SEMIANNUAL REPORT
MARCH 31, 1997
FMI
FOCUS FUND
A NO-LOAD
MUTUAL FUND
FMI FOCUS FUND
April 25, 1997
Dear Fellow Shareholder:
After some early strength during the first quarter, the stock market began to
fade, driven mostly by concerns over interest rates, but also by increasing
reservations about the prospects for corporate earnings. Many individual stocks
were hit very hard during the quarter as they reported disappointing results for
last year or announced expected shortfalls for the first quarter of 1997. The
NASDAQ index, dominated by technology stocks, was down 5.4% for the quarter and
the Russell 2000 down 5.2%, while the S&P 500 held on to a small 2.6% gain. FMI
Focus Fund was up 4.8% for the quarter.
We have talked for some time about the difficulty that the S&P 500 companies
face in trying to tack on any significant earnings gains moving forward from
these levels. And while the market is concerned about further increases in
interest rates by the Fed, we continue to believe that rates a year from now
will be lower than today. This would be consistent with our view that the
economy is probably not as robust as recent economic data would suggest. We
continue to emphasize niche companies with above average growth prospects in a
slowing economy, and selling at a discount to the market.
As is customary in our April letter, we highlight a few of our present
holdings.
CORNING INC. -- Corning has gone through an amazing transformation these past
few years. The Company wrote off its original 50% ownership investment in Dow-
Corning due to Dow's Chapter 11 filing (breast implants litigation). Corning
appointed a new CEO, Roger Ackerman, replacing the long time head, James
Houghton, and recently spun off its two major health care businesses, Covance
Inc. and Quest Diagnostics Incorporated as separate, publicly traded
corporations.
Meanwhile, demand for Corning's principal remaining businesses, fiber optic
cable and related telecom products, exploded as the so-called "information
highway" gets "paved" with Corning's fiber. Nearly our entire wish list, with
respect to what could go right with our original, contrarian investment two
years ago, has now come to fruition. These significant events have not gone
unnoticed on Wall Street, as the stock has nearly doubled. While we certainly
believe Corning's future to be bright, given its focus on and position in fiber
optics (50% market share), at 23 times this year's earnings estimate, we
anticipate lightening up the position and investing some of the proceeds in
Corning's recent health care related spinoffs, Covance and Quest Diagnostics.
CUNO INC. -- Cuno is a leader in the manufacturing and marketing of
filtration products, including proprietary depth filters used in health care,
fluid processing, and potable water markets. Many of Cuno's products are
disposable, creating an attractive stream of recurring revenue. Historically,
Cuno has participated in many prefilter and less proprietary segments of the
industry, but has, over the past several quarters, significantly boosted its
value-added offerings. We anticipate positive margin comparisons and good
earnings growth; this, combined with an attractive valuation, gives us
confidence in the stock.
JOSTENS, INC. -- Jostens is a leading producer of products to commemorate and
promote educational and individual achievement. Best known for its class rings,
where they are a dominant player, the Company also offers yearbooks, graduation
products and school portraits. Recognition products include personalized
jewelry, plaques and certificates. Although the Company had a stellar growth
record in the 1970s and 1980s, maturing markets and management missteps caused
the stock to underperform in the 1990s. Over the past year, as new management
initiatives began to take effect, Jostens' fundamentals have turned positive.
The recently reported March quarter was strong, and we look for continued
improvement throughout the year. The valuation is attractive.
RAYCHEM CORP. -- Although Raychem has retraced some of its strong gain of the
past two years, we believe the outlook for the stock remains excellent. Much of
the restructuring and refocusing of the Company is now complete and the plans'
architect, CEO Dr. Richard Kashnow, has turned his attention to revenue growth
and operating margin improvement. A world leader in applying advanced material
science (especially in polymers) to the electronics, telecommunications,
utility, and automotive markets, we believe the Company can leverage 10% sales
growth into 16-18% earnings growth, in part through the redeployment of the
Company's enormous free cash flow and relatively debt-free balance sheet. We
look for further, significant share repurchases, strategic acquisitions, and
joint ventures. Further productivity in Raychem's various polymer closures
businesses, particularly in the telecom and utility areas, should also drive
operating profit margins. We have great respect for, and faith in, Raychem's
management and believe they will continue to deliver strong results. At 15
times our estimate for this year's earnings and free cash flow, valuation is
attractive as well.
Thank you for your continuing confidence in FMI Focus Fund.
Sincerely,
/s/ Ted D. Kellner /s/ Donald S. Wilson
Ted D. Kellner, C.F.A. Donald S. Wilson, C.F.A.
President Vice President
225 E. Mason St. o Milwaukee, WI 53202 o 414-226-4555
FMI FOCUS FUND
STATEMENT OF NET ASSETS
MARCH 31, 1997 (UNAUDITED)
SHARES OR QUOTED
PRINCIPAL MARKET
AMOUNT COST VALUE
------- ------- -----
COMMON STOCKS -- 93.5% (A)<F2>
BANKS/SAVINGS & LOANS -- 21.2%
1,300 Amcore Financial, Inc. $30,712 $36,725
2,000 Independent
Bankshares Inc. 28,500 32,250
1,500 Merchants Bancshares, Inc. 30,750 30,187
2,400 Southwest Bancorporation
of Texas, Inc.*<F1> 41,700 46,200
--------- --------
131,662 145,362
CONSUMER SERVICES -- 9.9%
3,000 Jostens, Inc. 62,200 67,875
DISTRIBUTION -- 5.1%
800 Fisher Scientific
International Inc. 34,580 35,300
ELECTRONICS -- 4.1%
2,000 Methode Electronics, Inc. 31,891 28,000
FOREST PRODUCTS/PAPER -- 4.0%
1,500 Wausau Paper Mills Co. 27,750 27,469
HEALTH INDUSTRIES -- 14.2%
1,500 Covance Inc.*<F1> 30,150 24,188
1,500 Patterson Dental Co.*<F1> 44,250 51,000
1,500 Quest Diagnostics
Incorporated*<F1> 25,778 22,313
--------- --------
100,178 97,501
INSURANCE -- 7.3%
1,000 CapMAC Holdings Inc. 25,185 26,625
500 Executive Risk, Inc. 23,238 23,188
--------- --------
48,423 49,813
MEDIA/COMMUNICATION -- 0.9%
1,000 Diana Corp.*<F1> 8,850 6,000
MISCELLANEOUS - FINANCE -- 3.6%
2,000 Willis Lease Finance Corp.*<F1> 26,250 25,000
MISCELLANEOUS - TECHNOLOGY MANUFACTURING -- 6.9%
700 Corning Inc. 32,154 31,062
200 Raychem Corp. 17,840 16,475
--------- --------
49,994 47,537
PRODUCER MANUFACTURING -- 12.1%
6,800 Bucyrus International, Inc.*<F1> 52,920 56,950
1,700 Cuno Inc.*<F1> 24,863 26,138
--------- --------
77,783 83,088
RETAIL TRADE -- 4.2%
1,500 Casey's General Stores, Inc. 25,500 28,875
--------- --------
Total common stocks 625,061 641,820
VARIABLE RATE DEMAND NOTES -- 3.8% (A)<F2>
$26,374 Wisconsin Electric
Power Company 26,374 26,374
---------
Total investments $651,435 668,194
=========
Cash and receivables, less
liabilities 2.7% (a) (B)<F3> 18,751
---------
Net Assets $686,945
=========
Net Asset Value Per Share
($0.0001 par value 500,000,000
shares authorized), offering
and redemption price
($686,945 / 64,058
shares outstanding) $10.72
======
*<F1>Non-income producing security.
(a)<F2>Percentages for the various classifications relate to net assets.
(b)<F3>Includes $6,000 of short sales (proceeds $26,022).
The accompanying notes to financial statements are an integral part of this
statement.
FMI FOCUS FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM DECEMBER 16, 1996 (COMMENCEMENT OF OPERATIONS) TO MARCH 31,
1997 (UNAUDITED)
INCOME:
Dividends $1,267
Interest 2,987
--------
Total income 4,254
--------
EXPENSES:
Professional fees 5,635
Transfer agent fees 3,334
Custodian fees 1,905
Management fees 1,784
Amortization of organizational expenses 1,488
Administrative services 357
Other expenses 963
--------
Total expenses before reimbursement 15,466
Less expenses assumed by adviser (10,561)
--------
Net expenses 4,905
NET INVESTMENT LOSS (651)
--------
NET REALIZED GAIN ON INVESTMENTS 6,392
NET INCREASE IN UNREALIZED APPRECIATION ON INVESTMENTS 36,781
--------
NET GAIN ON INVESTMENTS 43,173
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $42,522
========
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD FROM DECEMBER 16, 1996 (COMMENCEMENT OF OPERATIONS) TO MARCH 31,
1997 (UNAUDITED)
OPERATIONS:
Net investment loss $(651)
Net realized gain on investments 6,392
Net increase in unrealized appreciation on investments 36,781
--------
Net increase in net assets resulting from operations 42,522
--------
DISTRIBUTION TO SHAREHOLDERS:
Distribution from net investment income ($0.015 per share) (818)
--------
FUND SHARE ACTIVITIES:
Proceeds from shares issued (63,978 shares) 544,437
Net asset value of shares issued in distribution (80 shares) 804
Cost of shares redeemed --
--------
Net increase in net assets derived from Fund share activities 545,241
--------
TOTAL INCREASE 586,945
NET ASSETS AT THE BEGINNING OF THE PERIOD 100,000
--------
NET ASSETS AT THE END OF THE PERIOD $686,945
========
The accompanying notes to financial statements are an integral part of these
statements.
FMI FOCUS FUND
FINANCIAL HIGHLIGHTS
(SELECTED DATA FOR EACH SHARE OF THE FUND OUTSTANDING THROUGHOUT EACH PERIOD)
(UNAUDITED)
FOR THE PERIOD FROM
DECEMBER 16, 1996+<F4> TO
MARCH 31,1997
---------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $10.00
Income from investment operations:
Net investment loss (0.01)
Net realized and unrealized gains on investments 0.74
------
Total from investment operations 0.73
Less distributions:
Dividend from net investment income (0.01)
Distribution from net realized gains --
------
Total from distributions (0.01)
------
Net asset value, end of period $10.72
======
TOTAL INVESTMENT RETURN 28.0%*<F5>
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's $) 687
Ratio of expenses (after reimbursement) to average net assets (a)<F6>2.75%*<F5>
Ratio of net investment income to average net assets (b)<F7> (0.37%)*<F5>
Portfolio turnover rate 62.4%
Average commission rate paid $0.0910
+<F4>Commencement of operations.
*<F5>Annualized.
(a)<F6>Computed after giving effect to adviser's expense limitation
undertaking. If the Fund had paid all of its expenses, the ratio would have been
8.67%*<F5>.
(b)<F7>If the Fund had paid all of its expenses, the ratio would have been
(6.29%)*<F5>.
The accompanying notes to financial statements are an integral part of this
statement.
FMI FOCUS FUND
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
The following is a summary of significant accounting policies of the FMI
Focus Fund (the "Fund"), a portfolio of FMI Funds, Inc. (the "Company") which
is registered under the Investment Company Act of 1940. The Company was
incorporated under the laws of Maryland on September 5, 1996 and the Fund
commenced operations on December 16, 1996. The investment objective of the
Fund is to seek capital appreciation principally through investing in common
stocks and warrants, engage in short sales, invest in foreign securities and
effect transactions in stock index contracts, options and stock index futures
contracts, and options on securities and stock indexes.
(a) Each security, including securities sold short, but excluding short-term
investments, is valued at the last sale price reported by the principal
security exchange on which the issue is traded, or if no sale is reported,
the average of the current bid and asked prices. Securities for which
quotations are not readily available are valued at fair value as determined
by the investment adviser under the supervision of the Board of Directors.
Short-term investments are valued at amortized cost which approximates
quoted market value. Investment transactions are recorded no later than the
first business day after the trade date.
(b) Net realized gains and losses on common stock are computed on the basis of
the cost of specific certificates.
(c) Provision has not been made for Federal income taxes since the Fund will
elect to be taxed as a "regulated investment company" and intends to
distribute substantially all net investment company taxable income and net
capital gains to its shareholders and otherwise comply with the provisions
of the Internal Revenue Code applicable to regulated investment companies.
(d) Dividend income is recorded on the ex-dividend date. Interest income is
recorded on the accrual basis.
(e) The Fund has investments in short-term variable rate demand notes, which
are unsecured instruments. The Fund may be susceptible to credit risk with
respect to these notes to the extent the issuer defaults on its payment
obligation. The Fund's policy is to monitor the creditworthiness of the
issuer and does not anticipate nonperformance by these counterparties.
(f) Generally accepted accounting principles require that permanent financial
reporting and tax differences be reclassified to capital stock.
(g) 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 revenues and expenses during the
reporting period. Actual results could differ from these estimates.
(2) INVESTMENT ADVISER AND MANAGEMENT AGREEMENT AND TRANSACTIONS WITH RELATED
PARTIES --
The Fund has a management agreement with Fiduciary Management, Inc. ("FMI"),
with whom certain officers and directors of the Fund are affiliated, to serve
as investment adviser and manager. Under the terms of the agreement, the Fund
will pay FMI a monthly management fee at the annual rate of 1% of the daily
net assets. The Fund has an administrative agreement with FMI to supervise
all aspects of the Fund's operations except those performed by FMI pursuant to
the management agreement. Under the terms of the agreement, the Fund will pay
FMI a monthly administrative fee at the annual rate of 0.2% of the daily net
assets up to and including $30,000,000, 0.1% on the next $70,000,000 and 0.05%
of the daily net assets of the Fund in excess of $100,000,000, subject to a
fiscal year minimum of $20,000.
(3) DISTRIBUTION TO SHAREHOLDERS --
Net investment income and net realized gains are distributed to shareholders.
On December 27, 1996, a dividend from net investment income of $818 ($0.015
per share) was declared. The distribution was paid on December 30, 1996, to
shareholders of record on December 26, 1996.
(4) DEFERRED EXPENSES --
Organizational expenses were deferred and are being amortized on a straight-
line basis over a period of five years beginning with the date of sales of
shares to the public. These expenses were advanced by the Adviser who will be
reimbursed by the Fund over a period of five years. The proceeds of any
redemption of the initial shares by the original shareholder will be reduced
by a pro-rata portion of any then unamortized deferred expenses in the same
proportion as the number of initial shares being redeemed bears to the number
of initial shares outstanding at the time of such redemption. The unamortized
organizational expenses at March 31, 1997 were $28,280.
(5) INVESTMENT TRANSACTIONS --
For the period ending March 31, 1997, purchases and proceeds of sales of
investment securities (excluding short-term investments) were $824,565 and
$232,050, respectively, and $98,871 and $99,667, respectively, of short-term
U.S. Government Securities.
(6) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES --
As of March 31, 1997, liabilities of the Fund included the following:
Payable to FMI for management, administrative fees
and deferred expenses $28,985
Other liabilities 910
(7) SOURCES OF NET ASSETS --
As of March 31, 1997, the sources of net assets were as follows:
Fund shares issued and outstanding $645,241
Net unrealized appreciation on investments 36,781
Accumulated net realized gains on investments 5,741
Overdistributed net investment income (818)
--------
$686,945
========
Aggregate net unrealized appreciation as of March 31, 1997, consisted of the
following:
Aggregate gross unrealized appreciation $57,549
Aggregate gross unrealized depreciation (20,768)
--------
Net unrealized appreciation $36,781
========
FMI FOCUS FUND
225 East Mason Street
Milwaukee, Wisconsin 53202
BOARD OF DIRECTORS
BARRY K. ALLEN
TED D. KELLNER
THOMAS W. MOUNT
DONALD S. WILSON
INVESTMENT ADVISER
AND ADMINISTRATOR
FIDUCIARY MANAGEMENT, INC.
225 East Mason Street
Milwaukee, Wisconsin 53202
CUSTODIAN, TRANSFER AGENT
AND DIVIDEND DISBURSING AGENT
FIRSTAR TRUST COMPANY
615 East Michigan Street
Milwaukee, Wisconsin 53202
INDEPENDENT ACCOUNTANTS
PRICE WATERHOUSE LLP
100 East Wisconsin Avenue
Suite 1500
Milwaukee, Wisconsin 53202
LEGAL COUNSEL
FOLEY & LARDNER
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
