<PAGE>
[LOGO OF REA-GRAHAM BALANCED FUND]
12100 Wilshire Blvd., Suite 680, Los Angeles, California 90025
(800) 433-1998 (310) 442-2660
- -------------------------------------------------------------------------------
May 11, 1998
Dear Shareholders:
I am pleased to present this Annual Report for the Rea-Graham Balanced Fund
for the year ended March 31, 1998. From inception, June 30, 1976, the Fund has
returned to investors a gain/1/ of 552.15%, a compound growth rate of 9.0% per
year. For calendar-year 1997, the Fund gained 13.48%. For 1998, year-to-date
(May 11, 1998) the Fund is up 3.76%. These results were achieved with low risk
and low volatility.
We have included two charts which illustrate Fund performance versus broad-
based indexes. Chart I illustrates information on four indexes which we
believe represent the components and investment strategy of the Rea-Graham
Balanced Fund. Chart II provides a comparison of Fund performance to a
weighted composite of the indexes.
We are excited about our new direction at American Diversified Rea-Graham
Funds. On January 12, 1998, Fund shareholders approved the merger of American
Diversified Asset Management, Inc. ("ADAM") and James Buchanan Rea, Inc. which
became effective April 1, 1998. Our investment management company is now owned
by an international financial services company with headquarters in Los
Angeles, California, and Berlin, Germany. A new association with Ladas &
Hulings, Inc., of Scottsdale, Arizona as sub-investment adviser has also been
approved. Ladas & Hulings has two portfolios which Nelson's Information rates
as "Top 20" Money Managers --10 year returns/2/. Ladas & Hulings has a 25-year
track record of applying the Benjamin Graham investment philosophy to world
markets with superior results achieved with reduced risk and reduced
volatility.
Today, our Fund holds approximately 40% of assets in common stocks, 10% in
medium-term U.S. Government Treasury Notes, and 50% in liquid cash
instruments. The Fund continues to maintain a strong margin of safety and
diversification among 15 investment categories.
As evidence of our policy to select value investments, the stock portfolio
has a low price-to-earnings ratio of 17.2, compared to 28.6 for domestic stock
mutual funds and a low price-to-book value ratio of 2.4, compared to 5.6 for
equity funds. Our stocks have an average dividend yield of 2.0%, compared to
0.5 for domestic stock funds. We continue to select stocks with high reward-
to-risk ratios, solid fundamentals, and with demonstrated superior earnings,
growth and profitability.
It is important for all shareholders to remember that American Diversified
Rea-Graham Funds remains dedicated to Benjamin Graham's methods which identify
stock bargains worldwide. The management company will soon introduce
additional fund portfolios to compliment our current domestic offerings. There
will soon also be available a European series of funds to provide a prudent
investment opportunity for Europeans.
With many new opportunities ahead, and our global emphasis on investment
management, products, and marketing, we see a bright future ahead.
Please call us at (800) 433-1998 to learn more about our new direction and
how we can work together to meet your investment objectives.
We thank you for your continued confidence in the Rea-Graham Balanced Fund.
Sincerely,
/s/ James B. Rea, Jr.
James B. Rea, Jr.
President
American Diversified Funds, Inc.
Rea-Graham Balanced Fund
/1/ Performance information is based on total return including reinvestment of
dividend distributions and excluding sales charges.
/2/ Nelson Information, World's Best Money Managers, 3rd Quarter, 1997,
International Equity, rated Ladas & Hulings, Inc. International EAFE Value
Account 3rd, and Ladas & Hulings, Inc. International Value Account 5th of
43 composite/funds.
<PAGE>
* Performance information is based on total return including reinvestment of
dividend distributions and excluding sales charges.
CHART I
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN REA-GRAHAM BALANCED
FUND AND BENCHMARK INDEXES
[A Line Chart Appears Here]
Pursuant to Rule 304(a) of Regulation S-T, the following narrative
description replaces the chart that appears on this page of the Annual Report:
Chart I depicts the ending values of a $10,000 investment in the Rea-Graham
Balanced Fund and the four benchmark indexes as follows:
<TABLE>
<S> <C>
1.Morgan Stanley World Index...................................... $83,010.45
2.Value Line Composite............................................ $77,201.93
3.Rea-Graham Fund................................................. $62,123.81
4.Two-year U.S. Treasury Notes.................................... $55,020.47
5.Three-month U.S. Treasury Bills................................. $43,873.82
</TABLE>
The beginning date for each such $10,000 investment is June 30, 1976. Past
performance is not predicitive of future performance.
<TABLE>
<CAPTION>
========================================================================
AVERAGE ANNUAL TOTAL RETURN
------------------------------------------------------------------------
1 YEAR 5 YEAR 10 YEAR INCEPT.
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REA-GRAHAM FUND +13.48% +5.60% +5.47% +9.00%
EXCLUDING SALES LOAD
------------------------------------------------------------------------
REA-GRAHAM FUND +8.07% +4.58% +4.96% +8.76%
INCLUDING 4.75% SALES LOAD
------------------------------------------------------------------------
</TABLE>
Chart I illustrates the value of $10,000 investment in Rea-Graham Balanced
Fund, INCLUDING all expenses and the effect of the maximum sales load of 4.75%
(resulting in a net investment of $9,525) versus four benchmark indexes: (1)
Value Line Composite (an equal-weighted index of 1700 broad-based U.S.
stocks); (2) Morgan Stanley World Index (a sample of stocks from 21 European,
Pacific Rim and North American countries); (3) Two-year Treasury Notes; and
(4) Three-month Treasury Bills. These are unmanaged indexes, and EXCLUDE
expenses such as brokerage, custody, and overhead which would be charged if
actual investments were made. The Morgan Stanley World Index had 6 loss years
and the Value Line Composite had 5 loss years, while Rea-Graham Balanced Fund
had only 1.
2
<PAGE>
CHART II
REA-GRAHAM BALANCED FUND VS. COMPOSITE INDEX
Illustration of an assumed investment of $10,000* with net investment income
and capital gains distributions reinvested.
[A MOUNTAIN CHART APPEARS HERE]
Pursuant to Rule 304(a) of Regulation S-T, the following narrative
description replaces the chart that appears on this page of the Annual Report:
Chart II is a "mountain chart" that depicts the cumulative change in value
of a $10,000 investment made as of June 30, 1976, assuming the reinvestment of
net investment income and capital gains distributions, for the Rea-Graham
Balanced Fund and a weighted composite index of the benchmark indexes used in
Chart I. For the period ended March 31, 1998, the ending value for the Fund
was $65,215.51 and the ending value for the Composite Index was $63,904.15. In
the case of the Fund, this represents a cumulative total return of 552.15%
measured from June 30, 1976.
The following chart is depicted in conjunction with Chart II:
<TABLE>
<CAPTION>
PERIOD COMPOSITE REA-GRAHAM
ENDED VALUE VALUE
------ --------- ----------
<S> <C> <C>
06/30/76 $10,000 $10,000
12/31/76 $10,408 $10,846
12/31/77 $12,053 $11,194
12/31/78 $12,843 $12,355
12/31/79 $15,180 $14,362
12/31/80 $17,552 $15,837
12/31/81 $18,076 $18,391
08/19/82** $17,477 $18,856
03/31/83 $21,999 $23,035
03/31/84 $23,311 $23,797
03/31/85 $25,274 $26,931
03/31/86 $30,095 $34,378
03/31/87 $33,575 $37,626
03/31/88 $32,528 $38,308
03/31/89 $35,233 $41,211
03/31/90 $36,147 $43,037
03/31/91 $37,175 $43,502
03/31/92 $39,206 $46,834
03/31/93 $41,807 $49,705
03/31/94 $43,426 $48,213
03/31/95 $43,884 $48,291
03/31/96 $49,601 $54,005
03/31/97 $52,977 $57,467
03/31/98 $63,904 $65,215
</TABLE>
Chart II illustrates Rea-Graham Balanced Fund performance* versus a weighted
composite of the benchmark indexes used in Chart I. From inception Rea-Graham
Balanced Fund has averaged 25% allocation to Three-month Treasury Bills, 25%
to Two-year Treasury Notes, 40% to broad-based U.S. stocks and 10% to
established market foreign stocks. Each index was weighted accordingly, to
demonstrate the performance of a composite of the investment components
historically found in the Fund. As evidenced by Charts I and II, Rea-Graham
Balanced Fund has provided the advantages of long-term stock investment, with
very low risk and low volatility.
* Includes Fund expenses, but excludes sales load.
** Pro Forma information through April 29, 1982, the date the Fund succeeded
to the business of Rea, Graham-Plan Fund. Initial public offering date was
August 19, 1982.
3
<PAGE>
RESULTS OF PROXY VOTE
A Special Meeting of the Shareholders of the Fund was held on January 12,
1998 in order for shareholders to consider various proposals submitted for
their consideration. The matters submitted to shareholders were as follows:
Proposal 1: Approval of a New Investment Advisory Agreement; Proposal 2:
Approval of a New Sub-Investment Advisory Agreement; and Proposal 3: Election
of the following Directors: (i) James B. Rea, Jr.; (ii) James Tracy; (iii)
Thomas Fitzgerald; (iv) Gerald M. Borden; (v) J. Victor Monke; (vi) John P.
Shelton; (vii) R. Paul Toeppen; and (viii) Klaus Conradi. The results of the
voting is presented below:
PROPOSAL 1: Approval of a New Investment Advisory Agreement:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN RESULT
--- ------- ------- ------
<S> <C> <C> <C>
311,107 (95.92%) 3,878 (1.20%) 9,348 (2.88%) Passed
PROPOSAL 2: Approval of a New Sub-Investment Advisory Agreement:
<CAPTION>
FOR AGAINST ABSTAIN RESULT
--- ------- ------- ------
<S> <C> <C> <C>
310,411 (95.71%) 4,180 (1.29%) 9,741 (3.00%) Passed
</TABLE>
PROPOSAL 3: Election of Directors:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN RESULT
--- ------- ------- ------
<S> <C> <C> <C> <C>
James B. Rea, Jr........... 320,960 (98.96%) 1,749 (0.54%) 1,624 (0.50%) Elected
James Tracy................ 320,960 (98.96%) 1,749 (0.54%) 1,624 (0.50%) Elected
Thomas Fitzgerald.......... 320,960 (98.96%) 1,749 (0.54%) 1,624 (0.50%) Elected
Gerald M. Borden........... 320,960 (98.96%) 1,749 (0.54%) 1,624 (0.50%) Elected
J. Victor Monke............ 320,960 (98.96%) 1,749 (0.54%) 1,624 (0.50%) Elected
John P. Shelton............ 320,960 (98.96%) 1,749 (0.54%) 1,624 (0.50%) Elected
R. Paul Toeppen............ 320,960 (98.96%) 1,749 (0.54%) 1,624 (0.50%) Elected
Klaus Conradi.............. 320,960 (98.96%) 1,749 (0.54%) 1,624 (0.50%) Elected
</TABLE>
4
<PAGE>
REA-GRAHAM BALANCED FUND
STATEMENT OF INVESTMENTS
MARCH 31, 1998
<TABLE>
<CAPTION>
NUMBER
NAME OF ISSUER OF SHARES VALUE
- -------------- --------- ----------
<S> <C> <C>
COMMON STOCKS -- 31.33%
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 -- SLAUGHTER/
PRODUCTS -- 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
----------
INSURANCE/SERVICES -- 1.31%
EXCEL 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........................................ 12,000 336,000
----------
788,406
----------
TOTAL COMMON STOCKS
(Cost $2,236,123)........................................ $3,108,920
----------
</TABLE>
<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%,
5/11/98................................................ 2,900,000 2,882,697
Federal Home Loan Mortgage Corp. Discount Note, 5.42%,
6/15/98................................................ 550,000 543,835
Federal National Mortgage Association Discount Note,
5.36%, 4/29/98......................................... 1,000,000 995,831
U.S. Treasury Bills, 5.25%, 4/23/98..................... 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 -- 98.62% (Cost $8,913,085+)........... 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.
5
<PAGE>
REA-GRAHAM BALANCED FUND
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1998
<TABLE>
<S> <C> <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:
Payables 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>
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.
6
<PAGE>
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 in-
come................................................. (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.
REA-GRAHAM BALANCED FUND
NOTES TO FINANCIAL STATEMENTS
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.
The selected financial information, for the periods prior to April 29, 1982
(Note 6), gives effect to the assumed issuance of shares for partners' capital
contributions based upon the 300,000 shares issued on April 29, 1982 as
described above.
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.
7
<PAGE>
REA-GRAHAM BALANCED FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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>
5. INVESTMENT TRANSACTIONS
During the year ended March 31, 1998, purchases 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>
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>
8
<PAGE>
REA-GRAHAM BALANCED FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE (FOR A
SHARE OUTSTANDING
THROUGHOUT THE
PERIOD)
Net asset value, be-
ginning of period... $ 14.99 $ 14.36 $ 13.12 $ 13.20 $ 13.68 $ 13.14 $ 12.84 $ 13.56 $ 13.90 $ 13.83 $ 15.56 $ 16.45
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income from invest-
ment operations:
Net investment in-
come............... 0.23 0.27 0.31 0.15 0.07 0.21 0.59 0.75 0.90 0.78 0.66 0.43
Net realized and
unrealized gain
(loss) on
investments........ 1.78 0.65 1.24 (0.13) (0.47) 0.59 0.37 (0.65) (0.27) 0.25 (0.46) 0.98
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from invest-
ment operations..... 2.01 0.92 1.55 0.02 (0.40) 0.80 0.96 0.10 0.63 1.03 0.20 1.41
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Less distributions:
Dividends from net
investment income.. (0.23) (0.29) (0.31) (0.10) (0.08) (0.26) (0.66) (0.82) (0.96) (0.68) (1.03) (0.47)
Dividends from net
realized gains..... 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (0.01) (0.28) (0.90) (1.83)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions. (0.23) (0.29) (0.31) (0.10) (0.08) (0.26) (0.66) (0.82) (0.97) (0.96) (1.93) (2.30)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end
of period........... $ 16.77 $ 14.99 $ 14.36 $ 13.12 $ 13.20 $ 13.68 $ 13.14 $ 12.84 $ 13.56 $ 13.90 $ 13.83 $ 15.56
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000's)...... $ 9,923 $10,481 $12,277 $14,242 $17,877 $24,771 $28,281 $34,758 $43,386 $50,554 $49,287 $48,141
Ratios to average
net assets:
Expenses........... 3.13% 2.89% 2.65% 2.52% 2.37% 2.16% 2.06% 2.04% 1.60% 1.43% 1.41% 1.48%
Net investment in-
come............... 1.36% 1.70% 2.02% 1.08% 0.49% 1.45% 4.05% 5.27% 5.82% 5.46% 4.82% 3.54%
Aggregate portfolio
turnover rate....... 8% 19% 223% 93% 106% 87% 109% 100% 125% 88% 226% 111%
Portfolio turnover
rate on stocks**.... 14% 45% 88% 36%
Net asset value ad-
justed for reinvest-
ment of
dividends and dis-
tributions:
Beginning of peri-
od................. $ 34.67 $ 32.58 $ 29.14 $ 29.09 $ 29.97 $ 28.24 $ 26.23 $ 25.95 $ 24.85 $ 23.10 $ 22.69 $ 20.73
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
End of period...... $ 39.34 $ 34.67 $ 32.58 $ 29.14 $ 29.09 $ 29.97 $ 28.24 $ 26.23 $ 25.95 $ 24.85 $ 23.10 $ 22.69
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (ex-
cluding sales
charge) ............ 13.48% 6.41% 11.81% 0.17% (2.94)% 6.13% 7.66% 1.08% 4.43% 7.58% 1.81% 9.45%
Average commission
rate paid........... $0.0506 $0.0537
</TABLE>
- -----
** Provided for additional information. Portfolio turnover rate on stocks for
periods prior to 1995 not available.
9
<PAGE>
REA-GRAHAM BALANCED FUND NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PRO FORMA INFORMATION + (UNAUDITED)
--------------------------------------------------------------------
JUNE 30, 1976
APRIL 30, (COMMENCEMENT
YEAR ENDED MARCH 31, 1982 TO JANUARY 1, YEAR ENDED DECEMBER 31, OF OPERATIONS)
------------------------ MARCH 31, TO APRIL 29, -------------------------------------- TO DECEMBER 31,
1986 1985 1984 1983 1982 1981 1980 1979 1978 1977 1976
------- ------- ------ --------- ------------ ------ ------ ------ ------ ------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE (FOR A
SHARE OUTSTANDING
THROUGHOUT THE
PERIOD)
Net asset value, be-
ginning of period... $ 13.65 $ 13.09 $13.89 $11.45 $11.09 $ 9.55 $ 8.66 $ 7.45 $ 6.75 $ 6.54 $ 6.03
------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from invest-
ment operations:
Net investment in-
come............... 0.50 0.46 0.72 0.43 0.05 0.59 0.56 0.30 0.12 0.18 0.00
Net realized and
unrealized gain
(loss) on
investments........ 3.06 1.12 (0.27) 2.01 0.31 0.95 0.33 0.91 0.58 0.03 0.51
------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from invest-
ment operations..... 3.56 1.58 0.45 2.44 0.36 1.54 0.89 1.21 0.70 0.21 0.51
------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions:
Dividends from net
investment income.. (0.53) (0.74) (0.33) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Dividends from net
realized gains..... (0.23) (0.28) (0.92) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions. (0.76) (1.02) (1.25) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end
of period........... $ 16.45 $ 13.65 $13.09 $13.89 $11.45 $11.09 $ 9.55 $ 8.66 $ 7.45 $ 6.75 $ 6.54
======= ======= ====== ====== ====== ====== ====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000's)...... $31,531 $13,627 $9,842 $6,863 $3,436 $3,200 $2,631 $3,063 $2,169 $1,458 $1,093
Ratios to average
net assets:
Expenses........... 1.50% 2.28% 2.45% 1.50%* 3.62%* 2.70% 3.10% 3.07% 2.90% 2.77% 4.92%*
Net investment in-
come............... 4.78% 4.68% 6.46% 5.49%* 2.90%* 6.48% 3.85% 4.63% 2.72% 2.98% --
Portfolio turnover
rate................ 208% 196% 261% 187% 9% 135% 151% 101% 135% 148% 22%
Net asset value
adjusted for
reinvestment of
dividends and
distributions:
Beginning of peri-
od................. $ 16.24 $ 14.35 $13.89 $11.45 $11.09 $ 9.55 $ 8.66 $ 7.45 $ 6.75 $ 6.54 $ 6.03
======= ======= ====== ====== ====== ====== ====== ====== ====== ====== ======
End of period...... $ 20.73 $ 16.24 $14.35 $13.89 $11.45 $11.09 $ 9.55 $ 8.66 $ 7.45 $ 6.75 $ 6.54
======= ======= ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (ex-
cluding sales
charge)............. 27.65% 13.17% 3.31% 21.31% 3.25% 16.13% 10.28% 16.24% 10.37% 3.21% 8.46%
</TABLE>
- ----
* Annualized
+ Prepared as if the predecessor partnership (Note 1) had been organized as a
corporation on June 30, 1976, the date of commencement of its operations,
and had initially issued capital stock at a net asset value of $6.03 per
share.
10
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders of
Rea-Graham Balanced Fund
We have audited the accompanying statement of assets and liabilities,
including the statement of investments, of Rea-Graham Balanced Fund as of
March 31, 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 April 30, 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.
/s/ McGladrey & Pullen, LLP
New York, New York
April 24, 1998
11
<PAGE>
PLEASE CONTACT US
[LOGO OF REA-GRAHAM FUND, INC.]
AMERICAN DIVERSIFIED FUNDS, INC.
12100 Wilshire Blvd., Suite 680 -----------------
Los Angeles, California 90025
(800) 433-1998
Transfer Agent AMERICAN DIVERSIFIED
PFPC, Inc. REA-
400 Bellevue Parkway GRAHAM
Wilmington, DE 19809
(800) 348-5032 [LOGO OF REA-GRAHAM FUND, INC.]
Principal Underwriter
AMERICAN DIVERSIFIED ASSET ANNUAL REPORT
MANAGEMENT, INC.
12100 Wilshire Blvd., Suite 680 March 31, 1998
Los Angeles, California 90025
(310) 442-2660
- ------------------------------------
This report must be preceded or
accompanied by the Prospectus of
Rea-Graham Balanced Fund.
