Khan Funds:
Khan Growth Fund
714 FM 1960 West #201
Houston, Texas 77090
(888) 311-KHAN
www.khanfunds.com
1999 Semi-Annual Report of the Khan Growth Fund
Investment Advisor: Custodian:
Khan Investment, Inc. Firstar, N.A.
714 FM 1960 West #201 425 Walnut Street, M.L. 6118
Houston, TX 77090 Cincinnati, OH 45202
Transfer Agent: Auditors:
American Data Services Tait, Weller & Baker
P.O. Box 5536 Eight Penn Center Plaza
Hauppauge, NY 11788-0123 Philadelphia, PA 19103
Dear Fellow Shareholders:
Once again, it gives us here at Khan Funds great pleasure to
provide you with our 1999 Semi-Annual report of the Khan Growth
Fund (the "Fund"). For the six months ending June 30, 1999 the
Khan Growth Fund produced a return of 5.98% versus that of the S &
P 500 return of 12.38%.
We attribute our return to a well-planned strategy and discipline
that only adheres to the long-term fundamentals of a company and
does not consider market trends and short-run fluctuations.
Instead a focus is placed on 3 to 5 year consistent growth in
company earnings. During the second quarter of 1999, there was
considerable volatility based on concerns over interest rates,
inflation and corporate earnings. These concerns adversely
affected the Fund's return, however by late August, many of the
lingering questions were resolved and the market seemed to
stabilize and regain its bullish momentum. During the first six
months of 1999, the Khan Growth Fund benefited from the growth in
the communication and technology sectors. In an effort to reduce
risk exposure, maintain a diversified portfolio and limit
volatility, the Fund's investment in aggressive internet related
technology was minimal, thereby reducing short-term gains to the
Fund, yet hedging against considerable losses in this extremely
volatile side of the market. Our commitment to more consistent,
well-established companies adversely affected our return over this
short six-month span, in which speculation took precedence over
consistent, quality investments. There was also considerable
weakness in the pharmaceutical, auto and computer hardware
industries. Our considerable investment in the pharmaceutical
sector, once considered to be some of the more stable and
predictable holdings in the portfolio, proved to be the weakest.
We believe this is a short-term trend, and we feel that our
continued investment into this sector will produce significant
growth opportunities. Our unwavering commitment to quality and
discipline to achieve our goals should continue to produce strong
returns, while limiting risk exposure.
PORTFOLIO COMPOSITION
By the end of the second quarter of 1999, the fund had 2.73% of its
net assets in short-term investments, the remaining in diversified
common stocks, with an emphasis on healthcare, telecommunication
services, technology and retail sectors. Though our primary focus
leans towards an investment in equities, a small percentage of
assets are kept liquid in order to take advantage of possible
market inefficiencies or opportunities.
ECONOMIC OUTLOOK - September 1999
Now that concerns regarding changes in interest rates by the
Federal Reserve are behind us, we can look for a decrease in the
volatility that has plagued the market in recent times. This
stability along with the substantial increase in cash being
invested into the stock market should pave the way for the DJIA
(Dow Jones Industrial Average) to finish the year around the 12,000
level.
Historically, when economic growth is strong, inflation tends
to afflict the markets. In 1999, with the economy growing
considerably faster than most had imagined, many felt the robust
growth would force businesses to increase wages, thereby fueling
inflation. However inflation has remained at around 2%, partly
because of continued weakness in commodity prices. As inflation
fears ease, interest rates should come down in the next year
fueling the growth-oriented companies, which are at the center of
the Fund's investment strategy.
The primary concern for 1999 was whether corporate profits
could achieve the growth required to sustain their valuations
within the market. The strong earnings reports of the large-cap
growth stocks has eased these concerns and overall profits should
continue to match or beat the forecasts. In years past, an
investment into a strong sector would be rewarding, yet with an
emphasis shifting towards earnings growth, only the best companies
within a sector should see substantial appreciation possibilities.
The market has shifted much of its emphasis from that of
speculation of growth to that of actual growth in cash flow and
earnings, a shift that should positively affect our fundamentally
sound companies. This will be a primary area of concern for the
internet sector. The growth in the internet has been phenomenal,
and is expected to grow to close to 10% of the Gross Domestic
Product (GDP) over the next decade. While this growth is
substantial, the market seems to be narrowing in terms of the
leaders of this industry. There is a rapid consolidation of power
within this industry, and the companies with the greatest cash flow
should continue their dominance. Then there are companies such as
AT&T, Sun Microsystems, Cisco Systems, Hewlett Packard and
International Business Machines that are silent players trying to
stake their claim to lead the information revolution into the next
millennium. The benefits of size and economies of scale allow
companies of this magnitude to utilize their cash flow to maintain
growth, whether through acquisitions or internal reinvestment.
The situation in the weakened pharmaceutical industry is strikingly
similar with smaller biotech firms being the prey. These
industries should lead the market into the next millennium along
with solid performances from the financial services,
telecommunications, utilities and retail sectors.
The resilience of the world economy is another positive signal
going into the year 2000 and beyond. In recent years, the U.S.
economy has been carrying the world financially, going back to
before the liquidity problems sent these economies plunging in
1998. With the stabilization of these economies, the large cap
U.S. companies can continue to utilize the foreign markets to
achieve the rapid growth required to sustain their current
valuations.
INVESTMENT STRATEGY
The strategy of the Fund is based on an investment in the common
stock of large-cap companies, which we believe provide value based
on consistent growth in earnings. 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
innovation, 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 will continue to invest in the Fund to understand
and live with the emotions caused by fluctuation in the market.
We believe that our investment strategy limits market speculation
and sensitivity. Furthermore, consistency is a goal we strive for
as we navigate into the millennium and beyond.
Sincerely,
S. D. Khan, M.D.
Chairman Khan Funds
The outlook and opinion expressed above represent the view of the
investment advisor as of August 26, 1999, 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 during the six months ended 6/30/1999.
It is important to understand the difference between your Fund
and an index. Your Fund's total return 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.
For the Six Months Ended June 30, 1999:
Khan Growth Fund = 5.98%
S&P 500 Return = 12.38%
Comparative Investment Returns June 30, 1999
* Initial investment $10,000.
* Past performance is no guarantee of future results.
The Standard & Poor's 500 Stock Index is a capitalization-weighed
index of 500 stocks that attempts to measure the performance of the
broad domestic economy through changes in the aggregate market
value of 500 stocks representing major industries.
Top Sectors Holdings
Healthcare 14.99%
Computer Software 10.35%
Communication Services 6.79%
Computer Hardware 6.72%
Retail 6.53%
Banks 6.31%
Telecommunication Equipment 6.30%
Food, Beverages & Tobacco 5.89%
Insurance 4.59%
Financial Services 4.26%
Top Ten Holdings
Cisco Systems, Inc. 4.95%
Dell Computer 4.65%
Microsoft Corp. 4.01%
Nokia Class A 3.96%
Pfizer, Inc. 3.93%
Citigroup Inc. 3.80%
Wal-Mart Stores, Inc. 3.76%
Johnson & Johnson 3.56%
MCI Worldcom 3.23%
Intel Corp. 3.02%
KHAN GROWTH FUND
SCHEDULE OF INVESTMENTS
June 30, 1999 (Unaudited)
Market
Shares Value
COMMON STOCKS (97.32%)
Auto Related (3.90%)
467 Daimler Chrysler AG * $ 41,505
279 Delphi Automotive 5,189
1,100 Ford Motor Co. 62,081
400 General Motor Co. 26,400
=======
135,175
Banks (6.31%)
300 BankAmerica Corp. 21,993
750 Chase Manhattan Bank Corp. 64,969
2,775 Citigroup, Inc. 131,813
=======
218,775
Capital Goods (3.83%)
925 General Electric Co. 104,525
300 Tyco International 28,425
=======
132,950
Communication Services (6.79%)
750 AT&T Corp. 41,859
500 BellSouth Corp. 23,438
1,300 MCI Worldcom, Inc. * 112,125
1,000 SBC Communications, Inc. 58,000
=======
235,422
Computer Hardware (6.72%)
4,360 Dell Computer Corp. * 161,320
200 Hewlett-Packard Corp. 20,100
400 IBM Corp. 51,700
=======
233,120
Computer Memory Services (1.59%)
1,000 EMC Corp. * 55,000
Computer Software (10.35%)
2,660 Cisco Systems, Inc. * 171,570
1,540 Microsoft Corp. * 138,888
700 Sun Microsystems, Inc. * 48,213
=======
358,671
Electronics (3.02%)
1,760 Intel Corp. 104,720
Energy (3.31%)
306 BP Amoco PLC $ 33,201
260 Chevron Corp. 24,749
375 Exxon Corp. 28,922
280 Mobil Corp. 27,720
=======
114,592
Financial Services (4.26%)
600 Associated First Capital 26,588
545 Fedrl Natl Mortgage Assoc 37,264
500 Merrill Lynch & Co. 39,969
400 Schwab Corp. 43,950
=======
147,771
Food, Beverages & Tobacco (5.89%)
950 Coca-Cola Co. 59,375
430 McDonalds Corp. 17,764
1,900 Pepsico, Inc. 73,506
1,330 Phillip Morris Co. 53,450
=======
204,095
Healthcare (14.99%)
1,120 Abbot Laboratories 50,960
400 American Home Products 23,000
800 Bristol Myers Squibb 56,350
1,260 Johnson & Johnson 123,480
1,090 Merck & Co., Inc. 80,660
1,240 Pfizer, Inc. 136,090
930 Schering Plough Corp. 49,290
=======
519,830
Insurance (4.59%)
500 American International Group 58,531
1 Berkshire Hathaway * 68,900
420 Marsh & McLennan Cos., Inc. 31,710
=======
159,141
Internet Software (2.55%)
800 America Online, Inc. * 88,400
Multimedia (1.06%)
500 Time Warner, Inc. 36,750
Personal Care (3.83%)
400 Estee Lauder Cos., Inc. $ 20,050
1,120 Gillette Co. 45,920
750 Proctor Gamble Co. 66,938
=======
132,908
Publishing (0.93%)
600 McGraw-Hill Cos., Inc. 32,362
Retail (6.53%)
450 GAP Stores 22,669
500 Home Depot, Inc. 32,219
1,400 Walgreen Co. 41,125
2,700 Wal-Mart Stores, Inc. 130,275
=======
226,288
Telecommunication Equipment (6.30%)
1,200 Lucent Technologies, Inc. 80,925
1,500 NOKIA Class A * 137,344
=======
218,269
Telecommunication Services (0.57%)
600 QWEST Communication Intl * 19,837
Total Common Stocks 97.32% (Cost $2,576,041) 3,374,076
SHORT-TERM INVESTMENTS (5.41%)
Market Value
187,761 Star Treasury Fund (Cost $187,761) 187,761
Total Investment Securities (Cost $2,763,802+) 102.73% 3,561,837
Liabilities in Excess of Other Assets (2.73%) (94,750)
======= =========
Net Assets 100.00% $3,467,087
+ Cost for federal income tax purposes is the same.
Net unrealized appreciation consist of:
Aggregate unrealized appreciation of investment securities $851,300
Aggregate unrealized depreciation of investment securities (53,265)
=========
Net unrealized appreciation of investment securities $798,035
* Denotes non-income producing securities
See accompanying notes to financial statements.
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1999 (Unaudited)
ASSETS
Investments, at market value (cost $2,763,802) $3,561,837
Dividends and interest receivable 1,982
Organization costs, net 22,283
Due from advisor 44,269
==========
Total assets 3,630,371
LIABILITIES
Due to advisor 36,818
Accrued expenses 38,341
Payable for securities purchased 88,125
==========
Total liabilities 163,284
==========
Net assets applicable to shares outstanding $3,467,087
Shares outstanding 477,183
Net asset value, offering and redemption price per share $7.27
NET ASSETS
At June 30, 1999, net assets consist of:
Paid-in capital $2,740,381
Accumulated net realized loss on investments (71,329)
Accumulated net unrealized appreciation of investments
798,035
==========
$3,467,087
See accompanying notes to financial statements.
STATEMENT OF OPERATIONS
Six Months Ended June 30, 1999 (Unaudited)
Investment income
Dividends (net of foreign taxes withheld of $218) $14,664
Interest 1,047
==========
Total investment income 15,711
Expenses
Investment advisory fee 11,250
Administration fee 3,750
Fund accounting expense 7,439
Transfer agent fees 5,951
Registration fee 2,480
Custodial fee 2,976
Prospectus and shareholders' reports 496
Professional fees 7,935
Directors fees and expenses 595
Insurance fee 496
Amortization of organization costs 3,649
Miscellaneous 7,440
==========
Total expenses 54,457
Less: reimbursed and waived expenses (24,455)
==========
Net expenses 30,002
==========
Net investment loss (14,291)
==========
Realized and unrealized gain (loss) on investments:
Net realized loss on sales of investments (33,311)
Net change in unrealized appreciation of investments 225,222
==========
Net realized and unrealized gain on investments 191,911
==========
Net increase in net assets resulting from operations $177,620
See accompanying notes to financial statements.
STATEMENT OF CHANGES IN NET ASSETS
Six Months
Ended June 30, Year Ended
1999(Unaudited) December 31,1998
Operations
Net investment loss $(14,291) $(10,630)
Net realized loss on investments (33,311) (38,018)
========== ==========
Net change in unrealized appreciation invstmts
225,222 564,124
Net inc. net assets resulting from operations
177,620 515,476
Distributions to shareholders
From capital gain
($.00 and $.03 per share, respectively) - (7,983)
Net capital share transactions (Note 5) 696,656 935,666
========== ==========
Total increase in net assets
874,276 1,443,159
Net assets
Beginning of period 2,592,811 1,149,652
========== ==========
End of period $3,467,087 $2,592,811
See accompanying notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999 (Unaudited)
(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, 1999,
the only series issued by the Trust is the Khan Growth Fund
(the "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 advisor.
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.
D.Deferred Organization Costs - The Fund has incurred expenses
of $36,818 in connection with the organization. These costs
have been deferred and are being amortized on a straight line
basis over a period of sixty months from the date the Fund
commenced operations.
E.Use of Estimates - 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, as well as the reported
amounts of income and expenses during the reported period.
Actual results could differ from those estimates.
NOTES TO FINANCIAL STATEMENTS - (Continued)
June 30, 1999 (Unaudited)
(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 six months ended June 30, 1999, the
Advisor was paid $11,250 for such services. The Advisor has
voluntarily agreed to waive all of their fees and reimburse
fund expense in order to limit operating expenses to an annual
rate of 2% of the net assets of the Fund. Fee waivers and
expense reimbursements are voluntary and may be terminated at
anytime.
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 six months ended June 30, 1999, the Advisor
was paid $3,750 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, 1999, the Fund has not made any payments.
(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
Purchases of securities and proceeds from sales of securities
(other than short-term securities) during the six months ended
June 30, 1999 were $887,901 and $290,649, respectively.
NOTES TO FINANCIAL STATEMENTS - (Continued)
June 30, 1999 (Unaudited)
(5) CAPITAL STOCK
Changes in the Fund's capital stock outstanding for the periods
ended June 30, 1999 and December 31, 1998 were as follows:
Six Months Ended
June 30, 1999 Year Ended
(Unaudited) December 31, 1998
Shares Amount Shares Amount
Shares sold 101,178 $711,668 154,870 $927,800
Shares issued in reinvst of dividends - - 1,416 7,983
Shares redeemed (2,114) (15,012) (21) (117)
Net increase 99,064 $696,656 156,265 $935,666
As of June 30, 1999, S.D. Khan and his family owned an
aggregate of 52.5% of the outstanding shares of this Fund
which may be deemed to control the Fund.
NOTES TO FINANCIAL STATEMENTS - (Continued)
June 30, 1999 (Unaudited)
(6) FINANCIAL HIGHLIGHTS
Shown below are the financial highlights for a share
outstanding throughout each period.
Six Months
Ended July 9, 1997**
June 30, Year Ended To
1999 December 31, December,
(Unaudited) 1998 1997
Net asset value, beg. the period $6.86 $5.18 $5.00
Income from investment operations:
Net investment loss (0.03) (0.02) (0.01)(a)
Net gain on securities
(both realized and unrealized) 0.44 1.73 0.19
========== ========== ========
Total from invstmt operations 0.41 1.71 0.18
Less distributions:
Distributions from capital gains - (0.03) -
Total distributions - (0.03) -
Net asset value, end of period $7.27 $6.86 $5.18
Total return 5.98%(b) 33.21% 3.60%(b)
Ratios/Supplement Data:
Net assets,end of period (000's omtd) $3,467 $2,593 $1,150
Ratio of expenses to average net assets:
Before fee waivers and reimbursements 3.62%* 5.38% 6.30%*
After fee waivers and reimbursements 2.00%* 2.00% 2.00%*
Ratio of net investment loss to average net assets:
Before fee waivers and reimbursements (2.57)%* (4.00)% (8.89)%*
After fee waivers and reimbursements (0.95)%* (0.62)% (0.25)%*
Portfolio turnover rate 9.71% 31.21% 18.81%
Financial Foot Notes:
(a) Calculated using average shares outstanding
(b) Not annualized
* Annualized
** Commencement of operations
For More Information:
Khan Growth Fund
714 FM 1960 West #201
Houston, Texas 77090
(888) 311-KHAN
Investment Advisor:
Khan Investment, Inc.
714 FM 1960 West #201
Houston, Texas 77090
Custodian:
Firstar, N.A.
425 Walnut Street, M.L. 6118
Cincinnati, Ohio 45202
Transfer Agent:
American Data Services
P.O. Box 5536
Hauppauge, New York 11788-0123
Auditors:
Tait, Weller & Baker
Eight Penn Center Plaza
Philadelphia, PA 19103
To Obtain Information:
BY TELEPHONE:
Call 1-888-311-KHAN
BY MAIL Write to:
Khan Growth Fund
714 FM 1960 West #201
Houston, Texas 77090
BY E-MAIL send your request to [email protected]
ON THE INTERNET Information can be viewed online from:
http://www.khanfunds.com
