GRAPHIC: THE PREFERRED GROUP
OF MUTUAL FUNDS (R)
SEMIANNUAL REPORT
DECEMBER 31, 1997
(Unaudited)
<PAGE>
THE PREFERRED GROUP OF MUTUAL FUNDS
- -------------------------------------------------------------------------------
Table of Contents
Performance Data............................................ 1
Our Message to You.......................................... 2
Funds & Investment Objectives............................... 4
Performance Information and Benchmarks...................... 5
Investment Review........................................... 6
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............................... 53
Shareholder Privileges...................................... 62
<TABLE>
<CAPTION>
PERFORMANCE DATA SIX MONTHS ENDED 12/31/97 (UNAUDITED)
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>
Growth $20.42 $18.23 10.72% -- $ -- $4.38
Value 21.14 22.85 9.12 -- .22 --
International 16.12 14.10 (6.60) -- .24 .72
Small Cap 14.30 14.45 14.42 -- .08 1.83
Asset Allocation 14.52 14.28 9.55 -- .24 1.38
Fixed Income 10.24 10.32 5.06 6.38% .32 .11
S.T. Gov't. Securities 9.78 9.83 3.49 5.86 .29 --
Money Market 1.00 1.00 2.58 5.16 .03 --
<FN>
* Total return includes reinvestment of dividends and capital gains
distributions (not annualized).
+ The yield shown for the Fixed Income and Short-Term Government Securities
Funds is the 30-day current yield as of 12/31/97. The yield shown for the Money
Market Fund is a seven-day current yield as of 12/31/97, in accordance with
Securities and Exchange Commission rules for reporting yields of money market
funds.
The performance data quoted represents past performance and does not
guarantee future results. Investment return and principal value will fluctuate
so that, when redeemed, an investor's shares may be worth more or less than
their original cost.
</FN>
See notes to financial statements
</TABLE>
<PAGE>
December 31, 1997 (unaudited)
OUR MESSAGE TO YOU
Photo of: Ronald R. Rossmann
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, 1997. This report provides detailed
information on your Funds' performances, including their holdings, financial
status and commentary from their managers.
MARKET COMMENTARY
The last half of 1997 broke records of every type. The market experienced
its largest one-day drop in the Dow's history (554 points) on October 27, and
the next day it had its biggest-ever gain (337). The Dow had its first-ever
close above the 8000 mark on July 16, peaking at 8259.31 on August 6.
While the U.S. stock market was volatile, it was also strong. The S&P 500
Index climbed 10.6% for the six months, wrapping up an unprecedented third
consecutive year of 20%+ returns.
Financial services led the industry sectors. They benefited from "merger
mania," loan growth and declines in interest rates and loan losses. At the same
time, technology fell from grace due to weakening demand and shrinking profit
margins.
Small caps temporarily outperformed the larger companies' stocks during the
third quarter, but the big stocks later regained the lead as investors turned to
well-known larger companies and retreated from the tech stocks that figure
prominently among small caps. Still, the Russell 2000 Index benchmark for small
caps rose 11.0% over the six-month period.
At the same time, bond prices continued their rise because of falling
inflation, a relatively inactive Federal Reserve Board and a strong dollar. The
Salomon Bros. BIG Index benchmark returned 6.4%, an excellent six-month showing
for bonds.
The big news internationally was Asia. As the Wall Street Journal said, "It
was the year the Asian financial markets plunged. Then things got worse." Asian
turmoil dragged down results far beyond the Pacific region boundaries. European
returns were moderate, but most countries felt Asia's shock waves, resulting in
an 8.4% downturn in the EAFE Index.
Looking ahead, the growth in U.S. earnings may slow. Analysts are cheered
by the stock market's record-setting pace in recent years, but their enthusiasm
is now tempered by continued market volatility and Asia's threat to other
economies. But a well-diversified portfolio and a long-term perspective can see
investors through the ups and downs that are natural for the market.
<PAGE>
PREFERRED GROUP HIGHLIGHTS
This summer President Clinton signed the Taxpayer Relief Act. The law
creates new planning opportunities for Preferred Group investors by offering a
choice between two individual retirement accounts--the Roth IRA and the
traditional IRA--which provide valuable tax savings in very different ways. We
are developing a Roth IRA to complement the IRA we have long offered.
The new law also lowers the capital gains rate, and our new tax statement
helps shareholders understand the implications for their investment portfolio.
(See page 60 of this report for some 1997 long-term capital gain
tax information.)
On July 1 The Preferred Group celebrated its five-year anniversary, a
significant milestone in the mutual fund industry, and on November 1 the
Preferred Small Cap Fund marked its second anniversary. Our Funds have been
recognized recently for their performance in such well-known publications as
Fortune, Mutual Funds Magazine, Morningstar Investor, Kiplinger's Personal
Finance Magazine, Worth, Wall Street Journal, USA Today, Your Money, Forbes, and
Bloomberg Personal.
Lately in the financial press there has been much discussion about
individual "stars" who manage funds versus the team approach. Here at The
Preferred Group we have always hired the firm as opposed to the individual.
While there have been occasional staff changes, our associations with top
investment firms are designed to assure the necessary "bench strength" to manage
your funds with excellence and consistency through the coming years.
We are proud of the achievements of The Preferred Group and look forward to
more enhancements. Serving our shareholders is our highest priority--and we
welcome your suggestions and comments. Please call Investor Services at
1-800-662-GROW.
As always, we appreciate your support of The Preferred Group.
Sincerely,
Ronald R. Rossmann
President
<PAGE>
FUNDS & INVESTMENT OBJECTIVES
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 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>
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, five years and 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, 1997. This allows you to compare funds from different complexes on
an equal basis.
$10,000 HYPOTHETICAL INVESTMENT:
The "$10,000 investment since inception" illustrates the value of your
investment as of December 31, 1997, had you invested $10,000 when the Fund
started.
BENCHMARKS - WHAT ARE THEY AND WHAT DO THEY TELL ME?
Benchmarks are simply a "point of reference for comparison." Mutual funds
typically compare themselves to a suitable stock or bond market index to gauge
their performance over the long term (3-5 years). An index is really a
fictitious unmanaged portfolio. It does not trade or incur any expenses. In that
sense, a fund must actually outperform its benchmark (gross return) by the
amount of its management fees and other expenses in order for its reported
performance (net of fees) to match its benchmark. Because the Funds are managed
portfolios investing in a wide range of securities, the securities owned by a
Fund will not match those included in the relevant benchmark. (Please refer to
the Investment Review section of this report for detailed descriptions of each
Fund's benchmark.)
PREFERRED GROWTH FUND
S&P 500 Index
PREFERRED VALUE FUND
S&P 500 Index
PREFERRED INTERNATIONAL FUND
EAFE Index
PREFERRED SMALL CAP FUND
Russell 2000 Index
PREFERRED FIXED INCOME FUND
Salomon Brothers Broad Investment Grade (BIG) Index
PREFERRED ASSET ALLOCATION FUND
65% - S&P 500 Index
30% - Lehman Brothers Long-Term Treasury Index
5% - 90-Day Treasury Bills
PREFERRED SHORT-TERM GOVERNMENT SECURITIES FUND
Merrill Lynch 1-3 Year Treasury Index
PREFERRED MONEY MARKET FUND
IBC's Money Fund Report Avg/All Taxable
<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: Robert B. Corman, CFA, CPA
Title: Director/Senior Vice President,
Jennison Associates LLC
Last Five Years' Experience: Portfolio Manager/Research Analyst at Jennison
Associates. Bob assumed management of the Preferred Growth Fund in
January 1998.
Education: B.A. - University of Wisconsin; MBA - University of Chicago;
Chartered Financial Analyst; Certified Public Accountant
Note: Lulu C. Wang managed the Preferred Growth Fund through December 31, 1997.
DISCUSSION & ANALYSIS:
For the six-month period ended December 31, 1997, the Preferred Growth Fund
advanced by 10.7%, compared with a gain of 10.6% for the S&P 500 Index. Since
inception, the Fund has advanced at an average rate of 20.1% per year compared
to 20.0% for the benchmark.
Volatility in the stock market intensified during the second half of 1997
as the severity of the Asian financial crises became clear. After broadening out
briefly, the stock market's advance became increas- ingly selective toward the
end of the year as those stocks with large market capitalizations accounted for
a disproportionate share of the market's advance.
Strong contributions to the Fund's performance were made by pharmaceutical
stocks, specifically Eli Lilly (1.5% of net assets) and Pfizer. The technology
sector, which accounts for a number of the Fund's top holdings, experienced some
profit-taking amid worries over Asian demand. Compaq Computer (1.8%), Platinum
Technology (1.5%) and Dell Computer (1.7%) were the Fund's top performers, while
3Com (1.0%) and Motorola (1.6%) pulled back from their highs. Selected retail
stocks also struggled as Sears (1.0%) fell over concern that credit-card
delinquencies would rise and Gucci (eliminated from portfolio by period-end)
sagged after warning investors of decelerating sales growth in Asia.
As we look toward 1998, we believe that the Asian meltdown clearly has increased
the attractiveness of the U.S. stock market as a safe haven. At the same time,
individual stock selection has become increas ingly important as the impact of
Asia's turmoil on U.S. corporate profits becomes more visible. Moreover, higher
U.S. wage rates and the lack of corporate pricing power all pose additional
threats to U.S. profit growth. Fortunately, new lows in inflation and interest
rates should provide an important buffer for the stock market and may prevent
normal corrections from evolving into a bear market.
- Jennison Associates
<PAGE>
TOP TEN HOLDINGS: (% of total net assets)
1. Pfizer Inc. 2.7%
- ----------------------------------------------------------
2. General Electric Co. 2.4%
- ----------------------------------------------------------
3. HBO&Co. 2.3%
- ----------------------------------------------------------
4. Walt Disney Co. 2.2%
- ----------------------------------------------------------
5. Hewlett Packard Co. 2.2%
- ----------------------------------------------------------
6. Chase Manhattan Corp. 2.2%
- ----------------------------------------------------------
7. Omnicom Group 2.2%
- ----------------------------------------------------------
8. Morgan Stanley Dean Witter 2.1%
- ----------------------------------------------------------
9. Diebold Inc. 2.1%
- ----------------------------------------------------------
10. Cisco Systems Inc. 2.1%
- ----------------------------------------------------------
PERFORMANCE:
The following information illustrates the historical performance of the
Preferred Growth Fund compared with the S&P 500 INDEX. The S&P 500 Index is the
most common index for the overall U.S. stock market. It comprises 500 of the
leading U.S. companies representing major industries.
Note: Past performance is not necessarily indicative of future results.
Investment return and principal value will fluctuate, so that, when redeemed, an
investor's shares may be worth more or less than their original cost. The
Preferred Growth Fund's inception date was July 1, 1992. This report will
provide ten-year performance history in the future as the Fund matures.
An index is a fictitious unmanaged portfolio and does not trade or incur any
expenses. An investment fund must outperform its benchmark by the amount of its
management fees and other expenses for its reported performance to match its
benchmark.
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN:
PAST PAST PAST SINCE
6 MONTHS 1 YEAR 5 YEARS INCEPTION*
<S> <C> <C> <C> <C>
PREFERRED GROWTH
FUND 10.72% 31.22% 129.83% 173.85%
S&P 500 Index 10.59% 33.23% 151.16% 172.18%
* JULY 1, 1992
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN:
PAST PAST SINCE
1 YEAR 5 YEARS INCEPTION*
<S> <C> <C> <C>
PREFERRED GROWTH FUND 31.22% 18.11% 20.10%
S&P 500 Index 33.23% 20.22% 19.97%
* JULY 1, 1992
</TABLE>
A $10,000 INVESTMENT SINCE INCEPTION:
LINE CHART:
PREFERRED GROWTH FUND S&P 500 INDEX
7/1/92 10000 10000
6/30/93 12425 11359
6/30/94 12468 11514
6/30/95 16733 14510
6/30/96 19237 18291
6/30/97 24732 24612
12/31/97 27385 27218
<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 that are 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, 1997, the Preferred Value Fund
returned 9.1%, compared to a 10.6% advance in the S&P 500 Index. Since its
inception, the Fund has delivered an average annual return of 19.4%, compared to
a 20.0% average annual increase in the benchmark.
With the decline in interest rates during the period, the Fund's results were
aided by the strong performance of financial stocks, an industry in which the
Fund has been overweighted since the Fund's inception. The more notable stocks
in this category included Travelers Group, Ace Ltd., Exel Ltd., Countrywide
Credit Industry, Wells Fargo, Morgan Stanley Dean Witter (2.8% of net assets)
and Federal Home Loan Mortgage. In contrast, much of the strength in the S&P 500
Index was a result of the exceptional performance of very large consumer
nondurable companies (pharmaceuticals, beverages, household products, etc.),
where due to valuation concerns we have found few companies that meet our
investment criteria.
During the period, financial markets worldwide were buffeted by the impact of
the Asian financial crisis. Stock prices in some Asian nations fell
precipitously, and the U.S. stock market was extremely volatile. Several of our
large multinational holdings, including Citicorp, Boeing (3.2%) and Aflac
(2.6%), suffered when the market reacted to the near-term issues of slowed
growth, reduced profits and negative currency translation. However, we see good
long-term risk/reward opportunity in such holdings.
The Fund's philosophy is to be a long-term holder
of superior businesses. We stress a high return on invested capital, a high
level of cash flow generation throughout the economic cycle and a management
that redeploys cash flow for the benefit of the shareholder. Our philosophy does
not change as market or economic outlooks change. Well-positioned companies
create value for the shareholder over long periods of time. We want to own
companies that will be prospering 20 years from now.
The U.S. stock market ended 1997 with a level of uncertainty not seen in
some time as investors pondered the implications of the Asian financial crisis.
We believe the impact of the Asian crisis will be offset somewhat by factors in
the U.S., such as a tight job market. While we would not be surprised to see a
high level of market volatility in the near term, this volatility may provide
opportunities to buy stocks we like at favorable prices.
- Oppenheimer Capital
<PAGE>
TOP TEN HOLDINGS: (% of total net assets)
- ---------------------------------------------------------
1. Travelers Group Inc. 5.4%
- ---------------------------------------------------------
2. Federal Home Loan Mortgage Corp. 4.7%
- ---------------------------------------------------------
3. Exel Ltd. 4.5%
- ---------------------------------------------------------
4. Wells Fargo & Co. 4.0%
- ---------------------------------------------------------
5. Citicorp 3.9%
- ---------------------------------------------------------
6. General Electric Co. 3.7%
- ---------------------------------------------------------
7. Ace Ltd. 3.7%
- ---------------------------------------------------------
8. AMRCorp. 3.6%
- ---------------------------------------------------------
9. Monsanto Co. 3.5%
- ---------------------------------------------------------
10. Countrywide Credit Industry Inc. 3.3%
- ---------------------------------------------------------
PERFORMANCE:
The following information illustrates the historical performance of the
Preferred Value Fund compared with the S&P 500 INDEX. The S&P 500 Index is the
most common index for the overall U.S. stock market. It comprises 500 of the
leading U.S. companies representing major industries.
Note: Past performance is not necessarily indicative of future results.
Investment return and principal value will fluctuate, so that, when redeemed, an
investor's shares may be worth more or less than their original cost. The
Preferred Value Fund's inception date was July 1, 1992. This report will provide
ten-year performance history in the future as the Fund matures.
An index is a fictitious unmanaged portfolio and does not trade
or incur any expenses. An investment fund must outperform its benchmark by the
amount of its management fees and other expenses for its reported performance to
match its benchmark.
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN:
PAST PAST PAST SINCE
6 MONTHS 1 YEAR 5 YEARS INCEPTION*
<S> <C> <C> <C> <C>
PREFERRED VALUE FUND 9.12% 28.02% 141.48% 165.15%
S&P 500 Index 10.59% 33.23% 151.16% 172.18%
* JULY 1, 1992
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN:
PAST PAST SINCE
1 YEAR 5 YEARS INCEPTION*
<S> <C> <C> <C>
PREFERRED VALUE FUND 28.02% 19.28% 19.40%
S&P 500 Index 33.23% 20.22% 19.97%
* JULY 1, 1992
</TABLE>
A $10,000 INVESTMENT SINCE INCEPTION:
LINE CHART:
PREFERRED VALUE FUND S&P 500 INDEX
7/1/92 10000 10000
6/30/93 11673 11359
6/30/94 11707 11514
6/30/95 14718 14510
6/30/96 18322 18291
6/30/97 24298 24612
12/31/97 26515 27218
<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 dropped 6.6% for the six-month period
ended December 31, 1997, versus an 8.4% drop in the EAFE Index. Foreign stocks
performed poorly as the crisis in Asia took its toll on stocks.
The turmoil in Asia created havoc for stock markets in the region as many
countries experienced severe currency devaluations. Bad economic policies and
poor lending practices by banks were major contributors to the crisis.
Confidence must be restored, and this will not occur until currencies in the
region stabilize.
However, we believe that the long-term outlook for Asia is very good and
that many great investment bargains will emerge. Our strict value discipline
kept us out of stocks in Southeast Asia and significantly limited our
participation in the rest of Asia, particularly in the very weak Japanese
market. We believe this discipline will also enable us to identify the best
stock bargains at the appropriate time.
Our significant underweighting in Asia proved beneficial as those markets were
pummeled. Australia and New Zealand stocks were poor performers as they are
somewhat dependent on Asian economies. However, Europe, where we have a
significant weighting in the portfolio, did relatively well.
During the period we reduced stock positions in Italy, Spain, Norway and
Canada based on high price levels. We eliminated L.G. Construction (South Korea)
from the portfolio. Our exposure increased in France, Switzerland, Australia and
Japan, where we added to some very attractively priced stocks. We added two new
stocks to the portfolio, Pharmacia & UpJohn (2.0% of net assets) (Sweden), a
health care company, and Bouygues (2.1%) (France), a multi-industry company. The
portfolio continues to be heavily weighted in Europe (64%) and significantly
underweighted in Asia (8%).
We are optimistic on the outlook for the Fund based on the valuation level of
stocks, low inflation, low interest rates and a positive earnings outlook.
Accelerating corporate restructuring overseas may help companies improve their
profitability. The portfolio holds very attractively priced stocks that we
believe may provide handsome rewards over the long term. The short term will be
volatile, but as always, Mercator will focus on long-term opportunities.
- Mercator Asset Management, L.P.
<PAGE>
TOP TEN HOLDINGS: (% of total net assets)
- ------------------------------------------------------
1. National Westminster United Kingdom 2.6%
- ------------------------------------------------------
2. Akzo Nobel NV Netherlands 2.5%
- ------------------------------------------------------
3. British Telecom United Kingdom 2.4%
- ------------------------------------------------------
4. Schweiz Bankverein Switzerland 2.4%
- ------------------------------------------------------
5. Tesco United Kingdom 2.4%
- ------------------------------------------------------
6. Allied Domecq PLC United Kingdom 2.4%
- ------------------------------------------------------
7. ING Groep NV Netherlands 2.2%
- ------------------------------------------------------
8. KLM Netherlands 2.2%
- ------------------------------------------------------
9. Benetton Group SPA Italy 2.2%
- ------------------------------------------------------
10. Societe Elf Aquitaine France 2.2%
- ------------------------------------------------------
GEOGRAPHIC ALLOCATION:
(% of total net assets)
- ------------------------
United Kingdom 14.8%
- ------------------------
Switzerland 10.4%
- ------------------------
Netherlands 10.0%
- ------------------------
Sweden 8.2%
- ------------------------
Australia 7.7%
- ------------------------
France 7.7%
- ------------------------
Japan 6.2%
- ------------------------
Spain 5.8%
- ------------------------
Italy 5.5%
- ------------------------
Canada 4.6%
- ------------------------
New Zealand 4.2%
- ------------------------
Argentina 3.5%
- ------------------------
South Korea 1.7%
- ------------------------
Norway 1.0%
- ------------------------
PERFORMANCE:
The following information illustrates the historical performance of the
Preferred International Fund compared with the Europe, Australia & Far East
(EAFE) Index. The EAFEIndex contains over 1000 stocks from 20 different
countries with Japan (approx. 28%), the United Kingdom, France and Germany being
the most heavily weighted.
There are special risk considerations associated with foreign investing,
including political and currency risks. (See "Risk Factors of Foreign
Investments" in the current Prospectus.)
Note: Past performance is not necessarily indicative of future results.
Investment return and principal value will fluctuate, so that, when redeemed, an
investor's shares may be worth more or less than their original cost. The
Preferred International Fund's inception date was July 1, 1992. This report will
provide ten-year performance history in the future as the Fund matures.
An index is a fictitious unmanaged portfolio and does not trade or incur any
expenses. An investment fund must outperform its benchmark by the amount of its
management fees and other expenses for its reported performance to match its
benchmark.
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN:
PAST PAST PAST SINCE
6 MONTHS 1 YEAR 5 YEARS INCEPTION*
<S> <C> <C> <C> <C>
PREFERRED
INTERNATIONAL FUND (6.60%) 6.78% 100.96% 69.18%
EAFE Index (8.36%) 2.06% 73.94% 70.07%
* JULY 1, 1992
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN:
PAST PAST SINCE
1 YEAR 5 YEARS INCEPTION*
<S> <C> <C> <C>
PREFERRED
INTERNATIONAL FUND 6.78% 14.98% 10.03%
EAFE Index 2.06% 11.71% 10.14%
* JULY 1, 1992
</TABLE>
LINE CHART:
A $10,000 INVESTMENT SINCE INCEPTION:
Preferred International Fund EAFE Index
7/1/92 10000 10000
6/30/93 9623 12072
6/30/94 12189 14159
6/30/95 13004 14433
6/30/96 14787 16400
6/30/97 18114 18558
12/31/97 16918 17007
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. 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, 1997, the Preferred Small Cap
Fund returned 14.4%, compared to an 11.0% advance for the Russell 2000 Index.
Since the inception of the Fund on November 1, 1995, the Fund has provided an
annualized return of 26.5% against a gain of 21.5% for the benchmark.
The Fund's outperformance in the last six months occurred mainly in the
third quarter. The Fund's holdings in the technology-related sector provided the
leadership during this period. Holdings in this sector, which represented
approximately 15% of the portfolio, advanced better than 45% on average. The
rapid increase in price of many of these holdings forced their relative
valuations lower. As a consequence, we reduced or eliminated many of these
positions by the end of the third quarter. This reduced our exposure to the
significant declines technology-related stocks suffered in the fourth quarter.
Stocks of financial service companies also performed well during the six-month
period, growing more than 20% on average. They are the largest economic sector
concentration in the portfolio, representing more than 15% of the total
portfolio. These holdings benefited greatly from the decline in long-term
interest rates during the period.
The Russell 2000 Index matched the performance of the S&P 500 Index for the
last six months of 1997. However, taken as a whole, 1997 was the fourth
consecutive year in which U.S. small caps trailed large caps. Investors
preferred larger stocks during the periods of extreme market volatility we
faced.
We have remarked a number of times that this situation appears poised to
reverse. The situation in Asia may yet provide the catalyst for small cap stocks
to rebound. Larger stocks, with a more international presence, may suffer
greater deterioration in earnings growth than more domestically oriented small
cap stocks. Investors in search of earnings growth may have to look to small
caps. With valuations at what we believe to be attractive levels and with the
typically greater potential growth of earnings still intact, small cap stocks
could be in for a good year in 1998.
- Caterpillar Investment Management Ltd.
<PAGE>
TOP TEN HOLDINGS: (% of total net assets)
- ----------------------------------------------------------
1. Bowne & Co. Inc. 2.4%
- ----------------------------------------------------------
2. Imperial Credit Mortgage Holdings Inc. 2.0%
- ----------------------------------------------------------
3. Seacor Smit Inc. 1.8%
- ----------------------------------------------------------
4. Arvin Industry Inc. 1.7%
- ----------------------------------------------------------
5. Burlington Coat Factory Warehouse 1.5%
- ----------------------------------------------------------
6. Cooper Cos Inc. 1.5%
- ----------------------------------------------------------
7. CHS Electronics Inc. 1.5%
- ----------------------------------------------------------
8. First American Financial Corp. 1.3%
- ----------------------------------------------------------
9. Commercial Intertech Corp. 1.3%
- ----------------------------------------------------------
10. Capstead Mortgage Corp. 1.3%
- ----------------------------------------------------------
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 14.42% 31.42% 66.29%+
Russell 2000 Index 11.03% 22.36% 52.46%
* 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.
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN:
PAST SINCE
1 YEAR INCEPTION*
<S> <C> <C>
PREFERRED SMALL CAP FUND 31.42% 26.46%+
Russell 2000 Index 22.36% 21.49%
* NOVEMBER 1, 1995
+ TOTAL RETURN WOULD HAVE BEEN LOWER IF A PORTION OF
THE MANAGEMENT FEE (0.35%) HAD NOT BEEN WAIVED FOR
HE PERIOD NOVEMBER 1, 1995 THROUGH OCTOBER 31, 1996.
</TABLE>
LINE CHART:
A $10,000 INVESTMENT SINCE INCEPTION:
PREFERRED SMALL CAP FUND RUSSELL 2000 INDEX
11/1/95 10000 10000
12/31/95 10506 10695
6/30/96 11267 11804
12/31/96 12653 12460
6/30/97 14534 13731
12/31/97 16629 15246
<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 returned 9.6% for the six-month period ended
December 31, 1997. By comparison, the Fund's blended benchmark consisting of 65%
- - S&P 500 Index, 30% - Lehman Brothers Long-Term Treasury Index and 5% - 90-Day
Treasury Bills returned 10.9% for the period. The Fund returned an average
annual return of 14.8% since inception, compared to 16.4% for the benchmark.
During the quarter ended September 30, financial markets delivered strong
performance amid a high level of stock market volatility. Financial markets were
concerned that tight labor markets might soon bring faster wage growth that
would inevitably flow through to higher prices. There were also questions about
the sustainability of the relatively rapid pace of economic growth. However,
economic statistics released during the quarter showed little evidence of an
overheating economy, greater price inflation or wage inflation. After weighing
all the evidence, the Federal Reserve chose to leave both the overnight and
discount rates unchanged at its Open Market Committee meeting at the end of
September.
During the quarter ended December 31, reverberations from the meltdown of Asian
stock and currency markets were felt in U.S. financial markets. Stocks and bonds
posted sharply divergent returns during October as the bond market benefited
from a flight to quality. Financial markets later benefited from the growing
realization that despite the Southeast Asian financial crisis, the U.S. economy
showed few signs of straying from its path of steady growth with low inflation.
Economic data indicate that the U.S. economy may continue to avoid serious
fallout from the crisis in Asia while growing at a sustainable pace.
At the beginning of the fiscal year, the Preferred Asset Allocation Fund had an
asset mix (adjusted for the effect of futures contracts) of 33% stocks, 51%
bonds and 16% cash. The sharp fall in stock prices in October made stocks
relatively more attractive, while the rally in the bond market reduced bond
yields, making bonds less attractive. This caused a shift out of bonds into
stocks. Meanwhile, yields on short-term cash instruments rose substantially,
lowering the spread between the expected returns on bonds and cash and prompting
a move from bonds into cash. The Fund ended the six-month period with an asset
mix (adjusted for the effect of futures contracts) of 46% stocks, 33% bonds and
21% cash.
- Mellon Capital Management
- PanAgora Asset Management
<PAGE>
PORTFOLIO ALLOCATION*: (% of portfolio)
- -------------------------------------------------------
12/31/97 6/30/97 12/31/96
- -------------------------------------------------------
Stocks 46% 33% 69%
- -------------------------------------------------------
Bonds 33% 51% 20%
- -------------------------------------------------------
Short-Term 21% 16% 11%
(maturities less than one year)
- -------------------------------------------------------
*Adjusted for the effect of futures contracts
PERFORMANCE:
The following information illustrates the historical performance of the
Preferred Asset Allocation Fund compared with a blended benchmark consisting of:
65% - S&P 500 INDEX; 30% - LEHMAN BROTHERS LONG-TERM TREASURY INDEX; AND 5% -
90-DAY TREASURY BILLS. The S&P 500 Index is the most common index for the
overall U.S. stock market. It comprises 500 of the leading U.S. companies
representing major industries. The Lehman Brothers Long-Term Treasury Index is a
market weighted index of all publicly held Treasury issues with maturities
greater than 10 years. The 90-Day Treasury Bill benchmark is a performance
calculation using recently issued 90-Day Treasury Bills.
The Asset Allocation Fund has a blended benchmark to reflect its
flexibility to invest in stocks, bonds and short-term instruments.
Note: Past performance is not necessarily indicative of future results.
Investment return and principal value will fluctuate, so that, when redeemed, an
investor's shares may be worth more or less than their original cost. The
Preferred Asset Allocation Fund's inception date was July 1, 1992. This report
will provide ten-year performance history in the future as the Fund matures. An
index is a fictitious unmanaged portfolio and does not trade or incur any
expenses. An investment fund must outperform its benchmark by the amount of its
management fees and other expenses for its reported performance to match its
benchmark.
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN:
PAST PAST PAST SINCE
6 MONTHS 1 YEAR 5 YEARS INCEPTION*
<S> <C> <C> <C> <C>
PREFERRED ASSET
ALLOCATION FUND 9.55% 20.92% 99.28% 113.84%
65/30/5 Benchmark 10.89% 26.28% 113.84% 130.54%
* JULY 1, 1992
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN:
PAST PAST SINCE
1 YEAR 5 YEARS INCEPTION*
<S> <C> <C> <C>
PREFERRED ASSET
ALLOCATION FUND 20.92% 14.79% 14.82%
65/30/5 Benchmark 26.28% 16.42% 16.40%
* JULY 1, 1992
</TABLE>
LINE CHART:
A $10,000 INVESTMENT SINCE INCEPTION:
PREFERRED ASSET ALLOCATION FUND 65/30/5 BENCHMARK
7/1/92 10000 10000
6/30/93 11357 11523
6/30/94 11212 11483
6/30/95 13643 14057
6/30/96 16132 16429
6/30/97 19521 20789
12/31/97 21384 23054
<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 5.1% for the six-month period
ended December 31, 1997, compared to 6.4% for the Salomon Brothers Broad
Investment Grade (BIG) Bond Index. Since its inception, the Fund has returned
7.4%, compared to 7.7% for its benchmark.
Throughout 1997, the U.S. economy continued to grow at an above-average rate,
and unemployment was low. In addition, income, consumption and confidence
measures stayed strong. In spite of a continuing rise in wage rates, both
wholesale and retail inflation remained exceptionally mild.
In managing the Preferred Fixed Income Fund, three key decisions add value.
First, we determine the Fund's duration, which is a measure of the Fund's
sensitivity to changes in interest rates. The Fund's duration, which averaged
approximately 1/4 year longer than the Salomon Brothers BIG Index, enhanced
performance and partially offset the poor showing of the spread sectors.
Second, we allocate the Fund's assets across the broad sectors of the fixed
income market, including governments, corporates, high-yield, emerging market
debt, international bonds and mortgage-backed securities. During the second half
of the year, the Fund's overall performance benefited from our decision to
overweight mortgage-backed securities and investment grade corporates while
maintaining an underweighted position in U.S. Treasuries. However, this decision
suppressed the Fund's performance at the end of the year as the volatility in
Asia caused many investors to leave stock markets for the relative safety of
fixed income markets, particularly U.S. Treasuries.
Finally, we select individual securities for the Fund with substantial input
from our fixed income analysts and traders. Security selection continued to add
value during the year. The Fund maintained its focus on high-quality issues,
keeping the average credit quality of its holdings between AA and AAA.
The Fund remains strategically overweighted in the spread sectors, although to a
lesser degree. We have reduced the Fund's position in mortgages and callable
corporate securities as they have become particularly vulnerable with the fall
in interest rates. Since we believe the volatility in the financial markets will
not dissipate any time soon, we have increased the Fund's holdings in U.S.
Treasuries.
- J. P. Morgan Investment Management
<PAGE>
PORTFOLIO STATISTICS: (as of December 31, 1997)
Portfolio Holdings 135
- --------------------------------------------------
Average Maturity 12.3 years
- --------------------------------------------------
Average Duration 4.7 years
- --------------------------------------------------
Average Quality AAA
- --------------------------------------------------
Allocation (% of portfolio*):
- --------------------------------------------------
Treasury/Agency 20%
- --------------------------------------------------
Corporates 34%
- --------------------------------------------------
Mortgages/Asset Backed 45%
- --------------------------------------------------
Short-Term 1%
(maturities less than one year)
- --------------------------------------------------
*Adjusted for the effect of futures contracts
PERFORMANCE:
The following information illustrates the historical performance of the
Preferred Fixed Income Fund compared with the SALOMON BROTHERS BROAD INVESTMENT
GRADE (BIG) INDEX. The Index contains 5,000 U.S. Treasury, Agency, Mortgage and
Corporate Bonds. Credit quality must be investment grade (AAA-BBB by Standard &
Poor's).
Note: Past performance is not necessarily indicative of future results.
Investment return and principal value will fluctuate, so that, when redeemed, an
investor's shares may be worth more or less than their original cost. The
Preferred Fixed Income Fund's inception date was July 1, 1992. This report will
provide ten-year performance history in the future as the Fund matures.
An index is a fictitious unmanaged portfolio and does not trade or incur any
expenses. An investment fund must outperform its benchmark by the amount of its
management fees and other expenses for its reported performance to match its
benchmark.
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN:
PAST PAST PAST SINCE
6 MONTHS 1 YEAR 5 YEARS INCEPTION*
<S> <C> <C> <C> <C>
PREFERRED FIXED
INCOME FUND 5.06% 8.45% 41.49% 48.14%
Salomon Bros.
BIG Index 6.37% 9.63% 43.78% 50.38%
* JULY 1, 1992
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN:
PAST PAST SINCE
1 YEAR 5 YEARS INCEPTION*
<S> <C> <C> <C>
PREFERRED FIXED
INCOME FUND 8.45% 7.19% 7.41%
Salomon Bros. BIG Index 9.63% 7.53% 7.70%
* JULY 1, 1992
</TABLE>
LINE CHART:
A $10,000 INVESTMENT SINCE INCEPTION:
PREFERRED FIXED INCOME FUND SALOMON BROS. BIG INDEX
7/1/92 10000 10000
6/30/93 11259 11198
6/30/94 11207 11065
6/30/95 12494 12454
6/30/96 13009 13071
6/30/97 14101 14138
12/31/97 14814 15038
<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: Richard W. Oswald, CPA
Title: Vice President, Portfolio Manager, J.P. Morgan Investment Management Inc.
Last Five Years' Experience: Richard joined J.P. Morgan as Portfolio Manager in
October 1996 after eight years with CBS Inc., where he served as corporate
treasurer and president of the company's investment subsidiary and managed a
portfolio of fixed income securities. Richard assumed responsibility for
management of the Preferred Short-Term Government Securities Fund in November
1997.
Education: B.A. - University of Toronto; MBA - Rochester Institute of
Technology, Certified Public Accountant
DISCUSSION & ANALYSIS:
The Preferred Short-Term Government Securities Fund returned 3.5% for the
six-month period ended December 31, 1997, compared with a 3.7% return for the
Merrill Lynch 1-3 Year Treasury Index. Since inception, the Fund's average
annual return has been 5.0% versus 5.7% for the benchmark. Shareholders holding
a majority of the Fund's shares approved a new subadvisor agreement for the Fund
with J.P. Morgan Investment Management, Inc., which assumed primary
responsibility for the day-to-day management of the Fund's portfolio on November
1, 1997. During the second half of the year, the U.S. economy continued to grow
at above-trend levels. The turmoil in Asia spilled into other markets,
increasing the volatility of financial markets worldwide. Investors left stock
markets for the relative safety of U.S. fixed income securities, favoring U.S.
Treasuries in particular. The yield on the 30-year U.S. Treasury fell from 6.4%
on September 30 to 5.9% on December 31.
Given the economic environment, we made a tactical decision to purchase GNMA 8%
mortgage issued in 1992. These securities tend to be less sensitive to interest
rate movements than other GNMAs in current production. We also added Overseas
Private Investors Corp., a government-sponsored enterprise, which benefited from
the outperformance of the U.S. Treasury market.
We plan to reduce the Fund's position in prepayment-sensitive mortgages as they
have become particularly vulnerable with the fall in interest rates. As we
believe the volatility in the financial markets will not dissipate any time
soon, we expect to increase the Fund's holdings in U.S. Treasury securities.
Our analysis of the economic impact on the U.S.
economy of the recent events in Asia leads us to believe that there will be only
modest slowing of growth. At this time, we believe that in light of the
economy's inflation performance and the ongoing global market uncertainties, the
Federal Reserve is likely to take no further action.
- J.P. Morgan Investment Management
<PAGE>
PORTFOLIO STATISTICS: (as of December 31, 1997)
- ------------------------------------------------
Portfolio Holdings 28
- ------------------------------------------------
Average Maturity 2.8 years*
- ------------------------------------------------
Average Duration 2.5 years*
- ------------------------------------------------
*estimated
PERFORMANCE:
The following information illustrates the historical performance of the
Preferred Short-Term Government Securities Fund compared with the MERRILL LYNCH
1-3 YEAR TREASURY INDEX. The Index comprises primarily U.S. Treasury Notes and
Bonds with remaining maturities of one to three years.
Note: Past performance is not necessarily indicative of future results.
Investment return and principal value will fluctuate, so that, when redeemed, an
investor's shares may be worth more or less than their original cost. The
Preferred Short-Term Government Securities Fund's inception date was July 1,
1992. This report will provide ten-year performance history in the future as the
Fund matures.
An index is a fictitious unmanaged portfolio and does not trade or incur any
expenses. An investment fund must outperform its benchmark by the amount of its
management fees and other expenses for its reported performance to match its
benchmark.
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN:
PAST PAST PAST SINCE
6 MONTHS 1 YEAR 5 YEARS INCEPTION*
<S> <C> <C> <C> <C>
PREFERRED SHORT-TERM
GOVERNMENT
SECURITIES FUND 3.49% 6.18% 27.14% 30.46%
ML 1-3 Yr. Treasury Index 3.67% 6.66% 31.75% 35.93%
* JULY 1, 1992
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN:
PAST PAST SINCE
1 YEAR 5 YEARS INCEPTION*
<S> <C> <C> <C>
PREFERRED SHORT-TERM
GOVERNMENT
SECURITIES FUND 6.18% 4.92% 4.95%
ML 1-3 Yr. Treasury Index 6.66% 5.67% 5.74%
* JULY 1, 1992
</TABLE>
LINE CHART:
A $10,000 INVESTMENT SINCE INCEPTION:
PREFERRED SHORT-TERM GOV'T. SEC. FUND ML 1-3 YR. TREASURY INDEX
7/1/92 10000 10000
6/30/93 10632 10658
6/30/94 10723 10830
6/30/95 11336 11666
6/30/96 11914 12303
6/30/97 12606 13111
12/31/97 13046 13593
<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
Management. 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, 1997, matching the return of the IBC's Money Fund Report Avg/All
Taxable. Since inception, the Fund's average annual return has been 4.4% versus
4.3% for the benchmark.
During the second half of the year, robust growth in the U.S. economy continued.
Unemployment moved to cyclical lows, and income, consumption and confidence
measures remained robust. In spite of an ongoing drift upward in wage rates,
inflation at both the wholesale and retail levels remained remarkably benign.
The U.S. economy continued to exhibit strong growth and moderate inflation
during the fourth quarter. The volatile Asian markets were the focus in November
and December, causing a "flight to quality"with many investors. The yield on the
30-year U.S. Treasury bond ended just below 6%, the lowest level in more than
four years.
Active management of the Fund's average maturity, which was within a 35-55 day
range, enhanced performance. Near year-end, we avoided the short end of the
yield curve and extended the Fund's average life to approximately 50 days to
maturity to take advantage of year-end pressures. In addition, the Fund's yield
was enhanced by short agency discount notes and one-year securities. We added
value by re-entering the Japanese CD market near the end of the year.
Going forward, we plan to maintain the fund's average life within the 35-50 day
range. We continue to focus on high quality and highly liquid securities. All
securities are rated A1/P1, AA or better or are of comparable credit quality as
determined by management. At this time, we believe that the Federal Reserve is
likely to withhold action in light of the weakened economic conditions
throughout Asia.
- 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 IBC'S MONEY FUND REPORT AVG/ALL TAXABLE.
This benchmark is used for taxable money market funds.
Note: Past performance is not necessarily indicative of future results.
Investment return and principal value will fluctuate, so that, when redeemed, an
investor's shares may be worth more or less than their original cost. The
Preferred Money Market Fund's inception date was July 1, 1992. This report will
provide ten-year performance history in the future as the Fund matures.
An index is a fictitious unmanaged portfolio and does not trade or incur any
expenses. An investment fund must outperform its benchmark by the amount of its
management fees and other expenses for its reported performance to match its
benchmark.
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN:
PAST PAST PAST SINCE
6 MONTHS 1 YEAR 5 YEARS INCEPTION*
<S> <C> <C> <C> <C>
PREFERRED MONEY
MARKET FUND 2.58% 5.16% 24.64%+ 26.38%+
IBC's Money Fund
Report Avg/All Taxable 2.57% 5.09% 23.96% 25.79%
* 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.
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN:
PAST PAST SINCE
1 YEAR 5 YEARS INCEPTION*
<S> <C> <C> <C>
Preferred Money Market
Fund 5.16% 4.50%+ 4.35%+
IBC's Money Fund
Report Avg/All Taxable 5.09% 4.39% 4.26%
* 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.
</TABLE>
LINE CHART:
A $10,000 INVESTMENT SINCE INCEPTION:
PREFERRED DONOGHUE'S TAXABLE
MONEY MARKET FUND MONEY MARKET FUND AVERAGE
7/1/92 10000 10000
6/30/93 10271 10284
6/30/94 10569 10583
6/30/95 11126 11113
6/30/96 11719 11690
6/30/97 12319 12259
12/31/97 12638 12579
<PAGE>
<TABLE>
STATEMENTS OF ASSETS & LIABILITIES
<CAPTION>
DECEMBER 31, 1997 (UNAUDITED)
GROWTH VALUE INTERNATIONAL
<S> <C> <C> <C>
ASSETS
Investments at value................................... $436,380,294 $329,404,588 $221,260,035
Short-term obligations at amortized cost............... 18,512,000 12,942,781 18,579,000
Cash................................................... 600 476
Foreign currency holdings at value..................... 884,141
Receivable for investments sold........................ 400,992
Receivable for fund shares sold........................ 2,604,885 1,575,976 1,386,024
Receivable for variation margin........................
Dividends and interest receivable...................... 329,728 177,419 596,856
Prepaid expenses and other assets...................... 20,829 15,049 9,246
------------ ------------ ------------
Total assets...................................... 458,249,328 344,115,813 242,715,778
------------ ------------ ------------
LIABILITIES
Payable for investments purchased...................... 7,525,156 91,704
Payable for fund shares redeemed....................... 2,049 2,188 136,562
Payable for distributions..............................
Accrued:
Management fees..................................... 283,906 221,258 192,640
Audit fees.......................................... 19,098 16,989 19,383
Custodian fees...................................... 7,965 5,744 35,527
Legal fees.......................................... 17,556 14,496 10,786
Trustees' fees...................................... 158 816
Transfer agent fees................................. 15,373 12,566 13,419
Other fees.......................................... 1,312 2,081
------------ ------------ ------------
Total liabilities.............................. 7,872,415 273,399 502,918
------------ ------------ ------------
Net assets............................................. $450,376,913 $343,842,414 $242,212,860
============ ============ ============
Shares of beneficial interest outstanding.............. 24,703,731 15,050,706 17,180,760
============ ============ ============
Offering and redemption price per share................ $18.23 $22.85 $14.10
============ ============ ============
COMPOSITION OF NET ASSETS:
Paid-in capital........................................ $296,710,114 $144,875,300 $206,030,031
Undistributed (Distributions in excess of) net
investment income................................... (380,156) 11,823 152,001
Accumulated net realized gains (losses) on
investments, futures and foreign currency........... 35,353,410 27,625,526 5,509,787
Net unrealized appreciation (depreciation) on:
Investments......................................... 118,693,545 171,329,765 30,553,127
Futures.............................................
Foreign denominated other assets,
liabilities and currency......................... (32,086)
------------ ------------ ------------
$450,376,913 $343,842,414 $242,212,860
============ ============ ============
Investments and short-term obligations at cost......... $336,198,749 $171,017,604 $209,285,908
Foreign currency holdings at cost...................... 902,005
<PAGE>
<CAPTION>
DECEMBER 31, 1997 (UNAUDITED) ASSET FIXED
SMALL CAP ALLOCATION INCOME
<S> <C> <C> <C>
ASSETS
Investments at value................................... $121,116,506 $ 99,156,271 $136,572,245
Short-term obligations at amortized cost............... 1,169,173 40,151,655 7,696,594
Cash................................................... 139 1,016
Foreign currency holdings at value.....................
Receivable for investments sold........................ 6,004,732 7,610 3,113,438
Receivable for fund shares sold........................ 558,498 455,751 40,800
Receivable for variation margin........................ 28,375 36,719
Dividends and interest receivable...................... 165,935 790,449 1,437,456
Prepaid expenses and other assets...................... 12,633 9,795 5,273
------------ ------------ ------------
Total assets...................................... 129,027,477 140,600,045 148,903,541
------------ ------------ ------------
LIABILITIES
Payable for investments purchased...................... 6,814,901
Payable for fund shares redeemed....................... 17,968 11,740 35,335
Payable for distributions.............................. 5,531 767,142
Accrued:
Management fees..................................... 76,760 82,081 62,822
Audit fees.......................................... 14,631 17,906 15,819
Custodian fees...................................... 2,252 16,603 8,248
Legal fees.......................................... 3,570 5,216 5,522
Trustees' fees...................................... 142 677
Transfer agent fees................................. 4,670 9,916 9,767
Other fees.......................................... 2,941
Total liabilities.............................. 6,934,894 148,993 908,273
------------ ------------ ------------
Net assets............................................. $122,092,583 $140,451,052 $147,995,268
============ ============ ============
Shares of beneficial interest outstanding.............. 8,444,469 9,836,431 14,342,050
============ ============ ============
Offering and redemption price per share................ $14.45 $14.28 $10.32
============ ============ ============
COMPOSITION OF NET ASSETS:
Paid-in capital........................................ $102,092,819 $112,715,518 $145,246,835
Undistributed (Distributions in excess of) net
investment income................................... (3,310) 89,002
Accumulated net realized gains (losses) on
investments, futures and foreign currency........... 1,861,692 (4,933,811) 161,784
Net unrealized appreciation (depreciation) on:
Investments......................................... 18,141,382 31,929,854 2,381,827
Futures............................................. 739,491 115,820
Foreign denominated other assets,
liabilities and currency.........................
------------ ------------ ------------
$122,092,583 $140,451,052 $147,995,268
============ ============ ============
Investments and short-term obligations at cost......... $104,144,297 $107,378,072 $141,887,012
Foreign currency holdings at cost......................
<PAGE>
<CAPTION>
DECEMBER 31, 1997 (UNAUDITED) SHORT-TERM MONEY
GOVERNMENT MARKET
ASSETS
Investments at value................................... $47,210,888
Short-term obligations at amortized cost............... 8,966,162 $85,864,184
Cash................................................... 94,799
Foreign currency holdings at value.....................
Receivable for investments sold........................
Receivable for fund shares sold........................ 96,906 956,274
Receivable for variation margin........................
Dividends and interest receivable...................... 793,093 448,467
Prepaid expenses and other assets...................... 3,844 3,084
------------ ------------
Total assets...................................... 57,070,893 87,366,808
------------ ------------
LIABILITIES
Payable for investments purchased......................
Payable for fund shares redeemed....................... 29,657
Payable for distributions.............................. 133 378,657
Accrued:
Management fees..................................... 16,835 22,610
Audit fees.......................................... 17,290 14,356
Custodian fees...................................... 3,311 5,522
Legal fees.......................................... 2,565 5,151
Trustees' fees...................................... 380 749
Transfer agent fees................................. 5,015 7,981
Other fees..........................................
------------ ------------
Total liabilities.............................. 45,529 464,683
------------ ------------
Net assets............................................. $57,025,364 $86,902,125
============ ============
Shares of beneficial interest outstanding.............. 5,800,910 86,902,125
============ ============
Offering and redemption price per share................ $9.83 $1.00
============ ============
COMPOSITION OF NET ASSETS:
Paid-in capital........................................ $57,611,508 $86,902,125
Undistributed (Distributions in excess of) net
investment income...................................
Accumulated net realized gains (losses) on
investments, futures and foreign currency........... (808,230)
Net unrealized appreciation (depreciation) on:
Investments......................................... 222,086
Futures.............................................
Foreign denominated other assets,
liabilities and currency.........................
------------ ------------
$57,025,364 $86,902,125
============ ============
Investments and short-term obligations at cost......... $55,954,964 $85,864,184
Foreign currency holdings at cost......................
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF OPERATIONS
<CAPTION>
SIX MONTH PERIOD ENDED
DECEMBER 31, 1997 (UNAUDITED) GROWTH VALUE INTERNATIONAL
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends............................................... $ 1,529,464 $ 2,559,067 $ 3,487,050
Interest................................................ 180,629 661,458 271,308
----------- ----------- -----------
1,710,093 3,220,525 3,758,358
Less foreign taxes withheld at source................... (26,953) (363,965)
----------- ----------- -----------
Total income......................................... 1,683,140 3,220,525 3,394,393
----------- ----------- -----------
EXPENSES
Management fees......................................... 1,869,265 1,461,004 1,215,413
Audit fees.............................................. 18,442 15,922 18,442
Custodian fees.......................................... 61,836 43,858 242,586
Registration fees....................................... 12,602 9,872 12,098
Legal fees.............................................. 19,071 15,333 10,795
Trustees' fees.......................................... 7,772 6,050 4,538
Transfer agent fees..................................... 47,216 44,232 35,877
Insurance fees.......................................... 6,763 5,336 4,033
Other fees.............................................. 20,329 20,998 11,719
----------- ----------- -----------
Total expenses....................................... 2,063,296 1,622,605 1,555,501
----------- ----------- -----------
Net investment income (loss)...................... (380,156) 1,597,920 1,838,892
----------- ----------- -----------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS, FUTURES, FORWARD CONTRACTS
AND FOREIGN CURRENCY
Net realized gain (loss) on:
Investments.......................................... 76,327,212 27,974,112 13,512,978
Futures..............................................
Foreign denominated other assets,
liabilities and currency......................... (155,750)
Change in net unrealized appreciation
(depreciation) on:
Investments.......................................... (25,085,939) 3,562,358 (30,952,409)
Futures..............................................
Forward contracts....................................
Foreign denominated other assets,
liabilities and currency.......................... (24,114)
----------- ----------- -----------
Net gain (loss).............................. 51,241,273 31,536,470 (17,619,295)
----------- ----------- -----------
Net increase (decrease) in net assets
resulting from operations............................ $50,861,117 $33,134,390 ($15,780,403)
=========== =========== ===========
<PAGE>
<CAPTION>
SIX MONTH PERIOD ENDED ASSET FIXED
DECEMBER 31, 1997 (UNAUDITED) SMALL CAP ALLOCATION INCOME
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends............................................... $ 637,010 $ 487,402
Interest................................................ 60,640 2,358,354 $5,008,061
---------- ---------- ----------
697,650 2,845,756 5,008,061
Less foreign taxes withheld at source................... (549) (2,328)
---------- ---------- ----------
Total income......................................... 697,101 2,843,428 5,008,061
---------- ---------- ----------
EXPENSES
Management fees......................................... 412,683 474,246 363,505
Audit fees.............................................. 14,619 17,434 15,922
Custodian fees.......................................... 40,448 87,465 52,931
Registration fees....................................... 7,477 6,763 13,106
Legal fees.............................................. 3,529 5,042 5,755
Trustees' fees.......................................... 1,303 2,017 2,311
Transfer agent fees..................................... 11,509 26,509 26,803
Insurance fees.......................................... 1,008 2,017 2,017
Other fees.............................................. 3,234 10,625 8,191
---------- ---------- ----------
Total expenses....................................... 495,810 632,118 490,541
---------- ---------- ----------
Net investment income (loss)...................... 201,291 2,211,310 4,517,520
---------- ---------- ----------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS, FUTURES, FORWARD CONTRACTS
AND FOREIGN CURRENCY
Net realized gain (loss) on:
Investments.......................................... 12,823,692 464,589 945,362
Futures.............................................. 1,877,463 266,271
Foreign denominated other assets,
liabilities and currency......................... 28,484
Change in net unrealized appreciation
(depreciation) on:
Investments.......................................... (928,119) 8,560,427 1,268,366
Futures.............................................. (845,665) 118,378
Forward contracts.................................... (14,477)
Foreign denominated other assets,
liabilities and currency.......................... (8)
---------- ---------- ----------
Net gain (loss).............................. 11,895,573 10,056,814 2,612,376
---------- ---------- ----------
Net increase (decrease) in net assets
resulting from operations............................ $12,096,864 $12,268,124 $7,129,896
=========== =========== ==========
<PAGE>
<CAPTION>
SIX MONTH PERIOD ENDED SHORT-TERM MONEY
DECEMBER 31, 1997 (UNAUDITED) GOVERNMENT MARKET
<S> <C> <C>
INVESTMENT INCOME
Dividends...............................................
Interest................................................ $1,799,244 $2,694,922
---------- ----------
1,799,244 2,694,922
Less foreign taxes withheld at source...................
---------- ----------
Total income......................................... 1,799,244 2,694,922
---------- ----------
EXPENSES
Management fees......................................... 98,329 146,430
Audit fees.............................................. 16,721 13,401
Custodian fees.......................................... 22,895 32,557
Registration fees....................................... 9,075 5,716
Legal fees.............................................. 2,311 5,042
Trustees' fees.......................................... 1,008 2,017
Transfer agent fees..................................... 12,602 23,988
Insurance fees.......................................... 1,008 1,512
Other fees.............................................. 2,940 5,251
---------- ----------
Total expenses....................................... 166,889 235,914
---------- ----------
Net investment income (loss)...................... 1,632,355 2,459,008
---------- ----------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS, FUTURES, FORWARD CONTRACTS
AND FOREIGN CURRENCY
Net realized gain (loss) on:
Investments.......................................... 34,219
Futures..............................................
Foreign denominated other assets,
liabilities and currency.........................
Change in net unrealized appreciation (depreciation) on:
Investments.......................................... 246,314 0
Futures..............................................
Forward contracts....................................
Foreign denominated other assets,
liabilities and currency..........................
---------- ----------
Net gain (loss).............................. 280,533
---------- ----------
Net increase (decrease) in net assets
resulting from operations............................ $1,912,888 $2,459,008
========== ==========
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
GROWTH VALUE
PERIOD+ YEAR PERIOD+ YEAR
ENDED ENDED ENDED ENDED
12/31/97 6/30/97 12/31/97 6/30/97
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss)........ ($ 380,156) ($ 524,651) $ 1,597,920 $ 3,300,434
Net realized gain (loss) on:
Investments..................... 76,327,212 65,171,565 27,974,112 1,849,729
Futures.........................
Forward contracts...............
Foreign denominated other assets,
liabilities and currency..
Change in net unrealized appreciation
(depreciation) on:
Investments.................... (25,085,939) 36,641,616 3,562,358 83,847,734
Futures........................
Forward contracts..............
Foreign denominated other assets,
liabilities and currency..
Net increase (decrease)
in net assets
------------ ------------ ----------- -----------
resulting from operations 50,861,117 101,288,530 33,134,390 88,997,897
------------ ------------ ----------- -----------
Distributions to shareholders from:
Net investment income......... (3,250,000) (3,256,687)
In excess of net investment income
Net realized gains............ (86,312,238) (54,170,251) (9,329,095)
In excess of realized gains... (368,409)
------------ ------------ ----------- -----------
(86,312,238) (54,170,251) (3,250,000) (12,954,191)
------------ ------------ ----------- -----------
Fund share transactions:
Receipts for shares sold...... 127,365,762 111,186,933 90,775,310 128,368,956
Value of distributions reinvested 85,934,412 53,884,207 3,231,683 12,912,303
Cost of shares redeemed....... (182,494,017) (168,855,688) (153,722,337) (111,233,290)
------------ ------------ ----------- -----------
Net increase (decrease)
in net assets
from fund share transactions 30,806,157 (3,784,548) (59,715,344) 30,047,969
------------ ------------ ----------- -----------
Total increase (decrease) (4,644,964) 43,333,731 (29,830,954) 106,091,675
NET ASSETS
Beginning of period........... 455,021,877 411,688,146 373,673,368 267,581,693
------------ ------------ ----------- -----------
End of period................. $450,376,913 $455,021,877 $343,842,414 $373,673,368
============ ============ =========== ===========
Undistributed (distributions in excess of)
net investment income at
end of period ($ 380,156) $ 11,823 $ 1,663,903
============ ============ =========== ===========
NUMBER OF FUND SHARES
Sold.......................... 5,656,876 5,970,365 3,996,953 6,922,277
Issued for distributions reinvested 4,841,361 3,096,761 144,207 708,598
Redeemed...................... (8,078,784) (9,014,649) (6,769,582) (6,019,884)
------------ ------------ ----------- -----------
Net increase (decrease) in
shares outstanding........ 2,419,453 52,477 (2,628,422) 1,610,991
Outstanding at:
Beginning of period........... 22,284,278 22,231,801 17,679,128 16,068,137
------------ ------------ ----------- -----------
End of period................. 24,703,731 22,284,278 15,050,706 17,679,128
============ ============ =========== ===========
<PAGE>
<CAPTION>
INTERNATIONAL SMALL CAP
PERIOD+ YEAR PERIOD+ YEAR
ENDED ENDED ENDED ENDED
12/31/97 6/30/97 12/31/97 6/30/97
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss)........ $ 1,838,892 $ 5,631,095 $ 201,291 $ 443,824
Net realized gain (loss) on:
Investments..................... 13,512,978 4,868,619 12,823,692 2,582,310
Futures.........................
Forward contracts...............
Foreign denominated other assets,
liabilities and currency.. (155,750) (378,463)
Change in net unrealized appreciation
(depreciation) on:
Investments.................... (30,952,409) 38,165,006 (928,119) 16,470,111
Futures........................
Forward contracts..............
Foreign denominated other assets,
liabilities and currency.. (24,114) (2,909)
------------ ------------ ----------- -----------
Net increase (decrease)
in net assets
resulting from operations (15,780,403) 48,283,348 12,096,864 19,496,245
------------ ------------ ----------- -----------
Distributions to shareholders from:
Net investment income......... (3,800,000) (5,001,023) (630,000) (138,649)
In excess of net investment income
Net realized gains............ (11,334,089) (3,628,376) (13,550,134) (872,803)
In excess of realized gains...
------------ ------------ ----------- -----------
(15,134,089) (8,629,399) (14,180,134) (1,011,452)
------------ ------------ ----------- -----------
Fund share transactions:
Receipts for shares sold...... 107,504,730 132,359,314 39,842,300 34,854,928
Value of distributions reinvested 15,063,974 8,604,550 14,145,264 1,011,452
Cost of shares redeemed....... (114,733,747) (72,952,827) (14,689,516) (15,166,080)
------------ ------------ ----------- -----------
Net increase (decrease) in net assets
from fund share transactions 7,834,957 68,011,037 39,298,048 20,700,300
------------ ------------ ----------- -----------
Total increase (decrease) (23,079,535) 107,664,986 37,214,778 39,185,093
NET ASSETS
Beginning of period........... 265,292,395 157,627,409 84,877,805 45,692,712
------------ ------------ ----------- -----------
End of period................. $242,212,860 $265,292,395 $122,092,583 $84,877,805
============ ============ =========== ===========
Undistributed (distributions in excess of)
net investment income
at end of period......... $ 152,001 $ 2,113,109 ($ 3,310) $ 425,399
============ ============ =========== ===========
NUMBER OF FUND SHARES
Sold.......................... 6,896,192 9,319,513 2,394,862 3,056,514
Issued for distributions reinvested 1,072,156 619,016 1,006,767 82,010
Redeemed...................... (7,249,080) (4,965,744) (894,391) (1,263,669)
------------ ------------ ----------- -----------
Net increase (decrease)
in shares outstanding..... 719,268 4,972,785 2,507,238 1,874,855
Outstanding at:
Beginning of period........... 16,461,492 11,488,707 5,937,231 4,062,376
------------ ------------ ----------- -----------
End of period................. 17,180,760 16,461,492 8,444,469 5,937,231
============ ============ =========== ===========
<PAGE>
<CAPTION>
ASSET ALLOCATION
PERIOD+ YEAR
ENDED ENDED
12/31/97 6/30/97
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss)........ $ 2,211,310 $ 3,641,881
Net realized gain (loss) on:
Investments..................... 464,589 5,536,255
Futures......................... 1,877,463 1,296,282
Forward contracts...............
Foreign denominated other assets,
liabilities and currency..
Change in net unrealized appreciation
(depreciation) on:
Investments.................... 8,560,427 9,423,939
Futures........................ (845,665) 1,297,749
Forward contracts..............
Foreign denominated other assets,
liabilities and currency..
----------- -----------
Net increase (decrease)
in net assets
resulting from operations 12,268,124 21,196,106
----------- -----------
Distributions to shareholders from:
Net investment income......... (2,211,310) (3,641,881)
In excess of net investment income
Net realized gains............ (12,219,032) (4,019,339)
In excess of realized gains...
----------- -----------
(14,430,342) (7,661,220)
----------- -----------
Fund share transactions:
Receipts for shares sold...... 10,482,263 29,650,410
Value of distributions reinvested 14,369,567 7,651,646
Cost of shares redeemed....... (11,123,316) (18,841,534)
----------- -----------
Net increase (decrease) in net assets
from fund share transactions 13,728,514 18,460,522
----------- -----------
Total increase (decrease) 11,566,296 31,995,408
NET ASSETS
Beginning of period........... 128,884,756 96,889,348
----------- -----------
End of period................. $140,451,052 $128,884,756
============ ============
Undistributed (distributions
in excess of)
net investment income at
end of period............
============ ============
NUMBER OF FUND SHARES
Sold.......................... 691,612 2,188,945
Issued for distributions reinvested 1,001,737 559,132
Redeemed...................... (731,111) (1,394,051)
----------- -----------
Net increase (decrease)
in shares outstanding..... 962,238 1,354,026
Outstanding at:
Beginning of period........... 8,874,193 7,520,167
----------- -----------
End of period................. 9,836,431 8,874,193
============ ============
+ Unaudited for six-month period ended December 31, 1997.
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
FIXED INCOME SHORT-TERM GOVERNMENT
PERIOD+ YEAR PERIOD+ YEAR
ENDED ENDED ENDED ENDED
12/31/97 6/30/97 12/31/97 6/30/97
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income............... $ 4,517,520 $ 8,261,468 $ 1,632,355 $ 2,924,509
Net realized gain (loss) on:
Investments..................... 945,362 205,772 34,219 (121,577)
Futures......................... 266,271 212,323
Forward contracts............... 493,121
Foreign denominated other assets,
liabilities and currency.. 28,484 4,577
Change in net unrealized appreciation
(depreciation) on:
Investments.................... 1,268,366 1,650,442 246,314 246,617
Futures........................ 118,378 (16,233)
Forward contracts.............. (14,477) 14,477
Foreign denominated other assets,
liabilities and currency.. (8) 8
----------- ----------- ---------- -----------
Net increase in net assets
resulting from operations 7,129,896 10,825,955 1,912,888 3,049,549
----------- ----------- ---------- -----------
Distributions to shareholders from:
Net investment income......... (4,517,520) (8,266,883) (1,632,355) (2,924,573)
In excess of net investment income
Net realized gains............ (1,541,898) (463,056)
In excess of realized gains...
----------- ----------- ---------- -----------
(6,059,418) (8,729,939) (1,632,355) (2,924,573)
----------- ----------- ---------- -----------
Fund share transactions:
Receipts for shares sold...... 9,064,739 36,814,668 3,056,037 5,554,290
Value of distributions reinvested 5,267,996 8,716,605 1,630,666 2,922,565
Cost of shares redeemed....... (7,566,427) (18,653,299) (2,749,281) (5,549,739)
----------- ----------- ---------- -----------
Net increase (decrease) in net assets from
fund share transactions.. 6,766,308 26,877,974 1,937,422 2,927,116
----------- ----------- ---------- -----------
Total increase (decrease) 7,836,786 28,973,990 2,217,955 3,052,092
NET ASSETS
Beginning of period........... 140,158,482 111,184,492 54,807,409 51,755,317
----------- ----------- ---------- -----------
End of period................. $147,995,268 $140,158,482 $57,025,364 $54,807,409
=========== =========== ========== ===========
Undistributed (distributions in excess of)
net investment income at
end of period............ $ 89,002 $ 89,002
=========== =========== ========== ===========
NUMBER OF FUND SHARES
Sold.......................... 872,189 3,646,778 311,006 567,913
Issued for distributions reinvested 507,206 856,477 165,885 299,167
Redeemed...................... (729,475) (1,832,384) (279,985) (567,113)
----------- ----------- ---------- -----------
Net increase (decrease)
in shares outstanding..... 649,920 2,670,871 196,906 299,967
Outstanding at:
Beginning of period........... 13,692,130 11,021,259 5,604,004 5,304,037
----------- ----------- ---------- -----------
End of period................. 14,342,050 13,692,130 5,800,910 5,604,004
=========== =========== ========== ===========
<PAGE>
<CAPTION>
MONEY MARKET
PERIOD+ YEAR
ENDED ENDED
12/31/97 6/30/97
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income............... $ 2,459,008 $ 5,032,595
Net realized gain (loss) on:
Investments.....................
Futures.........................
Forward contracts...............
Foreign denominated other assets,
liabilities and currency..
Change in net unrealized appreciation
(depreciation) on:
Investments....................
Futures........................
Forward contracts..............
Foreign denominated other assets,
liabilities and currency..
----------- ----------
Net increase in net assets
resulting from operations 2,459,008 5,032,595
----------- ----------
Distributions to shareholders from:
Net investment income......... (2,459,008) (5,032,595)
In excess of net investment income
Net realized gains............
In excess of realized gains....
----------- ----------
(2,459,008) (5,032,595)
----------- ----------
Fund share transactions:
Receipts for shares sold...... 186,596,735 193,156,175
Value of distributions reinvested 2,034,626 5,006,772
Cost of shares redeemed....... (211,411,382) (178,963,236)
----------- ----------
Net increase (decrease) in net assets from
fund share transactions.. (22,780,021) 19,199,711
----------- ----------
Total increase (decrease)(22,780,021) 19,199,711
NET ASSETS
Beginning of period........... 109,682,146 90,482,435
----------- ----------
End of period................. $ 86,902,125 $109,682,146
=========== ===========
Undistributed (distributions
in excess of)
net investment income
at end of period.........
=========== ===========
NUMBER OF FUND SHARES
Sold.......................... 186,596,735 193,156,175
Issued for distributions reinvested 2,034,626 5,006,772
Redeemed...................... (211,411,382) (178,963,236)
----------- ----------
Net increase (decrease)
in shares outstanding..... (22,780,021) 19,199,711
Outstanding at:
Beginning of period........... 109,682,146 90,482,435
----------- ----------
End of period................. 86,902,125 109,682,146
=========== ===========
+Unaudited for six-month period ended December 31, 1997.
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
(SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT
THE YEAR)
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS DISTRIBUTIONS
Net Total Distributions Distributions
NET ASSET Net Realized Net Income Distributions in Excess from Net Distributions
VALUE, Investment and (Loss) from from Net of Net Realized in Excess
BEGINNING Income Unrealized Investment Investment Investment Gains on of Realized
OF YEAR (Loss) Gain (Loss) Operations Income Income Investments Gains
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PREFERRED GROWTH FUND
Year Ended June 30,
1993 $10.00 $0.01 $2.42 $2.43 $(0.01) - $ - $ -
1994 12.42 0.01 0.03 0.04 - - - -
1995 12.46 0.01 4.24 4.25 (0.02) - (0.06) -
1996 16.63 0.00 2.44 2.44 (0.01) - (0.54) -
1997 18.52 0.00 4.76 4.76 - - (2.86) -
Six-months Ended
12/31/97(unaudited) 20.42 (0.02) 2.21 2.19 - - (4.38) -
<CAPTION>
PREFERRED VALUE FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended June 30,
1993 10.00 0.19 1.44 1.63 (0.11) - - -
1994 11.52 0.19 (0.12) 0.07 (0.16) - (0.10) -
1995 11.33 0.21 2.62 2.83 (0.20) - (0.14) -
1996 13.82 0.20 3.13 3.33 (0.21) - (0.29) -
1997 16.65 0.19 5.10 5.29 (0.20) - (0.58) (0.02)
Six-months Ended
12/31/97(unaudited) 21.14 0.13 1.80 1.93 (0.22) - - -
<CAPTION>
PREFERRED INTERNATIONAL FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended June 30,
1993 10.00 0.15 (0.53) (0.38) (0.03) - - -
1994 9.59 0.08 2.47 2.55 (0.07) - (0.05) -
1995 12.02 0.18 0.60 0.78 (0.13) - (0.26) (0.17)
1996 12.24 0.19 1.47 1.66 (0.17) - (0.01) -
1997 13.72 0.33 2.67 3.00 (0.35) - (0.25) -
Six-months Ended
12/31/97(unaudited) 16.12 0.12 (1.18) (1.06) (0.24) - (0.72) -
<CAPTION>
PREFERRED SMALL CAP FUND (Commenced investment operations on November 1, 1995)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Period Ended June 30,
1996+ 10.00 0.05 1.22 1.27 (0.02) - - -
1997 11.25 0.06 3.18 3.24 (0.03) - (0.16) -
Six-months Ended
12/31/97(unaudited) $14.30 $0.01 $2.05 $2.06 $(0.08) - $(1.83) $ -
<PAGE>
<CAPTION>
DISTRIBUTIONS
NET ASSET TOTAL Net
VALUE, RETURN AT Assets,
Total END OF NET ASSET End of
Distributions YEAR VALUE(1) Year
<S> <C> <C> <C> <C>
PREFERRED GROWTH FUND
Year Ended June 30,
1993 $(0.01) $12.42 24.25% $117,706,665
1994 - 12.46 0.34% 171,467,064
1995 (0.08) 16.63 34.21% 374,592,700
1996 (0.55) 18.52 14.96% 411,688,146
1997 (2.86) 20.42 28.57% 455,021,877
Six-months Ended
12/31/97(unaudited) (4.38) 18.23 10.72%++ 450,376,913
<CAPTION>
PREFERRED VALUE FUND
<S> <C> <C> <C> <C>
Year Ended June 30,
1993 (0.11) 11.52 16.37% 121,511,090
1994 (0.26) 11.33 0.60% 121,088,130
1995 (0.34) 13.82 25.72% 212,678,363
1996 (0.50) 16.65 24.49% 267,581,693
1997 (0.80) 21.14 32.62% 373,673,368
Six-months Ended
12/31/97(unaudited) (0.22) 22.85 9.12%++ 343,842,414
<CAPTION>
PREFERRED INTERNATIONAL FUND
<S> <C> <C> <C> <C>
Year Ended June 30,
1993 (0.03) 9.59 (3.77%) 39,126,841
1994 (0.12) 12.02 26.66% 94,933,414
1995 (0.56) 12.24 6.70% 118,216,038
1996 (0.18) 13.72 13.70% 157,627,409
1997 (0.60) 16.12 22.50% 265,292,395
Six-months Ended
12/31/97(unaudited) (0.96) 14.10 (6.60%)++ 242,212,860
<CAPTION>
PREFERRED SMALL CAP FUND (Commenced investment operations on November 1, 1995)
<S> <C> <C> <C> <C>
Period Ended June 30,
1996+ (0.02) 11.25 12.67%*++ 45,692,712
1997 (0.19) 14.30 29.00%* 84,877,805
Six-months Ended
12/31/97(unaudited) $(1.91) $14.45 14.42%++ $122,092,583
<PAGE>
<CAPTION>
RATIOS TO AVERAGE NET ASSETS
Operating
Expenses Net
Before Investment Portfolio Average
Operating Voluntary Income Turnover Brokerage
Expenses Waiver (Loss) Rate Commissions(2)
<S> <C> <C> <C> <C> <C>
PREFERRED GROWTH FUND
Year Ended June 30,
1993 1.00% - 0.07% 58.12%
1994 0.91% - 0.13% 51.56%
1995 0.87% - 0.13% 55.32%
1996 0.86% - (0.16%) 75.24% N/A
1997 0.84% - (0.13%) 58.31% $0.060
Six-months Ended
12/31/97(unaudited) 0.83%+++ - (0.15%)+++ 35.28% 0.059
<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
1997 0.85% - 1.06% 7.23% 0.058
Six-months Ended
12/31/97(unaudited) 0.83%+++ - .82%+++ 3.79% 0.058
<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
1997 1.25% - 2.66% 13.16% 0.030
Six-months Ended
12/31/97(unaudited) 1.22%+++ - 1.44%+++ 8.41% 0.029
<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
1997 0.88% 0.98% 0.66% 104.45% 0.048
Six-months Ended
12/31/97(unaudited) 0.90%+++ - 0.37%+++ 55.04% $0.047
<FN>
1 Total return at net asset value assumes reinvestment of dividends and
capital gains distributions.
2 For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on which
commissions are charged. Small Cap was the only Fund required to disclose this
information for the fiscal year ended June 30, 1996.
*Total return for the Small Cap Fund would have been lower if a portion of the
fees had not been waived by the manager.
+ Eight-month period ended June 30, 1996.
++ Not annualized
+++ Annualized
</FN>
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
(SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT
THE YEAR)
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS DISTRIBUTIONS
Net Total Distributions Distributions
NET ASSET Net Realized Net Income Distributions in Excess from Net Distributions
VALUE, Investment and (Loss) from from Net of Net Realized in Excess
BEGINNING Income Unrealized Investment Investment Investment Gains on of Realized
OF YEAR (Loss) Gain (Loss) Operations Income Income Investments Gains
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PREFERRED ASSET ALLOCATION FUND
Year Ended June 30,
1993 $10.00 $0.34 $0.99 $1.33 $(0.34) $ - $(0.09) $ -
1994 10.90 0.30 (0.42) (0.12) (0.30) - (0.21) -
1995 10.27 0.38 1.79 2.17 (0.38) - (0.09) -
1996 11.97 0.40 1.72 2.12 (0.40) - (0.81) -
1997 12.88 0.44 2.17 2.61 (0.44) - (0.53) -
Six-months Ended
12/31/97(unaudited) 14.52 0.24 1.14 1.38 (0.24) - (1.38) -
<CAPTION>
PREFERRED FIXED INCOME FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended June 30,
1993 10.00 0.51 0.71 1.22 (0.51) - (0.11) -
1994 10.60 0.47 (0.50) (0.03) (0.47) - (0.14) (0.16)
1995 9.80 0.58 0.50 1.08 (0.58) - - -
1996 10.30 0.58 (0.16) 0.42 (0.58) - (0.05) -
1997 10.09 0.64 0.19 0.83 (0.64) - (0.04) -
Six-months Ended
12/31/97(unaudited) 10.24 0.32 0.19 0.51 (0.32) - (0.11) -
<CAPTION>
PREFERRED SHORT-TERM GOVERNMENT SECURITIES FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended June 30,
1993 10.00 0.39 0.23 0.62 (0.39) - (0.15) -
1994 10.08 0.37 (0.29) 0.08 (0.37) - - (0.02)
1995 9.77 0.51 0.03 0.54 (0.51) - - -
1996 9.80 0.53 (0.04) 0.49 (0.53) - - -
1997 9.76 0.53 0.02 0.55 (0.53) - - -
Six-months Ended
12/31/97(unaudited) 9.78 0.29 0.05 0.34 (0.29) - - -
<CAPTION>
PREFERRED MONEY MARKET FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended June 30,
1993 1.00 0.03 - 0.03 (0.03) - - -
1994 1.00 0.03 - 0.03 (0.03) - - -
1995 1.00 0.05 - 0.05 (0.05) - - -
1996 1.00 0.05 - 0.05 (0.05) - - -
1997 1.00 0.05 - 0.05 (0.05) - - -
Six-months Ended
12/31/97(unaudited) $1.00 $0.03 $ - $0.03 $(0.03) $ - $ - $ -
<PAGE>
<CAPTION>
DISTRIBUTIONS
NET ASSET TOTAL Net
VALUE, RETURN AT Assets,
Total END OF NET ASSET End of
Distributions YEAR VALUE(1) Year
<S> <C> <C> <C> <C>
PREFERRED ASSET ALLOCATION FUND
Year Ended June 30,
1993 $(0.43) $10.90 13.57% $48,420,381
1994 (0.51) 10.27 (1.28%) 58,961,139
1995 (0.47) 11.97 21.70% 77,745,018
1996 (1.21) 12.88 18.23% 96,889,348
1997 (0.97) 14.52 21.01% 128,884,756
Six-months Ended
12/31/97(unaudited) (1.62) 14.28 9.55%++ 140,451,052
<CAPTION>
PREFERRED FIXED INCOME FUND
<S> <C> <C> <C> <C>
Year Ended June 30,
1993 (0.62) 10.60 12.59% 35,889,454
1994 (0.77) 9.80 (0.46%) 45,872,668
1995 (0.58) 10.30 11.48% 57,911,899
1996 (0.63) 10.09 4.12% 111,184,492
1997 (0.68) 10.24 8.39% 140,158,482
Six-months Ended
12/31/97(unaudited) (0.43) 10.32 5.06%++ 147,995,268
<CAPTION>
PREFERRED SHORT-TERM GOVERNMENT SECURITIES FUND
<S> <C> <C> <C> <C>
Year Ended June 30,
1993 (0.54) 10.08 6.32% 27,027,485
1994 (0.39) 9.77 0.86% 30,271,535
1995 (0.51) 9.80 5.71% 32,121,171
1996 (0.53) 9.76 5.10% 51,755,317
1997 (0.53) 9.78 5.81% 54,807,409
Six-months Ended
12/31/97(unaudited) (0.29) 9.83 3.49%++ 57,025,364
<CAPTION>
PREFERRED MONEY MARKET FUND
<S> <C> <C> <C> <C>
Year Ended June 30,
1993 (0.03) 1.00 2.71%* 18,146,496
1994 (0.03) 1.00 2.91%* 45,605,598
1995 (0.05) 1.00 5.27%* 79,585,753
1996 (0.05) 1.00 5.32%* 90,482,435
1997 (0.05) 1.00 5.14% 109,682,146
Six-months Ended
12/31/97(unaudited) $(0.03) $1.00 2.58%++ $ 86,902,125
<PAGE>
<CAPTION>
RATIOS TO AVERAGE NET ASSETS
Operating
Expenses Net
Before Investment Portfolio Average
Operating Voluntary Income Turnover Brokerage
Expenses Waiver (Loss) Rate Commissions(2)
<S> <C> <C> <C> <C> <C>
PREFERRED ASSET ALLOCATION FUND
Year Ended June 30,
1993 1.27% - 3.25% 34.10%
1994 1.25% - 2.76% 24.71%
1995 1.11% - 3.52% 18.27%
1996 1.04% - 3.21% 38.25% N/A
1997 0.99% - 3.29% 27.73% $0.032
Six-months Ended
12/31/97(unaudited) 0.93%+++ - 3.26%+++ 2.50% 0.034
<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
1997 0.74% - 6.32% 105.98% N/A
Six-months Ended
12/31/97(unaudited) 0.68%+++ - 6.25%+++ 48.63% 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
1997 0.63% - 5.49% 183.73% N/A
Six-months Ended
12/31/97(unaudited) 0.59%+++ - 5.81%+++ 113.06% 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
1997 0.48% - 5.03% N/A N/A
Six-months Ended
12/31/97(unaudited) 0.48%+++ - 5.04%+++ 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 Money Market Fund would
have been lower if a portion of the fees had not been waived by the manager.
**Shareholders holding a majority of the Short-Term Government Fund's shares
approved a new subadvisor agreement for the Fund with J.P. Morgan Investment
Management, Inc., which assumed primary responsibility for the day-to-day
management of the Fund's portfolio on November 1, 1997.
++Not annualized.
+++Annualized.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULES OF INVESTMENTS
PREFERRED GROWTH FUND
COMMON STOCK - 96.89% SHARES VALUE
<S> <C> <C>
AEROSPACE - .95%
Boeing Co 87,300 $ 4,272,244
-----------
BANKS - 5.11%
Chase Manhattan Corp 91,996 10,073,562
Citicorp 17,800 2,250,588
Fleet Financial Group Inc 60,600 4,541,213
MBNA Corp 225,975 6,171,942
-----------
23,037,305
-----------
CHEMICALS - 1.61%
Monsanto Co 172,900 7,261,800
-----------
COMPUTER SOFTWARE - 5.01%
Microsoft Corp * 62,200 8,039,350
Platinum Technology Inc * 238,300 6,731,975
SAP Aktiengesellschaft ADR 71,500 7,792,857
-----------
22,564,182
-----------
CONGLOMERATES - 2.44%
General Electric Co 150,000 11,006,250
-----------
CONSUMER PRODUCTS - 1.79%
Gillette Co 80,200 8,055,088
-----------
DISCOUNT & FASHION RETAILING - 10.34%
AutoZone Inc * 218,300 6,330,700
Dollar General Corp 190,260 6,896,925
Gap Inc 242,500 8,593,594
Home Depot Inc 130,149 7,662,522
Kohls Corp * 102,900 7,010,063
Polo Ralph Lauren Corp * 229,800 5,587,013
Sears Roebuck & Co 98,800 4,470,700
-----------
46,551,517
-----------
ELECTRICAL & ELECTRONICS - 9.41%
Diebold Inc 187,205 9,477,253
Intel Corp 62,800 4,411,700
KLA Tencor Corp * 147,200 5,685,600
Motorola Inc 123,100 7,024,394
Symbol Technologies Inc 151,750 5,728,563
Texas Instruments Inc 153,100 6,889,500
Xilinx Inc * 89,900 3,152,119
-----------
42,369,129
-----------
FINANCE-OTHER - 8.21%
MGIC Investment Corp 82,900 5,512,850
Morgan Stanley Dean Witter 163,820 9,685,858
Provident Cos Inc 171,600 6,628,050
Schwab (Charles) Corp 171,200 7,179,700
Washington Mutual Inc 124,600 7,951,038
-----------
36,957,496
-----------
<PAGE>
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
FUEL - 1.93%
Schlumberger Ltd 107,800 $ 8,677,900
-----------
HEALTH CARE - 10.70%
Bristol Myers Squibb Co 61,900 5,857,288
Eli Lilly & Co 98,900 6,885,913
Healthsouth Corp * 233,400 6,476,850
Pfizer Inc 164,500 12,265,531
Phycor Inc * 113,750 3,071,250
Smithkline Beecham PLC
Class A ADR 169,000 8,692,938
Warner Lambert Co 39,700 4,922,800
-----------
48,172,570
-----------
LEISURE TIME INDUSTRIES - 6.82%
Hilton Hotels Corp 274,300 8,160,425
Interstate Hotels Co * 200,400 7,026,525
Promus Hotel Corp * 127,741 5,365,106
Walt Disney Co 102,800 10,183,625
-----------
30,735,681
-----------
MANUFACTURING - 2.80%
Applied Materials Inc 182,600 5,500,825
Case Corp 117,800 7,119,538
-----------
12,620,363
-----------
OFFICE EQUIPMENT & COMPUTERS - 12.71%
3Com Corp * 132,300 4,622,231
Cisco Systems Inc * 166,950 9,307,463
Compaq Computer Corp 146,900 8,290,669
Dell Computer Corp * 93,500 7,854,000
HBO & Co 216,200 10,377,600
Hewlett Packard Co 162,100 10,131,250
International Business Machines 63,700 6,660,631
-----------
57,243,844
-----------
PUBLISHING & BROADCASTING - 1.42%
Reuters Holdings PLC Class B ADR 96,500 6,393,125
-----------
SERVICE INDUSTRIES - 4.62%
Cendant Corp * 199,000 6,840,625
Manpower Inc 112,100 3,951,525
Omnicom Group 236,800 10,034,400
-----------
20,826,550
-----------
TELECOMMUNICATIONS - 9.07%
Airtouch Communications Inc * 171,600 7,132,125
Ciena Corp * 105,700 6,460,913
Clear Channel Communications * 107,500 8,539,531
Nokia Corp ADR 75,500 5,285,000
Tellabs Inc * 140,500 7,428,938
Vodafone Group PLC ADR 82,700 5,995,743
-----------
40,842,250
-----------
<PAGE>
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
TRANSPORTATION - 1.95%
Federal Express Corp Class A * 144,000 $ 8,793,000
-----------
TOTAL COMMON STOCK
(Cost $317,686,749) 436,380,294
-----------
<CAPTION>
SHORT TERM INVESTMENTS - 4.11% PAR VALUE
<S> <C> <C>
COMMERCIAL PAPER - 4.11%
Ford Motor Co
6.25% January 2, 1998 $18,512,000 18,512,000
-----------
TOTAL SHORT TERM INVESTMENTS
(Cost $18,512,000) 18,512,000
-----------
TOTAL INVESTMENTS - 101.00%
(Cost $336,198,749) 454,892,294
-----------
OTHER ASSETS AND LIABILITIES - (1.00%) (4,515,381)
-----------
TOTAL NET ASSETS - 100% $450,376,913
============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PREFERRED VALUE FUND
COMMON STOCK - 95.80% SHARES VALUE
<S> <C> <C>
AEROSPACE - 6.07%
Boeing Co 225,000 $11,010,938
Lockheed Martin Corp 100,000 9,850,000
-----------
20,860,938
-----------
BANKS - 7.79%
Citicorp 104,400 13,200,075
Wells Fargo & Co 40,000 13,577,500
-----------
26,777,575
-----------
CHEMICALS - 9.11%
Du Pont E I de Nemours & Co 140,000 8,408,750
Freeport McMoRan Copper
& Gold Class B 261,000 4,110,750
Hercules Inc 139,200 6,968,700
Monsanto Co 282,000 11,844,000
-----------
31,332,200
-----------
CONGLOMERATES - 5.21%
General Electric Co 174,000 12,767,250
Tenneco Inc 130,500 5,154,750
-----------
17,922,000
-----------
<PAGE>
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
CONSUMER PRODUCTS - 3.91%
Anheuser Busch Cos Inc 110,000 $ 4,840,000
Avon Products Inc 140,000 8,592,500
-----------
13,432,500
-----------
DISCOUNT & FASHION RETAILING - 2.15%
May Department Stores Co 140,000 7,376,250
-----------
ELECTRICAL & ELECTRONICS - 2.86%
Intel Corp 140,000 9,835,000
-----------
FINANCE-OTHER - 10.64%
Countrywide Credit Industry Inc 261,000 11,190,375
Federal Home Loan Mortgage Corp 380,000 15,936,250
Morgan Stanley Dean Witter 160,000 9,460,000
-----------
36,586,625
-----------
FOOD - 5.04%
Diageo PLC ADR 226,200 8,567,323
Dole Food Inc 192,000 8,784,000
-----------
17,351,323
-----------
HEALTH CARE - 4.28%
Becton Dickinson & Co 121,800 6,090,000
Warner Lambert Co 69,600 8,630,400
-----------
14,720,400
-----------
INSURANCE - 21.67%
Ace Ltd 130,000 12,545,000
Aflac Inc 174,000 8,895,750
American International Group Inc 90,000 9,787,500
Exel Ltd 243,600 15,438,150
Transamerica Corp 87,000 9,265,500
Travelers Group Inc 345,000 18,586,875
-----------
74,518,775
-----------
LEISURE TIME INDUSTRIES - 2.10%
Carnival Corp Class A 130,500 7,226,438
-----------
MANUFACTURING - 4.52%
Caterpillar Inc 145,000 7,041,563
Minnesota Mining & Manufacturing Co42,000 3,446,625
Shaw Industries Inc 435,000 5,056,875
-----------
15,545,063
-----------
PAPER & FOREST PRODUCTS - 1.15%
Champion International Corp 87,000 3,942,188
-----------
SERVICE INDUSTRIES - 2.78%
Arrow Electronics Inc * 295,000 9,569,063
-----------
TELECOMMUNICATIONS - 2.97%
Sprint Corp 174,000 10,200,750
-----------
<PAGE>
<CAPTION>
PREFERRED VALUE FUND (continued)
COMMON STOCK SHARES VALUE
<S> <C> <C>
TRANSPORTATION - 3.55%
AMR Corp * 95,000 $12,207,500
-----------
TOTAL COMMON STOCK
(Cost $158,074,823) 329,404,588
-----------
<CAPTION>
SHORT TERM INVESTMENTS - 3.77% PAR/SHARES VALUE
<S> <C> <C>
COMMERCIAL PAPER - 2.91%
General Electric Capital Corp
6.10% January 6, 1998 @ $ 5,000,000 4,995,764
Household Financial Corp
5.90% January 2, 1998 @ $ 5,000,000 4,999,180
-----------
9,994,944
-----------
SHORT TERM INVESTMENT FUND - .86%
State Street Global Advisors Money
Market Fund 2,947,837 2,947,837
-----------
TOTAL SHORT TERM INVESTMENTS
(Cost $12,942,781) 12,942,781
-----------
TOTAL INVESTMENTS - 99.57%
(Cost $171,017,604) 342,347,369
-----------
OTHER ASSETS AND LIABILITIES - .43% 1,495,045
-----------
TOTAL NET ASSETS - 100% $343,842,414
============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PREFERRED INTERNATIONAL FUND
COMMON STOCK &
EQUIVALENTS - 91.35% SHARES VALUE
<S> <C> <C>
ARGENTINA - 3.49%
COMMUNICATION SERVICES - 1.68%
Telecom Argentina Stet France
Class B ADR 114,000 $4,075,500
INTERNATIONAL OIL - 1.81%
YPF Sociedad Anomina
Class D ADR 128,300 4,386,256
-----------
Total Argentina 8,461,756
-----------
<PAGE>
<CAPTION>
COMMON STOCK & EQUIVALENTS SHARES VALUE
<S> <C> <C>
AUSTRALIA - 7.74%
BANKS - 2.09%
National Australia Bank 363,000 $ 5,070,021
CONGLOMERATES - 1.91%
CSR Limited 1,365,000 4,626,120
CONSTRUCTION MATERIALS - 1.69%
Pioneer International Ltd 1,500,000 4,096,248
TRUCKING & FREIGHT - 2.05%
Mayne Nickless Ltd 939,000 4,963,264
-----------
Total Australia 18,755,653
-----------
CANADA - 4.60%
ALUMINUM - 1.90%
Alcan Aluminum Ltd 166,000 4,588,363
BANKS - 2.14%
Bank Novia Scotia Halifax 110,000 5,184,213
RETAIL TRADE - .56%
Canadian Tire Ltd Class A 63,500 1,364,158
-----------
Total Canada 11,136,734
-----------
FRANCE - 7.74%
APPAREL & TEXTILES - 1.39%
Christian Dior 32,800 3,362,565
AUTOMOBILES - 2.12%
Peugeot S.A. 40,800 5,145,335
GAS EXPLORATION - 2.16%
Societe Elf Aquitaine 45,000 5,233,862
HOMEBUILDERS - 2.07%
Bouygues 44,200 5,008,623
-----------
Total France 18,750,385
-----------
<PAGE>
<CAPTION>
COMMON STOCK & EQUIVALENTS SHARES VALUE
<S> <C> <C>
ITALY - 5.46%
APPAREL & TEXTILES - 2.20%
Benetton Group SPA 325,000 $ 5,318,683
-----------
BANKS - 2.80%
Banca Fideuram SPA 453,000 1,983,315
Banca Pop Bergam CV 275,000 4,803,561
-----------
6,786,876
-----------
FOOD & BEVERAGES - .46%
Parmalat Finanziaria 787,000 1,125,557
-----------
Total Italy 13,231,116
-----------
JAPAN - 6.25%
AUTOMOBILES - 1.29%
Nissan Motor Co 756,000 3,126,599
-----------
ELECTRICAL EQUIPMENT - 1.46%
Hitachi 496,000 3,532,817
-----------
HOUSEHOLD APPLIANCES - 3.50%
Matsushita Electric Industries 240,000 3,510,760
Sony Corp 56,000 4,975,109
-----------
8,485,869
-----------
Total Japan 15,145,285
-----------
NETHERLANDS - 10.04%
AIR TRAVEL - 2.21%
KLM Royal Dutch Air Lines 145,000 5,363,352
CHEMICALS - 2.49%
Akzo Nobel NV 35,000 6,034,572
FINANCIAL SERVICES - 2.23%
ING Groep NV 128,000 5,391,068
INDUSTRIAL MACHINERY - 1.50%
Stork NV 105,000 3,624,886
PETROLEUM - 1.61%
Pakhoed NV Kon 135,000 3,894,903
-----------
Total Netherlands 24,308,781
-----------
<PAGE>
<CAPTION>
COMMON STOCK & EQUIVALENTS SHARES VALUE
<S> <C> <C>
NEW ZEALAND - 4.18%
FOOD & BEVERAGES - 1.85%
Lion Nathan Ltd 2,000,000 $ 4,482,618
FOREST PRODUCTS - 1.40%
Carter Holt Harvey 2,200,000 3,397,964
HOUSEHOLD APPLIANCES - .93%
Fisher & Paykel 700,000 2,235,502
-----------
Total New Zealand 10,116,084
-----------
NORWAY - 1.02%
CONGLOMERATES - 1.02%
Orkla Borregaard AS Series A 28,700 2,467,505
-----------
Total Norway 2,467,505
-----------
SOUTH KOREA - 1.69%
BANKS - .33%
Korea Long Term Credit Bank 132,902 815,446
ELECTRICAL EQUIPMENT - .27%
Samsung Electronic 28,565 647,136
ELECTRIC UTILITIES - .69%
Korea Electric Power 179,400 1,661,699
NON-FERROUS METALS - .16%
Korea Zinc 88,000 391,457
STEEL - .24%
Pohang Iron & Steel 20,280 576,634
-----------
Total South Korea 4,092,372
-----------
SPAIN - 5.81%
BANKS - 3.73%
Banco Bilbao Vizcaya 160,000 5,177,551
Banco de Andalucia 23,000 3,849,688
-----------
9,027,239
-----------
ELECTRIC UTILITIES - 2.08%
Iberdrola S.A. 383,000 5,040,466
-----------
Total Spain 14,067,705
-----------
<PAGE>
<CAPTION>
PREFERRED INTERNATIONAL FUND (continued)
COMMON STOCK & EQUIVALENTS SHARES VALUE
<S> <C> <C>
SWEDEN - 8.20%
AUTOMOBILES - 1.44%
Volvo AB Series B 130,000 $ 3,487,449
DRUGS & HEALTH CARE - 2.03%
Pharmacia & UpJohn 133,900 4,924,344
HOUSEHOLD APPLIANCES - 1.72%
Electrolux AB Series B 60,000 4,163,780
INDUSTRIAL MACHINERY - 1.71%
SKF AB Series B 195,000 4,150,556
MINING - 1.30%
Svedala Industrial 190,000 3,134,800
-----------
Total Sweden 19,860,929
-----------
SWITZERLAND - 10.38%
BANKS - 2.44%
Schweiz Bankverein 19,000 5,903,367
DRUGS & HEALTH CARE - 2.14%
Novartis AG 3,200 5,190,255
INDUSTRIAL MACHINERY - 1.83%
Sulzer AG 7,000 4,436,080
RETAIL TRADE - 1.83%
Valora Holding AG 21,000 4,426,499
TOYS & AMUSEMENTS - 2.14%
SMH AG Neuenburg 9,375 5,171,263
-----------
Total Switzerland 25,127,464
-----------
UNITED KINGDOM - 14.75%
APPAREL & TEXTILES - 1.11%
Coats Viyella 1,800,000 2,690,415
BANKS - 2.64%
National Westminster 385,000 6,399,509
FOOD & BEVERAGES - 2.35%
Allied Domecq PLC 660,000 5,702,103
<PAGE>
<CAPTION>
COMMON STOCK & EQUIVALENTS SHARES VALUE
<S> <C> <C>
UNITED KINGDOM (continued)
HOUSEHOLD PRODUCTS - .48%
Care First Group 420,000 $ 1,152,050
LEISURE TIME - 1.84%
Rank Group 800,000 4,454,460
RETAIL GROCERY - 2.38%
Tesco 700,000 5,772,205
STEEL - 1.51%
British Steel 1,700,000 3,657,848
TELEPHONE - 2.44%
British Telecom 750,000 5,909,676
-----------
Total United Kingdom 35,738,266
-----------
TOTAL COMMON STOCK & EQUIVALENTS
(Cost $190,706,908) 221,260,035
-----------
<CAPTION>
SHORT TERM INVESTMENTS - 7.67% PAR VALUE
<S> <C> <C>
REPURCHASE AGREEMENTS - 7.67%
State Street Repo 5.00% January 2, 1998
(Cost - $18,579,000)(Dated December 31, 1997,
due January 2, 1998, collateralized by $15,300,000
U.S. Treasury Bond 10.75%, May 15, 2003,
Market Value $18,953,885,
Repurchase Proceeds
$18,584,161 $18,579,000 18,579,000
-----------
TOTAL SHORT TERM INVESTMENTS
(Cost $18,579,000) 18,579,000
-----------
TOTAL INVESTMENTS - 99.02%
(Cost $209,285,908) 239,839,035
-----------
OTHER ASSETS & LIABILITIES - .98% 2,373,825
-----------
TOTAL NET ASSETS - 100% $242,212,860
============
</TABLE>
<PAGE>
<TABLE>
PREFERRED SMALL CAP FUND
COMMON STOCK - 99.20% SHARES VALUE
<S> <C> <C>
AEROSPACE - 1.77%
Aviall Inc * 94,000 $ 1,404,125
Ducommun Inc * 21,600 754,650
-----------
2,158,775
-----------
<PAGE>
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
AUTOMOTIVE - 1.68%
Arvin Industry Inc 61,700 $ 2,055,381
-----------
BANKS - .77%
BSB Bancorp Inc 11,250 402,188
Mid-Am Inc 7,700 198,275
New York Bancorp Inc 8,500 337,344
-----------
937,807
-----------
CHEMICALS - 1.63%
Chemed Corp 22,500 932,344
Dexter Corp 24,500 1,058,094
-----------
1,990,438
-----------
COMPUTER SOFTWARE - .77%
Midway Games Inc * 15,300 278,269
Symantec Corp * 30,300 664,706
-----------
942,975
-----------
CONSUMER PRODUCTS - 5.60%
Dimon Inc 38,300 1,005,375
Ethan Allen Interiors Inc 21,600 832,950
Genesco Inc * 71,800 915,450
ITI Technologies Inc * 49,500 1,076,625
Paragon Trade Brands Inc * 54,700 704,263
Polaris Industry Inc 20,600 629,588
Thomas Industry Inc 9,000 177,750
Universal Corp 36,200 1,488,725
-----------
6,830,726
-----------
DISCOUNT & FASHION RETAILING - 8.22%
Ames Dept Stores Inc * 75,300 1,317,750
Burlington Coat Factory
Warehouse 112,260 1,845,274
Dynex Cap Inc 26,800 356,775
Fingerhut Cos Inc 27,100 579,263
Goody's Family Clothing Inc * 33,000 897,188
Oxford Industry Inc 36,500 1,186,250
Ross Stores Inc 38,600 1,404,075
Russ Berrie & Co Inc 27,000 708,750
Shopko Stores Inc * 29,300 637,275
The Dress Barn * 38,800 1,100,950
-----------
10,033,550
-----------
ELECTRICAL & ELECTRONICS - 8.81%
Anixter International Inc * 22,500 371,250
CHS Electronics Inc * 103,650 1,775,006
Cohu Inc 36,900 1,130,063
Encore Wire Corp * 41,250 1,265,859
General Cable Corp 34,700 1,255,706
HMT Technology Corp * 108,700 1,413,100
MTS System Corp 27,600 1,035,000
SCI System Inc * 16,900 736,206
Technitrol Inc 28,500 855,000
<PAGE>
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
ELECTRICAL & ELECTRONICS (continued)
Triumph Group Inc * 15,100 $ 502,075
Veeco Instruments Inc * 19,000 418,000
-----------
10,757,265
-----------
FINANCE-OTHER - 14.89%
Alfa Corp 15,900 274,275
Americredit Corp * 22,600 625,738
Delphi Financial Group Inc * 17,800 801,000
Delta Financial Corp * 24,700 330,363
Doral Financial Corp 28,900 733,338
Eaton Vance Corp 23,400 883,350
FBL Financial Group Inc 9,400 377,175
First American Financial Corp * 21,500 1,588,313
First Plus Financial Group Inc *35,500 1,362,313
GBC Bancorp California 22,000 1,402,500
Imperial Credit Mortgage
Holdings 138,000 2,466,750
INMC Mortgage Holdings Inc 25,000 585,938
Interra Financial Inc 14,300 986,700
Investment Technology Group Inc *44,000 1,232,000
Jefferies Group Inc 30,800 1,260,875
ONBAN Corp Inc 8,500 599,250
Raymond James Financial Inc 30,750 1,220,391
SCPIE Holdings Inc 33,400 966,513
United Wisconsin Services Inc 18,700 481,525
-----------
18,178,307
-----------
FOOD - 2.32%
Herbal Life International
Inc Class A 24,200 508,200
Herbal Life International
Inc Class B * 48,400 1,040,600
Pilgrims Pride Corp 50,700 789,019
Suiza Foods Corp * 8,200 488,413
-----------
2,826,232
-----------
FUEL - 4.03%
Comstock Resource Inc * 65,700 784,294
Devon Energy Corp 17,800 685,300
Indiana Energy Inc 7,800 256,913
Seacor Smit Inc * 36,300 2,187,075
Vintage Petroleum Inc 53,200 1,010,800
-----------
4,924,382
-----------
HEALTH CARE - 4.27%
Cooper Cos Inc * 45,100 1,843,463
Datascope Corp * 34,000 879,750
Integrated Health Services Inc 37,300 1,163,294
Lincare Holdings Inc * 13,200 752,400
Novacare Inc * 43,800 572,138
-----------
5,211,045
-----------
HOUSING & REAL ESTATE - 9.73%
American Homestar Corp * 29,025 478,913
Capstead Mortgage Corp 78,375 1,562,602
<PAGE>
<CAPTION>
PREFERRED SMALLCAP FUND (continued)
COMMON STOCK SHARES VALUE
<S> <C> <C>
HOUSING & REAL ESTATE (continued)
Centex Construction Products Inc 45,000 $ 1,355,625
Centex Corp 23,800 1,497,913
Grubb & Ellis Co * 22,700 310,706
Lennar Corp 65,523 1,412,840
Lone Star Industry Inc 17,600 935,000
NVR Inc * 66,500 1,454,688
Palm Harbor Homes Inc * 17,500 494,375
Pulte Corp 23,100 965,869
Standard Pacific Corp 13,900 218,925
Thornburg Mortgage Asset Corp 39,400 650,100
US Home Corp * 13,800 541,650
-----------
11,879,206
-----------
INSURANCE - 3.80%
Capital Realty Corp 5,300 328,931
Enhance Financial Services
Group Inc 14,400 856,800
Fremont General Corp 20,650 1,130,588
Orion Capital Corp 19,800 919,463
Presidential Life Inc 21,800 441,450
RLI Corp 19,400 966,363
-----------
4,643,595
-----------
LEISURE TIME INDUSTRIES - 1.32%
Anchor Gaming * 21,000 1,170,750
Thor Industry Inc 13,000 446,063
-----------
1,616,813
-----------
MANUFACTURING - 8.06%
AFC Cable System Inc * 8,950 266,263
Asyst Technologies Inc * 14,500 316,281
Commercial Intertech Corp 76,000 1,577,000
Gencorp Inc 39,600 990,000
Hexcel Corp * 58,200 1,451,363
Huffy Corp 40,800 550,800
Lone Star Technologies Inc * 18,900 536,288
Magnetek Inc * 8,300 161,850
Manitowoc Inc 20,200 656,500
Omniquip International Inc 38,800 773,575
Robbins & Myers Inc 13,400 530,975
Tredegar Industry Inc 19,100 1,258,213
Wynns International Inc 24,200 771,375
-----------
9,840,483
-----------
METALS & MINING - 6.06%
AK Steel Holding Corp 50,400 891,450
Chase Industry Inc * 26,100 665,550
Medusa Corp 32,900 1,375,631
Mueller Industry Inc * 14,400 849,600
RMI Titanium Co * 71,100 1,422,000
<PAGE>
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
METALS & MINING (continued)
Southdown Inc 17,600 $ 1,038,400
Texas Industry Inc 25,700 1,156,500
-----------
7,399,131
-----------
PAPER & FOREST PRODUCTS - 1.98%
Buckeye Technologies Corp * 11,500 531,875
CSS Industry Inc * 6,400 204,000
Florida Rock Industry Inc 47,800 1,087,450
Schweitzer Mauduit
International Inc 15,900 592,275
-----------
2,415,600
-----------
PUBLISHING & BROADCASTING - 3.64%
Bowne & Co Inc 73,800 2,942,775
Merrill Corp 64,800 1,506,600
-----------
4,449,375
-----------
SERVICE INDUSTRIES - 3.14%
Advo Inc * 66,300 1,292,850
New England Business Services Inc 3,300 111,375
Prime Hospitality Corp * 28,000 570,500
Stone & Webster Inc 9,600 450,000
Veritas DGC Inc * 18,300 722,850
Zurn Industry Inc 21,800 685,338
-----------
3,832,913
-----------
TELECOMMUNICATIONS - 1.15%
Cellstar Corp * 35,800 711,525
Superior Telecom Inc * 20,200 698,163
-----------
1,409,688
-----------
TRANSPORTATION - 5.05%
Alaska Air Group Inc * 25,000 968,750
Arnold Industry Inc 19,400 334,650
Comair Holdings Inc 24,675 595,284
Continental Airlines Inc
Class B *15,300 736,313
Hvide Marine Inc * 36,700 945,021
Roadway Express Inc 27,700 612,859
Trico Marine Services Inc * 42,000 1,233,746
US Freightways Corp 22,700 737,746
-----------
6,164,369
-----------
UTILITIES & POWER - .51%
Commonwealth Energy Systems 18,600 618,450
-----------
TOTAL COMMON STOCK
(Cost $102,975,124) 121,116,506
-----------
<PAGE>
<CAPTION>
SHORT TERM INVESTMENTS - .96% SHARES VALUE
<S> <C> <C>
SHORT TERM INVESTMENT FUND - .96%
State Street Global Advisors Money
Market Fund 1,169,173 $ 1,169,173
-----------
TOTAL SHORT TERM INVESTMENTS
(Cost $1,169,173) 1,169,173
-----------
TOTAL INVESTMENTS - 100.16%
(Cost $104,144,297) 122,285,679
-----------
OTHER ASSETS AND LIABILITIES - (.16%) (193,096)
-----------
TOTAL NET ASSETS - 100% $122,092,583
============
</TABLE>
<PAGE>
<TABLE>
PREFERRED ASSET ALLOCATION FUND
<CAPTION>
COMMON STOCK - 42.05% SHARES VALUE
<S> <C> <C>
AEROSPACE - .56%
Boeing Co 7,962 $ 389,640
General Dynamics Corp 600 51,863
Lockheed Martin Corp 1,619 159,472
Northrop Grumman Corp 300 34,500
United Technologies Corp 2,080 151,450
-----------
786,925
-----------
AUTOMOTIVE - .91%
Chrysler Corp 5,616 197,613
Cooper Tire & Rubber Co 400 9,750
Cummins Engine Inc 200 11,813
Dana Corp 1,040 49,400
Eaton Corp 770 68,723
Echlin Inc 300 10,856
Ford Motor Co * 9,100 443,056
General Motors Corp 5,850 354,656
Goodyear Tire & Rubber 1,320 83,985
Navistar International Corp Inc * 310 7,692
Paccar Inc 740 38,850
-----------
1,276,394
-----------
BANKS - 3.62%
BB&T Corp 600 38,438
Banc One Corp 4,064 220,726
Bank New York Inc 3,200 185,000
Bank of Boston Corp 1,200 112,725
Bankamerica Corp 5,700 416,100
Bankers Trust New York Corp 740 83,204
Barnett Banks Inc 1,700 122,188
-----------
<PAGE>
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
BANKS (continued)
Chase Manhattan Corp 3,421 $ 374,600
Citicorp 3,650 461,497
Comerica Inc 900 81,225
Corestates Financial Corp 1,700 136,106
Fifth Third Bancorp 1,200 98,100
First Chicago NBD Corp 2,543 212,341
First Union Corp 4,794 245,693
Fleet Financial Group Inc 2,044 153,172
JP Morgan & Co Inc 1,420 160,283
Keycorp 1,900 134,544
MBNA Corp 2,268 61,945
Mellon Bank Corp 2,200 133,375
National City Corp 1,700 111,775
Nationsbank Corp 5,274 320,725
Norwest Corp 5,900 227,888
PNC Bank Corp 2,430 138,662
Republic New York Corp 500 57,094
State Street Corporation 1,300 75,644
Suntrust Banks Inc 1,900 135,613
US Bancorp 1,628 182,234
Wachovia Corp 1,530 124,121
Wells Fargo & Co 809 274,605
-----------
5,079,623
-----------
CHEMICALS - 1.07%
Air Products & Chemicals Inc 930 76,493
BF Goodrich Co 200 8,288
Dow Chemical Co 1,880 190,820
Du Pont E I de Nemours & Co 8,540 512,934
Eastman Chemical Co 675 40,205
Engelhard Corp 1,467 25,489
Freeport McMoRan Copper &
Gold Class B 1,900 29,925
Great Lakes Chemical Corp 570 25,579
Hercules Inc 920 46,058
International Flavours 940 48,410
Monsanto Co 4,700 197,400
Morton International Inc 1,310 45,031
Nalco Chemical Co 840 33,233
Praxair Inc 1,430 64,350
Rohm & Haas Co 620 59,365
Union Carbide Corp 1,120 48,090
WR Grace & Co 590 47,458
-----------
1,499,128
-----------
COMPUTER SOFTWARE - 1.44%
Adobe System Inc 550 22,688
Autodesk Inc 200 7,400
Automatic Data Processing Inc 2,430 149,141
Computer Associates
International Inc 4,368 230,958
Computer Sciences Corp * 500 41,750
First Data Corp 3,400 99,450
Microsoft Corp * 9,300 1,202,025
<PAGE>
<CAPTION>
PREFERRED ASSET ALLOCATION FUND (continued)
COMMON STOCK SHARES VALUE
<S> <C> <C>
COMPUTER SOFTWARE (continued)
Novell Inc * 3,300 $ 24,750
Oracle System Corp * 8,035 179,281
Parametric Technology Corp * 1,100 52,113
Shared Medical System 100 6,600
-----------
2,016,156
-----------
CONGLOMERATES - 1.81%
Allied Signal Inc 4,660 181,449
General Electric Co 25,640 1,881,335
Harcourt General Inc 300 16,425
Household International Inc 400 51,025
ITT Corp * 960 79,560
Pall Corp 533 11,026
Rockwell International Corp 1,800 94,050
TRW Inc 1,200 64,050
Tenneco Inc 1,490 58,855
Textron Inc 1,480 92,500
Whitman Corp 500 13,031
-----------
2,543,306
-----------
CONSUMER PRODUCTS - 3.73%
Alberto Culver Co 300 9,619
Anheuser Busch Cos Inc 4,080 179,520
Armstrong World Industries Inc 200 14,950
Avon Products Inc 1,150 70,581
Brown Forman Corp Class B 300 16,575
Circuit City Stores Inc 400 14,225
Clorox Co 860 67,994
Coca Cola Co 19,380 1,291,193
Colgate Palmolive Co 2,320 170,520
Coors Adolph Co Class B 200 6,650
Ecolab Inc 300 16,631
Fortune Brands Inc 1,360 50,405
Fruit Of The Loom Inc Class A * 500 12,813
Gillette Co 4,020 403,759
Liz Claiborne Inc 680 28,433
Masco Corp 1,370 69,699
Maytag Corp 500 18,656
Nike Inc Class B 2,280 89,490
Pepsico Inc 12,180 443,809
Philip Morris Cos Inc 18,860 854,594
Proctor & Gamble Co 10,500 838,031
Reebok International Ltd * 620 17,864
Russell Corp 200 5,313
Seagram Ltd 3,070 99,199
Tupperware Corp 300 8,363
UST Inc 1,560 57,623
Unilever NV 4,680 292,208
V F Corp 1,160 53,288
Whirlpool Corp 730 40,150
-----------
5,242,155
-----------
<PAGE>
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
CONTAINERS & PACKING - .07%
Ball Corp 100 $ 3,531
Bemis Inc 200 8,813
Crown Cork & Seal Inc 1,070 53,634
Stone Container Corp * 406 4,238
Temple Inland Inc 600 31,388
-----------
101,604
-----------
DISCOUNT & FASHION RETAILING - 1.60%
AutoZone Inc * 1,200 34,800
Charming Shoppes Inc * 500 2,344
Costco Cos Inc * 1,865 83,226
Dayton Hudson Corp 1,990 134,325
Dillards Department
Stores Inc Class A 1,110 39,128
Federated Department Stores Inc *1,600 68,900
Gap Inc 3,660 129,701
Home Depot Inc 5,678 334,292
JC Penney Inc 2,000 120,625
K Mart Corp * 4,130 47,753
Limited Inc 2,042 52,071
Lowes Cos Inc 800 38,150
May Department Stores Co 2,110 111,171
Mercantile Stores Inc 200 12,175
Nordstrom Inc 810 48,904
Payless Shoesource Inc * 24 1,611
Pep Boys-Manny Moe & Jack 300 7,163
Sears Roebuck & Co 3,300 149,325
TJX Cos Inc 800 27,500
Toys R Us Inc * 2,470 77,651
Wal Mart Stores Inc 17,910 706,326
Woolworth Corp * 1,300 26,488
-----------
2,253,629
-----------
ELECTRICAL & ELECTRONICS - 1.53%
Advanced Micro Devices Inc * 600 10,763
Amp Inc 2,028 85,176
Cooper Industries Inc 1,182 57,918
Emerson Electric Co 3,580 202,046
Harris Corp 400 18,350
Honeywell Inc 1,190 81,515
Intel Corp 12,920 907,630
Johnson Controls Inc 400 19,100
KLA Tencor Corp * 700 27,038
LSI Logic Corp * 1,100 21,725
Micron Technology Inc * 1,800 46,800
Millipore Corp 200 6,788
Motorola Inc 4,700 268,194
National Semiconductor Corp * 700 18,156
National Service Industry Inc 200 9,913
Perkin Elmer Corp 200 14,213
Raychem Corp 400 17,225
Raytheon Co Class A 1 52
Raytheon Co Class B 2,400 121,200
<PAGE>
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
ELECTRICAL & ELECTRONICS (continued)
Tektronix Inc 150 $ 5,953
Texas Instruments Inc 3,240 145,800
Thermo Electron Corp * 1,300 57,850
Thomas & Betts Corp 200 9,450
-----------
2,152,855
-----------
FINANCE-OTHER - 1.69%
American Express Co 3,750 334,688
American General Corp 1,938 104,773
Beneficial Corp 200 16,625
Cincinnati Financial Corp 200 28,150
Countrywide Credit Industry Inc 900 38,588
Equifax Inc 1,300 46,069
Federal Home Loan Mortgage Corp 5,680 238,205
Federal National Mortgage Assn 8,500 485,031
Golden West Financial Corp 760 74,338
Green Tree Financial Corp 1,200 31,425
HF Ahmanson & Co 500 33,469
H & R Block Inc 1,160 51,983
Huntington Bancshares Inc 900 32,400
Merrill Lynch & Co Inc 2,820 205,684
Morgan Stanley Dean Witter 4,363 257,962
Progressive Corp Ohio 700 83,913
Providian Financial Corp 980 44,284
Schwab (Charles) Corp 1,200 50,325
Sunamerica Inc 1,950 83,363
Synovus Financial Corp 800 26,200
Washington Mutual Inc 1,740 111,034
-----------
2,378,509
-----------
FOOD - 1.39%
Albertsons Inc 2,210 104,699
American Stores Co 2,740 56,341
Archer Daniels Midland Co 4,502 97,637
CPC International Inc 1,100 118,525
Campbell Soup Co 3,700 215,063
ConAgra Inc 3,740 122,719
General Mills Inc 1,330 95,261
Giant Foods Inc Class A 300 10,106
Great Atlantic & Pacific Tea Inc 200 5,938
HJ Heinz Co 2,815 143,037
Hershey Food Corp 1,220 75,564
Kellogg Co 3,420 169,718
Kroger Co * 1,100 40,631
Pioneer Hi Bred International Inc 704 75,504
Quaker Oats Co 1,160 61,190
Ralston Purina Co 910 84,573
Sara Lee Corp 3,760 211,735
Supervalu Inc 300 12,563
Sysco Corp 1,720 78,368
<PAGE>
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
FOOD (continued)
Tricon Global Restaurants Inc * 1,218 $ 35,398
Winn Dixie Stores Inc 1,340 58,541
Wrigley Wm Jr Co 970 77,176
-----------
1,950,287
-----------
FUEL - 3.54%
Amerada Hess Corp 910 49,936
Amoco Corp 3,760 320,070
Anadarko Petroleum Co 700 42,481
Apache Corp 700 24,544
Ashland Inc 300 16,106
Atlantic Richfield Co 2,380 190,698
Baker Hughes Inc 1,400 61,075
Burlington Resources Inc 1,455 65,202
Chevron Corp 5,060 389,620
Coastal Corp 940 58,221
Dresser Industries Inc 1,750 73,391
Exxon Corp 19,240 1,177,248
Halliburton Co 2,220 115,301
Helmerich & Payne Inc 100 6,788
Kerr McGee Corp 200 12,663
Mobil Corp 6,220 449,006
Occidental Petroleum Co 2,710 79,437
Oneok Inc 100 4,038
Oryx Energy Co * 1,490 37,995
Pennzoil Co 560 37,415
Phillips Petroleum Co 2,260 109,893
Rowan Cos Inc * 400 12,200
Royal Dutch Petroleum Co 16,200 877,838
Schlumberger Ltd 3,860 310,730
Sun Inc 821 34,533
Texaco Inc 4,320 234,900
USX Marathon Group 2,400 81,000
Unocal Corp 2,200 85,388
Western Atlas Inc 200 14,800
-----------
4,972,517
-----------
HEALTH CARE - 4.84%
Abbott Labs 5,940 389,441
Allergan Inc 670 22,487
Alza Corp * 1,000 31,813
American Home Products Corp 4,920 376,380
Amgen Inc * 2,180 117,993
Bausch & Lomb Inc 780 30,908
Baxter International Inc 2,080 104,910
Becton Dickinson & Co 1,160 58,000
Biomet Inc 1,300 33,313
Boston Scientific Corp * 1,600 73,400
Bristol Myers Squibb Co 7,580 717,258
CR Bard Inc 300 9,394
CVS Corp 1,290 82,641
Cardinal Health Inc 500 37,563
<PAGE>
<CAPTION>
PREFERRED ASSET ALLOCATION FUND (continued)
COMMON STOCK SHARES VALUE
<S> <C> <C>
HEALTH CARE (continued)
Columbia HCA Healthcare Corp 5,249 $ 155,502
Eli Lilly & Co 7,948 553,380
Guidant Corp 1,300 80,925
Healthsouth Corp * 2,600 72,150
Humana Inc * 1,300 26,975
Johnson & Johnson 10,320 679,830
Longs Drug Stores Corp 200 6,425
Mallinckrodt Group Inc 300 11,400
Manor Care Inc 300 10,500
Medtronic Inc 3,840 200,880
Merck & Co Inc 9,330 991,313
Pfizer Inc 10,000 745,625
Pharmacia & UpJohn Inc 4,053 148,441
Rite Aid Corp 600 35,213
Schering Plough Corp 5,880 365,295
Sigma Aldrich 1,100 43,725
St. Jude Medical Inc * 800 24,400
Tenet Healthcare Corp * 2,260 74,863
United Healthcare Corp * 1,500 74,531
United States Surgical Corp 600 17,588
Walgreen Co 4,320 135,540
Warner Lambert Co 2,120 262,880
-----------
6,802,882
-----------
HOUSING & REAL ESTATE - .11%
Centex Corp 100 6,294
Kaufman & Broad Home Corp 200 4,488
Owens Corning Fiberglass Corp 200 6,825
PPG Industries Inc 1,480 84,545
Pulte Corp 100 4,181
Sherwin Williams Co 1,880 52,170
-----------
158,503
-----------
INSURANCE - 1.99%
Aetna Inc 1,266 89,332
Allstate Corp 3,629 329,785
American International Group Inc 5,377 584,749
Aon Corp 750 43,969
Chubb Corp 1,360 102,850
Cigna Corp 540 93,454
Conseco Inc 1,200 54,525
General Reinsurance Corp 640 135,680
Hartford Financial Services Group 960 89,820
Jefferson Pilot Corp 760 59,185
Lincoln National Corp 880 68,750
Loews Corp 900 95,513
MBIA Inc 400 26,725
MGIC Investment Corp 1,000 66,500
Marsh & McLennan Cos Inc 1,460 108,861
Safeco Corp 1,160 56,550
<PAGE>
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
INSURANCE (continued)
St. Paul Cos Inc 740 $ 60,726
Torchmark Inc 1,400 58,888
Transamerica Corp 670 71,355
Travelers Group Inc 9,609 517,685
USF&G Corp 500 11,031
Unum Corp 1,200 65,250
-----------
2,791,183
-----------
LEISURE TIME INDUSTRIES - .91%
American Greetings Corp Class A 300 11,738
Brunswick Corp 980 29,706
Darden Restaurants Inc 1,530 19,125
Eastman Kodak Co 2,630 159,937
Fleetwood Enterprises Inc 200 8,488
Harrahs Entertainment Inc * 450 8,494
Hasbro Inc 1,210 38,115
Hilton Hotels Corp 2,020 60,095
King World Productions Inc 200 11,550
Mattel Inc 2,469 91,970
McDonalds Corp 5,500 262,625
Mirage Resorts Inc * 800 18,200
Polaroid Corp 200 9,738
Walt Disney Co 5,360 530,975
Wendys International Inc 600 14,438
-----------
1,275,194
-----------
MANUFACTURING - 1.07%
Aeroquip Vickers Inc 100 4,906
Applied Materials Inc * 3,200 96,400
Avery Dennison Corp 500 22,375
Black & Decker Corp 400 15,625
Briggs & Stratton Corp 100 4,856
Case Corp 700 42,306
Caterpillar Inc 3,320 161,228
Cincinnati Milacron Inc 200 5,188
Corning Inc 1,950 72,394
Crane Co 200 8,675
Deere & Co 2,260 131,786
Dover Corp 1,000 36,125
FMC Corp 200 13,463
General Signal Corp 200 8,438
Harnischfeger Industries Inc 200 7,063
ITT Industry Inc 960 30,120
Illinois Tool Works Inc 2,220 133,478
Ingersoll Rand Co 1,560 63,180
Jostens Inc 200 4,613
Minnesota Mining &
Manufacturing Co 3,360 275,730
Newell Co 1,460 62,050
Owens Illinois Inc * 900 34,144
Parker Hannifin Corp 525 24,084
Rubbermaid Inc 1,380 34,500
Snap On Inc 300 13,088
<PAGE>
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
MANUFACTURING (continued)
Springs Industries Inc 100 $ 5,200
Stanley Works 400 18,875
Timken Co 200 6,875
Tyco International Ltd 3,600 162,225
-----------
1,498,990
-----------
METALS & MINING - .35%
Alcan Aluminum Ltd 1,810 50,001
Allegheny Teldyne Inc 777 20,105
Aluminum Company of America 1,500 105,563
Armco Inc * 500 2,469
Asarco Inc 200 4,488
Barrick Gold Corp 3,000 55,875
Battle Mountain Gold Co 2,000 11,750
Bethleham Steel Corp * 500 4,313
Cyprus Amax Minerals Co 960 14,760
Echo Bay Mines Ltd * 600 1,463
Homestake Mining Co 1,690 14,999
Inco Ltd 1,360 23,120
Inland Steel Industries Inc 200 3,425
Newmont Mining Corp 718 21,091
Nucor Corp 400 19,325
Phelps Dodge Corp 530 32,993
Placer Dome Inc 1,950 24,741
Reynolds Metals Co 600 36,000
USX U.S. Steel Group 1,000 31,250
Worthington Industries Inc 450 7,425
-----------
485,156
-----------
OFFICE EQUIPMENT & COMPUTERS - 2.37%
3Com Corp * 2,600 90,838
Apple Computer * 1,150 15,094
Bay Networks Inc * 1,700 43,456
Cabletron Systems Inc * 1,100 16,500
Ceridian Corp * 400 18,325
Cisco Systems Inc * 7,830 436,523
Compaq Computer Corp 5,712 322,371
Data General Corp * 200 3,488
De Luxe Corp 1,050 36,225
Dell Computer Corp * 3,000 252,000
Digital Equipment Corp * 1,410 52,170
EMC Corp * 3,800 104,263
HBO & Co 1,500 72,000
Hewlett Packard Co 8,020 501,250
Ikon Office Solutions Inc 600 16,875
International Business Machines 8,100 846,956
John H Harland Co 100 2,100
Moore Corp Ltd 500 7,563
Pitney Bowes Inc 1,400 125,913
Seagate Technology * 2,000 38,500
Silicon Graphics Inc * 1,700 21,144
Sun Microsystems Inc * 1,700 67,788
-----------
<PAGE>
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
OFFICE EQUIPMENT & COMPUTERS (continued)
Tandy Corp 600 $ 23,138
Unisystem Corp * 800 11,100
Xerox Corp 2,720 200,770
-----------
3,326,350
-----------
PAPER & FOREST PRODUCTS - .48%
Boise Cascade Corp 200 6,050
Champion International Corp 800 36,250
Fort James Corp 900 34,425
Georgia Pacific Corp 710 43,133
Georgia Pacific Corp-Timber Group 310 7,033
International Paper Co 2,380 102,638
Kimberly Clark Corp 4,446 219,243
Louisiana Pacific Corp 1,160 22,040
Mead Corp 400 11,200
Potlatch Corp 100 4,300
Union Camp Corp 630 33,823
Westvaco Corp 1,100 34,581
Weyerhaeuser Co 1,550 76,047
Williamette Industries Inc 1,200 38,625
-----------
669,388
-----------
PUBLISHING & BROADCASTING - .77%
Comcast Corp 2,050 64,703
Dow Jones & Co 970 52,077
Dun & Bradstreet Corp 1,430 44,241
Gannett Inc 2,420 149,586
Knight Ridder Inc 1,020 53,040
McGraw Hill Inc 860 63,640
Meredith Corp 200 7,138
New York Times Co 400 26,450
Tele Communications Inc Series A *4,572 127,730
Time Warner Inc 4,020 249,240
Times Mirror Co Series A 800 49,200
Tribune Co 1,220 75,945
Viacom Inc Class B * 2,950 122,241
-----------
1,085,231
-----------
SERVICE INDUSTRIES - .61%
Browning Ferris Industries Inc 1,900 70,300
Cendant Corp * 6,209 213,425
Cognizant Corp 1,430 63,724
EG & G Inc 200 4,163
Fluor Corp 750 28,031
Foster Wheeler Corp 200 5,413
Genuine Parts Co 1,825 61,936
Interpublic Group Cos Inc 600 29,888
Marriot International Inc 1,180 81,715
McDermott International Inc 200 7,325
Omnicom Group 1,200 50,850
RR Donnelley & Sons Co 1,270 47,308
Safety Kleen Corp 1,190 32,651
Service Corp International 1,100 40,631
<PAGE>
<CAPTION>
PREFERRED ASSET ALLOCATION FUND (continued)
COMMON STOCK SHARES VALUE
<S> <C> <C>
SERVICE INDUSTRIES (continued)
Waste Management Inc 3,530 $ 97,075
WW Grainger Inc 200 19,438
-----------
853,873
-----------
TELECOMMUNICATIONS - 3.54%
Airtouch Communications Inc 4,160 172,900
Alltel Corp 1,300 53,381
American Telephone &
Telegraph Corp 12,440 761,950
Ameritech Corp 4,290 345,345
Andrew Corp * 405 9,720
Bell Atlantic Corp 6,026 548,366
Bellsouth Corp 7,760 436,985
CBS Corp 5,520 162,495
Clear Channel Communications * 800 63,550
DSC Communications Corp * 500 12,000
Frontier Corp 700 16,844
GTE Corp 7,410 387,173
Lucent Technologies Inc 5,084 406,084
MCI Communications Corp 5,500 235,469
Next Level Systems Inc * 1,000 17,875
Northern Telecom Ltd 2,210 196,690
SBC Communications Inc 7,277 533,040
Scientific Atlanta Inc 300 5,025
Sprint Corp 3,510 205,774
Tellabs Inc * 1,600 84,600
US West Inc-Communications Group *3,970 179,146
US West Inc-Media Group * 4,570 131,959
-----------
4,966,371
-----------
TRANSPORTATION - .59%
AMR Corp * 760 97,660
Burlington Northern Santa Fe 1,134 105,391
CSX Corp 1,820 98,280
Caliber Systems Inc 370 18,014
Delta Airlines Inc 560 66,640
Federal Express Corp * 1,000 61,063
Laidlaw Inc 2,900 39,513
Norfolk Southern Corp 3,150 97,059
Roadway Express Inc 50 1,106
Ryder System Inc 300 9,825
Southwest Airlines Co 1,950 48,019
Union Pacific Corp 1,830 114,261
Union Pacific Resource Group 2,219 53,811
US Airways Group Inc * 300 18,750
-----------
829,392
-----------
UTILITIES & POWER - 1.46%
American Electric Power Inc 1,460 75,373
Baltimore Gas & Electric Co 1,460 49,731
Carolina Power & Lighting Co 1,390 58,988
<PAGE>
<CAPTION>
COMMON STOCK SHARES VALUE
<S> <C> <C>
UTILITIES & POWER (continued)
Central & SouthWest Corp 1,700 $ 46,006
Cinergy Corp 706 27,049
Columbia Gas Systems Inc 200 15,713
Consolidated Edison Co 1,910 78,310
Consolidated Natural Gas Co 930 56,265
DTE Energy Co 1,380 47,869
Dominion Resource Inc 1,460 62,141
Duke Energy Co 2,251 124,649
Eastern Enterprises 100 4,500
Edison International 3,430 93,253
Enron Corp 2,400 99,750
Entergy Corp 1,680 50,295
FPL Group Inc 1,390 82,271
First Energy Corp * 1,950 56,550
GPU Inc 500 21,063
Houston Industries Inc 2,072 55,297
Niagara Mohawk Power Corp * 1,790 18,795
Nicor Inc 200 8,438
Northern Systems Power Co 730 42,523
PG & E Corp 3,370 102,574
PP & L Resource Inc 700 16,756
Pacific Enterprises 400 15,050
Pacificorp 2,440 66,638
Peco Energy Co 1,950 47,283
Peoples Energy Corp 200 7,870
Public Service Enterprise Group 1,930 61,152
Sonat Inc 400 18,295
Southern Co 5,090 131,699
Texas Utilities Co 1,837 76,345
Unicom Corp 1,860 57,190
Union Electric Co 950 41,083
William Cos Inc 1,410 40,004
Worldcom Inc * 6,600 199,645
-----------
2,056,413
-----------
TOTAL COMMON STOCK
(Cost $30,926,026) 59,052,014
-----------
<CAPTION>
FIXED INCOME - 28.55% PAR VALUE
<S> <C> <C>
U.S. TREASURY - 28.55%
United States Treasury Bonds
6.00% February 15, 2026 $ 2,945,000 2,941,319
6.25% August 15, 2023 1,745,000 1,797,350
6.50% November 15, 2026 205,000 218,838
6.875% August 15, 2025 890,000 992,350
7.125% February 15, 2023 1,790,000 2,043,392
7.25% May 15, 2016 605,000 689,131
7.25% August 15, 2022 340,000 392,754
7.50% November 15, 2016 1,870,000 2,182,645
7.50% November 15, 2024 140,000 167,475
7.625% November 15, 2022 1,805,000 2,173,328
<PAGE>
<CAPTION>
FIXED INCOME PAR VALUE
<S> <C> <C>
U.S. TREASURY (continued)
United States Treasury Bonds
7.625% February 15, 2025 $2,030,000 $ 2,463,588
8.00% November 15, 2021 1,380,000 1,720,474
8.125% August 15, 2019 530,000 663,163
8.125% May 15, 2021 909,000 1,145,485
8.125% August 15, 2021 1,480,000 1,866,887
8.50% February 15, 2020 760,000 988,000
8.75% May 15, 2017 350,000 458,882
8.75% May 15, 2020 2,010,000 2,677,380
8.75% August 15, 2020 1,150,000 1,533,997
8.875% August 15, 2017 615,000 816,314
8.875% February 15, 2019 875,000 1,170,584
9.00% November 15, 2018 350,000 472,829
9.125% May 15, 2009 655,000 766,147
9.125% May 15, 2018 1,420,000 1,934,083
9.25% February 15, 2016 700,000 949,809
9.875% November 15, 2015 750,000 1,067,460
10.375% November 15, 2012 450,000 597,938
10.625% August 15, 2015 150,000 225,446
11.25% February 15, 2015 870,000 1,364,134
11.75% February 15, 2010 295,000 394,610
11.75% November 15, 2014 505,000 752,844
12.00% August 15, 2013 635,000 935,634
12.50% August 15, 2014 230,000 355,529
12.75% November 15, 2010 510,000 727,943
13.875% May 15, 2011 300,000 456,515
-----------
40,104,257
-----------
TOTAL FIXED INCOME
(Cost $36,299,953) 40,104,257
-----------
<CAPTION>
SHORT TERM INVESTMENTS - 28.59% PAR VALUE
<S> <C> <C>
COMMERCIAL PAPER - 18.12%
Associates Corp of North America
6.75% January 2, 1998 @# 2,712,360 2,711,851
Cargill Financial Services Corp
5.65% March 23, 1998 @# 1,000,000 987,280
Cargill Inc
5.61% March 20, 1998 @# 1,000,000 987,760
Ford Motor Credit Co
5.51% March 20, 1998 @# 2,000,000 1,975,400
France Telecom
5.74% March 19, 1998 @# 2,000,000 1,975,840
General Electric Capital Corp
5.52% March 20, 1998 @# 2,000,000 1,975,520
HJ Heinz Co
5.60% June 22, 1998 @# 2,000,000 1,946,600
<PAGE>
<CAPTION>
SHORT TERM INVESTMENTS PAR/SHARES VALUE
<S> <C> <C>
COMMERCIAL PAPER (continued)
International Lease Financial Corp
6.02% January 2, 1998 @# $ 2,500,000 $ 2,499,582
Met Life Funding Inc
5.70% March 20, 1998 @# 2,000,000 1,975,520
National Rural Utilities Financial Coop
5.70% March 27, 1998 @# 2,000,000 1,973,300
PHH Corp
5.68% March 25, 1998 @# 2,000,000 1,973,800
Siemens Capital Corp
5.66% March 25, 1998 @# 2,000,000 1,973,940
Walt Disney Co
6.10% January 5, 1998 @# 2,500,000 2,498,306
-----------
25,454,699
-----------
REPURCHASE AGREEMENTS - 7.24%
State Street Repo 5.00% January 2, 1998
(Cost - $10,163,000)(Dated December 31, 1997,
due January 2, 1998, collateralized by $8,370,000
U.S. Treasury Bond 10.75%, May 15, 2003,
Market Value $10,368,890
Repurchase
Proceeds $10,165,823) $10,163,000 10,163,000
-----------
SHORT TERM INVESTMENT FUND - 1.06%
State Street Global Advisors
Money Market Fund # 1,485,874 1,485,874
-----------
U.S. TREASURY - 2.17%
United States Treasury Bills
5.00% March 19, 1998 @#$ 250,000 247,285
5.06% March 5, 1998 @# 450,000 446,000
5.065% March 19, 1998 @ 2,040,000 2,017,900
5.09% March 5, 1998 @# 200,000 198,222
5.12% March 19, 1998 @# 40,000 39,566
5.145% March 5, 1998 @# 50,000 49,556
5.20% March 5, 1998 @# 50,000 49,553
-----------
3,048,082
-----------
TOTAL SHORT TERM INVESTMENTS
(Cost $40,152,093) 40,151,655
-----------
TOTAL INVESTMENTS - 99.19%
(Cost $107,378,072) 139,307,926
-----------
OTHER ASSETS AND LIABILITIES - .81% 1,143,126
-----------
TOTAL NET ASSETS - 100% $140,451,052
============
</TABLE>
<PAGE>
<TABLE>
PREFERRED FIXED INCOME FUND
<CAPTION>
FIXED INCOME - 92.28% PAR VALUE
<S> <C> <C>
ASSET BACKED - 6.86%
CIT Group Securitization Corp
6.25% May 20, 2006 $ 1,129,000 $ 1,132,872
Chevy Chase Auto Receivables
6.00% December 15, 2001 164,192 164,089
Eaglemark Trust
6.75% November 15, 2002 1,782,885 1,795,686
First Enterprise **
6.84% June 15, 2001 856,926 861,344
First U.S.A Credit Card Master Trust
6.35% October 15, 2003 1,500,000 1,508,430
Ford Credit Auto Loan Master Trust
5.50% February 15, 2003 1,000,000 983,120
Reliable Auto Receivable Master Trust
5.80% June 15, 2002 457,367 451,935
Sears Credit Account Master Trust II
6.50% November 15, 1999 3,000,000 3,019,680
Western Financial
6.05% November 1, 2000 231,277 231,321
-----------
10,148,477
-----------
COLLATERALIZED MORTGAGE OBLIGATION - 17.64%
1345 Funding LLC Class C **
7.993% May 25, 2006 3,000,000 3,153,000
Chase Commercial Mortgage Securities Corp
6.45% December 19, 2004 1,000,000 1,002,656
Criimi Mae Financial Corp
7.00% January 1, 2033 863,007 858,422
Federal Home Loan Mortgage Pc Gtd
6.00% April 15, 2006 1,000,000 997,500
6.50% November 15, 2022 5,000,000 5,014,050
7.00% August 15, 2023 1,000,000 1,030,000
Federal National Mortgage Assn Gtd
5.50% December 25, 2008 1,200,000 1,149,000
First Union Lehman Brothers Mortgage Trust
6.65% June 18, 2008 1,300,000 1,311,781
JP Morgan Commercial Mortgage
Financial Corp **
8.731% November 25, 2027 1,000,000 1,037,218
MLIC Commercial Mortgage **
6.60% July 25, 2027 638,723 641,342
Merrill Lynch Mortgage Investments Inc
6.95% June 18, 2029 1,458,119 1,492,294
6.96% November 21, 2028 750,000 766,758
7.15% April 25, 2028 2,800,443 2,870,891
Santista Securitization **
8.09% November 30, 2006 1,000,000 988,000
Tryon Mortgage Funding Inc
7.55% December 20, 2009 3,750,000 3,794,014
-----------
26,106,926
-----------
<PAGE>
<CAPTION>
FIXED INCOME PAR VALUE
<S> <C> <C>
ELECTRIC - 2.04%
Boston Edison
7.80% May 15, 2010 $ 1,375,000 $ 1,495,313
Houston Lighting & Power Co MTN
6.50% April 21, 2003 1,500,000 1,521,615
-----------
3,016,928
-----------
FEDERAL AGENCY POOLED - 4.99%
Federal Home Loan Mortgage Corp
6.50% July 15, 2016 2,000,000 1,998,125
6.65% March 15, 2018 2,500,000 2,509,725
7.00% December 1, 2024 391,629 396,767
8.00% August 1, 2026 2,396,299 2,481,272
-----------
7,385,889
-----------
FINANCE & BANKING - 9.63%
ABN Amro Bank NV Chicago
7.55% June 28, 2006 1,500,000 1,605,060
Associates Corp of North America MTN
5.96% May 15, 2037 920,000 946,100
6.73% September 30, 2002 725,000 742,183
Banc One Corp
6.375% October 1, 2002 1,500,000 1,516,350
Bank Boston Capital Trust II
7.75% December 15, 2026 1,000,000 1,020,210
General Motors Acceptance Corp
8.00% October 1, 1999 1,500,000 1,545,120
9.00% October 15, 2002 800,000 885,280
Integra Bank Pittsburgh MTN
6.55% June 15, 2000 650,000 657,170
Keycorp Institutional Capital B
8.25% December 15, 2026 1,000,000 1,078,540
Korea Development Bank
7.25% May 15, 2006 325,000 250,640
NB Capital Trust II
7.83% December 15, 2026 1,500,000 1,581,810
Pacific Corp Security Discounted MTN
6.75% July 15, 2004 1,000,000 1,024,960
Security Pacific Corp MTN
10.30% May 15, 2001 1,250,000 1,405,300
-----------
14,258,723
-----------
FOREIGN CORPORATE - 5.72%
BTM Curacao Holding NV
6.219% September 29, 2049 1,000,000 960,000
Bangkok Bank Pub Ltd **
7.25% September 15, 2005 1,000,000 745,280
British Sky Broadcasting Group
7.30% October 15, 2006 1,000,000 1,029,590
CANTV Financial Ltd
9.25% February 1, 2004 500,000 498,750
Comp de Desarollo Aeropu **
10.19% May 31, 2011 500,000 526,450
<PAGE>
<CAPTION>
FIXED INCOME PAR VALUE
<S> <C> <C>
Energy Group Overseas BV **
7.50% October 15, 2027 $ 1,250,000 $ 1,302,463
Export/Import Bank of Korea
6.375% February 15, 2006 200,000 147,264
Financiera Energet
9.375% June 15, 2006 1,000,000 1,009,375
Korea Electric Power Corp
7.75% April 1, 2013 500,000 360,195
Midland Bank PLC
7.625% June 15, 2006 775,000 823,500
Rogers Cable Systems Ltd
11.09% June 1, 2000 400,000 422,500
Santander Financial Issuances Ltd
7.875% April 15, 2005 250,000 270,788
Voto Votorantim Overseas **
8.50% June 27, 2005 400,000 364,000
-----------
8,460,155
-----------
FOREIGN GOVERNMENT - 3.43%
Argentina Republic
9.75% September 19, 2027 100,000 95,650
Indonesian Republic
7.75% August 1, 2006 420,000 340,557
Kingdom of Sweden
5.85% February 13, 2001 1,500,000 1,494,300
Quebec Providence of Canada
7.50% July 15, 2023 1,600,000 1,725,184
Russian Federation **
10.00% June 26, 2007 100,000 92,650
United Mexican States
9.75% February 6, 2001 500,000 520,000
11.50% May 15, 2026 600,000 711,000
Venezuela Republic
9.25% September 15, 2027 100,000 89,600
-----------
5,068,941
-----------
GOVERNMENT SPONSORED - 6.07%
Federal National Mortgage Association
6.50% February 1, 2024 155,905 154,638
6.50% April 1, 2024 267,905 265,727
6.50% July 1, 2024 284,260 281,949
6.925% March 1, 2001 961,455 976,477
7.00% April 1, 2026 2,463 2,490
7.50% October 1, 2026 2,385,776 2,443,178
8.50% August 1, 2025 27,045 28,296
8.50% October 1, 2026 2,402,513 2,509,857
8.50% December 1, 2026 1,002,873 1,049,246
8.50% June 1, 2027 612,912 639,917
8.50% July 1, 2027 608,408 635,214
-----------
8,986,989
-----------
<PAGE>
<CAPTION>
FIXED INCOME PAR VALUE
<S> <C> <C>
INDUSTRIALS - 8.81%
Clear Channel Communication Inc
7.25% October 15, 2027 $ 1,250,000 $ 1,261,100
Copamex Industrias SA de CV
11.375% April 30, 2004 300,000 329,250
Ford Motor Co
9.00% September 15, 2001 1,695,000 1,846,143
9.95% February 15, 2032 1,250,000 1,748,575
Laidlaw Inc
6.72% October 1, 2027 1,000,000 1,021,800
Lasmo U.S.A. Inc
7.30% November 15, 2027 1,500,000 1,531,875
Lomak Petroleum Inc
8.75% January 15, 2007 400,000 404,000
Mariner Health Group Inc
9.50% April 1, 2006 400,000 413,000
Oil Purchase Co **
7.10% April 30, 2002 2,000,000 1,995,600
Plains Resource Inc
10.25% March 15, 2006 400,000 428,000
Ultramar Diamond Shamrock Corp
6.75% October 15, 2037 2,000,000 2,066,639
-----------
13,045,982
-----------
MORTGAGE RELATED-OTHER MARKETABLE - 2.63%
Midland Realty Acceptance Corp
7.02% January 25, 2029 1,836,978 1,894,383
Providian Master Trust
6.25% June 15, 2007 2,000,000 2,006,250
-----------
3,900,633
-----------
NATURAL GAS - .64%
RAS Laffan Liquified Natural Gas **
8.294% September 15, 2014 1,000,000 941,006
-----------
OIL AND GAS - 2.16%
Columbia Gas System Inc
6.61% November 28, 2002 1,500,000 1,512,780
PTTEP International Ltd **
7.625% October 1, 2006 2,000,000 1,681,560
-----------
3,194,340
-----------
PUBLISHING & BROADCASTING - .58%
Time Warner Entertainment Co
8.375% July 15, 2033 750,000 858,570
-----------
TELEPHONE - 1.26%
McLeod Inc **
9.25% July 15, 2007 435,000 456,750
Qwest Communications International Inc
(9.47% Oct. 15, 2002)
Oct. 15, 2007 *** 550,000 375,375
<PAGE>
<CAPTION>
PREFERRED FIXED INCOME FUND (continued)
FIXED INCOME PAR VALUE
<S> <C> <C>
TELEPHONE (continued)
US West Capital Funding Inc
7.30% January 15, 2007 $ 1,000,000 $ 1,035,090
-----------
1,867,215
-----------
U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES - 9.74%
Government National Mortgage Association
7.00% November 15, 2023 2,621,731 2,652,039
7.00% February 15, 2024 480,562 485,815
7.00% March 15, 2024 378,952 383,093
7.00% April 15, 2024 725,696 733,627
7.00% June 15, 2026 960,665 968,466
7.50% August 20, 2026 3,078,040 3,143,448
8.00% January 15, 2027 403,988 418,757
9.00% March 15, 2016 51,829 56,445
9.00% May 15, 2016 55,239 60,159
9.00% June 15, 2016 698,026 760,192
9.00% July 15, 2016 258,333 281,340
9.00% August 15, 2016 58,637 63,859
9.00% September 15, 2016 350,765 382,004
9.00% October 15, 2016 812,128 884,456
9.00% November 15, 2016 218,981 238,483
9.00% December 15, 2016 272,404 296,663
9.00% February 15, 2017 7,942 8,641
9.00% November 15, 2017 2,385,275 2,597,702
-----------
14,415,189
-----------
U.S. TREASURY - 10.08%
United States Treasury Notes
6.00% June 30, 1999 # 4,590,000 4,612,950
6.25% February 28, 2002 4,500,000 4,582,260
6.50% November 15, 2026 # 2,035,000 2,172,363
6.625% June 30, 2001 # 1,740,000 1,788,128
6.75% August 15, 2026 # 193,000 212,481
6.875% May 15, 2006 205,000 219,350
10.375% November 15, 2012 #1,000,000 1,328,750
-----------
14,916,282
-----------
TOTAL FIXED INCOME
(Cost $134,196,057) 136,572,245
-----------
<PAGE>
<CAPTION>
SHORT TERM INVESTMENTS - 5.20% PAR VALUE
<S> <C> <C>
INDUSTRIALS - .67%
Occidental Petroleum Corp MTN
5.76% June 15, 1998 @ $ 1,000,000 $ 998,640
-----------
U.S. TREASURY - 4.53%
United States Treasury Bills
4.55% January 22, 1998 @ 210,000 209,443
4.98% January 22, 1998 @ 273,000 272,207
5.09% January 22, 1998 @ 66,000 65,804
5.095% January 22, 1998 @# 128,000 127,620
5.11% January 22, 1998 @# 246,000 245,267
5.115% January 22, 1998 @# 560,000 558,329
5.13% January 22, 1998 @# 2,662,000 2,654,034
5.15% January 22, 1998 @# 405,000 403,783
5.155% January 22, 1998 @#1,279,000 1,275,154
5.16% January 22, 1998 @ 21,000 20,937
5.17% January 22, 1998 @# 399,000 397,797
5.175% January 22, 1998 @ 67,000 66,798
5.19% January 22, 1998 @# 373,000 371,871
5.20% January 22, 1998 @ 29,000 28,910
-----------
6,697,954
-----------
TOTAL SHORT TERM INVESTMENTS
(Cost $7,690,955) 7,696,594
-----------
TOTAL INVESTMENTS - 97.48%
(Cost $141,887,012) 144,268,839
-----------
OTHER ASSETS AND LIABILITIES - 2.52% 3,726,429
-----------
TOTAL NET ASSETS - 100% $147,995,268
============
<CAPTION>
PREFERRED SHORT-TERM GOVERNMENT SECURITIES FUND
FIXED INCOME - 82.79% PAR VALUE
<S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATION - 3.91%
National Collegiate Trust
8.76% September 20, 2011 $ 1,250,000 $ 1,317,188
Olympic Automobiles Receivables
6.65% February 15, 2005 904,007 909,375
-----------
2,226,563
-----------
<PAGE>
<CAPTION>
FIXED INCOME PAR VALUE
<S> <C> <C>
FEDERAL AGENCY POOLED - 33.57%
Federal Home Loan Mortgage Corp
6.50% July 15, 2016 $ 2,000,000 $ 1,998,125
7.125% July 21, 1999 2,050,000 2,090,037
Federal Home Loan Mortgage PLC
6.00% December 1, 1999 4,298,682 4,255,610
6.75% October 1, 1999 744,770 749,052
Tennessee Valley Authority
6.25% August 1, 1999 10,000,000 10,053,000
-----------
19,145,824
-----------
GOVERNMENT SPONSORED - 13.72%
Federal National Mortgage Association
5.50% November 1, 2002 1,034,332 1,017,979
6.00% August 1, 2000 2,874,222 2,855,511
7.50% January 1, 2003 443,805 443,250
8.997% May 1, 2001 963,843 1,006,312
Overseas Private Investment Corp
6.13% September 15, 2001 2,500,000 2,500,000
-----------
7,823,052
-----------
MUNICIPAL - 24.64%
Alabama Housing Financial Authority
Single Family
6.90% October 1, 2014 1,050,000 1,066,034
Arkansas State Financial Authority
Single Family
5.75% February 1, 2005 1,000,000 999,080
Bossier LA Public Trust
6.50% August 1, 2011 1,355,000 1,347,073
Corona CA Single Family Mortgage
6.875% November 1, 2017 4,060,000 4,074,251
Mississippi Home Corp Collateralized Mortgage
7.80% November 1, 2012 575,000 586,972
7.85% April 1, 2021 366,036 367,833
Texas State Department Housing &
Community Affairs
9.50% March 1, 2016 5,300,000 5,610,050
-----------
14,051,293
-----------
U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES - 6.95%
Government National Mortgage Association
8.00% March 15, 2022 164,334 171,267
8.00% April 15, 2022 303,164 315,954
8.00% August 15, 2022 877,957 914,998
8.00% September 15, 2022 1,661,037 1,731,116
8.00% November 15, 2022 278,282 290,021
8.00% December 15, 2022 517,978 540,800
-----------
3,964,156
-----------
<PAGE>
<CAPTION>
FIXED INCOME PAR VALUE
<S> <C> <C>
TOTAL FIXED INCOME
(Cost $46,985,242) $ 47,210,888
------------
SHORT TERM INVESTMENTS - 15.72%PAR/SHARES VALUE
<S> <C> <C>
REPURCHASE AGREEMENTS - 13.32%
State Street Repo 5.00% January 2, 1998
(Cost - $7,594,000) (Dated
December 31, 1997, due
January 2, 1998, collateralized
by $6,255,000 U.S. Treasury
Bond 10.75%, May 15, 2003,
Market Value $7,748,794,
Repurchase Proceeds
$7,596,109) $ 7,594,000 7,594,000
-----------
SHORT TERM INVESTMENT FUND - .02%
State Street Global Advisors Money
Market Fund 13,345 13,345
-----------
U.S. TREASURY - 2.38%
United States Treasury Notes
5.125% December 31, 1998 @$ 1,365,000 1,358,817
-----------
TOTAL SHORT TERM INVESTMENTS
(Cost $8,969,722) 8,966,162
-----------
TOTAL INVESTMENTS - 98.51%
(Cost $55,954,964) 56,177,050
-----------
OTHER ASSETS AND LIABILITIES - 1.49% 848,314
-----------
TOTAL NET ASSETS - 100% $ 57,025,364
============
</TABLE>
<PAGE>
<TABLE>
PREFERRED MONEY MARKET FUND
<CAPTION>
SHORT TERM INVESTMENTS - 98.80% PAR VALUE
<S> <C> <C>
CERTIFICATES OF DEPOSIT - 15.53%
Bank of Tokyo Mitsubishi
6.50% March 4, 1998 $ 4,000,000 $ 4,000,000
Duetsche Bank AG New York
5.70% February 6, 1998 @ 2,500,000 2,499,906
Norinchukin Bank New York
6.02% February 13, 1998 @ 2,000,000 2,000,024
Rabobank Netherland N.V.
5.99% March 24, 1998 @ 1,000,000 999,893
Royal Bank of Canada
6.14% May 12, 1998 @ 1,000,000 999,897
Swiss Bank Corp New York
5.98% March 19, 1998 @ 3,000,000 2,999,879
-----------
13,499,599
-----------
COMMERCIAL PAPER - 39.97%
Abbey National North America
5.735% March 10, 1998 @ 3,000,000 2,967,502
American Express Credit Corp
6.45% January 2, 1998 @ 4,000,000 3,999,283
Bayer Corp
5.75% February 24, 1998 @ 4,000,000 3,965,500
KFW International Financial Inc
5.70% February 12, 1998 @ 3,000,000 2,980,050
5.74% January 29, 1998 @ 1,000,000 995,536
National Australia
5.74% February 18, 1998 @ 4,000,000 3,969,387
Nationsbank Corp
5.75% February 23, 1998 @ 4,000,000 3,966,139
Pfizer Inc
5.95% January 28, 1998 @ 4,000,000 3,982,150
Providence de Quebec
5.615% March 6, 1998 @ 2,000,000 1,980,036
Rabobank Netherland N.V.
5.55% April 29, 1998 @ 2,000,000 1,963,617
Southern Company
5.70% February 23, 1998 @ 4,000,000 3,966,433
-----------
34,735,633
-----------
FLOATING RATE NOTES - 31.59%
Bank Boston North America
6.14% January 2, 1998 @## 4,000,000 3,998,364
Bankers Trust Company
5.69% January 2, 1998 @## 2,500,000 2,499,629
Bayerische Landes Bank of New York
5.839% January 26, 1998 @##5,000,000 4,998,125
Corestates Bank
5.919% January 31, 1998 ## 4,000,000 4,000,000
Key Bank North America
6.12% January 2, 1998 @## 4,000,000 3,998,421
<PAGE>
<CAPTION>
SHORT TERM INVCESTMENTS PAR VALUE
<S> <C> <C>
FLOATING RATE NOTES (continued)
Liquid Asset Backed Securities Trust **
5.938% January 7, 1998 ##$ 4,462,057 $ 4,462,057
Old Kent Bank
5.65% January 2, 1998 ## 3,500,000 3,500,000
-----------
27,456,596
-----------
GOVERNMENT AGENCY - 11.71%
Federal Home Loan Bank
5.96% June 9, 1998 @ 1,500,000 1,499,741
Federal Home Loan Bank Discount Notes
5.75% January 2, 1998 @ 8,674,000 8,672,615
-----------
10,172,356
-----------
TOTAL SHORT TERM INVESTMENTS
(Cost $85,864,184) 85,864,184
-----------
TOTAL INVESTMENTS - 98.80%
(Cost $85,864,184) 85,864,184
-----------
OTHER ASSETS AND LIABILITIES - 1.20% 1,037,941
-----------
TOTAL NET ASSETS - 100% $86,902,125
===========
<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, 1997, these securities amounted to
$14,786,663 or 10.0% of the net assets of the Preferred Fixed Income Fund and
$4,462,057 or 5.13% of the net assets of the Preferred Money Market Fund.
*** Currently zero coupon. Shown parenthetically is the next interest rate
to be paid, and the date the Fund will begin accruing this rate.
# All or a portion of this security is being used to collateralize futures
contracts outstanding at December 31, 1997.
## Floating rate note. The interest rate shown reflects the rate currently
in effect. The maturity date shown reflects the next reset date.
@ Yields are at time of purchase
ABBREVIATIONS:
ADR - American Depository Receipt
MTN - Medium Term Notes
</FN>
</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 eight
portfolios ("Funds"):
PREFERRED GROWTH FUND ("Growth") - seeks long-term capital appreciation by
investing its assets primarily in equity securities that are believed to
offer the potential for capital appreciation, including stocks of companies
that are experiencing rapid earnings growth.
PREFERRED VALUE FUND ("Value") - seeks capital appreciation and current
income. The Fund invests primarily in equity securities that are believed to
be undervalued and that offer above-average potential for capital
appreciation.
PREFERRED INTERNATIONAL FUND ("International") - seeks long-term capital
appreciation by investing its assets primarily in equity securities traded
principally on markets outside the United States.
PREFERRED SMALL CAP FUND ("Small Cap") - seeks long-term capital
appreciation through investments in companies with small equity
capitalizations.
PREFERRED ASSET ALLOCATION FUND ("Asset Allocation") - seeks both capital
appreciation and current income by allocating its assets among stocks, bonds
and high quality money market instruments.
PREFERRED 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
the reported amounts of income and expenses during the reporting period and
disclosure of contingent assets and liabilities at the date of the financial
statements. 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 and futures for which market quotations are readily
available are valued at market value, which is determined by using the last
reported sale price, or, if no sales are reported, the last reported bid
price. Portfolio debt securities with remaining maturities greater than
sixty days are valued by pricing agents approved by the Trustees, which
prices reflect broker/dealer supplied valuations and electronic data
processing techniques. If the pricing agents are unable to provide such
quotations, the most recent bid quotation supplied by a bonafide market
maker is 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
counterparty. Forward contracts are valued at the mean between the bid and
the offered forward rates as last quoted by a pricing service. Obligations
with a remaining maturity of 60 days or less and holdings in Money Market
are valued at amortized cost which approximates market value. Equity
securities that have reached the limit for aggregate foreign ownership may
trade at a premium to the local share price. The premium is valued based on
prices supplied by a broker. Portfolio positions which cannot be valued as
set forth above are valued at fair value under procedures approved by the
Trustees.
<PAGE>
SECURITY TRANSACTIONS
Security transactions are accounted for on the trade date. Cost is
determined and gains and losses are based upon the specific identification
method for both financial statement and federal tax purposes.
FEDERAL TAXES
Consistent with each Fund's policy to qualify as a regulated investment
company and to distribute all of its taxable income and net realized capital
gains to its shareholders, no federal tax has been accrued.
At June 30, 1997, approximate capital loss carry-forwards available (to the
extent provided in federal income tax regulations) to offset future realized
gains were as follows:
YEAR OF CAPITAL LOSS
FUND EXPIRATION CARRYFORWARD
Short-Term Government 2003 $418,000
Short-Term Government 2004 $303,000
Short-Term Government 2005 $ 97,000
To the extent the loss carryforwards are used to offset any future realized
gains, it is unlikely that such gains would be distributed.
INTEREST INCOME, DEBT DISCOUNT AND PREMIUM
Interest income is recorded on the accrual basis. Original issue discount
and market discount are accreted to interest income over the life of a
security with a corresponding adjustment in the cost basis; premium is
amortized on debt securities with a corresponding adjustment to the cost
basis.
DISTRIBUTIONS TO SHAREHOLDERS
Growth, Value, International and Small Cap
declare and pay dividends at least annually. Dividends are declared and paid
quarterly for Asset Allocation. Dividends are declared and recorded daily
and paid monthly for Fixed Income, Short-Term Government and Money Market.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments of
foreign currency transactions, losses deferred due to wash sales and
post-October 31 losses. Permanent book and tax differences relating to
shareholder distributions will result in reclassifications in the Funds'
capital accounts.
EXPENSES
Expenses specific to an individual Fund are charged to that Fund. Common
expenses are allocated to the Funds based on their relative net asset
values.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Funds are maintained in U.S. dollars. All
assets and liabilities initially expressed in foreign currencies are
converted into U.S. dollars at the daily exchange rates.
Net realized gains and losses on foreign denominated other assets,
liabilities and currency transactions disclosed in the Statement of
Operations represent net gains and losses from the disposition of foreign
currencies, currency gains and losses realized between the trade and
settlement dates on securities transactions, and the difference between the
amount of net investment income accrued and the U.S. dollar amount actually
received. Further, the effects of changes in foreign currency exchange rates
on securities are not segregated in the Statement of Operations from the
effects of changes in market prices of those securities, but rather, are
included with the net realized and unrealized gain or loss on investments.
<PAGE>
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. There were no open forward currency contracts as of
December 31, 1997.
FUTURES CONTRACTS
All Funds (except Money Market) may enter into futures contracts. A Fund may
use futures contracts to manage its exposure to the stock and fixed income
markets. Buying futures tends to increase the Fund's exposure to the
underlying instrument. Selling futures tends to decrease the Fund's exposure
to the underlying instrument or hedge other Fund instruments. Upon entering
into such a contract, the Fund is required to pledge to the broker an amount
of cash or investment securities equal to the minimum "initial margin"
requirements of the exchange. Pursuant to the contract, the Fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are known as
"variation margin," and are recorded by the Fund as unrealized gains or
losses. When the contract is closed, the Fund records a realized gain or
loss equal to the difference between the value of the contract at the time
it was opened and the value at the time it was closed. Futures contracts
involve, to varying degrees, risk of loss in excess of the variation margin.
Losses may arise from the changes in the value of the underlying instrument,
the illiquidity of the secondary market for the contracts, or the failure of
counterparties to perform under the contract terms. See Note 4 for all open
futures contracts held as of December 31, 1997.
DELAYED DELIVERY TRANSACTIONS
All Funds (except Money Market) may purchase or sell securities on a
forward commitment basis. Payment and delivery may take place a month or
more after the date of the transaction. The price of the underlying
securities and the date when the securities will be delivered and paid for
are fixed at the time the transaction is negotiated. The Fund identifies
securities as segregated in its custodial records with a value at least
equal to the amount of the purchase commitment.
REPURCHASE AGREEMENTS
The Funds' custodian takes possession through the federal book-entry system
of securities collateralizing repurchase agreements. Collateral is
marked-to-market daily to ensure that the market value of the underlying
assets remains sufficient to protect the Funds. The Funds may experience
costs and delays in liquidating the collateral if the issuer defaults or
declares bankruptcy.
INDUSTRY CONCENTRATIONS
While none of the Funds are permitted to invest more than 25% of their
assets in a particular industry (other than the Money Market Fund, which may
concentrate in the domestic banking industry), each Fund may, from time to
time, "focus" its investments (generally considered to include investing
more than 10% of its assets) in certain industries. This may subject a Fund
to greater risk than Funds that are not so focused.
<PAGE>
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.
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:
ANNUAL PERCENTAGE OF
FUND AVERAGE NET ASSETS
Growth.................................. 0.75%
Value................................... 0.75%
International........................... 0.95%
Small Cap............................... 0.75%
Asset Allocation........................ 0.70%
Fixed Income............................ 0.50%
Short-Term Government................... 0.35%
Money Market............................ 0.30%
<PAGE>
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................................. Jennison Associates Capital Corp. ("Jennison")
Value.................................. Oppenheimer Capital ("Oppenheimer")
International.......................... Mercator Asset Management, L.P. ("Mercator")
Small Cap ............................. 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")
Short-Term Government.................. None (7/1/97 - 10/31/97)
Morgan (11/1/97 - 12/31/97)
</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, 1997, brokerage commissions were
paid to the following affiliates of the Trust's subadvisors by the following
Funds:
GROWTH VALUE
J.P. Morgan Securities, Inc. $ 4,664 -
Lehman Bros. 25,023 -
Oppenheimer & Co., Inc. 2,328 $3,456
------- ------
$32,015 $3,456
======= ======
TRUSTEES' FEES
During the six-month period ended December 31, 1997, the Trustees who were
not "interested persons" of The Preferred Group, as defined in the
Investment Company Act of 1940, as amended, received an annual fee of
$10,000 plus $1,500 for each Trustees' meeting attended.
<PAGE>
3. BENEFICIAL INTEREST
As of December 31, 1997, affiliated shareholders beneficially holding more
than 5% of total shares outstanding are as follows:
<TABLE>
<CAPTION>
% OF TOTAL SHARES OUTSTANDING
GROUP PREFERRED STABLE
INSURANCE INSURANCE PRINCIPAL
401(K) PLAN* TRUST A & B** RESERVES*** COLLECTIVE TRUST
<S> <C> <C> <C> <C>
Growth 57.10% - 7.74% -
Value 69.73% - 9.50% -
International 34.16% 39.94% - -
Small Cap 34.93% 51.27% 8.33% -
Asset Allocation 41.47% 31.84% - -
Fixed Income 16.09% 27.43% - 44.54%
Short-Term Government 25.06% 32.26% 38.50% -
Money Market 71.29% - - 13.12%
</TABLE>
In addition, one shareholder owned 5.17% of the outstanding shares of the
Asset Allocation Fund.
* 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. The 38.50%
holdings in the Short-Term Government Securities Fund are held by
American Bankers' Insurance Company of Florida for the benefit of
Caterpillar Insurance Company Limited.
4. PORTFOLIO INFORMATION
SECURITY PURCHASES AND SALES
During the six-month period ended December 31, 1997, purchases and sales of
long-term investments (i.e. - investments other than short-term obligations
and U.S. Government securities) and U.S. Government securities (short- and
long-term), respectively, were as follows:
<TABLE>
<CAPTION>
LONG-TERM U.S. GOVERNMENT
PURCHASES SALES PURCHASES SALES
<S> <C> <C> <C> <C>
Growth $ 167,893,677 $ 233,825,336 - -
Value 13,619,120 61,209,787 - -
International 20,061,693 32,283,468 - -
Small Cap 84,652,010 58,848,019 - -
Asset Allocation 1,024,929 214,705 $ 6,595,104 $11,131,632
Fixed Income 44,364,773 28,245,483 66,939,301 72,993,685
Short-Term Government 28,516,175 29,269,311 27,546,093 21,202,927
</TABLE>
<PAGE>
During the six-month period ended December 31, 1997, Money Market had
purchases and sales (including maturities and excluding repurchase
agreements) of short-term obligations and U.S. Government securities of:
<TABLE>
<CAPTION>
OTHER U.S. GOVERNMENT
PURCHASES SALES PURCHASES SALES
<S> <C> <C> <C> <C>
Money Market $ 1,220,935,690 $ 1,238,576,262 $ 16,507,514 $ 18,510,078
</TABLE>
FUTURES CONTRACTS
Asset Allocation and Fixed Income had the following futures contracts open
at December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION UNREALIZED
CONTRACTS CONTRACTS DATE GAIN (LOSS), NET
<S> <C> <C> <C>
ASSET ALLOCATION:
Long Positions:
S&P 500 30 Jun 98 $ 54,750
S&P 500 57 Mar 98 738,375
U.S. Treasury Bonds 52 Mar 98 85,826
------------
878,951
------------
Short Positions:
S&P 500 67 Mar 98 (139,460)
------------
$ 739,491
============
FIXED INCOME:
Long Positions:
U.S. Treasury Bonds 65 Mar 98 $119,421
------------
Short Positions:
U.S. Treasury Notes - 5 Years 6 Mar 98 (3,601)
------------
$ 115,820
============
</TABLE>
<PAGE>
<TABLE>
UNREALIZED APPRECIATION (DEPRECIATION)
Unrealized appreciation (depreciation) for each Fund at December 31, 1997
based on cost of both long-term and short-term securities for federal tax
purposes were as follows:
<CAPTION>
NET UNREALIZED COST FOR
GROSS UNREALIZED GROSS UNREALIZED APPRECIATION/ FEDERAL TAX
FUND APPRECIATION (DEPRECIATION) (DEPRECIATION) PURPOSES
<S> <C> <C> <C> <C>
Growth $ 126,019,728 ($ 7,768,549) $ 118,251,179 $ 336,641,115
Value 174,547,479 (3,217,714) 171,329,765 171,017,604
International 50,497,681 (19,944,554) 30,553,127 209,285,908
Small Cap 22,192,847 (4,051,465) 18,141,382 104,144,297
Asset Allocation 32,542,719 (632,809) 31,909,910 107,398,016
Fixed Income 3,393,035 (1,014,533) 2,378,502 141,890,337
Short-Term Government 265,004 (42,918) 222,086 55,954,964
Money Market -- -- -- 85,864,184
</TABLE>
INCOME TAX INFORMATION
The Funds which declared and paid a long-term capital gain distribution in
calendar year 1997 (Growth, International, Small Cap, Asset Allocation, and
Fixed Income) hereby have designated the distribution between "28% Rate
Gain" and "20% Rate Gain" as follows:
<TABLE>
"28% RATE GAIN" "20% RATE GAIN"
<S> <C> <C>
Growth 46.68% 53.32%
International 13.88% 86.12%
Small Cap 64.14% 35.86%
Asset Allocation 19.51% 80.49%
Fixed Income 62.89% 37.11%
</TABLE>
<PAGE>
THE PREFERRED GROUP OF MUTUAL FUNDS
OFFICERS AND TRUSTEES
Gary M. Anna Trustee
William F. Bahl Trustee
James F. Masterson Trustee
F. Lynn McPheeters Trustee
Dixie L. Mills Trustee
Ronald R. Rossmann President
Carol K. Burns Vice President and Assistant Clerk
Fred L. Kaufman Vice President and Treasurer
Richard P. Konrath Clerk
INVESTMENT ADVISOR
Caterpillar Investment Management Ltd.
1200 First Financial Plaza
411 Hamilton Boulevard
Peoria, IL 61602-1104
DISTRIBUTOR
Caterpillar Securities Inc.
1200 First Financial Plaza
411 Hamilton Boulevard
Peoria, IL 61602-1104
CUSTODIAN
State Street Bank & Trust Co.
P.O. Box 1713
Boston, MA 02101
TRANSFER AGENT AND INVESTOR SERVICES
Boston Financial Data Services, Inc.
The BFDS Building
Two Heritage Drive
Quincy, MA 02171
LEGAL COUNSEL
Ropes & Gray
One International Place
Boston, MA 02110-2624
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>
SHAREHOLDER PRIVILEGES
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
Regular or Roth IRA account. You may also transfer or roll over your
current 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>
GRAPHIC: THE PREFERRED GROUP
OF MUTUAL FUNDS (R)
P.O.BOX 8320
BOSTON, MA 02266-8320
SEMIANNUAL REPORT
DECEMBER 31, 1997
(Unaudited)
- --------------
BULK RATE
U.S. POSTAGE
PAID
BERWYN, IL
PERMIT NO. 150
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