SEMIANNUAL REPORT
DECEMBER 31, 1996
(Unaudited)
THE PREFERRED GROUP OF MUTUAL FUNDS
<PAGE>
December 31, 1996 (unaudited)
- ------------------------------------------------------------------------------
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............................ 54
Performance Data for Six Months Ended 12/31/96
<TABLE>
<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 $17.23 8.48% - $ - $2.8607
Value 16.65 18.02 13.04 - .2016 .6004
International 13.72 14.10 7.15 - .3483 .2527
Small Cap 11.25 12.45 12.31** - .0254 .1593
Asset Allocation 12.88 13.37 9.63 - .2141 .5283
Balanced 10.69 11.12 6.78*** - .1386 .1527
Fixed Income 10.09 10.24 5.00 6.36% .3115 .0365
S.T. Gov't. Securities 9.76 9.80 3.13 5.40 .2622 -
Money Market $1.00 1.00 2.56 5.07 .0251 .0002
<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 12.19% 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 six-month period ended December 31, 1996, 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 12/31/96.
The yield shown for the Money Market Fund is a seven-day current yield
as of 12/31/96, 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>
The Preferred Group of Mutual Funds
- ------------------------------------------------------------------------------
Our Message To You
DEAR PREFERRED GROUP SHAREHOLDER:
We are pleased to present you with The Preferred Group's semiannual
report for the six-month period ended December 31, 1996. This report
provides detailed information about how your portfolio management team
is managing your fund, including fund performance, portfolio holdings
and financial statements.
MARKET COMMENTARY
The economy's reasonably steady growth and low inflationary
pressure set the stage for the stock market's continued strong
performance during the last half of 1996. This stable economy, coupled
with a post-election euphoria, vaulted equities into record territory
during October and November. Nevertheless, Alan Greenspan's comment
that this was a period of "irrational exuberance" was taken by many to
indicate his belief that the U.S. stock market was overvalued. The
result of his comment was a short-term drop in stock prices in early
December.
The Dow Jones Industrial Average continued to break records during
the period, reaching a high of 6547.79 in late November, while the
Standard & Poor's 500 Index, a common benchmark for the U.S. stock
market, gained 11.7% for the six months ended December 31, 1996. Large
company stocks performed especially well; The Preferred Group's equity
funds also performed positively during this period.
For fixed income investors, however, the last six months proved to
be fairly quiet. The Salomon Brothers BIG Index, a benchmark for bond
performance, was up a slight 5.0%.
The EAFE Index of foreign stocks was up 1.6% for the six months
ended December 31, 1996, a return which appears especially modest when
compared with the unusually strong U.S. stock market. Japan, in
particular, had a disappointing year. Benefiting from its
underweighting in Japan, the Preferred International Fund outpaced the
return of the EAFE Index, with a return of 7.2% for the six months
ended December 31, 1996.
The current environment has been characterized by some analysts as
a "Goldilocks" economy -- the rate of growth is not too fast,
inflationary pressures are not too great and interest rates are not
too high. In sum, the economy appears to be "just right." For the past
six years we've enjoyed a bull market, but just how much longer it
will last is a subject of great discussion and debate. As always, it
is important that you adopt an investment approach with which you are
comfortable, so you won't be discouraged if the market declines or
simply continues the volatility of the past six months.
<PAGE>
PREFERRED GROUP HIGHLIGHTS
The two newest Funds reached milestones during the last six months.
July 1 marked the Preferred Balanced Fund's first anniversary, while
the Preferred Small Cap Fund celebrated its first year of operation on
October 31.
Late in the year, the Preferred Short-Term Government Securities
Fund received the highest ratings possible by Fitch Investor Services:
AAA for credit quality and V-1 for interest rate sensitivity.
Overall, it is particularly encouraging to note that The Preferred
Group has experienced solid growth while maintaining its high standard
of customer service. As part of a constant effort to enhance its
products and services, The Preferred Group implemented a new customer
service plan during the year, and customers have responded positively
to the year-end consolidated statements.
On July 1, 1997, The Preferred Group will mark its five-year
anniversary. Looking back over the past five years, we are proud of
The Preferred Group's progress and excited about its future. We are
pleased, too, with how well the Funds have been received by
shareholders and recognized by the financial press. Perhaps you have
noticed that a number of the Funds have been recently recognized for
their performance in well-known publications like Fortune, U.S. News &
World Report, Kiplinger's Personal Finance Magazine, Money Magazine,
Mutual Funds Magazine and others.
We hold fast to our commitment to excellence. Providing you with
quality products and serving your long-term investing needs is our top
priority. Thank you for your continued support and confidence. Call
the Investor Services line at 1-800-662-GROW; your suggestions and
comments are always welcome.
Caterpillar Investment Management Ltd.
<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 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,
December 31, 1996. 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 December 31, 1996, 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 six-month period ended December 31, 1996, the Preferred Growth Fund
advanced by 8.5%, compared with a gain of 11.7% for the S&P 500 Index. Since
inception, the Fund has advanced at an average rate of 17.8% per annum versus
17.2% for the benchmark.
This period was dominated by Presidential politics and renewed tensions in the
Middle East, both of which had a limited impact on the investment community.
The stock market spent much of this time in record territory, reflecting the
increased confidence of investors in an economy that continues to grow
moderately without signs of significant inflation. Although Alan Greenspan's
early December remarks concerning "irrational exuberance" in the stock market
left the broader indices slightly off their highs at the close of 1996,
investor sentiment remains positive as we move into the new year.
Technology stocks, after appreciating significantly during the first half of
1996, continued to build momentum through the remainder of the year. Intel,
Dell Computer, and 3Com made substantial contributions to the Fund's overall
performance. Laggards were concentrated in the retail sector which, as
evidenced by the lackluster holiday shopping season, have been under
pressure as consumers concentrate on debt reduction and curtail spending
activity. Though their retail sales held up well, this pull-back hurt the
performance of Autozone (1.1% of net assets), as well as Sunglass Hut, which
was eliminated from the portfolio. The Fund's position in Shiva was also sold,
as we were concerned about an earnings slowdown.
We believe that the economy will continue to grow moderately with low and
stable inflation. The stock market, faced with slowing profit growth and a
relatively high valuation level, should continue to exhibit a high degree of
volatility and rapid rotations in sector leadership. Last year's advance was
extremely narrow in breadth, with a select group of large capitalization
growth stocks accounting for the majority of the stock market's gains. With
these issues now supporting rich valuations, market leadership must broaden if
the market's advance is to be sustained. Although it will undoubtedly be
difficult to match the stock market's returns over the last two years, we
believe that a selective, growth-oriented investment strategy should yield
strong results within this environment.
- Jennison Associates
<PAGE>
<TABLE>
<CAPTION>
TOP TEN HOLDINGS: (% of total net assets)
<S> <C>
- ----------------------------------------------------------
1. Intel 3.5%
- ----------------------------------------------------------
2. Boeing 3.3%
- ----------------------------------------------------------
3. Cisco Systems 2.9%
- ----------------------------------------------------------
4. Diebold Inc. 2.6%
- ----------------------------------------------------------
5. 3Com 2.6%
- ----------------------------------------------------------
6. Microsoft 2.5%
- ----------------------------------------------------------
7. Hewlett-Packard 2.4%
- ----------------------------------------------------------
8. Dell Computer 2.2%
- ----------------------------------------------------------
9. Reuters Holdings 2.1%
- ----------------------------------------------------------
10. Nokia 1.9%
- ----------------------------------------------------------
</TABLE>
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 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>
<CAPTION>
CUMULATIVE TOTAL RETURN:
PAST PAST SINCE
6 MONTHS 1 YEAR INCEPTION*
<S> <C> <C> <C>
Preferred Growth Fund 8.48% 18.88% 108.68%
S&P 500 Index 11.69% 23.07% 104.29%
* JULY 1, 1992
</TABLE>
<TABLE>
AVERAGE ANNUAL TOTAL RETURN:
PAST SINCE
1 YEAR INCEPTION*
<S> <C> <C>
Preferred Growth Fund 18.88% 17.76%
S&P 500 Index 23.07% 17.20%
* JULY 1, 1992
</TABLE>
<TABLE>
<CAPTION>
A $10,000 INVESTMENT SINCE INCEPTION:
Preferred S&P 500
Growth Fund Index
<S> <C> <C>
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
</TABLE>
<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
DISCUSSION & ANALYSIS:
During the six-month period ended December 31, 1996, the Preferred Value Fund
returned 13.0%, compared to the 11.7% advance recorded by the S&P 500 Index.
Since its inception, the Fund has delivered an average annual return of 17.6%,
out- pacing the 17.2% average annual increase in the benchmark.
With the economy slowing during the second half of 1996 and interest rates
falling, particularly in the fourth quarter, the interest rate-sensitive
stocks in the Fund outperformed the market. As of December 31, 1996,
approximately 35% of the Fund's assets were invested in banks and financial
service and insurance companies, some of which have been held since the
inception of the Fund. Particularly strong returns were recorded by Travelers
Group, Citicorp, Federal Home Loan Mortgage, Aflac (2.8% of net assets), Ace
Ltd. (3.2%) and Wells Fargo & Co. These stocks are owned for their individual
business characteristics and not as a bet on interest rates.
In addition to financial stocks, the Fund benefited from several restructuring
announcements which may improve the value-creating potential of the affected
companies. Notably, McDonnell Douglas is being acquired by Boeing, and Monsanto
is spinning out its chemical division to concentrate on its agricultural
biotechnology business.
The Fund's results have been achieved primarily through good stock selection.
Our approach is to seek to control risk and make capital grow through investing
in superior businesses that are undervalued by the market. A "superior"
business has a powerful competitive position, a well-thought-out business
strategy, excellent earnings and cash flow, and a shareholder-oriented
management. Rather than attempting to predict market turns or choosing stocks
that fit some macroeconomic view, we select stocks one at a time based on
company fundamentals. Moreover, we tend to be long-term investors in what we
believe are quality, undervalued securities, focusing on companies with high
cash flow that we believe are able to generate economic value that compounds
regardless of stock market ups and downs.
Our expectations for the equity market in 1997 are subdued, yet we do not
foresee a bear market. While valuation levels are high based on historical
measures, financial liquidity remains positive. Further, corporate America is
creating significant value. Return on capital is high and rising, and free
cash flow is being generated at a higher rate than in any past period in our
country's history.
- Oppenheimer Capital
<PAGE>
<TABLE>
<CAPTION>
TOP TEN HOLDINGS: (% of total net assets)
<S> <C>
- ---------------------------------------------------------
1. McDonnell Douglas 4.2%
- ---------------------------------------------------------
2. Monsanto 4.1%
- ---------------------------------------------------------
3. Wells Fargo & Co. 4.1%
- ---------------------------------------------------------
4. Citicorp 4.1%
- ---------------------------------------------------------
5. Travelers Group 4.0%
- ---------------------------------------------------------
6. Federal Home Loan Mortgage 4.0%
- ---------------------------------------------------------
7. Exel Ltd. 3.5%
- ---------------------------------------------------------
8. Intel Corp. 3.4%
- ---------------------------------------------------------
9. Lockheed Martin 3.3%
- ---------------------------------------------------------
10. General Electric 3.2%
- ---------------------------------------------------------
</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 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>
<CAPTION>
CUMULATIVE TOTAL RETURN:
PAST PAST SINCE
6 MONTHS 1 YEAR INCEPTION*
<S> <C> <C> <C>
Preferred Value Fund 13.04% 25.31% 107.12%
S&P 500 Index 11.69% 23.07% 104.29%
* JULY 1, 1992
</TABLE>
<TABLE>
AVERAGE ANNUAL TOTAL RETURN:
PAST SINCE
1 YEAR INCEPTION*
<S> <C> <C>
Preferred Value Fund 25.31% 17.56%
S&P 500 Index 23.07% 17.20%
* JULY 1, 1992
</TABLE>
<TABLE>
A $10,000 INVESTMENT SINCE INCEPTION:
Preferred S&P 500
Value Fund Index
<S> <C> <C>
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
</TABLE>
<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 7.2% for the six-month period ended
December 31, 1996, compared to 1.6% for the EAFE Index. The fund's significant
underweighting in Japan was clearly beneficial to performance.
Foreign markets struggled during the period, encumbered by an uncertain global
economic environment, tight fiscal policies in Europe and slower growth in
Asia. The progress against inflation has been exceptional, as country after
country experiences consumer price levels not seen in a decade or more, and the
good news is that we expect more of the same. The discipline exhibited by
governments in spite of high unemployment and weak economic growth has been
remarkable. Consequently, we are seeing lower interest rates.
The consensus forecast for 1997 is for stronger GDP growth in Europe,
resulting in both higher corporate earnings and stock prices. If earnings are
below expectations, low interest rates may still help support stock prices.
Most of Asia, with the exception of Japan, is expected to see good economic
growth, although not quite as strong as in recent years. Japan's recovery may
slow considerably in 1997 despite the government's effort to stimulate the
economy. With some exceptions, stock valuations in the region appear to be
less attractive than in Europe.
During the period we eliminated some positions in Finland, France, the
Netherlands and Norway and purchased stocks in the United Kingdom, Australia,
South Korea, Sweden and Switzerland. Stocks in Japan, Germany and Hong Kong
continue to offer little in the way of bargains. We believe the best
opportunities are in Europe, where we have approximately two-thirds of the
portfolio's assets. On balance, consumer, bank and financial services stocks
appear to offer better value than basic industry cyclicals.
U.S. stocks have significantly outperformed foreign stocks over the last seven
years, with their annualized return during this period dramatically above
their historical annual rate of return. On the other hand, foreign stocks are
significantly below their historical annual rate for the same period. Mercator
believes that at some point, foreign stocks should provide better returns to
close this wide performance gap.
- Mercator Asset Management, L.P.
<PAGE>
<TABLE>
<CAPTION>
TOP TEN HOLDINGS: (% of total net assets)
<S> <C>
- -------------------------------------------------------------------
1. Iberdrola Spain 3.3%
- -------------------------------------------------------------------
2. Societe Elf Aquitaine France 2.7%
- -------------------------------------------------------------------
3. Bank Nova Scotia Halifax Canada 2.6%
- -------------------------------------------------------------------
4. Christian Dior France 2.6%
- -------------------------------------------------------------------
5. Canadian Tire Ltd. Canada 2.5%
- -------------------------------------------------------------------
6. British Telecom United Kingdom 2.4%
- -------------------------------------------------------------------
7. Orkla Borregaard Norway 2.3%
- -------------------------------------------------------------------
8. Akzo Nobel Netherlands 2.3%
- -------------------------------------------------------------------
9. National Australia Bank Australia 2.3%
- -------------------------------------------------------------------
10. Banco Bilbao Vizcaya Spain 2.2%
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GEOGRAPHIC ALLOCATION: (% of total net assets)
<S> <C>
United Kingdom 15.8
Netherlands 10.1
Switzerland 8.7
Australia 8.1
Sweden 7.3
Spain 7.1
France 6.6
Italy 5.6
Japan 5.2
Canada 5.1
New Zealand 5.1
South Korea 4.8
Argentina 3.4
Norway 2.3
</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 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>
<CAPTION>
CUMULATIVE TOTAL RETURN:
PAST PAST SINCE
6 MONTHS 1 YEAR INCEPTION*
<S> <C> <C> <C>
Preferred International Fund 7.15% 17.14% 58.45%
EAFE Index 1.61% 6.36% 66.64%
* JULY 1, 1992
</TABLE>
<TABLE>
AVERAGE ANNUAL TOTAL RETURN:
PAST SINCE
1 YEAR INCEPTION*
<S> <C> <C>
Preferred International Fund 17.14% 10.77%
EAFE Index 6.36% 12.02%
* JULY 1, 1992
</TABLE>
<TABLE>
<CAPTION>
A $10,000 INVESTMENT SINCE INCEPTION:
Preferred
International EAFE
Fund Index
<S> <C> <C>
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
</TABLE>
<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 with
primary responsibility for managing a small cap index fund. Prior to that time,
Todd held various positions within the Corporate Treasury Department of
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:
During the six-month period ended December 31, 1996, the Preferred Small Cap
Fund returned 12.3%, compared to a 5.6% advance for the Russell 2000 Index.
Since the inception of the Fund on November 1, 1995, the Fund has provided an
annualized return of 22.4% against a gain of 20.8% for the benchmark.
The Fund's strong performance for the six-month period was primarily
attributable to holdings of financial services and technology-related stocks.
While portfolio holdings of banks and savings & loan institutions led the
broad-based performance of stocks in the financial services sector, the Fund
also experienced strong gains in holdings of insurance companies and
investment banking firms. Fremont General Corp. (0.8% of net assets) and Alex
Brown Inc., for example, returned 26% and 29%, respectively, during the
six-month period.
Performance within the Fund's technology holdings was a little more
concentrated. Most of the gains were attributable to a small number of
holdings: Jabil Circuit advanced more than 200%; Inacom Corp. (1.2%) returned
113%; Chips & Technologies Inc. (1.0%) returned 87%; and Genrad (0.6%)
returned 70%.
Other securities that contributed significantly to performance during the
period include: Herman Miller Inc., which returned 86%; Hadco Corp (0.5%),
which returned 127%; Herbalife International Inc. (0.8%), which returned 125%;
and Ross Stores Inc. (1.3%), which returned 44%. Airline stocks had a negative
impact on the Fund's performance over the past six months. America West
Holding Corp. (0% - none held at 12/31/96) and Alaska Air Group Inc. (1.0%) saw
the biggest declines in this sector as higher fuel costs cut into airline
profitability.
In selecting securities for the Fund, we employ a disciplined process that
combines a strong valuation component with the desire to pursue companies with
consistent and growing earnings. Implementation of this strategy is intended to
result in a portfolio that has approximately half of the price-earnings ratio
of the Russell 2000 while still providing nearly the same long-term earnings
growth rate. Using this process, we continue to find what we consider to be
attractive opportunities for investment.
- Caterpillar Investment Management Ltd.
<PAGE>
<TABLE>
<CAPTION>
TOP TEN HOLDINGS: (% of total net assets)
<S> <C>
- ----------------------------------------------------------
1. Jabil Circuit 1.8%
- ----------------------------------------------------------
2. Alex Brown 1.7%
- ----------------------------------------------------------
3. Resource Mortgage Capital 1.7%
- ----------------------------------------------------------
4. Herman Miller 1.6%
- ----------------------------------------------------------
5. Capstead Mortgage 1.6%
- ----------------------------------------------------------
6. Stant 1.6%
- ----------------------------------------------------------
7. Champion Enterprises 1.5%
- ----------------------------------------------------------
8. RMI Titanium 1.5%
- ----------------------------------------------------------
9. Enhance Financial Services Group 1.3%
- ----------------------------------------------------------
10. Continental Airlines 1.3%
- ----------------------------------------------------------
</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.
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN:
PAST PAST SINCE
6 MONTHS 1 YEAR INCEPTION*
<S> <C> <C> <C>
Preferred Small Cap Fund 12.31%+ 20.44%+ 26.53%+
Russell 2000 Index 5.56% 16.50% 24.60%
<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:
PAST SINCE
1 YEAR INCEPTION*
<S> <C> <C>
Preferred Small Cap Fund 20.44%+ 22.35%+
Russell 2000 Index 16.50% 20.75%
<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>
A $10,000 INVESTMENT SINCE INCEPTION:
Preferred Small Russell 2000
Cap Fund Index
<S> <C> <C>
11/1/95 10000 10000
12/31/95 10506 10695
6/30/96 11267 11804
12/31/96 12653 12460
</TABLE>
<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 9.6% for the
six-month period ended December 31, 1996. 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 9.7%. This period has
seen market sentiment move from uncertainty regarding the pace of economic
growth to a belief that the economy was slowing. The period started with
economic data pointing to a job market that had heated up considerably,
portending a rise in inflation. As the quarter progressed, employment reports
alternately indicated that labor market conditions had softened, then
strengthened, and then softened again. With the economy slowing, inflation
remaining in check and monetary policy on hold, both the stock and bond
markets prospered during September, October and November. However, investor
confidence was shaken early in December by comments from the Federal Reserve
Chairman.
The Preferred Asset Allocation Fund started the six-month period with an asset
mix of 57% stocks and 43% bonds and short-term. In mid-July the asset
allocation models began to identify equities as the favored asset class. This
recommendation strengthened in August as bond yields decreased initially.
Therefore the actual fund mix shifted to 70/30 in mid-August. Nevertheless, as
the markets fluctuated and bond yields again rose in late August, the asset
allocation models recommended a shift back from 70/30 to 60/40. This signal
continued into September as the rising equity market decreased the stock
expected returns. As the bond market rallied during October and November,
yields fell correspondingly. With these reduced yields, the asset allocation
models began to signal a reallocation from bonds to equities. Hence, the asset
mix of the fund was changed to an allocation of 70% stocks and 30% bonds and
short-term in early December. The models continued to recommend a 70/30 mix
through calendar year-end.
- Mellon Capital Management
- PanAgora Asset Management
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO ALLOCATION*: (% of portfolio)
- -------------------------------------------------------------------
12/31/95 6/30/96 12/31/96
- -------------------------------------------------------------------
<S> <C> <C> <C>
Stocks 71 57 69
- -------------------------------------------------------------------
Bonds 10 34 20
- -------------------------------------------------------------------
Short-Term 19 9 11
(maturities less than one year)
- -------------------------------------------------------------------
*Adjusted for the effect of futures contracts
</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 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>
<CAPTION>
CUMULATIVE TOTAL RETURN:
PAST PAST SINCE
6 MONTHS 1 YEAR INCEPTION*
<S> <C> <C> <C>
Preferred Asset Allocation Fund 9.63% 15.17% 76.85%
65/30/5 Benchmark 9.69% 13.70% 80.21%
* JULY 1, 1992
</TABLE>
<TABLE>
AVERAGE ANNUAL TOTAL RETURN:
PAST SINCE
1 YEAR INCEPTION*
<S> <C> <C>
Preferred Asset Allocation Fund 15.17% 13.51%
65/30/5 Benchmark 13.70% 13.98%
* JULY 1, 1992
</TABLE>
<TABLE>
A $10,000 INVESTMENT SINCE INCEPTION:
Preferred Asset 65/30/5
Allocation Fund Benchmark
<S> <C> <C>
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
</TABLE>
<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 six-month period ended December 31, 1996, continued the pattern of strong
stock market gains with positive but relatively lackluster bond market returns.
The S&P 500 Index was up 11.7%, while the Lehman Government/Corporate Bond
Index was up 4.9%. During this period, the stock market experienced
considerable volatility by starting the period quite weak but then staging a
spectacular rally. The bond market had the opposite pattern of ending an
otherwise strong period on a December sell-off.
For the six months ended December 31, 1996, the Preferred Balanced Fund
returned 6.8%. This lagged the blended benchmark (55% - S&P 500 Index, 35% -
Lehman Government/Corporate Bond Index, and 10% - 90-Day Treasury Bills),
which returned 8.6%. The lower-than-benchmark performance is attributed
primarily to a rather conservative asset allocation posture, which had less
than the benchmark stock exposure and greater than the benchmark cash exposure
throughout the second half of 1996. The Fund ended the period with 50% in
stocks, 33% in bonds and 17% in cash. The Fund's relatively cautious stock
weighting reflects Jennison's view that the stock market has entered a period
of excessive optimism. From this level, the risks are elevated and a
conservative asset allocation posture is warranted.
While concerned about overall market valuation, we do take comfort from the
fact we expect the stocks in the Balanced Fund to show greater than S&P 500
Index earnings growth in 1997. These stocks are selling at a price-to-earnings
ratio of only 13.5, as opposed to the S&P 500's price-to-earnings ratio of
16.8 (each based on estimated 1997 operating earnings). We will continue our
strategy of focusing on stocks that we believe have good fundamentals but are
reasonably priced in the market.
In the bond sector of the portfolio, we have maintained a very high quality
and an all U.S. Treasury position. In our view, risk spreads in the corporate
sector are inadequate to justify a movement away from Treasuries. Unlike
stocks, we believe bonds potentially offer very attractive total returns. We
are holding back on increasing our bond position because of short-term
concerns that strength in the economy could postpone the eventual interest
rate decline we are looking for.
- Jennison Associates
<PAGE>
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>
<CAPTION>
CUMULATIVE TOTAL RETURN:
PAST PAST SINCE
6 MONTHS 1 YEAR INCEPTION*
<S> <C> <C> <C>
Preferred Balanced Fund 6.78%+ 11.42%+ 19.71%+
55/35/10 Benchmark 8.65% 14.17% 26.14%
<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:
PAST SINCE
1 YEAR INCEPTION*
<S> <C> <C>
Preferred Balanced Fund 11.42%+ 12.74%+
55/35/10 Benchmark 14.17% 16.74%
<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>
A $10,000 INVESTMENT SINCE INCEPTION:
Preferred 55/35/10
Balanced Fund Benchmark
<S> <C> <C>
7/1/95 10000 10000
12/31/95 10744 11049
6/30/96 11211 11609
12/31/96 11971 12614
</TABLE>
<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 5.0% for the six-month period ended
December 31, 1996, matching the Salomon Brothers Broad Investment Grade Bond
Index.
Amid signs of slowing growth, subdued inflation and an inactive Fed during the
latter half of 1996, our longer-than-benchmark duration strategy had a
positive impact on the Fund's performance. The Fund also attained positive
investment results by maintaining overweighted positions in mortgage-backed
securities and investment grade corporate securities while maintaining an
underweighted position in U.S. Treasury securities throughout the entire year.
The Fund's aggressive investment in mortgage-backed securities fueled relative
returns as this sector was one of the market's best performers of 1996.
Recent figures have reinforced investor hopes that economic growth has slowed
to a sustainable pace and that labor market tightness is not a problem. However,
we continue to believe that evidence reconfirming labor cost pressures will
focus the debate on how much weakness is ultimately necessary to slow the
economy. We suspect that warning signs of impending inflation may accumulate
sufficiently over the next few months to convince the Federal Reserve's less
hawkish members to engineer a significant economic slowdown during 1997. The
current level of monetary conditions suggests that higher interest rates (on
either end of the yield curve) would be necessary to accomplish this.
Given this environment, we plan to maintain the Fund's duration at close to
neutral in the short term, despite yields being above our long-term
equilibrium assumption. We currently do not have an information advantage that
compels us to assume a different posture. We also plan to maintain the Fund's
current overweighted exposures to mortgage-backed securities and investment
grade corporate securities.
- J. P. Morgan Investment Management
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO STATISTICS: (as of December 31, 1996)
<S> <C>
- --------------------------------------------------
Portfolio Holdings 111
- --------------------------------------------------
Average Maturity 13.6 years
- --------------------------------------------------
Average Duration 4.7 years
- --------------------------------------------------
Average Quality AAA
- --------------------------------------------------
Allocation (% of portfolio*):
- --------------------------------------------------
Treasury/Agency 11%
- --------------------------------------------------
Corporates 35%
- --------------------------------------------------
Mortgages/Asset Backed 53%
- --------------------------------------------------
Short-Term 1%
(maturities less than one year)
- ---------------------------------------------------
*Adjusted for the effect of futures contracts
</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 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>
<CAPTION>
CUMULATIVE TOTAL RETURN:
PAST PAST SINCE
6 MONTHS 1 YEAR INCEPTION*
<S> <C> <C> <C>
Preferred Fixed Income Fund 5.00% 2.99% 36.60%
Salomon Bros. BIG Index 4.95% 3.62% 37.17%
* JULY 1, 1992
</TABLE>
<TABLE>
AVERAGE ANNUAL TOTAL RETURN:
PAST SINCE
1 YEAR INCEPTION*
<S> <C> <C>
Preferred Fixed Income Fund 2.99% 7.18%
Salomon Bros. BIG Index 3.62% 7.28%
* JULY 1, 1992
</TABLE>
<TABLE>
A $10,000 INVESTMENT SINCE INCEPTION:
Preferred Fixed Salomon Bros.
Income Fund BIG Index
<S> <C> <C>
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
</TABLE>
<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:
In the six-month period ended December 31, 1996, the Fund had a total return
of 3.1%, compared with a 3.6% return for the Merrill Lynch 1-3 Year Treasury
Index. Since inception, the Fund's average annual return is 4.7% versus 5.5%
for the Merrill Lynch 1-3 Year Treasury Index.
In 1996 interest rates reflected investor fears of future inflation. For the
first six months of the year, each Employment Report from the Bureau of Labor
Statistics brought higher yields. The Fund outperformed its benchmark in the
first half of 1996 as rates rose. As the employment situation moderated, the
bond market responded with its only rally of the year, lasting from Labor Day
through mid-November. During this time the Fund generally kept pace with its
benchmark. For the year, the three-year Treasury's yield rose just over
three-quarters of a point to close the year at 6.0%.
During this period the Fund pared its holdings of
non-U.S. Government securities, replacing them with both U.S. agency
securities and shorter average life mortgage-backed securities. The
mortgage-backed securities purchased by the Fund to date have been pools of
seasoned loans that have call protection features for the investor. The Fund
does not purchase mortgage derivatives such as Interest Only or Principal Only
REMIC securities. Late in the year the Fund was rated by Fitch Investor
Services for credit quality and interest rate sensitivity. The Fund received
the highest ratings possible, AAA and V-1, respectively.
At the threshold of 1997, the economy is sound but running near full capacity.
Bond market participants cling to the belief that economic growth will
generate price inflation. We believe the connection between the two is
questionable at best. However, we will continue our defensive posture and
expect rates to rise in the near term.
- Caterpillar Investment Management Ltd.
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO STATISTICS: (as of December 31, 1996)
<S> <C>
- --------------------------------------------------
Portfolio Holdings 23
- --------------------------------------------------
Average Maturity 2.5 years
- --------------------------------------------------
Average Duration 1.6 years
- --------------------------------------------------
</TABLE>
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 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>
<CAPTION>
CUMULATIVE TOTAL RETURN:
PAST PAST SINCE
6 MONTHS 1 YEAR INCEPTION*
<S> <C> <C> <C>
Preferred Short-Term
Government Securities Fund 3.13% 4.71% 22.87%
ML 1-3 Yr. Treasury Index 3.58% 4.98% 27.44%
* JULY 1, 1992
</TABLE>
<TABLE>
AVERAGE ANNUAL TOTAL RETURN:
PAST SINCE
1 YEAR INCEPTION*
<S> <C> <C>
Preferred Short-Term
Government Securities Fund 4.71% 4.68%
ML 1-3 Yr. Treasury Index 4.98% 5.54%
* JULY 1, 1992
</TABLE>
<TABLE>
<CAPTION>
A $10,000 INVESTMENT SINCE INCEPTION:
Preferred Short-Term ML 1-3 Yr.
Gov't. Sec. Fund Treasury Index
<S> <C> <C>
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
</TABLE>
<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 2.6%
for the six-month period ended December 31, 1996, compared with a return of
2.4% for the Donoghue's Taxable Money Market Fund Average.
During the third quarter, mixed economic data showing strong employment growth,
combined with benign consumer and producer inflation figures, prompted yields
on maturities one year and longer to remain unchanged and shorter-term yields
to fall. However, an environment of slowing growth and subdued inflation
during the fourth quarter decreased Treasury yields on instruments one year
and longer while causing shorter-term yields to rise.
Concerns over a continued rise in interest rates pointed to a shorter average
life strategy during the third quarter. However, as expectations of Fed
tightening decreased, the Fund extended its average life during October and
has essentially maintained its position around the 50-60 day level. The Fund
enhanced yield by taking advantage of higher yields offered by floating rate
notes, commercial paper and agency sectors at the expense of short-term
Treasuries. In addition, the Fund enhanced returns by making tactical
allocations in Japanese bank commercial paper.
Recent figures have reinforced investor hopes that economic growth has
slowed to a sustainable pace and that labor market tightness is not
a problem. However, we continue to believe that evidence reconfirming
labor cost pressures will focus the debate on how much weakness is
ultimately necessary to slow the economy. We suspect that warning signs of
impending inflation may accumulate sufficiently over the next few months to
convince the Federal Reserve's less hawkish members to engineer a significant
economic slowdown during 1997. The current level of monetary conditions
suggests that higher interest rates (on either end of the yield curve) would
be necessary to accomplish this.
We will continue to search for attractively priced floating rate notes and
commercial paper while reducing short-term Treasuries as we anticipate that
the higher yielding sectors will continue to look attractive on a relative
yield basis. We plan to maintain the Fund's average life range between 50 and
60 days.
- J. P. Morgan Investment Management
<PAGE>
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 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>
<CAPTION>
CUMULATIVE TOTAL RETURN:
PAST PAST SINCE
6 MONTHS 1 YEAR INCEPTION*
<S> <C> <C> <C>
Preferred Money Market Fund 2.56% 5.07% 20.18%+
Donoghue's Taxable Money
Market Fund Average 2.43% 4.93% 19.74%
<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:
PAST SINCE
1 YEAR INCEPTION*
<S> <C> <C>
Preferred Money Market Fund 5.07% 4.18%+
Donoghue's Taxable Money
Market Fund Average 4.93% 4.09%
<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>
A $10,000 INVESTMENT SINCE INCEPTION:
Preferred Money Donoghue's Taxable Money
Market Fund Market Fund Average
<S> <C> <C>
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
</TABLE>
<PAGE>
<TABLE>
December 31, 1996 (unaudited)
Statements of Assets & Liabilities
<CAPTION>
December 31, 1996 (unaudited)
Growth Value International
<S> <C> <C> <C>
Assets
Investments at value ......................... $ 377,515,901 $ 278,838,740 $ 201,303,496
Short-term obligations at amortized cost ..... 2,081,000 25,103,335 6,153,000
Cash ......................................... 1,737
Foreign currency holdings at value ........... 1,167,368
Receivable for investments sold .............. 519,301 155,419
Receivable for fund shares sold .............. 2,221,541 1,199,630 620,868
Dividends and interest receivable ............ 213,042 198,759 2,295,582
Prepaid expenses and other assets ............ 19,467 16,098 9,174
------------ ------------ ------------
Total assets ............................ 382,570,252 305,356,562 211,706,644
------------ ------------ ------------
Liabilities
Payable for investments purchased ............ 401,109
Payable for fund shares redeemed ............. 1,000 2,110
Payable for variation margin
Payable for distributions .................... 52
Accrued:
Management fees ........................... 244,541 192,942 165,842
Audit fees ................................ 21,201 16,611 21,479
Custodian fees ............................ 21,371 18,259 39,900
Legal fees ................................ 23,005 14,434 10,848
Trustees' fees ............................ 1,420 299 341
Transfer agent fees ....................... 20,283 13,372 12,226
Other fees ................................ 3,505 172
------------ ------------ ------------
Total liabilities .................... 737,435 256,089 252,798
------------ ------------ ------------
Net assets ................................... $ 381,832,817 $ 305,100,473 $ 211,453,846
------------ ------------ ------------
Shares of beneficial interest outstanding .... 22,157,132 16,935,913 15,001,651
------------ ------------ ------------
Offering and redemption price per share ...... $ 17.23 $ 18.02 $ 14.10
------------ ------------ ------------
Composition of Net Assets
Paid-in capital .............................. $ 264,185,095 $ 190,569,957 $ 177,268,004
Undistributed (Distribution in excess of)
net investment income ..................... (492,540) 23,658 1,285
Accumulated net realized gains (losses) on
investments, futures and foreign currency . 10,961,654 (5,893,493) 412,425
Net unrealized appreciation (depreciation) on:
Investments ............................... 107,178,608 120,400,351 33,725,479
Futures
Foreign denominated other assets,
liabilities & currency ................. 46,653
------------ ------------ ------------
$ 381,832,817 $ 305,100,473 $ 211,453,846
------------ ------------ ------------
Investments and short-term obligations at cost $ 272,418,293 $ 183,541,724 $ 173,731,017
Foreign currency holdings at cost ............ 1,164,324
<PAGE>
<CAPTION>
December 31, 1996 (unaudited) Asset Balanced
Small Cap Allocation
<S> <C> <C> <C>
Assets
Investments at value ......................... $ 67,914,118 $ 77,527,759 $ 35,990,101
Short-term obligations at amortized cost ..... 1,247,490 29,133,575 6,893,000
Cash ......................................... 2,396 4,558
Foreign currency holdings at value
Receivable for investments sold .............. 269,921
Receivable for fund shares sold .............. 217,423 637,888 8,927
Dividends and interest receivable ............ 94,066 654,233 272,378
Prepaid expenses and other assets ............ 7,157 9,620 2,167
------------ ------------ ------------
Total assets ............................ 69,480,254 107,965,471 43,441,052
------------ ------------ ------------
Liabilities
Payable for investments purchased ............ 454,350
Payable for fund shares redeemed
Payable for variation margin ................. 401,400
Payable for distributions .................... 1,310 24,444
Accrued:
Management fees ........................... 42,875 63,470 27,645
Audit fees ................................ 15,148 19,544 11,537
Custodian fees ............................ 8,208 34,499 2,697
Legal fees ................................ 3,252 5,191 1,310
Trustees' fees ............................ 179 189
Transfer agent fees ....................... 2,362 8,551 2,510
Other fees ................................ 95
------------ ------------ ------------
Total liabilities .................... 72,024 988,504 70,238
------------ ------------ ------------
Net assets ................................... $ 69,408,230 $ 106,976,967 $ 43,370,814
------------ ------------ ------------
Shares of beneficial interest outstanding .... 5,573,536 8,000,143 3,899,863
------------ ------------ ------------
Offering and redemption price per share ...... $ 12.45 $ 13.37 $ 11.12
------------ ------------ ------------
Composition of Net Assets
Paid-in capital .............................. $ 58,118,495 $ 87,108,546 $ 40,103,806
Undistributed (Distribution in excess of)
net investment income ..................... 281,759 763
Accumulated net realized gains (losses) on
investments, futures and foreign currency . (180,633) 81,861 390,970
Net unrealized appreciation (depreciation) on:
Investments ............................... 11,188,609 19,136,181 2,875,275
Futures ................................... 650,379
Foreign denominated other assets,
liabilities & currency
------------ ------------ ------------
$ 69,408,230 $ 106,976,967 $ 43,370,814
------------ ------------ ------------
Investments and short-term obligations at cost $ 57,972,999 $ 87,525,153 $ 40,007,826
Foreign currency holdings at cost.............
<PAGE>
<CAPTION>
December 31, 1996 (unaudited) Fixed Short-Term Money
Income Government Market
<S> <C> <C> <C>
Assets
Investments at value ......................... $ 125,773,111 $ 47,538,699
Short-term obligations at amortized cost ..... 4,243,798 5,694,212 $ 98,850,557
Cash ......................................... 10,312 3,948
Foreign currency holdings at value
Receivable for investments sold .............. 605,251
Receivable for fund shares sold .............. 133,632 91,474 105,379
Dividends and interest receivable ............ 1,306,936 661,827 560,126
Prepaid expenses and other assets ............ 6,086 21,688 10,943
------------ ------------ ------------
Total assets ............................ 132,079,126 54,007,900 99,530,953
------------ ------------ ------------
Liabilities
Payable for investments purchased ............ 594,245
Payable for fund shares redeemed ............. 16,645 26,000
Payable for variation margin ................. 4,844
Payable for distributions .................... 753 122
Accrued:
Management fees ........................... 55,773 16,011 25,950
Audit fees ................................ 15,380 17,911 12,183
Custodian fees ............................ 11,712 6,898 12,272
Legal fees ................................ 6,569 1,764 4,883
Trustees' fees ............................ 511 190 217
Transfer agent fees ....................... 8,417 3,117 6,801
Other fees ................................ 279
------------ ------------ ------------
Total liabilities .................... 715,128 46,013 88,306
------------ ------------ ------------
Net assets ................................... $ 131,363,998 $ 53,961,887 $ 99,442,647
------------ ------------ ------------
Shares of beneficial interest outstanding .... 12,828,003 5,504,729 99,442,647
------------ ------------ ------------
Offering and redemption price per share ...... $ 10.24 $ 9.80 $ 1.00
------------ ------------ ------------
Composition of Net Assets
Paid-in capital .............................. $ 129,664,555 $ 54,707,516 $ 99,442,647
Undistributed (Distribution in excess of)
net investment income
Accumulated net realized gains (losses) on
investments, futures and foreign currency . 652,899 (720,544)
Net unrealized appreciation (depreciation) on:
Investments ............................... 1,094,558 (25,085)
Futures ................................... (14,064)
Foreign denominated other assets,
liabilities & currency ................. (33,950)
------------ ------------ ------------
$ 131,363,998 $ 53,961,887 $ 99,442,647
------------ ------------ ------------
Investments and short-term obligations at cost $ 128,922,351 $ 53,257,996 $ 98,850,557
------------ ------------ ------------
Foreign currency holdings at cost.............
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31, 1996 (unaudited)
Statements of Operations
Six Month Period Ended
December 31, 1996 (Unaudited) Growth Value International
<S> <C> <C> <C>
Investment Income
Dividends ................................................................. $ 1,105,341 $ 2,141,675 $ 4,395,375
Interest .................................................................. 68,076 714,812 418,381
------------ ------------ ------------
1,173,417 2,856,487 4,813,756
Less foreign taxes withheld at source ..................................... (20,776) (342,407)
------------ ------------ ------------
Total income ........................................................... 1,152,641 2,856,487 4,471,349
------------ ------------ ------------
Expenses
Management fees ........................................................... 1,443,445 1,065,894 928,105
Audit fees ................................................................ 18,148 15,376 17,770
Custodian fees ............................................................ 60,494 41,842 175,134
Registration fees ......................................................... 12,980 10,082 11,468
Legal fees ................................................................ 23,739 17,086 11,693
Trustees' fees ............................................................ 7,184 6,050 3,906
Transfer agent fees ....................................................... 55,038 41,962 39,694
Insurance fees ............................................................ 7,688 5,546 3,151
Other expenses ............................................................ 16,465 12,283 7,742
------------ ------------ ------------
Total expenses before waiver or reimbursement .......................... 1,645,181 1,216,121 1,198,663
------------ ------------ ------------
Expenses waived or borne by advisor (Note 2)
------------ ------------ ------------
Net investment income (loss) ........................................ (492,540) 1,640,366 3,272,686
------------ ------------ ------------
Net Realized and Unrealized Gain (Loss) on Investments, Futures and Foreign
Currency
Net realized gain (loss) on:
Investments ............................................................ 30,794,783 (3,675,355) 1,802,911
Futures
Foreign denominated other assets,
liabilities and currency ........................................... (140,361)
Change in net unrealized appreciation
(depreciation) on:
Investments ............................................................ 40,740 36,480,678 10,384,949
Futures
Foreign denominated other assets,
liabilities & currency .............................................. 51,716
------------ ------------ ------------
Net gain ....................................................... 30,835,523 32,805,323 12,099,215
------------ ------------ ------------
Net increase in net assets
resulting from operations .............................................. $ 30,342,983 $ 34,445,689 $ 15,371,901
------------ ------------ ------------
<PAGE>
<CAPTION>
Six Month Period Ended Asset Balanced
December 31, 1996 (Unaudited) Small Cap Allocation
<S> <C> <C> <C>
Investment Income
Dividends ................................................................. $ 468,527 $ 517,814 $ 180,508
Interest .................................................................. 49,831 1,651,404 554,478
------------ ------------ ------------
518,358 2,169,218 734,986
Less foreign taxes withheld at source ..................................... (2,628) (716)
------------ ------------ ------------
Total income ........................................................... 518,358 2,166,590 734,270
------------ ------------ ------------
Expenses
Management fees ........................................................... 230,215 354,030 137,565
Audit fees ................................................................ 12,856 16,635 14,115
Custodian fees ............................................................ 36,295 92,252 19,263
Registration fees ......................................................... 6,301 7,814 10,459
Legal fees ................................................................ 3,830 6,401 1,562
Trustees' fees ............................................................ 1,387 2,142 819
Transfer agent fees ....................................................... 11,441 29,485 11,189
Insurance fees ............................................................ 1,008 2,017 252
Other expenses ............................................................ 2,395 4,339 1,715
------------ ------------ ------------
Total expenses before waiver or reimbursement .......................... 305,728 515,115 196,939
------------ ------------ ------------
Expenses waived or borne by advisor (Note 2) .............................. (69,005) (5,876)
------------ ------------ ------------
Net investment income (loss) ........................................ 281,635 1,651,475 543,207
------------ ------------ ------------
Net Realized and Unrealized Gain (Loss) on Investments, Futures and Foreign
Currency
Net realized gain (loss) on:
Investments ............................................................ (179,854) 646,154 904,653
Futures ................................................................ 1,324,405
Foreign denominated other assets,
liabilities and currency
Change in net unrealized appreciation (depreciation) on:
Investments ............................................................ 8,589,219 5,190,693 2,681,176
Futures ................................................................ 362,972
Foreign denominated other assets,
liabilities & currency
------------ ------------ ------------
Net gain ....................................................... 8,409,365 7,524,224 3,585,829
------------ ------------ ------------
Net increase in net assets
resulting from operations .............................................. $ 8,691,000 $ 9,175,699 $ 4,129,036
------------ ------------ ------------
<PAGE>
<CAPTION>
Six Month Period Ended Fixed Short-Term Money
December 31, 1996 (Unaudited) Income Government Market
<S> <C> <C> <C>
Investment Income
Dividends
Interest .................................................................. $ 4,432,631 $ 1,587,637 $ 2,570,040
------------ ------------ ------------
4,432,631 1,587,637 2,570,040
Less foreign taxes withheld at source
------------ ------------ ------------
Total income ........................................................... 4,432,631 1,587,637 2,570,040
------------ ------------ ------------
Expenses
Management fees ........................................................... 386,353 93,625 140,386
Audit fees ................................................................ 14,997 16,131 12,855
Custodian fees ............................................................ 46,564 22,181 30,750
Registration fees ......................................................... 12,098 8,570 8,191
Legal fees ................................................................ 8,165 3,704 5,973
Trustees' fees ............................................................ 2,521 1,008 2,017
Transfer agent fees ....................................................... 29,868 14,466 24,828
Insurance fees ............................................................ 2,772 1,008 1,512
Other expenses ............................................................ 7,540 4,528 4,186
------------ ------------ ------------
Total expenses before waiver or reimbursement .......................... 510,878 165,221 230,698
------------ ------------ ------------
Expenses waived or borne by advisor (Note 2)
------------ ------------ ------------
Net investment income (loss) ........................................ 3,921,753 1,422,416 2,339,342
------------ ------------ ------------
Net Realized and Unrealized Gain (Loss) on Investments, Futures and Foreign
Currency
Net realized gain (loss) on:
Investments ............................................................ 816,567 328
Futures ................................................................ 171,073
Foreign denominated other assets,
liabilities and currency ........................................... 23,070
Change in net unrealized appreciation
(depreciation) on:
Investments ............................................................ 1,631,539 245,760
Futures ................................................................ (27,739)
Foreign denominated other assets,
liabilities & currency .............................................. (33,950)
------------ ------------ ------------
Net gain ....................................................... 2,580,560 246,088
------------ ------------ ------------
Net increase in net assets
resulting from operations .............................................. $ 6,502,313 $ 1,668,504 $ 2,339,342
------------ ------------ ------------
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31, 1996 (unaudited)
Statement of Changes in Net Assets
GROWTH VALUE
Period+ Year Period+ Year
Ended Ended Ended Ended
12/31/96 6/30/96 12/31/96 6/30/96
<S> <C> <C> <C> <C>
Increase (decrease) in net assets
Operations:
Net investment income (loss) ........................... ($ 492,540) ($ 656,447) $ 1,640,366 $ 2,961,886
Net realized gain (loss) on:
Investments ........................................ 30,794,783 45,847,473 (3,675,355) 11,101,033
Futures.............................................
Foreign denominated other assets,
liabilities & currency
Change in net unrealized appreciation (depreciation) on:
Investments ....................................... 40,740 13,169,169 36,480,678 37,625,337
Futures............................................
Foreign denominated other assets,
liabilities & currency
------------ ------------ ------------ ------------
Net increase in net assets
resulting from operations ............... 30,342,983 58,360,195 34,445,689 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) (9,697,504) (4,345,798)
------------ ------------ ------------ ------------
(54,170,251) (12,254,423) (12,954,191) (7,395,737)
------------ ------------ ------------ ------------
Fund share transactions:
Receipts for shares sold .......................... 42,116,003 135,580,181 55,329,159 82,411,934
Value of distributions reinvested ................. 53,877,323 12,181,842 12,907,130 7,390,214
Cost of shares redeemed ........................... (102,021,387) (156,772,349) (52,209,007) (79,191,337)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets
from fund share transactions ................. (6,028,061) (9,010,326) 16,027,282 10,610,811
------------ ------------ ------------ ------------
Total increase (decrease) ............. (29,855,329) 37,095,446 37,518,780 54,903,330
Net assets
Beginning of period ............................... 411,688,146 374,592,700 267,581,693 212,678,363
------------ ------------ ------------ ------------
End of period ..................................... $ 381,832,817 $ 411,688,146 $ 305,100,473 $ 267,581,693
------------ ------------ ------------ ------------
Undistributed (distribution in excess of)
net investment income at end of period ......... ($ 492,540) $ 23,658 $ 1,639,979
------------ ------------ ------------ ------------
Number of fund shares
Sold .............................................. 2,250,134 7,749,419 3,134,872 5,426,357
Issued for distributions reinvested ............... 3,096,398 720,817 708,405 496,321
Redeemed .......................................... (5,421,201) (8,758,721) (2,975,501) (5,241,207)
------------ ------------ ------------ ------------
Net increase (decrease) in shares outstanding ... (74,669) (288,485) 867,776 681,471
Outstanding at:
Beginning of period ............................... 22,231,801 22,520,286 16,068,137 15,386,666
------------ ------------ ------------ ------------
End of period ..................................... 22,157,132 22,231,801 16,935,913 16,068,137
------------ ------------ ------------ ------------
<PAGE>
<CAPTION>
December 31, 1996 (unaudited)
INTERNATIONAL SMALL CAP
Period+ Year Period+ Period++
Ended Ended Ended Ended
12/31/96 6/30/96 12/31/96 6/30/96
<S> <C> <C> <C> <C>
Increase (decrease) in net assets
Operations:
Net investment income (loss) ....................... $ 3,272,686 $ 2,255,455 $ 281,635 $ 175,243
Net realized gain (loss) on:
Investments .................................... 1,802,911 6,002,869 (179,854) 872,024
Futures.........................................
Foreign denominated other assets,
liabilities & currency ................... (140,361) (142,034)
Change in net unrealized appreciation
(depreciation) on:
Investments ................................... 10,384,949 10,137,240 8,589,219 2,599,390
Futures........................................
Foreign denominated other assets,
liabilities & currency ................... 51,716 (11,109)
------------ ------------ ------------ ------------
Net increase in net assets
resulting from operations ........... 15,371,901 18,242,421 8,691,000 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)
------------ ------------ ------------ ------------
(8,629,399) (1,927,390) (1,011,452) (40,000)
------------ ------------ ------------ ------------
Fund share transactions:
Receipts for shares sold ...................... 62,697,334 68,424,541 24,208,003 45,871,596
Value of distributions reinvested ............. 8,602,352 1,924,529 1,011,701 40,000
Cost of shares redeemed ....................... (24,215,751) (47,252,730) (9,183,734) (3,825,541)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets
from fund share transactions ............. 47,083,935 23,096,340 16,035,970 42,086,055
------------ ------------ ------------ ------------
Total increase (decrease) ......... 53,826,437 39,411,371 23,715,518 45,692,712
Net assets
Beginning of period ........................... 157,627,409 118,216,038 45,692,712 --
------------ ------------ ------------ ------------
End of period ................................. $ 211,453,846 $ 157,627,409 $ 69,408,230 $ 45,692,712
------------ ------------ ------------ ------------
Undistributed (distribution in excess of)
net investment income at end of period ..... $ 1,285 $ 1,729,622 $ 281,759 $ 138,773
------------ ------------ ------------ ------------
Number of fund shares
Sold .......................................... 4,640,762 5,347,892 2,225,797 4,408,434
Issued for distributions reinvested ........... 618,874 153,348 81,985 3,842
Redeemed ...................................... (1,746,692) (3,673,667) (796,622) (349,900)
------------ ------------ ------------ ------------
Net increase (decrease) in shares outstanding 3,512,944 1,827,573 1,511,160 4,062,376
Outstanding at:
Beginning of period ........................... 11,488,707 9,661,134 4,062,376 --
------------ ------------ ------------ ------------
End of period ................................. 15,001,651 11,488,707 5,573,536 4,062,376
------------ ------------ ------------ ------------
<PAGE>
<CAPTION>
December 31, 1996 (unaudited)
ASSET ALLOCATION
Period+ Year
Ended Ended
12/31/96 6/30/96
Increase (decrease) in net assets
<S> <C> <C>
Operations:
Net investment income (loss) ........................... $ 1,651,475 $ 2,818,557
Net realized gain (loss) on:
Investments ........................................ 646,154 3,533,395
Futures ............................................ 1,324,405 3,047,390
Foreign denominated other assets,
liabilities & currency
Change in net unrealized appreciation (depreciation) on:
Investments ....................................... 5,190,693 4,847,237
Futures ........................................... 362,972 (168,975)
Foreign denominated other assets,
liabilities & currency
------------ -------------
Net increase in net assets
resulting from operations ............... 9,175,699 14,077,604
------------ -------------
Distributions to shareholders from:
Net investment income ............................. (1,651,475) (2,806,264)
In excess of net investment income
Net realized gains ................................ (4,019,339) (5,044,890)
------------ -------------
(5,670,814) (7,851,154)
------------ -------------
Fund share transactions:
Receipts for shares sold .......................... 12,285,280 29,687,309
Value of distributions reinvested ................. 5,666,658 7,845,238
Cost of shares redeemed ........................... (11,369,204) (24,614,667)
------------ -------------
Net increase (decrease) in net assets
from fund share transactions ................. 6,582,734 12,917,880
------------ -------------
Total increase (decrease) ............. 10,087,619 19,144,330
Net assets
Beginning of period ............................... 96,889,348 77,745,018
------------ -------------
End of period ..................................... $ 106,976,967 $ 96,889,348
------------ -------------
Undistributed (distribution in excess of)
net investment income at end of period..........
------------ -------------
Number of fund shares
Sold .............................................. 926,643 2,326,968
Issued for distributions reinvested ............... 417,200 623,923
Redeemed .......................................... (863,867) (1,923,331)
------------ -------------
Net increase (decrease) in shares outstanding ... 479,976 1,027,560
Outstanding at:
Beginning of period ............................... 7,520,167 6,492,607
------------ -------------
End of period ..................................... 8,000,143 7,520,167
------------ -------------
<FN>
+Unaudited six-month period ended December 31, 1996.
++Eight-month period ended June 30, 1996 (Commenced investment
operations on November 1, 1995).
</FN>
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31, 1996 (unaudited)
Statements of Changes in Net Assets
BALANCED FIXED INCOME
Period+ Year Period+ Year
Ended Ended Ended Ended
12/31/96 6/30/96 12/31/96 6/30/96
<S> <C> <C> <C> <C>
Increase (decrease) in net assets
Operations:
Net investment income (loss) ....................... $ 543,207 $ 98,638 $ 3,921,753 $ 4,053,370
Net realized gain (loss) on:
Investments .................................... 904,653 100,697 816,567 797,650
Futures ........................................ 171,073 23,252
Foreign denominated other assets,
liabilities & currency ................... 23,070
Change in net unrealized appreciation
(depreciation) on:
Investments ................................... 2,681,176 194,099 1,631,539 (2,116,758)
Futures ....................................... (27,739) 13,675
Foreign denominated other assets,
liabilities & currency ................... (33,950)
------------- ------------ ------------- ------------
Net increase in net assets
resulting from operations ........... 4,129,036 393,434 6,502,313 2,771,189
------------- ------------ ------------- ------------
Distributions to shareholders from:
Net investment income ......................... (542,444) (98,638) (3,921,753) (4,053,370)
In excess of net investment income ............ (46,028)
Net realized gains ............................ (584,308) (30,072) (463,056) (317,329)
------------- ------------ ------------- ------------
(1,126,752) (174,738) (4,384,809) (4,370,699)
------------- ------------ ------------- ------------
Fund share transactions:
Receipts for shares sold ...................... 37,218,863 4,026,951 23,345,536 65,353,092
Value of distributions reinvested ............. 1,037,882 22,047 4,378,307 4,352,562
Cost of shares redeemed ....................... (1,894,208) (261,701) (9,661,841) (14,833,551)
------------- ------------ ------------- ------------
Net increase (decrease) in net assets
from fund share transactions ............. 36,362,537 3,787,297 18,062,002 54,872,103
------------- ------------ ------------- ------------
Total increase (decrease) .......... 39,364,821 4,005,993 20,179,506 53,272,593
Net assets
Beginning of period ........................... 4,005,993 -- 111,184,492 57,911,899
------------- ------------ ------------- ------------
End of period ................................. $ 43,370,814 $ 4,005,993 $ 131,363,998 $ 111,184,492
------------- ------------ ------------- ------------
Undistributed (distribution in excess of)
net investment income at end of period ..... $ 763
------------- ------------ ------------- ------------
Number of fund shares
Sold .......................................... 3,601,681 397,260 2,323,831 6,413,968
Issued for distributions reinvested ........... 93,397 2,073 429,807 422,744
Redeemed ...................................... (169,852) (24,696) (946,894) (1,440,043)
------------- ------------ ------------- ------------
Net increase (decrease) in shares outstanding 3,525,226 374,637 1,806,744 5,396,669
Outstanding at:
Beginning of period ........................... 374,637 -- 11,021,259 5,624,590
------------- ------------ ------------- ------------
End of period ................................. 3,899,863 374,637 12,828,003 11,021,259
------------- ------------ ------------- ------------
<PAGE>
<CAPTION>
SHORT-TERM GOVERNMENT MONEY MARKET
Period+ Year Period+ Period+
Ended Ended Ended Ended
12/31/96 6/30/96 12/31/96 6/30/96
<S> <C> <C> <C> <C>
Increase (decrease) in net assets
Operations:
Net investment income (loss) ........................... $ 1,422,416 $ 2,066,204 $ 2,339,342 $ 4,094,056
Net realized gain (loss) on:
Investments ........................................ 328 217,718
Futures
Foreign denominated other assets,
liabilities & currency
Change in net unrealized appreciation (depreciation) on:
Investments ....................................... 245,760 (540,502)
Futures
Foreign denominated other assets,
liabilities & currency
------------- ------------ ------------- ------------
Net increase in net assets
resulting from operations ............... 1,668,504 1,743,420 2,339,342 4,094,056
------------- ------------ ------------- ------------
Distributions to shareholders from:
Net investment income ............................. (1,422,480) (2,066,140) (2,339,342) (4,094,056)
In excess of net investment income
Net realized gains
------------- ------------ ------------- ------------
(1,422,480) (2,066,140) (2,339,342) (4,094,056)
------------- ------------ ------------- ------------
Fund share transactions:
Receipts for shares sold .......................... 3,723,379 23,481,754 61,841,559 150,542,997
Value of distributions reinvested ................. 1,421,287 2,064,082 2,333,621 4,096,124
Cost of shares redeemed ........................... (3,184,120) (5,588,970) (55,214,968) (143,742,439)
------------- ------------ ------------- ------------
Net increase (decrease) in net assets
from fund share transactions ................. 1,960,546 19,956,866 8,960,212 10,896,682
------------- ------------ ------------- ------------
Total increase (decrease) .............. 2,206,570 19,634,146 8,960,212 10,896,682
Net assets
Beginning of period ............................... 51,755,317 32,121,171 90,482,435 79,585,753
------------- ------------ ------------- ------------
End of period ..................................... $ 53,961,887 $ 51,755,317 $ 99,442,647 $ 90,482,435
------------- ------------ ------------- ------------
Undistributed (distribution in excess of)
net investment income at end of period ......... $ 64
------------- ------------ ------------- ------------
Number of fund shares
Sold .............................................. 380,250 2,384,848 61,841,559 150,542,997
Issued for distributions reinvested ............... 145,296 210,694 2,333,621 4,096,124
Redeemed .......................................... (324,854) (570,108) (55,214,968) (143,742,439)
------------- ------------ ------------- ------------
Net increase (decrease) in shares outstanding ... 200,692 2,025,434 8,960,212 10,896,682
Outstanding at:
Beginning of period ............................... 5,304,037 3,278,603 90,482,435 79,585,753
------------- ------------ ------------- ------------
End of period ..................................... 5,504,729 5,304,037 99,442,647 90,482,435
------------- ------------ ------------- ------------
<FN>
+Unaudited six-month period ended December 31, 1996.
</FN>
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31, 1996 (unaudited)
Financial Highlights
(Selected data for a share of beneficial interest outstanding throughout the period)
Income (Loss) From Investment Operations
Net Total
Net Asset Net Realized Income
Value, Investment and (Loss) from
Beginning Income Unrealized Investment
of Period (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
Six Months Ended
12/31/96 (unaudited) 18.52 (0.02) 1.59 1.57
<CAPTION>
PREFERRED VALUE FUND
<S> <C> <C> <C> <C>
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
Six Months Ended
12/31/96 (unaudited) 16.65 0.10 2.07 2.17
<CAPTION>
PREFERRED INTERNATIONAL FUND
<S> <C> <C> <C> <C>
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
Six Months Ended
12/31/96 (unaudited) 13.72 0.20 0.78 0.98
<CAPTION>
PREFERRED SMALL CAP FUND (Commenced investment operations on November 1, 1995)
<S> <C> <C> <C> <C>
Period Ended June 30,
1996+ 10.00 0.05 1.22 1.27
Six Months Ended
12/31/96 (unaudited) $11.25 $0.04 $1.35 $1.39
<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)
Six Months Ended
12/31/96 (unaudited) - - (2.86) - (2.86)
<CAPTION>
PREFERRED VALUE FUND
<S> <C> <C> <C> <C> <C>
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)
Six Months Ended
12/31/96 (unaudited) (0.20) - (0.60) - (0.80)
<CAPTION>
PREFERRED INTERNATIONAL FUND
<S> <C> <C> <C> <C> <C>
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)
Six Months Ended
12/31/96 (unaudited) (0.35) - (0.25) - (0.60)
<CAPTION>
PREFERRED SMALL CAP FUND (Commenced investment operations on November 1, 1995)
<S> <C> <C> <C> <C> <C>
Period Ended June 30,
1996+ (0.02) - - - (0.02)
Six Months Ended
12/31/96 (unaudited) $(0.03) - $(0.16) $ - $(0.19)
<PAGE>
<CAPTION>
Net Asset Total Net
Value, Return at Assets,
End of Net Asset End of
Period Value1 Period
<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
Six Months Ended
12/31/96 (unaudited) 17.23 8.48%++ 381,832,817
<CAPTION>
PREFERRED VALUE FUND
<S> <C> <C> <C>
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
Six Months Ended
12/31/96 (unaudited) 18.02 13.04%++ 305,100,473
<CAPTION>
PREFERRED INTERNATIONAL FUND
<S> <C> <C> <C>
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
Six Months Ended
12/31/96 (unaudited) 14.10 7.15%++ 211,453,846
<CAPTION>
PREFERRED SMALL CAP FUND
(Commenced investment
operations on November 1, 1995)
<S> <C> <C> <C>
Period Ended June 30,
1996+ 11.25 12.67%*++ 45,692,712
Six Months Ended
12/31/96 (unaudited) $12.45 12.31%*++ $69,408,230
<PAGE>
<CAPTION>
Ratios to Average Net Assets
Operating
Expenses Net
Before Investment Portfolio Average
Operating Voluntary Income Turnover Brokerage
Expenses Waiver (Loss) Rate Commissions
<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
Six Months Ended
12/31/96 (unaudited) 0.86%+++ - (0.26%)+++ 27.80% $0.060
<CAPTION>
PREFERRED VALUE FUND
<S> <C> <C> <C> <C> <C>
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
Six Months Ended
12/31/96 (unaudited) 0.86%+++ - 1.15%+++ 7.40% $0.057
<CAPTION>
PREFERRED INTERNATIONAL FUND
<S> <C> <C> <C> <C> <C>
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
Six Months Ended
12/31/96 (unaudited) 1.23%+++ - 3.35%+++ 10.30% $0.030
<CAPTION>
PREFERRED SMALL CAP FUND
(Commenced investment
operations on November 1, 1995)
<S> <C> <C> <C> <C> <C>
Period Ended June 30,
1996+ 0.88%+++ 1.23%+++ 0.75%+++ 65.70%++ 0.047
Six Months Ended
12/31/96 (unaudited) 0.78%+++ 1.00%+++ 0.92%+++ 41.66% $0.049
<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>
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31, 1996 (unaudited)
Financial Highlights
(Selected data for a share of beneficial interest outstanding throughout the period)
Income (Loss) From Investment Operations
Net Total
Net Asset Net Realized Income
Value, Investment and (Loss) from
Beginning Income Unrealized Investment
of Period (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
Six Months Ended
12/31/96 (unaudited) 12.88 0.21 1.02 1.23
<CAPTION>
PREFERRED BALANCED FUND
<S> <C> <C> <C> <C>
Year Ended June 30,
1996 10.00 0.41 0.78 1.19
Six Months Ended
12/31/96 (unaudited) 10.69 0.14 0.58 0.72
<CAPTION>
PREFERRED FIXED
INCOME FUND
<S> <C> <C> <C> <C>
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
Six Months Ended
12/31/96 (unaudited) 10.09 0.31 0.19 0.50
<CAPTION>
PREFERRED SHORT-TERM
GOVERNMENT SECURITIES FUND
<S> <C> <C> <C> <C>
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
Six Months Ended
12/31/96 (unaudited) 9.76 0.26 0.04 0.30
<CAPTION>
PREFERRED MONEY MARKET FUND
<S> <C> <C> <C> <C>
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
Six Months Ended
12/31/96 (unaudited) $1.00 $0.03 $ - $0.03
<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)
Six Months Ended
12/31/96 (unaudited) (0.21) - (0.53) - (0.74)
<CAPTION>
PREFERRED BALANCED FUND
<S> <C> <C> <C> <C> <C>
Year Ended June 30,
1996 (0.28) (0.13) (0.09) - (0.50)
Six Months Ended
12/31/96 (unaudited) (0.14) - (0.15) - (0.29)
<CAPTION>
PREFERRED FIXED
INCOME FUND
<S> <C> <C> <C> <C> <C>
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)
Six Months Ended
12/31/96 (unaudited) (0.31) - (0.04) - (0.35)
<CAPTION>
PREFERRED SHORT-TERM
GOVERNMENT SECURITIES FUND
<S> <C> <C> <C> <C> <C>
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)
Six Months Ended
12/31/96 (unaudited) (0.26) - - - (0.26)
<CAPTION>
PREFERRED MONEY MARKET FUND
<S> <C> <C> <C> <C> <C>
Year Ended June 30,
1993 (0.03) - - - (0.03)
1994 (0.03) - - - (0.03)
1995 (0.05) - - - (0.05)
1996 (0.05) - - - (0.05)
Six Months Ended
12/31/96 (unaudited) $(0.03) $ - $ - $ - $(0.03)
<PAGE>
<CAPTION>
Net Asset Total Net
Value, Return at Assets,
End of Net Asset End of
Period Value1 Period
<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
Six Months Ended
12/31/96 (unaudited) 13.37 9.63%++ 106,976,967
<CAPTION>
PREFERRED BALANCED FUND
<S> <C> <C> <C>
Year Ended June 30,
1996 10.69 12.11%* 4,005,993
Six Months Ended
12/31/96 (unaudited) 11.12 6.78%*++ 43,370,814
<CAPTION>
PREFERRED FIXED
INCOME FUND
<S> <C> <C> <C>
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
Six Months Ended
12/31/96 (unaudited) 10.24 5.00%++ 131,363,998
<CAPTION>
PREFERRED SHORT-TERM
GOVERNMENT SECURITIES FUND
<S> <C> <C> <C>
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
Six Months Ended
12/31/96 (unaudited) 9.80 3.13%++ 53,961,887
<CAPTION>
PREFERRED MONEY MARKET FUND
<S> <C> <C> <C>
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
Six Months Ended
12/31/96 (unaudited) $1.00 2.56%++ $99,442,647
<PAGE>
<CAPTION>
Ratios to Average Net Assets
Operating
Expenses Net
Before Investment Portfolio Average
Operating Voluntary Income Turnover Brokerage
Expenses Waiver (Loss) Rate Commissions
<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
Six Months Ended
12/31/96 (unaudited) 1.02%+++ - 3.27%+++ 10.07% $0.034
<CAPTION>
PREFERRED BALANCED FUND
<S> <C> <C> <C> <C> <C>
Year Ended June 30,
1996 1.15%** 4.37%** 2.77% 48.03% N/A
Six Months Ended
12/31/96 (unaudited) 1.04%**+++ 1.07%**+++ 2.96%+++ 21.29% $0.055
<CAPTION>
PREFERRED FIXED
INCOME FUND
<S> <C> <C> <C> <C> <C>
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
Six Months Ended
12/31/96 (unaudited) 0.80%+++ - 6.14%+++ 63.43% N/A
<CAPTION>
PREFERRED SHORT-TERM
GOVERNMENT SECURITIES FUND
<S> <C> <C> <C> <C> <C>
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
Six Months Ended
12/31/96 (unaudited) 0.62%+++ - 5.32%+++ 81.21% N/A
<CAPTION>
PREFERRED MONEY MARKET FUND
<S> <C> <C> <C> <C> <C>
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
Six Months Ended
12/31/96 (unaudited) 0.49%+++ - 5.00%+++ 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.
No fees were waived for the Money Market
Fund during the six-month period ended 12/31/96.
** Effective July 1, 1995, and until further notice, the manager has agreed to
cap its expense ratio at 1.15%.
++ Not annualized +++Annualized
</FN>
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31, 1996 (unaudited)
- ------------------------------------------------------
Schedule of Investments
PREFERRED GROWTH FUND
- ------------------------------------------------------
COMMON STOCK - 98.87% SHARES VALUE
- ------------------------------------------------------
<S> <C> <C>
AEROSPACE - 3.28%
Boeing Co 117,900 $12,541,613
------------
BANKS - 2.27%
Chase Manhattan Corp 79,596 7,103,943
MBNA Corp 38,100 1,581,150
-----------
8,685,093
COMPUTER SOFTWARE - 5.50%
First Data Corp 124,800 4,555,200
Microsoft Corp * 116,300 9,609,288
Platinum Technology Inc * 249,500 3,399,438
SAP Aktiengesellschaft ADR 75,500 3,435,250
------------
20,999,176
------------
CONSUMER PRODUCTS - 3.89%
Gillette Co 81,800 6,359,950
Nike Inc Class B 78,400 4,684,400
Pepsico Inc 24,000 702,000
Saks Holdings Inc * 115,100 3,107,700
------------
14,854,050
------------
DISCOUNT & FASHION RETAILING - 8.76%
AutoZone Inc * 148,800 4,092,000
Dollar General Corp 159,175 5,093,600
Gap Inc 123,100 3,708,388
Gucci Group NV 68,600 4,381,825
Home Depot Inc 124,433 6,237,204
Kohls Corp * 149,600 5,871,800
Tommy Hilfiger Corp * 85,000 4,080,000
------------
33,464,817
------------
ELECTRICAL & ELECTRONICS - 13.16%
Diebold Inc 156,737 9,854,839
Intel Corp 101,100 13,237,781
KLA Instruments Corp * 159,600 5,665,800
LSI Logic Corp * 167,440 4,479,020
Symbol Technologies Inc * 113,500 5,022,375
Texas Instruments Inc 36,700 2,339,625
Thermo Electron Corp * 92,000 3,795,000
Xilinx Inc * 159,100 5,856,869
------------
50,251,309
------------
FINANCE - 1.93%
Charles Schwab Corp 47,600 1,523,200
Morgan Stanley Group Inc 102,300 5,843,888
------------
7,367,088
------------
FUEL - 2.47%
Amerada Hess Corp 57,700 3,339,388
Schlumberger Ltd 60,900 6,082,388
------------
9,421,776
------------
<PAGE>
<CAPTION>
- ------------------------------------------------------
COMMON STOCK SHARES VALUE
- ------------------------------------------------------
<S> <C> <C>
HEALTHCARE - 9.85%
Astra AB ADR 79,400 $ 3,918,811
Chiron Corp * 67,200 1,251,600
Eli Lilly & Co 50,400 3,679,200
Healthsouth Corp * 95,800 3,700,275
Johnson & Johnson 99,800 4,965,050
Merch & Co Inc 57,400 4,548,950
Pfizer Inc 67,300 5,577,488
Phycor Inc * 140,550 3,988,106
Smithkline Beecham PLC ADR 87,900 5,977,200
------------
37,606,680
------------
LEISURE TIME INDUSTRIES - 6.13%
Hilton Hotels Corp 263,000 6,870,875
Interstate Hotels Co * 185,100 5,229,075
Promus Hotel Corp 142,425 4,219,341
Walt Disney Co 101,600 7,073,900
------------
23,393,191
------------
MANUFACTURING - 4.94%
Applied Materials Inc * 166,700 5,990,781
Caterpillar Inc 86,800 6,531,700
Harnischfeger Industries Inc 131,300 6,318,813
------------
18,841,294
------------
OFFICE EQUIPMENT &
COMPUTERS - 18.15%
3Com Corp * 133,600 9,802,900
America Online Inc * 88,600 2,945,950
Ascend Communications Inc * 101,200 6,287,050
Cisco Systems Inc * 171,900 10,937,138
Corporate Express Inc * 133,000 3,915,188
Dell Computer Corp * 159,900 8,494,688
HBO & Co 115,100 6,834,063
Hewlett Packard Co 182,500 9,170,625
International Business Machines 24,900 3,759,900
Seagate Technology * 181,200 7,157,400
------------
69,304,902
------------
PUBLISHING & BROADCASTING - 2.14%
Reuters Holdings PLC
Class B ADR 106,600 8,154,900
------------
SERVICE INDUSTRIES - 4.90%
CUC International Inc * 276,900 6,576,375
Manpower Inc 164,600 5,349,500
Omnicom Group 148,600 6,798,450
------------
18,724,325
------------
TELECOMMUNICATIONS - 7.17%
Clear Channel Communications * 111,500 4,027,938
Ericsson LM Tel Co Class B ADR 189,500 5,720,531
Nokia Corp ADR 125,400 7,226,175
Tellabs Inc * 164,500 6,189,313
Vodafone Group PLC ADR 101,800 4,211,975
------------
27,375,932
------------
See notes to financial statements and notes to schedules of investments
<PAGE>
<CAPTION>
- ------------------------------------------------------
COMMON STOCK SHARES VALUE
- ------------------------------------------------------
<S> <C> <C>
TRANSPORTATION - 4.33%
AMR Corp * 80,500 $ 7,094,063
Union Pacific Res Group Inc 78,200 2,287,350
Wisconsin Central Trans Corp * 180,400 7,148,342
------------
16,529,755
------------
TOTAL COMMON STOCK
(Cost -$270,337,293) 377,515,901
------------
<CAPTION>
- ------------------------------------------------------
SHORT TERM OBLIGATIONS - .54% PAR VALUE
- ------------------------------------------------------
<S> <C> <C>
COMMERCIAL PAPER - .54%
Ford Motor Credit Co
6.00% 2 Jan 1997 $2,081,000 2,081,000
------------
TOTAL SHORT TERM OBLIGATIONS
(Cost - $2,081,000) 2,081,000
------------
TOTAL INVESTMENTS - 99.41%
(Cost - $272,418,293) 379,596,901
------------
OTHER ASSETS AND LIABILITIES - .59% 2,235,916
------------
TOTAL NET ASSETS - 100% $381,832,817
============
PREFERRED VALUE FUND
<CAPTION>
- ------------------------------------------------------
COMMON STOCK - 91.39% SHARES VALUE
- ------------------------------------------------------
<S> <C> <C>
AEROSPACE - 7.49%
Lockheed Martin Corp 110,000 $10,065,000
McDonnell Douglas Corp 200,000 12,800,000
------------
22,865,000
------------
BANKS - 8.12%
Citicorp 120,000 12,360,000
Wells Fargo & Co 46,000 12,408,500
------------
24,768,500
------------
CHEMICALS - 13.37%
Du Pont E I de Nemours & Co 80,000 7,550,000
Freeport McMoRan Inc 170,000 5,461,250
Freeport McMoRan Inc
Copper & Gold Class B 275,000 8,215,625
Hercules Inc 160,000 6,920,000
Monsanto Co 325,000 12,634,375
------------
40,781,250
------------
<PAGE>
<CAPTION>
- ------------------------------------------------------
COMMON STOCK SHARES VALUE
- ------------------------------------------------------
<S> <C> <C>
CONGLOMERATES - 5.31%
General Electric Co 100,000 $ 9,887,500
Tenneco Inc 140,000 6,317,500
------------
16,205,000
------------
CONSUMER PRODUCTS - 3.00%
Avon Products Inc 160,000 9,140,000
------------
DISCOUNT & FASHION
RETAILING - 2.30%
May Dept Stores Co 150,000 7,012,500
------------
ELECTRICAL - 3.43%
Intel Corp 80,000 10,475,000
------------
FINANCE - 27.18%
Ace Ltd 160,000 9,620,000
Aflac Inc 200,000 8,550,000
American International Group Inc 70,000 7,577,500
Countrywide Credit Industry Inc 300,000 8,587,500
Exel Ltd 280,000 10,605,000
Federal Home Loan Mortgage Corp 110,000 12,113,750
Morgan Stanley Group Inc 100,000 5,712,500
Transamerica Corp 100,000 7,900,000
Travelers Group Inc 270,000 12,251,250
------------
82,917,500
------------
FOOD - 3.29%
Dole Food Inc 180,000 6,097,500
Grand Metropolitan PLC ADR 125,000 3,953,125
------------
10,050,625
------------
HEALTH CARE - 4.45%
Becton Dickinson & Co 140,000 6,072,500
Warner Lambert Co 100,000 7,500,000
------------
13,572,500
------------
LEISURE TIME INDUSTRIES - 1.62%
Carnival Corp Class A 150,000 4,950,000
------------
MANUFACTURING - 1.93%
Shaw Industries Inc 500,000 5,875,000
------------
PAPER & FOREST PRODUCTS - 1.42%
Champion International Corp 100,000 4,325,000
------------
SERVICE INDUSTRIES - 2.98%
Arrow Electronics Inc* 170,000 9,095,000
------------
TELECOMMUNICATIONS - 2.61%
Sprint Corp 200,000 7,975,000
------------
See notes to financial statements and notes to schedules of investments
<PAGE>
<CAPTION>
PREFERRED VALUE FUND (continued)
- ------------------------------------------------------
COMMON STOCK SHARES VALUE
- ------------------------------------------------------
<S> <C> <C>
TRANSPORTATION - 2.89%
AMR Corp* 100,000 $ 8,830,865
------------
TOTAL COMMON STOCK
(Cost - $158,438,389) 278,838,740
------------
<CAPTION>
- ------------------------------------------------------
SHORT TERM OBLIGATIONS - 8.23% PAR/SHARES VALUE
- ------------------------------------------------------
<S> <C> <C>
COMMERICIAL PAPER - 7.37%
Deere & Co@
5.50% 7 Jan 1997 $ 8,000,000 7,992,667
Ford Motor Credit Co@
5.62% 2 Jan 1997 4,500,000 4,499,298
Household Finance Corp@
5.50% 14 Jan 1997 6,000,000 5,988,083
Merrill Lynch & Co Inc@
5.75% 9 Jan 1997 $ 4,000,000 3,994,888
------------
22,474,936
------------
SHORT TERM INVESTMENT
FUND - .86%
State Street Global Advisors
Funds 2,628,399 2,628,399
------------
TOTAL SHORT TERM OBLIGATIONS
(Cost - $25,103,335) 25,103,335
------------
TOTAL INVESTMENTS - 99.62%
(Cost - $183,541,724) 303,942,075
------------
OTHER ASSETS AND LIABILITIES - .38% 1,158,398
------------
TOTAL NET ASSETS - 100% $305,100,473
============
PREFERRED INTERNATIONAL FUND
<CAPTION>
- ------------------------------------------------------
COMMON STOCK &
EQUIVALENTS - 95.20% SHARES VALUE
- ------------------------------------------------------
<S> <C> <C>
ARGENTINA - 3.35%
COMMUNICATION SERVICES - 1.32%
Telecom Argentina Stet
France Class B ADR 69,000 $ 2,785,875
INTERNATIONAL OIL - 2.03%
YPF Sociedad Anonima
Class D ADR 170,000 4,292,500
------------
Total Argentina 7,078,375
------------
<PAGE>
<CAPTION>
- -------------------------------------------------------
COMMON STOCK & EQUIVALENTS SHARES VALUE
- -------------------------------------------------------
<S> <C> <C>
AUSTRALIA - 8.13%
BANKS - 2.25%
National Australia Bank 405,000 $ 4,764,327
CONGLOMERATES - 1.82%
CSR Ltd 1,100,000 3,847,071
CONSTRUCTION MATERIALS - 2.12%
Pioneer International Ltd 1,500,000 4,471,028
TRUCKING & FREIGHT -1.94%
Mayne Nickless Ltd 600,000 4,101,423
------------
Total Australia 17,183,849
------------
- ------------------------------------------------------
CANADA - 5.13%
BANKS - 2.61%
Bank Nova Scotia Halifax 165,000 5,524,903
RETAIL TRADE - 2.52%
Canadian Tire Ltd Class A 320,000 5,316,585
------------
Total Canada 10,841,488
------------
- ------------------------------------------------------
FRANCE - 6.59%
APPAREL & TEXTILES - 2.59%
Christian Dior 34,000 5,484,822
AUTOMOBILES - 1.33%
Peugeot S.A. 25,000 2,813,915
GAS EXPLORATION - 2.67%
Societe Elf Aquitaine * 62,000 5,643,751
------------
Total France 13,942,488
------------
- ------------------------------------------------------
ITALY - 5.55%
APPAREL & TEXTILES - 2.03%
Benetton Group SPA * 340,000 4,300,989
BANKS - 1.35%
Banca Fideuram SPA * 1,300,000 2,857,943
FOOD & BEVERAGES - 2.17%
Parmalat Finanziaria 3,000,000 4,588,003
------------
Total Italy 11,746,935
------------
See notes to financial statements and notes to schedules of investments
<PAGE>
<CAPTION>
- ------------------------------------------------------
COMMON STOCK & EQUIVALENTS SHARES VALUE
- ------------------------------------------------------
<S> <C> <C>
JAPAN - 5.16%
ELECTRICAL EQUIPMENT - 1.76%
Hitachi 400,000 $ 3,730,248
HOUSEHOLD APPLIANCES - 3.40%
Matsushita Electric Industries 215,000 3,508,764
Sony Corp 56,000 3,670,149
------------
7,178,913
------------
Total Japan 10,909,161
------------
- ------------------------------------------------------
NETHERLANDS - 10.13%
AIR TRAVEL - 1.33%
KLM Royal Dutch Air Lines 100,000 2,814,944
CHEMICALS - 2.26%
Akzo Nobel NV 35,000 4,784,246
FINANCIAL SERVICES - 2.18%
ING Groep NV 128,000 4,611,410
INDUSTRIAL MACHINERY - 2.17%
Stork NV * 130,000 4,585,578
PETROLEUM - 2.19%
Pakhoed NV Kon * 148,000 4,629,018
------------
Total Netherlands 21,425,196
------------
- ------------------------------------------------------
NEW ZEALAND - 5.04%
FOOD & BEVERAGES - 1.81%
Lion Nathan Ltd 1,600,000 3,834,571
FOREST PRODUCTS - 1.93%
Carter Holt Harvey 1,800,000 4,084,836
HOUSEHOLD APPLIANCES - 1.30%
Fisher & Paykel 700,000 2,746,554
------------
Total New Zealand 10,665,961
------------
- ------------------------------------------------------
NORWAY - 2.30%
CONGLOMERATES - 2.30%
Orkla Borregaard AS Series A * 70,000 4,856,358
------------
Total Norway 4,856,358
------------
<PAGE>
<CAPTION>
- ------------------------------------------------------
COMMON STOCK & EQUIVALENTS SHARES VALUE
- ------------------------------------------------------
<S> <C> <C>
SOUTH KOREA - 4.84%
BANKS - .24%
Korea LT Credit Bank * 30,050 $ 515,651
BUILDING CONSTRUCTION - .38%
LG Construction Co * 40,801 801,534
CONSTRUCTION & MINING
EQUIPMENT - .52%
Tongyang Cement * 60,070 1,087,658
ELECTRIC UTILITIES - 1.84%
Korea Electric Power * 133,650 3,890,876
ELECTRICAL EQUIPMENT - .71%
Samsung Electronic * 24,024 1,293,600
Samsung Electronic New * 4,075 209,296
------------
1,502,896
------------
NON-FERROUS METALS - .79%
Korea Zinc * 88,000 1,666,272
STEEL - .36%
Pohang Iron & Steel * 17,700 764,556
------------
Total South Korea 10,229,443
------------
- ------------------------------------------------------
SPAIN - 7.12%
BANKS - 3.84%
Banco Bilbao Vizcaya 88,000 4,751,627
Banco de Andalucia 23,000 3,366,070
------------
8,117,697
------------
ELECTRIC UTILITIES - 3.28%
Iberdrola S.A. 490,000 6,944,733
------------
Total Spain 15,062,430
------------
- ------------------------------------------------------
SWEDEN - 7.31%
AUTOMOBILES - 1.83%
Volvo AB Series B * 175,000 3,861,860
HOUSEHOLD APPLIANCES - 2.00%
Electrolux AB Series B * 73,000 4,238,772
INDUSTRIAL MACHINERY - 1.96%
Skf AB Series B * 175,000 4,144,122
MINING - 1.52%
Svedala Industrial * 190,000 3,217,789
------------
Total Sweden 15,462,543
------------
See notes to financial statements and notes to schedules of investments
<PAGE>
<CAPTION>
PREFERRED INTERNATIONAL FUND (continued)
- ------------------------------------------------------
COMMON STOCKS & EQUIVALENTS SHARES VALUE
- ------------------------------------------------------
<S> <C> <C>
SWITZERLAND - 8.73%
BANKS - 1.53%
Schweiz Bankverein * 17,000 $ 3,232,350
INDUSTRIAL MACHINERY - 1.91%
Sulzer AG * 7,000 4,042,585
MISCELLANEOUS - 1.73%
Novartis AG * 3,200 3,664,769
RETAIL TRADE - 1.72%
Valora Holding AG * 19,000 3,633,919
TOYS & AMUSEMENT - 1.84%
SMH AG Neunburg 6,300 3,883,078
------------
Total Switzerland 18,456,701
------------
- ------------------------------------------------------
UNITED KINGDOM - 15.82%
APPAREL & TEXTILES - 1.63%
Coats Viyella 1,500,000 3,443,550
BANKS - 3.22%
Lloyds Trustees Savings
Bank Group 325,714 2,405,049
National Westminster 375,000 4,407,230
------------
6,812,279
------------
FOOD & BEVERAGES - 1.88%
Allied Domecq PLC 505,000 3,962,481
HOUSEHOLD PRODUCTS - .46%
Takare 420,000 978,585
LEISURE TIME - 1.99%
Rank Organisation 560,000 4,202,159
RETAIL GROCERY - 2.22%
Tesco 775,000 4,700,188
STEEL - 2.02%
British Steel 1,557,000 4,267,945
TELEPHONE - 2.40%
British Telecom 750,000 5,075,381
------------
Total United Kingdom 33,442,568
------------
<PAGE>
<CAPTION>
- ------------------------------------------------------
COMMON STOCK & EQUIVALENTS SHARES VALUE
- ------------------------------------------------------
<S> <C> <C>
TOTAL COMMON STOCK
& EQUIVALENTS
(Cost - $167,578,017) $ 201,303,496
------------
<CAPTION>
- ------------------------------------------------------
SHORT TERM OBLIGATIONS - 2.91% PAR VALUE
- ------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENTS - 2.91%
State Street Repo 4.75%
2 Jan 1997 (Cost - $6,153,000)
(Dated 12/31/96, due 1/2/97,
collateralized by $4,280,000
U.S. Treasury Bond 10.625%,
8/15/15, Market Value
$6,281,568, Repurchase
Proceeds $6,154,624) $6,153,000 6,153,000
----------
TOTAL SHORT TERM OBLIGATIONS
(Cost - $6,153,000) 6,153,000
-----------
TOTAL INVESTMENTS - 98.11%
(Cost - $173,731,017) 207,456,496
------------
OTHER ASSETS AND LIABILITIES - 1.89% 3,997,350
-----------
TOTAL NET ASSETS - 100% $211,453,846
============
PREFERRED SMALL CAP FUND
- ------------------------------------------------------
COMMON STOCK - 97.85% SHARES VALUE
- ------------------------------------------------------
<S> <C> <C>
AUTOMOTIVE - 4.28%
Arvin Industry Inc 20,000 $ 495,000
Borg Warner Automotive Inc 8,500 327,250
Excel Industry Inc 31,700 527,013
Simpson Industry Inc 48,000 522,750
Stant Corp 70,000 1,102,500
------------
2,974,513
------------
BANKS - 4.99%
Astoria Financial Corp 14,300 527,313
BSB Bancorp Inc 7,500 200,625
Bancorpsouth Inc 5,000 138,750
City National Corp 15,800 341,675
Commercial Fed Corp 13,000 624,000
Commonwealth Bancorp Inc 25,000 375,000
Cullen Frost Bankers Inc 6,600 219,450
New York Bancorp Inc 16,900 654,875
Riggs National Corp 22,000 379,500
------------
3,461,188
------------
See notes to financial statements and notes to schedules of investments
<PAGE>
<CAPTION>
- ----------------------------------------------------------
COMMON STOCK SHARES VALUE
- ----------------------------------------------------------
<S> <C> <C>
CHEMICALS - 1.38%
Fuller (H.B.) Co 5,000 $ 235,000
Mississippi Chemical Corp 30,000 720,000
------------
955,000
------------
CONGLOMERATES - .68%
Premark International Inc 21,200 471,700
------------
CONSUMER PRODUCTS - 3.00%
Dimon Inc 20,300 469,438
Herbalife International Inc 16,100 525,263
Paragon Trade Brands Inc* 13,200 396,000
Universal Corp 21,500 690,688
------------
2,081,389
------------
DISCOUNT & FASHION RETAILING - 4.37%
Brown Group Inc 34,500 633,938
Ross Stores Inc 17,700 885,000
Russ Berrie & Co Inc 10,200 183,600
Shopko Stores Inc 20,000 300,000
The Dress Barn* 35,000 525,000
Zale Corp* 26,400 504,900
------------
3,032,438
------------
ELECTRICAL & ELECTRONICS - 9.48%
Chips & Technologies Inc* 39,300 717,225
Cohu Inc 24,300 564,975
Genrad Inc* 18,000 418,500
HMT Technology Corp* 60,000 900,938
Hadco Corp* 6,500 318,500
Jabil Circuit Inc* 31,800 1,272,000
Logicon Inc 5,300 193,450
Park Electrochemical Corp 12,800 291,200
Pittway Corp Class A 2,700 144,450
SCI System Inc* 8,800 392,700
Smart Modular Technologies Inc* 16,000 402,000
Standard Microsystems Corp* 61,500 584,250
Technitrol Inc 10,000 383,750
------------
6,583,938
------------
FINANCE - 14.72%
Acceptance Insurance Co* 15,300 302,175
Alex Brown Inc 16,000 1,160,000
American Bankers Insurance
Group Inc1 6,500 843,563
BHC Financial Inc 5,500 86,625
Capital Re Corp 5,300 247,113
Eaton Vance Corp 9,500 452,438
Enhance Financial Services
Group Inc 25,400 927,100
Fidelity National Financial Inc 17,820 269,528
First American Financial Corp 19,500 801,938
Fremont Gen Corp 18,950 587,450
Inter Regional Financial
Group Inc 14,000 493,500
<PAGE>
<CAPTION>
- ------------------------------------------------------
COMMON STOCK SHARES VALUE
- ------------------------------------------------------
<S> <C> <C>
FINANCE (continued)
Investment Technology Group Inc* 10,000 $ 192,500
Lawyers Title Corp 31,500 618,188
Legg Mason Inc 9,600 369,600
Olympic Financial Ltd* 40,000 575,000
Orion Cap Corp 7,300 446,213
Presidential Life Corp 20,000 241,250
Raymond James Financial Inc 15,000 451,875
Resource Mortgage Capital Inc 39,100 1,148,563
------------
10,214,619
------------
FOOD - 1.12%
Riser Foods Inc 13,200 419,100
Ruddick Corp 25,500 357,000
------------
776,100
------------
FUEL - 3.55%
Berry Petroleum Co Class A 25,400 365,125
Giant Industry Inc 49,700 695,800
Smith International Inc* 11,200 502,600
Tesoro Petroleum Inc* 64,500 903,000
------------
2,466,525
------------
HEALTH CARE - 5.29%
Bio Rad Laboratories Inc
Class A* 20,250 607,500
ICN Pharmaceuticals Inc 25,600 502,400
Lincare Holdings Inc* 11,900 487,900
Novacare Inc* 43,000 473,000
Ornda Health Corp* 19,500 570,375
Rotech Medical Corp* 10,600 222,600
Universal Health Services Inc
Class B* 28,300 810,088
------------
3,673,863
------------
HOUSING & REAL ESTATE - 9.52%
ABT Building Products Corp* 11,600 290,000
CWM Mortgage Holdings Inc 37,100 797,650
Capstead Mortgage Corp 46,575 1,117,800
Centex Construction Products Inc 24,600 442,800
Centex Corp 21,800 820,225
Champion Enterprises Inc* 54,484 1,062,438
Continental Homes Holding Corp 30,400 646,000
Lennar Corp 13,000 354,250
Lone Star Industry Inc 15,800 582,625
NVR Inc* 37,800 491,400
------------
6,605,188
------------
LEISURE TIME INDUSTRIES - 2.05%
Anchor Gaming* 7,900 317,975
Coachmen Industry Inc 19,000 539,125
Hilton Hotels Corp 9,000 235,125
Thor Industry Inc 13,000 328,250
------------
1,420,475
------------
See notes to financial statements and notes to schedules of investments
<PAGE>
<CAPTION>
PREFERRED SMALLCAP FUND (continued)
- ----------------------------------------------------------
COMMON STOCK SHARES VALUE
- ----------------------------------------------------------
<S> <C> <C>
MANUFACTURING - 5.67%
Coastcast Corp* 26,200 $ 379,900
Day Runner Inc* 10,600 206,700
Falcon Building Products Inc
Class A* 23,000 339,250
Furniture Brands International
Inc* 62,300 872,200
Global Industrial Technologies
Inc* 10,200 225,675
Graco Inc 16,700 409,150
Kimball International Inc
Class B 4,500 186,188
Mohawk Industry Inc* 11,500 253,000
Robbins & Myers Inc 12,300 307,500
Tredegar Industry Inc 18,800 754,350
------------
3,933,913
------------
METALS & MINING - 8.82%
Chase Brass Industry Inc* 25,600 508,800
Cleveland Cliffs Inc 6,500 294,938
Kaydon Corp 8,200 386,425
Medusa Corp 14,700 505,313
Mueller Industry Inc* 10,100 388,850
Oregon Steel Mills Inc 37,000 619,750
Quanex Corp 4,600 125,925
RMI Titanium Co* 36,500 1,026,563
Reliance Steel & Aluminum Co 19,400 679,000
Southdown Inc 26,600 827,925
Texas Industry Inc 15,000 759,375
------------
6,122,864
------------
OFFICE EQUIPMENT & COMPUTERS - 3.94%
CompUSA Inc* 20,000 412,500
Herman Miller Inc 20,100 1,138,163
Inacom Corp* 20,000 800,000
Trident Microsystems Inc* 22,600 381,375
------------
2,732,038
------------
PAPER & FOREST PRODUCTS - 2.37%
Caraustar Industry Inc 7,400 246,050
Florida Rock Industry Inc 7,100 232,525
Mosinee Paper Corp 12,700 450,850
Rock Tenn Co Class A 15,840 312,840
Universal Forest Products Inc 30,300 401,475
------------
1,643,740
------------
PUBLISHING & BROADCASTING - 1.53%
Media Gen Inc Class A 13,000 393,250
Merrill Corp 29,200 671,600
------------
1,064,850
------------
SERVICE INDUSTRIES - .37%
Hughes Supply Inc 5,900 254,438
------------
<PAGE>
<CAPTION>
- ------------------------------------------------------
COMMON STOCK SHARES VALUE
- ------------------------------------------------------
TELECOMMUNICATIONS - .34%
Mastec Inc* 4,400 $ 233,188
------------
TRANSPORTATION - 7.49%
APL Ltd 22,000 519,750
Alaska Air Group Inc* 31,700 665,700
Atlantic Southeast Airlines Inc 10,000 218,750
Avondale Industry Inc* 23,900 513,850
Comair Holdings Inc 15,050 361,200
Continental Airlines Inc
Class B* 32,000 904,000
Interpool Inc 29,800 696,575
Midwest Express Holdings Inc* 12,000 432,000
USAir Group Inc* 38,100 890,588
------------
5,202,413
------------
UTILITIES & POWER - 2.89%
Commonwealth Energy System 33,500 787,250
TNP Enterprises Inc 24,600 673,425
United Illuminating Co 17,500 549,063
------------
2,009,738
------------
TOTAL COMMON STOCK
(Cost - $56,725,509) 67,914,118
------------
<CAPTION>
- ----------------------------------------------------------
SHORT TERM OBLIGATIONS - 1.80% SHARES VALUE
- ----------------------------------------------------------
<S> <C> <C>
SHORT TERM INVESTMENT
FUND - 1.80%
State Street Global
Advisors Funds 1,247,490 1,247,490
------------
TOTAL SHORT TERM OBLIGATIONS
(Cost - $1,247,490) 1,247,490
------------
TOTAL INVESTMENTS - 99.65%
(Cost - $57,972,999) 69,161,608
------------
OTHER ASSETS AND LIABILITIES - .35% 246,622
------------
TOTAL NET ASSETS - 100% $69,408,230
============
See notes to financial statements and notes to schedules of investments
<PAGE>
<CAPTION>
PREFERRED ASSET ALLOCATION FUND
- ------------------------------------------------------
COMMON STOCK - 46.23% SHARES VALUE
- ------------------------------------------------------
<S> <C> <C>
AEROSPACE - .80%
Boeing Co 3,163 $ 336,464
General Dynamics Corp 600 42,300
Lockheed Martin Corp 1,819 166,439
McDonnell Douglas Corp 1,920 122,880
Northrop Grumman Corp 300 24,825
United Technologies Corp 2,380 157,080
------------
849,988
------------
AUTOMOTIVE - 1.07%
Chrysler Corp 6,616 218,328
Cooper Tire & Rubber 500 9,875
Cummins Engine Inc 200 9,200
Dana Corp 1,140 37,193
Eaton Corp 870 60,683
Echlin Inc 300 9,488
Ford Motor Co 10,100 321,938
General Motors Corp 6,550 365,163
Goodyear Tire & Rubber 1,420 72,953
Navistar International Corp 410 3,741
Paccar Inc 470 31,960
------------
1,140,522
------------
BANKS - 3.64%
Banc One Corp 3,864 166,152
Bank New York Inc 3,600 121,500
Bank of Boston Corp 1,300 83,525
Bankamerica Corp 3,250 324,188
Bankers Trust NY Corp 740 63,825
Barnett Banks Inc 1,800 74,025
Boatmens Bancshares Inc 900 58,050
Chase Manhattan Corp 3,921 349,949
Citicorp 4,150 427,450
Comerica Inc 1,000 52,375
Corestates Financial Corp 1,900 98,563
Fifth Third Bancorp 800 50,250
First Bank System Inc 1,200 81,900
First Chicago NBD Corp 2,843 152,811
First Union Corp 2,397 177,378
Fleet Financial Group Inc 2,244 111,920
J P Morgan & Co Inc 1,620 158,153
Keycorp 2,100 106,050
MBNA Corp 1,275 52,913
Mellon Bank Corp 1,300 92,300
National City Corp 1,900 85,263
Nationsbank Corp 2,500 244,375
Norwest Corp 3,050 132,675
PNC Bank Corp 2,830 106,479
Republic NY Corp 600 48,975
Suntrust Banks Inc 2,100 103,425
US Bancorp 800 35,950
<PAGE>
<CAPTION>
- --------------------------------------------------------
COMMON STOCK SHARES VALUE
- --------------------------------------------------------
<S> <C> <C>
BANKS (continued)
Wachovia Corp 1,530 $ 86,445
Wells Fargo & Co 909 245,203
------------
3,892,067
------------
CHEMICALS - 1.39%
Air Products & Chemicals Inc 1,030 71,199
B F Goodrich Co 200 8,100
Dow Chemical Co 2,280 178,695
DuPont E I de Nemours & Co 4,770 450,169
Eastman Chemical Co 775 42,819
Engelhard Corp 1,667 31,881
Freeport McMoRan Copper and
Gold Inc Class B 2,100 62,738
Great Lakes Chemical Corp 670 31,323
Hercules Inc 1,020 44,115
International Flavours 1,040 46,800
Monsanto Co 5,000 194,375
Morton International Inc 1,510 61,533
Nalco Chemical Co 940 33,958
Praxair Inc 1,530 70,571
Rohm & Haas Co 720 58,770
Union Carbide Corp 1,320 53,955
W R Grace & Co 790 40,883
------------
1,481,884
------------
COMPUTER SOFTWARE - 1.50%
Autodesk Inc 300 8,400
Automatic Data Processing Inc 2,730 117,049
Computer Associates
International Inc 3,212 159,797
Computer Sciences Corp* 500 41,063
First Data Corp 3,800 138,700
Microsoft Corp* 10,300 851,038
Novell Inc* 3,700 35,034
Oracle System Corp* 5,857 244,530
Shared Medical System 100 4,925
------------
1,600,536
------------
CONGLOMERATES - 2.00%
Alco Standard Corp 600 30,975
Allied Signal Inc 2,530 169,510
General Electric 14,720 1,455,440
Harcourt General Inc 400 18,450
Household International Inc 500 46,125
ITT Corp 1,060 45,978
Pall Corp 633 16,142
Rockwell International Corp 2,000 121,750
TRW Inc 1,400 69,300
Tenneco Inc 1,690 76,261
Textron Inc 840 79,170
Whitman Corp 600 13,725
------------
2,142,826
------------
See notes to financial statements and notes to schedules of investments
<PAGE>
<CAPTION>
PREFERRED ASSET ALLOCATION FUND (continued)
- ------------------------------------------------------
COMMON STOCKS SHARES VALUE
- ------------------------------------------------------
<S> <C> <C>
CONSUMER PRODUCTS - 4.42%
Alberto Culver Co Class B 200 $ 9,600
American Brands Inc 1,560 77,415
Anheuser Busch Cos Inc 4,580 183,200
Armstrong World Industries Inc 200 13,900
Avon Products Inc 1,350 77,119
Brown Forman Corp Class B 400 18,300
Circuit City Stores Inc 500 15,063
Clorox Co 530 53,199
Coca Cola Co 21,980 1,156,698
Colgate Palmolive Co 1,260 116,235
Coors Adolph Co Class B 200 3,800
Ecolab Inc 400 15,050
Fruit Of The Loom Inc Class A* 600 22,725
Gillette Co 3,920 304,780
Lix Claiborne 780 30,128
Masco Corp 1,570 56,520
Maytag Corp 600 11,850
Nike Inc 2,580 154,155
Pepsico Inc 13,780 403,065
Philip Morris Cos Inc 7,220 813,153
Procter & Gamble Co 5,950 639,625
Reebok International Ltd* 520 21,840
Russell Corp 200 5,950
Seagram Ltd 3,370 130,588
Stride Rite Corp 300 3,000
Tupperware Corp 300 16,088
UST Inc 1,860 60,218
Unilever N V 1,370 240,093
V F Corp 580 39,150
Whirlpool Corp 830 38,699
------------
4,731,206
------------
CONTAINERS & PACKING - .10%
Ball Corp 200 5,200
Bemis Inc 300 11,063
Crown Cork & Seal Inc 970 52,744
Stone Container Corp 506 7,527
Temple Inland Inc 600 32,475
------------
109,009
------------
DISCOUNT & FASHION RETAILING - 1.59%
AutoZone Inc 500 13,626
Brown Group Inc 100 1,838
Charming Shoppes Inc 600 3,038
Dayton Hudson Corp 2,190 85,958
Dillard Dept Stores Inc Class A 1,210 37,359
Federated Dept Stores Inc* 1,800 61,425
Gap Inc 2,740 82,543
Home Depot Inc 4,286 214,836
<PAGE>
<CAPTION>
- ------------------------------------------------------
COMMON STOCK SHARES VALUE
- ------------------------------------------------------
<S> <C> <C>
DISCOUNT & FASHION RETAILING
(continued)
J C Penney Inc 2,100 $ 102,375
K Mart Corp* 4,430 45,961
Limited Inc 2,442 44,872
Lowes Companies Inc 900 31,950
May Dept Stores Co 2,410 112,668
Mercantile Stores Inc 200 9,875
Nordstrom Inc 910 32,248
Payless ShoeSource Inc 24 900
Pep Boys-Manny Moe & Jack 300 9,225
Price Costco Inc* 2,065 51,883
Sears Roebuck & Co 3,600 166,050
TJX Cos Inc 400 18,950
Toys R Us Inc* 2,670 80,100
Wal Mart Stores Inc 20,110 460,016
Woolworth Corp* 1,400 30,625
------------
1,698,321
------------
ELECTRICAL & ELECTRONICS - 2.10%
Advanced Micro Devices Inc 600 15,450
Amp Inc 2,228 85,500
Cooper Industries Inc 1,282 54,004
Emerson Electric Co 1,990 192,533
General Instrument Corp* 1,100 23,788
Harris Corp 200 13,725
Honeywell Inc 1,290 84,818
Intel Corp 7,260 950,606
Johnson Controls Inc 200 16,575
LSI Logic Corp* 1,200 32,100
Micron Technology Inc 2,000 58,250
Millipore Corp 200 8,275
Motorola Inc 5,200 319,150
National Semiconductor Corp 700 17,063
National Service Industries 300 11,213
Perkin Elmer Corp 200 11,775
Raychem Corp 200 16,025
Raytheon Co 2,300 110,688
Tektronix Inc 200 10,250
Texas Instruments Inc 1,720 109,650
Thermo Electron Corp 600 24,752
Thomas & Betts Corp 200 8,875
Westinghouse Electric Corp 3,820 75,923
------------
2,250,988
------------
FINANCE - 3.27%
Aetna Life & Casualty Co 1,366 109,280
Alexander & Alexander Services 200 3,475
Allstate Corp 4,029 233,178
American Express Co 4,350 245,775
American General Corp 2,000 81,750
American International Group Inc 4,085 442,201
Aon Corp 600 37,275
See notes to financial statements and notes to schedules of investments
<PAGE>
<CAPTION>
- ------------------------------------------------------
COMMON STOCK SHARES VALUE
- ------------------------------------------------------
<S> <C> <C>
FINANCE (continued)
Beneficial Corp 300 $ 19,013
Chubb Corp 1,560 83,850
Cigna Corp 640 87,440
Dean Witter Discover & Co 1,589 105,271
Federal Home Loan Mortgage Corp 1,620 178,403
Federal National Mortgage
Association 9,600 357,600
General Reinsurance Corp 640 100,960
Golden West Financial Corp 760 47,975
Great Western Financial Corp 700 20,300
Green Tree Financial Corp 1,300 50,213
H F Ahmanson & Co 600 19,500
H & R Block Inc 1,260 36,540
ITT Hartford Group Inc 1,060 71,550
Jefferson Pilot Corp 860 48,698
Lincoln National Corp 980 51,450
Loews Corp 1,000 94,250
MBIA Inc 200 20,250
MGIC Investment Corp 500 38,000
Marsh & McLennan Companies 730 75,920
Merrill Lynch & Co Inc 1,710 139,365
Morgan Stanley Group Inc 1,000 57,125
Providian Corp 1,080 55,485
Safeco Corp 1,160 45,748
Salomon Inc 1,100 51,838
St. Paul Companies Inc 840 49,245
Torchmark Inc 800 40,400
Transamerica Corp 770 60,830
Travelers Group Inc 5,877 266,669
US Life Corp 225 7,481
USF&G Corp 600 12,525
Unum Corp 700 50,575
------------
3,497,403
------------
FOOD - 1.50%
Albertsons Inc 2,510 89,419
American Stores Co 1,520 62,130
Archer Daniels Midland Co 4,888 107,536
CPC International Inc 1,300 100,750
Campbell Soup Co 2,200 176,550
ConAgra Inc 2,070 102,983
Fleming Cos Inc 200 3,450
General Mills Inc 1,530 96,964
Giant Foods Inc Class A 300 10,350
Great Atlantic & Pacific Tea Inc 200 6,375
H J Heinz Co 3,115 111,361
Hershey Food Corp 1,320 57,750
Kellogg Co 1,910 125,344
Kroger Co 700 32,550
Pioneer Hi Bred International Inc 880 61,600
Quaker Oats Co 1,260 48,038
Ralston Purina Co 1,010 74,109
<PAGE>
<CAPTION>
- --------------------------------------------------------
COMMON STOCK SHARES VALUE
- --------------------------------------------------------
<S> <C> <C>
FOOD (continued)
Sara Lee Corp 4,160 $ 154,960
Supervalu Inc 400 11,350
Sysco Corp 1,920 62,640
Winn Dixie Stores Inc 1,440 45,540
Wrigley Wm Jr Co 1,070 60,188
------------
1,601,937
------------
FUEL - 4.24%
Amerada Hess Corp 1,010 58,454
Amoco Corp 4,260 342,930
Ashland Inc 300 13,163
Atlantic Richfield Co 1,390 184,175
Baker Hughes Inc 1,500 51,750
Burlington Resources Inc 1,250 62,969
Chevron Corp 5,760 374,400
Coastal Corp 1,040 50,830
Dresser Industries Inc 1,950 60,450
Exxon Corp 10,820 1,060,360
Halliburton Co 1,110 66,878
Helmerich & Payne Inc 100 5,213
Kerr McGee Corp 300 21,600
Louisiana Land & Exploration Co 200 10,725
Mobil Corp 3,510 429,098
Occidental Petroleum Corp 2,910 68,021
Oneok Inc 100 3,000
Oryx Energy Co* 1,590 39,353
Panenergy Corp 800 36,000
Pennzoil Co 660 37,290
Phillips Petroleum Co 2,460 108,855
Rowan Cos Inc 500 11,313
Royal Dutch Petroleum Co 4,550 776,913
Santa Fe Energy Resources Inc 500 6,938
Schlumberger Ltd 2,130 212,734
Sun Inc 921 22,449
Texaco Inc 2,360 231,575
USX Marathon Group 2,700 64,463
Unocal Corp 2,400 97,500
Western Atlas Inc 300 21,263
------------
4,530,662
------------
HEALTH CARE - 4.91%
Abbott Labs 6,740 342,055
Allergan Inc 770 27,431
Alza Corp* 1,100 28,463
American Home Products Corp 5,420 317,748
Amgen Inc* 2,380 129,413
Bausch & Lomb Inc 780 27,300
Baxter International Inc 2,380 97,580
Becton Dickinson & Co 1,360 58,990
Beverly Enterprises Inc 500 6,375
Biomet Inc 1,400 21,175
See notes to financial statements and notes to schedules of investments
<PAGE>
<CAPTION>
PREFERRED ASSET ALLOCATION FUND (continued)
- ------------------------------------------------------
COMMAON STOCKS SHARES VALUE
- ------------------------------------------------------
<S> <C> <C>
HEALTHCARE (continued)
Boston Scientific Corp* 1,500 $ 90,000
Bristol Myers Squibb Co 4,340 471,975
C R Bard Inc 300 8,400
CVS Corp 1,090 45,099
Columbia Healthcare Corp 5,949 242,422
Eli Lilly & Co 4,474 326,602
Guidant Corp 750 42,750
Humana Inc* 1,500 28,688
Johnson & Johnson 11,320 563,170
Longs Drug Stores Corp 100 4,913
Mallinckrodt Group Inc 400 17,650
Manor Care Inc 300 8,100
Medtronic Inc 2,120 144,160
Merck & Co Inc 10,730 850,353
Pfizer Inc 5,600 464,100
Pharmacia & Upjohn Inc 4,353 172,488
Rite Aid Corp 500 19,875
Schering Plough Corp 3,240 209,790
Sigma Aldrich 600 37,463
St. Jude Medical Inc* 900 38,363
Tenet Healthcare Corp* 1,960 42,875
United Healthcare Corp 1,600 72,000
United States Surgical Corp 600 23,625
Walgreen Co 2,360 94,400
Warner Lambert Co 2,320 174,000
------------
5,249,791
------------
HOUSING & REAL ESTATE - .17%
Centex Corp 200 7,525
Kaufman & Broad Home Corp 200 2,575
Owens Corning Fiberglass Corp 300 12,788
PPG Industries Inc 1,780 99,903
Pulte Corp 100 3,075
Sherwin Williams Co 1,040 58,240
------------
184,106
------------
LEISURE TIME INDUSTRIES - 1.20%
American Greetings Corp Class A 400 11,350
Brunswick Corp 1,080 25,920
Darden Restaurants Inc 1,730 15,138
Eastman Kodak Co 3,030 243,158
Fleetwood Enterprises Inc 200 5,500
HFS Inc* 1,200 71,700
Handleman Co 200 1,700
Harrahs Entertainment Inc 550 10,931
Hasbro Inc 940 36,543
Hilton Hotels Corp 2,420 63,223
King World Productions Inc 200 7,375
Lubys Cafeterias Inc 100 1,988
Mattel Inc 2,669 74,065
<PAGE>
<CAPTION>
- -------------------------------------------------------
COMMON STOCK SHARES VALUE
- -------------------------------------------------------
<S> <C> <C>
LEISURE TIME INDUSTRIES
(continued)
McDonalds Corp 6,100 $ 276,025
Outboard Marine Corp 100 1,650
Polaroid Corp 200 8,700
Ryans Family Steak Houses Inc 300 2,063
Shoneys Inc 200 1,400
Walt Disney Co 5,960 414,965
Wendys International Inc 600 12,300
------------
1,285,694
------------
MANUFACTURING - 1.18%
Applied Materials Inc* 1,800 64,688
Avery Dennison Corp 600 21,225
Black & Decker Corp 500 15,063
Briggs & Stratton Corp 200 8,800
Case Corp 800 43,600
Caterpillar Inc 1,860 139,965
Cincinnati Milacron Inc 200 4,375
Corning Inc 2,250 104,063
Crane Co 300 8,700
Deere & Co 2,560 104,000
Dover Corp 600 30,150
FMC Corp 200 14,025
General Signal Corp 300 12,825
Giddings & Lewis Inc 200 2,575
Harnischfeger Industries Inc 300 14,438
ITT Industry Inc* 1,060 25,970
Illinois Tool Works Inc 1,110 88,661
Ingersoll Rand Co 1,140 50,730
Jostens Inc 200 4,225
Minnesota Mining & Mfg Corp 3,760 311,610
Newell Co 1,660 52,290
Parker Hannifin Corp 450 17,438
Rubbermaid Inc 1,580 35,945
Snap On Inc 300 10,688
Springs Industries Inc 100 4,300
Stanley Works 400 10,800
Timken Co 200 9,175
Trinova Corp 200 7,275
Tyco International Ltd 800 42,300
------------
1,259,899
------------
METALS & MINING - .61%
Alcan Aluminum Ltd 2,010 67,586
Allegheny Teldyne Inc 977 22,471
Aluminum Company of America 1,700 108,375
Armco Inc 600 2,475
Asarco Inc 200 4,975
Barrick Gold Corp 3,300 94,875
Battle Mountain Gold Company 2,200 15,125
Bethleham Steel Corp 600 5,400
Cyprus Amax Minerals Co 1,060 24,778
Echo Bay Mines Ltd 800 5,300
See notes to financial statements and notes to schedules of investments
<PAGE>
<CAPTION>
- --------------------------------------------------------
COMMON STOCK SHARES VALUE
- --------------------------------------------------------
<S> <C> <C>
METALS & MINING (continued)
Homestake Mining Co 1,790 $ 25,508
Inco Ltd 1,460 46,538
Inland Steel Industries Inc 300 6,000
Newmont Mining Corp 474 21,212
Nucor Corp 500 25,500
Phelps Dodge Corp 630 42,525
Placer Dome Inc 2,150 46,763
Reynolds Metals Co 600 33,825
Santa Fe Pacific Gold Corp 700 10,763
USX US Steel 1,000 31,375
Worthington Industries Inc 450 8,156
------------
649,525
------------
OFFICE EQUIPMENT & COMPUTERS - 2.53%
3Com Corp* 1,600 117,400
Amdahl Corp* 1,710 20,734
Apple Computer* 1,250 26,094
Bay Networks Inc* 1,800 37,575
Cabletron Systems Inc* 1,200 39,900
Ceridian Corp 400 16,200
Cisco Systems Inc* 5,720 363,935
Compaq Computer Corp* 2,380 176,715
Data General Corp 200 2,900
De Luxe Corp 1,150 37,663
Dell Computer Corp* 1,700 90,313
Digital Equipment Corp* 1,510 54,926
E M C Corp* 2,000 66,250
Hewlett Packard Co 9,020 453,255
Intergraph Corp 300 3,075
International Business Machines 4,850 732,350
John H Harland Co 200 6,600
Moore Corp Ltd 500 10,188
Pitney Bowes Inc 1,500 81,750
Seagate Technology* 2,100 82,950
Silicon Graphics Inc* 1,800 45,900
Sun Microsystems Inc 2,000 51,375
Tandem Computers Inc 600 8,250
Tandy Corp 400 17,600
Unisys Corp 900 6,075
Xerox Corp 3,020 158,928
------------
2,708,901
------------
PAPER & FOREST PRODUCTS - .66%
Boise Cascade Corp 300 9,525
Champion International Corp 900 38,925
Georgia Pacific Corp 810 58,320
International Paper Co 2,580 104,168
James River Corp 500 16,563
Kimberly Clark Corp 2,473 235,553
Louisiana Pacific Corp 1,260 26,618
Mead Corp 300 17,438
Potlatch Corp 200 8,600
<PAGE>
<CAPTION>
- --------------------------------------------------------
COMMON STOCK SHARES VALUE
- --------------------------------------------------------
<S> <C> <C>
PAPER & FOREST PRODUCTS
(continued)
Union Camp Corp 730 $ 34,858
Westvaco Corp 1,200 34,500
Weyerhaeuser Co 1,750 82,906
Willamette Industries Inc 600 41,775
------------
709,749
------------
PUBLISHING & BROADCASTING - .76%
Comcast Corp Class A 2,350 41,859
Dow Jones & Co 1,070 36,246
Dun & Bradstreet Corp 1,530 36,338
Gannett Inc 1,410 105,574
Knight Ridder Inc 1,220 46,665
McGraw Hill Inc 1,060 48,893
Meredith Corp 200 10,550
New York Times Co Class A 500 19,000
Tele Communications Inc Series A*6,140 80,204
Time Warner Inc 4,520 169,500
Times Mirror Co Series A 1,000 49,750
Tribune Co 710 56,001
Viacom Class B* 3,350 116,831
------------
817,411
------------
SERVICE INDUSTRIES - .66%
Browning Ferris Industries Inc 2,100 55,125
CUC International Inc* 3,725 88,469
Cognizant Corp* 1,530 50,490
EG & G Inc 300 6,038
Fluor Corp 850 53,338
Foster Wheeler Corp 200 7,425
Genuine Parts Co 1,350 60,075
Interpublic Goup Cos Inc 400 19,000
Laidlaw Inc Class B 3,200 36,800
Marriot International Inc 1,280 70,720
McDermott International Inc 300 4,988
R R Donnelley & Sons Co 1,370 42,984
Safety Kleen Corp 1,190 19,486
Service Corp International 1,200 33,600
W W Grainger Inc 300 24,075
WMX Technologies Inc 4,230 138,004
------------
710,617
------------
TELECOMMUNICATIONS - 3.49%
Airtouch Communications Inc* 4,560 115,140
Alltel Corp 1,500 47,063
American Telephone &
Telegraph Inc 13,840 602,040
Ameritech Corp 4,790 290,394
Andrew Corp 337 17,882
Bell Atlantic Corp 3,800 246,050
Bellsouth Corp 8,660 349,648
DSC Communications Inc 600 10,725
GTE Corp 8,410 382,655
See notes to financial statements and notes to schedules of investments
<PAGE>
<CAPTION>
PREFERRED ASSET ALLOCATION FUND (continued)
- ------------------------------------------------------
COMMON STOCKS SHARES VALUE
- ------------------------------------------------------
<S> <C> <C>
TELECOMMUNICATIONS (continued)
Lucent Technologies Inc 5,584 $ 258,260
MCI Communications Corp 6,100 199,394
Northern Telecom Ltd 2,410 149,119
Nynex Corp 3,720 179,025
Pacific Telesis Group 3,950 145,163
SBC Communications Inc 5,270 272,723
Scientific Atlanta Inc 400 6,000
Sprint Corp 4,010 159,899
Tellabs Inc* 1,800 67,725
U S West Inc Communications
Group* 4,370 140,933
U S West Inc Media Group* 5,170 95,645
------------
3,735,483
------------
TRANSPORTATION - .72%
AMR Corp* 760 66,975
Burlington Northern Santa Fe 1,234 106,587
CSX Corp 2,020 85,345
Caliber System Inc 370 7,123
Conrail Inc 714 71,132
Delta Airlines Inc 560 39,690
Federal Express Corp* 1,100 48,950
Norfolk Southern Corp 1,150 100,625
Roadway Express Inc 50 969
Ryder System Inc 400 11,250
Southwest Airlines Co 1,400 30,975
US Air Group Inc 300 7,013
Union Pacific Corp 2,030 122,054
Union Pacific Resource Group Inc 2,419 70,756
------------
769,444
------------
UTILITIES & POWER - 1.72%
American Electric Power Inc 1,660 68,268
Baltimore Gas & Electric Co 1,560 41,730
Carolina Power & Light Co 1,590 58,035
Central & South West Corp 1,700 43,563
Cinergy Corp 806 26,900
Columbia Gas Systems Inc 300 19,088
Consolidated Edison Co 2,110 61,718
Consolidaed Natural Gas Co 1,030 56,908
DTE Energy Co 1,480 47,915
Dominion Resources Inc 1,560 60,060
Duke Power Inc 1,720 79,550
Eastern Enterprises 100 3,538
Edison International 3,830 76,121
El Paso Natural Gas Co 0.17 9
Enron Corp 2,400 103,500
Enserch Corp 400 9,200
Entergy Corp 1,880 52,170
FPL Group Inc 1,590 73,140
GPU Inc 600 20,175
<PAGE>
<CAPTION>
- --------------------------------------------------------
COMMON STOCK SHARES VALUE
- --------------------------------------------------------
<S> <C> <C>
UTILITIES & POWER (continued)
Houston Industries Inc 2,100 $ 47,513
Niagara Mohawk Power Corp* 1,890 18,664
Nicor Inc 300 10,725
Noram Energy Corp 700 10,763
Northern States Power Co 830 38,076
Ohio Edison Co 1,650 37,538
P P & L Resources Inc 900 20,700
Pacific Enterprises 500 15,188
Pacific Gas & Electric Co 3,770 79,170
Pacificorp 2,740 56,170
Peco Energy Corp 2,150 54,288
Peoples Energy Corp 200 6,775
Public Service Enterprise Group 2,130 58,043
Sonat Inc 500 25,750
Southern Co 5,690 128,736
Texas Utilities Co 1,970 80,278
Unicom Corp 2,060 55,878
Union Electric Co 1,050 40,425
Williams Cos Inc 806 30,206
Worldcom Inc* 4,900 127,642
------------
1,844,116
------------
TOTAL COMMON STOCK
(Cost - $30,822,241) 49,452,085
------------
<CAPTION>
- ------------------------------------------------------
FIXED INCOME - 26.24% PAR VALUE
- ------------------------------------------------------
<S> <C> <C>
U.S. TREASURY - 26.24%
United States Treasury
Bonds
6.00% 15 Feb 2026 $ 1,325,000 1,205,962
6.25% 15 Aug 2023 # 2,295,000 2,151,563
6.875% 15 Aug 2025 500,000 509,845
7.125% 15 Feb 2023 # 1,140,000 1,190,228
7.25% 15 May 2016 # 1,125,000 1,187,933
7.25% 15 Aug 2022 # 340,000 359,655
7.50% 15 Nov 2016 1,390,000 1,504,675
7.625% 15 Nov 2022 # 805,000 888,648
7.625% 15 Feb 2025 1,860,000 2,066,051
7.875% 15 Nov 2007 # 175,000 188,125
8.00% 15 Nov 2021 # 930,000 1,066,301
8.125% 15 Aug 2019 # 830,000 960,078
8.125% 15 May 2021 669,000 776,247
8.125% 15 Aug 2021 # 1,480,000 1,718,191
8.50% 15 Feb 2020 1,160,000 1,393,264
8.75% 15 May 2017 # 350,000 427,056
8.75% 15 May 2020 830,000 1,021,805
8.75% 15 Aug 2020 # 500,000 616,015
8.875% 15 Aug 2017 # 900,000 1,111,644
8.875% 15 Feb 2019 # 780,000 968,300
9.00% 15 Nov 2018 # 100,000 125,484
9.125% 15 May 2009 # 355,000 408,861
See notes to financial statements and notes to schedules of investments
<PAGE>
<CAPTION>
- ------------------------------------------------------
FIXED INCOME PAR VALUE
- ------------------------------------------------------
<S> <C> <C>
U.S. TREASURY (continued)
United States Treasury
Bonds
9.125% 15 May 2018 $ 510,000 $ 646,027
9.25% 15 Feb 2016 # 200,000 253,906
9.875% 15 Nov 2015 # 750,000 1,001,835
10.375% 15 Nov 2009 180,000 222,385
10.375% 15 Nov 2012 # 150,000 193,172
10.625% 15 Aug 2015 100,000 141,391
11.25% 15 Feb 2015 # 420,000 620,222
11.75% 15 Feb 2010 # 295,000 391,751
11.75% 15 Nov 2014 # 505,000 726,806
12.00% 15 Aug 2013 # 745,000 1,065,700
12.50% 15 Aug 2014 230,000 343,741
12.75% 15 Nov 2010 440,000 622,807
------------
28,075,674
------------
<CAPTION>
TOTAL FIXED INCOME
(Cost - $27,553,411) 28,075,674
------------
- ------------------------------------------------------
SHORT TERM OBLIGATIONS - 27.23% PAR VALUE
- ------------------------------------------------------
<S> <C> <C>
COMMERCIAL PAPER - 17.47%
American Telephone &
Telegraph Co
5.26% 20 Jun 1997 #@ 1,500,000 1,461,090
Associates Corp of North
America
6.57% 2 Jan 1997 #@ 1,696,558 1,696,249
Ciesco Inc
5.27% 14 Mar 1997 #@ 1,500,000 1,482,750
Corporate Asset Fund
5.30% 14 Mar 1997 #@ 1,500,000 1,482,345
Ford Motor Credit
5.32% 21 Mar 1997 #@ 1,000,000 987,350
General Electric
Capital Corp
5.33% 27 Mar 1997 #@ 1,000,000 986,570
Golden Peanut Co
5.28% 20 Mar 1997 #@ 1,500,000 1,481,355
Minnesota Mining &
Manufacturing Co
5.35% 20 Mar 1997 #@ 1,277,000 1,261,127
Repsol International
5.31% 20 Jun 1997 #@ 1,000,000 974,060
Saint Gobain
5.31% 17 Jun 1997 #@ 1,000,000 974,380
Toronto Dominion Holdings
5.32% 18 Jun 1997 #@ 1,500,000 1,461,540
Transamerica Finance
Group Inc
5.43% 21 Mar 1997 #@ 1,500,000 1,480,965
USAA Capital Corp
5.29% 21 Mar 1997 #@ 1,500,000 1,481,130
Xerox Corp
5.27% 10 Mar 1997 #@ 1,500,000 1,483,605
------------
18,694,516
------------
<PAGE>
<CAPTION>
- -------------------------------------------------------
SHORT-TERM OBLIGATIONS PAR/SHARES VALUE
- -------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENTS -7.56%
State Street Repo
4.75% 2 Jan 1997
(Cost - $8,094,000)
(Dated 12/31/96, due
1/2/97, collateralized by
$5,630,000 U.S. Treasury
Bond 10.625%,
8/15/15, Market Value
$8,262,903, Repurchase
Proceeds $8,096,136) # $ 8,094,000 $ 8,094,000
------------
SHORT TERM
INVESTMENT FUND -.82%
State Street Global Advisors
Funds # 872,970 872,970
------------
U.S.TREASURY - 1.38%
United States Treasury Bills
4.81% 20 Mar 1997 #@ $ 50,000 49,844
4.94% 27 Mar 1997 #@ 660,000 652,225
5.07% 19 Jun 1997 #@ 500,000 488,050
5.25% 20 Mar 1997 #@ 285,000 281,970
------------
1,472,089
------------
TOTAL SHORT TERM OBLIGATIONS
(Cost - $29,149,501) 29,133,575
------------
TOTAL INVESTMENTS - 99.70%
(Cost - $87,525,153) 106,661,334
------------
OTHER ASSETS AND LIABILITIES - .30% 315,633
------------
TOTAL NET ASSETS - 100% $106,976,967
============
<CAPTION>
PREFERRED BALANCED FUND
- -------------------------------------------------------
COMMON STOCK - 49.64% SHARES VALUE
- -------------------------------------------------------
<S> <C> <C>
AEROSPACE - .32%
Boeing Co 1,320 $ 140,415
------------
AUTOMOTIVE - 3.18%
General Motors Corp 20,090 1,120,018
General Motors Corp Class H 4,600 258,750
------------
1,378,768
------------
BANKS - 3.02%
Chase Manhattan Corp 3,620 323,085
Fleet Financial Group Inc 8,440 420,945
Hibernia Corp Class A 42,800 567,100
------------
1,311,130
------------
CHEMICALS - 2.00%
Betzdearborn Inc 8,900 520,650
Dexter Corp 10,890 347,119
------------
867,769
------------
See notes to financial statements and notes to schedules of investments
<PAGE>
<CAPTION>
PREFERRED BALANCED FUND (continued)
- -------------------------------------------------------
COMMON STOCKS SHARES VALUE
- -------------------------------------------------------
<S> <C> <C>
COMPUTER SOFTWARE - 1.00%
Geoworks * 9,600 $ 235,200
Macromedia Inc * 11,000 198,000
------------
433,200
------------
CONGLOMERATES - .64%
Alco Standard Corp 5,400 278,775
------------
DISCOUNT & FASHION
RETAILING - 1.37%
Limited Inc 32,333 594,119
------------
ELECTRICAL & ELECTRONICS - 2.60%
International Rectifier Corp * 8,600 131,150
Millipore Corp 7,800 322,725
Westinghouse Electric Corp 34,000 675,750
------------
1,129,625
------------
FINANCE - 2.06%
Cigna Corp 6,550 894,894
------------
FUEL - 4.54%
Amerada Hess 10,700 619,263
Anadarko Petroleum Corp 6,620 428,645
Dresser Industries Inc 23,380 724,780
Unocal Corp 4,800 195,000
------------
1,967,688
------------
HEALTH CARE - 1.56%
Chiron Corp * 2,080 38,740
Smithkline Beecham PLC Class A ADR4,330 294,440
Vertex Pharmaceuticals Inc * 8,540 343,735
------------
676,915
------------
HOUSING & REAL ESTATE - 1.45%
Avalon Properties Inc 13,350 383,813
York International Corp 4,360 243,615
------------
627,428
------------
LEISURE TIME INDUSTRIES - .66%
Hilton Hotels Corp 10,100 263,863
Interstate Hotels Co * 800 22,600
------------
286,463
------------
MANUFACTURING - 1.82%
Caterpillar Inc 2,500 188,125
Harnischfeger Industries Inc 3,850 185,281
Kennametal Inc 10,700 415,963
------------
789,369
------------
<PAGE>
<CAPTION>
- -------------------------------------------------------
COMMON STOCK SHARES VALUE
- -------------------------------------------------------
<S> <C> <C>
METALS & MINING - 4.22%
Asarco Inc 13,800 $ 343,275
J&L Specialty Steel Inc 11,600 131,950
Minerals Technologies Inc 4,630 189,830
Newmont Mining Corp 10,080 451,080
Reynolds Metal Co 7,950 448,181
USX US Steel 8,420 264,178
------------
1,828,494
------------
OFFICE EQUIPMENT &
COMPUTERS - 4.57%
Hewlett Packard Co 6,680 335,670
International Business Machines 7,220 1,090,220
Unisys Corp * 30,800 207,900
Xerox Corp 6,600 347,325
------------
1,981,115
------------
PAPER & FOREST PRODUCTS - 1.18%
Champion International Corp 7,300 315,725
Mead Corp 3,350 194,719
------------
510,444
------------
PUBLISHING & BROADCASTING - 5.50%
Dow Jones & Co Inc 18,330 620,929
McGraw Hill Co Inc 12,060 556,268
New York Times Co Class A 20,910 794,580
Tribune Co 5,220 411,728
------------
2,383,505
------------
SERVICE INDUSTRIES - 1.64%
CUC International Inc * 10,260 243,675
Manpower Inc 7,100 230,750
Omnicom Group 5,140 235,155
------------
709,580
------------
TELECOMMUNICATIONS - 1.13%
MCI Communications Corp 8,950 292,553
Vodafone Group PLC ADR 4,740 196,118
------------
488,671
------------
TRANSPORTATION - 5.18%
AMR Corp 4,700 414,188
Delta Airlines Inc 7,420 525,893
Ryder System Inc 18,680 525,369
Union Pacific Corp 5,250 315,656
Union Pacific Resources
Group Inc 15,944 466,362
------------
2,247,468
------------
TOTAL COMMON STOCK
(Cost - $18,879,769) 21,525,835
------------
See notes to financial statements and notes to schedules of investments
<PAGE>
<CAPTION>
- -------------------------------------------------------
FIXED INCOME - 33.35% PAR VALUE
- -------------------------------------------------------
<S> <C> <C>
U.S. TREASURY - 33.35%
United States Treasury Bonds
7.875% 15 Feb 2021 $ 2,135,000 $ 2,413,212
10.75% 15 Aug 2005 70,000 89,807
United States Treasury Notes
5.75% 15 Aug 2003 4,060,000 3,938,200
6.25% 15 Feb 2003 625,000 624,218
7.50% 15 Nov 2001 4,110,000 4,326,432
8.875% 15 Nov 1998 2,920,000 3,072,397
------------
14,464,266
------------
TOTAL FIXED INCOME
(Cost - $14,235,057) 14,464,266
------------
<CAPTION>
- -------------------------------------------------------
SHORT TERM OBLIGATIONS - 15.89% PAR VALUE
- -------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENTS -15.89%
State Street Repo 4.75%
2 Jan 1997 (Cost - $6,893,000)
(Dated 12/31/96, due 1/2/97,
collateralized by $4,795,000
U.S. Treasury Bond 10.625%,
8/15/15, Market Value
$7,037,411, Repurchase
Proceeds $6,894,136) 6,893,000 6,893,000
------------
TOTAL SHORT TERM OBLIGATIONS
(Cost - $6,893,000) 6,893,000
------------
TOTAL INVESTMENTS - 98.88%
(Cost - $40,007,826) 42,883,101
------------
OTHER ASSETS AND LIABILITIES - 1.12% 487,713
------------
TOTAL NET ASSETS - 100% $43,370,814
============
<PAGE>
<CAPTION>
PREFERRED FIXED INCOME FUND
- -------------------------------------------------------
FIXED INCOME - 95.74% PAR VALUE
- -------------------------------------------------------
<S> <C> <C>
ASSET BACKED - 10.70%
Aegis Auto Receivables
Trust ***
8.39% 20 Oct 2001 $ 769,068 $ 780,604
Banc One Auto Trust
6.90% 15 Apr 1998 1,000,000 1,003,120
Chase Manhattan Credit
Card Master Trust
7.04% 15 Feb 2004 1,100,000 1,125,091
Chevy Chase Auto Receivables
6.00% 15 Dec 2001 338,695 338,800
Eaglemark Trust
6.75% 15 Nov 2002 2,965,315 2,992,181
First Enterprise ***
6.84% 15 Jun 2001 1,629,403 1,640,351
Ford Credit Auto
Loan Master Trust
5.50% 15 Feb 2003 1,000,000 965,310
Reliable Auto Receivable
Master Trust
5.80% 15 Mar 2002 748,170 736,948
Santista Securitization I ***
8.09% 30 Nov 2006 1,000,000 1,005,000
Sears Credit Account
Master Trust II
6.50% 15 Nov 1999 3,000,000 3,025,290
Western Financial
6.05% 1 Nov 2000 449,891 449,610
------------
14,062,305
------------
COLLATERALIZED MORTGAGE
OBIGATION - 16.14%
1345 Funding LLC
Class C ***
7.993% 25 May 2006 3,000,000 3,037,969
CIT Group Securitization
Corp
6.25% 20 May 2006 1,129,000 1,089,132
Crimi Mae Financial Corp
7.00% 1 Jan 2033 926,092 887,312
Federal Home Loan Mortgage
PC Gtd
5.50% 25 Dec 2008 1,200,000 1,101,744
6.00% 15 Apr 2006 1,000,000 986,250
6.50% 15 Nov 2022 5,000,000 4,809,350
7.00% 15 Aug 2023 1,000,000 1,006,250
Federal National Mortgage
Assn REMIC
5.75% 25 Apr 2019 1,000,000 986,870
6.50% 25 Jan 2023 1,500,000 1,459,680
Green Tree Financial Corp
6.05% 15 Dec 2026 363,502 363,615
MLIC Commercial Mortgage ***
6.60% 25 Jul 2027 961,054 954,231
Merrill Lynch Mortgage
Investment Inc
6.96% 21 Nov 2028 750,000 746,250
Tyron Mortgage Funding Inc
7.55% 20 Dec 2009 3,750,000 3,772,266
------------
21,200,919
------------
See notes to financial statements and notes to schedules of investments
<PAGE>
<CAPTION>
PREFERRED FIXED INCOME FUND (continued)
- -------------------------------------------------------
FIXED INCOME PAR VALUE
- -------------------------------------------------------
<S> <C> <C>
ELECTRIC & OTHER
UTILITIES - 4.37%
Boston Edison
7.80% 15 May 2010 $ 1,375,000 $ 1,328,250
7.80% 15 Mar 2023 500,000 455,490
Houston Lighting
& Power Co MTN
6.50% 21 Apr 2003 1,500,000 1,480,620
Jersey Central Power
& Lighting MTN
6.45% 26 Nov 2001 2,500,000 2,470,250
------------
5,734,610
------------
FEDERAL AGENCY POOLED - 5.64%
Federal Home Loan Mortgage
Corp
7.00% 1 Dec 2024 428,075 421,521
8.00% 1 Jun 2011 1,404,451 1,445,684
8.00% 1 Jul 2011 1,455,374 1,497,679
8.00% 1 Aug 2011 1,442,032 1,483,491
8.00% 1 Aug 2026 2,518,137 2,566,913
------------
7,415,288
------------
FINANCE & BANKING - 9.90%
ABN Amro Bank NV Chicago
7.55% 28 Jun 2006 1,000,000 1,035,370
American General Finance
Corp
7.25% 1 Mar 1998 1,000,000 1,012,650
Associates Corp of North
America MTN
6.375% 15 Oct 2002 1,800,000 1,765,440
6.73% 30 Sep 2002 725,000 726,363
General Motors Acceptance
Corp
8.00% 1 Oct 1999 1,500,000 1,560,630
9.00% 15 Oct 2002 800,000 880,784
Integra Bank Pittsburgh MTN
6.55% 15 Jun 2000 650,000 650,241
M & I Cap Trust A
7.65% 1 Dec 2026 2,000,000 1,950,980
NB Cap Tr II
7.83% 15 Dec 2026 2,000,000 1,999,880
Security Pacific Corp MTN
10.30% 15 May 2001 1,250,000 1,420,125
------------
13,002,463
------------
FOREIGN CORPORATE - 2.82%
British Sky Broadcasting
Group
7.30% 15 Oct 2006 1,000,000 1,005,620
Comp de Desarollo Aeropu ***
10.19% 31 May 2011 500,000 534,600
Financiera Energet
9.375% 15 Jun 2006 1,000,000 1,100,625
Midland Bank PLC
7.625% 15 Jun 2006 775,000 802,482
Santander Financial Issuances
Ltd
7.875% 15 Apr 2005 250,000 261,575
------------
3,704,902
------------
<PAGE>
<CAPTION>
- -------------------------------------------------------
FIXED INCOME PAR VALUE
- -------------------------------------------------------
<S> <C> <C>
FOREIGN GOVERNMENT - 8.58%
Federal Republic of
Germany
8.25% 20 Sep 2001 DM 1,600,000 $ 1,190,434
9.00% 22 Jan 2001 DM 1,500,000 1,135,333
France (Govt) O.A.T.
6.50% 25 Oct 2006 FF 6,200,000 1,261,721
Italy Republic Yankee
Bond
6.875% 27 Sep 2023 $ 1,450,000 1,378,907
Kingdom of Sweden
5.85% 13 Feb 2001 1,500,000 1,468,035
United Mexican States ***
7.562% 6 Aug 2001 1,000,000 1,002,300
9.75% 6 Feb 2001 500,000 519,375
Newfoundland Province
Canada
Yankee Bond
9.875% 1 Jun 2020 500,000 625,585
Quebec Province Canada
9.125% 22 Aug 2001 2,000,000 2,182,502
Republic of Argentina
9.25% 23 Feb 2001 500,000 507,188
------------
11,271,380
------------
GOVERNMENT SPONSORED - 6.21%
Federal National Mortgage
Association
6.50% 1 Feb 2024 161,503 154,891
6.50% 1 Apr 2024 330,096 316,582
6.50% 1 Jul 2024 308,689 295,665
6.925% 1 Mar 2001 979,378 987,948
7.00% 1 Sep 2025 250,001 244,608
7.00% 1 Nov 2025 1,037,748 1,015,364
7.00% 1 Apr 2026 2,705 2,646
7.50% 1 Oct 2026 2,495,994 2,494,421
8.50% 1 Aug 2025 33,963 35,205
8.50% 1 Oct 2026 2,521,874 2,614,073
------------
8,161,403
------------
HEALTHCARE - .30%
Mariner Health Group Inc
9.50% 1 Apr 2006 400,000 391,000
------------
INDUSTRIALS - 4.32%
AK Steel Corp ***
9.125% 15 Dec 2006 400,000 411,000
Atlantic Richfield Co
9.125% 1 Aug 2031 1,000,000 1,211,550
Ford Motor Company
9.00% 15 Sep 2001 1,695,000 1,852,940
9.95% 15 Feb 2032 600,000 777,132
Occidental Pete Corp MTN
5.76% 15 Jun 1998 1,000,000 994,460
Oregon Steel Mills Inc
11.00% 15 Jun 2003 400,000 428,000
------------
5,675,082
------------
See notes to financial statements and notes to schedules of investments
<PAGE>
<CAPTION>
- -------------------------------------------------------
FIXED INCOME PAR VALUE
- -------------------------------------------------------
NATURAL GAS - 1.16%
RAS Laffan Liquefied
Natural Gas ***
8.294% 15 Sep 2014 $ 1,500,000 $ 1,522,335
------------
OIL & GAS - 1.57%
Pttep International
Ltd ***
7.625% 1 Oct 2006 2,000,000 2,059,760
------------
TELEPHONE - .48%
Paging Network Inc ***
10.00% 15 Oct 2008 400,000 406,500
TCI Communications Inc
6.875% 15 Feb 2006 250,000 227,185
------------
633,685
------------
U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES - 14.94%
Government National
Mortgage Association
6.50% 15 Sep 2023 492,324 472,479
6.50% 15 Oct 2023 2,159,038 2,072,007
6.50% 15 Nov 2023 1,261,272 1,210,431
6.50% 15 Dec 2023 381,280 365,911
7.00% 15 Nov 2023 2,888,265 2,837,720
7.00% 15 Feb 2024 534,522 525,168
7.00% 15 Mar 2024 421,977 414,592
7.00% 15 Apr 2024 818,305 803,984
7.00% 15 Jun 2026 991,385 969,693
7.50% 15 Aug 2025 498,430 498,893
7.50% 15 Oct 2025 864,733 865,537
7.50% 20 Aug 2026 3,251,912 3,239,685
8.00% 15 Dec 2008 716,642 741,273
8.00% 15 Nov 2009 1,045,895 1,081,842
8.00% 15 Jun 2025 367,227 374,913
8.00% 15 May 2026 360,905 368,123
8.00% 15 Sep 2026 506,109 516,232
9.00% 15 Mar 2016 104,481 112,056
9.00% 15 Apr 2016 50,116 53,764
9.00% 15 Aug 2016 55,074 59,083
9.00% 15 Nov 2017 1,890,973 2,038,091
------------
19,621,477
------------
U.S. TREASURY - 8.61%
United States Treasury Bonds
6.00% 15 Feb 2026 # 1,870,000 1,701,999
7.125% 15 Feb 2023 # 1,370,000 1,430,362
10.375% 15 Nov 2012 # 2,035,000 2,620,693
United States Treasury Notes
6.625% 30 Jun 2001 # 2,550,000 2,591,029
6.875% 15 May 2006 535,000 551,301
7.50% 15 Nov 2001 # 2,300,000 2,421,118
------------
11,316,502
------------
<PAGE>
<CAPTION>
- -------------------------------------------------------
FIXED INCOME PAR VALUE
- -------------------------------------------------------
TOTAL FIXED INCOME
(Cost - $124,678,240) $ 125,773,111
------------
<CAPTION>
- -------------------------------------------------------
SHORT TERM OBLIGATIONS - 3.23% PAR VALUE
- -------------------------------------------------------
<S> <C> <C>
U.S. TREASURY - 3.23%
United States Treasury Bills@
4.845% 23 Jan 1997 $ 2,182,000 2,175,539
4.92% 6 Mar 1997 206,000 204,150
4.95% 6 Mar 1997 115,000 113,967
4.97% 6 Mar 1997 1,610,000 1,595,542
5.00% 6 Mar 1997 108,000 107,030
5.03% 6 Mar 1997 48,000 47,570
------------
4,243,798
------------
TOTAL SHORT TERM OBLIGATIONS
(Cost - $4,244,111) 4,243,798
------------
TOTAL INVESTMENTS - 98.97%
(Cost -$128,922,351) 130,016,909
------------
OTHER ASSETS AND LIABILITIES - 1.03% 1,347,089
------------
TOTAL NET ASSETS - 100% $131,363,998
============
PREFERRED SHORT-TERM GOVERNMENT SECURITIES FUND
- -------------------------------------------------------
FIXED INCOME 88.10% PAR VALUE
- -------------------------------------------------------
<S> <C> <C>
GOVERNMENT SPONSORED - 32.78%
Federal Agricultural
Mortgage Corp MTN
7.15% 15 Jul 1998 1,000,000 1,017,970
Federal Farm Credit
Banks MTN
7.51% 13 Feb 1998 2,000,000 2,035,620
Federal Home Loan
Mortgage Corp
7.125% 21 Jul 1999 2,050,000 2,098,360
Federal National
Mortgage Association
6.642% 1 Oct 1998 6,000,000 6,024,360
7.50% 1 Jan 2003 638,373 651,640
8.997% 1 May 2001 977,052 1,021,019
Federal National
Mortgage Association MTN
6.72% 27 Apr 1998 730,000 736,570
Israel St
6.125% 15 Aug 1999 4,100,000 4,104,920
------------
17,690,459
------------
See notes to financial statements and notes to schedules of investments
<PAGE>
<CAPTION>
PREFERRED S.T. GOV'T. SEC. FUND (continued)
- -------------------------------------------------------
FIXED INCOME PAR VALUE
- -------------------------------------------------------
<S> <C> <C>
MUNICIPAL - 6.31%
Baxter Springs KS US
Govt Gtd
6.44% 1 Aug 2002 $ 700,000 $ 701,246
Bossier LA Public Trust
6.50% 1 Aug 2011 1,680,000 1,674,624
Mississippi Home Corp
Coll Mtg
7.80% 1 Nov 2012 1,000,000 1,027,300
------------
3,403,170
------------
U.S. TREASURY - 49.01%
United States Treasury Notes
5.00% 15 Feb 1999 6,200,000 6,087,594
5.125% 30 Jun 1998 2,200,000 2,180,068
5.125% 31 Dec 1998 1,625,000 1,602,396
5.50% 15 Nov 1998 5,000,000 4,966,400
5.875% 15 Aug 1998 1,500,000 1,500,705
6.125% 15 May 1998 1,250,000 1,256,050
6.25% 30 Jun 1998 3,000,000 3,020,160
6.50% 30 Apr 1999 3,000,000 3,036,570
7.25% 15 Feb 1998 2,750,000 2,795,127
------------
26,445,070
------------
TOTAL FIXED INCOME
(Cost - $47,585,000) 47,538,699
------------
<CAPTION>
- -------------------------------------------------------
SHORT TERM OBLIGATIONS - 10.55% PAR/SHARES VALUE
- -------------------------------------------------------
<S> <C> <C>
GOVERNMENT SPONSORED - 6.47%
Federal Home Loan Mortgage
Disc Notes
5.37% 14 Jan 1997@ $3,500,000 3,493,213
------------
SHORT TERM INVESTMENT
FUND - 1.32%
State Street Global
Advisors Fund 712,038 712,038
------------
U.S. TREASURY - 2.76%
United States Treasury Notes
8.875% 15 Nov 1997 $1,450,000 1,488,961
------------
TOTAL SHORT TERM OBLIGATIONS
(Cost - $5,672,996) 5,694,212
------------
TOTAL INVESTMENTS - 98.65%
(Cost - $53,257,996) 53,232,911
------------
OTHER ASSETS AND LIABILITIES - 1.35% 728,976
------------
TOTAL NET ASSETS - 100% $53,961,887
============
<PAGE>
<CAPTION>
PREFERRED MONEY MARKET FUND
- -------------------------------------------------------
SHORT TERM OBLIGATIONS - 99.41% PAR VALUE
- -------------------------------------------------------
<S> <C> <C>
CERTIFICATES OF DEPOSIT - 40.03%
Bank of Montreal (Chicago)
5.36% 10 Jan 1997 $ 5,000,000 $ 5,000,000
Bank of New York
5.55% 1 Apr 1997@ 1,000,000 999,828
Bank of Tokyo Mitsubishi
5.52% 6 Mar 1997 5,000,000 5,000,000
Banque Natl de Paris
Yankee CD
5.38% 3 Mar 1997@ 5,000,000 4,999,889
First United National Bank
Charlotte NC
5.36% 18 Feb 1997 4,800,000 4,800,000
Industrial Bank of Japan Ltd
5.52% 5 Mar 1997@ 5,000,000 5,000,086
Landesbank Hessen Thuringen
6.01% 18 Jul 1997@ 4,000,000 4,006,168
Royal Bank of Canada
5.81% 13 May 1997@ 4,000,000 3,999,862
Sanwa Bank Ltd
5.68% 13 Jan 1997@ 4,000,000 4,000,013
Societe Generale New York
5.84% 6 Oct 1997@ 2,000,000 1,999,563
------------
39,805,409
------------
COMMERCIAL PAPER - 41.29%
AIG Funding
5.95% 2 Jan 1997@ 3,000,000 2,999,504
Asea Brown Boverei
5.65% 27 Jan 1997@ 4,000,000 3,983,678
Caisse D Amortissement
5.33% 6 Feb 1997@ 5,000,000 4,973,350
Coca Cola Co
5.92% 9 Jan 1997@ 4,000,000 3,994,738
Deutsche Bank Finance Inc
5.70% 2 Jan 1997@ 5,000,000 4,999,208
General Electric Capital Corp
5.39% 6 Jan 1997@ 5,000,000 4,996,257
Koch Industries
7.10% 2 Jan 1997@ 1,170,000 1,169,769
Korea Dev Bank
5.32% 5 Mar 1997@ 5,000,000 4,953,450
Republic NY Corp
5.39% 15 Jan 1997@ 5,000,000 4,989,519
Warner Lambert Co
6.10% 6 Jan 1997@ 4,000,000 3,996,611
------------
41,056,084
------------
See notes to financial statements and notes to schedules of investments
<PAGE>
<CAPTION>
- -------------------------------------------------------
SHORT-TERM OBLIGATIONS PAR VALUE
- -------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS - 10.05%
Abbey National Treasury
Services PLC
5.48% 16 May 1997@ $ 4,000,000 $ 3,998,895
PNC Bank Pittsburgh
5.503% 11 Dec 1997@ 3,000,000 2,997,908
Society National Bank
Cleveland
4.85% 8 Jul 1997@ 3,000,000 2,998,948
------------
9,995,751
------------
U.S. GOVERNMENT AGENCY - 6.03%
Federal Farm Credit Banks
5.40% 2 Dec 1997@ 2,000,000 1,997,562
Federal National Mortgage
Assn MTN
5.42% 11 Jun 1997@ 4,000,000 3,998,633
------------
5,996,195
------------
U.S. TREASURY - 2.01%
United States Treasury Notes
5.375% 30 Nov 1997@ 2,000,000 1,997,118
------------
TOTAL SHORT TERM OBLIGATIONS
(Cost - $98,850,557) 98,850,557
------------
TOTAL INVESTMENTS - 99.41%
(Cost - $98,850,557) 98,850,557
------------
OTHER ASSETS AND LIABILITIES - .59% 592,090
------------
TOTAL NET ASSETS - 100% $99,442,647
============
<FN>
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 December 31, 1996,
these securities amounted to $13,874,025 or 10.56% of the net assets
of the Preferred Fixed Income Fund.
# All or a portion of this security is being used to collateralize
futures contracts outstanding at December 31, 1996.
@ Yields are at time of purchase
ABBREVIATIONS:
ADR - American Depository Receipt
MTN - Medium Term Notes
REMIC - Real Estate Mortgage Investment Conduit
DM - Deutsche Mark
FF - French Franc
</FN>
See notes to financial statements
</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
experiencing rapid earnings growth.
PREFERRED VALUE FUND ("Value") - 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.
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
<PAGE>
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. Obligations with a maturity of 60 days or less
and holdings in Money Market are valued at amortized cost which
approximates market value. Portfolio positions which cannot be valued as
set forth above are valued at fair value under procedures approved by the
Trustees.
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, 1996, 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
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
is accreted to interest income over the life of a security with a
corresponding adjustment in the cost basis; premium is amortized and
market discount is accreted on debt securities with a corresponding
adjustment to the cost basis.
DISTRIBUTIONS TO SHAREHOLDERS
Growth, Value, International and Small Cap will 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, post-October 31 losses and excise tax regulations.
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.
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.
<PAGE>
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.
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 December 31, 1996.
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 its
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>
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 such 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 six-month period ended December 31, 1996, brokerage commissions
were paid to the following affiliates of the Trust's subadvisors by the
following funds:
<TABLE>
<CAPTION>
GROWTH VALUE BALANCED
<S> <C> <C> <C>
J.P. Morgan Securities, Inc. $ 3,735 - $ 8
Lehman Bros. 21,844 - 1,144
Oppenheimer & Co., Inc 2,892 $9,291 72
Prudential Securities, Inc. - - -
$28,471 $9,291 $1,224
</TABLE>
TRUSTEES' FEES
Prior to July 1, 1996, 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 $6,000 plus $1,000 for each Trustees'
meeting attended. Effective July 1, 1996, such Trustees receive an annual
fee of $10,000 plus $1,500 for each Trustees' meeting attended.
<PAGE>
3. BENEFICIAL INTEREST
As of December 31, 1996, shareholders holding more than 5% of total shares
outstanding are as follows:
<TABLE>
<CAPTION>
% OF TOTAL SHARES OUTSTANDING
---------------------------------------------------------------------------------------
GROUP CATERPILLAR PREFERRED STABLE AMERICAN
INSURANCE INSURANCE INVESTMENT PRINCIPAL BANKER'S
401(K) PLAN* TRUST A & B** RESERVES*** MGMT. LTD. COLLECTIVE TRUST INSURANCE CO.
<S> <C> <C> <C> <C> <C> <C>
Growth 51.24% 9.41% 9.42% - - -
Value 60.31% 13.40% 12.88% - - -
International 40.28% 42.83% 5.19% - - -
Small Cap 26.47% 57.52% 12.70% - - -
Asset Allocation 44.53% 34.56% - - - -
Balanced - 89.91% - 7.69% - -
Fixed Income 16.96% 28.50% - - 44.37% -
Short-Term Government 26.93% 32.11% - - - 36.60%
Money Market 85.83% - - - 5.39% -
<FN>
* 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>
<TABLE>
<CAPTION>
4. PORTFOLIO INFORMATION
SECURITY PURCHASES AND SALES
During the six-month period ended December 31, 1996, 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:
LONG TERM U.S. GOVERNMENT
PURCHASES SALES PURCHASES SALES
<S> <C> <C> <C> <C>
Growth $ 105,633,571 $ 164,552,320 - -
Value 18,916,728 20,420,701 - -
International 61,332,223 18,284,448 - -
Small Cap 41,846,012 27,558,009 - -
Asset Allocation 674,176 1,862,746 $ 9,384,449 $ 12,449,183
Balanced 23,586,376 7,316,659 12,953,320 200,722
Fixed Income 64,813,608 47,393,671 60,587,423 80,293,963
Short-Term Government 15,650,129 19,256,989 27,228,277 21,285,766
</TABLE>
<PAGE>
During the six-month period ended December 31, 1996, Money Market had
purchases and sales (including maturities and excluding repurchase
agreements) of other 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 $ 837,477,700 $ 832,449,778 $ 6,525,662 $ 4,787,469
</TABLE>
<TABLE>
FUTURES CONTRACTS
Asset Allocation and Fixed Income had the following futures contracts open
at December 31, 1996:
NUMBER OF EXPIRATION UNREALIZED
CONTRACTS CONTRACTS DATE GAIN (LOSS)
<S> <C> <C> <C>
ASSET ALLOCATION:
Long Positions:
S&P 500 52 Mar 97 $582,688
S&P 500 13 Jun 97 5,225
--------
587,913
--------
Short Positions:
U.S. Treasury Bonds 59 Mar 97 62,466
--------
$650,379
========
FIXED INCOME:
Long Positions:
U.S. Treasury Notes 21 Mar 97 ($15,251)
U.S. Treasury Bonds 2 Mar 97 1,187
--------
($14,064)
========
</TABLE>
UNREALIZED APPRECIATION (DEPRECIATION)
Unrealized appreciation (depreciation) for each Fund at December 31, 1996
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 $ 110,908,720 ($ 4,166,008) $ 106,742,712 $ 272,854,189
Value 125,474,131 (5,073,780) 120,400,351 183,541,724
International 40,929,629 (7,204,150) 33,725,479 173,731,017
Small Cap 12,644,195 (1,455,586) 11,188,609 57,972,999
Asset Allocation 20,026,201 (907,231) 19,118,970 87,542,364
Balanced 3,142,957 (272,187) 2,870,770 40,012,331
Fixed Income 1,512,475 (429,023) 1,083,452 128,933,457
Short-Term Government 67,683 (92,768) (25,085) 53,257,996
Money Market - - - 98,850,557
</TABLE>
<PAGE>
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<PAGE>
Fund & Investment Objective
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.
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.
PREFERRED INTERNATIONAL FUND
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
Seeks long-term capital appreciation through investments in companies
with small equity capitalizations.
PREFERRED ASSET ALLOCATION FUND
Seeks both capital appreciation and current income by allocating its
assets among stocks, bonds and high quality money market instruments.
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.
PREFERRED FIXED INCOME FUND
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
Seeks high current income, consistent with preservation of capital,
primarily through investment in U.S. Government Securities.
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.
<PAGE>
AFFORDABLE MINIMUM INVESTMENT
You may open a Preferred account with an investment of $1,000 or more.
Subsequent investments of $50 or more may be made at any time.
FREE CHECKWRITING
You can write an unlimited number of free checks (minimum $250 per
check) against the assets in your account (Money Market and
Short-Term Government Securities Funds only). You must maintain the
minimum required account balance of $1,000.
SYSTEMATIC SAVINGS PLAN
You may authorize your bank to debit your checking account
automatically and send regular monthly investments of $50 or more to
your fund account. If you select this option, you may open an account
with your first monthly investment of $50.
EXCHANGE PRIVILEGE
Should you wish to change your investment selection, you may move all
or a portion of your assets to another fund. One toll-free call is
all it takes.
IRA PLANS
If you consider a comfortable retirement to be one of your financial
goals, you might be especially interested in opening a Preferred IRA
account. You may also transfer or roll over your current IRA to a
Preferred IRA. Call 1-800-662-GROW for a free IRA Kit.
COMPREHENSIVE INVESTOR SERVICES
You can reach The Preferred Group at 1-800-662-GROW during normal
business hours of 8 a.m. to 6 p.m. Eastern Time to discuss your
questions with our Investor Services representatives. After business
hours you can access pre-recorded information via The Preferred
Tele-Services line. You will also receive easy-to-read
account statements and a comprehensive year-end Summary Statement for
your tax records. High quality service is a top priority at The
Preferred Group.
100% NO-LOAD
We are a 100% NO-LOAD FUND GROUP. There are no sales commissions,
exchange fees, exit fees, or 12b-1 fees when you invest in a
Preferred Group Fund. All of your money goes to work for you
immediately.
<PAGE>
OFFICERS AND TRUSTEES
Gary M. Anna Trustee
William F. Bahl Trustee
James F. Masterson Trustee
Dixie L. Mills Trustee
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.
100 N.E. Adams Street
Peoria, IL 61629-5330
DISTRIBUTOR
Caterpillar Securities Inc.
100 N. E. Adams Street
Peoria, IL 61629-5330
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
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>
The Preferred Group of Mutual Funds
P.O. Box 8320
Boston, MA 02266-8320
SEMIANNUAL REPORT
December 31, 1996
