<PAGE> 1
As filed with the Securities and Exchange Commission on August 3, 1998
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. 21
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 22
American Diversified Funds, Inc.
(formerly Rea-Graham Funds, Inc.)
--------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
12100 Wilshire Blvd.
Los Angeles, California 90025
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(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
1775 Eye Street, N.W.
Washington, D.C. 20006
(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.
<PAGE> 2
AMERICAN DIVERSIFIED FUNDS, INC.
AMERICAN DIVERSIFIED GLOBAL VALUE FUND
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NO. CAPTION
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<S> <C>
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
</TABLE>
<PAGE> 3
PROSPECTUS
JULY 31, 1998
AMERICAN DIVERSIFIED GLOBAL VALUE FUND
12100 Wilshire Boulevard, Suite 680, Los Angeles, California 90025
(800) 433-1998, (310) 442-2660
- --------------------------------------------------------------------------------
American Diversified Global Value Fund (the "Fund"), is a separate series
of shares of American Diversified Funds, Inc.(the "Company"), an open-end
diversified investment company. The Fund seeks as its investment objective
medium-term capital growth, income and safety through balanced investments in
common stocks, preferred stocks (or common stock equivalents, such as
convertible securities), corporate, government and agency debt securities and
money market instruments. Its Investment Policy is based on principles of
Benjamin Graham, as interpreted and applied by Ladas & Hulings, Inc., the Fund's
Subadviser.
This Prospectus sets forth concisely information about the Fund that a
prospective investor ought to know before investing.
American Diversified Asset Management, Inc. ("ADAM" or the "Adviser") is
the Fund's investment adviser and oversees the investment activities of Ladas &
Hulings, Inc. ("Hulings" or the "Subadviser"). Hulings, the Fund's Subadviser is
responsible for the primary day-to-day portfolio investment management decision
making process, for furnishing continuous investment supervision to the Fund and
for management of the Fund's portfolio.
A statement of additional information dated July 31, 1998, 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 American Diversified Asset Management, Inc.,
12100 Wilshire Boulevard, Suite 680, Los Angeles, California 90025. The
Securities and Exchange Commission maintains an Internet website,
(http:\\www.sec.gov) that contains the Statement of Additional Information,
material that is incorporated by reference and other information about the Fund.
- --------------------------------------------------------------------------------
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> 4
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 (after reimbursement).................. 0.00%*
----
12b-1 Fees............................................. 0.35%
----
Other Expenses (after reimbursement)................... 1.53%*
----
Total Fund Operating Expenses (after reimbursement).... 1.88%*
====
</TABLE>
EXAMPLE
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses $66 $104 $144 $257
on a $1,000 investment, assuming
(1) 5% annual return and (2)
redemption at the end of each time
period............................
</TABLE>
* The adviser has voluntarily agreed to limit the Fund's expenses to 1.88%
until March 31, 2000. In the absence of the expense reimbursement management
fees, other expenses, and total fund operating expenses would be 1.00%, 1.78%,
and 3.13%, respectively.
The table above is provided for purposes of assisting current and
prospective shareholders in understanding the various costs and expenses that an
investor in the Fund will bear, directly or indirectly. The table has been
restated to reflect current expenses of the Fund. 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> 5
SELECTED FINANCIAL INFORMATION
The following selected financial information of American Diversified Global
Value Fund has been audited by McGladrey & Pullen, LLP, Independent Certified
Public Accountants, whose report thereon appears in the Statement of Additional
Information.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(FOR A SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
Net asset value, beginning of period....... $ 14.99 $ 14.36 $ 13.12 $ 13.20 $ 13.68 $ 13.14 $ 12.84 $ 13.56
------- ------- ------- ------- ------- ------- ------- -------
Income from investment operations:
Net investment income...................... 0.23 0.27 0.31 0.15 0.07 0.21 0.59 0.75
Net realized and unrealized gain (loss) on
investments............................... 1.78 0.65 1.24 (0.13) (0.47) 0.59 0.37 (0.65)
------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations............................ 2.01 0.92 1.55 0.02 (0.40) 0.80 0.96 0.10
------- ------- ------- ------- ------- ------- ------- -------
Less distributions:
Dividends from net investment income....... (0.23) (0.29) (0.31) (0.10) (0.08) (0.26) (0.66) (0.82)
Distributions from net realized gains...... 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
------- ------- ------- ------- ------- ------- ------- -------
Total distributions..................... (0.23) (0.29) (0.31) (0.10) (0.08) (0.26) (0.66) (0.82)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of period............. $ 16.77 $ 14.99 $ 14.36 $ 13.12 $ 13.20 $ 13.68 $ 13.14 $ 12.84
======= ======= ======= ======= ======= ======= ======= =======
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............ $ 9,923 $10,481 $12,277 $14,242 $17,877 $24,771 $28,281 $34,758
Ratios to average net assets
Expenses................................ 3.13% 2.89% 2.65% 2.52% 2.37% 2.16% 2.06% 2.04%
Net investment income................... 1.36% 1.70% 2.02% 1.08% 0.49% 1.45% 4.05% 5.27%
Portfolio turnover rate.................... 8% 19% 223% 93% 106% 87% 109% 100%
Portfolio turnover rate on stocks**........ 14% 45% 88% 36%
Net asset value adjusted for
reinvestment of dividends and
distributions:
Beginning of period..................... $ 34.67 $ 32.58 $ 29.14 $ 29.09 $ 29.97 $ 28.24 $ 26.23 $ 25.95
======= ======= ======= ======= ======= ======= ======= =======
End of period........................... $ 39.34 $ 34.67 $ 32.58 $ 29.14 $ 29.09 $ 29.97 $ 28.24 $ 26.23
======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (without deduction of
sales load)........................... 13.48% 6.41% 11.81% 0.17% -2.94% 6.13% 7.66% 1.08%
Average commission rate paid............... $0.0506 $0.0537
<CAPTION>
YEAR ENDED MARCH 31, AUG. 19, 1982
------------------------------------------------------------------ TO MARCH 31,
1990 1989 1988 1987 1986 1985 1984 1983+
------- ------- ------- ------- ------- ------- ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(FOR A SHARE OUTSTANDING
THROUGHOUT THE PERIOD)
Net asset value, beginning of period....... $ 13.90 $ 13.83 $ 15.56 $ 16.45 $ 13.65 $ 13.09 $13.89 $ 11.37
------- ------- ------- ------- ------- ------- ------ -------
Income from investment operations:
Net investment income...................... 0.90 0.78 0.66 0.43 0.50 0.46 0.72 0.23
Net realized and unrealized gain (loss) on
investments............................... (0.27) 0.25 (0.46) 0.98 3.06 1.12 (0.27) 2.29
------- ------- ------- ------- ------- ------- ------ -------
Total from investment
operations............................ 0.63 1.03 0.20 1.41 3.56 1.58 0.45 2.52
------- ------- ------- ------- ------- ------- ------ -------
Less distributions:
Dividends from net investment income....... (0.96) (0.68) (1.03) (0.47) (0.53) (0.74) (0.33) --
Distributions from net realized gains...... (0.01) (0.28) (0.90) (1.83) (0.23) (0.28) (0.92) --
------- ------- ------- ------- ------- ------- ------ -------
Total distributions..................... (0.97) (0.96) (1.93) (2.30) (0.76) (1.02) (1.25) 0.00
------- ------- ------- ------- ------- ------- ------ -------
Net asset value, end of period............. $ 13.56 $ 13.90 $ 13.83 $ 15.56 $ 16.45 $ 13.65 $13.09 $ 13.89
======= ======= ======= ======= ======= ======= ====== =======
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............ $43,386 $50,554 $49,287 $48,141 $31,531 $13,627 $9,842 $ 6,863
Ratios to average net assets
Expenses................................ 1.60% 1.43% 1.41% 1.48% 1.50% 2.28% 2.45% 1.67%*
Net investment income................... 5.82% 5.46% 4.82% 3.54% 4.78% 4.68% 6.46% 5.46%*
Portfolio turnover rate.................... 125% 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..................... $ 24.85 $ 23.10 $ 22.69 $ 20.73 $ 16.24 $ 14.35 $13.89 $ 11.37
======= ======= ======= ======= ======= ======= ====== =======
End of period........................... $ 25.95 $ 24.85 $ 23.10 $ 22.69 $ 20.73 $ 16.24 $14.35 $ 13.89
======= ======= ======= ======= ======= ======= ====== =======
TOTAL RETURN (without deduction of
sales load)........................... 4.43% 7.58% 1.81% 9.45% 27.65% 13.17% 3.31% 35.80%
Average commission rate paid...............
</TABLE>
- ---------
* Annualized.
** Provided for additional information. Portfolio turnover rate on stocks for
periods prior to 1995 not available.
+ Commencement of public offering of the Fund's shares.
3
<PAGE> 6
THE FUND
American Diversified Global Value Fund (the "Fund"), formerly Rea-Graham
Balanced Fund, whose predecessor, Rea, Graham-Plan Fund, a private limited
partnership was organized in 1976 by Dr. James B. Rea and Benjamin Graham, as
general partners. Mr. Graham was 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, 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. (the
"Company") 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. Effective April 1, 1998, the Company has been referred to as
American Diversified Funds, Inc.
As of March 31, 1998, James Buchanan Rea, Inc. ("JBRI"), the investment
adviser and distributor of Rea-Graham Balanced Fund, completed a merger
transaction (the "Transaction"), resulting in a change in control of JBRI and
pursuant to which all of the outstanding voting securities of JBRI were acquired
by American Diversified Asset Management, Inc. ("ADAM"), a Nevada corporation
organized in October 1997 for the purpose of effectuating the Transaction. ADAM
has succeeded to the business operations of JBRI and will operate as a
broker-dealer and registered investment adviser as successor to JBRI. ADAM is a
wholly owned subsidiary of American Diversified Holdings, Inc., a corporation
formed to manage mutual funds in the United States and Europe. American
Diversified Holdings, Inc. is the parent company to American Diversified AG
Wertpapierhandelsbank, a German financial services firm located in Berlin.
Shareholders of the Fund voting at a Special Meeting of Shareholders held
on January 12, 1998, approved a new Investment Advisory Agreement with ADAM
which is substantially similar to the Fund's previous Investment Advisory
Agreement with JBRI, and provides for the same investment advisory fee schedule.
Shareholders also approved a new Sub-Investment Advisory Agreement for the Fund
with Ladas & Hulings, Inc. ("Hulings" or the "subadviser"), a registered
investment advisory firm headquartered in Scottsdale, Arizona. The
Sub-Investment Advisory fees payable to Hulings are to be paid directly by ADAM
from its investment advisory fees. Hulings who provides the primary day-to-day
portfolio investment management decision making process for the Fund relies upon
an investment committee consisting of its analysts and portfolio management
professionals to conduct investment management responsibilities for the Fund.
Hulings began actively carrying out their duties under the terms of the
Sub-Investment Advisory Agreement on April 1, 1998. For a more detailed
discussion of the Fund's fees, expenses, management and subadviser, see the
following section of the prospectus: "Fee Data" and "Management of the Fund,"
and the following section of the Statement of Additional Information:
"Investment Advisory and Other Services."
INVESTMENT OBJECTIVES AND POLICIES. The Fund's investment objectives are
medium-term capital growth, income and safety through balanced investments in
common and preferred stocks (or common stock equivalents, such as convertible
securities), corporate, government and agency securities and money market
instruments. Up to 75% of the Fund's assets normally are invested in selected
equity securities.
Normally, 25% of the Fund's assets are invested in government, agency or
corporate 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 instrumentality's, 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
4
<PAGE> 7
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. 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 "American Diversified Global Value 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, American Diversified Asset
Management, Inc., 12100 Wilshire Boulevard, Suite 680, Los Angeles 90025.
Dealers may place wire orders with the transfer agent by calling (800) 348-5032
(9:00 a.m. to 6:00 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.
5
<PAGE> 8
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.
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 U.S. 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) account fee on purchases and
redemptions by its customers 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
<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.
6
<PAGE> 9
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.
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 who are participants in a medallion program recognized by
the Securities Transfer Association.
7
<PAGE> 10
The three recognized medallion programs are Securities Transfer Agents Medallion
(STAMP), Stock Exchanges Medallion Program (SEMP and New York Stock Exchange,
Inc. Medallion Signature Program (MSP). 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. PNC
Bank, N.A. will provide a signature guarantee for distribution requests from any
IRA account held with the Fund for which PNC Bank, N.A. 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.
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, within 7
days after tender of the share certificate properly endorsed and with the
required medallion 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 medallion 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, American Diversified Asset
Management, Inc. nor PFPC Inc. will be responsible for the authenticity of
withdrawal instructions received by telephone or liable for any loss, liability,
cost
8
<PAGE> 11
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.
9
<PAGE> 12
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. American Diversified Asset Management, Inc. ("ADAM"),
12100 Wilshire Boulevard, Suite 680, Los Angeles, California 90025, is the
Fund's Investment Adviser. James B. Rea, Jr., President of ADAM, oversees the
investment activities of the Subadviser. Ladas & Hulings, Inc. ("Hulings" or
"Subadviser"), as Subadviser for the Fund is responsible for the primary
day-to-day portfolio investment management decision making process for the Fund,
for furnishing continuous investment supervision to the Fund and for management
of the Fund's portfolio.
The Subadviser 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 and the Subadviser maintain 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, 1998, the Fund
paid the Investment Adviser $101,604.
The Investment Advisory Agreement for the Fund was originally approved by
the Directors of Rea-Graham Balanced Fund, Inc. and by vote of the Shareholders
of the Fund on January 12, 1998, effective March 31, 1998. The Investment
Advisory Agreement will continue in effect until March 31, 2000, and then will
continue in effect from year to year if specifically approved annually by (a)
the Directors, acting on behalf of the Fund, including a majority of the
Disinterested Directors, or (b) by a majority of the outstanding voting
securities of each class of the Fund as defined in the 1940 Act. The adviser has
voluntarily agreed to limited the Fund's expenses to 1.88% until March 31, 2000.
The Fund's Investment Advisory Agreement may be terminated without penalty
and at any time, by a similar vote upon not more than 60 nor less than 30 days
written notice by ADAM, the Directors, or a majority of the outstanding voting
securities of the Fund as defined in the 1940 Act. Such agreement will
automatically terminate in the event of its assignment, as defined in Section
2(a)(4) of the Act.
SUBADVISER. Ladas & Hulings, Inc. ("Hulings" or "Subadviser"), 8655 E. Via
De Ventura, Suite G-200, Scottsdale, Arizona 85258, is the Fund's registered
investment advisory firm, as of April 1, 1998. Hulings began actively carrying
out their duties under the terms of the Sub-Investment Advisory agreement by
assuming primary responsibility for the Fund's day-to-day portfolio management
decision making process, for furnishing continuous investment supervision to the
Fund. Hulings relies upon an investment committee consisting of several of its
investment analysts and professionals to conduct the day-to-day investment
management responsibilities for the Fund.
Pursuant to the Sub-Investment Advisory Agreement between ADAM and Hulings,
dated (April 1, 1998), fees payable under the Sub-Investment Advisory Agreement
will accrue daily and be paid monthly by ADAM. The sub-investment advisory fees
payable to Hulings are to be paid directly by ADAM from its investment advisory
fees and therefore the investment advisory fees for the Fund will not be
increased as a result of the implementation of the Sub-Investment Advisory
Agreement. As compensation for its services, ADAM will pay Hulings at the annual
rate of 0.50% of the first $20,000,000 of the Fund's average daily net assets,
0.375% of such net assets in excess of $20,000,000 up to $100,000,000, 0.25% of
such net assets in excess of $100,000,000 up to $200,000,000, and 0.225% of all
such net assets in excess of $200,000,000.
10
<PAGE> 13
The Fund's Sub-Investment Advisory Agreement may be terminated without
penalty at any time, by a similar vote upon not more than 60 nor less than 30
days written notice by ADAM, Hulings, the Directors, or a majority of the
outstanding voting securities of the Fund as defined in the 1940 Act. Such
agreement will automatically terminate in the event of its assignment, as
defined in Section 2(a)(4) of the Act.
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, American Diversified Asset Management, 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.
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, 1998, expenses amounted to
3.13% of the Fund's average net assets.
11
<PAGE> 14
PORTFOLIO BROKERAGE. As a general matter, it is the Fund's policy to
execute purchases and sales of listed portfolio securities through brokers who
provide the best price and execution in the judgment of the Fund's management.
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 noncumulative 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.
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.
12
<PAGE> 15
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.
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 supplementary 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.
13
<PAGE> 16
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, 1998, are included in the Fund's 1998 Annual Report
to Shareholders, a copy of which is available upon request and without charge.
THE YEAR 2000 ISSUE. The Fund relies extensively on various computer
systems in carrying out its business activities, including the computer systems
employed by the Adviser, the Sub-Adviser, the Transfer Agent and the Custodian
(collectively, the "Service Providers"). In this connection, the Fund is aware
of the so-called "Year 2000 Issue" which involves the potential problems that
may be confronted by computer systems users the day after December 31, 1999,
when computers using date-sensitive software must be able to properly identify
the Year 2000 in their systems. In the event that a computer system fails to
make the proper identification of the Year 2000, this could result in a system
failure or miscalculations causing disruptions of operations such as pricing
errors and account maintenance failures. The Fund is working with the Service
Providers to take steps that are reasonably designed to address the Year 2000
Issue with respect to the computer systems relied upon by the Fund. The Fund has
no reason to believe that these steps will not be sufficient to avoid any
material adverse impact on its operations, although there can be no assurances
of this. The costs or consequences of incomplete or untimely resolution of the
Year 2000 Issue are unknown to the Fund and the Service Providers at this time
but could have a material adverse impact on the operations of the Fund and the
Service Providers.
INQUIRIES: Shareholders' inquiries by mail or telephone should be addressed
to the Principal Underwriter, American Diversified Asset Management, Inc. 12100
Wilshire Boulevard, Suite 680, Los Angeles, California 90025, (800) 433-1998, or
(310) 442-2660.
14
<PAGE> 17
SHARE PURCHASE APPLICATION
- --------------------------------------------------------------------------------
AMERICAN DIVERSIFIED
GLOBAL VALUE FUND
PFPC Inc.
400 Bellevue Parkway
Suite 108
Wilmington, DE 19809 ______________________________ 19_______
(800) 348-5032 Date of Purchase
I enclose a check for $_________ payable to "American Diversified Global
Value Fund" for the purchase of shares of American Diversified Global Value
Fund. The minimum initial purchase is $1,000. Each subsequent purchase requires
a $200 minimum.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
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 Joint Owner (A Joint Tenancy with right of Social Security No. is
survivorship will be presumed unless provided for IRS purposes
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 by law) Minor's Social Sec. No.
D. Corporations, Trust, ------------------------------------------------ -----------------------
Partnerships etc., Account Title (where appropriate include name Tax I.D. No.
Complete Both Lines of Trustee
If Needed
------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
City State Zip
- --------------------------------------------------------------------------------
I have received a copy of the Fund's Prospectus dated July 31, 1998, 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
American Diversified Global Value Fund. The Fund reserves the right not to
accept checks for more than $50,000 that are not certified or bank checks. 7-98
<PAGE> 18
AMERICAN DIVERSIFIED
GLOBAL VALUE FUND
<TABLE>
<S> <C>
(Subject to terms and
conditions in the Fund's
Prospectus)
--------------------------------
</TABLE>
APPLICATION FOR LETTER OF INTENT
------------------------------------- 19 _____
Date of Initial Purchase
Although I am not obliged to do so, I intend to purchase shares of American
Diversified Global Value 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 American
Diversified Global Value Fund held as security.
By____________________________________ _______________________________________
Signature of Owner Signature (if registered in joint name,
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_______________________________
7-98
<TABLE>
<S> <C>
(Subject to terms and
AMERICAN DIVERSIFIED conditions in the Fund's
GLOBAL VALUE FUND Prospectus)
--------------------------------
</TABLE>
APPLICATION FOR WITHDRAWAL PROGRAM
Minimum requirements: $10,000 of shares of American Diversified Global
Value 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. 7-98
<PAGE> 19
AMERICAN DIVERSIFIED
GLOBAL VALUE FUND
<TABLE>
<S> <C>
(Subject to terms and
conditions in the Fund's
Prospectus)
--------------------------------
</TABLE>
APPLICATION FOR
REDEMPTION BY TELEPHONE
To: American Diversified Global Value 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, American Diversified Asset
Management, 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 American Diversified Global Value
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.
<TABLE>
<S> <C>
- --------------------------- -----------------------------------------------------------------------------
DATE SIGNATURE OF REGISTERED OWNER(S)
- --------------------------- -----------------------------------------------------------------------------
DATE SIGNATURE GUARANTEE
</TABLE>
7-98
<PAGE> 20
AMERICAN DIVERSIFIED
GLOBAL VALUE FUND
TRANSFER REQUEST FORM
<TABLE>
<S> <C>
- --------------------------------------------------- ------------------------------------------
(Name of Present Trustee/Custodian) (Date)
- ---------------------------------------------------
(Address)
RE: -------------------------------------------------------------
City, State, Zip Code (Name of Plan Participant)
ATTN: RETIREMENT PLANS DEPARTMENT ------------------------------------------------------------------
(Account Number(s) to be Transferred)
</TABLE>
I HEREBY AUTHORIZE THE TRUSTEE-TO-TRUSTEE TRANSFER OF MY IRA PLAN ASSETS AS
LISTED ABOVE TO PNC BANK, N.A. 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: AMERICAN DIVERSIFIED
GLOBAL VALUE 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 PNC
Bank, N.A. Custodian, and invest the proceeds in American Diversified Global
Value Fund.
Signature __________________________________ Date ________________________
Please complete, sign and forward to: c/o PFPC Inc., 400 Bellevue Parkway, Suite
108, Wilmington, DE 19809
7-98
<PAGE> 21
AMERICAN DIVERSIFIED
GLOBAL VALUE FUND
APPLICATION FOR
BANK DRAFT INVESTING
(This application adds the option to a new or existing account.)
SEND COMPLETED APPLICATION TO: AMERICAN DIVERSIFIED
GLOBAL VALUE 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 # ___________________________________________________________
7-98
- --------------------------------------------------------------------------------
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.
<TABLE>
<S> <C>
- ---------------------------- -----------------------------------------------------------------------------
DATE SIGNATURE OF SHAREOWNER
- ---------------------------- -----------------------------------------------------------------------------
DATE SIGNATURE OF JOINT SHAREOWNER
</TABLE>
(PLEASE COMPLETE OTHER SIDE) 7-98
<PAGE> 22
BANK AUTHORIZATION
TO:
- --------------------------------------------------------------------------------
NAME OF BANK/BRANCH
- --------------------------------------------------------------------------------
STREET ADDRESS OF BANK/BRANCH WHERE ACCOUNT IS MAINTAINED
- --------------------------------------------------------------------------------
CITY STATE ZIP
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., American Diversified Asset
Management, Inc. and American Diversified 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
7-98
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
7-98
<PAGE> 23
STATEMENT OF ADDITIONAL INFORMATION
JULY 31, 1998
AMERICAN DIVERSIFIED GLOBAL VALUE FUND
12100 WILSHIRE BOULEVARD, SUITE 680
LOS ANGELES, CALIFORNIA 90025
(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 AMERICAN DIVERSIFIED GLOBAL VALUE FUND
DATED JULY 31, 1998, WHICH MAY BE OBTAINED OUT CHARGE UPON REQUEST TO THE
PRINCIPAL UNDERWRITER, AMERICAN DIVERSIFIED ASSET MANAGEMENT, INC., 12100
WILSHIRE BOULEVARD, SUITE 680, LOS ANGELES, CALIFORNIA 90025, (800) 433-1998, OR
(310) 442-2660.
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
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 ................................................. 9
Withdrawal Program ............................................... 10
Individual Retirement Account .................................... 10
Tax Status ............................................................... 10
Principal Underwriter .................................................... 13
Distribution Plan ................................................ 13
Performance Information .......................................... 14
Financial Statements ..................................................... 15
</TABLE>
1
<PAGE> 24
GENERAL INFORMATION AND HISTORY
American Diversified Global Value Fund (the "Fund") formerly Rea-Graham
Balanced Fund whose predecessor, Rea, Graham-Plan Fund, a private limited
partnership was organized in 1976 by Dr. James B. Rea and Benjamin Graham, as
general partners. Mr. Graham was 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, 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., (the
"Company") and on August 19, 1982, the Fund commenced a public offering of its
shares as an open-end diversified investment company. Effective April 1,1998,
the Company has been referred to as American Diversified Funds, Inc.
As of March 31, 1998, James Buchanan Rea, Inc. ("JBRI"), the investment
adviser and distributor of Rea-Graham Balanced Fund, completed a merger
transaction (the "Transaction"), resulting in a change in control of JBRI and
pursuant to which all of the outstanding voting securities of JBRI were acquired
by American Diversified Asset Management, Inc. ("ADAM"), a Nevada corporation
organized in October 1997 for the purpose of effectuating the Transaction. ADAM
has succeeded to the business operations of JBRI, and will operate as a
broker-dealer and registered investment adviser as successor to JBRI. ADAM is a
wholly owned subsidiary of American Diversified Holdings, Inc. a corporation
formed to manage mutual funds in the United States and Europe. American
Diversified Holdings, Inc. is the parent company to American Diversified AG
Wertpapierhandelsbank, a German financial services firm located in Berlin.
Shareholders of the Fund voting at a Special Meeting of Shareholders
held on January 12, 1998, approved a new Investment Advisory Agreement with ADAM
which is substantially similar to the Fund's previous Investment Advisory
Agreement with JBRI, and provides for the same investment advisory fee schedule.
Shareholders also approved a new Sub-Investment Advisory Agreement for the Fund
with Ladas & Hulings, Inc. ("Hulings" or the "Subadvisor"), a registered
investment advisory firm headquartered in Scottsdale, Arizona. The
Sub-Investment Advisory fees payable to Hulings are to be paid directly by ADAM
from its investment advisory fees. Hulings who provides the primary day-to-day
portfolio investment management decision making process for the Fund, relies
upon an investment committee consisting of its analysts, and portfolio
management professionals to conduct investment management responsibilities for
the Fund. Hulings began actively carrying out their duties under the terms of
the Sub-Investment Advisory Agreement on April 1, 1998. For a more detailed
discussion of the Fund's fees, expenses, management and Subadvisor, see the
following section of the prospectus: "Fee Data" and "Management of the Fund,"
and the following section of the Statement of Additional Information:
"Investment Advisory and Other Services."
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.
2
<PAGE> 25
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 instrumentality's, 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 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.
3
<PAGE> 26
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 common stock of the same or a
different issuer within a particular period of time at a specified price or
formula. A convertible security entities 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> 27
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:
<TABLE>
<CAPTION>
Name, Address and
Principal Occupations
Officers with Company
During Past 5 Years
- --------------------------------------------------------------------------------
<S> <C>
JAMES B. REA, JR.*
2305 Donella Circle
Los Angeles, California
Chairman of the Board, President, Director and CFO of American Diversified Asset Management,
President and Secretary Inc., investment advisor, broker-dealer, underwriter and distributor.
GERALD H. BORDEN
2407 Swanfield Court
Thousand Oaks, CA 91361 Orthodontic Specialist. President of Gerald H. Borden, DDS, Inc. of Westlake Village,
Director California.
Klaus Conradi*
Kurfurstendamm 15
Berlin, 10719 Germany Sr. Executive of American Diversified AG Wertpapierhandelsbank, Berlin, Germany;
Director Director of American Diversified Holdings, Inc. Professional Banker and Appraiser.
J. VICTOR MONKE
6500 Wilshire Boulevard
Suite 950 Psychiatrist, Psychoanalyst. Recent President, Southern California Psychoanalytic
Los Angeles, California Institute, attending Psychiatrist Cedars-Sinai Medical Center, Los Angeles, California;
Director 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.
JOHN P. SHELTON
12377 Ridge Circle Professor Emeritus of Finance at Anderson Graduate School of Management, UCLA.
Los Angeles, California 90049 Chartered Financial Analyst, Ph.D. in Economics and board member of (1) Paramount
Director Mutual Fund, Los Angeles, CA., (2) Genisco Technology Corp., (electronics), Anaheim,
CA.
R. PAUL TOEPPEN
1703 Stone Canyon Road President, Toeppen and Company, Los Angeles, California, management and financial
Los Angeles, California consultants.
Director
JAMES A. TRACY 3723 Brookview Road
Rockford, Illinois Director, Managing Partner, Tracsam Associates, real estate developer and manager; formerly
Secretary and Treasurer, Barber-Colman Company (capital goods manufacturer), Rockford,
Illinois.
</TABLE>
5
<PAGE> 28
* Mr. Rea, Jr. and Mr. Conradi are "interested persons" of the Fund (as that
term is defined by the 1940 Act) by virtue of their affiliations with American
Diversified Asset Management, Inc. and American Diversified Holdings, Inc.,
respectively. Drs. Borden and Monke and Messrs., Toeppen, Tracy and Shelton are
not "interested persons" of the Fund.
The Directors and officers of the Company who are affiliated with
American Diversified Asset Management, 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 American Diversified Asset
Management, 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, 1998, 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
Klaus Conradi None N/A N/A None
Gerald H. Borden $1,200 N/A N/A $1,200
Thomas H. Fitzgerald, Jr.** $900 N/A N/A $900
J. Victor Monke $600 N/A N/A $600
John P. Shelton $1,200 N/A N/A $1,200
R. Paul Toeppen $800 N/A N/A $800
James A. Tracy $1,200 N/A N/A $1,200
</TABLE>
** Resigned May 22,1998.
PRINCIPAL SHAREHOLDERS
As of March 31, 1998, there were 591,610 shares outstanding, of which
167,422 shares (or 28.30% 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. American Diversified Asset Management, Inc., 12100
Wilshire Boulevard, Suite 680, Los Angeles, California 90025, a Nevada
corporation, is the Fund's Investment Adviser. Mr. James B. Rea, Jr., President
of ADAM, oversees the investment activities of the Subadviser. Ladas & Hulings,
Inc. ("Hulings" or "Subadvisor"), as Subadvisor for the Fund, is responsible for
the primary day-to-day portfolio investment management decision making process
and for furnishing continuous investment supervision to the Fund. American
Diversified Asset Management, Inc. also serves as the Fund's Principal
Underwriter and Distributor.
Pursuant to an Investment Advisory Agreement (the "Agreement") and a
Sub-Investment Advisory Agreement the Company has retained the Investment
Adviser to oversee the Sub-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 Sub-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
Sub-Investment Adviser or Subadvisor also selects brokers and dealers for
execution of the Fund's portfolio transactions and the Investment Adviser and
Subadvisor maintain some of the Fund's books and records.
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
6
<PAGE> 29
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, 1998, 1997, and 1996 were
$101,604, $115,095, and $133,298 respectively.
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 Investment Advisory Agreement for the Fund was originally approved
by the Directors of Rea-Graham Funds, Inc. and by vote of the Shareholders of
the Fund on January 12, 1998, effective March 31, 1998. The Investment Advisory
Agreement will continue in effect until March 31, 2000. It will continue in
effect from year to year if specifically approved annually by (a) the Directors,
acting on behalf of the Fund, including a majority of the Disinterested
Directors, or (b) by a majority of the outstanding voting securities of each
class of the Fund as defined in the 1940 Act.
.
The Fund's Investment Advisory Agreement may be terminated without
penalty at any time, by a similar vote upon not more than 60 nor less than 30
days written notice by ADAM, the Directors, or a majority of the outstanding
voting securities of the Fund as defined in the 1940 Act. Such agreement will
automatically terminate in the event of its assignment, as defined in Section
2(a)(4) of the Act.
Pursuant to the Sub-Investment Advisory Agreement between ADAM and
Hulings, dated (April 1,1998), fees payable under the Sub-Investment Advisory
Agreement will accrue daily and be paid monthly by ADAM. The sub-investment
advisory fees payable to Hulings are to be paid directly by ADAM from its
investment advisory fees and therefore the investment advisory fees for the Fund
will not be increased as a result of the implementation of the Sub-Investment
Advisory Agreement. As compensation for its services, ADAM will pay Hulings at
the annual rate of 0.50% of the first $20,000,000 of the Fund's average daily
net assets, 0.375% of such net assets in excess of $20,000,000 up to
$100,000,000, 0.25% of such net assets in excess of $100,000,000 up to
$200,000,000, and 0.225% of all such net assets in excess of $200,000,000.
The Sub-Investment Advisory Agreement for the Fund was originally
approved by the Directors of Rea-Graham Funds, Inc. and by vote of the
Shareholders of the Fund on January 12, 1998, effective March 31, 1998. The
Sub-Investment Advisory Agreement will continue in effect until March 31, 2000
and then will continue in effect from year to year if specifically approved
7
<PAGE> 30
annually by (a) the Directors, acting on behalf of the Fund, including a
majority of the Disinterested Directors, or (b) by a majority of the outstanding
voting securities of each class of the Fund as defined in the 1940 Act.
The Fund's Sub-Investment Advisory Agreement may be terminated without
penalty at any time, by a similar vote upon not more than 60 nor less than 30
days written notice by ADAM, Hulings, the Directors, or a majority of the
outstanding voting securities of the Fund as defined in the 1940 Act. Such
agreement will automatically terminate in the event of its assignment, as
defined in Section 2(a)(4) of the Act.
The Directors and officers of American Diversified Asset Management, Inc. are as
follows:
<TABLE>
<CAPTION>
Position With Position With
Name Investment Adviser the Company
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
James B. Rea, Jr. Director, President and Chairman of the Board, President
CFO and Secretary
Frances L. Rea None Treasurer
</TABLE>
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., 400 Bellevue Parkway, Suite 108,
Wilmington, DE 19809, serves as transfer agent for the Fund's shares.
Independent Accountants. McGladrey & Pullen, LLP., 555 5th Avenue, 8th
Floor, New York, New York 10017, serves as independent accountants for the Fund.
Their audit services for the fiscal year ended March 31, 1998, 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.
As a general matter, it is the Fund's policy to execute purchases and
sales of listed portfolio securities through American Diversified Asset
Management, Inc., except when better price and execution can be obtained
elsewhere. In executing securities transactions for the Fund, it is understood
that American Diversified Asset Management, Inc. will transmit the transaction
to a member firm of the exchange used, of which the 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 American Diversified Asset Management,
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 American Diversified Asset Management, Inc.,
pursuant to Rule 17e-1 under the 1940 Act. Rule 17e-1 requires that such
commissions or other remuneration received by American Diversified Asset
Management, 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
American Diversified Asset Management, Inc. can perform its services on such
basis, it will continue to be principal broker
8
<PAGE> 31
for the Fund's transactions in listed securities. In executing transactions for
the Fund, American Diversified Asset Management, Inc. treats the Fund like any
other public customer, and the Fund's orders are accorded priority over those
received by American Diversified Asset Management, 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 American Diversified Asset Management, 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 American Diversified Asset Management, Inc. may receive indirect
benefits from the Fund as a result of the usual and customary brokerage
commissions which American Diversified Asset Management, Inc. may receive for
acting as broker to the Fund in portfolio securities transactions. In approving
the Agreement between the Company and American Diversified Asset Management,
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 American
Diversified Asset Management, Inc. may receive.
The Investment Adviser may from time to time recommend allocating
brokerage commissions to firms other than American Diversified Asset Management,
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, 1998, 1997, and 1996 were $1,970, $3,937, and
$25,544 respectively, of which James Buchanan Rea, Inc. retained $0 (00.0%), $0
(00.0%), and $13,835 (54.2%) respectively. Of the Fund's aggregate dollar amount
of transactions on which brokerage commissions were paid during the fiscal year
ended March 31, 1998, 00.0% 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
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.
9
<PAGE> 32
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.
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: American Diversified Asset Management, Inc., 12100
Wilshire Boulevard, Suite 680, Los Angeles, California 90025. 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.
PNC Bank, N.A. charges an annual $10.00 custodian fee for IRAs. PNC
Bank, N.A. 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) 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 M 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 (3)
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.
10
<PAGE> 33
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 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 from 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, referred 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.
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<PAGE> 34
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, 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.
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<PAGE> 35
PRINCIPAL UNDERWRITER
American Diversified Asset Management, Inc., 12100 Wilshire Boulevard,
Suite 680, Los Angeles, California 90025, telephone: (800) 433-1998, or (310)
442-2660, is the Principal Underwriter of the Fund pursuant to an Underwriting
Agreement dated April 1,1998, 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, 1998, 1997, and 1996 the Underwriter retained $196
(27.0%), $302 (29.3%), and $585 (21.6%) 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
American Diversified Asset Management, 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 shareholders; (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.
American Diversified Asset Management, 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 American Diversified Asset Management,
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 6, 1998. 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
13
<PAGE> 36
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, 1998, James Buchanan Rea, Inc.
received distribution fees of $35,750. James Buchanan Rea, Inc. spent
approximately: (1) $30,354 on trail commissions and service fees to Dealers; (2)
$8,639 on advertising and seminar expenses; (3) $4,640 on printing, postage and
mailing expenses of Prospectuses and sales literature to brokers and prospective
shareholders; and (4) $5,171on 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(l + 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 supplementary 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, 1998, the average
annual total return of the Fund was +8.07%, +4.58% and +4.96%, respectively,
assuming the imposition of the maximum initial sales charge, and +13.48%,
+5.60%, and +5.47% 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.
14
<PAGE> 37
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, 1998,
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 fifteen 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, 1998, by correspondence with
the custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our 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, 1998, 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.
McGladrey & Pullen, LLP
New York, New York
April 24, 1998, except as to
Note 7 the date of which is
July 31, 1998
15
<PAGE> 38
REA-GRAHAM BALANCED FUND
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments at value (cost $8,913,085) $9,785,616
Receivables:
Securities sold 173,250
Dividends and interest 15,428
Other 6,786
----------
TOTAL ASSETS 9,981,080
----------
LIABILITIES
Payable for capital shares redeemed 5,615
Accrued expenses 52,928
----------
TOTAL LIABILITIES 58,543
----------
NET ASSETS
Net assets, equivalent to $16.77 per share on 591,610
shares outstanding (Note 4) $9,922,537
==========
Computation of public offering price:
Net asset value per share $ 16.77
==========
Offering price per share (100/95.25 x $16.77) $ 17.61
==========
</TABLE>
See Notes to Financial Statements.
16
<PAGE> 39
REA-GRAHAM BALANCED FUND
STATEMENT OF OPERATIONS
YEAR ENDED MARCH 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment Income:
Income:
Dividends $ 63,675
Interest 393,305
----------
TOTAL INCOME 456,980
----------
Expenses:
Investment advisory fee (Note 3) 101,604
Distribution fee (Note 3) 35,750
Custodian fees 19,712
Transfer agency fees and expenses 18,426
Administrative expenses 30,541
Registration and filing fees 22,105
Legal 13,506
Audit and accounting 26,501
Recordkeeping and pricing fees 16,275
Directors' fees and meeting expenses 16,398
Printing and postage 16,812
Other 1,343
----------
TOTAL EXPENSES 318,973
----------
NET INVESTMENT INCOME 138,007
----------
Realized and unrealized gain on investments:
Net realized gain on investments 266,439
Unrealized appreciation of investments for the year 883,902
----------
NET GAIN ON INVESTMENTS 1,150,341
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS $1,288,348
==========
</TABLE>
See Notes to Financial Statements.
17
<PAGE> 40
REA-GRAHAM BALANCED FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (Decrease) in Net Assets from Operations:
Net investment income $ 138,007 $ 196,317
Net realized gain on investments 266,439 663,263
Unrealized appreciation (depreciation) for the year 883,902 (122,154)
---------------------------------
NET INCREASE IN NET ASSETS
FROM OPERATIONS 1,288,348 737,426
Dividends paid to shareholders from net investment
income (143,282) (219,505)
Capital share transactions (Note 4) (1,703,230) (2,314,306)
---------------------------------
TOTAL DECREASE (558,164) (1,796,385)
Net Assets:
Beginning of year 10,480,701 12,277,086
---------------------------------
End of year (including undistributed net investment
income of $29,870 and $35,145) $ 9,922,537 $ 10,480,701
=================================
</TABLE>
See Notes to Financial Statements.
18
<PAGE> 41
REA-GRAHAM BALANCED FUND
STATEMENT OF INVESTMENTS
MARCH 31, 1998
<TABLE>
<CAPTION>
NUMBER
NAME OF ISSUER OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 1.33 %
BANKS - 3.33%
Bank of New York 3,000 $188,437
Citicorp 1,000 142,000
--------
330,437
--------
AIRLINES - 1.79%
Southwest Airlines Co. 6,000 177,375
--------
BEEF - 0.90%
IBP, Inc. 4,000 89,750
--------
CHEMICAL - 0.98%
Dow Chemical 1,000 97,250
--------
COMMUNICATIONS - 3.55%
Century Telephone 3,000 183,187
Sprint Corp. 2,500 169,219
--------
352,406
--------
ELECTRICAL APPARATUS - 0.73%
Hughes Supply 2,000 72,375
--------
FINANCIAL SERVICES - 2.23%
Advanta Corp. CL A 1,656 37,260
American Express 2,000 183,625
--------
220,885
--------
INDUSTRIALS - 2.45%
AUTO/PARTS
Chrysler Corp. 3,000 124,687
--------
TIRES
Cooper Tire, Inc. 5,000 118,750
--------
TOTAL INDUSTRIALS 243,437
--------
</TABLE>
(Continued)
See Notes to Financial Statements.
19
<PAGE> 42
REA-GRAHAM BALANCED FUND
STATEMENT OF INVESTMENTS (CONTINUED)
MARCH 31, 1998
<TABLE>
<CAPTION>
NUMBER
NAME OF ISSUER OF SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
INSURANCE/SERVICES - 1.31%
EXEL Limited 1,000 77,500
NAC RE Corp. 1,000 52,438
---------
129,938
---------
JET FUEL/OIL RECOVERY - 1.33%
World Fuel 6,000 132,000
---------
REAL ESTATE INVESTMENT TRUST - 0.73%
Security Capital Pacific Trust 3,000 72,188
---------
RESTAURANTS - 3.32%
Cracker Barrel 6,000 240,000
Wendy's International 4,000 89,250
---------
329,250
---------
STORES (RETAIL/WHOLESALE) - 0.74%
Cash American International 4,506 73,223
---------
UTILITIES - 7.94%
Conectiv Inc. 7,500 164,531
GPU Inc. 2,000 88,500
NY State Electric & Gas 5,000 199,375
Nipsco Industries (U.S.A.) 12,000 336,000
---------
788,406
---------
TOTAL COMMON STOCKS (Cost $2,236,123) 3,108,920
---------
</TABLE>
(Continued)
See Notes to Financial Statements.
20
<PAGE> 43
REA-GRAHAM BALANCED FUND
STATEMENT OF INVESTMENTS (CONTINUED)
MARCH 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
NAME OF ISSUER AMOUNT VALUE
- ---------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS - 66.93%
LONG-TERM U.S. GOVERNMENT OBLIGATIONS - 10.06%
U.S. Treasury Notes, 5.125%, 12/31/98 $1,000,000 $ 997,501
----------
SHORT-TERM U.S. GOVERNMENT OBLIGATIONS - 56.87%
Federal Home Loan Mortgage Corp.
Discount Note, 5.37%, 4/24/98 1,200,000 1,195,883
Federal Home Loan Mortgage Corp.
Discount Note, 5.37%, 05/11/98 2,900,000 2,882,697
Federal Home Loan Mortgage Corp.
Discount Note, 5.42%, 06/15/98 550,000 543,835
Federal National Mortgage Association
Discount Note, 5.36%, 04/29/98 1,000,000 995,831
U.S. Treasury Bills, 5.25%, 04/23/98 25,000 24,920
----------
5,643,166
----------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $6,640,933) 6,640,667
OTHER SHORT TERM INVESTMENTS - 0.36%
Chase Institutional Money Market (Cost $36,029) 36,029
----------
TOTAL INVESTMENTS (COST $8,913,085+) - 98.62% 9,785,616
OTHER ASSETS LESS LIABILITIES - 1.38% 136,921
----------
TOTAL NET ASSETS - 100% $9,922,537
==========
</TABLE>
+ Aggregate cost for federal income tax purposes is identical.
See Notes to Financial Statements.
21
<PAGE> 44
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 American
Diversified Funds, Inc. (formerly 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.
22
<PAGE> 45
REA-GRAHAM BALANCED FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
On March 31, 1998, James Buchanan Rea, Inc. ("JBRI") the investment adviser and
principal underwriter of the Fund completed a merger transaction pursuant to
which all of the outstanding voting securities of JBRI were acquired by American
Diversified Asset Management, Inc. ("ADAM"). A new Investment Advisory Agreement
with ADAM, which is substantially similar to the Fund's previous Investment
Advisory Agreement with JBRI and provides for the same investment advisory fee
schedule, became effective on the same date. 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. ADAM has voluntarily agreed for a
period of two years following the merger to limit the Fund's total operating
expenses to 2.80% per annum.
Pursuant to a Plan of Distribution the Fund pays monthly to ADAM, 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.
During the year ended March 31, 1998, James Buchanan Rea, Inc. earned
commissions of $196 as principal underwriter and authorized dealer in Fund
shares.
NOTE 4. CAPITAL STOCK
At March 31, 1998, there were 20,000,000 shares of capital stock ($1 par value)
authorized and capital paid-in amounted to $9,724,309. Transactions in capital
stock were as follows:
<TABLE>
<CAPTION>
YEAR ENDED Year Ended
MARCH 31, 1998 March 31, 1997
------------------------------- -------------------------------
SHARES AMOUNT Shares Amount
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sold 4,319 $ 69,856 13,094 $ 195,810
Issued on reinvestment of dividends 8,269 132,462 13,765 205,795
Redeemed (119,982) (1,905,548) (182,560) (2,715,911)
----------- ----------- ----------- -----------
Net decrease (107,394) $(1,703,230) (155,701) $(2,314,306)
=========== =========== =========== ===========
</TABLE>
NOTE 5. INVESTMENT TRANSACTIONS
During the year ended March 31, 1998, purchase and sales of investment
securities, excluding short-term obligations, were as follows:
<TABLE>
<CAPTION>
Cost of Proceeds
Purchases of Sales
---------- ----------
<S> <C> <C>
U.S. Government Obligations $ $2,000,000
Other securities 403,437 888,468
---------- ----------
$ 403,437 $2,888,468
========== ==========
</TABLE>
23
<PAGE> 46
REA-GRAHAM BALANCED FUND
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 5. INVESTMENT TRANSACTIONS (CONTINUED)
The aggregate portfolio turnover of the Fund for the year ended March 31, 1998
was 8%. Portfolio turnover on stocks was 14%. Portfolio turnover on U.S.
Government Obligations was 0%.
Realized gains and losses are reported on an identified cost basis. Accumulated
undistributed net realized losses at March 31, 1998 were $704,173. 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, 1998, the aggregate gross unrealized appreciation and
(depreciation) of portfolio securities, based on cost for federal income tax
purposes, was as follows:
<TABLE>
<S> <C>
Unrealized appreciation $ 933,550
Unrealized depreciation (61,019)
---------
$ 872,531
=========
</TABLE>
NOTE 6. SELECTED FINANCIAL INFORMATION
Reference is made to Page 3 of the Prospectus.
NOTE 7. SUBSEQUENT EVENT
On July 31, 1998 the name of the Fund was changed to American Diversified Global
Value Fund.
24
<PAGE> 47
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
<TABLE>
<S> <C> <C> <C>
(a) Financial Statements:
Selected Financial Information. Part A
Report of Independent Auditors. Part B
Statement of Assets and Liabilities at March 31, 1998
Statement of Operations for year ended March 31,
1998.
Statements of Changes in Net Assets
for years ended March 31, 1998 and 1997.
Statement of Investments at March 31, 1998.
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
</TABLE>
Item 25. Persons Controlled by or Under Common Control with Registrant
None
- --------
* Previously filed.
<PAGE> 48
Item 26. Number of Holders of Securities
<TABLE>
<CAPTION>
Number of
Date Title of Class Record Holders
- ---- -------------- --------------
<S> <C> <C>
June 30, 1998 Common Stock 736
</TABLE>
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, American Diversified Asset Management, 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>
Name and Business Address Position with Underwriter Position with Registrant
- ------------------------- ------------------------- ------------------------
<S> <C> <C>
James Buchanan Rea, Jr. Director, President and Treasurer Chairman of the Board, President and
12100 Wilshire Blvd. Secretary
Los Angeles, CA 90025
Frances L. Rea Vice President and Secretary Treasurer
12100 Wilshire Blvd.
Los Angeles, CA 90025
</TABLE>
(c) Not Applicable.
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");
- 2 -
<PAGE> 49
American Diversified Asset Management, Inc., 12100 Wilshire
Blvd., Los Angeles, California 90025 ("ADAM"); American Data
Services, Inc., 136 Nassau Road, Huntington, New York 11743
("ADS"); PFPC, 400 Bellevue Parkway, Wilmington, Delaware,
19809 ("PFPC"); or Dechert Price & Rhoads, 1775 Eye Street,
N.W., Washington, D.C. 20006 ("DPR").
Rule 31a-1
(b)(1)..................................... Chase, ADAM, ADS and PFPC
(b)(2)(A).................................. ADS and PFPC
(b)(2)(B).................................. Chase and ADS
(b)(2)(C).................................. Chase and ADAM
(b)(2)(D).................................. Chase and PFPC
(b)(3)..................................... Not Applicable
(b)(4)..................................... DPR and ADAM
(b)(5)..................................... Chase and ADAM
(b)(6)..................................... Chase and ADAM
(b)(7)..................................... Not Applicable
(b)(8)..................................... ADS
(b)(9)..................................... ADAM
(b)(10).................................... Chase and ADAM
(b)(11).................................... ADAM
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> 50
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. 21 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, 1998.
AMERICAN DIVERSIFIED 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 and Chairman of July 31, 1998
James Buchanan Rea, Jr. the Board (Principal Executive
Officer)
_____________________________ Treasurer (Chief Financial Officer) July 31, 1998
Frances L. Rea**
_____________________________ Director July 31, 1998
Gerald M. Borden*
_____________________________ Director July 31, 1998
John P. Shelton*
_____________________________ Director July 31, 1998
J. Victor Monke*
_____________________________ Director July 31, 1998
R. Paul Toeppen*
</TABLE>
<PAGE> 51
<TABLE>
<S> <C> <C>
_____________________________ Director July 31, 1998
James Tracy*
_____________________________ Director
Klaus Conradi
</TABLE>
*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.
** Power of attorney previously filed with Post-Effective Amendment No. 11
to the Registration Statement.
- 2 -
<PAGE> 1
EXHIBIT 11
MCGLADREY & PULLEN, LLP
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use of our report dated April 25, 1998 on the
financial statements of Rea-Graham Balanced Fund referred to therein in
Post-Effective Amendment No. 21 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 31, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 01
<NAME> AMERICAN DIVERSIFIED GLOBAL VALUE FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 8,913,085
<INVESTMENTS-AT-VALUE> 9,785,616
<RECEIVABLES> 188,678
<ASSETS-OTHER> 6,786
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 9,981,080
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 58,543
<TOTAL-LIABILITIES> 58,543
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9,724,309
<SHARES-COMMON-STOCK> 591,610
<SHARES-COMMON-PRIOR> 699,004
<ACCUMULATED-NII-CURRENT> 29,870
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (704,173)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 872,531
<NET-ASSETS> 9,922,537
<DIVIDEND-INCOME> 63,675
<INTEREST-INCOME> 393,305
<OTHER-INCOME> 0
<EXPENSES-NET> 318,973
<NET-INVESTMENT-INCOME> 138,007
<REALIZED-GAINS-CURRENT> 266,439
<APPREC-INCREASE-CURRENT> 883,902
<NET-CHANGE-FROM-OPS> 1,288,348
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (143,282)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,319
<NUMBER-OF-SHARES-REDEEMED> (119,982)
<SHARES-REINVESTED> 8,269
<NET-CHANGE-IN-ASSETS> (558,164)
<ACCUMULATED-NII-PRIOR> 35,145
<ACCUMULATED-GAINS-PRIOR> (970,612)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 101,604
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 318,973
<AVERAGE-NET-ASSETS> 10,176,506
<PER-SHARE-NAV-BEGIN> 14.99
<PER-SHARE-NII> 0.23
<PER-SHARE-GAIN-APPREC> 1.78
<PER-SHARE-DIVIDEND> (0.23)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.77
<EXPENSE-RATIO> 3.13
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
