As filed with the Securities and Exchange Commission on February 27, 1998
Securities Act File No. 333-12597
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. __ [ ]
POST-EFFECTIVE AMENDMENT NO. 1 [X]
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1940 [X]
AMENDMENT NO. 3 [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 following effective date.
It is proposed that this filing will become effective:
x immediately upon filing pursuant to paragraph (b)
o on (date) pursuant to paragraph (b)
o 60 days after filing pursuant to paragraph (a)(1)
o on (date) pursuant to paragraph (a)(1)
o 75 days after filing pursuant to paragraph (a)(2)
o on (date) pursuant to paragraph (a)(2), of Rule 485.
o This post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
Title of securities being registered: Shares of Beneficial Interest
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KHAN FUNDS
Form N-1A
Cross Reference Sheet
ITEM NO. ITEM LOCATION IN PROSPECTUS
PART A
1. Cover page Cover page
2. Synopsis Expense Table
3. Condensed Financial Information "Financial Highlights"
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"
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.
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KHAN GROWTH FUND
714 FM 1960 West, Suite 201
Houston, Texas 77090
Phone: 1-888-217-KHAN
Prospectus
February 27, 1998
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 FEBRUARY 27, 1998 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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INVESTMENT ADVISOR CUSTODIAN
KHAN INVESTMENT INC. STAR BANK
714 FM 1960 West, Suite 201 425 Walnut Street, M.L. 6118
Houston, Texas 77090 Cincinnati, Ohio 45202
TRANSFER AGENT AUDITORS
AMERICAN DATA SERVICES KPMG PEAT MARWICK LLP
P.O. Box 5536 700 Louisiana Street
Hauppauge, New York 11788-0123 Houston, Texas 77002
TABLE OF CONTENTS
PAGE
General Information.................................................. 3
Expenses............................................................. 3
Shareholder Transaction Expenses............................... 3
Annual Fund Operating Expenses................................. 3
Understanding Expenses......................................... 4
Financial Highlights................................................. 4
Investment Objectives, Policies And Techniques....................... 4
Investment Objectives.......................................... 4
Management Policies............................................ 4
Investment Techniques.......................................... 5
Risk Factors................................................... 7
Management........................................................... 9
The Advisor.................................................... 9
The Administrator.............................................. 10
Shareholder Service Plan....................................... 10
The Custodian and Transfer Agent............................... 10
Your Account......................................................... 10
Ways To Set Up Your Account.................................... 10
How to Sell Shares............................................. 13
Shareholder and Account Policies............................... 15
Dividends, Capital Gains, And Taxes.................................. 17
Understanding Distributions.................................... 17
Distribution Options........................................... 17
Taxes.......................................................... 17
Performance Information.............................................. 18
General Information.................................................. 18
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%
Administration expenses ..................................... 0.25%
Other expenses (after expense reimbursements)................ 1.00%
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Total operating expenses..................................... 2.00%
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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 Other expenses and Total operating
expenses before reimbursement at the annualized rate of 6.30% and 7.05% of
average net assets, respectively.
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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.
FINANCIAL HIGHLIGHTS
The following financial highlights have been audited by KPMG Peat Marwick
LLP with respect to the period from commencement of operations of the Fund
through December 31, 1997. They should be read in conjunction with the financial
statements in the Fund's 1997 Annual Report to Shareholders incorporated by
reference in the Statement of Additional Information.
Financial highlights are for a share of capital stock outstanding during
the period July 9, 1997 (date operations commenced) to December 31, 1997.
<TABLE>
<CAPTION>
<S> <C>
Net asset value, beginning of the period .................... $ 5.00
Income from investment operations:
Net investment income loss ............................... (0.01) (a)
Net realized and unrealized gain on investment ........... 0.19
Net asset value, end of period .............................. $ 5.18
Total return ................................................ 3.60 %(b)
Ratio of expenses to average net assets ..................... 2.00 %(c)(d)(e)
Ratio of net investment income loss to average net assets ... (0.25)%(d)(f)
Portfolio turnover rate ..................................... 18.81 %
=============
Average commission rate paid ................................ $ 0.02 (g)
=============
Net assets, end of period ................................... $ 1,149,652
=============
</TABLE>
(a) Calculated using averaged shares outstanding of 179,836.
(b) Total return is not annualized.
(c) After fee waivers and/or expenses reimbursements. Ratio of expenses
to average net assets prior to fee waivers and/or expense
reimbursement was 6.30%.
(d) Ratios are based an average net assets of $ 950,706.
(e) Annulized.
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(f) After fee waivers and/or expenses reimbursement, Ratio of net
investment loss to average assets prior to fee waivers and/or
expense reimbursement was 8.89% (annulized).
(g) The average commission rate paid is the total brockerage commision
paid on applicabe purchases and sales of securities for the period
divided by the total number of related shares purchased and sold.
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, 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 20% 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
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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.
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
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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.
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.
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OTHER INVESTMENT CONSIDERATIONS - The Fund's net asset value per share is not
fixed, and should be expected to fluctuate.
The Fund invests for long-term growth rather than short-term profits;
however, a limited amount of short-term trading can be expected in order to
maintain a flexible portfolio strategy. In addition, the possible need to
realize cash for redemption of Fund shares may make it necessary to sell
securities even though such sales would not otherwise be desirable from an
investment standpoint. Consequently, portfolio turnover may vary from year to
year, as well as within a year. Higher portfolio turnover rates are likely to
result in comparatively greater brokerage commissions than lower turnover rates.
Moreover, when extraordinary market conditions prevail, the Advisor's investment
strategy may shift rapidly, in which case higher turnover rates can be expected.
The amount of portfolio activity will not be a limiting factor when making
portfolio decisions. Under normal market conditions, the Fund's portfolio
turnover rate generally will be less than 100%. See "Portfolio Transactions" in
the Statement of Additional Information.
Investment decisions for the Fund are made independently from those of any
other accounts advised by the Advisor. However, if such other accounts are
prepared to invest in, or desire to dispose of, securities of the type in which
the Fund invests at the same time as the Fund, available investments or
opportunities for sales will be allocated equitably to each. In some cases, this
procedure may adversely affect the size of the position obtained for or disposed
of by the Fund or the price paid or received by the Fund. The Fund is newly
organized and has a limited 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 securities are located, the Fund may invest in
companies organized in any country. Investments in securities issued by the
governments of emerging
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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 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 limited 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
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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. For the period from commencement of Fund operations on July 9, 1997
through December 31, 1997, the Adviser received fees at the annual rate of 0.75%
of the Fund's average daily net assets.
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% (including management and administrative fees) 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.
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
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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.
* ROTH IRAS permit you to contribute up to $2,000 per year, even if you
are over 70 1/2, provided your adjusted gross income does not exceed
$110,000 for single taxpayers or $160,000 for joint filers. The $2,000
contribution limit is reduced by your contributions to all other IRAs.
Although contributions to a Roth IRA are not tax-deductible, both the
contributions and the earnings on them may be withdrawn tax-free if
certain requirements are met.
* 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.
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.
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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:
MAIL
TO OPEN AN ACCOUNT: TO ADD TO AN ACCOUNT:
Complete and sign the new Make your check or money order payable to
account application. Make your "Khan Funds". Put your account number on
check or money order payable to your check.
"Khan Funds".
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 If you did not elect the telephone
by phone. transaction option on your new account
application, complete the shareholder
You may establish the telephone options form to make investments by
transaction option when you open phone for amounts from $250 to $25,000.
an account by electing the option
on your new account application.
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<PAGE>
WIRE
TO OPEN AN ACCOUNT: TO ADD TO AN ACCOUNT:
Call 1-888-217-KHAN for Call 1-888-217-KHAN for
instructions on 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 Sign up for the Automatic
Investment Plan when you open Investment Plan on the shareholder
your account. The minimum options form or call for
initial investment will be instructions on how to add to your
$2,000. existing account.
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.
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<PAGE>
The following table summarizes the procedures for selling shares that you
own:
NOTE: SOME REDEMPTIONS REQUIRE SIGNATURE GUARANTEES. SEE PAGE 17.
MAIL
SPECIAL REQUIREMENTS
Individual Joint Owners, Sole The letter of instruction must be signed
Proprietorships, UGMA, UTMA by all persons required to sign for
account transactions (usually, all owners
of the account) exactly as their names
appear on the account
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.
SYSTEMATIC WITHDRAWL
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:
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<PAGE>
* 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.
* 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.
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<PAGE>
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.
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 the disposition of its investments.
The Fund's net 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.
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<PAGE>
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 net investment income and short-term
capital gain distributions are taxed as dividends; long-term capital gain
distributions are taxed as long-term capital gains. At the end of the year, the
Fund will send you and the IRS a statement, called a Form 1099, showing the
amount of each taxable distribution you received in the previous calendar year.
TAXES ON TRANSACTIONS - When you redeem shares you will recognize a capital gain
or loss if there is a difference between the price of your shares at the time
you bought them (cost) and the price of your shares when you sell them.
Whenever you sell shares of the Fund, you will receive a confirmation
statement showing how many shares you sold and at what price. You also will
receive a year-end statement every January. 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
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<PAGE>
through a hypothetical $1,000 investment at the beginning of the specified
period and the net asset value of such shares at the end of the period, assuming
reinvestment of all distributions. Investors should note that performance
results of the Fund will fluctuate over time, and that presentation of the
Fund's total return for any prior period should not be considered as a
representation of what an investor's total return may be in any future period.
In addition to standardized return information as required by the SEC,
performance advertisements and sale literature may also include other total
return performance data ("non-standardized return"). Non-standardized return may
be quoted for the same or different periods as those for which standardized
return is quoted and may consist of aggregate or average annual percentage rates
of return, actual year by year rates, or any combination thereof. All data
included in performance advertisements will reflect past performance and will
not necessarily be indicative of future results. The Fund may also advertise
relative rankings by mutual fund ranking services, such as Lipper Analytical
Services, Inc. or Morningstar, Inc. The investment return and principal value of
an investment in the Fund will fluctuate over time. Consequently, an investor's
proceeds upon redeeming Fund shares may be more or less than this original cost
of the shares.
GENERAL INFORMATION
The Fund was organized as a Delaware business trust on September 17, 1996.
The trustees have authority to issue an unlimited number of shares of beneficial
interest of separate series.
The Fund does not hold annual shareholder meetings. There normally will be
no meetings of shareholders to elect trustees unless fewer than a majority of
the trustees holding office have been elected by shareholders. Shareholders of
record holding at least two-thirds of the outstanding shares of the Fund may
remove a trustee by votes cast in person or by proxy at a meeting called for
that 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.
As of December 31, 1997, S.D. Khan beneficially owned an aggregate of
34.37% of the outstanding shares of the Fund and may be deemed to control the
Fund.
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.
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<PAGE>
KHAN FUNDS
STATEMENT OF ADDITIONAL INFORMATION
FOR
KHAN GROWTH FUND
FEBRUARY 27, 1998
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
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INVESTMENT OBJECTIVES AND POLICIES
The Fund is a mutual fund whose investment objective is long-term capital
appreciation consistent with the preservation of capital. The Fund seeks to
achieve its objective by investing principally in equity securities of large
capitalization issuers. Current income is a secondary objective of the Fund.
There can be no assurance that the investment objectives of the Fund will be
achieved.
INVESTMENT RESTRICTIONS
The Fund has adopted the following investment policies and restrictions in
addition to the policies and restrictions discussed in the Prospectus.
FUNDAMENTAL POLICIES - The fundamental policies and restrictions listed below
cannot be changed without approval by the holders of a "majority of the
outstanding voting securities" of the Fund (which is defined in the Investment
Company Act of 1940 (the "Investment Company Act") to mean the lesser of (i) 67%
of the shares represented at a meeting at which more than 50% of the outstanding
shares are represented or (ii) more than 50% of the outstanding shares. As a
matter of fundamental policy, the Fund is diversified: i.e., at least 75% of the
value of its total assets is represented by cash and cash items (including
receivables), U.S. Government securities, securities of other investment
companies, and other securities limited for the purposes of this calculation in
respect of any one issuer to an amount not greater than 5% of the value of the
total assets of the Fund and not more than 10% of the outstanding voting
securities of such issuer.
In addition, the Fund may not:
1. Issue senior securities, borrow money, or pledge its assets, except
that the Fund may borrow on an unsecured basis from banks for temporary or
emergency purposes or for the clearance of Fund transactions in amounts not
exceeding 10% of its total assets (not including the amount borrowed), provided
that it will not make investments while borrowings in excess of 5% of the value
of its total assets are outstanding;
2. Make short sales of securities or maintain a short position, except for
short sales against the box;
3. Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of Fund transactions;
4. Act as underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities in its
investment portfolio;
5. Invest 25% or more of its total assets, calculated at the time of
purchase and taken at market value, in any one industry (other than U.S.
Government securities), except that the Fund reserves the right to invest all of
its assets in shares of another investment company;
6. Purchase or sell real estate or interests in real estate or real estate
partnerships (although the Fund may purchase and sell securities which are
secured by real estate, securities of companies which invest or deal in real
estate, and securities issued by real estate investment trusts);
7. Purchase or sell commodities or commodity futures contracts, except
that the Fund may purchase and sell stock index futures contracts as described
in the Prospectus and in this Statement of Additional Information and to this
extent permitted under applicable federal and state laws and regulations;
8. Make loans, except for the purchase of debt securities consistent with
the investment objectives and policies of the Fund and except for repurchase
agreements;
9. Make investments for the purpose of exercising control or management;
10. Invest in oil and gas limited partnerships or oil, gas or mineral
leases.
OPERATING POLICIES - The Fund observes the following restrictions as a matter of
operating, but not
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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 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
24
<PAGE>
secondary market could make it difficult for the Fund to dispose of the variable
or floating rate instrument involved if the issuer of the instrument defaults on
its payment obligation or during periods in which the Fund is not entitled to
exercise its demand rights, and the Fund could, for these or other reasons,
suffer a loss to the extent of the default. Variable and floating rate
instruments may be secured by bank letters of credit.
MORTGAGE PASS-THROUGH SECURITIES - Interests in pools of mortgage-related
securities differ from other forms of debt securities, which normally provide
for periodic payment of interest in fixed amounts with principal payments at
maturity or specified call dates. Instead, these securities provide a monthly
payment which consists of both interest and principal payments. In effect, these
payments are a "pass-through" of the monthly payments made by the individual
borrowers on their residential mortgage loans, net of any fees paid to the
issuer or guarantor of such securities. Additional payments are caused by
repayments of principal resulting from the sale of the underlying residential
property, refinancing or foreclosure, net of fees or costs which may be
incurred. Some mortgage-related securities (such as securities issued by the
Government National Mortgage Association) are described as "modified
pass-throughs." These securities entitle the holder to receive all interest and
principal payments owed on the mortgage pool, net of certain fees, at the
scheduled payment dates regardless of whether or not the mortgagor actually
makes the payment.
The principal governmental guarantor of U.S. mortgage-related securities
is the Government National Mortgage Association ("GNMA"). GNMA is a wholly owned
United States Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the United States Government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks and mortgage bankers) and backed by pools of
mortgages insured by the Federal Housing Agency or guaranteed by the Veterans
Administration.
Government-related guarantors include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders and subject to general regulation by the Secretary of Housing and
Urban Development. FNMA purchases conventional residential mortgages not insured
or guaranteed by any government agency from a list of approved seller/servicers
which include state and federally chartered savings and loan associations,
mutual savings banks, commercial banks and credit 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
25
<PAGE>
extent that the proceeds from any sale of collateral upon a default in the
obligation to repurchase were less than the repurchase price, the purchaser
would suffer a loss. If the other party to the repurchase agreement petitions
for bankruptcy or otherwise becomes subject to bankruptcy or other liquidation
proceedings, there might be restrictions on the purchaser's ability to sell the
collateral and the purchaser could suffer a loss. However, with respect to
financial institutions whose bankruptcy or liquidation proceedings are subject
to the U.S. Bankruptcy Code, the Fund intends to comply with provisions under
such Code that would allow it immediately to resell the collateral.
WHEN-ISSUED SECURITIES - The Fund may from time to time purchase securities on a
"when-issued" basis. The price of such securities, which may be expressed in
yield terms, is fixed at the time the commitment to purchase is made, but
delivery and payment for when-issued securities take place at a later date.
Normally, the settlement date occurs within one month of the purchase; during
the period between purchase and settlement, no payment is made by the Fund to
the issuer and no interest accrues to the Fund. To the extent that assets of the
Fund are held in cash pending the settlement of a purchase of securities, the
Fund would earn no income. While when-issued securities may be sold prior to the
settlement date, the Fund intends to purchase such securities with the purpose
of actually acquiring them unless a sale appears desirable for investment
reasons. At the time the Fund makes the commitment to purchase a security on a
when-issued basis, it will record the transaction and reflect the value of the
security in determining its net asset value. The market value of when-issued
securities may be more or less than the purchase price. The Advisor does not
believe that a Fund's net asset value or income will be 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
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option position by closing it out in the secondary market at its current price
(i.e., by selling an option of the same series as the option purchased), if a
liquid secondary market exists.
The buyer of a typical put option can expect to realize a gain if security
prices fall substantially. However, if the underlying instrument's price does
not fall enough to offset the cost of purchasing the option, a put option buyer
can expect to suffer a loss (limited to the amount of the premium paid, plus
related transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price. A call option buyer typically attempts to participate in potential price
increases of the underlying instrument with risk limited to the cost of the
option if security prices fall. At the same time, the buyer can expect to suffer
a loss if the underlying prices do not rise sufficiently to offset the cost of
the option.
WRITING OPTIONS. When the Fund writes a call option, it takes the opposite side
of the transaction from the option's purchaser. In return for receipt of the
premium, the Fund assumes the obligation to sell or deliver the option's
underlying instrument, in return for the strike price, upon exercise of the
option. The Fund may seek to terminate its position in a call option it writes
before exercise by closing out the option 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.
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
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<PAGE>
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.
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.
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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.
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 55
Shahwar D. Khan*
14022 Champions Hamlet Ct., Houston Texas 77069 Trustee, Chief
Financial
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Treasurer, Khan Investment Inc. Officer and Secretart
Age 48
Shehzad D. Khan*
14022 Champions Hamlet Ct., Houston, Texas 77069 Trustee
Trainee Broker, Olde Discount Corporation
Age 24
Mushtaq R. Malik
6622 Gentle Bend, Houston, Texas 77069 Trustee
Senior Principal Engineer, Stone & Webster
Engineering Corp.
Age 56
Charles E. Moore
2504 Sand Shore Drive, Conroe, Texas 77304 Trustee
General Sales Manager, Landmark Chevrolet
Age 60
- ---------------
* Denotes "interested person" of the Trust as defined in the Investment
Company Act. Sardar A. D. Khan and Shahwar D. Kahn are married, and
Shehzad D. Khan is their son.
The Trust will pay a fee of $200 per meeting to the Trustees who are not
"interested persons" of the Fund, as that term is defined in the Investment
Company Act. These Trustees also receive a fee of $200 for any committee
meetings held on dates other than scheduled Board meeting dates, and are
reimbursed for any expenses incurred in attending Board or committee meetings.
The following table sets forth the estimated aggregate compensation which
will be paid by the Trust for its first full 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).
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
- ---- ------------ ---------------- --------------- ---------------
Mushtaq R. Malik $ 800 None N/A $ 800
Charles E. Moore $ 800 None N/A $ 800
ADVISORY AGREEMENT
Subject to the supervision of the Board of Trustees, investment management
and services are provided to the Fund by the Advisor, pursuant to an Investment
Advisory Agreement (the "Advisory Agreement"). Under the Advisory Agreement, the
Advisor provides a continuous investment program for the Fund and makes
decisions and places orders to buy, sell or hold particular securities. In
addition to the fees payable to the Advisor and the Administrator, the Fund is
responsible for its operating expenses, including: (i) interest and taxes; (ii)
brokerage commissions; (iii) insurance premiums; (iv) compensation and expenses
of Trustees other than those affiliated with the Advisor or the Administrator;
(v) legal and audit expenses; (vi) fees and expenses of the Custodian and any
shareholder service and transfer agents; (vii) fees and expenses for
registration or qualification of the Fund and its shares under federal and state
securities laws; (viii) expenses of preparing, printing and mailing reports and
notices and proxy materials to shareholders; (ix) other expenses incidental to
holding any shareholder meetings; (x) dues or assessments of or contributions to
the Investment Company Institute or any successor; (xi) such non-
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<PAGE>
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.
During the period from commencement of Fund operations on July 9, 1997
through December 31, 1997, the Advisor earned fees of $3,313.
Under the Advisory Agreement, the Advisor and its officers, directors,
agents, employees, controlling persons, shareholders and other affiliates will
not be liable to the Fund for any error of judgment by the Advisor or any loss
sustained by the Fund, except in the case of a breach of fiduciary duty with
respect to the receipt of compensation for services, (in which case any award of
damages will be limited as provided in the Investment Company Act) or of willful
misfeasance, bad faith, gross negligence or reckless disregard of duty. In
addition, the Fund will indemnify the Advisor and such other persons from any
such liability to the extent permitted by applicable law.
The Advisory Agreement with respect to the Fund will remain in effect for
two years from its execution. Thereafter, if not terminated, it will continue
automatically for successive annual periods, provided that such continuance is
specifically approved at least annually (i) by a majority vote of the Trustees
who are not parties to the Agreement or "interested persons" of the Fund as
defined in the Investment Company Act, cast in person at a meeting called for
the purpose of voting on such approval, or (ii) by vote of a majority of the
outstanding voting securities of the Fund.
The Advisory Agreement is terminable by vote of the Board of Trustees or
by the holders of a majority of the outstanding voting securities of the Fund at
any time without penalty, on 60 days written notice to the Advisor. The Advisory
Agreement also may be terminated by the Advisor on 60 days written notice to the
Fund. The Advisory Agreement terminates automatically upon its assignment (as
defined in the Investment Company Act).
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.
During the period from commencement of Fund operations on July 9, 1997
through December 31, 1997, the Administrator earned fees of $1,104. In
accordance with the Fund's expense limit, it reimbursed the Fund for expenses of
$ 40,917.
31
<PAGE>
FUND ACCOUNTING SERVICE AGREEMENT
American Data Services, Inc. ("ADS") provides fund accounting services to
the Fund pursuant 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").
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.
During the period from commencement of Fund operations on July 9, 1997
through December 31, 1997, no payments were made under the Shareholder Service
Plan.
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
32
<PAGE>
or more of such other client accounts. To the extent any of these client
accounts and the Fund seek to acquire the same security at the same time, the
Fund may not be able to acquire as large a portion of such security as it
desires, or it may have to pay a higher price or obtain a lower yield for such
security. Similarly, to the extent any such client accounts and the Fund seek to
sell the same security at the same time, the Fund may not be able to obtain as
high a price for, or as large an execution of, an order to sell any particular
security as would otherwise be the case. If one or more of such client accounts
simultaneously purchases or sells the same security that the Fund is purchasing
or selling, each day's transactions in such security will be allocated between
the Fund and all such client accounts in a manner deemed equitable by the
Advisor, taking into account the respective sizes of the accounts, the amount
being purchased or sold and other factors deemed relevant by the Advisor. In
some cases this system could have a detrimental effect on the price or value of
the security insofar as the Fund is concerned. In other cases, however, the
Advisor believes that the ability of the Fund to participate in volume
transactions may produce better executions for the Fund.
The Fund does not effect securities transactions through broker-dealers in
accordance with any formula, nor does it effect securities transactions through
such broker-dealers solely for selling shares of the Fund. However, as stated
above, broker-dealers who execute transactions for the Fund may from time to
time effect purchases of shares of the Fund for their customers.
During the period from commencement of Fund operations on July 9, 1997
through December 31, 1997, the Fund acquired no securities of its regular
brokers or dealers (as defined in Rule 10b-1 under the Investment Company Act)
or their parents. The Fund held no securities of such brokers or dealers as of
December 31, 1997. The aggregate amount of brokerage commissions paid by the
Fund during such period was $1,422.
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
33
<PAGE>
valued at fair value as determined in good faith by or under the direction of
the Board of Trustees. Such valuations and procedures, as well as any pricing
services, are reviewed periodically by the Board of Trustees.
REDEMPTIONS
The Fund intends to pay cash (U.S. dollars) for all shares redeemed, but,
under abnormal conditions which make payment in cash unwise, the Fund may make
payment partly in readily marketable securities with a current market value
equal to the redemption price. Although the Fund does not anticipate that it
will make any part of a redemption payment in securities, if such payment were
made, an investor may incur brokerage costs in converting such securities to
cash. The Fund has elected to be governed by the provisions of Rule 18f-1 under
the 1940 Act, which contains a formula for determining the minimum redemption
amounts that must be paid in cash.
TAXATION
The Fund intends to qualify for treatment as a regulated investment
company ("RIC") under Subchapter M of the Internal Revenue Code (the "Code"). In
each taxable year that the Fund qualifies, the Fund (but not its shareholders)
will be relieved of federal income tax on that part of its investment company
taxable income (consisting generally of interest and dividend income, net
short-term capital gain and net realized gains from currency transactions) and
net capital gain that is distributed to shareholders.
In order to qualify for treatment as 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) 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 (3) 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.
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
34
<PAGE>
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 periodicals including, but not limited
to, the Wall Street Journal, Money Magazine, Forbes, Business Week, Financial
World and Barron's.
FINANCIAL STATEMENTS
The Trust's 1997 Annual Report to Shareholders of the Fund accompanies this
Statement of Additional Information. The financial statements in such Annual
Report are incorporated in this Statement of Additional Information by
reference. Such financial statements have been audited by the Fund's independent
accountants, KPMG Peat Marwick LLP, whose report thereon appears in the Annual
Report and is incorporated herein by reference. Such financial statements have
been incorporated herein in reliance on such report given on their authority as
experts in accounting and auditing. Additional copies of the Fund's 1997 Annual
Report to Shareholders may be obtained at no charge by writing or telephoning
the Trust as the address or number on the front page of this Statement of
Additional Information.
35
<PAGE>
GENERAL INFORMATION
CAPITALIZATION
The capitalization of the Trust consists solely of an unlimited number
of shares of beneficial interest. The Board of Trustees has currently authorized
only one series of shares, the Khan Growth Fund. The Board of Trustees may
establish additional funds, with different investment objectives and policies,
and additional classes of shares, at any time in the future.
Expenses incurred by the Trust in connection with its organization are
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.
As of December 31, 1997, the following persons held of record more
than 5% of the outstanding shares of the Fund: Dr. and Mrs. S.D. Khan, 14022
Champions Hamlet Ct., Houston Texas (11.19%); S. Khan Pension Plan, 714 FM 1960
West, Suite 201, Houston, Texas (23.18%); Shehzad Khan, 14022 Champions Hamlet
Ct., Houston, Texas (7.04%); Faisal Khan, 14022 Champions Hamlet Ct., Houston,
Texas (18.36%); Edward E. Shubert, 17115 Red Oak Drive, #121, Houston, Texas
(5.19%).
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.
The Trust will dispense with annual meetings of shareholders in any
year in which it is not required to elect Trustees under the Investment Company
Act. However, the Trust undertakes to hold a special meeting of its shareholders
for the purpose of voting on the question of removal of a Trustee or Trustees if
requested in writing by the holders of at least 10% of the Trust's outstanding
voting securities, and to assist in communicating with other shareholders as
required by Section 16(c) of the Investment Company Act.
36
<PAGE>
PART C
OTHER INFORMATION
Item 24 Financial Statements and Exhibits
(a Financial Statements
Registrant's Statement of Assets and Liabilities as of December 31,
1997, Statement of Operations for the Period Ended December 31,
1997, Statement of Changes in Net Assets for the Period Ended
December 31, 1997, Notes to Financial Statements, Selected Per Share
Data and Ratios, and Auditor's Report dated February 20, 1998 are
incorporated by reference in Part B hereto.
(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 (b)
(6) Not Applicable
(7) Not Applicable
(8) Custody Agreement (b)
(9.1) Form of Administration Agreement (a)
(9.2) Form of Fund Accounting Service Agreement (b)
(9.3) Form of Transfer Agency and Service Agreement (b)
(10) Opinion and Consent of Counsel (b)
(11) Consent of Independent Accountants
(12) Not Applicable
(13) Investment Letters of Initial Investors (b)
(14) Individual Retirement Account Documents (b)
(15) Not Applicable
(16) Not Applicable
(17) Financial Data Schedule
(18) Not Applicable
(19.1) Powers of Attorney (a)
(19.2) Shareholder Service Plan (b)
(a) Filed as an Exhibit to the Registration Statement on September 25,
1996 and incorporated herein by reference.
(b) Filed as an Exhibit to Pre-Effective Amendment No. 2 on June 26,
1997 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 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 December 31, 1997, the Trust had 18 shareholders.
Item 27 Indemnification
37
<PAGE>
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 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, 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.
38
<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 2nd day of
February, 1998.
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 February 11, 1998
Executive Officer
/s/ SHEHZAD D. KHAN
Shehzad D. Khan, Trustee February 11, 1998
/s/ SHAHWAR D. KHAN
Shahwar D. Khan, Trustee and Principal Financial February 11, 1998
and Accounting Officer
/s/ CHARLES E. MOORE
Charles E. Moore, Trustee February 11, 1998
/s/ MUSHTAQ R. MALIK
Mushtaq R. Malik, Trustee February 11, 1998
*By /s/ S.A.D. KHAN
Sardar A.D. Khan
Attorney-in-Fact
<PAGE>
EXHIBIT INDEX
KHAN FUNDS
FORM N-1A REGISTRATION STATEMENT
POST-EFFECTIVE AMENDMENT NO. 1
EXHIBITS
(11) Consent of Independant Accountants
(17) Financial Data Schedule
EXHIBIT 11
Consent of Independent Accountants
The Board of Trustees and Shareholders
Khan Growth Fund:
We consent to the use of our report on the Khan Growth Fund dated January 24,
1998 included herein and to the reference to our firm under the headings
"Financial Highlights" in the prospectus and in the Financial Statement of
additional information.
KPMG Peat Marwick LLP
Houston, Texas
February 16, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 1,168,173
<INVESTMENTS-AT-VALUE> 1,176,862
<RECEIVABLES> 1,160
<ASSETS-OTHER> 48,196
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,226,228
<PAYABLE-FOR-SECURITIES> 26,556
<SENIOR-LONG-TERM-DEBT> 0
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</TABLE>
