ANNUAL REPORT
SEPTEMBER 30, 1998
FMI
FOCUS FUND
A NO-LOAD
MUTUAL FUND
FMI Focus Fund
OCTOBER 27, 1998
THE VALUE OF A $10,000 INVESTMENT IN THE FMI FOCUS FUND FROM ITS INCEPTION
(12/16/96) TO 9/30/98 AS COMPARED TO THE STANDARD & POOR'S 500 AND THE RUSSELL
2000
FMI FOCUS FUND STANDARD & POOR'S 500 RUSSELL 2000
12/16/96 $10,000 $10,000 $10,000
12/31/96 $10,245 $10,280 $10,350
3/31/97 $10,736 $10,549 $9,815
6/30/97 $12,709 $12,390 $11,406
9/30/97 $16,796 $13,333 $13,103
12/31/97 $17,391 $13,712 $12,664
3/31/98 $19,876 $15,626 $13,938
6/30/98 $19,687 $16,145 $13,289
9/30/98 $17,838 $14,553 $10,611
RESULTS FROM FUND INCEPTION (12/16/96) THROUGH 9/30/98
Annualized
Total Return*<F1>
Total Return*<F1> Through 9/30/98
Total Return*<F1> For the Year From Fund
Last 3 Months Ended 9/30/98 Inception 12/16/96
----------------- -------------- ------------------
FMI Focus Fund -9.4% 6.2% 38.2%
Standard &Poor's 500 -9.9% 9.2% 23.3%
Russell 2000 -20.1% -19.0% 3.4%
*<F1> Total return includes change in share prices and in each case includes
reinvestments of any dividends, interest and capital gain distributions.
Dear Fellow Shareholder:
The third quarter of 1998 was the worst quarter for U.S. stock funds in eight
years (since the Gulf War). The average domestic stock fund dropped by 15.02%,
according to Lipper Analytical Services. As bad as that statistic appears, it
pales in comparison to the 21.52% shellacking incurred by the average small
stock fund. Many small-cap funds fared much worse. The average mid-cap fund
fell over 17%, according to Morningstar Inc., the Chicago-based financial
publisher. The FMI Focus Fund fell 9.4% during the quarter, but was still up
2.5% year-to-date. Certainly, our numbers look good on a relative basis, but we
recognize that provides little solace for new investors who bought in at higher
prices. We hope that the ensuing discussion will give shareholders a better
understanding of what is happening, and more importantly, leave you with a sense
of optimism with respect to the opportunity to make meaningful returns from this
point forward. Through a series of tables and charts provided by our friend Con
Level, from Salomon Smith Barney, we will first show you just how over-sold and
inexpensive small- to medium-sized companies have gotten. Then, we will present
very encouraging historical data on how hard these small- and medium-cap stocks
have typically bounced back.
The first chart vividly reveals the dismal performance of the 5,734 smallest
publicly held companies year-to-date through October 6, 1998. Clearly, the pain
wasn't evenly distributed among all companies. The smaller the capitalization,
the larger the damage. Indeed, the largest stocks, those with over $20 billion
in market value, declined a mere two percent. Even more amazing is that the
NASDAQ 100 Index, which is mostly represented by technology giants such as
Microsoft, Intel, Cisco Systems, and Dell Computer, was actually up 19.67%
during the same time period.
UNWEIGHTED PERFORMANCE
MARKET CAPITALIZATION 12/31/97 THOUGH 10/6/98 # OF COMPANIES
---------------------- ----------------------- --------------
< 250 Million -35.75% 5,734
250 Million - 2 Billion -33.43% 1,929
2 Billion - 5 Billion -24.30% 383
5 Billion - 20 Billion -12.67% 321
> 20 Billion -2.18% 137
NASDAQ 100 Index +19.67% 100
We found the next table quite interesting as well. It shows the average
decline in stocks, again sorted by market cap, as of September 25, 1998, from
their 52 week highs made earlier in the year.
MARKET CAPITALIZATION AVERAGE 52-WEEK DECLINE # OF COMPANIES
---------------------- ----------------------- --------------
< 250 Million -53.28% 5,734
250 Million - 2 Billion -34.59% 1,929
2 Billion - 5 Billion -26.77% 383
5 Billion - 20 Billion -23.62% 321
> 20 Billion -19.35% 137
NASDAQ 100 Index -5.03% 100
Again, it is pretty clear that the smaller- and medium-sized stocks have
endured bear market type declines, but the extent of the damage to the market
overall has been obfuscated by the limited damage incurred by the Big Caps.
THE PERFECT STORM
For those of you who have read, or are familiar with Sebastian Junger's book
"The Perfect Storm", you'll appreciate the analogy we draw to what has happened
to small- and mid-cap equities. The author gives an account of a brutal
Nor'easter that hit a fleet of fishing boats off the coast of Boston in the fall
of 1991. This "100 year storm" generated 150 foot high waves, destroying nearly
everything in its path. In the case of the stock market, an economic tsunami --
described in our 3rd fiscal quarter letter -- descended upon us from Asia (see
our web page, www.fiduciarymgt.com). In the novel, many meteorological factors
coincided to produce a perfect storm. Likewise, in the market, many economic
and political events combined to create a true panic in small-cap land.
President Clinton lost his scruples, Russia devalued its rubles, investors
feared "real" devaluation in Brazil, hedge funds like Long Term Capital
Management (oxymoron?) were bailed out or hung out to dry, Congress debated
Presidential impeachment, and many companies pre-released disappointing
earnings. From a capital markets perspective, investors around the globe were
flocking to what they deemed to be safe investments -- Treasury bills, notes,
and bonds, and large multi-national stocks. However, where there is extreme
comfort, there rarely is opportunity. The profound flight to "quality" has left
Treasuries yielding less than 5% and large-cap stocks sporting very rich price-
to-earnings ratios both in absolute and relative terms. For those investors not
intimately familiar with stock market "jargon", the price-to-earnings ratio, or
P/E, is the multiple of earnings that the stock is selling at. A high P/E
typically reflects enthusiastic investors bidding up a stock price relative to
the underlying earnings, and the higher the P/E, the higher the implicit level
of expectations with respect to the company's future prospects.
Dell Computer provides an example of just how extreme, in our view, so-called
"quality" stocks have been bid up vis-a-vis smaller stocks. Dell Computer's
market capitalization is now approximately $82 billion (1.3 billion shares
outstanding times $62.50 per share). That is the price you would have to pay if
you wanted to buy the entire company. After-tax earnings estimates for the PC
giant are $1.3 billion this year. Thus, Dell is selling at about 61 times
earnings, or a 61 P/E multiple. To put that in perspective, most of the stocks
in the FMI Focus Fund have P/E's of between 10 and 16 times earnings. On that
basis alone, Dell's stock seems to have already discounted a pretty bright
future. Indeed, in an exercise outlined in the October edition of Grants
Interest Rate Observer, it was pointed out that even if Dell captured 100% of
the 80 million computers forecasted to be shipped worldwide this year, the
---------
company would still only earn $8 billion in net income (assuming an average
price of $2,000 per computer and a 5% net margin). Dell is certainly a
terrific company, but the risk/reward ratio in the stock seems less than
compelling. Incidentally, we have noticed some inside selling going on at Dell.
THE CASE FOR SMALL-CAP STOCKS: UPSIDE TO THE UPHEAVAL
It's VERY UNCOMFORTABLE for most investors to consider investing in small
companies at this time. But, the stocks have been badly beaten up and are
selling at reasonable valuations. Many are selling below book value and less
than 10 times earnings, simply because the public has abandoned them. The
public and institutional investors alike are clearly infatuated with the big-cap
"quality" names. They have flocked to them in a panic. We present one last
chart on the subject before moving on to the much more interesting topic of
reviewing two recent additions to the portfolio. The graph below plots the
relative valuation (P/E) for small- and mid-cap growth stocks to larger-cap
issues. Using the well-known T. Rowe Price New Horizons Fund as a proxy, one
can see that the relative value of small companies has fallen to an
unprecedented low. The relevancy of this chart to investors is that in the
past, each time small-caps became this cheap, the subsequent period's returns
were very rewarding as seen in the last table presented.
[Chart - NEW HORIZONS FUNDS P/E RELATIVE TO THE S&P 500
FOR 1961-1998. ESTIMATED RELATIVE P/E 10/8/98 = 0.85]
PERFORMANCE COMPARISON OF NEW HORIZONS FUND VS. S&P 500
NEW NEW
HORIZONS FUND S&P 500 HORIZONS FUND S&P 500
-------------- ------- -------------- -------
1977: 1 Year 35.93% -0.42% 1990: 1 Year 55.03% 29.10%
3 Year 73.20% 8.24% 3 Year 94.70% 55.99%
5 Year 81.74% 22.12% 5 Year 123.46% 96.12%
NEW ADDITIONS
Recently, Milwaukee businessman and FMI Focus Fund investor, Henry H.
Uihlein, offered us some counsel in a recent letter. He advised us to overlook
this year's debacle, and to focus on positioning the portfolio for 1999
performance. We couldn't agree more, and towards that end we began to
accumulate two beaten down stocks that we hope will prove to be excellent
investments over the next couple of years: Anicom, Inc. and Arrow Electronics.
Anicom, Inc. is one of the fastest growing distributors of voice & data,
electronic, fiber optic, and industrial wire & cable, and connectivity products
in the United States. Its fiery Chairman, Alan Anixter, and his brother William
are the Wright Brothers of the wire & cable distribution business. They created
this industry in the early 1950s by cutting electrical wire to length for
contractors. In 1967, the brothers took their $10 million company public. They
built Anixter Brothers (now called Anixter International) through a series of
over 40 acquisitions, product expansions, and a commitment to providing
excellent customer service. Growth was also stimulated by industry happenings,
such as the divestiture of AT&T, and the rapid expansion of the cable television
industry. In 1986, the Anixter Bros., Inc. was sold for $572 million to Intel
Corporation. Two years later with sales over $1 billion, Alan Anixter left the
organization.
In February 1995, the Anicom management team took their $20 million company
public. Proceeds from the offering and some follow-on private placements have
been used to make a series of acquisitions and support internal growth, just as
the first Anixter organization did some 40 years ago. Some of the dynamics
driving the growth of the industry today include: The Telecommunications Act of
1996, the exponential use of the internet, the need for greater computing power
within organizations, increased demand for better sound & security systems in
businesses, and continuous cabling upgrades. In a little over five years,
management has grown the company to a run-rate of over $500 million.
In September, the company announced an acquisition of a Canadian electrical
wire & cable distribution specialist, Texcan Cables. The company paid a bit
more for Texcan than previous mergers, but this transaction increases Anicom's
geographic footprint and there is considerable room for sales synergies by
incorporating communications wiring product lines. When an analyst claimed that
the deal was fifteen cents dilutive, the stock got crushed. We immediately
contacted management in order to discuss the dilution issue, and were convinced
that the deal was actually accretive. Our experience in this sector enabled us
to act quickly (Note: FMI Focus Fund analyst Glenn Primack once worked with
Anicom COO Carl Putnam at Anixter). We have analyzed Anicom's stock in the
past, loved the story, but it did not meet our valuation parameters (the stock
always sold at a hefty premium to its peers) with a 20-30x P/E multiple. Today,
the price is $7 with a $0.70 estimate for next year. At 10 times the December
1999 estimate, and the capacity to grow the business well above this level while
generating cash, we took advantage of the sell-off to accumulate shares.
Arrow Electronics, Inc. is the world's largest distributor of semiconductors,
connectors, passive components, and computer systems with sales expected to
exceed $8 billion next year. We recently purchased the stock at around $12-1/2,
down more than 50% from its high. The shares have languished due to a supply
glut in the semiconductor industry, the Asian economic crisis, and a slowdown in
the computer business. These are negative short-term factors, but in the long
run electronics is still a terrific growth business and we believe that another
cycle in computers and other goods containing electronic components is not too
far away. Arrow's size and great geographic reach makes it a prime beneficiary
of the trend by both suppliers and customers to rely more on the electronics
distribution channel. Chip-makers want to focus on their core competencies, and
concentrate their efforts on research and development, product design, and
marketing programs. Distribution becomes increasingly important as product
cycles shorten and technological innovation requires more capital.
Consequently, suppliers are depending more on fewer distributors to provide
logistics, as well as the marketing and technical service support for their
products in the marketplace. In return for this product support, manufacturers
provide distributors with sales referrals and the right to return certain
amounts of inventory and obsolete products for credit. Customers are partnering
with fewer distributors to provide one-stop shopping, inventory management,
kitting, and contract assembly.
At this time, we believe Arrow Electronics is a classic FMI Focus Fund name.
The company has an incredibly strong brand name. It is the industry leader, and
was the first electronic component distributor to structure its business around
customer segments and their specific needs. There has been a slowdown in the
erosion of average selling prices. The company recently acquired Richey
Electronics and the Electronics Distribution Group of Bell Industries. These two
deals increase Arrow's exposure to small-to-medium-sized North American
customers, strengthen its connector/passive product mix, and could add a dime to
our conservative $1.85 calendar 1999 EPS estimates. The expectations are low,
the risk is low, but the potential returns are high!!! Even without a
turnaround in the technology sector, the stock should trade well above our $12-
1/2 entrance price.
The Board of Directors has declared a distribution of $0.01891 from net long-
term realized capital gains and $0.5993 from net short-term capital gains. Your
distribution confirmation is enclosed.
In closing, we would like to thank our sell-side, buy-side, and industry
contacts for their invaluable input of investment ideas, research, sounding
board roles, and always giving us "the heads-up". This powerful network
definitely aided our performance this fiscal year. We would also like to thank
our shareholders for their continuing support through a very difficult period.
The volatility has been unnerving. As large shareholders ourselves, we are
acutely aware of it. But, the best opportunities come out of periods like
these. We believe we have picked up some terrific companies during the turmoil
and look forward to reaping the benefits when the markets stabilize.
Sincerely,
/s/Ted D. Kellner /s/ Richard E. Lane
Ted D. Kellner, C.F.A. Richard E. Lane, C.F.A.
Portfolio Manager Portfolio Manager
PS: In an effort to improve communications with our shareholders, we can now
be contacted via our website www.fiduciarymgt.com, and look forward to your
input and comments.
PPS: We would also like to thank L. Keith Mullins of Salomon Smith Barney
for most of the data found in the tables and charts in this report.
225 E. Mason St. o Milwaukee, WI 53202 o 414-226-4555
FMI Focus Fund 100 East Wisconsin Avenue
REPORT OF INDEPENDENT ACCOUNTANTS Suite 1500
Milwaukee, WI 53202
(PricewaterhouseCoopers Logo)
October 27, 1998
To the Shareholders and Board of Directors
of FMI Focus Fund
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of FMIFocus Fund (the "Fund") at
September 30, 1998, and the results of its operations for the year then ended,
the changes in its net assets and the financial highlights for the year ended
September 30, 1998 and for the period December 16, 1996 (commencement of
operations) through September 30, 1997, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at September 30, 1998 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
FMI Focus Fund
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1998
ASSETS:
Investments in securities, at value (cost $17,499,169) $17,424,183
Receivable for investments sold 2,247,632
Deferred organizational expenses 19,349
Dividends and interest receivable 15,535
------------
Total assets $19,706,699
------------
------------
LIABILITIES:
Payable to brokers for investments purchased $ 379,390
Payable to adviser for management, administrative
fees and deferred expenses 41,902
Other liabilities 21,699
------------
Total liabilities 442,991
------------
NET ASSETS:
Capital Stock, $0.01 par value;
500,000,000 shares authorized;
1,271,739 shares outstanding 19,139,545
Net unrealized depreciation on investments (74,986)
Accumulated net realized gains on investments,
securities sold short and put options 199,149
------------
Net assets 19,263,708
------------
Total liabilities and net assets $19,706,699
------------
------------
CALCULATION OF NET ASSET VALUE:
Offering and redemption price per share
($19,263,708 / 1,271,739 shares outstanding) $ 15.15
------------
------------
The accompanying notes to financial statements are an integral part of this
statement.
FMI Focus Fund
SCHEDULE OF INVESTMENTS
September 30, 1998
QUOTED
MARKET
SHARES COST VALUE
- ------ ---- ------
LONG-TERM INVESTMENTS -- 95.2% (A)<F3>
COMMON STOCKS -- 95.0% (A)<F3>
BANKS/SAVINGS & LOANS -- 9.9%
10,000 Amcore Financial Inc. $241,675 $227,500
3,300 Bay Bancshares, Inc. 52,800 41,045
36,200 Blackhawk Bancorp, Inc. 526,555 515,850
10,000 Home Federal Bancorp 312,500 230,000
8,000 Local Financial*<F2> 80,000 69,000
11,800 National City Bancorp*<F2> 339,500 330,400
10,000 Prime Bancshares, Inc. 175,000 172,500
12,000 Union Bankshares Ltd.*<F2> 158,250 144,000
---------- ----------
1,886,280 1,730,295
CABLE TELEVISION & RELATED -- 13.7%
3,000 Adelphia Communications Corp.*<F2> 96,000 117,375
20,000 Century Communications Corp.*<F2> 366,094 477,500
16,000 Channell Commercial Corp.*<F2> 209,210 134,000
30,000 Jones Intercable Inc.*<F2> 464,245 746,250
10,000 Scientific-Atlanta, Inc. 203,731 211,250
25,000 TCA Cable TV, Inc. 627,844 703,125
---------- ----------
1,967,124 2,389,500
COMPUTERS & ELECTRONICS -- 12.3%
25,000 Arrow Electronics, Inc.*<F2> 337,139 328,125
30,100 Bell & Howell Co.*<F2> 766,318 780,734
20,000 Methode Electronics, Inc. 275,625 300,000
49,000 MicroTouch Systems, Inc.*<F2> 728,544 612,500
5,000 Raychem Corp. 184,057 121,875
---------- ----------
2,291,683 2,143,234
CONSUMER PRODUCTS & RETAIL -- 3.3%
14,000 Elder-Beerman Stores Corp.*<F2> 268,000 243,250
16,000 Jostens, Inc. 346,366 332,000
---------- ----------
614,366 575,250
FINANCIAL SERVICES -- 7.1%
10,200 Freedom Securities Corp. 148,534 135,150
35,000 Heller Financial, Inc.*<F2> 799,755 840,000
15,500 Willis Lease Finance Corp.*<F2> 290,750 257,688
---------- ----------
1,239,039 1,232,838
FOREST PRODUCTS/PAPER -- 0.8%
10,000 Wausau-Mosinee Paper Corp. 136,850 143,750
HEALTH INDUSTRIES -- 4.8%
32,375 Covance Inc.*<F2> 660,422 839,743
INDUSTRIAL PRODUCTS -- 3.8%
35,650 General Cable Corp. 683,470 659,525
INDUSTRIAL SERVICES -- 0.9%
15,000 White Cap Industries, Inc.*<F2> 261,250 153,750
INSURANCE -- 20.1%
14,000 Chicago Title Corp. 610,027 617,750
23,000 CNA Surety Corp.*<F2> 328,583 333,500
10,160 Delphi Financial Group, Inc.*<F2> 399,166 400,050
18,000 Enhance Financial Services Group Inc. 564,503 532,134
21,000 Financial Security Assurance Holdings Ltd. 982,267 1,023,750
7,000 Reinsurance Group of America 335,045 362,250
15,900 Stirling Cooke Brown Holdings Ltd. 339,515 234,525
---------- ----------
3,559,106 3,503,959
TELECOMMUNICATION/MEDIA -- 13.0%
13,000 ADC Telecommunications, Inc.*<F2> 328,750 274,625
55,000 Anicom, Inc.*<F2> 421,876 371,250
23,900 Imax Corp.*<F2> 506,521 478,000
25,000 Paging Network, Inc.*<F2> 268,750 150,775
20,000 PRIMEDIA Inc.*<F2> 231,450 217,500
9,000 Superior TeleCom Inc. 263,632 435,375
14,500 Tollgrade Communications Inc.*<F2> 313,919 188,500
20,000 Ziff-Davis Inc.*<F2> 163,075 145,000
---------- ----------
2,497,973 2,261,025
OIL SERVICES -- 1.5%
17,000 Pogo Producing Co. 229,333 253,946
TRANSPORTATION -- 3.8%
20,000 Midwest Express Holdings, Inc.*<F2> 613,350 670,000
---------- ----------
Total common stocks 16,640,246 16,556,815
OPTIONS -- 0.2% (A)<F3>
15 General Electric Co. put options,
expiration January 16, 1999,
exercise price $80.00 (b)<F4> 6,277 10,125
15 General Electric Co. put options,
expiration January 16, 1999,
exercise price $85.00 (b)<F4> 8,903 13,500
---------- ----------
Total options 15,180 23,625
---------- ----------
Total long-term
investments 16,655,426 16,580,440
PRINCIPAL
AMOUNT
- ---------
SHORT-TERM INVESTMENTS -- 4.8% (A)<F3>
VARIABLE RATE DEMAND NOTE
$843,743 Firstar Bank U.S.A., N.A. 843,743 843,743
---------- ----------
TOTAL INVESTMENTS (100%) $17,499,169 $17,424,183
---------- ----------
---------- ----------
*<F2> Non-income producing security.
(a)<F3> Percentages for the various classifications relate to total
investments.
(b)<F4> The Fund may buy put options on securities. By buying a put option,
the Fund has the right, in return for a premium paid during the term
of the option, to sell the securities underlying the option at the
exercise price.
For the year ended September 30, 1998, the FMI Focus Fund had
purchased the following put options:
# OF
CONTRACTS COST
--------- -----
Balance at October 1, 1997 0 $ 0
Options purchased
(General Electric Co. 9/98) 100 26,750
Options purchased
(General Electric Co. 1/99) 30 15,180
Options expired -- --
Options closed (100) (26,750)
----- ---------
Balance at September 30, 1998 30 $ 15,180
----- ---------
----- ---------
The accompanying notes to financial statements are an integral part of this
schedule.
FMI Focus Fund
STATEMENT OF OPERATIONS
For the Year Ended September 30, 1998
INCOME:
Dividends $ 76,487
Interest 26,438
--------
Total income 102,925
--------
EXPENSES:
Management fees 172,533
Professional fees 43,397
Registration fees 33,853
Administrative services 28,354
Custodian fees 15,272
Transfer agent fees 12,494
Printing and postage expenses 11,495
Amortization of organizational expenses 5,954
Board of Directors fees 900
Other expenses 7,888
--------
Total operating expenses before interest expense 332,140
Interest expense 46,204
--------
Net expenses 378,344
--------
NET INVESTMENT LOSS (275,419)
--------
REALIZED GAINS AND (LOSSES) ON INVESTMENTS:
Net realized gain on securities $669,919
Net realized loss on short positions (78,658)
Net realized gain on put options 6,531
--------
NET REALIZED GAIN ON INVESTMENTS 597,792
NET DECREASE IN UNREALIZED APPRECIATION ON INVESTMENTS (480,785)
--------
NET GAIN ON INVESTMENTS 117,007
--------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(158,412)
--------
--------
The accompanying notes to financial statements are an integral part of this
statement.
FMI Focus Fund
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended September 30, 1998 and For the Period from December 16, 1996
(commencement of operations) to September 30, 1997
1998 1997
---------- ----------
OPERATIONS:
Net investment loss $ (275,419) $ (20,220)
Net realized gain on investments 597,792 524,136
Net (decrease) increase in unrealized
appreciation on investments (480,785) 405,799
---------- ----------
Net (decrease) increase in net assets
resulting from operations (158,412) 909,715
---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividend from net investment income
($0.0150 per share) -- (818)
Distributions from net realized gains
($0.4782 and $1.8971 per share, respectively) (278,771) (355,365)
---------- ----------
Total distributions (278,771)*<F5> (356,183)
---------- ----------
FUND SHARE ACTIVITIES:
Proceeds from shares issued
(1,038,885 and 316,306 shares, respectively) 16,465,542 4,178,695
Net asset value of shares issued
in distributions (15,049 and 24,664 shares,
respectively) 215,951 339,335
Cost of shares redeemed
(132,094 and 1,071 shares, respectively) (2,136,896) (15,268)
---------- ----------
Net increase in net assets derived
from Fund share activities 14,544,597 4,502,762
---------- ----------
TOTAL INCREASE 14,107,414 5,056,294
NET ASSETS AT THE BEGINNING OF THE PERIOD 5,156,294 100,000
---------- ----------
NET ASSETS AT THE END OF THE PERIOD $19,263,708 $5,156,294
---------- ----------
---------- ----------
*<F5>See Note 9.
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)
<TABLE>
FOR THE PERIOD FROM
YEAR ENDED DECEMBER 16, 1996+<F6> TO
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------- --------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 14.74 $ 10.00
Income from investment operations:
Net investment loss (a)<F9> (0.17) (0.04)
Net realized and unrealized gains on investments 1.06 6.69
------ ------
Total from investment operations 0.89 6.65
Less distributions:
Dividend from net investment income -- (0.01)
Distribution from net realized gains (0.48) (1.90)
------ ------
Total from distributions (0.48) (1.91)
------ ------
Net asset value, end of period $ 15.15 $ 14.74
------ ------
------ ------
TOTAL INVESTMENT RETURN 6.2% 68.0%*<F7>
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's $) 19,264 5,156
Ratio of operating expenses (after reimbursement)
to average net assets (b)<F10> 2.34% 2.75%**<F8>
Ratio of interest expense and dividends on short
positions to average net assets 0.33% 0.17%**<F8>
Ratio of net investment loss to average net assets (c)<F11> (1.94%) (1.85%)**<F8>
Portfolio turnover rate 402.2% 298.2%
</TABLE>
+<F6> Commencement of operations.
*<F7> Not annualized.
**<F8> Annualized.
(a)<F9> Net investment loss before interest expense and dividends on short
positions for the year ended September 30, 1998 and for the period
ended September 30, 1997 was ($0.14) and ($0.04), respectively. In
1998, net investment loss per share is calculated using ending
balances prior to consideration of adjustments for permanent book
and tax differences.
(b)<F10> Computed after giving effect to adviser's expense limitation
undertaking. If the Fund had paid all of its expenses for the
period ended September 30, 1997, the ratio would have been
6.38%**<F8>.
(c)<F11> Computed after giving effect to adviser's expense limitation
undertaking. If the Fund had paid all of its expenses for the
period ended September 30, 1997, the ratio would have been
(5.48%)**<F8>.
The accompanying notes to financial statements are an integral part of this
statement.
FMI Focus Fund
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
(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 as a non-diversified, open-end management investment company
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,
engaging in short sales, investing in foreign securities and effecting
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. Common stocks which are
listed on a national securities exchange or the Nasdaq Stock Market but
which were not traded on the valuation date are valued at the most recent
bid price. Securities sold short which are listed on a national securities
exchange or the Nasdaq Stock Market but which were not traded on the
valuation date are valued at the most recent ask price. Unlisted equity
securities for which market quotations are readily available are valued at
the most recent bid price. Options purchased or written by the Fund are
valued at the average of the most recent bid and ask 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 (securities with maturities of 60 days
or less) are valued at amortized cost which approximates quoted market
value. For financial reporting purposes, investment transactions are
recorded on trade date. Cost amounts, as reported on the schedule of
investments, are substantially the same for Federal income tax purposes.
(b) Net realized gains and losses on common stock are computed on the
identified cost basis.
(c) Provision has not been made for Federal income taxes since the Fund has
elected 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 the Fund does not anticipate nonperformance by these
counterparties.
(f) Generally accepted accounting principles require that permanent differences
between income for financial reporting and tax purposes be reclassified in
the capital accounts.
(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.
(h) The Fund may sell securities short. For financial statement purposes, an
amount equal to the settlement amount would be included in the Statement of
Assets and Liabilities as a liability. The amount of the liability is
subsequently marked-to-market to reflect the current value of the short
position. Subsequent fluctuations in the market prices of securities sold,
but not yet purchased, may require purchasing the securities at prices
which may differ from the market value reflected on the Statement of Assets
and Liabilities. The Fund is liable for any dividends payable on securities
while those securities are in a short position. As collateral for its short
positions, the Fund is required under the 1940 Act to maintain segregated
assets consisting of liquid securities. These segregated assets are
required to be adjusted daily to reflect changes in the value of the
securities sold short. As of September 30, 1998 there were no short
positions in the Fund.
(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
paid FMI, for the period from October 1, 1997 through December 31, 1997, a
monthly management fee at the annual rate of 1% of the daily net assets.
Effective January 1, 1998, the Fund pays a monthly management fee of 1.25% 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 pays 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.
Under the management agreement, FMI will reimburse the Fund for expenses over
2.75% of the daily net assets of the Fund. No such reimbursements were
required for the year ended September 30, 1998.
(3) CREDIT FACILITY --
Firstar Bank Milwaukee, NA has made available to the Fund a $1,000,000 credit
facility pursuant to a Credit Agreement ("Agreement") dated August 21, 1997
(subsequently amended) for the purpose of purchasing portfolio securities.
The Agreement is renewed annually. Principal and interest of each loan under
the Agreement are due not more than 90 days after the date of the loan.
Amounts under the credit facility bear interest at a rate per annum equal to
the prime rate (8.00% on September 30, 1998) on the amount borrowed.
Additionally, the Fund pays a commitment fee of 0.25% of the commitment and an
unused line fee of 0.25% of the unused amount of the facility. Advances are
collateralized by securities owned by the Fund. Pursuant to the 1940 Act, the
Fund is required to satisfy asset coverage requirements on its outstanding
borrowings. During the year ended September 30, 1998, the Fund had an
outstanding average daily balance of $460,616 under the Agreement. The
maximum amount outstanding during that period was $2,000,000. Interest
expense amounted to $46,204 for the year ended September 30, 1998. At
September 30, 1998, the Fund had no borrowings outstanding under the
Agreement.
(4) DISTRIBUTION TO SHAREHOLDERS --
Net investment income and net realized gains, if any, are distributed to
shareholders. On October 27, 1998, the Fund distributed $769,961 from net
short-term realized gains ($0.59930 per share) and $24,294 from net long-term
realized gains ($0.01891 per share). The distributions were declared on
October 26, 1998 to shareholders of record on October 23, 1998.
(5) 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 September 30, 1998 were $19,349.
(6) INVESTMENT TRANSACTIONS --
For the year ended September 30, 1998, purchases and proceeds of sales of
investment securities (excluding short-term investments) were $66,479,990 and
$55,381,551, respectively.
(7) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES --
As of September 30, 1998, liabilities of the Fund included the following:
Payable to brokers for securities purchased $ 379,390
Payable to FMI for management,
administrative fees and deferred expenses 41,902
Other liabilities 21,699
(8) SOURCES OF NET ASSETS --
As of September 30, 1998, the sources of net assets were as follows:
Fund shares issued and outstanding $19,139,545
Net unrealized depreciation on investments (74,986)
Accumulated net realized gains on investments 199,149
-----------
$19,263,708
-----------
-----------
Aggregate net unrealized depreciation as of September 30, 1998, consisted of
the following:
Aggregate gross unrealized appreciation $ 1,289,127
Aggregate gross unrealized depreciation (1,364,113)
-----------
Net unrealized depreciation $ (74,986)
-----------
-----------
(9) REQUIRED FEDERAL INCOME TAX DISCLOSURES (UNAUDITED) --
In early 1998, shareholders received information regarding all distributions
paid to them by the Fund during the fiscal year ended September 30, 1998. The
Fund did not pay any long-term capital gains distributions.
The percentage of ordinary income which is eligible for the corporate
dividend received deduction for the fiscal year ended
September 30, 1998 was 4%.
(10) MATTERS SUBMITTED TO A SHAREHOLDER VOTE (UNAUDITED) --
During fiscal 1998, a special shareholders meeting was held and the following
matters were approved by at least 83% of the voting shares: (a) Election of
Directors and (b) New Investment Advisory Agreement with FMI.
FMI FOCUS FUND
225 East Mason Street
Milwaukee, Wisconsin 53202
414-226-4555
BOARD OF DIRECTORS
BARRY K. ALLEN
GEORGE D. DALTON
PATRICK J. ENGLISH
TED D. KELLNER
THOMAS W. MOUNT
DONALD S. WILSON
INVESTMENT ADVISER
AND ADMINISTRATOR
FIDUCIARY MANAGEMENT, INC.
225 East Mason Street
Milwaukee, Wisconsin 53202
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
FIRSTAR MUTUAL FUND SERVICES, LLC
615 East Michigan Street
Milwaukee, Wisconsin 53202
800-811-5311
or
414-765-4124
INDEPENDENT ACCOUNTANTS
PRICEWATERHOUSECOOPERS LLP
100 East Wisconsin Avenue
Suite 1500
Milwaukee, Wisconsin 53202
LEGAL COUNSEL
FOLEY & LARDNER
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of FMI Focus Fund unless accompanied or preceded by the
Fund's current prospectus. Past performance is not indicative of future
performance. Investment return and principal value of an investment may
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost.
