LOGO: THE PREFERRED GROUP OF MUTUAL FUNDS
ANNUAL REPORT
JUNE 30, 1998
<PAGE>
THE PREFERRED GROUP OF MUTUAL FUNDS
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Performance Data........................................................ 1
Our Message to You...................................................... 2
Funds & Investment Objectives........................................... 4
Performance Information & 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........................................... 54
Report of Independent Accountants....................................... 62
Shareholder Privileges.................................................. 64
<TABLE>
<CAPTION>
PERFORMANCE DATA FISCAL YEAR ENDED 6/30/98
CAPITAL
BEGINNING ENDING TOTAL CURRENT INCOME GAINS
FUND NAME NAV NAV RETURN* YIELD + DIVIDENDS DISTRIBUTIONS
(PER SHARE) (PER SHARE) (PER SHARE) (PER SHARE)
<S> <C> <C> <C> <C> <C> <C>
Growth $20.42 $21.97 33.44% - $ - $4.38
Value 21.14 26.49 26.51 - .22 -
International 16.12 16.18 7.18 - .24 .72
Small Cap 14.30 15.59 23.45 - .08 1.83
Asset Allocation 14.52 15.65 21.84 - .47 1.38
Fixed Income 10.24 10.42 9.32 5.82% .64 .11
S.T. Gov't. Securities 9.78 9.77 5.72 5.32 .56 -
Money Market 1.00 1.00 5.40 5.19 .05 -
* Total return includes reinvestment of dividends and capital gains
distributions.
+ The yield shown for the Fixed Income and Short-Term Government Securities
Funds is the 30-day current yield as of 6/30/98. The yield shown for the Money
Market Fund is a seven-day current yield as of 6/30/98, 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.
</TABLE>
<PAGE>
Photo of: Ronald R. Rossman
OUR MESSAGE TO YOU
DEAR PREFERRED GROUP SHAREHOLDER:
We are pleased to present you with The Preferred Group's annual report for
the fiscal year ended June 30, 1998. This report provides detailed information
on your Funds' performance, including fund holdings, financial data and
commentary from each of the portfolio managers.
MARKET COMMENTARY
Understanding where the markets stand is puzzling. What you see depends on
which direction and how deeply you look.
Look at the U.S. stock market and you see an attractive sight. The U.S.
bull market charged ahead during the fiscal year (July `97 through June `98).
The Dow Jones Industrial Average was up 16.7% despite a 7.2% drop on October 27.
The Dow broke through two 1000-point milestones, crossing 8000 on July 16 and
9000 on April 6 and peaking at 9211.84 on May 13. At fiscal year-end, the U.S.
economy is prospering, with low interest rates and inflation, steady consumer
demand, low unemployment and high growth.
Focus beyond the largest capitalized companies and the picture is less
positive. While the S&P 500 climbed 30.2%, this composite figure masks the
market's disproportionate favoring of the largest of the large companies as we
ended the fiscal year. The Russell 2000 Index of small caps rose "only" 16.5%
for the year--but plunged 4.7% during second quarter 1998.
When you survey the rest of the globe, the view is even more uncertain.
Asia's economies were in turmoil all year, and the reverberations rattled the
world. Though European markets thrived, markets in Latin America and emerging
countries took a hit. The Asian crisis suppressed the EAFE Index, a commonly
used benchmark of international stocks, to a return of 6.4% for the fiscal year.
And even in the U.S., the reactions of wary investors to daily news fueled
market volatility.
At the same time, stock market fears benefited the bond market. Bonds had a
respectable year as investors fled to quality. The Salomon Bros. Broad
Investment Grade Index registered a 10.6% gain.
What should an investor do? Many experts continue to recommend
diversification. Asset classes do not always move in sync, as the previously
noted benchmarks show.
You may consider transfers to lower-risk alternatives to help you sleep
nights. The Preferred Group offers three fixed income funds with varying
risk-return profiles: the Preferred Fixed Income Fund, the Preferred Short-Term
Government Securities Fund and the Preferred Money Market Fund.
Most importantly, consider a long-term perspective. Long-term investors
should immunize themselves against short-term motion sickness in a volatile
market and be willing to ride out a market downturn.
THE PREFERRED GROUP
It has now been six years since the introduction of The Preferred Group.
The Funds have developed a respected track record; their performance has been
recognized this year in such publications as the Wall Street Journal, Mutual
Funds Magazine, Kiplinger's Personal Finance Magazine, Morningstar FundInvestor,
Worth, Bloomberg Personal Finance, Forbes, Fortune and USA Today.
We build upon the strengths we have offered since our beginning:
ACTIVE FUND MANAGEMENT BY INDUSTRY-RESPECTED PORTFOLIO MANAGERS. The
Preferred Group offers access to seasoned managers who have experience in a
variety of markets.
A TEAM APPROACH. We believe all of our business partners represent firms
whose services, people and processes make them industry leaders.
NO-LOAD FUNDS WITH LOW EXPENSE RATIOS. Look at the expense ratios on pages
31 and 33--most of them have dropped from year to year.
On top of these fundamental strengths, we strive to offer you more. This
year we introduced a Roth IRA to complement our traditional IRA. We are
participating in new distribution channels for individual investors and reaching
out to additional 401(k) plans.
Our top priority is to help you meet your investment objectives. We welcome
your comments and suggestions. Please call Investor Services at 1-800-662-GROW.
We are proud of our progress and appreciate your continued support and
confidence.
Thank you for choosing The Preferred Group.
Sincerely,
/s/ Ronald R. Rossmann
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 above-average 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, June
30, 1998. This allows you to compare Funds from different complexes on an equal
basis.
$10,000 HYPOTHETICAL INVESTMENT:
The "$10,000 investment since inception" illustrates the value of your
investment as of June 30, 1998, 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 ASSET ALLOCATION FUND
65% - S&P 500 Index
30% - Lehman Brothers Long-Term Treasury Index
5% - 90-Day Treasury Bills
PREFERRED FIXED INCOME FUND
Salomon Brothers Broad Investment Grade (BIG) Index
PREFERRED SHORT-TERM GOVERNMENT SECURITIES FUND
Merrill Lynch 1-3 Year Treasury Index
PREFERRED MONEY MARKET FUND
IBC's Money Fund Report Average/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 above-average
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: Lula C. Wang managed the Preferred Growth Fund through December 31, 1997.
DISCUSSION & ANALYSIS:
For the fiscal year ended June 30, 1998, the Preferred Growth Fund rose by
33.4%, compared with a gain of 30.2% for the S&P 500 Index. Since inception, the
Fund has advanced at an average annual rate of 22.0%, versus 21.4% for its
benchmark.
The last 12 months have witnessed the continuation of the current bull market,
but not without some bumps along the way. International turmoil captured many of
the headlines as currency devaluations throughout much of the Pacific Rim
resulted in capital flight to more stable investment environments. Japan remains
mired in a recessionary state as ineffective policymakers once again failed to
implement a meaningful strategy to stimulate domestic demand, while the yen
continues to weaken versus the dollar. Fortunately, the news wasn't all bad on
the currency front, as the prospects of monetary union in Europe sent stock
markets to new highs throughout much of the region. Meanwhile, the U.S. stock
market, buoyed by a strong domestic economy and its status as a safe haven for
investors, turned in another spectacular performance.
Technology and pharmaceutical stocks preserved their market leadership status,
as Dell Computer (1.8% of net assets), SAP AG (1.4%) and Pfizer, Inc. were the
Fund's three top performing issues. Impressive results were also turned in by
financial stocks, which continued to benefit from booming stock markets and
declining interest rates. Selected technology subtracted from performance, with
both Motorola, Inc. (eliminated from portfolio) and 3Com Corp. (1.0%)
experiencing significant declines as a result of strategic missteps. KLA-Tencor
Corp. (0.6%) also pulled back as the outlook for the semiconductor industry
deteriorated throughout the year.
Looking forward, U.S. economic growth appears to be moderating. We view this as
a necessary slowdown from unsustainably strong consumer and business spending
growth. Meanwhile, intense competitive pressures and declining demand in the
Pacific Rim have kept inflation in check, an unusual occurrence for an
expansion in its eighth year. With these fundamentals in mind, we continue to
marvel at the overall health of the U.S. economy, but we worry about the
implications for corporate profit margins. Further-more, with the full impact
of Asian currency turmoil still to be felt in the domestic economy, stock
prices are likely to experience a high degree of volatility over the remainder
of the calendar year.
- Jennison Associates
<PAGE>
TOP TEN HOLDINGS: (% of total net assets)
- --------------------------------------------------
1. Worldcom Inc. 3.1%
- --------------------------------------------------
2. Cisco Systems Inc. 3.1%
- --------------------------------------------------
3. Chase Manhattan Corp. 3.0%
- --------------------------------------------------
4. Citicorp 2.9%
- --------------------------------------------------
5. Pfizer Inc. 2.9%
- --------------------------------------------------
6. General Electric Co. 2.5%
- --------------------------------------------------
7. Microsoft Corp. 2.4%
- --------------------------------------------------
8. Morgan Stanley Dean Witter & Co. 2.2%
- --------------------------------------------------
9. Washington Mutual Inc. 2.2%
- --------------------------------------------------
10. Monsanto Co. 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.
CUMULATIVE TOTAL RETURN:
PAST PAST PAST SINCE
6 MONTHS 1 YEAR 5 YEARS INCEPTION*
PREFERRED
GROWTH FUND 20.52% 33.44% 165.61% 230.03%
S&P 500 Index 17.74% 30.20% 182.12% 220.46%
* JULY 1, 1992
AVERAGE ANNUAL TOTAL RETURN:
PAST PAST SINCE
1 YEAR 5 YEARS INCEPTION*
PREFERRED GROWTH FUND 33.44% 21.58% 22.01%
S&P 500 Index 30.20% 23.05% 21.42%
* JULY 1, 1992
CHART:
A $10,000 INVESTMENT SINCE INCEPTION:
PREFERRED GROWTH FUND S&P 500 INDEX
7/1/92 10000 10000
12/31/92 11915 10837
6/30/93 12425 11359
12/31/93 13828 11921
6/30/94 12468 11514
12/31/94 13676 12074
6/30/95 16733 14510
12/31/95 17554 16599
6/30/96 19237 18291
12/31/96 20868 20429
6/30/97 27732 24612
12/31/97 27385 27218
6/30/98 33003 32046
<PAGE>
INVESTMENT REVIEW
PREFERRED VALUE FUND
INVESTMENT OBJECTIVE:
The Preferred Value Fund seeks capital appreciation and current income. The Fund
invests primarily in equity securities believed to be under-valued 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 fiscal year ended June 30, 1998, the Preferred Value Fund returned
26.5%, compared to the 30.2% advance recorded by the S&P 500 Index. Since its
inception, the Fund has delivered an average annual return of 20.6%, compared to
21.4% for its benchmark.
Although some of the stocks in the Fund were affected by Asia's financial
problems this year, the crisis has also provided attractive opportunities to
buy stocks inexpensively. These purchases included large, well-managed U.S.
companies whose stocks, in our opinion, were unduly punished in the crisis's
aftermath.
We employ a bottom-up approach, looking at individual companies one by one
regardless of industry affiliation. Since its inception, the Fund has had
significant holdings in the financial industry. Our investments in this sector
of the market have included a diverse group of companies which, relative to the
industry, have performed very strongly.
Several holdings have especially benefited Fund performance. Ace Ltd. and Exel
Ltd., both specialty lines insurers, are fast growing and have the lowest cost
structures in their industries. Carnival (2.5% of net assets) is the largest
and most efficient operator in the cruise industry, and it reinvests profits in
the business. Countrywide Credit Industries (3.2%), which originates and
services residential mortgages, has the opportunity to grow beyond its 5%
market share due to its own efficiencies and fragmentation in its industry.
AMR Corp., parent of American Airlines, is efficiently managed, with a modern
fleet and an extensive route structure.
Two of the largest holdings in the Fund, Citicorp and Travelers, have agreed to
a merger. Both are powerful franchises, and their merger may create cost
synergies.
We continue to be optimistic about the prospects for the U.S. economy. In our
view, the benign, low-inflation economic environment that has driven the stock
market's phenomenal performance of the past three and one-half years
remains intact.
To some extent the Asian crisis has been positive for the U.S. stock market.
Investors seeking a safe haven have directed money to the U.S., which has
resulted in a strong dollar and a decline in U.S. long-term interest rates.
However, there are risks that as countries under pressure, such as Japan and
China, attempt to resolve their economic problems, they may create additional
pressures on other economies in the region. Ultimately, the U.S. could also
suffer from such strains on the international financial system.
- Oppenheimer Capital
TOP TEN HOLDINGS: (% of total net assets)
- ----------------------------------------------------
1. Travelers Group Inc. 4.9%
- ----------------------------------------------------
2. Exel Ltd. 4.5%
- ----------------------------------------------------
3. Federal Home Loan Mortgage Corp. 4.2%
- ----------------------------------------------------
4. AMR Corp. 3.8%
- ----------------------------------------------------
5. Monsanto Co. 3.8%
- ----------------------------------------------------
6. Citicorp 3.8%
- ----------------------------------------------------
7. Ace Ltd. 3.7%
- ----------------------------------------------------
8. General Electric Co. 3.6%
- ----------------------------------------------------
9. Wells Fargo & Co. 3.6%
- ----------------------------------------------------
10. Morgan Stanley Dean Witter & Co. 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.
CUMULATIVE TOTAL RETURN:
PAST PAST PAST SINCE
6 MONTHS 1 YEAR 5 YEARS INCEPTION*
PREFERRED VALUE FUND 15.93% 26.51% 164.16% 207.40%
S&P 500 Index 17.74% 30.20% 182.12% 220.46%
* JULY 1, 1992
AVERAGE ANNUAL TOTAL RETURN:
PAST PAST SINCE
1 YEAR 5 YEARS INCEPTION*
PREFERRED VALUE FUND 26.51% 21.44% 20.57%
S&P 500 Index 30.20% 23.05% 21.42%
* JULY 1, 1992
CHART:
A $10,000 INVESTMENT SINCE INCEPTION:
PREFERRED VALUE FUND S&P 500 INDEX
7/1/92 10000 10000
12/31/92 10980 10837
6/30/93 11673 11359
12/31/93 11945 11921
6/30/94 11707 11514
12/31/94 12001 12074
6/30/95 14718 14510
12/31/95 16258 16599
6/30/96 18322 18291
12/31/96 20712 20429
6/30/97 24612 24298
12/31/97 27218 26515
6/30/98 30740 32046
<PAGE>
INVESTMENT REVIEW
PREFERRED INTERNATIONAL FUND
INVESTMENT OBJECTIVE:
The Preferred International Fund seeks long-term capital appreciation by
investing its assets primarily in equity securities traded principally on
markets outside the United States.
PORTFOLIO MANAGER PROFILE:
Portfolio Manager: Peter F. Spano, CFA
Title: President, PXS Corp., General Partner, Mercator Asset Management, L.P.
Last Five Years' Experience: Portfolio Manager at Mercator. Pete has managed
the Preferred International Fund since its inception on July 1, 1992.
Education: BBA - St. John's University; MBA - Baruch College (City University
of New York); Chartered Financial Analyst
DISCUSSION & ANALYSIS:
The Preferred International Fund advanced 7.2% for the fiscal year, somewhat
better than the EAFE Index, which rose 6.4%. Since inception of the Fund, it has
returned 11.7% on an average annual basis versus 12.0% for its benchmark.
It was not a good year for foreign stocks. Investors experienced a high degree
of volatility in stock prices. Our heavy weighting in European stocks and
underweighting in Asian stocks helped relative performance.
The major event for the year was the Asian crisis, which began in July 1997 with
the devaluation of Thailand's currency. It was swiftly followed by a series of
devaluations in other Southeast Asian currencies. Shortly thereafter, stock
markets around the world suffered serious corrections.
Strong recoveries followed in many developed markets of the world, and some
went on to new highs. Markets in Asia had sharp but brief rallies followed by
new lows. Emerging markets such as Latin America and Russia continue to suffer
as they react to the negatives from Asia. Economic well-being continues for
Europe, with corporate profits strong and consumer spending accelerating.
However, investors should be prepared for more short-term volatility.
We took profits from stocks in Spain, Italy, Canada and Norway whose share
prices had become richly valued. Due to deteriorating fundamentals, we
eliminated four companies in South Korea. Positions in France, Australia and the
United Kingdom were increased as we identified stocks that were attractively
priced. We are monitoring companies in Japan and the rest of Asia for improving
earnings visibility, but with little success. The short-term outlook for Asian
stock prices is poor, but long-term opportunities will appear at a point of
maximum investor pessimism. We are not identifying any great bargains in Latin
America. Mercator expects that our heavy weighting in Europe and significant
underweighting in Asia will continue over the near term.
It is our belief that stock prices will continue to be very volatile;
consequently, investors need to maintain a long-term perspective. Mercator
believes that the stocks in the portfolio will perform well over the long term
given their attractive valuations and earnings outlook.
- Mercator Asset Management, L.P.
- ----------------------------------------------------
TOP TEN HOLDINGS: (% of total net assets)
- ----------------------------------------------------
1. British Telecom United Kingdom 3.3%
- ----------------------------------------------------
2. Peugeot SA France 3.1%
- ----------------------------------------------------
3. ING Groep NV Netherlands 3.0%
- ----------------------------------------------------
4. Banco Bilbao Vizcaya Spain 2.9%
- ----------------------------------------------------
5. Bouygues France 2.8%
- ----------------------------------------------------
6. Akzo Nobel NV Netherlands 2.7%
- ----------------------------------------------------
7. UBS AG Switzerland 2.7%
- ----------------------------------------------------
8. Banca Pop di Brescia Italy 2.6%
- ----------------------------------------------------
9. Swatch Group Switzerland 2.6%
- ----------------------------------------------------
10. Electrolux AB Sweden 2.5%
- ----------------------------------------------------
GEOGRAPHIC ALLOCATION: (% of total net assets)
- ----------------------------------------------------
United Kingdom 16.0% Australia 6.7%
- ----------------------------------------------------
Switzerland 11.1% Japan 5.0%
- ----------------------------------------------------
Netherlands 10.5% Canada 3.5%
- ----------------------------------------------------
France 10.1% Argentina 2.5%
- ----------------------------------------------------
Sweden 7.6% New Zealand 2.1%
- ----------------------------------------------------
Italy 7.0% South Korea 1.2%
- ----------------------------------------------------
Spain 6.8% Norway 1.1%
- ----------------------------------------------------
PERFORMANCE:
The following information illustrates the historical performance of the
Preferred International Fund compared with the EUROPE, AUSTRALASIA & FAR EAST
(EAFE) INDEX. The EAFE Index contains over 1000 stocks from 20 different
countries with Japan (approx. 22%), 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.
CUMULATIVE TOTAL RETURN:
PAST PAST PAST SINCE
6 MONTHS 1 YEAR 5 YEARS INCEPTION*
PREFERRED
INTERNATIONAL FUND
14.75% 7.18% 101.75% 94.15%
EAFE Index 16.08% 6.38% 63.56% 97.42%
* JULY 1, 1992
AVERAGE ANNUAL TOTAL RETURN:
PAST PAST SINCE
1 YEAR 5 YEARS INCEPTION*
PREFERRED
INTERNATIONAL FUND 7.18% 15.07% 11.69%
EAFE Index 6.38% 10.34% 12.00%
* JULY 1, 1992
CHART:
A $10,000 INVESTMENT SINCE INCEPTION:
PREFERRED INTERNATIONAL FUND EAFE INDEX
7/1/92 10000 10000
12/31/92 8419 9779
6/30/93 9623 12072
12/31/93 11915 12999
6/30/94 12189 14159
12/31/94 12305 14047
6/30/95 13004 14433
12/31/95 13526 15668
6/30/96 14787 16400
12/31/96 15845 16664
6/30/97 18558 18114
12/31/97 17007 16918
6/30/98 19415 19742
<PAGE>
INVESTMENT REVIEW
PREFERRED SMALL CAP FUND
INVESTMENT OBJECTIVE:
The Preferred Small Cap Fund seeks long-term capital appreciation through
investments in companies with small equity capitalizations.
PORTFOLIO MANAGER PROFILE:
Portfolio Manager: Todd M. Sheridan, CFA
Title: Portfolio Manager, Caterpillar Investment Management Ltd. (CIML)
Last Five Years' Experience: Portfolio Manager at CIML. Todd has managed the
Preferred Small Cap Fund since its inception on November 1, 1995.
Education: B.S. - University of Illinois; Chartered Financial Analyst
DISCUSSION & ANALYSIS:
The Preferred Small Cap Fund returned 23.4% for the fiscal year, compared to a
16.5% gain for the Russell 2000 benchmark. Since the inception of the Fund on
November 1, 1995, the Fund has provided an annualized return of 24.6% against a
gain of 19.3% for its benchmark.
The consistent and disciplined way in which we execute our investment strategy
helps us outperform our benchmark. In selecting securities for the Fund, we
employ a process that combines a strong valuation component with the desire to
pursue companies with growing earnings. Therefore our holdings generally have
approximately half of the price/earnings ratio of the Russell 2000 while still
providing nearly the same expected earnings growth rate.
The Fund's holdings in the technology-related sector led performance during the
first months of the fiscal year. Holdings in this sector, which represented more
than 15% of the portfolio, advanced better than 45% on average. The rapid
increase in price of many of these stocks forced their relative valuations
lower. As a consequence, many of the holdings were sold or reduced.
Stocks of financial service companies performed well throughout the year. For
the 12-month period, these stocks grew more than 50% on average. At more than
16% of the portfolio, financial service stocks represent the biggest sector
allocation in the portfolio. These holdings have benefited greatly from the
decline in long-term interest rates. Holdings of capital goods and
housing-related stocks also benefited from the low interest rate environment,
adding further to portfolio performance.
We remarked in our last report that small cap stocks generally offered greater
expected growth of earnings than large caps and that small caps continued to
trade at attractive valuations relative to large caps, compared to their
historical levels. Still, large caps continue to outperform small cap stocks. It
appears this market is driven more by large flows of capital into U.S. markets
than by earnings or fundamentals. So long as this remains the case, large cap
stocks may continue to be favored.
We continue to believe, however, that given the current relative earnings
prospects and valuations, small cap stocks have the potential to outperform
large cap stocks. Moreover, investors should be careful about spending too much
time "on the sidelines," as much of the performance of small cap stocks relative
to large cap stocks has historically been attributable to relatively brief
periods.
- Caterpillar Investment Management Ltd.
TOP TEN HOLDINGS: (% of total net assets)
- -----------------------------------------------
1. Bowne & Co. Inc. 2.5%
- -----------------------------------------------
2. First American Financial Corp. 2.1%
- -----------------------------------------------
3. Fingerhut Cos. Inc. 1.9%
- -----------------------------------------------
4. Centex Corp. 1.7%
- -----------------------------------------------
5. Arvin Industries Inc. 1.6%
- -----------------------------------------------
6. Seacor Smit Inc. 1.6%
- -----------------------------------------------
7. Stewart Information Services Corp. 1.6%
- -----------------------------------------------
8. Ames Department Stores Inc. 1.5%
- -----------------------------------------------
9. Medusa Corp. 1.4%
- -----------------------------------------------
10. Lennar Corp. 1.4%
- -----------------------------------------------
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.
CUMULATIVE TOTAL RETURN:
PAST PAST SINCE
6 MONTHS 1 YEAR INCEPTION*
PREFERRED SMALL CAP FUND 7.89% 23.45% 79.42%+
Russell 2000 Index 4.93% 16.50% 59.97%
* 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.
AVERAGE ANNUAL TOTAL RETURN:
PAST SINCE
1 YEAR INCEPTION*
PREFERRED SMALL CAP FUND 23.45% 24.55%+
Russell 2000 Index 16.50% 19.27%
* 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.
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
6/30/98 17942 15997
<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 21.8% for the fiscal year ended
June 30, 1998. 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 25.9%. Since inception, the Fund has had an average
annual return of 15.5% as compared to 17.4% for its benchmark.
During the fiscal year, economic reports showed continued growth and low
inflation in the U.S. but with little evidence of an overheating economy. The
Federal Reserve chose to leave interest rates unchanged.
While the meltdown of Asian equity and currency markets was felt in U.S.
financial markets, economic data in the first half of the year indicated that
the U.S. economy could continue to grow at a sustainable pace. Domestic demand
remained strong, but job growth moderated and news on the inflation front
remained positive. Towards the end of the fiscal year, the crisis in Asia
dampened demand for U.S. exports and helped to cool the economy.
During the fiscal year, the Fund seized opportunities presented by fast moving
markets by recommending several asset allocation shifts. The sharp fall in stock
prices in October coupled with a rally in the bond market widened the spread
between the expected performance of stocks and bonds. Meanwhile, yields on
short-term cash instruments rose substantially, decreasing the spread between
the expected returns on bonds and cash. This prompted a move from bonds into
cash. Therefore, as 1997 drew to a close, the Fund's allocation to stocks and
cash strengthened, while bond holdings dropped.
During the first quarter of 1998, a sell-off in the bond market drove up the
expected return on bonds while cash yields held relatively steady. The continued
rise in
stock prices reduced the expected return on stocks. These events lowered the
spread between the expected returns on stocks and on bonds. As a result, the
Fund increased its bond allocation. During the second quarter of 1998, a bond
market rally reduced bond yields. As the spread between the expected returns on
bonds and cash decreased, a move into cash resulted.
- Mellon Capital Management
- PanAgora Asset Management
PORTFOLIO ALLOCATION*: (% of portfolio)
- ---------------------------------------------------
6/30/98 12/31/97 6/30/97
- ---------------------------------------------------
Stocks 41% 42% 42%
- ---------------------------------------------------
Bonds 22% 29% 32%
- ---------------------------------------------------
Short-Term 37% 29% 26%
(maturities less than one year)
- ---------------------------------------------------
* Allocations do not consider the effect of
futures contracts. See Note 4 of the notes
to the financial statements for open
futures contracts at June 30, 1998.
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.
CUMULATIVE TOTAL RETURN:
PAST PAST PAST SINCE
6 MONTHS 1 YEAR 5 YEARS INCEPTION*
PREFERRED ASSET
ALLOCATION FUND 11.22% 21.84% 109.42% 137.84%
65/30/5 Benchmark 13.50% 25.87% 127.09% 161.67%
* JULY 1, 1992
AVERAGE ANNUAL TOTAL RETURN:
PAST PAST SINCE
1 YEAR 5 YEARS INCEPTION*
PREFERRED ASSET
ALLOCATION FUND 21.84% 15.93% 15.53%
65/30/5 Benchmark 25.87% 17.83% 17.39%
* JULY 1, 1992
CHART:
A $10,000 INVESTMENT SINCE INCEPTION:
PREFERRED ASSET ALLOCATION FUND 65/30/5 BENCHMARK
7/1/92 10000 10000
12/31/92 10731 10781
6/30/93 11357 11523
12/31/93 11869 12057
6/30/94 11212 11483
12/31/94 11563 11848
6/30/95 13643 14057
12/31/95 15354 15849
6/30/96 16132 16429
12/31/96 17685 18021
6/30/97 19521 20789
12/31/97 21384 23054
6/31/98 23784 26167
<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 9.3% for the fiscal year ended June 30,
1998, compared to a 10.6% return for the Salomon Brothers Broad Investment
Grade (BIG) Index benchmark. Since inception, the Fund's average annual return
is 7.5% versus 7.7% for the benchmark.
During the Fund's fiscal year, the Federal Reserve remained on hold due to the
combination of firm economic growth and tame inflation. The economic
instability in Asia impacted fixed income markets worldwide throughout most of
the time period, resulting in a "flight to quality" with many investors and a
sharp rally in U.S. Treasuries. Near the end of the fiscal year, the financial
crisis in Asia spread to Russia. Many market participants came to the conclusion
that the impact of the economic difficulties in Asia and Russia will be both
deeper and more persistent than they anticipated just a few months ago. In
addition, we saw a decline in interest rates during the fiscal year, which
resulted in an increase in mortgage refinancing.
As interest rates moved lower during the fiscal year, we took advantage of the
widening spread in returns between mortgages and U.S. Treasuries. Our decision
to overweight mortgages, focusing on prepayment-protected mortgages, benefited
Fund performance. In addition, we sold several positions in investment-grade
corporates and asset-backed securities and reallocated to the same sectors at
more attractive levels.
Emerging markets and high-yield securities added value in the first quarter of
1998. However, we reduced these holdings because they were affected by the
financial crisis in Asia and Russia during the next quarter. Our effective
duration management enhanced performance throughout the fiscal year.
We expect to see continued volatility in the spread between fixed income
securities and U.S. Treasuries in coming months given the increasingly unsettled
global financial and political situation. We believe interest rate levels will
likely remain within their current trading range, though they could dip below
these levels if there is unexpected bad news from outside the U.S. We expect the
Federal Reserve to remain on hold until either relative calm returns to the
global financial and currency markets or there are significant signs of
increased inflation in the U.S.
- J. P. Morgan Investment Management
PORTFOLIO STATISTICS: (as of June 30, 1998)
- --------------------------------------------------
Portfolio Holdings 103
- --------------------------------------------------
Average Maturity 11.1 years
- --------------------------------------------------
Average Duration 5.4 years
- --------------------------------------------------
Average Quality AA-
- --------------------------------------------------
Allocation (% of portfolio*):
- --------------------------------------------------
Treasury/Agency 15%
- --------------------------------------------------
Corporates 27%
- --------------------------------------------------
Mortgages/Asset Backed 46%
- --------------------------------------------------
Foreign Corporates & Govt. 10%
- --------------------------------------------------
Short-Term 2%
(maturities less than one year)
- --------------------------------------------------
*Allocations do not consider the effect of futures contracts. See Note 4 of the
notes to the financial statements for open futures contracts at June 30,1998.
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.
CUMULATIVE TOTAL RETURN:
PAST PAST PAST SINCE
6 MONTHS 1 YEAR 5 YEARS INCEPTION*
PREFERRED FIXED
INCOME FUND 4.05% 9.32% 36.92% 54.16%
Salomon Bros.
BIG Index 3.96% 10.58% 39.63% 56.34%
* JULY 1, 1992
AVERAGE ANNUAL TOTAL RETURN:
PAST PAST SINCE
1 YEAR 5 YEARS INCEPTION*
PREFERRED FIXED
INCOME FUND 9.32% 6.49% 7.48%
Salomon Bros. BIG Index 10.58% 6.90% 7.73%
* JULY 1, 1992
CHART:
A $10,000 INVESTMENT SINCE INCEPTION:
PREFERRED FIXED INCOME FUND SALOMON BROS. BIG INDEX
7/1/92 10000 10000
12/31/92 10471 10461
6/30/93 11259 11198
12/31/93 11549 11496
6/30/94 11207 11065
12/31/94 11273 11169
6/30/95 12494 12454
12/31/95 13264 13238
6/30/96 13009 13071
12/31/96 13660 13717
6/30/97 14101 14138
12/31/97 14814 15038
6/30/98 15416 15634
<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: 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 Short-Term Government Securities Fund since June 1, 1998.
Education: B.S. - University of Illinois; Chartered Financial Analyst
DISCUSSION & ANALYSIS:
For the fiscal year ended June 30, 1998, the Preferred Short-Term Government
Securities Fund had a total return of 5.7%, compared with a 6.8% return for the
Merrill Lynch 1-3 Year Treasury Index. Since inception, the Fund's average
annual total return is 4.9% versus 5.8% for its 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. Caterpillar Investment Management Ltd.
reassumed primary responsibility on April 1,1998.
The U.S. economy showed firm growth with low inflation throughout the
fiscal year. However, the Asian crisis increased the volatility of financial
markets worldwide. U.S. fixed income securities, especially Treasuries,
attracted investors searching out relatively safe alternatives to the stock
markets.
Given the constructive inflation outlook and the ongoing impact of the
Asian financial situation, we continued to hold a modestly long duration
position through the first half of 1998. As the yield curve flattened and
actually became inverted, we reduced the duration position to a slightly shorter
exposure.
We believe that economic growth will moderate somewhat as 1998
progresses as a result of lower exports and tighter monetary conditions. We
believe inflation will remain low in spite of continued strong labor markets due
to the strength of the dollar and lower industrial commodity prices. Profit
margins may come under increasing pressure as the Federal Reserve Board will
likely remain on hold until the financial situation in Asia stabilizes. We
believe the U.S. bond market will continue to be a safe haven for international
capital seeking stability, and interest rates will likely remain below where
they were for most of 1997.
- Caterpillar Investment Management Ltd.
- ---------------------------------------------------
PORTFOLIO STATISTICS: (as of June 30, 1998)
- ---------------------------------------------------
Portfolio Holdings 24
- ---------------------------------------------------
Average Maturity 1.5 years
- ---------------------------------------------------
Average Duration 1.4 years
- ---------------------------------------------------
PERFORMANCE:
The following information illustrates the historical performance of the
Preferred Short-Term Government Securities Fund compared with the MERRILL LYNCH
1-3 YEAR TREASURY INDEX. The Index comprises primarily U.S. Treasury Notes and
Bonds with remaining maturities of one to three years.
Note: Past performance is not necessarily indicative of future results.
Investment return and principal value will fluctuate, so that, when redeemed,
an investor's shares may be worth more or less than their original cost. The
Preferred Short-Term Government Securities Fund's inception date was July 1,
1992. This report will provide ten-year performance history in the future as
the Fund matures.
An index is a fictitious unmanaged portfolio and does not trade or incur any
expenses. An investment fund must outperform its benchmark by the amount of its
management fees and other expenses for its reported performance to match its
benchmark.
CUMULATIVE TOTAL RETURN:
PAST PAST PAST SINCE
6 MONTHS 1 YEAR 5 YEARS INCEPTION*
PREFERRED SHORT-TERM
GOVERNMENT
SECURITIES FUND 2.15% 5.72% 25.35% 33.27%
ML 1-3 Yr. Treasury Index 3.02% 6.80% 31.38% 40.03%
* JULY 1, 1992
AVERAGE ANNUAL TOTAL RETURN:
PAST PAST SINCE
1 YEAR 5 YEARS INCEPTION*
PREFERRED SHORT-TERM
GOVERNMENT
SECURITIES FUND 5.72% 4.62% 4.90%
ML 1-3 Yr. Treasury Index 6.80% 5.61% 5.77%
* JULY 1, 1992
CHART:
A $10,000 INVESTMENT SINCE INCEPTION:
PREFERRED SHORT-TERM GOV'T. SEC. FUND ML 1-3 YR. TREASURY INDEX
7/1/92 10000 10000
12/31/92 10261 10317
6/30/93 10632 10658
12/31/93 10833 10875
6/30/94 10723 10830
12/31/94 10757 10938
6/30/95 11336 11666
12/31/95 11735 12140
6/30/96 11914 12303
12/31/96 12287 12744
6/30/97 12606 13111
12/31/97 13046 13593
6/30/98 13327 14003
<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 (Skip) R. 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 5.4% for the fiscal year ended June 30,
1998, compared with a return of 5.2% for IBC's Money Fund Report Average/All
Taxable. Since inception, the Fund's average annual return has been 4.4%
compared to 4.3% for the benchmark.
During the fiscal year, a favorable combination of firm economic growth and tame
inflation in addition to a sell-off in the short-term financial markets allowed
interest rates to ease back to previous levels.
The volatile Asian markets resulted in a "flight to quality" for many investors.
As a result, U.S. Treasury yields fell by 22, 18 and 10 basis points for
3-month, 6-month and 1-year maturities, respectively, in the first quarter of
1998. The fact that this strong growth occurred with relatively no inflation
and robust consumer spending has given rise to speculation among investors
that the Federal Reserve might tighten if the economy does not decelerate.
During the fiscal year, performance was enhanced by short agency discount notes
as well as one-year securities. In addition, performance was positively
affected by our decision to increase the Fund's holdings of floating-rate notes
and asset-backed commercial paper. The effective management of duration and
liquidity also added value to the Fund. The Fund was managed within a 35- to
58-day maturity range.
We forecast that the U.S. economy will slow down to 2% or less growth later this
year, which would be in line with the Federal Reserve's target. However, this
probability could be affected if consumer spending remains strong and late cycle
price pressures accelerate. The Fund will remain near the top end of its
maturity range in view of a slowing economy and a favorable inflation outlook,
which should result in declining interest rates.
- J. P. Morgan Investment Management
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 AVERAGE/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.
CUMULATIVE TOTAL RETURN:
PAST PAST PAST SINCE
6 MONTHS 1 YEAR 5 YEARS INCEPTION*
PREFERRED MONEY
MARKET FUND 2.75% 5.40% 26.43%+ 29.86%+
IBC's Money Fund
Report Avg./All Taxable 2.52% 5.16% 25.39% 28.96%
* 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.
AVERAGE ANNUAL TOTAL RETURN:
PAST PAST SINCE
1 YEAR 5 YEARS INCEPTION*
PREFERRED MONEY
MARKET FUND 5.40% 4.80%+ 4.45%+
IBC's Money Fund
Report Avg./All Taxable 5.16% 4.63% 4.33%
* 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.
CHART:
A $10,000 INVESTMENT SINCE INCEPTION:
PREFERRED MONEY MARKET FUND IBC'S MONEY FUND REPORT AVG/ALL TAXABLE
7/1/92 10000 10000
12/31/92 10140 10148
6/30/93 10271 10284
12/31/93 10406 10422
6/30/94 10569 10583
12/31/94 10814 10813
6/30/95 11126 11113
12/31/95 11438 11407
6/30/96 11719 11690
12/31/96 12018 11974
6/30/97 12319 12259
12/31/97 12638 12579
6/30/97 12986 12896
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS & LIABILITIES
JUNE 30, 1998
<CAPTION>
GROWTH VALUE INTERNATIONAL
<S> <C> <C> <C>
ASSETS
Investments at value $489,193,541 $386,273,900 $259,096,034
Short-term obligations at amortized cost 9,706,000 29,219,393 26,325,000
Cash 920 213
Foreign currency at value 214,883
Receivable for investments sold 6,636,154 456,399
Receivable for fund shares sold 5,242,267 1,482,760 720,947
Receivable for variation margin
Dividends and interest receivable 212,658 126,953 1,075,020
Receivable for open forward foreign currency contracts
Prepaid expenses and other assets 254 580 38
------------ ------------ ------------
Total assets 510,991,794 417,559,985 287,432,135
------------ ------------ ------------
LIABILITIES
Payable for investments purchased 2,005,899
Payable for fund shares redeemed 1,764,650 3,623,839 3,049,603
Payable for distributions
Payable for:
Management fee 299,512 250,290 223,140
Audit fee 22,355 18,768 22,640
Custodian fees 10,499 7,287 39,552
Legal fees 9,802 8,378 6,178
Trustees' fees 4,383 3,315 3,258
Transfer agent fees 11,093 9,467 8,312
Other fees 33,110 28,798 23,349
------------ ------------ ------------
Total liabilities 4,161,303 3,950,142 3,376,032
------------ ------------ ------------
Net assets $506,830,491 $413,609,843 $284,056,103
============ ============ ============
Shares of beneficial interest outstanding 23,064,696 15,613,985 17,554,859
============ ============ ============
Offering and redemption price per share $21.97 $26.49 $16.18
============ ============ ============
COMPOSITION OF NET ASSETS:
Paid-in capital $265,918,632 $185,250,771 $211,437,325
Undistributed net investment income 2,410,338 2,672,340
Accumulated net realized gains (losses) on
investments, futures and foreign currency 101,530,358 11,015,774 8,069,437
Net unrealized appreciation (depreciation) on:
Investments 139,381,501 214,932,960 61,873,862
Futures
Forwards
Foreign denominated other assets,
liabilities & currency 3,139
------------
Net assets $506,830,491 $413,609,843 $284,056,103
============ ============ ============
Investments and short-term obligations at cost $359,518,040 $200,560,333 $223,547,172
Foreign currency holdings at cost $ 212,106
See notes to financial statements
<PAGE>
<CAPTION>
ASSET FIXED
SMALL CAP ALLOCATION INCOME
<S> <C> <C> <C>
ASSETS
Investments at value $134,284,982 $106,811,642 $140,273,155
Short-term obligations at amortized cost 566,335 63,848,835 2,111,043
Cash 605 475
Foreign currency at value
Receivable for investments sold 1,189,332 7,555,817
Receivable for fund shares sold 483,486 634,788 256,010
Receivable for variation margin 100,469 38,405
Dividends and interest receivable 150,410 722,149 1,493,781
Receivable for open forward foreign currency contracts 144,573
Prepaid expenses and other assets 609
------------ ------------ ------------
Total assets 136,675,154 172,118,488 151,873,259
------------ ------------ ------------
LIABILITIES
Payable for investments purchased 248,011 88,405 486,248
Payable for fund shares redeemed 6,302 34,554 57,275
Payable for distributions 5,858 3,383
Payable for:
Management fee 83,136 96,820 64,621
Audit fee 16,712 21,171 17,598
Custodian fees 8,957 14,037 8,265
Legal fees 925 1,079 2,465
Trustees' fees 716 1,163
Transfer agent fees 1,974 7,294 6,151
Other fees 5,674 14,988 21,816
------------ ------------ ------------
Total liabilities 371,691 284,922 668,985
------------ ------------ ------------
Net assets $136,303,463 $171,833,566 $151,204,274
============ ============ ============
Shares of beneficial interest outstanding 8,744,214 10,980,440 14,505,934
============ ============ ============
Offering and redemption price per share $15.59 $15.65 $10.42
============ ============ ============
COMPOSITION OF NET ASSETS:
Paid-in capital $105,426,562 $129,895,653 $146,887,681
Undistributed net investment income 125,934 104,812
Accumulated net realized gains (losses) on
investments, futures and foreign currency 5,072,094 124,012 1,231,690
Net unrealized appreciation (depreciation) on:
Investments 25,678,873 41,204,006 2,628,464
Futures 609,895 209,456
Forwards 144,573
Foreign denominated other assets,
liabilities & currency (2,402)
------------ ------------ ------------
Net assets $136,303,463 $171,833,566 $151,204,274
============ ============ ============
Investments and short-term obligations at cost $109,172,444 $129,456,471 $139,755,734
Foreign currency holdings at cost
<PAGE>
<CAPTION>
SHORT-TERM MONEY
GOVERNMENT MARKET
<S> <C> <C>
ASSETS
Investments at value $52,391,081
Short-term obligations at amortized cost 7,430,411 $ 99,245,542
Cash 50 11,352
Foreign currency at value
Receivable for investments sold
Receivable for fund shares sold 80,470 4,642,284
Receivable for variation margin
Dividends and interest receivable 390,458 521,951
Receivable for open forward foreign currency contracts
Prepaid expenses and other assets
----------- ------------
Total assets 60,292,470 104,421,129
----------- ------------
LIABILITIES
Payable for investments purchased
Payable for fund shares redeemed 190,233
Payable for distributions 101 1,697
Payable for:
Management fee 17,236 25,217
Audit fee 19,270 15,655
Custodian fees 3,139 5,489
Legal fees 729 1,941
Trustees' fees 913 1,977
Transfer agent fees 2,611 5,492
Other fees 12,190 5,904
----------- ------------
Total liabilities 56,189 253,605
----------- ------------
Net assets $60,236,281 $104,167,524
=========== ============
Shares of beneficial interest outstanding 6,166,612 104,167,524
=========== ============
Offering and redemption price per share $9.77 $1.00
=========== ============
COMPOSITION OF NET ASSETS:
Paid-in capital $61,188,500 $104,167,524
Undistributed net investment income
Accumulated net realized gains (losses) on
investments, futures and foreign currency (931,363)
Net unrealized appreciation (depreciation) on:
Investments (20,856)
Futures
Forwards
Foreign denominated other assets,
liabilities & currency
----------- ------------
Net assets $60,236,281 $104,167,524
=========== ============
Investments and short-term obligations at cost $59,842,348 $ 99,245,542
Foreign currency holdings at cost
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF OPERATIONS
<CAPTION>
FISCAL YEAR ENDED
JUNE 30, 1998 GROWTH VALUE INTERNATIONAL
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends $ 3,288,897 $ 6,012,624 $ 7,920,067
Interest 396,590 1,239,009 829,653
------------ ------------ -----------
3,685,487 7,251,633 8,749,720
Less foreign taxes withheld at source (51,802) (924,952)
------------ ------------ -----------
Total income 3,633,685 7,251,633 7,824,768
------------ ------------ -----------
EXPENSES
Management fees 3,631,767 2,912,039 2,506,446
Audit fees 36,000 31,000 36,000
Custodian fees 128,000 91,000 501,000
Registration fees 25,000 19,000 24,000
Legal fees 41,000 33,000 22,000
Trustees' fees 16,000 12,000 9,000
Transfer agent fees 96,000 92,000 71,000
Insurance fees 14,000 10,000 8,000
Other expenses 56,304 55,159 27,999
------------ ------------ -----------
Total expenses 4,044,071 3,255,198 3,205,445
------------ ------------ -----------
Net investment income (loss) (410,386) 3,996,435 4,619,323
------------ ------------ -----------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS, FUTURES
AND FOREIGN CURRENCY
Net realized gain (loss) on:
Investments 143,439,200 39,129,419 15,916,879
Futures
Forward contracts
Foreign denominated other assets,
liabilities & currency (260,093)
Change in net unrealized appreciation
(depreciation) on:
Investments (4,397,983) 47,165,553 368,326
Futures
Forward contracts
Foreign denominated other assets,
liabilities & currency 11,111
------------ ------------ -----------
Net gain (loss) 139,041,217 86,294,972 16,036,223
------------ ------------ -----------
Net increase (decrease) in net assets
resulting from operations $138,630,831 $90,291,407 $20,655,546
============ =========== ===========
See notes to financial statements
<PAGE>
<CAPTION>
ASSET FIXED
SMALL CAP ALLOCATION INCOME
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends $ 1,453,684 $ 1,040,505
Interest 7,986 4,974,335 $10,188,234
------------ ----------- -----------
1,461,670 6,014,840 10,188,234
Less foreign taxes withheld at source (887) (5,492)
------------ ----------- -----------
Total income 1,460,783 6,009,348 10,188,234
------------ ----------- -----------
EXPENSES
Management fees 918,583 1,023,199 747,105
Audit fees 29,000 34,000 31,000
Custodian fees 93,000 175,000 107,000
Registration fees 16,000 14,000 26,000
Legal fees 9,000 10,000 12,000
Trustees' fees 2,000 4,000 4,000
Transfer agent fees 25,000 54,000 52,000
Insurance fees 2,000 4,000 4,000
Other expenses 12,001 30,549 20,000
------------ ----------- -----------
Total expenses 1,106,584 1,348,748 1,003,105
------------ ----------- -----------
Net investment income (loss) 354,199 4,660,600 9,185,129
------------ ----------- -----------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS, FUTURES
AND FOREIGN CURRENCY
Net realized gain (loss) on:
Investments 15,998,484 3,219,993 1,799,943
Futures 4,179,437 527,799
Forward contracts 48,557
Foreign denominated other assets,
liabilities & currency (51,081)
Change in net unrealized appreciation
(depreciation) on:
Investments 6,609,372 17,834,579 1,515,003
Futures (975,261) 212,014
Forward contracts 130,096
Foreign denominated other assets,
liabilities & currency (2,410)
------------ ----------- -----------
Net gain (loss) 22,607,856 24,258,748 4,179,921
------------ ----------- -----------
Net increase (decrease) in net assets
resulting from operations $22,962,055 $28,919,348 $13,365,050
=========== =========== ===========
<PAGE>
<CAPTION>
SHORT-TERM MONEY
GOVERNMENT MARKET
<S> <C> <C>
INVESTMENT INCOME
Dividends
Interest $3,578,681 $5,708,007
---------- ----------
3,578,681 5,708,007
Less foreign taxes withheld at source
---------- ----------
Total income 3,578,681 5,708,007
---------- ----------
EXPENSES
Management fees 199,653 298,521
Audit fees 32,000 26,000
Custodian fees 48,000 65,000
Registration fees 18,000 9,000
Legal fees 4,000 8,000
Trustees' fees 2,000 4,000
Transfer agent fees 25,000 49,000
Insurance fees 2,000 3,000
Other expenses 13,135 11,002
---------- ----------
Total expenses 343,788 473,523
---------- ----------
Net investment income (loss) 3,234,893 5,234,484
---------- ----------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS, FUTURES
AND FOREIGN CURRENCY
Net realized gain (loss) on:
Investments (88,914)
Futures
Forward contracts
Foreign denominated other assets,
liabilities & currency
Change in net unrealized appreciation (depreciation) on:
Investments 3,372
Futures
Forward contracts
Foreign denominated other assets,
liabilities & currency
---------- ----------
Net gain (loss) (85,542)
---------- ----------
Net increase (decrease) in net assets
resulting from operations $3,149,351 $5,234,484
========== ==========
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
GROWTH VALUE
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
6/30/98 6/30/97 6/30/98 6/30/97
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
Operations:
Net investment income (loss) ($ 410,386) ($ 524,651) $ 3,996,435 $ 3,300,434
Net realized gain (loss) on:
Investments 143,439,200 65,171,565 39,129,419 1,849,729
Futures
Forward contracts
Foreign denominated other assets,
liabilities & currency
Change in net unrealized appreciation (depreciation) on:
Investments (4,397,983) 36,641,616 47,165,553 83,847,734
Futures
Forward contracts
Foreign denominated other assets,
liabilities & currency
------------ ------------ ------------ ------------
Net increase (decrease) in net assets
resulting from operations 138,630,831 101,288,530 90,291,407 88,997,897
------------ ------------ ------------ ------------
Distributions to shareholders from:
Net investment income (3,250,000) (3,256,687)
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 271,215,829 111,186,933 209,248,942 128,368,956
Value of distributions reinvested 85,946,784 53,884,207 3,234,091 12,912,303
Cost of shares redeemed (357,672,592) (168,855,688) (259,587,965) (111,233,290)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets
from fund share transactions (509,979) (3,784,548) (47,104,932) 30,047,969
------------ ------------ ------------ ------------
Total increase (decrease) 51,808,614 43,333,731 39,936,475 106,091,675
NET ASSETS
Beginning of year 455,021,877 411,688,146 373,673,368 267,581,693
------------ ------------ ------------ ------------
End of year $506,830,491 $455,021,877 $413,609,843 $373,673,368
============ ============ ============ ============
Undistributed net investment income
at end of year $ 2,410,338 $ 1,663,903
============ ============ ============ ============
NUMBER OF FUND SHARES
Sold 12,681,087 5,970,365 8,741,834 6,922,277
Issued for distributions reinvested 4,842,045 3,096,761 144,310 708,598
Redeemed (16,742,714) (9,014,649) (10,951,287) (6,019,884)
------------ ------------ ------------ ------------
Net increase (decrease) in shares outstanding 780,418 52,477 2,065,143 1,610,991
Outstanding at:
Beginning of year 22,284,278 22,231,801 17,679,128 16,068,137
------------ ------------ ------------ ------------
End of year 23,064,696 22,284,278 15,613,985 17,679,128
============ ============ ============ ============
See notes to financial statements
<PAGE>
<CAPTION>
INTERNATIONAL SMALL CAP
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
6/30/98 6/30/97 6/30/98 6/30/97
INCREASE IN NET ASSETS
Operations:
Net investment income (loss) $ 4,619,323 $ 5,631,095 $ 354,199 $ 443,824
Net realized gain (loss) on:
Investments 15,916,879 4,868,619 15,998,484 2,582,310
Futures
Forward contracts
Foreign denominated other assets,
liabilities & currency (260,093) (378,463)
Change in net unrealized appreciation
(depreciation) on:
Investments 368,326 38,165,006 6,609,372 16,470,111
Futures
Forward contracts
Foreign denominated other assets,
liabilities & currency 11,111 (2,909)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets
resulting from operations 20,655,546 48,283,348 22,962,055 19,496,245
------------ ------------ ------------ ------------
Distributions to shareholders from:
Net investment income (3,800,000) (5,001,023) (630,000) (138,649)
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 235,904,014 132,359,314 78,592,510 34,854,928
Value of distributions reinvested 15,067,423 8,604,550 14,167,942 1,011,452
Cost of shares redeemed (237,729,186) (72,952,827) (50,116,715) (15,166,080)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets
from fund share transactions 13,242,251 68,011,037 42,643,737 20,700,300
------------ ------------ ------------ ------------
Total increase (decrease) 18,763,708 107,664,986 51,425,658 39,185,093
NET ASSETS
Beginning of year 265,292,395 157,627,409 84,877,805 45,692,712
------------ ------------ ------------ ------------
End of year $284,056,103 $265,292,395 $136,303,463 $84,877,805
============ ============ ============ ============
Undistributed net investment income
at end of year $ 2,672,340 $ 2,113,109 $ 125,934 $ 425,399
============ ============ ============ ============
NUMBER OF FUND SHARES
Sold 15,075,789 9,319,513 4,932,192 3,056,514
Issued for distributions reinvested 1,072,399 619,016 1,008,381 82,010
Redeemed (15,054,821) (4,965,744) (3,133,590) (1,263,669)
------------ ------------ ------------ ------------
Net increase (decrease) in shares outstanding 1,093,367 4,972,785 2,806,983 1,874,855
Outstanding at:
Beginning of year 16,461,492 11,488,707 5,937,231 4,062,376
------------ ------------ ------------ ------------
End of year 17,554,859 16,461,492 8,744,214 5,937,231
============ ============ ============ ============
<PAGE>
<CAPTION>
ASSET ALLOCATION
YEAR YEAR
ENDED ENDED
6/30/98 6/30/97
<S> <C> <C>
INCREASE IN NET ASSETS
Operations:
Net investment income (loss) $ 4,660,600 $ 3,641,881
Net realized gain (loss) on:
Investments 3,219,993 5,536,255
Futures 4,179,437 1,296,282
Forward contracts
Foreign denominated other assets,
liabilities & currency
Change in net unrealized appreciation (depreciation) on:
Investments 17,834,579 9,423,939
Futures (975,261) 1,297,749
Forward contracts
Foreign denominated other assets,
liabilities & currency
------------ -----------
Net increase (decrease) in net assets
resulting from operations 28,919,348 21,196,106
------------ -----------
Distributions to shareholders from:
Net investment income (4,660,600) (3,641,881)
Net realized gains (12,219,032) (4,019,339)
In excess of realized gains
------------ -----------
(16,879,632) (7,661,220)
------------ -----------
Fund share transactions:
Receipts for shares sold 32,320,319 29,650,410
Value of distributions reinvested 16,807,794 7,651,646
Cost of shares redeemed (18,219,019) (18,841,534)
------------ -----------
Net increase (decrease) in net assets
from fund share transactions 30,909,094 18,460,522
------------ -----------
Total increase (decrease) 42,948,810 31,995,408
NET ASSETS
Beginning of year 128,884,756 96,889,348
------------ -----------
End of year $171,833,566 $128,884,756
============ ===========
Undistributed net investment income
at end of year
============ ===========
NUMBER OF FUND SHARES
Sold 2,147,829 2,188,945
Issued for distributions reinvested 1,159,620 559,132
Redeemed (1,201,202) (1,394,051)
------------ -----------
Net increase (decrease) in shares outstanding 2,106,247 1,354,026
Outstanding at:
Beginning of year 8,874,193 7,520,167
------------ -----------
End of year 10,980,440 8,874,193
============ ===========
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
FIXED INCOME SHORT-TERM GOVERNMENT
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
6/30/98 6/30/97 6/30/98 6/30/97
INCREASE IN NET ASSETS
Operations:
Net investment income (loss) $ 9,185,129 $ 8,261,468 $ 3,234,893 $ 2,924,509
Net realized gain (loss) on:
Investments 1,799,943 205,772 (88,914) (121,577)
Futures 527,799 212,323
Forward contracts 48,557 493,121
Foreign denominated other assets,
liabilities & currency (51,081) 4,577
Change in net unrealized appreciation
(depreciation) on:
Investments 1,515,003 1,650,442 3,372 246,617
Futures 212,014 (16,233)
Forward contracts 130,096 14,477
Foreign denominated other assets,
liabilities & currency (2,410) 8
------------ ------------ ------------ ------------
Net increase (decrease) in net assets
resulting from operations 13,365,050 10,825,955 3,149,351 3,049,549
------------ ------------ ------------ ------------
Distributions to shareholders from:
Net investment income (9,184,514) (8,266,883) (3,234,893) (2,924,573)
Net realized gains (1,541,898) (463,056)
In excess of realized gains
------------ ------------ ------------ ------------
(10,726,412) (8,729,939) (3,234,893) (2,924,573)
------------ ------------ ------------ ------------
Fund share transactions:
Receipts for shares sold 24,788,038 36,814,668 6,856,161 5,554,290
Value of distributions reinvested 10,675,319 8,716,605 3,231,487 2,922,565
Cost of shares redeemed (27,056,203) (18,653,299) (4,573,234) (5,549,739)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets
from fund share transactions 8,407,154 26,877,974 5,514,414 2,927,116
------------ ------------ ------------ ------------
Total increase (decrease) 11,045,792 28,973,990 5,428,872 3,052,092
NET ASSETS
Beginning of year 140,158,482 111,184,492 54,807,409 51,755,317
------------ ------------ ------------ ------------
End of year $151,204,274 $140,158,482 $60,236,281 $54,807,409
============ ============ ============ ============
Undistributed net investment income
at end of year $ 104,812 $ 89,002
============ ============ ============ ============
NUMBER OF FUND SHARES
Sold 2,386,283 3,646,778 699,315 567,913
Issued for distributions reinvested 1,028,283 856,477 329,506 299,167
Redeemed (2,600,762) (1,832,384) (466,213) (567,113)
------------ ------------ ------------ ------------
Net increase (decrease) in shares outstanding 813,804 2,670,871 562,608 299,967
Outstanding at:
Beginning of year 13,692,130 11,021,259 5,604,004 5,304,037
------------ ------------ ------------ ------------
End of year 14,505,934 13,692,130 6,166,612 5,604,004
============ ============ ============ ============
See notes to financial statements
<PAGE>
<CAPTION>
MONEY MARKET
YEAR YEAR
ENDED ENDED
6/30/98 6/30/97
<S> <C> <C>
INCREASE IN NET ASSETS
Operations:
Net investment income (loss) $ 5,234,484 $ 5,032,595
Net realized gain (loss) on:
Investments
Futures
Forward contracts
Foreign denominated other assets,
liabilities & currency
Change in net unrealized appreciation
(depreciation) on:
Investments
Futures
Forward contracts
Foreign denominated other assets,
liabilities & currency
------------ ------------
Net increase (decrease) in net assets
resulting from operations 5,234,484 5,032,595
------------ ------------
Distributions to shareholders from:
Net investment income (5,234,484) (5,032,595)
Net realized gains
In excess of realized gains
------------ ------------
(5,234,484) (5,032,595)
------------ ------------
Fund share transactions:
Receipts for shares sold 431,368,703 193,156,175
Value of distributions reinvested 5,149,937 5,006,772
Cost of shares redeemed (442,033,262) (178,963,236)
------------ ------------
Net increase (decrease) in net assets
from fund share transactions (5,514,622) 19,199,711
------------ ------------
Total increase (decrease) (5,514,622) 19,199,711
NET ASSETS
Beginning of year 109,682,146 90,482,435
------------ ------------
End of year $104,167,524 $109,682,146
============ ============
Undistributed net investment income
at end of year
============ ============
NUMBER OF FUND SHARES
Sold 431,368,703 193,156,175
Issued for distributions reinvested 5,149,937 5,006,772
Redeemed (442,033,262) (178,963,236)
------------ ------------
Net increase (decrease) in shares outstanding (5,514,622) 19,199,711
Outstanding at:
Beginning of year 109,682,146 90,482,435
------------ ------------
End of year 104,167,524 109,682,146
============ ============
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
(SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT THE YEAR)
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Total
Net Asset Net Realized Net Income
Value, Investment and (Loss) from
Beginning Income Unrealized Investment
of Year (Loss) Gain (Loss) Operations
<S> <C> <C> <C> <C>
PREFERRED GROWTH FUND
Year Ended June 30,
1993 $10.00 $0.01 $2.42 $2.43
1994 12.42 0.01 0.03 0.04
1995 12.46 0.01 4.24 4.25
1996 16.63 0.00 2.44 2.44
1997 18.52 0.00 4.76 4.76
1998 20.42 0.00 5.93 5.93
<CAPTION>
PREFERRED VALUE FUND
<S> <C> <C> <C> <C>
Year Ended June 30,
1993 10.00 0.19 1.44 1.63
1994 11.52 0.19 (0.12) 0.07
1995 11.33 0.21 2.62 2.83
1996 13.82 0.20 3.13 3.33
1997 16.65 0.19 5.10 5.29
1998 21.14 0.28 5.29 5.57
<CAPTION>
PREFERRED INTERNATIONAL FUND
<S> <C> <C> <C> <C>
Year Ended June 30,
1993 10.00 0.15 (0.53) (0.38)
1994 9.59 0.08 2.47 2.55
1995 12.02 0.18 0.60 0.78
1996 12.24 0.19 1.47 1.66
1997 13.72 0.33 2.67 3.00
1998 16.12 0.26 0.76 1.02
<CAPTION>
PREFERRED SMALL CAP FUND
(Commenced investment operations on
November 1, 1995)
Period Ended June 30,
<S> <C> <C> <C> <C>
1996+ 10.00 0.05 1.22 1.27
1997 11.25 0.06 3.18 3.24
1998 $14.30 $0.03 $3.17 $3.20
1 Total return at net asset value assumes reinvestment of dividends and capital gains distributions.
* Total return for Small Cap would have been lower if a portion of the fees had not been waived/reimbursed by the advisor.
+ Eight-month period ended June 30, 1996.
++ Not annualized
+++ Annualized
See notes to financial statements
<PAGE>
<CAPTION>
DISTRIBUTIONS
Distributions
Distributions from Net Distributions Net Asset Total
from Net Realized in Excess Value, Return at
Investment Gains on of Realized Total End of Net Asset
Income Investments Gains Distributions Year Value(1)
<S> <C> <C> <C> <C> <C> <C>
PREFERRED GROWTH FUND
Year Ended June 30,
1993 $(0.01) $ - $ - $(0.01) $12.42 24.25%
1994 - - - - 12.46 0.34%
1995 (0.02) (0.06) - (0.08) 16.63 34.21%
1996 (0.01) (0.54) - (0.55) 18.52 14.96%
1997 - (2.86) - (2.86) 20.42 28.57%
1998 - (4.38) - (4.38) 21.97 33.44%
<CAPTION>
PREFERRED VALUE FUND
<S> <C> <C> <C> <C> <C> <C>
Year Ended June 30,
1993 (0.11) - - (0.11) 11.52 16.37%
1994 (0.16) (0.10) - (0.26) 11.33 0.60%
1995 (0.20) (0.14) - (0.34) 13.82 25.72%
1996 (0.21) (0.29) - (0.50) 16.65 24.49%
1997 (0.20) (0.58) (0.02) (0.80) 21.14 32.62%
1998 (0.22) - - (0.22) 26.49 26.51%
<CAPTION>
PREFERRED INTERNATIONAL FUND
<S> <C> <C> <C> <C> <C> <C>
Year Ended June 30,
1993 (0.03) - - (0.03) 9.59 (3.77%)
1994 (0.07) (0.05) - (0.12) 12.02 26.66%
1995 (0.13) (0.26) (0.17) (0.56) 12.24 6.70%
1996 (0.17) (0.01) - (0.18) 13.72 13.70%
1997 (0.35) (0.25) - (0.60) 16.12 22.50%
1998 (0.24) (0.72) - (0.96) 16.18 7.18%
<CAPTION>
PREFERRED SMALL CAP FUND
(Commenced investment operations on
November 1, 1995)
Period Ended June 30,
<S> <C> <C> <C> <C> <C> <C>
1996+ (0.02) - - (0.02) 11.25 12.67%*++
1997 (0.03) (0.16) - (0.19) 14.30 29.00%*
1998 $(0.08) $(1.83) $ - $(1.91) $15.59 23.45%
<PAGE>
<CAPTION>
RATIOS TO AVERAGE NET ASSETS
Operating
Net Expenses Net
Assets, Before Investment Portfolio
End of Operating Voluntary Income Turnover
Year Expenses Waiver (Loss) Rate
<S> <C> <C> <C> <C> <C>
PREFERRED GROWTH FUND
Year Ended June 30,
1993 $117,706,665 1.00% - 0.07% 58.12%
1994 171,467,064 0.91% - 0.13% 51.56%
1995 374,592,700 0.87% - 0.13% 55.32%
1996 411,688,146 0.86% - (0.16%) 75.24%
1997 455,021,877 0.84% - (0.13%) 58.31%
1998 506,830,491 0.84% - (0.08%) 70.35%
<CAPTION>
PREFERRED VALUE FUND
<S> <C> <C> <C> <C> <C>
Year Ended June 30,
1993 121,511,090 0.96% - 1.79% 17.77%
1994 121,088,130 0.93% - 1.64% 11.95%
1995 212,678,363 0.89% - 1.95% 29.02%
1996 267,581,693 0.85% - 1.23% 17.04%
1997 373,673,368 0.85% - 1.06% 7.23%
1998 413,609,843 0.84% - 1.03% 10.14%
<CAPTION>
PREFERRED INTERNATIONAL FUND
<S> <C> <C> <C> <C> <C>
Year Ended June 30,
1993 39,126,841 1.60% - 1.83% 16.21%
1994 94,933,414 1.38% - 1.37% 27.78%
1995 118,216,038 1.32% - 1.65% 29.47%
1996 157,627,409 1.31% - 1.64% 19.61%
1997 265,292,395 1.25% - 2.66% 13.16%
1998 284,056,103 1.22% - 1.76% 17.08%
<CAPTION>
PREFERRED SMALL CAP FUND
(Commenced investment operations on
November 1, 1995)
Period Ended June 30,
<S> <C> <C> <C> <C> <C>
1996+ 45,692,712 0.88%+++ 1.23%+++ 0.75%+++ 65.70%++
1997 84,877,805 0.88% 0.98% 0.66% 104.45%
1998 $136,303,463 0.90% - 0.29% 105.32%
1 Total return at net asset value assumes reinvestment of dividends and capital
gains distributions.
*Total return for Small Cap would have been lower if a portion of the fees had
not been waived/reimbursed by the advisor.
+ Eight-month period ended June 30, 1996.
++ Not annualized
+++ Annualized
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Total
Net Asset Net Realized Net Income
Value, Investment and (Loss) from
Beginning Income Unrealized Investment
of Year (Loss) Gain (Loss) Operations
<S> <C> <C> <C> <C>
PREFERRED ASSET
ALLOCATION FUND
Year Ended June 30,
1993 $10.00 $0.34 $0.99 $1.33
1994 10.90 0.30 (0.42) (0.12)
1995 10.27 0.38 1.79 2.17
1996 11.97 0.40 1.72 2.12
1997 12.88 0.44 2.17 2.61
1998 14.52 0.47 2.51 2.98
<CAPTION>
PREFERRED FIXED
INCOME FUND
Year Ended June 30,
<S> <C> <C> <C> <C>
1993 10.00 0.51 0.71 1.22
1994 10.60 0.47 (0.50) (0.03)
1995 9.80 0.58 0.50 1.08
1996 10.30 0.58 (0.16) 0.42
1997 10.09 0.64 0.19 0.83
1998 10.24 0.64 0.29 0.93
<CAPTION>
PREFERRED SHORT-TERM
GOVERNMENT
SECURITIES FUND
Year Ended June 30,
<S> <C> <C> <C> <C>
1993 10.00 0.39 0.23 0.62
1994 10.08 0.37 (0.29) 0.08
1995 9.77 0.51 0.03 0.54
1996 9.80 0.53 (0.04) 0.49
1997 9.76 0.53 0.02 0.55
1998** 9.78 0.56 (0.01) 0.55
<CAPTION>
PREFERRED MONEY
MARKET FUND
Year Ended June 30,
<S> <C> <C> <C> <C>
1993 1.00 0.03 - 0.03
1994 1.00 0.03 - 0.03
1995 1.00 0.05 - 0.05
1996 1.00 0.05 - 0.05
1997 1.00 0.05 - 0.05
1998 $1.00 $0.05 $ - $0.05
See notes to financial statements
<PAGE>
<CAPTION>
DISTRIBUTIONS
Distributions
Distributions from Net Distributions Net Asset Total
from Net Realized in Excess Value, Return at
Investment Gains on of Realized Total End of Net Asset
Income Investments Gains Distributions Year Value(1)
<S> <C> <C> <C> <C> <C> <C>
PREFERRED ASSET
ALLOCATION FUND
Year Ended June 30,
1993 $(0.34) $(0.09) $ - $(0.43) $10.90 13.57%
1994 (0.30) (0.21) - (0.51) 10.27 (1.28%)
1995 (0.38) (0.09) - (0.47) 11.97 21.70%
1996 (0.40) (0.81) - (1.21) 12.88 18.23%
1997 (0.44) (0.53) - (0.97) 14.52 21.01%
1998 (0.47) (1.38) - (1.85) 15.65 21.84%
<CAPTION>
PREFERRED FIXED
INCOME FUND
Year Ended June 30,
<S> <C> <C> <C> <C> <C> <C>
1993 (0.51) (0.11) - (0.62) 10.60 12.59%
1994 (0.47) (0.14) (0.16) (0.77) 9.80 (0.46%)
1995 (0.58) - - (0.58) 10.30 11.48%
1996 (0.58) (0.05) - (0.63) 10.09 4.12%
1997 (0.64) (0.04) - (0.68) 10.24 8.39%
1998 (0.64) (0.11) - (0.75) 10.42 9.32%
<CAPTION>
PREFERRED SHORT-TERM
GOVERNMENT
SECURITIES FUND
Year Ended June 30,
<S> <C> <C> <C> <C> <C> <C>
1993 (0.39) (0.15) - (0.54) 10.08 6.32%
1994 (0.37) - (0.02) (0.39) 9.77 0.86%
1995 (0.51) - - (0.51) 9.80 5.71%
1996 (0.53) - - (0.53) 9.76 5.10%
1997 (0.53) - - (0.53) 9.78 5.81%
1998** (0.56) - - (0.56) 9.77 5.72%
<CAPTION>
PREFERRED MONEY
MARKET FUND
Year Ended June 30,
<S> <C> <C> <C> <C> <C> <C>
1993 (0.03) - - (0.03) 1.00 2.71%*
1994 (0.03) - - (0.03) 1.00 2.91%*
1995 (0.05) - - (0.05) 1.00 5.27%*
1996 (0.05) - - (0.05) 1.00 5.32%*
1997 (0.05) - - (0.05) 1.00 5.14%
1998 $(0.05) $ - $ - $(0.05) $1.00 5.40%
<PAGE>
<CAPTION>
RATIOS TO AVERAGE NET ASSETS
Operating
Net Expenses Net
Assets, Before Investment Portfolio
End of Operating Voluntary Income Turnover
Year Expenses Waiver (Loss) Rate
<S> <C> <C> <C> <C> <C>
PREFERRED ASSET
ALLOCATION FUND
Year Ended June 30,
1993 $48,420,381 1.27% - 3.25% 34.10%
1994 58,961,139 1.25% - 2.76% 24.71%
1995 77,745,018 1.11% - 3.52% 18.27%
1996 96,889,348 1.04% - 3.21% 38.25%
1997 128,884,756 0.99% - 3.29% 27.73%
1998 171,833,566 0.92% - 3.19% 27.90%
<CAPTION>
PREFERRED FIXED
INCOME FUND
Year Ended June 30,
<S> <C> <C> <C> <C> <C>
1993 35,889,454 1.05% - 4.91% 316.06%
1994 45,872,668 0.97% - 4.53% 254.92%
1995 57,911,899 0.95% - 5.94% 330.55%
1996 111,184,492 0.93% - 5.65% 313.51%
1997 140,158,482 0.74% - 6.32% 105.98%
1998 151,204,274 0.67% - 6.16% 143.66%
<CAPTION>
PREFERRED SHORT-TERM
GOVERNMENT
SECURITIES FUND
Year Ended June 30,
<S> <C> <C> <C> <C> <C>
1993 27,027,485 0.78% - 3.87% 268.36%
1994 30,271,535 0.74% - 3.75% 134.34%
1995 32,121,171 0.71% - 5.27% 256.44%
1996 51,755,317 0.66% - 5.37% 79.04%
1997 54,807,409 0.63% - 5.49% 183.73%
1998** 60,236,281 0.60% - 5.67% 263.47%
<CAPTION>
PREFERRED MONEY
MARKET FUND
Year Ended June 30,
<S> <C> <C> <C> <C> <C>
1993 18,146,496 0.80% 0.87% 2.67% N/A
1994 45,605,598 0.53% 0.68% 2.97% N/A
1995 79,585,753 0.39% 0.54% 5.24% N/A
1996 90,482,435 0.49% 0.54% 5.25% N/A
1997 109,682,146 0.48% - 5.03% N/A
1998 $104,167,524 0.48% - 5.28% N/A
1 Total return at net asset value assumes reinvestment of dividends and capital
gains distributions.
*Total return for the Money Market Fund would have been lower if a portion of
the fees had not been waived/reimbursed by the advisor.
**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. Caterpillar Investment
Management Ltd. reassumed primary responsibility for the day-to-day management
of the Fund's portfolio on April 1,1998.
</TABLE>
See notes to financial statements
<PAGE>
SCHEDULES OF INVESTMENTS
PREFERRED GROWTH FUND
COMMON STOCK - 96.52% SHARES VALUE
AEROSPACE - 1.54%
Boeing Co 175,400 $ 7,816,263
------------
BANKS - 8.12%
Chase Manhattan Corp 204,992 15,476,896
Citicorp 99,200 14,805,600
Fleet Financial Group Inc 69,200 5,778,200
MBNA Corp 154,975 5,114,175
------------
41,174,871
------------
CHEMICALS - 2.07%
Monsanto Co 187,400 10,470,975
------------
COMPUTER SOFTWARE - 7.30%
Microsoft Corp * 112,600 12,203,025
Oracle Corp * 192,300 4,723,369
Parametric Technology Corp * 188,500 5,113,063
Platinum Technology Inc * 267,900 7,651,894
SAP Aktiengesellschaft ADR 32,200 7,276,975
------------
36,968,326
------------
CONGLOMERATES - 2.51%
General Electric Co 139,800 12,721,800
------------
CONSUMER PRODUCTS - 1.51%
Gillette Co 135,200 7,664,150
------------
DISCOUNT & FASHION RETAILING - 8.73%
Dollar General Corp 172,925 6,841,345
Gap Inc 152,900 9,422,463
Home Depot Inc 125,149 10,395,189
Kohls Corp 176,000 9,130,000
Sears Roebuck & Co 138,800 8,475,475
------------
44,264,472
------------
ELECTRICAL & ELECTRONICS - 5.41%
Intel Corp 103,900 7,701,588
KLA Tencor Corp * 119,800 3,316,963
Symbol Technologies Inc 204,825 7,732,144
Texas Instruments Inc 148,800 8,676,900
------------
27,427,595
------------
FINANCE-OTHER - 8.10%
Associates First Capital Corp 97,300 7,479,938
Merrill Lynch & Co Inc 85,000 7,841,250
- ----------------------------------------------------------------------
COMMON STOCK SHARES VALUE
- ----------------------------------------------------------------------
FINANCE-OTHER (continued)
Morgan Stanley Dean Witter & Co 124,820 $11,405,428
Schwab (Charles) Corp 103,200 3,354,000
Washington Mutual Inc 252,000 10,946,250
------------
41,026,866
------------
FUEL - 1.29%
Schlumberger Ltd 96,000 6,558,000
------------
HEALTH CARE - 11.24%
American Home Products Corp 189,500 9,806,625
Eli Lilly & Co 148,800 9,830,100
Healthsouth Corp * 170,300 4,544,881
Pfizer Inc 134,700 14,640,206
Schering Plough Corp 109,500 10,032,938
Warner Lambert Co 117,000 8,116,875
------------
56,971,625
------------
INSURANCE - 3.39%
Ace Ltd 191,200 7,456,800
Provident Cos Inc 135,600 4,678,200
Unum Corp 90,800 5,039,400
------------
17,174,400
------------
LEISURE TIME INDUSTRIES - 3.60%
Hilton Hotels Corp 335,800 9,570,300
Promus Hotel Corp * 150,140 5,780,390
Walt Disney Co 27,400 2,878,713
------------
18,229,403
------------
MANUFACTURING - 1.83%
Applied Materials Inc * 160,300 4,728,850
Case Corp 94,700 4,569,275
------------
9,298,125
------------
OFFICE EQUIPMENT & COMPUTERS - 13.33%
3Com Corp * 157,400 4,830,213
Ascend Communications Inc * 111,100 5,506,394
Cisco Systems Inc * 169,950 15,646,022
Compaq Computer Corp 287,000 8,143,625
Dell Computer Corp * 97,300 9,030,656
HBO & Co 210,600 7,423,650
Hewlett Packard Co 140,300 8,400,463
International Business Machines 74,600 8,565,013
------------
67,546,036
------------
See notes to financial statements and notes to schedules of investments
<PAGE>
- ----------------------------------------------------------------------
COMMON STOCK SHARES VALUE
- ----------------------------------------------------------------------
SERVICE INDUSTRIES - 1.55%
Omnicom Group 158,000 $ 7,880,250
------------
TELECOMMUNICATIONS - 14.12%
Airtouch Communications Inc * 148,400 8,672,125
CBS Corp 275,100 8,734,425
Ciena Corp * 135,600 9,441,150
Clear Channel Communications * 79,600 8,686,350
Nokia Corp ADR 111,200 8,068,950
Tellabs Inc * 103,200 7,391,700
Vodafone Group PLC ADR 37,100 4,676,919
Worldcom Inc * 328,100 15,892,340
------------
71,563,959
------------
TRANSPORTATION - .88%
FDX Corp * 70,700 4,436,425
------------
TOTAL COMMON STOCK
(Cost $349,812,040) 489,193,541
============
- ----------------------------------------------------------------------
SHORT TERM INVESTMENTS - 1.92% PAR VALUE
- ----------------------------------------------------------------------
COMMERCIAL PAPER - 1.92%
Ford Motor Credit Co
5.90% July 1, 1998 $ 9,706,000 9,706,000
------------
TOTAL SHORT TERM INVESTMENTS
(Cost $9,706,000) 9,706,000
============
TOTAL INVESTMENTS - 98.44%
(Cost $359,518,040) 498,899,541
============
OTHER ASSETS AND LIABILITIES - 1.56% 7,930,950
============
TOTAL NET ASSETS - 100% $506,830,491
============
See notes to financial statements and notes to schedules of investments
<PAGE>
PREFERRED VALUE FUND
- ----------------------------------------------------------------------
COMMON STOCK - 93.39% SHARES VALUE
- ----------------------------------------------------------------------
AEROSPACE - 4.99%
Boeing Co 225,000 $10,026,563
Lockheed Martin Corp 100,000 10,587,500
------------
20,614,063
------------
BANKS - 7.32%
Citicorp 104,000 15,522,000
Wells Fargo & Co 40,000 14,760,000
------------
30,282,000
------------
CHEMICALS - 7.72%
Du Pont E I de Nemours & Co 140,000 10,447,500
Hercules Inc 139,000 5,716,375
Monsanto Co 282,000 15,756,750
------------
31,920,625
------------
CONGLOMERATES - 4.83%
General Electric Co 165,000 15,015,000
Tenneco Inc 130,000 4,948,125
------------
19,963,125
------------
CONSUMER PRODUCTS - 6.62%
Anheuser Busch Cos Inc 110,000 5,190,625
Avon Products Inc 140,000 10,850,000
Diageo PLC ADR 194,400 9,367,650
Philip Morris Cos Inc 50,000 1,968,750
------------
27,377,025
------------
DISCOUNT & FASHION RETAILING - 2.22%
May Department Stores Co 140,000 9,170,000
------------
ELECTRICAL & ELECTRONICS - 2.69%
Intel Corp 150,000 11,118,750
------------
FINANCE-OTHER - 18.84%
Conseco Inc 70,000 3,272,500
Countrywide Credit Industries Inc 260,000 13,195,000
Federal Home Loan Mortgage Corp 370,000 17,413,125
Morgan Stanley Dean Witter & Co 150,000 13,706,250
Transamerica Corp 87,000 10,015,875
Travelers Group Inc 335,000 20,309,375
------------
77,912,125
------------
FOOD - 2.40%
Dole Food Inc 200,000 9,937,500
------------
See notes to financial statements and notes to schedules of investments
<PAGE>
PREFERRED VALUE FUND (continued)
- ----------------------------------------------------------------------
COMMON STOCK SHARES VALUE
- ----------------------------------------------------------------------
HEALTH CARE - 2.25%
Becton Dickinson & Co 120,000 $ 9,315,000
------------
INSURANCE - 13.92%
Ace Ltd 390,000 15,210,000
Aflac Inc 348,000 10,548,750
American International Group Inc 90,000 13,140,000
Exel Ltd 240,000 18,675,000
------------
57,573,750
------------
LEISURE TIME INDUSTRIES - 2.49%
Carnival Corp Class A 260,000 10,302,500
------------
MANUFACTURING - 5.88%
Caterpillar Inc 150,000 7,931,250
Dover Corp 75,000 2,568,750
Minnesota Mining & Manufacturing Co 75,000 6,164,063
Shaw Industries Inc 435,000 7,666,875
------------
24,330,938
------------
METALS & MINING - .96%
Freeport McMoRan Copper & Gold Class B 261,000 3,963,938
------------
PAPER & FOREST PRODUCTS - 1.03%
Champion International Corp 87,000 4,279,313
------------
PUBLISHING & BROADCASTING - .90%
Reed International PLC 100,000 3,712,500
------------
SERVICE INDUSTRIES - 1.55%
Arrow Electronics Inc * 295,000 6,416,250
------------
TELECOMMUNICATIONS - 2.96%
Sprint Corp 174,000 12,267,000
------------
TRANSPORTATION - 3.82%
AMR Corp * 190,000 15,817,498
------------
TOTAL COMMON STOCK
(Cost $171,340,940) 386,273,900
============
See notes to financial statements and notes to schedules of investments
<PAGE>
- ----------------------------------------------------------------------
SHORT TERM INVESTMENTS - 7.06% PAR/SHARES VALUE
- ----------------------------------------------------------------------
COMMERCIAL PAPER - 6.27%
Household Financial Corp
5.55% July 14, 1998 @ $5,000,000 $ 4,989,979
5.55% July 16, 1998 @ 5,000,000 4,988,438
Merrill Lynch & Co Inc
5.54% July 2, 1998 @ 4,000,000 3,999,384
5.58% July 7, 1998 @ 4,000,000 3,996,280
5.59% July 21, 1998 @ 5,000,000 4,984,472
5.63% July 9, 1998 @ 3,000,000 2,996,247
------------
25,954,800
------------
SHORT TERM INVESTMENT FUND - .79%
State Street Global Advisors Money
Market Fund 3,264,593 3,264,593
------------
TOTAL SHORT TERM INVESTMENTS
(Cost $29,219,393) 29,219,393
============
TOTAL INVESTMENTS - 100.45%
(Cost $200,560,333) 415,493,293
============
OTHER ASSETS AND LIABILITIES - (.45%) (1,883,450)
============
TOTAL NET ASSETS - 100% $413,609,843
============
PREFERRED INTERNATIONAL FUND
- ----------------------------------------------------------------------
COMMON STOCK & EQUIVALENTS - 91.21% SHARES VALUE
- ----------------------------------------------------------------------
ARGENTINA - 2.49%
COMMUNICATION SERVICES - 1.13%
Telecom Argentina Stet France Class B ADR 108,000 $ 3,219,750
INTERNATIONAL OIL - 1.36%
YPF Sociedad Anomina Class D ADR 128,300 3,857,019
------------
Total Argentina 7,076,769
============
- ----------------------------------------------------------------------
AUSTRALIA - 6.73%
BANKS - 1.86%
National Australia Bank 399,000 5,275,566
See notes to financial statements and notes to schedules of investments
<PAGE>
- ----------------------------------------------------------------------
COMMON STOCK & EQUIVALENTS SHARES VALUE
- ----------------------------------------------------------------------
AUSTRALIA (continued)
CONGLOMERATES - 1.39%
CSR Limited 1,365,000 $ 3,948,527
CONSTRUCTION MATERIALS - 1.48%
Pioneer International Ltd 1,759,000 4,203,811
TRUCKING & FREIGHT - 2.00%
Mayne Nickless Ltd 1,072,000 5,689,544
------------
Total Australia 19,117,448
============
- ----------------------------------------------------------------------
CANADA - 3.51%
ALUMINUM - 1.59%
Alcan Aluminum Ltd 166,000 4,523,530
BANKS - 1.92%
Bank Nova Scotia Halifax 220,000 5,441,881
------------
Total Canada 9,965,411
============
- ----------------------------------------------------------------------
FRANCE - 10.06%
APPAREL & TEXTILES - 1.76%
Christian Dior 39,700 4,997,221
AUTOMOBILES - 3.09%
Peugeot SA 40,800 8,773,178
GAS EXPLORATION - 2.39%
Elf Aquitaine 48,300 6,790,777
HOMEBUILDERS - 2.82%
Bouygues 44,200 8,027,458
------------
Total France 28,588,634
============
- ----------------------------------------------------------------------
ITALY - 7.02%
APPAREL & TEXTILES - 2.38%
Benetton Group SPA 3,250,000 6,755,171
------------
BANKS - 4.64%
Banca Pop Bergam CV 275,000 5,664,837
Banca Pop di Brescia 397,500 7,517,096
------------
13,181,933
------------
Total Italy 19,937,104
============
- ----------------------------------------------------------------------
COMMON STOCK & EQUIVALENTS SHARES VALUE
- ----------------------------------------------------------------------
JAPAN - 5.05%
AUTOMOBILES - .84%
Nissan Motor Co 756,000 $ 2,389,325
------------
ELECTRICAL EQUIPMENT - 1.14%
Hitachi 496,000 3,246,402
------------
HOUSEHOLD APPLIANCES - 3.07%
Matsushita Electric Industries 240,000 3,870,688
Sony Corp 56,000 4,839,806
------------
8,710,494
------------
Total Japan 14,346,221
============
- ----------------------------------------------------------------------
NETHERLANDS - 10.49%
AIR TRAVEL - 2.08%
KLM Royal Dutch Air Lines 145,000 5,892,018
CHEMICALS - 2.74%
Akzo Nobel NV 35,000 7,786,004
FINANCIAL SERVICES - 2.95%
ING Groep NV 128,000 8,387,455
INDUSTRIAL MACHINERY - 1.18%
Stork NV 105,000 3,347,190
PETROLEUM - 1.54%
Pakhoed NV Kon 135,000 4,383,225
------------
Total Netherlands 29,795,892
============
- ----------------------------------------------------------------------
NEW ZEALAND - 2.12%
FOOD & BEVERAGES - .82%
Lion Nathan Ltd 1,046,000 2,329,545
FOREST PRODUCTS - .67%
Carter Holt Harvey 2,200,000 1,923,214
HOUSEHOLD APPLIANCES - .63%
Fisher & Paykel 700,000 1,784,801
------------
Total New Zealand 6,037,560
============
See notes to financial statements and notes to schedules of investments
<PAGE>
PREFERRED INTERNATIONAL FUND (continued)
- ----------------------------------------------------------------------
COMMON STOCK & EQUIVALENTS SHARES VALUE
- ----------------------------------------------------------------------
NORWAY - 1.06%
PETROLEUM SERVICES - 1.06%
Saga Petroleum 195,200 $ 3,005,232
------------
Total Norway 3,005,232
============
- ----------------------------------------------------------------------
SOUTH KOREA - 1.23%
ELECTRICAL EQUIPMENT - .31%
Samsung Electronic 28,565 884,204
ELECTRIC UTILITIES - .68%
Korea Electric Power 179,400 1,914,210
STEEL - .24%
Pohang Iron & Steel 20,280 687,718
------------
Total South Korea 3,486,132
============
- ----------------------------------------------------------------------
SPAIN - 6.80%
BANKS - 4.61%
Banco Bilbao Vizcaya 160,000 8,211,281
Banco de Andalucia 23,000 4,874,470
------------
13,085,751
------------
ELECTRIC UTILITIES - 2.19%
Iberdrola SA 383,000 6,218,911
------------
Total Spain 19,304,662
============
- ----------------------------------------------------------------------
SWEDEN - 7.58%
DRUGS & HEALTH CARE - 2.30%
Pharmacia & UpJohn 141,900 6,529,250
HOUSEHOLD APPLIANCES - 2.48%
Electrolux AB Series B 410,000 7,042,377
INDUSTRIAL MACHINERY - 1.25%
SKF AB Series B 195,000 3,545,010
MINING - 1.55%
Svedala Industrial 190,000 4,406,971
------------
Total Sweden 21,523,608
============
- ----------------------------------------------------------------------
COMMON STOCK & EQUIVALENTS SHARES VALUE
- ----------------------------------------------------------------------
SWITZERLAND - 11.11%
BANKS - 2.68%
UBS AG 20,462 $ 7,621,058
DRUGS & HEALTH CARE - 1.88%
Novartis AG 3,200 5,333,686
INDUSTRIAL MACHINERY - 2.05%
Sulzer AG 7,360 5,817,817
RETAIL TRADE - 1.95%
Valora Holding AG 21,000 5,547,117
TOYS & AMUSEMENTS - 2.55%
Swatch Group 9,375 7,255,828
------------
Total Switzerland 31,575,506
============
- ----------------------------------------------------------------------
UNITED KINGDOM - 15.96%
APPAREL & TEXTILES - .78%
Coats Viyella 1,800,000 2,209,013
BANKS - 2.42%
National Westminster 385,000 6,884,757
FOOD & BEVERAGES - 2.18%
Allied Domecq PLC 660,000 6,204,271
LEISURE TIME - 1.55%
Rank Group 800,000 4,394,650
NON-FERROUS METALS - 1.91%
Rio Tinto 480,000 5,409,828
RETAIL GROCERY - 2.41%
Tesco 700,000 6,837,421
STEEL - 1.45%
British Steel 1,877,000 4,129,080
TELEPHONE - 3.26%
British Telecom 750,000 9,266,835
------------
Total United Kingdom 45,335,855
============
See notes to financial statements and notes to schedules of investments
<PAGE>
- ----------------------------------------------------------------------
COMMON STOCK & EQUIVALENTS SHARES VALUE
- ----------------------------------------------------------------------
TOTAL COMMON STOCK & EQUIVALENTS
(Cost $197,222,172) $259,096,034
============
- ----------------------------------------------------------------------
SHORT TERM INVESTMENTS - 9.27% PAR VALUE
- ----------------------------------------------------------------------
REPURCHASE AGREEMENTS - 9.27% State Street
Repo 5.00% July 1, 1998 (Cost -
$26,325,000)(Dated June 30, 1998, due
July 1, 1998, collateralized by
$19,685,000 U.S. Treasury Bond 8.50%,
February 15, 2020, Market Value
$26,857,328, Repurchase
Proceeds $25,328,656) $26,325,000 26,325,000
TOTAL SHORT TERM INVESTMENTS
(Cost $26,325,000) 26,325,000
============
TOTAL INVESTMENTS - 100.48%
(Cost $223,547,172) 285,421,034
============
OTHER ASSETS & LIABILITIES - (.48%) (1,364,931)
============
TOTAL NET ASSETS - 100% $284,056,103
============
PREFERRED SMALL CAP FUND
- ----------------------------------------------------------------------
COMMON STOCK - 98.52% SHARES VALUE
- ----------------------------------------------------------------------
AEROSPACE - 2.40%
Aviall Inc * 83,600 $ 1,144,275
America West Holding Corp Class B * 26,500 756,906
BE Aerospace Inc * 24,900 725,213
Ducommun Inc * 32,550 651,000
------------
3,277,394
------------
AUTOMOTIVE - 1.65%
Arvin Industry Inc 62,000 2,251,375
------------
BANKS - .59%
BSB Bancorp Inc 11,350 343,338
Mid-Am Inc 18,100 457,025
------------
800,363
------------
- ----------------------------------------------------------------------
COMMON STOCK SHARES VALUE
- ----------------------------------------------------------------------
CHEMICALS - 2.24%
Chemed Corp 32,700 $ 1,113,844
Spartech Corp 37,900 812,481
Wellman Inc 49,900 1,132,106
------------
3,058,431
------------
COMPUTER SOFTWARE - 1.74%
Dialogic Corp * 38,200 1,136,450
Symantec Corp * 47,000 1,227,875
------------
2,364,325
------------
CONSUMER PRODUCTS - 4.99%
Ethan Allen Interiors Inc 26,600 1,328,338
Fingerhut Cos Inc 77,300 2,550,900
Finlay Enterprises Inc * 25,000 603,125
Nortek Inc * 22,100 679,575
Thomas Industry Inc 11,100 271,256
Universal Corp 36,400 1,360,450
------------
6,793,644
------------
DISCOUNT & FASHION RETAILING - 8.20%
Ames Department Stores Inc * 75,700 1,991,856
Burlington Coat Factory Warehouse 60,460 1,360,350
Goody's Family Clothing Inc * 30,000 1,646,250
Oxford Industry Inc 37,700 1,317,144
Ross Stores Inc 38,800 1,668,400
Russ Berrie & Co Inc 50,900 1,272,500
Shopko Stores Inc * 27,800 945,200
The Dress Barn * 39,000 970,125
------------
11,171,825
------------
ELECTRICAL & ELECTRONICS - 8.70%
Ametek Aerospace Products Inc 31,000 908,688
CHS Electronics Inc * 100,450 1,795,544
Eagle Geophysical Inc * 59,300 622,650
Encore Wire Corp * 62,175 1,002,572
General Cable Corp 52,350 1,511,606
MTS System Corp 91,800 1,474,538
Neomagic Corp * 69,200 1,072,600
Semtech Corp * 37,900 670,356
Technitrol Inc 28,600 1,142,213
Triumph Group Inc * 15,200 638,400
Veritas DGC Inc * 20,400 1,018,725
------------
11,857,892
------------
FINANCE-OTHER - 16.82%
Alfa Corp 45,100 935,825
Americredit Corp * 38,200 1,363,263
Arthur J Gallagher & Co * 24,500 1,096,375
Delphi Financial Group Inc * 17,256 971,729
Delta Financial Corp * 24,800 455,700
See notes to financial statements and notes to schedules of investments
<PAGE>
PREFERRED SMALLCAP FUND (continued)
- ----------------------------------------------------------------------
COMMON STOCK SHARES VALUE
- ----------------------------------------------------------------------
FINANCE-OTHER (continued)
Doral Financial Corp 56,400 $ 987,000
Dynex Cap Inc 20,800 231,400
Eaton Vance Corp 17,700 819,731
FBL Financial Group Inc * 27,000 691,875
Fidelity National Financial Inc 43,500 1,731,844
First American Financial Corp 32,400 2,916,000
Flagstar Bancorp Inc 19,600 477,750
Impac Mortgage Holdings Inc 118,200 1,839,488
Investment Technology Group Inc * 54,500 1,498,750
Jefferies Group Inc 30,900 1,266,900
Landamerica Financial Group Inc 19,100 1,093,475
Raymond James Financial Inc 56,375 1,687,727
Resource Bancshare Mortgage Group Inc 35,000 651,875
Stewart Information Services Corp 45,400 2,204,738
------------
22,921,445
------------
FOOD - .75%
Michael Foods Inc 18,800 552,250
Suiza Foods Corp * 7,800 465,563
------------
1,017,813
------------
FUEL - 2.61%
Cliffs Drilling Co * 15,800 518,438
Key Energy Group Inc * 60,900 799,313
Seacor Smit Inc * 36,500 2,237,906
------------
3,555,657
------------
HEALTH CARE - 3.92%
Bio Rad Laboratories Inc * 58,000 1,776,250
Cooper Cos Inc * 38,700 1,410,131
Curative Health Services Inc * 9,700 276,450
Datascope Corp * 22,900 608,281
Integrated Health Services Inc 17,800 667,500
Novacare Inc 51,200 601,600
------------
5,340,212
------------
HOUSING & REAL ESTATE - 9.83%
American Homestar Corp * 29,125 697,180
Capstead Mortgage Corp 30,775 257,741
Centex Construction Products Inc 46,700 1,797,950
Centex Corp 63,000 2,378,250
Cornerstone Realty Income Trust Inc 51,900 593,606
D.R. Horton Inc 33,400 697,225
Indy Mac Mortgage Holdings Inc 14,100 320,775
Kaufman & Broad Home Corp 32,500 1,031,875
Lennar Corp 65,823 1,941,779
M.D.C. Holdings Inc 6,600 130,350
NVR Inc * 31,800 1,305,788
Republic Group Inc 69,100 1,451,100
- ----------------------------------------------------------------------
COMMON STOCK SHARES VALUE
- ----------------------------------------------------------------------
HOUSING & REAL ESTATE (continued)
Schottenstein Homes Inc 23,700 $ 512,513
Standard Pacific Corp 13,900 286,688
------------
13,402,820
------------
INSURANCE - 3.58%
Enhance Financial Services Group 27,400 924,750
Orion Capital Corp 19,900 1,111,913
Presidential Life Corp 57,600 1,231,200
RLI Corp 39,750 1,617,328
------------
4,885,191
------------
LEISURE TIME INDUSTRIES - 3.31%
Anchor Gaming * 21,100 1,637,888
Fleetwood Enterprises Inc 39,700 1,588,000
Servico Inc * 2,300 34,496
Thor Industry Inc 19,600 542,675
Winnebago Industry Inc 56,100 715,275
------------
4,518,334
------------
MANUFACTURING - 10.05%
C & D Technologies 6,300 365,400
Chart Industry Inc 16,900 403,488
Commercial Intertech Corp 68,600 1,243,375
Gulf Island Fabrication Inc * 12,500 234,375
Hexcel Corp * 64,300 1,454,788
Huffy Corp 52,200 946,125
Lone Star Industries Inc 17,700 1,364,006
Manitowoc Inc 16,100 649,031
Modine Manufacturing Co 23,900 827,538
Mohawk Industry Inc * 38,500 1,219,969
Monaco Coach Corp * 2,400 70,200
Myers Industry Inc 23,600 566,400
Omniquip International Inc 31,200 577,200
Plantronics Inc * 14,500 746,750
Polymer Group Inc * 26,400 300,300
Standard Products Co 31,600 888,750
Tredegar Industry Inc 14,200 1,205,225
Wynns International Inc 33,100 637,175
------------
13,700,095
------------
METALS & MINING - 6.78%
Barnes Group Inc 38,200 1,033,788
Chase Industry Inc * 37,050 731,738
Cleveland Cliffs Inc 28,800 1,544,400
Medusa Corp 31,200 1,957,800
Mueller Industry Inc * 13,600 504,900
Southdown Inc 17,700 1,263,338
Terex Corp * 18,400 524,400
Texas Industries Inc 31,800 1,685,400
------------
9,245,764
------------
See notes to financial statements and notes
to schedules of investments
<PAGE>
- ----------------------------------------------------------------------
COMMON STOCK SHARES VALUE
- ----------------------------------------------------------------------
OFFICE EQUIPMENT & COMPUTERS - .63%
Knoll Inc * 26,800 $ 790,600
Pomeroy Computer Resources * 2,500 65,152
------------
855,752
------------
PUBLISHING & BROADCASTING - 3.57%
Bowne & Co Inc 76,200 3,429,000
Merrill Corp 65,100 1,436,269
------------
4,865,269
------------
SERVICE INDUSTRIES - 1.55%
Advo Inc * 66,700 1,880,106
URS Corp * 13,700 232,896
------------
2,113,002
------------
TELECOMMUNICATIONS - .77%
Superior Telecom Inc 25,350 1,055,194
------------
TRANSPORTATION - 3.33%
Airbourne Freight Corp 26,600 929,338
Alaska Air Group Inc * 21,300 1,162,181
Comair Holdings Inc 23,375 721,703
Continental Airlines Inc Class B * 15,400 937,475
USFreightways Corp 22,800 748,838
Varlen Corp 1,000 34,500
------------
4,534,035
------------
UTILITIES & POWER - .51%
Pool Energy Services Co * 47,400 699,150
------------
TOTAL COMMON STOCK
(Cost $108,606,109) 134,284,982
============
- ----------------------------------------------------------------------
SHORT TERM INVESTMENTS - .42% SHARES VALUE
- ----------------------------------------------------------------------
SHORT TERM INVESTMENT FUND - .42%
State Street Global Advisors Money
Market Fund 566,335 566,335
------------
TOTAL SHORT TERM INVESTMENTS
(Cost $566,335) 566,335
============
TOTAL INVESTMENTS - 98.94%
(Cost $109,172,444) 134,851,317
============
- ----------------------------------------------------------------------
SHORT TERM INVESTMENTS SHARES VALUE
- ----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES - 1.06% $ 1,452,146
============
TOTAL NET ASSETS - 100% $136,303,463
============
PREFERRED ASSET ALLOCATION FUND
- ----------------------------------------------------------------------
COMMON STOCK - 40.49% SHARES VALUE
- ----------------------------------------------------------------------
AEROSPACE - .55%
Boeing Co 7,962 $ 354,807
General Dynamics Corp 1,200 55,800
Lockheed Martin Corp 1,619 171,412
Northrop Grumman Corp 300 30,938
Raytheon Co 2,400 141,900
United Technologies Corp 2,080 192,400
------------
947,257
------------
AUTOMOTIVE - .86%
Chrysler Corp 5,316 299,690
Cooper Tire & Rubber Co 400 8,250
Cummins Engine Inc 200 10,250
Dana Corp 1,040 55,640
Eaton Corp 770 59,868
Echlin Inc 300 14,719
Ford Motor Co 9,100 536,900
General Motors Corp 5,450 364,128
Goodyear Tire & Rubber 1,320 85,058
Navistar International Corp Inc 310 8,951
Paccar Inc 740 38,665
------------
1,482,119
------------
BANKS - 3.45%
BB&T Corp 600 40,575
Banc One Corp 4,769 266,170
BankAmerica Corp 5,700 492,694
BankBoston Corp 2,400 133,500
Bank New York Inc 3,200 194,200
Bankers Trust New York Corp 740 85,886
Chase Manhattan Corp 6,842 516,571
Citicorp 3,650 544,763
Comerica Inc 1,350 89,438
Fifth Third Bancorp 1,800 113,400
First Chicago NBD Corp 2,543 225,373
First Union Corp 7,548 439,671
Fleet Financial Group Inc 2,044 170,674
See notes to financial statements and
notes to schedules of investments
<PAGE>
PREFERRED ASSET ALLOCATION FUND (continued)
- ----------------------------------------------------------------------
COMMON STOCK SHARES VALUE
- ----------------------------------------------------------------------
BANKS (continued)
JP Morgan & Co Inc 1,420 $ 166,318
Keycorp 3,800 135,375
MBNA Corp 2,268 74,844
Mellon Bank Corp 2,200 153,175
Mercantile Bancorporation Inc 600 30,225
National City Corp 2,200 156,200
Nationsbank Corp 7,292 557,838
Norwest Corp 5,900 220,513
PNC Bank Corp 2,430 130,764
Republic New York Corp 1,000 62,938
State Street Corporation 1,300 90,350
Summit Bancorp 800 38,000
Suntrust Banks Inc 1,900 154,494
U.S. Bancorp 4,884 210,012
Wachovia Corp 1,530 129,285
Wells Fargo & Co 809 298,521
------------
5,921,767
------------
CHEMICALS - .95%
Air Products & Chemicals Inc 1,860 74,400
BF Goodrich Co 200 9,925
Dow Chemical Co 1,880 181,773
Du Pont E I de Nemours & Co 8,540 637,298
Eastman Chemical Co 675 42,019
Engelhard Corp 1,467 29,707
Freeport McMoRan Copper & Gold Class B 1,900 28,856
Great Lakes Chemical Corp 570 22,479
Hercules Inc 920 37,835
International Flavors & Fragrances 940 40,831
Monsanto Co 4,700 262,613
Morton International Inc 1,310 32,750
Nalco Chemical Co 840 29,505
Praxair Inc 1,430 66,942
Rohm & Haas Co 620 64,441
Union Carbide Corp 1,120 59,780
WR Grace & Co * 590 10,067
------------
1,631,221
------------
COMPUTER SOFTWARE - 1.73%
Adobe System Inc 550 23,341
Autodesk Inc 200 7,725
Automatic Data Processing Inc 2,430 177,086
Computer Associates International Inc 4,368 242,697
Computer Sciences Corp 1,000 64,000
First Data Corp 3,400 113,263
Microsoft Corp * 18,800 2,037,450
Novell Inc * 3,300 42,075
Oracle Corp * 7,735 189,991
- ----------------------------------------------------------------------
COMMON STOCK SHARES VALUE
- ----------------------------------------------------------------------
COMPUTER SOFTWARE (continued)
Parametric Technology Corp * 2,200 $ 59,675
Shared Medical System 100 7,344
------------
2,964,647
------------
CONGLOMERATES - 1.72%
Allied Signal Inc 4,660 206,788
General Electric Co 25,640 2,333,240
Harcourt General Inc 300 17,850
Household International Inc 1,500 74,625
Pall Corp 533 10,927
Rockwell International Corp 1,800 86,513
TRW Inc 1,200 65,550
Tenneco Inc 1,490 56,713
Textron Inc 1,480 106,098
------------
2,958,304
------------
CONSUMER PRODUCTS - 3.48%
Alberto Culver Co 300 8,700
Anheuser Busch Cos Inc 4,080 192,525
Armstrong World Industries Inc 200 13,475
Avon Products Inc 1,150 89,125
Brown Forman Corp Class B 300 19,275
Circuit City Stores Inc 400 18,750
Clorox Co 860 82,023
Coca Cola Co 19,380 1,656,990
Colgate Palmolive Co 2,320 204,160
Coors Adolph Co Class B 200 6,800
Ecolab Inc 600 18,600
Fortune Brands Inc 1,360 52,275
Fruit of the Loom Inc Class A * 500 16,594
Gillette Co 8,040 455,768
Liz Claiborne Inc 680 35,530
Masco Corp 1,370 82,885
Maytag Corp 500 24,688
Nike Inc Class B 2,280 111,008
Pepsico Inc 11,880 489,308
Philip Morris Cos Inc 18,860 742,613
Proctor & Gamble Co 10,500 956,156
Reebok International Ltd * 620 17,166
Russell Corp 200 6,038
Seagram Ltd 3,070 125,678
Tupperware Corp 300 8,438
UST Inc 1,560 42,120
Unilever NV 4,680 369,428
V F Corp 1,160 59,740
Venator Group Inc * 1,300 24,863
Whirlpool Corp 730 50,188
------------
5,980,907
------------
See notes to financial statements and
notes to schedules of investments
<PAGE>
- ----------------------------------------------------------------------
COMMON STOCK SHARES VALUE
- ----------------------------------------------------------------------
CONTAINERS & PACKING - .07%
Ball Corp 100 $ 4,019
Bemis Inc 200 8,175
Crown Cork & Seal Inc 1,070 50,825
Sealed Air Corp * 515 18,926
Stone Container Corp 406 6,344
Temple Inland Inc 600 32,325
------------
120,614
------------
DISCOUNT & FASHION RETAILING - 1.83%
AutoZone Inc * 1,200 38,325
Consolidated Stores Corp * 1,000 36,250
Costco Cos Inc * 1,865 117,612
Dayton Hudson Corp 3,980 193,030
Dillards Department Stores Inc Class A 1,110 45,996
Federated Department Stores Inc * 1,600 86,100
Gap Inc 3,460 213,223
Home Depot Inc 5,678 471,629
JC Penney Inc 2,000 144,625
K Mart Corp * 4,130 79,503
Limited Inc 1,842 61,016
Lowes Cos Inc 1,600 64,900
May Department Stores Co 2,110 138,205
Mercantile Stores Inc 200 15,788
Nordstrom Inc 810 62,573
Payless Shoesource Inc 24 1,769
Pep Boys-Manny Moe & Jack 300 5,681
Sears Roebuck & Co 3,300 201,506
TJX Cos Inc 1,600 38,600
Toys R Us Inc * 2,470 58,199
Wal Mart Stores Inc 17,710 1,075,883
------------
3,150,413
------------
ELECTRICAL & ELECTRONICS - 1.31%
Advanced Micro Devices Inc * 600 10,238
Ameren Corp 950 37,763
Amp Inc 2,028 69,713
Consolidated Edison Inc 1,910 87,979
Cooper Industries Inc 1,182 64,936
Emerson Electric Co 3,580 216,143
Harris Corp 400 17,875
Honeywell Inc 1,190 99,439
Intel Corp 13,220 979,933
Johnson Controls Inc 400 22,875
KLA Tencor Corp * 700 19,381
LSI Logic Corp * 1,100 25,369
Micron Technology Inc * 1,800 44,663
Millipore Corp 200 5,450
Motorola Inc 4,700 247,044
National Semiconductor Corp 700 9,231
- ----------------------------------------------------------------------
COMMON STOCK SHARES VALUE
- ----------------------------------------------------------------------
ELECTRICAL & ELECTRONICS (continued)
National Service Industry Inc 200 $ 10,175
Perkin Elmer Corp 200 12,438
Raychem Corp 400 11,825
Tektronix Inc 150 5,306
Texas Instruments Inc 3,240 188,933
Thermo Electron Corp * 1,300 44,444
Thomas & Betts Corp 200 9,850
------------
2,241,003
------------
FINANCE-OTHER - 1.89%
American Express Co 3,750 427,500
American General Corp 1,938 137,961
Associates First Capital Corp 2,584 198,644
Bear Stearns Cos Inc 200 11,356
Beneficial Corp 200 30,638
Capital One Financial Corp 200 24,839
Cincinnati Financial Corp 800 30,700
Countrywide Credit Industry Inc 900 45,675
Equifax Inc 1,300 47,206
Federal Home Loan Mortgage Corp 5,680 267,315
Federal National Mortgage Assn 8,300 504,225
Golden West Financial Corp 760 80,798
Green Tree Financial Corp 1,200 51,375
HF Ahmanson & Co 500 35,500
H & R Block Inc 1,160 48,865
Huntington Bancshares Inc 900 30,150
Lehman Brothers Holding Corp 900 69,806
Merrill Lynch & Co Inc 3,020 278,595
Morgan Stanley Dean Witter & Co 4,363 398,669
Northern Trust Co 500 38,125
Progressive Corp Ohio 700 98,700
Providian Financial Corp 980 76,991
SLM Holding Corp 400 19,602
Schwab (Charles) Corp 1,200 39,000
Sunamerica Inc 1,950 112,003
Synovus Financial Corp 1,200 28,500
Washington Mutual Inc 2,610 113,372
------------
3,246,110
------------
FOOD - 1.17%
Albertsons Inc 2,210 114,506
American Stores Co 2,740 66,274
Archer Daniels Midland Co 4,502 87,226
Best Foods 2,200 127,738
Campbell Soup Co 3,700 196,563
ConAgra Inc 3,740 118,511
General Mills Inc 1,330 90,939
Giant Foods Inc Class A 300 12,919
Great Atlantic & Pacific Tea Inc 200 6,613
See notes to financial statements and
notes to schedules of investments
<PAGE>
PREFERRED ASSET ALLOCATION FUND (continued)
- ----------------------------------------------------------------------
COMMON STOCK SHARES VALUE
- ----------------------------------------------------------------------
FOOD (continued)
HJ Heinz Co 2,815 $ 157,992
Hershey Food Corp 1,220 84,180
Kellogg Co 3,220 120,951
Kroger Co * 1,100 47,163
Pioneer Hi Bred International Inc 2,112 87,384
Quaker Oats Co 1,160 63,728
Ralston Purina Co 910 106,299
Sara Lee Corp 3,760 210,325
Supervalu Inc 300 13,313
Sysco Corp 3,440 88,150
Tricon Global Restaurants Inc * 1,218 38,595
Winn Dixie Stores Inc 1,340 68,591
Wrigley Wm Jr Co 970 95,060
------------
2,003,020
------------
FUEL - 3.00%
Amerada Hess Corp 910 49,424
Amoco Corp 7,520 313,020
Anadarko Petroleum Co 700 47,031
Apache Corp 700 22,050
Ashland Inc 300 15,488
Atlantic Richfield Co 2,380 185,938
Baker Hughes Inc 1,400 48,388
Burlington Resources Inc 1,455 62,656
Chevron Corp 5,060 420,296
Coastal Corp 940 65,624
Dresser Industries Inc 1,750 77,109
Exxon Corp 19,240 1,372,053
Halliburton Co 2,220 98,929
Helmerich & Payne Inc 200 4,450
Kerr McGee Corp 200 11,575
Mobil Corp 6,220 476,608
Occidental Petroleum Corp 2,910 78,570
Oneok Inc 100 3,988
Oryx Energy Co * 1,490 32,966
Pennzoil Co 560 28,350
Phillips Petroleum Co 2,260 108,904
Rowan Cos Inc 400 7,775
Royal Dutch Petroleum Co 16,200 887,963
Schlumberger Ltd 3,860 263,686
Sun Inc 821 31,865
Texaco Inc 4,320 257,850
USX Marathon Group 2,400 82,350
Unocal Corp 2,200 78,650
Western Atlas Inc 200 16,975
------------
5,150,531
------------
- ----------------------------------------------------------------------
COMMON STOCK SHARES VALUE
- ----------------------------------------------------------------------
HEALTH CARE - 4.97%
Abbott Labs 11,880 $ 485,595
Allergan Inc 670 31,071
Alza Corp * 1,000 43,250
American Home Products Corp 9,840 509,220
Amgen Inc * 2,180 142,518
Bausch & Lomb Inc 780 39,098
Baxter International Inc 2,080 111,930
Becton Dickinson & Co 1,160 90,045
Biomet Inc 1,300 42,981
Boston Scientific Corp * 1,600 114,600
Bristol Myers Squibb Co 7,580 871,226
CR Bard Inc 300 11,419
CVS Corp 2,580 100,459
Cardinal Health Inc 500 46,875
Columbia HCA Healthcare Corp 5,249 152,877
Eli Lilly & Co 7,948 525,065
Guidant Corp 1,300 92,706
Healthsouth Corp * 2,600 69,388
Humana Inc * 1,300 40,544
Johnson & Johnson 10,320 761,100
Longs Drug Stores Corp 200 5,775
Mallinckrodt Inc 300 8,906
Manor Care Inc 300 11,531
Medtronic Inc 3,840 244,800
Merck & Co Inc 9,330 1,247,888
Pfizer Inc 10,000 1,086,875
Pharmacia & UpJohn 4,053 186,945
Rite Aid Corp 1,200 45,075
Schering Plough Corp 5,880 538,755
Sigma Aldrich 1,100 38,638
St. Jude Medical Inc * 800 29,450
Tenet Healthcare Corp * 2,260 70,625
United Healthcare Corp 1,500 95,250
United States Surgical Corp 600 27,375
Walgreen Co 4,320 178,470
Warner Lambert Co 6,360 441,225
------------
8,539,550
------------
HOUSING & REAL ESTATE - .11%
Centex Corp 200 7,550
Kaufman & Broad Home Corp 200 6,350
Owens Corning Fiberglass Corp 200 8,163
PPG Industries Inc 1,480 102,953
Pulte Corp 200 5,975
Sherwin Williams Co 1,880 62,275
------------
193,266
------------
See notes to financial statements and
notes to schedules of investments
<PAGE>
- ----------------------------------------------------------------------
COMMON STOCK SHARES VALUE
- ----------------------------------------------------------------------
INSURANCE - 1.84%
Aetna Inc 1,266 $ 96,374
Allstate Corp 3,429 313,968
American International Group Inc 5,377 785,042
Aon Corp 750 52,688
Chubb Corp 1,360 109,310
Cigna Corp 1,620 111,780
Conseco Inc 1,200 56,100
General Reinsurance Corp 640 162,240
Hartford Financial Services Group 960 109,800
Jefferson Pilot Corp 1,140 66,049
Lincoln National Corp 880 80,410
Loews Corp 900 78,413
MBIA Inc 400 29,950
MGIC Investment Corp 1,000 57,063
Marsh & McLellan Cos Inc 2,190 132,358
Safeco Corp 1,160 52,708
St. Paul Cos Inc 1,762 74,114
Torchmark Inc 1,400 64,050
Transamerica Corp 670 77,134
Travelers Group Inc 9,609 582,546
Unum Corp 1,200 66,600
------------
3,158,697
------------
LEISURE TIME INDUSTRIES - .91%
American Greetings Corp Class A 300 15,281
Brunswick Corp 980 24,255
Darden Restaurants Inc 1,530 24,289
Eastman Kodak Co 2,630 192,154
Fleetwood Enterprises Inc 200 8,000
Harrahs Entertainment Inc * 450 10,463
Hasbro Inc 1,310 51,499
Hilton Hotels Corp 2,020 57,570
King World Productions Inc * 400 10,200
Marriott International Inc 2,360 76,405
Mattel Inc 2,469 104,470
McDonalds Corp 5,500 379,500
Mirage Resorts Inc * 800 17,050
Polaroid Corp 200 7,113
Walt Disney Co 5,360 563,135
Wendys International Inc 600 14,095
------------
1,555,479
------------
MANUFACTURING - .95%
Aeroquip Vickers Inc 100 5,838
Applied Materials Inc * 3,200 94,400
Avery Dennison Corp 500 26,875
Black & Decker Corp 400 24,400
Briggs & Stratton Corp 100 3,744
Case Corp 700 33,775
Caterpillar Inc 3,320 175,545
- ----------------------------------------------------------------------
COMMON STOCK SHARES VALUE
- ----------------------------------------------------------------------
MANUFACTURING (continued)
Cincinnati Milacron Inc 200 $ 4,863
Corning Inc 1,950 67,763
Crane Co 200 9,713
Deere & Co 2,260 119,498
Dover Corp 1,000 34,250
FMC Corp * 200 13,638
General Signal Corp 200 7,200
Harnischfeger Industries Inc 200 5,663
ITT Industries Inc 960 35,880
Illinois Tool Works Inc 2,220 148,046
Ingersoll Rand Co 1,560 68,737
Jostens Inc 200 4,775
Minnesota Mining & Manufacturing Co 3,360 276,150
Newell Co 1,460 72,726
Owens Illinois Inc * 900 40,275
Parker Hannifin Corp 525 20,016
Rubbermaid Inc 1,380 45,799
Snap On Inc 300 10,875
Springs Industries Inc 100 4,613
Stanley Works 400 16,625
Timken Co 200 6,163
Tyco International Ltd 4,000 251,995
------------
1,629,840
------------
METALS & MINING - .27%
Alcan Aluminum Ltd 1,810 50,001
Allegheny Teldyne Ind 777 17,774
Aluminum Company of America 1,500 98,906
Armco Inc * 500 3,188
Asarco Inc 200 4,450
Barrick Gold Corp 3,000 57,563
Battle Mountain Gold Co 2,000 11,875
Bethlehem Steel Corp * 500 6,219
Cyprus Amax Minerals Co 960 12,720
Homestake Mining Co 1,990 20,646
Inco Ltd 1,360 18,530
Inland Steel Industries Inc 200 5,638
Newmont Mining Corp 718 16,963
Nucor Corp 400 18,400
Phelps Dodge Corp 530 30,309
Placer Dome Inc 1,950 22,913
Reynolds Metals Co 600 33,563
USX US Steel Group 1,000 33,000
Worthington Industries Inc 450 6,773
------------
469,431
------------
OFFICE EQUIPMENT & COMPUTERS - 2.47%
3Com Corp * 2,600 79,788
Apple Computer * 1,150 32,991
Ascend Communications Inc * 1,500 74,344
See notes to financial statements and
notes to schedules of investments
<PAGE>
PREFERRED ASSET ALLOCATION FUND (continued)
- ----------------------------------------------------------------------
COMMON STOCK SHARES VALUE
- ----------------------------------------------------------------------
OFFICE EQUIPMENT & COMPUTERS (continued)
Bay Networks Inc * 1,700 $ 54,825
Cabletron Systems Inc * 1,100 14,781
Ceridian Corp * 300 17,625
Cisco Systems Inc * 7,830 720,849
Compaq Computer Corp 13,056 370,477
Data General Corp * 200 2,988
De Luxe Corp 1,050 37,603
Dell Computer Corp * 5,700 529,031
EMC Corp * 3,800 170,288
Gateway 2000 Inc * 1,200 60,750
HBO & Co 3,000 105,750
Hewlett Packard Co 8,020 480,198
Ikon Office Solutions Inc 600 8,738
International Business Machines 7,600 872,575
Moore Corp Ltd 500 6,625
Pitney Bowes Inc 2,600 125,125
Seagate Technology * 2,000 47,625
Silicon Graphics Inc * 1,700 20,613
Sun Microsystems Inc 1,700 73,844
Tandy Corp 600 31,838
Unisys Corp 1,100 31,075
Xerox Corp 2,720 276,415
------------
4,246,761
------------
PAPER & FOREST PRODUCTS - .38%
Boise Cascade Corp 200 6,550
Champion International Corp 800 39,350
Fort James Corp 900 40,050
Georgia Pacific Group 710 41,846
Georgia Pacific Timber Group 310 7,149
International Paper Co 2,380 102,340
Kimberly Clark Corp 4,446 203,960
Louisiana Pacific Corp 1,160 21,170
Mead Corp 400 12,700
Potlatch Corp 100 4,200
Union Camp Corp 630 31,264
Westvaco Corp 1,100 31,075
Weyerhaeuser Co 1,550 71,591
Williamette Industries Inc 1,200 38,395
------------
651,640
------------
PUBLISHING & BROADCASTING - .79%
Comcast Corp 2,250 91,336
Dow Jones & Co 970 54,078
Dun & Bradstreet Corp 1,430 51,659
Gannett Inc 2,420 171,971
Knight Ridder Inc 1,020 56,164
McGraw Hill Inc 860 70,144
Meredith Corp 200 9,388
- ----------------------------------------------------------------------
COMMON STOCK SHARES VALUE
- ----------------------------------------------------------------------
PUBLISHING & BROADCASTING (continued)
New York Times Co 400 $ 31,700
Tele Communications Inc Series A * 4,572 175,736
Time Warner Inc 4,020 343,459
Times Mirror Co Series A 800 50,300
Tribune Co 1,220 83,951
Viacom Inc Class B * 2,950 171,833
------------
1,361,719
------------
SERVICE INDUSTRIES - .50%
Browning Ferris Industries Inc 1,700 59,075
Cendant Corp * 6,608 137,942
Cognizant Corp 1,430 90,090
EG&G Inc 200 6,000
Fluor Corp 750 38,250
Foster Wheeler Corp 200 4,288
Franklin Resource Inc 2,100 113,400
Genuine Parts Co 1,825 63,077
Interpublic Group Cos Inc 600 36,413
McDermott International Inc 200 6,888
Omnicom Group 1,200 59,850
RR Donnelley & Sons Co 1,270 58,103
Service Corp International 1,100 47,163
WW Grainger Inc 400 19,920
Waste Management Inc 3,530 123,550
------------
864,009
------------
TELECOMMUNICATIONS - 3.52%
Airtouch Communications Inc * 4,460 260,631
Alltel Corp 1,300 60,450
Ameritech Corp 8,580 385,028
American Telephone & Telegraph Corp 12,440 710,635
Andrew Corp * 405 7,315
Bell Atlantic Corp 12,052 549,873
Bellsouth Corp 7,760 520,890
CBS Corp 5,520 175,260
Clear Channel Communications * 1,000 109,125
DSC Communications Corp * 500 15,000
Frontier Corp 700 22,050
GTE Corp 7,410 412,181
General Instruments Corp * 1,000 27,188
Lucent Technologies Inc 10,168 845,850
MCI Communications Corp 5,700 331,313
Media One Group * 4,570 200,794
Nextel Communications Inc 1,200 29,850
Northern Telecom Ltd 4,420 250,835
SBC Communications Inc 14,554 582,160
Scientific Atlanta Inc 300 7,613
Sprint Corp 3,510 247,455
Tellabs Inc * 1,600 114,600
US West Inc 4,095 192,451
------------
6,058,547
------------
See notes to financial statements and
notes to schedules of investments
<PAGE>
- ----------------------------------------------------------------------
COMMON STOCK SHARES VALUE
- ----------------------------------------------------------------------
TRANSPORTATION - .48%
AMR Corp * 1,520 $ 126,540
Burlington Northern Santa Fe 1,134 111,345
CSX Corp 1,820 82,810
Delta Airlines Inc 560 72,380
FDX Corp * 1,296 81,324
Laidlaw Inc 2,900 35,344
Norfolk Southern Corp 3,150 93,909
Roadway Express Inc 50 944
Ryder System Inc 300 9,469
Southwest Airlines Co 1,950 57,769
Union Pacific Corp 1,830 80,749
Union Pacific Resource Group 2,219 38,971
US Airways Group Inc 500 39,620
------------
831,174
------------
UTILITIES & POWER - 1.29%
American Electric Power Inc 1,460 66,248
Baltimore Gas & Electric Co 1,460 45,351
Carolina Power & Lighting Co 1,390 60,291
Central & SouthWest Corp 1,700 45,688
Cinergy Corp 706 24,710
Columbia Gas Systems Inc 300 16,688
Consolidated Natural Gas Co 930 54,754
DTE Energy Co 1,380 55,718
Dominion Resource Inc 1,460 59,495
Duke Energy Co 2,251 133,372
Eastern Enterprises 100 4,288
Edison International 3,030 89,574
Enron Corp 2,400 129,750
Entergy Corp 1,680 48,300
FPL Group Inc 1,390 87,570
First Energy Corp 1,950 59,963
GPU Inc 500 18,906
Houston Industries Inc 2,072 63,973
Niagara Mohawk Power Co * 1,790 26,738
Nicor Inc 200 8,025
Northern Systems Power Co 1,460 41,793
PG & E Corp 3,170 100,053
PP & L Resource Inc 700 15,881
Pacificorp 2,440 55,205
Peco Energy Co 1,950 56,916
Peoples Energy Corp 200 7,725
Public Service Enterprise Group 1,930 66,464
Sempra Energy 1,102 30,567
Sonat Inc 500 19,313
Southern Co 5,090 140,929
Texas Utilities Co 2,037 84,790
Unicom Corp 1,860 65,216
Williams Cos Inc 1,810 61,085
Worldcom Inc * 7,800 377,809
------------
2,223,148
------------
<PAGE>
- ----------------------------------------------------------------------
COMMON STOCK SHARES VALUE
- ----------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost $31,719,059) $ 69,581,174
============
- ----------------------------------------------------------------------
FIXED INCOME - 21.67% PAR VALUE
- ----------------------------------------------------------------------
U.S. TREASURY - 21.67%
United States Treasury Bonds
6.00% February 15, 2026 $ 1,547,000 1,609,360
6.25% August 15, 2023 1,020,000 1,092,032
6.50% November 15, 2026 1,275,000 1,415,849
6.875% August 15, 2025 890,000 1,030,727
7.125% February 15, 2023 760,000 899,057
7.25% May 15, 2016 2,495,000 2,923,042
7.25% August 15, 2022 340,000 406,830
7.50% November 15, 2016 400,000 480,188
7.50% November 15, 2024 290,000 359,826
7.625% November 15, 2022 555,000 691,669
7.625% February 15, 2025 3,060,000 3,852,724
8.00% November 15, 2021 3,145,000 4,054,094
8.125% August 15, 2019 530,000 684,029
8.125% May 15, 2021 39,000 50,779
8.125% August 15, 2021 500,000 651,720
8.75% May 15, 2017 350,000 471,352
8.75% May 15, 2020 1,090,000 1,496,701
8.75% August 15, 2020 2,215,000 3,046,312
8.875% August 15, 2017 505,000 688,456
8.875% February 15, 2019 1,400,000 1,928,276
9.00% November 15, 2018 350,000 486,444
9.125% May 15, 2009 655,000 767,169
9.125% May 15, 2018 125,000 174,980
9.25% February 15, 2016 200,000 278,188
9.875% November 15, 2015 250,000 364,140
10.375% November 15, 2012 1,225,000 1,640,349
10.625% August 15, 2015 1,360,000 2,090,578
11.25% February 15, 2015 1,080,000 1,730,700
11.75% February 15, 2010 295,000 393,548
11.75% November 15, 2014 205,000 308,365
12.00% August 15, 2013 245,000 363,252
12.50% August 15, 2014 230,000 358,225
12.75% November 15, 2010 310,000 441,507
------------
37,230,468
------------
TOTAL FIXED INCOME
(Cost $33,887,602) 37,230,468
============
- ----------------------------------------------------------------------
SHORT TERM INVESTMENTS - 37.16% PAR/SHARES VALUE
- ----------------------------------------------------------------------
COMMERCIAL PAPER - 24.74%
Associates Corp of North America
6.10% July 1, 1998 2,808,303 2,808,303
See notes to financial statements and
notes to schedules of investments
<PAGE>
PREFERRED ASSET ALLOCATION FUND (continued)
- ----------------------------------------------------------------------
SHORT TERM INVESTMENTS PAR/SHARES VALUE
- ----------------------------------------------------------------------
COMMERCIAL PAPER (continued)
Cargill Inc
6.05% July 1, 1998 $ 3,000,000 $ 3,000,000
CIT Group Holdings Inc
5.43% September 18, 1998 @ 1,000,000 987,900
Coca Cola Co
5.47% September 22, 1998 @ 2,000,000 1,974,720
Duke Energy Co
6.05% July 1, 1998 3,000,000 3,000,000
Ford Motor Credit Co
5.50% September 16, 1998 @ 2,500,000 2,470,525
France Telecom
5.51% September 1, 1998 @ 2,000,000 1,981,040
General Electric Capital Corp
5.50% September 15, 1998 @ 1,000,000 988,430
5.51% September 4, 1998 @ 1,500,000 1,485,090
General Motors Acceptance Corp
5.44% September 18, 1998 @ 2,500,000 2,469,550
General Resource Corp
5.50% August 28, 1998 @ 2,000,000 1,982,278
International Lease Financial Corp
5.48% September 21, 1998 @ 2,500,000 2,468,775
Met Life Funding Inc
5.90% July 6, 1998 @ 2,000,000 1,998,361
Motorola Credit Corp
5.48% September 25, 1998 @ 1,500,000 1,480,350
National Rural Utilities Financial Coop
5.50% September 17, 1998 @ 2,000,000 1,976,120
OGE Energy Corp
5.70% July 2, 1998 @ 2,000,000 1,999,683
Proctor & Gamble Co
5.48% September 18, 1998 @ 2,500,000 2,469,750
Repsol International Financial
5.60% July 2, 1998 @ 3,000,000 2,999,533
Walt Disney Co
6.05% July 1, 1998 2,000,000 2,000,000
Winn Dixie Stores Inc
5.50% September 22, 1998 @ 2,000,000 1,974,580
------------
42,514,988
------------
REPURCHASE AGREEMENTS - 8.93%
State Street Repo 5.00% July 1, 1998
(Cost - $15,338,000)(Dated June 30, 1998,
due July 1, 1998, collateralized by
$11,470,000 U.S. Treasury Bond 8.50%,
February 15, 2020, Market Value
$15,649,152, Repurchase
Proceeds $15,340,130) 15,338,000 15,338,000
------------
- ----------------------------------------------------------------------
SHORT TERM INVESTMENTS PAR/SHARES VALUE
- ----------------------------------------------------------------------
SHORT TERM INVESTMENT FUND - 1.65%
State Street Global Advisors Money
Market Fund $2,842,731 $ 2,842,731
------------
U.S. TREASURY - 1.84%
United States Treasury Bills
4.875% September 24, 1998 #@ 2,040,000 2,016,519
4.96% September 17, 1998 #@ 450,000 445,239
4.97% October 8, 1998 #@ 400,000 394,532
5.06% September 17, 1998 #@ 300,000 296,826
------------
3,153,116
------------
TOTAL SHORT TERM INVESTMENTS
(Cost $63,849,810) 63,848,835
============
TOTAL INVESTMENTS - 99.32%
(Cost $129,456,471) 170,660,477
============
OTHER ASSETS AND LIABILITIES - .68% 1,173,089
============
TOTAL NET ASSETS - 100% $171,833,566
============
PREFERRED FIXED INCOME FUND
- ----------------------------------------------------------------------
FIXED INCOME - 92.77% PAR+ VALUE
- ----------------------------------------------------------------------
ASSET BACKED - 5.08%
Chevy Chase Auto Receivables
6.00% December 15, 2001 $ 103,416 $ 103,512
Eaglemark Credit
6.75% November 15, 2002 1,344,438 1,355,354
First U.S.A. Credit Card Master Trust **
6.80% February 18, 2011 4,500,000 4,574,250
Ford Credit Auto Loan Master Trust
6.50% August 15, 2002 1,134,000 1,146,758
Reliable Auto Receivable Master Trust
5.80% June 15, 2002 340,346 340,665
Western Financial
6.05% November 1, 2000 155,562 155,794
------------
7,676,333
------------
COLLATERALIZED MORTGAGE OBLIGATIONS - 24.13%
1345 Funding LLC Class C **
7.993% May 25, 2006 3,000,000 3,238,125
<PAGE>
- ----------------------------------------------------------------------
FIXED INCOME PAR+ VALUE
- ----------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS (continued)
Chase Commercial Mortgage
Securities Corp
6.45% December 19, 2004 $ 977,508 $ 990,949
Countrywide Home Loans
6.75% May 25, 2028 1,954,435 1,941,914
Criimi Mae Financial Corp
7.00% January 1, 2033 805,320 817,022
Deutsche Mortgage & Asset
Receivable Corp
6.22% September 15, 2007 1,481,271 1,479,882
Federal Home Loan Mortgage Pc Gtd
6.00% April 15, 2006 1,000,000 998,430
6.50% November 15, 2022 5,000,000 5,087,500
7.00% August 15, 2023 1,000,000 1,040,000
Federal National Mortgage Assn Gtd
5.50% December 25, 2008 1,200,000 1,170,744
First Union Lehman Brothers
Mortgage Trust
6.65% December 18, 2007 1,300,000 1,331,772
JP Morgan Commercial Mortgage
Financial Corp **
8.731% November 25, 2027 1,000,000 1,044,688
MLIC Commercial Mortgage **
6.60% July 25, 2027 444,017 444,105
Merrill Lynch Mortgage Investments Inc
6.96% November 21, 2028 750,000 771,094
7.15% April 25, 2028 2,704,788 2,788,123
Morgan Stanley Capital I Inc
6.19% January 15, 2007 639,521 642,207
6.25% July 15, 2007 1,483,911 1,500,723
Mortgage Capital Funding Inc
6.417% June 18, 2007 1,980,259 2,010,194
Residential Funding Mortgage
Securities I Inc
6.50% March 25, 2013 1,461,617 1,458,419
Santista Securitization I **
8.09% November 30, 2006 961,167 927,142
Sears Credit Account Master Trust II
6.50% October 15, 2003 3,000,000 3,019,680
Tyron Mortgage Funding Inc
7.55% December 20, 2009 3,750,000 3,784,988
------------
36,487,701
------------
ELECTRIC - 2.01%
Boston Edison Co
7.80% May 15, 2010 1,375,000 1,503,824
Houston Lighting & Power Co MTN
6.50% April 21, 2003 1,500,000 1,534,845
------------
3,038,669
------------
- ----------------------------------------------------------------------
FIXED INCOME PAR+ VALUE
- ----------------------------------------------------------------------
FEDERAL AGENCY POOLED - 4.59%
Federal Home Loan Mortgage Corp
6.50% July 15, 2016 $ 2,000,000 $ 2,009,360
6.65% March 15, 2018 2,380,752 2,390,609
Federal Home Loan Pc
7.00% December 1, 2024 363,935 369,624
8.00% August 1, 2026 2,103,505 2,175,802
------------
6,945,395
------------
FINANCE & BANKING - 7.79%
ABN Amro Bank NV Chicago
7.55% June 28, 2006 1,500,000 1,605,105
AMSouth Bank North America
Birmingham AL
6.45% February 1, 2018 1,500,000 1,496,625
FCB/NC Capital Trust I **
8.05% March 1, 2028 700,000 735,070
General Motors Acceptance Corp
8.00% October 1, 1999 1,500,000 1,537,095
Integra Bank Pittsburgh MTN
6.55% June 15, 2000 650,000 658,535
Keycorp Institutional Capital B
8.25% December 15, 2026 1,000,000 1,116,140
Pacific Corp Security Discounted MTN
6.75% July 15, 2004 1,000,000 1,028,380
Security Pacific Corp MTN
10.30% May 15, 2001 1,250,000 1,391,500
Simon Debartolo Group L.P. MTN
7.125% September 20, 2007 1,500,000 1,543,215
Weeks Realty
6.875% March 15, 2005 667,000 668,760
------------
11,780,425
------------
FOREIGN CORPORATE - 1.89%
Bangkok Bank Pub Ltd **
7.25% September 15, 2005 175,000 137,821
British Sky Broadcasting Group
7.30% October 15, 2006 1,000,000 1,044,320
Energy Group Overseas BV
7.50% October 15, 2027 1,250,000 1,350,313
Rogers Cable Systems Ltd
11.09% June 1, 2000 300,000 317,250
------------
2,849,704
------------
FOREIGN GOVERNMENT - 7.94%
Germany Federal Unity
8.50% February 20, 2001 DEM 8,500,000 5,215,143
Government of France
4.75% March 12, 2002 FRF 39,125,000 6,567,968
See notes to financial statements and
notes to schedules of investments
<PAGE>
PREFERRED FIXED INCOME FUND (continued)
- ----------------------------------------------------------------------
FIXED INCOME PAR+ VALUE
- ----------------------------------------------------------------------
FOREIGN GOVERNMENT (continued)
Quebec Providence of Canada
7.50% July 15, 2023 $ 200,000 $ 222,346
------------
12,005,457
------------
GOVERNMENT SPONSORED - 6.41%
Federal National Mortgage Association
6.50% February 1, 2024 148,811 148,997
6.50% April 1, 2024 265,114 265,277
6.50% July 1, 2024 281,935 282,110
6.50% With maturities of December 1, 2027
through December 1, 2028 805,509 802,231
6.925% March 1, 2001 775,040 788,846
7.00% March 1, 2011 18,275 18,640
7.00% October 1, 2011 316,043 322,067
7.00% December 1, 2011 707,449 720,268
7.00% May 1, 2012 1,441,930 1,468,058
7.00% August 1, 2012 32,777 33,371
7.00% September 1, 2012 136,906 139,387
7.50% October 1, 2026 2,272,627 2,330,851
8.50% October 1, 2026 2,273,965 2,373,451
------------
9,693,554
------------
INDUSTRIALS - 10.78%
Boston Scientific Corp
6.625% March 15, 2005 1,500,000 1,515,870
Canadian Occidental Petroleum Ltd
7.40% May 1, 2028 1,500,000 1,529,310
Ford Motor Co
9.00% September 15, 2001 1,695,000 1,838,160
Laidlaw Inc
6.50% May 1, 2005 2,350,000 2,364,382
6.72% October 1, 2027 1,000,000 1,039,850
Lasmo U.S.A. Inc
7.30% November 15, 2027 1,500,000 1,495,515
Lomak Petroleum Inc
8.75% January 15, 2007 400,000 394,000
Mariner Health Group Inc
9.50% April 1, 2006 400,000 424,000
Oil Purchase Co **
7.10% April 30, 2002 1,942,589 1,935,304
Philip Morris Cos Inc
6.15% March 15, 2000 600,000 599,988
Plains Resource Inc
10.25% March 15, 2006 400,000 417,000
Tricon Global Restaurants Inc
7.45% May 15, 2005 400,000 399,548
- ----------------------------------------------------------------------
FIXED INCOME PAR+ VALUE
- ----------------------------------------------------------------------
INDUSTRIALS (continued)
Ultramar Diamond Shamrock Corp
6.75% October 15, 2037 $2,000,000 $ 2,088,640
Westpoint Stevens Inc **
7.875% June 15, 2005 250,000 252,500
------------
16,294,067
------------
MORTGAGE RELATED-OTHER MARKETABLE - 4.51%
Deutsche Financial Capital
6.00% April 15, 2028 1,030,000 1,026,298
Midland Realty Acceptance Corp
7.02% January 25, 2029 1,558,867 1,605,041
Morgan Stanley Capital II Inc
6.34% November 15, 2007 1,500,000 1,519,688
Ocwen Residential MBS Corp **
4.00% October 25, 2040 2,702,513 2,672,110
------------
6,823,137
------------
NATURAL GAS - 1.32%
RAS Laffan Liquified Natural Gas **
8.294% March 15, 2014 2,000,000 1,996,822
------------
OIL AND GAS - .39%
PTTEP International Ltd **
7.625% October 1, 2006 750,000 596,205
------------
PUBLISHING & BROADCASTING - .59%
Time Warner Entertainment Co
8.375% July 15, 2033 750,000 886,658
------------
TELEPHONE - 2.26%
Aerial Communications Inc **
0% February 1, 2008 *** 3,265,000 1,556,971
McLeodUSA Inc
9.25% July 15, 2007 435,000 452,400
Qwest Communications International Inc
(9.47% Oct. 15, 2002) Oct. 15, 2007 *** 550,000 412,500
US West Capital Funding Inc
6.25% July 15, 2005 1,000,000 997,820
------------
3,419,691
------------
U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES - 3.32%
Government National Mortgage Association
7.50% August 20, 2026 2,564,553 2,627,872
7.50% June 15, 2027 205,769 211,492
7.50% January 15, 2028 748,813 769,637
7.50% February 15, 2028 438,309 450,498
See notes to financial statements and
notes to schedules of investments
<PAGE>
- ----------------------------------------------------------------------
FIXED INCOME PAR+ VALUE
- ----------------------------------------------------------------------
U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES (continued)
Government National Mortgage Association
7.50% March 15, 2028 $ 743,380 $ 764,053
8.00% With maturities of January 15, 2027
through December 15, 2028 193,483 200,497
------------
5,024,049
------------
U.S. TREASURY - 9.76%
United States Treasury Bonds
6.75% August 15, 2026 1,050,000 1,202,082
United States Treasury Notes
5.50% February 15, 2008 4,640,000 4,637,077
6.125% August 15, 2007 275,000 286,129
6.25% February 28, 2002 # 3,557,000 3,638,704
6.625% June 30, 2001 # 1,625,000 1,672,483
6.875% May 15, 2006 3,065,000 3,318,813
------------
14,755,288
------------
TOTAL FIXED INCOME
(Cost $137,645,751) $140,273,155
============
- ----------------------------------------------------------------------
SHORT TERM INVESTMENTS - 1.40% PAR+ VALUE
- ----------------------------------------------------------------------
FINANCE & BANKING - .25%
DuPont E I de Nemours & Co
5.47% July 17, 1998 @ 200,000 199,514
Koch Industries
6.30% July 1, 1998 168,000 168,000
------------
367,514
------------
U.S. TREASURY - 1.15%
United States Treasury Notes
5.75% December 31, 1998 @ 1,740,000 1,743,529
------------
TOTAL SHORT TERM INVESTMENTS
(Cost $2,109,983) 2,111,043
============
TOTAL INVESTMENTS - 94.17%
(Cost $139,755,734) 142,384,198
============
OTHER ASSETS AND LIABILITIES - 5.83% 8,820,076
============
TOTAL NET ASSETS - 100% $151,204,274
============
See notes to financial statements and
notes to schedules of investments
<PAGE>
PREFERRED SHORT-TERM GOVERNMENT SECURITIES FUND
- ----------------------------------------------------------------------
FIXED INCOME - 86.98% PAR VALUE
- ----------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS - 44.15%
Federal Home Loan Mortgage Corp
6.00% February 15, 2007 $3,000,000 $ 3,005,610
Federal Home Loan Mortgage Pc Gtc
5.75% January 15, 2006 2,482,415 2,478,517
5.75% February 25, 2017 2,000,000 1,992,160
6.00% April 15, 2005 3,000,000 3,001,860
6.00% August 15, 2016 845,412 845,699
6.00% December 15, 2017 4,100,000 4,096,146
Federal National Mortgage
Association REMIC
6.00% November 25, 2016 5,151,125 5,143,038
6.00% November 25, 2018 3,306,000 3,295,652
6.65% October 25, 2018 2,736,558 2,738,255
------------
26,596,937
------------
FEDERAL AGENCY POOLED - 26.12%
Federal Home Loan Banks
5.82% March 12, 2001 3,000,000 2,986,860
Federal Home Loan Pc
6.00% July 1, 1999 2,514,333 2,508,726
6.00% December 1, 2000 4,663,233 4,651,388
6.00% January 1, 2001 4,061,320 4,051,004
6.00% April 1, 2001 1,088,258 1,085,494
6.75% October 1, 1999 445,499 448,564
------------
15,732,036
------------
GOVERNMENT SPONSORED - 13.91%
Federal National Mortgage Association
5.50% November 1, 2002 1,026,600 1,014,989
6.50% December 1, 2000 2,472,543 2,482,013
6.50% April 1, 2003 2,349,940 2,366,342
Overseas Private Investment Corp
6.13% September 15, 2001 2,500,000 2,512,500
------------
8,375,844
------------
MUNICIPAL - .71%
Arkansas State Financial Authority
5.75% February 1, 2005 425,000 425,085
------------
U.S. TREASURY - 2.09%
United States Treasury Bonds
8.125% August 15, 2021 180,000 234,619
United States Treasury Notes
8.00% August 15, 1999 1,000,000 1,026,560
------------
1,261,179
------------
TOTAL FIXED INCOME
(Cost $52,411,937) 52,391,081
============
See notes to financial statements and
notes to schedules of investments
<PAGE>
PREFERRED SHORT-TERM GOV'T SEC FUND (continued)
- ----------------------------------------------------------------------
SHORT TERM INVESTMENTS - 12.33% PAR/SHARES VALUE
- ----------------------------------------------------------------------
FEDERAL AGENCY POOLED - 9.90%
Federal Home Loan Mortgage
Discount Notes
5.44% August 6, 1998 @ $6,000,000 $ 5,967,360
------------
SHORT TERM INVESTMENT FUND - 2.43%
State Street Global Advisors Money
Market Fund 1,463,051 1,463,051
------------
TOTAL SHORT TERM INVESTMENTS
(Cost $7,430,411) 7,430,411
============
TOTAL INVESTMENTS - 99.31%
(Cost $59,842,348) 59,821,492
============
OTHER ASSETS AND LIABILITIES - .69% 414,789
============
TOTAL NET ASSETS - 100% $ 60,236,281
============
PREFERRED MONEY MARKET FUND
- ----------------------------------------------------------------------
SHORT TERM INVESTMENTS - 95.27% PAR VALUE
- ----------------------------------------------------------------------
CERTIFICATES OF DEPOSIT - 19.20%
Bank of New York
5.64% March 26, 1999 @ $2,000,000 $ 1,999,155
Bayerische Landes Bank of New York
5.72% May 6, 1999 @ 3,000,000 2,999,268
Credit Anstalt Bankverein
5.89% November 17, 1998 @ 3,000,000 3,001,582
Credit Suisse
5.74% January 7, 1999 3,000,000 3,000,000
Deutsche Bank AG New York
5.73% April 15, 1999 @ 2,000,000 1,999,244
Harris Trust & Savings Bank
5.57% August 25, 1998 4,000,000 4,000,000
Nationsbank Corp
5.55% July 16, 1998 1,000,000 1,000,000
Swiss Bank Corp New York
5.64% March 23, 1999 @ 2,000,000 1,999,443
------------
19,998,692
------------
- ----------------------------------------------------------------------
SHORT TERM INVESTMENTS PAR VALUE
- ----------------------------------------------------------------------
COMMERCIAL PAPER - 41.49%
Alpine Securitization Corp
5.505% July 15, 1998 @ $1,500,000 $ 1,496,789
Atlantic Richfield Co
5.55% August 14, 1998 @ 3,000,000 2,979,650
Bank of New York
5.49% September 21, 1998 @ 1,500,000 1,481,243
Barclays U.S. Funding
5.51% July 23, 1998 @ 3,500,000 3,488,215
CXC Inc
5.50% July 6, 1998 @ 4,000,000 3,996,944
Commerzbank US Financial
5.53% July 23, 1998 @ 3,500,000 3,488,172
DuPont E I de Nemours & Co
5.53% July 22, 1998 @ 3,000,000 2,990,323
Ford Motor Credit Co
5.49% July 8, 1998 @ 5,000,000 4,994,663
Halifax PLC
5.48% September 21, 1998 @ 4,000,000 3,950,071
Koch Industries
6.30% July 1, 1998 3,000,000 3,000,000
Providence de Quebec
5.48% December 30, 1998 @ 2,000,000 1,944,591
5.50% January 11, 1999 @ 2,000,000 1,940,722
Wachovia Corporation
5.52% August 12, 1998 @ 3,500,000 3,477,460
Windmill Funding Corp
5.55% July 8, 1998 @ 4,000,000 3,995,683
------------
43,224,526
------------
FLOATING RATE NOTES - 26.39%
American Express Centurion Bank
5.608% July 8, 1998 ## 1,000,000 1,000,000
BankBoston North America
5.849% July 2, 1998 ##@ 4,000,000 3,999,429
Bank of Nova Scotia
5.603% July 7, 1998 ##@ 5,000,000 4,996,330
General Electric Capital Corp
5.569% July 2, 1998 ## 4,000,000 4,000,000
Key Bank North America
5.606% July 2, 1998 ##@ 4,000,000 3,999,775
Old Kent Bank
5.581% July 2, 1998 ## 3,500,000 3,500,000
Societe Generale
5.649% July 26, 1998 ##@ 5,000,000 4,996,892
Triangle Funding Ltd **
5.895% July 15, 1998 ##@ 1,000,000 999,898
------------
27,492,324
------------
See notes to financial statements and
notes to schedules of investments
<PAGE>
- ----------------------------------------------------------------------
SHORT TERM INVESTMENTS PAR VALUE
- ----------------------------------------------------------------------
GOVERNMENT AGENCY - 8.19%
Federal Farm Credit Bank
5.55% July 1, 1998 $8,530,000 $ 8,530,000
------------
TOTAL SHORT TERM INVESTMENTS
(Cost $99,245,542) 99,245,542
============
TOTAL INVESTMENTS - 95.27%
(Cost $99,245,542) 99,245,542
============
OTHER ASSETS AND LIABILITIES - 4.73% 4,921,982
============
TOTAL NET ASSETS - 100% $104,167,524
============
NOTES TO SCHEDULES OF INVESTMENTS
* Non-income producing security
** Pursuant to Rule 144A under the Securities Act of 1933, these
securities may be resold in transactions exempt from registration, normally to
qualified institutional buyers. At June 30, 1998, these securities amounted to
$20,111,113 or 13.30% of the net assets of the Preferred Fixed Income Fund and
$999,898 or .96% of the net assets of the Preferred Money Market Fund.
*** Currently zero coupon. Shown parenthetically is the next interest
rate to be paid, and the date the Fund will begin accruing this rate.
# All or a portion of this security is being used to collateralize
futures contracts outstanding at June 30, 1998. Additional securities are
segregated to cover the remaining value of futures contracts.
## 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 (unaudited).
+ Par is in U.S. dollars unless otherwise noted.
ABBREVIATIONS:
ADR - American Depository Receipt
MTN - Medium Term Notes
DEM - Deutsche Mark
FRF - French Franc
See notes to financial statements and
notes to schedules of investments
<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 above-average earnings growth.
PREFERRED VALUE FUND ("Value") - seeks capital appreciation and current
income. The Fund invests primarily in equity securities believed to be
undervalued and that offer above-average potential for capital appreciation.
PREFERRED INTERNATIONAL FUND ("International") - seeks long-term capital
appreciation by investing its assets primarily in equity securities traded
principally on markets outside the United States.
PREFERRED SMALL CAP FUND ("Small Cap") - seeks long-term capital
appreciation through investments in companies with small equity
capitalizations.
PREFERRED ASSET ALLOCATION FUND ("Asset Allocation") - seeks both capital
appreciation and current income by allocating its assets among stocks, bonds
and high quality money market instruments.
PREFERRED 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
<PAGE>
pricing agents approved by the Trustees, which prices reflect broker/dealer
supplied valuations and electronic data processing techniques. If the
pricing agents are unable to provide such quotations, the most recent bid
quotation supplied by a bonafide market maker shall be used.
Over-the-counter options are valued at fair value, as determined in good
faith by the Trustees or by persons acting at their direction based on
prices supplied by a broker, usually the option counter-party. Forward
contracts are valued at the mean between the bid and the offered forward
rates as last quoted by a pricing service. Obligations having remaining
maturities of 60 days or less and securities held 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.
Certain investments in securities held by the Funds were valued on the basis
of a price provided by a principal market maker. At June 30, 1998, the total
value of these securities represented 10.00% of net assets of the Fixed
Income Fund. These prices may differ from the value that would have been
used had a broader market for the securities existed.
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, 1998, capital loss carryforwards 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 $408,901
Short-Term Government 2004 $302,863
Short-Term Government 2005 $ 96,867
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. For the Short-Term Government Securities Fund, income earned on
short-term investment funds is included in interest income in the Statement
of Operations. Payments received in kind are recorded at the fair market
value of the securities received.
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, tax straddles, redemption-in-kind transactions and
post-October 31 losses. Permanent book and tax differences relating to
shareholder distributions will result in reclassifications in the Funds'
capital accounts.
<PAGE>
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.
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, disclosed in the Statement of Assets and
Liabilities, which become realized at the time the forward contracts are
settled. Forward currency contracts do not eliminate fluctuations in the
prices of the Funds' portfolio securities. The maximum potential loss from
such contracts is the aggregate face value in U.S. dollars at the time the
contract was opened. See note 4 for all open forward currency contracts held
as of June 30, 1998.
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 in the Statement of Assets and Liabilities. 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, which is disclosed in the Statement of Operations.
Futures contracts involve, to varying degrees, risk of loss in excess of the
variation margin. Losses may arise from the changes in the value of the
underlying instrument, the illiquidity of the secondary market for the
contracts, or the failure of counterparties to perform under the contract
terms. See Note 4 for all open futures contracts held as of June 30, 1998.
<PAGE>
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.
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. The Funds may be subject to
foreign taxes on income and gains on investments which are accrued based
upon the Fund's understanding of the tax rules and regulations.
<PAGE>
2. FEES AND COMPENSATION PAID TO AFFILIATES
MANAGEMENT FEE
Caterpillar Investment Management Ltd. ("the Manager") provides investment
advisory and portfolio management services for the Funds. Each Fund pays a
monthly fee based on the average net assets of the Fund at the following
rates:
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%
To assist in carrying out its responsibilities, the Manager has retained
various subadvisors to render advisory services to the Funds:
FUND SUBADVISOR(S)
Growth................................. Jennison Associates LLC
("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 - 3/31/98)
None (4/1/98 - 6/30/98)
The subadvisors operate under the supervision of the Manager and The
Preferred Group's Trustees. The Manager pays the fees of each of the
subadvisors; the Funds do not pay subadvisory fees in addition to the
management fee paid to the Manager.
For the fiscal year ended June 30, 1998, brokerage commissions were paid to
the following affiliates of the Trust's subadvisors by the following Funds:
GROWTH VALUE
J.P. Morgan Securities, Inc. $14,518 -
Lehman Brothers Inc. 25,023* -
Oppenheimer & Co., Inc. 4,061 $8,115
------- ------
$43,602 $8,115
======= ======
* As of January 31,1998, Lehman Brothers Inc. ceased to be an affiliate of
PanAgora and the Trust. Amount represents brokerage commissions paid to
Lehman Brothers Inc. for the period July 1, 1997 through January 31, 1998.
<PAGE>
TRUSTEES' FEES
For the fiscal year ended June 30, 1998, 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.
3. BENEFICIAL INTEREST
As of June 30, 1998, 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 63.30% - 6.28% -
Value 69.48% - 7.48% -
International 34.41% 39.09% 5.98% -
Small Cap 35.76% 49.52% 7.64% -
Asset Allocation 42.05% 28.95% - -
Fixed Income 19.54% 27.95% - 38.72%
Short-Term Government 25.91% 31.19% 37.22% -
Money Market 73.25% - - 5.23%
* 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 37.22%
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.
</TABLE>
<PAGE>
4. PORTFOLIO INFORMATION
SECURITY PURCHASES AND SALES
During the fiscal year ended June 30, 1998, purchases and sales of long-term
investments (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 $332,008,626 $432,926,981 - -
Value 36,634,261 82,121,394 - -
International 42,050,498 48,861,323 - -
Small Cap 154,040,612 125,780,427 - -
Asset Allocation 2,065,515 795,141 $ 38,222,393 $ 47,526,381
Fixed Income 140,490,578 117,727,112 154,592,261 165,838,647
Short-Term Government 78,635,070 57,403,481 57,869,684 66,713,293
</TABLE>
During the fiscal year ended June 30, 1998, 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 $2,907,028,607 $2,912,754,628 $16,507,514 $18,510,078
</TABLE>
FUTURES CONTRACTS
Asset Allocation and Fixed Income had the following futures contracts open
at June 30, 1998:
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION UNDERLYING UNREALIZED
CONTRACTS CONTRACTS DATE FACE VALUE GAIN (LOSS), NET
<S> <C> <C> <C> <C>
ASSET ALLOCATION:
Long Positions:
S&P 500 99 Sep 98 $26,420,625 $ 828,100
U.S. Treasury Bonds 259 Sep 98 32,229,313 540,736
---------
1,368,836
Short Positions:
S&P 500 112 Sep 98 (29,825,660) (758,941)
---------
$ 609,895
=========
FIXED INCOME:
Long Positions:
U.S. Treasury Bonds 14 Sep 98 1,546,125 1,244
U.S. Treasury Bonds 158 Sep 98 19,680,875 $ 249,138
---------
250,382
Short Positions:
U.S. Treasury Notes - 10 Years 41 Sep 98 (4,707,313) (40,926)
---------
$ 209,456
=========
</TABLE>
<PAGE>
FORWARD CURRENCY CONTRACTS
Fixed Income Fund had the following forward currency contracts open at June
30, 1998:
<TABLE>
<CAPTION>
SALES:
SETTLEMENT UNITS OF IN EXCHANGE FOR VALUE AT UNREALIZED
DATE DELIVER CURRENCY (IN US DOLLARS) 6/30/98 APPRECIATION
<S> <C> <C> <C> <C> <C> <C>
July 30, 1998 DEM 9,566,986 $5,371,391 $5,314,608 $ 56,783
July 31, 1998 FRF 39,948,325 6,708,054 6,620,264 87,790
--------
$144,573
========
</TABLE>
UNREALIZED APPRECIATION (DEPRECIATION)
Unrealized appreciation (depreciation) for each Fund at June 30, 1998 based
on cost of both long-term and short-term securities for federal tax purposes
were as follows:
<TABLE>
<CAPTION>
NET UNREALIZED COST FOR
GROSS UNREALIZED GROSS UNREALIZED APPRECIATION/ FEDERAL TAX
FUND APPRECIATION (DEPRECIATION) (DEPRECIATION) PURPOSES
<S> <C> <C> <C> <C>
Growth $146,232,873 ($ 7,918,110) $138,314,763 $360,584,778
Value 218,549,439 (3,616,479) 214,932,960 200,560,333
International 82,914,880 (21,374,367) 61,540,513 223,880,521
Small Cap 29,542,220 (3,853,882) 25,688,338 109,162,979
Asset Allocation 41,707,856 (580,118) 41,127,738 129,532,739
Fixed Income 3,040,952 (435,088) 2,605,864 139,778,334
Short-Term Government 40,075 (60,931) (20,856) 59,842,348
Money Market - - - 99,245,542
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES AND SHAREHOLDERS OF THE PREFERRED GROUP OF MUTUAL FUNDS:
In our opinion, the accompanying statements of assets and liabilities,
including the schedules of investments, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of each of the eight Funds
constituting The Preferred Group of Mutual Funds (the "Trust") at June 30, 1998,
the results of each of their operations for the year then ended, the changes in
each of their net assets and the financial highlights for the periods indicated,
in conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at June
30, 1998 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
August 13, 1998
<PAGE>
THE PREFERRED GROUP OF MUTUAL FUNDS
OFFICERS AND TRUSTEES
Gary M. Anna Trustee
William F. Bahl Trustee
James F. Masterson Trustee
F. Lynn McPheeters Trustee
Dixie L. Mills Trustee
Ronald R. Rossmann President
Carol K. Burns Vice President and Assistant Clerk
Fred L. Kaufman Vice President and Treasurer
Richard P. Konrath Clerk
INVESTMENT ADVISOR
Caterpillar Investment Management Ltd.
1200 First Financial Plaza
411 Hamilton Boulevard
Peoria, IL 61602-1104
DISTRIBUTOR
Caterpillar Securities Inc.
1200 First Financial Plaza
411 Hamilton Boulevard
Peoria, IL 61602-1104
CUSTODIAN
State Street Bank & Trust Co.
P.O. Box 1713
Boston, MA 02101
TRANSFER AGENT AND INVESTOR SERVICES
Boston Financial Data Services, Inc.
The BFDS Building
Two Heritage Drive
Quincy, MA 02171
LEGAL COUNSEL
Ropes & Gray
One International Place
Boston, MA 02110-2624
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
160 Federal Street
Boston, MA 02110
This report and the financial statements contained herein are submitted
for the general information of the shareholders of The Preferred Group of Mutual
Funds. The report is not intended for distribution to prospective investors
unless preceded or accompanied by a current prospectus.
1-800-662-GROW
<PAGE>
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>
LOGO: THE PREFERRED GROUP OF MUTUAL FUNDS
P.O.BOX 8320
BOSTON, MA 02266-8320
ANNUAL REPORT
JUNE 30, 1998
--------------
BULK RATE
U.S. POSTAGE
PAID
BERWYN, IL
PERMIT NO. 150
--------------
