KHAN GROWTH FUND
February 28, 1999
INVESTMENT ADVISOR
Khan Investment Inc.
714 FM 1960 West, Suite 201
Houston, Texas 77090
CUSTODIAN
Star Bank
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
810 Center Suite 800
Philadelphia PA 19103
Table of Contents
Page
General Information ...................................
Investment Objectives, Policies And Techniques.........
Main Risk .............................................
Past Performance ......................................
Expenses ...............................................
Shareholder Transaction Expenses ..................
Annual Fund Operating Expenses ....................
Understanding Expenses ............................
Management ............................................
The Advisor ......................................
The Administrator .................................
Shareholder Service Plan ..........................
The Custodian and Transfer Agent ..................
Financial Highlights....................................
Your Account ...........................................
Ways To Set Up Your Account .......................
How to buy the shares .............................
How to Sell Shares ................................
Shareholder and Account Policies .................
Dividends, Capital Gains, And Taxes ...................
Understanding Distributions ......................
Distribution Options ..............................
Taxes ............................................
General Information ..................................
MINIMUM INVESTMENT
To open an account $2,000
To add to an account $250
KHAN GROWTH FUND
714 FM 1960 West, Suite 201
Houston, Texas 77090
Phone: 1-888-217-KHAN
Prospectus February 28, 1999
This Prospectus offers shares of the Khan Growth Fund (the
"Fund"), a portfolio or series of Khan Funds, an open-end management
investment company which was formed under Delaware Law on September 17,
1996 as a business trust (the "Trust"). 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.
Investment Objectives and Techniques
The Fund seeks long-term capital growth, consistent with the
preservation of capital, by investing at least 80% of its net assets in
the common stock of large capitalization companies (i.e., companies
having a market capitalization exceeding $ 1 billion). These
established companies have demonstrated sustained patterns of
profitability, strong balance sheets and have potential to achieve
predictable, above-average earnings growth. Current income is a
secondary objective of the Fund. Khan Investment Inc. serves as an
investment advisor to the Fund.
The Fund identifies economic sectors which it believes will expand and
then by utilizing extensive fundamental analysis identifies the
companies with dominance in that sector. The Fund looks for established
growth companies with sustained and relatively predictable above
average earnings. The Fund also identifies undervalued companies which
have lagged current market levels.
The Fund usually employs a "buy-and-hold" strategy, which results in
reduced turn over and sells when there is fundamental change in
company's business or when stock values do not appreciate as expected
by the Advisor. This strategy reduces trading costs and minimizes tax
liability by limiting the distribution of capital gains.
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.
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.
MAIN RISKS
While stocks have historically been a leading choice of long-term
investors, they do fluctuate in price. The value of your investment in
the fund will go up and down, which means that you could lose money.
Because different types of stocks tend to shift in and out of favor
depending on market and economic conditions, the fund's performance may
sometimes be lower or higher than that of other types of funds (such as
those emphasizing smaller companies). Moreover, since the fund holds
large positions in a relatively small number of stocks, it can be
volatile when the large capitalization sector of the market is out of
favor with investors.
Growth companies are expected to increase their earnings at a certain
rate. When these expectations are not met, investors can punish the
stocks inordinately--even if earnings showed an absolute increase. In
addition, growth stocks typically lack the dividend yield that can
cushion stock prices in market downturns.
Under adverse market conditions, the fund could invest some or all of
its assets in money market securities. Although the fund would do this
only in seeking to avoid losses, it could have the effect of reducing
the benefit from any upswing in the market.
The fund may invest some assets in options and foreign currencies.
These practices are used primarily to hedge the fund's portfolio but
may, in the case of options, be used to increase returns; however,
there is the risk that such practices sometimes may reduce returns or
increase volatility.
YEAR 2000 ISSUES: the fund could be adversely affected if the computer
systems used by the Fund its other service providers do not properly
process and calculate date-related information from and after January
1, 2000.
While year 2000-related computer problems could have a negative effect
on the fund, Fund is working to avoid such problems and to obtain
assurances from its service providers that they are taking similar
steps.
PAST PERFORMANCE
The tables below show the fund's annual returns and its performance
since its inception (i.e. July 9, 1997). It also shows how it compared
with S&P (reg. Tm) - a widely recognized unmanaged index of stock
performance. The table assume reinvestment of dividends and
distributions. As with all mutual funds, the past is not a prediction
of the future.
Year-by-year total return as of December 31 each year (%)
1998 1997(July 9, 1997 thru 12/31/97)
Fund 33.21% 3.6%
S&P500 28.58% 6.9%
Best Quarter Q4'98 +23.6%
Worst quarter Q3'98 -10.0%
Average annual return as of 12/31/1998
Fund ............... 24.28%
S&P 500 ........... 24.63%
What this fund is -- and isn't
This fund is a mutual fund: a pooled investment that is professionally
managed and gives you the opportunity to participate in financial
markets. It strives to reach its stated goal, although as with all
mutual funds, it cannot offer guaranteed results.
An investment in this fund is not a bank deposit. It is not insured or
guaranteed by the FDIC or any other government agency. It is not a
complete investment program. You could lose money in this fund, but you
also have the potential to make money.
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 redemption............ 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%
Total operating expenses ......................... 2.00%
Khan Investment Inc. has agreed to reimburse the Fund for any
ordinary operating expenses in excess of 2% of average net assets
annually.
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.
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 D. Khan, its President,
has extensive experience in managing investment portfolio manages the
Fund. Dr. Khan and his team is responsible for selection of the
securities the Fund purchases and sells.
Management Fee - Subject to the direction and control of the Trustees
and consistent with the investment objectives and policies of the Fund,
the Advisor formulates and implements an investment program for the
Fund, including determining which securities should be bought and sold.
The Advisor also provides officers for the Fund. For its services, the
Advisor receives a fee, accrued daily and paid monthly, at the annual
rate of 0.75% of the average daily net assets of the Fund.
Operating Expenses - The Fund is responsible for paying its operating
expenses, including but not limited to management and administrative
fees, legal and auditing fees, fees and expenses of its custodian,
accounting and shareholder servicing fees, trustees fees, the cost of
communicating with shareholders and registration fees. The Advisor has
agreed to limit the Fund's operating expenses to 2.00% (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.
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.
FINANCIAL HIGHLIGHTS
This table describes the fund's performance for the fiscal periods
indicated. "Total return" shows how much your investment in the fund
would have increased (or decreased) during each period, assuming you
had reinvested all dividends and distributions.
Year Ended 7/9/1997** to
12/31, 1998 12/31, 1997
Net asset value, beginning of the period $ 5.18 $ 5.00
Income from investment operations:
Net investment loss (0.02) (0.01)(a)
Net realized and unrealized gain
on investment 1.73 0.19
Total from investment operations 1.71 0.18
Less distributions from realized gains (0.03) -
Net asset value, end of period $6.86 $5.18
Total return 33.21% 3.60%
Net assets, end of period (000's omitted) $2,593 $1,150
Ratio of expenses to average net assets:
After fee waivers and reimbursements 2.00% 2.00% *
Before fee waivers and reimbursements 5.38% 6.30% *
Ratio of net investment loss to average net assets:
After fee waivers and reimbursement 0.62)% (0.25)% *
Before fee waivers and reimbursements (4.00)% (8.89)% *
Portfolio turnover rate 31.21% 18.81%
Financial Foot Notes:
(a) Calculated using averaged shares outstanding.
* Annualized
** Commencement of operations
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 8.30AM and
5PM Central Time.
Ways To Set Up Your Account
You may set up an account with the Fund in one of the following
ways:
* Individual or Joint Ownership -
For your general investment needs
Individual accounts are owned by one person. Joint accounts can have
two or more owners.
* Retirement -
To defer taxes on your retirement savings.
Retirement plans allow individuals to defer taxes on investment
income and capital gains. Contributions to these accounts may be tax
deductible. Retirement accounts require another application.
Concepts to understand
TRADITIONAL IRA: an individual retirement account. Your contributions
may or may not be deductible depending on your circumstances. Assets
grow tax-deferred; withdrawals and distributions are taxable in the
year made.
SPOUSAL IRA: an IRA funded by a working spouse in the name of a non
working spouse.
ROTH IRA: an IRA with non-deductible contributions, and tax-free growth
of assets and distributions to pay retirement expenses, provided
certain conditions are met.
EDUCATION IRA: an IRA with nondeductible contributions, and tax-free
growth of assets and distributions, if used to pay certain educational
expenses.
FOR MORE COMPLETE IRA INFORMATION, CONSULT YOUR TAX PROFESSIONAL.
How to Buy Shares
You can open a new account by mailing in an application with a check
for $2,000 or more.
After your account is open, you may add to it by:
*mailing a check or money order along with the form at the bottom
of your account statement, or a letter;
*moving money from your bank account by telephone provided you
have elected this privilege on your new account application;
* wiring money from your bank; or
* making automatic investments.
The Fund is a no-load fund, which means you pay no sales
commissions of any kind. The price you pay for shares is the net asset
value per share next calculated after your investment is received and
accepted. An order is considered received when the application (for a
new account) or information identifying the account, and the money are
received. See "Shareholder and Account Policies" for information about
share price. The Fund does not issue share certificates.
Minimum Investments
* To open the account $ 2,000.00
* To add to an account $ 250.00
* Minimum balance $ 2,000.00
Because it is very expensive for the Fund to maintain small
accounts(and that cost is borne by all shareholders), the Fund reserves
the right to close your account if the value is less than $2,000,
unless the decrease in value is solely due to market factors. Before
closing a small account, the Fund will notify you and allow you at
least 30 days to bring the value of the account up to the minimum.
The following table summarizes the various ways to buy shares of
the Fund, either initially when an account is opened or subsequently:
MAIL
To open an account
Complete and sign the new account application.
Make your check or money order payable to "Khan Funds".
Mail your application and check to:
Khan Funds
C/o American Data Services, Inc.
P.O. Box 5536
Hauppauge, New York 11788-0132
To add to an account Make your check or money order
payable to "Khan Funds" . Put your account number on the check.
Mail your application and check to:
Khan Funds
C/o American Data Services, Inc.
P.O. Box 5536
Hauppauge, New York 11788-0132
PHONE 1-888-217-KHAN
To open an account
You may not open a new account
by phone .
You may establish the telephone transaction option When you open
an account by electing the option on your new account application.
To add to an account If you did not elect the
telephone transaction Option on your new account application,
complete the shareholders option to make investments by phone for
amounts from $250.to $25,000.
WIRE
TO open an account
Call 1-888-217-KHAN for instruction on an account by wire.
To add to an account
Call 1-888-217-KHAN for instruction on opening and adding to an account.
AUTOMATIC INVESTMENT PLAN
To open an account Sign up for the Automatic
Investment Plan when you open your account. The minimum
initial investment will be $2,000.
To add to an account Sign up for the Automatic
Investment Plan on the shareholder options form or call
for instructions on how to add to your 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.
Selling shares in writing - Write a "letter of instruction" with:
* each owner's name and address,
* your account number,
* the dollar amount or number of shares to be redeemed, and
* the signature of each owner as it appears on the account.
Mail your letter to: Khan Funds, c/o American Data Services, Inc., P.O.
Box 5536, Hauppauge, New York 11788-0132.
Certain redemption requests must include a signature guarantee,
designed to protect you and the Fund from fraud. Your request must be
made in writing and include a signature guarantee if any of the
following situations applies:
* You wish to redeem more than $25,000 worth of shares;
* You add/change your name or add/remove an owner on your
account;
* You add/change the beneficiary on your account;
* The check is being mailed to an address different from
the address on your account (record address);
* The check is being made payable to someone other than
the account owner;
* When you add the telephone redemption option to your
existing account; or
* If you transfer the ownership of your account.
You should be able to obtain a signature guarantee from a bank,
broker, dealer, credit union(if authorized under state law), securities
exchange or association, clearing agency, or savings association. A
notary public cannot provide a signature guarantee.
The following table summarizes the procedures for selling shares that
you own:
Note: Some redemptions require signature guarantees. See page
MAIL
SPECIAL REQUIREMENTS
Individual Joint Owners, Sole
Proprietorships,
UGMA,UTMA
The letter of instruction must be signed by all persons
required to sign for account transactions(usually, all owners
of the account) exactly as their names appear on the account.
Trust
The letter of instruction must include the signatures of all trustees.
PHONE 1-888-217-KHAN
TO open an account (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 WITHDRAWLS (All accounts except IRAs)
Sign up for systematic withdrawals(distributions from
your account at regular intervals in specified dollar
amounts of at least $250) by calling 1-888-217-KHAN for
instructions on how to add this option.
You must have $ 5,000 in your account before you are eligible
to sign up for this option. If the amount in your account is
not sufficient to meet a withdrawal, the remaining amount
in the account will be redeemed.
Shareholder and Account Policies
Statements and Reports - Statements and reports that the Fund sends to
you include:
* Confirmation statements (after every transaction in your account
or change in your account registration);
* Account statements (quarterly);
* Annual and semi-annual reports with financial statements; and
Year-end tax statements.
We recommend that you keep each quarterly account statement and,
especially, each calendar year-end statement with your other important
financial papers since you may need to refer to them at a later date
for tax purposes. If you need copies of current or preceding year
statements, call 1-888-217-KHAN. Copies of statements for earlier
years are available and are subject to a $10 processing fee.
Share Price - The Fund is open for business each day the New York Stock
Exchange ("NYSE") is open. The offering price (price to buy one share)
and redemption price (price to sell one share) is the Fund's net asset
value per share calculated at the next Closing Time after receipt of
your purchase or redemption order. Closing Time is the time of the
close of regular session trading on the NYSE, which is usually 3:00
p.m. Central time, but is sometimes earlier.
The Fund's net asset value per share is the value of a single
share, and is computed each day the Fund is open for business as of
3:00 p.m. Central time, by adding up the value of the Fund's
investments, cash, and other assets, subtracting its liabilities, and
then dividing the result by the number of shares outstanding.
Fund securities and assets are valued primarily on the basis of
market quotations from the primary market in which they are traded or,
if quotations are not readily available, by a method that the board of
trustees believes accurately reflects a fair value. Values of foreign
securities are translated from the local currency into U.S. dollars
using current exchange rates.
Purchases -
* All of your purchases must be made in U.S. dollars and checks
must be drawn on U.S. banks.
* The Fund does not accept cash, credit cards or third-party
checks.
*If your check or telephone purchase order does not clear, your
purchase will be canceled and you will be liable for any losses or
fees the Fund or its transfer agent incurs.
* Your ability to make automatic investments and telephone
purchases may be immediately terminated if any item is unpaid by
your financial institution.
* The Fund reserves the right to reject any purchase order.
Redemptions -
*Normally, redemption proceeds will be mailed within seven days
after receipt of the request for redemption.
*The Fund may withhold payment on redemptions recently purchased
by check until it is reasonably satisfied that the check has
cleared, which can take up to fifteen days.
*If you make a telephone redemption, the Fund will send payment
for your redemption in one of three ways: (i) by mail; (ii) by
Electronic Fund Transfer (EFT) to a preauthorized bank account; or
(iii) to your bank account by wire transfer. The cost of the wire
(currently $13.00) will be deducted from the payment. Your bank
also may impose a fee for the incoming wire. Payment by EFT will
usually arrive at your bank within two banking days after your
call. Payment by wire is usually credited to your bank account on
the next business day after your call.
*Redemptions may be suspended or payment dates postponed on days
when the NYSE is closed (other than customary closings on weekends
or holidays), when trading on the NYSE is restricted, during an
emergency when it may not be reasonably practicable for the Fund
to dispose of the securities it owns or for the Fund's trustees to
determine the fair value of the net assets of the Fund, or as
permitted by the SEC.
If the Fund sends you a check (paying for a redemption, systematic
withdrawal payment, or a dividend or capital gain distribution you
elected to receive in cash) and the check is returned "undeliverable"
or remains uncashed for six months, the check will be canceled and the
proceeds will be reinvested in the Fund at the net asset value per
share on the date of cancellation. In addition, after that six-month
period, your systematic withdrawal payments will be canceled and future
withdrawals will be allowed only when requested, or your cash election
will automatically be changed and future dividends and distributions
will be reinvested in your account.
Account Registration - Address changes for your account may be made by
writing us a letter or by calling us at 1-888-217-KHAN. The Fund will
send a written confirmation of the change to both your old and new
addresses. No telephone redemptions may be made for 60 days after a
change of address by phone. During those 60 days, a signature
guarantee will be required for any written redemption request, unless
your change of address was made in writing with a signature guarantee.
Telephone Transactions- You may initiate many transactions, including
purchases and redemptions, by telephone. The Fund will not be
responsible for any losses resulting from unauthorized transactions if
it follows reasonable procedures designed to verify the identity of the
caller. Those procedures may include recording the call, requesting
additional information, and faxing written confirmation of telephone
transactions. If the Fund fails to follow such reasonable procedures,
the Fund may be responsible for resulting losses.
You should verify the accuracy of telephone transactions
immediately upon receipt of your confirmation statement. If you are
unable to reach the Fund by phone (for example, during periods of
unusual market activity), consider placing your order by mail.
DIVIDENDS, CAPITAL GAINS, AND TAXESDIVIDENDS, 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.
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.
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.
GENERAL INFORMATION
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.
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.
For More Information
Khan Funds ------- SEC file number: 811-7829
More information on this fund is available free upon request,
including the following:
Annual/Semiannual Report - Describes the fund's performance, lists
portfolio holdings and contains a letter from the fund's Advisor
discussing recent market conditions, economic trends and fund
strategies that significantly affected the fund performance during
the last fiscal year.
Statement of Additional Information (SAI) - Provides more details
about the fund and its policies. A current SAI is on file with the
Securities and Exchange Commission (SEC) and is incorporated by
reference (is legally considered part of this prospectus).
To obtain information:
BY TELEPHONE Call 1-888-217-KHAN
BY MAIL Write to:
The Khan Funds
714 FM 1960 West Suite 201
Houston TX 77090
On the internet - Text only versions of the Fund documents can be
viewed and Downloaded from: SEC http://www.sec.gov
You can also obtain copies by visiting the SEC's Public Reference Room
in Washington, DC (phone 1-800-SEC-0330) or by sending your request
and a duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009.
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KHAN FUNDS
STATEMENT OF ADDITIONAL INFORMATION
FOR KHAN GROWTH FUND
February 27,1999
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-
Securities and Investment Techniques............. B-
Risks ............................................B-
Risks and returns ............................... B-
Investment Restrictions.......................... B-
Management....................................... B-
Trustees and Officers............................ B-
Advisory Agreement............................... B-
Administration Agreement... ..................... B-
Fund accounting and service agreement ............B-
Shareholder and service plan .....................B-
Portfolio Transactions and Brokerage............. B-
Net Asset Value.................................. B-
Redemptions...................................... B-
Taxation......................................... B-
Dividends and Distributions...................... B-
Performance Information.......................... B-
General information ..............................B-
The Fund's most recent Annual Report to Shareholders are
separate documents supplied with this Statement of Additional
Information, and the financial statements, accompanying notes and
report of independent auditors (as to the Annual Report only) appearing
therein are incorporated by reference into this Statement of Additional
Information.
DESCRIPTION OF THE FUND
The Fund is a Delaware business trust formed on September 17,
1996. The Fund is an open-end management investment company, known as a
mutual fund. The Fund is a diversified fund, which means that, with
respect to 75% of its total assets, the Fund will not invest more than
5% of its assets in the securities of any single issuer. The Khan
Investment Inc. ("Khan") serves as the Fund's investment adviser and
administrator provides day-to-day management of the Fund's portfolio.
INVESTMENT OBJECTIVES AND POLICIES
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. 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.
SECURITIES AND Investment Techniques
In addition to purchasing the common stock of domestic and foreign
companies, the Fund may purchase the portfolio securities described
below.
Warrants. A warrant is an instrument issued by a corporation which
gives the holder the right to subscribe to a specified amount of the
corporation's capital stock at a set price for a specified period of
time. The Fund may invest up to 2% of its net assets in warrants,
except that this limitation does not apply to warrants purchased by the
Fund that are sold in units with, or attached to, other securities.
Money Market Instruments. 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.
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.
When the Advisers determine that adverse market conditions exist,
the Fund may adopt a temporary defensive position and invest some or
all of its assets in money market instruments, including U.S.
Government securities, repurchase agreements, bank obligations and
commercial paper.
ZERO COUPON SECURITIES - The Fund may invest in zero coupon securities
issued by the U.S. Treasury on up to 5% of its net assets. Zero coupon
Treasury securities are U.S. Treasury notes and bonds which have been
stripped of their unmatured interest coupons and receipts, or
certificates representing interests in such stripped debt obligations
or coupons. Because a zero coupon security pays no interest to its
holder during its life or for a substantial period of time, it usually
trades at a deep discount from its face or par value and will be
subject to greater fluctuations of market value in response to changing
interest rates than debt obligations of comparable maturities which
make current distributions of interest.
VARIABLE AND FLOATING RATE INSTRUMENTS - The Fund may acquire variable
and floating rate instruments. Such instruments are frequently not
rated by credit rating agencies; however, unrated variable and floating
rate instruments purchased by the Fund will be determined by the
Advisor under guidelines established by the Board of Trustees to be of
comparable quality at the time of the purchase and rated instruments
eligible for purchase by the Fund. In making such determinations, the
Advisor will consider the earning power, cash flow and other liquidity
ratios of the issuers of such instruments (such issuers include
financial, merchandising, bank holding and other companies) and will
monitor their financial condition. An active secondary market may not
exist with respect to particular variable or floating rate instruments
purchased by the Fund. The absence of such an active secondary market
could make it difficult for the Fund to dispose of the variable or
floating rate instrument involved if the issuer of the instrument
defaults on its payment obligation or during periods in which the Fund
is not entitled to exercise its demand rights, and the Fund could, for
these or other reasons, suffer a loss to the extent of the default.
Variable and floating rate instruments may be secured by bank letters
of credit.
MORTGAGE PASS-THROUGH SECURITIES - Interests in pools of mortgage-
related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest
and principal payments. In effect, these payments are a "pass-through"
of the monthly payments made by the individual borrowers on their
residential mortgage loans, net of any fees paid to the issuer or
guarantor of such securities. Additional payments are caused by
repayments of principal resulting from the sale of the underlying
residential property, refinancing or foreclosure, net of fees or costs
which may be incurred. Some mortgage-related securities (such as
securities issued by the Government National Mortgage Association) are
described as "modified pass-throughs." These securities entitle the
holder to receive all interest and principal payments owed on the
mortgage pool, net of certain fees, at the scheduled payment dates
regardless of whether or not the mortgagor actually makes the payment.
The principal governmental guarantor of U.S. mortgage-related
securities is the Government National Mortgage Association("GNMA").
GNMA is a wholly owned United States Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to
guarantee, with the full faith and credit of the United States
Government, the timely payment of principal and interest on securities
issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks and mortgage bankers) and backed by
pools of mortgages insured by the Federal Housing Agency or guaranteed
by the Veterans Administration.
Government-related guarantors include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC"). FNMA is a government-sponsored corporation owned entirely by
private stockholders and subject to general regulation by the Secretary
of Housing and Urban Development. FNMA purchases conventional
residential mortgages not insured or guaranteed by any government
agency from a list of approved seller/servicers which include state and
federally chartered savings and loan associations, mutual savings
banks, commercial banks and credit unions and mortgage bankers. FHLMC
is a government-sponsored corporation created to increase the
availability of mortgage credit for residential housing and owned
entirely by private stockholders. FHLMC issues participation
certificates which represent interests in conventional mortgages from
FHLMC's national portfolio. Pass-through securities issued by FNMA and
participation certificates issued by FHLMC are guaranteed as to timely
payment of principal and interest by FNMA and FHLMC, respectively, but
are not backed by the full faith and credit of the United States
Government.
Although the underlying mortgage loans in a pool may have
maturities of up to 30 years, the actual average life of the pool
certificates typically will be substantially less because the mortgages
will be subject to normal principal amortization and may be prepaid
prior to maturity. Prepayment rates vary widely and may be affected by
changes in market interest rates. In periods of falling interest rates,
the rate of prepayment tends to increase, thereby shortening the actual
average life of the pool certificates. Conversely, when interest rates
are rising, the rate of prepayments tends to decrease, thereby
lengthening the actual average life of the certificates. Accordingly,
it is not possible to predict accurately the average life of a
particular pool.
REPURCHASE AGREEMENTS - Repurchase agreements are transactions in which
the Fund purchases a security from a bank or recognized securities
dealer and simultaneously commits to resell that security to the bank
or dealer at an agreed-upon date and price reflecting a market rate of
interest unrelated to the coupon rate or maturity of the purchased
security. The purchaser maintains custody of the underlying securities
prior to their repurchase; thus, the obligation of the bank or dealer
to pay the repurchase price on the date agreed to is, in effect,
secured by such underlying securities. If the value of such securities
is less than the repurchase price, the other party to the agreement
will provide additional collateral so that at all times the collateral
is at least equal to the repurchase price.
Although repurchase agreements carry certain risks not associated
with direct investments in securities, the Fund intends to enter into
repurchase agreements only with banks and dealers believed by the
Advisor to present minimum credit risk in accordance with guidelines
established by the Board of Trustees. The Advisor will review and
monitor the creditworthiness of such institutions under the Board's
general supervision. To the extent that the proceeds from any sale of
collateral upon a default in the obligation to repurchase were less
than the repurchase price, the purchaser would suffer a loss. If the
other party to the repurchase agreement petitions for bankruptcy or
otherwise becomes subject to bankruptcy or other liquidation
proceedings, there might be restrictions on the purchaser's ability to
sell the collateral and the purchaser could suffer a loss. However,
with respect to financial institutions whose bankruptcy or liquidation
proceedings are subject to the U.S. Bankruptcy Code, the Fund intends
to comply with provisions under such Code that would allow it
immediately to resell the collateral.
WHEN-ISSUED SECURITIES - The Fund may from time to time purchase
securities on a "when-issued" basis. The price of such securities,
which may be expressed in yield terms, is fixed at the time the
commitment to purchase is made, but delivery and payment for when-
issued securities take place at a later date. Normally, the settlement
date occurs within one month of the purchase; during the period between
purchase and settlement, no payment is made by the Fund to the issuer
and no interest accrues to the Fund. To the extent that assets of the
Fund are held in cash pending the settlement of a purchase of
securities, the Fund would earn no income. While when-issued securities
may be sold prior to the settlement date, the Fund intends to purchase
such securities with the purpose of actually acquiring them unless a
sale appears desirable for investment reasons. At the time the Fund
makes the commitment to 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 - 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 - The Fund may buy and sell put and call options.
PURCHASING OPTIONS. By purchasing a put option, the Fund obtains the
right (but not the obligation) to sell the option's underlying
instrument at a fixed "strike" price. In return for this right, the
Fund pays the current market price for the option (known as the option
premium). Options have various types of underlying instruments,
including specific securities, indices of securities prices, and
futures contracts.
This Fund may terminate its position in a put option it has purchased
by allowing it to expire or by exercising the option. If the option is
allowed to expire, the Fund will lose the entire premium it paid. If
the Fund exercises the option, it completes the sale of the underlying
instrument at the strike price. The Fund may also terminate a put
option position by closing it out in the secondary market at its
current price (i.e., by selling an option of the same series as the
option purchased), if a liquid secondary market exists.
The buyer of a typical put option can expect to realize a gain if
security prices fall substantially. However, if the underlying
instrument's price does not fall enough to offset the cost of
purchasing the option, a put option buyer can expect to suffer a loss
(limited to the amount of the premium paid, plus related transaction
costs).
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 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.
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.
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.
Foreign Currency Transactions. Foreign currency transactions may be
entered into for a variety of purposes, including: to fix in U.S.
dollars, between trade and settlement date, the value of a security the
Fund has agreed to buy or sell; or to hedge the U.S. dollar value of
securities the Fund already owns, particularly if it expects a decrease
in the value of the currency in which the foreign security is
denominated.
Foreign currency transactions may involve, for example, the Fund's
purchase of short positions in foreign currencies, which would involve
the Fund agreeing to exchange an amount of a currency it did not
currently own for another currency at a future date in anticipation of
a decline in the value of the currency sold relative to the currency
the Fund contracted to receive in the exchange. The Fund's success in
these transactions will depend principally on Khan's ability to predict
accurately the future exchange rates between foreign currencies and the
U.S. dollar.
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 United States or abroad.
Lending Portfolio Securities. The Fund may lend securities from its
portfolio to brokers, dealers and other financial institutions needing
to borrow securities to complete certain transactions. The Fund
continues to be entitled to payments in amounts equal to the interest
or other distributions payable on the loaned securities which affords
the Fund an opportunity to earn interest on the amount of the loan and
on the loaned securities' collateral. Loans of portfolio securities may
not exceed 33-1/3% of the value of the Fund's total assets, and the
Fund will receive collateral consisting of cash, U.S. Government
securities or irrevocable letters of credit which will be maintained at
all times in an amount equal to at least 100% of the current market
value of the loaned securities. Such loans are terminable by the Fund
at any time upon specified notice. The Fund might experience risk of
loss if the institution with which it has engaged in a portfolio loan
transaction breaches its agreement with the Fund.
Risks
Investing in Debt Securities - Debt obligations with longer maturities
tend to produce higher yields and are generally subject to potentially
greater capital appreciation and depreciation than obligations with
shorter maturities and lower yields. The market prices of debt
obligations usually vary depending upon available yields. An increase
in interest rates will generally reduce the value of such portfolio
investments, and a decline in interest rates will generally increase
the value of such portfolio investments. The return on such
investments also depends on the continuing ability of the issuers of
the debt securities in which the Fund invests to meet their obligations
for the payment of interest and principal when due.
Mortgage-Backed Securities - Mortgage-backed securities are often
subject to more rapid repayment than their stated maturity dates would
indicate as a result of the pass-throughs or prepayments of principal
on the underlying loans, which may increase the volatility of such
investments relative to similarly rated debt securities. During
periods of declining interest rates, prepayment of loans underlying
mortgage-backed securities can be expected to accelerate and thus
impair the Fund's ability to reinvest the returns of principal at
comparable yields. During periods of rising interest rates, reduced
prepayment rates may extend the average life of mortgage-backed
securities and increase the Fund's exposure to rising interest rates.
Other Investment Considerations - The Fund's net asset value per share
is not fixed, and should be expected to fluctuate.
The Fund invests for long-term growth rather than short-term
profits; however, a limited amount of short-term trading can be
expected in order to maintain a flexible portfolio strategy. In
addition, the 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.
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.
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 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.
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*-- Trustee and president
714 FM 1960 West Suite 201,Houston Texas 77090
Physician; President, Caring Physicians Network Inc.
Age 56
Shahwar D. Khan* ---- Trustee
14022 Champions Hamlet Ct., Houston Texas 77069
Age 49
Shehzad D. Khan* ---- Trustee
14022 Champions Hamlet Ct., Houston, Texas 77069
Broker, Olde Discount Corporation
Age 25
Mushtaq R. Malik --- Trustee
6622 Gentle Bend, Houston, Texas 77069
Senior Principal Engineer, Stone & Webster
Engineering Corp.
Age 57
Charles E. Moore --- Trustee
2504 Sand Shore Drive, Conroe, Texas 77304
General Sales Manager, Landmark Chevrolet
Age 62
Faisal D. Khan* ----- Secreatry
14022 Champions Hamlet Ct., Houston Texas 77069
Age 22
*Denotes "interested person" of the as defined in the Investment
Company Act. Sardar D. Khan and Shahwar D. Khan are married, and
Shehzad D. Khan and Faisal D. Khan are 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 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).
Name Mushtaq R. Malik Charles E. Moore
Aggregate compensation - $200
from trust
Pension or retirement
Benefits accrued as None None
part of trust expenses
Estimated annual
benefits upon N/A N/A
retirement
Compensation from
Trust paid to trustees $00 $200
ADVISORY AGREEMENT
Subject to the supervision of the Board of Trustees, investment
management and services are provided to the Fund by the Advisor,
pursuant to an Investment Advisory Agreement (the "Advisory
Agreement"). Under the Advisory Agreement, the Advisor provides a
continuous investment program for the Fund and makes decisions and
places orders to buy, sell or hold particular securities. In addition
to the fees payable to the Advisor and the Administrator, the Fund is
responsible for its operating expenses, including: (i) interest and
taxes; (ii) brokerage commissions; (iii) insurance premiums; (iv)
compensation and expenses of Trustees other than those affiliated with
the Advisor or the Administrator; (v) legal and audit expenses; (vi)
fees and expenses of the Custodian and any shareholder service and
transfer agents; (vii) fees and expenses for registration or
qualification of the Fund and its shares under federal and state
securities laws; (viii) expenses of preparing, printing and mailing
reports and notices and proxy materials to shareholders; (ix) other
expenses incidental to holding any shareholder meetings; (x) dues or
assessments of or contributions to the Investment Company Institute or
any successor; (xi) such non-recurring expenses as may arise, including
litigation affecting the Fund and the legal obligations with respect to
which the Fund may have to indemnify the Trust's officers and trustees;
and (xii) amortization of organization costs.
Under the Advisory Agreement, the Advisor and its officers,
directors, agents, employees, controlling persons, shareholders and
other affiliates will not be liable to the Fund for any error of
judgment by the Advisor or any loss sustained by the Fund, except in
the case of a breach of fiduciary duty with respect to the receipt of
compensation for services, (in which case any award of
damages will be limited as provided in the Investment Company Act) or
of willful misfeasance, bad faith, gross negligence or reckless
disregard of duty. In addition, the Fund will indemnify the Advisor and
such other persons from any such liability to the extent permitted by
applicable law.
The Advisory Agreement with respect to the Fund will remain in
effect for two years from its execution. Thereafter, if not terminated,
it will continue automatically for successive annual periods, provided
that such continuance is specifically approved at least annually (i) by
a majority vote of the Trustees who are not parties to the Agreement or
"interested persons" of the Fund as defined in the Investment Company
Act, cast in person at a meeting called for the purpose of voting on
such approval, or (ii) by vote of a majority of the outstanding voting
securities of the Fund.
The Advisory Agreement is terminable by vote of the Board of
Trustees or by the holders of a majority of the outstanding voting
securities of the Fund at any time without penalty, on 60 days written
notice to the Advisor. The Advisory Agreement also may be terminated by
the Advisor on 60 days written notice to the Fund. The Advisory
Agreement terminates automatically upon its assignment (as defined in
the Investment Company Act).
Personnel of the Advisor may invest in securities for their own
accounts pursuant to a Code of Ethics that sets forth all employees'
fiduciary responsibilities regarding the Fund, establishes procedures
for personal investing, and restricts certain transactions. For
example, all personal trades in most securities require pre-clearance,
and preparation in initial public offerings is prohibited. In addition,
restrictions on the timing of personal investing in relation to trades
by the Fund and on short-term trading having been adopted.
ADMINISTRATION AGREEMENT
Khan Investment Inc. serves as administrator for the
Funds("Administrator"), subject to the overall supervision of the
Trustees, pursuant to an Administration Agreement executed between the
Fund and the Administrator. Under the terms of the Administration
Agreement, the Administrator is responsible for providing such services
as the Trustees may reasonably request, including but not limited to
(i) maintaining the Fund's books and records (other than financial or
accounting books and records maintained by any custodian, transfer
agent or accounting services agent); (ii) overseeing the Fund's
insurance relationships; (iii) preparing for the Fund (or assisting
counsel and/or auditors in the preparation of) all required tax
returns, proxy statements and reports to the Fund's shareholders and
trustees and reports to and other filings with the Securities and
Exchange Commission and any other governmental agency; (iv) preparing
such applications and reports as may be necessary to register or
maintain the Fund's registration and/or the registration of the shares
of the Fund under the blue sky laws of the various states; (v)
responding to all inquiries or other communications of shareholders;
(vi) overseeing all relationships between the Fund's other service
providers, such as the Fund's Custodian; and (vii) authorizing and
directing any of the Administrator's directors, officers and employees
who may be elected as trustees or officers of the Trust to serve in the
capacities in which they are elected.
Under the terms of the Administration Agreement, the Fund will pay
the Administrator an annual fee, payable monthly, equal to 0.25% of the
average daily net assets of the Fund.
FUND ACCOUNTING SERVICE AGREEMENT
American Data Services, Inc. ("ADS") provides fund accounting
services to the Fund 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.
The Shareholder Service Plan continues in effect from year to year,
provided that each such continuance is approved at least annually, by a
vote of the Board of Trustees, including a majority of the Trustees who
have no direct or indirect financial interest in the operation of the
Plan or in any agreement related to the Plan (the "Independent
Trustees"), cast in person at a meeting called for the purpose of
voting on such continuance. The Plan may be amended at any time by the
Board of Trustees, provided that any material amendments of the terms
of the Plan will become effective only upon the approval by a majority
of the Board and a majority of the Independent Trustees pursuant to a
vote cast in person at a meeting called for the purpose of voting on
the Plan.
PORTFOLIO TRANSACTIONS AND BROKERAGE
In all purchases and sales of securities for the Fund, the primary
consideration is to obtain the most favorable price and execution
available. Pursuant to the Advisory Agreement, the Advisor determines
which securities are to be purchased and sold by the Fund and which
broker-dealers are eligible to execute portfolio transactions, subject
to the instructions of and review by the Trust's Board of Trustees.
Purchases of portfolio securities may be made directly from
issuers or from underwriters. Where possible, purchase and sale
transactions are effected through dealers (including banks) which
specialize in the types of securities which the Fund will be holding,
unless better executions are available elsewhere. Dealers and
underwriters usually act as principals for their own accounts.
Purchases from underwriters include a commission paid by the issuer to
the underwriter and purchases from dealers include the spread between
the bid and the asked price.
Investment decisions for the Fund are made independently from
those of other client accounts of the Advisor. Nevertheless, it is
possible that at times the same securities will be acceptable for the
Fund and for one or more of such other client accounts. To the extent
any of these client accounts and the Fund seek to acquire the same
security at the same time, the Fund may not be able to
acquire as large a portion of such security as it desires, or it may
have to pay a higher price or obtain a lower yield for such security.
Similarly, to the extent any such client accounts and the Fund seek to
sell the same security at the same time, the Fund may not be able to
obtain as high a price for, or as large an execution of, an order to
sell any particular security as would otherwise be the case. If one or
more of such client accounts simultaneously purchases or sells the same
security that the Fund is purchasing or selling, each day's
transactions in such security will be allocated between the Fund and
all such client accounts in a manner deemed equitable by the Advisor,
taking into account the respective sizes of the accounts, the amount
being purchased or sold and other factors deemed relevant by the
Advisor. In some cases this system
could have a detrimental effect on the price or value of the security
insofar as the Fund is concerned. In other cases, however, the Advisor
believes that the ability of the Fund to participate in volume
transactions may produce better executions for the Fund. The Fund does
not effect securities transactions through broker-dealers in accordance
with any formula, nor does it effect securities transactions through
such broker-dealers solely for selling shares of the Fund. However, as
stated above, broker-dealers who execute transactions for the Fund may
from time to time effect purchases of shares of the Fund for their
customers.
NET ASSET VALUE
The net asset value of the Fund's shares will fluctuate and is
determined as of the close of trading on the New York Stock Exchange
("Exchange"), normally 4:00 p.m. Eastern time, each business day. The
Exchange annually announces the days on which it will not be open for
trading. The most recent announcement indicates that it will not be
open on the following days: New Year's Day, Martin Luther King Jr. 's
Birthday, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day. However, the Exchange
may close on days not included in that announcement.
Options and futures contracts which are traded on exchanges are
valued at their last sale or settlement price as of the close of such
exchanges or, if no sales are reported, at the mean between the last
reported bid and asked prices. However, if an exchange closes later
than the New York Stock Exchange, the options or futures traded on it
are valued based on the sales price, or the mean between bid and asked
prices, as the case may be, as of the close of the Exchange.
Trading in securities in foreign securities markets is normally
completed well before the close of the Exchange. In addition, foreign
securities trading may not take place on all days on which the Exchange
is open for trading, and may occur in certain foreign markets on days
on the Fund's net asset value is not calculated. Events affecting the
values of portfolio securities that occur between the time their prices
are determined and the close of the Exchange will not be reflected in
the calculation of net asset value unless the Board of Trustees
determines that the particular event would materially affect net asset
value, in which case an adjustment will be made. Assets or liabilities
expressed in foreign currencies are translated, in determining net
asset value, into U.S. dollars based on the spot exchange rates at 1:00
p.m., Eastern time, or at such other rates as the Advisor may determine
to be appropriate.
The Fund may use a pricing service approved by the Board of
Trustees. Prices provided by such a service represent evaluations of
the mean between current bid and asked prices, may be determined
without exclusive reliance on quoted prices, and may reflect
appropriate factors such as institution-size trading in similar groups
of securities, yield, quality, coupon rate, maturity, type of issue,
individual trading characteristics, indications of values from dealers
and other market data. Such services also may use electronic data
processing techniques and/or a matrix system to determine valuations.
Securities and other assets for which market quotations are not
readily available, or for which the Board of Trustees or its designate
determines the foregoing methods do not accurately reflect current
market value, are valued at fair value as determined in good faith by
or under the direction of the Board of Trustees. Such valuations and
procedures, as well as any pricing services, are reviewed periodically
by the Board of Trustees.
REDEMPTIONS
The Fund intends to pay cash (U.S. dollars) for all shares
redeemed, but, under abnormal conditions which make payment in cash
unwise, the Fund may make payment partly in readily marketable
securities with a current market value equal to the redemption price.
Although the Fund does not anticipate that it will make any part of a
redemption payment in securities, if such payment were made, an
investor may incur brokerage costs in converting such securities to
cash. The Fund has elected to be governed by 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 remain qualified for treatment as a regulated
investment company ("RIC") under Subchapter M of the Internal Revenue
Code (the "Code"). In each taxable year that the Fund qualifies, the
Fund (but not its shareholders) will be relieved of federal income tax
on that part of its investment company taxable income (consisting
generally of interest and dividend income, net short-term capital gain
and net realized gains from currency transactions) and net capital gain
that is distributed to shareholders.
In order to qualify for treatment as an RIC, the Fund must
distribute annually to shareholders at least 90% of its investment
company taxable income and must meet several additional requirements.
Among these requirements are the following: (1) at least 90% of the
Fund's gross income each taxable year must be derived from dividends,
interest, payments with respect to securities loans and gains from the
sale or other disposition of securities or foreign currencies, or other
income derived with respect to its business of investing in securities
or currencies; (2) less than 30% of the Fund's gross income each
taxable year may be derived from the sale or other disposition of
securities held for less than three months; (3) at the close of each
quarter of the Fund's taxable year, at least 50% of the value of its
total assets must be represented by cash and cash items, U.S.
Government securities, securities of other RICs and other securities,
limited in respect of any one issuer to an amount that does not exceed
5% of the value of the Fund and that does not represent more than 10%
of the outstanding voting securities of such issuer; and (4) at the
close of each quarter of the Fund's taxable year, not more than 25% of
the value of its assets may be invested in securities (other than U.S.
Government securities or the securities of other RICs) of any one
issuer.
The Fund will be subject to a nondeductible 4% excise tax to the
extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain
net income for the one-year period ending on October 31 of that year,
plus certain other amounts.
Dividends and interest received by the Fund may give rise to
withholding and other taxes imposed by foreign countries. Tax
conventions between certain countries and the U.S. may reduce or
eliminate such taxes. Shareholders may be able to claim U.S. foreign
tax credits with respect to such taxes subject to provisions and
limitations contained in the Code. For example, certain retirement
accounts cannot claim foreign tax credits on investments in foreign
securities held by the Fund. If more than 50% in value of the Fund's
total assets at the close of its taxable year consists of securities of
foreign corporations, the Fund will be eligible, and intends, to file
an election with the Internal Revenue Service pursuant to which
shareholders of the Fund will be required to include their
proportionate share of such withholding taxes in their U.S. income tax
returns as gross income, treat such proportionate share as taxes paid
by them, and deduct such proportionate share in computing their taxable
incomes or, alternatively, use them as foreign tax credits against
their U.S. income taxes. No deductions for foreign taxes, however, may
be claimed by noncorporate shareholders who do not itemize deductions.
A shareholder that is a nonresident alien individual or foreign
corporation may be subject to U.S. withholding tax on the income
resulting from the Fund's election described in this paragraph but may
not be able to claim a credit or deduction against such U.S. tax for
the foreign taxes treated as having been paid by such shareholder. The
Fund will report annually to its shareholders the amount per share of
such withholding taxes.
DIVIDENDS AND DISTRIBUTIONS
Dividends from the Fund's investment company taxable income
(whether paid in cash or invested in additional shares) will be taxable
to shareholders as ordinary income to the extent of the Fund's earnings
and profits. Distributions of the Fund's net capital gain (whether paid
in cash or invested in additional shares) will be taxable to
shareholders as long-term capital gain, regardless of how long they
have held their Fund shares. Dividends declared by the Fund in October,
November or December of any year and payable to shareholders of record
on a date in one of such months will be deemed to have been paid by the
Fund and received by the shareholders on the record date if the
dividends are paid by the Fund during the following January.
Accordingly, such dividends will be taxed to shareholders for the year
in which the record date falls.
The Fund is required to withhold 31% of all dividends, capital
gain distributions and repurchase proceeds payable to any individuals
and certain other noncorporate shareholders who do not provide the Fund
with a correct taxpayer identification number. The Fund also is
required to withhold 31% of all dividends and capital gain
distributions paid to such shareholders who otherwise are subject to
backup withholding.
PERFORMANCE INFORMATION
TOTAL RETURN
Average annual total return quotations used in the Fund's
advertising and promotional materials are calculated according to the
following formula:
P(1 + T)^n = ERV
where P equals a hypothetical initial payment of $1000; T equals
average annual total return; n equals the number of years; and ERV
equals the ending redeemable value at the end of the period of a
hypothetical $1000 payment made at the beginning of the period.
The time periods used in advertising will be updated to the last
day of the most recent quarter prior to submission of the advertising
for publication. Average annual total return, or "T" in the above
formula, is computed by finding the average annual compounded rates of
return over the period that would equate the initial amount invested to
the ending redeemable value. Average annual total return assumes the
reinvestment of all dividends and distributions. Any performance
information used in advertising and sales literature will include
information based on this formula for the most recent one, five and ten
year periods, or for the life of the Fund, if less.
OTHER PERFORMANCE INFORMATION
Performance data of the Fund quoted in advertising and other
promotional materials represents past performance and is not intended
to predict or indicate future results. The return and principal value
of an investment in the Fund will fluctuate, and an investor's
redemption proceeds may be more or less than the original investment
amount. In advertising and promotional materials the Fund may compare
its performance with data published by Lipper Analytical Services, Inc.
("Lipper"), Morningstar, Inc. ("Morningstar") or CDA Investment
Technologies, Inc. ("CDA"). The Fund also may refer in such materials
to mutual fund performance rankings and other data, such as comparative
asset, expense and fee levels, published by Lipper, CDA or Morningstar.
Advertising and promotional materials also may refer to discussions of
the Fund and comparative mutual fund data and ratings reported in
independent periodicals including, but not limited to, the Wall Street
Journal, Money Magazine, Forbes, Business Week, Financial World and
Barron's.
GENERAL INFORMATION
CAPITALIZATION
The capitalization of the Trust consists solely of an unlimited
number of shares of beneficial interest. The Board of Trustees has
currently authorized only one series of shares, the Khan Growth Fund.
The Board of Trustees may establish additional funds, with different
investment objectives and policies, and additional classes of shares,
at any time in the future.
Expenses incurred by the Trust in connection with its organization
are reimbursed to the Advisor and amortized on a straight line basis
over a period of five years. Expenses incurred in the organization of
subsequent offered series of the Trust will be charged to those series
and will be amortized on the same basis.
REGISTRATION STATEMENT
The Registration Statement of the Trust, including the Fund's
Prospectus, the Statement of Additional Information and the exhibits
filed therewith, may be examined at the office of the Securities and
Exchange Commission in Washington, D.C. Statements contained in the
Fund's Prospectus or the Statement of Additional Information as to the
contents of any contract or other document referred to herein or in the
Prospectus are not necessarily complete, and, in each instance,
reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference.
OTHER INFORMATION
As used in the Prospectus and in this Statement of Additional
Information, the term "majority," when referring to approvals to be
obtained from shareholders of the Fund, means the vote of the lesser of
(i) 67% of the shares of the Fund represented at a meeting of the
holders of more than 50% of the outstanding shares of the Fund are
present in person or by proxy, or (ii) more than 50% of the outstanding
shares of the Fund.
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.
Independent Auditors
Tait, Weller & Baker 810 Center Suite 800 Philadelphia PA 19103 has
been selected as independent auditors of the Fund.
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