<PAGE>
As filed with the Securities and Exchange Commission on July 31, 1996
File No. 2-76762
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 19
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 20
Rea-Graham Funds, Inc.
-------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
10966 Chalon Road
Los Angeles, California 90077
--------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (310) 442-2660
Patrick W.D. Turley, Esq.
Dechert Price & Rhoads
1500 K Street, N.W.
Washington, D.C. 20005
(Name and Address of Agent for Service)
It is proposed that this filing will become effective immediately upon filing
pursuant to paragraph (b) of Rule 485.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
Proposed
Maximum
Offering Proposed
Title of Price Maximum
Securities Amount Per Share** Aggregate Amount of
Being Being (within 15 days Offering Registration
Registered Registered of filing) Price** Fee
- --------------------------- ----------- ---------------- ----------- ------------
<S> <C> <C> <C> <C>
Shares of Common Indefinite* N/A N/A N/A
Stock Par Value
$1.00 Per Share
Rea-Graham Balanced Fund 250,750 $14.55 $3,509,767 $100.00
=========================================================================================
</TABLE>
* Registrant continues its election to register an indefinite number of
shares under Rule 24f-2 and filed its Rule 24f-2 Notice for the fiscal year
ended March 31, 1996 on May 30, 1996.
** Registrant elects to calculate the maximum aggregate offering price
pursuant to Rule 24e-2. 258,015 shares ($3,605,762 worth of securities) of
Rea-Graham Balanced Fund were redeemed during the fiscal year ended March
31, 1996. 27,196 shares ($385,995 worth of securities) of Rea-Graham
Balanced Fund were used for reduction pursuant to Paragraph (c) of Rule
24f-2 during the current year. 230,819 shares ($3,219,767 worth of
securities) is the amount used for reduction in this Amendment. Pursuant to
Rule 457(d) under the Securities Act of 1933, the offering price as
calculated on July 23, 1996 for Rea-Graham Balanced Fund is $14.55 per
share. While no fee is required for the 230,819 shares of Rea-Graham
Balanced Fund, the Registrant has elected to register, for $100, an
additional $290,000 worth of shares (approximately 19,931 shares).
<PAGE>
REA-GRAHAM FUNDS, INC.
REA-GRAHAM BALANCED FUND
CROSS-REFERENCE SHEET
ITEM NO. CAPTION
-------- -------
PART A
------
1 Cover Page
2 Fee Data
3 Financial Highlights
4 The Fund
5 Management of the Fund
5A Performance Information
6 Description of Shares
7 Purchase of Shares
8 Redemption and Repurchase of Shares
9 Not Applicable
PART B
------
10 Cover Page
11 Table of Contents
12 General Information and History
13 Investment Objectives and Policies
14 Management of the Fund
15 Principal Shareholders
16 Investment Advisory and Other Services
17 Brokerage Allocation
18 Description of Shares, Part A
19 Purchase, Redemption and Pricing of Shares
20 Tax Status
21 Principal Underwriter
22 Not Applicable
23 Financial Statements
<PAGE>
PROSPECTUS
[LOGO FOR REA-GRAHAM BALANCED FUND JULY 31, 1996
REA-GRAHAM
APPEARS 10966 Chalon Road, Los Angeles, California 90077
HERE]
(800) 433-1998, (310) 442-2660
- -------------------------------------------------------------------------------
Rea-Graham Balanced Fund (the "Fund"), is a separate series of shares of
Rea-Graham Funds, Inc. (the "Company"), an open-end diversified investment
company. The Fund seeks as its investment objectives medium-term capital
growth, income and safety through balanced investments in common stocks,
preferred stocks, U.S. Government securities and money market instruments. Its
Investment Policy is based on principles of Benjamin Graham, applied by his
partner James B. Rea.
This Prospectus sets forth concisely information about the Fund that a
prospective investor ought to know before investing.
A STATEMENT OF ADDITIONAL INFORMATION DATED JULY 31, 1996, HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS INCORPORATED IN ITS
ENTIRETY BY REFERENCE IN AND MADE A PART OF THIS PROSPECTUS. THIS STATEMENT IS
AVAILABLE WITHOUT CHARGE UPON REQUEST TO JAMES BUCHANAN REA, INC., 10966
CHALON ROAD, LOS ANGELES, CALIFORNIA 90077.
- -------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
<PAGE>
FEE DATA
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load imposed on Purchases (as a percentage of public
offering price)........................................................ 4.75%
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Management Fees....................................................... 0.99%
----
12b-1 Fees............................................................ 0.35%
----
Other Expenses........................................................ 1.31%
----
Total Fund Operating Expenses......................................... 2.65%
====
<CAPTION>
EXAMPLE
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual
return and (2) redemption at the end of
each time period.......................... $ 73 $ 126 $ 181 $ 332
---- ----- ----- -----
</TABLE>
The table above is provided for purposes of assisting current and
prospective shareholders in understanding the various costs and expenses that
an investment in the Fund will bear, directly or indirectly. The Example
should not be considered a representation of past or future expenses, and
actual expenses may be greater or lesser than those shown. The hypothetical
annual return of 5% is used for illustrative purposes only and should not be
interpreted as an estimate that the Fund's annual return will equal that
figure, for there can be no guarantee of the Fund's future performance. For a
more detailed discussion of the Fund's fees and expenses, see the following
section of the Prospectus: "Management of the Fund," and the following section
of the Statement of Additional information: "Investment Advisory and Other
Services."
Under rules of the National Association of Securities Dealers, Inc. (the
"NASD"), a 12b-1 fee may be treated as a sales charge for certain purposes
under those rules. Because the 12b-1 fee is an annual fee charged against the
assets of the Fund, long-term shareholders may indirectly pay an amount that
is more than the economic equivalent of the maximum front-end sales charge
permitted by rules of the NASD. See "MANAGEMENT OF THE FUND--DISTRIBUTION
SERVICES."
2
<PAGE>
SELECTED FINANCIAL INFORMATION
The following selected financial information of Rea-Graham Balanced Fund has
been audited by McGIadrey & Pullen, LLP, Independent Certified Public
Accountants, whose report thereon appears in the Statement of Additional
Information.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE
OPERATING
PERFORMANCE
(FOR A SHARE
OUTSTANDING
THROUGHOUT THE
PERIOD)
Net asset value,
beginning of
period.......... $ 13.12 $ 13.20 $ 13.68 $ 13.14 $ 12.84 $ 13.56 $ 13.90
------- ------- ------- ------- ------- ------- -------
Income from
investment
operations:
Net investment
income.......... 0.31 0.15 0.07 0.21 0.59 0.75 0.90
Net realized and
unrealized gain
(loss) on
investments..... 1.24 (0.13) (0.47) 0.59 0.37 (0.65) (0.27)
------- ------- ------- ------- ------- ------- -------
Total from
investment
operations.... 1.55 0.02 (0.40) 0.80 0.96 0.10 0.63
------- ------- ------- ------- ------- ------- -------
Less
distributions:
Dividends from
net investment
income.......... (0.31) (0.10) (0.08) (0.26) (0.66) (0.82) (0.96)
Distributions
from net realized
gains........... 0.00 0.00 -- -- -- -- (0.01)
------- ------- ------- ------- ------- ------- -------
Total
distributions. (0.31) (0.10) (0.08) (0.26) (0.66) (0.82) (0.97)
------- ------- ------- ------- ------- ------- -------
Net asset value,
end of period... $ 14.36 $ 13.12 $ 13.20 $ 13.68 $ 13.14 $ 12.84 $ 13.56
======= ======= ======= ======= ======= ======= =======
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end
of period (000). $12,277 $14,242 $17,877 $24,771 $28,281 $34,758 $43,386
Ratios to average
net assets
Expenses....... 2.65% 2.52% 2.37% 2.16% 2.06% 2.04% 1.60%
Net investment
income........ 2.02% 1.08% 0.49% 1.45% 4.05% 5.27% 5.82%
Portfolio
turnover rate... 223% 93% 106% 87% 109% 100% 125%
Portfolio
turnover rate on
stocks**........ 88% 36%
Net asset value
adjusted for
reinvestment of
dividends and
distributions:
Beginning of
period........ $ 29.14 $ 29.09 $ 29.97 $ 28.24 $ 26.23 $ 25.95 $ 24.85
======= ======= ======= ======= ======= ======= =======
End of period.. $ 32.58 $ 29.14 $ 29.09 $ 29.97 $ 28.24 $ 26.23 $ 25.95
======= ======= ======= ======= ======= ======= =======
TOTAL RETURN
(without
deduction of
sales load)..... 11.81% 0.17% -2.94% 6.13% 7.66% 1.08% 4.43%
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, AUG. 19, 1982
--------------------------------------------------- TO MARCH 31,
1989 1988 1987 1986 1985 1984 1983+
------- ------- ------- ------- ------- ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE
OPERATING
PERFORMANCE
(FOR A SHARE
OUTSTANDING
THROUGHOUT THE
PERIOD)
Net asset value,
beginning of
period.......... $ 13.83 $ 15.56 $ 16.45 $ 13.65 $ 13.09 $13.89 $11.37
------- ------- ------- ------- ------- ------ ------
Income from
investment
operations:
Net investment
income.......... 0.78 0.66 0.43 0.50 0.46 0.72 0.23
Net realized and
unrealized gain
(loss) on
investments..... 0.25 (0.46) 0.98 3.06 1.12 (0.27) 2.29
------- ------- ------- ------- ------- ------ ------
Total from
investment
operations.... 1.03 0.20 1.41 3.56 1.58 0.45 2.52
------- ------- ------- ------- ------- ------ ------
Less
distributions:
Dividends from
net investment
income.......... (0.68) (1.03) (0.47) (0.53) (0.74) (0.33) --
Distributions
from net realized
gains........... (0.28) (0.90) (1.83) (0.23) (0.28) (0.92) --
------- ------- ------- ------- ------- ------ ------
Total
distributions. (0.96) (1.93) (2.30) (0.76) (1.02) (1.25) 0.00
------- ------- ------- ------- ------- ------ ------
Net asset value,
end of period... $ 13.90 $ 13.83 $ 15.56 $ 16.45 $ 13.65 $13.09 $13.89
======= ======= ======= ======= ======= ====== ======
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end
of period (000). $50,554 $49,287 $48,141 $31,531 $13,627 $9,842 $6,863
Ratios to average
net assets
Expenses....... 1.43% 1.41% 1.48% 1.50% 2.28% 2.45% 1.67%*
Net investment
income........ 5.46% 4.82% 3.54% 4.78% 4.68% 6.46% 5.46%*
Portfolio
turnover rate... 88% 226% 111% 208% 196% 261% 212%
Portfolio
turnover rate on
stocks**........
Net asset value
adjusted for
reinvestment of
dividends and
distributions:
Beginning of
period........ $ 23.10 $ 22.69 $ 20.73 $ 16.24 $ 14.35 $13.89 $11.37
======= ======= ======= ======= ======= ====== ======
End of period.. $ 24.85 $ 23.10 $ 22.69 $ 20.73 $ 16.24 $14.35 $13.89
======= ======= ======= ======= ======= ====== ======
TOTAL RETURN
(without
deduction of
sales load)..... 7.58% 1.81% 9.45% 27.65% 13.17% 3.31% 35.80%
</TABLE>
- ----
*Annualized. +Commencement of public offering of the Fund's shares.
**Provided for additional information. Portfolio turnover rate on stocks for
periods prior to 1995 not available.
3
<PAGE>
THE FUND
Rea-Graham Balanced Fund (the "Fund") is the successor to Rea, Graham-Plan
Fund, a private limited partnership that was organized in 1976 by Dr. James B.
Rea and Benjamin Graham, as general partners. Mr. Graham is the author of
"Security Analysis" and "The Intelligent Investor," which are recognized texts
on the fundamental value of common stocks. After Mr. Graham's death later that
year, Dr. Rea continued to direct the operation of the Fund as a limited
partnership. On February 26, 1982, the Fund was incorporated under the laws of
Maryland as "Rea-Graham Fund, Inc." and on August 19, 1982, began a public
offering of its shares as an open-end diversified investment company
registered under the Investment Company Act of 1940. Since July 31,1989, the
Fund has been referred to as Rea-Graham Balanced Fund, and is a separate
series of shares of Rea-Graham Funds, Inc. (the "Company").
INVESTMENT OBJECTIVES AND POLICIES. The Fund's investment objectives are
medium-term capital growth, income and safety through balanced investments in
common stocks, preferred stocks, U.S. Government securities and money market
instruments. Up to 75% of the Fund's assets normally are invested in selected
common stocks when they can be acquired at prices which, in the opinion of
James Buchanan Rea Inc., the Fund's Investment Adviser, are less than
"fundamental value." The Investment Adviser's selection of such investments is
based on its own overall evaluation, and it considers common stocks (or common
stock equivalents, such as convertible securities) of companies which, in its
judgment, have higher-than-average earnings, dividends, book values and/or net
current asset values, in relation to the market price of their stock. The
averages used as standards in evaluating these factors are generally based on
statistics published in various sources, such as Standard & Poor's Stock
Guide. Generally, the Fund sells its holding of each stock if the market price
reaches 50% above the Investment Adviser's appraisal of its current
fundamental value, or within three years from the date of purchase, whichever
occurs first.
Normally, 25% of the Fund's assets are invested in U.S. Treasury Notes
(usually 2 to 10 year maturities at the time of purchase) or in short-term
money market instruments, or cash or cash equivalents (including repurchase
agreements with respect to obligations of the U.S. Government, its agencies or
instrumentalities, maturing in 7 days or less). Under unusual circumstances,
such as while affecting an orderly liquidation of portfolio securities to
redeem Fund shares, or on occasion to acquire equity securities, the Fund
temporarily may hold less than 25% of its assets in such fixed debt
obligations or cash items. At any time, for temporary defensive purposes, the
Fund may invest to an unlimited extent in such fixed debt obligations or cash
items.
The Fund may not invest more than 5% of its total assets in the stock of any
one issuer, nor may it purchase more than 10% of any class of securities of
any one issuer. Although the Fund is permitted to invest up to 25% of its
total assets in the stock of companies in the same industry (determined by
reference to the Standard Industrial Classification code), it generally seeks
as wide a selection among different industries as practicable in its equity
investments. The Fund may borrow money from a bank for temporary or emergency
purposes in amounts not exceeding 5% of its total assets and may pledge its
assets to secure such borrowings. In addition, the Fund may invest up to 15%
of its total assets in unlisted foreign securities, including not more than
10% of its total assets in securities with a limited trading market which, in
the opinion of the Investment Adviser, are liquid and have readily available
market quotations. The Fund also may invest up to 10% of its assets in the
securities of other investment companies, subject to additional restrictions
set forth in the Statement of Additional Information. These investment
restrictions are fundamental investment policies which may not be changed
without the affirmative vote of the holders of the lesser of (A) 67% or more
of the Fund's shares present at a shareholders meeting at which more than 50%
of the outstanding shares are present or represented by proxy, or (B) more
than 50% of the Fund's outstanding shares. The Fund will not invest in
warrants.
RISK CONSIDERATIONS. There is a risk factor in all investments and there can
be no guarantee against loss from an investment in the Fund, nor can there be
any assurance that its investment objectives will be realized.
4
<PAGE>
The Fund has an unlimited right to purchase foreign securities listed on a
stock exchange, as well as a limited right to purchase unlisted foreign
securities. Investments in foreign securities may be subject to the
possibility of expropriation, confiscatory taxation or nationalization, and
political or social instability or diplomatic developments. The Fund may enter
into forward foreign currency contracts for the purpose of hedging against
foreign currency risk in connection with the purchase or sale of foreign
securities. Although such contracts may reduce the risk of loss to the Fund
due to a decline in the value of the currency which is sold, they also limit
any possible gain which might result should the value of such currency rise.
These risk considerations are further described in the Statement of Additional
Information.
PURCHASE OF SHARES
Shares of the Fund may be purchased at the Offering Price by mailing a
completed application form (page 13) and a check drawn in U.S. currency on a
U.S. bank payable to "Rea-Graham Balanced Fund" to the Fund's transfer agent,
PFPC Inc., 400 Bellevue Parkway, Suite 108, Wilmington, DE 19809. The
investment will be made at the Offering Price of the shares next computed
after the application and check have been received by the transfer agent.
Shares also may be purchased through any securities dealer having a dealer
agreement with the Fund's Principal Underwriter, James Buchanan Rea, Inc.,
10966 Chalon Road, Los Angeles, California 90077. Dealers may place wire
orders with the transfer agent by calling (800) 348-5032 (9:00 a.m. to 5:00
p.m., Eastern time). The investment then will be made at the Offering Price of
the shares next computed after the transfer agent receives the telephone order
in proper form.
Certain financial intermediaries ("Purchase Agents") may establish omnibus
accounts with the Fund for purposes of making investments in the Fund
available to their clients. Purchase Agents do not have a dealer agreement
with the Fund's Principal Underwriter and are not acting as dealers in
providing this service to its customers. Purchase Agents may impose additional
or different conditions on the purchase or redemption of a Fund's shares by
their customers and may charge their customers transaction or other account
fees on the purchase and redemption of a Fund's shares. Each Purchase Agent is
responsible for transmitting to its customers a schedule of any such fees and
information regarding any additional or different conditions regarding
purchases and redemptions. Shareholders who are customers of Purchase Agents
should consult their Purchase Agent for information regarding these fees and
conditions.
The minimum initial purchase is $1,000 ($200 for an individual retirement
account (IRA) or Bank Draft Investing). Each subsequent purchase requires a
$200 minimum ($25 for an IRA or Bank Draft Investing). The minimum initial and
subsequent purchase amount for 403(b)(7) plans and 401 (k) plans sponsored by
others is $25. Any subscription may be rejected by the Principal Underwriter
or by the Fund. The Fund reserves the right not to accept checks for more than
$50,000 that are not certified checks or bank checks.
NET ASSET VALUE. The net asset value of the Fund's shares is computed as of
the close of regular trading on each day the New York Stock Exchange is open
for trading, by dividing the value of the Fund's securities plus any cash or
other assets (including accrued dividends and interest) less all liabilities
(including accrued expenses) by the number of shares outstanding, the result
being adjusted to the nearest whole cent.
A security listed or traded on a recognized stock exchange is valued at its
last sales price on the principal exchange on which it is traded prior to the
time when assets are valued. If no sale is reported at that time, the mean
between the last reported bid and asked price is used. In the case of
securities traded on foreign exchanges, if events having a material effect
upon the value of such securities occur between the time their price is
determined and the time the Fund's net asset value is calculated, the
securities will be valued at fair value as determined in good faith by the
Board of Directors.
5
<PAGE>
All other securities for which over-the-counter market quotations are
readily available are valued at the mean between the last reported bid and
asked price. Securities for which market quotations are not readily available
and other assets are valued at fair value as determined in good faith by the
Board of Directors. For valuation purposes, quotations of foreign securities
in foreign currency are converted to US. dollar equivalents using the foreign
exchange rate in effect either at the close of the stock exchange in the
country where the security is issued and traded (for securities traded on
North American securities exchanges) or at noon New York time following the
close of the stock exchange in the country where the security is issued and
traded (for all other foreign securities). Short-term investments having a
maturity of 60 days or less are valued at cost with accrued interest or
discount earned included in interest receivable.
OFFERING COST. The Offering Price on purchases of Fund shares made at one
time by a single purchaser, by an individual, his spouse and their children
under the age of 21, or a by a single trust or fiduciary account, is the net
asset value per share plus a sales commission not exceeding 4.75% of the
Offering Price (equivalent to 4.99% of the net asset value) which is reduced
on larger sales as shown below.
Fund shares may be purchased at net asset value, upon written assurance that
the purchase is made for investment purposes and that the shares will not be
resold except through redemption by the Fund, by (a) officers and directors of
the Fund (and their relatives), (b) employees of the Principal Underwriter
(and their relatives), (c) directors, officers, partners,or registered
representatives (and their relatives) of broker-dealers with a selling
agreement with the Principal Underwriter,and (d) any trust, pension, profit-
sharing or other benefit plan for such persons. There can be no assurance that
such an investor will be sold shares without a sales charge unless at the time
of placing a purchase order the investor (or dealer) makes a written request
for such a sale. Fund shares will also be sold at net asset value when
purchased through a Purchase Agent that does not have a dealer agreement with
the Principal Underwriter and may impose a transaction or other account fee on
purchases and redemptions by its customers.
<TABLE>
<CAPTION>
SALES COMMISSION
AMOUNT OF SINGLE SALE AS A PERCENTAGE AS A PERCENTAGE PORTION RETAINED
AT OFFERING PRICE OF OFFERING PRICE OF NET ASSET VALUE BY DEALER
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $25,000........... 4.75% 4.99% 4.00%
$25,000 but less than
$50,000.................... 4.25% 4.44% 3.60%
$50,000 but less than
$100,000................... 3.50% 3.63% 3.00%
$100,000 but less than
$200,000................... 3.00% 3.09% 2.55%
$200,000 but less than
$500,000................... 2.50% 2.56% 2.10%
$500,000 but less than
$1,000,000................. 1.75% 1.78% 1.45%
$1,000,000 or more.......... 0% 0% *
</TABLE>
*Fund dealers can earn a commission and should contact the Principal
Underwriter for details.
CUMULATIVE DISCOUNT. The scale of reduced sales commissions applicable to
single sales made at one time of $25,000 or more also may be applied on a
cumulative basis to subsequent sales. For this purpose, shares held in
accounts registered in the name of the investor are combined and the dollar
amount of the subsequent sale is added to the higher of (1) the current net
asset value of the account(s), or (2) the original purchase amount of any
other Fund shares owned at that time by the investor. The sales commission on
the shares being purchased will then be at the rate applicable to the
aggregate. For example, if the investor held shares valued at $16,000 (or, if
valued at less than $16,000, had been purchased for $16,000) and purchased an
additional $10,000 of Fund shares, the sales commission for the $10,000
purchase would be at the rate of 4.25%. There can be no assurance that an
investor will receive the cumulative quantity discount to which he may be
entitled, unless at the time of placing his purchase order the investor or his
dealer makes a written request for the discount. The cumulative quantity
discount may be amended or terminated at any time.
6
<PAGE>
LETTER OF INTENT. The foregoing schedule of reduced sales charges also is
available to investors who enter into a written Letter of Intent establishing
a total investment goal to be achieved by any number of investments over a
thirteen-month period. Each investment made during the period will receive the
reduced sales commission applicable to the amount represented by the goal as
if it were a single investment. In the event the Letter of Intent goal is not
achieved within the thirteen-month period, the investor will be required to
pay the difference between the sales charge otherwise applicable to the
purchases made during this period and the sales charges actually paid.
The initial purchase under a Letter of Intent must be equal to at least 5%
of the stated investment goal. Investors electing to purchase Fund shares
pursuant to a Letter of Intent should see the Statement of Additional
Information under the heading "Purchase, Redemption and Pricing of Shares--
Letter of Intent" and should read the Letter of Intent Application on page 14
of this Prospectus.
BANK DRAFT INVESTING. Investors can purchase Fund shares regularly each
month by means of a Bank Draft Investing Plan with a pre-authorized check
drawn on their checking accounts. The minimum initial purchase of Fund shares
by pre-authorized check is $200, and each subsequent purchase requires a $25
minimum. The full details of this service and the necessary forms may be found
on page 17 and 18.
INDIVIDUAL RETIREMENT ACCOUNT. Individuals can invest in Fund shares through
an Individual Retirement Account ("IRA"). Contributions from annual earnings
($200 initial minimum: $25 subsequent minimum) can be made in any amount up to
$2,000 or, for an individual with a non-working spouse (or spouse earning less
than $250 a year), up to $2,250. If both husband and wife work, each may
contribute up to $2,000 to an IRA. Contributions may not be tax-deductible
depending on the individual's income and participation by the individual or
his spouse in employer sponsored retirement plans. An IRA application form and
disclosure statement may be obtained on request to the Principal Underwriter.
REDEMPTION AND REPURCHASE OF SHARES
Fund shares may be redeemed upon tender to the Transfer Agent of a proper
written request setting forth the following: (a) signatures of each registered
owner exactly as the shares are registered; (b) the account number of the
shareholder and the number of shares or dollar amount to be redeemed; (c) if
stock certificates have been issued, the certificates for the shares to be
redeemed, either properly endorsed or accompanied by a duly executed stock
power; (d) signature guarantees, as described below; and (e) any additional
documents for redemption by corporations, partnerships, trusts, estates or
other fiduciaries which, in the judgment of the Transfer Agent, are sufficient
to establish the authority of the person or persons signing the request.
To assure proper redemptions, the signature of each registered shareholder
must be guaranteed by an eligible guarantor institution such as a commercial
bank, credit union, savings association or a member firm of a national
securities exchange. A notary public is not an eligible guarantor. The
signature guarantee(s) must appear either: (a) on the written request for
redemption, which must clearly identify the exact name (and each name
separately if there is more than one signature) in which the account is
registered, the account number, and the number of shares or the dollar amount
to be redeemed; (b) on a stock power, which may be obtained from most banks
and stockbrokers; or (c) on all share certificates tendered for redemption.
Provident National Bank will provide a signature guarantee for distribution
requests from any IRA account held with the Fund for which Provident National
Bank acts as Custodian. A signature guarantee is not required for redemptions
of $25,000 or less, requested by and payable to all shareholders of record, to
be sent to the address of record for that account.
Shares will be redeemed at the net asset value per share computed after the
tender of the request for redemption in proper form is received by the
Transfer Agent. Payment of the redemption price will be made as soon as
practicable but in any event within seven days after tender of the request for
redemption is received in proper form.
7
<PAGE>
The Fund also repurchases through broker-dealers shares for which
certificates have been issued. The Fund will accept wire or telephone orders
from dealers on behalf of their customers to repurchase such shares at the net
asset value next computed after the dealer has received such customer's
request for repurchase, if the dealer has received such request before closing
time of the New York Stock Exchange on that day. Dealers have the
responsibility of submitting repurchase requests no later than 5 PM. Eastern
time on such day in order to secure the redemption price applicable on that
day. The Fund does not charge for the convenience of repurchase services, but
broker-dealers may charge a fee to the certificate holder for transmitting the
notice of repurchase to the Fund. The Fund reserves the right to reject any
order for repurchase. Payment for a repurchase effected through a broker-
dealer will be made as requested, either to the broker-dealer or directly to
the redeeming shareholder, within7 days after tender of the share certificate
properly endorsed and with the required signature guarantee.
The Fund also will accept, from member firms of the New York Stock Exchange,
wire or telephone orders to repurchase unissued shares without a redemption
request signed by the shareholder, provided the member firm agrees to
indemnity the Fund, the Principal Underwriter and the Transfer Agent from
liability arising from the absence of such signature. Forms for the indemnity
agreement may be obtained from the Principal Underwriter.
The Fund may, but is not required to, involuntarily redeem, after 30 days'
written notice, the shares of an investor with an aggregate value of less than
$200 at the then current net asset value.
REDEMPTION BY TELEPHONE. Redemptions may be made by telephone if the
Redemption by Telephone option is selected in advance. Under this option,
written authority and signature guarantees for each redemption are required
upon set-up of this option but are not needed at the time of placing
individual redemption orders, and checks are mailed directly to your bank
account as designated on the form. If you select this option, share
certificates cannot be issued. Also, this option cannot be used under a
Retirement Plan. Telephone redemptions will be accepted by PFPC Inc. between
the hours of 9 A.M. and 4 P.M. Eastern time. To establish this option,
complete the Redemption by Telephone Application on page 15 of this
Prospectus. To add this option to an existing account, you may write or call
PFPC Inc. for the required form. Once established, any changes must be
communicated in writing to PFPC Inc. Applications or subsequent changes must
be signed by all shareowners with each signature guaranteed by an eligible
guarantor institution such as a commercial bank, credit union, savings
association or a member firm of a national securities exchange. Further
documentation may be required from corporations, executors, administrators,
trustees, guardians, or other fiduciaries. The Fund will employ reasonable
procedures to confirm that instructions received by telephone are genuine,
including requiring a form of personal identification prior to acting on
instructions. Neither the Fund, James Buchanan Rea, Inc., nor PFPC Inc. will
be responsible for the authenticity of withdrawal instructions received by
telephone or liable for any loss, liability, cost or expense for acting upon
such instructions, provided that, pursuant to the Fund's procedures, the
instructions are believed to be genuine. Accordingly, shareholders who elect
the redemption by telephone option bear the risks arising from this option,
including the risk of unauthorized use.
WITHDRAWAL PROGRAM. A shareholder owning or purchasing Fund shares with
$10,000 or more value at the Offering Price may open a Withdrawal Program
providing regular quarterly or monthly payments in any amount requested from
shares held in the Program. The Program is described in the Statement of
Additional Information under the heading "Purchase, Redemption and Pricing of
Shares--Withdrawal Program." An application form is on page 14 of this
Prospectus.
8
<PAGE>
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS. The business and affairs of the Fund are managed
under the direction of the Company's Board of Directors. Additional
Information about the Directors, as well as the Company's executive officers,
may be found in the Statement of Additional Information under the heading
"Management--Directors and Officers."
INVESTMENT ADVISER. James Buchanan Rea, Inc., 10966 Chalon Road, Los
Angeles, California 90077, is the Fund's Investment Adviser. James B. Rea, Jr.
and members of his immediate family control the Investment Adviser, as well as
the Fund's distributor, and he is primarily responsible for the day-to-day
management of the Fund's portfolio. Mr. Rea, Jr. has managed the Fund since
1979.
The Investment Adviser manages the investment of the Fund's assets,
including the placing of orders for the purchase and sale of portfolio
securities, and furnishes the Fund with investment research, advice and
supervision. The Investment Adviser also maintains some of the Fund's books
and records.
The Fund pays the Investment Adviser a monthly fee equal on the annual basis
to 1% of the first $20,000,000 of the Fund's net assets, 0.75% of such net
assets in excess of $20,000,000 up to $100,000,000, 0.5% of such net assets in
excess of $100,000,000 up to $200,000,000, and 0.45% of all such net assets in
excess of $200,000,000. During the fiscal year ended March 31, 1996, the Fund
paid the Investment Adviser $133,298.
Further information about the Investment Adviser may be found under the
heading "Investment Advisory and Other Services--Investment Adviser" in the
Statement of Additional Information.
DISTRIBUTION SERVICES. Effective April 1, 1990, the Fund adopted a Plan of
Distribution (the "Plan") pursuant to which the Fund will pay monthly to its
distributor, James Buchanan Rea, Inc., a distribution fee charged against the
assets of the Fund and equal on an annual basis to 0.35% of the Fund's average
daily net assets. The Plan states that, to the extent that amounts paid to the
Underwriter under the Plan exceed amounts expended by the Underwriter for
distribution-related activities for the Fund, such excess will be profit to
the Underwriter. The distribution fee will be paid to the Distributor for its
services as distributor of the Fund's shares in connection with any activities
or expenses primarily intended to result in the sale of shares of the Fund,
including, but not limited to: (1) compensation to employees of the
Distributor who engage in or support the distribution of the Fund's shares,
including salary, commissions, travel and related expenses; (2) compensation
to and expenses of the Distributor, including overhead and telephone expenses,
allocable to its activities as distributor of the Fund's shares; (3) payments
to broker-dealers, financial institutions and other persons as compensation
for services in connection with the distribution of shares of the Fund,
including promotional incentives and fees calculated with reference to the
average daily net asset value of shares held by shareholders who have a
brokerage or other service relationship with such broker-dealers or financial
institutions; (4) the costs of printing and distributing prospectuses,
statements of additional information, and reports for other than existing
shareholders; (5) payments to consultants for public relations, marketing,
research and promotional services related to the distribution of the Fund's
shares; (6) the costs of preparing, printing and distributing sales literature
and advertising materials; and (7) such other similar services as the
Company's Board of Directors determines to be reasonably calculated to result
in the sale of shares of the Fund. Pursuant to the Plan, the Distributor
currently pays a service fee to selling brokers equal on an annual basis to
0.25% of the average aggregate net asset value of outstanding Fund shares
registered in the name of that broker as nominee or held in a shareholder
account that designates that broker as broker of record. The Fund will pay all
costs and expenses in connection with the preparation, printing and
distribution of its Prospectus and Statement of Additional Information for
current shareholders and the implementation and operation of the Plan,
including legal and accounting fees related thereto.
9
<PAGE>
The distribution fee is payable to the Distributor regardless of the amounts
actually expended by the Distributor for distribution-related activities. The
distribution fee is calculated and accrued daily; the Plan provides that, if
it is terminated, any distribution expenses incurred by the Distributor on
behalf of the Fund in excess of payments of the distribution fee received or
accrued through the termination date are the sole responsibility and liability
of the Distributor, and are not obligations of the Fund.
Further information about the Plan may be found under the heading "Principal
Underwriter--Distribution Plan" in the Statement of Additional Information.
TRANSFER AGENT. PFPC Inc., 400 Bellevue Parkway, Suite 108, Wilmington, DE
19809, serves as transfer agent for the Fund's shares and acts as the Fund's
dividend paying agent.
PRICING SERVICES. American Data Services, Inc. provides certain
administrative services to the Fund, including computation of the net asset
value of the Fund's shares and maintenance of certain of its books and
records.
EXPENSES. For the fiscal year ended March 31, 1996, expenses amounted to
2.65% of the Fund's average net assets.
PORTFOLIO BROKERAGE. As a general matter, it is the Fund's policy to execute
purchases and sales of listed portfolio securities through James Buchanan Rea,
Inc., except when better price and execution, in the judgment of the Fund's
management, can be obtained elsewhere. Sales of the Fund's shares by a broker
are a factor that may be taken into account in recommending and in allocating
portfolio transactions to that broker, provided that (1) the broker furnishes
best execution; (2) the allocation conforms to the Fund's brokerage allocation
policies; and (3) in every allocation made to a broker in which the sale of
Fund shares is taken into account, there is no increase in the commissions or
other compensation paid to that broker beyond a reasonable commission or other
compensation based on best execution or best execution plus research services.
A more complete description of the Fund's brokerage allocation policies may
be found under the heading "Brokerage Allocation" in the Statement of
Additional Information.
DESCRIPTION OF SHARES
The Company's authorized capital consists of 20,000,000 shares of common
stock of $1.00 par value per share, all of which are allocated to the Fund as
a single class, or series of shares. The Directors may from time to time
create other classes of shares from the Company's authorized but unissued
shares. Each share of the Fund entitles the holder to one vote for the
election of Directors and on all other matters and to participate equally in
dividends, distributions of capital and net assets of the Fund on liquidation.
The shares are fully paid and nonassessable when issued and have no
preference, pre-emptive or conversion rights. The shares have non-cumulative
voting rights, so that the holders of more than 50% of the shares voting for
the election of Directors can elect all the Directors. In that event, the
holders of the remaining shares voting for the election of Directors will not
be able to elect any person to the Board of Directors. As a Maryland
corporation, the Company is not required to hold regular annual meetings of
shareholders and does not intend to do so unless a meeting is required under
the Investment Company Act of 1940 or otherwise.
REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS. The Fund intends normally to
pay dividends representing substantially all of its net investment income and
to distribute any net capital gains. Income dividends and capital gains
distributions paid by the Fund on all shares, other than those whose owners
keep them registered in the name of a broker-dealer, are automatically
reinvested in whole or fractional shares of the Fund at net asset value,
unless a shareholder makes a written request to the Transfer Agent for
payments in cash.
10
<PAGE>
TAX INFORMATION. It is intended that the Fund will continue to qualify and
elect to be taxed as a "regulated investment company" under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"). In any fiscal year
in which the Fund so qualifies and distributes all of its net investment
income (which includes, among other items, dividends, interest and the excess,
if any, of net short-term capital gains over net long-term capital losses) and
net capital gains (the excess of net long-term capital gains over net short-
term capital losses), the Fund generally will be relieved of federal income
tax on such income. Amounts not distributed by the Fund on a timely basis in
accordance with a calendar year distribution requirement are subject to a
nondeductible 4% excise tax. A distribution will be treated as paid on
December 31 of the current calendar year if it is declared by the Fund in
October, November or December with a record date in such a month and paid
during January of the following year. Such distributions will be taxable to
shareholders in the calendar year in which the distributions are declared,
rather than the year in which the distributions are received. To avoid
application of the excise tax, the Fund intends to make its distributions in
accordance with the calendar year distribution requirement.
Distributions of any net investment income are taxable to shareholders as
ordinary income. Distributions of any net capital gains, designated by the
Fund as capital gain dividends, are taxable to shareholders as long-term
capital gains regardless of the length of time a shareholder may have held
shares of the Fund. The tax treatment of distributions treated as ordinary
income or long-term capital gain will be the same whether the shareholder
reinvests the distributions in additional shares or elects to receive them in
cash.
Special tax rules may apply to the Fund's transactions involving forward
foreign currency contracts. Such rules may, among other things, affect the
character of gains or losses realized by the Fund from such transactions and
have the effect of deferring recognition of losses incurred from such
transactions.
Upon the sale, redemption, or other disposition of shares of the Fund, a
shareholder generally will realize a taxable gain or loss, depending upon the
shareholder's basis in the shares. Such gain or loss will be treated as
capital gain or loss if the shares are capital assets in the shareholder's
hands and will be long-term or short-term, depending upon the shareholder's
holding period for the shares. Any loss realized on a sale or exchange will be
disallowed to the extent the shares disposed of are replaced (including shares
acquired pursuant to the automatic reinvestment plan) within a period of 61
days beginning 30 days before the ending 30 days after the shares are disposed
of. In such a case, the basis of the shares acquired will be adjusted to
reflect the disallowed loss. Any loss realized by a shareholder on a
disposition of Fund shares held by a shareholder for six months or less will
be treated as a long-term capital loss to the extent of any capital gain
dividends received by the shareholder with respect to such shares.
Under certain circumstances, the sales charge incurred in acquiring shares
of the Fund may not be taken into account in determining the gain or loss on
the disposition of those shares. This rule applies where shares of the Fund
are disposed of within 90 days after the date they were purchased and new
shares of a regulated investment company are acquired without a sales charge
or at a reduced sales charge. In that case, the gain or loss recognized on the
disposition will be determined by excluding from the tax basis of the shares
disposed of all or a portion of the sales charge incurred in acquiring those
shares. This exclusion applies to the extent that the otherwise applicable
sales charge with respect to the newly acquired shares is reduced as a result
of having incurred a sales charge initially. The portion of the sales charge
affected by this rule will be treated as a sales charge paid for the new
shares.
Shareholders will be notified each year of the amounts of dividends and
distributions, including the amounts (if any) for that year which have been
designated as long-term capital gain dividends. Dividends and distributions
may also be subject to additional state, local or foreign taxes, depending
upon each shareholder's particular situation. Investors should consult their
tax advisers for specific information on the tax consequences of particular
types of distributions. For additional information relating to taxes, see "Tax
Status" in the Statement of Additional Information.
11
<PAGE>
PERFORMANCE INFORMATION: The Fund may, from time to time, include its total
return in advertisements or reports to shareholders or prospective investors.
Standardized quotations of average annual total return for the Fund will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in the Fund over a period of 1, 5 and 10 years (up to
the life of the Fund). Standardized total return quotations reflect the
deduction of a proportional share of Fund expenses (on an annual basis),
deduction of the maximum initial sales load, and assume that all dividends and
distributions are reinvested when paid. The Fund also may quote supplementally
a rate of total return that is based on a net amount invested in the Fund
(i.e., that does not reflect deduction of the maximum initial sales load).
Performance information for the Fund may be compared, in reports and
promotional literature, to: (i) the Value Line Composite, NASDAQ, Morgan
Stanley World Index, Treasury Note Index, or other unmanaged indices so that
investors may compare the Fund's results with those of a group of unmanaged
securities widely regarded by investors as representative of the securities
markets in general; (ii) other groups of mutual funds tracked by Lipper
Analytical Services, a widely used independent research firm which ranks
mutual funds by overall performance, investment objectives, and assets, or
tracked by other services, companies, publications, or persons who rank mutual
funds on overall performance or other criteria; and (iii) the Consumer Price
Index (measure for inflation) to assess the real rate of return from an
investment in the Fund. Unmanaged indices may or may not assume the
reinvestment of dividends but generally do not reflect deductions for
administrative and management costs and expenses.
Performance information for the Fund reflects only the performance of a
hypothetical investment in the Fund during the particular time period on which
the calculations are based. Performance information should be considered in
light of the Fund's investment objectives and policies, characteristics and
quality of the portfolio, and the market conditions during the given time
period, and should not be considered as a representation of what may be
achieved in the future. For a description of the methods used to determine
total return for the Fund, see the Statement of Additional Information. A
discussion of the Fund's performance, and the factors affecting the Fund's
performance, for the fiscal year ending March 31, 1996, are included in the
Fund's 1996 Annual Report to Shareholders, a copy of which is available upon
request and without charge.
INQUIRIES: Shareholders' inquiries by mail or telephone should be addressed
to the Principal Underwriter, James Buchanan Rea, Inc., 10966 Chalon Road, Los
Angeles, California 90077, (800) 433-1998, or (31O) 442-2660.
12
<PAGE>
- --------------------------------------------------------------------------------
SHARE PURCHASE APPLICATION
- --------------------------------------------------------------------------------
REA-GRAHAM BALANCED FUND
PFPC Inc.
400 Bellevue Parkway
Suite 108 ___________________________________ 19______
Wilmington, DE 19809 Date of Purchase
(800) 348-5032
I enclose a check for $ ____________ payable to "Rea-Graham Balanced Fund" for
the purchase of shares of Rea-Graham Balanced Fund. The minimum initial purchase
is $1,000. Each subsequent purchase requires a $200 minimum.
- --------------------------------------------------------------------------------
1. REGISTRATION PLEASE PRINT (FOR CLARITY, PLEASE SKIP A SPACE WHERE
APPROPRIATE)
A. Individuals
Complete Line A
----------------------------------- --------------
First Name Initial Last Name Soc. Sec. No.
B. Joint Owners Please circle name of
Complete Lines A Joint Owner whose
and B Social Security No.
----------------------------------- is provided for IRS
Joint Owner (A Joint Tenancy with purposes
right of survivorship will be
presumed unless otherwise indicated)
C. Gifts to Minors
Under UGMA
Complete Both
Lines -----------------------------------
Custodian's Name (only one allowed
by law)
----------------------------------- --------------
Minor's Name (only one allowed Minor's Social
by law) Sec. No.
D. Corporations,
Trust,
Partnerships
etc.,
Complete Both
Lines If Needed ----------------------------------- --------------
Account Title (where appropriate Tax I.D. No.
include name of Trustee)
-----------------------------------
- --------------------------------------------------------------------------------
Address
-------------------------------------------------------------------------
- --------------------------------------------------------------------------------
City State Zip
- --------------------------------------------------------------------------------
I have received a copy of the Fund's Prospectus dated July 31, 1996. I already
own ________________ shares of the Fund and request qualification of this
purchase for the Cumulative Quantity Discount if applicable. I understand that
dividends and distributions will be reinvested in additional shares of the Fund
unless payment in cash is requested in writing. Under penalties of perjury, I
certify (1) that the number shown on this form is my correct taxpayer
identification number and (2) that I have not been notified by the Internal
Revenue Service that I am subject to backup withholding as a result of a failure
to report all interest or dividends, or the Internal Revenue Service has
notified me that I am no longer subject to backup withholding. (Strike out item
(2) if it is not correct)
By __________________________ _________________________________________________
Signature of Owner Signature (if registered in joint names,
both must sign)
- --------------------------------------------------------------------------------
FOR DEALER ONLY
Dealer's Name: __________________________________ Dealer code: _____________
Representative: ______________ Rep. No.___________ Branch code: _____________
- --------------------------------------------------------------------------------
You may mail this form, when completed, to PFPC Inc., 400 Bellevue Parkway,
Suite 108, Wilmington, DE 19809, together with a check payable to the order of
Rea-Graham Balanced Fund. The Fund reserves the right not to accept checks for
more than $50,000 that are not certified or bank checks. 7-96
- --------------------------------------------------------------------------------
13
<PAGE>
- --------------------------------------------------------------------------------
REA-GRAHAM BALANCED FUND (Subject to terms and condi-
tions in the Fund's Prospectus)
--------------------------------
APPLICATION FOR LETTER OF INTENT
_________________________ 19__
Date of Initial Purchase
Although I am not obliged to do so, I intend to purchase shares of Rea-Graham
Balanced Fund over the next 13-month period which will equal or exceed:
[_] $25,000 [_] $50,000 [_] $100,000 [_] $200,000
[_] $500,000 [_] $1,000,000
Each purchase will be made at the then reduced Offering Price (or at net
asset value for purchases of $1,000,000 or more) applicable to the amount
checked above, as described in the Fund's Prospectus.
I agree to the terms and conditions of the Letter of Intent and I hereby
irrevocably constitute and appoint PFPC Inc. my attorney, with full power of
substitution, to surrender for redemption any or all shares of Rea-Graham
Balanced Fund held as security.
By____________________________________ ______________________________________
Signature of Owner Signature (if registered in joint
names, both must sign)
In making purchases under this statement, the following are the related
accounts on which reduced offering prices are to apply:
(1) Name______________________________ (2) Name______________________________
7-96
- --------------------------------------------------------------------------------
REA-GRAHAM BALANCED FUND (Subject to terms and
conditions in the
APPLICATION FOR WITHDRAWAL PROGRAM Fund's Prospectus)
---------------------
Minimum requirements: $10,000 of shares of Rea-Graham Balanced Fund at
current Offering Price.
(a) Commencing ________, 19__ issue a check for $ ______ monthly [ ] on or
about the twenty-fifth day or quarterly [ ] on or about the twenty-fifth
day of January, April, July and October.
(b) Draw checks payable to the order of _____________________________________
(c) Mail to: Name (Please print)_____________________________________________
Address _________________________________________________________________
Signature of Owner(s) ___________________________________________________
Signature of Guarantee __________________________________________________
- --------------------------------------------------------------------------------
You may mail this form, when completed, to PFPC Inc., 400 Bellevue Parkway,
Suite 108, Wilmington, DE 19809. 7-96
- --------------------------------------------------------------------------------
14
<PAGE>
(Subject to terms and condi-
REA-GRAHAM BALANCED FUND tions in the Fund's Prospectus)
-------------------------------
APPLICATION FOR
REDEMPTION BY TELEPHONE
To: Rea-Graham Balanced Fund
c/o PFPC Inc.
400 Bellevue Parkway
Suite 108
Wilmington, DE 19809
From:
---------------------------------------------------------------------------
Name(s) of Registered Shareholder(s)
---------------------------------------------------------------------------
Address
---------------------------------------------------------------------------
City State Zip
If you wish to have the convenience of making redemptions by telephone, and
without obtaining the usual signature guarantees, please furnish the
information below. Then, when you wish to withdraw funds, all you need to do is
call PFPC Inc. toll-free at (800) 348-5032 (in Delaware call (302) 791-1041
collect) and the proceeds will be mailed to your bank for deposit to the
account number you have indicated below. Phone calls for placing the telephone
redemptions are recorded.
It is understood that neither the Fund, James Buchanan Rea, Inc., nor PFPC
Inc. will be liable for any loss, liability, cost or expense for acting upon
instructions reasonably believed to be genuine.
Until further notice:
All telephone redemptions from my account #_____________________________________
in Rea-Graham Balanced Fund are to be mailed directly to my bank:
- --------------------------------------------------------------------------------
NAME OF BANK
- --------------------------------------------------------------------------------
STREET ADDRESS
- --------------------------------------------------------------------------------
CITY/STATE/ZIP
for deposit to ______ checking _______ savings account #________________________
Each individual named in the registration of the mutual fund account above is
to sign below. Each signature is to be guaranteed by a commercial bank or trust
company, or a member firm of a national securities exchange. Signature
guarantees will not be necessary at the time redemption request is made by
telephone. Under this agreement signature guarantees will be kept on file.
IMPORTANT--Once this option has been established, telephone redemptions will
be paid to the Bank and Account Number as specified above. Any changes must be
in writing to PFPC Inc. and signed by all shareowners with each signature
guarantee.
______________ ________________________________________________________________
DATE SIGNATURE OF REGISTERED OWNER(S)
______________ ________________________________________________________________
DATE SIGNATURE GUARANTEE
7-96
- --------------------------------------------------------------------------------
15
<PAGE>
- --------------------------------------------------------------------------------
REA-GRAHAM BALANCED FUND
TRANSFER REQUEST FORM
___________________________ _________________
(Name of Present (Date)
Trustee/Custodian)
___________________________
(Address)
___________________________ RE: _______________________________________
City, State, Zip Code (Name of Plan Participant)
ATTN: RETIREMENT PLANS DEPARTMENT ___________________________________________
(Account Number(s) to be Transferred)
I HEREBY AUTHORIZE THE TRUSTEE-TO-TRUSTEE TRANSFER OF MY IRA PLAN ASSETS AS
LISTED ABOVE TO PROVIDENT NATIONAL BANK AS SUCCESSOR TRUSTEE/CUSTODIAN. YOU ARE
INSTRUCTED TO LIQUIDATE AND TRANSFER CASH ONLY TO PROVIDENT NATIONAL BANK IN
ACCORDANCE WITH THE FOLLOWING INSTRUCTIONS:
_____ Liquidate and transfer the ENTIRE BALANCE of my IRA plan assets
IMMEDIATELY. I am aware of any applicable penalties.
_____ Liquidate and transfer the ENTIRE BALANCE of my IRA plan assets AT
MATURITY DATE ONLY. I do not wish to incur any penalties.
_____ Liquidate and transfer $ only. The remainder of my IRA plan assets will
not be transferred at this time.
THE CHECK FOR THE PROCEEDS OF THE TRANSFER SHOULD BE MAILED TO THE FOLLOWING
ADDRESS:
Provident National Bank--CUST
FBO: _________________--IRA
Fund/Acct: REA-GRAHAM BALANCED FUND
c/o PFPC Inc.
400 Bellevue Parkway, Suite 108
Wilmington, DE 19809
ATTN: RETIREMENT PLANS DEPARTMENT
IF ANYTHING FURTHER IS REQUIRED TO EXPEDITE YOUR COMPLIANCE, PLEASE CONTACT
ME IMMEDIATELY AT ( )__________________ HOME or ( ) ___________________OFFICE.
After making any required distribution pursuant to Section 408(a)(6) of the
Internal Revenue Code, please forward the check for $___________ to Provident
National Bank Custodian, and invest the proceeds in Rea-Graham Balanced Fund.
Signature _______________________________ Date ___________________
Please complete, sign and forward to: c/o PFPC Inc., 400 Bellevue Parkway,
Suite 108, Wilmington, DE 19809
7-96
- --------------------------------------------------------------------------------
16
<PAGE>
- --------------------------------------------------------------------------------
REA-GRAHAM BALANCED FUND
APPLICATION FOR
BANK DRAFT INVESTING
(This application adds the option to a new or existing account.)
SEND COMPLETED APPLICATION TO: REA-GRAHAM BALANCED FUND
c/o PFPC INC.
400 BELLEVUE PARKWAY
SUITE 108
WILMINGTON, DE 19809
(Provident will send a copy of the Bank Authorization form to your bank.)
I authorize you as Agent for Bank Draft Investing to automatically invest
$_______ for me on or about the 20th of each month and to draw a bank draft in
payment of the investment against my checking account which is identified on
the back of this application. For this purpose, I have enclosed a blank check,
marked void, from my checkbook. In addition, the following information is
provided to assist you in establishing my Bank Draft Investing Plan:
_____ This is a new account. Enclosed is my NEW ACCOUNT APPLICATION and a
check in the amount of my initial investment.
_____ Please add the Bank Draft Investing option to my existing account:
ACCOUNT #_______________________________________
7-96
- --------------------------------------------------------------------------------
I understand: (1) my bank will clear and process each bank draft and will
include it with my regular bank statement; (2) my Bank Draft Investing Plan
will automatically terminate WITHOUT NOTICE if any bank draft is not paid upon
presentation and you are not obliged to notify me in such event; (3) my Bank
Draft Investing Plan may be terminated at any time by you or me upon thirty
(30) days' written notice to the other; (4) acceptance by you of this
application is conditional upon acceptance of my authorization by my bank (see
other side); (5) PFPC Inc. acts as Agent for my Bank Draft Investing Plan; and
(6) Bank Draft Investing has been designed for the convenience of the investor
and cannot assure a profit or protect against loss during declining markets.
______________ ________________________________________________________________
DATE SIGNATURE OF SHAREOWNER
______________ ________________________________________________________________
DATE SIGNATURE OF JOINT SHAREOWNER
(PLEASE COMPLETE OTHER SIDE)
7-96
- --------------------------------------------------------------------------------
17
<PAGE>
- --------------------------------------------------------------------------------
BANK AUTHORIZATION
TO:
- --------------------------------------------------------------------------------
NAME OF BANK/BRANCH
- --------------------------------------------------------------------------------
STREET ADDRESS OF BANK/BRANCH WHERE ACCOUNT IS MAINTAINED
- --------------------------------------------------------------------------------
CITYSTATEZIP
I hereby request and authorize you to pay and charge my account with bank
drafts drawn on my account by and payable to the order of PFPC Inc. provided
there are sufficient funds in said account to pay the same upon presentation. I
agree that your treatment of each such bank draft, and your rights in respect
to it, shall be the same as if it were signed personally by me. I further agree
that if any such bank draft be dishonored, whether with or without cause, and
whether intentionally or inadvertently, PFPC Inc., James Buchanan Rea, Inc. and
Rea-Graham Funds, Inc. shall be under no liability whatsoever. I further agree
that such authorization, unless sooner terminated by you, is to remain in
effect until receipt by you of written notice from me of its revocation.
______________ ________________________________________________________________
DATE BANK ACCOUNT NUMBER
- --------------------------------------------------------------------------------
NAME OF DEPOSITOR(S) AS SHOWN ON THE BANK RECORDS (please print)
- ----------------------------------- -------------------------------------------
SIGNATURE OF DEPOSITOR SIGNATURE OF JOINT DEPOSITOR
7-96
- --------------------------------------------------------------------------------
TO THE BANK NAMED ABOVE: In consideration of your compliance with the request
and authorization of the depositor above, PFPC Inc. hereby agrees: (1) to
indemnify and hold you harmless from any loss you may suffer resulting from or
in connection with the execution and issuance of any bank draft, whether or not
genuine, purporting to be drawn by or on behalf of, and payable to PFPC Inc. on
the account of your Depositor(s) executing the authorization above and received
by you in the regular course of business through normal banking channels for
the purpose of payment, including any cost or expenses reasonably incurred in
connection with such loss, but excepting any loss due to your payment of any
bank draft drawn against insufficient funds; and (2) in the event that any such
bank draft shall be dishonored, whether with or without cause, and whether
intentionally or inadvertently, to indemnify you and hold you harmless from any
loss resulting from such dishonor, including your costs and reasonable
expenses.
______________ ________________________________________________________________
DATE PFPC Inc.
AUTHORIZED SIGNATURE
7-96
-------------------------------------------------------------------------------
18
<PAGE>
PLEASE CONTACT US
[LOGO OF
REA-GRAHAM
. FUND, INC.
APPEARS HERE]
------------------
REA-GRAHAM FUNDS, INC.
10966 Chalon Road
Los Angeles, California 90077
(800) 433-1998
Transfer Agent
PFPC INC.
400 Bellevue Parkway, Suite 108 REA-
GRAHAM
BALANCED FUND
Wilmington, DE 19809
(800) 348-5032
PROSPECTUS
Principal Underwriter
JAMES BUCHANAN REA, INC.
10966 Chalon Road July 31, 1996
Los Angeles, California 90077
(310) 442-2660
- ------------------------------------
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
JULY 31, 1996
REA-GRAHAM BALANCED FUND
10966 Chalon Road
Los Angeles, California 90077
(800) 433-1998
(310) 442-2660
________________________________________________________________________________
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE READ
IN CONJUNCTION WITH THE PROSPECTUS OF REA-GRAHAM BALANCED FUND DATED JULY 31,
1996, WHICH MAY BE OBTAINED WITHOUT CHARGE UPON REQUEST TO THE PRINCIPAL
UNDERWRITER, JAMES BUCHANAN REA, INC., 10966 CHALON ROAD, LOS ANGELES,
CALIFORNIA 90077, (800) 433-1998, OR (310) 442-2660.
TABLE OF CONTENTS
________________________________________________________________________________
General Information and History.......................................... 2
Investment Objectives and Policies....................................... 2
-- Investment Policies................................................ 2
-- Investment Restrictions............................................ 2
-- Risk Considerations................................................ 3
Management of the Fund................................................... 5
Principal Shareholders................................................... 6
Investment Advisory and Other Services................................... 6
-- Investment Adviser................................................. 6
-- Custodian.......................................................... 8
-- Transfer Agent..................................................... 8
-- Legal Counsel...................................................... 8
-- Independent Accountants............................................ 8
Brokerage Allocation..................................................... 8
Purchase, Redemption and Pricing of Shares............................... 9
-- Net Asset Value.................................................... 9
-- Letter of Intent................................................... 10
-- Withdrawal Program................................................. 10
-- Individual Retirement Account...................................... 10
Tax Status............................................................... 11
Principal Underwriter.................................................... 14
-- Distribution Plan.................................................. 14
-- Performance Information............................................ 16
Financial Statements..................................................... 17
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1
<PAGE>
GENERAL INFORMATION AND HISTORY
-------------------------------
Rea-Graham Balanced Fund (the "Fund") is the successor to Rea, Graham-Plan
Fund, a private limited partnership that was organized in 1976 by Dr. James B.
Rea and Benjamin Graham, as general partners. Mr. Graham is the author of
"Security Analysis" and "The Intelligent Investor," which are recognized texts
on the fundamental value of common stocks. After Mr. Graham's death later that
year, Dr. Rea continued to direct the operation of the Fund as a limited
partnership. On February 26, 1982, the Fund was incorporated under the laws of
Maryland as "Rea-Graham Fund, Inc." and on August 19, 1982, the Fund commenced a
public offering of its shares as an open-end diversified investment company.
Since July 31, 1989, the Fund has been referred to as Rea-Graham Balanced Fund,
and is a separate series of shares of Rea-Graham Funds, Inc. (the "Company").
INVESTMENT OBJECTIVES AND POLICIES
----------------------------------
Investment Policies. The investment objectives and policies of the Fund
-------------------
are described in the Prospectus under the heading "The Fund - Investment
Objectives and Policies."
Investment Restrictions. The following investment restrictions, except
-----------------------
insofar as otherwise indicated, are fundamental policies which may not be
changed without the affirmative vote of the holders of the lesser of (A) 67% or
more of the Fund's shares present at a shareholders meeting at which more than
50% of the outstanding shares are present or represented by proxy, or (B) more
than 50% of the Fund's outstanding shares. In accordance with these investment
restrictions, the Fund will not:
1. Purchase or sell real estate or interests therein, although the Fund may
purchase securities of issuers which engage in real estate operations and
securities which are secured by real estate or interests therein.
2. Purchase or sell commodities or commodity futures contracts, except that
the Fund may enter into foreign currency forward contracts for the purpose of
hedging against foreign currency risk in connection with the purchase or sale of
foreign securities.
3. Purchase oil, gas or other mineral leases, rights or royalty contracts
or exploration or development programs, except that the Fund may invest in the
securities of companies which operate, invest in or sponsor such programs.
4. Write, purchase or sell puts, calls, or combinations thereof.
5. Make short sales of securities.
6. Purchase securities on margin, except for such short-term loans as are
necessary for the clearance of purchases of portfolio securities.
7. Engage in the underwriting of securities.
8. Make loans of money or securities, except (a) by the purchase of a
portion of an issue of publicly distributed debt obligations in which the Fund
may invest consistent with its investment objectives and policies, or (b) by in
repurchase agreements with respect to obligations of the U.S. Government, its
agencies or instrumentalities, maturing in 7 days or less.
9. Borrow money, except that the Fund may borrow from a bank for temporary
or emergency purposes in amounts not exceeding 5% (taken at the lower of cost or
current value) of its total assets (not including the amount borrowed).
10. Pledge its assets or assign or otherwise encumber them, except to
secure borrowings effected within the limitations set forth in Restriction 9. To
meet the requirements of regulations in certain states, the Fund, as a matter of
operating policy, but not as a fundamental policy, will limit any
2
<PAGE>
pledge of its assets such that at the time of sale of Fund shares the market
value of unpledged net assets (per share) is at least 90% of the Offering Price.
11. Issue senior securities, as defined in the Investment Company Act of
1940 ("1940 Act"), except insofar as the Fund may be deemed to have issued a
senior security by reason of (a) entering into any repurchase agreement, or (b)
borrowing money in accordance with Restriction 9.
12. Invest more than 5% of the Fund's total assets in securities of issuers
which have been in continuous operation less than three years.
13. Purchase more than 10% of any class of securities of any one issuer,
including its outstanding voting securities, or invest in any issuer for the
purpose of exercising control or management.
14. Invest more than 15% of the Fund's total assets in securities of
foreign issuers that are not listed on a recognized U.S. or foreign securities
exchange, including no more than 10% of its total assets which may be invested
in securities with a limited trading market.
15. Invest more than 25% of its total net assets in any one industry
(determined by reference to the Standard Industrial Classification code).
16. Purchase or retain securities of any company in which Directors or
Officers of the Company or of the Fund's Investment Adviser, individually owning
more than 1/2 of 1% of the securities of such company, in the aggregate own more
than 5% of the securities of such company.
17. Purchase securities of other investment companies, except (a) in
connection with a merger, consolidation, reorganization or acquisition of
assets, or (b) in the open market where no commission or profit to a sponsor or
dealer other than the customary broker's commission results from such purchase,
in an amount not in excess of 10% of the value of the Fund's total assets.
18. Invest in "letter stocks" or securities on which there are any sales
restrictions under a purchase agreement or in securities which do not have
readily available market quotations.
19. Participate on a joint or a joint and several basis in any trading
account in securities.
Whenever any investment policy or investment restriction states a maximum
percentage of the Fund's assets which may be invested in any security or other
property, it is intended that such maximum percentage limitation be determined
immediately after and as a result of the Fund's acquisition of such security or
property. Accordingly, the Fund is not required to dispose of common stocks due
to an increase in percentage resulting from a change in market values.
Risk Considerations. The Fund may invest in debt securities, including
-------------------
foreign and domestic corporate and government debt securities. As a general
matter, the current value of debt securities, including U.S. Treasury Notes,
varies inversely with changes in prevailing interest rates. If interest rates
increase after a debt security is purchased, the value of that security will
normally decline. Conversely, should prevailing interest rates decrease after a
debt security is purchased, its market price will normally rise.
The Fund may invest in preferred stocks. Preferred stocks are generally
fixed-income securities. Preferred stockholders normally have the right to
receive dividends at a fixed rate when and as declared by the issuer's board of
directors, but do not participate in other amounts available for distribution by
the issuing corporation. Preferred stocks are, however, equity securities in
the sense that they do not represent a liability of the issuer and therefore do
not offer as great a degree of protection of capital or assurance of continued
income as investments in corporate debt securities. In addition, preferred
stocks are subordinated in right of payment to all debt obligations and
creditors of the issuer.
The Fund may invest in convertible securities. A convertible security is a
bond, debenture, note, preferred stock or other security that may be converted
into or exchanged for a prescribed amount of
3
<PAGE>
common stock of the same or a different issuer within a particular period of
time at a specified price or formula. A convertible security entitles the holder
to receive interest generally paid or accrued on debt or the dividend paid on
preferred stock until the convertible security matures or is redeemed, converted
or exchanged. Convertible securities have several unique investment
characteristics such as (1) higher yields than common stocks, but lower yields
than comparable nonconvertible securities, (2) a lesser degree of fluctuation in
value than the underlying stock since they have fixed income characteristics,
and (3) the potential for capital appreciation if the market price of the
underlying common stock increases. A convertible security might be subject to
redemption at the option of the issuer at a price established in the convertible
security's governing instrument. If a convertible security held by the Fund is
called for redemption, the Fund may be required to permit the issuer to redeem
the security, convert it into the underlying common stock or sell it to a third
party.
The Fund also may invest in the securities of other investment companies.
The Investment Adviser intends to invest in the securities of closed-end
investment companies that invest in "special situations" (such as in the
securities of foreign issuers) or that in the Investment Adviser's estimation
are undervalued. Investments in the securities of investment companies are
subject to certain limitations under the 1940 Act. Under the 1940 Act, the Fund
may not invest more than 5% of its total assets in the securities of any one
investment company or acquire more than 3% of the outstanding voting securities
of any investment company. In addition, the Fund may not invest more than 10%
of its total assets in securities issued by other investment companies. If the
Fund were to invest in the securities of an investment company, the Fund's
shareholders would bear not only their proportionate share of the expenses of
the Fund (including operating expenses and the fees paid to the Investment
Adviser), but also would bear indirectly similar expenses of the underlying
investment company.
The Fund has an unlimited right to purchase foreign securities listed on a
stock exchange as well as a limited right to purchase unlisted securities.
There may be less publicly available information about foreign companies as
compared to the reports and ratings which are published about companies in the
United States. Foreign companies generally are not subject to uniform
accounting, auditing and financial reporting standards, practices and
requirements comparable to those applicable to United States companies. Foreign
stock markets have substantially less volume than the New York Stock Exchange,
and securities of foreign companies frequently tend to be less liquid and more
volatile than securities of comparable United States companies. The Fund may
invest up to 15% of its total assets in unlisted foreign securities, including
not more than 10% of its total assets in securities with a limited trading
market, which, in the opinion of the Investment Adviser, are liquid and have
readily available market quotations. There is less government supervision and
regulation of foreign stock exchanges, brokers and listed companies than in the
United States. Brokerage commissions may be higher for effecting transactions
in foreign securities than is the case for securities of United States
companies. Furthermore, investments in securities of issuers located in foreign
countries may be subject to the possibility of expropriation, confiscatory
taxation or nationalization, and could be affected by political or social
instability or diplomatic developments.
The Fund may enter into forward foreign currency contracts for the purpose
of hedging against foreign currency risk in connection with the purchase or sale
of foreign securities. A foreign currency forward contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days (usually less than one year) from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
If the Fund entered into a contract for the purchase or sale of a security
denominated in a foreign currency, generally it would also enter into a forward
contract for the purchase or sale, for a fixed amount of dollars, of the amount
of foreign currency involved in the underlying security transaction. In this
manner, the Fund may obtain protection against a possible loss resulting from an
adverse change in the relationship between the U.S. dollar and the foreign
currency during the period between the date the security is purchased or sold
and the date upon which payment is made or received, although the Fund also
loses the right to the benefit of any favorable movement in exchange rates
occurring during such period. The settlement period for certain foreign
securities transactions may be longer than the customary period applicable to
most securities settlements that take place in the United States.
4
<PAGE>
MANAGEMENT OF THE FUND
----------------------
The name, address, principal occupations during the past five years, and other
information with respect to each of the directors and officers of the Company
are as follows:
Name, Address and Principal Occupations
Offices with Company During Past 5 years
- --------------------------------------------------------------------------------
JAMES B. REA, JR.* President, Director and Treasurer
2305 Donella Circle of James Buchanan Rea, Inc.,
Los Angeles, California investment advisor, broker-dealer,
Chairman of the Board, underwriter and distributor.
President and Secretary
FRANCES L. REA * Vice-President, Secretary and
10966 Chalon Road Director of James Buchanan Rea, Inc.,
Los Angeles, California Director of Counseling Center, Bel Air
Treasurer Presbyterian Church.
GERALD H. BORDEN Orthodontic Specialist. President of
1435 Oldbury Place Gerald H. Borden, D.D.S., Inc. of Westlake
Westlake Village, California Village, California.
Director
THOMAS H. FITZGERALD, JR. President, T.H. Fitzgerald & Co. (Registered
80 Wall Street Investment Advisor), New York and
New York, New York Connecticut. Formerly Editor Money Market
Director Directory of Institutional Investors and
their Money Managers.
J. VICTOR MONKE Psychiatrist; Psychoanalyst. Recent
6500 Wilshire Boulevard President, Southern California
Institute, Suite 950 Los Psychoanalytic attending Psychiatrist
Angeles, California Cedars-Sinai Medical Center, Los Angeles,
Director California; Associate Clinical Professor of
Psychiatry, University of Cali-fornia at Los
Angeles, Formerly General Partner Nebraska
Company, real estate management, Trustee
American Psychoanalytic Association and
Southern California Psychoanalytic
Institute.
JOHN P. SHELTON Professor Emeritus of Finance at Anderson
12377 Ridge Circle Graduate School of Management, UCLA.
Los Angeles, CA 90049 Chartered Financial Analyst, PH.D. in
Director Economics and board member of (1) Paramount
Mutual Fund, Los Angeles, CA., (2) Genisco
Technology Corp., (electronics), Cypress,
CA.
R. PAUL TOEPPEN President, Toeppen and Company,
1703 Stone Canyon Road Los Angeles, California, management
Los Angeles, California and financial consultants.
Director
JAMES A. TRACY Managing partner, Tracsam Associates, real
3723 Brookview Road estate developer and manager; formerly
Rockford, Illinois Secretary and Treasurer, Barber-Colman
Director Company (capital goods manufacturer),
Rockford, Illinois.
- -----------------
5
<PAGE>
* Mr. Rea, Jr. and Mrs. Rea are "interested persons" of the Fund (as that term
is defined by the 1940 Act) by virtue of their affiliations with James Buchanan
Rea, Inc. Drs. Borden and Monke and Messrs. Fitzgerald, Jr., Toeppen, Tracy and
Shelton are not "interested persons" of the Fund.
The directors and officers of the Company who are affiliated with James
Buchanan Rea, Inc. are not separately compensated for their services as
directors and officers of the Company. The Company pays each of its directors
who are not affiliated with James Buchanan Rea, Inc. a fee of $200 per Board of
Directors meeting attended and $100 per Audit Committee meeting attended, and
reimburses their expenses for attendance at the meetings. For the fiscal year
ended March 31, 1996, the Directors received the following compensation from the
Company:
<TABLE>
<CAPTION>
Pension or Total
Retirement Estimated Compensation
Aggregate Benefits Accrued Annual From Registrant
Compensation As Part of Fund Benefits Upon and Fund Complex
Name of Director from the Company Expenses Retirement Paid to Directors
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
James B. Rea, Jr. None N/A N/A None
Gerald H. Borden $1,000 N/A N/A $1,000
Thomas H. Fitzgerald, Jr. $ 400 N/A N/A $ 400
J. Victor Monke $ 800 N/A N/A $ 800
John P. Shelton $1,000 N/A N/A $1,000
R. Paul Toeppen 300 N/A N/A 300
James A. Tracy $ 800 N/A N/A $ 800
</TABLE>
PRINCIPAL SHAREHOLDERS
----------------------
As of March 31, 1996, there were 854,704.694 shares outstanding, of which
175,046.813 shares (or 20.48% of the total outstanding shares) were owned
beneficially, directly or indirectly, controlled or held with power to vote, by
the directors and officers of the Fund. As of that date, to the knowledge of
management, no person owned beneficially, directly or indirectly, 5% or more of
the outstanding shares, except for James B. Rea, Jr. and members of his
immediate family, and R. Paul Toeppen, a director of the Fund who owned
beneficially over 5%.
INVESTMENT ADVISORY AND OTHER SERVICES
--------------------------------------
Investment Adviser. James Buchanan Rea, Inc., 10966 Chalon Road, Los
------------------
Angeles, California 90077, a California corporation, is the Fund's Investment
Adviser. Mr. James B. Rea, Jr. controls the Investment Adviser. James Buchanan
Rea, Inc. also serves as the Fund's Principal Underwriter and Distributor. The
Investment Adviser also provides investment counseling to private clients and
produces "Radix," a proprietary computer analysis for corporate acquisition and
institutional investment research.
Pursuant to an Investment Advisory Agreement (the "Agreement") the Company
has retained the Investment Adviser to manage the investment of the Fund's
assets, including the placing of orders for the purchase and sale of portfolio
securities, and to furnish the Fund with investment research, advice and
supervision. The Investment Adviser obtains and evaluates such statistical and
factual information and advice relating to the economy, securities markets and
specific securities as it considers necessary or useful continuously to manage
the assets of the Fund in a manner consistent with the Fund's investment
objectives and policies and investment restrictions. The Investment Adviser also
selects brokers and dealers for execution of the Fund's portfolio transactions
and maintains some of the Fund's books and records.
6
<PAGE>
The Fund bears all expenses incurred in its operation, including, but not
limited to, charges and expenses of any registrar, custodian, stock transfer and
dividend disbursing agent; brokerage commissions; taxes, engraving and printing
of stock certificates; registration costs of the Fund and its shares under
federal and state securities laws; the cost and expense of printing, including
typesetting, and distributing prospectuses of the Fund and supplements thereto
to existing shareholders; all expenses of meetings of shareholders, directors
and committees of directors, including the fees and expenses of the directors
and committee members who are not affiliated with the Investment Adviser;
expenses of preparing, printing and mailing of proxy statements and reports to
shareholders; all fees and expenses incident to services of the custodian and
transfer agent, including any plans or programs insofar as not charged directly
to the investors; charges and expenses of any outside service used for pricing
of the Fund's shares; fees and expenses of legal counsel and of independent
accountants; membership dues of industry associations; interest on borrowing;
such office space, facilities, utilities, equipment and postage as the Fund
reasonably requires in the conduct of its business; insurance premiums on
property or personnel (including directors and officers) of the Fund, which
inure to its benefit; and extraordinary expenses (including, but not limited to,
legal claims and liabilities and litigation costs and any indemnification
relating thereto).
As compensation for the services and facilities furnished to the Fund, the
Fund pays the Investment Adviser a monthly fee equal on an annual basis to 1% of
the first $20,000,000 of the Fund's net assets as of the close of business on
the last business day of each calendar month during the Fund's fiscal year;
reduced to 0.75% of such net assets in excess of $20,000,000 up to $100,000,000;
0.5% of such net assets in excess of $100,000,000 up to $200,000,000; and 0.45%
of all such net assets in excess of $200,000,000. The investment advisory fees
paid by the Fund in the fiscal years ended March 31, 1996, 1995 and 1994 were
$133,298, $158,386 and $211,074 respectively.
Total operating expenses of the Fund are subject to applicable limitations
under rules and regulations of states where the Fund is authorized to sell its
shares. Accordingly, if in any fiscal year, the Fund's total operating
expenses, except for taxes, brokerage fees and commissions and extraordinary
expenses such as litigation (to the extent permitted by applicable state
securities laws and regulations), exceed any applicable state law or regulation
which limits the annual expenses that may be borne by a mutual fund whose shares
are registered for sale in that state, the Investment Adviser will reimburse the
Fund (up to the amount of its fee) for the amount of such excess (subject to
adjustment month by month during the balance of the Fund's fiscal year if
accrued expenses thereafter fall below the limit).
The Fund has applied for and received a partial variance from the State of
California Corporations Commission to permit exclusion of a portion of the
Fund's advisory, custody, audit and pricing service fees from the Fund's
aggregate annual expenses for purposes of applying an expense limitation imposed
by California law. The Fund requested and received such a variance on the
grounds that the Fund's global investment strategy tends to cause such advisory,
custody, audit and pricing service fees to be higher than those of comparable
funds that do not invest in foreign securities. The Fund still remains subject
to the applicable expense limitations for those portions of the fees not
excluded.
The Agreement provides that in the absence of willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations thereunder, the
Investment Adviser is not liable to the Fund or any of its shareholders for any
error of judgment, mistake of law, or any loss arising out of any investment or
for any other act or omission by the Investment Adviser in the performance of
its duties under the Agreement. The Agreement in no way restricts the Investment
Adviser from acting as investment counselor or adviser to others.
The Agreement was last approved by vote of the Fund's shareholders on July
15, 1988, and by the Board of Directors on May 24, 1996, including the
affirmative vote of a majority of the directors who are not parties to the
agreement or "interested persons" of any such party, cast in person at a meeting
called for the purpose of voting on such approval. The Agreement will continue
from year to year, provided that continuance of the Agreement is approved
annually by the vote of the holders of a majority of outstanding Fund shares as
defined in the 1940 Act or by the Company's Board of Directors, and provided
further that in either event such continuance is approved by the vote of a
majority of
7
<PAGE>
the directors of the Company who are not parties to the Agreement or "interested
persons" of any such party, cast in person at a meeting called for the purpose
of voting on such approval. The Agreement may be terminated at any time without
penalty on sixty days notice by the Company's Board of Directors or by the
holders of a majority of the Fund's shares. The Agreement will terminate
automatically in the event of its assignment.
The Company has acknowledged that the name "Rea-Graham" is a property right
of the Investment Adviser. The Fund has agreed that the Investment Adviser may
use or, at any time, permit others to use the name "Rea-Graham." The Company
also has agreed that in the event the Agreement between the Investment Adviser
and the Company is terminated, the Company, upon request of the Investment
Adviser, will submit to its shareholders a proposal to amend its Articles of
Incorporation to delete the name "Rea-Graham" from its name and will cease to
use the name "Rea-Graham" and indicate that the Investment Adviser is no longer
the investment adviser for the Fund.
The directors and officers of James Buchanan Rea, Inc. are as follows:
Position With Position With
Name Investment Adviser the Company
- --------------------------------------------------------------------------------
James B. Rea, Jr. Director, President and Chairman of the Board, President
Treasurer and Secretary
Frances L. Rea Director, Vice-President Treasurer
and Secretary
Custodian. The Chase Manhattan Bank, One MetroTech Center, Brooklyn,
---------
New York 11245 serves as custodian of the Fund's assets. The custodian has
entered into agreements with foreign sub-custodians approved by the directors
pursuant to rules under the 1940 Act. The Fund pays The Chase Manhattan Bank,
N.A. for its services according to a schedule of charges agreed on from time to
time.
Transfer Agent. PFPC Inc. serves as transfer agent for the Fund's shares.
--------------
Legal Counsel. Dechert Price & Rhoads, 1500 K Street, N.W., Washington,
-------------
D.C. 20005, serve as legal counsel for the Fund.
Independent Accountants. McGladrey & Pullen, LLP., 555 5th Avenue,
-----------------------
8th Floor, New York, New York 10017, serve as independent accountants for the
Fund. Their audit services for the fiscal year ended March 31, 1996, comprised
examination of the Fund's financial statements and review of the Fund's filings
with the Securities and Exchange Commission.
BROKERAGE ALLOCATION
--------------------
The Investment Adviser selects, for the execution of purchases and sales of
the Fund's portfolio securities, brokers and dealers who, in its opinion, will
provide the best combination of price (inclusive of brokerage commissions) and
execution for the Fund's orders. Pursuant to the Agreement, the Investment
Adviser may consider research provided by a broker-dealer, and a broker-dealer
may receive a fee higher than that which would be charged by another broker-
dealer that does not furnish research services or that furnishes research
services deemed to be of lesser value, so long as the criteria of Section 28(e)
of the Securities Exchange Act of 1934 are met. According to Section 28(e), a
person with investment discretion, such as the Investment Adviser, shall not be
deemed to have acted unlawfully or to have breached its fiduciary duty by
causing the Fund to pay a higher commission than the lowest available, if such
person makes a good faith determination that the commissions paid are reasonable
in relation to the value of the brokerage and research services provided, in
terms of either a particular transaction or his overall responsibilities with
respect to the accounts as to which he exercises investment discretion.
8
<PAGE>
As a general matter, it is the Fund's policy to execute purchases and sales
of listed portfolio securities through James Buchanan Rea, Inc., except when
better price and execution can be obtained elsewhere. In executing securities
transactions for the Fund, it is understood that James Buchanan Rea, Inc. will
transmit the transaction to a member firm of the exchange used, which member
firm will receive a portion of the commission as the clearing broker and floor
trader. The brokerage commissions to be paid by the Fund to James Buchanan Rea,
Inc. for executing securities transactions for the Fund's portfolio are
calculated in accordance with procedures adopted by the Company's Board of
Directors, including a majority of the directors who are not "interested
persons" of the Company or of James Buchanan Rea, Inc., pursuant to Rule 17e-1
under the 1940 Act. Rule 17e-1 requires that such commissions or other
remuneration received by James Buchanan Rea, Inc. be reasonable and fair
compared to the commissions, fees or other remuneration received by other
brokers in comparable transactions involving similar securities during a
comparable period of time. So long as James Buchanan Rea, Inc. can perform its
services on such basis, it will continue to be principal broker for the Fund's
transactions in listed securities. In executing transactions for the Fund, James
Buchanan Rea, Inc. treats the Fund like any other public customer, and the
Fund's orders are accorded priority over those received by James Buchanan Rea,
Inc. for its own account or for the account of any of its directors, officers or
employees. No transactions may be effected by the Fund with James Buchanan Rea,
Inc. acting as principal for its own account. Over-the-counter purchases and
sales normally are made with principal market makers, except where, in the
opinion of the Investment Adviser, better prices and execution may be obtained
on a commission basis or from other sources.
Directors and officers of the Company who are also directors and officers
of James Buchanan Rea, Inc. may receive indirect benefits from the Fund as a
result of the usual and customary brokerage commissions which James Buchanan
Rea, Inc. may receive for acting as broker to the Fund in portfolio securities
transactions. In approving the Agreement between the Company and James Buchanan
Rea, Inc., the Board of Directors took into account that the Agreement does not
provide for a reduction of the investment advisory fee by any portion of the
brokerage generated by portfolio transactions of the Fund which James Buchanan
Rea, Inc. may receive.
The Investment Adviser may from time to time recommend allocating brokerage
commissions to firms other than James Buchanan Rea, Inc., which furnish research
and statistical information to the Investment Adviser or which render services
to the Fund which the Investment Adviser is not required to provide. The
supplementary research or other services provided by such firms is useful in
varying degrees and is of indeterminable value. No formula can be established
for the allocation of business to such brokers.
Total brokerage commissions on portfolio transactions for the Fund in the
fiscal years ended March 31, 1996, 1995 and 1994 were $25,544, $28,179, and
$70,699 respectively, of which James Buchanan Rea, Inc. retained $13,835
(54.2%), $17,930 (63.6%), and $42,499 (60.1%) respectively. Of the Fund's
aggregate dollar amount of transactions on which brokerage commissions were paid
during the fiscal year ended March 31, 1996, 86.2% were effected through James
Buchanan Rea, Inc.
PURCHASE, REDEMPTION AND PRICING OF SHARES
------------------------------------------
The Prospectus describes the manner in which the Fund's shares may be
purchased and redeemed. See "Purchase of Shares" and "Redemption and Repurchase
of Shares."
Net Asset Value. Because of differences in time zones, trading on European
---------------
and Far Eastern securities exchanges and over-the-counter markets is completed
before the close of business on the New York Stock Exchange on each day when the
New York Stock Exchange is open. In addition, European or Far Eastern securities
trading may not take place on all business days in New York, and likewise may
take place on certain days when the New York Stock Exchange is not open, and on
which the Fund's net asset value is not calculated. The Fund calculates net
asset value per share, and therefore effects sales and redemptions, as of the
close of the New York Stock Exchange once on each day on which that Exchange is
open. If events materially affecting the value of foreign securities occur
between the time when their price is determined (as of the close of the foreign
markets) and the time when the Fund's net asset value is calculated, such
securities will be valued at fair value by methods as
9
<PAGE>
determined in good faith by the Board of Directors.
The Board of Directors may suspend the determination of the net asset
value for the whole or any part of any period (1) during which the New York
Stock Exchange is closed other than for customary week-end and holiday closings,
(2) during which trading on the New York Stock Exchange is restricted as
determined by the Securities and Exchange Commission, (3) during which an
emergency exists as a result of which disposal by the Fund of securities owned
by it is not reasonably practicable or it is not reasonably practicable for the
Fund fairly to determine the value of its net assets, or (4) for such other
periods as the Securities and Exchange Commission may by order permit for the
protection of the holders of the shares.
Letter of Intent. The schedule of reduced sales charges also is available
----------------
to investors who enter into a written Letter of Intent providing for the
purchase, within a thirteen-month period, of Fund shares from the Principal
Underwriter. Fund shares previously purchased prior to the date of receipt by
the Fund's Transfer Agent of the Letter of Intent and still owned by the
shareholder may also be included in determining the applicable reduction,
provided the dealer or shareholder notifies the Principal Underwriter of such
prior purchase.
A Letter of Intent permits an investor to establish a total investment goal
to be achieved by any number of investments over a thirteen-month period. Each
investment made during the period will receive the reduced sales commission
applicable to the amount represented by the goal as if it were a single
investment. A number of shares totaling 5% of the dollar amount of the Letter of
Intent will be held in escrow by the Fund's Transfer Agent in the name of the
shareholder. The initial purchase under a Letter of Intent must be equal to at
least 5% of the stated investment goal.
The Letter of Intent does not obligate the investor to purchase, or the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the investor is required to pay
the difference between the sales charge otherwise applicable to the purchases
made during this period and sales charges actually paid. The Principal
Underwriter is authorized by the shareholder to liquidate a sufficient number of
his escrowed shares to obtain such a difference. If the goal is exceeded and
purchases pass the next sales charge level, the sales charge on the entire
amount of the purchase that results in passing that level and on subsequent
purchases will be subject to further reduced sales charges, but there will be no
retroactive reduction of sales charges on previous purchases. At any time while
a Letter of Intent is in effect, a shareholder may, by written notice to the
Principal Underwriter, increase the amount of the stated goal. In that event
shares purchased and still owned by the shareholder will be included in
determining the applicable sales charge reduction. The 5% escrow and minimum
purchase requirements will be applicable to the new stated goal.
Withdrawal Program. A shareholder owning or purchasing Fund shares with
------------------
$10,000 or more value at Offering Price may open a Withdrawal Program providing
regular quarterly or monthly payments in any amount requested from shares held
in the Program. Additional shares may be purchased in the Program only in
amounts of $5,000 or more. The Program is voluntary and can be terminated at any
time by either the shareholder or the Fund. There are no service charges for the
program.
Income dividends and capital gains distributions on shares held in a
Program are automatically reinvested in additional whole or fractional shares.
The Program is not an annuity and does not and cannot protect against loss in
declining markets. Amounts paid to a shareholder from the Program represent the
proceeds from redemption of shares, and the value of the shareholder's
investment in the Fund will be reduced to the extent that the payments exceed
any increase in the aggregate value of his shares, including shares purchased
through reinvestment of dividends and distributions. This is particularly apt to
occur in a declining market. For tax purposes, depending upon the shareholder's
cost basis in the shares redeemed, each withdrawal generally will result in a
capital gain or loss.
Individual Retirement Account. Individuals (even if already covered by a
-----------------------------
qualified pension or profit-sharing plan, Keogh plan, or Government Plan) can
invest in Fund shares through an Individual Retirement Account under Section 408
of the Internal Revenue Code.
10
<PAGE>
An application form, together with the disclosure statement which the
Internal Revenue Service requires to be furnished, may be obtained on request to
the Principal Underwriter: James Buchanan Rea, Inc., 10966 Chalon Road, Los
Angeles, California 90077. An IRA which is established within seven days of the
date of receipt of the disclosure statement may be revoked within seven days
after the account is established and the initial contribution will be refunded.
An IRA established more than seven days after the receipt of the disclosure
statement may not be revoked.
Application forms are also available to "rollover" to an IRA in the Fund,
without federal income tax, distributions from a qualified retirement plan and
amounts previously accumulated under any other IRA, which satisfy tax law
requirements for such tax-free rollover treatment. By doing so, federal
income tax, both on the amount rolled over and on any earnings derived from it,
generally will be deferred until distributed from the IRA.
Provident National Bank charges an annual $10.00 custodian fee for IRAs.
Provident National Bank may redeem Fund shares held in an IRA in order to pay
this fee.
TAX STATUS
----------
The following discussion sets forth additional information summarizing certain
U.S. Federal tax considerations incident to an investment in the Fund.
The Fund intends to continue to qualify and elect to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code").
Generally, in order to qualify as a regulated investment company, the Fund
must, among other things, (1) derive in each taxable year at least 90% of its
gross income from dividends, interest, payments with respect to securities
loans, and gains from the sale or other disposition of stock, securities or
foreign currencies, or other income derived with respect to its business of
investing in such stock, securities or currencies; (2) derive in each taxable
year less than 30% of its gross income from the sale or other disposition of
certain assets (namely, in the case of the Fund, (a) stock or securities, and
(b) foreign currencies and including forward contracts on such currencies, to
the extent such positions are not directly related to the Fund's principal
business of investing in stocks or securities) held for less than three months
(the "30% Limitation"); (3) diversify its holdings so that, at the end of each
quarter of the taxable year, (a) at least 50% of the value of the Fund's assets
is represented by cash, U.S. Government securities, the securities of other
regulated investment companies and other securities, with such other securities
of any one issuer limited for the purposes of this calculation to an amount not
greater than 5% of the value of the Fund's total assets and 10% of the
outstanding voting securities of such issuer, and (b) not more than 25% of the
value of its total assets is invested or deemed to be invested in the securities
of any one issuer (other than U.S. Government securities or the securities of
other regulated investment companies); and (4) distribute at least 90% of its
net investment income (which includes dividends, interest and net short-term
capital gains in excess of net long-term capital losses) each taxable year.
As a regulated investment company, the Fund generally will not be subject
to U.S. federal income tax on its net investment income and net capital gains
(any net long-term capital gains in excess of the sum of net short-term capital
losses) if any, that it distributes to shareholders. The Fund intends to
distribute to its shareholders, at least annually, substantially all of its net
investment income and net capital gains. In addition, amounts not distributed by
the Fund on a timely basis in accordance with a calendar year distribution
requirement are subject to a nondeductible 4% excise tax. To prevent imposition
of the tax, the Fund must distribute during each calendar year an amount equal
to the sum of (1) at least 98% of its ordinary income (not taking into account
any capital gains or losses) for the calendar year, (2) at least 98% of its
capital gains in excess of its capital losses (adjusted for certain ordinary
losses, as prescribed by the Code) for the twelve month period ending on October
31 of the calendar year, and (3) all ordinary income and capital gains for
previous years that are treated under the excise tax rules as not having been
distributed during such years. A distribution will be treated as paid on
December 31 of a calendar year if it is declared by the Fund in October,
November or December of that
11
<PAGE>
year to shareholders of record on a date in such a month and paid during January
of the following calendar year. Such distributions will be taxable to
shareholders in the calendar year in which the distributions are declared,
rather than the calendar year in which the distributions are received. To
prevent imposition of the excise tax, the Fund intends to make its distributions
in accordance with the calendar year distribution requirements.
Dividends paid out of the Fund's net investment income will be taxable to a
shareholder as ordinary income. To the extent such dividends are attributable to
certain dividends received by the Fund from domestic corporations, they will be
eligible for the dividends received deduction available to shareholders which
are corporations, provided that such amounts otherwise qualify for that
deduction and the Fund designates such amounts as derived from certain dividends
from domestic corporations. Net capital gains, if any, to the extent distributed
by the Fund and designated by the Fund as capital gain dividends, are taxable to
shareholders as long-term capital gains, regardless of how long the shareholder
has held the Fund's shares, and are not eligible for the dividends received
deduction. The tax treatment of dividends and distributions will be the same
whether a shareholder reinvests them in additional shares or elects to receive
them in cash.
If the management, in its sole discretion, deems it in the best interests
of the Fund and its shareholders to do so, the Fund may invest more than 50% of
its total assets in securities of foreign corporations. In that case, the Fund
may be eligible to elect to take advantage of the provisions of Section 853 of
the Code, under which a shareholder will be treated as receiving an additional
distribution from the Fund, in the amount indicated in a notice furnished to
him, as his pro rata portion of income and similar taxes paid to foreign
governments with respect to interest, dividends and gain on the Fund's foreign
portfolio investments. The shareholder then may take his portion of the amount
of such foreign taxes paid as a credit against his federal income tax, subject
to certain limitations. If the shareholder finds it more to his advantage to do
so, he may, in the alternative, treat the foreign tax paid as a deduction from
his gross income in computing his taxable income. No deduction for foreign taxes
may be claimed by a shareholder who computes his tax as an individual and does
not itemize deductions. In addition, foreign income and similar taxes are not
generally deductible by an individual in computing alternative minimum taxable
income. Generally, a credit for foreign taxes is subject to the limitation that
it may not exceed the shareholder's U.S. tax attributable to his or her total
foreign source taxable income. For this purpose, if the Fund makes the Section
853 election, the source of the Fund's income flows through to its shareholders.
With respect to the Fund, gains from the sale of securities generally will be
treated as derived from U.S. sources and certain currency fluctuation gains will
be treated as derived form U.S. sources. The limitation on the foreign tax
credit is applied separately to foreign source passive income, including foreign
source passive income received from the Fund. In addition, the foreign tax
credit may offset only 90% of the tentative alternative minimum tax imposed on
corporations and individuals, and foreign taxes may not be deducted in computing
minimum taxable income. The foregoing is only a general description of the
foreign tax credit under current law and should not be regarded as exhaustive.
Each shareholder should consult his tax adviser with respect to the availability
of the foreign tax credit.
Certain forward contracts in which the Fund may invest may be "section 1256
contracts." Gains or losses on section 1256 contracts are generally considered
60% long-term and 40% short-term capital gains or losses ("60/40"); however,
foreign currency gains or losses (as discussed below) arising from forward
foreign currency contracts generally are treated as ordinary income or loss.
Also, certain forward foreign currency contracts that are held by the Fund at
the end of each taxable year (and, possibly, on other dates, as required under
the Code) are "marked-to-market" with the result that unrealized gains or losses
are treated as though they were realized.
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time the Fund accrues income or other receivables
or accrues expenses or other liabilities denominated in a foreign currency and
the time the Fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or ordinary loss. Similarly, on
disposition of certain securities denominated in a foreign currency and certain
forward contracts, gains or losses attributable to fluctuations in the value of
foreign currency between the date of acquisition of the security or contract and
the date of disposition also are treated as ordinary gain or loss. These gains
or losses, re-
12
<PAGE>
ferred to under the Code as "section 988" gains or losses, may increase,
decrease, or eliminate the amount of the Fund's net investment income to be
distributed to its shareholders as ordinary income.
Generally, the hedging transactions undertaken by the Fund may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may affect
the character of gains (or losses) realized by the Fund. In addition, losses
realized by the Fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which losses are realized. Because
only a few regulations implementing the straddle rules have been promulgated,
the tax consequences to the Fund of hedging transactions are not entirely clear.
The hedging transactions may increase the amount of short-term capital gain
realized by the Fund which is taxed as ordinary income when distributed to
shareholders.
The Fund may make one or more of the elections available under the Code
which are applicable to straddles. If the Fund makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of gains
or losses, defer losses and/or accelerate the recognition of gains or losses
from the affected straddle positions, the amount which must be distributed to
shareholders and which will be taxed to shareholders as ordinary income or long-
term capital gain, may be increased or decreased as compared to a fund that did
not engage in such hedging transactions.
Requirements relating to the Fund's status as a regulated investment
company may limit the extent to which the Fund will be able to engage in
transactions in forward contracts.
The Fund may be required to withhold 31% of all distributions and gross
redemption proceeds payable to shareholders who fail to provide the Fund with
their correct taxpayer identification number or to make required certifications,
or who have been notified by, or about whom the Fund has been notified by, the
Internal Revenue Service (the "IRS") that they are subject to backup
withholding. Corporate shareholders and certain other shareholders specified in
the Code or in U.S. Treasury Department Regulations generally are exempt from
such backup withholding. Backup withholding is not an additional tax. Any
amounts withheld are credited against the shareholder's U.S. federal tax
liability. The Fund reserves the right not to accept account applications not
accompanied by correct, certified taxpayer identification numbers and such other
information or certifications as the Fund may request pursuant to tax laws and
IRS pronouncements. The Fund also reserves the right to close by redemption
those accounts for which it does not have a correct, certified taxpayer
identification number.
The Fund may invest in shares of foreign corporations which may be
classified under the Code as passive foreign investment companies ("PFICs"). In
general, a foreign corporation is classified as a PFIC for a taxable year if at
least one-half of its assets constitute investment-type assets or 75% or more of
its gross income is investment-type income. If the Fund receives a so-called
"excess distribution" with respect to PFIC stock, the Fund itself will be
subject to a tax on a portion of the excess distribution, whether or not the
corresponding income is distributed by the Fund to shareholders. In general,
under the PFIC rules, an excess distribution is treated as having been realized
ratably over the period during which the Fund held the PFIC shares. The Fund
itself will be subject to tax on the portion, if any, of an excess distribution
that is so allocated to prior Fund taxable years and an interest factor will be
added to the tax, as if the tax had been payable in such prior taxable years.
Certain distributions from a PFIC as well as gain from the sale of PFIC shares
are treated as excess distributions. Excess distributions are characterized as
ordinary income even though, absent application of the PFIC rules, certain
excess distributions might have been classified as capital gain.
The Fund may be eligible to elect alternative tax treatment with respect to
PFIC shares. Under an election that currently is available in some
circumstances, the Fund generally would be required to include in its gross
income its share of the earnings of a PFIC on a current basis, regardless of
whether distributions are received from the PFIC in a given year. If this
election were made, the special rules,
13
<PAGE>
discussed above, relating to the taxation of excess distributions, would not
apply. In addition, other elections may become available that would affect the
tax treatment of PFIC shares held by the Fund. The Fund's intention to qualify
annually as a regulated investment company may limit its elections with respect
to PFIC shares.
Because the application of the PFIC rules may affect, among other things,
the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC shares, as well as subject the Fund
itself to tax on certain income from PFIC shares, the amount that must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not invest in PFIC shares.
Distributions and redemptions also may be subject to state, local and
foreign taxes depending on each shareholder's particular situation. Shareholders
are advised to consult their tax advisers with respect to the particular tax
consequences to them of an investment in the Fund. Special U.S. tax rules may
apply to investors who are not U.S. citizens. Accordingly, such persons should
consult their tax advisers with respect to the tax consequences to them of an
investment in the Fund.
PRINCIPAL UNDERWRITER
---------------------
James Buchanan Rea, Inc., 10966 Chalon Road, Los Angeles, California 90077,
telephone: (800) 433-1998, or (310) 442-2660, is the Principal Underwriter of
the Fund pursuant to an Underwriting Agreement dated April 1, 1990, which is
subject to renewal each year in accordance with the provisions of the 1940 Act.
The Agreement will terminate automatically in the event of its assignment. The
Principal Underwriter is relieved of liability for any act or omission in the
course of its performance of the Agreement, in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations.
The Agreement provides that the Principal Underwriter will use its best
efforts to maintain a broad distribution of the Fund's shares among bona fide
investors and may sign dealer agreements with responsible securities dealers as
well as sell to individual investors. The shares are to be sold only at the
Offering Price in effect at the time of sale, with the Fund to receive not less
than the full net asset value of the shares sold. The discount between the
Offering Price and the net asset value may be retained by the Underwriter, or it
may reallow all or any part of such discount to dealers. For the fiscal years
ended March 31, 1996, 1995 and 1994 the Underwriter retained $585 (21.6%),
$1,267 (29.5%) and $3,600 (18.8%) respectively, of the gross sales
commissions.
The Agreement provides that the Fund shall pay all costs and expenses
incident to registering and qualifying, and maintaining the registration and
qualification of, Fund shares for sale under the Securities Act of 1933 and
under the applicable blue sky laws of the jurisdictions in which the Underwriter
desires to distribute such shares.
Distribution Plan. On February 28, 1990, the Shareholders of the Fund
-----------------
approved a Plan of Distribution for the Fund (the "Plan"), which Plan became
effective April 1, 1990. The Plan provides that the Fund will pay monthly to
James Buchanan Rea, Inc. as Principal Underwriter, a distribution fee charged
against the assets of the Fund and equal on an annual basis to 0.35% of the
Fund's average daily net assets. The distribution fee will be paid to the
Underwriter for its services as distributor of the Fund's shares in connection
with any activities or expenses primarily intended to result in the sale of
shares of the Fund, including, but not limited to: (1) compensation to employees
of the Underwriter who engage in or support the distribution of the Fund's
shares, including salary, commissions, travel and related expenses; (2)
compensation to and expenses of the Underwriter, including overhead and
telephone expenses, allocable to its activities as distributor of the Fund's
shares; (3) payments to broker-dealers, financial institutions and other persons
as compensation for services in connection with the distribution of shares of
the Fund, including promotional incentives and fees calculated with reference to
the average daily net asset value of the shares held by share-holders who have a
brokerage or other service relationship with such broker-dealers or financial
institutions; (4) the costs of printing and distributing prospectuses,
statements of additional information, and reports for other than existing
share-
14
<PAGE>
holders; (5) payments to consultants for public relations, marketing, research
and promotional services related to the distribution of the Fund's shares; (6)
the cost of preparing, printing and distributing sales literature and
advertising materials; and (7) such other similar services as the Fund's Board
of Directors determines to be reasonably calculated to result in the sale of
shares of the fund. The Fund will pay all costs and expenses in connection with
preparation, printing, and distribution of its Prospectus and SAI for current
shareholders and the implementation and operation of the Plan, including legal
and accounting fees related thereto.
James Buchanan Rea, Inc. receives and retains brokerage commissions with
respect to portfolio transactions for the Fund as described above under
"Brokerage Allocation," and, as principal underwriter of the Fund's shares, also
receives the underwriter's portion of the sales load paid on initial purchases
of shares of the Fund. The distribution fee is in addition to the compensation
received by James Buchanan Rea, Inc. as advisor for investment advisory
services.
The distribution fee is payable to the Underwriter regardless of the
amounts actually expended by the Underwriter for distribution-related
activities. The Plan specifically provides that the amount of the distribution
fee payable to the Underwriter pursuant to the Plan is not related directly to
the expenses incurred by the Underwriter in providing distribution-related
services to the Fund, and that the Plan does not obligate the Fund to reimburse
the Underwriter for such expenses. The distribution fee is calculated and
accrued daily; the Plan provides that, if it is terminated, any distribution
expenses incurred by the Underwriter on behalf of the Fund in excess of payments
of the distribution fee received or accrued through the termination date are the
sole responsibility and liability of the Underwriter, and are not obligations of
the Fund.
Currently, a service fee and a trail fee will be paid to selling brokers
equal on an annual basis to 0.25% and 0.05%, respectively, of the average
aggregate net asset value of outstanding Fund shares registered in the name of
that broker as nominee or held in a shareholder account that designates that
broker as broker of record.
The Plan was approved by the Board of Directors of the Fund, including the
unanimous vote of the Directors who are not "interested persons," as defined in
the 1940 Act, and who have no direct or indirect financial interest in the
operation of the Plan or related agreement (the "Independent Directors"), on
October 27, 1989, and most recently on May 24, 1996. On a quarterly basis, the
Fund's Board of Directors views a report on expenditures under the Plan and the
purposes for which expenditures were made. The Directors conduct an additional,
more extensive, review annually in determining whether the Plan will be
continued. By its terms, continuation of the Plan from year to year is
contingent on annual approval by a majority of the Fund's Directors and by a
majority of the Independent Directors. The Plan may be terminated at any time
with respect to the Fund by vote of a majority of the Independent Directors or a
majority of the outstanding shares of the Fund.
On July 7, 1993, certain amendments to the National Association of
Securities Dealers, Inc. ("NASD") Rules of Fair Practice governing sales charges
that may be imposed on purchases of fund shares became effective. The
amendments, among other things, subject the payment of 12b-1 fees by mutual
funds to certain limits which may vary depending on the existence of other types
of sales charges. At its current sales load level, the maximum asset-based
distribution fee that the Fund could impose on shares would be 0.75% per annum.
"Service fees," up to a maximum of 0.25% per annum, would be exempt from the
overall limits on distribution fees. In addition to these annual limitations,
all 12b-1 fees and sales loads paid to the Underwriter would be subject to an
ongoing cap of 6.25% of aggregate net sales. Because the Plan currently
contemplates a 12b-1 fee equal on an annual basis to 0.35%, of which 0.25% would
generally meet the definition of a service fee, the NASD rule does not have a
significant impact on the Fund or the Plan. Nevertheless, the Plan will be
reviewed and, if necessary, amended to assure its compliance with the NASD rules
or with any SEC rule amendments that may be adopted.
For the fiscal year ended March 31, 1996, James Buchanan Rea, Inc. received
distribution fees of $47,005. It is estimated that James Buchanan Rea, Inc.
spent approximately: (1) $39,301 on trail commissions and service fees to
Dealers; (2) $7,110 on advertising and seminar expenses; (3) $3,553
15
<PAGE>
on printing, postage and mailing expenses of Prospectuses and sales literature
to brokers and prospective shareholders; and (4) $4,151 on other distribution
related services.
Performance Information. The Fund may, from time to time, include its
-----------------------
total return in advertisements or reports to shareholders or prospective
investors. Standardized quotations of average annual total return for the Fund
will be expressed in terms of the average annual compounded rate of return for a
hypothetical investment in the Fund over periods of 1, 5 and 10 years (up to the
life of the Fund), calculated pursuant to the following formula: P(1 + T)/n/=
ERV (where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years, and ERV = the ending redeemable value of
a hypothetical $1,000 payment made at the beginning of the period). All total
return figures reflect the deduction of a proportional share of Fund expenses
(on an annual basis), deduction of the maximum initial sales load, and assume
that all dividends and distributions are reinvested when paid. The Fund also
may quote supplementally a rate of total return that is based on a net amount
invested in the Fund (i.e., that does not reflect deduction of the maximum
initial sales load).
Performance information for the Fund may be compared, in reports and
promotional literature, to: (1) the Value Line Composite, NASDAQ, Morgan Stanley
World Index, Treasury Note Index, or other unmanaged indices so that investors
may compare the Fund's results with those of a group of unmanaged securities
widely regarded by investors as representative of the securities markets in
general; (2) other groups of mutual funds tracked by Lipper Analytical Services,
a widely used independent research firm which ranks mutual funds by overall
performance, investment objectives, and assets, or tracked by other services,
companies, publications, or persons who rank mutual funds on overall performance
or other criteria; and (3) the Consumer Price Index (measure for inflation) to
assess the real rate of return from an investment in the Fund. Unmanaged
indices may assume the reinvestment of dividends but generally do not reflect
deductions for administrative and management costs and expenses.
For the 1, 5 and 10 year periods ended March 31, 1996, the average annual
total return of the Fund was +6.55%, +3.42% and +4.12%, respectively, assuming
the imposition of the maximum initial sales charge, and +11.83%, +4.43% and
+4.62% respectively, assuming that the maximum sales charge had not been
deducted.
Performance information for the Fund reflects only the performance of a
hypothetical investment in the Fund during the particular time period on which
the calculations are based. Performance information should be considered in
light of the Fund's investment objectives and policies, characteristics and
quality of the portfolio, and the market conditions during the given time
period, and should not be considered as a representation of what may be achieved
in the future.
16
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders of
Rea-Graham Balanced Fund
We have audited the accompanying statement of assets and liabilities,
including the statement of investments, of Rea-Graham Balanced Fund as of March
31, 1996, and the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period then
ended, and the selected financial information for each of the thirteen years in
the period then ended and the period from August 19, 1982 to March 31, 1983.
These financial statements and selected financial information are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and selected financial information based
on our audits.
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 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 March 31, 1996, by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and selected financial information
referred to above present fairly, in all material respects, the financial
position of Rea-Graham Balanced Fund as of March 31, 1996, the results of its
operations, the changes in its net assets and the selected financial
information for the periods indicated, in conformity with generally accepted
accounting principles.
/s/ McGladrey & Pullen, LLP
New York, New York
April 19, 1996
1
<PAGE>
REA-GRAHAM BALANCED FUND
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investments at value (cost $12,146,192) $ 12,256,975
Dividends and interest receivable 73,156
Other 6,864
---------------
Total assets 12,336,995
---------------
LIABILITIES
Payable for capital shares redeemed 5,116
Accrued expenses 54,793
---------------
Total liabilities 59,909
---------------
NET ASSETS
Net assets, equivalent to $14.36 per share on 854,705
shares outstanding (Note 4) $ 12,277,086
===============
Computation of public offering price:
Net asset value per share $ 14.36
===============
Offering price per share (100/95.25 x $14.36) $ 15.08
===============
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
Rea-Graham Balanced Fund
Statement of Operations
Year Ended March 31, 1996
- --------------------------------------------------------------------------------
[S]
Investment Income:
Income:
Dividends $ 104,786
Interest 523,362
---------------
Total income 628,148
---------------
Expenses:
Investment advisory fee (Note 3) 133,298
Distribution fee (Note 3) 47,005
Custodian fees 21,612
Transfer agency fees and expenses 19,074
Administrative expenses 30,188
Registration and filing fees 22,310
Legal 6,500
Audit and accounting 29,000
Recordkeeping and pricing fees 23,602
Directors' fees and meeting expenses 7,297
Printing and postage 10,623
Other 6,265
---------------
Total expenses 356,774
---------------
Net investment income 271,374
---------------
Realized and Unrealized Gain on Investments:
Net realized gain on investments 1,056,147
Unrealized appreciation of investments for the year 212,662
---------------
Net gain on investments 1,268,809
---------------
Net increase in net assets from operations $ 1,540,183
===============
See Notes to Financial Statements.
3
<PAGE>
Rea-Graham Balanced Fund
Statements of Changes in Net Assets
Years Ended March 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (Decrease) in Net Assets from Operations:
Net investment income $ 271,374 $ 172,912
Net realized gain (loss) on investments 1,056,147 (755,227)
Unrealized appreciation for the year 212,662 585,283
Net increase in net assets ---------------------------------
from operations 1,540,183 2,968
Dividends paid to shareholders from net investment
income (285,223) (115,583)
Capital share transactions (Note 4) (3,219,767) (3,522,172)
---------------------------------
Total decrease (1,964,807) (3,634,787)
Net Assets:
Beginning of year 14,241,893 17,876,680
---------------------------------
End of year (including undistributed net investment
income of $58,333 and $72,182) $ 12,277,086 $ 14,241,893
=================================
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
REA-GRAHAM BALANCED FUND
STATEMENT OF INVESTMENTS
March 31, 1996
<TABLE>
<CAPTION>
NUMBER
NAME OF ISSUER OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 23.39%
BANKS - 6.58%
Barnett Banks 3,500 $ 217,875
Fleet Financial 4,000 162,000
Keycorp (U.S.A.) 5,386 208,034
Norwest CP 6,000 220,500
-------------
808,409
-------------
BEEF - SLAUGHTER/PRODUCTS - 0.84%
IBP, Inc. 4,000 102,500
-------------
FINANCIAL SERVICES - 0.85%
Advanta Corp. CL A 2,000 104,000
-------------
FLEET MANAGEMENT/LEASING - 0.68%
Rollins Truck Lease (U.S.A.) 8,000 83,000
-------------
INDUSTRIALS- 3.74%
AUTO/PARTS
Excel Industries Inc. 13,000 147,875
-------------
SPRING MANUFACTURING
Leggett & Platt 8,000 183,000
-------------
TIRES
Cooper Tire, Inc. 5,000 128,750
-------------
TOTAL INDUSTRIALS 459,625
-------------
</TABLE>
(Continued)
See Notes to Financial Statements.
5
<PAGE>
REA-GRAHAM BALANCED FUND
STATEMENT OF INVESTMENTS (Continued)
March 31, 1996
<TABLE>
<CAPTION>
NUMBER
NAME OF ISSUER OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
INSURANCE/SERVICES - 1.53%
MBIA, Inc. (U.S.A.) 2,500 $ 187,500
--------------
JET FUEL/OIL RECOVERY - 0.97%
World Fuel 7,000 119,000
--------------
RESTAURANTS - 0.57%
Cracker Barrel 3,000 69,750
--------------
STORES (RETAIL/WHOLESALE) - 0.61%
Cash American International 14,000 75,250
--------------
TECHNOLOGY - ENERGY - 1.42%
Wheelabrator Tech 10,500 174,563
--------------
TIMBER RESOURCES - 0.71%
IP-Timber LP Class A 4,000 87,000
--------------
UTILITIES - 4.89%
Delmarva Power & Light Co. 7,500 159,375
KCS Energy 9,500 147,250
NY State Electric & Gas 3,000 70,500
Nipsco Industries (U.S.A.) 6,000 223,500
--------------
600,625
--------------
TOTAL COMMON STOCKS (Cost $2,727,940) 2,871,222
--------------
</TABLE>
(Continued)
See Notes to Financial Statements.
6
<PAGE>
REA-GRAHAM BALANCED FUND
STATEMENT OF INVESTMENTS (Continued)
March 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
NAME OF ISSUER AMOUNT VALUE
- -----------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS - 76.24%
LONG-TERM U.S. GOVERNMENT OBLIGATIONS - 32.28%
U.S. Treasury Notes, 5.75%, 09/30/97 $ 1,000,000 $ 1,000,936
U.S. Treasury Notes, 5.375%,11/30/97 1,000,000 994,061
U.S. Treasury Notes, 5.00%, 01/31/98 1,000,000 987,500
U.S. Treasury Notes, 5.125%, 12/31/98 1,000,000 980,936
----------------
3,963,433
----------------
SHORT-TERM U.S. GOVERNMENT OBLIGATIONS - 43.96%
U.S. Treasury Bills, 4.85%, 04/04/96 150,000 149,939
U.S. Treasury Bills, 5.00%, 04/04/96 200,000 199,917
U.S. Treasury Bills, 4.98%, 04/11/96 900,000 898,755
U.S. Treasury Bills, 4.70%, 04/25/96 2,500,000 2,492,167
U.S. Treasury Bills, 4.67%, 05/02/96 175,000 174,296
U.S. Treasury Bills, 4.75%, 05/02/96 425,000 423,261
U.S. Treasury Bills, 5.15%, 05/30/96 1,067,000 1,058,221
----------------
5,396,556
----------------
TOTAL U.S. GOVERNMENT OBLIGATIONS (Cost $9,392,488) 9,359,989
OTHER SHORT-TERM INVESTMENTS - .21%
Chase Institutional Money Market (Cost $25,764) 25,764
----------------
TOTAL INVESTMENTS (Cost $12,146,192+) - 99.84% 12,256,975
OTHER ASSETS LESS LIABILITIES - .16% 20,111
TOTAL NET ASSETS - 100% $ 12,277,086
================
</TABLE>
+ Aggregate cost for federal income tax purposes is identical.
See Notes to Financial Statements.
7
<PAGE>
REA-GRAHAM BALANCED FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Basis of Presentation
Rea-Graham Balanced Fund (the Fund) is the only series of shares of
Rea-Graham Funds, Inc., a diversified open-end management investment company
registered under the Investment Company Act of 1940. It was organized in 1982
to succeed to the business of Rea, Graham-Plan Fund, an investment company
organized as a limited partnership which commenced operations June 30, 1976 for
the purpose of investing the partners' capital in securities under professional
investment management. This succession occurred on April 29, 1982 when the
partnership's net assets aggregating $3,436,275 were transferred to the Fund in
exchange for 300,000 shares of the Fund's capital stock. The Fund seeks as its
investment objectives medium-term capital growth, income and safety through
balanced investments in common stocks, preferred stocks, U.S. government
securities and money market instruments.
Note 2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements.
(a) Valuation of securities.
Investments are stated at value based on latest sales prices reported on
national securities exchanges on the last business day of the period.
Investments for which no sale is reported, or which are traded over the
counter, are valued at the mean between bid and asked prices.
(b) Income taxes.
The Fund intends to comply with the provisions of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its
taxable income to its shareholders. Therefore no provision has been made
for federal income taxes.
(c) 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 and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of increases and decreases in
net assets from operations during the reporting period. Actual results
could differ from those estimates.
(d) Other.
Securities transactions are recorded on the trade date basis. Interest is
accrued as earned and dividend income is recorded on the ex-dividend date,
except that certain dividends from foreign securities are recorded as soon
as information is available to the Fund. Dividends and capital gain
distributions to shareholders are recorded on the ex-dividend date.
8
<PAGE>
REA-GRAHAM BALANCED FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 3. Investment Advisory Fee and Other Transactions With Affiliates
The Fund retains James Buchanan Rea, Inc. (Adviser) as its investment
adviser. Under the terms of the agreement the Adviser receives a monthly fee
of 1/12 of 1% of the first $20,000,000 of the Fund's net assets on the last
business day of the month, 1/12 of .75% of the next $80,000,000, 1/12 of .5% of
the next $100,000,000, and 1/12 of .45% of monthly net assets in excess of
$200,000,000. The Adviser has agreed to reduce its advisory fee for all
expenses (excluding certain defined expenses) in excess of limitations set
under applicable state securities laws. No reduction in fee was required for
the year ended March 31, 1996.
Pursuant to a Plan of Distribution the Fund pays monthly to James Buchanan
Rea, Inc., as Principal Underwriter, a distribution fee equal on an annual
basis to 0.35% of the Fund's average daily net assets. There were no
additional expenses borne by the Fund pursuant to the Plan of Distribution.
Commissions earned by James Buchanan Rea, Inc. for services rendered as a
registered broker-dealer in securities transactions of the Fund for the year
ended March 31, 1996 were $13,835 (0.10% of average net assets), net of $8,174
allocated to clearing brokers. During this period, James Buchanan Rea, Inc.
earned commissions of $585 as principal underwriter and authorized dealer in
Fund shares.
Note 4. Capital Stock
At March 31, 1996, there were 20,000,000 shares of capital stock ($1 par
value) authorized and capital paid-in amounted to $13,741,845. Transactions in
capital stock were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
March 31, 1996 March 31, 1995
---------------------------------- ----------------------------------
Shares Amount Shares Amount
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Sold 8,496 $ 119,521 11,138 $ 144,351
Issued on reinvestment of dividends 18,700 266,474 8,388 105,850
Redeemed (258,015) (3,605,762) (288,532) (3,772,373)
----------- ----------------- ----------- -----------------
Net decrease (230,819) $ (3,219,767) (269,006) $ (3,522,172)
=========== ================= =========== =================
</TABLE>
Notes 5. Investment Transactions
During the year ended March 31, 1996, purchase and sales of investment
securities, excluding short-term obligations, were as follows:
<TABLE>
<CAPTION>
Cost of Purchases Proceeds of Sales
------------------- ------------------
<S> <C> <C>
U.S. Government Obligations $ 10,981,068 $ 8,036,406
Other securities 3,358,072 6,440,022
------------------- ------------------
$ 14,339,140 $ 14,476,428
=================== ==================
</TABLE>
9
<PAGE>
REA-GRAHAM BALANCED FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The aggregate portfolio turnover of the Fund for the year ended March 31,
1996 was 223%. Portfolio turnover on stocks was 88%. Portfolio turnover on
U.S. Government Obligations was 310%.
Realized gains and losses are reported on an identified cost basis.
Accumulated undistributed net realized losses at March 31, 1996 were
$1,633,875. Such amount represents tax basis capital losses which may be
carried forward to offset future capital gains. Such losses expire in varying
amounts from March 31, 1999 to March 31, 2003.
At March 31, 1996, the aggregate gross unrealized appreciation and
(depreciation) of portfolio securities, based on cost for federal income tax
purposes, was as follows:
<TABLE>
<CAPTION>
<S> <C>
Unrealized appreciation $ 243,103
Unrealized depreciation (132,320)
-----------------
$ 110,783
=================
</TABLE>
Note 6. Selected Financial Information
Reference is made to page 3 of the Prospectus.
10
<PAGE>
PART C. OTHER INFORMATION
--------------------------
Item 24. Financial Statements and Exhibits
--------------------------------
(a) Financial Statements:
Selected Financial Information. Part A
Report of Independent Auditors. Part B
Statement of Assets and Liabilities
at March 31,1996.
Statement of Operations for year
ended March 31,1996.
Statements of Changes in Net Assets
for years ended March 31,1996 and
1995.
Statement of Investments at
March 31,1996.
Notes to Financial Statements.
(b) Exhibits:
(1) through (10) are incorporated by reference
to Registration Statement No. 2-76762.
(10) Opinion of Dechert Price & Rhoads.*
(11) Consent of McGladrey & Pullen, LLP.
(12) through (15) are incorporated herein by reference to
Registration Statement No. 2-76762.
(16) Not Applicable
(27) Financial Data Schedule
____________________
* An Opinion of Counsel was filed with Registrant's Rule 24f-2 Notice on May
30,1996.
<PAGE>
Item 25. Persons Controlled by or Under Common Control with Registrant
-------------------------------------------------------------
None
Item 26. Number of Holders of Securities
--------------------------------
Number of
Date Title of Class Record Holders
---- -------------- ---------------
June 30, 1996 Common Stock 1,013
Item 27. Indemnification
---------------
Article EIGHTH of Registrant's Articles of Incorporation and Section
2-418 of the Corporations and Associations Article of the Annotated
Code of Maryland are incorporated by reference.
Item 28. Business and Other Connections of Investment Adviser and its Officers
---------------------------------------------------------------------
and Directors
-------------
The business and other connections of Registrant's investment adviser,
James Buchanan Rea, Inc. are described in Parts A and B.
Item 29. Principal Underwriters
----------------------
(a) Not Applicable.
(b) With respect to each director and officer of the Principal
Underwriter:
<TABLE>
<CAPTION>
Position with Position with
Name and Business Address Underwriter Registrant
- ---------------------------- -------------- -------------
<S> <C> <C>
James Buchanan Rea, Jr. Director, Chairman of
10966 Chalon Road President and the Board
Los Angeles, CA 90077 Treasurer President and
Secretary
Frances L. Rea Vice President Treasurer
10966 Chalon Road and Secretary
Los Angeles, CA 90077
</TABLE>
(c) Not Applicable.
-2-
<PAGE>
Item 30. 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 thereunder are maintained as indicated in the
possession of The Chase Manhattan Bank, N.A., One Metro Tech Center,
Brooklyn, New York, 11245 ("Chase"); James Buchanan Rea, Inc., 10966
Chalon Road, Los Angeles, California 90077 and 10920 Wilshire
Boulevard, Suite 1520, Los Angeles, California 90024 ("JBRI");
American Data Services, Inc., 136 Nassau Road, Huntington, New York
11743 ("ADS"); PFPC, 400 Bellevue Parkway, Wilmington, Delaware, 19809
("PFPC"); or Dechert Price & Rhoads, 1500 K Street, N.W., Washington,
D.C. 20005 ("DPR").
Rule 31a-1
(b)(1).............................Chase, JBRI, ADS and PFPC
(b)(2)(A)..........................ADS and PFPC
(b)(2)(B)..........................Chase and ADS
(b)(2)(C)..........................Chase and JBRI
(b)(2)(D)..........................Chase and PFPC
(b)(3).............................Not Applicable
(b)(4).............................DPR and JBRI
(b)(5).............................Chase and JBRI
(b)(6).............................Chase and JBRI
(b)(7).............................Not Applicable
(b)(8).............................ADS
(b)(9).............................JBRI
(b)(10)............................Chase and JBRI
(b)(11)............................JBRI
Item 31. Management Services
-------------------
Not Applicable.
Item 32. Undertakings
------------
(a) The Registrant undertakes to furnish each person to whom a prospectus
is delivered a copy of the Registrant's latest annual report to
shareholders, upon request and without charge, in the event that the
information called for by Item 5A of Form N-1A has been presented in
the Registrant's latest annual report to shareholders.
-3-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this Post-
Effective Amendment No. 19 to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Los
Angeles, in the State of California, on the 31st day of July, 1996.
REA-GRAHAM FUNDS, INC.
By: /s/ James Buchanan Rea, Jr.
--------------------------------
James Buchanan Rea, Jr.
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 and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ James Buchanan Rea, Jr.
- --------------------------- President, Secretary July 31, 1996
James Buchanan Rea, Jr. and Chairman of the
Board (Principle
Executive Officer)
- --------------------------- Treasurer, July 31, 1996
Frances L. Rea* (Chief Financial
Officer)
Director July 31, 1996
- ---------------------------
Gerald M. Borden*
Director July 31, 1996
- --------------------------
John P. Shelton**
Director July 31, 1996
- -----------------------
J. Victor Monke*
Director July 31, 1996
- -----------------------
R. Paul Toeppen*
</TABLE>
<PAGE>
Director July 31, 1996
- -----------------------
James Tracy*
Director July 31, 1996
- -----------------------
Thomas Fitzgerald*
*By: /s/ James Buchanan Rea, Jr.
----------------------------
James Buchanan Rea, Jr.
Attorney-in-fact
* Powers of attorney previously filed with Registration Statement No. 2-76762
and Post-Effective Amendment No. 11 to the Registration Statement and filed
herein.
**By: /s/ Jeffrey L. Steele
----------------------------
Jeffrey L. Steele
Attorney-in-fact
** Power of attorney previously filed with Post-Effective Amendment No. 11
to the Registration Statement.
-2-
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints Robert W. Helm, Patrick W.D. Turley, Jeffrey L. Steele, Paul F. Roye
and James B. Rea, Jr., and each of them, her true and lawful attorney-in-fact
and agent with full power of substitution and resubstitution for her in her
name, place, and stead, to sign any and all registration statements applicable
to the Rea-Graham Funds, Inc. and any amendments or supplements thereto, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, or the securities
administrator of any jurisdiction, granting unto said attorney-in-fact and agent
full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as she
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
July 26, 1996 /s/ Frances L. Rea
----------------------------------
Frances L. Rea
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000701570
<NAME> REA-GRAHAM FUND, INC.
<SERIES>
<NUMBER> 01
<NAME> REA-GRAHAM BALANCED FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<INVESTMENTS-AT-COST> 12,146,192
<INVESTMENTS-AT-VALUE> 12,256,975
<RECEIVABLES> 73,156
<ASSETS-OTHER> 6,864
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 12,336,995
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 59,909
<TOTAL-LIABILITIES> 59,909
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 13,741,845
<SHARES-COMMON-STOCK> 854,705
<SHARES-COMMON-PRIOR> 1,085,524
<ACCUMULATED-NII-CURRENT> 58,333
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,633,875)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 110,783
<NET-ASSETS> 12,277,086
<DIVIDEND-INCOME> 104,786
<INTEREST-INCOME> 523,362
<OTHER-INCOME> 0
<EXPENSES-NET> 356,774
<NET-INVESTMENT-INCOME> 271,374
<REALIZED-GAINS-CURRENT> 1,056,147
<APPREC-INCREASE-CURRENT> 212,662
<NET-CHANGE-FROM-OPS> 1,540,183
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (285,223)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 8,496
<NUMBER-OF-SHARES-REDEEMED> (258,015)
<SHARES-REINVESTED> 18,700
<NET-CHANGE-IN-ASSETS> (1,964,807)
<ACCUMULATED-NII-PRIOR> 72,182
<ACCUMULATED-GAINS-PRIOR> (2,690,022)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 133,298
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 356,774
<AVERAGE-NET-ASSETS> 13,439,549
<PER-SHARE-NAV-BEGIN> 13.12
<PER-SHARE-NII> 0.31
<PER-SHARE-GAIN-APPREC> 1.24
<PER-SHARE-DIVIDEND> (0.31)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.36
<EXPENSE-RATIO> 2.65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT 11
CONSENT OF MCGLADREY & PULLEN, LLP
<PAGE>
MCGLADREY & PULLEN, LLP
Certified Public Accountants and Consultants
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use of our report dated April 19, 1996 on the
financial statements of Rea-Graham Balanced Fund referred to therein in Post-
Effective Amendment No. 19 to the Registration Statement on Form N-1A, File No.
2-76762, as filed with the Securities and Exchange Commission.
We also consent to the reference to our firm in the Prospectus under the
caption "Selected Financial Information" and in the Statement of Additional
Information under the caption "Independent Accountants."
McGladrey & Pullen, LLP
New York, New York
July 29, 1996
