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FRONTEGRA FUNDS
ANNUAL REPORT
Frontegra Growth Fund
FRONTEGRA ASSET MANAGEMENT, INC.
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October 31, 1998
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FRONTEGRA FUNDS
Table of Contents
Shareholder Letter 1
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Investment Highlights 3
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Schedule of Investments 4
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Statement of Assets and Liabilities 7
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Statement of Operations 8
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Statement of Changes in Net Assets 9
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Financial Highlights 10
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Notes to Financial Statements 11
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Report of Independent Auditors 14
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This report is submitted for the general information of the shareholders of the
Fund. It is not authorized for distribution to prospective investors unless
accompanied or preceded by an effective Prospectus for the Fund. The Prospectus
includes more complete information about management fees and expenses,
investment objectives, risks and operating policies of the Fund. Please read the
Prospectus carefully.
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FRONTEGRA FUNDS
DEAR FELLOW SHAREHOLDERS:
We're glad to finally report positive absolute and relative performance results
for the Frontegra Growth Fund (the "Fund") as we achieved an 18.5% gain since
the trough in the stock market on October 8. The recent recovery followed what
had been a very difficult environment for all equity investors and specifically
our shareholders from the inception of the Fund on March 18, 1998, through early
October. During this period the large-cap, mid-cap and small-cap market indices
declined 11%, 23% and 34%, respectively, while the Fund reported a disappointing
21.5% decline.
Since inception, the Fund is down 7.10% versus modest gains of 2.66% and 4.92%
achieved by the S&P 500 Stock Index and the Russell Growth Index, respectively.
The underperformance primarily reflects our lower exposure to the "mega-
capitalization" companies that have been largely responsible for the strong
performances of these indices.
MEASURING MARKET RETURNS
The returns of primary market indices, such as the S&P 500 Stock Index and the
Russell Growth Index, have not been a good proxy for the typical stock during
1998. The discrepancy results from these indices, which are market-
capitalization weighted, being dominated by the 15-25 "mega-capitalization"
companies versus an equal-weighted measure which is more representative of the
average company. Over longer periods there should be marginal deviation between
the returns of market-capitalization weighted and equal-weighted measures.
However, significant short-term deviations may arise during very volatile
periods such as the summer of 1998 when global uncertainty led investors to pay
significant premiums for the perceived safety of the largest companies.
The following table illustrates the differences in performance between the
market-capitalization weighted and the equal-weighted indices in addition to
various mid- and small-capitalization companies since the inception of the Fund
on March 18, 1998.
MAJOR MARKET INDICES CHARACTERISTICS YEAR-TO-DATE RETURN
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Russell Growth Index Large-Cap Growth 4.92%
Equal-Weighted Russell Growth Index -10.62%
S&P 500 Stock Index Large-Cap 2.66%
Equal-Weighted S&P 500 Stock Index -5.78%
S&P Mid-Cap Index Medium-Cap -7.21%
S&P Small-Cap Index Small-Cap -19.28%
Although we are disappointed with the 7.10% decline in the Fund, we believe that
the relative underperformance versus the major indices is related more to the
construction of these indices and the abnormal current investment environment
than to our investment process. We are very encouraged by the recent recovery in
the Fund and believe that the market is moving in the direction of rewarding
investors who own the best and most attractive companies rather than just the
largest companies. Your portfolio is very well positioned to outperform the
market during this type of environment as we continue to invest for the long-
term consistent with our core philosophy.
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FRONTEGRA FUNDS
PORTFOLIO STRATEGY
Your research team continues to find companies that demonstrate the strong and
sustainable earnings growth that is the cornerstone of our time-tested criteria,
while avoiding those companies whose stock prices reflect unrealistic profit
expectations. The Fund's five largest holdings on October 31 were Bristol-Myers
Squibb, Northern Telecom, Amgen, Pfizer and Telecommunications, Inc. Each of
these companies has a sustainable competitive advantage, strong secular growth
prospects and a dominant market position.
The current portfolio reflects some of the opportunistic transactions we were
able to make during the turbulent summer months when we purchased various
quality growth companies at prices that were 30% to 50% below where they traded
just three months prior. Although our performance to date is not reflective of
the caliber of our portfolio holdings, we are very encouraged by the recent
returns (up 18.5% since the market bottom October 8) and the changes we see in
the market with investors becoming increasingly more focused on fundamentals.
SUMMARY
As managers and investors, we understand how disconcerting these times can be.
The recent increase in market volatility, the divergence in performance between
stocks and bonds, and the extraordinary performance differential between large
and small companies might cause investors to question their investment beliefs
and strategies. However, we believe investors should maintain their long-term
perspective, remain disciplined and look through current market anomalies. We
will continue to work diligently to uncover and purchase quality growth
companies for your Fund. We thank you for your continued support and confidence
in our ability to deliver long-term performance that exceeds our performance
benchmarks.
Sincerely,
/s/ Daniel T. Murphy, CFA /s/Thomas J. Holmberg
Daniel T. Murphy, CFA Thomas J. Holmberg
President and Chief Investment Officer Co-President
Northern Capital Management, Inc. Frontegra Funds
/s/ Brian A. Hellmer, CFA /s/ William D. Forsyth
Brian A. Hellmer, CFA William D. Forsyth
Senior Vice President and Director of Research Co-President
Northern Capital Management, Inc. Frontegra Funds
/s/ Stephen L. Hawk, Ph.D.
Stephen L. Hawk, Ph.D.
Chairman and Chief Executive Officer
Northern Capital Management, Inc.
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FRONTEGRA FUNDS
INVESTMENT HIGHLIGHTS
GROWTH OF A $100,000 INVESTMENT
FRONTEGRA S&P 500 RUSSELL 1000
GROWTH FUND STOCK INDEX GROWTH INDEX
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3/18/98 $100,000 $100,000 $100,000
3/31/98 $101,000 $101,523 $101,743
4/30/98 $99,200 $102,544 $103,151
5/31/98 $98,000 $100,782 $100,224
6/30/98 $102,000 $104,875 $106,362
7/31/98 $97,300 $103,758 $105,658
8/31/98 $81,100 $88,757 $89,801
9/30/98 $85,800 $94,443 $96,700
10/31/98 $92,900 $102,125 $104,471
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Portfolio Total Return
FOR THE PERIOD ENDED 10/31/98
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SINCE COMMENCEMENT (7.10)%
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This chart assumes an initial gross investment of $100,000 made on 3/18/98
(commencement of operations). Past performance is not predictive of future
results. Investment return and principal value will fluctuate so that shares,
when redeemed, may be worth more or less than the original cost. In the absence
of existing fee waivers, total return would be reduced.
The S&P 500 Stock Index includes 500 common stocks, most of which are listed on
The New York Stock Exchange. The Index is a market capitalization-weighted index
representing approximately two-thirds of the total market value of all domestic
common stocks.
The Russell 1000 Growth Index is comprised of those securities in the Russell
1000 Index which have higher price-to-book ratios and higher forecasted growth
values. The Russell 1000 Index is comprised of the 1000 largest securities in
the Russell 3000 Index. The Russell 3000 Index is comprised of the 3000 largest
U.S. companies based on market capitalization.
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FRONTEGRA FUNDS
Frontegra Growth Fund
SCHEDULE OF INVESTMENTS
October 31, 1998
Number of Shares Value
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COMMON STOCKS 99.2%
Capital Goods & Construction 1.8%
950 Precision Castparts Corp. $ 41,800
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Consumer Durables 1.6%
1,300 Masco Corp. 36,644
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Consumer Staples 12.2%
1,525 ConAgra, Inc. 46,417
1,100 Gillette Company 49,431
1,200 Interstate Bakeries Corp. 30,075
955 Kroger Co.<F1> 53,003
1,600 PepsiCo, Inc. 54,000
600 The Procter & Gamble Co. 53,325
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286,251
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Financial 10.3%
850 Ambac Financial Group, Inc. 49,459
300 American International Group, Inc. 25,575
1,460 Citigroup Inc. 68,711
505 Fannie Mae 35,760
1,600 MBNA Corp. 36,500
425 State Street Corp. 26,509
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242,514
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Healthcare 22.2%
1,750 Abbott Laboratories 82,141
925 American Home Products Corp. 45,094
1,300 Amgen, Inc. <F1> 102,131
700 Baxter International Inc. 41,956
1,000 Bristol-Meyers Squibb Co. 110,562
500 Cardinal Health, Inc. 47,281
850 Pfizer Inc. 91,216
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520,381
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See notes to financial statements.
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Frontegra Funds
Frontegra Growth Fund
SCHEDULE OF INVESTMENTS (continued)
October 31, 1998
Number of Shares Value
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Information Services & Software 10.0%
1,600 Compaq Computer Corp. $ 50,600
925 Computer Associates International, Inc. 36,422
3,200 First Data Corp. 84,800
300 Microsoft Corp. <F1> 31,763
1,400 PeopleSoft, Inc. <F1> 29,663
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233,248
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Leisure & Entertainment 9.9%
1,525 Liberty Media Group<F1> 58,045
1,430 Marriott International, Inc. 38,431
1,295 Mattel, Inc. 46,458
2,085 Tele-Communications, Inc. <F1> 87,831
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230,765
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Multi-Sector Companies 8.6%
800 E. I. Du Pont de Nemours and Company 46,000
860 General Electric Co. 75,250
3,360 U.S. Industries, Inc. 54,810
950 The Walt Disney Co. 25,591
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201,651
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Retailing & Restaurants 8.3%
425 CVS Corp. 19,417
4,410 Cendant Corp. <F1> 50,439
1,300 Dayton Hudson Corp. 55,088
850 The Home Depot, Inc. 36,975
900 Service Corp. International 32,063
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193,982
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Technology 5.5%
865 Intel Corp. 77,147
530 Xerox Corp. 51,344
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128,491
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Telecommunications 8.8%
1,150 Ascend Communications, Inc. <F1> 55,488
864 MCI WorldCom, Inc. <F1> 47,736
2,425 Northern Telecom Limited 103,820
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207,044
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TOTAL COMMON STOCKS
(cost $2,406,209) 2,322,771
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See notes to financial statements.
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Frontegra Funds
Frontegra Growth Fund
SCHEDULE OF INVESTMENTS (continued)
October 31, 1998
Principal Amount Value
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SHORT-TERM INVESTMENT 5.2%
$122,009 UMB Bank Money Market Fiduciary $ 122,009
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TOTAL SHORT-TERM INVESTMENT
(cost $122,009) 122,009
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TOTAL INVESTMENTS 104.4%
(cost $2,528,218) 2,444,780
Liabilities less Other Assets (4.4%) (102,012)
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NET ASSETS 100.0% $2,342,768
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<F1> Non-income producing
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FRONTEGRA FUNDS
Frontegra Growth Fund
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1998
ASSETS:
Investments at value (cost $2,528,218) $2,444,780
Interest and dividends receivable 1,865
Receivable from adviser 8,388
Other assets 2,335
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Total assets 2,457,368
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LIABILITIES:
Payable for investments purchased 95,519
Accrued investment advisory fee 1,452
Accrued expenses 17,629
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Total liabilities 114,600
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NET ASSETS $2,342,768
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NET ASSETS CONSIST OF:
Paid in capital $2,517,893
Accumulated net investment income 3,813
Accumulated net realized losses on investments (95,500)
Net unrealized depreciation on investments (83,438)
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NET ASSETS $2,342,768
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CAPITAL STOCK, $0.01 PAR VALUE
Authorized 100,000,000
Issued and outstanding 252,208
NET ASSET VALUE, REDEMPTION PRICE AND OFFERING PRICE PER SHARE $9.29
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See notes to financial statements.
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FRONTEGRA FUNDS
Frontegra Growth Fund
STATEMENT OF OPERATIONS
For the Period Ended October 31, 1998<F1>
INVESTMENT INCOME:
Dividends (net of $23 foreign withholding taxes) $ 7,599
Interest 1,964
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9,563
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EXPENSES:
Fund administration and accounting fees 35,105
Shareholder servicing 10,390
Investment advisory fees 7,231
Custody fees 6,940
Audit fees 6,549
Reports to shareholders 5,269
Legal fees 5,072
Federal and state registration fees 3,560
Pricing 1,340
Directors' fees and related expenses 333
Other 601
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Total expenses before waiver and reimbursements 82,390
Waiver and reimbursements of expenses by adviser (75,313)
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Net expenses 7,077
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NET INVESTMENT INCOME 2,486
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REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains (losses) on investments (95,500)
Change in unrealized appreciation/depreciation
on investments (83,438)
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NET GAINS (LOSSES) ON INVESTMENTS (178,938)
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NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $(176,452)
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<F1> Commenced operations on March 18, 1998
See notes to financial statements.
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FRONTEGRA FUNDS
Frontegra Growth Fund
STATEMENT OF CHANGES IN NET ASSETS
For the Period Ended October 31, 1998<F1>
OPERATIONS:
Net investment income $ 2,486
Net realized gains (losses) on investments (95,500)
Change in unrealized appreciation/depreciation
on investments (83,438)
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Net increase (decrease) in net assets
resulting from operations (176,452)
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CAPITAL SHARE TRANSACTIONS:
Shares sold 2,533,745
Shares redeemed (14,525)
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Net increase in net assets resulting from
capital share transactions 2,519,220
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TOTAL INCREASE IN NET ASSETS 2,342,768
NET ASSETS:
Beginning of period _
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End of period (includes undistributed net
investment income of $3,813) $2,342,768
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<F1> Commenced operations on March 18, 1998
See notes to financial statements.
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FRONTEGRA FUNDS
Frontegra Growth Fund
FINANCIAL HIGHLIGHTS
For the Period Ended October 31, 1998<F1>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income 0.01
Net realized and unrealized gains (losses) on investments (0.72)
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TOTAL INCOME (LOSS) FROM INVESTMENT OPERATIONS (0.71)
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LESS DISTRIBUTIONS PAID:
From net investment income _
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TOTAL DISTRIBUTIONS PAID _
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NET ASSET VALUE, END OF PERIOD $9.29
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TOTAL RETURN<F2> (7.10)%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period (in thousands) $2,343
Ratio of expenses to average net assets<F3> <F4> 0.80%
Ratio of net investment income to average net assets<F3> <F4> 0.28%
Portfolio turnover rate<F2> 67%
<F1> Commenced operations on March 18, 1998
<F2> Not annualized
<F3> Net of waiver and reimbursements by Adviser. Without waiver and
reimbursements of expenses, the ratio of expenses to average net assets
would have been 9.23%, and the ratio of net investment income to average
net assets would have been (8.15)% for the period ended October 31, 1998.
<F4> Annualized
See notes to financial statements.
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FRONTEGRA FUNDS
Frontegra Growth Fund
NOTES TO FINANCIAL STATEMENTS
October 31, 1998
(1) ORGANIZATION
Frontegra Funds, Inc. ("Frontegra") was incorporated on May 24, 1996, as a
Maryland corporation and is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end management investment
company issuing its shares in series, each series representing a distinct
portfolio with its own investment objectives and policies. Frontegra
consists of three series: the Frontegra Growth Fund (the "Fund"), the
Frontegra Total Return Bond Fund and the Frontegra Opportunity Fund. The
Fund commenced operations on March 18, 1998.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
(a) Investment Valuation
Securities (other than short-term instruments) for which market
quotations are readily available are valued at the last trade price on
the national securities exchange on which such securities are
primarily traded. Securities for which there were no transactions on a
given day or securities not listed on a national securities exchange
are valued at the most recent bid prices. Securities maturing within
60 days or less when purchased are valued by the amortized cost
method. Any securities for which market quotations are not readily
available are valued at their fair value as determined in good faith
by Northern Capital Management, Inc. (the "Sub-Adviser") pursuant to
guidelines established by the Board of Directors.
(b) Federal Income Taxes
No federal income tax provision has been made since the Fund intends
to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute substantially all
investment company net taxable income and net capital gains to
shareholders in a manner which results in no tax cost to the Fund.
(c) Distributions to Shareholders
Dividends from net investment income and distributions of net realized
gains, if any, will be declared and paid at least annually.
Distributions to shareholders are recorded on the ex-dividend date.
The character of distributions made during the year from net
investment income
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FRONTEGRA FUNDS
Frontegra Growth Fund
NOTES TO FINANCIAL STATEMENTS (continued)
October 31, 1998
or net realized gains may differ from the characterization for federal
income tax purposes due to differences in the recognition of income,
expense and gain items for financial statement and tax purposes. Where
appropriate, reclassifications between net asset accounts are made for
such differences that are permanent in nature. Accordingly, at October
31, 1998, reclassifications were recorded to increase accumulated net
investment income and decrease paid-in capital by $1,327.
(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 Frontegra Asset Management, Inc. (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 0.80% 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 0.80% of the Fund's average daily net assets.
(4) CAPITAL SHARE TRANSACTIONS
Since the Fund commenced operations on March 18, 1998, 253,765 shares of
the Fund were sold and 1,557 shares of the Fund were redeemed. There were
no shares issued to holders in reinvestment of distributions.
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FRONTEGRA FUNDS
Frontegra Growth Fund
NOTES TO FINANCIAL STATEMENTS (continued)
October 31, 1998
(5) INVESTMENT TRANSACTIONS
The aggregate purchases and sales of securities, excluding short-term
investments for the Fund for the period March 18, 1998 to October 31, 1998
are summarized below:
Purchases $3,506,131
Sales $1,004,422
There were no purchases or sales of U.S. government securities.
At October 31, 1998, gross unrealized appreciation and depreciation of
investments, based on cost for federal income tax purposes of $2,530,191,
were as follows:
Appreciation $141,576
Depreciation (226,987)
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Net depreciation on investments $(85,411)
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At October 31, 1998, the Fund had an accumulated net realized capital loss
carryover of $93,527 expiring in 2006. To the extent the Fund realizes
future net capital gains, taxable distributions to its shareholders will be
offset by any unused capital loss carryover.
For the year ended October 31, 1998, 100% of dividends paid from taxable
income (including short-term capital gains) qualify for the dividends
received deduction available to corporate shareholders.
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FRONTEGRA FUNDS
Frontegra Growth Fund
REPORT OF INDEPENDENT AUDITORS
October 31, 1998
To the Board of Directors and Shareholders of the Frontegra Funds,
Inc./Frontegra Growth Fund:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of the Frontegra Growth Fund (the "Fund") as of
October 31, 1998, the related statement of operations, the statement of changes
in net assets and the financial highlights for the period from March 18, 1998
(commencement of operations) to October 31, 1998. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on the financial statements and
financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of October 31, 1998, by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Frontegra Growth Fund at October 31, 1998, and the results of its operations,
the changes in its net assets and the financial highlights for the period from
March 18, 1998 (commencement of operations) to October 31, 1998, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
November 30, 1998
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FRONTEGRA FUNDS, INC.
c/o Sunstone Investor Services, LLC
P.O. Box 2142, Milwaukee, Wisconsin 53201-2142
FG-410-1298
