As filed with the Securities and Exchange Commission on June 26, 1997
Securities Act File No. 33-12597
Investment Company Act File No. 811-7829
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. 2 [X]
POST-EFFECTIVE AMENDMENT NO. [ ]
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1940 [X]
AMENDMENT NO. 2 [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
Approximate Date of Proposed Public Offering: as soon as practicable
after the effective date of the Registration Statement
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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. The
amount of the registration fee is $500.
A Rule 24f-2 Notice for the Registrant's fiscal year ending December 31, 1997
will be filed with the Commission on or before March 1, 1998.
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KHAN FUNDS
Form N-1A
Cross Reference Sheet
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ITEM NO. ITEM LOCATION IN PROSPECTUS
<S> <C> <C>
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 Not Applicable
Fund 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
Holders of Securities "General Information"
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"
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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 281-444-3417
Prospectus
July 1, 1997
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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 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 July 1,1997 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.
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LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
Page
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General Information ............................................... 1
Expenses .......................................................... 1
Shareholder Transaction Expenses ......................... 1
Annual Fund Operating Expenses ........................... 1
Understanding Expenses ................................... 2
Investment Objectives, Policies And Techniques .................... 2
Investment Objectives .................................... 2
Management Policies ...................................... 2
Investment Techniques .................................... 3
Risk Factors ............................................. 5
Management ........................................................ 6
The Advisor .............................................. 6
The Administrator ........................................ 7
Shareholder Service Plan ................................. 7
The Custodian and Transfer Agent ......................... 7
Your Account ...................................................... 8
Ways To Set Up Your Account .............................. 8
How to Sell Shares ....................................... 10
Shareholder and Account Policies ......................... 12
Dividends, Capital Gains, And Taxes ............................... 14
Understanding Distributions .............................. 14
Distribution Options ..................................... 14
Taxes .................................................... 15
Performance Information ........................................... 15
General Information ............................................... 16
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MINIMUM
INVESTMENT
To open an account $2,000
To add to an account $250
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GENERAL INFORMATION
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. Trustees who are not affiliated with Khan Investment Inc., the
Fund's investment advisor (the "Advisor"), 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 advisory fee to the Advisor, for
managing its investments, of 0.75% of its average daily net assets.
While the advisory 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 administrator, 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 the Advisor, 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 $13.00 fee to transmit a redemption payment by
wire.
ANNUAL FUND OPERATING EXPENSES
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%
Other expenses (after expense reimbursements)...................1.25%
Total operating expenses........................................2.00%
Khan Investment Inc. has agreed to reimburse the Fund for any ordinary
operating expenses in excess of 2% of average net assets annually. During its
first fiscal year, the Fund expects to incur
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Other expenses and Total operating expenses at the annualized rate of 6.30% and
7.05% 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 $1,000 you
invested, here's how much you would have paid in total expenses if you closed
your account after the number of years indicated:
After 1 year....................................................$ 21
After 3 years ..................................................$ 64
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.
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 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
government and its agencies and instrumentalities.
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 issuers which it considers undervalued by the stock market in terms of
current earnings, assets or growth prospects. These companies will include those
that the 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, 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,
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or Aaa, Aa, A or Baa by Moody's Investors Service, Inc.) or, if unrated, will be
determined to be of comparable quality by the Advisor.
The Fund may invest in short-term investments to maintain liquidity for
redemptions during periods when attractive investments are not available. Under
normal circumstances, no more than 10% of the Fund's total assets will be
retained in such investments. Short-term investments include 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 branches of foreign
banks, domestic savings and loan associations and other banking institutions,
money market funds, repurchase agreements or investment grade corporate bonds.
In addition, the Fund may invest without limitation, in short-term investments
for temporary defensive purposes, to preserve shareholders' capital during
periods when the securities markets or economic conditions are expected to enter
a period of decline.
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 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.
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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 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.
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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, without its 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. 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; and (ii) pledge, hypothecate, mortgage or otherwise
encumber its assets, but only to secure permitted borrowings. 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 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.
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
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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.
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 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
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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.
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.
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
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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 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 agreed to limit the Fund's operating expenses
to 2.00% of its average annual net assets.
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 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 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.
SHAREHOLDER SERVICE PLAN
The Trust has adopted a Shareholder Service Plan under which the Fund
may pay to broker-dealers and others an annual fee of up to 0.25% of the Fund's
average daily net assets for the provision of support services to their clients
who are shareholders of the Fund. Such services include establishing and
maintaining accounts and records relating to their clients' investments in
shares of the Fund, preparing tax reports, assisting clients in processing
account designations and redemption requests, and responding to client inquiries
concerning their investments.
-12-
<PAGE>
THE CUSTODIAN AND TRANSFER AGENT
Star Bank, located at 425 Walnut Street, M.L. 6118, Cincinnati, Ohio
45201, is the Fund's custodian ("Custodian"). American Data Services, Inc., P.O.
Box 5536, Hauppauge, New York 11788, acts as the Fund's transfer agent and
dividend disbursing 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 8:30 a.m. and 5:00 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
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 another application.
* 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 must include the child's social security number.
-13-
<PAGE>
- --------------------------------------------------------------------------------
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 must be included on the new account application.
- --------------------------------------------------------------------------------
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 $2,000
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 $ 2,000.00
* To add to an account $ 250.00
* Minimum balance $ 2,000.00
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 $2,000, 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:
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<PAGE>
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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 on your check.
Mail your application and check to: Mail your check to:
Khan Funds Khan Funds
c/o American Data Services, Inc. c/o American Data Services, Inc.
P.O. Box 5536 P.O. Box 5536
Hauppauge, New York 11788-0132 Hauppauge, New York 11788-0132
- --------------------------------------------------------------------------------
PHONE 1-888-217-KHAN
- --------------------------------------------------------------------------------
TO OPEN AN ACCOUNT: TO ADD TO AN ACCOUNT:
You may not open a new account by If you did not elect the
phone. telephone transaction option on
your new account application,
You may establish the telephone complete the shareholder options
transaction option when you open an form to make investments by phone
account by electing the option on your for amounts from $250 to $25,000.
new account application.
- --------------------------------------------------------------------------------
WIRE
- --------------------------------------------------------------------------------
TO OPEN AN ACCOUNT: TO ADD TO AN ACCOUNT:
Call 1-888-217-KHAN for instructions on Call 1-888-217-KHAN for
account by wire. instructions on opening and
adding to an account by wire.
- --------------------------------------------------------------------------------
AUTOMATIC INVESTMENT PLAN
- --------------------------------------------------------------------------------
TO OPEN AN ACCOUNT: TO ADD TO AN ACCOUNT:
Sign up for the Automatic Investment Sign up for the Automatic
Plan when you open your account. The Investment Plan on the
minimum initial investment will be shareholder options form or call
$2,000. for instructions on how to add to
your existing account.
- --------------------------------------------------------------------------------
-15-
<PAGE>
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 American Data Services, Inc., P.O. Box
5536, Hauppauge, New York 11788-0132.
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.
The following table summarizes the procedures for selling shares that you
own:
- --------------------------------------------------------------------------------
NOTE: SOME REDEMPTIONS REQUIRE SIGNATURE GUARANTEES. SEE PAGE 17.
-16-
<PAGE>
- --------------------------------------------------------------------------------
MAIL
- --------------------------------------------------------------------------------
SPECIAL REQUIREMENTS
Individual Joint Owners, Sole The letter of instruction must be
Proprietorships, UGMA, UTMA signed by all persons required to
sign for account transactions
(usually, all owners of the
account) exactly as their names
appear on the account
Trust The letter of instruction must
include the signatures of all
trustees.
- --------------------------------------------------------------------------------
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. ALL
PHONE ORDERS MUST BE FOLLOWED UP
WITH A FAX BY 4:00 P.M. EASTERN
TIME ON THE SAME DAY. 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 $13.00 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.
-17-
<PAGE>
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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 $250) 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.
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 1-888-217-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 as of 3:00 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.
-18-
<PAGE>
* 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.
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 $13.00)
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 1-888-217-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 faxing 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.
-19-
<PAGE>
DIVIDENDS, CAPITAL GAINS, AND TAXES
The Fund intends to distribute substantially all of its net income and
capital gains to shareholders at least annually.
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 by a written request.
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
-20-
<PAGE>
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. This will allow you or your tax
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.
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"). Nonstandardized 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
-21-
<PAGE>
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 purpose. 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 and the Investment Company Act of 1940.
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.
-22-
<PAGE>
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INVESTMENT ADVISOR
KHAN FUNDS
Khan Investment Inc.
714 FM 1960 West, Suite 201
Khan Growth Fund
Houston Texas 77090 KHAN FUNDS
Khan Growth Fund
CUSTODIAN
Star Bank
425 Walnut Street M.L. 6118
Cincinnati, OH 45202
PROSPECTUS
TRANSFER AGENT
American Data Services, Inc.
P.O. Box 5536
Hauppauge, New York 11788-0132
AUDITORS
KPMG Peat Marwick L.L.P.
700 Louisiana Street
Houston TX 77002
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-23-
<PAGE>
KHAN FUNDS
STATEMENT OF ADDITIONAL INFORMATION
FOR
KHAN GROWTH FUND
JULY 1,1997
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 Khan 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 c/o American Data
Services, Inc., P.O. Box 5536, Hauppauge, New York 11788-0132, or by calling
1-888-217-KHAN.
TABLE OF CONTENTS PAGE
----
Investment Objectives and Policies............... B-2
Investment Restrictions........................ B-2
Securities and Investment Techniques........... B-3
Management....................................... B-9
Trustees and Officers.......................... B-9
Advisory Agreement............................. B-11
Administration Agreement....................... B-12
Portfolio Transactions and Brokerage............. B-13
Net Asset Value.................................. B-14
Redemptions...................................... B-14
Taxation......................................... B-15
Dividends and Distributions...................... B-16
Performance Information.......................... B-16
Financial Statements............................. B-17
General Information.............................. B-17
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);
B-2
<PAGE>
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.
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).
2. Invest more than 10% of its assets in real estate investment trusts;
3. Invest in illiquid securities.
4. 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");
5. 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.
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
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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.
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.
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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 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.
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
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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
adversely affected by the purchase of securities on a when-issued basis. The
Fund will establish a segregated account with Star Bank, 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 obligations 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 not invest 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).
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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 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 obligations, 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.
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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.
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.
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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, 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.
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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.
TRUSTEES AND OFFICERS
The trustees and officers of the Trust, and their business addresses and
principal occupations during the past five years are:
Sardar A. D. Khan*
714 FM 1960 West Suite 201, Houston Texas 77090 Trustee and President
Physician; President, Caring Physicians Network Inc.
Age 54
Shahwar D. Khan*
14022 Champions Hamlet Ct., Houston Texas 77069 Trustee, Chief
Treasurer, Khan Investment Inc. Financial Officer
Age 47 and Secretary
Shehzad D. Khan*
14022 Champions Hamlet Ct., Houston, Texas 77069 Trustee
Trainee Broker, Olde Discount Corporation
Age 23
Mushtaq R. Malik
6622 Gentle Bend, Houston, Texas 77069 Trustee
Senior Principal Engineer, Stone & Webster
Engineering Corp.
Age 55
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
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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).
<TABLE>
<CAPTION>
Pension or
Retirement Total
Aggregate Benefits Accrued Estimated Compensation
Compensation as Part of Trust Annual Benefits from Trust Paid
Name from Trust Expenses Upon Retirement to Trustee
<S> <C> <C> <C> <C>
Mushtaq R. Malik $ 800 None N/A $ 800
Charles E. Moore $ 800 None N/A $ 800
</TABLE>
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.
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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).
Personnel of the Advisor may invest in securities for their own accounts
pursuant to a Code of Ethics that sets forth all employees' fiduciary
responsibilities regarding the Fund, establishes procedures for personal
investing, and restricts certain transactions. For example, all personal trades
in most securities require pre-clearance, and preparation in initial public
offerings is prohibited. In addition, restrictions on the timing of personal
investing in relation to trades by the Fund and on short-term trading having
been adopted.
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's 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.
FUND ACCOUNTING SERVICE AGREEMENT
American Data Services, Inc. ("ADS") provides fund accounting services to
the Fund puyrsuatn to a Fund Accounting Service Agreement with the Fund. Under
the Accounting Service Agreement, ADS calculates the Fund's daily net asset
value, maintains the Fund's accounting books and records, and provides
information used in preparing tax returns, proxy statements and reports to the
Fund's shareholders and trustees, and reports to the Securities and Exchange
Commission and other governmental agencies. ADS' fees range from $1,200 to
$2,000 per month, depending on the level of the Fund's assets, plus
reimbursement of ADS' expenses.
SHAREHOLDER SERVICE PLAN
Pursuant to the Shareholder Service Plan, the Fund will pay for expenses
incurred in connection with non-distribution shareholder services provided by
securities broker-dealers, retirement plan sponsors and administrators, and
other securities professionals ("Service Organizations") with respect to shares
of the Fund, and to the beneficial owners of such shares, for the provision of
support services to their clients who are beneficial owners of shares
("Clients").
B-12
<PAGE>
Support services provided pursuant to the Shareholder Service Plan include
(a) establishing and maintaining accounts and records relating to Clients who
invest in shares; (b) aggregating and processing purchase, exchange and
redemption requests for shares from Clients and placing net purchase and
redemption orders with respect to such shares; (c) investing, or causing to be
invested, the assets of Clients' accounts in shares pursuant to specific or
pre-authorized instructions; (d) processing dividend and distribution payments
from the Fund on behalf of Clients; (e) providing information periodically to
Clients showing their positions in shares; (f) arranging for bank wires; (g)
responding to Client inquiries relating to the services performed by Service
Organizations; (h) providing sub-accounting services with respect to shares
beneficially owned by Clients or the information to the Trust necessary for sub-
accounting services; (i) preparing any necessary tax reports or forms on behalf
of Clients; (j) if required by law, forwarding shareholder communications from
the Fund to Clients; and (k) assisting Clients in changing dividend options,
account designations and addresses.
The Shareholder Service Plan continues in effect from year to year, provided
that each such continuance is approved at least annually, by a vote of the Board
of Trustees, including a majority of the Trustees who have no direct or indirect
financial interest in the operation of the Plan or in any agreement related to
the Plan (the "Independent Trustees"), cast in person at a meeting called for
the purpose of voting on such continuance. The Plan may be amended at any time
by the Board of Trustees, provided that any material amendments of the terms of
the Plan will become effective only upon the approval by a majority of the Board
and a majority of the Independent Trustees pursuant to a vote cast in person at
a meeting called for the purpose of voting on the Plan.
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.
B-13
<PAGE>
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, Martin
Luther King Jr.'s Birthday, 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 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
B-14
<PAGE>
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 an 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 October 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
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.
B-15
<PAGE>
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.
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
B-16
<PAGE>
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 May 16, 1997, is
included in Appendix A to this Statement of Additional Information. Such
Statement has been audited by the Fund's independent accountants, KPMG Peat
Marwick, 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.
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 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 Dr. and Mrs. Sardar A.D. Khan and trusts established for
their children.
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
B-17
<PAGE>
securities, and to assist in communicating with other shareholders as required
by Section 16(c) of the Investment Company Act.
B-18
<PAGE>
EXHIBIT A
KPMG PEAT MARWICK LLP
700 Louisiana
P. O. Box 4545
Houston TX 77210-4545
KHAN GROWTH FUND
Statement of Assets and Liabilities
May 16, 1997
(With Independent Auditors' report therein)
INDEPENDENT AUDITOR'S REPORT
The Board of Trustees and Shareholders
Khan Growth Fund:
We have audited the accompanying statement of assets and liabilities of Khan
Growth Fund (the Fund) as of May 16, 1997. This financial statement is the
responsibility of the Fund's management. Our responsibility is to express an
opinion on the financial statement of based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of Khan Growth Fund as of May 16,
1997 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Houston Texas
May 20, 1997
B-19
<PAGE>
KHAN GROWTH FUND
Statement of Assets and Liabilities
May 16, 1997
Assets - cash .................................................... $100,000
--------
Net assets applicable to shares outstanding ...................... $100,000
--------
Capital shares, no par value - outstanding ....................... 20,000
--------
Net asset value, offering and redemption price per share ......... $ 5.00
--------
See accompanying notes to statement of assets and liabilities
B-20
<PAGE>
KHAN GROWTH FUND
Note to Statement of Assets and Liabilities
May 16, 1997
(1) ORGANIZATION Khan Funds, (the Trust) is an open-ended management investment
company organized as a business trust under the laws of Delaware on September
17, 1996. The Declaration of Trust provides for the issuance of multiple series
of shares, each representing a diversified portfolio of investments with
different investment objectives, policies and restrictions. At May 16, 1997, the
only series issued by the Trust is the Khan Growth Fund.
Khan Growth Fund (the Fund) seeks long-term capital growth, consistent with the
preservation of capital, by investing primarily in the common stock of large
capitalization companies. Income is a secondary objective of the Fund.
(2) FEDERAL TAXES The Fund intend to comply with the requirements of the
Internal Revenue Code, as amended, applicable to regulated investment companies
and to distribute taxable income to the shareholders of the Fund in amounts that
will avoid or minimize federal income or excise taxes for the Fund.
(3) ORGANIZATION COSTS The costs incurred by the Fund in connection with its
organization have been paid by Khan Investment Inc., the Advisor.
(4) ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES: On April 21, 1997, the
Trust's Board of Trustees the (Trustees) voted to approve an Investment Advisory
Agreement (the Management Agreement) between the Trust and Khan Investment, Inc.
Under the terms of the Management Agreement, the Advisor has responsibility for
supervising all aspects of the operations of the Fund subject to the supervision
of the Trustees. The Advisor has agreed to ensure that assets of the Fund are
invested in accordance with the investment objectives and policies. For its
services, the Advisor receives an annual management fee, payable monthly, and
computed on the value of the net assets of the Fund as of the close of business
each business day, at the annual rate of 0.75% of such net assets of the Fund.
On April 21, 1997, the Trustees approved an administrative service agreement
(the Agreement) between the Trust and the Advisor. Under the terms of the
Agreement the Advisor provides all administrative services necessary for the
Trust's operations and is responsible for the supervision of the Trust's other
service providers. The Advisor also assumes all ordinary, recurring expenses
necessary in carrying out its duties for the Trust, such as office space and
facilities, and equipment and clerical personnel. The Advisor shall also pay all
compensation of all trustees, officers and employees of the Trust who are
affiliated persons of the Advisor. For these services, the Advisor receives an
annual fee, payable monthly, computed on the value of the net assets of the Fund
as of the close of business day at the annual rate of 0.25% of 1% of such net
assets of the Fund.
On April 21, 1997, the Trustees approved a Shareholder Services Plan (the Plan)
whereby the Trust will pay securities broker-dealers retirement plan sponsors
and administrators, and other securities professionals and/or beneficial owners
of shares of the Fund, for expenses incurred in connection with non-distribution
shareholder services provided by them to shareholders, provided that such
shareholders servicing is not duplicative of the servicing otherwise provided on
behalf of the Fund. These expenses will be limited to an annual rate of not more
than 0.25% of the net assets of the Fund as of the close of business each
business day.
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<PAGE>
All other operating expenses of the Fund in addition to those stated above will
be limited to an annual rate of 0.75% of the net assets of the Fund as of the
close of business each business day, resulting in total expenses at the annual
rate of not more than 2.00% of such net assets of the Fund.
May 16, 1997
B-22
<PAGE>
PART C
OTHER INFORMATION
Item 24 Financial Statements and Exhibits
(a) Financial Statements
Registrant's Statement of Assets as of May 16, 1997, Related
Notes and Independent Auditor's Report dated May 20, 1997, are
included in Part B.
(a) Exhibits
(1.2) Certificate of Trust (a)
(1.3) Declaration of Trust (a)
(2) By-Laws (a)
(3) Not Applicable
(4) Not Applicable
(5) Form of Investment Advisory Agreement
(6) Not Applicable
(7) Not Applicable
(8) Custody Agreement
(9.1) Form of Administration Agreement (a)
(9.2) Form of Fund Accounting Service Agreement
(9.3) Form of Transfer Agency and Service Agreement
(10) Opinion and Consent of Counsel
(11) Consent of Independent Accountants
(12) Not Applicable
(13) Investment Letters of Initial Investors
(14) Individual Retirement Account Documents
(15) Not Applicable
(16) Not Applicable
(18) Not Applicable
(19.1) Powers of Attorney (a)
(19.2) Shareholder Service Plan
(27.1) Financial Data Schedule
(a) Filed as an Exhibit to the Registration Statement on September 25,
1996 and incorporated herein by reference.
Item 25 Persons Controlled by or under Common Control with Registrant
Faisal P. Khan and Shehzad D. Khan, sons of Sardar A.D. Khan and
Shahwar D. Khan, own Caring Physicians Network Inc., a preferred
provider organization of which Sardar
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A.D. Khan is the President. In addition, Sardar A.D. Khan owns S.D.
Kahn M.D., P.A., a professional medical corporation and Qualcare a
utilization review company. Both companies may be deemed to be under
common control with Registrant.
Item 26 Number of Holders of Securities
As of July 1, 1997, the Trust had four shareholders.
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
Not Applicable
Item 30 Location of Accounts and Records
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 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
C-2
<PAGE>
West, Suite 201, Houston, Texas 77090; and all other records are maintained by
the Custodian at 425 Walnut Street, Cincinnati, Ohio 45202 and the Fund
Accounting Agent at 24 West Carve Street, Huntington, NY 11743.
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.
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<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 Amendment to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Houston, State of Texas on the 23rd day of June,
1997.
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
Sardar A. D. Khan, Trustee and Principal June 23, 1997
Executive Officer
/S/ SHEHZAD D. KHAN
Shehzad D. Khan, Trustee June 23, 1997
/S/SHAHWAR D. KHAN
Shahwar D. Khan, Trustee and Principal Financial June 23, 1997
and Accounting Officer
*CHARLES E. MOORE
Charles E. Moore, Trustee June 23, 1997
*MUSHTAQ R. MALIK
Mushtaq R. Malik, Trustee June 23, 1997
*By /S/S.A.D. KHAN
Sardar A.D. Khan
Attorney-in-Fact
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EXHIBIT INDEX
KHAN FUNDS
FORM N-1A REGISTRATION STATEMENT
PRE-EFFECTIVE AMENDMENT NO. 2
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
(6) Not Applicable
(7) Not applicable
(8) Custody Agreement
(9.1) Form of Administration Agreement (a)
(9.2) Form of Fund Accounting Service Agreement
(9.3) Form of Transfer Agency and Service Agreement
(10) Opinion and Consent of Counsel
(11) Consent of Independent Accountants
(12) Not applicable
(13) Investment Letters of Initial Investors
(14) Individual Retirement Account Documents
(15) Not Applicable
(16) Not Applicable
(17) Financial Data Schedule
(18) Not Applicable
(19.1) Powers of Attorney (a)
(19.2) Shareholder Service Plan
(a) Filed as an Exhibit to the Registration Statement on September 25, 1996, and
incorporated herein by reference.
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EXHIBIT 5
KHAN FUNDS
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT is made as of the 21 day of April, 1997,
by and between KHAN FUNDS (the "Trust"), a trust organized under the laws of the
State of Delaware, and KHAN INVESTMENT INC. (the "Advisor"), a Texas
corporation.
In consideration of the mutual promises and agreements herein contained and
other good and valuable consideration, the receipt of which is hereby
acknowledged, it is hereby agreed by and between the parties hereto as follows:
1. IN GENERAL
(a) The Trust hereby appoints the Advisor to act as investment adviser
to the Khan Growth Fund series of the Trust (the "Fund"). The Advisor agrees,
all as more fully set forth herein, to provide professional investment
management with respect to the investment of the assets of the Fund and to
supervise and arrange the purchase and sale of securities held in the portfolio
of the Fund.
(b) In the event that the Trust establishes one or more series other
than the Fund with respect to which it desires to retain the Advisor to serve as
investment adviser hereunder, it will notify the Advisor in writing. If the
Advisor is willing to render such services under this Agreement it will so
notify the Trust in writing, whereupon such series will become a "Fund" and will
be subject to the provisions of this Agreement to the same extent as the initial
Fund except to the extent that such provisions (including those relating to the
compensation payable by the Fund to the Advisor) are modified with respect to
such Fund in writing by the Trust and the Advisor at the time.
2. MANAGEMENT OF THE TRUST
(a) Subject to the succeeding provisions of this section and subject
to the direction and control of the Board of Trustees of the Trust, the Advisor
shall decide what securities shall be purchased or sold by the Fund and when,
and shall arrange for the purchase and the sale of securities held in the
portfolios of the Fund by placing purchase and sale orders for the Fund.
(b) Any investment purchases or sales made by the Advisor shall at all
times conform to, and be in accordance with, any requirements imposed by: (i)
the provisions of the Investment Company Act of 1940 (the "Act") and of any
rules or regulations in force thereunder; (ii) any other applicable provisions
of law; (iii) the provisions of the Agreement and Declaration of Trust and
ByLaws of the Trust as amended from time to time; (iv) any policies and
determinations of the Board of Trustees of the Trust; and (v) the fundamental
policies of the Fund, as reflected in its registration statement under the Act,
or as amended by the shareholders of the Fund.
(c) The Advisor shall give the Trust the benefit of its best judgment
and effort in rendering services hereunder. In the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of obligations or
duties hereunder ("disabling conduct") on the part of the Advisor (and its
officers, directors, agents, employees, controlling persons, shareholders and
any other person or entity affiliated with the Advisor), the Advisor shall not
be subject to liability to the Trust or to any shareholder of the Trust for any
act or omission in the course of, or connected with, rendering
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services hereunder, including, without limitation, any error of judgment or
mistake of law, or for any loss suffered by any of them in connection with the
matters to which this Agreement relates, except to the extent specified in
Section 36(b) of the Act concerning loss resulting from a breach of fiduciary
duty with respect to the receipt of compensation for services. Except for such
disabling conduct, the Trust shall indemnify the Advisor (and its officers,
directors, agents, employees, controlling persons, shareholders and any other
person or entity affiliated with the Advisor) from any liability arising from
the Advisor's conduct under this Agreement to the extent permitted by the
Agreement and Declaration of Trust and applicable law.
(d) Nothing in this Agreement shall prevent the Advisor or any
affiliated person (as defined in the Act) of the Advisor from acting as
investment adviser, manager and/or principal underwriter for any other person,
firm or corporation and shall not in any way limit or restrict the Advisor or
any such affiliated person from buying, selling or trading any securities for
its or their own accounts or the accounts of others for whom it or they may be
acting; provided, however, that the Advisor expressly represents that it will
undertake no activities which, in its judgment, will adversely affect the
performance of its obligations to the Trust under this Agreement.
(e) The Advisor shall have no responsibility or liability for the
accuracy or completeness of the Trust's Registration Statement under the Act
except for information supplied by the Advisor for inclusion therein.
3. BROKER-DEALER RELATIONSHIPS
In connection with its duties set forth in Section 2 (a) of this Agreement
to arrange for the purchase and the sale of securities held by the Fund by
placing purchase and sale orders for the Trust, the Advisor shall select such
broker-dealers ("brokers") as shall, in the Advisor's judgment, implement the
policy of the Trust to achieve "best execution", I.E., prompt and efficient
execution at the most favorable securities price. In making such selection, the
Advisor is authorized to consider the reliability, integrity and financial
condition of the broker. The Advisor is also authorized to consider whether the
broker provides brokerage and/or research services to the Trust and/or other
accounts of the Advisor. The commissions paid to any such broker may be higher
than another broker would have charged if a good faith determination is made by
the Advisor that the commission is reasonable in relation to the services
provided, viewed in terms of either that particular transaction or the Advisor's
overall responsibilities to the accounts as to which it exercises investment
discretion. The Advisor shall use its judgment in determining that the amounts
of commissions paid are reasonable in relation to the value of brokerage and
research services provided and need not place or attempt to place a specific
dollar value on such services or on the portion of commission rates reflecting
such services. To demonstrate that such determinations were in good faith, and
to show the overall reasonableness of commissions paid, the Advisor shall be
prepared to show that commissions paid (i) were for purposes contemplated by
this Agreement; (ii) provide lawful and appropriate assistance to the Advisor in
the performance of its decision-making responsibilities; and (iii) were within a
reasonable range as compared to the rates charged by qualified brokers to other
institutional investors as such rates may become known from available
information. The Trust recognizes that, on any particular transaction, a higher
than usual commission may be paid due to the difficulty of the transaction in
question. The Advisor also is authorized to consider sales of shares of the
Trust as a factor in the selection of brokers to execute brokerage and principal
transactions, subject to the requirements of "best execution", as defined above.
4. ALLOCATION OF EXPENSES
The Advisor shall furnish the Trust, at the Advisor's expense, with all
office space and facilities, and equipment and clerical personnel necessary for
carrying out its duties under this Agreement. The
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Advisor shall also pay all compensation of all Trustees, officers and employees
of the Trust who are affiliated persons of the Advisor. All costs and expenses
not expressly assumed by the Advisor under this Agreement shall be paid by the
Trust, including, but not limited to (i) interest and taxes; (ii) brokerage
commissions; (iii) insurance premiums; (iv) compensation and expenses of its
Trustees other than those affiliated with the Advisor; (v) legal and audit
expenses; (vi) fees and expenses of the Trust's custodian, transfer agent and
accounting services agent; (vii) expenses incident to the issuance of its
shares, including issuance of shares on the payment of, or reinvestment of,
dividends; (viii) fees and expenses incident to the registration under Federal
or state securities laws of the Trust or its shares; (ix) expenses of preparing,
printing and mailing reports, notices, proxy material and prospectuses to
shareholders of the Trust; (x) all other expenses incidental to holding meetings
of the Trust's shareholders; (xi) dues or assessments of or contributions to the
Investment Company Institute or any successor or other industry association;
(xii) such non-recurring expenses as may arise, including litigation affecting
the Trust and the legal obligations which the Trust may have to indemnify its
officers and Trustees with respect thereto; (xiii) fees of the Trust's
Administrator and (xiii) the organization costs of the Trust.
5. COMPENSATION OF THE ADVISOR
(a) The Trust agrees to pay the Advisor and the Advisor agrees to
accept as full compensation for all services rendered to the Fund by the Advisor
as such, an annual management fee, payable monthly and computed on the value of
the net assets of the Fund as of the close of business each business day, at the
annual rate of 0.75% of such net assets of the Fund.
(b) In the event the expenses of the Fund (including the fees of the
Advisor and the Administrator and amortization of organization expenses, but
excluding interest, taxes, brokerage commissions, extraordinary expenses and
sales charges and distribution fees) for any fiscal year exceed 2.00% of the
average daily net assets of the Fund, the Advisor shall reduce its fee by the
amount of such excess and, to the extent necessary, reimburse the Fund for
payment of such Fund expenses. Any such reductions or reimbursements are subject
to readjustment during the year. The payment of the management fee at the end of
any month shall be reduced or postponed or, if necessary, a refund shall be made
to the Fund, so that at no time will there be any accrued but unpaid liability
under this expense limitation.
6. DURATION AND TERMINATION
(a) This Agreement shall go into effect on the date set forth above
and shall, unless terminated as hereinafter provided, continue in effect until
December 31, 1998 and thereafter from year to year, but only so long as such
continuance is specifically approved at least annually by the Trust's Board of
Trustees, including the vote of a majority of the Trustees who are not parties
to this Agreement or "interested persons" (as defined in the Act) of any such
party cast in person at a meeting called for the purpose of voting on such
approval, or by the vote of the holders of a "majority" (as defined interest) of
the outstanding voting securities of the Fund.
(b) This Agreement may be terminated by the Advisor with respect to
the Fund at any time without penalty upon giving the Trust sixty (60) days'
written notice (which notice may be waived by the Trust) and may be terminated
by the Trust at any time with respect to the Fund without penalty upon giving
the Advisor sixty (60) days' written notice (which notice may be waived by the
Advisor), provided that such termination by the Trust shall be directed or
approved by the vote of a majority of all of its Trustees in office at the time
or by the vote of the holders of a majority (as defined in the Act) of the
voting securities of the Fund. This Agreement shall automatically terminate in
the event of its assignment (as defined in the Act).
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7. RECORDS
(a) The Advisor shall maintain all books and records with respect to
the securities transactions of the Fund, keep books of account with respect to
such transactions, and furnish the Board with such periodic and special reports
as the Board may request.
(b) The Advisor shall treat confidentially and as proprietary
information of the Trust all records and other information relative to the Trust
and shareholders of the Trust ("Investors") or those persons or entities who
respond to inquiries concerning investment in the Trust, and shall not use such
records and information for any purpose other than performance of its
responsibilities and duties hereunder or under any other agreement with the
Trust except after prior notification to and approval in writing by the Trust,
which approval will not be unreasonably withheld and may not be withheld where
the Advisor may be exposed to civil or criminal contempt proceedings for failure
to comply, when requested to divulge such information by duly constituted
authorities, or when so requested by the Trust. Nothing contained herein,
however, shall prohibit the Advisor from advertising to or soliciting the public
generally with respect to other products or services, including, but not limited
to, any advertising or marketing via radio, television, newspapers, magazines or
direct mail solicitation, regardless of whether such advertisement or
solicitation may coincidentally include prior or present Investors or those
persons or entities who have responded to inquiries regarding the Trust.
(c) In compliance with the requirements of Rule 31a-3 under the 1940
Act, the Advisor agrees that all records which it maintains for the Trust are
the property of the Trust and further agrees to surrender promptly to the Trust
any such records upon the Trust's request. In addition, the Advisor agrees to
preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the records
required to be maintained by Rule 31a-1 under the 1940 Act.
8. REPRESENTATIONS AND WARRANTIES
(a) The Trust represents and warrants to the Advisor that: (i) it is a
business trust duly organized and existing and in good standing under the laws
of the State of Delaware and is duly qualified to conduct its business in the
State of Delaware and in such other jurisdictions wherein the nature of its
activities or its properties owned or leased makes such qualification necessary;
(ii) it is a registered open-end management investment company under the 1940
Act; (iii) a registration statement on Form N-1A under the Securities Act of
1933, as amended, on behalf of the Fund is currently effective and will remain
effective, and appropriate state securities law filings have been made and will
continue to be made, with respect to all shares of the Fund being offered for
sale; (iv) it is empowered under applicable laws and by its Declaration of Trust
and Bylaws to enter into and perform this Agreement; and (v) all requisite trust
proceedings have been taken to authorize it to enter into and perform this
Agreement.
(b) The Advisor represents and warrants to the Trust that: (i) it is a
corporation duly organized and existing and in good standing under the laws of
the State of Texas and is duly qualified to conduct its business in the State of
Texas and in such other jurisdictions wherein the nature of its activities or
its properties owned or leased makes such qualification necessary; (ii) it is
empowered under applicable laws and by its charter documents to enter into and
perform this Agreement; (iii) all requisite corporate proceedings have been
taken to authorize it to enter into and perform this Agreement; and (iv) it is a
registered investment adviser under the Investment Advisers Act of 1940 and
applicable state laws.
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9. MISCELLANEOUS
(a) This Agreement constitutes the entire agreement and understanding
between the parties hereto, and supersedes all prior agreements and
understandings relating to the subject matter hereof. No provision of this
Agreement may be changed, waived, discharged or terminated orally, but only by
an instrument in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought. No amendment of this
Agreement will be effective as to a particular Fund until approved by vote of a
majority of the outstanding voting securities of such Fund, except as permitted
by the Act.
(b) No Trustee, officer, employee or agent of the Trust shall be
subject to any personal liability whatsoever, in his or her official or
individual capacity, to any person, including the Advisor, other than the Trust
or its shareholders, in connection with the property or affairs of the Trust,
save only that arising from his or her bad faith, willful misfeasance, gross
negligence or reckless disregard of his or her duty to such person; and all such
persons shall look solely to the Trust property for satisfaction of claims of
any nature against a Trustee, officer, employee or agent of the Trust arising in
connection with the affairs of the Trust. Moreover, the debts, liabilities,
obligations and expenses incurred, contracted for or otherwise existing with
respect to a Fund shall be enforceable against the assets and property of such
Fund only, and not against the assets and property of any other series of the
Trust.
(c) This Agreement will be binding upon and will inure to the benefit
of the parties hereto and their respective successors and will be governed by
the internal laws, and not the law of conflicts of laws, of the state of Texas;
provided that nothing herein will be construed in a manner inconsistent with the
Act, the Investment Advisers Act of 1940, as amended, or any rule or regulation
of the Securities and Exchange Commission thereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by duly authorized persons as of the day and year first above written.
KHAN FUNDS
By_________________________________________
Title______________________________________
KHAN INVESTMENT INC.
___________________________________________
Title______________________________________
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EXHIBIT 8
CUSTODY AGREEMENT
This agreement (the "Agreement") is entered into as of the 21 day of
April, 1997 by and between Khan Growth Fund, (the "Fund"), an open-end
diversified investment business trust organized under the laws of Delaware and
having its office at 714 FM 1960 West, Suite 201, Houston, Texas 77090 and Star
Bank, National Association, (the "Custodian"), a national banking association
having its principal office at 425 Walnut Street, Cincinnati, Ohio, 45202.
WHEREAS, the Fund and the Custodian desire to enter into this Agreement
to provide for the custody and safekeeping of the assets of the Fund as required
by the Investment Company Act of 1940, as amended (the "Act").
WHEREAS, the Fund hereby appoints the Custodian as custodian of all the
Fund's Securities and moneys at any time owned by the Fund during the term of
this Agreement (the "Fund Assets").
WHEREAS, the Custodian hereby accepts such appointment as Custodian and
agrees to perform the duties thereof as hereinafter set forth.
THEREFORE, in consideration of the mutual promises hereinafter set
forth, the Fund and the Custodian agree as follows:
ARTICLE I
DEFINITIONS
The following words and phrases, when used in this Agreement, unless
the context otherwise requires, shall have the following meanings:
AUTHORIZED PERSON - the Chairman, President, Secretary, Treasurer,
Controller, or Senior Vice President of the Fund, or any other person, whether
or not any such person is an officer or employee of the Fund, duly authorized by
the Board of Trustees of the Fund to give Oral Instructions and Written
Instructions on behalf of the Fund, and listed in the Certificate annexed hereto
as Appendix A, or such other Certificate as may be received by the Custodian
from time to time.
BOOK-ENTRY SYSTEM - the Federal Reserve Bank book-entry system for
United States Treasury securities and federal agency securities.
DEPOSITORY - The Depository Trust Company ("DTC"), a limited purpose
trust company its successor(s) and its nominee(s) or any other person or
clearing agent
DIVIDEND AND TRANSFER AGENT - the dividend and transfer agent
appointed, from time to time, pursuant to a written agreement between the
dividend and transfer agent and the Fund
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FOREIGN SECURITIES - a) securities issued and sold primarily outside of
the United States by a foreign government, a national of any foreign country, or
a trust or other organization incorporated or organized under the laws of any
foreign country or; b) securities issued or guaranteed by the government of the
United States, by any state, by any political subdivision or agency thereof, or
by any entity organized under the laws of the United States or of any state
thereof, which have been issued and sold primarily outside of the United States.
MONEY MARKET SECURITY - debt obligations issued or guaranteed as to
principal and/or interest by the government of the United States or agencies or
instrumentalities thereof, commercial paper, obligations (including certificates
of deposit, bankers' acceptances, repurchase agreements and reverse repurchase
agreements with respect to the same), and time deposits of domestic banks and
thrift institutions whose deposits are insured by the Federal Deposit Insurance
Corporation, and short-term corporate obligations where the purchase and sale of
such securities normally require settlement in federal funds or their equivalent
on the same day as such purchase and sale, all of which mature in not more than
thirteen (13) months.
OFFICERS - the Chairman, President, Secretary, Treasurer, Controller,
and Senior Vice President of the Fund listed in the Certificate annexed hereto
as Appendix A, or such other Certificate as may be received by the Custodian
from time to time.
ORAL INSTRUCTIONS - verbal instructions received by the Custodian from
an Authorized Person (or from a person that the Custodian reasonably believes in
good faith to be an Authorized Person) and confirmed by Written Instructions in
such a manner that such Written Instructions are received by the Custodian on
the business day immediately following receipt of such Oral Instructions.
PROSPECTUS - the Fund's then currently effective prospectus and
Statement of Additional Information, as filed with and declared effective from
time to time by the Securities and Exchange Commission.
SECURITY OR SECURITIES - Money Market Securities, common stock,
preferred stock, options, financial futures, bonds, notes, debentures, corporate
debt securities, mortgages, and any certificates, receipts, warrants, or other
instruments representing rights to receive, purchase, or subscribe for the same
or evidencing or representing any other rights or interest therein, or any
property or assets.
WRITTEN INSTRUCTIONS - communication received in writing by the
Custodian from an Authorized Person.
ARTICLE II
DOCUMENTS AND NOTICES TO BE FURNISHED BY THE FUND
A The following documents, including any amendments thereto, will be
provided contemporaneously with the execution of the Agreement, to the Custodian
by the Fund:
1. A copy of the Articles of Incorporation of the Fund certified
by the Secretary.
2. A copy of the By-Laws of the Fund certified by the Secretary.
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3. A copy of the resolution of the Board of Trustees of the Fund
appointing the Custodian, certified by the Secretary.
4. A copy of the then current Prospectus.
5. A Certificate of the President and Secretary of the Fund
setting forth the names and signatures of the Officers of the
Fund.
B. The Fund agrees to notify the Custodian in writing of the
appointment of any Dividend and Transfer Agent.
ARTICLE III
RECEIPT OF FUND ASSETS
A. During the term of this Agreement, the Fund will deliver or cause to
be delivered to the Custodian all moneys constituting Fund Assets. The Custodian
shall be entitled to reverse any deposits made on the Fund's behalf where such
deposits have been entered and moneys are not finally collected within 30 days
of the making of such entry.
B. During the term of this Agreement, the Fund will deliver or cause to
be delivered to the Custodian all Securities constituting Fund Assets. The
Custodian will not have any duties or responsibilities with respect to such
Securities until actually received by the Custodian.
C. As and when received, the Custodian shall deposit to the account(s)
of the Fund any and all payments for shares of the Fund issued or sold from time
to time as they are received from the Fund's distributor or Dividend and
Transfer Agent or from the Fund itself.
ARTICLE IV
DISBURSEMENT OF FUND ASSETS
A. The Fund shall furnish to the Custodian a copy of the resolution of
the Board of Trustees of the Fund, certified by the Fund's Secretary, either (i)
setting forth the date of the declaration of any dividend or distribution in
respect of shares of the Fund, the date of payment thereof, the record date as
of which Fund shareholders entitled to payment shall be determined, the amount
payable per share to Fund shareholders of record as of that date, and the total
amount to be paid by the Dividend and Transfer Agent on the payment date, or
(ii) authorizing the declaration of dividends and distributions in respect of
shares of the Fund on a daily basis and authorizing the Custodian to rely on a
Certificate setting forth the date of the declaration of any such dividend or
distribution, the date of payment thereof, the record date as of which Fund
shareholders entitled to payment shall be determined, the amount payable per
share to Fund shareholders of record as of that date, and the total amount to be
paid by the Dividend and Transfer Agent on the payment date.
On the payment date specified in such resolution or
Certificate described above, the Custodian shall segregate such amounts from
moneys held for the account of the Fund so that they are available for such
payment.
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B. Upon receipt of Written Instructions so directing it, the Custodian
shall segregate amounts necessary for the payment of redemption proceeds to be
made by the Dividend and Transfer Agent from moneys held for the account of the
Fund so that they are available for such payment.
C. Upon receipt of a Certificate directing payment and setting forth
the name and address of the person to whom such payment is to be made, the
amount of such payment, and the purpose for which payment is to be made, the
Custodian shall disburse amounts as and when directed from the Fund Assets. The
Custodian is authorized to rely on such directions and shall be under no
obligation to inquire as to the propriety of such directions.
D. Upon receipt of a Certificate directing payment, the Custodian shall
disburse moneys from the Fund Assets in payment of the Custodian's fees and
expenses as provided in Article VIII hereof.
ARTICLE V
CUSTODY OF FUND ASSETS
A. The Custodian shall open and maintain a separate bank account or
accounts in the United States in the name of the Fund, subject only to draft or
order by the Custodian acting pursuant to the terms of this Agreement, and shall
hold all cash received by it from or for the account of the Fund, other than
cash maintained by the Fund in a bank account established and used by the Fund
in accordance with Rule 17f-3 under the Act. Moneys held by the Custodian on
behalf of the Fund may be deposited by the Custodian to its credit as Custodian
in the banking department of the Custodian. Such moneys shall be deposited by
the Custodian in its capacity as such, and shall be withdrawable by the
Custodian only in such capacity.
B. The Custodian shall hold all Securities delivered to it in
safekeeping in a separate account or accounts maintained at Star Bank, N.A. for
the benefit of the Fund.
C. All Securities held which are issued or issuable only in bearer
form, shall be held by the Custodian in that form; all other Securities held for
the Fund shall be registered in the name of the Custodian or its nominee. The
Fund agrees to furnish to the Custodian appropriate instruments to enable the
Custodian to hold, or deliver in proper form for transfer, any Securities that
it may hold for the account of the Fund and which may, from time to time, be
registered in the name of the Fund.
D. With respect to all Securities held for the Fund , the Custodian
shall on a timely basis (concerning items 1 and 2 below, as defined in the
Custodian's Standards of Service Guide, as amended from time to time, annexed
hereto as Appendix C):
1.) Collect all income due and payable with respect to
such Securities;
2.) Present for payment and collect amounts payable upon
all Securities which may mature or be called,
redeemed, or retired, or otherwise become payable;
3.) Surrender Securities in temporary form for definitive
Securities; and
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4.) Execute, as agent, any necessary declarations or
certificates of ownership under the Federal income
tax laws or the laws or regulations of any other
taxing authority, including any foreign taxing
authority, now or hereafter in effect.
E. Upon receipt of a Certificate AND NOT OTHERWISE, the Custodian
shall:
1.) Execute and deliver to such persons as may be designated
in such Certificate proxies, consents, authorizations, and any other instruments
whereby the authority of the Fund as beneficial owner of any Securities may be
exercised;
2.) Deliver any Securities in exchange for other Securities or
cash issued or paid in connection with the liquidation, reorganization,
refinancing, merger, consolidation, or recapitalization of any trust, or the
exercise of any conversion privilege;
3.) Deliver any Securities to any protective committee,
reorganization committee, or other person in connection with the reorganization,
refinancing, merger, consolidation, recapitalization, or sale of assets of any
trust, and receive and hold under the terms of this Agreement such certificates
of deposit, interim receipts or other instruments or documents as may be issued
to it to evidence such delivery;
4.) Make such transfers or exchanges of the assets of the Fund
and take such other steps as shall be stated in said Certificate to be for the
purpose of effectuating any duly authorized plan of liquidation, reorganization,
merger, consolidation or recapitalization of the Fund; and
5.) Deliver any Securities held for the Fund to the depository
agent for tender or other similar offers.
F. The Custodian shall promptly deliver to the Fund all notices, proxy
material and executed but unvoted proxies pertaining to shareholder meetings of
Securities held by the Fund. The Custodian shall not vote or authorize the
voting of any Securities or give any consent, waiver or approval with respect
thereto unless so directed by a Certificate or Written Instruction.
G. The Custodian shall promptly deliver to the Fund all information
received by the Custodian and pertaining to Securities held by the Fund with
respect to tender or exchange offers, calls for redemption or purchase, or
expiration of rights.
ARTICLE VI
PURCHASE AND SALE OF SECURITIES
A. Promptly after each purchase of Securities by the Fund, the Fund
shall deliver to the Custodian (i) with respect to each purchase of Securities
which are not Money Market Securities, Written Instructions, and (ii) with
respect to each purchase of Money Market Securities, Written Instructions or
Oral Instructions, specifying with respect to each such purchase the;
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1.) name of the issuer and the title of the Securities,
2.) principal amount purchased and accrued interest, if
any,
3.) date of purchase and settlement,
4.) purchase price per unit,
5.) total amount payable, and
6.) name of the person from whom, or the broker through
which, the purchase was made.
The Custodian shall, against receipt of Securities purchased by or for the Fund,
pay out of the Fund Assets, the total amount payable to the person from whom or
the broker through which the purchase was made, provided that the same conforms
to the total amount payable as set forth in such Written Instructions or Oral
Instructions, as the case may be.
B. Promptly after each sale of Securities by the Fund, the Fund shall
deliver to the Custodian (i) with respect to each sale of Securities which are
not Money Market Securities, Written Instructions, and (ii) with respect to each
sale of Money Market Securities, Written Instructions or Oral Instructions,
specifying with respect to each such sale the;
1.) name of the issuer and the title of the Securities,
2.) principal amount sold and accrued interest, if any,
3.) date of sale and settlement,
4.) sale price per unit,
5.) total amount receivable, and
6.) name of the person to whom, or the broker through
which, the sale was made.
The Custodian shall deliver the Securities against receipt of the total amount
receivable, provided that the same conforms to the total amount receivable as
set forth in such Written Instructions or Oral Instructions, as the case may be.
C. On contractual settlement date, the account of the Fund will be
charged for all purchased Securities settling on that day, regardless of whether
or not delivery is made. Likewise, on contractual settlement date, proceeds from
the sale of Securities settling that day will be credited to the account of the
Fund, irrespective of delivery.
D. Purchases and sales of Securities effected by the Custodian will be
made on a delivery versus payment basis. The Custodian may, in its sole
discretion, upon receipt of a
-6-
<PAGE>
Certificate, elect to settle a purchase or sale transaction in some other
manner, but only upon receipt of acceptable indemnification from the Fund.
E. The Custodian shall, upon receipt of a Written Instruction so
directing it, establish and maintain a segregated account or accounts for and on
behalf of the Fund. Cash and/or Securities may be transferred into such account
or accounts for specific purposes, to-wit:
1.) in accordance with the provision of any agreement among
the Fund, the Custodian, and a broker-dealer registered under the Securities and
Exchange Act of 1934, as amended, and also a member of the National Association
of Securities Dealers (NASD) (or any futures commission merchant registered
under the Commodity Exchange Act), relating to compliance with the rules of the
Options Clearing Corporation and of any registered national securities exchange,
the Commodity Futures Trading Commission, any registered contract market, or any
similar organization or organizations requiring escrow or other similar
arrangements in connection with transactions by the Fund;
2.) for purposes of segregating cash or government securities
in connection with options purchased, sold, or written by the Fund or commodity
futures contracts or options thereon purchased or sold by the Fund;
3.) for the purpose of compliance by the fund with the
procedures required for reverse repurchase agreements, firm commitment
agreements, standby commitment agreements, and short sales by Act Release No.
10666, or any subsequent release or releases or rule of the Securities and
Exchange Commission relating to the maintenance of segregated accounts by
registered investment companies; and
4.) for other corporate purposes, only in the case of this
clause 4 upon receipt of a copy of a resolution of the Board of Trustees of the
Fund, certified by the Secretary of the Fund, setting forth the purposes of such
segregated account.
F. Except as otherwise may be agreed upon by the parties hereto, the
Custodian shall not be required to comply with any Written Instructions to
settle the purchase of any Securities on behalf of the Fund unless there is
sufficient cash in the account(s) at the time or to settle the sale of any
Securities from an account(s) unless such Securities are in deliverable form.
Notwithstanding the foregoing, if the purchase price of such Securities exceeds
the amount of cash in the account(s) at the time of such purchase, the Custodian
may, in its sole discretion, advance the amount of the difference in order to
settle the purchase of such Securities. The amount of any such advance shall be
deemed a loan from the Custodian to the Fund payable on demand and bearing
interest accruing from the date such loan is made up to but not including the
date such loan is repaid at a rate per annum customarily charged by the
Custodian on similar loans.
ARTICLE VII
FUND INDEBTEDNESS
In connection with any borrowings by the Fund, the Fund will cause to
be delivered to the Custodian by a bank or broker requiring Securities as
collateral for such borrowings (including the Custodian if the borrowing is from
the Custodian), a notice or undertaking in the form currently employed by such
bank or broker setting forth the amount of collateral. The Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to each such
borrowing: (a) the name of
-7-
<PAGE>
the bank or broker, (b) the amount and terms of the borrowing, which may be set
forth by incorporating by reference an attached promissory note duly endorsed by
the Fund, or a loan agreement, (c) the date, and time if known, on which the
loan is to be entered into, (d) the date on which the loan becomes due and
payable, (e) the total amount payable to the Fund on the borrowing date, and (f)
the description of the Securities securing the loan, including the name of the
issuer, the title and the number of shares or the principal amount. The
Custodian shall deliver on the borrowing date specified in the Certificate the
required collateral against the lender's delivery of the total loan amount then
payable, provided that the same conforms to that which is described in the
Certificate. The Custodian shall deliver, in the manner directed by the Fund,
such Securities as additional collateral, as may be specified in a Certificate,
to secure further any transaction described in this Article VII. The Fund shall
cause all Securities released from collateral status to be returned directly to
the Custodian and the Custodian shall receive from time to time such return of
collateral as may be tendered to it.
The Custodian may, at the option of the lender, keep such collateral in
its possession, subject to all rights therein given to the lender because of the
loan. The Custodian may require such reasonable conditions regarding such
collateral and its dealings with third-party lenders as it may deem appropriate.
ARTICLE VIII
CONCERNING THE CUSTODIAN
A. Except as otherwise provided herein, the Custodian shall not be
liable for any loss or damage resulting from its action or omission to act or
otherwise, except for any such loss or damage arising out of its own gross
negligence or willful misconduct. The Fund shall defend, indemnify and hold
harmless the Custodian and its directors, officers, employees and agents with
respect to any loss, claim, liability or cost (including reasonable attorneys'
fees) arising or alleged to arise from or relating to the Fund's duties
hereunder or any other action or inaction of the Fund or its Trustees, officers,
employees or agents, except such as may arise from the negligent action,
omission, willful misconduct or breach of this Agreement by the Custodian. The
Custodian may, with respect to questions of law, apply for and obtain the advice
and opinion of counsel, at the expense of the Fund, and shall be fully protected
with respect to anything done or omitted by it in good faith in conformity with
the advice or opinion of counsel. The provisions under this paragraph shall
survive the termination of this Agreement.
B. Without limiting the generality of the foregoing, the Custodian,
acting in the capacity of Custodian hereunder, shall be under no obligation to
inquire into, and shall not be liable for:
1.) The validity of the issue of any Securities purchased
by or for the account of the Fund, the legality of
the purchase thereof, or the propriety of the amount
paid therefor;
2.) The legality of the sale of any Securities by or for
the account of the Fund, or the propriety of the
amount for which the same are sold;
3.) The legality of the issue or sale of any shares of
the Fund, or the sufficiency of the amount to be
received therefor;
-8-
<PAGE>
4.) The legality of the redemption of any shares of the
Fund, or the propriety of the amount to be paid
therefor;
5.) The legality of the declaration or payment of any
dividend by the Fund in respect of shares of the
Fund;
6.) The legality of any borrowing by the Fund on behalf
of the Fund, using Securities as collateral;
C. The Custodian shall not be under any duty or obligation to take
action to effect collection of any amount due to the Fund from any Dividend and
Transfer Agent of the Fund nor to take any action to effect payment or
distribution by any Dividend and Transfer Agent of the Fund of any amount paid
by the Custodian to any Dividend and Transfer Agent of the Fund in accordance
with this Agreement.
D. Notwithstanding Section D of Article V, the Custodian shall not be
under any duty or obligation to take action to effect collection of any amount,
if the Securities upon which such amount is payable are in default, or if
payment is refused after due demand or presentation, unless and until (i) it
shall be directed to take such action by a Certificate and (ii) it shall be
assured to its satisfaction (including prepayment thereof) of reimbursement of
its costs and expenses in connection with any such action.
E. The Fund acknowledges and hereby authorizes the Custodian to hold
Securities through its various agents described in Appendix B annexed hereto.
The Fund hereby represents that such authorization has been duly approved by the
Board of Trustees of the Fund as required by the Act. The Custodian acknowledges
that although certain Fund Assets are held by its agents, the Custodian remains
primarily liable for the safekeeping of the Fund Assets.
In addition, the Fund acknowledges that the Custodian may appoint one
or more financial institutions, as agent or agents or as sub-custodian or
sub-custodians, including, but not limited to, banking institutions located in
foreign countries, for the purpose of holding Securities and moneys at any time
owned by the Fund. The Custodian shall not be relieved of any obligation or
liability under this Agreement in connection with the appointment or activities
of such agents or sub-custodians. Any such agent or sub-custodian shall be
qualified to serve as such for assets of investment companies registered under
the Act. Upon request, the Custodian shall promptly forward to the Fund any
documents it receives from any agent or sub-custodian appointed hereunder which
may assist trustees of registered investment companies fulfill their
responsibilities under Rule 17f-5 of the Act.
F. The Custodian shall not be under any duty or obligation to ascertain
whether any Securities at any time delivered to or held by it for the account of
the Fund are such as properly may be held by the Fund under the provisions of
the Articles of Incorporation and the Fund's By-Laws.
G. The Custodian shall treat all records and other information relating
to the Fund and the Fund Assets as confidential and shall not disclose any such
records or information to any other person unless (i) the Fund shall have
consented thereto in writing or (ii) such disclosure is required by law.
H. The Custodian shall be entitled to receive and the Fund agrees to
pay to the Custodian such compensation as shall be determined pursuant to
Appendix D attached hereto, or as shall be determined pursuant to amendments to
such Appendix D. The Custodian shall be entitled to
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<PAGE>
charge against any money held by it for the account of the Fund, the amount of
any of its fees, any loss, damage, liability or expense, including counsel fees.
The expenses which the Custodian may charge against the account of the Fund
include, but are not limited to, the expenses of agents or sub-custodians
incurred in settling transactions involving the purchase and sale of Securities
of the Fund.
I. The Custodian shall be entitled to rely upon any Oral Instructions
and any Written Instructions. The Fund agrees to forward to the Custodian
Written Instructions confirming Oral Instructions in such a manner so that such
Written Instructions are received by the Custodian, whether by hand delivery,
facsimile or otherwise, on the same business day on which such Oral Instructions
were given. The Fund agrees that the failure of the Custodian to receive such
confirming instructions shall in no way affect the validity of the transactions
or enforceability of the transactions hereby authorized by the Fund. The Fund
agrees that the Custodian shall incur no liability to the Fund for acting upon
Oral Instructions given to the Custodian hereunder concerning such transactions.
J. The Custodian will (i) set up and maintain proper books of account
and complete records of all transactions in the accounts maintained by the
Custodian hereunder in such manner as will meet the obligations of the Fund
under the Act, with particular attention to Section 31 thereof and Rules 31a-1
and 31a-2 thereunder and those records are the property of the Fund, and (ii)
preserve for the periods prescribed by applicable Federal statute or regulation
all records required to be so preserved. All such books and records shall be the
property of the Fund, and shall be open to inspection and audit at reasonable
times and with prior notice by Officers and auditors employed by the Fund.
K. The Custodian shall send to the Fund any report received on the
systems of internal accounting control of the Custodian, or its agents or
sub-custodians, as the Fund may reasonably request from time to time.
L. The Custodian performs only the services of a custodian and shall
have no responsibility for the management, investment or reinvestment of the
Securities from time to time owned by the Fund. The Custodian is not a selling
agent for shares of the Fund and performance of its duties as custodian shall
not be deemed to be a recommendation to the Fund's depositors or others of
shares of the Fund as an investment.
M. The Custodian shall take all reasonable action, that the Fund may
from time to time request, to assist the Fund in obtaining favorable opinions
from the Fund's independent accountants, with respect to the Custodian's
activities hereunder, in connection with the preparation of the Fund's Form
N-1A, Form N-SAR, or other annual reports to the Securities and Exchange
Commission.
N. The Fund hereby pledges to and grants the Custodian a security
interest in any Fund Assets to secure the payment of any liabilities of the Fund
to the Custodian, whether acting in its capacity as Custodian or otherwise, or
on account of money borrowed from the Custodian. This pledge is in addition to
any other pledge of collateral by the Fund to the Custodian.
-10-
<PAGE>
ARTICLE IX
FORCE MAJEURE
Neither the Custodian nor the Corporation shall be liable for any
failure or delay in performance of its obligations under this Agreement arising
out of or caused, directly or indirectly, by circumstances beyond its reasonable
control, including, without limitation, acts of God; earthquakes; fires; floods;
wars; civil or military disturbances; sabotage; strikes; epidemics; riots; labor
disputes; acts of civil or military authority; governmental actions; or
inability to obtain labor, material, equipment or transportation; provided,
however, that the Custodian, in the event of a failure or delay, shall use its
best efforts to ameliorate the effects of such failure or delay.
ARTICLE X
TERMINATION
A. Either of the parties hereto may terminate this Agreement for any
reason by giving to the other party a notice in writing specifying the date of
such termination, which shall be not less than ninety (90) days after the date
of giving of such notice. If such notice is given by the Fund, it shall be
accompanied by a copy of a resolution of the Board of Trustees of the Fund,
certified by the Secretary of the Fund, electing to terminate this Agreement and
designating a successor custodian or custodians. In the event such notice is
given by the Custodian, the Fund shall, on or before the termination date,
deliver to the Custodian a copy of a resolution of the Board of Trustees of the
Fund, certified by the Secretary, designating a successor custodian or
custodians to act on behalf of the Fund. In the absence of such designation by
the Fund, the Custodian may designate a successor custodian which shall be a
bank or trust company having not less than $100,000,000 aggregate capital,
surplus, and undivided profits. Upon the date set forth in such notice this
Agreement shall terminate, and the Custodian, provided that it has received a
notice of acceptance by the successor custodian, shall deliver, on that date,
directly to the successor custodian all Securities and moneys then owned by the
Fund and held by it as Custodian. Upon termination of this Agreement, the Fund
shall pay to the Custodian on behalf of the Fund such compensation as may be due
as of the date of such termination. The Fund agrees on behalf of the Fund that
the Custodian shall be reimbursed for its reasonable costs in connection with
the termination of this Agreement as outlined in Appendix D Schedule of
Compensation.
B. If a successor custodian is not designated by the Fund, or by the
Custodian in accordance with the preceding paragraph, or the designated
successor cannot or will not serve, the Fund shall, upon the delivery by the
Custodian to the Fund of all Securities (other than Securities held in the
Book-Entry System which cannot be delivered to the Fund) and moneys then owned
by the Fund, be deemed to be the custodian for the Fund, and the Custodian shall
thereby be relieved of all duties and responsibilities pursuant to this
Agreement, other than the duty with respect to Securities held in the Book-Entry
System, which cannot be delivered to the Fund, which shall be held by the
Custodian in accordance with this Agreement.
ARTICLE XI
MISCELLANEOUS
A. Appendix A sets forth the names and the signatures of all Authorized
Persons, as certified by the Secretary of the Fund. The Fund agrees to furnish
to the Custodian a new Appendix
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<PAGE>
A in form similar to the attached Appendix A, if any present Authorized Person
ceases to be an Authorized Person or if any other or additional Authorized
Persons are elected or appointed. Until such new Appendix A shall be received,
the Custodian shall be fully protected in acting under the provisions of this
Agreement upon Oral Instructions or signatures of the then current Authorized
Persons as set forth in the last delivered Appendix A.
B. No recourse under any obligation of this Agreement or for any claim
based thereon shall be had against any organizer, shareholder, Officer,
Director, past, present or future as such, of the Fund or of any predecessor or
successor, either directly or through the Fund or any such predecessor or
successor, whether by virtue of any constitution, statute or rule of law or
equity, or be the enforcement of any assessment or penalty or otherwise; it
being expressly agreed and understood that this Agreement and the obligations
thereunder are enforceable solely against the Fund, and that no such personal
liability whatever shall attach to, or is or shall be incurred by, the
organizers, shareholders, Officers, Trustees of the Fund or of any predecessor
or successor, or any of them as such. To the extent that any such liability
exists, it is hereby expressly waived and released by the Custodian as a
condition of, and as a consideration for, the execution of this Agreement.
C. The obligations set forth in this Agreement as having been made by
the Fund have been made by the Board of Trustees, acting as such Trustees for
and on behalf of the Fund, pursuant to the authority vested in them under the
laws of the State of Delaware, the Articles of Incorporation and the By-Laws of
the Fund. This Agreement has been executed by Officers of the Fund as officers,
and not individually, and the obligations contained herein are not binding upon
any of the Trustees, Officers, agents or holders of shares, personally, but bind
only the Fund.
D. Provisions of the Prospectus and any other documents (including
advertising material) specifically mentioning the Custodian (other than merely
by name and address) shall be reviewed with the Custodian by the Fund prior to
publication and/or dissemination or distribution, and shall be subject to the
consent of the Custodian.
E. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Custodian, shall be sufficiently given if
addressed to the Custodian and mailed or delivered to it at its offices at Star
Bank Center, 425 Walnut Street, M. L. 6118, Cincinnati, Ohio 45202, attention
Mutual Fund Custody Department, or at such other place as the Custodian may from
time to time designate in writing.
F. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Fund shall be sufficiently given when
delivered to the Fund or on the second business day following the time such
notice is deposited in the U.S. mail postage prepaid and addressed to the Fund
at its office at 714 FM 1960 West, Suite 201, Houston, Texas 77090 or at such
other place as the Fund may from time to time designate in writing.
G. This Agreement, with the exception of the Appendices, may not be
amended or modified in any manner except by a written agreement executed by both
parties with the same formality as this Agreement, and authorized and approved
by a resolution of the Board of Trustees of the Fund.
H. This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns; provided, however, that
this Agreement shall not be assignable by the Fund or by the Custodian, and no
attempted assignment by the Fund or the Custodian shall be effective without the
written consent of the other party hereto.
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<PAGE>
I. This Agreement shall be construed in accordance with the laws of the
State of Ohio.
J. This Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original, but such counterparts shall,
together, constitute only one instrument.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective Officers, thereunto duly authorized
as of the day and year first above written.
ATTEST: Khan Growth Fund
.................................... By: ....................................
Title: ..................................
ATTEST: Star Bank, N.A.
.................................... By: ....................................
Title: ..................................
APPENDIX A
Authorized Persons Specimen Signature
Chairman: .......................... ..........................
President: .......................... ..........................
Secretary: .......................... ..........................
Treasurer: .......................... ..........................
Chief Financial Officer: .......................... ..........................
Adviser Employees .......................... ..........................
.......................... ..........................
Transfer Agent/Fund Accountant
Employees .......................... ..........................
.......................... ..........................
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<PAGE>
APPENDIX B
The following agents are employed currently by Star Bank, N.A.
for securities processing and control . . .
The Depository Trust Company (New York)
7 Hanover Square
New York, NY 10004
The Federal Reserve Bank
Cincinnati and Cleveland Branches
Bankers Trust Company
16 Wall Street
New York, NY 10005
(For Foreign Securities and certain non-DTC
eligible Securities)
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<PAGE>
APPENDIX C
STANDARDS OF SERVICE GUIDE
Star Bank, N.A.
Mail Location #6118,
425 Walnut Street,
Cincinnati, OH 45202
STAR BANK, N.A.
STANDARDS OF SERVICE GUIDE
Star Bank, N.A. is committed to providing superior quality service to
all customers and their agents at all times. We have compiled this guide as a
tool for our clients to determine our standards for the processing of security
settlements, payment collection, and capital change transactions. Deadlines
recited in this guide represent the times required for Star Bank to guarantee
processing. Failure to meet these deadlines will result in settlement at our
client's risk. In all cases, Star Bank will make every effort to complete all
processing on a timely basis.
Star Bank is a direct participant of the Depository Trust Company, a
direct member of the Federal Reserve Bank of Cleveland, and utilizes the Bankers
Trust Company as its agent for ineligible and foreign securities.
For corporate reorganizations, Star Bank utilizes SEI's Reorg Source,
Financial Information, Inc., XCITEK, DTC Important Notices, and the WALL STREET
JOURNAL.
For bond calls and mandatory puts, Star Bank utilizes SEI's Bond
Source, Kenny Information Systems, Standard and Poor's Corporation, and DTC
Important Notices. Star Bank will not notify clients of optional put
opportunities.
Any securities delivered free to Star Bank or its agents must be
received three (3) business days prior to any payment or settlement in order for
the Star Bank standards of service to apply.
Should you have any questions regarding the information contained in
this guide, please feel free to contact your account representative.
THE INFORMATION CONTAINED IN THIS STANDARDS OF SERVICE GUIDE IS SUBJECT
TO CHANGE. SHOULD ANY CHANGES BE MADE STAR BANK WILL PROVIDE YOU WITH AN UPDATED
COPY OF ITS STANDARDS OF SERVICE GUIDE.
STAR BANK SECURITY SETTLEMENT STANDARDS
<TABLE>
<CAPTION>
TRANSACTION TYPE INSTRUCTIONS DEADLINES* DELIVERY INSTRUCTIONS
<S> <C> <C>
DTC 1:30 P.M. on Settlement Date DTC Participant #2219
Agent Bank ID 27895
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Institutional #________
For Account #__________
Federal Reserve Book Entry 12:30 P.M. on Settlement Date Federal Reserve Bank of
Cinti/Trust for Star Bank,
N.A. ABA #042000013
For Account #_________
Federal Reserve Book Entry 1:00 P.M. on Settlement Date Federal Reserve Bank of
(Repurchase Agreement Cinti/Spec for Star Bank,
Collateral Only) N.A. ABA #042000013
For Account #_________
PTC Securities 12:00 P.M. on Settlement Date PTC For Account BTRST/
(GNMA Book Entry) CUST Sub Account: Star
Physical Securities 9:30 A.M. EST on Settlement Date Bank, N.A. #090334
(for Deliveries, by 4:00 P.M. on Bankers Trust Company
Settlement Date minus 1) 16 Wall Street 4th Floor,
Window 43 for Star Bank
Account #090334
CEDEL/EURO-CLEAR 11:00 A.M. on Settlement Date Euroclear Via Cedel Bridge
minus 2 In favor of Bankers Trust
Comp Cedel 53355
For Star Bank Account
#501526354
Cash Wire Transfer 3:00 P.M. Star Bank, N.A. Cinti/
Trust ABA #042000013
Credit Account #9901877
Further Credit to _______
Account #____________
</TABLE>
*All times listed are Eastern Standard Time.
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STAR BANK PAYMENT STANDARDS
SECURITY TYPE INCOME PRINCIPAL
Equities Payable Date
Municipal Bonds* Payable Date Payable Date
Corporate Bonds* Payable Date Payable Date
Federal Reserve Bank Book Entry* Payable Date Payable Date
PTC GNMA's (P&I) Payable Date +1 Payable Date +1
CMOs*
DTC Payable Date +1 Payable Date +1
Bankers Trust Payable Date +1 Payable Date +1
SBA Loan Certificates When Received When Received
Unit Investment Trust Payable Date Payable Date
Certificates*
Certificates of Deposit* Payable Date + 1 Payable Date + 1
Limited Partnerships When Received When Received
Foreign Securities When Received When Received
*Variable Rate Securities
Federal Reserve Bank Book Entry Payable Date Payable Date
DTC Payable Date + 1 Payable Date+1
Bankers Trust Payable Date + 1 Payable Date +1
NOTE: If a payable date falls on a weekend or bank holiday, payment will be made
on the immediately following business day.
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<PAGE>
STAR BANK CORPORATE REORGANIZATION STANDARDS
<TABLE>
<CAPTION>
TYPE OF ACTION NOTIFICATION TO CLIENT DEADLINE FOR CLIENT TRANSACTION
POSTING
INSTRUCTIONS TO STAR BANK
<S> <C> <C> <C>
Rights, Warrants Later of 10 business days 5 business days prior to upon receipt
and Optional prior to expiration or expiration
Mergers receipt of notice
Mandatory Puts Later of 10 business days 5 business days prior to upon receipt
with Option to prior to expiration or expiration
Retain receipt of notice
Class Actions 10 business days prior to 5 business days prior to upon receipt
expiration date expiration
Voluntary Tenders, Later of 10 business days prior 5 business days
prior to upon receipt
Exchanges, and to expiration or receipt of expiration
Conversions notice
Mandatory Puts, At posting of funds or None upon receipt
Defaults, securities received
Liquidations,
Bankruptcies,
Stock Splits,
Mandatory Exchanges
Full and Partial Later of 10 business days None upon receipt
Calls prior to expiration or receipt
of notice
</TABLE>
NOTE: Fractional Shares/par amounts resulting from any of the above will be
sold.
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<PAGE>
APPENDIX D
SCHEDULE OF COMPENSATION
STAR BANK, N.A.
PROPOSED CUSTODY FEE SCHEDULE FOR KHAN INVESTMENT, INC.
Star Bank, N.A., as Custodian, will receive monthly compensation for services
according to the terms of the following Schedule:
<TABLE>
<CAPTION>
I. PORTFOLIO TRANSACTION FEES:
---------------------------
<S> <C>
(a) For each repurchase agreement transaction $ 7.00
(b) For each portfolio transaction processed through DTC or Federal Reserve $ 9.00
(c) For each portfolio transaction processed through our New York custodian $ 25.00
(d) For each GNMA/Amortized Security Purchase $ 16.00
(e) For each GNMA Prin/Int Paydown, GNMA Sales $ 8.00
(f) For each option/future contract written, exercised or expired $ 40.00
(g) For each Cedel/Euro clear transaction $ 80.00
(h) For each Disbursement (Fund expenses only) $ 5.00
A transaction is a purchase/sale of a security, free receipt/free delivery
(excludes initial conversion), maturity, tender, or exchange.
II. MARKET VALUE FEE
---------------- MILLION
Based upon an annual rate of -------
.0003 (3 Basis Points) on First $20
.0002 (2 Basis Points) on Next $20
.00015 (1.5 Basis Points) on Balance
III. MONTHLY MINIMUM FEE-PER FUND $300.00
----------------------------
IV. OUT-OF-POCKET EXPENSES
----------------------
The only out-of-pocket expenses charged to your account will be shipping
fees or transfer fees.
V. IRA DOCUMENTS
-------------
Per Shareholder/year to hold each IRA Document $8.00
</TABLE>
VI. EARNINGS CREDITS
----------------
On a monthly basis any earnings credits generated from uninvested custody
balances will be applied against any cash management service fees generated.
Earning credits are based on a Cost of Funds Tiered Earnings Credit Rate.
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<PAGE>
STAR BANK
PROPOSED CASH MANAGEMENT FEE SCHEDULE
SERVICES UNIT COST ($) MONTHLY COST ($)
- -------- ------------- ----------------
D.D.A. Account Maintenance 14.00
Deposits .399
Deposited Items .109
Checks Paid .159
Balance Reporting- P.C. Access
ACH Transaction .095
ACH Monthly Maintenance 40.00
Controlled Disbursement (1st account) 110.00
Each additional account 25.00
Deposited Items Returned 6.00
International Items Returned 10.00
NSF Returned Checks 25.00
Stop Payments 22.00
Data Transmission per account 110.00
Data Capture* .10
Drafts Cleared .179
Lockbox Maintenance** 55.00
Lockbox items Processed
with copy of check .32
without copy of check .26
Checks Printed .20
Positive Pay .06
Issued Items .015
Wires Incoming
Domestic 10.00
International 10.00
Wires Outgoing
Domestic
Repetitive 12.00
Non-Repetitive 13.00
International
Repetitive 35.00
Non-Repetitive 40.00
PC - Initiated Wires:
Domestic
Repetitive 9.00
Non- Repetitive 9.00
International
Repetitive 25.00
Non-Repetitive 25.00
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<PAGE>
*** Uncollected Charge Star Bank Prime Rate as of first of month plus 4%
* Price can vary depending upon what information needs to be captured
** With the use of lockbox, the collected balance in the demand deposit
account will be significantly increased and therefore earnings to
offset cash management service fees will be maximized.
*** Fees for uncontrolled balances are figured on the MONTHLY AVERAGE of
all combined accounts.
**** Other available cash management services are priced separately. Revised
10/31/95
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EXHIBIT 9.2
FUND ACCOUNTING SERVICE AGREEMENT
AGREEMENT made the 1st day of July 1997, by and between the Kahn Funds,
a Delaware Business Trust, having its principal office and place of business at
714 FM 1960 W., Suite 201, Houston, Texas 77090 (the "Fund"), and American Data
Services, Inc., a New York corporation having its principal office and place of
business at 24 West Carver Street., Huntington, New York 11743 ("ADS").
BACKGROUND
WHEREAS, the Fund is a diversified, open-end management investment company
registered with the United States Securities and Exchange Commission under the
Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, ADS is a corporation experienced in providing accounting services to
mutual funds and possesses facilities sufficient to provide such services; and
WHEREAS, the Fund desires to avail itself of the experience, assistance and
facilities of ADS and to have ADS perform for the Fund certain services
appropriate to the operations of the Fund, and ADS is willing to furnish such
services in accordance with the terms hereinafter set forth.
TERMS
NOW, THEREFORE, in consideration of the promises and mutual covenants
hereinafter contained, the Fund and ADS hereby agree as follows:
1. DUTIES OF ADS.
ADS will provide the Fund with the necessary office space,
communication facilities and personnel to perform the following services for the
Fund:
(a) Timely calculate and transmit to NASDAQ the Fund's daily net asset
value and communicate such value to the Fund and its transfer agent;
I. Maintain and keep current all books and records of the Fund as required
by Rule 31a-1 under the 1940 Act, as such rule or any successor rule
may be amended from time to time ("Rule 31a-1"), that are applicable to
the fulfillment of ADS's duties hereunder, as well as any other
documents necessary or advisable for compliance with applicable
regulations as may be mutually agreed to between the Fund and ADS.
Without limiting the generality of the foregoing, ADS will prepare and
maintain the following records upon receipt of information in proper
form from the Fund or its authorized agents:
II. Cash receipts journal
III. Cash disbursements journal
<PAGE>
IV. Dividend record
V. Purchase and sales - portfolio securities journals
VI. Subscription and redemption journals
VII. Security ledgers
VIII. Broker ledger
IX. General ledger
X. Daily expense accruals
XI. Daily income accruals
XII. Securities and monies borrowed or loaned and collateral therefore
XIII. Foreign currency journals
XIV. Trial balances
(b) Provide the Fund and its investment adviser with daily portfolio
valuation, net asset value calculation and other standard operational reports as
requested from time to time.
(c) Provide all raw data available from our fund accounting system
(PAIRS) for management's or the administrators preparation of the following:
1. Semi-annual financial statements;
2. Semi-annual form N-SAR;
3. Annual tax returns;
4. Financial data necessary to update form N-1a;
5. Annual proxy statement.
(d) Provide facilities to accommodate annual audit and any audits or
examinations conducted by the Securities and Exchange Commission or any other
governmental or quasi-governmental entities with jurisdiction.
ADS shall for all purposes herein be deemed to be an independent
contractor and shall, unless otherwise expressly provided or authorized, have no
authority to act for or represent the Fund in any way or otherwise be deemed an
agent of the Fund.
2. COMPENSATION OF ADS.
In consideration of the services to be performed by ADS as set forth
herein for each portfolio listed in Schedule B, ADS shall be entitled to receive
compensation and reimbursement for all reasonable out-of-pocket expenses. The
Fund agrees to pay ADS the fees and reimbursement of out-of-pocket expenses as
set forth in the fee schedule attached hereto as Schedule A.
3. LIMITATION OF LIABILITY OF ADS.
(a) ADS shall be held to the exercise of reasonable care in carrying
out the provisions of the Agreement, but shall be without liability to the Fund
for any action taken or omitted by it in good faith without gross negligence,
bad faith, willful misconduct or reckless disregard of its duties hereunder. It
shall be entitled to rely upon and may act upon the accounting records and
reports generated by the Fund, advice of the Fund, or of counsel for the Fund
and upon statements of the Fund's independent accountants, and shall be without
liability for any action reasonably taken or
-2-
<PAGE>
omitted pursuant to such records and reports or advice, provided that such
action is not, to the knowledge of ADS, in violation of applicable federal or
state laws or regulations, and provided further that such action is taken
without gross negligence, bad faith, willful misconduct or reckless disregard of
its duties.
(b) Nothing herein contained shall be construed to protect ADS against
any liability to the Fund or its security holders to which ADS shall otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence in the
performance of its duties on behalf of the Fund, reckless disregard of ADS'
obligations and duties under this Agreement or the willful violation of any
applicable law.
(c) Except as may otherwise be provided by applicable law, neither ADS
nor its stockholders, officers, directors, employees or agents shall be subject
to, and the Fund shall indemnify and hold such persons harmless from and
against, any liability for and any damages, expenses or losses incurred by
reason of the inaccuracy of information furnished to ADS by the Fund or its
authorized agents.
4. REPORTS.
(a) The Fund shall provide to ADS on a quarterly basis a report of a
duly authorized officer of the Fund representing that all information furnished
to ADS during the preceding quarter was true, complete and correct in all
material respects. ADS shall not be responsible for the accuracy of any
information furnished to it by the Fund or its authorized agents, and the Fund
shall hold ADS harmless in regard to any liability incurred by reason of the
inaccuracy of such information.
(b) Whenever, in the course of performing its duties under this
Agreement, ADS determines, on the basis of information supplied to ADS by the
Fund or its authorized agents, that a violation of applicable law has occurred
or that, to its knowledge, a possible violation of applicable law may have
occurred or, with the passage of time, would occur, ADS shall promptly notify
the Fund and its counsel of such violation.
5. ACTIVITIES OF ADS.
The services of ADS under this Agreement are not to be deemed
exclusive, and ADS shall be free to render similar services to others so long as
its services hereunder are not impaired thereby.
6. ACCOUNTS AND RECORDS.
The accounts and records maintained by ADS shall be the property of the
Fund, and shall be surrendered to the Fund promptly upon request by the Fund in
the form in which such accounts and records have been maintained or preserved.
ADS agrees to maintain a back-up set of accounts and records of the Fund (which
back-up set shall be updated on at least a weekly basis) at a location other
than that where the original accounts and records are stored. ADS shall assist
the Fund's independent auditors, or, upon approval of the Fund, any regulatory
body, in any requested review of the Fund's accounts and records. ADS shall
preserve the accounts and records as they are required to be maintained and
preserved by Rule 31a-1.
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<PAGE>
7. CONFIDENTIALITY.
ADS agrees that it will, on behalf of itself and its officers and
employees, treat all transactions contemplated by this Agreement, and all other
information germane thereto, as confidential and not to be disclosed to any
person except as may be authorized by the Fund.
8. DURATION AND TERMINATION OF THIS AGREEMENT.
This Agreement shall become effective as of the date hereof and shall
remain in force for a period of three (3) years, provided however, that either
party to this Agreement has the option to terminate the Agreement, without
penalty, upon ninety (90) days prior written notice.
Should the Fund exercise its right to terminate, all out-of-pocket
expenses associated with the movement of records and material will be borne by
the Fund. Additionally, ADS reserves the right to charge for any other
reasonable expenses associated with such termination.
9. ASSIGNMENT.
This Agreement shall extend to and shall be binding upon the parties
hereto and their respective successors and assigns; provided, however, that this
Agreement shall not be assignable by the Fund without the prior written consent
of ADS, or by ADS without the prior written consent of the Fund.
10. NEW YORK LAWS TO APPLY
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New York as at the time in effect and
the applicable provisions of the 1940 Act. To the extent that the applicable law
of the State of New York, or any of the provisions herein, conflict with the
applicable provisions of the 1940 Act, the latter shall control.\
11. AMENDMENTS TO THIS AGREEMENT.
This Agreement may be amended by the parties hereto only if such
amendment is in writing and signed by both parties.
12. MERGER OF AGREEMENT
This Agreement constitutes the entire agreement between the parties
hereto and supersedes any prior agreement with respect to the subject matter
hereof whether oral or written.
13. NOTICES.
All notices and other communications hereunder shall be in writing,
shall be deemed to have been given when received or when sent by telex or
facsimile, and shall be given to the following addresses (or such other
addresses as to which notice is given):
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<PAGE>
TO THE FUND: TO ADS:
S.D. Khan Michael Miola
President President
Khan Funds American Data Services, Inc.
714 FM 1960 W., Suite 201 24 West Carver Street
Houston, Texas 77090 Huntington, New York 11743
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
KHAN FUNDS AMERICAN DATA SERVICES, INC.
By:_________________________ By:__________________________
S.D. Khan, President Michael Miola, President
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<PAGE>
SCHEDULE A
(a) FUND ACCOUNTING SERVICE FEE:
For the services rendered by ADS in its capacity as fund accounting
agent, as specified in Paragraph 1. DUTIES OF ADS, the Fund shall pay ADS,
within ten (10) days after receipt of an invoice from ADS at the beginning of
each month, a fee equal to:
Calculated Fee Will Be Based Upon Prior Month Average Net Assets:
(No prorating partial months)
MONTHLY FEE PER PORTFOLIO:
--------------------------
Portfolio Type
Net Assets (In Millions) Global Domestic Money Mkt
- ------------------------ ------ ------ ------
Under $1 .................................... $1,400 $1,200 $1,050
From $1 to $ 5 ............................. 1,600 1,500 1,300
From $5 to $10 ............................. 1,850 1,700 1,500
From $10 to $20 ............................ 2,250 1,850 1,650
Over $20 .................................... 2,500 2,000 1,800
Excess of $25 million:
The fee for assets over $20 million,
plus 1/12 of ............................ 3.50BP* 2.00BP 2.00BP
* Basis Points
MULTI-CLASS PROCESSING CHARGE
$300 per month will be charged for each additional class of stock per portfolio.
FEE INCREASES
On each annual anniversary date of this Agreement, the fees enumerated
above will be increased by the change in the Consumer Price Index for the New
York & Northeast New Jersey region (CPI) for the twelve month period ending with
the month preceding such annual anniversary date.
-6-
<PAGE>
(b) EXPENSES.
The Fund shall reimburse ADS for any out-of-pocket expenses , exclusive
of salaries, advanced by ADS in connection with but not limited to the printing
or filing of documents for the Fund, travel, telephone, quotation services,
facsimile transmissions, stationery and supplies, record storage, NASDAQ
insertion fee, prorata portion of annual SAS 70 review, postage, telex, and
courier charges, incurred in connection with the performance of its duties
hereunder. ADS shall provide the Fund with a monthly invoice of such expenses
and the Fund shall reimburse ADS within fifteen (15) days after receipt thereof.
(c) SPECIAL REPORTS.
All reports and /or analyses requested by the Fund, its auditors, legal
counsel, portfolio manager, or any regulatory agency having jurisdiction over
the Fund, that are not in the normal course of fund accounting activities as
specified in Section 1 of this Agreement shall be subject to an additional
charge, agreed upon in advance, based upon the following rates:
Labor:
Senior staff - $150.00/hr.
Junior staff - $ 75.00/hr.
Computer time - $45.00/hr.
(d) SECURITY DEPOSIT.
The Fund will remit to ADS upon execution of this Agreement a security
deposit equal to one (1) month's minimum fee under this Agreement, computed in
accordance with the number of portfolios listed in Schedule B of this Agreement.
The Fund will have the option to have the security deposit applied to the last
month's service fee, or applied to any new contract between the Fund and ADS.
However, if the Fund elects or is forced to terminate this Agreement
for any reason what-so-ever other than a material breach by ADS (including, but
not limited to, the voluntary or involuntary termination of the Fund,
liquidation of the Fund's assets, the sale or merger of the Fund or it's assets
to any successor entity) prior to the termination date of this Agreement as
specified in Paragraph 8 of this Agreement, the Fund will forfeit the Security
Deposit paid to ADS upon execution of this Agreement.
(e) CONVERSION CHARGE.
NOTE: FOR EXISTING FUNDS ONLY (NEW FUNDS PLEASE IGNORE):
There will be a charge to convert the Fund's portfolio accounting
records on to the ADS fund accounting system (PAIRS). In addition, ADS will be
reimbursed for all out-of-pocket expenses, enumerated in paragraph (b) above,
incurred during the conversion process.
The conversion charge will be estimated and agreed upon in advance by
the Fund and ADS. The charge will be based upon the quantity of records to be
converted and the condition of the previous service agents records.
-7-
<PAGE>
SCHEDULE B:
PORTFOLIOS TO BE SERVICED UNDER THIS AGREEMENT:
KHAN GROWTH FUND
-8-
EXHIBIT 9.3
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made the 1st day of July 1997, by and between the Kahn Funds,
a Delaware Business Trust, having its principal office and place of business at
714 FM 1960 W., Suite 201, Houston, Texas 77090 (the "Fund"), and American Data
Services, Inc., a New York corporation having its principal office and place of
business at 24 West Carver Street., Huntington, New York 11743 ("ADS").
WHEREAS, the Fund desires to appoint ADS as its transfer agent, dividend
disbursing agent and agent in connection with certain other activities, and ADS
desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein contained, the
parties hereto agree as follows:
1. TERMS OF APPOINTMENT; DUTIES OF ADS
1.01 Subject to the terms and conditions set forth in this agreement,
the Fund hereby employs and appoints ADS to act as, and ADS agrees to act as its
transfer agent for the Fund's authorized and issued shares of its common stock
("Shares"), dividend disbursing agent and agent in connection with any
accumulation, open-account or similar plans provided to the shareholders of the
fund ("Shareholders") set out in the currently effective prospectus and
statement of additional information ("prospectus") of the Fund.
1.02 ADS agrees that it will perform the following services:
(a) In accordance with procedures established from time to
time by agreement between the Fund and ADS, ADS shall:
I. Receive for acceptance, orders for the purchase of Shares, and promptly
deliver payment and appropriate documentation therefore to the
Custodian of the Fund authorized by the Board of Directors of the Fund
(the "Custodian");
II. Pursuant to purchase orders, issue the appropriate number of Shares and
hold such Shares in the appropriate Shareholder account;
III. Receive for acceptance redemption requests and redemption directions
and deliver the appropriate documentation therefore to the Custodian;
IV. At the appropriate time as and when it receives monies paid to it by
the Custodian with respect to any redemption, pay over or cause to be
paid over in the appropriate manner such monies as instructed by the
redeeming Shareholders;
V. Effect transfers of Shares by the registered owners thereof upon
receipt of appropriate instructions;
<PAGE>
VI. Prepare and transmit payments for dividends and distributions declared
by the Fund;
VII. Maintain records of account for and advise the Fund and its
Shareholders as to the foregoing; and
VIII. Record the issuance of shares of the Fund and maintain pursuant to SEC
Rule 17Ad-10(e) a record of the total number of shares of the Fund
which are authorized, based upon data provided to it by the Fund, and
issued and outstanding. ADS shall also provide the Fund on a regular
basis with the total number of shares which are authorized and issued
and outstanding and shall have no obligation, when recording the
issuance of shares, to monitor the issuance of such shares or to take
cognizance of any laws relating to the issue or sale of such shares,
which functions shall be the sole responsibility of the Fund.
(b) In addition to and not in lieu of the services set forth
in the above paragraph (a), ADS shall:
IX. Perform all of the customary services of a transfer agent, dividend
disbursing agent, including but not limited to: maintaining all
Shareholder accounts, preparing Shareholder meeting lists, mailing
proxies, receiving and tabulating proxies, mailing Shareholder reports
and prospectuses to current Shareholders, withholding taxes on U.S.
resident and non-resident alien accounts, preparing and filing U.S.
Treasury Department Forms 1099 and other appropriate forms required
with respect to dividends and distributions by federal authorities for
all Shareholders, preparing and mailing confirmation forms and
statements of account to Shareholders for all purchases redemption's of
Shares and other confirmable transactions in Shareholder accounts,
preparing and mailing activity statements for Shareholders, and
providing Shareholder account information and (ii) provide a system and
reports which will enable the Fund to monitor the total number of
Shares sold in each State.
X. In addition, the Fund shall (i) identify to ADS in writing those
transactions and shares to be treated as exempt from blue sky reporting
for each State and (ii) verify the establishment of such transactions
for each state on the system prior to activation and thereafter monitor
the daily activity for each State as provided by ADS. The
responsibility of ADS for the Fund's blue sky State registration status
is solely limited to the initial establishment of transactions subject
to blue sky compliance by the Fund and the reporting of such
transactions to the Fund as provided above.
Procedures applicable to certain of these services may be established
from time to time by agreement between the Fund and ADS.
2. FEES AND EXPENSES
2.01 For performance by ADS pursuant to this Agreement, the Fund agrees
to pay ADS an annual maintenance fee for each Shareholder account and
transaction fees for each portfolio or class of shares serviced under this
Agreement (See Schedule A) as set out in the fee schedule attached hereto. Such
fees and out-of pocket expenses and advances identified under Section 2.02 below
may be changed from time to time subject to mutual written agreement between the
Fund and ADS.
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<PAGE>
2.02 In addition to the fee paid under Section 2.01 above, the Fund
agrees to reimburse ADS for out-of-pocket expenses or advances incurred by ADS
for the items set out in the fee schedule attached hereto. In addition, any
other expenses incurred by ADS at the request or with the consent of the Fund,
will be reimbursed by the Fund.
2.03 The Fund agrees to pay all fees and reimbursable expenses within
five days following the receipt of the respective billing notice. Postage for
mailing of dividends, proxies, Fund reports and other mailings to all
shareholder accounts shall be advanced to ADS by the Fund at least seven (7)
days prior to the mailing date of such materials.
3. REPRESENTATIONS AND WARRANTIES OF ADS
ADS represents and warrants to the Fund that:
3.01 It is a corporation duly organized and existing and in good
standing under the laws of The State of New York.
3.02 It is duly qualified to carry on its business in The State of New
York.
3.03 It is empowered under applicable laws and by its charter and
by-laws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to authorize
it to enter into and perform this Agreement.
3.05 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.
3.06 ADS is duly registered as a transfer agent under the Securities
Act of 1934 and shall continue to be registered throughout the remainder of this
Agreement.
4. REPRESENTATIONS AND WARRANTIES OF THE FUND
The Fund represents and warrants to ADS that;
4.01 It is a business trust duly organized and existing and in good
standing under the laws of Delaware.
4.02 It is empowered under applicable laws and by its Declaration of
Trust to enter into and perform this Agreement.
4.03 All proceedings required by said Declaration of Trust have been
taken to authorize it to enter into and perform this Agreement.
4.04 It is an open-end and diversified management investment company
registered under the Investment Company Act of 1940.
-3-
<PAGE>
4.05 A registration statement under the Securities Act of 1933 is
currently or will become effective and will remain effective, and appropriate
state securities law filings as required, have been or will be made and will
continue to be made, with respect to all Shares of the Fund being offered for
sale.
5. INDEMNIFICATION
5.01 ADS shall not be responsible for, and the Fund shall indemnify and
hold ADS harmless from and against, any and all losses, damages, costs, charges,
counsel fees, payments, expenses and liability arising out of or attributable
to:
(a) All actions of ADS or its agents or subcontractors
required to be taken pursuant to this Agreement, provided that such actions are
taken in good faith and without gross negligence or willful misconduct.
(b) The Fund's refusal or failure to comply with the terms of
this Agreement, or which arise out of the Fund's lack good faith, gross
negligence or willful misconduct or which arise out of the breach of any
representation or warranty of the Fund hereunder.
(c) The reliance on or use by ADS or its agents or
subcontractors of information, records and documents which (i) are received by
ADS or its agents or subcontractors and furnished to it by or on behalf of the
Fund, and (ii) have been prepared and/or maintained by the Fund or any other
person or firm on behalf of the Fund.
(d) The reliance on, or the carrying out by ADS or its agents
or subcontractors of any instructions or requests of the Fund.
(e) The offer or sale of Shares in violation of any
requirement under the federal securities laws or regulations or the securities
laws or regulations of any state that such Shares be registered in such state or
in violation of any stop order or other determination or ruling by any federal
agency or any state with respect to the offer or sale of such Shares in such
state.
5.02 ADS shall indemnify and hold the Fund harmless from and against
any and all losses, damages, costs, charges, counsel fees, payments, expenses
and liability arising out of or attributable to any action or failure or
omission to act by ADS as a result of ADS's lack of good faith, gross negligence
or willful misconduct.
5.03 At any time ADS may apply to any officer of the Fund for
instructions, and may consult with legal counsel with respect to any matter
arising in connection with the services to be performed by ADS under this
Agreement, and ADS and its agents or subcontractors shall not be liable and
shall be indemnified by the Fund for any action taken or omitted by it in
reliance upon such instructions or upon the opinion of such counsel. ADS, its
agents and subcontractors shall be protected and indemnified in acting upon any
paper or document furnished by or on behalf of the Fund, reasonably believed to
be genuine and to have been signed by the proper person or persons, or upon any
instruction, information, data, records or documents provided ADS or its agents
or subcontractors by machine readable input, telex, CRT data entry or other
similar means authorized by the Fund, and shall not be held to have notice of
any change of authority of any person, until receipt of written notice thereof
from the Fund. ADS, its agents and subcontractors shall also be protected and
indemnified in recognizing stock certificates which are reasonably believed to
bear the proper
-4-
<PAGE>
manual or facsimile signatures of the officers of the Fund, and the proper
countersignature of any former transfer agent or registrar, or of a co-transfer
agent or co-registrar.
5.04 In the event either party is unable to perform its obligations
under the terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage reasonably beyond its control, or other causes
reasonably beyond its control, such party shall not be liable for damages to the
other for any damages resulting from such failure to perform or otherwise from
such causes.
5.05 Neither party to this Agreement shall be liable to the other party
for consequential damages under any provision of this Agreement or for any act
or failure to act hereunder.
5.06 In order that the indemnification provisions contained in this
Article 5 shall apply, upon the assertion of a claim for which either party may
be required to indemnify the other, the party of seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The party
who may be required to indemnify shall have the option to participate with the
party seeking indemnification the defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any compromise in any
case in which the other party may be required to indemnify it except with the
other party's prior written consent.
6. COVENANTS OF THE FUND AND ADS
6.01 The Fund Shall promptly furnish to ADS a certified copy of the
resolution of the Board of Directors of the Fund authorizing the appointment of
ADS and the execution and delivery of this Agreement.
6.02 ADS hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Fund for safekeeping of stock
certificates, check forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and for keeping account of, such certificates,
forms and devices.
6.03 ADS shall keep records relating to the services to be performed
hereunder, in the form and manner as it may deem advisable. ADS agrees to
maintain a backup set of records, such backup shall be updated on at least a
weekly basis at a location other than that where the original records are
stored. To the extent required by Section 31 of the Investment Company Act of
1940, as amended, and the Rules thereunder, ADS agrees that all such records
prepared or maintained by ADS relating to the services to be performed by ADS
hereunder are the property of the Fund and will be preserved, maintained and
made available in accordance with such Section and Rules, and will be
surrendered promptly to the Fund on and in accordance with its request.
6.04 ADS and the Fund agree that all books, records, information and
data pertaining to the business of the other party which are exchanged or
received pursuant to the negotiation or the carrying out of this Agreement shall
remain confidential, and shall not be voluntarily disclosed to any other person,
except as may be required by law.
6.05 In case of any requests or demands for the inspection of the
Shareholder records of the Fund, ADS will endeavor to notify the Fund and to
secure instructions from an authorized officer of the Fund as to such
inspection. ADS reserves the right, however, to exhibit the Shareholder
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<PAGE>
records to any person whenever it is advised by its counsel that it may be held
liable for the failure to exhibit the Shareholder records to such person, and
shall promptly notify the Fund of any unusual request to inspect or copy the
shareholder records of the Fund or the receipt of any other unusual request to
inspect, copy or produce the records of the Fund.
7. TERMINATION OF AGREEMENT
7.01 This Agreement shall become effective as of July 1, 1997 and shall
remain in force for a period of three (3) years terminating on August 31, 2000,
provided however, that either party to this Agreement has the option to
terminate the Agreement upon ninety (90) days prior written notice.
7.02 Should the Fund exercise its right to terminate, all out-of-pocket
expenses associated with the movement of records and material will be borne by
the Fund. Additionally, ADS reserves the right to charge for any other
reasonable expenses associated with such termination.
8. ASSIGNMENT
8.01 Neither this Agreement nor any rights or obligations hereunder may
be assigned by either party without the written consent of the other party.
8.02 This Agreement shall inure to the benefit of and be binding upon
the parties and their respective permitted successors and assigns.
9. AMENDMENT
9.01 This Agreement may be amended or modified by a written agreement
executed by both parties and authorized or approved by a resolution of the Board
of Trustees of the Fund.
10. NEW YORK LAWS TO APPLY
10.01 The provisions of this Agreement shall be construed and
interpreted in accordance with the laws of the State of New York as at the time
in effect and the applicable provisions of the 1940 Act. To the extent that the
applicable law of the State of New York, or any of the provisions herein,
conflict with the applicable provisions of the 1940 Act, the latter shall
control.
11. MERGER OF AGREEMENT
11.01 This Agreement constitutes the entire agreement between the
parties hereto and supersedes any prior agreement with respect to the subject
matter hereof whether oral or written.
12. NOTICES.
All notices and other communications hereunder shall be in writing,
shall be deemed to have been given when received or when sent by telex or
facsimile, and shall be given to the following addresses (or such other
addresses as to which notice is given):
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<PAGE>
TO THE FUND: TO ADS:
S.D. Khan Michael Miola
President President
Khan Funds American Data Services, Inc.
714 FM 1960 W., Suite 201 24 West Carver Street
Houston, Texas 77090 Huntington, New York 11743
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
KHAN FUNDS AMERICAN DATA SERVICES, INC.
By:________________________ By:________________________
S.D. Khan, President Michael Miola, President
-7-
<PAGE>
FEE SCHEDULE
For the services rendered by ADS in its capacity as transfer agent, the
Fund shall pay ADS, within ten (10) days after receipt of an invoice from ADS at
the beginning of each month, a fee, calculated as a combination of account
maintenance charges and transaction charges as follows:
(A) ACCOUNT MAINTENANCE CHARGE:
The Greater of (No prorating for partial months):
XI. Minimum maintenance charge per portfolio/class $900.00/ month
OR,
XII. Based upon the total of all open/closed accounts(1) per portfolio/class
upon the following annual rates (billed monthly):
FUND TYPE:
Dividend calculated and
paid annually, semi-annually, quarterly....$ 9.00 per account
Dividend calculated and paid monthly........$10.50 per account
Dividend accrued daily and paid monthly.....$14.00 per account
Closed accounts ................. $ 2.00 per account (2)
(1) All accounts closed during a calendar year will be considered as open
accounts for billing purposes until the end of that calendar year.
(2) Closed accounts remain on the shareholder files until all 1099's and 5498's
have been distributed to the shareholders and send via mag-media to the IRS.
(B) TRANSACTION FEES:
Trade Entry (purchase/liquidation) and maintenance transactions $ 1.50 each
New account set-up.............................................. $ 3.00 each
Customer service calls.......................................... $ 1.25 each
Correspondence/ information requests............................ $ 1.75 each (2)
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Check preparation............................................... $ .50 each
Liquidation's paid by wire transfer............................. $ 3.00 each
ACH charge...................................................... $ .45 each
SWP ............................................................ $ 1.00 each
(C) 24 HOUR AUTOMATED VOICE RESPONSE:
Initial set-up charge per portfolio - $150.00
Monthly maintenance charge per portfolio - $50.00
All calls processed through automated voice response will be billed as a
customer service call listed above.
(D) FUND/SERV
All portfolios processed through Fund/SERV will be subject to an additional
monthly charge of $250.00
All transactions processed through Fund/SERV will be billed at the transaction
fee rates listed in (b) above.
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FEE INCREASES
On each annual anniversary date of this Agreement, the fees enumerated above
will be increased by the change in the Consumer Price Index for the Northeast
region (CPI) for the twelve month period ending with the month preceding such
annual anniversary date.
(E) IRA PLAN FEES:
The following fees will be charged directly to the shareholder account:
Annual maintenance fee .............................. $15.00/account *
Incoming transfer from prior custodian .............. $12.00
Distribution to a participant ....................... $15.00
Refund of excess contribution ....................... $15.00
Transfer to successor custodian ..................... $15.00
Automatic periodic distributions .................... $15.00/year per account
* Includes $8.00 Bank Custody Fee.
(F) EXPENSES:
The Fund shall reimburse ADS for any out-of-pocket expenses, exclusive
of salaries, advanced by ADS in connection with but not limited to the costs for
printing fund documents, (i.e. printing of confirmation forms, shareholder
statements, redemption/dividend checks, envelopes, financial statements, proxy
statement, fund prospectus, etc.) proxy solicitation and mailing expenses,
travel requested by the Fund, telephone toll charges, 800-line costs and fees,
facsimile and data transmission costs, stationery and supplies (related to Fund
records), record storage, postage (plus a $0.105 service charge for all
mailings), pro-rata portion of annual SAS-70 audit letter, telex and courier
charges incurred in connection with the performance of its duties hereunder. ADS
shall provide the Fund with a monthly invoice of such expenses and the Fund
shall reimburse ADS within fifteen (15) days after receipt thereof.
(G) SPECIAL REPORTS:
All reports and/or analyses requested by the Fund that are not included
in the fee schedule, shall be subject to an additional charge, agreed upon in
advance, based upon the following rates:
Labor:
Senior staff - $150.00/hr.
Junior staff - $ 75.00/hr.
Computer time - $45.00/hr.
(H) SERVICE DEPOSIT:
The Fund will remit to ADS upon execution of this Agreement a security
deposit of equal to one (1) month's shareholder service fee. The service deposit
computation will be based either on the total
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<PAGE>
number of shareholder accounts (open and closed) of each portfolio to be
serviced or the minimum fee, whichever is greater, as of the execution date of
this Agreement. The Fund will have the option to have the security deposit
applied to the last month's service fee, or applied to any new contract between
the Fund and ADS.
However, if the Fund elects or is forced to terminate this Agreement
for any reason what-so-ever other than a material breach by ADS (including, but
not limited to, the voluntary or involuntary termination of the Fund,
liquidation of the Fund's assets, the sale or merger of the Fund or it's assets
to any successor entity) prior to the termination date of this Agreement as
specified in Paragraph 7 of this Agreement, the Fund will forfeit the Security
Deposit paid to ADS upon execution of this Agreement
(I) CONVERSION CHARGE: (EXISTING FUNDS ONLY, NEW FUNDS PLEASE IGNORE)
There will be a charge to convert the Fund's shareholder accounting
records on to the ADS stock transfer system. In addition, ADS will be reimbursed
for all out-of-pocket expenses, enumerated in paragraph (b) above and data media
conversion costs, incurred during the conversion process.
The conversion charge will be estimated and agreed upon in advance by
the Fund and ADS. The charge will be based upon the quantity of records to be
converted and the condition of the previous service agents records.
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SCHEDULE A
PORTFOLIOS TO BE SERVICED UNDER THIS AGREEMENT:
KHAN GROWTH FUND
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EXHIBIT 10
PAUL, HASTINGS, JANOFSKY & WALKER LLP
555 West Flower Street
Los Angeles, California 90071
(213) 683-6000
June 23, 1997
Khan Funds
714 FM 1960 West
Suite 201
Houston, Texas 77090
Ladies and Gentlemen:
We have acted as counsel to Khan Funds, a Delaware business trust (the
"Trust"), in connection with the issuance of an indefinite number of shares of
beneficial interest ("Shares") in the Khan Growth Fund series of the Trust (the
"Fund") in a public offering pursuant to a Registration Statement on Form N-1A
(Registration No. 33-12597), as amended, filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Registration
Statement").
In our capacity as counsel for the Trust, we have examined the
Certificate of Trust of the Trust dated August 30, 1996, the Agreement and
Declaration of Trust of the Trust dated September, 1996, the bylaws of the
Trust, originals or copies of actions of the Trustees as furnished to us by the
Trust, certificates of public officials, statutes and such other documents,
records and certificates as we have deemed necessary for the purposes of this
opinion.
Based upon our examination as aforesaid, we are of the opinion that
the Shares are duly authorized and, when purchased and paid for as described in
the Registration Statement, will be validly issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion of counsel as an
exhibit to the Registration Statement.
Very truly yours,
PAUL, HASTINGS, JANOFSKY & WALKER LLP
EXHIBIT 11
KPMG PEAT MARWICK LLP
700 Louisiana
P. O. Box 4545
Houston TX 77210-4545
The Board of Trustees and Shareholders
Khan Growth Fund:
We consent to the use of our report on the Khan Growth Fund dated May 20, 1997
included herein and to the reference to our firm under the heading "Financial
Statements" in the prospectus and statement of additional information.
KPMG Peat Marwick LLP
Houston, Texas
May 26, 1997
EXHIBIT 13
Khan Funds
714 FM 1960 West
Suite 201
Houston, Texas 77090
Ladies and Gentlemen:
In connection with your sale to me today of the number of shares of
beneficial interest indicated below ("Shares") of the Khan Growth Fund series of
Khan Funds (the "Trust"), I understand that: (i) the Shares have not been
registered under the Securities Act of 1933, as amended (the "1933 Act"); (ii)
your sale of the Shares to me is made in reliance on such sale being exempt
under Section 4(2) of the 1933 Act as not involving any public offering; and
(iii) in part, your reliance on such exemption is predicated on my
representation, which I hereby confirm, that I am acquiring the Shares for
investment for my own account as the sole beneficial owner thereof, and not with
a view to or in connection with any resale or distribution of the Shares or of
any interest therein.
I hereby agree that I will not sell, assign or transfer the Shares or
any interest therein, except upon repurchase or redemption by the Trust, unless
and until the Shares have been registered under the 1933 Act or you have
received an opinion of your counsel indicating to your satisfaction that such
sale, assignment or transfer will not violate the provisions of the 1933 Act or
any rules or regulations promulgated thereunder. I further agree that if any
portion of the Shares is redeemed prior to the full amortization of the Trust's
organizational expenses, the proceeds thereof will be reduced by a pro rata
portion of such unamortized balance in the same proportion as the number of such
Shares being redeemed bears to the number of such Shares outstanding at the time
of redemption.
Dated: May 16, 1997
Number of Shares: 12,000
/s/S.A.D. Khan
--------------
<PAGE>
Khan Funds
714 FM 1960 West
Suite 201
Houston, Texas 77090
Ladies and Gentlemen:
In connection with your sale to me today of the number of shares of
beneficial interest indicated below ("Shares") of the Khan Growth Fund series of
Khan Funds (the "Trust"), I understand that: (i) the Shares have not been
registered under the Securities Act of 1933, as amended (the "1933 Act"); (ii)
your sale of the Shares to me is made in reliance on such sale being exempt
under Section 4(2) of the 1933 Act as not involving any public offering; and
(iii) in part, your reliance on such exemption is predicated on my
representation, which I hereby confirm, that I am acquiring the Shares for
investment for my own account as the sole beneficial owner thereof, and not with
a view to or in connection with any resale or distribution of the Shares or of
any interest therein.
I hereby agree that I will not sell, assign or transfer the Shares or
any interest therein, except upon repurchase or redemption by the Trust, unless
and until the Shares have been registered under the 1933 Act or you have
received an opinion of your counsel indicating to your satisfaction that such
sale, assignment or transfer will not violate the provisions of the 1933 Act or
any rules or regulations promulgated thereunder. I further agree that if any
portion of the Shares is redeemed prior to the full amortization of the Trust's
organizational expenses, the proceeds thereof will be reduced by a pro rata
portion of such unamortized balance in the same proportion as the number of such
Shares being redeemed bears to the number of such Shares outstanding at the time
of redemption.
Dated: May 16, 1997
Number of Shares: 4,000
/s/A.M. Khan
---------------------------
for Shehzad Khan Trust
<PAGE>
Khan Funds
714 FM 1960 West
Suite 201
Houston, Texas 77090
Ladies and Gentlemen:
In connection with your sale to me today of the number of shares of
beneficial interest indicated below ("Shares") of the Khan Growth Fund series of
Khan Funds (the "Trust"), I understand that: (i) the Shares have not been
registered under the Securities Act of 1933, as amended (the "1933 Act"); (ii)
your sale of the Shares to me is made in reliance on such sale being exempt
under Section 4(2) of the 1933 Act as not involving any public offering; and
(iii) in part, your reliance on such exemption is predicated on my
representation, which I hereby confirm, that I am acquiring the Shares for
investment for my own account as the sole beneficial owner thereof, and not with
a view to or in connection with any resale or distribution of the Shares or of
any interest therein.
I hereby agree that I will not sell, assign or transfer the Shares or
any interest therein, except upon repurchase or redemption by the Trust, unless
and until the Shares have been registered under the 1933 Act or you have
received an opinion of your counsel indicating to your satisfaction that such
sale, assignment or transfer will not violate the provisions of the 1933 Act or
any rules or regulations promulgated thereunder. I further agree that if any
portion of the Shares is redeemed prior to the full amortization of the Trust's
organizational expenses, the proceeds thereof will be reduced by a pro rata
portion of such unamortized balance in the same proportion as the number of such
Shares being redeemed bears to the number of such Shares outstanding at the time
of redemption.
Dated: May 16, 1997
Number of Shares: 4,000
/s/A.M. Khan
--------------------------
for Faisal Khan Trust
EXHIBIT 14
IRA DISCLOSURE STATEMENT
1. RIGHT TO REVOKE THE ACCOUNT. You have the right to revoke this Individual
Retirement Account (IRA) within seven days of receiving this Disclosure
Statement. To revoke your IRA account, simply contact the person designated in
the booklet instructions. You may notify us in person, in writing, or by
telephone. Written notice must be sent by first-class mail at the address listed
on the application and will be accepted as of the date such notice is
postmarked. If you revoke your IRA account, we will refund your entire IRA
contribution. If you do not use this right within seven days of the date you
receive this Disclosure Statement, you have accepted the terms and conditions of
the IRA agreement and may no longer revoke the IRA account.
2. DEFINITIONS. In this Disclosure Statement the terms "you," "your," or "IRA
Owner" means the person who established the IRA. The terms "Custodian," "our,"
"us,", or " we" shall mean the financial organization acting as the Custodian of
your IRA. The term "IRS" shall refer to the Internal Revenue Service. The term
"IRA" shall mean the Individual Retirement Account within the meaning of section
408 of the Code and shall also refer to your Custodial Account. The term "SRA"
shall mean SIMPLE Retirement Account within the meaning of section 408(p) of the
Code (SRAs are also called SIMPLE IRAs). The term "Code" shall mean the Internal
Revenue Code.
3. ACCOUNT GROWTH. Your IRA is self-directed, we will not take any action except
at your written direction. Earnings and capital appreciation on investments
chosen by you will depend on overall economic conditions and the success of that
particular investment. EARNINGS ON THESE INVESTMENTS ARE NOT GUARANTEED BY THE
CUSTODIAN AND MAY OR MAY NOT BE REASONABLY PROJECTED. For example, if the
initial investment is a passbook, time deposit or money market account, the
account projection can be made based on the current rate of earnings paid. On
the other hand, if the initial investment is an investment security (stocks,
bonds, or mutual funds), the rate of growth of the earnings on these types of
investments cannot be reasonably projected.
4. ELIGIBILITY FOR IRAS.
A. REGULAR CONTRIBUTIONS. You must be under the age 70 1/2 and have
"compensation" in order to contribute to an IRA. For tax years during or after
which you reach the age 70 1/2 you are not allowed to contribute to an IRA.
"Compensation" includes wages, tips, bonuses, taxable alimony, as well as other
compensation received for personal services. (If you are self-employed,
compensation is your net earnings from your trade or business reduced by your
deduction for contributions made on your behalf to retirement plans and the
deduction allowed for one-half of your self-employment taxes.) If you meet the
above eligibility requirements, you may contribute up to 100% of your
compensation or $2,000, whichever is less. Regular and spousal IRA contributions
must be made by your tax filing due date excluding extensions.
B. SPOUSAL CONTRIBUTIONS. You may make a contribution into your
spouse's IRA if you meet the special spousal IRA rules. You must be married,
file a joint federal income tax return, the receiving spouse must be under 70
1/2, and the receiving spouse must earn less in compensation than the spouse
making the contribution. The total combined contribution a couple can make each
year to both IRAs is the smaller of $4,000 or their combined compensation for
the year. You can divide your total IRA contribution in any manner you choose,
provided you do not contribute more than $2,000 to either IRA. Your combined
compensation equals the lesser compensated spouse's compensation plus the higher
compensated spouse's compensation (reduced by any IRA deduction). Please consult
you tax advisor if you need additional assistance. CAUTION: FOR TAX YEARS PRIOR
TO 1997, INCLUDING CONTRIBUTIONS MADE IN 1997 FOR 1996, DIFFERENT RULES APPLY
THAN THOSE STATED ABOVE. THE SPOUSAL CONTRIBUTION LIMIT FOR TAX YEAR 1996 IS
$2,250 (NOT $4,000) AND ONLY ONE SPOUSE'S COMPENSATION MAY BE CONSIDERED IN
DETERMINING HOW MUCH YOU ARE ELIGIBLE TO CONTRIBUTE.
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<PAGE>
C. ROLLOVER, TRANSFER, SEP, AND SIMPLE CONTRIBUTIONS. You may be
eligible to roll over, directly roll over, or transfer your existing IRA, SRA,
or qualified plan assets. The rules covering rollovers and transfers are
discussed later in this disclosure statement. Simplified Employee Pension (SEP)
plan contributions may also be made to this IRA. Your employer is responsible
for verifying the SEP eligibility requirements and determining the contribution
amount. SIMPLE contributions may not be made to this IRA, but instead must be
contributed into an SRA. After two years, however, you may roll over or transfer
your SRA into this IRA. The IRS or your employer can provide additional
information concerning SEP and SIMPLE eligibility.
5. DEDUCTIBILITY. You may or may not be allowed to deduct your IRA contribution
on your income tax return. Whether or not you may deduct your contribution
depends upon whether you or your spouse are active participants in an
employer-maintained retirement plan, your income level, and your filing status.
A. ACTIVE PARTICIPANT. You are an "active participant" for a year if
you, or your spouse, are covered by a retirement plan. For example, if you are
covered under a profit sharing plan, a 401(k) plan, a tax-sheltered annuity plan
(403(b)), certain government plans, a Simplified Employee Pension (SEP) plan, a
SIMPLE arrangement, or a plan which promises you a retirement benefit which is
based upon the number of years of service you have with the employer, you are
likely to be an active participant. The W-2, Wage and Tax Statement, includes a
box (the "Pension Plan" box) to indicate whether or not you are covered for the
plan year. If you are not certain whether or not you are covered (an "active
participant") you should ask your employer or tax advisor. If you are not an
active participant, you may fully deduct your IRA contribution regardless of
your compensation.
MODIFIED AGI MARRIED MARRIED
(FOR ACTIVE PARTICIPANTS) SINGLE FILING JOINTLY FILING SEPARATELY
$10,000 OR LESS FULL DEDUCTION FULL DEDUCTION *PHASEOUT
$10,001-$25,000 FULL DEDUCTION FULL DEDUCTION NO DEDUCTION
$25,001-$35,000 *PHASEOUT FULL DEDUCTION NO DEDUCTION
$35,001-$40,000 NO DEDUCTION FULL DEDUCTION NO DEDUCTION
$40,001-$50,000 NO DEDUCTION *PHASEOUT NO DEDUCTION
$50,001 OR OVER NO DEDUCTION NO DEDUCTION NO DEDUCTION
* IF SUBJECT TO PHASEOUT OF DEDUCTIBILITY, PLEASE SEE PART C. PHASEOUT
CALCULATIONS.
B. MODIFIED ADJUSTED GROSS INCOME. If you are an active participant in
a retirement plan, your ability to deduct your IRA contribution begins to be
phased out when your federal modified adjusted gross income exceeds certain
limits.
C. PHASEOUT CALCULATION. If you are an active participant and your
income falls within the phaseout limits form the previous chart, you can
determine your deductible amount according to the deduction formula below.
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<PAGE>
DEDUCTION FORMULA
FILING STATUS
MARRIED MARRIED
SINGLE* FILING JOINTLY FILING SEPARATELY
A. MODIFIED ADJUSTED $35,000 $50,000 $10,000
GROSS INCOME (MAGI)
LIMIT
B. YOUR MAGI (FROM IRS $_______ $______ $_______
FORM 1040 OR 1040A)
C. SUBTRACT B FROM A $_______ $______ $_______
(LINE C MULTIPLIED BY .2 X.2 X.2*** X.2
EQUALS THE AMOUNT YOU
MAY DEDUCT.**)
DEDUCTIBLE AMOUNT $________ $______ $________
* Qualifying married couples, filing separately, may also use this
category.
** If the adjusted dollar deduction limit is not a multiple of ten, it
is rounded up to the next highest $10 increment. If your partial deduction is
less than $200 but greater than $0, you are allowed to claim an IRA deduction of
$200.
*** For tax year 1997 and after, the IRS has not released final
guidance concerning spousal IRA deductibility, however, the .2 multiple
apparently applies separately to the IRA owner and the IRA owner's spouse.
CAUTION: FOR 1996 SPOUSAL CONTRIBUTIONS, INCLUDING CONTRIBUTIONS MADE IN 1997
FOR 1996, MULTIPLY BY .225 (INSTEAD OF .2) TO CALCULATE THE COMBINED DEDUCTIBLE
AMOUNT.
You are still allowed to contribute up to the lesser of $2,000 or 100% of your
earned income; however, if your contribution exceeds your maximum deductible
amount, the remainder will be treated as a nondeductible contribution.
6. ROLLOVERS, TRANSFERS, AND DIRECT ROLLOVERS. Distributions from IRAs, SRAs,
qualified plans or tax-sheltered annuity programs may be eligible for a tax-free
rollover or transfer into an IRA. Transfer and rollover contributions are not
deductible and will not be applied against the annual contribution limits
mentioned above.
A. ROLLOVERS AND TRANSFER FROM IRAS. Assets in IRAs may be directly
transferred or rolled over to another IRA. A rollover occurs when you take a
distribution of the assets and roll them into an IRA within 60 calendar days
form the date of receipt. If you retain the assets for any period of time beyond
the 60 days, the rollover is no longer allowed. An additional restriction on
rollovers is that you are only allowed one rollover for each 12-month period.
B. ROLLOVERS OR TRANSFERS FROM SIMPLE RETIREMENT ACCOUNTS (SRAS). An
SRA is basically an IRA that can only accept contribution pursuant to a SIMPLE
arrangement set up through your employer. SRAs must remain separate from IRAs
for a two-year period. After the two years you may roll over or transfer your
SRA into an IRA .
C. ROLLOVERS AND DIRECT ROLLOVERS FROM QUALIFIED PLANS. An eligible
rollover distribution from a qualified retirement plan or tax-sheltered annuity
program may be rolled over or directly rolled over to an IRA. Generally, an
eligible rollover distribution is any distribution except: (1) one of a series
of substantially
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equal periodic payments over the single or joint life expectancy of the employee
and beneficiary or for a specific period of ten years of more, (2) a nontaxable
distribution, or (3) a required distribution for an employee age 70 1/2 or
older. To complete a direct rollover you would instruct your employer to deliver
the funds directly to the IRA Custodian. To complete a rollover, you would take
control of the assets and would have 60 calendar days from the date of receipt
to roll over the taxable portion of the distribution to an IRA.
7. REQUIRED DISTRIBUTIONS AFTER AGE 70 1/2. After you reach age 70 1/2, the
rules require you to take minimum distributions from your IRA each year. The
distribution for your first year, the year in which you reach age 70 1/2, must
be made no later than April 1 of the following year. Distributions for
subsequent years must be taken by December 31 of each year.
You must elect a method to receive your distributions in a manner which
distributes the funds at least as rapidly as the minimum required distributions.
Unless you elect otherwise, the minimum required distribution for each year is
determined by dividing your ending account balance for the previous year
(adjusted by any outstanding rollovers) by your joint life expectancy with the
appropriate beneficiary. If no beneficiary exists or a beneficiary other than a
natural person is named (except certain trusts), your single life expectancy
must be used for this calculation.
For years after the first distribution year, you may elect to annually
recalculate your life expectancy and/or your spouse's life expectancy. If you do
not choose a method, it is presumed that recalculation is elected. If
recalculation is elected, a new life expectancy factor is determined each year
based upon the ages of you and/or your spouse as of your birthdays during the
year. If the person whose life is being recalculated dies, the life expectancy
for that individual becomes zero. If recalculation is not chosen, the life
expectancy is calculated by determining the life expectancy at the end of the
first distribution year and subtracting 1 for each year which has elapsed since.
If no recalculation is elected, the death of the IRA Owner of the beneficiary is
disregarded.
The joint life expectancy of you and a beneficiary other than your
spouse is limited by the Minimum Distribution Incidental Benefit (MDIB) tables.
The tables give life expectancies for the IRA Owner and a beneficiary ten years
younger. If this factor is less than your joint life expectancy with the
applicable beneficiary, the factor from the MDIB table must be used to calculate
the minimum distribution.
If you have more than one IRA at the same or different financial
organization(s), the minimum distribution must be calculated separately for each
IRA. However, the minimum distribution from each IRA can be withdrawn from any
one or more of your IRAs.
8. DISTRIBUTIONS AFTER DEATH.
A. DEATH AFTER THE REQUIRED BEGINNING DATE. If you die after the date
when payments must have begun (after you reach age 70 1/2), the payments to your
beneficiary or estate must continue so that the funds will be distributed at
least as rapidly as they would have been distributed if the death had not
occurred. A spouse beneficiary may elect to roll over a distribution (other than
a required minimum distribution) into his or her own IRA.
B. DEATH BEFORE THE REQUIRED BEGINNING DATE. If you die before the
required beginning date, your beneficiary has the following options:
(1) FIVE YEAR OPTION. The beneficiary may withdraw the entire
account balance in any manner so that the IRA is depleted by December 31 of the
fifth year following the year of death.
(2) LIFE EXPECTANCY OPTION. The beneficiary may withdraw the
funds in a series of payments over a period which does not exceed the
beneficiary's life expectancy. These payments must begin
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by December 31 of the year following the year of death if the beneficiary is not
your spouse, or December 31 of the year you would have been age 70 1/ 2 ( if
later ), if the beneficiary is your spouse.
(3) SPOUSE TREAT AS OWN OPTION. A spouse beneficiary may elect
to roll over a distribution into his/her own account or to treat the IRA as
his/her own.
If you die before your required beginning date, your spouse beneficiary
must make his/her election of payment by the earlier of December 31 of the fifth
year after the year of your death or December 31 of the year you would have
attained age 70 1/2. If you die before your required beginning date, your
nonspouse beneficiary must make his/her election of payment no later than
December 31 of the year following the year of your death.
9. INCOME TAX STATUS OF DISTRIBUTIONS. IRA distributions are generally fully
taxable as ordinary income. IRAs are not eligible for the special tax treatment
(five and ten year tax averaging and capital gains treatment) available to
certain distributions from pension and profit sharing plans.
A. NONDEDUCTIBLE CONTRIBUTIONS. If you have made nondeductible
contributions to an IRA, a certain percentage of your distributions will be
nontaxable. The nontaxable portion of your distributions is calculated as
follows:
<!-- Please clarify this formula -->
Total Nondeductible Contributions Less Previous Nontaxable
Distributions Nontaxable Distributions=
- -----------------------------------------------------------------
X Distributions During the Year Total Account Balance of All IRAs at Year End
Plus Total Distributions During the Year.
B. ESTATE TAX STATUS OF DISTRIBUTIONS. All funds held within your IRA
will be included in your gross estate for estate tax purposes, regardless of the
named beneficiary or manner of distribution. There is no specific estate tax
exclusion for funds held within an IRA.
C. GIFT TAX STATUS OF IRA CONTRIBUTIONS AND DISTRIBUTIONS. For gift tax
purposes, irrevocable beneficiary designations will not be treated as gifts.
10. FEDERAL PENALTIES. In addition to the taxes imposed on IRAs, distributions
from IRAs are also potentially subject to a wide variety of penalties (excise
taxes).
A. PENALTY FOR PREMATURE DISTRIBUTION. Generally, if you take a
distribution from your IRA before you reach the age 59 1/2 you will owe, in
addition to regular income taxes a 10% excise tax on the taxable amount of the
distribution. Exceptions to the 10% excise tax exist in the case of disability,
death, or if you agree to take a series of substantially equal periodic payments
made over your life expectancy or the joint life expectancy of yourself and your
designated beneficiary. Effective for years after 1996, additional exceptions
exist in the case of distributions for health care expenses exceeding 7.5% of
your adjusted gross income and distributions used to pay for health care
insurance if you are unemployed. In the case of an SRA, the 10% excise is
increased to 25% for the initial two-year period beginning on the date you first
participated in a SIMPLE Salary Reduction Arrangement.
B. PENALTY FOR EXCESS CONTRIBUTIONS. If you contribute more to your IRA
than allowed it is called an "excess contribution" and you may be penalized. The
government imposes a 6% penalty (excise tax) per year for any excess amount you
allow to remain in your IRA. You must pay the penalty by filing a special IRS
form along with your income tax return. You can avoid the 6% penalty by removing
your excess contribution plus any earnings on the excess amount prior to the due
date for filing your Federal income tax return for the year, plus extensions.
You are not allowed to deduct an excess contribution and would not be able to
avoid the 6% excise tax if you took a deduction for the contribution. Any
earnings you receive along with a distribution of the excess is taxable income
in the tax year the excess contribution was made.
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The 6% excess contribution penalty may be eliminated for future tax
years by withdrawing the excess contribution form the IRA before the end of the
tax year or by under-contributing for that year by an amount equal to the excess
contribution. The excess contribution being returned will not be subject to
income tax nor will the 10% premature withdrawal penalty as discussed below be
assessed provided the contribution for the year during which the excess
contribution was made did not exceed $2,000 (excluding rollover contributions)
and no deduction was allowed for the excess.
C. EXCESS DISTRIBUTION PENALTY. If you receive more than $155,000 (1996
amount--subject to cost-of-living adjustments) you will generally be subject to
a 15% tax on the amount of the excess. The excess distribution penalty, however,
does not apply to distributions made during 1997, 1998, and 1999. Special rules
may apply to you and you should consult your tax advisor with questions
concerning the excess distribution penalty.
D. EXCESS ACCUMULATION PENALTY. An excess accumulation penalty may be
imposed on your estate if you die with an excess accumulation in your IRA. You
should consult with your tax advisor concerning excess accumulation penalties.
The excess accumulation penalty continues to apply in years 1997-1999.
E. PENALTY FOR INSUFFICIENT OR LATE DISTRIBUTION. You will owe a
penalty of 50% of the amount of any minimum distribution you fail to take. As
discussed above, minimum distributions are required when you reach age 70 1/2
and beneficiaries may also be required to take minimum distributions. You are
responsible for paying this tax and reporting it on your income tax return. This
50% penalty is in addition to the regular income tax that may be payable on
distributions from IRAs. The tax imposed is equal to 50% of the amount by which
the minimum required distribution exceeds the amount actually distributed during
the year.
F. PENALTY FOR PROHIBITED TRANSACTIONS. If you engage in a prohibited
transaction, the IRA loses its tax exemption as of the first day of the year.
You must include the Fair Market Value of the IRA in your gross income for the
year during which the prohibited transaction occurred and pay all applicable
taxes and penalties.
G. PENALTY FOR PLEDGING THE ACCOUNT AS SECURITY. If you pledge your IRA
as security for a loan, the portion pledged is treated as a distribution to you
in that year. The portion pledged is fully taxable and subject to all penalties.
11. MISCELLANEOUS PROVISIONS.
A. YOUR CUSTODIAN. Your Custodian must be a bank, savings and loan
association, credit union, or other entity that is permitted to accept IRA
contributions.
B. CASH CONTRIBUTIONS. All contributions to your IRA must be in cash
except for rollover and transfer contributions.
C. CONTRIBUTION LIMIT. You are not allowed to contribute more than
$2,000 as a regular contribution and no more than $4,000 (effective for tax year
1997 and after) in the case when you are making a contribution both to your IRA
and to the IRA of your spouse under the spousal IRA rules.
D. LIFE INSURANCE. You may not invest your IRA in life insurance
contracts.
E. NONFORFEITABLE. Your interest in your IRA balance is nonforfeitable.
F. NO COMMINGLING. The assets of the IRA will not be commingled with
other property except in a common trust or investment fund.
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G. COLLECTIBLES. No part of the funds can be invested in collectibles,
including any work of art, rug or antique, metal or gem, stamp or coin,
alcoholic beverage, or any other tangible property specified by the IRS. The
acquisition of certain U.S. government-issued gold and silver coins and certain
state-issued coins are permitted as investments in an IRA.
12. IRS APPROVAL OF FORMS. The Custodial Agreement used to establish this IRA is
the IRS Model Custodial Agreement (Form 5305-A). This agreement has been
approved as to form by the Internal Revenue Service. You are responsible to
ensure you follow the terms and conditions of this agreement. This approval is
not an endorsement of the investment instruments used by the Custodian.
13. PROVISIONS REGARDING AMENDMENTS TO THE PLAN. The Custodian of this IRA may
amend (change or terminate) the IRA at any time. The Custodian shall furnish
copies of any such amendments to the IRA Owner within 30 days of the date the
amendments are to become effective.
14. FEES. The Custodian may charge service fees for the administration of the
IRA. If a fee is charged at the time the IRA is first opened, the IRA Owner will
be notified of the amount charged, either on the IRA Application, or otherwise.
If fees will be charged in the future, the Custodian will furnish the IRA Owner
with a written notice stating the nature and amount of such fees at least 30
days before charging any fees.
15. ANNUAL STATEMENTS. Each year the Custodian will furnish you and the IRS with
statements reflecting the activity in your IRA. You will receive an annual
report, the IRS Form 5498 or a substitute form, which will indicate Fair Market
Value of the account as of the end of the previous calendar year. This will give
the amount of your contribution to the IRA and will indicate any rollovers into
the account. Another statement, the IRS Form 1099-R, will reflect your
distributions for the year. The information is also sent by your Custodian to
the IRS.
16. OTHER IRS FORMS. You may be required to file IRS Form 5329 with the IRS for
each taxable year in which you are assessed a Federal penalty as discussed
above. If you only owe the 10% premature distribution penalty, you may be able
to pay the penalty on your income tax return alone and no Form 5329 would be
required. You must also file IRS Form 8606 (Nondeductible IRA Contributions IRA
Basis, and Nontaxable Distributions) for each taxable year you make
nondeductible contributions or receive nontaxable distributions.
FURTHER INFORMATION REGARDING INDIVIDUAL RETIREMENT ACCOUNTS CAN BE OBTAINED
FROM ANY DISTRICT OFFICE OF THE IRS OR FROM IRS PUBLICATION 590.
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IRA SERVICES AGREEMENT
Khan Funds (the "Transfer Agent")
714 FM 1960 West, Suite 201
Houston, Texas 77090
Khan Growth Fund (the "Fund")
714 FM 1960 West, Suite 201
Houston, Texas 77090
Star Bank, N.A. ("STAR")
425 Walnut Street
Cincinnati, Ohio 45202
RECITALS:
A. WHEREAS, STAR provides custodial services, including serving as the custodian
(the "Custodian") for Individual Retirement Accounts ("IRAs"),
B. WHEREAS, the Fund desires to retain STAR for such services.
C. WHEREAS, the Transfer Agent provides shareholder services.
D. WHEREAS, STAR desires to delegate some of its responsibilities as Custodian
of the IRAs to the Transfer Agent.
E. WHEREAS, STAR can offer certain IRA administration services (government
reporting, 70 1/2 distribution calculations, etc.) through its third-party
service provider.
F. WHEREAS, the Fund and Transfer Agent may decide pursuant to this agreement
whether the Transfer Agent or STAR (through its third-party provider) will
perform the IRA administration responsibilities of the Custodian,
G. WHEREAS, the Transfer Agent and the Fund desire to perform some of the
responsibilities of the IRA Custodian.
AGREEMENT:
In consideration of the covenants contained herein and for other good and
valuable consideration; STAR, and the Transfer Agent agree as follows:
SECTION 1 -- STAR'S RESPONSIBILITIES. As the Custodian for IRAs established by
the Fund through its Transfer Agent, STAR agrees to the following:
1.1 PROVIDE IRA DOCUMENT. STAR agrees to provide the Transfer Agent
with an IRA document that satisfies the laws of the Internal Revenue Code and
regulations of the Internal Revenue Service ( the "IRA Document"). The IRA
Document will be based on the IRS Form 5305-A.
1.2 RETAIN IRA DOCUMENTS. STAR agrees to retain copies of all IRA
Documents established pursuant to the terms of the agreement. The sole function
of STAR in connection with its retention of the
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IRA Documents shall be to retain the IRA Documents for safekeeping on behalf of
the customers establishing IRAs (the "IRA Owners") with the Fund through the
Transfer Agent.
1.3 MAINTAIN IRS APPROVAL OF THE FORMS. STAR agrees to keep the IRA
Documents up-to-date for IRA amendments. This shall include forwarding copies of
all required amendments to the Transfer Agent for forwarding to the IRA Owners
and maintaining a record verifying the proper amendment procedures were executed
for the IRAs.
SECTION 2 -- TRANSFER AGENT'S RESPONSIBILITIES. The Transfer Agent agrees to the
following:
2.1 ESTABLISH IRAS. The Transfer Agent hereby agrees to open new IRAs
for the Fund. STAR hereby delegates its authority and responsibility as
Custodian for the IRAs to the Transfer Agent to establish IRAs for the Fund. The
Transfer Agent hereby agrees to establish the IRAs in accordance with all
applicable laws and regulations concerning establishing IRAs including without
limitation, providing the IRA Owner with a copy of the legal plan agreement, a
disclosure statement, and if applicable a financial projection. Pursuant to
Section 1.1 of this agreement, STAR will provide Transfer Agent with an IRA
Document that meets the legal requirements for establishing an IRA. If STAR is
not providing the IRA Document, then Transfer Agent shall assume full liability
for the legal compliance of the IRA Document(s) used in establishing IRAs for
the Funds and shall indemnify and hold STAR Harmless for any and all resulting
liabilities.
2.2 FORWARD DOCUMENTS TO STAR. The Transfer Agent hereby agrees to
forward all executed IRA Documents to STAR for retention.
2.3 INVESTING IRA ASSETS. The Transfer Agent shall invest and reinvest
the assets of the IRAs subject to this agreement. This shall include, without
limitation, processing additional purchases and redemptions of shares. The
Transfer Agent shall also process the dividends and capital gain distributions.
This includes the mailing of dividends and preparing statements to shareholders
for reinvested distributions.
2.4 BILLING. The Transfer Agent shall bill the IRA Owners for annual
maintenance bills or other fees.
2.5 STATEMENTS AND VOTING. The Transfer Agent shall mail shareholder
statements to the IRA Owners. Additionally, the Transfer Agent shall be
responsible for any and all communications concerning voting of shares and all
other aspects of voting concerning shares in the Funds.
2.6 OTHER RESPONSIBILITIES. The Transfer Agent shall be responsible for
all other aspects of the IRA and the Fund not specifically discussed in this
agreement.
SECTION 3 -- IRA ADMINISTRATION RESPONSIBILITIES. The IRA administration
responsibilities covered by this section are generally responsibilities of STAR
as the Custodian of the IRAs and STAR desires to delegate these responsibilities
either to the Transfer Agent or a third-party administrator. STAR hereby
delegates the following responsibilities of the Transfer Agent; or, at the
Transfer Agent's discretion, STAR will perform these duties using a third-party
administrator.
3.1 SELECTION OF RESPONSIBLE PARTY. The party responsible for the IRA
administrative services covered in this section 3 of this agreement shall be:
Khan Funds ( the "Service Provider").
3.2 FEDERAL TAX REPORTING. The Service Provider hereby agrees to
perform the required tax reporting for the IRAs subject to this agreement. The
tax reporting responsibilities are limited to IRS Form 5498 reporting and IRS
Form 1099R reporting.
3.3 70 1/2 DISTRIBUTIONS. The Service Provider hereby agrees to
maintain age records of the IRA Owners and notify either the IRA Owner, the
Transfer Agent, or the Fund when the IRA Owner must begin
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receiving 70 1/2 minimum distributions. The Service Provider shall also
calculate the amount of the minimum distribution amount based on the method
elected by the IRA Owner. The Transfer Agent shall be responsible for collecting
the information concerning a 70 1/2 election of payment method and forwarding
the information to the Service Provider.
3.4 STORAGE OF INFORMATION. The Service Provider shall store
information concerning the IRAs.
SECTION 4--FEES. Transfer Agent agrees to pay STAR its reasonable and customary
fees for providing these services. The current fees are attached to this
agreement as an exhibit. STAR reserves the right to change its fees upon sixty
(60) days prior notice to the Transfer Agent or Fund.
SECTION 5 -- MISCELLANEOUS.
5.1 TERM. This agreement may be terminated by either party upon sixty
(60) days advance written notice of intention to terminate.
5.2 GOVERNING LAW. This agreement shall be governed by the laws of the
State of Ohio.
5.3 HEADINGS. The headings contained in this agreement are for
informational purposes only and are not part of this agreement.
5.4 EXAMINATION OF RECORDS. The parties agree that all records and
functions performed by the Transfer Agent, the Fund, or the Service Provider,
pursuant to this agreement, may be subject to regulation and examination by a
bank or tax regulatory authority.
5.5 CONFIDENTIALITY. Each party to this agreement shall treat the
records of the other party to this agreement and of the IRA Owner as strictly
confidential, and shall not release information to anyone (except the IRA Owner,
with respect to the IRA Owner's IRA) without the prior permission of the other
except as required by law.
5.6 AUTHORITY OF TRANSFER AGENT. The Transfer Agent shall have no
authority over the IRAs which STAR serves as Custodian, except as indicated in
this agreement.
5.7 INDEMNIFICATION OF STAR. Transfer Agent and Service Provider hereby
agree to indemnify and hold STAR harmless against any and all claims, demands,
actions and suits, whether groundless or otherwise, and from and against any and
all judgments, IRS or other governmental penalties or fees of any sort, losses,
damages costs, charges, counsel fees, and other expenses of every nature and
character arising out of or in any way relating to the Transfer Agent's or
Service Provider's responsibilities under this agreement. If STAR is the Service
Provider through its third-party IRA administrator, then STAR assumes
responsibility for the Service Provider's duties.
5.8 INDEMNIFICATION OF TRANSFER AGENT AND SERVICE PROVIDER. STAR hereby
agrees to indemnify and hold the Transfer Agent an Service Provider harmless
against any and all claims, demands, governmental penalties, actions and suits,
whether groundless or otherwise, and from and against any and all judgments,
liabilities, losses, damages, costs, charges, counsel fees, and other expenses
of every nature and character arising out of or in any way relating to STAR's
responsibilities under this agreement.
5.9 FORCE MAJEURE. No party to this agreement shall be liable for
failure to perform its obligations under this agreement, where such failure
results from acts of GOD, fires, storms, accidents, actions or decree of
governmental bodies or communication failure or any other even beyond its
reasonable control. If such an event occurs, the party shall give reasonable
notice and use its best efforts to resume performance.
5.10 NON-ASSIGNABILITY. This Agreement including any rights, duties, or
obligations under it, may not be assigned by either party without the prior
written consent of the other party.
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5.11 COUNTERPARTS. This agreement may be executed in multiple
counterparts, each of which will be deemed to be an original of equal force and
effect.
In witness whereof, the undersigned, by their respective duly authorized
officers, hereby execute the agreement, effective on the day and year indicated
below.
TRANSFER AGENT STAR BANK,N.A.
- --------------------------- ---------------------------------
By By
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Title Title
- --------------------------- ---------------------------------
Date Date
ACKNOWLEDGED BY THE FUND
- --------------------------- ---------------------------------
By Effective Date
- ---------------------------
Title
- ---------------------------
Date
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INDIVIDUAL RETIREMENT CUSTODIAL ACCOUNT
FORM 5305-A (REV. OCTOBER 1992) DEPARTMENT OF TREASURY INTERNAL REVENUE SERVICE
DO NOT file with Internal Revenue Service
The Depositor and the Custodian make the following agreement:
ARTICLE I
The Custodian may accept additional cash contributions on behalf of the
Depositor for a tax year of the Depositor. The total cash contributions are
limited to $2,000 for the tax year unless the contribution is a rollover
contribution described in section 402 (c) (but only after December 31, 1992),
403 (a)(4), 403 (b)(8), 408 (d)(3), or an employer contribution to a simplified
employee pension plan as described in section 408 (k). Rollover contributions
before January 1, 1993, include rollovers described in section 402 (a)(5), 402
(a)(6), 402 (a)(7), 403 (a)(4), 403 (b)(8), 408 (d)(3), or an employer
contribution to a simplified employee pension plan as described in section
408(k).
ARTICLE II
The Depositor's interest in the balance in the custodial account is
nonforfeitable.
ARTICLE III
1. No part of the custodial funds may be invested in life insurance contracts,
nor may the assets of the custodial account be commingled with other property
except in a common trust fund or common investment fund (within the meaning of
section 408(a)(5)). 2. No part of the custodial funds may be invested in
collectibles (within the meaning of section 408(m)) except as otherwise
permitted by section 408(m)(3) which provides an exception for certain gold and
silver coins issued under the laws of any state.
ARTICLE IV
1. Notwithstanding any provision of this agreement to the contrary, the
distribution of the Depositor's interest in the custodial account shall be made
in accordance with the following requirements and shall otherwise comply with
section 408(a)(6) and Proposed Regulations section 1.408-8, including the
incidental death benefit provisions of Proposed Regulations section
1.401(a)(9)-2, the provisions of which are incorporated by reference.
2. Unless otherwise elected by the time distributions are required to begin to
the Depositor under paragraph 3, or to the surviving spouse under paragraph 4,
other than in the case of a life annuity, life expectancies shall be
recalculated annually. Such election shall be irrevocable as to the Depositor
and the surviving spouse and shall apply to all subsequent years. The life
expectancy of a nonspouse beneficiary may not be recalculated.
3. The Depositor's entire interest in the custodial account must be , or begin
to be, distributed by the Depositor's required beginning date, (April 1
following the calendar year end in which the Depositor reaches age 701/2). By
that date, the Depositor may elect, in a manner acceptable to the Custodian, to
have the balance in the custodial account distributed in:
(a) A single sum payment.
(b) An annuity contract that provides equal or substantially equal
monthly, quarterly, or annual payments over the life of the Depositor.
(c) An annuity contract that provides equal or substantially equal
monthly, quarterly, or annual payments over the joint and last survivor lives of
the Depositor and his or her designated beneficiary.
(d) Equal or substantially equal annual payments over a specified
period that may not be longer than the Depositor's life expectancy.
(e) Equal or substantially equal annual payments over a specified
period that may not be longer than the joint life and last survivor expectancy
of the Depositor and his or her designated beneficiary.
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4. If the Depositor dies before his or her entire interest is distributed to him
or her, the entire remaining interest will be distributed as follows:
(a) If the Depositor dies on or after distribution of his or her
interest has begun, distribution must continue to be made in accordance with
paragraph 3.
(b) If the Depositor dies before distribution of his or her interest
has begun, the entire remaining interest will, at the election of the Depositor
or, if the Depositor has not so elected, at the election of the beneficiary or
beneficiaries, either
(i) Be distributed by December 31 of the year containing the
fifth anniversary of the Depositor's death, or
(ii) Be distributed in equal or substantially equal payments
over the life or life expectancy of the designated beneficiary or beneficiaries
starting by December 31 of the year following the year of the Depositor's death.
If, however, the beneficiary is the Depositor's surviving spouse, then this
distribution is not required to begin before December 31 of the year in which
the Depositor would have turned age 70 1/2.
(c) Except where distribution in the form of an annuity meeting the
requirements of section 408(b)(3) and its related regulations has irrevocably
commenced, distributions are treated as having begun on the Depositor's required
beginning date, even though payments may actually have been made before that
date.
(d) If the Depositor dies before his or her entire interest has been
distributed and if the beneficiary is other than the surviving spouse, no
additional cash contributions or rollover contributions may be accepted in the
account.
5. In the case of a distribution over life expectancy in equal or substantially
equal annual payments, to determine the minimum annual payment for each year,
divide the Depositor's entire interest in the Custodial account as of the close
of business on December 31 of the preceding year by the life expectancy of the
Depositor (or the joint life and last survivor expectancy of the Depositor and
the Depositor's designated beneficiary, or the life expectancy of the designated
beneficiary, whichever applies). In the case of distributions under paragraph 3,
determine the initial life expectancy (or joint life and last survivor
expectancy) using the attained ages of the Depositor and designated beneficiary
as of their birthdays in the year the Depositor reaches age 70 1/2. In the case
of a distribution in accordance with paragraph 4(b)(ii), determine life
expectancy using the attained age of the designated beneficiary as of the
beneficiary's birthday in the year distributions are required to commence.
6. The owner of two or more individual retirement accounts may use the
"alternative method" described in Notice 88-38, 1988-1C.B.524, to satisfy the
minimum distribution requirements described above. This method permits an
individual to satisfy these requirements by taking from one individual
retirement account the amount required to satisfy the requirement for another.
ARTICLE V
1. The Depositor agrees to provide the Custodian with information necessary for
the Custodian to prepare any reports required under section 408(i) and
Regulations sections 1.408-5 and 1.408-6. 2. The Custodian agrees to submit
reports to the Internal Revenue Service and the Depositor prescribed by the
Internal Revenue Service.
ARTICLE VI
Notwithstanding any other articles which may be added or incorporated, the
provisions of Articles I through III and this sentence will be controlling. Any
additional articles that are not consistent with section 408(a) and the related
regulations will be invalid.
ARTICLE VII
This agreement will be amended from time to time to comply with the
provisions of the Code and related regulations. Other amendments may be made
with the consent of the persons whose signatures appear below.
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ARTICLE VIII DEFINITIONS.
8.1 "CODE." The term "Code" shall mean the Internal Revenue Code.
8.2 "CUSTODIAL ACCOUNT." Your IRA shall be referred to as the "custodial
account" or "account."
8.3 "IRA." IRA shall mean Individual Retirement Account within the meaning of
Section 408 of the Code.
8.4 "IRS." The term "IRS" shall mean the Internal Revenue Service.
8.5 "WE." The IRS selected the term "Custodian " to describe us, your financial
organization. In other parts of this agreement, the "Custodian" will be referred
to as "us,""we,","our," or the "Custodian."
8.6 "YOU." The IRS selected the term "Depositor" to describe "you" the IRA
Owner. In other parts of this agreement, you will be referred to as
"you,""your," or "IRA Owner."
8.7 "FUND(S)." The "Fund(s)" shall mean the mutual fund(s) identified in the IRA
Application used to establish this IRA.
ARTICLE IX FEES AND EXPENSES
9.1 FEES. You agree to pay any fees we establish pursuant to the Application or
a separate fee schedule which we will publish from time to time. Such fees may
include, without limitation, establishment fees, annual administration fees,
termination fees, transfer fees, transaction fees, legal fees, investment
commissions, and such other fees as we determine applicable. You agree to pay
such fees either by a separate billing or direct deduction from the custodial
account; the method of payment is at our discretion. Some fees, such as
brokerage commissions, must be deducted from the custodial account. The
Custodian shall have the right to liquidate sufficient shares in the custodial
account to pay such fees. In the case of a third party receiving payments, such
as brokerage fees and commissions, we may receive a portion of these fees in
return for services provided in completing these transactions. We agree to give
you at least 30 days prior written notice prior to changing a fee or imposing a
new fee.
9.2 EXPENSES. You agree to pay any income, transfer, and other taxes of any kind
that may be levied or assessed upon the custodial account, and all other
administrative expenses reasonably incurred by us in the performance of our
duties. These expenses may include legal, or other professionals hired by us in
connection with your custodial account. You agree to reimburse us for any
reasonable expenses incurred in the administration of the account. The Custodian
shall have the right to liquidate sufficient shares in the custodial account to
pay such expenses.
ARTICLE X AMENDMENTS
We may amend your custodial account at any time to comply with necessary laws
and regulations or for any other reason. Amendments may be made retroactively
when required to meet a law or regulatory change. You are deemed to have
automatically consented to any amendment 30 days after we mail you a copy of the
amendment. Your actual written or verbal consent is not required to amend. We
shall send you a copy of such amendment within 30 days of the amendment's
effective date.
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ARTICLE XI LIMITED LIABILITY.
11.1 HOLD HARMLESS. You agree to hold us harmless, to indemnify, and to defend
us against any and all claims arising from and liabilities incurred by reason of
any action taken by us, except to the extent such liability arises from the
willful misconduct or gross negligence of the Custodian.
11.2 NO INVESTMENT DISCRETION. You agree that all contributions shall be
invested according to your sole discretion in whole or fractional shares of the
Fund(s) identified in the IRA Application. All dividends and capital gain
distributions received on shares of the Fund(s) shall be reinvested in the
shares of the same Fund(s)which shall be credited to the custodial account. We
shall not be responsible or liable for any investment decisions or
recommendations with respect to the investment, reinvestment, or sale of assets
in the custodial account. We shall not be responsible for reviewing any assets
held in the custodial account and shall not be responsible for questioning any
of your investment decisions. We shall not be responsible for any loss resulting
from any failure to act because of the absence of directions from you. In the
event we determine your investment instructions are unclear, then we shall act
as soon as practical to obtain clarification of such instructions. Pending
clarification, we shall hold without investing all or any portion of the
contribution, without liability for loss of income or appreciation and without
liability for interest or dividends.
11.3 TRANSACTION RESPONSIBILITY. We are not responsible for inquiring into the
nature or amount of any contribution made by you , nor into the amount or timing
of any distribution requested. This includes, without limitation, that you are
solely responsible for all your required minimum distributions. We have no
responsibility to notify you of any required minimum distribution nor do we have
any responsibility to determine the correct minimum amount for you. You shall
have full responsibility for determining your required minimum distributions as
well as for any tax or investment consequences of all contributions to and
distributions from the custodial account. We shall not be bound to take any
action on behalf of you, except upon receipt of written instructions from you.
We shall have no obligation to inquire into the genuineness of any such written
instruction without liability for any action taken pursuant thereto, so long as
we act in good faith. You shall bear sole responsibility for assuring the
deductibility of any deposits to the custodial account.
11.4 NO ASSUMED RESPONSIBILITIES. We assume no responsibilities and agree only
to provide the administrative and custodial services required under IRC section
408 and applicable regulations.
ARTICLE XII DEFAULT PROVISIONS
(70 1/2 AND DEATH)
12.1 70 1/2 DISTRIBUTIONS. If you fail to make a written election of payment by
your required beginning date, the minimum required distribution will be
calculated using the joint life expectancy of you and your designated
beneficiary. If no beneficiary exists or a beneficiary other than a natural
person is named (except certain trusts), your single life expectancy will be
used for this calculation. See section 11.3 above. The recalculation method will
be used to the extent allowed.
12.2 DEATH DISTRIBUTIONS. If you die before your required beginning date, then
your designated beneficiary must elect a method of distribution under Article
IV-4(b)(i) and (b)(ii) by the earlier of December 31 of the calendar year in
which the life expectancy distributions must begin under Article IV-4(b)(ii) or
December 31 of the calendar year which contains the fifth anniversary of the
date of your death. If you use the designation of beneficiary form provided in
the Application then the following rules apply (i) the designation in the
Application revokes all previously made designations, (ii) if any of the
beneficiaries dies before you, the deceased beneficiary's share will be
reallocated to the surviving beneficiaries on a pro rata basis, and (iii) if
none of the beneficiaries survive you, or if the Custodian cannot locate your
beneficiary(ies) after a reasonable search, any balance in your IRA will be paid
to your estate. The Custodian may refuse to accept a designation not made on its
standard form. You agree to release the Custodian from and indemnify it for any
and all claims arising from the Custodian's actions under your designation of
beneficiary.
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ARTICLE XIII REPORTS AND RECORDS
We shall keep accurate and detailed records of all contributions, receipts,
investments, distributions, disbursements, and other transactions relating to
the custodial account. We shall provide reports to the IRS and to you as
required by law and regulations. Unless you file a written statement with us
within 60 days after you receive a statement, we shall be relieved and
discharged from all liability to you (including any of your beneficiaries) with
respect to all matters set forth in such report.
ARTICLE XIV POWERS
We shall have the right to hire attorneys or other professionals if we deem
it necessary for the proper administration of your custodial account. This
includes the right to have a party affiliated with the Fund(s) to perform
administrative duties. We shall also have the power to request a judicial
settlement of your account or to enter into a lawsuit for your account. We shall
also have the power to do whatever else we determine necessary for the proper
administration of your account.
ARTICLE XV RESIGNATION OR REMOVAL OF US AS CUSTODIAN
We may resign as Custodian without your consent and you may remove us as
Custodian without our consent. We must provide notice to you of any resignation
30 days prior to the effective date of the resignation. In the event of
resignation by us, you shall appoint a qualified successor Custodian. Upon our
receipt of a written acceptance of such appointment by the successor Custodian,
we shall transfer and pay over the assets of the custodial account to the
successor Custodian. If after 30 days from notice of resignation, you have not
appointed a successor Custodian or we have not received a written acceptance of
such appointment by the successor Custodian, we shall have the right to transfer
the assets remaining in the custodial account to a successor Custodian that we
choose in our sole discretion or we may liquidate the assets and distribute the
cash proceeds, or we may make an in-kind distribution, or we may otherwise
distribute to you the assets remaining in the custodial account. We are
authorized, however, to reserve such funds as we deem advisable for payment of
any liabilities constituting a charge against the assets of the custodial
account or against us, with any balance of such reserve remaining after payment
of all such items to be paid over the successor Custodian.
ARTICLE XVI TERMINATION
In the event the balance of the custodial account is less than the minimum
value prescribed from time to time by the appropriate Fund(s), we may liquidate
the custodial account by making a distribution in cash or in-kind of the assets
in the account less any fees owing. If we terminate for any reason, we shall not
be liable for any loss or penalty incurred upon termination and liquidation of
the custodial account. Upon liquidation of the custodial account this Agreement
shall terminate and we shall be relieved of all further duties and any liability
relative to this Agreement, the custodial account, and the assets distributed
hereunder.
ARTICLE XVII CUSTODIAN'S RESPONSIBILITIES
We shall act as an agent for you, we shall receive funds and invest them at
your direction and in accordance with this Agreement. All shares of the Fund(s)
shall be held in our name as Custodian or our nominee's name. The parties do not
intend to confer any fiduciary responsibilities upon the Custodian and none
shall be implied. We shall deliver, or cause to be executed or delivered to you
all notices, prospectuses, financial statements, proxies and proxy solicitation
materials relative to shares of the appropriate Fund(s) held in the custodial
account. The Custodian shall vote such shares only in accordance with your
written instructions.
ARTICLE XVIII CONTRIBUTIONS
The Custodian is under no duty to compel you to make any contributions and
shall have no duty to assure that such contributions are appropriate in amount.
You have sole responsibility for assuring the deductibility of any
contributions. We may request additional information in the case of rollovers
and direct rollovers. We may request a Transfer Form, or other forms prior to a
transfer.
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<PAGE>
ARTICLE XIX MISCELLANEOUS
19.1 NOTICE. Any notice, payment, report, or other material mailed to you shall
be deemed delivered and effective three days after the date mailed by us to you.
We shall send such material to your last address you provided and we shall
assume no obligation to ascertain the actual address or whereabouts of you. Any
notice you send us shall be deemed delivered when actually received by us.
Except as otherwise permitted by us, all instructions to us must be in writing.
19.2 HEADINGS. The heading and articles of this agreement are for convenience of
reference only, and shall have no substantive effect on provisions of this
agreement.
19.3 SINGULAR FORM. Throughout this agreement, the singular form includes the
plural where applicable.
19.4 STATE LAW. This agreement shall be construed and interpreted in accordance
with the laws of the state in which our principal office is located, except to
the extent superseded by federal law.
19.5 DISQUALIFYING PROVISION. Any provision of this agreement which would
disqualify the custodial account as an IRA shall be disregarded to the extent
necessary to make the custodial account an IRA.
11 INTERPRETATION. If any questions arises as to the meaning of
any provision of this agreement, then we shall be authorized
to interpret any such provision, and our interpretation
shall be binding upon all parties.
11 ADDITIONAL PROVISIONS. Additional provisions to this
agreement may be attached on a separate sheet.
GENERAL INSTRUCTIONS
(Section references are to the Internal Revenue Code unless otherwise
noted.)
PURPOSE OF FORM
Form 5305-A is a model custodial account agreement that meets the requirements
of section 408(a) and has been automatically approved by the IRS. An individual
retirement account (IRA) is established after the form is fully executed by both
the individual (Depositor) and the Custodian and must be completed no later than
the due date of the individual's income tax return for the tax year (without
regard to extensions). This account must be created in the United States for the
exclusive benefit of the Depositor or his or her beneficiaries.
Individuals may rely on regulations for the Tax Reform Act of 1986 to the
extent specified in those regulations. Do not file Form 5305-A with the IRS,
instead, keep it for your records.
For more information on IRAs, including the required disclosure you can get
from your Custodian, get Pub. 590, Individual Retirement Arrangements (IRAs).
DEFINITIONS
CUSTODIAN- The Custodian must be a bank or savings and loan association, as
defined in section 408(n), or any person who has the approval of the IRS to act
as Custodian.
DEPOSITOR - The Depositor is the person who establishes the custodial account.
IDENTIFYING NUMBER - The depositor's social security number will serve as the
identification number of his or her IRA. An employer identification number is
required only for an IRA for which a return is filed to report unrelated
business taxable income. An employer identification number is required for a
common fund created for IRAs.
IRA FOR NONWORKING SPOUSE
Form 5305-A may be used to establish the IRA custodial account for a nonworking
spouse. Contributions to an IRA custodial account for a nonworking spouse must
be made to a separate IRA custodial account established by the nonworking
spouse.
SPECIFIC INSTRUCTIONS
ARTICLE IV. Distributions made under this article may be made in a single sum,
periodic payment, or a combination of both. The distribution option should be
reviewed in the year the Depositor reaches age 70 1/2 to ensure that the
requirements of section 408(a)(6) have been met.
-6-
<PAGE>
ARTICLE VIII- Article VIII and any that follow it may incorporate additional
provisions that are agreed to by the depositor and Custodian to complete the
agreement. They may include, for example, definitions, investment powers, voting
rights, exculpatory provisions, amendments and termination, removal of the
Custodian, Custodian's fees, state law requirements, beginning date of
distributions, accepting only cash, treatment of excess contributions,
prohibited transactions with the depositor, etc. Use additional pages if
necessary and attach them to this form.
NOTE: Form 5305-A may be reproduced and reduced in size for adoption to passbook
purposes.
-7-
EXHIBIT 19.2
KHAN FUNDS
SHAREHOLDER SERVICE PLAN
INTRODUCTION
The Board of Trustees (the "Board") of Khan Funds, a Delaware business
trust (the "Trust"), has approved this Shareholder Service Plan (the "Plan"),
with respect to its various series (each a "Fund"), including without limitation
the Khan Growth Fund.
THE PLAN
The material aspects of the Plan are as follows:
SECTION 1. The Fund will pay securities broker-dealers, retirement
plan sponsors and administrators, and other securities professionals ("Service
Organizations") for expenses incurred in connection with non-distribution
shareholder services provided by them to shareholders of the Fund, provided that
such shareholder servicing is not duplicative of the servicing otherwise
provided on behalf of the Funds.
SECTION 2. Such services may include: (a) establishing and maintaining
accounts and records relating to clients of such Service Organizations
("Clients") who invest in Shares of the Funds; (b) aggregating and processing
purchase, exchange and redemption requests for Shares from Clients and placing
net purchase and redemption orders with respect to the Shares; (c) investing, or
causing to be invested, the assets of Clients' accounts in Shares pursuant to
specific or pre-authorized instructions; (d) processing dividend and
distribution payments from the Trust on behalf of Clients; (e) providing
information periodically to Clients showing their positions in Shares; (f)
arranging for bank wires; (g) responding to Client inquiries relating to the
services performed by Service Organizations; (h) providing subaccounting
services with respect to Shares beneficially owned by Clients or the information
to the Trust necessary for subaccounting services; (i) preparing any necessary
tax reports or forms on behalf of Clients; (j) if required by law, forwarding
shareholder communications from the Funds (such as proxies, shareholder reports,
annual and semi-annual financial statements and dividend, distribution and tax
notices) to Clients; (k) assisting Clients in changing dividend options, account
designations and addresses; and (l) providing such other similar services as the
Trust may reasonably request to the extent the Service Organization is permitted
to do so under applicable statutes, rules or regulations.
SECTION 3. While this Plan is in effect, the Service Organization will
be paid for such shareholder servicing expenses that are incurred in connection
with Shares of the Fund on a monthly basis, at the annual rate of up to 0.25% of
each Fund's average daily net assets during such month. These monthly payments
may be amended or discontinued at any time by the Board, in its sole discretion.
SECTION 4. The monthly payments under this Plan shall be made in
accordance with, and subject to, the following conditions:
(a) if in any month a Fund does not expend the entire amount
then available under Sections 1, 2 and 3, and assuming that
no unpaid amounts have been carried forward and remain
unpaid under such Sections, then the amount not expended
shall be considered a credit and may be drawn upon from
month to month by the Fund to permit payment under Sections
1, 2 and 3 when necessary in the future;
(b) notwithstanding any provision of item (a) above, no
amounts payable or credit due pursuant to this Plan for any
fiscal year may be utilized as a credit beyond the end of
such
-1-
<PAGE>
year. In addition, any amount being carried forward during
any given year shall be extinguished in the event this Plan
is terminated in that year;
(c) payments made out of or charged against the assets of a
particular Fund must be in payment for shareholder servicing
expenses incurred on behalf of such Fund; and
(e) payments made pursuant to Sections 1, 2 and 3 must be
for the shareholder servicing expenses described therein.
Payments to a Service Organization under this Plan shall be subject to
compliance by the Service Organization with the terms of a shareholder service
agreement between the Service Organization and the Trust.
SECTION 5. For purposes of determining the amounts payable under this
Plan, the value of a Fund's net assets shall be computed in the manner specified
in the Fund's prospectus and statement of additional information as then in
effect for the computation of the value of the Fund's net assets.
SECTION 6. The Administrator shall provide the Board, at least
quarterly, with a written report of all amounts expended pursuant to this Plan.
The report shall state the purpose for which the amounts were expended.
SECTION 7. This Plan shall continue in full force and effect upon
approval and adoption by the Board and shall continue thereafter automatically
for successive annual periods provided such continuance is approved by a
majority of the Board, including a majority of the Trustees who are not
"interested persons" (as defined in the Investment Company Act of 1940, as
amended) of the Trust and who have no direct or indirect financial interest in
the operation of this Plan or in any agreements entered into in connection with
this Plan (the "Disinterested Trustees"), pursuant to a vote cast in person at a
meeting called for the purpose of voting on the continuance of the Plan. This
Plan may be amended at any time by the Board, provided that any material
amendments of the terms of this Plan shall become effective only upon the
approval by a majority of the Board and a majority of the Disinterested Trustees
pursuant to a vote cast in person at a meeting called for the purpose of voting
on the Plan. This Plan is terminable, as to any Fund, without penalty at any
time by the Board.
Dated: April 21 1997
-2-
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 100,000
<INVESTMENTS-AT-VALUE> 100,000
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 100,000
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 100,000
<SHARES-COMMON-STOCK> 20,000
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
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<NET-ASSETS> 100,000
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 20,000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
