- -------------------------------------------------------
KHAN FUNDS: 1999 Annual Report of the Khan Growth Fund
- -------------------------------------------------------
INVESTMENT ADVISOR
Khan Investment Inc
714 FM 1960 West #201
Houston, Texas 77090
CUSTODIAN
Firstar Corporation
425 Walnut St., M.L. 6118
Cincinnati, Ohio 45202
TRANSFER AGENT
American Data Services
P.O. Box 5536
Hauppauge, New York 11788-
0123
AUDITORS
Tait, Weller & Baker
8 Penn Center Plaza #800
Philadelphia,
Pennsylvania 19103
Dear Fellow Shareholders:
As always, it gives us great pleasure to provide you with
our 1999 Annual report of the Khan Growth Fund (the
"Fund"). Once again, it is with excitement and pride that
we shall address our performance of the Fund for this past
fiscal year and the direction we will navigate together
into the year 2000 and beyond. For the year ending
December 31, 1999, the Fund produced a return of 26.06%,
which compares with the benchmark Standard & Poor's 500
index return of 21.04%.
We attribute this success to well planned strategies, hard
work, along with unwavering commitment and discipline to
achieve our defined goals. Our tax-efficient approach has
produced an extra bonus for our shareholders in 1998 and
1999 while providing excellent returns. The Fund's
performance has been strong primarily due to participation
in the rise of the communication services, technology, and
retail sectors. We at Khan Funds believe, our long-term
investment in large cap companies with strong growth
prospects will continue to increase our shareholder's
wealth in the years to come. We enjoyed robust gains from
our investments in companies like Cisco systems, General
Electric, Microsoft, Home Depot, EMC Corp., Nokia, Hewlett-
Packard, Wal-Mart, America Online and Sun Microsystems. As
the drive towards increased efficiency continues, these
information technology companies will continue to reap the
benefits from the explosive growth in this sector of the
market while the overall economy will benefit from the
increased productivity. Our healthcare sector holdings,
once considered to be some of the more stable and
predictable in the portfolio, proved to be some of most
volatile. Medicare reform and concerns regarding the
future of the industry and the effects of rising interest
rates overshadowed the increased demand for quality
healthcare by the aging population. Adversely affected by
these concerns were Fund holdings such as Pfizer, Bristol
Myers Squibb, Merck, and Johnson and Johnson. Insurance
giant and holding company Berkshire Hathaway also adversely
affected us, along with the problems experienced by Compaq
that resulted in shifts of business focus and cost
efficiency and weakness in the earnings growth of
consistent market favorites like Coca-Cola, Charles Schwab,
Associated financial services and Gillette.
PORTFOLIO COMPOSITION
By the end of 1999, the Fund had 2.77% of its net assets in
short term investments, the remaining in diversified common
stocks, with an emphasis on the healthcare, technology,
telecommunication services and retail sectors. Though our
primary focus leans towards an investment in equities, a
small percentage of assets are kept liquid in order to take
advantage of possible market inefficiencies or
opportunities.
ECONOMIC OUTLOOK
Considerable attention has been focused on the Federal
Reserve and their preemptive strike against future
inflation. Inflation is currently at very healthy levels,
but the fear remains that if technology driven efficiency
declines, inflation will increase. The current policy to
raise interest rates by the Fed has revealed their
confidence in the resilience of the US economy and their
goal to maintain a stout bull market for years to come.
With unemployment rates unusually low, the job market is
very tight. In the past this has caused wage price
inflation, yet this has been offset by substantial cost
savings from productivity-based technology and corporate
mergers to cut costs. A tight job market has forced
companies to embrace the new technology to attain higher
efficiency in order to maintain earnings growth. The
Consumer price index increased by 2.5% in 1999, and should
increase by a mere 2% or less in 2000.
The U.S. Economy sees no signs of a slowdown occurring.
Even with its size, the benefits of economies of scale are
justifying a Gross Domestic Product (GDP) growth of over
3.5%. The U.S. has consistently surpassed GDP growth
estimates by strong margins. With the growth estimates for
2000, the U.S. still remains one of the fastest growing
nations in the world. Growth, along with the level of
political and economic stability, makes the U.S. a prime
target for U.S. and international investors.
Inflation, interest rates, economic growth and commodity
prices are all simply factors that affect the essence of
stock prices, corporate profits and excess cash flow. We
feel the S&P 500 corporate profits will grow at a rate of
over 12%. Corporate profits should also benefit from the
future absence of a one-time charge against earnings in the
form of Y2K compliance costs. This will be reflected in
the earnings in the first two quarters of 2000. Though
there will be inventory costs associated with Y2K buildup,
the decrease in production costs should offset any losses
and ease inflation fears. Stable inflation of around 2%
will create an environment suited for growth. The new
technologies acquired by companies to maintain earnings
growth during a tight labor market will show more promise
as unemployment rates settle to more healthy levels in 2000
and beyond. We believe U.S. companies, which are ahead of
the rest of the world in almost every industry, and
completely dominate the new economy industries of
technology and telecommunication, are the best investment
choice for investors seeking growth and stability.
INVESTMENT STRATEGY
The strategy of the Fund is to invest in the common stock
of large capitalization companies, which we believe provide
growth opportunities based on future cash flow. We will
continue to conduct extensive analysis of the underlying
fundamentals of each company, while using technical
analysis to take advantage of market inefficiencies.
Finally, variable factors such as management performance,
dynamic visionary approach, consumer trends, industry and
sector dominance, and projection models are used to
establish the continued investment worthiness of Khan
Growth Fund holdings.
Here at Khan Funds, our most important asset is you, our
shareholders. Through our mutual trust and dependence, we
strive for conviction from both ourselves and from you in
our investment philosophy. We look forward to what lies
ahead in our financial futures and together strive for
excellence. The management of the Khan Growth Fund
intentionally invests in the Fund to understand and live
with the emotions caused by fluctuation in the market.
Furthermore, consistency is a goal we strive for as we
navigate into the next millennium.
Sincerely,
S. D. Khan, M.D. Faisal D. Khan
Portfolio Manager Portfolio Manager
The outlook and opinion expressed above represent the view
of the investment advisors as of February 21, 2000, and are
subject to change as market and economic events unfold.
Khan Growth Fund vs. Benchmark index
The chart below compares your Fund to a benchmark index.
It is intended to give you a general idea how your Fund
performed compared to the stock market during the year
ended 12/31/99. It is important to understand the
difference between your Fund and an index. Your Fund's
total return includes Fund expenses and management fees.
An index reflects the investment of income dividends and
capital gains distributions, if any, but does not reflect
fees, brokerage commissions, or other expenses of
investing.
Comparative Investment Returns
Year ended December 31, 1999
* Initial investment $10,000.
* Past performance is no guarantee of future results.
(GRAPH)
A graphic comparison of the change iv value of a hypothetical
$10,000 investment in the Khan Growth Fund and the S&P 500 Index.
The Khan Growth Fund is represented by a the black solid line.
The S&P 500 Index is represented by the grey dashed line. The "y"
axis reflects the value of the investment. The "x" axis reflects
the computation perionds from inception, July 9, 1997, through
December 31, 1999. The ending value of the hypothetical investment
in Khan Growth Fund was $17,397 versus that of $16,769 for the
S&P 500 Index.
Average Annual Total Return for the Periods ended December 31, 1999
KGF S&P 500
One Year 26.06 % 21.04 %
Since 7/9/97* 25.05 % 23.20 %
Hypothetical Investment of $10,000 since 7/9/97*
Khan Growth Fund $ 17,397
S&P 500 Index $ 16,769
*Fund's Inception Date
The Standard & Poor's 500 Stock Index is a
capitalization-weighed index of 500 stocks that attempts
to measure performance of the broad domestic economy
through changes in the aggregate market value of 500
stocks representing major industries.
Top Industries %
- ------------------- -----
Computer - Micro 16.50 %
Medical - Drugs 9.40 %
Telecom Equipment 9.26 %
Retail Discount 7.18 %
Networking 6.68 %
Computer Software 5.81 %
Internet Software 5.65 %
Diversified Operations 5.35 %
Telephone 5.10 %
Insurance 3.84 %
Top 10 Holdings Symbol %
- ---------------- ------ ---
Cisco Systems, Inc. CSCO 6.39%
Nokia Class A NOKA 6.39 %
Sun Microsystems SUNW 5.56 %
Dell Computer DELL 4.99 %
Wal-Mart Corp. WMT 4.96 %
Microsoft MSFT 4.55 %
America Online AOL 4.40 %
Citigroup C 3.46 %
Intel Corporation INTC 3.25 %
General Electric GE 3.21 %
KHAN GROWTH FUND
SCHEDULE OF INVESTMENTS
December 31, 1999
Market
Shares Value
COMMON STOCKS (95.64%)
Aerospace (0.52%)
400 Honeywell International, Inc. $23,075
Audio/Video Products (0.96%)
200 *Gemstar International Group 14,250
100 Sony Corporation 28,475
-------
42,725
Auto Related (1.32%)
1,100 Ford Motor Co. 58,781
Banks (3.46%)
2,775 Citigroup, Inc. 154,186
Cable TV (0.54%)
500 Comcast Corporation 23,937
Capital Goods (4.60%)
1,600 Tyco International, Ltd. 62,200
925 General Electric Co. 143,144
--------
205,344
Cellular Telecommunications (0.68%)
200 *Sprint Corp. 20,500
200 Vodafone AirTouch PLC 9,900
--------
30,400
Communication Services (6.49%)
1,250 AT&T Corp. 63,437
200 *AT&T Corp. - Liberty Media Group 11,350
200 *Clear Channel Communications, Inc. 17,850
200 *Exodus Communications, Inc. 17,763
300 *Level 3 Communications 24,563
2,700 *MCI Worldcom, Inc. 143,269
100 Telefonos de Mexico SA 11,250
--------
289,482
Computer & Related (23.28%)
4,360 *Dell Computer Corp. $222,360
1,000 *EMC Corp./Mass 109,250
200 Hewlett-Packard Corp. 22,788
1,760 Intel Corp. 144,870
400 International Business Machines 43,200
1,740 *Microsoft Corp. 203,145
400 *Oracle Corporation 44,825
3,200 *Sun Microsystems, Inc. 247,800
--------
1,038,238
Electronics Components (1.60%)
200 *Applied Materials, Inc. 25,337
100 *Broadcom Corporation 27,237
200 Solectron Corporation 19,025
--------
71,599
Financial (4.25%)
500 American Express 83,125
545 Federal National Mortgage Association 34,028
500 Merrill Lynch & Co. Inc. 41,750
800 Schwab Corp. 30,700
--------
189,603
Healthcare (8.05%)
800 *Amgen, Inc. 48,050
800 Bristol Myers Squibb 51,350
200 *Genetech, Inc. 26,900
1,090 Merck & Co., Inc. 73,098
3,720 Pfizer, Inc. 120,668
930 Schering Plough Corp. 39,234
--------
359,300
Insurance (3.67%)
625 American International Group 67,578
1 *Berkshire Hathaway 56,100
420 Marsh & McLennan Cos., Inc. 40,189
--------
163,867
Internet Software (10.79%)
2,600 *America Online, Inc. 196,137
2,660 *Cisco Systems, Inc. 284,952
--------
481,089
Multimedia & Entertainment (0.81%)
500 Time Warner, Inc. $36,219
Personal Care (4.47%)
750 Proctor & Gamble Co. 82,172
1,260 Johnson & Johnson 117,338
--------
199,510
Pipelines (0.99%)
1,000 Enron Corp. 44,375
Publishing (0.83%)
600 McGraw-Hill Cos., Inc. 36,975
Retail (9.47%)
200 *Amazon.com 15,225
200 *Costco Wholesale 18,250
950 GAP Stores 43,700
1,200 Home Depot, Inc. 82,275
1,000 Walgreens Co. 29,250
3,200 Wal-Mart Stores, Inc. 221,200
1,000 Warnaco Group 12,313
---------
422,213
Telecommunication Equip(8.86%)
1,200 Lucent Technologies, Inc. 89,775
1,500 *Nokia Class A 285,000
200 Nortel Networks Corporation 20,200
---------
394,975
Total Common Stocks (Cost $2,862,985) 4,265,893
Short-Term Investments (2.77%)
123,637 Star Treasury Fund (Cost $123,637) 123,637
Total Investments Securities (Cost $2,986,622) 98.41% 4,389,530
Other Assets Less Liabilities 1.59% 70,877
Net Assets 100.00% $4,460,407
+Cost is the same for federal income tax purposes.
Net unrealized appreciation consist of:
Aggregate unrealized appreciation of investment
securities $1,458,364
Aggregate unrealized depreciation of investment
securities (55,456)
Net unrealized appreciation of investment securities $1,402,908
* Denotes non-income producing securities
See accompanying notes to financial statements.
KHAN GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1999
ASSETS
Investment, at market value (cost $2,986,622)
$ 4,389,530
Receivable for investment securities sold 73,185
Dividends and interest receivable 2,121
Organization costs, net 18,573
Due from advisor 11,763
Total assets
4,495,172
LIABILITIES
Accrued expenses $34,765
Total liabilities 34,765
Net assets applicable to shares outstanding
$ 4,460,407
Shares outstanding
519,991
Net assets value, offering and redemption price per share
$8.58
NET ASSETS
At December 31, 1999, net assets consists of:
Paid-in capital
$3,061,498
Accumulated net realized loss on investments (3,999)
Accumulated net unrealized appreciation of investments
1,402,908
----------
$4,460,407
See accompanying notes to financial statements.
KHAN GROWTH FUND
STATEMENT OF OPERATIONS
For the year ended December 31, 1999
Investment income
Dividends (net of foreign taxes withhold of $145) $29,035
Interest 2,924
Total investment income
31,959
Expenses
Investment advisory fee (Note 2) 25,518
Administration fee (Note 2) 8,506
Fund accounting expense 15,002
Transfer agent fees 12,001
Registration fee 5,001
Custodial fee 6,001
Prospectus and shareholders' reports 1,000
Professional fees 16,002
Directors fees and expenses 1,201
Amortization of organization costs 7,358
Insurance fee 1,000
Miscellaneous 7,642
Total expenses 106,232
Less: reimbursed and waived expenses
(38,184)
Net expenses
68,048
Net investment loss
(36,089)
Realized and unrealized gain on investments:
Net realized gain on sales of investments 96,767
Net change in unrealized appreciation of investments
830,095
Net realized and unrealized gain on investments
926,862
Net increase in net assets resulting from operations
$890,773
See accompanying notes to financial statements.
KHAN GROWTH FUND
STATEMENT OF CHANGES IN NET ASSETS
Year Ended Year Ended
December 31, December 31,
1999 1998
Operations
Net investment loss $ (36,089) $(10,630)
Net realized gain (loss) on investments
96,767 (38,018)
Net change in unrealized appreciation on investments
830,095 564,124
Net increase in net assets resulting from operations
890,773 515,476
Dividends paid to shareholders from:
Capital gain ($.07 and $.03 per share, respectively)
(34,016) (7,983)
Net capital share transactions (Note 5)
1,010,839 935,666
Total increase in net assets
1,867,596 1,443,159
Net assets
Beginning of year 2,592,811 1,149,652
End of year $4,460,407 $2,592,811
See accompanying notes to financial statements.
KHAN GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
(1) SIGNIFICANT ACCOUNTING POLICIES
Khan Funds, (the "Trust") is a business trust under the laws
of Delaware registered under the Investment Company Act of
1940, as amended (the "1940 Act") as an open-end management
investment company. The Declaration of Trust provides for
the issuance of multiple series of shares, each representing
a diversified portfolio of investments with different
investment objectives, policies and restrictions. As of
December 31, 1999, the only series issued by the Trust is
the Khan Growth Fund.
The Fund seeks long-term capital growth, consistent with the
preservation of capital, by investing primarily in the
common stock of large capitalization U.S. companies.
Income is a secondary objective of the Fund. Khan
Investment, Inc. serves as the Fund's investment advisor.
The following is a summary of significant accounting
policies followed by the Fund in the preparation of its
financial statements. The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
A. Security Valuations - A security listed or traded on an
exchange is valued at the last sales price on the
exchange where the security is principally traded.
Investments with maturities of 60 days or less are valued
on the basis of amortized cost which approximates market
value.
B. Securities Transactions, Investment Income and
Distributions - Securities transactions are accounted for
on a trade date basis. Realized gains or losses are
computed on the basis of specific identification of the
securities sold. Interest income is recorded as earned
from settlement date and is recorded on an accrual basis.
Dividend income and distributions to shareholders are
recorded on the ex-dividend date.
C. Federal Income Taxes - The Fund intends to comply with
the requirements of the Internal Revenue Code necessary
to qualify as a regulated investment company and, as
such, will not be subject to federal income taxes on
otherwise taxable income (including net realized capital
gains) which is distributed to shareholders. Therefore,
no provision for federal income taxes is recorded in the
financial statements.
D. Deferred Organization Costs - The Fund has incurred
expenses of $36,818 in connection with the organization.
These costs have been deferred and are being amortized on
a straight line basis over a period of sixty months from
the date the Fund commenced operations.
E. Use of Estimates - The preparation of financial
statements in conformity with generally accepted
accounting principles requires management to make
estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the
financial statements, as well as the reported amounts of
income and expenses during the reported period. Actual
results could differ from those estimates.
KHAN GROWTH FUND
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 1999
(2) ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Fund has an investment advisory agreement with Khan
Investment, Inc. (the "Advisor"). Under the terms of the
investment advisory agreement, the Advisor has
responsibility for supervising all aspects of the operations
of the Fund subject to the Trust's Board of Trustees (the
"Trustees"). The Advisor has agreed to ensure that assets
of the Fund are invested in accordance with the investment
objectives and policies. For its services, the Advisor
receives an annual management fee, payable monthly, and
computed on the value of the net assets of the Fund as of
the close of business each business day, at the annual rate
of 0.75% of such net assets of the Fund. During the year
ended December 31, 1999, the Advisor was paid $25,518 for
such services. The Advisor has voluntarily agreed to waive
all of their fees and reimburse fund expense in order to
limit operating expenses to an annual rate of 2% of the net
assets of the Fund. Fee waivers and expense reimbursements
are voluntary and may be terminated at anytime.
The Fund has an administrative services agreement (the
"Agreement") with the Advisor. Under the terms of the
Agreement, the Advisor provides all administrative services
necessary for the Fund's operations and is responsible for
the supervision of the Fund's other service providers. The
Advisor also assumes all ordinary, recurring expenses
necessary in carrying out the duties for the Fund, such as
office space and facilities, and equipment and clerical
personnel. The Advisor shall also pay all compensation of
all Trustees, officers and employees of the Trust who are
affiliated persons of the Advisor. For these services, the
Advisor receives an annual fee, payable monthly, computed on
the value of the net assets of the Fund as of the close of
business each business day at an annual rate of 0.25% of 1%
of such assets of the Fund. During the year ended December
31, 1999, the Advisor was paid $8,506 for such services.
The Fund has a shareholder service plan whereby the Trust
pays securities broker-dealers, retirement plan sponsors and
administrators, and other securities professionals and/or
beneficial owners of shares of the Fund, for expenses
incurred in connection with non-distribution shareholder
services provided by them to shareholders, provided that
such shareholder servicing is not duplicative of the
servicing otherwise provided on behalf of the Fund. These
expenses are limited to an annual rate of not more than
0.25% of the net assets of the Fund as of the close of
business each business day. As of December 31, 1999, the
Fund has not made any payments.
(3) DIRECTORS' FEES AND EXPENSES
Directors' fees represent remuneration paid or accrued to
each director who is not an "interested person" of Khan
Investment, Inc.
(4) INVESTMENT SECURITIES
Purchases of securities and proceeds from sales of
securities (other than short-term securities) during the
year ended December 31, 1999 were $2,238,295 and $1,484,177,
respectively.
KHAN GROWTH FUND
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 1999
(5) CAPITAL STOCK
Changes in the Fund's capital stock outstanding for the
years ended December 31, 1999 and 1998, were as follows:
Year Ended Year Ended
December 31, 1999 December 31, 1998
Shares Amount Shares Amount Shares sold
166,170 $1,187,594 154,870 $927,800
Shares issued in reinvestment of dividends 4,015
33,439 1,416 7,983
Shares redeemed
(28,313) (210,194) (21) (117)
Net increase
141,872 $ 1,010,839 156,265 $935,666
As of December 31, 1999, S. D. Khan and his family owned an
aggregate of 52.6% of the outstanding shares of this
Fund which may be deemed to control the Fund.
(6) FINANCIAL HIGHLIGHTS
Shown below are the financial highlights for a share
outstanding throughout each period.
July 8, 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
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Trustees
Khan Funds
Houston, Texas
We have audited the accompanying statement of assets and
liabilities of the Khan Growth Fund, a series of shares of the
Khan Funds including the portfolio of investments, as of
December 31, 1999, and the related statement of operations for
the year then ended and the statement of changes in net assets
and the financial highlights for the two years in the period
then ended. These financial statements are the
responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and
financial highlights based on our audits. The financial
statements and financial highlights presented for the period
ended December 31, 1997 were audited by other auditors whose
report dated January 24, 1998, expressed an unqualified
opinion on those statements.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements and financial highlights are free of
material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1999, by
correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and
significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial
highlights referred to above present fairly, in all material
respects, the financial position of Khan Growth Fund as of
December 31, 1999, the results of its operation for the year
then ended and, the changes in its net assets and the
financial highlights for the two years in the period then
ended in conformity with generally accepted accounting
principles.
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
February 16, 2000
