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FRONTEGRA FUNDS
ANNUAL REPORT
Frontegra Opportunity Fund
FRONTEGRA ASSET MANAGEMENT, INC.
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OCTOBER 31, 1998
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FRONTEGRA FUNDS
TABLE OF CONTENTS
Shareholder Letter 1
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Investment Highlights 2
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Schedule of Investments 3
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Statement of Assets and Liabilities 6
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Statement of Operations 7
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Statements of Changes in Net Assets 8
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Financial Highlights 9
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Notes to Financial Statements 10
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Report of Independent Auditors 13
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This report is submitted for the general information of the shareholders of the
Fund. It is not authorized for distribution to prospective investors unless
accompanied or preceded by an effective Prospectus for the Fund. The Prospectus
includes more complete information about management fees and expenses,
investment objectives, risks and operating policies of the Fund. Please read the
Prospectus carefully.
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FRONTEGRA FUNDS
DEAR FELLOW SHAREHOLDERS:
The 12-month period ended October 31 proved to be a difficult time for small-cap
investors. After declining more than 30% from its April high, the Russell 2000,
a proxy for small-cap stocks, rebounded in September and October to finish the
fiscal year down 11.84%. Despite a relatively slow start in the first six months
of the fiscal year, the Frontegra Opportunity Fund held up well in the midst of
the recent market turmoil. The Fund was down 13.24% for the fiscal year,
trailing the benchmark but outperforming the average small-cap fund in the
Lipper Universe.
PORTFOLIO REVIEW AND STRATEGY
Small-cap stocks suffered significantly in recent months, particularly in July
(down 8.1%) and August (down 19.4%). Many companies were trading down 40% to 50%
from their recent highs. Recent market volatility can be attributable to a
number of domestic and global events, including leadership issues in the U.S.,
Japan and Germany, continuing economic problems in emerging markets such as
Russia, Brazil and the Pacific Rim and profit pressure on U.S. multinationals.
Given that small-cap stocks typically have the least amount of foreign exposure,
one would expect that small stocks would have weathered the recent storm better
than their large-cap counterparts. However, just the opposite happened as
liquidity dried up in the small-cap sector when investors sought a safe haven in
large-cap liquid stocks.
While the July/August period was very painful, the portfolio held up relatively
well and the Fund made up ground on the benchmark Russell 2000. Many of the
stocks in the portfolio incurred only modest declines. In fact, from a
performance attribution standpoint, our stock selection added value in every
sector except Technology in the July/August period. Even though several large-
cap Technology stocks have posted big gains this year, smaller Technology
stocks, and in particular, the undervalued Technology stocks which appear on our
screens have fared much worse than the overall market.
The Fund's Real Estate Investment Trust (REIT) holdings also held up well in
recent months after proving to be a drag on Fund performance earlier in the
year. We took this opportunity to trim our REIT position to under 10% in
September after being as high as 15% in July. We used the proceeds to add to
several holdings, including Mitchell Energy and Kemet. In addition, we purchased
several new companies, including World Fuel Services and Stolt-Nielsen. Both
World Fuel Services and Stolt-Nielsen are solid companies in niche businesses.
World Fuel Services provides fuel, and importantly, the financing for the fuel,
to the growing private and corporate jet business. Stolt-Nielsen has several
lines of business, including shipping and raising salmon. However, the most
intriguing part of the business is complex oil rig servicing, where Stolt
receives a steady income stream resulting from long-term contracts. Both stocks
have declined significantly from recent highs and are trading at attractive
valuations.
SUMMARY
In the past, following difficult periods in the small-cap sector, stocks in our
portfolios have rebounded strongly. We took advantage of the market volatility
to add to several positions where our confidence is high and were also able to
buy some very good companies at bargain prices. We are excited about the
prospects of the Fund and appreciate your continued confidence and investment in
the Fund.
Sincerely,
/s/David R. Milroy /s/William D. Forsyth /s/Thomas J. Holmberg
David R. Milroy William D. Forsyth Thomas J. Holmberg
Portfolio Manager Co-President Co-President
Reams Asset Management Co. Frontegra Funds Frontegra Funds
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FRONTEGRA FUNDS
INVESTMENT HIGHLIGHTS
GROWTH OF A $100,000 INVESTMENT
FRONTEGRA LIPPER SMALL-CAP RUSSELL 2000
OPPORTUNITY FUND FUND INDEX INDEX
--------------- -------------- ---------------
7/31/97 $100,000 $100,000 $100,000
10/31/97 $107,400 $103,470 $104,952
1/31/98 $104,868 $100,629 $104,424
4/30/98 $115,038 $114,075 $117,415
7/31/98 $100,425 $101,601 $102,313
10/31/98 $93,185 $89,353 $92,523
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Portfolio Total Return
FOR THE PERIOD ENDED 10/31/98
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ONE YEAR (13.24)%
AVERAGE ANNUAL
SINCE COMMENCEMENT (5.48)%
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This chart assumes an initial gross investment of $100,000 made on 7/31/97
(commencement of operations). Returns shown include the reinvestment of all
distributions. Past performance is not predictive of future results. Investment
return and principal value will fluctuate so that shares, when redeemed, may be
worth more or less than the original cost. In the absence of existing fee
waivers, total return would be reduced.
The Lipper Small-Cap Fund Index includes the 30 largest funds which, by
prospectus or portfolio practice, limit their investments to companies on the
basis of the size of the company.
The Russell 2000 Index is comprised of the smallest 2000 companies in the
Russell 3000 Index. The Russell 3000 Index is comprised of the 3000 largest U.S.
companies based on market capitalization.
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FRONTEGRA FUNDS
Frontegra Opportunity Fund
SCHEDULE OF INVESTMENTS
October 31, 1998
Number of Shares Value
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COMMON STOCKS 95.8%
Commercial Services 5.5%
3,500 ABR Information Services, Inc.<F1> $ 66,062
5,200 Banta Corp. 129,350
4,800 Lawson Products, Inc. 111,600
6,000 Stolt-Nielsen S.A. 68,625
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375,637
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Consumer Durables 8.7%
10,750 CLARCOR Inc. 181,406
6,200 Department 56, Inc. <F1> 193,362
5,400 Harman International Industries, Inc. 218,363
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593,131
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Consumer Services 3.7%
5,500 Carmike Cinemas, Inc. <F1> 102,781
5,300 Jones Intercable, Inc. - Class A<F1> 148,731
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251,512
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Electronic Technology 6.6%
4,700 Belden Inc. 68,444
9,500 Electroglas, Inc. <F1> 119,344
8,600 Kemet Corp. <F1> 120,400
7,900 UCAR International Inc. <F1> 142,200
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450,388
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Energy Minerals 6.8%
11,800 Mitchell Energy & Development Corp. 165,938
7,600 Pool Energy Services Co. <F1> 101,412
24,600 Santa Fe Energy Resources, Inc. <F1> 199,875
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467,225
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Finance 4.3%
12,000 First Bell Bancorp, Inc. 174,000
13,100 Local Financial Corp. <F1> 118,719
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292,719
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Health Technology 6.5%
8,600 Ballard Medical Products 182,750
7,900 Haemonetics Corp. <F1> 170,344
8,600 Lunar Corp. <F1> 90,300
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443,394
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See notes to financial statements.
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FRONTEGRA FUNDS
Frontegra Opportunity Fund
SCHEDULE OF INVESTMENTS (continued)
October 31, 1998
Number of Shares Value
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Industrial Services 8.5%
18,500 Dames & Moore, Inc. $ 222,000
7,500 Jacobs Engineering Group, Inc. <F1> 244,687
6,800 Quanex Corp. 114,750
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581,437
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Non-Energy Minerals 8.2%
8,700 AK Steel Holding Corp. 150,619
8,000 Giant Cement Holding, Inc. <F1> 167,000
3,400 Lone Star Industries, Inc. 239,487
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557,106
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Process Industries 4.4%
6,450 Ferro Corp. 164,475
8,800 Furon Co. 139,700
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304,175
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Producer Manufacturing 14.8%
3,500 Artesyn Technologies, Inc. <F1> 50,531
15,600 Griffon Corp. <F1> 153,075
7,400 Holophane Corp. <F1> 157,712
10,100 Juno Lighting, Inc. 239,875
10,100 Northwest Pipe Co. <F1> 171,069
6,100 Standex International Corp. 150,594
4,200 Wolverine Tube, Inc. <F1> 88,988
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1,011,844
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Real Estate Investment Trust 9.4%
3,100 Amli Residential Properties Trust 69,750
8,800 Asset Investors Corp. 122,650
2,400 First Industrial Realty Trust, Inc. 61,500
7,900 Great Lakes REIT, Inc. 129,856
5,000 Prentiss Properties Trust 103,125
4,400 Storage Trust Realty 98,725
7,000 Winston Hotels, Inc. 59,938
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645,544
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Retail 4.6%
24,900 Homebase, Inc. <F1> 168,075
3,900 Sonic Corp. <F1> 74,100
5,200 World Fuel Services Corp. 72,800
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314,975
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See notes to financial statements.
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FRONTEGRA FUNDS
Frontegra Opportunity Fund
SCHEDULE OF INVESTMENTS (continued)
October 31, 1998
Number of Shares Value
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Technology Services 1.3%
9,700 Pioneer-Standard Electronics, Inc. $ 86,694
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Transportation 2.5%
13,200 Arnold Industries, Inc. 168,300
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TOTAL COMMON STOCKS
(cost $7,343,732) 6,544,081
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Principal Amount
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SHORT-TERM INVESTMENT 2.4%
$161,697 UMB Bank Money Market Fiduciary 161,697
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TOTAL SHORT-TERM INVESTMENT
(cost $161,697) 161,697
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TOTAL INVESTMENTS 98.2%
(cost $7,505,429) 6,705,778
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Other Assets less Liabilities 1.8% 121,265
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NET ASSETS 100.0% $6,827,043
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<F1> Non-income producing
See notes to financial statements.
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FRONTEGRA FUNDS
Frontegra Opportunity Fund
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1998
ASSETS:
Investments at value (cost $7,505,429) $6,705,778
Receivable for investments sold 121,884
Interest and dividends receivable 4,406
Receivable from adviser 7,631
Deferred organizational costs, net 30,266
Other assets 2,579
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Total assets 6,872,544
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LIABILITIES:
Payable for investments purchased 23,055
Accrued investment advisory fee 3,466
Accrued expenses 18,980
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Total liabilities 45,501
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NET ASSETS $6,827,043
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NET ASSETS CONSIST OF:
Paid in capital $7,714,735
Accumulated net investment income 64,806
Accumulated net realized losses on investments (152,847)
Net unrealized depreciation on investments (799,651)
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NET ASSETS $6,827,043
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CAPITAL STOCK, $0.01 PAR VALUE
Authorized 100,000,000
Issued and outstanding 244,445
NET ASSET VALUE, REDEMPTION PRICE AND OFFERING PRICE PER SHARE $27.93
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See notes to financial statements.
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FRONTEGRA FUNDS
Frontegra Opportunity Fund
STATEMENT OF OPERATIONS
For the Year Ended October 31, 1998
INVESTMENT INCOME:
Dividends $ 124,106
Interest 7,849
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131,955
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EXPENSES:
Fund administration and accounting fees 57,625
Investment advisory fees 47,155
Legal fees 16,025
Audit fees 13,502
Shareholder servicing 12,837
Federal and state registration fees 10,437
Amortization of organizational costs 8,078
Reports to shareholders 6,584
Custody fees 5,209
Pricing 1,765
Insurance 1,690
Directors' fees and related expenses 775
Other 1,420
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Total expenses before waiver and reimbursements 183,102
Waiver and reimbursements of expenses by adviser (117,911)
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Net expenses 65,191
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NET INVESTMENT INCOME 66,764
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REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains (losses) on investments (158,568)
Change in unrealized appreciation/depreciation on investments (905,970)
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NET GAINS (LOSSES) ON INVESTMENTS (1,064,538)
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NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $(997,774)
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See notes to financial statements.
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FRONTEGRA FUNDS
Frontegra Opportunity Fund
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED PERIOD ENDED
OCTOBER 31, 1998 OCTOBER 31, 1997<F1>
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OPERATIONS:
Net investment income $ 66,764 $ 7,206
Net realized gains (losses) on investments (158,568) (1,205)
Change in unrealized
appreciation/depreciation on investments (905,970) 106,319
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Net increase (decrease) in net
assets resulting from operations (997,774) 112,320
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DISTRIBUTIONS PAID FROM:
Net investment income (7,018) _
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Net decrease in net assets
resulting from distributions paid (7,018) _
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CAPITAL SHARE TRANSACTIONS:
Shares sold 1,925,149 5,787,348
Shares issued to holders in
reinvestment of distributions 7,018 _
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Net increase in net assets resulting from
capital share transactions 1,932,167 5,787,348
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TOTAL INCREASE IN NET ASSETS 927,375 5,899,668
NET ASSETS:
Beginning of period 5,899,668 _
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End of period (includes undistributed net
investment income of $64,806 and
$8,034, respectively) $6,827,043 $5,899,668
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<F1> Commenced operations on July 31, 1997
See notes to financial statements.
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FRONTEGRA FUNDS
Frontegra Opportunity Fund
FINANCIAL HIGHLIGHTS
YEAR ENDED PERIOD ENDED
OCTOBER 31, 1998 OCTOBER 31, 1997<F1>
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NET ASSET VALUE, BEGINNING OF PERIOD $32.22 $30.00
INCOME (LOSS) FROM INVESTMENT
OPERATIONS:
Net investment income 0.26 0.04
Net realized and unrealized gains
(losses) on investments (4.52) 2.18
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TOTAL INCOME (LOSS) FROM INVESTMENT OPERATIONS (4.26) 2.22
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LESS DISTRIBUTIONS PAID:
From net investment income (0.03) _
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TOTAL DISTRIBUTIONS PAID (0.03) _
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NET ASSET VALUE, END OF PERIOD $27.93 $32.22
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TOTAL RETURN<F2> (13.24)% 7.40%
Supplemental Data and Ratios:
Net assets, end of period (in thousands) $6,827 $5,900
Ratio of expenses to average net assets<F3><F4> 0.90% 0.90%
Ratio of net investment income to
average net assets<F3><F4> 0.92% 2.61%
Portfolio turnover rate<F2> 54% 9%
<F1> Commenced operations on July 31, 1997
<F2> Not annualized for periods less than a full year
<F3> Net of waivers and reimbursements by Adviser. Without waivers and
reimbursements of expenses, the ratio of expenses to average net assets
would have been 2.53% and 12.02%, and the ratio of net investment income to
average net assets would have been (0.71)% and (8.51)% for the year ended
October 31, 1998 and the
period ended October 31, 1997, respectively.
<F4> Annualized
See notes to financial statements.
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FRONTEGRA FUNDS
Frontegra Opportunity Fund
NOTES TO FINANCIAL STATEMENTS
October 31, 1998
(1) ORGANIZATION
Frontegra Funds, Inc. ("Frontegra") was incorporated on May 24, 1996, as a
Maryland corporation and is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end management investment
company issuing its shares in series, each series representing a distinct
portfolio with its own investment objectives and policies. Frontegra
consists of three series: the Frontegra Opportunity Fund (the "Fund"), the
Frontegra Total Return Bond Fund and the Frontegra Growth Fund. The Fund
commenced operations on July 31, 1997. Costs incurred by the Fund in
connection with its organization, registration and the initial public
offering of shares have been deferred and will be amortized over the period
of benefit, but not to exceed five years from the date upon which the Fund
commenced its investment activities.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
(a) Investment Valuation
Securities (other than short-term instruments) for which market
quotations are readily available are valued at the last trade price on
the national securities exchange on which such securities are
primarily traded. Securities for which there were no transactions on a
given day or securities not listed on a national securities exchange
are valued at the most recent bid prices. Securities maturing within
60 days or less when purchased are valued by the amortized cost
method. Any securities for which market quotations are not readily
available are valued at their fair value as determined in good faith
by Reams Asset Management Co., LLC (the "Sub-Adviser") pursuant to
guidelines established by the Board of Directors.
(b) Federal Income Taxes
No federal income tax provision has been made since the Fund intends
to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute substantially all
investment company net taxable income and net capital gains to
shareholders in a manner which results in no tax cost to the Fund.
(c) Distributions to Shareholders
Dividends from net investment income and distributions of net realized
gains, if any, will be declared and paid at least annually.
Distributions to shareholders are recorded on the ex-dividend date.
The character of distributions made during the year from net
investment income or net realized gains may differ from the
characterization for federal income tax purposes due
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FRONTEGRA FUNDS
Frontegra Opportunity Fund
NOTES TO FINANCIAL STATEMENTS (continued)
October 31, 1998
to differences in the recognition of income, expense and gain items
for financial statement and tax purposes. Where appropriate,
reclassifications between net asset accounts are made for such
differences that are permanent in nature. Accordingly, at October 31,
1998, reclassifications were recorded to decrease accumulated net
investment income by $2,974, decrease accumulated net realized losses
on investments by $6,926 and decrease paid in capital by $3,952.
(d) Other
Investment transactions are accounted for on the trade date. The Fund
determines the gain or loss realized from investment transactions by
comparing the original cost of the security lot sold with the net sale
proceeds. Dividend income is recognized on the ex-dividend date and
interest income is recognized on an accrual basis.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of
increases and decreases in net assets from operations during the
reporting period. Actual results could differ from those estimates.
(3) INVESTMENT ADVISER
The Fund has an agreement with the Adviser, with whom certain officers and
directors of the Fund are affiliated, to furnish investment advisory
services to the Fund. Under the terms of this agreement, the Fund will pay
the Adviser a monthly fee at the annual rate of 0.65% of the Fund's average
daily net assets. The Adviser has agreed to voluntarily waive its
management fee and/or reimburse the Fund's operating expenses (exclusive of
brokerage, interest, taxes and extraordinary expenses) to ensure that the
Fund's operating expenses do not exceed 0.90% of the Fund's average daily
net assets.
(4) CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Fund were as follows:
YEAR ENDED PERIOD ENDED
OCTOBER 31, 1998 OCTOBER 31, 1997<F1>
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Shares sold 61,127 183,102
Shares issued to holders in
reinvestment of distributions 216 _
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61,343 183,102
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<F1> Commenced operations on July 31, 1997
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FRONTEGRA FUNDS
Frontegra Opportunity Fund
NOTES TO FINANCIAL STATEMENTS (continued)
October 31, 1998
(5) INVESTMENT TRANSACTIONS
The aggregate purchases and sales of securities, excluding short-term
investments, for the Fund for the year ended October 31, 1998, are
summarized below:
Purchases $5,640,530
Sales $3,825,982
There were no purchases or sales of U.S. government securities.
At October 31, 1998, gross unrealized appreciation and depreciation of
investments, based on cost for federal income tax purposes of $7,507,884
were as follows:
Appreciation $393,805
Depreciation (1,195,911)
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Net depreciation on investments $(802,106)
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At October 31, 1998, the Fund had an accumulated net realized capital loss
carryover of $1,102 and $141,178 expiring in 2005 and 2006, respectively.
To the extent the Fund realizes future net capital gains, taxable
distributions to its shareholders will be offset by any unused capital loss
carryover.
For the year ended October 31, 1998, 84% of dividends paid from
taxable income (including short-term capital gains) qualify for the
dividends received deduction available to corporate shareholders.
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FRONTEGRA FUNDS
Frontegra Opportunity Fund
REPORT OF INDEPENDENT AUDITORS
October 31, 1998
To the Board of Directors and Shareholders of the Frontegra Funds,
Inc./Frontegra Opportunity Fund:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of the Frontegra Opportunity Fund (the "Fund") as
of October 31, 1998, the related statement of operations, the statements of
changes in net assets and the financial highlights for the fiscal periods
indicated therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on the financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1998, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Frontegra Opportunity Fund at October 31, 1998, and the results of its
operations, the changes in its net assets and the financial highlights for the
fiscal periods indicated therein, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
November 30, 1998
FRONTEGRA FUNDS, INC.
c/o Sunstone Investor Services, LLC
P.O. Box 2142, Milwaukee, Wisconsin 53201-2142
FO-410-1298
