SEMIANNUAL REPORT
MARCH 31, 1999
FMI
Focus Fund
A NO-LOAD
MUTUAL FUND
FMI Focus Fund
MAY 19, 1999
THE VALUE OF A $10,000 INVESTMENT IN THE FMI FOCUS FUND FROM ITS INCEPTION
(12/16/96) TO 3/31/99 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
RESULTS FROM FUND INCEPTION (12/16/96) THROUGH 3/31/99
Annualized
Total Return*<F1>
Total Return*<F1> Through 3/31/99
Total Return*<F1> For the Year From Fund
Last 6 Months Ended 3/31/99 Inception 12/16/96
------------- ------------- ------------------
FMI Focus Fund 28.0% 14.8% 43.4%
Standard & Poor's 500 27.3% 18.5% 31.0%
Russell 2000 10.0% -16.3% 7.0%
*<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 first quarter of 1999 again tested the conviction of small-cap investors.
As seen in the table below, the Russell 2000 small company index continued
1998's downward drift, declining nearly 5-1/2% in the quarter. The relative
underperformance of small companies also carried over from last year, as the S&P
500 actually appreciated some 5%. However, hope springs eternal as April and
-----------
early May are proving to be much friendlier to the small-cap investor. We
believe a good case can be made that the two-year small-cap bear market may have
ended. As we have pointed out in previous shareholder letters (in particular,
see last years third quarter letter) the valuation and performance disparities
reached record levels, indeed, ridiculous levels, and like a stretched rubber
band finally snapped back. Over the course of the last six weeks, the small-cap
indices have dramatically outperformed their big-cap brethren, a trend we think
is sustainable for awhile given that smaller companies still are considerably
less expensive relative to underlying earnings. It would also appear that the
market is broadening in general, with increasing investor interest in good, but
formerly neglected companies. This is in stark contrast to the momentum market
of the past 18 months, where investors simply kept piling into a handful of
companies.
The recent performance of the Fund mimics the discussion above. Following a
difficult first quarter, down about 3%, the Fund has rebounded significantly, up
over 10% as of this writing (mid May). Investors familiar with the Fund know
that we have consistently cautioned our co-investors that the unstable world
economic condition of the past several years, initiated by Asia's 1997 collapse,
was likely to create volatile markets. We felt this would be particularly true
in the small-cap arena where illiquidity can often amplify underlying
volatility. But we have also urged our co-investors to "hang in there", that the
flipside of unsettled conditions would be opportunity. Opportunity brought on by
investors less confident in their approach, who tend to panic and sell just at
the most opportune moment.
Early Fund investors also know that there have been three times in the 2-1/2
year life of the Fund when things looked bleak: the Spring of 1997, Fall of
1998, and the First quarter of 1999. After each period, the Fund came back with
a vengeance. Last Fall, the Fund was down over 10% year-to-date through early
October, yet finished the full year up nearly 36%. Likewise, at one point during
the current quarter, the Fund was down nearly 8% but has now recovered nicely
into positive territory, over 10%.
Indeed, as we urged in the fourth quarter shareholder letter, if it weren't
for periods of investor panic, the opportunity for outsized gains would not
ordinarily present themselves. At least not in the type of companies in which we
prefer to invest; competitively positioned, well managed business franchises
that exhibit strong growth characteristics, yet sell at reasonable valuations.
Just such an opportunity presented itself in the recent market turmoil, with our
old friend, Covance, which is the focus of this quarter's shareholder letter.
COVANCE INC.
Covance is the leading contract research organization or CRO to the
pharmaceutical industry. The company has been a prominent holding for most of
the Fund's existence and has clearly been one of our biggest winners. During the
first quarter, the stock approached our target price in the low 30's and was
trimmed back. But several weeks ago, we were presented with a great opportunity
to buy it all back, and then some (now one of the Fund's largest holdings at
about 6%). The opportunity, a decline in share price from the low 30's to low
20's, was precipitated by a gross over reaction by investors to a major
acquisition: Covance's purchase of Parexcel in an $800 million stock swap. This
merger combines the CRO industry's number two and number three participants,
resulting in the number one, world wide player focused on clinical research
services to major pharmaceutical companies. While competitor Quintiles (QTRN) is
larger in aggregate, a large percent of its revenue is outside the base CRO
business due to its purchase of Envoy.
We like the deal and feel Covance is a stronger company as a result of the
combination. We also appreciate the fact that Covance kept Parexcel out of the
hands of a competitor. Wall Street, however, initially feared earnings dilution
and pummeled the stock nearly 30% the day the deal was announced. Critics also
questioned the strategic thrust (too much overlap) and felt Covance was
overpaying for a company that missed several quarters of earnings estimates.
While we admit Covance paid a "full price", we do believe that Parexcel adds
to Covance's functional and geographical mix, and again, kept Parexcel out of
competitor's hands. Covance believes the combination will boost its growth rate
by several percentage points longer term, from perhaps 20% to 23% or so. From
our vantage point, we were able to buy back a better company in the low 20's
than we had been selling only several months ago in the low 30's. The high level
of confidence we have in the Covance management team gave us the confidence to
"step into the breach, on panic selling". For newer Focus Fund investors, we
will quickly review the investment case for the CRO industry.
CRO's or contract research organizations are commonly known for their work
managing clinical trials for drug makers.
While Covance certainly manages clinical trials on an outsourced basis to
pharmaceutical and biotech companies (roughly 1/3 of revenue), the Company's
strategy is to provide a wide array of services related to new drug development.
Current offerings range from central lab services, early in the trial process,
to post trial marketing, consulting, and economics. Covance also has a trial
drug packaging business and a bio-manufacturing facility (very exciting
opportunity).
The principal reason for our bullish stance on the industry is simple: the
pharmaceutical industry has a record amount of drugs coming off patent ($40
billion worth over the next 8 years) and is under intense pressure to replace
those drugs with new ones. Consequently, major pharmaceutical companies are
spending some $40 billion annually on research and development, an amount
growing 12% annually. Currently, about 20% of that amount is outsourced, and as
"big pharma" focuses more of its own efforts on drug discovery, we believe it
will outsource more and more of the post discovery process to the CRO's. Most
industry analysts feel the CRO industry can grow 20% to 30% annually for the
foreseeable future.
As well, the Biotech industry, well funded by Wall Street, is really coming
into its own. New technologies such as, genomics, combinatorial chemistry, and
high throughput screening are likely to help biotech and pharmaceutical
companies increase the number of new compounds brought to preclinical trials
each year, ultimately fueling further demand for CRO services. And we believe
Covance is the best positioned CRO to capitalize on these trends.
OUTLOOK FOR THE BALANCE OF 1999
As mentioned in the body of the shareholder report, we believe the market is
broadening into smaller and somewhat more cyclical companies, which is where we
have repositioned a portion of the Fund. We used the first quarter volatility to
pick up some terrific bargains, which we expect to play out during the balance
of 1999.
And as always, we would hope to use any future periods of panic to our
advantage with respect to buying excellent, franchise companies on an
opportunistic basis.
Again, thanks to all our co-investors, co-workers, and associates for your
patience and input. In particular, we would like to thank John Kreger, the
William Blair CRO analyst. John has given us invaluable insights over the years,
much to our Fund investors' economic benefit.
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
P.S. Now that we have surpassed the $30 million threshold, daily pricing for
the FMI Focus Fund can be found in most financial tables, including The New York
Times, Investors Business Daily, and The Wall Street Journal.
225 E. Mason St. o Milwaukee, WI 53202 o 414-226-4555
FMI Focus Fund
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1999 (Unaudited)
ASSETS:
Investments in securities, at value (cost $26,389,177) $29,172,262
Receivable for investments sold 3,847,698
Deferred organizational expenses 16,372
Dividends and interest receivable 15,379
-----------
Total assets $33,051,711
-----------
-----------
LIABILITIES:
Payable to brokers for investments purchased $ 1,884,184
Payable to adviser for management, administrative fees
and deferred expenses 52,377
Other liabilities 28,035
-----------
Total liabilities 1,964,596
-----------
NET ASSETS:
Capital Stock, $0.01 par value; 500,000,000 shares
authorized; 1,666,322 shares outstanding 26,130,189
Net unrealized appreciation on investments 2,783,085
Accumulated net realized gains on investments and put options 2,173,841
-----------
Net assets 31,087,115
-----------
Total liabilities and net assets $33,051,711
-----------
-----------
CALCULATION OF NET ASSET VALUE:
Offering and redemption price per share
($31,087,115 / 1,666,322 shares outstanding) $ 18.66
-----------
-----------
The accompanying notes to financial statements are an integral part of this
statement.
FMI Focus Fund
SCHEDULE OF INVESTMENTS
March 31, 1999 (Unaudited)
QUOTED
SHARES OR MARKET
PRINCIPAL AMOUNT COST VALUE
---------------- ---- ------
COMMON STOCKS -- 91.1% (A)<F3>
COMMUNICATIONS EQUIPMENT -- 5.8%
17,000 ADC Telecommunications,
Inc.*<F2> $ 320,625 $ 810,696
43,500 Anicom, Inc.*<F2> 294,375 380,625
16,000 Channell Commercial Corp.*<F2> 209,210 141,008
7,000 Teltrend Inc.*<F2> 140,312 110,250
14,500 Tollgrade Communications
Inc.*<F2> 313,919 241,062
----------- -----------
1,278,441 1,683,641
COMMUNICATION SERVICES/CABLE TV -- 23.1%
32,600 Bell & Howell Co.*<F2> 834,049 955,604
31,000 Century Communications
Corp.*<F2> 706,344 1,439,578
28,900 Imax Corp.* 621,109 563,550
41,500 Jones Intercable Inc. Cl A*<F2> 1,048,839 1,636,677
15,000 Omnipoint Corp.*<F2> 184,922 216,570
50,000 PRIMEDIA Inc.*<F2> 608,281 700,000
10,000 TCA Cable TV, Inc. 228,000 435,000
8,000 Wiztec Solutions Ltd.*<F2> 141,680 143,504
30,000 Ziff-Davis Inc.*<F2> 496,590 645,000
----------- -----------
4,869,814 6,735,483
COMPUTERS & ELECTRONICS -- 17.4%
39,000 Arrow Electronics, Inc.*<F2> 513,734 585,000
28,000 Celestica Inc.*<F2> 730,610 908,264
27,000 The DII Group, Inc.*<F2> 695,197 789,750
25,000 General
Semiconductor, Inc.*<F2> 189,937 181,250
26,500 HNC Software Inc.*<F2> 777,906 867,875
20,000 Methode Electronics, Inc. 262,812 222,500
22,500 MicroTouch Systems, Inc.*<F2> 272,438 267,187
5,000 Molex Inc. 129,375 129,375
32,500 Pioneer-Standard
Electronics, Inc. 247,500 213,298
12,000 Sykes Enterprises, Inc.*<F2> 359,250 387,756
37,000 Vishay Intertechnology, Inc.*<F2> 522,833 538,831
----------- -----------
4,701,592 5,091,086
CONSUMER PRODUCTS & RETAIL -- 6.4%
16,500 Casey's General Stores, Inc. 231,156 243,375
10,000 Consolidated Stores Corp.*<F2> 260,284 303,130
26,000 Jostens, Inc. 541,341 552,500
11,000 Ross Stores, Inc. 473,771 481,943
8,600 Sotheby's, Inc. 266,634 278,425
----------- -----------
1,773,186 1,859,373
ENERGY/ENERGY SERVICES -- 4.5%
22,000 Noble Affiliates, Inc. 564,988 638,000
35,250 Pride International, Inc.*<F2> 320,569 290,812
52,500 Santa Fe Energy
Resources, Inc.*<F2> 334,963 383,933
----------- -----------
1,220,520 1,312,745
FINANCIAL SERVICES & BANKS -- 10.8%
21,250 Affiliated Managers
Group, Inc.*<F2> 540,141 552,500
20,000 Associated Banc-Corp. 633,941 638,760
36,200 Blackhawk Bancorp, Inc. 526,555 484,175
15,000 F&M Bancorporation, Inc. 480,312 495,000
10,000 Freedom Securities Corp. 163,578 159,380
12,000 Heller Financial, Inc. 231,595 282,000
10,000 Prime Bancshares, Inc. 175,000 141,880
12,000 Union Bankshares Ltd.*<F2> 158,250 132,000
15,000 Willis Lease Finance Corp.*<F2> 241,250 262,500
----------- -----------
3,150,622 3,148,195
HEALTH INDUSTRIES -- 8.7%
10,500 Centocor, Inc.*<F2> 422,594 387,849
22,875 Covance Inc.*<F2> 530,380 573,316
22,500 Henry Schein, Inc.*<F2> 736,661 568,125
9,500 PAREXEL International Corp.*<F2> 242,109 196,536
16,000 Patterson Dental Co.*<F2> 610,928 692,000
5,000 Quest Diagnostics Inc.*<F2> 112,175 111,250
----------- -----------
2,654,847 2,529,076
INDUSTRIAL & TRANSPORTATION PRODUCTS -- 6.8%
10,000 Applied Power Inc. 256,085 272,500
11,250 Dura Automotive
Systems, Inc.*<F2> 383,750 317,812
18,850 The Manitowoc
Company, Inc. 581,902 789,344
16,900 Millipore Corp. 475,737 407,713
9,100 Raychem Corp. 274,503 205,323
----------- -----------
1,971,977 1,992,692
INSURANCE -- 6.8%
23,000 CNA Surety Corp. 328,583 284,625
10,000 Enhance Financial Services
Group Inc. 247,320 227,500
9,000 Financial Security Assurance
Holdings Ltd. 365,290 446,625
17,000 FPIC Insurance Group, Inc.*<F2> 624,750 705,500
17,000 Fremont General Corp. 349,442 324,071
----------- -----------
1,915,385 1,988,321
PRINTING/PUBLISHING/FORMS -- 0.8%
18,000 Mail-Well, Inc.*<F2> 261,893 240,750
----------- -----------
Total common stocks 23,798,277 26,581,362
SHORT-TERM INVESTMENTS -- 8.9% (A)<F3>
VARIABLE RATE DEMAND NOTES
$1,400,000 Firstar Bank U.S.A., N.A. 1,400,000 1,400,000
1,190,900 Warner-Lambert Co. 1,190,900 1,190,900
----------- -----------
Total short-term
investments 2,590,900 2,590,900
----------- -----------
TOTAL INVESTMENTS
(100%)(B)<F4> $26,389,177 $29,172,262
----------- -----------
----------- -----------
*<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 period ending March 31, 1999, the FMI Focus Fund had closed the
following put options:
# OF
CONTRACTS COST
--------- ----
Balance at September 30, 1998 30 $ 15,180
Options purchased 0 --
Options expired 0 --
Options closed (30) (15,180)
--- --------
Balance at March 31, 1999 0 $ 0
--- --------
--- --------
The accompanying notes to financial statements are an integral part of this
statement.
FMI Focus Fund
STATEMENT OF OPERATIONS
For the Period Ending March 31, 1999 (Unaudited)
INCOME:
Dividends $ 83,089
Interest 15,254
----------
Total income 98,343
----------
EXPENSES:
Management fees 163,565
Administrative services 26,143
Professional fees 19,090
Registration fees 12,955
Custodian fees 9,656
Printing and postage expenses 8,633
Transfer agent fees 7,568
Amortization of organizational expenses 2,977
Board of Directors fees 450
Other expenses 6,921
----------
Total operating expenses before interest expense 257,958
Interest expense 31,247
----------
Net expenses 289,205
----------
NET INVESTMENT LOSS (190,862)
----------
REALIZED GAINS AND (LOSSES) ON INVESTMENTS:
Net realized gain on securities $2,973,940
Net realized loss on put options (14,097)
----------
NET REALIZED GAIN ON INVESTMENTS 2,959,843
NET INCREASE IN UNREALIZED APPRECIATION ON INVESTMENTS 2,858,071
----------
NET GAIN ON INVESTMENTS 5,817,914
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $5,627,052
----------
----------
The accompanying notes to financial statements are an integral part of this
statement.
FMI Focus Fund
STATEMENTS OF CHANGES IN NET ASSETS
For the Period Ending March 31, 1999 (Unaudited) and For the Year Ended
September 30, 1998
1999 1998
------ ------
OPERATIONS:
Net investment loss $ (190,862)$ (275,419)
Net realized gain on investments 2,959,843 597,792
Net increase (decrease) in unrealized
appreciation on investments 2,858,071 (480,785)
----------- -----------
Net increase (decrease) in net assets
resulting from operations 5,627,052 (158,412)
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net realized gains
($0.61821 and $0.4782 per share, respectively) (794,289) (278,771)
----------- -----------
Total distributions (794,289) (278,771)*<F5>
----------- -----------
FUND SHARE ACTIVITIES:
Proceeds from shares issued (562,944 and
1,038,885 shares, respectively) 10,185,452 16,465,542
Net asset value of shares issued in distributions
(42,877 and 15,049 shares, respectively) 683,037 215,951
Cost of shares redeemed (211,239 and 132,094
shares, respectively) (3,877,845) (2,136,896)
----------- -----------
Net increase in net assets derived from
Fund share activities 6,990,644 14,544,597
----------- -----------
TOTAL INCREASE 11,823,407 14,107,414
NET ASSETS AT THE BEGINNING OF THE PERIOD 19,263,708 5,156,294
----------- -----------
NET ASSETS AT THE END OF THE PERIOD $31,087,115 $19,263,708
----------- -----------
----------- -----------
*<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>
(UNAUDITED) FOR THE PERIOD FROM
FOR THE PERIOD DECEMBER 16, 1996+<F6>
ENDING YEAR ENDED TO
MARCH 31, 1999 SEPTEMBER 30, 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) (0.06) (0.17) (0.04)
Net realized and unrealized gains on investments 4.19 1.06 6.69
------- ------- -------
Total from investment operations 4.13 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 $ 18.66 $ 15.15 $ 14.74
------- ------- -------
------- ------- -------
TOTAL INVESTMENT RETURN 28.0%*<F7> 6.2% 68.0%*<F7>
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's $) 31,087 19,264 5,156
Ratio of operating expenses (after reimbursement
to average net assets (b)<F10> 1.97%**<F8> 2.34% 2.75%**<F8>
Ratio of interest expense and dividends on short positions
to average net assets 0.24%**<F8> 0.33% 0.17%**<F8>
Ratio of net investment loss to average net assets (c)<F11> (1.46%)**<F8> (1.94%) (1.85%)**<F8>
Portfolio turnover rate 142.0% 402.2% 298.2%
+<F6> Commencement of operations.
*<F7> Not annualized.
**<F8> Annualized.
(a)<F9> Net investment loss before interest expense and dividends on short positions for the period ending March 31, 1999, for the
year ended September 30, 1998 and for the period ended September 30, 1997 was ($0.05), ($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)<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>
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
FMI Focus Fund
NOTES TO FINANCIAL STATEMENTS
March 31, 1999 (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 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 March 31, 1999 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 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 period ending March 31, 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 (7.75% on March 31, 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.
Pursuant to the 1940 Act, the Fund is required to satisfy asset coverage
requirements on its outstanding borrowings. During the period ending March
31, 1999, the Fund had an outstanding average daily balance of $714,011
under the Agreement. The maximum amount outstanding during that period was
$2,000,000. Interest expense amounted to $31,247 for the period ending
March 31, 1999. At March 31, 1999, 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.
(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 March 31, 1999
were $16,372.
(6)Investment Transactions --
For the period ending March 31, 1999, purchases and proceeds of sales of
investment securities (excluding short-term investments) were $41,623,937
and $37,439,835, respectively.
(7)Accounts Payable and Accrued Liabilities --
As of March 31, 1999, liabilities of the Fund included the following:
Payable to brokers for securities purchased $ 1,884,184
Payable to FMI for management, administrative fees
and deferred expenses 52,377
Other liabilities 28,035
(8)Sources of Net Assets --
As of March 31, 1999, the sources of net assets were as follows:
Fund shares issued and outstanding $ 26,130,189
Net unrealized appreciation on investments 2,783,085
Accumulated net realized gains on investments 2,173,841
------------
$ 31,087,115
------------
------------
Aggregate net unrealized appreciation as of March 31, 1999,
consisted of the following:
Aggregate gross unrealized appreciation $ 3,937,243
Aggregate gross unrealized depreciation (1,154,158)
------------
Net unrealized appreciation $ 2,783,085
------------
------------
(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%.
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.
