<PAGE>
POLYNOUS GROWTH FUND
SEMI-ANNUAL REPORT
January 31, 1999
Polynous Capital Management, Inc., Investment Adviser
(800) 924-3863
<PAGE>
Dear Shareholder,
The Polynous Growth Fund's semi-annual period ending January 31, 1999
unfortunately resulted in both poor absolute and relative performance for the
Fund. The Fund had negative absolute performance of 8.95 percent (-13.45
percent with full sales load) during the period. The Fund's performance was
also unattractive on a relative basis as compared to the Russell 2000 small-
cap index as that index increased 2.40 percent during the period.
Although the minimal appreciation of the Russell 2000 index might suggest that
the overall period was relatively quiet for small company stocks, the actual
environment was substantially different. The period started off in the month
of August with a substantial decline in the Russell 2000 index of almost 20
percent as investors reacted to the threat of Russia defaulting on its debt.
Why there was such a severe reaction to the problems of a country that
accounts for only .3 percent of world GDP (and only about one percent of the
world's outstanding debt) is a mystery to me but the Fund also experienced a
similar decline as the Russell 2000 in August.
Although both small company stocks and the overall market experienced some
recovery in September, the first part of October again experienced a
significant decline due to concerns about third quarter corporate earnings.
When earnings reports began to be released in the second half of October,
however, positive earnings reports from many prominent companies resulted in a
large company oriented market rally. Unfortunately, although many smaller
companies and almost all of the Fund's companies also had good earnings
reports, small company stocks still remained depressed.
I believe the overall small company sector, in having experienced two periods
of sudden declines (August and early-October) within a few months had, in the
short-term, become unattractive for all but dedicated small company investors.
In the short-term, declining stocks in a particular sector will also
experience more downward pressure as investors sell poorly performing stocks
to both realize tax losses and to reallocate assets to other sectors with
better current performance. Both types of selling decisions unfortunately
disregard both company fundamentals and valuations. For ourselves, however,
being both fundamentally driven and valuation conscious investors, there was a
significant mismatch between qualities that we emphasize (good operating
prospects and inexpensive valuations) and the current negative sentiment
toward small company stocks. Although the Fund did have some recovery from
each period of downward volatility, the attempted recovery of many of our
stocks was met with further selling pressure due to the tax loss selling and
relative performance factors already mentioned above.
Another unfortunate part of the investing environment during the six-month
period was that the best performing small company stocks were either very
expensive stocks that already have valuations well in excess of the typical
valuations in our portfolios or Internet-related stocks with minimal sales and
huge operating losses. Our structured, controlled, and disciplined investment
process avoids both valuation risks and the risks of very speculative
companies and so, in a speculative, valuation-insensitive environment, it will
often be challenging for our absolute or relative performance to keep up with
the index's performance.
<PAGE>
Even with the recent disappointing performance, I still believe that the Fund
is well positioned both for recouping the capital loss that was experienced
during the period and for producing attractive absolute and relative
performance in the future. The Fund's portfolio is very inexpensively valued
with an average price/earnings ratio as of January 31, 1999 of only 11-times
1999 projected earnings. This average valuation results in the Fund's
companies being priced at a large discount relative to their average projected
growth rate of approximately 20 percent. If the Fund's currently owned stocks
merely appreciated to our historical average price/earnings ratio of
approximately 15-times earnings, that would produce overall appreciation of
about 35 percent. I also believe, however, that the Fund is well positioned
for attractive relative performance once the huge gap between large company
and small company valuations does again become significant to other investors.
As opposed to the Fund's current average company valuations and projected
growth rates that are mentioned above, the S&P 500 large company index is
currently valued at 25-times projected 1999 earnings at a time that the
projected growth rate of companies within its index is only about five
percent!
Supporting our view that small companies should experience a good absolute and
relative stock market recovery are the positive economic aspects of the
current environment. These attributes, e.g., good economic growth, almost no
inflation, and very low interest rates, do at least create a stable domestic
environment for U.S. equities and appear as if they can persist at least
throughout 1999. The economic power and dominance of United States has also
actually increased during the last two years of economic turmoil in various
parts of the world. If most of Asia is now starting to recover economically
and if European economies begin to show more growth in either late-1999 or
early in 2000, then U.S. economic growth appears as if it can continue for
another two years.
If I am correct about such a stable economic environment in the U.S., then the
operating prospects for small-cap companies should also be fairly positive. As
was shown in 1998 for small-cap stocks, positive operating prospects do not
guarantee positive stock market performance but the current 30 percent
valuation premium for large-cap stocks is at an historical high. With such an
overall valuation difference, I believe that small-cap stocks should at least
outperform on a relative basis in 1999 and, with their currently attractive
valuations, also have a good chance for attractive absolute performance as
well.
Yours truly,
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 12/31/98
was (16.24%) and since inception average annual return of 2.20%. 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
01/31/99. The Polynous Growth Fund is distributed by Polynous Securities, LLC.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded by or accompanied by a prospectus.
-DFU 3/99
<PAGE>
Polynous Growth Fund
Schedule of Investments (unaudited) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value
---------- -----------
<C> <S> <C>
COMMON STOCKS - 89.71%
BASIC INDUSTRIES/MATERIALS - 0.76%
16,200 Metals USA, Inc.*..................................... $ 160,988
-----------
BUSINESS SERVICES - 16.39%
14,600 Coach USA, Inc.*...................................... 437,087
79,400 Compass International Services Corp.*................. 585,575
45,400 ExecuStay Corp.*...................................... 629,925
17,500 Global DirectMail Corp.*.............................. 322,656
131,000 International Total Services, Inc.*................... 687,750
1,700 RCM Technologies, Inc.*............................... 33,150
28,700 RemedyTemp, Inc.*..................................... 523,775
23,600 SOS Staffing Services, Inc.*.......................... 252,225
-----------
3,472,143
-----------
CAPITAL GOODS - 8.89%
9,000 American Buildings Co.*............................... 214,875
45,500 Gradall Industries, Inc.*............................. 654,062
17,600 NCI Building Systems, Inc.*........................... 470,800
40,700 OmniQuip International, Inc. ......................... 544,363
-----------
1,884,100
-----------
CONSUMER DURABLES - 10.74%
26,100 Crossmann Communities, Inc.*.......................... 698,175
60,900 Meade Instruments Corp.*.............................. 822,150
70,300 Meadowcraft, Inc.*.................................... 755,725
-----------
2,276,050
-----------
CONSUMER NON-DURABLES - 5.55%
65,100 Lifetime Hoan Corp. .................................. 683,550
31,200 Nautica Enterprises*.................................. 491,400
-----------
1,174,950
-----------
CONSUMER SERVICES - 20.00%
20,000 Central Garden & Pet Co.*............................. 321,250
20,700 Children's Place Retail Stores, Inc.*................. 587,363
24,700 Claire's Stores, Inc. ................................ 487,825
55,100 Finish Line, Inc., Class A*........................... 506,231
61,200 Paul Harris Stores, Inc.*............................. 466,650
12,200 Sonic Corp.*.......................................... 308,050
64,400 Stein Mart, Inc.*..................................... 462,875
116,500 Track 'n Trail*....................................... 262,125
50,600 Whitehall Jewellers, Inc.*............................ 834,900
-----------
4,237,269
-----------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Polynous Growth Fund
Schedule of Investments (unaudited) - continued January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value
---------- -----------
<C> <S> <C>
COMMON STOCKS - continued
ENERGY - 1.65%
47,900 Varco International, Inc. ........................... $ 350,269
-----------
HEALTH CARE - 10.88%
48,500 Concentra Managed Care, Inc.*........................ 557,750
26,900 Healthcare Recoveries, Inc.*......................... 430,400
23,700 Ocular Sciences, Inc.*............................... 548,063
30,800 Prime Medical Services, Inc.*........................ 246,400
83,600 ProMedCo Management Company*......................... 459,800
3,100 RehabCare Group, Inc.*............................... 63,162
-----------
2,305,575
-----------
TECHNOLOGY - 12.80%
33,300 Aspect Telecommunications Corp.*..................... 299,700
21,300 BARRA, Inc.*......................................... 455,287
25,600 InaCom Corp.*........................................ 334,400
51,300 Information Management Associates, Inc.*............. 179,550
24,000 Melita International Corp.*.......................... 480,000
81,600 Princeton Video Image, Inc.*......................... 402,900
58,800 Richardson Electronics, Ltd.......................... 558,600
-----------
2,710,437
-----------
TRANSPORTATION - 2.05%
60,500 Motor Cargo Industries, Inc.*........................ 434,844
-----------
Total Common Stocks (Cost $20,847,811)............... 19,006,625
-----------
<CAPTION>
Principal
Amount
----------
<C> <S> <C>
SHORT-TERM INVESTMENTS - 9.94%
$2,104,742 The Bank of New York Cash Reserve, 3.75%............. 2,104,742
-----------
Total Short Term Investments (Cost $2,104,742) ...... 2,104,742
-----------
Total Investments (Cost $22,952,553**) - 99.65%...... 21,111,367
Other Assets, Less Other Liabilities - 0.35%......... 74,705
-----------
NET ASSETS - 100.00% ................................ $21,186,072
===========
Gross unrealized appreciation........................ $ 2,583,807
Gross unrealized depreciation........................ (4,424,993)
-----------
Net Unrealized depreciation.......................... $(1,841,186)
===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Polynous Growth Fund
Statement of Assets and Liabilities (unaudited) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments at market value (Cost $22,952,553) (Note 1).......... $21,111,367
Receivables:
Investment securities sold...................................... 239,209
Dividends and interest.......................................... 6,248
Deferred organization costs (Note 1)............................. 37,964
Other assets..................................................... 7,884
-----------
TOTAL ASSETS................................................... 21,402,672
-----------
LIABILITIES:
Payables:
Investment securities purchased................................. 155,665
Capital stock redeemed.......................................... 11,996
Due to Adviser.................................................. 9,950
Accrued expenses................................................ 34,438
Accrued distribution expense.................................... 4,551
-----------
TOTAL LIABILITIES.............................................. 216,600
-----------
NET ASSETS:
Applicable to 1,810,198 shares; unlimited number of shares of
beneficial interest authorized with no par value............... $21,186,072
===========
Net asset value and redemption price ($21,186,072 / 1,810,198
shares)........................................................ $ 11.70
===========
Offering price per share ($11.70 / 0.9550)...................... $ 12.25
===========
NET ASSETS CONSIST OF:
Paid-in capital................................................. $23,874,384
Accumulated net investment loss................................. (155,276)
Accumulated net realized loss on investments.................... (691,850)
Net unrealized depreciation on investments...................... (1,841,186)
-----------
NET ASSETS..................................................... $21,186,072
===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Polynous Growth Fund
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Six Months
Ended
January 31, 1999
INVESTMENT INCOME: ------------------
<S> <C>
Dividends.................................................. $ 14,927
Interest................................................... 31,479
-----------
TOTAL INCOME............................................. 46,406
-----------
EXPENSES:
Investment advisory fees (Note 3).......................... 106,149
Distribution expense (Note 3).............................. 26,537
Administration fees........................................ 24,725
Professional fees.......................................... 22,965
Transfer agent fees........................................ 20,497
Registration fees.......................................... 12,968
Accounting fees............................................ 12,806
Custodian fees............................................. 8,133
Amortization of organization costs (Note 1)................ 7,555
Insurance expense.......................................... 3,463
Printing expense........................................... 2,923
Trustees' fees............................................. 2,512
Miscellaneous fees......................................... 403
-----------
TOTAL EXPENSES........................................... 251,636
Expenses waived by Adviser (Note 3)...................... (49,954)
-----------
NET EXPENSES............................................. 201,682
-----------
NET INVESTMENT LOSS......................................... (155,276)
-----------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss on investments........................... (2,367,770)
Net change in unrealized appreciation (depreciation) on
investments............................................... (42,203)
-----------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS.......... (2,409,973)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $(2,565,249)
===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Polynous Growth Fund
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Six Months
Ended For the Year
January 31, 1999 Ended
(unaudited) July 31, 1998
OPERATIONS: ------------------ -------------
<S> <C> <C>
Net investment loss........................... $ (155,276) $ (282,690)
Net realized gain (loss) on investments....... (2,367,771) 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 depreciation on
investments.................................. (42,202) (4,261,443)
----------- -----------
Net decrease in net assets resulting from
operations................................... (2,565,249) (1,085,659)
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income......................... 0 (1,505,415)
Net capital gains............................. 0 (810,949)
----------- -----------
Total distributions........................... 0 (2,316,364)
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold..................... 1,204,765 12,377,540
Reinvestment of dividends..................... 0 2,048,552
Cost of shares redeemed....................... (4,577,327) (6,409,241)
----------- -----------
Increase (decrease) in net assets derived from
capital share transactions (a)............... (3,372,562) 8,016,851
----------- -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS..... (5,937,811) 4,614,828
----------- -----------
NET ASSETS:
Beginning of period........................... 27,123,883 22,509,055
----------- -----------
End of period................................. $21,186,072 $27,123,883
=========== ===========
(a)Transactions in capital stock were:
Shares sold.................................. 109,491 826,466
Shares issued through reinvestment of
dividends................................... 0 153,680
Shares redeemed.............................. (409,525) (437,986)
----------- -----------
Increase (decrease) in shares outstanding...... (300,034) 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 Six Months For the Period
Ended For the Year August 12, 1996*
January 31, 1999 Ended through
(unaudited) 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).................. (0.09) (0.21) 0.96
Net realized and
unrealized gain (loss)
on investments.......... (1.06) 0.07 1.41
------- -------- --------
Total from investment
operations............. (1.15) (0.14) 2.37
------- -------- --------
Less distributions from:
Net investment income.... 0.00 (0.88) 0.00
Net capital gains........ 0.00 (0.48) (0.02)
------- -------- --------
Total distributions..... 0.00 (1.36) (0.02)
------- -------- --------
Net asset value, end of
period................... $ 11.70 $ 12.85 $ 14.35
======= ======== ========
Total return+............. (8.95%) (1.33%) 20.53%
Ratios/Supplemental Data
Net assets, end of period
(in 000s)............... $21,186 $ 27,124 $ 22,509
Ratio of expenses to
average net assets:
Before expense
reimbursement.......... 2.37% /1/ 2.19% 2.73% /1/
After expense
reimbursement.......... 1.90% /1/ 1.99% /2/ 2.00% /1/
Ratio of net investment
income to average net
assets:
Before expense
reimbursement.......... (1.93%)/1/ (1.22%) 9.44% /1/
After expense
reimbursement.......... (1.46%)/1/ (1.02%) 10.17% /1/
Portfolio turnover rate.. 46.43% 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 (unaudited) January 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
$9,261,251 and $13,732,989 respectively, for the six months ended January 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 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
<PAGE>
Polynous Growth Fund
Notes to Financial Statements (unaudited) - continued January 31, 1999
- -------------------------------------------------------------------------------
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 six months ended
January 31, 1999, advisory fees of $106,149 were paid to the Adviser and the
Adviser reimbursed the Fund $49,954. 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 January 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
six months ended January 31, 1999, the Fund reimbursed the Distributor and FPS
Broker Services, Inc. $9,024 and $17,513, respectively, 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>
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.
