POLYNOUS GROWTH FUND
SEMI-ANNUAL REPORT
January 31, 2000
Polynous Capital Management, Inc., Investment Adviser
(415) 956-3384
<PAGE>
Dear Shareholder,
The latest six month semi-annual period for the Fund (ending January 31, 2000)
was marked by a very simplistic overall investing environment. There appears to
be two simple, but dominant, rules in this environment: 1) if a stock has been
advancing in price, investors aggressively buy more of the stock regardless of
how expensively valued it becomes, and 2) if a stock has been declining in
price, investors aggressively continue selling - also regardless of how
inexpensively valued the stock becomes. Unfortunately, as a valuation sensitive
investor, the Fund did not do well under my management during this period.
As you may recall from previous letters, our management approach is to use our
original fundamental research to determine an accurate assessment of operating
fundamentals for each individual company under our review. We then use the
knowledge gained from that assessment to support what I believe are conservative
valuation guidelines that are applied in our buy/sell decisions. Historically,
our approach resulted in stocks being purchased at a 20 to 25 percent discount
to what we believed was the intrinsic value of the underlying company. When we
were correct with our fundamental and valuation assumptions, a company's stock
would then usually appreciate 20 to 30 percent over the following 12 to 18
months as it advanced towards its intrinsic value.
In today's environment, however, valuations apparently mean nothing. Stocks that
appreciate to full valuation levels based on my historical experience now
subsequently double and even triple in price. Stocks purchased at our typical 20
to 25 percent discount to intrinsic value have then subsequently declined to
valuations that are 40 to 50 percent discounts to their intrinsic value. What
hurt the Fund significantly during this latest period were these apparently
inexplicable "bottomless" declines in a good number of portfolio stocks. By the
end of the semi-annual period, the Fund had experienced negative absolute
performance of 18.35 percent. The closest comparable stock market index, the
Russell 2000 small stock index, had total performance of 12.25 percent during
the period.
The performance of the index, however, ends up being skewed by the anomalies
given that the index is weighted by the size of each company. In an environment
where the stocks that have already appreciated the most are widely considered
most attractive to new waves of investors who continue aggressively buying such
stocks, stocks that have already tripled and quadrupled will add
disproportionately to the value of the index. Actually, over 60 percent of the
Russell 2000 index's stocks declined during the latest semi-annual period and
over 40 percent of the index's stocks declined more than 20 percent. Although
such behavior in many other index stocks is no excuse for the poor investment
results experienced by the Fund, it does suggest that the current investing
environment is more challenging than it might otherwise appear.
There is also one other significant irony in an environment where most stocks
are actually declining in value and that is the strong condition of the economy.
The third and fourth calendar quarters of 1999 experienced year-over-year real
economic growth of approximately four and five percent, respectively.
Inflationary pressures, which are usually a primary cause of stock price
declines, were also negligible during the period. International economic
conditions are also improving which should promote further strength in the U.S.
economy and add further
<PAGE>
support for attractive continuing growth in U.S. corporate profits. In summary,
there does not appear to be any fundamental reasons for such a divided stock
market where most stocks decline in price although capitalization weighted
indexes continue to advance.
In short, the only explanation for such behavior appears to be the simplistic
investment approach described at the start of this letter. In retrospect, now
that I have come to a belated recognition that the asylum of the stock market is
currently being run by its inmates rather than by rational and prudent guards,
there are some things that we can and will do differently. Fortunately, however,
what I regard as one of our prominent strengths, our fundamental economic and
company analytical skills, will still be of use in such an environment.
A somewhat more elaborate form of the "buy more if it is still advancing"
approach is to completely ignore valuations as long as company fundamentals are
still intact. Our company analytical skills should allow us to exploit such a
phenomena and to continue participating in the full appreciation of a stock
while still having adequate warning before fundamentals begin to change. Our
company analytical skills should also enable us to be more flexible in
considering more expensive (and more popular) stocks as new investments for the
Fund while, again, also hopefully still having adequate warning before
fundamentals may change. And at some point, the overall investing environment
itself will change back to being more sensitive to valuations and fundamentals,
and I also believe that we should be able to be adequately warned before such
changes occur due to our economic analysis skills.
In closing, I would like to make an analogy about the current stock market
environment as if it was a restaurant. Most restaurants normally have a fairly
close range between the prices of their entrees as has been the case
historically for the valuation ranges seen for most stocks in the stock market.
Currently, however, if the stock market is a restaurant, the prices for entrees
range from $10 to $1,000 and the entrees above $500 are the ones that are most
popular. In the real world, it is obvious that such pricing differences and such
lack of value in the higher price ranges make no sense but the current fashion
of the moment (nine years into an economic expansion) is to aggressively consume
such high priced offerings. While we will not participate on the extremes of
such behavior, we will be more flexible in enjoying some of the entrees that our
fundamental analysis has at least determined that they are not poisonous. And at
the point that this particular restaurant is about to close, our overall
analytical skills should hopefully help prevent us from getting indigestion.
Yours truly,
/s/ Kevin L. Wenck signature
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 12/31/99
WAS (22.01%) AND SINCE INCEPTION AVERAGE ANNUAL RETURN OF (4.35%). 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
01/31/00. 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 3/00
<PAGE>
POLYNOUS GROWTH FUND
SCHEDULE OF INVESTMENTS (UNAUDITED) JANUARY 31, 2000
- --------------------------------------------------------------------------------
MARKET
SHARES VALUE
------ ------
COMMON STOCKS - 63.45%
BUSINESS SERVICES - 8.72%
11,600 Ambassadors International, Inc.*............... $ 127,600
15,600 Extended Stay America, Inc.*................... 121,875
23,700 Group Maintenance America Corp.*............... 213,300
15,100 RemedyTemp, Inc., Class A*..................... 325,594
1,600 Wackenhut Corrections Corp.*................... 13,700
----------
802,069
----------
CAPITAL GOODS - 6.10%
8,000 Jacobs Engineering Group Inc.*................. 236,000
15,400 NCI Building Systems, Inc.*.................... 232,925
6,900 Wabash National Corp. ......................... 91,856
----------
560,781
----------
CONSUMER DURABLES - 10.36%
17,000 Champion Enterprises, Inc.*.................... 130,688
32,100 Guitar Center, Inc.*........................... 321,000
8,200 Meade Instruments Corp.*....................... 239,337
9,700 Superior Industries International, Inc. ....... 261,294
----------
952,319
----------
CONSUMER NON-DURABLES - 1.36%
20,000 Lifetime Hoan Corp. ........................... 125,000
----------
CONSUMER SERVICES - 27.34%
11,800 AnnTaylor Stores Corp.*........................ 259,600
7,900 Applebee's International, Inc.................. 197,994
17,200 The Buckle, Inc.*.............................. 269,825
22,400 The Children's Place Retail Stores, Inc.*...... 324,800
19,900 The Finish Line, Inc., Class A*................ 114,425
27,500 Friedman's Inc., Class A ...................... 192,070
12,400 RARE Hospitality International, Inc.*.......... 204,987
6,400 Sonic Corp.*................................... 184,000
43,600 Stein Mart, Inc.*.............................. 209,825
13,200 Whitehall Jewellers, Inc.*..................... 321,750
5,100 Whole Foods Market, Inc.*...................... 234,600
----------
2,513,876
----------
HEALTH CARE - 6.53%
13,500 Ocular Sciences, Inc.*......................... 273,375
13,900 RehabCare Group, Inc.*......................... 327,519
----------
600,894
----------
See accompanying notes to financial statements.
<PAGE>
POLYNOUS GROWTH FUND
SCHEDULE OF INVESTMENTS (UNAUDITED) - CONTINUED JANUARY 31, 2000
- --------------------------------------------------------------------------------
MARKET
SHARES VALUE
------ ------
COMMON STOCKS - CONTINUED
TRANSPORTATION - 3.04%
58,100 Motor Cargo Industries, Inc.*.................. $ 279,606
----------
TOTAL COMMON STOCKS (COST $5,958,972) ........ 5,834,545
----------
TOTAL INVESTMENTS (COST $5,958,972**) - 63.45% 5,834,545
OTHER ASSETS, LESS OTHER LIABILITIES - 36.55% . 3,361,027
----------
NET ASSETS - 100.00% .......................... $9,195,572
==========
* Non-income producing security
** Cost for Federal income tax purposes is $5,958,972, and net unrealized
depreciation consists of:
Gross unrealized appreciation ............................ $ 611,626
Gross unrealized depreciation ............................ (736,053)
----------
Net unrealized depreciation ........................... $ (124,427)
==========
See accompanying notes to financial statements.
<PAGE>
POLYNOUS GROWTH FUND
SCHEDULE OF ASSETS AND LIABILITIES (UNAUDITED) JANUARY 31, 2000
- --------------------------------------------------------------------------------
ASSETS:
Investments at market value (Cost $5,958,972) (Note 1)..... $ 5,834,545
Cash....................................................... 3,641,162
Receivables:
Investment securities sold............................... 187,179
Dividends and interest................................... 13,338
Due from Adviser ........................................ 37,285
Deferred organization costs (Note 1)....................... 22,977
Other assets............................................... 1,015
-----------
TOTAL ASSETS........................................ 9,737,501
-----------
LIABILITIES:
Payables:
Investment securities purchased.......................... 422,521
Capital stock redeemed................................... 38,212
Accrued expenses......................................... 77,134
Accrued distribution expense............................. 4,062
-----------
TOTAL LIABILITIES................................... 541,929
-----------
NET ASSETS:
Applicable to 1,043,692 shares; unlimited number of shares
of beneficial interest authorized with no par value...... $ 9,195,572
===========
Net asset value and redemption price
($9,195,572 / 1,043,692 shares)........................ $ 8.81
===========
Offering price per share ($8.81/0.9550)................. $ 9.23
===========
NET ASSETS CONSIST OF:
Paid-in capital.......................................... $16,433,494
Net investment loss ..................................... (67,398)
Accumulated net realized loss on investments............. (7,046,097)
Net unrealized depreciation on investments............... (124,427)
-----------
NET ASSETS........................................ $ 9,195,572
===========
See accompanying notes to financial statements.
<PAGE>
POLYNOUS GROWTH FUND
SCHEDULE OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
FOR THE SIX MONTHS
ENDED
JANUARY 31, 2000
------------------
INVESTMENT INCOME:
Dividends................................................... $ 9,024
Interest.................................................... 40,366
-----------
TOTAL INCOME......................................... 49,390
-----------
EXPENSES:
Investment advisory fees (Note 3) .......................... 61,467
Professional fees .......................................... 43,701
Administration fees ........................................ 31,918
Transfer agent fees ........................................ 21,400
Distribution expense (Note 3)............................... 15,367
Accounting fees ............................................ 12,072
Custodian fees ............................................. 8,801
Registration fees .......................................... 8,686
Amortization of organization costs (Note 1) ................ 7,555
Insurance expense .......................................... 3,463
Trustees' fees ............................................. 2,447
Printing expense ........................................... 2,018
Miscellaneous fees ......................................... 583
-----------
TOTAL EXPENSES....................................... 219,478
Expenses waived by Adviser (Note 3).................. (93,690)
Expenses waived by Administrator (Note 3) ........... (9,000)
-----------
NET EXPENSES......................................... 116,788
-----------
NET INVESTMENT LOSS........................................... (67,398)
-----------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized loss on investments............................ (4,581,541)
Net change in unrealized depreciation on investments........ 1,611,130
-----------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS...... (2,970,411)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS.......... $(3,037,809)
===========
See accompanying notes to financial statements.
<PAGE>
POLYNOUS GROWTH FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
FOR THE SIX MONTHS
ENDED FOR THE YEAR
JANUARY 31, 2000 ENDED
(UNAUDITED) JULY 31, 1999
----------------- -------------
OPERATIONS:
Net investment loss............................. $ (67,398) $ (275,134)
Net realized loss on investments................ (4,581,541) (2,454,384)
Net change in unrealized depreciation
on investments................................. 1,611,130 63,426
----------- -----------
Net decrease in net assets resulting from
operations..................................... (3,037,809) (2,666,092)
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net capital gains............................... 0 (1,405,281)
----------- -----------
Total distributions............................. 0 (1,405,281)
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold ..................... 106,385 1,681,967
Reinvestment of dividends ...................... 0 1,259,373
Cost of shares redeemed ........................ (4,575,015) (9,291,839)
----------- -----------
Decrease in net assets derived from capital
share transactions (a)....................... (4,468,630) (6,350,499)
----------- -----------
TOTAL DECREASE IN NET ASSETS (7,506,439) (10,421,872)
----------- -----------
NET ASSETS:
Beginning of year............................... 16,702,011 27,123,883
----------- -----------
End of year (including undistributed net
investment loss of $67,398 and $0,
respectively) ............................... $ 9,195,572 $16,702,011
=========== ===========
(a) Transactions in capital stock were:
Shares sold................................. 10,677 155,836
Shares issued through reinvestment
of dividends............................... 0 132,010
Shares redeemed............................. (514,619) (850,444)
----------- -----------
Decrease in shares outstanding.................. (503,942) (562,598)
=========== ===========
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 FOR THE YEAR AUGUST 12, 1996*
JANUARY 31, 2000 ENDED ENDED THROUGH
(UNAUDITED) JULY 31, 1999 JULY 31, 1998 JULY 31, 1997
---------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.............. $10.79 $ 12.85 $ 14.35 $ 12.00
------ ------- ------- -------
Income (loss) from investment operations:
Net investment income (loss)................. (0.07) (0.18) (0.21) 0.96
Net realized and unrealized
gain (loss) on investments................. (1.91) (1.01) 0.07 1.41
------ ------- ------- -------
Total from investment operations......... (1.98) (1.19) (0.14) 2.37
------ ------- ------- -------
Less distributions from:
Net investment income........................ 0.00 0.00 (0.88) 0.00
Net capital gains............................ 0.00 (0.87) (0.48) (0.02)
------ ------- ------- -------
Total distributions........................ 0.00 (0.87) (1.36) (0.02)
------ ------- ------- -------
NET ASSET VALUE, END OF PERIOD.................... $ 8.81 $ 10.79 $ 12.85 $ 14.35
====== ======= ======= =======
TOTAL RETURN+..................................... (18.35%) (8.34%) (1.33%) 20.53%(1)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000s)............. $9,196 $16,702 $27,124 $22,509
Ratio of expenses to average net assets:
Before expense reimbursement............... 3.57%(1) 2.41% 2.19% 2.73%(1)
After expense reimbursement................ 1.90%(1) 1.90% 1.99%(2) 2.00%(1)
Ratio of net investment income (loss) to average
net assets:
Before expense reimbursement............... (2.77%)(1) (1.93%) (1.22%) 9.44%(1)
After expense reimbursement................ (1.10%)(1) (1.42%) (1.02%) 10.17%(1)
Portfolio turnover rate......................... 127.88% 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 (UNAUDITED) JANUARY 31, 2000
- --------------------------------------------------------------------------------
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 net taxable income to its
shareholders. Accordingly, no provisions for federal income taxes have been made
in the accompanying financial statements.
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
$12,452,051 and $19,396,988 respectively, for the six months ended January 31,
2000.
<PAGE>
POLYNOUS GROWTH FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED JANUARY 31, 2000
- --------------------------------------------------------------------------------
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 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 1.90% of the Fund's average daily net assets. For
the six months ended January 31, 2000, advisory fees of $61,467 were paid to the
Adviser and the Adviser reimbursed the Fund $93,690.
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. For the six months
ended January 31, 2000, the Fund reimbursed the Distributor $15,367 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. PFPC Inc. ("PFPC") serves as the Fund's Administrator pursuant to an
Administration agreement with the Trust on behalf of the Fund. Under the terms
of the agreement, PFPC is entitled to receive fees based on the aggregate
average daily net assets of the Fund, computed daily and payable monthly at a
rate of 0.15% of the first $50 million of net assets, 0.10% of net assets
between $50 million and $10 million and 0.05% of net assets over $100 million,
subject to a minimum annual charge of $55,000. PFPC has agreed to waive $3,000
of monthly administrative fees for the period November 1999 through April 2000.
NOTE 4 - CAPITAL LOSS CARRYFORWARD
At January 31, 2000, 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>
BOARD OF TRUSTEES OFFICERS
Kevin L. Wenck Kevin L. Wenck
Richard H. Kimball
Ronald H. Kase
INVESTMENT ADVISER SHAREHOLDER SERVICES
Polynous Capital Management, Inc. PFPC Inc.
345 California Street, Suite 1220 211 South Gulph Road
San Francisco, CA 94104 King of Prussia, PA 19406
(415) 956-3384 (800) 528-8069
(610) 239-4600
UNDERWRITER LEGAL COUNSEL
Polynous Securities, LLC Paul, Hastings, Janofsky & Walker LLP
345 California Street, Suite 1220 345 California Street
San Francisco, CA 94104 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
For Additional Information about Polynous Growth Fund call:
(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.
