UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number
811-07831
FMI Funds, Inc.
----------------
(Exact name of registrant as specified in charter)
100 East Wisconsin Avenue, Suite 2200
Milwaukee, WI 53202
--------------------
(Address of principal executive offices) (Zip code)
Ted D. Kellner
Fiduciary Management, Inc.
100 East Wisconsin Avenue, Suite 2200
Milwaukee, WI 53202
--------------------
(Name and address of agent for service)
(414) 226-4555
--------------
Registrant's telephone number, including area code:
Date of fiscal year end: September 30
Date of reporting period: March 31, 2006
ITEM 1. REPORTS TO STOCKHOLDERS.
- --------------------------------
SEMIANNUAL REPORT
MARCH 31, 2006
FMI
Focus Fund
A NO-LOAD
MUTUAL FUND
May 4, 2006
Dear Fellow Shareholders:
As detailed in the portfolio manager letter from Rick and Glenn, the FMI
Focus Fund enjoyed an excellent first quarter. All sectors of the U.S. market
rose smartly in the first quarter given the continued good economic news and
strong corporate earnings growth. We would categorize both the economy and the
stock market as being in the seventh or eighth inning of their current strong
advance. The market has not experienced a correction of 8% or more since the
current advance began in the fourth quarter of 2002. Strong advances in U.S.
equity markets have occurred despite fifteen rate increases by the Federal
Reserve, soaring energy and commodity prices, and a consumer that has leveraged
their balance sheets to historic levels. Last year alone, over $700 billion of
home equity was monetized through refinancing, and we believe, has allowed the
consumer to continue to help fuel the forward momentum of the economy over the
last several years.
Against this backdrop, with valuations in the equity markets which are
certainly not cheap by historic standards, Rick and Glenn have repositioned the
portfolio, taking advantage of the strong moves in many of your stocks, to
harvest gains and move the portfolio into companies that we believe will serve
us well going forward, and away from the sectors of the market that appear to
them to be excessively valued, particularly the manufacturing and energy
industries.
We believe we have a strong portfolio of solid companies with sound balance
sheets and excellent cash flows and earnings, which should serve to provide us
all with good rates of return over the next several years. As always, we thank
you for your continued confidence in the FMI Focus Fund, and look forward to
many years of successful investing alongside of all of you.
Sincerely,
/s/Ted D. Kellner
Ted D. Kellner, CFA
President
100 E. Wisconsin Ave., Suite 2200 o Milwaukee, WI 53202 o 414-226-4555
www.fmifunds.com
April 27, 2006
Dear Fellow Shareholders,
The FMI Focus Fund enjoyed a strong March quarter, finishing up 8.06%. The
S&P 500 (large-cap stocks) increased 4.21%, the S&P MidCap 400(1)<F1> was up
7.63% while the Russell 2000 (small-cap stocks) was up 13.94%. As is obvious,
small-cap stocks continued to dramatically outperform again this quarter. As we
have discussed in previous shareholder letters, it is our belief that the small-
cap arena has become very speculative. Over the course of the past five
quarters, we have harvested many of our small-cap holdings and have found
considerably more value with respect to new investments in somewhat larger
companies.
Investors seem to be ignoring the strong earnings and solid valuations of
companies outside of small-caps. This isn't unusual. Over short periods of
time, markets typically have a narrow focus, and currently, "Mr. Market" seems
only capable of considering small companies, as well as a handful of industries
such as manufacturing and energy-related businesses. As Warren Buffet likes to
say (and we like to quote), "In the short run, the market is a popularity
contest, but in the long run, it's a weighing machine." Using a cruise ship
metaphor, all the passengers have run to the small-cap, manufacturing and energy
side of the ship and it has gotten very crowded, if not "tippy."
Yes, earnings in these sectors have been very strong, but valuations are
really stretched. Expectations are ratcheting up with stock prices and we have
been cutting back our exposures here, enjoying sizable gains in historically
modestly growing companies (i.e. prices we never imagined achieving). Indeed,
the manufacturing and energy sectors remind us a lot of the Internet bubble days
in 1999 and 2000. One can find many examples of stocks up five to ten fold. We
will have more to say on the "manufacturing mania" later on in our shareholder
report.
As we stated at the onset, we were quite pleased with the first quarter
performance numbers. As presaged in the last shareholder letter, the strong
earnings of many of our portfolio companies started showing up in the form of
strong stock prices, albeit with a lag. The following companies had
particularly strong earnings and stock prices: Milwaukee-based MGIC Investment
Corp. and Manpower Inc., the temporary help leader; three Chicago-based
companies: Molex Inc., a worldwide leader in connectors for the electronics
industry; W.W. Grainger, Inc., the industrial distributor; and Laidlaw
International Inc., the largest school bus operator; and Radnar, PA based
industrial gas producer and distributor, Airgas, Inc. Particularly notable,
Rogers Corp., a specialty materials manufacturer, recently reported such strong
results that its stock price was up over five dollars the day it reported and is
up over 40% year-to-date through mid-April.
Rent-A-Center, Inc. is another winner this year, having been recently added
to the portfolio late last year. We would like to acknowledge FMI Focus Fund
analyst and associate Ed Ciskowski for this investment. Ed joined our team a
little over a year ago and it is exciting to have him making important
contributions early on in his tenure.
Dresser-Rand Group, Inc. is another recent addition we are particularly
excited about. Notwithstanding, our concern about the recent run up in energy-
related stocks, Dresser is as well positioned as any in the group in our
opinion, yet seems to have been forgotten about. Dresser manufactures rotating
equipment (i.e. compressors and turbines) for nearly every aspect of the energy
business. Their products are used in pulling oil and gas out of the ground
(known as upstream operations), transport and delivery of gas through pipelines
(midstream operations) and in the manufacture of oil and gas derived products
like gasoline and chemicals (downstream operations). The entire world is adding
to capacity all along the energy infrastructure continuum and will require an
enormous amount of compression. Huge LNG projects (liquefied natural gas) hold
outstanding potential for Dresser.
LNG is a long talked about technology whose time has finally come. As a
quick primer, there are many producers of oil in remote parts of the world.
When the oil is extracted, natural gas also comes up the wellhead. Often, there
is no pipeline to capture the gas and believe it or not, the gas is simply
burned off at the wellhead (known as flaring). We have read reports that one
huge oil field in the Middle East flares enough natural gas daily to heat our
fair city of Milwaukee on an ongoing basis!
LNG is a technology whereby the natural gas is liquefied and transported by
enormous ships to markets where it is needed. There it is converted back to its
gaseous state and distributed to market. Today's high energy prices as well as
advances in LNG processes make it economical to spend the $2 to $10 billion for
a typical LNG liquefaction and regasification facility. Many LNG facilities are
on the drawing board. Historically, environmental issues were also gating
factors but $75 oil may well overcome many of the "NIMBY" hurdles (not in my
back yard).
While we are not counting on LNG for our base investment case, LNG does
represent enormous upside potential. Even without it, Dresser's stock is
selling at approximately 10 times this year's cash flow with the cycle just
starting. Being early in the cycle is crucial to our thinking here. Most of
the energy stocks have already had big moves and, we would argue, already factor
mid-cycle earnings at a minimum. One of the reasons the market seems to have
overlooked Dresser is that it has only been public for six months or so, and
simply needs some "seasoning".
MARCH QUARTER WINNER
Rogers Corp. was the first quarter's winner appreciating some 40%. As noted
above, subsequent to the end of the quarter, Rogers reported blowout first-
quarter earnings, its second in a row. Wilton, Connecticut based Rogers is a
specialty materials manufacturer of products for the communications (cell phones
CATV, satellite) and general industrial markets. PORON, the Company's
trademarked high performance foam product, is enjoying robust demand from a
variety of end markets and the Company as a whole is enjoying the fruits of a
company turnaround, based in part to operations relocated to China. We have
taken some money off the table as the recent run in the stock has left Rogers
fairly valued, in our opinion.
MARCH QUARTER LOSER
Emmis Communications Corp. was our worst performer this past quarter and has
been a very frustrating investment. The Company owns some 29 radio stations,
primarily in clusters around New York, Chicago and Los Angeles. Traditional
media, which we define as newspapers, television, and radio are feeling a lot of
pressure as advertisers shift ad dollars to the Internet. In general terms,
consumers "consume" approximately 18% of their media on the Internet, yet U.S.
companies only spend roughly 6%-7% of their ad dollars online. With online
media consumption growing 15%-20% per year, the gap is actually growing wider.
A fair question to ask is, given our understanding of the space, why did we
invest in radio at all. The answer is that we felt the general strength in the
economy would boost advertising spending sufficiently to "raise all boats."
Emmis also sported such a low valuation that we felt the secular challenges were
already priced in.
Subsequent to our purchase, several things changed. The first was that the
fundamentals of the radio business really fell apart. In retrospect, we
underestimated U.S. companies' willingness to explore many other advertising
venues beyond just the Internet. It would appear there has been some animosity
built up over the years toward radio and television when those outlets were the
only "game in town" and advertisers felt they were getting gouged on price. Now
that the balance of power is shifting away from the mediums to the advertisers,
pricing came under pressure as well as volume. This is resulting in an
unprecedented decline in revenue during an economic upturn.
The second thing was that Jeff Smulyan, Emmis' Founder, President and CEO
decided that he wanted to diversify his business by purchasing a baseball team
(the Washington Nationals). Unfortunately the timing could not have been worse,
coming on the heels of Emmis' very successful sale of the Company's television
properties. It is our belief that had the Company not bid for the Nationals and
used the entire sale proceeds to buy back stock, the price probably would have
appreciated enough to hit our sell target and we would have harvested a decent
return. However, Wall Street reacted violently to the Nationals bid followed by
a poor earnings report and the stock declined substantially.
We have sold a good portion of the holding and, at this point, anticipate
selling the rest on a bounce.
Somewhat surprisingly, some good did come out of the experience. Born out of
frustration for traditional media and looking for a way to capitalize on the ad
shift to the Internet, we discovered and invested in online ad agencies. We
have profiled these companies in previous letters. aQuantive, Inc. was a
terrific stock for us in 2005 (sold in November) and we believe Digitas Inc.
will be a good investment in the coming years.
MANUFACTURING MANIA
The amazing run in manufacturing stocks is very reminiscent of the Internet
bubble six years ago. Mining equipment stocks are up over ten fold, mundane
pump and valve companies selling at 13 times cash flow and 25 times earnings and
Wall Street is still recommending investors purchase more shares!
What is driving this mania? Well, China for one. The infrastructure build
going on there is well documented. In and of itself, that constitutes a lot of
demand. Then there are the multiplier effects. All of the new automobiles,
homes, airports, subway systems, etc. require materials like steel, copper, and
aluminum for components, bearings, pumps, and so forth. Therefore, places like
Chile are expanding their copper mines which require mining equipment which also
require a lot of steel and copper. The mining equipment companies are expanding
to meet increased demand for their equipment. In so doing, they add on to their
factories, which require things like cement and steel. So the world is going
through a substantial capital spending cycle, driven by places like China and
India. That in turn is creating enough additional demand in the developed part
of the world that companies, like Caterpillar, are also expanding.
While manufacturing is booming, technology, still feeling some of the
lingering effects of the Internet bubble, is still relatively weak, particularly
relative to where one would expect it to be at this part of the economic cycle.
The reason this is relevant is that technology is usually the province of growth
stock investors. But growth stock investors are not playing tech stocks very
aggressively this cycle because the action, the "growth," has shifted to
manufacturing. And growth investors are typically much more interested in
growth than concerned with valuations. We would also argue that this class of
investor doesn't have much experience with manufacturing companies, they don't
understand the nuances of the business, and they sure don't appreciate how
cyclical these industries are. As long as next quarters earnings look good,
that's often all they care about.
In the "old days" when value players were the primary investors in this
space, the mantra of 10 to 12 times peak earnings kept a rational lid on these
stocks. From experience, these traditional investors understood, no, feared the
end of the cycle. They remembered how brutal the other side of the cycle can be
and respected it by throttling back as the cycle aged. Today, it appears to us
that as the cycle ages, the current batch of investors are actually ratcheting
up their valuation targets, suggesting peak multiples on peak earnings.
Obviously, we think this is nuts!
What happens to the steel industry once China slows down but the industry has
40% more capacity? Things never looked better for Cisco's business than when
the stock hit $80 per share. Backlog was at all time highs and it looked like
the world was permanently short of routers. Well, eighteen months later there
was such a glut of routers there were rumors that Cisco had dumped a couple of
billion dollars worth of them in the San Francisco Bay.
There have been many modern day manias. One of our favorites was the oil
drilling frenzy of 1980-1982. Recall that previous oil embargoes had sent oil
prices rocketing. This precipitated a drilling boom the likes of which the world
had never seen. Well, it took 20 years of cannibalizing parts and melting down
rigs for scrap steel before the next building cycle took place. We built twenty
years worth of rigs in the span of a few years.
Today, manufacturing is indeed booming, but unless the laws of the business
cycle have been repealed, investors should be starting to discount the
possibility of the next downturn, but exactly the opposite seems to be taking
place. We don't know when the punch bowl at this wild party gets taken away,
but when it does, look out below!
Financials seem to be the current "anti-manufacturing" stocks. Rarely have
we seen less interest in this group. We recently attended Scottish Re Group
Ltd.'s analyst day in New York. This is an important annual event where the
Company flies in divisional managers for a thorough review of its operations.
The Company is doing well, and is selling at the absurd level of eight-times
this year's earnings. That's pretty cheap for a leading life reinsurance
company with a stable book of business. It appeared that there were more people
from the Company at the meeting than there were investors. Nobody cares! Music
to our ears! That's usually how you make money, not by chasing the hot sectors.
But patience is required.
Speaking of patience, we would like to thank our shareholders for their
patience while reading through this long letter and as always for being loyal
investors.
Sincerely,
/s/Richard E. Lane /s/Glenn W. Primack
Richard E. Lane, CFA Glenn W. Primack
Portfolio Manager Portfolio Manager
(1)<F1> The S&P MidCap 400 Index consists of 400 domestic stocks chosen for
market size, liquidity, and industry group representation. The S&P
MidCap 400 Index is a widely used index for mid-sized companies. The
S&P MidCap 400 covers approximately 7% of the U.S. equities market,
and is part of a series of S&P U.S. Indices that can be used as
building blocks for portfolio construction.
THE VALUE OF A $10,000 INVESTMENT IN THE FMI FOCUS FUND FROM ITS INCEPTION
(12/16/96) TO 3/31/06 AS COMPARED TO THE STANDARD & POOR'S 500 AND THE RUSSELL
2000
Date 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 $36,309 $21,367 $14,965
3/31/00 $46,693 $21,858 $16,025
6/30/00 $47,926 $21,277 $15,419
9/30/00 $50,634 $21,071 $15,590
12/31/00 $44,803 $19,424 $14,513
3/31/01 $40,107 $17,121 $13,568
6/30/01 $45,270 $18,123 $15,507
9/30/01 $35,815 $15,463 $12,283
12/31/01 $45,939 $17,116 $14,874
3/31/02 $48,707 $17,163 $15,466
6/30/02 $42,035 $14,863 $14,174
9/30/02 $32,363 $12,295 $11,141
12/31/02 $35,721 $13,332 $11,827
3/31/03 $33,933 $12,912 $11,296
6/30/03 $42,160 $14,901 $13,942
9/30/03 $45,643 $15,296 $15,208
12/31/03 $52,906 $17,159 $17,416
3/31/04 $53,466 $17,448 $18,506
6/30/04 $52,735 $17,749 $18,593
9/30/04 $49,982 $17,417 $18,061
12/31/04 $56,636 $19,024 $20,606
3/31/05 $54,142 $18,615 $19,506
6/30/05 $55,250 $18,870 $20,348
9/30/05 $58,412 $19,551 $21,303
12/31/05 $59,427 $19,960 $21,544
3/31/06 $64,218 $20,800 $24,547
RESULTS FROM FUND INCEPTION (12/16/96) THROUGH 3/31/06
Annualized Total Annualized Total Return*<F2>
Total Return*<F2> Total Return*<F2> For the Return*<F2> For the 5 Through 3/31/06 From
Last 3 Months Year Ended 3/31/06 Years Ended 3/31/06 Fund Inception 12/16/96
----------------- ------------------------- --------------------- ----------------------------
FMI Focus Fund 8.06% 18.61% 9.87% 22.17%
Standard & Poor's 500(1)<F3> 4.21% 11.73% 3.97% 8.20%
Russell 2000(2)<F4> 13.94% 25.85% 12.59% 10.15%
*<F2> Total return includes change in share prices and in each case includes
reinvestments of any dividends, interest and capital gain
distributions. Performance data quoted represents past performance;
----------------------------------------------------
past performance does not guarantee future results. 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. Current performance of the Fund may be lower or higher
than the performance quoted. Performance data current to the most
recent month end may be obtained by visiting www.fmifunds.com. The
graph and table do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or the redemption of Fund
shares.
(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 of the Frank Russell Company.
FMI Focus Fund
COST DISCUSSION
INDUSTRY SECTORS AS OF MARCH 31, 2006
Process Industries 11.8%
Finance 11.4%
Electronic Technology 8.8%
Industrial Services 8.2%
Producer Manufacturing 8.1%
Technology Services 8.1%
Health Technology 7.7%
Commercial Services 7.6%
Retail Trade 6.5%
Distribution Services 6.4%
Transportation 3.8%
Mutual Funds 3.3%
Energy Minerals 2.1%
Communications 1.3%
Consumer Durables 1.3%
Consumer Services 1.0%
Cash & Cash Equivalents 2.6%
As a shareholder of the Fund you incur ongoing costs, including management
fees and other Fund expenses. You do not incur transaction costs such as sales
charges (loads) on purchase payments, reinvested dividends, or other
distributions; redemption fees; and exchange fees because the Fund does not
charge these fees. This example is intended to help you understand your ongoing
costs (in dollars) of investing in FMI Focus Fund and to compare these costs
with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of
the period and held for the entire period from October 1, 2005 through March 31,
2006.
ACTUAL EXPENSES
The first line of the table below provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
In addition to the costs highlighted and described below, the only Fund
transaction costs you might currently incur would be wire fees ($15 per wire),
if you choose to have proceeds from a redemption wired to your bank account
instead of receiving a check. Additionally, U.S. Bank charges an annual
processing fee ($15) if you maintain an IRA account with the Fund. To determine
your total costs of investing in the Fund, you would need to add any applicable
wire or IRA processing fees you've incurred during the period to the costs
provided in the example at the end of this article.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table below provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads), redemption or exchange fees. Therefore, the second line of the
table is useful in comparing ongoing costs only, and will not help you determine
the relative total costs of owning different funds. In addition, if these
transactional costs were included, your costs would have been higher.
Beginning Ending Expenses Paid
Account Account During Period*<F5>
Value 10/01/05 Value 3/31/06 10/01/05-3/31/06
-------------- ------------- ------------------
FMI Focus Fund Actual $1,000.00 $1,099.40 $7.54
Hypothetical
(5% return before expenses) $1,000.00 $1,017.80 $7.25
*<F5> Expenses are equal to the Fund's annualized expense ratio of 1.44%,
multiplied by the average account value over the period, multiplied by
182/365 (to reflect the one-half year period between October 1, 2005 and
March 31, 2006).
FMI Focus Fund
STATEMENT OF NET ASSETS
March 31, 2006 (Unaudited)
SHARES COST VALUE
------ ---- -----
LONG-TERM INVESTMENTS -- 97.4% (A)<F7>
COMMON STOCKS -- 94.1% (A)<F7>
COMMERCIAL SERVICES SECTOR -- 7.6%
- ----------------------------------
ADVERTISING/MARKETING SERVICES -- 1.1%
696,800 ValueClick, Inc.*<F6> $ 12,209,721 $ 11,789,856
MISCELLANEOUS COMMERCIAL SERVICES -- 2.8%
601,500 ARAMARK Corp. CL B 16,020,615 17,768,310
499,100 ProQuest Co.*<F6> 11,072,289 10,675,749
------------ --------------
27,092,904 28,444,059
PERSONNEL SERVICES -- 3.7%
651,800 Manpower Inc. 27,182,081 37,269,924
COMMUNICATIONS SECTOR -- 1.3%
- -----------------------------
SPECIALTY TELECOMMUNICATIONS -- 1.3%
616,100 TNS Inc.*<F6> 13,167,975 13,048,998
CONSUMER DURABLES SECTOR -- 1.3%
- --------------------------------
TOOLS & HARDWARE -- 1.3%
350,000 Snap-on Inc. 9,002,278 13,342,000
CONSUMER SERVICES SECTOR -- 1.0%
- --------------------------------
BROADCASTING -- 1.0%
659,163 Emmis Communications Corp.*<F6> 11,979,127 10,546,608
DISTRIBUTION SERVICES SECTOR -- 6.4%
- ------------------------------------
ELECTRONICS DISTRIBUTORS -- 1.4%
162,400 Arrow Electronics, Inc.*<F6> 3,886,137 5,240,648
432,400 Ingram Micro Inc.*<F6> 4,650,391 8,648,000
------------ --------------
8,536,528 13,888,648
WHOLESALE DISTRIBUTORS -- 5.0%
487,400 Grainger (W.W.), Inc. 27,236,595 36,725,590
553,600 Interline Brands, Inc.*<F6> 9,676,889 13,967,328
------------ --------------
36,913,484 50,692,918
ELECTRONIC TECHNOLOGY SECTOR -- 8.8%
- ------------------------------------
ELECTRONIC EQUIPMENT/INSTRUMENTS -- 3.3%
592,643 Symbol Technologies, Inc. 7,876,402 6,270,163
664,000 Varian Inc.*<F6> 23,920,121 27,343,520
------------ --------------
31,796,523 33,613,683
ELECTRONIC PRODUCTION EQUIPMENT -- 1.7%
499,500 Asyst Technologies, Inc.*<F6> 2,711,152 5,199,795
726,400 Entegris Inc.*<F6> 7,983,970 7,728,896
180,500 MKS Instruments, Inc.*<F6> 2,141,430 4,229,115
------------ --------------
12,836,552 17,157,806
SEMICONDUCTORS -- 3.2%
435,000 Actel Corp.*<F6> 8,444,912 6,933,900
790,000 Altera Corp.*<F6> 14,941,033 16,305,600
689,700 Exar Corp.*<F6> 10,054,561 9,848,916
------------ --------------
33,440,506 33,088,416
TELECOMMUNICATIONS EQUIPMENT -- 0.6%
406,100 Tekelec*<F6> 4,049,317 5,616,363
ENERGY MINERALS SECTOR -- 2.1%
- ------------------------------
OIL & GAS PRODUCTION -- 2.1%
482,000 Noble Energy, Inc. 9,549,365 21,169,440
FINANCE SECTOR -- 11.4%
- -----------------------
FINANCE/RENTAL/LEASING -- 1.7%
688,800 Assured Guaranty Ltd. 14,793,242 17,220,000
LIFE/HEALTH INSURANCE -- 2.4%
100,100 Reinsurance Group of America, Inc. 3,372,704 4,733,729
803,800 Scottish Re Group Ltd. 19,792,140 19,942,278
------------ --------------
23,164,844 24,676,007
MULTI-LINE INSURANCE -- 1.5%
250,000 PartnerRe Ltd. 12,657,963 15,522,500
REGIONAL BANKS -- 2.8%
631,025 Associated Banc-Corp 17,093,990 21,442,229
112,700 Greater Bay Bancorp 3,006,410 3,126,298
96,600 Midwest Banc Holdings, Inc. 2,028,600 2,505,804
117,900 Nexity Financial Corp.*<F6> 1,886,400 1,485,540
11,614 Summit Bancshares, Inc. 209,967 223,802
------------ --------------
24,225,367 28,783,673
SPECIALTY INSURANCE -- 3.0%
448,700 MGIC Investment Corp. 27,455,192 29,896,881
HEALTH TECHNOLOGY SECTOR -- 7.7%
- --------------------------------
BIOTECHNOLOGY -- 0.9%
168,400 Charles River Laboratories
International, Inc.*<F6> 7,088,428 8,254,968
80,600 Genitope Corp.*<F6> 685,100 701,220
------------ --------------
7,773,528 8,956,188
MEDICAL SPECIALTIES -- 5.0%
296,700 Bausch & Lomb Inc. 20,293,677 18,899,790
243,900 Beckman Coulter, Inc. 13,420,820 13,309,623
699,500 PerkinElmer, Inc. 13,081,349 16,417,265
150,000 Wright Medical Group, Inc.*<F6> 2,942,585 2,962,500
------------ --------------
49,738,431 51,589,178
PHARMACEUTICALS: OTHER -- 1.8%
370,600 ICON PLC - SP-ADR*<F6> 12,952,224 18,118,634
INDUSTRIAL SERVICES SECTOR -- 8.2%
- ----------------------------------
CONTRACT DRILLING -- 1.5%
245,000 Pride International, Inc.*<F6> 3,137,513 7,639,100
164,200 Rowan Companies, Inc. 4,481,667 7,218,232
------------ --------------
7,619,180 14,857,332
ENGINEERING & CONSTRUCTION -- 0.5%
222,000 Chicago Bridge & Iron Co. N.V. NYS 5,378,489 5,328,000
ENVIRONMENTAL SERVICES -- 3.5%
1,131,510 Casella Waste Systems, Inc.*<F6> 10,173,236 16,078,757
98,900 Clean Harbors, Inc.*<F6> 2,769,200 2,934,363
383,800 Republic Services, Inc. 6,038,474 16,315,338
------------ --------------
18,980,910 35,328,458
OILFIELD SERVICES/EQUIPMENT -- 2.7%
565,200 Dresser-Rand Group, Inc.*<F6> 12,985,140 14,045,220
590,452 Hanover Compressor Co.*<F6> 6,695,914 10,994,216
135,000 Willbros Group, Inc.*<F6> 1,019,291 2,745,900
------------ --------------
20,700,345 27,785,336
PROCESS INDUSTRIES SECTOR -- 11.8%
- ----------------------------------
CHEMICALS: MAJOR DIVERSIFIED -- 1.2%
619,600 Celanese Corp. 10,154,220 12,993,012
CHEMICALS: SPECIALTY -- 3.8%
466,800 Airgas, Inc. 6,421,585 18,247,212
429,600 Rockwood Holdings Inc.*<F6> 8,333,505 9,889,392
157,200 Sigma-Aldrich Corp. 10,191,621 10,342,188
------------ --------------
24,946,711 38,478,792
CONTAINERS/PACKAGING -- 4.7%
621,700 Bemis Company, Inc. 16,986,110 19,633,286
785,900 Packaging Corp of America 17,017,423 17,635,596
778,600 Smurfit-Stone Container Corp.*<F6> 9,738,283 10,565,602
------------ --------------
43,741,816 47,834,484
INDUSTRIAL SPECIALTIES -- 2.1%
507,800 Ferro Corp. 9,715,659 10,156,000
201,800 Rogers Corp.*<F6> 7,640,529 10,994,064
------------ --------------
17,356,188 21,150,064
PRODUCER MANUFACTURING SECTOR -- 8.1%
- -------------------------------------
ELECTRICAL PRODUCTS -- 1.6%
115,000 Molex Inc. 3,329,556 3,818,000
402,200 Molex Inc. Cl A 10,270,334 11,953,384
------------ --------------
13,599,890 15,771,384
INDUSTRIAL MACHINERY -- 6.5%
336,800 CIRCOR International, Inc. 5,258,148 9,834,560
765,800 Kadant Inc.*<F6> 10,638,806 17,383,660
316,700 Kennametal Inc. 10,467,203 19,363,038
464,100 Regal-Beloit Corp. 13,406,774 19,617,507
------------ --------------
39,770,931 66,198,765
RETAIL TRADE SECTOR -- 6.5%
- ---------------------------
DISCOUNT STORES -- 2.1%
790,500 Family Dollar Stores, Inc. 16,991,996 21,027,300
SPECIALTY STORES -- 4.4%
343,800 PETCO Animal Supplies, Inc.*<F6> 7,661,603 8,103,366
850,000 Rent-A-Center, Inc.*<F6> 16,517,838 21,751,500
419,700 The Sports Authority, Inc.*<F6> 9,859,876 15,486,930
------------ --------------
34,039,317 45,341,796
TECHNOLOGY SERVICES SECTOR -- 8.1%
- ----------------------------------
DATA PROCESSING SERVICES -- 3.0%
1,242,600 The BISYS Group, Inc.*<F6> 16,801,142 16,750,248
452,200 Hewitt Associates, Inc.*<F6> 11,710,604 13,448,428
------------ --------------
28,511,746 30,198,676
INFORMATION TECHNOLOGY SERVICES -- 2.3%
1,225,000 CIBER, Inc.*<F6> 9,285,444 7,815,500
1,112,300 JDA Software Group, Inc.*<F6> 14,162,117 16,061,612
------------ --------------
23,447,561 23,877,112
INTERNET SOFTWARE/SERVICES -- 1.0%
700,000 Digitas Inc.*<F6> 8,162,351 10,080,000
PACKAGED SOFTWARE -- 1.8%
944,240 Parametric Technology Corp.*<F6> 10,289,504 15,419,439
280,959 Ulticom, Inc.*<F6> 2,208,663 3,020,310
------------ --------------
12,498,167 18,439,749
TRANSPORTATION SECTOR -- 3.8%
- -----------------------------
OTHER TRANSPORTATION -- 2.9%
1,066,100 Laidlaw International Inc. 21,196,177 28,997,920
TRUCKING -- 0.9%
522,200 Werner Enterprises, Inc. 10,191,370 9,592,814
------------ --------------
Total common stocks 767,804,517 957,712,774
MUTUAL FUNDS -- 3.3% (A)<F7>
525,200 iShares S&P
SmallCap 600 Index Fund 16,111,428 34,258,796
------------ --------------
Total long-term investments 783,915,945 991,971,570
PRINCIPAL AMOUNT
- -----------------
SHORT-TERM INVESTMENTS -- 2.9% (A)<F7>
VARIABLE RATE DEMAND NOTE -- 2.9%
$29,258,350 U.S. Bank, N.A., 4.57% 29,258,350 29,258,350
------------ --------------
Total short-term investments 29,258,350 29,258,350
------------ --------------
Total investments $813,174,295 1,021,229,920
------------
------------
Liabilities, less cash
and receivables -- (0.3%) (A)<F7> (3,327,990)
--------------
NET ASSETS $1,017,901,930
--------------
--------------
Net Asset Value Per Share ($0.0001 par value,
100,000,000 shares authorized), offering and
redemption price ($1,017,901,930 / 28,980,875
shares outstanding) $35.12
------
------
*<F6> Non-income producing security.
(A)<F7> Percentages for the various classifications relate to net assets.
ADR - American Depositary Receipt
N.V. - Netherland Antilles Limited Liability Corporation
NYS - New York Registered Shares
The accompanying notes to financial statements are an integral part of this
statement.
FMI Focus Fund
STATEMENT OF OPERATIONS
For the Six Month Period Ending March 31, 2006 (Unaudited)
INCOME:
Dividends $ 4,006,643
Interest 1,472,422
-----------
Total income 5,479,065
-----------
EXPENSES:
Management fees 6,325,451
Administrative services 297,159
Transfer agent fees 222,052
Printing and postage expense 173,147
Custodian fees 106,223
Professional fees 29,847
Registration fees 24,095
Board of Directors fees 20,000
Insurance expense 3,133
Other expenses 65,702
-----------
Total expenses 7,266,809
-----------
NET INVESTMENT LOSS (1,787,744)
-----------
NET REALIZED GAIN ON INVESTMENTS 68,508,234
NET INCREASE IN UNREALIZED APPRECIATION ON INVESTMENTS 28,653,710
-----------
NET GAIN ON INVESTMENTS 97,161,944
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $95,374,200
-----------
-----------
The accompanying notes to financial statements are an integral part of this
statement.
FMI Focus Fund
STATEMENTS OF CHANGES IN NET ASSETS
For the Six Month Period Ending March 31, 2006 (Unaudited) and for the Year
Ended September 30, 2005
2006 2005
-------- --------
OPERATIONS:
Net investment loss $ (1,787,744) $ (6,497,578)
Net realized gain on investments 68,508,234 117,893,228
Net increase in unrealized appreciation on investments 28,653,710 54,258,714
-------------- --------------
Net increase in net assets from operations 95,374,200 165,654,364
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net realized gains
($3.7158 and $1.54578 per share, respectively) (109,117,314) (50,913,006)*<F8>
-------------- --------------
FUND SHARE ACTIVITIES:
Proceeds from shares issued (1,912,919 and 8,994,973 shares, respectively) 64,133,011 302,810,231
Net asset value of shares issued in distributions reinvested
(3,415,461 and 1,477,564 shares, respectively) 105,420,981 47,929,766
Cost of shares redeemed (5,744,852 and 14,184,802 shares, respectively) (191,345,927) (476,039,445)
-------------- --------------
Net decrease in net assets derived from Fund share activities (21,791,935) (125,299,448)
-------------- --------------
TOTAL DECREASE (35,535,049) (10,558,090)
NET ASSETS AT THE BEGINNING OF THE PERIOD 1,053,436,979 1,063,995,069
-------------- --------------
NET ASSETS AT THE END OF THE PERIOD (Includes undistributed
net investment income of $0 and $0, respectively) $1,017,901,930 $1,053,436,979
-------------- --------------
-------------- --------------
*<F8> See Note 8.
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)
(UNAUDITED)
FOR THE SIX MONTH
PERIOD ENDING YEARS ENDED SEPTEMBER 30,
MARCH 31, --------------------------------------------------------
2006 2005 2004 2003 2002 2001
---- ---- ---- ---- ---- ----
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 35.83 $ 32.14 $ 29.35 $ 20.81 $ 23.03 $ 36.43
Income from investment operations:
Net investment loss (a)<F9> (0.06) (0.21) (0.29) (0.18) (0.16) (0.13)
Net realized and unrealized
gains (losses) on investments 3.07 5.44 3.08 8.72 (2.06) (9.74)
------- ------- ------- ------- ------- -------
Total from investment operations 3.01 5.23 2.79 8.54 (2.22) (9.87)
Less distributions:
Dividend from net investment income -- -- -- -- -- (0.03)
Distributions from net realized gains (3.72) (1.54) -- -- -- (3.50)
------- ------- ------- ------- ------- -------
Total from distributions (3.72) (1.54) -- -- -- (3.53)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 35.12 $ 35.83 $ 32.14 $ 29.35 $ 20.81 $ 23.03
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
TOTAL RETURN 9.94%(1) 16.83% 9.51% 41.04% (9.64%) (29.27%)
<F10>
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's $) 1,017,902 1,053,437 1,063,995 948,471 433,799 261,549
Ratio of operating expenses to average net assets 1.44%(2) 1.48% 1.43% 1.47% 1.46% 1.50%
<F11>
Ratio of net investment loss to average net assets (0.35%)(2) (0.61%) (0.87%) (0.71%) (0.60%) (0.55%)
<F11>
Portfolio turnover rate 26.4% 63.1% 63.8% 52.6% 92.8% 165.3%
(a)<F9> Net investment loss per share is calculated using average shares
outstanding.
(1)<F10> Not Annualized.
(2)<F11> Annualized.
The accompanying notes to financial statements are an integral part of this
statement.
FMI Focus Fund
NOTES TO FINANCIAL STATEMENTS
March 31, 2006 (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 diversified, open-end management investment
company under the Investment Company Act of 1940, as amended. The Company
was incorporated under the laws of Maryland on September 5, 1996 and the
Fund commenced operations on December 16, 1996. The assets and liabilities
of each Fund in the Company are segregated as a shareholder's interest is
limited to the Fund in which the shareholder owns shares. 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 the liability for securities sold short, if
any, but excluding short-term investments, is valued at the last sale
price reported by the principal security exchange on which the issue
is traded. Securities that are traded on the Nasdaq National Market
or the Nasdaq SmallCap Market are valued at the Nasdaq Official
Closing Price or if no sale is reported, at the latest bid price.
Securities which are traded over-the-counter are valued at the latest
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. The fair
value of a security is the amount which the Fund might reasonably
expect to receive upon a current sale. The fair value of a security
may differ from the last quoted price and the Fund may not be able to
sell a security at the fair value. Market quotations may not be
available, for example, if trading in particular securities was halted
during the day and not resumed prior to the close of trading on the
New York Stock Exchange. Short-term investments with maturities of 60
days or less are valued at cost which approximates value. For
financial reporting purposes, investment transactions are recorded on
the trade date.
(b) Net realized gains and losses on sale of securities are computed on
the identified cost basis.
(c) Dividend income is recorded on the ex-dividend date. Interest income
is recorded on an accrual basis.
(d) 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 nonperformance by these
counterparties is not anticipated.
(e) Accounting principles generally accepted in the United States of
America ("GAAP") require that permanent differences between income for
financial reporting and tax purposes be reclassified in the capital
accounts.
(f) The preparation of financial statements in conformity with GAAP
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.
(g) The Fund may sell securities short. For financial statement purposes,
an amount equal to the settlement amount would be included in the
statement of net assets 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 net assets. The Fund is liable for any dividends
payable on securities while those securities are in a short position.
Under the 1940 Act, the Fund is required to maintain collateral for
its short positions consisting of liquid securities. The collateral is
required to be adjusted daily to reflect changes in the value of the
securities sold short.
(h) The Fund may own certain securities that are restricted. Restricted
securities include Section 4(2) commercial paper, securities issued in
a private placement, or securities eligible for resale pursuant to
Rule 144A under the Securities Act of 1933. A restricted security
cannot be resold to the general public without prior registration
under the Securities Act of 1933 (the "Act") or pursuant to the resale
limitations provided by Rule 144A under the Act, or an exemption from
the registration requirements of the Act.
(i) No provision has 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.
(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 will pay FMI a monthly management fee at an annual
rate 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 will pay 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.
FMI entered into a sub-advisory agreement with Broadview Advisors, LLC,
to assist it in the day-to-day management of the Fund. Broadview Advisors,
LLC, determines which securities will be purchased, retained or sold for
the Fund. FMI pays Broadview Advisors, LLC 76% of the Fund's management
fee of 1.25% of the daily net assets.
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 six month period ending March 31,
2006.
In the normal course of business the Fund enters into contracts with
service providers that contain general indemnification clauses. The Fund's
maximum exposure under these arrangements is unknown as this would involve
future claims that may be made against the Fund that have not yet occurred.
However, based on experience, the Fund expects the risk of loss to be
remote.
(3) CREDIT AGREEMENT --
U.S. Bank, N.A. has made available to the Fund a $30,000,000 credit
facility pursuant to a Credit Agreement ("Agreement") dated November 18,
2002 for the purpose of having cash available to cover incoming redemptions
and to purchase portfolio securities. Principal and interest of such loan
under the Agreement are due not more than 31 days after the date of the
loan. Amounts under the credit facility bear interest at a rate per annum
equal to the current prime rate minus one on the amount borrowed. Advances
will be collateralized by securities owned by the Fund. During the six
month period ending March 31, 2006, the Fund did not borrow against the
Agreement. The Credit Agreement expires on June 5, 2006.
(4) DISTRIBUTIONS TO SHAREHOLDERS --
Net investment income and net realized gains, if any, are distributed
to shareholders at least annually. On December 29, 2005, the Fund
distributed $3,887,124 from net short-term realized gains ($0.1247 per
share), and $10,231,833 from long-term realized gains ($0.32824 per share).
The distributions were paid on December 29, 2005 to shareholders of record
on December 28, 2005.
(5) INVESTMENT TRANSACTIONS --
For the six month period ending March 31, 2006, purchases and proceeds
of sales of investment securities (excluding short-term investments) were
$249,823,124 and $301,118,538, respectively.
(6) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES --
As of March 31, 2006, liabilities of the Fund included the following:
Payable to brokers for securities purchased $ 4,022,293
Payable to FMI for management and administrative fees 1,114,502
Payable to shareholders for redemptions 473,473
Due to custodian 61,354
Other liabilities 256,877
(7) SOURCES OF NET ASSETS --
As of March 31, 2006, the sources of net assets were as follows:
Fund shares issued and outstanding $ 772,187,865
Net unrealized appreciation on investments 208,055,625
Accumulated net realized gains on investments 37,658,440
--------------
$1,017,901,930
--------------
--------------
(8) INCOME TAX INFORMATION --
The following information for the Fund is presented on an income tax
basis as of March 31, 2006:
GROSS GROSS NET UNREALIZED
COST OF UNREALIZED UNREALIZED APPRECIATION
INVESTMENTS APPRECIATION DEPRECIATION ON INVESTMENTS
----------- ------------ ------------ --------------
$820,217,321 $216,166,422 $15,153,823 $201,012,599
The following information for the Fund is presented on an income tax
basis as of September 30, 2005:
GROSS GROSS NET UNREALIZED DISTRIBUTABLE DISTRIBUTABLE
COST OF UNREALIZED UNREALIZED APPRECIATION ORDINARY LONG-TERM
INVESTMENTS APPRECIATION DEPRECIATION ON INVESTMENTS INCOME CAPITAL GAINS
----------- ------------ ------------ -------------- ------------- -------------
$869,914,139 $193,189,657 $28,730,528 $164,459,129 $40,358,232 $54,639,817
The difference between the cost amount for financial statement and
federal income tax purposes is due primarily to timing differences in
recognizing certain gains and losses in security transactions.
The tax components of dividends paid during the years ended September
30, 2005 and 2004, capital loss carryovers, which may be used to offset
future capital gains, subject to Internal Revenue Code limitations, as of
September 30, 2005, and tax basis post-October losses as of September 30,
2005, which are not recognized for tax purposes until the first day of the
following fiscal year are:
SEPTEMBER 30, 2005 SEPTEMBER 30, 2004
--------------------------------------------------------------- ------------------------------
ORDINARY LONG-TERM NET CAPITAL ORDINARY LONG-TERM
INCOME CAPITAL GAINS LOSS POST-OCTOBER INCOME CAPITAL GAINS
DISTRIBUTIONS DISTRIBUTIONS CARRYOVERS LOSSES DISTRIBUTIONS DISTRIBUTIONS
------------- ------------- ----------- ------------ ------------- -------------
$2,938,476 $47,974,530 $ -- $ -- $ -- $ --
For corporate shareholders in the Fund, the percentage of dividend
income distributed for the year ended September 30, 2005 which is
designated as qualifying for the dividends received deduction is 12%
(unaudited).
For shareholders in the Fund, the percentage of dividend income under
the Jobs and Growth Tax Relief Act of 2003, is 12% (unaudited).
ADDITIONAL INFORMATION
For additional information about the Directors and Officers or for a description
of the policies and procedures that the Fund uses to determine how to vote
proxies relating to portfolio securities, please call (800) 811-5311 and request
a Statement of Additional Information. One will be mailed to you free of
charge. The Statement of Additional Information is also available on the
website of the Securities and Exchange Commission (the "Commission") at
http://www.sec.gov. Information on how the Fund voted proxies relating to
portfolio securities is available on the Fund's website at
http://www.fmifunds.com or the website of the Commission no later than August 31
for the prior 12 months ending June 30. The Fund files its complete schedule of
portfolio holdings with the Commission for the first and third quarters of each
fiscal year on Form N-Q. The Fund's Form N-Q is available on the Commission's
website. The Fund's Form N-Q may be reviewed and copied at the Commission's
Public Reference Room in Washington, D.C., and that information on the operation
of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
FMI Focus Fund
ADVISORY AGREEMENT
On December 16, 2005, the Board of Directors of FMI Funds, Inc. approved
the continuation of the FMI Focus Fund's investment advisory agreement with
Fiduciary Management, Inc. and its sub-advisory agreement with Broadview
Advisors, LLC. Prior to approving the continuation of the agreements, the Board
considered:
o the nature, extent and quality of the services provided by
Fiduciary Management, Inc. and Broadview Advisors, LLC
o the investment performance of the Fund
o the cost of the services to be provided and profits to be realized
by Fiduciary Management, Inc. from its relationship with the Fund
o the extent to which economies of scale would be realized as the
Fund grew and whether fee levels reflect these economies of scale
o the expense ratio of the Fund
In considering the nature, extent and quality of the services provided by
Fiduciary Management, Inc. and Broadview Advisors, LLC, the Board of Directors
reviewed a report describing the portfolio management, shareholder communication
and servicing, prospective shareholder assistance and regulatory compliance
services provided by Fiduciary Management, Inc. to the Fund. In connection with
the Board's review of the performance of the Fund, the Board considered the
quality of portfolio management services provided by Broadview Advisors, LLC.
The Board concluded that Fiduciary Management, Inc. and Broadview Advisors, LLC
were providing essential services to the Fund. In particular, the Board
concluded that Fiduciary Management, Inc. and Broadview Advisors, LLC were
preparing reports to shareholders in addition to those required by law, and were
providing services to the Fund that were in addition to the services investment
advisers typically provided non-mutual fund clients.
The Directors compared the performance of the Fund to benchmark indices
over various periods of time and concluded that the performance of the Fund
warranted the continuation of the agreements.
In concluding that the advisory fees payable by the Fund were reasonable,
the Directors considered the profitability of publicly traded investment
advisory firms. The Directors also reviewed reports comparing the Fund's
expense ratio and advisory fees paid by the Fund to those of other comparable
mutual funds and concluded that the advisory fee paid by the Fund and the Fund's
expense ratio were within the range of comparable mutual funds. The Directors
noted that the investment advisory fee was not adjusted if economies of scale
were realized as the Fund grew, but did not consider that factor to be
significant in light of the other factors considered, and because the number of
investments in the Fund was such that there would not be economies of scale
similar to what an index fund or a fund using an "index" approach to investing
would realize.
Finally, the Board reviewed reports discussing the manner in which
portfolio transactions for the Fund were conducted, including the use of soft
dollars. Based on these reports, the Board concluded that the research obtained
by Broadview Advisors, LLC was beneficial to the Fund and that Broadview
Advisors, LLC was executing the Fund's portfolio transactions in a manner
designated to obtain best execution for the Fund.
FMI FOCUS FUND
100 East Wisconsin Avenue, Suite 2200
Milwaukee, Wisconsin 53202
www.fmifunds.com
414-226-4555
BOARD OF DIRECTORS
BARRY K. ALLEN
GEORGE D. DALTON
PATRICK J. ENGLISH
GORDON H. GUNNLAUGSSON
TED D. KELLNER
RICHARD E. LANE
PAUL S. SHAIN
INVESTMENT ADVISER
AND ADMINISTRATOR
FIDUCIARY MANAGEMENT, INC.
100 East Wisconsin Avenue, Suite 2200
Milwaukee, Wisconsin 53202
PORTFOLIO MANAGER
BROADVIEW ADVISORS, LLC
100 East Wisconsin Avenue, Suite 2250
Milwaukee, Wisconsin 53202
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
U.S. BANCORP FUND SERVICES, LLC
615 East Michigan Street
Milwaukee, Wisconsin 53202
800-811-5311 or 414-765-4124
CUSTODIAN
U.S. BANK, N.A.
425 Walnut Street
Cincinnati, Ohio 45202
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
PRICEWATERHOUSECOOPERS LLP
100 East Wisconsin Avenue
Suite 1800
Milwaukee, Wisconsin 53202
LEGAL COUNSEL
FOLEY & LARDNER LLP
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.
SEMIANNUAL REPORT
MARCH 31, 2006
FMI
Large Cap
Fund
A NO-LOAD
MUTUAL FUND
FMI
Large Cap
Fund
March 31, 2006
Dear Fellow Shareholders:
FMI Large Cap Fund gained 4.11% in the March quarter, roughly in line with
the return for the Standard & Poor's 500 Index(1)<F12>. The finance sector was
a laggard for us in the quarter, as we remain underweight in a group that
continues to do surprisingly well in spite of higher interest rates and a less
favorable consumer credit environment. We significantly increased our weighting
in Willis Group Holdings Ltd., an insurance brokerage firm, while eliminating
Loews Corp. Loews was a very good stock for us but we felt its valuation was no
longer compelling compared to Willis. We also believe Willis' business model
and return dynamics are superior to Loews' and will thus be a better investment,
over the long pull. Aside from the finance sector, there was continued strength
in energy stocks and somewhat surprisingly, the industrial group. From an
individual stock perspective, Waste Management, Inc., CANON INC, Diageo and
Cardinal Health, Inc. all performed well in the quarter. Tyco International
Ltd., Time Warner Inc. and Kimberly-Clark Corp. were all down slightly in the
period.
Small-cap stocks were extremely strong in the quarter, with the Russell 2000
Index(2)<F13> outpacing the Standard & Poor's 500 Index (S&P 500) by over 9.5
percentage points. There seems to be a speculative fervor once again in small-
cap "growth" stocks. High-multiple technology stocks and deeply cyclical
equities were extraordinary in the quarter, particularly for the smaller-cap
issues. The spending environment for technology products and services is
relatively healthy and we are not surprised to see strength in these stocks.
Indeed, our own "downstream" technology investments have generally done well and
we remain optimistic about each of their respective prospects. Valuations for
larger-cap high technology stocks appear to be a lot more reasonable than they
are for small-cap issues, but neither hold great appeal for us. Valuations in
the deeply cyclical part of the market seem extraordinarily high, particularly
when one considers that we are four-and-a-half years into an economic expansion
cycle. We do not see the bottom dropping out of the economy or anything near-
term to shake technology spending, but we are less sanguine about the heavy
industrial and high technology stocks.
Valuations are always near and dear to our heart, of course, and as of March
31, 2006, this is what the Fund looked like relative to the benchmark S&P 500,
on a weighted average basis:
PRICE-TO-EARNINGS PRICE-TO-EARNINGS
YEAR 1 YEAR 2 PRICE-TO-SALES PRICE-TO-BOOK
----------------- ----------------- -------------- -------------
FMI LARGE CAP FUND 15.8 14.0 1.3 3.0
STANDARD & POOR'S 500 17.8 15.7 2.6 4.1
While absolute valuations aren't compelling, relative valuations remain on
our side. We continue to find interesting special situations that keep us
hopeful for the future.
(1)<F12> The Standard and 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)<F13> 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 of the Frank Russell Company.
We have outlined two of our recent purchases below:
TYCO INTERNATIONAL LTD.
DESCRIPTION
- -----------
Tyco is a $40 billion diversified manufacturing and service company that
operates in the following businesses: Electronics, at 31% of revenue and 29% of
operating profit before corporate expense in fiscal 2005; Fire & Security, at
29% and 19%, respectively; Healthcare, at 24% and 41%; and Engineered Products &
Services, at 16% and 11%. The U.S. accounts for 49% of revenue; Europe, 29%;
Asia-Pacific, 16%; and Other Americas, 6%.
GOOD BUSINESS
- -------------
o Tyco has a diverse portfolio of leading brands that include AMP and
Raychem in the Electronics division; ADT in Fire & Security; and U.S.
Surgical, Kendall, and Mallinckrodt in Healthcare. Over two-thirds of
revenue is derived from products and services where they have a number
one position.
o The Company appears to be well positioned for the current stage of the
economic cycle. Approximately 35% of the overall portfolio is levered
to non-residential construction, an additional 30% is levered to a
recovery in Electronics, and approximately one-quarter is levered to
the relatively defensive Healthcare business.
o While the current return on investment capital (ROIC) of 8.2% is
depressed due to one-time expenses and historical mistakes, the return
on incremental invested capital is nearly 30%.
o The debt is rated BBB+ by Standard & Poor's. The rating includes the
assumption that the Company will have to pay $4 billion to put all its
legal issues behind it.
VALUATION
- ---------
o The stock is off 22% from its 52-week high, as management has lowered
its forecasts on several occasions.
o Tyco trades below the S&P 500 on a multiple of earnings per share
(EPS); earnings before interest, taxes, depreciation and amortization
(EBITDA); sales; and free cash flow.
o Management has announced that it will be breaking the Company up into
three individual pieces: Electronics; Fire & Security and Engineered
Products & Services; and Healthcare. We value Tyco at 25-30% higher
than the current stock price on a sum-of-the-parts basis.
MANAGEMENT
- ----------
o Ed Breen has been Chairman and Chief Executive Officer since July of
2002. Since coming to Tyco from Motorola, Breen has resolved the
liquidity crisis, paid down nearly $13 billion in net debt, replaced
the entire Board of Directors and much of senior management, and re-
structured operations.
o Chris Coughlin has been Chief Financial Officer since March 2005. He
previously served as Chief Operating Officer of Interpublic and Chief
Financial Officer of Pharmacia and Nabisco.
o Management is focused on driving organic growth and returning cash to
shareholders via the payment of a dividend (1.5% yield) and the buyback
of stock.
INVESTMENT THESIS
- -----------------
The pullback in Tyco's stock price provides us with an opportunity to own
several well-established (albeit underperforming) franchises at a significant
discount to both the market and comparable companies, based on a sum-of-the-
parts analysis. After several years of turmoil following the Dennis Kowslowski
era, we believe management will execute better at the business unit level.
Better performance will remove the taint on this Company and should ultimately
lead to a higher valuation.
WAL-MART STORES, INC.
DESCRIPTION
- -----------
Wal-Mart is the world's largest retailer with the broadest assortment of
consumer goods anywhere. The Company operates in a variety of formats around
the world. The majority of U.S. stores are SuperCenters (1,986 units), followed
by discount stores (1,203 units), SAM'S Clubs (567), and Neighborhood Markets
(101). The domestic Wal-Mart Stores segment accounts for 67% of revenues.
SAM's Club accounts for 13% with the remaining 20% of revenues earned in the
Company's international business.
GOOD BUSINESS
- -------------
o Wal-Mart offers exceptional quality at a low price. This strategy has
proven highly durable. The Company has significant competitive
advantages in sourcing, logistics and marketing.
o Wal-Mart's revenues are derived from the recurring sale of consumable
products.
o Since 1997 Wal-Mart has increased its ROIC by nearly 300 basis points
to 13.3%. The Company continues to invest in expansion, sourcing,
supply chain efficiencies and merchandising initiatives, the
combination of which should lead to attractive incremental returns on
capital.
o Wal-Mart is the ultimate scale operator. It has a sustainable
competitive advantage.
o The Company maintains an AA rated balance sheet. Net debt-to-total
capital is 29% and long-term debt-to-EBITDA is 1.3.
VALUATION
- ---------
o Wal-Mart currently trades at its lowest valuation level in nearly a
decade on every common valuation yardstick.
o The current forward price-to-earnings ratio (P/E) of 16 is at the low
end of the historical 10-year P/E range of 16 to 54, and 41% below the
27 average.
o On an enterprise value basis, Wal-Mart trades at 70% of annual
revenues, a deep discount to the Company's 10-year average of 105%.
The 10-year range is 60% to 210%.
o The current enterprise-value-to-EBITDA multiple is 36% below the 10-
year average of 14.6. The range is 9 to 31.
o Despite Wal-Mart's durable business model and strong financial profile
the stock trades at over a 10% discount to the S&P 500 versus a
historical average premium of 20%.
MANAGEMENT
- ----------
o Lee Scott has been President and Chief Executive Officer since January
2000. In his 22 previous years at the Company, Scott has held a
variety of other leadership positions including Chief Operating
Officer, and Chief Executive Officer of the Wal-Mart Stores division.
o The executive management team also includes Eduardo Castro-Wright,
Chief Executive Officer of the Wal-Mart Stores division; Michael Duke,
Chief Executive Officer of the International segment; John Menzer, head
of U.S. operations; and Tom Schoewe, Chief Financial Officer.
o Wal-Mart has a strong heritage of organically developing its management
talent. Approximately two-thirds of management started their careers
as Wal-Mart associates.
o Management incentives are aligned with shareholders due to significant
insider ownership and incentive compensation targets based, in part,
upon return on assets.
INVESTMENT THESIS
- -----------------
Despite improved returns on invested capital and average annual earnings
growth of approximately 15% over the last five years, Wal-Mart's stock is the
same price it was in the fall of 1999. Near-term concerns over the global
economy, labor relations, and consumer activism have obscured numerous positive
changes evolving through the Company's reinvigorated focus on improving capital
efficiency. The current discounted valuation presents an opportunity to invest
in the world's most dominant retailer with a significant margin of safety.
Thank you for your continued confidence in FMI Large Cap Fund.
Sincerely,
/s/Ted D. Kellner /s/Donald S. Wilson /s/Patrick J. English
Ted D. Kellner, CFA Donald S. Wilson, CFA Patrick J. English, CFA
President and Vice President Vice President and
Portfolio Manager Portfolio Manager
100 E. Wisconsin Ave., Suite 2200 o Milwaukee, WI 53202 o 414-226-4555
www.fmifunds.com
FMI Large Cap Fund
COST DISCUSSION
INDUSTRY SECTORS AS OF MARCH 31, 2006
Finance 15.4%
Retail Trade 13.8%
Consumer Non-Durables 10.4%
Distribution Services 10.2%
Commercial Services 6.2%
Consumer Services 5.8%
Electronic Technology 5.6%
Technology Services 4.4%
Process Industries 4.2%
Industrial Services 4.0%
Health Technology 3.6%
Producer Manufacturing 2.8%
Energy Minerals 2.7%
Cash & Cash Equivalents 10.9%
As a shareholder of the Fund you incur ongoing costs, including management fees
and other Fund expenses. You do not incur transaction costs such as sales
charges (loads) on purchase payments, reinvested dividends, or other
distributions; redemption fees; and exchange fees because the Fund does not
charge these fees. This example is intended to help you understand your ongoing
costs (in dollars) of investing in FMI Large Cap Fund and to compare these costs
with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period from October 1, 2005 through March 31,
2006.
ACTUAL EXPENSES
The first line of the table below provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
In addition to the costs highlighted and described below, the only Fund
transaction costs you might currently incur would be wire fees ($15 per wire),
if you choose to have proceeds from a redemption wired to your bank account
instead of receiving a check. Additionally, U.S. Bank charges an annual
processing fee ($15) if you maintain an IRA account with the Fund. To determine
your total costs of investing in the Fund, you would need to add any applicable
wire or IRA processing fees you've incurred during the period to the costs
provided in the example at the end of this article.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table below provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads), redemption or exchange fees. Therefore, the second line of the
table is useful in comparing ongoing costs only, and will not help you determine
the relative total costs of owning different funds. In addition, if these
transactional costs were included, your costs would have been higher.
Beginning Ending Expenses Paid
Account Account During Period*<F14>
Value 10/01/05 Value 3/31/06 10/01/05-3/31/06
-------------- ------------- -------------------
FMI Large Cap Fund Actual $1,000.00 $1,082.20 $5.19
Hypothetical
(5% return before expenses) $1,000.00 $1,019.90 $5.04
*<F14> Expenses are equal to the Fund's annualized expense ratio of 1.00%,
multiplied by the average account value over the period, multiplied by
182/365 (to reflect the one-half year period between October 1, 2005
and March 31, 2006).
FMI Large Cap Fund
STATEMENT OF NET ASSETS
March 31, 2006 (Unaudited)
SHARES COST VALUE
------ ---- -----
COMMON STOCKS -- 89.1% (A)<F16>
COMMERCIAL SERVICES SECTOR -- 6.2%
- ----------------------------------
MISCELLANEOUS COMMERCIAL SERVICES -- 6.2%
239,000 ARAMARK Corp. CL B $ 6,308,246 $ 7,060,060
CONSUMER NON-DURABLES SECTOR -- 10.4%
- -------------------------------------
BEVERAGES: ALCOHOLIC -- 3.4%
61,000 Diageo PLC - SP-ADR 3,533,576 3,869,230
FOOD: SPECIALTY/CANDY -- 3.2%
91,000 Cadbury Schweppes
PLC - SP-ADR 3,573,930 3,640,000
HOUSEHOLD/PERSONAL CARE -- 3.8%
73,500 Kimberly-Clark Corp. 4,437,851 4,248,300
CONSUMER SERVICES SECTOR -- 5.8%
- --------------------------------
MEDIA CONGLOMERATES -- 5.8%
390,000 Time Warner Inc. 6,876,985 6,548,100
DISTRIBUTION SERVICES SECTOR -- 10.2%
- -------------------------------------
MEDICAL DISTRIBUTORS -- 5.4%
82,000 Cardinal Health, Inc. 4,831,361 6,110,640
WHOLESALE DISTRIBUTORS -- 4.8%
72,000 Grainger (W.W.), Inc. 4,293,793 5,425,200
ELECTRONIC TECHNOLOGY SECTOR -- 5.6%
- ------------------------------------
ELECTRONIC EQUIPMENT/INSTRUMENTS -- 5.6%
96,000 CANON INC. SP-ADR 5,198,891 6,340,800
ENERGY MINERALS -- 2.7%
- -----------------------
INTEGRATED OIL -- 2.7%
45,000 BP PLC - SP-ADR 2,948,478 3,102,300
FINANCE SECTOR -- 15.4%
- -----------------------
INSURANCE BROKERS/SERVICES -- 4.5%
148,000 Willis Group Holdings Ltd. 5,289,607 5,070,480
MAJOR BANKS -- 3.2%
64,000 Comerica Inc. 3,680,192 3,710,080
PROPERTY/CASUALTY INSURANCE -- 7.7%
2,900 Berkshire Hathaway
Inc. Cl B*<F15> 8,235,298 8,734,800
HEALTH TECHNOLOGY SECTOR -- 3.6%
- --------------------------------
MEDICAL SPECIALTIES -- 3.6%
67,000 Becton, Dickinson & Co. 3,577,843 4,125,860
INDUSTRIAL SERVICES SECTOR -- 4.0%
- ----------------------------------
ENVIRONMENTAL SERVICES -- 4.0%
127,000 Waste Management, Inc. 3,662,997 4,483,100
PROCESS INDUSTRIES SECTOR -- 4.2%
- ---------------------------------
CHEMICALS: SPECIALTY -- 4.2%
86,000 Praxair, Inc. 3,956,832 4,742,900
PRODUCER MANUFACTURING SECTOR -- 2.8%
- -------------------------------------
INDUSTRIAL CONGLOMERATES -- 2.8%
117,000 Tyco International Ltd. 3,119,690 3,144,960
RETAIL TRADE SECTOR -- 13.8%
- ----------------------------
APPAREL/FOOTWEAR RETAIL -- 4.2%
193,000 TJX Companies, Inc. 4,468,131 4,790,260
DISCOUNT STORES -- 6.0%
145,000 Wal-Mart Stores, Inc. 6,923,446 6,849,800
FOOD RETAIL -- 3.6%
198,000 Kroger Co. 3,423,956 4,031,280
TECHNOLOGY SERVICES SECTOR -- 4.4%
- ----------------------------------
INFORMATION TECHNOLOGY SERVICES -- 4.4%
165,000 Accenture Ltd. 3,978,520 4,961,550
------------ ------------
Total common stocks 92,319,623 100,989,700
PRINCIPAL AMOUNT
- ----------------
SHORT-TERM INVESTMENTS -- 10.2% (A)<F16>
VARIABLE RATE DEMAND NOTES -- 10.2%
$ 887,711 American Family Financial
Services, 4.47% 887,711 887,711
5,472,000 U.S. Bank, N.A., 4.57% 5,472,000 5,472,000
5,190,000 Wisconsin Corporate
Central Credit
Union, 4.49% 5,190,000 5,190,000
------------ ------------
Total short-term
investments 11,549,711 11,549,711
------------ ------------
Total investments $103,869,334 112,539,411
------------
------------
Cash and receivables, less
liabilities -- 0.7% (A)<F16> 792,450
------------
NET ASSETS $113,331,861
------------
------------
Net Asset Value Per Share
($0.0001 par value, 100,000,000
shares authorized), offering
and redemption price
($113,331,861 / 8,131,836
shares outstanding) $13.94
------
------
*<F15> Non-income producing security.
(A)<F16> Percentages for the various classifications relate to net assets.
ADR - American Depositary Receipt
The accompanying notes to financial statements are an integral part of this
statement.
FMI Large Cap Fund
STATEMENT OF OPERATIONS
For the Six Month Period Ending March 31, 2006 (Unaudited)
INCOME:
Dividends $ 652,894
Interest 215,323
----------
Total income 868,217
----------
EXPENSES:
Management fees 355,991
Administrative services 67,461
Transfer agent fees 58,019
Registration fees 27,573
Professional fees 21,587
Printing and postage expense 13,579
Custodian fees 12,191
Board of Directors fees 5,000
Insurance expense 264
Other expenses 2,264
----------
Total expenses before reimbursement 563,929
Less expenses reimbursed by adviser (89,489)
----------
Net expenses 474,440
----------
NET INVESTMENT INCOME 393,777
----------
NET REALIZED GAIN ON INVESTMENTS 1,258,692
NET INCREASE IN UNREALIZED APPRECIATION ON INVESTMENTS 5,749,464
----------
NET GAIN ON INVESTMENTS 7,008,156
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $7,401,933
----------
----------
The accompanying notes to financial statements are an integral part of this
statement.
FMI Large Cap Fund
STATEMENTS OF CHANGES IN NET ASSETS
For the Six Month Period Ending March 31, 2006 (Unaudited) and for the Year
Ended September 30, 2005
2006 2005
-------- --------
OPERATIONS:
Net investment income $ 393,777 $ 227,861
Net realized gain on investments 1,258,692 2,241,688
Net increase in unrealized appreciation on investments 5,749,464 1,904,975
------------ -----------
Net increase in net assets resulting from operations 7,401,933 4,374,524
------------ -----------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income ($0.03425 and $0.07275 per share, respectively) (204,488) (98,948)
Distributions from net realized gains ($0.36695 and $0.19847 per share, respectively) (2,194,312) (270,639)
------------ -----------
Total distributions (2,398,800) (369,587)*<F17>
------------ -----------
FUND SHARE ACTIVITIES:
Proceeds from shares issued (3,004,740 and 4,460,824 shares, respectively) 40,428,174 57,352,368
Net asset value of shares issued in distributions reinvested
(188,157 and 30,545 shares, respectively) 2,381,405 362,337
Cost of shares redeemed (621,634 and 215,796 shares, respectively) (8,383,928) (2,793,409)
------------ -----------
Net increase in net assets derived from Fund share activities 34,425,651 54,921,296
------------ -----------
TOTAL INCREASE 39,428,784 58,926,233
NET ASSETS AT THE BEGINNING OF THE PERIOD 73,903,077 14,976,844
------------ -----------
NET ASSETS AT THE END OF THE PERIOD (Includes undistributed
net investment income of $393,771 and $204,482, respectively) $113,331,861 $73,903,077
------------ -----------
------------ -----------
*<F17> See Note 7
The accompanying notes to financial statements are an integral part of these
statements.
FMI Large Cap Fund
FINANCIAL HIGHLIGHTS
(Selected data for each share of the Fund outstanding throughout each period)
(UNAUDITED)
FOR THE SIX MONTH FOR THE YEARS ENDED FOR THE PERIOD FROM
PERIOD ENDING SEPTEMBER 30, DECEMBER 31,
MARCH 31, ---------------------------------- 2001+<F18> TO
2006 2005 2004 2003 SEPTEMBER 30, 2002
---- ---- ---- ---- ------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $13.29 $11.66 $10.03 $ 7.94 $10.00
Income from investment operations:
Net investment income (loss) 0.06 0.08 0.10 0.03 (0.01)
Net realized and unrealized
gains (loss) on investments 0.99 1.82 1.68 2.06 (2.05)
------ ------ ------ ------ ------
Total from investment operations 1.05 1.90 1.78 2.09 (2.06)
Less distributions:
Dividends from net investment income (0.03) (0.07) (0.03) -- --
Distributions from net realized gains (0.37) (0.20) (0.12) -- --
------ ------ ------ ------ ------
Total from distributions (0.40) (0.27) (0.15) -- --
------ ------ ------ ------ ------
Net asset value, end of period $13.94 $13.29 $11.66 $10.03 $ 7.94
------ ------ ------ ------ ------
------ ------ ------ ------ ------
TOTAL RETURN 8.22%* 16.60% 17.96% 26.32% (20.60%)*
<F19> <F19>
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's $) 113,332 73,903 14,977 5,680 3,236
Ratio of expenses (after reimbursement)
to average net assets (a)<F21> 1.00%** 1.00% 1.13% 1.34% 1.75%**
<F20> <F20>
Ratio of net investment gain (loss)
to average net assets (b)<F22> 0.83%** 0.64% 0.85% 0.36% (0.30%)**
<F20> <F20>
Portfolio turnover rate 11.3% 39.5% 38.1% 54.4% 31.8%
+<F18> Commencement of operations.
*<F19> Not annualized.
**<F20> Annualized.
(a)<F21> Computed after giving effect to adviser's expense limitation
undertaking. If the Fund had paid all of its expenses for the six
month period ending March 31, 2006 and for the years ended September
30, 2005, 2004 and 2003 and for the period December 31, 2001+<F18>
through September 30, 2002, the ratios would have been
1.19%**<F20>, 1.33%, 2.44%, 3.07% and 3.71%**<F20>, respectively.
(b)<F22> If the Fund had paid all of its expenses for the six month period
ending March 31, 2006 and for the years ended September 30, 2005,
2004 and 2003 and for the period December 31, 2001+<F18> through
September 30, 2002, the ratios would have been 0.64%**<F20>, 0.31%,
(0.46%), (1.37%) and (2.26%)**<F20>, respectively.
The accompanying notes to financial statements are an integral part of this
statement.
FMI Large Cap Fund
NOTES TO FINANCIAL STATEMENTS
March 31, 2006 (Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
The following is a summary of significant accounting policies of the
FMI Large Cap Fund (the "Fund"), a series 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, as amended.
The Company was incorporated under the laws of Maryland on September 5,
1996 and the Fund commenced operations on December 31, 2001. The assets
and liabilities of each Fund in the Company are segregated and a
shareholder's interest is limited to the Fund in which the shareholder owns
shares. The investment objective of the Fund is to seek long-term capital
appreciation principally through investing in a limited number of large
capitalization value stocks.
(a) Each security, excluding short-term investments, is valued at the last
sale price reported by the principal security exchange on which the
issue is traded. Securities that are traded on the Nasdaq National
Market or the Nasdaq SmallCap Market are valued at the Nasdaq Official
Closing Price, or if no sale is reported, the latest bid price.
Securities that are traded over-the-counter are valued at the latest
bid price. Unlisted equity securities for which market quotations are
readily available are valued at the most recent bid price. 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. The fair value of a security is the amount
which the Fund might reasonably expect to receive upon a current sale.
The fair value of a security may differ from the last quoted price and
the Fund may not be able to sell a security at the fair value. Market
quotations may not be available, for example, if trading in particular
securities was halted during the day and not resumed prior to the
close of trading on the New York Stock Exchange. Short-term
investments with maturities of 60 days or less are valued at amortized
cost which approximates value. For financial reporting purposes,
investment transactions are recorded on the trade date.
(b) Net realized gains and losses on sales of securities are computed on
the identified cost basis.
(c) Dividend income is recorded on the ex-dividend date. Interest income
is recorded on an accrual basis.
(d) 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 nonperformance by these
counterparties is not anticipated.
(e) Accounting principles generally accepted in the United States of
America ("GAAP") require that permanent differences between income for
financial reporting and tax purposes be reclassified in the capital
accounts.
(f) The preparation of financial statements in conformity with GAAP
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.
(g) No provision has 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.
(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 will pay FMI a monthly management fee at the annual
rate of 0.75% 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 will pay 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 1.20% of the daily net assets of the Fund. For the six month
period ending March 31, 2006, no contractual reimbursements were required.
In addition to the reimbursement required under the management agreement,
FMI has voluntarily reimbursed the Fund for expenses over 1.00%. For the
six month period ending March 31, 2006, FMI reimbursed the Fund $89,489 for
these excess expenses.
In the normal course of business the Fund enters into contracts with
service providers that contain general indemnification clauses. The Fund's
maximum exposure under these arrangements is unknown as this would involve
future claims that may be made against the Fund that have not yet occurred.
However, based on experience, the Fund expects the risk of loss to be
remote.
(3) DISTRIBUTION TO SHAREHOLDERS --
Net investment income and net realized gains, if any, are distributed
to shareholders at least annually. On December 29, 2005, the Fund
distributed $20,565 from net short-term realized gains ($0.00288 per
share), and $500 from net long-term realized gains ($0.00007 per share).
The distributions were paid on December 29, 2005 to shareholders of record
on December 28, 2005.
(4) INVESTMENT TRANSACTIONS --
For the six month period ending March 31, 2006, purchases and proceeds
of sales of investment securities (excluding short-term investments) were
$38,774,805 and $9,491,980, respectively.
(5) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES --
As of March 31, 2006, liabilities of the Fund included the following:
Payable to FMI for management and administrative fees $82,116
Payable to shareholders for redemptions 10,000
Other liabilities 23,440
(6) SOURCES OF NET ASSETS --
As of March 31, 2006, the sources of net assets were as follows:
Fund shares issued and outstanding $103,051,436
Net unrealized appreciation on investments 8,670,077
Undistributed net realized gains on investments 1,216,577
Undistributed net investment income 393,771
------------
$113,331,861
------------
------------
(7) INCOME TAX INFORMATION --
The following information for the Fund is presented on an income tax
basis as of March 31, 2006:
GROSS GROSS NET UNREALIZED
COST OF UNREALIZED UNREALIZED APPRECIATION
INVESTMENTS APPRECIATION DEPRECIATION ON INVESTMENTS
----------- ------------ ------------ --------------
$103,880,932 $9,775,732 $1,117,253 $8,658,479
The following information for the Fund is presented on an income tax
basis as of September 30, 2005:
GROSS GROSS NET UNREALIZED DISTRIBUTABLE DISTRIBUTABLE
COST OF UNREALIZED UNREALIZED APPRECIATION ORDINARY LONG-TERM
INVESTMENTS APPRECIATION DEPRECIATION ON INVESTMENTS INCOME CAPITAL GAINS
----------- ------------ ------------ -------------- ------------- -------------
$70,506,870 $4,309,276 $1,409,687 $2,899,589 $1,527,168 $850,536
The difference, if any, between the cost amounts for financial
statement and federal income tax purposes is due primarily to timing
differences in recognizing certain gains and losses on security
transactions.
The tax components of dividends paid during the years ended September
30, 2005 and 2004, capital loss carryovers, which may be used to offset
future capital gains, subject to Internal Revenue Code limitations, as of
September 30, 2005, and tax basis post-October losses as of September 30,
2005, which are not recognized for tax purposes until the first day of the
following fiscal year are:
SEPTEMBER 30, 2005 SEPTEMBER 30, 2004
--------------------------------------------------------------- ------------------------------
ORDINARY LONG-TERM NET CAPITAL ORDINARY LONG-TERM
INCOME CAPITAL GAINS LOSS POST-OCTOBER INCOME CAPITAL GAINS
DISTRIBUTIONS DISTRIBUTIONS CARRYOVERS LOSSES DISTRIBUTIONS DISTRIBUTIONS
------------- ------------- ----------- ------------ ------------- -------------
$369,587 $ -- $ -- $ -- $86,908 $ --
For corporate shareholders in the Fund, the percentage of dividend
income distributed for the year ended September 30, 2005 which is
designated as qualifying for the dividends received deduction is 46%
(unaudited).
For shareholders in the Fund, the percentage of dividend income
distributed for the year ended September 30, 2005 which is designated as
qualified dividend income under the Jobs and Growth Tax Relief Act of 2003,
is 46% (unaudited).
FMI Large Cap Fund
ADVISORY AGREEMENT
On December 16, 2005, the Board of Directors of FMI Funds, Inc. approved the
continuation of the FMI Large Cap Fund's investment advisory agreement with
Fiduciary Management, Inc. Prior to approving the continuation of the
investment advisory agreement, the Board considered:
o the nature, extent and quality of the services provided by Fiduciary
Management, Inc.
o the investment performance of the Fund
o the cost of the services to be provided and profits to be realized by
Fiduciary Management, Inc. from its relationship with the Fund
o the extent to which economies of scale would be realized as the Fund
grew and whether fee levels reflect these economies of scale
o the expense ratios of the Fund
o the manner in which portfolio transactions for the Fund are conducted,
including the use of soft dollars
In considering the nature, extent and quality of the services provided by
Fiduciary Management, Inc., the Board of Directors reviewed a report describing
the portfolio management, shareholder communication and servicing, prospective
shareholder assistance and regulatory compliance services provided by Fiduciary
Management, Inc. to the Fund. The Board concluded that Fiduciary Management,
Inc. was providing essential services to the Fund. In particular, the Board
concluded that Fiduciary Management, Inc. was preparing reports to shareholders
in addition to those required by law, and was providing services to the Fund
that were in addition to the services Fiduciary Management, Inc. provided its
non-mutual fund clients.
The Directors compared the performance of the Fund to benchmark indices over
various periods of time and concluded that the performance of the Fund warranted
the continuation of the advisory agreement.
In concluding that the advisory fees payable by the Fund were reasonable,
the Directors reviewed a report of the costs of services provided by, and the
profits realized by Fiduciary Management, Inc., from its relationship with the
Fund and concluded that such profits, expressed as a percentage of pre-tax
revenues, was generally less than that of publicly traded investment advisers.
The Directors also reviewed reports comparing the Fund's expense ratio and
advisory fees paid by the Fund to those of other comparable mutual funds and
concluded that the advisory fee paid by the Fund, and the Fund's expense ratio,
were within the range of comparable mutual funds. The Directors noted that the
investment advisory fee was not adjusted if economies of scale were realized as
the Fund grew, but did not consider that factor to be significant in light of
the other factors considered.
Finally, the Board reviewed reports discussing the manner in which portfolio
transactions for the Fund were conducted, including the use of soft dollars.
Based on these reports, the Board concluded that the research obtained by
Fiduciary Management, Inc. was beneficial to the Fund and that Fiduciary
Management, Inc. was executing the Fund's portfolio transactions in a manner
designed to obtain best execution for the Fund.
ADDITIONAL INFORMATION
For additional information about the Directors and Officers or for a description
of the policies and procedures that the Fund uses to determine how to vote
proxies relating to portfolio securities, please call (800) 811-5311 and request
a Statement of Additional Information. One will be mailed to you free of
charge. The Statement of Additional Information is also available on the
website of the Securities and Exchange Commission (the "Commission") at
http://www.sec.gov. Information on how the Fund voted proxies relating to
portfolio securities is available on the Fund's website at
http://www.fmifunds.com or the website of the Commission no later than August 31
for the prior 12 months ending June 30. The Fund files its complete schedule of
portfolio holdings with the Commission for the first and third quarters of each
fiscal year on Form N-Q. The Fund's Form N-Q is available on the Commission's
website. The Fund's Form N-Q may be reviewed and copied at the Commission's
Public Reference Room in Washington, D.C., and that information on the operation
of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
FMI LARGE CAP FUND
100 East Wisconsin Avenue, Suite 2200
Milwaukee, Wisconsin 53202
www.fmifunds.com
414-226-4555
BOARD OF DIRECTORS
BARRY K. ALLEN
GEORGE D. DALTON
PATRICK J. ENGLISH
GORDON H. GUNNLAUGSSON
TED D. KELLNER
RICHARD E. LANE
PAUL S. SHAIN
INVESTMENT ADVISER
AND ADMINISTRATOR
FIDUCIARY MANAGEMENT, INC.
100 East Wisconsin Avenue, Suite 2200
Milwaukee, Wisconsin 53202
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
U.S. BANCORP FUND SERVICES, LLC
615 East Michigan Street
Milwaukee, Wisconsin 53202
800-811-5311
or
414-765-4124
CUSTODIAN
U.S. BANK, N.A.
425 Walnut Street
Cincinnati, Ohio 45202
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
PRICEWATERHOUSECOOPERS LLP
100 East Wisconsin Avenue
Suite 1800
Milwaukee, Wisconsin 53202
LEGAL COUNSEL
FOLEY & LARDNER LLP
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 Large Cap Fund unless accompanied or preceded by
the Fund's current prospectus. Performance data quoted represents past
---------------------------------------
performance; past performance does not guarantee future results. The investment
- ----------------------------------------------------------------
return and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
Current performance of the Fund may be lower or higher than the performance
quoted. Performance data current to the most recent month end may be obtained by
visiting www.fmifunds.com.
ITEM 2. CODE OF ETHICS.
- -----------------------
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
- ----------------------------------------
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
- -----------------------------------------------
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
- ----------------------------------------------
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
- --------------------------------
Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
- -------------------------------------------------------------------------
MANAGEMENT INVESTMENT COMPANIES
- -------------------------------
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
- -------------------------------------------------------------------------
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
- --------------------------------------------------------------------------
COMPANY AND AFFILIATED PURCHASERS.
- ----------------------------------
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- --------------------------------------------------------------
None.
ITEM 11. CONTROLS AND PROCEDURES.
- ---------------------------------
(a) The disclosure controls and procedures of the FMI Funds, Inc. are
periodically evaluated. As of March 24, 2006, the date of the last
evaluation, we concluded that our disclosure controls and procedures are
adequate.
(b) The internal controls of the FMI Funds, Inc. are periodically evaluated.
There were no changes to FMI Funds' internal control over financial
reporting that occurred during the second fiscal quarter of the period
covered by this report that have materially affected, or are reasonably
likely to materially affect, such controls.
ITEM 12. EXHIBITS.
- -----------------
(a) Any code of ethics or amendment thereto. Not applicable.
(b) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Filed herewith.
(c) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FMI Funds, Inc.
---------------
Registrant
By /s/ Ted D. Kellner
-------------------------------------------
Ted D. Kellner, Principal Executive Officer
Date May 4, 2006
----------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
FMI Funds, Inc.
---------------
Registrant
By /s/ Ted D. Kellner
--------------------------------------------
Ted D. Kellner, Principal Financial Officer
Date May 4, 2006
-----------------------------------------