QUARTERLY REPORT
DECEMBER 31, 1999
FMI
Focus Fund
A NO-LOAD
MUTUAL FUND
FMI Focus Fund
THE VALUE OF A $10,000 INVESTMENT IN THE FMI FOCUS FUND FROM ITS INCEPTION
(12/16/96) TO 12/31/99 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
6/30/99 $27,450 $19,840 $13,488
9/30/99 $26,372 $18,599 $12,634
12/31/99 $36,304 $21,387 $14,965
RESULTS FROM FUND INCEPTION (12/16/96) THROUGH 12/31/99
Annualized
Total Return*<F1>
Total Return*<F1> Through 12/31/99
Total Return*<F1> For the Year From Fund
Last 3 Months Ended 12/31/99 Inception 12/16/96
- -------------------------------------------------------------------------------
FMI Focus Fund 37.7% 54.1% 52.8%
Standard & Poor's 500 14.5% 21.1% 28.4%
Russell 2000 18.4% 21.3% 14.2%
*<F1> Total return includes change in share prices and in each case includes
reinvestments of any dividends, interest and capital gain distributions.
March 3, 2000
Dear Fellow Shareholders:
On December 16th, your FMI Focus Fund celebrated its third year anniversary
(thus establishing an important, official "track record"). We have worked
extremely hard over this time frame, and our "labor of love" is paying off. The
table below illustrates the Funds compounded annual growth rate over a three-
year period versus the S&P 500 and Russell 2000 Indexes. Morningstar, the
widely respected mutual fund rating firm, recently assigned a five star rating
to the Fund. On a calendar year basis, our three year performance recently
earned a Morningstar 5-Star rating.+<F2>
Before discussing the most recent quarter and outlook, we would like to thank
our families (especially our wives), associates at Fiduciary Management,
brokers, and fellow shareholders. The Fund's success would not have been
possible without their understanding and support. Our calendar year results
also would not have been possible without the classic Focus Fund Fourth Quarter
-------------------------
Final Rally. This year's surge was driven by our misunderstood technology
- -----------
stocks. The Fund returned 37.7% during the quarter compared to 14.5% for the
S&P 500 and 18.4% for the Russell 2000 Index. The boom in tech stocks was even
more apparent in the Nasdaq 100 Index, which surged 54.0% in the quarter. We
attribute the strength in this sector to the increasing role of technology in
supporting low inflationary growth in the United States and investors'
optimistic expectations that the role will continue to expand.
EXECUTION & MANAGEMENT
A significant element of stockpicking is aligning with a good management
team. Once we invest in a company, it's up to the management to execute.
Fortunately, over the years we have met some excellent leaders. As part of
this special third year report, the FMI Focus Fund is starting a new tradition
by honoring great executives with our 1st Annual FMI Focus Fund 5-Star Award.
This years recipients are the Rigas Family, Neal Hansen and John Mutch.
Adelphia is derived from the Greek word for brothers. John and Gus Rigas
built one of the earliest community antenna television (CATV) systems in the
1950s in Pennsylvania. Since then, a second generation of brothers, Michael,
Timothy, and James have dramatically grown the cable business and expanded into
the competitive local exchange carrier (CLEC) market. When we first invested in
Adelphia Communications Corp. (ADLAC), it was a small regional cable operator
that was relatively ignored by Wall Street and undervalued. What a difference a
year makes! The Company surprised the investment community when it bought
Century Communications, Frontiervision, and Harron Communications doubling in
size to roughly five million subscribers. The Fund also owned Century
Communications. After meeting with Tim Rigas at an industry trade show, we
decided not only to convert into more Adelphia stock but also to invest more in
the CLEC operation. Although ADLAC shareholders have benefited from the
Company's recent recognition, we still believe that the stock is undervalued on
a relative as well as an absolute basis. One reason for the valuation disparity
is the value of the Company's CLEC subsidiary - Adelphia Business Solutions
(formerly Hyperion). We learned about this stock while doing research on the
parent company. The voice/data market for small-to-medium sized businesses is
large and growing. This industry has just begun to blossom after the global
financial meltdown in the fall of 1998 made it difficult to access capital. The
winners last year proved to be those firms that executed on their stated
--------
business plan and had access to capital. Adelphia Business Solutions is clearly
one of the industry leaders. We think there are synergies to operating
companies in both sectors, specifically network equipment savings, carrying long
haul voice traffic and being the cable Internet Service Provider (ISP). If the
Rigas team continues to execute, we probably will be talking about them again
next year. It's also comforting to know that the Rigas family owns a
significant amount of stock in their companies.
Neal C. Hansen, Chairman and Chief Executive Officer of CSG Systems
International, Inc. is a focused, hard-driving leader. If we were to assemble a
football team from our portfolio companies, Neal would be our captain and start
at both middle linebacker and fullback. We met Neal at the National Cable
Television Association trade show in Chicago last summer. His management team
gave us a full booth tour, pointed us to their competitors' booths, and invited
us to meet customers at a cocktail party. We were very impressed with the
leadership of the organization and its focus on helping their customers become
more productive and more profitable. At that time the stock price had been cut
in half on fears that the Company's earnings growth would slow, due to
lackluster cable subscriber growth (CSG Systems is the leading billing and
customer care provider for the industry). Wall Street clearly misunderstood
CSG's economic model. The Company develops software and solutions as well as
being the billing engine for cable operators, so there is excellent growth
prospects on a revenue per subscriber basis as customers deliver new services to
the public. Instead of listening to the bears and "clamming up", Neal and his
team went on the road to tell their story while beating analysts' expectations.
The stock has since recovered nicely. Thank you Neal.
HNC Software has been on our radar screen since it went public. Our
intensive research of the financial services industry directed us to this
predictive software solutions provider. Banks and insurance/healthcare
companies employ HNC products for fraud detection purposes (i.e. credit card,
Medicare/Medicaid comp.). The neural network technology is fascinating and the
economic model has 70% recurring revenue. Each transaction represents a few
cents or a few dollars depending on the pricing. Historically, the stock could
never breakout of a trading range. We originally purchased the stock at the low
end of this range (mid-to-high twenties) only to watch the stock get halved
after a preannounced earnings shortfall due to Y2K (we purchased more shares).
At that time, the biggest risk for the Company was losing some of its scientists
and statisticians to other high tech firms. We met the recently appointed
President and CEO, John Mutch, at an analyst meeting later in the year. Mr.
Mutch had been President of HNC Insurance Solutions. He came to HNC in 1997
as the VP of Corporate Marketing. Prior to joining the Company, he founded a
private equity fund that invested in start-up technology companies and held
several executive marketing positions at Microsoft. Needless to say, we think
very highly of John Mutch. During the meeting, it became apparent to us that
there would be some unlocking of shareholder value sooner rather than later. In
the fourth quarter, the Company spunout its retail subsidiary, Retek (Nasdaq:
RETK). Retek provides retailers with robust e-commerce and supply chain
management software solutions. The Company plans on aggressively selling
solutions into the electronic commerce market through its eHNC division. The
interactivity of the internet provides a multitude of opportunities for HNC's
neural network core competency. In due time, management will spinout this
division too. The Fund has made a lot of money on this position in a short
period of time. We attribute this rapid value creation to John Mutch. He took
a promising franchise to the next level at a critical juncture in the Company's
history. He has since restructured the organization in order to further drive
shareholder value. This may only be the beginning...
Congratulations to our first time FMI Focus Fund Five Star award recipients.
Who will receive next year's honors? There are plenty of candidates, Tom Rogers,
Chairman and CEO, Primedia, Inc. is definitely an up & comer for next year's
award and he has only been on the job for three months. Christopher Allison,
Chairman and CEO, Tollgrade Communications has distanced himself from the pack
having delivered a whopping fourth quarter. In good markets or bad, we will
continue our tireless search for the next Bucyrus International, Jones
Intercable, HNC Software, or Tollgrade Communications. They are out there and
we intend to find them.
In summary, we would once again like to thank our families, friends and loyal
shareholders for "Hanging in There" over the past three years. Today the market
is in uncharted waters, interest rates are rising, and we are searching for
buoys. Rather than analyzing macroeconomic conditions and the Fed, we are
focusing on company fundamentals. One thing for sure is that there will be more
volatility and more opportunity. We will continue to work hard and stay focused
- ---------- ----------------
and not become overly optimistic or pessimistic about the market and its future
course.
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
+<F2> Morningstar proprietary ratings reflect historical risk-adjusted
performance as of 12/31/99. The ratings are subject to change every
month. Past performance is no guarantee of future results. Morningstar
ratings are calculated from the fund's three, five, and ten-year average
annual returns (if applicable) in excess of 90-day Treasury bill returns
with appropriate fee adjustments, and a risk factor that reflects fund
performance below 90-day Treasury bill returns. FMI Focus Fund received
5 stars for the three-year period ending 12/31/99. Five stars is the
highest rating, representing the top 10% of the funds in a broad asset
class. The Fund was rated among 4,535 funds (as of 12/31/99) for the
three-year period.
225 E. Mason St. o Milwaukee, WI 53202 o 414-226-4555
FMI Focus Fund
STATEMENT OF NET ASSETS
December 31, 1999 (Unaudited)
QUOTED
MARKET
SHARES VALUE (B)<F4>
- ------ -------------
LONG-TERM INVESTMENTS -- 100.9% (A)<F3>
COMMON STOCKS -- 100.9% (A)<F3>
BANKS -- 4.6%
47,500 AMCORE Financial, Inc. $ 1,140,000
24,000 Associated Banc-Corp. 822,000
36,200 Blackhawk Bancorp, Inc. 497,750
-----------
2,459,750
CHEMICAL/SPECIALTY MATERIALS -- 1.7%
29,500 Georgia Gulf Corp. 897,906
COMMUNICATIONS EQUIPMENT -- 14.9%
31,974 ADC Telecommunications, Inc. 2,320,113
17,000 ANADIGICS, Inc. 802,187
24,000 Andrew Corp. 454,500
9,000 Aware, Inc./MASS 327,375
29,000 Channell Commercial Corp. 331,688
30,000 Stamford International Inc. 405,000
17,000 Tekelec 382,500
15,000 Teltrend Inc. 453,750
72,000 Tollgrade Communications Inc. 2,484,000
-----------
7,961,113
COMMUNICATIONS SERVICES/CABLE -- 24.1%
20,000 ACTV, Inc. 913,750
33,348 Adelphia Communications Corp. 2,188,462
42,500 Adelphia Business Solutions, Inc. 2,040,000
30,350 Allied Riser Communications Corp. 627,866
25,000 Bell Canada International Inc. 567,187
21,500 Classic Communications, Inc. 786,094
37,000 CSG Systems International, Inc. 1,475,375
15,000 ICG Communications, Inc. 281,250
7,100 Jones Intercable, Inc. 493,450
12,000 Jones Intercable, Inc. Cl A 831,750
21,000 MasTec, Inc. 934,500
14,000 Omnipoint Corp. 1,688,750
30,000 Paging Network, Inc. 24,375
-----------
12,852,809
COMMUNICATIONS SERVICES/MEDIA -- 12.8%
10,500 InterVU, Inc. 1,102,500
34,500 LodgeNet Entertainment Corp. 858,187
12,000 Playboy Enterprises, Inc. Cl B 291,750
86,000 PRIMEDIA Inc. 1,419,000
15,000 StarMedia Network, Inc. 600,938
23,000 True North Communications, Inc. 1,027,813
47,000 World Wrestling Federation
Entertainment, Inc. 810,750
46,000 Ziff-Davis Inc. Series ZD 727,375
-----------
6,838,313
COMPUTERS & ELECTRONICS -- 16.2%
39,000 Arrow Electronics, Inc. 989,625
10,000 C.P. Clare Corp. 105,000
30,000 Daisytek International Corp. 699,375
24,000 The DII Group, Inc. 1,703,249
35,000 General Semiconductor, Inc. 496,563
8,000 LeCroy Corp. 98,000
12,000 MetaCreations Corp. 103,124
12,500 MicroTouch Systems, Inc. 157,813
20,000 Mitel Corp. 275,000
31,000 MKS Instruments, Inc. 1,119,875
53,000 Varian Inc. 1,192,500
31,250 Vishay Intertechnology, Inc. 988,281
12,000 Zebra Technologies Corp. 702,000
-----------
8,630,405
CONSUMER PRODUCTS & RETAIL -- 1.1%
20,000 Sotheby's Holdings, Inc. 600,000
CONSUMER SERVICES --2.1%
10,900 Pfsweb Inc. 408,750
9,200 Retek Inc. 692,300
-----------
1,101,050
ENERGY/ENERGY SERVICES -- 4.3%
7,000 St. Mary Land & Exploration Co. 173,250
19,000 Noble Affiliates, Inc. 407,313
61,250 Pride International, Inc. 895,781
103,000 Santa Fe Snyder Corp. 824,000
-----------
2,300,344
FINANCIAL SERVICE -- 7.2%
28,000 Heller Financial, Inc. 561,750
27,900 HNC Software Inc. 2,950,425
14,000 SunGard Data Systems Inc. 332,500
-----------
3,844,675
HEALTH INDUSTRIES -- 4.9%
30,900 Millipore Corp. 1,193,512
47,500 Quest Diagnostics Inc. 1,451,719
-----------
2,645,231
INDUSTRIAL & TRANSPORTATION PRODUCTS -- 5.0%
20,000 The Alpine Group, Inc. 257,500
21,500 Applied Power Inc. 790,125
15,500 Dura Automotive Systems, Inc. 270,281
18,000 The Manitowoc Company, Inc. 612,000
26,000 Oshkosh Truck Corp. 762,125
-----------
2,692,031
INDUSTRIAL SERVICES -- 0.6%
10,000 Republic Services, Inc. 143,750
12,000 Tetra Tech, Inc. 184,500
-----------
328,250
INSURANCE -- 1.0%
41,600 CNA Surety Corp. 540,800
PRINTING/PUBLISHING/FORMS -- 0.4%
5,000 ImageX.com, Inc. 209,375
-----------
Total common stocks 53,902,052
OPTIONS -- 0.0% (A)<F3>
11 Daisytek International Corp. call
options, expiration
January 22, 2000,
exercise price $22.50 (c)<F5> 2,372
-----------
Total options 2,372
-----------
Total long-term investments 53,904,424
SHORT-TERM INVESTMENTS -- 0.0% (A)<F3>
VARIABLE RATE DEMAND NOTE
$16,121 Wisconsin Corporate Central
Credit Union 16,121
-----------
Total investments 53,920,545
Liabilities, less cash and
receivables (0.9%) (A)<F3> (490,342)
-----------
Net Assets $53,430,203
-----------
-----------
Net Asset Value Per Share
($0.01 par value 500,000,000
shares authorized), offering
and redemption price
($53,430,203 / 2,045,599
shares outstanding) $ 26.12
-----------
-----------
(a)<F3> Percentages for the various classifications relate to net assets.
(b)<F4> 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)<F5> The Fund may write call options on securities. By writing a call
option, and receiving a premium, the Fund may be obligated during the
term of the option to deliver the securities underlying the option at
the exercise price if the option is exercised.
For the period ending December 31, 1999, the FMI Focus Fund has written
the following call options:
# OF
CONTRACTS COST
--------- ----
Balance at October 1, 1999 0 $ 0
Options written (Daisytek 01/00) 11 2,508
Options exercised -- --
Options expired -- --
Options closed -- --
--- ------
Balance at December 31, 1999 11 $2,508
--- ------
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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, 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.
