BUILDING
FINANCIAL
BRIDGES
[PREFERRED GROUP logo]
The Preferred Group
of Mutual Funds
Annual Report
June 30, 2000
<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
Report of Independent Accountants 62
Shareholder Privileges 65
<PAGE>
The Preferred Group of Mutual Funds
PERFORMANCE DATA
<TABLE>
<CAPTION>
PERFORMANCE DATA YEAR ENDED 6/30/00
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 $26.43 30.00% - - $3.09
-----------------------------------------------------------------------------------------------------------------------
Value 26.80 21.95 (5.19) - $.17 3.25
-----------------------------------------------------------------------------------------------------------------------
International 16.63 18.11 14.15 - .23 .64
-----------------------------------------------------------------------------------------------------------------------
Small Cap 12.05 12.65 5.22 - .03 -
-----------------------------------------------------------------------------------------------------------------------
Asset Allocation 16.81 16.77 5.60 - .57 .37
-----------------------------------------------------------------------------------------------------------------------
Fixed Income 9.76 9.51 3.62 6.44% .59 -
-----------------------------------------------------------------------------------------------------------------------
S.T. Gov't. Securities 9.61 9.51 4.46 6.37 .52 -
-----------------------------------------------------------------------------------------------------------------------
Money Market++ 1.00 1.00 5.45 6.23 .05 -
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total return includes reinvestment of dividends and capital gains
distributions.
+ The yield shown for the Fixed Income and Short-Term Government
Securities Funds is the 30-day current yield as of 6/30/00. The yield
shown for the Money Market Fund is the seven-day current yield as of
6/30/00, 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>
June 30, 2000
OUR MESSAGE TO YOU
[picture of David L. Bomberger]
David L. Bomberger
President
DEAR FELLOW PREFERRED GROUP SHAREHOLDER:
I am pleased to present you with The Preferred Group's annual report for the
twelve months ended June 30, 2000. This report provides detailed information on
your Funds, including fund holdings, financial and performance data, and
commentary from each of the portfolio managers.
MARKET COMMENTARY
For much of the past year, investment analysts consistently warned eager
investors of overvalued companies and overinflated expectations. Toward the end
of 1999, investors intent on chasing performance abandoned time-honored
strategies of diversification and asset allocation in favor of risky bets on one
or two high-flying stocks. If they made the right choices, their penchant for
high risk was richly rewarded, with proof as close as the Nasdaq Composite
Index, which gained 85% in price during calendar year 1999.
Then, spring sprung. From its high of 5048.62 on March 10 to its low of 3164.55
on May 23, the Nasdaq lost 37% of its value. The Dow Jones Industrial Average
also lost ground. Moreover, neither measure of the market has returned to its
January 2000 level. Tech-burned investors seem to be casting a more critical eye
on "overnight sensations," looking not just for great ideas but reasonable
business plans and well-executed operations.
The major stock indexes are running at a slower pace than last year. In fact,
during the first six months of 2000, bonds outpaced stocks. The Salomon Bros.
BIG Index posted a 3.92% gain from January 1 through June 30, well ahead of the
large-cap S&P 500 Index (down 0.28%), the small-cap Russell 2000 Index (up
3.04%), and the EAFE Index, the international equities benchmark (down 3.95%).
PREFERRED GROUP HIGHLIGHTS
Whether you look at the stock markets in general or The Preferred Group in
particular, you'll notice a lot of changes compared to just 12 months ago. In
the markets, volatility is at record highs. Now, we don't think of ourselves as
volatile, but we're definitely busy at The Preferred Group. In order to help you
build your financial bridges to the future, we are building on our strengths in
the fixed income and equity areas. Here's a review of portfolio management
developments for the year ended June 30.
In November, Charles T. (C.T.) Urban III, CFA, became manager of the Preferred
Short-Term Government Securities Fund. C.T. has over 15 years of fixed income
portfolio experience.
In January, Mark Settles of J.P. Morgan took over as manager of the Preferred
Money Market Fund. 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. He replaced Skip Johnson, who retired at the end
of 1999 after seven years at the helm.
In February, E. Luke Farrell of J.P. Morgan assumed management of the Preferred
Fixed Income Fund. His experience includes U.S. Treasury, high yield, emerging
market and investment grade securities, and foreign currency hedging.
2
<PAGE>
The Preferred Group of Mutual Funds
OUR MESSAGE TO YOU
These particular portfolio management changes represent changes in personnel,
but not in the fundamental philosophies of the Funds. That's why I believe the
biggest change of the year occurred in January when Turner Investment Partners,
Inc. of Berwyn, PA began managing the Preferred Small Cap Fund, replacing
Caterpillar Investment Management Ltd. Along with a change in manager, the Fund
switched from a core/value philosophy to a growth orientation.
Bill McVail and the rest of the team at Turner Investment Partners, Inc. ensured
a smooth transition for the portfolio. And they have exhibited great
professionalism during an extremely volatile time for equities. We believe
Turner is an excellent addition to The Preferred Group family.
One other change at the Preferred Group gives shareholders faster access to
Preferred Group information. Computer users can pick up the latest Fund fact
sheets, manager comments, reports and our prospectus on the Web at
http://www.PreferredGroup.com.
LOOKING FORWARD
The events of April, while devastating to some, served as a much-needed wake-up
call to people who hadn't thoroughly examined their tolerance for risk. As
long-term investors, we should welcome this correction as proof that the
fundamentals of investing haven't changed.
But maybe it's time to turn down the volume. Paying too much attention to the
daily whims of the market may be injurious to a healthy long-term outlook. After
all, you can easily get lost in the details when business news is broadcast
24-hours a day and hot securities analysts and newly minted CEOs are the biggest
celebrities around.
That doesn't mean tuning out. It simply means rededication to the time-honored
benefits of asset allocation and diversification. These strategies may not be as
exciting as betting the house on a dotcom, but on the other hand, you still get
to live in the house during a market turndown.
In a constantly changing world, one thing doesn't change: our appreciation for
your business. Thank you for your continued confidence in The Preferred Group of
Mutual Funds. As always feel free to call us at 1-800-662-4769 with your
questions and comments.
We look forward to having the opportunity to serve you during the coming year.
Sincerely,
/S/ David L. Bomberger
David L. Bomberger, CFA
3
<PAGE>
June 30, 2000
FUNDS & INVESTMENT OBJECTIVES
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.
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, June 30, 2000. This allows you to compare funds
from different complexes on an equal basis.
$10,000 HYPOTHETICAL INVESTMENT:
The "$10,000 investment since inception" illustrates the value of your
investment as of June 30, 2000, 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 Growth Index
Russell 2000 Index
--------------------------------------------------------------------------------
PREFERRED ASSET ALLOCATION FUND
65/30/5 Benchmark*
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
--------------------------------------------------------------------------------
* Blended benchmark consisting of 65% - S&P 500 Index; 30% - Lehman Brothers
Long-Term Treasury Index; and 5% - 90-Day Treasury Bills.
5
<PAGE>
June 30, 2000
INVESTMENT REVIEW
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 April 1999.
---------------------------------------------------------------------------
EDUCATION: B.B.A. in Finance -- University of Wisconsin; M.B.A. -- Harvard
Business School
---------------------------------------------------------------------------
DISCUSSION & ANALYSIS:
For the fiscal year ended June 30, 2000, the Preferred Growth Fund returned
30.00%, while the S&P 500 Index gained 7.49%. Since inception, the Fund has
provided an average annual return of 24.02%, versus 19.75% for the Index.
The last 12 months were characterized by widely differing performances of
the various sectors within the S&P 500 as measured by price and earnings
growth. Six of the Index's 11 sectors--basic materials, communication
services, consumer cyclicals, consumer staples, financials and
transportation--actually posted negative returns for the period. Technology
and health care were the only sectors able to make a meaningful
contribution to the S&P 500 return. Earnings growth for technology and
health care stocks was robust for the period, with the technology sector
growing close to 25% and health care growing 15% to 16%. Other sectors fell
victim to slow unit growth, no pricing power, rising input costs,
tremendous competition and a global economy that was still dominated by
weakness in Japan and below-trend growth for the rest of the world.
On June 30, 2000, technology stocks represented approximately 36% of the
Fund compared to 31% for the benchmark. While the expected rates of
earnings growth for stocks in this sector are some of the highest in the
Fund, we believe current valuations discount much of this growth. Cisco
Systems, Inc., Intel Corp., Texas Instruments Inc. (2.2% of net assets) and
EMC Corp. (2.1%) made positive contributions during the period.
In health care, positive news about new drugs, stable earnings growth and
attractive relative valuations attracted investors. We believe the
biotechnology industry remains a bright though extremely volatile sector
with expanding product portfolios, strong new product pipelines and an
explosion of genomic-related news. In the financial sector, we continue to
favor a few large global companies such as American International Group
Inc. (2.3%), Citigroup Inc., American Express Co. (2.0%) and Morgan Stanley
Dean Witter & Co. (2.7%), companies we believe to have expanding market
positions, excellent management and above-average earnings growth.
We expect above-trend earnings growth for the Fund in 2000 and 2001, and we
believe the earnings growth of the Fund will exceed that of the S&P 500
Index. One risk to our expectations is the possibility of inflation
emerging at higher levels than expected, leading the Federal Reserve to
continue reining in the growth of money and credit in an attempt to slow
the economy and maintain price stability.
- Jennison Associates LLC
6
<PAGE>
The Preferred Group of Mutual Funds
INVESTMENT REVIEW
TOP TEN HOLDINGS:* (% of total net assets)
-----------------------------------------------------------------------------
1. Pfizer Inc. 4.2%
-----------------------------------------------------------------------------
2. Intel Corp. 4.0%
-----------------------------------------------------------------------------
3. Citigroup Inc. 3.5%
-----------------------------------------------------------------------------
4. Hewlett Packard Co. 3.4%
-----------------------------------------------------------------------------
5. Cisco Systems, Inc. 3.4%
-----------------------------------------------------------------------------
6. Nokia Corp. ADR 3.4%
-----------------------------------------------------------------------------
7. Home Depot, Inc. 3.2%
-----------------------------------------------------------------------------
8. Vodafone AirTouch Plc ADR 3.2%
-----------------------------------------------------------------------------
9. Viacom Inc. 3.1%
-----------------------------------------------------------------------------
10. Qwest Communications International Inc. 2.8%
-----------------------------------------------------------------------------
* Holdings listed are as of 6/30/00. Current holdings of
any mutual fund are subject to change without notice.
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.
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.
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.
The Fund may be more concentrated and subject to greater risk than other common
stock mutual funds having a greater number of holdings.
CUMULATIVE TOTAL RETURN:
Past Past Past Since
6 Months 1 Year 5 Years Inception*
PREFERRED
GROWTH FUND 3.93% 30.00% 234.74% 460.14%
S&P 500 Index -0.28% 7.49% 191.36% 322.76%
* July 1, 1992
AVERAGE ANNUAL TOTAL RETURN:
Past Past Since
1 Year 5 Years Inception*
PREFERRED
GROWTH FUND 30.00% 27.33% 24.02%
S&P 500 Index 7.49% 23.85% 19.75%
* July 1, 1992
A $10,000 INVESTMENT SINCE INCEPTION:
[Line 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
6/30/00 56014 42276
7
<PAGE>
June 30, 2000
INVESTMENT REVIEW
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 year ended June 30, 2000, the Preferred Value Fund declined 5.19%,
trailing the 7.49% gain of the S&P 500 Index. Since inception, the Fund has
provided an average annual total return of 15.22%, compared to 19.75% for
the Index.
Relative to the performance of the overall market, the Fund's performance
was disappointing. For much of the year, the stock markets were dominated
by a relatively small number of growth-orientated technology stocks. The
good news is that we had little trouble finding fundamentally strong
businesses that met our value criteria. Positive signs began to emerge for
the Fund in late March when it became apparent to us that investors were
placing greater emphasis on stock valuations that are more closely tied to
underlying business growth.
Stocks that contributed to Fund performance during the period included
Citigroup Inc., Intel Corp., Pharmacia Corp. and Arrow Electronics Inc.
(3.0% of net assets). During the year, it was difficult to find technology
stocks that met our valuation criteria. The resulting sector underweighting
contributed to the Fund's underperformance relative to the S&P 500 Index.
The Fund's holdings in Federal Home Loan Mortgage Corp. (Freddie Mac) also
hurt performance, as investors perceived that higher interest rates
negatively affect the earnings outlook for Freddie Mac. However, by hedging
its interest rate bets, Freddie Mac has continued to increase earnings
throughout wide swings in interest rates. We also believe the market has
become overly concerned about rising political risk for Freddie Mac. In
addition, our investments in Boeing Co. (2.8%), Textron Inc. (1.2%),
Emerson Electric Co. (2.7%) and Minnesota Mining & Manufacturing Co. (2.1%)
underperformed the overall markets.
Near-term, the considerable volatility that has characterized the equity
markets of late does not appear likely to abate. Large-cap value stocks,
the Fund's area of emphasis, have lagged large-cap growth stocks by a
significant margin for the past several years. This is an unusually long
period for one investment style to trail the other, and we believe the
chances are this will not always be the case. We believe history suggests
that performance disparities between growth and value dissipate over time
and that a well-conceived style of value investing, as part of a
diversified portfolio, may deliver superior long-term performance while
controlling risk. We do not know when value will return to favor. We do
believe, however, that a shift is inevitable.
- Oppenheimer Capital
8
<PAGE>
The Preferred Group of Mutual Funds
INVESTMENT REVIEW
-------------------------------------------------------------------------
TOP TEN HOLDINGS:* (% of total net assets)
-------------------------------------------------------------------------
1. Citigroup Inc. 6.2%
-------------------------------------------------------------------------
2. Intel Corp. 5.1%
-------------------------------------------------------------------------
3. Sprint Corp. 5.1%
-------------------------------------------------------------------------
4. Wells Fargo & Co. 4.3%
-------------------------------------------------------------------------
5. Federal Home Loan Mortgage Corp. 4.2%
-------------------------------------------------------------------------
6. Pharmacia Corp. 4.1%
-------------------------------------------------------------------------
7. Aflac Inc. 3.9%
-------------------------------------------------------------------------
8. Morgan Stanley Dean Witter & Co. 3.9%
-------------------------------------------------------------------------
9. XL Capital Ltd. Class A 3.8%
-------------------------------------------------------------------------
10. News Corp. Ltd. ADR 3.6%
-------------------------------------------------------------------------
* Holdings listed are as of 6/30/00. Current holdings of
any mutual fund are subject to change without notice.
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.
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.
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.
The Fund may be more concentrated and subject to greater risk than other common
stock mutual funds having a greater number of holdings.
CUMULATIVE TOTAL RETURN:
Past Past Past Since
6 Months 1 Year 5 Years Inception*
PREFERRED
VALUE FUND -1.70% -5.19% 111.07% 210.64%
S&P 500 Index -0.28% 7.49% 191.36% 322.76%
* July 1, 1992
AVERAGE ANNUAL TOTAL RETURN:
Past Past Since
1 Year 5 Years Inception*
PREFERRED
VALUE FUND -5.19% 16.11% 15.22%
S&P 500 Index 7.49% 23.85% 19.75%
* July 1, 1992
A $10,000 INVESTMENT SINCE INCEPTION:
[Line chart]
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
6/30/00 31064 42276
9
<PAGE>
June 30, 2000
INVESTMENT REVIEW
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),
LP
---------------------------------------------------------------------------
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 year ended June 30, 2000, the Preferred International Fund gained
14.15%, trailing the EAFE Index, which gained 17.44%. Since inception, the
Fund has returned 11.42% on an average annual basis versus a 12.15% gain
for its benchmark.
On the economic front, global GDP growth continued to improve. Interest
rates moved up as central banks continued to be concerned over inflation
and accelerating economic growth. Currencies were relatively quiet but the
euro proved to be much weaker than expected. Corporate profits improved
nicely. Overall, the economic climate seems to be quite healthy, and there
is hope that as the U.S. economy slows, both accelerating growth in Europe
and the recovery in Japan will pick up the slack.
Over the course of the year, the Fund's weighting in Japan increased from
9% to 25% as we identified a number of very attractive companies in the
pharmaceutical, insurance and real estate industries. For the first time in
many years, we have positions in Singapore and China.
Fund performance was helped by a number of Japanese and European companies.
Mergers and acquisitions also helped the Fund, as we received premium
buy-out prices for Elf Aquitaine by Total Fina (France), National
Westminster Bank by Royal Bank of Scotland (United Kingdom) and Pioneer
International by Hanson Plc (United Kingdom). The Fund was hurt by negative
performance in Germany and Korea, also we lost money in Electrolux AB
Series B (1.8% of net assets) and Royal & Sun Alliance (2.0%). However, we
took advantage of price weakness and added to some of these stocks based on
their long-term fundamental attraction.
On the sell side we eliminated a number of stocks based on valuation and/or
deteriorating fundamentals. They include Cable & Wireless Optus
(Australia), Mayne Nickless Ltd. (Australia), CSR Ltd. (Australia),
Bouygues (France), Vopak and Stork (Netherlands), British Telecom (United
Kingdom) and Rank Group and Allied Domecq Plc (United Kingdom). We also
reduced a number of other profitable positions, the most significant being
Japan's Sony Corp. (0.6%), based on high valuation.
Looking ahead we may find some more bargains in Asia (excluding Japan), but
selectivity will be key in identifying true bargains. Volatility will
continue at least until there is a clear sign that interest rates have
peaked. We believe our emphasis on fundamental analysis makes us well
positioned for the investment environment ahead, and that our companies are
attractively valued and should provide good earnings growth.
- Mercator Asset Management(R), LP
10
<PAGE>
The Preferred Group of Mutual Funds
INVESTMENT REVIEW
TOP TEN HOLDINGS:* (% of total net assets)
--------------------------------------------------------------------------------
1. Daiichi Pharmaceutical Japan 3.7%
--------------------------------------------------------------------------------
2. Christian Dior France 3.3%
--------------------------------------------------------------------------------
3. Hitachi Ltd. Japan 3.2%
--------------------------------------------------------------------------------
4. Oriental Land Co. Ltd. Japan 3.2%
--------------------------------------------------------------------------------
5. Bipop-Carire Italy 2.9%
--------------------------------------------------------------------------------
6. Mitsui Fudosan Co. Japan 2.8%
--------------------------------------------------------------------------------
7. ING Groep NV Netherlands 2.6%
--------------------------------------------------------------------------------
8. National Australia Bank Australia 2.6%
--------------------------------------------------------------------------------
9. Bank Nova Scotia Halifax Canada 2.6%
--------------------------------------------------------------------------------
10. Matsushita Electric Industries Japan 2.5%
--------------------------------------------------------------------------------
* Holdings listed are as of 6/30/00. Current holdings of
any mutual fund are subject to change without notice.
GEOGRAPHIC ALLOCATION: (% of total net assets)
----------------------------------------------------------
Japan 24.7%
----------------------------------------------------------
United Kingdom 12.2%
----------------------------------------------------------
Switzerland 9.0%
----------------------------------------------------------
France 6.9%
----------------------------------------------------------
Italy 6.6%
----------------------------------------------------------
Sweden 6.1%
----------------------------------------------------------
Netherlands 5.8%
----------------------------------------------------------
Canada 4.6%
----------------------------------------------------------
Spain 4.0%
----------------------------------------------------------
Germany 3.6%
----------------------------------------------------------
South Korea 2.8%
----------------------------------------------------------
Australia 2.6%
----------------------------------------------------------
Finland 1.7%
----------------------------------------------------------
Singapore 1.7%
----------------------------------------------------------
Argentina 0.9%
----------------------------------------------------------
New Zealand 0.8%
----------------------------------------------------------
China 0.7%
----------------------------------------------------------
Others 5.3%
----------------------------------------------------------
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 1,000 stocks from 20 different
countries with Japan, the United Kingdom, France and Germany being the most
heavily weighted.
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.
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.
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.
CUMULATIVE TOTAL RETURN:
Past Past Past Since
6 Months 1 Year 5 Years Inception*
PREFERRED
INTERNATIONAL FUND -4.43% 14.15% 82.69% 137.60%
EAFE Index -3.95% 17.44% 73.34% 150.20%
* July 1, 1992
AVERAGE ANNUAL TOTAL RETURN:
Past Past Since
1 Year 5 Years Inception*
PREFERRED
INTERNATIONAL FUND 14.15% 12.81% 11.42%
EAFE Index 17.44% 11.63% 12.15%
* July 1, 1992
A $10,000 INVESTMENT SINCE INCEPTION:
[Line chart]
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
6/30/00 23760 25020
11
<PAGE>
June 30, 2000
INVESTMENT REVIEW
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: William C. McVail, CFA, leads an investment committee.
---------------------------------------------------------------------------
TITLE: Senior Portfolio Manager/Security Analyst, Turner Investment
Partners, Inc.
---------------------------------------------------------------------------
LAST FIVE YEARS' EXPERIENCE: Portfolio Manager at PNC Equity Advisors
before joining Turner in 1998. Bill assumed management of the Preferred
Small Cap Fund in January 2000.
---------------------------------------------------------------------------
EDUCATION: B.A. in Economics and B.A. in Psychology--Vassar College;
Chartered Financial Analyst
---------------------------------------------------------------------------
NOTE: Todd Sheridan, then Dave Bomberger, both of Caterpillar Investment
Management Ltd., managed the Preferred Small Cap Fund prior to January 1,
2000.
---------------------------------------------------------------------------
DISCUSSION & ANALYSIS:
For the year ended June 30, 2000, the Preferred Small Cap Fund gained
5.22%, trailing the Russell 2000 Growth Index and the Russell 2000 Index,
which gained 28.39% and 14.33%, respectively. Since inception, the Fund has
returned 9.51% on an average annual basis versus 15.59% for the Russell
2000 Growth Index and 14.17% for the Russell 2000 Index.
The Russell 2000 Index achieved 90% of its annual gain during the fourth
quarter of 1999 and closed December 31, 1999, at 504.75, an all-time
record. Unfortunately for the Fund at that time, 1999 markets favored
growth stocks over value stocks, and the Fund declined 2.52% for the six
months ended December 31, 1999.
On January 1, 2000, Caterpillar Investment Management Ltd. retained Turner
Investment Partners, Inc. to manage the Fund's investments. At the same
time, the Fund changed its investment philosophy from a value/core
orientation to a growth orientation.
For the six months ended June 30, 2000, the Turner-led Fund gained 7.94%,
ahead of both the Russell 2000 Growth Index and the Russell 2000 Index,
which gained 1.23% and 3.04%, respectively. Most of the Fund's gains came
early and late in the period. In between, the Fund declined sharply,
mirroring the markets. The Russell 2000 Index, for instance, lost 25% of
its value from March 9 to April 14.
During the past six months, six of the Fund's 10 sector positions
outperformed their corresponding Index sectors, with investments in the
technology and producer durables sectors--more than 40% of the Fund's
holdings--contributing the most to performance. Detracting the most from
performance was a negative return in the consumer-discretionary/services
sector. The Fund's consumer holdings were victims of higher interest rates.
We continue to emphasize the stocks of leading companies that, in our
analysis, can sustain their earnings growth. In the market downturn during
the past six months, the stocks that were hit hardest were those with the
least solid fundamentals. In a market that has come to prize companies that
can deliver earnings growth, we think the Preferred Small Cap Fund is
particularly well positioned for the times ahead.
- Caterpillar Investment Management Ltd.
- Turner Investment Partners, Inc.
12
<PAGE>
The Preferred Group of Mutual Funds
INVESTMENT REVIEW
TOP TEN HOLDINGS:* (% of total net assets)
------------------------------------------------------------------------
1. DSP Group Inc. 1.4%
------------------------------------------------------------------------
2. Natural Microsystems Corp. 1.3%
------------------------------------------------------------------------
3. Audio Codes Ltd. 1.2%
------------------------------------------------------------------------
4. Insight Enterprises Inc. 1.2%
------------------------------------------------------------------------
5. Medicis Pharmaceutical Corp. 1.2%
------------------------------------------------------------------------
6. Techne Corp. 1.2%
------------------------------------------------------------------------
7. Diamond Technology Partner Inc. 1.1%
------------------------------------------------------------------------
8. ISS Group Inc. 1.1%
------------------------------------------------------------------------
9. Getty Images Inc. 1.1%
------------------------------------------------------------------------
10. Proxicom Inc. 1.0%
------------------------------------------------------------------------
* Holdings listed are as of 6/30/00. Current holdings of
any mutual fund are subject to change without notice.
PERFORMANCE:
On January 1, 2000, the Preferred Small Cap Fund gained a new subadviser and
switched from a value/core orientation to a growth orientation. As a result, the
Fund is now measured against the Russell 2000 Growth Index instead of the
Russell 2000 Index.
The following information illustrates the historical performance of the
Preferred Small Cap Fund compared with the RUSSELL 2000 GROWTH INDEX and the
RUSSELL 2000 INDEX. The Russell 2000 Growth Index contains those Russell 2000
companies with higher price-to-book ratios and higher forecasted growth values.
The Russell 2000 Index contains the 2,000 smallest of the 3,000 largest
U.S.-domiciled corporations, ranked by market capitalization.
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.
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.
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.
CUMULATIVE TOTAL RETURN:
Past Past Past Since
6 Months 1 Year 3 Years Inception*
PREFERRED
SMALL CAP FUND 7.94% 5.22% 5.12% 52.78%+
Russell 2000
Growth Index 1.23% 28.39% 57.38% 96.65%
Russell 2000 Index 3.04% 14.33% 35.19% 85.63%
* 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 5.22% 1.68% 9.51%+
Small Cap Fund
Russell 2000
Growth Index 28.39% 16.32% 15.59%
Russell 2000 Index 14.33% 10.57% 14.17%
* 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:
[Line chart]
<TABLE>
<CAPTION>
PREFERRED SMALL CAP FUND RUSSELL 2000 INDEX RUSSELL 2000 GROWTH INDEX
<S> <C> <C> <C>
11/1/95 10000 10000 10000
12/31/95 10506 10695 10673
6/30/96 11267 11804 11946
12/31/96 12653 12460 11875
6/30/97 14534 13731 12495
12/31/97 16629 15246 13411
6/30/98 17942 15997 14143
12/31/98 15797 14858 13576
6/30/99 14487 16237 15316
12/31/99 14156 18016 19426
6/30/00 15278 18563 19665
</TABLE>
13
<PAGE>
June 30, 2000
INVESTMENT REVIEW
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 gained 5.60% for the year ended June
30, 2000. By comparison, the Fund's blended benchmark and the S&P 500
returned 7.43% and 7.49% respectively. Since inception, the Fund has had an
average annual return of 14.44% versus 15.83% for its blended benchmark and
19.75% for the S&P 500.
Economic growth remained strong during the third calendar quarter of 1999.
During September 1999, manufacturing orders surged to levels last seen just
prior to the Asian crisis of 1997. The unemployment rate remained low and
ended the quarter at 4.2%. Worried about the potential for inflation, the
Federal Reserve chose to raise the Federal Funds rate by .25% to 5.25%.
The economy continued on its path of solid growth with low inflation during
the fourth calendar quarter of 1999. Personal consumption, which accounts
for two-thirds of economic activity, accelerated during the quarter, and
consumer confidence rose to a 31-year high. The jobless rate fell to a
30-year low of 4.1%. Inflation, as measured by the year-over-year change in
the core consumer price index, ended the year at a 33-year low of 1.9%.
Bonds significantly outperformed stocks and the current economic expansion
became the longest in U.S. history during the first quarter of 2000. The
stock market hit new highs in early January and then experienced extreme
volatility and a substantial sell-off that lasted until mid-May. The
Federal Reserve raised the Federal Funds rate twice during the quarter,
achieving a level of 6.0%. However, by quarter's end, there was little
evidence that higher rates had slowed the rate of economic expansion.
14
<PAGE>
The Preferred Group of Mutual Funds
INVESTMENT REVIEW
Bonds again outperformed stocks in the second quarter of 2000 as the
unemployment rate declined to a new 30-year low of 3.9%. The Federal
Reserve raised interest rates by .50% to 6.5%--a nine-year high. Although
the economy remained strong, there were emerging signs of moderation in the
pace of growth during May and June 2000.
The Fund made several adjustments throughout the fiscal year in response to
the relative valuations of the stock and bond markets. However, on a
risk-adjusted basis, we continue to favor a slightly larger allocation to
bonds.
- Mellon Capital Management
- PanAgora Asset Management
-----------------------------------------------------
Portfolio Allocation* (% of portfolio)
-----------------------------------------------------
6/30/00 12/31/99 6/30/99
-----------------------------------------------------
Stocks 31% 35% 44%
-----------------------------------------------------
Bonds 55% 56% 34%
-----------------------------------------------------
Short-Term 14% 9% 22%
(maturities less than one year)
-----------------------------------------------------
* Allocations do not consider the effect of futures contracts.
See Note 4 of the notes to the financial statements for
open futures contracts at June 30, 2000.
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.
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.
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.
CUMULATIVE TOTAL RETURN:
Past Past Past Since
6 Months 1 Year 5 Years Inception*
PREFERRED ASSET
ALLOCATION FUND 6.05% 5.60% 115.71% 194.33%
65/30/5 Benchmark 2.76% 7.43% 129.35% 223.95%
S&P 500 Index -0.28% 7.49% 191.36% 322.76%
* July 1, 1992
AVERAGE ANNUAL TOTAL RETURN:
Past Past Since
1 Year 5 Years Inception*
PREFERRED ASSET
ALLOCATION FUND 5.60% 16.62% 14.44%
65/30/5 Benchmark 7.43% 18.06% 15.83%
S&P 500 Index 7.49% 23.85% 19.75%
* July 1, 1992
A $10,000 INVESTMENT SINCE INCEPTION:
[Line chart]
<TABLE>
<CAPTION>
Preferred Asset Allocation Fund 65/30/5 Benchmark S&P 500 Index
<S> <C> <C> <C>
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
6/30/00 29433 32395 42276
</TABLE>
15
<PAGE>
June 30, 2000
INVESTMENT REVIEW
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: E. Luke Farrell
-------------------------------------------------------------------------------
TITLE: Vice President, Fixed Income Portfolio Manager,
J.P. Morgan Investment Management Inc.
-------------------------------------------------------------------------------
LAST FIVE YEARS' EXPERIENCE: Prior to joining Morgan's
portfolio management group, Luke traded fixed
income securities for the firm. He assumed primary
responsibility for management of the Preferred
Fixed Income Fund in February 2000.
-------------------------------------------------------------------------------
EDUCATION: B.S.-- University of Virginia
-------------------------------------------------------------------------------
NOTE: Paul Zemsky, CFA, managed the Preferred
Fixed Income Fund before February 2000.
-------------------------------------------------------------------------------
DISCUSSION & ANALYSIS:
The Preferred Fixed Income Fund returned 3.62% for the year ended June 30,
2000, compared to 4.50% for the Salomon Bros. Broad Investment Grade (BIG)
Index. Since inception, the Fund has returned 6.17% versus a 6.74% return
for the benchmark.
Tight labor markets, strong consumer spending and strength in the equity
markets prompted the Federal Reserve to tighten monetary policy twice in
the second half of 1999. Bond yields ended 1999 sharply higher as investors
anticipated tighter monetary policy after the Y2K turn.
And the Federal Reserve did continue to tighten monetary policy during the
first half of 2000. The subsequent U.S. Treasury announcement that it would
begin repurchasing outstanding long Treasury bonds precipitated an
inversion of the Treasury yield curve that would persist through the end of
June. Meanwhile, investment grade corporate debt reached the highest spread
level in 81 years outside of recession.
Our focus for most of the past year has been on liquidity and Treasury
securities. Early last year we were overweight treasuries, sold into the
fourth quarter, then repurchased Treasuries in the beginning of this year
up to a level approaching a 50% allocation. Duration of the portfolio was
short through the second half of 1999 but was moved to a long position
early in January, where it remained through the fiscal year. The corporate
sector was reduced significantly over the entire period.
We believe that global growth has reached its peak. Going forward, we
expect the U.S. economy to arrive at a "soft landing" slowdown, with GDP
growth below 4% in upcoming months and inflation pressures controlled.
While we believe Fed tightening is nearly complete, a final move of .25%
year's end is possible. With the exception of short rates being affected by
further Fed moves, we believe interest rates shouldn't change much from
current levels.
We plan to continue reducing our underweight in the corporate sector, but
remain cautious due to the sector's illiquidity, performance sensitivity to
new issue supply and increased event risk in a slowing economy. Emerging
market debt continues its volatility, and our approach will be to moderate
this instability with an opportunistic focus. As we approach a new quarter,
we have moved to a neutral position in our duration and yield curve.
- J.P. Morgan Investment Management Inc.
16
<PAGE>
The Preferred Group of Mutual Funds
INVESTMENT REVIEW
PORTFOLIO STATISTICS: (as of June 30, 2000)
Portfolio Holdings 115
--------------------------------------------------------
Average Maturity 17.6 years
--------------------------------------------------------
Average Duration 5.2 years
--------------------------------------------------------
Average Quality AAA
--------------------------------------------------------
Allocation (% of portfolio*):
--------------------------------------------------------
Treasury 13%
--------------------------------------------------------
Corporates 11%
--------------------------------------------------------
Mortgages/Asset-Backed 65%
--------------------------------------------------------
Foreign Corporates & Govt. 2%
--------------------------------------------------------
Short-Term 9%
(maturities less than one year)
--------------------------------------------------------
*Allocations do not consider the effect of futures contracts.
See Note 4 of the notes to the financial statements
for open futures contracts at June 30, 2000.
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).
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.
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.
CUMULATIVE TOTAL RETURN:
Past Past Past Since
6 Months 1 Year 5 Years Inception*
PREFERRED FIXED
INCOME FUND 2.64% 3.62% 29.21% 61.44%
Salomon Bros.
BIG Index 3.92% 4.50% 35.28% 68.46%
* July 1, 1992
AVERAGE ANNUAL TOTAL RETURN:
Past Past Since
1 Year 5 Years Inception*
PREFERRED FIXED
INCOME FUND 3.62% 5.26% 6.17%
Salomon Bros. 4.50% 6.23% 6.74%
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
6/30/00 16144 16846
17
<PAGE>
June 30, 2000
INVESTMENT REVIEW
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. C.T. assumed management of the
Preferred Short-Term Government Securities Fund
on November 1, 1999.
-------------------------------------------------------------------------------
EDUCATION: B.S.-- University of North Carolina;
M.B.A.--University of Minnesota; Chartered
Financial Analyst
-------------------------------------------------------------------------------
NOTE: Todd Sheridan, then Dave Bomberger, both of
Caterpillar Investment Management Ltd., managed
the Preferred Short-Term Government Securities Fund
prior to November 1999.
-------------------------------------------------------------------------------
DISCUSSION & ANALYSIS:
The Preferred Short-Term Government Securities Fund returned 4.46% for the
year ended June 30, 2000 compared to a return of 4.91% for the Merrill
Lynch 1-3 Year Treasury Index. Since inception, the Fund has achieved an
average annualized return of 4.64% versus 5.58% for the benchmark.
As interest rates increased, in part due to the increase in short-term
target rates by the Federal Reserve, the Fund's performance trailed the
benchmark. The Fund carried a longer duration than that of the benchmark
during this period. Late in 1999, management of the Fund became more
defensive with less emphasis on timing interest rate movements and more
emphasis on the income component of total return. Performance relative to
the benchmark improved but was hampered by the sharp widening in yield
spreads endured by the debt and related instruments of various
government-sponsored enterprises. The possibility of a bill in Congress
changing or restricting the way some agencies conducted business caused
two-year agency yield spreads to widen by as much as 35 basis points during
this period. While we gradually added new positions to the portfolio, yield
spreads remained slightly wider than our initial entry points.
During the past nine months, we also emphasized securities with current
amortizing structures in order to take advantage of what we felt would be
rising short-term rates. The yield on the two-year Treasury note rose from
6.20% at the end of 1999 to 6.90% in mid-May and finished the period at
6.36%. At fiscal year end, the portfolio had a duration of 1.61 versus 1.62
for the benchmark. The portfolio allocation was 66% agency debentures, 27%
agency mortgage-backed securities, 6% Treasury notes and 1% cash
equivalents.
We believe the 1.75% increase in the Fed Funds target rate and the
resulting effect on market rates has started to cool the growth rate of the
domestic economy. With the Fed's rate increase in May and a possible peak
to inflation in June, further rate hikes by the Fed may not be needed.
While we don't necessarily expect a sharp downward movement in rates, the
situation does lead us to believe that volatility should decrease and
spreads should start to narrow. Therefore, given current yield spread
levels, expect to continue to emphasize short-maturity government agency
debt and mortgage securities which we believe will improve the performance
of the Fund.
- Caterpillar Investment Management Ltd.
18
<PAGE>
The Preferred Group of Mutual Funds
INVESTMENT REVIEW
-------------------------------------------------------------------------------
PORTFOLIO STATISTICS: (as of June 30, 2000)
-------------------------------------------------------------------------------
Portfolio Holdings 40
-------------------------------------------------------------------------------
Average Maturity 1.9 years
-------------------------------------------------------------------------------
Average Duration 1.6 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.
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.
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.
CUMULATIVE TOTAL RETURN:
Past Past Past Since
6 Months 1 Year 5 Years Inception*
PREFERRED SHORT-TERM
GOVERNMENT
SECURITIES FUND 2.82% 4.46% 26.81% 43.76%
ML 1-3 Yr.
Treasury Index 2.99% 4.91% 32.32% 54.38%
* July 1, 1992
AVERAGE ANNUAL TOTAL RETURN:
Past Past Since
1 Year 5 Years Inception*
PREFERRED SHORT-TERM
GOVERNMENT
SECURITIES FUND 4.46% 4.87% 4.64%
ML 1-3 Yr.
Treasury Index 4.91% 5.76% 5.58%
* July 1, 1992
A $10,000 INVESTMENT SINCE INCEPTION:
[Line chart]
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
6/30/00 14376 15438
19
<PAGE>
June 30, 2000
INVESTMENT REVIEW
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: Mark Settles
-------------------------------------------------------------------------------
TITLE: Fixed Income Portfolio Manager,
J.P. Morgan Investment Management Inc.
-------------------------------------------------------------------------------
LAST FIVE YEARS' EXPERIENCE: Product Portfolio Manager
of Morgan's Short Term Fixed Income group. Mark
assumed responsibility for management of the
Preferred Money Market Fund on January 1, 2000.
-------------------------------------------------------------------------------
EDUCATION: B.A.-- Columbia University;
M.B.A.--Northwestern University
-------------------------------------------------------------------------------
NOTE: Robert (Skip) R. Johnson managed the
Preferred Money Market Fund before January 2000.
-------------------------------------------------------------------------------
DISCUSSION & ANALYSIS:
The Preferred Money Market Fund returned 5.45% for the year ended June 30,
2000, compared to a 5.22% return for IBC's Money Fund Report Average/All
Taxable. Since inception, the Fund's average annual return has been 4.63%
versus 4.48% for the benchmark.
The Federal Reserve raised the Fed Funds rate by .25% in August 1999 and
another .25% in November 1999. Non-Treasury, or "spread sector" spreads
widened as issuance increased in anticipation of Y2K. Meanwhile, investors
showed increased risk aversion stemming from Y2K and Fed policy-related
fears. We maintained a barbell strategy in the fourth quarter of 1999,
remaining liquid and capturing higher yields at the longer end of the
curve.
During the first quarter of 2000, the U.S. Treasury announced it would buy
back longer-dated securities, reduce issuance, and review the federal
guarantee of government-sponsored entities (GSEs). The U.S. Treasury curve
flattened dramatically under these influences. Spreads on non-Treasury
sectors came under pressure on the widening gap between Treasury and
corporate supply. Additional pressure on spreads came in the form of
aggressive borrowing spurred by productivity growth, putting upward
pressure on borrowing rates at the same time Treasury yields were falling.
Strong economic data continued into April and the Federal Reserve responded
with a .50% rate increase in May. Spreads rallied briefly after the .50%
rate hike, but retreated on a month of record investment-grade supply in
June. Short-dated asset-backed and CMBS securities were the outliers as
they performed well largely on low fixed rate supply. The U.S. Treasury
curve has disinverted in response and the two-year note is now trading
through the Fed Funds target of 6.5%. The environment for spread product
has also improved as market sentiment suggests the Fed is on hold for the
near term.
We believe the recent slowdown is not a temporary event and that the
tightening in credit conditions will continue to moderate economic
activity. Inflation appears contained and corporate earnings can be
expected to wane under these conditions. We will continue to look to add to
our asset-backed holdings and modestly extend the weighted average maturity
of the portfolio, as we believe economic data will continue to point to a
soft landing for the U.S. economy.
- J.P. Morgan Investment Management Inc.
20
<PAGE>
The Preferred Group of Mutual Funds
INVESTMENT REVIEW
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.
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.
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 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.
CUMULATIVE TOTAL RETURN:
PAST 7-DAY CURRENT PAST PAST SINCE
6 MONTHS YIELD++ 1 YEAR 5 YEARS INCEPTION*
PREFERRED MONEY
MARKET FUND 2.86% 6.23% 5.45% 29.09%+ 43.63%+
IBC's Money Fund
Report Avg./ 2.74% 5.96% 5.22% 27.82% 42.03%
All Taxable
* 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 June 30, 2000.
AVERAGE ANNUAL TOTAL RETURN:
Past Past Since
1 Year 5 Years Inception*
PREFERRED MONEY
MARKET FUND 5.45% 5.24%+ 4.63%+
IBC's Money Fund
Report Avg./
All Taxable 5.22% 5.03% 4.48%
* 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:
[Line chart]
<TABLE>
<CAPTION>
Preferred Money Market Fund IBC's Money Fund Report Avg/All Taxable
<S> <C> <C>
7/1/92 10000 10000
12/31/92 10140 10148
6/30/93 10271 10284
12/31/93 10406 10422
6/30/94 10569 10583
12/31/94 10814 10813
6/30/95 11126 11113
12/31/95 11438 11407
6/30/96 11719 11690
12/31/96 12018 11974
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
6/30/00 14363 14203
</TABLE>
21
<PAGE>
June 30, 2000
STATEMENTS OF ASSETS & LIABILITIES
<TABLE>
<CAPTION>
JUNE 30, 2000
<S> <C> <C> <C>
GROWTH VALUE INTERNATIONAL
ASSETS
Investments at value $830,651,442 $331,124,815 $327,720,244
Short-term obligations 10,610,000 7,972,420 7,726,000
Cash. 522 213
Foreign currency at value 587,464
Receivable for investments sold 1,305,292 1,351,830 1,868,139
Receivable for fund shares sold 7,613,856 874,967 6,471,219
Receivable for variation margin
Dividends and interest receivable 288,299 238,186 1,494,658
Foreign tax reclaim receivable 451,001
Prepaid expenses and other assets 4,005 86 3,036
-------------- -------------- -------------
Total assets 850,473,416 341,562,304 346,321,974
-------------- -------------- -------------
LIABILITIES
Payable for investments purchased 1,930,731
Payable for fund shares redeemed 3,001,377 874 26,084
Payable for distributions
Payable for:
Management fees 518,224 219,354 270,570
Audit fees 21,636 18,484 23,357
Custodian fees 17,206 7,367 50,842
Legal fees 12,098 6,053 5,321
Trustees' fees 9,752 2,721
Transfer agent fees 37,047 25,206 19,187
Other fees 9,661 10,200 6,640
-------------- -------------- -------------
Total liabilities 5,557,732 290,259 402,001
-------------- -------------- -------------
Net assets $844,915,684 $341,272,045 $345,919,973
============== ============== =============
Shares of beneficial interest outstanding 31,972,277 15,544,411 19,100,555
============== ============== =============
Offering and redemption price per share $26.43 $21.95 $18.11
============== ============== =============
COMPOSITION OF NET ASSETS:
Paid-in capital $455,049,940 $180,955,534 $230,852,370
Undistributed net investment income 1,029,659 6,329,013
Accumulated net realized gains (losses) on
investments, futures, forwards, and foreign currency 132,255,965 22,682,329 31,231,990
Net unrealized appreciation (depreciation) on:
Investments 257,609,779 136,604,523 77,503,725
Futures
Foreign denominated other assets,
liabilities & currency 2,875
-------------- -------------- -------------
Net assets $844,915,684 $341,272,045 $345,919,973
============== ============== =============
Investments and short-term obligations at cost $583,651,663 $202,492,712 $257,942,519
Foreign currency holdings at cost 584,243
See notes to financial statements
22
<PAGE>
The Preferred Group of Mutual Funds
STATEMENTS OF ASSETS & LIABILITIES
ASSET FIXED
SMALL CAP ALLOCATION INCOME
ASSETS
Investments at value $116,133,265 $184,730,508 $161,273,341
Short-term obligations 6,883,068 29,486,540 16,319,163
Cash. 8,355 1,003
Foreign currency at value
Receivable for investments sold 5,337,120 8,459
Receivable for fund shares sold 463,910 492,404 128,583
Receivable for variation margin 244,381 375
Dividends and interest receivable 22,537 2,117,335 1,722,451
Foreign tax reclaim receivable
Prepaid expenses and other assets 5,467 760 1,426
-------------- -------------- --------------
Total assets 128,845,367 217,088,742 179,446,342
-------------- -------------- --------------
LIABILITIES
Payable for investments purchased 10,323,133 165,656 11,752,837
Payable for fund shares redeemed 8,125 409
Payable for distributions 10,093 1,089
Payable for:
Management fees 91,504 124,060 68,212
Audit fees 17,430 22,668 19,095
Custodian fees 8,503 16,624 12,389
Legal fees 1,771 3,265 619
Trustees' fees 1,028
Transfer agent fees 6,401 17,613 11,754
Other fees 8,046 9,798 4,679
-------------- -------------- --------------
Total liabilities 10,456,788 377,902 11,872,111
-------------- -------------- --------------
Net assets $118,388,579 $216,710,840 $167,574,231
============== ============== ==============
Shares of beneficial interest outstanding 9,356,179 12,925,096 17,622,567
============== ============== ==============
Offering and redemption price per share $12.65 $16.77 $9.51
============== ============== ==============
COMPOSITION OF NET ASSETS:
Paid-in capital $113,513,221 $162,583,426 $179,299,486
Undistributed net investment income 46,933
Accumulated net realized gains (losses) on
investments, futures, forwards, and foreign currency (6,967,957) 23,768,245 (10,823,769)
Net unrealized appreciation (depreciation) on:
Investments 11,843,315 30,901,025 (834,863)
Futures (541,856) (113,535)
Foreign denominated other assets,
liabilities & currency (21)
-------------- -------------- --------------
Net assets $118,388,579 $216,710,840 $167,574,231
============== ============== ==============
Investments and short-term obligations at cost $111,173,018 $183,316,023 $178,427,367
Foreign currency holdings at cost
SHORT-TERM MONEY
GOVERNMENT MARKET
ASSETS
<S> <C> <C>
Investments at value $68,772,045
Short-term obligations 2,108,236 $147,304,321
Cash. 853
Foreign currency at value
Receivable for investments sold
Receivable for fund shares sold 48,370 824,489
Receivable for variation margin
Dividends and interest receivable 948,219 1,103,031
Foreign tax reclaim receivable
Prepaid expenses and other assets 1,627
-------------- --------------
Total assets 71,876,870 149,234,321
-------------- --------------
LIABILITIES
Payable for investments purchased
Payable for fund shares redeemed 95 5,195,084
Payable for distributions 103 410
Payable for:
Management fees 20,487 33,640
Audit fees 20,987 16,372
Custodian fees 6,593 8,199
Legal fees 945 2,065
Trustees' fees 154 185
Transfer agent fees 5,558 13,537
Other fees 1,513 56
-------------- --------------
Total liabilities 56,435 5,269,548
-------------- --------------
Net assets $71,820,435 $143,964,773
============== ==============
Shares of beneficial interest outstanding 7,549,218 143,964,773
============== ==============
Offering and redemption price per share $9.51 $1.00
============== ==============
COMPOSITION OF NET ASSETS:
Paid-in capital $74,528,797 $143,964,773
Undistributed net investment income 14,000
Accumulated net realized gains (losses) on
investments, futures, forwards, and foreign currency (2,443,395)
Net unrealized appreciation (depreciation) on:
Investments (278,967)
Futures
Foreign denominated other assets,
liabilities & currency
-------------- --------------
Net assets $71,820,435 $143,964,773
============== ==============
Investments and short-term obligations at cost $71,159,248 $147,304,321
Foreign currency holdings at cost
</TABLE>
23
<PAGE>
June 30, 2000
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JUNE 30, 2000 GROWTH VALUE INTERNATIONAL
INVESTMENT INCOME
<S> <C> <C> <C>
Dividends $ 3,232,026 $ 5,178,949 $11,797,631
Interest 834,862 501,716 1,032,052
-------------- -------------- --------------
4,066,888 5,680,665 12,829,683
Less foreign taxes withheld at source (48,654) (54,982) (932,290)
-------------- -------------- --------------
Total income 4,018,234 5,625,683 11,897,393
-------------- -------------- --------------
Expenses
Management fees 5,722,528 2,815,825 3,196,471
Audit fees 37,000 32,000 38,000
Custodian fees 161,000 88,000 597,000
Registration fees 7,000 13,000 15,000
Legal fees 81,000 37,000 35,000
Trustees' fees 27,000 17,000 12,000
Transfer agent fees 287,000 192,000 129,000
Insurance fees 14,000 9,000 6,000
Other expenses 47,000 30,000 23,000
-------------- -------------- --------------
Total expenses 6,383,528 3,233,825 4,051,471
-------------- -------------- --------------
Net investment income (loss) (2,365,294) 2,391,858 7,845,922
-------------- -------------- --------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS, FUTURES
AND FOREIGN CURRENCY
Net realized gain (loss) on:
Investments 169,909,461 26,645,750 35,268,014
Futures
Forward contracts
Foreign denominated other assets,
liabilities & currency (782,271)
Change in net unrealized appreciation
(depreciation) on:
Investments 29,437,309 (51,695,979) 4,084,273
Futures
Forward contracts
Foreign denominated other assets,
liabilities & currency 22,810
-------------- -------------- --------------
Net gain (loss) 199,346,770 (25,050,229) 38,592,826
-------------- -------------- --------------
Net increase (decrease) in net assets
resulting from operations $196,981,476 ($22,658,371) $46,438,748
============== ============== ==============
See notes to financial statements
24
<PAGE>
The Preferred Group of Mutual Funds
STATEMENTS OF OPERATIONS
FISCAL YEAR ENDED ASSET FIXED
JUNE 30, 2000 SMALL CAP ALLOCATION INCOME
INVESTMENT INCOME
Dividends $ 750,197 $ 1,045,412
Interest 15,524 8,439,051 $11,833,425
-------------- -------------- --------------
765,721 9,484,463 11,833,425
Less foreign taxes withheld at source (2,197) (4,783)
-------------- -------------- --------------
Total income 763,524 9,479,680 11,833,425
-------------- -------------- --------------
Expenses
Management fees 932,520 1,554,952 866,460
Audit fees 30,000 37,000 33,000
Custodian fees 106,000 196,000 139,000
Registration fees 12,000 9,000 12,000
Legal fees 23,000 22,000 15,000
Trustees' fees 3,000 8,000 7,000
Transfer agent fees 48,000 128,000 79,000
Insurance fees 2,000 5,000 4,000
Other expenses 17,000 22,000 16,000
-------------- -------------- --------------
Total expenses 1,173,520 1,981,952 1,171,460
-------------- -------------- --------------
Net investment income (loss) (409,996) 7,497,728 10,661,965
-------------- -------------- --------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS, FUTURES
AND FOREIGN CURRENCY
Net realized gain (loss) on:
Investments 8,459,666 29,045,640 (9,690,573)
Futures (3,587,434) 619,416
Forward contracts 104,235
Foreign denominated other assets,
liabilities & currency (687)
Change in net unrealized appreciation
(depreciation) on:
Investments (3,485,987) (22,586,883) 4,400,994
Futures 769,825 (51,139)
Forward contracts
Foreign denominated other assets,
liabilities & currency (21)
-------------- -------------- --------------
Net gain (loss) 4,973,679 3,641,148 (4,617,775)
-------------- -------------- --------------
Net increase (decrease) in net assets
resulting from operations $4,563,683 $11,138,876 $ 6,044,190
============== ============== ==============
<CAPTION>
FISCAL YEAR ENDED SHORT-TERM MONEY
JUNE 30, 2000 GOVERNMENT MARKET
<S> <C> <C>
INVESTMENT INCOME
Dividends
Interest $4,151,563 $9,006,977
-------------- --------------
4,151,563 9,006,977
Less foreign taxes withheld at source
-------------- --------------
Total income 4,151,563 9,006,977
-------------- --------------
Expenses
Management fees 241,455 475,924
Audit fees 35,000 28,000
Custodian fees 56,000 87,000
Registration fees 11,000 11,000
Legal fees 7,000 15,000
Trustees' fees 3,000 6,000
Transfer agent fees 33,000 98,000
Insurance fees 2,000 4,000
Other expenses 6,000 8,000
-------------- --------------
Total expenses 394,455 732,924
-------------- --------------
Net investment income (loss) 3,757,108 8,274,053
-------------- --------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS, FUTURES
AND FOREIGN CURRENCY
Net realized gain (loss) on:
Investments (1,558,091)
Futures
Forward contracts
Foreign denominated other assets,
liabilities & currency
Change in net unrealized appreciation
(depreciation) on:
Investments 846,898
Futures
Forward contracts
Foreign denominated other assets,
liabilities & currency
-------------- --------------
Net gain (loss) (711,193)
-------------- --------------
Net increase (decrease) in net assets
resulting from operations $3,045,915 $8,274,053
============== ==============
</TABLE>
25
<PAGE>
<TABLE>
June 30, 2000
The Preferred Group of Mutual Funds
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
GROWTH VALUE
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
6/30/00 6/30/99 6/30/00 6/30/99
INCREASE (DECREASE) IN NET ASSETS -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) $ (2,365,294) $ (803,669) $ 2,391,858 $ 2,802,226
Net realized gain (loss) on:
Investments 169,909,461 63,513,505 26,645,750 49,008,891
Futures
Forward contracts
Foreign denominated other assets,
liabilities & currency
Change in net unrealized appreciation
(depreciation) on:
Investments 29,437,309 88,790,969 (51,695,979) (26,632,458)
Futures
Forward contracts
Foreign denominated other assets,
liabilities & currency
-------------- -------------- ------------- -------------
Net increase (decrease)
in net assets resulting
from operations 196,981,476 151,500,805 (22,658,371) 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
In excess of net investment
income (loss)
-------------- -------------- ------------- -------------
(88,296,267) (111,232,130) (50,694,216) (19,868,633)
-------------- -------------- ------------- -------------
Fund share transactions:
Receipts for shares sold 249,086,582 635,081,746 55,593,253 123,051,076
Value of distributions reinvested 88,031,129 110,140,361 50,537,692 19,637,430
Cost of shares redeemed (267,289,935) (625,918,574) (118,739,789) (134,374,899)
-------------- -------------- ------------- -------------
Net increase (decrease) in
net assets from fund
share transactions 69,827,776 119,303,533 (12,608,844) 8,313,607
-------------- -------------- ------------- -------------
Total increase (decrease) 178,512,985 159,572,208 (85,961,431) 13,623,633
NET ASSETS
Beginning of period 666,402,699 506,830,491 427,233,476 413,609,843
-------------- -------------- ------------- -------------
End of period $844,915,684 $666,402,699 $341,272,045 $427,233,476
============== ============= ============= =============
Undistributed net investment
income at end of period $ 1,029,659 $ 1,212,801
============== ============= ============= =============
NUMBER OF FUND SHARES
Sold 9,938,690 30,109,700 2,378,110 4,868,725
Issued for distributions reinvested 3,566,863 5,636,660 2,324,629 802,182
Redeemed (10,656,147) (29,688,185) (5,097,890) (5,345,330)
-------------- -------------- ------------- -------------
Net increase (decrease)
in shares outstanding 2,849,406 6,058,175 (395,151) 325,577
Outstanding at:
Beginning of period 29,122,871 23,064,696 15,939,562 15,613,985
-------------- -------------- ------------- -------------
End of period 31,972,277 29,122,871 15,544,411 15,939,562
============== ============== ============= =============
See notes to financial statements
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
June 30, 2000
INTERNATIONAL SMALL CAP
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
6/30/00 6/30/99 6/30/00 6/30/99
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) $ 7,845,922 $ 3,974,453 $ (409,996) $ 167,300
Net realized gain (loss) on:
Investments 35,268,014 8,595,547 8,459,666 (15,467,932)
Futures
Forward contracts
Foreign denominated other assets,
liabilities & currency (782,271) (249,262)
Change in net unrealized appreciation
(depreciation) on:
Investments 4,084,273 11,545,590 (3,485,987) (10,349,571)
Futures
Forward contracts
Foreign denominated other assets,
liabilities & currency 22,810 (23,074)
------------ ------------ ------------ ------------
Net increase (decrease)
in net assets resulting
from operations 46,438,748 23,843,254 4,563,683 (25,650,203)
------------ ------------ ------------ ------------
Distributions to shareholders from:
Net investment income (4,455,000) (2,900,000) (101,444) (150,000)
Net realized gains (12,186,100) (8,299,909) (5,076,273)
In excess of realized gains
In excess of net investment
income (loss) (108,556)
------------ ------------ ------------ ------------
(16,641,100) (11,199,909) (210,000) (5,226,273)
------------ ------------- ------------- -------------
Fund share transactions:
Receipts for shares sold 704,693,961 509,126,412 101,399,648 106,831,536
Value of distributions reinvested 16,534,826 11,065,960 209,837 5,207,954
Cost of shares redeemed (717,490,742) (504,507,540) (95,193,046) (109,848,020)
------------ ------------- ------------- -------------
Net increase (decrease) in
net assets from fund
share transactions 3,738,045 15,684,832 6,416,439 2,191,470
------------ ------------ ------------ ------------
Total increase (decrease) 33,535,693 28,328,177 10,770,122 (28,685,006)
NET ASSETS
Beginning of period 312,384,280 284,056,103 107,618,457 136,303,463
------------ ------------ ------------ ------------
End of period $345,919,973 $312,384,280 $118,388,579 $107,618,457
Undistributed net investment ============ ============= ============ ============
income at end of period $ 6,329,013 $ 3,600,408 $ 101,444
============ ============= ============ ============
NUMBER OF FUND SHARES
Sold 40,342,186 33,624,656 8,293,248 8,651,249
Issued for distributions reinvested 917,582 747,700 18,635 417,639
Redeemed (40,944,753) (33,141,675) (7,884,732) (8,884,074)
------------ ------------ ------------ ------------
Net increase (decrease)
in shares outstanding 315,015 1,230,681 427,151 184,814
Outstanding at:
Beginning of period 18,785,540 17,554,859 8,929,028 8,744,214
------------ ------------ ------------ ------------
End of period 19,100,555 18,785,540 9,356,179 8,929,028
============ ============= ============ ============
ASSET ALLOCATION
YEAR YEAR
ENDED ENDED
6/30/00 6/30/99
------------ ------------
INCREASE (DECREASE) IN NET ASSETS
<S> <C> <C>
Operations:
Net investment income (loss) $ 7,497,728 $ 5,912,028
Net realized gain (loss) on:
Investments 29,045,640 1,525,975
Futures (3,587,434) 13,670,729
Forward contracts
Foreign denominated other assets,
liabilities & currency
Change in net unrealized appreciation
(depreciation) on:
Investments (22,586,883) 12,283,902
Futures 769,825 (1,921,576)
Forward contracts
Foreign denominated other assets,
liabilities & currency ------------ -----------
Net increase (decrease)
in net assets resulting
from operations 11,138,876 31,471,058
------------ -----------
Distributions to shareholders from:
Net investment income (7,497,728) (5,912,028)
Net realized gains (4,951,396) (12,057,120)
In excess of realized gains
In excess of net investment
income (loss) (2,161)
------------ ------------
(12,451,285) (17,969,148)
------------ ------------
Fund share transactions:
Receipts for shares sold 32,412,344 81,281,375
Value of distributions reinvested 12,389,676 17,848,793
Cost of shares redeemed (68,290,892) (42,953,523)
------------ ------------
Net increase (decrease) in
net assets from fund
share transactions (23,488,872) 56,176,645
------------ ------------
Total increase (decrease) (24,801,281) 69,678,555
NET ASSETS
Beginning of period 241,512,121 171,833,566
------------ ------------
End of period $216,710,840 $241,512,121
Undistributed net investment ============ ============
income at end of period
============ ============
NUMBER OF FUND SHARES
Sold 1,964,114 4,918,432
Issued for distributions reinvested 756,642 1,079,576
Redeemed (4,158,781) (2,615,327)
------------ ------------
Net increase (decrease)
in shares outstanding (1,438,025) 3,382,681
Outstanding at:
Beginning of period 14,363,121 10,980,440
------------ ------------
End of period 12,925,096 14,363,121
============ ============
</TABLE>
27
<PAGE>
<TABLE>
June 30, 2000
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
FIXED INCOME SHORT-TERM GOVERNMENT
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
6/30/00 6/30/99 6/30/00 6/30/99
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) $ 10,661,965 $ 9,569,764 $ 3,757,108 $ 3,102,004
Net realized gain (loss) on:
Investments (9,690,573) 277,794 (1,558,091) 46,059
Futures 619,416 139,601
Forward contracts 104,235 (571,343)
Foreign denominated other assets,
liabilities & currency (687) (8,556)
Change in net unrealized appreciation
(depreciation) on:
Investments 4,400,994 (7,864,321) 846,898 (1,105,009)
Futures (51,139) (271,852)
Forward contracts (144,573)
Foreign denominated other assets,
liabilities & currency (21) 2,402
------------ ------------ ----------- -----------
Net increase (decrease)
in net assets
resulting from
operations 6,044,190 1,128,916 3,045,915 2,043,054
------------ ------------ ----------- -----------
Distributions to shareholders from:
Net investment income (10,661,965) (9,548,818) (3,743,108) (3,102,004)
Net realized gains (1,463,746)
In excess of realized gains (1,540,433)
In excess of net investment ------------ ------------ ----------- -----------
income (loss) (10,661,965) (12,552,997) (3,743,108) (3,102,004)
------------ ------------ ----------- -----------
Fund share transactions:
Receipts for shares sold 34,897,091 60,839,246 15,067,186 11,307,017
Value of distributions
reinvested 10,637,001 12,474,288 3,741,524 3,099,781
Cost of shares redeemed (53,390,274) (33,045,539) (12,842,455) (7,032,756)
------------ ------------ ----------- -----------
Net increase (decrease)
in net assets from fund
share transactions (7,856,182) 40,267,995 5,966,255 7,374,042
------------ ------------ ----------- -----------
Total increase
(decrease) (12,473,957) 28,843,914 5,269,062 6,315,092
NET ASSETS
Beginning of period 180,048,188 151,204,274 66,551,373 60,236,281
------------ ------------ ----------- -----------
End of period $167,574,231 $180,048,188 $71,820,435 $66,551,373
============ ============ =========== ===========
Undistributed net investment
income at
end of period $ 46,933 $ 21,439 $ 14,000
============ ============ =========== ===========
NUMBER OF FUND SHARES
Sold 3,630,673 5,945,932 1,579,811 1,159,310
Issued for distributions
reinvested 1,112,354 1,224,847 392,938 318,373
Redeemed (5,564,885) (3,232,288) (1,346,739) (721,087)
------------ ------------ ----------- -----------
Net increase (decrease)
in shares outstanding (821,858) 3,938,491 626,010 756,596
Outstanding at:
Beginning of period 18,444,425 14,505,934 6,923,208 6,166,612
------------ ------------ ----------- -----------
End of period 17,622,567 18,444,425 7,549,218 6,923,208
============ ============ =========== ===========
See notes to financial statements
28
<PAGE>
The Preferred Group of Mutual Funds
STATEMENTS OF CHANGES IN NET ASSETS
MONEY MARKET
YEAR YEAR
ENDED ENDED
6/30/00 6/30/99
------------ ----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) $ 8,274,053 $ 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 8,274,053 6,882,649
------------ ----------------
Distributions to shareholders from:
Net investment income (8,274,053) (6,882,649)
Net realized gains
In excess of realized gains
------------ ----------------
In excess of net investment
income (loss) (8,274,053) (6,882,649)
------------ ----------------
Fund share transactions:
Receipts for shares sold 302,468,071 1,084,707,427
Value of distributions
reinvested 8,216,479 6,597,028
Cost of shares redeemed (361,527,886) (1,000,663,870)
------------ ----------------
Net increase (decrease)
in net assets from fund
share transactions (50,843,336) 90,640,585
------------ ----------------
Total increase
(decrease) (50,843,336) 90,640,585
NET ASSETS
Beginning of period 194,808,109 104,167,524
------------ ----------------
End of period $143,964,773 $ 194,808,109
============ ================
Undistributed net investment
income at
end of period
============ ================
NUMBER OF FUND SHARES
Sold 302,468,071 1,084,707,427
Issued for distributions
reinvested 8,216,479 6,597,028
Redeemed (361,527,886) (1,000,663,870)
------------ ----------------
Net increase (decrease)
in shares outstanding (50,843,336) 90,640,585
Outstanding at:
Beginning of period 194,808,109 104,167,524
------------ ----------------
End of period 143,964,773 194,808,109
============ ================
</TABLE>
29
<PAGE>
June 30, 2000
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(Selected data for a share
of beneficial interest
outstanding throughout the year)
INCOME (LOSS) FROM INVESTMENT OPERATIONS LESS DISTRIBUTIONS
---------------------------------------- -----------------------------------------------------------------
Net
NET ASSET Net Realized Total From Net
VALUE, Investment and from From Net Realized In Excess In Excess of
BEGINNING Income Unrealized Investment Investment Gains on of Realized Net Investment Total
OF YEAR (Loss) Gain (Loss) Operations Income Investments Gains Income (Loss) Distributions
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Growth
====================================================================================================================================
Year Ended June 30,
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)
2000 22.88 0.00 6.64 6.64 - (3.09) - - (3.09)
Value
====================================================================================================================================
Year Ended June 30,
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)
2000 26.80 0.16 (1.59) (1.43) (0.17) (3.25) - - (3.42)
International
====================================================================================================================================
Year Ended June 30,
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)
2000 16.63 0.37 1.98 2.35 (0.23) (0.64) - - (0.87)
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)
2000 12.05 0.02 0.61 0.63 (0.01) - - (0.02) (0.03)
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
30
<PAGE>
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 VALUE1 End of Year Expenses Waiver (Loss) Rate
<S> <C> <C> <C> <C> <C> <C>
Growth
=============================================================================================================================
Year Ended June 30,
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%
2000 26.43 30.00% 844,915,684 0.83% - (0.31%) 72.50%
Value
=============================================================================================================================
Year Ended June 30,
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%
2000 21.95 (5.19%) 341,272,045 0.86% - 0.64% 7.75%
International
=============================================================================================================================
Year Ended June 30,
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%
2000 18.11 14.15% 345,919,973 1.20% - 2.32% 28.96%
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%
2000 12.65 5.22% 118,388,579 1.11% - (0.39%) 236.49%
</TABLE>
31
<PAGE>
June 30, 2000
FINANCIAL HIGHLIGHTS
(Selected data for a share
of beneficial interest
outstanding throughout the year)
<TABLE>
<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 In Excess of
BEGINNING Income Unrealized Investment Investment Gains on of Realized Net Investment Total
OF YEAR (Loss) Gain (Loss) Operations Income Investments Gains Income (Loss) Distributions
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Asset Allocation
====================================================================================================================================
Year Ended June 30,
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)
2000 16.81 0.57 0.33 0.90 (0.57) (0.37) - -+ (0.94)
Fixed Income
====================================================================================================================================
Year Ended June 30,
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)
2000 9.76 0.59 (0.25) 0.34 (0.59) - - - (0.59)
Short-Term Government Securities
====================================================================================================================================
Year Ended June 30,
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)
2000 9.61 0.52 (0.10) 0.42 (0.52) - - - (0.52)
Money Market
====================================================================================================================================
Year Ended June 30,
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)
2000 1.00 0.05 - 0.05 (0.05) - - - (0.05)
1 Total return at net asset value assumes reinvestment of dividends and
capital gains distributions.
* Total return for the Money Market Fund would have been lower if a portion
of the fees had not been waived/reimbursed by the adviser.
+ Underlying value is less than $(0.01) per share.
See notes to financial statements
</TABLE>
30
<PAGE>
<TABLE>
<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 VALUE1 End of Year Expenses Waiver (Loss) Rate
Asset Allocation
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended June 30,
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%
2000 16.77 5.60% 216,710,840 0.89% - 3.37% 32.32%
Fixed Income
=================================================================================================================================
Year Ended June 30,
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%
2000 9.51 3.62% 167,574,231 0.68% - 6.20% 253.33%
Short-Term Government Securities
=================================================================================================================================
Year Ended June 30,
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%
2000 9.51 4.46% 71,820,435 0.57% - 5.46% 120.81%
Money Market
=================================================================================================================================
Year Ended June 30,
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
2000 1.00 5.45% 143,964,773 0.46% - 5.21% N/A
</TABLE>
33
<PAGE>
SCHEDULES OF INVESTMENTS June 30, 2000
PREFERRED GROWTH FUND
--------------------------------------------------------------------------
COMMON STOCK--98.31% SHARES VALUE
--------------------------------------------------------------------------
AUTOMOTIVE-- 1.22%
General Motors Corp * 117,900 $ 10,345,725
--------------
COMPUTER SOFTWARE-- 2.54%
Microsoft Corp * 185,900 14,872,000
Veritas Software Corp * 57,950 6,549,255
--------------
21,421,255
--------------
CONSUMER PRODUCTS-- .53%
Estee Lauder Companies Inc Class A 90,700 4,483,981
--------------
DISCOUNT & FASHION RETAILING-- 9.65%
Costco Wholesale Corp * 32,600 1,075,800
Gap Inc 246,050 7,689,063
Home Depot Inc 548,097 27,370,594
Kohls Corp * 316,700 17,616,438
Tiffany & Co 141,900 9,578,250
Wal Mart Stores 316,600 18,244,075
--------------
81,574,220
--------------
ELECTRICAL & ELECTRONICS-- 11.59%
ASM Lithography Holding NV * 135,900 5,996,588
Applied Micro Circuits Corp * 57,500 5,678,125
Broadcom Corp * 22,800 4,991,775
General Electric Co 396,600 21,019,800
Intel Corp 250,100 33,435,244
Motorola Inc 275,000 7,992,188
Texas Instruments Inc 273,400 18,779,163
--------------
97,892,883
--------------
FINANCE-OTHER-- 10.34%
American Express Co 324,300 16,904,138
Citigroup Inc 492,300 29,661,075
Merrill Lynch & Co 158,100 18,181,500
Morgan Stanley Dean Witter & Co 271,240 22,580,730
--------------
87,327,443
--------------
FUEL-- 1.05%
Schlumberger Ltd 119,000 8,880,375
--------------
HEALTH CARE-- 13.26%
American Home Products Corp 271,300 15,938,875
Amgen Inc * 188,900 13,270,225
Eli Lilly & Co 62,500 6,242,188
Genentech Inc * 57,500 9,890,000
Merck & Co Inc 177,400 13,593,275
Pfizer Inc 731,775 35,125,200
Pharmacia Corp 348,197 17,997,432
--------------
112,057,195
--------------
--------------------------------------------------------------------------
COMMON STOCK SHARES VALUE
--------------------------------------------------------------------------
INSURANCE-- 2.29%
American International Group Inc 164,750 $ 19,358,125
--------------
MANUFACTURING-- 2.85%
Applied Material Inc * 134,600 12,198,125
Corning Inc 44,200 11,928,475
--------------
24,126,600
--------------
OFFICE EQUIPMENT & COMPUTERS-- 14.86%
Cisco Systems Inc * 454,100 28,863,731
Compaq Computer Corp 335,400 8,573,663
Dell Computer Corp * 182,800 9,014,325
EMC Corp * 234,900 18,072,619
Hewlett Packard Co 231,600 28,921,050
JDS Uniphase Corp * 75,100 9,002,613
Juniper Networks Inc * 36,000 5,240,250
Metromedia Fiber Network Inc * 176,400 7,000,875
Sun Microsystems Inc * 119,400 10,857,938
--------------
125,547,064
--------------
PUBLISHING & BROADCASTING-- 5.75%
Clear Channel Communications * 189,000 14,175,000
Time Warner Inc 105,900 8,048,400
Viacom Inc * 386,477 26,352,900
--------------
48,576,300
--------------
SERVICE INDUSTRIES-- 2.74%
America Online Inc * 175,300 9,247,075
Omnicom Group Inc 94,000 8,371,875
VeriSign Inc * 31,200 5,506,800
--------------
23,125,750
--------------
TELECOMMUNICATIONS-- 19.64%
AT&T Corp Liberty Media Group Class A * 545,000 13,216,250
Allegiance Telecom Inc * 117,450 7,516,800
Ericsson LM Tel 565,500 11,310,000
Global Crossing Ltd * 374,500 9,854,031
Level 3 Communications Inc * 43,600 3,836,800
NTL Inc * 183,212 10,969,819
Nextel Communications Inc Class A * 93,000 5,690,438
Nextlink Communications Inc Class A * 127,000 4,818,063
Nokia Corp ADR 574,500 28,689,094
Nortel Networks Corp 139,900 9,548,175
Qwest Communications International Inc * 468,500 23,278,594
Univision Communications Inc Class A * 97,400 10,080,900
Vodafone AirTouch Plc ADR 654,614 27,125,562
--------------
165,934,526
--------------
TOTAL COMMON STOCK
(Cost $573,041,663) 830,651,442
==============
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--1.26% PAR VALUE
--------------------------------------------------------------------------
COMMERCIAL PAPER-- 1.26%
American Express Corp
6.88% July 3, 2000 @ $10,610,000 $ 10,610,000
--------------
TOTAL SHORT TERM INVESTMENTS
(Cost $10,610,000) 10,610,000
--------------
TOTAL INVESTMENTS-- 99.57%
(Cost $583,651,663) 841,261,442
--------------
OTHER ASSETS AND LIABILITIES-- .43% 3,654,242
--------------
TOTAL NET ASSETS-- 100% $844,915,684
==============
PREFERRED VALUE FUND
--------------------------------------------------------------------------
COMMON STOCK-- 97.02% SHARES VALUE
--------------------------------------------------------------------------
AEROSPACE-- 2.76%
Boeing Co 225,000$ 9,407,813
--------------
BANKS-- 8.03%
Chase Manhattan Corp 127,500 5,872,969
FleetBoston Financial Corp 200,000 6,800,000
Wells Fargo & Co 380,000 14,725,000
--------------
27,397,969
--------------
CHEMICALS-- 1.79%
Du Pont E I de Nemours & Co 140,000 6,125,000
--------------
COMPUTER SOFTWARE-- 2.62%
Computer Associates International Inc 175,000 8,957,813
--------------
CONSUMER PRODUCTS-- 3.26%
Avon Products Inc 250,000 11,125,000
--------------
DISCOUNT & FASHION RETAILING-- 1.76%
May Department Stores Co 250,000 6,000,000
--------------
ELECTRICAL & ELECTRONICS-- 9.19%
Emerson Electric Co 150,000 9,056,250
Intel Corp 130,000 17,379,375
Motorola Inc 170,000 4,940,625
--------------
31,376,250
--------------
--------------------------------------------------------------------------
COMMON STOCK SHARES VALUE
--------------------------------------------------------------------------
FINANCE-OTHER-- 20.48%
Citigroup Inc 350,000 $21,087,500
Countrywide Credit Industries Inc 275,000 8,335,938
Federal Home Loan Mortgage Corp 350,000 14,175,000
Morgan Stanley Dean Witter & Co 160,000 13,320,000
XL Capital Ltd Class A 240,000 12,990,000
--------------
69,908,438
--------------
FOOD-- 2.60%
Diageo Plc ADR 250,000 8,890,625
--------------
HEALTH CARE-- 6.11%
Becton Dickinson & Co 240,000 6,885,000
Pharmacia Corp 270,000 13,955,625
--------------
20,840,625
--------------
INSURANCE-- 7.19%
Ace Ltd 400,000 11,200,000
Aflac Inc 290,000 13,321,875
--------------
24,521,875
--------------
LEISURE TIME INDUSTRIES-- 3.07%
Carnival Corp 250,000 4,875,000
McDonalds Corp 170,000 5,599,375
--------------
10,474,375
--------------
MANUFACTURING--6.34%
Caterpillar Inc 150,000 5,081,250
Dover Corp 135,000 5,475,938
Minnesota Mining & Manufacturing Co 85,000 7,012,500
Textron Inc 75,000 4,073,438
--------------
21,643,126
--------------
OFFICE EQUIPMENT & COMPUTERS-- 1.50%
Compaq Computer Corp 200,000 5,112,500
--------------
PUBLISHING & BROADCASTING-- 6.15%
AMFM Inc * 125,000 8,625,000
News Corp Ltd ADR 260,000 12,350,000
--------------
20,975,000
--------------
SERVICE INDUSTRIES-- 5.31%
Arrow Electronics Inc * 325,000 10,075,000
Sabre Holdings Corp * 115,624 3,295,284
Waste Management Inc 250,000 4,750,000
--------------
18,120,284
--------------
TELECOMMUNICATIONS-- 5.08%
Sprint Corp 340,000 17,340,000
--------------
See notes to financial statements and notes to schedules of investments
35
<PAGE>
June 30, 2000
SCHEDULES OF INVESTMENTS
PREFERRED VALUE FUND (continued)
--------------------------------------------------------------------------
COMMON STOCK SHARES VALUE
--------------------------------------------------------------------------
TRANSPORTATION-- 3.78%
AMR Corp * 160,000 $ 4,230,000
Burlington Northern Santa Fe 150,000 3,440,622
Canadian Pacific Ltd 200,000 5,237,500
--------------
12,908,122
--------------
TOTAL COMMON STOCK
(Cost $194,520,292) 331,124,815
==============
--------------------------------------------------------------------------
SHORT TERM INVESTMENTS--2.34% PAR/SHARES VALUE
--------------------------------------------------------------------------
COMMERCIAL PAPER-- 1.32%
CIT Group Holdings Inc
6.30% July 5, 2000 @ $1,200,000 1,199,160
Household Finance Corp
6.65% July 6, 2000 @ 1,800,000 1,798,338
6.65% July 11, 2000 @ 1,500,000 1,497,229
--------------
4,494,727
--------------
SHORT TERM INVESTMENT FUND-- 1.02%
State Street Global Advisors
Money Market Fund 3,477,693 3,477,693
--------------
TOTAL SHORT TERM INVESTMENTS
(Cost $7,972,420) 7,972,420
--------------
TOTAL INVESTMENTS-- 99.36%
(Cost $202,492,712) 339,097,235
--------------
OTHER ASSETS AND LIABILITIES-- .64% 2,174,810
--------------
TOTAL NET ASSETS-- 100% $341,272,045
==============
PREFERRED INTERNATIONAL FUND
--------------------------------------------------------------------------
COMMON STOCK-- 94.74% SHARES VALUE
--------------------------------------------------------------------------
ARGENTINA-- .86%
TELECOMMUNICATIONS-- .86%
Telecom Argentina Stet France Class B ADR 108,000 $ 2,970,000
--------------
Total Argentina 2,970,000
--------------
--------------------------------------------------------------------------
AUSTRALIA-- 2.56%
BANKS-- 2.56%
National Australia Bank 530,000 8,842,731
--------------
Total Australia 8,842,731
--------------
--------------------------------------------------------------------------
CANADA-- 4.63%
BANKS-- 2.55%
Bank Nova Scotia Halifax 360,000 8,829,730
MERCHANDISING-- .25%
Canadian Tire Ltd 56,600 852,824
NON-FERROUS METALS-- 1.83%
Alcan Aluminum Ltd 203,600 6,328,108
--------------
Total Canada 16,010,662
--------------
--------------------------------------------------------------------------
CHINA-- .68%
FINANCIAL SERVICES-- .68%
Swire Pacific Class A 403,200 2,363,702
--------------
Total China 2,363,702
--------------
--------------------------------------------------------------------------
FINLAND-- 1.70%
FOREST PRODUCTS-- 1.70%
Stora Enso Oyj Series R 645,000 5,880,716
--------------
Total Finland 5,880,716
--------------
--------------------------------------------------------------------------
FRANCE-- 6.90%
AUTOMOBILES-- 1.84%
Peugeot SA 31,800 6,381,561
--------------
See notes to financial statements and notes to schedules of investments
36
<PAGE>
The Preferred Group of Mutual Funds
SCHEDULES OF INVESTMENTS
--------------------------------------------------------------------------
COMMON STOCK SHARES VALUE
--------------------------------------------------------------------------
CONSUMER GOODS-- 3.30%
Christian Dior 50,300 $11,405,090
--------------
ENERGY SOURCES--1.76%
Total Fina Elf 39,796 6,101,717
--------------
Total France 23,888,368
--------------
--------------------------------------------------------------------------
GERMANY--3.65%
CONSUMER GOODS-- 3.65%
Adidas-Salomon AG 114,000 6,305,949
Continental AG 375,300 6,306,064
--------------
12,612,013
--------------
Total Germany 12,612,013
--------------
--------------------------------------------------------------------------
ITALY-- 6.65%
APPAREL & TEXTILES-- 2.11%
Benetton Group SPA 3,495,500 7,308,370
--------------
BANKS-- 4.54%
Banca Popolare di Bergamo CV 310,000 5,735,649
Bipop-Carire 1,265,000 9,951,415
--------------
15,687,064
Total Italy 22,995,434
--------------
--------------------------------------------------------------------------
JAPAN-- 24.68%
DRUGS & HEALTHCARE-- 5.83%
Daiichi Pharmaceutical 500,000 12,676,123
Tanabe Seiyaku Co 980,900 7,497,384
--------------
20,173,507
ELECTRICAL EQUIPMENT-- 3.19%
Hitachi Ltd 764,800 11,028,171
--------------
INSURANCE-- 4.62%
Sumitomo Marine & Fire Insurance1, 300,100 7,560,075
Yasuda Marine & Fire Insurance1, 600,200 8,430,440
--------------
15,990,515
--------------
HOMEBUILDERS-- 1.92%
Daiwa House Industry Co 908,400 6,626,470
--------------
HOUSEHOLD APPLIANCES-- 3.14%
Matsushita Electric Industries 340,000 8,812,026
Sony Corp 22,100 2,062,014
--------------
10,874,040
--------------
--------------------------------------------------------------------------
COMMON STOCK SHARES VALUE
--------------------------------------------------------------------------
JAPAN (continued)
REAL ESTATE-- 5.98%
Mitsui Fudosan Co 901,300 $ 9,768,579
Oriental Land Co Ltd 107,000 10,921,352
--------------
20,689,931
--------------
Total Japan 85,382,634
--------------
--------------------------------------------------------------------------
NETHERLANDS-- 5.80%
CHEMICALS-- 1.72%
Akzo Nobel NV 140,000 5,947,784
--------------
FINANCIAL SERVICES-- 2.60%
ING Groep NV 133,300 9,010,119
--------------
TRANSPORTATION-- 1.48%
KLM Royal Dutch Air Lines 190,075 5,117,304
--------------
Total Netherlands 20,075,207
--------------
--------------------------------------------------------------------------
NEW ZEALAND-- .76%
FOREST PRODUCTS-- .30%
Carter Holt Harvey 1,200,000 1,041,402
--------------
HOUSEHOLD APPLIANCES-- .46%
Fisher & Paykel 500,000 1,571,485
--------------
Total New Zealand 2,612,887
--------------
--------------------------------------------------------------------------
SINGAPORE-- 1.68%
BANKS-- 1.68%
United Overseas Bank 886,200 5,798,529
--------------
Total Singapore 5,798,529
--------------
--------------------------------------------------------------------------
SOUTH KOREA-- 2.83%
ELECTRIC UTILITIES-- 2.22%
Korea Electric Power 247,100 7,667,684
--------------
STEEL-- .61%
Pohang Iron & Steel 24,480 2,118,449
--------------
Total South Korea 9,786,133
--------------
See notes to financial statements and notes to schedules of investments
37
<PAGE>
June 30, 2000
SCHEDULES OF INVESTMENTS
PREFERRED INTERNATIONAL FUND (continued)
--------------------------------------------------------------------------
COMMON STOCK SHARES VALUE
--------------------------------------------------------------------------
SPAIN-- 4.04%
BANKS-- 2.36%
Banco Bilbao Vizcaya 380,300 $ 5,682,086
Banco de Andalucia 92,000 2,477,753
--------------
8,159,839
--------------
UTILITIES-- 1.68%
Iberdrola SA 452,000 5,825,582
--------------
Total Spain 13,985,421
--------------
--------------------------------------------------------------------------
SWEDEN-- 6.09%
DRUGS & HEALTH CARE-- 1.86%
Pharmacia Corp SDR 127,092 6,419,443
--------------
HOUSEHOLD APPLIANCES-- 1.83%
Electrolux AB Series B 410,000 6,345,238
--------------
INDUSTRIAL MACHINERY-- 2.40%
SKF AB Series B 235,400 3,936,678
Svedala Industrial 230,000 4,380,952
--------------
8,317,630
--------------
Total Sweden 21,082,311
--------------
--------------------------------------------------------------------------
SWITZERLAND-- 8.99%
BANKS-- 1.73%
UBS AG 40,922 5,995,438
--------------
CONSUMER GOODS--1.99%
Swatch Group 5,400 6,865,445
--------------
DRUGS & HEALTH CARE-- 1.60%
Novartis AG 3,500 5,544,045
--------------
INDUSTRIAL MACHINERY-- 1.98%
Sulzer AG 10,300 6,850,671
--------------
MERCHANDISING-- 1.69%
Valora Holding AG 21,000 5,831,545
--------------
Total Switzerland 31,087,144
--------------
--------------------------------------------------------------------------
COMMON STOCK SHARES VALUE
--------------------------------------------------------------------------
UNITED KINGDOM--12.24%
BANKS-- 2.15%
Royal Bank of Scotland Group 445,000 $ 7,447,023
--------------
FINANCIAL SERVICES--3.91%
Hanson Plc 958,500 6,744,594
Royal & Sun Alliance 1,055,600 6,791,613
--------------
13,536,207
--------------
MERCHANDISING-- 1.80%
Tesco 2,000,000 6,218,840
--------------
STEEL-- 2.19%
Corus Group Plc 1,900,000 2,774,268
Rio Tinto 293,300 4,792,955
--------------
7,567,223
--------------
TRANSPORTATION-- 2.19%
British Airways 1,317,800 7,577,059
--------------
Total United Kingdom 42,346,352
--------------
TOTAL COMMON STOCK
(Cost $250,216,519) 327,720,244
--------------
--------------------------------------------------------------------------
SHORT TERM INVESTMENTS-- 2.23% PAR VALUE
--------------------------------------------------------------------------
REPURCHASE AGREEMENTS-- 2.23%
State Street Repo 5.25% July 3, 2000
(Dated June 30, 2000, due July 3, 2000,
collateralized by $8,025,000
U.S. Treasury Note 5.50%, May 31, 2003,
Market Value $7,884,563
Repurchase Proceeds $7,729,380) $7,726,000 7,726,000
--------------
TOTAL SHORT TERM INVESTMENTS
(Cost $7,726,000) 7,726,000
--------------
TOTAL INVESTMENTS-- 96.97%
(Cost $257,942,519) 335,446,244
--------------
OTHER ASSETS & LIABILITIES-- 3.03% 10,473,729
--------------
TOTAL NET ASSETS-- 100% $345,919,973
==============
See notes to financial statements and notes to schedules of investments
38
<PAGE>
The Preferred Group of Mutual Funds
SCHEDULES OF INVESTMENTS
PREFERRED SMALL CAP FUND
--------------------------------------------------------------------------
COMMON STOCK--98.09% SHARES VALUE
--------------------------------------------------------------------------
AUTOMOTIVE-- .46%
Avis Group Holdings Inc * 29,060 $ 544,875
--------------
BANKS-- .52%
Silicon Valley Bancshares * 14,330 610,816
--------------
CHEMICALS-- 1.98%
Dexter Corp 11,940 573,120
Millennium Chemicals Inc 43,690 742,730
OM Group Inc 11,990 527,560
Olin Corp 30,540 503,910
--------------
2,347,320
--------------
COMPUTER SOFTWARE-- 11.34%
Allaire Corp * 15,700 576,975
Centillium Communications Inc * 6,790 468,510
Click Commerce Inc * 31,740 718,118
Digex Inc * 10,550 716,741
Henry (Jack) & Associates 23,660 1,185,958
Informatica Corp * 8,520 698,108
ISS Group Inc * 13,400 1,323,041
Keynote Systems Inc * 10,870 767,014
Matrixone Inc * 16,150 656,094
National Instruments Corp * 10,620 463,298
Netegrity Inc * 13,980 1,052,869
Netiq Corp * 19,630 1,170,439
Niku Corp * 22,250 750,938
Nuance Communications * 6,140 511,539
Proxicom Inc * 25,750 1,232,781
Viant Corp * 18,360 543,915
Webtrends Corp * 15,350 593,853
--------------
13,430,191
--------------
CONSUMER PRODUCTS-- 1.15%
Beringer Wine Estates Holdings * 11,320 399,738
Michaels Stores Inc * 20,880 956,565
--------------
1,356,303
--------------
DISCOUNT & FASHION RETAILING-- 1.59%
Mens Warehouse Inc * 25,840 576,555
Too Inc * 17,740 451,261
Zale Corp * 23,310 850,815
--------------
1,878,631
--------------
ELECTRICAL & ELECTRONICS-- 15.25%
Actel Corp * 15,200 693,500
American Superconductor Corp * 18,950 914,338
Applied Power Inc * 18,560 621,760
Benchmark Electronics Inc * 13,030 476,409
Cree Inc * 5,110 682,185
DSP Group Inc * 28,870 1,616,720
--------------------------------------------------------------------------
COMMON STOCK SHARES VALUE
--------------------------------------------------------------------------
ELECTRICAL & ELECTRONICS (continued)
Electro Scientific Industries Inc * 13,640 $ 600,586
Emcore Corp * 6,020 722,400
Exar Corp * 9,690 844,847
Globespan Semiconductor Inc * 7,710 941,222
Integrated Silicon Solution * 24,890 945,820
Kent Electronics Corp * 15,380 458,516
Lattice Semiconductor Corp * 11,360 785,260
MIPS Technologies Inc * 14,300 607,750
MKS Instruments Inc * 16,310 638,129
Manufacturers Services Ltd * 26,640 547,785
Marvell Technology Group Ltd * 5,490 312,930
Photon Dynamics Inc * 8,090 583,484
Plexus Corp * 8,960 1,012,480
Silicon Image Inc * 10,960 627,948
Transwitch Corp * 14,890 1,149,322
Tweeter Home Entertainment Group Inc * 28,100 853,538
Varian Semiconductor Equipment Inc * 11,680 733,650
Virata Corp * 11,510 686,284
--------------
18,056,863
--------------
FINANCE-OTHER-- 3.55%
Affiliated Managers Group Inc * 9,630 438,165
AmeriCredit Corp * 29,230 496,910
Bisys Group Inc * 19,510 1,199,865
Black Rock Inc * 15,890 460,810
Legg Mason Inc 12,190 609,500
Metris Cos Inc 39,750 998,719
--------------
4,203,969
--------------
FOOD-- 1.50%
Hain Celestial Group Inc * 17,820 653,771
Jack in the Box Inc * 23,170 570,561
Whole Foods Market Inc * 13,430 554,827
--------------
1,779,159
--------------
FUEL-- 2.57%
Global Industries Inc * 45,470 858,246
Grey Wolf Inc * 125,880 629,400
Key Energy Services Inc * 56,370 542,561
Ocean Energy Inc * 30,970 439,387
Precision Drilling Corp * 14,720 568,560
--------------
3,038,154
--------------
HEALTH CARE-- 16.48%
Aclara BioSciences Inc * 11,690 595,459
Alkermes Inc * 20,110 947,684
Biovail Corp * 15,770 874,249
Caremark RX Inc * 33,240 232,959
Celgene Corp * 18,480 1,088,010
Conmed Corp * 19,690 509,479
Dendrite International Inc * 33,260 1,107,974
See notes to financial statements and notes to schedules of investments
39
<PAGE>
June 30, 2000
SCHEDULES OF INVESTMENTS
PREFERRED SMALL CAP FUND (continued)
--------------------------------------------------------------------------
COMMON STOCK SHARES VALUE
--------------------------------------------------------------------------
HEALTH CARE (continued)
Diversa Corp * 10,000 $ 331,250
Express Scripts Inc * 16,600 1,031,275
First Health Group Corp * 22,280 731,063
Idexx Labs Inc * 23,020 526,583
Inhale Therapeutic Systems * 8,590 871,617
Jones Pharma Inc 25,465 1,017,008
King Pharmaceuticals Inc * 13,095 574,543
Laboratory Corp American Holdings * 7,410 584,731
Maxygen Inc * 5,200 295,181
Medicis Pharmaceutical Corp * 24,590 1,401,630
Minimed Inc * 5,060 597,080
Novoste Corp * 18,490 1,127,890
Patterson Dental Co * 18,740 955,740
QLT Inc * 13,070 1,010,474
Quest Diagnostics Inc * 15,470 1,156,383
Shire Pharmaceuticals Group * 10,470 543,131
Techne Corp * 10,770 1,400,100
--------------
19,511,493
--------------
INSURANCE-- .68%
Radian Group Inc 15,630 808,853
--------------
LEISURE TIME INDUSTRIES-- .68%
Station Casinos Inc * 32,000 800,000
--------------
MANUFACTURING-- 3.43%
Advanced Energy Industries Inc * 8,050 474,447
Asyst Technologies Inc * 21,150 724,388
Grant Pride Inc * 24,730 618,250
MSC Industrial Direct Co * 28,580 598,394
Mettler Toledo International Inc * 23,610 944,400
Varian Inc * 15,170 699,716
--------------
4,059,595
--------------
OFFICE EQUIPMENT & COMPUTERS-- 7.98%
Active Software Inc * 11,680 907,390
Apex Inc * 25,490 1,115,188
Boise Cascade Corp 18,800 486,450
C-COR.net Corporation * 22,620 610,740
Insight Enterprises Inc * 24,370 1,445,446
Integrated Circuit Systems Inc * 40,480 693,220
MMC Networks Inc * 12,390 662,091
M-Systems Flash Disk Pioneers * 9,940 774,078
Newport Corp * 11,020 1,183,273
PRI Automation Inc * 15,890 1,039,057
Polycom Inc * 5,600 526,925
--------------
9,443,858
--------------
--------------------------------------------------------------------------
COMMON STOCK SHARES VALUE
--------------------------------------------------------------------------
PUBLISHING & BROADCASTING-- 2.42%
Emmis Communications Corp * 16,850 $ 697,169
Entercom Communications Corp * 19,440 947,700
Lifeminders Inc * 18,090 534,786
Radio One Inc * 28,610 690,308
--------------
2,869,963
--------------
SERVICE INDUSTRIES-- 9.27%
AC Nielson Corp * 34,280 754,160
Breakaway Solutions Inc * 30,690 828,630
Core Laboratories NV * 20,590 597,110
Diamond Technology Partner Inc * 15,090 1,327,920
Dycom Industries Inc * 22,810 1,049,260
Getty Images Inc * 34,680 1,285,328
Hall Kinion & Associates Inc * 11,030 367,437
Looksmart Ltd * 33,260 615,310
Modem Media Poppe Tyson Inc * 39,110 486,431
Predictive Systems Inc * 13,370 480,484
Rare Medium Group Inc * 27,120 428,835
Stolt Offshore SA * 35,470 501,014
True North Communications * 27,500 1,210,000
Veritical Net Inc * 28,140 1,039,421
--------------
10,971,340
--------------
TELECOMMUNICATIONS-- 16.29%
Advanced Fibre Communications * 25,680 1,163,625
Allied Riser Communications Corp * 41,300 583,363
Anaren Microwave Inc * 4,300 564,308
Aspect Communications Inc * 26,480 1,040,995
Audio Codes Ltd * 12,150 1,458,000
Celeritek Inc * 21,830 890,937
Clarent Corp * 12,230 874,445
Digital Microwave Corp * 30,380 1,158,238
Ditech Communications Corp * 9,800 926,713
I3 Mobile Inc * 30,250 555,844
ITC Deltacom Inc * 26,380 588,604
Intermedia Communications Inc * 15,380 457,555
Leap Wireless International lnc * 9,310 437,570
MGC Communications Inc * 16,590 994,363
MRV Communications Inc * 17,660 1,187,635
Mastec Inc * 15,270 583,123
McLeodUSA Inc * 11,660 241,216
Natural Microsystems Corp * 13,800 1,551,638
Pinnacle Holdings Inc * 18,030 973,620
Price Communications Corp * 35,900 845,894
Primus Telecommunications Group Inc * 30,220 751,723
SBA Communications Corp * 13,250 688,172
Tekelec Inc * 16,060 773,891
--------------
19,291,472
--------------
See notes to financial statements and notes to schedules of investments
40
<PAGE>
The Preferred Group of Mutual Funds
SCHEDULES OF INVESTMENTS
--------------------------------------------------------------------------
COMMON STOCK SHARES VALUE
--------------------------------------------------------------------------
TRANSPORTATION-- .95%
Atlas Air Inc * 18,970 $ 680,544
EGL Inc * 14,630 449,866
--------------
1,130,410
--------------
TOTAL COMMON STOCK
(Cost $104,289,950) 116,133,265
--------------
--------------------------------------------------------------------------
SHORT TERM INVESTMENTS-- 5.81% SHARES VALUE
--------------------------------------------------------------------------
SHORT TERM INVESTMENT FUND--5.81%
State Street Global Advisors
Money Market Fund 6,883,068 6,883,068
--------------
TOTAL SHORT TERM INVESTMENTS
(Cost $6,883,068) 6,883,068
--------------
TOTAL INVESTMENTS-- 103.90%
(Cost $111,173,018) 123,016,333
--------------
OTHER ASSETS AND LIABILITIES-- -3.90% (4,627,754)
--------------
Total Net Assets-- 100% $118,388,579
-=============
PREFERRED ASSET ALLOCATION FUND
--------------------------------------------------------------------------
COMMON STOCK-- 30.76% SHARES VALUE
--------------------------------------------------------------------------
AEROSPACE-- .25%
BF Goodrich Co 300 $ 10,219
Boeing Co 4,962 207,474
General Dynamics Corp 1,200 62,700
Lockheed Martin Corp 2,238 55,530
Northrop Grumman Corp 200 13,250
Raytheon Co 1,900 36,575
United Technologies Corp 2,560 150,720
--------------
536,468
--------------------------------------------------------------------------
COMMON STOCK SHARES VALUE
--------------------------------------------------------------------------
AUTOMOTIVE-- .29%
Cooper Tire & Rubber Co 200 $ 2,225
Cummins Engine Inc 100 2,725
Dana Corp 1,018 21,569
Delphi Automotive Systems Corp 3,407 49,614
Eaton Corp 470 31,490
Ford Motor Co 6,300 270,900
General Motors Corp 3,180 184,659
Goodyear Tire and Rubber 920 18,400
Navistar International Corp Inc * 210 6,523
Paccar Inc 540 21,431
Visteon Corp * 725 8,789
--------------
618,325
--------------
BANKS-- 1.28%
Amsouth Bancorporation 1,750 27,563
BB&T Corp 1,000 23,875
Bank America Corp 8,942 384,506
Bank New York Inc 4,200 195,300
Bank One Corp 6,288 167,025
Charter One Financial Inc 600 13,800
Chase Manhattan Corp 6,713 309,218
Comerica Inc 950 42,631
Fifth Third Bancorp 1,600 101,200
First Union Corp 5,348 132,697
Firstar Corp Wisconsin 5,681 119,656
FleetBoston Financial Corp 5,003 170,102
JP Morgan & Co Inc 920 101,315
Keycorp 2,600 45,825
MBNA Corp 2,402 65,154
National City Corp 3,200 54,600
Old Kent Financial Corp 420 11,235
PNC Financial Services Group Inc 1,730 81,094
Regions Financial Corp 600 11,925
Southtrust Corp 800 18,100
State Street Corporation 1,000 106,063
Summit Bancorp 500 12,313
Suntrust Banks Inc 1,700 77,669
U.S. Bancorp 3,684 70,917
Union Planters Corp 1,000 27,938
Wachovia Corp 1,130 61,303
Wells Fargo & Co 8,890 344,488
--------------
2,777,512
--------------
CHEMICALS-- .28%
Air Products & Chemicals Inc 1,360 41,905
Dow Chemical Co 3,440 103,845
Du Pont E I de Nemours & Co 5,514 241,238
Eastman Chemical Co 475 22,681
Engelhard Corp 967 16,499
See notes to financial statements and notes to schedules of investments
41
<PAGE>
June 30, 2000
SCHEDULES OF INVESTMENTS
PREFERRED ASSET ALLOCATION FUND (continued)
--------------------------------------------------------------------------
COMMON STOCK SHARES VALUE
--------------------------------------------------------------------------
CHEMICALS (continued)
Freeport McMoRan Copper & Gold Class B * 1,200 $ 11,100
Great Lakes Chemical Corp 370 11,655
Hercules Inc 720 10,125
International Flavors & Fragrances 540 16,301
Praxair Inc 930 34,817
Rohm & Haas Co 1,216 41,952
Union Carbide Corp 820 40,590
WR Grace & Co * 490 5,941
--------------
598,649
--------------
COMPUTER SOFTWARE-- 2.28%
Adobe Systems Inc 800 104,000
Autodesk Inc 200 6,938
Automatic Data Processing Inc 3,660 196,039
BMC Software Inc * 1,300 47,430
Citrix Systems Inc * 1,100 20,831
Computer Associates International Inc 3,268 167,281
Computer Sciences Corp * 900 67,219
Compuware Corp * 2,300 23,863
Comverse Technology Inc * 1,000 93,000
Electronic Data Systems Corp 2,600 107,250
First Data Corp 2,500 124,063
Mercury Interactive Corp * 250 24,188
Microsoft Corp * 27,900 2,232,000
Novell Inc * 2,000 18,500
Oracle Corp * 15,304 1,286,492
Parametric Technology Corp * 1,800 19,800
Peoplesoft Inc * 1,550 25,963
Siebel Systems Inc * 1,000 163,563
Veritas Software Corp * 1,850 209,079
--------------
4,937,499
--------------
CONGLOMERATES-- .14%
Harcourt General Inc 200 10,875
Honeywell International Inc 4,316 145,395
Household International Inc 1,413 58,728
Pall Corp 333 6,161
Perkinelmer Inc 100 6,613
Pinnacle West Capital Corp 200 6,775
Rockwell International Corp 1,100 34,650
TRW Inc 700 30,363
--------------
299,560
--------------
CONSUMER PRODUCTS-- 1.53%
Alberto Culver Co Class B 200 6,113
Anheuser Busch Cos Inc 2,480 185,225
Avon Products Inc 1,400 62,300
Bed Bath & Beyond Inc * 900 32,625
--------------------------------------------------------------------------
COMMON STOCK SHARES VALUE
--------------------------------------------------------------------------
CONSUMER PRODUCTS (continued)
Best Buy Co Inc * 1,100 $ 69,575
Brown Forman Corp Class B 200 10,750
Circuit City Stores Inc 600 19,913
Clorox Co 1,320 59,153
Coca Cola Co 13,080 751,283
Coca Cola Enterprises Inc 2,000 32,625
Colgate Palmolive Co 3,140 188,008
Coors Adolph Co Class B 100 6,050
Ecolab Inc 400 15,625
Fortune Brands Inc 1,060 24,446
Gillette Co 5,740 200,541
Harley Davidson Inc 900 34,650
Liz Claiborne Inc 480 16,920
Masco Corp 2,640 47,685
Maytag Corp 200 7,375
Newell Rubbermaid Inc 1,505 38,754
Nike Inc Class B 1,580 62,904
Pepsico Inc 7,580 336,836
Philip Morris Cos Inc 12,460 330,969
Proctor & Gamble Co 7,000 400,750
Radioshack Corp 500 23,688
Reebok International Ltd * 520 8,288
Russell Corp 100 2,000
Seagram Ltd 2,370 137,460
Starbucks Corp * 500 19,094
Tupperware Corp 200 4,400
UST Inc 1,060 15,569
Unilever NV 2,960 127,280
V F Corp 660 15,716
Whirlpool Corp 530 24,711
--------------
3,319,281
--------------
CONTAINERS & PACKING-- .03%
Ball Corp 100 3,219
Bemis Inc 200 6,725
Crown Cork & Seal Inc 870 13,050
Pactiv Corp * 1,190 9,371
Sealed Air Corp * 415 21,736
Temple Inland Inc 400 16,800
--------------
70,901
--------------
DISCOUNT & FASHION RETAILING-- 1.34%
Autozone Inc * 900 19,800
Consolidated Stores Corp * 800 9,600
Costco Wholesale Corp * 2,530 83,490
Dillards Inc Class A 710 8,698
Dollar General Corp 1,702 33,189
Federated Department Stores Inc * 1,200 40,500
Gap Inc 4,634 144,813
Home Depot Inc 12,434 620,923
JC Penney Inc 1,500 27,656
See notes to financial statements and notes to schedules of investments
42
<PAGE>
The Preferred Group of Mutual Funds
SCHEDULES OF INVESTMENTS
--------------------------------------------------------------------------
COMMON STOCK SHARES VALUE
--------------------------------------------------------------------------
DISCOUNT & FASHION RETAILING (continued)
K Mart Corp * 2,930 $ 19,961
Kohls Corp * 1,800 100,125
Limited Inc 2,856 61,761
Lowe's Cos Inc 1,100 45,169
May Department Stores Co 1,815 43,560
Nordstrom Inc 920 22,195
Sears Roebuck & Co 2,000 65,250
TJX Cos Inc 900 16,875
Target Corp 2,480 143,840
Tiffany & Co 200 13,500
Toys R Us Inc * 1,770 25,776
Wal Mart Stores Inc 23,720 1,366,865
--------------
2,913,546
--------------
ELECTRICAL & ELECTRONICS-- 3.76%
Advanced Micro Devices Inc * 700 54,075
Agilent Technologies Inc * 3,143 231,796
Altera Corp * 800 81,550
Ameren Corp 550 18,563
Analog Devices Inc * 1,550 117,800
Broadcom Corp * 620 135,741
Conexant Systems Inc * 1,000 48,625
Consolidated Edison Inc 1,010 29,921
Cooper Industries Inc 582 18,951
Emerson Electric Co 2,380 143,693
General Electric Co 52,620 2,788,860
Intel Corp 18,040 2,411,723
Johnson Controls Inc 300 15,394
KLA Tencor Corp * 1,100 64,419
LSI Logic Corp * 1,900 102,838
Linear Technology Corp 1,000 63,938
Maxim Integrated Products Inc * 1,000 67,938
Micron Technology Inc * 3,200 281,800
Millipore Corp 100 7,538
Molex Inc 1,250 60,156
Motorola Inc 11,851 344,420
National Semiconductor Corp * 500 28,375
National Service Industries Inc 100 1,950
Sanmina Corp * 400 34,200
Solectron Corp * 2,500 104,688
Tektronix Inc 150 11,100
Teradyne Inc * 1,100 80,850
Texas Instruments Inc 8,960 615,440
Thermo Electron Corp * 1,100 23,169
Thomas & Betts Corp 200 3,825
Xilinx Inc * 1,900 156,869
--------------
8,150,205
--------------
--------------------------------------------------------------------------
COMMON STOCK SHARES VALUE
--------------------------------------------------------------------------
FINANCE-OTHER-- 1.83%
American Express Co 7,350 $ 383,119
American General Corp 1,438 87,718
Associates First Capital Corp 4,068 90,767
Bear Stearns Cos Inc 591 24,600
Capital One Financial Corp 1,200 53,550
Cincinnati Financial Corp 500 15,719
Citigroup Inc 18,300 1,102,575
Conseco Inc 1,898 18,506
Countrywide Credit Industry Inc 700 21,219
Dun & Bradstreet Corp 1,130 32,346
Equifax Inc 1,000 26,250
Federal Home Loan Mortgage Corp 3,780 153,090
Federal National Mortgage Association 5,500 287,031
Golden West Financial Corp 1,280 52,240
H&R Block Inc 660 21,368
Huntington Bancshares Inc 619 9,788
Jefferson Pilot Corp 640 36,120
Lehman Brothers Holding Corp 800 75,650
Mellon Financial Corp 2,900 105,669
Merrill Lynch & Co Inc 2,220 255,300
Morgan Stanley Dean Witter & Co 6,226 518,315
Northern Trust Corp 700 45,544
Paine Webber Group Inc 800 36,400
Paychex Inc 2,325 97,650
Progressive Corp Ohio 400 29,600
Providian Financial Corp 870 78,300
SLM Holding Corp 900 33,694
Schwab (Charles) Corp 5,675 190,822
Synovus Financial Corp 800 14,100
Washington Mutual Inc 2,550 73,631
--------------
3,970,681
--------------
FOOD-- .54%
Albertsons Inc 2,388 79,401
Archer Daniels Midland Co 3,306 32,440
Bestfoods 1,400 96,950
Campbell Soup Co 2,200 64,075
ConAgra Inc 2,640 50,325
General Mills Inc 1,560 59,670
Great Atlantic & Pacific Tea Inc 100 1,663
HJ Heinz Co 1,815 79,406
Hershey Foods Corp 720 34,920
Kellogg Co 2,120 63,070
Kroger Co * 3,300 72,806
Nabisco Group Holdings Corp 2,000 51,875
Quaker Oats Co 660 49,583
Ralston Purina Co 1,730 34,492
Safeway Inc * 2,900 130,863
Sara Lee Corp 4,820 93,086
Supervalu Inc 400 7,625
See notes to financial statements and notes to schedules of investments
43
<PAGE>
June 30, 2000
SCHEDULES OF INVESTMENTS
PREFERRED ASSET ALLOCATION FUND (continued)
--------------------------------------------------------------------------
COMMON STOCK SHARES VALUE
--------------------------------------------------------------------------
FOOD (Continued)
Sysco Corp 1,840 $ 77,510
Tricon Global Restaurants Inc * 918 25,934
WM Wrigley Jr Co 570 45,707
Winn Dixie Stores Inc 840 12,023
--------------
1,163,424
--------------
FUEL-- 1.69%
Amerada Hess Corp 610 37,668
Anadarko Petroleum Corp 900 44,381
Apache Corp 600 35,288
Ashland Inc 200 7,013
Baker Hughes Inc 1,640 52,480
Burlington Resources Inc 1,155 44,179
Chevron Corp 3,460 293,451
Coastal Corp 1,280 77,920
Conoco Inc 3,528 86,656
Exxon Mobile Corp 18,334 1,439,219
Halliburton Co 2,670 125,991
Kerr McGee Corp 586 34,537
Occidental Petroleum Inc 2,310 48,654
Oneok Inc 100 2,594
Phillips Petroleum Co 1,460 74,004
Rowan Companies Inc * 300 9,113
Royal Dutch Petroleum Co 11,400 701,813
Schlumberger Ltd 3,160 235,815
Texaco Inc 2,920 155,490
Tosco Corp 700 19,819
Transocean Sedco Forex Inc 930 49,717
USX Marathon Group 1,800 45,113
Unocal Corp 1,500 49,688
--------------
3,670,603
--------------
HEALTH CARE-- 3.72%
Abbott Labs 8,280 368,978
Allergan Inc 840 62,580
Alza Corp * 700 41,388
American Home Products Corp 6,940 407,725
Amgen Inc * 5,520 387,780
Bard (C.R.) Inc 100 4,813
Bausch & Lomb Inc 380 29,403
Baxter International Inc 1,580 111,094
Becton Dickerson & Co 1,420 40,736
Biogen Inc * 700 45,150
Biomet Inc 700 26,906
Boston Scientific Corp * 2,400 52,650
Bristol Myers Squibb Co 10,560 615,120
CVS Corp 2,080 83,200
Cardinal Health Inc 800 59,200
--------------------------------------------------------------------------
COMMON STOCK SHARES VALUE
--------------------------------------------------------------------------
HEALTH CARE (continued)
Columbia/HCA Healthcare Corp 3,049 $ 92,613
Eli Lilly & Co 5,948 594,057
Guidant Corp * 1,800 89,100
Healthsouth Corp * 1,900 13,656
Humana Inc * 1,100 5,363
IMS Health Inc 1,960 35,280
Johnson & Johnson 7,420 755,913
Longs Drug Stores Corp 100 2,175
Mallinckrodt Inc 200 8,688
Manor Care Inc * 300 2,100
McKesson HBOC Inc 1,530 32,034
Medimmune Inc * 600 44,400
Medtronic Inc 6,480 322,785
Merck & Co Inc 12,360 947,085
Pfizer Inc 33,515 1,608,720
Pharmacia Corp 6,894 356,334
Quintiles Transnational Corp * 300 4,238
Rite Aid Corp 800 5,250
Schering Plough Corp 7,860 396,930
Sigma Aldrich 700 20,475
St Jude Medical Inc * 600 27,525
Tenet Healthcare Corp 1,760 47,520
United Healthcare Corp * 1,000 85,750
Walgreen Corp 5,640 181,538
Watson Pharmaceuticals Inc * 300 16,125
Wellpoint Health Networks Inc Class A * 400 28,975
--------------
8,061,352
--------------
HOUSING & REAL ESTATE-- .03%
Centex Corp 200 4,700
Kaufman & Broad Home Corp 100 1,981
Owens Corning 200 1,850
PPG Industries Inc 880 38,995
Pulte Corp 100 2,163
Sherwin Williams Co 1,080 22,883
--------------
72,572
--------------
INSURANCE-- .83%
Aetna Inc 766 49,168
Aflac Inc 800 36,750
Allstate Corp 4,258 94,741
American International Group Inc 8,284 973,370
Aon Corp 775 24,073
Chubb Corp 960 59,040
Cigna Corp 1,020 95,370
Hartford Financial Services Group 1,220 68,244
Lincoln National Corp Inc 1,260 45,518
Loews Corp 500 30,000
MBIA Inc 300 14,456
MGIC Investment Corp 700 31,850
See notes to financial statements and notes to schedules of investments
44
<PAGE>
The Preferred Group of Mutual Funds
SCHEDULES OF INVESTMENTS
--------------------------------------------------------------------------
COMMON STOCK SHARES VALUE
--------------------------------------------------------------------------
INSURANCE (continued)
Marsh & McLennan Cos Inc 1,590 $ 166,056
Safeco Corp 760 15,105
St Paul Cos Inc 1,262 43,066
Torchmark Corp 900 22,219
Unum Provident Corp 1,376 27,606
--------------
1,796,632
--------------
LEISURE TIME INDUSTRIES-- .47%
American Greetings Corp Class A 200 3,800
Brunswick Corp 680 11,263
Carnival Corp 3,300 64,350
Darden Restaurants Inc 1,030 16,738
Eastman Kodak Co 1,630 96,985
Harrahs Entertainment Inc * 350 7,328
Hasbro Inc 1,153 17,367
Hilton Hotels Corp 2,020 18,938
Marriott International Inc Class A1, 560 56,258
Mattel Inc 2,569 33,879
McDonalds Corp 7,300 240,444
Polaroid Corp 100 1,806
Walt Disney Co 11,280 437,805
Wendy's International Inc 300 5,344
--------------
1,012,305
--------------
MANUFACTURING-- .91%
Applied Materials Inc * 4,400 398,750
Armstrong Holdings Inc 100 1,531
Avery Dennison Corp 300 20,138
Black & Decker Corp 300 11,794
Briggs & Stratton Corp 100 3,425
Caterpillar Inc 1,920 65,040
Corning Inc 1,550 418,306
Crane Co 200 4,863
Danaher Corp 800 39,550
Deere & Co 1,360 50,320
Dover Corp 600 24,338
FMC Corp * 100 5,800
ITT Industries Inc 660 20,048
Illinois Tool Works Inc 1,720 98,040
Ingersoll Rand Co 960 38,640
Leggett & Platt Inc 600 9,900
Minnesota Mining & Manufacturing Co 2,160 178,200
Owens Illinois Inc * 700 8,181
PE Corp 700 46,113
Parker Hannifin Corp 325 11,131
Snap On Inc 200 5,325
Springs Industries Inc 100 3,200
Stanley Works 300 7,125
Textron Inc 780 42,364
--------------------------------------------------------------------------
COMMON STOCK SHARES VALUE
--------------------------------------------------------------------------
MANUFACTURING (continued)
Timken Co 200 $ 3,725
Tyco International Ltd 9,242 437,840
Vulcan Materials Co 500 21,344
--------------
1,975,031
--------------
METALS & MINING-- .15%
Alcan Aluminum Ltd 1,210 37,510
Alcoa Inc * 4,948 143,494
Allegheny Technologies Inc 288 5,184
Barrick Gold Corp 2,400 43,650
Bethlehem Steel Corp * 400 1,425
Homestake Mining Corp 1,790 12,306
Inco Ltd * 1,060 16,298
Newmont Mining Corp 518 11,202
Nucor Corp 300 9,956
Phelps Dodge Corp 601 22,350
Placer Dome Inc 1,850 17,691
USX US Steel Group 700 12,994
Worthington Industries Inc 250 2,625
--------------
336,685
--------------
OFFICE EQUIPMENT & COMPUTERS-- 3.61%
3Com Corp * 2,000 115,250
Adaptec Inc * 700 15,925
American Power Conversion Corp * 600 24,488
Apple Computer * 2,100 109,988
Cabletron Systems Inc * 900 22,725
Ceridian Corp * 400 9,625
Cisco Systems Inc * 37,080 2,356,898
Compaq Computer Corp 9,455 241,693
De Luxe Corp 550 12,959
Dell Computer Corp * 14,000 690,375
EMC Corp * 11,600 892,475
Gateway Inc * 1,800 102,150
Hewlett Packard Co 5,520 689,310
International Business Machines 9,600 1,051,800
Lexmark International Group Inc * 900 60,525
NCR Corp * 300 11,681
Network Appliance Inc * 1,700 136,850
Novellus Systems Inc * 500 28,281
Office Depot Inc * 1,900 11,875
Pitney Bowes Inc 1,700 68,000
QUALCOMM Inc * 4,000 240,000
Seagate Technology * 1,500 82,500
Staples Inc * 2,650 40,744
Sun Microsystems Inc * 7,900 718,406
Unisys Corp * 900 13,106
Xerox Corp 3,940 81,755
--------------
7,829,384
--------------
See notes to financial statements and notes to schedules of investments
45
<PAGE>
June 30, 2000
SCHEDULES OF INVESTMENTS
PREFERRED ASSET ALLOCATION FUND (continued)
--------------------------------------------------------------------------
COMMON STOCK SHARES VALUE
--------------------------------------------------------------------------
PAPER & FOREST PRODUCTS-- .19%
Boise Cascade Corp 200 $ 5,175
Fort James Corp 600 13,875
Georgia Pacific Group 1,130 29,616
International Paper Co 2,688 80,136
Kimberly Clark Co 3,046 174,764
Louisiana Pacific Corp 960 10,440
Mead Corp 300 7,575
Potlatch Corp 100 3,313
Westvaco Corp 700 17,369
Weyerhaeuser Co 1,350 58,050
Williamette Industries Inc 700 19,075
--------------
419,388
--------------
PUBLISHING & BROADCASTING-- .79%
Clear Channel Communications * 1,800 135,000
Comcast Corp Class A * 3,800 153,900
Dow Jones & Co Inc 670 49,078
Gannett Inc 1,620 96,896
Knight Ridder Inc 520 27,658
McGraw Hill Inc 1,220 65,880
Meredith Corp 100 3,375
New York Times Co Class A 500 19,750
Time Warner Inc 6,740 512,240
Tribune Co 1,625 56,875
Viacom Inc Class B * 8,613 587,299
--------------
1,707,951
--------------
SERVICE INDUSTRIES-- .81%
Allied Waste Industries Inc * 1,100 11,000
America Online Inc * 11,800 622,450
Cendant Corp * 4,308 60,312
Convergys Corp * 500 25,938
Fedex Corp * 1,692 64,296
Fluor Corp 550 17,394
Franklin Resources Inc 1,600 48,600
Genuine Parts Co 1,125 22,500
Interpublic Group Cos Inc 900 38,700
McDermott International Inc 200 1,763
Media One Group Inc * 3,470 232,178
Omnicom Group Inc 900 80,156
RR Donnelley & Sons Co 770 17,373
Sabre Holdings Corp 692 19,722
Sapient Corp * 200 21,388
T. Rowe Price Associates Inc 400 17,000
WW Grainger Inc 300 9,244
Waste Management Inc 3,359 63,821
Yahoo Inc * 3,000 371,625
Young & Rubicam Inc 200 11,438
--------------
1,756,898
--------------
--------------------------------------------------------------------------
COMMON STOCK SHARES VALUE
--------------------------------------------------------------------------
TELECOMMUNICATIONS-- 3.18%
ADC Telecommunications Inc * 2,000 $ 167,750
AT&T Corp 17,275 546,322
Alltel Corp 1,400 86,713
Andrew Corp * 205 6,880
BellSouth Corp 10,320 439,890
CenturyTel Inc 1,000 28,750
GTE Corp 5,210 324,323
Global Crossing Ltd * 4,555 119,853
Lucent Technologies Inc 17,371 1,029,232
Nextel Communications Inc Class A * 3,400 208,038
Nortel Networks Corp 15,360 1,048,320
SBC Communications Inc 18,382 795,022
Scientific Atlanta Inc 500 37,250
Sprint Corp * 9,430 517,565
Tellabs Inc * 2,300 157,406
US West Inc 2,794 239,586
Verizon Communications 8,352 424,386
Worldcom Inc 15,383 705,695
--------------
6,882,981
--------------
TRANSPORTATION-- .18%
AMR Corp * 820 21,679
Burlington Northern Santa Fe 2,402 55,096
CSX Corp 1,220 25,849
Delta Airlines Inc 720 36,405
Kansas City Southern Industries Inc 700 62,081
Norfolk Southern Corp 2,050 30,494
Ryder Systems Inc 200 3,788
Southwest Airlines Co 2,837 53,726
US Airways Group Inc * 200 7,800
Union Pacific Corp 1,430 53,178
Union Pacific Resources Group Inc 1,819 40,018
--------------
390,114
--------------
UTILITIES & POWER-- .65%
AES Corp * 2,500 114,063
American Electric Power Inc 1,560 46,215
CMS Energy Corp 600 13,275
CP&L Energy Inc * 790 25,231
Cinergy Corp 506 12,871
Columbia Energy Corp 200 13,125
Constellation Energy Group Inc 760 24,748
DTE Energy Co 680 20,783
Dominion Resources Inc 1,522 65,256
Duke Energy Co 1,651 93,075
Eastern Enterprises 100 6,300
Edison International 1,930 39,565
El Paso Energy Corp 700 35,656
Enron Corp 4,100 264,450
Entergy Corp 1,380 37,519
See notes to financial statements and notes to schedules of investments
46
<PAGE>
The Preferred Group of Mutual Funds
SCHEDULES OF INVESTMENTS
--------------------------------------------------------------------------
COMMON STOCK SHARES VALUE
--------------------------------------------------------------------------
UTILITIES & POWER (continued)
FPL Group Inc 890 $ 44,055
First Energy Corp 1,150 26,878
Florida Progress Corp 600 28,125
GPU Inc 400 10,825
New Century Energies Inc 500 15,000
Niagara Mohawk Holdings Inc * 1,190 16,586
Nicor Inc 100 3,258
Northern Systems Power Co 760 15,338
PPL Corp 400 8,775
PG&E Corp 1,970 48,506
Peco Energy Co 1,050 42,323
Peoples Energy Corp 100 3,233
Public Services Enterprise Group 1,030 35,659
Reliant Energy Inc 1,572 46,472
Sempra Energy 600 10,200
Southern Co 3,490 81,361
Sunoco Inc 621 18,281
TXU CORP 1,437 42,385
Unicom Corp 1,060 41,004
Williams Cos Inc 1,310 54,606
--------------
1,405,002
--------------
TOTAL COMMON STOCK
(Cost $35,793,511) 66,672,949
--------------
--------------------------------------------------------------------------
FIXED INCOME-- 54.48% PAR VALUE
--------------------------------------------------------------------------
U.S. TREASURY-- 54.48%
United States Treasury Bonds
5.25% November 15, 2028 $2,145,000 1,899,333
5.25% February 15, 2029 2,085,000 1,850,438
5.50% August 15, 2028 4,750,000 4,356,653
6.00% February 15, 2026 1,547,000 1,514,853
6.125% November 15, 2027 5,340,000 5,328,305
6.125% August 15, 2029 1,230,000 1,242,300
6.25% August 15, 2023 1,720,000 1,733,966
6.375% August 15, 2027 4,695,000 4,835,099
6.50% November 15, 2026 2,876,000 3,004,068
6.625% February 15, 2027 730,000 775,056
6.75% August 15, 2026 900,000 968,481
6.875% August 15, 2025 2,495,000 2,719,151
7.125% February 15, 2023 5,020,000 5,579,278
7.25% May 15, 2016 4,505,000 4,965,366
7.25% August 15, 2022 940,000 1,057,350
7.50% November 15, 2016 2,000,000 2,258,740
7.50% November 15, 2024 1,895,000 2,208,262
7.625% November 15, 2022 2,955,000 3,457,350
--------------------------------------------------------------------------
FIXED INCOME PAR VALUE
--------------------------------------------------------------------------
U.S. TREASURY (continued)
7.625% February 15, 2025 $2,835,000 $ 3,352,388
7.875% February 15, 2021 1,250,000 1,487,500
8.00% November 15, 2021 7,240,000 8,752,508
8.125% August 15, 2019 1,780,000 2,151,860
8.125% May 15, 2021 3,939,000 4,806,210
8.125% August 15, 2021 2,085,000 2,547,286
8.50% February 15, 2020 1,603,000 2,010,258
8.75% May 15, 2017 3,680,000 4,635,070
8.75% May 15, 2020 3,055,000 3,921,367
8.75% August 15, 2020 4,000,000 5,142,480
8.875% August 15, 2017 3,020,000 3,849,564
8.875% February 15, 2019 3,049,000 3,924,154
9.00% November 15, 2018 350,000 454,507
9.125% May 15, 2018 1,125,000 1,470,938
9.25% February 15, 2016 600,000 778,596
9.875% November 15, 2015 550,000 745,767
10.375% November 15, 2012 3,320,000 4,082,040
10.625% August 15, 2015 2,475,000 3,524,945
11.25% February 15, 2015 1,185,000 1,747,318
11.75% November 15, 2014 2,165,000 2,981,941
12.00% August 15, 2013 3,095,000 4,178,250
12.50% August 15, 2014 230,000 325,988
12.75% November 15, 2010 370,000 473,311
13.25% May 15, 2014 215,000 313,666
13.875% May 15, 2011 220,000 298,410
14.00% November 15, 2011 250,000 347,188
--------------
118,057,559
--------------
TOTAL FIXED INCOME
(Cost $118,035,972) 118,057,559
--------------
TOTAL INVESTMENTS AT VALUE
(Cost $153,829,483) 184,730,508
--------------
--------------------------------------------------------------------------
Short Term Investments -- 13.61% Par/Shares Value
--------------------------------------------------------------------------
COMMERCIAL PAPER-- 7.09%
AT&T Corp
6.52% July 14, 2000 @# 2,650,000 2,638,961
Associates Corp of North America
6.90% July 3, 2000 @# 4,735,195 4,733,380
Ciesco
6.56% July 5, 2000 @# 3,300,000 3,297,595
General Electric Capital Corp
6.50% July 10, 2000 @# 1,400,000 1,397,725
Phillip Morris Companies Inc
6.52% July 21, 2000 @# 3,300,000 3,288,047
--------------
15,355,708
--------------
See notes to financial statements and notes to schedules of investments
47
<PAGE>
June 30, 2000
SCHEDULES OF INVESTMENTS
PREFERRED ASSET ALLOCATION FUND (continued)
--------------------------------------------------------------------------
SHORT TERM INVESTMENTS PAR/SHARES VALUE
--------------------------------------------------------------------------
REPURCHASE AGREEMENTS-- 5.41%
State Street Repo 5.25% July 3, 2000
(Cost - $11,725,000)(Dated June 30, 2000,
due July 3, 2000, collateralized by $10,755,000
U.S. Treasury Bond 7.25%, May 15, 2016,
Market Value $11,964,938
Repurchase Proceeds $11,730,130) $11,725,000 $ 11,725,000
--------------
SHORT TERM INVESTMENT FUND-- .27%
State Street Global Advisors
Money Market Fund 594,385 594,385
--------------
U.S. TREASURY-- .84%
United States Treasury Bills
5.635% September 21, 2000 @ 1,835,000 1,811,447
--------------
TOTAL SHORT TERM INVESTMENTS
(Cost $29,486,540) 29,486,540
--------------
TOTAL INVESTMENTS-- 98.85%
(Cost $183,316,023) 214,217,048
--------------
OTHER ASSETS AND LIABILITIES-- 1.15% 2,493,792
--------------
TOTAL NET ASSETS-- 100% $216,710,840
==============
PREFERRED FIXED INCOME FUND
--------------------------------------------------------------------------
FIXED INCOME-- 96.24% PAR+ VALUE
--------------------------------------------------------------------------
ASSET BACKED-- 8.22%
Carco Auto Loan Master Trust
5.78% March 15, 2004 $1,650,000 $ 1,615,961
Coti Mortgage Home Equity Loan Trust
6.57% March 15, 2023 4,000,000 3,677,480
EQCC Home Equity Loan Trust
6.41% December 15, 2004 1,600,000 1,563,456
Ford Credit Auto Owner Trust
6.82% June 17, 2002 5,000,000 4,989,050
Sears Credit Account Master Trust
6.45% November 15, 2009 2,000,000 1,936,250
--------------
13,782,197
--------------
COLLATERALIZED MORTGAGE OBLIGATIONS-- 18.24%
Chase Commercial Mortgage Securities Corp
7.656% June 15, 2008 5,551,458 5,616,498
Chase Manhattan Bank First Union
7.134% July 15, 2007 1,188,129 1,172,721
Commercial Mortgage Acceptance Corp
6.03% March 15, 2008 5,200,000 4,752,313
6.57% October 15, 2007 4,000,000 3,811,000
DLJ Commercial Mortgage Corp
7.62% May 10, 2010 3,060,000 3,072,431
DLJ Mortgage Acceptance Corp
6.50% October 19, 2029 3,641,784 3,406,197
Federal Home Loan Mortgage Corp
6.50% July 15, 2016 1,323,314 1,307,183
Federal National Mortgage Assn Gtd
5.50% December 25, 2008 1,200,000 1,129,500
First Union Lehman Brothers Commercial
6.60% May 18, 2007 5,845,000 5,653,211
Morgan Stanley Capital I Inc
6.25% July 15, 2007 661,272 642,880
--------------
30,563,934
--------------
ELECTRIC-- .34%
TXU Eastern Funding Co **
6.75% May 15, 2009 625,000 562,275
--------------
FINANCE & BANKING-- 4.29%
CIT Group Inc
5.92% November 8, 2002 1,500,000 1,443,120
Cho Hung Bank **
11.875% April 1, 2010 90,000 85,950
Ford Motor Credit Co
5.75% February 23, 2004 1,095,000 1,031,370
HSBC Capital Funding DLR **
10.176% December 31, 2049 775,000 831,304
Keycorp Institutional Capital B
8.25% December 15, 2026 1,000,000 892,580
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 (continued)
Toyota Motor Credit Corp
5.625% November 13, 2003 $1,000,000 $ 956,131
Wachovia Corp
6.70% June 21, 2004 2,000,000 1,951,680
--------------
7,192,135
--------------
FOREIGN GOVERNMENT-- 1.57%
Argentina Republic
9.75% September 19, 2027 25,000 19,376
Argentina Republic
12.00% February 1, 2020 145,000 134,850
Brazil (Federal Republic)
12.75% January 15, 2020 30,000 28,620
Columbia Republic
11.75% February 25, 2020 30,000 24,525
Columbia Republic
9.75% April 23, 2009 60,000 46,800
Mexico
11.375% September 15, 2016 660,000 748,110
Panama Republic
4.00% July 17, 2016 158,550 130,415
Peru Republic
4.50% March 7, 2017 260,000 174,850
Philippines Republic
10.625% March 16, 2025 110,000 93,500
Quebec Providence of Canada
7.50% September 15, 2029 1,200,000 1,178,892
Turkey Republic
11.875% January 15, 2030 50,000 53,188
--------------
2,633,126
--------------
GOVERNMENT SPONSORED-- 33.33%
Federal Home Loan
7.00% May 1, 2029 2,252,248 2,165,221
Federal National Mortgage Association
6.00% March 1, 2014 81,572 77,136
6.00% January 1, 2030 4,687,246 4,290,283
6.50% July 1, 2013 296,155 285,419
6.50% September 1, 2013 281,470 271,266
6.50% October 1, 2013 314,533 303,131
6.50% February 1, 2014 309,851 298,619
6.50% December 1, 2014 113,205 109,101
6.50% November 1, 2028 451,832 426,416
6.50% January 1, 2029 869,585 820,670
6.50% February 1, 2029 875,971 826,698
6.50% March 1, 2029 83,627 78,922
6.50% April 1, 2029 933,733 891,145
6.50% June 1, 2029 86,348 81,491
6.50% August 1, 2029 441,331 416,506
--------------------------------------------------------------------------
FIXED INCOME PAR+ VALUE
--------------------------------------------------------------------------
GOVERNMENT SPONSORED (continued)
6.50% December 1, 2029 $ 50,687 $ 47,789
6.50% January 1, 2030 120,143 113,272
7.00% June 1, 2014 182,078 178,606
7.00% August 1, 2014 87,763 86,090
7.00% October 1, 2014 1,379,965 1,353,649
7.00% February 1, 2015 42,177 41,373
7.00% March 1, 2015 3,322,628 3,259,265
7.00% November 1, 2025 303,930 294,526
7.00% October 1, 2028 314,404 303,793
7.00% August 1, 2029 492,189 475,115
7.00% October 1, 2029 990,120 955,773
7.00% December 1, 2099 TBA 3,925,000 3,788,842
7.125% January 15, 2030 735,000 740,395
7.25% January 15, 2010 4,845,000 4,893,789
7.50% March 1, 2015 221,387 220,625
7.50% May 1, 2015 908,616 905,490
7.50% June 1, 2015 1,483,182 1,471,955
7.50% August 1, 2029 332,614 327,831
7.50% October 1, 2029 825,916 814,040
7.50% November 1, 2029 510,139 502,803
7.50% January 1, 2030 1,712,898 1,688,267
7.50% February 1, 2030 1,328,614 1,309,509
7.50% March 1, 2030 363,175 357,953
7.50% April 1, 2030 1,952,012 1,906,571
7.50% May 1, 2030 263,198 259,413
7.50% June 1, 2030 4,762,927 4,694,435
7.50% December 1, 2099 TBA 8,110,000 7,993,378
8.00% January 1, 2030 410,305 411,971
8.00% March 1, 2030 2,435,388 2,445,275
8.00% June 1, 2030 1,999,900 2,008,019
8.00% July 1, 2030 653,859 656,514
--------------
55,848,350
--------------
INDUSTRIALS-- 3.84%
Amerada Hess Corp
7.875% October 1, 2029 700,000 684,467
Ford Motor Co
9.00% September 15, 2001 1,695,000 1,722,849
Lakehead Pipeline Co Ltd
7.125% October 1, 2028 350,000 307,046
Mariner Health Group Inc ***
9.50% April 1, 2006 400,000 3,500
Oil Purchase Co **
7.10% April 30, 2002 727,679 690,560
Rohm & Haas Co
7.85% July 15, 2029 1,400,000 1,415,708
Time Warner Inc
6.625% May 15, 2029 850,000 701,616
Ultramar Diamond Shamrock Corp
6.75% October 15, 2037 # 1,000,000 902,680
--------------
6,428,426
--------------
See notes to financial statements and notes to schedules of investments
49
<PAGE>
June 30, 2000
SCHEDULES OF INVESTMENTS
--------------------------------------------------------------------------
PREFERRED FIXED INCOME (continued)
--------------------------------------------------------------------------
FIXED INCOME PAR+ VALUE
--------------------------------------------------------------------------
MORTGAGE RELATED-OTHER MARKETABLE-- 1.18%
Ocwen Residential MBS Corp **
7.00% October 25, 2030 $2,057,536 $ 1,979,416
--------------
TELECOMMUNICATIONS-- 3.09%
Adelphia Communications Corp
7.875% May 1, 2009 # 200,000 169,000
9.375% November 15, 2009 100,000 92,750
Charter Communication Holdings
8.25% April 1, 2007 350,000 309,750
Global Crossing Ltd
9.125% November 15, 2006 230,000 220,800
Liberty Media Corp
8.25% February 1, 2030 835,000 766,330
McLeod USA Inc
9.25% July 15, 2007 235,000 226,188
Sprint Capital Corp
5.70% November 15, 2003 1,500,000 1,414,920
US West Capital Funding Inc
6.25% July 15, 2005 1,000,000 936,850
Vodafone AirTouch **
7.625% February 15, 2005 750,000 750,548
Williams Communications Corp
10.70% October 1, 2007 300,000 298,500
--------------
5,185,636
--------------
U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES-- 8.37%
Government National Mortgage Association
6.50% December 15, 2028 4,984,425 4,732,064
7.50% June 15, 2028 3,929,644 3,906,341
8.00% April 15, 2030 5,331,467 5,388,087
--------------
14,026,492
--------------
U.S. TREASURY-- 13.77%
United States Treasury Bonds
5.25% February 15, 2029 # 2,315,000 2,054,563
6.50% November 15, 2026 260,000 271,578
6.75% August 15, 2026 6,510,000 7,005,346
8.875% February 15, 2019 6,260,000 8,056,808
United States Treasury Notes
6.00% August 15, 2004 3,335,000 3,303,718
6.00% August 15, 2009 150,000 148,805
6.50% February 15, 2010 # 1,485,000 1,535,812
6.875% May 15, 2006 675,000 694,724
--------------
23,071,354
--------------
TOTAL FIXED INCOME
(Cost $162,118,567) 161,273,341
--------------
--------------------------------------------------------------------------
SHORT TERM INVESTMENTS-- 9.74% PAR+ VALUE
--------------------------------------------------------------------------
FINANCE & BANKING-- 4.35%
American Express Credit Corp
6.879% July 3, 2000 @ $6,000,000 $ 5,997,707
Security Pacific Corp MTN
10.30% May 15, 2001 @ 1,250,000 1,282,537
--------------
7,280,244
--------------
INDUSTRIALS--2.98%
General Electric Capital Corp
6.90% July 3, 2000 @ 5,000,000 4,998,083
--------------
GOVERNMENT SPONSORED-- 2.23%
Federal Home Loan Mortgage
6.57% July 3, 2000 @ 3,743,000 3,741,634
--------------
U.S. Treasury-- .18%
United States Treasury Notes
5.625% November 30, 2000 @ 300,000 299,202
--------------
TOTAL SHORT TERM INVESTMENTS
(Cost $16,308,800) 16,319,163
--------------
TOTAL INVESTMENTS-- 105.98%
(Cost $178,427,367) 177,592,504
--------------
OTHER ASSETS AND LIABILITIES-- -5.98% (10,018,273)
--------------
TOTAL NET ASSETS-- 100% $167,574,231
==============
50
<PAGE>
The Preferred Group of Mutual Funds
SCHEDULES OF INVESTMENTS
PREFERRED SHORT-TERM GOVERNMENT SECURITIES FUND
--------------------------------------------------------------------------
FIXED INCOME-- 95.76% PAR VALUE
--------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS-- 22.57%
Federal Home Loan Mortgage Corp
5.50% June 15, 2008 $1,217,738 $ 1,188,050
6.00% February 15, 2007 254,510 253,713
6.25% January 15, 2015 3,152,792 3,134,064
6.59% June 25, 2012 365,166 363,402
Federal Home Loan Mortgage Gtd
5.75% January 15, 2006 594,849 591,500
5.75% November 15, 2020 304,185 301,143
5.89% July 15, 2008 1,181,701 1,182,800
5.89% December 15, 2023 1,534,868 1,533,901
6.00% December 15, 2017 131,248 130,838
6.50% August 15, 2018 1,302,403 1,297,923
6.75% February 15, 2006 524,503 523,192
6.75% March 15, 2019 595,814 593,949
7.00% May 15, 2006 391,543 390,564
8.40% April 15, 2021 175,000 178,992
Federal National Mortgage
Association Gtd
5.60% May 25, 2018 262,139 260,582
5.75% February 25, 2017 153,171 152,456
5.80% September 25, 2006 304,751 302,846
6.25% December 18, 2019 754,457 749,500
Federal National Mortgage
Association REMIC
6.75% March 25, 2019 1,695,103 1,686,627
7.50% May 25, 2007 415,589 416,495
8.00% January 25, 2019 971,522 976,681
--------------
16,209,218
--------------
FEDERAL AGENCY POOLED-- 2.41%
Federal National Mortgage Association
5.50% November 1, 2002 669,093 648,465
6.50% April 1, 2003 1,095,955 1,078,893
--------------
1,727,358
--------------
GOVERNMENT SPONSORED-- 64.51%
Federal Farm Credit Bonds
6.875% May 1, 2002 3,000,000 2,996,250
Federal Home Loan Banks
5.23% November 16, 2001 1,000,000 977,500
6.00% November 15, 2001 5,000,000 4,942,200
6.00% August 15, 2002 12,000,000 11,765,640
6.60% January 11, 2002 2,000,000 1,986,240
7.00% November 22, 2004 2,000,000 1,956,240
7.22% August 28, 2002 2,000,000 1,994,680
7.625% December 21, 2001 1,000,000 1,001,800
--------------------------------------------------------------------------
FIXED INCOME PAR VALUE
--------------------------------------------------------------------------
GOVERNMENT SPONSORED (continued)
Federal Home Loan Mortgage Corp
5.75% July 15, 2003 $5,000,000 $ 4,828,900
6.25% October 15, 2002 3,000,000 2,955,480
Federal National Mortgage Association
7.47% May 7, 2007 7,500,000 7,408,575
7.68% April 24, 2007 1,000,000 980,780
Overseas Private Investment Corp
6.13% September 15, 2001 1,041,666 1,041,666
Student Loan Marketing Trust
6.34% October 27, 2008 1,500,000 1,498,125
--------------
46,334,076
--------------
U.S. TREASURY-- 6.27%
United States Treasury Notes
6.375% June 30, 2002 4,500,000 4,501,393
--------------
TOTAL FIXED INCOME
(Cost $69,045,384) 68,772,045
--------------
--------------------------------------------------------------------------
SHORT TERM INVESTMENTS -- 2.93% PAR/SHARES VALUE
--------------------------------------------------------------------------
GOVERNMENT SPONSORED-- 2.77%
Federal Home Loan Banks
6.50% January 26, 2001 @ 2,000,000 1,994,060
--------------
SHORT TERM INVESTMENT FUND-- .16%
State Street Global Advisors
Money Market Fund 114,176 114,176
--------------
TOTAL SHORT TERM INVESTMENTS
(Cost $2,113,864) 2,108,236
--------------
TOTAL INVESTMENTS-- 98.69%
(Cost $71,159,248) 70,880,281
--------------
OTHER ASSETS AND LIABILITIES-- 1.31% 940,154
--------------
TOTAL NET ASSETS-- 100% $71,820,435
==============
See notes to financial statements and notes to schedules of investments
51
<PAGE>
June 30, 2000
SCHEDULES OF INVESTMENTS
PREFERRED MONEY MARKET FUND
--------------------------------------------------------------------------
SHORT TERM INVESTMENTS-- 102.32% PAR VALUE
--------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT-- 17.88%
Abbey National Treasury Services
6.47% January 10, 2001 @ $2,000,000 $ 1,999,497
Bank of America Charlotte NC
6.75% August 17, 2000 @ 3,000,000 3,000,000
Bayerische Landesbank
5.93% October 2, 2000 @ 2,500,000 2,498,887
Canadian Imperial Bank
7.42% June 4, 2001 @ 1,000,000 999,738
Deutsche Bank New York
6.19% December 1, 2000 @ 3,000,000 2,999,161
Landesbank Hessen
7.143% May 8, 2001 @ 1,000,000 999,940
Lloyds Bank of New York
7.20% June 15, 2001 @ 1,000,000 999,729
Nationsbank Texas
6.75% August 15, 2000 @ 1,000,000 1,000,864
Rabobank Netherlands
6.66% March 9, 2001 @ 1,000,000 999,674
6.755% April 10, 2001 @ 3,000,000 2,999,674
Suntrust Bank Georgia
6.24% July 6, 2000 @ 2,000,000 2,000,000
Union Bank of Switzerland
6.235% December 4, 2000 @ 1,000,000 999,695
6.39% December 21, 2000 @ 3,000,000 2,999,323
6.88% April 30, 2001 @ 1,250,000 1,249,803
--------------
25,745,985
--------------
COMMERCIAL PAPER-- 27.96%
Alpine Securitization Corp
6.599% July 25, 2000 @ 3,000,000 2,986,800
American Express Credit Corp
6.54% July 6, 2000 @ 2,000,000 1,998,183
6.879% July 3, 2000 @ 4,000,000 3,998,471
Bavaria Trr Corp Cp
6.55% July 11, 2000 @ 1,000,000 998,181
Bellsouth Telecommunications Inc
6.519% July 12, 2000 @ 1,000,000 998,008
Credit Suisse Group
6.52% July 10, 2000 @ 1,000,000 998,370
6.65% August 21, 2000 @ 2,000,000 1,981,158
Edison Asset Securitization
6.589% July 26, 2000 @ 2,000,000 1,990,847
6.599% August 1, 2000 @ 1,000,000 994,317
Enterprise Funding Corp
6.54% July 11, 2000 @ 1,000,000 998,183
6.59% September 19, 2000 @ 1,000,000 985,333
Eureka Securitization Inc
6.58% July 28, 2000 @ 3,000,000 2,985,195
--------------------------------------------------------------------------
SHORT TERM INVESTMENTS PAR VALUE
--------------------------------------------------------------------------
COMMERCIAL PAPER (continued)
FPLGroup Capital Inc
6.57% July 10, 2000 @ $1,000,000 $ 998,358
Ford Motor Credit Co
6.53% July 20, 2000 @ 1,500,000 1,494,830
HD Real Estate Funding Corp
6.80% November 21, 2000 @ 1,000,000 972,989
Nationwide Building Society
6.599% September 14, 2000 @ 2,000,000 1,972,500
Province of Quebec
6.675% December 14, 2000 @ 1,500,000 1,453,831
Receivables Capital Corp
6.58% July 20, 2000 @ 3,000,000 2,989,582
6.599% July 25, 2000 @ 1,000,000 995,600
SBC Communications Inc
6.56% July 20, 2000 @ 1,000,000 996,538
6.589% September 6, 2000 @ 1,000,000 987,735
6.63% August 17, 2000 @ 2,500,000 2,478,360
Wisconsin Energy Corp
6.519% July 11, 2000 @ 1,000,000 998,189
6.559% July 18, 2000 @ 2,000,000 1,993,804
--------------
40,245,362
--------------
CORPORATE BONDS-- 2.09%
General Mills Inc
6.68% February 9, 2001 @ 1,000,000 999,726
Manitoba Province of Canada
9.50% October 1, 2000 @ 2,000,000 2,013,255
--------------
3,012,981
--------------
FLOATING RATE NOTES-- 47.58%
AT&T Corp **
7.19% July 13, 2000 @## 6,000,000 5,999,921
Bank of America Charlotte NCMTN
6.651% September 6, 2000 @## 1,000,000 999,907
Bank of Austria
6.664% July 16, 2000 @## 3,000,000 2,999,077
Bank of Scotland Treasury Services **
6.777% September 6, 2000 @## 3,000,000 2,999,901
Bayerische Landesbank
6.88% July18, 2000 @## 1,500,000 1,498,725
CIT Financial
6.657% July 5, 2000 @## 1,000,000 999,650
CIT Group Inc
6.683% July 5, 2000 @## 1,000,000 999,450
CIT Group Inc MTN
6.457% July 5, 2000 @## 3,000,000 2,999,648
Citigroup Inc
6.443% August 4, 2000 @## 2,000,000 2,000,000
52
<PAGE>
The Preferred Group of Mutual Funds
SCHEDULES OF INVESTMENTS
--------------------------------------------------------------------------
SHORT TERM INVESTMENTS PAR VALUE
--------------------------------------------------------------------------
FLOATING RATE NOTES (continued)
Commerz Bank AG New York
6.531% July 28, 2000 @## $3,000,000 $ 2,999,026
7.18% July 26, 2000 @## 1,000,000 999,839
Deutsche Bank New York
7.216% July 16, 2000 @## 2,000,000 1,999,385
Diageo Capital PLC
6.606% August 24, 2000 @## 6,000,000 5,999,433
First Union National
6.661% July 5, 2000 @## 3,000,000 3,000,000
6.855% September 5, 2000 @## 1,000,000 999,941
6.64% July 5, 2000 @## 1,000,000 1,000,000
Fleet Financial Group
6.271% July 13, 2000 @## 4,000,000 3,999,323
General Electric Capital Corp
6.254% July 7, 2000 @## 4,000,000 4,000,000
General Motors Acceptance Corp
6.528% September 30, 2000 @## 1,000,000 1,001,084
National City Bank
6.709% August 4, 2000 @## 2,000,000 2,000,000
Norwest Financial Inc
6.703% July 5, 2000 @## 4,000,000 3,997,955
PNC Bank NA
6.863% July 12, 2000 @## 6,000,000 5,999,912
Southtrust Bank NA
7.277% July 23, 2000 @## 6,000,000 5,999,458
Westdeutsche Landesbank
6.592% July 25, 2000 @## 3,000,000 2,998,939
--------------
68,490,574
--------------
GOVERNMENT AGENCY-- 6.81%
Federal Home Loan Mortgage
Discount Note
6.57% July 3, 2000 @ 9,813,000 9,809,419
--------------
TOTAL SHORT TERM INVESTMENTS
(Cost $147,304,321) 147,304,321
--------------
TOTAL INVESTMENTS-- 102.32%
(Cost $147,304,321) 147,304,321
--------------
OTHER ASSETS AND LIABILITIES-- -2.32% (3,339,548)
--------------
TOTAL NET ASSETS-- 100% $143,964,773
==============
--------------------------------------------------------------------------------
NOTES TO SCHEDULES OF INVESTMENTS
* Non-income producing security
** Pursuant to Rule 144A under the Securities Act of 1933, these securities
may be resold in transactions exempt from registration, normally to
qualified institutional buyers. At June 30, 2000, these securities amounted
to $4,900,053 or 2.92% of the net assets of the Preferred Fixed Income Fund
and $8,999,822 or 6.25% of the net assets of the Preferred Money Market
Fund.
*** Non-income producing security - issuer filed for protection under the
Federal Bankruptcy Code or is in default of interest payment.
# All or a portion of this security is being used to collateralize futures
contracts outstanding at June 30, 2000. Additional securities are earmarked
to cover the remaining value of futures contracts and the open delayed
delivery securities at year end.
## 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
REMIC - Real Estate Mortgage Investment Conduit
SDR - Swedish Depositary Receipt
TBA - To Be Announced, these securities have been purchased on a delayed
delivery basis.
See notes to financial statements
53
<PAGE>
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,uas an,
2000 open-end, Notes to Financial Statements 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 that
are experiencing above-average earnings growth.
PREFERRED VALUE FUND ("Value") - 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 ("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 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 accounting
principles generally accepted in the United States 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, options, futures and option on 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
54
<PAGE>
The Preferred Group of Mutual Funds
NOTES TO FINANCIAL STATEMENTS
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 is used. Over-the-counter
options are valued at fair value, as determined in good faith by the
Trustees or by persons acting at their direction based on prices supplied by
a broker, usually the option counter party. Forward contracts are valued at
market. 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.
Certain investments in securities held by the Funds were valued on the basis
of a price provided by a principal market maker. At June 30, 2000, the total
value of these securities represented 2.1% of net assets of the Fixed Income
Fund. These prices may differ from the value that would have been used had a
broader market for securities existed.
SECURITY TRANSACTIONS
Security transactions are accounted for on the trade date. Cost is
determined and gains and losses are based upon the specific identification
method for both financial statement and federal tax purposes.
FEDERAL TAXES
Consistent with each Fund's policy to qualify as a regulated investment
company and to distribute all of its taxable income and net realized capital
gains to its shareholders, no federal tax has been accrued.
At June 30, 2000, 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
SHORT-TERM GOVERNMENT 2008 679,840
FIXED INCOME 2008 5,851,143
SMALL CAP 2007 5,897,783
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.
55
<PAGE>
June 30, 2000
NOTES TO FINANCIAL STATEMENTS
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.
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 June
30, 2000.
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
56
<PAGE>
The Preferred Group of Mutual Funds
NOTES TO FINANCIAL STATEMENTS
are fixed at the time the transaction is negotiated. The Fund identifies
securities as segregated in its custodial records with a value at least
equal to the amount of the purchase commitment.
REPURCHASE AGREEMENTS
The Funds' custodian takes possession through the federal book-entry system
of securities collateralizing repurchase agreements. Collateral is
marked-to-market daily to ensure that the market value of the underlying
assets remains sufficient to protect the Funds. The Funds may experience
costs and delays in liquidating the collateral if the issuer defaults or
declares bankruptcy.
INDUSTRY CONCENTRATIONS
While none of the Funds 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>
2. FEES AND COMPENSATION PAID TO AFFILIATES
MANAGEMENT FEE
Caterpillar Investment Management Ltd. (the "Manager")
providestinvestmentnadvisorytandnportfolio 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 1.00%(1)
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:
FUND SUBADVISERS
GROWTH Jennison Associates LLC ("Jennison")
VALUE Oppenheimer Capital ("Oppenheimer")
INTERNATIONAL Mercator Asset Management(R), LP
("Mercator")
SMALL CAP Turner Investment Partners, Inc.
("Turner")(1)
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
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 fiscal year ended June 30, 2000, brokerage commissions were paid to
the following affiliates of the Trust's subadvisers by the following Funds:
GROWTH VALUE SMALL CAP
J. P. MORGAN SECURITIES, INC. $50,117 $1,200 $3,058
DEUTSCHE BANK ALEX BROWN 300
TRUSTEES' FEES
For the fiscal year ended June 30, 2000, 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.
(1) On January 1, 2000, Caterpillar Investment Management Ltd. retained Turner
Investment Partners, Inc. to manage the Fund's investments. On this date,
the management fee increased from 0.75% to 1.00%.
58
<PAGE>
3. BENEFICIAL INTEREST
The Preferred Group of Mutual Funds As of June 30, 2000, affiliated
shareholders beneficially holdings more F than c5% loft total n shares
outstanding were as follows:
<TABLE>
<CAPTION>
% OF TOTAL SHARES OUTSTANDING
GROUP PREFERRED STABLE
INSURANCE INSURANCE PRINCIPAL
401(K) PLAN* TRUST A & B** RESERVES*** COLLECTIVE TRUST
<S> <C> <C> <C> <C>
GROWTH 67.27% - - -
VALUE 68.43% - 5.79% -
INTERNATIONAL 33.11% 39.92% - -
SMALL CAP 36.83% 48.60% - -
ASSET ALLOCATION 40.42% 28.47% - -
FIXED INCOME 15.96% 20.22% - 51.27%
SHORT-TERM GOVERNMENT 22.30% 27.55% 33.72% 12.98%
MONEY MARKET 71.39% - - 8.97%
</TABLE>
* 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 33.72%
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>
4. PORTFOLIO INFORMATION
SECURITY PURCHASES AND SALES
During the fiscal year ended June 30, 2000, purchases and sales to f
long-term investments (investments other than short-term obligations and
U.S. Government securities) and U.S. Government securities (short- and
long-term), respectively, were as follows:
<TABLE>
<CAPTION>
LONG-TERM U.S. GOVERNMENT
PURCHASES SALES PURCHASES SALES
<S> <C> <C> <C> <C>
GROWTH $544,173,907 $571,956,454 - -
VALUE 28,132,896 69,611,052 - -
INTERNATIONAL 94,932,612 91,373,930 - -
SMALL CAP 250,470,726 245,235,546 - -
ASSET ALLOCATION 5,474,213 48,131,168 $ 70,974,040 $ 33,190,473
FIXED INCOME 268,548,718 258,393,604 172,955,423 179,795,404
SHORT-TERM GOVERNMENT 94,397,899 38,006,239 14,909,638 41,735,274
</TABLE>
During the fiscal year ended June 30, 2000, Money Market had purchases and
sales (including maturities and excluding repurchase agreements) of
short-term obligations and U.S. Government securities of:
<TABLE>
<CAPTION>
OTHER U.S. GOVERNMENT
PURCHASES SALES PURCHASES SALES
<S> <C> <C> <C> <C>
MONEY MARKET $7,552,677,775 $7,606,362,232 $32,581,975 $32,605,000
</TABLE>
FUTURES CONTRACTS
Asset Allocation and Fixed Income had the following futures contracts open
at June 30, 2000:
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION UNDERLYING UNREALIZED
CONTRACTS CONTRACTS DATE FACE VALUE GAIN (LOSS), NET
ASSET ALLOCATION:
Long Positions:
<S> <C> <C> <C> <C>
S&P 500 42 Sep 00 $15,415,050 ($ 192,801)
S&P 500 52 Sep 00 19,085,300 (318,825)
----------
(511,626)
----------
Short Positions:
U.S. Treasury Bonds (45) Sep 00 (4,380,469) (30,230)
----------
($541,856)
==========
FIXED INCOME:
Long Positions:
U.S. Treasury Notes 6 Sep 00 584,063 $ 17,194
U.S. Treasury Notes 90 Sep 00 8,911,406 (401)
----------
16,793
----------
Short Positions:
U.S. Treasury Bonds (78) Sep 00 (7,681,781) (130,326)
----------
($ 113,533)
==========
</TABLE>
60
<PAGE>
The Preferred Group of Mutual Funds
NOTES TO FINANCIAL STATEMENTS
UNREALIZED APPRECIATION (DEPRECIATION)
Unrealized appreciation (depreciation) for each Fund at June 30, 2000, 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 $274,739,470 ($18,294,850) $256,444,620 $584,816,822
VALUE 151,768,526 (15,164,003) 136,604,523 202,492,712
INTERNATIONAL 95,918,941 (18,415,216) 77,503,725 257,942,519
SMALL CAP 18,123,404 (7,350,263) 10,773,141 112,243,192
ASSET ALLOCATION 34,688,885 (3,901,224) 30,787,661 183,429,387
FIXED INCOME 1,325,626 (2,254,571) (928,945) 178,521,449
SHORT-TERM GOVERNMENT 48,465 (327,432) (278,967) 71,159,248
MONEY MARKET - - - 147,304,321
</TABLE>
61
<PAGE>
June 30, 2000
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES AND SHAREHOLDERS OF THE PREFERRED GROUP OF MUTUAL FUNDS
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of each of the eight Funds
constituting The Preferred Group of Mutual Funds (the "Trust") at June 30, 2000,
the results of each of their operations for the year then ended, the changes in
each of their net assets for each of the two years in the period then ended and
the financial highlights for each of the five years in the period then ended, in
conformity with accounting principles generally accepted in the United States.
These financial statements and financial highlights (hereafter referred to as
"financial statements")are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at June 30, 2000 by correspondence with the custodian and brokers,
provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
August 15, 2000
62
<PAGE>
The Preferred Group of Mutual Funds
NOTES TO FINANCIAL STATEMENTS
INCOME TAX INFORMATION (UNAUDITED)
The Funds which declared and paid a long-term capital gain distribution in
calendar year 1999 (Growth, Value International and Asset Allocation) hereby
designate the following amounts as long-term capital gain distributions:
LONG-TERM
FUND CAPITAL GAINS
GROWTH $79,398,410
VALUE 48,119,216
INTERNATIONAL 11,234,529
ASSET ALLOCATION 3,305,334
SHAREHOLDER ACTION (UNAUDITED)
On January 1, 2000, the majority shareholder of the Preferred Small Cap Fund
approved by written consent: (i) the Management Contract between Caterpillar
Investment Management Ltd. and the Preferred Small Cap Fund and (ii) the
Subadviser Agreement between Caterpillar Investment Management Ltd. and
Turner Investment Partners, Inc.
On February 28, 2000, the majority shareholder of the Preferred Value Fund
approved by written consent the Subadviser Agreement between Caterpillar
Investment Management Ltd. and Oppenheimer Capital.
63
<PAGE>
June 30, 2000
THE PREFERRED GROUP OF MUTUAL FUNDS
[PREFERRED GROUP logo]
The Preferred 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
Sean X. McKessy 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
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
160 Federal Street
Boston, MA 02110
64
<PAGE>
The Preferred Group of Mutual Funds
SHAREHOLDER PRIVILEGES
AFFORDABLE MINIMUM
INVESTMENT
You may open a Preferred account with an investment of $1,000 or more.
Subsequent investments of $50 or more may be made at any time.
FREE CHECKWRITING
You can write an unlimited number of free checks (minimum $250 per check)
against the assets in your account (Money Market and Short-Term Government
Securities Funds only). You must maintain the minimum required account
balance of $1,000.
SYSTEMATIC
SAVINGS PLAN
You may authorize your bank to debit your checking account automatically and
send regular monthly investments of $50 or more to your fund account. If you
select this option, you may open an account with your first monthly
investment of $50.
EXCHANGE PRIVILEGE
Should you wish to change your investment selection, you may move all or a
portion of your assets to another fund. One toll-free call is all it takes.
IRA PLANS
If you consider a comfortable retirement to be one of your financial goals,
you might be especially interested in opening a Preferred 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 INVESTOR SERVICES
You can reach The Preferred Group at 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.
65
<PAGE>
[PREFERRED GROUP logo]
The Preferred Group
of Mutual Funds
P.O. Box 8320
Boston, MA 02266-8320
www.PreferredGroup.com
Distributed by
Caterpillar Securities Inc.
--------------------------------------------------------------------------------
PRESORTED
STANDARD A
U.S. POSTAGE PAID
SOUTH SUBURBAN, IL
PERMIT #3602
--------------------------------------------------------------------------------
Annual Report
June 30, 2000
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