QUARTERLY REPORT
DECEMBER 31, 1997
FMI
FOCUS FUND
A NO-LOAD
MUTUAL FUND
FMI FOCUS FUND
February 6, 1998
Dear Fellow Shareholder:
We are pleased to report that the FMI Focus Fund experienced another good
quarter, increasing in value by 3.5%. It is gratifying to produce positive
results for a quarter in which many mutual funds struggled. The 2.8% advanced
by the S&P 500 masked the overall weakness in the market. The Russell 2000
Index (smaller companies) was down 3.3% and NASDAQ composite was down 6.7%.
Lipper Analytical Services reported that the average U.S. stock fund was down
1.54% while the small cap, capital appreciation, and Midcap mutual fund
categories were down 5.08%, 3.68%, and 3.41%, respectively. So again, against
that backdrop, we are pleased with the results.
Three stocks were important contributors this quarter: The PMI Group, a
private mortgage insurance company, John Wiley and Sons, a publisher, and VWR
Scientific Products Corp., a laboratory products distributor. All three stocks
had several common characteristics, including low valuation, particularly
relative to private market value, low or no expectations on the part of Wall
Street, and little Wall Street coverage. During the quarter, all three stocks
appreciated significantly as investors "rediscovered" these companies.
We are also pleased to note that the Fund completed it's first full year of
operation since inception on December 16, 1996. Through year end 1997, the
Fund's total return was 73.9% (70.1% annualized). For calendar 1997, the Fund's
69.7% return placed it third among all domestic equity mutual funds and second
in the capital appreciation category, according to Lipper Analytical Services.
While we are thrilled to get off to such a terrific start, and believe the
strong results help validate our focused approach to investing, we enter 1998 on
a somewhat cautious note.
The events unfolding in Asia, combined with high valuations, particularly in
the large capitalization sector of the U.S. stock market, seem likely to produce
a choppy and volatile market this year, perhaps similar to the recent experience
this past quarter. We believe the fallout from the "Asian Flu" may still be in
front of us. The impact is likely to be uneven, hurting some companies much
more than others, producing plenty of earnings disappointments and investment
potholes. Investor resolve is likely to be tested, all the more because we have
just come through a period of investment nirvana. Corporate earnings were very
strong last year, interest rates fell throughout the year, and investors poured
money into mutual funds, increasing the demand for stocks. In other words, last
year's near perfect environment set up a very tough comparison for this year
even if "Asia" had not occurred.
Of course, choppy and volatile environments can create excellent long term
opportunities for careful, diligent investors. But more than ever, it will be
critical to really know your companies to avoid being shaken out just when you
should be buying more.
We think just such an opportunity is unfolding in one of our old favorites,
Raychem Corporation. We made a lot of money the last time Raychem "became
misunderstood" -- euphemisms for the stock price declining, or over-reacting to
certain events.
You may recall from previous shareholder letters that Raychem is a global
leader in materials science, producing special plastics, adhesives, ceramics,
and gels. The company's original core competency entailed applying proprietary
technology to polymers to create clever "intelligent" materials, i.e., plastics
that "remember" original shapes often being subject to harsh conditions, or gels
that can seal electrical connections without requiring heat. These products are
used to seal and protect outside physical plant, ranging from electric utilities
and electrical equipment to telephone companies. Just look up at any telephone
or utility pole and you will see several Raychem products at work.
From this core technology, Raychem developed many new, rapidly growing
products like Polyswitch, an ingenious "resettable" fuse device, which has
turned into a $200 million business from standing start in the early 1990s. The
company is also one of two major players in the burgeoning touch screen market.
Most of the touch screens you see in restaurants, hotels, reservation desks,
etc. are likely to be either Raychem's or MicroTouch's. Indeed, we think the
intermediate outlook for touch screens is sufficiently exciting that the Fund
invested in MicroTouch as well.
Raychem's excellent mix of proprietary businesses has created barriers to
entry, resulting in attractive profit margins and outstanding free cash flow
generation. But concern about Asian exposure, about 20% of Raychem's sales, has
depressed the stock to very attractive levels. In our opinion, based on our
1998 estimates, Raychem is trading at only 13 times earnings and 13 times free
cash flow. And management has committed much of the cash flow to buying back
stock. President, Richard Kashnow is clearly an effective and shareholder-
oriented manager.
From current levels, we believe Raychem will be an excellent investment over
the next several years.
In closing, we want to thank Fiduciary Management's Research Director,
Patrick English, for the VWR Scientific idea and FMI Focus shareholders for
their continued support.
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
225 E. Mason St. o Milwaukee, WI 53202 o 414-226-4555
STATEMENT OF NET ASSETS
December 31, 1997 (Unaudited)
SHARES QUOTED
OR PRINCIPAL MARKET
AMOUNT VALUE (B)<F2>
--------- ---------
LONG-TERM INVESTMENTS 112.3% (A)<F1>
COMMON STOCKS -- 112.3% (A)<F1>
BANKS/SAVINGS & LOANS -- 20.6%
5,000 Amcore Financial Inc. $125,625
4,000 Associated Banc-Corp. 220,500
7,800 Bay Bancshares, Inc. 154,050
19,200 Blackhawk Bancorp, Inc. 288,000
1,000 First State Bancorporation 21,375
10,000 Local Financial (c)<F3> 116,250
1,500 Merchants Bancshares, Inc. 48,750
13,000 Prime Bancshares, Inc. 271,375
13,000 Six Rivers National Bank 230,750
7,000 Southwest Bancorporation
of Texas, Inc. 217,875
4,000 Summit Bancshares, Inc. 84,000
2,000 Union Bankshares Ltd. 50,250
----------
1,828,800
CABLE -- 4.7%
24,000 Jones Intercable Inc. Cl A 421,512
CHEMICAL/SPECIALTY MATERIALS -- 6.6%
10,000 Minerals Technologies Inc. 454,380
5,000 Solutia Inc. 133,440
----------
587,820
CONSUMER PRODUCTS-NON-DURABLE -- 4.4%
17,000 Jostens, Inc. 392,071
ELECTRONICS -- 11.8%
18,000 Berg Electronics Corp. 409,500
8,000 Methode Electronics, Inc. 130,000
23,000 MicroTouch Systems, Inc. 362,250
6,000 Tollgrade Communications Inc. 142,500
----------
1,044,250
HEALTH INDUSTRIES -- 5.1%
18,875 Covance Inc. 375,140
20,000 IBAH, Inc. 75,000
----------
450,140
INDUSTRIAL PRODUCTS -- 12.8%
14,000 Bandag, Inc. Class A 670,250
12,900 General Cable Corporation 466,825
----------
1,137,075
INSURANCE -- 20.8%
6,000 CapMAC Holdings Inc. 208,500
8,000 Delphi Financial Group, Inc. 360,000
4,000 MBIA Inc. 267,252
13,000 Motor Club of America 175,500
3,000 Old Republic International Corp. 111,564
5,900 The PMI Group, Inc. 426,647
11,950 Stirling Cooke Brown Holdings 292,775
----------
1,842,238
MEDIA/COMMUNICATION -- 16.7%
22,000 Anixter International Inc. 363,000
22,000 Cabletron Systems, Inc. 330,000
6,000 Corning Inc. 222,750
15,000 Imax Corporation 330,000
12,000 PairGain Technologies, Inc. 232,500
----------
1,478,250
MISCELLANEOUS-FINANCE -- 3.0%
15,000 Willis Lease Finance Corp. 262,500
PRINTING/PUBLISHING/FORMS -- 4.4%
3,000 John Wiley & Sons, Inc. 162,750
10,000 The Petersen Companies, Inc. 230,000
----------
392,750
RETAIL TRADE -- 1.4%
15,400 Homebase, Inc. 121,275
----------
Total common stocks 9,958,681
RIGHTS -- 0.0% (A)<F1>
800 Delphi International Ltd
Rights, 01/22/98 0
----------
Total long-term
investments 9,958,681
SHORT-TERM INVESTMENTS -- 0.1% (A)<F1>
Variable Rate Demand Notes
$9,984 Warner-Lambert Company 9,984
----------
Total short-term investments 9,984
----------
Total investments 9,968,665
Liabilities, less cash and
receivables (12.4%) (A)<F1>(D)<F4> (1,102,185)
----------
NET ASSETS $8,866,480
==========
Net Asset Value Per Share
($0.01 par value
500,000,000 shares
authorized),offering
and redemption price
($8,866,480 / 600,372
shares outstanding) $14.77
======
(a)<F1>Percentages for the various classifications relate to net assets.
(b)<F2>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. Securities which are traded
over-the-counter, unlisted, or if no sale is reported, are valued at the most
recent bid price (the most recent ask price for securities sold short). Options
purchased or written 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 are valued at cost which
approximates quoted market value.
(c)<F3>Security, purchased September 3, 1997, is illiquid and unregistered
and is valued at fair value as discussed in footnote (b). The issuer, at its
own cost, has agreed to cause registration of the security and has submitted its
registration to the Securities and Exchange Commission as of January 5, 1998.
(d)<F4>Includes $745,633 of short sales (proceeds $748,132).
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
CUSTODIAN, TRANSFER AGENT
AND DIVIDEND DISBURSING AGENT
FIRSTAR TRUST COMPANY
615 East Michigan Street
Milwaukee, Wisconsin 53202
800-811-5311 or 414-765-4124
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
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.
