ANNUAL REPORT
SEPTEMBER 30, 1999
FMI
FOCUS FUND
A NO-LOAD
MUTUAL FUND
FMI Focus Fund
NOVEMBER 15, 1999
Ted D. Kellner, C.F.A.
Portfolio Manager
Richard E. Lane, C.F.A.
Portfolio Manager
THE VALUE OF A $10,000 INVESTMENT IN THE FMI FOCUS FUND FROM ITS INCEPTION
(12/16/96) TO 9/30/99 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
12/31/98 $23,561 $17,654 $12,342
3/31/99 $22,826 $18,533 $11,673
6/30/99 $27,450 $19,840 $13,488
9/30/99 $26,372 $18,599 $12,634
RESULTS FROM FUND INCEPTION (12/16/96) THROUGH 9/30/99
Annualized
Total Return*<F1>
Total Return*<F1> Through 9/30/99
Total Return*<F1> For the Year From Fund
Last 3 Months Ended 9/30/99 Inception 12/16/96
----------------- ---------------- ------------------
FMI Focus Fund -3.9% 47.9% 41.6%
Standard &Poor's 500 -6.2% 27.8% 24.9%
Russell 2000 -6.3% 19.1% 8.7%
*<F1> Total return includes change in share prices and in each case includes
reinvestments of any dividends, interest and capital gain distributions.
Dear Fellow Shareholders:
Happy New Year!! The FMI Focus Fund delivered an admirable return of 47.9%
over the past twelve months ending September 30, our fiscal year. This
performance didn't come easy as the operating environment, "market", has been
volatile and challenging. We would have liked to close our fiscal year with a
bang, but the Fund declined 3.9% over the past three months. The table below
shows comparative results.
QUARTER ENDED YEAR-TO-DATE
9/30 9/30
------------- ------------
FMIOX -3.9% 11.9%
S&P 500 -6.2% 5.4%
S&P Mid-Cap -8.4% -2.1%
Russell 2000 -6.3% 2.4%
On the bright side though, the Fund's 11.9% year-to-date return easily places
us in the top quartile of all domestic equity mutual funds, according to
Morningstar data.
Despite the challenging market environment, we remain very enthusiastic about
our current holdings and future opportunities. We believe the strong
fundamentals underlying our portfolio companies will result in excellent stock
performance once this "churning period" runs its course. Shareholders who have
been with us awhile will recall that last October, during the "Asian Contagion",
the Focus Fund bottomed out at around negative 10% then mounted a furious rally,
ending the year up nearly 36% (a 45% swing in 2-1/2 months). Remarkably, a
similar pattern played out in 1997, a year in which the Fund appreciated nearly
70%. Though little consolation for recent investors, who may be underwater on
their investment, we provide the review for perspective and urge patience. We
believe the Focus Fund's charter gives us a terrific platform to take full
advantage of our nimbleness, broad view of the world, and intensive research
effort.
We usually don't spend much time examining the big picture issues, preferring
to concentrate our energies looking for attractive companies in which to invest.
Yet, the current environment is so unique that it warrants a discussion. No, we
are not referring to Alan Greenspan and whether the Fed is going to raise
interest rates again. Clearly that is an important factor impacting the market,
but we gave up on predicting interest rates and general movements in the economy
a long time ago. We favor a "bottom-up" approach to stock picking. What we are
referring to is a much more potent factor than even the Federal Reserve...THE
INTERNET. It is changing the business and investment landscape in many ways. We
offer a series of observations below, from our unique perspective, not just
because it is so fascinating which of course it is, but also to offer a glimpse
of how we view "The Revolution" and gain insight into our "Net investment
strategy".
Internet-based technologies are transforming the ways that companies work.
Smart manufacturing firms have established extranets that link suppliers,
engineers, production planners, and product managers. An extranet is a framework
that provides secure and protected Internet transactions. Virtually all
business-to-business commerce occurs over some form of secure, private extranet.
According to Forrester research, extranet transactions in the United States will
amount to $1.3 trillion by 2003, from $43.1 billion last year and an estimated
$109.3 billion in 1999. Extranets enable companies to streamline and speed up
operations, allowing them to respond quickly to market opportunities. Clearly we
are in the early innings of this phenomenon. Since this technology challenges
traditional business models and practices, there is tremendous uncertainty among
business people, portfolio managers, and the investing public at large. This is
the flip side of the Internet IPO craze that has so captured the public's
imagination. An obvious example can be found in the distribution industry.
Almost across the board publicly held distribution companies have been terrible
performers as investors fear that the Internet will somehow disintermediate
their economic role. Clearly, the Internet may reduce the role of many
intermediaries/distributors, but it will also prove quite beneficial to others.
Until the winners and losers get sorted out, the market is taking them all down.
Likewise, in many other industries where the Internet is deemed to be a threat,
from financial services to printing to transaction processing. The only sectors
immune to the Internet bogeyman are those that enable the tremendous growth in
the Internet itself (i.e. fiber optics, semiconductors, communications).
The Internet IPO mania has led to a tremendous disparity in the stock market
this year. While a handful of Internet companies appreciated by leaps and
bounds, most stocks had not appreciated much this year (through the 3rd
quarter). While some stocks performed poorly, due to the Internet threat -
"Internet Road Kill", many more stocks performed poorly simply out of neglect.
They were "crowded out" by the booming Internet stocks. After all there is only
so much money to go around, and with a small number of Internet stocks going up
100 points at a time, not much money was left to invest in the broader stock
market. This mania has been bigger than previous ones, namely Biotechnology,
because the investing public identifies with it so well; people surf the web
everyday. The basic concept of many pure Internet plays is very speculative,
reminiscent of a lottery ticket. A simple consumer-oriented concept such as
selling gardening products over the Internet is hatched on Wall Street. As first
mover advantage is deemed to be so important, i.e. the first to market has the
best shot at establishing a brand and erecting a permanent barrier to entry by
other potential competitors, the whole process is often not well thought
out and rushed to market. A large percentage of the proceeds from Internet IPOs
are spent on advertising in order to quickly build a national brand. If the new
company can show some revenue in the ensuing nine months, the idea is that Wall
Street will raise a second round of funding, again largely for branding. If the
new company doesn't produce some revenue, chances are that Wall Street won't
fund the next round and the new company is toast. It's an all or nothing, boom
or bust game. We believe many new Internet companies may be approaching this
point over the next year or so. Like the lottery, you probably want to spread
your bets over a number of different "games".
So what should a self-respecting mutual fund manager still sensitive to
valuation discipline and the concept of downside risk do in the current
environment to sensibly capitalize on the internet revolution? We have several
strategies which we believe will indeed capitalize on the web explosion, while
at the same time avoid the huge "valuation risk" with direct Internet plays. The
obvious one is to invest in the companies building the internet itself.
Portfolio companies like ADC Telecom, Tollgrade, Allied Riser, Adelphia
Communications, Jones Intercable, Anadigics, and Aware, all participate in one
way or another in building the internet. Some are "chips" companies, others in
fiber and coax, but all should benefit from the buildout. Very exciting! And
going back to our initial discussion of extranets, we failed to mention the
industries that have embraced the new supply chain, namely computer and
electronics manufacturers, and the automotive industry. Contract manufacturers
and distributors are important players in the supply chain. The DII Group and
Arrow Electronics are examples of industry leaders with unwarranted discounted
multiples relative to their peer group. The DII Group provides a wide spectrum
of services to its client base. It can design and manufacture printed circuit
boards as well as perform full box build assembly. Ironically, much of its
product portfolio are incorporated into servers, workstations, high-end storage
devices, and telecommunications equipment that are part of the internet
infrastructure. Not only are their end markets growing, but there are still many
companies that have not yet changed to an outsourced model. The largest
opportunity being in the telecommunications area. Arrow Electronics is the
world's largest distributor of electronic components. We have mentioned Arrow in
the past, and believe that the stock has a bright future because we are in the
early stages of a rebound in the semiconductor/components cycle.
Our second strategy entails backdoor plays on the Internet. True North is a
classic example. The Company is a major advertising firm benefiting from the
huge .com spending. We have seen figures suggesting that as much as 70% of all
initial public offering proceeds are going directly to Madison Avenue for
advertising and branding. True North is an arms supplier to the "warring
Internet factions" and stands to benefit no matter who wins the "battle for
eyeballs". Ziff Davis and Primedia are other examples, which in both cases here,
represent content plays on the internet.
Our last strategy is to simply take advantage of the great bargains being
created in non-internet companies. Many good companies are selling for much less
than private market value. Ordinarily an unusual situation, this has been
brought about through sheer neglect. Everyone is simply obsessed with internet.
But cash flow is cash flow. If the public market doesn't recognize it, smart
management will. We expect quite a bit of take over activity in the next year to
eighteen months. CNA Surety is a good example here. The company is a niche
insurance underwriter at about 8 times earnings despite a very high level of
profitability and good growth prospects. If the stock stays this low, we think
CNA Surety would make a good acquisitions candidate, most likely its parent CNA,
which currently owns a majority of the shares. Dura Automotive, an excellent
company in the automobile OEM market is another example. The stock sells at 5
times earnings despite outstanding management and strong growth prospects.
The Board of Directors has declared a distribution of $0.0465 from net long-
term realized capital gains and $2.48687 from net short-term capital gains. Your
distribution confirmation has been previously sent.
As is our custom, we would like to thank our shareholders, Wall Street
research, sales, and trading contributors, and FMI employees for helping make
this another successful year. We are approaching our 3rd anniversary - December
16th, and we have an excellent chance at becoming one of the very top funds in
Morningstar's small-cap blend category. As hard as we have worked to make that
dream three years ago become a reality today, we couldn't have done it without
the above constituencies. So again, thanks for the help and we look forward to
another profitable year.
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
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
The first fiscal quarter ended December 31, 1998, accounted for the lion's
share of the gain for the fiscal year. In large part, this was due to the market
rebound from the October lows. Recall that the "Asian Contagion" hit the stock
market quite hard during the Summer and Fall of 1998. The Federal Reserve
responded by lowering interest rates which stabilized the market.
FMI Focus Fund had a handful of stocks that enjoyed significant rebounds
during this period, such as Ziff Davis, Manitowoc Corp., Arrow Electronics, and
Heller Financial. The Focus Fund also benefited from continued consolidation in
Cable TV holdings, Century Communications and Jones Intercable were both
acquired. The Fund's holdings in ADC Telecom, Tollgrade, and a hand full of
other companies benefited from the continued buildout of the communications
industry. Finally Omnipoint, a mobile phone operator and holding was purchased
by Voicestream.
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
FMI FOCUS FUND, STANDARD & POOR'S 500 INDEX, AND RUSSELL 2000 INDEX
AVERAGE ANNUAL TOTAL RETURN
1-Year Since inception 12/16/96
+47.9% +41.6%
FMI Standard & Poor's Russell 2000
Date Focus Fund 500 Index(1)<F3> Index(2)<F4>
12/16/96*<F2> $10,000 $10,000 $10,000
9/30/97 $16,796 $13,333 $13,103
9/30/98 $17,827 $14,553 $10,611
9/30/99 $26,372 $18,599 $12,634
*<F2> inception date 12/16/96
Past performance is not predictive of future performance.
(1)<F3> The Standard & Poor's 500 Index consists of 500 selected common
stocks, most of which are listed on the New York Stock Exchange. The
Standard & Poor's Ratings Group designates the stocks to be included
in the Index on a statistical basis. A particular stock's weighting in
the Index is based on its relative total market value (i.e., its
market price per share times the number of shares outstanding). Stocks
may be added or deleted from the Index from time to time.
(2)<F4> The Russell 2000 Index is an index comprised of 2,000 publicly traded
small capitalization common stocks that are ranked in terms of
capitalization below the large and mid-range capitalization sectors of
the United States equity market. The Russell 2000 Index is a
trademark/service mark of the Frank Russell Company.
100 East Wisconsin Avenue
Suite 1500
Milwaukee, WI 53202
FMI Focus Fund
REPORT OF INDEPENDENT ACCOUNTANTS
(PRICEWATERHOUSECOOPERS LOGO)
October 28, 1999
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 FMI Focus Fund (the "Fund") at
September 30, 1999, the results of its operations for the year then ended, the
changes in its net assets and the financial highlights for each of the periods
indicated, 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, 1999 by correspondence with the custodian and brokers and
application of alternative auditing procedures where confirmations were not
received, provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
FMI Focus Fund
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1999
ASSETS:
Investments in securities, at value (cost $29,633,960) $35,715,741
Receivable for investments sold 3,481,524
Deferred organizational expenses 13,395
Dividends and interest receivable 12,296
-----------
Total assets $39,222,956
-----------
-----------
LIABILITIES:
Loan payable $ 1,725,000
Payable to brokers for investments purchased 1,208,530
Payable to adviser for management, administrative
fees and deferred expenses 56,141
Interest payable on loan payable 1,584
Other liabilities 61,509
-----------
Total liabilities 3,052,764
-----------
NET ASSETS:
Capital Stock, $0.01 par value; 500,000,000 shares
authorized; 1,677,782 shares outstanding 26,487,970
Net unrealized appreciation on investments 6,081,781
Accumulated net realized gains on investments
and put options 3,600,441
-----------
Net assets 36,170,192
-----------
Total liabilities and net assets $39,222,956
-----------
-----------
CALCULATION OF NET ASSET VALUE:
Offering and redemption price per share
($36,170,192 / 1,677,782 shares outstanding) $ 21.56
-----------
-----------
The accompanying notes to financial statements are an integral part of this
statement.
FMI Focus Fund
SCHEDULE OF INVESTMENTS
September 30, 1999
QUOTED
MARKET
SHARES COST VALUE
- ------ ---- ------
COMMON STOCKS -- 100.0% (A)<F7>
BANKS -- 8.6%
57,500 AMCORE Financial, Inc. $ 1,215,626 $ 1,185,937
35,000 Associated Banc-Corp. 1,187,535 1,266,562
36,200 Blackhawk Bancorp, Inc.+<F6> 526,555 520,375
7,000 Union Bankshares Ltd.*<F5> 89,000 112,438
----------- -----------
3,018,716 3,085,312
CHEMICAL/SPECIALTY MATERIALS -- 1.5%
29,500 Georgia Gulf Corp. 395,339 519,937
COMMUNICATIONS EQUIPMENT -- 6.6%
16,000 ADC Telecommunications, Inc.*<F5> 300,000 671,000
16,500 Channell Commercial Corp.*<F5> 214,240 167,062
4,000 Conexant Systems, Inc.*<F5> 302,365 290,625
45,500 Tollgrade Communications Inc.*<F5> 959,098 1,222,813
----------- -----------
1,775,703 2,351,500
COMMUNICATION SERVICES/CABLE -- 25.1%
20,100 Bell & Howell Co.*<F5> 498,137 737,419
25,000 Bell Canada
International Inc.*<F5> 324,688 256,250
14,000 Century Communications
Corp.*<F5> 255,344 638,750
30,000 CSG Systems
International, Inc.*<F5> 712,019 822,186
50,500 Hyperion
Telecommunications, Inc.*<F5> +<F6> 745,129 1,253,031
25,900 Imax Corp.*<F5> 547,984 518,000
10,100 Jones Intercable, Inc.*<F5> 434,481 537,825
24,100 Jones Intercable, Inc. Cl A*<F5> 359,132 1,302,906
15,000 Omnipoint Corp. 404,844 838,125
51,000 PRIMEDIA Inc.*<F5> 624,341 714,000
15,000 True North
Communications, Inc. 533,669 545,625
48,500 Ziff-Davis Inc.*<F5> 772,104 782,063
----------- -----------
6,211,872 8,946,180
COMMUNICATIONS SERVICES/MEDIA -- 6.7%
30,500 Mail-Well, Inc.*<F5> 448,549 423,187
21,000 MasTec, Inc.*<F5> 625,026 618,188
15,000 Penton Media, Inc. 194,650 243,750
12,000 Playboy Enterprises,
Inc. Cl B*<F5> 293,667 320,250
53,000 Saville Systems
PLC - SP ADR*<F5> 714,000 778,438
----------- -----------
2,275,892 2,383,813
COMPUTERS & ELECTRONICS -- 23.1%
39,000 Arrow Electronics, Inc.*<F5> 513,734 687,375
5,000 Celestica Inc.
Subordinate Voting*<F5> 101,125 246,875
10,000 C.P. Clare Corp.*<F5> 66,250 63,750
48,000 The DII Group, Inc.*<F5> 1,484,759 1,689,000
35,000 General
Semiconductor, Inc.*<F5> 265,537 360,937
28,900 HNC Software Inc.*<F5> 842,522 1,146,969
12,000 LeCroy Corp.*<F5> 204,703 216,000
20,000 Methode Electronics, Inc. 262,813 377,500
22,500 MicroTouch Systems, Inc.*<F5> 272,438 379,687
19,000 MKS Instruments, Inc.*<F5> 390,813 422,750
46,500 Pioneer-Standard
Electronics, Inc. 427,562 671,344
13,000 Plexus Corp.*<F5> 399,100 398,125
48,000 Varian Inc.*<F5> 727,260 852,000
31,250 Vishay
Intertechnology, Inc.*<F5> 352,375 742,188
----------- -----------
6,310,991 8,254,500
ENERGY/ENERGY SERVICES -- 9.2%
20,000 EOG Resources, Inc. 445,000 425,000
7,000 St. Mary Land &
Exploration Co. 194,688 182,875
22,000 Noble Affiliates, Inc. 564,988 638,000
81,250 Pride International, Inc.*<F5> 847,122 1,152,734
100,000 Santa Fe Snyder Corp.*<F5> 750,186 900,000
----------- -----------
2,801,984 3,298,609
FINANCIAL SERVICES -- 3.9%
14,000 Fiserv, Inc.*<F5> 435,750 455,000
36,000 Heller Financial, Inc. 821,620 810,000
10,000 Willis Lease Finance Corp.*<F5> 160,833 131,875
----------- -----------
1,418,203 1,396,875
HEALTH INDUSTRIES -- 4.4%
8,475 Covance Inc.*<F5> 149,000 82,102
10,000 Henry Schein, Inc.*<F5> 183,750 142,500
10,900 Millipore Corp. 320,014 409,431
35,500 Quest Diagnostics Inc.*<F5> 900,980 923,000
----------- -----------
1,553,744 1,557,033
INDUSTRIAL & TRANSPORTATION PRODUCTS -- 7.9%
36,000 The Alpine Group, Inc.*<F5> 468,758 465,750
27,500 Dura Automotive
Systems, Inc.*<F5> 800,453 661,719
30,000 Inco Limited 521,857 641,250
16,000 The Manitowoc
Company, Inc. 287,652 546,000
24,900 Regal-Beloit Corp. 469,183 516,675
----------- -----------
2,547,903 2,831,394
INDUSTRIAL SERVICES -- 0.3%
10,000 Republic Services, Inc.*<F5> 206,131 108,750
INSURANCE -- 2.7%
26,600 CNA Surety Corp. 380,063 349,125
24,428 Reinsurance Group
of America, Inc. 732,200 627,494
----------- -----------
1,112,263 976,619
----------- -----------
Total common stocks 29,628,741 35,710,522
SHARES OR QUOTED
PRINCIPAL MARKET
AMOUNT COST VALUE
------ ---- ------
SHORT-TERM INVESTMENTS -- 0.0% (A)<F7>
VARIABLE RATE DEMAND NOTE
$5,219 Wisconsin Corporate Central
Credit Union 5,219 5,219
----------- -----------
TOTAL
INVESTMENTS (100%) $29,633,960 $35,715,741
----------- -----------
----------- -----------
*<F5> Non-income producing security.
+<F6> Securities not committed as collateral for the credit facility. All or
a portion of the rest of the securities have been committed as
collateral for the credit facility.
(a)<F7> Percentages for the various classifications relate to total
investments.
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, 1999
INCOME:
Dividends $ 170,481
Interest 43,038
-----------
Total income 213,519
-----------
EXPENSES:
Management fees 386,611
Administrative services 59,027
Professional fees 28,892
Registration fees 23,560
Custodian fees 19,437
Transfer agent fees 15,879
Printing and postage expenses 14,897
Amortization of organizational expenses 5,954
Board of Directors fees 450
Other expenses 5,681
-----------
Total operating expenses before interest expense 560,388
Interest expense 48,193
-----------
Total expenses 608,581
-----------
NET INVESTMENT LOSS (395,062)
-----------
REALIZED GAINS AND (LOSSES) ON INVESTMENTS:
Net realized gain on securities $4,600,274
Net realized loss on put options (14,097)
-----------
NET REALIZED GAIN ON INVESTMENTS 4,586,177
NET INCREASE IN UNREALIZED APPRECIATION ON INVESTMENTS 6,156,767
-----------
NET GAIN ON INVESTMENTS 10,742,944
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $10,347,882
-----------
-----------
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended September 30, 1999 and 1998
1999 1998
----------- -----------
OPERATIONS:
Net investment loss $ (395,062) $ (275,419)
Net realized gain on investments 4,586,177 597,792
Net increase (decrease) in unrealized
appreciation on investments 6,156,767 (480,785)
----------- -----------
Net increase (decrease) in net assets
resulting from operations 10,347,882 (158,412)
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net realized gains
($0.61821 and $0.47820 per share,
respectively) (794,289) (278,771)
----------- -----------
Total distributions (794,289)*<F9> (278,771)
----------- -----------
FUND SHARE ACTIVITIES:
Proceeds from shares issued (797,147 and
1,038,885 shares, respectively) 15,195,513 16,465,542
Net asset value of shares issued in
distributions (42,878 and 15,049 shares,
respectively) 683,037 215,951
Cost of shares redeemed (433,982 and 132,094
shares, respectively) (8,525,659) (2,136,896)
----------- -----------
Net increase in net assets derived
from Fund share activities 7,352,891 14,544,597
----------- -----------
TOTAL INCREASE 16,906,484 14,107,414
NET ASSETS AT THE BEGINNING OF THE YEAR 19,263,708 5,156,294
----------- -----------
NET ASSETS AT THE END OF THE YEAR $36,170,192 $19,263,708
----------- -----------
----------- -----------
*<F9> 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>
YEARS ENDED SEPTEMBER 30, FOR THE PERIOD FROM
------------------------- DECEMBER 16, 1996+<F10> TO
1999 1998 SEPTEMBER 30, 1997
---- ---- --------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $15.15 $14.74 $10.00
Income from investment operations:
Net investment loss (a)<F13> (0.18) (0.17) (0.04)
Net realized and unrealized gains on investments 7.21 1.06 6.69
------ ------ ------
Total from investment operations 7.03 0.89 6.65
Less distributions:
Dividend from net investment income -- -- (0.01)
Distributions from net realized gains (0.62) (0.48) (1.90)
------ ------ ------
Total from distributions (0.62) (0.48) (1.91)
------ ------ ------
Net asset value, end of period $21.56 $15.15 $14.74
------ ------ ------
------ ------ ------
TOTAL INVESTMENT RETURN 47.9% 6.2% 68.0%*<F11>
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's $) 36,170 19,264 5,156
Ratio of operating expenses before interest expense and dividends
on shorts (after reimbursement) to average net assets (b)<F14> 1.81% 2.34% 2.75%**<F12>
Ratio of interest expense and dividends on short
positions to average net assets 0.16% 0.33% 0.17%**<F12>
Ratio of net investment loss to average net assets (c)<F15> (1.28%) (1.94%) (1.85%)**<F12>
Portfolio turnover rate 238.8% 402.2% 298.2%
</TABLE>
+<F10> Commencement of operations.
*<F11> Not annualized.
**<F12> Annualized.
(a)<F13> Net investment loss before interest expense and dividends on short
positions for the years ended September 30, 1999 and 1998 and for
the period ended September 30, 1997 was ($0.16), ($0.14) and
($0.04), respectively. In 1999 and 1998, net investment loss per
share is calculated using ending balances prior to consideration of
adjustments for permanent book and tax differences.
(b)<F14> 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%**<F12>.
(c)<F15> 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%)**<F12>.
The accompanying notes to financial statements are an integral part of this
statement.
FMI Focus Fund
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
(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 futures contracts,
options on 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. The collateral is
required to be adjusted daily to reflect changes in the value of the
securities sold short. There were no short positions in the Fund
during fiscal year 1999.
(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 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, 1999.
(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 (8.25% on September 30, 1999) 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.
During the year ended September 30, 1999, the Fund had an outstanding
average daily balance of $506,575 under the Agreement. The maximum amount
outstanding during that period was $2,000,000. Interest expense amounted
to $48,193 for the year ended September 30, 1999. At September 30, 1999,
the Fund had a loan payable balance of $1,725,000, and the securities
collateralizing the Agreement amounted to $17,088,659.
Pursuant to the 1940 Act, the Fund is required to satisfy asset
coverage requirements on its outstanding borrowings. At September 30,
1999, the Fund satisfied all asset coverage requirements of the 1940 Act.
(4) DISTRIBUTION TO SHAREHOLDERS --
Net investment income and net realized gains, if any, are distributed
to shareholders. On October 28, 1999, the Fund distributed $4,198,727 from
net short-term realized gains ($2.48687 per share) and $78,492 from net
long-term realized gains ($0.0465 per share). The distributions were
declared on October 27, 1999 to shareholders of record on October 26, 1999.
(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, 1999 were $13,395.
(6) INVESTMENT TRANSACTIONS --
For the year ended September 30, 1999, purchases and proceeds of sales
of investment securities (excluding short-term investments) were
$80,904,269 and $72,517,120, respectively.
(7) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES --
As of September 30, 1999, liabilities of the Fund included the
following:
Loan payable $ 1,725,000
Payable to brokers for securities purchased 1,208,530
Payable to FMI for management, administrative
fees and deferred expenses 56,141
Interest payable on loan payable 1,584
Other liabilities 61,509
(8) SOURCES OF NET ASSETS --
As of September 30, 1999, the sources of net assets were as follows:
Fund shares issued and outstanding $26,487,970
Net unrealized appreciation on investments 6,081,781
Accumulated net realized gains on investments
and put options 3,600,441
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$36,170,192
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Aggregate net unrealized appreciation as of September 30, 1999,
consisted of the following:
Aggregate gross unrealized appreciation $ 7,027,196
Aggregate gross unrealized depreciation (945,415)
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Net unrealized appreciation $ 6,081,781
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(9) REQUIRED FEDERAL INCOME TAX DISCLOSURES (UNAUDITED) --
In early 1999, shareholders received information regarding all
distributions paid to them by the Fund during the fiscal year ended
September 30, 1999. The Fund hereby designates the following amount as
long-term capital gains distributions.
Capital gains taxed at 20% $ 24,296
The percentage of ordinary income which is eligible for the corporate
dividend received deduction for the fiscal year ended
September 30, 1999 was 8%.
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
CUSTODIAN
FIRSTAR BANK MILWAUKEE, NA
615 East Michigan Street
Milwaukee, Wisconsin 53202
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.
