THE KHAN GROWTH FUNDS
ANNUAL REPORT - DECEMBER 31, 1997
714 FM 1960 West , Suite 201
Houston TX 77090
Phone 1-888-217-KHAN
Dear Fellow Shareholders:
It gives us at the Khan Funds great pleasure to provide you with our 1997
annual report of Khan Growth Fund. Almost six months have passed since our date
of inception, July 9, 1997. It has been an interesting time for us investors,
especially in light of recent market events and activity. Since inception date,
we have experienced quite a volatile market. From July 9, 1997 till December 31,
1997 the Dow Jones Industrial Average increased by .84% and the total return of
Standard & Poor's 500 Composite Stock Price Index increased by 6.93%. during
this period the Khan Growth Fund produced a total return of 3.60%. Our return
has increased by investment in stocks such as Bristol Myers Squibb, Disney,
Pfizer, Federal National Mortgage Assn. and Ford Motor Co. but was adversely
affected because of poor performance of the Technology and Financial sector
stocks such as Motorola, Texas Instrument and HSBC Holding PLC ADR.
While the overall market performance has been shadowed by events in Asia
and the Pacific Rim economies, our investment strategy remains steadfast. We
have observed and are aware of the fluctuations in share prices of some of our
holdings. Our bottom line is this: we will not be concerned with day-to-day or
short time changes in the markets. We believe that after `the dust settles' in
the Asian markets, the companies with the strong fundamentals will continue to
appreciate. Furthermore, we at Khan funds strongly believe, that the exceptional
quality of the companies we invest in provide the best long-term defensive
investment your and our money can buy.
PORTFOLIO COMPOSITION
At the close of the year, the Fund had 3.89% of its net assets in short
term investments, and a larger proportion in the health care and capital goods
sectors. We will continue to invest in the companies with strong fundamentals,
as investment opportunities arise.
ECONOMIC OUTLOOK
With the increase in the interdependence of world economies, the U.S. is
being effected by market fluctuations around the world. With the advent of
deflation in Asia, a much more cautious view must be taken of the economy.
Deflation in Asia in the last six months has emerged as a risk for the entire
world economy. With Asia consuming nearly 30% of U.S. exports, the U.S. trade
balance will fall as the amounts of exports decrease. As a result, the U.S.
economy is expected to grow at about 2.5% in 1998, versus that of 3.7% in 1997.
Much of the deterioration of the U.S. trade balance is expected to occur being
in the first six months of 1998. Many companies may blame low earnings on the
Asian crisis, but in reality the U.S. economy, predominantly consumer spending,
will be slowing in 1998. Looking at sales in the last three months, the economy
seems to have already begun to slow down. With the uncertainties of the global
environment, many changes can easily occur. With the slight slowdown of the
economy, we believe that the Federal Reserve Bank may lower interest rates. They
seem to be pleased with the progress of the economy, rarely using policy to
alter economic growth. In this changing economy, we have and will continue to
adopt a cautious view on the marketplace while adhering to our original strategy
of long term capital growth.
INVESTMENT STRATEGY
The strategy of the Fund has been that of investing in larger
capitalization companies which we believe are undervalued yet still retain the
best growth potential. We will to continue to conduct extensive and thorough
fundamental and technical analysis of the holdings we invest in. Furthermore, a
great deal of importance is given to what we consider variable `factors' Such as
management styles, industry and sector dominance, and projection models.
Trust is the backbone of the Khan Growth Fund. Our commitment to you and
your financial commitment to us have created an undeniable interdependence. We
at Khan Funds take this trust very seriously, and will always have the highest
regard for our fellow shareholders. Finally, we feel that our investment in
higher quality companies should consistently produce higher returns as we look
forward into 1998 and beyond.
43
<PAGE>
FEBRUARY 24, 1998
THE OUTLOOK AND OPINION EXPRESSED ABOVE REPRESENT THE VIEW OF THE INVESTMENT
ADVISOR AS OF FEBRUARY 20, 1998, AND ARE SUBJECT TO CHANGE AS MARKET AND
ECONOMIC EVENTS UNFOLD.
KHAN GROWTH FUND vs. BENCHMARK INDEXES
The chart below compares your Fund to two benchmark indexes. It is intended to
give you a general idea how your Fund performed compared to the stock market
over the period 7/9/97 -12/31/97. It is important to understand the difference
between your Fund and an index. Your Fund's total return is shown with sales
charges and includes Fund expenses and management fees. An Index reflects the
reinvestment of income dividends and capital gains distributions, if any, but
does not reflect fees, brokerage commissions, or other expenses of investing.
COMPARATIVE INVESTMENT RETURNS SINCE INCEPTION
- ------------------------------ ---------------
The Growth Fund .......................................... 3.60%
S&P 500 Stock Index ...................................... 6.96%
Russell 1000 ............................................. 8.07%
[BAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
7/9/97 12/31/97
-------- --------
Russell 1000.............................................. 10,000 $ 10,807
Khan Growth Fund.......................................... 10,000 $ 10,360
S&P 500................................................... 10,000 $ 10,696
* INITIAL INVESTMENT $10,000.
* PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
The Standard & Poor's 500 Stock Index is a capitalization-weighted index of 500
stocks that attempts to measure performance of the broad domestic economy
through changes in the aggregate market value of 500 stocks representing major
industries. The Russell 1000 Index measures the performance of the 1,000 largest
companies in the Russell 3000 Index, which is comprised of the 3,000 largest
U.S. securities as measured by total market capitalization.
TOP TEN INDUSTRY SECTORS TOP TEN HOLDIONGS
- ------------------------ -----------------
HEALTHCARE 16.62% PFIZER 4.15%
CAPITAL GOODS 9.33% AMERICAN EXPRESS 3.11%
FOOD, BEVERAGES & TOBACCO 8.62% CHASE MANHATTAN BANK 3.57%
ENERGY 7.24% COMPAQ COMPUTER 3.07%
BANKS 7.44% DISNEY 3.02%
ELECTRONICS 6.04% ELI LILLY 3.03%
PERSONAL CARE 5.95% GENERAL ELECTRIC 3.99%
RETAIL 5.42% JOHNSON & JOHNSON 3.32%
COMPUTERS 5.79% MERCK CO. 3.19%
COMMUNICATION SERVICES 4.41% SBC COMMUNICATION 3.19%
44
<PAGE>
KHAN GROWTH FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SHARES MARKET VALUE
------ ------------
<S> <C> <C>
DOMESTIC COMMON STOCKS -- 97.39%
Airlines - 2.07% Delta Airline 200 $ 23,800
----------
Auto Related - 3.19% Chrysler 350 12,315
Ford 500 24,344
----------
36,659
Banks - 7.44% Bank of New York 200 11,563
Chase Manhattan 375 41,062
Citicorp 260 32,874
----------
85,499
----------
Basic Industries - 1.83% duPont (EI)
deNemours & Co. 350 21,022
----------
Capital Goods - 9.33% Allied Signal 250 9,734
Boeing 195 9,543
Caterpillar 360 17,483
General Electric 625 45,859
Minnesota Mining
Manufacturing 300 24,619
----------
107,238
----------
Communication Services - 4.41% Bell South 250 14,078
SBC Communication 500 36,625
----------
50,703
----------
Computers (hardware) - 5.79% Compaq 625 35,273
Hewlett-Packard 500 31,250
----------
66,523
----------
Computers (software &
Services) -2.36% Microsoft 210 27,143
----------
Electronics - 6.04% Intel 280 19,670
Motorola 400 22,825
Texas Instrument 600 27,000
----------
69,495
----------
Energy - 7.24% Chevron 260 20,020
Exxon 375 22,945
Mobil 280 20,213
Pennzoil 300 20,044
----------
83,222
----------
Financial - 4.32% American Express 400 35,700
Federal National
Mortg. Ass. 245 13,980
----------
49,680
Food, Beverages &
Tobacco - 8.62 % Coca-Cola 450 29,981
PepsiCo 400 14,575
Philip Morris 480 21,750
</TABLE>
45
<PAGE>
<TABLE>
<S> <C> <C>
McDonald's Corp 215 10,266
Saralee 400 22,525
-----------
99,097
-----------
Health Care - 16.62% Abbot Laboratories 310 20,324
Elli Lilly 500 34,813
Johnson & Johnson 580 38,208
Merck & Co. 345 36,656
Pfizer 640 47,720
Schering-Plough 215 13,357
-----------
191,078
-----------
Insurance - 1.82% Marsh & McLannan 280 20,877
-----------
Media & Entertainment 3.02% Walt Disney Co. 350 34,672
-----------
Personal Care - 5.95% Colgate Palmolive 250 18,375
Gillette 260 26,114
Proctor & Gamble 300 23,944
-----------
68,433
-----------
Publishing - 1.93% McGraw-Hill 300 22,200
-----------
Retail - 5.42% Home Depot 250 14,719
Walgreen Co. 700 21,963
Walmart Corp. 650 25,634
-----------
62,316
Total Domestic common stocks 1,119,657
-----------
FOREIGN STOCKS & OTHER EQUITY INTERESTS - 1.09%
Hong Kong - 1.09%
HSBC Holdings PLC ADR
(Banks-Maps Regional) 50 12,500
SHORT-TERM INVESTMENTS - 3.89%
Star Treasury 44,705
-----------
Total investments - 102.37% 1,176,862
Other assets less liabilities - (2.37) (27,210)
-----------
Net assets 100% $ 1,149,652
===========
</TABLE>
see accompanying notes to financial statements.
46
<PAGE>
KHAN GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
ASSETS:
Investment, at market value (cost $1,168,173) .................. $1,176,862
Dividends and interest receivable .............................. 1,160
Organization costs, net ........................................ 33,290
Reimbursement from advisor receivable .......................... 14,906
----------
Total assets ............................................ 1,226,228
----------
LIABILITIES:
Due to Khan Investment Inc. for organization cost .............. 36,818
Payable for investment securities purchased .................... 26,556
Accrued expenses ............................................... 13,192
----------
Total liabilities ....................................... 76,566
----------
Net assets applicable to shares outstanding .................... $1,149,652
----------
Shares outstanding ............................................. 221,854
----------
Net asset value, offering and redemption price per share ........ $ 5.18
==========
See accompanying notes to financial statements.
47
<PAGE>
KHAN GROWTH FUND
STATEMENT OF OPERATION
DECEMBER 31, 1998
For the period from July 9, 1997
(Date operations commenced)
to December 31, 1997
Investment income:
Dividends .............................................. $ 6,826
Interest ............................................... 872
--------
Total investment income ................................. 7,698
Expenses
Investment advisory fee ................................ 3,313
Administration fee ..................................... 1,104
Registration fee ....................................... 5,000
Custodial fee .......................................... 1,801
Prospectus and shareholder's reports ................... 5,000
Professional fees ...................................... 22,601
Director fees and expenses ............................ 1,200
Amortization of organization costs ...................... 3,528
Insurance fee .......................................... 999
Miscellaneous .......................................... 4,101
--------
Total expenses ......................................... 48,647
Reimbursed expenses ..................................... (39,813)
--------
Net expenses ............................................ 8,834
--------
Net investment loss ..................................... (1,136)
--------
Realized and unrealized gain on investments:
Net realized gain on sales of investment .............. 7,358
Net unrealized appreciation of investments ............ 8,689
--------
Net realized and unrealized gain on investments ....... 16,047
--------
Net increase in net assets resulting from operations .. $ 14,911
========
See accompanying notes to financial statements
48
<PAGE>
KHAN GROWTH FUND
STATEMENT OF CHANGES IN NET ASSETS
DECEMBER 31, 1998
For the period from July 9, 1997
(date operations commenced)
to December 31, 1997
Operations:
Net investment loss ................................ $ (1,136)
Net realized gain on investments ................... 7,358
-----------
Net unrealized appreciation on investments ......... 8,689
-----------
Net increase in net assets resulting from operations 14,911
Capital stock transactions; proceeds from shares sold . 1,134,741
-----------
Total increase in net assets .......................... 1,049,652
Net assets in beginning of period ..................... 100,000
-----------
Net assets at end of period ........................... $ 1,149,652
===========
Net assets consist of:
Paid-in capital ................................... $ 1,133,605
Accumulated net realized gain on sales of investments 7,358
Accumulated net unrealized appreciation of investments 8,689
-----------
Net assets ............................... $ 1,149,652
===========
See accompanying notes to financial statements.
49
<PAGE>
KHAN GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(1) SIGNIFICANT ACCOUNTING POLICIES
Khan Funds, (the Trust) is a business trust under the laws of Delaware
registered under the Investment Company Act of 1940, as amended (the "1940
Act") as an open-end management investment company. The Declaration of
Trust provides for the issuance of multiple series of shares, each
representing a diversified portfolio of investments with different
investment objectives, policies and restrictions. At December 31, 1997, the
only series issued by the Trust is the Khan Growth Fund. The Fund initial
sale of 20,000 shares for $100,000 was made just prior to the commencement
of the Fund's operation.
The Fund seeks long-term capital growth, consistent with the preservation
of capital, by investing primarily in the common stock of large
capitalization U.S. companies. Income is a secondary objective of the Fund.
Khan Investment, Inc. serves as the Fund's investment adviser.
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
A. SECURITY VALUATIONS - A security listed or traded on an exchange is
valued at the last sales price on the exchange where the security is
principally traded. Investments with maturities of 60 days or less are
valued on the basis of amortized cost which approximates market value.
B. SECURITIES TRANSACTIONS, INVESTMENT INCOME AND DISTRIBUTIONS
-Securities transactions are accounted for on a trade date basis.
Realized gains or losses are computed on the basis of specific
identification of the securities sold. Interest income is recorded as
earned from settlement date and is recorded on an accrual basis.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
C. FEDERAL INCOME TAXES -- The Fund intends to comply with the
requirements of the Internal Revenue Code necessary to qualify as a
regulated investment company and, as such, will not be subject to
federal income taxes on otherwise taxable income (including net
realized capital gains) which is distributed to shareholders.
Therefore, no provision for federal income taxes is recorded in the
financial statements.
(2) ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Fund has an investment advisory agreement with Khan Investment, Inc.
(the Advisor). Under the terms of the investment advisory agreement, the
Advisor has responsibility for supervising all aspects of the operations of
the Fund subject to the Trust's Board of Trustees (the Trustees). The
Advisor has agreed to ensure that assets of the Fund are invested in
accordance with the investment objectives and policies. For its services,
the Advisor receives an annual management fee, payable monthly, and
computed on the value of the net assets of the Fund as of the close of
business each business day, at the annual rate of 0.75% of such net assets
of the Fund. During the period ended December 31, 1997, the Advisor was
paid $3,313 for such services.
The Fund has an administrative services agreement (the Agreement) with the
Advisor. Under the terms of the Agreement, the Advisor provides all
administrative services necessary for the Fund's operations and is
responsible for the supervision of the Fund's other service providers. The
Advisor also assumes all ordinary, recurring expenses necessary in carrying
out the duties for the Fund, such as office space and facilities, and
equipment and clerical personnel. The Advisor shall also pay all
compensation of all
50
<PAGE>
Trustees, officers and employees of the Trust who are affiliated persons of
the Advisor. For these services, the Advisor receives an annual fee,
payable monthly , computed on the value of the net assets of the fund as of
the close of business each business day at an annual rate of 0.25% of 1% of
such assets of the Fund. During the period ended December 31, 1997, the
Advisor was paid $1,104 for such services.
The Fund has a shareholder service plan whereby the Trust pays securities
broker-dealers, retirement plan sponsors and administrators, and other
securities professionals and/or beneficial owners of shares of the Fund,
for expenses incurred in connection with non-distribution shareholder
services provided by them to shareholders, provided that such shareholder
servicing is not duplicative of the servicing otherwise provided on behalf
of the Fund. These expenses are limited to an annual rate of not more than
0.25% of the net assets of the Fund as of the close of business each
business day. As of December 31, 1997, the Fund has not made any payments.
All operating expenses of the Fund including those stated above are limited
to an annual rate of 2% of the net assets of the Fund as of the close of
business each business day.
(3) DIRECTORS' FEES AND EXPENSES
Directors' fees represent remuneration paid or accrued to each director who
is not an "interested person" of Khan Investment, Inc.
(4) INVESTMENT SECURITIES
The aggregate amount of investment securities (other than short-term
securities) purchased and sold by the Fund during the period ended December
31, 1997 was $1,201,847 and $78,379, respectively. The amount of unrealized
appreciation (depreciation) of investment securities, on a tax basis, as of
December 31, 1997 is as follows:
Aggregate unrealized appreciation of investment securities $ 61,660
Aggregate unrealized depreciation of investment securities (52,971)
--------
Net unrealized appreciation of investment securities ...... $ 8,689
========
Cost of investments for tax purposes is $1,168,173
(5) CAPITAL STOCK
Changes in the Fund's capital stock outstanding during the period ended
December 31, 1997 were as follows:
SHARES AMOUNT
-------- ----------
Sold ..................... 201,854 $1,034,741
-------- ----------
As of December 31, 1997 S. D. Khan and his family owned an aggregate of
34.37% of the outstanding shares of Of this Fund which may be deemed to
control the Fund.
(6) FINANCIAL HIGHLIGHTS
Shown below are the financial highlights 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)
=============
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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.
(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.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders
Khan Growth Fund:
We have audited the accompanying statement of assets and liabilities of Khan
Growth Fund, including the schedule of investments, as of December 31, 1997, and
the related statement of operations, the statement of changes in net assets and
the financial highlights for the period from July 9, 1997 (date operations
commenced) to December 31, 1997. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of December 31, 1997, by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Khan
Growth Fund as of December 31, 1997, and the results of its operations, changes
in its net assets and the financial highlights for the period from July 9, 1997
(date operations commenced) to December 31, 1997, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
January 24, 1998
52
