As filed with the Securities and Exchange Commission on May 30, 1997
Securities Act Registration No. 333-7305
Investment Company Act Registration No. 811-7685
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 1 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 2 [X]
FRONTEGRA FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
400 Skokie Blvd.
Suite 500 60062
Northbrook, Illinois (Zip Code)
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code:
(847) 509-9860
William D. Forsyth III
400 Skokie Blvd., Suite 500
Northbrook, Illinois 60062
(Name and Address of Agent for Service)
Copies to:
Carol A. Gehl
Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, Wisconsin 53202
In accordance with Rule 24f-2 under the Investment
Company Act of 1940, Registrant has registered an
indefinite number of shares of its common stock, $.01
par value; the Registrant's Rule 24f-2 Notice for the
year ending December 31, 1997 will be filed on or
before February 28, 1998.
It is proposed that this filing will become
effective (check appropriate box):
[X] immediately upon filing pursuant to paragraph (b) of Rule 485.
[ ] on (date) pursuant to paragraph (b) of Rule 485.
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485.
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485.
[ ] 75 days after filing pursuant to paragraph (a)(2) of Rule 485.
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
<PAGE>
CROSS REFERENCE SHEET
(Pursuant to Rule 481 showing the location in
the Prospectus and the Statement of Additional
Information of the responses to the Items of Parts A
and B of Form N-1A).
Caption or Subheading in
Prospectus or Statement
Item No. on Form N-1A of Additional Information
PART A - INFORMATION REQUIRED IN PROSPECTUS
1. Cover Page Cover Page
2. Synopsis Summary; Summary of
Portfolio Expenses
3. Condensed Financial *
Information
4. General Description of Organization; Investment
Registrant Objectives and Policies;
Investment Techniques and
Risks; Investment Restrictions
5. Management of the Fund Management; Portfolio
Expenses
5A. Management's Discussion
of Fund Performance *
6. Capital Stock and Other Dividends, Capital Gain
Securities Distributions and Tax
Treatment; Organization
7. Purchase of Securities How to Purchase Shares;
Being Offered Determination of Net Asset
Value; Exchange Privilege
8. Redemption or Repurchase How to Redeem Shares;
Determination of Net Asset
Value; Exchange Privilege
9. Pending Legal Proceedings *
PART B - INFORMATION REQUIRED IN STATEMENT OF
ADDITIONAL INFORMATION
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information Included in Prospectus
and History under the heading Organization
13. Investment Investment Restrictions;
Objectives and Policies Investment Policies and
Techniques
14. Management of the Directors and Officers
Fund
15. Control Persons and Principal Shareholders;
Principal Holders of Directors and Officers;
Securities Investment Adviser
<PAGE>
16. Investment Advisory Investment Adviser;
and Other Services Management (in Prospectus);
Custodian; Transfer Agent and
Dividend-Disbursing
Agent; Independent
Accountants
17. Brokerage Allocation Portfolio Transactions
and Other Practices and Brokerage
18. Capital Stock and Included in Prospectus
Other Securities under the heading
Organization
19. Purchase, Redemption Included in Prospectus
and Pricing of under the headings How to
Securities Being Offered Purchase Shares;
Determination of Net
Asset Value; How to
Redeem Shares; Exchange
Privilege; and in the
Statement of Additional
Information under the
heading Investment
Adviser
20. Tax Status Included in Prospectus
under the heading
Dividends, Capital Gain
Distributions and Tax
Treatment
21. Underwriters *
22. Calculations of Performance Information
Performance Data
23. Financial Statements Financial Statements
________________________
* Answer Negative or inapplicable.
<PAGE>
FRONTEGRA FUNDS, INC.
SUPPLEMENT TO PROSPECTUS
dated October 30, 1996, as
Supplemented on November 25, 1996
Financial Highlights
The following Financial Highlights table is to be
inserted after "Summary of Expenses" in the Prospectus:
The unaudited financial information relating to
the Total Return Bond Fund during the period from
November 25, 1996 (commencement of operations) to April
30, 1997 included in this table has been derived from
the unaudited financial statements of the Fund. The
table should be read in conjunction with the financial
statements and related notes included in the Fund's
Semi-Annual Report to Shareholders, which is available
without charge by writing to the Company c/o Sunstone
Investor Services, LLC, P.O. Box 2142, Milwaukee,
Wisconsin 53201-2142, or by calling, toll-free,
1-888-825-2100. Financial information relating to the
Opportunity Fund is not provided because the
Opportunity Fund has not commenced operations.
Net asset value, beginning of period $30.00
Income from investment operations:
Net investment income 0.74
Net realized and unrealized
loss on investments (0.77)
Total income from investment
operations (0.03)
Less distributions:
From net investment income (0.58)
Total distributions (0.58)
Net asset value, end of period $29.39
Total return (1) (0.07%)
Supplemental data and ratios:
Net assets, end of period
(in thousands) $14,350
Ratio of expenses to average
net assets (2)(3) 0.50%
Ratio of net investment income
to average net assets (2)(3) 6.18%
Portfolio turnover rate (1) 47%
__________
(1) Not annualized
(2) Net of waivers and reimbursements by Frontegra. Without
waivers and reimbursements of expenses, the ratio of expenses
to average net assets would have been 1.66% and the ratio of
net investment income to average net assets would have been
5.02% for the period November 25, 1996 to April 30, 1997.
(3) Annualized
This Supplement should be retained with your Prospectus
for future reference.
The date of this Supplement is May 30, 1997.
<PAGE>
PROSPECTUS
October 30, 1996
FRONTEGRA FUNDS, INC.
c/o Sunstone Investor Services, LLC
P. O. Box 2142
Milwaukee, Wisconsin 53201-2142
1-888-825-2100
FRONTEGRA FUNDS, INC. is an open-end, diversified,
management investment company, known as a mutual fund
(the "Company"). The Company is currently comprised of
two separate portfolios, the FRONTEGRA TOTAL RETURN
BOND FUND (the "Total Return Bond Fund") and the
FRONTEGRA OPPORTUNITY FUND (the "Opportunity Fund")
(hereinafter collectively referred to as the "Funds").
The investment objective of the Total Return Bond
Fund is a high level of total return, consistent with
the preservation of capital. The Total Return Bond
Fund invests primarily in a diversified portfolio of
fixed income securities of varying maturities. The
investment objective of the Opportunity Fund is capital
appreciation. The Opportunity Fund invests primarily
in a diversified portfolio of equity securities of
companies with small to mid-sized market
capitalizations. The Funds are 100% no-load. There
are no sales, redemption or 12b-1 fees.
This Prospectus sets forth concisely the
information that you should be aware of prior to
investing in the Funds. Please read this Prospectus
carefully and retain it for future reference.
Additional information regarding the Company and the
Funds is included in the Statement of Additional
Information dated October 30, 1996, which has been
filed with the Securities and Exchange Commission
("SEC") and is incorporated in this Prospectus by
reference. A copy of the Company's Statement of
Additional Information is available without charge by
writing to the Company at the address listed above or
by calling, toll-free, 1-888-825-2100.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION, NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
Page
SUMMARY 4
INVESTMENT OBJECTIVE 4
RISK FACTORS 4
INVESTMENT ADVISER 4
PURCHASES AND REDEMPTIONS 4
SHAREHOLDER SERVICES 4
SUMMARY OF EXPENSES 5
FEE TABLES 5
EXAMPLE 5
INVESTMENT OBJECTIVES AND POLICIES 6
TOTAL RETURN BOND FUND 6
OPPORTUNITY FUND 6
INVESTMENT TECHNIQUES AND RISKS 7
TOTAL RETURN BOND FUND 7
FIXED INCOME SECURITIES 7
REVERSE REPURCHASE AGREEMENTS AND MORTGAGE DOLLAR
ROLLS 10
WHEN-ISSUED SECURITIES 11
ILLIQUID SECURITIES 11
REPURCHASE AGREEMENTS 11
FOREIGN SECURITIES AND CURRENCIES 11
DERIVATIVE INSTRUMENTS 12
PORTFOLIO TURNOVER 12
OPPORTUNITY FUND 13
SMALL COMPANIES 13
SHORT-TERM FIXED INCOME SECURITIES 13
ILLIQUID SECURITIES 13
REPURCHASE AGREEMENTS 13
FOREIGN SECURITIES AND CURRENCIES 14
DERIVATIVE INSTRUMENTS 14
PORTFOLIO TURNOVER 15
MANAGEMENT 15
HOW TO PURCHASE SHARES 16
INITIAL INVESTMENT - MINIMUM $100,000 16
SUBSEQUENT INVESTMENTS - MINIMUM $1,000 17
HOW TO REDEEM SHARES 17
WRITTEN REDEMPTION 17
SIGNATURE GUARANTEES 17
EXCHANGE PRIVILEGE 18
<PAGE>
TAX-SHELTERED RETIREMENT PLANS 18
INDIVIDUAL RETIREMENT ACCOUNT 18
SIMPLIFIED EMPLOYEE PENSION PLAN 18
DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAX TREATMENT 18
FUND EXPENSES 19
DETERMINATION OF NET ASSET VALUE 19
SHAREHOLDER REPORTS 20
ORGANIZATION 20
ADMINISTRATOR AND FUND ACCOUNTANT 20
CUSTODIAN AND TRANSFER AGENT 21
COMPARISON OF INVESTMENT RESULTS 21
No person has been authorized to give any information
or to make any representations other than those
contained in this Prospectus and the Statement of
Additional Information, and if given or made, such
information or representations may not be relied upon
as having been authorized by the Company. This
Prospectus does not constitute an offer to sell
securities in any state to any person to whom it is
unlawful to make such offer in such state.
<PAGE>
SUMMARY
Investment Objective
Frontegra Funds, Inc. currently is comprised of the
Frontegra Total Return Bond Fund and the Frontegra
Opportunity Fund. The investment objective of the
Total Return Bond Fund is a high level of total return,
consistent with the preservation of capital. The Total
Return Bond Fund invests primarily in a diversified
portfolio of fixed income securities of varying
maturities. The investment objective of the
Opportunity Fund is capital appreciation. The
Opportunity Fund invests primarily in a diversified
portfolio of equity securities of companies with small
to mid-sized market capitalizations. Each Fund's
investments are subject to market risk and the value of
its shares will fluctuate with changing market
valuations of its portfolio holdings. See "INVESTMENT
OBJECTIVES AND POLICIES" and "INVESTMENT TECHNIQUES AND
RISKS."
Risk Factors
The Funds are suitable for long-term investors only
and are not designed as a short-term investment. The
share price of each Fund is expected to fluctuate and
may, at redemption, be worth more or less than the
initial purchase price. Market risks associated with
fixed income investments include the possibility that
bond prices in general will decline over short or even
extended periods. This risk is in addition to the
risks inherent in individual stock selections. Market
risks associated with fixed income investments include
the possibility that bond prices in general will
decline when interest rates increase. While fixed
income securities normally fluctuate less in price than
stocks, there have been extended periods of increases
in interest rates that have caused significant declines
in fixed income securities prices. In addition to
market risks associated with fixed income investments,
individual issues of fixed income securities may be
subject to credit risk of the issuer. Market risks
associated with equity investments include the
possibility that stock prices in general will decline
over short or even extended periods. This risk is in
addition to the risks inherent in individual stock
selections. See "INVESTMENT TECHNIQUES AND RISKS," for
more information.
Investment Adviser
The Funds are managed by Frontegra Asset
Management, Inc. ("Frontegra"), which supervises the
management of each Fund's portfolio by the sub-adviser
and administers the Company's business affairs.
Investment advisory services are provided to the Funds
by Reams Asset Management Company, LLC ("Reams"). The
firm operated as a corporation (Reams Asset Management
Company, Inc.) from its founding in 1981 until March
31, 1994, when it became an Indiana limited liability
company (LLC), with no change in principals, employees
or clients. Reams primarily acts as investment adviser
to institutional clients with investment portfolios
totaling approximately $2.4 billion. See "MANAGEMENT."
Purchases and Redemptions
Shares of the Funds are sold and redeemed at net
asset value without the imposition of any sales or
redemption charges. The minimum initial investment
required by each Fund is $100,000. The minimum
subsequent investment is $1,000. These minimums may be
changed or waived at any time at the discretion of the
Funds. See "HOW TO PURCHASE SHARES" and "HOW TO REDEEM
SHARES." Shares in one Fund may be exchanged without
any charge for shares in another Fund at their
respective net asset values.
Shareholder Services
Questions regarding either of the Funds may be
directed to the Company at the address and telephone
number on the front page of this Prospectus.
<PAGE>
SUMMARY OF EXPENSES
Fee Tables
Shareholder Transaction Expenses
Total Return Bond Opportunity
Fund Fund
Sales Load Imposed on Purchases NONE NONE
Sales Load Imposed on Reinvested Dividends NONE NONE
Deferred Sales Load Imposed on Redemptions NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
Annual Operating Expenses (after waivers or
reimbursements) (as a percentage of average net assets)
Total Return Bond Opportunity
Fund Fund
Management Fees 0.40% 0.65%
12b-1 Fees NONE NONE
Other Expenses
(Net of Reimbursements) 0.10% 0.25%
TOTAL OPERATING EXPENSES 0.50% 0.90%
(after Waivers or Reimbursements)
For the Funds' first twelve months of operation,
Frontegra has agreed to waive its management fee and/or
reimburse each Fund's operating expenses to the extent
necessary to ensure that the Total Return Bond Fund's
and the Opportunity Fund's Total Operating Expenses do
not exceed 0.50% and 0.90% respectively of the Fund's
average daily net assets. Since the Funds did not
commence operations until November 25, 1996, other
expenses have been estimated and are presented net of
reimbursements. Absent these reimbursements, the Other
Expenses and Total Operating Expenses for the Total
Return Bond Fund are estimated to be 0.36% and .76%,
respectively; Other Expenses and Total Operating
Expenses for the Opportunity Fund are estimated to be
0.35% and 100%, respectively. For additional
information concerning fees and expenses, see
"MANAGEMENT."
The Fund will charge a service fee of $9 for
redemptions effected via wire transfer, and $20 for
checks that do not clear. See "HOW TO REDEEM SHARES."
Example
You would pay the following expenses on a $1,000
investment, assuming (i) 5% annual return and (ii)
redemption at the end of each time period:
Total Return Bond Opportunity
Fund Fund
1 Year $ 5 $ 9
3 Years $16 $30
The Fee Tables, including the Example, are included
to assist you in understanding the various costs and
expenses that an investor in the Funds bears directly
or indirectly. The Example is based on the Total
Operating Expenses specified in the table above. The
amounts in the Example may increase absent the waivers
or
<PAGE>
reimbursements. Please remember that the Example
should not be considered representative of past or
future expenses and that actual expenses may be greater
or lesser than those shown. The assumption in the
Example of a 5% annual rate of return is required by
regulations of the SEC applicable to all mutual funds.
This return is hypothetical and should not be
considered representative of past or future performance
of the Funds.
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives presented below may not
be changed without shareholder approval. Since all
investments are subject to inherent market risks, there
is no assurance that these objectives will be realized.
Other investment restrictions which may not be changed
without shareholder approval are contained in the
Company's Statement of Additional Information. Except
for each Fund's investment objective and the investment
restrictions enumerated in the Company's Statement of
Additional Information, a Fund's policies may be
changed without a vote of the Fund's shareholders.
TOTAL RETURN BOND FUND
The Total Return Bond Fund's investment objective
is a high level of total return, consistent with the
preservation of capital.
The Total Return Bond Fund will seek, under normal
market conditions, to achieve its investment objective
by investing in a diversified portfolio of fixed income
securities of varying maturities. The Fund will invest
at least 65% of its net assets in bonds. The Fund
considers a bond to be any debt instrument. These
instruments include: short-term fixed income
securities; U.S. government securities; corporate debt
securities, including convertible securities and
corporate commercial paper; mortgage-backed and other
asset-backed securities; structured notes and loan
participations; bank certificates of deposit, fixed
time deposits and bankers' acceptances; repurchase
agreements; obligations of foreign governments or their
subdivisions, agencies and instrumentalities; and
obligations of international agencies or supranational
entities. Although the Fund primarily will invest in
investment grade fixed income securities, the Fund may
invest up to 25% of its assets in fixed income
securities that are rated below investment grade. The
Fund may invest up to 20% of its assets in securities
denominated in foreign currencies and may invest beyond
this limit in U.S. dollar-denominated securities of
foreign issuers. The portfolio duration of the Fund
will normally fall between three to seven years based
on market conditions. Duration is a measure of a fixed
income security's average life that reflects the
present value of the security's cash flow, and
accordingly is a measure of price sensitivity to
interest rate changes.
Reams attempts to maximize total return over a long-
term horizon through opportunistic investing in a broad
array of eligible securities. The investment process
combines active duration and yield-curve management
with bottom-up issue selection, focusing on undervalued
issues in the fixed income market. Reams employs a two-
step process in managing the Total Return Bond Fund.
The first step is to establish the portfolio's duration
on the basis of whether the bond market is under or
over priced. Emphasis is placed on inflation and
monetary policy in the formulation of Reams'
strategies. Reams determines market attractiveness by
comparing current interest rates to historical interest
rates. Once Reams has determined an overall market
strategy, the second step is to select the most
attractive bonds for the Fund. The portfolio
management team screens hundreds of issues to determine
how each will perform in various interest-rate
environments. The firm's outlook for interest rates,
fundamental credit analysis and option-adjusted spread
analysis are the primary tools used when constructing
these scenarios. Investment opportunities are compared
and the Fund's portfolio is assembled from the best
available values.
OPPORTUNITY FUND
The Opportunity Fund's investment objective is
capital appreciation.
The Opportunity Fund will seek, under normal market
conditions, to achieve its investment objective by
investing its assets primarily in equity securities of
companies with small to mid-sized market
capitalizations. The Fund
<PAGE>
will invest at least 80% of
its net assets in equity securities. These securities
include: common stocks; preferred stocks; warrants to
purchase common stocks or preferred stocks; depositary
receipts; and securities convertible into common or
preferred stocks, such as convertible bonds and
debentures rated Baa or higher by Moody's Investors
Service ("Moody's") or BBB or higher by Standard &
Poor's ("S&P"), Duff & Phelps, Inc. ("D&P") or Fitch
Investors Service, Inc. ("Fitch"). At least 65% of the
Opportunity Fund's total assets will normally be
invested in equity securities of small to mid-sized
market capitalization companies, which for the purposes
of this Fund are those companies with a market
capitalization of $2 billion or less at the time of the
Fund's investment. In general, smaller-capitalization
companies often involve greater risks than investments
in larger capitalized companies. (See "INVESTMENT
TECHNIQUES AND RISKS - Small Companies"). The Fund may
invest up to 15% of its net assets directly in the
securities of foreign issuers. It may also invest,
without limitation, in foreign securities in domestic
markets through depositary receipts. However, as a
matter of policy, the Opportunity Fund intends to limit
its total foreign exposure, including both direct
investments and depositary receipts, to no more than
25% of the Fund's net assets. In addition, the Fund
may invest up to 20% of its total assets in cash and
short-term fixed income securities for any purpose and
up to 100% of its total assets may be invested in such
instruments for temporary defensive purposes.
In seeking to achieve the Opportunity Fund's
investment objective, Reams uses a value-oriented
discipline. Reams evaluates the small and mid-cap
markets by using a number of valuation criteria,
including both current and historical measures, for
ratios comparing price to earnings, price to book value
and price to sales. The portfolio management team then
constructs a focus list based in part on each company's
competitive position, capital structure, cash flow and
management. The team then determines a target price
for the stock, thus providing a specific expected rate
of return. The approximately 75 securities with the
highest expected rates of return would be among those
securities selected for the Fund's portfolio. On
average, a security will be held by the Fund for
approximately 12 months. Ultimately, securities will
be sold due to the emergence of superior alternatives.
INVESTMENT TECHNIQUES AND RISKS
In addition to the investment policies described
above (and subject to certain restrictions described
below), the Funds may invest in the following
securities and employ the following investment
techniques, some of which may present special risks as
described below. A more complete discussion of certain
of these securities and investment techniques and the
associated risks is contained in the Company's
Statement of Additional Information.
TOTAL RETURN BOND FUND
Fixed Income Securities
The Fund may invest in a wide variety of fixed
income securities. Issuers of fixed income securities
have a contractual obligation to pay interest at a
specified rate on specified dates and to repay
principal on a specified maturity date. Certain
securities (usually intermediate- and long-term bonds)
have provisions that allow the issuer to redeem or
"call" a bond before its maturity. Issuers are most
likely to call such securities during periods of
falling interest rates. As a result, the Fund may be
required to invest the unanticipated proceeds of the
called security at lower interest rates, which may
cause the Fund's income to decline.
In general, the longer the maturity of a fixed
income security the higher its yield and the greater
its sensitivity to changes in interest rates.
Conversely, the shorter the maturity the lower the
yield but the greater the price stability. The values
of fixed income securities also may be affected by
changes in the credit rating or financial condition of
their issuers. Generally, the lower the quality rating
of a security the higher the degree of risk as to the
payment of interest and return of principal. To
compensate investors for taking on such increased risk,
issuers deemed to be less creditworthy generally must
offer investors higher interest rates than do issuers
with better credit ratings.
Commercial paper generally is considered the
shortest form of fixed income security. Notes whose
original maturities are two years or less are
considered short-term obligations. The term "bond"
generally refers to securities with maturities longer
than two years. Bonds with maturities of three years
or less are considered short-term, bonds with
<PAGE>
maturities between three and ten years are considered
intermediate-term, and bonds with maturities greater
than ten years are considered long-term.
Investment Grade Debt Obligations. Investment
grade debt obligations include: (i) U.S. government
securities (ii) commercial paper rated in one of the
three highest rating categories (e.g., A-2 or higher by
S&P); (iii) short-term notes rated in one of the three
highest rating categories (e.g., SP-2 or higher by
S&P); (iv) bonds rated in one of the four highest
rating categories (e.g., rated BBB or higher by S&P);
and (v) unrated securities determined by Reams to be of
comparable quality. Investment grade securities are
generally believed to have relatively low degrees of
credit risk. However, certain investment- grade
securities may have some speculative characteristics,
since their issuers' capacity for repayment may be more
vulnerable to adverse economic conditions or changing
circumstances than that of higher-rated issuers.
Non-investment Grade Debt Obligations. Non-
investment grade debt obligations, also referred to as
"junk bonds", are those securities that are rated
lower than investment grade and unrated securities of
comparable quality. Although they generally offer
higher yields than investment grade securities with
similar maturities, lower-quality securities involve
greater risks, including the possibility of default or
bankruptcy. In general, they are regarded to be
predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal.
For a more extensive discussion of debt ratings,
see the Company's Statement of Additional Information.
Debt Obligations-General. Debt obligations
include: (i) corporate debt securities, including
bonds, debentures, and notes; (ii) bank obligations,
such as certificates of deposit, banker's acceptances
and time deposits of domestic and foreign banks,
domestic savings associations and their subsidiaries
and branches (in amounts in excess of the current
$100,000 per account insurance coverage provided by the
Federal Deposit Insurance Corporation); (iii)
commercial paper (including variable-amount master
demand notes); (iv) repurchase agreements; (v) loan
interests; (vi) foreign debt obligations issued by
foreign issuers traded either in foreign markets or in
domestic markets through depositary receipts; (vii)
convertible securities - debt obligations convertible
into or exchangeable for equity securities or debt
obligations that carry with them the right to acquire
equity securities, as evidenced by warrants attached to
such securities, or acquired as part of units of the
securities; (viii) preferred stocks - securities that
represent an ownership interest in a corporation and
that give the owner a prior claim over common stock on
the company's earnings or assets; (ix) U.S. government
securities; (x) mortgage-backed securities,
collateralized mortgage obligations and similar
securities; and (xi) municipal obligations.
Short-Term Fixed Income Securities. Short-term
fixed income securities must be rated at least A or
higher by S&P, Moody's or Fitch or A- or higher by D&P.
These securities (each of which has a stated maturity
of one year or less from the date of purchase unless
otherwise indicated) include: U.S. government
securities, including bills, notes and bonds, differing
as to maturity and rate of interest, which are either
issued or guaranteed by the U.S. Treasury or by U.S.
governmental agencies or instrumentalities;
certificates of deposit issued against funds deposited
in a U.S. bank or savings and loan association; bank
time deposits, which are monies kept on deposit with
U.S. banks or savings and loan associations for a
stated period of time at a fixed rate of interest;
bankers' acceptances which are short-term credit
instruments used to finance commercial transactions;
commercial paper and commercial paper master notes
(which are demand instruments without a fixed maturity
bearing interest at rates which are fixed to known
lending rates and automatically adjusted when such
lending rates change) rated A-1 or better by S&P, Prime-
1 or better by Moody's, Duff 2 or higher by D&P, or
Fitch 2 or higher by Fitch; or repurchase agreements
entered into only with respect to obligations of the
U.S. government, its agencies or instrumentalities.
The Fund may also invest in the short-term investment
fund of its custodial bank.
U.S. Government Securities. U.S. government
securities are issued or guaranteed by the U.S.
government or its agencies or instrumentalities.
Securities issued or guaranteed by government agencies
or instrumentalities include: (i) the Federal Housing
Administration, Farmers Home Administration, Export-
Import Bank of the United States, Small Business
Administration and Government National Mortgage
Association ("GNMA"), including GNMA pass-through
certificates, whose securities are supported by the
full faith and credit of the United States; (ii) the
Federal Home Loan Banks, Federal Intermediate Credit
Banks and the Tennessee Valley Authority, whose
securities are supported by the
<PAGE>
right of the agency to
borrow from the U.S. Treasury; (iii) the Federal
National Mortgage Association and Federal Home Loan
Mortgage Corporation, whose securities are supported by
the discretionary authority of the U.S. government to
purchase certain obligations of the agency or
instrumentality; and (iv) the Student Loan Marketing
Association, the Inter-American Development Bank and
International Bank for Reconstruction and Development,
whose securities are supported only by the credit of
such agencies. Although the U.S. government provides
financial support to these U.S. government-sponsored
agencies and instrumentalities, no assurance can be
given that it will always do so. The U.S. government
and its agencies and instrumentalities do not guarantee
the market value of their securities. Consequently,
the value of these securities will fluctuate.
Corporate Debt Securities. Corporate debt
securities include investment grade and non-investment
grade corporate bonds, debentures, notes and other
similar corporate debt instruments, including
convertible securities. Corporate debt securities may
be acquired with warrants attached. Income producing
corporate debt securities may also include forms of
preferred or preference stock. The rate of interest on
a corporate debt security may be fixed, floating or
variable, and may vary inversely with respect to a
reference rate. See "Variable and Floating Rate
Securities" below.
Variable and Floating Rate Securities. The Fund
may invest in variable, floating and inverse floating
rate debt instruments. Variable and floating rate
securities provide for a periodic adjustment of the
interest rate paid on the obligations. These
obligations must provide that interest rates are
adjusted periodically based on a specified interest
rate adjustment index. The adjustment intervals may be
regular (ranging from daily to annually) or may be
based on certain events (such as a change in the prime
rate). The interest rate on a floating rate security is
a variable rate which is tied to another interest rate,
such as a money-market index or U.S. Treasury bill rate
and resets periodically, typically every six months.
While floating rate securities provide the Fund with a
certain degree of protection against rises in interest
rates because of the interest rate reset feature, the
Fund will be subject to any decline in interest rates
as well. The interest rate on an inverse floater
resets in the opposite direction from the market rate
of interest to which the inverse floater is indexed.
An inverse floating rate security may exhibit greater
price volatility than a fixed rate obligation of
similar credit quality. The Fund will not invest more
than 5% of its net assets in any combination of inverse
floaters, interest only or principal only securities.
See "Mortgage- and Other Asset-Backed Securities" for a
discussion of interest only and principal only
securities.
Mortgage- and Other Asset-Backed Securities.
Mortgage-backed securities represent direct or indirect
participation in, or are secured by and payable from,
mortgage loans secured by real property, and include
single- and multi-class pass-through securities and
collateralized mortgage obligations. Such securities
may be issued or guaranteed by U.S. government agencies
or instrumentalities or by private issuers, generally
originators in mortgage loans, including savings
associations, mortgage bankers, commercial banks,
investment bankers and special purpose entities
(collectively, "private lenders"). Mortgage-backed
securities issued by private lenders may be supported
by pools of mortgage loans or other mortgage-backed
securities that are directly or indirectly guaranteed
by the U.S. government or one of its agencies or
instrumentalities, or they may be issued without any
governmental guarantee of the underlying mortgage
assets but with some form of non-governmental credit
enhancement.
Asset-backed securities have structural
characteristics similar to mortgage-backed securities.
However, the underlying assets are not first-lien
mortgage loans or interests therein. Instead, they
include assets such as motor vehicle installment sales
contracts, installment loan contracts, home equity
loans, leases of various types of property and
receivables from credit card issuers or other revolving
credit arrangements. Payments or distributions of
principal and interest on asset-backed securities may
be supported by non-governmental credit enhancements
similar to those utilized in connection with mortgage-
backed securities.
The yield characteristics of mortgage- and asset-
backed securities differ from those of traditional debt
obligations. Among the principal differences are that
interest and principal payments are made more
frequently on mortgage- and asset-backed securities,
usually monthly, and that principal may be prepaid at
any time because the underlying mortgage loans or other
assets generally may be prepaid at any time. As a
result, if the Fund purchases these securities at a
premium, a prepayment rate that is faster than expected
will reduce yield to maturity, while a prepayment rate
that is slower than expected will have the opposite
effect of increasing the yield to maturity.
Conversely, if the Fund purchases these securities at a
discount, a prepayment rate that is faster than
expected will
<PAGE>
increase yield to maturity, while a
prepayment rate that is slower than expected will
reduce yield to maturity. Accelerated prepayments on
securities purchased by the Fund at a premium also
impose a risk of loss of principal because the premium
may not have been fully amortized at the time the
principal is prepaid in full. The market for privately
issued mortgage- and asset-backed securities is smaller
and less liquid than the market for government
sponsored mortgage-backed securities.
The Fund may invest in stripped mortgage- or asset-
backed securities, which receive differing proportions
of the interest and principal payments from the
underlying assets. The market value of such securities
generally is more sensitive to changes in prepayment
and interest rates than is the case with traditional
mortgage- and asset-backed securities, and in some
cases the market value may be extremely volatile. With
respect to certain stripped securities, such as
interest only and principal only classes, a rate of
prepayment that is faster or slower than anticipated
may result in the Fund failing to recover all or a
portion of its investment, even though the securities
are rated investment grade.
Loan Interests. The Fund may invest its assets in
loan interests, which are interests in amounts owed by
a corporate, governmental or other borrower to lenders
or lending syndicates. Loan interests purchased by the
Fund may have a maturity of any number of days or years
and may be secured or unsecured. Loan interests, which
may take the form of interests in, assignments of, or
novations of a loan, may be acquired from U.S. and
foreign banks, insurance companies, finance companies
or other financial institutions that have made loans or
are members of a lending syndicate or from the holders
of loan interests. Loan interests involve the risk of
loss in the case of default or bankruptcy of the
borrower and, in the case of participation interests,
involve a risk of insolvency of the agent lending bank
or other financial intermediary. Loan interests are
not rated by any nationally recognized statistical
rating organization, and are, at present, not readily
marketable and may be subject to contractual
restrictions on resale.
Zero-Coupon, Step-Coupon and Pay-In-Kind
Securities. The Fund may invest in zero-coupon, step-
coupon and pay-in-kind securities. These securities
are debt securities that do not make regular cash
interest payments. Zero-coupon and step-coupon
securities are sold at a deep discount to their face
value. Pay-in-kind securities pay interest through the
issuance of additional securities. Because these
securities do not pay current cash income, their price
can be volatile when interest rates fluctuate. Federal
income tax law requires the holders of zero-coupon,
step-coupon and pay-in-kind securities to include in
income each year the portion of the original issue
discount (or deemed discount) and other non-cash income
on such securities accrued during that year. In order
to qualify for treatment as a "regulated investment
company" under the Internal Revenue Code of 1986, as
amended (the "Code") and avoid a certain excise tax,
the Fund may be required to distribute a portion of
such discount and income and may be required to dispose
of other portfolio securities (which may occur in
periods of adverse market prices) in order to generate
cash to meet these distribution requirements.
Reverse Repurchase Agreements and Mortgage Dollar Rolls
The Total Return Bond Fund may engage in reverse
repurchase agreements to facilitate portfolio liquidity
(a practice common in the mutual fund industry) or for
arbitrage transactions. In a reverse repurchase
agreement, the Fund would sell a security and enter
into an agreement to repurchase the security at
specified future date and price. The Fund generally
retains the right to interest and principal payments on
the security. Since the Fund receives cash upon
entering into a reverse repurchase agreement, it may be
considered a borrowing. When required by SEC
guidelines, the Fund will set aside permissible liquid
assets in a segregated account to secure its obligation
to repurchase the security.
The Total Return Bond Fund also may enter into
mortgage dollar rolls, in which the Fund would sell
mortgage-backed securities for delivery in the current
month and simultaneously contract to purchase
substantially similar securities on a specified future
date. While the Fund would forego principal and
interest paid on the mortgage-backed securities during
the roll period, it would be compensated by the
difference between the current sale price and the lower
price for the future purchase as well as by any
interest earned on the proceeds of the initial sale.
The Fund also could be compensated through the receipt
of fee income equivalent to a lower forward price.
When required by SEC guidelines, the Fund will set
aside permissible liquid assets in a segregated account
to secure its obligation for the forward commitment to
buy mortgage-backed securities. Mortgage dollar roll
transactions may be considered a borrowing by the Fund.
<PAGE>
The mortgage dollar rolls and reverse repurchase
agreements entered into by the Fund may be used as
arbitrage transactions in which the Fund will maintain
an offsetting position in investment grade debt
obligations or repurchase agreements that mature on or
before the settlement date of the related mortgage
dollar roll or reverse repurchase agreement. Since the
Fund will receive interest on the securities or
repurchase agreements in which it invests the
transaction proceeds, the transactions may involve
leverage.
When-Issued Securities
The Fund may invest without limitation in
securities purchased on a when-issued or delayed
delivery basis ("when-issued securities"). Although
the payment and terms of these securities are
established at the time the purchaser enters into the
commitment, these securities may be delivered and paid
for at a future date, generally within 45 days.
Purchasing when-issued securities allows the Fund to
lock in a fixed price on a security it intends to
purchase. The Fund will segregate and maintain cash,
cash equivalents, U.S. government securities, or other
liquid securities in an amount at least equal to the
amount of outstanding commitments for when-issued
securities at all times. Such securities involve a
risk of loss if the value of the security to be
purchased declines prior to the settlement date.
Illiquid Securities
The Total Return Bond Fund may invest up to 15% of
the value of its net assets in illiquid securities.
Illiquid securities include: restricted securities
(securities the disposition of which is restricted
under the federal securities laws); securities which
may only be resold pursuant to Rule 144A under the
Securities Act of 1933; and repurchase agreements with
maturities in excess of seven days. Risks associated
with restricted securities include the potential
obligation to pay all or part of the registration
expenses in order to sell restricted securities. A
considerable period of time may elapse between the time
of the decision to sell a restricted security and the
time the Fund may be permitted to sell under an
effective registration statement or otherwise. If,
during such a period, adverse conditions were to
develop, the Fund might obtain a less favorable price
than that which prevailed when it decided to sell. The
Board of Directors of the Company, or its delegate, has
the ultimate authority to determine, to the extent
permissible under the federal securities laws, which
securities are liquid or illiquid. Rule 144A
securities will be treated as illiquid securities,
subject to the liquidity guidelines. The Board of
Directors has adopted guidelines and delegated this
determination to Reams.
Repurchase Agreements
The Fund may enter into repurchase agreements with
certain banks and non-bank dealers. In a repurchase
agreement, a Fund buys a security at one price and at
the time of sale, the seller agrees to repurchase the
obligation at a mutually agreed upon time and price
(usually within seven days). The repurchase agreement
determines the yield during the purchaser's holding
period, while the seller's obligation to repurchase is
secured by the value of the underlying security. The
Fund may enter into repurchase agreements with respect
to any security in which it may invest. Repurchase
agreements could involve certain risks in the event of
a default or insolvency of the other party to the
agreement, including possible delays or restrictions
upon a Fund's ability to dispose of the underlying
securities. Under certain circumstances, the Fund may
deem repurchase agreements collateralized by U.S.
government securities to be investments in U.S.
government securities.
Foreign Securities and Currencies
The Fund may invest directly in foreign securities.
Investments in securities of foreign issuers involve
risks which are in addition to the usual risks inherent
in domestic investment. In many countries there is
less publicly available information about issuers than
is available in the reports and ratings published about
companies in the U.S. Additionally, foreign companies
are not subject to uniform accounting, auditing and
financial reporting standards as companies in the U.S.
Other risks inherent in foreign investment include:
expropriation; confiscatory taxation; capital gains
taxes; withholding taxes on dividends and interest;
less extensive regulation of foreign brokers,
securities markets
<PAGE>
and issuers; costs incurred in
conversions between currencies; the possibility of
delays in settlement in foreign securities markets;
limitations on the use or transfer of assets (including
suspension of the ability to transfer currency from a
given country); the difficulty of enforcing obligations
in other countries; diplomatic developments; and
political or social instability. Foreign economies may
differ favorably or unfavorably from the U.S. economy
in various respects, and many foreign securities are
less liquid and their prices are more volatile than
comparable U.S. securities. From time to time, foreign
securities may be difficult to liquidate rapidly
without adverse price effects. Certain costs
attributable to foreign investing, such as custody
charges and brokerage costs, are higher than those
attributable to domestic investing.
Because most foreign securities are denominated in
non-U.S. currencies, the investment performance of the
Fund could be affected by changes in foreign currency
exchange rates to some extent. The value of the Fund's
assets denominated in foreign currencies will increase
or decrease in response to fluctuations in the value of
those foreign currencies relative to the U.S. dollar.
Currency exchange rates can be volatile at times in
response to various political and economic conditions.
In addition, the Fund may purchase and sell foreign
currency on a spot basis and may engage in forward
currency contracts, currency options and futures
transactions for hedging or any other lawful purpose.
See "Derivative Instruments."
Derivative Instruments
The Fund may engage in options, futures and options
on futures transactions which are sometimes referred to
as derivative transactions. Derivative transactions
may also include short sales against the box, in which
the Fund sells a security it owns for delivery at a
future date; swaps, in which two parties agree to
exchange a series of cash flows in the future, such as
interest-rate payments; interest-rate caps, under
which, in return for a premium, one party agrees to
make payments to the other to the extent that interest
rates exceed a specified rate, or "cap"; and interest-
rate floors, under which, in return for a premium, one
party agrees to make payments to the other to the
extent that interest rates fall below a specified
level, or "floor". Derivative transactions may also
include forward currency contracts and foreign currency
exchange-related securities.
Derivative instruments may be used by the Fund for
any lawful purpose consistent with the Fund's
investment objective, including hedging or managing
risk but not for speculation. Derivative instruments
are securities or agreements whose value is derived
from the value of some underlying asset, for example,
securities, currencies, reference indexes or
commodities. Derivatives generally have investment
characteristics that are based upon either forward
contracts or option contracts. The change in value of
a forward-based derivative generally is proportional to
the change in value of the underlying asset while the
change in value of an option-based derivative generally
is related to favorable movements in the price of the
underlying asset, without the corresponding exposure to
adverse movements in the value of the underlying asset.
The seller of an option-based derivative generally will
receive fees or premiums but is exposed to losses due
to changes in the value of the underlying asset. When
required by guidelines of the SEC, the Fund will set
aside permissible liquid assets in a segregated account
to secure its potential obligations under its
derivative positions. Such liquid assets may include
cash, U.S. government securities and high grade liquid
debt securities. The ability of the Fund to use
derivatives effectively is largely dependent upon
Reams' ability to use such instruments correctly which
may involve different skills than are associated with
securities generally. For a further discussion of
derivative transactions, please see the Statement of
Additional Information.
[/R]
Portfolio Turnover
Under normal market conditions, the Fund
anticipates that its portfolio turnover rate will
generally not exceed 125% and is expected to be between
75% and 125%. A portfolio turnover rate of 100% would
occur, for example, if all of the securities held by
the Fund were replaced within one year. In the event
the Fund has a portfolio turnover rate of 100% or more
in any year, it would result in the payment by the Fund
of increased brokerage costs and could result in the
payment by shareholders of increased taxes on realized
investment gains.
<PAGE>
OPPORTUNITY FUND
Small Companies
The Opportunity Fund may invest a substantial
portion of its assets in small companies. While
smaller companies generally have the potential for
rapid growth, investments in smaller companies often
involve greater risks than investments in larger, more
established companies because smaller companies may
lack the management experience, financial resources,
product diversification and competitive strengths of
larger companies. In addition, in many instances the
securities of smaller companies are traded only over-
the-counter or on a regional securities exchange, and
the frequency and volume of their trading is
substantially less than is typical of larger companies.
Therefore, the securities of smaller companies may be
subject to greater and more abrupt price fluctuations.
When making large sales, the Opportunity Fund may have
to sell portfolio holdings at discounts from quoted
prices or may have to make a series of small sales over
an extended period of time due to the trading volume of
smaller company securities. An investment in the
Opportunity Fund may be subject to greater price
fluctuations than an investment in a fund that invests
primarily in larger companies.
Short-Term Fixed Income Securities
The Fund may invest in short-term fixed income
securities. Short-term fixed income securities must be
rated at least A or higher by S&P, Moody's or Fitch or
A- or higher by D&P. These securities (each of which
has a stated maturity of one year or less from the date
of purchase unless otherwise indicated) include: U.S.
government securities, including bills, notes and
bonds, differing as to maturity and rate of interest,
which are either issued or guaranteed by the U.S.
Treasury or by U.S. governmental agencies or
instrumentalities; certificates of deposit issued
against funds deposited in a U.S. bank or savings and
loan association; bank time deposits, which are monies
kept on deposit with U.S. banks or savings and loan
associations for a stated period of time at a fixed
rate of interest; bankers' acceptances which are short-
term credit instruments used to finance commercial
transactions; commercial paper and commercial paper
master notes (which are demand instruments without a
fixed maturity bearing interest at rates which are
fixed to known lending rates and automatically adjusted
when such lending rates change) rated A-1 or better by
S&P, Prime-1 or better by Moody's, Duff 2 or higher by
D&P, or Fitch 2 or higher by Fitch; or repurchase
agreements entered into only with respect to
obligations of the U.S. government, its agencies or
instrumentalities. The Fund may also invest in the
short-term investment fund of its custodial bank.
Illiquid Securities
The Opportunity Fund may invest up to 5% of the
value of its net assets in illiquid securities.
Illiquid securities include restricted securities
(securities the disposition of which is restricted
under the federal securities laws); and repurchase
agreements with maturities in excess of seven days.
Risk associated with restricted securities include the
potential obligation to pay all or part of the
registration expenses in order to sell restricted
securities. A considerable period of time may elapse
between the time of the decision to sell a restricted
security and the time the Fund may be permitted to sell
under an effective registration statement or otherwise.
If, during such a period, adverse conditions were to
develop, the Fund might obtain a less favorable price
than that which prevailed when it decided to sell. The
Board of Directors of the Company, or its delegate, has
the ultimate authority to determine, to the extent
permissible under the federal securities laws, which
securities are liquid or illiquid. Rule 144A
securities will be treated as illiquid, subject to the
liquidity guidelines. The Board of Directors has
adopted guidelines and delegated this determination to
Reams.
Repurchase Agreements
The Fund may enter into repurchase agreements with
certain banks and non-bank dealers. In a repurchase
agreement, a Fund buys a security at one price and at
the time of sale, the seller agrees to repurchase the
obligation at a mutually agreed upon time and price
(usually within seven days). The repurchase agreement
determines the yield during the purchaser's holding
period, while the seller's obligation to repurchase is
secured by the value of the underlying security. The
Fund may enter into repurchase agreements with respect
to any security in which it may
<PAGE>
invest. Repurchase
agreements could involve certain risks in the event of
a default or insolvency of the other party to the
agreement, including possible delays or restrictions
upon a Fund's ability to dispose of the underlying
securities. Under certain circumstances, the Fund may
deem repurchase agreements collateralized by U.S.
government securities to be investments in U.S.
government securities.
Foreign Securities and Currencies
The Fund may invest directly in foreign securities
or indirectly through depositary receipts. Depositary
receipts are typically issued by banks or trust
companies evidencing ownership of the underlying
foreign security. Investments in securities of foreign
issuers involve risks which are in addition to the
usual risks inherent in domestic investment. In many
countries there is less publicly available information
about issuers than is available in the reports and
ratings published about companies in the U.S.
Additionally, foreign companies are not subject to
uniform accounting, auditing and financial reporting
standards as companies in the U.S. Other risks
inherent in foreign investment include: expropriation;
confiscatory taxation; capital gains taxes; withholding
taxes on dividends and interest; less extensive
regulation of foreign brokers, securities markets and
issuers; costs incurred in conversions between
currencies; the possibility of delays in settlement in
foreign securities markets; limitations on the use or
transfer of assets (including suspension of the ability
to transfer currency from a given country); the
difficulty of enforcing obligations in other countries;
diplomatic developments; and political or social
instability. Foreign economies may differ favorably or
unfavorably from the U.S. economy in various respects,
and many foreign securities are less liquid and their
prices are more volatile than comparable U.S.
securities. From time to time, foreign securities may
be difficult to liquidate rapidly without adverse price
effects. Certain costs attributable to foreign
investing, such as custody charges and brokerage costs,
are higher than those attributable to domestic
investing.
Because most foreign securities are denominated in
non-U.S. currencies, the investment performance of the
Fund could be affected by changes in foreign currency
exchange rates to some extent. The value of the Fund's
assets denominated in foreign currencies will increase
or decrease in response to fluctuations in the value of
those foreign currencies relative to the U.S. dollar.
Currency exchange rates can be volatile at times in
response to various political and economic conditions.
Derivative Instruments
The Fund may engage in options, futures and options
on futures transactions which are sometimes referred to
as derivative transactions. Derivative transactions
may also include forward currency contracts and foreign
currency exchange-related securities.
Derivative instruments may be used by the Fund for
any lawful purpose consistent with the Fund's
investment objective, including hedging or managing
risk but not for speculation. Derivative instruments
are securities or agreements whose value is derived
from the value of some underlying asset, for example,
securities, currencies, reference indexes or
commodities. Derivatives generally have investment
characteristics that are based upon either forward
contracts or option contracts. The change in value of
a forward-based derivative generally is proportional to
the change in value of the underlying asset, while the
change in value of an option-based derivative generally
is related to favorable movements in the price of the
underlying asset, without the corresponding exposure to
adverse movements in the value of the underlying asset.
The seller of an option-based derivative generally will
receive fees or premiums but is exposed to losses due
to changes in the value of the underlying asset. When
required by guidelines of the SEC, the Fund will set
aside permissible liquid assets in a segregated account
to secure its potential obligations under its
derivative positions. Such liquid assets may include
cash, U.S. government securities and high grade liquid
debt securities. The ability of the Fund to use
derivatives effectively is largely dependent upon
Reams' ability to use such instruments correctly which
may involve different skills than are associated with
securities generally. For a further discussion of
derivative transactions, please see the Statement of
Additional Information.
<PAGE>
Portfolio Turnover
Under normal market conditions, the Fund
anticipates that its portfolio turnover rate will
generally not exceed 125% and is expected to be between
75% and 125%. A portfolio turnover rate of 100% would
occur, for example, if all of the securities held by
the Fund were replaced within one year. In the event
the Fund has a portfolio turnover rate of 100% or more
in any year, it would result in the payment by the Fund
of increased brokerage costs and could result in the
payment by shareholders of increased taxes on realized
investment gains.
MANAGEMENT
Under the laws of the State of Maryland, the Board
of Directors of the Company (the "Board of Directors")
is responsible for managing the Company's business and
affairs. The Board of Directors also oversees duties
required by applicable state and federal law. The
Company has entered into an investment advisory
agreement with Frontegra Asset Management, Inc. dated
October 30, 1996 (the "Investment Advisory Agreement")
pursuant to which Frontegra supervises the management
of each Fund's investments and business affairs,
subject to the supervision of the Company's Board of
Directors. Frontegra has entered into an agreement
with Reams Asset Management Company, LLC under which
Reams serves as each Fund's portfolio manager and,
subject to Frontegra's supervision, manages the Funds'
portfolio assets. Frontegra provides office facilities
for the Funds and pays the salaries, fees, and expenses
of all officers and directors of the Funds who are
interested persons of Frontegra.
Frontegra was organized in 1996 and is located at
400 Skokie Blvd., Suite 500, Northbrook, Illinois
60062. Mr. William D. Forsyth III and Mr. Thomas J.
Holmberg, Jr. each own 50% of Frontegra. Under the
Investment Advisory Agreement, the Total Return Bond
Fund compensates Frontegra at the annual rate of 0.40%
of that Fund's average daily net assets and the
Opportunity Fund compensates Frontegra for its
management services at the annual rate of 0.65% of the
Opportunity Fund's average daily net assets. Frontegra
has voluntarily agreed to waive its management fee
and/or reimburse each Fund's operating expenses to the
extent necessary to ensure that the Total Return Bond
Fund's Total Operating Expenses for the first twelve
months do not exceed 0.50% of the Fund's average daily
net assets and the Opportunity Fund's Total Operating
Expenses for the first twelve months do not exceed
0.90% of the Fund's average daily net assets. Any such
waiver or reimbursement will have the effect of
lowering the overall expense ratio for a Fund and
increasing the Fund's overall return to investors at
the time any such amounts are waived and/or reimbursed.
Reams operated as a corporation (Reams Asset
Management Company, Inc.) from its founding in 1981
until March 31, 1994, when it became an Indiana limited
liability company (LLC), with no change in principals,
employees or clients. Reams is located at 227
Washington Street, Columbus, Indiana 47201. Under the
subadvisory agreement, and with certain exceptions
described herein, Reams is compensated by Frontegra for
its investment advisory services at the annual rate of
0.20% of the Total Return Bond Fund's average daily net
assets and 0.45% of the Opportunity Fund's average
daily net assets. In recognition of the economies of
scale that will be gained by the Funds and Frontegra,
and with the exception of defined contribution or
401(k) investments in the Funds, for initial
investments of over $15 million Frontegra will
compensate Reams an extra 0.10% on the average daily
net assets of such investments. Reams provides
continuous advice and recommendations concerning each
Fund's investments and is responsible for selecting the
broker/dealers who execute the portfolio transactions.
In executing such transactions, Reams seeks to obtain
the best net results for the Funds. While Reams has
not previously provided investment advice to a mutual
fund, Reams serves as investment adviser to pension and
profit-sharing plans, and other institutional
investors. As of October 1, 1996, Reams had
approximately $2.5 billion under management. Mr. Fred
W. Reams owns units representing a majority of the
voting rights of Reams.
The day-to-day management responsibilities for the
Funds' portfolios are primarily handled by Reams'
portfolio management teams. The portfolio management
teams are managed primarily by Mr. Reams, Mr. Robert A.
Crider, Mr. David R. Milroy and Mr. Mark M. Egan. Mr.
Reams, as chief investment officer, is involved in all
aspects of the firm's investment activities on a
strategic level. The firm's global economic forecast
is a collaborative effort by
<PAGE>
Mr. Reams, Mr. Crider, the
firm's senior fixed income portfolio manager, Mr.
Milroy, the firm's senior equity portfolio manager and
Mr. Egan, the firm's fixed income portfolio manager.
The prior five year business experience history for
these individuals is as follows: Mr. Reams has been
President of Reams from April, 1994 and was President
of Reams Asset Management Company, Inc. until March,
1994; Mr. Crider has been Senior Vice President, Fixed
Income Management, of Reams since April, 1994 and was
Senior Vice President, Fixed Income Management, of
Reams Asset Management, Inc. until March, 1994; Mr.
Milroy has been Senior Vice President, Equity
Management, of Reams since April, 1994, was Vice
President and Senior Vice President, Equity Management,
of Reams Asset Management Company, Inc. from June, 1990
until March, 1994, and was Portfolio Manager of Loomis,
Sayles & Co. until May, 1990; and Mr. Egan has been
Vice President, Portfolio Manager of Reams since April,
1994, was Vice President, Portfolio Manager, of Reams
Asset Management Company, Inc. from June, 1990 until
March, 1994, and was Portfolio Manager of National
Investment Services, until May, 1990. The global
economic forecast is incorporated into the construction
of scenarios firm-wide. With respect to the Total
Return Bond Fund, the fixed income portfolio managers
implement decisions on a team basis with respect to the
Fund's portfolio structure and issue selection.
Portfolio strategy is reviewed weekly by the fixed
income committee. With respect to the Opportunity
Fund, the portfolio management team approves scenarios
established for individual securities submitted by each
analyst, and makes the final buy and sell decisions.
HOW TO PURCHASE SHARES
Shares of the Funds are sold on a continuous basis
at the next offering price after receipt of the order
by the Fund. This price is the net asset value of the
Fund and is determined as of the close of trading
(currently 4:00 p.m., Eastern Standard Time) on each
day the New York Stock Exchange is open. See
"DETERMINATION OF NET ASSET VALUE." The price at which
your purchase will be effected is based on the Fund's
net asset value next determined after the Fund receives
your request in proper form. A confirmation indicating
the details of the transaction will be sent to you
promptly. Shares are credited to your account, but
certificates are not issued. However, you will have
full shareholder rights.
The minimum initial investment required by each
Fund is $100,000. Subsequent investments may be made
by mail or wire with a minimum subsequent investment of
$1,000. Each Fund reserves the right to change or
waive these minimums at any time. Shareholders will be
given at least 30 days' notice of any increase in the
minimum dollar amount of purchases.
If you purchase shares of either Fund by check and
request the redemption of such shares within 15 days of
the initial purchase, the Fund will not forward the
portion of your redemption proceeds which has not been
collected by the Fund until that 15 day period has
expired. This is a security precaution only and does
not affect your investment.
Initial Investment - Minimum $100,000
You may purchase shares of the Funds by completing
an application and mailing it along with a check or
money order payable to "Frontegra Funds, Inc." to:
Frontegra Funds, Inc., c/o Sunstone Financial Group,
Inc., P.O. Box 2142, Milwaukee, Wisconsin 53201-2142.
For overnight deliveries, please use 207 E. Buffalo
Street, Suite 315, Milwaukee, Wisconsin 53202-5712.
Purchases must be made in U.S. dollars and all checks
must be drawn on a U.S. bank. If your check does not
clear, you will be charged a $20 service fee. You will
also be responsible for any losses suffered by a Fund
as a result. All applications to purchase shares of
the Funds are subject to acceptance by the Company and
are not binding until so accepted. The Company
reserves the right to decline to accept a purchase
order application in whole or in part.
In addition, you may purchase shares of the Funds
by wire. To establish a new account by wire transfer,
please call the Transfer Agent at 1-888-825-2100. The
Transfer Agent will assign an account number to you at
that time. Funds should then be wired through the
Federal Reserve System as follows:
<PAGE>
UMB Bank, n.a.
ABA Number 101000 695
For credit to Frontegra Funds, Inc.
Account Number 9870610221
For further credit to Frontegra Funds, Inc.
(investor account number)
(name or account registration)
(social security or tax identification number)
(identify which Fund to purchase)
The Funds are not responsible for the consequences of
delays resulting from the banking or Federal Reserve
wire system.
Subsequent Investments - Minimum $1,000
Additions to your account in amounts of $1,000 or
more may be made by mail or by wire. When making an
additional purchase by mail, enclose a check payable to
"Frontegra Funds, Inc." along with the additional
investment form provided on the lower portion of your
account statement. To make an additional purchase by
wire, please follow the instructions listed above.
HOW TO REDEEM SHARES
You may request redemption of part or all of your
Fund shares at any time. The price you receive will be
the net asset value next determined after the Fund
receives your request in proper form. Once your
redemption request is received in proper form, the Fund
normally will mail or wire your redemption proceeds the
next business day and, in any event, no later than
seven days after receipt of a redemption request.
However, the Fund may hold payment of that portion of
an investment which was made by check which has not
been collected.
Written Redemption
To request redemption of Fund shares, you must
furnish a written, unconditional request to: Frontegra
Funds, Inc., c/o Sunstone Investor Services, LLC, P.O.
Box 2142, Milwaukee, Wisconsin 53201-2142. For written
redemption requests sent via overnight delivery, please
use 207 E. Buffalo Street, Suite 315, Milwaukee,
Wisconsin 53202-5712. The request must (i) be signed
exactly as the shares are registered, including the
signature of each owner and (ii) specify the number of
Fund shares or dollar amount to be redeemed.
Additional documentation may be requested from
corporations, executors, administrators, trustees, guar
dians, agents or attorneys-in-fact. Redemption
proceeds may be wired to a commercial bank authorized
on your account application. However, you will be
charged a $9 service fee for such redemptions.
Signature Guarantees
Signature guarantees are required for: (i)
redemption requests to be mailed or wired to a person
other than the registered owner(s) of the shares and
(ii) redemption requests to be mailed or wired to other
than the address of record. A signature guarantee may
be obtained from any eligible guarantor institution, as
defined by the SEC. These institutions include banks,
savings associations, credit unions, brokerage firms
and others.
Your account may be terminated by a Fund on not
less than 30 days' notice if, at the time of any
redemption of shares in your account, the value of the
remaining shares in the account falls below $10,000.
Upon any such termination, a check for the redemption
proceeds will be sent to the account of record within
seven days of the redemption.
<PAGE>
EXCHANGE PRIVILEGE
You may exchange your shares in a Fund for shares
in any other Fund of the Company at any time by written
request. The value of the shares to be exchanged and
the price of the shares being purchased will be the net
asset value next determined after receipt of
instructions for exchange. An exchange from one Fund
to another is treated the same as an ordinary sale and
purchase for federal income tax purposes and you will
realize a capital gain or loss. This is not a tax-free
exchange. Exchange requests should be directed to:
Frontegra Funds, Inc., c/o Sunstone Investor Services,
LLC, P.O. Box 2142, Milwaukee, Wisconsin 53201-2142.
For written exchange requests sent via overnight
delivery, please use 207 E. Buffalo Street, Suite 315,
Milwaukee, Wisconsin 53202-5712. Exchange requests may
be subject to limitations, including those relating to
frequency, that may be established from time to time to
ensure that the exchanges do not disadvantage the Funds
or their investors. The Company reserves the right to
modify or terminate the exchange privilege upon 60
days' written notice to each shareholder prior to the
modification or termination taking effect.
TAX-SHELTERED RETIREMENT PLANS
The Company offers through its Custodian, UMB Bank,
n.a., certain qualified retirement plans for adoption
by individuals and employers. Participants in these
plans can accumulate shares of a Fund on a tax-deferred
basis. Contributions to these plans are tax-deductible
as provided by law and earnings are tax-deferred until
distributed.
Individual Retirement Account
Individuals who receive compensation or earned
income, even if they are active participants in a
qualified retirement plan (or certain similar
retirement plans), may establish their own tax-
sheltered Individual Retirement Account ("IRA"). The
Company offers a prototype IRA plan which may be
adopted by individuals to establish a new IRA or to
roll-over funds from an existing IRA. There may be a
charge for establishing an IRA account and there is
also an annual maintenance fee.
Earnings on amounts held in an IRA are not taxed
until withdrawn. However, the amount of deduction, if
any, allowed for IRA contributions is limited for an
individual who is, or whose spouse is, an active
participant in an employer-sponsored retirement plan
and whose income exceeds specific limits.
Simplified Employee Pension Plan
The Company also offers a Simplified Employee
Pension ("SEP") Plan for employers, including self-
employed individuals, who wish to purchase Fund shares
with tax-deductible contributions. Under the SEP plan,
employer contributions are made directly to the IRA
accounts of eligible participants.
A complete description of the above plans and other
plans, including 401(k) plans, as well as a description
of the applicable service fees may be obtained by
calling, toll-free, 1-888-825-2100 or writing to
Frontegra Funds, Inc. c/o Sunstone Investor Services,
LLC, P.O. Box 2142, Milwaukee, Wisconsin 53201-2142.
Please note that early withdrawals from a retirement
plan may result in adverse tax consequences.
DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAX TREATMENT
Each Fund intends to operate as a "Regulated
Investment Company" under Subchapter M of the Internal
Revenue Code, and therefore will not be liable for
federal income taxes to the extent earnings are
distributed on a timely basis. For federal income tax
purposes, all dividends and net realized short-term
capital
<PAGE>
gains paid by the Funds are taxable as ordinary
income whether reinvested or received in cash unless
you are exempt from taxation or entitled to a tax
deferral. Distributions paid by a Fund from net
realized long-term capital gains, whether received in
cash or reinvested in additional shares, are taxable as
a capital gain unless you are exempt from taxation or
entitled to a tax deferral. The capital gain holding
period is determined by the length of time the Fund has
held the security and not the length of time you have
held shares in the Fund. Investors are informed
annually as to the amount and nature of all dividends
and capital gains paid during the prior year. Such
capital gains and dividends may also be subject to
state or local taxes. If you are not required to pay
taxes on your income, you are generally not required to
pay federal income taxes on the amounts distributed to
you.
Dividends are usually distributed quarterly by the
Total Return Bond Fund and annually by the Opportunity
Fund. Capital gains are usually distributed annually
in December. When a dividend or capital gain is
distributed, a Fund's net asset value decreases by the
amount of the payment. If you purchase shares shortly
before a distribution, you will, nonetheless, be
subject to income taxes on the distribution, even
though the value of your investment (plus cash
received, if any) remains the same. All dividends or
capital gain distributions will automatically be
reinvested in shares of the Funds at the then
prevailing net asset value unless an investor
specifically requests that either dividends or capital
gains or both be paid in cash. The election to receive
dividends or reinvest them may be changed by writing
to: Frontegra Funds, Inc., c/o Sunstone Investor
Services, LLC, P.O. Box 2142, Milwaukee, Wisconsin
53201-2142. For overnight deliveries, please use 207
E. Buffalo Street, Suite 315, Milwaukee, Wisconsin
53202-5712. Such notice must be received at least five
days prior to the record date of any dividend or
capital gain distribution.
If you do not furnish a Fund with your correct
social security number or employer identification
number, the Fund is required by federal law to withhold
federal income tax from your distributions and
redemption proceeds at a rate of 31%.
This section is not intended to be a full
discussion of federal income tax laws and the effect of
such laws on you. There may be other federal, state, or
local tax considerations applicable to a particular
investor. You are urged to consult your own tax
advisor.
FUND EXPENSES
Each Fund is responsible for its own expenses,
including, without limitation: interest charges; taxes;
brokerage commissions; organizational expenses;
expenses of registering or qualifying shares for sale
with the states and the SEC; expenses of issue, sale,
repurchase or redemption of shares; expenses of
printing and distributing prospectuses and annual and
semi-annual reports to existing shareholders; charges
of custodians; expenses for accounting, administrative,
audit, and legal services; fees for directors who are
not interested persons of Frontegra; expenses of
fidelity bond coverage and other insurance; expenses of
indemnification; extraordinary expenses; and costs of
shareholder and director meetings.
DETERMINATION OF NET ASSET VALUE
Each Fund's net asset value per share is determined
as of the close of trading (currently 4:00 p.m.,
Eastern Standard Time) on each day the New York Stock
Exchange is open for business. A Fund's net asset
value may not be calculated on days during which a Fund
receives no orders to purchase shares and no shares are
tendered for redemption. Net asset value is calculated
by taking the fair value of the Fund's total assets,
including interest or dividends accrued, but not yet
collected, less all liabilities, and dividing by the
total number of shares outstanding. The result,
rounded to the nearest cent, is the net asset value per
share. In determining net asset value, expenses are
accrued and applied daily and securities and other
assets for which market quotations are available are
valued at market value. Debt securities are valued by a
pricing service that utilizes electronic data
processing techniques to determine values for normal
institutional-sized trading units of debt securities
without regard to the existence of sale or bid prices
when such values are believed by Reams to reflect more
accurately the fair market value of such securities;
otherwise, actual sale
<PAGE>
or bid prices are used. Common
stocks and other equity-type securities are valued at
the last trade price on the national securities
exchange or Nasdaq on which such securities are
primarily traded; however, securities traded on a
national securities exchange or Nasdaq for which there
were no transactions on a given day or securities not
listed on a national securities exchange or Nasdaq are
valued at the most recent bid prices. Debt securities
having remaining maturities of 60 days or less when
purchased are valued by the amortized cost method when
the Board of Directors determines that the fair market
value of such securities is their amortized cost.
Under this method of valuation, a security is initially
valued at its acquisition cost, and thereafter,
amortization of any discount or premium is assumed each
day, regardless of the impact of fluctuating interest
rates on the market value of the security. Any
securities for which market quotations are not readily
available are valued at their fair value as determined
in good faith by the Board of Directors or its
delegate.
SHAREHOLDER REPORTS
You will be provided at least semi-annually with a
report showing the Fund's holdings and annually after
the close of the Company's fiscal year, which ends
October 31, with an annual report containing audited
financial statements. An individual account statement
will be sent to you by the Transfer Agent after each
purchase or redemption of Fund shares as well as on a
monthly basis. You will also receive an annual
statement after the end of the calendar year listing
all transactions during such year.
If you have questions about your account(s), you
should call the Funds' Transfer Agent at 1-888-825-
2100. Investors who have general questions about the
Funds or the Company or desire additional information
should write to Frontegra Funds, Inc., c/o Sunstone
Investor Services, LLC, P.O. Box 2142, Milwaukee,
Wisconsin 53201-2142.
ORGANIZATION
The Company was organized as a Maryland corporation
on May 24, 1996. The Company is authorized to issue
300,000,000, $.01 par value shares, in addition to the
100,000,000, $.01 par value shares of the Total Return
Bond Fund and the 100,000,000, $.01 par value shares of
the Opportunity Fund. The assets belonging to each
Fund will be held separately by the Custodian, and if
the Company issues additional series, each additional
series will be held separately. In effect, each series
will be a separate fund.
Each share, irrespective of series, is entitled to
one vote on all questions, except that certain matters
must be voted on separately by the series of shares
affected, and matters affecting only one series are
voted upon only by that series. Shares have non-
cumulative voting rights, which means that the holders
of more than 50% of the shares voting for the election
of Directors can elect all of the Directors if they
choose to do so and, in such event, the holders of the
remaining shares will not be able to elect any person
or persons to the Board of Directors.
The Company will not hold annual shareholders
meetings except when required by the Investment Company
Act of 1940. The Company has adopted procedures in its
Bylaws for the removal of Directors by the shareholders
as well as by the Board of Directors. As of September
30, 1996, Frontegra and Reams each owned a controlling
interest in the Company.
ADMINISTRATOR AND FUND ACCOUNTANT
Pursuant to an Administration and Fund Accounting
Agreement, Sunstone Financial Group, Inc. (the
"Administrator"), 207 East Buffalo Street, Suite 400,
Milwaukee, Wisconsin 53202-5712, calculates the daily
net asset
<PAGE>
value of each Fund and provides
administrative services (which include clerical,
compliance and regulatory services such as filing all
federal income and excise tax returns and state income
tax returns, assisting with regulatory filings,
preparing financial statements and monitoring expense
accruals). For the foregoing, the Administrator
receives from the Funds a fee, computed daily and
payable monthly based on each Fund's average net assets
at the annual rate of 20 basis points on the first
$50,000,000 of average net assets and 7 basis points of
average net assets in excess of $50,000,000, subject to
an annual minimum of $65,000 per Fund, plus out of
pocket expenses.
CUSTODIAN AND TRANSFER AGENT
UMB Bank, n.a., 928 Grand Avenue, Kansas City,
Missouri 64141 acts as Custodian of each Fund's assets.
Sunstone Investor Services, LLC, 207 E. Buffalo Street,
Suite 315, P.O. Box 2142, Milwaukee, Wisconsin 53202-
5712 acts as Dividend-Disbursing and Transfer Agent for
the Funds.
COMPARISON OF INVESTMENT RESULTS
Each Fund may from time to time compare its
investment results to various passive indices or other
mutual funds and cite such comparisons in reports to
shareholders, sales literature, and advertisements.
The results may be calculated on the basis of average
annual total return, total return or cumulative total
return.
All total return figures assume the reinvestment of
all dividends and measure the net investment income
generated by, and the effect of, any realized and
unrealized appreciation or depreciation of the
underlying investments in each Fund over a specified
period of time. Average annual total return figures
are annualized and therefore represent the average
annual percentage change over the specified period.
Total return figures are not annualized and represent
the aggregate percentage or dollar value change over
the period of a year or less. Cumulative total return
simply reflects a Fund's performance over a stated
period of time of greater than one year.
Quotations of yield for the Total Return Bond Fund
will be based on the net investment income (including
dividends and interest) per share (as defined by the
SEC) during a particular 30-day (or one month) period,
less expenses accrued during the period, and will be
computed by dividing net investment income by the
public offering price per share on the last day of the
period.
Average annual total return, total return,
cumulative total return, and yield are based upon the
historical results of the respective Fund and are not
necessarily representative of the future performance of
the Fund. Additional information concerning the
performance of each Fund appears in the Statement of
Additional Information.
The Company reserves the right to change any of the
policies, practices and procedures described in this
Prospectus with respect to either Fund, including the
Statement of Additional Information, without
shareholder approval except in those instances where
shareholder approval is expressly required.
<PAGE>
DIRECTORS
William D. Forsyth III
Thomas J. Holmberg, Jr.
David L. Heald
OFFICERS
William D. Forsyth III
Thomas J. Holmberg, Jr.
INVESTMENT ADVISER
Frontegra Asset Management, Inc.
400 Skokie Blvd.
Suite 500
Northbrook, IL 60062
SUB-ADVISER
Reams Asset Management Company, LLC
227 Washington Street
Columbus, IN 47201
CUSTODIAN
UMB Bank, n.a.
928 Grand Avenue
Kansas City, Missouri 64141
DIVIDEND-DISBURSING AND TRANSFER AGENT
Sunstone Investor Services, LLC
207 East Buffalo Street, Suite 315
P.O. Box 2142
Milwaukee, WI 53201-2142
ADMINISTRATOR AND FUND ACCOUNTANT
Sunstone Financial Group, Inc.
207 East Buffalo Street, Suite 400
Milwaukee, WI 53202-5712
<PAGE>
AUDITORS
Ernst & Young, LLP
Sears Tower
233 South Wacker Drive
Chicago, IL 60606-6301
LEGAL COUNSEL
Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, WI 53202
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FRONTEGRA FUNDS, INC.
Frontegra Total Return Bond Fund
Frontegra Opportunity Fund
400 Skokie Blvd.
Suite 500
Northbrook, Illinois 60062
1-888-825-2100
This Statement of Additional Information is not a
prospectus and should be read in conjunction with the
Prospectus of Frontegra Funds, Inc. (the "Company"),
dated October 30, 1996. Requests for copies of the
Prospectus should be made by writing to the Company at
the address listed above; or by calling 1-888-825-2100.
This Statement of Additional Information is dated October
30, 1996, as supplemented on May 30, 1997.
<PAGE>
FRONTEGRA FUNDS, INC.
TABLE OF CONTENTS
PAGE NO.
INVESTMENT RESTRICTIONS 1
INVESTMENT POLICIES AND TECHNIQUES 3
ILLIQUID SECURITIES 3
SHORT-TERM FIXED INCOME SECURITIES 4
SHORT SALES AGAINST THE BOX 5
WARRANTS 5
VARIABLE- OR FLOATING-RATE SECURITIES 6
WHEN-ISSUED SECURITIES 7
UNSEASONED COMPANIES 7
NON-INVESTMENT GRADE DEBT SECURITIES (JUNK BONDS) 7
HEDGING STRATEGIES 9
FOREIGN INVESTMENT COMPANIES 17
DEPOSITARY RECEIPTS 17
LENDING OF PORTFOLIO SECURITIES 18
MORTGAGE-AND ASSET-BACKED SECURITIES 18
MORTGAGE DOLLAR ROLLS AND REVERSE REPURCHASE
AGREEMENTS 19
REPURCHASE AGREEMENTS 20
DIRECTORS AND OFFICERS 20
INVESTMENT ADVISER 22
TOTAL RETURN 26
YIELD 26
VOLATILITY 26
COMPARISONS 27
INDEPENDENT AUDITORS 27
FINANCIAL STATEMENTS 28
APPENDIX - BOND RATINGS A-1
No person has been authorized to give any information
or to make any representations other than those
contained in this Statement of Additional Information
and the Prospectus dated October 30, 1996, and if given
or made, such information or representations may not be
relied upon as having been authorized by the Company.
This Statement of Additional Information does not
constitute an offer to sell securities in any state to
any person to whom it is unlawful to make such offer in
such state.
<PAGE>
INVESTMENT RESTRICTIONS
The investment objective of the Frontegra Total
Return Bond Fund (the "Total Return Bond Fund") is a
high level of total return, consistent with the
preservation of capital. The investment objective of
the Frontegra Opportunity Fund (the "Opportunity Fund")
is capital appreciation. The investment objective and
policies of each Fund are described in detail in the
Prospectus under the captions "Total Return Bond Fund."
and "Opportunity Fund".
The following is a complete list of each Fund's
fundamental investment limitations which cannot be
changed without shareholder approval.
Each Fund:
1.May not with respect to 75% of its total
assets, purchase the securities of any issuer
(except securities issued or guaranteed by the
U.S. government or its agencies or
instrumentalities) if, as a result, (i) more
than 5% of the Fund's total assets would be
invested in the securities of that issuer or
(ii) the Fund would hold more than 10% of the
outstanding voting securities of that issuer.
2.May (i) borrow money from banks and (ii) make
other investments or engage in other
transactions permissible under the Investment
Company Act of 1940 (the "1940 Act") which may
involve a borrowing, provided that the
combination of (i) and (ii) shall not exceed 33-
1/3% of the value of the Fund's total assets
(including the amount borrowed), less the
Fund's liabilities (other than borrowings). The
Fund may also borrow money from other Frontegra
Funds or other persons to the extent permitted
by applicable law.
3.May not issue senior securities, except as
permitted under the 1940 Act.
4.May not act as an underwriter of another
issuer's securities, except to the extent the
Fund may be deemed to be an underwriter within
the meaning of the Securities Act of 1933 in
connection with the purchase and sale of
portfolio securities.
5.May not purchase or sell physical commodities
unless acquired as a result of ownership of
securities or other instruments (but this
limitation shall not prevent the Fund from
purchasing or selling options, futures
contracts, or other derivative instruments, or
from investing in securities or other
instruments backed by physical commodities).
6.May not make loans if, as a result, more than
33-1/3% of the Fund's total assets would be
lent to other persons, except through (i)
purchases of debt securities or other debt
instruments or (ii) engaging in repurchase
agreements.
7.May not purchase the securities of any issuer
if, as a result, more than 25% of the Fund's
total assets would be invested in the
securities of issuers, the principal business
activities of which are in the same industry.
8.May not purchase or sell real estate unless
acquired as a result of ownership of securities
or other instruments (but this limitation shall
not prohibit the Fund from purchasing or
selling securities or other instruments backed
by real estate or of issuers engaged in real
estate activities).
<PAGE>
9.May, notwithstanding any other fundamental
investment policy or restriction, invest all of
its assets in the securities of a single open-
end management investment company with
substantially the same fundamental investment
objective, policies, and restrictions as the
Fund.
With the exception of the investment restriction
set out in item 2 above, if a percentage restriction is
adhered to at the time of investment, a later increase
in percentage resulting from a change in market value
of the investment or the total assets will not
constitute a violation of that restriction.
The following are the Funds' non-fundamental
operating policies which may be changed by the Board of
Directors of the Company (the "Board of Directors")
without shareholder approval.
Each Fund may not:
1.Sell securities short, unless the Fund owns
or has the right to obtain securities
equivalent in kind and amount to the securities
sold short or unless it covers such short sale
as required by the current rules and positions
of the Securities and Exchange Commission or
its staff, and provided that transactions in
options, futures contracts, options on futures
contracts, or other derivative instruments are
not deemed to constitute selling securities
short.
2.Purchase securities on margin, except that
the Fund may obtain such short-term credits as
are necessary for the clearance of
transactions, and provided that margin deposits
in connection with futures contracts, options
on futures contracts, or other derivative
instruments shall not constitute purchasing
securities on margin.
3.Invest in illiquid securities if, as a result
of such investment, more than 15% of its net
assets would be invested in illiquid
securities, or such other amounts as may be
permitted under the 1940 Act.
4.Purchase securities of other investment
companies except in compliance with the 1940
Act and applicable state law.
5.Invest all of its assets in the securities of
a single open-end investment management company
with substantially the same fundamental
investment objective, restrictions and policies
as the Fund.
6.Purchase the securities of any issuer (other
than securities issued or guaranteed by
domestic or foreign governments or political
subdivisions thereof) if, as a result, more
than 5% of its total assets would be invested
in the securities of issuers that, including
predecessor or unconditional guarantors, have a
record of less than three years of continuous
operation. This policy does not apply to
securities of pooled investment vehicles or
mortgage or asset-backed securities.
7.Invest in direct interests in oil, gas, or
other mineral exploration programs or leases;
however, the Fund may invest in the securities
of issuers that engage in these activities.
8.Engage in futures or options on futures
transactions which are impermissible pursuant
to Rule 4.5 under the Commodity Exchange Act
and, in accordance with Rule 4.5, will use
futures or options on futures transactions
solely for bona fide hedging transactions
(within the meaning of the Commodity Exchange
Act), provided, however, that the Fund may, in
addition to bona fide hedging transactions, use
futures and options on futures transactions if
the aggregate initial margin and premiums
required to establish such positions, less the
amount by which any such options positions are
in the money (within the meaning of the
Commodity Exchange Act), do not exceed 5% of
the Fund's net assets. In addition, (i) the
aggregate value of securities underlying call
options on securities written by the Fund or
obligations
<PAGE>
underlying put options on
securities written by the Fund determined as of
the date the options are written will not
exceed 50% of the Fund's net assets; (ii) the
aggregate premiums paid on all options
purchased by the Fund and which are being held
will not exceed 20% of the Fund's net assets;
(iii) the Fund will not purchase put or call
options, other than hedging positions if, as a
result thereof, more than 5% of its total
assets would be so invested; and (iv) the
aggregate margin deposits required on all
futures and options on futures transactions
being held will not exceed 5% of the Fund's
total assets.
9.Pledge, mortgage or hypothecate any assets
owned by the Fund except as may be necessary in
connection with permissible borrowings or
investments and then such pledging, mortgaging,
or hypothecating may not exceed 33-1/3% of the
Fund's total assets at the time of the
borrowing or investment.
10. Purchase warrants, valued at the lower of
cost or market value, in excess of 5% of the
Fund's net assets. Included in that amount,
but not to exceed 2% of the Fund's net assets,
may be warrants that are not listed on any
stock exchange. Warrants acquired by the Fund
in units or attached to securities are not
subject to these restrictions.
11. Borrow money, except (i) from banks or
(ii) through reverse repurchase agreements or
mortgage dollar rolls, and will not purchase
securities when bank borrowings exceed 5% of
its total assets.
12. Make any loans other than loans of
portfolio securities, except through (i)
purchases of debt securities or other debt
instruments, or (ii) engaging in repurchase
agreements.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the
discussion of the Funds' investment objectives,
policies, and techniques that are described in the
Prospectus under the captions Total Return Bond Fund,"
and "Opportunity Fund," " and "INVESTMENT TECHNIQUES
AND RISKS."
Illiquid Securities
The Funds may invest in illiquid securities (i.e.,
securities that are not readily marketable). For
purposes of this restriction, illiquid securities
include, but are not limited to, restricted securities
(securities the disposition of which is restricted
under the federal securities laws), securities which
may only be resold pursuant to Rule 144A under the
Securities Act of 1933, as amended (the "Securities
Act"), and repurchase agreements with maturities in
excess of seven days. However, neither Fund will
acquire illiquid securities if, as a result, such
securities would comprise more than 15% of the value of
the Fund's net assets. The Opportunity Fund does not
currently intend to invest more than 5% of its net
assets in illiquid securities. Rule 144A securities
will be treated as illiquid securities, subject to the
liquidity guidelines. The Board of Directors or its
delegate has the ultimate authority to determine, to
the extent permissible under the federal securities
laws, which securities are liquid or illiquid for
purposes of this 15% limitation. The Board of
Directors has delegated to Frontegra Asset Management,
Inc. ("Frontegra") the day-to-day determination of the
liquidity of any security, although it has retained
oversight and ultimate responsibility for such
determinations. Although no definitive liquidity
criteria are used, the Board of Directors has directed
Frontegra to look to such factors as (i) the nature of
the market for a security (including the institutional
private resale market), (ii) the terms of certain
securities or other instruments allowing for the
disposition to a third party or the issuer thereof
(e.g., certain repurchase obligations and demand
instruments), (iii) the availability of market
quotations (e.g., for securities quoted in the PORTAL
system) and (iv) other permissible relevant factors.
Restricted securities may be sold only in
privately negotiated transactions or in a public
offering with respect to which a registration statement
is in effect under the Securities Act. Where
registration is required, a Fund may be
<PAGE>
obligated to
pay all or part of the registration expenses and a
considerable period may elapse between the time of the
decision to sell and the time the Fund may be permitted
to sell a security under an effective registration
statement. If, during such a period, adverse market
conditions were to develop, the Fund might obtain a
less favorable price than that which prevailed when it
decided to sell. Restricted securities will be priced
at fair value as determined in good faith by the Board
of Directors. If, through the appreciation of
restricted securities or the depreciation of
unrestricted securities, the Opportunity Fund and the
Total Return Bond Fund should be in a position where
more than 5% and 15% of the value of their respective
net assets are invested in illiquid securities,
including restricted securities which are not readily
marketable, the affected Fund will take such steps as
is deemed advisable, if any, to protect liquidity.
Short-Term Fixed Income Securities
The Total Return Bond Fund may invest without
limitation in cash and short-term fixed income
securities. The Opportunity Fund may invest up to 20%
of its total assets in cash and short-term fixed income
securities for any purpose and up to 100% of its total
assets may be invested in such instruments for
temporary defensive purposes. Short-term fixed income
securities are defined to include without limitation,
the following:
1.U.S. government securities, including bills,
notes and bonds differing as to maturity and
rates of interest, which are either issued or
guaranteed by the U.S. Treasury or by U.S.
government agencies or instrumentalities. U.S.
government agency securities include securities
issued by: (a) the Federal Housing
Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small
Business Administration and the Government
National Mortgage Association, whose securities
are supported by the full faith and credit of
the United States; (b) the Federal Home Loan
Banks, Federal Intermediate Credit Banks and
the Tennessee Valley Authority, whose
securities are supported by the right of the
agency to borrow from the U.S. Treasury; (c)
the Federal National Mortgage Association,
whose securities are supported by the
discretionary authority of the U.S. government
to purchase certain obligations of the agency
or instrumentality; and (d) the Student Loan
Marketing Association, whose securities are
supported only by its credit. While the U.S.
government provides financial support to such
U.S. government-sponsored agencies or
instrumentalities, no assurance can be given
that it always will do so since it is not so
obligated by law. The U.S. government, its
agencies and instrumentalities do not guarantee
the market value of their securities and
consequently the value of such securities may
fluctuate.
2.Certificates of Deposit issued against funds
deposited in a bank or savings and loan
association. Such certificates are for a
definite period of time, earn a specified rate
of return and are normally negotiable. If such
certificates of deposit are non-negotiable,
they will be considered illiquid securities and
be subject to each Fund's restriction on
investments in illiquid securities. Pursuant
to the certificate of deposit, the issuer
agrees to pay the amount deposited plus
interest to the bearer of the certificate on
the date specified thereon. Under current FDIC
regulations, the maximum insurance payable as
to any one certificate of deposit is $100,000;
therefore, certificates of deposit purchased by
a Fund may not be fully insured.
3.Bankers' acceptances which are short-term
credit instruments used to finance commercial
transactions. Generally, an acceptance is a
time draft drawn on a bank by an exporter or an
importer to obtain a stated amount of funds to
pay for specific merchandise. The draft is
then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face
value of the instrument on its maturity date.
The acceptance may then be held by the
accepting bank as an asset or it may be sold in
the secondary market at the going rate of
interest for a specific maturity.
4.Repurchase agreements which involve purchases
of debt securities. In such an action, at the
time a Fund purchases the security, it
simultaneously agrees to resell and redeliver
the security to the seller,
<PAGE>
who also
simultaneously agrees to buy back the security
at a fixed price and time. This assures a
predetermined yield for the Fund during its
holding period since the resale price is always
greater than the purchase price and reflects an
agreed-upon market rate. Such actions afford
an opportunity for the Fund to invest
temporarily available cash. The Funds may
enter into repurchase agreements only with
respect to obligations of the U.S. government,
its agencies or instrumentalities, certificates
of deposit, or bankers acceptances in which the
Funds may invest. Repurchase agreements may be
considered loans to the seller, collateralized
by the underlying securities. The risk to the
Funds is limited to the ability of the seller
to pay the agreed-upon sum on the repurchase
date. In the event of default, the repurchase
agreement provides that the affected Fund is
entitled to sell the underlying collateral.
However, if the value of the collateral
declines after the agreement is entered into,
and if the seller defaults under a repurchase
agreement when the value of the underlying
collateral is less than the repurchase price,
the Fund could incur a loss of both principal
and interest. Frontegra monitors the value of
the collateral at the time the transaction is
entered into and at all times during the term
of the repurchase agreement. Frontegra does so
in an effort to determine that the value of the
collateral always equals or exceeds the agreed-
upon repurchase price to be paid to the Fund.
If the seller were to be subject to a federal
bankruptcy proceeding, the ability of a Fund to
liquidate the collateral could be delayed or
impaired because of certain provisions of the
bankruptcy laws.
5.Bank time deposits, which are monies kept on
deposit with banks or savings and loan
associations for a stated period of time at a
fixed rate of interest. There may be penalties
for the early withdrawal of such time deposits,
in which case the yields of these investments
will be reduced.
6.Commercial paper consists of short-term
unsecured promissory notes, including variable
rate master demand notes issued by corporations
to finance their current operations. Master
demand notes are direct lending arrangements
between a Fund and a corporation. There is no
secondary market for the notes. However, they
are redeemable by the Funds at any time.
Frontegra will consider the financial condition
of the corporation (e.g., earning power, cash
flow and liquidity ratios) and will
continuously monitor the corporation's ability
to meet all of its financial obligations,
because a Fund's liquidity might be impaired if
the corporation were unable to pay principal
and interest on demand. Investments in
commercial paper will be limited to commercial
paper rated in the two highest categories by a
major rating agency or unrated commercial paper
which is, in the opinion of Frontegra, of
comparable quality.
Short Sales Against the Box
When Frontegra believes that the price of a
particular security held by the Total Return Bond Fund
may decline, it may make "short sales against the box"
to hedge the unrealized gain on such security. Selling
short against the box involves selling a security which
the Fund owns for delivery at a specified date in the
future. The Total Return Bond Fund will limit its
transactions in short sales against the box to 5% of
its net assets.
Warrants
Each Fund may invest in warrants if, after giving
effect thereto, not more than 5% of its net assets will
be invested in warrants other than warrants acquired in
units or attached to other securities. Of such 5%, not
more than 2% of its assets at the time of purchase may
be invested in warrants that are not listed on the New
York Stock Exchange or the American Stock Exchange.
Investing in warrants is purely speculative in that
they have no voting rights, pay no dividends and have
no rights with respect to the assets of the corporation
issuing them. Warrants basically are options to
purchase equity securities at a specific price for a
specific period of time. They do not represent
ownership of the securities but only the right to buy
them. Warrants are issued by the issuer of the
<PAGE>
security, which may be purchased on their exercise.
The prices of warrants do not necessarily parallel the
prices of the underlying securities.
Variable- or Floating-Rate Securities
The Total Return Bond Fund may invest in
securities which offer a variable- or floating-rate of
interest. Variable-rate securities provide for
automatic establishment of a new interest rate at fixed
intervals (e.g., daily, monthly, semi-annually, etc.).
Floating-rate securities generally provide for
automatic adjustment of the interest rate whenever some
specified interest rate index changes. The interest
rate on variable- or floating-rate securities is
ordinarily determined by reference to or is a
percentage of a bank's prime rate, the 90-day U.S.
Treasury bill rate, the rate of return on commercial
paper or bank certificates of deposit, an index of
short-term interest rates, or some other objective
measure.
Variable- or floating-rate securities frequently
include a demand feature entitling the holder to sell
the securities to the issuer at par. In many cases,
the demand feature can be exercised at any time on 7
days notice; in other cases, the demand feature is
exercisable at any time on 30 days notice or on similar
notice at intervals of not more than one year. Some
securities which do not have variable or floating
interest rates may be accompanied by puts producing
similar results and price characteristics. When
considering the maturity of any instrument which may be
sold or put to the issuer or a third party, the Fund
may consider that instrument's maturity to be shorter
than its stated maturity.
Variable-rate demand notes include master demand
notes which are obligations that permit the Fund to
invest fluctuating amounts, which may change daily
without penalty, pursuant to direct arrangements
between the Fund, as lender, and the borrower. The
interest rates on these notes fluctuate from time to
time. The issuer of such obligations normally has a
corresponding right, after a given period, to prepay in
its discretion the outstanding principal amount of the
obligations plus accrued interest upon a specified
number of days' notice to the holders of such
obligations. The interest rate on a floating-rate
demand obligation is based on a known lending rate,
such as a bank's prime rate, and is adjusted
automatically each time such rate is adjusted. The
interest rate on a variable-rate demand obligation is
adjusted automatically at specified intervals.
Frequently, such obligations are secured by letters of
credit or other credit support arrangements provided by
banks. Because these obligations are direct lending
arrangements between the lender and borrower, it is not
contemplated that such instruments will generally be
traded. There generally is not an established secondary
market for these obligations, although they are
redeemable at face value. Accordingly, where these
obligations are not secured by letters of credit or
other credit support arrangements, the Fund's right to
redeem is dependent on the ability of the borrower to
pay principal and interest on demand.
The Total Return Bond Fund will not invest more
than 5% of its net assets in variable- and
floating-rate demand obligations that are not readily
marketable (a variable- or floating-rate demand
obligation that may be disposed of on not more than
seven days notice will be deemed readily marketable and
will not be subject to this limitation). In addition,
each variable- or floating-rate obligation must meet
the credit quality requirements applicable to all the
Fund's investments at the time of purchase. When
determining whether such an obligation meets the Fund's
credit quality requirements, the Fund may look to the
credit quality of the financial guarantor providing a
letter of credit or other credit support arrangement.
In determining the Fund's weighted average
portfolio maturity, the Fund will consider a floating
or variable rate security to have a maturity equal to
its stated maturity (or redemption date if it has been
called for redemption), except that it may consider (i)
variable rate securities to have a maturity equal to
the period remaining until the next readjustment in the
interest rate, unless subject to a demand feature, (ii)
variable rate securities subject to a demand feature to
have a remaining maturity equal to the longer of (a)
the next readjustment in the interest rate or (b) the
period remaining until the principal can be recovered
through demand, and (iii) floating rate securities
subject to a demand feature to have a maturity equal to
the period remaining until the principal can be
recovered through demand.
<PAGE>
Variable and floating rate
securities generally are subject to less principal
fluctuation than securities without these attributes
since the securities usually trade at par following the
readjustment in the interest rate.
When-Issued Securities
The Total Return Bond Fund may from time to time
purchase securities on a "when-issued" basis. The
price of securities purchased on a when-issued basis is
fixed at the time the commitment to purchase is made,
but delivery and payment for the securities take place
at a later date. Normally, the settlement date occurs
within 45 days of the purchase. During the period
between the purchase and settlement, no payment is made
by the Fund to the issuer and no interest is accrued on
debt securities or dividend income is earned on equity
securities. Forward commitments involve a risk of loss
if the value of the security to be purchased declines
prior to the settlement date, which risk is in addition
to the risk of decline in value of the Fund's other
assets. While when-issued securities may be sold prior
to the settlement date, the Fund intends to purchase
such securities with the purpose of actually acquiring
them. At the time the Fund makes the commitment to
purchase a security on a when-issued basis, it will
record the transaction and reflect the value of the
security in determining its net asset value. The Fund
does not believe that net asset value will be adversely
affected by purchases of securities on a when-issued
basis.
The Fund will maintain cash, U.S. government
securities and liquid securities equal in value to
commitments for when-issued securities. Such
segregated securities either will mature or, if
necessary, be sold on or before the settlement date.
When the time comes to pay for when-issued securities,
the Fund will meet its obligations from then available
cash flow, sale of the securities held in the separate
account, described above, sale of other securities or,
although it would not normally expect to do so, from
the sale of the when-issued securities themselves
(which may have a market value greater or less than the
Fund's payment obligation).
Unseasoned Companies
Neither Fund may invest more than 5% of its net
assets in unseasoned companies. While smaller
companies generally have potential for rapid growth,
they often involve higher risks because they lack the
management experience, financial resources, product
diversification and competitive strengths of larger
corporations. In addition, in many instances, the
securities of smaller companies are traded only over-
the-counter or on regional securities exchanges, and
the frequency and volume of their trading is
substantially less than is typical of larger companies.
Therefore, the securities of smaller companies may be
subject to wider price fluctuations. When making large
sales, the Funds may have to sell portfolio holdings of
small companies at discounts from quoted prices or may
have to make a series of smaller sales over an extended
period of time due to the trading volume in smaller
company securities.
Non-Investment Grade Debt Securities (Junk Bonds)
The Total Return Bond Fund may invest up to 25% of
its net assets in junk bonds. While generally offering
higher yields than investment grade securities with
similar maturities, non-investment grade debt
securities involve greater risks, including the
possibility of default or bankruptcy. They are
regarded as predominantly speculative with respect to
the issuer's capacity to pay interest and repay
principal. The special risk considerations in
connection with investments in these securities are
discussed below. Refer to the Appendix of this
Statement of Additional Information for a discussion of
securities ratings.
Effect of Interest Rates and Economic Changes.
The junk bond market is relatively new and its growth
has paralleled a long economic expansion. As a result,
it is not clear how this market may withstand a
prolonged recession or economic downturn. Such an
economic downturn could severely disrupt the market for
and adversely affect the value of such securities.
<PAGE>
All interest-bearing securities typically
experience appreciation when interest rates decline and
depreciation when interest rates rise. The market
values of junk bond securities tend to reflect
individual corporate developments to a greater extent
than do higher rated securities, which react primarily
to fluctuations in the general level of interest rates.
Junk bond securities also tend to be more sensitive to
economic conditions than are higher-rated securities.
As a result, they generally involve more credit risks
than securities in the higher-rated categories. During
an economic downturn or a sustained period of rising
interest rates, highly leveraged issuers of junk bond
securities may experience financial stress and may not
have sufficient revenues to meet their payment
obligations. The risk of loss due to default by an
issuer of these securities is significantly greater
than issuers of higher-rated securities because such
securities are generally unsecured and are often
subordinated to other creditors. Further, if the
issuer of a junk bond security defaulted, a Fund might
incur additional expenses to seek recovery. Periods of
economic uncertainty and changes would also generally
result in increased volatility in the market prices of
these securities and thus in the Fund's net asset
value.
As previously stated, the value of a junk bond
security will generally decrease in a rising interest
rate market, and accordingly so will the Fund's net
asset value. If the Fund experiences unexpected net
redemptions in such a market, it may be forced to
liquidate a portion of its portfolio securities without
regard to their investment merits. Due to the limited
liquidity of junk bond securities, the Fund may be
forced to liquidate these securities at a substantial
discount. Any such liquidation would reduce the Fund's
asset base over which expenses could be allocated and
could result in a reduced rate of return for the Fund.
Payment Expectations. Junk bond securities
typically contain redemption, call or prepayment
provisions which permit the issuer of such securities
containing such provisions to redeem the securities at
its discretion. During periods of falling interest
rates, issuers of these securities are likely to redeem
or prepay the securities and refinance them with debt
securities with a lower interest rate. To the extent
an issuer is able to refinance the securities, or
otherwise redeem them, the Fund may have to replace the
securities with a lower yielding security, which could
result in a lower return for the Fund.
Credit Ratings. Credit ratings issued by credit-
rating agencies evaluate the safety of principal and
interest payments of rated securities. They do not,
however, evaluate the market value risk of junk bond
securities and, therefore may not fully reflect the
true risks of an investment. In addition, credit
rating agencies may or may not make timely changes in a
rating to reflect changes in the economy or in the
condition of the issuer that affect the market value of
the security. Consequently, credit ratings are used
only as a preliminary indicator of investment quality.
Investments in junk bond securities will be more
dependent on the subadviser's credit analysis than
would be the case with investments in investment-grade
debt securities. The subadviser employs its own credit
research and analysis, which includes a study of
existing debt, capital structure, ability to service
debt and to pay dividends, the issuer's sensitivity to
economic conditions, its operating history and the
current trend of earnings. The subadviser continually
monitors the Fund's investments and carefully evaluates
whether to dispose of or to retain junk bond securities
whose credit ratings or credit quality may have
changed.
Liquidity and Valuation. The Fund may have
difficulty disposing of certain junk bond securities
because there may be a thin trading market for such
securities. Because not all dealers maintain markets
in all junk bond securities there is no established
retail secondary market for many of these securities.
The Fund anticipates that such securities could be sold
only to a limited number of dealers or institutional
investors. To the extent a secondary trading market
does exist, it is generally not as liquid as the
secondary market for higher-rated securities. The lack
of a liquid secondary market may have an adverse impact
on the market price of the security. The lack of a
liquid secondary market for certain securities may also
make it more difficult for the Fund to obtain accurate
market quotations for purposes of valuing the Fund.
Market quotations are generally available on many junk
bond issues only from a limited number of dealers and
may not necessarily represent firm bids of such dealers
or prices for actual sales. During periods of thin
trading, the spread between bid and asked prices is
likely to increase significantly. In
<PAGE>
addition, adverse
publicity and investor perceptions, whether or not
based on fundamental analysis, may decrease the values
and liquidity of junk bond securities, especially in a
thinly traded market.
New and Proposed Legislation. Recent legislation
has been adopted and, from time to time, proposals have
been discussed regarding new legislation designed to
limit the use of certain junk bond securities by
certain issuers. An example of such legislation is a
law which requires federally insured savings and loan
associations to divest their investments in these
securities over time. It is not currently possible to
determine the impact of the recent legislation or the
proposed legislation on the junk bond securities
market. However, it is anticipated that if additional
legislation is enacted or proposed, it could have a
material affect on the value of these securities and
the existence of a secondary trading market for the
securities.
Hedging Strategies
General Description of Hedging Strategies. The
Funds may engage in hedging activities, including
options, futures contracts (sometimes referred to as
"futures") and options on futures contracts to attempt
to hedge a Fund's holdings.
Hedging instruments on securities generally are
used to hedge against price movements in one or more
particular securities positions that a Fund owns or
intends to acquire. Hedging instruments on stock
indices, in contrast, generally are used to hedge
against price movements in broad equity market sectors
in which a Fund has invested or expects to invest. The
use of hedging instruments is subject to applicable
regulations of the Securities and Exchange Commission
(the "SEC"), the several options and futures exchanges
upon which they are traded, the Commodity Futures
Trading Commission (the "CFTC") and various state
regulatory authorities. In addition, a Fund's ability
to use hedging instruments will be limited by tax
considerations.
General Limitations on Futures and Options
Transactions. The Company has filed a notice of
eligibility for exclusion from the definition of the
term "commodity pool operator" with the CFTC and the
National Futures Association, which regulate trading in
the futures markets. Pursuant to Section 4.5 of the
regulations under the Commodity Exchange Act (the
"CEA"), the notice of eligibility for the Funds
includes the representation that the Funds will use
futures contracts and related options solely for bona
fide hedging purposes within the meaning of CFTC
regulations, provided that the Funds may hold other
positions in futures contracts and related options that
do not fall within the definition of bona fide hedging
transactions (i.e., for speculative purposes) if
aggregate initial margins and premiums paid do not
exceed 5% of the net asset value of the respective
Funds. In addition, neither Fund will enter into
futures contracts and options transactions if more than
50% of its net assets would be committed to such
instruments.
The foregoing limitations are not fundamental
policies of the Funds and may be changed without
shareholder approval as regulatory agencies permit.
Various exchanges and regulatory authorities have
undertaken reviews of options and futures trading in
light of market volatility. Among the possible actions
that have been presented are proposals to adopt new or
more stringent daily price fluctuation limits for
futures and options transactions and proposals to
increase the margin requirements for various types of
futures transactions.
Asset Coverage for Futures and Options Positions.
Each Fund will comply with the regulatory requirements
of the SEC and the CFTC with respect to coverage of
options and futures positions by registered investment
companies and, if the guidelines so require, will set
aside cash, U.S. government securities, high grade
liquid debt securities and/or other liquid assets
permitted by the SEC and CFTC in a segregated custodial
account in the amount prescribed. Securities held in a
segregated account cannot be sold while the futures or
options position is outstanding, unless replaced with
other permissible assets, and will be marked-to-market
daily.
<PAGE>
Stock Index Options. Each Fund may (i) purchase
stock index options for any purpose, (ii) sell stock
index options in order to close out existing positions,
and/or (iii) write covered options on stock indexes for
hedging purposes. Stock index options are put options
and call options on various stock indexes. In most
respects, they are identical to listed options on
common stocks. The primary difference between stock
options and index options occurs when index options are
exercised. In the case of stock options, the
underlying security, common stock, is delivered.
However, upon the exercise of an index option,
settlement does not occur by delivery of the securities
comprising the index. The option holder who exercises
the index option receives an amount of cash if the
closing level of the stock index upon which the option
is based is greater than, in the case of a call, or
less than, in the case of a put, the exercise price of
the option. This amount of cash is equal to the
difference between the closing price of the stock index
and the exercise price of the option expressed in
dollars times a specified multiple.
A stock index fluctuates with changes in the
market values of the stocks included in the index. For
example, some stock index options are based on a broad
market index, such as the Standard & Poor's 500 or the
Value Line Composite Index or a narrower market index,
such as the Standard & Poor's 100. Indexes may also be
based on an industry or market segment, such as the
AMEX Oil and Gas Index or the Computer and Business
Equipment Index. Options on stock indexes are
currently traded on the following exchanges: the
Chicago Board of Options Exchange, the New York Stock
Exchange, the American Stock Exchange, the Pacific
Stock Exchange, and the Philadelphia Stock Exchange.
A Fund's use of stock index options is subject to
certain risks. Successful use by the Funds of options
on stock indexes will be subject to the ability of the
subadviser to correctly predict movements in the stock
market. This requires different skills and techniques
than predicting changes in the prices of individual
securities. In addition, a Fund's ability to
effectively hedge all or a portion of the securities in
its portfolio, in anticipation of or during a market
decline through transactions in put options on stock
indexes, depends on the degree to which price movements
in the underlying index correlate with the price
movements of the securities held by a Fund. Inasmuch
as a Fund's securities will not duplicate the
components of an index, the correlation will not be
perfect. Consequently, each Fund will bear the risk
that the prices of its securities being hedged will not
move in the same amount as the prices of its put
options on the stock indexes. It is also possible that
there may be a negative correlation between the index
and a Fund's securities which would result in a loss on
both such securities and the options on stock indexes
acquired by the Fund.
The hours of trading for options may not conform
to the hours during which the underlying securities are
traded. To the extent that the options markets close
before the markets for the underlying securities,
significant price and rate movements can take place in
the underlying markets that cannot be reflected in the
options markets. The purchase of options is a highly
specialized activity which involves investment
techniques and risks different from those associated
with ordinary portfolio securities transactions. The
purchase of stock index options involves the risk that
the premium and transaction costs paid by a Fund in
purchasing an option will be lost as a result of
unanticipated movements in prices of the securities
comprising the stock index on which the option is
based.
Certain Considerations Regarding Options. There
is no assurance that a liquid secondary market on an
options exchange will exist for any particular option,
or at any particular time, and for some options no
secondary market on an exchange or elsewhere may exist.
If a Fund is unable to close out a call option on
securities that it has written before the option is
exercised, the Fund may be required to purchase the
optioned securities in order to satisfy its obligation
under the option to deliver such securities. If a Fund
is unable to effect a closing sale transaction with
respect to options on securities that it has purchased,
it would have to exercise the option in order to
realize any profit and would incur transaction costs
upon the purchase and sale of the underlying
securities.
The writing and purchasing of options is a highly
specialized activity which involves investment
techniques and risks different from those associated
with ordinary portfolio securities transactions.
Imperfect correlation
<PAGE>
between the options and
securities markets may detract from the effectiveness
of attempted hedging. Options transactions may result
in significantly higher transaction costs and portfolio
turnover for the Funds.
Federal Tax Treatment of Options. Certain option
transactions have special tax results for the Funds.
Expiration of a call option written by a Fund will
result in short-term capital gain. If the call option
is exercised, the Fund will realize a gain or loss from
the sale of the security covering the call option and,
in determining such gain or loss, the option premium
will be included in the proceeds of the sale.
If a Fund writes options other than "qualified
covered call options," as defined in Section 1092 of
the Internal Revenue Code of 1986, as amended (the
"Code"), or purchases puts, any losses on such options
transactions, to the extent they do not exceed the
unrealized gains on the securities covering the
options, may be subject to deferral until the
securities covering the options have been sold.
In the case of transactions involving "nonequity
options," as defined in Code Section 1256, the Funds
will treat any gain or loss arising from the lapse,
closing out or exercise of such positions as 60% long-
term and 40% short-term capital gain or loss as
required by Section 1256 of the Code. In addition,
such positions must be marked-to-market as of the last
business day of the year, and gain or loss must be
recognized for federal income tax purposes in
accordance with the 60%/40% rule discussed above even
though the position has not been terminated. A
"nonequity option" includes an option with respect to
any group of stocks or a stock index if there is in
effect a designation by the CFTC of a contract market
for a contract based on such group of stocks or
indexes. For example, options involving stock indexes
such as the Standard & Poor's 500 and 100 indexes would
be "nonequity options" within the meaning of Code
Section 1256.
Futures Contracts. The Funds may enter into
futures contracts (hereinafter referred to as "Futures"
or "Futures Contracts"), including index and interest
rate Futures as a hedge against movements in the equity
and bond markets, in order to establish more definitely
the effective return on securities held or intended to
be acquired by the Funds or for other purposes
permissible under the CEA. Each Fund's hedging may
include sales of Futures as an offset against the
effect of expected declines in stock prices and
purchases of Futures as an offset against the effect of
expected increases in stock or bond prices. The Funds
will not enter into Futures Contracts which are
prohibited under the CEA and will, to the extent
required by regulatory authorities, enter only into
Futures Contracts that are traded on national futures
exchanges and are standardized as to maturity date and
underlying financial instrument. The principal
interest rate Futures exchanges in the United States
are the Board of Trade of the City of Chicago and the
Chicago Mercantile Exchange. Futures exchanges and
trading are regulated under the CEA by the CFTC.
An index Futures Contract is an agreement pursuant
to which the parties agree to take or make delivery of
an amount of cash equal to the difference between the
value of the index at the close of the last trading day
of the contract and the price at which the index
Futures Contract was originally written. An interest
rate futures contract provides for the future sale by
one party and purchase by another party of a specified
amount of a specific financial instrument (e.g. debt
security) for a specified price at a designated date,
time, and place. Transaction costs are incurred when a
Futures Contract is bought or sold and margin deposits
must be maintained. A Futures Contract may be
satisfied by delivery or purchase, as the case may be,
of the instrument or by payment of the change in the
cash value of the index. More commonly, Futures
Contracts are closed out prior to delivery by entering
into an offsetting transaction in a matching Futures
Contract. Although the value of an index might be a
function of the value of certain specified securities,
no physical delivery of those securities is made. If
the offsetting purchase price is less than the original
sale price, a gain will be realized; if it is more, a
loss will be realized. Conversely, if the offsetting
sale price is more than the original purchase price, a
gain will be realized; if it is less, a loss will be
realized. The transaction costs must also be included
in these calculations. There can be no assurance,
however, that the Funds will be able to enter into an
offsetting transaction with respect to a particular
Futures Contract at a particular time. If the Funds
are not able to enter into an offsetting transaction,
the Funds will continue to be required to maintain the
margin deposits on the Futures Contract.
<PAGE>
Margin is the amount of funds that must be
deposited by each Fund with its custodian in a
segregated account in the name of the futures
commission merchant in order to initiate Futures
trading and to maintain the Fund's open positions in
Futures Contracts. A margin deposit is intended to
ensure the Fund's performance of the Futures Contract.
The margin required for a particular Futures Contract
is set by the exchange on which the Futures Contract is
traded and may be significantly modified from time to
time by the exchange during the term of the Futures
Contract. Futures Contracts are customarily purchased
and sold on margins that may range upward from less
than 5% of the value of the Futures Contract being
traded.
If the price of an open Futures Contract changes
(by increase in the case of a sale or by decrease in
the case of a purchase) so that the loss on the Futures
Contract reaches a point at which the margin on deposit
does not satisfy margin requirements, the broker will
require an increase in the margin. However, if the
value of a position increases because of favorable
price changes in the Futures Contract so that the
margin deposit exceeds the required margin, the broker
will pay the excess to the Fund. In computing daily
net asset value, each Fund will mark to market the
current value of its open Futures Contracts. The Funds
expect to earn interest income on their margin
deposits.
Because of the low margin deposits required,
Futures trading involves an extremely high degree of
leverage. As a result, a relatively small price
movement in a Futures Contract may result in immediate
and substantial loss, as well as gain, to the investor.
For example, if at the time of purchase, 10% of the
value of the Futures Contract is deposited as margin, a
subsequent 10% decrease in the value of the Futures
Contract would result in a total loss of the margin
deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15%
decrease would result in a loss equal to 150% of the
original margin deposit, if the Futures Contract were
closed out. Thus, a purchase or sale of a Futures
Contract may result in losses in excess of the amount
initially invested in the Futures Contract. However, a
Fund would presumably have sustained comparable losses
if, instead of the Futures Contract, it had invested in
the underlying financial instrument and sold it after
the decline.
Most United States Futures exchanges limit the
amount of fluctuation permitted in Futures Contract
prices during a single trading day. The daily limit
establishes the maximum amount that the price of a
Futures Contract may vary either up or down from the
previous day's settlement price at the end of a trading
session. Once the daily limit has been reached in a
particular type of Futures Contract, no trades may be
made on that day at a price beyond that limit. The
daily limit governs only price movement during a
particular trading day and therefore does not limit
potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures Contract
prices have occasionally moved to the daily limit for
several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of
Futures positions and subjecting some Futures traders
to substantial losses.
There can be no assurance that a liquid market
will exist at a time when the Funds seek to close out a
Futures position. The Funds would continue to be
required to meet margin requirements until the position
is closed, possibly resulting in a decline in the
Funds' net asset value. In addition, many of the
contracts discussed above are relatively new
instruments without a significant trading history. As
a result, there can be no assurance that an active
secondary market will develop or continue to exist.
A public market exists in Futures Contracts
covering a number of indexes, including, but not
limited to, the Standard & Poor's 500 Index, the
Standard & Poor's 100 Index, the NASDAQ 100 Index, the
Value Line Composite Index and the New York Stock
Exchange Composite Index.
Options on Futures. The Funds may also purchase
or write put and call options on Futures Contracts and
enter into closing transactions with respect to such
options to terminate an existing position. A futures
option gives the holder the right, in return for the
premium paid, to assume a long position (call) or short
position (put) in a Futures Contract at a specified
exercise price prior to the expiration of the option.
Upon exercise of a call option, the holder acquires a
long position in the Futures Contract and the writer is
assigned the opposite short position. In the
<PAGE>
case of a
put option, the opposite is true. Prior to exercise or
expiration, a futures option may be closed out by an
offsetting purchase or sale of a futures option of the
same series.
The Funds may use options on Futures Contracts in
connection with hedging strategies. Generally, these
strategies would be employed under the same market and
market sector conditions in which the Funds use put and
call options on securities or indexes. The purchase of
put options on Futures Contracts is analogous to the
purchase of puts on securities or indexes so as to
hedge the Funds' securities holdings against the risk
of declining market prices. The writing of a call
option or the purchasing of a put option on a Futures
Contract constitutes a partial hedge against declining
prices of the securities which are deliverable upon
exercise of the Futures Contract. If the futures price
at expiration of a written call option is below the
exercise price, the Fund will retain the full amount of
the option premium which provides a partial hedge
against any decline that may have occurred in the
Fund's holdings of securities. If the futures price
when the option is exercised is above the exercise
price, however, the Fund will incur a loss, which may
be offset, in whole or in part, by the increase in the
value of the securities held by the Fund that were
being hedged. Writing a put option or purchasing a
call option on a Futures Contract serves as a partial
hedge against an increase in the value of the
securities the Fund intends to acquire.
As with investments in Futures Contracts, each
Fund is required to deposit and maintain margin with
respect to put and call options on Futures Contracts
written by it. Such margin deposits will vary
depending on the nature of the underlying Futures
Contract (and the related initial margin requirements),
the current market value of the option, and other
futures positions held by the Fund. The Funds will set
aside in a segregated account at the Funds' custodian
liquid assets, such as cash, U.S. government securities
or other high grade liquid debt obligations equal in
value to the amount due on the underlying obligation.
Such segregated assets will be marked to market daily,
and additional assets will be placed in the segregated
account whenever the total value of the segregated
account falls below the amount due on the underlying
obligation.
The risks associated with the use of options on
Futures Contracts include the risk that a Fund may
close out its position as a writer of an option only if
a liquid secondary market exists for such options,
which cannot be assured. The Funds' successful use of
options on Futures Contracts depends on the
subadviser's ability to correctly predict the movement
in prices of Futures Contracts and the underlying
instruments, which may prove to be incorrect. In
addition, there may be imperfect correlation between
the instruments being hedged and the Futures Contract
subject to the option. For additional information, see
"Futures Contracts."
Federal Tax Treatment of Futures Contracts. For
federal income tax purposes, each Fund is required to
recognize as income for each taxable year its net
unrealized gains and losses on Futures Contracts as of
the end of the year, as well as gains and losses
actually realized during the year. Except for
transactions in Futures Contracts that are classified
as part of a "mixed straddle" under Code Section 1256,
any gain or loss recognized with respect to a Futures
Contract is considered to be 60% long-term capital gain
or loss and 40% short-term capital gain or loss,
without regard to the holding period of the Futures
Contract. In the case of a Futures transaction not
classified as a "mixed straddle," the recognition of
losses may be deferred to a later taxable year.
Sales of Futures Contracts that are intended to
hedge against a change in the value of securities held
by a Fund may affect the holding period of such
securities and, consequently, the nature of the gain or
loss on such securities upon disposition.
Each Fund intends to operate as a "Regulated
Investment Company" under Subchapter M of the Code, and
therefore will not be liable for federal income taxes
to the extent earnings are timely distributed. As a
result of being a Regulated Investment Company, net
capital gain that the Funds distribute to shareholders
will retain their original capital gain character in
the shareholders' individual tax returns.
<PAGE>
In order for each Fund to qualify for federal
income tax treatment as a Regulated Investment Company,
at least 90% of the gross income of each Fund for a
taxable year must be derived from qualifying income;
i.e., dividends, interest, income derived from loans of
securities and gains from the sale of securities, and
other income (including gains on options and futures
contracts) derived with respect to the Fund's business
of investing in stock or securities. In addition,
gains realized on the sale or other disposition of
securities or Futures Contracts held for less than
three months must be limited to less than 30% of the
Fund's annual gross income. It is anticipated that any
net gain realized from the closing out of Futures
Contracts will be considered gain from the sale of
securities and therefore be qualifying income for
purposes of the 90% requirement. For purposes of
applying these tests, any increase in value on a
position that is part of a designated hedge will be
offset by any decrease in value (whether or not
realized) on any other position that is part of such
hedge. It is anticipated that unrealized gains on
Futures Contracts which have been open for less than
three months as of the end of a Fund's fiscal year and
which are recognized for tax purposes will not be
considered gains on securities held less than three
months for purposes of the 30% test.
The Funds will distribute to shareholders annually
any net capital gains which have been recognized for
federal income tax purposes (including unrealized gains
at the end of the Fund's fiscal year) on Futures
transactions. Such distributions will be combined with
distributions of capital gains realized on the Funds'
other investments and shareholders will be advised of
the nature of the payments.
Foreign Currency - Related Derivative Strategies -
Special Considerations. The Funds may purchase and
sell foreign currency on a spot basis, and may use
currency-related derivatives instruments such as
options on foreign currencies, futures on foreign
currencies, options on futures on foreign currencies
and forward currency contracts (i.e., an obligation to
purchase or sell a specific currency at a specified
future date, which may be any fixed number of days from
the contract date agreed upon by the parties, at a
price set at the time the contract is entered into).
The Funds may use these instruments for hedging or any
other lawful purpose consistent with its investment
objective, including transaction hedging, anticipatory
hedging, cross hedging, proxy hedging, and position
hedging. A Fund's use of currency-related derivative
instruments will be directly related to the Fund's
current or anticipated portfolio securities, and the
Fund may engage in transactions in currency-related
derivative instruments as a means to protect against
some or all of the effects of adverse changes in
foreign currency exchange rates on its portfolio
investments. In general, if the currency in which a
portfolio investment is denominated appreciates against
the U.S. dollar, the dollar value of the security will
increase. Conversely, a decline in the exchange rate
of the currency would adversely affect the value of the
portfolio investment expressed in U.S. dollars.
For example, a Fund might use currency-related
derivative instruments to "lock in" a U.S. dollar price
for a portfolio investment, thereby enabling the Fund
to protect itself against a possible loss resulting
from an adverse change in the relationship between the
U.S. dollar and the subject foreign currency during the
period between the date the security is purchased or
sold and the date on which payment is made or received.
The Fund also might use currency-related derivative
instruments when the Advisor believes that one currency
may experience a substantial movement against another
currency, including the U.S. dollar, and it may use
currency-related derivative instruments to sell or buy
the amount of the former foreign currency,
approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign
currency. Alternatively, where appropriate, the Fund
may use currency-related derivative instruments to
hedge all or part of its foreign currency exposure
through the use of a basket of currencies or a proxy
currency where such currency or currencies act as an
effective proxy for other currencies. The use of this
basket hedging technique may be more efficient and
economical than using separate currency-related
derivative instruments for each currency exposure held
by a Fund. Furthermore, currency-related derivative
instruments may be used for short hedges - for example,
a Fund may sell a forward currency contract to lock in
the U.S. dollar equivalent of the proceeds from the
anticipated sale of a security denominated in a foreign
currency.
<PAGE>
In addition, a Fund may use a currency-related
derivative instrument to shift exposure to foreign
currency fluctuations from one foreign country to
another foreign country where it's anticipated that the
foreign currency exposure purchased will appreciate
relative to the U.S. dollar and thus better protect the
Fund against the expected decline in the foreign
currency exposure sold. For example, if a Fund owns
securities denominated in a foreign currency and it is
anticipated that the currency will decline, it might
enter into a forward contract to sell an appropriate
amount of the first foreign currency, with payment to
be made in a second foreign currency that would better
protect the Fund against the decline in the first
security than would a U.S. dollar exposure. Hedging
transactions that use two foreign currencies are
sometimes referred to as "cross hedges." The effective
use of currency-related derivative instruments by a
Fund in a cross hedge is dependent upon a correlation
between price movements of the two currency instruments
and the underlying security involved, and the use of
two currencies magnifies the risk that movements in the
price of one instrument may not correlate or may
correlate unfavorably with the foreign currency being
hedged. Such a lack of correlation might occur due to
factors unrelated to the value of the currency
instruments used or investments being hedged, such as
speculative or other pressures on the markets in which
these instruments are traded.
The Funds also might seek to hedge against changes
in the value of a particular currency when no hedging
instruments on that currency are available or such
hedging instruments are more expensive than certain
other hedging instruments. In such cases, a Fund may
hedge against price movements in that currency by
entering into transactions using currency-related
derivative instruments on another foreign currency or a
basket of currencies, the values of which are believed
to have a high degree of positive correlation to the
value of the currency being hedged. The risk that
movements in the price of the hedging instrument will
not correlate perfectly with movements in the price of
the currency being hedged is magnified when this
strategy is used.
The use of currency-related derivative instruments
by a Fund involves a number of risks. The value of
currency-related derivative instruments depends on the
value of the underlying currency relative to the U.S.
dollar. Because foreign currency transactions
occurring in the interbank market might involve
substantially larger amounts than those involved in the
use of such derivative instruments, a Fund could be
disadvantaged by having to deal in the odd lot market
(generally consisting of transactions of less than $1
million) for the underlying foreign currencies at
prices that are less favorable than for round lots
(generally consisting of transactions of greater than
$1 million).
There is no systematic reporting of last sale
information for foreign currencies or any regulatory
requirement that quotations available through dealers
or other market sources be firm or revised on a timely
basis. Quotation information generally is
representative of very large transactions in the
interbank market and thus might not reflect odd-lot
transactions where rates might be less favorable. The
interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options
or futures markets are closed while the markets for the
underlying currencies remain open, significant price
and rate movements might take place in the underlying
markets that cannot be reflected in the markets for the
derivative instruments until they re-open.
Settlement of transactions in currency-related
derivative instruments might be required to take place
within the country issuing the underlying currency.
Thus, a Fund might be required to accept or make
delivery of the underlying foreign currency in
accordance with any U.S. or foreign regulations
regarding the maintenance of foreign banking
arrangements by U.S. residents and might be required to
pay any fees, taxes and charges associated with such
delivery assessed in the issuing country.
When a Fund engages in a transaction in a currency-
related derivative instrument, it relies on the
counterparty to make or take delivery of the underlying
currency at the maturity of the contract or otherwise
complete the contract. In other words, a Fund will be
subject to the risk that a loss may be sustained by the
Fund as a result of the failure of the counterparty to
comply with the terms of the transaction. The
counterparty risk for exchange-traded instruments is
generally less than for privately-negotiated or OTC
currency instruments, since generally a clearing
agency, which is the issuer or counterparty to each
instrument, provides a guarantee of performance. For
privately-
<PAGE>
negotiated instruments, there is no similar
clearing agency guarantee. In all transactions, a Fund
will bear the risk that the counterparty will default,
and this could result in a loss of the expected benefit
of the transaction and possibly other losses to the
Fund. The Fund will enter into transactions in
currency-related derivative instruments only with
counterparties that are reasonably believed to be
capable of performing under the contract.
Purchasers and sellers of currency-related
derivative instruments may enter into offsetting
closing transactions by selling or purchasing,
respectively, an instrument identical to the instrument
purchased or sold. Secondary markets generally do not
exist for forward currency contracts, with the result
that closing transactions generally can be made for
forward currency contracts only by negotiating directly
with the counterparty. Thus, there can be no assurance
that a Fund will in fact be able to close out a forward
currency contract (or any other currency-related
derivative instrument) at a time and price favorable to
the Fund. In addition, in the event of insolvency of
the counterparty, a Fund might be unable to close out a
forward currency contract at any time prior to
maturity. In the case of an exchange-traded
instrument, the Fund will be able to close the position
out only on an exchange which provides a market for the
instruments. The ability to establish and close out
positions on an exchange is subject to the maintenance
of a liquid market, and there can be no assurance that
a liquid market will exist for any instrument at any
specific time. In the case of a privately-negotiated
instrument, the Fund will be able to realize the value
of the instrument only by entering into a closing
transaction with the issuer or finding a third party
buyer for the instrument. While the Funds will enter
into privately-negotiated transactions only with
entities who are expected to be capable of entering
into a closing transaction, there can be no assurance
that a Fund will in fact be able to enter into such
closing transactions.
The precise matching of currency-related
derivative instrument amounts and the value of the
portfolio securities involved generally will not be
possible because the value of such securities, measured
in the foreign currency, will change after the currency-
related derivative instrument position has been
established. Thus, a Fund might need to purchase or
sell foreign currencies in the spot (cash) market. The
projection of short-term currency market movements is
extremely difficult, and the successful execution of a
short-term hedging strategy is highly uncertain.
Permissible foreign currency options will include
options traded primarily in the OTC market. Although
options on foreign currencies are traded primarily in
the OTC market, the Funds will normally purchase or
sell OTC options on foreign currency only when it is
believed that a liquid secondary market will exist for
a particular option at any specific time.
There will be a cost to the Funds of engaging in
transactions in currency-related derivative instruments
that will vary with factors such as the contract or
currency involved, the length of the contract period,
and the market conditions then prevailing. A Fund may
have to pay a fee or commission or, in cases where the
instruments are entered into on a principal basis,
foreign exchange dealers or other counterparties will
realize a profit based on the difference ("spread")
between the prices at which they are buying and selling
various currencies. Thus, for example, a dealer may
offer to sell a foreign currency to a Fund at one rate,
while offering a lesser rate of exchange should the
Fund desire to resell that currency to the dealer.
When required by the SEC guidelines, a Fund will
set aside permissible liquid assets in segregated
accounts or otherwise cover its potential obligations
under currency-related derivatives instruments. To the
extent a Fund's assets are so set aside, they cannot be
sold while the corresponding currency position is open,
unless they are replaced with similar assets. As a
result, if a large portion of a Fund's assets are so
set aside, this could impede portfolio management or
the Fund's ability to meet redemption requests or other
current obligations.
The decision to engage in a particular currency-
related derivative instrument will reflect the
portfolio manager's judgment that the transaction will
provide value to the Fund and its shareholders and is
consistent with the Fund's objective and policies. In
making such a judgment, the benefits and risks of the
transaction will be weighed in
<PAGE>
the context of the
Fund's entire portfolio and objective. The
effectiveness of any transaction in a currency-related
derivative instrument is dependent on a variety of
factors, including the portfolio manager's skill in
analyzing and predicting currency values and upon a
correlation between price movements of the currency
instrument and the underlying security. There might be
imperfect correlation, or even no correlation, between
price movements of an instrument and price movements of
investments being hedged. Such a lack of correlation
might occur due to factors unrelated to the value of
the investments being hedged, such as speculative or
other pressures on the markets in which these
instruments are traded. In addition, a Fund's use of
currency-related derivative instruments is always
subject to the risk that the currency in question could
be devalued by the foreign government. In such a case,
any long currency positions would decline in value and
could adversely affect any hedging position maintained
by a Fund.
A Fund's dealing in currency-related derivative
instruments will generally be limited to the
transactions described above. However, the Funds
reserve the right to use currency-related derivatives
instruments for different purposes and under different
circumstances. It also should be realized that use of
these instruments does not eliminate, or protect
against, price movements in a Fund's securities that
are attributable to other (i.e., non-currency related)
causes. Moreover, while the use of currency-related
derivatives instruments may reduce the risk of loss due
to a decline in the value of a hedged currency, at the
same time the use of these instruments tends to limit
any potential gain which may result from an increase in
the value of that currency.
Foreign Investment Companies
Some of the countries in which the Funds may
invest may not permit direct investment by outside
investors. Investments in such countries may only be
permitted through foreign government-approved or -
authorized investment vehicles, which may include other
investment companies. Investing through such vehicles
may involve frequent or layered fees or expenses and
may also be subject to limitation under the 1940 Act.
Under the 1940 Act, a Fund may invest up to 10% of its
assets in shares of investment companies and up to 5%
of its assets in any one investment company as long as
the investment does not represent more than 3% of the
voting stock of the acquired investment company.
Depositary Receipts
As indicated in the Prospectus, the Opportunity
Fund may invest in foreign securities by purchasing
depositary receipts, including American Depositary
Receipts ("ADRs") and European Depositary Receipts
("EDRs") or other securities convertible into
securities or issuers based in foreign countries.
These securities may not necessarily be denominated in
the same currency as the securities into which they may
be converted. Generally, ADRs, in registered form, are
denominated in U.S. dollars and are designed for use in
the U.S. securities markets, while EDRs, in bearer
form, may be denominated in other currencies and are
designed for use in European securities markets. ADRs
are receipts typically issued by a U.S. Bank or trust
company evidencing ownership of the underlying
securities. EDRs are European receipts evidencing a
similar arrangement. For purposes of the Fund's
investment policies, ADRs and EDRs are deemed to have
the same classification as the underlying securities
they represent. Thus, an ADR or EDR representing
ownership of common stock will be treated as common
stock.
ADR facilities may be established as either
"unsponsored" or "sponsored." While ADRs issued under
these two types of facilities are in some respects
similar, there are distinctions between them relating
to the rights and obligations of ADR holders and the
practices of market participants. A depositary may
establish an unsponsored facility without participation
by (or even necessarily the acquiescence of) the issuer
of the deposited securities, although typically the
depositary requests a letter of non-objection from such
issuer prior to the establishment of the facility.
Holders of unsponsored ADRs generally bear all the
costs of such facilities. The depositary usually
charges fees upon the deposit and withdrawal of the
deposited securities, the conversion of dividends into
U.S. dollars, the disposition of non-cash distribution,
and the performance of other services. The depositary
of an unsponsored facility frequently is under no
obligation to distribute shareholder communications
received from the issuer of the deposited
<PAGE>
securities or
to pass through voting rights to ADR holders in respect
of the deposited securities. Sponsored ADR facilities
are created in generally the same manner as unsponsored
facilities, except that the issuer of the deposited
securities enters into a deposit agreement with the
depositary. The deposit agreement sets out the rights
and responsibilities of the issuer, the depositary and
the ADR holders. With sponsored facilities, the issuer
of the deposited securities generally will bear some of
the costs relating to the facility (such as dividend
payment fees of the depositary), although ADR holders
continue to bear certain other costs (such as deposit
and withdrawal fees). Under the terms of most
sponsored arrangements, depositaries agree to
distribute notices of shareholder meetings and voting
instructions, and to provide shareholder communications
and other information to the ADR holders at the request
of the issuer of the deposited securities.
Lending of Portfolio Securities
Each Fund is authorized to lend up to 33 1/3% of
the total value of its portfolio securities to broker-
dealers or institutional investors, but only when the
borrower maintains with the Fund's custodian bank
collateral either in cash or money market instruments
in an amount at least equal to the market value of the
securities loaned, plus accrued interest and dividends,
determined on a daily basis and adjusted accordingly.
However, the Funds do not presently intend to engage in
such lending. In determining whether to lend
securities to a particular broker-dealer or
institutional investor, the portfolio manager will
consider, and during the period of the loan will
monitor, all relevant facts and circumstances,
including the creditworthiness of the borrower. The
Fund will retain authority to terminate any loans at
any time. The Funds may pay reasonable administrative
and custodial fees in connection with a loan and may
pay a negotiated portion of the interest earned on the
cash or money market instruments held as collateral to
the borrower or placing broker. The Funds will receive
reasonable interest on the loan or a flat fee from the
borrower and amounts equivalent to any dividends,
interest or other distributions on the securities
loaned. The Funds will retain record ownership of
loaned securities to exercise beneficial rights, such
as voting and subscription rights and rights to
dividends, interest or other distributions, when
retaining such rights is considered to be in a Fund's
interest.
Mortgage-and Asset-Backed Securities
Mortgage-backed securities represent direct or
indirect participations in, or are secured by and
payable from, mortgage loans secured by real property,
and include single- and multi-class pass-through
securities and collateralized mortgage obligations.
Such securities may be issued or guaranteed by U.S.
government agencies or instrumentalities, such as the
Government National Mortgage Association and the
Federal National Mortgage Association, or by private
issuers, generally originators and investors in
mortgage loans, including savings associations,
mortgage bankers, commercial banks, investment bankers,
and special purpose entities (collectively, "private
lenders"). Mortgage-backed securities issued by
private lenders may be supported by pools of mortgage
loans or other mortgage-backed securities that are
guaranteed, directly or indirectly, by the U.S.
government or one of its agencies or instrumentalities,
or they may be issued without any governmental
guarantee of the underlying mortgage assets but with
some form of non-governmental credit enhancement.
Asset-backed securities have structural
characteristics similar to mortgage-backed securities.
However, the underlying assets are not first lien
mortgage loans or interests therein, but include assets
such as motor vehicle installment sales contracts,
other installment loan contracts, home equity loans,
leases of various types of property, and receivables
from credit card or other revolving credit
arrangements. Payments or distributions of principal
and interest on asset-backed securities may be
supported by non-governmental credit enhancements
similar to those utilized in connection with mortgage-
backed securities.
The yield characteristics of mortgage- and asset-
backed securities differ from those of traditional debt
securities. Among the principal differences are that
interest and principal payments are made more
frequently on mortgage- and asset-backed securities,
usually monthly, and that principal may be prepaid at
any time because the underlying mortgage loans or other
assets generally may be prepaid at any time. As a
result, if the Total Return
<PAGE>
Bond Fund purchases these
securities at a premium, a prepayment rate that is
faster than expected will reduce yield to maturity,
while a prepayment rate that is slower than expected
will have the opposite effect of increasing the yield
to maturity. Conversely, if the Fund purchases these
securities at a discount, a prepayment rate that is
faster than expected will increase yield to maturity,
while a prepayment rate that is slower than expected
will reduce yield to maturity. Amounts available for
reinvestment by the Fund are likely to be greater
during a period of declining interest rates and, as a
result are likely to be reinvested at lower interest
rates than during a period of rising interest rates.
Accelerated prepayments on securities purchased by the
Fund at a premium also impose a risk of loss of
principal because the premium may not have been fully
amortized at the time the principal is prepaid in full.
The market for privately issued mortgage- and asset-
backed securities is smaller and less liquid than the
market for government-sponsored mortgage-backed
securities.
The Total Return Bond Fund may also invest in
stripped mortgage- or asset-backed securities, which
receive differing proportions of the interest and
principal payments from the underlying assets. The
market value of such securities generally is more
sensitive to changes in prepayment and interest rates
than is the case with traditional mortgage- and asset-
backed securities, and in some cases such market value
may be extremely volatile. With respect to certain
stripped securities, such as interest only and
principal only classes, a rate of prepayment that is
faster or slower than anticipated may result in the
Fund failing to recover all or a portion of its
investment, even though the securities are rated
investment grade.
Mortgage Dollar Rolls and Reverse Repurchase Agreements
The Total Return Bond Fund may engage in reverse
repurchase agreements to facilitate portfolio
liquidity, a practice common in the mutual fund
industry, or for arbitrage transactions discussed
below. In a reverse repurchase agreement, a Fund would
sell a security and enter into an agreement to
repurchase the security at a specified future date and
price. The Fund generally retains the right to
interest and principal payments on the security. Since
the Fund receives cash upon entering into a reverse
repurchase agreement, it may be considered a borrowing.
When required by guidelines of the SEC, a Fund will set
aside permissible liquid assets in a segregated account
to secure its obligations to repurchase the security.
The Total Return Bond Fund may also enter into
mortgage dollar rolls, in which the Fund would sell
mortgage-backed securities for delivery in the current
month and simultaneously contract to purchase
substantially similar securities on a specified future
date. While the Fund would forego principal and
interest paid on the mortgage-backed securities during
the roll period, the Fund would be compensated by the
difference between the current sales price and the
lower price for the future purchase as well as by any
interest earned on the proceeds of the initial sale.
The Fund also could be compensated through the receipt
of fee income equivalent to a lower forward price. At
the time the Fund would enter into a mortgage dollar
roll, it would set aside permissible liquid assets in a
segregated account to secure its obligation for the
forward commitment to buy mortgage-backed securities.
Mortgage dollar roll transactions may be considered a
borrowing by the Fund.
The mortgage dollar rolls and reverse repurchase
agreements entered into by the Fund may be used as
arbitrage transactions in which the Fund will maintain
an offsetting position in investment grade debt
obligations or repurchase agreements that mature on or
before the settlement date on the related mortgage
dollar roll or reverse repurchase agreements. Since
the Fund will receive interest on the securities or
repurchase agreements in which it invests the
transaction proceeds, such transactions may involve
leverage. However, since such securities or repurchase
agreements will be high quality and will mature on or
before the settlement date of the mortgage dollar roll
or reverse repurchase agreement, the portfolio manager
believes that such arbitrage transactions do not
present the risks to the Fund that are associated with
other types of leverage.
<PAGE>
Repurchase Agreements
The Funds may enter into repurchase agreements
with certain banks or non-bank dealers. In a
repurchase agreement, a Fund buys a security at one
price, and at the time of sale, the seller agrees to
repurchase the obligation at a mutually agreed upon
time and price (usually within seven days). The
repurchase agreement, thereby, determines the yield
during the purchaser's holding period, while the
seller's obligation to repurchase is secured by the
value of the underlying security. The portfolio
manager will monitor, on an ongoing basis, the value of
the underlying securities to ensure that the value
always equals or exceeds the repurchase price plus
accrued interest. Repurchase agreements could involve
certain risks in the event of a default or insolvency
of the other party to the agreement, including possible
delays or restrictions upon the Fund's ability to
dispose of the underlying securities. Although no
definitive creditworthiness criteria are used, the
portfolio manager reviews the creditworthiness of the
banks and non-bank dealers with which the Fund enters
into repurchase agreements to evaluate those risks.
The Funds may, under certain circumstances, deem
repurchase agreements collateralized by U.S. government
securities to be investments in U.S. government
securities.
DIRECTORS AND OFFICERS
The directors and officers of the Company,
together with information as to their principal
business occupations during the last five years, and
other information, are shown below. Each director who
is deemed an "interested person," as defined in the
Investment Company Act of 1940 ("Investment Company
Act"), is indicated by an asterisk.
*William D. Forsyth, III, Co-President, Treasurer,
Assistant Secretary and a Director of the Company.
Mr. Forsyth was born in 1963 and received his B.S.
in Finance from the University of Illinois in 1986
and his M.B.A. from the University of Chicago in
1988. Mr. Forsyth has served as Co-President,
Treasurer, Assistant Secretary, Portfolio Manager
and a Director of Frontegra since May 1996. From
July 1993 until the present, Mr. Forsyth has also
served as a Partner of Frontier Partners, Inc., a
consulting/marketing firm. From April 1987 until
June 1993, Mr. Forsyth served as a Partner of
Brinson Partners, Inc., an investment advisor, and
from June 1986 until April 1987, he served as a
product marketing representative of Harris Trust &
Savings Bank. Mr. Forsyth received his CFA
designation in 1991.
*Thomas J. Holmberg, Jr., Co-President, Secretary,
Assistant Treasurer and a Director of the Company.
Mr. Holmberg was born in 1958 and received his
B.A. in Economics from the College of William and
Mary in 1980 and his M.P.P.M. from Yale University
in 1987. Mr. Holmberg has served as Co-President,
Secretary, Assistant Treasurer, Portfolio Manager
and a Director of Frontegra since May 1996. From
July 1993 until the present, Mr. Holmberg has also
served as a Partner of Frontier Partners, Inc., a
consulting/marketing firm. From February 1989
until July 1993, Mr. Holmberg served as a Partner
of, and Account Manager for, Brinson Partners,
Inc., an investment advisor. From July 1987 until
January 1989, Mr. Holmberg served as an associate
in the fixed income sales area of Goldman, Sachs,
and from May 1986 until August 1986, he served as
a summer associate in the corporation finance area
of Lehman Brothers. Mr. Holmberg received his CFA
designation in 1991.
<PAGE>
David L. Heald, a Director of the Company.
Mr. Heald was born in 1943 and received his
B.A. in English from Denison University in
1966 and his J.D. from Vanderbilt University
School of Law in 1969. Mr. Heald has been a
principal of Consulting Fiduciaries, Inc.
("CFI"), a registered investment adviser,
since August of 1994. CFI provides
professional, independent, fiduciary decision
making, consultation and alternative dispute
resolution services to ERISA plans, plan
sponsors and investment managers. Between
April 1994 and August 1994, Mr. Heald engaged
in the private practice of law. From August
1992 until April 1994, Mr. Heald was a
managing director and the chief
administrative officer of Calamos Asset
Management, Inc., a registered investment
adviser specializing in convertible
securities, and he served as an officer and
director of CFS Investment Trust, a
registered investment company comprised of
four series. From January 1990 until August
1992, Mr. Heald was a partner in the Chicago
based law firm of Gardner, Carton & Douglas.
The address of Mr. Forsyth and Mr. Holmberg is
Frontegra Asset Management, Inc., 400 Skokie Blvd.,
Suite 500, Northbrook, Illinois 60062. Mr. Heald's
address is 2745 Riverwoods Road, Riverwoods, Illinois
60015.
As of September 30, 1996, officers and directors
of the Company did not own any shares of common stock
of the Total Return Bond Fund or the Opportunity Fund.
Directors and officers of the Company who are also
officers, directors, employees, or shareholders of
Frontegra do not receive any remuneration from either
of the Funds for serving as directors or officers.
The following table provides information relating
to compensation intended to be paid to directors of the
Company for their services as such for the fiscal year
ending September 30, 1997:
Name Cash Compensation(1) Other Compensation Total
David L. Heald $ 2,000 $ 0 $2,000
All directors as a $ 2,000 $ 0 $2,000
group (3 persons)
________________
(1)The director who is not deemed an "interested person,"
as defined in the Investment Company Act, will receive
$500 for each board of directors meeting attended by
that person. At such time as the Company's assets
equal or exceed $100,000,000, the disinterested
director will receive $2,500 for each board of
directors meeting attended. The board intends to hold
4 meetings during fiscal 1997, and the Funds are not
expected to have assets equal to or exceeding
$100,000,000 at such time. Thus, the disinterested
director described above is expected to receive $2,000
during such time period from the Company.
<PAGE>
PRINCIPAL SHAREHOLDERS
As of September 30, 1996, the following persons
owned of record or are known by the Company to own of
record or beneficially 5% or more of the outstanding
shares of each Fund:
<TABLE>
<CAPTION>
Name and Address Fund No. Shares Percentage
<S> <C> <C> <C>
Frontegra Asset Management, Inc. Total Return Bond Fund 1,666.667 50%
400 Skokie Blvd., Suite 500
Northbrook, IL 60062
Reams Asset Management, LLC Total Return Bond Fund 1,666.667 50%
227 Washington Street
Columbus, IN 47202
</TABLE>
As of September 30, 1996, Frontegra and Reams each
owned a controlling interest in the Company.
Shareholders with a controlling interest could effect
the outcome of proxy voting or the direction of
management of the Company.
INVESTMENT ADVISER
Frontegra Asset Management, Inc. ("Frontegra") is
the investment adviser to the Funds. Mr. William D.
Forsyth III and Mr. Thomas J. Holmberg, Jr., each own
50% of Frontegra. A brief description of the Funds'
investment advisory agreement is set forth in the
Prospectus under "MANAGEMENT."
The Funds' advisory agreement is dated October 30,
1996 (the "Advisory Agreement"). The Advisory
Agreement has an initial term of two years and
thereafter is required to be approved annually by the
Board of Directors of the Company or by vote of a
majority of each of the Fund's outstanding voting
securities (as defined in the Investment Company Act).
Each annual renewal must also be approved by the vote
of a majority of the Company's directors who are not
parties to the Advisory Agreement or interested persons
of any such party, cast in person at a meeting called
for the purpose of voting on such approval. The
Advisory Agreement was approved by the vote of a
majority of the Company's directors who are not parties
to the Advisory Agreement or interested persons of any
such party on October 9, 1996 and by the initial
shareholders of each Fund on October 6, 1996. The
Advisory Agreement is terminable without penalty, on 60
days' written notice by the Board of Directors of the
Company, by vote of a majority of each of the Fund's
outstanding voting securities or by Frontegra, and will
terminate automatically in the event of its assignment.
Under the terms of the Advisory Agreement,
Frontegra supervises the management of the Funds'
investments and business affairs, subject to the
supervision of the Company's Board of Directors. At
its expense, Frontegra provides office space and all
necessary office facilities, equipment and personnel
for servicing the investments of the Funds. As
compensation for its services, the Opportunity Fund
pays to Frontegra a monthly advisory fee at the annual
rate of 0.65% of the average daily net asset value of
the Fund and the Total Return Bond Fund pays to
Frontegra a monthly advisory fee at the annual rate of
0.40% of the average daily net asset value of the Fund.
From time to time, Frontegra may voluntarily waive all
or a portion of its management fee for the Funds. In
fact, Frontegra has agreed to waive its management fee
and/or reimburse each Fund's operating expenses to the
extent necessary to ensure that the Opportunity and
Total Return Bond Fund's total operating expenses do
not exceed 0.90% and 0.50% of the respective Fund's
average daily net assets for the first twelve months of
each Fund's operations.
<PAGE>
The organizational expenses of
each Fund were advanced by Frontegra and will be
reimbursed by the Funds over a period of not more than
60 months. The organizational expenses were
approximately $38,000 for the Total Return Bond Fund.
The Advisory Agreement requires Frontegra to
reimburse the Funds in the event that the expenses and
charges payable by the Funds in any fiscal year,
including the advisory fee but excluding taxes,
interest, brokerage commissions, and similar fees,
exceed those set forth in any statutory or regulatory
formula prescribed by any state in which shares of the
Funds are registered. Such excess is determined by
valuations made as of the close of each business day of
the year. The most restrictive percentage limitation
currently applicable to the Funds will be 2-1/2% of
each Fund's average net asset value up to $30,000,000,
2% on the next $70,000,000 of each Fund's average net
asset value and 1-1/2% of each Fund's average net asset
value in excess of $100,000,000. Reimbursement of
expenses in excess of the applicable limitation will be
made on a monthly basis and will be paid to the Funds
by reduction of Frontegra's fee, subject to later
adjustment, month by month, for the remainder of the
Funds' fiscal year. Frontegra may from time to time
voluntarily absorb expenses for the Funds in addition
to the reimbursement of expenses in excess of
applicable limitations.
Frontegra has entered into an agreement with Reams
Asset Management Company, LLC ("Reams") under which
Reams serves as each Fund's portfolio manager and,
subject to Frontegra's supervision, manages the Funds'
portfolio assets. (Reams operated as a corporation
(Reams Asset Management Company, Inc.) from its
founding in 1981 until March 31, 1994, when it became
an Indiana limited liability company (LLC), with no
change in principals, employees or clients.) Under
this agreement, and with certain exceptions described
herein, Reams is compensated by Frontegra for its
investment advisory services at the annual rate of
0.45% of the Opportunity Fund's average daily net
assets; and 0.20% of the Total Return Bond Fund's
average daily net assets. In recognition of the
economies of scale that will be gained by the Funds and
Frontegra, and with the exception of defined
contribution or 401(k) investments in the Funds, for
initial investments of over $15 million Frontegra will
compensate Reams an extra 0.10% on the average daily
net assets of such investments. Frontegra acts as a
third party solicitor on behalf of Reams and Frontier
Partners, Inc. has a 2.2% nonvoting ownership interest
in Reams.
FUND TRANSACTIONS AND BROKERAGE
Reams is responsible for decisions to buy and sell
securities for the Funds and for the placement of the
Funds' securities business, the negotiation of the
commissions to be paid on such transactions and the
allocation of portfolio brokerage and principal
business. Reams seeks the best execution at the best
security price available with respect to each
transaction, in light of the overall quality of
brokerage and research services provided to Reams or
the Funds. The best price to the Funds means the best
net price without regard to the mix between purchase or
sale price and commission, if any. Purchases may be
made from underwriters, dealers and, on occasion, the
issuers. Commissions will be paid on the Funds'
futures and options transactions. The purchase price
of portfolio securities purchased from an underwriter
or dealer may include underwriting commissions and
dealer spreads. The Funds may pay mark-ups on
principal transactions. In selecting broker-dealers
and in negotiating commissions, Reams considers the
firm's reliability, the quality of its execution
services on a continuing basis and its financial
condition. Brokerage will not be allocated based on
the sale of a Fund's shares.
Section 28(e) of the Securities Exchange Act of
1934 ("Section 28(e)") permits an investment adviser,
under certain circumstances, to cause an account to pay
a broker or dealer who supplies brokerage and research
services a commission for effecting a transaction in
excess of the amount of commission another broker or
dealer would have charged for effecting the
transaction. Brokerage and research services include
(a) furnishing advice as to the value of securities,
the advisability of investing, purchasing or selling
securities and the availability of securities or
purchasers or sellers of securities; (b) furnishing
analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio
strategy and the performance of accounts; and (c)
effecting securities transactions and performing
functions incidental thereto (such as clearance,
settlement, and custody).
<PAGE>
In selecting brokers, Reams considers investment
and market information and other research, such as
economic, securities and performance measurement
research provided by such brokers and the quality and
reliability of brokerage services, including execution
capability, performance and financial responsibility.
Accordingly, the commissions charged by any such broker
may be greater than the amount another firm might
charge if Reams determines in good faith that the
amount of such commissions is reasonable in relation to
the value of the research information and brokerage
services provided by such broker to the Funds. Reams
believes that the research information received in this
manner provides the Funds with benefits by
supplementing the research otherwise available to the
Funds. The Subadvisory Agreement provides that such
higher commissions will not be paid by the Funds unless
(a) Reams determines in good faith that the amount is
reasonable in relation to the services in terms of the
particular transaction or in terms of Reams' overall
responsibilities with respect to the accounts as to
which it exercises investment discretion; (b) such
payment is made in compliance with the provisions of
Section 28(e), other applicable state and federal laws,
and the Subadvisory Agreement; and (c) in the opinion
of Reams, the total commissions paid by the Funds will
be reasonable in relation to the benefits to the Funds
over the long term. The investment advisory fees paid
by the Funds under the Advisory Agreement are not
reduced as a result of Reams' receipt of research
services.
Reams places portfolio transactions for other
advisory accounts managed by Reams. Research services
furnished by firms through which the Funds effect their
securities transactions may be used by Reams in
servicing all of its accounts; not all of such services
may be used by Reams in connection with the Funds.
Reams believes it is not possible to measure separately
the benefits from research services to each of the
accounts (including the Funds) managed by it. Because
the volume and nature of the trading activities of the
accounts are not uniform, the amount of commissions in
excess of those charged by another broker paid by each
account for brokerage and research services will vary.
However, Reams believes such costs to the Funds will
not be disproportionate to the benefits received by the
Funds on a continuing basis. Reams seeks to allocate
portfolio transactions equitably whenever concurrent
decisions are made to purchase or sell securities by
the Funds and another advisory account. In some cases,
this procedure could have an adverse effect on the
price or the amount of securities available to the
Funds. In making such allocations between the Fund and
other advisory accounts, the main factors considered by
Reams are the respective investment objectives, the
relative size of portfolio holdings of the same or
comparable securities, the availability of cash for
investment and the size of investment commitments
generally held.
Each Fund anticipates that its portfolio turnover
rate will not exceed 125%, and is expected to be
between 75% and 125%. The annual portfolio turnover
rate indicates changes in each Fund's securities
holdings; for instance, a rate of 100% would result if
all the securities in a portfolio (excluding securities
whose maturities at acquisition were one year or less)
at the beginning of an annual period had been replaced
by the end of the period. The turnover rate may vary
from year to year, as well as within a year, and may be
affected by portfolio sales necessary to meet cash
requirements for redemptions of the Funds' shares.
CUSTODIAN
As custodian of the Funds' assets, United Missouri
Bank, n.a., 928 Grand Avenue, Kansas City, Missouri
64141, has custody of all securities and cash of each
Fund, delivers and receives payment for securities
sold, receives and pays for securities purchased,
collects income from investments and performs other
duties, all as directed by the officers of the Company.
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
Sunstone Investor Services, LLC ("SIS") acts as
transfer agent and dividend-disbursing agent for the
Funds. SIS is compensated based on an annual fee per
open account of $14, plus out-of-pocket expenses such
as postage and printing expenses in connection with
shareholder communications, subject to a minimum fee of
$12,000.
<PAGE>
TAXES
Each Fund will be treated as a separate entity for
Federal income tax purposes since the Tax Reform Act of
1986 requires that all portfolios of a series fund be
treated as separate taxpayers. As indicated under
"DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS, AND TAX STATUS"
in the Prospectus, each Fund intends to qualify
annually as a "regulated investment company" under the
Code. This qualification does not involve government
supervision of the Funds' management practices or
policies.
A dividend or capital gain distribution received
shortly after the purchase of shares reduces the net
asset value of shares by the amount of the dividend or
distribution and, although in effect a return of
capital, will be subject to income taxes. Net gains on
sales of securities when realized and distributed are
taxable as capital gains. If the net asset value of
shares were reduced below a shareholder's cost by
distribution of gains realized on sales of securities,
such distribution would be a return of investment
although taxable as stated above.
DETERMINATION OF NET ASSET VALUE
As set forth in the Prospectus under the same
caption, the net asset value of each of the Funds will
be determined as of the close of trading on each day
the New York Stock Exchange is open for trading. The
Funds do not determine net asset value on days the New
York Stock Exchange is closed and at other times
described in the Prospectus. The New York Stock
Exchange is closed on New Year's Day, President's Day,
Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Additionally, if
any of the aforementioned holidays falls on a Saturday,
the New York Stock Exchange will not be open for
trading on the preceding Friday and when such holiday
falls on a Sunday, the New York Stock Exchange will not
be open for trading on the succeeding Monday, unless
unusual business conditions exist, such as the ending
of a monthly or the yearly accounting period.
SHAREHOLDER MEETINGS
Maryland law permits registered investment
companies, such as the Company, to operate without an
annual meeting of shareholders under specified
circumstances if an annual meeting is not required by
the Investment Company Act. The Company has adopted
the appropriate provisions in its Bylaws and may, at
its discretion, not hold an annual meeting in any year
in which the election of directors is not required to
be acted on by shareholders under the Investment
Company Act.
The Company's Bylaws also contain procedures for
the removal of directors by shareholders of the
Company. At any meeting of shareholders, duly called
and at which a quorum is present, the shareholders may,
by the affirmative vote of the holders of a majority of
the votes entitled to be cast thereon, remove any
director or directors from office and may elect a
successor or successors to fill any resulting vacancies
for the unexpired terms of removed directors.
<PAGE>
PERFORMANCE INFORMATION
As described in the "COMPARISON OF INVESTMENT
RESULTS" section of the Funds' Prospectus, the Funds'
historical performance or return may be shown in the
form of various performance figures. The Funds'
performance figures are based upon historical results
and are not necessarily representative of future
performance. Factors affecting the Funds' performance
include general market conditions, operating expenses
and investment management.
Total Return
The average annual total return of each Fund is
computed by finding the average annual compounded rates
of return over the periods that would equate the
initial amount invested to the ending redeemable value,
according to the following formula:
P(1+T)n = ERV
P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of
the stated periods at the end of the stated
periods.
Performance for a specific period is calculated by
first taking an investment (assumed to be $1,000)
("initial investment") in a Fund's shares on the first
day of the period and computing the "ending value" of
that investment at the end of the period. The total
return percentage is then determined by subtracting the
initial investment from the ending value and dividing
the remainder by the initial investment and expressing
the result as a percentage. The calculation assumes
that all income and capital gains dividends paid by a
Fund have been reinvested at the net asset value of the
Fund on the reinvestment dates during the period.
Total return may also be shown as the increased dollar
value of the hypothetical investment over the period.
<PAGE>
Cumulative total return represents the simple
change in value of an investment over a stated period
and may be quoted as a percentage or as a dollar
amount. Total returns may be broken down into their
components of income and capital (including capital
gains and changes in share price) in order to
illustrate the relationship between
these factors and their contributions to total return.
Yield
The Total Return Bond Fund's yield is computed in
accordance with a standardized method prescribed by
rules of the SEC. Under that method, the current yield
quotation for the Fund is based on a one month or 30-
day period. The yield is computed by dividing the net
investment income per share earned during the 30-day or
one month period by the maximum offering price per
share on the last day of the period, according to the
following formula:
YIELD=2[(a-b +1)6-1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share on the last day
of the period.
Volatility
Occasionally statistics may be used to specify a
Fund's volatility or risk. Measures of volatility or
risk are generally used to compare a Fund's net asset
value or performance relative to a market index. One
measure of volatility is beta. Beta is the volatility
of a fund relative to the total market as represented
by the Standard & Poor's 500 Stock Index. A beta of
more than 1.00 indicates volatility greater than the
market, and a beta of less than 1.00 indicates
volatility less than the market. Another measure of
volatility or risk is standard deviation. Standard
deviation is used to measure variability of net asset
value or total return around an average, over a
specified period of time. The premise is that greater
volatility connotes greater risk undertaken in
achieving performance.
Comparisons
From time to time, in marketing and other Fund
literature, the Funds' performance may be compared to
the performance of other mutual funds in general or to
the performance of particular types of mutual funds
with similar investment goals, as tracked by
independent organizations. Among these organizations,
Lipper Analytical Services, Inc. ("Lipper"), a widely
used independent research firm which ranks mutual funds
by overall performance, investment objectives, and
assets, may be cited. Lipper performance figures are
based on changes in net asset value, with all income
and capital gains dividends reinvested. Such
calculations do not include the effect of any sales
charges imposed by other funds. The Funds will be
compared to Lipper's appropriate fund category, that
is, by fund objective and portfolio holdings.
The Funds' performance may also be compared to the
performance of other mutual funds by Morningstar, Inc.,
which ranks funds on the basis of historical risk and
total return. Morningstar's rankings range from five
stars (highest) to one star (lowest) and represent
Morningstar's assessment of the historical risk level
and total return of a fund as a weighted average for 3,
5 and 10 year periods. Rankings are not absolute or
necessarily predictive of future performance.
<PAGE>
Evaluations of Fund performance made by independent
sources may also be used in advertisements concerning
the Funds, including reprints of or selections from,
editorials or articles about the Funds. Sources for
Fund performance and articles about the Funds may
include publications such as Money, Forbes,
Kiplinger's, Financial World, Business Week, U.S. News
and World Report, the Wall Street Journal, Barron's and
a variety of investment newsletters.
The Funds may compare their performance to a wide
variety of indices and measures of inflation including
the Standard & Poor's Index of 500 Stocks, the NASDAQ
Over-the-Counter Composite Index, the Russell 2500
Index and the Lehman Aggregate Bond Index. There are
differences and similarities between the investments
that the Funds may purchase for their respective
portfolios and the investments measured by these
indices.
Investors may want to compare the Funds'
performance to that of certificates of deposit offered
by banks and other depositary institutions.
Certificates of deposit may offer fixed or variable
interest rates and principal is guaranteed and may be
insured. Withdrawal of the deposits prior to maturity
normally will be subject to a penalty. Rates offered
by banks and other depositary institutions are subject
to change at any time specified by the issuing
institution. Investors may also want to compare
performance of the Funds to that of money market funds.
Money market fund yields will fluctuate and shares are
not insured, but share values usually remain stable.
INDEPENDENT AUDITORS
Ernst & Young LLP, Sears Tower, 233 South Wacker
Drive, Chicago, IL 60606-6301, have been selected as
the independent auditors for the Funds. Ernst & Young
will audit and report on the Funds' annual financial
statements, review certain regulatory reports and the
Funds' federal income tax returns, and perform other
professional accounting auditing, tax and advisory
services when engaged to do so by the Funds.
<PAGE>
FINANCIAL STATEMENTS
Unaudited financial statements of the Total Return
Bond Fund for the period from November 25, 1996
(commencement of operations) to April 30, 1997 are
incorporated herein by reference to the Company's Semi-
Annual Report to Shareholders. The Semi-Annual Report
is available without charge by writing to the Company
c/o Sunstone Investor Services, LLC, P.O. Box 2142,
Milwaukee, Wisconsin 53201-2142 or by calling, toll-
free, 1-888-825-2100.
The Total Return Bond Fund's audited Statement of
Assets and Liabilities, including the related notes and
auditors' report, is also incorporated herein by
reference to the Company's Pre-Effective Amendment No.
1 to its Registration Statement on Form N-1A, as filed
with the SEC on October 11, 1996.
[/R]
<PAGE>
APPENDIX
BOND RATINGS
Standard & Poor's Debt Ratings
A Standard & Poor's corporate or municipal debt
rating is a current assessment of the creditworthiness
of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors
such as guarantors, insurers, or lessees.
The debt rating is not a recommendation to
purchase, sell or hold a security, as it does not
comment as to market price or suitability for a
particular investor.
The ratings are based on current information
furnished by the issuer or obtained by S&P from other
sources it considers reliable. S&P does not perform an
audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such
information, or based on other circumstances.
The ratings are based, in varying degrees, on the
following considerations:
1. Likelihood of default -- capacity and
willingness of the obligor as to the timely
payment of interest and repayment of
principal in accordance with the terms of the
obligation;
2.Nature of and provisions of the
obligation; and
3.Protection afforded by, and relative
position of, the obligation in the event
of bankruptcy, reorganization or other
arrangement under the laws of bankruptcy
and other laws affecting creditors'
rights.
Investment Grade
AAA Debt rated 'AAA' has the highest rating
assigned by S&P. Capacity to pay interest and repay
principal is extremely strong.
AA Debt rated 'AA' has a very strong capacity to
pay interest and repay principal and differs from the
highest rated issues only in small degree.
A Debt rated 'A' has a strong capacity to pay
interest and repay principal although it is somewhat
more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in
higher rated categories.
BBB Debt rated 'BBB' is regarded as having an
adequate capacity to pay interest and repay principal.
Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt
in this category than in higher rated categories.
Speculative grade
Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is
regarded as having predominantly speculative
characteristics with respect to capacity to pay
interest and repay principal. 'BB' indicates the least
degree of speculation and 'C' the
<PAGE>
highest. While such
debt will likely have some quality and protective
characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse
conditions.
BB Debt rated 'BB' has less near-term
vulnerability to default than other speculative issues.
However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic
conditions which could lead to inadequate capacity to
meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied 'BBB-
' rating.
B Debt rated 'B' has a greater vulnerability to
default but currently has the capacity to meet interest
payments and principal repayments. Adverse business,
financial or economic conditions will likely impair
capacity or willingness to pay interest and repay
principal. The 'B' rating category is also used for
debt subordinated to senior debt that is assigned an
actual or implied 'BB' or 'BB-' rating.
CCC Debt rated 'CCC' has a currently identifiable
vulnerability to default, and is dependent upon
favorable business, financial, and economic conditions
to meet timely payment of interest and repayment of
principal. In the event of adverse business,
financial, or economic conditions, it is not likely to
have the capacity to pay interest and repay principal.
The 'CCC' rating category is also used for debt
subordinated to senior debt that is assigned an actual
or implied 'B' or 'B-' rating.
CC Debt rated 'CC' typically is applied to debt
subordinated to senior debt that is assigned an actual
or implied 'CCC' rating.
C Debt rated 'C' typically is applied to debt
subordinated to senior debt which is assigned an actual
or implied 'CCC-' debt rating. The 'C' rating may be
used to cover a situation where a bankruptcy petition
has been filed, but debt service payments are
continued.
CI The rating 'CI' is reserved for income bonds on
which no interest is being paid.
D Debt rated 'D' is in payment default. The 'D'
rating category is used when interest payments or
principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P
believes that such payments will be made during such
grace period. The 'D' rating also will be used upon
the filing of a bankruptcy petition if debt service
payments are jeopardized.
Moody's Long-Term Debt Ratings
Aaa - Bonds which are rated Aaa are judged to be
of the best quality. They carry the smallest degree of
investment risk and are generally referred to as "gilt
edged". Interest payments are protected by a large or
by an exceptionally stable margin and principal is
secure. While the various protective elements are
likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong
position of such issues.
Aa - Bonds which are rated Aa are judged to be of
high quality by all standards. Together with the Aaa
group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in
Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other
elements present which make the long-term risk appear
somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable
investment attributes and are to be considered as upper-
medium grade obligations. Factors giving security to
principal and interest are considered adequate, but
elements may be present which suggest a susceptibility
to impairment some time in the future.
<PAGE>
Baa - Bonds which are rated Baa are considered as
medium-grade obligations (i.e., they are neither highly
protected nor poorly secured). Interest payments and
principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of
time. Such Bonds lack outstanding investment
characteristics and in fact have speculative
characteristics as well.
Ba - Bonds which are rated Ba are judged to have
speculative elements; their future cannot be considered
as well-assured. Often the protection of interest and
principal payments may be very moderate, and thereby
not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes
Bonds in this class.
B - Bonds which are rated B generally lack
characteristics of the desirable investment. Assurance
of interest and principal payments or of maintenance of
other terms of the contract over any long period of
time may be small.
Caa - Bonds which are rated Caa are of poor
standing. Such issues may be in default or there may
be present elements of danger with respect to principal
or interest.
Ca - Bonds which are rated Ca represent
obligations which are speculative in a high degree.
Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated
class of bonds, and issues so rated can be regarded as
having extremely poor prospects of ever attaining any
real investment standing.
Fitch Investors Service, Inc. Bond Ratings
Fitch investment grade bond ratings provide a
guide to investors in determining the credit risk
associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class
of debt in a timely manner.
The rating takes into consideration special
features of the issue, its relationship to other
obligations of the issuer, the current and prospective
financial condition and operating performance of the
issuer and any guarantor, as well as the economic and
political environment that might affect the issuer's
future financial strength and credit quality.
Fitch ratings do not reflect any credit
enhancement that may be provided by insurance policies
or financial guaranties unless otherwise indicated.
Bonds that have the same rating are of similar but
not necessarily identical credit quality since the
rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy,
sell, or hold any security. Ratings do not comment on
the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt
nature or taxability of payments made in respect of any
security.
Fitch ratings are based on information obtained
from issuers, other obligors, underwriters, their
experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or
accuracy of such information. Ratings may be changed,
suspended, or withdrawn as a result of changes in, or
the unavailability of, information or for other
reasons.
AAA Bonds considered to be investment grade
and of the highest credit quality. The
obligor has an exceptionally strong ability
to pay interest and repay principal, which is
unlikely to be affected by reasonably
foreseeable events.
<PAGE>
AA Bonds considered to be investment grade
and of very high credit quality. The
obligor's ability to pay interest and repay
principal is very strong, although not quite
as strong as bonds rated 'AAA'. Because
bonds rated in the 'AAA' and 'AA' categories
are not significantly vulnerable to
foreseeable future developments, short-term
debt of the issuers is generally rated 'F-
1+'.
A Bonds considered to be investment grade
and of high credit quality. The obligor's
ability to pay interest and repay principal
is considered to be strong, but may be more
vulnerable to adverse changes in economic
conditions and circumstances than bonds with
higher ratings.
BBB Bonds considered to be investment grade
and of satisfactory credit quality. The
obligor's ability to pay interest and repay
principal is considered to be adequate.
Adverse changes in economic conditions and
circumstances, however, are more likely to
have adverse impact on these bonds and,
therefore, impair timely payment. The
likelihood that the ratings of these bonds
will fall below investment grade is higher
than for bonds with higher ratings.
Fitch speculative grade bond ratings provide a
guide to investors in determining the credit risk
associated with a particular security. The ratings
('BB' to 'C') represent Fitch's assessment of the
likelihood of timely payment of principal and interest
in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating
('DDD' to 'D') is an assessment of the ultimate
recovery value through reorganization or liquidation.
The rating takes into consideration special
features of the issue, its relationship to other
obligations of the issuer, the current and prospective
financial condition and operating performance of the
issuer and any guarantor, as well as the economic and
political environment that might affect the issuer's
future financial strength.
Bonds that have the same rating are of similar but
not necessarily identical credit quality since the
rating categories cannot fully reflect the differences
in the degrees of credit risk.
BB Bonds are considered speculative. The
obligor's ability to pay interest and repay
principal may be affected over time by
adverse economic changes. However, business
and financial alternatives can be identified
which could assist the obligor in satisfying
its debt service requirements.
B Bonds are considered highly speculative.
While bonds in this class are currently
meeting debt service requirements, the
probability of continued timely payment of
principal and interest reflects the obligor's
limited margin of safety and the need for
reasonable business and economic activity
throughout the life of the issue.
CCC Bonds have certain identifiable
characteristics which, if not remedied, may
lead to default. The ability to meet
obligations requires an advantageous business
and economic environment.
CC Bonds are minimally protected. Default
in payment of interest and/or principal seems
probable over time.
C Bonds are in imminent default in payment
of interest or principal.
DDD,
DD
and D Bonds are in default on interest
and/or principal payments. Such bonds are
extremely speculative and should be valued on
the basis of their ultimate recovery value in
liquidation or reorganization of the obligor.
'DDD' represents the highest potential for
recovery of these bonds, and 'D' represents
the lowest potential for recovery.
<PAGE>
Duff & Phelps, Inc. Long-Term Debt Ratings
These ratings represent a summary opinion of the
issuer's long-term fundamental quality. Rating
determination is based on qualitative and quantitative
factors which may vary according to the basic economic
and financial characteristics of each industry and each
issuer. Important considerations are vulnerability to
economic cycles as well as risks related to such
factors as competition, government action, regulation,
technological obsolescence, demand shifts, cost
structure, and management depth and expertise. The
projected viability of the obligor at the trough of the
cycle is a critical determination.
Each rating also takes into account the legal form
of the security, (e.g., first mortgage bonds,
subordinated debt, preferred stock, etc.). The extent
of rating dispersion among the various classes of
securities is determined by several factors including
relative weightings of the different security classes
in the capital structure, the overall credit strength
of the issuer, and the nature of covenant protection.
The Credit Rating Committee formally reviews all
ratings once per quarter (more frequently, if
necessary). Ratings of 'BBB-' and higher fall within
the definition of investment grade securities, as
defined by bank and insurance supervisory authorities.
Structured finance issues, including real estate, asset-
backed and mortgage-backed financings, use this same
rating scale. Duff & Phelps Credit Rating claims
paying ability ratings of insurance companies use the
same scale with minor modification in the definitions.
Thus, an investor can compare the credit quality of
investment alternatives across industries and
structural types. A "Cash Flow Rating" (as noted for
specific ratings) addresses the likelihood that
aggregate principal and interest will equal or exceed
the rated amount under appropriate stress conditions.
Rating Scale Definition
AAA Highest credit quality. The risk
factors are negligible, being only slightly more
than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors
are strong. Risk is modest, but may
AA vary slightly from time to time because
of economic conditions.
AA-
A+ Protection factors are average but
adequate. However, risk factors are more
A variable and greater in periods of
economic stress.
A-
BBB+ Below average protection factors but
still considered sufficient for prudent
BBB investment. Considerable variability in
risk during economic cycles.
BBB-
BB+ Below investment grade but deemed likely
to meet obligations when due.
BB Present or prospective financial
protection factors fluctuate according to
BB- industry conditions or company fortunes.
Overall quality may move up or
down frequently within this category.
<PAGE>
B+ Below investment grade and possessing
risk that obligations will not be met
B when due. Financial protection factors
will fluctuate widely according to
B- economic cycles, industry conditions
and/or company fortunes. Potential
exists for frequent changes in the
rating within this category or into a higher
or lower rating grade.
CCC Well below investment grade securities.
Considerable uncertainty exists as to
timely payment of principal, interest or
preferred dividends.
Protection factors are narrow and risk
can be substantial with unfavorable
economic/industry conditions, and/or
with unfavorable company developments.
DD Defaulted debt obligations. Issuer
failed to meet scheduled principal and/or
interest payments.
DP Preferred stock with dividend
arrearages.
SHORT-TERM RATINGS
Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a
current assessment of the likelihood of timely payment
of debt considered short-term in the relevant market.
Ratings graded into several categories, ranging
from 'A-1' for the highest quality obligations to 'D'
for the lowest. These categories are as follows:
A-1 This highest category indicates that the
degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+)
designation.
A-2 Capacity for timely payment on issues with
this designation is satisfactory. However, the
relative degree of safety is not as high as for issues
designated 'A-1'.
A-3 Issues carrying this designation have adequate
capacity for timely payment. They are, however, more
vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher
designations.
B Issues rated 'B' are regarded as having only
speculative capacity for timely payment.
C This rating is assigned to short-term debt
obligations with doubtful capacity for payment.
D Debt rated 'D' is in payment default. The 'D'
rating category is used when interest payments or
principal payments are not made on the date due, even
if the applicable grace period has not expired, unless
S&P believes that such payments will be made during
such grace period.
<PAGE>
Moody's Commercial Paper Ratings
The term "commercial paper" as used by Moody's
means promissory obligations not having an original
maturity in excess of nine months. Moody's makes no
representation as to whether such commercial paper is
by any other definition "commercial paper" or is exempt
from registration under the Securities Act of 1933, as
amended.
Moody's commercial paper ratings are opinions on
the ability of issuers to repay punctually promissory
obligations not having an original maturity in excess
of nine months. Moody's makes no representation that
such obligations are exempt from registration under the
Securities Act of 1933, nor does it represent that any
specific note is a valid obligation of a rated issuer
or issued in conformity with any applicable law.
Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Issuers rated Prime-1 (or related supporting
institutions) have a superior capacity for repayment of
short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following
characteristics: (i) leading market positions in well
established industries, (ii) high rates of return on
funds employed, (iii) conservative capitalization
structures with moderate reliance on debt and ample
asset protection, (iv) broad margins in earnings
coverage of fixed financial charges and high internal
cash generation, and (v) well established access to a
range of financial markets and assured sources of
alternate liquidity.
Issuers rated Prime-2 (or related supporting
institutions) have a strong capacity for repayment of
short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited
above, but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still
appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting
institutions) have an acceptable capacity for repayment
of short-term promissory obligations. The effect of
industry characteristics and market composition may be
more pronounced. Variability in earnings and
profitability may result in changes in the level of
debt protection measurements and the requirement for
relatively high financial leverage. Adequate alternate
liquidity is maintained.
Issuers rated Not Prime do not fall within any of
the Prime rating categories.
Fitch Investors Service, Inc. Short-Term Ratings
Fitch's short-term ratings apply to debt
obligations that are payable on demand or have original
maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term
notes, and municipal and investment notes.
The short-term rating places greater emphasis than
a long-term rating on the existence of liquidity
necessary to meet the issuer's obligations in a timely
manner.
F-1+ Exceptionally Strong Credit Quality
Issues assigned this rating are regarded as
having the strongest degree of assurance for
timely payment.
F-1 Very Strong Credit Quality Issues
assigned this rating reflect an assurance of
timely payment only slightly less in degree
than issues rated 'F-1+'.
F-2 Good Credit Quality Issues assigned this
rating have a satisfactory degree of
assurance for timely payment but the margin
of safety is not as great as for issues
assigned 'F-1+' and 'F-1' ratings.
<PAGE>
F-3 Fair Credit Quality Issues assigned this
rating have characteristics suggesting that
the degree of assurance for timely payment is
adequate; however, near-term adverse changes
could cause these securities to be rated
below investment grade.
F-S Weak Credit Quality Issues assigned this
rating have characteristics suggesting a
minimal degree of assurance for timely
payment and are vulnerable to near-term
adverse changes in financial and economic
conditions.
D Default Issues assigned this rating are
in actual or imminent payment default.
LOC The symbol LOC indicates that the rating is
based on a letter of credit issued by a commercial
bank.
Duff & Phelps, Inc. Short-Term Debt Ratings
Duff & Phelps' short-term ratings are consistent
with the rating criteria used by money market
participants. The ratings apply to all obligations
with maturities of under one year, including commercial
paper, the uninsured portion of certificates of
deposit, unsecured bank loans, master notes, bankers
acceptances, irrevocable letters of credit, and current
maturities of long-term debt. Asset-backed commercial
paper is also rated according to this scale.
Emphasis is placed on liquidity which is defined
as not only cash from operations, but also access to
alternative sources of funds including trade credit,
bank lines, and the capital markets. An important
consideration is the level of an obligor's reliance on
short-term funds on an ongoing basis.
The distinguishing feature of Duff & Phelps Credit
Ratings' short-term ratings is the refinement of the
traditional '1' category. The majority of short-term
debt issuers carry the highest rating, yet quality
differences exist within that tier. As a consequence,
Duff & Phelps Credit Rating has incorporated gradations
of '1+' (one plus) and '1-' (one minus) to assist
investors in recognizing those differences.
These ratings are recognized by the SEC for broker-
dealer requirements, specifically capital computation
guidelines. These ratings meet Department of Labor
ERISA guidelines governing pension and profit sharing
investments. State regulators also recognize the
ratings of Duff & Phelps Credit Rating for insurance
company investment portfolios.
Rating Scale: Definition
High Grade
D-1+ Highest certainty of timely
payment. Short-term liquidity,
including internal operating factors
and/or access to alternative sources of
funds, is outstanding, and safety is
just below risk-free U.S. Treasury short-
term obligations.
D-1 Very high certainty of timely
payment. Liquidity factors are
excellent and supported by good
fundamental protection factors. Risk
factors are minor.
D-1- High certainty of timely payment.
Liquidity factors are strong and
supported by good fundamental protection
factors. Risk factors are very small.
<PAGE>
Good Grade
D-2 Good certainty of timely payment.
Liquidity factors and company
fundamentals are sound. Although
ongoing funding needs may enlarge total
financing requirements, access to
capital markets is good. Risk factors
are small.
Satisfactory Grade
D-3 Satisfactory liquidity and other
protection factors qualify issue as to
investment grade. Risk factors are
larger and subject to more variation.
Nevertheless, timely payment is
expected.
Non-investment Grade
D-4 Speculative investment
characteristics. Liquidity is not
sufficient to insure against disruption
in debt service. Operating factors and
market access may be subject to a high
degree of variation.
Default
D-5 Issuer failed to meet scheduled
principal and/or interest payments.
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements (included in Parts
A and B, or incorporated by reference
therein)
(b) Exhibits
(1) Registrant's Articles of Incorporation(1)
(2) Registrant's By-Laws(1)
(3) None
(4) None
(5.1) Investment Advisory Agreement(2)
(5.2) Subadvisory Agreement(2)
(6) None
(7) None
(8) Custodian Agreement with UMB Bank, n.a.(2)
(9.1) Transfer Agency Agreement with Sunstone Investor
Services, LLC(2)
(9.2) Administration and Fund Accounting Agreement
with Sunstone Financial Group, Inc.(2)
(10) Opinion and Consent of Godfrey & Kahn, S.C.(2)
(11) Consent of Ernst & Young LLP
(12) None
(13) Subscription Agreements(2)
(14) Individual Retirement Trust Account(2)
(15) None
<PAGE>
(16) None
(17) None
(18) None
(19) Powers of Attorney for Directors and
Officers (see signature page)
______________________
(1) Incorporated by reference to Registrant's Form
N-1A as filed with the Commission on July 2, 1996.
(2) Incorporated by reference to Registrant's Form
N-1A as filed with the Commission on October 11, 1996.
Item 25. Persons Controlled by or under Common Control
with Registrant
Registrant neither controls any person nor is
under common control with any other person.
Item 26. Number of Holders of Securities
Number of Record Holders
Title of Securities as of September 30, 1996
Common Stock, $.01 par value 2
Item 27. Indemnification
Article VI of Registrant's By-Laws provides as
follows:
ARTICLE VI INDEMNIFICATION
The Corporation shall indemnify (a) its
Directors and officers, whether serving the
Corporation or at its request any other entity, to
the full extent required or permitted by (i)
Maryland law now or hereafter in force, including
the advance of expenses under the procedures and
to the full extent permitted by law, and (ii) the
Investment Company Act of 1940, as amended, and
(b) other employees and agents to such extent as
shall be authorized by the Board of Directors and
be permitted by law. The foregoing rights of
indemnification shall not be exclusive of any
other rights to which those seeking
indemnification may be entitled. The Board of
Directors may take such action as is necessary to
carry out these indemnification provisions and is
expressly empowered to adopt, approve and amend
from time to time such resolutions or contracts
implementing such provisions or such further
indemnification arrangements as may be permitted
by law.
Item 28. Business and Other Connections of Investment
Adviser
None.
Item 29. Principal Underwriters
(a) None
(b) None
<PAGE>
(c) None
Item 30. Location of Accounts and Records
All accounts, books or other documents
required to be maintained by section 31(a) of the
Investment Company Act of 1940 and the rules
promulgated thereunder are in the possession of
Frontegra Asset Management, Inc., Registrant's
investment adviser, at Registrant's corporate
offices, except (1) records held and maintained
by UMB Bank, n.a., 928 Grand Avenue, Kansas City,
Missouri 64141, relating to its function as
custodian and (2) records held and maintained by
Sunstone Financial Group, Inc., 207 E. Buffalo
Street, Suite 400, Milwaukee, Wisconsin 53202,
relating to its function as transfer agent,
administrator, and fund accountant.
Item 31. Management Services
All management-related service contracts
entered into by Registrant are discussed in Parts
A and B of this Registration Statement.
Item 32. Undertakings.
Registrant undertakes to furnish each person to
whom a prospectus or statement of additional
information is delivered with a copy of the
Registrant's latest semi-annual or annual report
to shareholders, without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act
of 1933 and the Investment Company Act of 1940, the
Registrant has duly caused this Post-Effective
Amendment No. 1 to the Registration Statement on Form N-
1A to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Chicago and
State of Illinois on the 28th day of May, 1997.
FRONTEGRA FUNDS, INC.
(Registrant)
By: /s/ William D. Forsyth III
--------------------------
William D. Forsyth III
Co-President
Each person whose signature appears below
constitutes and appoints William D. Forsyth III and
Thomas J. Holmberg, Jr., and each of them, his true and
lawful attorney-in-fact and agent with full power of
substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to
sign any and all pre-effective amendments to this
Registration Statement and to file the same, with all
exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission
and any other regulatory body, granting unto said
attorney-in-fact and agent, full power and authority to
do and perform each and every act and thing requisite
and necessary to be done, as fully to all intents and
purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact
and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act
of 1933, this Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A has been signed
below by the following persons in the capacities and on
the date(s) indicated.
Name Title Date
/s/ William D. Forsyth III Co-President and a Director May 28, 1997
- -----------------------------
William D. Forsyth III
/s/ Thomas J. Holmberg, Jr. Co-President and a Director May 28, 1997
- -----------------------------
Thomas J. Holmberg, Jr.
/s/ David L. Heald Director May 28, 1997
- -----------------------------
David L. Heald
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
(1) Registrant's Articles of Incorporation
(previously filed as Exhibit No. 1 to the
Registration Statement on Form N-1A; File Nos.
333-7305 and 811-7685)
(2) Registrant's By-Laws (previously filed as
Exhibit No. 2 to the Registration Statement
on Form N-1A; File Nos. 333-7305 and 811-7685)
(3) None
(4) None
(5.1) Investment Advisory Agreement (previously
filed as Exhibit No. 5.1 to the Registration
Statement on Form N-1A, File Nos. 333-7305 and 811-7685)
(5.2) Subadvisory Agreement (previously filed as
Exhibit No. 5.2 to the Registration Statement
on Form N-1A, File Nos. 333-7305 and 811-7685)
(6) None
(7) None
(8) Custodian Agreement with
UMB Bank, n.a. (previously field as
Exhibit No. 8 to the Registration
Statement on Form N-1A, File Nos. 333-7305
and 811-7685)
(9.1) Transfer Agency Agreement
with Sunstone Investor Services, LLC
(previously filed as Exhibit No. 9.1 to
the Registration Statement on Form N-1A,
File Nos. 333-7305 and 811-7685)
(9.2) Administration and Fund
Accounting Agreement with Sunstone
Financial Group, Inc. (previously filed as
Exhibit No. 9.2 to the Registration
Statement on Form N-1A, File Nos. 333-7305
and 811-7685)
(10) Opinion and Consent of
Godfrey & Kahn, S.C. (previously filed as
Exhibit No. 10 to the Registration
Statement on Form N-1A, File Nos. 333-7305
and 811-7685)
(11) Consent of Ernst & Young LLP
(12) None
(13) Subscription Agreements
(previously filed as Exhibit No. 13 to the
Registration Statement on Form N-1A, File
Nos. 333-7305 and 811-7685)
(14) Individual Retirement Trust
Account (previously filed as Exhibit No.
14 to the Registration Statement on Form
N-1A, File Nos. 333-7305 and 811-7685)
(15) None
(16) None
(17) None
(18) None
(19) Powers of Attorney for Directors and
Officers (see signature page)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference of
our report dated September 30, 1996 relating to our
audit of the statement of assets and liabilities of the
Frontegra Funds, Inc.-Total Return Bond Fund and to the
reference to our firm under the caption "Independent
Auditors" in the Statement of Additional Information of
the Frontegra Funds, Inc., as filed with the Securities
and Exchange Commission in this Post-Effective
Amendment No. 1 to the Registration Statement on Form
N-1A under the Securities Act of 1933 (Registration No.
333-7305) and in this Amendment No. 2 under the
Investment Company Act of 1940 (Registration No. 811-
7685).
/s/ ERNST & YOUNG LLP
Chicago, Illinois
May 28, 1997
