KHAN FUNDS
714 FM 1960 West, Suite 201 - Houston TX 77090
KHAN GROWTH FUND
ANNUAL REPORT December 31, 1998
Dear Fellow Shareholders:
As always, it gives us here at Khan Funds great pleasure to
provide you with our 1998 Annual report of the Khan Growth
Fund (the "Fund"). Once again, it is with excitement and
pride that we shall address our performance of Khan Growth
Fund for this past fiscal year and the direction we together
navigate into 1999. For the year ending December 31, 1998,
the Khan Growth Fund had a return of 33.21%, which compares
with the Standard & Poor's 500 index return of 28.58%.
We attribute this success to a well-planned strategy, hard
work, unwavering commitment and discipline to achieve our
defined goals. Our tax efficient approach has produced an
extra bonus for our shareholders while providing excellent
returns. The Fund's performance has been strong primarily
due to participation in the rise of the healthcare,
technology, communication services and retail sectors. We at
Khan Funds have and will continue to focus our attentions on
this side of the market, and, we believe, our long-term
investment in large cap companies with strong fundamentals
will continue to increase our shareholder's wealth in the
upcoming quarters. We enjoyed robust gains from our
investment in companies like General Electric, Cisco
systems, Berkshire Hathaway, Chrysler, Pfizer, SBC
communication, Wal-Mart, Walgreen, Microsoft and America On-
line. Our financial sector, once considered to be some of
the more stable and predictable in the portfolio, proved to
be some of most volatile. The Asian economic crisis, Russian
debt fiasco, hedge fund meltdowns, and assimilation
difficulties with high profile banking mergers contributed
to some of our losses. While companies heavily exposed to
these foreign markets were affected, our overall defensive
strategy in primarily quality offerings has and should
continue to produce good returns to our shareholders while
reducing risk exposure.
PORTFOLIO COMPOSITION
By the end of 1998, the Fund had 0.39% of its net assets in
short term investments, the remaining in diversified common
stocks, with an emphasis on the healthcare, technology,
telecommunication services and retail sectors. Though our
primary focus leans towards an investment in equities, a
small percentage of assets are kept liquid in order to take
advantage of possible market inefficiencies or
opportunities.
ECONOMIC OUTLOOK
The Federal Reserve Board's (Fed's) more helpful monetary
position has been invigorating for the stock market,
reversing a broad based abdication phase. Generally,
positive third quarter earnings reports and involvement by
smaller capitalization issues have assisted in the
fortification of the positive momentum. We believe that,
even though the market's predicament has not been completely
eradicated and although more agitation could occur at any
time, a stable point in this trend has been reached.
The resolution of the Fed to reduce rates intensified the
belief that the central bank is determined to avoid a worst-
case scenario for the economy and that monetary relief in
the United States should help persuade other countries to
follow our lead, assisting in the avoidance of a global
liquidity crisis. Global stability is still questionable.
The low inflation environment has strained U.S. domestic
companies profits because of their lack of ability to raise
prices, yet their expenses continue to rise.
Asia remains a weight on United States economic growth. The
economic setback in Asia has drained United States export
growth and financially strained the large multi-national
corporations that obtain a large part of their profits in
Asia. There are many questions regarding Japanese indecision
on banking reforms and economic stimulus. Japan remains in
its longest recession during the post-World War II period.
Many economies including the developing ones in Asia rely on
trade with Japan. It is also a primary lender to the budding
nations of Asia. Japan is starting to realize the extent of
its banking dilemmas and seems to be making some headway
toward reform, but it is still too early to forecast
definite changes although renewed confidence among Japanese
consumers will eventually improve their economy.
The risk of market downturn has been reduced, so we feel
that now is a good time to invest in stocks. Also,
historically the third year of the U.S. presidency has been
undoubtedly the best of the four years in regards to the
stock market. So we anticipate that the growing large-
capitalization multinational companies, which are at the
center of our firm's investment strategy, will undergo
excellent value increases, especially while the lackluster
recovery and lengthy slow growth environment that we foresee
occur. Investing in these multinational companies will reap
the benefits of growing emerging markets, while limiting
exposure to a more volatile part of the economic world.
INVESTMENT STRATEGY
The strategy of the Fund has been that of investing in the
common stock of large capitalization companies which we
believe provide value based on growth of future operating
cash flow. We will continue to conduct extensive analysis of
the underlying fundamentals of the company, while using
technical analysis to take advantage of market
inefficiencies. Finally, variable factors such as management
performance, consumer trends, industry and sector dominance,
and projection models are used to establish the continued
investment worthiness of Khan Growth Fund holdings.
Here at Khan Funds, our most important asset is you, our
shareholders. Through our mutual trust and dependence, we
strive for conviction from both ourselves and from you in
our investment philosophy. We look forward to what lies
ahead in our financial futures and together strive for
excellence. The management of the Khan Growth Fund
intentionally invests in the Fund to understand and live
with the emotions caused by fluctuation in the market. We
believe that our investment strategy limits market
speculation and sensitivity. Furthermore, consistency is a
goal we strive for as we navigate into year 1999 and beyond.
Sincerely,
S. D. Khan, M.D.
Chairman Khan Funds
The outlook and opinion expressed above represent the view
of the investment advisor as of February 27, 1999, and are
subject to change as market and economic events unfold.
Khan Growth Fund vs. Benchmark index
The chart below compares your Fund to a benchmark index.
It is intended to give you a general idea how your Fund
performed compared to the stock market during the year ended
12/31/98. It is important to understand the difference
between your Fund and an index. Your Fund's total return
includes Fund expenses and management fees. An index
reflects the investment of income dividends and capital
gains distributions, if any, but does not reflect fees,
brokerage commissions, or other expenses of investing.
(GRAPH INFORMATION)
$10,000 Investment in The S&P 500 and Khan Growth Fund since
inception ( 7/09/97)
KHAN GROWTH FUND
Average Annual Total Return For Periods Ended
December 31, 1998:
1 Year = 33.21%
Inception* = 24.28%
Khan Growth Fund = $13,801
S&P 500 INDEX
Average Annual Total Return For Periods Ended
December 31, 1998:
1 Year = 28.58%
Inception* = 24.63%
S&P 500 = $13,859
Comparative Investment Returns Year ended December 31, 1999
Initial investment $10,000.
* Past performance is no guarantee of future results.
The Standard & Poor's 500 Stock Index is a capitalization-
weighed index of 500 stocks that attempts to measure
performance of the broad domestic economy through changes in
the aggregate market value of 500 stocks representing major
industries.
Top Sector Holdings
Healthcare 17.62%
Computer Software 9.78%
Food, Beverages And Tobacco 9.67%
Computer Hardware 7.20%
Retail 7.00%
Banks 6.20%
Personal Care 5.76%
Communication Services 5.69%
Auto Related 5.32%
Energy 4.80%
Top Ten Holdings
Cisco Systems, Inc. 4.76%
Wal-Mart Stores, Inc. 4.24%
Pfizer, Inc. 4.06%
General Electric Co. 3.64%
Citigroup, Inc. 3.53%
Johnson & Johnson 3.11%
Dell Computer 3.05%
PepsiCo, Inc. 3.00%
Compaq Computer Corp. 2.83%
Microsoft Corp. 2.78%
KHAN GROWTH FUND
Schedule of Investments
December 31, 1998
Shares Market Value
COMMON STOCKS (99.70%)
Auto Related (5.32%)
467 Daimler Chrysler AG * $44,861
1100 Ford Motor Co. 64,556
400 General Motors Corp. 28,625
--------
138,042
Banks (6.20%)
300 Bankamerica Corp. 18,038
750 Chase Manhattan Corp. 51,047
1,850 Citigroup, Inc. 91,575
--------
160,660
Basic Industries (0.72%)
350 DuPont E.I. De Nemours & Co. 18,572
Capital Goods (4.07%)
250 Allied Signal, Inc. 11,078
925 General Electric Co. 94,408
--------
105,486
Communication Services (5.69%)
500 BellSouth Corp. 24,938
1,000 SBC Communications, Inc. 53,625
500 MCI Worldcom, Inc. 35,875
300 Lucent Technologies, Inc 33,000
---------
147,438
Computer Hardware (7.20%)
1,750 Compaq Computer Corp. 73,390
1,080 Dell Computer Corp. * 79,043
500 Hewlett-Packard Co 34,156
---------
186,589
Computer Software (9.78%)
350 BMC Software, Inc. * 15,597
1,330 Cisco Systems, Inc. * 123,441
500 EMC Corp/Mass * 42,500
520 Microsoft Corp. 72,117
---------
253,655
Electronics (2.42%)
530 Intel Corp. 62,838
Shares Market Value
Energy (4.80%)
304 British Petroleum PLC $27,246
260 Chevron Corp. 21,564
375 Exxon Corp. 27,422
280 Mobil Corp. 24,395
500 Royal Dutch Petroleum Co. 23,937
-----------
124,564
Financial (3.82%)
600 Associates First Capital Corp. 25,425
545 Federal national Mortgage Association 40,330
500 Merrill Lynch & Co. Inc. 33,375
-----------
99,130
Food, Beverages & Tobacco (9.67%)
950 Coca-Cola Co. 63,531
215 McDonald's Corp. 16,474
200 Nestle SA-Spons ADR 21,770
1,900 Pepsico, Inc. 77,781
1,330 Philip Morris Cos., Inc. 71,155
-----------
250,711
Healthcare (17.62%)
1,120 Abbot Laboratories 54,880
400 American Home Products 22,525
400 Bristol Myers Squibb 53,525
960 Johnson & Johnson 80,520
345 Merck & Co., Inc. 50,951
840 Pfizer, Inc. 105,368
930 Schering Plough Corp. 51,383
500 Warner Lambert Co. 37,594
-----------
456,746
Insurance (3.64%)
1 Berkshire Hathaway * 70,000
420 Marsh & McLennan Cos., Inc 24,544
-----------
94,544
Internet Services (2.47%)
400 America Online, Inc. * 64,000
Market Value
Media & Entertainment (1.83%)
220 Eastman Kodak $15,840
1,050 Walt Disney Co. 31,500
-----------
47,340
Personal Care (5.76%)
200 Estee Lauder Cos., Inc. 17,100
1,120 Gillette Co. 54,110
500 Polo Ralph Lauren Corp. * 9,594
750 Proctor & Gamble Co. 68,484
-----------
149,288
Publishing (1.69%)
300 McGraw-Hill Cos., Inc. 30,562
500 News Corp. Ltd 13,219
-----------
43,781
Retail (7.00%)
500 Home Depot, Inc. 30,594
700 Walgreen Co. 40,994
1,350 Wal-Mart Stores, Inc. 109,940
-----------
181,528
-----------
Total COMMON STOCKS(99.70%)(Cost $2,012,099) 2,584,912
Short-Term Investments (0.39%)
10,151 Star Treasury Fund (Cost $10,151) 10,151
Total Investments Securities
(Cost $2,022,250+) 100.09% 2,595,063
Liabilities in Excess of Other Assets (.09%) (2,252)
Net Assets 100.00% $2,592,811
+Cost for federal income tax purposes is the same.
Net unrealized appreciation consist of:
Aggregate unrealized appreciation of
investment securities: $604,128
Aggregate unrealized depreciation of
investment securities (31,315)
Net unrealized appreciation of
investment securities $572,813
*Denotes non-income producing securities
See accompanying note to Financial statements
KHAN GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
ASSETS
Investment, at market value (cost $2,022,250) $2,595,063
Dividends and interest receivable 1,934
Organization costs, net 25,932
Due to advisor 30,147
Total assets 2,653,076
LIABILITIES
Due to advisor cost $36,818
Accrued expenses 23,447
Total liabilities 60,265
Net assets applicable to
shares outstanding $2,592,811
Shares outstanding 378,119
Net assets value, offering and
redemption price per share $6.86
NET ASSETS
At December 31, 1998, net assets consists of:
Paid-in capital $2,058,016
Accumulated net realized loss on investments (38,018)
Accumulated net unrealized appreciation
of investments 572,813
$2,592,811
See accompanying notes to financial statements.
KHAN GROWTH FUND
STATEMENT OF OPERATIONS
For the year ended December 31, 1998
Investment income
Dividends (net of foreign taxes withhold of $196) $22,635
Interest 1,186
Total investment income 23,821
Expenses
Investment advisory fee 12,919
Administration fees 4,306
Fund accounting expense 20,584
Transfer agent fees 11,061
Registration fee 2,450
Custodial fee 5,411
Prospectus and shareholders' reports 2,123
Professional fees 21,289
Directors fees and expenses 200
Amortization of organization costs 7,358
Insurance fee 500
Miscellaneous 4,487
Total expenses 92,688
Less: reimbursed and waived expenses (58,237)
Net expenses 34,451
Net investment loss (10,630)
Realized and unrealized gain (loss) on investments:
Net realized loss on sales of investments (38,018)
Net change in unrealized appreciation of
Investment 564,124
Net realized and unrealized
gain on investments 526,106
Net increase in net assets
resulting from Operations $515,476
See accompanying notes to financial statements.
KHAN GROWTH FUND
STATEMENT OF CHANGES IN NET ASSETS
From January 1,1998 From July 9,1997*
To To
December 31, 1998 December 31, 1997
Operations
Net investment loss $(10,630) $ (1,136)
Net realized gain (loss)
on investments (38,018) 7,358
Net change in unrealized
appreciation on investments 564,124 8,689
Net increase in net assets
resulting from operations 515,476 14,911
Dividends paid to shareholders from:
Capital gain ($0.03 and $.00
per share, respectively (7,983)
Net capital share
transactions (Note 5) 935,666 1,034,741
Total increase
in net assets 1,443,159 1,049,652
Net assets
Beginning of period 1,149,652 100,000
End of period 2,592,811 1,149,652
* Commencement of Operations
See accompanying notes to financial statements.
KHAN GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
(1) SIGNIFICANT ACCOUNTING POLICIES
Khan Funds, (the "Trust") is a business trust under the
laws of Delaware registered under the Investment Company
Act of 1940, as amended (the "1940 Act") as an open-end
management investment company. The Declaration of Trust
provides for the issuance of multiple series of shares,
each representing a diversified portfolio of investments
with different investment objectives, policies and
restrictions. As of December 31, 1998, the only series
issued by the Trust is the Khan Growth Fund.
The Fund seeks long-term capital growth, consistent with
the preservation of capital, by investing primarily in the
common stock of large capitalization U.S. companies.
Income is a secondary objective of the Fund. Khan
Investment, Inc. serves as the Fund's investment advisor.
The following is a summary of significant accounting
policies followed by the Fund in the preparation of its
financial statements. The preparation of financial
statements in conformity with generally accepted
accounting principles requires management to make
estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
A. Security Valuations-A security listed or traded on an
exchange is valued at the last sales price on the
exchange where the security is principally traded.
Investments with maturities of 60 days or less are
valued on the basis of amortized cost, which
approximates market value.
B. Securities Transactions, Investment Income and
Distributions - Securities transactions are accounted
for on a trade date basis. Realized gains or losses are
computed on the basis of specific identification of the
securities sold. Interest income is recorded as earned
from settlement date and is recorded on an accrual
basis. Dividend income and distributions to
shareholders are recorded on the ex-dividend date.
C. Federal Income Taxes - The Fund intends to comply with
the requirements of the Internal Revenue Code necessary
to qualify as a regulated investment company and, as
such, will not be subject to federal income taxes on
otherwise taxable income (including net realized
capital gains) which is distributed to shareholders.
Therefore, no provision for federal income taxes is
recorded in the financial statements.
D. Deferred Organization Costs - The Fund has incurred
expenses of $36,818 in connection with the
organization. These costs have been deferred and are
being amortized on a straight line basis over a period
of sixty months from the date the Fund commenced
operations.
E. Use of Estimates - The preparation of financial
statements in conformity with generally accepted
accounting principles requires management to make
estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the
financial statements, as well as the reported amounts
of income and expenses during the reported period.
Actual results could differ from those estimates.
KHAN GROWTH FUND
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 1998
(2) ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Fund has an investment advisory agreement with Khan
Investment, Inc. (the "Advisor"). Under the terms of the
investment advisory agreement, the Advisor has
responsibility for supervising all aspects of the
operations of the Fund subject to the Trust's Board of
Trustees (the "Trustees"). The Advisor has agreed to
ensure that assets of the Fund are invested in accordance
with the investment objectives and policies. For its
services, the Advisor receives an annual management fee,
payable monthly, and computed on the value of the net
assets of the Fund as of the close of business each
business day, at the annual rate of 0.75% of such net
assets of the Fund. During the year ended December 31,
1998, the Advisor was paid $12,919 for such services.
The advisor has voluntarily agreed to waive all of their
fees and reimburse fund expense in order to limit
operating expenses to an annual rate of 2% of the net
assets of the Fund. Fee waivers and expense
reimbursements are voluntary and may be terminated at
anytime.
The Fund has an administrative services agreement (the
"Agreement") with the Advisor. Under the terms of the
Agreement, the Advisor provides all administrative
services necessary for the Fund's operations and is
responsible for the supervision of the Fund's other
service providers. The Advisor also assumes all ordinary,
recurring expenses necessary in carrying out the duties
for the Fund, such as office space and facilities, and
equipment and clerical personnel. The Advisor shall also
pay all compensation of all Trustees, officers and
employees of the Trust who are affiliated persons of the
Advisor. For these services, the Advisor receives an
annual fee, payable monthly, computed on the value of the
net assets of the Fund as of the close of business each
business day at an annual rate of 0.25% of 1% of such
assets of the Fund. During the year ended December 31,
1998, the Advisor was paid $4,306 for such services.
The Fund has a shareholder service plan whereby the Trust
pays securities broker-dealers, retirement plan sponsors
and administrators, and other securities professionals
and/or beneficial owners of shares of the Fund, for
expenses incurred in connection with non-distribution
shareholder services provided by them to shareholders,
provided that such shareholder servicing is not
duplicative of the servicing otherwise provided on behalf
of the Fund. These expenses are limited to an annual rate
of not more than 0.25% of the net assets of the Fund as of
the close of business each business day. As of December
31, 1998, the Fund has not made any payments.
(3) DIRECTORS' FEES AND EXPENSES
Directors' fees represent remuneration paid or accrued to
each director who is not an "interested person" of Khan
Investment, Inc.
(4) INVESTMENT SECURITIES
Purchases of securities and proceeds from sales of
securities (other than short-term securities) during the
year ended December 31, 1998 were $1,459,410 and $532,761,
respectively.
NOTES TO FINANCIAL STATEMENTS - (Continued)
KHAN GROWTH FUND
December 31, 1998
(5) CAPITAL STOCK
Changes in the Fund's capital stock outstanding for the
years ended December 31, 1998 and 1997, were as follows:
January 1, 1998 to July 9, 1997** to
December 31, 1998 December 31, 1997
Shares Amount Shares Amount
Shares sold: 154,870 $927,800 201,854 $1,034,741
Shares issued in
reinvestment of
dividends: 1,416 7,983 - -
Shares redeemed:
(21) (117) - -
Net increase: 156,265 $935,666 201,854 $1,034,741
As of December 31, 1998, S. D. Khan and his family owned
an aggregate of 234,997.12 of the outstanding shares of
this Fund, which may be deemed to control the Fund.
(6) FINANCIAL HIGHLIGHTS
Shown below are the financial highlights for a share
outstanding throughout each period.
Year Ended July 9,1997** to
December 31, 1998 December 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 reimbursements (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
TAIT, WELLER & BAKER
Certified Public Accountants
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Trustees
Khan Funds
Houston, Texas
We have audited the accompanying statement of assets and
liabilities of the Khan Growth Fund, a series of shares of
the Khan Funds including the portfolio of investments, as of
December 31, 1998, and the related statement of operations,
the statement of changes in net assets, and the financial
highlights for the year then ended. These financial
statements are the responsibility of the Fund's management.
Our responsibility is to express an opinion on these
financial statements and financial highlights based on our
audits. The financial statements and financial highlights
presented for the period ended December 31, 1998 were
audited by other auditors whose report dated January 24,
1998, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about
whether the financial statements and financial highlights
are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. Our procedures
included confirmation of securities owned as of December 31,
1998, by correspondence with the custodian. An audit also
includes assessing the accounting principles used and
significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial
highlights referred to above present fairly, in all material
respects, the financial position of Khan Growth Fund as of
December 31, 1998, the results of its operations, the
changes in its net assets, and the financial highlights for
the year then ended in conformity with generally accepted
accounting principles.
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
February 4, 1999
16
