KHAN FUNDS
Khan Growth Fund
714 FM 1960 West #201
Houston TX 77090
April 20, 2000
PROSPECTUS
Phone 1-888-217-KHAN
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR
DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS CRIMINAL OFFENSE.
KHAN GROWTH FUND
714 FM 1960 West Suite 201
Houston, TX 77090
Phone 1-888-217-Khan
E Mail - [email protected]
Home Page: www.khanfunds.com
Contents
The Fund Page
________________________________________________
Investment Objectives and Strategies ......... 2
Main Risk .................................... 2
Past Performance ............................. 3
Fees & Expenses ...............................3
Management ....................................4
The Advisor ............................ 4
The Administrator ...................... 4
Shareholder Service Plan .................5
The Custodian and Transfer Agent ........ 5
Financial Highlights...........................5
Your account
_________________________________________________
Your Account ................................. 6
Account policies ........................ 6
Instruction for IRAs .................... 6
Ways To Set Up Your Account ............. 6
How to buy shares ....................... 6
How to Sell Shares ...................... 7
Shareholder and Account Policies ........ 9
Distributions and Taxes ...................... 11
General Information .......................... 12
For more information
_______________________________________________
For more information ................. Back Cover
Khan Growth Fund The Fund
Investment Objectives and Strategies
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 invests
primarily in the common stock of large capitalization
companies (companies having a market capitalization exceeding
$ 1 billion) which the Fund's Advisor believes have potential
to experience above average and predictable earning growth.
The Fund usually employs a" buy and hold" strategy, which
results in reduced turnover and sells when there is a
fundamental change in a 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. The Advisor also
seeks to identify those issuers which it considers undervalued
by the stock market in the terms of current earnings, assets
or growth prospects. These companies will include those that
the Advisor believes have new or innovative products, services
or processes which can enhance prospect for growth in future
earnings. The Fund invests at least 80% of the value of its
net assets in common stocks.
During normal market conditions, the Fund may invest up to 20%
of the value of its net assets in short to intermediate term
investment grade debt securities of the United States and its
agencies and instrumentalities. The Advisor will also consider
the issuer's financial and debt structure when analyzing these
securities.
The Fund may invest in short-term investments primarily money
market securities to maintain liquidity for redemptions and
during the periods when attractive investments are not
available.
Under adverse market conditions, the fund could invest some or
all of its assets in money market securities. The fund would
do this only in seeking to avoid losses. During adverse market
conditions the Fund may not achieve its investment objectives.
Main Risks
Stocks can fluctuate in price and their value can go 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 than that of other types of funds
(such as those emphasizing only the small companies or value
stocks). Moreover, since the fund holds large positions in a
relatively small number of stocks, it can be more 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 stock value can decline even if
there is an increase in earnings. In addition, growth stocks
typically lack the dividend yield that can cushion stock
prices in market downturns. An increasing interest rates and
various other credit risk factors associated with market
conditions can adversely affect the value of Fund's holdings
and thus performance of the Fund.
Past Performance
The two tables below provide the Fund's annual returns and its
long-term performance. The first table shows you how the Fund
performed last year. The second compares the Fund's
performance over time to that of the S&P 500, a widely
recognized unmanaged index of stock performance. Both tables
assume reinvestment of dividends and distributions. As with
all mutual funds, the past is not a prediction of the future.
Investment return and principal will fluctuate so that an
investor's shares, when redeemed, may be worth more or less
than original cost.
This Fund is a professionally managed pooled investment,
which gives you opportunity to participate in financial
markets. It strives to achieve its stated goal, but like any
other mutual fund it cannot offer guaranteed results. An
Investment in this Fund is not a bank deposit. It is not
insured or guaranteed by FDIC or any other government agency.
It is not a complete investment program. You could lose money
in this fund, but you have a potential to make money.
Year-by-year return total return as of 12/31 EACH YEAR (%)
Graph
3.6% 33.21% 26.06%
1997* 1998 1999
Best Quarter Q4 - 99 24.07%
Worst Quarter Q3 - 98 (10.00%)
Average annual total return as of 12/31/1999
1 Year *Since date of inception (7/9/1997)
Fund - 26.06% 25.05%
S&P 500** - 21.04% 23.2%
*(since date of inception 7/9/97)
** S&P 500: an unmanaged index of 500 common stocks chosen to
reflect the industries of the U.S. economy. The S&P 500 is
often considered a proxy for the stock market in general.
Fees and Expenses
This table describes the fees and expenses that you pay if you
buy and hold the shares of the Fund.
Fee Table
Shareholder Fees (fees paid directly from
your investment) - -- ------------------ None **
Annual Fund operating expenses (expenses
that are deducted from Fund's assets)
% of average daily net assets
Management fee ------------------------ 0.75%
Distribution (and/or) 12b-1 ----------- None
Other expenses
Administration fee ------------------- 0.25%
Shareholder Service Plan Fee --------- 0.25%
Other Expenses ----------------------- 1.87%
Total Annual Fund Operating Expenses - 3.12% ***
** The Fund will charge a $13.00 fee to transmit a redemption
payment by wire.
*** Khan Investment Inc. has voluntarily agreed to reimburse
the Fund for any ordinary operating expenses in excess of 2%
of average net assets annually. This voluntary reimbursement
can be terminated at any time.
Expense example
This example is intended to help you compare the cost of
investing in the Fund with the cost of investing in other
mutual funds.
1 Year 3 Years 5 Years 10 Years
315 963 1,635 3,430
The Example assumes that you invest $10,000 in the Fund for
the time periods indicated and then redeem all of your shares
at the end of those periods. The Example also assumes that
your investment has a 5% return each year, includes
reinvestment of dividends and distributions, and that the
Fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these
assumptions you costs would be:
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 and he has managed the Fund's investment
portfolio since its inception. Faisal D. Khan, its Vice
President, joined the Advisor in 1997 and works as a
Securities Analyst and supervises the administration of the
Fund.
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
voluntarily agreed to limit the Fund's operating expenses to
2.00% (including management and administrative fees) of its
average annual net assets, however reimbursement can be
discontinued by the Advisor at any time.
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 such as research material.
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
(for the share outstanding throughout each period)
The following financial highlight table is intended to help
you understand the Fund's financial performance for the period
July 9, 1997** to December 31, 1999. Certain information
reflects financial results for the single Fund share. Total
returns in the table represent the rate that an investor would
have earned (or lost) on an investment in the Fund (assuming
reinvestment of all dividends and distributions). This
information, for the year ending December 31, 1999, has been
audited by Tait, Weller, & Baker whose report, along with the
Fund's financial statements are included in the Statement of
Additional Information or annual report, which is available
upon request. The Fund was also audited by Tait, Weller, &
Baker in 1998. The information for the period ending December
31, 1997 was audited by KPMG Peat Marwick LLP.
(6) FINANCIAL HIGHLIGHTS
Shown below are the financial highlights for a share
outstanding throughout each period.
July 9, 1997**
Year Ended Year Ended To
December 31, December 31, December 31,
1999 1998 1997
Net asset value, beginning of the period $ 6.86 $ 5.18
$ 5.00
Income from investment operations:
Net investment loss (0.07) (0.02)
(0.01) (a)
Net realized and unrealized gain on investment 1.86
1.73 0.19
Total from investment operations 1.79 1.71
0.18
Less distributions from realized gains (0.07)
(0.03) -
Net asset value, end of period $ 8.58 $ 6.86
$ 5.18
Total return 26.06% 33.21% 3.60%
Net assets, end of period (000's omitted)
$4,460 $2,593 $1,150
Ratio of expenses to average net assets:
After fee waivers and reimbursements 2.00% 2.00%
2.00% *
Before fee waivers and reimbursements 3.12% 5.38%
6.30%
Ratio of net investment loss to average net assets:
After fee waivers and reimbursements (1.06)% (0.62)%
(0.25)% *
Before fee waivers and reimbursements (2.18)% (4.00)%
(8.89)% *
Portfolio turnover rate 44.48% 31.21% 18.81%
Financial Foot Notes:
(a) Calculated using averaged shares outstanding.
* Annualized
** Commencement of operations
YOUR ACCOUNT
ACCOUNT POLICIES
Buying the shares
There are no sales charges to invest in this Fund. The price
for the Fund shares is the Fund's net asset value per share
(NAV), which is calculated as of the close of trading on the
New York Stock Exchange (Usually by 4:00 p.m. Eastern time)
every day the exchange is open. Your order will be priced at
the next NAV calculated after your order is received in good
form by the Fund. The Fund's investments are valued based on
market value, or where market quotations are not readily
available, based on fair value as determined in good faith by
the Fund's board.
Minimum investments
Initial Additional
Regular accounts $2,000 $250
Traditional IRAs $2000 $250
Spousal IRAs $2000 $250
Roth IRAs $2000 $250
Educational IRAs $2000 $250
Automatic investment $2000 $250
plan
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 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.
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.
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 the 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
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.subsequent minimum
investment will be minimum $250.
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
Mail your letter to:
Khan Funds
c/o American Data Services, Inc.
P.O. Box 5536,
Hauppauge, New York 11788-0132.
Limitations on selling the shares by phone
Proceeds
sent by Minimum Maximum every 30 day
Check no minimum 100,000 per day
Wire 1,000 100,000 Per day
All redemption by phone over $5,000 must be followed by fax
by 3 p.m. EST otherwise your order will not be honored.
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:
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
All accounts except IRAs
You automatically have the telephone redemption option (which
allows you to redeem at least $1000 and up to $5,000 worth of
shares per day by phone) unless you declined it on your new
account application.
Phone redemption of amounts more than $5,000 must be followed
up with a fax by 3:00 p.m. Eastern Time on the same day
otherwise your order will not be accepted. Telephone
redemption over $25,000 must have signature guarantee.
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 4:00
p.m. Eastern Standard 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 4:00 p.m. Eastern 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.
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 beliable 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.
Redemption -
*Normally, redemption proceeds will be mailed within seven
days after receipt of the request for redemption.
*The Fund may refuse any purchase that could adversely affect
the Fund or its operations, including those from any
individual or group who, in the Fund's view, is likely to
engage in excessive trading.
*The Fund may withhold payment on redemption recently
purchased by check until it is reasonably
satisfied that the check has cleared, which can take up to
fifteen days.
*The Fund also reserves the right to make a "redemption in
kind" - payment in portfolio securities rather cash - if the
amount you are redeeming is large enough to affect fund
operation (for example, if it represents more than 1% of the
Fund's assets).
*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 pre-
authorized 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.
Third Party Investments
If you invest through a third party (rather than directly with
Fund), policies and fees may be different than those described
here. Banks, brokers, 401(k) plans, financial advisors and
financial supermarkets may charge transaction fees and may set
up different minimum investments or limitations on buying or
selling shares. Consult a representative of your plan or
financial institution if in doubt.
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.
DISTRIBUTIONS AND TAXES
The Fund intends to distribute substantially all of its net
income and capital gains to shareholders at least annually.
Your distributions will be reinvested in the Fund unless you
instruct the Fund otherwise. There are no fees or sales
charges on reinvestments.
Fund dividends and distributions are taxable to most investors
(unless your investment is in IRA or other tax-advantage
account). The tax status of any distribution is the same
regardless of how long you have been in the Fund and whether
you reinvest your distributions or take them in cash. In
general, distributions are taxable as follows:
Taxes on transactions
Except in tax-advantage accounts, any sale may generate a tax
liability. Tax-deferred accounts do not generate a tax
liability.
The table can provide a guide for your potential tax liability
when selling fund's shares. "Short-term capital gains" applies
to Fund shares sold up to 12 months after buying them. "long-
term capital gains" applies to shares held for more than 12
months.
Taxability of distributions
Type of
distributions Tax rate
Income Ordinary
dividends income rate
Short-term Ordinary
Capital gains income rate
Long-term Capital Gains
Capital gains rate
The tax status of the distributions for each calendar year
will be detailed in your annual tax statement from the Fund.
Because everyone's tax situation is unique, always consult
your tax advisor about federal, state and local tax
consequences.
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.
GENERAL INFORMATION
This Prospectus offers shares of 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 Khan Growth Fund ("the Fund") is a
diversified series of Khan Funds, and is designed for long-
term investors who seek growth of capital and can tolerate the
greater risks associated with common stock investment.
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.
The Fund does not hold annual shareholders meetings. There
normally will be no meetings of shareholders to elect the
trustees unless less than 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 shareholder 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
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).
Shareholders in the Fund may make inquiries to the Fund by any
of the following methods:
By telephone
Call -1-888-217-KHAN
BY MAIL Write to:
The Khan Funds
714 FM 1960 West Suite 201
Houston TX 77090
By E Mail - Send your request to
[email protected]
On the internet - Text only versions of the Fund documents
can be viewed and Downloaded from: SEC http://www.sec.gov
Information can be reviewed and copies can be obtained by
visiting the SEC's Public Reference Room in Washington, DC
(phone 1-202-942-8090) or by sending your request and a
duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009.or to its E-Mail address:
[email protected]
Khan Growth Fund
A series of Khan Funds
SEC files number: 811-7829
KHAN FUNDS
STATEMENT OF ADDITIONAL INFORMATION
FOR KHAN GROWTH FUND
April 20, 2000
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 dated April 20,
2000. 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-1
Securities and Investment Techniques....B-2
Risks ..................................B-9
Risks and returns ..................... B-9
Investment Restrictions.. ............. B-10
Management............................. B-11
Trustees and Officers...................B-11
Advisory Agreement..................... B-12
Administration Agreement... ........... B-13
Fund accounting and service agreement. .B-13
Shareholder and service plan ...........B-14
Portfolio Transactions and Brokerage... B-14
Net Asset Value........................ B-15
Redemptions............................ B-15
Taxation............................... B-16
Dividends and Distributions............ B-16
Performance Information................ B-17
General information ....................B-17
Financial Statements - -- --- -- - -- - B-18
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 sometime foreign issuers, including common stocks with
warrants attached, and debt securities of the United States
government and its agencies and instrumentalities.
Securities & 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 Instrumentss - 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. 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.
Puts 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 byexercising 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 liquidbecause 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.
Future 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 Future 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 however the Fund has
placed a limit of 15% on any borrowing; (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 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 15% 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* MD
14022 Champions Hamlet Ct., Houston Texas 77090
Age 57
Trustee and president
1. Practicing Physician in Gastroenterology since 1980
2. President, Caring Physicians Network Inc.
3. Advisor with Khan Growth Fund since July 1997.
Shahwar D. Khan*
14022 Champions Hamlet Ct., Houston Texas 77069
Age 50
Trustee
1. Business Accounting
2. Assists in research since inception of Fund
Shehzad D. Khan*
14022 Champions Hamlet Ct., Houston, Texas 77069
Age 26
Trustee
1. Graduated from Trinity University San Antonio TX
1992 - 1996
2. Broker, Olde Discount Corp. Since 1996
Edward Shubert, MD
17115 Red Oak Dr. Houston TX 77090
Age 57
Trustee
Practicing Physician Ophthalmology
Charles E. Moore
2504 Sand Shores Drive Conroe, TX 77304
Age 63
Trustee
General Sales Manager, Landmark Chevrolet Houston,TX
Faisal D. Khan*
14022 Champions Hamlet Ct. Houston, TX 77069
Age 23
Secretary
1. Graduated From Trinity University in San Antonio, TX
2. Security Analyst with Khan Funds Since 1997
*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 fiscal
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 Aggregate Pension or Estimated Total
Compensation Retirement Annual Compensation
from the Fund Benefits Benefits From Fund and
Accrued as Upon Fund Complex
Part of Fund Retirement Paid to
Expenses Directors
Sardar None None None None
D. Khan
Shahwar None None None None
D. Khan
Shehzad None None None None
D. Khan
Charles None None None $1000
E. Moore
Edward None None None $200
Shubert
Item 14
a. Control Persons (As of 3/31/99)
Name Address Shares % Amount
Sardar D. 14022 Champions Hamlet 162100.76 31.18% 1,390,825
Khan Houston, TX 77069
AND
Shahwar D 14022 Champions Hamlet
Khan Houston, TX 77069
Faisal D 14022 Champions Hamlet 61637.29 11.85 .. 528,848
Khan
Shehzad D 14022 Champions Hamlet 49816.98 9.58% .427,429
Khan
b. Principal Persons
Edward 17115 Red Oak Dr. #121 49810.771 9.58% 428,234
Shubert Houston, TX 77090
Atila 6337 Mercer 38,495 7.4% 330,287
Ertan Houston, TX 77005
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 or 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
participation 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.
Advisor is Texas based Corporation (Khan Investment Inc.)
controlled by Sardar D. Khan, Mrs. Shahwar D. Khan and their
son Faisal D. Khan.
Under the terms of the Advisory Agreement, the Fund will pay
the Advisor an annual fee, payable monthly, equal to 0.75% of
the average daily net assets of the Fund. For its services
Advisor was paid $3,313 in 1997, $12,919 in 1998 and $21,945
in 1999.
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.
Administrator is Texas based Corporation (Khan Investment
Inc.) controlled by Sardar D. Khan, Mrs. Shahwar D. Khan and
their son Faisal D. Khan.
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. For its
services Advisor was paid $1,104 in 1997, $4,306 in 1998 and
$7,315 in 1999.
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 reimbursementof 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 toacquire 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.
Since the date of inception (July 9, 1997) till December 1997
Fund paid 1,382.88, for fiscal year 1998 the Fund paid
2,297.21. For the fiscal year 1999 the Fund paid $3177.50 to
ADS Distributors and Dreyfus Brokerage for brokerage fees.
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.
Code of Ethics
The Fund and the Advisor have adopted a strict Code of
Ethics that limits Fund trustees and officers and Advisor
directors, officers, investment personnel and other employees
in investing in securities for their own accounts. The Code
complies in all material respects with the Investment Company
Act of 1940, Persons subject to the Code may purchase and sell
securities for their own account. On the other hand, the Code
prohibits trading when the Fund is or is contemplating
trading, purchasing in private placements, or initial public
offerings without prior approval, taking short-term trading
profits, and e3ngagin in other related activities which may be
adverse to the interests of the Fund. The Code also requires
quarterly and annual reporting of transactions so that
personal trading activity may be monitored. The Code is
available upon request by calling 1-888-311-KHAN or by
writing: Khan Funds 714 FM 1960 West #201 Houston Texas 77090.
Independent Auditors
Tait, Weller & Baker 810 Center Suite 800 Philadelphia PA
19103 has been selected as independent auditors of the Fund.
Item 22
Financial Statements
Registrant's Statement of Assets as of December 31, 1999 and
Related Notes and Independent Auditor's Report, are included
in Annual audited report.
PART C
OTHER INFORMATION
Item 23. Exhibits
(a.1) Certificate of Trust (*)
(a.2) Declaration of Trust (*)
(b.) By-Laws (*)
(c.) Not Applicable
(d) Form of Investment Advisory Agreement**
(e) Not Applicable
(f) Not Applicable
(g) Custody Agreement**
(h.1) Form of Administration Agreement (*)
(h.2) Form of Fund Accounting Service Agreement**
(h.3) Form of Transfer Agency and Service Agreement**
(i.1) Opinion and Consent of Prior Counsel**
(i.2) Consent of Current Counsel
(j) Consent of Current Independent Accountants
(k) Annual Audited Financial Statements***
(l.1) Investment Letters of Initial Investors**
(m) Not Applicable
(n) Financial Data Schedule
(o) Not applicable
(p-1) Miscellaneous shareholders Plan**
(P-2) Code of Ethics.
* Filed as an Exhibit to the Registration Statement on
September 25, 1996 and incorporated herein by reference.
** Filed as an Exhibit to the Registration Statement on June
26, 1997 and incorporated herein by reference.
*** Filed as an Exhibit to the 1999 Audited Annual Report
filed on February 25, 2000 and incorporated herein by
reference.
Item 24 Persons Controlled by or under Common Control with
Registrant
Faisal D. Khan and Shehzad D. Khan, sons of Sardar D. Khan
and Mrs. Shahwar D. Khan, own Caring Physicians Network Inc.,
a preferred provider organization of which Sardar D. Khan is
the President. In addition, Sardar D. Khan owns S.D. Kahn
M.D., P.A., a professional medical Corp. The company may be
deemed to be under common control with Registrant.
Item 25 Indemnification
Article VII, Section 2 of Registrant's Declaration of Trust,
filed herewith as Exhibit 1, and Article VI of Registrant By-
Laws, filed herewith as Exhibit 2, provide for the
indemnification of Registrant's trustees, officers, employees
and agents against liabilities incurred by them in connection
with the defense or disposition of any action or proceeding in
which they may be involved or with which they may be
threatened, while in office or thereafter, by reason of being
or having been in such office, except with respect to matters
as to which it has been determined that they acted with
willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of their
office ("Disabling Conduct").
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers
and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer
or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such
trustee, officer, or controlling person in connection with the
securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it
is against public policy as expressed in the Securities Act of
1933 and will be governed by the final adjudication of such
issue.
Item 26 Business and Other Connections of Investment Adviser
Sardar D. Khan, the President and controlling shareholder of
Khan Investment Inc., is a practicing physician and president
of Caring Physician Network Inc., a Texas based preferred
provider organization. Sardar D Khan Khan and Mrs. Shahwar D.
Khan are shareholders in Pakistani Corporation (Trans Chemical
Ltd.) Company is in litigation with China National Machinery
Import Corp. and New orient International Honk Kong, china.
Item 27 Principal Underwriters
Not Applicable
Item 28 Location of Accounts and Records
The accounts, books and other documents required to be
maintained by Registrant pursuant to Section 31(a) of the
Investment Company Act of 1940 and the rules promulgated
thereunder are in the possession of Registrant and
Registrant's Administrator and Custodian, as follows: the
documents required to be maintained by paragraphs (5), (6),
(7), (10) and (11) of Rule 31a-l(b) are maintained by the
Registrant at 714 F.M. 1960 West, Suite 201, Houston, Texas
77090; the documents required to be maintained by paragraph
(4) of Rule 31a-l(b) are maintained by the Administrator at
714 F.M. 1960 West, Suite 201, Houston, Texas 77090; and all
other records are maintained by the Custodian at 425 Walnut
Street, Cincinnati, Ohio 45202 and the Fund Accounting Agent
at 24 West Carve Street, Huntington, NY 11743.
Item 29 Management Services
Not applicable
Item 30 Undertakings
The Registrant hereby undertakes, if requested to do so by the
holders of at least 10% of the Registrant's outstanding
shares, to call a meeting of shareholders for the purposes of
voting upon the question of removal of a Trustee and to assist
in communications with other shareholders as required by
Section 16(c) of the Investment Company Act of 1940.
The Registrant hereby undertakes, in the event the information
required by Item 5A of Form N-1A is contained in an annual
report to shareholders, to furnish a copy of such latest
report to shareholders to each person to whom a prospectus is
delivered, upon request and without charge.
EXHIBIT - I.1
PAUL, HASTINGS, JANOFSKY & WALKER LLP
555 West Flower Street
Los Angeles, California 90071
(213) 683-6000
June 23, 1997
Khan Funds
714 FM 1960 West Suite 201
Houston, Texas 77090
Ladies and Gentlemen:
We have acted as counsel to Khan Funds, a Delaware
business trust (the "Trust"), in connection with the issuance
of an indefinite number of shares of beneficial interest
("Shares") in the Khan Growth Fund series of the Trust (the
"Fund") in a public offering pursuant to a Registration
Statement on Form N-1A (Registration No. 33-12597), as
amended, filed with the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the
"Registration Statement").
In our capacity as counsel for the Trust, we have
examined the Certificate of Trust of the Trust dated August
30, 1996, the Agreement and Declaration of Trust of the Trust
dated September, 1996, the bylaws of the Trust, originals or
copies of actions of the Trustees as furnished to us by the
Trust, certificates of public officials, statutes and such
other documents, records and certificates as we have deemed
necessary for the purposes of this opinion.
Based upon our examination as aforesaid, we are of
the opinion that the Shares are duly authorized and, when
purchased and paid for as described in the Registration
Statement, will be validly issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion of
counsel as an exhibit to the Registration Statement.
Very truly yours,
PAUL, HASTINGS,
JANOFSKY & WALKER LLP
EXHIBIT - I.2
CHARLES W. LUTTER Jr. ATTORNEY AND COUNSELLOR AT LAW
103 Canyon Oaks
San Antonio, TX 78232
(210) 496-5438
Fax (210) 496-1631
April 17, 2000
Khan Funds
714 FM 1960 West #201
Houston, Texas 77090
Dear Sirs
I have been asked to provide this legal opinion and consent so
that Khan Funds (the "Trust") may provide a "current" opinion
and consent to complete a post-effective amendment (PEA) to
the Trust 's registration statement on Form N-1A (SEC File
number 33-12597).
I have considered among other things, the Trust's registration
statement, the Trust documents and the June 23, 1997 legal
opinion of Paul, Hastings Janofsky and Walker LLP previously
filled as an exhibit to the Trust's registration statement, a
current certificate from the State of Delaware, and copies of
actions of the Trustees furnished by the Trust.
Based on my review, I am of the opinion that shares of
beneficial interest in the Khan Growth Fund series of the
Trust are duly authorized and when purchased and paid for as
described in the Trust's registration statement, will be
validly issued, fully paid and nonassessable.
I am delivering this letter to the Company and no person other
than the Company may rely upon it.
I hereby consent to the filing of this opinion of counsel as
an exhibit to PEA.
If you have any questions, contact me any time.
Sincerely,
/S/
Charles W. Lutter Jr.
EXHIBIT -J
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use of our report dated February 16,
2000 on the financial statements and financial highlights of
the Khan Growth Fund. Such financial statements and financial
highlights appear in the 1999 Annual Report to shareholders
which appears in the Statement of Additional information file
in the Post-Effective Amendment to the Registration statement
on Form N-1A of Khan Growth Fund. We also consent to the
references to our Firm in the Registration Statement and
Prospectus.
/s/:
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
March 23, 2000
Exhibits. (P.2)
CODE OF ETHICS OF
KHAN FUNDS AND
KHAN INVESTMENTS INC.
Pursuant to the requirements of Rule 17j-1 under the
Investment Company Act of 1940, each of Khan Funds (the
"Trust") and Khan Investment Inc. (the "Adviser") has adopted
this code of ethics for its officers, directors, trustees and
advisory employees. This Code of Ethics information relating
to Trust portfolio transactions from engaging in inappropriate
personal securities transactions and to require reports from
such persons of certain purchases and sales of securities.
A. Definitions
When used in this Code of Ethics, the following terms
have the following meanings:
1. Access Person. The term "access person" means
any trustee, direction officer, or advisory
employee (as hereinafter defined) of the Trust or
the Adviser.
2. Advisory Employee. The term "advisory employee"
means any employee of the Trust or of the Adviser
who, in connection with his or her regular
functions or duties, makes, participates in, or
obtains information regarding the purchase or
sale of a security by the Trust, or whose
functions relate to the making of any
recommendations with respect to such purchases or
sales. In the event that any individual or
company should be in a control relationship to
the Trust or the Adviser, the term "advisory
employee" would include such an individual or any
employee of such a company to the same extent as
an employee of the Trust or the adviser.
3. Beneficial Ownership. "Beneficial ownership"
has the same meaning as would be used in
determining whether am employee is subject to the
provisions of section 16 of the Securities
Exchange Act of 1934 and the rules and
regulations thereunder. "Beneficial ownership"
includes accounts of spouse, minor children and
relatives resident in an access person's home, as
well as accounts of another person if by reason
of any contract, understanding, relationship,
agreement or other arrangement the access person
obtains therefrom benefits substantially
equivalent to those of ownership. A copy of a
release issued by the Securities and exchange
Commission on the meaning of the term "beneficial
ownership" is available upon request, and should
be studied carefully by any access person
concerned with this definition before preparing
any report required hereunder.
4. Considered for Purchase or Sale . A security is
"being considered for purchase or sale" when a
recommendation to purchase or sell such security
has been made and communicated by any advisory
employee of the Trust or the Adviser in the
course of his on her duties and, with respect to
the person making the recommendation, when such
person seriously considers making such a
recommendation.
5. Control . The term "control" has the same
meaning as that set forth in Section 2(a) (19) of
the Investment Company Act of 1940.
6. Disinterested Trustee . The term "disinterested
trustee" means a trustee of the Trust who is not
an "interested person" of the Trust within the
meaning of Section 2(a) (19) of the Investment
Company Act of 1940.
7. Security . The term "security" has the same
meaning as set forth in section 2 (a) (36) of the
investment company act of 1940, except that it
does not include securities issued by the
Government of the United States, bankers'
acceptances, bank certificates of deposit,
commercial paper or shares of registered open-end
investment companies. Any prohibition or
reporting obligation relating to a security
applies to any option, warrant or right to
purchase or sell such security and any security
convertible into or exchangeable for such
security.
B. Prohibited Actions
1. Purchases and Sales No access person shall
purchase or sell, directly or indirectly, any
security in which he or she has, or by reason of
such transaction acquires, any direct or indirect
beneficial ownership and which to his or her
actual knowledge at the time of such purchase or
sale is being purchased or sold by the Trust or
is being considered for purchase or sale by the
Trust. This prohibition shall continue until the
time that the Trust completes the purchase or
sale or determines not to make the purchase or
sale.
2. Initial Public Offerings . No access person shall
purchase or otherwise acquire any security in an
initial public offering without the prior written
approval of the President of the Trust or the
Adviser, as the case may be.
3. Private Placements. No access person shall
purchase or otherwise acquire any security in a
private placement without the prior written
approval of the President of the Trust or the
Adviser, as the case may be. If granted, such
approval shall take into account, among other
factors, whether the investment opportunity
should be reserved for the Trust and whether the
opportunity is being offered to the access person
by virtue of his position with the adviser or the
Trust. In such circumstances, the decision to
purchase securities of the issuer will be
subject to an independent review by an access
person with no personal interest in the issuer.
4. Short -Term Trading Profits . No access person
may profit from the purchase and sale, or sale
and purchase, of the same (or equivalent)
securities within 60 calendar days. Any profits
realized on such short-term trades shall be
disgorged to a charity selected by the Trust or
the Adviser, as the case may be. This prohibition
shall not prohibit an access person from closing
a position that is at a loss within a 60-day
period after purchase.
5. Gifts . No access person shall seek any gift,
gratuity, or preferential treatment from any
person that does business with or on behalf of
the Trust or the Adviser, that is or may appear
to be connected with any present or future
business dealings between that person and the
adviser or the Trust, or that may create or
appear to create a conflict of interest.
6. Service As Director . No access person may serve
on the board of directors of any publicly traded
company other than the Trust. No access persons
may serve on the board of directors of any
privately held company without prior written
approval of the President of the Trust or the
adviser, as the case may be.
7. Inside Information . No access person shall use
material, non-public information about any
issuer, whether or not held in the portfolio of
the Trust or suitable for inclusion in such
portfolio, for personal gain or on behalf of the
Trust. Any access person who believes he is in
possession of such information shall contact the
President of the Trust or the Adviser, as the
case may be, immediately to discuss the
information and the circumstances surrounding its
receipt.
8.
9. Confidentiality . No access person shall reveal
to any other person (except in the normal course
of his or her duties behalf of the Trust or the
Adviser) any information regarding securities
transactions made or being consider by or on
behalf of the trust or the Adviser.
C. Exempt Purchase and Sales
The prohibitions of Section B(1) shall not apply to:
1. Purchases a sales effected in any account over
which the access person has no direct or indirect
influence or control, or in any account of the
access person which is managed on a discretionary
basis by a person other than the access person
and with respect to which the access person does
not in fact influence or control such
transactions.
2. Purchases or sales of securities which are not
eligible for purchase or sale by the Trust.
3. Purchases or sales which are non-volitional on
the part of the access person or the Trust.
4. Purchases which are part of an automatic dividend
reinvestment plan.
5. Purchases effected upon the exercise of rights
issued by the issuer pro rata to all holders of a
class of its securities, to the extent such
rights were acquired from such issuer, and sales
of such rights so acquired.
6. Any fixed income securities transaction involving
$100,000 principal amount or less if the access
person has no prior knowledge of the Trust's
transactions in such securities.
7. Any equity securities transaction, or series of
related transactions, involving 500 shares or
less in the aggregate, if the access person has
no prior knowledge of the Trust's activity in
such security and the issuer has a market
capitalization greater than $500 million.
8. Purchases or sales which receive the prior
approval of the President of the Trust or the
Adviser, as the case may be, on the basis that
(a) the transaction is not potentially harmful to
the Trust because it would be very unlikely to
affect a highly institutional market and (b) the
decision to purchase or sell the security is not
the result of information obtained in the course
of the access person's relationship with the
Trust or the Adviser.
9. Any purchase or sale of shares of Trust.
D. Reporting
1. Access Persons (other than disinterested
trustees) . (a)Every access person (except
disinterested trustees of the Trust) shall report
to the Secretary of the Trust or the Adviser, as
the case may be, the information described in
Section D(30 below with respect to transactions
in any security in which such access person has,
or by reason of such transaction requires, any
direct or indirect beneficial ownership in the
security; provided, however, that no access
person shall be required to make a report with
respect to purchases and sales specified in
Section C(1). (b) Every access person shall
provide to the Secretary of the Trust or the
Advisor, as the case may be, an initial holdings
report no later than ten (10) days after the end
of the Trust's fiscal year.
2. Disinterested Trustees . a disinterested trustee
of the Trust shall report such a transaction in a
security if such trustee, at the time of the
transaction, knew or, in the ordinary course of
fulfilling his or her official duties as a
trustee of the Trust, should have known that,
during the 15-day period immediately preceding or
after the date of the transaction by the trustee,
such security is or was purchased or sold by the
Trust or is or was considered for purchase or
sale.
3. Form of Report . Every report shall be made not
later than ten (10) days after the end of the
calendar quarter in which the transaction to
which the report relates was effected, and shall
contain the following information:
(a) the date of the transaction, the title,
the interest rate and maturity date ( if
applicable) number of shares, and the
principal amount of the security involved;
(b) the nature of the transaction, i.e.,
purchase, sale or any other type of
acquisition or deposition;
(c) the price at which the transaction was
effected; and
(d) the name of the broker, dealer or bank
with or though whom the transaction was
effected and the date the account was
established; and
(e) The date the report was submitted.
All reports shall be made on the form available
from the secretary of the Trust or the Adviser, as
the case may be. Copies of confirmation statements
may be attached to signed report in lieu of setting
forth the information otherwise required.
4. Disclaimer of Beneficial Ownership . Any such
report shall not be construed as an admission by
the person making such report that he or she has
any direct or indirect beneficial ownership in
the security to which the report relates.
5. Notification of Reporting Obligation . The
quarterly report is designed to comply with the
requirements of the Securities and Exchange
Commission under the Investment Company Act of
1940. All access persons having a duty to file
reports hereunder shall be informed of such duty
by the Secretary of the Trust or the Adviser, as
the case may be, in writing and a listing of
access persons will be maintained. Once
informed of the duty to file a quarterly report,
an access person has a continuing obligation to
file such report in a timely manner, until such
time as he or she is notified otherwise.
Information supplied on the reports is available
for inspection by the Securities and Exchange
Commission at any time during the five-year
period following the end of the fiscal year in
which the report is made.
6. Review of Reports The Trust and the Adviser, as
the case may be, shall designate the person or
persons responsible for reviewing the reports
prescribed in this part D and shall maintain a
record of the persons designated. The personal
securities transaction and holdings reports shall
be reviewed by the designated person or persons
upon receipt. After the reports have been
reviewed, the designated person or persons shall
advise, in writing the President of the Trust or
the Adviser, as the case may be, whether the
reports reflect violations or this Code.
E. Sanctions .
The Secretary of the Trust and the Adviser shall furnish
to the Audit Committee of the Board of Trustees of the Trust
reports regarding the administration hereof and summarizing
any reports filed hereunder. If such report indicates that any
changes hereto are advisable, the Audit Committee shall make
an appropriate recommendation to the Board of Trustees. The
Audit Committee also shall inquire into any apparent
violations of this Code of Ethics and shall report any
apparent material violations to the Board of Trustees. Upon
finding of a violation of this Code of Ethics, the Board of
Trustees may impose (or require the Adviser to impose) such
sanctions as it deems appropriate, which may include censure,
suspension or termination of status of the violator.
F. Annual Certification
At the first board meeting after fiscal years management
of the Trust and the Adviser, as the case may be, shall
provide the Board of Trustees a written report that (1)
describes issues that arose during the previous year under
this code and related procedures and (2) certifies the trust
or the Adviser, as the case my be, has adopted procedures
reasonably necessary to prevent access persons from violating
its Code of Ethics.
April 1997
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Fund certifies that it
meets all of the requirements for effectiveness of this registration
statment under rule 485(b) under the Securities act and has duly
caused this registration statement to be signed on its behalf by
the undersigned, duly authorized, in the city of Houston, and
state of Texas on the 20th day of April, 2000.
KHAN FUNDS
By /S/ S.A.D. KHAN
Sardar A. D. Khan, President
Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement has been signed below by the
following persons in the capacities indicated on the following
dates.
/S/ S.A.D. KHAN
Sardar A. D. Khan, Trustee and Principal April 20, 2000
Executive Officer
/S/ SHEHZAD D. KHAN
Shehzad D. Khan, Trustee April 20, 2000
/S/SHAHWAR D. KHAN
Shahwar D. Khan, Trustee April 20, 2000
*CHARLES E. MOORE April 20, 2000
Charles E. Moore, Trustee
*EDWARD SHUBERT April 20 2000
Edward Shubert, Trustee
*By /S/S.A.D. KHAN
Sardar A.D. Khan
Attorney-in-Fact
[TYPE] EX-27.1
[ARTICLE] 6
<TABLE>
<S> <C>
[PERIOD-TYPE] OTHER
[FISCAL-YEAR-END] DEC-31-1999
[PERIOD-END] DEC-31-1999
[INVESTMENTS-AT-COST] 2,986,622
[INVESTMENTS-AT-VALUE] 4,389,530
[RECEIVABLES] 75,306
[ASSETS-OTHER] 30,336
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 4,495,172
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 34,765
[TOTAL-LIABILITIES] 34,765
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 3,061,498
[SHARES-COMMON-STOCK] 519,991
[SHARES-COMMON-PRIOR] 378,119
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (3,999)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 1,402,908
[NET-ASSETS] 4,460,407
[DIVIDEND-INCOME] 29,035
[INTEREST-INCOME] 2,924
[OTHER-INCOME] 0
[EXPENSES-NET] 68,048
[NET-INVESTMENT-INCOME] (36,089)
[REALIZED-GAINS-CURRENT] 96,767
[APPREC-INCREASE-CURRENT] 830,095
[NET-CHANGE-FROM-OPS] 890,773
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] 34,016
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 166,170
[NUMBER-OF-SHARES-REDEEMED] 28,313
[SHARES-REINVESTED] 4,015
[NET-CHANGE-IN-ASSETS] 1,867,596
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] (38,018)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 25,518
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 102,232
[AVERAGE-NET-ASSETS] 3,407,606
[PER-SHARE-NAV-BEGIN] $6.86
[PER-SHARE-NII] (.07)
[PER-SHARE-GAIN-APPREC] 1.86
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] .07
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] $8.58
[EXPENSE-RATIO] 2.00%
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
