(LOGO)
FRONTEGRA FUNDS
ANNUAL REPORT
Frontegra Opportunity Fund
FRONTEGRA ASSET MANAGEMENT, INC.
October 31, 1997
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.
DEAR FELLOW SHAREHOLDERS:
We are pleased to report that the Frontegra Opportunity Fund (the "Fund") is
off to a strong start since its inception on July 31, 1997. The Fund returned
7.40% for the three months ended October 31, 1997. This compares to a 4.95%
return for its benchmark, the Russell 2000 Index (the "Index") for the same
period. The net asset value closed the period at $32.22 per share.
During the Fund's first three months, the small cap market exhibited significant
volatility. The first two months of the period were very strong for both the
Fund and small cap stocks as a group, both of which advanced nearly 10%. In
October, however, the overall market experienced a mild correction and small cap
stocks declined nearly 5%. The Fund's value orientation protected investors from
significant loss as its loss in October was just half that of the Index.
As you know, the Fund is invested in a portfolio of stocks that sell at a
discount to the market on the basis of their price to earnings and price to book
value ratios. Currently, the portfolio is selling at a 25% discount to the
Index's price to earnings ratio and a 32% discount to its price to book value
ratio. In addition to attractive valuations, stocks in the portfolio tend to
have strong financial characteristics. Consistent with this, the portfolio
exhibits a very strong five-year average return on equity of 19.1% compared to
13.5% for the Index.
Even though we believe that the overall stock market is fairly valued, we are
able to find attractive investment opportunities through our bottom-up
fundamental research. As a result of the bottom-up process, the portfolio is
focused on three sectors: Finance, Consumer Durables and Services and Producer
Manufacturing. The Finance exposure consists of bank holding companies,
including First Bell Bancorp and Dime Bancorp, as well as a number of Real
Estate Investment Trusts (REITS). The Consumer Durables and Services exposure is
focused on entertainment, cable and consumer electronics companies. Finally, the
Producer Manufacturing exposure in the portfolio is focused on industrial
equipment and value-added building materials.
As the new fiscal year begins, we believe the portfolio is well positioned to
take advantage of opportunities in the small cap market. The portfolio continues
to focus on companies with low valuations, industry leading products,
conservative capital structures and superior cash generation abilities.
In closing, we appreciate your investment, particularly as early shareholders in
the Fund, and will continue to work hard to produce top tier results for you.
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
INVESTMENT HIGHLIGHTS
TOTAL RETURN
7/31/97 10/31/97
Frontegra Opportunity Fund $107,400
Lipper Small-Cap Fund Index $103,477
Russell 2000 Index $104,952
Portfolio Total Return
FOR THE PERIOD ENDED 10/31/97
- -----------------------------
SINCE COMMENCEMENT 7.40%
This chart assumes an initial gross investment of $100,000 made on 7/31/97. 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 Lipper Small-Cap Fund Index includes the 30 largest funds which, by
prospectus or portfolio practice limits its investments to companies on the
basis of the size of the company.
The Russell 2000 Index is comprised of the smallest 2000 companies in the
Russell 3000 Index. The Russell 3000 Index is comprised of the 3000 largest U.S.
companies based on market capitalization.
Frontegra Opportunity Fund
SCHEDULE OF INVESTMENTS
October 31, 1997
Number of Shares Value
- ---------------------------------------------------------------------------
COMMON STOCKS 98.2%
Commercial Services 3.9%
5,300 Banta Corp. $138,462
3,200 Lawson Products, Inc. 88,600
---------
227,062
---------
Consumer Durables 10.1%
3,400 Champion Enterprises, Inc.* 59,712
5,200 CLARCOR Inc. 149,175
5,300 Department 56, Inc.* 159,994
1,700 Harman International Industries, Inc. 91,800
5,900 Jostens, Inc. 137,544
---------
598,225
---------
Consumer Services 7.9%
5,600 Carmike Cinemas, Inc.* 182,000
13,200 Jones Intercable, Inc. - Class A* 168,300
4,900 Lone Star Steakhouse & Saloon, Inc.* 113,313
---------
463,613
---------
Electronic Technology 5.5%
9,600 Auspex Systems, Inc.* 111,600
9,900 Periphonics Corp.* 95,288
8,600 Robotic Vision Systems, Inc.* 118,250
---------
325,138
---------
Energy Minerals 5.7%
6,300 Mitchell Energy & Development Corp. 157,500
13,800 Santa Fe Energy Resources, Inc.* 180,263
---------
337,763
---------
Finance 11.4%
3,200 Arthur J. Gallagher & Co. 112,000
4,110 Dime Bancorp, Inc. 98,640
9,200 First Bell Bancorp, Inc. 161,000
6,800 Resource Bancshares Mortgage Group, Inc. 90,950
4,400 Sovran Self Storage, Inc. 129,250
3,200 United Companies Finance Corp. 81,000
---------
672,840
---------
See notes to financial statements.
Frontegra Opportunity Fund
SCHEDULE OF INVESTMENTS (continued)
October 31, 1997
Number of Shares Value
- ---------------------------------------------------------------------------
Health Technology 4.4%
8,900 Haemonetics Corp.* $ 134,612
6,500 Lunar Corp.* 123,906
---------
258,518
---------
Industrial Services 4.8%
14,300 Dames & Moore, Inc. 177,856
3,900 Jacobs Engineering Group Inc.* 105,300
---------
283,156
---------
Non-Energy Materials 6.7%
2,400 AK Steel Holding Corp. 101,100
7,000 Giant Cement Holding, Inc.* 169,750
2,600 Texas Industries, Inc. 123,338
---------
394,188
---------
Process Industries 5.9%
1,600 Ferro Corp. 59,900
3,800 Furon Co. 144,875
5,800 Shorewood Packaging Corp.* 143,550
---------
348,325
---------
Producer Manufacturing 17.4%
7,300 Global Industrial Technologies, Inc.* 124,556
11,700 Griffon Corp.* 185,006
6,500 Holophane Corp.* 147,875
9,400 JLG Industries, Inc. 119,262
8,700 Juno Lighting, Inc. 156,600
4,600 Standex International Corp. 161,000
4,300 Wolverine Tube, Inc.* 133,300
---------
1,027,599
---------
Retail 2.5%
16,000 Homebase, Inc.* 147,000
---------
Real Estate Investment Trusts 12.0%
6,400 Amli Residential Properties Trust 148,800
5,900 Associated Estates Realty Corp. 135,331
5,000 Colonial Properties Trust 141,875
4,400 Mid-Atlantic Realty Trust 59,400
5,400 Storage Trust Realty 138,038
See notes to financial statements.
Number of Shares Value
- ----------------------------------------------------------------------------
Real Estate Investment Trusts 12.0% (cont'd.)
6,400 Winston Hotels, Inc. $ 87,200
---------
710,644
---------
TOTAL COMMON STOCKS
(cost $5,687,752) 5,794,071
---------
Principal Amount
- ----------------------------------------------------------------------------
SHORT-TERM INVESTMENT 0.7%
$41,034 UMB Bank Money Market Fiduciary 41,034
---------
TOTAL SHORT-TERM INVESTMENT
(cost $41,034) 41,034
---------
TOTAL INVESTMENTS 98.9%
(cost $5,728,786) 5,835,105
---------
Cash and Other Assets, less Liabilities 1.1% 64,563
---------
NET ASSETS 100.00% $5,899,668
=========
* Non-income producing
See notes to financial statements.
Frontegra Opportunity Fund
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1997
ASSETS:
Investments at value (cost $5,728,786) $5,835,105
Receivable for investments sold 149,397
Receivable for fund shares sold 34,012
Interest and dividends receivable 6,001
Receivable from adviser 31,847
Deferred organizational costs, net 38,344
Other assets 6,603
----------
Total assets 6,101,309
----------
LIABILITIES:
Payable for investments purchased 124,624
Accrued expenses 12,441
Accrued investment advisory fee 1,796
Payable to adviser - expenses 62,780
----------
Total liabilities 201,641
----------
NET ASSETS $5,899,668
==========
NET ASSETS CONSIST OF:
Paid in capital $5,786,520
Undistributed net investment income 8,034
Accumulated net realized losses on investments (1,205)
Net unrealized appreciation on investments 106,319
----------
NET ASSETS $5,899,668
==========
CAPITAL STOCK, $0.01 PAR VALUE
Authorized 100,000,000
Issued and outstanding 183,102
NET ASSET VALUE, REDEMPTION PRICE AND OFFERING PRICE PER SHARE $32.22
======
See notes to financial statements.
Frontegra Opportunity Fund
STATEMENT OF OPERATIONS
For the Period Ended October 31, 1997<F1>
INVESTMENT INCOME:
Dividends $ 8,555
Interest 1,138
----------
9,693
----------
EXPENSES:
Fund administration and accounting fees 15,123
Shareholder servicing 4,033
Federal and state registration fees 3,367
Legal fees 2,521
Amortization of organizational costs 2,036
Reports to shareholders 1,891
Investment advisory fees 1,796
Audit fees 1,386
Custody fees 1,210
Pricing 384
Director's fees and expenses 315
Insurance 247
Other 25
----------
Total expenses before waiver and reimbursements 34,334
Waiver and reimbursements of expenses by adviser (31,847)
----------
Net expenses 2,487
----------
NET INVESTMENT INCOME 7,206
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments (1,205)
Change in unrealized appreciation on investments 106,319
----------
NET GAINS ON INVESTMENTS 105,114
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $112,320
==========
<F1> Commenced operations on July 31, 1997
See notes to financial statements.
Frontegra Opportunity Fund
STATEMENT OF CHANGES IN NET ASSETS
For the Period Ended October 31, 1997<F1>
OPERATIONS:
Net investment income $ 7,206
Net realized loss on investments (1,205)
Change in unrealized appreciation on investments 106,319
----------
Net increase in net assets resulting from operations 112,320
----------
CAPITAL SHARE TRANSACTIONS:
Shares sold 5,787,348
----------
Net increase 5,787,348
----------
TOTAL INCREASE IN NET ASSETS 5,899,668
----------
NET ASSETS:
Beginning of period --
----------
End of period (includes undistributed net
investment income of $8,034) $5,899,668
==========
<F1> Commenced operations on July 31, 1997
See notes to financial statements.
Frontegra Opportunity 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 0.04
Net realized and unrealized gain on investments 2.18
---------
TOTAL FROM INVESTMENT OPERATIONS 2.22
---------
NET ASSET VALUE, END OF PERIOD $ 32.22
=========
TOTAL RETURN<F2> 7.40%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period (in thousands) $5,900
Ratio of expenses to average net assets<F3><F4> 0.90%
Ratio of net investment income to average net assets<F3><F4> 2.61%
Portfolio turnover rate<F2> 9%
<F1> Commenced operations on July 31, 1997
<F2> Not annualized
<F3> Net of waiver and reimbursements by Adviser. Without waiver and
reimbursements of expenses, the ratio of expenses to average net assets
would have been 12.02% and the ratio of net investment income to average
net assets would have been (8.51)% for the period July 31, 1997 to October
31, 1997.
<F4> Annualized
See notes to financial statements.
Frontegra Opportunity Fund
NOTES TO FINANCIAL STATEMENTS
October 31, 1997
(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 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 Opportunity Fund (the
"Fund") and the Frontegra Total Return Bond Fund. The Fund commenced
operations on July 31, 1997. 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.
(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
Securities (other than short-term instruments) for which market
quotations are readily available are valued at the last trade price on
the material securities exchange on which such securities are
primarily traded. Securities for which there were no transactions on a
given day or securities not listed on a national securities exchange
are valued at the most recent bid prices. 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.
(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 and 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 increase undistributed net
investment income and decrease capital stock by $828.
(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 0.65% 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 0.90% of the Fund's average daily
net assets.
(4) CAPITAL SHARE TRANSACTIONS
Since the Fund commenced operations on July 31, 1997, 183,102 shares of the
Fund were sold. There were no shares issued to holders in reinvestment of
distributions or shares redeemed.
Frontegra Opportunity Fund
NOTES TO FINANCIAL STATEMENTS (continued)
(5) INVESTMENT TRANSACTIONS
The aggregate purchases and sales of securities, excluding short-term
investments for the Fund for the period July 31, 1997 to October 31, 1997
are summarized below:
Purchases $5,916,211
Sales $227,254
At October 31, 1997, gross unrealized appreciation and depreciation of
investments were as follows:
Appreciation $191,535
Depreciation (85,216)
--------
Net appreciation on investments $106,319
========
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of the Frontegra Funds,
Inc./Frontegra Opportunity Fund:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of the Frontegra Opportunity 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 Opportunity 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
December 19, 1997
FRONTEGRA FUNDS, INC.
c/o Sunstone Investor Services, LLC
P.O. Box 2142, Milwaukee, Wisconsin 53201-2142
