FRONTEGRA FUNDS
ANNUAL REPORT
Frontegra Total Return Bond Fund
FRONTEGRA ASSET MANAGEMENT, INC.
October 31, 1997
FRONTEGRA FUNDS
TABLE OF CONTENTS
Shareholder Letter 1
Investment Highlights 2
Schedule of Investments 3
Statement of Assets and Liabilities 6
Statement of Operations 7
Statement of Changes in Net Assets 8
Financial Highlights 9
Notes to Financial Statements 10
Report of Independent Auditors 13
This report is submitted for the general information of the shareholders of the
Fund. It is not authorized for distribution to prospective investors unless
accompanied or preceded by an effective prospectus for the Fund. The Prospectus
includes more complete information about management fees and expenses,
investment objectives, risks and operating policies of the Fund. Please read the
Prospectus carefully.
<PAGE>
FRONTEGRA FUNDS
DEAR SHAREHOLDER:
As our first year draws to a close, we want to take this opportunity to express
our appreciation and to update you on the progress of the Frontegra Total Return
Bond Fund (the "Fund"). We are pleased to report the Fund has returned 7.13%
since its inception on November 25, 1996. This compares to a 7.57% return for
the Lehman Brothers Aggregate Bond Index (the "Index") for the same time
period. The net asset value of the Fund closed the period at $30.85 per share.
The period since inception has been characterized by a relatively low level of
volatility in the domestic fixed income markets, presenting few opportunities to
add significant value in the portfolio.
Since inception, the 10-year Treasury yield fluctuated between 6% and 7%,
with "real" yields varying little from what we consider a historical neutral
range of 3.0% to 3.5%. During the latter part of 1996 and early 1997, we
believed the bond market was undervalued relative to historical measures and
therefore positioned the portfolio's duration slightly longer than that of the
Index. As rates declined during the middle of the year, we decreased portfolio
duration accordingly. In the recent months, we have positioned the portfolio to
take advantage of the relatively flat yield curve by implementing a moderately
bulleted yield curve strategy.
The portfolio has been invested in a higher than normal percentage of Treasury
securities, given that yield spreads between Treasuries and other securities in
the fixed income market have been narrow for quite some time. We continue to
seek well-structured, call-protected mortgage and asset-backed securities, but
our exposure to these sectors remains below normal due to the narrow level of
spreads. We have been able to find better pockets of value in the corporate
sector, particularly in putable, electric utility and yankee bonds. The
portfolio's high-yield exposure (approximately 6% of the portfolio) has been
limited to the BB-rated electric utility first mortgage bonds.
Going forward, we expect steady to declining inflation in the 2% to 3% range as
a result of continued restrictive monetary policy. We also expect to see some
steepening of the yield curve, as the current spread between the 2-year and 30-
year Treasuries of 50 to 60 basis points is low by historical standards.
Finally, if the market volatility present during the last several weeks of
October continues, we believe there will be significant opportunities to add
value in the portfolio.
Thank you for the opportunity to assist you with your investment goals.
Sincerely,
/s/ Thomas J. Holmberg, Jr. /s/ William D. Forsyth, III
Thomas J. Holmberg, Jr. William D. Forsyth, III
Co-President Co-President
November 14, 1997
<PAGE> 1
FRONTEGRA FUNDS
INVESTMENT HIGHLIGHTS
TOTAL RETURN
11/25/96 1/31/97 4/30/97 7/31/97 10/31/97
-------- ------- -------- -------- --------
Frontegra Total
Return Bond Fund 100,000 99,406.57 99,926.47 105,089.71 107,127.64
Lehman Brothers
Aggregate Bond Index 100,000 99,849.95 100,471.36 105,392.47 107,572.25
Portfolio Total Return
FOR THE PERIOD ENDED 10/31/97
- ---------------------------------------
SIX MONTH 7.21%
SINCE COMMENCEMENT 7.13%
This chart assumes an initial gross investment of $100,000 made on 11/25/96.
Returns shown include the reinvestment of all dividends. Past performance is not
predictive of future results. Investment return and principal value will
fluctuate so that shares, when redeemed, may be worth more or less than the
original cost. In the absence of existing fee waivers, total return would be
reduced.
The Lehman Brothers Aggregate Bond Index includes fixed rate debt issues rated
investment grade or higher by Moody's Investors Service, Standard & Poor's
Corporation, or Fitch Investors Service, in that order. All issues have at least
one year to maturity and an outstanding par value of at least $100 million.
Price, coupon, paydown, and total return are reported for all sectors on a
month-end to month-end basis. All returns are market value-weighted inclusive of
accrued interest.
<PAGE> 2
FRONTEGRA FUNDS
Frontegra Total Return Bond Fund
SCHEDULE OF INVESTMENTS
October 31, 1997
Principal Amount Value
- --------------------------------------------------------------------------------
ASSET-BACKED SECURITIES 18.24%
$ 300,000 Charming Shoppes, Inc. Master Trust, 7.00%, 4/15/99 $ 304,992
1,600,000 First Chicago Master Trust II, 5.695%, 10/15/02 1,588,800
109,935 Green Tree Recreational 96-A-A1, 5.55%, 2/15/18 109,520
250,000 Green Tree 95-7-A5, 6.95%, 11/25/26 258,633
200,000 Green Tree 95-9-193, 6.20%, 1/15/27 200,866
200,000 Green Tree 96-7-MI, 7.70%, 10/15/27 211,568
229,310 J.P. Morgan 1996-C2, 6.47%, 3/25/05 231,713
350,000 Lehman Trust 96-2-A3, 7.11%, 10/25/09 357,609
1,500,000 MBNA Trust 1996-K-A, 5.755%, 3/15/06 1,501,350
117,626 Mego 1996-2-A2, 7.275%, 2/25/18 120,872
350,000 Pru. Mtg. 1993-5-A4, 7.00%, 2/25/00 353,584
231,444 RTC 1991-6-A1, 6.92%, 5/25/19 232,793
163,231 RTC 1991-6-C1, 9.00%, 9/25/28 172,059
250,000 Sec. Pac. 1992-3-A3, 7.45%, 9/15/12 255,420
190,504 SASCO 1996-CFL-A-1C, 5.94%, 2/25/28 189,860
1,000,000 World Financial 1996-B, 6.95%, 4/15/06 1,042,380
----------
TOTAL ASSET-BACKED SECURITIES 7,132,019
(cost $7,099,189) ----------
CORPORATE BONDS 36.16%
Airlines 1.55%
150,000 America West Airlines, Inc., 7.33%, 7/2/08 157,511
400,000 Delta Air Lines, Inc., 9.75%, 6/1/03 449,980
----------
607,491
----------
Banking 1.65%
200,000 Korea Development Bank, 6.625%, 11/21/03 183,548
500,000 Korea Development Bank, 7.25%, 5/15/06 462,210
----------
645,758
----------
Forest Products & Paper 2.12%
800,000 Boise Cascade Corp., 7.48%, 6/15/05 827,896
----------
Lodging 1.94%
750,000 Hilton Hotels Corp., 7.00%, 7/15/04 756,780
----------
See notes to financial statements.
<PAGE> 3
FRONTEGRA FUNDS
Frontegra Total Return Bond Fund
SCHEDULE OF INVESTMENTS (continued)
October 31, 1997
Principal Amount Value
- --------------------------------------------------------------------------------
Municipal 1.19%
$ 300,000 City of Taegu, South Korea, 7.375%, 10/15/07 $ 300,543
150,000 Province of Quebec, 7.22%, 7/22/36 166,164
----------
466,707
----------
Oil & Gas 5.53%
500,000 PDV America, Inc., 7.75%, 8/1/00 512,735
600,000 PDV America, Inc., 7.875%, 8/1/03 619,974
1,000,000 Transcontinental Gas Pipe Line Corp., 7.08%, 7/15/26 1,031,850
----------
2,164,559
----------
Publishing 1.43%
500,000 News America Holdings, Inc., 8.50%, 2/23/25 559,560
----------
Services 2.43%
247,522 Federal Express Corp., 8.04%, 11/22/07 269,157
344,162 Federal Express Corp., 7.85%, 1/30/15 368,532
150,000 Federal Express Corp., 7.84%, 1/30/18 156,917
150,000 Service Corporation International, 8.50%, 6/1/15 154,992
----------
949,598
----------
Utilities 17.25%
400,000 Cleveland Electric Illuminating Co. (The), 7.85%, 7/30/02 416,372
150,000 Commonwealth Edison Co., MBIA, 8.25%, 10/1/06 168,552
700,000 Commonwealth Edison Co., MBIA, 8.00%, 5/15/08 779,079
400,000 Hydro-Quebec, 8.05%, 7/7/24 456,088
160,000 Korea Electric Power Corp., 7.00%, 2/1/27 151,776
500,000 Korea Electric Power Corp., 6.75%, 8/1/27 479,370
400,000 Niagara Mohawk Power Corp., 7.375%, 8/1/03 409,716
600,000 Niagara Mohawk Power Corp., 8.00%, 6/1/04 633,180
687,000 North Atlantic Energy Corp., 9.05%, 6/1/02 693,918
250,000 Sithe/Independence Funding, 8.50%, 6/30/07 272,395
200,000 Sithe/Independence Funding, 9.00%, 12/30/13 229,220
1,000,000 Utilicorp United Inc., 6.70%, 10/15/06 1,015,110
1,000,000 Utilicorp United Inc. (AMBAC Insured), 6.875%, 10/1/04 1,038,850
----------
6,743,626
----------
Waste Management 1.07%
400,000 WMX Technologies, Inc., 7.10%, 8/1/26 416,500
----------
TOTAL CORPORATE BONDS
(cost $13,951,147) 14,138,475
==========
See notes to financial statements.
<PAGE> 4
FRONTEGRA FUNDS
Principal Amount Value
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCIES 4.98%
$515,000 FHLMC - GNMA, Series 20H, 5.50%, 10/25/23 $ 460,765
350,000 FHLMC - GNMA, Series 20L, 5.50%, 10/25/23 295,379
245,651 FNMA, Pool 73339, 6.18%, 1/1/03 243,809
290,833 FNMA, Pool 160098, 7.91%, 3/1/04 299,378
209,722 FNMA, Series 91-26G, 8.00%, 4/25/06 216,359
85,000 FNMA, Series 94-3PL, 5.50%, 1/25/24 76,197
84,961 GNMA, Pool 36629, 9.50%, 10/15/09 91,944
248,623 GNMHB, Pool 331001, 8.25%, 7/15/07 261,131
-----------
TOTAL U.S. GOVERNMENT AGENCIES
(cost $1,897,232) 1,944,962
-----------
U.S. TREASURY OBLIGATIONS 35.08%
U.S. Treasury Bonds 9.43%
2,000,000 7.50%, 11/15/16 2,284,400
1,400,000 6.25%, 8/15/23 1,402,534
-----------
3,686,934
-----------
U.S. Treasury Notes 25.65%
1,000,000 5.625%,1/31/98 1,000,250
450,000 6.375%, 1/15/99 453,996
2,500,000 6.625%, 7/31/01 2,569,925
250,000 6.375%, 9/30/01 255,033
850,000 5.75%, 8/15/03 846,081
250,000 6.50%, 8/15/05 259,067
4,470,000 6.50%, 10/15/06 4,641,961
-----------
10,026,313
-----------
TOTAL U.S. TREASURY OBLIGATIONS
(cost $13,321,374) 13,713,247
----------
SHORT-TERM INVESTMENT 5.48%
2,143,827 UMB Bank Money Market Fiduciary 2,143,827
----------
TOTAL SHORT-TERM INVESTMENT
(cost $2,143,827) 2,143,827
----------
TOTAL INVESTMENTS 99.94%
(cost $38,412,769) 39,072,530
----------
Cash and Other Assets, less Liabilities 0.06% 23,248
----------
NET ASSETS 100.00% $39,095,778
===========
See notes to financial statements.
<PAGE> 5
FRONTEGRA FUNDS
Frontegra Total Return Bond Fund
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1997
ASSETS:
Investments at value (cost $38,412,769) $39,072,530
Receivable for investments sold 725,672
Interest receivable 507,168
Receivable from adviser 140,807
Deferred organizational costs 35,277
Other assets 2,549
----------
Total assets 40,484,005
----------
LIABILITIES:
Payable for investments purchased 1,188,483
Accrued expenses 32,138
Accrued investment advisory fee 73,665
Payable to adviser - expenses 93,941
-----------
Total liabilities 1,388,227
-----------
NET ASSETS $39,095,778
===========
NET ASSETS CONSIST OF:
Paid in capital $38,183,366
Undistributed net investment income 183,488
Accumulated net realized gains on investments 69,163
Net unrealized appreciation on investments 659,761
-----------
NET ASSETS $39,095,778
===========
CAPITAL STOCK, $0.01 PAR VALUE
Authorized 100,000,000
Issued and outstanding 1,267,222
NET ASSET VALUE, REDEMPTION PRICE AND OFFERING PRICE PER SHARE $30.85
======
See notes to financial statements.
<PAGE> 6
FRONTEGRA FUNDS
Frontegra Total Return Bond Fund
STATEMENT OF OPERATIONS
For the Period Ended October 31, 1997 <F1>
INVESTMENT INCOME:
Interest $1,198,165
----------
1,198,165
EXPENSES:
Investment advisory fees 73,665
Fund administration and accounting fees 59,465
Shareholder servicing 19,204
Legal fees 18,190
Federal and state registration fees 18,130
Reports to shareholders 10,068
Pricing 8,136
Amortization of organizational costs 8,102
Insurance 6,251
Audit fees 5,504
Custody fees 4,658
Director's fees and expenses 1,256
Other 258
----------
Total expenses before waiver and reimbursements 232,887
Waiver and reimbursements of expenses by adviser (140,807)
----------
Net expenses 92,080
----------
NET INVESTMENT INCOME 1,106,085
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gains on investments 60,778
Change in unrealized appreciation on investments 659,761
----------
NET GAINS ON INVESTMENTS 720,539
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,826,624
==========
<F1> Commenced operations on November 25, 1996
See notes to financial statements.
<PAGE> 7
FRONTEGRA FUNDS
Frontegra Total Return Bond Fund
STATEMENT OF CHANGES IN NET ASSETS
For the Period Ended October 31, 1997<F1>
OPERATIONS:
Net investment income $ 1,106,085
Net realized gains on investments 60,778
Change in unrealized appreciation on investments 659,761
----------
Net increase in net assets resulting from operations 1,826,624
----------
DISTRIBUTIONS PAID FROM:
Net investment income (917,864)
----------
CAPITAL SHARE TRANSACTIONS:
Shares sold 37,210,071
Shares issued to holders in reinvestment of distributions 904,999
Shares redeemed (28,052)
----------
Net increase 38,087,018
----------
TOTAL INCREASE IN NET ASSETS 38,995,778
NET ASSETS:
Beginning of period 100,000
----------
End of period (includes undistributed net
investment income of $183,488) $39,095,778
===========
<F1> Commenced operations on November 25, 1996
See notes to financial statements.
<PAGE> 8
FRONTEGRA FUNDS
Frontegra Total Return Bond Fund
FINANCIAL HIGHLIGHTS
For the Period Ended October 31, 1997 <F1>
NET ASSET VALUE, BEGINNING OF PERIOD $ 30.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 1.37
Net realized and unrealized gain on investments 0.70
---------
TOTAL FROM INVESTMENT OPERATIONS 2.07
---------
LESS DISTRIBUTIONS PAID:
From net investment income (1.22)
---------
TOTAL DISTRIBUTIONS (1.22)
---------
NET ASSET VALUE, END OF PERIOD $ 30.85
=========
TOTAL RETURN <F2> 7.13%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period (in thousands) $39,096
Ratio of expenses to average net assets <F3> <F4> 0.50%
Ratio of net investment income to average net assets <F3> <F4> 6.02%
Portfolio turnover rate <F2> 202%
<F1> Commenced operations on November 25, 1996
<F2> Not annualized
<F3> Net of waivers and reimbursements by Adviser. Without waivers and
reimbursements of expenses, the ratio of expenses to average net assets
would have been 1.27% and the ratio of net investment income to average net
assets would have been 5.25% for the period November 25, 1996 to October
31, 1997.
<F4> Annualized
See notes to financial statements.
<PAGE> 9
FRONTEGRA FUNDS
Frontegra Total Return Bond Fund
NOTES TO FINANCIAL STATEMENTS
October 31, 1997
FRONTEGRA FUNDS
(1) ORGANIZATION
Frontegra Funds, Inc. ("Frontegra") was incorporated on May 24, 1996, as
a Maryland corporation and is registered under the Investment Company Act
of 1940, as amended (the "1940 Act"), as an open-end diversified
management investment company issuing its shares in series, each series
representing a distinct portfolio with its own investment objectives and
policies. Frontegra consists of two series: the Frontegra Total Return Bond
Fund (the "Fund") and the Frontegra Opportunity Fund. The Fund issued and
sold 3,333 shares of common stock ("initial shares") of which 1,667
shares were sold to Frontegra Asset Management, Inc. (the "Adviser") and
1,666 shares were sold to Reams Asset Management Company, LLC (the "Sub-
Adviser") at $30 per share on September 30, 1996. The Fund commenced
operations on November 25, 1996. Costs incurred by the Fund in connection
with its organization, registration and the initial public offering of
shares have been deferred and will be amortized over the period of benefit,
but not to exceed five years from the date upon which the Fund commenced
its investment activities. If any of the original shares of the Fund
purchased by the Adviser or Sub-Adviser are redeemed by any holder thereof
prior to the end of the amortization period, the redemption proceeds will
be reduced by the pro rata share of the unamortized costs as of the date of
redemption. The pro rata share by which the proceeds are reduced will be
derived by dividing the number of original shares of the Fund being
redeemed by the total number of original shares outstanding at the time of
redemption.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
(a) Investment Valuation
Debt securities (other than short-term instruments) are valued at bid
prices furnished by a pricing service. Securities maturing within 60
days or less when purchased are valued by the amortized cost method.
Any securities for which market quotations are not readily available
are valued at their fair value as determined in good faith by the Sub-
Adviser pursuant to guidelines established by the Board of Directors.
<PAGE> 10
FRONTEGRA FUNDS
(b) Federal Income Taxes
No federal income tax provision has been made since the Fund intends
to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute substantially all
investment company net taxable income and net capital gains to
shareholders in a manner which results in no tax cost to the Fund.
(c) Distributions to Shareholders
Dividends from net investment income are usually declared and paid
quarterly. Distributions of net realized gains, if any, will be
declared and paid at least annually. Distributions to shareholders are
recorded on the ex-dividend date. The character of distributions made
during the year from net investment income or net realized gain may
differ from the characterization for federal income tax purposes due
to differences in the recognition of income, expense and gain items
for financial statement and tax purposes. Where appropriate,
reclassifications between net asset accounts are made for such
differences that are permanent in nature. Accordingly, at October 31,
1997, reclassifications were recorded to decrease undistributed net
investment income by $4,733, increase accumulated net realized gains
on investments by $8,385 and decrease capital stock by $3,652.
(d) Other
Investment transactions are accounted for on the trade date. The Fund
determines the gain or loss realized from investment transactions by
comparing the original cost of the security lot sold with the net sale
proceeds. Dividend income is recognized on the ex-dividend date and
interest income is recognized on an accrual basis. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of increases and decreases in net
assets from operations during the reporting period. Actual results
could differ from those estimates.
(3) INVESTMENT ADVISER
The Fund has an agreement with the Adviser, with whom certain officers and
directors of the Fund are affiliated, to furnish investment advisory
services to the Fund. Under the terms of this agreement, the Fund will pay
the Adviser a monthly fee at the annual rate of 0.40% of the Fund's
average daily net assets. The Adviser has agreed to voluntarily waive its
management fee and/or reimburse the Fund's operating expenses (exclusive
of brokerage, interest, taxes and extraordinary expenses) to ensure that
the Fund's operating expenses do not exceed 0.50% of the Fund's average
daily net assets.
<PAGE> 11
FRONTEGRA FUNDS
Frontegra Total Return Bond Fund
NOTES TO FINANCIAL STATEMENTS (continued)
(4) CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Fund were as follows:
Period Ended
October 31, 1997 <F1>
-----------------
Shares sold 1,234,460
Shares issued to holders in reinvestment
of distributions 30,340
Shares redeemed (911)
---------
1,263,889
=========
<F1> Commenced operations on November 25, 1996
(5) INVESTMENT TRANSACTIONS
The aggregate purchases and sales of securities, excluding short-term
investments and U.S. government securities, for the Fund for the period
November 25, 1996, to October 31, 1997, are summarized below:
Purchases $26,285,253
Sales $3,291,430
Purchases and sales of U.S. government securities were $49,569,251 and
$36,336,109, respectively.
At October 31, 1997, gross unrealized appreciation and depreciation of
investments, based on cost for federal income tax purposes of $38,427,582
were as follows:
Appreciation $694,492
Depreciation (49,544)
--------
Net appreciation on investments $644,948
========
<PAGE> 12
FRONTEGRA FUNDS
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of the Frontegra Funds,
Inc./Frontegra Total Return Bond Fund:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of the Frontegra Total Return Bond Fund (the
"Fund") as of October 31, 1997, the related statement of operations, the
statement of changes in net assets and the financial highlights for the fiscal
period indicated therein. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on the financial statements and financial highlights based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of October 31, 1997, by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Frontegra Total Return Bond Fund at October 31, 1997, and the results of its
operations, the changes in its net assets and the financial highlights for the
fiscal period indicated therein, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Chicago, Illinois
November 21, 1997
<PAGE> 13
FRONTEGRA FUNDS, INC.
c/o Sunstone Investor Services, LLC
P.O. Box 2142, Milwaukee, Wisconsin 53201-2142
