<PAGE>
POLYNOUS GROWTH FUND
ANNUAL REPORT
July 31, 1999
Polynous Capital Management, Inc., Investment Adviser
(800) 924-3863
<PAGE>
Dear Shareholder,
The Polynous Growth Fund's fiscal year ending July 31, 1999 continued to be a
challenging period for investing in small-cap stocks. The Fund had negative
absolute performance of 8.34 percent (-12.46 percent with full sales load)
during the period. The Fund's relative performance also appeared to be
unattractive during the period as well. The most widely used index for small-
cap stocks, the Russell 2000 index, had total performance of 7.41 percent
during our fiscal year.
A closer look into various segments within the Russell 2000 index does,
however, suggest that the overall environment for investing in mainstream
small-cap stocks was actually both very challenging and somewhat bizarre. The
bizarre aspects are shown by the performance of the Russell 2000 stocks whose
underlying companies had lost money in the four quarters prior to our fiscal
year. The overall group comprising these paragons of unprofitable growth
actually gained approximately 41 percent during the period. Such gains are
certainly impressive but I do believe it would be an absurd and unacceptable
investment strategy to state that one focuses only on unprofitable companies.
Another performance anomaly resulted from company size differences within the
Russell 2000. Small-cap stocks traditionally have been those companies having
a market value of less than $1 billion. To maintain our focus as a small-cap
investor for our clients we also limit our investments to companies fitting
the traditional definition of a small-cap stock. The Russell 2000 index is not
as disciplined, however, and currently about 15 percent of the index is above
$1 billion in market capitalization. These companies somehow had performance
of approximately 59 percent during our fiscal year. If one had decided to stay
disciplined, however, and only invest in Russell 2000 index companies with a
market valuation of under $1 billion, then the aggregate return would have
been approximately negative 11 percent. Although I am not trying to present
any relative performance numbers that would actually make the Fund's
performance in the last year look better, the Fund's performance was at least
somewhat better than the average Russell 2000 stock that was under $1 billion
in market capitalization.
It is probable, however, at this point that you are thinking "well, why don't
the fine people at Polynous just invest in larger companies - and maybe even a
few unprofitable ones too!" but such thoughts illustrate the challenges of
investing. There is really no rational explanation for (or prior predictive
ability to possibly exploit) a 70 percent performance difference between
relatively similar companies. There could be some difference in possibly
assuming that the larger Russell 2000 companies might be more successful
companies or that it is easier to buy their stocks since the companies are
larger, but the economic benefits of such differences would normally account
for no more than a two to three percent performance difference at most in an
efficient capital market.
The current investing environment does not appear to be "normal", however, and
that does present a more unpredictable environment for someone such as
ourselves who uses a very structured, controlled, and disciplined investment
process. Our process does not allow us to invest broadly in companies that are
losing money. Our process does not allow us to invest in
<PAGE>
companies at extreme valuations. The average valuation of the over $1 billion
market capitalization stocks in the Russell 2000 was approximately 60-times
earnings. Such extreme valuations are put in perspective when compared to the
overall market price/earnings ratio currently of about 30-times earnings and
the historical average price/earnings ratio of about 15-times earnings. In
contrast, our current average price/earnings ratio is only 11-times earnings.
It would also be a natural question to ask: "what is wrong with the companies
in the Fund if their price/earnings ratios are so inexpensive relative to the
market and to more prominent stocks in the Russell 2000." This question
unfortunately seems to also carry with it a conclusion that there must be
something wrong and that appears to be part of the problem of trying to invest
in mainstream small-cap growth companies. Everyday in our ongoing research we
are of course asking the same question but the answer keeps coming back that
there is not much that is wrong. While we are also as susceptible to making
mistakes as anyone else, some fundamental information might be informative as
to whether there is much that is wrong with our companies.
Statistically, the financial characteristics of the companies currently held
in the Fund's portfolio are very similar to the historical financial
characteristics seen in portfolios managed over a long period of time by
myself. Almost all of the companies have positive cash flow. Aside from the
companies that have seasonal borrowings within a year, approximately half of
our companies typically have either no or minimal debt at the end of their
fiscal years. As for the companies that have included debt as part of their
capital structures, there are both strong cash flows and robust interest
coverage ratios supporting the use of debt. The growth rates of our companies
are also attractive and are in line with the historical average annual growth
rates of companies in portfolios under my management of around 20 percent. So
in summary, although fundamentals suggest that there is not much that is
either wrong or different about the companies currently owned in our
portfolios, the current inexpensive valuation of the portfolio still suggests
that something is wrong.
You also may observe when looking through our holdings that there are no
"dot.com" (Internet-related) stocks in our portfolio and wonder why we are
missing one of the greatest investment booms ever. It is not ignorance,
however, that is the cause of this possible omission as I actually have a
fairly significant background in technology investing. Aside from having
actively invested in technology stocks for over 20 years I also have real
world work experience in both the semiconductor and software industries. From
my experience, my observations about the Internet are as follows.
The Internet is undoubtedly the world's most efficient medium for
disseminating information and effective medium for target marketing of an
organization's products or services. The efficiency of the Internet, however,
exposes one of the potentially fatal flaws for companies attempting to build a
sustainable business model by interacting with its customers through the
Internet. The Internet is so cost efficient to use that both competitive
barriers to entry are extremely low and switching costs for customers are also
very low.
<PAGE>
Although the challenge for anyone trying to compete for customers through
using the Internet is to somehow bring someone to their web-site, the cost of
introducing a web presence is quite low. Ebay, which is the leading auction
site on the Internet, and which currently has a market value of around $20
billion, had spent less than $6 million through the end of 1998 developing its
auction site. If that is all it takes to produce a $20 billion market value,
you can imagine all of the other potential competitors who might be willing to
risk $6 million!
The switching costs for customers are also quite low. When comparison shopping
in "bricks and mortar" retailers having real stores, it can be quite time
consuming to physically go from store to store and eventually a customer might
find it more efficient to just use one store with which they are familiar. On
the Internet, however, after enjoying the fabulous book reviews and other
features on the Amazon.com website, with just four or five mouse clicks, a
potential customer can browse other sites looking for the best price.
One other note worthy to make about Amazon.com as well, however, is that the
business models of "Internet" retailers also appear to be changing drastically
to more resemble the "bricks and mortar" organizations that they claim they
are going to put out of business. As recently as two years ago, Amazon claimed
that it would never need more than a web site to conduct business and that all
basic business functions could be outsourced to others. By early next year,
however, the company will be operating approximately 5 million square feet of
distribution center facilities around the country while also having the high
fixed costs inherent in such facilities. The company's financial
characteristics are also not as good as the typical company in our portfolios.
At the end of its most recently reported quarter, Amazon had $300 million more
in debt than in cash. Also, at the company's currently projected rate of
operating losses through the year 2001, at the end of that period the company
will have almost no cash while still having approximately $1.5 billion in
debt.
The intent of this letter is not to ridicule Internet related stocks, however,
but to highlight the real businesses and financial characteristics of our
portfolio companies as a contrast to the potentially ephemeral business and
financial characteristics of many current Internet stocks. Aside from the
unpredictable eventual business models of current Internet high flyers, one
other critical difference currently between such stocks and our stocks is what
I would call the entertainment value of such stocks. I do have to admit that
our stocks are not very sexy - they are typically just well-managed stable
businesses with projected average growth rates of around 20 percent annually.
They are not going to be highlighted on CNBC but therein lies another critical
distinction that is worth making. Our firm is in the investment business - not
the entertainment business--and our investment process focuses on companies
with relatively low operating risk, above average growth rates, and below
average valuations.
As a result, the companies in our portfolios will never be very high profile
and their executives stay out of the limelight as they focus intensively on
running their businesses as well as they can. Unfortunately, however, all the
"entertaining" stocks, concepts, and "stories" in the market today have
diverted attention from such real companies. Such lack of attention, in my
opinion, is the only reason for our unprecedented low price/earnings ratio of
only 11-times this year's projected earnings. As segments within stock markets
also always eventually
<PAGE>
fluctuate both up and down through various cycles, I also believe strongly
that market participants will again return to focusing on fundamentals and not
just the entertainment value of stocks. If such events occur and if the Fund's
portfolio returns to being valued at our historical average valuations of
approximately 15-times earnings, then one can easily calculate the potential
appreciation of the Fund from its currently depressed valuation levels.
I would now like to take the opportunity, however, to highlight some of our
more prominent holdings to offer a view into the types of real companies in
which we do invest.
Lifetime Hoan Corporation (3.31% of the Fund) has a prominent position in the
housewares business with its strongly positioned brands such as Farberware,
Hoffritz, and Revere. The company has the highest gross margins in its
industry and its strong cash flows give the company a potential growth rate of
around 15 percent. The company is currently selling for only 9-times our
current year's earnings estimate.
Crossmann Communities (3.17% of the Fund) has had an historical growth rate of
35 percent as it has gained market share with its reasonably-priced entry-
level single family homes. The company's new markets and very positive
financial characteristics should enable its growth rate to average around 20
percent over the next few years. The company is currently selling for only 9-
times our current year's earnings estimate.
Ocular Sciences (3.02% of the Fund) has grown 25 percent annually over the
past few years as it has increased its market share in the weekly disposable
contact lens business from zero to 16 percent. The company is now about to
enter the daily disposable contact lens business and we believe the company's
effective marketing programs and highly efficient business model positions the
company well for similar market share potential in its new market segment.
Although we believe the company can have a future annual growth rate of around
20 percent, the company is currently selling for only 13-times our current
year's earnings estimate.
RCM Technologies (2.79% of the Fund) has used a very focused approach to build
local market share in concentrated markets in the Information Technology
staffing industry. As many other competitors have expanded wildly into many
different geographic locations, the company has steadily gained market share
through its excellent service and effective marketing. We believe the company
can grow 20 percent annually by continuing such practices but the company's
stock is currently selling for only 10-times our current year's earnings
estimate.
RemedyTemp (2.72% of the Fund) is our hidden Internet play in that it supplies
temporary staffing to a wide variety of rapidly growing companies. As e-
commerce oriented companies slowly realize that they actually need people to
operate basic business function such as shipping products to customers,
RemedyTemp can rapidly provide contract work forces to fill their needs. We
believe the company can grow at least 15 percent annually but the company's
stock is currently selling for only 11-times our current year's earnings
estimate.
<PAGE>
Whitehall Jewellers (2.70% of the Fund) operates very focused, upscale
oriented jewelry stores in regional malls. The company's effective business
model is demonstrated by their sales per square foot being more than double
industry average sales per square foot. The strong cash flows from such
productive stores should allow the company to grow at annual rate of around 20
percent. The company's stock, however, is currently selling for only 14-times
our current year's earnings estimate.
Meade Instruments (2.70% of the Fund) has over 40 percent of the telescope
market in the U.S. and has produced sales growth of around 25 percent annually
while gaining such market share. The company's substantial research and
development expenditures relative to the rest of its competitors have resulted
in a substantially higher rate of new product introductions over the past few
years. We believe that these new products and anticipated additional new
products will allow the company to continue to have a growth rate of around 20
percent annually. Although the company's stock has actually been one of our
more successful positions, at current valuations the company is still selling
for only 15-times our current year's earnings estimate.
Although there are also many other interesting companies to describe that we
currently hold in our portfolios, in the interest of brevity I will stop my
descriptions at this point. One feature of our Fund, however, which I believe
is a first in the mutual fund industry, is that we post all of our current
holdings on a monthly basis on our website. If you ever have any questions
about any of our holdings, we look forward to having you find out how customer
friendly we are by giving us a call.
In conclusion, although I am also disappointed by the recent results of our
fundamentally driven research process, we still remain confident that
fundamentals ultimately win out over themes, concepts, and stories. The very
low current valuations of such fundamentally strong companies also suggests
the potential for very attractive appreciation when the emphasis in overall
stock market shifts back to being in the investment business rather than being
in the entertainment business.
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 returns for the Class A shares as of 6/30/99
was (18.64%) and since inception average annual return of 1.71%. 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
07/31/99. The Polynous Growth Fund is distributed by Polynous Seccurities,
LLC. This report is not authorized for distribution to prospective investors
in the Fund unless preceded by or accompanied by a prospectus.
- DFU 9/99
<PAGE>
Polynous Growth Fund
Schedule of Investments July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value
------- -----------
<C> <S> <C>
COMMON STOCKS - 94.30%
BASIC INDUSTRIES/MATERIALS - 1.94%
26,100 Metals USA, Inc.*........................................ $ 324,619
-----------
BUSINESS SERVICES - 15.43%
29,200 Compass International Services Corp.*.................... 251,850
21,600 Group Maintenance America Corp.*......................... 292,950
103,900 International Total Services, Inc.*...................... 331,181
11,500 Mail-Well, Inc.*......................................... 166,750
33,400 RCM Technologies, Inc.*.................................. 465,513
25,400 RemedyTemp, Inc., Class A*............................... 454,025
13,000 SCP Pool Corp.*.......................................... 297,375
31,900 Systemax, Inc.*.......................................... 317,006
-----------
2,576,650
-----------
CAPITAL GOODS - 2.85%
19,000 NCI Building Systems, Inc.*.............................. 363,375
14,000 OmniQuip International, Inc. ............................ 112,438
-----------
475,813
-----------
CONSUMER DURABLES - 11.14%
16,800 Champion Enterprises, Inc.*.............................. 229,950
16,800 Crossmann Communities, Inc.*............................. 529,200
33,700 Guitar Center, Inc.*..................................... 406,506
14,400 Keystone Automotive Industries, Inc.*.................... 247,500
24,000 Meade Instruments Corp.*................................. 447,000
-----------
1,860,156
-----------
CONSUMER NON-DURABLES - 6.36%
13,500 Helen of Troy, Ltd.*..................................... 225,281
59,800 Lifetime Hoan Corp. ..................................... 553,150
16,700 Nautica Enterprises, Inc.*............................... 283,900
-----------
1,062,331
-----------
CONSUMER SERVICES - 20.14%
27,900 Central Garden & Pet Co.*................................ 252,844
10,000 Consolidated Graphics, Inc.*............................. 397,500
40,700 The Finish Line, Inc., Class A*.......................... 427,350
32,100 Gerald Stevens, Inc.*.................................... 343,069
27,400 Jo-Ann Stores, Inc., Class A*............................ 385,312
49,300 Paul Harris Stores, Inc.*................................ 305,044
12,800 Pillowtex Corp. ......................................... 200,800
1,900 Sonic Corp.*............................................. 61,038
56,700 Stein Mart, Inc.*........................................ 377,409
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Polynous Growth Fund
Schedule of Investments - continued July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value
------- ------------
<C> <S> <C>
COMMON STOCKS - continued
CONSUMER SERVICES - continued
18,400 Whitehall Jewellers, Inc.*............................. $ 450,800
3,700 Whole Foods Market, Inc.*.............................. 162,800
------------
3,363,966
------------
ENERGY - 1.22%
19,200 Varco International, Inc.*............................. 204,000
------------
HEALTH CARE - 24.18%
27,000 Alterra Healthcare Corp.*.............................. 307,125
70,100 Coast Dental Services, Inc.*........................... 319,831
27,200 Concentra Managed Care, Inc.*.......................... 431,800
13,700 Cytyc Corp.*........................................... 337,362
83,900 Healthcare Recoveries, Inc.*........................... 388,037
19,400 Kendle International, Inc.*............................ 291,000
25,600 Ocular Sciences, Inc.*................................. 504,000
27,900 PAREXEL International Corp.*........................... 306,900
26,900 Prime Medical Services, Inc.*.......................... 205,113
101,100 ProMedCo Management Co.*............................... 312,778
20,600 RehabCare Group, Inc.*................................. 431,313
17,800 Women First HealthCare, Inc.*.......................... 202,475
------------
4,037,734
------------
TECHNOLOGY - 8.93%
13,400 Complete Business Solutions, Inc.*..................... 254,600
25,600 InaCom Corp.*.......................................... 355,200
29,900 Melita International Corp.*............................ 343,850
34,200 Princeton Video Image, Inc.*........................... 158,175
25,600 Richardson Electronics, Ltd. .......................... 177,600
5,900 Visio Corp.*........................................... 202,075
------------
1,491,500
------------
TRANSPORTATION - 2.11%
45,200 Motor Cargo Industries, Inc.*.......................... 353,125
------------
Total Common Stocks (Cost $17,485,451)................. 15,749,894
------------
Total Investments (Cost $17,485,451**) - 94.30%........ 15,749,894
Other Assets, Less Other Liabilities - 5.70%........... 952,117
------------
NET ASSETS - 100.00%................................... $ 16,702,011
============
* Non-income producing security
** Cost for Federal income tax purposes is $17,619,900, and net unrealized
depreciation consists of:
Gross unrealized appreciation.......................... $ 1,586,564
Gross unrealized depreciation.......................... (3,322,121)
------------
Net unrealized depreciation............................ $ (1,735,557)
============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Polynous Growth Fund
Statement of Assets and Liabilities July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments at market value (Cost $17,485,451) (Note 1)......... $ 15,749,894
Cash............................................................ 1,265,870
Receivables:
Investment securities sold...................................... 153,595
Capital stock sold.............................................. 4,775
Dividends and interest.......................................... 5,931
Deferred organization costs (Note 1)............................ 30,532
Other assets.................................................... 4,478
------------
TOTAL ASSETS.................................................. 17,215,075
------------
LIABILITIES:
Payables:
Investment securities purchased................................. 434,736
Capital stock redeemed.......................................... 5,480
Due to Adviser.................................................. 10,563
Accrued expenses................................................ 58,631
Accrued distribution expense.................................... 3,654
------------
TOTAL LIABILITIES............................................. 513,064
------------
NET ASSETS:
Applicable to 1,547,634 shares; unlimited number of shares of
beneficial interest authorized with no par value............... $ 16,702,011
============
Net asset value and redemption price ($16,702,011 / 1,547,634
shares)........................................................ $ 10.79
============
Offering price per share ($10.79/0.9550)........................ $ 11.30
============
NET ASSETS CONSIST OF:
Paid-in capital................................................. $ 20,902,124
Accumulated net realized loss on investments.................... (2,464,556)
Net unrealized depreciation on investments...................... (1,735,557)
------------
NET ASSETS.................................................... $ 16,702,011
============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Polynous Growth Fund
Statement of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year
Ended
July 31, 1999
INVESTMENT INCOME: -------------
<S> <C>
Dividends...................................................... $ 29,451
Interest....................................................... 63,961
------------
TOTAL INCOME................................................. 93,412
------------
EXPENSES:
Investment advisory fees (Note 3).............................. 193,972
Distribution expense (Note 3).................................. 48,493
Administration fees............................................ 47,584
Professional fees.............................................. 43,036
Transfer agent fees............................................ 40,686
Accounting fees................................................ 24,199
Registration fees.............................................. 22,049
Custodian fees................................................. 16,930
Amortization of organization costs (Note 1).................... 14,987
Insurance expense.............................................. 6,869
Printing expense............................................... 5,061
Trustees' fees................................................. 4,000
Miscellaneous fees............................................. 802
------------
TOTAL EXPENSES............................................... 468,668
Expenses waived by Adviser (Note 3).......................... (100,122)
------------
NET EXPENSES................................................. 368,546
------------
NET INVESTMENT LOSS............................................. (275,134)
------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized loss on investments............................... (2,454,384)
Net change in unrealized appreciation (depreciation) on
investments................................................... 63,426
------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS.............. (2,390,958)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS............ $ (2,666,092)
============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Polynous Growth Fund
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year For the Year
Ended Ended
July 31, 1999 July 31, 1998
OPERATIONS: ------------- -------------
<S> <C> <C>
Net investment loss............................... $ (275,134) $ (282,690)
Net realized gain (loss) on investments........... (2,454,384) 3,371,252
Net realized gain on option contracts written..... 0 5,946
Net realized gain on in-kind redemption........... 0 81,276
Net change in unrealized
appreciation/(depreciation) on investments....... 63,426 (4,261,443)
------------ ------------
Net decrease in net assets resulting from
operations....................................... (2,666,092) (1,085,659)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................. 0 (1,505,415)
Net capital gains................................. (1,405,281) (810,949)
------------ ------------
Total distributions............................... (1,405,281) (2,316,364)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold......................... 1,681,967 12,377,540
Reinvestment of dividends......................... 1,259,373 2,048,552
Cost of shares redeemed........................... (9,291,839) (6,409,241)
------------ ------------
Increase (decrease) in net assets derived from
capital share transactions (a)................... (6,350,499) 8,016,851
------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS......... (10,421,872) 4,614,828
------------ ------------
NET ASSETS:
Beginning of year................................. 27,123,883 22,509,055
------------ ------------
End of year....................................... $ 16,702,011 $ 27,123,883
============ ============
(a)Transactions in capital stock were:
Shares sold...................................... 155,836 826,466
Shares issued through reinvestment of dividends.. 132,010 153,680
Shares redeemed.................................. (850,444) (437,986)
------------ ------------
Increase (decrease) in shares outstanding......... (562,598) 542,160
============ ============
</TABLE>
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 For the Year August 12, 1996*
Ended Ended through
July 31, 1999 July 31, 1998 July 31, 1997
------------- ------------- ----------------
<S> <C> <C> <C>
Net asset value, beginning of
period........................ $ 12.85 $ 14.35 $ 12.00
-------- -------- --------
Income from investment
operations:
Net investment income (loss).. (0.18) (0.21) 0.96
Net realized and unrealized
gain (loss) on investments... (1.01) 0.07 1.41
-------- -------- --------
Total from investment
operations.................. (1.19) (0.14) 2.37
-------- -------- --------
Less distributions from:
Net investment income......... 0.00 (0.88) 0.00
Net capital gains............. (0.87) (0.48) (0.02)
-------- -------- --------
Total distributions.......... (0.87) (1.36) (0.02)
-------- -------- --------
Net asset value, end of
period........................ $ 10.79 $ 12.85 $ 14.35
======== ======== ========
Total return+.................. (8.34%) (1.33%) 20.53% /1/
Ratios/Supplemental Data
Net assets, end of period (in
000s)........................ $ 16,702 $ 27,124 $ 22,509
Ratio of expenses to average
net assets:
Before expense reimbursement.. 2.41% 2.19% 2.73% /1/
After expense reimbursement... 1.90% 1.99% /2/ 2.00% /1/
Ratio of net investment income
to average net assets:
Before expense reimbursement.. (1.93%) (1.22%) 9.44% /1/
After expense reimbursement... (1.42%) (1.02%) 10.17% /1/
Portfolio turnover rate....... 102.53% 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, 1999
- -------------------------------------------------------------------------------
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. 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.
C. Organization Costs. Organization costs are being amortized on a straight
line basis over five years from commencement of operations.
D. 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.
E. 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.
F. 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
$18,530,135 and $26,350,483 respectively, for the year ended July 31, 1999.
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 an annual fee of 1.00%
of average daily net assets. The Adviser has voluntarily agreed to waive its
fees to the extent total annualized fund operating expenses, inclusive of
distribution expenses, exceed
<PAGE>
Polynous Growth Fund
Notes to Financial Statements - continued July 31, 1999
- -------------------------------------------------------------------------------
1.90% of the Fund's average daily net assets. For the year ended July 31,
1999, advisory fees of $193,972 were paid to the Adviser and the Adviser
reimbursed the Fund $100,122. 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. Effective July 1, 1999, the Plan provides
that the Fund will reimburse Polynous Securities, LLC (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. FPS Broker Services, Inc. acted as the Fund's sole
underwriter and distributor until December 31, 1998. For the year ended July
31, 1999, the Fund reimbursed the Distributor and FPS Broker Services, Inc.
$30,980 and $17,513, respectively, for distribution costs incurred. Certain
officers and trustees of the Fund are affiliated persons of the Adviser and
the Distributor. All officers serve without direct compensation from the Fund.
Note 4 - Capital Loss Carryforward
At July 31, 1999, the Fund had available for federal tax purposes an unused
capital loss carryforward of $2,330,107, expiring in 2007. Capital loss
carryforwards are available to offset future realized capital gains. To the
extent that these carryforwards are used to offset future capital gains, it is
probable that the amount which is offset will not be distributed to
shareholders.
<PAGE>
Polynous Growth Fund
Illustration of $10,000 Investment
- --------------------------------------------------------------------------------
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.
[GRAPH APPEARS HERE]
- ------------------------------
Average Annual Total Return
for the period ending 7/31/99:
Since Inception......1.16%
1 Year.............(12.46%)
- ------------------------------
POLYNOUS GROWTH FUND 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
8/31/98 8,908 10,639
9/30/98 9,075 11,642
10/31/98 9,259 12,026
11/30/98 10,085 13,260
12/31/98 10,533 14,469
1/31/99 10,278 14,685
2/28/99 9,549 13,617
3/31/99 9,264 13,406
4/30/99 9,820 13,952
5/31/99 10,376 14,458
6/30/99 10,501 15,465
7/31/99 10,347 15,497
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
- --------------------------------------------------------------------------------
Dear Shareholder:
Of the ordinary income distributions paid by the Fund on April 6, 1999, 10.18%
qualify for the dividends received deduction for corporations. Additionally,
the Fund distributed long-term capital gains of $0.4152 per share on April 6,
1999.
POLYNOUS GROWTH FUND
<PAGE>
Polynous Growth Fund
Independent Auditors' Report
- -------------------------------------------------------------------------------
The Board of Trustees and Shareholders,
Polynous Growth Fund
(a series of Polynous Trust):
We have audited the accompanying statement of assets and liabilities of
Polynous Growth Fund (the "Fund"), including the schedule of investments, as
of July 31, 1999, the related statement of operations for the year then ended
and the statements of changes in net assets and financial highlights for the
periods presented. 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 have 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. Our procedures included confirmation of securities
owned as of July 31, 1999 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, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Polynous Growth Fund as of July 31, 1999, the results of its operations, 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
September 3, 1999
<PAGE>
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,
345 California Street, Suite 1220 Inc.
San Francisco, CA 94104 211 South Gulph Road
(800) 924-3863 King of Prussia, PA 19406
(415) 956-3384 (800) 528-8069
(610) 239-4600
Underwriter
Legal Counsel
Polynous Securities, LLC
345 California Street, Suite 1220 Paul, Hastings, Janofsky & Walker
San Francisco, CA 94104 LLP
345 California Street
Custodian San Francisco, CA 94104
The Bank of New York Independent Auditors
48 Wall Street
New York, NY 10286 Deloitte & Touche LLP
50 Fremont Street
For Additional Information about Polynous Growth Fund call:
(800) 924-3863 San Francisco, CA 94105
(415) 956-3384
or access our 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.
