KHAN FUNDS
KHAN GROWTH FUND
SEPTEMBER 14, 1998
SEMI-ANNUAL REPORT AMENDMENT
INVESTMENT ADVISOR CUSTODIAN
Khan Investment Inc. Star Bank
714 FM 1960 West, Suite 201 425 Walnut Street, M.L. 6118
Houston, TX 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
Dear Fellow Shareholders:
As always it gives us here at Khan Funds great pleasure to provide you
with our 1998 Semi-Annual report of the Khan Growth Fund. It is with excitement
and enthusiasm that we desire to address our performance this past six months,
possible upcoming economic concerns, and our investment direction for the next
six months. For the period ending June 30th of 1998, the Khan Growth Fund has
had a year to date return of 19.8%. Which compares with the Standard & Poor's
500 index return of 17.71%. Since the inception of the Khan Growth Fund on July
9th of 1997 the total investment return is 24.8% as compared to Standard &
Poor's 500 index total return of 27.6%.
Our performance this year has been strong primarily due to participation
in the rise of the health care sector. We at Khan Funds have and will continue
to focus our attentions on this side of the market, and, we believe, our
long-term investment in Bristol Myers Squibb, Pfizer and Merck will continue to
increase shareholder wealth in the next upcoming quarters. Furthermore we
enjoyed robust gains from our investment in General Electric, Berkshire
Hathaway, Chrysler and Microsoft. As we had predicted, both the first and second
quarters of the year were marred by the weakened markets in Asia and concerns
over technology issues. While companies heavily exposed to these foreign markets
were affected, our defensive strategy in primarily quality domestic offerings
has and should ultimately continue to produce returns to our shareholders while
reducing risk.
PORTFOLIO COMPOSITION
Since the beginning of 1998, the fund had 2.32% of its net assets in short
term investments, the remaining in diversified common stocks, with an emphasis
in the healthcare and capital goods sectors. Though our primary focus leans
towards a long-term investment in equities, a fair percentage of assets are kept
liquid in order to take advantage of possible market inefficiencies or
opportunities.
ECONOMIC OUTLOOK
The resilience of the U.S. economy was shown in the last six months when
in spite of a dwindling Asian economy and expected slowdown in consumer
spending, the GDP rose 5.4% in the first quarter alone. Because of the robust
growth in the first half of 1998, GDP growth should slow to a gain of 1.5% over
the next two quarters. Corporate profits should continue to be strong, yet
revenue growth may slow to more sustainable levels. The Federal Reserve Bank
still seems reluctant to increase interest rates, showing their confidence in
the growth experienced by the U.S. economy. The prospect of low inflation,
declining interest rates, a balanced budget and sound monetary policy by the
Federal Reserve has created an essential mechanism for the economy to continue
to excel. With the eventual stabilization of U.S. and World economies, the
strategy of the Khan Growth Fund will remain steadfast in its focus and
directives.
INVESTMENT STRATEGY
The strategy of the Fund has been that of investing in the common stock of
large capitalization companies, which we believe provide value based on growth
of future operating cash flow. We will continue to conduct extensive analysis of
the underlying fundamentals of the company, while using technical analysis to
take advantage of market inefficiencies. Finally, variable factors such as
management performance, consumer trends, industry and sector dominance, and
projection models are used to establish the continued investment worthiness of
Khan Growth Fund holdings.
Here at Khan Funds, our most important asset is you, our shareholders.
Through our mutual trust and dependence, we strive for conviction from both
ourselves and from you in our investment philosophy. We look forward to what
lies ahead in our financial futures and together strive for excellence. The
management of the Khan Growth Fund intentionally invests in the fund. We believe
that our investment into large quality companies limits market speculation and
sensitivity. Furthermore, consistency is a goal we strive for as we look to the
next half of 1998 and beyond.
Sincerely,
<PAGE>
S. D. Khan
Chairman Khan Funds
THE OUTLOOK AND OPINION EXPRESSED ABOVE REPRESENT THE VIEW OF THE INVESTMENT
ADVISOR AS OF AUGUST 11, 1998, AND ARE SUBJECT TO CHANGE AS MARKET AND ECONOMIC
EVENTS UNFOLD..
KHAN GROWTH FUND VS. BENCHMARK INDEX
The chart below compares your Fund to a benchmark index. It is intended to give
you a general idea how your Fund performed compared to the stock market over the
period 12/31/98 -6/30/98. 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 investment 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 DECEMBER 31, 1997 TILL JUNE 30, 1998
- --------------------------------------------------------------------------------
(GRAPH)
Khan Growth Fund $11,980
Standard and Poor's 500 Index $11,771
* INITIAL INVESTMENT $10,000.
* PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
o The Standard & Poor's 500 Stock Index is a capitalization-weighed 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.
TOP TEN INDUSTRY SECTORS TOP TEN HOLDIONGS
- ------------------------ -----------------
HEALTHCARE 18.3% BERKSHIRE HATHAWAY CL. A 4.75%
CAPITAL GOODS 8.6% PFIZER 4.22%
PERSONAL CARE 7.45% GILLETTE INC. 3.85%
ENERGY 6.75% GENERAL ELECTRIC 3.45%
BANKS 6.53% MICROSOFT 3.42%
RETAIL 6.19% MERCK & CO. 2.80%
INSURANCE 6.29% PROCTOR & GAMBLE 2.76%
ELECTRONICS 5.61% SBC COMMUNICATIONS 2.42%
FOOD, BEVERAGES & JOHNSON & JOHNSON 2.59%
TOBACCO 5.38% WAL-MART 2.39%
AUTO 5.32%
KHAN GROWTH FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 1998
SHARES MARKET VALUE
------ ------------
STOCKS -- 97.75%
----------------
Auto Related - 5.32 Chrysler 350 19,731
Ford 700 41,300
General Motor 400 26,725
-------
87,756
Banks - 6.53% Chase Manhattan 750 56,625
Citicorp 260 38,805
HSBC Holdings ADR 50 12,300
-------
107,730
Basic Industries - 1.58% DuPont (EI)
deNemours & Co. 350 26,119
-------
26,119
Capital Goods - 8.6% Allied Signal 250 11,094
2
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Boeing 195 8,690
Caterpillar 360 19,035
General Electric 625 56,875
Minnesota Mining
Manufacturing 300 24,656
Rockwell International 450 21,628
-------
141,978
Communication Services 3.44% Bell South 250 16,781
SBC Communication 1000 40,000
-------
56,781
Computers (hardware) - 3.96% Compaq 1,250 35,469
Hewlett-Packard 500 29,937
-------
65,406
Computers 3.96%
(Software & Services) -3.42% Microsoft 520 56,355
-------
56,355
Electronics - 5.61% Cisco System 400 36,825
Intel 280 20,755
Texas Instrument 600 34,987
-------
92,567
Energy - 8.56% British Petroleum 300 26,475
Chevron 260 21,596
Exxon 375 26,742
Mobil 280 21,455
Pennzoil 300 15,187
-------
111,456
Financial - 2.01% Federal National
Mortg. Ass. 545 33,108
-------
33,108
Food, Beverages &
Tobacco - 5.38% Coca-Cola 450 38,475
McDonald's Corp 215 14,835
Nestle SA-Spons ADR 200 21,350
PepsiCo 400 16,475
Philip Morris 480 18,900
-------
110,035
Health Care - 18.3% Abbot Laboratories 620 25,342
Am. Home product 400 22,700
Bristol Myers Squibb 400 45,975
Elli Lilly 200 13,212
Johnson & Johnson 580 42,775
Merck & Co. 345 46,143
Pfizer 640 69,560
Roche Holdings ADR 180 17,685
Schering-Plough 215 19,699
-------
301,093
Insurance - 6.29% Berkshire Hathaway Cl. A 1 78,305
Marsh & McLennan 420 25,384
-------
103,689
Media & Entertainment 4.01% Walt Disney Co. 350 36,772
& Photography Eastman Kodak 220 16,074
-------
52,845
Personal Care - 4.66% Estee Lauder 200 13,937
Gillette 1120 63,490
3
<PAGE>
Proctor & Gamble 500 45,531
-------
122,98
Publishing - 2.93% McGraw-Hill 300 24,469
News Corp. Ltd. 500 16,062
-------
40,531
Retail - 6.19% Home Depot 250 20,765
May Dept. Store 200 13,100
Walgreen Co. 700 28,919
Wal-Mart Corp. 650 39,487
-------
102,27
Total Domestic common stocks (Cost $1,364,177) 22,636 1,612,681
SHORT-TERM INVESTMENTS - 2.32%
Star Treasury 38,325
-------
Total investments - 100.07% 1,651,007
Other assets less liabilities -(0.07%) (1,164)
Net assets 100% $ 1,649,843
KHAN GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998
ASSETS:
- -------
Investment, at market value (cost $1,402,502) $ 1,651,007
Dividends and interest receivable 1,311
Organization costs, net 29,641
Reimbursement from advisor receivable 51,451
-------
Total assets 1,733,410
LIABILITIES:
- ------------
Due to Khan Investment Inc. for organization cost 36,818
Accrued expenses 46,749
------
Total liabilities 83,567
Net assets applicable to shares outstanding $1,649,843
Shares outstanding 267,324
Net asset value, offering and redemption price per
share $6.17
*See accompanying notes to financial statements.
KHAN GROWTH FUND
STATEMENT OF OPERATION
JUNE 30, 1998
Investment income:
Dividends $ 9,360
Interest 515
---
Total investment income 9,875
Expenses
Investment advisory fee 5,168
Administration fee 1,723
Registration fee 5,171
Custodial fee 1,862
Prospectus and shareholder's reports 5,171
Professional fees 23,376
Director fees and expenses 1,242
Amortization of organization costs 3,649
Insurance fee 1,034
Miscellaneous 15,945
------
4
<PAGE>
Total expenses 64,341
Reimbursed expenses (50,560)
-------
Net expenses 13,781
-------
Net investment loss (3,906)
Realized and unrealized gain on investments:
Net realized gain on sales of investment 10,575
Net unrealized appreciation of investments 239,816
-------
Net realized and unrealized gain on investments 250,391
Net increase in net assets resulting from operations 246,485
See accompanying notes to financial statements
KHAN GROWTH FUND
STATEMENT OF CHANGES IN NET ASSETS
FOR SIX MONTHS ENDED JUNE 30, 1998
Operations:
Net investment loss $ (3,906)
Net realized gain on investments 10,575
Net unrealized appreciation on investments 239,816
-------
Net increase in net assets resulting from
operations 246,485
Dividends paid to Shareholders (7,983)
Capital gains (0.03 per share short term) (7,983)
Net Capital Share Transactions (Notes) 261,689
-------
Total increase in net assets 500,191
Net assets in beginning of period 1,149,652
---------
Net assets at end of period $ 1,649,843
---------
Net assets consist of:
Paid-in capital $ 1,396,431
Accumulated net investment income(loss) (5,043)
Accumulated net realized gain on sales of
investments 9,950
Accumulated net unrealized appreciation of
investments 248,505
-------
Net assets $1,649,843
---------
See accompanying notes to financial statements.
KHAN GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
(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. As of June 30 1998, the
only series issued by the Trust is the Khan Growth Fund.
The Fund seeks long-term capital growth, consistent with the preservation
of capital, by investing primarily in the common stock of large
capitalization 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.
5
<PAGE>
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 June 30, 1998, the Advisor was paid
$5,168. 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 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 June 30
1998, the Advisor was paid $1,723. 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 June 30, 1998, 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 June 30
1998 was $509,873 and $279,738 respectively. The amount of unrealized
appreciation (depreciation) of investment securities, on a tax basis, as of
June 30 1998 is as follows:
Aggregate unrealized appreciation of investment securities $ 288,862
Aggregate unrealized depreciation of investment securities (40,357)
------
Net unrealized appreciation of investment securities $ 248,505
=========
Cost of investments for tax purposes is $1,402,502
(5) CAPITAL STOCK
Changes in the Fund's capital stock outstanding during the period ended
June 30 1998 were as follows:
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
6
<PAGE>
Shares sold 44,054 253,706 201,854 1,034,741
Shares issued for reinvestment
dividends and distribution
distribution of capital gains 1,415 7,983
Shares redeemed 0 0 0 0
Net increase 45,469 261,689 201,854 1,034,741
As of June 30 1998 S. D. Khan and his family owned an aggregate of 66.38% of
the outstanding shares 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 January 1, 1998 to June 30 1998.
Net asset value, beginning of the period 5.18
Income from investment operations:
Net investment income loss (0.01) (a)
Net realized and unrealized gain on investment 1.03 (a)
Dividend paid (.03)
Net asset value, end of period $ 6.17
====
Total return 43.98% (e)
=====
Ratio of expenses to average net assets 2.00% (c)(d)(e)
=====
Ratio of net investment income loss to average
net assets (0.57%)(d)(e)(f)
====
Portfolio turnover rate 20.49%
=====
Average commission rate paid $ 0.0805 (g)
========
Net assets, end of period $ 1,664,553
=========
Financial Foot Notes:
(a) Calculated using averaged shares outstanding of 242,173.
(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 9.34% annualized.
(d) Ratios are based an average net assets of $ 1,389,482
(e) Annualized.
(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 7.90% (annualized).
(g) The average commission rate paid is the total brokerage commission
paid on applicable purchases and sales of securities for the period
divided by the total number of related shares purchased and sold.
7