<PAGE>
REA-GRAHAM FUNDS, INC.
REA-GRAHAM BALANCED FUND
12100 WILSHIRE BLVD.
SUITE 680
LOS ANGELES, CALIFORNIA 90025
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD JANUARY 12, 1998 AT 11:00 A.M.
A Special Meeting of the Shareholders of Rea-Graham Balanced Fund (the
"Fund"), a series of Rea-Graham Funds, Inc. (the "Company") will be held at
the offices of the Fund's transfer agent, PFPC Inc., 400 Bellevue Parkway,
Wilmington, Delaware 19809, on January 12, 1998 at 11:00 a.m. Eastern Time, or
at such adjourned time as may be necessary to vote (the "Meeting") for the
following purposes:
PROPOSAL 1. To approve a new Investment Advisory Agreement for the
Fund;
PROPOSAL 2. To approve a new Sub-Investment Advisory Agreement for the
Fund;
PROPOSAL 3. To elect Directors of the Fund; and
PROPOSAL 4. To transact such other business as may properly come before
the Meeting.
Shareholders of record of the Fund at the close of business on December 1,
1997 (the "Record Date") will be entitled to vote at the Meeting. Each share
of the Fund is entitled to one vote and fractional shares have pro-rata voting
rights.
We urge you to sign, date and return your proxy in the enclosed addressed
envelope, which requires no postage and is intended for your convenience. Your
prompt return of your proxy or proxies may save the Fund the necessity and
expense of further solicitations to ensure a quorum at the Meeting. You may
vote your shares in person at the Meeting.
By Order of the Board of Directors
/s/ James B. Rea
James B. Rea, Jr.
Secretary
Los Angeles, California
December 8, 1997
<PAGE>
PROXY STATEMENT
REA-GRAHAM FUNDS, INC.
REA-GRAHAM BALANCED FUND
12100 WILSHIRE BLVD.
SUITE 680
LOS ANGELES, CALIFORNIA 90025
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD JANUARY 12, 1998 AT 11:00 A.M.
This Proxy Statement and enclosed form of proxy are furnished in connection
with the solicitation of proxies by and on behalf of the Directors of the Fund
to be used at a Special Meeting of Shareholders of the Fund to be held at the
offices of the Fund's transfer agent, PFPC, Inc., 400 Bellevue Parkway,
Wilmington, Delaware 19809, on January 12, 1998, at 11:00 a.m. Eastern Time or
at any adjournment or adjournments thereof (the "Meeting"), for the purposes
set forth in the accompanying Notice.
This Proxy Statement and the form of proxy are being mailed to shareholders
on or about December 8, 1997. Any shareholder giving a proxy has the power to
revoke it by mail (addressed to the Secretary of the Fund at the principal
executive office of the Fund, 12100 Wilshire Blvd., Suite 680, Los Angeles,
California 90025) or in person at the Meeting, by executing a superseding
proxy or by submitting a notice of revocation to the Fund. All properly
executed and unrevoked proxies received in time for the Meeting will be voted
as specified in the proxy or, if no specification is made, for each proposal
referred to in the proxy statement.
Holders of record of the shares of common stock of the Fund at the close of
business on December 1, 1997 (the "Record Date") will be entitled to one vote
per share on each proposal presented at the Meeting and fractional shares have
pro-rata voting rights.
A copy of the Fund's most recent annual report and semi-annual report is
available upon request and without charge by calling the Fund at (800) 433-
1998 at their principal executive office, 12100 Wilshire Blvd., Suite 680, Los
Angeles, California 90025.
James Buchanan Rea, Inc., 12100 Wilshire Blvd., Los Angeles, California
90025, currently serves as the Fund's investment adviser, principal
underwriter and administrator.
PROPOSAL 1
APPROVAL OF A NEW
INVESTMENT ADVISORY AGREEMENT
The Board of Directors of the Fund is proposing that shareholders of the
Fund approve a new Investment Advisory Agreement (the "New Agreement") to be
entered into between the Fund and American Diversified Securities, Inc.
("ADS"), the entity that has proposed to acquire control of James Buchanan
Rea, Inc. ("JBRI") through a merger transaction as more fully discussed below
(the "Transaction"). A form of the New Agreement is attached hereto as Exhibit
A.
JBRI has served as investment manager and distributor for the Fund since the
Fund was established in 1982. JBRI serves as investment adviser pursuant to
the Fund's existing Investment Advisory Agreement with JBRI (the "Current
Agreement"). In connection with a proposed change in control of the ownership
of JBRI pursuant to which ADS intends to acquire all of the voting shares of
JBRI, this change of control of JBRI would constitute
<PAGE>
an assignment (as that term is defined in the Investment Company Act of 1940
(the "1940 Act")) of the Current Agreement. As required under the 1940 Act,
the Current Agreement provides for its automatic termination in the event of
an "assignment."
Because the Current Agreement will be terminated upon the completion of the
change in control of JBRI, which is currently expected to occur on or about
January 12, 1998, it is necessary to adopt a new investment management
agreement for the Fund. Management of the Fund made a proposal to the
Directors at a meeting held on November 24, 1997, for the adoption of the New
Agreement. The New Agreement differs from the Current Agreement only with
respect to the names of the parties and the dates, and with respect to certain
non-material changes that have been made to reflect recent regulatory
developments. The Directors at this meeting accepted this recommendation for
the adoption of the New Agreement and the Directors are recommending that
shareholders approve the New Agreement. In addition, as more fully discussed
below under Proposal 2, the Directors are also recommending that shareholders
approve of a new sub-investment advisory agreement for the Fund pursuant to
which a new sub-investment advisory firm, Ladas & Hulings, Inc., would take on
the day-to-day portfolio management responsibilities for the Fund subject to
the review and oversight of ADS while ADS would continue to provide the
administrative and managerial services for the Fund that are currently
provided by JBRI.
The Directors were also advised that JBRI intends to rely on Section 15(f)
of the 1940 Act which provides a non-exclusive safe harbor for an investment
adviser to an investment company, and any of the investment adviser's
affiliated persons (as defined in the 1940 Act) to receive any amount or
benefit in connection with a change in control of the investment adviser so
long as two conditions are met. First, for a period of three years after the
Transaction, at least 75% of the Directors must be persons who are not
"interested persons" of the predecessor or successor adviser. JBRI and ADS
have indicated that they intend to comply with this 75% requirement with
respect to the Directors of the Fund for the three year period following the
Transaction. The second condition of Section 15(f) is that, for a period of
two years following an acquisition, there must not be imposed on the funds any
"unfair burden" as a result of the acquisition or any express or implied
terms, conditions or understandings related to it. An "unfair burden" would
include any arrangement whereby an adviser, or any interested person of the
adviser, would receive or be entitled to receive any compensation, directly or
indirectly, from the funds or their shareholders (other than fees for bona
fide investment advisory or other services) or from any person in connection
with the purchase or sale of securities or other property to, from or on
behalf of the fund (other than bona fide ordinary compensation as principal
underwriter for the fund.) In this regard, the Directors noted that no special
compensation arrangements were contemplated in connection with the
Transaction.
1. The Proposed Change in Control of JBRI
Presently, the voting stock of JBRI is controlled by Mr. James B. Rea Jr.,
and members of his immediate family. The following persons currently own
beneficially or of record 10% or more of the outstanding voting securities of
JBRI: Mr. James B. Rea, Jr.; Mrs. Frances L. Rea; and the Rea Community
Property Living Trust. The address of each such person is c/o JBRI, 12100
Wilshire Blvd., Suite 680, Los Angeles, California 90025.
It is proposed that as a result of the Transaction, which will be
effectuated as a merger, ADS will acquire all of the outstanding voting shares
of JBRI. It is also proposed that Mr. James B. Rea, Jr., who currently serves
as President of the Fund and Portfolio Manager of the Fund, will be retained
by ADS to continue to serve as President and Portfolio Manager for the Fund
and President, Chief Executive Officer and Chief Financial Officer of ADS.
ADS is a Nevada corporation organized in February 1997 for the purpose of
effectuating the Transaction and which does not yet have an operating history
and has not previously engaged in the investment management business or in the
operation and distribution of registered investment companies. ADS will
succeed to the business operations of JBRI and will operate as a broker-dealer
and registered investment adviser as successor to JBRI as a result of the
Transaction. ADS is a wholly-owned subsidiary of American Diversified
Holdings, Inc., a multinational corporation formed to manage a family of
international mutual funds in Europe and the United States. American
Diversified Holdings, Inc. is the parent company to American Diversified
Holdings, AG, a German provider of financial service products located in
Berlin.
2
<PAGE>
2. The Current Agreement
Under the terms of the Current Agreement, JBRI manages the Fund's
investments and the Fund pays JBRI compensation for such services a fee of
1/12th of 1% monthly (equivalent to 1% annually) on the first $20,000,000 of
the net assets of the Fund as of the close of business on the last business
day of each calendar month during the Fund's fiscal year, reduced to 1/12th of
.75% monthly (equivalent to .75% annually) of such net assets in excess of
$20,000,000 up to $100,000,000, reduced to 1/12th of .5% monthly (equivalent
to .5% annually) of such net assets in excess of $100,000,000 up to
$200,000,000, and reduced to 1/12th of .45% monthly (equivalent to .45%
annually) of all such net assets in excess of $200,000,000. For the fiscal
year ended March 31, 1997, the Fund paid investment advisory fees to JBRI in
the amount of $115,095.
The Current Agreement has been previously approved by shareholders in the
ordinary course of obtaining shareholder approval of such agreement as
required by applicable law. The Current Agreement is dated July 15, 1988 and
was last submitted to a vote of shareholders on July 15, 1988.
The Fund is subject to a Plan of Distribution, and related agreements, in
accordance with Rule 12b-1 of the 1940 Act. Under the terms of such Plan of
Distribution, the Fund may make payments in connection with the distribution
of the Fund's shares at an annual rate of .35% of the net asset value of the
Fund. Such payments are designed to facilitate the sale of Fund shares. The
Plan of Distribution will remain in full force and effect for the Fund and
will not be changed or affected as a result of the matters addressed herein.
The investment advisory fee will not change under the New Agreement and will
remain the same fee as provided for in the Current Agreement. In addition, ADS
has voluntarily agreed for a period of two years following the approval of the
New Agreement, to limit the Fund's total operating expenses to 2.80% per
annum.
3. The Directors' Considerations and Recommendations
In approving the New Agreement and determining to submit it to shareholders
for approval, the Directors concluded that the compensation to be paid by the
Fund to ADS under the New Agreement is fair and reasonable. In making this
determination, the Directors considered several factors. The factors
considered by the Directors included: (1) the investment management fees
payable under the Current Agreement and those payable under the New Agreement;
(2) the efforts and expenses of JBRI in rendering its services to the Fund and
the proposed efforts and expenses of ADS in rendering services to the Fund;
(3) the nature, quality and extent of the services as currently provided by
JBRI to the Fund and as to be provided by ADS under the New Agreement; (4) the
fees charged by investment managers operating funds with similar investment
objectives; (5) the fact that Mr. James B. Rea, Jr., the current Portfolio
Manager of the Fund and President of JBRI will continue to serve as Portfolio
Manager of the Fund and will serve as President, Chief Executive Officer and
Chief Financial Officer of ADS; and (6) the proposed addition of a new sub-
investment adviser for the Fund which would have its fees paid directly by ADS
without increasing the Fund's investment advisory fees.
REQUIRED VOTE
The approval of the New Investment Advisory Agreement requires the
affirmative vote of a majority of the Fund's outstanding voting securities,
which for these purposes means the vote (i) of 67 percent or more of the
voting securities present at the Meeting, if the holders of more than 50
percent of the outstanding voting securities of the Fund are present or
represented by proxy, or (ii) of more than 50 percent of the outstanding
voting securities of the Fund, whichever is less.
THE DIRECTORS RECOMMEND THAT SHAREHOLDERS VOTE FOR THE APPROVAL OF THE NEW
INVESTMENT ADVISORY AGREEMENT, AND ANY SIGNED BUT UNMARKED PROXIES WILL BE SO
VOTED.
3
<PAGE>
PROPOSAL 2
APPROVAL OF A NEW
SUB-INVESTMENT ADVISORY AGREEMENT
The Board of Directors of the Fund is proposing that shareholders approve a
new Sub-Investment Advisory Agreement (the "Sub-Advisory Agreement") to be
entered into between ADS and Ladas & Hulings, Inc. ("Ladas & Hulings") a
registered investment adviser founded in 1970 and headquartered in Scottsdale,
Arizona with regional offices in Austin, Texas and Palm Beach, Florida which
currently has approximately $270 million in assets under management which
consists of $180 million in domestic managed accounts and $90 million in non-
domestic managed accounts. The sub-investment advisory fees payable to Ladas &
Hulings would be paid directly by ADS from its investment advisory fees and
would not be paid directly by the Fund. As provided for in the Sub-Advisory
Agreement (a copy of which is attached hereto as Exhibit B), ADS would pay
Ladas & Hulings sub-advisory fees of 1/12th of .50% monthly (equivalent to
.50% annually) on the first $20,000,000 of the net assets of the Fund as of
the close of business on the last business day of each calendar month during
the Fund's fiscal year, reduced to 1/12th of .375% monthly (equivalent to
.375% annually) of such net assets in excess of $20,000,000 up to
$100,000,000, reduced to 1/12th of .25% monthly (equivalent to .25% annually)
of such net assets in excess of $100,000,000 up to $200,000,000, and reduced
to 1/12th of .225% monthly (equivalent to .225% annually) of all such net
assets in excess of $200,000,000.
Ladas & Hulings is being proposed as a new sub-investment adviser for the
Fund because their investment style is substantially similar to the investment
style followed by JBRI (and which will continue to be followed by ADS
following the Transaction) which involves the use of fundamental investment
analysis applied and adapted to the global equity markets. It is proposed that
Ladas & Hulings would take over the day-to-day portfolio investment management
decision making process and would have authority to make purchases and sales
of portfolio securities for the Fund subject to the oversight and review of
Mr. Rea and ADS. Because Ladas & Hulings' fee will be paid by ADS out of its
fees, the investment advisory fees for the Fund will not be increased if the
Sub-Advisory Agreement is approved. Although Ladas & Hulings has not
previously provided investment advisory services to a registered investment
company, Ladas & Hulings has been providing investment advisory services to
individuals and institutional clients, including pension accounts, trusts and
charitable organizations since 1970.
It is proposed that Ladas & Hulings will rely upon an investment committee
consisting of several of its investment analysts and professionals to conduct
the day-to-day investment management responsibilities of the Fund's portfolio.
The Directors' Considerations and Recommendations
In approving the Sub-Advisory Agreement and determining to submit it to
shareholder for approval, the Directors concluded that the compensation to be
paid to Ladas & Hulings by ADS is fair and reasonable. In making this
determination, the Directors considered several factors. The factors
considered by the Board included: (1) the level of the sub-investment advisory
fees under the Sub-Advisory Agreement and the fees paid by other comparable
funds for similar sub-investment advisory services; (2) the fact that the
payment of the sub-advisory fees would not result in an increase in the Fund's
total investment advisory fees; and (3) the experience and qualifications of
Ladas & Hulings as investment advisers and their prior performance investing
in a manner similar to JBRI.
REQUIRED VOTE
The approval of the Sub-Investment Advisory Agreement requires the
affirmative vote of a majority of the Fund's outstanding voting securities,
which for these purposes means the vote (i) of 67 percent or more of the
voting securities present at the Meeting, if the holders of more than 50
percent of the outstanding voting securities of the Fund are present or
represented by proxy, or (ii) of more than 50 percent of the outstanding
voting securities of the Fund, whichever is less.
THE DIRECTORS RECOMMEND THAT SHAREHOLDERS VOTE FOR THE APPROVAL OF THE SUB-
INVESTMENT ADVISORY AGREEMENT, AND ANY SIGNED BUT UNMARKED PROXIES WILL BE SO
VOTED.
4
<PAGE>
PROPOSAL 3
ELECTION OF DIRECTORS
It is being proposed that all of the current Directors of the Fund stand for
election and in addition that Mr. Klaus Conradi stand for election as a new
Director. All Directors are elected to serve indefinitely until his or her
resignation or removal or until his or her successor is duly elected and
qualified.
Proxies which do not contain specific instructions to the contrary will be
voted in favor of the election of the nominees shown below. Set forth below is
certain information about each nominee:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING
NAME AND AGE POSITION WITH THE FUND THE PAST FIVE YEARS
------------ ---------------------- ---------------------------
<S> <C> <C>
James B. Rea, Jr.* President, Secretary and President and Director of James Buchanan
12100 Wilshire Blvd. Chairman of the Board Rea, Inc., investment advisor, broker-
Los Angeles, CA 90025 (1982 to present) dealer, underwriter and distributor for the
Age: 42 Fund.
Gerald M. Borden Director Orthodontic Specialist, President of Gerald
12100 Wilshire Blvd. (1982 to present) H. Borden, D.D.S., Inc. of Westlake
Los Angeles, CA 90025 Village, California.
Age: 75
John P. Shelton Director Professor Emeritus of Finance at Anderson
12100 Wilshire Blvd. (1988 to present) Graduate School of Management, UCLA.
Los Angeles, CA 90025 Chartered Financial Analyst, PH.D. in
Age: 77 Economics and board member of (1) Paramount
Mutual Fund, Los Angeles, CA., and (2)
Genisco Technology Corp., (electronics),
Cypress, CA.
J. Victor Monke Director Psychiatrist; Psychoanalyst. Recent
12100 Wilshire Blvd. (1983 to present) President, Southern California
Los Angeles, CA 90025 Psychoanalytic Institute, attending
Age: 83 Psychiatrist Cedars-Sinai Medical Center,
Los Angeles, California; Associate Clinical
Professor of Psychiatry, University of
California at Los Angeles, Formerly General
Partner Nebraska Company, real estate
management; Trustee American Psychoanalytic
Association and Southern California
Psychoanalytic Institute.
R. Paul Toeppen Director President, Toeppen and Company, Los
12100 Wilshire Blvd. (1982 to present) Angeles, California, management and
Los Angeles, CA 90025 financial consultants.
Age: 76
James Tracy Director Managing partner, Tracsam Associates, real
12100 Wilshire Blvd. (1983 to present) estate developer and manager; formerly
Los Angeles, CA 90025 Secretary and Treasurer, Barber-Colman
Age: 77 Company (capital goods manufacturer),
Rockford, Illinois.
Thomas Fitzgerald Director President, T.H. Fitzgerald & Co.
12100 Wilshire Blvd. (1988 to present) (Registered Investment Advisor), New York
Los Angeles, CA 90025 and Connecticut. Formerly Editor Money
Age: 65 Market Directory of Institutional Investors
and their Money Managers.
Klaus Conradi* None Chief Executive Officer of American
Kurfurstendamm 15 Diversified Holdings AG, Berlin Germany;
Berlin, 10719 Germany President, American Diversified Corporation
Age: 27 and a Director of Immofin GMBH, Berlin,
Germany.
</TABLE>
5
<PAGE>
- --------
* Mr. Rea is currently an "interested person" of the Fund (as defined in the
Investment Company Act of 1940) due to his position with JBRI and, if
elected, and if Proposal 1 is approved, he would continue to be deemed an
"interested person" due to his proposed position with ADS.
* If elected, Mr. Conradi would be considered an "interested person" (as
defined in the Investment Company Act of 1940) in the event that the
Transaction discussed in Proposal 1 occurs and the New Investment Advisory
Agreement is approved due to his ownership interest in ADS.
Directors other than those affiliated with James Buchanan Rea, Inc. ("JBRI")
receive a fee of $200 for each Board of Directors meeting attended and $100
per Audit Committee attended, plus reimbursement of related expenses for
attendance at meetings. For the fiscal year ended March 31, 1997, such fees
and expenses aggregated $9,058 for the unaffiliated Directors as a group.
During the fiscal year ended March 31, 1997, there were four meetings of the
Board. During this period two of the incumbent Directors, Mr. Fitzgerald and
Mr. Toeppen, attended less than 75% of the aggregate of the total number of
Board meetings and the total number of Committee meetings for the Committees
on which that Director serves.
The Fund has a Audit Committee, presently consisting of Drs. Borden and
Shelton and Mr. Tracy, none of whom are "interested persons" as defined in the
1940 Act. The Audit Committee reviews both the audit and non-audit work of the
Fund's independent public accountants, submits a recommendation to the
Directors as to the selection of independent public accountants, and reviews
generally the maintenance of the Fund's records and the safekeeping
arrangements of the Fund's custodian. The Audit Committee of the Fund held two
meetings in the last fiscal year.
For the fiscal year ended March 31, 1997, the Nominees (other than Mr.
Conradi who was not a Director during this period) received the following
compensation from the Fund:
<TABLE>
<CAPTION>
PENSION OR TOTAL
RETIREMENT COMPENSATION
AGGREGATE BENEFITS ACCRUED EST. ANNUAL FROM ALL FUNDS
COMPENSATION AS PART OF FUND BENEFITS UPON MANAGED BY
NAME OF NOMINEE FROM THE FUND EXPENSES RETIREMENT JBRI
--------------- ------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C>
James Buchanan Rea, Jr. None N/A N/A None
Gerald M. Borden $1,000 N/A N/A $1,000
John P. Shelton $1,000 N/A N/A $1,000
J. Victor Monke $ 600 N/A N/A $ 600
R. Paul Toeppen $ 200 N/A N/A $ 200
James Tracy $ 800 N/A N/A $ 800
Thomas Fitzgerald $ 200 N/A N/A $ 200
</TABLE>
The following are the officers of the Fund who are not Directors. The
address of all such officers is 12100 Wilshire Blvd., Suite 680, Los Angeles,
California 90025.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING
NAME AND AGE POSITION WITH THE FUND THE PAST FIVE YEARS
------------ ---------------------- ---------------------------
<S> <C> <C>
Frances L. Rea Treasurer Vice President, Secretary and Director of
Age: 73 James Buchanan Rea, Inc., Director of
Counseling Center, Bel Air Presbyterian
Church.
</TABLE>
As of the Record Date, the Directors and officers of the Fund as a group
owned 26.82% of the outstanding shares of common stock of the Fund. It is
anticipated that the Directors and officers will vote their shares in favor of
each of the Proposals.
REQUIRED VOTE
The election of each of the above nominees requires the affirmative vote of
a majority of the votes cast at the Meeting by shareholders of the Fund.
6
<PAGE>
OTHER INFORMATION
SHARE OWNERSHIP OF THE FUND
The following table sets forth the information concerning beneficial
ownership, as of the Record Date, of the Fund's shares by each person who
beneficially owns more than five percent of the voting securities of the Fund:
<TABLE>
<CAPTION>
PERCENTAGE
OF
SHARES OUTSTANDING
NAME AND ADDRESS OF BENEFICIALLY SHARES
SHAREHOLDER OWNED(1) OWNED
------------------- ------------ -----------
<S> <C> <C>
James B. Rea, Jr. 41,789.884(2) 6.72%
12100 Wilshire Blvd.
Suite 680
Los Angeles, CA 90025
Mr. R. Paul Toeppen 71,582.072 11.50%
12100 Wilshire Blvd.
Suite 680
Los Angeles, CA 90025
</TABLE>
- --------
(1) Beneficial ownership is as defined under Section 13(d) of the Securities
Exchange Act of 1934.
(2) The shares deemed to be beneficially owned by Mr. Rea include shares owned
by members of his immediate family and certain other accounts over which
he has discretionary authority.
MANNER OF VOTING PROXIES
All proxies received by the Management of the Fund will be voted on all
matters presented at the Meeting, and if not limited to the contrary, will be
voted FOR Proposals 1 through 3.
Management knows of no other matters to be brought before the Meeting. If,
however, any other matters properly come before the Meeting, it is
Management's intention that proxies not limited to the contrary will be voted
in accordance with the judgment of the persons named in the enclosed form of
proxy.
Broker "non-votes" (that is, proxies from brokers or nominees indicating
that such persons have not received instructions from the beneficial owner or
other persons entitled to vote shares on a particular matter with respect to
which the brokers or nominees do not have discretionary power) will have the
same effect as abstentions in determining whether an issue has received the
requisite approval. Where the broker or nominee
has no discretion to vote the shares as to one or more proposals before the
Meeting, the non-voted shares will be excluded from the pool of shares voted
on such issues. Thus, abstentions and non-votes will have the same effect as a
negative vote on issues requiring the affirmative vote of a specified portion
of the Fund's outstanding shares, but will not be considered votes cast and
thus will have no effect on matters requiring approval of a specified
percentage of votes cast.
In the event that at the time any session of the Meeting is called to order
a quorum is not present in person or by proxy, the persons named as proxies
may vote those proxies which have been received to adjourn the
7
<PAGE>
Meeting to a later date. In the event that a quorum is present but sufficient
votes in favor of any of Proposals 1 through 3 set forth in the Notice of
Meeting have not been received, the persons named as proxies may propose one
or more adjournments of the Meeting to permit further solicitations of proxies
with respect to those items. Any such adjournment will require the affirmative
vote of a majority of the shares present in person or by proxy at the session
of the Meeting to be adjourned. The persons named as proxies will vote those
proxies which they are entitled to vote for any such item in favor of such an
adjournment, and will vote those proxies required to be voted against any such
item against any such adjournment. A shareholder vote may be taken on one or
more of the items in this Proxy Statement prior to such adjournment if
sufficient votes for its approval have been received and it is otherwise
appropriate.
SUBMISSION OF CERTAIN PROPOSALS
Proposals of shareholders which are intended to be presented at a future
shareholders' meeting must be received by the Fund by a reasonable time prior
to the Fund's solicitation of proxies relating to such future meeting.
Shareholder proposals must meet certain requirements and there is no guarantee
that any proposal will be presented at a Shareholder meeting.
ADDITIONAL INFORMATION
The expense of the preparation, printing and mailing of the enclosed form of
proxy, this Notice and Proxy Statement and other expenses relating to the
Meeting will be borne jointly by JBRI and ADS. To obtain the necessary
representation at the Meeting, supplementary solicitations may be made by
mail, telephone, or interview by officers of the Funds and/or employees of
JBRI.
It is the current intention of ADS, in the event that Proposals 1 and 2 are
approved, to change the name of the Company from Rea-Graham Funds, Inc. to
American Diversified Funds, Inc. in order to better identify the role that ADS
will play with the Company in the future. It should be noted that ADS does not
intend to change the name of the Fund which will remain the Rea-Graham
Balanced Fund.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY
December 8, 1997
8
<PAGE>
EXHIBIT A
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made as of the 1st day of January, 1998, between REA-GRAHAM FUNDS,
INC. (hereinafter referred to as the "Fund") and AMERICAN DIVERSIFIED
SECURITIES, INC., a corporation organized under the laws of the State of
Nevada (hereinafter referred to as the "Investment Adviser").
1. The Investment Adviser agrees, during the life of this Agreement, to
furnish the Fund with investment research, advice and supervision and
will continuously furnish the Fund with an investment program for the
assets of the Fund consistent with the provisions of the Articles of
Incorporation of the Fund and the investment policies adopted and
declared by its Board of Directors.
2. The Investment Adviser is not required to furnish any overhead items or
facilities for the Fund including trading desk facilities or daily
pricing. In rendering such advisory services to the Fund pursuant to
this Agreement, the Investment Adviser may employ, retain or otherwise
avail itself of the services or facilities of other persons or
organizations for the purpose of providing itself or the Fund with such
statistical and other factual information, such advice regarding
economic factors and trends, such advice as to occasional transactions
in specific securities and other properties and assets, or such other
information, advice or assistance as the Adviser may deem necessary,
appropriate or convenient for the discharge of its overall
responsibilities with respect to the Fund and the other accounts which
it or its affiliates serve as investment adviser.
3. In addition to being responsible for supplying recommendations regarding
the purchase and sale of securities by the Fund, the Adviser shall
recommend brokers and dealers for execution of the Fund's portfolio
transactions. The foremost consideration in making such recommendations
will be the Fund's obtaining best price and execution. Secondarily, the
Adviser may take into account certain additional services provided by
broker-dealers to the Fund. The Adviser and any person performing
executive, administrative or trading functions for the Fund, whose
services are made available to the Fund by the Adviser, are specifically
authorized to recommend to the Fund that it allocate brokerage and
principal business to firms that provide such services or facilities
which, if accepted, might cause the Fund to pay a member of a securities
exchange or any other securities broker or dealer an amount of
commission or "mark-up" for effecting the securities transaction in
excess of the amount of commission, or at a less advantageous price
another member of the exchange, broker or dealer would have charged for
effecting that transaction, if the Adviser or such person determine in
good faith that such amount of commission, or "mark-up", as the case may
be, is reasonable in relation to the value of the brokerage and research
(as such services are defined in Section 28(e) of the securities and
Exchange Act of 1934) provided by ouch member, broker or dealer, viewed
in terms of either that particular transaction or the Adviser's
evaluation of such person's overall responsibilities with respect to
accounts as to which the Adviser or such person exercise investment
discretion (as that term is defined in Section 3(a)(35) of the
Securities Exchange Act of 1934).
4. The Fund may purchase and/or sell many securities which are also
purchased or sold by the Investment Adviser, or its affiliates or other
investment advisory clients. The orders for all such securities
transactions will be placed for execution by methods so as to be
impartial and fair for all parties.
5. In the absence of willful misfeasance, bad faith or gross negligence on
the part of the Investment Adviser, or of reckless disregard of its
obligations hereunder, the Investment Adviser shall have no liability to
the Fund or any shareholder of the Fund for any error of judgment,
mistake of law, or any loss arising out of any investment or for any
other act or omission in the performance by the Investment Adviser of
its duties under this Agreement.
6. The Fund agrees, during the life of this Agreement, to pay to the
investment Adviser as compensation for such services a fee of 1/12th of
1% monthly (equivalent to 1% annually) on the first $20,000,000 of the
net assets of the Fund as of the close of business on the last business
day of each calendar month
A-1
<PAGE>
during the Fund's fiscal year, reduced to 1/12th of .75% monthly
(equivalent to .75% annually) of such net assets in excess of $20,000,000
up to $100,000,000, reduced to 1/12th of .5% monthly (equivalent to .5%
annually) of such net assets in excess of $100,000,000 up to $200,000,000,
and reduced to 1/12th of .45% monthly (equivalent to .45% annually) of all
such net assets in excess of $200,000,000.
7. This Agreement shall remain in full force and effect until two years from
the date hereof and thereafter from year to year to the extent such
continuance is approved annually by the Board of Directors of the Fund or
by vote of a majority of the outstanding voting securities of the Fund (as
defined by the Investment Company Act of 1940) and also, in either event,
approval by a majority of those Directors who are not parties to the
Contract or interested persons of any such party.
8. This Agreement may be terminated by the Fund at any time on sixty (60)
day's written notice without payment of penalty, provided that such
termination by the Fund shall be directed or approved by the vote of a
majority of the Directors of the Fund in office at the time or by the vote
of a majority of the outstanding voting securities of the Fund (as defined
by the Investment Company Act of 1940).
9. This Agreement shall automatically and immediately terminate in the event
of its assignment.
10. The Investment Adviser will maintain its books and records or duplicate
copies thereof relating to the Fund and will comply with Section 31 of
the Investment Company Act of 1940 and the rules thereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their duly authorized officers and their respective corporate
seals to be hereunto duly affixed and attested.
REA-GRAHAM FUNDS, INC., on behalf of
Rea-Graham Balanced Fund
By______________________________________
James B. Rea, Jr., President
(Seal)
ATTEST:
___________________________________
(Secretary)
AMERICAN DIVERSIFIED SECURITIES, INC.
By______________________________________
James B. Rea, Jr., President
(Seal)
ATTEST:
___________________________________
(Secretary)
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<PAGE>
EXHIBIT B
SUB-ADVISORY AGREEMENT
AGREEMENT made this 1st day of January, 1998, between American Diversified
Securities, Inc. (the "Adviser") and Ladas & Hulings, Inc. (the "Sub-
Adviser").
WHEREAS, Rea-Graham Funds, Inc. (the "Company") is registered as an open-
end, management investment company under the Investment Company Act of 1940,
as amended (the "1940 Act"); and
WHEREAS, Rea-Graham Balanced Fund (the "Fund") is a separate investment
series of the Company; and
WHEREAS, the Adviser has been appointed investment adviser to the Fund; and
WHEREAS, the Adviser desires to retain the Sub-Adviser to assist it in the
provision of a continuous investment program for the Fund and the Sub-Adviser
is willing to do so upon the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the promises and mutual covenants herein
contained, it is agreed between the parties hereto as follows:
1. Appointment. The Adviser hereby appoints the Sub-Adviser to act as sub-
adviser to the Fund as permitted by the Adviser's Investment Advisory
Agreement with the Company pertaining to the Fund. Intending to be legally
bound, the Sub-Adviser accepts such appointment and agrees to render the
services herein set forth for the compensation herein provided.
2. Sub-Advisory Services. Subject to the supervision of the Board of
Directors, the Sub-Adviser shall assist the Adviser in providing a continuous
investment program with respect to the Fund's portfolio, including investment
research and management with respect to all securities and investments and
cash equivalents in the Fund. The Sub-Adviser may, subject to the Adviser's
review, determine the securities and investments to be purchased, sold or
retained by the Fund, and the Sub-Adviser may place orders directly with the
issuer or any broker or dealer for such securities and investments. The Sub-
Adviser will provide services under this Agreement in accordance with the
Fund's investment objective, policies and restrictions as stated in the Fund's
prospectus and Statement of Additional Information, which shall be forwarded
to the Sub-Adviser by the Adviser from time to time, and resolutions of the
Board of Directors applicable to the Fund provided those resolutions are
communicated to the Sub-Adviser and a reasonable amount of time is provided in
order for it to comply.
Without limiting the generality of the foregoing, the Sub-Adviser further
agrees that it:
(a) will use the same skill and care in providing such services as it
uses in providing services to fiduciary accounts for which it has
investment responsibilities;
(b) will conform with all applicable Rules and Regulations of the
Securities and Exchange Commission under the 1940 Act applicable to
sub-advisers to registered investment companies and in addition
will conduct its activities under this Agreement in accordance with
any applicable regulations of any governmental authority pertaining
to the investment advisory activities of the Sub-Adviser;
(c) will place or cause to be placed orders for the Fund either
directly with the issuer or with any broker or dealer. In placing
orders with brokers and dealers, the Sub-Adviser will attempt to
obtain prompt execution of orders in an effective manner at the
most favorable price. Consistent with this obligation and to the
extent permitted by the 1940 Act, when the execution and price
offered by two or more brokers or dealers are comparable, the Sub-
Adviser may, in its discretion, purchase and sell portfolio
securities to and from brokers and dealers who provide the Sub-
Adviser with research advice and other services;
(d) will maintain or cause to be maintained all books and records with
respect to the securities transactions of the Fund and will furnish
the Board of Directors with such periodic and special reports as
the Board may request; and
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<PAGE>
(e) will treat confidentially and as proprietary information of the
Company all records and other information relative to the Company
and the Fund and prior, present, or potential shareholders, and
will not use such records and information for any purpose other
than performance of its responsibilities and duties hereunder.
3. Services Not Exclusive. Except as provided herein, the services furnished
by the Sub-Adviser hereunder are deemed not to be exclusive, and the Sub-
Adviser shall be free to furnish similar services to others so long as its
services under this Agreement are not impaired thereby.
4. Books and Records. In compliance with the requirements of Rule 31a-3
under the 1940 Act, the Sub-Adviser hereby agrees that all records which it
maintains for the Company are the property of the Company and further agrees
to surrender promptly to the Company any of such records upon the Company's
request. The Sub-Adviser further agrees to preserve for the periods prescribed
by Rule 31a-2 under the 1940 Act the records required to be maintained by Rule
31a-1 under the 1940 Act.
5. Expenses. During the term of this Agreement, the Sub-Adviser will pay all
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities, commodities and other investments
(including brokerage commissions and other transaction charges, if any)
purchased for the Fund.
6. Compensation. For the services provided and the expenses assumed with
respect to the Fund pursuant to this Agreement, the Sub-Adviser will be
entitled to a fee of 1/12th of .50% monthly (equivalent to .50% annually) on
the first $20,000,000 of the net assets of the Fund as of the close of
business on the last business day of each calendar month during the Fund's
fiscal year, reduced to 1/12th of .375% monthly (equivalent to .375% annually)
of such net assets in excess of $20,000,000 up to $100,000,000, reduced to
1/12th of .25% monthly (equivalent to .25% annually) of such net assets in
excess of $100,000,000 up to $200,000,000, and reduced to 1/12th of .225%
monthly (equivalent to .225% annually) of all such net assets in excess of
$200,000,000.
7. Limitation of Liability. The Sub-Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the performance of this Agreement, except a loss resulting
from a breach of fiduciary duty with respect to the receipt of compensation
for services or a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of the Sub-Adviser in the performance of its duties or
from reckless disregard by it of its obligations and duties under this
Agreement. Notwithstanding the foregoing or any other provision of this
Agreement, nothing herein shall in any way constitute a waiver or limitation
of any rights that the Company, the Fund or the Adviser may have under the
United States federal or State securities laws, which may impose liability on
persons who act in good faith.
8. Duration and Termination. Unless sooner terminated, this Agreement shall
continue until January 1, 2000, and thereafter shall continue automatically
for successive annual periods, provided such continuance is specifically
approved at least annually by the Company's Board of Directors or vote of the
lesser of (a) 67% of the shares of the Fund represented at a meeting if
holders of more than 50 % of the outstanding shares of the Fund are present in
person or by proxy or (b) more than 50 % of the outstanding shares of the
Fund, provided that in either event its continuance also is approved by a
majority of the Directors who are not "interested persons" (as defined in the
1940 Act) of any party to this Agreement (the "Independent Directors"), by
vote cast in person at a meeting called for the purpose of voting on such
approval. This Agreement is terminable at any time without penalty, on 60
days' notice, by the Adviser, the Sub-Adviser or by the Board of Directors or
by vote of the lesser of (a) 67% of the shares of the Fund represented at a
meeting if holders of more than 50 % of the outstanding shares of the Fund are
present in person or by proxy or (b) more than 50 % of the outstanding shares
of the Fund. This Agreement will terminate automatically in the event of its
assignment (as defined in the 1940 Act).
9. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
10. Governing Law. This Agreement shall be governed by and its provisions
shall be construed in accordance with the laws of the State of California.
B-2
<PAGE>
11. Possession of Fund Assets. At all times the assets of the Fund
(consisting of all cash, securities and other instruments held by the Fund)
shall remain exclusively under the management and control of the Fund's
custodian. At no time will the Sub-Adviser have custody or possession of any
such assets of the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
AMERICAN DIVERSIFIED SECURITIES,
INC.
By:__________________________________
Name:________________________________
Title:_______________________________
LADAS & HULINGS, INC.
By:__________________________________
Name:________________________________
Title:_______________________________
B-3
<PAGE>
PROXY
REA-GRAHAM BALANCED FUND OF
REA-GRAHAM FUNDS, INC.
SPECIAL MEETING OF SHAREHOLDERS
January 12, 1998
The undersigned hereby appoints Raymond Werkmeister and Marie Gipple and
each of them, his attorneys and proxies with full power of substitution to vote
and act with respect to all shares of Rea-Graham Balanced Fund (the "Fund") held
by the undersigned at the Special Meeting of Shareholders of the Fund to be held
at 11:00 a.m., Eastern Time, on January 12, 1998, at the offices of the Fund's
transfer agent, PFPC Inc., 400 Bellevue Parkway, Wilmington, Delaware 19809, and
at any adjournment thereof (the "Meeting"), and instructs them to vote as
indicated on the matters referred to in the Proxy Statement for the Meeting,
receipt of which is hereby acknowledged, with discretionary power to vote upon
such other business as may properly come before the Meeting.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF THE FUND. The Board of
Directors recommends that you vote FOR each of the Nominees and FOR each of the
following proposals:
1. Approve a new Investment Advisory Agreement for the Fund.
[ ]FOR [ ]AGAINST [ ]ABSTAIN
2. Approve a new Sub-Investment Advisory Agreement for the Fund.
[ ]FOR [ ]AGAINST [ ]ABSTAIN
3. Election of Directors:
James Buchanan Rea, Jr. James Tracy Thomas Fitzgerald
Gerald M. Borden J. Victor Monke Klaus Conradi
John P. Shelton R. Paul Toeppen
[ ]FOR ALL [ ]AGAINST ALL [ ]FOR ALL EXCEPT
--------------------------------------------------------------------
(Only use to withhold authority to vote on individual Nominees)
<PAGE>
This proxy will be voted as specified. IF NO SPECIFICATION IS MADE, THIS PROXY
WILL BE VOTED FOR ALL OF THE NOMINEES AND FOR ALL OF THE PROPOSALS.
---
Receipt of the Notice of Special Meeting and Proxy Statement is hereby
acknowledged.
Dated _____________________, 1997
----------------------------------------------
Name of Shareholder(s) -- Please print or type
----------------------------------------------
Signature(s) of Shareholder(s)
----------------------------------------------
Signature(s) of Shareholder(s)
This proxy must be signed by the beneficial owner of Fund shares. If signing as
attorney, executor, guardian or in some representative capacity or as an officer
of a corporation, please add title as such.
PLEASE VOTE, SIGN AND DATE THIS PROXY AND RETURN IT IN
THE ENCLOSED POSTAGE-PAID ENVELOPE.
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