As filed with the Securities and Exchange Commission on December __, 1996
Securities Act File No. 33-12597
Investment Company Act File No. 811-7829
==========================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. 1 [X]
POST-EFFECTIVE AMENDMENT NO. [ ]
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1940 [X]
AMENDMENT NO. 1 [X]
KHAN FUNDS
(Exact name of registrant as specified in Charter)
714 FM 1960 West Suite 201
Houston Texas 77090
(Address of Principal Executive Office)
Registrant's Telephone Number (Including Area Code) 1-800-217-KHAN
Sardar A. D. Khan
Khan Funds
714 FM 1960 West Suite 201
Houston Texas 77090
(Name and address of agent for service of process)
Copy to:
Michael Glazer
Paul, Hastings, Janofsky & Walker LLP
555 S. Flower Street
Los Angeles, California 90071
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until the Registration Statement shall become effective on such
date as this Commission, acting pursuant to said Section 8(a), may determine.
Approximate Date of Proposed Public Offering: as soon as practicable
after the effective date of the Registration Statement
===========================================================
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant has
elected to register an indefinite number of shares of beneficial interest ,
$.001. The amount of the registration fee is $500.
A Rule 24f-2 Notice for the Registrant's fiscal year ending June 30, 1997 will
be filed with the Commission on or before August 29, 1997.
===========================================================
<PAGE>
KHAN FUNDS
Form N-1A
Cross Reference Sheet
ITEM NO. ITEM LOCATION IN PROSPECTUS
PART A
1. Cover page ..................................Cover page
2. Synopsis ....................................Expense Table
3. Condensed Financial Information .............Not Applicable
4. General Description of Registrant ..........."General Information";
"Management"; "Investment
Objectives, Policies and
Techniques";
5. Management of the Fund ......................"Management"; "General
Information"
5A.Management's Discussion of Fund .............Not Applicable
Performance
6. Capital Stock and Other Securities .........."General Information";
"Dividends, Capital
Gains, and Taxes"
7. Purchase of Securities Being Offered ........"Your Account"
8. Redemption or Repurchase ...................."Your Account"
9. Pending Legal Proceedings ...................Not Applicable
PART B LOCATION IN STATEMENT OF ADDITIONAL INFORMATION
10. Cover Page .................................Cover Page
11. Table of Contents .........................."Table of Contents"
12. General Information and History ............Not Applicable
13. Investment Objectives and Policies ........."Investment Objectives and
Policies"; "Investment
Restrictions"; "Other Securities
and Investment Techniques"
14. Management of Fund ........................."Management"
15. Control Persons and Principal .............."General Information"
Holders of Securities
16. Investment Advisory and Other Services ....."Management"; Distribution
Arrangements"; "General
Information"
17. Brokerage Allocation ......................."Portfolio Transactions and
Brokerage"
18. Capital Stock and other Securities ........."General Information".
19. Purchase, Redemption and Pricing
of Securities Being Offered ................"Net Asset Value"; "Redemptions"
20. Tax Status ................................."Taxation"; "Dividends and
Distributions"
21. Underwriters ...............................Not Applicable
22. Calculation of Performance Data ............"Performance Information"
23. Financial Statements ......................."Financial Statements"
PART C
The information required to be included in Part C is set forth under the
appropriate item, so numbered, in part C to the Registration Statement.
<PAGE>
KHAN FUNDS
Khan Growth Fund
714 FM 1960 West Suite 201
Houston, Texas 77090
1-888-217-KHAN
Fax 713-444-3417
Prospectus
_____________, 1996
This Prospectus offers shares of the Khan Growth Fund (the "Fund"), a portfolio
or series of Khan Funds, an open-end management investment company (the
"Trust"). The Fund seeks long-term capital growth, consistent with the
preservation of capital, by investing primarily in the common stock of large
capitalization U.S. and foreign companies (I.E., companies having a market
capitalization exceeding $1 billion). Current income is a secondary objective of
the Fund. Khan Investment Inc. serves as investment advisor to the Fund.
THIS PROSPECTUS DESCRIBES CONCISELY THE INFORMATION ABOUT THE FUND THAT YOU
SHOULD KNOW BEFORE INVESTING. PLEASE READ IT CAREFULLY AND RETAIN IT FOR FUTURE
REFERENCE.
A Statement of Additional Information dated ______, 1996 has been filed with the
Securities and Exchange Commission, and is incorporated herein by reference (is
legally considered a part of this prospectus). The Statement of Additional
Information is available free upon request by writing to Khan Funds or calling
1-888-217-KHAN.
- --------------------------------------------------------------------------------
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Expenses....................................................................
Shareholder Transaction Expenses........................................
Annual Fund Operating Expenses..........................................
Understanding Expenses..................................................
Investment Objectives, Policies and Techniques..............................
Investment Objectives...................................................
Management Policies.....................................................
Investment Techniques...................................................
Risk Factors............................................................
Management..................................................................
The Advisor.............................................................
The Distributor.........................................................
The Custodian and Transfer Agent........................................
Your Account................................................................
Ways to Set Up Your Account.............................................
How to Sell Shares......................................................
Shareholder and Account Policies........................................
Dividends, Capital Gains, and Taxes.........................................
Understanding Distributions.............................................
Distribution Options....................................................
Taxes...................................................................
Performance Information.....................................................
General Information.........................................................
- --------------------------------------------------------------------------------
MINIMUM INVESTMENT
To open an account $1,000
To add to an account $100
Minimum account balance $1,000
- --------------------------------------------------------------------------------
-2-
<PAGE>
PROSPECTUS
KHAN GROWTH FUND
_____, 1996
================================================================================
Khan Growth Fund ("the Fund") is a series of Khan Funds, an open-end,
management investment company which was formed under Delaware law in 1996 as a
business trust (the "Trust"). Each share of the Fund has one vote. All shares of
the Fund participate equally in dividends and other distributions declared by
the board of trustees, and all shares of the Fund have equal rights in the event
of liquidation of the Fund. Shares of the Fund have no preemptive, conversion or
subscription rights.
The Trust is governed by a board of a trustees which is responsible for
protecting the interests of the shareholders of the Fund. The trustees meet at
regular intervals to oversee the activities of the Fund, review contractual
arrangements with companies that provide services to the Fund, and review
performance. Non-affiliated trustees have been included on the board to
safeguard the interests of the Fund's shareholders.
EXPENSES
Like all mutual funds, the Fund pays expenses related to its daily
operations. Expenses paid out of the Fund's assets are reflected in its share
price or dividends. The Fund pays an annual management fee to Khan Investment
Inc., for managing its investments and business affairs, of 0.75% of its average
daily net assets.
While the management fee is a significant component of the Fund's annual
operating costs, the Fund has other expenses as well. The Fund pays the fees of
its custodian, auditors, fund accountants, independent accountants, and lawyers.
It also pays other expenses such as the cost of compliance with federal and
state laws, proxy solicitations, shareholder reports, taxes, insurance premiums,
and the fees of trustees who are not "interested persons" of the Fund or Khan
Investment Inc., as that term is defined in the Investment Company Act of 1940,
the federal securities law that governs the regulation of investment companies
(the "Investment Company Act").
SHAREHOLDER TRANSACTION EXPENSES
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when you buy or sell
shares of the Fund.
Maximum sales charge on purchases and reinvested dividends......None
Deferred sales charge on redemptions............................None
Redemption fee..................................................None*
* The Fund will charge a $15.00 fee to transmit a redemption payment by wire.
ANNUAL FUND OPERATING EXPENSES
The Fund pays its own operating expenses, including a management fee to Khan
Investment Inc. The Fund also incurs other expenses for services such as
maintaining shareholder records and furnishing shareholder statements and
reports. The Fund's expenses are factored into its share price and dividends,
are subtracted from the share price daily, and are not charged directly to
shareholder accounts. The Fund expects to incur the following expenses at the
following annualized rates during its first fiscal year.
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS).
Management fee........................................................0.75%
12b-1 fee.............................................................0.25%*
Other expenses (after expense reimbursements).........................1.00%
Total operating expenses..............................................2.00%
* Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charge permitted by the National Association of
Securities Dealers, Inc.
-3-
<PAGE>
Khan Investment Inc. has voluntarily undertaken to reimburse the Fund for
any ordinary operating expenses in excess of 2% of average net assets annually
through June 30, 1997. Any reduction is subject to reimbursement by the Fund
within the following three years, provided that the Fund is able to effect such
reimbursement while remaining within the expense limitation. During its first
fiscal year, the Fund expects to incur Other expenses and Total operating
expenses at the annualized rate of ____% and ___% of average net assets,
respectively.
UNDERSTANDING EXPENSES
Operating a mutual fund requires paying for portfolio management,
shareholder statements, tax reporting, and other services. These costs are paid
from the Fund's assets; any quoted share price or return is after expenses.
EXAMPLE:
Let's say, hypothetically, that the Fund's annual return is 5% and that its
operating expenses are exactly as shown above. For every $1,000 you invested,
here's how much you would have paid in total expenses if you closed your account
after the number of years indicated:
After 1 year............................................................$
After 3 years ..........................................................$
The purpose of the expense table is to help an investor understand the costs
and expenses associated with investing in the Fund. This example illustrates the
effect of expenses, but is not meant to suggest actual or expected costs or
returns, all of which may be more or less than those shown in the example.
Because the Fund is new, the above amounts are estimates. Actual investment
returns and operating expenses may be more or less than those shown.
-4-
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND TECHNIQUES
INVESTMENT OBJECTIVES
The Fund's primary objective is to provide you with long-term capital growth
consistent with the preservation of capital. Current income is a secondary
objective. The Fund's investment objectives cannot be changed without approval
by the holders of a majority (as defined in the Investment Company Act) of the
Fund's outstanding voting shares. The Fund commenced operation as of the date of
this Prospectus and has no operating history. There can be no assurance that the
Fund's investment objectives will be achieved.
MANAGEMENT POLICIES
During periods which the Fund's investment advisor, Khan Investment Inc.
(the "Advisor"), judges to be of market strength, the Fund acts aggressively to
increase shareholders' capital by investing principally in common stocks of
domestic and foreign issuers, including common stocks with warrants attached,
and debt securities of the United States and foreign governments.
The Fund seeks investment opportunities generally in equity securities of
larger capitalization companies (those with market capitalization exceeding $1
billion) which the Fund's Advisor believes have the potential to experience
above average and predictable earnings growth. The Advisor seeks to identify
those foreign and domestic issuers which it considers undervalued by the stock
market in terms of current earnings, assets or growth prospects. These companies
will include those that Advisor believes have new or innovative products,
services or processes which can enhance prospects for growth in future earnings.
Other than in periods of anticipated market weakness, the Fund invests at least
80% of the value of its net assets in common stocks.
During normal market conditions, the Fund may invest up to 20% of the value
of its net assets in debt securities of the United States and its agencies and
instrumentalities, and of foreign governments, with initial maturities of more
than one year. All debt securities held by the Fund will be rated investment
grade at the time of purchase by an established rating agency (e.g. AAA, AA, A
or BBB by Standard & Poor's Corporation) or, if unrated, will be determined to
be of comparable qualify by the Advisor.
In periods of anticipated market weakness, the Fund may adopt a temporary
defensive posture to preserve shareholders' capital by investing the Fund's
assets in securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities, certificates of deposit, time deposits, bankers'
acceptances and other short-term debt obligations issued by domestic banks,
foreign subsidiaries of domestic banks, foreign branches of domestic banks,
domestic and foreign branches of foreign banks, domestic savings and loan
associations and other banking institutions, or investment grade corporate
bonds. When market conditions warrant, all of the Fund's assets can be so
invested.
The Fund may invest up to 10% of the value of its net assets in securities
of foreign governments and foreign companies which are not publicly traded in
the United States. The Fund may invest up to 2% of the value of its net assets
in warrants to purchase securities in which the Fund may invest; warrants
acquired by the Fund in units with other securities or attached to other
securities are not included in this 2% restriction.
INVESTMENT TECHNIQUES
In connection with its investment objectives and policies, the Fund may
employ, among others, the following investment techniques which may involve
certain risks.
PUT AND CALL OPTIONS - The Fund may purchase put and call options on securities
in which it may invest and on stock indices. In addition, to earn additional
income on its investment securities, the Fund may sell (write) covered call
option contracts on securities it owns and on stock indices to the extent of 20%
of the value of its net assets at the time such option contracts are written. A
put option gives the purchaser of the option the right to sell, and obligates
the writer to purchase, the underlying security or index at the exercise price
at any time during the option period. A call option gives the purchaser of the
option the right to buy, and obligates the writer to sell, the underlying
security or index at the exercise price at any time during the option period. A
covered call option sold by the Fund, which is a call option with respect to
which the Fund owns the underlying security, exposes the Fund during the term of
the option to
-5-
<PAGE>
possible loss of opportunity to realize appreciation in the market price of the
underlying security or obligates the Fund to hold a security which might
otherwise have been sold to protect against depreciation in the market price of
the security. Options are subject to a variety of risks, including the risk that
the Adviser does not predict correctly movements in the price of the underlying
security or the market in general, and the inability to close out positions.
FUTURES CONTRACTS - The Fund may buy and sell stock index futures contracts and
options on such contracts as a hedge against changes in market prices. A futures
contract obligates the seller of the contract to deliver and the purchaser of
the contract to take delivery of the type of financial instrument called for in
the contract at a specified price. Like stock index options, stock index futures
contracts are settled in cash. Futures contracts and related options are subject
to a variety of risks, including the risk that the Advisor does not predict
correctly movements in the direction of the stock market generally, exchange
limitations on daily price fluctuations, trading interruptions, and the
inability to close out positions.
MORTGAGE-BACKED SECURITIES - The Fund may invest in certificates issued by the
Government National Mortgage Association ("GNMA") as a short-term investment.
GNMA certificates are mortgage-backed securities representing part ownership of
a pool of mortgage loans, which are issued by lenders such as mortgage bankers,
commercial banks and savings associations, and are either insured by the Federal
Housing Administration or the Veterans Administration. A pool of these mortgages
is assembled and, after being approved by GNMA, is offered to investors through
securities dealers. The timely payment of interest and principal on each
mortgage is guaranteed by GNMA and backed by the full faith and credit of the
U.S. Government. Principal is paid back monthly by the borrower over the term of
the loan rather than returned in a lump sum at maturity.
SHORT SALES - The Fund is authorized to make short sales of securities it owns
or has the right to acquire at no added cost (referred to as short sales
"against the box"). The Fund will use this technique to hedge against market
risks when the Advisor believes that the price of a portfolio security may
decline. As a matter of operating policy, the Fund will not make such short
sales or maintain a short position if to do so could require collateral deposits
and segregation of assets aggregating more than 5% of the value of its net
assets.
FOREIGN CURRENCY TRANSACTIONS - The Fund may engage in currency exchange
transactions to protect against uncertainty in the level of future exchange
rates in connection with hedging and other non-speculative strategies involving
either specific settlement transactions or portfolio positions. The Fund will
conduct its currency exchange transactions either on a spot (i.e., cash) basis
at the rate prevailing in the currency exchange market, or by entering into
forward contracts to purchase or sell currencies. A forward currency exchange
contract involves an obligation to purchase or sell a specific currency at a
future date, which must be more than two days from the date of the contract, at
a price set at the time of the contract. Transaction hedging is the purchase or
sale of forward currency with respect to specific receivable or payable of the
Fund generally arising in connection with the purchase or sale of its portfolio
securities. Position hedging is the sale of forward currency with respect to
portfolio security positions denominated or quoted in the currency. These
contracts are entered into in the interbank market conducted directly between
currency traders (typically commercial banks or other financial institutions)
and their customers.
LENDING PORTFOLIO SECURITIES - From time to time, the Fund may lend its
portfolio securities to brokers, dealers and other financial institutions
needing to borrow securities to complete certain transactions. Such loans may
not exceed 33-1/3% of the value of the Fund's total assets. In connection with
such loans, the Fund will receive collateral consisting of cash, U.S. Government
securities or irrevocable letters of credit issued by domestic financial
institutions which will be maintained at all times in an amount equal to at
least 100% of the current market value of the loaned securities. The Fund can
increase its income through the investment of such collateral. The Fund
continues to be entitled to payments in amounts equal to the interest, dividends
or other distributions payable on the loaned security, and receives interest on
the amount of the loan. Such loans will be terminable at any time upon specified
notice. The Fund might experience risk of loss if the institution with which it
has engaged in a portfolio loan transaction breaches its agreement with the
Fund.
BORROWING MONEY - As a fundamental policy, the Fund is permitted to borrow to
the extent permitted under the Investment Company Act. However, the Fund
currently intends to borrow money only for temporary or emergency (not
leveraging) purposes, in an amount up to 15% of the value of the Fund's
-6-
<PAGE>
total assets (including the amount borrowed) less liabilities (not including the
amount borrowed) at the time the borrowing is made. While borrowings exceed 5%
of the Fund's total assets, the Fund will not make any additional investments.
ILLIQUID SECURITIES - The Fund may invest up to 15% of the value of its net
assets in securities as to which a liquid trading market does not exist,
provided such investments are consistent with the Fund's investment objectives.
Such securities may include securities that are not readily marketable, such as
certain securities that are subject to legal or contractual restrictions on
resale, repurchase agreements providing for settlement in more than seven days
after notice, and certain options traded in the over-the counter market and
securities used to cover such options. As to these securities, the Fund is
subject to a risk that should the Fund desire to sell them when a ready buyer is
not available at a price the Fund deems representative of their value, the value
of the Fund's net assets could be adversely affected.
REPURCHASE AGREEMENTS - The Fund may enter into repurchase agreements, which
involve the acquisition by the Fund of an underlying debt instrument, subject to
an obligation of the seller to repurchase, and the Fund to resell, the
instrument at a fixed price, usually not more than one week after its purchase.
Certain costs may be incurred by the Fund in connection with the sale of
securities if the seller does not repurchase them in accordance with the
repurchase agreement. In addition, if bankruptcy proceedings are commenced with
respect to the seller of the securities, realization on the securities by the
Fund may be delayed or limited.
CERTAIN FUNDAMENTAL POLICIES - The Fund may (i) borrow money to the extent
permitted under the Investment Company Act of 1940, which currently limits
borrowing to no more than 33-1/3% of the value of the Fund's total assets; (ii)
invest up to 5% of its total assets in the obligations of any issuer, except
that up to 25% of the value of the Fund's total assets may be invested without
regard to any such limitation and the Fund may invest in securities issued or
guaranteed by the U.S. Government, its without regard to any such limitation;
and (iii) invest up to 25% of its total assets in the securities of issuers in a
single industry, provided that, there shall be no such limitation on investments
in securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. Notwithstanding any of the foregoing policies, and to the
extent permitted by the Investment Company Act, the Fund may invest all of its
assets in an investment company with substantially the same investment
objectives as the Fund. This paragraph describes fundamental policies that
cannot be changed without approval by the holders of a majority (as defined in
the Investment Company Act) of the Fund's outstanding voting shares. See
"Investment Objectives and Policies--Investment Restrictions" in the Fund's
Statement of Additional Information for additional fundamental policies.
CERTAIN ADDITIONAL NON-FUNDAMENTAL POLICIES - The Fund may (i) purchase
securities of any company having less than three years' continuous operation
(including operations of any predecessor companies) if such purchase does not
cause the value of its investments in all such companies to exceed 5% of the
value of its total assets; (ii) pledge, hypothecate, mortgage or otherwise
encumber its assets, but only to secure permitted borrowings; and (iii) invest
up to 15% of the value of its net assets in repurchase agreements providing for
settlement in more than seven days after notice and in other illiquid
securities. This paragraph describes non-fundamental policies that can be
changed by the board of trustees without shareholder approval. See "Investment
Objectives and Policies--Investment Restrictions" in the Fund's Statement of
Additional Information for additional non-fundamental policies.
RISK FACTORS
INVESTING IN FOREIGN SECURITIES - Foreign securities markets generally are not
as developed or efficient as those in the United States. Securities of some
foreign issuers are less liquid and more volatile than securities of comparable
U.S. issuers. Similarly, volume and liquidity in most foreign securities markets
are less than in the United States and, at times, volatility of price can be
greater than in the United States. Settlement of transactions in foreign markets
may be delayed or less frequent than in the U.S. The issuers of some foreign
securities may be subject to less stringent or different regulations than are
U.S. issuers. In addition, there may be less publicly available information
about non-U.S. issuers than is available for U.S. issuers, and non-U.S. issuers
are not generally subject to uniform accounting and financial reporting
standards, practices and requirements comparable to those applicable to U.S.
issuers.
Because stock certificates and other evidences of ownership of such
securities usually are held outside the United States, the Fund will be subject
to additional risks which include possible adverse political and economic
developments, possible seizure or nationalization of foreign deposits and
possible adoption of
-7-
<PAGE>
governmental restrictions which might adversely affect the payment of principal,
interest and dividends on the foreign securities or might restrict the payment
of principal, interest and dividends to investors located outside the country of
the issuer, whether as a result of currency blockage or otherwise. Custodial
expenses for a portfolio of non- U.S. securities generally are higher than for a
portfolio of U.S. securities.
Since foreign securities often are purchased with and payable in currencies
of foreign countries, the value of these assets as measured in U.S. dollars may
be affected favorably or unfavorably by changes in currency rates and exchange
control regulations. Some currency exchange costs may be incurred when the Fund
changes investments from one country to another.
Furthermore, some of these securities may be subject to brokerage taxes
levied by foreign governments, which have the effect of increasing the cost of
such investment and reducing the realized gain or increasing the realized loss
on such securities at the time of sale. Income received by the Fund from sources
within foreign countries may be reduced by withholding or other taxes imposed by
such countries. Tax conventions between certain countries and the United States,
however, may reduce or eliminate such taxes. All such taxes paid by the Fund
will reduce its net income available for distribution to shareholders.
Although the Fund's focus on investments in stocks of companies with large
market capitalizations will to some extent limit the foreign countries in which
the issuers of its portfolio securities are located, the Fund may invest in
companies organized in any country. Investments in securities issued by the
governments of emerging or developing countries, and of companies within those
countries, involves greater risks than other foreign investments. Investments in
emerging or developing markets involve exposure to economic and legal structures
that are generally less diverse and mature (and in some cases the absence of
developed legal structures governing private and foreign investments and private
property), and to political systems which can be expected to have less
stability, than those of more developed countries. The risks of investment in
such countries may include matters such as relatively unstable governments,
higher degrees of government involvement in the economy, the absence until
recently of capital market structures or market-oriented economies, economies
based on only a few industries, securities markets which trade only a small
number of securities, restrictions on foreign investment and stocks, and
significant foreign currency devaluations and fluctuations.
INVESTING IN DEBT SECURITIES - Debt obligations with longer maturities tend to
produce higher yields and are generally subject to potentially greater capital
appreciation and depreciation than obligations with shorter maturities and lower
yields. The market prices of debt obligations usually vary depending upon
available yields. An increase in interest rates will generally reduce the value
of such portfolio investments, and a decline in interest rates will generally
increase the value of such portfolio investments. The return on such investments
also depends on the continuing ability of the issuers of the debt securities in
which the Fund invests to meet their obligations for the payment of interest and
principal when due.
MORTGAGE-BACKED SECURITIES - Mortgage-backed securities are often subject to
more rapid repayment than their stated maturity dates would indicate as a result
of the pass-throughs or prepayments of principal on the underlying loans, which
may increase the volatility of such investments relative to similarly rated debt
securities. During periods of declining interest rates, prepayment of loans
underlying mortgage-backed securities can be expected to accelerate and thus
impair the Fund's ability to reinvest the returns of principal at comparable
yields. During periods of rising interest rates, reduced prepayment rates may
extend the average life of mortgage-backed securities and increase the Fund's
exposure to rising interest rates.
FOREIGN CURRENCY EXCHANGE - Currency exchange rates may fluctuate significantly
over short periods of time. They generally are determined by the forces of
supply and demand in the foreign exchange markets and the relative merits of
investments in different countries, actual or perceived changes in interest
rates and other complex factors, as seen from an international perspective.
Currency exchange rates also can be affected unpredictably by intervention by
U.S. or foreign governments or central banks, or the failure to intervene, or by
currency controls or political developments in the U.S. or abroad.
The foreign currency market offers less protection against defaults in the
forward trading of currencies than is available when trading in currencies
occurs on an exchange. Since a forward currency contract is not guaranteed by an
exchange or clearinghouse, a default on the contract would deprive the Fund of
unrealized profits or force the Fund to cover its commitments for purchase or
resale, if any, at the current market price.
-8-
<PAGE>
OTHER INVESTMENT CONSIDERATIONS - The Fund's net asset value per share is not
fixed, and should be expected to fluctuate.
The Fund invests for long-term growth rather than short-term profits;
however, a limited amount of short-term trading can be expected in order to
maintain a flexible portfolio strategy. In addition, the possible need to
realize cash for redemption of Fund shares may make it necessary to sell
securities even though such sales would not otherwise be desirable from an
investment standpoint. Consequently, portfolio turnover may vary from year to
year, as well as within a year. Higher portfolio turnover rates are likely to
result in comparatively greater brokerage commissions than lower turnover rates.
Moreover, when extraordinary market conditions prevail, the Advisor's investment
strategy may shift rapidly, in which case higher turnover rates can be expected.
The amount of portfolio activity will not be a limiting factor when making
portfolio decisions. Under normal market conditions, the Fund's portfolio
turnover rate generally will be less than 100%. See "Portfolio Transactions" in
the Statement of Additional Information.
Investment decisions for the Fund are made independently from those of any
other accounts advised by the Advisor. However, if such other accounts are
prepared to invest in, or desire to dispose of, securities of the type in which
the Fund invests at the same time as the Fund, available investments or
opportunities for sales will be allocated equitably to each. In some cases, this
procedure may adversely affect the size of the position obtained for or disposed
of by the Fund or the price paid or received by the Fund.
The Fund is newly organized and has no operating history.
RISKS AND RETURNS
Historically, stocks have shown greater growth than other types of
securities. In the short term, however, stock prices may fluctuate widely in
response to company, market or economic news. In addition the stock prices of
small companies often are more volatile than the stock prices of larger
companies. The Fund does not pursue income and is not by itself a balanced
investment plan. The Fund will seek to limit risk by selecting companies with
experienced management, positive cash flows and sustainable growth prospects and
diversifying its holdings, to avoid concentration in any one stock or industry.
Similarly, the values of the debt securities held by the Fund change as
interest rates fluctuate, with longer-term securities fluctuating more widely in
response to changes in interest rates than those of shorter-term securities. A
decline in interest rates usually produces an increase in the value of debt
securities, while an increase in interest rates generally reduces their value.
The interest rate on a debt obligation depends on a variety of factors,
including the general conditions of the money and bond markets, the size of a
particular offering, the maturity of the obligation, and economic and other
matters affecting the issuer.
The value of the Fund's investment and the return it generates vary from day
to day. Performance depends upon on the Advisor's skill in selecting individual
stocks, as well as general market and economic conditions. When you sell your
shares, they may be worth more or less than what you paid for them.
MANAGEMENT
THE ADVISOR
Khan Investment Inc., 714 FM 1960 West Suite 201 Houston, Texas 77090, acts
as the Advisor to the Fund. The Advisor is a Texas corporation that was
organized to act as the Fund's investment advisor. The advisor is controlled by
Sardar A.D. Khan, its President, who has extensive experience managing his own
investment portfolio utilizing the techniques used in managing the Fund. Dr.
Khan will be primarily responsible for managing the assets of the Fund and for
selecting the securities that the Fund will purchase and sell, although he may
be assisted by other employees who will provide him with research assistance.
The Advisor is newly organized and has no previous experience in managing a
registered investment company.
MANAGEMENT FEE - Subject to the direction and control of the Trustees and
consistent with the investment
-9-
<PAGE>
objectives and policies of the Fund, the Advisor formulates and implements an
investment program for the Fund, including determining which securities should
be bought and sold. The Advisor also provides officers for the Fund. For its
services, the Advisor receives a fee, accrued daily and paid monthly, at the
annual rate of 0.75% of the average daily net assets of the Fund.
OPERATING EXPENSES - The Fund is responsible for paying its operating expenses,
including but not limited to management and administrative fees, legal and
auditing fees, fees and expenses of its custodian, accounting and shareholder
servicing fees, trustees fees, the cost of communicating with shareholders and
registration fees. The Advisor has voluntarily agreed to limit the Fund's
operating expenses to 2.00% of its average annual net assets through June 30,
1997. Any reduction made by the Advisor in its fees or reimbursement of expenses
is subject to reimbursement by the Fund within the following three years,
provided that the Fund is able to effect such reimbursement while remaining
within the expense limitation. The Advisor will notify shareholders in the event
it determines not to maintain this voluntary limit.
BROKERAGE - In placing portfolio transactions, the Advisor uses its best efforts
to choose a broker-dealer capable of providing the services necessary to obtain
the most favorable price and execution available. The full range and quality of
services available are considered in making these determinations, such as the
size of the order, the difficulty of execution, the operational facilities of
the firm involved, the firm's risk in positioning a block of securities, and
other factors.
In those instances where it is reasonably determined that more than one
broker-dealer can offer the services needed to obtain the most favorable price
and execution available and the transaction involves a brokerage commission,
consideration may be given to those broker-dealers which furnish or supply
research and statistical information to the Advisor that it may lawfully and
appropriately use in its investment advisory capacity for the Fund and for other
accounts, as well as provide other services in addition to execution services.
The Advisor considers such information, which is in addition to, and not in lieu
of, the services required to be performed by it under the Advising Agreement, to
be useful in varying degrees, but of indeterminable value. The Board of Trustees
reviews brokerage allocations, where services other than best price/execution
capabilities are a factor, to ensure that the other services provided meet the
tests outlined above and produce a benefit to the Fund.
The placement of portfolio transactions with broker-dealers who sell shares
of the Fund is subject to rules adopted by the National Association of
Securities Dealers, Inc. ("NASD"). Provided the Advisor is satisfied that the
Fund is receiving the most favorable price and execution available, the Advisor
may also consider the sale of the Fund's shares as a factor in the selection of
broker-dealers to execute its portfolio transactions.
THE DISTRIBUTOR
The Fund's Distributor is Khan Investment Inc., an affiliate of the Advisor,
located at 714 FM 1960 West Suite 201 Houston, Texas 77090.
The Trust has adopted a Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act with respect to the Fund. Under the Plan, the Fund
compensates the Distributor for services rendered and costs incurred in
connection with distribution of shares of the Fund, at the annual rate of 0.25%
of the value of the Fund's average net assets. The Distribution Plan is a
"compensation plan," which means the distribution fees may exceed the
Distributor's actual expenses. There is no limit on the periods during which
unreimbursed expenses may be carried forward. However, the Fund does not pay
interest, carrying or other finance charges on any unreimbursed expenses of the
Distributor, and is not obligated to pay any unreimbursed expenses that may
exist at such time, if any, as the Distribution Plan terminates or is not
continued by the trustees.
THE ADMINISTRATOR
Khan Investment Inc. also acts as the Fund's Administrator, subject to the
direction and control of the Trustees. In this capacity, the Administrator is
responsible for providing bookkeeping and administrative services to the Fund.
For its services, the Administrator receives a fee, accrued daily and paid
monthly, at the annual rate of 0.25% of the average daily net assets of the
Fund.
-10-
<PAGE>
THE CUSTODIAN AND TRANSFER AGENT
The River Oaks Trust Company, a subsidiary of Compass Bank, located at 2001
Kirby at San Felipe, P.O. Box 4886, Houston, Texas 77021-4886, is the Fund's
Custodian ("Custodian").
The Fund acts as its own transfer agent.
YOUR ACCOUNT
The Fund provides shareholders with service 5 business days a week, 8 hours a
day. To reach the Fund, call 1-888-217-KHAN between ____ a.m. and ____ p.m.
Central Time.
WAYS TO SET UP YOUR ACCOUNT
You may set up an account with the Fund in one of the following ways:
INDIVIDUAL OR JOINT OWNERSHIP -
FOR YOUR GENERAL INVESTMENT NEEDS
Individual accounts are owned by one person. Joint accounts can have two or more
own owners.
RETIREMENT -
TO DEFER TAXES ON YOUR RETIREMENT SAVINGS.
Retirement plans allow individuals to defer taxes on investment income and
capital gains. Contributions to these accounts may be tax deductible. Retirement
accounts require special applications.
* INDIVIDUAL RETIREMENT ACCOUNTS (IRAS) allow anyone of legal age and under
70-1/2 with earned income to invest up to $2,000 per tax year. If your
spouse has (or elects to be treated as having) earned income of less than
$250 per year, you can invest up to a total of $2,250 in a "spousal IRA,"
which is split between you and your spouse so that neither of you has
invested more than $2,000.
* ROLLOVER IRAS retain special tax advantages for certain distributions from
employer-sponsored retirement plans.
* SIMPLIFIED EMPLOYEE PENSION PLANS (SEP-IRAS) allow small business owners
or those with self-employment income to make tax-deductible contributions of
up to $22,500 per year for themselves and any eligible employees.
* OTHER RETIREMENT PLANS - The Fund may be included as an investment option
in other kinds of retirement plans, including Keogh or corporate profit
sharing and money purchase plans, 403(b) plans and 401(k) plans. The Fund
does not offer prototypes of these plans.
An IRA disclosure statement is delivered in advance of opening any IRA
account and contains information unique to retirement accounts. It also contains
a summary of the custodian fees which may be incurred for set-up and maintenance
of an IRA account.
GIFT OR TRANSFER TO A MINOR (UGMA, UTMA) TO INVEST FOR A MINOR'S EDUCATION OR
OTHER FUTURE NEEDS
These custodial accounts provide a way to give money to a minor. The account
application should include the child's social security number.
TRUST OR ESTABLISHED EMPLOYEE BENEFIT OR PROFIT-SHARING PLAN
FOR MONEY BEING INVESTED BY A TRUST, EMPLOYEE BENEFIT PLAN, OR PROFIT-SHARING
PLAN
The trust or plan must be established before an account can be opened. The
date of the trust or plan should be included on the new account application.
-11-
<PAGE>
BUSINESS OR ORGANIZATION
FOR INVESTMENT NEEDS OF CORPORATIONS, ASSOCIATIONS, PARTNERSHIPS, INSTITUTIONS,
OR OTHER GROUPS
You will need to send a certified corporate resolution (indicating which
officers are authorized to act) with your application.
HOW TO BUY SHARES
YOU CAN OPEN A NEW ACCOUNT by mailing in an application with a check for $1,000
or more.
AFTER YOUR ACCOUNT IS OPEN, YOU MAY ADD TO IT BY:
* mailing a check or money order along with the form at the bottom of your
account statement, or a letter;
* moving money from your bank account by telephone provided you have elected
this privilege on your new account application;
* wiring money from your bank; or
* making automatic investments.
The Fund is a NO-LOAD FUND, which means you pay no sales commissions of any
kind. The price you pay for shares is the net asset value per share next
calculated after your investment is received and accepted. An order is
considered received when the application (for a new account) or information
identifying the account, and the money are received. See "Shareholder and
Account Policies" for information about share price. The Fund does not issue
share certificates.
MINIMUM INVESTMENTS
* To open the account $ 1000.00
* To add to an account $ 100.00
* Minimum balance $ 1000.00
Because it is very expensive for the Fund to maintain small accounts (and
that cost is borne by all shareholders), the Fund reserves the right to close
your account if the value is less than $1000, unless the decrease in value is
solely due to market factors. Before closing a small account, the Fund will
notify you and allow you at least 30 days to bring the value of the account up
to the minimum.
The following table summarizes the various ways to buy shares of the Fund,
either initially when an account is opened or subsequently:
MAIL
TO OPEN AN ACCOUNT: TO ADD TO AN ACCOUNT:
Complete and sign the new account Make your check or money order
application. Make your check or money payable to "Khan Funds". Put your
order payable to "Khan Funds". account number onyour check.
Mail to the address on the new account Mail your check and the form at the
application or for overnite delivery: bottom of your account statement (or
a letter) to the address on your
account statement or for overnite
delivery:
Khan Funds Khan Funds
c/o River Oaks Trust Company c/o River Oaks Trust Company,
2001 Kirby Drive P.O. Box 4886 2001 Kirby Drive P.O. Box 4886
Houston, Texas 77210-4886 Houston, Texas 77210-4886
-12-
<PAGE>
PHONE 1-888-217-KHAN
TO OPEN AN ACCOUNT: TO ADD TO AN ACCOUNT:
You may not open a new account by phone. If you did not elect the telephone
transaction option on your new account
You may establish the telephone application, complete the shareholder
transaction option when you open an options form to make investments by
account by electing the option on your phone for amounts from $100 to $25,000.
new account application.
WIRE
TO OPEN AN ACCOUNT: TO ADD TO AN ACCOUNT:
Call 1-888-217-KHAN for instructions Call 1-888-217-KHAN for instructions on
on account by wire. opening and adding to an account by wire.
AUTOMATIC INVESTMENT PLAN
TO OPEN AN ACCOUNT: TO ADD TO AN ACCOUNT:
If you sign up for the Automatic Sign up for the Automatic Investment Plan
Investment Plan when you open your on the shareholder options form or call
account, the minimum initial for instructions on how to add to your
investment will be waived. Complete existing account.
and sign the Automatic Investment
Plan section of the new account
application
----------------------------------------------
HOW TO SELL SHARES
You can arrange to take money out of your account at any time by selling
(redeeming) some or all of your shares. Your shares will be sold at the next net
asset value per share (share price) calculated after your order is received. The
order must include the information specified below. See "Shareholder and Account
Policies" for more information about share price.
To sell shares in a regular (non-IRA) account, you may use any of the
methods described here. To sell shares in an IRA account, your request must be
made in writing. If you need an IRA distribution form, call us at
1-888-217-KHAN.
SELLING SHARES IN WRITING - Write a "letter of instruction" with:
* each owner's name and address,
* your account number,
* the dollar amount or number of shares to be redeemed, and
* the signature of each owner as it appears on the account.
Mail your letter to: Khan Funds c/o River Oaks Trust Company, 2001 Kirby Drive,
P.O. Box 4886, Houston, Texas 77210-4886.
-13-
<PAGE>
CERTAIN REDEMPTION REQUESTS MUST INCLUDE A SIGNATURE GUARANTEE, designed to
protect you and the Fund from fraud. Your request must be made in writing and
include a signature guarantee if any of the following situations applies:
* You wish to redeem more than $25,000 worth of shares;
* You add/change your name or add/remove an owner on your account;
* You add/change the beneficiary on your account;
* The check is being mailed to an address different from the address on your
account (record address);
* The check is being made payable to someone other than the account owner;
* When you add the telephone redemption option to your existing account; or
* If you transfer the ownership of your account.
You should be able to obtain a signature guarantee from a bank, broker,
dealer, credit union (if authorized under state law), securities exchange or
association, clearing agency, or savings association. A notary public cannot
provide a signature guarantee.
-14-
<PAGE>
The following table summarizes the procedures for selling shares that you
own:
NOTE: SOME REDEMPTIONS REQUIRE SIGNATURE GUARANTEES. SEE PAGE ....
- -------------------------------------------------------------------------------
MAIL
- --------------------------------------------------------------------------------
SPECIAL REQUIREMENTS
Individual Joint Owners, Sole The letter of instruction must be signed
Proprietorships, UGMA, UTMA by all persons required to sign for
account transactions (usually, all
owners of the account) exactly as their
names appear on the account The letter
of instruction must include Trust the
signatures of all trustees.
All Others Call 1-888-217-KHAN for instructions.
- --------------------------------------------------------------------------------
PHONE 1-888-217-KHAN
- --------------------------------------------------------------------------------
All accounts except IRAs You automatically have the telephone
redemption option (which allows you to
redeem at least $500 and up to $25,000
worth of shares per day by phone) unless
you declined it on your new account
application. If you declined the
telephone redemption option, call
1-888-217-KHAN for instructions on how
to add it.
- --------------------------------------------------------------------------------
WIRE
- --------------------------------------------------------------------------------
All accounts except IRAs For a $15.00 fee, the Fund will transmit
payment by wire to a pre-authorized bank
account. Usually, the proceeds will
arrive at your bank the next business
day.
- --------------------------------------------------------------------------------
SYSTEMATIC WITHDRAWALS
- --------------------------------------------------------------------------------
All accounts except IRAs Sign up for systematic withdrawals
(distributions from your account at
regular intervals in specified dollar
amounts of at least $100) by calling
1-888-217-KHAN for instructions on how
to add this option.
You must have $ 5,000 in your account
before you are eligible to sign up for
this option. If the amount in your
account is not sufficient to meet a
withdrawal, the remaining amount in the
account will be redeemed.
SHAREHOLDER AND ACCOUNT POLICIES
STATEMENTS AND REPORTS - Statements and reports that the Fund sends to you
include:
* Confirmation statements (after every transaction in your account or change
in your account registration);
* Account statements (quarterly);
* Annual and semi-annual reports with financial statements; and
* Year-end tax statements.
-15-
<PAGE>
We recommend that you keep each quarterly account statement and, especially,
each calendar year-end statement with your other important financial papers
since you may need to refer to them at a later date for tax purposes. If you
need copies of current or preceding year statements, call 1-800-217-KHAN. Copies
of statements for earlier years are available and are subject to a $10
processing fee.
SHARE PRICE - The Fund is open for business each day the New York Stock Exchange
("NYSE") is open. The offering price (price to buy one share) and redemption
price (price to sell one share) is the Fund's net asset value per share
calculated at the next Closing Time after receipt of your purchase or redemption
order. Closing Time is the time of the close of regular session trading on the
NYSE, which is usually 3:00 p.m. Central time, but is sometimes earlier.
The Fund's net asset value per share is the value of a single share, and is
computed each day the Fund is open for business at ___ p.m. Central time, by
adding up the value of the Fund's investments, cash, and other assets,
subtracting its liabilities, and then dividing the result by the number of
shares outstanding.
Fund securities and assets are valued primarily on the basis of market
quotations from the primary market in which they are traded or, if quotations
are not readily available, by a method that the board of trustees believes
accurately reflects a fair value. Values of foreign securities are translated
from the local currency into U.S. dollars using current exchange rates.
PURCHASES -
* All of your purchases must be made in U.S. dollars and checks must be
drawn on U.S. banks.
* The Fund does not accept cash, credit cards or third-party checks.
* If your check or telephone purchase order does not clear, your purchase
will be canceled and you will be liable for any losses or fees the Fund or
its transfer agent incurs.
* Your ability to make automatic investments and telephone purchases may be
immediately terminated if any item is unpaid by your financial
institution.
* The Fund reserves the right to reject any purchase order.
Certain financial institutions that have entered into sales agreements with the
Fund may enter confirmed purchase orders or redemption requests on behalf of
customers on an expedited basis, including orders by phone, with payment to
follow no later than the time when the Fund is priced on the following business
day. If payment is not received by that time, the financial institution could be
held liable for resulting fees or losses. These institutions may impose charges
for their services, and those charges could constitute a significant portion of
a smaller account.
-16-
<PAGE>
REDEMPTIONS -
* Normally, redemption proceeds will be mailed within seven days after
receipt of the request for redemption.
* The Fund may withhold payment on redemptions recently purchased by check
until it is reasonably satisfied that the check has cleared, which can
take up to fifteen days.
* If you make a telephone redemption, the Fund will send payment for your
redemption in one of three ways: (i) by mail; (ii) by Electronic Fund
Transfer (EFT) to a preauthorized bank account; or (iii) to your bank
account by wire transfer. The cost of the wire (currently $5.00) will be
deducted from the payment. Your bank also may impose a fee for the
incoming wire. Payment by EFT will usually arrive at your bank within two
banking days after your call. Payment by wire is usually credited to your
bank account on the next business day after your call.
* Redemptions may be suspended or payment dates postponed on days when the
NYSE is closed (other than customary closings on weekends or holidays),
when trading on the NYSE is restricted, during an emergency when it may
not be reasonably practicable for the Fund to dispose of the securities it
owns or for the Fund's trustees to determine the fair value of the net
assets of the Fund, or as permitted by the SEC.
If the Fund sends you a check (paying for a redemption, systematic
withdrawal payment, or a dividend or capital gain distribution you elected to
receive in cash) and the check is returned "undeliverable" or remains uncashed
for six months, the check will be canceled and the proceeds will be reinvested
in the Fund at the net asset value per share on the date of cancellation. In
addition, after that six-month period, your systematic withdrawal payments will
be canceled and future withdrawals will be allowed only when requested, or your
cash election will automatically be changed and future dividends and
distributions will be reinvested in your account.
ACCOUNT REGISTRATION - Address changes for your account may be made by writing
us a letter or by calling us at 1-800-217-KHAN. The Fund will send a written
confirmation of the change to both your old and new addresses. No telephone
redemptions may be made for 60 days after a change of address by phone. During
those 60 days, a signature guarantee will be required for any written redemption
request, unless your change of address was made in writing with a signature
guarantee.
TELEPHONE TRANSACTIONS - You may initiate many transactions, including purchases
and redemptions, by telephone. The Fund will not be responsible for any losses
resulting from unauthorized transactions if it follows reasonable procedures
designed to verify the identity of the caller. Those procedures may include
recording the call, requesting additional information, and sending written
confirmation of telephone transactions. If the Fund fails to follow such
reasonable procedures, the Fund may be responsible for resulting losses.
You should verify the accuracy of telephone transactions immediately upon
receipt of your confirmation statement. If you are unable to reach the Fund by
phone (for example, during periods of unusual market activity), consider placing
your order by mail.
DIVIDENDS, CAPITAL GAINS, AND TAXES
The Fund intends to distribute substantially all of its net income and
capital gains to shareholders at least annually.
-17-
<PAGE>
UNDERSTANDING DISTRIBUTIONS
As a shareholder, you are entitled to your share of the Fund's net income
and any gains realized on this disposition of its investments.
The Fund's income from dividends and interest, and any net realized
short-term gain, are paid to you as dividends. The Fund realizes long-term
capital gains whenever it sells securities held for more than one year for a
higher price than it paid for them. Net realized long-term gains are paid to you
as capital gain distributions.
DISTRIBUTION OPTIONS
When you open an account, specify on your new account application how you
want to receive your distributions. If you later want to change your
distribution option, you may do so either by a written request or by calling us
at 1-800-217-KHAN. The Fund offers three distribution options:
* REINVESTMENT OPTION. Your dividends and capital gain distributions will be
automatically reinvested in additional shares of the Fund. If you do not
indicate a choice on your new account application, your distributions will
be reinvested automatically.
* INCOME-ONLY OPTION. Your capital gain distributions will be automatically
reinvested, but you will be sent a check for each dividend.
* CASH OPTION. You will be sent a check for all distributions.
FOR IRA ACCOUNTS, all distributions are automatically reinvested because payment
of distributions in cash would be a taxable distribution from your IRA, and
might be subject to income tax and penalties if you are under 59-1/2 years old.
If you are 59-1/2 or older, you may request payment of distributions in cash,
which might be subject to income tax.
When you reinvest any distributions, the reinvestment price is the Fund's
net asset value per share at the close of business on the reinvestment date. The
mailing of distribution checks will usually begin on the payment date, which is
usually one week after the ex-dividend date.
TAXES
As with any investment, you should consider how the return on your
investment in the Fund will be taxed. If your account is a tax deferred account
(for example, an IRA or an employee benefit plan account), the following tax
discussion does not apply. If your account is not a tax-deferred account,
however, you should be aware of the following tax rules:
TAXES ON DISTRIBUTIONS - Distributions are subject to federal income tax, and
also may be subject to state or local taxes. If you live outside the United
States, your distributions also could be taxed by the country in which you
reside.
Your distributions are taxable when they are paid, whether you take them in
cash or reinvest them in additional shares. However, distributions declared in
October, November or December and paid in January are taxable as if they were
received by you on December 31.
For federal tax purposes, the Fund's income and short-term capital gain
distributions are taxed as dividends; long-term capital gain distributions are
taxed as long-term capital gains. At the end of the year, the Fund will send you
and the IRS a statement, called a Form 1099, showing the amount of each taxable
distribution you received in the previous calendar year.
TAXES ON TRANSACTIONS - When you redeem shares you will recognize a capital gain
or loss if there is a difference between the price of your shares at the time
you bought them (cost) and the price of your shares when you sell them.
Whenever you sell shares of the Fund, you will receive a confirmation
statement showing how many shares you sold and at what price. You also will
receive a year-end statement every January reporting, among other things, your
average cost basis in the shares you sold. This will allow you or your tax
-18-
<PAGE>
preparer to determine whether a redemption resulted in a capital gain or loss
and the tax consequences of that gain or loss. However, be sure to keep your
regular account statements; the information they contain will be essential in
verifying the amount of your capital gains or losses.
FOREIGN INCOME TAXES - Investment income received by the Fund from sources
within foreign countries may be subject to foreign income taxes withheld at the
source. The Fund will not be eligible to make an election to permit you to claim
a foreign tax credit for your share of such taxes because it will not meet the
requirement of having more than 50% of its assets invested in stocks or
securities of foreign corporations. However, the Fund expects such taxes to be
deductible by it in computing its taxable income.
ADDITIONAL INFORMATION - When you sign your account application, you will be
asked to certify that your Social Security or taxpayer identification number is
correct and that you are not subject to backup withholding for failing to report
income to the IRS. If you fail to comply with applicable IRS regulations,
including the certification procedures described above, the IRS can require the
Fund to withhold 31% of your taxable distributions and redemptions.
Additional information about taxes is set forth in the Statement of
Additional Information. Shareholders should consult their own advisers
concerning federal, state and local taxation of distributions from the Fund.
PERFORMANCE INFORMATION
From time to time, the Fund may publish its total return in advertisements
and communications to investors. Total return information will include the
Fund's average annual compounded rate of return over the four most recent
calendar quarters and, where applicable, over the most recent 5-year and 10-year
periods or over the period from the Fund's inception of operations (if shorter).
The Fund may also aggregate and advertise total return information over
different periods of time. The Fund's return will be based upon the value of the
shares acquired through a hypothetical $1,000 investment at the beginning of the
specified period and the net asset value of such shares at the end of the
period, assuming reinvestment of all distributions. Investors should note that
performance results of the Fund will fluctuate over time, and that presentation
of the Fund's total return for any prior period should not be considered as a
representation of what an investor's total return may be in any future period.
In addition to standardized return information as required by the SEC,
performance advertisements and sale literature may also include other total
return performance data ("non-standardized return"). Non-standardized return may
be quoted for the same or different periods as those for which standardized
return is quoted and may consist of aggregate or average annual percentage rates
of return, actual year by year rates, or any combination thereof. All data
included in performance advertisements will reflect past performance and will
not necessarily be indicative of future results. The Fund may also advertise
relative rankings by mutual fund ranking services, such as Lipper Analytical
Services, Inc. or Morningstar, Inc. The investment return and principal value of
an investment in the Fund will fluctuate over time. Consequently, an investor's
proceeds upon redeeming Fund shares may be more or less than this original cost
of the shares.
GENERAL INFORMATION
The Fund was organized as a Delaware business trust on September 17, 1996.
The trustees have authority to issue an unlimited number of shares of beneficial
interest of separate series.
The Fund does not hold annual shareholder meetings. There normally will be
no meetings of shareholders to elect trustees unless fewer than a majority of
the trustees holding office have been elected by shareholders. Shareholders of
record holding at least two-thirds of the outstanding shares of the Fund may
remove a trustee by votes cast in person or by proxy at a meeting called for
that propose. The trustees are required to call a meeting of shareholders for
the purpose of voting upon the question of removal of any trustee when so
requested in writing by the shareholders of record owning at least 10% of the
Fund's outstanding shares. Each share of the Fund has equal voting rights. Each
share of the Fund is entitled to participate equally in dividends and
distributions and the proceeds of any liquidation.
This Prospectus is part of a Registration Statement that has been filed with
the Securities and Exchange Commission in Washington, D.C. under the Securities
Act of 1933.
-19-
<PAGE>
No person has been authorized to give any information or to make any
representations in connection with the offer of Fund shares, other than as
contained in this Prospectus and the Fund's official sales literature.
Therefore, other information and representations must not be relied upon as
having been authorized by the Trust. This Prospectus does not constitute an
offer in any State in which, or to any person by whom, such offering may not
lawfully be made.
-20-
<PAGE>
INVESTMENT ADVISER
Khan Investment Inc.
714 FM 1960 West, Suite 201
Houston, Texas 77090
DISTRIBUTOR
Khan Investment Inc.
714 FM 1960 West, Suite 201 KHAN FUNDS
Houston, Texas 77090
Khan Growth Fund
CUSTODIAN
River Oaks Trust Company
2001 Kirby Drive P.O. Box 4886
Houston, Texas 77210-4886
TRANSFER AGENT PROSPECTUS
Khan Funds
714 FM 1960 West, Suite 201 _________, 1996
Houston, Texas 77090
AUDITORS
Coopers & Lybrand
1100 Louisiana Street
Houston, Texas 77002
Khan Investment Inc.
KHAN FUNDS Distributor
714 FM 1960 West, Suite 201 714 FM 1960 West, Suite 201
Houston, Texas 77090 Houston, Texas 77090
-21-
<PAGE>
KHAN FUNDS
STATEMENT OF ADDITIONAL INFORMATION
FOR
KHAN GROWTH FUND
, 1996
This Statement of Additional Information is not a prospectus, but contains
information in addition to and more detailed than that set forth in the
Prospectus for the Khan Growth Fund series (the "Fund") of Kahn Funds (the
"Trust"), and it should be read in conjunction with the Prospectus. Khan
Investment Inc. (the "Advisor") is the Advisor to the Fund. A copy of the
Prospectus may be obtained without charge by writing the Fund at 714 FM 1960
West Suite 201, Houston, Texas 77090, or by calling 1-800-838-5986.
TABLE OF CONTENTS
Investment Objectives and Policies .............................. B-2
Investment Restrictions ....................................... B-2
Securities and Investment Techniques .......................... B-4
Management ...................................................... B-11
Trustees and Officers ......................................... B-11
Advisory Agreement ............................................ B-12
Administration Agreement ...................................... B-13
Distribution Arrangements ....................................... B-13
Portfolio Transactions and Brokerage ............................ B-13
Net Asset Value ................................................. B-15
Redemptions ..................................................... B-15
Taxation ........................................................ B-16
Dividends and Distributions ..................................... B-17
Performance Information ......................................... B-17
Financial Statements ............................................ B-18
General Information ............................................. B-18
B-1
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Fund is a mutual fund whose investment objective is long-term capital
appreciation consistent with the preservation of capital. The Fund seeks to
achieve its objective by investing principally in equity securities of large
capitalization issuers. Current income is a secondary objective of the Fund.
There can be no assurance that the investment objectives of the Fund will be
achieved.
INVESTMENT RESTRICTIONS
The Fund has adopted the following investment policies and restrictions in
addition to the policies and restrictions discussed in the Prospectus.
FUNDAMENTAL POLICIES - The fundamental policies and restrictions listed below
cannot be changed without approval by the holders of a "majority of the
outstanding voting securities" of the Fund (which is defined in the Investment
Company Act of 1940 (the "Investment Company Act") to mean the lesser of (i) 67%
of the shares represented at a meeting at which more than 50% of the outstanding
shares are represented or (ii) more than 50% of the outstanding shares). As a
matter of fundamental policy, the Fund is diversified: I.E., at least 75% of the
value of its total assets is represented by cash and cash items (including
receivables), U.S. Government securities, securities of other investment
companies, and other securities limited for the purposes of this calculation in
respect of any one issuer to an amount not greater than 5% of the value of the
total assets of the Fund and not more than 10% of the outstanding voting
securities of such issuer.
In addition, the Fund may not:
1. Issue senior securities, borrow money, or pledge its assets, except that
the Fund may borrow on an unsecured basis from banks for temporary or emergency
purposes or for the clearance of Fund transactions in amounts not exceeding 10%
of its total assets (not including the amount borrowed), provided that it will
not make investments while borrowings in excess of 5% of the value of its total
assets are outstanding;
2. Make short sales of securities or maintain a short position, except for
short sales against the box;
3. Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of Fund transactions;
4. Act as underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities in its
investment portfolio;
5. Invest 25% or more of its total assets, calculated at the time of
purchase and taken at market value, in any one industry (other than U.S.
Government securities), except that the Fund reserves the right to invest all of
its assets in shares of another investment company;
6. Purchase or sell real estate or interests in real estate or real estate
partnerships (although the Fund may purchase and sell securities which are
secured by real estate, securities of companies which invest or deal in real
estate, and securities issued by real estate investment trusts);
7. Purchase or sell commodities or commodity futures contracts, except that
the Fund may purchase and sell stock index futures contracts as described in the
Prospectus and in this Statement of Additional Information and to this extent
permitted under applicable federal and state laws and regulations;
8. Make loans, except for the purchase of debt securities consistent with
the investment objectives and policies of the Fund and except for repurchase
agreements;
9. Make investments for the purpose of exercising control or management;
10. Invest in oil and gas limited partnerships or oil, gas or mineral
leases.
B-2
<PAGE>
OPERATING POLICIES - The Fund observes the following restrictions as a matter of
operating, but not fundamental, policy, which can be changed by the Board of
Trustees without shareholder approval.
The Fund may not:
1. Purchase any security if as a result the Fund would then hold more than
10% of any class of voting securities of an issuer (taking all common stock
issues as a single class, all preferred stock issues as a single class, and all
debt issues as a single class), except that each Fund reserves the right to
invest all of its assets in a class of voting securities of another investment
company;
2. Invest in securities of any issuer if any officer or trustee of the Trust
or any officer or director of the Advisor owns more than 1/2% of the outstanding
securities of such issuer, and such officers, trustees and directors who own
more than 1/2% own in the aggregate more than 5% of the outstanding securities
of such issuer;
3. Invest more than 10% of its assets in real estate investment trusts;
4. Invest more than 5% of the value of its net assets in warrants, although
the Fund does not have any present intention to invest in warrants;
5. Invest in any security if, as a result, the Fund would have more than 5%
of its total assets invested in securities of companies which, together with any
predecessor company, have been in continuous operation for fewer than three
years ("unseasoned securities");
6. Invest more than 10% of its assets in the securities of other investment
companies or purchase more than 3% of any other investment company's voting
securities or make any other investment in other investment companies except as
permitted by federal and state law, and except that the Fund reserves the right
to invest all of its assets in another investment company;
SECURITIES AND INVESTMENT TECHNIQUES
MONEY MARKET INSTRUMENTS - Certificates of deposit are negotiable certificates
evidencing the obligation of a bank to repay funds deposited with it for a
specified period of time. Time deposits are non-negotiable deposits maintained
in a banking institution for a specified period of time at a stated interest
rate. Bankers' acceptances are credit instruments evidencing the obligation of a
bank to pay a draft drawn on it by a customer; these instruments reflect the
obligation both of the bank and of the drawer to pay the full amount of the
instrument upon maturity.
U.S. GOVERNMENT SECURITIES - Securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities include U.S. Treasury
securities, which are backed by the full faith and credit of the U.S.
Government. Some obligations issued or guaranteed by U.S. Government agencies
and instrumentalities, for example, Government National Mortgage Association
pass-through certificates, are supported by the full faith and credit of the
U.S. Treasury; others, such as those of the Federal Home Loan banks, by the
right of the issuer to borrow from the U.S. Treasury; others, such as those
issued by the Federal National Mortgage Association, by the discretionary
authority of the U.S. Government to purchase certain obligations of the agency
or instrumentality; and others, such as those issued by the Student Loan
Marketing Association, only by the credit of the agency or instrumentality.
These securities bear fixed, floating or variable rates of interest. Principal
and interest may fluctuate based on generally recognized reference rates or the
relationship of rates. While the U.S. Government provides financial support to
such U.S. Government-sponsored agencies and instrumentalities, no assurance can
be given that it will always do so since it is not so obligated by law. The Fund
will invest in such securities only when it is satisfied that the credit risk
with respect to the issuer is minimal.
SOVEREIGN DEBT OBLIGATIONS - The Fund may invest in sovereign debt obligations
of foreign countries. A sovereign debtor's willingness or ability to repay
principal and interest in a timely manner may be affected by a number of
factors, including its cash flow situation, the extent of its foreign reserves,
the availability of sufficient foreign exchange on the date a payment is due,
the relative size of the debt service burden to the economy as a whole, the
sovereign debtor's policy toward international lenders and the political
B-3
<PAGE>
constraints to which it may be subject. Emerging market governments could
default on their sovereign debt. Such sovereign debtors also may be dependent on
expected disbursements from foreign governments, multilateral agencies and other
entities abroad to reduce principal and interest arrearages on their debt. The
commitments on the part of these governments, agencies and others to make such
disbursements may be conditioned on a sovereign debtor's implementation of
economic reforms and/or economic performance and the timely service of such
debtor's obligations. Failure to meet such conditions could result in the
cancellation of such third parties' commitments to lend funds to the sovereign
debtor, which may further impair such debtor's ability or willingness to service
its debt in a timely manner.
ZERO COUPON SECURITIES - The Fund may invest in zero coupon securities issued by
the U.S. Treasury on up to 5% of its net assets. Zero coupon Treasury securities
are U.S. Treasury notes and bonds which have been stripped of their unmatured
interest coupons and receipts, or certificates representing interests in such
stripped debt obligations or coupons. Because a zero coupon security pays no
interest to its holder during its life or for a substantial period of time, it
usually trades at a deep discount from its face or par value and will be subject
to greater fluctuations of market value in response to changing interest rates
than debt obligations of comparable maturities which make current distributions
of interest.
VARIABLE AND FLOATING RATE INSTRUMENTS - The Fund may acquire variable and
floating rate instruments. Such instruments are frequently not rated by credit
rating agencies; however, unrated variable and floating rate instruments
purchased by the Fund will be determined by the Advisor under guidelines
established by the Board of Trustees to be of comparable quality at the time of
the purchase and rated instruments eligible for purchase by the Fund. In making
such determinations, the Advisor will consider the earning power, cash flow and
other liquidity ratios of the issuers of such instruments (such issuers include
financial, merchandising, bank holding and other companies) and will monitor
their financial condition. An active secondary market may not exist with respect
to particular variable or floating rate instruments purchased by the Fund. The
absence of such an active secondary market could make it difficult for the Fund
to dispose of the variable or floating rate instrument involved if the issuer of
the instrument defaults on its payment obligation or during periods in which the
Fund is not entitled to exercise its demand rights, and the Fund could, for
these or other reasons, suffer a loss to the extent of the default. Variable and
floating rate instruments may be secured by bank letters of credit.
MORTGAGE PASS-THROUGH SECURITIES - Interests in pools of mortgage-related
securities differ from other forms of debt securities, which normally provide
for periodic payment of interest in fixed amounts with principal payments at
maturity or specified call dates. Instead, these securities provide a monthly
payment which consists of both interest and principal payments. In effect, these
payments are a "pass-through" of the monthly payments made by the individual
borrowers on their residential mortgage loans, net of any fees paid to the
issuer or guarantor of such securities. Additional payments are caused by
repayments of principal resulting from the sale of the underlying residential
property, refinancing or foreclosure, net of fees or costs which may be
incurred. Some mortgage-related securities (such as securities issued by the
Government National Mortgage Association) are described as "modified
pass-throughs." These securities entitle the holder to receive all interest and
principal payments owed on the mortgage pool, net of certain fees, at the
scheduled payment dates regardless of whether or not the mortgagor actually
makes the payment.
The principal governmental guarantor of U.S. mortgage-related securities is
the Government National Mortgage Association ("GNMA"). GNMA is a wholly owned
United States Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the United States Government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks and mortgage bankers) and backed by pools of
mortgages insured by the Federal Housing Agency or guaranteed by the Veterans
Administration.
Government-related guarantors include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders and subject to general regulation by the Secretary of Housing and
Urban Development. FNMA purchases conventional residential mortgages not insured
or guaranteed by any government agency from a list of approved seller/servicers
which include state and federally chartered savings and loan associations,
mutual savings banks, commercial banks and credit
B-4
<PAGE>
unions and mortgage bankers. FHLMC is a government-sponsored corporation created
to increase the availability of mortgage credit for residential housing and
owned entirely by private stockholders. FHLMC issues participation certificates
which represent interests in conventional mortgages from FHLMC's national
portfolio. Pass-through securities issued by FNMA and participation certificates
issued by FHLMC are guaranteed as to timely payment of principal and interest by
FNMA and FHLMC, respectively, but are not backed by the full faith and credit of
the United States Government.
Although the underlying mortgage loans in a pool may have maturities of up
to 30 years, the actual average life of the pool certificates typically will be
substantially less because the mortgages will be subject to normal principal
amortization and may be prepaid prior to maturity. Prepayment rates vary widely
and may be affected by changes in market interest rates. In periods of falling
interest rates, the rate of prepayment tends to increase, thereby shortening the
actual average life of the pool certificates. Conversely, when interest rates
are rising, the rate of prepayments tends to decrease, thereby lengthening the
actual average life of the certificates. Accordingly, it is not possible to
predict accurately the average life of a particular pool.
WARRANTS - A warrant gives the holder a right to purchase at any time during a
specified period a predetermined number of shares of common stock at a fixed
price. Unlike convertible debt securities or preferred stock, warrants do not
pay a fixed dividend. Investments in warrants involve certain risks, including
the possible lack of a liquid market for resale of the warrants, potential price
fluctuations as a result of speculation or other factors, and failure of the
price of the underlying security to reach or have reasonable prospects of
reaching a level at which the warrant can be prudently exercised (in which event
the warrant may expire without being exercised, resulting in a loss of the
Fund's entire investment therein).
REPURCHASE AGREEMENTS - Repurchase agreements are transactions in which the Fund
purchases a security from a bank or recognized securities dealer and
simultaneously commits to resell that security to the bank or dealer at an
agreed-upon date and price reflecting a market rate of interest unrelated to the
coupon rate or maturity of the purchased security. The purchaser maintains
custody of the underlying securities prior to their repurchase; thus, the
obligation of the bank or dealer to pay the repurchase price on the date agreed
to is, in effect, secured by such underlying securities. If the value of such
securities is less than the repurchase price, the other party to the agreement
will provide additional collateral so that at all times the collateral is at
least equal to the repurchase price.
Although repurchase agreements carry certain risks not associated with
direct investments in securities, the Fund intends to enter into repurchase
agreements only with banks and dealers believed by the Advisor to present
minimum credit risk in accordance with guidelines established by the Board of
Trustees. The Advisor will review and monitor the creditworthiness of such
institutions under the Board's general supervision. To the extent that the
proceeds from any sale of collateral upon a default in the obligation to
repurchase were less than the repurchase price, the purchaser would suffer a
loss. If the other party to the repurchase agreement petitions for bankruptcy or
otherwise becomes subject to bankruptcy or other liquidation proceedings, there
might be restrictions on the purchaser's ability to sell the collateral and the
purchaser could suffer a loss. However, with respect to financial institutions
whose bankruptcy or liquidation proceedings are subject to the U.S. Bankruptcy
Code, the Fund intends to comply with provisions under such Code that would
allow it immediately to resell the collateral.
WHEN-ISSUED SECURITIES - The Fund may from time to time purchase securities on a
"when-issued" basis. The price of such securities, which may be expressed in
yield terms, is fixed at the time the commitment to purchase is made, but
delivery and payment for when-issued securities take place at a later date.
Normally, the settlement date occurs within one month of the purchase; during
the period between purchase and settlement, no payment is made by the Fund to
the issuer and no interest accrues to the Fund. To the extent that assets of the
Fund are held in cash pending the settlement of a purchase of securities, the
Fund would earn no income. While when-issued securities may be sold prior to the
settlement date, the Fund intends to purchase such securities with the purpose
of actually acquiring them unless a sale appears desirable for investment
reasons. At the time the Fund makes the commitment to purchase a security on a
when-issued basis, it will record the transaction and reflect the value of the
security in determining its net asset value. The market value of when-issued
securities may be more or less than the purchase price. The Advisor does not
believe that a Fund's net asset value or income will be
B-5
<PAGE>
adversely affected by the purchase of securities on a when-issued basis. The
Fund will establish a segregated account with the River Oaks Trust Company, the
Fund's custodian (the "Custodian"), in which it will maintain cash or liquid
assets such as U.S. Government securities or other high-grade debt or equity
securities equal in value to commitments for when-issued securities. Such
segregated securities either will mature or, if necessary, be sold on or before
the settlement date.
RULE 144A SECURITIES - As noted in the Prospectus, the Fund may invest no more
than 5% of its net assets in securities that at the time of purchase have legal
or contractual restrictions on resale, are otherwise illiquid or do not have
readily available market quotations. Historically, illiquid securities have
included securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of 1933,
securities which are otherwise not readily marketable such as over-the-counter,
(dealer traded) options, and repurchase agreements having a maturity of more
than seven days. Mutual funds do not typically hold a significant amount of
restricted or other illiquid securities because of the potential for delays on
resale and uncertainty in valuation. Limitations on resale may have an adverse
effect on the marketability of portfolio securities, the Fund might not be able
to dispose of such securities promptly or at reasonable prices and might thereby
experience difficulty satisfying redemptions. The Fund might also have to
register such restricted securities in order to dispose of them, resulting in
additional expense and delay.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act of 1933,
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments. If such securities are subject to purchase by institutional buyers
in accord with Rule 144A promulgated by the Securities and Exchange Commission,
the Advisor, pursuant to guidelines adopted by the Board of Trustees, may
determine that such securities, up to a limit of 5% of a Fund's total net
assets, are not illiquid notwithstanding their legal or contractual restrictions
on resale.
PUT AND CALL OPTIONS - As described in the Prospectus, the Fund may buy and sell
put and call options.
PURCHASING OPTIONS. By purchasing a put option, the Fund obtains the right (but
not the obligation) to sell the option's underlying instrument at a fixed
"strike" price. In return for this right, the Fund pays the current market price
for the option (known as the option premium). Options have various types of
underlying instruments, including specific securities, indices of securities
prices, and futures contracts. This Fund may terminate its position in a put
option it has purchased by allowing it to expire or by exercising the option. If
the option is allowed to expire, the Fund will lose the entire premium it paid.
If the Fund exercises the option, it completes the sale of the underlying
instrument at the strike price. The Fund may also terminate a put option
position by closing it out in the secondary market at its current price (i.e.,
by selling an option of the same series as the option purchased), if a liquid
secondary market exists.
The buyer of a typical put option can expect to realize a gain if security
prices fall substantially. However, if the underlying instrument's price does
not fall enough to offset the cost of purchasing the option, a put option buyer
can expect to suffer a loss (limited to the amount of the premium paid, plus
related transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price. A call option buyer typically attempts to participate in potential price
increases of the underlying instrument with risk limited to the cost of the
option if security prices fall. At the same time, the buyer can expect to suffer
a loss if the underlying prices do not rise sufficiently to offset the cost of
the option.
WRITING OPTIONS. When the Fund writes a call option, it takes the opposite side
of the transaction from the option's purchaser. In return for receipt of the
premium, the Fund assumes the obligation to sell or deliver the option's
underlying instrument, in return for the strike price, upon exercise of the
option. The Fund may seek to terminate its position in a call option it writes
before exercise by closing out the option
B-6
<PAGE>
in the secondary market at its current price (i.e., by buying an option of the
same series as the option written). If the secondary market is not liquid for a
call option the Fund has written, however, the Fund must continue to be prepared
to deliver the underlying instrument in return for the strike price while the
option is outstanding, regardless of price changes, and must continue to
segregate assets to cover its position. The Fund will establish a segregated
account with the Custodian in which it will maintain the security underlying the
option written, or securities convertible into that security, or cash or liquid
assets such as U.S. Government securities or other high-grade debt or equity
securities, equal in value to commitments for options written.
Writing a call generally is a profitable strategy if the price of the
underlying security remains the same or falls. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in the underlying price
increases.
COMBINED POSITIONS. The Fund may purchase and write options in combination with
each other to adjust the risk and return characteristics of its overall
position. For example, the Fund may purchase a put option and write a call
option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract. Another possible combined position would involve writing a call option
at one strike price and buying a call option at a lower price, in order to
reduce the risk of the written call option in the event of a substantial price
increase. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
CORRELATION OF PRICE CHANGES. Because there are a limited number of types of
exchange-traded options contracts, it is likely that the standardized contracts
available will not match the Fund's current or anticipated investments exactly.
The Fund may invest in options contracts based on securities with different
issuers, maturities, or other characteristics from the securities in which it
typically invests.
Options prices also can diverge from the prices of their underlying
instruments, even if the underlying instruments match the Fund's investments
well. Options prices are affected by such factors as current and anticipated
short-term interest rates, changes in volatility of the underlying instrument,
and the time remaining until expiration of the contract, which may not affect
the security prices the same way. Imperfect correlation also may result from:
differing levels of demand in the options markets and the securities markets,
structural differences in how options are traded, or imposition of daily price
fluctuation limits or trading halts. The Fund may purchase or sell options with
a greater or lesser value than the securities it wishes to hedge or intends to
purchase in order to attempt to compensate for differences in volatility between
the contract and the securities, although this may not be successful in all
cases. If price changes in the Fund's options positions are poorly correlated
with its other investments, the positions may fail to produce anticipated gains
or result in losses that are not offset by gains in other investments.
LIQUIDITY OF OPTIONS. There is no assurance a liquid secondary market will exist
for any particular options contract at any particular time. Options may have
relatively low trading volume and liquidity if their strike prices are not close
to the underlying instrument's current price. In addition, exchanges may
establish daily price fluctuation limits for options contracts, and may halt
trading if a contract's price moves upward or downward more than the limit in a
given day. On volatile trading days when the price fluctuation limit is reached
or a trading halt is imposed, it may be impossible for the Fund to enter into
new positions or close out existing positions. If the secondary market for a
contract is not liquid because of price fluctuation limits or otherwise, it
could prevent prompt liquidation of unfavorable positions, and potentially could
require the Fund to continue to hold a position until delivery or expiration
regardless of changes in its value. As a result, the Fund's access to other
assets held to cover its options positions also could be impaired.
OTC OPTIONS. Unlike exchange-traded options, which are standardized with respect
to the underlying instrument, expiration date, contract size, and strike price,
the terms of over-the-counter options, i.e., options not traded on exchanges
("OTC options"), generally are established through negotiation with the other
party to the option contract. While this type of arrangement allows the Fund
greater flexibility to tailor an option to its needs, OTC options generally
involve greater credit risk than exchange-traded
B-7
<PAGE>
options, which are guaranteed by the clearing organization of the exchanges
where they are traded. OTC options are considered to be illiquid, since these
options generally can be closed out only by negotiation with the other party to
the option.
STOCK INDEX OPTIONS. The distinctive characteristics of options on stock indices
create certain risks that are not present with stock options. Generally, because
the value of an index option depends on movements in the level of the index
rather than the price of a particular stock, whether the Fund will realize a
gain or loss on an options transaction depends on movements in the level of
stock prices generally rather than movements in the price of a particular stock.
Accordingly, successful use of options on a stock index will be subject to the
Advisor's ability to predict correctly movements in the direction of the stock
market generally. Index prices may be distorted if trading in certain stocks
included in the index is interrupted. Trading of index options also may be
interrupted in certain circumstances, such as if trading were halted in a
substantial number of stocks included in the index. If this were to occur, the
Fund would not be able to close out positions it holds. It is the policy of the
Fund to engage in options transactions only with respect to an index which the
Advisor believes includes a sufficient number of stocks to minimize the
likelihood of a trading halt in the index.
FUTURES CONTRACTS - The Fund may buy and sell stock index futures contracts.
Such a futures contract is an agreement between two parties to buy and sell an
index of securities of companies included therein for a set price on a future
date. Futures contracts are traded on designated "contract markets" which,
through their clearing corporations, guarantee performance of the contracts. A
stock index futures contract does not require the physical delivery of
securities, but merely provides for profits and losses resulting from changes in
the market value of the contract to be credited or debited at the close of each
trading day to the respective accounts of the parties to the contract. On the
contract's expiration date, a final cash settlement occurs. Changes in the
market value of a particular stock index futures contract reflect changes in the
specified index of equity securities on which the future is based.
No price is paid or received by the Fund upon the purchase or sale of a
futures contract. When it enters into a futures contract, the Fund will be
required to deposit in a segregated account with its Custodian an amount of cash
or U.S. Treasury bills equal to approximately 5% of the contract amount. This
amount is known as initial margin. The nature of initial margin in futures
transactions is different from that of margin in securities transactions.
Futures contract margin does not involve the borrowing of funds by the customer
to finance the transaction. Rather, the initial margin is in the nature of a
performance bond or good faith deposit on the contract which is returned to the
Fund upon termination of the futures contract, assuming all contractual
obligations have been satisfied. Subsequent payments (called variation margin)
to and from the broker will be made on a daily basis as the price of the
underlying index fluctuates, to reflect movements in the price of the contract
making the long and short positions in the futures contract more or less
valuable. For example, when the Fund has purchased an index futures contract and
the price of the underlying index has risen, that position will have increased
in value and the Fund will receive from the broker a variation margin payment
equal to that increase in value. Conversely, when the Fund has purchased an
index futures contract and the price of the underlying index has declined, the
position will be less valuable and the Fund will be required to make a variation
margin payment to the broker.
At any time prior to expiration of a futures contract, the Fund may elect to
close the position by taking an opposite position, which will operate to
terminate the Fund's position in the futures contract. A final determination of
variation margin is made on closing the position. Additional cash is paid by or
released to the Fund, which realizes a loss or gain.
The Fund will engage in futures transactions only as a hedge against the
risk of unexpected changes in the values of securities held or intended to be
held by the Fund. As a general rule, the Fund will not purchase or sell futures,
if immediately thereafter, more than 25% of its net assets would be hedged. In
addition, the Fund will not purchase or sell futures or related options if,
immediately thereafter, the sum of the amount of initial margin deposits on the
Fund's existing futures positions and premiums paid for such options would
exceed 5% of the market value of the Fund's net assets.
RISKS OF FUTURES CONTRACTS. There are several risks related to the use of
futures contracts. In the event of an imperfect correlation between the index
and the portfolio position which is intended to be protected,
B-8
<PAGE>
the desired protection may not be obtained and the Fund may be exposed to risk
of loss. The loss from investing in futures transactions is potentially
unlimited. Further, unanticipated changes in stock price movements may result in
a poorer overall performance for the Fund than if it had not entered into any
futures on stock indexes.
In addition, the market prices of futures contracts may be affected by
certain factors. First, all participants in the futures market are subject to
margin deposit and maintenance requirements. Rather than meeting additional
margin deposit requirements, investors may close futures contracts through
offsetting transactions which could distort the normal relationship between the
securities and futures markets. Second, from the point of view of speculators,
the deposit requirements in the futures market are less onerous than margin
requirements in the securities market. Therefore, increased participation by
speculators in the futures market may also cause temporary price distortions.
Finally, positions in futures contracts may be closed out only on an
exchange or board of trade which provides a secondary market for such futures.
There is no assurance that a liquid secondary market on an exchange or board of
trade will exist for any particular contract or at any particular time.
SHORT SALES - If the Fund makes a short sale "against the box," the Fund would
not immediately deliver the securities sold and would not receive the proceeds
from the sale. The seller is said to have a short position in the securities
sold until it delivers the securities sold, at which time it receives the
proceeds of the sale. To secure its obligation to deliver securities sold short,
the Fund will deposit in escrow in a separate account with the Custodian an
equal amount of the securities sold short or securities convertible into or
exchangeable for such securities. The Fund can close out its short position by
purchasing and delivering an equal amount of the securities sold short, rather
than by delivering securities already held by the Fund.
The Fund's decision to make a short sale "against the box" may be a
technique to hedge against market risks when the Investment Adviser believes
that the price of a security may decline, causing a decline in the value of a
security owned by the Fund or a security convertible into or exchangeable for
such security. In such case, any future losses in the Fund's long position would
be reduced by a gain in the short position. The extent to which such gains or
losses in the long position are reduced will depend upon the amount of
securities sold short relative to the amount of the securities the Fund owns,
either directly or indirectly.
The extent to which the Fund may enter into short sales transactions may be
limited by the Internal Revenue Code requirements for qualification of the Fund
as a regulated investment company.
MANAGEMENT
The overall management of the business and affairs of the Trust is vested
with its Board of Trustees. The Board approves all significant agreements
between the Trust and persons or companies furnishing services to it, including
its agreements with the Advisor, Administrator, Custodian and Transfer Agent.
The day to day operations of the Trust are delegated to its officers, subject to
the Fund's investment objectives and policies and to general supervision by the
Board of Trustees.
B-9
<PAGE>
TRUSTEES AND OFFICERS
The trustees and officers of the Trust, and their business addresses and
principal occupations during the past five years are:
1. Sardar A. D. Khan*
714 FM 1960 West Suite 201, Houston Texas 77090 Trustee and President
Physician; President, Caring Physicians Network Inc.
Age 53
2. Shahwar D. Khan*
14022 Champions Hamlet Ct., Houston Texas 77069 Trustee and Chief
Treasurer, Khan Investment Inc. Financial Officer
Age 46
3. Shehzad D. Khan*
14022 Champions Hamlet Ct., Houston, Texas 77069 Trustee
Trainee Broker, Olde Discount Corporation
Age 22
4. Mushtaq R. Malik
6622 Gentle Bend, Houston, Texas 77069 Trustee
Senior Principal Engineer, Stone & Webster
Engineering Corp.
Age 55
5. Charles E. Moore
2504 Sand Shore Drive, Conroe, Texas 77304 Trustee
General Sales Manager, Landmark Chevrolet
Age 60
*Denotes "interested person" of the Trust as defined in the Investment
Company Act. Sardar A. D. Khan and Shahwar D. Kahn are married, and Shehzad D.
Khan is their son.
The Trust will pay a fee of $200 per meeting to the Trustees who are not
"interested persons" of the Fund, as that term is defined in the Investment
Company Act. These Trustees also receive a fee of $200 for any committee
meetings held on dates other than scheduled Board meeting dates, and are
reimbursed for any expenses incurred in attending Board or committee meetings.
The following table sets forth the estimated aggregate compensation which
will be paid by the Trust for its first year of operation to the Trustees who
are not affiliated with the Advisor. There are no other funds in the "Trust
complex" (as defined in Schedule 14A under the Securities Act of 1934).
B-10
<PAGE>
Pension or
Retirement
Benefits Total
Aggregate Accrued as Estimated Compensation
Compensation Part of Trust Annual Benefits from Trust
Name from Trust Expenses Upon Retirement Paid to Trustee
- ----------------- ------------ ------------- --------------- ---------------
Mushtaq R. Malik $ 800 None N/A $ 800
Charles E. Moore $ 800 None N/A $ 800
ADVISORY AGREEMENT
Subject to the supervision of the Board of Trustees, investment management
and services are provided to the Fund by the Advisor, pursuant to an Investment
Advisory Agreement (the "Advisory Agreement"). Under the Advisory Agreement, the
Advisor provides a continuous investment program for the Fund and makes
decisions and places orders to buy, sell or hold particular securities. In
addition to the fees payable to the Advisor and the Administrator, the Fund is
responsible for its operating expenses, including: (i) interest and taxes; (ii)
brokerage commissions; (iii) insurance premiums; (iv) compensation and expenses
of Trustees other than those affiliated with the Advisor or the Administrator;
(v) legal and audit expenses; (vi) fees and expenses of the Custodian and any
shareholder service and transfer agents; (vii) fees and expenses for
registration or qualification of the Fund and its shares under federal and state
securities laws; (viii) expenses of preparing, printing and mailing reports and
notices and proxy materials to shareholders; (ix) other expenses incidental to
holding any shareholder meetings; (x) dues or assessments of or contributions to
the Investment Company Institute or any successor; (xi) such non-recurring
expenses as may arise, including litigation affecting the Fund and the legal
obligations with respect to which the Fund may have to indemnify the Trust's
officers and trustees; and (xii) amortization of organization costs.
Under the Advisory Agreement, the Advisor and its officers, directors,
agents, employees, controlling persons, shareholders and other affiliates will
not be liable to the Fund for any error of judgment by the Advisor or any loss
sustained by the Fund, except in the case of a breach of fiduciary duty with
respect to the receipt of compensation for services, (in which case any award of
damages will be limited as provided in the Investment Company Act) or of willful
misfeasance, bad faith, gross negligence or reckless disregard of duty. In
addition, the Fund will indemnify the Advisor and such other persons from any
such liability to the extent permitted by applicable law.
The Advisory Agreement with respect to the Fund will remain in effect for
two years from its execution. Thereafter, if not terminated, it will continue
automatically for successive annual periods, provided that such continuance is
specifically approved at least annually (i) by a majority vote of the Trustees
who are not parties to the Agreement or "interested persons" of the Fund as
defined in the Investment Company Act, cast in person at a meeting called for
the purpose of voting on such approval, or (ii) by vote of a majority of the
outstanding voting securities of the Fund.
The Advisory Agreement is terminable by vote of the Board of Trustees or by
the holders of a majority of the outstanding voting securities of the Fund at
any time without penalty, on 60 days written notice to the Advisor. The Advisory
Agreement also may be terminated by the Advisor on 60 days written notice to the
Fund. The Advisory Agreement terminates automatically upon its assignment (as
defined in the Investment Company Act).
As indicated in the Prospectus, the Advisor has voluntarily agreed to limit
the Fund's operating expenses through June 30, 1997, subject to reimbursement
under certain circumstances. The Board of Trustees has specifically approved
this agreement. Any such reimbursement will be accounted for on the Fund's
financial statements as a contingent liability and will appear as a footnote to
the financial statements until such time as it appears that the Fund will be
able to effect the reimbursement. At such time as it appears to be probable that
the Fund will be able to effect the reimbursement, the amount of reimbursement
that the Fund is able to effect will be accrued as an expense of the Fund for
that current period.
B-11
<PAGE>
ADMINISTRATION AGREEMENT
Khan Investment Inc. serves as administrator for the Funds
("Administrator"), subject to the overall supervision of the Trustees, pursuant
to an Administration Agreement executed between the Fund and the Administrator.
Under the terms of the Administration Agreement, the Administrator is
responsible for providing such services as the Trustees may reasonably request,
including but not limited to (i) maintaining the Fund's books and records (other
than financial or accounting books and records maintained by any custodian,
transfer agent or accounting services agent); (ii) overseeing the Fund's
insurance relationships; (iii) preparing for the Fund (or assisting counsel
and/or auditors in the preparation of) all required tax returns, proxy
statements and reports to the Fund's shareholders and trustees and reports to
and other filings with the Securities and Exchange Commission and any other
governmental agency; (iv) preparing such applications and reports as may be
necessary to register or maintain the Fund's registration and/or the
registration of the shares of the Fund under the blue sky laws of the various
states; (v) responding to all inquiries or other communications of shareholders;
(vi) overseeing all relationships between the Fund other service providers, such
as the Fund's Custodian; and (vii) authorizing and directing any of the
Administrator's directors, officers and employees who may be elected as trustees
or officers of the Trust to serve in the capacities in which they are elected.
Under the terms of the Administration Agreement, the Fund will pay
the Administrator an annual fee, payable monthly, equal to 0.25% of the average
daily net assets of the Fund.
DISTRIBUTION ARRANGEMENTS
As described in the Prospectus, under the Distribution Plan adopted by the
Trustees with respect to the shares, the Fund pays the Distributor monthly
distribution fees at the annual rate of 0.25% of the average daily net assets of
the Fund.
Among other things the Plan provides that (1) the Distributor will submit to
the trustees at least quarterly, and the trustees will review, reports regarding
all amounts expended under the Plan and the purposes for which such expenditures
were made; (2) the Plan will continue in effect only so long as it as approved
at least annually, and any material amendment thereto is approved, by the
trustees, including those trustees who are not "interested persons" of the Fund
and who have no direct or indirect financial interest in the Plan or any
agreement related thereto, acting in person at a meeting called for that
purpose; (3) the Plan may be terminated at any time by such trustees or by a
vote of a majority of the outstanding shares of the Fund; (4) payments by the
Fund under the Plan shall not be materially increased without the affirmative
vote of the holders of a majority of the outstanding shares of the Fund; and (5)
while the Plan remains in effect, the selection and nomination of the trustees
who are not "interested persons" of the Fund shall be committed to the
discretion of such trustees.
B-12
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
In all purchases and sales of securities for the Fund, the primary
consideration is to obtain the most favorable price and execution available.
Pursuant to the Advisory Agreement, the Advisor determines which securities are
to be purchased and sold by the Fund and which broker-dealers are eligible to
execute portfolio transactions, subject to the instructions of and review by the
Trust's Board of Trustees.
Purchases of portfolio securities may be made directly from issuers or from
underwriters. Where possible, purchase and sale transactions are effected
through dealers (including banks) which specialize in the types of securities
which the Fund will be holding, unless better executions are available
elsewhere. Dealers and underwriters usually act as principals for their own
accounts. Purchases from underwriters include a commission paid by the issuer to
the underwriter and purchases from dealers include the spread between the bid
and the asked price.
Investment decisions for the Fund are made independently from those of other
client accounts of the Advisor. Nevertheless, it is possible that at times the
same securities will be acceptable for the Fund and for one or more of such
other client accounts. To the extent any of these client accounts and the Fund
seek to acquire the same security at the same time, the Fund may not be able to
acquire as large a portion of such security as it desires, or it may have to pay
a higher price or obtain a lower yield for such security. Similarly, to the
extent any such client accounts and the Fund seek to sell the same security at
the same time, the Fund may not be able to obtain as high a price for, or as
large an execution of, an order to sell any particular security as would
otherwise be the case. If one or more of such client accounts simultaneously
purchases or sells the same security that the Fund is purchasing or selling,
each day's transactions in such security will be allocated between the Fund and
all such client accounts in a manner deemed equitable by the Advisor, taking
into account the respective sizes of the accounts, the amount being purchased or
sold and other factors deemed relevant by the Advisor. In some cases this system
could have a detrimental effect on the price or value of the security insofar as
the Fund is concerned. In other cases, however, the Advisor believes that the
ability of the Fund to participate in volume transactions may produce better
executions for the Fund.
The Fund does not effect securities transactions through broker-dealers in
accordance with any formula, nor does it effect securities transactions through
such broker-dealers solely for selling shares of the Fund. However, as stated
above, broker-dealers who execute transactions for the Fund may from time to
time effect purchases of shares of the Fund for their customers.
NET ASSET VALUE
The net asset value of the Fund's shares will fluctuate and is determined as
of the close of trading on the New York Stock Exchange ("Exchange"), normally
4:00 p.m. Eastern time, each business day. The Exchange annually announces the
days on which it will not be open for trading. The most recent announcement
indicates that it will not be open on the following days: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. However, the Exchange may close on days not
included in that announcement.
Options and futures contracts which are traded on exchanges are valued at
their last sale or settlement price as of the close of such exchanges or, if no
sales are reported, at the mean between the last reported bid and asked prices.
However, if an exchange closes later than the New York Stock Exchange, the
options or futures traded on it are valued based on the sales price, or the mean
between bid and asked prices, as the case may be, as of the close of the
Exchange.
Trading in securities in foreign securities markets is normally completed
well before the close of the Exchange. In addition, foreign securities trading
may not take place on all days on which the Exchange is open for trading, and
may occur in certain foreign markets on days on the Fund's net asset value is
not calculated. Events affecting the values of portfolio securities that occur
between the time their prices are determined and the close of the Exchange will
not be reflected in the calculation of net asset value unless the Board of
Trustees determines that the particular event would materially affect net asset
value, in which
B-13
<PAGE>
case an adjustment will be made. Assets or liabilities expressed in foreign
currencies are translated, in determining net asset value, into U.S. dollars
based on the spot exchange rates at 1:00 p.m., Eastern time, or at such other
rates as the Advisor may determine to be appropriate.
The Fund may use a pricing service approved by the Board of Trustees. Prices
provided by such a service represent evaluations of the mean between current bid
and asked prices, may be determined without exclusive reliance on quoted prices,
and may reflect appropriate factors such as institution-size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
individual trading characteristics, indications of values from dealers and other
market data. Such services also may use electronic data processing techniques
and/or a matrix system to determine valuations.
Securities and other assets for which market quotations are not readily
available, or for which the Board of Trustees or its designate determines the
foregoing methods do not accurately reflect current market value, are valued at
fair value as determined in good faith by or under the direction of the Board of
Trustees. Such valuations and procedures, as well as any pricing services, are
reviewed periodically by the Board of Trustees.
REDEMPTIONS
The Fund intends to pay cash (U.S. dollars) for all shares redeemed, but,
under abnormal conditions which make payment in cash unwise, the Fund may make
payment partly in readily marketable securities with a current market value
equal to the redemption price. Although the Fund does not anticipate that it
will make any part of a redemption payment in securities, if such payment were
made, an investor may incur brokerage costs in converting such securities to
cash. The Fund has elected to be governed by the provisions of Rule 18f-1 under
the 1940 Act, which contains a formula for determining the minimum redemption
amounts that must be paid in cash.
TAXATION
The Fund intends to qualify for treatment as a regulated investment company
("RIC") under Subchapter M of the Internal Revenue Code (the "Code"). In each
taxable year that the Fund qualifies, the Fund (but not its shareholders) will
be relieved of federal income tax on that part of its investment company taxable
income (consisting generally of interest and dividend income, net short-term
capital gain and net realized gains from currency transactions) and net capital
gain that is distributed to shareholders.
In order to qualify for treatment as a RIC, the Fund must distribute
annually to shareholders at least 90% of its investment company taxable income
and must meet several additional requirements. Among these requirements are the
following: (1) at least 90% of the Fund's gross income each taxable year must be
derived from dividends, interest, payments with respect to securities loans and
gains from the sale or other disposition of securities or foreign currencies, or
other income derived with respect to its business of investing in securities or
currencies; (2) less than 30% of the Fund's gross income each taxable year may
be derived from the sale or other disposition of securities held for less than
three months; (3) at the close of each quarter of the Fund's taxable year, at
least 50% of the value of its total assets must be represented by cash and cash
items, U.S. Government securities, securities of other RICs and other
securities, limited in respect of any one issuer to an amount that does not
exceed 5% of the value of the Fund and that does not represent more than 10% of
the outstanding voting securities of such issuer; and (4) at the close of each
quarter of the Fund's taxable year, not more than 25% of the value of its assets
may be invested in securities (other than U.S. Government securities or the
securities of other RICs) of any one issuer.
The Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year substantially all of its
ordinary income for that year and capital gain net income for the one-year
period ending on December 31 of that year, plus certain other amounts.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes. Shareholders may be
able to claim U.S. foreign tax credits with respect to such taxes subject to
B-14
<PAGE>
provisions and limitations contained in the Code. For example, certain
retirement accounts cannot claim foreign tax credits on investments in foreign
securities held by the Fund. If more than 50% in value of the Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible, and intends, to file an election with
the Internal Revenue Service pursuant to which shareholders of the Fund will be
required to include their proportionate share of such withholding taxes in their
U.S. income tax returns as gross income, treat such proportionate share as taxes
paid by them, and deduct such proportionate share in computing their taxable
incomes or, alternatively, use them as foreign tax credits against their U.S.
income taxes. No deductions for foreign taxes, however, may be claimed by
noncorporate shareholders who do not itemize deductions. A shareholder that is a
nonresident alien individual or foreign corporation may be subject to U.S.
withholding tax on the income resulting from the Fund's election described in
this paragraph but may not be able to claim a credit or deduction against such
U.S. tax for the foreign taxes treated as having been paid by such shareholder.
The Fund will report annually to its shareholders the amount per share of such
withholding taxes.
DIVIDENDS AND DISTRIBUTIONS
Dividends from the Fund's investment company taxable income (whether paid in
cash or invested in additional shares) will be taxable to shareholders as
ordinary income to the extent of the Fund's earnings and profits. Distributions
of the Fund's net capital gain (whether paid in cash or invested in additional
shares) will be taxable to shareholders as long-term capital gain, regardless of
how long they have held their Fund shares. Dividends declared by the Fund in
October, November or December of any year and payable to shareholders of record
on a date in one of such months will be deemed to have been paid by the Fund and
received by the shareholders on the record date if the dividends are paid by the
Fund during the following January. Accordingly, such dividends will be taxed to
shareholders for the year in which the record date falls.
The Fund is required to withhold 31% of all dividends, capital gain
distributions and repurchase proceeds payable to any individuals and certain
other noncorporate shareholders who do not provide the Fund with a correct
taxpayer identification number. The Fund also is required to withhold 31% of all
dividends and capital gain distributions paid to such shareholders who otherwise
are subject to backup withholding.
B-15
<PAGE>
PERFORMANCE INFORMATION
TOTAL RETURN
Average annual total return quotations used in the Fund's advertising and
promotional materials are calculated according to the following formula:
P(1 + T)n = ERV
where P equals a hypothetical initial payment of $1000; T equals average annual
total return; n equals the number of years; and ERV equals the ending redeemable
value at the end of the period of a hypothetical $1000 payment made at the
beginning of the period.
The time periods used in advertising will be updated to the last day of the
most recent quarter prior to submission of the advertising for publication.
Average annual total return, or "T" in the above formula, is computed by finding
the average annual compounded rates of return over the period that would equate
the initial amount invested to the ending redeemable value. Average annual total
return assumes the reinvestment of all dividends and distributions. Any
performance information used in advertising and sales literature will include
information based on this formula for the most recent one, five and ten year
periods, or for the life of the Fund, if less.
OTHER PERFORMANCE INFORMATION
Performance data of the Fund quoted in advertising and other promotional
materials represents past performance and is not intended to predict or indicate
future results. The return and principal value of an investment in the Fund will
fluctuate, and an investor's redemption proceeds may be more or less than the
original investment amount. In advertising and promotional materials the Fund
may compare its performance with data published by Lipper Analytical Services,
Inc. ("Lipper"), Morningstar, Inc. ("Morningstar") or CDA Investment
Technologies, Inc.("CDA"). The Fund also may refer in such materials to mutual
fund performance rankings and other data, such as comparative asset, expense and
fee levels, published by Lipper, CDA or Morningstar. Advertising and promotional
materials also may refer to discussions of the Fund and comparative mutual fund
data and ratings reported in independent periodicals including, but not limited
to, The Wall Street Journal, Money Magazine, Forbes, Business Week, Financial
World and Barron's.
FINANCIAL STATEMENTS
A Statement of Assets and Liabilities of the Fund as of _______, 1996, is
included in Appendix A to this Statement of Additional Information. Such
Statement has been audited by the Fund's independent accountants, Coopers &
Lybrand, L.L.P., whose report thereon also appears in Appendix A. Such Financial
Statement has been included herein in reliance upon such report given upon their
authority as experts in accounting and auditing.
B-16
<PAGE>
GENERAL INFORMATION
CAPITALIZATION
The capitalization of the Trust consists solely of an unlimited number of
shares of beneficial interest. The Board of Trustees has currently authorized
only one series of shares, the Khan Growth Fund. The Board of Trustees may
establish additional funds, with different investment objectives and policies,
and additional classes of shares, at any time in the future.
Expenses incurred by the Trust in connection with its organization are being
reimbursed to the Advisor and amortized on a straight line basis over a period
of five years. Expenses incurred in the organization of subsequent offered
series of the Trust will be charged to those series and will be amortized on the
same basis.
REGISTRATION STATEMENT
The Registration Statement of the Trust, including the Fund's Prospectus,
the Statement of Additional Information and the exhibits filed therewith, may be
examined at the office of the Securities and Exchange Commission in Washington,
D.C. Statements contained in the Fund's Prospectus or the Statement of
Additional Information as to the contents of any contract or other document
referred to herein or in the Prospectus are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference.
OTHER INFORMATION
As used in the Prospectus and in this Statement of Additional Information,
the term "majority," when referring to approvals to be obtained from
shareholders of the Fund, means the vote of the lesser of (i) 67% of the shares
of the Fund represented at a meeting of the holders of more than 50% of the
outstanding shares of the Fund are present in person or by proxy, or (ii) more
than 50% of the outstanding shares of the Fund.
As of the date of this Prospectus, all of the outstanding shares of the Fund
are held by _________________________.
The Trust will dispense with annual meetings of shareholders in any year in
which it is not required to elect Trustees under the Investment Company Act.
However, the Trust undertakes to hold a special meeting of its shareholders for
the purpose of voting on the question of removal of a Trustee or Trustees if
requested in writing by the holders of at least 10% of the Trust's outstanding
voting securities, and to assist in communicating with other shareholders as
required by Section 16(c) of the Investment Company Act.
B-17
<PAGE>
PART C
OTHER INFORMATION
Item 24 Financial Statements and Exhibits
(a) Financial Statements
(To be filed by amendment)
(b) Exhibits
(1.1) Certificate of Trust (a)
(1.2) Declaration of Trust (a)
(2) By-Laws (a)
(3) Not Applicable
(4) Not Applicable
(5) Form of Investment Advisory Agreement (a)
(6) Form of Distribution Agreement (a)
(7) Not applicable
(8) Custodian Agreement*
(9) Form of Administration Agreement (a)
(10) Opinion and consent of counsel*
(11) Consent of independent accountants*
(12) Not applicable
(13) Investment letter of initial investor*
(14) Individual Retirement Account forms*
(15) Plan of Distribution*
(16) Not Applicable
(17) Financial Data Schedule*
(18) Not Applicable
(19) Powers of Attorney (a)
(a) Filed as an Exhibit to the Registration Statement on September 25,
1996 and incorporated herein by reference.
* To be filed by amendment
Item 25 Persons Controlled by or under Common Control with Registrant
None
Item 26 Number of Holders of Securities
None
C-18
<PAGE>
Item 27 Indemnification
Article VII, Section 2 of Registrant's Declaration of Trust, filed herewith
as Exhibit 1, and Article VI of Registrant By-Laws, filed herewith as Exhibit 2,
provide for the indemnification of Registrant's trustees, officers, employees
and agents against liabilities incurred by them in connection with the defense
or disposition of any action or proceeding in which they may be involved or with
which they may be threatened, while in office or thereafter, by reason of being
or having been in such office, except with respect to matters as to which it has
been determined that they acted with willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of their
office ("Disabling Conduct").
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
Item 28 Business and Other Connections of Investment Adviser
Sardar A.D. Khan, the President and controlling shareholder of Khan
Investment Inc., is a practicing physician and president of Caring Physician
Network Inc., a Texas based preferred provider organization.
Item 29 Principal Underwriters
(a) Khan Distributors Inc., a Texas corporation, acts as Distributor of
Registrant.
(b) The following information is furnished with respect to the officers and
directors of Khan Distributors Inc.
NAME AND PRINCIPAL POSITION AND OFFICES POSITION AND OFFICES
BUSINESS ADDRESS WITH UNDERWRITER WITH REGISTRANT
- ----------------------------- --------------------- ------------------------
Sardar A. D. Khan President Trustee and President
714 FM 1960 West Suite 201
Houston Texas 77090
Shehzad D. Khan -- Trustee
14022 Champions Hamlet Ct.
Houston Texas 77069
Shahwar D. Khan Treasurer Trustee
14022 Champions Hamlet Ct.
Houston Texas 77069
(c) Not applicable
Item 30 Location of Accounts and Records
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section
C-19
<PAGE>
31(a) of the Investment Company Act of 1940 and the rules promulgated thereunder
are in the possession of Registrant and Registrant's Administrator and
Custodian, as follows: the documents required to be maintained by paragraphs
(5), (6), (7), (10) and (11) of Rule 31a-l(b) are maintained by the Registrant
at 714 F.M. 1960 West, Suite 201, Houston, Texas 77090; the documents required
to be maintained by paragraph (4) of Rule 31a-l(b) are maintained by the
Administrator at 714 F.M. 1960 West, Suite 201, Houston, Texas 77090; and all
other records are maintained by the Custodian at 2001 Kirby at San Felipe,
Houston, Texas 77019.
Item 31 Management Services
Not applicable
Item 32 Undertakings
The Registrant hereby undertakes, if requested to do so by the holders of at
least 10% of the Registrant's outstanding shares, to call a meeting of
shareholders for the purposes of voting upon the question of removal of a
Trustee and to assist in communications with other shareholders as required by
Section 16(c) of the Investment Company Act of 1940.
The Registrant hereby undertakes to file a post-effective amendment to the
Registration Statement, containing reasonably current financial statements which
need not be audited, within four to six months from the effective date of the
Registration Statement.
The Registrant hereby undertakes, in the event the information required by
Item 5A of Form N-1A is contained in an annual report to shareholders, to
furnish a copy of such latest report to shareholders to each person to whom a
prospectus is delivered, upon request and without charge.
C-20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Houston, State of Texas on this 16th day of December,
1996.
KHAN FUNDS
By S/ S.A.D. KHAN
Sardar A. D. Khan, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the following dates.
S/ S.A.D. KHAN December 16, 1996
Sardar A. D. Khan, Trustee and Principal
Executive Officer
S/ SHEHZAD D. KHAN December 16, 1996
Shehzad D. Khan, Trustee
S/ SHAHWAR D. KHAN December 16, 1996
Shahwar D. Khan, Trustee and Principal
Financial and Accounting Officer
* CHARLES E. MOORE December 16, 1996
Charles E. Moore, Trustee
* MUSHTAQ R. MALIK December 16, 1996
Mushtaq R. Malik, Trustee
*By S/ S.A.D. KHAN
Sardar A.D. Khan
Attorney-in-Fact
C-21
<PAGE>
EXHIBIT INDEX KHAN FUNDS
FORM N-1A REGISTRATION STATEMENT
PRE-EFFECTIVE AMENDMENT NO. 1
EXHIBITS:
(1.1) Certificate of Trust (a)
(1.2) Declaration of Trust (a)
(2) By-Laws (a)
(3) Not Applicable
(4) Not Applicable
(5) Form of Investment Advisory Agreement (a)
(6) Form of Distribution Agreement (a)
(7) Not applicable
(8) Custodian Agreement*
(9) Form of Administration Agreement (a)
(10) Opinion and consent of counsel*
(11) Consent of independent accountants*
(12) Not applicable
(13) Investment letter of initial investor*
(14) Individual Retirement Account forms*
(15) Plan of Distribution*
(16) Not Applicable
(17) Financial Data Schedule*
(18) Not Applicable
(19) Powers of Attorney (a)
(a) Filed as an Exhibit to the Registration Statement on September 25, 1996, and
incorporated herein by reference.
* To be filed by amendment.
12/19/96 5:16 PM
C-22
