any liability, uncollectible items of deposit and other
insurance or fidelity bonds; (i) any costs, expenses or losses arising out of
any liability of or claim for damage or other relief asserted against the Trust
for violation of any law; (j) legal, accounting and auditing expenses, including
legal fees of special counsel for the independent trustees; (k) charges of
custodians, transfer agents and other agents; (l) costs of preparing share
certificates; (m) expenses of setting in type and printing prospectuses and
supplements thereto for existing shareholders, reports and statements to
shareholders and proxy material; (n) any extraordinary expenses (including fees
and disbursements of counsel) incurred by the Trust; and (o) fees and other
expenses incurred in connection with membership in investment company
organizations.
- 3 -
<PAGE>
The Trust may pay directly any expense incurred by it in its normal
operations and, if any such payment is consented to by the Adviser and
acknowledged as otherwise payable by the Adviser pursuant to this Agreement, the
Trust may reduce the fee payable to the Adviser pursuant to paragraph 7 hereof
by such amount. To the extent that such deductions exceed the fee payable to the
Adviser on any monthly payment date, such excess shall be carried forward and
deducted in the same manner from the fee payable on succeeding monthly payment
dates.
In addition, if the expenses borne by the Trust or any Portfolio in any
fiscal year exceed the expense limitations voluntarily or contractually imposed
by the Adviser, the Adviser will reimburse the Trust or Portfolio for any excess
up to the amount of the fee payable to it during that fiscal year pursuant to
paragraph 7 hereof. However, the Adviser may recover any expenses reimbursed in
the three previous years if the recovery does not cause the Trust or any
Portfolio to exceed such limitations.
6. LIMITATION OF LIABILITY OF THE ADVISER. The Adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Trust or any Portfolio in connection with the matters to which this
Agreement relate except a loss resulting from the willful misfeasance, bad faith
or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations and duties under this Agreement. Any
person, even though also an officer, partner, employee, or agent of the Adviser,
who may be or become an officer, trustee, employee or agent of the Trust shall
be deemed, when rendering services to the Trust or acting in any business of the
Trust, to be rendering such services to or acting solely for the Trust and not
as an officer, partner, employee, or agent or one under the control or direction
of the Adviser even though paid by it.
7. COMPENSATION. For the services provided and the expenses assumed
pursuant to this Agreement with respect to each Portfolio, the Trust will pay
the Adviser, effective from the date of this Agreement, a fee that is computed
daily and paid monthly from each Portfolio's assets at the annual rates as
percentages of that Portfolio's average daily net assets as set forth in the
attached Schedule A, which schedule can be modified from time to time to reflect
changes in annual rates or the addition or deletion of a Portfolio from the
terms of this Agreement, subject to appropriate approvals required by the 1940
Act. If this Agreement becomes effective or terminates with respect to any
Portfolio before the end of any month, the fee for the period from the effective
date to the end of the month or from the beginning of such month to the date of
termination, as the case may be, shall be prorated according to the proportion
that such period bears to the full month in which such effectiveness or
termination occurs.
8. DURATION AND TERMINATION. This Agreement shall become effective upon
its execution; provided, that with respect to any Portfolio now existing or
hereafter created, this Agreement shall not take effect unless it first has been
approved (i) by a vote of the majority of those trustees of the Trust who are
not parties to this Agreement or interested persons of such party, cast in
person at a meeting called for the purpose of voting on such approval, and (ii)
by vote of a majority of that Portfolio's outstanding voting securities. This
Agreement shall remain in full force and effect continuously thereafter until
terminated without the payment of any penalty as follows:
(a) By vote of a majority of its trustees, or by the affirmative vote of a
majority of the outstanding shares of such Portfolio, the Trust may at any time
terminate this Agreement with respect to any or all Portfolios by providing not
- 4 -
<PAGE>
more than 60 days' written notice delivered or mailed by registered mail,
postage prepaid, to the Adviser at its principal offices; or
(b) With respect to any Portfolio, this Agreement shall be approved for an
initial period of two year and at least annually thereafter by (i) the Trustees
or the shareholders of that Portfolio by the affirmative vote of a majority of
the outstanding shares of such Portfolio, and (ii) a majority of the Trustees
who are not interested persons of the Trust or of the Adviser or of any
subadviser, by vote cast in person at a meeting called for the purpose of voting
on such approval. If the continuance of this Agreement is not approved at least
annually after the initial two-year period, then this Agreement shall
automatically terminate at the close of business on the second anniversary of
its execution, or upon the expiration of one year from the effective date of the
last such continuance, whichever is later; provided, however, that if the
continuance of this Agreement is submitted to the shareholders of a Portfolio
for their approval and such shareholders fail to approve such continuance of
this Agreement as provided herein, the Adviser may continue to serve hereunder
in a manner consistent with the 1940 Act and the rules and regulations
thereunder with respect to that Portfolio; or
(c) The Adviser may at any time terminate this Agreement with respect to
any or all Portfolios by not less than 60 days' written notice delivered or
mailed by registered mail, postage prepaid to the Trust.
(d) This Agreement automatically and immediately will terminate in the
event of its assignment.
9. AMENDMENT OF THIS AGREEMENT. No provision of this Agreement may be
changed, waived, discharged or terminated orally, except by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. No material amendment of this Agreement with
respect to any Portfolio shall be effective except, if required by law, by vote
of the holders of a majority of that Portfolio's outstanding voting securities.
10. GOVERNING LAW. This Agreement shall be construed in accordance with
the laws of the Commonwealth of Massachusetts, without giving effect to the
conflicts of laws principles thereof, and in accordance with the 1940 Act. To
the extent that the applicable laws of the Commonwealth of Massachusetts
conflict with the applicable provisions of the 1940 Act, the latter shall
control.
11. DEFINITIONS. As used in this Agreement, the terms "majority of the
outstanding voting securities," "interested person," and "assignment" shall have
the same meanings as such terms have in the 1940 Act.
12. SEVERABILITY. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors.
13. MISCELLANEOUS. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
- 5 -
<PAGE>
provisions hereof or otherwise affect their construction or effect.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
Attest: POTOMAC INSURANCE TRUST
By: By:
---------------------------- -----------------------------
Attest: RAFFERTY ASSET MANAGEMENT, LLC
By: By:
---------------------------- -----------------------------
- 6 -
<PAGE>
SCHEDULE A
TO THE
INVESTMENT ADVISORY AGREEMENT
BETWEEN
THE POTOMAC INSURANCE TRUST
AND
RAFFERTY ASSET MANAGEMENT, LLC
Pursuant to section 1 of the Investment Advisory Agreement between the
Potomac Insurance Trust (the "Trust") and Rafferty Asset Management, LLC (the
"Rafferty"), the Trust hereby appoints Rafferty to manage the investment and
reinvestment of the Portfolios of the Trust listed below. As compensation for
such, the Trust shall pay to Rafferty pursuant to section 7 of the Investment
Advisory Agreement a fee, computed daily and paid monthly, at the following
annual rates as percentages of each Portfolio's average daily net assets:
Advisory Fee as a % of
Average Daily Net
PORTFOLIOS OF THE TRUST ASSETS UNDER MANAGEMENT
For each VP Plus Fund listed below: 0.75%
The Potomac VP OTC Plus Fund
The Potomac VP Dow 30 Plus Fund
The Potomac VP Small Cap Plus Fund
The Potomac VP Internet Plus Fund
The Potomac VP U.S. Plus Fund
The Potomac VP Japan Plus Fund
For each VP Short Fund listed below: 0.90%
The Potomac VP OTC/Short Fund
The Potomac VP Dow 30/Short Fund
The Potomac VP Small Cap/Short Fund
The Potomac VP Internet/Short Fund
The Potomac VP U.S./Short Fund
The Potomac VP Japan/Short Fund
The Potomac VP Money Market Fund 0.50%
Dated: _____________, 2000
FUND ADMINISTRATION SERVICING AGREEMENT
THIS AGREEMENT is made and entered into as of this 24th day of February,
2000, by and between Potomac Insurance Trust, a Massachusetts business trust
(hereinafter referred to as the "Trust") and Firstar Mutual Fund Services, LLC,
a limited liability company organized under the laws of the State of Wisconsin
(hereinafter referred to as "FMFS").
WHEREAS, the Trust is an open-end management investment company which is
registered under the Investment Company Act of 1940, as amended (the "1940
Act");
WHEREAS, the Trust is authorized to create separate series, each with
its own separate investment portfolio;
WHEREAS, FMFS is a limited liability corporation and, among other things,
is in the business of providing fund administration services for the benefit of
its customers; and
WHEREAS, the Trust desires to retain FMFS to act as Administrator for each
series of the Trust listed on Exhibit A attached hereto, (each hereinafter
referred to as a "Fund"), as may be amended from time to time.
NOW, THEREFORE, in consideration of the mutual agreements herein made, the
Trust and FMFS agree as follows:
1. APPOINTMENT OF ADMINISTRATOR
The Trust hereby appoints FMFS as Administrator of the Trust on the terms
and conditions set forth in this Agreement, and FMFS hereby accepts such
appointment and agrees to perform the services and duties set forth in
this Agreement in consideration of the compensation provided for herein.
2. DUTIES AND RESPONSIBILITIES OF FMFS
A. General Fund Management
1. Act as liaison among all Fund service providers
2. Supply:
a. Corporate secretarial services
b. Office facilities (which may be in FMFS's or its affiliate's
own offices)
c. Non-investment-related statistical and research data as
needed
3. Coordinate board communication by:
a. Establish meeting agendas
<PAGE>
b. Preparing board reports based on financial and administrative
data
c. Evaluating independent auditor
d. Recommend dividend declarations to the Board, prepare and
distribute to appropriate parties notices announcing
declaration of dividends and other distributions to
shareholders
e. Provide personnel to serve as officers of the Trust if so
elected by the Board and attend Board meetings to present
materials for Board review
4. Audits
a. Prepare appropriate schedules and assist independent
auditors
b. Provide information to SEC and facilitate audit process
c. Provide office facilities
5. Assist in overall operations of the Fund
6. Pay Fund expenses upon written authorization from the Trust
7. Monitor arrangements under shareholder services or similar plan
B. Compliance
1. Regulatory Compliance
a. Monitor compliance with 1940 Act requirements, including:
1) Asset diversification tests
2) Total return and SEC yield calculations
3) Maintenance of books and records under Rule 31a-3
b. Monitor Fund's compliance with the policies and investment
limitations of the Trust as set forth in its Prospectus and
Statement of Additional Information
c. Maintain awareness of applicable regulatory and operational
service issues and recommend dispositions
2. SEC Registration and Reporting
a. Assist Trust counsel in updating Prospectus and Statement
of Additional Information and in preparing proxy statements
and Rule 24f-2 notices
b. Prepare annual and semiannual reports, Form N-SAR filings and
Rule 24f-2 notices
2
<PAGE>
c. Coordinate the printing, filing and mailing of publicly
disseminated Prospectuses and reports
d. File shareholder reports under Rule 30b2-1
e. Monitor sales of each Fund's shares and ensure that such
shares are properly registered with the SEC and the
appropriate state authorities
f. File Rule 24f-2 notices
3. IRS Compliance
a. Monitor Company's status as a regulated investment company
under Subchapter M, including without limitation, review of
the following:
1) Asset diversification requirements
2) Qualifying income requirements
3) Distribution requirements
b. Calculate required distributions
C. Financial Reporting
1. Provide financial data required by Fund's Prospectus and
Statement of Additional Information;
2. Prepare financial reports for officers, shareholders, tax
authorities, performance reporting companies, the board, the SEC,
and independent auditors;
3. Supervise the Company's Custodian and Trust Accountants in the
maintenance of the Company's general ledger and in the preparation
of the Fund's financial statements, including oversight of expense
accruals and payments, of the determination of net asset value of
the Company's net assets and of the Company's shares, and of the
declaration and payment of dividends and other distributions to
shareholders;
4. Compute the yield, total return and expense ratio of each class of
each Portfolio, and each Portfolio's portfolio turnover rate; and
5. Monitor the expense accruals and notify Trust management of any
proposed adjustments.
6. Prepare monthly financial statements, which will include without
limitation the following items:
Schedule of Investments
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
3
<PAGE>
Cash Statement
Schedule of Capital Gains and Losses
7. Prepare quarterly broker security transaction summaries.
D. Tax Reporting
1. Prepare and file on a timely basis appropriate federal and state
tax returns including, without limitation, Forms 1120/8613 with
any necessary schedules
2. Prepare state income breakdowns where relevant
3. File Form 1099 Miscellaneous for payments to trustees and other
service providers
4. Monitor wash losses
5. Calculate eligible dividend income for corporate shareholders
3. COMPENSATION
The Trust, on behalf of the Fund, agrees to pay FMFS for the performance
of the duties listed in this Agreement, the fees and out-of-pocket
expenses as set forth in the attached Exhibit A. Notwithstanding anything
to the contrary, amounts owed by the Trust to FMFS shall only be paid out
of the assets and property of the particular Fund involved.
These fees may be changed from time to time, subject to mutual written
Agreement between the Trust and FMFS.
The Trust agrees to pay all fees and reimbursable expenses within ten (10)
business days following the receipt of the billing notice.
4. PERFORMANCE OF SERVICE; LIMITATION OF LIABILITY
A. FMFS shall exercise reasonable care in the performance of its
duties under this Agreement. FMFS shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Trust in
connection with matters to which this Agreement relates, including losses
resulting from mechanical breakdowns or the failure of communication or
power supplies beyond FMFS's control, except a loss arising out of or
relating to FMFS's refusal or failure to comply with the terms of this
Agreement or from bad faith, negligence, or willful misconduct on its part
in the performance of its duties under this Agreement. Notwithstanding any
other provision of this Agreement, if FMFS has exercised reasonable care
in the performance of its duties under this Agreement, the Trust shall
indemnify and hold harmless FMFS from and against any and all claims,
demands, losses, expenses, and liabilities (whether with or without basis
in fact or law) of any and every nature (including reasonable attorneys'
fees) which FMFS may sustain or incur or which may be asserted against
FMFS by any person arising out of any action taken or omitted to be taken
4
<PAGE>
by it in performing the services hereunder, except for any and all claims,
demands, losses, expenses, and liabilities arising out of or relating to
FMFS's refusal or failure to comply with the terms of this Agreement or
from bad faith, negligence or from willful misconduct on its part in
performance of its duties under this Agreement, (i) in accordance with the
foregoing standards, or (ii) in reliance upon any written or oral
instruction provided to FMFS by any duly authorized officer of the Trust,
such duly authorized officer to be included in a list of authorized
officers furnished to FMFS and as amended from time to time in writing by
resolution of the Board of Trustees of the Trust.
FMFS shall indemnify and hold the Trust harmless from and against
any and all claims, demands, losses, expenses, and liabilities (whether
with or without basis in fact or law) of any and every nature (including
reasonable attorneys' fees) which the Trust may sustain or incur or which
may be asserted against the Trust by any person arising out of any action
taken or omitted to be taken by FMFS as a result of FMFS's refusal or
failure to comply with the terms of this Agreement, its bad faith,
negligence, or willful misconduct.
In the event of a mechanical breakdown or failure of
communication or power supplies beyond its control, FMFS shall take all
reasonable steps to minimize service interruptions for any period that
such interruption continues beyond FMFS's control. FMFS will make every
reasonable effort to restore any lost or damaged data and correct any
errors resulting from such a breakdown at the expense of FMFS. FMFS agrees
that it shall, at all times, have reasonable contingency plans with
appropriate parties, making reasonable provision for emergency use of
electrical data processing equipment to the extent appropriate equipment
is available. Representatives of the Trust shall be entitled to inspect
FMFS's premises and operating capabilities at any time during regular
business hours of FMFS, upon reasonable notice to FMFS.
Regardless of the above, FMFS reserves the right to reprocess and
correct administrative errors at its own expense.
B. In order that the indemnification provisions contained in this
section shall apply, it is understood that if in any case the indemnitor
may be asked to indemnify or hold the indemnitee harmless, the indemnitor
shall be fully and promptly advised of all pertinent facts concerning the
situation in question, and it is further understood that the indemnitee
will use all reasonable care to notify the indemnitor promptly concerning
any situation which presents or appears likely to present the probability
of a claim for indemnification. The indemnitor shall have the option to
defend the indemnitee against any claim which may be the subject of this
indemnification. In the event that the indemnitor so elects, it will so
notify the indemnitee and thereupon the indemnitor shall take over
complete defense of the claim, and the indemnitee shall in such situation
initiate no further legal or other expenses for which it shall seek
indemnification under this section. The indemnitee shall in no case
confess any claim or make any compromise in any case in which the
indemnitor will be asked to indemnify the indemnitee except with the
indemnitor's prior written consent.
5
<PAGE>
C. FMFS is hereby expressly put on notice of the limitation of
shareholder liability as set forth in the Trust Instrument of the Trust
and agrees that obligations assumed by the Trust pursuant to this
Agreement shall be limited in all cases to the Trust and its assets, and
if the liability relates to one or more series, the obligations hereunder
shall be limited to the respective assets of such series. FMFS further
agrees that it shall not seek satisfaction of any such obligation from the
shareholder or any individual shareholder of a series of the Trust, nor
from the Trustees or any individual Trustee of the Trust.
5. PROPRIETARY AND CONFIDENTIAL INFORMATION
FMFS agrees on behalf of itself and its directors, officers, and employees
to treat confidentially and as proprietary information of the Trust all
records and other information relative to the Trust and prior, present, or
potential shareholders of the Trust (and clients of said shareholders),
and not to use such records and information for any purpose other than the
performance of its responsibilities and duties hereunder, except after
prior notification to and approval in writing by the Trust, which approval
shall not be unreasonably withheld and may not be withheld where FMFS may
be exposed to civil or criminal contempt proceedings for failure to
comply, when requested to divulge such information by duly constituted
authorities, or when so requested by the Trust.
6. TERM OF AGREEMENT
This Agreement shall become effective as of the date hereof and will
continue in effect for a period of one year. During the initial one year
term of this Agreement, if the Trust terminates any services with FMFS,
the Trust agrees to compensate Firstar an amount equal to the fees
remaining under the initial one year Agreement. Subsequent to the initial
one year term, this Agreement may be terminated by either party upon
giving ninety (90) days prior written notice to the other party or such
shorter period as is mutually agreed upon by the parties. However, this
Agreement may be amended by mutual written consent of the parties.
7. RECORDS
FMFS shall keep records relating to the services to be performed
hereunder, in the form and manner, and for such period as it may deem
advisable and is agreeable to the Trust but not inconsistent with the
rules and regulations of appropriate government authorities, in
particular, Section 31 of the 1940 Act and the rules thereunder. FMFS
agrees that all such records prepared or maintained by FMFS relating to
the services to be performed by FMFS hereunder are the property of the
Trust and will be preserved, maintained, and made available in accordance
with such section and rules of the 1940 Act and will be promptly
surrendered to the Trust on and in accordance with its request.
6
<PAGE>
8. GOVERNING LAW
This Agreement shall be construed and the provisions thereof interpreted
under and in accordance with the laws of the State of Wisconsin. However,
nothing herein shall be construed in a manner inconsistent with the 1940
Act or any rule or regulation promulgated by the Securities and Exchange
Commission thereunder.
9. DUTIES IN THE EVENT OF TERMINATION
In the event that, in connection with termination, a successor to any of
FMFS's duties or responsibilities hereunder is designated by the Trust by
written notice to FMFS, FMFS will promptly, upon such termination and at
the expense of the Trust, transfer to such successor all relevant books,
records, correspondence, and other data established or maintained by FMFS
under this Agreement in a form reasonably acceptable to the Trust (if such
form differs from the form in which FMFS has maintained, the Trust shall
pay any expenses associated with transferring the data to such form), and
will cooperate in the transfer of such duties and responsibilities,
including provision for assistance from FMFS's personnel in the
establishment of books, records, and other data by such successor.
10. NO AGENCY RELATIONSHIP
Nothing herein contained shall be deemed to authorize or empower FMFS to
act as agent for the other party to this Agreement, or to conduct business
in the name of, or for the account of the other party to this Agreement.
11. DATA NECESSARY TO PERFORM SERVICES
The Trust or its agent, which may be FMFS, shall furnish to FMFS the data
necessary to perform the services described herein at times and in such
form as mutually agreed upon if FMFS is also acting in another capacity
for the Trust, nothing herein shall be deemed to relieve FMFS of any of
its obligations in such capacity.
12. NOTICES
Notices of any kind to be given by either party to the other party shall
be in writing and shall be duly given if mailed or delivered as follows:
Notice to FMFS shall be sent to:
Firstar Mutual Fund Services, LLC
615 East Michigan Street
Milwaukee, WI 53202
and notice to the Trust shall be sent to:
Potomac Insurance Trust
1311 Mamaroneck Avenue
White Plains, NY 10605
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by a duly authorized officer or one or more counterparts as of the day and year
first written above.
POTOMAC INSURANCE TRUST FIRSTAR MUTUAL FUND SERVICES, LLC
By:______________________________ By: ________________________________
Attest:__________________________ Attest:_____________________________
<PAGE>
FUND ADMINISTRATION AND COMPLIANCE
ANNUAL FEE SCHEDULE - DOMESTIC FUNDS
EXHIBIT A
Separate Series of Potomac Insurance Trust
NAME OF SERIES
Potomac U.S. Plus Fund Potomac U.S./Short Fund
Potomac OTC Plus Fund Potomac OTC/Short Fund
Potomac 30 Plus Fund Potomac 30/Short Fund
Potomac Small Cap Plus Fund Potomac Small Cap/Short Fund
Potomac Internet Plus Fund Potomac Internet/Short Fund
Potomac Japan Plus Fund Potomac Japan Short Fund
Potomac Money Market Fund
Annual fee based upon average assets per fund:
8 basis points on the first $200 million
7 basis points on the next $500 million
5 basis points on the balance
No minimum
Plus out-of-pocket expense reimbursements, including but not limited to:
Postage
Programming
Stationery
Proxies
Retention of records
Special reports
Federal and state regulatory filing fees
Certain insurance premiums
Expenses from board of trustees meetings
Auditing and legal expenses
Fees and out-of-pocket expense reimbursements are billed monthly
The fees noted above are for one class of shares. There will be an additional
25% increase in fees for each class of shares.
FORM OF
DISTRIBUTION AGREEMENT
THIS AGREEMENT made as of ____________, 2000, between the Potomac
Insurance Trust ("Trust"), a Massachusetts business trust, Rafferty Asset
Management, LLC ("Rafferty"), a New York limited liability corporation, and
Rafferty Capital Markets, Inc. ("Distributor"), a corporation organized and
existing under the laws of the State of New York.
WHEREAS the Trust is registered under the Investment Company Act of 1940,
as amended ("1940 Act"), as an open-end management investment company, and has
registered its shares of beneficial interest ("Shares") for sale to the public
under the Securities Act of 1933, as amended ("1933 Act"), and has qualified it
shares for sale to the public under various state securities laws; and
WHEREAS the Trust offers for public sale distinct series of Shares, each
corresponding to a distinct portfolio as listed on Schedule A to this Agreement
("Series"); and
WHEREAS Rafferty is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and serves as investment adviser to
the Trust; and
WHEREAS the Trust and Rafferty desire to retain the Distributor as
principal underwriter in connection with the offering and sale of the Shares of
each Series listed on Schedule A (as amended from time to time) to this
Agreement; and
WHEREAS this Agreement has been approved by a vote of the Trust's Board of
Trustees and its disinterested Trustees in conformity with Section 15(c) under
the 1940 Act; and
WHEREAS the Distributor is willing to act as principal underwriter for the
Trust on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT. The Trust hereby appoints the Distributor as its
exclusive agent to be the principal underwriter to promote the Trust, solicit
orders for the purchase of the Shares and accept orders for the purchase and
redemption of Shares on behalf of the Trust, subject to the terms and for the
period set forth in this Agreement. The Distributor hereby accepts such
appointment and agrees to act hereunder.
2. SERVICES AND DUTIES OF THE DISTRIBUTOR.
(a) The Distributor agrees to sell the Shares on a best efforts basis
from time to time during the term of this Agreement as agent for the Trust and
upon the terms described in the Registration Statement. As used in this
Agreement, the term "Registration Statement" shall mean the currently effective
<PAGE>
registration statement of the Trust, and any supplements thereto, under the 1933
Act and the 1940 Act.
(b) Upon the date of this Agreement, the Distributor will hold itself
available to receive purchase orders satisfactory to the Distributor for Shares
and will accept such orders on behalf of the Trust. Purchase orders shall be
deemed effective at the time and in the manner set forth in the Registration
Statement.
(c) The Distributor shall print and distribute to prospective
investors Prospectuses, and shall print and distribute, upon request, to
prospective investors Statements of Additional Information ("SAIs"), and may
print and distribute such other sales literature, reports, forms and
advertisements in connection with the sale of the Shares as comply with the
applicable provisions of federal and state law. In connection with such sales
and offers of sales, the Trust authorizes the Distributor to provide only such
information and make only such statements or representations as are contained in
the Series' then-current Prospectus, SAI, or in such financial or other
statements furnished in writing to the Distributor by the Trust or as may
properly be included in sales literature or advertisements in accordance with
the provisions of the 1933 Act, the 1940 Act and applicable rules of
self-regulatory organizations. Neither the Trust nor any Series shall be
responsible in any way for any other information, statements or representations
given or made by the Distributor or its representatives or agents other than
those described in the preceding sentence. Except as specifically provided in
this Agreement, the Trust shall bear none of the expenses of the Distributor in
connection with its promotion, offer and sale of Shares.
(d) The offering price of the Shares shall be the net asset value per
Share as next determined by the Trust as set forth in the most-current
Prospectus. The Trust shall make available to the Distributor a statement of
each computation of net asset value and the details of entering into such
computation.
(e) The Distributor may at its sole discretion repurchase Shares
offered for sale by the shareholders. Repurchase of Shares by the Distributor
shall be at the price determined in accordance with, and in the manner set forth
in, the most-current Prospectus. At the end of each business day, the
Distributor shall notify, by any appropriate means, the Trust and its transfer
agent of the orders for repurchase of Shares received by the Distributor since
the last such report, the amount to be paid for such Shares, and the identity of
the shareholders offering Shares for repurchase. The Trust reserves the right to
suspend such repurchase right upon written notice to the Distributor. The
Distributor further agrees to act as agent for the Trust to receive and transmit
promptly to the Trust's transfer agent shareholder requests for redemption of
Shares.
(f) The Distributor shall not be obligated to sell any certain number
of Shares.
(g) The Distributor shall have the right to use any lists of
shareholders of the Trust or any Series or any other lists of investors that it
obtains in connection with its provision of services under this Agreement;
provided, however, that the Distributor shall not sell or knowingly provide such
lists of shareholders to any unaffiliated person of the Trust without the
consent of the Trust's Board of Trustees.
- 2 -
<PAGE>
3. DUTIES OF THE TRUST.
(a) The Trust shall keep the Distributor fully informed of its affairs
and shall make available to the Distributor copies of all information, financial
statements, and other papers that the Distributor may reasonably request for use
in connection with the distribution of Shares, including, without limitation,
certified copies of any financial statements prepared for the Trust by its
independent public accountant and such reasonable number of copies of the most
current Prospectus, SAI, and annual and interim reports as the Distributor may
request, and the Trust shall fully cooperate in the efforts of the Distributor
to promote, sell and arrange for the sale of the Shares and in the performance
of the Distributor's duties under this Agreement.
(b) The Trust shall maintain a currently effective Registration
Statement on Form N-1A with respect to such Series, maintain qualification with
states and file with the Securities and Exchange Commission (the "SEC") such
reports and other documents as may be required under the 1933 Act and the 1940
Act or by the rules and regulations of the SEC thereunder. Each Series shall
bear all expenses related to preparing and typesetting such Prospectuses, SAI
and other materials required by law and such other expenses, including printing
and mailing expenses, related to such Series' communication with persons who are
shareholders of that Series.
(c) Each Series represents and warrants that the Registration
Statement, post-effective amendments, Prospectus and SAI (excluding statements
relating to the Distributor and the services it provides that are based upon
written information furnished by the Distributor expressly for inclusion
therein) of such Series shall not contain any untrue statement of material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading, and that all statements or
information furnished to the Distributor, pursuant to Section 3(a) hereof, shall
be true and correct in all material respects.
4. OTHER BROKER-DEALERS. The Distributor in its discretion may enter into
agreements to sell Shares of each Series to such registered and qualified retail
dealers, as it may select. In making agreements with such dealers, the
Distributor shall act only as principal and not as agent for the Trust. The form
of any such dealer agreement shall be mutually agreed upon and approved by the
Trust and the Distributor.
5. WITHDRAWAL OF OFFERING. The Trust reserves the right at any time to
withdraw all offerings of any or all Series by written notice to the Distributor
at its principal office.
6. SERVICES NOT EXCLUSIVE. The services furnished by the Distributor
hereunder are not to be deemed exclusive and the Distributor shall be free to
furnish similar services to others so long as its services under this Agreement
are not impaired thereby. Nothing in this Agreement shall limit or restrict the
right of any director, officer or employee of the Distributor, who also may be a
director, officer or employee of the Trust, to engage in any other business or
to devote his or her time and attention in part to the management or other
aspects of any other business, whether of a similar or a dissimilar nature.
- 3 -
<PAGE>
7. EXPENSES OF THE TRUST. The Trust shall bear all costs and expenses of
registering the Shares with the SEC and state and other regulatory bodies, and
shall assume expenses related to communications with shareholders of the Trust,
including (i) fees and disbursements of its counsel and independent public
accountant; (ii) the preparation, filing, and printing of Registration
Statements and/or Prospectuses or SAIs; (iii) the preparation and mailing of
annual and interim reports, Prospectuses, SAIs, and proxy materials to
shareholders; and (iv) the qualifications of Shares for sale under the
securities laws of such jurisdictions as shall be selected by the Trust pursuant
to Paragraph 3(b) hereof, and the costs and expenses payable to each such
jurisdiction for continuing qualification therein.
8. EXPENSES OF THE DISTRIBUTOR. Distributor shall bear all costs and
expenses of (i) preparing, printing and distributing any materials not prepared
by the Trust and other materials used by the Distributor in connection with the
sale of Shares under this Agreement, including the additional cost of printing
copies of Prospectuses, SAIs, and annual and interim shareholder reports other
than copies thereof required for distribution to existing shareholders or for
filing with any Federal or state securities authorities; (ii) any expenses of
advertising incurred by the Distributor in connection with such offering; (iii)
the expenses of registration or qualification of the Distributor as a broker or
dealer under federal or state laws and the expenses of continuing such
registration or qualification; and (iv) all compensation paid to the
Distributor's employees and others for selling Shares, and all expenses of the
Distributor, its employees, and others who engage in or support the sale of
Shares as may be incurred in connection with their sales efforts.
9. COMPENSATION. As compensation for the services performed and the
expenses assumed by the Distributor under this Agreement including, but not
limited to, any commissions paid for sales of Shares, Rafferty shall pay the
Distributor, as promptly as possible after the last day of each month, a fee as
set forth in Schedule B to this Agreement.
10. INDEMNIFICATION.
(a) The Trust agrees to indemnify, defend, and hold the Distributor,
its officers and directors, and any person who controls the Distributor within
the meaning of Section 15 of the 1933 Act, free and harmless from and against
any and all claims, demands, liabilities, and expenses (including the cost of
investigating or defending such claims, demands, or liabilities and any counsel
fees incurred in connection therewith) that the Distributor, its officers,
directors, or any such controlling person may incur under the 1933 Act, or under
common law or otherwise, arising out of or based upon any alleged untrue
statement of a material fact contained in the Registration Statement, Prospectus
or SAI or arising out of or based upon any alleged omission to state a material
fact required to be stated in the either thereof or necessary to make the
statements therein not misleading, except insofar as such claims, demands,
liabilities, or expenses arise out of or are based upon any such untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with information furnished in writing by the Distributor
to the Trust for use in the Registration Statement; provided, that in no event
shall anything contained herein be so construed as to protect the Distributor
against any liability to the Trust or its shareholders to which the Distributor
would otherwise be subject by reason of willful misfeasance, bad faith, or gross
- 4 -
<PAGE>
negligence in the performance of its duties or by reason of its reckless
disregard of its obligations under this Agreement.
(b) The Trust shall not be liable to the Distributor under this
Agreement with respect to any claim made against the Distributor or any person
indemnified unless the Distributor or other such person shall have notified the
Trust in writing of the claim within a reasonable time after the summons or
other first written notification giving information of the nature of the claim
shall have been served upon the Distributor or such other person (or after the
Distributor or the person shall have received notice of service on any
designated agent). However, failure to notify the Trust of any claim shall not
relieve the Trust from any liability that it may have to the Distributor or any
person against whom such action is brought otherwise than on account of this
Agreement.
(c) The Trust shall be entitled to participate at its own expense in
the defense or, if it so elects, to assume the defense of any suit brought to
enforce any claims subject to this Agreement. If the Trust elects to assume the
defense of any such claim, the defense shall be conducted by counsel chosen by
the Trust and satisfactory to indemnified defendants in the suit whose approval
shall not be unreasonably withheld. In the event that the Trust elects to assume
the defense of any suit and retain counsel, the indemnified defendants shall
bear the fees and expenses of any additional counsel retained by them. If the
Trust does not elect to assume the defense of a suit, it will reimburse the
indemnified defendants for the reasonable fees and expenses of any counsel
retained by the indemnified defendants. The Trust agrees to promptly notify the
Distributor of the commencement of any litigation or proceedings against it or
any of its officers or directors in connection with the issuance or sale of any
of its Shares.
(d) The Distributor agrees to indemnify, defend, and hold the Trust,
its officers and directors, and any person who controls the Trust within the
meaning of Section 15 of the 1933 Act, free and harmless from and against any
and all claims, demands, liabilities, and expenses (including the cost of
investigating or defending against such claims, demands, or liabilities and any
counsel fees incurred in connection therewith) that the Trust, its directors or
officers, or any such controlling person may incur under the 1933 Act, or under
common law or otherwise, resulting from the Distributor's willful misfeasance,
bad faith or negligence in the performance of its obligations and duties under
this Agreement, or arising out of or based upon any alleged untrue statement of
a material fact contained in information furnished in writing by the Distributor
to the Trust for use in the Registration Statement, Prospectus or SAI arising
out of or based upon any alleged omission to state a material fact in connection
with such information required to be stated in either thereof or necessary to
make such information not misleading, or arising out of any agreement between
the Distributor and any retail dealer, or arising out of any supplemental sales
literature or advertising used by the Distributor in connection with its duties
under this Agreement.
(e) The Distributor shall be entitled to participate, at its own
expense, in the defense or, if it so elects, to assume the defense of any suit
brought to enforce the claim, but if the Distributor elects to assume the
defense, the defense shall be conducted by counsel chosen by the Distributor and
satisfactory to the indemnified defendants whose approval shall not be
unreasonably withheld. In the event that the Distributor elects to assume the
- 5 -
<PAGE>
defense of any suit and retain counsel, the defendants in the suit shall bear
the fees and expenses of any additional counsel retained by them. If the
Distributor does not elect to assume the defense of any suit, it will reimburse
the indemnified defendants in the suit for the reasonable fees and expenses of
any counsel retained by them.
11. SERVICES PROVIDED TO THE TRUST BY EMPLOYEES OF THE DISTRIBUTOR. Any
person, even though also an officer, director, employee, or agent of the
Distributor who may be or become an officer, director, employee, or agent of the
Trust, shall be deemed, when rendering services to the Trust or acting in any
business of the Trust, to be rendering such services to or acting for solely the
Trust and not as an officer, director, employee, or agent or one under the
control or direction of the Distributor even though paid by the Distributor.
12. DURATION AND TERMINATION.
(a) This Agreement shall become effective with respect to each Series
on the date first written above or such later date as indicated in Schedule A
and, unless sooner terminated as provided herein, will continue in effect for
two years from the above written date. Thereafter, if not terminated this
Agreement shall continue in effect with respect to each Series for successive
annual periods, provided that such continuance is specifically approved at least
annually (i) by a vote of a majority of the Trust's Trustees who are neither
interested persons (as defined in the 1940 Act) of the Trust ("Independent
Trustees") or the Distributor, cast in person at a meeting called for the
purpose of voting on such approval, and (ii) by the Board or by vote of a
majority of the outstanding voting securities of the Trust.
(b) Notwithstanding the foregoing, this Agreement may be terminated
with respect to any Series or in its entirety at any time, without the payment
of any penalty, by vote of the Board, by vote of a majority of the Independent
Trustees, or by vote of a majority of the outstanding voting securities of the
Trust on sixty days' written notice to the Distributor or by the Distributor at
any time, without the payment of any penalty, on sixty days' written notice to
the Trust. This Agreement will automatically terminate in the event of its
assignment.
13. AMENDMENT OF THIS AGREEMENT. No provision of this Agreement may be
changed, waived, discharged, or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge, or termination is sought. This Agreement may be amended as to any
Series with the approval of the Trustees or of a majority of the outstanding
voting securities of such Series; provided, that in either case, such amendment
also shall be approved by a majority of the Disinterested Trustees.
14. LIMITATION OF LIABILITY. Trustees and shareholders of each Series
shall not be personally liable for obligations of that Series in connection with
any matter arising from or in connection with this Agreement.
15. NOTICE. Any notice required or permitted to be given by either party
to the other shall be deemed sufficient upon receipt in writing at the other
party's principal offices.
- 6 -
<PAGE>
16. MISCELLANEOUS. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule, or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors. As used in this
Agreement, the terms "majority of the outstanding voting securities,"
"interested person," and "assignment" shall have the same meaning as such terms
have in the 1940 Act.
17. GOVERNING LAW. This Agreement shall be construed in accordance with
the laws of the State of New York and the 1940 Act. To the extent that the
applicable laws of the State of New York conflict with the applicable provisions
of the 1940 Act, the latter shall control.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated as of the day and year first above
written.
ATTEST: POTOMAC INSURANCE TRUST
By:
------------------------ ---------------------------------------
ATTEST: RAFFERTY ASSET MANAGEMENT, LLC
By:
------------------------ ---------------------------------------
ATTEST: RAFFERTY CAPITAL MARKETS, INC.
By:
------------------------ ---------------------------------------
- 7 -
<PAGE>
SCHEDULE A
to the
DISTRIBUTION AGREEMENT
among
the POTOMAC INSURANCE TRUST,
RAFFERTY ASSET MANAGEMENT, LLC and
RAFFERTY CAPITAL MARKETS, INC.
Pursuant to section 1 of the Distribution Agreement among the Potomac
Insurance Trust ("Trust"), Rafferty Asset Management, LLC ("Adviser") and
Rafferty Capital Markets, Inc. ("Distributor"), the Trust hereby appoints the
Distributor as its exclusive agent to be the principal underwriter of Trust with
respect to its following series:
The Potomac VP OTC Plus Fund
The Potomac VP OTC/Short Fund
The Potomac VP Dow 30 Plus Fund
The Potomac VP Dow 30/Short Fund
The Potomac VP Small Cap Plus Fund
The Potomac VP Small Cap/Short Fund
The Potomac VP Internet Plus Fund
The Potomac VP Internet/Short Fund
The Potomac VP U.S. Plus Fund
The Potomac VP U.S./Short Fund
The Potomac VP Japan Plus Fund
The Potomac VP Japan/Short Fund
The Potomac VP Money Market Fund
Dated ________, 2000
- 8 -
<PAGE>
SCHEDULE B
to the
DISTRIBUTION AGREEMENT
among
the POTOMAC INSURANCE TRUST,
RAFFERTY ASSET MANAGEMENT, LLC and
RAFFERTY CAPITAL MARKETS, INC.
As compensation pursuant to section 9 of the Distribution Agreement among
the Potomac Insurance Trust (the "Trust"), Rafferty Asset Management, LLC
("Adviser") and Rafferty Capital Markets, Inc. ("Distributor"), the Adviser
shall pay to the Distributor an annual fee of $15,000 for the first series of
the Trust and $2,000 for each series thereafter or 0.01% of the average daily
net assets of each Series, computed daily and paid monthly, whichever is
greater.
Dated: _________, 2000
- 9 -
RAFFERTY CAPITAL MARKETS, INC.
1311 MAMARONECK AVENUE
WHITE PLAINS, NEW YORK 10605
FORM OF
DEALER AGREEMENT
This Agreement made as of ___________________, 2000, between Rafferty
Capital Markets, Inc. ("RCM"), a corporation organized and existing under the
laws of the State of New York, and _____________________ ("Dealer"), a
corporation organized and existing under the laws of ________________.
WHEREAS, each fund listed on Schedule A (each a "Fund") is registered
under the Investment Company Act of 1940, as amended ("1940 Act"), as an
open-end management investment company or a series thereof and currently offers
for public sale shares of common stock or beneficial interest ("Shares"),
WHEREAS, RCM serves as principal underwriter in connection with the
offering and sale of the Shares of each Fund pursuant to a Distribution
Agreement; and
WHEREAS, Dealer desires to serve as a selected dealer for the Shares; and
NOW THEREFORE, in consideration of the promises and the mutual covenants
contained herein, RCM and Dealer agree as follows:
1. OFFERS AND SALES OF SHARES. The Dealer is to offer and sell Shares
only at the public offering price currently in effect, in accordance with the
terms of the then-current prospectus(es), including any supplements or
amendments thereto, of each Fund ("Prospectus"). The Dealer agrees to act only
as principal in such transactions and shall not have authority to act as agent
for the Funds, for RCM, or for any other dealer in any respect. Dealer agrees to
purchase Shares of the Funds only in transactions contemplating the simultaneous
resale of such Shares to investors and in no event shall Dealer place orders for
Shares unless it has already received customers orders to purchase Shares at the
applicable public offering price. Unless otherwise mutually agreed in writing,
each transaction shall be confirmed in writing. All purchase orders are subject
to acceptance by RCM and the Fund and become effective only upon confirmation by
RCM. In its sole discretion, either the Fund or RCM may reject any purchase
order and may, without notice, suspend sales or withdraw the offering of Shares
entirely.
2. PROCEDURES FOR PURCHASES. The procedures relating to all orders and
the handling of them shall be made in accordance with the procedures set forth
in each Fund's Prospectus, and to the extent consistent with the Prospectus,
written instructions forwarded to Dealer by RCM from time to time.
<PAGE>
3. SETTLEMENT AND DELIVERY FOR PURCHASES. Transactions shall be settled
by the Dealer by payment of the full purchase price to RCM in Federal Funds.
Payment for Shares ordered from RCM shall be received by RCM by the later of (a)
the end of the third business day following the Dealer's receipt of the
customer's order to purchase such Shares or (b) the end of one business day
following the Dealer's receipt of the customer's payment for such Shares, but in
no event later than the end of the sixth business day following the Dealer's
receipt of the customer's order. If such payment is not received within the time
specified, the sale may be canceled forthwith without any responsibility or
liability on RCM's part or on the part of the Funds (in which case the Dealer
will be responsible for any loss, including loss of profit, suffered by the
Funds resulting from the Dealer's failure to make payment as aforesaid), or, at
RCM's option, RCM may sell the Shares ordered back to the Funds (in which case
RCM may hold the Dealer responsible for any loss of profit suffered by RCM
resulting from the Dealer's failure to make payment as aforesaid).
RCM will not accept from the Dealer any conditional orders for Shares.
Delivery of certificates for Shares purchased shall be made by the Funds only if
requested (provided that the Fund issues certificates) and only against receipt
of the purchase price, subject to deduction for any discount reallowed to the
Dealer and RCM's portion of the sales charge on such sale.
RCM shall pay to the Dealer, not less frequently than monthly, the
aggregate fees due it on orders received and settled.
4. PROCEDURES FOR REDEMPTIONS, REPURCHASES AND EXCHANGES. Redemption or
repurchases of Shares as well as exchange requests shall be made in accordance
with the procedures set forth in the each Fund's Prospectus, and to the extent
consistent with the Prospectus, written instructions forwarded to Dealer by RCM
from time to time.
5. COMPENSATION. On each purchase of Shares by the Dealer from RCM, the
total sales charges and discount to selected dealer, if any, shall be as stated
in each Fund's Prospectus. Such sales charges and discounts to dealers are
subject to reductions under a variety of circumstances as described in each
Fund's Prospectus. To obtain these reductions, RCM must be notified when a sale
takes place that would qualify for the reduced charge. If any Shares sold to the
Dealer under the terms of this Agreement are redeemed by a Fund or repurchased
within seven business days after the date of the Dealer purchased such Shares,
the Dealer agrees to forfeit its right to any discount or commission received by
or allowed to the Dealer from the original sale.
From time to time during the term of this Agreement, RCM may make payments
to Dealer pursuant to one or more distribution plans adopted by certain of the
Funds pursuant to Rule 12b-1 under the 1940 Act ("Plan of Distribution) in
consideration, with respect to each such Fund, of your furnishing distribution
services hereunder and providing administrative, accounting and other services,
including personal service and/or the maintenance of shareholder accounts. The
provisions and terms of a Fund's Plan of Distribution are described in its
Prospectus and statement of additional information ("SAI"), and the Dealer
agrees that RCM has made no representations to the Dealer with respect to the
Plan of Distribution in addition to or conflicting with the description set
forth therein. The Dealer agrees that (1) Dealer has no right to receive payment
2
<PAGE>
of any amounts otherwise payable to it by RCM under a Fund's Plan of
Distribution until such time as RCM is in receipt of such fee from the Fund and
(2) RCM's liability to the Dealer for the payment of any such fees is limited
solely to the amount of the applicable Fund's fee received by RCM.
6. EXPENSES. The Dealer agrees that it will bear all expenses incurred
in connection with its performance of this Agreement.
7. DEALER REGISTRATION. The Dealer represents and warrants that it is
registered as a broker-dealer under the Securities Exchange Act of 1934 (the
"1934 Act"), is qualified as a broker-dealer in all states or other
jurisdictions in which it sells Fund Shares, and, if it sells shares in
additional states or jurisdictions in the future, will become qualified to act
as a dealer in each such state or jurisdiction prior to selling any Fund shares.
The Dealer shall maintain any filings and licenses required by federal and state
laws to conduct the business contemplated under this Agreement. The Dealer
further represents and warrants that it is a member in good standing of the
National Association of Securities Dealers, Inc. ("NASD") and that it agrees to
abide by the Conduct Rules of the NASD. The Dealer agrees to notify RCM
immediately in the event of (1) its expulsion or suspension from the NASD, or
(2) its being found to have violated any applicable federal or state law, rule
or regulation arising out of its activities as a broker-dealer or in connection
with this Agreement, or which may otherwise affect in any material way its
ability to act in accordance with the terms of this Agreement. The Dealer
further represents and warrants that it is a member of the Securities Investor
Protection Corporation ("SIPC") in good standing and agrees to notify RCM of any
changes in the Dealer's status with the SIPC.
8. COMPLIANCE WITH FEDERAL AND STATE LAWS. The Dealer will not offer or
sell any of the Shares except in compliance with all applicable federal and
state securities laws. In connection with sales and offers to sell Shares, the
Dealer will furnish or cause to be furnished to each person to whom any such
sale or offer is made, at or prior to the time of offering or sale, a copy of
the Prospectus and, if requested, the related SAI. RCM shall be under no
liability to the Dealer except for lack of good faith and for obligations
expressly assumed by RCM herein. Nothing herein contained, however, shall be
deemed to be a condition, stipulation or provision binding any persons acquiring
any security to waive compliance with, or to relieve the parties hereto from any
liability arising under, the federal securities laws.
RCM shall, from time to time, inform the Dealer as to the states and
jurisdictions in which RCM believes the Shares have been qualified for sale
under, or are exempt from the requirements of, the respective securities laws of
such states and jurisdictions. The Dealer agrees that it will not offer or sell
Shares in any state or jurisdiction in which such Shares are not qualified,
unless any such offer or sale is made in a transaction that qualifies for an
exemption from registration.
RCM assumes no responsibility in connection with the registration of the
Dealer under the laws of the various states or under federal law or the Dealer's
qualification under any such law to offer or sell Shares.
9. UNAUTHORIZED REPRESENTATIONS. No person is authorized to make any
3
<PAGE>
representations concerning Shares of the Funds except those contained in the
Prospectus, SAI and printed information issued by each Fund or by RCM as
information supplemental to each Prospectus. RCM shall, upon request, supply the
Dealer with reasonable quantities of Prospectuses and SAIs. The Dealer agrees
not to use other advertising or sales material relating to the Funds unless
approved in writing by RCM in advance of such use.
Neither party shall use the name of the other party in any manner without
the other party's written consent, except as required by any applicable federal
or state law, rule or regulation, and except pursuant to any mutually agreed
upon promotional programs.
10. CONFIRMATIONS. The Dealer agrees to send confirmations of orders to
its customers as required by Rule 10b-10 of the 1934 Act and agrees to pay any
costs in connection therewith.
11. RECORDS. The Dealer agrees to maintain all records required by
applicable state and federal laws and regulations relating to the offer and sale
of Shares, and upon the request of RCM, or of the Funds, promptly make these
records available to RCM or the Funds' Administrator as requested. In addition,
the Dealer hereby agrees to establish appropriate procedures and reporting forms
and/or mechanisms and schedules in conjunction with RCM and the Funds'
Administrator, to enable the Funds to identify the location, type of, and sales
to all accounts opened and maintained by the Dealer's customers or by the Dealer
on behalf of the Dealer's customers.
12. TAXPAYER IDENTIFICATION NUMBERS. The Dealer agrees to obtain any
taxpayer identification number certification from its customers required under
the Internal Revenue Code and any applicable Treasury regulations, and to
provide RCM or its designee with timely written notice of any failure to obtain
such taxpayer identification number certification in order to enable the
implementation of any required backup withholding.
13. INDEMNIFICATION. (a) The Dealer shall indemnify and hold harmless RCM,
each Fund, the transfer agents of the Funds, and their respective affiliates,
officers, directors, agents, employees and controlling persons from all direct
or indirect liabilities, losses or costs (including attorneys fees) arising
from, related to or otherwise connected with:
(1) any breach by the Dealer of any provision of this Agreement; or
(2) any actions or omissions of RCM, any Fund, the transfer agents of
the Funds, and the subsidiaries, affiliates, officers, directors, agents,
employees and controlling persons of any of them, in reliance upon any
oral or written instructions believed to be genuine and to have been given
by or on behalf of the Dealer.
(b) RCM shall indemnify and hold harmless the Dealer and its affiliates,
officers, directors, agents, employees and controlling persons from and against
any and all direct or indirect liabilities, losses or costs (including attorneys
fees) arising from, related to or otherwise connected with:
(1) any breach by RCM of any provision of this Agreement; or
4
<PAGE>
(2) any alleged untrue statement of a material fact contained in any
Fund's Registration Statement or prospectus or in any supplemental
materials prepared by RCM and supplied to the Dealer, or any alleged
omission to state in any such document a material fact required to be
stated, or necessary to make the statements made not misleading, but
only, in the case of a Registration Statement or Prospectus, if such
statement or omission was made by the Fund in reliance on information
provided by RCM.
(c) The Agreement of the parties in this Paragraph to indemnify each other
is conditioned upon the party entitled to indemnification (Indemnified Party)
giving notice to the party required to provide the indemnification (Indemnifying
Party) promptly after the summons or other first legal process for any claim as
to which indemnity may be sought is served on the Indemnified Party. The
Indemnified Party shall permit the Indemnifying Party to assume the defense of
any such claim or any litigation resulting from it, provided that counsel for
the Indemnifying Party who shall conduct the defense of such claim or litigation
shall be approved by the Indemnified Party (which approval shall not
unreasonably be withheld), and that the Indemnified Party may participate in
such defense at its expense. The failure of the Indemnified Party to give notice
as provided in this sub-paragraph (c) shall not relieve the Indemnifying Party
from any liability other than its indemnity obligation under this Paragraph. No
Indemnifying Party, in the defense of any such claim or litigation, shall,
without the consent of the Indemnified Party, consent to entry of any judgment
or enter into any settlement that does not include as an unconditional term the
giving by the claimant or plaintiff to the Indemnified Party of a release from
all liability in respect to such claim or litigation.
14. NO AGENCY CREATED. Nothing in this Agreement shall be deemed or
construed to make the Dealer an employee, agent, representative or partner of
any of the Funds or of RCM, and the Dealer is not authorized to act for RCM or
for any Fund or to make any representations on RCM's or the Funds' behalf. The
Dealer acknowledges that this Agreement is not exclusive and that RCM may enter
into similar arrangements with other broker-dealers.
15. TERMINATION, ASSIGNMENT AND AMENDMENT. Either party to this Agreement
may cancel this Agreement by giving ten days' written notice to the other. Such
notice shall be deemed to have been given on the date on which it was either
delivered personally to the other party or any officer or member thereof or was
mailed to the other party at its address as shown below. This Agreement will
terminate automatically without notice with respect to any Fund if (a) the
Dealer filed a petition in bankruptcy, (b) a trustee or the like is appointed
for the Dealer or its assets under federal bankruptcy laws, (c) the Dealer's
registration as a broker-dealer with the Securities and Exchange Commission is
suspended or revoked, (d) the Dealer's NASD membership is suspended or revoked,
(e) if an application for a protective decree under the provisions of the
Securities Investor Protection Act of 1970 shall have been filed against the
Dealer, or (f) the Distribution Agreement between RCM and a Fund is terminated.
Termination of this Agreement by operation of this Section 15 shall not affect
any unpaid obligations under Sections 2, 3 or 5 of this Agreement or the
liability, legal and indemnity obligations set forth under Sections 7, 8, 9, or
13 of this Agreement. This Agreement may be amended by RCM at any time upon
notice thereof to the Dealer and the Dealer's placing of an order after the
5
<PAGE>
effective date of any such amendment shall constitute the Dealer's acceptance
thereof.
16. NOTICES. Except as otherwise specifically provided in this Agreement,
all notices required or permitted to be given pursuant to this Agreement shall
be given in writing and delivered by personal delivery or by postage prepaid,
registered or certified United States first class mail, return receipt
requested, or by electronic mail, telex, telegram or similar means of same day
delivery (with a confirming copy by mail as provided herein). Unless otherwise
notified in writing, all notices to RCM shall be given or sent to RCM at its
offices located at 1311 Mamaroneck Avenue, White Plains, New York 10605,
Attention: Thomas A. Mulrooney, and all notices to the Dealer shall be given or
sent to: ______________________________________________________________________.
17. MISCELLANEOUS. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors.
18. GOVERNING LAW. This Agreement shall be construed in accordance with
the laws (without regard, however, to conflicts of law principles) of the State
of New York and the 1940 Act. To the extent that the applicable laws of the
State of New York conflict with the applicable provisions of the 1940 Act, the
latter shall control. The parties hereto submit to the non-exclusive
jurisdiction of New York.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated as of the day and year first written
above.
RAFFERTY CAPITAL MARKETS, INC.
Attest: _______________________ By:___________________________________
[DEALER]
Attest: _______________________ By:___________________________________
7
<PAGE>
RAFFERTY CAPITAL MARKETS, INC.
DEALER AGREEMENT
SCHEDULE A
The following Funds are covered by the terms and conditions of the
attached Dealer Agreement.
Date:_________________________
FORM OF SERVICES AGREEMENT
This Agreement is made as of _____________________, 2000 between Rafferty
Capital Markets, Inc. ("RCM") and ____________________ ("Company").
WHEREAS, RCM serves as principal distributor for the Class B shares of the
various Series of The Potomac Insurance Trust ("Trust"), which are sold to the
separate accounts ("Separate Accounts") of insurance companies that issue
variable annuity or variable life contracts ("Variable Contracts"); and
WHEREAS, the Company and the Trust have entered into a Trust Participation
Agreement ("Participation Agreement") with respect to the purchase by the
Company on behalf of the Company's Separate Accounts of Class B shares of the
Series of the Trust listed on Exhibit A to this Agreement, as amended from time
to time ("Shares"); and
WHEREAS, RCM and the Company desire that the Company provide certain
services concerning the Shares to current and prospective owners of Variable
Contracts;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. SERVICES TO BE PROVIDED. The Company agrees to provide certain
services with respect to the Shares to current and prospective owners of
Variable Contracts. These services include, but are not limited to, any
combination of the following: (a) printing and mailing of Trust prospectuses,
statements of additional information, any supplements thereto and shareholder
reports for existing and prospective Variable Contract owners; (b) services
relating to the development, preparation, printing and mailing of Trust
advertisements, sales literature and other promotional materials describing
and/or relating to the Shares and including materials intended for use within
the Company or for broker-dealer use only or retail use; (c) holding seminars
and sales meetings designed to promote the distribution of the Shares; (d)
obtaining information and providing explanations to Variable Contract owners
regarding the investment objectives and policies and other information about the
Trust and its Series, including the performance of the Series; (e) training
sales personnel regarding the Fund and its Series; (f) compensating sales
personnel with respect to the Trust and its Series; (g) providing personal
services and/or maintenance of the Variable Contract owner accounts with respect
to the Shares attributable to such accounts; and (h) financing any other
activity that is primarily intended to result in the sale of the Shares.
2. COMPENSATION. In consideration for these services, RCM agrees to
pay the Company (or to direct the Trust to pay the Company) a fee for so long as
this agreement is in effect, calculated daily, at the annual rate of ____% of
the average daily net asset value of the Shares held in the Company's Separate
Accounts. Each payment is to be made to the Company within 30 days after the end
of the calendar month to which it relates.
<PAGE>
The Company agrees that (1) the Company has no right to receive payment of
any amounts otherwise payable to it by RCM under the Trust's Plan of
Distribution until such time as RCM is in receipt of such fee from the Trust and
(2) RCM's liability to the Trust for the payment of any such fees is limited
solely to the amount of the applicable fee received by RCM.
3. RECORDS. The Company agrees to maintain and preserve all records
as required by law to be maintained and preserved in connection with providing
services under this Agreement. The Company agrees to provide RCM and the Trust
with copies of such records upon their reasonable request and to cooperate with
RCM in providing information to the Trust and its board of trustees with respect
to amounts expended and services provided under this Agreement.
4. INDEMNIFICATION.
(a) The Company will indemnify and hold RCM and the Trust harmless from
any claim, demand, loss, expense or cause of action resulting from the
misconduct or negligence, as measured by industry standards, of the Company, its
agents or employees, in carrying out the Company's obligations under this
Agreement.
(b) RCM will indemnify and hold the Company harmless from any claim, loss,
expense or cause of action resulting from the misconduct or negligence, as
measured by industry standards, of RCM, its agents or employees, in carrying out
RCM's obligations under this Agreement.
(c) These indemnification provisions will survive the termination of this
Agreement.
5. AMENDMENT AND TERMINATION. This Agreement may be amended only
upon written agreement of the parties. Either party to the Agreement may
terminate the Agreement, without cause or penalty, by giving the other party at
least thirty (30) days' written notice of its intention to terminate. This
Agreement may be terminated at any time without penalty with respect to the
Trust or a particular Series if a majority of the Trust's trustees who are not
interested persons of the Trust (as defined in the Investment Company Act of
1940 (the "1940 Act"), or a majority of the Shares of the Trust or a Series (as
defined in the 1940 Act) vote to terminate the Agreement. This Agreement may
terminate in the event of its assignment (as defined in the 1940 Act) or upon
termination of the Participation Agreement.
6. OTHER DOCUMENTS. Nothing in this Agreement shall amend, modify
or supersede any contractual terms, obligations or covenants between the Company
and RCM previously or currently in effect, including the contractual terms,
obligations or covenants contained in the Participation Agreement.
7. NOTICES. All notices required or permitted to be given under
this Agreement shall be given in writing and delivered by personal delivery, by
postage prepaid mail, or by facsimile machine or a similar means of same day
delivery (with a confirming copy by mail). All notices to RCM shall be given or
sent to its offices located at 1311 Mamaroneck Avenue, White Plains, New York
10605, ATTN: ______________. All notices to the Company shall be given or sent
- 2 -
<PAGE>
to it at the address specified by it below. Either party may change the address
to which notices shall be sent by giving notice to the other party in accordance
with this paragraph.
- 3 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated as of the day and year first above
written.
RAFFERTY CAPITAL MARKETS, INC.
By:___________________________
Name and Title:
COMPANY
By:___________________________
Name and Title:
Address:______________________
______________________________
- 4 -
<PAGE>
EXHIBIT A
SERIES OF THE POTOMAC INSURANCE TRUST
The Potomac VP OTC Plus Fund
The Potomac VP OTC/Short Fund
The Potomac VP Dow 30 Plus Fund
The Potomac VP Dow 30/Short Fund
The Potomac VP Small Cap Plus Fund
The Potomac VP Small Cap/Short Fund
The Potomac VP Internet Plus Fund
The Potomac VP Internet/Short Fund
The Potomac VP U.S. Plus Fund
The Potomac VP U.S./Short Fund
The Potomac VP Japan Plus Fund
The Potomac VP Japan/Short Fund
The Potomac VP Money Market Fund
Dated: ___________, 2000
- 5 -
CUSTODY AGREEMENT
-----------------
This AGREEMENT, dated as of February 24, 2000, by and between Potomac
Insurance Trust (the "Trust"), a business trust organized under the laws of the
State of Massachusetts, acting with respect to each series of the Trust listed
on Exhibit C attached hereto ( individually, a "Fund" and, collectively, the
"Funds"), each of them a series of the Trust and each of them operated and
administered by the Trust, and FIRSTAR BANK, N.A., a national banking
association (the "Custodian").
W I T N E S S E T H:
-------------------
WHEREAS, the Trust desires that the Fund's Securities and cash be held and
administered by the Custodian pursuant to this Agreement; and
WHEREAS, the Trust is an open-end management investment company registered
under the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Custodian represents that it is a bank having the
qualifications prescribed in Section 26(a)(i) of the 1940 Act;
NOW, THEREFORE, in consideration of the mutual agreements herein made, the
Trust and the Custodian hereby agree as follows:
ARTICLE I
---------
DEFINITIONS
-----------
Whenever used in this Agreement, the following words and phrases, unless
the context otherwise requires, shall have the following meanings:
1.1 "AUTHORIZED PERSON" means any Officer or other person duly
authorized by resolution of the Board of Trustees to give Oral
Instructions and Written Instructions on behalf of the Fund and
named in Exhibit A hereto or in such resolutions of the Board Of
Trustees, certified by an Officer, as may be received by the
Custodian from time to time.
1.2 "BOARD OF TRUSTEES" shall mean the Trustees from time to time
serving under the Trust's Agreement and Declaration of Trust, as
from time to time amended.
1.3 "BOOK-ENTRY SYSTEM" shall mean a federal book-entry system as
provided in Subpart O of Treasury Circular No. 300, 31 CFR 306, in
Subpart B of 31 CFR Part 350, or in such book-entry regulations of
federal agencies as are substantially in the form of such Subpart
O.
- 1 -
<PAGE>
1.4 "BUSINESS DAY" shall mean any day recognized as a settlement day by
The New York Stock Exchange, Inc. and any other day for which the
Trust computes the net asset value of Shares of the Fund.
1.5 "FUND CUSTODY ACCOUNT" shall mean any of the accounts in the name
of the Trust, which is provided for in Section 3.2 below.
1.6 "NASD" shall mean The National Association of Securities Dealers,
Inc.
1.7 "OFFICER" shall mean the Chairman, President, any Vice President,
any Assistant Vice President, the Secretary, any Assistant
Secretary, the Treasurer, or any Assistant Treasurer of the Trust.
1.8 "ORAL INSTRUCTIONS" shall mean instructions orally transmitted to
and accepted by the Custodian because such instructions are: (i)
reasonably believed by the Custodian to have been given by an
Authorized Person, (ii) recorded and kept among the records of the
Custodian made in the ordinary course of business and (iii) orally
confirmed by the Custodian. The Trust shall cause all Oral
Instructions to be confirmed by Written Instructions prior to the
end of the next Business Day. If such Written Instructions
confirming Oral Instructions are not received by the Custodian
prior to a transaction, it shall in no way affect the validity of
the transaction or the authorization thereof by the trust. If Oral
Instructions vary from the Written Instructions which purport to
confirm them, the Custodian shall notify the trust of such variance
but such Oral Instructions will govern unless the Custodian has not
yet acted.
1.9 "PROPER INSTRUCTIONS" shall mean Oral Instructions or Written
Instructions. Proper Instructions may be continuing Written
Instructions when deemed appropriate by both parties.
1.10 "SECURITIES DEPOSITORY" shall mean The Depository Trust Company and
(provided that Custodian shall have received a copy of a resolution
of the Board Of Trustees, certified by an Officer, specifically
approving the use of such clearing agency as a depository for the
Fund) any other clearing agency registered with the Securities and
Exchange Commission under Section 17A of the Securities and
Exchange Act of 1934 as amended (the "1934 Act"), which acts as a
system for the central handling of Securities where all Securities
of any particular class or series of an issuer deposited within the
system are treated as fungible and may be transferred or pledged by
bookkeeping entry without physical delivery of the Securities.
1.11 "SECURITIES" shall include, without limitation, common and
preferred stocks, bonds, call options, put options, debentures,
notes, bank certificates of deposit, bankers' acceptances,
- 2 -
<PAGE>
mortgage-backed securities or other obligations, and any
certificates, receipts, warrants or other instruments or documents
representing rights to receive, purchase or subscribe for the same,
or evidencing or representing any other rights or interests
therein, or any similar property or assets that the Custodian has
the facilities to clear and to service.
1.12 "SHARES" shall mean, with respect to a Fund, the units of
beneficial interest issued by the trust on account of the Fund.
1.13 "SUB-CUSTODIAN" shall mean and include (i) any branch of a "U.S.
Bank," as that term is defined in Rule 17f-5 under the 1940 Act,
(ii) any "Eligible Foreign Custodian," as that term is defined in
Rule 17f-5 under the 1940 Act, having a contract with the Custodian
which the Custodian has determined will provide reasonable care of
assets of the Funds based on the standards specified in Section 3.3
below. Such contract shall include provisions that provide: (i) for
indemnification or insurance arrangements (or any combination of
the foregoing) such that the Funds will be adequately protected
against the risk of loss of assets held in accordance with such
contract; (ii) that the Funds' assets will not be subject to any
right, charge, security interest, lien or claim of any kind in
favor of the Sub-Custodian or its creditors except a claim of
payment for their safe custody or administration, in the case of
cash deposits, liens or rights in favor of creditors of the
Sub-Custodian arising under bankruptcy, insolvency, or similar
laws; (iii) that beneficial ownership for the Funds' assets will be
freely transferable without the payment of money or value other
than for safe custody or administration; (iv) that adequate records
will be maintained identifying the assets as belonging to the funds
or as being held by a third party for the benefit of the Funds; (v)
that the Funds' independent public accountants will be given access
to those records or confirmation of the contents of those records;
and (vi) that the Funds will receive periodic reports with respect
to the safekeeping of the Funds' assets, including, but not limited
to, notification of any transfer to or from a Fund's account or a
third party account containing assets held for the benefit of the
Fund. Such contract may contain, in lieu of any or all of the
provisions specified above, such other provisions that the
Custodian determines will provide, in their entirety, the same or a
greater level of care and protection for Fund assets as the
specified provisions, in their entirety.
1.14 "WRITTEN INSTRUCTIONS" shall mean (i) written communications
actually received by the Custodian and signed by an Authorized
Person, or (ii) communications by telex or any other such system
from one or more persons reasonably believed by the Custodian to be
Authorized Persons, or (iii) communications between
electro-mechanical or electronic devices provided that the use of
such devices and the procedures for the use thereof shall have been
- 3 -
<PAGE>
approved by resolutions of the Board Of Trustees, a copy of which,
certified by an Officer, shall have been delivered to the
Custodian.
ARTICLE II
----------
APPOINTMENT OF CUSTODIAN
------------------------
2.1 APPOINTMENT. The Trust hereby constitutes and appoints the
Custodian as custodian of all Securities and cash owned by or in
the possession of the Fund at any time during the period of this
Agreement.
2.2 ACCEPTANCE. The Custodian hereby accepts appointment as such
custodian and agrees to perform the duties thereof as hereinafter
set forth.
2.3 DOCUMENTS TO BE FURNISHED. The following documents, including any
amendments thereto, will be provided contemporaneously with the
execution of the Agreement to the Custodian by the trust:
(a) A copy of the Declaration of Trust certified by the
Secretary;
(b) A copy of the Bylaws of the Trust certified by the
Secretary;
(c) A copy of the resolution of the Board Of Trustees of the
Trust appointing the Custodian, certified by the Secretary;
(d) A copy of the then current Prospectus of the Fund; and
(e) A certification of the Chairman and Secretary of the Trust
setting forth the names and signatures of the current Officers of
the Trust and other Authorized Persons.
2.4 NOTICE OF APPOINTMENT OF DIVIDEND AND TRANSFER AGENT. The Trust
agrees to notify the Custodian in writing of the appointment,
termination or change in appointment of any Dividend and Transfer
Agent of the Fund.
ARTICLE III
-----------
CUSTODY OF CASH AND SECURITIES
------------------------------
3.1 SEGREGATION. All Securities and non-cash property held by the
Custodian for the account of the Fund (other than Securities
maintained in a Securities Depository or Book-Entry System) shall
be physically segregated from other Securities and non-cash
property in the possession of the Custodian (including the
Securities and non-cash property of the other Funds) and shall be
identified as subject to this Agreement.
3.2 FUND CUSTODY ACCOUNTS. As to each Fund, the Custodian shall open
and maintain in its trust department a custody account in the name
of the Trust coupled with the name of the Fund, subject only to
draft or order of the Custodian, in which the Custodian shall enter
and carry all Securities, cash and other assets of such Fund which
are delivered to it.
- 4 -
<PAGE>
3.3 APPOINTMENT OF AGENTS. (a) In its discretion, the Custodian may
appoint one or more Sub-Custodians to act as Securities
Depositories or as sub-custodians to hold Securities and cash of
the Funds and to carry out such other provisions of this Agreement
as it may determine, provided, however, that the appointment of any
such agents and maintenance of any Securities and cash of the Fund
shall be at the Custodian's expense and shall not relieve the
Custodian of any of its obligations or liabilities under this
Agreement.
(b) If, after the initial approval of Sub-Custodians by the
Board Of Trustees in connection with this Agreement, the Custodian
wishes to appoint other Sub-Custodians to hold property of the
Fund, it will so notify the Trust and provide it with information
reasonably necessary to determine any such new Sub-Custodian's
eligibility under Rule 17f-5 under the 1940 Act, including a copy
of the proposed agreement with such Sub-Custodian. The Trust shall
at the meeting of the Board Of Trustees next following receipt of
such notice and information give a written approval or disapproval
of the proposed action.
(c) The Agreement between the Custodian and each Sub-Custodian
acting hereunder shall contain the required provisions set forth in
Rule 17f-5(a)(1)(iii).
(d) At the end of each calendar quarter, the Custodian shall
provide written reports notifying the Board of Trustees of the
placement of the Securities and cash of the Funds with a particular
Sub-Custodian and of any material changes in the Funds'
arrangements. The Custodian shall promptly take such steps as may
be required to withdraw assets of the Funds from any Sub-Custodian
that has ceased to meet the requirements of Rule 17f-5 under the
1940 Act.
(e) With respect to its responsibilities under this Section 3.3,
the Custodian hereby warrants to the Trust that it agrees to
exercise reasonable care, prudence and diligence such as a person
having responsibility for the safekeeping of property of the Funds.
The Custodian further warrants that a Fund's assets will be subject
to reasonable care, based on the standards applicable to custodians
in the relevant market, if maintained with each Sub-Custodian,
after considering all factors relevant to the safekeeping of such
assets, including, without limitation: (i) the Sub-Custodian's
practices, procedures, and internal controls, for certificated
securities (if applicable), the method of keeping custodial
records, and the security and data protection practices; (ii)
whether the Sub-Custodian has the requisite financial strength to
provide reasonable care for Fund assets; (iii) the Sub-Custodian's
general reputation and standing and, in the case of a Securities
Depository, the Securities Depository's operating history and
number of participants; and (iv) whether the Fund will have
jurisdiction over and be able to enforce judgments against the
Sub-Custodian, such as by virtue of the existence of any offices of
- 5 -
<PAGE>
the Sub-Custodian in the United States or the Sub-Custodian's
consent to service of process in the United States.
(f) The Custodian shall establish a system to monitor the
appropriateness of maintaining the Fund's assets with a particular
Sub-Custodian and the contract governing the Funds' arrangements
with such Sub-Custodian.
3.3 DELIVERY OF ASSETS TO CUSTODIAN. The Trust shall deliver, or cause
to be delivered, to the Custodian all of the Funds' Securities,
cash and other assets, including (a) all payments of income,
payments of principal and capital distributions received by the
Fund with respect to such Securities, cash or other assets owned by
the Fund at any time during the period of this Agreement, and (b)
all cash received by the Fund for the issuance, at any time during
such period, of Shares. The Custodian shall not be responsible for
such Securities, cash or other assets until actually received by
it.
3.4 SECURITIES DEPOSITORIES AND BOOK-ENTRY SYSTEMS. The Custodian may
deposit and/or maintain Securities of the Fund in a Securities
Depository or in a Book-Entry System, subject to the following
provisions:
(a) Prior to a deposit of Securities of the Funds in any
Securities Depository or Book-Entry System, the Trust shall deliver
to the Custodian a resolution of the Board Of Trustees, certified
by an Officer, authorizing and instructing the Custodian on an
on-going basis to deposit in such Securities Depository or
Book-Entry System all Securities eligible for deposit therein and
to make use of such Securities Depository or Book-Entry System to
the extent possible and practical in connection with its
performance hereunder, including, without limitation, in connection
with settlements of purchases and sales of Securities, loans of
Securities, and deliveries and returns of collateral consisting of
Securities.
(b) Securities of the Funds kept in a Book-Entry System or
Securities Depository shall be kept in an account ("Depository
Account") of the Custodian in such Book-Entry System or Securities
Depository which includes only assets held by the Custodian as a
fiduciary, custodian or otherwise for customers.
(c) The records of the Custodian with respect to Securities of
the Fund maintained in a Book-Entry System or Securities Depository
shall, by book-entry, identify such Securities as belonging to such
Fund.
(d) If Securities purchased by a Fund are to be held in a
Book-Entry System or Securities Depository, the Custodian shall pay
for such Securities upon (i) receipt of advice from the Book-Entry
System or Securities Depository that such Securities have been
transferred to the Depository Account, and (ii) the making of an
- 6 -
<PAGE>
entry on the records of the Custodian to reflect such payment and
transfer for the account of such Fund. If Securities sold by a Fund
are held in a Book-Entry System or Securities Depository, the
Custodian shall transfer such Securities upon (i) receipt of advice
from the Book-Entry System or Securities Depository that payment
for such Securities has been transferred to the Depository Account,
and (ii) the making of an entry on the records of the Custodian to
reflect such transfer and payment for the account of such Fund.
(e) The Custodian shall provide the Trust with copies of any
report (obtained by the Custodian from a Book-Entry System or
Securities Depository in which Securities of the Fund are kept) on
the internal accounting controls and procedures for safeguarding
Securities deposited in such Book-Entry System or Securities
Depository.
(f) Anything to the contrary in this Agreement notwithstanding,
the Custodian shall be liable to the Trust for any loss or damage
to the Fund resulting (i) from the use of a Book-Entry System or
Securities Depository by reason of any negligence or willful
misconduct on the part of Custodian or any Sub-Custodian appointed
pursuant to Section 3.3 above or any of its or their employees, or
(ii) from failure of Custodian or any such Sub-Custodian to enforce
effectively such rights as it may have against a Book-Entry System
or Securities Depository. At its election, the Trust shall be
subrogated to the rights of the Custodian with respect to any claim
against a Book-Entry System or Securities Depository or any other
person from any loss or damage to the Fund arising from the use of
such Book-Entry System or Securities Depository, if and to the
extent that the Funds has not been made whole for any such loss or
damage.
3.5 DISBURSEMENT OF MONEYS FROM FUND CUSTODY ACCOUNT. Upon receipt of
Proper Instructions, the Custodian shall disburse moneys from the
Fund Custody Account but only in the following cases:
(a) For the purchase of Securities for the Fund but only in
accordance with Section 4.1 of this Agreement and only (i) in the
case of Securities (other than options on Securities, futures
contracts and options on futures contracts), against the delivery
to the Custodian (or any Sub-Custodian appointed pursuant to
Section 3.3 above) of such Securities registered as provided in
Section 3.9 below or in proper form for transfer, or if the
purchase of such Securities is effected through a Book-Entry System
or Securities Depository, in accordance with the conditions set
forth in Section 3.5 above; (ii) in the case of options on
Securities, against delivery to the Custodian (or such
Sub-Custodian) of such receipts as are required by the customs
prevailing among dealers in such options; (iii) in the case of
futures contracts and options on futures contracts, against
- 7 -
<PAGE>
delivery to the Custodian (or such Sub-Custodian) of evidence of
title thereto in favor of the Fund or any nominee referred to in
Section 3.9 below; and (iv) in the case of repurchase or reverse
repurchase agreements entered into between the Trust and a bank
which is a member of the Federal Reserve System or between the
Trust and a primary dealer in U.S. Government securities, against
delivery of the purchased Securities either in certificate form or
through an entry crediting the Custodian's account at a Book-Entry
System or Securities Depository with such Securities;
(b) In connection with the conversion, exchange or surrender, as
set forth in Section 3.7(f) below, of Securities owned by the Fund;
(c) For the payment of any dividends or capital gain
distributions declared by the Fund;
(d) In payment of the redemption price of Shares as provided in
Section 5.1 below;
(e) For the payment of any expense or liability incurred by the
Fund, including but not limited to the following payments for the
account of the Fund: interest; taxes; administration, investment
advisory, accounting, auditing, transfer agent, custodian, trustee
and legal fees; and other operating expenses of the Fund; in all
cases, whether or not such expenses are to be in whole or in part
capitalized or treated as deferred expenses;
(f) For transfer in accordance with the provisions of any
agreement among the Trust, the Custodian and a broker-dealer
registered under the 1934 Act and a member of the NASD, relating to
compliance with rules of The Options Clearing Corporation and of
any registered national securities exchange (or of any similar
organization or organizations) regarding escrow or other
arrangements in connection with transactions by the Fund;
(g) For transfer in accordance with the provision of any
agreement among the Trust, the Custodian, and a futures commission
merchant registered under the Commodity Exchange Act, relating to
compliance with the rules of the Commodity Futures Trading
Commission and/or any contract market (or any similar organization
or organizations) regarding account deposits in connection with
transactions by the Fund;
(h) For the funding of any uncertificated time deposit or
other interest-bearing account with any banking institution
- 8 -
<PAGE>
(including the Custodian), which deposit or account has a term of
one year or less; and
(i) For any other proper purpose, but only upon receipt, in
addition to Proper Instructions, of a copy of a resolution of the
Board Of Trustees, certified by an Officer, specifying the amount
and purpose of such payment, declaring such purpose to be a proper
corporate purpose, and naming the person or persons to whom such
payment is to be made.
3.6 DELIVERY OF SECURITIES FROM FUND CUSTODY ACCOUNT. Upon receipt of
Proper Instructions, the Custodian shall release and deliver
Securities from the Fund Custody Account but only in the
following cases:
(a) Upon the sale of Securities for the account of the Fund
but only against receipt of payment therefor in cash, by certified
or cashiers check or bank credit;
(b) In the case of a sale effected through a Book-Entry System
or Securities Depository, in accordance with the provisions of
Section 3.5 above;
(c) To an offeror's depository agent in connection with tender
or other similar offers for Securities of the Fund; provided that,
in any such case, the cash or other consideration is to be
delivered to the Custodian;
(d) To the issuer thereof or its agent (i) for transfer into
the name of the Fund, the Custodian or any Sub-Custodian appointed
pursuant to Section 3.3 above, or of any nominee or nominees of any
of the foregoing, or (ii) for exchange for a different number of
certificates or other evidence representing the same aggregate face
amount or number of units; provided that, in any such case, the new
Securities are to be delivered to the Custodian;
(e) To the broker selling Securities, for examination in
accordance with the "street delivery" custom;
(f) For exchange or conversion pursuant to any plan or merger,
consolidation, recapitalization, reorganization or readjustment of
the issuer of such Securities, or pursuant to provisions for
conversion contained in such Securities, or pursuant to any deposit
agreement, including surrender or receipt of underlying Securities
in connection with the issuance or cancellation of depository
receipts; provided that, in any such case, the new Securities and
cash, if any, are to be delivered to the Custodian;
- 9 -
<PAGE>
(g) Upon receipt of payment therefor pursuant to any repurchase
or reverse repurchase agreement entered into by the Fund;
(h) In the case of warrants, rights or similar Securities,
upon the exercise thereof, provided that, in any such case, the new
Securities and cash, if any, are to be delivered to the Custodian;
(i) For delivery in connection with any loans of Securities of
the Fund, but only against receipt of such collateral as the Trust
shall have specified to the Custodian in Proper Instructions;
(j) For delivery as security in connection with any borrowings
by the Fund requiring a pledge of assets by the Trust, but only
against receipt by the Custodian of the amounts borrowed;
(k) Pursuant to any authorized plan of liquidation,
reorganization, merger, consolidation or recapitalization of the
Trust;
(l) For delivery in accordance with the provisions of any
agreement among the Trust, the Custodian and a broker-dealer
registered under the 1934 Act and a member of the NASD, relating to
compliance with the rules of The Options Clearing Corporation and
of any registered national securities exchange (or of any similar
organization or organizations) regarding escrow or other
arrangements in connection with transactions by the Fund;
(m) For delivery in accordance with the provisions of any
agreement among the Trust, the Custodian, and a futures commission
merchant registered under the Commodity Exchange Act, relating to
compliance with the rules of the Commodity Futures Trading
Commission and/or any contract market (or any similar organization
or organizations) regarding account deposits in connection with
transactions by the Fund; or
(n) For any other proper corporate purpose, but only upon
receipt, in addition to Proper Instructions, of a copy of a
resolution of the Board Of Trustees, certified by an Officer,
specifying the Securities to be delivered, setting forth the
purpose for which such delivery is to be made, declaring such
purpose to be a proper corporate purpose, and naming the person or
persons to whom delivery of such Securities shall be made.
3.7 ACTIONS NOT REQUIRING PROPER INSTRUCTIONS. Unless otherwise
instructed by the Trust, the Custodian shall with respect to all
Securities held for the Fund:
- 10 -
<PAGE>
(a) Subject to Section 7.4 below, collect on a timely basis
all income and other payments to which the Fund is entitled either
by law or pursuant to custom in the securities business;
(b) Present for payment and, subject to Section 7.4 below,
collect on a timely basis the amount payable upon all Securities
which may mature or be called, redeemed, or retired, or otherwise
become payable;
(c) Endorse for collection, in the name of the Fund, checks,
drafts and other negotiable instruments;
(d) Surrender interim receipts or Securities in temporary form
for Securities in definitive form;
(e) Execute, as custodian, any necessary declarations or
certificates of ownership under the federal income tax laws or the
laws or regulations of any other taxing authority now or hereafter
in effect, and prepare and submit reports to the Internal Revenue
Service ("IRS") and to the Trust at such time, in such manner and
containing such information as is prescribed by the IRS;
(f) Hold for the Fund, either directly or, with respect to
Securities held therein, through a Book-Entry System or Securities
Depository, all rights and similar securities issued with respect
to Securities of the Fund; and
(g) In general, and except as otherwise directed in Proper
Instructions, attend to all non-discretionary details in connection
with the sale, exchange, substitution, purchase, transfer and other
dealings with Securities and assets of the Fund.
3.8 REGISTRATION AND TRANSFER OF SECURITIES. All Securities held for
a Fund that are issued or issuable only in bearer form shall be
held by the Custodian in that form, provided that any such
Securities shall be held in a Book-Entry System if eligible
therefor. All other Securities held for the Fund may be registered
in the name of such Fund, the Custodian, or any Sub-Custodian
appointed pursuant to Section 3.3 above, or in the name of any
nominee of any of them, or in the name of a Book-Entry System,
Securities Depository or any nominee of either thereof. The Trust
shall furnish to the Custodian appropriate instruments to enable
the Custodian to hold or deliver in proper form for transfer, or to
register in the name of any of the nominees hereinabove referred to
or in the name of a Book-Entry System or Securities Depository, any
Securities registered in the name of a Fund.
- 11 -
<PAGE>
3.9 RECORDS.
(a) The Custodian shall maintain, by Fund, complete and accurate
records with respect to Securities, cash or other property held for
the Fund, including (i) journals or other records of original entry
containing an itemized daily record in detail of all receipts and
deliveries of Securities and all receipts and disbursements of
cash; (ii) ledgers (or other records) reflecting (A) Securities in
transfer, (B) Securities in physical possession, (C) monies and
Securities borrowed and monies and Securities loaned (together with
a record of the collateral therefor and substitutions of such
collateral), (D) dividends and interest received, and (E) dividends
receivable and interest receivable; and (iii) canceled checks and
bank records related thereto. The Custodian shall keep such other
books and records of the Funds as the Trust shall reasonably
request, or as may be required by the 1940 Act, including, but not
limited to, Section 31 of the 1940 Act and Rule 31a-2 promulgated
thereunder.
(b) All such books and records maintained by the Custodian shall
(i) be maintained in a form acceptable to the Trust and in
compliance with rules and regulations of the Securities and
Exchange Commission, (ii) be the property of the Trust and at all
times during the regular business hours of the Custodian be made
available upon request for inspection by duly authorized officers,
employees or agents of the Trust and employees or agents of the
Securities and Exchange Commission, and (iii) if required to be
maintained by Rule 31a-1 under the 1940 Act, be preserved for the
periods prescribed in Rule 31a-2 under the 1940 Act.
3.10 FUND REPORTS BY CUSTODIAN. The Custodian shall furnish the Trust
with a daily activity statement and a summary of all transfers to
or from each Fund Custody Account on the day following such
transfers. At least monthly and from time to time, the Custodian
shall furnish the Trust with a detailed statement of the Securities
and moneys held by the Custodian and the Sub-Custodians for the
Fund under this Agreement.
3.11 OTHER REPORTS BY CUSTODIAN. The Custodian shall provide the Trust
with such reports, as the Trust may reasonably request from time to
time, on the internal accounting controls and procedures for
safeguarding Securities, which are employed by the Custodian or any
Sub-Custodian appointed pursuant to Section 3.3 above.
3.12 PROXIES AND OTHER MATERIALS. The Custodian shall cause all
proxies relating to Securities which are not registered in the name
of the Fund, to be promptly executed by the registered holder of
- 12 -
<PAGE>
such Securities, without indication of the manner in which such
proxies are to be voted, and shall promptly deliver to the Trust
such proxies, all proxy soliciting materials and all notices
relating to such Securities.
3.13 INFORMATION ON CORPORATE ACTIONS. The Custodian shall promptly
deliver to the Trust all information received by the Custodian and
pertaining to Securities being held by the Fund with respect to
optional tender or exchange offers, calls for redemption or
purchase, or expiration of rights as described in the Standards of
Service Guide attached as Exhibit B. If the Trust desires to take
action with respect to any tender offer, exchange offer or other
similar transaction, the Trust shall notify the Custodian at least
five Business Days prior to the date on which the Custodian is to
take such action. The Trust will provide or cause to be provided to
the Custodian all relevant information for any Security which has
unique put/option provisions at least five Business Days prior to
the beginning date of the tender period.
ARTICLE IV
----------
PURCHASE AND SALE OF INVESTMENTS OF THE FUND
--------------------------------------------
4.1 PURCHASE OF SECURITIES. Promptly upon each purchase of Securities
for the Fund, Written Instructions shall be delivered to the
Custodian, specifying (a) the name of the issuer or writer of such
Securities, and the title or other description thereof, (b) the
number of shares, principal amount (and accrued interest, if any)
or other units purchased, (c) the date of purchase and settlement,
(d) the purchase price per unit, (e) the total amount payable upon
such purchase, and (f) the name of the person to whom such amount
is payable. The Custodian shall upon receipt of such Securities
purchased by such Fund pay out of the moneys held for the account
of a Fund the total amount specified in such Written Instructions
to the person named therein. The Custodian shall not be under any
obligation to pay out moneys to cover the cost of a purchase of
Securities for the Fund, if in the Fund Custody Account there is
insufficient cash available to the Fund for which such purchase was
made.
4.2 LIABILITY FOR PAYMENT IN ADVANCE OF RECEIPT OF SECURITIES
PURCHASED. In any and every case where payment for the purchase of
Securities for a Fund is made by the Custodian in advance of
receipt of the Securities purchased but in the absence of specified
Written Instructions to so pay in advance, the Custodian shall be
liable to the Fund for such Securities to the same extent as if the
Securities had been received by the Custodian.
4.3 SALE OF SECURITIES. Promptly upon each sale of Securities by a
Fund, Written Instructions shall be delivered to the Custodian,
specifying (a) the name of the issuer or writer of such Securities,
- 13 -
<PAGE>
and the title or other description thereof, (b) the number of
shares, principal amount (and accrued interest, if any), or other
units sold, (c) the date of sale and settlement, (d) the sale price
per unit, (e) the total amount payable upon such sale, and (f) the
person to whom such Securities are to be delivered. Upon receipt of
the total amount payable to the Fund as specified in such Written
Instructions, the Custodian shall deliver such Securities to the
person specified in such Written Instructions. Subject to the
foregoing, the Custodian may accept payment in such form as shall
be satisfactory to it, and may deliver Securities and arrange for
payment in accordance with the customs prevailing among dealers in
Securities.
4.4 DELIVERY OF SECURITIES SOLD. Notwithstanding Section 4.3 above or
any other provision of this Agreement, the Custodian, when
instructed to deliver Securities against payment, shall be
entitled, if in accordance with generally accepted market practice,
to deliver such Securities prior to actual receipt of final payment
therefor. In any such case, the Fund shall bear the risk that final
payment for such Securities may not be made or that such Securities
may be returned or otherwise held or disposed of by or through the
person to whom they were delivered, and the Custodian shall have no
liability for any for the foregoing.
4.5 PAYMENT FOR SECURITIES SOLD, ETC. In its sole discretion and from
time to time, the Custodian may credit the Fund Custody Account,
prior to actual receipt of final payment thereof, with (i) proceeds
from the sale of Securities which it has been instructed to deliver
against payment, (ii) proceeds from the redemption of Securities or
other assets of the Fund, and (iii) income from cash, Securities or
other assets of the Fund. Any such credit shall be conditional upon
actual receipt by Custodian of final payment and may be reversed if
final payment is not actually received in full. The Custodian may,
in its sole discretion and from time to time, permit the Fund to
use funds so credited to the Fund Custody Account in anticipation
of actual receipt of final payment. Any such funds shall be
repayable immediately upon demand made by the Custodian at any time
prior to the actual receipt of all final payments in anticipation
of which funds were credited to the Fund Custody Account.
4.6 ADVANCES BY CUSTODIAN FOR SETTLEMENT. The Custodian may, in its
sole discretion and from time to time, advance funds to the Trust
to facilitate the settlement of a Fund's transactions in the Fund
Custody Account. Any such advance shall be repayable immediately
upon demand made by Custodian.
ARTICLE V
---------
REDEMPTION OF FUND SHARES
-------------------------
5.1 TRANSFER OF FUNDS. From such funds as may be available for the
purpose in the relevant Fund Custody Account, and upon receipt of
- 14 -
<PAGE>
Proper Instructions specifying that the funds are required to
redeem Shares of the Fund, the Custodian shall wire each amount
specified in such Proper Instructions to or through such bank as
the Trust may designate with respect to such amount in such Proper
Instructions.
5.2 NO DUTY REGARDING PAYING BANKS. The Custodian shall not be under
any obligation to effect payment or distribution by any bank
designated in Proper Instructions given pursuant to Section 5.1
above of any amount paid by the Custodian to such bank in
accordance with such Proper Instructions.
ARTICLE VI
----------
SEGREGATED ACCOUNTS
-------------------
Upon receipt of Proper Instructions, the Custodian shall establish and
maintain a segregated account or accounts for and on behalf of the Fund, into
which account or accounts may be transferred cash and/or Securities, including
Securities maintained in a Depository Account,
(a) in accordance with the provisions of any agreement
among the Trust, the Custodian and a broker-dealer
registered under the 1934 Act and a member of the NASD (or
any futures commission merchant registered under the
Commodity Exchange Act), relating to compliance with the
rules of The Options Clearing Trust and of any registered
national securities exchange (or the Commodity Futures
Trading Commission or any registered contract market), or of
any similar organization or organizations, regarding escrow
or other arrangements in connection with transactions by the
Fund,
(b) for purposes of segregating cash or Securities in
connection with securities options purchased or written by
the Fund or in connection with financial futures contracts
(or options thereon) purchased or sold by the Fund,
(c) which constitute collateral for loans of Securities
made by the Fund,
(d) for purposes of compliance by the Fund with
requirements under the 1940 Act for the maintenance of
segregated accounts by registered investment companies in
connection with reverse repurchase agreements and
when-issued, delayed delivery and firm commitment
transactions, and
(e) for other proper corporate purposes, but only upon
receipt of, in addition to Proper Instructions, a certified
- 15 -
<PAGE>
copy of a resolution of the Board Of Trustees, certified by
an Officer, setting forth the purpose or purposes of such
segregated account and declaring such purposes to be proper
corporate purposes.
Each segregated account established under this Article VI shall be
established and maintained for a single Fund only. All Proper Instructions
relating to a segregated account shall specify the Fund involved.
ARTICLE VII
-----------
CONCERNING THE CUSTODIAN
------------------------
7.1 STANDARD OF CARE. The Custodian shall be held to the exercise of
reasonable care in carrying out its obligations under this
Agreement, and shall be without liability to the Trust or any Fund
for any loss, damage, cost, expense (including attorneys' fees and
disbursements), liability or claim unless such loss, damage, cost,
expense, liability or claim arises from negligence, bad faith or
willful misconduct on its part or on the part of any Sub-Custodian
appointed pursuant to Section 3.3 above. The Custodian shall be
entitled to rely on and may act upon advice of counsel on all
matters, and shall be without liability for any action reasonably
taken or omitted pursuant to such advice. The Custodian shall
promptly notify the Trust of any action taken or omitted by the
Custodian pursuant to advice of counsel. The Custodian shall not be
under any obligation at any time to ascertain whether the Trust or
the Fund is in compliance with the 1940 Act, the regulations
thereunder, the provisions of the Trust's charter documents or
by-laws, or its investment objectives and policies as then in
effect.
7.2 ACTUAL COLLECTION REQUIRED. The Custodian shall not be liable
for, or considered to be the custodian of, any cash belonging to a
Fund or any money represented by a check, draft or other instrument
for the payment of money, until the Custodian or its agents
actually receive such cash or collect on such instrument.
7.3 NO RESPONSIBILITY FOR TITLE, ETC. So long as and to the extent
that it is in the exercise of reasonable care, the Custodian shall
not be responsible for the title, validity or genuineness of any
property or evidence of title thereto received or delivered by it
pursuant to this Agreement.
7.4 LIMITATION ON DUTY TO COLLECT. Custodian shall not be required to
enforce collection, by legal means or otherwise, of any money or
property due and payable with respect to Securities held for the
Fund if such Securities are in default or payment is not made after
due demand or presentation.
7.5 RELIANCE UPON DOCUMENTS AND INSTRUCTIONS. The Custodian shall be
entitled to rely upon any certificate, notice or other instrument
- 16 -
<PAGE>
in writing received by it and reasonably believed by it to be
genuine. The Custodian shall be entitled to rely upon any Oral
Instructions and any Written Instructions actually received by it
pursuant to this Agreement.
7.6 EXPRESS DUTIES ONLY. The Custodian shall have no duties or
obligations whatsoever except such duties and obligations as are
specifically set forth in this Agreement, and no covenant or
obligation shall be implied in this Agreement against the
Custodian.
7.7 CO-OPERATION. The Custodian shall cooperate with and supply
necessary information to the entity or entities appointed by the
Trust to keep the books of account of the Funds and/or compute the
value of the assets of the Funds. The Custodian shall take all such
reasonable actions as the Trust may from time to time request to
enable the Trust to obtain, from year to year, favorable opinions
from the Trust's independent accountants with respect to the
Custodian's activities hereunder in connection with (a) the
preparation of the Trust's reports on Form N-1A and Form N-SAR and
any other reports required by the Securities and Exchange
Commission, and (b) the fulfillment by the Trust of any other
requirements of the Securities and Exchange Commission.
ARTICLE VIII
------------
INDEMNIFICATION
---------------
8.1 INDEMNIFICATION BY TRUST. The Trust shall indemnify and hold
harmless the Custodian and any Sub-Custodian appointed pursuant to
Section 3.3 above, and any nominee of the Custodian or of such
Sub-Custodian, from and against any loss, damage, cost, expense
(including attorneys' fees and disbursements), liability
(including, without limitation, liability arising under the
Securities Act of 1933, the 1934 Act, the 1940 Act, and any state
or foreign securities and/or banking laws) or claim arising
directly or indirectly (a) from the fact that Securities are
registered in the name of any such nominee, or (b) from any action
or inaction by the Custodian or such Sub-Custodian (i) at the
request or direction of or in reliance on the advice of the Trust,
or (ii) upon Proper Instructions, or (c) generally, from the
performance of its obligations under this Agreement or any
sub-custody agreement with a Sub-Custodian appointed pursuant to
Section 3.3 above, provided that neither the Custodian nor any such
Sub-Custodian shall be indemnified and held harmless from and
against any such loss, damage, cost, expense, liability or claim
arising from the Custodian's or such Sub-Custodian's negligence,
bad faith or willful misconduct.
8.2 INDEMNIFICATION BY CUSTODIAN. The Custodian shall indemnify and
hold harmless the Trust from and against any loss, damage, cost,
expense (including attorneys' fees and disbursements), liability
- 17 -
<PAGE>
(including without limitation, liability arising under the
Securities Act of 1933, the 1934 Act, the 1940 Act, and any state
or foreign securities and/or banking laws) or claim arising from
the negligence, bad faith or willful misconduct of the Custodian or
any Sub-Custodian appointed pursuant to Section 3.3 above, or any
nominee of the Custodian or of such Sub-Custodian.
8.3 INDEMNITY TO BE PROVIDED. If the Trust requests the Custodian to
take any action with respect to Securities, which may, in the
opinion of the Custodian, result in the Custodian or its nominee
becoming liable for the payment of money or incurring liability of
some other form, the Custodian shall not be required to take such
action until the Trust shall have provided indemnity therefor to
the Custodian in an amount and form satisfactory to the Custodian.
8.4 SECURITY. If the Custodian advances cash or Securities to the
Fund for any purpose, either at the Trust's request or as otherwise
contemplated in this Agreement, or in the event that the Custodian
or its nominee incurs, in connection with its performance under
this Agreement, any loss, damage, cost, expense (including
attorneys' fees and disbursements), liability or claim (except such
as may arise from its or its nominee's negligence, bad faith or
willful misconduct), then, in any such event, any property at any
time held for the account of such Fund shall be security therefor,
and should the Fund fail promptly to repay or indemnify the
Custodian, the Custodian shall be entitled to utilize available
cash of such Fund and to dispose of other assets of such Fund to
the extent necessary to obtain reimbursement or indemnification.
ARTICLE IX
----------
FORCE MAJEURE
-------------
Neither the Custodian nor the Trust shall be liable for any failure or
delay in performance of its obligations under this Agreement arising out of or
caused, directly or indirectly, by circumstances beyond its reasonable control,
including, without limitation, acts of God; earthquakes; fires; floods; wars;
civil or military disturbances; sabotage; strikes; epidemics; riots; power
failures; computer failure and any such circumstances beyond its reasonable
control as may cause interruption, loss or malfunction of utility,
transportation, computer (hardware or software) or telephone communication
service; accidents; labor disputes; acts of civil or military authority;
governmental actions; or inability to obtain labor, material, equipment or
transportation; provided, however, that the Custodian in the event of a failure
or delay (i) shall not discriminate against the Funds in favor of any other
customer of the Custodian in making computer time and personnel available to
input or process the transactions contemplated by this Agreement and (ii) shall
use its best efforts to ameliorate the effects of any such failure or delay.
- 18 -
<PAGE>
ARTICLE X
---------
EFFECTIVE PERIOD; TERMINATION
-----------------------------
10.1 EFFECTIVE PERIOD. This Agreement shall become effective as of its
execution and shall continue in full force and effect until
terminated as hereinafter provided.
10.2 TERMINATION. Either party hereto may terminate this Agreement by
giving to the other party a notice in writing specifying the date
of such termination, which shall be not less than sixty (60) days
after the date of the giving of such notice. If a successor
custodian shall have been appointed by the Board Of Trustees, the
Custodian shall, upon receipt of a notice of acceptance by the
successor custodian, on such specified date of termination (a)
deliver directly to the successor custodian all Securities (other
than Securities held in a Book-Entry System or Securities
Depository) and cash then owned by the Fund and held by the
Custodian as custodian, and (b) transfer any Securities held in a
Book-Entry System or Securities Depository to an account of or for
the benefit of the Funds at the successor custodian, provided that
the Trust shall have paid to the Custodian all fees, expenses and
other amounts to the payment or reimbursement of which it shall
then be entitled. Upon such delivery and transfer, the Custodian
shall be relieved of all obligations under this Agreement. The
Trust may at any time immediately terminate this Agreement in the
event of the appointment of a conservator or receiver for the
Custodian by regulatory authorities or upon the happening of a like
event at the direction of an appropriate regulatory agency or court
of competent jurisdiction.
10.3 FAILURE TO APPOINT SUCCESSOR CUSTODIAN. If a successor custodian
is not designated by the Trust on or before the date of termination
specified pursuant to Section 10.1 above, then the Custodian shall
have the right to deliver to a bank or corporation company of its
own selection, which (a) is a "bank" as defined in the 1940 Act and
(b) has aggregate capital, surplus and undivided profits as shown
on its then most recent published report of not less than $25
million, all Securities, cash and other property held by Custodian
under this Agreement and to transfer to an account of or for the
Funds at such bank or trust company all Securities of the Funds
held in a Book-Entry System or Securities Depository. Upon such
delivery and transfer, such bank or trust company shall be the
successor custodian under this Agreement and the Custodian shall be
relieved of all obligations under this Agreement.
ARTICLE XI
----------
COMPENSATION OF CUSTODIAN
-------------------------
The Custodian shall be entitled to compensation as agreed upon from time
to time by the Trust and the Custodian. The fees and other charges in effect on
the date hereof and applicable to the Fund are set forth in Exhibit C attached
hereto.
- 19 -
<PAGE>
ARTICLE XII
-----------
LIMITATION OF LIABILITY
-----------------------
It is expressly agreed that the obligations of the Trust hereunder shall
not be binding upon any of the Trustees, shareholders, nominees, officers,
agents or employees of the Trust personally, but shall bind only the property of
the Trust as provided in the Trust's Agreement and Articles of Incorporation, as
from time to time amended. The execution and delivery of this Agreement have
been authorized by the Trustees, and this Agreement has been signed and
delivered by an authorized officer of the Trust, acting as such, and neither
such authorization by the Trustees nor such execution and delivery by such
officer shall be deemed to have been made by any of them individually or to
impose any liability on any of them personally, but shall bind only the
corporation property of the Trust as provided in the above-mentioned Agreement
and Articles of Incorporation.
ARTICLE XIII
------------
NOTICES
-------
Unless otherwise specified herein, all demands, notices, instructions, and
other communications to be given hereunder shall be in writing and shall be sent
or delivered to the recipient at the address set forth after its name
hereinbelow:
To the Trust:
------------
Potomac Insurance Trust
1311 Mamaroneck Avenue
White Plains, NY 10605
To Custodian:
------------
Firstar Bank, N.A.
425 Walnut Street, M.L. CN-WN-06TC
Cincinnati, Ohio 45202
Attention: Mutual Fund Custody Services
Telephone: (513) 632-2969
Facsimile: (513) 632-3299
or at such other address as either party shall have provided to the other by
notice given in accordance with this Article XIII. Writing shall include
transmissions by or through teletype, facsimile, central processing unit
connection, on-line terminal and magnetic tape.
- 20 -
<PAGE>
ARTICLE XIV
-----------
MISCELLANEOUS
-------------
14.1 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Ohio.
14.2 REFERENCES TO CUSTODIAN. The Trust shall not circulate any printed
matter which contains any reference to Custodian without the prior
written approval of Custodian, excepting printed matter contained
in the prospectus or statement of additional information for the
Fund and such other printed matter as merely identifies Custodian
as custodian for the Fund. The Trust shall submit printed matter
requiring approval to Custodian in draft form, allowing sufficient
time for review by Custodian and its counsel prior to any deadline
for printing.
14.3 NO WAIVER. No failure by either party hereto to exercise, and no
delay by such party in exercising, any right hereunder shall
operate as a waiver thereof. The exercise by either party hereto of
any right hereunder shall not preclude the exercise of any other
right, and the remedies provided herein are cumulative and not
exclusive of any remedies provided at law or in equity.
14.4 AMENDMENTS. This Agreement cannot be changed orally and no
amendment to this Agreement shall be effective unless evidenced by
an instrument in writing executed by the parties hereto.
14.5 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, and by the parties hereto on separate counterparts,
each of which shall be deemed an original but all of which together
shall constitute but one and the same instrument.
14.6 SEVERABILITY. If any provision of this Agreement shall be invalid,
illegal or unenforceable in any respect under any applicable law,
the validity, legality and enforceability of the remaining
provisions shall not be affected or impaired thereby.
14.7 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their
respective successors and assigns; provided, however, that this
Agreement shall not be assignable by either party hereto without
the written consent of the other party hereto.
14.8 HEADINGS. The headings of sections in this Agreement are for
convenience of reference only and shall not affect the meaning or
construction of any provision of this Agreement.
- 21 -
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed and delivered in its name and on its behalf by its
representatives thereunto duly authorized, all as of the day and year first
above written.
ATTEST: POTOMAC INSURANCE TRUST
______________________________ By:_____________________________
ATTEST: FIRSTAR BANK, N.A.
______________________________ By:____________________________
- 22 -
<PAGE>
EXHIBIT A
---------
AUTHORIZED PERSONS
------------------
Set forth below are the names and specimen signatures of the persons
authorized by the Trust to administer the Fund Custody Accounts.
Authorized Persons Specimen Signatures
- ------------------ -------------------
Adviser Employees:
Timothy P. Hagan _____________________
Mark D. Edwards _____________________
Jesse Noel _____________________
- 23 -
<PAGE>
EXHIBIT B
---------
FIRSTAR BANK, N.A.
STANDARDS OF SERVICE GUIDE
EXHIBIT C
---------
FIRSTAR BANK, N.A.
DOMESTIC CUSTODY FEE SCHEDULE
Firstar Bank, N.A., as Custodian, will receive monthly compensation for services
according to the terms of the following Schedule:
Annual fee based upon average assets per fund:
3.5 basis points on average net assets per fund
No transactions costs will be charged to the funds.
The fees noted above are for one class of shares. There will be an additional
25% increase in fees for each class of shares.
- 24 -
TRANSFER AGENT SERVICING AGREEMENT
THIS AGREEMENT is made and entered into as of this 24th day of February,
2000, by and between Potomac Insurance Trust, a Massachusetts business trust
(hereinafter referred to as the "Trust") and Firstar Mutual Fund Services, LLC,
a limited liability company organized under the laws of the State of Wisconsin
(hereinafter referred to as the "FMFS").
WHEREAS, the Trust is an open-end management investment company which is
registered under the Investment Company Act of 1940, as amended (the "1940
Act");
WHEREAS, the Trust is authorized to create separate series, each with its
own separate investment portfolio;
WHEREAS, FMFS is a limited liability corporation and, among other things,
is in the business of administering transfer and dividend disbursing agent
functions for the benefit of its customers; and
WHEREAS, the Trust desires to retain FMFS to provide transfer and dividend
disbursing agent services to each series of the Trust listed on Exhibit A
attached hereto, (each hereinafter referred to as a "Fund") as may be amended
from time to time.
NOW, THEREFORE, in consideration of the mutual agreements herein made, the
Trust and FMFS agree as follows:
1. APPOINTMENT OF TRANSFER AGENT
The Trust hereby appoints FMFS as Transfer Agent of the Trust on the terms
and conditions set forth in this Agreement, and FMFS hereby accepts such
appointment and agrees to perform the services and duties set forth in this
Agreement in consideration of the compensation provided for herein
2. DUTIES AND RESPONSIBILITIES OF FMFS
FMFS shall perform all of the customary services of a transfer agent and
dividend disbursing agent, and as relevant, agent in connection with
accumulation, open account or similar plans (including without limitation any
periodic investment plan or periodic withdrawal program), including but not
limited to:
A. Receive orders for the purchase of shares;
B. Process purchase orders with prompt delivery, where appropriate, of
payment and supporting documentation to the Trust's custodian, and
issue the appropriate number of uncertificated shares with such
<PAGE>
Page 2
uncertificated shares being held in the appropriate shareholder
account;
C. Arrange for issuance of shares obtained through transfers of funds
from shareholders' accounts at financial institutions and arrange for
the exchange of shares for shares of other eligible investment
companies, when permitted by Prospectus.
D. Process redemption requests received in good order and, where
relevant, deliver appropriate documentation to the Trust's custodian;
E. Pay monies upon receipt from the Trust's custodian, where relevant, in
accordance with the instructions of redeeming shareholders;
F. Process transfers of shares in accordance with the shareholder's
instructions;
G. Process exchanges between funds and/or classes of shares of funds
within the same family of funds;
H. Prepare and transmit payments for dividends and distributions declared
by the Trust with respect to the Fund, after deducting any amount
required to be withheld by any applicable laws, rules and regulations
and in accordance with shareholder instructions;
I. Make changes to shareholder records, including, but not limited to,
address changes in plans (i.e., systematic withdrawal, automatic
investment, dividend reinvestment, etc.);
J. Record the issuance of shares of the Fund and maintain, pursuant to
Rule 17ad-10(e) promulgated under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), a record of the total number of
shares of the Fund which are authorized, issued and outstanding;
K. Prepare shareholder meeting lists and, if applicable, mail, receive
and tabulate proxies;
L. Mail shareholder reports and prospectuses to current shareholders;
M. Prepare and file U.S. Treasury Department Forms 1099 and other
appropriate information returns required with respect to dividends and
distributions for all shareholders;
N. Provide shareholder account information upon request and prepare and
mail confirmations and statements of account to shareholders for all
purchases, redemptions and other confirmable transactions as agreed
upon with the Trust;
O. Mail requests for shareholders' certifications under penalties of
perjury and pay on a timely basis to the appropriate Federal
authorities any taxes to be withheld on dividends and distributions
<PAGE>
Page 3
paid by the Trust, all as required by applicable Federal tax laws and
regulations;
P. Answer correspondence from shareholders, securities brokers and others
relating to FMFS's duties hereunder and such other correspondence as
may from time to time be mutually agreed upon between FMFS and the
Trust.
Reimburse the Fund each month for all material losses resulting from "as
of" processing errors for which FMFS is responsible in accordance with the "as
of" processing guidelines set forth in the attached exhibit B.
3. COMPENSATION
The Trust agrees to pay FMFS for the performance of the duties listed in
this agreement as set forth on Exhibit A attached hereto; the fees and
out-of-pocket expenses include, but are not limited to the following: printing,
postage, forms, stationery, record retention (if requested by the Trust),
mailing, insertion, programming (if requested by the Trust), labels, shareholder
lists and proxy expenses.
These fees and reimbursable expenses may be changed from time to time
subject to mutual written agreement between the Trust and FMFS.
The Trust agrees to pay all fees and reimbursable expenses within ten (10)
business days following the receipt of the billing notice.
Notwithstanding anything to the contrary, amounts owed by the Trust to FMFS
shall only be paid out of assets and property of the particular Fund involved.
4. REPRESENTATIONS OF FMFS
FMFS represents and warrants to the Trust that:
A. It is a limited liability corporation duly organized, existing and in
good standing under the laws of Wisconsin;
B. It is a registered transfer agent under the Exchange Act.
C. It is duly qualified to carry on its business in the State of
Wisconsin;
D. It is empowered under applicable laws and by its charter and bylaws to
enter into and perform this Agreement;
E. All requisite corporate proceedings have been taken to authorize it to
enter and perform this Agreement;
<PAGE>
Page 4
F. It has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations under
this Agreement; and
G. It will comply with all applicable requirements of the Securities Act
of 1933, as amended, and the Exchange Act, the 1940 Act, and any laws,
rules, and regulations of governmental authorities having
jurisdiction.
5. REPRESENTATIONS OF THE TRUST
The Trust represents and warrants to FMFS that:
A. The Trust is an open-ended non diversified investment company under
the 1940 Act;
B. The Trust is a business trust organized, existing, and in good
standing under the laws of Massachusetts;
C. The Trust is empowered under applicable laws and by its Declaration of
Trust and Bylaws to enter into and perform this Agreement;
D. All necessary proceedings required by the Declaration of Trust have
been taken to authorize it to enter into and perform this Agreement;
E. The Trust will comply with all applicable requirements of the
Securities Act, the Exchange Act, the 1940 Act, and any laws, rules
and regulations of governmental authorities having jurisdiction; and
F. A registration statement under the Securities Act will be made
effective and will remain effective, and appropriate state securities
law filings have been made and will continue to be made, with respect
to all shares of the Trust being offered for sale.
6. PERFORMANCE OF SERVICE; LIMITATION OF LIABILITY
FMFS shall exercise reasonable care in the performance of its duties under
this Agreement. FMFS shall not be liable for any error of judgment or mistake of
law or for any loss suffered by the Trust in connection with matters to which
this Agreement relates, including losses resulting from mechanical breakdowns or
the failure of communication or power supplies beyond FMFS's control, except a
loss arising out of or relating to the Agent's refusal or failure to comply with
the terms of this Agreement or from bad faith, negligence, or willful misconduct
on its part in the performance of its duties under this Agreement.
Notwithstanding any other provision of this Agreement, if FMFS has exercised
reasonable care in the performance of its duties under this Agreement, the Trust
shall indemnify and hold harmless FMFS from and against any and all claims,
demands, losses, expenses, and liabilities (whether with or without basis in
fact or law) of any and every nature (including reasonable attorneys' fees)
which FMFS may sustain or incur or which may be asserted against FMFS by any
person arising out of any action taken or omitted to be taken by it in
<PAGE>
Page 5
performing the services hereunder, except for any and all claims, demands,
losses expenses, and liabilities arising out of or relating to FMFS's refusal or
failure to comply with the terms of this Agreement or from bad faith, negligence
or from willful misconduct on its part in performance of its duties under this
Agreement, (i) in accordance with the foregoing standards, or (ii) in reliance
upon any written or oral instruction provided to FMFS by any duly authorized
officer of the Trust, such duly authorized officer to be included in a list of
authorized officers furnished to FMFS and as amended from time to time in
writing by resolution of the Board of Trustees of the Trust.
The Fund will indemnify and hold the Agent harmless against any and all
losses, claims, damages, liabilities or expenses (including reasonable counsel
fees and expenses) resulting from any claim, demand, action, or suit as a result
of the negligence of the Fund or the principal underwriter (unless contributed
to by the Agent's breach of this Agreement or other Agreements between the Fund
and the Agent, or the Agent's own negligence or bad faith); or as a result of
the Agent acting upon telephone instructions relating to the exchange or
redemption of shares received by the Agent and reasonably believed by the Agent
under a standard of care customarily used in the industry to have originated
from the record owner of the subject shares; or as a result of acting in
reliance upon any genuine instrument or stock certificate signed, countersigned,
or executed by any person or persons authorized to sign, countersign, or execute
the same.
FMFS shall indemnify and hold the Trust harmless from and against any and
all claims, demands, losses, expenses, and liabilities (whether with or without
basis in fact or law) of any and every nature (including reasonable attorneys'
fees) which the Trust may sustain or incur or which may be asserted against the
Trust by any person arising out of any action taken or omitted to be taken by
FMFS as a result of FMFS's refusal or failure to comply with the terms of this
Agreement, its bad faith, negligence, or willful misconduct.
In the event of a mechanical breakdown or failure of communication or power
supplies beyond its control, FMFS shall take all reasonable steps to minimize
service interruptions for any period that such interruption continues beyond
FMFS's control. FMFS will make every reasonable effort to restore any lost or
damaged data and correct any errors resulting from such a breakdown at the
expense of FMFS. FMFS agrees that it shall, at all times, have reasonable
contingency plans with appropriate parties, making reasonable provision for
emergency use of electrical data processing equipment to the extent appropriate
equipment is available. Representatives of the Trust shall be entitled to
inspect FMFS's premises and operating capabilities at any time during regular
business hours of FMFS, upon reasonable notice to FMFS.
Regardless of the above, FMFS reserves the right to reprocess and correct
administrative errors at its own expense.
In order that the indemnification provisions contained in this section
shall apply, it is understood that if in any case the indemnitor may be asked to
indemnify or hold the indemnitee harmless, the indemnitor shall be fully and
promptly advised of all pertinent facts concerning the situation in question,
and it is further understood that the indemnitee will use all reasonable care to
notify the indemnitor promptly concerning any situation which presents or
appears likely to present the probability of a claim for indemnification. The
<PAGE>
Page 6
indemnitor shall have the option to defend the indemnitee against any claim
which may be the subject of this indemnification. In the event that the
indemnitor so elects, it will so notify the indemnitee and thereupon the
indemnitor shall take over complete defense of the claim, and the indemnitee
shall in such situation initiate no further legal or other expenses for which it
shall seek indemnification under this section. The indemnitee shall in no case
confess any claim or make any compromise in any case in which the indemnitor
will be asked to indemnify the indemnitee except with the indemnitor's prior
written consent.
FMFS is hereby expressly put on notice of the limitation of shareholder
liability as set forth in the Trust Instrument of the Trust and agrees that
obligations assumed by the Trust pursuant to this Agreement shall be limited in
all cases to the Trust and its assets, and if the liability relates to one or
more series, the obligations hereunder shall be limited to the respective assets
of such series. FMFS further agrees that it shall not seek satisfaction of any
such obligation from the shareholder or any individual shareholder of a series
of the Trust, nor from the Trustees or any individual Trustee of the Trust.
7. PROPRIETARY AND CONFIDENTIAL INFORMATION
FMFS agrees on behalf of itself and its directors, officers, and employees
to treat confidentially and as proprietary information of the Trust all records
and other information relative to the Trust and prior, present, or potential
shareholders (and clients of said shareholders) and not to use such records and
information for any purpose other than the performance of its responsibilities
and duties hereunder, except after prior notification to and approval in writing
by the Trust, which approval shall not be unreasonably withheld and may not be
withheld where FMFS may be exposed to civil or criminal contempt proceedings for
failure to comply after being requested to divulge such information by duly
constituted authorities, or when so requested by the Trust.
8. TERM OF AGREEMENT
This Agreement shall become effective as of the date hereof and will
continue in effect for a period of one year. During the initial one year term of
this Agreement, if the Trust terminates any services with FMFS, the Trust agrees
to compensate Firstar an amount equal to the fees remaining under the initial
one year Agreement. Subsequent to the initial one year term, this Agreement may
be terminated by either party upon giving ninety (90) days prior written notice
to the other party or such shorter period as is mutually agreed upon by the
parties. However, this Agreement may be amended by mutual written consent of the
parties.
<PAGE>
Page 7
9. RECORDS
The Agent shall keep records relating to the services to be performed
hereunder, in the form and manner, and for such period as it may deem advisable
and is agreeable to the Trust but not inconsistent with the rules and
regulations of appropriate government authorities, in particular, Section 31 of
The Investment Company Act of 1940 as amended (the "Investment Company Act"),
and the rules thereunder. The Agent agrees that all such records prepared or
maintained by The Agent relating to the services to be performed by the Agent
hereunder are the property of the Trust and will be preserved, maintained, and
made available with such section and rules of the Investment Company Act and
will be promptly surrendered to the Trust on and in accordance with its request.
10. GOVERNING LAW
This Agreement shall be construed and the provisions thereof interpreted
under and in accordance with the laws of the State of Wisconsin. However,
nothing herein shall be construed in a manner inconsistent with the 1940 Act or
any rule or regulation promulgated by the Securities and Exchange Commission
thereunder.
11. DUTIES IN THE EVENT OF TERMINATION
In the event that, in connection with termination, a successor to any of
FMFS's duties or responsibilities hereunder is designated by the Trust by
written notice to FMFS, FMFS will promptly, upon such termination and at the
expense of the Trust, transfer to such successor all relevant books, records,
correspondence, and other data established or maintained by FMFS under this
Agreement in a form reasonably acceptable to the Trust (if such form differs
from the form in which FMFS has maintained, the Trust shall pay any expenses
associated with transferring the data to such form), and will cooperate in the
transfer of such duties and responsibilities, including provision for assistance
from FMFS's personnel in the establishment of books, records, and other data by
such successor.
12. NOTICES
Notices of any kind to be given by either party to the other party shall
be in writing and shall be duly given if mailed or delivered as follows:
Notice to FMFS shall be sent to:
Firstar Mutual Fund Services, LLC
615 East Michigan Street
Milwaukee, WI 53202
and notice to the Trust shall be sent to:
Potomac Insurance Trust
1311 Mamaroneck Avenue
White Plains, NY 10605
<PAGE>
Page 8
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by a duly authorized officer or one or more counterparts as of the day and year
first written above.
POTOMAC INSURANCE TRUST FIRSTAR MUTUAL FUND SERVICES, LLC
By:______________________________ By: ________________________________
Attest:__________________________ Attest:_____________________________
<PAGE>
Page 9
TRANSFER AGENT AND SHAREHOLDER SERVICING
ANNUAL FEE SCHEDULE
EXHIBIT A
Separate Series of Potomac Insurance Trust
NAME OF SERIES
Potomac U.S. Plus Fund Potomac U.S./Short Fund
Potomac OTC Plus Fund Potomac OTC/Short Fund
Potomac 30 Plus Fund Potomac 30/Short Fund
Potomac Small Cap Plus Fund Potomac Small Cap/Short Fund
Potomac Internet Plus Fund Potomac Internet/Short Fund
Potomac Japan Plus Fund Potomac Japan Short Fund
Potomac Money Market Fund
Annual fee based upon average assets per fund:
3.5 basis points on average net assets per fund
Maximum annual fee of $10,000 per fund
Extraordinary services quoted separately.
Plus Out-of-Pocket Expenses, including but not limited to:
Telephone - toll free lines Retention of records
Postage Microfilm/fiche of records
Programming Special reports
Stationery/envelopes ACH fees
Insurance NSCC charges
Proxies All other out-of-pocket expenses
ACH Shareholder Services
$125.00 per month per fund group
$ .50 per account setup and/or change
$ .50 per ACH item
$ 5.00 per correction, reversal, return item
File Transfer - $160/month and $.01/record
The fees noted above are for one class of shares. There will be an additional
25% increase in fees for each class of shares.
<PAGE>
Page 10
Qualified Plan Fees (Billed to Investors) *
Annual maintenance fee per account $ 12.50/acct. (Cap at $25.00 per SSN)
Education IRA $ 5.00/acct. (Cap at $25.00/per SSN)
Transfer to successor trustee $ 15.00/trans.
Distribution to participant $ 15.00/trans. (Exclusive of SWP)
Refund of excess contribution $ 15.00/trans.
Select requests $ 200.00/trans
Additional Shareholder Fees (Billed to Investors)
Any outgoing wire transfer $ 12.00/wire
Return check fee $ 20.00/item
Stop payment $ 20.00/stop
(Liquidation, dividend, draft check)
Research fee $ 5.00/item
(For requested items of the second calendar year [or previous] to the
request)(Cap at $25.00)
Fees and out-of-pocket expenses are billed to the fund monthly.
<PAGE>
Page 11
NSCC
Out-of-Pocket Charges
NSCC Interfaces
Set Up
Fund/SERV, Networking, ACATS, $5,000 set-up (one time)
Exchanges DCCS, TORA
Commission Settlement $5,000 set-up (one time)
Processing
Fund/SERV $ 50/month
Networking $ 250/month
CPU Access $ 40/month
FundServ Transactions $ .35/trade
Networking - per item $ .025/monthly dividend fund
Networking - per item $ .015/non-mo. Dividend fund
First Data $ .10/next-day FundServ trade
First Data $ .15/same-day FundServ trade
Mutual Fund Services
Out-of-Pocket Expense Items
Forms Costs
Statement Paper $ .038/item
#9, #10 Envelopes $ .043/item
Check/Statement Paper $ .25/item
Certificate $ 1.00/item
Wire Order Confirm (non-NSCC) $ .22/item
Firstar Fulfillment Envelope $ .25/item
Presort Postage (one ounce) $ .34/item
Shareholder System Select Request $ 200.00/request
Systems Development/Programming $ 150.00/hour
Fund Group Addition $2,000.00/fund group*
Fund Additions $1,000.00/fund or class*
Fund Group Restore $1,000.00/occurrence
Lost Shareholder Search (Keane Tracers) $ 3.00/search
DAZL ($5,000 setup) $1,000.00/month
Price record transmission $ .015/price record
Other record $ .025/record
NSCC Setup (Fund/SERV, Networking Exchanges, ACATS, MF Profile,
DCCS, TORA) $5,000.00/fund group
NSCC Commission Settlement $5,000.00/fund group
*Waived for first 4 classes
Note - All rates subject to change
<PAGE>
Page 12
EXHIBIT B
FIRSTAR MUTUAL FUND SERVICES, LLC AS OF PROCESSING POLICY
Firstar Mutual Fund Services, LLC (FMFS) will reimburse the Fund(s) for
any net material loss that may exist on the Fund(s) books and for which FMFS is
responsible, at the end of each calendar month. "Net Material Loss" shall be
defined as any remaining loss, after netting losses against any gains, which
impacts the Fund's net asset value by more than 1/2 cent. Gains and losses will
be accumulated on a daily basis, will be reflected on on the Fund's daily share
sheet, and will be settled on a monthly basis. FMFS will notify the Fund's
advisor on the daily share sheet of any losses for which the Fund's adviser may
be held accountable.
FUND ACCOUNTING SERVICING AGREEMENT
THIS AGREEMENT is made and entered into as of this 24th day of February,
2000, by and between Potomac Insurance Trust, a Massachusetts business trust
(hereinafter referred to as the "Trust") and Firstar Mutual Fund Services, LLC,
a limited liability company organized under the laws of the State of Wisconsin
(hereinafter referred to as "FMFS").
WHEREAS, the Trust is an open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act");
WHEREAS, the Trust is authorized to create separate series, each with
its own separate investment portfolio;
WHEREAS, FMFS is a limited liability corporation and, among other
things, is in the business of providing mutual fund accounting services to
investment companies; and
WHEREAS, the Trust desires to retain FMFS to provide accounting services
to each series of the Trust listed on Exhibit A attached hereto, (each
hereinafter referred to as a "Fund"), as it may be amended from time to time.
NOW, THEREFORE, in consideration of the mutual agreements herein made,
the Trust and FMFS agree as follows:
1. APPOINTMENT OF FUND ACCOUNTANT
The Trust hereby appoints FMFS as Fund Accountant of the Trust on the
terms and conditions set forth in this Agreement, and FMFS hereby accepts such
appointment and agrees to perform the services and duties set forth in this
Agreement in consideration of the compensation provided for herein.
2. DUTIES AND RESPONSIBILITIES OF FMFS
A. Portfolio Accounting Services:
(1) Maintain portfolio records on a trade date+1 basis
using security trade information communicated from the investment
manager.
(2) For each valuation date, obtain prices from a pricing
source approved by the Board of Trustees of the Trust and apply
those prices to the portfolio positions. For those securities
where market quotations are not readily available, the Board of
Trustees of the Trust shall approve, in good faith, the method
for determining the fair value for such securities.
<PAGE>
PAGE 2
(3) Identify interest and dividend accrual balances as of
each valuation date and calculate gross earnings on investments
for the accounting period.
(4) Determine gain/loss on security sales and identify
them as, short-term or long-term; account for periodic
distributions of gains or losses to shareholders and maintain
undistributed gain or loss balances as of each valuation date.
B. Expense Accrual and Payment Services:
(1) For each valuation date, calculate the expense accrual
amounts as directed by the Trust as to methodology, rate or
dollar amount.
(2) Record payments for Fund expenses upon receipt of
written authorization from the Trust.
(3) Account for Fund expenditures and maintain expense
accrual balances at the level of accounting detail, as agreed
upon by FMFS and the Trust.
(4) Provide expense accrual and payment reporting.
C. Fund Valuation and Financial Reporting Services:
(1) Account for Fund share purchases, sales, exchanges,
transfers, dividend reinvestments, and other Fund share activity
as reported by the transfer agent on a timely basis.
(2) Apply equalization accounting as directed by the
Trust.
(3) Determine net investment income (earnings) for the
Fund as of each valuation date. Account for periodic
distributions of earnings to shareholders and maintain
undistributed net investment income balances as of each valuation
date.
(4) Maintain a general ledger and other accounts, books,
and financial records for the Fund in the form as agreed upon.
(5) Determine the net asset value of the Fund according to
the accounting policies and procedures set forth in the Fund's
Prospectus.
(6) Calculate per share net asset value, per share net
earnings, and other per share amounts reflective of Fund
operations at such time as required by the nature and
characteristics of the Fund.
(7) Communicate, at an agreed upon time, the per share
price for each valuation date to parties as agreed upon from time
to time.
<PAGE>
PAGE 3
(8) Prepare monthly reports which document the adequacy of
accounting detail to support month-end ledger balances.
D. Tax Accounting Services:
(1) Maintain accounting records for the investment
portfolio of the Fund to support the tax reporting required for
IRS-defined regulated investment companies.
(2) Maintain tax lot detail for the investment
portfolio.
(3) Calculate taxable gain/loss on security sales
using the tax lot relief method designated by the Trust.
(4) Provide the necessary financial information to support
the taxable components of income and capital gains distributions
to the transfer agent to support tax reporting to the
shareholders.
E. Compliance Control Services:
(1) Support reporting to regulatory bodies and support
financial statement preparation by making the Fund's accounting
records available to the Trust, the Securities and Exchange
Commission, and the outside auditors.
(2) Maintain accounting records according to the 1940 Act
and regulations provided thereunder
F. FMFS will perform the following accounting functions
on a daily basis:
(1) Reconcile cash and investment balances of each
Portfolio with the Custodian, and provide the Advisor with the
beginning cash balance available for investment purposes;
(2) Transmit or mail a copy of the portfolio valuation to
the Advisor;
(3) Review the impact of current day's activity on a per
share basis, review changes in market value.
G. In addition, FMFS will:
(1) Prepare monthly security transactions listings;
(2) Supply various Trust, Portfolio and class statistical
data as requested on an ongoing basis.
<PAGE>
PAGE 4
3. PRICING OF SECURITIES
For each valuation date, obtain prices from a pricing source selected by FMFS
but approved by the Board of Trustees and apply those prices to the portfolio
positions of the Fund. For those securities where market quotations are not
readily available, the Company's Board of Trustees shall approve, in good faith,
the method for determining the fair value for such securities.
If the Trust desires to provide a price which varies from the pricing source,
the Trust shall promptly notify and supply FMFS with the valuation of any such
security on each valuation date. All pricing changes made by the Trust will be
in writing and must specifically identify the securities to be changed by CUSIP,
name of security, new price or rate to be applied, and, if applicable, the time
period for which the new price(s) is/are effective.
4. CHANGES IN ACCOUNTING PROCEDURES
Any resolution passed by the Board of Trustees of the Trust that affects
accounting practices and procedures under this Agreement shall be effective upon
written receipt and acceptance by the FMFS.
5. CHANGES IN EQUIPMENT, SYSTEMS, SERVICE, ETC.
FMFS reserves the right to make changes from time to time, as it deems
advisable, relating to its services, systems, programs, rules, operating
schedules and equipment, so long as such changes do not adversely affect the
service provided to the Trust under this Agreement.
6. COMPENSATION
FMFS shall be compensated for providing the services set forth in this Agreement
in accordance with the Fee Schedule attached hereto as Exhibit A and as mutually
agreed upon and amended from time to time. The Trust agrees to pay all fees and
reimbursable expenses within ten (10) business days following the receipt of the
billing notice. Notwithstanding anything to the contrary, amounts owed by the
Trust to FMFS shall only be paid out of the assets and property of the
particular Fund involved.
7. PERFORMANCE OF SERVICE; LIMITATION OF LIABILITY
A. FMFS shall exercise reasonable care in the performance of its
duties under this Agreement. FMFS shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Trust in
connection with matters to which this Agreement relates, including
losses resulting from mechanical breakdowns or the failure of
communication or power supplies beyond FMFS's control, except a loss
arising out of or relating to FMFS's refusal or failure to comply with
the terms of this Agreement or from bad faith, negligence, or willful
misconduct on its part in the performance of its duties under this
Agreement. Notwithstanding any other provision of this Agreement, if
FMFS has exercised reasonable care in the performance of its duties
under this Agreement, the Trust shall indemnify and hold harmless FMFS
<PAGE>
PAGE 5
from and against any and all claims, demands, losses, expenses, and
liabilities (whether with or without basis in fact or law) of any and
every nature (including reasonable attorneys' fees) which FMFS may
sustain or incur or which may be asserted against FMFS by any person
arising out of any action taken or omitted to be taken by it in
performing the services hereunder, except for any and all claims,
demands, losses, expenses, and liabilities arising out of or relating
to FMFS's refusal or failure to comply with the terms of this Agreement
or from bad faith, negligence or from willful misconduct on its part in
performance of its duties under this Agreement, (i) in accordance with
the foregoing standards, or (ii) in reliance upon any written or oral
instruction provided to FMFS by any duly authorized officer of the
Trust, such duly authorized officer to be included in a list of
authorized officers furnished to FMFS and as amended from time to time
in writing by resolution of the Board of Trustees of the Trust.
FMFS shall indemnify and hold the Trust harmless from and against
any and all claims, demands, losses, expenses, and liabilities (whether
with or without basis in fact or law) of any and every nature
(including reasonable attorneys' fees) which the Trust may sustain or
incur or which may be asserted against the Trust by any person arising
out of any action taken or omitted to be taken by FMFS as a result of
FMFS's refusal or failure to comply with the terms of this Agreement,
its bad faith, negligence, or willful misconduct.
In the event of a mechanical breakdown or failure of
communication or power supplies beyond its control, FMFS shall take all
reasonable steps to minimize service interruptions for any period that
such interruption continues beyond FMFS's control. FMFS will make every
reasonable effort to restore any lost or damaged data and correct any
errors resulting from such a breakdown at the expense of FMFS. FMFS
agrees that it shall, at all times, have reasonable contingency plans
with appropriate parties, making reasonable provision for emergency use
of electrical data processing equipment to the extent appropriate
equipment is available. Representatives of the Trust shall be entitled
to inspect FMFS's premises and operating capabilities at any time
during regular business hours of FMFS, upon reasonable notice to FMFS.
Regardless of the above, FMFS reserves the right to reprocess and
correct administrative errors at its own expense.
B. In order that the indemnification provisions contained in this
section shall apply, it is understood that if in any case the
indemnitor may be asked to indemnify or hold the indemnitee harmless,
the indemnitor shall be fully and promptly advised of all pertinent
facts concerning the situation in question, and it is further
understood that the indemnitee will use all reasonable care to notify
the indemnitor promptly concerning any situation which presents or
appears likely to present the probability of a claim for
indemnification. The indemnitor shall have the option to defend the
indemnitee against any claim which may be the subject of this
indemnification. In the event that the indemnitor so elects, it will so
notify the indemnitee and thereupon the indemnitor shall take over
complete defense of the claim, and the indemnitee shall in such
<PAGE>
PAGE 6
situation initiate no further legal or other expenses for which it
shall seek indemnification under this section. Indemnitee shall in no
case confess any claim or make any compromise in any case in which the
indemnitor will be asked to indemnify the indemnitee except with the
indemnitor's prior written consent.
C. FMFS is hereby expressly put on notice of the limitation of
shareholder liability as set forth in the Trust Instrument of the Trust
and agrees that obligations assumed by the Trust pursuant to this
Agreement shall be limited in all cases to the Trust and its assets,
and if the liability relates to one or more series, the obligations
hereunder shall be limited to the respective assets of such series.
FMFS further agrees that it shall not seek satisfaction of any such
obligation from the shareholder or any individual shareholder of a
series of the Trust, nor from the Trustees or any individual Trustee of
the Trust.
8. PROPRIETARY AND CONFIDENTIAL INFORMATION
FMFS agrees on behalf of itself and its directors, officers, and employees to
treat confidentially and as proprietary information of the Trust all records and
other information relative to the Trust and prior, present, or potential
shareholders of the Trust (and clients of said shareholders), and not to use
such records and information for any purpose other than the performance of its
responsibilities and duties hereunder, except after prior notification to and
approval in writing by the Trust, which approval shall not be unreasonably
withheld and may not be withheld where FMFS may be exposed to civil or criminal
contempt proceedings for failure to comply, when requested to divulge such
information by duly constituted authorities, or when so requested by the Trust.
9. TERM OF AGREEMENT
This Agreement shall become effective as of the date hereof and will continue in
effect for a period of one year. During the initial one year term of this
Agreement, if the Trust terminates any services with FMFS, the Trust agrees to
compensate Firstar an amount equal to the fees remaining under the initial one
year Agreement. Subsequent to the initial one year term, this Agreement may be
terminated by either party upon giving ninety (90) days prior written notice to
the other party or such shorter period as is mutually agreed upon by the
parties. However, this Agreement may be amended by mutual written consent of the
parties.
10. RECORDS
FMFS shall keep records relating to the services to be performed hereunder, in
the form and manner, and for such period as it may deem advisable and is
agreeable to the Trust but not inconsistent with the rules and regulations of
appropriate government authorities, in particular, Section 31 of the 1940 Act,
and the rules thereunder. FMFS agrees that all such records prepared or
maintained by FMFS relating to the services to be performed by FMFS hereunder
are the property of the Trust and will be preserved, maintained, and made
available in accordance with such section and rules of the 1940 Act and will be
promptly surrendered to the Trust on and in accordance with its request.
<PAGE>
PAGE 7
11. GOVERNING LAW
This Agreement shall be construed in accordance with the laws of the State of
Wisconsin. However, nothing herein shall be construed in a manner inconsistent
with the 1940 Act or any rule or regulation promulgated by the SEC thereunder.
12. DUTIES IN THE EVENT OF TERMINATION
In the event that in connection with termination, a successor to any of FMFS's
duties or responsibilities hereunder is designated by the Trust by written
notice to FMFS, FMFS will promptly, upon such termination and at the expense of
the Trust transfer to such successor all relevant books, records, correspondence
and other data established or maintained by FMFS under this Agreement in a form
reasonably acceptable to the Trust (if such form differs from the form in which
FMFS has maintained the same, the Trust shall pay any expenses associated with
transferring the same to such form), and will cooperate in the transfer of such
duties and responsibilities, including provision for assistance from FMFS's
personnel in the establishment of books, records and other data by such
successor.
13. NO AGENCY RELATIONSHIP
Nothing herein contained shall be deemed to authorize or empower FMFS to act as
agent for the other party to this Agreement, or to conduct business in the name
of, or for the account of the other party to this Agreement.
14. DATA NECESSARY TO PERFORM SERVICES
The Trust or its agent, which may be FMFS, shall furnish to FMFS the data
necessary to perform the services described herein at such times and in such
form as mutually agreed upon. If FMFS is also acting in another capacity for the
Trust, nothing herein shall be deemed to relieve FMFS of any of its obligations
in such capacity.
15. NOTIFICATION OF ERROR
The Trust will notify FMFS of any balancing or control error caused by FMFS the
later of: within three (3) business days after receipt of any reports rendered
by FMFS to the Trust; within three (3) business days after discovery of any
error or omission not covered in the balancing or control procedure, or within
three (3) business days of receiving notice from any shareholder.
<PAGE>
PAGE 8
16. NOTICES
Notices of any kind to be given by either party to the other party shall be in
writing and shall be duly given if mailed or delivered as follows: Notice to
FMFS shall be sent to:
Firstar Mutual Fund Services, LLC
615 East Michigan Street
Milwaukee, WI 53202
and notice to the Trust shall be sent to:
Potomac Insurance Trust
1311 Mamaroneck Avenue
White Plains, NY 10605
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by a duly authorized officer on one or more counterparts as of the day
and year first written above.
POTOMAC INSURANCE TRUST FIRSTAR MUTUAL FUND SERVICES, LLC
By:______________________________ By: _________________________________
Attest:__________________________ Attest:______________________________
<PAGE>
PAGE 9
FUND ACCOUNTING SERVICES
ANNUAL FEE SCHEDULE
EXHIBIT A
Separate Series of Potomac Insurance Trust
NAME OF SERIES
Potomac U.S. Plus Fund Potomac U.S./Short Fund
Potomac OTC Plus Fund Potomac OTC/Short Fund
Potomac 30 Plus Fund Potomac 30/Short Fund
Potomac Small Cap Plus Fund Potomac Small Cap/Short Fund
Potomac Internet Plus Fund Potomac Internet/Short Fund
Potomac Japan Plus Fund Potomac Japan Short Fund
Potomac Money Market Fund
Annual fee based upon average assets per fund:
6 basis points on the first $50 million
3 basis points on the next $200 million
1.5 basis points on the balance
No minimum
Plus out-of-pocket expenses, including pricing service:
Domestic and Canadian Equities $.15
Options $.15
Corp/Gov/Agency Bonds $.50
CMO's $.80
International Equities and Bonds $.50
Municipal Bonds $.80
Money Market Instruments $.80
Fees and out-of-pocket expenses are billed to the fund monthly.
The fees noted above are for one class of shares. There will be an additional
25% increase in fees for each class of shares.
Ex-99.h.iii
FORM OF PARTICIPATION AGREEMENT
This Agreement made as of ________, 2000, by and between The Potomac
Insurance Trust ("Trust"), a Massachusetts business trust, Rafferty Asset
Management, LLC ("Rafferty") a New York corporation, and _______________
("Company"), a life insurance company organized under the laws of the State of
_____________.
WHEREAS, Trust is registered with the Securities and Exchange
Commission ("SEC") under the Investment Company Act of 1940, as amended (the
"1940 Act"), as an open-end management investment company; and
WHEREAS, Trust is organized as a series fund comprised of multiple
Portfolios ("Portfolios"), those of which are currently available for sale being
listed on Appendix A hereto as may be amended from time to time; and
WHEREAS, Trust was organized to act as the funding vehicle for certain
variable life insurance and/or variable annuity contracts ("Variable Contracts")
offered by life insurance companies through separate accounts of such life
insurance companies ("Participating Insurance Companies"); and
WHEREAS, Trust intends to apply for an order from the SEC, granting
Participating Insurance Companies and their separate accounts exemptions from
the provisions of Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act, and
Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to
permit shares of the Portfolios of the Trust to be sold to and held by variable
annuity and variable life insurance separate accounts of both affiliated and
unaffiliated Participating Insurance Companies ("Exemptive Order"); and
WHEREAS, the Company has established or will establish one or more
separate accounts ("Separate Accounts") to offer Variable Contracts and is
desirous of having Trust as one of the underlying funding vehicles for such
Variable Contracts; and
WHEREAS, Rafferty is registered with the SEC as an investment adviser
under the Investment Advisers Act of 1940; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares of Trust to fund the
aforementioned Variable Contracts and Trust is authorized to sell such shares to
the Company at net asset value;
<PAGE>
NOW, THEREFORE, in consideration of their mutual promises, the Company,
Trust and Rafferty agree as follows:
Article I. SALE OF TRUST SHARES
--------------------
1.1 Trust agrees to make available to the Separate Accounts of the
Company shares of the selected Portfolios as listed on Appendix B for investment
of proceeds from Variable Contracts allocated to the designated Separate
Accounts, such shares to be offered as provided in Trust's Prospectus.
1.2 Trust agrees to sell to Company those shares of the selected
Portfolios of Trust which Company orders, executing such orders on a daily basis
at the net asset value next computed after receipt by Trust or its designee of
the order for the shares of Trust. For purposes of this Section 1.2, Company
shall be the designee of Trust for receipt of such orders from Company and
receipt by such designee shall constitute receipt by Trust; provided that Trust
receives notice of such order by _____ Eastern Time on the next following
Business Day. "Business Day" shall mean any day on which the New York Stock
Exchange is open for trading and on which Trust calculates its net asset value
pursuant to the rules of the SEC.
1.3 Trust agrees to redeem for cash, on Company's request, any full or
fractional shares of Trust held by Company, executing such requests on a daily
basis at the net asset value next computed after receipt by Trust or its
designee of the request for redemption. For purposes of this Section 1.3,
Company shall be the designee of Trust for receipt of requests for redemption
from Company and receipt by such designee shall constitute receipt by Trust;
provided that Trust receives notice of such request for redemption by _______
Eastern Time on the next following Business Day.
1.4 Trust shall furnish, on or before the ex-dividend date, notice to
Company of any income dividends or capital gain distributions payable on the
shares of any Portfolio of Trust. Company hereby elects to receive all such
income dividends and capital gain distributions as are payable on a Portfolio's
shares in additional shares of the Portfolio. Trust shall notify Company or its
designee of the number of shares so issued as payment of such dividends and
distributions.
1.5 Trust shall make the net asset value per share for the selected
Portfolio(s) available to Company on a daily basis as soon as reasonably
practicable after the net asset value per share is calculated but shall use its
best efforts to make such net asset value available by ____ Eastern time. If
Trust provides Company with materially incorrect share net asset value
information through no fault of Company, Company on behalf of the Separate
Accounts, shall be entitled to an adjustment to the number of shares purchased
or redeemed to reflect the correct share net asset value. Any material error in
the calculation of net asset value per share, dividend or capital gain
information shall be reported promptly upon discovery to Company.
2
<PAGE>
1.6 At the end of each Business Day, Company shall use the information
described in Section 1.5 to calculate Separate Account unit values for the day.
Using these unit values, Company shall process each such Business Day's Separate
Account transactions based on requests and premiums received by it by the close
of trading on the floor of the New York Stock Exchange (currently 4:00 p.m.
Eastern time) to determine the net dollar amount of Trust shares which shall be
purchased or redeemed at that day's closing net asset value per share. The net
purchase or redemption orders so determined shall be transmitted to Trust by
Company by _____ Eastern time on the Business Day next following Company's
receipt of such requests and premiums in accordance with the terms of Sections
1.2 and 1.3 hereof.
1.7 If Company's order requests the purchase of Trust shares, Company
shall pay for such purchase by wiring federal funds to Trust or its designated
custodial account on the next Business Day following the day the order is
transmitted by Company. If Company's order requests a net redemption resulting
in a payment of redemption proceeds to Company, Trust shall use its best efforts
to wire the redemption proceeds to Company by the next Business Day, unless
doing so would require Trust to dispose of portfolio securities or otherwise
incur additional costs, but in such event, proceeds shall be wired to Company
within seven days or such shorter period as may be required by applicable law
and Trust shall notify the person designated in writing by Company as the
recipient for such notice of such delay by ____ Eastern time the same Business
Day that Company transmits the redemption order to Trust. If Company's order
requests the application of redemption proceeds from the redemption of shares to
the purchase of shares of another fund as advised by Rafferty, the amount wire
transferred by Company shall be reduced by the amount of such proceeds and Trust
shall so apply such proceeds on the same Business Day that Company transmits
such order to Trust.
1.8 Notwithstanding Section 1.7, Trust reserves the right to suspend
the right of redemption or postpone the date of payment or satisfaction upon
redemption consistent with Section 22(e) of the 1940 Act and any rules
thereunder.
1.9 Trust agrees that all shares of the Portfolios of Trust will be
sold only to Participating Insurance Companies which have agreed to participate
in Trust to fund their Separate Accounts and/or to certain qualified pension and
other retirement plans, all in accordance with the requirements of Section
817(h) of the Internal Revenue Code of 1986, as amended ("Code") and Treasury
Regulation 1.817-5. Shares of the Portfolios of Trust will not be sold directly
to the general public.
1.10 Trust may refuse to sell shares of any Portfolio to any person, or
suspend or terminate the offering of the shares of any Portfolio if such action
is required by law or by regulatory authorities having jurisdiction or is, in
the sole discretion of the Board of Trustees of Trust, acting in good faith and
in light of its fiduciary duties under federal and any applicable state laws,
deemed necessary and in the best interests of the shareholders of such
Portfolios.
3
<PAGE>
Article II. REPRESENTATIONS AND WARRANTIES
------------------------------
2.1 Company represents and warrants that it is an insurance company
duly organized and in good standing under the laws of _________ and that it has
legally and validly established each Separate Account as a segregated asset
account under such laws, and that ______________, the principal underwriter for
the Variable Contracts, is registered as a broker-dealer under the Securities
Exchange Act of 1934.
2.2 Company represents and warrants that it has registered or, prior to
any issuance or sale of the Variable Contracts, will register each Separate
Account as a unit investment trust ("UIT") in accordance with the provisions of
the 1940 Act and cause each Separate Account to remain so registered to serve as
a segregated asset account for the Variable Contracts, unless an exemption from
registration is available.
2.3 Company represents and warrants that the Variable Contracts will be
registered under the Securities Act of 1933 (the "1933 Act") unless an exemption
from registration is available prior to any issuance or sale of the Variable
Contracts and that the Variable Contracts will be issued and sold in compliance
in all material respects with all applicable federal and state laws and further
that the sale of the Variable Contracts shall comply in all material respects
with state insurance law suitability requirements.
2.4 Company represents and warrants that the Variable Contracts are
currently and at the time of issuance will be treated as life insurance,
endowment or annuity contracts under applicable provisions of the Code, that it
will maintain such treatment and that it will notify Trust immediately upon
having a reasonable basis for believing that the Variable Contracts have ceased
to be so treated or that they might not be so treated in the future.
2.5 Company represents and warrants that is shall deliver such
prospectuses, statements of additional information, proxy statements and
periodic reports of Trust as required to be delivered under applicable federal
or state law in connection with the offer, sale or acquisition of the Variable
Contracts.
2.6 Company represents and warrants that no existing text or formatting
of Trust's prospectus as delivered to Company in electronic format will be
revised or altered by Company or any employee or agent of Company; provided,
that addition of hyperlinks and other common electronic features shall not
constitute a revision or alteration of the material.
2.7 Trust represents and warrants that the Portfolio shares offered and
sold pursuant to this Agreement will be registered under the 1933 Act and sold
in accordance with all applicable federal and state laws, and Trust shall be
registered under the 1940 Act prior to and at the time of any issuance or sale
of such shares. Trust shall register and qualify its shares for sale in
accordance with the laws of the various states only if and to the extent deemed
advisable by Trust.
4
<PAGE>
2.8 Trust represents and warrants that each Portfolio will comply with
the diversification requirements set forth in Section 817(h) of the Code, and
the rules and regulations thereunder, including without limitation Treasury
Regulation 1.817-5, and will notify Company immediately upon having a reasonable
basis for believing any Portfolio has ceased to comply or might not so comply
and will immediately take all reasonable steps to adequately diversify the
Portfolio to achieve compliance within the grace period afforded by Regulation
1.817-5.
2.9 Trust represents and warrants that each Portfolio invested in by
the Separate Account is currently qualified as a "regulated investment company"
under Subchapter M of the Code, that it will make every effort to maintain such
qualification and will notify Company immediately upon having a reasonable basis
for believing it has ceased to so qualify or might not so qualify in the future.
Article III. PROSPECTUS AND PROXY STATEMENTS
-------------------------------
3.1 Trust shall prepare and be responsible for filing with the SEC and
any state regulators requiring such filing all shareholder reports, notices,
proxy materials (or similar materials such as voting instruction solicitation
materials), prospectuses and statements of additional information of Trust.
Trust shall bear the costs of registration and qualification of shares of the
Portfolios, preparation and filing of the documents listed in this Section 3.1
and all taxes to which an issuer is subject on the issuance and transfer of its
shares.
3.2 Trust will bear the printing costs (or duplicating costs with
respect to the statement of additional information), mailing costs, and, in the
case of proxy solicitations, tabulation costs, associated with the delivery of
the following Trust (or individual Portfolio) documents, and any supplements
thereto, to existing Variable Contract owners of Company: (i) prospectuses and
statements of additional information; (ii) annual and semi-annual reports; and
(iii) proxy materials.
If requested by Company, Trust shall provide such documentation (including a
final copy of the Trust's prospectus as set in type or in camera-ready copy) and
other assistance as is reasonably necessary in order for Company to print the
current prospectus for the Trust either as a standalone document or together
with the prospectus for the Variable Contracts or the prospectuses for other
funds offered through the Variable Contracts. Should Company wish to print any
of these documents in a format different from that provided by Trust, Company
shall provide Trust with sixty (60) days, prior written notice and Company shall
bear the cost associated with any format change (but not the cost of printing or
mailing).
Company will submit any bills for printing, duplicating and/or mailing costs,
relating to the Trust documents described above, to Trust for reimbursement by
Trust. Company shall monitor such costs and shall use its best efforts to
control these costs. Company will provide Trust on a semi-annual basis, or more
frequently as reasonably requested by Trust, with a current tabulation of the
number of existing Variable Contract owners of Company whose Variable Contract
values are invested in Trust. This tabulation will be sent to Trust in the form
of a letter signed by a duly authorized officer of Company attesting to the
accuracy of the information contained in the letter.
5
<PAGE>
Trust will provide, at its expense, to Company with the following Trust (or
individual Portfolio) documents, and any supplements thereto, with respect to
prospective Variable Contract owners of Company: (i)camera-ready copy of the
current prospectus for printing by Company; (ii) a copy of the statement of
additional information suitable for duplication; (iii) camera-ready copy of
proxy material suitable for printing; and (iv) camera-ready copy of the annual
and semi-annual reports for printing by Company.
3.4 Trust, upon request of Company, will provide Company with
electronic copies of any of the Trust (or individual portfolio) documents listed
in Section 3.1 of this Agreement, for use by Company in the delivery of the
Trust's documents on an individual basis to current and prospective Variable
Contract Owners.
3.5. Trust will provide Company with at least one complete copy of all
prospectuses, statements of additional information, annual and semi-annual
reports, proxy statements, exemptive applications and all amendments or
supplements to any of the above that relate to the Portfolios promptly after the
filing of each such document with the SEC or other regulatory authority. Company
will provide Trust with at least one complete copy of all prospectuses,
statements or additional information, annual and semi-annual reports, proxy
statements, exemptive applications and all amendments or supplements to any of
the above that relate to the Separate Account promptly after the filing of each
such document with the SEC or other regulatory authority.
Article IV. SALES MATERIALS
---------------
4.1 Company will furnish, or will cause to be furnished, to Trust each
piece of sales literature or other promotional material in which Trust is named,
at least fifteen (15) Business Days prior to its intended use. No such material
will be used if Trust objects to its use in writing within ten (10) Business
Days after receipt of such material.
4.2 Trust will furnish, or will cause to be furnished, to Company, each
piece of sales literature or other promotional material in which Company or its
Separate Accounts are named, at least fifteen (15) Business Days prior to its
intended use. No such material will be used if Company objects to its use in
writing within ten (10) Business Days after receipt of such material.
4.3 Trust and its affiliates and agents shall not give any information
or make any representations on behalf of Company or concerning Company, the
Separate Accounts, or the Variable Contracts issued by Company, other than the
information or representations contained in a registration statement or
prospectus for such Variable Contracts, as such registration statement and
prospectus may be amended or supplemented from time to time, or in reports of
the Separate Accounts or reports prepared for distribution to owners of such
Variable Contracts, or in sales literature or other promotional material
approved by the Company or its designee, except with the written permission of
the Company.
6
<PAGE>
4.4 Company and its affiliates and agents shall not give any
information or make any representations on behalf of Trust or concerning Trust
other than the information or representations contained in a registration
statement or prospectus for Trust, as such registration statement or prospectus
may be amended or supplemented from time to time, or in sales literature or
other promotional material approved by Trust or its designee, except with the
written permission of Trust.
4.5 For purposes of this Agreement, the phrase "sales literature or
other promotional material" or words of similar import include, without
limitation, advertisements (such as material published, or designed for use, in
a newspaper, magazine or other periodical, radio, television, telephone or tape
recording, videotape display, signs or billboards, motion pictures or other
public media), sales literature (such as any written communication distributed
or made generally available to customers or the public including brochures,
circulars, research reports, market letters, form letters, seminar text, or
reprints or excerpts of any other advertisement, sales literature, or published
article), educational or training materials or other communications distributed
or made generally available to some or all agents or employees (including
so-called "broker only" materials), registration statements, prospectuses,
statements of additional information, shareholder reports and proxy materials,
and any other material constituting sales literature or advertising under
National Association of Securities Dealers, Inc. rules, the 1940 Act or the 1933
Act, but shall not include depositor or variable account financial statements
sent to existing customers.
Article V. POTENTIAL CONFLICTS
-------------------
5.1 The Trust's Board of Trustees ("Board") will monitor Trust for the
existence of any material irreconcilable conflict between the interests of
Variable Contract owners of Participating Insurance Company Separate Accounts
investing in Portfolios. A material irreconcilable conflict may arise for a
variety of reasons, including: (a) state insurance regulatory authority action;
(b) a change in applicable federal or state insurance, tax, or securities laws
or regulations, or a public ruling, private letter ruling or any similar action
by insurance, tax or securities regulatory authorities; (c) an administrative or
judicial decision in any relevant proceeding, (d) the manner in which the
investments of the Portfolios are being managed; (e) a difference in voting
instructions given by contract owners of different Participating Insurance
Companies; and (f) a decision by a Participating Insurance Company to disregard
the voting instructions of Variable Contract owners.
5.2 Company will report any potential or existing conflicts to the
Board. Company will be responsible for assisting the Board in carrying out its
responsibilities under the Conditions set forth in the notice when issued by the
SEC for the Portfolios (the "Notice"), which Company has reviewed, by providing
the Board with all information reasonably necessary for the Board to consider
any issues raised. The responsibility includes, but is not limited to, an
obligation by Company to inform the Board whenever Variable Contract owner
voting instructions are disregarded by Company. These responsibilities will be
carried out with a view only to the interests of the Variable Contract owners.
7
<PAGE>
5.3 If a majority of the Board or majority of its disinterested
trustees or directors, determines that a material irreconcilable conflict
exists, affecting Company, Company, at its expense and to the extent reasonably
practicable (as determined by a majority of the Board's disinterested trustees
or directors), will take any steps necessary to remedy or eliminate the
irreconcilable material conflict, including; (a) withdrawing the assets
allocable to some or all of the Separate Accounts from Trust or any Portfolio
thereof and reinvesting those assets in a different investment medium, which may
include another Portfolio of Trust, or another investment company; (b)
submitting the question of whether such segregation should be implemented to a
vote of all affected Variable Contract owners and as appropriate, segregating
the assets of any appropriate group (i.e., variable annuity or variable life
insurance Contract owners of one or more Participating Insurance Companies) that
votes in favor of such segregation, or offering to the affected Variable
Contract owners' the option of making such a change; and (c) establishing a new
registered management investment company (or series thereof) or managed separate
account. If a material irreconcilable conflict arises because of a decision by
Company to disregard Variable Contract owner voting instructions, and that
decision represents a minority position or would preclude a majority vote,
Company may be required, at the election of Trust, to withdraw the Separate
Account's investment in Trust, and no charge or penalty will be imposed as a
result of such withdrawal. The responsibility to take such remedial action shall
be carried out with a view only to the interests of the Variable Contract
owners.
For the purposes of this Section 5.3, a majority of the disinterested
members of the Board shall determine whether or not any proposed action
adequately remedies any material irreconcilable conflict, but in no event will
Trust or Rafferty (or any other investment adviser of the Portfolios) be
required to establish a new funding medium for any Variable Contract. Further,
Company shall not be required by this Section 5.3 to establish a new funding
medium for any Variable Contracts if any offer to do so has been declined by a
vote of a majority of Variable Contract owners materially and adversely affected
by the irreconcilable material conflict.
5.4 The Board's determination of the existence of an material
irreconcilable conflict and its implications shall be made known promptly and in
writing to Company.
5.5 No less than annually, Company and Rafferty shall submit to the
Board such reports, materials or data as the Board may reasonably request so
that the Board may fully carry out the obligations imposed upon them by these
Conditions. Such reports, materials, and data. shall be submitted more
frequently if deemed appropriate by the Board.
Article VI. VOTING
------
6.1 Company will provide pass-through voting privileges to all Variable
Contract owners so long as the SEC continues to interpret the 1940 Act as
requiring pass-through voting privileges for Variable Contract owners.
Accordingly, Company, where applicable, will vote shares of a Portfolio held in
its Separate Accounts in a manner consistent with voting instructions timely
received from its Variable Contract owners. Company will be responsible for
assuring that each of its Separate Accounts that participates in any Portfolio
8
<PAGE>
calculates voting privileges in a manner consistent with other participants as
defined in the Conditions set forth in the Notice ("Participants"). The
obligation to calculate voting privileges in a manner consistent with all other
Separate Accounts investing in a Portfolio will be a contractual obligation of
all Participants under the agreements governing participation in the Portfolios.
Each Participant will vote shares for which it has not received voting
instructions, as well as shares it owns, in the same proportion as it votes
those shares for which it has received voting instructions.
6.2 If and to the extent Rule 6e-2 and Rule 6e-3(T) are amended, or if
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940
Act or the rules thereunder with respect to mixed and shared funding on terms
and conditions materially different from any exemptions granted in the Exemptive
Order, then Trust and the Participants, as appropriate, shall take such steps as
may be necessary to comply with Rule 6e-2 and Rule 6e-3(T), as amended, and Rule
6e-3, as adopted, to the extent applicable.
Article VII. INDEMNIFICATION
---------------
7.1 INDEMNIFICATION BY COMPANY. Company agrees to indemnify and hold
harmless Trust, Rafferty and each of their Trustees, directors, officers,
employees and agents and each person, if any, who controls Trust or Rafferty
within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified
Parties" for purposes of this Article VII) against any and all losses, claims,
damages, liabilities (including amounts paid in settlement with the written
consent of Company, which consent shall not be unreasonably withheld) or
litigation (including reasonable legal and other expenses), to which the
Indemnified Parties may become subject under any statute, regulation, at common
law or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) or settlements are related to the sale
or acquisition of Trust's shares or the Variable Contracts and:
(a) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in
the registration statement or prospectus for the Variable
Contracts or contained in the Variable Contracts (or any
amendment or supplement to any of the foregoing), or arise out
of or are based upon the omission or the alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading,
provided that this agreement to indemnify shall not apply as
to any Indemnified Party if such statement or omission or such
alleged statement or omission was made in reliance upon and in
conformity with information furnished to Company by or on
behalf of Trust for use in the registration statement or
prospectus for the Variable Contracts or in the Variable
Contracts or sales literature (or any amendment or supplement)
or otherwise for use in connection with the sale of the
Variable Contracts or Trust shares; or
(b) arise out of or as a result of statements or representations
(other than statements or representations contained in the
registration statement, prospectus or sales literature of
9
<PAGE>
Trust not supplied by Company, or persons under its control)
or wrongful conduct of Company or persons under its control,
with respect to the sale or distribution of the Variable
Contracts or Trust shares; or
(c) arise out of any untrue statement or alleged untrue statement
of a material fact contained in the registration statement,
prospectus or sales literature of Trust or any amendment
thereof or supplement thereto or the omission or alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading if such statement or omission or such alleged
statement or omission was made in reliance upon and in
conformity with information furnished to Trust by or on behalf
of Company; or
(d) arise as a result of any failure by Company to substantially
provide the services and furnish the materials under the terms
of this Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by Company in this
Agreement or arise out of or result from any other material
breach of this Agreement by Company.
7.2 Company shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation incurred
or assessed against an Indemnified Party as such may arise from such Indemnified
Party's willful misfeasance, bad faith, or gross negligence in the performance
of such Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations or duties under this Agreement or to Trust,
whichever is applicable.
7.3 Company shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Part shall have notified Company in writing within a reasonable time
after the summons or other first legal process giving information of the nature
of the claim shall have been served upon such Indemnified Party (or after such
Indemnified Party shall have received notice of such service on any designated
agent), but failure to notify Company of any such claim shall not relieve
Company from any liability which it may have to the Indemnified Party against
whom such action is brought otherwise than on account of this indemnification
provision. In case any such action is brought against an Indemnified Party,
Company shall be entitled to participate at its own expense in the defense of
action. Company also shall be entitled to assume the defense thereof, with
counsel satisfactory to the party named in the action. After notice from Company
to such party of Company's election to assume the defense thereof, the
Indemnified Party shall bear the fees and expenses of any additional counsel
retained by it, and Company will not be liable to such party under this
Agreement for any legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof.
7.4 INDEMNIFICATION BY RAFFERTY. Rafferty agrees to indemnify and hold
harmless Company and each of its directors, officers employees, and agents and
each person, if any, who controls Company within the meaning of Section 15 of
10
<PAGE>
the 1933 Act (collectively, the "Indemnified Parties" for the purposes of this
Article VII) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of Rafferty which consent
shall not be unreasonably withheld) or litigation (including reasonable legal
and other expenses) to which the Indemnified Parties may become subject under
any statute, or regulation, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof) or
settlements are related to the sale or acquisition of Trust's shares or the
Variable Contracts and:
(a) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the
registration statement, prospectus or sales literature of Trust
(or any amendment or supplement to any of the foregoing), or
arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall not
apply as to any Indemnified Party if such statement or omission
or such alleged statement or omission was made in reliance upon
and in conformity with information furnished to Rafferty or
Trust by or on behalf of Company for use in the registration
statement or prospectus for Trust or in sales literature (or any
amendment or supplement) or otherwise for use in connection with
the sale of the Variable Contracts or Trust shares; or
(b) arise out of or as a result of statements or representations
(other than statements or representations contained in the
registration statement, prospectus or sales literature for the
Variable Contracts not supplied by Rafferty or Trust or persons
under their control) or wrongful conduct of Rafferty or Trust or
persons under their control, with respect to the sale or
distribution of the Variable Contracts or Trust shares; or
(c) arise out of any untrue statement or alleged untrue statement of
a material fact contained in a registration statement,
prospectus, or sales literature covering the Variable Contracts,
or any amendment thereof or supplement thereto or the omission
or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein
not misleading, if such statement or omission or such alleged
statement or omission was made in reliance upon and in
conformity with information furnished to Company for inclusion
therein by or on behalf of Trust or Rafferty; or
(d) arise as a result of (i) a failure by Trust to substantially
provide the services ad furnish the material under the terms of
this Agreement; or (ii) a failure by a Portfolio(s) invested in
by the Separate Accounts to comply with the diversification
requirements of Section 817(h) of the Code; or (iii) a failure
by a Portfolio(s) invested in by the Separate Account to qualify
as a "regulated investment company" under Subchapter M of the
Code; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by Rafferty in this
Agreement or arise out of or result from any other material
breach of this Agreement by Rafferty.
12
<PAGE>
7.5 Rafferty shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation to which
an Indemnified Party would otherwise be subject by reason of such Indemnified
Party's willful misfeasance, bad faith, or gross negligence in the performance
of such Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations and duties under this Agreement or to Company.
7.6 Rafferty shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified Rafferty in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify Rafferty of any such claim shall not
relieve Rafferty from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against the
Indemnified Parties, Rafferty shall be entitled to participate at their own
expense in the defense thereof. Rafferty also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the action.
After notice from Rafferty to such party of Rafferty's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and Rafferty will not be liable to such party
under this Agreement for any legal or other expenses subsequently incurred by
such party independently in connection with the defense thereof.
Article VIII. TERM; TERMINATION
-----------------
8.1 This Agreement shall be effective as of the date hereof and shall
continue in force until terminated in accordance with the provisions herein.
8.2 This Agreement shall terminate in accordance with the following
provisions:
(a) At the option of Company, Trust or Rafferty at any
time from the date hereof upon 60 days' notice,
unless a shorter time is agreed to by the parties;
(b) At the option of Company, if Trust shares are not
reasonably available to meet the requirements of the
Variable Contracts as determined by Company. Prompt
notice of election to terminate shall be furnished by
Company, said termination to be effective ten days
after receipt of notice unless Trust makes available
a sufficient number of shares to reasonably meet the
requirements of the Variable Contracts within said
ten-day period;
(c) At the option of Company, upon the institution of
formal proceedings against Trust by the SEC, or any
12
<PAGE>
other regulatory body, the expected or anticipated
ruling, judgment or outcome of which would, in
Company's reasonable judgment, materially impair
Trust's ability to meet and perform Trust's
obligations and duties hereunder. Prompt notice of
election to terminate shall be furnished by Company
with said termination to be effective upon receipt of
notice;
(d) At the option of Trust or Rafferty, upon the
institution of formal proceedings against Company by
the SEC or any other regulatory body, the expected or
anticipated ruling, judgment or outcome of which
would, in Trust's or Rafferty's reasonable judgment,
materially impair the Company's ability to meet and
perform its obligations and duties hereunder. Prompt
notice of election to terminate shall be furnished by
Trust or Rafferty with said termination to be
effective upon receipt of notice;
(e) In the event Trust's shares are not registered,
issued or sold in accordance with applicable state or
federal law, or such law precludes the use of such
shares as the underlying investment medium of
Variable Contracts issued or to be issued by Company.
Termination shall be effective upon such occurrence
without notice;
(f) At the option of Trust, if the Variable Contracts
cease to qualify as annuity contracts or life
insurance contracts, as applicable, under the Code,
or if Trust reasonably believes that the Variable
Contracts may fail to so qualify. Termination shall
be effective upon receipt of notice by Company;
(g) At the option of Company, upon Trust's breach of any
material provision of this Agreement, which breach
has not been cured to the satisfaction of Company
within ten days after written notice of such breach
is delivered to Trust;
(h) At the option of Trust, upon Company's breach of any
material provision of this Agreement, which breach
has not been cured to the satisfaction of Trust
within ten days after written notice of such breach
is delivered to Company;
(i) At the option of Trust, if the Variable Contracts are
not registered, issued or sold in accordance with
applicable federal and/or state law. Termination
shall be effective immediately upon such occurrence
without notice;
(j) In the event this Agreement is assigned without the
prior, written consent of the Company, Trust, and
Rafferty termination shall be effective immediately
upon such occurrence without notice.
13
<PAGE>
8.3 Notwithstanding any termination of this Agreement pursuant to
Section 8.2 hereof, Trust at the option may elect to continue to make available
additional Trust shares, as provided below, for so long as Trust desires
pursuant to the terms and conditions of this Agreement, for all Variable
Contracts in effect on the effective date of termination of this Agreement
(hereinafter referred to as "Existing Contracts"). Specifically, without
limitation, if Trust so elects to make additional Trust shares available, the
owners of the Existing Contracts or Company, whichever shall have legal
authority to do so, shall be permitted to reallocate investments in Trust,
redeem investments in Trust and/or invest in Trust upon the payment of
additional premiums or a transfer from other sub-accounts under the "Existing
Contracts". In the event of termination of this Agreement pursuant to Section
8.2 hereof, Trust and Rafferty as promptly as is practicable under the
circumstances, shall notify Company whether Trust elects to continue to make
Trust shares available after such termination. If Trust shares continue to be
made available after such termination, the provisions of this Agreement shall
remain in effect and thereafter either Trust or Company may terminate this
Agreement, as so continued pursuant to Section 8.3, upon sixty (60) days prior
written notice to the other party.
8.4. Except as necessary to implement Variable Contract owner initiated
transactions, or as required by state insurance laws or regulations, Company
shall not redeem the shares attributable to the Variable Contracts (as opposed
to the shares attributable to Company's assets held in the Separate Accounts),
and Company shall not prevent Variable Contract owners from allocating payments
to a Portfolio that was otherwise available under the Variable Contracts, until
thirty (30) days after the Company shall have notified Trust of its intention to
do so.
Article IX NOTICES
----------
Any notice hereunder shall be given by registered or certified mail
return receipt requested to the other party at the address of such party set
forth below or at such other address as such party may from time to time specify
in writing to the other party.
If to Trust OR Rafferty:
Daniel D. O'Neill
Managing Director
Rafferty Asset Management, LLC
1311 Mamaroneck Avenue
White Plains, New York 10605
If to the Company:
14
<PAGE>
Notice shall be deemed given on the date of receipt by the addressee as
evidenced by the return receipt. Notice may also be given by facsimile
transmission with a confirming copy sent by overnight delivery. Such notice will
be deemed given on the date of receipt of the facsimile transmission.
Article X. MISCELLANEOUS
-------------
10.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
10.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
10.3 If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
10.4 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of New York. It
shall also be subject to the provisions of the federal securities laws and the
rules and regulations thereunder and to any orders of the SEC granting exemptive
relief therefrom and the conditions of such orders.
10.5 The parties agree that the assets and liabilities of each
Portfolio are separate and distinct from the assets and liabilities of each
other Portfolio. No Portfolio shall be liable or shall be charged for any debt,
obligation or liability of any other Portfolio. No Trustee, officer or agent
shall be personally liable for such debt, obligation or liability of any
Portfolio and not Portfolio or other investor, other than the Portfolio or other
investors investing in the Portfolio which incurs a debt, obligation or
liability, shall be liable therefor.
10.6 Each party shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
National Association of Securities Dealers, Inc. and state insurance regulators)
and shall permit such authorities reasonable access to its books and records in
connection with any investigation or inquiry relating to this Agreement or the
transactions contemplated hereby.
10.7 The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to under
state and federal laws.
10.8 No provision of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by
Company, Trust and Rafferty.
15
<PAGE>
IN WITNESS WHEREOF, the parties have caused their duly authorized
officers to execute this Fund Participation Agreement as of the date and year
first above written.
Insurance Company Potomac Insurance Trust
By: By:
----------------------------- -----------------------
Name: Name:
Title: Title:
Rafferty Asset Management, LLC
By: By:
----------------------------- -----------------------
Name: Name:
Title: Title:
16
<PAGE>
Appendix A
Potomac Insurance Trust Portfolios
- ----------------------------------
The Potomac VP OTC Plus Fund
The Potomac VP OTC/Short Fund
The Potomac VP Dow 30 Plus Fund
The Potomac VP Dow 30/Short Fund
The Potomac VP Small Cap Plus Fund
The Potomac VP Small Cap/Short Fund
The Potomac VP Internet Plus Fund
The Potomac VP Internet/Short Fund
The Potomac VP U.S. Plus Fund
The Potomac VP U.S./Short Fund
The Potomac VP Japan Plus Fund
The Potomac VP Japan/Short Fund
The Potomac VP Money Market Fund
17
<PAGE>
APPENDIX B
Separate Accounts Selected Portfolios
- ----------------- -------------------
18
KIRKPATRICK & LOCKHART LLP 1800 MASSACHUSETTS AVENUE, NW
SECOND FLOOR
WASHINGTON, DC 20036-1800
202.778.9000
www.kl.com
April 14, 2000
Potomac Insurance Trust
1311 Mamaroneck Avenue
White Plains, New York 10605
Ladies and Gentlemen:
You have requested our opinion, as counsel to the Potomac Insurance
Trust (the "Trust"), as to certain matters regarding the issuance of Shares of
the Trust. As used in this letter, the term "Shares" means the Class A and Class
B shares of beneficial interest of the following series of the Trust: the
Potomac VP U.S. Plus Fund; the Potomac VP U.S./Short Fund; the Potomac VP OTC
Plus Fund; the Potomac VP OTC/Short Fund; the Potomac VP Dow 30 Plus Fund; the
Potomac VP Dow 30/Short Fund; the Potomac VP Small Cap Plus Fund; the Potomac VP
Small Cap/Short Fund; the Potomac VP Internet Plus Fund; the Potomac VP
Internet/Short Fund; the Potomac VP Japan Plus Fund; the Potomac VP Japan/Short
Fund, and the Potomac VP Money Market Fund.
As such counsel, we have examined certified or other copies, believed
by us to be genuine, of the Trust's Declaration of Trust and By-laws and such
resolutions and minutes of meetings of the Trust's Board of Trustees as we have
deemed relevant to our opinion, as set forth herein. Our opinion is limited to
the laws and facts in existence on the date hereof, and it is further limited to
the laws (other than the conflict of law rules) in the Commonwealth of
Massachusetts that in our experience are normally applicable to the issuance of
shares by unincorporated voluntary associations and to the Securities Act of
1933 ("1933 Act"), the Investment Company Act of 1940 ("1940 Act") and the
regulations of the Securities and Exchange Commission ("SEC") thereunder.
Based on present laws and facts, we are of the opinion that the
issuance of the Shares has been duly authorized by the Trust and that, when sold
in accordance with the terms contemplated by Pre-Effective Amendment No. 1 to
the Trust's Registration Statement on Form N-1A ("PEA"), including receipt by
the Trust of full payment for the Shares and compliance with the 1933 Act and
the 1940 Act, the Shares will have been validly issued, fully paid and
non-assessable.
We note, however, that the Trust is an entity of the type commonly
known as a "Massachusetts business trust." Under Massachusetts law, shareholders
could, under certain circumstances, be held personally liable for the
obligations of the Trust. The Declaration of Trust states that all persons
extending credit to, contracting with or having any claim against the Trust or
the Trustees shall look only to the assets of the Trust for payment under such
credit, contract or claim; and neither the Shareholders nor the Trustees, nor
any of their agents, whether past, present or future, shall be personally liable
therefor. It also requires that every note, bond, contract or other undertaking
issued by or on behalf of the Trust or the Trustees relating to the Trust shall
include a recitation limiting the obligation represented thereby to the Trust
and its assets. The Declaration of Trust further provides: (1) for
indemnification from the assets of the Trust for all loss and expense of any
shareholder held personally liable for the obligations of the Trust by virtue of
ownership of shares of the Trust; and (2) for the Trust to assume the defense of
any claim against the shareholder for any act or obligation of the Trust. Thus,
the risk of a shareholder incurring financial loss on account of shareholder
<PAGE>
Potomac Insurance Trust
April 14, 2000
Page 2
liability is limited to circumstances in which the Trust or series would be
unable to meet its obligations.
We hereby consent to this opinion accompanying the PEA when it is filed
with the SEC and to the reference to our firm in the PEA.
Very truly yours,
KIRKPATRICK & LOCKHART LLP
By /s/ Robert J. Zutz
------------------------
Robert J. Zutz
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form N-1A of our
report dated March 24, 2000, relating to the financial statements of The Potomac
Insurance Trust, which appear in such Registration Statement. We also consent to
the reference to us under the heading "Independent Accountants" in such
Registration Statement.
/s/ PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
May 5, 2000
RAFFERTY ASSET MANAGEMENT, LLC
1311 Mamaroneck Avenue
White Plains, New York 10605
March 14, 2000
The Potomac Insurance Trust
1311 Mamaroneck Avenue
White Plains, New York 10605
Gentlemen:
Please be advised that the 1,250 shares of Class A and 1,250 of Class B of
each of The Potomac VP OTC Plus Fund, The Potomac VP Dow 30 Plus Fund, The
Potomac VP Internet Plus Fund and The Potomac VP Small Cap Plus Fund which we
have purchased from you in the aggregate amount of $100,000 were purchased as an
investment with no present intention of redeeming or selling such shares and we
do not now have any intention of redeeming or selling such shares.
Very truly yours,
RAFFERTY ASSET MANAGEMENT, LLC
By: /s/ Daniel D. O'Neill
---------------------
Daniel D. O'Neill
Managing Director
POTOMAC INSURANCE TRUST
CLASS A SHARES
DISTRIBUTION PLAN
WHEREAS, the Potomac Insurance Trust (the "Trust") is engaged in business
as an open-end management investment company and is registered as such under the
Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Trust, on behalf of its one or more designated series
presently existing or hereafter established (hereinafter referred to as
"Portfolios"), desires to adopt a Distribution Plan pursuant to Rule l2b-1 under
the 1940 Act and the Board of Trustees of the Trust has determined that there is
a reasonable likelihood that adoption of this Distribution Plan will benefit the
Trust and the shareholders; and
WHEREAS, the Trust intends to employ a registered broker-dealer as
Distributor of the securities of which it is the issuer;
NOW, THEREFORE, the Trust hereby adopts this Distribution Plan (the
"Plan") in accordance with Rule l2b-1 under the 1940 Act on the following terms
and conditions:
1. PAYMENT OF FEES. The Trust will not make separate payments as a result
of the Plan to the Distributor or any other party. The Trust's investment
adviser or any other service provider may from time to time make payments to
third parties out of its advisory fee, not to exceed the amount of that fee,
including payments for fees for shareholder servicing and transfer agency
functions. If such payments are deemed to be indirect financing of an activity
primarily intended to result in the sale of shares issued by a Portfolio within
the context of Rule 12b-1 under the 1940 Act, such payments shall be authorized
by this Plan. Nothing in the Plan shall require the investment adviser,
Distributor or any third party to perform any specific type of level of
distribution activities or to incur any specific level of expenses for
activities primarily intended to result in the sale of Trust shares.
2. BOARD APPROVAL. This Plan shall not take effect with respect to any
Portfolio until it has been approved, together with any related agreements, by
vote of a majority of both (a) the Board of Trustees and (b) those members of
the Board who are not "interested persons" of the Trust, as defined in the 1940
Act, and have no direct or indirect financial interest in the operation of this
Plan or any agreements related to it (the "Independent Trustees"), cast in
person at a meeting or meetings called for the purpose of voting on this Plan
and such related agreements.
3. RENEWAL OF PLAN. This Plan shall continue in full force and effect with
respect to a Portfolio for successive periods of one year from its approval as
set forth in Paragraphs 2 for so long as such continuance is specifically
approved at least annually in the manner provided for approval of this Plan in
Paragraph 2.
<PAGE>
4. REPORTS. Any Distribution Agreement entered into pursuant to this Plan
shall provide that the Distributor shall provide to the Board of Trustees and
the Board shall review, at least quarterly, or at such other intervals as
reasonably requested by the Board, a written report of the amounts so expended
and the purposes for which such expenditures were made.
5. TERMINATION. This Plan may be terminated with respect to a Portfolio at
any time by vote of a majority of the Independent Trustees or by a vote of a
majority of the outstanding voting securities of such Portfolio, voting
separately from any other Portfolio of the Trust.
6. AMENDMENTS. Any change to the Plan that would materially increase the
distribution costs to a Portfolio may not be instituted unless such amendment is
approved in the manner provided for board approval in Paragraph 2 hereof and
approved by a vote of at least a majority of such Portfolio's outstanding voting
securities, as defined in the 1940 Act, voting separately from any other
Portfolio of the Trust. Any other material change to the Plan may not be
instituted unless such change is approved in the manner provided for initial
approval in Paragraph 2 hereof.
7. NOMINATION OF TRUSTEES. While this Plan is in effect, the selection and
nomination of Independent Trustees of the Trust shall be committed to the
discretion of the Independent Trustees then in office.
8. RECORDS. The Trust shall preserve copies of this Plan and any related
agreements and all reports made pursuant to Paragraph 4 hereof for a period of
not less than six years from the date of execution of this Plan, or of the
agreements or of such reports, as the case may be, the first two years in an
easily accessible place.
Date: February 24, 2000
POTOMAC INSURANCE TRUST
CLASS B SHARES
DISTRIBUTION PLAN
WHEREAS, the Potomac Insurance Trust (the "Trust") is engaged in business
as an open-end management investment company and is registered as such under the
Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Trust, on behalf of its one or more designated series
presently existing or hereafter established (hereinafter referred to as
"Portfolios"), desires to adopt a Distribution Plan pursuant to Rule l2b-1 under
the 1940 Act and the Board of Trustees of the Trust has determined that there is
a reasonable likelihood that adoption of this Distribution Plan will benefit the
Trust and the shareholders; and
WHEREAS, the Trust intends to employ a registered broker-dealer as
Distributor of the securities of which it is the issuer;
NOW, THEREFORE, the Trust hereby adopts this Distribution Plan (the
"Plan") in accordance with Rule l2b-1 under the 1940 Act on the following terms
and conditions:
1. PAYMENT OF FEES. The Trust is authorized to pay the Distributor
distribution and service fees for each Portfolio listed on Schedule A of this
Plan, as such schedule may be amended from time to time, on an annualized basis,
at such rates as shall be determined from time to time by the Board of Trustees
in the manner provided for approval of this Plan in Paragraph 5, up to the
maximum rates set forth in Schedule A, as such schedule may be amended from time
to time. Such fees shall be calculated and accrued daily and paid monthly or at
such other intervals as shall be determined by the Board in the manner provided
for approval of this Plan in Paragraph 5. The distribution and service fees
shall be payable by the Trust on behalf of a Portfolio regardless of whether
those fees exceed or are less than the actual expenses, described in Paragraph 2
below, incurred by the Distributor with respect to such Portfolio in a
particular year.
2. DISTRIBUTION AND SERVICE EXPENSES. The fee authorized by Paragraph 1 of
this Plan shall be paid pursuant to an appropriate Distribution Agreement in
payment for any activities or expenses intended to result in the sale and
retention of Trust shares, including compensation paid by the Distributor to its
registered representatives, to participating dealers, to participating insurance
companies or to other categories of entities approved by the Board of Trustees
of the Trust that have entered into agreements with the Distributor,
advertising, salaries and other expenses of the Distributor relating to selling
or servicing efforts, expenses of organizing and conducting sales seminars,
printing of prospectuses, statements of additional information and reports for
other than existing shareholders, preparation and distribution of advertising
material and sales literature and other sales promotion expenses, or for
providing ongoing services to shareholders.
<PAGE>
3. ADDITIONAL COMPENSATION. This Plan shall not be construed to prohibit
or limit additional compensation derived from sales charges or other sources
that may be paid to the Distributor pursuant to the aforementioned Distribution
Agreement.
4. THIRD PARTY EXPENSES. Nothing in this Plan shall operate or be
construed to limit the extent to which the Trust's investment adviser or any
other person, other than the Trust, may incur costs and bear expenses associated
with the distribution of Shares of beneficial interest in a Portfolio. The
Trust's investment adviser may from time to time make payments to third parties
out of its advisory fee, not to exceed the amount of that fee, including
payments for fees for shareholder servicing and transfer agency functions. If
such payments are deemed to be indirect financing of an activity primarily
intended to result in the sale of shares issued by a Portfolio within the
context of Rule 12b-1 under the 1940 Act, such payments shall be authorized by
this Plan.
5. BOARD APPROVAL. This Plan shall not take effect with respect to any
Portfolio until it has been approved, together with any related agreements, by
vote of a majority of both (a) the Board of Trustees and (b) those members of
the Board who are not "interested persons" of the Trust, as defined in the 1940
Act, and have no direct or indirect financial interest in the operation of this
Plan or any agreements related to it (the "Independent Trustees"), cast in
person at a meeting or meetings called for the purpose of voting on this Plan
and such related agreements.
6. RENEWAL OF PLAN. This Plan shall continue in full force and effect with
respect to a Portfolio for successive periods of one year from its approval as
set forth in Paragraphs 5 for so long as such continuance is specifically
approved at least annually in the manner provided for approval of this Plan in
Paragraph 5.
7. REPORTS. Any Distribution Agreement entered into pursuant to this Plan
shall provide that the Distributor shall provide to the Board of Trustees and
the Board shall review, at least quarterly, or at such other intervals as
reasonably requested by the Board, a written report of the amounts so expended
and the purposes for which such expenditures were made.
8. TERMINATION. This Plan may be terminated with respect to a Portfolio at
any time by vote of a majority of the Independent Trustees or by a vote of a
majority of the outstanding voting securities of such Portfolio, voting
separately from any other Portfolio of the Trust.
9. AMENDMENTS. Any change to the Plan that would materially increase the
distribution costs to a Portfolio may not be instituted unless such amendment is
approved in the manner provided for board approval in Paragraph 5 hereof and
approved by a vote of at least a majority of such Portfolio's outstanding voting
securities, as defined in the 1940 Act, voting separately from any other
Portfolio of the Trust. Any other material change to the Plan may not be
instituted unless such change is approved in the manner provided for initial
approval in Paragraph 5 hereof.
10. NOMINATION OF TRUSTEES. While this Plan is in effect, the selection
and nomination of Independent Trustees of the Trust shall be committed to the
discretion of the Independent Trustees then in office.
2
<PAGE>
11. RECORDS. The Trust shall preserve copies of this Plan and any related
agreements and all reports made pursuant to Paragraph 6 hereof for a period of
not less than six years from the date of execution of this Plan, or of the
agreements or of such reports, as the case may be, the first two years in an
easily accessible place.
Date: February 24, 2000
3
<PAGE>
POTOMAC INSURANCE TRUST
CLASS B SHARES
DISTRIBUTION PLAN
SCHEDULE A
The maximum annualized fee rate pursuant to Paragraph 1 of the Potomac
Insurance Trust Class B Shares Distribution Plan shall be as follows:
The Potomac OTC Plus Fund
The Potomac OTC/Short Fund
The Potomac 30 Plus Fund
The Potomac 30/Short Fund
The Potomac Small Cap/Plus Fund
The Potomac Small Cap/Short Fund
The Potomac VP Internet Plus Fund
The Potomac Internet/Short Fund
The Potomac Japan/Long Fund
The Potomac Japan/Short Fund
The Potomac Money Market Fund
Up to 1.00% of the average daily net assets
Dated: February 24, 2000
POTOMAC INSURANCE TRUST
MULTIPLE CLASS PLAN PURSUANT TO RULE 18F-3
The Potomac Insurance Trust (the "Trust") hereby adopt this Multiple Class
Plan pursuant to Rule 18f-3 under the Investment Company Act of 1940, as amended
(the "1940 Act").
A. CLASSES OFFERED
---------------
Each series of the Trust (each, a "Fund") offers two classes of shares
pursuant to this Multiple Class Plan. The classes are described below and
require an initial investment of $10,000.
1. CLASS A. Class A shares are offered for purchase to certain insurance
company separate accounts and/or qualified pension and retirement plans that
have entered into an agreement with the Trust ("Participating Separate Accounts
and Plans"). The Participating Separate Accounts and Plans are the shareholders
of Class A shares and not the individual variable annuity or life insurance
contract holders or plan beneficiaries. Class A shares will be sold without any
sales charges and are not subject to an annual distribution or service fee
pursuant to a plan of distribution adopted pursuant to Rule 12b-1 under the 1940
Act.
2. CLASS B. Class B shares also are offered to Participating Separate
Accounts and Plans. There will be no sales charges assessed upon the purchase or
sale of Class B shares. However, Class B shares are subject to Rule 12b-1
distribution or service fees at the annual rate of up to 1.00% of a Fund's
average daily net assets attributable to Class B shares. That fee will be paid
to Participating Separate Accounts and/or Plans in connection with their
services in selling Fund shares, administration of shareholder accounts or other
activities approved by the Board of Trustees.
B. EXPENSE ALLOCATIONS OF EACH CLASS
---------------------------------
Certain expenses may be attributable to a particular class of shares of a
Fund ("Class Expenses"). Class Expenses are charged directly to the net assets
of the particular class and, thus are borne on a pro rata basis by the
outstanding shares of that class.
Each class may pay a different amount of the following other expenses: (1)
distribution and service fees, (2) transfer agent fees identified as being
attributable to a specific class, (3) stationery, printing, postage, and
delivery expenses related to preparing and distributing materials such as
shareholder reports, prospectuses, and proxy statements to current shareholders
of a class, (4) Blue Sky registration fees incurred by a specific class of
shares, (5) Securities and Exchange Commission registration fees incurred by a
specific class of shares, (6) expenses of administrative personnel and services
required to support the shareholders of a specific class, (7) trustees' fees or
expenses incurred as a result of issues relating to a specific class of shares,
(8) accounting expenses relating solely to a specific class of shares, (9)
auditors' fees, litigation expenses, and legal fees and expenses relating to a
specific class of shares, and (10) expenses incurred in connection with
shareholders meetings as a result of issues relating to a specific class of
shares.
<PAGE>
C. EXCHANGE PRIVILEGES
-------------------
Class A and Class B shares of each Fund may be exchanged for shares of the
corresponding Class of other Funds of the Trust that are offered to the to
investors of same Participating Separate Accounts and Plans. These exchange
privileges may be modified or terminated by a Fund.
D. CLASS DESIGNATION
-----------------
Subject to the approval of the Board of Trustees of the Trust, a Fund may
alter the nomenclature for the designation of one or more classes of shares.
E. ADDITIONAL INFORMATION
----------------------
This Multiple Class Plan is qualified by and subject to the terms of the
then current prospectus for the applicable classes; provided, however, that none
of the terms set forth in any such prospectus shall be inconsistent with the
terms of the classes contained in this Plan. The Trust's prospectus contains
additional information about the Class A and Class B shares and the Trust's
multiple class structure.
Dated: February 24, 2000
CODE OF ETHICS
POTOMAC FUNDS
POTOMAC INSURANCE TRUST
and
RAFFERTY ASSET MANAGEMENT, LLC
I. INTRODUCTION
------------
A. FIDUCIARY DUTY. This Code of Ethics has been adopted by the above
named trusts ("Trusts") and Rafferty Asset Management, LLC in compliance with
Rule 17j-1 under the Investment Company Act of 1940, as amended. Capitalized
terms used in this Code are defined in Appendix 1 to this Code. All Appendices
referred to herein are attached to and are a part of this Code.
This Code is based on the principle that the trustees, officers, and
employees of Rafferty and the Trusts have a fiduciary duty to place the
interests of the Funds ahead of their own interests. The Code applies to all
Access Persons and focuses principally on preclearance and reporting of personal
transactions in securities. Access Persons must avoid activities, interests and
relationships that might interfere with making decisions in the best interests
of the Funds.
As fiduciaries, Access Persons must at all times:
1. PLACE THE INTERESTS OF THE FUNDS FIRST. Access Persons must
scrupulously avoid serving their own personal interests ahead of the
interests of the Funds. An Access Person may not induce or cause a Fund
to take action, or not to take action, for personal benefit, rather than
for the benefit of the Fund. For example, an Access Person would violate
this Code by causing a Fund to purchase a Security he or she owned for
the purpose of increasing the price of that Security.
2. AVOID TAKING INAPPROPRIATE ADVANTAGE OF THEIR POSITIONS.
Access Persons may not, for example, use their knowledge of portfolio
transactions to profit by the market effect of such transactions.
Receipt of investment opportunities, prerequisites, or gifts from
persons seeking business with the Trusts or Rafferty could call into
question the exercise of an Access Person's independent judgment.
3. CONDUCT ALL PERSONAL SECURITIES TRANSACTIONS IN FULL
COMPLIANCE WITH THIS CODE INCLUDING THE REPORTING REQUIREMENTS. Doubtful
situations should be resolved in favor of the Funds. Technical
compliance with the Code's procedures will not automatically insulate
from scrutiny any trades that indicate an abuse of fiduciary duties.
B. APPENDICES TO THE CODE. The appendices to this Code are attached to
and are a part of the Code. The appendices include the following:
1. Definitions (Appendix 1),
-----------
2. Contact Persons (Appendix 2),
---------------
<PAGE>
3. Certification of Compliance with Code of Ethics (Appendix 3
-----------------------------------------------
and 3-I),
a) Personal Securities Holdings and Accounts Disclosure Form
---------------------------------------------------------
(Appendix 3-A)
4. Form Letter to Broker, Dealer or Bank (Appendix 4).
-------------------------------------
5. Report of Securities Transactions (Appendix 5)
---------------------------------
6. Initial Public Offering/Private Placement Clearance Form
--------------------------------------------------------
(Appendix 6)
C. APPLICATION OF THE CODE TO INDEPENDENT FUND TRUSTEES. Notwithstanding
the definition of Access Persons, the following provisions do not apply to
Independent Fund Trustees and their Immediate Families.
1. Personal Securities Transactions (Section II)
2. Initial, Quaterly and Annual Holdings Reporting Requirements
(Section III.A.)
3. Receipt and Giving of Gifts (Section IV.B.)
4. Restrictions on Service as a Director of a Publicly-Traded
Company (Section IV.E.)
II. PERSONAL SECURITIES TRANSACTIONS
--------------------------------
A. PROHIBITED TRANSACTIONS.
1. PROHIBITED SECURITIES TRANSACTIONS. The following Securities
Transactions are prohibited and will not be authorized by the Compliance
Officer (or a designee) absent exceptional circumstances. The
prohibitions apply only to the categories of Access Persons specified.
a. INITIAL PUBLIC OFFERINGS (INVESTMENT PERSONNEL ONLY). Any
purchase of Securities by Investment Personnel in an initial public
offering (other than a new offering of a registered open-end
investment company). However, if authorized, the Compliance Officer
will maintain a record of the reasons for such authorization (see
Appendix 6).
b. PENDING BUY OR SELL ORDERS (INVESTMENT PERSONNEL ONLY). Any
purchase or sale of Securities by Investment Personnel on any day
during which any Fund has a pending "buy" or "sell" order in the same
Security (or Equivalent Security) until that order is executed or
withdrawn.
c. SEVEN-DAY BLACKOUT (INVESTMENT PERSONNEL ONLY). Purchases or
sales of Securities by Investment Personnel within seven calendar
days of a purchase or sale of the same Securities (or Equivalent
Securities) by the Funds. For example, if a Fund trades a Security on
day one, day eight is the first day the Investment Personnel may
trade that Security for an account in which he or she has a
beneficial interest.
d. INTENTION TO BUY OR SELL FOR A FUND (ALL ACCESS PERSONS).
Purchases or sales of Securities by an Access Person at a time when
that Access Person intends, or knows of another's intention, to
purchase or sell that Security (or an Equivalent Security) on behalf
of a Fund. This prohibition applies whether the Securities
Transaction is in the same direction (E.G., two purchases) or the
opposite direction (a purchase and sale) as the transaction of the
Fund.
2
<PAGE>
2. ALWAYS PROHIBITED SECURITIES TRANSACTIONS. The following
Securities Transactions are prohibited and will not be authorized under
any circumstances.
a. INSIDE INFORMATION. Any transaction in a Security while in
possession of material nonpublic information regarding the Security
or the issuer of the Security.
b. MARKET MANIPULATION. Transactions intended to raise, lower, or
maintain the price of any Security or to create a false appearance of
active trading.
c. OTHERS. Any other transactions deemed by the Compliance Officer
(or a designee) to involve a conflict of interest, possible
diversions of a corporate opportunity, or an appearance of
impropriety.
3. PRIVATE PLACEMENTS (INVESTMENT PERSONNEL ONLY). Acquisition of
Beneficial Interests in Securities in a private placement by Investment
Personnel is strongly discouraged. The Compliance Officer (or a
designee) will give permission only after considering, among other
facts, whether the investment opportunity should be reserved for a Fund
and whether the opportunity is being offered to the person by virtue of
the person's position as an Investment Person. If a private placement
transaction is permitted, the Compliance Officer will maintain a record
of the reasons for such approval (see Appendix 6). Investment Personnel
who have acquired securities in a private placement are required to
disclose that investment to the Compliance Officer when they play a part
in any subsequent consideration of an investment in the issuer by a
Fund, and the decision to purchase securities of the issuer by a Fund
must be independently authorized by a Portfolio Manager with no personal
interest in the issuer.
B. EXEMPTIONS.
1. The following Securities Transactions are exempt from the
restrictions set forth in Section II.A.
a. MUTUAL FUNDS. Securities issued by any registered open-end
investment companies (including the Funds);
b. NO KNOWLEDGE. Securities Transactions where neither the Access
Person nor an Immediate Family member knows of the transaction before
it is completed (for example, Securities Transactions effected for an
Access Person by a trustee of a blind trust or discretionary trades
involving an investment partnership or investment club in which the
Access Person is neither consulted nor advised of the trade before it
is executed);
c. CERTAIN CORPORATE ACTIONS. Any acquisition of Securities
through stock dividends, dividend reinvestments, stock splits,
reverse stock splits, mergers, consolidations, spin-offs, or other
similar corporate reorganizations or distributions generally
applicable to all holders of the same class of Securities;
d. RIGHTS. Any acquisition of Securities through the exercise of
rights issued by an issuer PRO RATA to all holders of a class of its
Securities, to the extent the rights were acquired in the issue; and
3
<PAGE>
e. MISCELLANEOUS. Any transaction in the following: (1) bankers'
acceptances, (2) bank certificates of deposit, (3) commercial paper,
(4) high quality short-term debt, including repurchase agreements,
(5) Securities that are direct obligations of the U.S. Government,
and (6) other Securities as may from time to time be designated in
writing by the Compliance Officer on the grounds that the risk of
abuse is minimal or non-existent.
2. Personal Transactions in Securities that also are being
purchased, sold or held by a Fund are exempt from the prohibitions of
Sections II.A.1.b, and c, if the Access Person does not, in connection
with his or her regular functions or duties, make, participate in, or
obtain information regarding the purchase or sale of Securities by that
Fund.
THE SECURITIES TRANSACTIONS LISTED IN SECTION II IN THIS
SUBSECTION ARE NOT EXEMPT FROM THE REPORTING REQUIREMENTS OF THE CODE.
3. APPLICATION TO COMMODITIES, FUTURES, OPTIONS ON FUTURES AND
OPTIONS ON BROAD-BASED INDICES. Commodities, futures (including currency
futures and futures on securities comprising part of a broad-based,
publicly traded market based index of stocks) and options on futures are
not subject to the seven-day blackout and prohibited transaction
provisions of Section II.A., but are subject to transaction reporting.
III. REPORTING REQUIREMENTS
----------------------
A. REPORTING REQUIREMENTS FOR ALL ACCESS PERSONS EXCEPT INDEPENDENT
FUND TRUSTEES
1. INITIAL HOLDINGS AND ACCOUNTS REPORT. Any person who becomes an
Access Person of Rafferty or the Funds must submit within 10 days of
becoming an Access Person an Initial Holdings and Accounts Report (see
Appendix 3-A) to the Compliance Officer listing all Securities accounts
and securities that he or she holds in such accounts in which that
Access Person (or Immediate Family member) has Beneficial Interest..
2. QUARTERLY REPORTING REQUIREMENTS. Every Access Person and members
of his or her Immediate Family must arrange for the Compliance Officer
to receive directly from any broker, dealer, or bank that effects any
Securities Transaction, duplicate copies of each confirmation for each
such transaction and periodic statements for each brokerage account in
which such Access Person has a Beneficial Interest. Attached hereto as
Appendix 4 is a form of letter that may be used to request such
documents from such entities. All copies must be received no later than
10 days after the end of the calendar quarter. Each confirmation or
statement must disclose the following information:
a) the date of the transaction;
b) the title (and interest rate and maturity date, if applicable)
c) the number of shares and principal amount
d) the nature of the transaction (e.g., purchase, sale);
e) the price of the Security; and
f) the name of the broker, dealer or bank through which the trade
was effected.
If an Access Person is not able to arrange for duplicate
confirmations and periodic statements to be sent that contain the
information required above, the Access Person must submit a Quarterly
4
<PAGE>
Transaction Report (see Appendix 5) within 10 days after the completion
of each calendar quarter to the Compliance Officer.
3. Every Access Person who establishes a Securities account during
the quarter in which that Access Person (or Immediate Family member) has
Beneficial Interest must submit an Account Report (see Appendix 5) to
the Compliance Officer. This report must be submitted to the Compliance
Officer within 10 days after the completion of each calendar quarter.
4. ANNUAL HOLDINGS AND ACCOUNTS REPORT. Every Access Person must
submit an Annual Holdings and Accounts Report (see Appendix 3-A) listing
all Securities accounts and securities in which that Access Person (or
Immediate Family member) has Beneficial Interest. The information in the
Annual Holdings Report must be current as of a date no more than 30 days
before the report is submitted. The completed report should be submitted
to the Compliance Officer by December 31 following the end of the
calendar year.
B. REPORTING REQUIREMENTS FOR INDEPENDENT FUND TRUSTEES
Each Independent Fund Trustee (and their Immediate Families) must
report to the Compliance Officer any trade in a Security by any account
in which the Independent Fund Trustee has any Beneficial Interest if the
Independent Fund Trustee knew or, in the ordinary course of fulfilling
his or her duty as a Trustee of the Trusts, should have known that
during the 15-day period immediately preceding or after the date of the
transaction in a Security by the Trustee such Security (or an Equivalent
Security) was or would be purchased or sold by the Fund or such purchase
or sale by the Fund was or would be considered by the Fund or by
Rafferty for the Fund. Independent Fund Trustees who need to report such
transactions should refer to the procedures outlined in Section III.A.2.
C. EXEMPTIONS, DISCLAIMERS AND AVAILABILITY OF REPORTS
1. A Securities Transaction involving the following circumstances or
Securities are exempt from the Reporting Requirements discussed above:
(1) neither the Access Person nor an Immediate Family Member had any
direct or indirect influence or control over the transaction; (2)
Securities directly issued by the U.S. Government; (3) bankers'
acceptances; (4) bank certificates of deposit; (5) commercial paper; (6)
high quality short-term debt instruments, including repurchase
agreements; (7) shares issued by open-end mutual funds; and (7) other
Securities as may from time to time be designated in writing by the
Compliance Officer on the grounds that the risk of abuse is minimal or
non-existent.
In addition, no Access Person of Rafferty shall be required to make a
Quarterly Transaction Report where such report would duplicate
information recorded by Heritage pursuant to Rule 204-2(a) of the
Investment Advisers Act of 1940.
2. DISCLAIMERS. Any report of a Securities Transaction for the
benefit of a person other than the individual in whose account the
transaction is placed may contain a statement that the report should not
be construed as an admission by the person making the report that he or
she has any direct or indirect beneficial ownership in the Security to
which the report relates.
3. AVAILABILITY OF REPORTS. All information supplied pursuant to this
Code may be made available for inspection to the Board of Trustees of
the Trusts, the Board of Directors of Rafferty, the Compliance Officer,
5
<PAGE>
any party to which any investigation is referred by any of the
foregoing, the SEC, any self-regulatory organization of which Rafferty
is a member, any state securities commission, and any attorney or agent
of the foregoing or of the Trusts.
IV. FIDUCIARY DUTIES
----------------
A. CONFIDENTIALITY. Access Persons are prohibited from revealing
information relating to the investment intentions, activities or portfolios of
the Funds except to persons whose responsibilities require knowledge of the
information.
B. GIFTS. The following provisions on gifts apply to all Investment
Personnel.
1. ACCEPTING GIFTS. On occasion, because of their position with the
Trusts, Investment Personnel may be offered, or may receive without
notice, gifts from clients, brokers, vendors, or other persons not
affiliated with such entities. Acceptance of extraordinary or
extravagant gifts is not permissible. Any such gifts must be declined or
returned in order to protect the reputation and integrity of the Trusts
and Rafferty. Gifts of a nominal value (I.E., gifts whose reasonable
value is no more than $100 a year), and customary business meals,
entertainment (E.G., sporting events), and promotional items (E.G.,
pens, mugs, T-shirts) may be accepted.
If an Investment Person receives any gift that might be prohibited
under this Code, the Investment Person must inform the Compliance
Officer.
2. SOLICITATION OF GIFTS. Investment Personnel may not solicit gifts
or gratuities.
3. GIVING GIFTS. Investment Personnel may not personally give any
gift with a value in excess of $100 per year to persons associated with
securities or financial organizations, including exchanges, other member
organizations, commodity firms, news media, or clients of Rafferty.
C. CORPORATE OPPORTUNITIES. Access Persons may not take personal
advantage of any opportunity properly belonging to the Trusts or Rafferty. This
includes, but is not limited to, acquiring Securities for one's own account that
would otherwise be acquired for a Fund.
D. UNDUE INFLUENCE. Access Persons may not cause or attempt to cause any
Fund to purchase, sell or hold any Security in a manner calculated to create any
personal benefit to the Access Person. If an Access Person or Immediate Family
member stands to benefit materially from an investment decision for a Fund which
the Access Person is recommending or participating in, the Access Person must
disclose to those persons with authority to make investment decisions for the
Fund (or, if the Access Person in question is a person with authority to make
investment decisions for the Fund, to the Compliance Officer) any Beneficial
Interest that the Access Person (or Immediate Family member) has in that
Security or an Equivalent Security, or in the issuer thereof, where the decision
could create a material benefit to the Access Person (or Immediate Family
member) or the appearance of impropriety. The person to whom the Access Person
reports the interest, in consultation with the Compliance Officer, must
determine whether or not the Access Person will be restricted in making
investment decisions.
E. SERVICE AS A DIRECTOR. No Investment Person may serve on the board of
directors of a publicly-held company (other than the Trusts) absent prior
written authorization by the Compliance Officer. This authorization will rarely,
if ever, be granted and, if granted, normally will require that the affected
6
<PAGE>
Investment Person be isolated, through a "Chinese Wall" or other procedures,
from those making investment decisions related to the issuer on whose board the
person sits.
V. COMPLIANCE WITH THIS CODE OF ETHICS
-----------------------------------
A. COMPLIANCE OFFICER REVIEW
1. INVESTIGATING VIOLATIONS OF THE CODE. The Compliance Officer
is responsible for investigating any suspected violation of the Code and
shall report the results of each investigation to the President of
Rafferty. The President of Rafferty together with the Compliance Officer
are responsible for reviewing the results of any investigation of any
reported or suspected violation of the Code. Any violation of the Code
by an Access Person will be reported to the Boards of Trustees of the
Trusts no less frequently than each regular quarterly meeting.
2. ANNUAL REPORTS. The Compliance Officer will review the Code at
least once a year, in light of legal and business developments and
experience in implementing the Code, and will report to the Boards of
Trustees of the Trusts:
a. Summarizing existing procedures concerning personal investing
and any changes in the procedures made during the past year;
b. Identifying any violation requiring significant
remedial action during the past year; and
c. Identifying any recommended changes in existing
restrictions or procedures based on its experience under the
Code, evolving industry practices, or developments in applicable
laws or regulations.
B. REMEDIES
1. SANCTIONS. If the Compliance Officer and the President of
Rafferty determine that an Access Person has committed a violation of
the Code following a report of the Compliance Officer, the Compliance
Officer and the President of Rafferty may impose sanctions and take
other actions as they deem appropriate, including a letter of caution or
warning, suspension of personal trading rights, suspension of employment
(with or without compensation), fine, civil referral to the SEC,
criminal referral, and termination of the employment of the violator for
cause. The Compliance Officer and the President of Rafferty also may
require the Access Person to reverse the trade(s) in question and
forfeit any profit or absorb any loss derived therefrom. The amount of
profit shall be calculated by the Compliance Officer and the President
of Rafferty and shall be forwarded to a charitable organization selected
by the Compliance Officer and the President of Rafferty. The Compliance
Officer and the President of Rafferty may not review his or her own
transaction.
2. SOLE AUTHORITY. The Compliance Officer and the President of
Rafferty have sole authority, subject to the review set forth in Section
V.B.3 below, to determine the remedy for any violation of the Code,
including appropriate disposition of any monies forfeited pursuant to
this provision. Failure to promptly abide by a directive to reverse a
trade or forfeit profits may result in the imposition of additional
sanctions.
7
<PAGE>
3. REVIEW. Whenever the Compliance Officer and the President of
Rafferty determine that an Access Person has committed a violation of
this Code that merits remedial action, they will report no less
frequently than quarterly to the Boards of Trustees of the Trusts,
information relating to the investigation of the violation, including
any sanctions imposed. The Boards of Trustees of the Trusts may modify
such sanctions as it deems appropriate. The Boards of Trustees of the
Trusts and the Compliance Officer and the President of Rafferty shall
have access to all information considered by the Compliance Officer in
relation to the case. The Compliance Officer may determine whether or
not to delay the imposition of any sanctions pending review by the
applicable Board.
C. EXCEPTIONS TO THE CODE. Although exceptions to the Code will rarely,
if ever, be granted, the Compliance Officer may grant exceptions to the
requirements of the Code on a case by case basis if the Compliance Officer finds
that the proposed conduct involves negligible opportunity for abuse. All such
exceptions must be in writing and must be reported as soon as practicable to the
Boards of Trustees of the Trusts at its next regularly scheduled meeting after
the exception is granted.
D. COMPLIANCE CERTIFICATION. Each current Access Person and each
newly-hired Access Person shall certify that he or she has received, read and
understands the Code by executing the Certification of Compliance with the Code
of Ethics form (see Appendix 3). In addition, by December 31 following the end
of the prior calendar year, all Access Persons will be required to re-certify on
such form (see Appendix 3) that they have read and understand the Code, that
they have complied with the requirements of the Code, and that they have
reported all Securities Transactions required to be disclosed or reported
pursuant to the requirements of this Code. Independent Fund Trustees should
complete Appendix 3-I only.
E. INQUIRIES REGARDING THE CODE. The Compliance Officer will answer any
questions about the Code or any other compliance-related matters.
August 26, 1997, as amended February 24, 2000
8
<PAGE>
APPENDIX 1
DEFINITIONS
"ACCESS PERSON" means any trustee, director, officer or Advisory Person
of Rafferty or the Trusts.
"ADVISORY PERSON" means (1) any employee of Rafferty and the Trusts (or
of any company in a control relationship with such companies) who, in connection
with his or her regular functions or duties, makes, participates in, or obtains
information regarding the purchase or sale of a security by the Funds, or whose
functions relate to the making of any recommendation with respect to such
purchases or sales, and (2) any natural person in a control relationship to such
companies who obtains information concerning the recommendations made to the
Funds with respect to the purchase and sale of securities by the Funds.
"BENEFICIAL INTEREST" means the opportunity, directly or indirectly,
through any contract, arrangement, understanding, relationship or otherwise, to
profit, or share in any profit derived from, a transaction in the subject
Securities. An Access Person is deemed to have a Beneficial Interest in
Securities owned by members of his or her Immediate Family. Common examples of
Beneficial Interest include joint accounts, spousal accounts, UTMA accounts,
partnerships, trusts and controlling interests in corporations. Any uncertainty
as to whether an Access Person has a Beneficial Interest in a Security should be
brought to the attention of the Compliance Officer. Such questions will be
resolved in accordance with, and this definition shall be subject to, the
definition of "beneficial owner" found in Rules 16a-1(a)(2) and (5) promulgated
under the Securities Exchange Act of 1934.
"CODE" means this Code of Ethics, as it may be amended from time to
time.
"COMPLIANCE OFFICER" means the Compliance Officer of Rafferty and the
persons designated in Appendix 2, as such Appendix shall be amended from time to
time.
"EQUIVALENT SECURITY" means any Security issued by the same entity as
the issuer of a subject Security, including options, rights, stock appreciation
rights, warrants, preferred stock, restricted stock, phantom stock, bonds, and
other obligations of that company or security otherwise convertible into that
security. Options on securities are included even if, technically, they are
issued by the Options Clearing Corporation or a similar entity.
"FUND" and "FUNDS" mean one or more of the portfolios of the Potomac
Funds, an investment company registered under the 1940 Act for which Rafferty
serves as investment adviser.
"IMMEDIATE FAMILY" of an Access Person means any of the following
persons who reside in the same household as the Access Person:
child grandparent son-in-law
stepchild spouse daughter-in-law
grandchild sibling brother-in-law
parent mother-in-law sister-in-law
stepparent father-in-law
<PAGE>
Immediate Family includes adoptive relationships and any other relationship
(whether or not recognized by law) which the Compliance Officer determines could
lead to the possible conflicts of interest, diversions of corporate opportunity,
or appearances of impropriety which this Code is intended to prevent.
"INDEPENDENT FUND TRUSTEE" means a trustee of a Trust who is not an
"interested person" as that term is defined in Section 2(a)(19) of the 1940 Act.
"INITIAL PUBLIC OFFERING" is an offering of securities registered under
the Securities Act of 1933 by an issuer who immediately before the registration
of such securities was not subject to the reporting requirements of sections 13
or 15(d) of the Securities Exchange Act of 1934.
"INVESTMENT PERSONNEL" and "INVESTMENT PERSON" mean (1) employees of
Rafferty or the Trusts (or of any company in a control relationship to such
companies) who, in connection with his or her regular functions or duties, makes
or participates in making recommendations regarding the purchase or sale of a
security, or (2) any natural person who controls Rafferty or the Trusts and who
obtains information concerning recommendations made to the Funds regarding the
purchase and sale of securities by the Funds. References to Investment Personnel
include Portfolio Managers.
"1940 ACT" means the Investment Company Act of 1940, as amended.
"PRIVATE PLACEMENT" means a limited offering exempt from registration
pursuant to Rules 504, 505 or
506 or under Section 4(2) or 4(6) of the Securities Act of 1933.
"PORTFOLIO MANAGER" means a person who has or shares principal
day-to-day responsibility for managing the portfolio of a Fund.
"RAFFERTY" means Rafferty Asset Management, LLC.
"SEC" means the Securities and Exchange Commission.
"SECURITY" includes stock, notes, bonds, debentures, and other evidences
of indebtedness (including loan participations and assignments), limited
partnership interests, investment contracts, and all derivative instruments of
the foregoing, such as options and warrants. "Security" does not include futures
and options on futures, but the purchase and sale of such instruments are
nevertheless subject to the reporting requirements of the Code.
"SECURITIES TRANSACTION" means a purchase or sale of Securities in which
an Access Person or a member of his or her Immediate Family has or acquires a
Beneficial Interest.
"TRUSTS" means the Potomac Funds and the Potomac Insurance Trust, each
an investment company registered under the 1940 Act.
POWER OF ATTORNEY
The undersigned trustees of the Potomac Insurance Trust, a Massachusetts
business trust (the "Trust"), does hereby constitute and appoint Daniel O'Neill,
Philip A. Harding, and Robert J. Zutz, the true and lawful attorneys and agents
of the undersigned, with full power of substitution, to do any and all acts and
things and execute any and all instruments that said attorneys or agents, may
deem necessary or advisable or which may be required to enable the Trust to
comply with the Securities Act of 1933, as amended, the Investment Company Act
of 1940, as amended, the laws of the jurisdictions in which securities of the
Trust may be offered and sold, and any rules, regulations, or requirements of
the Securities and Exchange Commission ("SEC"), or of the securities commission
or other agency of any such jurisdiction in respect thereof, in connection with
the registration for sale of its securities under the Securities Act of 1933, as
amended, and the registration and qualification, under the securities laws of
any such jurisdiction, including specifically, but without limiting the
generality of the foregoing, the power and authority to sign in the name and on
behalf of the undersigned trustee, the Trust's Registration Statement on Form
N-1A and Notification of Registration on Form N-8A, any registration statement
on any other form adopted by the SEC, any amendments or post-effective
amendments of any of the foregoing and the applicable form of any such
jurisdiction, with respect to the Trust and its Shares of Beneficial Interest to
be filed with the SEC and the securities commission or other agency of any such
jurisdiction under said Acts, any and all amendments and supplements to said
amendments or post-effective amendments and any other instruments or documents
filed as part of or in connection with said Registration Statements, amendments,
or supplements; and the undersigned does hereby ratify and confirm all that said
attorneys and agents, or any of them, shall do or cause to be done by virtue
thereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents as of
this 24th day of February, 2000.
/s/ Lawrence C. Rafferty /s/ Jay F. Higgins
- ---------------------------------- ------------------------------
Lawrence C. Rafferty Jay F. Higgins
/s/ Daniel J. Byrne /s/ Gerald E. Shanley III
- ---------------------------------- ------------------------------
Daniel J. Byrne Gerald E. Shanley III
