<PAGE>
POLYNOUS GROWTH FUND
ANNUAL REPORT
July 31, 1998
Polynous Capital Management, Inc., Investment Adviser
(800) 924-3863
<PAGE>
Dear Shareholder,
The Polynous Growth Fund's results for its fiscal year ended July 31, 1998
ended up being a disappointing return of -1.33 percent (-5.77 percent if one
had paid the maximum sales load at the beginning of the fiscal year). The
Fund's return was somewhat below the Russell 2000 small company index return of
2.31 percent for the 12 months ending July 31, 1998. Until the last three
months of the fiscal year, however, the Fund had produced a fiscal year-to-date
return of around 20 percent. In May 1998, however, investor sentiment about
smaller growth stocks suddenly turned negative although there was no apparent
catalyst for such a sentiment change.
Reviewing typically important factors that influence stock price performance
such as interest rates, economic growth, company growth rates, and stock
valuations, we believe that there are no currently negative factors to have
caused such a sentiment change. Interest rates are at 25-year lows and, with
the extremely low current inflation rates, appear to be in no danger of
increasing. The economy is still growing strongly as year-over-year GDP growth
for the last four quarters is around four percent.
Although overall corporate earnings growth rates are beginning to slow, smaller
growth companies typically produce more rapid earnings growth than do larger
companies. We believe companies in our Fund's portfolio have the potential to
produce even more attractive earnings growth than the average small growth
company. Currently, our internally projected 1998 earnings growth rate for our
portfolio companies is around 25 percent.
Average valuations for smaller companies in general are also more attractive
than the historically high 20-times earnings valuation of the S&P 500 large
company index. We believe our Fund's portfolio was even more attractively
positioned earlier in the year when it was valued at only 16-times projected
earnings. We have now found out, however, that such inexpensive valuations
unfortunately have little significance in the current environment as the Fund's
portfolio is now selling at an average price/earnings ratio of only 13-times
1998's projected earnings.
With many economic and fundamental factors still appearing to be quite
positive, then what other reasons might there be for the recent general decline
in small growth companies? We now believe that there are two primary short-term
but non-fundamental factors affecting small growth companies currently.
The first factor is a structural change in the definition of a "small-cap"
company where many investment managers, for reasons discussed below, are now
stretching the upper market valuation limit for such companies to as high as $5
billion. The second factor is that 1998 began with great expectations for small
companies to outperform larger companies. With the short-term focus of many
investors currently, however, we believe that a substantial number of investors
decided to "give up" on small companies for the remainder of 1998 after the
first quarter's small-cap returns were less than S&P 500 returns.
The first factor mentioned is what we described as a structural change in the
small-cap market. Smaller growth companies have long been very popular with
investors given the
<PAGE>
significantly higher growth rates of smaller companies relative to larger
companies. That intrinsic attractiveness, however, has resulted in a tremendous
amount of investor assets being allocated to small growth companies relative to
the size of the companies themselves.
Such overall asset growth has also dramatically increased the assets under
management of traditional small company oriented investment management firms.
Five years ago, a typical small company investment specialist might have had
$500 million under management allocated to a well-researched portfolio of 50
stocks. Today, however, there are many small company specialists who now have
$2 billion to $5 billion under management and the number of companies in their
portfolios have now swelled to include 150 to 200 stocks.
Many of such managers have now also stretched the definition of a small-cap
stock from being a company of less than $1 billion in market capitalization to
being up to even $5 billion in market capitalization. With such stretching of
market capitalizations by "small-cap" managers, many of such managers appear to
be currently discarding what we regard as classic small growth companies of
between $250 million and $500 million in market capitalization. Traditional
small growth companies in this size range appear to currently be of less
interest to such managers as they now need to use larger market capitalization
stocks to soak up all of the assets they are now trying to manage.
The other factor mentioned that appears to be affecting smaller growth
companies currently is relative performance. Between the structural factors
mentioned above as many "small-cap" managers are now owning larger stocks and
also the overall popularity of index funds which keep driving up the prices and
valuations of larger capitalization stocks, many small-cap stocks have not
recently kept up with the extraordinary performance of larger stocks. At some
point, the valuation differential between larger stocks and smaller stock will
reach an absurd extreme and smaller stocks will suddenly start outperforming
larger stocks. Currently, however, the less attractive recent relative
performance of smaller stocks appears to be causing some investors to allocate
assets away from smaller companies.
Although the trends mentioned above may cause some to question if smaller
growth companies will ever outperform larger companies again, we strongly
believe that the answer to such a question is YES and is based on the
significant valuation differences that currently exist between small growth
companies and larger companies. Valuations sometimes do not matter in the face
of other stronger market trends for periods of up to six months, but the long-
term efficiency of U.S. financial markets will not usually permit significant
valuation differences between different types of companies to persist for very
long.
As mentioned above, at the end of the fiscal year our Fund's portfolio was
valued at a price/earnings ratio of 13-times 1998 projected earnings with such
projected earnings also implying a 25 percent year-over-year growth rate. Such
statistics are in contrast to the overall market which was valued at about 20-
times 1998 earnings with a projected year-over-year growth rate of less than
ten percent.
The financial characteristics of our companies also suggest that astute
investors will ultimately find them attractive. Approximately fifty percent of
our portfolio companies are
<PAGE>
typically debt free at the end of each year. We believe that approximately
eighty percent of our companies have the ability to indefinitely support their
currently high rates of growth with either internal cash flow or their current
cash resources. The remaining companies, while they may require some external
financing to further support their growth, should have ample debt capacity if
needed and already conservative capital structures. In an overall environment
of slowing corporate earnings growth, we also believe strongly that if we are
correct with our earnings growth projections, that many of our companies will
become attractive to other investors.
Apart from the individual companies themselves in which the Fund is invested,
we also believe that the sectors in which our investments are concentrated have
attractive fundamentals.
The largest sector, Consumer Services (comprising 26 percent of the Fund), is
currently supported by real consumer income growth of four percent annually
which is a high for our current economic expansion and which is very high
historically for any economic expansion. Behind the strong real growth is our
economy's currently low unemployment and low inflation. Some of our leading
companies in this sector are Children's Place, 3.58% of net assets (children's
apparel retailer with 30 percent growth selling for 18-times earnings), Marks
Bros. Jewelers, 3.18% of net assets (jewelry retailer with 20 percent growth
selling for 13-times earnings), and Claire's Stores, 2.65% of net assets (teen
accessories and apparel retailer with 20 percent growth selling for 14-times
earnings).
The next largest sector, Business Services (comprising 16 percent of the Fund),
is benefiting from the continuing trend of more and more businesses outsourcing
basic business functions to other organizations who specialize in such
functions. Some of our leading investments in this sector are Compass
International Services, 3.16% of net assets (printing/marketing/collections
services supplier with 20 percent growth selling for 15-times earnings), SOS
Staffing Services, 2.87% of net assets (temporary staffing services with 20
percent growth selling for 16-times earnings), and International Total
Services, 2.78% of net assets (aviation support services and security services
with 20 percent growth selling for nine-times earnings).
The next three largest sectors, Technology, Capital Goods, and Health Care are
all about equal in size at between 11 to 12 percent each of the Fund. Our
Technology and Capital Goods companies all have similar characteristics in that
each company's products promote significant productivity gains for their
customers using the products. Our Health Care investments are mainly service
oriented but with a central theme that each company is an innovative and more
economically efficient provider of specific niche-oriented Health Care
services.
Our other consumer-oriented investments are in Consumer Durables (nine percent
of the Fund) and Consumer Non-Durables (seven percent of the Fund). These
companies should also be supported by the strong current growth in both real
consumer income and consumer spending. Significant investments in these two
areas are Meadowcraft, 3.52% of net assets (wrought iron furniture manufacturer
with 15 percent growth selling for 10-times earnings)
<PAGE>
and Lifetime Hoan, 3.00% of net assets (housewares manufacturer with 15 percent
growth selling for 10-times earnings).
While we will not be correct with all of the projected earnings growth rates
mentioned above, we do believe strongly that the firm's comprehensive seven-
step research process and five-step portfolio management process will enhance
our chances of making correct assumptions and analytical conclusions about a
substantial majority of our current portfolio companies. And while future
returns are also uncertain, from our perspective we also note a reasonable
amount of interest from very sophisticated investors in the types of companies
in which the Fund invests. Our firm's services have become increasingly
attractive to institutional investors such as pension plans and college
endowment funds. Such investors have allocated our firm $100 million in new
assets so far in 1998 to invest in the types of companies that are apparently
of little interest to other investors currently. In fact, most of our new
institutional clients have chosen our firm as an alternative to their previous
"small-cap" managers who now own substantially larger companies.
In closing this report, I would also like to add a brief additional update on
Polynous Capital Management. With your support and with the support of our new
institutional clients, total firm assets under management are now above $150
million. We will not ultimately outgrow our ability to continue investing in
the classic small growth companies in which we specialize, however, as we
anticipate closing our small-cap product to new investors once assets under
management reach $500 million. To support our growth, the firm also now has
grown to eight employees. In April of this year we also moved to 4,600 square
feet of new office space (a 150 percent increase!) and now have the capability
of ultimately growing to 19 employees in our current offices to further support
our future growth.
Without your support, such growth would not have been possible and we very much
appreciate your commitment to and investment in the Polynous Growth Fund. We
would also like to add, however, that we are very "client-friendly" and if you
would ever like an update on the Fund, please feel free to give me a call.
Yours truly,
/s/ Kevin L. Wenck
Kevin L. Wenck
President
Past performance is not indicative of future results. Share price and returns
will fluctuate and when redeemed, shares may be worth more or less than their
original investment. The one year return for the Class A shares as of 6/30/98
was 8.40% and since inception average annual return of 11.75%. Class A shares
returns reflect a maximum sales load of 4.5%. Inception date of the Fund is
08/12/96. There are special risks associated with investing in small-cap stocks
which may be subject to a higher degree of market risk than large-cap stocks
due to market illiquidity. All individual stockholdings are as of 07/31/98. The
Polynous Growth Fund is distributed by FPS Broker Services, Inc. This report is
not authorized for distribution to prospective investors in the Fund unless
preceded by or accompanied by a prospectus.
-DFU 9/98
<PAGE>
POLYNOUS GROWTH FUND
SCHEDULE OF INVESTMENTS JULY 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
---------- ------------
<C> <S> <C>
COMMON STOCKS - 95.71%
BUSINESS SERVICES - 16.30%
53,100 American Bank Note Holographics, Inc.*............... $ 434,756
78,300 Compass International Services Corp.*................ 856,406
21,700 ExecuStay Corp.*..................................... 233,275
51,100 Global DirectMail Corp.*............................. 677,075
118,300 International Total Services, Inc.*.................. 754,163
29,100 RemedyTemp, Inc.*.................................... 687,487
37,700 SOS Staffing Services, Inc.*......................... 777,562
------------
4,420,724
------------
CAPITAL GOODS - 11.05%
19,000 American Buildings Co.*.............................. 572,375
40,100 Gradall Industries, Inc.*............................ 666,663
15,000 NCI Building Systems, Inc.*.......................... 346,875
38,600 OmniQuip International, Inc. ........................ 583,825
21,800 Regal-Beloit Corp.................................... 491,863
14,700 Roper Industries, Inc. .............................. 337,181
------------
2,998,782
------------
CONSUMER DURABLES - 9.00%
21,100 Crossmann Communities, Inc.*......................... 654,100
83,400 Meade Instruments Corp.*............................. 834,000
76,000 Meadowcraft, Inc.*................................... 954,750
------------
2,442,850
------------
CONSUMER NON-DURABLES - 7.40%
79,300 Lifetime Hoan Corp. ................................. 812,825
49,000 Q.E.P. Company, Inc.*................................ 453,250
57,500 Quaker Fabric Corp.*................................. 740,313
------------
2,006,388
------------
CONSUMER SERVICES - 26.10%
12,800 Applebee's International, Inc........................ 284,800
97,100 Children's Place Retail Stores, Inc.*................ 971,000
34,400 Claire's Stores, Inc. ............................... 718,100
22,200 Finish Line, Inc., Class A*.......................... 480,075
33,200 Finlay Enterprises, Inc.*............................ 763,600
30,100 Friedman's, Inc., Class A*........................... 357,437
66,900 Gadzooks, Inc.*...................................... 827,887
47,000 Marks Bros. Jewelers, Inc.*.......................... 863,625
34,000 Rio Hotel & Casino, Inc.*............................ 624,750
70,300 Stein Mart, Inc.*.................................... 742,544
101,700 Track'n Trail *...................................... 444,937
------------
7,078,755
------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
POLYNOUS GROWTH FUND
SCHEDULE OF INVESTMENTS -- CONTINUED JULY 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
---------- ------------
<C> <S> <C>
COMMON STOCKS - CONTINUED
FINANCE - 0.98%
17,300 Republic Bancorp, Inc., Class A*.................... $ 265,988
------------
HEALTH CARE - 10.94%
27,400 ADAC Laboratories*.................................. 746,650
12,500 Coast Dental Services, Inc.*........................ 146,875
35,600 Healthcare Recoveries, Inc.*........................ 582,950
77,800 PhyMatrix Corp.*.................................... 481,388
63,000 Prime Medical Services, Inc.*....................... 535,500
80,600 ProMedCo Management Company*........................ 473,525
------------
2,966,888
------------
TECHNOLOGY - 11.93%
31,100 BARRA, Inc.*........................................ 734,738
65,300 DataWorks Corp.*.................................... 428,531
29,400 Information Management Associates, Inc.*............ 264,600
52,100 Melita International Corp.*......................... 628,456
108,800 Princeton Video Image, Inc.*........................ 544,000
53,000 Richardson Electronics, Ltd......................... 636,000
------------
3,236,325
------------
TRANSPORTATION - 2.01%
60,500 Motor Cargo Industries, Inc.*....................... 544,500
------------
TOTAL COMMON STOCKS (COST $27,760,183).............. 25,961,200
------------
<CAPTION>
PRINCIPAL
AMOUNT
---------- SHORT-TERM INVESTMENTS - 5.31%
<C> <S> <C>
$1,439,987 The Bank of New York Cash Reserve, 4.60%............ 1,439,987
------------
TOTAL SHORT TERM INVESTMENTS (COST $1,439,987)...... 1,439,987
------------
TOTAL INVESTMENTS (COST $29,200,170**) - 101.02%.... 27,401,187
OTHER LIABILITIES, LESS OTHER ASSETS - (1.02%)...... (277,304)
------------
NET ASSETS - 100.00%................................ $ 27,123,883
============
*Non-income producing security
**Cost for Federal income tax purposes is $29,210,342 and net unrealized
depreciation consists of:
Gross unrealized appreciation....................... $ 2,424,653
Gross unrealized depreciation....................... (4,223,636)
------------
Net unrealized depreciation......................... $ (1,798,983)
============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
POLYNOUS GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES JULY 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments at market value (Cost $29,200,170) (Note 1)......... $ 27,401,187
Cash............................................................ 45,826
Receivables:
Investment securities sold..................................... 9,975
Capital stock sold............................................. 27,755
Dividends and interest......................................... 4,175
Deferred organization costs (Note 1)............................ 45,519
Other assets.................................................... 11,347
------------
TOTAL ASSETS.................................................. 27,545,784
------------
LIABILITIES:
Payables:
Investment securities purchased................................ 311,875
Capital stock redeemed......................................... 39,860
Due to Adviser................................................. 19,790
Accrued expenses............................................... 44,150
Accrued distribution expense................................... 6,226
------------
TOTAL LIABILITIES............................................. 421,901
------------
NET ASSETS:
Applicable to 2,110,232 shares; unlimited number of shares of
beneficial interest authorized with no par value............... $ 27,123,883
============
Net asset value and redemption price ($27,123,883 / 2,110,232
shares)........................................................ $ 12.85
============
Offering price per share ($12.85 / 0.9550)...................... $ 13.46
============
NET ASSETS CONSIST OF:
Paid-in capital................................................. $ 27,246,946
Accumulated net realized gain on investments.................... 1,675,920
Net unrealized depreciation on investments...................... (1,798,983)
------------
NET ASSETS.................................................... $ 27,123,883
============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
POLYNOUS GROWTH FUND
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
JULY 31, 1998
-------------
<S> <C>
INVESTMENT INCOME:
Dividends...................................................... $ 155,133
Interest....................................................... 115,438
------------
TOTAL INCOME................................................. 270,571
------------
EXPENSES:
Investment advisory fees (Note 3).............................. 278,247
Distribution expense (Note 3).................................. 69,562
Administration fees............................................ 64,028
Professional fees.............................................. 50,400
Transfer agent fees............................................ 40,975
Registration fees.............................................. 25,582
Accounting fees................................................ 27,289
Custodian fees................................................. 15,424
Amortization of organization costs (Note 1).................... 14,987
Insurance expense.............................................. 11,844
Printing expense............................................... 6,000
Trustees' fees................................................. 5,000
Miscellaneous fees............................................. 800
------------
TOTAL EXPENSES............................................... 610,138
Expenses waived by Adviser (Note 3).......................... (56,877)
------------
NET EXPENSES................................................. 553,261
------------
NET INVESTMENT LOSS............................................. (282,690)
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments............................... 3,371,252
Net realized gain on option contracts written.................. 5,946
Net realized gain on in-kind redemption........................ 81,276
Net change in unrealized appreciation (depreciation) on
investments................................................... (4,261,443)
------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS.............. (802,969)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS............ $ (1,085,659)
============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
POLYNOUS GROWTH FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR AUGUST 12, 1996*
ENDED THROUGH
JULY 31, 1998 JULY 31, 1997
OPERATIONS: ------------- ----------------
<S> <C> <C>
Net investment income (loss)........................................ $ (282,690) $ 1,505,354
Net realized gain (loss) on investments............................. 3,371,252 (942,391)
Net realized gain on option contracts written....................... 5,946 0
Net realized gain on in-kind redemption............................. 81,276 0
Net change in unrealized appreciation (depreciation) on
investments........................................................ (4,261,443) 2,462,460
------------ ------------
Net increase (decrease) in net assets resulting from operations..... (1,085,659) 3,025,423
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................... (1,505,415) 0
Net capital gains................................................... (810,949) (29,214)
------------ ------------
Total distributions................................................. (2,316,364) (29,214)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold........................................... 12,377,540 24,708,409
Reinvestment of dividends........................................... 2,048,552 26,628
Cost of shares redeemed............................................. (6,409,241) (5,406,152)
------------ ------------
Increase in net assets derived from capital share transactions (a).. 8,016,851 19,328,885
------------ ------------
TOTAL INCREASE IN NET ASSETS...................................... 4,614,828 22,325,094
------------ ------------
NET ASSETS:
Beginning of period................................................. 22,509,055 183,961
------------ ------------
End of period....................................................... $ 27,123,883 $ 22,509,055
============ ============
(a)Transactions in capital stock were:
Shares sold...................................................... 826,466 1,977,549
Shares issued through reinvestment of dividends.................. 153,680 2,107
Shares redeemed.................................................. (437,986) (426,914)
------------ ------------
Increase in shares outstanding...................................... 542,160 1,552,742
============ ============
</TABLE>
*Commencement of investment operations.
See accompanying notes to financial statements.
<PAGE>
POLYNOUS GROWTH FUND
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
The table below sets forth financial data for one share of capital stock
outstanding throughout each period presented.
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR AUGUST 12, 1996*
ENDED THROUGH
JULY 31, 1998 JULY 31, 1997
------------- ----------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $ 14.35 $ 12.00
-------- --------
Income from investment operations:
Net investment income (loss)............... (0.21) 0.96
Net realized and unrealized gain on
investments.............................. 0.07 1.41
-------- --------
Total from investment operations........ (0.14) 2.37
-------- --------
Less distributions from:
Net investment income...................... (0.88) 0.00
Net capital gains.......................... (0.48) (0.02)
-------- --------
Total distributions..................... (1.36) (0.02)
-------- --------
NET ASSET VALUE, END OF PERIOD............... $ 12.85 $ 14.35
======== ========
TOTAL RETURN+................................ (1.33%) 20.53% /1/
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000s)........ $ 27,124 $ 22,509
Ratio of expenses to average net assets:
Before expense reimbursement.............. 2.19% 2.73% /1/
After expense reimbursement............... 1.99% /2/ 2.00% /1/
Ratio of net investment income to average
net assets:
Before expense reimbursement.............. (1.22%) 9.44% /1/
After expense reimbursement............... (1.02%) 10.17% /1/
Portfolio turnover rate.................... 140.15% 925.07%
</TABLE>
*Commencement of investment operations.
+Total return calculation does not reflect sales load.
/1/Annualized.
/2/Reflects the reduction of the Operating Expense Ratio to 1.90% from 2.00%
on June 22, 1998.
See accompanying notes to financial statements.
<PAGE>
POLYNOUS GROWTH FUND
NOTES TO FINANCIAL STATEMENTS JULY 31, 1998
- -------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Polynous Trust (the "Trust") is organized as a Delaware business trust
pursuant to a Trust Agreement dated April 10, 1996. The Trust is registered
under the Investment Company Act of 1940, as amended, as an open-end,
diversified management investment company. The Trust is organized to offer
separate series of shares and is currently offering a single series of shares
called Polynous Growth Fund (the "Fund"). The Fund is organized to offer
separate classes of shares and currently offers one class (Class A). The
following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
A. SECURITY VALUATION. Investments in securities traded on a national
securities exchange are valued at the last reported sales price. Unlisted
securities, or listed securities in which there were no sales, are valued at
the mean of the closing bid and ask prices. When market quotations are not
readily available, securities and other assets are valued at fair value as
determined in good faith by the Board of Trustees. Short-term obligations
having a maturity of 60 days or less are valued at amortized cost, which the
Board of Trustees believes represents fair value.
B. OPTIONS. Premiums received by the Fund upon writing put or call options are
recorded as an asset with a corresponding liability which is subsequently
adjusted to the current market value of the option. When an option expires, is
exercised, or is closed, the Fund realizes a gain or loss, and the liability
is eliminated. The risk in writing a call option is that the Fund may forego
the opportunity of profit if the market value of the underlying security
increases and the option is exercised, although any potential loss would be
reduced by the amount of option premium received.
Transactions in options contracts written for the fiscal year ended July 31,
1998 were as follows:
<TABLE>
<CAPTION>
CONTRACTS PREMIUM
--------- ---------
<S> <C> <C>
Outstanding at July 31, 1997........................... 385 $(110,654)
Options purchased...................................... 0 0
Options terminated in closing transactions (Net)....... (385) 110,654
Options expired........................................ 0 0
---- ---------
Outstanding at July 31, 1998........................... 0 $ 0
==== =========
</TABLE>
C. INVESTMENT INCOME AND SECURITIES TRANSACTIONS. Security transactions are
accounted for on the date the securities are purchased or sold (trade date).
Cost is determined and gains and losses are based on the identified cost basis
for both financial statement and federal income tax purposes. Dividend income
is reported on the ex-dividend date. Interest income and expenses are accrued
daily.
D. ORGANIZATION COSTS. Organization costs are being amortized on a straight
line basis over five years from commencement of operations.
E. FEDERAL INCOME TAXES. It is the policy of the Fund to comply with all
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no federal income tax provision is required.
F. DISTRIBUTIONS TO SHAREHOLDERS. The Fund will distribute substantially all
of its net investment income in December, and capital gains, if any, annually.
Distributions to shareholders are recorded on the ex-dividend date. Income and
capital gain distributions are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles.
<PAGE>
POLYNOUS GROWTH FUND
NOTES TO FINANCIAL STATEMENTS - CONTINUED JULY 31, 1998
- -------------------------------------------------------------------------------
G. USE OF ESTIMATES. In preparing financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements, as well as the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
NOTE 2 - PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities, other than short-term investments, totaled
$40,232,726 and $35,648,502, respectively, for the fiscal year ended July 31,
1998.
NOTE 3 - INVESTMENT MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Polynous Capital Management, Inc. (the "Adviser"), a registered investment
adviser, provides the Fund with investment management services. For providing
investment advisory services, the Fund pays the Adviser a monthly fee which is
calculated by applying the following annual rates: 1.00% of the first $100
million of average net assets, 0.75% of the next $150 million, 0.60% of the
next $250 million, 0.50% of the next $500 million, and 0.40% of all amounts of
average net assets above $1 billion. The Adviser has voluntarily agreed to
waive its fees to the extent total annualized fund operating expenses,
inclusive of distribution expenses, exceed 1.90% of the Fund's average daily
net assets. For the fiscal year ended July 31, 1998, advisory fees of $278,247
were paid to the Adviser and the Adviser reimbursed the Fund $56,877. The Fund
has adopted a Distribution Plan (the "Plan"), pursuant to Rule 12b-1 under the
Investment Company Act of 1940, as amended, which permits the Fund to pay
certain expenses associated with the distribution of its Class A shares. The
Plan provides that the Fund will reimburse FPS Broker Services, Inc. (the
"Distributor"), the Fund's sole underwriter and distributor, for actual
distribution and shareholder servicing expenses incurred by the Distributor
not exceeding, on an annual basis, 0.25% of the Fund's average daily net
assets attributable to its Class A shares. For the fiscal year ended July 31,
1998, the Fund reimbursed the Distributor $69,562 for distribution costs
incurred. Certain officers and trustees of the Fund are affiliated persons of
the Adviser. All officers serve without direct compensation from the Fund.
<PAGE>
POLYNOUS GROWTH FUND
ILLUSTRATION OF $10,000 INVESTMENT
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The graph below compares the increase in value of a $10,000 investment in the
Polynous Growth Fund with the performance of the Russell 2000 Index. The
values and returns for Polynous Growth Fund include reinvested dividends and
the impact of the maximum sales charge placed on purchases.
Average Annual Total Return
for the period ending 7/31/98
Since Inception..........6.36%
1 Year..................(5.77%)
POLYNOUS GROWTH RUSSELL 2000 INDEX
8/12/96 $ 9,550 $10,000
10/31/96 9,693 10,445
1/31/97 10,348 11,384
4/30/97 9,806 10,613
7/31/97 11,441 12,871
10/31/97 12,294 13,509
1/31/98 11,947 13,441
4/30/98 13,898 15,113
7/31/98 11,289 13,169
Past performance is not indicative of future results.
Net asset value, investment return and principal value will fluctuate, so
shares, when redeemed, may be worth more or less than their original cost.
Fund performance presented is for Class A shares.
IMPORTANT TAX INFORMATION (UNAUDITED)
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Dear Shareholder:
Of the ordinary income distribution paid by the Fund on December 30, 1997,
69.30% qualifies for the dividends received deduction for corporations.
Additionally, the Fund distributed long-term capital gains of $0.0068 per
share. Of this long-term capital gain distribution, the entire amount is
subject to the 28% tax rate.
POLYNOUS GROWTH FUND
<PAGE>
POLYNOUS GROWTH FUND
INDEPENDENT AUDITORS' REPORT
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The Board of Trustees and Shareholders,
Polynous Growth Fund
(a series of Polynous Trust):
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Polynous Growth Fund (the "Fund") as
of July 31, 1998 and the related statement of operations for the year then
ended, and the statements of changes in net assets and financial highlights
for the year ended July 31, 1998 and for the period August 12, 1996 through
July 31, 1997. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion of these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of July 31, 1998 by correspondence with
the custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Polynous Growth
Fund at July 31, 1998, the results of its operations for the year then ended,
and the changes in its net assets and financial highlights for the periods
presented in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
San Francisco, California
August 28, 1998
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<TABLE>
<CAPTION>
<S> <C>
BOARD OF TRUSTEES OFFICERS
Kevin L. Wenck Kevin L. Wenck
Richard H. Kimball Erin Fry Sinclair
Ronald H. Kase
INVESTMENT ADVISER SHAREHOLDER SERVICES
Polynous Capital Management, Inc. First Data Investor Services Group, Inc.
345 California Street, Suite 1220 3200 Horizon Drive
San Francisco, CA 94104 King of Prussia, PA 19406
(800) 924-3863 (800) 528-8069
(415) 956-3384 (610) 239-4600
UNDERWRITER LEGAL COUNSEL
FPS Broker Services, Inc. Paul, Hastings, Janofsky & Walker LLP
3200 Horizon Drive 345 California Street
King of Prussia, PA 19406 San Francisco, CA 94104
CUSTODIAN INDEPENDENT AUDITORS
The Bank of New York Deloitte & Touche LLP
48 Wall Street 50 Fremont Street
New York, NY 10286 San Francisco, CA 94105
</TABLE>
For Additional Information about Polynous Growth Fund call:
(800) 924-3863
(415) 956-3384
or access out internet web site at www.polynous.com
THIS REPORT IS SUBMITTED FOR GENERAL INFORMATION OF THE SHAREHOLDERS OF THE
FUND. IT IS NOT AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE
FUND UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS WHICH INCLUDES
DETAILS REGARDING THE FUND'S OBJECTIVES, POLICIES, EXPENSES AND OTHER
INFORMATION.
