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<PAGE> PAGE 3
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<PAGE> PAGE 9
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<PAGE> PAGE 10
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<PAGE> PAGE 12
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<PAGE> PAGE 14
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<PAGE> PAGE 21
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<PAGE> PAGE 22
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<PAGE> PAGE 25
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<PAGE> PAGE 26
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<PAGE> PAGE 27
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<PAGE> PAGE 28
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<PAGE> PAGE 30
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<PAGE> PAGE 31
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<PAGE> PAGE 32
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<PAGE> PAGE 33
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<PAGE> PAGE 34
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<PAGE> PAGE 35
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<PAGE> PAGE 36
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<PAGE> PAGE 37
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<PAGE> PAGE 38
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<PAGE> PAGE 39
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<PAGE> PAGE 40
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SIGNATURE FRED KAUFMAN
TITLE VICE PRES/TREASURER
PricewaterhouseCoopers LLP
160 Federal Street
Boston, MA 02110
To the Shareholders and
Trustees of The Preferred Group of Mutual Funds
In planning and performing our audits of the financial statements of each of the
eight funds constituting The Preferred Group of Mutual Funds (the "Trust") for
the year ended June 30, 1998, we considered their internal control, including
control activities for safeguarding securities, in order to determine our
auditing procedures for the purpose of expressing our opinion on the financial
statements and to comply with the requirements of Form N-SAR, not to provide
assurance on internal control.
The management of the Trust is responsible for establishing and maintaining
internal control. In fulfilling this responsibility, estimates and judgments by
management are required to assess the expected benefits and related costs of
controls. Generally, controls that are relevant to an audit pertain to the
entity's objective of preparing financial statements for external purposes
that are fairly presented in conformity with generally accepted accounting
principles. Those controls include the safeguarding of assets against
unauthorized acquisition, use or disposition.
Because of inherent limitations in internal control, errors or fraud may occur
and not be detected. Also, projection of any evaluation of internal control to
future periods is subject to the risk that it may become inadequate because of
changes in conditions or that the effectiveness of the design and operation may
deteriorate.
Our consideration of internal control would not necessarily disclose all matters
in internal control that might be material weaknesses under standards
established by the American Institute of Certified Public Accountants. A
material weakness is a condition in which the design or operation of one or more
of the internal control components does not reduce to a relatively low level the
risk that misstatements caused by error or fraud in amounts that would be
material in relation to the financial statements being audited may occur and not
be detected within a timely period by employees in the normal course of
performing their assigned functions. However, we noted no matters involving
internal control and its operation, including controls for safeguarding
securities, that we consider to be material weaknesses as defined above as of
June 30, 1998.
This report is intended solely for the information and use of management and the
Trustees of the Trust and the Securities and Exchange Commission.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
August 13, 1998
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<DIVIDEND-INCOME> 7,920,067
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<NET-INVESTMENT-INCOME> 4,619,323
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<CIK> 0000885414
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<NAME> PREFERRED SMALL CAP FUND
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<FISCAL-YEAR-END> JUN-30-1998
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<TOTAL-ASSETS> 136,675,154
<PAYABLE-FOR-SECURITIES> 248,011
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 123,680
<TOTAL-LIABILITIES> 371,691
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 105,426,562
<SHARES-COMMON-STOCK> 8,744,214
<SHARES-COMMON-PRIOR> 5,937,231
<ACCUMULATED-NII-CURRENT> 125,934
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 5,072,094
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 25,678,873
<NET-ASSETS> 136,303,463
<DIVIDEND-INCOME> 1,453,684
<INTEREST-INCOME> 7,986
<OTHER-INCOME> 0
<EXPENSES-NET> 1,107,471
<NET-INVESTMENT-INCOME> 354,199
<REALIZED-GAINS-CURRENT> 15,998,484
<APPREC-INCREASE-CURRENT> 6,609,372
<NET-CHANGE-FROM-OPS> 22,962,055
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 630,000
<DISTRIBUTIONS-OF-GAINS> 13,550,134
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,932,192
<NUMBER-OF-SHARES-REDEEMED> 3,133,590
<SHARES-REINVESTED> 1,008,381
<NET-CHANGE-IN-ASSETS> 51,425,658
<ACCUMULATED-NII-PRIOR> 425,399
<ACCUMULATED-GAINS-PRIOR> 2,588,134
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 918,583
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,107,471
<AVERAGE-NET-ASSETS> 122,477,797
<PER-SHARE-NAV-BEGIN> 14.30
<PER-SHARE-NII> .03
<PER-SHARE-GAIN-APPREC> 3.17
<PER-SHARE-DIVIDEND> .08
<PER-SHARE-DISTRIBUTIONS> 1.83
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.59
<EXPENSE-RATIO> .90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
Item 77C. On January 12, 1998, an information statement relating to the
subadvisory agreement for the Preferred Asset Allocation Fund (the "Fund") was
mailed to shareholders, and shareholders constituting a majority (6,502,143.247
shares) of the outstanding securities of the Fund consented to such subadvisory
agreement.
THE PREFERRED GROUP OF MUTUAL FUNDS
Record of Securities Purchased under the Trust's Rule 10f-3 Procedures
Sub-adviser: J.P. Morgan Investment Management Inc.
Fund: Preferred Fixed Income Fund
Securities are: (Select one)
Part of an issue registered under the Securities Act of 1933 which is being
offered to the public YES
"Municipal securities" as defined in Section 3(a)(29) of the Securities
Exchange Act of 1934
Part of an "Eligible Foreign Offering" as defined in Rule 10f-3 under the
Investment Company Act of 1940
Part of an "Eligible Rule 144A Offering" as defined in Rule 10f-3 under the
Investment Company Act of 1940
Issuer: Sears Roebuck Acceptance Corp.
Description of Security: 6% Notes due March 20, 2003
Date of Purchase: 03-13-98
Underwriter from whom purchased: Bear Stearns & Co.
Name of Affiliated Underwriter managing or participating in syndicate (attach
list of all members of syndicate): J.P. Morgan Securities Inc. - please see
Schedule A.
Aggregate principal amount of purchase [this amount; when added to purchases by
other investment companies for whom CIML or the relevant sub-adviser act as
adviser, may not exceed 25% of (10)]: 0.25%
Aggregate principal amount of the offering of the class of securities being
offered (for purchases in the Eligible Rule 144A Offering, the total of (i) the
principal amount of the offering sold by underwriters or members of the
syndicate to qualified institutional buyers plus (ii) the principal amount of
the offering of such class in any concurrent public offering): $1,000,000,000
Aggregate principal amount of offering: $1,000,000,000
Purchase price, net of fees and expenses [may not exceed (14)]: 99.342
Date offering commenced: 03-13-98
Public offering price: 99.342
Was it purchased prior to close to first full business day after offering
commenced (or, if a rights offering, the securities were purchased on the
fourth day preceding the day on which the offering terminated)?: YES
Commission, spread or profit: 0.35%
Have the following conditions been satisfied?
The purchase price did not exceed the offering price? YES
The underwriting was a firm commitment underwriting? YES
The commission, spread or profit was reasonable and fair in relation to that
being received by others for underwriting similar securities during the same
period? YES
(For securities that are not municipal securities) The issuer has been in
continuous operation for not less than three years, including the operations of
any predecessors? YES
(For municipal securities only) The issue of securities has received an
investment grade rating from a nationally recognized statistical rating
organization or, if the issuer or entity supplying the revenues from which the
issue is to be paid shall have been in existence less than three years
(including any predecessors), it has received one of the three highest ratings
from at least one such rating service? N/A
The amount of such securities purchased by all of the investment companies
advised by the sub-adviser(s) to the Fund purchasing such securities did not
exceed (10)? YES
No Affiliated Underwriter was a direct or indirect participant in the sale? YES
Submitted by: /s/ Dan Anniello Date: 4/15/98
Schedule A
Members of the Underwriting Syndicate
Goldman, Sachs & Co.
J.P. Morgan Securities Inc.
Bear Stearns & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Morgan Stanley & Co.
Salomon Brothers Inc.