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The Preferred Group
of Mutual Funds
Semiannual Report
December 31, 1999
(unaudited)
<PAGE>
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
Shareholder Privileges...................................................... 63
<PAGE>
The Preferred Group of Mutual Funds
PERFORMANCE DATA
<TABLE>
<CAPTION>
PERFORMANCE DATA SIX MONTHS ENDED 12/31/99 (UNAUDITED)
BEGINNING ENDING TOTAL CURRENT INCOME CAPITAL 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 $22.88 $25.43 25.08% _ _ $3.09
- ---------------------------------------------------------------------------------------------------------------
Value 26.80 22.33 (3.55) _ $.17 3.25
- ---------------------------------------------------------------------------------------------------------------
International 16.63 18.95 19.45 _ .23 .64
- ---------------------------------------------------------------------------------------------------------------
Small Cap 12.05 11.72 (2.52) _ .03 _
- ---------------------------------------------------------------------------------------------------------------
Asset Allocation 16.81 16.11 (.42) _ .48 .37
- ---------------------------------------------------------------------------------------------------------------
Fixed Income 9.76 9.56 .95 6.64% .58 _
- ---------------------------------------------------------------------------------------------------------------
S.T. Gov't. Securities 9.61 9.52 1.60 5.83 .47 _
- ---------------------------------------------------------------------------------------------------------------
Money Market++ 1.00 1.00 2.52 5.36 .05 _
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
* Total return includes reinvestment of dividends and capital gains
distributions (not annualized).
+ The yield shown for the Fixed Income and Short-Term Government Securities
Funds is the 30-day current yield as of 12/31/99. The yield shown for the
Money Market Fund is the seven-day current yield as of 12/31/99, in
accordance with Securities and Exchange Commission rules
for reporting yields of money market funds.
++ An investment in the Money Market Fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
Although the Fund seeks to preserve the value of your investment at $1.00
per share, it is possible to lose money by investing in the Fund. The
seven-day current yield for the Money Market Fund more closely reflects
the current earnings of the Fund than does the total return quotation.
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.
1
<PAGE>
OUR MESSAGE TO YOU December 31, 1999 (unaudited)
Photo of David L. Bomberger
David L. Bomberger
President
DEAR FELLOW PREFERRED GROUP SHAREHOLDER:
I am pleased to present you with The Preferred Group's semiannual report for the
six months ended December 31, 1999. This report provides detailed information on
your Funds' performance, including fund holdings, financial and performance
data, and commentary from each of the portfolio managers.
MARKET COMMENTARY
1999 was another extraordinary year for investors--if they owned the right
stocks. This year, the right stocks to own were in the technology sector. On a
capitalization-weighted basis, the Nasdaq Composite Index was up over 85%, an
all-time record performance for a mature stock index. However--and this hasn't
received nearly as much attention--the really big gains were concentrated in a
small group of large-cap issues. Overall, the median price change for Nasdaq
stocks was less than 1%. And the Nasdaq's cap-weighted return without large-cap
technology stocks was 8%, a figure much closer to average returns of the past.
Similarly, the cap-weighted price change of the S&P 500 during 1999 was about
19.5%. However, the return on the largest 10 stocks in the index was nearly
double that of the remainder. And the median price change was a negative 2.9%.
Overall, the stock market may be a great party, but that certainly doesn't mean
everyone is dancing.
Still, the numbers are nothing to sneeze at. During the second half of 1999, the
S&P returned 7.79%. The reconstituted Dow Jones Industrial Average gained 5.65%.
And in a remarkable comeback for international stocks, the EAFE Index returned
an impressive 22.26%.
In comparison, the bond market was bearish to the point of hibernation as
interest rates continued to rise. The Salomon Brothers BIG Index managed to eke
out a .56% gain during the second half of 1999, but posted a .84% loss for the
year.
PREFERRED GROUP HIGHLIGHTS
The financial world changed during the year and so did the Preferred Group. Back
in May, Kathleen McCarragher became the portfolio manager of the Preferred
Growth Fund. And I'm pleased to note she has continued the outstanding
performance of that Fund.
Charles T. (C.T.) Urban, III became portfolio manager for the Preferred
Short-Term Government Securities Fund in November. C.T. has over 15 years of
fixed income portfolio experience.
The year 2000 will bring its own changes to the Preferred Group. For instance,
Mark Settles takes over the helm of the Preferred Money Market Fund on January
1, 2000. Prior to becoming a portfolio manager, Mark spent five years trading
dollar- and euro-denominated fixed income products on J.P. Morgan's New York and
London trading desks.
2
<PAGE>
The Preferred Group of Mutual Funds. OUR MESSAGE TO YOU
Luke Farrell of J.P. Morgan will assume management of the Preferred Fixed Income
Fund on February 1. His experience includes U.S. Treasury, high yield, emerging
market and investment grade securities, and foreign currency hedging.
But perhaps the biggest change to come is to the Preferred Small Cap Fund
because this change marks a switch in investment philosophies: from core, which
is a blend of growth and value, to growth. As previously announced, Bill McVail
of Turner Investment Partners, Inc. will become manager of the Fund on January
1, 2000.
LOOKING FORWARD
With indexes in nosebleed territory, we believe the fundamentals of investing
are more important than ever. Yes, new companies and entire new industries can
become leaders, seemingly overnight. But no one need invest blindly. As always,
a sound investment strategy is required to respond to change.
The dawn of a new millennium is a great time to revisit your investment plans.
Are you saving enough for the future? Should you establish a college tuition
fund, or increase your contribution to an existing one? Did your base pay level
change during the year--and did you increase your savings to match? Given the
big gains by growth stocks, it may be time to rebalance your investments. Or, if
you're closing in on retirement, to adjust your asset allocation.
You'll notice these questions have nothing to do with P/E ratios, commodity
futures or sector analysis. There's good reason for that: Studies continue to
show that success is heavily dependent on asset allocation and the length of
time you're invested in the market.
In closing, 1999 was a year of new records and new faces. In particular, it
marks the departure of Robert "Skip" Johnson, who managed the Preferred Money
Market Fund from its inception in 1992 until his retirement from J.P. Morgan in
December. Skip has been a great friend of the Preferred Group, and he has our
best wishes for many years of good health and happiness.
You have our best wishes, too. I thank you for your continued confidence and
support of The Preferred Group of Mutual Funds. As always, feel free to call us
at 1-800-662-4769 with your questions and comments.
It was a pleasure to serve you during the past century, and we're looking
forward to the next.
Sincerely,
/s/ David L. Bomberger
David L. Bomberger, CFA
3
<PAGE>
FUNDS & INVESTMENT OBJECTIVES December 31, 1999 (unaudited)
Preferred Growth Fund
Seeks its objective of long-term capital appreciation by investing 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 its objective of capital appreciation and current income by investing
primarily in equity securities that are believed to be undervalued and that
offer above-average potential for capital appreciation.
Preferred International Fund
Seeks its objective of long-term capital appreciation by investing primarily in
equity securities traded principally on markets outside the United States.
Preferred Small Cap Fund
Seeks its objective of long-term capital appreciation through investments in
companies with small equity capitalizations.
Preferred Asset Allocation Fund
Seeks its objective of both capital appreciation and current income by
allocating its assets among stocks, bonds and high quality money market
instruments.
Preferred Fixed Income Fund
Seeks its objective of a high level of current income consistent with investment
in a diversified portfolio of debt securities.
Preferred Short-Term
Government Securities Fund
Seeks its objective of high current income consistent with preservation of
capital, primarily through investment in U.S. Government securities.
Preferred Money Market Fund
Seeks its objective of the maximum current income believed to be consistent with
preservation of capital and maintenance of liquidity by investing in short-term,
fixed income instruments.
4
<PAGE>
The Preferred Group of Mutual Funds PERFORMANCE INFORMATION
HISTORICAL PERFORMANCE:
Historical performance can be evaluated in several ways. At the end of each
Fund's Discussion & Analysis section, we have provided a look at the total
percentage change in value, the average annual percentage change and the
growth of a hypothetical $10,000 investment. A comparison of this historical
data to an appropriate benchmark is also provided. These performance figures
include changes in a Fund's share price, plus reinvestment of any dividends
(or income) and any capital gains (profits the Fund earns when it sells
securities that have grown in value).
CUMULATIVE TOTAL RETURNS:
Cumulative total returns reflect the Fund's actual performance over a set
period: six months, one year, five years and since inception.
AVERAGE ANNUAL TOTAL RETURNS:
Average annual total returns are hypothetical. A fund's actual (or
cumulative) return indicates what would have happened if the fund had
performed at a constant rate each year. For your information, all funds must
provide average annual total returns as of the most recent calendar quarter
--in this case, December 31, 1999. This allows you to compare funds from
different complexes on an equal basis.
$10,000 HYPOTHETICAL INVESTMENT:
The "$10,000 investment since inception" illustrates the value of your
investment as of December 31, 1999, 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 Preferred Group
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
S&P 500 Index
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
5
<PAGE>
INVESTMENT REVIEW December 31, 1999 (unaudited)
Preferred Growth Fund
INVESTMENT OBJECTIVE:
The Preferred Growth Fund seeks its objective of long-term capital
appreciation by investing primarily in equity securities believed to offer
the potential for capital appreciation, including stocks of companies that
are experiencing above-average earnings growth.
PORTFOLIO MANAGER PROFILE:
PORTFOLIO MANAGER: Kathleen A. McCarragher
- --------------------------------------------------------------------------------
TITLE: Director, Executive Vice President and
Domestic Equity Investment Strategist
- --------------------------------------------------------------------------------
LAST FIVE YEARS' EXPERIENCE: Managing Director and Director of Large Cap
Growth Equities at Weiss, Peck & Greer before joining Jennison in May 1998.
Kathleen assumed management of the Preferred Growth Fund in May 1999.
- --------------------------------------------------------------------------------
EDUCATION: B.B.A. in Finance -- University of
Wisconsin; M.B.A. -- Harvard Business School
DISCUSSION & ANALYSIS:
For the six months ended December 31, 1999, the Preferred Growth Fund returned
25.08%, while the S&P 500 Index gained 7.79%. Since inception, the Fund has
provided an average annual return of 25.16%, ahead of the benchmark's 21.24%
return.
Stocks in the U.S. ended the year, the century and the millennium with a
flourish. Fourth-quarter results represented half or more of the gains for the
entire year, and pushed major indexes to record levels. The U.S. stock market
was not alone in its celebration. Stock markets around the world posted
significant gains for the year led by the emerging markets and Japan. Europe
also did well, principally because of strong fourth-quarter performance.
As was the case for most of the year, performance was paced by technology and
telecommunications stocks. The Nasdaq Composite gained 85% during 1999.
According to Merrill Lynch, this was the best one-year return achieved by a
major index in the history of the U.S. stock market. Interestingly, the return
of the equal-weighted S&P 500 was down for the six-month period, reflecting the
vast differences in earnings growth rates and investor preferences across the
market. In fact, more stocks declined than advanced for the year on the NYSE.
Decisions made in stock selection and sector weighting helped the Fund. For most
of the year, technology represented 30% to 40% of the portfolio. And because
this sector led the market, it had a very positive influence on returns. The
Fund benefited from telecommunications stocks that exploit the dramatic demand
for broadband communications. Wireless communications also played a part as
Nokia and Motorola (1.8% of net assets) experienced faster-than-expected growth
rates.
Financial stocks made an important contribution to returns this year but stock
selection was critical, as the sector was an underperformer versus the market.
However, a few large financial companies such as American International Group,
Citigroup, American Express (1.1%) and Morgan Stanley Dean Witter (2.2%) did
very well during the quarter. Consumer stocks were mixed for the year but select
retailers and media companies did extremely well. Healthcare had a very
difficult year. The combination of litigation, slowing revenue and earnings
growth, patent expirations, and possible government intervention on the pricing
front put pressure on these stocks all year.
Looking ahead, we believe one risk to future portfolio gains is the possibility
of the Federal Reserve aggressively raising interest rates. Higher interest
rates could have a
6
<PAGE>
The Preferred Group of Mutual Funds INVESTMENT REVIEW
negative effect on price-earnings ratios and create a volatile environment for
stock prices.
- Jennison Associates
TOP TEN HOLDINGS: (% OF TOTAL NET ASSETS)
- --------------------------------------------------------
1. Microsoft Corp. 4.9%
- --------------------------------------------------------
2. Cisco Systems Inc. 4.2%
- --------------------------------------------------------
3. Home Depot Inc. 3.8%
- --------------------------------------------------------
4. General Electric Co. 3.6%
- --------------------------------------------------------
5. CBS Corp. 3.4%
- --------------------------------------------------------
6. Nokia Corp. 3.2%
- --------------------------------------------------------
7. Citigroup Inc. 2.9%
- --------------------------------------------------------
8. American Int'l Group Inc. 2.8%
- --------------------------------------------------------
9. Texas Instruments 2.6%
- --------------------------------------------------------
10. Hewlett Packard Co. 2.6%
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.
The Fund may be more concentrated and subject to greater risk than other common
stock mutual funds having a greater number of holdings.
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 25.08% 44.83% 294.12% 438.94%
S&P 500 Index 7.79% 20.98% 251.13% 323.95%
* July 1, 1992
AVERAGE ANNUAL TOTAL RETURN:
PAST PAST SINCE
1 YEAR 5 YEARS INCEPTION*
PREFERRED 44.83% 31.56% 25.16%
GROWTH FUND
S&P 500 Index 20.98% 28.56% 21.24%
* July 1, 1992
A $10,000 INVESTMENT SINCE INCEPTION:
Chart
PREFERRED GROWTH FUND S&P 500 INDEX
7/1/92 10000 10000
12/31/92 11915 10837
6/30/93 12425 11359
12/31/93 13828 11921
6/30/94 12468 11514
12/31/94 13676 12074
6/30/95 16733 14510
12/31/95 17554 16599
6/30/96 19237 18291
12/31/96 20868 20429
6/30/97 27732 24612
12/31/97 27385 27218
6/30/98 33003 32046
12/31/98 37129 35043
6/30/99 42991 39331
12/31/99 53897 42395
7
<PAGE>
INVESTMENT REVIEW December 31, 1999 (unaudited)
Preferred Value Fund
INVESTMENT OBJECTIVE:
The Preferred Value Fund seeks its objective of capital appreciation and current
income by investing primarily in equity securities that are believed to be
undervalued and that offer above-average potential for capital appreciation.
PORTFOLIO MANAGER PROFILE:
PORTFOLIO MANAGER: John G. Lindenthal
- -------------------------------------------------------------------------------
TITLE: Managing Director of Oppenheimer Capital
LAST FIVE YEARS' EXPERIENCE: Portfolio Manager at Oppenheimer Capital. John has
managed the Preferred Value Fund since its inception on July 1, 1992.
EDUCATION: B.S., M.B.A.-- University of Santa Clara
DISCUSSION & ANALYSIS:
For the six months ended December 31, 1999, the Preferred Value Fund declined
3.55%, versus a 7.79% return for the S&P 500 Index. Since inception, the Fund
has provided an average annual return of 16.56%, compared with 21.24% for the
benchmark.
The period was very challenging for value investors and the Fund. Investors
focused almost exclusively on technology stocks, the prices of which soared
while stocks in other industries registered only modest gains or even price
declines. While the S&P 500 Index registered a healthy gain, the reported
numbers are deceiving; the strong returns of a few large, highly priced
technology companies accounted for most of the gain. And with investors largely
ignoring the majority of other stocks, even stocks of companies with excellent
competitive positions and strong earnings growth tended to fare poorly.
We have always given consideration to companies throughout the market, including
technology companies. However, in the exuberant market for technology stocks, it
has become increasingly difficult to find value in the sector. This is a major
factor in the Fund's underperformance relative to the S&P 500 Index.
The Fund's performance was also hurt by our investment in financial issues.
Rising interest rates caused price declines across the sector, even for
companies whose operations are relatively immune to the impact of higher rates.
Our financial holdings are not a bet on interest rates, but are based instead on
individual company fundamentals and attractive valuations. Notwithstanding
recent declines in their share prices, the financial companies we own continue
to generate strong business results. We continue to believe their share prices
will catch up with fundamentals over time. Among the Fund's declining holdings
were Countrywide Credit (1.7% of net assets), Diageo (2.1%), FleetBoston (1.8%),
and Federal Home Loan Mortgage Corp.
Individual securities which contributed to Fund performance during the six-month
period include AMFM (2.5%), the country's largest radio broadcaster, Computer
Associates Int'l, a software producer, and Minnesota Mining & Manufacturing
(2.2%), maker of, among other things, Post-it Notes and Scotch Tape.
We believe the Fund is well positioned to generate favorable long-term results
because we own good businesses that are selling at discounts to their inherent
value. We will not chase the best-performing sector during short-term periods
but will maintain a disciplined investment style focused on finding the best
values in the market.
- Oppenheimer Capital
8
<PAGE>
The Preferred Group of Mutual Funds INVESTMENT REVIEW
TOP TEN HOLDINGS: (% OF TOTAL NET ASSETS)
- --------------------------------------------------------
1. Citigroup Inc. 8.7%
- --------------------------------------------------------
2. Sprint Corp. 6.0%
- --------------------------------------------------------
3. Federal Home Loan Mortgage Corp 4.3%
- --------------------------------------------------------
4. Intel Corp. 4.3%
- --------------------------------------------------------
5. Wells Fargo & Co. 4.2%
- --------------------------------------------------------
6. Aflac Inc. 3.9%
- --------------------------------------------------------
7. Morgan Stanley Dean Witter & Co. 3.7%
- --------------------------------------------------------
8. XL Capital Ltd. 3.2%
- --------------------------------------------------------
9. Computer Associates Int'l Inc. 3.2%
- --------------------------------------------------------
10. Carnival Corp. 3.1%
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.
The Fund may be more concentrated and subject to greater risk than other common
stock mutual funds having a greater number of holdings.
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 -3.55% 4.19% 163.30% 216.02%
S&P 500 Index 7.79% 20.98% 251.13% 323.95%
* July 1, 1992
AVERAGE ANNUAL TOTAL RETURN:
PAST PAST SINCE
1 YEAR 5 YEARS INCEPTION*
PREFERRED 4.19% 21.36% 16.56%
VALUE FUND
S&P 500 Index 20.98% 28.56% 21.24%
* July 1, 1992
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
12/31/98 30311 35043
6/30/99 32743 39331
12/31/99 31600 42395
9
INVESTMENT REVIEW December 31, 1999 (unaudited)
Preferred International Fund
INVESTMENT OBJECTIVE:
The Preferred International Fund seeks its objective of long-term capital
appreciation by investing 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(R), 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: B.B.A.-- St. John's University; M.B.A.-- Baruch College (City
University of New York); Chartered Financial Analyst
DISCUSSION & ANALYSIS:
For the six months ended December 31, 1999, the Preferred International Fund
advanced 19.45%, trailing the EAFE Index, which rose 22.26%. Since inception,
the Fund has returned 12.90% on an average annual basis versus 13.62% for its
benchmark.
The gloom of early 1999 turned to optimism as expectations rose for world
economic growth. A number of central banks reversed earlier interest rate cuts
and became concerned instead with the global boom and the possibility of rising
inflation. Corporate restructuring continued as companies continued to reduce
costs and improve profit margins. Mergers and acquisitions came and went at a
record rate, and we believe the trend will continue in 2000 as companies better
position themselves for global competition.
In terms of countries, the Fund was most heavily weighted in Japan during the
last half of the year, and we continued to build our positions in that country.
We believe corporate restructuring will accelerate as leading companies set the
example for the rest of corporate Japan, and we expect profit margins and
earnings growth to dramatically improve over the next few years. We purchased
Yasuda Fire & Marine Insurance (1.5% of net assets) and Sumitomo Marine & Fire
Insurance (1.7%), both high-quality, innovative companies selling at significant
discounts to what we believe they are worth. In the pharmaceutical industry we
bought Daiichi Pharmaceutical (1.2%) and Tanabe Seiyaku (.7%). We also bought
Mitsui Fudosan (.6%), a large real estate developer.
During the six-month period, we eliminated two U.K. companies, Allied Domecq and
Rank Group. We also cut back positions in Australia and New Zealand and
eliminated CSR (Australia) based on deteriorating fundamentals. On the mergers
and acquisitions front, National Westminster Bank (2.0%) received bids from two
other banks at a premium price. Pioneer International (1.8%) received a buy-out
offer from Hanson, PLC, and Pharmacia & UpJohn (1.3%) agreed to merge with
Monsanto.
We believe a globally synchronized upturn is clearly under way and expect the
pace to accelerate into 2000. We also expect the U.S., Europe and Asia will
simultaneously experience a rising GDP in 2000 and probably in 2001 for the
first time in this economic cycle. On the down side, we recognize that rising
interest rates may pressure stock prices, and we expect continued stock price
volatility. However, we believe the earnings outlook is good and the portfolio
is well positioned as we enter the new millennium.
- Mercator Asset Management(R), L.P.
10
The Preferred Group of Mutual Funds INVESTMENT REVIEW
TOP TEN HOLDINGS: (% OF TOTAL NET ASSETS)
- --------------------------------------------------------
1. Sony Corp. Japan 5.8%
- --------------------------------------------------------
2. Christian Dior France 3.3%
- --------------------------------------------------------
3. Bipop-Carire Italy 3.3%
- --------------------------------------------------------
4. Hitachi Japan 3.3%
- --------------------------------------------------------
5. Swatch GroupSwitzerland 3.1%
- --------------------------------------------------------
6. Rio TintoUnited Kingdom 3.1%
- --------------------------------------------------------
7. Bouygues France 3.0%
- --------------------------------------------------------
8. Electrolux AB Sweden 2.7%
- --------------------------------------------------------
9. Matsushita Electric Industries Japan 2.5%
- --------------------------------------------------------
10. Peugeot SA France 2.5%
GEOGRAPHIC ALLOCATION: (% OF TOTAL NET ASSETS)
- --------------------------------------------------------
Japan 19.7% Others 4.0%
United Kingdom 12.4% Canada 3.8%
France 10.6% Germany 3.0%
Switzerland 9.1% South Korea 2.5%
Italy 7.1% Finland 2.1%
Sweden 6.2% Argentina 1.0%
Netherlands 6.2% New Zealand 0.9%
Australia 5.8% Others 5.6%
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, 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.)
The Fund may be more concentrated and subject to greater risk than other common
stock mutual funds having a greater number of holdings.
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 19.45% 32.87% 102.06% 148.62%
EAFE Index 22.26% 27.29% 85.45% 160.49%
* July 1, 1992
AVERAGE ANNUAL TOTAL RETURN:
PAST PAST SINCE
1 YEAR 5 YEARS INCEPTION*
PREFERRED
INTERNATIONAL FUND 32.87% 15.11% 12.90%
EAFE Index 27.29% 13.15% 13.62%
* July 1, 1992
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 19414 19742
12/31/98 18704 20464
6/30/99 20806 21305
12/31/99 24860 26049
11
<PAGE>
INVESTMENT REVIEW December 31, 1999 (unaudited)
Preferred Small Cap Fund
INVESTMENT OBJECTIVE:
The Preferred Small Cap Fund seeks its objective of long-term capital
appreciation through investments in companies with small equity capitalizations.
PORTFOLIO MANAGER PROFILE:
PORTFOLIO MANAGER: David L. Bomberger, CFA
- --------------------------------------------------------------------------------
TITLE: President, Caterpillar Investment Management Ltd. (CIML)
- --------------------------------------------------------------------------------
LAST FIVE YEARS' EXPERIENCE:Vice President at Commercial Federal Bank in Omaha,
Nebraska. Before that, Vice President, Treasurer and Chief Investment Officer at
The Guarantee Life Companies in Omaha.
- --------------------------------------------------------------------------------
EDUCATION: B.S.-- University of Nebraska; M.B.A.--University of Nebraska;
Chartered Financial Analyst
DISCUSSION & ANALYSIS:
The Preferred Small Cap Fund declined 2.52% for the six months ended December
31, 1999, compared to an 10.95% return for the Russell 2000 benchmark. Since
inception, the Fund has returned an annual average of 8.70%, trailing the
benchmark's 15.17% return.
Small cap stocks failed to keep pace with the hefty gains posted by large stock
indexes, including the S&P 500 Index, until the final month of the year. They
ended 1999 at record highs, as recorded by the Russell 2000 Index, which
achieved 90% of its annual gain during the fourth quarter and closed the year at
504.75, an all-time record.
However, the Preferred Small Cap Fund lost value during 1999. One reason? The
market continued to favor growth stocks over value stocks, and consequently,
growth- oriented funds. The Russell 2000 Growth Index, which tracks companies
with higher price-to-book ratios and forecasted growth values, returned 43.09%
in 1999. But the Russell 2000 Value Index, which measures the performance of
those Russell 2000 companies with lower price-to-book ratios and lower
forecasted growth values, lost 1.49%.
Positive performers for the Fund included CTS (1.3% of net assets), Guess (.8%),
Timberland (1.2%) and Unigraphics Solutions (.7%). Stocks that detracted from
performance included K-Swiss (.5%) and Tower Automotive (.5%). Detractors that
were eliminated from the portfolio included Frontier Airlines, 3DFX Interactive,
Claire Stores, Flagstar Bancorp, Pilgrims Pride, SLI and Standard Motor
Products.
During the second half of 1999, we reevaluated the performance of the Preferred
Small Cap Fund and its underlying strategy. While we believe the performance of
growth stocks in 1999 was extraordinary, we feel growth strategies will continue
to outperform value and core strategies in the future. For this reason, we
elected to change the strategy of the Fund beginning January 1, 2000.
To implement the new strategy, we selected Turner Investment Partners, Inc. as
the new adviser to the Fund beginning January 1, 2000. Turner will implement the
Fund's new growth strategy and make significant changes to the portfolio early
in the year. We believe the prospects are exciting.
- Caterpillar Investment Management Ltd.
12
<PAGE>
The Preferred Group of Mutual Funds INVESTMENT REVIEW
TOP TEN HOLDINGS: (% OF TOTAL NET ASSETS)
- ---------------------------------------------------------------------
1. Xircom Inc. 2.5%
- ---------------------------------------------------------------------
2. Progressive Software Corp. 2.0%
- ---------------------------------------------------------------------
3. Answerthink Consulting Group 1.9%
- ---------------------------------------------------------------------
4. Salton Inc. 1.8%
- ---------------------------------------------------------------------
5. Nvidia Corp. 1.6%
- ---------------------------------------------------------------------
6. Centex Construction Products Inc. 1.6%
- ---------------------------------------------------------------------
7. Avis Rent A Car Inc. 1.6%
- ---------------------------------------------------------------------
8. Ethan Allen Interiors Inc. 1.5%
- ---------------------------------------------------------------------
9. Dollar Thrifty Automotive Group 1.3%
- ---------------------------------------------------------------------
10. URS Corp. 1.3%
PERFORMANCE:
The following information illustrates the historical performance of the
Preferred Small Cap Fund compared with the RUSSELL 2000 INDEX. The Russell 2000
Index contains the 2000 smallest of the 3000 largest U.S. domiciled
corporations, ranked by market capitalization.
Securities of small-capitalization companies often trade less frequently and in
more limited volume, and may be subject to greater volatility than securities of
larger, more established companies.
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 PAST SINCE
6 MONTHS 1 YEAR 3 YEARS INCEPTION*
PREFERRED
SMALL CAP FUND -2.52% -10.60% 11.86%+ 41.55%+
Russell 2000 Index 10.95% 21.26% 44.59% 80.16%
* 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 PAST SINCE
1 YEAR 3 YEARS INCEPTION*
PREFERRED -10.60% 3.81%+ 8.70%+
SMALL CAP FUND
Russell 2000 Index 21.26% 13.08% 15.17%
* 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.
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
12/31/98 15797 14858
6/30/99 14487 16237
12/31/99 14156 18016
13
<PAGE>
INVESTMENT REVIEW December 31, 1999 (unaudited)
Preferred Asset Allocation Fund
INVESTMENT OBJECTIVE:
The Preferred Asset Allocation Fund seeks its objective of both capital
appreciation and current income by allocating its assets among stocks, bonds and
high quality money market instruments.
PORTFOLIO MANAGERS PROFILES:
MELLON CAPITAL MANAGEMENT CORPORATION PORTFOLIO MANAGER: Thomas B. Hazuka
- --------------------------------------------------------------------------------
TITLE: Executive Vice President and 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;
M.B.A.-- 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, Inc.
- --------------------------------------------------------------------------------
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;
M.B.A.-- Rutgers University
DISCUSSION & ANALYSIS:
The Preferred Asset Allocation Fund declined .42% for the six-month period ended
December 31, 1999. 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 4.55%. The S&P 500 Index returned 7.79% for the
six-month period ended December 31, 1999. Since inception, the Fund has had an
average annual return of 14.57% versus 16.54% for the 65/30/5 blended benchmark
and 21.24% for the S&P 500 Index.
Economic growth moderated, inflation remained subdued, and manufacturing orders
surged to a four-year high during the third quarter of 1999. While inflation
remained low following a surge in April, financial markets remained quite
concerned about the prospect of tight labor markets leading to accelerating
inflation down the road.
At the end of the fourth quarter, the U.S. economic expansion appeared set to
become the longest on record, topping the previous 106-month expansion of
1961-1969. Meanwhile pricing power remained weak across most industries, which
was reflected in restrained increases in producer prices.
During the third quarter, the S&P 500 experienced three consecutive down months
for the first time in nine years. At the same time the S&P managed to reach an
all-time high, and the Dow Industrials managed to reach two new all-time highs.
These seemingly contradictory facts were a good indication of the market's
volatility, which continued into the fourth quarter. After reaching lows in
mid-October, the stock market roared back during the fourth quarter, with major
indexes posting all-time records.
In recognition of rising stock prices and bond yields during the fourth quarter,
the Fund lowered its percentage of stock holdings and increased its percentage
of bond holdings. However, stocks significantly outperformed bonds during the
same time.
During the second half of 1999, we saw a decoupling of the stock and bond
markets as growing optimism about the future has propelled stocks to heights
disproportionate to underlying earnings expectations. While there is no telling
14
<PAGE>
The Preferred Group of Mutual Funds INVESTMENT REVIEW
how long stocks will remain decoupled from bonds, we remain committed to the
discipline of evaluating stocks in the context of returns available on
alternative investments. As a result, we continue to be overweight in bonds
relative to stocks.
- Mellon Capital Management
- PanAgora Asset Management
- --------------------------------------------------------------------------------
PORTFOLIO ALLOCATION* (% OF PORTFOLIO)
12/31/99 6/30/99 12/31/98
- --------------------------------------------------------------------------------
Stocks 35% 44% 44%
Bonds 56% 34% 30%
Short-Term 9% 22% 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 December 31, 1999.
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 is comprised of 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 performance of the
Asset Allocation Fund is also compared with the S&P 500 INDEX.
The Asset Allocation Fund has a blended benchmark to reflect its flexibility to
invest in stocks, bonds and short-term investments.
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 -.42% 2.15% 140.03% 177.55%
65/30/5 Benchmark 4.55% 10.63% 164.76% 215.26%
S&P 500 Index 7.79% 20.98% 251.13% 323.95%
* July 1, 1992
AVERAGE ANNUAL TOTAL RETURN:
PAST PAST SINCE
1 YEAR 5 YEARS INCEPTION*
PREFERRED ASSET
ALLOCATION FUND 2.15% 19.14% 14.57%
65/30/5 Benchmark 10.63% 21.50% 16.54%
S&P 500 Index 20.98% 28.56% 21.24%
* July 1, 1992
A $10,000 INVESTMENT SINCE INCEPTION:
Preferred Asset Allocation Fund 65/30/5 Benchmark S&P 500 Index
7/1/92 10000 10000 10000
12/31/92 10731 10781 10837
6/30/93 11357 11523 11359
12/31/93 11869 12057 11921
6/30/94 11212 11483 11514
12/31/94 11563 11848 12074
6/30/95 13643 14057 14510
12/31/95 15354 15849 16599
6/30/96 16132 16429 18291
12/31/96 17685 18021 20429
6/30/97 19521 20789 24612
12/31/97 21384 23054 27218
6/31/98 23784 26167 32046
12/31/98 27161 28497 35043
6/30/99 27879 30153 39331
12/31/99 27755 31526 42395
15
<PAGE>
INVESTMENT REVIEW December 31, 1999 (unaudited)
Preferred Fixed Income Fund
INVESTMENT OBJECTIVE:
The Preferred Fixed Income Fund seeks its objective of a high level of current
income consistent with investment in a diversified portfolio of 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
Management. Paul has been involved in the management of the Preferred Fixed
Income Fund since January 1, 1994.
- --------------------------------------------------------------------------------
EDUCATION: B.S.--Wharton School of Business, University of Pennsylvania;
B.S.E.E.-- University of Pennsylvania; Chartered Financial Analyst
DISCUSSION & ANALYSIS:
For the six-month period ended December 31, 1999, the Preferred Fixed Income
Fund rose .95%, compared to .56% for the Salomon Brothers Broad Investment Grade
(BIG) Index. Since inception, the Fund has returned 6.22%, compared to 6.65% for
the benchmark.
Bond yields ended the year sharply higher as investors reassessed the
strengthening economy and anticipated tighter monetary policy early in 2000.
Consumption continued to grow rapidly. The economy turned in a strong
performance, with GDP growth of 5.7%, almost a full percentage point above the
original estimate.
December's strong equity rally suggests the Federal Reserve Board's recent
actions will do little to stem economic growth in the first quarter of 2000. Low
unemployment, firm wage laws and the unprecedented external deficit indicate a
need to slow the economy to a more sustainable pace, even in the absence of any
significant consumer price pressures.
In the beginning of the reporting period, the Fund was conservatively positioned
in corporate bonds and held a heavy allocation of mortgage-backed securities. In
addition we maintained an overweight position in AAA rated agency debenture
bonds. Toward the end of the year, the Fund held positions that reflected our
positive outlook on mortgages relative to U.S. Treasuries.
The corporate sector outperformed Treasuries primarily because of lessened Y2K
fears and the presence of buyers who had built up cash and were stretching for
yield ahead of the first quarter. The fund was modestly overweight in the
corporate sector and we remained comfortable with the overweight position in
anticipation of a strong economic backdrop and light near-term supply.
We shifted the Fund's duration position early in November from neutral to a
modestly short position relative to the Index. We maintained this duration
through the end of the year. With little sign of any slowdown in U.S. growth,
the bond market ended the year lacking fundamental support.
We believe strong business and consumer confidence, a robust equity market and
very buoyant labor market suggest the need for additional Fed policy tightening,
and we believe Treasury yields will continue to move higher. As a result, we
expect to remain defensive--in terms of the fund's duration positions--during
the first half of 2000.
- J. P. Morgan Investment Management
16
<PAGE>
The Preferred Group of Mutual Funds INVESTMENT REVIEW
PORTFOLIO STATISTICS: (AS OF DECEMBER 31, 1999)
- --------------------------------------------------------------
Portfolio Holdings 139
- --------------------------------------------------------------
Average Maturity 16.4 years
- --------------------------------------------------------------
Average Duration 4.8 years
- --------------------------------------------------------------
Average Quality AA+
- --------------------------------------------------------------
Allocation (% of portfolio*):
- --------------------------------------------------------------
Treasury/Agency 6.2%
- --------------------------------------------------------------
Corporates 21.9%
- --------------------------------------------------------------
Mortgages/Asset-Backed 63.2%
- --------------------------------------------------------------
Foreign Corporates & Govt. 3.5%
- --------------------------------------------------------------
Short-Term 5.2%
(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 December 31, 1999.
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).
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 .95% -0.76% 39.52% 57.30%
Salomon Bros.
BIG Index .56% -0.84% 45.14% 62.11%
* July 1, 1992
AVERAGE ANNUAL TOTAL RETURN:
PAST PAST SINCE
1 YEAR 5 YEARS INCEPTION*
PREFERRED FIXED
INCOME FUND -0.76% 6.89% 6.22%
Salomon Bros. -0.84% 7.74% 6.65%
BIG Index
* July 1, 1992
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
12/31/98 15848 16348
6/30/99 15578 16121
12/31/99 15730 16211
17
<PAGE>
INVESTMENT REVIEW December 31, 1999 (unaudited)
Preferred Short-Term Government Securities Fund
INVESTMENT OBJECTIVE:
The Preferred Short-Term Government Securities Fund seeks its objective of high
current income consistent with preservation of capital, primarily through
investment in U.S. Government securities.
PORTFOLIO MANAGER PROFILE:
PORTFOLIO MANAGER: Charles T. (C.T.) Urban, III, CFA
- --------------------------------------------------------------------------------
TITLE: Senior Portfolio Manager, Caterpillar Investment Management Ltd. (CIML)
- --------------------------------------------------------------------------------
LAST FIVE YEARS' EXPERIENCE: Vice President and Senior Portfolio Manager for the
Windsor Financial Group in Minneapolis.
- --------------------------------------------------------------------------------
EDUCATION: B.S.-- University of North Carolina; M.B.A.--University of Minnesota;
Chartered Financial Analyst
DISCUSSION & ANALYSIS:
The Preferred Short-Term Government Securities Fund returned 1.60% for the six
months ended December 31, 1999. This compares to a return of 1.87% for the
Merrill Lynch 1-3 Year Treasury Index. Since inception, the Fund's average
annual return has been 4.57% versus 5.54% for the benchmark.
During the second half of 1999, the yield on the two-year Treasury note
increased 70 basis points, from 5.51% to 6.21%. This is after the yield jumped
100 basis points from the end of 1998. Stronger-than-expected economic growth,
inflationary concerns connected with increasing oil prices, and a declining
labor pool can justifiably be blamed as the major culprits for this sharp
movement in short-term rates.
In an attempt to cool the growth of the economy and preempt an inflationary
environment, the Federal Reserve, led by Alan Greenspan, raised the target on
the Federal Funds rate twice during the past six months, each time by 25 basis
points. Earlier, on June 30, the rate was raised another 25 basis points, which
means the Fed has completely reversed last year's reductions made during the
credit and liquidity crisis of 1998.
Much of the Fund's underperformance can be attributed to having a longer
duration than that of the benchmark. During the second half of the year, the
Fund's profile was changed, and the duration was brought back to neutral versus
the benchmark. This helped prevent deterioration of the Fund's net asset value
while we worked to increase the yield.
We expect the Fed to raise short-term rates by at least 50 basis points over the
next six months. Accordingly, the portfolio will remain neutral or shorter than
the benchmark, again in an attempt to prevent NAV deterioration and volatility.
If our analysis shows a potential slowing in the economy and lower consumer
confidence--in other words, if the stock market cools--we will then lengthen the
portfolio at what should be higher yields.
At fourth quarter's end, the portfolio's duration was 1.7, versus 1.7 for the
benchmark. The sector break- down at the end of the year was 7% U.S. Treasury,
43% government-sponsored agency debentures, 38% government agency
mortgage-related securities and 12% cash equivalents.
- Caterpillar Investment Management Ltd.
18
<PAGE>
The Preferred Group of Mutual Funds INVESTMENT REVIEW
PORTFOLIO STATISTICS: (AS OF DECEMBER 31, 1999)
- -----------------------------------------------------------
Portfolio Holdings 36
- -----------------------------------------------------------
Average Maturity 2.1 years
- -----------------------------------------------------------
Average Duration 1.7 years
PERFORMANCE:
The following information illustrates the historical performance of the
Preferred Short-Term Government Securities Fund compared with the MERRILL LYNCH
1-3 YEAR TREASURY INDEX. The Index comprises primarily U.S. Treasury Notes and
Bonds with remaining maturities of one to three years.
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 1.60% 2.31% 29.97% 39.82%
ML 1-3 Yr.
Treasury Index 1.87% 3.06% 37.05% 49.89%
* July 1, 1992
AVERAGE ANNUAL TOTAL RETURN:
PAST PAST SINCE
1 YEAR 5 YEARS INCEPTION*
PREFERRED SHORT-TERM
GOVERNMENT
Securities Fund 2.31% 5.38% 4.57%
ML 1-3 Yr.
Treasury Index 3.06% 6.51% 5.54%
* July 1, 1992
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
12/31/98 13667 14544
6/30/99 13762 14714
12/31/99 13982 14989
19
<PAGE>
INVESTMENT REVIEW December 31, 1999 (unaudited)
Preferred Money Market Fund
INVESTMENT OBJECTIVE:
The Preferred Money Market Fund seeks its objective of the maximum current
income believed to be consistent with preservation of capital and maintenance of
liquidity by investing in 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 2.52% for the six-month period ended
December 31, 1999, compared to a 2.41% return for IBC's Money Fund Report
Average/All Taxable. Since inception, the Fund's average annual return has been
4.55% versus 4.41% for the benchmark.
During the past year, global disinflationary forces caused by last fall's
economic crisis receded, allowing the Federal Reserve to focus on the prospect
of unsustainable growth at home. The Fed raised rates three times this year--at
its June, August and November meetings--taking back all of last year's stimulus,
and bringing the Fed Funds rate back up to 5.50%. Although inflation has
remained benign and wage pressures are still subdued, the Fed has embarked on a
path of incremental tightening in a proactive attempt to keep inflation at bay.
At mid-year, when the Fed began tightening, credit and swap spreads both widened
and the equity market tumbled. Since October, however, yield spreads have
narrowed and the equity market has rebounded, largely due to the vigilance of
the Federal Reserve and its adoption of a neutral stance. As expected, we
finished the year with higher yields due to the lingering probability of
additional Fed action, global synchronized growth, and uncertainty about when
the previous moves will begin to slow U.S. growth.
When the Fed started tightening monetary policy in June, we initiated a barbell
strategy. This meant investing at the very short end of the yield curve for
liquidity and farther out on the yield curve (though still less than one year)
to capture higher yields. In addition, our significant allocation to
floating-rate notes added to performance. These securities reset regularly
(usually quarterly), therefore the Fund benefits in a rising rate environment.
Because of the barbell structure and the floating-rate note allocation, the Fund
performed very well versus its peer group.
We expect the rising-rate environment to continue, with a quarter-percentage
point hike from the Federal Reserve at its February meeting. We believe these
incremental steps will bring about the desired economic slowdown and a "soft
landing." We think current strength in oil prices will translate into increasing
headline inflation as early as the first quarter of 2000. We also believe that
global growth will continue, with implications for U.S. assets as other
countries' assets become more attractive on a relative-value basis.
In the meantime, we will keep the Fund barbelled to maintain liquidity while
taking advantage of higher yields.
- J. P. Morgan Investment Management
20
<PAGE>
The Preferred Group of Mutual Funds INVESTMENT REVIEW
An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per share, it is possible to lose
money by investing in the Fund.
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.
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 7-DAY CURRENT PAST PAST SINCE
6 MONTHS YIELD++ 1 YEAR 5 YEARS INCEPTION*
PREFERRED MONEY
MARKET FUND 2.52% 5.36% 4.85% 29.13%+ 39.64%+
IBC's Money Fund
Report Avg./All Taxable 2.41% 5.13% 4.64% 27.84% 38.24%
* 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.
++ The seven-day current yield for the Money Market Fund more closely reflects
the current earnings of the Fund than does the total return quotation. The
yield for IBC's Money Fund Report Avg./All Taxable represents the seven-day
current yield as of December 31, 1999.
AVERAGE ANNUAL TOTAL RETURN:
PAST PAST SINCE
1 YEAR 5 YEARS INCEPTION*
PREFERRED MONEY
MARKET FUND 4.85% 5.25%+ 4.55%+
IBC's Money Fund
Report Avg./All Taxable 4.64% 5.04% 4.41%
* 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.
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
12/31/98 13318 13211
6/30/99 13621 13499
12/31/99 13963 13824
21
<PAGE>
<TABLE>
STATEMENTS OF ASSETS & LIABILITIES December 31, 1999 (unaudited)
DECEMBER 31, 1999 (unaudited)
<CAPTION>
GROWTH VALUE INTERNATIONAL
<S> <C> <C> <C>
ASSETS
Investments at value ............................................... $ 792,895,382 $ 372,771,338 $ 354,546,150
Short-term obligations at amortized cost ........................... 25,565,740 7,433,824 19,995,000
Cash ............................................................... 636 674
Foreign currency at value .......................................... 267,010
Receivable for investments sold ....................................
Receivable for fund shares sold .................................... 4,412,167 3,860,987 2,606,522
Receivable for variation margin ....................................
Dividends and interest receivable .................................. 264,662 271,186 482,795
Prepaid expenses and other assets .................................. 22,354 15,443 18,951
------------- ------------- -------------
Total assets .................................................. 823,160,941 384,352,778 377,917,102
------------- ------------- -------------
LIABILITIES
Payable for investments purchased ..................................
Payable for fund shares redeemed ................................... 162,263 227,739 1,258,892
Payable for distributions ..........................................
Payable for variation margin .......................................
Payable for:
Management fees ................................................. 482,948 237,523 280,102
Audit fees ...................................................... 19,975 17,325 19,711
Custodian fees .................................................. 20,088 15,647 74,100
Legal fees ...................................................... 1,626 2,916
Trustees' fees ..................................................
Transfer agent fees ............................................. 10,975 22,966 14,624
Other fees ...................................................... 18,679
------------- ------------- -------------
Total liabilities .......................................... 716,554 524,116 1,647,429
------------- ------------- -------------
Net assets ......................................................... $ 822,444,387 $ 383,828,662 $ 376,269,673
============= ============= =============
Shares of beneficial interest outstanding .......................... 32,339,217 17,190,927 19,856,043
============= ============= =============
Offering and redemption price per share ............................ $ 25.43 $ 22.33 $ 18.95
============= ============= =============
COMPOSITION OF NET ASSETS:
Paid-in capital .................................................... $ 463,652,718 $ 216,125,592 $ 245,493,702
Undistributed (Distributions in excess of)
net investment income .............................................. (1,083,152) 36,348 (179,482)
Accumulated net realized gains (losses) on
investments, futures, forwards, and foreign currency ............ 21,896,007 6,547,052 (451,579)
Net unrealized appreciation (depreciation) on:
Investments ..................................................... 337,978,814 161,119,670 131,421,420
Futures .........................................................
Foreign denominated other assets,
liabilities & currency ....................................... (14,388)
------------- ------------- -------------
Net assets ......................................................... $ 822,444,387 $ 383,828,662 $ 376,269,673
============= ============= =============
Investments and short-term obligations at cost ..................... $ 480,482,308 $ 219,085,492 $ 243,119,730
Foreign currency holdings at cost .................................. 266,578
22
<PAGE>
<CAPTION>
THE PREFERRED GROUP OF MUTUAL FUNDS STATEMENTS OF ASSETS & LIABILITIES
ASSET FIXED
SMALL CAP ALLOCATION INCOME
<S> <C> <C> <C>
ASSETS
Investments at value ............................................... $ 92,126,283 $ 197,644,398 $ 161,762,829
Short-term obligations at amortized cost ........................... 2,995,584 20,274,588 8,904,221
Cash ............................................................... 1,366 1,522
Foreign currency at value ..........................................
Receivable for investments sold .................................... 2,120 23,642,389
Receivable for fund shares sold .................................... 1,306,741 1,954,205 587,522
Receivable for variation margin .................................... 69,933
Dividends and interest receivable .................................. 119,432 2,303,435 1,834,765
Prepaid expenses and other assets .................................. 11,049 10,793 7,304
------------- ------------- -------------
Total assets .................................................. 96,559,089 222,190,905 196,810,485
------------- ------------- -------------
LIABILITIES
Payable for investments purchased .................................. 12,109 23,248,334
Payable for fund shares redeemed ................................... 5,693 4,182 168,016
Payable for distributions .......................................... 13,244 3,648
Payable for variation margin ....................................... 160,100
Payable for:
Management fees ................................................. 58,898 132,663 76,794
Audit fees ...................................................... 16,263 19,289 18,207
Custodian fees .................................................. 16,426 32,695 16,884
Legal fees ...................................................... 338 1,262 953
Trustees' fees .................................................. 22
Transfer agent fees ............................................. 5,399 13,357 13,213
Other fees ...................................................... 1,949 10,204 1,554
------------- ------------- -------------
Total liabilities .......................................... 104,988 399,105 23,547,603
------------- ------------- -------------
Net assets ......................................................... $ 96,454,101 $ 221,791,800 $ 173,262,882
============= ============= =============
Shares of beneficial interest outstanding .......................... 8,229,355 13,764,634 18,129,953
============= ============= =============
Offering and redemption price per share ............................ $ 11.72 $ 16.11 $ 9.56
============= ============= =============
COMPOSITION OF NET ASSETS:
Paid-in capital .................................................... $ 99,903,496 $ 175,917,582 $ 184,115,448
Undistributed (Distributions in excess of)
net investment income .............................................. 14,343 21,439
Accumulated net realized gains (losses) on
investments, futures, forwards, and foreign currency ............ (13,866,957) 15,479,513 (5,948,591)
Net unrealized appreciation (depreciation) on:
Investments ..................................................... 10,403,219 31,378,238 (5,164,758)
Futures ......................................................... (983,533) 239,344
Foreign denominated other assets,
liabilities & currency .......................................
------------- ------------- -------------
Net assets ......................................................... $ 96,454,101 $ 221,791,800 $ 173,262,882
============= ============= =============
Investments and short-term obligations at cost ..................... $ 84,718,648 $ 186,540,748 $ 175,831,808
Foreign currency holdings at cost ..................................
<PAGE>
<CAPTION>
SHORT-TERM MONEY
GOVERNMENT MARKET
<S> <C> <C>
ASSETS
Investments at value ............................................................ $ 60,342,639
Short-term obligations at amortized cost ........................................ 12,488,777 $152,832,998
Cash ............................................................................ 554
Foreign currency at value .......................................................
Receivable for investments sold .................................................
Receivable for fund shares sold ................................................. 44,435 4,103,849
Receivable for variation margin .................................................
Dividends and interest receivable ............................................... 759,652 1,268,456
Prepaid expenses and other assets ............................................... 6,486 353
------------ ------------
Total assets ............................................................... 73,641,989 158,206,210
------------ ------------
LIABILITIES
Payable for investments purchased ...............................................
Payable for fund shares redeemed ................................................ 711 6,129
Payable for distributions ....................................................... 75 59
Payable for variation margin ....................................................
Payable for:
Management fees .............................................................. 19,443 38,616
Audit fees ................................................................... 17,832 15,201
Custodian fees ............................................................... 7,823 5,222
Legal fees ................................................................... 1,440
Trustees' fees ...............................................................
Transfer agent fees .......................................................... 5,883 13,668
Other fees ................................................................... 4,515
------------ ------------
Total liabilities ....................................................... 51,767 84,850
------------ ------------
Net assets ...................................................................... $ 73,590,222 $158,121,360
============ ============
Shares of beneficial interest outstanding ....................................... 7,726,927 158,121,360
============ ============
Offering and redemption price per share ......................................... $ 9.52 $ 1.00
============ ============
COMPOSITION OF NET ASSETS:
Paid-in capital ................................................................. $ 76,215,503 $158,121,360
Undistributed (Distributions in excess of)
net investment income ...........................................................
Accumulated net realized gains (losses) on
investments, futures, forwards, and foreign currency ......................... (1,715,449)
Net unrealized appreciation (depreciation) on:
Investments .................................................................. (909,832)
Futures ......................................................................
Foreign denominated other assets,
liabilities & currency ....................................................
------------ ------------
Net assets ...................................................................... $ 73,590,222 $158,121,360
============ ============
Investments and short-term obligations at cost .................................. $ 73,741,248 $152,832,998
Foreign currency holdings at cost ...............................................
See notes to financial statements
23
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF OPERATIONS December 31, 1999 (unaudited)
<CAPTION>
SIX MONTH PERIOD ENDED
DECEMBER 31, 1999 (UNAUDITED) GROWTH VALUE INTERNATIONAL
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends ................................................ $ 1,531,228 $ 2,612,943 $ 2,432,455
Interest ................................................. 252,580 505,381 474,704
------------- ------------- -------------
1,783,808 3,118,324 2,907,159
Less foreign taxes withheld at source .................... (10,622) (30,996) (290,116)
------------- ------------- -------------
Total income .......................................... 1,773,186 3,087,328 2,617,043
------------- ------------- -------------
EXPENSES
Management fees .......................................... 2,586,478 1,490,174 1,555,611
Audit fees ............................................... 17,596 15,082 17,596
Custodian fees ........................................... 69,880 47,257 271,475
Registration fees ........................................ 26,143 7,540 8,044
Legal fees ............................................... 22,121 14,076 10,054
Trustees' fees ........................................... 9,551 6,033 4,525
Transfer agent fees ...................................... 101,444 92,030 55,231
Insurance fees ........................................... 7,038 4,524 3,016
Other expenses ........................................... 16,087 12,065 8,546
------------- ------------- -------------
Total expenses ........................................ 2,856,338 1,688,781 1,934,098
------------- ------------- -------------
Net investment income (loss) ...................... (1,083,152) 1,398,547 682,945
------------- ------------- -------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS, FUTURES
AND FOREIGN CURRENCY
Net realized gain (loss) on:
Investments ........................................... 57,184,209 10,510,473 3,744,078
Futures...............................................
Forward contracts.....................................
Foreign denominated other assets,
liabilities & currency ............................ (279,587)
Change in net unrealized appreciation
(depreciation) on:
Investments ........................................... 109,806,344 (27,180,832) 58,001,968
Futures................................................
Forward contracts......................................
Foreign denominated other assets,
liabilities & currency ............................. 5,547
------------- ------------- -------------
Net gain (loss) ................................. 166,990,553 (16,670,359) 61,472,006
------------- ------------- -------------
Net increase (decrease) in net assets
resulting from operations ............................. $ 165,907,401 ($ 15,271,812) $ 62,154,951
============= ============= =============
24
<PAGE>
<CAPTION>
THE PREFERRED GROUP OF MUTUAL FUNDS STATEMENTS OF OPERATIONS
ASSET FIXED
SMALL CAP ALLOCATION INCOME
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends ................................................ $ 595,736 $ 645,087
Interest ................................................. 3,909,737 $ 6,036,604
------------ ------------ ------------
595,736 4,554,824 6,036,604
Less foreign taxes withheld at source .................... (885) (2,764)
------------ ------------ ------------
Total income .......................................... 594,851 4,552,060 6,036,604
------------ ------------ ------------
EXPENSES
Management fees .......................................... 373,821 817,519 451,772
Audit fees ............................................... 14,076 17,094 15,585
Custodian fees ........................................... 45,246 94,513 66,362
Registration fees ........................................ 7,540 14,578 12,065
Legal fees ............................................... 3,520 8,045 6,033
Trustees' fees ........................................... 1,509 3,520 2,513
Transfer agent fees ...................................... 21,716 60,643 40,928
Insurance fees ........................................... 1,004 2,513 2,011
Other expenses ........................................... 3,520 7,038 6,033
------------ ------------ ------------
Total expenses ........................................ 471,952 1,025,463 603,302
------------ ------------ ------------
Net investment income (loss) ...................... 122,899 3,526,597 5,433,302
------------ ------------ ------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS, FUTURES
AND FOREIGN CURRENCY
Net realized gain (loss) on:
Investments ........................................... 1,563,364 22,516,276 (4,306,813)
Futures ............................................... (5,348,963) 85,340
Forward contracts ..................................... 104,235
Foreign denominated other assets,
liabilities & currency ............................ (687)
Change in net unrealized appreciation
(depreciation) on:
Investments ........................................... (4,926,083) (22,109,670) 71,099
Futures ............................................... 328,148 301,740
Forward contracts......................................
Foreign denominated other assets,
liabilities & currency .............................
------------ ------------ ------------
Net gain (loss) ................................. (3,362,719) (4,614,209) (3,745,086)
------------ ------------ ------------
Net increase (decrease) in net assets
resulting from operations ............................. ($ 3,239,820) ($ 1,087,612) $ 1,688,216
============ ============ ============
<PAGE>
<CAPTION>
SHORT-TERM MONEY
GOVERNMENT MARKET
<S> <C> <C>
INVESTMENT INCOME
Dividends ...............................................................
Interest ................................................................ $ 1,858,857 $ 4,768,548
----------- -----------
1,858,857 4,768,548
Less foreign taxes withheld at source ...................................
----------- -----------
Total income ......................................................... 1,858,857 4,768,548
----------- -----------
EXPENSES
Management fees ......................................................... 116,432 267,457
Audit fees .............................................................. 16,087 13,071
Custodian fees .......................................................... 25,136 35,694
Registration fees ....................................................... 7,038 19,607
Legal fees .............................................................. 2,011 6,536
Trustees' fees .......................................................... 1,005 3,016
Transfer agent fees ..................................................... 16,945 48,578
Insurance fees .......................................................... 502 2,011
Other expenses .......................................................... 2,514 5,529
----------- -----------
Total expenses ....................................................... 187,670 401,499
----------- -----------
Net investment income (loss) ..................................... 1,671,187 4,367,049
----------- -----------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS, FUTURES
AND FOREIGN CURRENCY
Net realized gain (loss) on:
Investments .......................................................... (830,145)
Futures...............................................................
Forward contracts.....................................................
Foreign denominated other assets,
liabilities & currency............................................
Change in net unrealized appreciation
(depreciation) on:
Investments .......................................................... 216,033
Futures
Forward contracts
Foreign denominated other assets,
liabilities & currency ............................................
----------- -----------
Net gain (loss) ................................................ (614,112)
----------- -----------
Net increase (decrease) in net assets
resulting from operations ............................................ $ 1,057,075 $ 4,367,049
=========== ===========
See notes to financial statements
25
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS December 31, 1999 (unaudited)
<CAPTION>
GROWTH VALUE
PERIOD+ YEAR PERIOD+ YEAR
ENDED ENDED ENDED ENDED
12/31/99 6/30/99 12/31/99 6/30/99
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
Operations:
Net investment income (loss) ................ ($ 1,083,152) ($ 803,669) $ 1,398,547 $ 2,802,226
Net realized gain (loss) on:
Investments ............................. 57,184,209 63,513,505 10,510,473 49,008,891
Futures..................................
Forward contracts........................
Foreign denominated other assets,
liabilities & currency...............
Change in net unrealized appreciation
(depreciation) on:
Investments ............................ 109,806,344 88,790,969 (27,180,832) (26,632,458)
Futures................................
Forward contracts......................
Foreign denominated other assets,
liabilities & currency............
------------ ------------- ------------- -------------
Net increase (decrease) in net
assets resulting from
operations ...................... 165,907,401 151,500,805 (15,271,812) 25,178,659
------------ ------------- ------------- -------------
Distributions to shareholders from:
Net investment income .................. (2,575,000) (3,999,940)
Net realized gains ..................... (88,296,267) (111,232,130) (48,119,216) (15,868,693)
In excess of realized gains
------------ ------------- ------------- -------------
(88,296,267) (111,232,130) (50,694,216) (19,868,633)
------------ ------------- ------------- -------------
Fund share transactions:
Receipts for shares sold ............... 103,220,974 635,081,746 28,471,543 123,051,076
Value of distributions
reinvested .......................... 88,000,889 110,140,361 50,522,460 19,637,430
Cost of shares redeemed ................ (112,791,309) (625,918,574) (56,432,789) (134,374,899)
------------ ------------- ------------- -------------
Net increase (decrease) in net
assets from fund share
transactions .................... 78,430,554 119,303,533 22,561,214 8,313,607
------------ ------------- ------------- -------------
Total increase
(decrease) ................ 156,041,688 159,572,208 (43,404,814) 13,623,633
NET ASSETS
Beginning of period .................... 666,402,699 506,830,491 427,233,476 413,609,843
------------ ------------- ------------- -------------
End of period .......................... $ 822,444,387 $ 666,402,699 $ 383,828,662 $ 427,233,476
============ ============= ============= =============
Undistributed (distributions
in excess of) net investment
income at end of period ............. ($ 1,083,152) $ 36,348 $ 1,212,801
============ ============= ============= =============
NUMBER OF FUND SHARES
Sold ................................... 4,394,464 30,109,700 1,161,637 4,868,725
Issued for distributions
reinvested .......................... 3,565,676 5,636,660 2,323,940 802,182
Redeemed ............................... (4,743,794) (29,688,185) (2,234,212) (5,345,330)
------------ ------------- ------------- -------------
Net increase (decrease)
in shares outstanding ............. 3,216,346 6,058,175 1,251,365 325,577
Outstanding at:
Beginning of period .................... 29,122,871 23,064,696 15,939,562 15,613,985
------------ ------------- ------------- -------------
End of period .......................... 32,339,217 29,122,871 17,190,927 15,939,562
============ ============= ============= =============
26
<PAGE>
<CAPTION>
THE PREFERRED GROUP OF MUTUAL FUNDS STATEMENTS OF CHANGES IN NET ASSETS
INTERNATIONAL SMALL CAP
PERIOD+ YEAR PERIOD+ YEAR
ENDED ENDED ENDED ENDED
12/31/99 6/30/99 12/31/99 6/30/99
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
Operations:
Net investment income (loss) ..................... $ 682,945 $ 3,974,453 $ 122,899 $ 167,300
Net realized gain (loss) on:
Investments .................................. 3,744,078 8,595,547 1,563,364 (15,467,932)
Futures.......................................
Forward contracts.............................
Foreign denominated other assets,
liabilities & currency ................... (279,587) (249,262)
Change in net unrealized appreciation
(depreciation) on:
Investments ................................. 58,001,968 11,545,590 (4,926,083) (10,349,571)
Futures......................................
Forward contracts............................
Foreign denominated other assets,
liabilities & currency ................... 5,547 (23,074)
------------- ------------- ------------- -------------
Net increase (decrease) in net assets
resulting from operations ............ 62,154,951 23,843,254 (3,239,820) (25,650,203)
------------- ------------- ------------- -------------
Distributions to shareholders from:
Net investment income ....................... (4,462,835) (2,900,000) (210,000) (150,000)
Net realized gains .......................... (12,178,268) (8,299,909) (5,076,273)
In excess of realized gains..................
------------- ------------- ------------- -------------
(16,641,103) (11,199,909) (210,000) (5,226,273)
------------- ------------- ------------- -------------
Fund share transactions:
Receipts for shares sold .................... 246,049,221 509,126,412 25,427,976 106,831,536
Value of distributions
reinvested .............................. 16,533,101 11,065,960 209,826 5,207,954
Cost of shares redeemed ..................... (244,210,777) (504,507,540) (33,352,338) (109,848,020)
------------- ------------- ------------- -------------
Net increase (decrease) in net assets
from fund share transactions ......... 18,371,545 15,684,832 (7,714,536) 2,191,470
------------- ------------- ------------- -------------
Total increase (decrease) ........ 63,885,393 28,328,177 (11,164,356) (28,685,006)
NET ASSETS
Beginning of period ........................... 312,384,280 284,056,103 107,618,457 136,303,463
------------- ------------- ------------- -------------
End of period ............................... $ 376,269,673 $ 312,384,280 $ 96,454,101 $ 107,618,457
============= ============= ============= =============
Undistributed (distributions in excess of)
net investment income at end of period ... ($ 179,482) $ 3,600,408 $ 14,343 $ 101,444
============= ============= ============= =============
NUMBER OF FUND SHARES
Sold ........................................ 14,177,507 33,624,656 2,241,032 8,651,249
Issued for distributions reinvested ......... 917,486 747,700 18,634 417,639
Redeemed .................................... (14,024,490) (33,141,675) (2,959,339) (8,884,074)
------------- ------------- ------------- -------------
Net increase (decrease)
in shares outstanding .................. 1,070,503 1,230,681 (699,673) 184,814
Outstanding at:
Beginning of period ......................... 18,785,540 17,554,859 8,929,028 8,744,214
------------- ------------- ------------- -------------
End of period ............................... 19,856,043 18,785,540 8,229,355 8,929,028
============= ============= ============= =============
<PAGE>
<CAPTION>
ASSET ALLOCATION
PERIOD+ YEAR
ENDED ENDED
12/31/99 6/30/99
<S> <C> <C>
INCREASE IN NET ASSETS
Operations:
Net investment income (loss) ........................................... $ 3,526,597 $ 5,912,028
Net realized gain (loss) on:
Investments ........................................................ 22,516,276 1,525,975
Futures ............................................................ (5,348,963) 13,670,729
Forward contracts...................................................
Foreign denominated other assets, liabilities & currency............
Change in net unrealized appreciation (depreciation) on:
Investments ....................................................... (22,109,670) 12,283,902
Futures ........................................................... 328,148 (1,921,576)
Forward contracts..................................................
Foreign denominated other assets, liabilities & currency...........
------------- -------------
Net increase (decrease) in net assets resulting from
operations ................................................. (1,087,612) 31,471,058
------------- -------------
Distributions to shareholders from:
Net investment income ............................................. (3,526,597) (5,912,028)
Net realized gains ................................................ (4,951,396) (12,057,120)
In excess of realized gains........................................
------------- -------------
(8,477,993) (17,969,148)
------------- -------------
Fund share transactions:
Receipts for shares sold .......................................... 18,531,665 81,281,375
Value of distributions reinvested ................................. 8,412,986 17,848,793
Cost of shares redeemed ........................................... (37,099,367) (42,953,523)
------------- -------------
Net increase (decrease) in net assets from fund share
transactions .............................................. (10,154,716) 56,176,645
------------- -------------
Total increase (decrease) .............................. (19,720,321) 69,678,555
NET ASSETS
Beginning of period ................................................. 241,512,121 171,833,566
------------- -------------
End of period ..................................................... $ 221,791,800 $ 241,512,121
============= =============
Undistributed (distributions in excess of) net investment
income at end of period.........................................
============= =============
NUMBER OF FUND SHARES
Sold .............................................................. 1,123,895 4,918,432
Issued for distributions reinvested ............................... 521,037 1,079,576
Redeemed .......................................................... (2,243,419) (2,615,327)
------------- -------------
Net increase (decrease) in shares outstanding .................. (598,487) 3,382,681
Outstanding at:
Beginning of period ............................................... 14,363,121 10,980,440
------------- -------------
End of period ..................................................... 13,764,634 14,363,121
============= =============
+ Unaudited for six-month period ended December 31, 1999.
See notes to financial statements
27
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS December 31, 1999 (unaudited)
<CAPTION>
FIXED INCOME SHORT-TERM GOVERNMENT
PERIOD+ YEAR PERIOD+ YEAR
ENDED ENDED ENDED ENDED
12/31/99 6/30/99 12/31/99 6/30/99
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
Operations:
Net investment income (loss) ..................... $ 5,433,302 $ 9,569,764 $ 1,671,187 $ 3,102,004
Net realized gain (loss) on:
Investments .................................. (4,306,813) 277,794 (830,145) 46,059
Futures ...................................... 85,340 139,601
Forward contracts ............................ 104,235 (571,343)
Foreign denominated other assets,
liabilities & currency ................... (687) (8,556)
Change in net unrealized appreciation
(depreciation) on:
Investments ................................. 71,099 (7,864,321) 216,033 (1,105,009)
Futures ..................................... 301,740 (271,852)
Forward contracts ........................... (144,573)
Foreign denominated other assets,
liabilities & currency ................... 2,402
------------- ------------- ------------- -------------
Net increase (decrease)
in net assets resulting
from operations ...................... 1,688,216 1,128,916 1,057,075 2,043,054
------------- ------------- ------------- -------------
Distributions to shareholders from:
Net investment income ....................... (5,433,302) (9,548,818) (1,671,187) (3,102,004)
Net realized gains .......................... (1,463,746)
In excess of realized gains ................. (1,540,433)
------------- ------------- ------------- -------------
(5,433,302) (12,552,997) (1,671,187) (3,102,004)
------------- ------------- ------------- -------------
Fund share transactions:
Receipts for shares sold .................... 29,375,354 60,839,246 12,252,511 11,307,017
Value of distributions reinvested ........... 5,403,598 12,474,288 1,670,434 3,099,781
Cost of shares redeemed ..................... (37,819,172) (33,045,539) (6,269,984) (7,032,756)
------------- ------------- ------------- -------------
Net increase (decrease) in net assets
from fund share transactions ......... (3,040,220) 40,267,995 7,652,961 7,374,042
------------- ------------- ------------- -------------
Total increase (decrease) ........ (6,785,306) 28,843,914 7,038,849 6,315,092
NET ASSETS
Beginning of period ......................... 180,048,188 151,204,274 66,551,373 60,236,281
------------- ------------- ------------- -------------
End of period ............................... $ 173,262,882 $ 180,048,188 $ 73,590,222 $ 66,551,373
============= ============= ============= =============
Undistributed net investment income
at end of period ......................... $ 21,439 $ 21,439
============= ============= ============= =============
NUMBER OF FUND SHARES
SOLD .......................................... 3,048,400 5,945,932 1,283,486 1,159,310
Issued for distributions reinvested ......... 560,410 1,224,847 174,658 318,373
Redeemed .................................... (3,923,282) (3,232,288) (654,425) (721,087)
------------- ------------- ------------- -------------
Net increase (decrease)
in shares outstanding .................. (314,472) 3,938,491 803,719 756,596
Outstanding at:
Beginning of period ......................... 18,444,425 14,505,934 6,923,208 6,166,612
------------- ------------- ------------- -------------
End of period ............................... 18,129,953 18,444,425 7,726,927 6,923,208
============= ============= ============= =============
28
<PAGE>
<CAPTION>
MONEY MARKET
PERIOD+ YEAR
ENDED ENDED
12/31/99 6/30/99
<S> <C> <C>
INCREASE IN NET ASSETS
Operations:
Net investment income (loss) ........... $ 4,367,049 $ 6,882,649
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 .. 4,367,049 6,882,649
Distributions to shareholders from:
Net investment income ............. (4,367,049) (6,882,649)
--------------- ---------------
Net realized gains.................
In excess of realized gains
--------------- ---------------
(4,367,049) (6,882,649)
--------------- ---------------
Fund share transactions:
Receipts for shares sold .......... 168,644,256 1,084,707,427
Value of distributions reinvested . 4,343,091 6,597,028
Cost of shares redeemed ........... (209,674,096) (1,000,663,870)
--------------- ---------------
Net increase (decrease)
in net assets from fund
share transactions ......... (36,686,749) 90,640,585
--------------- ---------------
Total increase
(decrease) ............. (36,686,749) 90,640,585
NET ASSETS
Beginning of period ............... 194,808,109 104,167,524
--------------- ---------------
End of period ..................... $ 158,121,360 $ 194,808,109
Undistributed net investment
income at end of period.........
NUMBER OF FUND SHARES
Sold .............................. 168,644,256 1,084,707,427
Issued for distributions
reinvested ..................... 4,343,091 6,597,028
Redeemed .......................... (209,674,096) (1,000,663,870)
--------------- ---------------
Net increase (decrease)
in shares outstanding ........ (36,686,749) 90,640,585
Outstanding at:
Beginning of period ............... 194,808,109 104,167,524
--------------- ---------------
End of period ..................... 158,121,360 194,808,109
+ Unaudited for six-month period ended December 31, 1999.
See notes to financial statements
29
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS December 31, 1999 (unaudited)
(SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT
THE PERIOD)
<CAPTION>
Income (Loss) From Investment Operations Less Distributions
---------------------------------------- ----------------------------------------------------
Net
NET ASSET Net Realized Total From Net
VALUE, Investment and from From Net Realized In Excess
BEGINNING Income Unrealized Investment Investment Gains on of Realized Total
OF YEAR (Loss) Gain (Loss) Operations Income Investments Gains Distributions
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GROWTH
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended June 30,
1995 $12.46 $0.01 $4.24 $4.25 $(0.02) $(0.06) $ - $(0.08)
1996 16.63 0.00 2.44 2.44 (0.01) (0.54) - (0.55)
1997 18.52 0.00 4.76 4.76 - (2.86) - (2.86)
1998 20.42 0.00 5.93 5.93 - (4.38) - (4.38)
1999 21.97 (0.00) 5.87 5.87 - (4.96) - (4.96)
Six-months Ended 22.88 (0.03) 5.67 5.64 - (3.09) - (3.09)
12/31/99 (unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
VALUE
Year Ended June 30,
1995 11.33 0.21 2.62 2.83 (0.20) (0.14) - (0.34)
1996 13.82 0.20 3.13 3.33 (0.21) (0.29) - (0.50)
1997 16.65 0.19 5.10 5.29 (0.20) (0.58) (0.02) (0.80)
1998 21.14 0.28 5.29 5.57 (0.22) - - (0.22)
1999 26.49 0.19 1.43 1.62 (0.26) (1.05) - (1.31)
Six-months Ended 26.80 0.10 (1.15) (1.05) (0.17) (3.25) - (3.42)
12/31/99 (unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL
Year Ended June 30,
1995 12.02 0.18 0.60 0.78 (0.13) (0.26) (0.17) (0.56)
1996 12.24 0.19 1.47 1.66 (0.17) (0.01) - (0.18)
1997 13.72 0.33 2.67 3.00 (0.35) (0.25) - (0.60)
1998 16.12 0.26 0.76 1.02 (0.24) (0.72) - (0.96)
1999 16.18 0.21 0.88 1.09 (0.17) (0.47) - (0.64)
Six-months Ended 16.63 0.03 3.16 3.19 (0.23) (0.64) - (0.87)
12/31/99 (unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
SMALL CAP (COMMENCED INVESTMENT OPERATIONS ON NOVEMBER 1, 1995)
Period Ended June 30,
1996+ 10.00 0.05 1.22 1.27 (0.02) - - (0.02)
1997 11.25 0.06 3.18 3.24 (0.03) (0.16) - (0.19)
1998 14.30 0.03 3.17 3.20 (0.08) (1.83) - (1.91)
1999 15.59 0.01 (2.96) (2.95) (0.02) (0.57) - (0.59)
Six-months Ended $12.05 $0.02 $(0.32) $(0.30) $(0.03) $ - $ - $(0.03)
12/31/99 (unaudited)
30
<PAGE>
<CAPTION>
The Preferred Group of Mutual Funds FINANCIAL HIGHLIGHTS
Ratios to Average Net Assets
-----------------------------------------
Operating
NET ASSET TOTAL Expenses Net
VALUE, RETURN AT Before Investment Portfolio
END OF NET ASSET Net Assets, Operating Voluntary Income Turnover
YEAR VALUE(1) End of Year Expenses Waiver (Loss) Rate
GROWTH
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended June 30,
1995 $16.63 34.21% $374,592,700 0.87% - 0.13% 55.32%
1996 18.52 14.96% 411,688,146 0.86% - (0.16%) 75.24%
1997 20.42 28.57% 455,021,877 0.84% - (0.13%) 58.31%
1998 21.97 33.44% 506,830,491 0.84% - (0.08%) 70.35%
1999 22.88 30.56% 666,402,699 0.83% - (0.15%) 74.31%
Six-months Ended 25.43 25.08%++ 822,444,387 0.83%+++ - (0.31%)+++ 27.53%++
12/31/99 (unaudited)
- ------------------------------------------------------------------------------------------------------------------------------
VALUE
Year Ended June 30,
1995 13.82 25.72% 212,678,363 0.89% - 1.95% 29.02%
1996 16.65 24.49% 267,581,693 0.85% - 1.23% 17.04%
1997 21.14 32.62% 373,673,368 0.85% - 1.06% 7.23%
1998 26.49 26.51% 413,609,843 0.84% - 1.03% 10.14%
1999 26.80 6.59% 427,233,476 0.84% - 0.71% 23.26%
Six-months Ended 22.33 (3.55%)++ 383,828,662 0.85%+++ - 0.70%+++ 7.15%++
12/31/99 (unaudited)
- ------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL
Year Ended June 30,
1995 12.24 6.70% 118,216,038 1.32% - 1.65% 29.47%
1996 13.72 13.70% 157,627,409 1.31% - 1.64% 19.61%
1997 16.12 22.50% 265,292,395 1.25% - 2.66% 13.16%
1998 16.18 7.18% 284,056,103 1.22% - 1.76% 17.08%
1999 16.63 7.21% 312,384,280 1.20% - 1.43% 15.31%
Six-months Ended 18.95 19.45%++ 376,269,673 1.18%+++ - 0.42%+++ 9.86%++
12/31/99 (unaudited)
- ------------------------------------------------------------------------------------------------------------------------------
SMALL CAP (COMMENCED INVESTMENT OPERATIONS ON NOVEMBER 1, 1995)
Period Ended June 30,
1996+ 11.25 12.67%*++ 45,692,712 0.88%+++ 1.23%+++ 0.75%+++ 65.70%++
1997 14.30 29.00%* 84,877,805 0.88% 0.98% 0.66% 104.45%
1998 15.59 23.45% 136,303,463 0.90% - 0.29% 105.32%
1999 12.05 (19.07%) 107,618,457 0.92% - 0.15% 121.53%
Six-months Ended $11.72 (2.52%)++ $ 96,454,101 0.95%+++ - 0.25%+++ 41.14%++
12/31/99 (unaudited)
</TABLE>
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 adviser.
+ Eight-month period ended June 30, 1996.
++ Not annualized
+++ Annualized
See notes to financial statements
31
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS December 31, 1999 (unaudited)
(SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT
THE PERIOD)
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS LESS DISTRIBUTIONS
---------------------------------------- ----------------------------------------------------
Net
NET ASSET Net Realized Total From Net
VALUE, Investment and from From Net Realized In Excess
BEGINNING Income Unrealized Investment Investment Gains on of Realized Total
OF YEAR (Loss) Gain (Loss) Operations Income Investments Gains Distributions
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSET ALLOCATION
Year Ended June 30,
1995 $10.27 $0.38 $1.79 $2.17 $(0.38) $(0.09) $ - $(0.47)
1996 11.97 0.40 1.72 2.12 (0.40) (0.81) - (1.21)
1997 12.88 0.44 2.17 2.61 (0.44) (0.53) - (0.97)
1998 14.52 0.47 2.51 2.98 (0.47) (1.38) - (1.85)
1999 15.65 0.46 2.18 2.64 (0.46) (1.02) - (1.48)
Six-months Ended 16.81 0.48 (0.33) 0.15 (0.48) (0.37) - (0.85)
12/31/99 (unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
FIXED INCOME
Year Ended June 30,
1995 9.80 0.58 0.50 1.08 (0.58) - - (0.58)
1996 10.30 0.58 (0.16) 0.42 (0.58) (0.05) - (0.63)
1997 10.09 0.64 0.19 0.83 (0.64) (0.04) - (0.68)
1998 10.24 0.64 0.29 0.93 (0.64) (0.11) - (0.75)
1999 10.42 0.58 (0.46) 0.12 (0.59) (0.11) (0.08) (0.78)
Six-months Ended 9.76 0.58 (0.20) 0.38 (0.58) - - (0.58)
12/31/99 (unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM
GOVERNMENT SECURITIES
Year Ended June 30,
1995 9.77 0.51 0.03 0.54 (0.51) - - (0.51)
1996 9.80 0.53 (0.04) 0.49 (0.53) - - (0.53)
1997 9.76 0.53 0.02 0.55 (0.53) - - (0.53)
1998 9.78 0.56 (0.01) 0.55 (0.56) - - (0.56)
1999 9.77 0.47 (0.16) 0.31 (0.47) - - (0.47)
Six-months Ended 9.61 0.47 (0.09) 0.38 (0.47) - - (0.47)
12/31/99 (unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
MONEY MARKET
Year Ended June 30,
1995 1.00 0.05 - 0.05 (0.05) - - (0.05)
1996 1.00 0.05 - 0.05 (0.05) - - (0.05)
1997 1.00 0.05 - 0.05 (0.05) - - (0.05)
1998 1.00 0.05 - 0.05 (0.05) - - (0.05)
1999 1.00 0.05 - 0.05 (0.05) - - (0.05)
Six-months Ended $1.00 $0.05 $ - $0.05 $(0.05) $ - $ - $(0.05)
12/31/99 (unaudited)
32
<PAGE>
<CAPTION>
The Preferred Group of Mutual Funds FINANCIAL HIGHLIGHTS
RATIOS TO AVERAGE NET ASSETS
---------------------------------------
Operating
NET ASSET TOTAL Expenses Net
VALUE, RETURN AT Before Investment Portfolio
END OF NET ASSET Net Assets, Operating Voluntary Income Turnover
YEAR VALUE(1) End of Year Expenses Waiver (Loss) Rate
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSET ALLOCATION
Year Ended June 30,
1995 $11.97 21.70% $ 77,745,018 1.11% - 3.52% 18.27%
1996 12.88 18.23% 96,889,348 1.04% - 3.21% 38.25%
1997 14.52 21.01% 128,884,756 0.99% - 3.29% 27.73%
1998 15.65 21.84% 171,833,566 0.92% - 3.19% 27.90%
1999 16.81 17.19% 241,512,121 0.89% - 2.85% 5.80%
Six-months Ended 16.11 (0.42%)++ 221,791,800 0.88%+++ - 3.02%+++ 1.61%++
12/31/99 (unaudited)
- ------------------------------------------------------------------------------------------------------------------------------
FIXED INCOME
Year Ended June 30,
1995 10.30 11.48% 57,911,899 0.95% - 5.94% 330.55%
1996 10.09 4.12% 111,184,492 0.93% - 5.65% 313.51%
1997 10.24 8.39% 140,158,482 0.74% - 6.32% 105.98%
1998 10.42 9.32% 151,204,274 0.67% - 6.16% 143.66%
1999 9.76 1.07% 180,048,188 0.65% - 5.77% 158.46%
Six-months Ended 9.56 0.95%++ 173,262,882 0.67%+++ - 6.01%+++ 127.77%++
12/31/99 (unaudited)
- ------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM
GOVERNMENT SECURITIES
Year Ended June 30,
1995 9.80 5.71% 32,121,171 0.71% - 5.27% 256.44%
1996 9.76 5.10% 51,755,317 0.66% - 5.37% 79.04%
1997 9.78 5.81% 54,807,409 0.63% - 5.49% 183.73%
1998 9.77 5.72% 60,236,281 0.60% - 5.67% 263.47%
1999 9.61 3.27% 66,551,373 0.55% - 4.87% 66.64%
Six-months Ended 9.52 1.60%++ 73,590,222 0.56%+++ - 5.02%+++ 53.05%++
12/31/99 (unaudited)
- ------------------------------------------------------------------------------------------------------------------------------
MONEY MARKET
Year Ended June 30,
1995 1.00 5.27%* 79,585,753 0.39% 0.54% 5.24% N/A
1996 1.00 5.32%* 90,482,435 0.49% 0.54% 5.25% N/A
1997 1.00 5.14% 109,682,146 0.48% - 5.03% N/A
1998 1.00 5.40% 104,167,524 0.48% - 5.28% N/A
1999 1.00 4.89% 194,808,109 0.45% - 4.73% N/A
Six-months Ended $1.00 2.52%++ $158,121,360 0.45%+++ - 4.90%+++ N/A
12/31/99 (unaudited)
1 Total return at net asset value assumes reinvestment of dividends and
capital gains distributions.
++ Not annualized
+++ Annualized
See notes to financial statements
33
</TABLE>
<PAGE>
SCHEDULES OF INVESTMENTS December 31, 1999 (unaudited)
- -------------------------------------------------------
PREFERRED GROWTH FUND
COMMON STOCK-- 96.41% SHARES VALUE
- -------------------------------------------------------
BANKS--4.46%
Chase Manhattan Corp 163,892$ 12,732,360
Citigroup Inc 430,600 23,925,213
------------
36,657,573
------------
COMPUTER SOFTWARE--6.48%
Equant NV * 93,400 10,460,800
Microsoft Corp * 343,700 40,126,975
Veritas Software Corp * 18,700 2,676,438
------------
53,264,213
------------
CONSUMER PRODUCTS--.84%
Estee Lauder Companies
Inc Class A 136,700 6,894,806
------------
DISCOUNT & FASHION RETAILING--10.58%
Gap Inc 301,150 13,852,900
Home Depot Inc 452,997 31,058,607
Kohls Corp * 174,400 12,589,500
Tiffany & Co 164,000 14,637,000
Wal Mart Stores 215,000 14,861,875
------------
86,999,882
------------
ELECTRICAL & ELECTRONICS--12.49%
Broadcom Corp * 31,400 8,552,575
General Electric Co 191,800 29,681,050
Intel Corp 229,800 18,915,413
KLA Tencor Corp * 81,200 9,043,650
Motorola Inc 101,400 14,931,150
Texas Instruments Inc 222,600 21,564,375
------------
102,688,213
------------
FINANCE-OTHER--3.36%
American Express Co 56,800 9,443,000
Morgan Stanley Dean Witter & Co 127,320 18,174,930
------------
27,617,930
------------
HEALTH CARE--10.49%
American Home Products Corp 309,100 12,190,131
Amgen Inc * 176,800 10,619,050
Bristol Myers Squibb Co 124,900 8,017,019
Eli Lilly & Co 57,800 3,843,700
Genentech Inc * 59,500 8,002,750
Glaxo Wellcome PLC ADR 144,000 8,046,000
Merck & Co Inc 179,500 12,037,719
Schering Plough Corp 105,200 4,438,125
Warner Lambert Co 233,000 19,091,438
------------
86,285,932
------------
INSURANCE--2.83%
American International
Group Inc 215,550 23,306,344
------------
- -------------------------------------------------------
COMMON STOCK SHARES VALUE
- -------------------------------------------------------
LEISURE TIME INDUSTRIES--1.36%
McDonalds Corp 277,400 $ 11,182,688
------------
MANUFACTURING--1.41%
Applied Materials Inc * 91,600 11,604,575
------------
OFFICE EQUIPMENT & COMPUTERS--15.37%
America Online Inc * 174,000 13,126,125
Cisco Systems Inc * 319,050 34,178,231
Dell Computer Corp * 214,100 10,919,100
EMC Corp * 143,600 15,688,300
Hewlett Packard Co 183,900 20,953,106
JDS Uniphase Corp * 68,000 10,969,250
Juniper Networks Inc * 16,500 5,610,000
Metromedia Fiber Network Inc * 88,000 4,218,500
Sun Microsystems Inc * 138,900 10,756,069
------------
126,418,681
------------
PUBLISHING & BROADCASTING--7.01%
CBS Corp * 441,400 28,222,013
Clear Channel Communications * 170,900 15,252,825
Omnicom Group 142,000 14,200,000
------------
57,674,838
------------
TELECOMMUNICATIONS--19.73%
AT&T Corp Liberty Media
Group Class A * 250,800 14,232,900
Allegiance Telecom Inc * 86,600 7,988,850
Level 3 Communications Inc * 67,200 5,502,000
Lucent Technologies Inc 130,780 9,783,979
MCI Worldcom Inc * 266,400 14,135,850
NTL Inc * 129,650 16,173,838
Nextlink Communications
Inc Class A * 73,800 6,130,013
Nokia Corp ADR 139,500 26,505,000
Qwest Communications
International Inc * 463,200 19,917,600
Tellabs Inc * 157,400 10,103,113
Univision Communications
Inc Class A * 134,500 13,744,219
Vodafone Airtouch PLC ADR 365,300 18,082,345
------------
162,299,707
------------
TOTAL COMMON STOCK
(Cost $454,916,568) 792,895,382
------------
- -------------------------------------------------------
SHORT TERM INVESTMENTS--3.11% PAR VALUE
- -------------------------------------------------------
REPURCHASE AGREEMENTS--1.66%
State Street Repo 2.50% January 3, 2000
(Dated December 31, 1999, due January 3, 2000,
collateralized by $11,230,000
U.S. Treasury Note 12.375%, May 15, 2004,
Market Value $13,883,088
Repurchase Proceeds
$13,607,834) $13,605,000 13,605,000
------------
See notes to financial statements and notes to schedules of investments
34
<PAGE>
The Preferred Group of Mutual Funds SCHEDULES OF INVESTMENTS
- -------------------------------------------------------
SHORT TERM INVESTMENTS PAR VALUE
- -------------------------------------------------------
U.S. TREASURY--1.45%
United States Treasury Bill
4.53% January 27, 2000 $12,000,000 $ 11,960,740
------------
TOTAL SHORT TERM INVESTMENTS
(Cost $25,565,740) 25,565,740
------------
TOTAL INVESTMENTS--99.52%
(Cost $480,482,308) 818,461,122
------------
OTHER ASSETS AND LIABILITIES--.48% 3,983,265
------------
TOTAL NET ASSETS--100% $822,444,387
============
- -------------------------------------------------------
PREFERRED VALUE FUND
COMMON STOCK--97.12% SHARES VALUE
- -------------------------------------------------------
AEROSPACE--2.44%
Boeing Co 225,000 $ 9,351,563
------------
BANKS--16.43%
Chase Manhattan Corp 85,000 6,603,438
Citigroup Inc 600,000 33,337,500
FleetBoston Financial Corp 200,000 6,962,500
Wells Fargo & Co 400,000 16,175,000
------------
63,078,438
------------
CHEMICALS--5.00%
Du Pont E I de Nemours & Co 140,000 9,222,500
Monsanto Co 280,000 9,975,000
------------
19,197,500
------------
COMPUTER SOFTWARE--3.19%
Computer Associates
International Inc 175,000 12,239,063
------------
CONSUMER PRODUCTS--2.41%
Avon Products Inc 280,000 9,240,000
------------
DISCOUNT & FASHION RETAILING--2.10%
May Department Stores Co 250,000 8,062,500
------------
- -------------------------------------------------------
COMMON STOCK SHARES VALUE
- -------------------------------------------------------
ELECTRICAL & ELECTRONICS--8.45%
Emerson Electric Co 150,000 $ 8,606,250
Intel Corp 200,000 16,462,500
Motorola Inc 50,000 7,362,500
------------
32,431,250
------------
FINANCE-OTHER--14.60%
Conseco Inc 350,000 6,256,250
Countrywide Credit
Industries Inc 260,000 6,565,000
Federal Home Loan Mortgage Corp 350,000 16,471,875
Morgan Stanley Dean Witter & Co 100,000 14,275,000
XL Capital Ltd Class A 240,000 12,450,000
------------
56,018,125
------------
FOOD--2.09%
Diageo PLC ADR 250,000 8,000,000
------------
HEALTH CARE--1.67%
Becton Dickinson & Co 240,000 6,420,000
------------
INSURANCE--5.67%
Ace Ltd 400,000 6,675,000
Aflac Inc 320,000 15,100,000
------------
21,775,000
------------
LEISURE TIME INDUSTRIES--4.90%
Carnival Corp 250,000 11,953,125
McDonalds Corp 170,000 6,853,125
------------
18,806,250
------------
MANUFACTURING--7.10%
Caterpillar Inc 150,000 7,059,375
Dover Corp 135,000 6,125,625
Minnesota Mining &
Manufacturing Corp 85,000 8,319,375
Textron Inc 75,000 5,751,563
------------
27,255,938
------------
OFFICE EQUIPMENT & COMPUTERS--1.41%
Compaq Computer Corp 200,000 5,412,500
------------
PUBLISHING & BROADCASTING--5.16%
AMFM Inc * 125,000 9,781,250
News Corp Ltd ADR 300,000 10,031,250
------------
19,812,500
------------
See notes to financial statements and notes to schedules of investments
35
<PAGE>
SCHEDULES OF INVESTMENTS December 31, 1999 (unaudited)
- -------------------------------------------------------
PREFERRED VALUE FUND (continued)
COMMON STOCK SHARES VALUE
- -------------------------------------------------------
SERVICE INDUSTRIES--3.68%
Arrow Electronics Inc * 386,900 $ 9,817,588
Waste Management Inc 250,000 4,296,875
------------
14,114,463
TELECOMMUNICATIONS--5.96%
Sprint Corp 340,000 22,886,250
------------
Transportation--4.86%
AMR Corp * 160,000 10,720,000
Burlington Northern Santa Fe 150,000 3,637,500
Canadian Pacific Ltd 200,000 4,312,498
------------
18,669,998
TOTAL COMMON STOCK
(Cost $211,651,668) 372,771,338
------------
- -------------------------------------------------------
SHORT TERM INVESTMENTS--1.94% PAR/SHARES VALUE
- -------------------------------------------------------
COMMERCIAL PAPER--.78%
Ford Motor Credit Co
5.96% January 4, 2000 @ $3,000,000 2,998,510
------------
SHORT TERM INVESTMENT FUND--1.16%
State Street Global Advisors
Money Market Fund 4,435,314 4,435,314
------------
TOTAL SHORT TERM INVESTMENTS
(Cost $7,433,824) 7,433,824
------------
TOTAL INVESTMENTS--99.06%
(Cost $219,085,492) 380,205,162
------------
OTHER ASSETS AND LIABILITIES--.94% 3,623,500
------------
TOTAL NET ASSETS--100% $383,828,662
============
- -------------------------------------------------------
PREFERRED INTERNATIONAL FUND
COMMON STOCK &
EQUIVALENTS--94.23% SHARES VALUE
- -------------------------------------------------------
ARGENTINA--.98%
TELECOMMUNICATIONS--.98%
Telecom Argentina Stet
France Class B ADR 108,000 $ 3,699,000
------------
Total Argentina 3,699,000
------------
- -------------------------------------------------------
AUSTRALIA--5.76%
BANKS--1.95%
National Australia Bank 480,000 7,342,297
CONSTRUCTION MATERIALS--1.76%
Pioneer International Ltd 2,200,000 6,629,338
TELECOMMUNICATIONS--1.52%
Cable & Wireless Optus * 1,715,200 5,731,488
TRUCKING & FREIGHT--.53%
Mayne Nickless Ltd 766,000 1,976,315
------------
Total Australia 21,679,438
------------
- -------------------------------------------------------
CANADA--3.82%
BANKS--1.69%
Bank Nova Scotia Halifax 295,000 6,345,514
NON-FERROUS METALS--2.13%
Alcan Aluminum Ltd 195,000 8,024,247
------------
Total Canada 14,369,761
------------
- -------------------------------------------------------
FINLAND--2.09%
FOREST PRODUCTS--2.09%
Stora Enso Oyj Series R 450,000 7,846,750
------------
Total Finland 7,846,750
------------
See notes to financial statements and notes to schedules of investments
36
<PAGE>
The Preferred Group of Mutual Funds SCHEDULES OF INVESTMENTS
- -------------------------------------------------------
COMMON STOCK & EQUIVALENTS SHARES VALUE
- -------------------------------------------------------
FRANCE--10.56%
AUTOMOBILES--2.46%
Peugeot SA 40,800 $ 9,263,909
CONGLOMERATES--2.98%
Bouygues 17,600 11,187,222
CONSUMER GOODS--3.31%
Christian Dior 50,300 12,464,743
ENERGY SOURCES--1.81%
Elf Aquitaine 8 1,233
Total Fina 50,996 6,806,631
------------
6,807,864
------------
Total France 39,723,738
------------
- -------------------------------------------------------
GERMANY--2.99%
CONSUMER GOODS--2.99%
Adidas-Salomon AG 66,700 5,005,671
Continental AG 312,700 6,252,715
------------
11,258,386
------------
Total Germany 11,258,386
------------
- -------------------------------------------------------
ITALY--7.06%
APPAREL & TEXTILES--1.98%
Benetton Group SPA 3,250,000 7,464,461
BANKS--5.08%
Banca Popolare di Bergamo CV 290,000 6,707,337
Bipop-Carire 140,000 12,389,393
------------
19,096,730
------------
Total Italy 26,561,191
------------
- -------------------------------------------------------
JAPAN--19.70%
DRUGS & HEALTHCARE--1.85%
Daiichi Pharmaceutical 340,800 4,433,035
Tanabe Seiyaku Co 374,500 2,532,833
------------
6,965,868
------------
ELECTRICAL EQUIPMENT--3.26%
Hitachi 764,800 12,276,324
- -------------------------------------------------------
COMMON STOCK & EQUIVALENTS SHARES VALUE
- -------------------------------------------------------
JAPAN (continued)
INSURANCE--3.24%
Sumitomo Marine &
Fire Insurance 1,041,400 $ 6,421,474
Yasuda Marine &
Fire Insurance 1,022,600 5,785,092
------------
12,206,566
------------
HOUSEHOLD APPLIANCES--8.34%
Matsushita Electric Industries 340,000 9,417,637
Sony Corp 74,000 21,945,777
------------
31,363,414
------------
REAL ESTATE--3.01%
Mitsui Fudosan Co 313,500 2,123,343
Oriental Land Co Ltd 107,000 9,195,067
------------
11,318,410
------------
Total Japan 74,130,582
------------
- -------------------------------------------------------
NETHERLANDS--6.15%
CHEMICALS--1.87%
Akzo Nobel NV 140,000 7,023,242
ENERGY SERVICES & EQUIPMENT--.82%
Vopak 130,400 3,100,058
FINANCIAL SERVICES--2.06%
ING Groep NV 128,000 7,728,709
INDUSTRIAL MACHINERY--.31%
Stork NV 80,000 1,168,526
TRANSPORTATION--1.09%
KLM Royal Dutch Air Lines 159,975 4,109,344
------------
Total Netherlands 23,129,879
------------
- -------------------------------------------------------
NEW ZEALAND--.92%
FOREST PRODUCTS--.41%
Carter Holt Harvey 1,200,000 1,567,500
HOUSEHOLD APPLIANCES--.51%
Fisher & Paykel 500,000 1,907,125
------------
Total New Zealand 3,474,625
------------
See notes to financial statements and notes to schedules of investments
37
<PAGE>
SCHEDULES OF INVESTMENTS December 31, 1999 (unaudited)
- -------------------------------------------------------
PREFERRED INTERNATIONAL FUND (continued)
COMMON STOCK & EQUIVALENTS SHARES VALUE
- -------------------------------------------------------
SOUTH KOREA--2.50%
ELECTRIC UTILITIES--1.73%
Korea Electric Power 210,000 $ 6,509,908
STEEL--.77%
Pohang Iron & Steel 24,480 2,883,487
------------
Total South Korea 9,393,395
------------
- -------------------------------------------------------
SPAIN--3.97%
BANKS--2.30%
Banco Bilbao Vizcaya 380,300 5,416,964
Banco de Andalucia 92,000 3,243,666
------------
8,660,630
------------
UTILITIES--1.67%
Iberdrola SA 452,000 6,265,231
------------
Total Spain 14,925,861
------------
- -------------------------------------------------------
SWEDEN--6.21%
DRUGS & HEALTH CARE--1.29%
Pharmacia & UpJohn SDR 106,800 4,844,847
HOUSEHOLD APPLIANCES--2.74%
Electrolux AB Series B 410,000 10,311,435
INDUSTRIAL MACHINERY--2.18%
SKF AB Series B 195,000 4,743,801
Svedala Industrial 190,000 3,483,371
------------
8,227,172
------------
Total Sweden 23,383,454
------------
- -------------------------------------------------------
SWITZERLAND--9.14%
BANKS--1.47%
UBS AG 20,461 5,525,485
CONSUMER GOODS--3.12%
Swatch Group 10,200 11,748,289
DRUGS & HEALTH CARE--1.37%
Novartis AG 3,500 5,139,107
- -------------------------------------------------------
COMMON STOCK & EQUIVALENTS SHARES VALUE
- -------------------------------------------------------
SWITZERLAND (continued)
INDUSTRIAL MACHINERY--1.69%
Sulzer AG 9,800 $ 6,370,031
MERCHANDISING--1.49%
Valora Holding AG 21,000 5,618,288
------------
Total Switzerland 34,401,200
------------
- -------------------------------------------------------
UNITED KINGDOM--12.38%
BANKS--1.97%
National Westminster 345,000 7,411,805
FINANCIAL SERVICES--1.82%
Royal & Sun Alliance 910,800 6,826,439
MERCHANDISING--1.61%
Tesco 2,000,000 6,073,528
STEEL--4.52%
Corus Group 2,356,950 5,482,247
Rio Tinto 480,000 11,521,613
------------
17,003,860
------------
TELECOMMUNICATIONS--1.15%
British Telecom 178,500 4,324,966
TRANSPORTATION--1.31%
British Airways 755,200 4,928,292
------------
Total United Kingdom 46,568,890
------------
TOTAL COMMON STOCK & EQUIVALENTS
(Cost $223,124,730) 354,546,150
------------
- -------------------------------------------------------
SHORT TERM INVESTMENTS--5.31% PAR VALUE
- -------------------------------------------------------
REPURCHASE AGREEMENTS--5.31%
State Street Repo 2.50% January 3, 2000
(Dated December 31, 1999, due January 3, 2000,
collateralized by $18,500,000
U.S. Treasury Note 7.50%, November 15, 2024,
Market Value $20,396,250
Repurchase Proceeds
$19,999,166) $19,995,000 19,995,000
------------
See notes to financial statements and notes to schedules of investments
38
<PAGE>
The Preferred Group of Mutual Funds SCHEDULES OF INVESTMENTS
- -------------------------------------------------------
SHORT TERM INVESTMENTS PAR VALUE
- -------------------------------------------------------
TOTAL SHORT TERM INVESTMENTS
(Cost $19,995,000) $ 19,995,000
------------
TOTAL INVESTMENTS--99.54%
(Cost $243,119,730) 374,541,150
------------
OTHER ASSETS & LIABILITIES--.46% 1,728,523
------------
TOTAL NET ASSETS--100% $376,269,673
------------
- -------------------------------------------------------
PREFERRED SMALL CAP FUND
COMMON STOCK &
EQUIVALENTS --95.51% SHARES VALUE
- -------------------------------------------------------
AUTOMOTIVE--5.47%
Arvin Industries Inc 29,600$ 839,900
Avis Rent A Car Inc * 58,300 1,490,294
Capital Automotive REIT 76,000 926,250
Dollar Thrifty Automotive
Group * 53,900 1,290,231
Rollins Truck Leasing Corp 19,200 229,200
Tower Automotive Inc * 32,500 501,719
------------
5,277,594
------------
BANKS--1.91%
Commonwealth Bank Corp Inc 35,000 581,875
East West Bancorp Inc 64,700 740,006
Ocean First Financial Corp 30,000 519,375
------------
1,841,256
------------
CHEMICALS--1.01%
Geon Co 30,000 975,000
------------
COMPUTER SOFTWARE--7.02%
Ardent Software Inc * 25,000 975,000
Nvidia Corp * 32,200 1,511,388
Pinnacle Systems Inc * 25,000 1,017,188
Progressive Software Corp * 33,900 1,923,825
Sunquest Information
Systems Inc * 47,000 634,500
Unigraphics Solutions Inc
Class A * 26,300 710,100
------------
6,772,001
------------
- -------------------------------------------------------
COMMON STOCK & EQUIVALENTS SHARES VALUE
- -------------------------------------------------------
CONSUMER PRODUCTS--9.01%
Agribrands International Inc * 15,000 $ 690,000
Canadaigua Wine Inc Class A * 15,000 765,000
Ethan Allan Interiors Inc 45,600 1,462,050
Fossil Inc * 36,000 832,500
Haverty Furniture Companies Inc 34,400 434,300
Mikasa Inc 27,500 276,719
Musicland Stores Inc * 79,300 669,094
Ocular Sciences Inc * 45,000 849,375
Oshkosh B'Gosh Inc Class A 17,600 370,700
Salton Inc * 52,500 1,755,469
Tupperware Corp 34,600 586,038
------------
8,691,245
------------
DISCOUNT & FASHION RETAILING--6.81%
Ann Taylor Stores Corp * 22,200 764,513
Brown Shoe Inc 53,200 751,450
Cato Corp Class A 25,000 315,625
Deb Shops Inc 25,600 473,600
Genesco Inc * 27,600 358,800
Guess Inc * 35,000 761,250
K-Swiss Inc 25,000 464,453
ShopKo Stores Inc * 16,000 368,000
Timberland Co Class A * 21,000 1,110,375
Zale Corp * 24,900 1,204,538
------------
6,572,604
------------
ELECTRICAL & ELECTRONICS--6.08%
Amphenol Corp * 12,000 798,750
Anixter International Inc * 29,900 616,688
CTS Corp 16,300 1,228,613
ESS Technology Inc * 45,800 1,016,188
Neomagic Corp * 34,300 375,156
Park Electrochemical Corp 44,500 1,182,031
Stoneridge Inc * 42,200 651,463
------------
5,868,889
------------
FINANCE-OTHER--8.25%
Advanta Corp Class A 67,600 1,233,700
Affiliated Managers Group Inc * 19,300 780,444
Alfa Corp 20,900 340,931
Andover Bancorp Inc 10,900 305,200
Dain Rauscher Corp 12,400 576,600
Dime Community Bancshares Inc 42,000 777,000
Doral Financial Corp 55,300 680,881
First Federal Financial Corp * 20,000 281,250
John Nuveen Co Class A 10,200 367,838
Medallion Financial Corp 55,600 997,325
PFF Bancorp Inc 35,000 678,125
See notes to financial statements and notes to schedules of investments
39
<PAGE>
SCHEDULES OF INVESTMENTS December 31, 1999 (unaudited)
- -------------------------------------------------------
PREFERRED SMALL CAP FUND (continued)
COMMON STOCK & EQUIVALENTS SHARES VALUE
- -------------------------------------------------------
FINANCE-OTHER (continued)
Richmond County Financial Corp 29,100 $ 525,619
Webster Financial Corp 17,500 412,344
------------
7,957,257
------------
FOOD--.56%
Jack In The Box Inc * 26,100 539,944
------------
FUEL--.55%
Swift Energy Co * 46,500 534,750
------------
HEALTH CARE--2.10%
Cooper Companies Inc 24,600 741,075
Medquist Inc * 25,000 645,313
Theragenics Corp * 70,000 634,375
------------
2,020,763
------------
HOUSING & REAL ESTATE--6.99%
Centex Construction Products Inc 38,700 1,509,300
Centex Corp 34,000 839,375
Commercial Net Lease Realty Inc 44,700 444,206
D.R. Horton Inc 35,200 486,200
Kaufman & Broad Home Corp 31,800 769,163
LNR Property Corp 20,000 397,500
M.D.C. Holdings Inc 28,400 445,525
Pulte Corp 32,500 731,250
Schottenstein Homes Inc 23,300 362,606
Standard Pacific Corp 46,500 511,500
U.S. Home Corp * 9,700 247,956
------------
6,744,581
------------
INSURANCE--3.09%
Foremost Corp 28,000 794,500
Leucadia National Corp 35,000 809,375
Professionals Group Inc * 13,750 322,266
RLI Corp 31,000 1,054,000
------------
2,980,141
------------
LEISURE TIME INDUSTRIES--5.55%
Argosy Gaming Corp * 24,200 376,613
Crestline Capital Corp * 45,100 930,188
GTECH Holdings Corp * 33,600 739,200
Monaco Coach Corp * 40,750 1,041,672
National RV Holdings Inc * 30,000 577,500
Trendwest Resorts Inc * 25,900 582,750
Winnebago Industries Inc 55,100 1,105,444
------------
5,353,367
------------
- -------------------------------------------------------
COMMON STOCK & EQUIVALENTS SHARES VALUE
- -------------------------------------------------------
MANUFACTURING--9.34%
Ameron International Corp 26,300 $1,040,494
Briggs & Stratton Corp 20,000 1,072,500
Graco Inc 13,000 466,375
Justin Industries Inc 15,200 226,100
La-Z-Boy Inc 39,000 655,688
Manitowoc Inc 23,850 810,900
Mohawk Industries Inc * 39,100 1,031,263
Newport News Shipbuilding Inc 24,900 684,750
Nortek Inc * 17,800 498,400
Primex Technologies Inc 34,000 705,500
Springs Industries Inc Class A 10,000 399,375
Tecumseh Products Inc Class A 18,900 891,844
Thermo Optek Corp * 17,500 199,063
Toro Co 8,700 324,619
------------
9,006,871
------------
METALS & MINING--3.95%
Amcol International Corp 45,000 725,625
Commercial Metals Co 7,000 237,563
Florida Rock Industries Inc 18,400 633,650
Reliance Steel & Aluminum Co 30,000 703,125
Rock-Tenn Co Class A 19,900 293,525
Terex Corp * 23,800 660,450
Texas Industries Inc 13,000 553,313
------------
3,807,251
------------
OFFICE EQUIPMENT & COMPUTERS--1.48%
Avant Corp * 39,500 592,500
Micro Warehouse Inc * 45,000 832,500
------------
1,425,000
------------
PUBLISHING & BROADCASTING--.82%
Valassis Communications Inc * 18,750 792,188
------------
SERVICE INDUSTRIES--7.90%
Aaron Rents Inc Class B 25,000 443,750
American Management Systems Inc *25,000 784,375
Answerthink Consulting Group * 53,400 1,828,950
CSG Systems International Inc * 15,000 598,125
Phoenix Investment Partners Ltd 86,600 703,625
Ritchie Bros Auctioneers Inc * 9,100 252,525
Ryland Group Inc 30,000 691,875
SCP Pool Corp * 17,200 446,125
SEI Investments Co 5,100 606,980
URS Corp * 58,300 1,264,381
------------
7,620,711
------------
See notes to financial statements and notes to schedules of investments
40
<PAGE>
The Preferred Group of Mutual Funds SCHEDULES OF INVESTMENTS
- -------------------------------------------------------
COMMON STOCK & EQUIVALENTS SHARES VALUE
- -------------------------------------------------------
TELECOMMUNICATIONS--2.53%
Xircom Inc * 32,500 $ 2,437,500
------------
TRANSPORTATION--4.54%
Alexander & Baldwin Inc 29,900 682,094
America West Holding Corp
Class B * 45,000 933,750
American Freightways Corp * 25,000 404,688
Amtran Inc * 26,900 521,188
Landstar Systems Inc * 18,000 770,620
US Freightways Corp 22,300 1,067,605
------------
4,379,945
------------
UTILITIES & POWER--.55%
Energen Corp 29,200 527,425
------------
TOTAL COMMON STOCK & EQUIVALENTS
(Cost $81,723,064) 92,126,283
------------
- -------------------------------------------------------
SHORT TERM INVESTMENTS--3.11% SHARES VALUE
- -------------------------------------------------------
SHORT TERM INVESTMENT FUND--3.11%
State Street Global Advisors
Money Market Fund 2,995,584 2,995,584
------------
TOTAL SHORT TERM INVESTMENTS
(Cost $2,995,584) 2,995,584
------------
TOTAL INVESTMENTS--98.62%
(Cost $84,718,648) 95,121,867
------------
OTHER ASSETS AND LIABILITIES--1.38% 1,332,234
------------
TOTAL NET ASSETS--100% $ 96,454,101
============
- -------------------------------------------------------
PREFERRED ASSET ALLOCATION FUND
COMMON STOCK &
EQUIVALENTS --34.38% SHARES VALUE
- -------------------------------------------------------
AEROSPACE--.30%
Boeing Co 6,262 $ 260,264
General Dynamics Corp 1,200 63,300
Lockheed Martin Corp 2,738 59,894
Northrop Grumman Corp 200 10,813
Raytheon Co 1,900 50,469
United Technologies Corp 3,360 218,400
------------
663,140
------------
AUTOMOTIVE--.42%
Cooper Tire & Rubber Co 200 3,113
Cummins Engine Inc 100 4,831
Dana Corp 1,018 30,476
Delphi Automotive Systems Corp 3,407 53,660
Eaton Corp 670 48,659
Ford Motor Co 7,300 390,094
General Motors Corp 4,350 316,191
Goodyear Tire and Rubber 1,120 31,570
Navistar International Corp Inc * 210 9,949
Paccar Inc 740 32,791
------------
921,334
------------
BANKS--2.18%
Amsouth Bancorporation 1,750 33,797
BB&T Corp 900 24,638
Bank America Corp 10,942 549,152
Bank New York Inc 5,000 200,000
Bank One Corp 6,988 224,053
Chase Manhattan Corp 5,442 422,775
Citigroup Inc 22,400 1,244,600
Comerica Inc 1,050 49,022
Fifth Third Bancorp 1,600 117,400
First Union Corp 5,848 191,888
Firstar Corp Wisconsin 7,081 149,586
Fleet Boston Financial Corp 5,603 195,054
JP Morgan & Co Inc 1,120 141,820
Keycorp 3,100 68,588
MBNA Corp 2,402 65,455
National City Corp 3,200 75,800
Old Kent Financial Corp 400 14,150
PNC Bank Corp 1,830 81,435
Regions Financial Corp 700 17,588
Republic New York Corp 900 64,800
Southtrust Corp 800 30,250
State Street Corporation 1,100 80,369
Summit Bancorp 500 15,313
Suntrust Banks Inc 1,900 130,744
U.S. Bancorp 3,684 87,725
See notes to financial statements and notes to schedules of investments
41
<PAGE>
SCHEDULES OF INVESTMENTS December 31, 1999 (unaudited)
- -------------------------------------------------------
PREFERRED ASSET ALLOCATION FUND (continued)
COMMON STOCK & EQUIVALENTS SHARES VALUE
- -------------------------------------------------------
BANKS (continued)
Union Planters Corp 1,100 $ 43,381
Wachovia Corp 1,230 83,640
Wells Fargo & Co 10,790 436,321
------------
4,839,344
------------
CHEMICALS--.54%
Air Products & Chemicals Inc 1,560 52,358
BF Goodrich Co 300 8,250
Dow Chemical Co 1,480 197,765
Du Pont E I de Nemours & Co 6,614 435,711
Eastman Chemical Co 575 27,420
Engelhard Corp 1,167 22,027
Freeport McMoRan Copper &
Gold Class B * 1,500 31,688
Great Lakes Chemical Corp 470 17,948
Hercules Inc 720 20,070
International Flavors & Fragrances 740 27,935
Monsanto Co 3,900 138,938
Praxair Inc 1,230 61,884
Rohm & Haas Co 1,916 77,957
Union Carbide Corp 920 61,410
WR Grace & Co * 490 6,799
------------
1,188,160
------------
COMPUTER SOFTWARE--2.83%
Adobe Systems Inc 900 60,525
Autodesk Inc 200 6,750
Automatic Data Processing Inc 4,060 218,733
BMC Software Inc * 1,300 103,919
Citrix Systems Inc * 900 110,700
Computer Associates
International Inc 3,468 242,543
Computer Sciences Corp * 900 85,163
Compuware Corp * 2,600 96,850
Comverse Technology Inc * 800 115,800
Electronic Data Systems Corp 2,700 180,731
First Data Corp 2,700 133,144
Microsoft Corp * 31,400 3,665,950
Novell Inc * 2,700 107,831
Oracle Corp * 9,402 1,053,612
Parametric Technology Corp * 1,800 48,713
Peoplesoft Inc * 1,550 33,034
Shared Medical System 100 5,094
------------
6,269,092
------------
CONGLOMERATES--1.70%
General Electric Co 20,540 3,178,565
Harcourt General Inc 200 8,050
Honeywell International Inc * 5,516 318,204
Household International Inc 1,413 52,634
Pall Corp 333 7,180
- -------------------------------------------------------
COMMON STOCK & EQUIVALENTS SHARES VALUE
- -------------------------------------------------------
CONGLOMERATES (continued)
Perkinelmer Inc 100 $ 4,169
Pinnacle West Capital Corp 300 9,169
Rockwell International Corp 1,400 67,025
TRW Inc 1,000 51,938
Textron Inc 1,080 82,823
------------
3,779,757
------------
CONSUMER PRODUCTS--1.91%
Alberto Culver Co Class B 200 5,163
Anheuser Busch Cos Inc 3,180 225,383
Armstrong World Industries Inc 100 3,338
Avon Products Inc 1,900 62,700
Bed Bath & Beyond Inc * 900 31,275
Best Buy Co Inc * 1,100 55,206
Brown Forman Corp Class B 200 11,450
Circuit City Stores Inc 600 27,038
Clorox Co 1,620 81,608
Coca Cola Co 15,480 901,710
Coca Cola Enterprises Inc 2,100 42,263
Colgate Palmolive Co 3,540 230,100
Coors Adolph Co Class B 100 5,250
Ecolab Inc 400 15,650
Fortune Brands Inc 1,060 35,046
Gillette Co 6,240 257,010
Liz Claiborne Inc 580 21,823
Masco Corp 2,640 66,990
Maytag Corp 300 14,400
Newell Rubbermaid Inc 2,105 61,045
Nike Inc Class B 1,780 88,221
Pepsico Inc 9,480 334,170
Philip Morris Cos Inc 14,960 346,885
Proctor & Gamble Co 8,200 898,413
Reebok International Ltd * 520 4,258
Russell Corp 100 1,675
Seagram Ltd 2,670 119,983
Tupperware Corp 200 3,388
UST Inc 1,260 31,736
Unilever NV 3,360 182,910
V F Corp 960 28,800
Whirlpool Corp 630 40,989
------------
4,235,876
------------
CONTAINERS & PACKING--.04%
Ball Corp 100 3,938
Bemis Inc 200 6,975
Crown Cork & Seal Inc 870 19,466
Pactiv Corp * 1,190 12,644
Sealed Air Corp * 415 21,502
Temple Inland Inc 500 32,969
------------
97,494
------------
See notes to financial statements and notes to schedules of investments
42
<PAGE>
The Preferred Group of Mutual Funds SCHEDULES OF INVESTMENTS
- -------------------------------------------------------
COMMON STOCK & EQUIVALENTS SHARES VALUE
- -------------------------------------------------------
DISCOUNT & FASHION RETAILING--1.92%
Autozone Inc * 900 $ 29,081
Consolidated Stores Corp * 800 13,000
Costco Wholesale Corp * 1,665 151,931
Dayton Hudson Corp 3,280 240,875
Dillards Inc Class A 910 18,371
Dollar General Corp 1,262 28,711
Federated Department Stores Inc * 1,300 65,731
Gap Inc 6,434 295,964
Home Depot Inc 14,034 962,206
JC Penney Inc 1,700 33,894
K Mart Corp * 3,430 34,514
Kohls Corp * 1,000 72,188
Limited Inc 1,428 61,850
Lowes Cos Inc 1,100 65,725
May Department Stores Co 2,515 81,109
Nordstrom Inc 1,220 31,949
Pep Boys-Manny Moe & Jack 200 1,825
Sears Roebuck & Co 2,600 79,138
TJX Cos Inc 900 18,394
Toys R Us Inc * 1,870 26,764
Wal Mart Stores Inc 28,220 1,950,708
------------
4,263,928
------------
ELECTRICAL & ELECTRONICS--1.69%
Advanced Micro Devices Inc * 400 11,575
Ameren Corp 850 27,838
Analog Devices Inc * 500 46,500
Consolidated Edison Inc 1,510 52,095
Cooper Industries Inc 982 39,710
Emerson Electric Co 2,880 165,240
Intel Corp 20,840 1,715,393
Johnson Controls Inc 300 17,063
KLA Tencor Corp * 600 66,825
LSI Logic Corp * 900 60,750
Micron Technology Inc * 1,600 124,400
Millipore Corp 100 3,863
Molex Inc 1,000 56,688
Motorola Inc 3,800 559,550
National Semiconductor Corp * 500 21,406
National Service Industries Inc 100 2,950
Solectron Corp * 900 85,613
Tektronix Inc 150 5,831
Teradyne Inc * 1,200 79,200
Texas Instruments Inc 5,180 501,813
Thermo Electron Corp * 1,100 16,500
Thomas & Betts Corp 200 6,375
Xilinx Inc * 2,000 90,938
------------
3,758,116
------------
- -------------------------------------------------------
COMMON STOCK & EQUIVALENTS SHARES VALUE
- -------------------------------------------------------
FINANCE-OTHER--1.41%
American Express Co 2,950 $ 490,438
American General Corp 1,638 124,283
Associates First Capital Corp 4,068 111,616
Bear Stearns Cos Inc 591 25,265
Capital One Financial Corp 1,200 57,825
Cincinnati Financial Corp 500 15,594
Countrywide Credit Industry Inc 700 17,675
Dun & Bradstreet Corp 1,130 33,335
Equifax Inc 1,000 23,563
Federal Home Loan Mortgage Corp 4,580 215,546
Federal National Mortgage
Association 6,600 412,088
Golden West Financial Corp 1,980 66,330
H&R Block Inc 960 42,000
Huntington Bancshares Inc 719 17,166
Jefferson Pilot Corp 940 64,155
Lehman Brothers Holding Corp 800 67,750
Mellon Financial Corp 3,500 119,219
Merrill Lynch & Co Inc 2,520 210,420
Morgan Stanley Dean Witter & Co 3,463 494,343
Northern Trust Corp 600 31,800
Paine Webber Group Inc 800 31,050
Paychex Inc 1,750 70,000
Progressive Corp Ohio 600 43,875
Providian Financial Corp 1,270 115,649
SLM Holding Corp 900 38,025
Schwab (Charles) Corp 2,400 92,100
Synovus Financial Corp 800 15,900
Washington Mutual Inc 2,650 68,900
------------
3,115,910
------------
FOOD--.64%
Albertsons Inc 3,288 106,038
Archer Daniels Midland Co 3,906 47,604
Bestfoods 1,800 94,613
Campbell Soup Co 2,900 112,194
ConAgra Inc 2,940 66,334
General Mills Inc 2,160 77,220
Great Atlantic & Pacific Tea Inc 100 2,788
HJ Heinz Co 2,215 88,185
Hershey Foods Corp 920 43,700
Kellogg Co 2,620 80,729
Kroger Co * 3,300 62,288
Nabisco Group Holdings Corp 2,000 21,250
Quaker Oats Co 960 63,000
Ralston Purina Co 2,230 62,161
Safeway Inc * 3,100 110,244
Sara Lee Corp 5,820 128,404
Supervalu Inc 400 8,000
See notes to financial statements and notes to schedules of investments
43
<PAGE>
SCHEDULES OF INVESTMENTS December 31, 1999 (unaudited)
- -------------------------------------------------------
PREFERRED ASSET ALLOCATION FUND (continued)
COMMON STOCK & EQUIVALENTS SHARES VALUE
- -------------------------------------------------------
FOOD (Continued)
Sysco Corp 2,840 $ 112,358
Tricon Global Restaurants Inc * 1,018 39,320
WM Wrigley Jr Co 770 63,862
Winn Dixie Stores Inc 1,040 24,895
------------
1,415,187
------------
FUEL--1.92%
Amerada Hess Corp 810 45,968
Anadarko Petroleum Corp 1,200 40,950
Apache Corp 600 22,163
Ashland Inc 200 6,588
Atlantic Richfield Co 1,980 171,270
Baker Hughes Inc 1,640 34,543
Burlington Resources Inc 1,155 38,187
Chevron Corp 4,060 351,698
Coastal Corp 1,480 52,448
Conoco Inc 3,628 90,247
Exxon Mobile Corp * 21,734 1,750,945
Halliburton Co 3,270 131,618
Kerr McGee Corp 586 36,332
Occidental Petroleum Inc 2,210 47,791
Oneok Inc 100 2,513
Phillips Petroleum Co 1,860 87,420
Rowan Companies Inc * 200 4,338
Royal Dutch Petroleum Co 13,000 785,688
Schlumberger Ltd 3,260 183,375
Texaco Inc 3,520 191,180
Tosco Corp 800 21,750
Transocean Sedco Forex Inc 1,261 42,485
USX Marathon Group 2,000 49,375
Unocal Corp 1,800 60,413
------------
4,249,285
------------
HEALTH CARE--3.30%
Abbott Labs 9,380 340,611
Allergan Inc 1,140 56,715
Alza Corp * 900 31,163
American Home Products Corp 7,940 313,134
Amgen Inc * 6,920 415,633
Bard (C.R.) Inc 200 10,600
Bausch & Lomb Inc 680 46,538
Baxter International Inc 1,780 111,806
Becton Dickerson & Co 1,820 48,685
Biomet Inc 1,100 44,000
Boston Scientific Corp * 2,600 56,875
Bristol Myers Squibb Co 12,060 774,101
CVS Corp 2,180 87,064
Cardinal Health Inc 800 38,300
- -------------------------------------------------------
COMMON STOCK & EQUIVALENTS SHARES VALUE
- -------------------------------------------------------
HEALTH CARE (continued)
Columbia/HCA Healthcare Corp 3,949 $ 115,755
Eli Lilly & Co 6,148 408,842
Guidant Corp * 2,300 108,100
Healthsouth Corp * 2,000 10,750
Humana Inc * 1,100 9,006
IMS Health Inc 2,160 58,725
Johnson & Johnson 8,320 774,800
Longs Drug Stores Corp 100 2,581
Mallinckrodt Inc 200 6,363
Manor Care Inc * 300 4,800
McKesson HBOC Inc 1,530 34,521
Medtronic Inc 6,780 247,046
Merck & Co Inc 14,860 996,549
Pfizer Inc 24,100 781,744
Pharmacia & UpJohn Inc 3,253 146,385
Quintiles Transnational Corp * 300 5,606
Rite Aid Corp 800 8,950
Schering Plough Corp 9,360 394,875
Sigma Aldrich 900 27,056
St Jude Medical Inc * 700 21,481
Tenet Healthcare Corp * 1,760 41,360
United Healthcare Corp * 1,200 63,750
Walgreen Corp 7,240 211,770
Warner Lambert Co 5,260 430,991
Watson Pharmaceuticals Inc * 300 10,744
Wellpoint Health Networks Inc
Class A * 400 26,375
------------
7,324,150
------------
HOUSING & REAL ESTATE--.05%
Centex Corp 200 4,938
Kaufman & Broad Home Corp 100 2,419
Owens Corning 200 3,863
PPG Industries Inc 1,180 73,826
Pulte Corp 100 2,250
Sherwin Williams Co 1,580 33,180
------------
120,476
------------
INSURANCE--.94%
Aetna Inc 1,066 59,496
Aflac Inc 800 37,750
Allstate Corp 5,558 133,392
American International Group Inc 9,784 1,057,895
Aon Corp 775 31,000
Chubb Corp 1,060 59,691
Cigna Corp 1,320 106,343
Conseco Inc 1,898 33,927
Hartford Financial Services Group 1,620 76,748
Lincoln National Corp Inc 1,360 54,400
Loews Corp 700 42,481
See notes to financial statements and notes to schedules of investments
44
<PAGE>
The Preferred Group of Mutual Funds SCHEDULES OF INVESTMENTS
- -------------------------------------------------------
COMMON STOCK & EQUIVALENTS SHARES VALUE
- -------------------------------------------------------
INSURANCE (continued)
MBIA Inc 300 $ 15,844
MGIC Investment Corp 700 42,131
Marsh & McLennan Cos Inc 1,790 171,281
Safeco Corp 960 23,880
St Paul Cos Inc 1,362 45,882
Torchmark Corp 1,200 34,875
Unum Provident Corp 1,576 50,531
------------
2,077,547
------------
LEISURE TIME INDUSTRIES--.57%
American Greetings Corp Class A 200 4,725
Brunswick Corp 880 19,580
Carnival Corp 3,700 176,906
Darden Restaurants Inc 1,230 22,294
Eastman Kodak Co 2,030 134,488
Fleetwood Enterprises Inc 100 2,063
Harrahs Entertainment Inc * 350 9,253
Hasbro Inc 1,615 30,786
Hilton Hotels Corp 2,020 19,443
Marriott International
Inc Class A 1,860 58,706
Mattel Inc 2,869 37,656
McDonalds Corp 8,600 346,688
Mirage Resorts Inc * 600 9,188
Polaroid Corp 100 1,881
Walt Disney Co 12,880 376,740
Wendy's International Inc 400 8,250
------------
1,258,647
------------
MANUFACTURING--.84%
Applied Materials Inc * 2,700 342,056
Avery Dennison Corp 300 21,863
Black & Decker Corp 300 15,675
Briggs & Stratton Corp 100 5,363
Caterpillar Inc 2,620 123,304
Corning Inc 1,650 212,747
Crane Co 200 3,975
Danaher Corp 800 38,600
Deere & Co 1,760 76,340
Dover Corp 600 27,225
FMC Corp * 100 5,731
ITT Industries Inc 760 25,413
Illinois Tool Works Inc 1,920 129,720
Ingersoll Rand Co 1,260 69,379
Jostens Inc 100 2,431
Leggett & Platt Inc 600 12,863
Milacron Inc 100 1,538
Minnesota Mining &
Manufacturing Co 2,660 260,348
Owens Illinois Inc * 800 20,050
PE Corp 300 36,094
Parker Hannifin Corp 325 16,677
Snap On Inc 200 5,313
- -------------------------------------------------------
COMMON STOCK & EQUIVALENTS SHARES VALUE
- -------------------------------------------------------
MANUFACTURING (continued)
Springs Industries Inc 100 $ 3,994
Stanley Works 300 9,038
Timken Co 200 4,088
Tyco International Ltd 9,542 370,945
Vulcan Materials Co 500 19,969
------------
1,860,739
------------
METALS & MINING--.24%
Alcan Aluminum Ltd 1,510 62,193
Alcoa Inc 2,500 207,500
Allegheny Technologies Inc 288 6,462
Barrick Gold Corp 2,600 45,988
Bethlehem Steel Corp * 400 3,350
Homestake Mining Corp 1,790 13,984
Inco Ltd * 1,160 27,260
Newmont Mining Corp 518 12,691
Nucor Corp 300 16,444
Phelps Dodge Corp 701 47,055
Placer Dome Inc 1,850 19,888
Reynolds Metals Co 500 38,313
USX US Steel Group 900 29,700
Worthington Industries Inc 250 4,141
------------
534,969
OFFICE EQUIPMENT & COMPUTERS--4.16%
3Com Corp * 2,200 103,400
Adaptec Inc * 1,100 54,863
America Online Inc * 11,600 875,075
Apple Computer * 1,050 107,953
Cabletron Systems Inc * 900 23,400
Ceridian Corp * 400 8,625
Cisco Systems Inc * 19,690 2,109,291
Compaq Computer Corp 10,655 288,351
De Luxe Corp 850 23,322
Dell Computer Corp * 18,700 953,700
EMC Corp * 6,200 677,350
Gateway Inc * 1,900 136,919
Hewlett Packard Co 6,402 731,479
Ikon Office Solutions Inc 400 2,725
International Business Machines 12,000 1,296,000
Lexmark International Group Inc * 900 81,450
Network Appliance Inc * 800 66,450
Pitney Bowes Inc 3,000 144,938
QUALCOMM Inc * 5,000 880,625
Seagate Technology * 1,500 69,844
Silicon Graphics Inc * 1,500 14,719
Staples Inc * 2,550 52,913
Sun Microsystems Inc * 4,600 356,213
See notes to financial statements and notes to schedules of investments
45
<PAGE>
SCHEDULES OF INVESTMENTS December 31, 1999 (unaudited)
- -------------------------------------------------------
PREFERRED ASSET ALLOCATION FUND (continued)
COMMON STOCK & EQUIVALENTS SHARES VALUE
- -------------------------------------------------------
OFFICE EQUIPMENT & COMPUTERS (continued)
Tandy Corp 600 $ 29,513
Unisys Corp * 900 28,744
Xerox Corp 4,440 100,733
------------
9,218,595
------------
PAPER & FOREST PRODUCTS--.32%
Boise Cascade Corp 200 8,100
Champion International Corp 700 43,356
Fort James Corp 700 19,163
Georgia Pacific Group 1,120 56,840
Georgia Pacific Timber Group 310 7,634
International Paper Co 2,664 150,349
Kimberly Clark Co 3,446 224,852
Louisiana Pacific Corp 960 13,680
Mead Corp 300 13,031
Potlatch Corp 200 8,925
Westvaco Corp 900 29,363
Weyerhaeuser Co 1,350 96,947
Williamette Industries Inc 900 41,794
------------
714,034
------------
PUBLISHING & BROADCASTING--.67%
Comcast Corp Class A * 3,400 171,913
Dow Jones & Co Inc 870 59,160
Gannett Inc 2,020 164,756
Knight Ridder Inc 820 48,790
McGraw Hill Inc 1,520 93,670
Meredith Corp 200 8,338
New York Times Co Class A 500 24,563
Time Warner Inc 6,640 480,985
Times Mirror Co Series A 600 40,200
Tribune Co 1,940 106,821
Viacom Inc Class B * 4,800 290,100
------------
1,489,296
------------
SERVICE INDUSTRIES--.72%
Allied Waste Industries Inc * 1,700 14,981
Cendant Corp * 4,908 130,369
Fluor Corp 550 25,231
Foster Wheeler Corp 100 888
Franklin Resources Inc 1,700 54,506
Genuine Parts Co 1,525 37,839
Interpublic Group Cos Inc 800 46,150
McDermott International Inc 200 1,813
Media One Group Inc * 3,570 274,221
Office Depot Inc * 2,100 22,969
Omnicom Group Inc 900 90,000
RR Donnelley & Sons Co 970 24,068
- -------------------------------------------------------
COMMON STOCK & EQUIVALENTS SHARES VALUE
- -------------------------------------------------------
SERVICE INDUSTRIES (continued)
Service Corp International 800 $ 5,550
T. Rowe Price Associates Inc 400 14,775
WW Grainger Inc 300 14,344
Waste Management Inc 3,659 62,889
Yahoo Inc* 1,800 778,838
------------
1,599,431
------------
TELECOMMUNICATIONS--4.13%
ADC Telecommunications Inc * 1,400 101,588
AT&T Corp 20,575 1,044,181
Alltel Corp 1,400 115,763
Andrew Corp * 205 3,882
Bell Atlantic Corp 9,552 588,045
BellSouth Corp 12,120 567,368
CBS Corp * 4,544 290,532
CenturyTel Inc 1,600 75,800
Clear Channel Communications * 1,800 160,650
GTE Corp 6,010 424,081
General Instrument Corp * 900 76,500
Global Crossing Ltd * 5,055 252,750
Lucent Technologies Inc 18,771 1,404,305
MCI Worldcom Inc * 17,684 938,331
Nextel Communications Inc
Class A * 1,350 139,219
Nortel Networks Corp 8,980 906,980
SBC Communications Inc 21,182 1,032,623
Scientific Atlanta Inc 200 11,125
Sprint Corp 2,105 215,763
Sprint Corp PCS Series 1 * 5,820 391,759
Tellabs Inc * 2,800 179,725
US West Inc 3,294 237,168
------------
9,158,138
------------
TRANSPORTATION--.27%
AMR Corp * 1,120 75,040
Burlington Northern Santa Fe 2,702 65,524
CSX Corp 1,420 44,553
Delta Airlines Inc 920 45,828
FDX Corp * 2,192 89,735
Kansas City Southern
Industries Inc 1,100 82,088
Norfolk Southern Corp 2,450 50,225
Ryder Systems Inc 200 4,888
Southwest Airlines Co 3,537 57,255
US Airways Group Inc * 200 6,413
Union Pacific Corp 1,430 62,384
Union Pacific Resources Group Inc 1,819 23,192
------------
607,125
------------
See notes to financial statements and notes to schedules of investments
46
<PAGE>
The Preferred Group of Mutual Funds SCHEDULES OF INVESTMENTS
- -------------------------------------------------------
COMMON STOCK & EQUIVALENTS SHARES VALUE
- -------------------------------------------------------
UTILITIES & POWER--.67%
AES Corp * 1,200 $ 89,700
American Electric Power Inc 1,260 40,478
CMS Energy Corp 700 21,831
Carolina Power & Lighting Co 1,190 36,221
Central & Southwest Corp 1,300 26,000
Cinergy Corp 506 12,207
Columbia Energy Corp 200 12,650
Consolidated Natural Gas Co 830 53,898
Constellation Energy Group Inc 1,160 33,640
DTE Energy Co 1,080 33,885
Dominion Resources Inc 1,260 49,455
Duke Energy Co 1,751 87,769
Eastern Enterprises 100 5,744
Edison International 2,430 63,636
El Paso Energy Corp 700 27,169
Enron Corp 4,100 181,938
Entergy Corp 1,380 35,535
FPL Group Inc 1,090 46,666
First Energy Corp 1,550 35,166
Florida Progress Corp 600 25,388
GPU Inc 400 11,975
New Century Energies Inc 700 21,263
Niagara Mohawk Holdings Inc * 1,690 23,554
Nicor Inc 100 3,250
Northern Systems Power Co 1,360 26,520
PG&E Corp 2,570 52,685
PP&L Resources Inc 500 11,438
Peco Energy Co 1,550 53,863
Peoples Energy Corp 100 3,350
Public Services Enterprise Group 1,530 53,263
Reliant Energy Inc 1,572 35,960
Sempra Energy 701 12,172
Southern Co 4,090 96,105
Sunoco Inc 821 19,284
Texas Utilities Co 1,637 58,206
Unicom Corp 1,460 48,900
Williams Cos Inc 1,310 40,027
------------
1,490,791
------------
TOTAL COMMON STOCK & EQUIVALENTS
(Cost $37,506,266) 76,250,561
------------
- -------------------------------------------------------
FIXED INCOME--54.73% PAR VALUE
- -------------------------------------------------------
U.S. TREASURY--54.73%
United States Treasury Bonds
5.25% November 15, 2028 $2,145,000 1,766,944
5.50% August 15, 2028 4,750,000 4,050,848
6.00% February 15, 2026 1,547,000 1,415,257
- -------------------------------------------------------
FIXED INCOME PAR VALUE
- -------------------------------------------------------
U.S. TREASURY (continued)
6.125% November 15, 2027 $6,100,000 $ 5,676,782
6.25% August 15, 2023 1,720,000 1,621,633
6.375% August 15, 2027 4,695,000 4,509,407
6.50% November 15, 2026 3,726,000 3,632,850
6.625% February 15, 2027 1,100,000 1,090,199
6.75% August 15, 2026 900,000 904,221
6.875% August 15, 2025 2,900,000 2,953,911
7.125% February 15, 2023 5,240,000 5,455,312
7.25% May 15, 2016 4,795,000 5,012,261
7.25% August 15, 2022 940,000 990,967
7.50% November 15, 2016 4,460,000 4,771,486
7.50% November 15, 2024 2,330,000 2,543,708
7.625% November 15, 2022 2,955,000 3,242,196
7.625% February 15, 2025 3,250,000 3,601,910
7.875% February 15, 2021 1,250,000 1,397,263
8.00% November 15, 2021 # 7,270,000 8,250,287
8.125% August 15, 2019 1,780,000 2,028,363
8.125% May 15, 2021 3,939,000 4,515,079
8.125% August 15, 2021 2,495,000 2,861,441
8.50% February 15, 2020 1,953,000 2,308,192
8.75% May 15, 2017 4,030,000 4,813,311
8.75% May 15, 2020 3,365,000 4,072,693
8.75% August 15, 2020 # 4,325,000 5,239,997
8.875% August 15, 2017 3,020,000 3,649,942
8.875% February 15, 2019 # 5,099,000 6,206,452
9.00% November 15, 2018 350,000 430,227
9.125% May 15, 2018 1,125,000 1,394,291
9.25% February 15, 2016 600,000 740,718
9.875% November 15, 2015 550,000 711,392
10.00% May 15, 2010 500,000 573,280
10.375% November 15, 2012 3,770,000 4,582,887
10.625% August 15, 2015 2,475,000 3,370,257
11.25% February 15, 2015 1,100,000 1,554,949
11.75% February 15, 2010 295,000 358,608
11.75% November 15, 2014 2,165,000 2,926,127
12.00% August 15, 2013 3,245,000 4,333,081
12.50% August 15, 2014 230,000 321,280
13.25% May 15, 2014 600,000 864,468
13.875% May 15, 2011 220,000 300,610
14.00% November 15, 2011 250,000 348,750
------------
121,393,837
------------
TOTAL FIXED INCOME
(Cost $128,759,894) 121,393,837
------------
See notes to financial statements and notes to schedules of investments
47
<PAGE>
SCHEDULES OF INVESTMENTS December 31, 1999 (unaudited)
- --------------------------------------------------------------------------------
PREFERRED ASSET ALLOCATION FUND (continued)
SHORT TERM INVESTMENTS --9.14% PAR/SHARES VALUE
- --------------------------------------------------------------------------------
COMMERCIAL PAPER--3.42%
American Honda Finance
5.95% February 17, 2000 @ $3,000,000 $ 2,976,696
Ford Motor Credit Co
5.83% February 17, 2000 @ 2,650,000 2,629,830
General Electric Capital Corp
6.15% February 9, 2000 @ 2,000,000 1,986,675
------------
7,593,201
------------
REPURCHASE AGREEMENTS--2.96%
State Street Repo 2.50% January 3, 2000
(Cost - $6,565,000)(Dated December
31,1999, due January 3, 2000,
collateralized by $6,075,000
U.S. Treasury Bond 7.50%,
November 15, 2024,
Market Value $6,697,688
Repurchase Proceeds $6,566,368) 6,565,000 6,565,000
------------
SHORT TERM INVESTMENT FUND--.31%
State Street Global Advisors
Money Market Fund 695,729 695,729
------------
U.S. TREASURY--2.45%
United States Treasury Bills
5.20% March 23, 2000 @# 5,485,000 5,420,658
------------
TOTAL SHORT TERM INVESTMENTS
(Cost $20,274,588) 20,274,588
------------
TOTAL INVESTMENTS--98.25%
(Cost $186,540,748) 217,918,986
------------
OTHER ASSETS AND LIABILITIES--1.75% 3,872,814
------------
TOTAL NET ASSETS--100% $221,791,800
============
PREFERRED FIXED INCOME FUND
FIXED INCOME--93.36% PAR+ VALUE
- --------------------------------------------------------------------------------
ASSET BACKED--5.18%
Commercial Mortgage Acceptance Corp
6.57% October 15, 2007 $4,000,000 $ 3,804,240
EQCC Home Equity Loan Trust
6.41% December 15, 2004 1,600,000 1,566,752
MBNA Master Credit Card Trust II
7.00% February 15, 2012 1,700,000 1,666,289
Sears Credit Account Master Trust
6.45% November 17, 2009 2,000,000 1,942,188
------------
8,979,469
------------
COLLATERALIZED MORTGAGE OBLIGATIONS--16.59%
Credit Suisse First Boston Mortgage
7.29% September 15, 2009 4,000,000 3,942,500
Federal Home Loan Mortgage Corp
6.50% July 15, 2016 1,553,600 1,538,064
Federal Home Loan Mortgage Corp Gtd
6.50% November 15, 2022 5,000,000 4,835,900
Federal National Mortgage Assn Gtd
5.50% December 25, 2008 1,200,000 1,127,244
6.50% May 18, 2011 2,500,000 2,445,300
First Nationwide Trust
6.50% October 19, 2029 3,716,592 3,456,431
JP Morgan Commercial Mortgage **
8.731% November 25, 2027 1,000,000 844,844
LB Commercial Conduit Mortgage Trust
6.48% January 18, 2008 3,200,000 3,015,744
Morgan Stanley Capital I Inc
6.17% October 3, 2008 700,000 643,349
6.25% July 15, 2007 685,966 664,315
6.52% January 15, 2008 340,000 321,786
6.92% November 15, 2008 4,000,000 3,903,920
Nomura Asset Securities Corp
6.59% March 17, 2028 2,135,000 2,008,693
------------
28,748,090
------------
ELECTRIC--.93%
Calpine Corp
7.625% April 15, 2006 308,000 293,370
Pacific Corp Security Discounted MTN
6.75% July 15, 2004 770,000 744,066
TXU Eastern Funding Co
6.75% May 15, 2009 625,000 574,425
------------
1,611,861
------------
See notes to financial statements and notes to schedules of investments
48
<PAGE>
The Preferred Group of Mutual Funds SCHEDULES OF INVESTMENTS
- -------------------------------------------------------
FIXED INCOME PAR+ VALUE
- -------------------------------------------------------
FINANCE & BANKING--7.79%
AMSouth Bank North America
6.45% February 1, 2008 $1,500,000 $ 1,381,185
Associates Corp North America
6.95% November 1, 2018 580,000 536,878
CIT Group Inc
5.92% November 8, 2002 1,500,000 1,449,735
Daimler Chrysler North
Holding Co
7.20% September 1, 2009 750,000 736,680
FCB/NC Capital Trust I
8.05% March 1, 2028 700,000 619,822
Ford Motor Credit Co
5.75% February 23, 2004 1,095,000 1,039,560
7.375% October 28, 2009 1,850,000 1,826,289
House Hold Financial Corp
5.875% February 1, 2009 840,000 743,072
Keycorp Institutional
Capital B
8.25% December 15, 2026 1,000,000 944,140
Security Pacific Corp MTN
10.30% May 15, 2001 1,250,000 1,304,625
Toyota Motor Credit Corp
5.625% November 13, 2003 1,000,000 952,681
Wachovia Corp
6.70% June 21, 2004 2,000,000 1,965,000
------------
13,499,667
------------
FOREIGN GOVERNMENT--3.45%
Brazil (Federal Republic)
6.938% April 15, 2006 893,000 783,608
7.00% April 15, 2009 425,000 340,000
Brazil (Federal Republic) C Bond
5.00% with 3.00% interest
capitalization April 15, 2014 430,689 321,940
Bulgaria (National Republic)
6.50% July 28, 2011 65,000 51,188
Columbia Republic
9.75% April 23, 2009 125,000 116,250
Mexico
11.375% September 15, 2016 315,000 355,005
11.50% May 15, 2026 100,000 118,750
Panama Republic
8.875% September 30, 2027 100,000 84,000
Peru Republic
4.50% March 7, 2017 150,000 103,125
Philippines Republic
9.875% January 15, 2019 190,000 187,863
Quebec Providence of Canada
5.75% February 15, 2009 2,000,000 1,775,360
7.50% September 15, 2029 1,800,000 1,744,866
------------
5,981,955
------------
- -------------------------------------------------------
FIXED INCOME PAR+ VALUE
- -------------------------------------------------------
GOVERNMENT SPONSORED--30.26%
Federal Home Loan
7.00% May 1, 2029 2,385,411 2,278,449
Federal Home Loan
Mortgage Corp
5.125% October 15, 2008 $ 450,000 $ 394,313
Federal National Mortgage
Association
6.00% May 15, 2008 900,000 842,625
6.00% March 1, 2014 84,636 80,326
6.00% September 1, 2028 614,741 562,291
6.00% October 1, 2028 579,157 529,744
6.00% November 1, 2028 1,458,100 1,333,694
6.00% December 1, 2028 974,855 891,681
6.00% January 1, 2029 736,705 673,849
6.00% February 1, 2029 440,965 403,342
6.00% March 1, 2029 401,946 367,652
6.00% April 1, 2029 202,865 185,557
6.00% July 1, 2029 283,327 259,154
6.16% August 7, 2028 840,000 735,655
6.50% September 1, 2028 476,490 448,940
6.50% October 1, 2028 1,416,753 1,334,836
6.50% November 1, 2028 463,825 437,007
6.50% January 1, 2029 1,378,050 1,298,371
6.50% February 1, 2029 902,531 850,347
6.50% March 1, 2029 690,294 650,381
6.50% April 1, 2029 934,856 892,108
6.625% September 15, 2009 1,230,000 1,194,638
7.00% November 1, 2025 316,189 306,801
7.00% May 1, 2026 154,320 149,593
7.00% September 1, 2026 86,563 83,912
7.00% October 1, 2027 69,837 67,632
7.00% February 1, 2028 40,808 39,520
7.00% August 1, 2028 43,172 41,809
7.00% October 1, 2028 413,269 399,914
7.00% February 1, 2029 58,541 56,601
7.00% August 1, 2029 3,646,821 3,526,002
7.00% September 1, 2029 256,019 247,537
7.00% October 1, 2029 3,323,793 3,213,676
7.00% November 1, 2029 1,219,706 1,179,298
7.00% December 1, 2029 28,872 27,916
7.50% September 1, 2029 2,583,371 2,554,308
7.50% October 1, 2029 2,717,521 2,686,949
7.50% November 1, 2029 2,089,899 2,066,388
8.00% October 1, 2029 77,685 78,316
8.00% December 1, 2029 43,223 43,574
6.00% through 7.00% TBA
contracts with maturities
of January &
February 2030 20,415,000 19,015,094
------------
52,429,800
------------
See notes to financial statements and notes to schedules of investments
49
<PAGE>
SCHEDULES OF INVESTMENTS December 31, 1999 (unaudited)
- -------------------------------------------------------
PREFERRED FIXED INCOME FUND (continued)
FIXED INCOME PAR+ VALUE
- -------------------------------------------------------
INDUSTRIALS--7.75%
Amerada Hess Corp
7.875% October 1, 2029 $ 700,000 $ 682,710
Canadian Occidental
Petroleum Ltd
7.40% May 1, 2028 1,900,000 1,705,934
Comcast Cable Communications
8.375% May 1, 2007 1,400,000 1,452,598
Energy Group Overseas BV
7.55% October 15, 2027 625,000 577,850
Ford Motor Co
9.00% September 15, 2001 1,695,000 1,752,223
Laidlaw Inc
6.72% October 1, 2027 1,000,000 860,220
6.50% May 1, 2005 2,350,000 2,074,533
Lakehead Pipeline Co Ltd
7.125% October 1, 2028 350,000 292,034
Lasmo U.S.A. Inc
7.30% November 15, 2027 80,000 72,352
Lomak Petroleum Inc
8.75% January 15, 2007 300,000 276,000
Mariner Health Group Inc
9.50% April 1, 2006 400,000 2,000
Occidental Petroleum Corp
8.45% February 15, 2029 70,000 72,603
Oil Purchase Co **
7.10% April 30, 2002 894,180 844,410
Plains Resource Inc
10.25% March 15, 2006 400,000 388,000
Qatar St **
9.50% May 21, 2009 250,000 263,438
Ultramar Diamond
Shamrock Corp
6.75% October 15, 2037 2,000,000 1,827,000
Westpoint Stevens Inc
7.875% June 15, 2005 300,000 274,500
------------
13,418,405
------------
MORTGAGE RELATED-OTHER MARKETABLE--5.13%
Loan Commercial Conduit
Mortgage Trust
7.325% October 15, 2032 4,000,000 3,951,000
Merrill Lynch Mortgage
Investments Inc
6.96% November 21, 2028 750,000 733,950
7.15% April 25, 2028 2,079,039 2,066,315
Ocwen Residential
MBS Corp **
7.00% October 25, 2040 2,214,527 2,142,209
------------
8,893,474
------------
TELEPHONE--5.06%
AT&T Corp
6.00% March 15, 2009 1,940,000 1,759,813
- -------------------------------------------------------
FIXED INCOME PAR+ VALUE
- -------------------------------------------------------
TELEPHONE (continued)
Adelphia Communications Corp
7.875% May 1, 2009 $ 200,000 $ 180,000
9.375% November 15, 2009 200,000 196,500
Aerial Communications Inc**
Zero Coupon
February 1, 2008 3,265,000 1,539,820
Charter Communication Holdings
8.25% April 1, 2007 350,000 325,500
Global Crossing Holdings Ltd**
9.125% November 15, 2006 330,000 325,875
McLeod USA Inc
9.25% July 15, 2007 235,000 235,588
Sprint Capital Corp
5.70% November 15, 2003 1,500,000 1,423,275
Telecommunications Inc
7.875% August 1, 2013 1,500,000 1,523,115
US West Capital Funding Inc
6.25% July 15, 2005 1,000,000 946,380
Williams Communications Corp
10.70% October 1, 2007 300,000 315,000
------------
8,770,866
------------
U.S. GOVERNMENT AGENCY
Mortgage-Backed Securities--5.11%
Government National
Mortgage Association
6.50% December 15, 2028 5,160,498 4,855,719
7.50% June 15, 2027 28,369 28,049
7.50% July 15, 2028 4,005,883 3,964,582
------------
8,848,350
------------
U.S. TREASURY--6.11%
United States Treasury Bonds
6.125% August 15, 2029 205,000 195,422
6.75% August 15, 2026 200,000 200,938
8.875% February 15, 2019 6,415,000 7,808,274
United States Treasury Notes
5.625% September 30, 2001 420,000 415,800
6.00% August 15, 2004 610,000 600,466
6.00% August 15, 2009 940,000 910,625
7.875% November 15, 2004 425,000 449,367
------------
10,580,892
TOTAL FIXED INCOME
(Cost $166,906,872) 161,762,829
------------
See notes to financial statements and notes to schedules of investments
50
<PAGE>
The Preferred Group of Mutual Funds SCHEDULES OF INVESTMENTS
- -------------------------------------------------------
SHORT TERM INVESTMENTS--5.14% PAR+ VALUE
- -------------------------------------------------------
FINANCE & BANKING--1.88%
Integra Bank Pittsburg MTN
6.55% June 15, 2000 @ $1,650,000 $ 1,651,749
UBS Finance Delaware Inc
4.25% January 3, 2000 @ 1,600,000 1,599,622
------------
3,251,371
------------
INDUSTRIALS--.35%
Philip Morris Cos Inc
6.15% March 15, 2,000 @ 600,000 599,046
------------
GOVERNMENT SPONSORED--2.74%
Federal Home Loan Banks
5.875% September 7, 2000 @ 4,770,000 4,755,070
------------
U.S. TREASURY--.17%
United States Treasury Notes
5.625% November 30, 2000 @ 300,000 298,734
------------
TOTAL SHORT TERM INVESTMENTS
(Cost $8,924,936) 8,904,221
------------
TOTAL INVESTMENTS--98.50%
(Cost $175,831,808) 170,667,050
------------
OTHER ASSETS AND LIABILITIES--1.50% 2,595,832
------------
TOTAL NET ASSETS--100% $173,262,882
============
PREFERRED SHORT-TERM GOVERNMENT
SECURITIES FUND
FIXED INCOME--82.00% PAR VALUE
- -------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS--26.33%
Federal Home Loan Mortgage Corp
6.00% February 15, 2007 $2,124,001 $ 2,116,036
Federal Home Loan Mortgage Gtd
5.75% January 15, 2006 1,029,677 1,023,561
5.75% November 15, 2020 416,360 412,583
5.89% July 15, 2008 1,388,659 1,398,199
5.89% December 15, 2023 1,753,531 1,763,929
6.00% April 15, 2005 536,287 534,609
6.00% August 15, 2016 161,869 161,464
- -------------------------------------------------------
FIXED INCOME PAR VALUE
- -------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS (continued)
6.00% December 15, 2017 $ 916,246 $ 912,517
6.50% August 15, 2018 2,415,578 2,408,766
7.00% May 15, 2006 990,406 988,851
Federal National Mortgage
Association Gtd
5.60% May 25, 2018 715,319 709,954
5.75% February 25, 2017 669,738 666,657
5.80% September 25, 2006 730,719 725,918
6.25% December 18, 2019 1,017,520 1,010,520
Federal National Mortgage
Association REMIC
6.00% November 25, 2016 1,097,754 1,091,914
6.75% March 25, 2019 2,228,913 2,219,841
8.00% January 25, 2019 1,224,877 1,230,609
------------
19,375,928
------------
FEDERAL AGENCY POOLED--6.47%
Federal Home Loan Pc
6.00% January 1, 2001 2,325,960 2,300,979
6.00% April 1, 2001 608,252 601,719
Federal National
Mortgage Association
5.50% November 1, 2002 674,311 658,215
6.50% April 1, 2003 1,209,191 1,195,987
------------
4,756,900
------------
GOVERNMENT SPONSORED--42.65%
Federal Home Loan Banks
5.66% January 13, 2003 4,500,000 4,374,855
6.00% November 15, 2001 5,000,000 4,941,400
6.00% August 15, 2002 4,000,000 3,939,360
7.00% November 22, 2004 2,000,000 1,961,240
Federal Home Loan
Mortgage Corp
6.01% April 26, 2004 5,000,000 4,797,650
6.25% October 15, 2002 3,000,000 2,972,820
Federal Home Loan
Mortgage Corp MTN
7.00% April 14, 2003 2,500,000 2,476,950
Federal National Mortgage
Association MTN
6.23% August 20, 2001 3,500,000 3,481,940
7.68% April 24, 2007 1,000,000 982,340
Overseas Private
Investment Corp
6.13% September 15, 2001 1,458,333 1,460,156
------------
31,388,711
------------
U.S. TREASURY--6.55%
United States Treasury Notes
5.25% August 15, 2003 5,000,000 4,821,100
------------
TOTAL FIXED INCOME
(Cost $61,215,860) 60,342,639
------------
See notes to financial statements and notes to schedules of investments
51
<PAGE>
SCHEDULES OF INVESTMENTS December 31, 1999 (unaudited)
- -------------------------------------------------------
PREFERRED SHORT-TERM GOVERNMENT
SECURITIES FUND (continued)
SHORT TERM
INVESTMENTS --16.97% PAR/SHARES VALUE
- -------------------------------------------------------
- -------------------------------------------------------
FEDERAL AGENCY POOLED--4.84%
Federal Home Loan Pc
6.00% December 1, 2000 @ $2,366,094 $ 2,340,683
Federal National
Mortgage Association
6.50% December 1, 2000 @ 1,227,308 1,222,656
------------
3,563,339
------------
REPURCHASE AGREEMENTS--8.02%
State Street Repo 2.50% January 3, 2000
(Dated December 31, 1999, due January 3, 2000,
collateralized by $5,455,000
U.S. Treasury Note 11.75%, February 15, 2001,
Market Value $6,020,956
Repurchase Proceeds
$5,901,229) 5,900,000 5,900,000
------------
SHORT TERM INVESTMENT FUND--4.11%
State Street Global Advisors
Money Market Funds 3,025,438 3,025,438
------------
TOTAL SHORT TERM INVESTMENTS
(Cost $12,525,388) 12,488,777
------------
TOTAL INVESTMENTS--98.97%
(Cost $73,741,248) 72,831,416
------------
OTHER ASSETS AND LIABILITIES--1.03% 758,806
------------
TOTAL NET ASSETS--100% $73,590,222
============
PREFERRED MONEY MARKET FUND
SHORT TERM INVESTMENTS--96.66% PAR VALUE
- -------------------------------------------------------
CERTIFICATES OF DEPOSIT--16.76%
Abbey National Treasury Services
5.22% May 11, 2000 @ $2,000,000 $ 1,999,655
Bank of Nova Scotia
5.15% April 20, 2000 @ 3,000,000 2,999,478
Bayerische Hypo Un
5.15% April 25, 2000 @ 7,000,000 6,998,727
- -------------------------------------------------------
SHORT TERM INVESTMENTS PAR VALUE
- -------------------------------------------------------
CERTIFICATES OF DEPOSIT (continued)
Bayerische Landes Bank
5.115% March 21, 2000 @ $1,000,000 $ 999,686
5.71% December 15, 2000 @ 1,500,000 1,498,725
Deutsche Bank New York
6.19% December 1, 2000 @ 3,000,000 2,998,163
Nationsbank Corp of NA Carolinas
5.00% January 5, 2000 @ 4,000,000 3,999,992
Nationsbank Texas
6.75% August 15, 2000 @ 1,000,000 1,004,358
Union Bank of Switzerland
6.235% December 4, 2000 @ 1,000,000 999,338
6.39% December 21, 2000 @ 3,000,000 2,998,612
------------
26,496,734
------------
COMMERCIAL PAPER--31.16%
Aspen Funding Corp
5.857% January 14, 2000 @ 4,000,000 3,991,406
Associates First Capital Corp
4.00% January 3, 2000 @ 6,000,000 5,998,667
Bank of New York
5.75% February 22, 2000 @ 1,000,000 991,694
Bankamerica Corp
5.99% March 13, 2000 @ 1,000,000 988,020
Bavaria Trr Corp Cp
5.93% March 17, 2000 @ 3,000,000 2,962,443
Bellsouth Capital Funding Corp
5.68% February 10, 2000 @ 3,500,000 3,477,911
CXC Inc
6.40% February 1, 2000 @ 4,000,000 3,977,956
General Motors Acceptance Corp
5.72% March 17, 2000 @ 2,000,000 1,975,849
5.98% January 28, 2000 @ 2,000,000 1,991,030
Newport Funding Corp
5.857% January 14, 2000 @ 4,000,000 3,991,406
Parthenon Receivables
6.55% January 18, 2000 @ 2,000,000 1,993,814
Receivables Capital Corp
6.12% January 14, 2000 @ 4,500,000 4,490,055
6.20% February 4, 2000 @ 1,000,000 994,144
Salomon Smith Barney Holdings Inc
6.01% March 1, 2000 @ 3,000,000 2,969,950
Southern Company
5.75% February 9, 2000 @ 2,000,000 1,987,542
UBS Finance Delaware Inc
4.25% January 3, 2000 @ 2,500,000 2,499,410
Windmill Funding Corp
6.12% January 18, 2000 @ 4,000,000 3,988,440
------------
49,269,737
------------
See notes to financial statements and notes to schedules of investments
52
<PAGE>
The Preferred Group of Mutual Funds SCHEDULES OF INVESTMENTS
- -------------------------------------------------------
SHORT TERM INVESTMENTS PAR VALUE
- -------------------------------------------------------
CORPORATE BONDS--2.53%
Wells Fargo & Co
5.31% March 31, 2000 @ $4,000,000 $ 3,999,642
-------------
FLOATING RATE NOTES--38.57%
AT&T Corp
6.365% January 13, 2000 @## 6,000,000 5,998,728
American Express Centurion Bank
5.349% January 26, 2000 @## 7,000,000 7,000,000
Bayerische Landesbank
6.519% January 18, 2000 @## 2,500,000 2,496,708
CIT Group Inc
5.569% January 4, 2000 @## 3,000,000 2,998,194
Citigroup Inc
5.857% February 3, 2000 @## 5,000,000 5,000,612
Comerica Bank of Detroit
6.454% January 15, 2000 @## 5,000,000 4,999,851
Commerz Bank AG New York
5.406% January 4, 2000 @## 4,000,000 3,999,770
Diageo Capital PLC
6.044% February 24, 2000 @## 6,000,000 5,997,524
First Union National
6.224% March 16, 2000 @## 1,000,000 999,777
Fleet Financial Group
6.189% January 13, 2000 @## 4,000,000 3,998,138
Key Bank North America
6.086% January 28, 2000 @## 2,000,000 2,000,619
Morgan Stanley Dean Witter
Zero Coupon
January 4, 2000 @## 3,500,000 3,500,000
PNC Bank NA
6.396% January 12, 2000 @## 6,000,000 5,998,450
Southtrust Bank NA
5.723% January 23, 2000 @## 6,000,000 5,995,168
-------------
60,983,539
-------------
GOVERNMENT AGENCY--4.80%
Federal Home Loan Mortgage
Discounted Notes
1.50% January 3, 2000 @ 3,086,000 3,085,743
1.95% January 3, 2000 @ 4,500,000 4,499,513
------------
7,585,256
------------
U.S. TREASURY--2.84%
United States Treasury Bills
3.05% January 6, 2000 @ 4,500,000 4,498,090
------------
TOTAL SHORT TERM INVESTMENTS
(Cost $152,832,998) 152,832,998
------------
- -------------------------------------------------------
SHORT TERM INVESTMENTS PAR VALUE
- -------------------------------------------------------
TOTAL INVESTMENTS--96.66%
(Cost $152,832,998) $152,832,998
-------------
OTHER ASSETS AND LIABILITIES--3.34% 5,288,362
-------------
TOTAL NET ASSETS--100% $158,121,360
=============
NOTES TO SCHEDULES OF INVESTMENTS
* Non-income producing security
** Pursuant to Rule 144A under the Securities Act of 1933, these securities
may be resold in transactions exempt from registration, normally to
qualified institutional buyers. At December 31, 1999, these securities
amounted to $5,960,596 or 3.44% of the net assets of the Preferred Fixed
Income Fund.
# All or a portion of this security is being used to collateralize futures
contracts outstanding at December 31, 1999. Additional securities are
earmarked 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 Depositary Receipt
MTN - Medium Term Notes
SDR - Swedish Depositary Receipt
TBA - To Be Announced
See notes to financial statements and notes to schedules of investments
53
<PAGE>
NOTES TO FINANCIAL STATEMENTS December 31, 1999 (unaudited)
- --------------------------------------------------------------------------------
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 (the
"Funds"):
PREFERRED GROWTH FUND ("Growth") - seeks its objective of long-term capital
appreciation by investing primarily in equity securities believed to offer the
potential for capital appreciation, including stocks of companies experiencing
above-average earnings growth.
PREFERRED VALUE FUND ("Value") - seeks its objective of capital appreciation and
current income by investing primarily in equity securities believed to be
undervalued and that offer above-average potential for capital appreciation.
PREFERRED INTERNATIONAL FUND ("International") - seeks its objective of
long-term capital appreciation by investing primarily in equity securities
traded principally on markets outside the United States.
PREFERRED SMALL CAP FUND ("Small Cap") - seeks its objective of long-term
capital appreciation through investments in companies with small equity
capitalizations.
PREFERRED ASSET ALLOCATION FUND ("Asset Allocation") - seeks its objective of
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 its objective of 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 its objective of high current income consistent with preservation of
capital, primarily through investment in U.S. Government securities.
PREFERRED MONEY MARKET FUND ("Money Market") - seeks its objective of the
maximum current income believed to be consistent with preservation of capital
and maintenance of liquidity by investing in short-term, fixed income
instruments.
The Preferred Group was established in 1991 as a business trust under
Massachusetts law and has an unlimited authorized number of shares of beneficial
interest which may, without shareholder approval, be divided into an unlimited
number of series of such shares.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the reported amounts
of income and expenses during the reporting period and disclosure of contingent
assets and liabilities at the date of the financial statements. Actual results
could differ from those estimates. The following significant accounting policies
are consistently followed by the Funds in the preparation of their financial
statements.
SECURITY VALUATIONS
Portfolio securities and futures for which market quotations are readily
available are valued at market value, which is determined by using the last
reported sale price, or, if no sales are reported, the last reported bid price.
Portfolio debt securities with remaining maturities greater than sixty days are
valued by pricing agents approved by the Trustees, which prices reflect broker/
dealer supplied market 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
54
<PAGE>
The Preferred Group of Mutual Funds NOTES TO FINANCIAL STATEMENTS
contracts are valued at the mean between the bid and the offered forward rates
as last quoted by a pricing service. Obligations with a remaining maturity of 60
days or less and holdings in Money Market are valued at amortized cost which
approximates market value. Equity securities that have reached the limit for
aggregate foreign ownership may trade at a premium to the local share price. The
premium is valued based on prices supplied by a broker. Portfolio positions
which cannot be valued as set forth above are valued at fair value under
procedures approved by the Trustees.
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, 1999, 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
Short-Term Government 2007 34,485
Small Cap 2007 11,053,418
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, net operating losses, losses deferred due to wash
sales and post-October 31 losses. Permanent book and tax differences relating to
shareholder distributions will result in reclassifications in the Funds' capital
accounts.
EXPENSES
Expenses specific to an individual Fund are charged to that Fund. Common
expenses are allocated to the Funds based on their relative net asset values.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Funds are maintained in U.S. dollars. All assets
and liabilities initially expressed in foreign currencies are converted into
U.S. dollars at the daily exchange rates.
55
<PAGE>
NOTES TO FINANCIAL STATEMENTS December 31, 1999 (unaudited)
Net realized gains and losses on foreign denominated other assets, liabilities
and currency transactions disclosed in the Statement of Operations represent net
gains and losses from the disposition of foreign currencies, currency gains and
losses realized between the trade and settlement dates on securities
transactions, and the difference between the amount of net investment income
accrued and the U.S. dollar amount actually received. Further, the effects of
changes in foreign currency exchange rates on securities are not segregated in
the Statement of Operations from the effects of changes in market prices of
those securities, but rather, are included with the net realized and unrealized
gain or loss on investments.
FORWARD CURRENCY CONTRACTS
All Funds (except Short-Term Government and Money Market) may enter into forward
currency contracts to purchase or sell foreign currencies at predetermined
exchange rates at future dates. The market value of the contract will fluctuate
with changes in currency exchange rates. All contracts are marked-to-market
daily, resulting in unrealized gains or losses which become realized at the time
the forward contracts are settled. Forward currency contracts do not eliminate
fluctuations in the prices of the Funds' portfolio securities. The maximum
potential loss from such contracts is the aggregate face value in U.S. dollars
at the time the contract was opened.
FUTURES CONTRACTS
All Funds (except Short-Term Government and 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 December 31, 1999.
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.
56
<PAGE>
The Preferred Group of Mutual Funds NOTES TO FINANCIAL STATEMENTS
INDUSTRY CONCENTRATIONS
While none of the Funds is permitted to invest more than 25% of its assets in a
particular industry (other than Money Market, 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.
57
<PAGE>
NOTES TO FINANCIAL STATEMENTS December 31, 1999 (unaudited)
- --------------------------------------------------------------------------------
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
subadvisers to render advisory services to the Funds:
<TABLE>
<CAPTION>
FUND SUBADVISERS
<S> <C>
Growth Jennison Associates LLC ("Jennison")
Value Oppenheimer Capital Corp. ("Oppenheimer")
International Mercator Asset Management(R), 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
</TABLE>
The subadvisers operate under the supervision of the Manager and The Preferred
Group's Trustees. The Manager pays the fees of each of the subadvisers; the
Funds do not pay subadvisory fees in addition to the management fee paid to the
Manager.
For the six months ended December 31, 1999, brokerage commissions were paid to
the following affiliates of the Trust's subadvisers by the following Funds:
GROWTH VALUE
J. P. Morgan Securities, Inc. $25,271 $1,200
TRUSTEES' FEES
For the six months ended December 31, 1999, 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 $12,000 plus $2,500
for each Trustees' meeting attended.
58
<PAGE>
The Preferred Group of Mutual Funds NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. BENEFICIAL INTEREST
- --------------------------------------------------------------------------------
As of December 31, 1999, affiliated shareholders beneficially holding more than
5% of total shares outstanding were as follows:
<TABLE>
<CAPTION>
GROUP PREFERRED STABLE
INSURANCE INSURANCE PRINCIPAL
401(K) PLAN* TRUST A & B** RESERVES*** COLLECTIVE TRUST
<S> <C> <C> <C> <C>
GROWTH 69.09% - - -
VALUE 70.39% - - -
INTERNATIONAL 34.35% 37.79% - -
SMALL CAP 31.36% 55.21% 5.65% -
ASSET ALLOCATION 42.77% 26.18% - -
FIXED INCOME 19.34% 19.03% - 48.26%
SHORT-TERM GOVERNMENT 25.38% 26.80% 31.99% 12.32%
MONEY MARKET 82.39% - - -
* 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 31.99%
holdings in Short-Term Government Securities Fund are held by American
Bankers' Insurance Company of Florida for the benefit of Caterpillar
Insurance Company Limited.
59
<PAGE>
NOTES TO FINANCIAL STATEMENTS December 31, 1999 (unaudited)
- --------------------------------------------------------------------------------
4. PORTFOLIO INFORMATION
- --------------------------------------------------------------------------------
SECURITY PURCHASES AND SALES
During the six months ended December 31, 1999, 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:
LONG-TERM SHORT-TERM
PURCHASES SALES PURCHASES SALES
<S> <C> <C> <C> <C>
GROWTH $187,267,707 $220,296,488 - -
VALUE 26,956,550 35,168,053 - -
INTERNATIONAL 35,452,487 30,046,215 - -
SMALL CAP 39,909,725 50,345,129 - -
ASSET ALLOCATION 3,014,213 36,897,622 $49,789,118 $ 13,259,710
FIXED INCOME 147,852,011 104,635,237 95,643,178 113,456,310
SHORT-TERM GOVERNMENT 44,205,217 6,936,075 - 26,511,524
During the six months ended December 31, 1999, Money Market had purchases
and sales (including maturities and excluding repurchase agreements) of
short-term obligations and U.S. Government securities of:
OTHER U.S. GOVERNMENT
PURCHASES SALES PURCHASES SALES
<S> <C> <C> <C> <C>
MONEY MARKET $4,737,682,502 $4,788,943,380 $27,599,417 $23,105,000
FUTURES CONTRACTS
Asset Allocation and Fixed Income had the following futures contracts open at
December 31, 1999:
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 21 Mar 00 $ 7,792,050 $ 263,851
U.S. Treasury Bonds 276 Mar 00 25,098,750 (544,051)
-----------
(280,200)
-----------
Short Positions:
S&P 500 47 Mar 00 (17,439,350) (703,333)
-----------
($983,533)
===========
FIXED INCOME:
Long Positions:
U.S. Treasury Bonds 83 Mar 00 7,547,813 (283,552)
Short Positions:
U.S. Treasury Notes 279 Mar 00 (26,744,766) 522,896
-----------
$ 239,344
===========
</TABLE>
60
<PAGE>
The Preferred Group of Mutual Funds NOTES TO FINANCIAL STATEMENTS
UNREALIZED APPRECIATION (DEPRECIATION)
Unrealized appreciation (depreciation) for each Fund at December 31, 1999, 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 $342,787,907 ($ 4,809,093) $337,978,814 $480,482,308
VALUE 177,467,070 (16,347,400) 161,119,670 219,085,492
INTERNATIONAL 140,685,453 (9,264,033) 131,421,420 243,119,730
SMALL CAP 15,455,065 (5,051,846) 10,403,219 84,718,648
ASSET ALLOCATION 40,534,316 (9,156,078) 31,378,238 186,540,748
FIXED INCOME 397,244 (5,562,002) (5,164,758) 175,831,808
SHORT-TERM GOVERNMENT 14,456 (924,288) (909,832) 73,741,248
MONEY MARKET - - - 152,832,998
</TABLE>
INCOME TAX INFORMATION (UNAUDITED)
The Funds that declared and paid a long-term capital gain distribution in
calendar year 1999 (Value, Growth, International and Asset Allocation) hereby
designate the following amounts as long-term capital gain distributions:
LONG-TERM
FUND CAPITAL GAINS
VALUE $48,119,259
GROWTH 79,398,489
INTERNATIONAL 11,234,706
ASSET ALLOCATION 3,305,447
61
<PAGE>
THE PREFERRED GROUP OF MUTUAL FUNDS December 31, 1999 (unaudited)
logo
THE PREFFERRED GROUP
OF MUTUAL FUNDS
1-800-662-4769
www.preferredgroup.com
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.
OFFICERS AND TRUSTEES
Gary M. Anna.........................................Trustee
William F. Bahl......................................Trustee
F. Lynn McPheeters...................................Trustee
Dixie L. Mills.......................................Trustee
Kenneth J. Zika......................................Trustee
David L. Bomberger.................................President
Fred L. Kaufman.................Vice President and Treasurer
Richard P. Konrath.....................................Clerk
INVESTMENT ADVISER
Caterpillar Investment Management Ltd.
411 Hamilton Boulevard, Suite 1200
Peoria, IL 61602-1104
DISTRIBUTOR
Caterpillar Securities Inc.
411 Hamilton Boulevard, Suite 1200
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
62
<PAGE>
The Preferred Group of Mutual Funds SHAREHOLDER PRIVILEGES
AFFORDABLE MINIMUM You may open a Preferred account with an
INVESTMENT 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 You may authorize your bank to debit your
SAVINGS PLAN 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 Traditional or Roth IRA
account. You may transfer or roll over
your current IRA. You may also convert
your current IRA at another institution
to a Preferred Roth IRA. Call 1-800-662-
4769 for a free IRA kit.
COMPREHENSIVE You can reach The Preferred Group at
INVESTOR SERVICES 1-800-662-4769 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 our 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.
*The Preferred Group is a no-load mutual fund family and does not charge any
12b-1 fees. As with any no-load mutual fund, however, certain other fees and
expenses do apply to continued investments in the Funds. These fees and
expenses are described in the Funds' current prospectus, which should be read
carefully before making an investment.
63
<PAGE>
---------------------------
PRESORTED
STANDARD A
U.S. POSTAGE PAID
SOUTH SUBURBAN, IL
PERMIT #3602
---------------------------
logo
The Preferred Group
of Mutual Funds
P.O. Box 8320
Boston, MA 02266-8320
www.preferredgroup.com
Distributed by
Caterpillar Securities Inc.
SEMIANNUAL REPORT
December 31, 1999
(unaudited)
BUILDING
FINANCIAL
BRIDGES(TM)
