GRAPHIC: THE PREFERRED GROUP
OF MUTUAL FUNDS (R)
ANNUAL REPORT
JUNE 30, 1997
<PAGE>
June 30, 1997
TABLE OF CONTENTS
Our Message to You....................................................... 1
Performance Information and Benchmarks................................... 3
Investment Review........................................................ 4
Statements of Assets & Liabilities....................................... 22
Statements of Operations................................................. 24
Statements of Changes in Net Assets...................................... 26
Financial Highlights..................................................... 30
Schedules of Investments................................................. 34
Notes to Financial Statements............................................ 55
Report of Independent Accountants........................................ 63
<TABLE>
PERFORMANCE DATA FISCAL YEAR ENDED 6/30/97
<CAPTION>
CAPITAL
BEGINNING ENDING TOTAL CURRENT INCOME GAINS
FUND NAME NAV NAV RETURN* YIELD + DIVIDENDS DISTRIBUTIONS
(PER SHARE) (PER SHARE) (PER SHARE) (PER SHARE)
<S> <C> <C> <C> <C> <C> <C>
Growth $18.52 $20.42 28.57% -- $ -- $2.8607
Value 16.65 21.14 32.62 -- .2016 .6004
International 13.72 16.12 22.50 -- .3483 .2527
Small Cap 11.25 14.30 29.00** -- .0254 .1593
Asset Allocation 12.88 14.52 21.01 -- .4425 .5283
Balanced 10.69 11.79 14.82*** -- .3002 .1527
Fixed Income 10.09 10.24 8.39 6.63% .6350 .0365
S.T. Gov't. Securities 9.76 9.78 5.81 5.95 .5332 --
Money Market 1.00 1.00 5.14 4.92 .0499 .0003
<FN>
* Total return includes reinvestment of dividends and capital gains
distributions.
** From November 1, 1995 through October 31, 1996, the manager had
voluntarily undertaken to waive a portion of its management fees (0.35% of
average net assets) for the Small Cap Fund. Total return for the Small Cap Fund
would have been 28.88% if a portion of the fee had not been waived.
*** Effective July 1, 1995, and until further notice, the manager has
voluntarily undertaken to cap the Balanced Fund's expenses at 1.15% of the
Fund's average net assets. Total return for the Balanced Fund would have been
lower for the twelve-month period ended June 30, 1997, if expenses had not been
capped.
+ The yield shown for the Fixed Income and Short-Term Government Securities
Funds is the 30-day current yield as of 6/30/97. The yield shown for the Money
Market Fund is a seven-day current yield as of 6/30/97, in accordance with
Securities and Exchange Commission rules for reporting yields of money market
funds.
The performance data quoted represents past performance and does not
guarantee future results. Investment return and principal value will fluctuate
so that, when redeemed, an investor's shares may be worth more or less than
their original cost.
</FN>
</TABLE>
<PAGE>
OUR MESSAGE TO YOU
PHOTOGRAPHIC IMAGE OF RONALD R. ROSSMAN, PRESIDENT.
DEAR PREFERRED GROUP SHAREHOLDER:
We are pleased to present you with The Preferred Group's annual report for
the fiscal year ended June 30, 1997. This report provides detailed information
on your fund's performance, including fund holdings, financial status and
commentary from each of our portfolio managers.
MARKET REVIEW
In our last annual report we said that "the financial markets continued
their strong momentum." This observation is just as appropriate today. During
the fiscal year ended June 30, 1997, the Dow Jones Industrial Average crossed
6000 and 7000, peaking at 7797 on June 20.
Certainly the market has performed at a remarkable pace during the past
year. The S&P 500 Index climbed 34.6% for the period. Half of this gain was in
the last quarter, when the U.S. economy enjoyed excellent growth coupled with a
shrinking federal budget deficit and minimal inflation.
The big winners have been the largest capitalized stocks, but the small cap
market also rebounded with a 16.3% gain in the Russell 2000 Index despite
weaknesses earlier in the fiscal year.
The Morgan Stanley EAFE Index (EAFE), a common benchmark for international
investing, rose by a respectable 13.2% for the year. Its returns were tempered
by disappointments in Japan, but gains were notable in Europe and Latin America.
By fiscal year-end, even Japan had turned around.
The bond market was quiet during the last six months of 1996 and even down
a bit during the first quarter of 1997, but an excellent fourth quarter enabled
the Salomon Brothers Broad Investment Grade Index to climb 8.2% for the year.
MARKET HISTORY
Just as this past year repeats much of the previous year's story, we must
repeat the cautionary tale taught by history: the market's strong performance
over the past twelve months is not necessarily indicative of future market
performance.
Ups and downs in the market are part of the normal investment cycle.
Investors may have grown accustomed to a favorable market environment -- we've
been riding a bull market since October 1990. However, there can be no assurance
that this bull market will continue.
<PAGE>
Because the different asset classes vary in volatility, diversifying your
investments among stock, bond and money market funds may reduce the risk to your
overall portfolio. Choosing funds that match your tolerance for risk and your
time horizon for investing is another strategy for making comfortable investment
choices.
PREFERRED GROUP HIGHLIGHTS
This is my first message to you as president of The Preferred Group, a
position I assumed this past May. Soon after, we moved to new offices (just
blocks from our previous location at Caterpillar Inc. headquarters) to serve you
more effectively.
This period of growth coincides with the fifth birthday of The Preferred
Group. The seven original funds - the Preferred International, Growth, Value,
Asset Allocation, Fixed Income, Short-Term Government Securities and Money
Market Funds - were introduced on July 1, 1992. Now they offer the longer
performance records that analysts and the financial press consider in advising
consumers.
As we achieve this five-year milestone, we are proud of the performance of
our funds. They have been recognized in recent issues of Fortune, Kiplinger's
Personal Finance Magazine, Consumer Reports and Mutual Funds. And as our assets
have grown to $1.7 billion, our expense ratios have dropped, allowing you to
share the benefits of our growth.
We are also proud of the customer service programs we have established.
You, our shareholders, participate in The Preferred Group through a variety of
channels: 401(k)s, IRAs, SEPs, direct accounts and others. We welcome your
comments and suggestions. Just call Investor Services at 1-800-662-GROW.
Thank you for choosing The Preferred Group. We appreciate your confidence
in us.
Sincerely,
Ronald R. Rossmann
President
<PAGE>
PERFORMANCE INFORMATION
HISTORICAL PERFORMANCE:
Historical performance can be evaluated in several ways. At the end of each
Fund's Discussion & Analysis section, we have provided a look at the total
percentage change in value, the average annual percentage change and the growth
of a hypothetical $10,000 investment. A comparison of this historical data to an
appropriate benchmark is also provided. These performance figures include
changes in a Fund's share price, plus reinvestment of any dividends (or income)
and any capital gains (profits the Fund earns when it sells securities that have
grown in value).
CUMULATIVE TOTAL RETURNS:
Cumulative total returns reflect the Fund's actual performance over a set period
- - six months, one year, or five years (since inception).
AVERAGE ANNUAL TOTAL RETURNS:
Average annual total returns are hypothetical. A Fund's actual (or cumulative)
return indicates what would have happened if the Fund had performed at a
constant rate each year. For your information, all Funds must provide average
annual total returns as of the most recent calendar quarter - in this case, June
30, 1997. This allows you to compare funds from different complexes on an equal
basis.
$10,000 HYPOTHETICAL INVESTMENT:
The "$10,000 investment since inception" illustrates the value of your
investment as of June 30, 1997, had you invested $10,000 when the Fund started.
BENCHMARKS - WHAT ARE THEY AND WHAT DO THEY TELL ME?
Benchmarks are simply a "point of reference for comparison." Mutual funds
typically compare themselves to a suitable stock or bond market index to gauge
their performance over the long term (3-5 years). An index is really a
fictitious unmanaged portfolio. It does not trade or incur any expenses. In that
sense, a fund must actually outperform its benchmark (gross return) by the
amount of its management fees and other expenses in order for its reported
performance (net of fees) to match its benchmark. Because the Funds are managed
portfolios investing in a wide range of securities, the securities owned by a
Fund will not match those included in the relevant benchmark. (Please refer to
the Investment Review section of this report for detailed descriptions of each
Fund's benchmark.)
PREFERRED GROWTH FUND
S&P 500 Index
PREFERRED VALUE FUND
S&P 500 Index
PREFERRED INTERNATIONAL FUND
EAFE Index
PREFERRED SMALL CAP FUND
Russell 2000 Index
PREFERRED FIXED INCOME FUND
Salomon Brothers Broad Investment Grade (BIG) Index
PREFERRED ASSET ALLOCATION FUND
65% - S&P 500 Index
30% - Lehman Brothers Long-Term Treasury Index
5% - 90-Day Treasury Bills
PREFERRED BALANCED FUND
55% - S&P 500 Index
35% - Lehman Government/Corporate Bond Index
10% - 90-Day Treasury Bills
PREFERRED SHORT-TERM GOVERNMENT SECURITIES FUND
Merrill Lynch 1-3 Year Treasury Index
PREFERRED MONEY MARKET FUND
Donoghue's Taxable Money Market Fund Average
<PAGE>
INVESTMENT REVIEW
PREFERRED GROWTH FUND
INVESTMENT OBJECTIVE:
The Preferred Growth Fund seeks long-term capital appreciation by investing its
assets primarily in equity securities believed to offer the potential for
capital appreciation, including stocks of companies experiencing rapid earnings
growth.
PORTFOLIO MANAGER PROFILE:
Portfolio Manager: Lulu C. Wang, CFA
Title: Executive Vice President/Director,
Jennison Associates Capital Corp.
Last Five Years' Experience: Portfolio Manager at Jennison Associates. Lulu
has managed the Preferred Growth Fund since its inception on July 1, 1992.
Education: B.A. - Wellesley College; MBA - Columbia University; Chartered
Financial Analyst
DISCUSSION & ANALYSIS:
For the fiscal year ended June 30, 1997, the Preferred Growth Fund rose by
28.6%, compared with a gain of 34.6% for the S&P 500 Index. Since inception, the
Fund has advanced at an average rate of 19.8%, versus 19.7% for the benchmark.
Over the past twelve months, the equity markets have been extremely volatile,
with stocks reacting, sometimes violently, to any perceived shift in the
economic outlook. The reelection of President Clinton last November, the
cautionary statements by Federal Reserve Chairman Alan Greenspan, and the
vacillating fears of recession and inflationary growth have all had dramatic,
but short lived, effects on a stock market which has continued its upward climb.
Although many market gauges are indicating that stock valuations are rising
toward the upper end of historical norms, the surprising strength of corporate
profits should support this ascent in stocks, despite the impressive performance
already registered in the recent past.
The Fund's strongest holdings were concentrated in the technology sector.
Applied Materials, Inc. (2.5% of net assets), Dell Computer Corp. (2.1%), Intel
Corp. (2.1%) and Microsoft Corp. (1.8%) all made substantial contributions to
the Fund, reflecting the strength of the personal computer industry. Offsetting
these gains somewhat was the Fund's exposure to the retail sector, where limited
pricing power and a cautious consumer provided a difficult environment for
Sunglass Hut International Inc., AutoZone, Inc. and Corporate Express, Inc.,
which have now been eliminated from the portfolio.
Looking forward, our confidence remains high that economic growth will be
moderate, with what we believe to be little likelihood of rising inflation.
Recent evidence of improving market breadth is clearly a healthy sign as we move
into the second half of calendar year 1997. Nevertheless, any future gains in
the stock market remain highly dependent on the performance of the bond market
and corporate earnings growth, both of which we expect to perform well over the
next six months. With this as a backdrop, we believe that the Fund's core
holdings will respond positively as the market's advance expands beyond the
largest growth companies, allowing other strong growing companies in the Fund to
enjoy healthy price appreciation as well.
- Jennison Associates
<PAGE>
INVESTMENT REVIEW
TOP TEN HOLDINGS: (% of total net assets)
- ----------------------------------------------------------
1. Boeing Co. 2.7%
- ----------------------------------------------------------
2. Applied Materials 2.5%
- ----------------------------------------------------------
3. Cisco Systems 2.5%
- ----------------------------------------------------------
4. Schlumberger Ltd. 2.3%
- ----------------------------------------------------------
5. Smithkline Beecham 2.2%
- ----------------------------------------------------------
6. Intel Corp. 2.1%
- ----------------------------------------------------------
7. Compaq Computers 2.1%
- ----------------------------------------------------------
8. Pfizer Inc. 2.1%
- ----------------------------------------------------------
9. Gillette Co. 2.1%
- ----------------------------------------------------------
10. Dell Computer 2.1%
- ----------------------------------------------------------
CUMULATIVE TOTAL RETURN:
<TABLE>
<CAPTION>
PAST PAST PAST 5 YEARS
6 MONTHS 1 YEAR (SINCE INCEPTION*)
<S> <C> <C> <C>
Preferred Growth Fund 18.51% 28.57% 147.32%
S&P 500 Index 20.48% 34.56% 146.12%
* JULY 1, 1992
</TABLE>
<TABLE>
AVERAGE ANNUAL TOTAL RETURN:
<CAPTION>
PAST PAST 5 YEARS
1 YEAR (SINCE INCEPTION*)
<S> <C> <C>
Preferred Growth Fund 28.57% 19.85%
S&P 500 Index 34.56% 19.74%
* JULY 1, 1992
</TABLE>
<PAGE>
PERFORMANCE:
The following information illustrates the historical performance of the
Preferred Growth Fund compared with the S&P 500 INDEX. The S&P 500 Index is the
most common index for the overall U.S. stock market. It comprises 500 of the
leading U.S. companies representing major industries.
Note: Past performance is not necessarily indicative of future results.
Investment return and principal value will fluctuate, so that, when redeemed, an
investor's shares may be worth more or less than their original cost. The
Preferred Growth Fund's inception date was July 1, 1992. This report will
provide ten-year performance history in the future as the Fund matures.
An index is a fictitious unmanaged portfolio and does not trade or incur any
expenses. An investment fund must outperform its benchmark by the amount of its
management fees and other expenses for its reported performance to match its
benchmark.
<PAGE>
A $10,000 INVESTMENT SINCE INCEPTION:
LINE CHART:
PREFERRED GROWTH FUND S&P 500 INDEX
7/1/92 10000 10000
12/31/92 11915 10837
6/30/93 12425 11359
12/31/93 13828 11921
6/30/94 12468 11514
12/31/94 13676 12074
6/30/95 16733 14510
12/31/95 17554 16599
6/30/96 19237 18291
12/31/96 20868 20429
6/30/97 24732 24612
<PAGE>
INVESTMENT REVIEW
PREFERRED VALUE FUND
INVESTMENT OBJECTIVE:
The Preferred Value Fund seeks capital appreciation and current income. The Fund
invests primarily in equity securities believed to be undervalued and that offer
above-average potential for capital appreciation.
PORTFOLIO MANAGER PROFILE:
Portfolio Manager: John G. Lindenthal
Title: Managing Director of Oppenheimer Capital
Last Five Years' Experience: Portfolio Manager at Oppenheimer Capital. John
has managed the Preferred Value Fund since its inception on July 1, 1992.
Education: B.S., MBA - University of Santa Clara
INFORMATION STATEMENT UPDATE:
As described in the Information Statement mailed to shareholders on or about
June 16, 1997, a new subadvisory agreement identical (except as to its date) to
the agreement under which Oppenheimer Capital cur rently serves as subadviser to
the Preferred Value Fund will take effect upon the closing of the Oppenheimer -
PIMCO transaction. The new subadvisory agreement was approved by written consent
of holders of a majority of the Fund's outstanding shares on July 7, 1997.
DISCUSSION & ANALYSIS:
During the fiscal year ended June 30, 1997, the Preferred Value Fund returned
32.6%, compared to the 34.6% advance recorded by the S&P 500 Index. Since its
inception, the Fund has delivered an average annual return of 19.4%, compared to
19.7% for the benchmark.
Financial stocks, particularly insurance and financial services companies, made
the largest contribution to the Fund's return during the past year. As of June
30, 1997, financial stocks made up 35% of the portfolio.
Consumer nondurable stocks (food, drugs, soaps, etc.) were particularly strong
this past year. While the companies we owned in this area performed very well
(+48%), we have not found many stocks in this sector which meet our investment
criteria. Therefore, we have underweighted them relative to the benchmark. This
is not a new situation, and in past periods this underweighting has aided Fund
results.
Two of the best performing stocks in the Fund during the past year are in
similar businesses. Ace Ltd. and Exel Ltd. are insurance carriers that write
specialty lines of coverage, such as excess liability and catastrophic property
reinsurance. Each has generated significant profits and created excess capital
to enter additional insurance lines and repurchase shares. Both companies have
evolved into diversified insurers earning returns on equity in excess of 30% in
their basic businesses. These firms benefit greatly from their Bermuda domicile
in that costs are low and they do not pay income taxes. We like these companies
not only for their strong fundamentals but also because of their modest
valuations.
We look for several basic characteristics in companies that the Fund owns. The
businesses we select must have a competitive advantage versus other companies in
their industry, a benefit that will allow them to sustain a high return on
invested capital. We invest in companies with strong management teams who are
focused on working hard for the shareholders through effective use of cash flow,
such as reinvesting in high return activities in the business, buying back stock
or paying dividends. Finally, we seek to buy the stock of these companies at
reasonable prices. The stocks in the Fund are selling at a discount to the
market in terms of price/earnings ratios, yet the companies in the portfolio are
generating higher returns on capital than the overall market. While it is more
difficult to find value in this generally inflated market, we continue to
unearth companies with favorable stock valuations.
- Oppenheimer Capital
<PAGE>
INVESTMENT REVIEW
TOP TEN HOLDINGS: (% of total net assets)
- ---------------------------------------------------------
1. Travelers Group 4.6%
- ---------------------------------------------------------
2. Federal Home Loan Mortgage 4.0%
- ---------------------------------------------------------
3. Exel Ltd. 4.0%
- ---------------------------------------------------------
4. Citicorp 3.9%
- ---------------------------------------------------------
5. Monsanto Co. 3.8%
- ---------------------------------------------------------
6. McDonnell Douglas 3.7%
- ---------------------------------------------------------
7. General Electric 3.5%
- ---------------------------------------------------------
8. Warner Lambert 3.3%
- ---------------------------------------------------------
9. Wells Fargo & Co. 3.3%
- ---------------------------------------------------------
10. Ace Ltd. 3.2%
- ---------------------------------------------------------
<TABLE>
CUMULATIVE TOTAL RETURN:
<CAPTION>
PAST PAST PAST 5 YEARS
6 MONTHS 1 YEAR (SINCE INCEPTION*)
<S> <C> <C> <C>
Preferred Value Fund 17.31% 32.62% 142.98%
S&P 500 Index 20.48% 34.56% 146.12%
* JULY 1, 1992
</TABLE>
<TABLE>
AVERAGE ANNUAL TOTAL RETURN:
<CAPTION>
PAST PAST 5 YEARS
1 YEAR (SINCE INCEPTION*)
<S> <C> <C>
Preferred Value Fund 32.62% 19.43%
S&P 500 Index 34.56% 19.74%
* JULY 1, 1992
</TABLE>
PERFORMANCE:
The following information illustrates the historical performance of the
Preferred Value Fund compared with the S&P 500 INDEX. The S&P 500 Index is the
most common index for the overall U.S. stock market. It comprises 500 of the
leading U.S. companies representing major industries.
Note: Past performance is not necessarily indicative of future results.
Investment return and principal value will fluctuate, so that, when redeemed, an
investor's shares may be worth more or less than their original cost. The
Preferred Value Fund's inception date was July 1, 1992. This report will provide
ten-year performance history in the future as the Fund matures.
An index is a fictitious unmanaged portfolio and does not trade or incur
any expenses. An investment fund must outperform its benchmark by the amount of
its management fees and other expenses for its reported performance to match its
benchmark.
LINE CHART:
A $10,000 INVESTMENT SINCE INCEPTION:
PREFERRED VALUE FUND S&P 500 INDEX
7/1/92 10000 10000
12/31/92 10980 10837
6/30/93 11673 11359
12/31/93 11945 11921
6/30/94 11707 11514
12/31/94 12001 12074
6/30/95 14718 14510
12/31/95 16258 16599
6/30/96 18322 18291
12/31/96 20712 20429
6/30/97 24298 24612
<PAGE>
INVESTMENT REVIEW
PREFERRED INTERNATIONAL FUND
INVESTMENT OBJECTIVE:
The Preferred International Fund seeks long-term capital appreciation by
investing its assets primarily in equity securities traded principally on
markets outside the United States.
PORTFOLIO MANAGER PROFILE:
Portfolio Manager: Peter F. Spano, CFA
Title: President, PXS Corp., General Partner,
Mercator Asset Management, L.P.
Last Five Years' Experience: Portfolio Manager at Mercator. Pete has
managed the Preferred International Fund since its inception on July 1, 1992.
Education: BBA - St. John's University; MBA - Baruch College (City
University of New York); Chartered Financial Analyst
DISCUSSION & ANALYSIS:
The Preferred International Fund advanced 22.5% for the fiscal year, well ahead
of the EAFE Index, which rose 13.2%. Our performance benefited from our
significant underweighting in the highly priced Japanese stock market. Positions
in Europe, where we have approximately 60% of the portfolio, did very well. It
is noteworthy that essentially all of the index's return occurred in the fourth
quarter (ended June 30).
The global economic outlook is improving, with rising GDP growth forecasted into
1998. Continental Europe in particular has been sluggish, but signs of
improvement are evident. The Pacific region has clearly slowed but we believe
should show decent relative growth. Japan's recovery has been erratic and
uncertain, with continuing problems in the banking system. Latin American
economies have been strong and we believe should continue so going forward.
Overall, global progress against inflation has been remarkable, and the future
looks just as bright.
We are closely watching the unification of European currencies. Consensus
opinion is that despite great difficulty, European Monetary Union will take
place in 1999. Consequently, tight fiscal policies will continue as governments
strive to meet the requirements.
Hong Kong has become a global focal point after being returned to China.
However, we expect little change in economic policy, at least over the short
term.
Over the year we eliminated our only position in Finland and cut back our
positions in Norway, based on high valuation levels for these stocks. Most of
our purchases were in the United Kingdom, South Korea, Japan, Sweden and Italy,
where we identified attractively valued stocks. The stocks purchased were
predominantly consumer oriented as opposed to basic industry issues. As has been
the case for a long time, we are underweighted in Japan and have no exposure in
Germany and Hong Kong; we have difficulty identifying bargains in these markets.
Overall our regional exposure has declined marginally in Europe and increased in
the Pacific basin.
Mercator believes the portfolio is very well positioned for the future, with
valuations very attractive and earnings growth very strong. Stock selectivity
will continue to be very important as many markets hit historic highs.
- Mercator Asset Management, L.P.
<PAGE>
INVESTMENT REVIEW
TOP TEN HOLDINGS: (% of total net assets)
- -------------------------------------------------------
1. Banco Bilbao Vizcaya Spain 2.7%
- -------------------------------------------------------
2. Societe Elf Aquitaine France 2.5%
- -------------------------------------------------------
3. Iberdrola SA Spain 2.3%
- -------------------------------------------------------
4. Sulzer AG Switzerland 2.3%
- -------------------------------------------------------
5. ING Groep NV Netherlands 2.2%
- -------------------------------------------------------
6. Pioneer Intl. Ltd. Australia 2.2%
- -------------------------------------------------------
7. Benetton Group SPA Italy 2.2%
- -------------------------------------------------------
8. Electrolux AB Sweden 2.2%
- -------------------------------------------------------
9. National Westminster United Kingdom 2.2%
- -------------------------------------------------------
10. Nissan Motor Co. Japan 2.2%
- -------------------------------------------------------
GEOGRAPHIC ALLOCATION: (% of total net assets)
- -----------------------------------------------------
United Kingdom 12.4%
- -----------------------------------------------------
Netherlands 9.9%
- -----------------------------------------------------
Switzerland 9.3%
- -----------------------------------------------------
Australia 7.7%
- -----------------------------------------------------
Sweden 7.7%
- -----------------------------------------------------
Japan 7.5%
- -----------------------------------------------------
Spain 6.5%
- -----------------------------------------------------
Italy 6.4%
- -----------------------------------------------------
France 6.1%
- -----------------------------------------------------
South Korea 5.7%
- -----------------------------------------------------
Canada 5.0%
- -----------------------------------------------------
New Zealand 4.7%
- -----------------------------------------------------
Argentina 3.3%
- -----------------------------------------------------
Norway 1.9%
- -----------------------------------------------------
<TABLE>
CUMULATIVE TOTAL RETURN:
<CAPTION>
PAST PAST PAST 5 YEARS
6 MONTHS 1 YEAR (SINCE INCEPTION*)
<S> <C> <C> <C>
Preferred International Fund 14.33% 22.50% 81.14%
EAFE Index 11.36% 13.16% 85.58%
* JULY 1, 1992
</TABLE>
<TABLE>
AVERAGE ANNUAL TOTAL RETURN:
<CAPTION>
PAST PAST 5 YEARS
1 YEAR (SINCE INCEPTION*)
<S> <C> <C>
Preferred International Fund 22.50% 12.62%
EAFE Index 13.16% 13.16%
* JULY 1, 1992
</TABLE>
PERFORMANCE:
The following information illustrates the historical performance of the
Preferred International Fund compared with the EAFE INDEX. The Europe, Australia
& Far East Index contains over 1000 stocks from 20 different countries with
Japan (approx. 40%), the United Kingdom, France and Germany being the most
heavily weighted.
There are special risk considerations associated with foreign investing,
including political and currency risks. (See "Risk Factors of Foreign
Investments" in the current Prospectus.)
Note: Past performance is not necessarily indicative of future results.
Investment return and principal value will fluctuate, so that, when redeemed, an
investor's shares may be worth more or less than their original cost. The
Preferred International Fund's inception date was July 1, 1992. This report will
provide ten-year performance history in the future as the Fund matures.
An index is a fictitious unmanaged portfolio and does not trade or incur any
expenses. An investment fund must outperform its benchmark by the amount of its
management fees and other expenses for its reported performance to match its
benchmark.
LINE CHART:
A $10,000 INVESTMENT SINCE INCEPTION:
PREFERRED INTERNATIONAL FUND EAFE INDEX
7/1/92 10000 10000
12/31/92 8419 9779
6/30/93 9623 12072
12/31/93 11915 12999
6/30/94 12189 14159
12/31/94 12305 14047
6/30/95 13004 14433
12/31/95 13526 15668
6/30/96 14787 16400
12/31/96 15845 16664
6/30/97 18114 18558
<PAGE>
INVESTMENT REVIEW
PREFERRED SMALL CAP FUND
INVESTMENT OBJECTIVE:
The Preferred Small Cap Fund seeks long-term capital appreciation through
investments in companies with small equity capitalizations.
PORTFOLIO MANAGER PROFILE:
Portfolio Manager: Todd M. Sheridan, CFA
Title: Portfolio Manager, Caterpillar Investment Management Ltd. (CIML)
Last Five Years' Experience: Portfolio Manager at CIML since October 1992.
Previously, he was a financial analyst for Caterpillar, Inc. Todd has managed
the Preferred Small Cap Fund since its inception on November 1, 1995.
Education: B.S. - University of Illinois; Chartered Financial Analyst
DISCUSSION & ANALYSIS:
The Preferred Small Cap Fund returned 29.0% for the last fiscal year, compared
to a 16.3% gain for the Russell 2000 benchmark. Since the inception of the Fund
on November 1, 1995, the Fund has provided an average annual return of 25.2%
against a gain of 21.0% for its benchmark.
The Fund's strong performance over the last 12 months is attributed in
large part to holdings of financial service-related stocks. Positions in banks,
savings and loans, insurance companies, brokerage firms and investment
management companies moved higher. They were fueled by generally lower interest
rates, a climbing stock market and heavy merger and acquisition activity.
Specialty retail stocks also performed well over the period as consumer spending
remained relatively strong. Although they were volatile throughout the period,
the Fund's technology holdings also contributed significantly to performance.
A number of the Fund's holdings became acquisition targets, boosting
performance. Many of the acquisition offers were at significant premiums to
market. These holdings include Alex Brown, Inc., a brokerage firm, as well as
Stant Corp., an auto parts manufacturer (0.0% of net assets as of 6/30/97 due to
acquisition-related activity), and Riser Foods Inc., an operator of regional
supermarkets (0.0% as of 6/30/97 due to acquisition-related activity).
Despite the Fund's strong performance, small cap stocks continued to trail large
caps. While the U.S. stock market continues to deliver returns well above
historical long-term averages, volatility remains extremely high. In this
environment, large cap stocks have continued to dominate small caps as investors
remain willing to pay premium price/earnings multiples for the trading liquidity
available from the largest, most actively traded stocks. Small cap stocks have
now underperformed large caps for 31/2 years. This situation has served to
create attractive relative valuations for small cap stocks today. We believe
this is excellent news for the Fund going forward.
We also believe the disciplined process we employ in selecting securities places
the Fund in an enviable position. Our strategy, which combines a strong
valuation component with the desire to pursue small cap companies with
consistent and growing earnings, seeks to uncover stocks with strong fundamental
positions in the market. And as the large cap market has run higher, the
valuation of these small cap stocks has only become more compelling. We believe
the Fund is well positioned to outperform should small cap stocks take a
leadership position in the market.
- Caterpillar Investment Management Ltd.
<PAGE>
INVESTMENT REVIEW
TOP TEN HOLDINGS: (% of total net assets)
- ----------------------------------------------------------
1. Jabil Circuit Inc. 2.3%
- ----------------------------------------------------------
2. Applied Magnetics Corp. 1.9%
- ----------------------------------------------------------
3. Alex Brown Inc. 1.7%
- ----------------------------------------------------------
4. Seacor Smit Inc. 1.5%
- ----------------------------------------------------------
5. Furniture Brands Intl. Inc. 1.4%
- ----------------------------------------------------------
6. Southdown Inc. 1.4%
- ----------------------------------------------------------
7. Ross Stores Inc. 1.4%
- ----------------------------------------------------------
8. CWM Mortgage Holdings Inc. 1.4%
- ----------------------------------------------------------
9. Medusa Corp. 1.3%
- ----------------------------------------------------------
10. ITI Technology Inc. 1.3%
- ----------------------------------------------------------
<TABLE>
CUMULATIVE TOTAL RETURN:
<CAPTION>
PAST PAST SINCE
6 MONTHS 1 YEAR INCEPTION*
<S> <C> <C> <C>
Preferred Small Cap Fund 14.86% 29.00%+ 45.34%+
Russell 2000 Index 10.20% 16.33% 37.31%
<FN>
* NOVEMBER 1, 1995
+ TOTAL RETURN WOULD HAVE BEEN LOWER IF A PORTION OF
THE MANAGEMENT FEE (0.35%) HAD NOT BEEN WAIVED FOR
THE PERIOD NOVEMBER 1, 1995 THROUGH OCTOBER 31, 1996.
</FN>
</TABLE>
<TABLE>
AVERAGE ANNUAL TOTAL RETURN:
<CAPTION>
PAST SINCE
1 YEAR INCEPTION*
<S> <C> <C>
Preferred Small Cap Fund 29.00%+ 25.15%+
Russell 2000 Index 16.33% 20.96%
<FN>
* NOVEMBER 1, 1995
+ TOTAL RETURN WOULD HAVE BEEN LOWER IF A PORTION OF
THE MANAGEMENT FEE (0.35%) HAD NOT BEEN WAIVED FOR
THE PERIOD NOVEMBER 1, 1995 THROUGH OCTOBER 31, 1996.
</FN>
</TABLE>
PERFORMANCE:
The following information illustrates the historical performance of the
Preferred Small Cap Fund compared with the RUSSELL 2000 INDEX. The Russell 2000
Index contains the 2000 smallest of the 3000 largest U.S. domiciled
corporations, ranked by market capitalization.
Note: Securities of small-capitalization companies often trade less frequently
and in more limited volume, and may be subject to greater price volatility than
securities of larger, more established companies.
Note: Past performance is not necessarily indicative of future results.
Investment return and principal value will fluctuate, so that, when redeemed, an
investor's shares may be worth more or less than their original cost. The
Preferred Small Cap Fund's inception date was November 1, 1995. This report will
provide five- and ten-year performance history in the future as the Fund
matures.
An index is a fictitious unmanaged portfolio and does not trade or incur any
expenses. An investment fund must outperform its benchmark by the amount of its
management fees and other expenses for its reported performance to match its
benchmark.
LINE CHART:
A $10,000 INVESTMENT SINCE INCEPTION:
PREFERRED SMALL CAP FUND RUSSELL 2000 INDEX
11/1/95 10000 10000
12/31/95 10506 10695
6/30/96 11267 11804
12/31/96 12653 12460
6/30/97 14534 13731
<PAGE>
INVESTMENT REVIEW
PREFERRED ASSET ALLOCATION FUND
INVESTMENT OBJECTIVE:
The Preferred Asset Allocation Fund seeks both capital appreciation and current
income by allocating its assets among stocks, bonds and high quality money
market instruments.
PORTFOLIO MANAGER PROFILE:
Mellon Capital Management Corporation
Portfolio Manager: Thomas B. Hazuka
Title: Chief Investment Officer, Mellon Capital Management Corporation
Last Five Years' Experience: Portfolio Manager at Mellon Capital. Tom has
been involved in the management of the Preferred Asset Allocation Fund since its
inception on July 1, 1992.
Education: B.S. - Stevens Institute of Technology;
MBA - University of Connecticut; Ph.D. - Stanford University
PanAgora Asset Management
Portfolio Manager: Edgar E. Peters
Title: Director, Asset Allocation, and Chief Investment Strategist,
PanAgora Asset Management
Last Five Years' Experience: Portfolio Manager at PanAgora Asset
Management. Ed has been involved in the management of the Preferred Asset
Allocation Fund since its inception on July 1, 1992.
Education: B.S. - Montclair State College; MBA - Rutgers University
DISCUSSION & ANALYSIS:
The Preferred Asset Allocation Fund had a total return of 21.0% for the fiscal
year ended June 30, 1997. By comparison, the Fund's blended benchmark consisting
of 65% - S&P 500 Index, 30% - Lehman Brothers Long-Term Treasury Index and 5% -
90-day Treasury Bills returned 24.9% for the year.
The first half of the fiscal year saw market sentiment move from uncertainty
regarding the pace of economic growth to a belief that the economy was slowing.
The markets followed the economic cycle, falling in July only to recover in
August. During September, October and November, with the economy slowing,
inflation remaining in check and monetary policy staying on hold, both the stock
and bond markets prospered. All in all, the stock market was able to post a
strong gain predicated on the continued solid earnings growth of corporate
America. Bond yields fluctuated considerably over the course of the six-month
period in response to the shifting tone of economic statistics.
The third quarter of the fiscal year was notable for the volatility of the
equity market. It jumped 7% in January and February, only to fall 4% in March.
Bond yields rose on investors' increased fears of inflation and in anticipation
of tightening by the Federal Reserve. The increase in bond yields, combined with
a decrease in the stock market's expected returns, made bonds increasingly
attractive as the quarter progressed. As the pace of economic activity slowed
during the final quarter of the fiscal year, the stock and bond markets reacted
very positively. At year-end, the markets were buoyed by low inflation, low
unemployment and continued high corporate earnings.
The Preferred Asset Allocation Fund began the fiscal year with an asset mix
(adjusted for the effect of futures contracts) of 57% stocks, 34% bonds and 9%
cash. As the bond market rallied during October and November, yields
correspondingly fell, and the asset allocation model signaled a reallocation
from bonds to stocks. The Fund began the second half of the fiscal year with an
asset mix (adjusted for the effect of futures contracts) of 69% stocks, 20%
bonds and 11% cash. As the spread between the expected return on stocks and the
expected return on bonds fell as a result of the strong stock market, the asset
allocation model signaled a reallocation to bonds. The Fund ended the fiscal
year at an asset mix (adjusted for the effect of futures contracts) of 33%
stocks, 51% bonds and 16% cash.
- Mellon Capital Management
- PanAgora Asset Management
PORTFOLIO ALLOCATION*: (% of portfolio)
- -----------------------------------------------------
6/30/97 12/31/96 6/30/96
- -----------------------------------------------------
Stocks 33% 69% 57%
- -----------------------------------------------------
Bonds 51% 20% 34%
- -----------------------------------------------------
Short-Term 16% 11% 9%
(maturities less than one year)
- -----------------------------------------------------
*Adjusted for the effect of futures contracts
<TABLE>
CUMULATIVE TOTAL RETURN:
<CAPTION>
PAST PAST PAST 5 YEARS
6 MONTHS 1 YEAR (SINCE INCEPTION*)
<S> <C> <C> <C>
Preferred Asset Allocation Fund 10.38% 21.01% 95.21%
65/30/5 Benchmark 13.87% 24.90% 107.89%
* JULY 1, 1992
</TABLE>
<TABLE>
AVERAGE ANNUAL TOTAL RETURN:
<CAPTION>
PAST PAST 5 YEARS
1 YEAR (SINCE INCEPTION*)
<S> <C> <C>
Preferred Asset Allocation Fund 21.01% 14.31%
65/30/5 Benchmark 24.90% 15.76%
* JULY 1, 1992
</TABLE>
PERFORMANCE:
The following information illustrates the historical performance of the
Preferred Asset Allocation Fund compared with a blended benchmark consisting of:
65% - S&P 500 INDEX; 30% - LEHMAN BROTHERS LONG-TERM TREASURY INDEX; AND 5% -
90-DAY TREASURY BILLS. The S&P 500 Index is the most common index for the
overall U.S. stock market. It comprises 500 of the leading U.S. companies
representing major industries. The Lehman Brothers Long-Term Treasury Index is a
market weighted index of all publicly held Treasury issues with maturities
greater than 10 years. The 90-Day Treasury Bill benchmark is a performance
calculation using recently issued 90-Day Treasury Bills.
The Asset Allocation Fund has a blended benchmark to reflect its
flexibility to invest in stocks, bonds and short-term instruments.
Note: Past performance is not necessarily indicative of future results.
Investment return and principal value will fluctuate, so that, when redeemed, an
investor's shares may be worth more or less than their original cost. The
Preferred Asset Allocation Fund's inception date was July 1, 1992. This report
will provide ten-year performance history in the future as the Fund matures. An
index is a fictitious unmanaged portfolio and does not trade or incur any
expenses. An investment fund must outperform its benchmark by the amount of its
management fees and other expenses for its reported performance to match its
benchmark.
LINE CHART:
A $10,000 INVESTMENT SINCE INCEPTION:
PREFERRED ASSET ALLOCATION FUND 65/30/5 BENCHMARK
7/1/92 10000 10000
12/31/92 10731 10781
6/30/93 11357 11523
12/31/93 11869 12057
6/30/94 11212 11483
12/31/94 11563 11848
6/30/95 13643 14057
12/31/95 15354 15849
6/30/96 16132 16429
12/31/96 17685 18021
6/30/97 19521 20789
<PAGE>
INVESTMENT REVIEW
PREFERRED BALANCED FUND
INVESTMENT OBJECTIVE:
The Preferred Balanced Fund seeks total return through a combination of capital
appreciation and current income. The Fund allocates its assets among stocks,
bonds and money market instruments.
PORTFOLIO MANAGER PROFILE:
Portfolio Manager: Bradley L. Goldberg, CFA
Title: Director, Executive Vice President, Jennison Associates Capital Corp.
Last Five Years' Experience: Portfolio manager at Jennison Associates. Brad has
managed the Preferred Balanced Fund since its inception on July 1, 1995. Prior
to that, Brad was an equity and balanced portfolio manager and has been chairman
of the Asset Allocation Committee at Jennison since 1980.
Education: B.S. - University of Illinois; MBA - New York University;
Chartered Financial Analyst
DISCUSSION & ANALYSIS:
The Preferred Balanced Fund returned 14.8% for the 12 months ended June 30,
1997, compared to its blended benchmark of 22.0%.
The Fund started the fiscal year with concerns that relatively high stock
market valuation would create an unfavorable stock market background. In fact,
the fiscal year started out with a significant sell-off, but one that quickly
terminated in late July. Clearly the strength of the stock market for the year
as a whole was not anticipated, and our below-benchmark exposure to stocks
hindered performance.
Although stocks as measured by the S&P 500 Index did very well, many secondary
stocks lagged. While many of the big capitalization names dominated market
performance, in our opinion a number of these stocks have become overvalued. It
is our strat egy to focus on stocks with good earnings growth but also
attractive valuation. The best performers in our portfolio were CIGNA (2.3% of
net assets), the New York Times Co. (2.0%), IBM (1.8%), McGraw Hill (1.5%), and
Fleet Financial Group (0.6%).
At the end of the fiscal year, we maintained our relatively cautious view
of stocks, believing the stock market to be stretched both with regard to
valuation and overall trend. Within our equity portfolio we have been diligent
to stick to our demand for attractive valuation. As a result, our equity
portfolio sells at a discount to the market price/earnings ratio, although we
expect it to show better earnings growth than the market over the coming fiscal
year.
In the bond sector, we maintained a very high quality all-Treasury portfolio
throughout the fiscal year. It is our view that risk spreads do not warrant an
exposure to lesser quality bonds at this time. We maintained our exposure to
bonds parallel to the benchmark throughout the fiscal year. We are very
impressed by the low inflation outlook, and we believe bonds are increasingly
due for a long awaited period of superior performance. We may well be increasing
exposure to the bond sector as we get into the new fiscal year.
- Jennison Associates
<PAGE>
INVESTMENT REVIEW
PERFORMANCE:
The following information illustrates the historical performance of the
Preferred Balanced Fund compared to a blended benchmark consisting of:
55% - S&P 500 INDEX; 35% - LEHMAN GOVERNMENT/ CORPORATE BOND INDEX; AND 10% -
90-DAY TREASURY BILLS. The S&P 500 Index is the most common index for the
overall U.S. stock market. The index comprises 500 of the leading U.S. companies
representing major industries. The Lehman Brothers Government/Corporate Bond
Index is an unmanaged list of publicly issued U.S. Treasury obligations, debt
obligations of the U.S. Government and its agencies (excluding mortgage-backed
securities), fixed rate, non-convertible, investment-grade corporate debt
securities and U.S. dollar-denominated, SEC-registered non-convertible debt
issued by foreign governmental entities or international agencies used as a
general measure of the performance of fixed income securities. The 90-Day
Treasury Bill benchmark is a performance calculation using recently issued
90-Day Treasury Bills.
Note: Past performance is not necessarily indicative of future results.
Investment return and principal value will fluctuate, so that, when redeemed, an
investor's shares may be worth more or less than their original cost. The
Preferred Balanced Fund's inception date was July 1, 1995. This report will
provide five- and ten- year performance history in the future as the Fund
matures.
An index is a fictitious unmanaged portfolio and does not trade or incur any
expenses. An investment fund must outperform its benchmark by the amount of its
management fees and other expenses for its reported performance to match its
benchmark.
<TABLE>
CUMULATIVE TOTAL RETURN:
<CAPTION>
PAST PAST SINCE
6 MONTHS 1 YEAR INCEPTION*
<S> <C> <C> <C>
Preferred Balanced Fund 7.54% 14.82%+ 28.73%+
55/35/10 Benchmark 12.28% 22.00% 41.63%
<FN>
* JULY 1, 1995
+ TOTAL RETURN WOULD HAVE BEEN LOWER IF THE MANAGER HAD
NOT VOLUNTARILY UNDERTAKEN TO LIMIT EXPENSES TO 1.15% OF
AVERAGE NET ASSETS.
</FN>
</TABLE>
<TABLE>
AVERAGE ANNUAL TOTAL RETURN:
<CAPTION>
PAST SINCE
1 YEAR INCEPTION*
<S> <C> <C>
Preferred Balanced Fund 14.82%+ 13.46%+
55/35/10 Benchmark 22.00% 19.01%
<FN>
* JULY 1, 1995
+ TOTAL RETURN WOULD HAVE BEEN LOWER IF THE MANAGER HAD
NOT VOLUNTARILY UNDERTAKEN TO LIMIT EXPENSES TO 1.15% OF
AVERAGE NET ASSETS.
</FN>
</TABLE>
LINE CHART:
A $10,000 INVESTMENT SINCE INCEPTION:
PREFERRED BALANCED FUND 55/35/10 BENCHMARK
7/1/95 10000 10000
12/31/95 10744 11049
6/30/96 11211 11609
12/31/96 11971 12614
6/30/97 12873 14163
<PAGE>
INVESTMENT REVIEW
PREFERRED FIXED INCOME FUND
INVESTMENT OBJECTIVE:
The Preferred Fixed Income Fund seeks a high level of current income consistent
with investment in a diversified portfolio of high quality debt securities.
PORTFOLIO MANAGER PROFILE:
Portfolio Manager: Paul L. Zemsky, CFA
Title: Managing Director, J. P. Morgan Investment Management Inc.
Last Five Years' Experience: Portfolio Manager at J. P. Morgan Investment.
Paul has been involved in the management of the Preferred Fixed Income Fund
since January 1, 1994.
Education: B.S., B.S.E.E. - University of Pennsylvania; Chartered Financial
Analyst
DISCUSSION & ANALYSIS:
The Preferred Fixed Income Fund returned 8.4% for the fiscal year ended June 30,
1997, compared to an 8.2% return for the Salomon Brothers Broad Investment Grade
(BIG) Index benchmark. Since inception, the Fund's average annual return is 7.1%
versus 7.2% for the benchmark.
Amid signs of slowing growth, subdued inflation and an inactive Federal
Reserve during the six months ending December 31, 1996, bond prices rallied, and
the Salomon Brothers BIG Index advanced. Federal Reserve Chairman Greenspan's
comment that the outlook for U.S. inflation was uncertain because of a supposed
speculative bubble sent the markets into a tailspin in early December and caused
investors to speculate that the Fed might raise rates soon. During the first
quarter of 1997, a strong U.S. economy and an historically tight labor market
signaled a potential increase in inflation. The Fed finally raised the interest
rate from 5.25% to 5.50% in late March. However, during the next quarter, slower
growth, combined with insubstantial inflation, allowed the Federal Reserve to
refrain from additional tightening of monetary policy.
In managing the Preferred Fixed Income Fund, we make three key decisions in
order to add value. First, we determine the Fund's duration, which is a measure
of the Fund's sensitivity to changes in interest rates. Although duration was
held neutral relative to the index throughout most of the fiscal year, slight
duration changes added value to the Fund's performance.
Second, we allocate the Fund's assets across the broad sectors of the fixed
income market, including governments, corporates, high-yields, emerging market
debt, international bonds and mortgage-backed securities. During the year, the
Fund benefited from our decision to reduce holdings in Treasury securities and
instead overweight mortgage-backed securities and corporate bonds. These sectors
outperformed as investor fears of the Federal Reserve raising rates diminished.
Finally, we select individual securities for the Fund. Securities are selected
on a daily basis by our portfolio managers, with substantial input from our
fixed income analysts and traders. Security selection continued to add value
during this period. The Fund maintained its focus on high-quality issues,
keeping the average credit quality of its holdings between AA and AAA.
Going forward, we plan to maintain our overweightings in corporates and
mortgages. We have the Fund positioned for a rise in rates because we believe
economic growth will continue to be above trend.
- J. P. Morgan Investment Management
<PAGE>
INVESTMENT REVIEW
PORTFOLIO STATISTICS: (as of June 30, 1997)
- --------------------------------------------------
Portfolio Holdings 144
- --------------------------------------------------
Average Maturity 13.1 years
- --------------------------------------------------
Average Duration 4.5 years
- --------------------------------------------------
Average Quality AAA
- --------------------------------------------------
Allocation (% of portfolio*):
- --------------------------------------------------
Treasury/Agency 13%
- --------------------------------------------------
Corporates 29%
- --------------------------------------------------
Mortgages/Asset Backed 51%
- --------------------------------------------------
Short-Term 7%
(maturities less than one year)
- --------------------------------------------------
*Adjusted for the effect of futures contracts
<TABLE>
CUMULATIVE TOTAL RETURN:
<CAPTION>
PAST PAST PAST 5 YEARS
6 MONTHS 1 YEAR (SINCE INCEPTION*)
<S> <C> <C> <C>
Preferred Fixed Income Fund 3.22% 8.39% 41.01%
Salomon Bros. BIG Index 3.07% 8.16% 41.38%
* JULY 1, 1992
</TABLE>
<TABLE>
AVERAGE ANNUAL TOTAL RETURN:
<CAPTION>
PAST PAST 5 YEARS
1 YEAR (SINCE INCEPTION*)
<S> <C> <C>
Preferred Fixed Income Fund 8.39% 7.11%
Salomon Bros. BIG Index 8.16% 7.17%
* JULY 1, 1992
</TABLE>
PERFORMANCE:
The following information illustrates the historical performance of the
Preferred Fixed Income Fund compared with the SALOMON BROTHERS BROAD INVESTMENT
GRADE (BIG) INDEX. The Index contains 5,000 U.S. Treasury, Agency, Mortgage and
Corporate Bonds. Credit quality must be investment grade (AAA-BBB by Standard &
Poor's).
Note: Past performance is not necessarily indicative of future results.
Investment return and principal value will fluctuate, so that, when redeemed, an
investor's shares may be worth more or less than their original cost. The
Preferred Fixed Income Fund's inception date was July 1, 1992. This report will
provide ten-year performance history in the future as the Fund matures.
An index is a fictitious unmanaged portfolio and does not trade or incur any
expenses. An investment fund must outperform its benchmark by the amount of its
management fees and other expenses for its reported performance to match its
benchmark.
LINE CHART:
A $10,000 INVESTMENT SINCE INCEPTION:
PREFERRED FIXED INCOME FUND SALOMON BROS. BIG INDEX
7/1/92 10000 10000
12/31/92 10471 10461
6/30/93 11259 11198
12/31/93 11549 11496
6/30/94 11207 11065
12/31/94 11273 11169
6/30/95 12494 12454
12/31/95 13264 13238
6/30/96 13009 13071
12/31/96 13660 13717
6/30/97 14101 14138
<PAGE>
INVESTMENT REVIEW
PREFERRED SHORT-TERM GOVERNMENT SECURITIES FUND
INVESTMENT OBJECTIVE:
The Preferred Short-Term Government Securities Fund seeks high current income,
consistent with preservation of capital, primarily through investment in U.S.
Government Securities.
PORTFOLIO MANAGER PROFILE:
Portfolio Manager: J. Steven Orr, CFA
Title: Senior Portfolio Manager, Caterpillar Investment Management Ltd. (CIML)
Last Five Years' Experience: Portfolio Manager at CIML since June 1993.
Previously, he was a portfolio manager at U.S. Global Advisors. Effective July
1, 1995, Steve assumed responsibility for management of the Preferred Short-Term
Government Securities Fund.
Education: B.A. - University of Texas; MBA - Southwest Texas State
University; J.D. - St. Mary's University School of Law; Chartered Financial
Analyst
DISCUSSION & ANALYSIS:
For the fiscal year ending June 30, 1997, the Fund had a total return of 5.8%,
compared with a 6.6% return for the Merrill Lynch 1-3 Year Treasury Index. Since
inception, the Fund's average annual total return is 4.7% versus 5.6% for the
Merrill Lynch 1-3 Year Treasury Index.
The interest rate on the three-year Treasury note declined over the year by only
0.1%. However, that slight change masks a great deal of rate movement. The
Treasury market had a nice bull market from Labor Day through mid-November.
Fears of Federal Reserve action, coupled with Chairman Greenspan's "irrational
exuberance" comments, drove the bulls into hiding. The rise in interest rates
lasted into April, with the three-year Treasury topping out at 6.70%. Softening
economic data in the spring convinced market participants that the Fed would not
raise rates. This, along with an attractive U.S. dollar, brought the three-year
Treasury back to the 6.25% area.
For the latter half of 1996, mortgage pools appeared to be the most attractive
sector. Investors bid up the prices of these securities relative to other
short-term instruments. We have begun to diversify the Fund's holdings into
taxable municipals, a sector that did well for us in 1995. Late in 1996, the
Fund received the highest ratings possible by Fitch Investors Service, L.P.:
AAA for credit quality and V-1 for interest rate sensitivity.
At mid-summer, 1997, the economy was running on all cylinders, and inflation was
surprisingly dormant. Fed insiders warned of 4% inflation in the service sector,
but that could be due to the scarcity of summer labor. Chairman Greenspan, in
his Humphrey-Hawkins testimony to Congress, implicitly agreed with the economy's
strength, stating that this period may be a "once in a century" time for
productivity and growth to coexist. The Fund is positioned to take advantage of
the rally and watching for change in market sentiment.
- Caterpillar Investment Management Ltd.
<PAGE>
PORTFOLIO STATISTICS: (as of June 30, 1997)
- --------------------------------------------------
Portfolio Holdings 21
- --------------------------------------------------
Average Maturity 2.5 years
- --------------------------------------------------
Average Duration 1.7 years
- --------------------------------------------------
PERFORMANCE:
The following information illustrates the historical performance of the
Preferred Short-Term Government Securities Fund compared with the MERRILL LYNCH
1-3 YEAR TREASURY INDEX. The Index comprises primarily U.S. Treasury Notes and
Bonds with remaining maturities of one to three years.
Note: Past performance is not necessarily indicative of future results.
Investment return and principal value will fluctuate, so that, when redeemed, an
investor's shares may be worth more or less than their original cost. The
Preferred Short-Term Government Securities Fund's inception date was July 1,
1992. This report will provide ten-year performance history in the future as the
Fund matures.
An index is a fictitious unmanaged portfolio and does not trade or incur any
expenses. An investment fund must outperform its benchmark by the amount of its
management fees and other expenses for its reported performance to match its
benchmark.
<TABLE>
CUMULATIVE TOTAL RETURN:
<CAPTION>
PAST PAST PAST 5 YEARS
6 MONTHS 1 YEAR (SINCE INCEPTION*)
<S> <C> <C> <C>
Preferred Short-Term
Government Securities Fund 2.60% 5.81% 26.06%
ML 1-3 Yr. Treasury Index 2.88% 6.57% 31.11%
* JULY 1, 1992
</TABLE>
<TABLE>
AVERAGE ANNUAL TOTAL RETURN:
<CAPTION>
PAST PAST 5 YEARS
1 YEAR (SINCE INCEPTION*)
<S> <C> <C>
Preferred Short-Term
Government Securities Fund 5.81% 4.74%
ML 1-3 Yr. Treasury Index 6.57% 5.57%
* JULY 1, 1992
</TABLE>
LINE CHART:
A $10,000 INVESTMENT SINCE INCEPTION:
PREFERRED SHORT-TERM GOV'T. SEC. FUND ML 1-3 YR. TREASURY INDEX
7/1/92 10000 10000
12/31/92 10261 10317
6/30/93 10632 10658
12/31/93 10833 10875
6/30/94 10723 10830
12/31/94 10757 10938
6/30/95 11336 11666
12/31/95 11735 12140
6/30/96 11914 12303
12/31/96 12287 12744
6/30/97 12606 13111
<PAGE>
INVESTMENT REVIEW
PREFERRED MONEY MARKET FUND
INVESTMENT OBJECTIVE:
The Preferred Money Market Fund seeks the maximum current income believed
to be consistent with preservation of capital and maintenance of liquidity by
investing in a portfolio of short-term, fixed income instruments.
PORTFOLIO MANAGER PROFILE:
Portfolio Manager: Robert R. "Skip" Johnson
Title: Vice President, J. P. Morgan Investment Management Inc.
Last Five Years' Experience: Portfolio Manager at J. P. Morgan Investment.
Skip has been involved with the management of the Preferred Money Market Fund
since its inception on July 1, 1992.
Education: B.A. - Dartmouth College
DISCUSSION & ANALYSIS:
The Preferred Money Market Fund returned 5.1% for the fiscal year ended June 30,
1997, compared with a return of 4.9% for the Donoghue's Taxable Money Market
Fund Average.
Mixed economic data in the third quarter of 1996, showing strong employment
growth combined with minimal consumer and producer inflation figures, decreased
shorter-term yields and left yields on maturities one year and longer unchanged.
However, during the next two quarters, strong economic growth helped cause
shorter-term yields to rise. Due to strong eco nomic signals and a potential
increase in inflation, the Federal Reserve increased the interest rate from
5.25% to 5.50% in late March. During the second quarter of 1997, slower growth
combined with benign inflation allowed the Federal Reserve to refrain from
additional tightening of monetary policy and counteracted the rise in short-term
yields during the previous two quarters.
Given this environment, active management of the Fund's average maturity within
the middle of the Fund's range (50-60 days) helped the Fund's performance.
Additionally, the Fund's yield was enhanced by investing in coupon securities
(instruments that were originally issued as notes and bonds but now have less
than 13 months left to maturity), commercial paper, agencies and floating rate
notes at the expense of Treasuries. The Fund also increased yield by re-entering
the Japanese bank CD market as yields in that market were once again attractive.
The Fund continued to focus on high quality and highly liquid securities. All
securities are rated A1/P1, AA or better, or of comparable credit quality as
determined by management.
We believe there will be a third quarter 1997 bounce-back in economic growth as
the economy continues to be fundamentally strong with continued easing of
monetary conditions. Consumer demand is likely to stay constant, with jobs
plentiful, consumer confidence strong and stable consumer credit growth.
Consequently, we plan to reduce the Fund's average maturity to the 35- to 45-day
range and will continue to take advantage of the higher yields offered by
floating rate notes, commercial paper and agency sectors given our expectation
that the Fed will raise interest rates before year-end.
- J. P. Morgan Investment Management
<PAGE>
INVESTMENT REVIEW
An investment in the Money Market Fund is neither insured nor guaranteed by the
U.S. Government, and there can be no assurance that the Fund will be able to
maintain a stable Net Asset Value of $1.00 per share.
PERFORMANCE:
The following information illustrates the historical performance of the
Preferred Money Market Fund compared to DONOGHUE'S TAXABLE MONEY MARKET FUND
AVERAGE. This benchmark is used for taxable money market funds.
Note: Past performance is not necessarily indicative of future results.
Investment return and principal value will fluctuate, so that, when redeemed, an
investor's shares may be worth more or less than their original cost. The
Preferred Money Market Fund's inception date was July 1, 1992. This report will
provide ten-year performance history in the future as the Fund matures.
An index is a fictitious unmanaged portfolio and does not trade or incur any
expenses. An investment fund must outperform its benchmark by the amount of its
management fees and other expenses for its reported performance to match its
benchmark.
<TABLE>
CUMULATIVE TOTAL RETURN:
<CAPTION>
PAST PAST PAST 5 YEARS
6 MONTHS 1 YEAR (SINCE INCEPTION*)
<S> <C> <C> <C>
Preferred Money Market Fund 2.51% 5.14% 23.19%+
Donoghue's Taxable Money
Market Fund Average 2.42% 4.92% 22.59%
<FN>
* JULY 1, 1992
+ TOTAL RETURN WOULD HAVE BEEN LOWER IF A PORTION OF
THE MANAGEMENT FEE (0.15%) HAD NOT BEEN WAIVED FOR
THE PERIOD JANUARY 1, 1993 THROUGH OCTOBER 31, 1995.
</FN>
</TABLE>
<TABLE>
AVERAGE ANNUAL TOTAL RETURN:
<CAPTION>
PAST PAST 5 YEARS
1 YEAR (SINCE INCEPTION*)
<S> <C> <C>
Preferred Money Market Fund 5.14% 4.26%+
Donoghue's Taxable Money
Market Fund Average 4.92% 4.16%
<FN>
* JULY 1, 1992
+ TOTAL RETURN WOULD HAVE BEEN LOWER IF A PORTION OF
THE MANAGEMENT FEE (0.15%) HAD NOT BEEN WAIVED FOR
THE PERIOD JANUARY 1, 1993 THROUGH OCTOBER 31, 1995.
</FN>
</TABLE>
LINE CHART:
A $10,000 INVESTMENT SINCE INCEPTION:
DONOGHUE'S TAXABLE MONEY
PREFERRED MONEY MARKET FUND MARKET FUND AVERAGE
7/1/92 10000 10000
12/31/92 10140 10148
6/30/93 10271 10284
12/31/93 10406 10422
6/30/94 10569 10583
12/31/94 10814 10813
6/30/95 11126 11113
12/31/95 11438 11407
6/30/96 11719 11690
12/31/96 12018 11974
6/30/97 12319 12259
<PAGE>
<TABLE>
STATEMENTS OF ASSETS & LIABILITIES
June 30, 1997
<CAPTION>
GROWTH VALUE INTERNATIONAL
<S> <C> <C> <C>
Assets
Investments at value .............................................. $ 451,070,679 $ 345,458,781 $ 249,621,656
Short-term obligations at amortized cost .......................... 8,106,000 26,825,971 13,841,000
Cash .............................................................. 805 1,138
Foreign currency holdings at value ................................ 1,590,239
Receivable for investments sold ................................... 2,912,432
Receivable for fund shares sold ................................... 1,837,238 1,607,522 1,726,572
Dividends and interest receivable ................................. 273,069 81,065 1,047,941
Receivable for open forward foreign
currency contracts
Prepaid expenses and other assets ................................. 534 40
------------- ------------- -------------
Total assets ................................................. 464,200,757 373,973,379 267,828,546
------------- ------------- -------------
Liabilities
Payable for investments purchased ................................. 6,326,207 720,971
Payable for fund shares redeemed .................................. 2,522,809 18,580 1,512,196
Payable for variation margin
Payable for distributions
Accrued:
Management fees ................................................ 278,101 227,478 203,543
Audit fees ..................................................... 20,822 18,233 22,107
Custodian fees ................................................. 9,717 6,788 40,983
Legal fees ..................................................... 7,722 6,388 4,736
Trustees' fees 154
Transfer agent fees ............................................ 8,108 5,952 7,347
Other fees ..................................................... 5,394 16,592 24,114
------------- ------------- -------------
Total liabilities ......................................... 9,178,880 300,011 2,536,151
------------- ------------- -------------
Net assets ........................................................ $ 455,021,877 $ 373,673,368 $ 265,292,395
============= ============= =============
Shares of beneficial interest outstanding ......................... 22,284,278 17,679,128 16,461,492
============= ============= =============
Offering and redemption price per share ........................... $ 20.42 $ 21.14 $ 16.12
============= ============= =============
Composition of Net Assets
Paid-in capital ................................................... $ 265,903,957 $ 204,590,644 $ 198,195,074
Undistributed net investment income ............................... 1,663,903 2,113,109
Accumulated net realized gains (losses) on
investments, futures, forward contracts,
and foreign currency ........................................... 45,338,436 (348,586) 3,486,648
Net unrealized appreciation (depreciation) on:
Investments .................................................... 143,779,484 167,767,407 61,505,536
Futures
Forward contracts ..............................................
Foreign denominated other assets,
liabilities and currency .................................... (7,972)
------------- ------------- -------------
$ 455,021,877 $ 373,673,368 $ 265,292,395
============= ============= =============
Investments and short-term obligations at cost .................... $ 315,397,195 $ 204,517,345 $ 201,957,120
Foreign currency holdings at cost ................................. 1,594,989
<PAGE>
<CAPTION>
ASSET BALANCED
SMALL CAP ALLOCATION
<S> <C> <C> <C>
Assets
Investments at value .............................................. $ 83,416,941 $ 94,203,988 $ 40,586,584
Short-term obligations at amortized cost .......................... 1,244,073 33,593,292 6,718,000
Cash .............................................................. 719 687
Foreign currency holdings at value
Receivable for investments sold ................................... 89,517
Receivable for fund shares sold ................................... 207,580 452,735
Dividends and interest receivable ................................. 92,878 882,557 320,790
Receivable for open forward foreign
currency contracts
Prepaid expenses and other assets ................................. 447
------------ ------------ ------------
Total assets ................................................. 84,961,472 129,133,738 47,715,578
------------ ------------ ------------
Liabilities
Payable for investments purchased ................................. 70,333 800,729
Payable for fund shares redeemed .................................. 3,715
Payable for variation margin ...................................... 44,350
Payable for distributions ......................................... 5,611 26,220
Accrued:
Management fees ................................................ 50,902 73,485 28,672
Audit fees ..................................................... 16,179 20,638 16,409
Custodian fees ................................................. 5,680 14,429 3,664
Legal fees ..................................................... 1,733 2,579 489
Trustees' fees ................................................. 423 0 185
Transfer agent fees ............................................ 2,020 6,115 2,205
Other fees ..................................................... 6,730 7,727 11,774
------------ ------------ ------------
Total liabilities ......................................... 83,667 248,982 890,347
------------ ------------ ------------
Net assets ........................................................ $ 84,877,805 $128,884,756 $ 46,825,231
============ ============ ============
Shares of beneficial interest outstanding ......................... 5,937,231 8,874,193 3,970,509
============ ============ ============
Offering and redemption price per share ........................... $ 14.30 $ 14.52 $ 11.79
============ ============ ============
Composition of Net Assets
Paid-in capital ................................................... $ 62,794,771 $ 98,987,004 $ 40,913,425
Undistributed net investment income ............................... 425,399
Accumulated net realized gains (losses) on
investments, futures, forward contracts,
and foreign currency ........................................... 2,588,134 4,943,169 1,208,674
Net unrealized appreciation (depreciation) on:
Investments .................................................... 19,069,501 23,369,427 4,703,132
Futures ........................................................ 1,585,156
Forward contracts
Foreign denominated other assets,
liabilities and currency
------------ ------------ ------------
$ 84,877,805 $128,884,756 $ 46,825,231
============ ============ ============
Investments and short-term obligations at cost .................... $ 65,591,513 $104,427,853 $ 42,601,452
Foreign currency holdings at cost .................................
<PAGE>
<CAPTION>
FIXED SHORT-TERM MONEY
INCOME GOVERNMENT MARKET
<S> <C> <C> <C>
Assets
Investments at value .............................................. $ 129,874,971 $ 35,014,656
Short-term obligations at amortized cost .......................... 8,742,305 19,301,805 $ 104,370,142
Cash .............................................................. 1,870 908
Foreign currency holdings at value
Receivable for investments sold ................................... 1,336,494
Receivable for fund shares sold ................................... 299,044 82,112 4,910,559
Dividends and interest receivable ................................. 1,337,334 511,140 528,219
Receivable for open forward foreign
currency contracts ............................................. 14,477
Prepaid expenses and other assets ................................. 679 12,364
------------- ------------- -------------
Total assets ................................................. 140,270,001 56,246,886 109,822,192
------------- ------------- -------------
Liabilities
Payable for investments purchased ................................. 1,394,792
Payable for fund shares redeemed .................................. 5,562 895 76,385
Payable for variation margin ...................................... 4,250
Payable for distributions ......................................... 1,004 121 364
Accrued:
Management fees ................................................ 57,045 15,720 27,928
Audit fees ..................................................... 17,064 19,736 16,121
Custodian fees ................................................. 7,947 3,472 3,584
Legal fees ..................................................... 2,330 1,245 1,864
Trustees' fees ................................................. 472 189 238
Transfer agent fees ............................................ 5,537 1,919 4,442
Other fees ..................................................... 10,308 1,388 9,120
------------- ------------- -------------
Total liabilities ......................................... 111,519 1,439,477 140,046
------------- ------------- -------------
Net assets ........................................................ $ 140,158,482 $ 54,807,409 $ 109,682,146
============= ============= =============
Shares of beneficial interest outstanding ......................... 13,692,130 5,604,004 109,682,146
============= ============= =============
Offering and redemption price per share ........................... $ 10.24 $ 9.78 $ 1.00
============= ============= =============
Composition of Net Assets
Paid-in capital ................................................... $ 138,480,527 $ 55,674,086 $ 109,682,146
Undistributed net investment income ............................... 89,002
Accumulated net realized gains (losses) on
investments, futures, forward contracts,
and foreign currency ........................................... 463,565 (842,449)
Net unrealized appreciation (depreciation) on:
Investments .................................................... 1,113,461 (24,228)
Futures ........................................................ (2,558)
Forward contracts .............................................. 14,477
Foreign denominated other assets,
liabilities and currency .................................... 8
------------- ------------- -------------
$ 140,158,482 $ 54,807,409 $ 109,682,146
============= ============= =============
Investments and short-term obligations at cost .................... $ 137,503,815 $ 54,340,689 $ 104,370,142
Foreign currency holdings at cost..................................
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF OPERATIONS
<CAPTION>
YEAR ENDED
JUNE 30, 1997 GROWTH VALUE INTERNATIONAL
<S> <C> <C> <C>
Investment Income
Dividends ..................................................... $ 2,730,618 $ 4,405,054 $ 8,429,222
Interest ...................................................... 166,772 1,535,458 761,551
------------- ------------- -------------
2,897,390 5,940,512 9,190,773
Less foreign taxes withheld at source ......................... (84,070) (14,687) (912,582)
------------- ------------- -------------
Total income ............................................... 2,813,320 5,925,825 8,278,191
------------- ------------- -------------
Expenses
Management fees ............................................... 2,983,971 2,331,391 2,020,096
Audit fees .................................................... 34,000 30,000 35,000
Custodian fees ................................................ 117,000 78,000 434,000
Registration fees ............................................. 15,000 24,000 34,000
Legal fees .................................................... 29,000 26,000 18,000
Trustees' fees ................................................ 13,000 12,000 8,000
Transfer agent fees ........................................... 93,000 79,000 73,000
Insurance fees ................................................ 15,000 11,000 6,000
Other expenses ................................................ 38,000 34,000 19,000
------------- ------------- -------------
Total expenses before waiver or reimbursement .............. 3,337,971 2,625,391 2,647,096
------------- ------------- -------------
Expenses waived or borne by advisor (Note 2) ..................
------------- ------------- -------------
Net investment income (loss) ............................ (524,651) 3,300,434 5,631,095
------------- ------------- -------------
Net Realized and Unrealized Gain (Loss) on
Investments, Futures, Forward Contracts
and Foreign Currency
Net realized gain (loss) on:
Investments ................................................ 65,171,565 1,849,729 4,868,619
Futures ....................................................
Forward contracts ..........................................
Foreign denominated other assets,
liabilities and currency ............................... (378,463)
Change in net unrealized appreciation
(depreciation) on:
Investments ................................................ 36,641,616 83,847,734 38,165,006
Futures
Forward contracts
Foreign denominated other assets,
liabilities and currency ................................ (2,909)
------------- ------------- -------------
Net gain ........................................... 101,813,181 85,697,463 42,652,253
------------- ------------- -------------
Net increase in net assets
resulting from operations .................................. $ 101,288,530 $ 88,997,897 $ 48,283,348
============= ============= =============
<PAGE>
<CAPTION>
YEAR ENDED ASSET BALANCED
JUNE 30, 1997 SMALL CAP ALLOCATION
<S> <C> <C> <C>
Investment Income
Dividends ..................................................... $ 952,524 $ 1,012,838 $ 373,460
Interest ...................................................... 80,730 3,726,405 1,233,799
------------ ------------ ------------
1,033,254 4,739,243 1,607,259
Less foreign taxes withheld at source ......................... (5,606) (1,238)
------------ ------------ ------------
Total income ............................................... 1,033,254 4,733,637 1,606,021
------------ ------------ ------------
Expenses
Management fees ............................................... 507,435 773,756 302,987
Audit fees .................................................... 21,000 32,000 27,000
Custodian fees ................................................ 75,000 180,000 51,000
Registration fees ............................................. 17,000 18,000 22,000
Legal fees .................................................... 6,000 10,000 3,000
Trustees' fees ................................................ 3,000 4,000 2,000
Transfer agent fees ........................................... 22,000 56,000 21,000
Insurance fees ................................................ 2,000 4,000 500
Other expenses ................................................ 5,000 14,000 5,000
------------ ------------ ------------
Total expenses before waiver or reimbursement .............. 658,435 1,091,756 434,487
------------ ------------ ------------
Expenses waived or borne by advisor (Note 2) .................. (69,005) (5,876)
------------ ------------ ------------
Net investment income (loss) ............................ 443,824 3,641,881 1,177,410
------------ ------------ ------------
Net Realized and Unrealized Gain (Loss) on
Investments, Futures, Forward Contracts
and Foreign Currency
Net realized gain (loss) on:
Investments ................................................ 2,582,310 5,536,255 1,725,757
Futures .................................................... 1,296,282
Forward contracts
Foreign denominated other assets,
liabilities and currency
Change in net unrealized appreciation (depreciation) on:
Investments ................................................ 16,470,111 9,423,939 4,509,033
Futures .................................................... 1,297,749
Forward contracts
Foreign denominated other assets,
liabilities and currency
------------ ------------ ------------
Net gain ........................................... 19,052,421 17,554,225 6,234,790
------------ ------------ ------------
Net increase in net assets
resulting from operations .................................. $ 19,496,245 $ 21,196,106 $ 7,412,200
============ ============ ============
<PAGE>
<CAPTION>
YEAR ENDED FIXED SHORT-TERM MONEY
JUNE 30, 1997 INCOME GOVERNMENT MARKET
<S> <C> <C> <C>
Investment Income
Dividends
Interest ...................................................... $ 9,231,314 $ 3,259,026 $ 5,514,501
----------- ----------- -----------
9,231,314 3,259,026 5,514,501
Less foreign taxes withheld at source
----------- ----------- -----------
Total income ............................................... 9,231,314 3,259,026 5,514,501
----------- ----------- -----------
Expenses
Management fees ............................................... 724,846 187,517 301,906
Audit fees .................................................... 29,000 31,000 25,000
Custodian fees ................................................ 102,000 44,000 58,000
Registration fees ............................................. 20,000 13,000 22,000
Legal fees .................................................... 11,000 6,000 9,000
Trustees' fees ................................................ 5,000 2,000 4,000
Transfer agent fees ........................................... 56,000 26,000 48,000
Insurance fees ................................................ 6,000 2,000 3,000
Other expenses ................................................ 16,000 23,000 11,000
----------- ----------- -----------
Total expenses before waiver or reimbursement .............. 969,846 334,517 481,906
----------- ----------- -----------
Expenses waived or borne by advisor (Note 2)
----------- ----------- -----------
Net investment income (loss) ............................ 8,261,468 2,924,509 5,032,595
----------- ----------- -----------
Net Realized and Unrealized Gain (Loss) on
Investments, Futures, Forward Contracts
and Foreign Currency
Net realized gain (loss) on:
Investments ................................................ 205,772 (121,577)
Futures .................................................... 212,323
Forward contracts .......................................... 493,121
Foreign denominated other assets,
liabilities and currency ............................... 4,577
Change in net unrealized appreciation
(depreciation) on:
Investments ................................................ 1,650,442 246,617
Futures .................................................... (16,233)
Forward contracts .......................................... 14,477
Foreign denominated other assets,
liabilities and currency ................................ 8
----------- ----------- -----------
Net gain ........................................... 2,564,487 125,040
----------- ----------- -----------
Net increase in net assets
resulting from operations .................................. $10,825,955 $ 3,049,549 $ 5,032,595
=========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
GROWTH VALUE
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
6/30/97 6/30/96 6/30/97 6/30/96
<S> <C> <C> <C> <C>
Increase (decrease) in net assets
Operations:
Net investment income (loss) ............................... ($ 524,651) ($ 656,447) $ 3,300,434 $ 2,961,886
Net realized gain (loss) on:
Investments ............................................ 65,171,565 45,847,473 1,849,729 11,101,033
Futures ................................................
Forward contracts ......................................
Foreign denominated other assets,
liabilities and currency
Change in net unrealized appreciation (depreciation) on:
Investments ........................................... 36,641,616 13,169,169 83,847,734 37,625,337
Futures ...............................................
Forward contracts .....................................
Foreign denominated other assets,
liabilities and currency .........................
------------- ------------- ------------- -------------
Net increase in net assets
resulting from operations ................... 101,288,530 58,360,195 88,997,897 51,688,256
------------- ------------- ------------- -------------
Distributions to shareholders from:
Net investment income ................................. (171,060) (3,256,687) (3,049,939)
In excess of net investment income
Net realized gains .................................... (54,170,251) (12,083,363) (9,329,095) (4,345,798)
------------- ------------- ------------- -------------
In excess of realized gains ........................... (368,409)
(54,170,251) (12,254,423) (12,954,191) (7,395,737)
------------- ------------- ------------- -------------
Fund share transactions:
Receipts for shares sold .............................. 111,186,933 135,580,181 128,368,956 82,411,934
Value of distributions reinvested ..................... 53,884,207 12,181,842 12,912,303 7,390,214
Cost of shares redeemed ............................... (168,855,688) (156,772,349) (111,233,290) (79,191,337)
------------- ------------- ------------- -------------
Net increase (decrease) in net assets
from fund share transactions ..................... (3,784,548) (9,010,326) 30,047,969 10,610,811
------------- ------------- ------------- -------------
Total increase ............................. 43,333,731 37,095,446 106,091,675 54,903,330
Net assets
Beginning of year ..................................... 411,688,146 374,592,700 267,581,693 212,678,363
------------- ------------- ------------- -------------
End of year ........................................... $ 455,021,877 $ 411,688,146 $ 373,673,368 $ 267,581,693
============= ============= ============= =============
Undistributed net investment
income at end of year ............................ $ 1,663,903 $ 1,639,979
============= ============= ============= =============
Number of fund shares
Sold .................................................. 5,970,365 7,749,419 6,922,277 5,426,357
Issued for distributions reinvested ................... 3,096,761 720,817 708,598 496,321
Redeemed .............................................. (9,014,649) (8,758,721) (6,019,884) (5,241,207)
------------- ------------- ------------- -------------
Net increase (decrease) in shares outstanding ....... 52,477 (288,485) 1,610,991 681,471
Outstanding at:
Beginning of year ..................................... 22,231,801 22,520,286 16,068,137 15,386,666
------------- ------------- ------------- -------------
End of year ........................................... 22,284,278 22,231,801 17,679,128 16,068,137
============= ============= ============= =============
<PAGE>
<CAPTION>
INTERNATIONAL SMALL CAP
YEAR YEAR YEAR PERIOD++
ENDED ENDED ENDED ENDED
6/30/97 6/30/96 6/30/97 6/30/96
<S> <C> <C> <C> <C>
Increase (decrease) in net assets
Operations:
Net investment income (loss) .............................. $ 5,631,095 $ 2,255,455 $ 443,824 $ 175,243
Net realized gain (loss) on:
Investments ........................................... 4,868,619 6,002,869 2,582,310 872,024
Futures ...............................................
Forward contracts .....................................
Foreign denominated other assets,
liabilities and currency ........................ (378,463) (142,034)
Change in net unrealized appreciation
(depreciation) on:
Investments .......................................... 38,165,006 10,137,240 16,470,111 2,599,390
Futures ..............................................
Forward contracts ....................................
Foreign denominated other assets,
liabilities and currency ........................ (2,909) (11,109)
------------- ------------- ------------- -------------
Net increase in net assets
resulting from operations .................. 48,283,348 18,242,421 19,496,245 3,646,657
------------- ------------- ------------- -------------
Distributions to shareholders from:
Net investment income ................................ (5,001,023) (1,800,796) (138,649) (40,000)
In excess of net investment income
Net realized gains ................................... (3,628,376) (126,594) (872,803)
------------- ------------- ------------- -------------
In excess of realized gains ..........................
(8,629,399) (1,927,390) (1,011,452) (40,000)
------------- ------------- ------------- -------------
Fund share transactions:
Receipts for shares sold ............................. 132,359,314 68,424,541 34,854,928 45,871,596
Value of distributions reinvested .................... 8,604,550 1,924,529 1,011,452 40,000
Cost of shares redeemed .............................. (72,952,827) (47,252,730) (15,166,080) (3,825,541)
------------- ------------- ------------- -------------
Net increase (decrease) in net assets
from fund share transactions .................... 68,011,037 23,096,340 20,700,300 42,086,055
------------- ------------- ------------- -------------
Total increase ............................ 107,664,986 39,411,371 39,185,093 45,692,712
Net assets
Beginning of year .................................... 157,627,409 118,216,038 45,692,712 --
------------- ------------- ------------- -------------
End of year .......................................... $ 265,292,395 $ 157,627,409 $ 84,877,805 $ 45,692,712
============= ============= ============= =============
Undistributed net investment
income at end of year ........................... $ 2,113,109 $ 1,729,622 $ 425,399 $ 138,773
============= ============= ============= =============
Number of fund shares
Sold ................................................. 9,319,513 5,347,892 3,056,514 4,408,434
Issued for distributions reinvested .................. 619,016 153,348 82,010 3,842
Redeemed ............................................. (4,965,744) (3,673,667) (1,263,669) (349,900)
------------- ------------- ------------- -------------
Net increase (decrease) in shares outstanding ...... 4,972,785 1,827,573 1,874,855 4,062,376
Outstanding at:
Beginning of year .................................... 11,488,707 9,661,134 4,062,376 --
------------- ------------- ------------- -------------
End of year .......................................... 16,461,492 11,488,707 5,937,231 4,062,376
============= ============= ============= =============
<PAGE>
<CAPTION>
ASSET ALLOCATION
YEAR YEAR
ENDED ENDED
6/30/97 6/30/96
<S> <C> <C>
Increase (decrease) in net assets
Operations:
Net investment income (loss) ................................ $ 3,641,881 $ 2,818,557
Net realized gain (loss) on:
Investments ............................................. 5,536,255 3,533,395
Futures ................................................. 1,296,282 3,047,390
Forward contracts........................................
Foreign denominated other assets,
liabilities and currency...........................
Change in net unrealized appreciation (depreciation) on:
Investments ............................................ 9,423,939 4,847,237
Futures ................................................ 1,297,749 (168,975)
Forward contracts ......................................
Foreign denominated other assets,
liabilities and currency...........................
------------- -------------
Net increase in net assets
resulting from operations .................... 21,196,106 14,077,604
------------- -------------
Distributions to shareholders from:
Net investment income .................................. (3,641,881) (2,806,264)
In excess of net investment income
Net realized gains ..................................... (4,019,339) (5,044,890)
------------- -------------
In excess of realized gains.............................
(7,661,220) (7,851,154)
------------- -------------
Fund share transactions:
Receipts for shares sold ............................... 29,650,410 29,687,309
Value of distributions reinvested ...................... 7,651,646 7,845,238
Cost of shares redeemed ................................ (18,841,534) (24,614,667)
------------- -------------
Net increase (decrease) in net assets
from fund share transactions ...................... 18,460,522 12,917,880
------------- -------------
Total increase .............................. 31,995,408 19,144,330
Net assets
Beginning of year ...................................... 96,889,348 77,745,018
------------- -------------
End of year ............................................ $ 128,884,756 $ 96,889,348
============= =============
Undistributed net investment
income at end of year..............................
============= =============
Number of fund shares
Sold ................................................... 2,188,945 2,326,968
Issued for distributions reinvested .................... 559,132 623,923
Redeemed ............................................... (1,394,051) (1,923,331)
------------- -------------
Net increase (decrease) in shares outstanding ........ 1,354,026 1,027,560
Outstanding at:
Beginning of year ...................................... 7,520,167 6,492,607
------------- -------------
End of year ............................................ 8,874,193 7,520,167
============= =============
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
BALANCED FIXED INCOME
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
6/30/97 6/30/96 6/30/97 6/30/96
<S> <C> <C> <C> <C>
Increase (decrease) in net assets
Operations:
Net investment income ................................. $ 1,177,410 $ 98,638 $ 8,261,468 $ 4,053,370
Net realized gain (loss) on:
Investments ....................................... 1,725,757 100,697 205,772 797,650
Futures ........................................... 212,323 23,252
Forward contracts ................................. 493,121
Foreign denominated other assets,
liabilities and currency .................... 4,577
Change in net unrealized appreciation
(depreciation) on:
Investments ...................................... 4,509,033 194,099 1,650,442 (2,116,758)
Futures .......................................... (16,233) 13,675
Forward contracts ................................ 14,477
Foreign denominated other assets,
liabilities and currency .................... 8
------------- ------------- ------------- -------------
Net increase in net assets
resulting from operations .............. 7,412,200 393,434 10,825,955 2,771,189
------------- ------------- ------------- -------------
Distributions to shareholders from:
Net investment income ............................ (1,177,410) (98,638) (8,266,883) (4,053,370)
In excess of net investment income ............... (46,028)
Net realized gains ............................... (584,308) (30,072) (463,056) (317,329)
In excess of realized gains
------------- ------------- ------------- -------------
(1,761,718) (174,738) (8,729,939) (4,370,699)
------------- ------------- ------------- -------------
Fund share transactions:
Receipts for shares sold ......................... 37,539,627 4,026,951 36,814,668 65,353,092
Value of distributions reinvested ................ 1,622,241 22,047 8,716,605 4,352,562
Cost of shares redeemed .......................... (1,993,112) (261,701) (18,653,299) (14,833,551)
------------- ------------- ------------- -------------
Net increase in net assets from fund
share transactions .......................... 37,168,756 3,787,297 26,877,974 54,872,103
------------- ------------- ------------- -------------
Total increase ........................ 42,819,238 4,005,993 28,973,990 53,272,593
Net assets
Beginning of year ................................ 4,005,993 -- 111,184,492 57,911,899
------------- ------------- ------------- -------------
End of year ...................................... $ 46,825,231 $ 4,005,993 $ 140,158,482 $ 111,184,492
============= ============= ============= =============
Undistributed net investment
income at end of year ...................... $ 89,002
============= ============= ============= =============
Number of fund shares
Sold ............................................. 3,629,693 397,260 3,646,778 6,413,968
Issued for distributions reinvested .............. 144,705 2,073 856,477 422,744
Redeemed ......................................... (178,526) (24,696) (1,832,384) (1,440,043)
------------- ------------- ------------- -------------
Net increase in shares outstanding ............. 3,595,872 374,637 2,670,871 5,396,669
Outstanding at:
Beginning of year ................................ 374,637 -- 11,021,259 5,624,590
------------- ------------- ------------- -------------
End of year ...................................... 3,970,509 374,637 13,692,130 11,021,259
============= ============= ============= =============
<PAGE>
<CAPTION>
SHORT-TERM GOVERNMENT MONEY MARKET
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
6/30/97 6/30/96 6/30/97 6/30/96
<S> <C> <C> <C> <C>
Increase (decrease) in net assets
Operations:
Net investment income ................................. $ 2,924,509 $ 2,066,204 $ 5,032,595 $ 4,094,056
Net realized gain (loss) on:
Investments ....................................... (121,577) 217,718
Futures ...........................................
Forward contracts .................................
Foreign denominated other assets,
liabilities and currency ....................
Change in net unrealized appreciation
(depreciation) on:
Investments ...................................... 246,617 (540,502)
Futures ..........................................
Forward contracts ................................
Foreign denominated other assets,
liabilities and currency ....................
------------- ------------- ------------- -------------
Net increase in net assets
resulting from operations .............. 3,049,549 1,743,420 5,032,595 4,094,056
------------- ------------- ------------- -------------
Distributions to shareholders from:
Net investment income ............................ (2,924,573) (2,066,140) (5,032,595) (4,094,056)
In excess of net investment income ...............
Net realized gains ...............................
In excess of realized gains ...........................
------------- ------------- ------------- -------------
(2,924,573) (2,066,140) (5,032,595) (4,094,056)
------------- ------------- ------------- -------------
Fund share transactions:
Receipts for shares sold ......................... 5,554,290 23,481,754 193,156,175 150,542,997
Value of distributions reinvested ................ 2,922,565 2,064,082 5,006,772 4,096,124
Cost of shares redeemed .......................... (5,549,739) (5,588,970) (178,963,236) (143,742,439)
------------- ------------- ------------- -------------
Net increase in net assets from fund
share transactions .......................... 2,927,116 19,956,866 19,199,711 10,896,682
------------- ------------- ------------- -------------
Total increase ........................ 3,052,092 19,634,146 19,199,711 10,896,682
Net assets
Beginning of year ................................ 51,755,317 32,121,171 90,482,435 79,585,753
------------- ------------- ------------- -------------
End of year ...................................... $ 54,807,409 $ 51,755,317 $ 109,682,146 $ 90,482,435
============= ============= ============= =============
Undistributed net investment
income at end of year ...................... $ 64
============= ============= ============= =============
Number of fund shares
Sold ............................................. 567,913 2,384,848 193,156,175 150,542,997
Issued for distributions reinvested .............. 299,167 210,694 5,006,772 4,096,124
Redeemed ......................................... (567,113) (570,108) (178,963,236) (143,742,439)
------------- ------------- ------------- -------------
Net increase in shares outstanding ............. 299,967 2,025,434 19,199,711 10,896,682
Outstanding at:
Beginning of year ................................ 5,304,037 3,278,603 90,482,435 79,585,753
------------- ------------- ------------- -------------
End of year ...................................... 5,604,004 5,304,037 109,682,146 90,482,435
============= ============= ============= =============
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
(SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT THE YEAR)
<CAPTION>
Income (Loss) From Investment Operations
Net Total
Net Asset Net Realized Net Income
Value, Investment and (Loss) from
Beginning Income Unrealized Investment
of Year (Loss) Gain (Loss) Operations
<S> <C> <C> <C> <C>
PREFERRED GROWTH FUND
Year Ended June 30,
1993 $10.00 $0.01 $2.42 $2.43
1994 12.42 0.01 0.03 0.04
1995 12.46 0.01 4.24 4.25
1996 16.63 0.00 2.44 2.44
1997 18.52 0.00 4.76 4.76
PREFERRED VALUE FUND
Year Ended June 30,
1993 10.00 0.19 1.44 1.63
1994 11.52 0.19 (0.12) 0.07
1995 11.33 0.21 2.62 2.83
1996 13.82 0.20 3.13 3.33
1997 16.65 0.19 5.10 5.29
PREFERRED
INTERNATIONAL FUND
Year Ended June 30,
1993 10.00 0.15 (0.53) (0.38)
1994 9.59 0.08 2.47 2.55
1995 12.02 0.18 0.60 0.78
1996 12.24 0.19 1.47 1.66
1997 13.72 0.33 2.67 3.00
PREFERRED SMALL CAP FUND (Commenced
investment operations on
November 1, 1995)
Period Ended June 30,
1996+ 10.00 0.05 1.22 1.27
1997 $11.25 $0.06 $3.18 $3.24
<PAGE>
<CAPTION>
Distributions
Distributions Distributions
Distributions in Excess from Net Distributions
from Net of Net Realized in Excess
Investment Investment Gains on of Realized Total
Income Income Investments Gains Distributions
<S> <C> <C> <C> <C> <C>
PREFERRED GROWTH FUND
Year Ended June 30,
1993 $(0.01) - $ - $ - $(0.01)
1994 - - - - -
1995 (0.02) - (0.06) - (0.08)
1996 (0.01) - (0.54) - (0.55)
1997 - - (2.86) - (2.86)
PREFERRED VALUE FUND
Year Ended June 30,
1993 (0.11) - - - (0.11)
1994 (0.16) - (0.10) - (0.26)
1995 (0.20) - (0.14) - (0.34)
1996 (0.21) - (0.29) - (0.50)
1997 (0.20) - (0.58) (0.02) (0.80)
PREFERRED
INTERNATIONAL FUND
Year Ended June 30,
1993 (0.03) - - - (0.03)
1994 (0.07) - (0.05) - (0.12)
1995 (0.13) - (0.26) (0.17) (0.56)
1996 (0.17) - (0.01) - (0.18)
1997 (0.35) - (0.25) - (0.60)
PREFERRED SMALL CAP FUND
(Commenced investment operations
on November 1, 1995)
Period Ended June 30,
1996+ (0.02) - - - (0.02)
1997 $(0.03) - $(0.16) $ - $(0.19)
<PAGE>
<CAPTION>
Net Asset Total Net
Value, Return at Assets,
End of Net Asset End of
Year Value1 Year
<S> <C> <C> <C>
PREFERRED GROWTH FUND
Year Ended June 30,
1993 $12.42 24.25% $117,706,665
1994 12.46 0.34% 171,467,064
1995 16.63 34.21% 374,592,700
1996 18.52 14.96% 411,688,146
1997 20.42 28.57% 455,021,877
PREFERRED VALUE FUND
Year Ended June 30,
1993 11.52 16.37% 121,511,090
1994 11.33 0.60% 121,088,130
1995 13.82 25.72% 212,678,363
1996 16.65 24.49% 267,581,693
1997 21.14 32.62% 373,673,368
PREFERRED
INTERNATIONAL FUND
Year Ended June 30,
1993 9.59 (3.77%) 39,126,841
1994 12.02 26.66% 94,933,414
1995 12.24 6.70% 118,216,038
1996 13.72 13.70% 157,627,409
1997 16.12 22.50% 265,292,395
PREFERRED SMALL CAP FUND
(Commenced investment operations
on November 1, 1995)
Period Ended June 30,
1996+ 11.25 12.67%*++ 45,692,712
1997 $14.30 29.00%* $84,877,805
<PAGE>
<CAPTION>
Ratios to Average Net Assets
Operating
Expenses Net
Before Investment Portfolio Average
Operating Voluntary Income Turnover Brokerage
Expenses Waiver (Loss) Rate Commissions2
<S> <C> <C> <C> <C> <C>
PREFERRED GROWTH FUND
Year Ended June 30,
1993 1.00% - 0.07% 58.12%
1994 0.91% - 0.13% 51.56%
1995 0.87% - 0.13% 55.32%
1996 0.86% - (0.16%) 75.24% N/A
1997 0.84% - (0.13%) 58.31% $0.060
PREFERRED VALUE FUND
Year Ended June 30,
1993 0.96% - 1.79% 17.77%
1994 0.93% - 1.64% 11.95%
1995 0.89% - 1.95% 29.02%
1996 0.85% - 1.23% 17.04% N/A
1997 0.85% - 1.06% 7.23% $0.058
PREFERRED
INTERNATIONAL FUND
Year Ended June 30,
1993 1.60% - 1.83% 16.21%
1994 1.38% - 1.37% 27.78%
1995 1.32% - 1.65% 29.47%
1996 1.31% - 1.64% 19.61% N/A
1997 1.25% - 2.66% 13.16% $0.030
PREFERRED SMALL
CAP FUND
(Commenced investment
operations on November 1, 1995)
Period Ended June 30,
1996+ 0.88%+++ 1.23%+++ 0.75%+++ 65.70%++ $0.047
1997 0.88% 0.98% 0.66% 104.45% $0.048
<FN>
1 Total return at net asset value assumes reinvestment of dividends and capital
gains distributions.
2 For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for trades on which
commissions are charged. Small Cap was the only Fund required to disclose this
information for the fiscal year ended June 30, 1996.
*Total return for the Small Cap Fund would have been lower if a portion of the
fees had not been waived by the manager.
+ Eight-month period ended June 30, 1996.
++ Not annualized
+++ Annualized
</FN>
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
(SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT THE YEAR)
<CAPTION>
Income (Loss) From Investment Operations
Net Total
Net Asset Net Realized Net Income
Value, Investment and (Loss) from
Beginning Income Unrealized Investment
of Year (Loss) Gain (Loss) Operations
<S> <C> <C> <C> <C>
PREFERRED ASSET
ALLOCATION FUND
Year Ended June 30,
1993 $10.00 $0.34 $0.99 $1.33
1994 10.90 0.30 (0.42) (0.12)
1995 10.27 0.38 1.79 2.17
1996 11.97 0.40 1.72 2.12
1997 12.88 0.44 2.17 2.61
PREFERRED
BALANCED FUND
Year Ended June 30,
1996 10.00 0.41 0.78 1.19
1997 10.69 0.30 1.25 1.55
PREFERRED FIXED
INCOME FUND
Year Ended June 30,
1993 10.00 0.51 0.71 1.22
1994 10.60 0.47 (0.50) (0.03)
1995 9.80 0.58 0.50 1.08
1996 10.30 0.58 (0.16) 0.42
1997 10.09 0.64 0.19 0.83
PREFERRED SHORT-TERM
GOVERNMENT
SECURITIES FUND
Year Ended June 30,
1993 10.00 0.39 0.23 0.62
1994 10.08 0.37 (0.29) 0.08
1995 9.77 0.51 0.03 0.54
1996 9.80 0.53 (0.04) 0.49
1997 9.76 0.53 0.02 0.55
PREFERRED MONEY
MARKET FUND
Year Ended June 30,
1993 1.00 0.03 - 0.03
1994 1.00 0.03 - 0.03
1995 1.00 0.05 - 0.05
1996 1.00 0.05 - 0.05
1997 $1.00 $0.05 $ - $0.05
<PAGE>
<CAPTION>
Distributions
Distributions Distributions
Distributions in Excess from Net Distributions
from Net of Net Realized in Excess
Investment Investment Gains on of Realized Total
Income Income Investments Gains Distributions
<S> <C> <C> <C> <C> <C>
PREFERRED ASSET
ALLOCATION FUND
Year Ended June 30,
1993 $(0.34) $ - $(0.09) $ - $(0.43)
1994 (0.30) - (0.21) - (0.51)
1995 (0.38) - (0.09) - (0.47)
1996 (0.40) - (0.81) - (1.21)
1997 (0.44) - (0.53) - (0.97)
PREFERRED
BALANCED FUND
Year Ended June 30,
1996 (0.28) (0.13) (0.09) - (0.50)
1997 (0.30) - (0.15) - (0.45)
PREFERRED FIXED
INCOME FUND
Year Ended June 30,
1993 (0.51) - (0.11) - (0.62)
1994 (0.47) - (0.14) (0.16) (0.77)
1995 (0.58) - - - (0.58)
1996 (0.58) - (0.05) - (0.63)
1997 (0.64) - (0.04) - (0.68)
PREFERRED SHORT-TERM
GOVERNMENT
SECURITIES FUND
Year Ended June 30,
1993 (0.39) - (0.15) - (0.54)
1994 (0.37) - - (0.02) (0.39)
1995 (0.51) - - - (0.51)
1996 (0.53) - - - (0.53)
1997 (0.53) - - - (0.53)
PREFERRED MONEY
MARKET FUND
Year Ended June 30,
1993 (0.03) - - - (0.03)
1994 (0.03) - - - (0.03)
1995 (0.05) - - - (0.05)
1996 (0.05) - - - (0.05)
1997 $(0.05) $ - $ - $ - $(0.05)
<PAGE>
<CAPTION>
Net Asset Total Net
Value, Return at Assets,
End of Net Asset End of
Year Value1 Year
<S> <C> <C> <C>
PREFERRED ASSET
ALLOCATION FUND
Year Ended June 30,
1993 $10.90 13.57% $48,420,381
1994 10.27 (1.28%) 58,961,139
1995 11.97 21.70% 77,745,018
1996 12.88 18.23% 96,889,348
1997 14.52 21.01% 128,884,756
PREFERRED
BALANCED FUND
Year Ended June 30,
1996 10.69 12.11%* 4,005,993
1997 11.79 14.82%* 46,825,231
PREFERRED FIXED
INCOME FUND
Year Ended June 30,
1993 10.60 12.59% 35,889,454
1994 9.80 (0.46%) 45,872,668
1995 10.30 11.48% 57,911,899
1996 10.09 4.12% 111,184,492
1997 10.24 8.39% 140,158,482
PREFERRED SHORT-TERM
GOVERNMENT
SECURITIES FUND
Year Ended June 30,
1993 10.08 6.32% 27,027,485
1994 9.77 0.86% 30,271,535
1995 9.80 5.71% 32,121,171
1996 9.76 5.10% 51,755,317
1997 9.78 5.81% 54,807,409
PREFERRED MONEY
MARKET FUND
Year Ended June 30,
1993 1.00 2.71%* 18,146,496
1994 1.00 2.91%* 45,605,598
1995 1.00 5.27%* 79,585,753
1996 1.00 5.32%* 90,482,435
1997 $1.00 5.14% $109,682,146
<PAGE>
<CAPTION>
Ratios to Average Net Assets
Operating
Expenses Net
Before Investment Portfolio Average
Operating Voluntary Income Turnover Brokerage
Expenses Waiver (Loss) Rate Commissions2
<S> <C> <C> <C> <C> <C>
PREFERRED ASSET
ALLOCATION FUND
Year Ended June 30,
1993 1.27% - 3.25% 34.10%
1994 1.25% - 2.76% 24.71%
1995 1.11% - 3.52% 18.27%
1996 1.04% - 3.21% 38.25% N/A
1997 0.99% - 3.29% 27.73% $0.032
PREFERRED
BALANCED FUND
Year Ended June 30,
1996 1.15%** 4.37%** 2.77% 48.03% N/A
1997 1.06%** 1.08%** 2.91% 45.20% $0.058
PREFERRED FIXED
INCOME FUND
Year Ended June 30,
1993 1.05% - 4.91% 316.06%
1994 0.97% - 4.53% 254.92%
1995 0.95% - 5.94% 330.55%
1996 0.93% - 5.65% 313.51% N/A
1997 0.74% - 6.32% 105.98% N/A
PREFERRED SHORT-TERM
GOVERNMENT
SECURITIES FUND
Year Ended June 30,
1993 0.78% - 3.87% 268.36%
1994 0.74% - 3.75% 134.34%
1995 0.71% - 5.27% 256.44%
1996 0.66% - 5.37% 79.04% N/A
1997 0.63% - 5.49% 183.73% N/A
PREFERRED MONEY
MARKET FUND
Year Ended June 30,
1993 0.80% 0.87% 2.67% N/A
1994 0.53% 0.68% 2.97% N/A
1995 0.39% 0.54% 5.24% N/A
1996 0.49% 0.54% 5.25% N/A N/A
1997 0.48% - 5.03% N/A N/A
<FN>
1 Total return at net asset value assumes reinvestment of dividends and capital
gains distributions.
2 For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for trades on which
commissions are charged. Small Cap was the only Fund required to disclose this
information for the fiscal year ended June 30, 1996.
*Total return for the Balanced and Money Market Funds would have been lower if a
portion of the fees had not been capped or waived by the manager.
**Effective July 1, 1995, and until further notice, the manager has agreed to
cap its expense ratio at 1.15%.
</FN>
</TABLE>
<PAGE>
<TABLE>
SCHEDULES OF INVESTMENTS
<CAPTION>
PREFERRED GROWTH FUND
COMMON STOCK - 99.13% SHARES VALUE
<S> <C> <C>
AEROSPACE - 2.71%
Boeing Co 232,400 $12,331,725
-----------
BANKS - 2.61%
Chase Manhattan Corp 79,596 7,725,787
MBNA Corp 113,250 4,147,781
-----------
11,873,568
-----------
COMPUTER SOFTWARE - 3.97%
Microsoft Corp * 65,000 8,214,375
Platinum Technology Inc * 277,000 3,670,250
SAP Aktiengesellschaft ADR 89,600 6,198,385
-----------
18,083,010
-----------
CONSUMER PRODUCTS - 3.30%
Avon Products Inc 77,700 5,482,706
Gillette Co 100,800 9,550,800
-----------
15,033,506
-----------
DISCOUNT & FASHION RETAILING - 8.55%
Dollar General Corp 191,168 7,168,800
Gap Inc 170,200 6,616,525
Gucci Group NV 82,700 5,323,813
Home Depot Inc 77,233 5,324,250
Kohls Corp * 139,700 7,395,369
Sears Roebuck & Co 68,200 3,665,750
Tommy Hilfiger Corp * 84,600 3,399,863
-----------
38,894,370
-----------
ELECTRICAL & ELECTRONICS - 10.97%
Diebold Inc 235,105 9,169,095
Intel Corp 68,800 9,756,700
KLA Tencor Corp * 150,700 7,346,625
LSI Logic Corp * 202,640 6,484,480
Symbol Technologies Inc * 152,550 5,129,494
Texas Instruments Inc 94,600 7,952,313
Xilinx Inc * 82,900 4,067,281
-----------
49,905,988
-----------
FINANCE-OTHER - 4.28%
Morgan Stanley Group Inc 195,620 8,423,886
Schwab (Charles) Corp 119,200 4,849,950
Washington Mutual Inc 103,500 6,184,125
-----------
19,457,961
-----------
FOOD - .88%
McDonalds Corp 82,800 4,000,275
-----------
FUEL - 3.49%
Amerada Hess Corp 97,200 5,400,675
Schlumberger Ltd 84,000 10,500,000
-----------
15,900,675
-----------
<PAGE>
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
HEALTH CARE - 12.36%
Boston Scientific Corp * 81,800 $ 5,025,588
Bristol Myers Squibb Co 74,200 6,010,200
Eli Lilly & Co 71,400 7,804,913
Healthsouth Corp * 282,700 7,049,831
Merck Co & Inc 57,400 5,940,900
Pfizer Inc 80,800 9,655,600
Phycor Inc * 139,150 4,791,978
Smithkline Beecham PLC
Class A ADR 108,600 9,950,475
----------
56,229,485
----------
INSURANCE - 2.20%
Cigna Corp 24,200 4,295,500
PMI Group Inc 91,500 5,707,313
----------
10,002,813
----------
LEISURE TIME INDUSTRIES - 6.43%
Hilton Hotels Corp 288,000 7,650,000
Interstate Hotels Co * 247,900 7,297,556
Promus Hotel Corp * 142,425 5,518,969
Walt Disney Co 109,400 8,779,350
----------
29,245,875
----------
MANUFACTURING - 5.18%
Applied Materials Inc * 163,600 11,584,925
Case Corp 75,700 5,213,838
Caterpillar Inc 63,300 6,796,838
----------
23,595,601
----------
OFFICE EQUIPMENT & COMPUTERS - 13.69%
3Com Corp * 178,800 8,046,000
Ascend Communications Inc * 66,900 2,634,188
Cisco Systems Inc * 169,000 11,344,125
Compaq Computer Corp * 97,400 9,666,950
Dell Computer Corp * 81,000 9,512,438
HBO & Co 123,600 8,512,950
Hewlett Packard Co 132,500 7,420,000
International Business Machines 57,200 5,158,725
----------
62,295,376
----------
PUBLISHING & BROADCASTING - 1.68%
Reuters Holdings PLC
Class B ADR 121,200 7,635,600
----------
SERVICE INDUSTRIES - 4.86%
CUC International Inc * 229,700 5,929,131
Manpower Inc 161,000 7,164,500
Omnicom Group 146,200 9,009,575
----------
22,103,206
----------
TELECOMMUNICATIONS - 8.16%
Clear Channel Communciations * 130,600 8,031,900
Ericsson LM Tel Co Class B ADR 187,700 7,390,688
Nokia Corp ADR 121,100 8,931,125
Tellabs Inc * 154,400 8,627,100
Vodafone Group PLC ADR 86,000 4,165,625
----------
37,146,438
----------
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
TRANSPORTATION - 3.81%
Federal Express Corp Class A * 100,000 $ 5,775,000
Union Pacific Res Group Inc 185,900 4,624,263
Wisconsin Central Trans Corp * 186,200 6,935,944
-------------
17,335,207
-------------
TOTAL COMMON STOCK
(Cost $307,291,195) 451,070,679
-------------
SHORT TERM OBLIGATIONS - 1.78% PAR VALUE
COMMERCIAL PAPER - 1.78%
Ford Motor Co
6.11% July 1, 1997 $ 8,106,000 8,106,000
-------------
TOTAL SHORT TERM OBLIGATIONS
(Cost $8,106,000) 8,106,000
-------------
TOTAL INVESTMENTS - 100.91%
(Cost $315,397,195) 459,176,679
-------------
OTHER ASSETS AND LIABILITIES - (.91%) (4,154,802)
-------------
TOTAL NET ASSETS - 100% $ 455,021,877
=============
<CAPTION>
PREFERRED VALUE FUND
<CAPTION>
COMMON STOCK - 92.45% SHARES VALUE
<S> <C> <C>
AEROSPACE - 6.72%
Lockheed Martin Corp 110,000 $11,391,875
McDonnell Douglas Corp 200,000 13,700,000
-------------
25,091,875
-------------
BANKS - 7.19%
Citicorp 120,000 14,467,500
Wells Fargo & Co 46,000 12,397,000
-------------
26,864,500
-------------
CHEMICALS - 12.53%
Du Pont E I de Nemours & Co 160,000 10,060,000
Freeport McMoRan Inc 200,000 5,775,000
Freeport McMoRan Inc Copper &
Gold Class B 300,000 9,337,500
Hercules Inc 160,000 7,660,000
Monsanto Co 325,000 13,995,313
-------------
46,827,813
-------------
<PAGE>
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
CONGLOMERATES - 5.31%
General Electric Co 200,000 $13,075,000
Tenneco Inc 150,000 6,778,125
-----------
19,853,125
-----------
CONSUMER PRODUCTS - 3.02%
Avon Products Inc 160,000 11,290,000
-----------
DISCOUNT & FASHION RETAILING - 2.02%
May Dept Stores Co 160,000 7,560,000
-----------
ELECTRICAL & ELECTRONICS - 3.04%
Intel Corp 80,000 11,345,000
-----------
FINANCE-OTHER - 8.64%
Countrywide Credit Industry Inc 300,000 9,356,250
Federal Home Loan Mortgage Corp 440,000 15,125,000
Morgan Stanley Group Inc 181,500 7,815,844
-----------
32,297,094
-----------
FOOD - 5.01%
Dole Food Inc 200,000 8,550,000
Grand Metropolitan PLC ADR 260,000 10,188,750
-----------
18,738,750
-----------
HEALTH CARE - 5.22%
Becton Dickinson & Co 140,000 7,087,500
Warner Lambert Co 100,000 12,425,000
-----------
19,512,500
-----------
INSURANCE - 19.50%
Ace Ltd 160,000 11,820,000
Aflac Inc 200,000 9,450,000
American International Group Inc 70,000 10,456,250
Exel Ltd 280,000 14,770,000
Transamerica Corp 100,000 9,356,250
Travelers Group Inc 270,000 17,026,875
-----------
72,879,375
-----------
LEISURE TIME INDUSTRIES - 1.66%
Carnival Corp Class A 150,000 6,187,500
-----------
MANUFACTURING - 3.15%
Caterpillar Inc 60,000 6,442,500
Shaw Industries Inc 500,000 5,312,500
-----------
11,755,000
-----------
PAPER & FOREST PRODUCTS - 1.48%
Champion International Corp 100,000 5,525,000
-----------
SERVICE INDUSTRIES - 2.42%
Arrow Electronics Inc * 170,000 9,031,249
-----------
TELECOMMUNICATIONS - 2.82%
Sprint Corp 200,000 10,525,000
-----------
<PAGE>
PREFERRED VALUE FUND (continued)
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
TRANSPORTATION - 2.72%
AMR Corp * 110,000 $ 10,175,000
------------
TOTAL COMMON STOCK
(Cost - $177,691,374) 345,458,781
============
<CAPTION>
SHORT TERM OBLIGATIONS - 7.18% PAR/SHARES VALUE
<S> <C> <C>
COMMERICAL PAPER - 6.95%
American Express Credit Corp
5.52% July 15, 1997 @ $ 2,500,000 2,494,633
Household Financial Corp
5.46% July 3, 1997 @ 3,500,000 3,498,938
5.50% July 17, 1997 @ 3,000,000 2,992,667
5.51% July 10, 1997 @ 5,000,000 4,993,113
Merrill Lynch & Co Inc
5.55% July 8, 1997 @ 5,000,000 4,994,604
5.57% July 17, 1997 @ 4,000,000 3,990,098
Prudential Funding Corp
5.46% July 1, 1997 @ $ 3,000,000 3,000,000
------------
25,964,053
------------
SHORT TERM INVESTMENT FUND - .23%
State Street Global Advisors Money
Market Fund 861,918 861,918
------------
TOTAL SHORT TERM OBLIGATIONS
(Cost $26,825,971) 26,825,971
------------
TOTAL INVESTMENTS - 99.63%
(Cost $204,517,345) 372,284,752
------------
OTHER ASSETS AND LIABILITIES - .37% 1,388,616
------------
TOTAL NET ASSETS - 100% $373,673,368
============
<CAPTION>
PREFERRED INTERNATIONAL FUND
COMMON STOCK & EQUIVALENTS - 94.09% SHARES VALUE
<S> <C> <C>
ARGENTINA - 3.26%
COMMUNICATION SERVICES - 1.46%
Telecom Argentina Stet France Class B ADR 74,000 $ 3,885,000
INTERNATIONAL OIL - 1.80%
YPF Sociedad Anomina Class D ADR 155,300 4,775,475
------------
Total Argentina 8,660,475
------------
<PAGE>
<CAPTION>
COMMON STOCK & EQUIVALENTS SHARES VALUE
<S> <C> <C>
AUSTRALIA - 7.73%
BANKS - 1.96%
National Australia Bank 363,000 $5,204,177
CONGLOMERATES - 2.00%
CSR Limited 1,365,000 5,292,101
CONSTRUCTION MATERIALS - 2.19%
Pioneer International Ltd 1,500,000 5,804,160
TRUCKING & FREIGHT - 1.58%
Mayne Nickless Ltd 720,000 4,200,760
----------
Total Australia 20,501,198
----------
CANADA - 5.04%
ALUMINUM - 1.17%
Alcan Aluminum Ltd 89,500 3,104,531
BANKS - 2.12%
Bank Nova Scotia Halifax 128,500 5,629,639
RETAIL TRADE - 1.75%
Canadian Tire Ltd Class A 236,500 4,623,991
----------
Total Canada 13,358,161
----------
FRANCE - 6.05%
APPAREL & TEXTILES - 2.04%
Christian Dior 32,800 5,413,923
AUTOMOBILES - 1.49%
Peugeot S.A 40,800 3,943,438
GAS EXPLORATION - 2.52%
Societe Elf Aquitaine 62,000 6,688,788
----------
Total France 16,046,149
----------
ITALY - 6.40%
APPAREL & TEXTILES - 2.18%
Benetton Group SPA 361,920 5,781,537
----------
BANKS - 2.62%
Banca Fideuram SPA 1,300,000 4,215,360
Banca Pop Bergam CV 185,700 2,747,963
----------
6,963,323
----------
FOOD & BEVERAGES - 1.60%
Parmalat Finanziaria 3,000,000 4,245,191
----------
Total Italy 16,990,051
----------
<PAGE>
<CAPTION>
COMMON STOCK & EQUIVALENTS SHARES VALUE
<S> <C> <C>
JAPAN - 7.50%
AUTOMOBILES - 2.15%
Nissan Motor Co 735,700 $5,706,136
----------
ELECTRICAL EQUIPMENT - 1.69%
Hitachi 400,000 4,466,934
----------
HOUSEHOLD APPLIANCES - 3.66%
Matsushita Electric Industries 240,000 4,836,852
Sony Corp 56,000 4,880,824
----------
9,717,676
----------
Total Japan 19,890,746
----------
NETHERLANDS - 9.86%
AIR TRAVEL - 1.87%
KLM Royal Dutch Air Lines 160,800 4,956,136
CHEMICALS - 1.80%
Akzo Nobel NV 35,000 4,796,475
FINANCIAL SERVICES - 2.22%
ING Groep NV 128,000 5,901,472
INDUSTRIAL MACHINERY - 2.00%
Stork NV 130,000 5,298,283
PETROLEUM - 1.97%
Pakhoed NV Kon 148,000 5,217,586
----------
Total Netherlands 26,169,952
----------
NEW ZEALAND - 4.67%
FOOD & BEVERAGES - 1.72%
Lion Nathan Ltd 1,800,000 4,560,485
FOREST PRODUCTS - 1.92%
Carter Holt Harvey 1,970,000 5,098,247
HOUSEHOLD APPLIANCES - 1.03%
Fisher & Paykel 700,000 2,733,981
----------
Total New Zealand 12,392,713
----------
NORWAY - 1.95%
CONGLOMERATES - 1.95%
Orkla Borregaard AS Series A 70,000 5,167,003
----------
Total Norway 5,167,003
----------
<PAGE>
<CAPTION>
COMMON STOCK & EQUIVALENTS SHARES VALUE
<S> <C> <C>
SOUTH KOREA - 5.75%
BANKS - .60%
Korea Long Term Credit Bank 102,502 $ 1,581,393
BUILDING CONSTRUCTION - .25%
LG Construction Co 40,801 684,611
CONSTRUCTION & MINING
EQUIPMENT - .42%
Tongyang Cement 60,070 1,122,930
ELECTRICAL EQUIPMENT - 1.16%
Samsung Electronic 28,099 3,078,549
ELECTRIC UTILITIES - 1.77%
Korea Electric Power 157,000 4,685,248
NON-FERROUS METALS - .77%
Korea Zinc 88,000 2,031,532
STEEL - .78%
Pohang Iron & Steel 20,280 2,062,531
-----------
Total South Korea 15,246,794
-----------
SPAIN - 6.50%
BANKS - 4.17%
Banco Bilbao Vizcaya 88,000 7,148,693
Banco de Andalucia 23,000 3,902,273
-----------
11,050,966
-----------
ELECTRIC UTILITIES - 2.33%
Iberdrola S.A 490,000 6,185,273
-----------
Total Spain 17,236,239
-----------
SWEDEN - 7.68%
ALUMINUM - .20%
Granges AB Series * 40,000 530,024
AUTOMOBILES - 1.91%
Volvo AB Series B 190,000 5,084,351
HOUSEHOLD APPLIANCES - 2.18%
Electrolux AB Series B 80,000 5,770,797
INDUSTRIAL MACHINERY - 1.90%
Skf AB Series B 195,000 5,041,691
MINING - 1.49%
Svedala Industrial 190,000 3,954,496
-----------
Total Sweden 20,381,359
-----------
<PAGE>
<CAPTION>
PREFERRED INTERNATIONAL FUND (continued)
COMMON STOCK & EQUIVALENTS SHARES VALUE
<S> <C> <C>
SWITZERLAND - 9.28%
BANKS - 1.91%
Schweiz Bankverein 19,000 $5,081,849
DRUGS & HEALTH CARE - 1.93%
Novartis AG 3,200 5,115,616
INDUSTRIAL MACHINERY - 2.26%
Sulzer AG 7,000 5,993,151
RETAIL TRADE - 1.52%
Valora Holding AG 19,000 4,034,247
TOYS & AMUSEMENTS - 1.66%
SMH AG Neunburg 7,700 4,398,493
----------
Total Switzerland 24,623,356
----------
UNITED KINGDOM - 12.42%
APPAREL & TEXTILES - 1.42%
Coats Viyella 1,800,000 3,776,903
BANKS - 2.16%
National Westminster 427,000 5,742,000
FOOD & BEVERAGES - 1.49%
Allied Domecq PLC 550,000 3,956,755
HOUSEHOLD PRODUCTS - .31%
Care First Group 420,000 811,335
LEISURE TIME - 1.67%
Rank Group 700,000 4,435,530
RETAIL GROCERY - 1.81%
Tesco 775,000 4,788,157
STEEL - 1.46%
British Steel 1,557,000 3,876,346
TELEPHONE - 2.10%
British Telecom 750,000 5,570,434
----------
Total United Kingdom 32,957,460
----------
<PAGE>
<CAPTION>
COMMON STOCK & EQUIVALENTS SHARES VALUE
<S> <C> <C>
TOTAL COMMON STOCK & EQUIVALENTS
(Cost $188,116,120) $249,621,656
------------
<CAPTION>
SHORT TERM OBLIGATIONS - 5.22% PAR VALUE
<S> <C> <C>
REPURCHASE AGREEMENTS - 5.22%
State Street Repo 5.00% July 1, 1997
(Cost - $13,841,000)(Dated June 30, 1997,
due July 1, 1997, collateralized by $9,420,000
U.S. Treasury Bond 11.25%, February 15, 2015,
Market Value $14,123,387,
Repurchase Proceeds $13,842,922) $ 13,841,000 13,841,000
------------
TOTAL SHORT TERM OBLIGATIONS
(Cost $13,841,000) 13,841,000
------------
TOTAL INVESTMENTS - 99.31%
(Cost $201,957,120) 263,462,656
------------
OTHER ASSETS & LIABILITIES - .69% 1,829,739
------------
TOTAL NET ASSETS - 100% $265,292,395
============
<CAPTION>
PREFERRED SMALL CAP FUND
COMMON STOCK - 98.28% SHARES VALUE
<S> <C> <C>
AUTOMOTIVE - 1.72%
Arvin Industry Inc 31,000 $ 844,750
Excel Industry Inc 31,700 618,150
------------
1,462,900
------------
BANKS - 2.83%
Astoria Financial Corp 14,300 679,250
BSB Bancorp Inc 7,500 286,875
Bancorpsouth Inc 5,000 145,000
City National Corp 15,800 380,188
Commonwealth Bancorp Inc 25,000 409,375
Cullen Frost Bankers Inc 6,600 279,675
FNB Corp PA 6,900 222,525
------------
2,402,888
------------
CHEMICALS - .32%
Fuller (H.B.) Co 5,000 275,000
------------
COMPUTER SOFTWARE - .06%
Symantec Corp * 2,800 54,600
------------
<PAGE>
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
CONGLOMERATES - .67%
Premark International Inc 21,200 $ 567,100
----------
CONSUMER PRODUCTS - 6.57%
Arctic Cat Inc 41,700 432,638
Ethan Allen Interiors Inc 10,300 587,100
Genesco Inc * 64,700 917,931
Herbalife International Inc 53,600 871,000
ITI Technologies Inc * 49,000 1,120,875
Polaris Industry Inc 18,900 615,431
Universal Corp 32,600 1,035,050
----------
5,580,025
----------
DISCOUNT & FASHION RETAILING - 6.42%
Burlington Coat Factory
Warehouse * 32,900 641,550
Kellwood Co 39,000 1,082,250
Macfrugals Bargains Close Out * 11,300 307,925
Ross Stores Inc 35,400 1,157,138
Russ Berrie & Co Inc 24,800 544,050
Shopko Stores Inc 20,000 510,000
The Dress Barn * 35,000 682,500
Zale Corp * 26,400 523,050
----------
5,448,463
----------
ELECTRICAL & ELECTRONICS - 10.40%
Applied Magnetics Corp * 70,900 1,604,113
Cohu Inc 21,900 684,375
ESS Technology Inc * 18,000 241,875
Genrad Inc * 18,000 407,250
Hutchinson Technology Inc * 33,100 806,813
Jabil Circuit Inc 22,800 1,912,350
Park Electrochemical Corp 16,300 428,894
Pittway Corp Class A 6,100 303,475
SCI System Inc * 8,800 561,000
Smart Modular
Technologies Inc * 19,300 651,375
Technitrol Inc 28,000 766,500
Zytec Corp * 24,300 455,625
----------
8,823,645
----------
FINANCE-OTHER - 10.21%
Alex Brown Inc 20,500 1,447,813
Bankers Corp 15,700 439,600
Eaton Vance Corp 19,000 528,438
First Plus Financial
Group Inc * 32,600 1,108,400
Imperial Credit Industry Inc * 29,800 612,763
Interra Financial Inc 14,000 587,125
Investment Technology
Group Inc * 20,000 537,500
Legg Mason Inc 9,600 516,600
Liberty Financial Cos Inc 5,500 274,313
ONBAN Corp Inc 17,000 867,000
Raymond James Financial Inc 27,750 759,656
Resource Bank Shares
Mortgage Group 31,000 612,250
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
FINANCE-OTHER (continued)
Washington Federal Inc 14,630 $ 375,808
----------
8,667,266
----------
FOOD - .50%
Ruddick Corp 25,500 420,750
----------
FUEL - 4.69%
Berry Petroleum Co Class A 25,400 482,600
Evi Inc 15,000 630,000
NUI Corp 8,200 183,988
Seacor Smit Inc * 24,700 1,292,119
Vintage Pete Inc 24,000 738,000
Zeigler Coal Holding Co 28,100 656,838
----------
3,983,545
----------
HEALTH CARE - 2.67%
ICN Pharmaceuticals Inc 3,000 86,063
Lincare Holdings Inc * 11,900 511,700
Novacare Inc * 43,000 596,625
Rotech Medical Corp * 20,300 407,269
Universal Health Services
Inc Class B * 17,300 666,050
----------
2,267,707
----------
HOUSING & REAL ESTATE - 11.72%
ABT Building Products Corp 17,600 462,000
American Homestar Corp * 17,750 379,406
CWM Mortgage Holdings Inc 48,100 1,151,394
Capstead Mortgage Corp 29,575 730,133
Cavalier Homes Inc 47,200 472,000
Centex Construction
Products Inc 24,600 479,700
Centex Corp 21,800 885,625
Champion Enterprises Inc 6,200 93,000
Dynex Cap Inc 66,400 925,450
Lennar Corp 13,000 415,188
Lone Star Industry Inc 15,800 715,938
NVR Inc * 53,000 808,250
Palm Harbor Homes Inc * 14,000 460,250
Pulte Corp 20,800 718,900
Thornburg Mortgage Asset Corp 25,900 556,850
US Home Corp * 26,000 690,625
----------
9,944,709
----------
INSURANCE - 5.62%
Capital Re Corp 5,300 283,550
Enhance Financial Services
Group Inc 13,000 570,375
Fidelity National Financial Inc 33,120 558,900
Fremont General Corp 18,950 762,738
Guaranty National Corp 27,000 648,000
Orion Capital Corp 12,500 921,875
Presidential Life Corp 20,000 387,500
RLI Corp 17,500 637,656
---------
4,770,594
---------
<PAGE>
<CAPTION>
PREFERRED SMALL CAP FUND (continued)
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
LEISURE TIME INDUSTRIES - .58%
Coachmen Industry Inc 9,800 $ 167,825
Thor Industry Inc 13,000 323,375
----------
491,200
----------
MANUFACTURING - 9.37%
Furniture Brands
International Inc * 62,300 1,207,063
Gencorp Inc 35,700 825,563
Gleason Corp 4,700 218,550
Graco Inc 16,700 503,088
Guilford Mills Inc 27,750 577,547
Kimball International Inc
Class B 4,500 181,125
Kuhlman Corp 12,200 393,450
Lone Star Technologies Inc * 17,000 486,625
Mohawk Industry Inc * 21,400 486,850
National Steel Corp Class B * 57,000 958,313
Robbins & Myers Inc 12,300 399,750
Tredegar Industry Inc 18,800 1,043,400
Wynns International Inc 23,800 675,325
----------
7,956,649
----------
METALS & MINING - 6.97%
Barnes Group Inc 22,500 666,563
Chase Industry Inc * 25,600 624,000
Cleveland Cliffs Inc 10,700 436,025
Medusa Corp 29,700 1,139,738
Mueller Industry Inc * 10,100 441,875
RMI Titanium Co * 36,500 994,625
Shiloh Industry Inc * 22,400 452,200
Southdown Inc 26,600 1,160,425
----------
5,915,451
----------
OFFICE EQUIPMENT & COMPUTERS - 3.17%
Herman Miller Inc 19,800 712,800
Inacom Corp * 20,000 622,500
Microage Inc * 29,300 538,388
Novellus Systems Inc * 9,400 813,100
----------
2,686,788
----------
PAPER & FOREST PRODUCTS - 3.08%
Buckeye Cellulose Corp * 17,500 590,625
CSS Industries Inc * 6,400 202,400
Florida Rock Industries Inc 16,700 678,438
Mosinee Paper Corp 6,650 162,925
Schweitzer Mauduit
International Inc 14,300 536,250
Universal Forest Products Inc 30,300 443,138
----------
2,613,776
----------
<PAGE>
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
PUBLISHING & BROADCASTING - 2.48%
Bowne & Co Inc 29,900 $ 1,042,763
Merrill Corp 29,200 1,062,150
----------
2,104,913
----------
SERVICE INDUSTRIES - 2.17%
CDI Corp * 18,700 779,556
New England Business
Services Inc 6,300 165,769
Red Roof Inns Inc * 15,400 277,200
Zurn Industries Inc 21,400 615,250
----------
1,837,775
----------
TELECOMMUNICATIONS - .37%
Mastec Inc * 6,600 312,263
----------
TRANSPORTATION - 4.12%
Comair Holdings Inc 15,050 416,697
Continental Airlines Inc
Class B * 14,000 489,125
Midwest Express Holding Inc * 37,350 1,022,456
Roadway Express Inc 25,000 584,375
USAir Group Inc * 28,100 983,500
----------
3,496,153
----------
UTILITIES & POWER - 1.57%
Commonwealth Energy Systems 33,500 801,906
Public Service Co 29,700 530,875
----------
1,332,781
----------
TOTAL COMMON STOCK
(Cost $64,347,440) 83,416,941
----------
<CAPTION>
SHORT TERM INVESTMENTS - 1.46% SHARES VALUE
<S> <C> <C>
SHORT TERM INVESTMENT FUND - 1.46%
State Street Global Advisors Money
Market Fund 1,244,073 1,244,073
-----------
TOTAL SHORT TERM INVESTMENTS
(Cost $1,244,073) 1,244,073
-----------
TOTAL INVESTMENTS - 99.74%
(Cost $65,591,513) 84,661,014
-----------
OTHER ASSETS AND LIABILITIES - .26% 216,791
-----------
TOTAL NET ASSETS - 100% $84,877,805
===========
<PAGE>
PREFERRED ASSET ALLOCATION FUND
<CAPTION>
COMMON STOCK - 41.20% SHARES VALUE
<S> <C> <C>
AEROSPACE - .65%
Boeing Co 5,726 $ 303,836
General Dynamics Corp 600 45,000
Lockheed Martin Corp 1,619 167,668
McDonnell Douglas Corp 1,720 117,820
Northrop Grumman Corp 300 26,344
United Technologies Corp 2,080 172,640
----------
833,308
----------
AUTOMOTIVE - .87%
Chrysler Corp 5,616 184,275
Cooper Tire & Rubber Co 400 8,800
Cummins Engine Inc 200 14,113
Dana Corp 1,040 39,520
Eaton Corp 770 67,231
Echlin Inc 300 10,800
Ford Motor Co 9,100 343,525
General Motors Corp 5,850 325,772
Goodyear Tire & Rubber 1,320 83,573
Navistar International Corp * 310 5,348
Paccar Inc 740 34,364
----------
1,117,321
----------
BANKS - 3.20%
Banc One Corp 4,064 196,850
Bank New York Inc 3,200 139,200
Bank of Boston Corp 1,200 86,475
Bankamerica Corp 5,700 368,006
Bankers Trust New York Corp 740 64,380
Barnett Banks Inc 1,700 89,250
Chase Manhattan Corp 3,421 332,051
Citicorp 3,650 440,053
Comerica Inc 900 61,200
Corestates Financial Corp 1,700 91,375
Fifth Third Bancorp 800 65,650
First Bank System Inc 1,100 93,913
First Chicago NBD Corp 2,543 153,852
First Union Corp 2,197 203,223
Fleet Financial Group Inc 2,044 129,283
JP Morgan & Co Inc 1,420 148,213
Keycorp 1,900 106,163
MBNA Corp 1,512 55,377
Mellon Bank Corp 2,200 99,275
National City Corp 1,700 89,250
Nationsbank Corp 5,274 340,173
Norwest Corp 2,950 165,938
PNC Bank Corp 2,430 101,149
Republic New York Corp 500 53,750
Suntrust Banks Inc 1,900 104,619
US Bancorp 700 44,888
<PAGE>
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
BANKS (continued)
Wachovia Corp 1,330 $ 77,556
Wells Fargo & Co 809 218,026
----------
4,119,138
----------
CHEMICALS - 1.19%
Air Products & Chemicals Inc 930 75,563
BF Goodrich Co 200 8,663
Dow Chemical Co 1,880 163,795
Du Pont E I de Nemours & Co 8,540 536,953
Eastman Chemical Co 675 42,863
Engelhard Corp 1,467 30,715
Freeport McMoRan Copper
& Gold Class B 1,900 59,138
Great Lakes Chemical Corp 570 29,854
Hercules Inc 920 44,045
International Flavours 940 47,470
Monsanto Co 4,700 202,394
Morton International Inc 1,310 39,546
Nalco Chemical Co 840 32,445
Praxair Inc 1,430 80,080
Rohm & Haas Co 620 55,839
Union Carbide Corp 1,120 52,710
WR Grace & Co 590 32,524
----------
1,534,597
----------
COMPUTER SOFTWARE - 1.56%
Adobe System Inc 550 19,284
Autodesk Inc 200 7,663
Automatic Data Processing Inc 2,430 114,210
Computer Associates
International Inc 2,912 162,162
Computer Sciences Corp * 500 36,063
First Data Corp 3,400 149,388
Microsoft Corp * 9,300 1,175,288
Novell Inc * 3,300 22,894
Oracle System Corp * 5,357 269,859
Parametric Technology Corp * 1,100 46,819
Shared Medical System 100 5,400
----------
2,009,030
----------
CONGLOMERATES - 1.83%
Allied Signal Inc 2,330 195,720
General Electric 25,640 1,676,215
Harcourt General Inc 300 14,288
Household International Inc 400 46,975
ITT Corp * 960 58,620
Pall Corp 533 12,392
Rockwell International Corp 1,800 106,200
TRW Inc 1,200 68,175
Tenneco Inc 1,490 67,329
Textron Inc 1,480 98,235
Whitman Corp 500 12,656
----------
2,356,805
----------
<PAGE>
PREFERRED ASSET ALLOCATION FUND (continued)
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
CONSUMER PRODUCTS - 3.97%
Alberto Culver Co Class B 300 $ 8,400
Anheuser Busch Cos Inc 4,080 171,105
Armstrong World Industries Inc 200 14,675
Avon Products Inc 1,150 81,147
Brown Forman Corp Class B 300 14,644
Circuit City Stores Inc 400 14,225
Clorox Co 430 56,760
Coca Cola Co 19,380 1,308,150
Colgate Palmolive Co 2,320 151,380
Coors Adolph Co Class B 200 5,325
Ecolab Inc 300 14,325
Fortune Brands Inc 1,360 50,745
Fruit Of The Loom Inc Class A * 500 15,500
Gillette Co 4,020 380,895
Liz Claiborne Inc 680 31,705
Masco Corp 1,370 57,198
Maytag Corp 500 13,063
Nike Inc Class B 2,280 133,095
Pepsico Inc 12,180 457,511
Philip Morris Cos Inc 18,860 836,913
Proctor & Gamble Co 5,250 741,563
Reebok International Ltd 620 28,985
Russell Corp 200 5,925
Seagram Ltd 3,070 123,568
Stride Rite Corp 200 2,575
Tupperware Corp 300 10,950
UST Inc 1,560 43,290
Unilever N V 1,170 255,060
V F Corp 580 49,155
Whirlpool Corp 730 39,831
----------
5,117,663
----------
CONTAINERS & PACKING - .08%
Ball Corp 100 3,006
Bemis Inc 200 8,650
Crown Cork & Seal Inc 1,070 57,178
Stone Container Corp 406 5,811
Temple Inland Inc 600 32,400
----------
107,045
----------
DISCOUNT & FASHION RETAILING - 1.52%
Autozone Inc * 1,200 28,275
Charming Shoppes Inc * 500 2,609
Costco Cos Inc * 1,865 61,312
Dayton Hudson Corp 1,990 105,843
Dillards Department Stores
Inc Class A 1,110 38,434
Federated Dept Stores Inc * 1,600 55,600
Gap Inc 2,440 94,855
Home Depot Inc 3,786 260,997
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
DISCOUNT & FASHION RETAILING (continued)
JC Penney Inc 2,000 $ 104,375
K Mart Corp * 4,130 50,593
Limited Inc 2,042 41,351
Lowes Cos Inc 800 29,700
May Department Stores Co 2,110 99,698
Mercantile Stores Inc 200 12,588
Nordstrom Inc 810 39,741
Payless Shoesource Inc * 24 1,313
Pep Boys-Manny Moe & Jack 300 10,219
Sears Roebuck & Co 3,300 177,375
TJX Cos Inc 800 21,100
Toys R Us Inc * 2,470 86,450
Wal Mart Stores Inc 17,910 605,582
Woolworth Corp * 1,300 31,200
----------
1,959,210
----------
ELECTRICAL & ELECTRONICS - 1.84%
Advanced Micro Devices Inc * 600 21,600
Amp Inc 2,028 84,669
Cooper Industries Inc 1,182 58,805
Emerson Electric Co 3,580 197,124
General Instrument Corp * 1,000 25,000
Harris Corp 200 16,800
Honeywell Inc 1,190 90,291
Intel Corp 6,460 916,109
Johnson Controls Inc 400 16,425
LSI Logic Corp * 1,100 35,200
Micron Technology Inc * 1,800 71,888
Millipore Corp 200 8,800
Motorola Inc 4,700 357,200
National Semiconductor Corp * 600 18,375
National Service Industry Inc 200 9,738
Perkin Elmer Corp 200 15,913
Raychem Corp 200 14,875
Raytheon Co 2,000 102,000
Tektronix Inc 100 6,000
Texas Instruments Inc 1,620 136,181
Thermo Electron Corp * 1,300 44,200
Thomas & Betts Corp 200 10,513
Westinghouse Electric Corp 5,020 116,088
----------
2,373,794
----------
FINANCE-OTHER - 1.39%
American Express Co 3,750 279,375
American General Corp 1,938 92,557
Beneficial Corp 200 14,213
Countrywide Credit Industry Inc 900 28,069
Equifax Inc 1,300 48,344
Federal Home Loan Mortgage Corp 5,680 195,250
Federal National Mortgage Assn 8,500 370,813
Golden West Financial Corp 760 53,200
Great Western Financial Corp 600 32,250
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
FINANCE-OTHER (continued)
Green Tree Financial Corp 1,200 $ 42,750
HF Ahmanson & Co 500 21,500
H & R Block Inc 1,160 37,410
Marsh & McLennan Cos 1,460 104,208
Merrill Lynch & Co Inc 2,820 168,143
Morgan Stanley Dean Witter 4,363 187,882
Providian Financial Corp * 980 31,483
Salomon Inc 1,000 55,625
Schwab (Charles) Corp 800 32,550
----------
1,795,622
----------
FOOD - 1.30%
Albertsons Inc 2,210 80,665
American Stores Co 1,420 70,113
Archer Daniels Midland Co 4,288 100,768
CPC International Inc 1,100 101,544
Campbell Soup Co 3,700 185,000
ConAgra Inc 1,870 119,914
Fleming Cos Inc 200 3,600
General Mills Inc 1,330 86,616
Giant Foods Inc Class A 300 9,788
Great Atlantic & Pacific Tea Inc 200 5,438
HJ Heinz Co 2,815 129,842
Hershey Food Corp 1,220 67,481
Kellogg Co 1,710 146,419
Kroger Co * 1,100 31,900
Pioneer Hi Bred
International Inc 780 62,400
Quaker Oats Co 1,160 52,055
Ralston Purina Co 910 74,791
Sara Lee Corp 3,760 156,510
Supervalu Inc 300 10,350
Sysco Corp 1,720 62,780
Winn Dixie Stores Inc 1,340 49,915
Wrigley Wm Jr Co 970 64,990
----------
1,672,879
----------
FUEL - 3.65%
Amerada Hess Corp 910 50,562
Amoco Corp 3,760 326,885
Ashland Inc 300 13,913
Atlantic Richfield Co 2,380 167,790
Baker Hughes Inc 1,400 54,163
Burlington Resources Inc 1,150 50,744
Chevron Corp 5,060 374,124
Coastal Corp 940 49,996
Dresser Industries Inc 1,750 65,188
Exxon Corp 19,240 1,183,260
Halliburton Co 1,110 87,968
Helmerich & Payne Inc 100 5,763
Kerr McGee Corp 200 12,675
Louisiana Land & Exloration Co 200 11,425
<PAGE>
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
FUEL (continued)
Mobil Corp 6,220 $ 434,623
Occidental Petroleum Corp 2,710 67,919
Oneok Inc 100 3,219
Oryx Energy Co * 1,490 31,476
Pennzoil Co 560 42,980
Phillips Petroleum Co 2,260 98,875
Rowan Cos Inc * 400 11,275
Royal Dutch Peteroleum Co 16,200 880,875
Santa Fe Energy
Resources Inc * 400 5,875
Schlumberger Ltd 1,930 241,250
Sun Inc 821 25,451
Texaco Inc 2,160 234,900
USX Marathon Group 2,400 69,300
Unocal Corp 2,200 85,388
Western Atlas Inc * 200 14,650
----------
4,702,512
----------
HEALTH CARE - 4.86%
Abbott Labs 5,940 396,495
Allergan Inc 670 21,314
Alza Corp * 1,000 29,000
American Home Products Corp 4,920 376,380
Amgen Inc * 2,180 126,713
Bausch & Lomb Inc 780 36,758
Baxter International Inc 2,080 108,680
Becton Dickinson & Co 1,160 58,725
Beverly Enterprises Inc * 400 6,500
Biomet Inc 1,300 24,213
Boston Scientific Corp * 1,600 98,300
Bristol Myers Squibb Co 7,580 613,980
CR Bard Inc 300 10,894
CVS Corp 1,290 66,113
Cardinal Health Inc 500 28,625
Columbia HCA Healthcare Corp 5,249 206,351
Eli Lilly & Co 3,974 434,408
Guidant Corp 650 55,250
Healthsouth Corp * 2,200 54,863
Humana Inc * 1,300 30,063
Johnson & Johnson 10,320 664,350
Longs Drug Stores Corp 200 5,238
Mallinckrodt Group Inc 300 11,400
Manor Care Inc 300 9,788
Medtronic Inc 1,920 155,520
Merck & Co Inc 9,330 965,655
Pfizer Inc 5,000 597,500
Pharmacia & UpJohn Inc 4,053 140,842
Rite Aid Corp 600 29,925
Schering Plough Corp 5,880 281,505
Sigma Aldrich 1,100 38,569
St. Jude Medical Inc * 800 31,200
Tenet Healthcare Corp * 2,260 66,811
<PAGE>
PREFERRED ASSET ALLOCATION FUND (continued)
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
HEALTH CARE (continued)
United Healthcare Corp 1,500 $ 78,000
United States
Surgical Corp 600 22,350
Walgreen Co 2,160 115,830
Warner Lambert Co 2,120 263,410
----------
6,261,518
----------
HOUSING & REAL ESTATE - .13%
Centex Corp 100 4,063
Kaufman & Broad Home Corp 200 3,513
Owens Corning
Fiberglass Corp 200 8,625
PPG Industries Inc 1,480 86,025
Pulte Corp 100 3,456
Sherwin Williams Co 1,880 58,045
----------
163,727
----------
INSURANCE - 1.77%
Aegon 2 121
Aetna Life & Casualty Co 1,266 129,607
Allstate Corp 3,629 264,917
American International
Group Inc 3,585 535,509
Aon Corp 750 38,813
Chubb Corp 1,360 90,950
Cigna Corp 540 95,850
Conseco Inc 1,200 44,400
General Reinsurance Corp 640 116,480
Hartford Financial
Services Group 960 79,440
Jefferson Pilot Corp 760 53,105
Lincoln National Corp 880 56,650
Loews Corp 900 90,113
MBIA Inc 200 22,563
MGIC Investment Corp 1,000 47,938
Safeco Corp 1,160 54,158
St. Paul Cos Inc 740 56,425
Torchmark Inc 700 49,875
Transamerica Corp 670 62,687
Travelers Group Inc 5,277 332,781
USF&G Corp 500 12,000
Unum Corp 1,200 50,400
----------
2,284,782
----------
LEISURE TIME INDUSTRIES - .96%
American Greetings Corp
Class A 300 11,138
Brunswick Corp 980 30,625
Darden Restaurants Inc 1,530 13,866
Eastman Kodak Co 2,630 201,853
Fleetwood Enterprises Inc 200 5,963
HFS Inc * 1,200 69,600
Harrahs Entertainment Inc * 450 8,213
<PAGE>
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
LEISURE TIME INDUSTRIES (continued)
Hasbro Inc 1,210 $ 34,334
Hilton Hotels Corp 2,020 53,656
King World Productions Inc 200 7,000
Mattel Inc 2,469 83,637
McDonalds Corp 5,500 265,719
Polaroid Corp 200 11,100
Walt Disney Co 5,360 430,140
Wendys International Inc 600 15,563
----------
1,242,407
----------
MANUFACTURING - 1.13%
Aeroquip Vickers Inc 100 4,725
Applied Materials Inc * 1,600 113,300
Avery Dennison Corp 500 20,063
Black & Decker Corp 400 14,875
Briggs & Stratton Corp 100 5,000
Case Corp 700 48,213
Caterpillar Inc 1,660 178,243
Cincinnati Milacron Inc 200 5,188
Corning Inc 1,950 108,469
Crane Co 200 8,363
Deere & Co 2,260 124,018
Dover Corp 500 30,750
FMC Corp * 200 15,888
General Signal Corp 200 8,725
Giddings & Lewis Inc 100 2,088
Harnischfeger Industries
Inc 200 8,300
ITT Industry Inc 960 24,720
Illinois Tool Works Inc 2,220 110,861
Ingersoll Rand Co 1,040 64,220
Jostens Inc 200 5,350
Minnesota Mining &
Manufacturing Co 3,360 342,720
Newell Co 1,460 57,853
Parker Hannifin Corp 350 21,241
Rubbermaid Inc 1,380 41,055
Snap On Inc 300 11,813
Springs Industries Inc 100 5,275
Stanley Works 400 16,000
Timken Co 200 7,113
Tyco International Ltd 800 55,650
----------
1,460,079
----------
METALS & MINING - .46%
Alcan Aluminum Ltd 1,810 62,784
Aluminum Company of America 1,500 113,063
Armco Inc * 500 1,938
Asarco Inc 200 6,125
Barrick Gold Corp 3,000 66,000
Battle Mountain Gold Co 2,000 11,375
Bethleham Steel Corp * 500 5,219
----------
<PAGE>
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
METALS & MINING (continued)
Cyprus Amax Minerals Co 960 $ 23,520
Echo Bay Mines Ltd 600 3,450
Homestake Mining Co 1,690 22,076
Inco Ltd 1,360 40,885
Inland Steel Industries Inc 200 5,225
Newmont Mining Corp 718 28,002
Nucor Corp 400 22,600
Phelps Dodge Corp 530 45,149
Placer Dome Inc 1,950 31,931
Reynolds Metals Co 600 42,750
Teldyne Allegheny Inc * 777 20,979
USX US Steel 1,000 35,063
Worthington Industries Inc 450 8,241
----------
596,375
----------
OFFICE EQUIPMENT & COMPUTERS - 2.22%
3Com Corp * 2,600 117,000
Amdahl Corp * 1,510 13,213
Apple Computer * 1,150 16,388
Bay Networks Inc * 1,700 45,156
Cabletron Systems Inc * 1,100 31,144
Ceridian Corp * 400 16,900
Cisco Systems Inc * 5,220 350,393
Compaq Computer Corp * 2,180 216,365
Data General Corp * 200 5,200
De Luxe Corp * 1,050 35,831
Dell Computer Corp * 1,500 176,156
Digital Equipment Corp * 1,410 49,967
EMC Corp * 1,900 74,100
Hewlett Packard Co 8,020 449,120
Ikon Office Solutions Inc 600 14,963
Intergraph Corp * 200 1,700
International Business
Machines 8,100 730,519
John H Harland Co 100 2,281
Moore Corp Ltd 500 9,844
Pitney Bowes Inc 1,400 97,300
Seagate Technology * 2,000 70,375
Silicon Graphics Inc * 1,700 25,500
Sun Microsystems Inc 1,700 63,272
Tandem Computers Inc 500 10,125
Tandy Corp 300 16,800
Unisystem Corp * 800 6,100
Xerox Corp 2,720 214,540
----------
2,860,252
----------
PAPER & FOREST PRODUCTS - .54%
Boise Cascade Corp 200 7,063
Champion International Corp 800 44,200
Georgia Pacific Corp 710 60,616
International Paper Co 2,380 115,579
James River Corp 400 14,800
----------
<PAGE>
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
PAPER & FOREST PRODUCTS (continued)
Kimberly Clark Corp 4,446 $221,189
Lousiana Pacific Corp 1,160 24,505
Mead Corp 200 12,450
Potlatch Corp 100 4,525
Union Camp Corp 630 31,500
Westvaco Corp 1,100 34,581
Weyerhaeuser Co 1,550 80,600
Williamette Industries
Inc 600 42,000
--------
693,608
--------
PUBLISHING & BROADCASTING - .65%
Comcast Corp 2,050 43,819
Dow Jones & Co 970 38,982
Dun & Bradstreet Corp 1,430 37,538
Gannett Inc 1,210 119,488
Knight Ridder Inc 1,020 50,044
McGraw Hill Inc 860 50,579
Meredith Corp 200 5,800
New York Times Co 400 19,800
Tele Communications
Inc Series A * 5,540 82,408
Time Warner Inc 4,020 193,965
Times Mirror Co Series A 800 44,200
Tribune Co 1,220 58,636
Viacom Inc Class B * 2,950 88,500
--------
833,759
--------
SERVICE INDUSTRIES - .54%
Browning Ferris
Industries Inc 1,900 63,175
CUC International Inc * 3,325 85,827
Cognizant Corp 1,430 57,915
EG & G Inc 200 4,500
Fluor Corp 750 41,391
Foster Wheeler Corp 200 8,100
Genuine Parts Co 1,825 61,822
Interpublic Group Cos Inc 400 24,525
Laidlaw Inc 2,900 40,056
Marriot International Inc 1,180 72,423
McDermott International Inc 200 5,838
RR Donnelley & Sons Co 1,270 46,514
Safety Kleen Corp 1,190 20,081
Service Corp International 1,100 36,163
W W Grainger Inc 200 15,638
Waste Management Inc 3,530 113,401
--------
697,369
--------
TELECOMMUNICATIONS - 2.96%
Airtouch Communications Inc * 4,160 113,880
Alltel Corp 1,300 43,469
American Telephone &
Telegraph Inc1 2,440 436,178
Ameritech Corp 4,290 291,452
Andrew Corp 405 11,391
<PAGE>
PREFERRED ASSET ALLOCATION FUND (continued)
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
TELECOMMUNICATIONS (continued)
Bell Atlantic Corp 3,400 $ 257,975
Bellsouth Corp 7,760 359,870
DSC Communications Corp * 500 11,125
Frontier Corp 700 13,956
GTE Corp 7,410 325,114
Lucent Technologies Inc 5,084 366,366
MCI Communications Corp 5,500 210,547
Northern Telecom Ltd 2,210 201,110
Nynex Corp 3,420 197,078
SBC Communications Inc 7,277 450,264
Scientific Atlanta Inc 300 6,563
Sprint Corp 3,510 184,714
Tellabs Inc * 1,600 89,400
US West Inc
Communications Group 3,970 149,619
US West Inc Media Group * 4,570 92,543
----------
3,812,614
----------
TRANSPORTATION - .57%
AMR Corp * 760 70,300
Burlington Northern
Santa Fe 1,134 101,918
CSX Corp 1,820 101,010
Caliber System Inc 370 13,783
Delta Airlines Inc 560 45,920
Federal Express Corp * 1,000 57,750
Norfolk Southern Corp 1,050 105,788
Roadway Express Inc 50 1,169
Ryder System Inc 300 9,900
Southwest Airlines Co 1,300 33,638
Union Pacific Corp 1,830 129,015
Union Pacific Resource
Group Inc 2,219 55,198
US Airways Group Inc * 300 10,500
----------
735,889
----------
UTILITIES & POWER - 1.36%
American Electric Power Inc 1,460 61,320
Baltimore Gas & Electric Co 1,460 38,964
Carolina Power & Light Co 1,390 49,866
Central & SouthWest Corp 1,700 36,125
Cinergy Corp 706 24,578
Columbia Gas Systems Inc 200 13,050
Consolidated Edison Co 1,910 56,226
Consolidated Natural Gas Co 930 50,046
DTE Energy Co 1,380 38,123
Dominion Resource Inc 1,460 53,473
Duke Power Co 2,251 107,911
Eastern Enterprises 100 3,469
Edison International 3,430 85,321
Enron Corp 2,100 85,706
Enserch Corp 300 6,675
<PAGE>
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
UTILITIES & POWER (continued)
Entergy Corp 1,680 $ 45,990
FPL Group Inc 1,390 64,027
GPU Inc 500 17,938
Houston Industries Inc 1,800 38,588
Niagara Mohawk Power Co * 1,790 15,327
Nicor Inc 200 7,175
Noram Energy Corp 600 9,150
Northern States Power Co 730 37,778
Ohio Edison Co 1,550 33,809
PG & E Corp 3,370 81,723
P P & L Resource Inc 700 13,956
Pacific Enterprises 400 13,450
Pacificorp 2,440 53,680
Peco Energy Co 1,950 40,950
Peoples Energy Corp 200 7,488
Public Service
Enterprise Group 1,930 48,250
Sonat Inc 400 20,500
Southern Co 5,090 111,344
Texas Utilities Co 1,770 60,954
Unicom Corp 1,860 41,385
Union Electric Co 950 35,789
Williams Cos Inc 705 30,819
Worldcom Inc * 6,600 211,175
----------
1,752,098
----------
TOTAL COMMON STOCK
(Cost $30,082,698) 53,093,401
----------
<CAPTION>
FIXED INCOME - 31.90% PAR VALUE
<S>
U.S. TREASURY - 31.90%
United States Treasury Bonds
6.00% February 15, 2026 $3,075,000 2,752,125
6.25% August 15, 2023 2,295,000 2,124,665
6.875% August 15, 2025 1,340,000 1,345,025
7.125% February 15, 2023 1,790,000 1,843,700
7.25% May 15, 2016 1,125,000 1,173,161
7.25% August 15, 2022 340,000 354,929
7.50% November 15, 2016 1,870,000 1,998,263
7.50% November 15, 2024 140,000 151,047
7.625% November 15, 2022 1,605,000 1,748,198
7.625% February 15, 2025 2,460,000 2,693,700
8.00% November 15, 2021 1,380,000 1,561,125
8.125% August 15, 2019 1,075,000 1,226,339
8.125% May 15, 2021 909,000 1,040,523
8.125% August 15, 2021 1,480,000 1,694,837
8.50% February 15, 2020 1,160,000 1,374,240
8.75% May 15, 2017 350,000 421,092
8.75% May 15, 2020 2,010,000 2,440,261
8.75% August 15, 2020 1,350,000 1,640,466
8.875% August 15, 2017 1,070,000 1,303,228
<PAGE>
<CAPTION>
FIXED INCOME PAR VALUE
<S> <C> <C>
U.S. TREASURY (continued)
United States Treasury Bonds
8.875% February 15, 2019 $ 780,000 $ 954,525
9.00% November 15, 2018 350,000 432,961
9.125% May 15, 2009 655,000 743,831
9.125% May 15, 2018 1,250,000 1,561,138
9.25% February 15, 2016 700,000 875,763
9.875% November 15, 2015 750,000 986,250
10.375% November 15, 2009 180,000 218,756
10.375% November 15, 2012 450,000 571,217
10.625% August 15, 2015 450,000 625,923
11.25% February 15, 2015 870,000 1,263,405
11.75% February 15, 2010 295,000 384,559
11.75% November 15, 2014 505,000 715,125
12.00% August 15, 2013 995,000 1,400,622
12.50% August 15, 2014 230,000 338,208
12.75% November 15, 2010 510,000 707,707
13.875% May 15, 2011 300,000 443,673
-----------
41,110,587
-----------
TOTAL FIXED INCOME
(Cost $40,747,748) 41,110,587
-----------
<CAPTION>
SHORT TERM OBLIGATIONS - 26.06% PAR VALUE
COMMERCIAL PAPER - 14.07%
ABN Amro
5.55% December 15, 1997 @# 2,000,000 1,947,820
Associates Corp of North America
6.18% July 1, 1997 @# 1,265,573 1,265,573
Cargill Financial Services Corp
5.53% September 17, 1997 @# 1,500,000 1,481,730
Daimler Benz North America
5.57% August 12, 1997 @# 1,800,000 1,788,030
DuPont E I de Nemours & Co
5.51% September 26, 1997 @# 1,500,000 1,479,645
Ford Motor Credit Co
5.59% September 19, 1997 @# 1,000,000 987,440
General Electric Capital Corp
5.65% September 19, 1997 @# 1,500,000 1,481,265
HJ Heinz Co
5.57% December 17, 1997 @# 1,500,000 1,459,020
Hertz Corp
5.55% September 19, 1997 @# 1,500,000 1,481,160
National Rural Utilities Coop
5.54% September 22, 1997 @# 1,500,000 1,480,575
Windmill Funding Corp
5.60% July 2, 1997 @# 1,825,000 1,824,716
Xerox Credit Corp
5.56% December 16, 1997 @# 1,500,000 1,461,080
-----------
18,138,054
-----------
<PAGE>
<CAPTION>
SHORT-TERM OBLIGATIONS PAR/SHARES VALUE
<S> <C> <C>
REPURCHASE AGREEMENTS - 9.14%
State Street Repo 5.00% July 1, 1997
(Cost - $11,777,000)(Dated June 30, 1997,
due July 1, 1997, collateralized by $8,015,000
U.S. Treasury Bond 11.25%, February 15, 2015,
Market Value $12,016,873,
Repurchase Proceeds $11,778,636) $ 11,777,000 $ 11,777,000
-----------
SHORT TERM INVESTMENT FUND - .73%
State Street Global Advisors
Money Market Fund # 940,570 940,570
-----------
U.S. TREASURY - 2.12%
United States Treasury Bills
4.96% September 25, 1997 @# $ 2,040,000 2,015,828
5.085% December 11, 1997 @# 400,000 390,632
5.28% September 18, 1997 @# $ 335,000 331,208
-----------
2,737,668
-----------
TOTAL SHORT TERM OBLIGATIONS
(Cost $33,597,407) 33,593,292
-----------
TOTAL INVESTMENTS - 99.16%
(Cost $104,427,853) 127,797,280
-----------
OTHER ASSETS AND LIABILITIES - .84% 1,087,476
-----------
TOTAL NET ASSETS - 100% $128,884,756
============
<CAPTION>
PREFERRED BALANCED FUND
COMMON AND PREFERRED STOCK - 51.71% SHARES VALUE
<S> <C> <C>
AEROSPACE - .23%
Boeing Co 2,040 $ 108,248
----------
AUTOMOTIVE - 4.33%
Autoliv * 2,932 114,715
General Motors Corp 19,290 1,074,212
General Motors Corp Class H 9,700 560,175
Hertz Corp Class A * 7,700 277,200
----------
2,026,302
----------
BANKS - 2.71%
Chase Manhattan Corp 3,720 361,073
Fleet Financial Group Inc 4,140 261,855
Hibernia Corp Class A 46,200 643,913
----------
1,266,841
----------
<PAGE>
<CAPTION>
PREFERRED BALANCED FUND (continued)
COMMON AND PREFERRED STOCK SHARES VALUE
<S> <C> <C>
CHEMICALS - 3.51%
Betz Laboratories Inc 7,300 $ 481,800
Dexter Corp 11,590 370,880
Englehard Corp 24,100 504,594
Morton International Inc 9,500 286,781
----------
1,644,055
----------
CONGLOMERATES - .72%
Ogden Corp 15,500 337,125
----------
CONTAINERS & PACKING - .53%
Stone Container Corp Series E Preferred * 14,500 248,313
----------
DISCOUNT & FASHION RETAILING - 2.34%
Limited Inc 34,633 701,318
Sears Roebuck & Co 7,300 392,375
----------
1,093,693
----------
ELECTRICAL & ELECTRONICS - 2.11%
International Rectifier Corp * 9,700 180,663
Millipore Corp 5,600 246,400
Westinghouse Electric Corp 24,300 561,938
----------
989,001
----------
FINANCE-OTHER - .75%
Washington Mutual Inc 5,900 352,525
----------
FUEL - 3.33%
Amerada Hess Corp 7,700 427,831
Anadarko Petroleum Corp 5,620 337,200
Baker Hughes Inc 5,100 197,306
Dresser Industries Inc 16,080 598,980
----------
1,561,317
----------
HEALTH CARE - 1.07%
Smithkline Beecham PLC
Class A ADR 4,330 396,736
Vertex Pharmaceuticals Inc * 2,740 104,805
----------
501,541
----------
HOUSING & REAL ESTATE - 1.60%
Avalon Properties Inc 10,650 304,856
NAC Re Corp 9,200 445,050
----------
749,906
----------
INSURANCE - 2.29%
Cigna Corp 6,050 1,073,875
----------
LEISURE TIME INDUSTRIES - 1.84%
American Greetings Corp
Class A 12,800 475,200
Hilton Hotels Corp 13,600 361,250
Interstate Hotels Co * 800 23,550
----------
860,000
----------
<PAGE>
<CAPTION>
COMMON AND PREFERRED STOCK SHARES VALUE
<S> <C> <C>
MANUFACTURING - 1.92%
Case Corp 5,300 $ 365,038
Caterpillar Inc 1,900 204,013
Kennametal Inc 7,700 331,100
----------
900,151
----------
METALS & MINING - 5.40%
Alumax Inc * 13,900 527,331
Asarco Inc 6,800 208,250
J & L Specialty Steel Inc 15,600 187,200
Minerals Technologies Inc 6,730 252,375
Newmont Mining Corp 8,680 338,520
Reynolds Metals Co 7,650 545,063
USX US Steel 13,420 470,539
----------
2,529,278
----------
OFFICE EQUIPMENT & COMPUTERS - 4.11%
Hewlett Packard Co 6,780 379,680
International Business Machines 9,440 851,370
Unisys Corp * 30,800 234,850
Xerox Corp 5,800 457,475
----------
1,923,375
----------
PAPER & FOREST PRODUCTS - 1.63%
Boise Cascade Corp 10,800 381,375
Champion International Corp 6,900 381,225
----------
762,600
----------
PUBLISHING & BROADCASTING - 4.77%
McGraw Hill Co Inc 12,060 709,279
New York Times Co Class A 18,510 916,245
Tribune Co 12,640 607,510
----------
2,233,034
----------
SERVICE INDUSTRIES - 1.68%
CUC International Inc * 11,960 308,718
Manpower Inc 7,100 315,950
Omnicom Group 2,640 162,690
----------
787,358
----------
TELECOMMUNICATIONS - .48%
Vodafone Group PLC ADR 4,640 224,750
---------
TRANSPORTATION - 4.36%
Delta Airlines Inc 5,920 485,440
Knightsbridge Tankers Ltd * 7,200 181,800
Ryder System Inc 17,580 580,140
Union Pacific Corp 5,250 370,125
Union Pacific Resources
Group Inc 17,044 423,965
---------
2,041,470
---------
TOTAL COMMON AND PREFERRED STOCK
(Cost $19,634,888) 24,214,758
----------
<PAGE>
<CAPTION>
FIXED INCOME - 34.96% PAR VALUE
<S> <C> <C>
U.S. TREASURY - 34.96%
United States Treasury Bonds
5.75% August 15, 2003 $5,680,000 $ 5,484,722
6.25% February 15, 2003 625,000 620,119
7.50% November 15, 2001 4,110,000 4,282,743
7.875% February 15, 2021 2,570,000 2,865,550
8.875% November 15, 1998 2,920,000 3,030,405
10.75% August 15, 2005 70,000 88,287
-----------
16,371,826
TOTAL FIXED INCOME
(Cost $16,248,564) 16,371,826
-----------
<CAPTION>
SHORT TERM OBLIGATIONS - 14.35% PAR VALUE
<S> <C> <C>
REPURCHASE AGREEMENTS - 14.35%
State Street Repo 5.00% July 1, 1997
(Cost - $6,718,000)(Dated June 30, 1997,
due July 1, 1997, collateralized by $4,575,000
U.S. Treasury Bond 11.25%, February 15, 2015,
Market Value $6,859,288,
Repurchase Proceeds $6,718,933) 6,718,000 6,718,000
----------
TOTAL SHORT TERM OBLIGATIONS
(Cost $6,718,000) 6,718,000
----------
TOTAL INVESTMENTS - 101.02%
(Cost $42,601,452) 47,304,584
----------
OTHER ASSETS AND LIABILITIES - (1.02%) (479,353)
----------
TOTAL NET ASSETS - 100% $46,825,231
===========
<CAPTION>
PREFERRED FIXED INCOME FUND
<S> <C> <C>
ASSET BACKED - 6.19%
Aegis Auto Receivables Trust **
8.39% October 20, 2001 $ 610,085 $ 614,089
8.90% January 20, 2002 691,409 693,785
Chevy Chase Auto Receivables
6.00% December 15, 2001 242,986 242,833
First Enterprise **
6.84% June 15, 2001 1,232,335 1,236,956
Ford Credit Auto Loan Master Trust
5.50% February 15, 2003 1,000,000 963,430
Reliable Auto Receivable Master Trust
5.80% June 15, 2002 589,587 583,138
<CAPTION>
FIXED INCOME PAR VALUE
<S> <C> <C>
ASSET BACKED (continued)
Santista Securitization I **
8.09% November 30, 2006 $ 1,000,000 $ 997,500
Sears Credit Account Master Trust
6.50% November 15, 1999 3,000,000 3,012,180
Western Financial
6.05% November 1, 2000 329,259 329,465
----------
8,673,376
----------
COLLATERALIZED MORTGAGE OBLIGATION - 17.77%
1345 Funding LLC Class C **
7.993% May 25, 2006 3,000,000 3,032,700
CIT Group Securitization Corp
6.25% May 20, 2006 1,129,000 1,097,600
Criimi Mae Financial Corp
7.00% January 1, 2033 887,101 857,716
Eaglemark Trust
6.75% November 15, 2002 2,374,846 2,390,425
Federal Home Loan Mortgage Pc Gtd
6.00% April 15, 2006 1,000,000 987,180
6.50% November 15, 2022 5,000,000 4,835,900
7.00% August 15, 2023 1,000,000 1,002,810
Federal National Mortgage Assn Gtd
5.50% December 25, 2008 1,200,000 1,104,744
MLIC Commercial Mortgage **
6.60% July 25, 2027 714,419 707,275
Merrill Lynch Mortgage Investments Inc
6.95% June 18, 2029 1,500,000 1,511,484
6.96% November 21, 2028 750,000 743,906
7.15% April 25, 2028 2,863,210 2,873,052
Tryon Mortgage Funding Inc
7.55% December 20, 2009 3,750,000 3,759,375
----------
24,904,167
----------
ELECTRIC - 2.05%
Boston Edison
7.80% May 15, 2010 1,375,000 1,401,813
Houston Lighting & Power
Co MTN
6.50% April 21, 2003 1,500,000 1,471,590
----------
2,873,403
----------
FEDERAL AGENCY POOLED - 2.05%
Federal Home Loan Mortgage Corp
7.00% December 1, 2024 413,793 408,364
8.00% August 1, 2026 2,409,443 2,465,896
----------
2,874,260
----------
FINANCE & BANKING - 8.51%
Associates Corp of North America MTN
5.96% May 15, 2037 920,000 928,400
6.375% October 15, 2002 1,400,000 1,370,362
6.73% September 30, 2002 725,000 721,375
<PAGE>
<CAPTION>
PREFERRED FIXED INCOME FUND (continued)
FIXED INCOME PAR VALUE
<S> <C> <C>
FINANCE & BANKING (continued)
Bank Boston Capital Trust II
7.75% December 15, 2026 $ 1,000,000 $ 959,520
General Motors Acceptance Corp
8.00% October 1, 1999 1,500,000 1,549,485
9.00% October 15, 2002 800,000 874,896
Integra Bank Pittsburgh MTN
6.55% June 15, 2000 650,000 647,706
Keycorp Institutional Capital B
8.25% December 15, 2026 1,000,000 1,012,970
NB Cap Trust II
7.83% December 15, 2026 1,500,000 1,474,485
Security Pacific Corp MTN
10.30% May 15, 2001 1,250,000 1,396,338
U.S. West Capital Funding Inc
7.30% January 15, 2007 1,000,000 1,000,880
----------
11,936,417
----------
FOREIGN CORPORATE - 6.82%
Argentina Botes
8.75% May 9, 2002 700,000 700,000
Bangkok Bk Pub Ltd**
7.25% September 15, 2005 1,000,000 953,130
British Sky Broadcasting Group
7.30% October 15, 2006 1,000,000 1,000,740
CANTV Financial Ltd
9.25% February 1, 2004 500,000 511,875
Comp de Desarollo Aeropu **
10.19% May 31, 2011 500,000 537,450
Copamex Industrials Sa De CV **
11.375% April 30, 2004 300,000 321,750
Financiera Energet
9.375% June 15, 2006 1,000,000 1,073,125
Midland Bank PLC
7.625% June 15, 2006 775,000 798,134
Montell Financial Co Bv **
8.10% March 15, 2027 2,500,000 2,579,750
Rogers Cable Systems Ltd
11.09% June 1, 2000 400,000 421,000
Santander Financial Issuances Ltd
7.875% April 15, 2005 250,000 260,053
Voto Votorantim Overseas **
8.50% June 27, 2005 400,000 399,000
----------
9,556,007
----------
FOREIGN GOVERNMENT - 4.03%
Canada Government
9.00% June 1, 2025 2,800,000 2,552,188
Kingdom of Sweden
5.85% February 13, 2001 1,500,000 1,464,270
<PAGE>
<CAPTION>
FIXED INCOME PAR VALUE
<S> <C> <C>
FOREIGN GOVERNMENT (continued)
Newfoundland Province Canada
9.875% June 1, 2020 $ 500,000 $ 620,415
United Mexican States **
7.875% August 6, 2001 ### 1,000,000 1,004,688
----------
5,641,561
----------
GOVERNMENT SPONSORED - 4.84%
Federal National Mortgage Association
6.50% February 1, 2024 157,879 151,959
6.50% April 1, 2024 178,651 171,952
6.50% April 1, 2024 111,773 107,581
6.50% July 1, 2024 286,480 275,737
6.925% March 1, 2001 970,582 971,188
7.00% April 1, 2026 2,689 2,639
7.50% October 1, 2026 2,462,489 2,467,858
8.50% August 1, 2025 29,202 30,315
8.50% October 1, 2026 2,512,034 2,606,235
----------
6,785,464
----------
INDUSTRIALS - 3.74%
AK Steel Corp
9.125% December 15, 2006 245,000 249,900
Ford Motor Co
9.00% September 15, 2001 1,695,000 1,831,210
9.95% February 15, 2032 600,000 771,942
Lomak Pete Inc
8.75% January 15, 2007 400,000 394,000
Mariner Health Group Inc
9.50% April 1, 2006 400,000 412,000
News America Holdings Inc
7.75% January 20, 2024 1,000,000 952,570
Oregon Steel Mills Inc
11.00% June 15, 2003 100,000 107,000
USG Corp
8.50% August 1, 2005 500,000 520,000
----------
5,238,622
----------
MORTGAGE RELATED-OTHER MARKETABLE - 1.35%
Midland Realty Acceptance Corp
7.02% January 25, 2029 1,883,165 1,896,103
----------
NATURAL GAS - .75%
RAS Laffan Liquified Natural Gas **
8.294% September 15, 2014 1,000,000 1,050,000
----------
OIL AND GAS - 1.45%
PTTEP International Ltd **
7.625% October 1, 2006 2,000,000 2,034,940
----------
<PAGE>
<CAPTION>
FIXED INCOME PAR VALUE
<S> <C> <C>
McLeod Inc **
(10.50% March 1, 2002) March 1, 2007 *** $ 575,000 $ 366,563
Paging Network Inc
10.00% October 15, 2008 400,000 388,500
TCI Communications Inc
6.875% February 15, 2006 250,000 236,458
8.75% August 1, 2015 450,000 471,645
----------
1,463,166
----------
U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES - 18.52%
Government National Mortgage Association
6.50% September 15, 2023 470,748 453,684
6.50% October 15, 2023 1,824,996 1,758,840
6.50% October 15, 2023 243,373 234,551
6.50% November 15, 2023 488,049 470,357
6.50% November 15, 2023 422,259 406,952
6.50% November 15, 2023 54,724 52,740
6.50% November 15, 2023 239,746 231,055
6.50% December 15, 2023 364,939 351,710
7.00% November 15, 2023 2,761,536 2,725,304
7.00% February 15, 2024 65,016 64,102
7.00% February 15, 2024 445,175 438,916
7.00% March 15, 2024 418,971 413,081
7.00% April 15, 2024 365,372 360,235
7.00% April 15, 2024 391,237 385,737
7.00% June 15, 2026 980,261 962,185
7.50% August 20, 2026 3,204,362 3,200,325
8.00% November 15, 2009 971,965 1,004,458
8.00% January 15, 2027 3,446,023 3,525,695
9.00% March 15, 2016 52,403 56,267
9.00% April 15, 2016 49,652 53,313
9.00% May 15, 2016 332,334 356,840
9.00% May 15, 2016 55,784 59,898
9.00% June 15, 2016 945,910 1,015,661
9.00% July 15, 2016 60,447 64,904
9.00% July 15, 2016 335,227 359,947
9.00% August 15, 2016 52,957 56,862
9.00% August 15, 2016 7,482 8,033
9.00% September 15, 2016 354,516 380,658
9.00% October 15, 2016 922,664 990,701
9.00% November 15, 2016 221,045 237,345
9.00% December 15, 2016 354,527 380,670
9.00% December 15, 2016 7,895 8,477
9.00% December 15, 2016 326,007 350,047
9.00% February 15, 2017 8,032 8,624
9.00% June 15, 2017 21,771 23,377
9.00% July 15, 2017 930,517 999,134
9.00% October 15, 2017 289,254 310,584
9.00% November 15, 2017 356,408 382,689
9.00% November 15, 2017 7,663 8,228
<PAGE>
<CAPTION>
FIXED INCOME PAR VALUE
<S> <C> <C>
U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES (continued)
9.00% November 15, 2017 $ 1,730,141 $ 1,857,722
9.00% November 15, 2017 887,458 952,900
----------
25,962,808
----------
U.S. TREASURY - 13.55%
United States Treasury Bonds
7.125% February 15, 2023 # 1,370,000 1,411,100
10.375% November 15, 2012 # 2,035,000 2,583,168
United States Treasury Notes
5.75% August 15, 2003 3,212,000 3,101,571
5.875% November 15, 2005 758,000 725,194
6.375% April 30, 1999 3,667,000 3,686,472
6.375% September 30, 2001 # 1,230,000 1,230,197
6.625% June 30, 2001 # 2,550,000 2,573,894
6.875% May 15, 2006 1,965,000 2,005,833
7.50% November 15, 2001 # 1,600,000 1,667,248
----------
18,984,677
----------
TOTAL FIXED INCOME
(Cost $128,771,370) 129,874,971
-----------
<CAPTION>
SHORT TERM OBLIGATIONS - 6.24% PAR VALUE
<S> <C> <C>
ASSET BACKED - .15%
Banc One Auto Trust
6.90% April 15, 1998 202,922 203,048
----------
INDUSTRIALS - .71%
Occidental Petroleum Corp MTN
5.76% June 15, 1998 1,000,000 995,060
----------
U.S. TREASURY - 5.38%
United States Treasury Bills
4.77% August 21, 1997 @# 238,000 236,392
4.85% August 21, 1997 @# 166,000 164,859
4.86% August 21, 1997 @# 987,000 980,205
4.87% August 21, 1997 @# 4,166,000 4,137,258
4.88% August 21, 1997 @# 365,000 362,477
4.92% August 21, 1997 @# 150,000 148,955
4.925% August 21, 1997 @# 82,000 81,428
4.93% August 21, 1997 @# 53,000 52,630
4.96% August 21, 1997 @# 26,000 25,817
4.97% August 21, 1997 @# 56,000 55,606
5.06% August 21, 1997 @# 183,000 181,688
5.07% August 21, 1997 @# 72,000 71,483
5.15% August 7, 1997 @ 446,000 443,639
5.19% August 7, 1997 @ 277,000 275,522
5.225% August 7, 1997 @ 328,000 326,238
----------
7,544,197
----------
<PAGE>
<CAPTION>
PREFERRED FIXED INCOME FUND (continued)
FIXED INCOME VALUE
<S> <C> <C>
TOTAL SHORT TERM OBLIGATIONS
(Cost $8,732,445) $ 8,742,305
------------
TOTAL INVESTMENTS - 98.90%
(Cost $137,503,815) 138,617,276
------------
OTHER ASSETS AND LIABILITIES - 1.10% 1,541,206
------------
TOTAL NET ASSETS - 100% $140,158,482
============
<CAPTION>
PREFERRED SHORT-TERM GOVERNMENT SECURITIES FUND
FIXED INCOME 63.89% PAR VALUE
<S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATION - 2.37%
National Collegiate Trust
8.76% September 20, 2011 $ 1,250,000 $ 1,296,250
-----------
FEDERAL AGENCY POOLED - 11.99%
Federal Home Loan Mortgage Corp
7.125% July 21, 1999 2,050,000 2,084,912
Federal Home Loan Mortgage PLC
6.00% December 1, 1999 4,595,242 4,484,669
-----------
6,569,581
-----------
GOVERNMENT SPONSORED - 21.57%
Federal National Mortgage Association
6.00% August 1, 2000 4,390,800 4,323,006
6.64% October 1, 1998 6,000,000 6,024,000
7.50% January 1, 2003 450,124 459,337
8.997% May 1, 2001 970,604 1,014,736
-----------
11,821,079
-----------
MUNICIPAL - 25.50%
Bossier LA Public Trust
6.50% August 1, 2011 1,550,000 1,548,915
Corona CA Single Family Mortgage
6.875% November 1, 2017 4,675,000 4,652,093
Mississippi Home Corp Collateralized
Mortgage
7.80% November 1, 2012 755,000 769,345
7.85% April 1, 2021 425,766 428,959
<PAGE>
<CAPTION>
FIXED INCOME PAR VALUE
<S> <C> <C>
MUNICIPAL (continued)
Mississippi Home Corp Single Family
6.85% June 1, 2020 $ 1,000,000 $ 996,100
Texas State Department Housing &
Community Affairs
9.50% March 1, 2016 5,300,000 5,583,550
-----------
13,978,962
-----------
U.S. TREASURY - 2.46%
United States Treasury Notes
5.125% December 31, 1998 1,365,000 1,348,784
-----------
TOTAL FIXED INCOME
(Cost $35,037,950) 35,014,656
-----------
<CAPTION>
SHORT TERM OBLIGATIONS - 35.21% PAR/SHARES VALUE
<S> <C> <C>
GOVERNMENT SPONSORED - 11.02%
Federal National Mortgage Assn Disc Notes
5.47% September 4, 1997 @ 6,100,000 6,039,244
-----------
REPURCHASE AGREEMENTS - 7.30%
State Street Repo 5.00% July 1, 1997
(Cost $4,000,000)(Dated June 30, 1997,
due July 1, 1997, collateralized by $2,725,000
U.S. Treasury Bond 11.25%, February 15, 2015,
Market Value $4,085,587,
Repurchase Proceeds $4,000,556) $ 4,000,000 4,000,000
-----------
SHORT TERM INVESTMENT FUND - .98%
State Street Global Advisors Money
Market Fund 538,744 538,744
-----------
U.S. TREASURY - 15.91%
United States Treasury Notes
5.125% June 30, 1998 $ 2,200,000 2,186,250
6.125% May 15, 1998 1,250,000 1,253,713
6.25% June 30, 1998 3,000,000 3,013,110
7.25% February 15, 1998 2,250,000 2,270,744
-----------
8,723,817
-----------
TOTAL SHORT TERM OBLIGATIONS
(Cost $19,302,739) 19,301,805
-----------
TOTAL INVESTMENTS - 99.10%
(Cost $54,340,689) 54,316,461
-----------
OTHER ASSETS AND LIABILITIES - .90% 490,948
-----------
TOTAL NET ASSETS - 100% $54,807,409
===========
<PAGE>
<CAPTION>
PREFERRED MONEY MARKET FUND
SHORT TERM OBLIGATIONS - 95.16% PAR VALUE
<S> <C> <C>
CERTIFICATES OF DEPOSIT - 46.50%
Bank of America
5.85% November 3, 1997 $ 5,000,000 $ 5,000,000
Bank of Nova Scotia Toronto
5.65% September 23, 1997 3,000,000 3,000,000
Banque Nationale de Paris
5.70% August 4, 1997 5,000,000 5,000,000
Dai Ichi Kangyo Bank
5.86% July 28, 1997 @ 1,500,000 1,500,041
Duetsche Bank AG New York
5.70% February 6, 1998 @ 2,500,000 2,499,423
Harris Trust & Savings Bank
5.59% July 31, 1997 5,000,000 5,000,000
Industrial Bank of Japan Ltd
5.67% July 11, 1997 @ 2,000,000 2,000,006
5.84% August 18, 1997 @ 2,500,000 2,500,033
Nationsbank Corp
5.54% July 15, 1997 4,000,000 4,000,000
Rabobank Netherland N.V.
5.99% March 24, 1998 @ 1,000,000 999,652
Royal Bank of Canada
6.14% May 12, 1998 @ 1,000,000 999,753
Sanwa Yankee CD
5.65% July 7, 1997 @ 5,500,000 5,499,982
Societe Generale New York
5.70% July 14, 1997 3,000,000 3,000,000
5.84% October 6, 1997 @ 2,000,000 1,999,847
Sumitomo Bank Yankee CD
5.68% July 1, 1997 5,000,000 5,000,000
Swiss Bank Corp New York
5.98% March 19, 1998 @ 3,000,000 2,999,590
-----------
50,998,327
-----------
COMMERCIAL PAPER - 30.90%
ABN AMRO
5.615% August 19, 1997 @ 3,500,000 3,473,251
Abbey National North America
4.532% August 12, 1997 @ 3,000,000 2,981,450
Associates Corp North America
5.55% July 24, 1997 @ 5,000,000 4,982,271
Bank One Corp
5.53% July 2, 1997 @ 5,000,000 4,999,232
Bankers Trust Company
5.69% July 1, 1997 ## 2,500,000 2,499,019
Cregem North America Inc
5.63% July 21, 1997 @ 1,500,000 1,495,308
Export Import Bank Korea
5.60% July 10, 1997 @ 2,000,000 1,997,200
<PAGE>
<CAPTION>
SHORT TERM OBLIGATIONS (CONTINUED) PAR VALUE
<S> <C> <C>
COMMERCIAL PAPER (continued)
Ford Motor Credit Co
5.64% December 2, 1997 @ $ 4,425,000 $ 4,318,240
Lloyds Bank PLC
5.65% August 22, 1997 @ 2,500,000 2,479,597
San Paolous Finance Company
5.67% August 21, 1997 @ 3,000,000 2,975,903
UBS Finance Delaware Inc
6.05% July 1, 1997 1,689,000 1,689,000
-----------
33,890,471
-----------
CORPORATE BONDS - 10.02%
Bayerische Landes Bank of New York
5.557% July 28, 1997 ## 5,000,000 4,996,164
Korea Development Bank
5.842% September 16, 1997 ## 3,000,000 2,999,442
Society National Bank Cleveland
5.58% July 1, 1997 ## 3,000,000 2,999,961
-----------
10,995,567
-----------
FLOATING RATE NOTES - 4.55%
Liquid Asset Backed Securities Trust **
5.687% July 31, 1997 ## 4,987,645 4,987,645
-----------
GOVERNMENT AGENCY - 1.37%
Federal Home Loan Bank
5.96% June 9, 1998 @ 1,500,000 1,499,450
-----------
U.S. TREASURY - 1.82%
United States Treasury Notes
5.375% November 30, 1997 @ 2,000,000 1,998,682
-----------
TOTAL SHORT TERM OBLIGATIONS
(Cost $104,370,142) 104,370,142
-----------
TOTAL INVESTMENTS - 95.16%
(Cost $104,370,142) 104,370,142
-----------
OTHER ASSETS AND LIABILITIES - 4.84% 5,312,004
-----------
TOTAL NET ASSETS - 100% $109,682,146
============
<PAGE>
NOTES TO SCHEDULES OF INVESTMENTS
* Non-income producing security
** Pursuant to Rule 144A under the Securities Act of 1933, these securities
may be resold in transactions exempt from registration, normally to qualified
institutional buyers. At June 30, 1997, these securities amounted to $16,529,576
or 11.79% of the net assets of the Preferred Fixed Income Fund and $4,987,645 or
4.55% of the net assets of the Preferred Money Market Fund.
*** Currently zero coupon. Shown parenthetically is the next interest rate
to be paid, and the date the Fund will begin accruing this rate.
# All or a portion of this security is being used to collateralize futures
contracts outstanding at June 30, 1997.
## Floating rate note. The interest rate shown reflects the rate currently
in effect. The maturity date shown reflects the next reset date.
### Floating rate note. The interest rate shown reflects the rate currently
in effect.
@ Yields are at time of purchase
ABBREVIATIONS:
ADR - American Depository Receipt
MTN - Medium Term Notes
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
The Preferred Group of Mutual Funds ("The Preferred Group" or "the Trust")
is registered under the Investment Company Act of 1940, as amended, as an
open-end, diversified series management investment company offering nine
portfolios ("Funds"):
PREFERRED GROWTH FUND ("Growth") - seeks long-term capital appreciation by
investing its assets primarily in equity securities believed to offer the
potential for capital appreciation, including stocks of companies that are
experiencing rapid earnings growth.
PREFERRED VALUE FUND ("Value") - seeks capital appreciation and current
income. The Fund invests primarily in equity securities that are believed to be
undervalued and that offer above-average potential for capital appreciation.
PREFERRED INTERNATIONAL FUND ("International") - seeks long-term capital
appreciation by investing its assets primarily in equity securities traded
principally on markets outside the United States.
PREFERRED SMALL CAP FUND ("Small Cap") - seeks long-term capital
appreciation through investments in companies with small equity capitalizations.
PREFERRED ASSET ALLOCATION FUND ("Asset Allocation") - seeks both capital
appreciation and current income by allocating its assets among stocks, bonds and
high quality money market instruments.
PREFERRED BALANCED FUND ("Balanced") - seeks total return through a
combination of capital appreciation and current income. The Fund allocates its
assets among stocks, bonds and money market instruments.
PREFERRED FIXED INCOME FUND ("Fixed Income") - seeks a high level of
current income consistent with investment in a diversified portfolio of high
quality debt securities.
PREFERRED SHORT-TERM GOVERNMENT SECURITIES FUND ("Short-Term Government") -
seeks high current income, consistent with preservation of capital, primarily
through investment in U.S. Government Securities.
PREFERRED MONEY MARKET FUND ("Money Market") - seeks the maximum current
income believed to be consistent with preservation of capital and maintenance of
liquidity by investing in a portfolio of short-term, fixed income instruments.
The Preferred Group was established in 1991 as a business trust under
Massachusetts law and has an unlimited authorized number of shares of beneficial
interest which may, without shareholder approval, be divided into an unlimited
number of series of such shares.
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 income and expenses during the reporting
period. Actual results could differ from those estimates. The following
significant accounting policies are consistently followed by the Funds in the
preparation of their financial statements.
SECURITY VALUATIONS
Portfolio securities, options and futures for which market quotations are
readily available are valued at market value, which is determined by using the
last reported sale price, or, if no sales are reported, the last reported bid
price. Portfolio debt securities with remaining maturities greater than sixty
days are valued by pricing agents approved by the Trustees, which prices reflect
broker/dealer supplied valuations and electronic data processing techniques. If
the pricing agents are unable to provide such quotations, the most recent bid
quotation supplied by a bonafide market maker shall be used. Over-the-counter
options are valued at fair value, as determined in good faith by the Trustees or
by persons acting at their direction based on prices supplied by a broker,
usually the option counter-party. Forward contracts are valued at the mean
between the bid and the offered forward rates as last quoted by a pricing
service. Obligations with a remaining maturity of 60 days or less and holdings
in Money Market are valued at amortized cost which approximates market value.
Equity securities that have reached the limit for aggregate foreign ownership
may trade at a premium to the local share price. The premium is valued based on
prices supplied by a broker. Portfolio positions which cannot be valued as set
forth above are valued at fair value under procedures approved by the Trustees.
<PAGE>
SECURITY TRANSACTIONS
Security transactions are accounted for on the trade date. Cost is
determined and gains and losses are based upon the specific identification
method for both financial statement and federal tax purposes.
FEDERAL TAXES
Consistent with each Fund's policy to qualify as a regulated investment
company and to distribute all of its taxable income and net realized capital
gains to its shareholders, no federal tax has been accrued.
At June 30, 1997, approximate capital loss carry- forwards available (to
the extent provided in federal income tax regulations) to offset future realized
gains were as follows:
YEAR OF CAPITAL LOSS
FUND EXPIRATION CARRYFORWARD
Short-Term Government 2003 $418,000
Short-Term Government 2004 $303,000
Short-Term Government 2005 $ 97,000
To the extent the loss carryforwards are used to offset any future realized
gains, it is unlikely that such gains would be distributed.
INTEREST INCOME, DEBT DISCOUNT AND PREMIUM
Interest income is recorded on the accrual basis. Original issue discount
and market discount are accreted to interest income over the life of a security
with a corresponding adjustment in the cost basis; premium is amortized on debt
securities with a corresponding adjustment to the cost basis.
DISTRIBUTIONS TO SHAREHOLDERS
Growth, Value, International and Small Cap declare and pay dividends at
least annually. Dividends are declared and paid quarterly for Asset Allocation
and Balanced. Dividends are declared and recorded daily and paid monthly for
Fixed Income, Short-Term Government and Money Market.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments of foreign currency transactions, losses deferred due to wash sales,
and post-October 31 losses. Permanent book and tax differences relating to
shareholder distributions will result in reclassifications in the Funds' capital
accounts.
EXPENSES
Expenses specific to an individual Fund are charged to that Fund. Common
expenses are allocated to the Funds based on their relative net asset values.
<PAGE>
FOREIGN CURRENCY TRANSLATION
The accounting records of the Funds are maintained in U.S. dollars. All
assets and liabilities initially expressed in foreign currencies are converted
into U.S. dollars at the daily exchange rates.
Net realized gains and losses on foreign denominated other assets,
liabilities and currency transactions disclosed in the Statement of Operations
represent net gains and losses from the disposition of foreign currencies,
currency gains and losses realized between the trade and settlement dates on
securities transactions, and the difference between the amount of net investment
income accrued and the U.S. dollar amount actually received. Further, the
effects of changes in foreign currency exchange rates on securities are not
segregated in the Statement of Operations from the effects of changes in market
prices of those securities, but rather, are included with the net realized and
unrealized gain or loss on investments.
FORWARD CURRENCY CONTRACTS
All Funds (except Short-Term Government and Money Market) may enter into
forward currency contracts to purchase or sell foreign currencies at
predetermined exchange rates at future dates. The market value of the contract
will fluctuate with changes in currency exchange rates. All contracts are
marked-to-market daily, resulting in unrealized gains or losses which become
realized at the time the forward contracts are settled. Forward currency
contracts do not eliminate fluctuations in the prices of the Funds' portfolio
securities. The maximum potential loss from such contracts is the aggregate face
value in U.S. dollars at the time the contract was opened. See note 4 for all
open forward currency contracts held as of June 30, 1997.
FUTURES CONTRACTS
All Funds (except Money Market) may enter into futures contracts. A Fund
may use futures contracts to manage its exposure to the stock and fixed income
markets. Buying futures tends to increase the Fund's exposure to the underlying
instrument. Selling futures tends to decrease the Fund's exposure to the
underlying instrument or hedge other Fund instruments. Upon entering into such a
contract, the Fund is required to pledge to the broker an amount of cash or
investment securities equal to the minimum "initial margin" requirements of the
exchange. Pursuant to the contract, the Fund agrees to receive from or pay to
the broker an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as "variation margin," and are
recorded by the Fund as unrealized gains or losses. When the contract is closed,
the Fund records a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the time it was
closed. Futures contracts involve, to varying degrees, risk of loss in excess of
the variation margin. Losses may arise from the changes in the value of the
underlying instrument, the illiquidity of the secondary market for the
contracts, or the failure of counterparties to perform under the contract terms.
See Note 4 for all open futures contracts held as of June 30, 1997.
DELAYED DELIVERY TRANSACTIONS
All Funds (except Money Market) may purchase or sell securities on a
forward commitment basis. Payment and delivery may take place a month or more
after the date of the transaction. The price of the underlying securities and
the date when the securities will be delivered and paid for are fixed at the
time the transaction is negotiated. The Fund identifies securities as segregated
in its custodial records with a value at least equal to the amount of the
purchase commitment.
REPURCHASE AGREEMENTS
The Funds' custodian takes possession through the federal book-entry system
of securities collateralizing repurchase agreements. Collateral is
marked-to-market daily to ensure that the market value of the underlying assets
remains sufficient to protect the Funds. The Funds may experience costs and
delays in liquidating the collateral if the issuer defaults or enters
bankruptcy.
<PAGE>
DOLLAR ROLL TRANSACTIONS
Dollar roll transactions consist of the sale by a Fund of mortgage-backed
securities, together with a forward commitment to purchase similar, but not
identical, securities at a future date. If the broker/ dealer to whom the Fund
sells the security becomes insolvent, the Fund's ability to enforce the forward
commitment may be restricted; the value of the security may change adversely
over the term of the dollar roll; the security that the Fund is required to
purchase may be worth less than the security that the Fund originally held, and
the return earned by the Fund with the proceeds of a dollar roll may not exceed
transaction costs.
INDUSTRY CONCENTRATIONS
While none of the Funds are permitted to invest more than 25% of their
assets in a particular industry (other than the Money Market Fund, which may
concentrate in the domestic banking industry), each Fund may, from time to time,
"focus" its investments (generally considered to include investing more than 10%
of its assets) in certain industries. This may subject a Fund to greater risk
than Funds that are not so focused.
OTHER
Corporate actions (including cash dividends) are recorded on the ex-date
(except for certain foreign securities for which corporate actions are recorded
as soon after the ex-date as the Funds become aware of such), net of
nonrebatable tax withholdings. Where a high level of uncertainty as to
collection exists, income on securities is recorded net of all tax withholdings
with any rebates recorded when received.
All Funds (except Short-Term Government) may invest in foreign securities.
There are certain additional risks involved when investing in foreign securities
that are not inherent with investments in domestic securities. These risks may
include foreign currency exchange rate fluctuations, adverse political and
economic developments and the imposition of unfavorable foreign governmental
laws or restrictions, including the possible prevention of currency exchange.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
2. FEES AND COMPENSATION PAID TO AFFILIATES MANAGEMENT FEE
Caterpillar Investment Management Ltd. ("the Manager") provides investment
advisory and portfolio management services for the Funds. Each Fund pays a
monthly fee based on the average net assets of the Fund at the following rates:
<TABLE>
<CAPTION>
ANNUAL PERCENTAGE OF
FUND AVERAGE NET ASSETS
<S> <C>
Growth.................................. 0.75%
Value................................... 0.75%
International........................... 0.95%
Small Cap............................... 0.75%*
Asset Allocation........................ 0.70%
Balanced................................ 0.75%**
Fixed Income............................ 0.50%***
Short-Term Government................... 0.35%
Money Market............................ 0.30%
<FN>
* Effective November 1, 1995 through October 31, 1996, the Manager had
voluntarily undertaken to waive its fee in excess of 0.40%.
** Effective July 1, 1995, and until further notice, the Manager has
voluntarily undertaken to waive a portion of its fee and/or bear expenses to the
extent necessary to ensure that expenses of the Fund do not exceed 1.15% of
average net assets.
*** Effective November 1, 1996, the Manager lowered its annual management
fee to .50% from .65%.
</FN>
</TABLE>
To assist in carrying out its responsibilities, the Manager has retained
various subadvisors to render advisory services to the Funds:
<TABLE>
<CAPTION>
FUND SUBADVISOR(S)
<S> <C>
Growth and Balanced.................... Jennison Associates Capital Corp.
("Jennison")
Value.................................. Oppenheimer Capital ("Oppenheimer")
International.......................... Mercator Asset Management, L.P.
("Mercator")
Small Cap and Short-Term Government ... None
Asset Allocation....................... Mellon Capital Management
Corporation ("Mellon") and
PanAgora Asset Management, Inc.
("PanAgora")
Fixed Income and Money Market.......... J.P. Morgan Investment Management,
Inc. ("Morgan")
</TABLE>
The subadvisors operate under the supervision of the Manager and The
Preferred Group's Trustees. The Manager pays the fees of each of the
subadvisors; the Funds do not pay subadvisory fees in addition to the management
fee paid to the Manager.
For the fiscal year ended June 30, 1997, brokerage commissions were paid to
the following affiliates of the Trust's subadvisors by the following funds:
<TABLE>
<CAPTION>
GROWTH VALUE INTERNATIONAL BALANCED
<S> <C> <C> <C> <C>
J.P. Morgan Securities, Inc. $ 5,835 - $322 $ 398
Lehman Bros. 31,054 - - 2,600
Oppenheimer & Co., Inc. 3,906 $12,316 - 588
------- ------- ---- ------
$40,795 $12,316 $322 $3,586
======= ======= ==== ======
</TABLE>
TRUSTEES' FEES
During fiscal year 1997, the Trustees who were not "interested persons" of
The Preferred Group, as defined in the Investment Company Act of 1940, as
amended, received an annual fee of $10,000 plus $1,500 for each Trustees'
meeting attended.
<PAGE>
3. BENEFICIAL INTEREST
As of June 30, 1997, affiliated shareholders holding more than 5% of total
shares outstanding are as follows:
<TABLE>
<CAPTION>
% OF TOTAL SHARES OUTSTANDING
GROUP CATERPILLAR PREFERRED STABLE
INSURANCE INSURANCE INVESTMENT PRINCIPAL
401(K) PLAN* TRUST A & B** RESERVES*** MGMT. LTD. COLLECTIVE TRUST
<S> <C> <C> <C> <C> <C>
Growth 51.00% 9.41% 8.81% - -
Value 60.49% 12.83% 10.34% - -
International 38.99% 39.03% 5.69% - -
Small Cap 29.36% 54.00% 12.62% - -
Asset Allocation 42.49% 31.67% - - -
Balanced - 89.56% - 7.56% -
Fixed Income 15.33% 27.57% - - 44.75%
Short-Term Government 26.40% 32.43% - - -
Money Market 78.81% - - - 7.55%
<FN>
In addition, one shareholder owned 5.44% and 36.96% of the outstanding
shares of the Asset Allocation and Fixed Income funds, respectively.
* Caterpillar Investment Trust 401(k) Plan
** Caterpillar Inc. Supplemental Unemployment and Benefits Group Insurance
Trust A and Caterpillar Group Insurance Trust B (Trust A and B)
*** Caterpillar Insurance Company Limited Insurance Reserves
</FN>
</TABLE>
4. PORTFOLIO INFORMATION
SECURITY PURCHASES AND SALES
During the fiscal year ended June 30, 1997, purchases and sales of
long-term investments (i.e. - investments other than short-term obligations and
U.S. Government securities) and U.S. Government securities (short- and
long-term), respectively, were as follows:
<TABLE>
<CAPTION>
LONG-TERM U.S. GOVERNMENT
PURCHASES SALES PURCHASES SALES
<S> <C> <C> <C> <C>
Growth $ 230,581,419 $ 286,923,048 - -
Value 32,644,552 20,420,701 - -
International 86,533,037 26,006,583 - -
Small Cap 86,896,407 68,755,326 - -
Asset Allocation 5,417,392 12,251,892 $ 27,917,692 $ 16,509,412
Balanced 31,269,266 15,065,534 15,005,134 200,722
Fixed Income 102,823,157 90,698,826 120,588,865 116,228,741
Short-Term Government 49,098,228 40,821,614 41,247,965 53,036,425
</TABLE>
<PAGE>
During the fiscal year ended June 30, 1997, Money Market had purchases and
sales (including maturities and excluding repurchase agreements) of short-term
obligations and U.S. Government securities of:
<TABLE>
<CAPTION>
OTHER U.S. GOVERNMENT
PURCHASES SALES PURCHASES SALES
<S> <C> <C> <C> <C>
Money Market $ 1,939,283,240 $ 1,929,911,409 $ 13,403,712 $ 11,666,459
</TABLE>
FUTURES CONTRACTS
Asset Allocation and Fixed Income had the following futures contracts open
at June 30, 1997:
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION UNREALIZED
CONTRACTS CONTRACTS DATE GAIN (LOSS), NET
<S> <C> <C> <C>
ASSET ALLOCATION:
Long Positions:
S&P 500 16 Dec 97 ($ 94,575)
S&P 500 26 Sep 97 1,155,400
U.S. Treasury Bonds 220 Sep 97 462,584
----------
1,523,409
----------
Short Positions:
S&P 500 66 Sep 97 61,747
----------
$1,585,156
==========
FIXED INCOME:
Long Positions:
U.S. Treasury Bonds 21 Sep 97 $11,468
----------
Short Positions:
U.S. Treasury Notes - 10 Years 6 Sep 97 (5,289)
U.S. Treasury Notes - 5 Years 22 Sep 97 (8,737)
----------
(14,026)
----------
($2,558)
==========
</TABLE>
FORWARD CURRENCY CONTRACTS
Fixed Income had the following forward currency contract open at June 30,
1997:
SALES:
<TABLE>
<CAPTION>
SETTLEMENT UNITS OF IN EXCHANGE FOR VALUE AT UNREALIZED
DATE DELIVER CURRENCY (IN US DOLLARS) 6/30/97 APPRECIATION
<S> <C> <C> <C> <C> <C>
September 9, 1997 CAD 3,500,000 $2,559,930 $2,545,453 $14,477
</TABLE>
<PAGE>
UNREALIZED APPRECIATION (DEPRECIATION)
Unrealized appreciation (depreciation) for each Fund at June 30, 1997 based
on cost of both long-term and short-term securities for federal tax purposes
were as follows:
<TABLE>
<CAPTION>
NET UNREALIZED COST FOR
GROSS UNREALIZED GROSS UNREALIZED APPRECIATION/ FEDERAL TAX
FUND APPRECIATION (DEPRECIATION) (DEPRECIATION) PURPOSES
<S> <C> <C> <C> <C>
Growth $ 144,813,511 ($ 2,041,704) $ 142,771,807 $ 316,404,872
Value 173,641,137 (5,873,730) 167,767,407 204,517,345
International 67,513,341 (6,007,805) 61,505,536 201,957,120
Small Cap 20,042,306 (960,859) 19,081,447 65,579,567
Asset Allocation 24,250,832 (977,975) 23,272,857 104,524,423
Balanced 4,837,272 (135,380) 4,701,892 42,602,692
Fixed Income 1,536,445 (426,310) 1,110,135 137,507,141
Short-Term Government 86,264 (110,492) (24,228) 54,340,689
Money Market - - - 104,370,142
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES AND SHAREHOLDERS OF THE PREFERRED GROUP OF MUTUAL FUNDS:
In our opinion, the accompanying statements of assets and liabilities,
including the schedules of investments, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of each of the nine Funds constituting
The Preferred Group of Mutual Funds (the "Trust") at June 30, 1997, the results
of each of their operations, the changes in each of their net assets and the
financial highlights for the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audits 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of investments owned at June 30, 1997 by
correspondence with the custodian and brokers, and the application of
alternative auditing procedures where investments purchased were not yet
received by the custodian, provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Boston, Massachusetts
August 15, 1997
<PAGE>
THE PREFERRED GROUP OF MUTUAL FUNDS
OFFICERS AND TRUSTEES
Gary M. Anna Trustee
William F. Bahl Trustee
James F. Masterson Trustee
F. Lynn McPheeters Trustee
Dixie L. Mills Trustee
Ronald R. Rossmann President
Carol K. Burns Vice President and Assistant Clerk
Fred L. Kaufman Vice President and Treasurer
Richard P. Konrath Clerk
INVESTMENT ADVISOR
Caterpillar Investment Management Ltd.
1200 First Financial Plaza
411 Hamilton Boulevard
Peoria, IL 61602-1104
DISTRIBUTOR
Caterpillar Securities Inc.
1200 First Financial Plaza
411 Hamilton Boulevard
Peoria, IL 61602-1104
CUSTODIAN
State Street Bank & Trust Co.
P.O. Box 1713
Boston, MA 02101
TRANSFER AGENT AND INVESTOR SERVICES
Boston Financial Data Services, Inc.
The BFDS Building
Two Heritage Drive
Quincy, MA 02171
LEGAL COUNSEL
Ropes & Gray
One International Place
Boston, MA 02110-2624
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110
This report and the financial statements contained herein are submitted for
the general information of the shareholders of The Preferred Group of Mutual
Funds. The report is not intended for distribution to prospective investors
unless preceded or accompanied by a current prospectus.
1-800-662-GROW
<PAGE>
GRAPHIC: THE PREFERRED GROUP
OF MUTUAL FUNDS (R)
P.O.BOX 8320
BOSTON, MA 02266-8320
ANNUAL REPORT
JUNE 30, 1997
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BULK RATE
U.S. POSTAGE
PAID
BERWYN, IL
PERMIT NO. 150
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