Reg. Nos. 333-7305;811-7685
Filed pursuant to Rule 497(c)
PROSPECTUS
January 30, 1998
FRONTEGRA FUNDS, INC.
FRONTEGRA TOTAL RETURN BOND FUND
c/o Sunstone Investor Services, LLC
P. O. Box 2142
Milwaukee, Wisconsin 53201-2142
1-888-825-2100
The FRONTEGRA TOTAL RETURN BOND FUND (the "Fund")
is a series of FRONTEGRA FUNDS, INC., an open-end,
management investment company, known as a mutual fund
(the "Company").
The investment objective of the Fund is a high
level of total return, consistent with the preservation
of capital. The Fund invests primarily in a
diversified portfolio of fixed income securities of
varying maturities. The Fund is 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 Fund. Please read this Prospectus
carefully and retain it for future reference.
Additional information regarding the Company and the
Fund is included in the Statement of Additional
Information dated January 30, 1998, 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.
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TABLE OF CONTENTS
Page
SUMMARY 1
INVESTMENT OBJECTIVE 1
RISK FACTORS 1
INVESTMENT ADVISER 1
PURCHASES AND REDEMPTIONS 1
SHAREHOLDER SERVICES 1
SUMMARY OF EXPENSES 2
FEE TABLES 2
EXAMPLE 2
FINANCIAL HIGHLIGHTS 3
INVESTMENT OBJECTIVE AND POLICIES 4
INVESTMENT TECHNIQUES AND RISKS 4
FIXED INCOME SECURITIES 4
REVERSE REPURCHASE AGREEMENTS AND MORTGAGE DOLLAR
ROLLS 7
WHEN-ISSUED SECURITIES 8
ILLIQUID SECURITIES 8
REPURCHASE AGREEMENTS 8
FOREIGN SECURITIES AND CURRENCIES 8
DERIVATIVE INSTRUMENTS 9
PORTFOLIO TURNOVER 9
INVESTMENT RESTRICTIONS 10
MANAGEMENT 10
HOW TO PURCHASE SHARES 11
INITIAL INVESTMENT - MINIMUM $100,000 11
SUBSEQUENT INVESTMENTS - MINIMUM $1,000 12
HOW TO REDEEM SHARES 12
WRITTEN REDEMPTION 12
SIGNATURE GUARANTEES 12
EXCHANGE PRIVILEGE 13
TAX-SHELTERED RETIREMENT PLANS 13
DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAX TREATMENT 13
FUND EXPENSES 14
DETERMINATION OF NET ASSET VALUE 14
SHAREHOLDER REPORTS 14
ORGANIZATION 15
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ADMINISTRATOR AND FUND ACCOUNTANT 15
CUSTODIAN AND TRANSFER AGENT 15
COMPARISON OF INVESTMENT RESULTS 15
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., an open-end, management
investment company, currently is comprised of the
Frontegra Total Return Bond Fund (the "Fund"), the
Frontegra Opportunity Fund and the Frontegra Growth
Fund. The investment objective of the Fund is a high
level of total return, consistent with the preservation
of capital. The Fund seeks to achieve this investment
objective primarily through investment in a diversified
portfolio of fixed income securities of varying
maturities. The 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 OBJECTIVE AND POLICIES" and
"INVESTMENT TECHNIQUES AND RISKS."
Risk Factors
The Fund is suitable for long-term investors only
and is not designed as a short-term investment vehicle.
The share price of the 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 and that bond prices in general will
decline when interest rates increase. This risk is in
addition to the risks inherent in individual bond
selections. 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. See "INVESTMENT TECHNIQUES
AND RISKS" for more information.
Investment Adviser
The Fund is managed by Frontegra Asset Management,
Inc. ("Frontegra"), which supervises the management of
the Fund's portfolio by the sub-adviser and administers
the Company's business affairs. Investment advisory
services are provided to the Fund by Reams Asset
Management Company, LLC ("Reams"). 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
primarily acts as investment adviser to institutional
clients with fixed income portfolios totaling
approximately $3.4 billion and has assets under
management totaling approximately $3.9 billion as of
December 31, 1997. See "MANAGEMENT."
Purchases and Redemptions
Shares of the Fund are sold and redeemed at net
asset value without the imposition of any sales or
redemption charges. The minimum initial investment
required by the 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
Fund. See "HOW TO PURCHASE SHARES" and "HOW TO REDEEM
SHARES." Shares in the Fund may be exchanged for
shares in other Funds of the Company at their
respective net asset values.
Shareholder Services
Questions regarding the Fund may be directed to
the Company at the address and telephone number on the
front page of this Prospectus.
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SUMMARY OF EXPENSES
Fee Tables
Shareholder Transaction Expenses
Sales Load Imposed on Purchases NONE
Sales Load Imposed on Reinvested Dividends NONE
Deferred Sales Load Imposed on Redemptions NONE
Redemption Fees NONE
Exchange Fees NONE
Annual Operating Expenses (after waivers or
reimbursements) (as a percentage of average net assets)
Management Fees 0.40%
12b-1 Fees NONE
Other Expenses (net of reimbursements) 0.10%
TOTAL OPERATING EXPENSES 0.50%
(after waivers and/or reimbursements)
For the fiscal year ended October 31, 1997,
Frontegra voluntarily agreed to waive its management
fee and/or reimburse the Fund's operating expenses to
the extent necessary to ensure that the Fund's Total
Operating Expenses did not exceed 0.50% of the Fund's
average daily net assets. Absent these reimbursements,
the Other Expenses and Total Operating Expenses for the
Fund would have been 0.87% and 1.27%, respectively.
Frontegra has voluntarily agreed to continue this
waiver/reimbursement policy for the year ending October
31, 1998, and for an indefinite amount of time beyond
that date. For additional information concerning fees
and expenses, see "MANAGEMENT."
The Fund will charge a service fee of $10 for
redemptions effected via wire transfer, and $23 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:
1 Year $ 5
3 Years $16
5 Years $28
10 Years $63
The Fee Tables, including the Example, are
included to assist you in understanding the various
costs and expenses that an investor in the Fund 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 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 Fund.
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FINANCIAL HIGHLIGHTS
The audited financial information relating to the
Fund during the period from November 25, 1996
(commencement of operations) to October 31, 1997
included in this table has been derived from the Fund's
audited financial statements. The table should be read
in conjunction with the financial statements and
related notes included in the Fund's 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.
Net asset value, beginning of period $30.00
Income from investment operations:
Net investment income 1.37
Net realized and unrealized gain
(loss) on investments 0.70
Total income from investment operations 2.07
Less distributions paid:
From net investment income (1.22)
Total distributions paid (1.22)
Net asset value, end of period $30.85
Total return (1) 7.13%
Supplemental data and ratios:
Net assets, end of period
(in thousands) $39,096
Ratio of expenses to average
net assets (2)(3) 0.50%
Ratio of net investment income
to average net assets (2)(3) 6.02%
Portfolio turnover rate (1) 202%
__________
(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 1.27% and the ratio of
net investment income to average net assets would have been
5.25% for the period November 25, 1996 to October 31, 1997.
(3)Annualized
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective presented below may not
be changed without shareholder approval. Since all
investments are subject to inherent market risks, there
is no assurance that this objective will be realized.
All of the Fund's investment restrictions which may not
be changed without shareholder approval are contained
in the Company's Statement of Additional Information.
Except for the Fund's investment objective and the
fundamental investment restrictions enumerated in the
Company's Statement of Additional Information, the
Fund's policies may be changed without a vote of the
Fund's shareholders.
The Fund's investment objective is a high level of
total return, consistent with the preservation of
capital. The 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 total 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 and 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 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. Reams' 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.
INVESTMENT TECHNIQUES AND RISKS
In addition to the investment policies described
above (and subject to certain restrictions described
below), the Fund 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.
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.
<PAGE>
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 credit 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
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
Standard & Poor's ("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., 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 because 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 Investors Service ("Moody's") or
Fitch Investors Service, Inc. ("Fitch") or A- or higher
by Duff & Phelps, Inc. ("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.
<PAGE>
U.S. Government Securities. U.S. government
securities are generally bills, notes or bonds issued
or guaranteed by the U.S. government or its agencies or
instrumentalities. The government agencies or
instrumentalities issuing such securities 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 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
<PAGE>
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 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 excise tax, the Fund
may be required to distribute a portion of such
discount 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 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 and therefore, subject to the
Fund's fundamental investment restrictions. 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 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
<PAGE>
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.
The reverse repurchase agreements and mortgage
dollar rolls 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 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,
as amended; 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 the security 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
security. 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. The
Board of Directors has adopted liquidity guidelines and
delegated this determination to Reams. Rule 144A
securities will be treated as illiquid securities,
subject to the liquidity guidelines.
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 are 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.
Portfolio Turnover
Under normal market conditions, the Fund
anticipates that its portfolio turnover rate will
generally not exceed 225% and is expected to be between
150% and 225%. 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 may 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. See "DIVIDENDS, CAPITAL GAIN
DISTRIBUTIONS AND TAX TREATMENT." The Fund's portfolio
turnover rate is included under "FINANCIAL HIGHLIGHTS."
<PAGE>
INVESTMENT RESTRICTIONS
The Company has adopted several restrictions on
the investments and other activities of the Fund that
may not be changed without shareholder approval. For
example, the Fund:
(1) May (i) borrow money from banks and (ii) make
other investments or engage in other transactions
permissible under the Investment Company Act of 1940
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.
(2) 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.
For additional investment restrictions, see the
Company's Statement of Additional Information.
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.
("Frontegra") dated October 30, 1996, as amended as of
February 1, 1998 (the "Investment Advisory Agreement"),
pursuant to which Frontegra supervises the management
of the Fund's investments and business affairs, subject
to the supervision of the Company's Board of Directors.
Frontegra has entered into a subadvisory agreement with
Reams Asset Management Company, LLC ("Reams") under
which Reams serves as the Fund's portfolio manager and,
subject to Frontegra's supervision, manages the Fund's
portfolio assets. Frontegra provides office facilities
for the Fund and pays the salaries, fees, and expenses
of all officers and directors of the Fund who are
interested persons of Frontegra.
Frontegra was organized in 1996 and is located at
400 Skokie Boulevard, 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 Fund compensates
Frontegra at the annual rate of 0.40% of the Fund's
average daily net assets. For the fiscal year ended
October 31, 1997, Frontegra voluntarily agreed to waive
its management fee and/or reimburse the Fund's
operating expenses to the extent necessary to ensure
that the Fund's Total Operating Expenses did not exceed
0.50% of the Fund's average daily net assets.
Frontegra has voluntarily agreed to continue this
waiver/reimbursement policy for the fiscal year ending
October 31, 1998 and for an indefinite amount of time
beyond that date. Any such waiver or reimbursement
will have the effect of lowering the overall expense
ratio for the Fund and increasing the Fund's overall
return to investors for the time any such amounts are
waived and/or reimbursed. For the fiscal year ended
October 31, 1997, after waivers and reimbursements,
these expenses totaled 0.50% of the Fund's average
daily net 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. 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 Fund's average daily net assets. In
recognition of the economies of scale that will be
gained by the Fund and Frontegra, and with the
exception of defined contribution or 401(k) investments
in the Fund, for initial investments of over $15
million Frontegra will compensate Reams an extra 0.10%
of the average daily net assets of such investments.
For the fiscal year ended October 31, 1997, Reams
received no compensation for its investment advisory
services to the Fund. Reams provides continuous advice
and recommendations concerning the 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 Fund. In addition to providing
investment advisory services to the Fund, Reams serves
as investment adviser to pension and profit-sharing
plans, and other institutional investors. As of
December 31, 1997, Reams had approximately $3.9 billion
under management,
<PAGE>
which includes fixed income
portfolios totaling approximately $3.4 billion. Mr.
Fred W. Reams owns units representing a majority of the
voting rights of Reams.
The day-to-day management responsibilities for the
Fund's portfolio are primarily handled by Reams'
portfolio management team. The portfolio management
team has been managed primarily by Mr. Robert A. Crider
and Mr. Mark M. Egan since the Fund's inception. The
prior five year business experience history for these
individuals is as follows: 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 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. 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.
HOW TO PURCHASE SHARES
Shares of the Fund are sold on a continuous basis
at the next offering price after receipt of the order
by the Fund. This price is based on the net asset
value of the Fund and is determined as of the close of
trading on the New York Stock Exchange ("NYSE")
(generally 4:00 p.m., Eastern Time) on each day the
NYSE 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 the
Fund is $100,000. Subsequent investments may be made
by mail or wire with a minimum subsequent investment of
$1,000. The 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 the Fund by check and
request the redemption of such shares within 15 days of
the initial purchase, payment of the redemption
proceeds may be delayed for up to seven business days
in order to ensure that the check has cleared. This is
a security precaution only and does not affect your
investment.
Initial Investment - Minimum $100,000
You may purchase shares of the Fund 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 Investor Services,
LLC (the "Transfer Agent"), 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 $23
service fee. You will also be responsible for any losses
suffered by the Fund as a result. All applications to
purchase shares of the Fund are subject to acceptance
by the Company and are not binding until so accepted.
The Company reserves the right to decline an application in
whole or in part.
Alternatively, you may place an order to purchase
shares of the Fund through a broker-dealer. Broker-
dealers may charge a transaction fee for placing orders
to purchase Fund shares. It is the responsibility of
the broker-dealer to place the order with the
appropriate Fund on a timely basis.
In addition, you may purchase shares of the Fund
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 Taxpayer Identification Number)
(identify which Fund to purchase)
The Fund is 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 business 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. In addition to the redemption
procedures described below, redemptions may also be
made through broker-dealers who may charge a commission
or other transaction fee.
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,
guardians, 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 $10 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 and loan associations, credit unions, brokerage
firms and others.
Your account may be terminated by the 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 address of record within
seven business days of the redemption.
<PAGE>
EXCHANGE PRIVILEGE
You may exchange your shares in the 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 Fund or its
shareholders. 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., various qualified retirement plans for
adoption by individuals and employers. Participants in
these plans can accumulate shares of the Fund on a tax-
deferred basis. Please call 1-888-825-2100 for a
current list of the plans offered.
DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAX TREATMENT
The 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 gains distributed by the Fund 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 the 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. Shareholders 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
Fund. Capital gains are usually distributed annually
in December. When a dividend or capital gain is
distributed, the 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 Fund 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 business days
prior to the record date of any dividend or capital
gain distribution.
If you do not furnish the Fund with your correct
Social Security Number or Taxpayer Identification
Number and/or the Fund receives notification from the
Internal Revenue Service requiring back-up withholding,
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.
<PAGE>
FUND EXPENSES
The 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
The Fund's net asset value per share is determined
as of the close of trading on the NYSE (generally 4:00
p.m., Eastern Time) on each day the NYSE is open for
business. The Fund is not required to calculate its
net asset value on days during which the 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 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. Other exchange-
traded securities (generally foreign securities) will
be valued based on market quotations.
Securities quoted in foreign currency will be
valued in U.S. dollars at the foreign currency exchange
rates that are prevailing at the time the daily net
asset value per share is determined. Foreign currency
exchange rates are generally determined prior to the
close of trading on the NYSE. Occasionally, events
affecting the value of foreign investments and such
exchange rates occur between the time at which they are
determined and the close of trading on the NYSE. Such
events would not normally be reflected in the
calculation of the Fund's net asset value on that day.
If events that materially affect the value of the
Fund's foreign investments or the foreign currency
exchange rates occur during such period, the
investments will be valued at their fair value as
determined in good faith by or under the direction of
the Board of Directors of the Company. Certain of the
securities holdings of the Fund may, from time to time,
be listed primarily on foreign exchanges that trade on
days other than those on which the NYSE is open for
business (e.g., Saturday). As a result, the net asset
value of the Fund may be significantly affected by such
trading on days when investors cannot effect
transactions in their accounts.
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 Fund'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 you make, 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.
<PAGE>
If you have questions about your account, you
should call the Fund's Transfer Agent at
1-888-825-2100. Investors who have general questions
about the Fund 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 is an open-end investment company
which was organized as a Maryland corporation on May
24, 1996. The Company is authorized to issue
200,000,000, $.01 par value shares, in addition to the
100,000,000, $.01 par value shares of the Fund, the
100,000,000, $.01 par value shares of the Frontegra
Opportunity Fund and the 100,000,000, $.01 par value
shares of the Frontegra Growth 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 January 1,
1998, two persons 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 value of the Fund and provides administrative
services (which include clerical, compliance and
regulatory services such as filing all required federal
income and excise tax returns and state property tax
returns, assisting with regulatory filings, preparing
financial statements and monitoring expense accruals).
For the foregoing, the Administrator receives from the
Fund a fee, computed daily and payable monthly based on
the Fund's average net assets at the annual rate of
0.175% on the first $50,000,000 of average net assets
and 0.04% of average net assets in excess of
$50,000,000, subject to an annual minimum of $56,200,
plus out of pocket expenses.
CUSTODIAN AND TRANSFER AGENT
UMB Bank, n.a., 928 Grand Boulevard, Kansas City,
Missouri 64141 acts as Custodian of the Fund's assets.
Sunstone Investor Services, LLC, 207 E. Buffalo Street,
Suite 315, Milwaukee, Wisconsin 53202-5712 acts as
Dividend-Disbursing and Transfer Agent for the Fund.
COMPARISON OF INVESTMENT RESULTS
The 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 the 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 the Fund's performance over a stated
period of time of greater than one year.
Quotations of yield for the Fund will be based on
the net investment income (including dividends and
interest) per share 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.
<PAGE>
Average annual total return, total return,
cumulative total return and yield are based upon the
historical results of the Fund and are not necessarily
representative of the future performance of the Fund.
Additional information concerning the performance of
the 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 the 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, Illinois 60062
SUB-ADVISER
Reams Asset Management Company, LLC
227 Washington Street
Columbus, Indiana 47201
CUSTODIAN
UMB Bank, n.a.
928 Grand Boulevard
Kansas City, Missouri 64141
DIVIDEND-DISBURSING AND TRANSFER AGENT
Sunstone Investor Services, LLC
207 E. Buffalo Street, Suite 315
P.O. Box 2142
Milwaukee, Wisconsin 53201-2142
ADMINISTRATOR AND FUND ACCOUNTANT
Sunstone Financial Group, Inc.
207 E. Buffalo Street, Suite 400
Milwaukee, Wisconsin 53202-5712
<PAGE>
AUDITORS
Ernst & Young LLP
Sears Tower
233 S. Wacker Drive
Chicago, Illinois 60606-6301
LEGAL COUNSEL
Godfrey & Kahn, S.C.
780 N. Water Street
Milwaukee, Wisconsin 53202
<PAGE>
Reg. Nos. 333-7305; 811-7685
Filed pursuant to Rule 497(c)
PROSPECTUS
January 30, 1998
FRONTEGRA FUNDS, INC.
FRONTEGRA OPPORTUNITY FUND
c/o Sunstone Investor Services, LLC
P. O. Box 2142
Milwaukee, Wisconsin 53201-2142
1-888-825-2100
The FRONTEGRA OPPORTUNITY FUND (the "Fund") is a
series of FRONTEGRA FUNDS, INC., an open-end,
management investment company, known as a mutual fund
(the "Company").
The investment objective of the Fund is capital
appreciation. The Fund invests primarily in a
diversified portfolio of equity securities of companies
with small market capitalizations. The Fund is 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 Fund. Please read this Prospectus
carefully and retain it for future reference.
Additional information regarding the Company and the
Fund is included in the Statement of Additional
Information dated January 30, 1998, 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 1
INVESTMENT OBJECTIVE 1
RISK FACTORS 1
INVESTMENT ADVISER 1
PURCHASES AND REDEMPTIONS 1
SHAREHOLDER SERVICES 1
SUMMARY OF EXPENSES 2
FEE TABLES 2
EXAMPLE 2
FINANCIAL HIGHLIGHTS 3
INVESTMENT OBJECTIVE AND POLICIES 3
INVESTMENT TECHNIQUES AND RISKS 4
SMALL COMPANIES 4
SHORT-TERM FIXED INCOME SECURITIES 5
ILLIQUID SECURITIES 5
REPURCHASE AGREEMENTS 5
FOREIGN SECURITIES AND CURRENCIES 5
DERIVATIVE INSTRUMENTS 6
PORTFOLIO TURNOVER 6
INVESTMENT RESTRICTIONS 6
MANAGEMENT 7
HOW TO PURCHASE SHARES 8
INITIAL INVESTMENT - MINIMUM $100,000 8
SUBSEQUENT INVESTMENTS - MINIMUM $1,000 9
HOW TO REDEEM SHARES 9
WRITTEN REDEMPTION 9
SIGNATURE GUARANTEES 9
EXCHANGE PRIVILEGE 9
TAX-SHELTERED RETIREMENT PLANS 10
DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAX TREATMENT 10
FUND EXPENSES 10
DETERMINATION OF NET ASSET VALUE 11
SHAREHOLDER REPORTS 11
ORGANIZATION 11
ADMINISTRATOR AND FUND ACCOUNTANT 12
<PAGE>
CUSTODIAN AND TRANSFER AGENT 12
COMPARISON OF INVESTMENT RESULTS 12
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., an open-end, management
investment company, currently is comprised of the
Frontegra Opportunity Fund (the "Fund"), the Frontegra
Total Return Bond Fund and the Frontegra Growth Fund.
The investment objective of the Fund is capital
appreciation. The Fund seeks to achieve this
investment objective primarily through investment in a
diversified portfolio of equity securities of companies
with small market capitalizations. The 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
OBJECTIVE AND POLICIES" and "INVESTMENT TECHNIQUES AND
RISKS."
Risk Factors
The Fund is suitable for long-term investors only
and is not designed as a short-term investment vehicle.
The share price of the Fund is expected to fluctuate
and may, at redemption, be worth more or less than the
initial purchase price. 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 Fund is managed by Frontegra Asset Management,
Inc. ("Frontegra"), which supervises the management of
the Fund's portfolio by the sub-adviser and administers
the Company's business affairs. Investment advisory
services are provided to the Fund by Reams Asset
Management Company, LLC ("Reams"). 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
primarily acts as investment adviser to institutional
clients with equity portfolios totaling approximately
$500 million and has assets under management totaling
approximately $3.9 billion as of December 31, 1997.
See "MANAGEMENT."
Purchases and Redemptions
Shares of the Fund are sold and redeemed at net
asset value without the imposition of any sales or
redemption charges. The minimum initial investment
required by the 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
Fund. See "HOW TO PURCHASE SHARES" and "HOW TO REDEEM
SHARES." Shares in the Fund may be exchanged for
shares in other Funds of the Company at their
respective net asset values.
Shareholder Services
Questions regarding the Fund 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
Sales Load Imposed on Purchases NONE
Sales Load Imposed on Reinvested Dividends NONE
Deferred Sales Load Imposed on Redemptions NONE
Redemption Fees NONE
Exchange Fees NONE
Annual Operating Expenses (after waivers or
reimbursements) (as a percentage of average net assets)
Management Fees 0.65%
12b-1 Fees NONE
Other Expenses (net of reimbursements) 0.25%
TOTAL OPERATING EXPENSES 0.90%
(after waivers and/or reimbursements)
For the fiscal year ended October 31, 1997,
Frontegra voluntarily agreed to waive its management
fee and/or reimburse the Fund's operating expenses to
the extent necessary to ensure that the Fund's Total
Operating Expenses did not exceed 0.90% of the Fund's
average daily net assets. Absent these reimbursements,
the Other Expenses and Total Operating Expenses for the
Fund would have been 11.37% and 12.02%, respectively.
Frontegra has voluntarily agreed to continue this
waiver/reimbursement policy for the year ending October
31, 1998, and for an indefinite amount of time beyond
that date. For additional information concerning fees
and expenses, see "MANAGEMENT."
The Fund will charge a service fee of $10 for
redemptions effected via wire transfer, and $23 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:
1 Year $ 9
3 Years $29
The Fee Tables, including the Example, are
included to assist you in understanding the various
costs and expenses that an investor in the Fund 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 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 Fund.
<PAGE>
FINANCIAL HIGHLIGHTS
The audited financial information relating to the
Fund during the period from July 31, 1997 (commencement
of operations) to October 31, 1997 included in this
table has been derived from the Fund's audited
financial statements. The table should be read in
conjunction with the financial statements and related
notes included in the Fund's Annual Report to
Shareholders. The unaudited financial information
relating to the Fund during the period from November 1,
1997 to December 31, 1997 included in this table has
been derived from the Fund's unaudited financial
statements. The table should be read in conjunction
with the financial statements and related notes
included in the Fund's Statement of Additional
Information. Both the Fund's Annual Report to
Shareholders and Statement of Additional Information
are 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.
Two Months Ended Period Ended
December 31, 1997 October 31, 1997(1)
Net asset value, beginning of period $32.22 $30.00
Income from investment operations:
Net investment income 0.05 0.04
Net realized and unrealized gain on investments 0.21 2.18
Total income from investment operations 0.26 2.22
Less distributions paid:
From net investment income (0.01) ---
Total distributions paid (0.01) ---
Net asset value, end of period $32.47 $32.22
Total return (2) 0.81% 7.40%
Supplemental data and ratios:
Net assets, end of period (in thousands) $7,648 $5,900
Ratio of expenses to average net
assets (3)(4) 0.90% 0.90%
Ratio of net investment income to
average net assets (3)(4) 1.34% 2.61%
Portfolio turnover rate (2) 9% 9%
Average commission rate paid on portfolio
investment transactions $0.0456 $0.0423
__________
(1)Commenced operations on July 31, 1997.
(2)Not annualized.
(3)Net of waiver and reimbursements by Adviser. Without waiver
and reimbursements of expenses, the ratio of expenses to
average net assets would have been 2.72% and 12.02%, and the
ratio of net investment income to average net assets would
have been (0.48)% and (8.51)% for the period ended December
31, 1997 and the period July 31, 1997 to October 31, 1997.
(4)Annualized.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective presented below may not
be changed without shareholder approval. Since all
investments are subject to inherent market risks, there
is no assurance that this objective will be realized.
All of the Fund's investment restrictions which may not
be changed without shareholder approval are contained
in the Company's Statement of Additional Information.
Except for the Fund's investment objective and the
fundamental investment restrictions enumerated in the
Company's Statement of Additional Information, the
Fund's policies may be changed without a vote of the
Fund's shareholders.
The Fund's investment objective is capital
appreciation. The Fund will seek, under normal market
conditions, to achieve its investment objective by
investing its assets primarily in equity securities of
companies with small market capitalizations. The Fund
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 Fund's total assets will normally be
invested in equity securities of small-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, investments in 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 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 Fund's investment
objective, Reams uses a value-oriented discipline.
Reams evaluates the small-cap market 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 Fund 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.
Small Companies
The 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 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 Fund
may be subject to greater price fluctuations than an
investment in a fund that invests primarily in larger
companies.
<PAGE>
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 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,
as amended; 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 the security 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
security. 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. The
Board of Directors has adopted liquidity guidelines and
delegated this determination to Reams. Rule 144A
securities will be treated as illiquid, subject to the
liquidity guidelines.
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
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 are 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
<PAGE>
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.
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. See "DIVIDENDS, CAPITAL GAIN
DISTRIBUTIONS AND TAX TREATMENT." The Fund's portfolio
turnover rate is included under "FINANCIAL HIGHLIGHTS."
INVESTMENT RESTRICTIONS
The Company has adopted several restrictions on
the investments and other activities of the Fund that
may not be changed without shareholder approval. For
example, the Fund:
(1) May (i) borrow money from banks and (ii) make
other investments or engage in other transactions
permissible under the Investment Company Act of 1940
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.
<PAGE>
(2) 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.
For additional investment restrictions, see the
Company's Statement of Additional Information.
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.
("Frontegra") dated October 30, 1996, as amended as of
February 1, 1998 (the "Investment Advisory Agreement"),
pursuant to which Frontegra supervises the management
of the Fund's investments and business affairs, subject
to the supervision of the Company's Board of Directors.
Frontegra has entered into a subadvisory agreement with
Reams Asset Management Company, LLC ("Reams") under
which Reams serves as the Fund's portfolio manager and,
subject to Frontegra's supervision, manages the Fund's
portfolio assets. Frontegra provides office facilities
for the Fund and pays the salaries, fees, and expenses
of all officers and directors of the Fund who are
interested persons of Frontegra.
Frontegra was organized in 1996 and is located at
400 Skokie Boulevard, 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 Fund compensates
Frontegra for its management services at the annual
rate of 0.65% of the Fund's average daily net assets.
For the fiscal year ended October 31, 1997, Frontegra
voluntarily agreed to waive its management fee and/or
reimburse the Fund's operating expenses to the extent
necessary to ensure that the Fund's Total Operating
Expenses did not exceed 0.90% of the Fund's average
daily net assets. Frontegra has voluntarily agreed to
continue this waiver/reimbursement policy for the
fiscal year ending October 31, 1998 and for an
indefinite amount of time beyond that date. Any such
waiver or reimbursement will have the effect of
lowering the overall expense ratio for the Fund and
increasing the Fund's overall return to investors for
the time any such amounts are waived and/or reimbursed.
For the fiscal year ended October 31, 1997, after
waivers and reimbursements, these expenses totaled
0.90% of the Fund's average net 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. 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
0.45% of the Fund's average daily net assets. In
recognition of the economies of scale that will be
gained by the Fund and Frontegra, and with the
exception of defined contribution or 401(k) investments
in the Fund, for initial investments of over $15
million Frontegra will compensate Reams an extra 0.10%
of the average daily net assets of such investments.
For the fiscal year ended October 31, 1997, Reams
received no compensation for its investment advisory
services to the Fund. Reams provides continuous advice
and recommendations concerning the 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 Fund. In addition to providing
investment advisory services to the Fund, Reams serves
as investment adviser to pension and profit-sharing
plans, and other institutional investors. As of
December 31, 1997, Reams had approximately $3.9 billion
under management, which includes equity portfolios
totaling approximately $500 million. Mr. Fred W. Reams
owns units representing a majority of the voting rights
of Reams.
The day-to-day management responsibilities for the
Fund's portfolio are primarily handled by Reams'
portfolio management team. The portfolio management
team has been managed primarily by Mr. Reams and Mr.
David R. Milroy. The prior five year business
experience history for these individuals is as follows:
Mr. Reams has been President of Reams since April, 1994
and was President of Reams Asset Management Company,
Inc. until March, 1994 and 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. The global economic
<PAGE>
forecast is
incorporated into the construction of scenarios firm-
wide. 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 Fund are sold on a continuous basis
at the next offering price after receipt of the order
by the Fund. This price is based on the net asset
value of the Fund and is determined as of the close of
trading on the New York Stock Exchange (the "NYSE")
(generally 4:00 p.m., Eastern Time) on each day the
NYSE 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 the
Fund is $100,000. Subsequent investments may be made
by mail or wire with a minimum subsequent investment of
$1,000. The 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 the Fund by check and
request the redemption of such shares within 15 days of
the initial purchase, payment of the redemption
proceeds may be delayed for up to seven business days
in order to ensure that the check has cleared. This is
a security precaution only and does not affect your
investment.
Initial Investment - Minimum $100,000
You may purchase shares of the Fund 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 Investor Services,
LLC (the "Transfer Agent"), 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 $23
service fee. You will also be responsible for any losses
suffered by the Fund as a result. All applications to purchase
shares of the Fund are subject to acceptance by the Company
and are not binding until so accepted. The Company
reserves the right to decline an application in whole or in part.
Alternatively, you may place an order to purchase
shares of the Fund through a broker-dealer. Broker-
dealers may charge a transaction fee for placing orders
to purchase Fund shares. It is the responsibility of
the broker-dealer to place the order with the
appropriate Fund on a timely basis.
In addition, you may purchase shares of the Fund
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:
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 Taxpayer Identification Number)
(identify which Fund to purchase)
The Fund is not responsible for the consequences of
delays resulting from the banking or Federal Reserve
wire system.
<PAGE>
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 business 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. In addition to the redemption
procedures described below, redemptions may also be
made through broker-dealers who may charge a commission
or other transaction fee.
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,
guardians, 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 $10 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 and loan associations, credit unions, brokerage
firms and others.
Your account may be terminated by the 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 address of record within
seven business days of the redemption.
EXCHANGE PRIVILEGE
You may exchange your shares in the 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 Fund or its
shareholders. 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.
<PAGE>
TAX-SHELTERED RETIREMENT PLANS
The Company offers through its Custodian, UMB
Bank, n.a., various qualified retirement plans for
adoption by individuals and employers. Participants in
these plans can accumulate shares of the Fund on a tax-
deferred basis. Please call 1-888-825-2100 for a
current list of the plans offered.
DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAX TREATMENT
The 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 gains distributed by the Fund 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 the 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. Shareholders 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 and capital gains will be
distributed at least annually. When a dividend or
capital gain is distributed, the 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 Fund 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
business days prior to the record date of any dividend
or capital gain distribution.
If you do not furnish the Fund with your correct
Social Security Number or Taxpayer Identification
Number and/or the Fund receives notification from the
Internal Revenue Service requiring back-up withholding,
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
The 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.
<PAGE>
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value per share is determined
as of the close of trading on the NYSE (generally
4:00 p.m., Eastern Time) on each day the NYSE is open
for business. The Fund is not required to calculate
its net asset value on days during which the 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 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. Other exchange-
traded securities (generally foreign securities) will
be valued based on market quotations.
Securities quoted in foreign currency will be
valued in U.S. dollars at the foreign currency exchange
rates that are prevailing at the time the daily net
asset value per share is determined. Foreign currency
exchange rates are generally determined prior to the
close of trading on the NYSE. Occasionally, events
affecting the value of foreign investments and such
exchange rates occur between the time at which they are
determined and the close of trading on the NYSE. Such
events would not normally be reflected in the
calculation of the Fund's net asset value on that day.
If events that materially affect the value of the
Fund's foreign investments or the foreign currency
exchange rates occur during such period, the
investments will be valued at their fair value as
determined in good faith by or under the direction of
the Board of Directors of the Company. Certain of the
securities holdings of the Fund may, from time to time,
be listed primarily on foreign exchanges that trade on
days other than those on which the NYSE is open for
business (e.g., Saturday). As a result, the net asset
value of the Fund may be significantly affected by such
trading on days when investors cannot effect
transactions in their accounts.
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 Fund'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 you make, 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, you
should call the Fund's Transfer Agent at
1-888-825-2100. Investors who have general questions
about the Fund 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 is an open-end investment company
which was organized as a Maryland corporation on May
24, 1996. The Company is authorized to issue
200,000,000, $.01 par value shares, in addition to the
100,000,000, $.01 par value shares of the Fund, the
100,000,000, $.01 par value shares of the Frontegra
Total Return Bond Fund and the 100,000,000, $.01 par
value shares of the Frontegra Growth Fund. The assets
belonging to each Fund will be held
<PAGE>
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 January 1,
1998, two persons 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 value of the Fund and provides administrative
services (which include clerical, compliance and
regulatory services such as filing all required federal
income and excise tax returns and state property tax
returns, assisting with regulatory filings, preparing
financial statements and monitoring expense accruals).
For the foregoing, the Administrator receives from the
Fund a fee, computed daily and payable monthly based on
the Fund's average net assets at the annual rate of
0.175% on the first $50,000,000 of average net assets
and 0.04% of average net assets in excess of
$50,000,000, subject to an annual minimum of $56,200,
plus out of pocket expenses.
CUSTODIAN AND TRANSFER AGENT
UMB Bank, n.a., 928 Grand Boulevard, Kansas City,
Missouri 64141 acts as Custodian of the Fund's assets.
Sunstone Investor Services, LLC, 207 E. Buffalo Street,
Suite 315, Milwaukee, Wisconsin 53202-5712 acts as
Dividend-Disbursing and Transfer Agent for the Fund.
COMPARISON OF INVESTMENT RESULTS
The 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 the 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 the Fund's performance over a stated
period of time of greater than one year.
Average annual total return, total return and
cumulative total return are based upon the historical
results of the Fund and are not necessarily
representative of the future performance of the Fund.
Additional information concerning the performance of
the 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 the 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, Illinois 60062
SUB-ADVISER
Reams Asset Management Company, LLC
227 Washington Street
Columbus, Indiana 47201
CUSTODIAN
UMB Bank, n.a.
928 Grand Boulevard
Kansas City, Missouri 64141
DIVIDEND-DISBURSING AND TRANSFER AGENT
Sunstone Investor Services, LLC
207 E. Buffalo Street, Suite 315
P.O. Box 2142
Milwaukee, Wisconsin 53201-2142
ADMINISTRATOR AND FUND ACCOUNTANT
Sunstone Financial Group, Inc.
207 E. Buffalo Street, Suite 400
Milwaukee, Wisconsin 53202-5712
<PAGE>
AUDITORS
Ernst & Young LLP
Sears Tower
233 S. Wacker Drive
Chicago, Illinois 60606-6301
LEGAL COUNSEL
Godfrey & Kahn, S.C.
780 N. Water Street
Milwaukee, Wisconsin 53202
<PAGE>
Reg. Nos. 333-7305; 811-7685
Filed pursuant to Rule 497(c)
PROSPECTUS
January 30, 1998
FRONTEGRA FUNDS, INC.
FRONTEGRA GROWTH FUND
c/o Sunstone Investor Services, LLC
P. O. Box 2142
Milwaukee, Wisconsin 53201-2142
1-888-825-2100
The FRONTEGRA GROWTH FUND (the "Fund") is a series
of FRONTEGRA FUNDS, INC., an open-end, management
investment company, known as a mutual fund (the
"Company").
The investment objective of the Fund is long-term
capital appreciation. The Fund invests primarily in a
diversified portfolio of equity securities of companies
with mid- to large-sized market capitalizations. The
Fund is 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 Fund. Please read this Prospectus
carefully and retain it for future reference.
Additional information regarding the Company and the
Fund is included in the Statement of Additional
Information dated January 30, 1998, 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 1
INVESTMENT OBJECTIVE 1
RISK FACTORS 1
INVESTMENT ADVISER 1
PURCHASES AND REDEMPTIONS 1
SHAREHOLDER SERVICES 1
SUMMARY OF EXPENSES 2
FEE TABLES 2
EXAMPLE 2
PRIOR PERFORMANCE OF NORTHERN 3
INVESTMENT OBJECTIVE AND POLICIES 4
INVESTMENT TECHNIQUES AND RISKS 4
SHORT-TERM FIXED INCOME SECURITIES 4
ILLIQUID SECURITIES 5
REPURCHASE AGREEMENTS 5
FOREIGN SECURITIES AND CURRENCIES 5
DERIVATIVE INSTRUMENTS 6
PORTFOLIO TURNOVER 6
INVESTMENT RESTRICTIONS 6
MANAGEMENT 7
HOW TO PURCHASE SHARES 7
INITIAL INVESTMENT - MINIMUM $100,000 8
SUBSEQUENT INVESTMENTS - MINIMUM $1,000 8
HOW TO REDEEM SHARES 9
WRITTEN REDEMPTION 9
SIGNATURE GUARANTEES 9
EXCHANGE PRIVILEGE 9
TAX-SHELTERED RETIREMENT PLANS 9
DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAX TREATMENT 10
FUND EXPENSES 10
DETERMINATION OF NET ASSET VALUE 10
SHAREHOLDER REPORTS 11
ORGANIZATION 11
ADMINISTRATOR AND FUND ACCOUNTANT 12
<PAGE>
CUSTODIAN AND TRANSFER AGENT 12
COMPARISON OF INVESTMENT RESULTS 12
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., an open-end, management
investment company, currently is comprised of the
Frontegra Growth Fund (the "Fund"), the Frontegra Total
Return Bond Fund and the Frontegra Opportunity Fund.
The investment objective of the Fund is long-term
capital appreciation. The Fund seeks to achieve this
investment objective primarily through investment in a
diversified portfolio of equity securities of companies
with mid- to large-sized market capitalizations. The
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
OBJECTIVE AND POLICIES" and "INVESTMENT TECHNIQUES AND
RISKS."
Risk Factors
The Fund is suitable for long-term investors only
and is not designed as a short-term investment vehicle.
The share price of the Fund is expected to fluctuate
and may, at redemption, be worth more or less than the
initial purchase price. 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 Fund is managed by Frontegra Asset Management,
Inc. ("Frontegra"), which supervises the management of
the Fund's portfolio by the sub-adviser and administers
the Company's business affairs. Investment advisory
services are provided to the Fund by Northern Capital
Management Incorporated ("Northern"). Northern
primarily acts as investment adviser to institutional
clients with assets under management totaling
approximately $1.3 billion as of December 31, 1997.
See "MANAGEMENT."
Purchases and Redemptions
Shares of the Fund are sold and redeemed at net
asset value without the imposition of any sales or
redemption charges. The minimum initial investment
required by the 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
Fund. See "HOW TO PURCHASE SHARES" and "HOW TO REDEEM
SHARES." Shares in the Fund may be exchanged for
shares in other Funds of the Company at their
respective net asset values.
Shareholder Services
Questions regarding the Fund 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
Sales Load Imposed on Purchases NONE
Sales Load Imposed on Reinvested Dividends NONE
Deferred Sales Load Imposed on Redemptions NONE
Redemption Fees NONE
Exchange Fees NONE
Annual Operating Expenses (after waivers or
reimbursements) (as a percentage of average net assets)
Management Fees 0.80%
12b-1 Fees NONE
Other Expenses (net of reimbursements) NONE
TOTAL OPERATING EXPENSES 0.80%
(after waivers and/or reimbursements)
For the fiscal year ending October 31, 1998 and
for an indefinite amount of time beyond that date,
Frontegra has voluntarily agreed to waive its
management fee and/or reimburse the Fund's operating
expenses to the extent necessary to ensure that the
Fund's Total Operating Expenses do not exceed 0.80% of
the Fund's average daily net assets. Because the Fund
has not commenced operations prior to the date hereof,
other expenses have been estimated and are presented
net of waivers and reimbursements. Absent these
waivers and reimbursements, the Other Expenses and
Total Operating Expenses for the Fund are estimated to
be 0.55% and 1.35%, respectively. For additional
information concerning fees and expenses, see
"MANAGEMENT."
The Fund will charge a service fee of $10 for
redemptions effected via wire transfer, and $23 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:
1 Year $ 8
3 Years $26
The Fee Tables, including the Example, are
included to assist you in understanding the various
costs and expenses that an investor in the Fund 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 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 Fund.
<PAGE>
PRIOR PERFORMANCE OF NORTHERN
The following table shows the historical composite
performance data for all of Northern's private advisory
accounts which have investment objectives, policies,
strategies and risks substantially similar to the Fund,
known as the NCM Equity Portfolio (the "Portfolio"),
for the periods indicated. Since its inception, the
Portfolio has shown an annual return of approximately
24%. The Portfolio has not been subject to the same
types of expenses to which the Fund is subject nor to
the diversification requirements, specific tax
restrictions and investment limitations imposed on the
Fund by the Internal Revenue Code of 1986, as amended
(the "Code"), and the Investment Company Act of 1940,
as amended (the "1940 Act"), respectively.
Consequently, the performance results for the Portfolio
could have been adversely affected if the Portfolio had
been regulated under the federal security and tax laws.
The data is provided to illustrate the past performance
of Northern in managing a substantially similar
portfolio as measured against the Russell 1000 Growth
Index and the Standard & Poor's 500 Stock Index (the
"S&P 500") and does not represent the performance of
the Fund. Investors should not consider this
performance data as an indication of the future
performance of the Fund or Northern.
Northern's performance information has been
calculated in accordance with recommended standards of
the Association for Investment Management and Research
("AIMR"), retroactively applied to all time periods.
All returns presented were calculated on a total return
basis and include all dividends and interest, if any,
accrued income, if any, and realized and unrealized
gains and losses. All returns reflect the deduction of
investment advisory fees, brokerage commissions and
execution costs paid by the Portfolio, without
provision for federal or state income taxes. Cash and
cash equivalents are included in the performance
returns. Total return is calculated monthly in
accordance with the time weighted rate of return method
provided for by AIMR standards accounted for on a trade-
date and accrual basis. AIMR standards for calculation
of total return differ from the standards required by
the SEC for calculation of average annual total return.
No leveraged positions were used. The monthly returns
are geometrically linked to derive an annual total
return.
The investment results of the Portfolio presented
below are unaudited and are not intended to predict or
suggest the future returns of the Fund. Investors
should be aware that the use of a methodology different
than that used below to calculate performance could
result in different performance data.
Northern Capital Management
NCM Equity Portfolio Performance History:
12/31/90-12/31/97
NCM Equity Russell 1000
Year Portfolio Growth S&P
Rate of Index(1) 500(2)
Return
1 31.02 30.49 33.34
3 32.50 30.14 31.14
5 20.77 18.40 20.25
From 24.00 19.36 19.75
Inception(3)
(1) The Russell 1000 Growth Index is an unmanaged
index that contains securities typically selected by
growth managers as being representative of the U.S.
stock market. The index does not reflect investment
management fees, brokerage commissions and other
expenses associated with investing in equity
securities.
(2) The S&P 500 is an unmanaged index generally
representative of the U.S. stock market. The index
does not reflect investment management fees,
brokerage commissions and other expenses associated
with investing in equity securities.
(3) The Portfolio commenced operations on December
31, 1990.
Average Annualized Return in Percent: 12/31/90-12/31/97
NCM Equity Portfolio
Composite Performance 24.00%
Russell 1000 Growth Index 19.36%
S&P 500 19.75%
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective presented below may not
be changed without shareholder approval. Since all
investments are subject to inherent market risks, there
is no assurance that this objective will be realized.
All of the Fund's investment restrictions which may not
be changed without shareholder approval are contained
in the Company's Statement of Additional Information.
Except for the Fund's investment objective and the
fundamental investment restrictions enumerated in the
Company's Statement of Additional Information, the
Fund's policies may be changed without a vote of the
Fund's shareholders.
The Fund's investment objective is long-term
capital appreciation. The Fund will seek, under normal
market conditions, to achieve its investment objective
by investing its assets primarily in the equity
securities of companies with mid- to large-sized market
capitalizations. The Fund 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; depository
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
Fund's total assets will normally be invested in equity
securities of mid- to large-sized market capitalization
companies, which for the purposes of this Fund are
those companies with a market capitalization of $1
billion or more at the time of the Fund's investment.
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 depository receipts.
However, as a matter of policy, the Fund intends to
limit its total foreign exposure, including both direct
investments and depository 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 to meet anticipated
redemption requests, pending investment and to pay
expenses. The Fund may, however, temporarily exceed
this 20% limitation, but only in circumstances pending
investment and only for short periods of time.
In seeking to achieve the Fund's investment
objective, Northern identifies companies with market
capitalizations greater than $1 billion and historical
earnings growth greater than the S&P 500. Northern
then assesses the competitive position of each such
company through fundamental research, including an
evaluation of its products or services, its management,
and the industry competition, and through Northern's
proprietary price/growth analysis. A target price is
then established for each security based on projected
earnings growth relative to market expectations. The
45-55 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. Securities
are generally sold as a result of price appreciation,
when they become less attractive on a risk/return basis
relative to their growth prospects and other identified
securities, or when the assumptions used in Northern's
proprietary price/growth analysis change with respect
to the security.
INVESTMENT TECHNIQUES AND RISKS
In addition to the investment policies described
above (and subject to certain restrictions described
below), the Fund 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.
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
<PAGE>
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 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); securities which may only be resold
pursuant to Rule 144A under the Securities Act of 1933,
as amended; 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 the security 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
security. 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. The
Board of Directors has adopted liquidity guidelines and
delegated this determination to Northern. Rule 144A
securities will be treated as illiquid securities,
subject to the liquidity guidelines.
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
or indirectly through depository receipts. Depository
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 are 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.
<PAGE>
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.
Portfolio Turnover
Under normal market conditions, the Fund
anticipates that its portfolio turnover rate will
generally not exceed 150% and is expected to be between
75% and 150%. 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 150% 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. See "DIVIDENDS, CAPITAL GAIN
DISTRIBUTIONS AND TAX TREATMENT."
INVESTMENT RESTRICTIONS
The Company has adopted several restrictions on
the investments and other activities of the Fund that
may not be changed without shareholder approval. For
example, the Fund:
(1) May (i) borrow money from banks and (ii) make
other investments or engage in other transactions
permissible under the Investment Company Act of 1940
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.
(2) 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.
For additional investment restrictions, see the
Company's Statement of Additional Information.
<PAGE>
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.
("Frontegra") dated October 30, 1996, as amended as of
February 1, 1998 (the "Investment Advisory Agreement"),
pursuant to which Frontegra supervises the management
of the Fund's investments and business affairs, subject
to the supervision of the Company's Board of Directors.
Frontegra has entered into a subadvisory agreement with
Northern Capital Management Incorporated ("Northern")
under which Northern serves as the Fund's portfolio
manager and, subject to Frontegra's supervision,
manages the Fund's portfolio assets. Frontegra
provides office facilities for the Fund and pays the
salaries, fees, and expenses of all officers and
directors of the Fund who are interested persons of
Frontegra.
Frontegra was organized in 1996 and is located at
400 Skokie Boulevard, 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 Fund compensates
Frontegra for its management services at the annual
rate of 0.80% of the Fund's average daily net assets.
For the fiscal year ending October 31, 1998 and for an
indefinite amount of time beyond that date, Frontegra
has voluntarily agreed to waive its management fee
and/or reimburse the Fund's operating expenses to the
extent necessary to ensure that the Fund's Total
Operating Expenses do not exceed 0.80% of the Fund's
average daily net assets. Any such waiver or
reimbursement will have the effect of lowering the
overall expense ratio for the Fund and increasing the
Fund's overall return to investors at the time any such
amounts are waived and/or reimbursed. For the fiscal
year ending October 31, 1998, after waivers and
reimbursements, these expenses are expected to total
0.80% of the Fund's average daily net assets.
Northern is located at 8018 Excelsior Drive, Suite
300, Madison, Wisconsin 53717. Under the subadvisory
agreement, Northern is compensated by Frontegra for its
investment advisory services at the annual rate of (i)
0.25% of the Fund's average daily net assets prior to
the first date when the Fund's average daily net assets
exceed $200 million and (ii) 0.30% of the Fund's
average daily net assets on and after the first date
when the Fund's average daily net assets exceed $200
million. Northern provides continuous advice and
recommendations concerning the Fund's investments and
is responsible for selecting the broker/dealers who
execute the portfolio transactions. In executing such
transactions, Northern seeks to obtain the best net
results for the Fund. While Northern has not
previously provided investment advice to a mutual fund,
Northern serves as investment adviser to pension and
profit-sharing plans, institutional investors and
private accounts. As of December 31, 1997, Northern
had approximately $1.3 billion under management.
United Asset Management Corporation, an investment
adviser holding company, owns 100% of the voting stock
of Northern.
The day-to-day management responsibilities for the
Fund's portfolio are primarily handled by Northern's
portfolio management team. The portfolio management
team is managed primarily by Daniel T. Murphy and Brian
A. Hellmer. The Fund's overall investment strategy,
and portfolio allocation and risk parameters are
determined by Northern's Investment Committee, which
consists of Stephen L. Hawk and Messrs. Murphy and
Hellmer. The prior five year business experience
history for these individuals is as follows: Mr. Hawk,
Chairman of Northern, has been with the firm since
March 1983; Mr. Murphy, the President, Chief Investment
Officer, Portfolio Manager and a Director of Northern,
joined the firm in March 1995 and was a Senior
Investment Analyst at Brinson Partners, Inc. from
December 1989 to March 1995; and Mr. Hellmer, Senior
Vice President and Director of Research of Northern,
joined the firm in April 1996 and was an Investment
Officer of Fleet Investment Advisors from July 1989 to
April 1996. The portfolio management team reviews and
approves the analyst's recommendations and makes the
final buy and sell decisions. The Fund's portfolio is
reviewed on a weekly basis by the Investment Committee.
HOW TO PURCHASE SHARES
Shares of the Fund are sold on a continuous basis
at the next offering price after receipt of the order
by the Fund. This price is based on the net asset
value of the Fund and is determined as of the close of
trading on the New York Stock Exchange (the "NYSE")
(generally 4:00 p.m., Eastern Time) on each day the
NYSE is open. See "DETERMINATION OF NET ASSET VALUE."
The price at which your purchase will be effected is
based on the
<PAGE>
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 the
Fund is $100,000. Subsequent investments may be made
by mail or wire with a minimum subsequent investment of
$1,000. The 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 the Fund by check and
request the redemption of such shares within 15 days of
the initial purchase, payment of the redemption
proceeds may be delayed for up to seven business days
in order to ensure that the check has cleared. This is
a security precaution only and does not affect your
investment.
Initial Investment - Minimum $100,000
You may purchase shares of the Fund 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 Investor Services,
LLC (the "Transfer Agent"), 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 $23
service fee. You will also be responsible for any
losses suffered by the Fund as a result. All
applications to purchase shares of the Fund are subject
to acceptance by the Company and are not binding until
so accepted. The Company reserves the right to decline
an application in whole or in part.
Alternatively, you may place an order to purchase
shares of the Fund through a broker-dealer. Broker-
dealers may charge a transaction fee for placing orders
to purchase Fund shares. It is the responsibility of
the broker-dealer to place the order with the
appropriate Fund on a timely basis.
In addition, you may purchase shares of the Fund
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:
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 Taxpayer Identification Number)
(identify which Fund to purchase)
The Fund is 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.
<PAGE>
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 business 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. In addition to the redemption
procedures described below, redemptions may also be
made through broker-dealers who may charge a commission
or other transaction fee.
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,
guardians, 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 $10 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 and loan associations, credit unions, brokerage
firms and others.
Your account may be terminated by the 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 address of record within
seven business days of the redemption.
EXCHANGE PRIVILEGE
You may exchange your shares in the 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 Fund or its
shareholders. 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., various qualified retirement plans for
adoption by individuals and employers. Participants in
these plans can accumulate shares of the Fund on a tax-
deferred basis. Please call 1-888-825-2100 for a
current list of the plans offered.
<PAGE>
DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAX TREATMENT
The 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 gains distributed by the Fund 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 the 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. Shareholders 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 annually by the
Fund. Capital gains are usually distributed annually
in December. When a dividend or capital gain is
distributed, the 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 Fund 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 business days
prior to the record date of any dividend or capital
gain distribution.
If you do not furnish the Fund with your correct
Social Security Number or Taxpayer Identification
Number and/or the Fund receives notification from the
Internal Revenue Service requiring back-up withholding,
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
The 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
The Fund's net asset value per share is determined
as of the close of trading on the NYSE (generally 4:00
p.m., Eastern Time) on each day the NYSE is open for
business. The Fund is not required to calculate its
net asset value on days during which the 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
<PAGE>
institutional-sized trading units of debt securities
without regard to the existence of sale or bid prices
when such values are believed by Northern to reflect
more accurately the fair market value of such
securities; otherwise, actual sale 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. Other exchange-
traded securities (generally foreign securities) will
be valued based on market quotations.
Securities quoted in foreign currency will be
valued in U.S. dollars at the foreign currency exchange
rates that are prevailing at the time the daily net
asset value per share is determined. Foreign currency
exchange rates are generally determined prior to the
close of trading on the NYSE. Occasionally, events
affecting the value of foreign investments and such
exchange rates occur between the time at which they are
determined and the close of trading on the NYSE. Such
events would not normally be reflected in the
calculation of the Fund's net asset value on that day.
If events that materially affect the value of the
Fund's foreign investments or the foreign currency
exchange rates occur during such period, the
investments will be valued at their fair value as
determined in good faith by or under the direction of
the Board of Directors of the Company. Certain of the
securities holdings of the Fund may, from time to time,
be listed primarily on foreign exchanges that trade on
days other than those on which the NYSE is open for
business (e.g., Saturday). As a result, the net asset
value of the Fund may be significantly affected by such
trading on days when investors cannot effect
transactions in their accounts.
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 Fund'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 you make, 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, you
should call the Fund's Transfer Agent at
1-888-825-2100. Investors who have general questions
about the Fund 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 is an open-end investment company
which was organized as a Maryland corporation on May
24, 1996. The Company is authorized to issue
200,000,000, $.01 par value shares, in addition to the
100,000,000, $.01 par value shares of the Fund, 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.
<PAGE>
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 January 1,
1998, two persons 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 value of each Fund and provides
administrative services (which include clerical,
compliance and regulatory services such as filing all
required federal income and excise tax returns and
state property tax returns, assisting with regulatory
filings, preparing financial statements and monitoring
expense accruals). For the foregoing, the
Administrator receives from the Fund a fee, computed
daily and payable monthly based on the Fund's average
net assets at the annual rate of 0.175% on the first
$50,000,000 of average net assets and 0.04% of average
net assets in excess of $50,000,000, subject to an
annual minimum of $56,200, plus out of pocket expenses.
CUSTODIAN AND TRANSFER AGENT
UMB Bank, n.a., 928 Grand Boulevard, Kansas City,
Missouri 64141 acts as Custodian of the Fund's assets.
Sunstone Investor Services, LLC, 207 E. Buffalo Street,
Suite 315, Milwaukee, Wisconsin 53202-5712 acts as
Dividend-Disbursing and Transfer Agent for the Fund.
COMPARISON OF INVESTMENT RESULTS
The 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 the 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 the Fund's performance over a stated
period of time of greater than one year.
Average annual total return, total return and
cumulative total return are based upon the historical
results of the Fund and are not necessarily
representative of the future performance of the Fund.
Additional information concerning the performance of
the 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 the 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, Illinois 60062
SUB-ADVISER
Northern Capital Management Incorporated
8018 Excelsior Drive
Suite 300
Madison, Wisconsin 53717
CUSTODIAN
UMB Bank, n.a.
928 Grand Boulevard
Kansas City, Missouri 64141
DIVIDEND-DISBURSING AND TRANSFER AGENT
Sunstone Investor Services, LLC
207 E. Buffalo Street, Suite 315
P.O. Box 2142
Milwaukee, Wisconsin 53201-2142
ADMINISTRATOR AND FUND ACCOUNTANT
Sunstone Financial Group, Inc.
207 E. Buffalo Street, Suite 400
Milwaukee, Wisconsin 53202-5712
<PAGE>
AUDITORS
Ernst & Young LLP
Sears Tower
233 S. Wacker Drive
Chicago, Illinois 60606-6301
LEGAL COUNSEL
Godfrey & Kahn, S.C.
780 N. Water Street
Milwaukee, Wisconsin 53202
<PAGE>
Reg. Nos. 333-7305; 811-7685
Filed pursuant to Rule 497(c)
STATEMENT OF ADDITIONAL INFORMATION
FRONTEGRA FUNDS, INC.
Frontegra Total Return Bond Fund
Frontegra Opportunity Fund
Frontegra Growth Fund
c/o Sunstone Investor Services, LLC
P.O. Box 2142
Milwaukee, Wisconsin 53201-2142
1-888-825-2100
This Statement of Additional Information is not a
prospectus and should be read in conjunction with the
Prospectuses of the Frontegra Total Return Bond Fund
(the "Total Return Bond Fund"), the Frontegra
Opportunity Fund (the "Opportunity Fund") and the
Frontegra Growth Fund (the "Growth Fund"), each of
which is a series of Frontegra Funds, Inc. (the
"Company") (individually, a "Fund," and collectively,
the "Funds"), dated January 30, 1998. Requests for
copies of a 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
January 30, 1998.
<PAGE>
FRONTEGRA FUNDS, INC.
TABLE OF CONTENTS
PAGE
INVESTMENT RESTRICTIONS 1
INVESTMENT POLICIES AND TECHNIQUES 2
ILLIQUID SECURITIES 2
SHORT-TERM FIXED INCOME SECURITIES 3
SHORT SALES AGAINST THE BOX 4
WARRANTS 5
VARIABLE- OR FLOATING-RATE SECURITIES 5
WHEN-ISSUED SECURITIES 6
NON-INVESTMENT GRADE DEBT SECURITIES (JUNK BONDS) 6
HEDGING STRATEGIES 7
FOREIGN INVESTMENT COMPANIES 14
DEPOSITARY RECEIPTS 14
LENDING OF PORTFOLIO SECURITIES 15
REPURCHASE AGREEMENTS 15
DIRECTORS AND OFFICERS 15
PRINCIPAL SHAREHOLDERS 17
INVESTMENT ADVISER 18
FUND TRANSACTIONS AND BROKERAGE 19
CUSTODIAN 21
DIVIDEND-DISBURSING AND TRANSFER AGENT 21
TAXES 21
DETERMINATION OF NET ASSET VALUE 21
SHAREHOLDER MEETINGS 21
PERFORMANCE INFORMATION 21
TOTAL RETURN 22
YIELD 22
VOLATILITY 22
COMPARISONS 23
INDEPENDENT AUDITORS 23
FINANCIAL STATEMENTS 23
APPENDIX - BOND RATINGS 35
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 each Prospectus dated January 30, 1998, 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 Total Return Bond
Fund is a high level of total return, consistent with
the preservation of capital. The investment objective
of the Opportunity Fund is capital appreciation. The
investment objective of the Growth Fund is long-term
capital appreciation. The investment objective and
policies of each Fund are described in detail in each
Prospectus under the caption "INVESTMENT OBJECTIVE AND
POLICIES."
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).
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.
<PAGE>
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.
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. 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.
7. 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.
8. 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 each
Prospectus under the caption "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, none of the Funds 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 Growth 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.
<PAGE>
The Board of
Directors has delegated to each Fund's respective
subadviser 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
each subadviser 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 obligated to
pay all or part of the registration expenses and a
considerable period may elapse between the time of the
decision to sell a security 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 Growth
Fund should be in a position where more than 5% of the
value of its net assets are invested in illiquid
securities and the Total Return Bond Fund and the
Opportunity Fund should be in a position where more
than 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. The Growth Fund intends
to be fully invested at all times and accordingly will
only hold cash or short-term fixed income securities to
meet anticipated redemption requests, pending
investment and to pay expenses which, in any case,
generally will not exceed 20% of its total assets. The
Growth Fund may, however, temporarily exceed this 20%
limitation, but only in circumstances pending
investment and only for short periods of time. 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
<PAGE>
the
certificate on the date specified thereon.
Under current Federal Deposit Insurance
Corporation 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, 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 Asset Management, Inc.
(the "Adviser") 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. The Adviser 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. The Adviser or a
subadviser 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 the Adviser or a subadviser, of
comparable quality.
Short Sales Against the Box
When the Adviser or a subadviser believes that the
price of a particular security held by the Total Return
Bond Fund or the Growth 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
<PAGE>
in the future. The Total
Return Bond Fund and the Growth Fund will limit their
transactions in short sales against the box to 5% of
their respective 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. 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 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 15% 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.
<PAGE>
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. 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).
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.
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
<PAGE>
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 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.
<PAGE>
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, less the
amount by which any such option positions are in the
money (within the meaning of the CEA), do not exceed 5%
of the net asset value of the respective Funds. In
addition, none of the Funds 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.
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.
<PAGE>
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 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
<PAGE>
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.
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
<PAGE>
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 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.
<PAGE>
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.
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. 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. 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.
The Funds will distribute to shareholders at least
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.
<PAGE>
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 Adviser or a subadviser 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.
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.
<PAGE>
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-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.
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.
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 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
derivative 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
<PAGE>
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 and the Growth 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 each
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 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
its total assets 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.
<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 Adviser or a
subadviser 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
1940 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 the Adviser 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 the Adviser 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.
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
<PAGE>
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 January 1, 1998, officers and directors of
the Company owned 34 shares of common stock of the
Total Return Bond Fund, 16 shares of common stock of
the Opportunity Fund and no shares of common stock of
the Growth Fund. Directors and officers of the Company
who are also officers, directors, employees, or
shareholders of the Adviser do not receive any
remuneration from the Funds for serving as directors or
officers.
The following table provides information relating
to compensation paid to directors of the Company for
their services as such for the fiscal year ended
October 31, 1997:
Name Cash Compensation(1) O ther 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 1940 Act, will receive $500 for each
Board of Directors meeting he attends. 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 1998, and the Funds
are not expected to have assets equal to or exceeding
$100,000,000 during such time. Thus, the disinterested
director described above is expected to receive $2,000
during such time period. The disinterested director
may invest his compensation in shares of the Funds.
PRINCIPAL SHAREHOLDERS
As of January 1, 1998, 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:
Name and Address Fund No. Shares Percentage
Bankers Trust Company, Trustee Total Return 177,871.368 11.363%
F/B/O Culver Educational Foundation Bond Fund
Mike Bloebaum
MS7200
648 Grassmere Park Road
Nashville, Tennessee 37211
Walt Loukota and John Negro, Trustees Total Return 473,592.336 30.254%
IBEW Local 405 Retirement Savings Fund Bond Fund
5907 16th Avenue, S.W., Suite 1
Cedar Rapids, Iowa 52404
Jerry Branson and Paul Hopkins, Total Return 245,932.368 15.711%
Trustees Bond Fund
IBEW Local 461 Pension Fund
1661 Landmark Avenue
Aurora, Illinois 60506
<PAGE>
Bankers Trust Company, Trustee Total Return 492,856.887 31.485%
F/B/O Southern Illinois Hospital Bond Fund
Post Office Box 9014
Church Street Station
New York, New York 10008
Culver Educational Foundation Opportunity Fund 135,511.366 57.524%
1300 Academy Road
Post Office Box 156
Culver, Indiana 46511-1291
G. Segal, H. Silverstone and Opportunity Fund 40,088.016 17.017%
B. Schneidewind, Trustees
Euromarkets Designs Inc. Profit
Sharing Trust
725 Landwehr Road
Northbrook, Illinois 60062
Reams Foundation Inc. Opportunity Fund 54,638.957 23.193%
Dave Dingle
Northern Trust Securities, Inc.
50 South LaSalle Street, B-12
Chicago, Illinois 60675-0001
As of January 1, 1998, two persons 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. (the "Adviser")
is the investment adviser to the Funds. Mr. William D.
Forsyth III and Mr. Thomas J. Holmberg, Jr., each own
50% of the Adviser. A brief description of the Funds'
investment advisory agreements is set forth in each
Prospectus under "MANAGEMENT."
The advisory agreement between the Adviser and the
Funds is dated October 30, 1996, while the amendment to
add the Growth Fund is dated as of February 1, 1998
(the "Advisory Agreement"). The Advisory Agreement has
an initial term of two years (with an October 30, 1996
or February 1, 1998 starting point, as the case may be)
and 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 1940 Act). Each annual renewal must
also be approved by the separate vote of the Company's
disinterested director, cast in person at a meeting
called for the purpose of voting on such approval. The
Advisory Agreement as it relates to the Total Return
Bond and Opportunity Funds was approved by the vote of
the Company's disinterested director on October 9, 1996
and by the initial shareholders of the Total Return
Bond Fund and the Opportunity Fund on October 9, 1996.
The amendment to the Advisory Agreement to add the
Growth Fund was recently approved by the disinterested
director on December 15, 1997. 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 the Adviser, and will terminate
automatically in the event of its assignment.
Under the terms of the Advisory Agreement, the
Adviser supervises the management of the Funds'
investments and business affairs, subject to the
supervision of the Company's Board of Directors. At
its expense, the Adviser 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 the Adviser a monthly advisory fee at the
annual rate of 0.65% of the average daily net asset
value of the Fund, the Total Return Bond Fund pays to
the Adviser a
<PAGE>
monthly advisory fee at the annual rate
of 0.40% of the average daily net asset value of the
Fund and the Growth Fund pays to the Adviser a monthly
advisory fee at the annual rate of 0.80% of the average
daily net asset value of the Fund. From time to time,
the Adviser may voluntarily waive all or a portion of
its management fee for the Funds. For the fiscal year
ended October 31, 1997, the Adviser voluntarily agreed
to waive its management fee and/or reimburse the
operating expenses of both the Total Return Bond Fund
and the Opportunity Fund to the extent necessary to
ensure that the total operating expenses of the Total
Return Bond Fund and of the Opportunity Fund did not
exceed 0.50% and 0.90%, respectively, of the Fund's
average daily net assets. The Adviser has voluntarily
agreed to continue this waiver/reimbursement policy for
the fiscal year ending October 31, 1998, and for an
indefinite period of time thereafter. During the year
ended October 31, 1997, the Adviser received no
compensation from the Total Return Bond Fund or the
Opportunity Fund for its services under the Advisory
Agreement. The amounts received by the Adviser for
such services would have been $73,665 for the Total
Return Bond Fund and $1,796 for the Opportunity Fund
had the Adviser not waived its fees during the year
ended October 31, 1997. For the fiscal year ending
October 31, 1998, and for an indefinite amount of time
thereafter, the Adviser has voluntarily agreed to waive
its management fee and/or reimburse the operating
expenses of the Growth Fund to the extent necessary to
ensure that such Fund's total operating expenses do not
exceed .80% of such Fund's average daily net assets.
The organizational expenses of the Total Return Bond
Fund and the Opportunity Fund were advanced by the
Adviser 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 and $40,000 for the Opportunity Fund.
The organizational expenses for the Growth Fund will be
advanced by the Adviser and will be reimbursed by the
Fund over a period of not more than 60 months and are
estimated to be $40,000.
The Advisory Agreement requires the Adviser 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, if any, 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. 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 the Adviser's fee, subject to later
adjustment, month by month, for the remainder of the
Funds' fiscal year. The Adviser may from time to time
voluntarily absorb expenses for the Funds in addition
to the reimbursement of expenses in excess of
applicable limitations.
The Adviser has entered into an agreement with
Reams Asset Management Company, LLC ("Reams") under
which Reams serves as the subadviser of the Total
Return Bond Fund and the Opportunity Fund and, subject
to the Adviser's supervision, manages the portfolio
assets of the Total Return Bond Fund and the
Opportunity Fund. (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 the Adviser 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 such Funds
and the Adviser, and with the exception of defined
contribution or 401(k) investments in such Funds, for
initial investments of over $15 million the Adviser
will compensate Reams an extra 0.10% of the average
daily net assets of such investments. Frontier
Partners, Inc., an affiliate of the Adviser, acts as a
third party solicitor on behalf of Reams and has a 2.2%
nonvoting ownership interest in Reams. Mr. Fred W.
Reams owns units representing a majority of the voting
rights of Reams.
The Adviser has also entered into an agreement
with Northern Capital Management Incorporated
("Northern") under which Northern serves as the
subadviser of the Growth Fund and, subject to the
Adviser's supervision, manages the Growth Fund's
portfolio assets. Under this agreement, Northern is
compensated for its advisory services at the annual
rate of (i) 0.25% of the Growth Fund's average daily
net assets prior to the first date when the Growth
Fund's average daily net assets exceed $200 million and
(ii) 0.30% of the Growth Fund's average daily net
assets on and after the first date when the Fund's
average daily net assets exceed $200 million. Frontier
Partners, Inc., an affiliate of the Adviser, acts as a
third party solicitor on behalf of Northern. United
Asset Management, an investment adviser holding
company, owns 100% of the voting stock of Northern.
<PAGE>
FUND TRANSACTIONS AND BROKERAGE
Reams and Northern (the "Subadvisers") are
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. The
Subadvisers seek 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 the
Subadvisers 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, the Subadvisers
consider 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.
The Total Return Bond Fund did not pay any
brokerage commissions for the fiscal year ended
October 31, 1997. The Opportunity Fund paid $2,996 in
brokerage commissions for the fiscal year ended October
31, 1997. As of the date hereof, the Growth Fund has
not commenced operations.
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).
In selecting brokers, the Subadvisers consider
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 the Subadvisers
determine 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. The Subadvisers
believe that the research information received in this
manner provides the Funds with benefits by
supplementing the research otherwise available to the
Funds. The Subadvisory Agreements provide that such
higher commissions will not be paid by the Funds unless
(a) the Subadvisers determine in good faith that the
amount is reasonable in relation to the services in
terms of the particular transaction or in terms of the
Subadvisers' overall responsibilities with respect to
the accounts as to which they exercise 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 Agreements; and
(c) in the opinion of the Subadvisers, 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 the Subadvisers' receipt of research
services.
The Subadvisers place portfolio transactions for
other advisory accounts managed by the Subadvisers.
Research services furnished by firms through which the
Funds effect their securities transactions may be used
by the Subadvisers in servicing all of its accounts;
not all of such services may be used by the Subadvisers
in connection with the Funds. The Subadvisers believe
it is not possible to measure separately the benefits
from research services to each of the accounts
(including the Funds) managed by them. 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, the Subadvisers believe such costs to the
Funds will not be disproportionate to the benefits
received by the Funds on a continuing basis. The
Subadvisers seek to allocate portfolio transactions
equitably whenever concurrent decisions are made to
purchase or sell securities by the Funds and
<PAGE>
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 the
Subadvisers 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.
The Total Return Bond Fund anticipates that its
portfolio turnover rate will not exceed 225%, and is
expected to be between 150% and 225%. The Opportunity
Fund anticipates that its portfolio turnover rate will
not exceed 125%, and is expected to be between 75% and
125%. The Growth Fund anticipates that its portfolio
turnover rate will not exceed 150%, and is expected to
be between 75% and 150%. 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, UMB Bank, n.a.,
928 Grand Boulevard, 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.
DIVIDEND-DISBURSING AND TRANSFER AGENT
Sunstone Investor Services, LLC acts as dividend-
disbursing and transfer agent for the Fund and 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.
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
TREATMENT" in each 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 are not required to 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, Martin Luther King, Jr. 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.
<PAGE>
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 1940 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 1940 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.
PERFORMANCE INFORMATION
As described in the "COMPARISON OF INVESTMENT
RESULTS" section of each Fund's 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.
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:
<PAGE>
a-b
YIELD = [2 --- + 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 S&P 500. 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.
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 S&P 500, the NASDAQ Over-the-Counter Composite
Index, the Russell 2500 Index, the Russell 1000 Growth
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.
<PAGE>
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.
FINANCIAL STATEMENTS
The following audited financial statements of the
Total Return Bond Fund for the period from November 25,
1996 (commencement of operations) to October 31, 1997
and of the Opportunity Fund for the period from July
31, 1997 (commencement of operations) to October 31,
1997 are incorporated herein by reference to each
Fund's Annual Report to Shareholders:
(a) Schedule of Investments.
(b) Statements of Assets and Liabilities.
(c) Statements of Operations.
(d) Statements of Changes in Net Assets.
(e) Financial Highlights.
(f) Notes to Financial Statements.
(g) Report of Independent Auditors.
Each 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. Financial
statements for the Growth Fund are not available since
the Fund, as of the date hereof, has not commenced
operations.
<PAGE>
FRONTEGRA OPPORTUNITY FUND
Schedule of Investments
December 31, 1997 (Unaudited)
Number
of Shares Value
COMMON STOCKS 96.6%
Commercial Services 4.2%
6,800 Banta Corp. $ 183,600
4,700 Lawson Products, Inc. 139,825
323,425
Consumer Durables 8.6%
6,500 CLARCOR Inc. 192,563
7,000 Department 56, Inc. * 201,250
3,000 Harman International Industries, Inc. 127,313
6,100 Jostens, Inc. 140,681
661,807
Consumer Services 6.7%
6,700 Carmike Cinemas, Inc. * 192,206
12,500 Jones Intercable, Inc. - Class A * 219,531
5,600 Lone Star Steakhouse & Saloon, Inc. * 98,000
509,737
Electronic Technology 7.9%
11,400 Auspex Systems, Inc. * 114,000
6,100 BancTec, Inc. * 163,556
11,100 Periphonics Corp. * 97,125
10,000 Robotic Vision Systems, Inc. * 115,000
4,300 SpeedFam International, Inc. * 113,950
603,631
Energy Minerals 5.3%
6,900 Mitchell Energy & Development Corp. 200,963
18,200 Santa Fe Energy Resources, Inc. * 204,750
405,713
Finance 2.9%
11,700 First Bell Bancorp, Inc. 222,300
Health Technology 4.4%
11,700 Haemonetics Corp. * 163,800
8,300 Lunar Corp. * 170,150
333,950
<PAGE>
Number
of Shares Value
Industrial Services 5.6%
18,100 Dames & Moore, Inc. $ 239,825
7,300 Jacobs Engineering Group Inc. 185,238
425,063
Non - Energy Materials 6.8%
8,500 AK Steel Holding Corp. 150,344
9,100 Giant Cement Holding, Inc. * 210,437
2,700 Southdown, Inc. 159,300
520,081
Process Industries 8.2%
7,550 Ferro Corp. 183,559
11,200 Furon Co. 233,800
7,700 Shorewood Packaging Corp. * 205,975
623,334
Producer Manufacturing 19.2%
6,200 AFC Cable Systems, Inc. * 184,450
9,100 Global Industrial Technologies, Inc. * 154,131
15,200 Griffon Corp. * 222,300
6,900 Holophane Corp. * 170,775
12,600 JLG Industries, Inc. 177,975
9,900 Juno Lighting, Inc. 173,250
5,900 Standex International Corp. 207,975
5,800 Wolverine Tube, Inc. * 179,800
1,470,656
Retail 1.9%
18,400 Homebase, Inc. * 144,900
Real Estate Investment Trusts 14.9%
6,700 Amli Residential Properties Trust 149,075
6,800 Associated Estates Realty Corp. 161,075
6,400 Colonial Properties Trust 192,800
1,700 Great Lakes REIT, Inc. 33,044
4,400 Mid-Atlantic Realty Trust 64,625
6,500 Sovran Self Storage, Inc. 210,844
6,800 Storage Trust Realty 178,925
11,500 Winston Hotels, Inc. 150,937
1,141,325
Total Common Stocks
(cost $7,239,156)
7,385,922
<PAGE>
Principal
Amount Value
Short-Term Investment 3.8%
$289,370 UMB Bank Money Market $ 289,370
Fiduciary
Total Short-Term Investment
(cost $289,370) 289,370
Total Investments
(cost $7,528,526) 100.4% 7,675,292
Liabilities, less Cash and (0.4%) (27,326)
Other Assets
NET ASSETS 100.0% $7,647,966
* Non-income producing
See notes to financial statements.
<PAGE>
FRONTEGRA OPPORTUNITY FUND
Statement of Assets and Liabilities
December 31, 1997 (Unaudited)
ASSETS:
Investments at value (cost $7,675,292
$7,528,526)
Cash 110,456
Dividends and interest 12,080
receivable
Receivable from adviser 50,921
Deferred organizational 36,994
costs, net
Other assets 6,503
Total assets 7,892,246
LIABILITIES:
Payable for investments 146,656
purchased
Payable to adviser - 68,056
expenses
Accrued expenses 20,994
Accrued investment advisory 8,574
fee
Total liabilities 244,280
NET ASSETS $7,647,966
NET ASSETS CONSIST OF:
Paid in capital $7,453,289
Undistributed net 19,531
investment income
Accumulated net realized 28,380
gains on investments
Net unrealized appreciation 146,766
on investments
NET ASSETS $7,647,966
CAPITAL STOCK, $0.01 PAR
VALUE
Authorized 100,000,000
Issued and outstanding 235,574
NET ASSET VALUE, REDEMPTION PRICE $32.47
AND OFFERING PRICE PER
SHARE
See notes to financial statements.
<PAGE>
FRONTEGRA OPPORTUNITY FUND
Statement of Operations
Two Months Ended December 31, 1997
(Unaudited)
INVESTMENT INCOME:
Dividends $21,330
Interest 2,051
23,381
EXPENSES:
Fund administration and accounting
fees 10,027
Investment advisory fees 6,778
Federal and state registration fees 2,470
Shareholder servicing 2,319
Legal fees 1,672
Amortization of organizational costs 1,350
Reports to shareholders 1,254
Custody fees 940
Audit fees 919
Insurance 279
Pricing 255
Director's fees and expenses 179
Other 16
Total expenses before waiver and 28,458
reimbursements
Waiver and reimbursements of expenses (19,074)
by adviser
Net expenses 9,384
NET INVESTMENT INCOME 13,997
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS:
Net realized gain on investments 29,585
Change in unrealized appreciation on
investments 40,447
Net Gains on Investments 70,032
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $84,029
See notes to financial statements.
<PAGE>
FRONTEGRA OPPORTUNITY FUND
Statements of Changes in Net Assets
(Unaudited)
Two Months Period
Ended Ended
December October
31, 1997 31, 1997(1)
OPERATIONS:
Net investment income $13,997 $7,206
Net realized gain on investments 29,585 (1,205)
Change in unrealized 40,447 106,319
appreciation on investments
Net increase in net assets 84,029 112,320
resulting from operations
DISTRIBUTIONS PAID FROM:
Net investment income (2,500) -
Net decrease in net assets (2,500) -
resulting from distributions
paid
CAPITAL SHARE TRANSACTIONS:
Shares sold 1,664,269 5,787,348
Shares issued to holders in 2,500 -
reinvestment of dividends
Net increase 1,666,769 5,787,348
TOTAL INCREASE IN NET ASSETS 1,748,298 5,899,668
NET ASSETS:
Beginning of period 5,899,668 -
End of period (includes $7,647,966 $5,899,668
undistributed net investment
income of $19,531 and $8,034,
respectively)
(1) Commenced operations on July 31, 1997
See notes to financial statements.
<PAGE>
FRONTEGRA OPPORTUNITY FUND
Financial Highlights (Unaudited)
Two Period
Months Ended
Ended
December October
31, 1997 31, 1997(1)
Net asset value, beginning of $32.22 $30.00
period
Income from investment
operations:
Net investment income 0.05 0.04
Net realized and unrealized gain 0.21 2.18
on investments
Total income from investment 0.26 2.22
operations
Less distributions paid:
From net investment income (0.01) -
Total distributions paid (0.01) -
Net asset value, end of period $32.47 $32.22
Total return (2) 0.81% 7.40%
Supplemental data and ratios:
Net assets, end of period (in $7,648 $5,900
thousands)
Ratio of expenses to average net 0.90% 0.90%
assets (3)(4)
Ratio of net investment income to 1.34% 2.61%
average net assets (3)(4)
Portfolio turnover rate (2) 9% 9%
Average commission rate paid on $0.0456 $0.0423
portfolio investment transactions
(1) Commenced operations on July 31, 1997
(2) Not annualized
(3) Net of waiver and reimbursements by Adviser.
Without waiver and reimbursements of expenses,
the ratio of expenses to average net assets
would have been 2.72% and 12.02%, and the ratio
of net investment income to average net assets
would have been (0.48)% and (8.51)% for the period
ended December 31, 1997 and the period July 31, 1997
to October 31, 1997.
(4) Annualized
See notes to financial statements.
<PAGE>
Frontegra Opportunity Fund
Notes to Financial Statements
December 31, 1997 (Unaudited)
(1) Organization
Frontegra Funds, Inc. ("Frontegra") was
incorporated on May 24, 1996 as a Maryland
corporation and is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"),
as an open-end management investment company
issuing its shares in series, each series
representing a distinct portfolio with its own
investment objectives and policies. Frontegra
consists of two series; the Frontegra Opportunity
Fund (the "Fund") and the Frontegra Total Return
Bond Fund. The Fund commenced operations on July
31, 1997. Costs incurred by the Fund in connection
with its organization, registration and the initial
public offering of shares have been deferred and
will be amortized over the period of benefit, but
not to exceed five years from the date upon which
the Fund commenced its investment activities.
(2)Significant Accounting Policies
The following is a summary of significant
accounting policies consistently followed by the
Fund in the preparation of its financial
statements. These policies are in conformity with
generally accepted accounting principles.
(a)Investment Valuation
Securities (other than short-term instruments)
for which market quotations are readily
available are valued at the last trade price on
the material securities exchange on which such
securities are primarily traded. Securities
for which there were no transactions on a given
day or securities not listed on a national
securities exchange are valued at the most
recent bid prices. Securities maturing within
60 days or less when purchased are valued by
the amortized cost method. Any securities for
which market quotations are not readily
available are valued at their fair value as
determined in good faith by the Sub-Adviser
pursuant to guidelines established by the Board
of Directors.
<PAGE>
(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 will
be declared and paid at least semi-annually and
distributions of net realized gains, if any,
will be declared and paid at least annually.
Distributions to share-holders are recorded on
the ex-dividend date. The character of
distributions made during the year from net
investment income or net realized gain may
differ from the characterization for federal
income tax purposes due to differences in the
recognition of income, expense and gain items
for financial statement and tax purposes.
Where appropriate, reclassifications between
net asset accounts are made for such
differences that are permanent in nature.
(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.
<PAGE>
(4) Capital Share Transactions
Transactions in shares of the Fund were as follows:
Two Months Period Ended
Ended October 31,
December 31, 1997(1)
1997
Shares sold 52,395 183,102
Shares issued to holders in 77 -
reinvestment of dividends
52,472 183,102
(1) Commenced operations on July 31,1997
(5)Investment Transactions
The aggregate purchases and sales of securities,
excluding short-term investments for the Fund for
the period November 1, 1997 to December 31, 1997
are summarized below:
Purchases $2,110,758
Sales $588,940
At December 31, 1997, gross unrealized appreciation
and depreciation of investments were as follows:
Appreciation $386,521
Depreciation (239,755)
Net appreciation on $146,766
investments
This report is submitted for the general information of
the shareholders of the Fund. It is not authorized for
distribution to prospective investors unless
accompanied or preceded by an effective prospectus for
the Fund. The Prospectus includes more complete
information about management fees and expenses,
investment objectives, risks and operating policies of
the Fund. Please read the Prospectus carefully.
<PAGE>
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, inasmuch 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.
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 Standard & Poor's. 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 highest. While such
debt will likely have some quality and protective
characteristics, these are outweighed by large
uncertainties or major exposures to adverse conditions.
<PAGE>
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-' 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.
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.
<PAGE>
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 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 and preferred stock
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 or
preferred issue 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 and preferred stock carrying 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 and preferred stock considered to be
investment grade and of the highest credit
quality. The obligor has an exceptionally
strong ability to pay interest and/or
dividends and repay principal, which is
unlikely to be affected by reasonably
foreseeable events.
AA Bonds and preferred stock considered to be
investment grade and of very high credit
quality. The obligor's ability to pay
interest and/or dividends 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 and preferred stock considered to be
investment grade and of high credit quality.
The obligor's ability to pay interest and/or
dividends and repay principal is considered
to be strong, but
<PAGE>
may be more vulnerable to
adverse changes in economic conditions and
circumstances than debt or preferred
securities with higher ratings.
BBB Bonds and preferred stock considered to be
investment grade and of satisfactory credit
quality. The obligor's ability to pay
interest or dividends 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 securities and, therefore,
impair timely payment. The likelihood that
the ratings of these bonds or preferred stock
will fall below investment grade is higher
than for securities with higher ratings.
Fitch speculative grade bond or preferred stock
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
issues not in default. For defaulted bonds or
preferred stock, 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 or possible recovery value in
bankruptcy, 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 or preferred stock 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 or preferred stock are considered
speculative. The obligor's ability to pay
interest or dividends 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 or preferred stock are considered
highly speculative. While bonds in this
class are currently meeting debt service
requirements or paying dividends, 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 or preferred stock 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 or preferred stock are minimally
protected. Default in payment of interest
and/or principal seems probable over time.
C Bonds or preferred stock are in imminent
default in payment of interest or principal
or suspension of preferred stock dividends is
imminent.
DDD,
DD
and D Bonds are in default on interest and/or
principal payments or preferred stock
dividends are suspended. Such securities 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 securities, 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.
Review of indenture restrictions is important to the
analysis of a company's operating and financial
constraints. From time to time, Duff & Phelps Credit
Rating Co. places issuers or security classes on Rating
Watch. The Rating Watch Status results form a need to
notify investors and the issuer that there are
conditions present leading us to reevaluate the current
rating(s). A listing on Rating Watch, however, does
not mean a rating change is inevitable. The Rating
Watch Status can either be resolved quickly or over a
longer period of time, depending on the reasons
surrounding the placement on Rating Watch. The "up"
designation means a rating may be upgraded; the "down"
designation means a rating may be downgraded, and the
uncertain designation means a rating may be raised or
lowered.
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 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.
AA Risk is modest, but may vary slightly from time to
AA- time because of economic conditions.
A+ Protection factors are average but adequate.
A However, risk factors are more variable and greater
A- in periods of economic stress.
BBB+ Below average protection factors but still considered
BBB sufficient for prudent investment. Considerable
BBB- variability in risk during economic cycles.
BB+ Below investment grade but deemed likely to meet
BB obligations when due. Present or prospective
BB- financial protection factors fluctuate according to
industry conditions or company fortunes. Overall
quality may move up or down frequently within this
category.
B+ Below investment grade and possessing risk that
B obligations will not be met when due. Financial
B- protection factors will fluctuate widely according to
economic cycles, industry conditions and/or
<PAGE>
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
DP scheduled principal and/or interest payments.
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.
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
<PAGE>
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.
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.
<PAGE>
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 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.
From time to time, Duff & Phelps places issuers or
security classes on Rating Watch. The Rating Watch
status results from a need to notify investors and the
issuer that there are conditions present leading us to
re-evaluate the current rating(s). A listing on Rating
Watch, however, does not mean a rating change is
inevitable.
The Rating Watch status can either be resolved
quickly or over a longer period of time, depending on
the reasons surrounding the placement on Rating Watch.
The "up" designation means a rating may be upgraded:
the "down" designation means a rating may be
downgraded, and the "uncertain" designation means a
rating may be raised or lowered.
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.
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.
MW1-96198-6
