QUARTERLY REPORT
DECEMBER 31, 1998
FMI
Focus Fund
A NO-LOAD
MUTUAL FUND
THE VALUE OF A $10,000 INVESTMENT IN THE FMI FOCUS FUND FROM ITS INCEPTION
(12/16/96) TO 12/31/98 AS COMPARED TO THE STANDARD & POOR'S 500 AND THE RUSSELL
2000
STANDARD &
FMI FOCUS FUND 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
RESULTS FROM FUND INCEPTION (12/16/96) THROUGH 12/31/98
Annualized
Total Return*<F1>
Total Return*<F1> Through 12/31/98
Total Return*<F1> For the Year From Fund
Last 3 Months Ended 12/31/98 Inception 12/16/96
- ---------------------------------------------------------------------------
FMI Focus Fund 32.1% 35.4% 52.1%
Standard &Poor's 500 21.3% 28.8% 32.1%
Russell 2000 16.3% -2.5% 10.9%
- ---------------------------------------------------------------------------
*<F1>Total return includes change in share prices and in each case includes
reinvestments of any dividends, interest and capital gain distributions.
FMI Focus Fund
February 25, 1999
Dear Fellow Shareholder:
We are pleased to report that the Fund concluded its second calendar year by
posting a 32.1% increase for the December quarter and 35.4% return for the year.
Combined with our 69.7% first year results (1997), our two year total return of
129.8% puts us in the top 1% of all mutual funds. Comparative returns are
displayed in the graph below. We are particularly pleased to have achieved
these results given the tough small and mid-cap markets these past several
years. Perhaps as significant, we believe that we achieved these excellent
returns without taking undue risk. The Fund's beta was just 0.79 over this two
year time frame. Recall that beta is a common measure of risk, and that the
broader market indices (such as S&P 500 and NYSE Index) has a beta of one. As
the FMI Focus Fund enters its third year, we are enthusiastic and confident in
our approach to investing in growing, well-managed, and reasonably valued small
to mid-sized companies. We strive to find strong franchises in industries we
know and understand, and invest in them on an opportunistic basis, such as last
fall, when the market went through one of its occasional "adjustments".
When we sat down to review the December quarter and write the shareholder
report, two appropriate phrases immediately leapt to mind: 1) "Whew" (picture
your portfolio manager in early September staring at his Bloomberg screen in
near disbelief at the percentage decreases in some stocks); and 2) "The Return
Of The Comeback Kids" which accurately describes our post-September rise from
the depths. Last summer through early fall was a real test of investors
convictions, particularly in the small and mid-cap stock arena. Stock prices
plummeted and many investors lost their composure (as well as their
pocketbooks). For those able to keep their wits, the sell-off presented some
unbelievable buying opportunities. As the ubiquitous Peter Lynch repeatedly
says in the popular T.V. commercial; "you have to know your companies and know
why you own them." Our investment success in the fourth quarter was a result of
conviction and staying power, which are derived from knowledge and
understanding. Out of the mayhem last fall, a handful of high quality companies
that we know well were handed to us on a silver platter. We purchased shares of
Financial Security Assurance (a municipal bond insurer) below adjusted book
value, and Heller Financial (an excellent commercial finance franchise) at
nearly nine times earnings. In Heller's case the price was less than half of
what General Electric reportedly had offered Fuji Bank (which owned 100% of
Heller prior to its IPOlast spring) for the entire company one year ago. We
accumulated Ziff-Davis, the technology magazine/web page publisher and
broadcaster at prices as low as $4 per share (currently trading in the mid-
teens). We added to Manitowoc Co., a terrific Wisconsin based manufacturer
enjoying an excellent new product cycle, at under ten times earnings. We also
added to our cable television and communications positions. Like you, we were
very nervous, but we maintained our perspective, took advantage of some of the
"giveaways" and finished the year strong. We believe the experience, while
trying, reinforces the logic of our approach; sticking with companies and
industries that we really understand and have good growth prospects, while also
---
being cognizant of valuation. We spoke to many of you during this rough period
in the market and want to thank you for your unwavering support. As we pointed
out during our many telephone conversations, it is during the nerve racking
times that investors can make the most money provided one doesn't panic. The
FMI Focus Fund probably wouldn't have had the opportunity for a nearly 36%
return this past year absent last summer's "hiccup". Some pain usually precedes
big gains. As we write this letter, we may be in for another near term hiccup
given the huge fourth quarter rally. Brazil and other international markets
look troubled again, and similar to last summer, small and mid-sized companies
seem to be the focus of the recent sell off. Yet we offer the same advice today
as last fall - "Hang In There". Again, we want to stress that our discipline
and experienced research driven approach allows us to take advantage of volatile
markets. If we encounter more turbulence, we would hope to avail ourselves of
any accompanying opportunities presented by "Mr. Market". I'll now turn my pen
over to senior analyst Glenn Primack, who will review several areas of focus.
WIRED IN WISCONSIN
As we enter 1999, approximately 35% of the portfolio is focused on media-
related stocks. This sector can be segregated into three categories:
facilities-based communications service providers, communications equipment
suppliers, and content providers. Our cable television holdings are a backdoor
Internet play since the hybrid-fiber coax (HFC) architecture being deployed by
cable operators provide a robust, always-on connection for web-surfers. The
merger between AT&T and TCI confirms our belief that HFC technology can deliver
advanced, two-way video, telco, and data signals through cable's broadband
network to a consumer. The boundary between cable television and phone service
will become increasingly blurred. Regional Bell Operating Companies (RBOCs) and
Competitive Local Exchange Carriers (CLECs) are also upgrading and building
their infrastructure in order to link almost every home and office in the
country with high-speed data capability (a faster Internet connection).
According to Jupiter Communications, a well-respected research firm, the number
of online users in the United States will pass 75 million, or over one-third of
the population. The rate of growth of the consumer Internet economy in Europe &
Asia meanwhile, is faster. The continued investment in bandwidth by service
providers led us to communications equipment stocks, such as ADC
Telecommunications and Northern Telecom. These companies address three fast
growing market segments: the worldwide public network infrastructure for voice,
video, and data communications, the Internet infrastructure that supports the
World Wide Web, and corporate wide area and virtual private networks
(WANs/VPNs). As digital networks are built-out, there will be a need for
information and entertainment content in electronic, interactive form. Owners
of programming should flourish as new distribution channels develop (digital
cable, internet, and satellite) offering new avenues to expand existing brands.
We believe that "content" is the next area where technology and consumer demand
will intersect, therefore we invested in Liberty Media, PRIMEDIA, and Ziff-
Davis.
OUTLOOK FOR 1999
We expect the market to continue to be volatile not only this year, but over
the next few years as investors cope with the increasingly complex global
landscape. Although the volatility may not subside anytime soon, this
environment does present some great opportunities, ala Warren Buffet's "Mr.
Market." In summary, we would like to thank our shareholders for supporting us
during a tumultuous period. We would especially like to welcome and thank a new
shareholder, Mr. Daniel Sterling, for boosting the Fund above the $25 million
asset threshold. This is a milestone event because financial publications, such
as: The Wall Street Journal, Investors Business Daily, and Barrons will now
incorporate the Fund into their databases and track the performance on a daily
basis. Mr. Sterling is a local entrepreneur that has opened a chain of homemade
bread stores aptly named The Breadsmith. We recently visited Dan at his
--------------
operation (we strongly recommend the homemade pizza) in order to thank him
personally, explain our investment process and "break bread". We hope to make
him, as well as each of you, some dough this 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
FMI Focus Fund
STATEMENT OF NET ASSETS
December 31, 1998 (Unaudited)
PRINCIPAL QUOTED
AMOUNT OR MARKET
SHARES VALUE (B)<F3>
------ -------------
COMMON STOCKS -- 102.1% (A)<F2>
COMMUNICATIONS EQUIPMENT -- 12.0%
27,000 ADC Telecommunications, Inc. $ 938,250
61,000 Anicom, Inc. 560,468
17,700 ANTEC Corp. 356,212
16,000 Channell Commercial Corp. 134,000
11,500 Northern Telecom Limited 576,438
6,000 Superior TeleCom Inc. 283,500
17,000 Teltrend Inc. 325,125
14,500 Tollgrade Communications Inc. 279,125
-----------
3,453,118
COMMUNICATION SERVICES/CABLE -- 23.3%
33,100 Bell & Howell Co. 1,251,610
25,000 Century Communications Corp. 792,975
1,000 Grey Advertising Inc. 364,000
23,900 Imax Corp. 755,838
25,000 Jones Intercable Inc. Cl A 890,625
30,000 PRIMEDIA Inc. 352,500
35,000 TCA Cable TV, Inc. 1,249,080
13,000 Univision Communications Inc. 470,444
35,000 Ziff-Davis Inc. 553,455
-----------
6,680,527
COMPUTERS & ELECTRONICS -- 19.9%
17,000 Affiliated Computer Services, Inc. 765,000
41,000 Arrow Electronics, Inc. 1,094,208
25,000 Celestica Inc. 617,200
7,000 DST Systems, Inc. 399,441
25,000 FileNet Corp. 286,725
25,000 General Semiconductor, Inc. 204,700
20,000 HNC Software Inc. 808,760
20,000 Methode Electronics, Inc. 312,500
44,000 MicroTouch Systems, Inc. 577,500
25,000 Pioneer-Standard
Electronics, Inc. 234,375
27,000 Vishay Intertechnology, Inc. 391,500
-----------
5,691,909
CONSUMER PRODUCTS & RETAIL -- 3.2%
20,000 Hanover Direct, Inc. 68,760
10,000 IDG Books Worldwide, Inc. 172,500
26,000 Jostens, Inc. 680,888
-----------
922,148
FINANCIAL SERVICES & BANKS -- 10.6%
22,700 Affiliated Managers Group, Inc. 678,162
36,200 Blackhawk Bancorp, Inc. 506,800
33,500 Heller Financial, Inc. 984,063
11,800 National City Bancorp. 309,750
10,000 Prime Bancshares, Inc. 172,500
12,000 Union Bankshares Ltd. 150,000
15,000 Willis Lease Finance Corp. 236,250
-----------
3,037,525
HEALTH INDUSTRIES -- 6.3%
15,375 Covance Inc. 447,797
6,000 Henry Schein, Inc. 268,500
22,500 PAREXEL International Corp. 562,500
17,500 Pharmaceutical Product
Development, Inc. 526,102
-----------
1,804,899
INDUSTRIAL PRODUCTS -- 6.1%
13,500 Crompton & Knowles Corp. 279,288
25,650 General Cable Corp. 525,825
15,000 The Manitowoc Company, Inc. 665,625
9,100 Raychem Corp. 294,049
-----------
1,764,787
INSURANCE -- 20.7%
15,000 Amerin Corp. 354,375
18,000 Chicago Title Corp. 844,884
23,000 CNA Surety Corp. 362,250
15,323 Delphi Financial Group, Inc. 803,507
12,000 Enhance Financial Services Group Inc. 360,000
22,500 Financial Security Assurance
Holdings Ltd. 1,220,625
30,000 FPIC Insurance Group, Inc. 1,434,390
9,000 Reinsurance Group Of America Non-Voting 546,750
-----------
5,926,781
-----------
Total common stocks 29,281,694
-----------
SHORT-TERM INVESTMENTS -- 0.1% (A)<F2>
VARIABLE RATE DEMAND NOTE
$19,053 Firstar Bank U.S.A., N.A. $ 19,053
-----------
Total investments 29,300,747
Liabilities, less cash and
receivables (2.2%) (A)<F2> (636,985)
-----------
Net Assets (C)<F4> $28,663,762
-----------
-----------
Net Asset Value Per Share
($0.01 par value 500,000,000
shares authorized), offering
and redemption price
($28,663,762 / 1,488,733
shares outstanding) $ 19.25
-----------
-----------
(a)<F2> Percentages for the various classifications relate to net assets.
(b)<F3> 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 are valued at amortized
cost which approximates quoted market value.
(c)<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 quarter ending December 31, 1998, 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)
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Balance at December 31, 1998 0 $ 0
------- --------
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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
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.
